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KEX > SEC Filings for KEX > Form 10-Q on 6-May-2013All Recent SEC Filings

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Form 10-Q for KIRBY CORP


6-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Statements contained in this Form 10-K that are not historical facts, including, but not limited to, any projections contained herein, are forward-looking statements and involve a number of risks and uncertainties. Such statements can be identified by the use of forward-looking terminology such as "may," "will," "expect," "anticipate," "estimate" or "continue," or the negative thereof or other variations thereon or comparable terminology. The actual results of the future events described in such forward-looking statements in this Form 10-Q could differ materially from those stated in such forward-looking statements. Among the factors that could cause actual results to differ materially are:
adverse economic conditions, industry competition and other competitive factors, adverse weather conditions such as high water, low water, tropical storms, hurricanes, tsunamis, fog and ice, marine accidents, lock delays, fuel costs, interest rates, construction of new equipment by competitors, government and environmental laws and regulations, and the timing, magnitude and number of acquisitions made by the Company. For a more detailed discussion of factors that could cause actual results to differ from those presented in forward-looking statements, see Item 1A-Risk Factors found in the Company's Annual Report on Form 10-K for the year ended December 31, 2012. Forward-looking statements are based on currently available information and the Company assumes no obligation to update any such statements.

For purposes of the Management's Discussion, all net earnings per share attributable to Kirby common stockholders are "diluted earnings per share." The weighted average number of common shares applicable to diluted earnings per share for the first quarter of 2013 and 2012 were 56,455,000 and 55,635,000, respectively. The increase in the weighted average number of common shares for the 2013 first quarter compared with the 2012 first quarter primarily reflects the issuance of 500,000 shares of Company common stock associated with the December 14, 2012 acquisition of Penn, the issuance of restricted stock and the exercise of stock options.


Overview

The Company is the nation's largest domestic tank barge operator, transporting bulk liquid products throughout the Mississippi River System, on the Gulf Intracoastal Waterway, coastwise along all three United States coasts and in Alaska and Hawaii. The Company transports petrochemicals, black oil, refined petroleum products and agricultural chemicals by tank barge. As of March 31, 2013, the Company operated a fleet of 844 inland tank barges with 16.9 million barrels of capacity, and operated an average of 256 inland towboats during the 2013 first quarter. The Company's coastal fleet consisted of 82 tank barges with 6.3 million barrels of capacity and 85 coastal tugboats. The Company also operates seven offshore barge and tug units transporting dry-bulk commodities in United States coastal trade. Through its diesel engine services segment the Company provides after-market services for medium-speed and high-speed diesel engines, reduction gears and ancillary products for marine and power generation applications, distributes and services high-speed diesel engines and transmissions, pumps and compression products, and manufactures and remanufacturers oilfield service equipment, including pressure pumping units, for the land-based pressure pumping and oilfield service markets.

For the 2013 first quarter, net earnings attributable to Kirby were $56,578,000, or $1.00 per share, on revenues of $558,785,000, compared with 2012 first quarter net earnings attributable to Kirby of $50,944,000, or $.91 per share, on revenues of $566,935,000. The 2013 first quarter results included a $4,300,000 before taxes, or $.05 per share, credit to selling, general and administrative expenses, resulting from a net decrease in the fair value of the contingent earnout liability associated with the April 2011 acquisition of United. This compares with a 2012 first quarter charge to selling, general and administrative expenses increasing the fair value of the contingent earnout liability by $4,200,000 before taxes, or $.05 per share, and a $2,421,000 before taxes, or $.03 per share, severance charge associated with the integration of Kirby Offshore Marine's administrative functions into the Company.

Marine Transportation

For the 2013 first quarter, 75% of the Company's revenue was generated by its marine transportation segment. The segment's customers include many of the major petrochemical and refining companies that operate in the United States. Products transported include intermediate materials used to produce many of the end products used widely by businesses and consumers - plastics, fiber, paints, detergents, oil additives and paper, among others, as well as residual fuel oil, ship bunkers, asphalt, gasoline, diesel fuel, heating oil and agricultural chemicals. Consequently, the Company's marine transportation business mirrors the volumes produced by the Company's petroleum, petrochemical and refining customer base. The 2013 first quarter results include the operations of Allied, acquired on November 1, 2012, and Penn, acquired on December 14, 2012.

