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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-7615
KIRBY CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEVADA 74-1884980
- ---------------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
55 WAUGH DRIVE, SUITE 1000, HOUSTON, TX 77007
- ---------------------------------------- ---------------------------------
(Address of principal executive offices) (Zip Code)
(713) 435-1000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
No Change
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [X] No [ ]
The number of shares outstanding of the registrant's Common Stock, $.10 par
value per share, on November 8, 2004 was 24,807,000.
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED BALANCE SHEETS
(UNAUDITED)
ASSETS
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------ -----------
($ IN THOUSANDS)
Current assets:
Cash and cash equivalents $ 19,775 $ 4,064
Accounts receivable:
Trade - less allowance for doubtful accounts 89,551 80,585
Other 6,897 17,347
Inventory - finished goods 16,604 13,991
Prepaid expenses and other current assets 15,736 13,173
Deferred income taxes 2,604 2,619
-------- --------
Total current assets 151,167 131,779
-------- --------
Property and equipment 963,116 890,923
Less accumulated depreciation 392,992 354,411
-------- --------
570,124 536,512
-------- --------
Investment in marine affiliates 11,927 9,162
Goodwill - net 160,641 156,726
Other assets 14,872 20,782
-------- --------
$908,731 $854,961
======== ========
See accompanying notes to condensed financial statements.
2
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------ -----------
($ IN THOUSANDS)
Current liabilities:
Current portion of long-term debt $ 1,359 $ 225
Income taxes payable 722 897
Accounts payable 41,041 41,577
Accrued liabilities 52,862 50,725
Deferred revenues 5,251 5,444
--------- ---------
Total current liabilities 101,235 98,868
--------- ---------
Long-term debt - less current portion 250,038 255,040
Deferred income taxes 117,515 106,134
Minority interests 2,791 2,933
Other long-term liabilities 22,518 19,854
--------- ---------
392,862 383,961
--------- ---------
Contingencies and commitments -- --
Stockholders' equity:
Preferred stock, $1.00 par value per share. Authorized
20,000,000 shares -- --
Common stock, $.10 par value per share. Authorized
60,000,000 shares, issued 30,907,000 shares 3,091 3,091
Additional paid-in capital 182,776 178,720
Accumulated other comprehensive income (6,543) (5,950)
Deferred compensation (2,432) (1,003)
Retained earnings 346,623 310,575
--------- ---------
523,515 485,433
Less cost of 6,265,000 shares in treasury (6,590,000 at
December 31, 2003) 108,881 113,301
--------- ---------
414,634 372,132
--------- ---------
$ 908,731 $ 854,961
========= =========
See accompanying notes to condensed financial statements.
3
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED STATEMENTS OF EARNINGS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2004 2003 2004 2003
--------- --------- --------- ---------
($ IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues:
Marine transportation $ 153,114 $ 134,396 $ 437,672 $ 396,617
Diesel engine services 20,275 20,111 63,908 64,829
--------- --------- --------- ---------
173,389 154,507 501,580 461,446
--------- --------- --------- ---------
Costs and expenses:
Costs of sales and operating expenses 108,690 98,800 320,008 300,804
Selling, general and administrative 21,331 18,069 60,775 54,381
Taxes, other than on income 3,398 3,385 10,800 9,921
Depreciation and other amortization 14,015 13,369 41,403 38,495
Loss (gain) on disposition of assets 43 (71) 241 62
--------- --------- --------- ---------
147,477 133,552 433,227 403,663
--------- --------- --------- ---------
Operating income 25,912 20,955 68,353 57,783
Equity in earnings (loss) of marine affiliates (782) 1,022 534 2,209
Other expense (415) (134) (737) (736)
Interest expense (3,344) (3,761) (10,008) (11,082)
--------- --------- --------- ---------
Earnings before taxes on income 21,371 18,082 58,142 48,174
Provision for taxes on income (8,121) (6,871) (22,094) (18,306)
--------- --------- --------- ---------
Net earnings $ 13,250 $ 11,211 $ 36,048 $ 29,868
========= ========= ========= =========
Net earnings per share of common stock:
Basic $ .54 $ .46 $ 1.48 $ 1.24
========= ========= ========= =========
Diluted $ .53 $ .46 $ 1.44 $ 1.22
========= ========= ========= =========
See accompanying notes to condensed financial statements.
4
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2004 2003
-------- ---------
($ IN THOUSANDS)
Cash flows from operating activities:
Net earnings $ 36,048 $ 29,868
Adjustments to reconcile net earnings to net cash provided by
operations:
Depreciation and other amortization 41,403 38,495
Deferred income taxes 11,715 986
Equity in earnings of marine affiliates, net of distributions 705 702
Other 1,601 1,617
Increase in cash flows resulting from changes in operating
assets and liabilities, net 8,036 8,058
-------- ---------
Net cash provided by operating activities 99,508 79,726
-------- ---------
Cash flows from investing activities:
Capital expenditures (75,810) (52,187)
Acquisitions of businesses and marine equipment (9,785) (37,816)
Proceeds from disposition of assets 2,258 3,622
-------- ---------
Net cash used in investing activities (83,337) (86,381)
-------- ---------
Cash flows from financing activities:
Payments on bank credit facilities, net (5,000) (245,700)
Proceeds from senior notes -- 250,000
Payments on long-term debt (168) (252)
Proceeds from exercise of stock options 5,298 3,388
Other (590) (464)
-------- ---------
Net cash provided by (used in) financing activities (460) 6,972
-------- ---------
Increase in cash and cash equivalents 15,711 317
Cash and cash equivalents, beginning of year 4,064 1,432
-------- ---------
Cash and cash equivalents, end of period $ 19,775 $ 1,749
======== =========
Supplemental disclosures of cash flow information:
Cash paid during the period:
Interest $ 9,610 $ 10,048
Income taxes $ 6,033 $ 15,958
Noncash investing activity:
Notes payable issued in acquisition $ 1,300 $ --
Disposition of assets for notes receivable $ -- $ 900
See accompanying notes to condensed financial statements.
5
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
In the opinion of management, the accompanying unaudited condensed
financial statements of Kirby Corporation and consolidated subsidiaries (the
"Company") contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position as of September 30,
2004 and December 31, 2003, and the results of operations for the three months
and nine months ended September 30, 2004 and 2003.
(1) BASIS FOR PREPARATION OF THE CONDENSED FINANCIAL STATEMENTS
The condensed financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Although the Company believes that the
disclosures are adequate to make the information presented not misleading,
certain information and footnote disclosures, including significant accounting
policies normally included in annual financial statements, have been condensed
or omitted pursuant to such rules and regulations. It is suggested that these
condensed financial statements be read in conjunction with the Company's Annual
Report on Form 10-K for the year ended December 31, 2003.
(2) ACQUISITIONS
On January 15, 2003, the Company purchased from SeaRiver Maritime, Inc.
("SeaRiver"), the U.S. transportation affiliate of Exxon Mobil Corporation, 45
double hull inland tank barges and seven inland towboats for $32,113,000 in
cash, and assumed from SeaRiver the leases of 16 double hull inland tank barges.
On February 28, 2003, the Company purchased three double hull inland tank barges
leased by SeaRiver from Banc of America Leasing & Capital, LLC ("Banc of America
Leasing") for $3,453,000 in cash. The Company entered into a contract to provide
inland marine transportation services to SeaRiver, transporting petrochemicals,
refined petroleum products and black oil products throughout the Gulf
Intracoastal Waterway and the Mississippi River System. Financing of the
equipment acquisitions was through the Company's revolving credit facility.
On April 7, 2004, the Company purchased from Walker Paducah Corp.
("Walker"), a subsidiary of Ingram Barge Company ("Ingram"), Walker's diesel
engine service operation and parts inventory located in Paducah, Kentucky for
$5,755,000 in cash. In addition, the Company entered into a contract to provide
diesel engine services to Ingram. Financing of the acquisition was through the
Company's bank revolving credit facility.
On April 16, 2004, the Company purchased a one-third interest in Osprey
Line, LLC ("Osprey") for $4,220,000. The purchase price consisted of cash of
$2,920,000 and notes payable totaling $1,300,000 due in April 2005. The
remaining two-thirds interest is owned by Cooper/T. Smith Corporation and
Richard L. Couch. Osprey, formed in 2000, operates a barge feeder service for
cargo containers between Houston, New Orleans and Baton Rouge, as well as
several ports located above Baton Rouge on the Mississippi River. Revenues for
Osprey for 2003 were approximately $11,700,000. The purchase will be accounted
for under the equity method of accounting and the cash portion of the purchase
price was financed through the Company's revolving credit facility.
6
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
(3) ACCOUNTING STANDARDS
In June 2001, Statement of Financial Accounting Standards No. 143,
"Accounting for Asset Retirement Obligations" ("SFAS No. 143") was issued. SFAS
No. 143 addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and associated asset
retirement costs. SFAS No. 143 requires the fair value of a liability associated
with an asset retirement be recognized in the period in which it is incurred if
a reasonable estimate of fair value can be determined. The associated retirement
costs are capitalized as part of the carrying amount of the long-lived asset and
depreciated over the life of the asset. The Company adopted SFAS No. 143
effective January 1, 2003 with no effect on the Company's financial position or
results of operations.
