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 June 30, 2002
[ ] 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 [ ]
The number of shares outstanding of the registrant's Common Stock, $.10 par
value per share, on August 9, 2002 was 23,993,000.
PART I - FINANCIAL INFORMATION
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED BALANCE SHEETS
(Unaudited)
ASSETS
June 30, December 31,
2002 2001
-------- --------
($ in thousands)
Current assets:
Cash and cash equivalents $ 2,924 $ 1,850
Accounts receivable:
Trade - less allowance for doubtful accounts 77,360 78,677
Insurance claims and other 6,282 5,420
Inventory - finished goods 16,303 15,105
Prepaid expenses 9,497 9,082
Deferred income taxes 3,568 3,113
-------- --------
Total current assets 115,934 113,247
-------- --------
Property and equipment 794,384 776,157
Less accumulated depreciation 324,963 309,918
-------- --------
469,421 466,239
-------- --------
Investment in marine affiliates 13,271 13,439
Goodwill - net 156,726 156,726
Other assets 3,416 4,820
-------- --------
$758,768 $754,471
======== ========
See accompanying notes to condensed financial statements.
2
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED BALANCE SHEETS
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31,
2002 2001
---------- ----------
($ in thousands)
Current liabilities:
Current portion of long-term debt $ 336 $ 335
Income taxes payable 1,142 2,997
Accounts payable 35,653 35,378
Accrued liabilities 43,540 54,097
Deferred revenues 3,199 4,250
---------- ----------
Total current liabilities 83,870 97,057
---------- ----------
Long-term debt - less current portion 247,433 249,402
Deferred income taxes 88,323 89,542
Minority interests 2,426 2,819
Other long-term liabilities 16,872 14,629
---------- ----------
355,054 356,392
---------- ----------
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 176,304 176,074
Accumulated other comprehensive income (4,774) (3,364)
Retained earnings 259,775 242,211
---------- ----------
434,396 418,012
Less cost of 6,748,000 shares in treasury (6,892,000 at
December 31, 2001) 114,552 116,990
---------- ----------
319,844 301,022
---------- ----------
$ 758,768 $ 754,471
========== ==========
See accompanying notes to condensed financial statements.
3
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED STATEMENTS OF EARNINGS
(Unaudited)
Three months ended Six months ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
--------- --------- --------- ---------
($ in thousands, except per share amounts)
Revenues:
Marine transportation $ 107,346 $ 124,893 $ 216,336 $ 236,844
Diesel engine services 22,132 22,729 44,579 43,906
--------- --------- --------- ---------
129,478 147,622 260,915 280,750
--------- --------- --------- ---------
Costs and expenses:
Costs of sales and operating expenses 82,746 92,925 166,216 177,816
Selling, general and administrative 15,488 17,615 32,688 34,717
Taxes, other than on income 2,209 3,045 4,558 5,749
Depreciation and other amortization 11,497 10,772 23,019 21,335
Amortization of goodwill -- 1,520 -- 3,050
Gain on disposition of assets (27) (102) (168) (115)
--------- --------- --------- ---------
111,913 125,775 226,313 242,552
--------- --------- --------- ---------
Operating income 17,565 21,847 34,602 38,198
Equity in earnings of marine affiliates 137 1,099 940 1,815
Other expense (214) (192) (341) (665)
Interest expense (3,366) (4,510) (6,873) (9,654)
--------- --------- --------- ---------
Earnings before taxes on income 14,122 18,244 28,328 29,694
Provision for taxes on income (5,366) (7,480) (10,764) (12,175)
--------- --------- --------- ---------
Net earnings $ 8,756 $ 10,764 $ 17,564 $ 17,519
========= ========= ========= =========
Net earnings per share of common stock:
Basic $ .36 $ .45 $ .73 $ .73
========= ========= ========= =========
Diluted $ .36 $ .44 $ .72 $ .72
========= ========= ========= =========
See accompanying notes to condensed financial statements.
4
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended June 30,
-------------------------
2002 2001
-------- --------
($ in thousands)
Cash flows from operating activities:
Net earnings $ 17,564 $ 17,519
Adjustments to reconcile net earnings to net cash provided by
operations:
Depreciation and amortization 23,019 24,385
Deferred income taxes (915) (173)
Equity in earnings of marine affiliates, net of distributions and
contributions 168 662
Other 168 675
Increase (decrease) in cash flows resulting from changes in operating
working capital (12,900) 8,964
-------- --------
Net cash provided by operating activities 27,104 52,032
-------- --------
Cash flows from investing activities:
Capital expenditures (28,234) (29,857)
Acquisition of marine equipment (2,800) --
Proceeds from disposition of assets 5,442 849
Other -- 10
-------- --------
Net cash used in investing activities (25,592) (28,998)
-------- --------
Cash flows from financing activities:
Borrowings (payments) on bank credit facilities, net 48,200 (24,100)
Payments on long-term debt (50,168) (5,168)
Proceeds from exercise of stock options 2,186 2,994
Other (656) (534)
-------- --------
Net cash used in financing activities (438) (26,808)
-------- --------
Increase (decrease) in cash and cash equivalents 1,074 (3,774)
Cash and cash equivalents, beginning of year 1,850 4,658
-------- --------
Cash and cash equivalents, end of period $ 2,924 $ 884
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period:
Interest $ 7,880 $ 9,809
Income taxes $ 13,533 $ 13,119
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 June 30, 2002
and December 31, 2001, and the results of operations for the three months and
six months ended June 30, 2002 and 2001.
(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, 2001.
