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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

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Form 10-Q

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T	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2013

o	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number 1-7615

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KIRBY CORPORATION

(Exact name of registrant as specified in its charter)

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(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)

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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 T No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes T No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “large accelerated filer” and “accelerated filer” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No T

The number of shares outstanding of the registrant’s Common Stock, $.10 par value per share, on October 31, 2013 was 56,819,000.

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PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements

KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES

CONDENSED BALANCE SHEETS

(Unaudited)

ASSETS

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KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES

CONDENSED BALANCE SHEETS

(Unaudited)

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

See accompanying notes to condensed financial statements.

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KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES

CONDENSED STATEMENTS OF EARNINGS

(Unaudited)

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KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

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, 2013 and December 31, 2012, and the results of operations for the three months and nine months ended September 30, 2013 and 2012.

(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, 2012.

(2)	ACCOUNTING STANDARDS ADOPTION

In February 2013, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (“ASU 2013-02”). ASU 2013-02 established the effective date for the requirement to present components of reclassifications out of accumulated other comprehensive income (“OCI”) on the face of the financial statements. The adoption of ASU 2013-02 in the first quarter of 2013 did not have an impact on the Company’s consolidated financial statements except the Company has applied these provisions to its presentation of consolidated financial statements.

(3)	ACQUISITIONS

On December 28, 2012, the Company purchased the assets of Flag Service & Maintenance, Inc. (“Flag”) for $6,864,000 in cash. Flag was an East Coast high-speed diesel engine service provider, operating factory-authorized full service marine dealerships for Caterpillar, Cummins, MTU and John Deere diesel engines.

On December 14, 2012, the Company completed the acquisition of Penn Maritime Inc. and Maritime Investments LLC (“Penn”), an operator of tank barges and tugboats participating in the coastal transportation of primarily refinery feedstocks, asphalt and crude oil in the United States. The total value of the transaction was $300,538,000, consisting of $146,750,000 of cash, $29,080,000 through the issuance of 500,000 shares of Company common stock valued at $58.16 per share, and $124,708,000 of cash for the retirement of Penn’s debt. Penn’s fleet, comprised of 18 double hull tank barges with a capacity of 1.9 million barrels and 16 tugboats, operates along the East Coast and Gulf Coast of the United States.

On November 1, 2012, the Company purchased from Allied Transportation Company (“Allied”) 10 coastal tank barges with a total capacity of 680,000 barrels, three offshore dry-bulk barges with a total capacity of 48,000 deadweight tons and seven coastal tugboats for $108,547,000 in cash plus a provision for up to $10,000,000 that will be paid contingent on developments with the sugar provisions in the United States Farm Bill. The fair value of the contingent liability recorded at the acquisition date was $9,756,000. A payment of $5,000,000 was made in the 2013 first quarter on the contingent liability. Allied provided coastal transportation of petrochemicals as well as dry sugar products in the Northeast, Atlantic and Gulf Coast regions of the United States.

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(4)	INVENTORIES

The following table presents the details of inventories as of September 30, 2013 and December 31, 2012 (in thousands):

(5)	FAIR VALUE MEASUREMENTS

The accounting guidance for using fair value to measure certain assets and liabilities establishes a three tier value hierarchy, which prioritizes the inputs to valuation techniques used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets or liabilities; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little, if any, market data exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing the asset or liability.

The following table summarizes the assets and liabilities measured at fair value on a recurring basis as of September 30, 2013 and December 31, 2012 (in thousands):

The fair value of the Company’s derivative instruments is more fully described below in Note 6, Derivative Instruments.

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In connection with the acquisition of Allied on November 1, 2012, Allied’s former owners are eligible to receive up to an additional $10,000,000 payable in 2013 through 2015, contingent on developments with the sugar provisions in the United States Farm Bill. The fair value of the contingent liability recorded at the acquisition date was $9,756,000. The fair value of the contingent liability is based on a valuation of the estimated fair value of the liability after probability weighting and discounting various potential payments. A payment of $5,000,000 was made in the 2013 first quarter on the contingent liability. The increase in the fair value of the contingent liability for the three months and nine months ended September 30, 2013 was $14,000 and $127,000, respectively, was charged to selling, general and administrative expense. As of September 30, 2013, the Company had recorded a contingent liability of $4,894,000.

In connection with the acquisition of United Holdings LLC (“United”) on April 15, 2011, United’s former owners are eligible to receive a three-year earnout provision for up to an additional $50,000,000 payable in 2014, dependent on achieving certain financial targets. The fair value of the contingent earnout liability recorded at the acquisition date was $16,300,000. The fair value of the earnout is based on a valuation of the estimated fair value of the liability after probability weighting and discounting various potential payments. The decrease in the fair value of the earnout liability for the three months and nine months ended September 30, 2013 was $7,900,000 and $18,300,000, respectively, was credited to selling, general and administrative expense. No United earnout liability was recorded as of September 30, 2013.

The estimated fair value of total debt outstanding at September 30, 2013 and December 31, 2012 was $829,056,000 and $1,130,967,000, respectively, which differs from the carrying amounts of $860,930,000 and $1,135,110,000, respectively, included in the consolidated financial statements. The fair value was determined using an income approach that relies on inputs such as yield curves. Cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities have carrying values that approximate fair value due to the short-term maturity of these financial instruments.

