Kirby Corporation: Q1 2012 Form 10-Q Summary
Business Context and Reporting Period
Kirby Corporation filed an unaudited Form 10-Q for the three months ended March 31, 2012. The company operates two reportable segments: marine transportation and diesel engine services. Its marine fleet included 806 inland tank barges, 58 coastal tank barges and 65 coastal tugboats at March 31, 2012. The diesel engine services segment includes engine and transmission distribution, repair and overhaul services, power-generation services and oilfield equipment manufacturing.
Results include the July 2011 acquisition of K-Sea Transportation Partners, now Kirby Offshore Marine, and the April 2011 acquisition of United Holdings. These acquisitions significantly affect year-over-year comparability.
Financial Performance and Key Metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenue | $566.9 million | $299.4 million | +89% |
| Operating income | $89.1 million | $55.6 million | +60% |
| Operating margin | 15.7% | 18.6% | Down |
| Net earnings attributable to Kirby | $50.9 million | $32.4 million | +57% |
| Diluted EPS | $0.91 | $0.60 | +52% |
| Net margin attributable to Kirby | 9.0% | 10.8% | Down |
| Net cash from operating activities | $73.4 million | $63.8 million | +15% |
| Capital expenditures | $61.9 million | $31.1 million | +99% |
Marine transportation revenue increased 39% to $336.0 million, and segment operating income increased 30% to $68.5 million. The segment margin declined to 20.4% from 21.8%, primarily because of the lower-margin coastal operations and a $2.4 million severance charge related to administrative integration.
Diesel engine services revenue increased 300% to $231.0 million, and segment operating income increased 257% to $23.6 million. The segment margin declined to 10.2% from 11.5%, partly because of a $4.2 million increase in the fair value of the United acquisition earnout liability.
At March 31, 2012, total assets were $3.0 billion, including $1.85 billion of net property and equipment and $483.0 million of goodwill. Cash and cash equivalents were $5.0 million, compared with $16.2 million at December 31, 2011. Total debt was approximately $773.0 million, compared with approximately $802.0 million at year-end, and the debt-to-capitalization ratio declined to 33.9% from 35.5%.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by the K-Sea and United acquisitions, stronger inland petrochemical and black-oil demand, higher equipment utilization and higher fuel-related revenue adjustments.
- Marine transportation inland tank-barge utilization was in the low-to-mid 90% range, compared with the low 90% range in Q1 2011. Inland term-contract renewals increased approximately 4% to 6% on average.
- Diesel fuel prices increased 19% year over year to approximately $3.16 per gallon, while fuel escalation provisions generally allowed the company to recover higher costs, subject to timing delays.
- Interest expense increased 106% to $5.8 million because of acquisition-related borrowings, although average debt increased substantially while the average interest rate, including swaps, declined to 3.0% from 5.7%.
- Cash flow from operations increased, but capital expenditures nearly doubled and investing cash outflow decreased to $58.4 million from $87.9 million because there were no comparable acquisitions in Q1 2012.
- The company reported a $4.2 million pretax earnout remeasurement charge and a $2.4 million pretax severance charge. Management indicated these charges reduced Q1 2012 EPS by approximately $0.05 and $0.03, respectively.
Liquidity, Debt and Capital Allocation
The company generated $73.4 million of operating cash flow and used $61.9 million for capital expenditures, $26.1 million for financing activities and $58.4 million for investing activities. Cash declined by $11.2 million during the quarter to $5.0 million.
Debt consisted principally of $500.5 million outstanding under the term loan, $72.5 million under the revolving credit facility and $200.0 million of senior notes due February 2013. The company was in compliance with applicable debt covenants. As of March 31, 2012, it reported $177.5 million of availability under the revolving credit facility; as of May 2, 2012, reported availability was $170.1 million. A separate $10.0 million credit line had no borrowings outstanding, with $5.7 million available as of May 2, 2012.
Management projected 2012 capital expenditures of $265 million to $275 million, including approximately $110 million for 55 inland tank barges and five inland towboats, approximately $70 million for two offshore articulated dry-bulk barge and tugboat units, and the balance for fleet and facility upgrades.
Outlook, Commentary, Risks and Unusual Items
- Management expected strong petrochemical production, refinery activity, crude-oil movements and low-cost natural-gas feedstock to support inland marine demand.
- Coastal markets remained weaker, with excess capacity, seasonal declines, mild Northeast weather and lower utilization. Coastal utilization averaged in the mid-to-high 70% range.
- Management expected diesel engine services demand to benefit from Gulf of Mexico drilling, marine overhaul work and power-generation upgrades. Low natural-gas prices had reduced natural-gas exploration, while crude-oil shale activity remained positive but caused a temporary pause in new oilfield-equipment orders.
- Key operating risks include economic weakness, competition and industry overcapacity, fuel-price volatility, weather and navigational delays, marine accidents, interest rates, environmental regulation, acquisition integration and the timing and magnitude of future acquisitions.
- The company had $26.8 million recorded for the United contingent earnout liability, which may increase or decrease based on estimated future payments.
- Interest-rate swaps had $200.0 million of notional value and foreign-currency forwards had $3.1 million of notional value. The company expected approximately $4.9 million of interest-rate swap losses and $0.2 million of foreign-currency contract losses in accumulated other comprehensive income to be reclassified into earnings over the following year.
- Environmental contingencies include several CERCLA Superfund sites. The company stated that reserves had been recorded where appropriate, but certain allocations and potential liabilities remained unresolved.
- A Fair Labor Standards Act collective action involving vessel tankermen had been conditionally certified; the company could not estimate a loss or range of loss. A separate putative securities class action related to K-Sea was considered without merit by management, which did not expect a material adverse effect but could not assure the outcome.
- Guarantees, letters of credit and performance bonds totaled $29.1 million, including $8.5 million of letters of credit and $20.7 million of performance bonds. Management did not expect material cash outlays under these instruments.
Most Important Facts for Investors to Verify
- Whether inland utilization and contract-rate increases offset coastal weakness and industry capacity additions.
- The sustainability of earnings from the acquired United and Kirby Offshore Marine operations, excluding the identified acquisition-related charges.
- The company’s ability to refinance or repay the $200.0 million of senior notes due February 2013 while funding planned capital expenditures.
- Progress against the $265 million to $275 million 2012 capital-expenditure plan and its effect on leverage and free cash flow.
- Changes in the United earnout liability and the related impact on selling, general and administrative expense.
- Developments in the tankerman overtime litigation, environmental matters and K-Sea securities litigation.
- Exposure to fuel-price timing, interest-rate movements, counterparty performance under hedges and compliance with debt covenants.