Kirby Corporation — FY2011 Form 10-K Summary
Business context and reporting period
Kirby Corporation reported for the fiscal year ended December 31, 2011. The company operates two segments: marine transportation of bulk liquid and dry-bulk products, and diesel engine services, including engine repair, parts distribution, power-generation services, and oilfield equipment manufacturing.
Kirby remained the largest U.S. domestic tank-barge operator. At year-end, it operated 819 inland tank barges, 59 coastal tank barges, 65 coastal tugboats and four offshore dry-bulk barge and tug units. The company had approximately 4,225 employees.
Financial performance and key metrics
| ($ in thousands, except per-share data) | 2011 | 2010 | Change |
|---|---|---|---|
| Revenue | $1,850,417 | $1,109,557 | +67% |
| Operating income | $312,343 | $200,044 | +56% |
| Operating margin | 16.9% | 18.0% | Down |
| Net earnings attributable to Kirby | $183,026 | $116,249 | +57% |
| Diluted EPS | $3.33 | $2.15 | +55% |
| Cash flow from operations | $311,995 | $245,246 | +27% |
| Capital expenditures | $226,238 | $136,841 | +65% |
| Total debt | $802,005 | $200,134 | +301% |
| Cash and cash equivalents | $16,249 | $195,600 | −92% |
Marine transportation revenue increased 31% to $1.195 billion, and operating income increased 36% to $262.2 million. The segment’s operating margin improved to 21.9% from 21.1%. Inland petrochemical and black-oil fleets operated at utilization levels in the low-to-mid 90% range; coastal utilization averaged in the mid-to-high 70% range.
Diesel engine services revenue increased 237% to $655.8 million, primarily from the United Holdings acquisition. Segment operating income increased 231% to $68.1 million, while the operating margin declined modestly to 10.4% from 10.6%.
Fourth-quarter 2011 revenue was $550.1 million, operating income was $92.9 million, net earnings attributable to Kirby were $56.2 million, and diluted EPS was $1.00. Fourth-quarter 2010 revenue was $286.3 million, operating income was $53.7 million, net earnings attributable to Kirby were $31.6 million, and diluted EPS was $0.59.
Material changes versus the prior comparable period
- The July 1, 2011 acquisition of K-Sea Transportation expanded Kirby into the U.S. coastal tank-barge market. Total transaction value was $603.4 million, funded with cash, debt and 1.94 million newly issued shares.
- The April 15, 2011 acquisition of United Holdings added land-based diesel engine distribution, transmission services, hydraulic-fracturing equipment and compression equipment. Cash consideration was $271.2 million, with a contingent earnout of up to $50.0 million.
- Additional marine acquisitions included Enterprise equipment for $53.2 million, Seaboats equipment for $42.7 million and a Kinder Morgan fleeting operation and towboat for approximately $5.3 million in aggregate.
- Marine transportation benefited from stronger petrochemical production, refinery activity, crude-oil movements and improved pricing. High water and flooding in the second quarter reduced 2011 earnings by an estimated $0.07 per share.
- Diesel engine services results shifted materially toward land-based operations. United generated approximately 69% of segment revenue in 2011, while the former EMD railroad distributorship was terminated during early 2011.
- Debt-to-capitalization increased to 35.5% from 14.7%, primarily because of acquisition financing. Total assets increased 65% to $2.960 billion, while goodwill increased 111% to $483.5 million.
- Cash flow from operations increased, but acquisitions and capital expenditures produced $1.089 billion of investing cash outflow and reduced year-end cash substantially.
Debt, liquidity and capital allocation
- Debt at December 31, 2011 consisted principally of a $507.0 million term loan, $95.0 million drawn on a $250.0 million revolving credit facility and $200.0 million of senior notes due February 2013.
- The term loan matures in 2016 and requires increasing quarterly amortization. The company was in compliance with all debt covenants at year-end.
- Available revolving-credit capacity was $155.0 million at December 31, 2011. As of February 21, 2012, management reported $175.953 million available under the revolving facility and $5.837 million under a separate credit line.
- 2011 capital expenditures were $226.2 million, including $114.7 million for inland tank barges and towboats. The company projected 2012 capital expenditures of $255 million to $265 million.
- Kirby paid no common-stock dividends and did not repurchase shares during 2011. The company has not paid dividends since 1989.
Guidance, outlook, risks and unusual items
Management expected continued improvement in inland petrochemical and black-oil demand, supported by competitive U.S. natural-gas feedstock costs, refinery activity, crude-oil movements and potential petrochemical capacity expansions. The company also expected the diesel engine services segment to benefit from installed hydraulic-fracturing horsepower and related repair and remanufacturing demand, although Gulf Coast oil-services activity remained weak.
The company identified approximately 230 inland tank barges ordered industry-wide for delivery during 2012. Management believed retirements of older vessels could moderate oversupply risk, but additional capacity could pressure utilization and pricing.
- Fuel costs represented approximately 14% of marine transportation revenue in 2011. Fuel escalation clauses generally have a 30- to 90-day lag, creating interim margin exposure.
- Weather, flooding, low or high water, lock outages and aging inland-waterway infrastructure can delay shipments and increase operating costs.
- Marine operations face environmental, spill, safety, Jones Act, USCG and potential climate-related regulatory risks. Three coastal tank barges were single hull and must be retired or converted by December 31, 2014.
- Hydraulic-fracturing regulation, customer cyclicality and increased competitor equipment could reduce demand for United’s products and services.
- Unusual 2011 items included a $1.252 million K-Sea integration severance charge, a $0.07-per-share increase in the United earnout liability, and a $0.03-per-share tax benefit from a favorable multi-year ruling.
- Contingencies included several CERCLA Superfund matters, a conditionally certified tankerman overtime collective action with no estimable loss, and a putative securities class action related to K-Sea that management considered without merit.
Most important facts for investors to verify
- Whether inland tank-barge utilization and contract pricing remained strong after the 2011 recovery and whether 2012 industry additions created oversupply.
- The contribution, margins and integration progress of K-Sea and United, including the final amount of United’s contingent earnout.
- Debt repayment requirements, the February 2013 senior-note maturity, covenant headroom and refinancing conditions.
- Whether operating cash flow can fund projected capital expenditures, acquisition-related obligations and pension contributions while maintaining adequate liquidity.
- Exposure to fuel-price lag, weather and waterway disruptions, environmental liabilities, labor litigation and hydraulic-fracturing regulation.
- The sustainability of reported earnings after excluding flooding impacts, acquisition-related costs, the earnout revaluation and the tax benefit.