Certain assets are measured at fair value on a nonrecurring basis and therefore are not included in the table above. These assets are adjusted to fair value when there is evidence of impairment. During the nine months ended September 30, 2013, there was no indication that the Company’s long-lived assets were impaired, and accordingly, measurement at fair value was not required.

(6)	DERIVATIVE INSTRUMENTS

The Company recognizes all derivative instruments at fair value in the balance sheet as either assets or liabilities. The accounting for changes in the fair value of a derivative instrument depends on the intended use of the derivative and the resulting designation, which is established at the inception date of a derivative. For derivative instruments designated as cash flow hedges, changes in fair value, to the extent the hedge is effective, are recognized in OCI until the hedged item is recognized in earnings. Hedge effectiveness is measured at least quarterly based on the cumulative difference between the fair value of the derivative contract and the hedged item over time. Any change in fair value resulting from ineffectiveness is recognized immediately in earnings.

Interest Rate Risk Management

From time to time, the Company has utilized 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 large multinational banks. On February 28, 2013, all of the Company’s outstanding interest rate swaps expired. These interest rate swaps, with a total notional amount of $200,000,000, were designated as cash flow hedges.

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Foreign Currency Risk Management

From time to time, the Company has utilized derivative financial instruments with respect to its forecasted foreign currency transactions to attempt to reduce the risk of its exposure to foreign currency rate fluctuations in its transactions denominated in foreign currency. These transactions, which relate to foreign currency obligations for the purchase of equipment from foreign suppliers or foreign currency receipts from foreign customers, generally are forward contracts or purchased call options and are entered into with large multinational banks.

As of September 30, 2013, the Company had a forward contract with a notional amount of $469,000 to hedge its exposure to foreign currency rate fluctuations in expected foreign currency transactions. This contract expires in the first quarter of 2014. This forward contract is designated as a cash flow hedge, therefore, the change in fair value, to the extent the forward contract is effective, is recognized in OCI until the forward contract expires and is recognized in cost of sales and operating expenses.

Fair Value of Derivative Instruments

The following table sets forth the fair value of the Company’s derivative instruments recorded as liabilities located on the consolidated balance sheet at September 30, 2013 and December 31, 2012 (in thousands):

Fair value amounts were derived as of September 30, 2013 and December 31, 2012 utilizing fair value models of the Company and its counterparties on the Company’s portfolio of derivative instruments. These fair value models use the income approach that relies on inputs such as yield curves, currency exchange rates and forward prices. The fair value of the Company’s derivative instruments is described above in Note 5, Fair Value Measurements.

Cash Flow Hedges

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of OCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. Any ineffectiveness related to the Company’s hedges was not material for any of the periods presented.

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The following table sets forth the location and amount of gains and losses on the Company’s derivative instruments in the consolidated statements of earnings for the three months and nine months ended September 30, 2013 and 2012 (in thousands):

 

		Location of Gain (Loss)		Amount of Gain (Loss) Recognized in OCI on Derivatives (Effective Portion)								Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
		Reclassified from		Three months ended								Three months ended
Derivatives in ASC 815 Cash		Accumulated OCI into Income		September 30,								September 30,
Flow Hedging Relationships:		(Effective Portion)		2013				2012				2013				2012
Interest rate contracts		Interest expense		$	—			$	1,950			$	—			$	(2,092	)
Foreign exchange contracts		Cost and sales of operating expenses			(20	)			110				—				21
Total				$	(20	)		$	2,060			$	—			$	(2,071	)

 

		Location of Gain (Loss)		Amount of Gain (Loss) Recognized in OCI on Derivatives (Effective Portion)								Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
		Reclassified from		Nine months ended								Nine months ended
Derivatives in ASC 815 Cash		Accumulated OCI into Income		September 30,								September 30,
Flow Hedging Relationships:		(Effective Portion)		2013				2012				2013				2012
Interest rate contracts		Interest expense		$	1,486			$	5,573			$	(1,389	)		$	(6,192	)
Foreign exchange contracts		Cost and sales of operating expenses			(13	)			359				—				19
Total				$	1,473			$	5,932			$	(1,389	)		$	(6,173	)

 

The Company expects $49,000 of net losses on foreign currency contracts included in accumulated OCI will be transferred into earnings over the next year based on current spot rates.

(7)	STOCK AWARD PLANS

The Company has share-based compensation plans which are described below. The compensation cost that has been charged against earnings for the Company’s stock award plans and the income tax benefit recognized in the statement of earnings for stock awards for the three months and nine months ended September 30, 2013 and 2012 were as follows (in thousands):

The Company has an employee stock award plan for selected officers and other key employees which provides for the issuance of stock options, restricted stock and performance awards. The exercise price for each option equals the fair market value per share of the Company’s common stock on the date of grant. The terms of the options granted prior to January 25, 2010 are five years and vest ratably over three years. Options granted on or after January 25, 2010 have terms of seven years and vest ratably over three years. No performance awards payable in stock have been awarded under the employee plan. At September 30, 2013, 2,666,815 shares were available for future grants under the employee plan and no outstanding stock options under the employee plan were issued with stock appreciation rights.

