form10-q.htm


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 quarterly period ended September 30, 2007
     
¨
 
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 incorporation or organization)
 
(IRS Employer Identification No.)
     
     
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 No  ¨

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

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

The number of shares outstanding of the registrant’s Common Stock, $.10 par value per share, on November 2, 2007 was 53,478,000.
 


1


Part I  Financial Information

Item 1.  Financial Statements

KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES

CONDENSED BALANCE SHEETS
(Unaudited)

ASSETS
 

   
September 30,
   
December 31,
 
   
2007
   
2006
 
   
($ in thousands)
 
Current assets:
           
Cash and cash equivalents
  $
3,930
    $
2,653
 
Accounts receivable:
               
Trade – less allowance for doubtful accounts
   
183,998
     
162,809
 
Other
   
8,957
     
20,850
 
Inventory – finished goods
   
47,207
     
41,777
 
Prepaid expenses and other current assets
   
17,011
     
16,426
 
Deferred income taxes
   
5,183
     
5,077
 
                 
Total current assets
   
266,286
     
249,592
 
                 
                 
Property and equipment
   
1,444,658
     
1,280,680
 
Less accumulated depreciation
   
564,419
     
514,074
 
                 
     
880,239
     
766,606
 
                 
                 
Investment in marine affiliates
   
1,881
     
2,264
 
Goodwill – net
   
229,119
     
223,432
 
Other assets
   
29,750
     
29,225
 
                 
    $
1,407,275
    $
1,271,119
 

See accompanying notes to condensed financial statements.

2


KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES

CONDENSED BALANCE SHEETS
(Unaudited)

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

   
September 30,
   
December 31,
 
   
2007
   
2006
 
   
($ in thousands)
 
Current liabilities:
           
Current portion of long-term debt
  $
1,018
    $
844
 
Income taxes payable
   
9,915
     
3,016
 
Accounts payable
   
90,650
     
88,213
 
Accrued liabilities
   
67,154
     
69,782
 
Deferred revenues
   
4,437
     
5,012
 
                 
Total current liabilities
   
173,174
     
166,867
 
                 
Long-term debt – less current portion
   
332,714
     
309,518
 
Deferred income taxes
   
128,229
     
125,943
 
Minority interests
   
2,893
     
3,018
 
Other long-term liabilities
   
38,024
     
33,778
 
                 
     
501,860
     
472,257
 
                 
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 120,000,000 shares, issued 57,337,000 shares
   
5,734
     
5,734
 
Additional paid-in capital
   
210,443
     
208,032
 
Accumulated other comprehensive income - net
    (22,654 )     (23,087 )
Retained earnings
   
613,340
     
524,351
 
     
806,863
     
715,030
 
Less cost of 3,888,000 shares in treasury (4,354,000 at December 31, 2006)
   
74,622
     
83,035
 
                 
     
732,241
     
631,995
 
                 
    $
1,407,275
    $
1,271,119
 

See accompanying notes to condensed financial statements.

3


KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES

CONDENSED STATEMENT OF EARNINGS
(Unaudited)

 
   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2007
   
2006
As Adjusted
   
2007
   
2006
As Adjusted
 
   
($ in thousands, except per share amounts)
 
Revenues:
                       
Marine transportation
  $
241,329
    $
211,080
    $
680,139
    $
604,551
 
Diesel engine services
   
61,227
     
53,532
     
184,636
     
128,256
 
                                 
     
302,556
     
264,612
     
864,775
     
732,807
 
Costs and expenses:
                               
Costs of sales and operating expenses
   
186,338
     
169,003
     
542,545
     
470,587
 
Selling, general and administrative
   
31,313
     
29,321
     
91,287
     
79,600
 
Taxes, other than on income
   
3,237
     
3,289
     
9,626
     
9,879
 
Depreciation and amortization
   
20,407
     
16,689
     
60,274
     
47,294
 
Loss (gain) on disposition of assets
    (30 )     (255 )    
531
      (1,197 )
                                 
     
241,265
     
218,047
     
704,263
     
606,163
 
                                 
Operating income
   
61,291
     
46,565
     
160,512
     
126,644
 
Equity in earnings of marine affiliates
   
22
     
88
     
225
     
641
 
Other expense
    (274 )     (389 )     (682 )     (457 )
Interest expense
    (5,236 )     (4,503 )     (15,826 )     (10,505 )
                                 
Earnings before taxes on income
   
55,803
     
41,761
     
144,229
     
116,323
 
Provision for taxes on income
    (21,373 )     (15,911 )     (55,240 )     (44,319 )
                                 
Net earnings
  $
34,430
    $
25,850
    $
88,989
    $
72,004
 
                                 
Net earnings per share of common stock:
                               
Basic
  $
.65
    $
.49
    $
1.68
    $
1.37
 
Diluted
  $
.64
    $
.48
    $
1.66
    $
1.35
 

See accompanying notes to condensed financial statements.

4


KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES

CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
   
Nine months ended
September 30,
 
   
2007
   
2006
As Adjusted
 
   
($ in thousands)
 
Cash flows from operating activities:
           
Net earnings
  $
88,989
    $
72,004
 
Adjustments to reconcile net earnings to net cash provided by operations:
               
Depreciation and amortization
   
60,274
     
47,294
 
Deferred income taxes
   
690
      (2,935 )
Loss (gain) on disposition of assets
   
531
      (1,197 )
Equity in earnings of marine affiliates, net of distributions
   
435
      (641 )
Amortization of unearned compensation
   
4,823
     
5,440
 
Other
   
743
     
452
 
Decrease in cash flows resulting from changes in operating assets and liabilities, net
    (647 )     (17,216 )
Net cash provided by operating activities
   
155,838
     
103,201
 
                 
Cash flows from investing activities:
               
Capital expenditures
    (123,027 )     (110,114 )
Acquisitions of businesses and marine equipment, net of cash acquired
    (61,766 )     (139,425 )
Proceeds from disposition of assets
   
813
     
2,654
 
Other
    (51 )     (7,313 )
Net cash used in investing activities
    (184,031 )     (254,198 )
                 
Cash flows from financing activities:
               
Borrowings on bank credit facilities, net
   
23,250
     
123,900
 
Payments on long-term debt, net
    (212 )     (72 )
Proceeds from exercise of stock options
   
4,706
     
12,108
 
Purchase of treasury stock
   
      (4,789 )
Tax benefit from equity compensation plans
   
2,422
     
5,304
 
Other
    (696 )    
826
 
Net cash provided by financing activities
   
29,470
     
137,277
 
Increase (decrease) in cash and cash equivalents
   
1,277
      (13,720 )
Cash and cash equivalents, beginning of year
   
2,653
     
17,838
 
Cash and cash equivalents, end of period
  $
3,930
    $
4,118
 
Supplemental disclosures of cash flow information:
               
Cash paid during the period:
               
Interest
  $
15,614
    $
10,272
 
Income taxes
  $
42,892
    $
43,040
 
Non-cash investing activity:
               
Disposition of assets for note receivables
  $
    $
1,310
 
Cash acquired in acquisitions
  $
10
    $
2,790
 
Debt assumed in acquisitions
  $
245
    $
2,625
 
Accrued payable for working capital adjustment related to acquisition
  $
869
    $
 

See accompanying notes to condensed financial statements.