The Company's marine transportation segment's revenues for the 2013 first quarter increased 25% and operating income increased 30% compared with the 2012 first quarter revenues and operating income. The higher marine transportation revenues reflected continued strong demand across all inland marine transportation markets, petrochemicals, black oil, refined petroleum products and agricultural chemicals, along with continued favorable pricing trends. The Company's inland petrochemical and black oil fleets achieved consistent tank barge utilization levels in the 90% to 95% range throughout the 2013 first quarter. The Company's coastal marine transportation markets continued to improve with tank barge utilization levels in the 90% range, aided by the addition of petrochemical volumes with the acquisition of the Allied fleet and additional black oil volumes with the acquisition of Penn, along with the transportation of crude oil and condensate.

During the 2013 and 2012 first quarters, approximately 75% of marine transportation's inland revenues were under term contracts and 25% were spot contract revenues. Inland time charters during the 2013 and 2012 first quarters represented 57% and 56%, respectively, of the inland revenues under term contracts.

During the 2013 first quarter, approximately 70% of the coastal revenues were under term contracts and 30% were spot contract revenues. Coastal time charters represented approximately 90% of the revenues under term contracts during the 2013 first quarter. For the 2012 first quarter, approximately 60% of the coastal revenues were under term contracts and 40% were spot contract revenues. The increase in term contracts reflected the 2012 fourth quarter acquisitions of Allied and Penn, along with stronger demand for coastal tank barges.

Rates on inland term contracts renewed in the 2013 first quarter increased in the 4% to 6% average range compared with term contracts renewed in the first quarter of 2012. Spot contract rates in the 2013 first quarter, which include the cost of fuel, increased modestly compared with the 2012 fourth quarter. Effective January 1, 2013, annual escalators for labor and the producer price index on a number of inland multi-year contracts resulted in rate increases on those contracts by approximately 1%, excluding fuel.

Rates on coastal term contracts renewed in the 2013 first quarter increased in the 7% to 9% average range compared with term contracts renewed in the 2012 first quarter. Spot contract rates in the 2013 first quarter, which include the cost of fuel, improved in the 5% to 9% average range compared with the 2012 fourth quarter.


The marine transportation operating margin was 21.3% for the 2013 first quarter compared with 20.4% for the 2012 first quarter.

Diesel Engine Services

For the 2013 first quarter, the diesel engine services segment generated 25% of the Company's revenue, of which 18% was generated from manufacturing, 58% from overhauls and service, and 24% from direct parts sales. The results of the diesel engine services segment are largely influenced by the economic cycles of the marine and power generation markets and the land-based pressure pumping and oilfield service industries.

Diesel engine services revenues for the 2013 first quarter decreased 39% and operating income decreased 40% compared with the 2012 first quarter revenues and operating income. The decreases were primarily attributable to a continuation of lower demand for the manufacturing of pressure pumping units, as well as a decline in the sales and service of land-based diesel engines and transmissions. Partially offsetting the decline in the manufacturing of pressure pumping units was an increase in the number of pressure pumping units remanufactured. The marine diesel engine services market remained stable, and the power generation market benefited from major generator set upgrades and parts sales for both domestic and international power generation customers.

The diesel engine services operating margin for the 2013 first quarter was 10.0%, including the positive earnings impact of the $4,300,000 credit to the contingent earnout liability, compared with 10.2% for the first quarter of 2012.

Cash Flow and Capital Expenditures

The Company continued to generate strong operating cash flow during the 2013 first quarter, with net cash provided by operating activities of $97,796,000 compared with $73,368,000 of net cash provided by operating activities for the 2012 first quarter. The 33% increase was primarily from higher net earnings attributable to Kirby, higher depreciation and amortization and a higher deferred tax provision in the 2013 first quarter versus the 2012 first quarter, and a $9,747,000 smaller net decrease in cash flows from changes in operating assets and liabilities. In addition, during the 2013 and 2012 first quarters, the Company generated cash of $2,262,000 and $1,001,000, respectively, from the exercise of stock options and $1,861,000 and $3,434,000, respectively, from proceeds from the disposition of assets.

For the 2013 first quarter, cash generated and borrowings under the Company's revolving credit facility were used for capital expenditures of $71,157,000, including $55,072,000 for inland tank barge and towboat construction, $6,906,000 for progress payments on the construction of two offshore articulated dry-bulk barge and tugboat units scheduled for completion in the 2013 first half, and $9,179,000 primarily for upgrading the existing marine transportation fleet. The Company's debt-to-capitalization ratio decreased to 38.4% at March 31, 2013 from 39.9% at December 31, 2012, primarily due to a decrease of $31,650,000 of debt outstanding and the increase in total equity from net earnings attributable to Kirby for the 2013 first quarter of $56,578,000, exercise of stock options, and the amortization of unearned equity compensation. As of March 31, 2013, the Company had $144,480,000 outstanding under its revolving credit facility and $455,000,000 outstanding under its term loan, of which $71,500,000 was classified as current portion of long-term debt, $500,000,000 of senior notes outstanding and $3,980,000 outstanding under its credit agreement.