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The following is a summary of the stock option activity under the employee plan described above for the nine months ended September 30, 2013:

The following table summarizes information about the Company’s outstanding and exercisable stock options under the employee plan at September 30, 2013:

The following is a summary of the restricted stock award activity under the employee plan described above for the nine months ended September 30, 2013:

 

The Company has a director stock award plan for nonemployee directors of the Company which provides for the issuance of stock options and restricted stock. The director plan provides for the automatic grants of stock options and restricted stock to nonemployee directors on the date of first election as a director and after each annual meeting of stockholders. In addition, the director plan allows for the issuance of stock options or restricted stock in lieu of cash for all or part of the annual director fee at the option of the director. The exercise prices for all options granted under the plan are equal to the fair market value per share of the Company’s common stock on the date of grant. The terms of the options are ten years. The options granted to a director when first elected vest immediately. The options granted and restricted stock issued after each annual meeting of stockholders vest six months after the date of grant. Options granted and restricted stock issued in lieu of cash director fees vest in equal quarterly increments during the year to which they relate. At September 30, 2013, 610,041 shares were available for future grants under the director plan. The director stock award plan is intended as an incentive to attract and retain qualified independent directors.

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The following is a summary of the stock option activity under the director plan described above for the nine months ended September 30, 2013:

The following table summarizes information about the Company’s outstanding and exercisable stock options under the director plan at September 30, 2013:

The following is a summary of the restricted stock award activity under the director plan described above for the nine months ended September 30, 2013:

The total intrinsic value of all stock options exercised under all of the Company’s plans was $5,622,000 and $1,985,000 for the nine months ended September 30, 2013 and 2012, respectively. The actual tax benefit realized for tax deductions from stock option exercises was $2,125,000 and $758,000 for the nine months ended September 30, 2013 and 2012, respectively.

The total intrinsic value of all the restricted stock vestings under all of the Company’s plans was $9,969,000 and $11,214,000 for the nine months ended September 30, 2013 and 2012, respectively. The actual tax benefit realized for tax deductions from restricted stock vestings was $3,768,000 and $4,284,000 for the nine months ended September 30, 2013 and 2012, respectively.

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As of September 30, 2013, there was $3,357,000 of unrecognized compensation cost related to nonvested stock options and $17,820,000 related to restricted stock. The stock options are expected to be recognized over a weighted average period of approximately 1.2 years and restricted stock over approximately 2.8 years. The total fair value of options vested was $1,829,000 and $1,339,000 during the nine months ended September 30, 2013 and 2012, respectively. The fair value of the restricted stock vested was $9,969,000 and $11,214,000 for the nine months ended September 30, 2013 and 2012, respectively.

The weighted average per share fair value of stock options granted during the nine months ended September 30, 2013 and 2012 was $25.14 and $22.15, respectively. The fair value of the stock options granted during the nine months ended September 30, 2013 and 2012 was $4,185,000 and $3,461,000, respectively. The Company currently uses treasury stock shares for restricted stock grants and stock option exercises. The fair value of each stock option was determined using the Black-Scholes option pricing model. The key input variables used in valuing the options during the nine months ended September 30, 2013 and 2012 were as follows:

(8)	OTHER COMPREHENSIVE INCOME

The Company’s changes in other comprehensive income for the three months and nine months ended September 30, 2013 and 2012 were as follows (in thousands):

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(a)	Actuarial gains (losses) are amortized into costs of sales and operating expenses or selling, general and administrative expenses as appropriate. (See Note 12 – Retirement Plans)

(b)	Reclassifications to net earnings of derivatives qualifying as effective hedges are recognized in interest expense or costs of sales and operating expenses as appropriate. (See Note 6 – Derivative Instruments)

(9)	SEGMENT DATA

The Company’s operations are classified into two reportable business segments as follows:

Marine Transportation — Marine transportation principally by United States flag vessels of liquid cargoes throughout the United States inland waterway system, coastwise along all three United States coasts and in Alaska and Hawaii and, to a lesser extent, United States coastal transportation of dry-bulk cargoes. The principal products transported include petrochemicals, black oil, refined petroleum products and agricultural chemicals.

Diesel Engine Services — Provides after-market services for medium-speed and high-speed diesel engines, reduction gears and ancillary products for marine and power generation applications, distributes and services high-speed diesel engines, transmissions, pumps and compression products, and manufactures and remanufactures oilfield service equipment, including pressure pumping units, for the land-based pressure pumping and oilfield service markets.

The Company’s two reportable business segments are managed separately based on fundamental differences in their operations. The Company evaluates the performance of its segments based on the contributions to operating income of the respective segments, before income taxes, interest, gains or losses on disposition of assets, other nonoperating income, noncontrolling interests, accounting changes, and nonrecurring items. Intersegment sales for the three months and nine months ended September 30, 2013 and 2012 were not significant.

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The following table sets forth the Company’s revenues and profit or loss by reportable segment for the three months and nine months ended September 30, 2013 and 2012 and total assets as of September 30, 2013 and December 31, 2012 (in thousands):

 

The following table presents the details of “Other” segment loss for the three months and nine months ended September 30, 2013 and 2012 (in thousands):

 

The following table presents the details of “Other” total assets as of September 30, 2013 and December 31, 2012 (in thousands):

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(10)	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, 2013 and 2012 were as follows (in thousands):

(11)	EARNINGS PER SHARE

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, 2013 and 2012 (in thousands, except per share amounts):

Certain outstanding options to purchase approximately 112,000 and 156,000 shares of common stock were excluded in the computation of diluted earnings per share as of September 30, 2013 and 2012, respectively, as such stock options would have been antidilutive.

