UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

Form 10-Q

 
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
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,
 
77007
Houston, TX
 
(Zip Code)
(Address of principal executive offices)
 
 

(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 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.

Large accelerated filer
T
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨
Smaller reporting company
¨

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.



PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES

CONDENSED BALANCE SHEETS
(Unaudited)

ASSETS

 
 
September 30,
2013
   
December 31,
2012
 
 
 
($ in thousands)
 
Current assets:
 
   
 
Cash and cash equivalents
 
$
6,482
   
$
11,059
 
Accounts receivable:
               
Trade – less allowance for doubtful accounts
   
308,495
     
313,182
 
Other
   
32,265
     
43,074
 
Inventories – net
   
138,439
     
177,397
 
Prepaid expenses and other current assets
   
39,511
     
39,248
 
Deferred income taxes
   
9,991
     
12,296
 
 
               
Total current assets
   
535,183
     
596,256
 
 
               
Property and equipment
   
3,340,165
     
3,219,113
 
Less accumulated depreciation
   
(973,117
)
   
(903,948
)
 
               
Property and equipment – net
   
2,367,048
     
2,315,165
 
 
               
Goodwill
   
591,362
     
596,030
 
Other assets
   
167,719
     
145,677
 
 
               
Total assets
 
$
3,661,312
   
$
3,653,128
 
 
See accompanying notes to condensed financial statements.

2

KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES

CONDENSED BALANCE SHEETS
(Unaudited)

LIABILITIES AND STOCKHOLDERS’ EQUITY

 
 
September 30,
2013
   
December 31,
2012
 
 
 
($ in thousands)
 
Current liabilities:
 
 
Current portion of long-term debt
 
$
   
$
65,000
 
Income taxes payable
   
11,391
     
2,369
 
Accounts payable
   
156,260
     
156,763
 
Accrued liabilities
   
121,728
     
114,031
 
Deferred revenues
   
35,872
     
16,857
 
 
               
Total current liabilities
   
325,251
     
355,020
 
 
               
Long-term debt – less current portion
   
860,930
     
1,070,110
 
Deferred income taxes
   
485,018
     
426,096
 
Other long-term liabilities
   
77,858
     
94,848
 
 
               
Total long-term liabilities
   
1,423,806
     
1,591,054
 
 
               
Contingencies and commitments
   
     
 
 
               
Equity:
               
Kirby stockholders’ equity:
               
Common stock, $.10 par value per share. Authorized 120,000,000 shares, issued 59,776,000 shares
   
5,978
     
5,978
 
Additional paid-in capital
   
406,427
     
397,785
 
Accumulated other comprehensive income – net
   
(57,188
)
   
(61,127
)
Retained earnings
   
1,627,873
     
1,439,079
 
Treasury stock – at cost, 2,965,000 at September 30, 2013 and 3,191,000 at December 31, 2012
   
(82,203
)
   
(86,747
)
Total Kirby stockholders’ equity
   
1,900,887
     
1,694,968
 
Noncontrolling interests
   
11,368
     
12,086
 
Total equity
   
1,912,255
     
1,707,054
 
 
               
Total liabilities and equity
 
$
3,661,312
   
$
3,653,128
 
 
See accompanying notes to condensed financial statements.
3

KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES

CONDENSED STATEMENTS OF EARNINGS
(Unaudited)

 
 
Three months ended
September 30,
   
Nine months ended
September 30,
 
 
 
2013
   
2012
   
2013
   
2012
 
 
 
($ in thousands, except per share amounts)
 
Revenues:
 
   
   
   
 
Marine transportation
 
$
436,181
   
$
349,771
   
$
1,278,567
   
$
1,027,923
 
Diesel engine services
   
114,924
     
171,553
     
395,231
     
572,184
 
Total revenues
   
551,105
     
521,324
     
1,673,798
     
1,600,107
 
 
                               
Costs and expenses:
                               
Costs of sales and operating expenses
   
344,396
     
344,990
     
1,083,257
     
1,075,265
 
Selling, general and administrative
   
43,241
     
44,473
     
128,335
     
140,772
 
Taxes, other than on income
   
3,714
     
3,455
     
12,589
     
11,276
 
Depreciation and amortization
   
41,640
     
35,729
     
122,907
     
107,400
 
Loss (gain) on disposition of assets
   
(223
)
   
