News Column

KIRBY CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 6, 2014

Statements contained in this Form 10-Q 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, 2013. 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 three months and six months ended June 30, 2014 and 2013 were as follows (in thousands): Three months ended Six months ended June 30, June 30, 2014 2013 2014 2013 Weighted average number of common stock - diluted 56,869 56,529 56,826 56,493 The increase in the weighted average number of common shares for the 2014 second quarter and first six months compared with the 2013 second quarter and first six months primarily reflected 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 June 30, 2014, the Company operated a fleet of 874 inland tank barges with 17.3 million barrels of capacity, and operated an average of 252 inland towboats during the 2014 second quarter. The Company's coastal fleet consisted of 71 tank barges with 6.0 million barrels of capacity and 76 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 remanufactures oilfield service equipment, including pressure pumping units, for the land-based pressure pumping and oilfield service markets. For the 2014 second quarter, net earnings attributable to Kirby were $74,992,000, or $1.31 per share, on revenues of $628,054,000, compared with 2013 second quarter net earnings attributable to Kirby of $63,093,000, or $1.11 per share, on revenues of $563,908,000. For the 2014 first six months, net earnings attributable to Kirby were $137,238,000, or $2.40 per share, on revenues of $1,217,300,000, compared with 2013 first six months net earnings attributable to Kirby of $119,671,000, or $2.10 per share, on revenues of $1,122,693,000. The 2014 first quarter and six months results included $2,766,000 before taxes, or $.03 per share, of severance charges which were mainly reflected in the marine transportation results. In addition, the 2014 first quarter and first six months results included an estimated $.03 per share combined negative impact from delays and the cost of extra horsepower to navigate the heavy ice conditions on the upper inland river systems, and costs related to a March 22, 2014 incident in the Houston Ship Channel. The 2013 second quarter and first six months results included a $6,100,000 before taxes, or $.07 per share, and $10,400,000 before taxes, or $.11 per share, respectively, 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. The 2013 second quarter and first six months results also included an estimated $.03 per share negative impact from high water on the Mississippi and Illinois Rivers and the negative impact of the closure for repair of the Algiers Lock near New Orleans on the Gulf Intracoastal Waterway, net of certain revenue and cost recovery from contracts with terms that provide reimbursements for delays and increased costs. 19



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Marine Transportation

For the 2014 second quarter and first six months, 73% 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, crude oil, gas condensate and agricultural chemicals. Consequently, the Company's marine transportation business is directly affected by the volumes produced by the Company's petroleum, petrochemical and refining customer base. The Company's marine transportation segment's revenues for the 2014 second quarter and first six months increased 8% and 6%, respectively, compared with the 2013 second quarter and first six months. The segment's operating income for the 2014 second quarter and first six months increased 19% and 14%, respectively, compared with the operating income for the 2013 second quarter and first six months. 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, black oil and refined petroleum products fleets achieved consistent tank barge utilization levels in the 90% to 95% range throughout the 2014 second quarter and first six months. The Company's coastal marine transportation markets reflected continued strong demand with tank barge utilization levels in the 90% to 95% range throughout the 2014 second quarter and first six months, aided by the increased transportation of crude oil and natural gas condensate, colder weather in the Northeast that increased the demand for heating oil during the 2014 first quarter and continued success in expanding the coastal customer base to inland customers with coastal requirements. During the 2014 second quarter and first six months, approximately 80% of marine transportation's inland revenues were under term contracts and 20% were spot contract revenues compared with 75% term contracts and 25% spot contracts for the 2013 second quarter and first six months. The 2014 second quarter and first six months increase in term contract revenues was primarily due to increased volumes from term contract customers, thereby reducing equipment available for spot contract movements. The harsh winter weather conditions during the 2014 first quarter and portion of the second quarter that required more equipment to meet contract volumes also contributed to the higher term contract revenues. Inland time charters represented 56% and 57%, respectively, of the revenues under term contracts during the 2014 second quarter and first six months. During the 2014 first and second quarters, approximately 80% and 85%, respectively, of the marine transportation's coastal revenues were under term contracts and approximately 20% and 15%, respectively, were spot contract revenues compared with 75% term contracts and 25% spot contracts for the 2013 second quarter and first six months. The increase in term contract revenues reflected a combination of stronger demand for coastal tank barges, as well as extended delivery times due to the harsh winter weather during the 2014 first quarter that extended into April. Coastal time charters represented approximately 90% of the revenues under term contracts during the 2014 and 2013 second quarters and first six months. Rates on inland term contracts renewed in the 2014 second quarter and first six months increased in the 3% to 5% average range compared with term contracts renewed in the second quarter and first six months of 2013. Spot contract rates in the 2014 first and second quarters, which include the cost of fuel, increased modestly compared with the prior quarters. Effective January 1, 2014, annual escalators for labor and the producer price index on a number of inland multi-year contracts resulted in rate increases on those contracts of approximately 1.7%, excluding fuel. Rates on coastal term contracts renewed in the 2014 second quarter and first six months increased in the 7% to 9% average range compared with term contracts renewed in the 2013 second quarter and first six months. Spot contract rates, which include the cost of fuel, continued to improve during the 2014 second quarter and first six months and remained above contract rates. 20 -------------------------------------------------------------------------------- The marine transportation operating margin was 25.4% for the 2014 second quarter compared with 23.0% for the 2013 second quarter, and 23.9% for the 2014 first six months compared with 22.2% for the 2013 first six months.