(12)	RETIREMENT PLANS

The Company sponsors a defined benefit plan for its inland vessel personnel and shore based tankermen. The plan benefits are based on an employee’s years of service and compensation. The plan assets consist primarily of equity and fixed income securities.

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The Company’s pension plan funding strategy has historically been to contribute an amount equal to the greater of the minimum required contribution under ERISA or 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 an accurate prediction of the pension plan contribution difficult. Based on current pension plan assets and market conditions, the Company does not expect to make a contribution to its pension plan prior to December 31, 2013 to fund its 2013 pension plan obligations. As of September 30, 2013, no 2013 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 limits cost increases in the Company’s contribution to 4% per year. The plan is contributory, with retiree contributions adjusted annually. The plan eliminated coverage for future retirees as of December 31, 2011. The Company also has an unfunded defined benefit supplemental executive retirement plan (“SERP”) that was assumed in an acquisition in 1999. That plan ceased to accrue additional benefits effective January 1, 2000.

The components of net periodic benefit cost for the Company’s defined benefit plans for the three months and nine months ended September 30, 2013 and 2012 were as follows (in thousands):

 

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The components of net periodic benefit cost for the Company’s postretirement benefit plan for the three months and nine months ended September 30, 2013 and 2012 were as follows (in thousands):

(13)	CONTINGENCIES

The Company is involved in various legal and other proceedings which are incidental to the conduct of its business, 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 claims and contingencies.

The Company has issued guaranties or obtained standby letters of credit and performance bonds supporting performance by the Company and its subsidiaries of contractual or contingent legal obligations of the Company and its subsidiaries incurred in the ordinary course of business. The aggregate notional value of these instruments was $46,623,000 at September 30, 2013, including $6,220,000 in letters of credit and $40,403,000 in performance bonds. All of these instruments have an expiration date within four 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.

Item 1A.

Risk Factors

The Company continues to be subject to the risk factors previously disclosed in its “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

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, tsunamis, fog and ice, marine accidents, lock delays, fuel costs, interest rates, construction of new equipment by competitors, government and environmental laws and regulations, and the timing, magnitude and number of acquisitions made by the Company. For a more detailed discussion of factors that could cause actual results to differ from those presented in forward-looking statements, see Item 1A-Risk Factors found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. Forward-looking statements are based on currently available information and the Company assumes no obligation to update any such statements.

For purposes of the Management’s Discussion, all net earnings per share attributable to Kirby common stockholders are “diluted earnings per share.” The weighted average number of common shares applicable to diluted earnings per share for the three months and nine months ended September 30, 2013 and 2012 were as follows (in thousands):

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The increase in the weighted average number of common shares for the 2013 third quarter and first nine months compared with the 2012 third quarter and first nine months primarily reflects the issuance of 500,000 shares of Company common stock associated with the December 14, 2012 acquisition of Penn, the issuance of restricted stock and the exercise of stock options.

Overview

The Company is the nation’s largest domestic tank barge operator, transporting bulk liquid products throughout the Mississippi River System, on the Gulf Intracoastal Waterway, coastwise along all three United States coasts and in Alaska and Hawaii. The Company transports petrochemicals, black oil, refined petroleum products and agricultural chemicals by tank barge. As of September 30, 2013, the Company operated a fleet of 855 inland tank barges with 17.2 million barrels of capacity, and operated an average of 256 inland towboats during the 2013 third quarter. The Company’s coastal fleet consisted of 72 tank barges with 6.0 million barrels of capacity and 79 coastal tugboats. The Company also operates eight offshore barge and tug units transporting dry-bulk commodities in United States coastal trade. Through its diesel engine services segment the Company provides after-market services for medium-speed and high-speed diesel engines, reduction gears and ancillary products for marine and power generation applications, distributes and services high-speed diesel engines and transmissions, pumps and compression products, and manufactures and remanufacturers oilfield service equipment, including pressure pumping units, for the land-based pressure pumping and oilfield service markets.