(2) CHANGES IN ACCOUNTING METHODS
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No.
142"). SFAS No. 142, issued in July 2001, requires that amortization of goodwill
will cease and be replaced with periodic tests of the goodwill's impairment at
least annually in accordance with the provisions of SFAS No. 142, and that
intangible assets other than goodwill be amortized over their useful lives. The
Company did not incur any transitional impairment losses or gains as a result of
adopting SFAS No. 142.
Amortization of goodwill for the 2001 second quarter and first six months
was $1,556,000 and $3,121,000, respectively. The following table sets forth the
reported and adjusted net earnings, and basic and diluted earnings per share,
for the three months and six months ended June 30, 2001 (in thousands, except
per share amounts):
Three months ended Six months ended
June 30, 2001 June 30, 2001
------------- -------------
Reported net earnings $ 10,764 $ 17,519
Amortization of goodwill - marine transportation 1,402 2,805
Amortization of goodwill - diesel engine services 118 245
Amortization of goodwill - equity in earnings of
marine affiliates 36 71
---------- ----------
Adjusted net earnings $ 12,320 $ 20,640
========== ==========
Reported basic earnings per share $ .45 $ .73
Amortization of goodwill .06 .13
---------- ----------
Adjusted basic earnings per share $ .51 $ .86
========== ==========
Reported diluted earnings per share $ .44 $ .72
Amortization of goodwill .07 .13
---------- ----------
Adjusted diluted earnings per share $ .51 $ .85
========== ==========
6
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS - (Continued)
(2) CHANGES IN ACCOUNTING METHODS - (Continued)
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS No. 144"). SFAS No. 144, issued in August 2001,
addresses the accounting and reporting for the impairment or disposal of
long-lived assets and supersedes Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("SFAS No. 121") and APB Opinion No. 30, "Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." The objective of SFAS No. 144 is to establish one accounting
model for long-lived assets to be disposed of by sale, as well as to resolve
implementation issues related to SFAS No. 121, while retaining many of the
fundamental provisions of SFAS No. 121. The adoption of SFAS No. 144 had no
effect on the Company's financial position or results of operations.
(3) COMPREHENSIVE INCOME
The Company's total comprehensive income for the three months and six
months ended June 30, 2002 and 2001 were as follows (in thousands):
Three months Six months
ended June 30, ended June 30,
-------------- --------------
2002 2001 2002 2001
-------- -------- -------- --------
Net earnings $ 8,756 $ 10,764 $ 17,564 $ 17,519
Change in fair value of derivative financial instruments,
net of tax (2,588) 1,042 (1,410) (46)
-------- -------- -------- --------
Total comprehensive income $ 6,168 $ 11,806 $ 16,154 $ 17,473
======== ======== ======== ========
7
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS - (Continued)
(4) SEGMENT INFORMATION
The following table sets forth the Company's revenues and income (loss) by
reportable segment for the three months and six months ended June 30, 2002 and
2001 and total assets as of June 30, 2002 and December 31, 2001 (in thousands):
Three months ended Six months ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Revenues:
Marine transportation $ 107,346 $ 124,893 $ 216,336 $ 236,844
Diesel engine services 22,132 22,729 44,579 43,906
---------- ---------- ---------- ----------
$ 129,478 $ 147,622 $ 260,915 $ 280,750
========== ========== ========== ==========
Segment income (loss):
Marine transportation $ 16,183 $ 21,642 $ 32,144 $ 37,392
Diesel engine services 2,609 2,176 4,980 4,405
Other (4,670) (5,574) (8,796) (12,103)
---------- ---------- ---------- ----------
$ 14,122 $ 18,244 $ 28,328 $ 29,694
========== ========== ========== ==========
June 30, December 31,
2002 2001
---------- ----------
Total assets:
Marine transportation $ 679,716 $ 681,976
Diesel engine services 54,369 48,288
Other 24,683 24,207
---------- ----------
$ 758,768 $ 754,471
========== ==========
The following table presents the details of "Other" segment income (loss)
for the three months and six months ended June 30, 2002 and 2001 (in thousands):
Three months ended Six months ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---------- ---------- ---------- ----------
General corporate expenses $ (1,254) $ (2,073) $ (2,690) $ (3,714)
Gain on disposition of assets 27 102 168 115
Interest expense (3,366) (4,510) (6,873) (9,654)
Equity in earnings of marine affiliates 137 1,099 940 1,815
Other expense (214) (192) (341) (665)
---------- ---------- ---------- ----------
$ (4,670) $ (5,574) $ (8,796) $ (12,103)
========== ========== ========== ==========
8
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS - (Continued)
(4) SEGMENT INFORMATION - (Continued)
The following table presents the details of "Other" total assets as of
June 30, 2002 and December 31, 2001 (in thousands):
June 30, December 31,
2002 2001
---------- ----------
General corporate assets $ 11,412 $ 10,768
Investment in marine affiliates 13,271 13,439
---------- ----------
$ 24,683 $ 24,207
========== ==========
(5) TAXES ON INCOME
Details of the provision for taxes on income for the three months and six
months ended June 30, 2002 and 2001 were as follows (in thousands):
Three months ended Six months ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Provision for taxes on income:
Current $ 4,837 $ 7,044 $ 10,967 $ 11,337
Deferred 32 (11) (1,015) (123)
State and local 497 447 812 961
---------- ---------- ---------- ----------
$ 5,366 $ 7,480 $ 10,764 $ 12,175
========== ========== ========== ==========
9
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS - (Continued)
(6) EARNINGS PER SHARE
The following table presents the components of basic and diluted earnings
per share for the three months and six months ended June 30, 2002 and 2001 (in
thousands, except per share amounts):
Three months ended Six months ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net earnings $ 8,756 $ 10,764 $ 17,564 $ 17,519
========== ========== ========== ==========
Basic earnings per share:
Weighted average number of common shares outstanding 24,146 24,054 24,113 24,021
========== ========== ========== ==========
Basic earnings per share $ .36 $ .45 $ .73 $ .73
========== ========== ========== ==========
Diluted earnings per share:
Weighted average number of common shares outstanding 24,146 24,054 24,113 24,021
Dilutive shares applicable to stock options 405 219 436 163
---------- ---------- ---------- ----------
Shares applicable to diluted earnings 24,551 24,273 24,549 24,184
========== ========== ========== ==========
Diluted earnings per share $ .36 $ .44 $ .72 $ .72
========== ========== ========== ==========
Certain outstanding options to purchase approximately 124,000 and 6,000
shares of common stock were excluded in the computation of diluted earnings per
share as of June 30, 2002 and 2001, as such stock options would have been
antidilutive.