Diesel Engine Services

For the 2014 second quarter and first six months, 27% of the Company's revenue was generated by its diesel engine services segment. For the 2014 second quarter and first six months, 51% and 50% of the diesel engine services revenue was generated from overhauls and service, 25% and 24% from manufacturing, and 24% and 26% from direct parts sales, respectively. 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 services industries. Diesel engine services revenues for the 2014 second quarter and first six months increased 22% and 16%, respectively, and operating income decreased 4% and 6%, respectively, when compared with the second quarter and first six months of 2013. The 2013 second quarter and first six months results included a $6,100,000 before taxes and a $10,400,000 before taxes, respectively, 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. Excluding the credits, the increases were primarily attributable to an improvement in the sale and service of land-based diesel engines and transmissions, and a continued increase in the manufacture of oilfield service equipment, including pressure pumping units. Demand for the remanufacture of pressure pumping units remained steady throughout the 2014 second quarter and reflected an improvement over the 2013 second quarter and first six months. The marine diesel engine services market improved modestly, benefiting from major service projects for inland and coastal customers, as well as Gulf of Mexico and foreign offshore service vessels and drilling operators. The power generation market was stable, benefiting from major generator set upgrades and parts sales for both domestic and international power generation customers. The diesel engine services operating margin for the 2014 second quarter was 8.4% compared with 10.7% for the 2013 second quarter. For the 2014 first six months, the operating margin was 8.3% compared with 10.3% for the first six months of 2013. The operating margin for the 2013 second quarter and first six months was positively impacted by the $6,100,000 and $10,400,000, respectively, benefit due to the reduction of the United contingent earnout liability noted above.