In April 2002, Statement of Financial Accounting Standards No. 145,
"Rescission of SFAS No. 4, 44, and 64, Amendment of SFAS No. 13 and Technical
Corrections" ("SFAS No. 145") was issued. SFAS No. 145 provides guidance for
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions and income statement classification of
gains and losses on extinguishment of debt. The Company adopted SFAS No. 145
effective January 1, 2003 with no effect on the Company's financial position or
results of operations.
In November 2002, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness to Others, an
interpretation of FASB Statements No. 5, 57, and 197 and a rescission of FASB
Interpretation No. 34." This Interpretation elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees issued. The Interpretation also clarifies
that a guarantor is required to recognize, at inception of a guarantee, a
liability for the fair value of the obligation undertaken. The disclosure
requirements are effective for the Company's financial statements for interim
and annual periods ending after December 15, 2002. The Company adopted the
recognition provisions of the Interpretation effective January 1, 2003 for
guarantees issued or modified after December 31, 2002. The adoption of the
Interpretation did not have a material effect on the Company's financial
position or results of operations. The Company's guarantees as of September 30,
2004 are described in Note 9, Contingencies.
In December 2002, Statement of Financial Accounting Standards No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS No.
148") was issued. SFAS No. 148 amends Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123")
and provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results.
The Company accounts for stock-based compensation utilizing the intrinsic
value method in accordance with the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." Under the intrinsic
value method of accounting for stock-based employee
7
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
(3) ACCOUNTING STANDARDS - (CONTINUED)
compensation, since the exercise price of the Company's stock options is at the
fair market value on the date of grant, no compensation expense is recorded. The
Company is required under SFAS No. 123 to disclose pro forma information
relating to option grants as if the Company used the fair value method of
accounting, which requires the recording of estimated compensation expenses.
The following table summarizes pro forma net earnings and earnings per
share for the three months and nine months ended September 30, 2004 and 2003
assuming the Company had used the fair value method of accounting for its stock
option plans (in thousands, except per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- --------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net earnings, as reported $ 13,250 $ 11,211 $ 36,048 $ 29,868
Deduct: Total stock-based employee compen-
sation expense determined under fair value
based method for all awards, net of related tax
effects (484) (478) (1,281) (1,363)
---------- ---------- ---------- ----------
Pro forma net earnings $ 12,766 $ 10,733 $ 34,767 $ 28,505
========== ========== ========== ==========
Earnings per share:
Basic - as reported $ .54 $ .46 $ 1.48 $ 1.24
Basic - pro forma $ .52 $ .44 $ 1.42 $ 1.18
Diluted - as reported $ .53 $ .46 $ 1.44 $ 1.22
Diluted - pro forma $ .51 $ .44 $ 1.39 $ 1.17
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51" and revised this
interpretation in December 2003 (collectively, "the Interpretations"). The
Interpretations address the consolidation by business enterprises of variable
interest entities as defined in the Interpretations. The Interpretations apply
immediately to variable interest in variable interest entities created after
January 31, 2003, and to variable interests in variable entities obtained after
January 31, 2003. The application of these Interpretations has not had an effect
on the Company's financial position or results of operations.
In April 2003, Statement of Financial Accounting Standards No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities"
("SFAS No. 149") was issued. SFAS No. 149 amends and clarifies financial
accounting and reporting for derivative instruments and hedging activities under
SFAS No. 133. SFAS No. 149 amends SFAS No. 133 for decisions made: (1) as part
of the Derivatives Implementation Group process that requires amendments to SFAS
No. 133; (2) in connection
8
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
(3) ACCOUNTING STANDARDS - (CONTINUED)
with other Financial Accounting Standards Board projects dealing with financial
instruments; and (3) in connection with the implementation issues raised related
to the application of the definition of a derivative. SFAS No. 149 is effective
for contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The adoption of SFAS No. 149 had
no effect on the Company's financial position or results of operations.
In May 2003, Statement of Financial Accounting Standards No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" ("SFAS No. 150") was issued. SFAS No. 150 establishes
standards for classification and measurement in the statement of financial
position of certain financial instruments with characteristics of both
liabilities and equity. It requires classification of a financial instrument
that is within its scope as a liability (or an asset in some circumstances).
SFAS No. 150 is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. The adoption of SFAS No. 150 had
no effect on the Company's financial position or results of operations.
(4) COMPREHENSIVE INCOME
The Company's total comprehensive income for the three months and nine
months ended September 30, 2004 and 2003 was as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2004 2003 2004 2003
-------- ------- -------- -------
Net earnings $ 13,250 $11,211 $ 36,048 $29,868
Change in fair value of derivative financial
instruments, net of tax (3,320) 125 (593) 328
-------- ------- -------- -------
Total comprehensive income $ 9,930 $11,336 $ 35,455 $30,196
======== ======= ======== =======
(5) SEGMENT DATA
The Company's operations are classified into two reportable business
segments as follows:
Marine Transportation - Marine transportation by United States flag
vessels on the United States inland waterway system. The principal products
transported on the United States inland waterway system include petrochemicals,
black oil products, refined petroleum products and agricultural chemicals.
9
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
(5) SEGMENT DATA - (CONTINUED)
Diesel Engine Services - Overhaul and repair of large medium-speed diesel
engines, reduction gear repair, and sale of related parts and accessories for
customers in the marine, power generation and industrial, and railroad
industries.
The following table sets forth the Company's revenues and profit (loss) by
reportable segment for the three months and nine months ended September 30, 2004
and 2003 and total assets as of September 30, 2004 and December 31, 2003 (in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Revenues:
Marine transportation $ 153,114 $ 134,396 $ 437,672 $ 396,617
Diesel engine services 20,275 20,111 63,908 64,829
--------- --------- --------- ---------
$ 173,389 $ 154,507 $ 501,580 $ 461,446
========= ========= ========= =========
Segment profit (loss):
Marine transportation $ 26,069 $ 20,828 $ 67,804 $ 56,314
Diesel engine services 1,773 1,653 6,396 6,242
Other (6,471) (4,399) (16,058) (14,382)
--------- --------- --------- ---------
$ 21,371 $ 18,082 $ 58,142 $ 48,174
========= ========= ========= =========
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------ -----------
Total assets:
Marine transportation $ 819,446 $ 779,121
Diesel engine services 46,947 40,152
Other 42,338 35,688
--------- ---------
$ 908,731 $ 854,961
========= =========
10
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
(5) SEGMENT DATA - (CONTINUED)
The following table presents the details of "Other" segment profit (loss)
for the three months and nine months ended September 30, 2004 and 2003 (in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- -----------------------
2004 2003 2004 2003
------- -------- -------- --------
General corporate expenses $(1,887) $ (1,597) $ (5,606) $ (4,711)
Gain (loss) on disposition of assets (43) 71 (241) (62)
Interest expense (3,344) (3,761) (10,008) (11,082)
Equity in earnings (loss) of marine affiliates (782) 1,022 534 2,209
Other expense (415) (134) (737) (736)
------- -------- -------- --------
$(6,471) $ (4,399) $(16,058) $(14,382)
======= ======== ======== ========
The following table presents the details of "Other" total assets as of
September 30, 2004 and December 31, 2003 (in thousands):
SEPTEMBER 30, DECEMBER 31,
2004 2003
------------ -----------
General corporate assets $30,411 $26,526
Investment in marine affiliates 11,927 9,162
------- -------
$42,338 $35,688
======= =======
(6) TAXES ON INCOME
Earnings before taxes on income and details of the provision for taxes on
income for the three months and nine months ended September 30, 2004 and 2003
were as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2004 2003 2004 2003
------- ------- ------- -------
Earnings before taxes on income - United States $21,371 $18,082 $58,142 $48,174
======= ======= ======= =======
Provision for taxes on income:
Current $ 2,994 $ 6,343 $ 9,521 $16,617
Deferred 4,354 55 10,480 361
State and local 773 473 2,093 1,328
------- ------- ------- -------
$ 8,121 $ 6,871 $22,094 $18,306
======= ======= ======= =======
11
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
(7) EARNINGS PER SHARE OF COMMON STOCK
The following table presents the components of basic and diluted earnings
per share of common stock for the three months and nine months ended September
30, 2004 and 2003 (in thousands, except per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
2004 2003 2004 2003
------- ------- ------- -------
Net earnings $13,250 $11,211 $36,048 $29,868
======= ======= ======= =======
Shares outstanding:
Weighted average common stock outstanding 24,507 24,166 24,435 24,112
Effect of dilutive securities:
Employee and director common stock options 683 379 631 317
------- ------- ------- -------
25,190 24,545 25,066 24,429
======= ======= ======= =======
Basic earnings per share of common stock $ .54 $ .46 $ 1.48 $ 1.24
======= ======= ======= =======
Diluted earnings per share of common stock $ .53 $ .46 $ 1.44 $ 1.22
======= ======= ======= =======
Certain outstanding options to purchase approximately 32,000 shares of
common stock were excluded in the computation of diluted earnings per share as
of September 30, 2003 as such stock options would have been antidilutive. No
options were excluded in the computation of diluted earnings per share as of
September 30, 2004.
