Kirby Corporation 2011 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
Kirby Corporation operates two reportable segments: marine transportation of liquid and dry-bulk products and diesel engine services, including engine and transmission distribution, repair, parts, power-generation services, and hydraulic-fracturing equipment manufacturing. This unaudited Form 10-Q covers the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods.
Results include the April 15, 2011 acquisition of United Holdings LLC and the July 1, 2011 acquisition of K-Sea Transportation Partners L.P. At September 30, 2011, Kirby operated 827 active inland tank barges, 57 coastwise and local tank barges, and related towing vessels.
Financial Performance and Key Metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Revenue | $563.6 million | $281.3 million | $1,300.3 million | $823.2 million |
| Operating income | $92.3 million | $52.7 million | $219.4 million | $146.4 million |
| Net earnings attributable to Kirby | $52.7 million | $30.7 million | $126.9 million | $84.6 million |
| Diluted EPS | $0.94 | $0.57 | $2.33 | $1.56 |
| Net cash from operating activities | Not separately provided | Not separately provided | $215.3 million | $169.8 million |
- Revenue increased 100% in the third quarter and 58% for the first nine months. Net earnings attributable to Kirby increased 72% and 50%, respectively; diluted EPS increased 65% and 49%.
- Calculated consolidated operating margins were approximately 16.4% in Q3 2011 versus 18.7% in Q3 2010, and 16.9% for the first nine months versus 17.8% in the prior-year period. The decline primarily reflects acquisition-related costs, higher depreciation, and increased corporate expenses.
- Marine transportation revenue increased 51% in Q3 and 26% for the first nine months. Segment operating income increased 52% and 32%, with operating margins of 22.2% and 22.0%, compared with 22.1% and 21.0% in the comparable periods.
- Diesel engine services revenue increased 338% in Q3 and 213% for the first nine months. Segment operating income increased 371% and 232%, while margins improved to 10.0% and 10.3% from 9.3% and 9.7%.
- Operating cash flow increased 27% year over year for the first nine months. Capital expenditures were $163.2 million, and acquisitions and marine equipment purchases used $816.8 million.
- Cash and cash equivalents declined to $8.4 million at September 30, 2011 from $195.6 million at December 31, 2010, primarily due to acquisitions and capital spending.
Material Changes Versus the Prior Comparable Period
- The United acquisition added land-based diesel engine, transmission, compressor, and hydraulic-fracturing equipment activities. The purchase price was $271.2 million in cash plus a contingent earnout with a recorded fair value of $16.3 million and a potential maximum payment of $50.0 million.
- The K-Sea acquisition expanded Kirby into coastwise and local tank-barge transportation. Total consideration was $603.4 million, including $227.6 million paid to equity holders, $262.8 million used to retire K-Sea debt, and $113.0 million of Kirby stock.
- Total assets increased 60% to $2.87 billion. Net property and equipment increased 58% to $1.76 billion, and goodwill increased 109% to $478.9 million, primarily due to acquisitions.
- Total debt increased substantially. Debt-to-capitalization increased to 36.0% from 14.7% at December 31, 2010, primarily due to acquisition financing.
- Interest expense increased 117% in Q3 and 49% for the first nine months because of the new term loan and borrowings under the revolving credit facility.
- Marine transportation benefited from stronger petrochemical and black-oil demand, higher utilization, improved contract pricing, and fuel-cost pass-throughs. High water and flooding adversely affected the first nine months, particularly the second quarter.
- Diesel engine services benefited from strong demand for hydraulic-fracturing equipment and related services, but Gulf Coast oil-services repair and parts activity remained weak.
Debt, Liquidity, Guidance, Outlook, and Risks
- At September 30, 2011, the company had $513.5 million outstanding under a $540.0 million unsecured term loan due May 31, 2016, $83.3 million outstanding under its $250.0 million revolving credit facility due November 9, 2015, and $200.0 million of senior notes due February 28, 2013.
- The company reported compliance with the covenants governing the term loan, revolving facility, and senior notes. Approximately $166.7 million remained available under the revolving facility at September 30, 2011; availability was reported at $208.6 million as of November 2, 2011.
- Management projected 2011 capital expenditures of approximately $225 million to $235 million, including construction of 40 inland tank barges, two inland towboats, and progress payments on two offshore dry-bulk barge and tug units.
- Management expected future capital spending to be funded through operating cash flow and available credit. No earnings guidance was provided.
- Management cited continued improvement in petrochemical and black-oil markets, inland utilization in the low-to-mid 90% range, and potential benefits from U.S. petrochemical production and shale-related crude transportation. The coastwise and local market had weaker utilization, particularly in New York harbor.
- Key risks include economic weakness, fuel-price volatility and timing of fuel-cost recovery, weather and flooding, marine accidents, navigational delays, interest-rate and counterparty risk, competition, crew availability, union negotiations, Jones Act changes or waivers, and regulation of hydraulic fracturing.
- Approximately 49% of K-Sea seagoing personnel were covered by a labor agreement that expired June 30, 2011; negotiations were continuing.
- The company is involved in several CERCLA Superfund matters, including Gulfco, Portland Harbor, Palmer, and State Marine. Liability allocations remain unresolved for certain sites, although management believes reserves and insurance coverage are adequate.
- The company expected to contribute $15 million to $25 million to its pension plan before December 31, 2011; no 2011 contributions had been made as of September 30.
- Interest-rate swaps had a $200.0 million notional amount, and foreign-currency hedges had an $8.5 million notional amount. The company expected approximately $5.1 million of net interest-rate swap losses and $0.5 million of foreign-currency contract losses to be reclassified from accumulated other comprehensive income over the following year.
Important Facts for Investors to Verify
- Assess the sustainability of earnings growth after excluding the partial-period contribution from United and K-Sea and the impact of acquisition-related costs.
- Reconcile the sharp increase in leverage and the limited cash balance with acquisition funding, scheduled term-loan amortization, and the February 2013 senior-note maturity.
- Monitor marine utilization, contract renewals, fuel-cost recovery timing, flooding and weather impacts, and the lower-utilization New York harbor fleet.
- Evaluate United’s exposure to hydraulic-fracturing regulation and the durability of its unusually strong acquisition-period margins.
- Review the finalization of acquisition fair values, goodwill and intangible-asset amortization, and the potential United earnout liability.
- Track union negotiations involving K-Sea personnel, CERCLA liability allocations, pension funding, and compliance with debt covenants.
- Confirm the effect of the September 2011 goodwill-impairment accounting update, which management was still evaluating.