Cash Flow and Capital Expenditures

The Company continued to generate strong operating cash flow during the 2014 first six months, with net cash provided by operating activities of $251,408,000 compared with $269,275,000 of net cash provided by operating activities for the 2013 first six months. The 7% decrease was primarily from a $7,027,000 net decrease in cash flows from changes in operating assets and liabilities and a $33,470,000 decrease in provision for deferred income taxes, partially offset by $17,578,000 of higher net earnings. In addition, during the 2014 and 2013 first six months, the Company generated cash of $7,275,000 and $2,573,000, respectively, from proceeds from the exercise of stock options and $3,884,000 and $13,111,000, respectively, from proceeds from the disposition of assets. For the 2014 first six months, cash generated and borrowings under the Company's revolving credit facility were used for capital expenditures of $163,299,000, including $57,456,000 for inland tank barge and towboat construction, $26,909,000 primarily for progress payments on the construction of two 185,000 barrel articulated tank barge and 10000 horsepower tugboat units, one scheduled to be placed in service in mid to late 2015 and one in the first half of 2016, and $78,934,000 primarily for upgrading existing marine transportation equipment and facilities and diesel engine services facilities, as well as the final costs for the construction of two offshore dry-bulk barge and tugboat units delivered during 2013. The Company's debt-to-capitalization ratio decreased to 23.0% at June 30, 2014 from 27.0% at December 31, 2013, primarily due to a decrease of $99,850,000 of outstanding debt, and an increase in total equity from net earnings attributable to Kirby for the 2014 first six months of $137,238,000, exercises of stock options, and the amortization of unearned equity compensation. As of June 30, 2014, the Company had $7,300,000 outstanding under its revolving credit facility, $142,000,000 outstanding under its term loan and $500,000,000 of senior notes outstanding. 21 -------------------------------------------------------------------------------- During 2013 and early 2014, the Company signed agreements to construct 66 inland tank barges with a total capacity of 1,220,000 barrels and one inland towboat, all for delivery throughout 2014. Based on current commitments, steel prices and projected delivery schedules, the cost of the 66 inland tank barges and one inland towboat is approximately $130,000,000. During the 2014 first six months, the Company took delivery of 39 new inland tank barges with a total capacity of approximately 450,000 barrels, retired 21 inland tank barges and returned five leased inland tank barges, reducing its capacity by approximately 420,000 barrels. As a result, the Company added a net 13 inland tank barges and approximately 30,000 barrels of capacity during the first half of 2014. In January 2014, the Company signed an agreement to construct a 185,000 barrel coastal articulated tank barge and 10000 horsepower tugboat unit at a cost of approximately $75,000,000 for delivery in mid to late 2015. In April 2014, the Company exercised its option for the construction of a second 185,000 barrel coastal articulated tank barge and 10000 horsepower tugboat unit at a cost of approximately $75,000,000 for delivery in the first half of 2016. In May 2014, the Company signed an agreement to construct 30 inland 10,000 barrel tank barges for delivery throughout the 2015 first half, and in June 2014 signed an agreement to construct three inland towboats for delivery in the 2015 second half. Based on current commitments, steel prices and projected delivery schedules, the cost of the 30 inland tank barges and three inland towboats is approximately $50,000,000. In July 2014, the Company signed agreements to construct two 155,000 barrel coastal articulated tank barge and 6000 horsepower tugboat units at a combined cost of approximately $125,000,000 to $130,000,000, the first for delivery in the 2016 second half and second in the 2017 first half. The Company projects that capital expenditures for 2014 will be in the $370,000,000 to $380,000,000 range, including approximately $140,000,000 for the construction of 66 inland tank barges and one inland towboat for delivery throughout 2014 and progress payments on 2015 inland tank barge and towboat construction, as well as approximately $105,000,000 in progress payments on the construction of two 185,000 barrel coastal articulated tank barge and 10000 horsepower tugboat units, and two 155,000 barrel coastal articulated tank barge and 6000 horsepower tugboat units. The balance of $125,000,000 to $135,000,000 is primarily capital upgrades and improvements to existing marine transportation equipment and facilities and diesel engine services facilities, as well as the final costs for the construction of two offshore dry-bulk barge and tugboat units delivered during 2013.



Outlook

Petrochemical and black oil inland tank barge utilization levels remained strong during the 2014 first six months in the 90% to 95% range. While the United States economy remains sluggish with consistently high unemployment levels, 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 remained strong throughout 2013 and the 2014 first six months, thereby producing increased marine transportation volumes of basic petrochemicals to both domestic consumers and terminals for export destinations. The black oil market also remained strong throughout 2013 and the 2014 first six months, primarily due to continued stable United States refinery utilization levels, aided by the export of refined petroleum products and heavy fuel oils. In addition, the black oil market reflected continued strong demand for the inland and coastal transportation of crude oil and gas condensate from shale formations in South Texas and inland transportation of Canadian, Bakken and Utica crude oil and gas condensate from the Midwest to the Gulf Coast, as well as the coastal transportation of Bakken crude oil and gas condensate along the East and West Coasts. 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 and refinery customers have resulted in the Company's inland petrochemical, black oil and refined petroleum products tank barge utilization levels in the 90% to 95% range and 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 spot contract pricing, which could be mitigated by additional tank barge capacity. 22 -------------------------------------------------------------------------------- As of June 30, 2014, the Company estimated there were approximately 3,450 inland tank barges in the industry fleet, of which approximately 500 were over 35 years old and approximately 275 of those were 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. With continued strong demand for inland petrochemical, refined petroleum products and black oil tank barges, the Company estimates that approximately 280 inland tank barges were ordered industry-wide during 2013 and early 2014 for delivery throughout 2014. Historically, 75 to 150 older inland tank barges are retired from service each year, with the extent of the retirements dependent on petrochemical and refinery production levels, crude oil and gas condensate movements and industry-wide tank barge utilization levels. As of June 30, 2014, the Company estimated there were approximately 265 tank barges operating in the 195,000 barrel or less coastal industry fleet, the sector of the market in which the Company operates. The Company believes that very few, if any, coastal tank barges in the 195,000 barrel or less category were built during 2012 and 2013. During 2013, coastal tank barge utilization was consistently in the 90% range, improving to the 90% to 95% range during the 2014 first six months with continued success in expanding the coastal customer base to include inland customers with coastal requirements and increased coastal demand for the movement of crude oil and natural gas condensate. The Company announced in January 2014 the signing of an agreement to construct a 185,000 barrel coastal articulated tank barge and 10000 horsepower tugboat unit at a cost of approximately $75,000,000, with delivery anticipated for mid to late 2015. In April 2014, the Company exercised its option for the construction of a second 185,000 barrel coastal articulated tank barge and 10000 horsepower tugboat unit at a cost of approximately $75,000,000 with delivery anticipated for the first half of 2016. In July 2014, the Company signed agreements to construct two 155,000 barrel coastal articulated tank barge and 6000 horsepower tugboat units at a combined cost of approximately $125,000,000 to $130,000,000, the first for delivery in the 2016 second half and the second in the 2017 first half. The Company is also aware of ten announced coastal tank barge and tugboat units to be constructed by competitors for delivery in 2014, 2015 and 2016. In the diesel engine services segment, with the stable drilling activity in the Gulf of Mexico and positive inland and coastal marine transportation markets, service activity levels for the marine diesel engine services market during the 2014 first six months reflected a modest improvement and is anticipated to reflect some modest softness due to seasonality during the 2014 third quarter. The power generation market should remain stable, 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 the distribution and service of their components, which include high-speed diesel engines, transmissions and pumps, many of the same components used by marine customers. Currently, an estimated 18 million horsepower is employed in the North American pressure pumping business. As a result of excess pressure pumping horsepower in 2012 and 2013, new orders for pressure pumping units essentially stopped and the supply and distribution portion of the land-based market slowed. During the 2014 second quarter, the land-based diesel engine business results reflected an improvement in manufacturing and remanufacturing of oil service equipment and the Company anticipates a continued improvement in this market in the 2014 second half.