For the 2013 third quarter, net earnings attributable to Kirby were $69,123,000, or $1.21 per share, on revenues of $551,105,000, compared with 2012 third quarter net earnings attributable to Kirby of $53,055,000, or $.95 per share, on revenues of $521,324,000. For the 2013 first nine months, net earnings attributable to Kirby were $188,794,000, or $3.32 per share, on revenues of $1,673,798,000, compared with 2012 first nine months net earnings attributable to Kirby of $151,550,000, or $2.70 per share, on revenues of $1,600,107,000. The 2013 third quarter and first nine months results included a credit to selling, general and administrative expenses of $7,900,000 before taxes, or $.08 per share, and $18,300,000 before taxes, or $.20 per share, respectively, eliminating the fair value of the contingent earnout liability associated with the April 2011 acquisition of United. This compares with a $400,000 before taxes credit to selling, general and administrative expenses for the 2012 third quarter and a $3,900,000 before taxes, or $.04 per share, charge to selling, general and administrative expenses for the 2012 first nine months. The 2013 first nine months included an estimated $.03 per share negative impact during the second quarter from high water on the Mississippi and Illinois Rivers and the negative impact of the closure for repair of the Algiers Lock near New Orleans on the Gulf Intracoastal Waterway, net of certain revenue and cost recovery from contracts with terms that provide reimbursements for delays and increased costs. The 2012 third quarter and first nine months included an estimated $.03 to $.04 per share negative impact from low water throughout the Mississippi River System, net of certain revenue and cost recovery from contracts with terms that provide reimbursements for delays and increase costs, and the impact of Hurricane Isaac which made landfall near the mouth of the Mississippi River on August 28, 2012 as a category 1 storm, impacting both the marine transportation and diesel engine services operations.  Also, the 2012 first nine months operating results included a $2,920,000 before taxes, or $.03 per share, severance charge associated with the integration of Kirby Offshore Marine’s administrative functions into the Company.

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Marine Transportation

For the 2013 third quarter and first nine months, 79% and 76%, respectively, of the Company’s revenue was generated by its marine transportation segment. The segment’s customers include many of the major petrochemical and refining companies that operate in the United States. Products transported include intermediate materials used to produce many of the end products used widely by businesses and consumers — plastics, fiber, paints, detergents, oil additives and paper, among others, as well as residual fuel oil, ship bunkers, asphalt, gasoline, diesel fuel, heating oil, crude oil, gas condensate and agricultural chemicals. Consequently, the Company’s marine transportation business mirrors the volumes produced by the Company’s petroleum, petrochemical and refining customer base. The 2013 third quarter and first nine months results include the operations of Allied, acquired on November 1, 2012, and Penn, acquired on December 14, 2012.

The Company’s marine transportation segment’s revenues for the 2013 third quarter and first nine months increased 25% and 24%, respectively, compared with the 2012 third quarter and first nine months. The segment’s operating income for the 2013 third quarter and first nine months increased 39% and 35%, respectively, compared with the operating income for the 2012 third quarter and first nine months. The higher marine transportation revenues reflected continued strong demand across all inland marine transportation markets, petrochemicals, black oil, refined petroleum products and agricultural chemicals, along with continued favorable pricing trends. The Company’s inland petrochemical, black oil and refined petroleum products fleets achieved consistent tank barge utilization levels in the 90% to 95% range throughout the 2013 third quarter and first nine months. High water conditions on the Mississippi and Illinois Rivers during the entire 2013 second quarter, and the closure of the Algiers Lock located on the Gulf Intracoastal Waterway due to structural damage during the entire second quarter and through the majority of July created heavy congestion and multi-day delays in the New Orleans area and along the alternate route to the Mississippi River at the Bayou Sorrels and Port Allen Locks. In addition, low water levels on the upper Mississippi River System led to the light loading of tank barges destined for that area during the month of September 2013.  During the 2012 second quarter, low water conditions on the Mississippi River System in mid-May and throughout June created delays and increased transit times. The Company’s coastal marine transportation markets continued to improve with tank barge utilization levels in the 90% range, aided by the addition of petrochemical volumes with the acquisition of the Allied fleet and additional black oil volumes with the acquisition of Penn, along with increased transportation of crude oil and gas condensate.

During the 2013 and 2012 third quarters and first nine months, approximately 75% of marine transportation’s inland revenues were under term contracts and 25% were spot contract revenues, thereby providing the operations with a predictable revenue stream. Inland time charters, which insulate the Company from revenue fluctuations caused by weather and navigational delays and temporary market declines, represented 59% and 58%, respectively, of the revenues under term contracts during the 2013 third quarter and first nine months compared with 58% and 57%, respectively, during the 2012 third quarter and first nine months.

During the 2013 third quarter and first nine months, approximately 75% of the coastal revenues were under term contracts and 25% were spot contract revenues. Coastal time charters represented approximately 90% of the revenues under term contracts during the 2013 third quarter and first nine months. For the 2012 third quarter and first nine months, approximately 60% of the coastal revenues were under term contracts and 40% were spot contract revenues. The increase in term contracts reflected stronger demand for coastal tank barges, new contracts with inland customers with coastal tank barge requirements and the 2012 fourth quarter acquisitions of Allied and Penn.

Rates on inland term contracts renewed in the 2013 third quarter and first nine months increased in the 4% to 6% average range compared with term contracts renewed in the third quarter and first nine months of 2012. Spot contract rates in the 2013 first, second and third quarters, which include the cost of fuel, increased modestly compared with the prior quarter. Effective January 1, 2013, annual escalators for labor and the producer price index on a number of inland multi-year contracts resulted in rate increases on those contracts by approximately 1%, excluding fuel.

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Rates on coastal term contracts renewed in the 2013 third quarter and first nine months increased in the 7% to 9% average range compared with term contracts renewed in the 2012 third quarter and first nine months.  Spot contract rates, which include the cost of fuel, continued to improve during the 2013 third quarter and first nine months and remained above term contract rates.

The marine transportation operating margin was 26.1% for the 2013 third quarter compared with 23.4% for the 2012 third quarter, and 23.5% for the 2013 first nine months compared with 21.6% for the 2012 first nine months.