(8) RETIREMENT PLANS
The Company sponsors a defined benefit plan for vessel personnel. The plan
benefits are based on an employee's years of service and compensation. The plan
assets primarily consist of fixed income securities and corporate stocks.
12
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
(8) RETIREMENT PLANS - (CONTINUED)
The following table presents the components of net periodic benefit cost
of the defined benefit plan for the three months and nine months ended September
30, 2004 and 2003 (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
2004 2003 2004 2003
------- ------- ------- -------
Net periodic benefit cost
Service cost $ 1,255 $ 695 $ 3,082 $ 2,234
Interest cost 1,248 991 3,549 3,187
Expected return on assets (1,455) (1,141) (4,368) (3,669)
Amortization of prior service cost (22) (21) (66) (67)
Amortization of actuarial loss 721 404 1,708 1,300
Less partnerships' allocation (54) (23) (124) (99)
------- ------- ------- -------
Net periodic benefit cost $ 1,693 $ 905 $ 3,781 $ 2,886
======= ======= ======= =======
The Company's pension plan funding strategy is to contribute an amount
equal to the greater of the minimum required contribution under ERISA and the
amount necessary to fully fund the plan on an Accumulated Benefit Obligation
("ABO") basis at the end of the fiscal year. The ABO is based on a variety of
demographic and economic assumptions, and the pension plan assets' returns are
subject to various risks, including market and interest rate risk, making the
prediction of the pension plan contribution difficult. Based on current pension
plan assets and market conditions, the Company expects to contribute $6,000,000
to $10,000,000 to its pension plan in November 2004 to fund its pension plan
obligations. As of September 30, 2004, no 2004 year contributions have been
made.
The Company sponsors an unfunded defined benefit health care plan that
provides limited postretirement medical benefits to employees who meet minimum
age and service requirements, and to eligible dependents. The plan is
contributory, with retiree contributions adjusted annually.
The following table presents the components of net periodic benefit cost
of the unfunded defined benefit healthcare plan for the three months and nine
months ended September 30, 2004 and 2003 (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- ---------------------
2004 2003 2004 2003
----- ----- ----- -----
Net periodic benefit cost
Service cost $ 46 $ (56) $ 232 $ 234
Interest cost 66 (99) 348 413
Amortization of prior service cost 9 (7) 29 29
Amortization of actuarial gain (81) 14 (91) (58)
----- ----- ----- -----
Net periodic benefit cost $ 40 $(148) $ 518 $ 618
===== ===== ===== =====
13
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
(8) RETIREMENT PLANS - (CONTINUED)
The Medicare Prescription Drug, Improvement and Modernization Act of 2003
("the Act") was signed December 8, 2003 to make additional benefits, including a
plan sponsor prescription drug subsidy, available through Medicare. The Company
had previously deferred recognition of the effects of the Act in its financial
statements in accordance with FASB Staff Position Nos. 106-1 and 106-2 ("FSPs"),
which prescribed accounting under the Act.
The Company recognized the financial effects as prescribed by the FSPs at
the beginning of its third quarter of 2004. The Company and its actuarial
advisors determined that certain benefits provided by the Company's health care
plan are at least actuarially equivalent to Medicare Part D of the Act. The
Company remeasured the effects of the Act on the Accumulated Plan Benefit
Obligation as of January 1, 2004. The effect of the Act, including the federal
subsidy to which the Company is entitled and changes in expected future plan
participation has been estimated as an actuarial gain of $1.3 million. The
subsidy will have the effect of reducing net postretirement expense for the
period from adoption, July 1, 2004, through December 31, 2004 by $296,000. The
components of the decrease in expense were a reduction in service cost of
$119,000, a reduction in the interest cost on the benefit obligation of $85,000
and an increase in the amortization of the actuarial gain of $92,000.
Approximately $148,000 was recorded in the third quarter of 2004 as a reduction
in net postretirement benefit expense because of the Act.
(9) CONTINGENCIES
The Company has issued guaranties or obtained stand-by letters of credit
and performance bonds supporting performance by the Company and its subsidiaries
of contractual or contingent legal obligations incurred in the ordinary course
of business. The aggregate notional value of these instruments is $1,758,000 at
September 30, 2004, including $838,000 in letters of credit and $920,000 in
performance bonds, of which $683,000 of these financial instruments relates to
contingent legal obligations which are covered by the Company's liability
insurance program in the event the obligations are incurred. All of these
instruments have an expiration date within three years. The Company does not
believe demand for payment under these instruments is likely and expects no
material cash outlays to occur in connection with these instruments.
The Company and a group of approximately 45 other companies have been
notified that they are Potentially Responsible Parties ("PRPs") under the
Comprehensive Environmental Response, Compensation and Liability Act with
respect to a potential Superfund site, the Palmer Barge Line Site ("Palmer"),
located in Port Arthur, Texas. In prior years, Palmer had provided tank barge
cleaning services to various subsidiaries of the Company. The Company and three
other PRPs have entered into an agreement with the Environmental Protection
Agency ("EPA") to perform a remedial investigation and feasibility study. Based
on information currently available, the Company is unable to ascertain the
extent of its exposure, if any, in this matter.
The Company and certain subsidiaries have received a Request For
Information ("RFI") from the EPA under the Comprehensive Environmental Response,
Compensation and Liability Act with respect to a potential Superfund site, the
Gulfco site, located in Freeport, Texas. In prior years, a company unrelated to
Gulfco operated at the site and provided tank barge cleaning services to various
subsidiaries
14
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
(9) CONTINGENCIES - (CONTINUED)
of the Company. An RFI is not a determination that a party is responsible or
potentially responsible for contamination at a site, it is only a request
seeking any information a party may have with respect to a site as part of an
EPA investigation into such site. Based on information currently available, the
Company is unable to ascertain the extent of its exposure, if any, in this
matter.
In addition, there are various other suits and claims against the Company,
none of which in the opinion of management will have a material effect on the
Company's financial condition, results of operations or cash flows. Management
believes that it has recorded adequate reserves and believes that it has
adequate insurance coverage or has meritorious defenses for these other claims
and contingencies.
15
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
PART I FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements contained in this Form 10-Q that are not historical facts,
including, but not limited to, any projections contained herein, are
forward-looking statements and involve a number of risks and uncertainties. Such
statements can be identified by the use of forward-looking terminology such as
"may," "will," "expect," "anticipate," "estimate," or "continue" or the negative
thereof or other variations thereon or comparable terminology. The actual
results of the future events described in such forward-looking statements in
this Form 10-Q could differ materially from those stated in such forward-looking
statements. Among the factors that could cause actual results to differ
materially are: adverse economic conditions, industry competition and other
competitive factors, adverse weather conditions such as high water, low water,
tropical storms, hurricanes, fog and ice, marine accidents, lock delays, fuel
costs, interest rates, construction of new equipment by competitors, including
construction with government assisted financing, government and environmental
laws and regulations, and the timing, magnitude and number of acquisitions made
by the Company.
For purposes of the Management's Discussion, all earnings per share are
"Diluted earnings per share." The weighted average number of common shares
applicable to diluted earnings for the third quarter of 2004 and 2003, and for
the first nine months of 2004 and 2003 were as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
2004 2003 2004 2003
------ ------ ------ ------
Weighted average number of
common stock-diluted 25,190 24,545 25,066 24,429
====== ====== ====== ======
The increase in the weighted average number of common shares for both 2004
periods compared with the 2003 periods primarily reflected the exercise of
employee and director stock options, as well as additional dilutive shares
applicable to stock options plans.
OVERVIEW
The Company is the nation's largest domestic inland tank barge operator
with a fleet as of September 30, 2004 of 888 active tank barges, with a total
capacity of 16.4 million barrels, and operated an average of 237 inland towboats
during the 2004 third quarter and 235 inland towboats during the 2004 first nine
months. The Company uses the inland waterway system of the United States to
transport bulk liquids including petrochemicals, black oil products, refined
petroleum products and agricultural chemicals. Through its diesel engine
services segment, the Company provides after-market services for large
medium-speed diesel engines used in marine, power generation and industrial, and
rail applications.
During the 2004 first nine months, approximately 87% of the Company's
revenue was generated by its marine transportation segment. The segment's
customers include many of the major United States petrochemical and refining
companies. Products transported include raw materials for many of the end
products used widely by businesses and consumers every day - plastics, fiber,
paints, detergents, oil additives and paper, among others. Consequently, the
Company's business tends to mirror the general performance of the United States
economy and the performance of the Company's customer base. The
16
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
OVERVIEW - (CONTINUED)
following table shows the products transported by the Company, the revenue
distribution for the first nine months of 2004, the uses of these products and
the factors that drive the demand for the products the Company transports:
END USES OF PRODUCTS TRANSPORTED
2004 FIRST
NINE MONTHS
REVENUE
PRODUCTS TRANSPORTED DISTRIBUTION USES OF PRODUCTS TRANSPORTED DRIVERS
- ------------------------ ------------ ----------------------------------- ------------------------------
Petrochemicals 70% Plastics, Fibers, Paper, Housing, Consumer Goods,
Gasoline Additives Autos, Clothing, Vehicle Usages
Black Oil Products 18% Asphalt, Boiler Fuel, No. 6 Fuel Road Construction, Feedstock
Oil, Coker Feedstocks, Residual for Refineries, Fuel for Power
Fuel, Crude Oil, Ship Bunkers Plants and Ships
Refined Petroleum 9% Gasoline Blends, No. 2 Oil, Vehicle Usage, Air Travel,
Products Jet Fuel, Heating Oil Weather Conditions
Agricultural 3% Liquid Fertilizers, Chemical Corn, Cotton, Wheat Production
Chemicals Feedstocks
For the 2004 third quarter, the Company reported net earnings of
$13,250,000, or $.53 per share, on revenues of $173,389,000. For the 2004 first
nine months, the Company's net earnings were $36,048,000, or $1.44 per share, on
revenues of $501,580,000. The results for both 2004 periods reflect the
continued improvement in the United States and global economies. The 2004 first
nine months results also reflect the full impact of the January 15, 2003
acquisition of the SeaRiver inland marine transportation equipment. The purchase
of the SeaRiver fleet, the United States marine transportation affiliate of
ExxonMobil, included 48 double hull inland tank barges and seven towboats, and
assumption of the leases on 16 double hull inland tank barges.