5


KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
 
 
In the opinion of management, the accompanying unaudited condensed financial statements of Kirby Corporation and consolidated subsidiaries (the “Company”) contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of September 30, 2007 and December 31, 2006, and the results of operations for the three months and nine months ended September 30, 2007 and 2006.

(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, 2006.

On April 25, 2006, the Board of Directors declared a two-for-one stock split of the Company’s common stock.  Stockholders of record on May 10, 2006 received one additional share of common stock for each share of common stock held on that day, with a distribution date of May 31, 2006.  All references to number of shares and per share information in the accompanying unaudited condensed financial statements have been adjusted to reflect the stock split.

(2)
ACCOUNTING ADOPTIONS

Accounting for Planned Major Maintenance Activities

Effective January 1, 2007, the Company transitioned to the direct expense method of accounting for planned major maintenance on its marine transportation equipment.  Previously, the Company used the accrue-in-advance method of accounting for planned major maintenance activities in its interim reporting periods.  Issued in September 2006, Financial Accounting Standards Board (“FASB”) Staff Position No. AUG AIR-1, “Accounting for Planned Major Maintenance Activities” prohibits the accrue-in-advance method in interim and annual financial reporting periods because an obligation has not occurred and therefore a liability should not be recognized.  This change was applied retrospectively for all consolidated financial statements presented.  The change had no impact on the annual consolidated financial statements but did result in the adjustment of prior year interim unaudited condensed financial statements.  The effect of adopting AUG AIR-1 on individual line items in the condensed statement of earnings for the three months and nine months ended September 30, 2006 is as follows (in thousands, except per share amounts):

6


KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
 

(2)
ACCOUNTING ADOPTIONS – (Continued)

   
Three months ended
September 30, 2006
   
Nine months ended
September 30, 2006
 
   
Before
AUG AIR-1
Adoption
   
Adjust-
ments
   
After
AUG AIR-1
Adoption
   
Before
AUG AIR-1
Adoption
   
Adjust-
ments
   
After
AUG AIR-1
Adoption
 
                                     
Costs of sales and operating expenses
  $
169,407
    $ (404 )   $
169,003
    $
471,380
    $ (793 )   $
470,587
 
Total costs and expenses
   
218,451
      (404 )    
218,047
     
606,956
      (793 )    
606,163
 
Operating income
   
46,161
     
404
     
46,565
     
125,851
     
793
     
126,644
 
Earnings before taxes on income
   
41,357
     
404
     
41,761
     
115,530
     
793
     
116,323
 
Provision for taxes on income
    (15,757 )     (154 )     (15,911 )     (44,017 )     (302 )     (44,319 )
Net earnings
  $
25,600
    $
250
    $
25,850
    $
71,513
    $
491
    $
72,004
 
                                                 
Net earnings per share of common stock:
                                               
Basic
  $
.49
    $
    $
.49
    $
1.36
    $
.01
    $
1.37
 
Diluted
  $
.48
    $
    $
.48
    $
1.34
    $
.01
    $
1.35
 

The effect of adopting AUG AIR-1 on individual line items in the condensed statement of cash flows for the nine months ended September 30, 2006 is as follows (in thousands):

   
Nine months ended
September 30, 2006
 
   
Before AUG AIR-1 Adoption
   
Adjustments
   
After AUG AIR-1 Adoption
 
                   
Net earnings
  $
71,513
    $
491
    $
72,004
 
Decrease in cash flows resulting from changes in operating assets and liabilities, net
    (16,725 )     (491 )     (17,216 )

Accounting for Uncertainty in Income Taxes

In June 2006, FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN No. 48”) was issued.  FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s consolidated financial statements in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes.”  FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  The Company adopted FIN No. 48 effective January 1, 2007 with no effect on the Company’s financial position or results of operations.

7


KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
 

 (2)
ACCOUNTING ADOPTIONS – (Continued)

As of January 1, 2007, the Company has provided a liability of approximately $3,400,000 for unrecognized tax benefits related to various income tax issues which includes approximately $1,300,000 of interest and penalties.  The amount that would impact the Company’s effective tax rate, if recognized, is $2,200,000, with the difference between the total amount of unrecognized tax benefits and the amount that would impact the effective tax rate being primarily related to the federal tax benefit of state income tax items.  The Company accounts for interest and penalties related to uncertain tax positions as part of its provision for federal and state income taxes.

The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the 2002 through 2006 tax years.  The Company’s and its subsidiaries’ state income tax returns are open to audit under the statute of limitations for the 2000 through 2006 tax years.  It is not reasonably possible to determine if the liability for unrecognized tax benefits will significantly change prior to September 30, 2008 due to the uncertainty of possible examination results.

(3)
ACQUISITIONS

On July 20, 2007, the Company purchased substantially all of the assets of Saunders Engine and Equipment Company, Inc. (“Saunders”) for $12,369,000 in cash, subject to post-closing inventory and other adjustments, and the assumption of $245,000 of debt.  Saunders was a Gulf Coast high-speed diesel engine services provider operating factory-authorized full service marine dealerships for Cummins and Detroit Diesel engines, as well as an authorized marine dealer for Caterpillar engines in Alabama.

On February 23, 2007, the Company purchased the assets of P&S Diesel Service, Inc. (“P&S”) for $1,622,000 in cash, subject to post-closing inventory adjustments.  P&S was a Gulf Coast high-speed diesel engine services provider operating as a factory-authorized marine dealer for Caterpillar in Louisiana.

On February 13, 2007, the Company purchased from NAK Engineering, Inc. (“NAK”) for a net $3,540,000 in cash, the assets and technology to support the Nordberg medium-speed diesel engines used in nuclear applications.  As part of the transaction, Progress Energy Carolinas, Inc. (“Progress Energy”) and Duke Energy Carolinas, LLC (“Duke Energy”) made payments to the Company for non-exclusive rights to the technology and entered into ten-year exclusive parts and service agreements with the Company.  Nordberg engines are used to power emergency diesel generators used in nuclear power plants owned by Progress Energy and Duke Energy.

On January 3, 2007, the Company purchased the stock of Coastal Towing, Inc. (“Coastal”), the owner of 37 inland tank barges, for $19,474,000 in cash, subject to post-closing working capital adjustments.  The Company had been operating the Coastal tank barges since October 2002 under a barge management agreement.

On January 2, 2007, the Company purchased 21 tank barges from Cypress Barge Leasing, LLC (“Cypress”) for $14,965,000 in cash.  The Company had been leasing the barges since 1994 when the leases were assigned to the Company as part of the Company’s purchase of the tank barge fleet of The Dow Chemical Company (“Dow”).

8


KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
 

(3)
ACQUISITIONS– (Continued)

On October 4, 2006, the Company signed agreements to purchase 11 inland tank barges from Midland Marine Corporation (“Midland”) and Shipyard Marketing, Inc. (“Shipyard”) for $10,600,000 in cash.  The Company purchased four of the barges during 2006 for $3,300,000 and the remaining seven barges on February 15, 2007 for $7,300,000.  The Company had been leasing the barges from Midland and Shipyard prior to their purchase.

On July 24, 2006, the Company signed an agreement to purchase the assets of Capital Towing Company (“Capital”), consisting of 11 towboats, for $15,000,000 in cash.  The Company purchased nine of the towboats during 2006 for $13,299,000 and the remaining two towboats on May 21, 2007 for $1,701,000.  The Company and Capital entered into a vessel operating agreement whereby Capital will continue to crew and operate the towboats for the Company.