(7) CONTINGENCIES
In January 2001, the Environmental Protection Agency ("EPA"), in
conjunction with other federal and state law enforcement agencies, initiated an
investigation into possible violations of the Clean Water Act at a dry cargo
barge cleaning facility in Houston operated by Western Towing Company
("Western"), a division of the Company. The Company has cooperated fully with
the authorities in the investigation. Western has entered into a plea agreement
with the U.S. Attorney for the Southern District of Texas in which Western plead
guilty to one violation of the Clean Water Act for discharging washwater from
the facility in violation of the facility's permit. The maximum fine for such a
violation is $500,000. The Company has made an accrual for this matter which
management believes is appropriate under present circumstances.
The Company and a group of approximately 45 other companies have been
notified that they are Potentially Responsible Parties under 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
10
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL STATEMENTS - (Continued)
(7) CONTINGENCIES - (Continued)
subsidiaries of the Company. 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
has recorded necessary reserves and believes that it has adequate insurance
coverage or has meritorious defenses for these other claims and contingencies.
11
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
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,
fog and ice, marine accidents, lock delays, 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.
The Company, through its marine transportation segment, is a provider of
inland marine transportation services with a fleet of 877 inland tank barges,
consisting of 15.6 million barrels of capacity, and 208 inland towing vessels,
transporting industrial petrochemicals, refined petroleum products, black oil
and agricultural chemicals along the United States inland waterways. The marine
transportation segment also serves as 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. The segment
is strictly a provider of transportation services for its customers and does not
assume ownership of any of the products that it transports.
The Company, through its diesel engine services segment, sells genuine
replacement 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, standby power generation,
industrial and railroad markets.
RESULTS OF OPERATIONS
The Company reported second quarter 2002 net earnings of $8,756,000, or
$.36 per share, on revenues of $129,478,000, compared with 2001 second quarter
net earnings of $10,764,000, or $.44 per share, on revenues of $147,622,000. Net
earnings for the six months ended June 30, 2002 were $17,564,000, or $.72 per
share, on revenues of $260,915,000, compared with net earnings of $17,519,000,
or $.72 per share, on revenues of $280,750,000 for the 2001 first six months.
For purposes of this Management's Discussion, all earnings per share are
"Diluted earnings per share." The weighted number of common shares applicable to
diluted earnings for the 2002 and 2001 second quarter were 24,551,000 and
24,273,000, respectively, and for the 2002 and 2001 first six months were
24,549,000 and 24,184,000, respectively. The increase in the weighted average
number of common shares for the 2002 second quarter and first six months
compared with the 2001 second quarter and first six months reflected shares
issued under the Company's employee stock option plans, partially offset by open
market stock repurchases during the third quarter of 2001.
12
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS - (CONTINUED)
The following tables set forth the Company's marine transportation
segment's revenues, costs and expenses, operating income and operating margins
for the three months and six months ended June 30, 2002 compared with the three
months and six months ended June 30, 2001 (dollars in thousands):
Three months ended June 30,
---------------------------
Increase (decrease)
-------------------
2002 2001 Amount %
---------- ---------- ---------- ----------
Marine transportation revenues $ 107,346 $ 124,893 $ (17,547) (14)%
---------- ---------- ---------- ----------
Costs and expenses:
Costs of sales and operating expenses 66,202 75,552 (9,350) (12)
Selling, general and administrative 12,141 13,395 (1,254) (9)
Taxes, other than an income 2,104 2,959 (855) (29)
Depreciation and other amortization 10,716 9,943 773 8
Amortization of goodwill -- 1,402 (1,402) --
---------- ---------- ---------- ----------
91,163 103,251 (12,088) (12)
---------- ---------- ---------- ----------
Operating income $ 16,183 $ 21,642 $ (5,459) (25)%
========== ========== ========== ==========
Operating margins 15.1% 17.3%
========== ==========
Six months ended June 30,
-------------------------
Increase (decrease)
-------------------
2002 2001 Amount %
---------- ---------- ---------- ----------
Marine transportation revenues $ 216,336 $ 236,844 $ (20,508) (9)%
---------- ---------- ---------- ----------
Costs and expenses:
Costs of sales and operating expenses 132,649 144,590 (11,941) (8)
Selling, general and administrative 25,776 26,793 (1,017) (4)
Taxes, other than an income 4,303 5,561 (1,258) (23)
Depreciation and other amortization 21,464 19,703 1,761 9
Amortization of goodwill -- 2,805 (2,805) --
---------- ---------- ---------- ----------
184,192 199,452 (15,260) (8)
---------- ---------- ---------- ----------
Operating income $ 32,144 $ 37,392 $ (5,248) (14)%
========== ========== ========== ==========
Operating margins 14.9% 15.8%
========== ==========
13
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS - (CONTINUED)
Revenues for the marine transportation segment decreased $17,547,000, or
14%, for the 2002 second quarter compared with the 2001 second quarter, and
$20,508,000, or 9%, for the 2002 first six months compared with the 2001 first
six months. The decrease for both periods reflected continued weak petrochemical
volumes to the Midwest and along the Gulf Coast, the result of the sluggish
economy. During the 2002 second quarter, petrochemical volumes to the Midwest
did reflect a marginal improvement when compared with the 2002 first quarter.
