FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number 0-12058
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KENAN TRANSPORT COMPANY
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(Exact name of registrant as specified in its charter)
North Carolina 56-0516485
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
University Square - West, 143 W. Franklin Street
Chapel Hill, North Carolina, 27516-3910
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(Address of principal executive offices, including Zip Code)
(919) 967-8221
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(Registrant's telephone number, including Area Code)
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
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Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at August 31, 1999
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Common stock, no par value 2,421,562
KENAN TRANSPORT COMPANY
INDEX
Page
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Part I - Financial Information
Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998 1
Consolidated Statements of Income for the three
and nine months ended September 30, 1999 and 1998 2
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1999 and 1998 3
Notes to Consolidated Financial Statements 4 - 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations 7 - 9
Part II - Other Information
Item 4 - Submission of Matters to a Vote of
Security Holders 10
Item 6 - Exhibits and Reports on Form 8-K 10
Signatures 11
Index to Exhibits 12
PART I - FINANCIAL INFORMATION
KENAN TRANSPORT COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 30, December 31,
1999 1998
ASSETS (Unaudited) (Note 1)
- -------------------------------------------------------------------------------
Current Assets
Cash and cash equivalents $ 10,955 $ 8,023
Accounts receivable, net 11,210 10,441
Operating supplies and parts 622 572
Prepayments
Tires 2,116 1,851
Insurance, licenses and other 1,706 1,353
Deferred income taxes 2,135 2,164
...................................
Total Current Assets 28,744 24,404
Operating Property
Land 3,464 3,464
Buildings and leasehold improvements 11,469 11,412
Revenue equipment 77,734 72,703
Other equipment 6,795 6,490
...................................
99,462 94,069
Accumulated depreciation (39,408) (36,444)
...................................
Net Operating Property 60,054 57,625
Intangible Assets, Net 10,512 10,944
Other Assets 1,988 1,671
...................................
$ 101,298 $ 94,644
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------
Current Liabilities
Capital lease obligations $ 970 $ 1,108
Accounts payable 8,097 2,784
Wages and employee benefits payable 6,930 9,331
Claims payable 4,648 3,942
Income taxes payable 396 --
...................................
Total Current Liabilities 21,041 17,165
Long-Term Debt 8,000 10,000
Capital Lease Obligations 3,430 2,056
Deferred Income Taxes 11,394 11,243
Stockholders' Equity
Common stock; no par; 20,000,000 shares
authorized; 2,421,562 shares issued
and outstanding 4,400 4,400
Deferred incentive compensation (784) (956)
Retained earnings 53,817 50,736
...................................
57,433 54,180
...................................
$ 101,298 $ 94,644
====================================
The Notes to Consolidated Financial Statements are an integral part of these
balance sheets.
Page 1
KENAN TRANSPORT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited and in thousands except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
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1999 1998 1999 1998
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Operating Revenue $ 35,547 $ 34,104 $ 103,524 $ 96,692
Operating Expenses
Wages and employee benefits 18,526 17,787 53,852 49,516
Fuel and other operating expenses 7,776 6,849 21,967 20,164
Depreciation and amortization 2,660 2,649 8,007 7,764
Taxes and licenses 1,813 1,838 5,522 5,313
Claims and insurance 1,396 1,350 4,178 3,662
Equipment rents 1,321 1,418 4,085 3,851
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33,492 31,891 97,611 90,270
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Operating Income 2,055 2,213 5,913 6,422
Interest Expense (221) (191) (663) (558)
Interest Income and Other Expenses, Net 227 74 708 138
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Income before Provision for Income Taxes 2,061 2,096 5,958 6,002
Provision for Income Taxes 812 855 2,338 2,432
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Net Income $ 1,249 $ 1,241 $ 3,620 $ 3,570
============================================================================================================
Basic and diluted earnings per share $ .51 $ .51 $ 1.49 $ 1.48
Operating ratio 94.2% 93.5% 94.3% 93.4%
Dividends paid per share $ .0750 $ .0725 $ .2200 $ .2125
The Notes to Consolidated Financial Statements are an integral part of these
statements.