40
     
(728
)
   
(1
)
Total costs and expenses
   
432,768
     
428,687
     
1,346,360
     
1,334,712
 
 
                               
Operating income
   
118,337
     
92,637
     
327,438
     
265,395
 
Other income (expense)
   
60
     
(56
)
   
236
     
123
 
Interest expense
   
(6,694
)
   
(6,056
)
   
(21,901
)
   
(17,797
)
 
                               
Earnings before taxes on income
   
111,703
     
86,525
     
305,773
     
247,721
 
Provision for taxes on income
   
(42,007
)
   
(32,794
)
   
(114,733
)
   
(93,676
)
 
                               
Net earnings
   
69,696
     
53,731
     
191,040
     
154,045
 
Less: Net earnings attributable to noncontrolling interests
   
(573
)
   
(676
)
   
(2,246
)
   
(2,495
)
 
                               
Net earnings attributable to Kirby
 
$
69,123
   
$
53,055
   
$
188,794
   
$
151,550
 
 
                               
Net earnings per share attributable to Kirby common stockholders:
                               
Basic
 
$
1.22
   
$
.95
   
$
3.33
   
$
2.71
 
Diluted
 
$
1.21
   
$
.95
   
$
3.32
   
$
2.70
 
 
See accompanying notes to condensed financial statements.
4

KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

 
 
Three months ended
September 30,
   
Nine months ended
September 30,
 
 
 
2013
   
2012
   
2013
   
2012
 
 
 
($ in thousands)
 
 
 
 
Net earnings
 
$
69,696
   
$
53,731
   
$
191,040
   
$
154,045
 
Other comprehensive income (loss), net of taxes:
                               
Pension and postretirement benefits
   
1,185
     
1,048
     
2,856
     
769
 
Foreign currency translation adjustments
   
(124
)
   
(257
)
   
125
     
190
 
Change in fair value of derivative instruments
   
(12
)
   
1,331
     
958
     
3,831
 
Total comprehensive income, net of taxes
   
1,049
     
2,122
     
3,939
     
4,790
 
 
                               
Total comprehensive income, net of taxes
   
70,745
     
55,853
     
194,979
     
158,835
 
Net earnings attributable to noncontrolling interests
   
(573
)
   
(676
)
   
(2,246
)
   
(2,495
)
 
                               
Comprehensive income attributable to Kirby
 
$
70,172
   
$
55,177
   
$
192,733
   
$
156,340
 
 
See accompanying notes to condensed financial statements.
5

KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES

CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)

 
 
Nine months ended
September 30,
 
 
 
2013
   
2012
 
 
 
($ in thousands)
 
Cash flows from operating activities:
 
   
 
Net earnings
 
$
191,040
   
$
154,045
 
Adjustments to reconcile net earnings to net cash provided by operations:
               
Depreciation and amortization
   
122,907
     
107,400
 
Provision for deferred income taxes
   
68,523
     
59,665
 
Amortization of unearned share-based compensation
   
8,921
     
7,331
 
Other
   
5,656
     
2,784
 
Increase (decrease) in cash flows resulting from changes in operating assets and liabilities, net
   
53,668
     
(84,997
)
Net cash provided by operating activities
   
450,715
     
246,228
 
 
               
Cash flows from investing activities:
               
Capital expenditures
   
(207,047
)
   
(255,887
)
Acquisition of businesses and marine equipment
   
(3,643
)
   
 
Proceeds from disposition of assets
   
30,390
     
15,165
 
Net cash used in investing activities
   
(180,300
)
   
(240,722
)
 
               
Cash flows from financing activities:
               
Borrowings (payments) on bank credit facilities, net
   
(143,180
)
   
5,970
 
Borrowings on long-term debt
   
225,000
     
 
Payments on long-term debt
   
(356,000
)
   
(26,005
)
Proceeds from exercise of stock options
   
4,328
     
3,173
 
Payment of contingent liability
   
(5,000
)
   