Diesel Engine Services

For the 2013 third quarter and first nine months, 21% and 24%, respectively, of the Company’s revenue was generated by its diesel engine services segment, of which 54% and 53% was generated from overhauls and service, 17% and 21% from manufacturing, and 29% and 26% from direct parts sales, respectively. The results of the diesel engine services segment are largely influenced by the economic cycles of the marine and power generation markets and the land-based pressure pumping and oilfield services industries.

Diesel engine services revenues for the 2013 third quarter and first nine months decreased 33% and 31%, respectively, and operating income decreased 38% and 29%, respectively, when compared with the third quarter and first nine months of 2012. The 2013 third quarter and first nine months results included a $7,900,000 before taxes and $18,300,000 before taxes, respectively, credit to selling, general and administrative expenses, resulting from a net decrease in the fair value of the contingent earnout liability associated with the April 2011 acquisition of United, thereby eliminating the remaining liability. This compares with a $400,000 before taxes credit to selling, general and administrative expenses for the 2012 third quarter and a $3,900,000 before taxes charge to selling, general and administrative expenses for the 2012 first nine months, resulting from a net increase in the fair value of the contingent earnout liability.

The 2013 third quarter and first nine months decreases in revenues and operating income were primarily attributable to a continuation of lower demand for the manufacturing of oil service equipment, including pressure pumping units, and the sale and service of land-based diesel engines, transmissions and parts.  The market for the remanufacturing of older pressure pumping units during the 2013 third quarter remained relatively stable. This decline in revenues for both 2013 periods reflected the current state of the pressure pumping market and current oversupply of pressure pumping units, the result of low natural gas prices and corresponding decline in drilling for natural gas in North America. The marine diesel engine services market remained stable, benefiting from major service projects for both inland and coastal customers. The power generation market, consisting of major engine-generator set upgrades market conditions and parts sales for both domestic and international power generation customers, was stable.

The diesel engine services operating margin for the 2013 third quarter was 7.9% compared with 8.5% for the 2012 third quarter. For the 2013 first nine months, the operating margin was 9.6% compared with 9.3% for the first nine months of 2012. The operating margin for the 2013 third quarter and first nine months was positively impacted by the $7,900,000 and $18,300,000, respectively, credit to the contingent earnout liability noted above, while the operating margin for the 2012 third quarter was positively impacted by the $400,000 credit and the operating margin for the 2012 first nine months negatively impacted by the $3,900,000 charge to the contingent earnout liability.

Cash Flow and Capital Expenditures

The Company continued to generate strong operating cash flow during the 2013 first nine months, with net cash provided by operating activities of $450,715,000 compared with $246,228,000 of net cash provided by operating activities for the 2012 first nine months. The 83% increase was primarily from higher net earnings attributable to Kirby, higher depreciation and amortization and a higher deferred tax provision in the 2013 first nine months versus the 2012 first nine months, and a $138,665,000 net increase in cash flows from changes in operating assets and liabilities. In addition, during the 2013 and 2012 first nine months, the Company generated cash of $4,328,000 and $3,173,000, respectively, from the exercise of stock options and $30,390,000 and $15,165,000, respectively, from proceeds from the disposition of assets.

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For the 2013 first nine months, cash generated and borrowings under the Company’s revolving credit facility were used for capital expenditures of $207,047,000, including $127,021,000 for inland tank barge and towboat construction and progress payments on the construction of two offshore articulated dry-bulk barge and tugboat units completed in the 2013 second quarter, and $80,026,000 primarily for upgrading the existing marine transportation fleet. The Company’s debt-to-capitalization ratio decreased to 31.0% at September 30, 2013 from 39.9% at December 31, 2012, primarily due to a decrease of $274,180,000 of debt outstanding and the increase in total equity from net earnings attributable to Kirby for the 2013 first nine months of $188,794,000, exercise of stock options, and the amortization of unearned equity compensation. As of September 30, 2013, the Company had $48,930,000 outstanding under its revolving credit facility, $312,000,000 outstanding under its term loan and $500,000,000 of senior notes outstanding.

During the 2013 first nine months, the Company took delivery of 55 new inland tank barges with a total capacity of approximately 1,200,000 barrels, and retired 37 inland tank barges and returned four leased inland tank barges, reducing its capacity by approximately 630,000 barrels. As a result, the Company added a net 14 inland tank barges and approximately 570,000 barrels of capacity.

The Company projects that capital expenditures for 2013 will be in the $240,000,000 to $250,000,000 range. The 2013 construction program will consist of 68 inland tank barges with a total capacity of approximately 1,375,000 barrels and three inland towboats. Based on current commitments, steel prices and projected delivery schedules, the Company’s 2013 payments on new inland tank barges, towboats and progress payments on the construction of two offshore articulated dry-bulk barge and tugboat units delivered in the 2013 second quarter will be approximately $143,000,000. The balance of approximately $97,000,000 to $107,000,000 is primarily capital upgrades and improvements to existing marine equipment, and marine transportation and diesel engine services facilities.

