Business Context and Reporting Period
Kirby Corporation’s Form 10-K reports the fiscal year ended December 31, 2010, with unaudited fourth-quarter information included. Kirby operates two segments: marine transportation of bulk liquid and dry-bulk commodities, and diesel engine services for marine, power-generation and railroad customers. The filing was signed February 25, 2011, and KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
- Marine transportation represented 82% of 2010 revenue and operated 825 active inland tank barges with 15.9 million barrels of capacity.
- Diesel engine services represented 18% of revenue; 65% of segment revenue came from marine customers, 27% from power generation and 8% from railroad customers.
Financial Metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Revenue | $1,109.6 million | $1,082.2 million | +3% |
| Operating income | $200.0 million | $216.0 million | -7% |
| Net earnings attributable to Kirby | $116.2 million | $125.9 million | -8% |
| Diluted EPS | $2.15 | $2.34 | -8% |
| Net cash from operations | $245.2 million | $319.9 million | -23% |
| Capital expenditures | $136.8 million | $192.7 million | -29% |
| Cash and cash equivalents | $195.6 million | $97.8 million | +100% |
| Total assets | $1,794.9 million | $1,636.0 million | +10% |
| Long-term debt, including current portion | $200.1 million | $200.2 million | Flat |
| Total equity | $1,159.1 million | $1,056.1 million | +10% |
Consolidated operating margin was approximately 18.0%, compared with approximately 20.0% in 2009. The effective income-tax rate was approximately 38.1%. Marine transportation operating income was $192.8 million, with a 21.1% margin versus 23.6% in 2009. Diesel engine services operating income was $20.6 million, with a 10.6% margin versus 10.5% in 2009.
At December 31, 2010, the company had no borrowings under its $250.0 million revolving credit facility and had $200.0 million of unsecured senior notes due February 28, 2013. Debt-to-capitalization declined to 14.7% from 15.9%. The company reported compliance with its debt covenants.
Material Changes Versus Prior Comparable Period
- Revenue increased modestly as petrochemical and black-oil demand and equipment utilization improved, while lower contract and spot rates, higher fuel costs and increased delay days reduced profitability.
- Marine transportation revenue increased 4%, but operating income declined 7% and the operating margin fell 250 basis points to 21.1%.
- Diesel engine services revenue declined 3% and operating income declined 2%. Weak Gulf Coast oil-services activity, deferred maintenance, drilling restrictions and pricing pressure offset stronger power-generation activity.
- Marine contract revenue mix shifted to approximately 75% term contracts and 25% spot contracts, compared with approximately 80% and 20%, respectively, in 2009.
- Fuel consumption increased to 43.3 million gallons from 41.8 million gallons, while average fuel cost increased to $2.22 per gallon from $1.72.
- Net cash from operations declined primarily because stronger activity increased receivables and the company recorded an $11.1 million federal income-tax receivable. The company also made an $11.9 million pension contribution, compared with none in 2009.
- The company repurchased 618,000 shares for $23.8 million in 2010, compared with 20,000 shares for $0.7 million in 2009.
- There was no goodwill impairment in 2010; 2009 included a $1.9 million impairment charge related to Osprey.
Guidance, Outlook, Risks and Unusual Items
Management stated that the 2011 outlook was unclear. Utilization improved in 2010 and industry tank-barge capacity declined modestly, but excess capacity, a sluggish economy, high unemployment, weak consumer confidence and uncertainty surrounding Gulf of Mexico drilling regulations remained concerns.
- Projected 2011 capital expenditures were $185 million to $195 million, including approximately $100 million for new tank barges and towboats, assuming completion of the United acquisition.
- At year-end, construction commitments included 40 tank barges and three 1,800-horsepower towboats.
- After year-end, Kirby purchased marine equipment from Enterprise for approximately $53.2 million and acquired a 51% interest in a Kinder Morgan fleeting operation for $4.1 million plus a towboat for $1.3 million.
- Kirby agreed to acquire United Holdings for $270 million in cash, plus a potential earnout of up to $50 million. Closing was expected in April 2011 and remained subject to regulatory and other conditions.
- Major risks include excess tank-barge capacity, fuel-price volatility and timing of fuel-cost pass-throughs, weather and lock disruptions, marine accidents and pollution, environmental and safety regulation, Jones Act compliance, customer concentration and cyclical demand in petrochemical, refining, oil-services and power-generation markets.
- Dow accounted for 12% of 2010 revenue and SeaRiver accounted for 11%; together they represented approximately 23% of revenue.
- Kirby remained a potentially responsible party at two Port Arthur, Texas, CERCLA sites. The EPA and DOJ had asserted historical cleanup cost claims of approximately $2.9 million at each site; Kirby recorded reserves for its estimated share.
- Operating leases, debt, construction commitments and other contractual obligations totaled approximately $409.9 million, including $100.8 million of tank-barge and towboat construction commitments.
Investor Verification Priorities
- Verify the closing, financing and integration results of the United Holdings acquisition and the related impact on leverage and liquidity.
- Assess whether marine contract rates and spot rates recover from the declines experienced in 2009 and the first half of 2010.
- Monitor tank-barge industry supply, retirements, utilization and pricing for evidence that excess capacity is moving toward balance.
- Review the February 2013 maturity of the $200 million senior notes and the company’s refinancing or repayment plans.
- Evaluate exposure to Dow, SeaRiver and other major customers, as well as contract renewal and term-versus-spot mix.
- Reconcile the reported cash balance and unused revolving capacity with planned 2011 capital expenditures, acquisitions, share repurchases and pension funding.
- Review reserves and developments relating to the CERCLA matters, environmental liabilities, insurance claims and regulatory contingencies.
- Confirm that management’s stated cost reductions and improved utilization offset fuel, maintenance, labor and regulatory cost pressures.