 
Excess tax benefit from equity compensation plans
   
2,824
     
2,342
 
Other
   
(2,964
)
   
(2,092
)
Net cash used in financing activities
   
(274,992
)
   
(16,612
)
Decrease in cash and cash equivalents
   
(4,577
)
   
(11,106
)
 
               
Cash and cash equivalents, beginning of year
   
11,059
     
16,249
 
Cash and cash equivalents, end of period
 
$
6,482
   
$
5,143
 
 
               
Supplemental disclosures of cash flow information:
               
Cash paid during the period:
               
Interest
 
$
19,921
   
$
15,928
 
Income taxes
 
$
23,000
   
$
29,353
 

See accompanying notes to condensed financial statements.
6

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.
7

(4)
INVENTORIES

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

 
 
September 30,
2013
   
December 31,
2012
 
Finished goods
 
$
119,586
   
$
162,859
 
Work in process
   
18,853
     
14,538
 
 
 
$
138,439
   
$
177,397
 

(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):

September 30, 2013:
 
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
   
Total Fair
Value
Measurements
 
Assets:
 
   
   
   
 
Derivatives
 
$
   
$
   
$
   
$
 
 
                               
Liabilities:
                               
Derivatives
 
$
   
$
49
   
$
   
$
49
 
Contingent liabilities
   
     
     
4,894
     
4,894
 
 
 
$
   
$
49
   
$
4,894
   
$
4,943
 

December 31, 2012:
 
Quoted
Prices in
Active
Markets for
 Identical
Assets
(Level 1)
   
Significant
Other
Observable
Inputs
(Level 2)
   
Significant
Unobservable
Inputs
(Level 3)
   
Total Fair
Value
Measurements
 
Assets:
 
   
   
   
 
Derivatives
 
$
   
$
   
$
   
$
 
 
                               
Liabilities:
                               
Derivatives
 
$
   
$
1,525
   
$
   
$
1,525
 
Contingent liabilities
   
     
     
28,067
     
28,067
 
 
 
$
   
$
1,525
   
$
28,067
   
$
29,592
 

The fair value of the Company’s derivative instruments is more fully described below in Note 6, Derivative Instruments.
8

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.
9

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):

Liability Derivatives
Balance Sheet Location
 
September 30,
2013
   
December 31,
2012
 
Derivatives designated as hedging instruments under ASC 815:
 
 
   
 
 
 
 
   
 
Foreign currency contracts
Other accrued liabilities
 
$
49
   
$
 
Foreign currency contracts
Other long-term liabilities
   
     
39
 
Interest rate contracts
Other accrued liabilities
   
     
1,486
 
 
 
               
Total derivatives designated as hedging instruments under ASC 815
 
 
$
49
   
$
1,525
 
Total liability derivatives
 
 
$
49
   
$
1,525
 

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.
10

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):

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2013
   
2012
   
2013
   
2012
 
Compensation cost
 
$
3,860
   
$
2,842
   
$
8,921
   
$
7,331
 
Income tax benefit
 
$
1,459
   
$
1,086
   
$
3,372
   
$
2,801
 

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.
11

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

 
 
Outstanding
Non-
Qualified or
Nonincentive
Stock
Awards
   
Weighted
Average
Exercise
Price
 
Outstanding at December 31, 2012
   
351,173
   
$
45.54
 
Granted
   
111,527
   
$
70.94
 
Exercised
   
(72,932
)
 
$
30.20
 
Outstanding at September 30, 2013
   
389,768
   
$
55.68
 

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

   
Options Outstanding
 
Options Exercisable
Range of
Exercise Prices
   
Number
Outstanding
   
Weighted
Average
Remaining
Contractual
Life in Years
   
Weighted
Average
Exercise
Price
 
Aggregate
Intrinsic
Value
 
Number
Exercisable
   
Weighted
Average
Exercise
Price
 
Aggregate
Intrinsic
Value
$
31.35 - 36.35
     
79,199
     
3.4
   
$
32.62
 
 
   
79,199
   
$
32.62
 
    
$
46.74
     
99,136
     
4.3
   
$
46.74
 
 
   