The Company's 2004 third quarter marine transportation segment's revenues
and operating income increased 14% and 25%, respectively, when compared with the
2003 third quarter. The segment's revenues and operating income for the first
nine months of 2004 increased 10% and 20%, respectively, when compared with the
corresponding period of 2003. For the 2004 third quarter and first nine months,
the Company's petrochemical market remained firm, as contract customers
continued to operate their plants at high utilization rates, generating strong
volumes. The black oil market for both reporting periods also remained strong,
the result of high refinery production and greater volumes of heavier refinery
residual oil by-products. The segment's refined petroleum products market
experienced typical Gulf Coast to Midwest demand for July and August, with
demand slowing in September. The agricultural chemical market remained weak for
the first, second and third quarters. Despite low Midwest inventory levels in
the 2004 third quarter, the volumes transported remained low, as high prices for
fertilizer products curtailed demand.
17
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
OVERVIEW - (CONTINUED)
The marine transportation segment was successful in modestly raising rates
on contract renewals during the 2004 first nine months, a continuation of a
trend that started during the 2003 fourth quarter. In addition, effective
January 1, 2004, contract escalators for labor, consumer price index and fuel on
numerous multiyear contracts resulted in a rate increase for those contracts of
approximately 2%. Spot market rates during the 2004 first nine months were
generally higher for most marine transportation markets and above contract
rates. Currently, approximately 70% of the Company's marine transportation
revenue is under term contracts with the remaining 30% in the spot market. The
70% contract and 30% spot market mix provides the Company with a stable revenue
stream with less exposure to day-to-day pricing fluctuations.
The marine transportation segment's results were negatively impacted by
navigational delays. Delay days measures the lost time incurred by a tow
(towboat and barge) during transit. The measure includes transit delays caused
by weather, lock congestion or closure and other navigational factors. Delay
days for the 2004 and 2003 first nine months by quarter were as follows:
%
2004 2003 CHANGE
----- ----- ------
First quarter 2,359 2,583 (9)%
Second quarter 1,822 1,268 44%
Third quarter 1,658 1,001 66%
Nine months 5,839 4,852 20%
The navigational delays for the 2004 first quarter were both weather and
lock related, while the 2003 first quarter delays were primarily from the repair
of a key lock located on the Gulf Intracoastal Waterway. The 44% increase in
navigational delays for the 2004 second quarter over the 2003 second quarter was
primarily due to the closure for repair during May of a major lock on the Gulf
Intracoastal Waterway. The 66% increase for the 2004 third quarter over the
corresponding prior year quarter reflected the delays from Hurricane Ivan and
the closure for repair of the McAlpine Lock, both of which are more fully
discussed under Marine Transportation Revenue below.
For the 2004 third quarter, the marine transportation segment's operating
margin was 17.0% compared with 15.5% for the 2003 third quarter. For the 2004
first nine months, the segment's margin was 15.5% compared with 14.2% for the
2003 first nine months.
The Company's diesel engine services segment's 2004 third quarter revenues
and operating income increased 1% and 7%, respectively, when compared with the
2003 third quarter. The segment's revenues for the 2004 first nine months
decreased 1% and operating income increased 2% when compared with the
corresponding period of 2003. The results for both periods reflected the April
2004 acquisition of Walker. The segment's power generation market strengthened
in the 2004 third quarter and its rail market was strong for both the 2004
second and third quarters. Continued weakness in the Gulf Coast offshore oil
service market and East and West Coast marine markets negatively impacted both
the 2004 third quarter and first nine months.
18
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
OVERVIEW - (CONTINUED)
The Company continued to generate strong cash flow provided by operating
activities during the 2004 third quarter and first nine months. The Company's
outstanding debt as of September 30, 2004 was $251,397,000, a reduction of
$3,868,000 when compared with $255,265,000 as of December 31, 2003. During the
2004 first nine months, the Company's debt-to-capitalization ratio was reduced
from 40.7% as of December 31, 2003 to 37.7% as of September 30, 2004. During the
2004 second quarter, the Company repaid all outstanding balances under its bank
credit facilities. As of September 30, 2004, the Company had invested cash of
$18,300,000. Also, during the 2004 first nine months, capital expenditures
totaled $75,810,000, of which $32,162,000 was for construction of new tank
barges, with the remaining $43,648,000 principally for upgrades of the existing
marine transportation fleet.
The Company anticipates that during the fourth quarter of 2004, the United
States and global economies will be stable to modestly improving, which may lead
to a quarter over quarter increase in petrochemical volumes transported by the
Company's marine transportation segment. During the 2004 first nine months,
feedstock and energy costs were high and the Company expects such costs to
remain high and volatile at least through the 2004 fourth quarter. Continued
high feedstock and energy costs could slow down or delay the improvement in
petrochemical volumes that the Company has experienced during 2003 and the 2004
first nine months.
Industry-wide, tank barge capacity declined during 2001 and 2002, and has
remained relatively constant in 2003 and during the first nine months of 2004.
This smaller industry-wide tank barge capacity supports higher industry
utilization and the improved pricing environment.
ACQUISITIONS
On January 15, 2003, the Company purchased from SeaRiver 45 double hull
inland tank barges and seven inland towboats for $32,113,000 in cash, and
assumed from SeaRiver the leases of 16 double hull inland tank barges. On
February 28, 2003, the Company purchased three double hull inland tank barges
leased by SeaRiver from Banc of America Leasing for $3,453,000 in cash. In
addition, the Company entered into a contract to provide inland marine
transportation services to SeaRiver.
On April 7, 2004, the Company purchased from Walker, a subsidiary of
Ingram, Walker's diesel engine service operation and parts inventory located in
Paducah, Kentucky for $5,755,000 in cash. In addition, the Company entered into
a contract to provide diesel engine services to Ingram.
On April 16, 2004, the Company purchased a one-third interest in Osprey
for $4,220,000. The purchase price consisted of cash of $2,920,000 and notes
payable totaling $1,300,000 due in April 2005. The remaining two-thirds interest
is owned by Cooper/T. Smith Corporation and Richard L. Couch. Osprey, formed in
2000, operates a feeder service for cargo containers on barges between Houston,
New Orleans and Baton Rouge, as well as several ports located above Baton Rouge
on the Mississippi River.
19
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
RESULTS OF OPERATIONS
The Company reported third quarter 2004 net earnings of $13,250,000, or
$.53 per share, on revenues of $173,389,000, compared with third quarter 2003
net earnings of $11,211,000, or $.46 per share, on revenues of $154,507,000. Net
earnings for the 2004 first nine months were $36,048,000, or $1.44 per share, on
revenues of $501,580,000, compared with net earnings of $29,868,000, or $1.22
per share, on revenues of $461,446,000 for the first nine months of 2003.
The following table sets forth the Company's marine transportation and
diesel engine services revenues for the 2004 third quarter compared with the
third quarter of 2003, the first nine months of 2004 compared with the first
nine months of 2003 and the percentage of each to total revenues for the
comparable periods (dollars in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------- --------------------------------------
2004 % 2003 % 2004 % 2003 %
-------- --- -------- --- -------- --- -------- ---
Marine transportation $153,114 88% $134,396 87% $437,672 87% $396,617 86%
Diesel engine services 20,275 12 20,111 13 63,908 13 64,829 14
-------- --- -------- --- -------- --- -------- ---
$173,389 100% $154,507 100% $501,580 100% $461,446 100%
======== === ======== === ======== === ======== ===
MARINE TRANSPORTATION
The Company, through its marine transportation segment, is a provider of
marine transportation services, operating inland tank barges and towing vessels,
transporting petrochemicals, black oil products, refined petroleum products and
agricultural chemicals along the United States inland waterways. As of September
30, 2004, the marine transportation segment operated 888 active inland tank
barges, with a total capacity of 16.4 million barrels, compared with 882 active
inland tank barges at September 30, 2003, with a total capacity of 16.0 million
barrels. The segment also operated an average of 237 inland towboats during the
2004 third quarter and 235 inland towboats during the first nine months of 2004.
