Kirby Corporation — Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three months ended March 31, 2011, compared with the three months ended March 31, 2010. Kirby operates two reportable segments: marine transportation of bulk liquids and dry-bulk cargoes, and diesel engine services. At March 31, 2011, Kirby operated 829 active inland tank barges with 16.1 million barrels of capacity and an average of 230 inland towing vessels.
Financial Performance and Key Metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total revenue | $299.4 million | $268.3 million | Up 12% |
| Operating income | $55.6 million | $43.0 million | Up 29% |
| Net earnings attributable to Kirby | $32.4 million | $24.7 million | Up 31% |
| Diluted EPS | $0.60 | $0.46 | Up $0.14 |
| Net cash from operating activities | $63.8 million | $56.6 million | Up 13% |
| Capital expenditures | $31.1 million | $34.4 million | Down 10% |
- Marine transportation revenue increased 10% to $241.7 million, representing 81% of consolidated revenue. Segment operating income increased 25% to $52.7 million, and the operating margin improved to 21.8% from 19.3%.
- Diesel engine services revenue increased 18% to $57.7 million. Segment operating income increased 31% to $6.6 million, and the operating margin improved to 11.5% from 10.4%.
- Consolidated operating margin was approximately 18.6%, compared with approximately 16.0% in the prior-year quarter. Net margin attributable to Kirby was approximately 10.8%, compared with approximately 9.2%.
- Interest expense increased 6% to $2.8 million, primarily because of higher average interest rates. Average debt was approximately $200.1 million and the average interest rate, including swaps, was 5.7%.
- Cash and cash equivalents were $172.1 million at March 31, 2011, compared with $195.6 million at December 31, 2010. Total assets increased to $1.84 billion from $1.79 billion.
- Total debt was approximately $200.1 million, consisting primarily of $200.0 million of senior notes due February 2013. Debt-to-capitalization declined to 14.3% from 14.7% at year-end 2010.
- Kirby had no borrowings under its $250 million revolving credit facility and reported $249.989 million of availability at March 31, 2011. As of May 3, 2011, availability was $139.994 million after acquisition financing activity.
- Net cash used in investing activities was $87.9 million, including $58.5 million for acquisitions of businesses and marine equipment. Cash decreased by $23.5 million during the quarter.
Material Changes Versus the Prior Comparable Period
- Improved petrochemical production, black oil product demand, equipment utilization and pricing drove higher marine transportation results. Tank barge utilization in key petrochemical and black oil markets reached the low 90% range.
- Approximately 75% of marine transportation revenue was generated under term contracts and 25% under spot contracts. Time charters represented 56% of term-contract revenue, versus 49% in the prior-year quarter.
- Term contract renewals increased 2% to 4% year over year; spot rates increased 5% to 7% from the 2010 fourth quarter. Fuel prices increased 24%, to an average of $2.65 per gallon, with contractual fuel pass-throughs generally subject to a 30- to 90-day lag.
- Marine transportation delay days increased 9% to 1,981 because of more severe winter weather, ice, fog, high water and lock delays.
- Diesel engine services benefited from stronger medium-speed power-generation demand, engine-generator upgrades, higher parts and engine sales, and stronger Midwest and West Coast marine maintenance cycles. Gulf Coast oil-services activity remained weak.
- Selling, general and administrative expense declined in marine transportation and corporate operations because the 2010 quarter included retirement and staff-reduction charges.
- Property and equipment increased 5% from year-end, reflecting capital expenditures and acquired equipment. Goodwill increased 4% following the Enterprise and Kinder Morgan transactions.
Guidance, Outlook, Risks and Unusual Items
- Management projected 2011 capital expenditures of $220 million to $230 million, including approximately $100 million for 40 inland tank barges and three inland towboats, and approximately $36 million of progress payments on an offshore dry-bulk barge and tugboat unit.
- Management expected continued improvement in petrochemical and black oil markets, supported by stronger production, exports, low-cost natural gas feedstock and potential plant expansions or restarts. Industry fleet retirements were expected to offset approximately 150 new tank barges during 2011.
- The Gulf Coast oil-services market remained depressed, although management expected gradual improvement as Gulf of Mexico drilling permits resumed.
- On April 15, 2011, after quarter-end, Kirby acquired United Holdings for $270 million in cash, before adjustments, plus a potential earnout of up to $50 million payable in 2014. Financing used operating cash flow and revolving-credit borrowings.
- Kirby signed an agreement to acquire K-Sea Transportation for approximately $600 million, including cash, Kirby stock and refinancing of $265 million of K-Sea debt. Closing was anticipated in the third quarter of 2011, subject to customary conditions. Planned financing included the revolving credit facility and a new $540 million five-year senior unsecured term loan.
- Newly identified risk: additional federal or state regulation of hydraulic fracturing could materially reduce demand for United’s hydraulic fracturing equipment and related products.
- Other risks include economic weakness, competition, adverse weather and river conditions, marine accidents, lock delays, fuel-price volatility, interest rates, environmental regulation, acquisition execution and construction commitments.
- Kirby had $16.5 million of derivative liabilities at March 31, 2011. Interest-rate swaps covered $200 million of notional debt, and foreign-currency forward contracts totaled $14.0 million. Management expected $5.2 million of interest-rate swap losses and $1.0 million of foreign-currency losses in accumulated other comprehensive income to be reclassified into earnings over the following year.
- Environmental proceedings involve the Palmer Barge Line and State Marine Superfund sites. Kirby has recorded reserves for its estimated share of potential costs. Guarantees, letters of credit and performance bonds totaled $10.0 million; management did not expect material cash outlays.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Integration, financing and earnings contribution from the post-quarter-end United acquisition.
- Closing timing, regulatory status, purchase accounting and leverage impact of the proposed K-Sea acquisition.
- Whether marine utilization, contract renewals and fuel pass-throughs offset fuel costs, weather disruptions and lock delays.
- Progress against the $220 million to $230 million 2011 capital-expenditure plan and the resulting cash-flow requirements.
- Refinancing or repayment of the $200 million senior notes due February 2013 and compliance with revolving-credit and term-loan covenants.
- Potential effects of hydraulic-fracturing regulation on United and the diesel engine services segment.
- Resolution and ultimate cost allocation of the two Superfund matters and exposure under outstanding guarantees and performance bonds.