On July 21, 2006, the Company purchased the assets of Marine Engine Specialists, Inc. (“MES”) for $6,863,000 in cash.  MES was a Gulf Coast high-speed diesel engine services provider, operating a factory-authorized full service dealership for John Deere, as well as a service provider for Detroit Diesel.

On June 7, 2006, the Company purchased the stock of Global Power Holding Company, a privately held company that owned all of the outstanding equity of Global Power Systems, L.L.C. (“Global”). The Company purchased Global for an aggregate consideration of $101,720,000, consisting of $98,657,000 in cash, the assumption of $2,625,000 of debt and $438,000 of merger costs.  Global was a Gulf Coast high-speed diesel engine services provider, operating factory-authorized marine market dealerships for Cummins, Detroit Diesel and John Deere high-speed diesel engines, and Allison transmissions, as well as an authorized marine dealer for Caterpillar in Louisiana.  As a result of the acquisition, the Company recorded $55,705,000 of goodwill and $16,292,000 of intangibles.  The intangibles have a weighted average amortization period of approximately 16 years.

On April 5, 2006, the Company purchased Gulf Coast Fire & Safety Service Co. (“Gulf Coast Fire & Safety”) for $1,008,000 in cash.  Gulf Coast Fire & Safety provided sales and rental of equipment and various technical services related to fire suppression and protection, and is part of Kirby Logistics Management Division (“KLM”), the Company’s shore tankering and in-plant operations group.  During the 2007 first quarter, the Company ended its third party fire suppression and protection operations and will provide internal services exclusively.

On March 1, 2006, the Company purchased from Progress Fuels Corporation (“PFC”) the remaining 65% interest in Dixie Fuels Limited (“Dixie Fuels”) for $15,818,000 in cash.  The Dixie Fuels partnership, formed in 1977, was 65% owned by PFC and 35% owned by the Company.  As part of the transaction, the Company extended the expiration date of its marine transportation contract with PFC from 2008 to 2010.

Effective January 1, 2006, the Company acquired an additional one-third interest in Osprey Line, L.L.C. (“Osprey”), increasing the Company’s ownership to a two-thirds interest.  Osprey, formed in 2000, operates a barge feeder service for cargo containers between Houston, New Orleans and Baton Rouge, as well as several ports located above Baton Rouge on the Mississippi River.

9


KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
 

(3)
ACQUISITIONS– (Continued)

Pro forma results of the acquisitions made in 2006 and 2007 have not been presented as the pro forma revenues, earnings before taxes on income, net earnings and net earnings per share would not be materially different from the Company’s actual results.

(4)
STOCK AWARD PLANS– (Continued)

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, 2007 and 2006 were as follows (in thousands):

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2007
   
2006
   
2007
   
2006
 
Compensation cost
  $
1,838
    $
2,110
    $
4,823
    $
5,440
 
Income tax benefit
   
704
     
804
     
1,847
     
2,073
 

Compensation cost capitalized as part of inventory is considered immaterial.

The Company has six employee stock award plans for selected officers and other key employees which provide for the issuance of stock options and restricted stock.  For all of the plans, 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 February 10, 2000 are ten years and vest ratably over four years. Options granted on and after February 10, 2000 have terms of five years and vest ratably over three years.  At September 30, 2007, 1,490,318 shares were available for future grants under the employee plans and no outstanding stock options under the employee plans were issued with stock appreciation rights.

The following is a summary of the stock award activity under the employee plans described above for the nine months ended September 30, 2007:

   
Outstanding Non-Qualified or Nonincentive
Stock Awards
   
Weighted Average Exercise Price
 
Outstanding December 31, 2006
   
1,072,317
    $
18.80
 
Granted
   
350,980
    $
35.69
 
Exercised
    (420,671 )   $
15.11
 
Canceled or expired
    (668 )   $
16.96
 
Outstanding September 30, 2007
   
1,001,958
    $
22.71
 
 
10


KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
 

(4)
STOCK AWARD PLANS– (Continued)

The following table summarizes information about the Company’s outstanding and exercisable stock options under the employee plans at September 30, 2007:

     
Options Outstanding
   
Options Exercisable
 
Range of Exercise Prices
   
Number Outstanding
   
Weighted Average Remaining Contractual Life in Years
   
Weighted Average Exercise Price
   
Aggregated Intrinsic Value
   
Number Exercisable
   
Weighted Average Exercise Price
   
Aggregated Intrinsic Value
 
$
 8.95               
     
38,000
     
1.30
    $
8.95
             
38,000
    $
8.95
         
$
12.78 - $16.96
 
   
383,648
     
1.09
    $
16.01
             
383,648
    $
16.01
         
$
20.89 - $22.05
     
189,668
     
2.40
    $
21.84
             
119,196
    $
21.86
         
$
25.69 - $27.60
     
212,876
     
3.37
    $
27.20
             
67,264
    $
27.18
         
$
35.66 - $36.94
     
177,766
     
4.33
    $
35.69
             
     
         
$
  8.95 - $36.94
     
1,001,958
     
2.42
    $
22.71
    $
21,469,000
     
608,108
    $
17.95
    $
15,927,000
 

The Company has three director stock award plans for nonemployee directors of the Company which provide for the issuance of stock options and restricted stock.  No additional options can be granted under two of the plans.  The third plan, the 2000 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 2000 Director Plan provides for the issuance of stock options or restricted stock in lieu of cash for all or part of the annual director fee. The exercise prices for all options granted under the plans 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 when first elected as a director 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, 2007, 121,562 shares were available for future grants under the nonemployee director plans. The director stock award plans are intended as an incentive to attract and retain qualified and competent independent directors.

The following is a summary of the stock award activity under the director plans described above for the nine months ended September 30, 2007:

   
Outstanding Non-Qualified or Nonincentive Stock Awards
   
Weighted Average Exercise Price
 
Outstanding December 31, 2006
   
343,316
    $
17.81
 
Granted
   
52,128
    $
36.82
 
Exercised
    (81,102 )   $
13.63
 
Outstanding September 30, 2007
   
314,342
    $
21.29
 
 
11


KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
 

(4)
STOCK AWARD PLANS– (Continued)

The following table summarizes information about the Company’s outstanding and exercisable stock options under the director plans at September 30, 2007:

     
Options Outstanding
   
Options Exercisable
 
Range of Exercise Prices
   
Number Outstanding
   
Weighted Average Remaining Contractual Life in Years
   
Weighted Average Exercise Price
   
Aggregated Intrinsic Value
   
Number Exercisable
   
Weighted Average Exercise Price
   
Aggregated Intrinsic Value
 
$
9.69 - $ 9.94
     
28,128
     
1.58
    $
9.83
             
28,128
    $
9.83
         
$
10.07 - $12.75
     
94,736
     
3.88
    $
11.31
             
94,736
    $
11.31
         
$
15.74 - $20.28
     
83,442
     
6.00
    $
17.66
             
83,442
    $
17.66
         
$
35.17 - $36.82
     
108,036
     
8.96
    $
35.83
             
66,036
    $
35.20
         
$
9.69 - $36.82
     
314,342
     
5.97
    $
21.29
    $
7,182,000
     
272,342
    $
18.90
    $
6,875,000
 

The total intrinsic value of all options exercised and restricted stock vestings under all of the Company’s plans was $11,742,000 and $20,595,000 for the nine months ended September 30, 2007 and 2006, respectively.  The actual tax benefit realized for tax deductions from stock award plans was $4,497,000 and $7,847,000 for the nine months ended September 30, 2007 and 2006, respectively.