This compared with an average of 222 inland towboats operated during the third
quarter of 2003 and 226 during the first nine months of 2003. The marine
transportation segment is also the managing partner of a 35% owned offshore
marine partnership, consisting of four dry-bulk barge and tug units. The
partnership is accounted for under the equity method of accounting.
20
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
MARINE TRANSPORTATION - (CONTINUED)
The following table sets forth the Company's marine transportation
segment's revenues, costs and expenses, operating income and operating margins
for the three months and nine months ended September 30, 2004 compared with the
three months and nine months ended September 30, 2003 (dollars in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- % --------------------- %
2004 2003 CHANGE 2004 2003 CHANGE
-------- -------- ------ -------- -------- ------
Marine transportation revenues $153,114 $134,396 14% $437,672 $396,617 10%
-------- -------- ------ -------- -------- -----
Costs and expenses:
Costs of sales and operating
expenses 93,579 83,492 12 272,626 251,713 8
Selling, general and administrative 16,887 14,216 19 47,619 42,836 11
Taxes, other than on income 3,293 3,206 3 10,475 9,450 11
Depreciation and other amortization 13,286 12,654 5 39,148 36,304 8
-------- -------- -- -------- -------- --
127,045 113,568 12 369,868 340,303 9
-------- -------- -- -------- -------- --
Operating income $ 26,069 $ 20,828 25% $ 67,804 $ 56,314 20%
======== ======== == ======== ======== ==
Operating margins 17.0% 15.5% 15.5% 14.2%
MARINE TRANSPORTATION REVENUES
Revenues for the 2004 third quarter increased 14% compared with the 2003
third quarter, reflecting stronger petrochemical and black oil products volumes,
modest contract rate increases, and fuel, labor and consumer price index
escalators effective January 1, 2004 on numerous multi-year contracts. Revenues
for the 2004 first nine months increased 10% compared with the first nine months
of 2003, reflecting the reasons noted above, as well as reflecting the full 2004
first quarter impact of the January 15, 2003 purchase of the inland tank barge
fleet of SeaRiver.
Petrochemical volumes transported during the 2004 third quarter and first
nine months remained strong, due primarily to the improved United States and
global economies. In addition, contract customers continued to operate their
plants at high utilization rates, generating strong volumes. Black oil volumes
during the 2004 third quarter and first nine months were higher than comparable
2003 periods, reflecting increased refinery production generating demand for
waterborne transportation of heavier refinery residual oil by-products. Refined
products volumes transported into the Midwest from the Gulf Coast during the
2004 third quarter and first nine months were generally at traditional seasonal
levels, with demand strong in July and August and slowing in September. The
agricultural chemical volumes were weak in the 2004 first, second and third
quarters. During the 2004 first and second quarters, high Midwest inventory
levels and high product prices caused volumes to be weak. During the third
quarter, despite low Midwest inventory levels, volumes transported remained low,
as continued high product prices curtailed demand.
21
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
MARINE TRANSPORTATION REVENUES - (CONTINUED)
For approximately two weeks during August 2004, the McAlpine Lock on the
Ohio River was closed for major repairs. The lock closure stopped all waterborne
traffic on the Ohio River with a destination upriver of Louisville, Kentucky,
including Cincinnati and Pittsburgh. The estimated impact of the McAlpine Lock
closure was approximately $.01 per share, less than the original estimate of
$.02 to $.03 per share, as customers were informed of the closure and volumes
were moved in advance of the closure or after the lock was reopened.
On September 16, 2004, Hurricane Ivan made landfall near Gulf Shores,
Alabama. The initial projected path was from New Orleans to the Florida
panhandle. In anticipation of Hurricane Ivan, most petrochemical plants and
refineries in the projected path closed. Additionally, the Company moved
equipment out of the projected path of the storm, creating disruptions of the
Company's distribution system and resulting in repositioning costs. Hurricane
Ivan's impact on the Company's third quarter results was an estimated $.02 per
share, including the impact on the operations of Company's 35% owned offshore
partnership with a Florida utility accounted for under the equity method of
accounting.
During the 2004 third quarter and first nine months, approximately 70% of
marine transportation revenues were under term contracts and 30% were spot
market revenues. Contracts renewed during the third quarter and first nine
months of 2004, reflected the continuation of modest 2% to 4% increases,
primarily the result of increased volumes industry wide and overall higher
utilization of tank barges. Effective January 1, 2004, escalators for labor,
consumer price index and fuel on numerous multi-year contracts did result in a
rate increase for those contracts of approximately 2%. Spot market rates during
the 2004 third quarter and first nine months were 10% to 15% higher for most
product lines when compared with the 2003 corresponding periods, and above
contract rates.
MARINE TRANSPORTATION COSTS AND EXPENSES
Costs of sales and operating expenses for the 2004 third quarter and first
nine months were 12% and 8% higher, respectively, than the comparable periods of
2003, reflecting wage increases and related expenses effective January 1, 2004,
as well as additional operating expenses associated with the increased volumes
transported. During the 2004 third quarter, the segment operated an average of
237 inland towboats compared with an average of 222 operated during the 2003
third quarter. For the 2004 first nine months, the segment operated an average
of 235 inland towboats compared with an average of 226 during the 2003 first
nine months. The number of towboats operated is adjusted daily, depending on the
amount of volumes transported, weather conditions and voyage times. The segment
consumed 14.3 million gallons of diesel fuel during the 2004 third quarter
compared with 14.2 million during the 2003 third quarter. For the 2004 first
nine months, the segment consumed 42.5 million gallons of diesel fuel compared
with 41.6 million during the 2003 first nine months. The increase for both
comparable periods primarily reflected the increased business levels, as well as
the costs associated with equipment repositioning caused by Hurricane Ivan, as
discussed above.
For the 2004 third quarter, the average price per gallon of diesel fuel
consumed increased to $1.16, up 16% from the 2004 first six months average of
$1.00 and 35% higher than the average for the 2003 third quarter. Term contracts
contain fuel escalation clauses that allow the Company to recover increases in
the cost of fuel; however, there is generally a 30 to 90 day delay before
contracts are
22
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
MARINE TRANSPORTATION COSTS AND EXPENSES - (CONTINUED)
adjusted. The Company estimated that the higher fuel prices reduced the
Company's 2004 third quarter earnings by an estimated $.01 per share.
Selling, general and administrative expenses for the 2004 third quarter
increased 19% compared with the 2003 third quarter, and increased 11% in the
2004 first nine months compared with the first nine months of 2003. The
increases for both comparable periods reflect salary increases and related
expenses effective January 1, 2004, higher incentive compensation accruals,
higher medical costs and increased professional and legal fees.
Taxes, other than on income, for the 2004 third quarter and first nine
months increased 3% and 11%, respectively, compared with the corresponding
periods of 2003, primarily reflecting increased waterway use taxes from
increased business activity levels and higher property taxes on new and existing
inland tank barges and towboats.
Depreciation and other amortization expenses for the 2004 third quarter
and first nine months increased 5% and 8%, respectively, compared with the
corresponding 2003 periods. The increases reflected depreciation on new tank
barge additions and capital expenditures in the 2004 first nine months and
during the 2003 year.
MARINE TRANSPORTATION OPERATING INCOME AND OPERATING MARGINS
Marine transportation operating income for the 2004 third quarter
increased 25% compared with the third quarter of 2003. For the first nine months
of 2004, the operating income for the segment increased 20% compared with the
first nine months of 2003. The 2004 third quarter operating margin increased to
17.0% compared with 15.5% for the 2003 third quarter. The operating margin for
the first nine months of 2004 improved to 15.5% compared with 14.2% for the
first nine months of 2003.
The higher operating margins for both 2004 periods over the comparable
2003 periods reflected the improved marine transportation volumes, the January
1, 2004 fuel, labor and consumer price index escalators on numerous multi-year
contracts, the renewal of contracts with rate increases in the 2% to 4% range
during the first nine months of 2004 and 10% to 15% increases in spot market
rates.
23
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
DIESEL ENGINE SERVICES
The Company, through its diesel engine services segment, sells original
equipment manufacturers' replacement parts and refurbished or rebuilt parts,
provides service mechanics to overhaul and repair large medium-speed diesel
engines and reduction gears, and maintains facilities to rebuild component parts
or entire large medium-speed diesel engines or entire reduction gears. The
segment services the marine, power generation and industrial, and railroad
markets.
The following table sets forth the Company's diesel engine services
segment's revenues, costs and expenses, operating income and operating margins
for the three months and nine months ended September 30, 2004 compared with the
three months and nine months ended September 30, 2003 (dollars in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ % ------------------ %
2004 2003 CHANGE 2004 2003 CHANGE
-------- ------- ------ ------- -------- ------
Diesel engine services revenues $20,275 $20,111 1% $63,908 $ 64,829 (1)%
------- ------- -- ------- -------- --
Costs and expenses:
Costs of sales and operating
expenses 15,102 15,246 (1) 47,269 48,951 (3)
Selling, general and administrative 3,041 2,859 6 9,092 8,607 6
Taxes, other than on income 95 81 17 268 241 11
Depreciation and other amortization 264 272 (3) 883 788 12
------- ------- -- ------- -------- --
18,502 18,458 -- 57,512 58,587 (2)
------- ------- -- ------- -------- --
Operating income $ 1,773 $ 1,653 7% $ 6,396 $ 6,242 2%
======= ======= == ======= ======== ==
Operating margins 8.7% 8.2% 10.0% 9.6%
DIESEL ENGINE SERVICES REVENUES
Revenues for the 2004 third quarter compared with the 2003 third quarter
and for the 2004 first nine months compared with the corresponding period of
2003 were relatively flat. During both 2004 periods, the segment was positively
impacted by the April 2004 purchase of the diesel engine services operations of
Walker, and an improved railroad market, which benefited from strong parts sales
to all rail markets during the 2004 second and third quarters. In addition,
during the 2004 third quarter the power generation market was enhanced with
direct parts sales to a major customer. The Gulf Coast offshore oil service
market and East Coast and West Coast marine markets remained weak during 2004.
