Business Context and Reporting Period
Kirby Corporation filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2011. Kirby operates two reportable segments: Marine Transportation and Diesel Engine Services. It is the largest domestic inland tank barge operator and, through its diesel engine services business, provides engine, transmission and oilfield equipment services.
The results include United Holdings LLC from its April 15, 2011 acquisition. The July 1, 2011 acquisition of K-Sea Transportation Partners occurred after the reporting date and is therefore not included in reported operating results.
Financial Metrics
| Metric | Three months ended June 30, 2011 | Three months ended June 30, 2010 | Six months ended June 30, 2011 | Six months ended June 30, 2010 |
|---|---|---|---|---|
| Revenue | $437.3 million | $273.7 million | $736.7 million | $541.9 million |
| Operating income | $71.5 million | $50.6 million | $127.1 million | $93.6 million |
| Net earnings attributable to Kirby | $41.7 million | $29.3 million | $74.1 million | $53.9 million |
| Diluted EPS | $0.77 | $0.54 | $1.38 | $1.00 |
| Operating margin | 16.3% | 18.5% | 17.3% | 17.3% |
| Net margin attributable to Kirby | 9.5% | 10.7% | 10.1% | 10.0% |
- Marine Transportation revenue increased 16% in the quarter and 13% year to date; segment operating income increased 18% and 21%, respectively. Operating margins were 21.9% and 21.8%, versus 21.6% and 20.4% in the comparable periods.
- Diesel Engine Services revenue increased 293% in the quarter and 148% year to date, primarily because of the United acquisition. Segment operating income increased 328% and 164%, respectively, with margins of 10.3% and 10.6%.
- Six-month operating cash flow was $117.8 million, compared with $103.0 million in 2010. Capital expenditures were $98.0 million, and acquisitions of businesses and marine equipment used $330.4 million.
- Cash and cash equivalents declined to $7.3 million at June 30, 2011 from $195.6 million at December 31, 2010, primarily reflecting acquisitions and capital spending.
- Total assets were $2.12 billion, up 18% from year-end 2010. Trade receivables were $255.0 million and inventories were $116.9 million, reflecting acquired businesses and higher activity levels.
Debt, Liquidity and Capital Resources
- Debt outstanding at June 30, 2011 included $119.7 million under the $250 million revolving credit facility and $200 million of floating-rate senior notes due February 2013. Current and long-term debt totaled approximately $319.8 million.
- The company had $130.3 million available under the revolving facility at June 30 and reported $119.3 million available as of August 2, 2011. It also had $5.5 million available under a separate $10 million credit line as of August 2.
- Debt-to-capitalization increased to 20.5% from 14.7% at December 31, 2010. Kirby remained in compliance with its debt covenants.
- On May 31, 2011, Kirby entered into a $540 million unsecured term loan facility, which was funded on July 1 to finance the K-Sea acquisition. The term loan matures May 31, 2016 and carries a variable rate currently stated as 1.5% over LIBOR.
- Kirby projected 2011 capital expenditures of $225 million to $235 million, including new inland tank barges, towboats and offshore dry-bulk units.
Material Changes Versus the Prior Comparable Period
- Revenue increased 60% in the second quarter and 36% for the first six months. The major driver was the United acquisition, supplemented by stronger marine transportation demand and utilization.
- Reported earnings growth was partially offset by high water and flooding on the Mississippi River System and near Morgan City. Management estimated an unfavorable impact of approximately $0.07 per share for both the quarter and first six months.
- The diesel engine services segment’s revenue mix shifted materially because United added land-based oilfield equipment, engine and transmission activity. United generated approximately 70% of segment revenue in the second quarter.
- Interest expense increased 22% in the quarter and 14% year to date because of borrowings used to finance United.
- Goodwill increased 61% to $369.3 million, primarily from acquisitions. Other assets increased to $95.4 million from $22.0 million, mainly due to acquired intangible assets.
- Operating working capital absorbed more cash: changes in operating assets and liabilities reduced cash flow by $38.9 million versus $6.8 million in the prior-year period.
Guidance, Outlook, Risks and Unusual Items
- Management reported marine tank barge utilization in the low-to-mid 90% range, the strongest levels since the third quarter of 2008. It expected continued support from petrochemical production, refinery activity, black oil exports and crude oil movements.
- The company expected gradual improvement in Gulf Coast oil services, while United was positioned to benefit from demand for hydraulic fracturing equipment and related engine and transmission services.
- The K-Sea acquisition added 58 tank barges and 63 tugboats serving the U.S. coastwise trade. The transaction value was $603.4 million, funded with $227.6 million of cash to holders, $262.8 million to retire K-Sea debt and $113.0 million of Kirby common stock.
- Key risks include flooding and adverse weather, fuel price volatility and delayed fuel-cost recovery, marine accidents and navigational disruptions, crew availability, interest rates, acquisition integration, and economic weakness.
- Additional risks include potential regulation of hydraulic fracturing, union labor disruptions affecting K-Sea, and changes or waivers involving Jones Act requirements.
- Kirby was investigating potential liability related to the Gulfco Superfund site and remained involved in claims involving the Palmer Barge Line and State Marine Superfund sites. Management stated that reserves, insurance or defenses were adequate and that other proceedings were not expected to materially affect results.
- The company had $16.5 million of guaranties, letters of credit and performance bonds outstanding at June 30, 2011 and did not expect material cash outlays under these instruments.
Investor Verification Items
- Verify the post-quarter K-Sea acquisition accounting, resulting leverage, interest expense and integration performance.
- Reconcile reported growth with the contribution from United and assess whether United’s initial margins are sustainable.
- Monitor cash balances, working-capital requirements, revolver availability and the February 2013 senior-notes maturity.
- Assess the effect of flooding, fuel-price escalation clauses and spot-market exposure on future marine margins.
- Review potential hydraulic-fracturing regulation and K-Sea labor negotiations for effects on operating demand and continuity.
- Evaluate goodwill, acquired intangible assets and the United contingent earnout, which could require future cash payment of up to $50 million.