Page 2
KENAN TRANSPORT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1999 and 1998
(Unaudited and dollars in thousands)
1999 1998
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Cash Provided by (Applied to):
Operations $ 14,346 $ 11,265
Purchases of operating property, net (7,824) (6,858)
Business acquisition -- (7,880)
Debt and capital lease obligations, net (3,051) 5,838
Dividends (539) (519)
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Net Increase in Cash and Cash Equivalents 2,932 1,846
Beginning Cash and Cash Equivalents 8,023 3,422
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Ending Cash and Cash Equivalents $ 10,955 $ 5,268
================================================================================
The Notes to Consolidated Financial Statements are an integral part of these
statements.
Page 3
KENAN TRANSPORT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
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The accompanying consolidated financial statements are prepared in
conformity with generally accepted accounting principles and include the
accounts of Kenan Transport Company and its wholly owned subsidiary,
Petro-Chemical Transport, Inc. All significant intercompany accounts and
transactions have been eliminated.
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) that are, in the opinion of management, necessary to a fair
statement of the results for the interim periods presented.
The balance sheet at December 31, 1998 has been taken from the audited
financial statements at that date.
The results of operations for the three and nine months ended September
30, 1999 and 1998 are not necessarily indicative of the results to be expected
for the full year.
2. Recent Accounting Pronouncements
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In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
requires that upon adoption all derivative instruments be recognized in the
balance sheet at fair value and that changes in such fair values be recognized
in earnings unless specific hedging criteria are met. Changes in the values of
derivatives that meet these hedging criteria will ultimately offset related
earnings effects of the hedged items; effects of certain changes in fair value
are recorded in other comprehensive income pending recognition in earnings. The
Company will adopt the Statement when required on January 1, 2001. The
application of Statement 133 is not expected to have a significant impact on the
Company's financial position or results of operations.
3. Business Acquisitions
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On February 28, 1998, the Company acquired 100% of the outstanding stock of
Petro-Chemical Transport, Inc. (PCT), a wholly owned subsidiary of CITGO
Petroleum Corporation. PCT is a tank truck carrier serving the petroleum
industry in the Southeast, Midwest and on the West Coast. The acquisition, net
of cash acquired, required a cash investment totaling $7,880,000. The Company
financed the acquisition through its line of credit facility.
The acquisition has been accounted for using the purchase method of
accounting. The accompanying consolidated statements of income include results
of operations of PCT beginning March 1, 1998. The purchased assets and
liabilities assumed have been recorded in the Company's financial statements at
their estimated fair market values. The excess of the purchase cost over the
fair value of net assets acquired in the acquisition (goodwill) is included in
intangible assets in the accompanying consolidated balance sheets and is being
amortized over 20 years on a straight-line basis.
Page 4
KENAN TRANSPORT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
The following unaudited pro forma summary presents the consolidated
results of operations of the Company, as if the acquisition had occurred as of
January 1, 1998. The pro forma information does not purport to be indicative of
what would have occurred had the acquisition been made as of January 1, 1998 or
of results that may occur in the future (dollars in thousands except per share
amounts).
Pro-Forma Information (unaudited)
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Three Months Ended Nine Months Ended
September 30 September 30
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1999 1998 1999 1998
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Revenue $35,547 $34,104 $103,524 $103,499
Net income 1,249 1,241 3,620 3,726
Basic and diluted
earnings per share .51 .51 1.49 1.54
4. Earnings Per Share
- --------------------------
A reconciliation of net income and the weighted average number of shares
outstanding used in calculating basic and diluted earnings per share is
presented in the table below (in thousands, except per share amounts):
Three Months Ended Nine Months Ended
September 30 September 30
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1999 1998 1999 1998
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Net Income $ 1,249 $ 1,241 $ 3,620 $ 3,570
=============================================================
Weighted Average Shares:
Basic shares 2,422 2,422 2,422 2,412
Dilutive effect of
stock options -- -- -- 1
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Diluted shares 2,422 2,422 2,422 2,413
=============================================================
Basic and diluted
earnings per share $ 0.51 $ 0.51 $ 1.49 $ 1.48
Page 5
KENAN TRANSPORT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(continued)
5. Long-Term Debt
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The Company has an unsecured $20,000,000 Reducing Line-of-Credit
Facility. The facility replaces the Company's previous $7,000,000
line-of-credit. Funds available under the line reduce $500,000 per quarter
beginning July 1, 1998 to a minimum line of $10,000,000. The facility matures in
March 2003. Interest under the facility is variable based on LIBOR plus an
applicable margin. At September 30, 1999 and December 31, 1998, the Company had
$8,000,000 and $10,000,000, respectively, outstanding under the new credit
facility.