Weak Midwest volumes of refined products and liquid fertilizer for both the 2002
second quarter and first six months more than offset the marginal improvement in
petrochemical volumes.
Historically, approximately 60% of the marine transportation revenues are
from petrochemical volumes, which have remained weak since the third quarter of
2000. Petrochemical volumes for the 2002 second quarter and first half were
approximately 15% and 12%, respectively, lower when compared with market highs
in the comparable 2000 periods. Refined products volumes, historically
representing approximately 20% of marine transportation revenues, began the 2002
year strong, but declined during the first quarter and remained weak the entire
second quarter. High Midwest inventories, a reduced demand for Midwest refined
products and a new refined products pipeline from the Gulf Coast to the Midwest
that went online April 1, 2002, negatively impacted the volumes moved by inland
tank barges. The transportation of refined products by tank barge into the
Midwest has historically been a seasonal business, with 2000 and 2001 reflecting
usually high demand for such products. During the first six months of 2002, the
movement of refined products returned to traditional levels, or pre-2000 levels,
with seasonal and demand variables based on inventory needs and planned refinery
closures for maintenance. Liquid fertilizer volumes, historically representing
approximately 10% of marine transportation revenues, were curtailed during the
2002 second quarter due to significant rainfall in the Midwest which kept
farmers out of their fields, reducing the demand for fertilizer usage. With
higher than normal Midwest inventory levels, there was reduced demand for the
movement of liquid fertilizer by tank barge to replenish inventories. Black oil
volumes, historically representing approximately 10% of marine transportation
revenues, were at expected levels for the 2002 second quarter and first six
months.
For the 2001 second quarter and first six months, upriver refined
products, liquid fertilizer and black oil volumes were all unseasonably strong,
offsetting weak petrochemical volumes. The strong refined product volumes were
the result of low Midwest inventory levels. The liquid fertilizer demand was
driven by high natural gas prices, which caused the U.S. manufacturers of
nitrogen based fertilizer to curtail production. The strong U.S. liquid
fertilizer demand, the result of low Midwest inventory levels, was met by
foreign manufacturers. The significant importation of fertilizer resulted in a
disruption of the traditional U.S. rail and barge distribution patterns and
created additional barging opportunities for the marine transportation segment.
The unseasonably strong black oil demand was driven by high crude and natural
gas pricing, creating a better market for residual fuel as a natural gas
substitute for boiler fuel, as well as the high demand for asphalt for use in
the active rebuilding of the U.S. highway infrastructure.
14
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS - (CONTINUED)
During the 2002 second quarter and first six months, contract renewal
rates have remained relatively flat. Spot market rates during the 2002 first
quarter compared with the 2001 fourth quarter declined approximately 10 to 15%,
and during the 2002 second quarter certain spot rates declined as much as 15 to
20% when compared with the 2001 fourth quarter, as weak petrochemical and
refined products volumes created lower utilization and excess capacity industry
wide. During the 2002 second quarter and first six months, approximately 70% of
movements were under term contracts and approximately 30% were spot market
movements.
During the 2002 second quarter, the marine transportation operations were
hampered by adverse weather conditions. High water on the upper Mississippi,
Illinois and Ohio Rivers in April and May and on the lower Mississippi River in
June, resulted in delays, increased transit times and the uses of smaller tows.
During the 2002 first quarter, delays were primarily along the Gulf Coast, the
result of heavy fog and winter frontal systems. During 2001, heavy fog and
winter frontal systems along the Gulf Coast caused delays in the 2001 first
quarter and ice on the Illinois River resulted in the closure of the river for
the majority of January 2001.
Total cost and expenses for the marine transportation segment for the 2002
second quarter and first six months decreased $12,088,000, or 12%, and
$15,260,000, or 8%, respectively, compared with the 2001 second quarter and 2001
first six months. Costs of sales and operating expenses for the 2002 second
quarter declined $9,350,000, or 12%, compared with the 2001 second quarter, and
$11,941,000, or 8%, for the 2002 first six months compared with the 2001 first
half, primarily reflecting the decrease in marine transportation revenues and
corresponding lower voyage related expenses. Due to the lower volumes moved, the
segment reduced the number of towboats operated from 217 at December 31, 2001,
to 203 at March 31 and 198 at June 30, 2002. In addition, the segment reduced
the vessel headcount to correspond with the number of towboats operated.
Partially offsetting the operating cost savings was the negative impact of
inclement weather conditions, which decreased revenues and increased operating
expenses. Ice conditions, fog, frontal systems, and high water require
additional horsepower to complete movements, additional fuel and other variable
expenses associated with longer transit times.