Results of Operations

The Company reported 2014 second quarter net earnings attributable to Kirby of $74,992,000, or $1.31 per share, on revenues of $628,054,000, compared with 2013 second quarter net earnings attributable to Kirby of $63,093,000, or $1.11 per share, on revenues of $563,908,000. Net earnings attributable to Kirby for the 2014 first six months were $137,238,000, or $2.40 per share, on revenues of $1,217,300,000, compared with $119,671,000, or $2.10 per share, on revenues of $1,122,693,000 for the 2013 first six months. The 2014 first six months results included a $2,766,000 before taxes, or $.03 per share, first quarter severance charge which was mainly reflected in the marine transportation results. In addition, the 2014 first six months included an estimated $.03 per share first quarter combined negative impact from delays and the cost of extra horsepower to navigate the heavy ice conditions on the upper inland river systems, and costs related to a March 22, 2014 incident in the Houston Ship Channel. The 2013 second quarter and first six months results included a $6,100,000 before taxes, or $.07 per share, and $10,400,000 before taxes, or $.11 per share, respectively, 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. The 2013 first six months included an estimated $.03 per share second quarter negative impact from high water on the Mississippi and Illinois Rivers and the negative impact of the closure for repair of the Algiers Lock near New Orleans on the Gulf Intracoastal Waterway, net of certain revenue and cost recovery from contracts with terms that provide reimbursements for delays and increased costs. 23 -------------------------------------------------------------------------------- The following table sets forth the Company's marine transportation and diesel engine services revenues for the 2014 second quarter compared with the second quarter of 2013, the first six months of 2014 compared with the first six months of 2013 and the percentage of each to total revenues for the comparable periods (dollars in thousands): Three months ended Six months ended June 30, June 30, 2014 % 2013 % 2014 % 2013 % Marine transportation $ 456,745 73 % $ 423,868 75 % $ 892,516 73 % $ 842,386 75 % Diesel engine services 171,309 27 140,040 25 324,784 27 280,307 25 $ 628,054 100 % $ 563,908 100 % $ 1,217,300 100 % $ 1,122,693 100 %