Outlook

Petrochemical and black oil inland tank barge utilization levels remained strong during the 2013 first nine months, in the 90% to 95% range. While the United States economy remains sluggish with consistently high unemployment levels, the United States petrochemical industry continues to see strong production levels for both domestic consumption and exports. Low priced domestic natural gas, a basic feedstock for the United States petrochemical industry, provides the industry with a competitive advantage against foreign petrochemical producers. As a result, United States petrochemical production has remained strong throughout 2012 and the 2013 first nine months, thereby producing increased marine transportation volumes of basic petrochemicals to both domestic consumers and terminals for export destinations. The black oil market has also remained strong throughout 2012 and the 2013 first nine months, primarily due to continued stable United States refinery utilization levels, aided by the export of refined petroleum products and heavy fuel oils, and demand for the transportation of crude oil and gas condensate from shale formations in South Texas, as well as the movement of Canadian, Bakken and Utica crude oil and gas condensate from the Midwest to the Gulf Coast.

The United States petrochemical industry is globally competitive based on a number of factors, including a highly integrated and efficient transportation system of pipelines, tank barges, railroads and trucks, largely depreciated yet well maintained and operated facilities, and a low cost feedstock slate, which includes natural gas. Certain United States producers have announced plans for plant capacity expansions and the reopening of idled petrochemical facilities. The current production volumes from the Company’s petrochemical and refinery customers have resulted in the Company’s inland petrochemical, black oil and refined petroleum products tank barge utilization levels in the 90% to 95% range and any increased production from current facilities, plant expansions or the reopening of idled facilities should drive feedstock and production volumes higher, in turn leading to higher tank barge utilization levels and higher term and spot contract pricing, which could be mitigated by additional tank barge capacity.

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As of September 30, 2013, the Company estimated there were approximately 3,350 inland tank barges in the industry fleet, of which approximately 500 were over 35 years old and approximately 300 of those were over 40 years old. Given the age profile of the industry inland tank barge fleet, the expectation is that older tank barges will continue to be removed from service and replaced by new tank barges that will enter the fleet. During 2012 and the first nine months of 2013, with continued strong demand for inland petrochemical and black oil tank barges and federal tax incentives on new equipment, the Company estimates that approximately 275 inland tank barges were ordered industry-wide during 2012 and early 2013 for delivery throughout 2013. Historically, 75 to 150 older tank barges are retired from service each year, with the extent of the retirements dependent on 2013 petrochemical and refinery production levels, crude oil and gas condensate movements and industry-wide tank barge utilization levels.

During 2011 and the first half of 2012, the marine transportation segment was negatively impacted by excess coastal tank barge capacity limiting tank barge utilization to the 75% range. The coastal operations reflected improvements in market conditions during the 2012 second half and the first nine months of 2013, with tank barge utilization improving to the 75% to 80% range in the 2012 third quarter, 85% to 90% in the 2012 fourth quarter, and to the 90% range in the 2013 first nine months. During the 2012 second half and 2013 first nine months, the Company experienced increased demand for coastal crude and gas condensate moves and success in expanding the coastal customer base to include inland customers with coastal requirements. The acquisitions of Allied and Penn during the 2012 fourth quarter also contributed to the higher 2013 third quarter and first nine months revenue and operating income. As of September 30, 2013, the Company estimated there were approximately 265 tank barges operating in the 195,000 barrel or less coastal industry fleet, the sector of the market in which the Company operates. The Company believes that very few coastal tank barges were built during 2012, and that very few orders for coastal tank barges have been placed for 2013 deliveries and beyond.

In the diesel engine services segment, with the increase in drilling rigs operating in the Gulf of Mexico, positive inland marine transportation markets during 2012 and the first nine months of 2013, and improving coastal marine transportation markets during the 2012 second half and 2013 first nine months, service activity levels for the marine diesel engine market reflected a modest improvement and should continue to modestly improve as activity increases. The power generation market should remain stable, benefiting from engine-generator set upgrades and parts sales for both domestic and international customers. The land-based diesel engine services market consists of manufacturing and remanufacturing of oilfield service equipment, including pressure pumping units, and the distribution and service of their components, which include high-speed diesel engines, transmissions and pumps, many of the same components used by marine customers. Currently, an estimated 18 million horsepower is employed in the North American pressure pumping business. With the current low price of natural gas, the exploration of United States natural gas shale formations has declined, resulting in excess pressure pumping horsepower. However, with the current high price of crude oil, the exploration of United States crude oil shale formations has remained active. As a result of the excess pressure pumping horsepower, new orders for pressure pumping units essentially stopped and the supply and distribution portion of the land-based market slowed. While the Company believes its land-based diesel engine business is at the bottom of the current cycle, it expects improvement in this market sometime in 2014. The Company will continue to manufacture oil service equipment. However, the primary focus for growth in this business, currently as well as into the future, will be on the remanufacturing and service of existing pressure pumping equipment.

Acquisitions

On December 28, 2012, the Company purchased the assets of Flag for $6,864,000 in cash. Flag was an East Coast high-speed diesel engine service provider, operating factory-authorized full service marine dealerships for Caterpillar, Cummins, MTU and John Deere diesel engines. Financing of the acquisition was through the Company’s revolving credit facility.