24
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
DIESEL ENGINE SERVICES COSTS AND EXPENSES
Costs and expenses for the 2004 third quarter were flat when compared with
the 2003 third quarter, while costs and expenses for the 2004 first nine months
decreased 2% compared with the corresponding 2003 period. Cost of sales and
operating expenses decreased 1% for the 2004 third quarter compared with the
third quarter of 2003 due to a greater mix of higher margin power generation
revenue. For the 2004 first nine months, cost of sales decreased 3% when
compared with the corresponding 2003 period, primarily reflecting lower revenue.
Selling, general and administrative expenses were higher for both 2004 periods
versus 2003 primarily due to increases in salaries and related expenses and
higher employee medical costs.
DIESEL ENGINE SERVICES OPERATING INCOME AND OPERATING MARGINS
Operating income for the diesel engine services segment for the 2004 third
quarter increased 7% and first nine months increased 2% compared with the
corresponding periods of 2003. The 2004 third quarter operating margin increased
to 8.7% compared with 8.2% for the 2003 third quarter, while the operating
margin for the 2004 first nine months improved to 10.0% compared with 9.6% for
the 2003 first nine months.
GENERAL CORPORATE EXPENSES
General corporate expenses for the 2004 third quarter totaled $1,887,000,
or 18% higher than the third quarter of 2003. For the first nine months of 2004,
general corporate expenses were $5,606,000, a 19% increase compared with the
2003 first nine months. The increases for both comparable periods reflected
increases in salaries and related expenses effective January 1, 2004, higher
employee incentive compensation accruals, higher employee medical costs, and
increased legal and professional fees, including the costs of evaluating and
implementing new accounting, disclosure and other governmental regulations.
25
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
OTHER INCOME AND EXPENSES
The following table sets forth the gain (loss) on disposition of assets,
equity in earnings (loss) of marine affiliates, other expense and interest
expense for the three months and nine months ended September 30, 2004 compared
with the three months and nine months ended September 30, 2003 (dollars in
thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ % -------------------- %
2004 2003 CHANGE 2004 2003 CHANGE
------- ------- ------ -------- -------- ------
Gain (loss) on disposition of assets $ (43) $ 71 (161)% $ (241) $ (62) 289%
Equity in earnings (loss) of marine
affiliates $ (782) $ 1,022 (177)% $ 534 $ 2,209 (76)%
Other expense $ (415) $ (134) 210% $ (737) $ (736) --%
Interest expense $(3,344) $(3,761) (11)% $(10,008) $(11,082) (10)%
EQUITY IN EARNINGS OF MARINE AFFILIATES
Equity in earnings of marine affiliates decreased 177% for the 2004 third
quarter compared with the 2003 third quarter. For the first nine months of 2004,
equity in earnings of marine affiliates decreased 76% compared with the 2003
first nine months. In October 2004, the Company sold its 50% interest in a
Shreveport, Louisiana liquid products terminal, resulting in a $598,000 pre-tax
loss on the sale. The loss was recorded in September and reflected in equity in
earnings of marine affiliates. In addition, Hurricanes Ivan, Frances and Jeanne,
during August and September, negatively impacted the Company's 35% owned
offshore marine partnership, resulting in fewer working days for the four
partnership barge and tugboat units during the quarter. The 35% owned offshore
marine partnership's first nine months results included the annual settlement of
demurrage charges with a major customer.
INTEREST EXPENSE
Interest expense for the 2004 third quarter decreased 11% compared with
the 2003 third quarter. For the 2004 first nine months, interest expense
decreased 10% compared with the 2003 first nine months. The decrease for both
comparable periods primarily reflected lower average debt. The average debt and
average interest rate for the third quarter of 2004 and 2003, including the
effect of interest rate swaps, were $251,452,000 and 5.3%, and $282,208,000 and
5.3%, respectively. For the first nine months of 2004 and 2003, the average debt
and average interest rate, including the effect of interest rate swaps, were
$256,423,000 and 5.3%, and $289,005,000 and 5.1%, respectively.
26
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
BALANCE SHEET
Total assets as of September 30, 2004 were $908,731,000, a 6% increase
compared with $854,961,000 as of December 31, 2003. The following table sets
forth the significant components of the balance sheet as of September 30, 2004
compared with December 31, 2003 (dollars in thousands):
SEPTEMBER 30, DECEMBER 31,
2004 2003 % CHANGE
------------ ----------- --------
Assets:
Current assets $151,167 $131,779 15%
Property and equipment, net 570,124 536,512 6
Investment in marine affiliates 11,927 9,162 30
Goodwill, net 160,641 156,726 2
Other assets 14,872 20,782 (28)
-------- -------- ---
$908,731 $854,961 6%
======== ======== ===
Liabilities and stockholders' equity:
Current liabilities $101,235 $ 98,868 2%
Long-term debt - less current portion 250,038 255,040 (2)
Deferred income taxes 117,515 106,134 11
Minority interest and other
long-term liabilities 25,309 22,787 11
Stockholders' equity 414,634 372,132 11
-------- -------- ---
$908,731 $854,961 6%
======== ======== ===
Current assets as of September 30, 2004 increased 15% compared with
December 31, 2003. Cash and cash equivalents as of September 30, 2004 totaled
$19,775,000 compared with $4,064,000 at December 31, 2003. During the 2004
second quarter, the Company repaid all outstanding balances under its bank
credit facilities. As of September 30, 2004, the Company had invested cash of
$18,300,000. Trade accounts receivable increased 11%, reflecting the improved
marine transportation volumes and resulting higher revenues in the 2004 first
nine months. Other accounts receivable decreased 60%, reflecting a reduction in
a receivable from the IRS of approximately $11,700,000. Inventory - finished
goods increased 19%. The increase primarily reflected additional inventory
needed to support increased Midwest business activity levels due to the Walker
acquisition. Prepaid expenses and other current assets increased 19%, reflecting
the timing of the payments of insurance premiums and the amortization of such
premiums over a twelve month period, and an increase in prepaid fuel inventory
due to the higher price of fuel partially offset by the sale of certain assets
held for sale during the 2004 first nine months.
Property and equipment, net of accumulated amortization, at September 30,
2004 increased 6% compared with December 31, 2003. The increase reflected
$75,810,000 of capital expenditures, more fully described under Capital
Expenditures below, $1,110,000 for the purchase of two pre-owned ammonia tank
barges and $278,000 of property with the Walker acquisition, less $41,088,000 of
depreciation expense and property disposals of $2,498,000 for the first nine
months of 2004.
27
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEET - (CONTINUED)
Investment in marine affiliates as of September 30, 2004 increased 30%
compared with December 31, 2003. The increase reflected the $4,220,000 purchase
of a one-third interest in Osprey in April 2004, equity in earnings of marine
affiliates of $534,000, including a loss of $598,000 from the sale of the
Company's 50% interest in a liquid products terminal recorded in September 2004,
less $1,239,000 of distributions received during the first nine months of 2004.
Goodwill - net as of September 30, 2004 increased 2% compared with
December 31, 2003, reflecting Walker acquisition goodwill.
Current liabilities as of September 30, 2004 increased 2% compared with
December 31, 2003. The increase was attributable to higher casualty loss
accruals and higher waterway use taxes from the increased marine transportation
business activity levels, partially offset by a decrease in employee
compensation accruals from the payment of 2003 incentive bonuses and profit
sharing contributions.
Long-term debt, less current portion, as of September 30, 2004 decreased
2% compared with December 31, 2003. The reduction primarily reflected the
reduction of long-term debt using the Company's 2004 first six months net cash
provided by operating activities. During the 2004 third quarter, the Company
repaid $56,000 of long-term debt and increased its invested cash by $5,000,000
to $18,300,000 as of September 30, 2004.
Deferred income taxes as of September 30, 2004 increased 11% compared with
December 31, 2003, primarily due to bonus tax depreciation on qualifying marine
transportation capital expenditures under federal legislation enacted in 2002
and 2003.
Minority interest and other long-term liabilities as of September 30, 2004
increased 11% compared with December 31, 2003, primarily due to the recording of
a $1,563,000 increase in the fair value of the interest rate swap agreements for
the 2004 first nine months, more fully described under Long-Term Financing
below.