As of September 30, 2007, there was $2,606,000 of unrecognized compensation cost related to nonvested stock options and $11,294,000 related to restricted stock.  The stock options are expected to be recognized over a weighted average period of approximately 0.9 years and restricted stock over approximately 2.4 years.  The total fair value of shares vested was $6,427,000 and $5,317,000 during the nine months ended September 30, 2007 and 2006, respectively.

The weighted average fair value of options granted during the nine months ended September 30, 2007 and 2006 was $11.85 and $10.18 per share, respectively.  The fair value of the options granted during the nine months ended September 30, 2007 and 2006 was $2,604,000 and $2,945,000, respectively. The fair value of each 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, 2007 and 2006 were as follows:

   
Nine months ended
September 30,
 
   
2007
   
2006
 
Dividend yield
 
None
   
None
 
Average risk-free interest rate
   
4.6%
     
4.9%
 
Stock price volatility
   
25%
     
25%
 
Estimated option term
 
Four or nine years
   
Four or nine years
 
 
12


KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
 

(5)
COMPREHENSIVE INCOME

The Company’s total comprehensive income for the three months and nine months ended September 30, 2007 and 2006 was as follows (in thousands):

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2007
   
2006
As Adjusted
   
2007
   
2006
As Adjusted
 
                         
Net earnings
  $
34,430
    $
25,850
    $
88,989
    $
72,004
 
Pension and postretirement benefit adjustments, net of taxes
   
375
     
     
1,420
     
 
Change in fair value of derivative financial instruments, net of taxes
    (2,350 )     (2,483 )     (987 )    
786
 
Total comprehensive income
  $
32,455
    $
23,367
    $
89,422
    $
72,790
 

(6)
SEGMENT DATA

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

Marine Transportation– Marine transportation by United States flag vessels on the United States inland waterway system and, to a lesser extent, offshore transportation of dry-bulk cargoes.  The principal products transported on the United States inland waterway system include petrochemicals, black oil products, refined petroleum products and agricultural chemicals.

Diesel Engine Services– Overhaul and repair of medium-speed and high-speed diesel engines, reduction gear repair, and sale of related parts and accessories for customers in the marine, power generation and railroad industries.

13


KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
 

(6)
SEGMENT DATA – (Continued)

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, 2007 and 2006 and total assets as of September 30, 2007 and December 31, 2006 (in thousands):

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2007
   
2006
As Adjusted
   
2007
   
2006
As Adjusted
 
                         
Revenues:
                       
Marine transportation
  $
241,329
    $
211,080
    $
680,139
    $
604,551
 
Diesel engine services
   
61,227
     
53,532
     
184,636
     
128,256
 
    $
302,556
    $
264,612
    $
864,775
    $
732,807
 
                                 
Segment profit (loss):
                               
Marine transportation
  $
55,213
    $
41,317
    $
141,943
    $
114,645
 
Diesel engine services
   
9,475
     
8,192
     
28,696
     
19,832
 
Other
    (8,885 )     (7,748 )     (26,410 )     (18,154 )
    $
55,803
    $
41,761
    $
144,229
    $
116,323
 

     
September 30, 
     
December 31, 
 
     
2007 
     
2006 
 
Total assets:
               
Marine transportation
  $
1,173,100
    $
1,047,264
 
Diesel engine services
   
217,145
     
205,281
 
Other
   
17,030
     
18,574
 
    $
1,407,275
    $
1,271,119
 

The following table presents the details of “Other” segment profit (loss) for the three months and nine months ended September 30, 2007 and 2006 (in thousands):

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2007
   
2006
   
2007
   
2006
 
                         
General corporate expenses
  $ (3,427 )   $ (3,199 )   $ (9,596 )   $ (9,030 )
Gain (loss) on disposition of assets
   
30
     
255
      (531 )    
1,197
 
Interest expense
    (5,236 )     (4,503 )     (15,826 )     (10,505 )
Equity in earnings of marine affiliates
   
22
     
88
     
225
     
641
 
Other expense
    (274 )     (389 )     (682 )     (457 )
    $ (8,885 )   $ (7,748 )   $ (26,410 )   $ (18,154 )
 
14


KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
 

(6)
SEGMENT DATA – (Continued)

The following table presents the details of “Other” total assets as of September 30, 2007 and December 31, 2006 (in thousands):

   
September 30,
   
December 31,
 
   
2007
   
2006
 
             
General corporate assets
  $
15,149
    $
16,310
 
Investment in marine affiliates
   
1,881
     
2,264
 
    $
17,030
    $
18,574
 

(7)
TAXES ON INCOME

Earnings before taxes on income and details of the provision (credit) for taxes on income for the three months and nine months ended September 30, 2007 and 2006 were as follows (in thousands):
 

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2007
   
2006
As Adjusted
   
2007
   
2006
As Adjusted
 
                         
Earnings before taxes on income – United States
  $
55,803
    $
41,761
    $
144,229
    $
116,323
 
                                 
Provision (credit) for taxes on income:
                               
Federal
                               
Current
  $
20,652
    $
16,826
    $
48,636
    $
42,585
 
Deferred
    (1,567 )     (2,502 )    
690
      (2,686 )
State and local
   
2,288
     
1,587
     
5,914
     
4,420
 
    $
21,373
    $
15,911
    $
55,240
    $
44,319
 
 
15


KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
 

(8)
EARNINGS PER SHARE OF COMMON STOCK

The following table presents the components of basic and diluted earnings per share of common stock for the three months and nine months ended September 30, 2007 and 2006 (in thousands, except per share amounts):

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2007
   
2006
As Adjusted
   
2007
   
2006
As Adjusted
 
                         
Net earnings
  $
34,430
    $
25,850
    $
88,989
    $
72,004
 
                                 
Shares outstanding:
                               
Weighted average common stock outstanding
   
52,983
     
52,587
     
52,892
     
52,400
 
Effect of dilutive securities:
                               
Employee and director common stock plans
   
819
     
805
     
817
     
869
 
     
53,802
     
53,392
     
53,709
     
53,269
 
                                 
Basic earnings per share of common stock
  $
.65
    $
.49
    $
1.68
    $
1.37
 
Diluted earnings per share of common stock
  $
.64
    $
.48
    $
1.66
    $
1.35
 

Certain outstanding options to purchase approximately 178,000 and 195,000 shares of common stock were excluded in the computation of diluted earnings per share as of September 30, 2007 and 2006, respectively, as such stock options would have been antidilutive.

(9)
RETIREMENT PLANS

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

The Company’s pension plan funding strategy is 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 the prediction of the pension plan contribution difficult.  Based on current pension plan assets and market conditions, the Company expects to contribute up to $5,000,000 to its pension plan in December 2007 to fund its 2007 pension plan obligations.  As of September 30, 2007, no 2007 year contributions have been made.

The Company sponsors an unfunded defined benefit health care plan that provides limited postretirement medical benefits to employees who meet minimum age and service requirements, and to eligible dependents.  The plan is contributory, with retiree contributions adjusted annually.  The 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.