The Company projects that capital expenditures for 2013 will be in the $190,000,000 to $200,000,000 range. The 2013 construction program will consist of 55 inland tank barges with a total capacity of 1,200,000 barrels and three inland towboats. Based on current commitments, steel prices and projected delivery schedules, the Company's 2013 payments on new inland tank barges and towboats will be approximately $115,000,000 and approximately $10,000,000 in progress payments on the construction of two offshore articulated dry-bulk barge and tugboat units for delivery in the 2013 first half with an estimated total cost of $52,000,000 for each unit. The balance of approximately $65,000,000 to $75,000,000 is primarily capital upgrades and improvements to existing marine equipment and marine transportation and diesel engine services facilities.

During the 2013 first quarter, the Company took delivery of 19 new inland tank barges with a total capacity of approximately 533,000 barrels, and retired 13 inland tank barges, returned two charter inland tank barges and transferred one tank barge to the offshore operations, reducing its capacity by approximately 253,000 barrels. As a result, the Company added a net three inland tank barges and 280,000 barrels of capacity, as the new barges were generally larger capacity barges than the barges removed from service.

Outlook

Petrochemical and black oil inland tank barge utilization levels remained strong during the 2013 first quarter, in the 90% to 95% range. While the United States economy remains sluggish, with consistently high unemployment levels and weak consumer confidence, the United States petrochemical industry continues to see strong production levels for both domestic consumption and exports. Low priced domestic natural gas, a basic feedstock for the United States petrochemical industry, provides the industry with a competitive advantage against foreign petrochemical producers. As a result, United States petrochemical production has remained strong throughout 2012 and the 2013 first quarter, thereby producing increased marine transportation volumes for basic petrochemicals to both domestic consumers and terminals for export destinations. The black oil market has also remained strong throughout 2012 and the 2013 first quarter, primarily due to a continued stable United States refinery utilization level, aided by the export of diesel fuel and heavy fuel oil, and demand for the transportation of crude oil from shale formations in South Texas, as well as the movement of Canadian and Bakken crude oil from the Midwest to the Gulf Coast.


The United States petrochemical industry is globally competitive based on a number of factors, including a highly integrated and efficient transportation system of pipelines, tank barges, railroads and trucks, largely depreciated yet well maintained and operated facilities, and a low cost feedstock slate, which includes natural gas. Certain United States producers have announced plans for plant capacity expansions and the reopening of idled petrochemical facilities. The current production volumes from the Company's petrochemical customers have resulted in the Company's inland tank barge utilization levels in the 90% to 95% range and any increased production from current facilities, plant expansions or the reopening of idled facilities should drive feedstock and production volumes higher, in turn leading to higher tank barge utilization levels and higher term and contract pricing, which could be mitigated by additional tank barge capacity.

As of March 31, 2013, the Company estimated there were approximately 3,300 inland tank barges in the industry fleet, of which approximately 500 were over 35 years old and approximately 300 of those over 40 years old. Given the age profile of the industry inland tank barge fleet, the expectation is that older tank barges will continue to be removed from service and replaced by new tank barges that will enter the fleet. During 2012 and early 2013, with continued strong demand for inland petrochemical and black oil tank barges and federal tax incentives on new equipment, the Company estimates that approximately 260 inland tank barges were ordered industry-wide during 2012 for delivery throughout 2013. Many older tank barges will be retired, with the extent of the retirements dependent on 2013 petrochemical and refinery production levels, crude oil movements and industry-wide tank barge utilization levels.

During 2011 and the first half of 2012, the marine transportation segment was negatively impacted by excess coastal tank barge capacity with tank barge utilization in the 75% range. The coastal operations reflected improvements in market conditions during the 2012 second half and 2013 first quarter, with tank barge utilization improving to the 75% to 80% range in the third quarter, 85% to 90% in the fourth quarter, and in the 90% range in the 2013 first quarter. During the 2012 second half and 2013 first quarter, the Company experienced increased demand for coastal crude and condensate moves and success in expanding the coastal customer base to include inland customers with coastal requirements. The acquisitions of Allied and Penn during the 2012 fourth quarter also contributed to the higher 2013 first quarter revenue and operating income. As of March 31, 2013, the Company estimated there were approximately 268 tank barges operating in the 195,000 barrel or less coastal industry fleet. The Company believes that very few coastal tank barges were built during 2012, and that very few orders for coastal tank barges have been placed for 2013 deliveries and beyond.