Stockholders' equity as of September 30, 2004 increased 11% compared with
December 31, 2003. The increase was the result of $36,048,000 of net earnings
for the first nine months of 2004, a $4,420,000 decrease in treasury stock, a
increase of $4,056,000 in additional paid-in capital, a decrease in accumulated
other comprehensive income of $593,000 and the recording of $1,429,000 of net
deferred compensation related to restricted stock options. The decrease in
treasury stock and increase in additional paid-in capital were attributable to
the exercise of employee and nonemployee director stock options and the issuance
of restricted stock. The decrease in accumulated other comprehensive income
resulted from the net changes in fair value of interest rate swap agreements,
net of taxes, more fully described under Long-Term Financing below.
28
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
LONG-TERM FINANCING
The Company has a $150,000,000 unsecured revolving credit facility
("Revolving Credit Facility") with a syndicate of banks, with JP Morgan Chase
Bank as the agent bank, and with a maturity date of December 9, 2007. The
Revolving Credit Facility allows for an increase in bank commitments from
$150,000,000 up to a maximum of $225,000,000 without further amendments to the
Revolving Credit Facility. As of September 30, 2004, the Company had no
borrowings outstanding under the Revolving Credit Facility and had outstanding
letters of credit totaling $11,000. The Company was in compliance with all
Revolving Credit Facility covenants as of September 30, 2004.
The Company has $250,000,000 of floating rate senior notes ("Senior
Notes") due February 28, 2013. The notes are currently callable at par without
penalty and no principal payments are required until maturity in 2013. As of
September 30, 2004, $250,000,000 was outstanding under the Senior Notes. The
Company was in compliance with all Senior Notes covenants as of September 30,
2004.
The Company has an uncommitted $10,000,000 line of credit ("Credit Line")
with Bank of America, N.A. for short-term liquidity needs and letters of credit.
The Credit Line matures on November 3, 2004. As of September 30, 2004, the
Company had no borrowings outstanding under the Credit Line and had outstanding
letters of credit totaling $514,000.
The Company has an uncommitted $5,000,000 revolving credit note ("Credit
Note") with BNP Paribus ("BNP") for short-term liquidity needs. The Company did
not have any borrowing outstanding under the Credit Note as of September 30,
2004.
The Company has on file with the Securities and Exchange Commission a
shelf registration for the issuance of up to $250,000,000 of debt securities,
including medium term notes, providing for the issuance of fixed rate or
floating rate notes with a maturity of nine months or longer. As of September
30, 2004, $121,000,000 was available under the shelf registration, subject to
mutual agreement to terms, to provide financing for future business or equipment
acquisitions, and to fund working capital requirements. As of September 30,
2004, there were no outstanding debt securities under the shelf registration.
From time to time, the Company hedges its exposure to fluctuations in
short-term interest rates under its Revolving Credit Facility and Senior Notes
by entering into interest rate swap agreements. The interest rate swap
agreements are designated as cash flow hedges, therefore, the changes in fair
value, to the extent the swap agreements are effective, are recognized in other
comprehensive income until the hedged interest expense is recognized in
earnings. As of September 30, 2004, the Company had a total notional amount of
$150,000,000 of interest rate swaps designated as cash flow hedges for its
variable rate Senior Notes as follows (dollars in thousands):
NOTIONAL FIXED
AMOUNT TRADE DATE EFFECTIVE DATE TERMINATION DATE PAY RATE RECEIVE RATE
- -------- -------------- -------------- ---------------- -------- -----------------
$100,000 February 2001 March 2001 March 2006 5.64% One-month LIBOR
$100,000 September 2003 March 2006 February 2013 5.45% Three-month LIBOR
$ 50,000 April 2004 April 2004 May 2009 4.00% Three-month LIBOR
29
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
LONG-TERM FINANCING - (CONTINUED)
Interest rate swaps hedge a majority of the Company's long-term debt and
only an immaterial loss on ineffectiveness was recognized in the 2004 third
quarter and first nine months. The total fair value of the interest rate swap
agreements was recorded as other long-term liability of $9,573,000 at September
30, 2004. The Company has recorded in interest expense, losses related to the
interest rate swap agreements of $1,403,000 and $1,657,000 for the three months
ended September 30, 2004 and 2003, respectively and $4,597,000 and $4,782,000
for the nine months ended September 30, 2004 and 2003, respectively. Gains or
losses on the interest rate swap contracts offset increases or decreases in
rates of the underlying debt, which results in a fixed rate for the underlying
debt. The Company anticipates $2,825,000 of net losses included in accumulated
other comprehensive income will be transferred into earnings over the next year
based on current interest rates. Fair value amounts were determined as of
September 30, 2004 based on quoted market values of the Company's portfolio of
derivative instruments.
CAPITAL EXPENDITURES
Capital expenditures for the 2004 first nine months totaled $75,810,000,
of which $32,162,000 was for construction of new tank barges and $43,648,000 was
primarily for upgrading of the existing marine transportation fleet.
In February 2002, the Company entered into a contract for the construction
of six double hull, 30,000 barrel capacity, inland tank barges for use in the
transportation of petrochemicals and refined petroleum products. Five of the
tank barges were delivered in 2003 and the sixth tank barge was delivered in
February 2004. The total purchase price of the six barges was approximately
$9,500,000, of which $780,000 was expended in 2002, $8,612,000 in 2003 and the
balance in the 2004 first quarter.
In October 2002, the Company entered into a contract for the construction
of six double hull, 30,000 barrel capacity, inland tank barges for use in the
transportation of petrochemical and refined petroleum products. Two of the six
barges were delivered in the 2004 second quarter, three in the third quarter and
one is anticipated in the fourth quarter. The total purchase price of the six
barges is approximately $8,900,000, of which $1,111,000 was expended in 2003 and
$7,516,000 was expended in the 2004 first nine months.
In May 2003, the Company entered into a contract for the construction of
16 double hull, 30,000 barrel capacity, inland tank barges; four for use in the
transportation of petrochemical and refined petroleum products and 12 for use in
the transportation of black oil products. Six of the 16 barges were delivered in
2003, one in the 2004 first quarter and nine in the 2004 second quarter. The
total purchase price of the 16 barges was approximately $29,000,000, of which
$10,806,000 was expended in 2003 and $17,590,000 was expended in the 2004 first
nine months.
30
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
CAPITAL EXPENDITURES - (CONTINUED)
In October 2003, the Company entered into a contract for the construction
of nine double hull, 30,000 barrel capacity, inland tank barges; five for use in
the transportation of petrochemicals and refined petroleum products and four for
use in the transportation of black oil products. Four barges were delivered in
the 2004 third quarter and five are anticipated to be delivered in the 2004
fourth quarter. The total purchase price of the nine barges is approximately
$16,000,000, of which $5,968,000 was expended in the 2004 first nine months.
In June 2004, the Company entered into a contract for the construction of
11 double hull, 30,000-barrel capacity, inland tank barges. Four of the tank
barges will be for use in the transportation of petrochemical and refined
petroleum products and seven for use in the transportation of black oil
products. Delivery of the 11 barges is scheduled for January through May 2005.
The total purchase price of the 11 barges is approximately $23,600,000, subject
to adjustment based on steel prices and any scrap surcharges that apply at the
time the steel is shipped.
In July 2004, the Company entered into a contract for the construction of
six double hull, 30,000 barrel capacity, inland tank barges for use in the
transportation of petrochemicals and refined petroleum products. Delivery of the
six barges is scheduled over a seven-month period starting in the 2005 second
quarter. The total purchase price of the six barges is approximately
$10,000,000, of which $1,006,000 was expended in the 2004 third quarter, subject
to adjustment based on steel prices and any scrap surcharges that apply at the
time the steel is shipped.
In August 2004, the Company entered into a letter of commitment for the
construction of 20 double hull, 10,000 barrel capacity, inland tank barges for
use in the transportation of petrochemicals and refined petroleum products.
Delivery of the 20 barges is scheduled for June through October 2005. The total
purchase price of the 20 barges is approximately $16,400,000, subject to
adjustment based on steel prices.
A number of tank barges in the combined black oil fleet of the Company and
Coastal Towing, Inc. ("Coastal") are scheduled to be retired and replaced with
new tank barges. Under the Company's barge management agreement with Coastal,
Coastal has the right to maintain its same capacity share of the combined fleet
by building replacement barges as older barges are retired. Coastal has elected
not to exercise its right to purchase its share of the black oil barges the
Company is currently building to replace the Coastal equipment.
Funding for future capital expenditures and new tank barge construction is
expected to be provided through operating cash flows and available credit under
the Company's Revolving Credit Facility.
31
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
TREASURY STOCK PURCHASES
During the 2004 first nine months, the Company did not purchase any
treasury stock. As of November 8, 2004, the Company had 1,210,000 shares
available under its common stock repurchase authorization. Historically,
treasury stock purchases have been financed through operating cash flows and
borrowing under the Company's Revolving Credit Facility. The Company is
authorized to purchase its common stock on the New York Stock Exchange and in
privately negotiated transactions. When purchasing its common stock, the Company
is subject to price, trading volume and other market considerations. Shares
purchased may be used for reissuance upon the exercise of stock options or the
granting of other forms of incentive compensation, in future acquisitions for
stock or for other appropriate corporate purposes.
LIQUIDITY
The Company generated net cash provided by operating activities of
$99,508,000 during the nine months ended September 30, 2004, 25% higher than the
$79,726,000 generated during the nine months ended September 30, 2003. The 2004
first nine months were positively influenced by favorable cash flow from working
capital of $8,036,000 compared with favorable cash flow from working capital of
$8,058,000 for the 2003 first nine months.