16


KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
 

(9)
RETIREMENT PLANS – (Continued)

The components of net periodic benefit cost for the Company’s defined benefit plans for the three months and nine months ended September 30, 2007 and 2006 were as follows (in thousands):

   
Pension Benefits
 
   
Pension Plan
   
SERP
 
   
Three months ended
September 30,
   
Three months ended
September 30,
 
   
2007
   
2006
   
2007
   
2006
 
Components of net periodic benefit cost:
                       
Service cost
  $
1,498
    $
1,476
    $
    $
 
Interest cost
   
1,701
     
1,601
     
22
     
27
 
Expected return on plan assets
    (1,923 )     (1,835 )    
     
 
Amortization:
                               
Actuarial loss
   
646
     
952
     
3
     
6
 
Prior service credit
    (22 )     (22 )    
     
 
Net periodic benefit cost
  $
1,900
    $
2,172
    $
25
    $
33
 


   
Pension Benefits
 
   
Pension Plan
   
SERP
 
   
Nine months ended
September 30,
   
Nine months ended
September 30,
 
   
2007
   
2006
   
2007
   
2006
 
Components of net periodic benefit cost:
                       
Service cost
  $
4,495
    $
4,171
    $
    $
 
Interest cost
   
5,104
     
4,551
     
70
     
76
 
Expected return on plan assets
    (5,770 )     (5,521 )    
     
 
Amortization:
                               
Actuarial loss
   
1,938
     
2,467
     
10
     
16
 
Prior service credit
    (67 )     (67 )    
     
 
Net periodic benefit cost
  $
5,700
    $
5,601
    $
80
    $
92
 
 
17


KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
 

(9)
RETIREMENT PLANS – (Continued)

The components of net periodic benefit cost for the Company’s postretirement benefit plan for the three months and nine months ended September 30, 2007 and 2006 were as follows (in thousands):

   
Other Postretirement Benefits
   
Other Postretirement Benefits
 
   
Postretirement Welfare Plan
   
Postretirement Welfare Plan
 
   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2007
   
2006
   
2007
   
2006
 
Components of net periodic benefit cost:
                       
Service cost
  $
126
    $
116
    $
379
    $
313
 
Interest cost
   
105
     
84
     
318
     
304
 
Amortization:
                               
Actuarial gain
    (28 )     (57 )     (86 )     (79 )
Prior service credit
   
10
     
10
     
30
     
30
 
Net periodic benefit cost
  $
213
    $
153
    $
641
    $
568
 

(10)
CONTINGENCIES

The Company has issued guaranties or obtained stand-by letters of credit and performance bonds supporting performance by the Company and its subsidiaries of contractual or contingent legal obligations of the Company and its subsidiaries incurred in the ordinary course of business.  The aggregate notional value of these instruments is $6,228,000 at September 30, 2007, including $5,101,000 in letters of credit and debt guarantees, and $1,127,000 in performance bonds, of which $683,000 relates to contingent legal obligations which are covered by the Company’s liability insurance program in the event the obligations are incurred.  All of these instruments have an expiration date within 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.

In 2000, the Company and a group of approximately 45 other companies were notified that they are Potentially Responsible Parties (“PRPs”) under the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) with respect to a Superfund site, the Palmer Barge Line Site (“Palmer”), located in Port Arthur, Texas.  In prior years, Palmer had provided tank barge cleaning services to various subsidiaries of the Company.  The Company and three other PRPs entered into an agreement with the United States Environmental Protection Agency (“EPA”) to perform a remedial investigation and feasibility study and, subsequently, a limited remediation which is now complete.   During the 2007 third quarter, five new PRP’s entered into an agreement with the EPA in regards to the Palmer site.  The Company believes it has no further material exposure with respect to this site.

In 2004, the Company and certain subsidiaries received a Request For Information (“RFI”) from the EPA under CERCLA with respect to a Superfund site, the State Marine site, located in Port Arthur, Texas.  An RFI is not a determination that a party is responsible or potentially responsible for contamination at a site, but is only a request seeking any information a party may have with respect to a site as part of an EPA investigation into such site.  In July 2005, a subsidiary of the Company received a notification of potential responsibility from the EPA and a request for voluntary participation in funding potential remediation activities at the SBA Shipyards, Inc. (“SBA”) property located in Jennings, Louisiana.  In prior years, SBA had provided tank barge cleaning services to the subsidiary.  In July 2006, the Company received a RFI from the United States Department of Agriculture – Forest Service under CERCLA with respect to a former mine site in South Dakota.  Based on information currently available, the Company is unable to ascertain the extent of its exposure, if any, in these matters.

18


KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
 

(10)
CONTINGENCIES – (Continued)

In addition, 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 other claims and contingencies.

 
(11)
Subsequent Event

On October 1, 2007, the Company purchased nine tank barges from Siemens Financial, Inc. (“Siemens”) for $4,500,000 in cash.  The Company had been leasing the barges since 1994 when the leases were assigned to the Company as part of the Company’s purchase of the tank barge fleet of Dow.

19


KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
 

Part I  Financial Information

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Statements contained in this Form 10-Q that are not historical facts, including, but not limited to, any projections contained herein, are forward-looking statements and involve a number of risks and uncertainties. Such statements can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “estimate,” or “continue” or the negative thereof or other variations thereon or comparable terminology. The actual results of the future events described in such forward-looking statements in this Form 10-Q could differ materially from those stated in such forward-looking statements. Among the factors that could cause actual results to differ materially are: adverse economic conditions, industry competition and other competitive factors, adverse weather conditions such as high water, low water, tropical storms, hurricanes, fog and ice, marine accidents, lock delays, fuel costs, interest rates, construction of new equipment by competitors, 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, 2006.  Forward-looking statements are based on currently available information and the Company assumes no obligation to update any such statements.

On April 25, 2006, the Board of Directors declared a two-for-one stock split of the Company’s common stock.  Stockholders of record on May 10, 2006 received one additional share of common stock for each share of common stock held on that day, with a distribution date of May 31, 2006.  All references to number of shares and per share information in this discussion have been adjusted to reflect the stock split.

For purposes of the Management’s Discussion, all earnings per share are “Diluted earnings per share.”  The weighted average number of common shares applicable to diluted earnings per share for the three months and nine months ended September 30, 2007 and 2006 were as follows (in thousands):

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2007
   
2006
   
2007
   
2006
 
Weighted average number of common stock-diluted
   
53,802
     
53,392
     
53,709
     
53,269
 

The increase in the weighted average number of common shares for both 2007 periods compared with the 2006 periods primarily reflected the issuance of restricted stock and the exercise of stock options, partially offset by common stock repurchases in the third quarter of 2006.

Overview

The Company is the nation’s largest domestic inland tank barge operator with a fleet of 913 active tank barges, of which 49 are leased, and 255 towing vessels, of which 90 are chartered.  The Company uses the inland waterway system of the United States to transport bulk liquids including petrochemicals, black oil products, refined petroleum products and agricultural chemicals.  The Company also owns and operates four ocean-going barge and tug units transporting dry-bulk commodities in United States coastwise trade.  Through its diesel engine services segment, the Company is engaged in the overhaul and repair of medium-speed and high-speed diesel engines and reduction gears, and related parts sales for engines used in marine, power generation and railroad applications.