Selling, general and administrative expenses for the 2002 second quarter
and first six months declined $1,254,000, or 9%, and $1,017,000, or 4%,
respectively, compared with the corresponding 2001 periods. The reduced selling,
general and administrative expenses primarily reflected lower incentive
compensation accruals and professional fees, partially offset by annual salary
increases effective January 2002.
Taxes, other than on income for the 2002 second quarter and first six
months decreased $855,000, or 29%, and $1,258,000, or 23%, respectively,
compared with the 2001 second quarter and first six months. The decreases
reflect lower waterway use taxes, the result of decreased marine transportation
revenues, and lower franchise taxes attributable to legal restructuring.
15
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS - (CONTINUED)
Depreciation and other amortization expense for the 2002 second quarter
and first six months increased $773,000, or 8% and $1,761,000, or 9%,
respectively, compared with the corresponding 2001 periods. The increases
reflected new inland tank barge additions during 2001 and the 2002 first half,
the acquisition of a 15 barge fleet in the 2002 first quarter, and decreasing of
the remaining useful lives of certain older barges to correspond with the
anticipated retirement dates of such barges.
Operating income for the marine transportation segment for the 2002 second
quarter was $16,183,000, or $5,459,000, or 25%, lower than the 2001 second
quarter operating income of $21,642,000. The 2001 second quarter's operating
income included $1,402,000 of goodwill amortization. For the 2002 first six
months, operating income totaled $32,144,000, or $5,248,000, or 14%, lower than
the 2002 first six months operating income of $37,392,000. The 2001 first six
months operating income included $2,805,000 of goodwill amortization.
Amortization of goodwill ceased January 1, 2002 as a result of adoption of SFAS
No. 142. Goodwill will be evaluated annually for impairment.
The operating margin for the marine transportation segment for the 2002
second quarter was 15.1% compared with 17.3% for the 2001 second quarter, or
18.5% when adjusted for goodwill amortization expense. For the 2002 first six
months, the marine transportation operating margin was 14.9% compared with 15.8%
for the corresponding 2001 period, or 17.0% when adjusted for goodwill
amortization expense. The lower operating income and operating margins for both
2002 periods compared with the actual or adjusted 2001 operating margins
reflected the softness in petrochemical, refined products and liquid fertilizer
volumes. During the 2001 second quarter and first half, petrochemical volumes
were weak; however, refined products, liquid fertilizer and black oil volumes
were strong.
16
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS - (CONTINUED)
The following tables set forth the Company's diesel engine services
segment's revenues, costs and expenses, operating income and operating margins
for the three months and six months ended June 30, 2002 compared with the three
months and six months ended June 30, 2001 (dollars in thousands):
Three months ended June 30,
----- ---------------------
Increase (decrease)
-------------------
2002 2001 Amount %
---------- ---------- ---------- ----------
Diesel engine services revenues $ 22,132 $ 22,729 $ (597) (3)%
---------- ---------- ---------- ----------
Costs and expenses:
Costs of sales and operating expenses 16,473 17,247 (774) (4)
Selling, general and administrative 2,780 2,886 (106) (4)
Taxes, other than an income 62 71 (9) (13)
Depreciation and other amortization 208 231 (23) (10)
Amortization of goodwill -- 118 (118) --
---------- ---------- ---------- ----------
19,523 20,553 (1,030) (5)
---------- ---------- ---------- ----------
Operating income $ 2,609 $ 2,176 $ 433 20 %
========== ========== ========== ==========
Operating margins 11.8% 9.6%
========== ==========
Six months ended June 30,
-------------------------
Increase (decrease)
-------------------
2002 2001 Amount %
---------- ---------- ---------- ----------
Diesel engine services revenues $ 44,579 $ 43,906 $ 673 2%
---------- ---------- ---------- ----------
Costs and expenses:
Costs of sales and operating expenses 33,432 33,065 367 1
Selling, general and administrative 5,598 5,607 (9) --
Taxes, other than an income 149 141 8 6
Depreciation and other amortization 420 443 (23) (5)
Amortization of goodwill -- 245 (245) --
---------- ---------- ---------- ----------
39,599 39,501 98 --
---------- ---------- ---------- ----------
Operating income $ 4,980 $ 4,405 $ 575 13%
========== ========== ========== ==========
Operating margins 11.2% 10.0%
========== ==========
17
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS - (CONTINUED)
The diesel engine services segment's revenues for the 2002 second quarter
decreased $597,000, or 3%, compared with the 2001 second quarter revenues, and
increased $673,000, or 2%, for the 2002 first six months compared with the 2001
corresponding six months. For both 2002 periods, the segment reported a strong
power generation market, East Coast marine market and railroad market. A July
2001 agreement to distribute replacement parts for locomotive engines used by
U.S. transit and Class II railroads positively impacted the 2002 second quarter
and first six months. The Gulf Coast oil drilling and offshore supply vessel
market, weak since the second half of 2001, remained weak during the 2002 second
quarter and first half.
For the 2001 second quarter and first six months, the diesel engine
services segment's revenues reflected the full impact of two diesel engine
service company acquisitions, one acquired in October 2000 and one in November
2000. The diesel engine services segment's revenues also benefited from a strong
Gulf Coast drilling and offshore supply vessel market, as well as other marine
markets. The shortline and industrial railroad market was weak.