In the diesel engine services segment, with the increase in drilling rigs operating in the Gulf of Mexico and relatively positive marine transportation markets during 2012, service activity levels for the marine diesel engine market reflected a modest improvement and should continue to modestly improve as activity increases. The power generation market should remain positive, benefiting from engine-generator set upgrades and parts sales for both domestic and international customers. The land-based diesel engine services market consists of manufacturing and remanufacturing of oilfield service equipment, including pressure pumping units, and servicing their components, which include high-speed diesel engines, transmissions and pumps, many of the same components used by marine customers. Currently, an estimated 17 million horsepower is employed in the North American pressure pumping business. With the current low price of natural gas, the exploration of United States natural gas shale formations has declined, resulting in excess pressure pumping horsepower. However, with the current high price of crude oil, the exploration of United States crude oil shale formations has remained active. As a result of the excess pressure pumping horsepower, new orders for pressure pumping units have essentially stopped and the supply and distribution portion of the land-based market has slowed. While the Company expects its land-based diesel engine business to remain profitable, it does not expect any significant improvement in this market until late 2013 or early 2014. The focus of the Company, currently as well as into the future, will be on the remanufacturing and service of existing pressure pumping equipment.

Acquisitions

On December 28, 2012, the Company purchased the assets of Flag for $6,864,000 in cash. Flag was an East Coast high-speed diesel engine service provider, operating factory-authorized full service marine dealerships for Caterpillar, Cummins, MTU and John Deere diesel engines. Financing of the acquisition was through the Company's revolving credit facility.

On December 14, 2012, the Company completed the acquisition of Penn, an operator of tank barges and tugboats participating in the coastal transportation of refinery feedstocks, asphalt and crude oil in the United States. The total value of the transaction was $300,538,000, consisting of $146,750,000 of cash, $29,080,000 through the issuance of 500,000 shares of Company common stock valued at $58.16 per share, and $124,708,000 of cash for the retirement of Penn's debt. Penn's fleet, comprised of 18 double hull tank barges with a capacity of 1.9 million barrels and 16 tugboats, operates along the East Coast and Gulf Coast of the United States. Financing of the acquisition was through a combination of new senior notes and the issuance of Company common stock.

On November 1, 2012, the Company purchased from Allied 10 coastal tank barges with a total capacity of 680,000 barrels, three offshore dry-bulk barges with a total capacity of 48,000 deadweight tons and seven coastal tugboats for $107,014,000 in cash, before post-closing adjustments and excluding transaction fees, including a provision for up to $10,000,000 that will be paid contingent on developments with the sugar provisions in the United States Farm Bill. The fair value of the contingent liability recorded at the acquisition date was $9,756,000. A payment of $5,000,000 was made in the 2013 first quarter on the contingent liability. Allied provided coastal transportation of petrochemicals as well as dry sugar products in the Northeast, Atlantic and Gulf Coast regions of the United States. Financing of the equipment acquisition was through the Company's revolving credit facility.


Results of Operations

The Company reported 2013 first quarter net earnings attributable to Kirby of $56,578,000, or $1.00 per share, on revenues of $558,785,000, compared with 2012 first quarter net earnings attributable to Kirby of $50,944,000, or $.91 per share, on revenues of $566,935,000. The 2013 first quarter results included a $4,300,000 before taxes, or $.05 per share, credit decreasing the fair value of the United contingent earnout liability associated with the April 2011 acquisition of United. The 2012 first quarter results included a $4,200,000 before taxes, or $.05 per share, charge increasing the fair value of the United contingent earnout liability, and a $2,421,000, or $03 per share, severance charge associated with the integration of Kirby Offshore Marine's administrative functions into the Company.

Marine transportation revenues for the 2013 first quarter were $418,518,000, or 75% of total revenues, compared with $335,957,000, or 59% of total revenues, for the 2012 first quarter. Diesel engine services revenues for the 2013 first quarter were $140,267,000, or 25% of total revenues, compared with $230,978,000, or 41% of total revenues, for the 2012 first quarter.