20


KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
 

For the 2007 third quarter, the Company reported net earnings of $34,430,000, or $.64 per share, on revenues of $302,556,000, compared with 2006 third quarter net earnings of $25,850,000, or $.48 per share, on revenues of $264,612,000.  For the first nine months of 2007, the Company reported net earnings of $88,989,000, or $1.66 per share, on revenues of $864,775,000, compared with 2006 first nine months net earnings of $72,004,000, or $1.35 per share, on revenues of $732,807,000.  The marine transportation segment’s performance in the 2007 third quarter and first nine months reflected continued strong petrochemical, black oil products and refined products demand, the favorable impact of contract rate increases and higher spot market prices, operating efficiencies from additional horsepower, and typical weather and water levels.  The 2007 second and third quarters also benefited from strong agricultural chemical demand.

The diesel engine services segment was also a strong performer in the 2007 third quarter and first nine months, reflecting the accretive acquisitions of Global in June 2006, MES in July 2006, P&S in February 2007 and Saunders in July 2007, as well as continued strong in-house and in-field service activity and direct parts sales in its marine, power generation and railroad markets.  In addition, the segment benefited from higher service rates and parts pricing implemented during 2006 and in the 2007 first nine months, and continued high labor utilization.

Marine Transportation

For the 2007 third quarter and first nine months, approximately 80% and 79%, 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 in the United States.  Products transported include raw materials for many of the end products used widely by businesses and consumers every day – plastics, fiber, paints, detergents, oil additives and paper, among others.  Consequently, the Company’s business tends to mirror the general performance of the United States economy and the performance of the Company’s customer base.   The following table shows the marine transportation markets serviced by the Company, the marine transportation revenue distribution for the first nine months of 2007, products moved and the drivers of the demand for the products the Company transports:

Markets Serviced
 
2007 Nine Months Revenue Distribution
 
Products Moved
 
Drivers
Petrochemicals
 
66%
 
Benzene, Styrene, Methanol, Acrylonitrile, Xylene, Caustic Soda, Butadiene, Propylene
 
Housing, Consumer Goods, Clothing, Automobiles
             
Black Oil Products
 
19%
 
Residual Fuel Oil, No. 6 Fuel Oil, Coker Feedstocks, Vacuum Gas Oil, Asphalt, Boiler Fuel,  Crude Oil, Ship Bunkers
 
Road Construction, Feedstock for Refineries, Fuel for Power Plants and Ships
             
Refined Petroleum Products
 
11%
 
Gasoline Blends, No. 2 Oil, Jet Fuel, Heating Oil, Naphtha
 
Vehicle Usage, Air Travel, Weather Conditions, Refinery Utilization
             
Agricultural  Chemicals
 
4%
 
Anhydrous Ammonia, Nitrogen- Based Liquid Fertilizer,  Industrial Ammonia
 
Corn, Cotton and Wheat Production, Chemical Feedstock Usage
 
21


KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
 
 
The Company’s marine transportation segment’s revenue and operating income for the 2007 third quarter increased 14% and 34%, respectively, when compared with the third quarter of 2006.  For the 2007 first nine months, revenue and operating income increased 13% and 24%, respectively, compared with the first nine months of 2006.  The petrochemical market is the Company’s largest market, contributing 66% of the marine transportation revenue for the 2007 first nine months.  During the 2007 third quarter and first nine months, the demand for the movement of petrochemicals and gasoline blending components remained strong, with term contract customers continuing to operate their plants and facilities at high utilization rates, resulting in high tank barge utilization.  The black oil products market contributed 19% of the 2007 first nine months marine transportation revenue.  This market also remained strong as refineries continued to operate at close to full capacity, generating high demand for the transportation of heavier residual oil by-products.  Refined petroleum products contributed 11% of 2007 first nine months marine transportation revenue, experiencing strong demand for the movement of products from the Gulf Coast to the Midwest.  The agricultural chemical market, which contributed 4% of 2007 first nine months marine transportation revenue, was seasonally weak during the first quarter and strong during the second and third quarters, fueled by the heavy demand for the movement of liquid fertilizer from the Gulf Coast to the Midwest.

During the 2007 third quarter, approximately 80% of the marine transportation revenues were under term contracts and 20% were spot market revenues, compared with a 75% term contract and 25% spot market mix for the first six months of 2007.  Rate renewals under term contracts, net of fuel, increased during the 2007 third quarter and first nine months in the 6% to 10% average range, with some contracts increasing by a higher percentage and some by a lower percentage.  Effective January 1, 2007, annual escalators for labor and the producer price index on a number of multi-year contracts resulted in rate increases on those contracts by 4% to 5%.  For the 2007 third quarter, spot market rates, which include the cost of fuel, increased approximately 13% compared with the 2006 third quarter.

The average cost per gallon of diesel fuel consumed for the 2007 third quarter was $2.21 compared with $2.08 for the third quarter of 2006.  For the 2007 first nine months, the average cost per gallon of diesel fuel consumed was $1.96 compared with $1.97 for the 2006 first nine months.  The Company adjusts contract rates for fuel on either a monthly or quarterly basis, depending on the specific contract.  Spot market contracts do not have escalators for fuel.

Navigational delays for the 2007 third quarter were 1,444 days, an increase of 20% compared with 1,200 days recorded in the 2006 third quarter.  For the 2007 first nine months, navigational delays were 5,846 days, an increase of 16% compared with 5,049 days recorded in the 2006 first nine months.  Delay days measure the lost time incurred by a tow (towboat and one or more barges) during transit.  The measure includes transit delays caused by weather, lock congestion or closure and other navigational factors.  The 20% increase for the 2007 third quarter and 16% for the 2007 first nine months reflected more normal 2007 weather conditions and water levels compared with unusually favorable weather conditions and water levels during the 2006 third quarter and first nine months.

The marine transportation operating margins for the 2007 third quarter and first nine months were 22.9% and 20.9%, respectively, compared with operating margins of 19.6% for the 2006 third quarter and 19.0% for the 2006 first nine months.  Continued strong demand, contract and spot market rate increases, the January 1, 2007 annual escalators on a number of multi-year contracts and improved operating efficiencies from additional horsepower contributed to the higher 2007 operating margins for both comparable periods.

22


KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
 
 
Diesel Engine Services

For the 2007 third quarter and first nine months, approximately 20% and 21%, respectively, of the Company’s revenue was generated by its diesel engine services segment, of which 65% was generated through service and 35% from direct parts sales.  The results of the diesel engine services segment are largely influenced by the economic cycles of the industries it serves.  The following table shows the markets serviced by the Company, the revenue distribution for the first nine months of 2007 and the customers for each market:

Markets Serviced
 
2007 Nine Months Revenue Distribution
 
Customers
Marine
 
78%
 
Inland River Carriers – Dry and Liquid, Offshore Towing – Dry and Liquid, Offshore Oilfield Services – Drilling Rigs &  Supply Boats, Harbor Towing, Dredging, Great Lakes Ore Carriers
         
Power Generation
 
13%
 
Standby Power Generation, Pumping Stations
         
Railroad
 
9%
 
Passenger (Transit Systems), Class II Shortline, Industrial

The Company’s diesel engine services segment’s 2007 third quarter revenue and operating income increased 14% and 16%, respectively, compared with the third quarter of 2006.  For the first nine months of 2007, revenue and operating income increased 44% and 45%, respectively, compared with the first nine months of 2006.  The diesel engine services segment’s operating margin for the 2007 third quarter was 15.5% compared with 15.3% for the third quarter of 2006. For the 2007 and 2006 first nine months, the operating margin was 15.5%.  The results were positively impacted by the accretive 2006 and 2007 acquisitions of Global, MES, P&S and Saunders, as well as from continued strong in-house and in-field service activity and direct parts sales in the majority of its markets, continued high labor utilization, and higher service rates and parts pricing implemented during 2006 and in the 2007 first nine months.