The Company accounts for its ownership in its four marine partnerships
under the equity method of accounting, recognizing cash flow upon the receipt or
distribution of cash from the partnerships and joint ventures. For the nine
months ended September 30, 2004 and 2003, the Company received net cash totaling
$1,239,000 and $2,911,000, respectively, from the partnerships and joint
ventures.
Funds generated are available for acquisitions, capital expenditure
projects, treasury stock repurchases, repayments of borrowings associated with
each of the above and other operating requirements. In addition to net cash flow
provided by operating activities, the Company also had available as of November
8, 2004, $149,989,000 under its Revolving Credit Facility and $121,000,000 under
its shelf registration program, subject to mutual agreement on terms. As of
November 8, 2004, the Company had $9,486,000 available under its Credit Line and
$5,000,000 under the Credit Note.
Net cash provided by operating activities for the fourth quarter of 2004
may be negatively impacted by a contribution of $6,000,000 to $10,000,000, based
on current market conditions, to the Company's defined benefit plan for vessel
personnel. The plan assets primarily consist of fixed income securities and
corporate stocks and any contribution would be the result of continued low
interest rates and low investment returns. Funding of the plan is based on
actuarial projections that are designed to satisfy minimum ERISA funding
requirements and achieve adequate funding of accumulated benefit obligations. In
2003, the Company made a contribution of $5,600,000 to its defined benefit plan
for vessel personnel.
Neither the Company, nor any of its subsidiaries, is obligated on any debt
instrument, swap agreement, or any other financial instrument or commercial
contract which has a rating trigger, except for the pricing grids on its
Revolving Credit Facility.
32
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
LIQUIDITY - (CONTINUED)
The Company expects to continue to fund expenditures for acquisitions,
capital construction projects, treasury stock repurchases, repayment of
borrowings, and for other operating requirements from a combination of funds
generated from operating activities and available financing arrangements.
The Company has issued guaranties or obtained stand-by letters of credit
and performance bonds supporting performance by the Company and its subsidiaries
of contractual or contingent legal obligations incurred in the ordinary course
of business. The aggregate notional value of these instruments is $1,758,000 at
September 30, 2004, including $838,000 in letters of credit and $920,000 in
performance bonds, of which $683,000 of these financial instruments relates to
contingent legal obligations, which are covered by the Company's liability
insurance program in the event the obligations are incurred. All of these
instruments have an expiration date within three years. The Company does not
believe demand for payment under these instruments is likely and expects no
material cash outlays to occur in connection with these instruments.
During the last three years, inflation has had a relatively minor effect
on the financial results of the Company. The marine transportation segment has
long-term contracts that generally contain cost escalation clauses whereby
certain costs, including fuel, can be passed through to its customers; however,
there is typically a 30 to 90 day delay before contracts are adjusted for fuel
prices. Spot contract rates are at the current market rate and are subject to
market volatility. The repair portion of the diesel engine services segment is
based on prevailing current market rates.
33
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
PART I FINANCIAL INFORMATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to risk from changes in interest rates on certain
of its outstanding debt. The outstanding loan balances under the Company's bank
credit facilities bear interest at variable rates based on prevailing short-term
interest rates in the United States and Europe. A 10% change in variable
interest rates would impact the 2004 interest expense by approximately $146,000,
based on balances outstanding at December 31, 2003, and change the fair value of
the Company's debt by less than 1%.
From time to time, the Company has utilized and expects to continue to
utilize derivative financial instruments with respect to a portion of its
interest rate risks to achieve a more predictable cash flow by reducing its
exposure to interest rate fluctuations. These transactions generally are
interest rate swap agreements which are entered into with major financial
institutions. Derivative financial instruments related to the Company's interest
rate risks are intended to reduce the Company's exposure to increases in the
benchmark interest rates underlying the Company's Senior Notes and variable rate
bank credit facilities. The Company does not enter into derivative financial
instrument transactions for speculative purposes.
From time to time, the Company hedges its exposure to fluctuations in
short-term interest rates under its Revolving Credit Facility and Senior Notes
by entering into interest rate swap agreements. The interest rate swap
agreements are designated as cash flow hedges, therefore, the changes in fair
value, to the extent to the swap agreements are effective, are recognized in
other comprehensive income until the hedged interest expense is recognized in
earnings. As of September 30, 2004, the Company had a total notional amount of
$150,000,000 of interest rate swaps designated as cash flow hedges for its
variable rate Senior Notes as follows (dollars in thousands):
NOTIONAL FIXED
AMOUNT TRADE DATE EFFECTIVE DATE TERMINATION DATE PAY RATE RECEIVE RATE
- -------- -------------- -------------- ---------------- -------- -----------------
$100,000 February 2001 March 2001 March 2006 5.64% One-month LIBOR
$100,000 September 2003 March 2006 February 2013 5.45% Three-month LIBOR
$ 50,000 April 2004 April 2004 May 2009 4.00% Three-month LIBOR
On April 29, 2004, the Company extended a hedge on part of its exposure to
fluctuations in short-term interest rates by entering into a five-year interest
rate swap agreement with a notional amount of $50,000,000 to replace a
$50,000,000 interest rate swap that expired in April 2004. Under the agreement,
the Company will pay a fixed rate of 4.00% for five years and will receive
floating rate interest payments to offset floating rate interest obligations
under the Company's Senior Notes. The interest rate swap was designated as a
cash flow hedge for the Company's Senior Notes.
These interest rate swaps hedge a majority of the Company's long-term debt
and only an immaterial loss on ineffectiveness was recognized in the 2004 third
quarter and first nine months. The total fair value of the interest rate swap
agreements was recorded as other long-term liability of $9,573,000 at September
30, 2004. The Company has recorded in interest expense, losses related to the
interest rate swap agreements of $1,403,000 and $1,657,000 for the three months
ended September 30,
34
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - (CONTINUED)
2004 and 2003, respectively and $4,597,000 and $4,782,000 for the nine months
ended September 30, 2004 and 2003, respectively. Gains or losses on the interest
rate swap contracts offset increases or decreases in rates of the underlying
debt, which results in a fixed rate for the underlying debt. The Company
anticipates $2,825,000 of net losses included in accumulated other comprehensive
income will be transferred into earnings over the next year based on current
interest rates. Fair value amounts were determined as of September 30, 2004
based on quoted market values of the Company's portfolio of derivative
instruments.
ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluation of the Company's disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934 (the "Exchange Act")) as of the end of the period covered by this quarterly
report, the Company's Chief Executive Officer and Chief Financial Officer have
concluded that the disclosure controls and procedures are effective to ensure
that information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms. There were no changes in the Company's internal
control over financial reporting that occurred during the Company's most recent
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
35
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and a group of approximately 45 other companies have been
notified that they are Potentially Responsible Parties ("PRPs") under the
Comprehensive Environmental Response, Compensation and Liability Act with
respect to a potential Superfund site, the Palmer Barge Line Site ("Palmer"),
located in Port Arthur, Texas. In prior years, Palmer had provided tank barge
cleaning services to various subsidiaries of the Company. The Company and three
other PRPs have entered into an agreement with the EPA to perform a remedial
investigation and feasibility study. Based on information currently available,
the Company is unable to ascertain the extent of its exposure, if any, in this
matter.
The Company and certain subsidiaries have received a Request For
Information ("RFI") from the EPA under the Comprehensive Environmental Response,
Compensation and Liability Act with respect to a potential Superfund site, the
Gulfco site, located in Freeport, Texas. In prior years, a company unrelated to
Gulfco operated at the site and provided tank barge cleaning services to various
subsidiaries of the Company. An RFI is not a determination that a party is
responsible or potentially responsible for contamination at a site, it is only a
request seeking any information a party may have with respect to a site as part
of an EPA investigation into such site. Based on information currently
available, the Company is unable to ascertain the extent of its exposure, if
any, in this matter.
In addition, there are various other suits and claims against the Company,
none of which in the opinion of management will have a material effect on the
Company's financial condition, results of operations or cash flows. Management
believes that it has recorded adequate reserves and believes that it has
adequate insurance coverage or has meritorious defenses for these other claims
and contingencies.
36
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
31.1 - Certification of Chief Executive Officer Pursuant to Rule
13a-14(a).
31.2 - Certification of Chief Financial Officer Pursuant to Rule
13a-14(a).
32 - Certification Pursuant to Rule 13a-14(b) and Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
The Company's report on Form 8-K dated July 29, 2004 stated that the
Company issued a press release announcing the Company's 2004 second quarter
results of operations.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KIRBY CORPORATION
(Registrant)
By: /s/ NORMAN W. NOLEN
-----------------------------------
Norman W. Nolen
Executive Vice President, Treasurer
and Chief Financial Officer
Dated: November 8, 2004
37
INDEX TO EXHIBITS
31.1 - Certification of Chief Executive Officer Pursuant to Rule 13a-14(a).
31.2 - Certification of Chief Financial Officer Pursuant to Rule 13a-14(a).
32 - Certification Pursuant to Rule 13a-14(b) and Section 906 of the Sarbanes-
Oxley Act of 2002.