Total costs and expenses for the diesel engine services segment for the
2002 second quarter decreased $1,030,000, or 5%, when compared with the 2001
second quarter, and increased $98,000, or less than 1%, for the 2002 first six
months compared with the 2001 first six months. Costs of sales and operating
expenses for the 2002 second quarter declined $774,000, or 4%, compared with the
2001 second quarter, and increased $367,000, or 1%, for the 2002 first six
months compared with the 2001 first six months. The decrease in the costs of
sales and operating results for the 2002 second quarter compared to 2001
reflects the decrease in revenue as well as the larger percentage of power
generation business which historically earns higher gross profit margins. The
increase in the cost of sales and operating expenses for the 2002 first six
months compared to 2001 is due to the increase in revenue.
Operating income for the diesel engine services segment for the 2002
second quarter was $2,609,000, or $433,000, or 20%, higher than the 2001 second
quarter operating income of $2,176,000. The 2001 second quarter operating income
included $118,000 of goodwill amortization expense. For the 2002 first six
months, operating income totaled $4,980,000, or $575,000, or 13%, higher than
the 2001 first half operating income of $4,405,000. The 2001 first half
operating income included $245,000 of goodwill amortization expense.
The operating margin for the diesel engine services segment for the 2002
second quarter was 11.8% compared with 9.6% for the 2001 second quarter, or
10.1% adjusted for goodwill amortization expense. For the 2002 first six months,
the operating margin was 11.2% compared with 10.0% for the corresponding 2001
period, or 10.6% adjusted for goodwill amortization expense. The higher 2002
second quarter and first six months operating income and operating margins
reflected increased power generation business, which historically earns a higher
operating margin, and improved operating margin on the segment's railroad
business during the 2002 second quarter.
18
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS - (CONTINUED)
General corporate expenses for the 2002 second quarter totaled $1,254,000
compared with $2,073,000 for the 2001 second quarter. General corporate expenses
for the 2002 first six months were $2,690,000 compared with $3,714,000 for the
2001 first six months. The majority of the general corporate expenses are
selling, general and administrative expenses. The lower general corporate
expenses for both 2002 periods reflected lower employee incentive compensation
accruals and professional fees, partially offset by annual salary increases
effective January 2002.
The following tables set forth the gain on disposition of assets, equity
in earnings of marine affiliates, other expenses and interest expense for the
three months and six months ended June 30, 2002 compared with the three months
and six months ended June 30, 2001 (in thousands):
Three months ended June 30,
---------------------------
Increase (decrease)
-------------------
2002 2001 Amount %
---- ---- ------ ---
Gain on disposition of assets $ 27 $ 102 $ (75) (74)%
Equity in earnings of marine affiliates $ 137 $ 1,099 $ (962) (88)%
Other expenses $ (214) $ (192) $ 22 11 %
Interest expense $ (3,366) $ (4,510) $ (1,144) (25)%
Six months ended June 30,
-------------------------
Increase (decrease)
-------------------
2002 2001 Amount %
---- ---- ------ ---
Gain on disposition of assets $ 168 $ 115 $ 53 46 %
Equity in earnings of marine affiliates $ 940 $ 1,815 $ (875) (48)%
Other expenses $ (341) $ (665) $ (324) (49)%
Interest expense $ (6,873) $ (9,654) $ (2,781) (29)%
The Company reported net gains on disposition of assets of $27,000 and
$102,000 in the 2002 and 2001 second quarters, and $168,000 and $115,000 in the
2002 and 2001 first six months, respectively. The net gains were predominately
from the sale of marine equipment.
Equity in earnings of marine affiliates declined $962,000, or 88%, for the
2002 second quarter compared with the 2001 second quarter, and declined
$875,000, or 48%, for the 2002 first six months compared with the 2001 first six
months. Equity in earnings of marine affiliates consisted primarily of a 35%
owned offshore marine partnership with a public utility consisting of four
offshore dry-cargo barge and tug units primarily transporting coal across the
Gulf of Mexico with a backhaul of limestone rock. The lower results for the 2002
second quarter and first six months reflected reduced rates on the recently
renewed coal contract, the placement of one of the units in the shipyard for the
entire 2002 second quarter, and the closure for repair of the coal dock facility
for two weeks during the 2002 second quarter.
19
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS - (CONTINUED)
The $1,144,000, or 25%, reduction in interest expense for the 2002 second
quarter compared with the 2001 second quarter, and $2,781,000, or 29%, decrease
for the 2002 first half compared with the 2001 first half, was attributable to
lower debt levels and lower interest rates. In addition, in January 2002, the
Company retired the remaining $50.0 million of 7.05% medium term notes,
refinancing the notes through the Company's bank revolving credit facility.
During the second quarter and first six months of 2002, the average interest
rate under the Company's revolving credit facility was 3.3% and 3.2%,
respectively. The overall average debt and average interest rate for the 2002
second quarter were $240,500,000 and 5.6%, compared with $269,000,000 and 6.7%
for the 2001 second quarter, respectively. For the 2002 first half, the average
debt was $241,200,000 and the average interest rate was 5.7%, compared with
average debt of $276,900,000 and an average interest rate of 7.0% for the 2001
first half.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
Balance Sheet
Total assets as of June 30, 2002 were $758,768,000 compared with
$754,471,000 as of December 31, 2001. The following table sets forth the
significant components of the balance sheet as of June 30, 2002 compared with
December 31, 2001 (dollars in thousands):
Increase (decrease)
June 30, December 31, -------------------
2002 2001 Amount %
-------- -------- -------- --------
Assets:
Current assets $115,934 $113,247 $ 2,687 2 %
Property and equipment, net 469,421 466,239 3,182 1
Investment in marine affiliates 13,271 13,439 (168) (1)
Goodwill - net 156,726 156,726 -- --
Other assets 3,416 4,820 (1,404) (29)
-------- -------- -------- --------
$758,768 $754,471 $ 4,297 1 %
======== ======== ======== ========
Liabilities and stockholders' equity:
Current liabilities $ 83,870 $ 97,057 $(13,187) (14)%
Long-term debt - less current portion 247,433 249,402 (1,969) (1)
Deferred income taxes 88,323 89,542 (1,219) (1)
Minority interest and other
long-term liabilities 19,298 17,448 1,850 11
Stockholders' equity 319,844 301,022 18,822 6
-------- -------- -------- --------
$758,768 $754,471 $ 4,297 1%
======== ======== ======== ========
20
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY - (CONTINUED)
Balance Sheet - (Continued)
Current assets as of June 30, 2002 increased 2% compared with December 31,
2001. Cash and cash equivalents increased $1,074,000 and trade accounts
receivable decreased $1,317,000, or 2%, primarily the result of lower revenues.