Cash Flow and Capital Expenditures

The Company continued to generate strong operating cash flow during the 2007 first nine months, with net cash provided by operating activities of $155,838,000, a 51% increase when compared with net cash provided by operating activities for the 2006 first nine months of $103,201,000.  In addition, during the 2007 and 2006 first nine months, the Company generated cash from the exercise of stock options of $4,706,000 and $12,108,000, respectively.  The cash, and borrowings under the revolving credit facility, were used for capital expenditures of $123,027,000, including $57,033,000 for new tank barge and towboat construction and $65,994,000 primarily for upgrading the existing marine transportation fleet, and $61,766,000 for the acquisitions of Saunders, Cypress, Coastal, P&S, the Nordberg engine assets and technology, seven tank barges from Shipyard, and the purchase of three towboats.  The Company’s debt-to-capitalization ratio decreased to 31.3% at September 30, 2007 from 32.9% at December 31, 2006, primarily due to the increase in stockholders’ equity attributable to net earnings for the 2007 first nine months of $88,989,000, the exercise of stock options and the issuance of restricted stock.

23


KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
 
 
The Company projects that capital expenditures for 2007 will be in the $150,000,000 to $160,000,000 range, including approximately $67,000,000 for new tank barge and towboat construction.  During the 2007 first nine months, the Company took delivery of 22 barges with a total capacity of 560,000 barrels and three 2100 horsepower towboats.  During the 2007 fourth quarter, the Company anticipates the delivery of five barges with a total capacity of 110,000 barrels and two 1800 horsepower towboats.

The Company projects that new tank barge and towboat construction capital expenditures will be approximately $83,000,000 in 2008, including 25 barges with a total capacity of 590,000 barrels and seven 1800 horsepower towboats.  Delivery is anticipated to be in 2008 and early 2009.

The Company’s strong cash flow and unutilized loan facilities position the Company to take advantage of internal and external growth opportunities in its marine transportation and diesel engine services segments.  The marine transportation segment’s external growth opportunities include potential acquisitions of independent inland tank barge operators and captive fleet owners seeking to outsource tank barge requirements.  Increasing the fleet size would allow the Company to improve asset utilization through more backhaul opportunities, faster barge turnarounds, more efficient use of horsepower, barges positioned closer to cargos, less cleaning due to operating more barges with compatible prior cargoes, lower incremental costs due to enhanced purchasing power and minimal incremental administrative staff.  The diesel engine services segment’s external growth opportunities include further consolidation of strategically located diesel service providers, and expanded service capability for other engine and marine gear related products.

The Company anticipates that for the remainder of 2007 and into early 2008, the United States and global economies will remain stable with continued strong demand for the transportation services of the marine transportation segment, as well as continued strong service activity and direct parts sales for the diesel engine services segment.

Acquisitions

On October 1, 2007, the Company purchased nine tank barges from Siemens for $4,500,000 in cash.  The Company had been leasing the barges since 1994 when the leases were assigned to the Company as part of the Company’s purchase of the tank barge fleet of Dow.  Financing of the equipment acquisition was through the Company’s revolving credit facility.

On July 20, 2007, the Company purchased substantially all of the assets of Saunders for $12,369,000 in cash, subject to post-closing inventory and other adjustments, and the assumption of $245,000 of debt.  Saunders, a Gulf Coast high-speed diesel engine services provider, operated factory-authorized full service marine dealerships for Cummins and Detroit Diesel engines, and served as an authorized marine dealer for Caterpillar engines in Alabama.  Financing of the cash portion of the acquisition was through the Company’s revolving credit facility.

On February 23, 2007, the Company purchased the assets of P&S for $1,622,000 in cash, subject to post-closing inventory adjustments.  P&S was a Gulf Coast high-speed diesel engine services provider operating as a factory-authorized marine dealer for Caterpillar in Louisiana.  Financing of the acquisition was through the Company’s revolving credit facility.

On February 13, 2007, the Company purchased from NAK for a net $3,540,000 in cash, the assets and technology to support the Nordberg medium-speed diesel engines used in nuclear applications.  As part of the transaction, Progress Energy and Duke Energy made payments to the Company for non-exclusive rights to the technology and entered into ten-year exclusive parts and service agreements with the Company.  Nordberg engines are used to power emergency diesel generators used in nuclear power plants owned by Progress Energy and Duke Energy.  Financing of the acquisition was through the Company’s revolving credit facility.

24


KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
 
 
On January 3, 2007, the Company purchased the stock of Coastal, the owner of 37 inland tank barges, for $19,474,000 in cash, subject to post-closing working capital adjustments.  The Company had been operating the Coastal tank barges since October 2002 under a barge management agreement.  Financing of the acquisition was through the Company’s revolving credit facility.

On January 2, 2007, the Company purchased 21 tank barges from Cypress for $14,965,000 in cash.  The Company had been leasing the barges since 1994 when the leases were assigned to the Company as part of the Company’s purchase of the tank barge fleet of Dow.  Financing of the equipment acquisition was through the Company’s revolving credit facility.

On October 4, 2006, the Company signed agreements to purchase 11 inland tank barges from Midland and Shipyard for $10,600,000 in cash.  The Company purchased four of the barges during 2006 for $3,300,000 and the remaining seven barges on February 15, 2007 for $7,300,000.  Financing of the equipment acquisition was through the Company’s revolving credit facility.

On July 24, 2006, the Company signed an agreement to purchase the assets of Capital, consisting of 11 towboats, for $15,000,000 in cash.  The Company purchased nine of the towboats during 2006 for $13,299,000 and the remaining two towboats on May 21, 2007 for $1,701,000.  The Company and Capital entered into a vessel operating agreement whereby Capital will continue to crew and operate the towboats for the Company.  Financing of the equipment acquisition was through the Company’s revolving credit facility.

On July 21, 2006, the Company purchased the assets of MES for $6,863,000 in cash.  MES was a Gulf Coast high-speed diesel engine services provider, operating a factory-authorized full service dealership for John Deere, as well as a service provider for Detroit Diesel.  Financing of the acquisition was through the Company’s revolving credit facility.

On June 7, 2006, the Company purchased the stock of Global for an aggregate consideration of $101,720,000, consisting of $98,657,000 in cash, the assumption of $2,625,000 of debt and $438,000 of merger costs.  Global was a Gulf Coast high-speed diesel engine services provider, operating factory-authorized marine market dealerships for Cummins, Detroit Diesel and John Deere high-speed diesel engines, and Allison transmissions, as well as an authorized marine dealer for Caterpillar engines in Louisiana.  Financing of the cash portion of the acquisition was through a combination of existing cash and the Company’s revolving credit facility.

On April 5, 2006, the Company purchased Gulf Coast Fire & Safety for $1,008,000 in cash.  Gulf Coast Fire & Safety provided sales and rental of equipment and various technical services related to fire suppression and protection, and is part of KLM, the Company’s shore tankering and in-plant operations group.  During the 2007 first quarter, the Company ended its third party fire suppression and protection operations and will provide internal services exclusively.  Financing of the acquisition was through the Company’s operating cash flows.