65,606
   
$
46.74
 
    
$
65.28 - 66.72
     
99,906
     
5.2
   
$
65.80
 
 
   
35,393
   
$
65.77
 
    
$
70.65
     
109,560
     
6.1
   
$
70.65
 
 
   
5,136
   
$
70.65
 
    
$
86.96
     
1,967
     
6.8
   
$
86.96
 
 
   
0
   
$
N/A
 
   
$
31.35 - 86.96
     
389,768
     
4.9
   
$
55.68
 
$12,032,000
   
185,334
   
$
45.00
 
$7,700,000

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:
 
 
 
Unvested
Restricted
Stock Award
Shares
   
Weighted
Average
Grant Date
Fair Value
Per Share
 
Nonvested balance at December 31, 2012
   
418,128
   
$
45.39
 
Granted
   
139,613
   
$
69.79
 
Vested
   
(147,192
)
 
$
44.48
 
Forfeited
   
(8,497
)
 
$
60.26
 
Nonvested balance at September 30, 2013
   
402,052
   
$
54.81
 

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.
12

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

 
 
Outstanding Non- Qualified or Nonincentive Stock Options
   
Weighted Average Exercise Price
 
Outstanding at December 31, 2012
   
345,938
   
$
45.84
 
Granted
   
54,958
   
$
75.17
 
Exercised
   
(54,000
)
 
$
39.36
 
Outstanding at September 30, 2013
   
346,896
   
$
51.50
 

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

   
Options Outstanding
 
Options Exercisable
Range of Exercise Prices
   
Number Outstanding
   
Weighted Average Remaining Contractual Life in Years
   
Weighted Average Exercise Price
 
Aggregate Intrinsic
Value
 
Number Exercisable
   
Weighted Average Exercise Price
 
Aggregate Intrinsic Value
$
17.88
     
12,000
     
0.6
   
$
17.88
 
 
   
12,000
   
$
17.88
 
  
$
20.28-29.60
     
36,000
     
4.2
   
$
26.49
 
 
   
36,000
   
$
26.49
 
  
$
35.17-36.82
     
50,036
     
2.9
   
$
35.80
 
 
   
50,036
   
$
35.80
 
  
$
41.24-56.45
     
133,596
     
6.3
   
$
52.48
 
 
   
133,596
   
$
52.48
 
  
$
61.89-62.48
     
60,306
     
8.7
   
$
62.38
 
 
   
60,306
   
$
62.38
 
  
$
75.17
     
54,958
     
9.6
   
$
75.17
 
 
   
478
   
$
75.17
 
  
$
17.88-75.17
     
346,896
     
6.3
   
$
51.50
 
$12,160,000
   
292,416
   
$
47.09
 
$11,540,000

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:

 
 
Unvested Restricted Stock Award Shares
   
Weighted
Average
Grant Date
Fair Value
Per Share
 
Nonvested balance at December 31, 2012
   
348
   
$
62.99
 
Granted
   
10,536
   
$
75.65
 
Vested
   
(1,116
)
 
$
71.70
 
Nonvested balance at September 30, 2013
   
9,768
   
$
75.65
 

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.
13

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:

   
Nine months ended
September 30,
 
   
2013
   
2012
 
   
None
   
None
 
Average risk-free interest rate
   
1.1
%
   
1.1
%
Stock price volatility
   
34
%
   
33
%
Estimated option term
 
Six years or seven years
   
Six years or seven years
 

(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):

   
Three months ended September 30,
 
   
2013
   
2012
 
Pension and postretirement benefits (a):
 
Gross
Amount
   
Income Tax
(Provision)
Benefit
   
Net Amount
   
Gross
Amount
   
Income Tax
(Provision)
Benefit
   
Net Amount
 
Amortization of net actuarial loss
 
$
1,922
   
$
(735
)
 
$
1,187
   
$
1,696
   
$
(623
)
 
$
1,073
 
Actuarial gains (losses)
   
(3
)
   
1
     
(2
)
   
2
     
(27
)
   
(25
)
 
                                               
Foreign currency translation adjustments
   
(124
)
   
     
(124
)
   
(257
)
   
     
(257
)
 
                                               
Change in fair value of derivative instruments (b):
                                               