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On December 14, 2012, the Company completed the acquisition of Penn, an operator of tank barges and tugboats participating in the coastal transportation of refinery feedstocks, asphalt and crude oil in the United States. The total value of the transaction was $300,538,000, consisting of $146,750,000 of cash, $29,080,000 through the issuance of 500,000 shares of Company common stock valued at $58.16 per share, and $124,708,000 of cash for the retirement of Penn’s debt. Penn’s fleet, comprised of 18 double hull tank barges with a capacity of 1.9 million barrels and 16 tugboats, operates along the East Coast and Gulf Coast of the United States. Financing of the acquisition was through a combination of new senior notes and the issuance of Company common stock.

On November 1, 2012, the Company purchased from Allied 10 coastal tank barges with a total capacity of 680,000 barrels, three offshore dry-bulk barges with a total capacity of 48,000 deadweight tons and seven coastal tugboats for $108,547,000 in cash plus a provision for up to $10,000,000 that will be paid contingent on developments with the sugar provisions in the United States Farm Bill. The fair value of the contingent liability recorded at the acquisition date was $9,756,000. A payment of $5,000,000 was made in the 2013 first quarter on the contingent liability. Allied provided coastal transportation of petrochemicals as well as dry sugar products in the Northeast, Atlantic and Gulf Coast regions of the United States. Financing of the equipment acquisition was through the Company’s revolving credit facility.

Results of Operations

The Company reported 2013 third quarter net earnings attributable to Kirby of $69,123,000, or $1.21 per share, on revenues of $551,105,000, compared with 2012 third quarter net earnings attributable to Kirby of $53,055,000, or $.95 per share, on revenues of $521,324,000. Net earnings attributable to Kirby for the 2013 first nine months were $188,794,000, or $3.32 per share, on revenues of $1,673,798,000, compared with $151,550,000, or $2.70 per share, on revenues of $1,600,107,000 for the 2012 first nine months. The 2013 third quarter and first nine months results included a credit to selling, general and administrative expenses of $7,900,000 before taxes, or $.08 per share, and $18,300,000 before taxes, or $.20 per share, respectively, eliminating the fair value of the contingent earnout liability associated with the April 2011 acquisition of United. This compares with a $400,000 before taxes credit to selling, general and administrative expenses for the 2012 third quarter and a $3,900,000 before taxes, or $.04 per share, charge to selling, general and administrative expenses for the 2012 first nine months. The 2013 first nine months included an estimated $.03 per share negative impact during the second quarter from high water on the Mississippi and Illinois Rivers and the negative impact of the closure for repair of the Algiers Lock near New Orleans on the Gulf Intracoastal Waterway, net of certain revenue and cost recovery from contracts with terms that provide reimbursements for delays and increased costs. The 2012 third quarter and first nine months included an estimated $.03 to $.04 per share negative impact from low water throughout the Mississippi River System, net of certain revenue and cost recovery from contracts with terms that provide reimbursements for delays and increase costs, and the impact of Hurricane Isaac which made landfall near the mouth of the Mississippi River on August 28, 2012 as a category 1 storm, impacting both the marine transportation and diesel engine services operations.  Also, the 2012 first nine months operating results included a $2,920,000 before taxes, or $.03 per share, severance charge associated with the integration of Kirby Offshore Marine’s administrative functions into the Company.

The following table sets forth the Company’s marine transportation and diesel engine services revenues for the 2013 third quarter compared with the third quarter of 2012, the first nine months of 2013 compared with the first nine months of 2012 and the percentage of each to total revenues for the comparable periods (dollars in thousands):

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Marine Transportation

The Company, through its marine transportation segment, is a provider of marine transportation services, operating tank barges and towing vessels transporting bulk liquid products throughout the Mississippi River System, on the Gulf Intracoastal Waterway, coastwise along all three United States coasts and in Alaska and Hawaii. The Company transports petrochemicals, black oil, refined petroleum products and agricultural chemicals by tank barge. As of September 30, 2013, the Company operated 855 inland tank barges, including 44 leased barges, with a total capacity of 17.2 million barrels. This compares with 853 inland tank barges operated as of September 30, 2012, including 49 leased barges, with a total capacity of 16.9 million barrels. The Company operated an average of 256 inland towboats during the 2013 third quarter, of which an average of 76 were chartered, compared with 246 during the 2012 third quarter, of which an average of 64 were chartered. The Company’s coastal tank barge fleet as of September 30, 2013 consisted of 72 tank barges, one of which was single hull and 11 of which were leased, with 6.0 million barrels of capacity, and 79 tugboats, four of which were chartered. This compares with 53 coastal tank barges, three of which were single hull and 12 were leased, with 3.7 million barrels of capacity, and 63 owned tugboats as of September 30, 2012. The Company operates eight offshore dry-bulk barge and tugboat units, of which one of the tugboats is chartered, engaged in the offshore transportation of dry-bulk cargoes. The Company also owns a two-thirds interest in Osprey Line, L.L.C., which transports project cargoes and cargo containers by barge, as well as a 51% interest in a shifting operation and fleeting facility for dry cargo barges and tank barges on the Houston Ship Channel.

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, 2013 compared with the three months and nine months ended September 30, 2012 (dollars in thousands):

Marine Transportation Revenues

The following table shows the marine transportation markets serviced by the Company, the marine transportation revenue distribution for the 2013 third quarter and first nine months, products moved and the drivers of the demand for the products the Company transports:

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