CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings of Kirby Corporation (KEX) following its announcement that KEX will acquire United Holdings LLC. The ratings have been affirmed as follows:
--Issuer Default Rating (IDR) at 'BBB';
--Unsecured credit facility rating at 'BBB';
--Senior unsecured rating at 'BBB'.
KEX's ratings apply to a $250 million unsecured revolving credit facility and $200 million of senior unsecured notes. The Rating Outlook is Stable.
On Feb. 21, 2011, KEX announced that it planned to acquire United Holdings for $270 million in cash (before post-closing adjustments) and an earn-out provision that could result in up to an additional $50 million payment in 2014. United Holdings is a diesel engine distributor and service provider for the oil and gas services, power generation and transportation industries. In addition, United Holdings manufactures oilfield service equipment, including equipment used in hydraulic fracturing for the gas drilling industry. The company plans to use cash on hand, as well as a draw on its credit facility, to fund the purchase. KEX expects the transaction to close in April 2011.
The planned acquisition is the largest that KEX has undertaken since its $321 million acquisition of Hollywood Marine in 1999. However, Fitch's existing ratings on the company have incorporated its acquisitive nature, and Fitch noted in its Sept. 10, 2010, rating action commentary on KEX that the company could potentially undertake a transaction of $200 million or more at some point. KEX ended 2010 with $196 million of cash and cash equivalents, significantly higher than it has historically held, and Fitch estimates that at year end nearly all of the company's $250 million unsecured revolving credit facility was available. However, earlier this month, KEX announced that it would acquire the ship bunkering assets of Enterprise Marine Services for $53 million, with an expected closing this month, so cash availability at the time of the United Services closing likely will be closer to $150 million. Nonetheless, KEX has a good track record of quickly repaying its acquisition borrowings, and Fitch believes the company likely will seek to repay any borrowings associated with this acquisition quickly as well.
Fitch estimates that fully funding the United Holdings acquisition with debt will result in near-term lease-adjusted leverage in the low 3 times (x) range, versus an estimated year-end 2010 figure of around 2.5x. However, with the estimated cash balance of $150 million following the closing of the Enterprise Marine Services acquisition, KEX is expected to have sufficient cash on hand to fund up to half or more of the United Holdings purchase, reducing the required amount of credit facility borrowings. Fitch expects KEX will produce positive free cash flow again in 2011, as it has over the past several years, which will provide the company with additional cash to reduce its acquisition-related credit facility borrowings over the course of the year.
KEX estimates that about 45% of United Holdings' projected 2011 revenue of $375 million to $450 million will be derived from diesel engine distribution and services work, with the remainder driven by manufacturing operations. United Holdings' engine services work appears to be generally consistent with KEX's existing service offerings, with a small amount of overlap in the two companies' customers, as well. With the acquisition, KEX will be able to combine its existing offshore services with onshore offerings that will grow its service footprint and the range of its service offerings. On the other hand, the manufacturing side of United Holdings' business appears to be relatively new to KEX and potentially presents more risk. Mitigating that somewhat, however, is the company's plan to keep United Holdings' current management team in place. Also, following the transaction, Fitch estimates that the manufacturing operations will remain relatively small compared to the size of the company's other businesses, with estimated 2011 full-year revenue of $200 million to $250 million versus total estimated pro forma annual KEX revenue (calculated using KEX's full-year 2010 revenue plus United Holdings' estimated full-year 2011 revenue) of about $1.5 billion following the acquisition. However, Fitch notes that manufacturing margins generally are lower than service margins, although KEX has not provided margin guidance for United Holdings. This potentially could result in somewhat lower near-term margins in KEX's Diesel Engine Services segment.
Outside of the acquisition, KEX's business fundamentals and credit profile generally remain solid. Market conditions in the tank barge business improved during 2010, although pricing remains weak relative to recent historical levels, due in part to the effects of term contracts that were entered into during the depths of the recession. Capacity utilization was running in the 80%-85% range during 2010, which bodes well for the pricing environment going forward. Free cash flow in the 12 months ended Sept. 30, 2010, was $115 million after $138 million of capital expenditures. Fitch expects free cash flow to be positive again in 2011, despite an increase in planned capital spending for the existing business to a range of $170 million to $180 million. Following the amendment of its revolving credit facility in November 2010, which now comes due in late 2015, KEX has no significant debt obligations until its $200 million of senior unsecured notes come due in February 2013.
KEX's acquisitive nature is the issue that has placed the most pressure on the company's ratings and is the single greatest factor limiting the potential for an Outlook revision to Positive or an upgrade in the ratings in the near term. Following the United Holdings acquisition, Fitch expects KEX to continue to look at acquisition candidates, although most are likely to be small and funded with available cash. On the other hand, KEX's Rating Outlook could be revised to Negative in the event that market conditions worsen over the intermediate term or if the company undertakes another very large acquisition that weakens its credit profile substantially for an extended period of time.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--Corporate Finance Rating Criteria Hierarchy (Interactive Compendium of Criteria Reports) (Dec. 20, 2010);
--Evaluating Corporate Governance (Dec. 16, 2010);
--Analysis of U.S. Corporate Pensions (Dec. 1, 2010);
--Corporate Rating Methodology (Aug. 13, 2010).
Applicable Criteria and Related Research:
Analysis of U.S. Corporate Pensions
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=578365
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646
Corporate Finance Rating Criteria Hierarchy (Interactive Compendium of Criteria Reports)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=520046
Evaluating Corporate Governance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=581405
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.