25


KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
 
 
On March 1, 2006, the Company purchased from PFC the remaining 65% interest in Dixie Fuels for $15,818,000 in cash.  The Dixie Fuels partnership, formed in 1977, was 65% owned by PFC and 35% owned by the Company.  As part of the transaction, the Company extended the expiration date of its marine transportation contract with PFC from 2008 to 2010.  Financing of the acquisition was through the Company’s operating cash flows.

Effective January 1, 2006, the Company acquired an additional one-third interest in Osprey, increasing the Company’s ownership to a two-thirds interest.  Osprey, formed in 2000, operates a barge feeder service for cargo containers between Houston, New Orleans and Baton Rouge, as well as several ports located above Baton Rouge on the Mississippi River.

Results of Operations

The Company reported third quarter 2007 net earnings of $34,430,000, or $.64 per share, on revenues of $302,556,000, compared with 2006 third quarter net earnings of $25,850,000, or $.48 per share, on revenues of $264,612,000.  Net earnings for the 2007 first nine months were $88,989,000, or $1.66 per share, on revenues of $864,775,000, compared with 2006 first nine months net earnings of $72,004,000, or $1.35 per share, on revenues of $732,807,000.

The following table sets forth the Company’s marine transportation and diesel engine services revenues for the 2007 third quarter compared with the third quarter of 2006, the first nine months of 2007 compared with the first nine months of 2006 and the percentage of each to total revenues for the comparable periods (dollars in thousands):

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2007
   
%
   
2006
   
%
   
2007
   
%
   
2006
   
%
 
Marine transportation
  $
241,329
      80 %   $
211,080
      80 %   $
680,139
      79 %   $
604,551
      82 %
Diesel engine services
   
61,227
     
20
     
53,532
     
20
     
184,636
     
21
     
128,256
     
18
 
    $
302,556
      100 %   $
264,612
      100 %   $
864,775
      100 %   $
732,807
      100 %

Marine Transportation

The Company, through its marine transportation segment, is a provider of marine transportation services, operating inland tank barges and towing vessels, transporting petrochemicals, black oil products, refined petroleum products and agricultural chemicals along the United States inland waterways.  As of September 30, 2007, the Company operated 913 active inland tank barges, with a total capacity of 17.3 million barrels, compared with 903 active inland tank barges at September 30, 2006, with a total capacity of 17.0 million barrels.   The Company operated an average of 255 active inland towing vessels during the 2007 third quarter and 252 during the 2007 first nine months compared with an average of 242 during the 2006 third quarter and 241 during the 2006 first nine months.  The marine transportation segment owns and operates four offshore dry-bulk barge and tug units engaged in the offshore transportation of dry-bulk cargoes.  The segment also owns a two-thirds interest in Osprey, operator of a barge feeder service for cargo containers between Houston, New Orleans and Baton Rouge, as well as several ports located above Baton Rouge on the Mississippi River.

26


KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
 
 
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, 2007 compared with the three months and nine months ended September 30, 2006 (dollars in thousands):

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2007
   
2006
As Adjusted
   
%
Change
   
2007
   
2006
As Adjusted
   
%
Change
 
Marine transportation revenues
  $
241,329
    $
211,080
      14 %   $
680,139
    $
604,551
      13 %
                                                 
Costs and expenses:
                                               
Costs of sales and operating expenses
   
143,232
     
132,195
     
8
     
411,299
     
380,284
     
8
 
Selling, general and administrative
   
20,925
     
19,067
     
10
     
61,796
     
56,006
     
10
 
Taxes, other than on income
   
3,020
     
3,009
     
     
8,901
     
9,153
      (3 )
Depreciation and amortization
   
18,939
     
15,492
     
22
     
56,200
     
44,463
     
26
 
     
186,116
     
169,763
     
10
     
538,196
     
489,906
     
10
 
Operating income
  $
55,213
    $
41,317
      34 %   $
141,943
    $
114,645
      24 %
                                                 
Operating margins
    22.9 %     19.6 %             20.9 %     19.0 %        

Marine Transportation Revenues

Marine transportation revenues for the 2007 third quarter and first nine months increased 14% and 13%, respectively, compared with the corresponding 2006 periods, reflecting continued strong petrochemical, black oil products and refined product demand, 2006 year and 2007 first nine months contract and spot market rate increases, labor and producer price index escalators effective January 1, 2007 on multi-year contracts, operating efficiencies from additional horsepower and typical 2007 third quarter and first nine months weather conditions.   The 2006 third quarter and first nine months benefited from unusually favorable weather conditions.  The 2007 second and third quarters also benefited from strong agricultural chemical demand.

Petrochemical transportation demand for the 2007 third quarter and first nine months remained strong as term contract customers, mainly large U.S. petrochemical and refining companies, continued to operate their plants and facilities at high utilization rates, resulting in continued high barge utilization for most products and trade lanes.

Black oil products demand during the 2007 third quarter and first nine months remained strong as refineries continued to operate at close to full capacity, which generated heavy demand for waterborne transportation of heavier residual oil by-products by barge.  Refined petroleum products demand for transportation into the Midwest during the 2007 third quarter and first nine months was stronger than normal.  Agricultural chemical demand was seasonally strong during the 2007 second and third quarter, benefiting from high demand for the movement of liquid fertilizer into the Midwest, partially the result of record United States corn production.

           The Company acquired an additional one-third interest in Osprey in January 2006, increasing the Company’s ownership to 67%, and purchased in March 2006 the remaining 65% of the Dixie Fuels partnership, bringing the Company’s ownership to 100%.  As a result of the acquisitions, the Company began consolidating the results of both entities in the marine transportation segment beginning on their acquisition dates.  During the 2007 third quarter and first nine months, the entities contributed a combined $10,714,000 and $31,333,000, respectively, of marine transportation revenues.

27


KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
 
 
For the 2007 third quarter, the marine transportation segment incurred 1,444 delay days, 20% more than the 2006 third quarter delay days of 1,200.  For the 2007 first nine months, 5,846 delay days occurred, 16% higher than the 5,049 delay days in the 2006 first nine months.  The 2007 third quarter and first nine months delay days were the result of more typical weather conditions and water levels compared with the third quarter and first nine months of 2006 which had unusually favorable weather conditions and water levels.

During the 2007 third quarter, approximately 80% of marine transportation revenues were under term contracts and 20% were spot market revenues, compared with a 75% term contract and 25% spot market mix for the 2007 first six months, and a 70% term contract and 30% spot market mix for the 2006 third quarter and full year. The increase in the term contract percentage was attributable to heavier demand for transportation services by the Company’s term contract customers.  The 80% contract and 20% spot market mix provides the Company with a predictable revenue stream while maintaining spot market exposure to take advantage of new business opportunities and existing customers’ peak demands.  Rates under term contracts renewed during the 2007 third quarter and first nine months increased in the 6% to 10% average range, primarily the result of continued strong industry demand and high utilization of tank barges.  Spot market rates, including fuel, for the 2007 third quarter increased approximately 13% compared with the 2006 third quarter.  Effective January 1, 2007, escalators for labor and the producer price index on a number of multi-year contracts increased rates on those contracts by 4% to 5%.

Marine Transportation Costs and Expenses

Costs and expenses for the 2007 third quarter and first nine months increased 10% compared with the 2006 third quarter and first nine months, reflecting the higher costs and expenses associated with the increased marine transportation demand noted above, coupled with the consolidation of Dixie Fuels