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 June 30, 2014, the Company operated 874 inland tank barges, including 39 leased barges, with a total capacity of 17.3 million barrels. This compares with 863 inland tank barges operated as of June 30, 2013, including 45 leased barges, with a total capacity of 17.3 million barrels. The Company operated an average of 252 inland towboats during the 2014 second quarter, of which an average of 78 were chartered, compared with 262 during the 2013 second quarter, of which an average of 79 were chartered. The Company's coastal tank barge fleet as of June 30, 2014 consisted of 71 tank barges, 11 of which were leased, with 6.0 million barrels of capacity, and 76 tugboats, seven of which were chartered. This compares with 79 coastal tank barges operated as of June 30, 2013, two of which were single hull and 12 of which were chartered, with 6.2 million barrels of capacity, and 86 tugboats, four of which were chartered. As of June 30, 2014 and 2013, the Company operated seven and eight, respectively, offshore dry-bulk barge and tugboat units 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. 24 -------------------------------------------------------------------------------- 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 and six months ended June 30, 2014 compared with the three months and six months ended June 30, 2013 (dollars in thousands): Three months ended Six months ended June 30, June 30, % % 2014 2013 Change 2014 2013 Change

Marine transportation revenues $ 456,745$ 423,868 8 % $ 892,516$ 842,386 6 % Costs and expenses: Costs of sales and operating expenses 269,232 259,332 4 533,658 518,561 3 Selling, general and administrative 29,778 26,439 13 62,205 55,415 12 Taxes, other than on income 4,127 3,928 5 8,208 7,838 5 Depreciation and amortization 37,640 36,606 3 74,926 73,756 2 340,777 326,305 4 678,997 655,570 4 Operating income $ 115,968$ 97,563 19 % $ 213,519$ 186,816 14 % Operating margins 25.4 % 23.0 % 23.9 % 22.2 %



Marine Transportation Revenues

The following table shows the marine transportation markets serviced by the Company, the marine transportation revenue distribution for the 2014 second quarter and first six months, products moved and the drivers of the demand for the products the Company transports:

2014 Second 2014 Six Quarter Months Revenue Revenue Markets Serviced Distribution Distribution Products Moved Drivers Petrochemicals 48% 48% Benzene, Styrene, Consumer Methanol, non-durables - 70%, Acrylonitrile, Consumer durables - Xylene, Caustic Soda, 30% Butadiene, Propylene Black Oil 24% 25% Residual Fuel Oil, Fuel for Power Coker Feedstock, Plants and Ships, Vacuum Gas Oil, Feedstock for Asphalt, Carbon Black Refineries, Road Feedstock, Crude Oil, Construction Ship Bunkers Refined Petroleum Products 25% 24%



Gasoline, No. 2 Oil, Vehicle Usage, Air

Jet Fuel, Heating Travel, Weather Oil, Naphtha, Diesel Conditions, Refinery Fuel, Ethanol Utilization

Agricultural Chemicals 3% 3% Anhydrous Ammonia, Corn, Cotton and Nitrogen - Based Wheat Production, Liquid