Unrealized gains (losses)
   
(20
)
   
8
     
(12
)
   
4,131
     
(1,461
)
   
2,670
 
Reclassified to net earnings
   
     
     
     
(2,071
)
   
732
     
(1,339
)
Total
 
$
1,775
   
$
(726
)
 
$
1,049
   
$
3,501
   
$
(1,379
)
 
$
2,122
 
14

   
Nine months ended September 30,
 
   
2013
   
2012
 
Pension and postretirement benefits (a):
 
Gross
Amount
   
Income Tax
(Provision)
Benefit
   
Net Amount
   
Gross
Amount
   
Income Tax
(Provision)
Benefit
   
Net Amount
 
Amortization of net actuarial loss
 
$
5,762
   
$
(2,204
)
 
$
3,558
   
$
5,091
   
$
(1,939
)
 
$
3,152
 
Actuarial gains (losses)
   
(1,137
)
   
435
     
(702
)
   
(3,849
)
   
1,466
     
(2,383
)
 
                                               
Foreign currency translation adjustments
   
125
     
     
125
     
190
     
     
190
 
 
                                               
Change in fair value of derivative instruments (b):
                                               
Unrealized gains (losses)
   
2,862
     
(1,001
)
   
1,861
     
12,105
     
(4,287
)
   
7,818
 
Reclassified to net earnings
   
(1,389
)
   
486
     
(903
)
   
(6,173
)
   
2,186
     
(3,987
)
Total
 
$
6,223
   
$
(2,284
)
 
$
3,939
   
$
7,364
   
$
(2,574
)
 
$
4,790
 

(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.
15

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):

 
 
Three months ended
September 30,
   
Nine months ended
September 30,
 
 
 
2013
   
2012
   
2013
   
2012
 
Revenues:
 
   
   
   
 
Marine transportation
 
$
436,181
   
$
349,771
   
$
1,278,567
   
$
1,027,923
 
Diesel engine services
   
114,924
     
171,553
     
395,231
     
572,184
 
 
 
$
551,105
   
$
521,324
   
$
1,673,798
   
$
1,600,107
 
Segment profit (loss):
                               
Marine transportation
 
$
113,647
   
$
81,695
   
$
300,463
   
$
221,915
 
Diesel engine services
   
9,077
     
14,603
     
38,031
     
53,275
 
Other
   
(11,021
)
   
(9,773
)
   
(32,721
)
   
(27,469
)
 
 
$
111,703
   
$
86,525
   
$
305,773
   
$
247,721
 
 
 
 
September 30,
2013
   
December 31,
2012
 
Total assets:
 
   
 
Marine transportation
 
$
3,028,919
   
$
2,951,723
 
Diesel engine services
   
582,843
     
647,986
 
Other
   
49,550
     
53,419
 
 
 
$
3,661,312
   
$
3,653,128
 

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):
 
   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2013
   
2012
   
2013
   
2012
 
                 
General corporate expenses
 
$
(4,610
)
 
$
(3,621
)
 
$
(11,784
)
 
$
(9,796
)
Gain (loss) on disposition of assets
   
223
     
(40
)
   
728
     
1
 
Interest expense
   
(6,694
)
   
(6,056
)
   
(21,901
)
   
(17,797
)
Other income (expense)
   
60
     
(56
)
   
236
     
123
 
 
 
$
(11,021
)
 
$
(9,773
)
 
$
(32,721
)
 
$
(27,469
)

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

 
 
September 30,
2013
   
December 31,
2012
 
General corporate assets
 
$
47,463
   
$
51,611
 
Investment in affiliates
   
2,087
     
1,808
 
 
 
$
49,550
   
$
53,419
 
16

(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):

 
 
Three months ended
September 30,
   
Nine months ended
September 30,
 
 
 
2013
   
2012
   
2013
   
2012
 
 
 
   
   
   
 
Earnings before taxes on income – United States
 
$
111,703
   
$
86,525
   
$
305,773
   
$
247,721
 
Provision for taxes on income:
                               
Federal:
                               