Finished goods inventory increased $1,198,000 during the 2002 first six months
to support the strengthening railroad market and projected third quarter diesel
engine services overhauls.
The 1% increase in property and equipment primarily reflected $28,234,000
of capital expenditures and the $2,800,000 acquisition of a tank barge fleet,
both more fully described under Capital Expenditures below, net of depreciation
expense and dispositions for the 2002 first six months.
Current liabilities as of June 30, 2002 decreased $13,187,000, or 14%,
compared with December 31, 2001. Income taxes payable and accrued liabilities
decreased 62% and 20%, respectively, primarily due to the timing of tax and
employee incentive compensation plan payments.
Long-term debt, less current portion, declined $1,969,000, or 1%,
reflecting the cash flow provided by operating activities. Long-term debt, less
current portion, as of June 30, 2002 compared with March 31, 2002 increased by
$5,615,000, the result of the timing of capital expenditures, and borrowings for
tax and employee incentive compensation plan payments.
Stockholders' equity as of June 30, 2002 increased 6% compared with
December 31, 2001. The increase was primarily attributable to net earnings of
$17,564,000 and a $2,438,000 decrease in treasury stock, primarily from the
exercise of employee stock options during the 2002 first six months. Accumulated
other comprehensive income declined $1,410,000, reflecting the net change in the
fair value of interest rate swap agreements, net of taxes, more fully described
under Quantitative and Qualitative Disclosures about Market Risk below.
Long-Term Financing
The Company has an unsecured $150,000,000 bank revolving credit facility
(the "Revolving Credit Facility") agented by JPMorgan Chase, with a maturity
date of October 9, 2004. The Company was in compliance with Revolving Credit
Facility covenants at June 30, 2002. As of June 30, 2002, $63,000,000 was
outstanding under the Revolving Credit Facility.
The Company has an unsecured term loan credit facility (the "Term Loan")
with a syndicate of banks, with Bank of America, N.A. as agent bank. The Term
Loan has quarterly principal payments of $12,500,000, plus interest, due
beginning October 9, 2002, with the remaining principal due on October 9, 2004,
the maturity date of the Term Loan. The principal payments of $37,500,000 due in
the next twelve months were classified as long-term debt at June 30, 2002, as
the Company has the ability and intent through the Revolving Credit Facility to
refinance the payments on a long-term basis. The Company was in compliance with
all Term Loan covenants at June 30, 2002. As of June 30, 2002, $184,000,000 was
outstanding under the Term Loan.
21
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY - (CONTINUED)
Long-Term Financing - (Continued)
The Company has an unsecured $10,000,000 line of credit ("Credit Line")
with Bank of America whereby Bank of America will provide short-term advances
and the issuance of letters of credit on an uncommitted basis. The Credit Line
maturity date is November 5, 2002. As of June 30, 2002, no borrowings were
outstanding under the Credit Line.
The Company has on file with the Securities and Exchange Commission a
shelf registration for the issuance of up to $250,000,000 of medium term notes
("Medium Term Notes") providing for the issuance of fixed rate or floating rate
notes with a maturity of nine months or longer. As of June 30, 2002,
$121,000,000 was available under the Medium Term Notes program, subject to
mutual agreement to terms, to provide financing for future business or equipment
acquisitions, and to fund working capital requirements. On January 29, 2002, the
Company used proceeds from its Revolving Credit Facility to retire $50,000,000
of Medium Term Notes due on that date. As of June 30, 2002, there were no
outstanding Medium Term Notes.
Capital Expenditures
Capital expenditures for the 2002 first half totaled $28,234,000, of which
$6,701,000 was for fleet and project construction and $21,533,000 was primarily
for upgrading of the existing marine transportation fleet. In addition, in March
2002, the Company purchased the Cargo Carriers fleet of 21 inland tank barges
for $2,800,000 from Cargill, and resold six of the barges for $530,000 in April
2002.
In June 2001, 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 products. During the 2002 first
quarter, one tank barge was placed into service, two tank barges were placed
into service in the second quarter, one in July 2002 and the remaining two tank
barges are expected to be delivered in the 2002 third quarter. The total
purchase price is approximately $8,700,000, of which approximately $4,518,000
was expended during the 2002 first six months. Financing of the remaining
construction cost of the tank barges will be through operating cash flows and
borrowings under the Company's Revolving Credit Facility.
In February 2002, the Company entered into a contract for the construction
of two double hull, 30,000 barrel capacity, inland tank barges that will be used
for transporting asphalt. Delivery of the tank barges is expected in the first
quarter of 2003. The total purchase price of the two barges is approximately
$3,600,000. No payments have been made on this construction contract through
June 30, 2002. Financing of the construction of the two tank barges will be
through operating cash flows and borrowings under the Company's Revolving Credit
Facility.