Fertilizer, Chemical Feedstock

Industrial Ammonia Usage Marine transportation revenues for the 2014 second quarter and first six months increased 8% and 6%, respectively, when compared with the 2013 second quarter and first six months, reflecting continued strong utilization levels for both the inland and coastal markets and favorable pricing trends. For the 2014 and 2013 second quarters, the inland tank barge fleet contributed 67% and 70%, respectively, and the coastal fleet 33% and 30%, respectively, of marine transportation revenues. For the 2014 and 2013 first six months, the inland tank barge fleet contributed 68% and 69%, respectively, and the coastal fleet 32% and 31%, respectively, of marine transportation revenues. The Company's inland petrochemical, black oil and refined products fleets achieved consistent tank barge utilization levels in the 90% to 95% range throughout the 2014 second quarter and first six months. The Company's coastal marine transportation markets reflected continued strong demand with tank barge utilization levels in the 90% to 95% range throughout the 2014 second quarter and first six months, aided by increased transportation of crude oil and natural gas condensate, continued success in expanding the coastal customer base to inland customers with coastal requirements, and cold weather during the 2014 first quarter that increased the demand for the transportation of heating oil. 25 -------------------------------------------------------------------------------- The petrochemical market, the Company's largest market, contributed 48% of the marine transportation revenues for the 2014 second quarter and first six months, reflecting continued strong volumes from Gulf Coast petrochemical plants for both domestic consumption and to terminals for export destinations. 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. The black oil market, which contributed 24% of marine transportation revenues for the 2014 second quarter and 25% for the first six months, reflected continued strong demand, driven by steady refinery production levels, the export of refined petroleum products and fuel oils, and demand for crude oil and gas condensate transportation from the Eagle Ford shale formations in South Texas both along the Gulf Intracoastal Waterway with inland vessels and in the Gulf of Mexico with coastal vessels, and for the movement of Canadian, Bakken and Utica crude oil and gas condensate downriver from the Midwest to the Gulf Coast. The coastal fleet also moved Bakken crude from Albany, New York to Northeast refineries, and from the Columbia River to West Coast refineries, a movement that began in the 2013 fourth quarter. The refined petroleum products market, which contributed 25% of marine transportation revenues for the 2014 second quarter and 24% for the first six months, reflected continued strong demand for the movement of products in the inland and coastal markets, benefiting from volumes from major customers and aided by the export of refined petroleum products and heavy fuel oils. The coastal refined products market was also driven by continued success in expanding the coastal customer base to inland customers with coastal requirements, as well as a cold winter in the Northeast that increased the demand for heating oil during the 2014 first quarter. The agricultural chemical market, which contributed 3% of marine transportation revenues for the 2014 second quarter and first six months, saw strong demand for both domestically produced and imported products during the first quarter but was hindered by the slow transit times created by the harsh Midwest operating conditions throughout the first quarter. Strong demand continued through the months of April and May 2014. For the second quarter of 2014, the inland operations incurred 2,117 delay days, 16% less than the 2,520 delay days that occurred during the 2013 second quarter, and 27% less than the 2,897 delay days that occurred during the 2014 first quarter. For the first six months of 2014, 5,014 delay days occurred, 10% more than the 4,569 delay days that occurred during the 2013 first six months. Delay days measure the lost time incurred by a tow (towboat and one or more tank barges) during transit when the tow is stopped due to weather, lock conditions or other navigational factors. Operating conditions during the 2014 second quarter were seasonally normal while operating conditions during the 2014 first quarter were challenging, as transit times along the Gulf Intracoastal Waterway were affected by numerous strong frontal systems and fog, as well as heavy ice conditions on the Illinois, upper Mississippi and upper Ohio Rivers for the majority of the first quarter. While the Company continued to operate on these rivers during the 2014 first quarter despite the heavy ice conditions, transit times were increased, and either additional horsepower was required or tow sizes were reduced. High water conditions on the Mississippi and Illinois Rivers during the entire 2013 second quarter, and the closure of the Algiers Lock located on the Gulf Intracoastal Waterway due to structural damage during the entire 2013 second quarter, created heavy congestion and multi-day delays in the New Orleans area and along the alternate route to the Mississippi River at the Bayou Sorrels and Port Allen Locks. 26 -------------------------------------------------------------------------------- During the 2014 second quarter and first six months, approximately 80% of marine transportation's inland revenues were under term contracts and 20% were spot contract revenues compared with 75% term contracts and 25% spot contract revenues for the 2013 second quarter and first six months. The 2014 second quarter and first six months increase in term contract revenues was primarily due to increased volumes from term contract customers, thereby reducing equipment available for spot contract movements. The harsh winter weather conditions during the 2014 first quarter and portion of the second quarter that required more equipment to meet contract volumes also contributed to the higher term contract revenues. Inland time charters, which insulate the Company from revenue fluctuations caused by weather and navigational delays and temporary market declines, represented 56% and 57%, respectively, of the revenues under term contracts during the 2014 second quarter and first six months compared with 58% and 57%, respectively, during the 2013 second quarter and first six months. The 80% term contract and 20% spot contract mix provides the inland operations with a predictable revenue stream. During the 2014 first and second quarters, approximately 80% and 85%, respectively, of the marine transportation's coastal revenues were under term contracts and approximately 20% and 15%, respectively, were spot contract revenues compared with 75% term contracts and 25% spot contracts for the 2013 second quarter and first six months. The increase in term contract revenues reflected a combination of stronger demand for coastal tank barges, as well as extended delivery times due to the harsh winter weather during the 2014 first quarter that extended into April. Coastal time charters represented approximately 90% of the revenues under term contracts during the 2014 and 2013 second quarters and first six months. Rates on inland term contracts renewed in the 2014 second quarter and first six months increased in the 3% to 5% average range compared with term contracts renewed in the second quarter and first six months of 2013. Spot contract rates in the 2014 first and second quarters, which include the cost of fuel, increased modestly compared with the prior quarters. Effective January 1, 2014, annual escalators for labor and the producer price index on a number of inland multi-year contracts resulted in rate increases on those contracts of approximately 1.7%, excluding fuel. Rates on coastal term contracts renewed in the 2014 second quarter and first six months increased in the 7% to 9% average range compared with term contracts renewed in the 2013 second quarter and first six months. Spot contract rates, which include the cost of fuel, continued to improve during the 2014 second quarter and first six months and remained above contract rates.