Marine Transportation

The Company, through its marine transportation segment, is a provider of marine transportation services, operating tank barges and towing vessels transporting bulk liquid products throughout the Mississippi River System, on the Gulf Intracoastal Waterway, coastwise along all three United States coasts and in Alaska and Hawaii. The Company transports petrochemicals, black oil, refined petroleum products and agricultural chemicals by tank barge. As of March 31, 2013, the Company operated 844 inland tank barges, including 47 leased barges, with a total capacity of 16.9 million barrels. This compares with 806 inland tank barges operated as of March 31, 2012, including 42 leased barges, with a total capacity of 16.0 million barrels. The Company operated an average of 256 inland towboats during the 2013 first quarter, of which an average of 73 were chartered, compared with 242 during the 2012 first quarter, of which an average of 59 were chartered. The Company's coastal tank barge fleet as of March 31, 2013 consisted of 82 tank barges, two of which were single hull and 12 of which were chartered, with 6.3 million barrels of capacity, and 85 tugboats. This compares with 58 coastal tank barges, three of which were single hull, with 3.8 million barrels of capacity, and 65 tugboats as of March 31, 2012. The Company operates seven offshore dry-bulk barge and tugboat units, of which one of the tugboats is chartered, engaged in the offshore transportation of dry-bulk cargoes. The Company also owns a two-thirds interest in Osprey Line, L.L.C., which transports project cargoes and cargo containers by barge, as well as a 51% interest in a shifting operation and fleeting facility for dry cargo barges and tank barges on the Houston Ship Channel.

The following table sets forth the Company's marine transportation segment's revenues, costs and expenses, operating income and operating margins for the three months ended March 31, 2013 compared with the three months ended March 31, 2012 (dollars in thousands):

                                          Three months ended
                                               March 31,
                                          2013          2012         % Change
Marine transportation revenues          $ 418,518     $ 335,957             25 %

Costs and expenses:
Costs of sales and operating expenses     259,229       203,407             27
Selling, general and administrative        28,976        28,519              2
Taxes, other than on income                 3,910         3,452             13
Depreciation and amortization              37,150        32,089             16
                                          329,265       267,467             23
Operating income                        $  89,253     $  68,490             30 %

Operating margins                            21.3 %        20.4 %


 Marine Transportation Revenues

The following table shows the marine transportation markets serviced by the
Company, the marine transportation revenue distribution for the first quarter of
2013, products moved and the drivers of the demand for the products the Company
transports:

                          2013
                       First Qtr.
                        Revenue
Markets Serviced      Distribution        Products Moved                  Drivers
Petrochemicals            47%        Benzene, Styrene,           Consumer non-durables
                                     Methanol, Acrylonitrile,    -70%
                                     Xylene, Caustic Soda,       Consumer durables - 30%
                                     Butadiene, Propylene

Black Oil                 25%        Residual Fuel Oil, Coker    Fuel for Power Plants and
                                     Feedstock, Vacuum Gas       Ships, Feedstock for
                                     Oil, Asphalt, Carbon        Refineries, Road
                                     Black Feedstock, Crude      Construction
                                     Oil, Ship Bunkers

Refined Petroleum         24%        Gasoline, No. 2 Oil, Jet    Vehicle Usage, Air
Products                             Fuel, Heating Oil,          Travel, Weather
                                     Naphtha, Diesel Fuel,       Conditions, Refinery
                                     Ethanol                     Utilization

Agricultural               4%        Anhydrous Ammonia,          Corn, Cotton and Wheat
Chemicals                            Nitrogen-Based Liquid       Production, Chemical
                                     Fertilizer, Industrial      Feedstock Usage
                                     Ammonia

Marine transportation revenues for the 2013 first quarter increased 25% when compared with the 2012 first quarter, reflecting the expansion of the coastal transportation business with the acquisition of Allied on November 1, 2012 and Penn on December 14, 2012. The inland tank barge fleet contributed approximately 68% and the coastal fleet approximately 32% of the 2013 first quarter marine transportation revenues.

The petrochemical market, the Company's largest market, contributed 47% of the marine transportation revenues for the 2013 first quarter, reflecting continued strong volumes from Gulf Coast petrochemical plants for both domestic consumers and to terminals for export destinations. The 2013 first quarter also includes revenues from the 10 coastal tank barges purchased from Allied that transport petrochemicals coastwise.

The black oil market, which contributed 25% of 2013 first quarter marine transportation revenues, also reflected continued strong demand, driven by steady refinery production levels, the export of heavy fuel oils, and demand for crude oil and condensate transportation on both the inland waterway system and coastwise. The 2013 first quarter also includes revenues from the 18 coastal . . .

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