The Company has entered into a simple interest rate swap agreement to
manage costs and risks associated with changing interest rates. Under the
agreement, the Company exchanges at specific intervals the difference between
the fixed and variable rate interest amounts calculated by reference to the
notional amount with any differential recorded as an adjustment to interest
expense. The agreement effectively changes a portion of the Company's interest
rate exposure on the line-of-credit from a floating rate to a fixed rate. At
September 30, 1999, the notional principal amount of this agreement totaled
$5,000,000. The agreement matures in March 2003.
The Company does not hold or issue derivative instruments for trading
purposes.
Page 6
KENAN TRANSPORT COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors that have affected the Company's financial position and
operating results during the periods included in the accompanying financial
statements.
Results of Operations
Revenue for the third quarter of 1999 was $35,547,000 compared to
$34,104,000 for the third quarter of 1998. Net income was $1,249,000 compared to
$1,241,000 in 1998. Earnings per share were $.51 during the period for each
year. Miles operated decreased 1% from the third quarter of 1998.
Operating expenses for the third quarter of 1999 increased $1,601,000
(5%) over the third quarter of 1998. The increase in operating expenses was
primarily due to increases in driver pay rates, training costs of new drivers,
and fuel prices. Fuel prices for the third quarter of 1999 increased 30% from
the third quarter of 1998. The Company's operating ratio for the quarter was
94.2% compared to 93.5% in 1998.
Revenue for the first nine months of 1999 was $103,524,000 compared to
$96,692,000 for 1998. Net income was $3,620,000 compared to $3,570,000 in 1998.
Earnings per share were $1.49 compared to $1.48 during the same period last
year. Miles operated increased 1% from the first nine months of 1998.
The first nine months revenue increased $6,832,000 (7%) over 1998 due
primarily to the Company's acquisition of PCT. Revenue for PCT was $33,826,000
in 1999, which includes revenues for the full nine months, compared to
$23,825,000 in 1998, which includes revenues from the time of acquisition at
February 28, 1998 through September 30, 1998.
Operating expenses for the first nine months of 1999 totaled
$97,611,000, an increase of $7,341,000 (8%) over 1998 due primarily to the
Company's acquisition of PCT and increases in driver pay rates and training
costs. The operating ratio increased to 94.3% from 93.4% in 1998.
The average balances of outstanding debt and capital lease obligations
during the third quarter of 1999 and 1998 were approximately $13,550,000 and
$11,980,000, respectively. Interest expense was $221,000 for the third quarter
of 1999 compared to $191,000 in 1998.
Liquidity and Capital Resources
At September 30, 1999, cash and cash equivalents totaled $10,955,000, an
increase of $2,932,000 from December 31,1998. Working capital of $7,703,000 was
up $464,000 from year-end 1998. At September 30, 1999, the Company had
outstanding debt and capital lease obligations totaling $12,400,000 compared to
$13,164,000 at December 31, 1998.
Page 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(continued)
The Company has fourth quarter cash commitments of approximately
$5,700,000 for tractor and trailer replacements. Management believes that cash
flows from operations and the Company's bank line-of-credit will be sufficient
to fund these planned expenditures, as well as 1999 working capital
requirements, expansion opportunities and other corporate needs.
Environmental Matters
The Company's operations require the storage of fuel for use in its
tractors in both underground and aboveground tanks. The Company has a program to
maintain its fuel storage facilities in compliance with environmental
regulations. Under the program, the Company incurs costs to replace tanks,
remediate soil contamination resulting from overfills, spills and leaks, and
monitor facilities on an ongoing basis. These costs are recorded when it is
probable that a liability has been incurred and the related amount can be
reasonably estimated. Such costs have not been and are not expected to be
material to the Company's operations or liquidity.
Year 2000
The "Year 2000" issue results from computer systems that store and
process data using two-digit fields to represent the year rather than four-digit
fields. Consequently, some computer systems may not process dates beyond 1999
causing businesses to be at risk of computer system failures that may disrupt
their operations. Computer systems termed Year 2000 compliant have been tested
and certified to correctly process dates in the year 2000 and beyond.
In 1998, the Company established a program to ensure that its critical
internal systems and selected third parties (key product loading locations,
suppliers and customers) would be ready for Year 2000 and, if not, to develop
contingency plans.