22
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY - (CONTINUED)
Capital Expenditures - (Continued)
In February 2002, the Company also 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 products. Delivery of
the six barges is scheduled over a six month period starting in March 2003. The
total purchase price of the six barges is approximately $8,700,000, of which
$780,000 has been expended in 2002. Financing of the construction of the six
barges will be through operating cash flows and borrowings under the Company's
Revolving Credit Facility.
Treasury Stock
During the 2002 first half, the Company did not purchase any treasury
stock. Since July 1, 2002, the Company has purchased 165,000 shares of its
common stock at a total purchase price of $3,930,000, for an average price of
$23.76. As of August 8, 2002, the Company has 1,210,000 shares available under
its common stock repurchase authorization. Historically, treasury stock
purchases have been financed through operating cash flows and borrowings 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
$27,104,000 and $52,032,000 for the six months ended June 30, 2002 and 2001,
respectively. Uses of cash during the 2002 first half included a $12,900,000
increase in working capital due primarily to the timing of tax and employee
incentive compensation plan payments. The 2001 first half was positively
impacted by a $5,352,000 reduction in trade accounts receivable, the result of
an enhanced billing and collections process.
The Company accounts for its ownership in its 35% owned marine
transportation partnership under the equity method of accounting, recognizing
cash flow only upon the receipt or distribution of cash from the partnership.
For the 2002 and 2001 first six months, the Company received $840,000 and
$2,303,000, respectively, of cash from the marine partnership.
Funds generated are available for acquisitions, capital construction
projects, treasury stock repurchases, repayment of borrowings associated with
each of the above and for other operating requirements. In addition to net cash
flow provided by operating activities, the Company also had available as of
August 8, 2002, $95,259,000 under its Revolving Credit Facility and $121,000,000
under its Medium Term Notes program, subject to mutual agreement and terms. As
of August 7, 2002, the Company had $6,256,000 available under its Credit Line.
23
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY - (CONTINUED)
Liquidity - (Continued)
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 which 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. The repair portion of the diesel engine services segment is based on
prevailing current market rates.
24
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to market risk from changes in interest rates on
certain of its outstanding debt and changes in fuel prices. The outstanding loan
balance under the Company's bank credit facilities bears interest at variable
rates based on prevailing short-term interest rates in the United States and
Europe. Notes issued under the Company's medium term note program may bear fixed
or variable interest rates. A 10% change in variable interest rates would impact
the 2002 interest expense by approximately $271,000, based on balances
outstanding at December 31, 2001, and change the fair value of the Company's
debt by less than 1%. The potential impact on the Company of fuel price
increases is limited because most of its term contracts contain escalation
clauses under which increases in fuel costs, among other, can be passed on to
the customers, while its spot contract rates are set based on prevailing fuel
prices. The Company does not presently use commodity derivative instruments to
manage its fuel costs. The Company has no foreign exchange risk.
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 and 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 variable rate bank credit
facilities. The Company does not enter into derivative financial instrument
transactions for speculative purposes.
In February and April 2001, the Company hedged a portion of its exposure
to fluctuations in short-term interest rates by entering into interest rate swap
agreements with bank counterparties. Five-year swap agreements with notional
amounts totaling $100 million were executed in February 2001 and three-year swap
agreements with notional amounts totaling $50 million were executed in April
2001. Under the swap agreements, the Company will pay to the bank counterparties
a fixed rate of 4.96% on a notional amount of $50 million for three years, an
average fixed rate of 5.64% on a notional amount of $100 million for five years,
and will receive from the bank counterparties floating rate interest payments
based on the LIBOR for United States dollar deposits. 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. No gain or loss on ineffectiveness was recognized for the three months
and six months ended June 30, 2002. The fair value of the interest rate swap
agreements was recorded as an other long-term liability of $7,346,000 at June
30, 2002. The Company has recorded, in interest expense, losses related to the
interest rate swap agreements of $1,361,000 and $2,646,000 for the three months
and first six months ended June 30, 2002, respectively. The Company anticipates
$3,324,000 of net losses included in accumulated other comprehensive income will
be transferred into earnings over the next twelve months based on current
interest rates. Amounts were determined as of June 30, 2002 based on quoted
market values, the Company's portfolio of derivative instruments, and the
Company's measurement of hedge effectiveness.
25
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In January 2001, the Environmental Protection Agency ("EPA"), in
conjunction with other federal and state law enforcement agencies,
initiated an investigation into possible violations of the Clean Water Act
at a dry cargo barge cleaning facility in Houston operated by Western
Towing Company ("Western"), a division of the Company. The Company has
cooperated fully with the authorities in the investigation. Western has
entered into a plea agreement with the U.S. Attorney for the Southern
District of Texas in which Western plead guilty to one violation of the
Clean Water Act for discharging washwater from the facility in violation
of the facility's permit. The maximum fine for such a violation is
$500,000. The Company has made an accrual for this matter which management
believes is appropriate under present circumstances.
The Company and a group of approximately 45 other companies have been
notified that they are Potentially Responsible Parties under 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. 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 has recorded necessary reserves and believes that it has
adequate insurance coverage or has meritorious defenses for these other
claims and contingencies.
26
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
99.1 - Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed for the three months ended June
30, 2002.
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: August 9, 2002
27
Exhibit Index
(a) Exhibits:
99.1 - Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
28