Marine Transportation Costs and Expenses

Costs and expenses for the 2014 second quarter and first six months increased 4% compared with the 2013 second quarter and first six months. Costs of sales and operating expenses for the 2014 second quarter and first six months increased 4% and 3%, respectively, compared with the second quarter and first six months of 2013. The inland operations operated an average of 252 towboats during the 2014 second quarter, of which an average of 78 towboats were chartered, compared with 262 during the 2013 second quarter, of which an average of 79 towboats were chartered. During the 2014 first six months, the inland operations operated an average of 254 towboats, of which an average of 76 towboats were chartered, compared with 259 towboats operated during the 2013 first six months, of which an average of 76 were chartered. As demand increases or decreases, or as weather or water conditions dictate, such as the heavy ice conditions on the Illinois, upper Mississippi and upper Ohio Rivers that occurred in the 2014 first quarter, the Company charters-in or releases chartered towboats in an effort to balance horsepower needs with current requirements. The Company has historically used chartered towboats for approximately one-third of its horsepower requirements. During the 2014 second quarter, the inland operations consumed 11.4 million gallons of diesel fuel compared to 11.1 million gallons consumed during the 2013 second quarter. The average price per gallon of diesel fuel consumed during the 2014 second quarter was $3.18 compared with $3.22 for the 2013 second quarter. For the 2014 first six months, the inland operations consumed 22.4 million gallons of diesel fuel compared to 22.1 million gallons consumed during the 2013 first six months. The average price per gallon of diesel fuel consumed during the 2014 first six months was $3.15 compared with $3.24 for the 2013 first six months. Fuel escalation and de-escalation clauses on term contracts are designed to rebate fuel costs when prices decline and recover additional fuel costs when fuel prices rise; however, there is generally a 30 to 90 day delay before the contracts are adjusted. Spot contracts do not have escalators for fuel. 27 -------------------------------------------------------------------------------- Selling, general and administrative expenses for the 2014 second quarter and first six months increased 13% and 12%, respectively, compared with the 2013 second quarter and first six months reflecting salary increases effective April 1, 2014, higher incentive compensation and higher professional fees. In addition, the increase for the 2014 first six months reflected a first quarter severance charge of $2,215,000 and the 2013 first quarter included a $370,000 severance charge.



Marine Transportation Operating Income and Operating Margins

Marine transportation operating income for the 2014 second quarter and first six months increased 19% and 14%, respectively, compared with the 2013 second quarter and first six months. The operating margin was 25.4% for the 2014 second quarter compared with 23.0% for the 2013 second quarter. The operating margin for the 2014 first six months was 23.9% compared with 22.2% for the 2013 first six months. The higher operating income and operating margin was a reflection of continued high inland and coastal equipment utilization, leading to higher inland and coastal term and spot contract rates negotiated throughout 2013 and the 2014 first six months. The higher operating margin for the 2014 first six months was partially offset by the winter weather conditions experienced throughout the 2014 first quarter and the March 22, 2014 incident in the Houston Ship Channel. Diesel Engine Services The Company, through its diesel engine services segment, sells genuine replacement parts, provides service mechanics to overhaul and repair medium-speed and high-speed diesel engines, transmissions, reduction gears, pumps and compression products, maintains facilities to rebuild component parts or entire medium-speed and high-speed diesel engines, transmissions and entire reduction gears, and manufactures and remanufactures oilfield service equipment, including pressure pumping units. The Company primarily services the marine, power generation and land-based oil and gas operator and producer markets. The following table sets forth the Company's diesel engine services segment's revenues, costs and expenses, operating income and operating margins for the three months and six months ended June 30, 2014 compared with the three months and six months ended June 30, 2013 (dollars in thousands): Three months ended Six months ended June 30, June 30, % % 2014 2013 Change 2014 2013 Change

Diesel engine services revenues $ 171,309$ 140,040 22 % $ 324,784$ 280,307 16 % Costs and expenses: Costs of sales and operating expenses 134,228 110,255 22 253,031 220,300 15 Selling, general and administrative 19,469 11,669 67 38,044 24,434 56 Taxes, other than on income 488 457 7 972 1,009 (4 ) Depreciation and amortization 2,787 2,727 2 5,628 5,610 - 156,972 125,108 25 297,675 251,353 18 Operating income $ 14,337$ 14,932 (4 )% $ 27,109$ 28,954 (6 )% Operating margins 8.4 % 10.7 % 8.3 % 10.3 % 28