The Company's internal systems include both information technology
("IT") systems and non-IT systems. The critical IT systems consist of financial
and operational software and hardware, and the critical non-IT systems consists
of embedded technology in telecommunications equipment and tractors. The phases
of the Company's program for evaluating its internal systems include assessing
the systems, upgrading critical systems that are not Year 2000 ready, internally
testing all critical IT systems and obtaining written assurances from vendors
for all critical non-IT systems. As of September 30, 1999, the Company has
completed 100% of its Year 2000 program for all of its critical internal systems
and believes that the systems are Year 2000 compliant.
The Company is also continuing to assess the Year 2000 readiness of
selected third parties by analyzing the responses to questionnaires sent to the
third parties. The goal is to ensure that no interruptions of service that would
adversely affect the Company's business will occur as a result of Year 2000
issues at those companies on which the Company's business is materially
dependent. The Company has completed approximately 85% of this phase and has not
received any responses that reveal a material third party that is not expecting
to be Year 2000 compliant. The Company is diligently monitoring the responses of
the selected third parties and will formulate contingency plans where
significant exposures are identified.
Page 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(continued)
The total cost of remediation for Year 2000 of the Company's critical
internal systems and to determine the Year 2000 readiness of selected third
parties is estimated to be $250,000. The Company has incurred and expensed
substantially all of the total estimated cost related to Year 2000 readiness.
Overall, management believes that the Year 2000 will not pose significant
operational problems for the Company or cause significant costs beyond those
already expensed.
The most reasonably likely worst case scenario for the Company is that a
number of key product loading locations, suppliers and customers would be unable
to operate due to Year 2000 related system failures. If a large number of
product loading locations and suppliers are unable to operate, the Company would
experience a delay in loading products for delivery to customers. The inability
of the Company to operate efficiently would result in a loss of revenues,
partially mitigated by reduced costs.
The Company believes that it has an effective plan in place to resolve
the Year 2000 issue in a timely manner. However, due to the unusual nature of
the Year 2000 issue, it is difficult to predict with certainty what will happen
after December 31, 1999.
Market Risk
Market risk is the potential loss arising from adverse changes in market
rates and prices, such as foreign currency rates and other relevant market rates
or price changes. In the ordinary course of business, Kenan is exposed to
interest rate risks and the Company regularly evaluates its exposure to this
risk. The Company does not hold or issue derivative instruments for trading
purposes.
The fair value of the interest rate swap agreement represents the
estimated receipts or payments that would be made to terminate the agreement. At
September 30, 1999, the Company would have received approximately $23,000 to
terminate the agreement. Assuming a 100 basis point reduction in the LIBOR
interest rate curve, the fair value of the interest rate swap agreement would
decrease by approximately $156,000.
Forward-Looking Statements
Statements in this document that are not historical facts are hereby
identified as forward-looking statements for the purpose of the safe harbor
provided by Section 21E of the Securities Exchange Act of 1934 and Section 27A
of the Securities Act of 1933. The Company cautions readers that such
forward-looking statements, including without limitation, those relating to the
Company's future business prospects, revenues, working capital, liquidity,
capital needs, interest costs and income, wherever they occur in this document
or in other statements attributable to the Company are estimates reflecting the
best judgement of the Company's senior management and involve a number of risks
and uncertainties that could cause actual results to differ materially from
those suggested by the forward-looking statements.
Disclosures concerning Year 2000 issues also contain forward-looking
statements that include assessments, timetables and cost estimates. The
incremental costs of the Year 2000 project and the time by which the Company
believes it will complete the Year 2000 modifications, as well as new system
initiatives that are Year 2000 compliant and third party compliance, are based
upon management's best estimates. There exists the possibility that factors
outside of management's control may have a material impact on the Company's
operations.
Page 9
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
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None
Item 5. Exhibits and Reports on Form 8-K
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(a) The Exhibits to this Form 10-Q are listed on the accompanying
index to Exhibits.
(b) The following reports on Form 8-K have been filed during the
quarter ended September 30, 1999:
None
Page 10
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.
KENAN TRANSPORT COMPANY
(Registrant)
DATE: November 12, 1999 BY:/s/ William L. Boone
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Vice President-Finance and
Chief Financial Officer
Page 11
INDEX TO EXHIBITS
The exhibits filed as part of this report are listed below:
Exhibit
Number Description
- -------- -------------------------------------------------------
11 Statement Re Computation of Per Share Earnings
27 Financial Data Schedule for the quarter ending September 30,1999.
Page 12