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Diesel Engine Services Revenues

The following table shows the markets serviced by the Company's diesel engine services segment, the revenue distribution for the 2014 second quarter and first six months and the customers for each market: 2014 Second 2014 Six Quarter Months Revenue Revenue Markets Serviced Distribution Distribution Customers Land-Based 68% 65% Land-Based Oilfield Services, Oil and Gas Operators and Producers, Compression, On-Highway Transportation Marine 24% 26% Inland River Carriers - Dry and Liquid, Offshore Towing - Dry and Liquid, Offshore Oilfield Services - Drilling Rigs & Supply Boats, Harbor Towing, Dredging, Great Lake Ore Carriers Power Generation Standby Power Generation, Pumping 8% 9% Stations Diesel engine services revenues for the 2014 second quarter and first six months increased 22% and 16%, respectively, compared with the 2013 second quarter and first six months, primarily attributable to an improvement in the sale and service of land-based diesel engines and transmissions, and a continued increase in the manufacture of oilfield service equipment, including pressure pumping units. Demand for the remanufacture of pressure pumping units remained steady throughout the 2014 second quarter and reflected an improvement over the 2013 second quarter and first six months. The marine diesel engine services market improved modestly, benefiting from major service projects for inland and coastal customers, as well as Gulf of Mexico and foreign offshore service vessels and drilling operators. The power generation market was stable, benefiting from major generator set upgrades and parts sales for both domestic and international power generation customers.



Diesel Engine Services Costs and Expenses

Costs and expenses for the 2014 second quarter and first six months increased 25% and 18%, respectively, compared with the 2013 second quarter and first six months. The increases in cost of sales and operating expenses were primarily attributable to the continued improvement in demand for the manufacturing of oilfield service equipment, including pressure pumping units, as well as the increase in the sale and service of land-based diesel engines and transmissions. The 2013 second quarter and first six months included a $6,100,000 and $10,400,000, respectively, 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.



Diesel Engine Services Operating Income and Operating Margins

Diesel engine services operating income for the 2014 second quarter decreased 4% compared with the 2013 second quarter. For the 2014 first six months, diesel engine services operating income decreased 6% compared with the 2013 first six months. The operating margin for the 2014 second quarter was 8.4% compared with 10.7% for the 2013 second quarter and 8.3% for the 2014 first six months compared with 10.3% for the 2013 first six months. The 2013 first quarter and first six months operating income and operating margin included the $6,100,000 and $10,400,000, respectively, credit to selling, general and administrative expenses noted above. Excluding the 2013 credits, the results reflected continued improvement in the marine and land-based markets and a stable power generation market.



General Corporate Expenses

General corporate expenses for the 2014 second quarter were $3,807,000, a 1% increase compared with $3,780,000 for the second quarter of 2013. For the first six months of 2014, general corporate expenses were $7,327,000, a 2% increase compared with $7,174,000 for the first six months of 2013.



Gain on Disposition of Assets

The Company reported a net gain on disposition of assets of $527,000 for the 2014 second quarter compared with a net gain of $537,000 for the 2013 second quarter. For the 2014 first six months, the Company reported a net gain on disposition of assets of $578,000 compared with a net gain of $505,000 for the first six months of 2013. The net gains were predominantly from the sale or retirement of marine equipment. 29



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Other Income (Expense)

The following table sets forth other income, noncontrolling interests and interest expense for the three months and six months ended June 30, 2014 compared with the three months and six months ended June 30, 2013 (dollars in thousands):

Three months ended Six months ended June 30, June 30, % % 2014 2013 Change 2014 2013 Change Other income (expense) $ 123$ 101 22 % $ (113 )$ 176 - % Noncontrolling interests $ (919 )$ (699 ) 31 % $ (1,684 )$ (1,673 ) 1 %



Interest

expense $ (5,469 )$ (7,219 ) (24 )%



$ (11,087 )$ (15,207 ) (27 )%

Interest Expense

Interest expense for the 2014 second quarter and first six months decreased 24% and 27%, respectively, compared with the 2013 second quarter and first six months. During the 2014 and 2013 second quarters, the average debt and average interest rate were $677,389,000 and 3.2%, and $1,047,935,000 and 2.7%, respectively. For the first six months of 2014 and 2013, the average debt and average interest rate, including the effect of interest rate swaps for a portion of the 2013 first quarter, were $705,836,000 and 3.1%, and $1,095,445,000 and 2.8%, respectively.


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Source: Edgar Glimpses


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