Current
 
$
17,144
   
$
3,125
   
$
34,676
   
$
23,221
 
Deferred
   
20,640
     
25,891
     
68,523
     
59,665
 
State and local
   
4,223
     
3,778
     
11,534
     
10,790
 
 
 
$
42,007
   
$
32,794
   
$
114,733
   
$
93,676
 

(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):

 
 
Three months ended
September 30,
   
Nine months ended
September 30,
 
 
 
2013
   
2012
   
2013
   
2012
 
 
 
   
   
   
 
Net earnings attributable to Kirby
 
$
69,123
   
$
53,055
   
$
188,794
   
$
151,550
 
Undistributed earnings allocated to restricted shares
   
(504
)
   
(409
)
   
(1,363
)
   
(1,180
)
Income available to Kirby common stockholders - basic
   
68,619
     
52,646
     
187,431
     
150,370
 
Undistributed earnings allocated to restricted shares
   
504
     
409
     
1,363
     
1,180
 
Undistributed earnings reallocated to restricted shares
   
(502
)
   
(407
)
   
(1,358
)
   
(1,175
)
Income available to Kirby common stockholders - diluted
 
$
68,621
   
$
52,648
   
$
187,436
   
$
150,375
 
 
                               
Shares outstanding:
                               
Weighted average common stock issued and outstanding
   
56,789
     
55,875
     
56,738
     
55,851
 
Weighted average unvested restricted stock
   
(414
)
   
(430
)
   
(409
)
   
(435
)
Weighted average common stock outstanding - basic
   
56,375
     
55,445
     
56,329
     
55,416
 
Dilutive effect of stock options
   
197
     
182
     
191
     
218
 
Weighted average common stock outstanding - diluted
   
56,572
     
55,627
     
56,520
     
55,634
 
 
                               
Net earnings per share attributable to Kirby common stockholders:
                               
Basic
 
$
1.22
   
$
.95
   
$
3.33
   
$
2.71
 
Diluted
 
$
1.21
   
$
.95
   
$
3.32
   
$
2.70
 

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.
17

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):

   
Pension Benefits
 
   
Pension Plan
   
SERP
 
   
Three months ended
September 30,
   
Three months ended
September 30,
 
Components of net periodic benefit cost:
 
2013
   
2012
   
2013
   
2012
 
Service cost
 
$
3,207
   
$
2,552
   
$
   
$
 
Interest cost
   
2,851
     
2,627
     
18
     
18
 
Expected return on plan assets
   
(4,033
)
   
(3,219
)
   
     
 
Amortization of actuarial loss
   
2,070
     
1,850
     
5
     
4
 
Net periodic benefit cost
 
$
4,095
   
$
3,810
   
$
23
   
$
22
 
 
   
Pension Benefits
 
   
Pension Plan
   
SERP
 
   
Nine months ended
September 30,
   
Nine months ended
September 30,
 
Components of net periodic benefit cost:
 
2013
   
2012
   
2013
   
2012
 
Service cost
 
$
9,621
   
$
7,657
   
$
   
$
 
Interest cost
   
8,553
     
7,881
     
53
     
55
 
Expected return on plan assets
   
(12,099
)
   
(9,657
)
   
     
 
Amortization of actuarial loss
   
6,209
     
5,548
     
14
     
11
 
Net periodic benefit cost
 
$
12,284
   
$
11,429
   
$
67
   
$
66
 
18

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):

   
Other Postretirement
Benefits
   
Other Postretirement
Benefits
 
   
Postretirement Welfare Plan
   
Postretirement Welfare Plan
 
   
Three months ended
September 30,
   
Nine months ended
September 30,
 
Components of net periodic benefit cost:
 
2013
   
2012
   
2013
   
2012
 
Service cost
 
$
   
$
   
$
   
$
 
Interest cost
   
27
     
34
     
83
     
101
 
Amortization of actuarial gain
   
(153
)
   
(158
)
   
(461
)
   
(468
)
Net periodic benefit cost
 
$
(126
)
 
$
(124
)
 
$
(378
)
 
$
(367
)

(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):
19

   
Three months ended
September 30,  
   
Nine months ended
September 30,  
 
   
2013
   
2012
   
2013
   
2012
 
Weighted average number of common stock - diluted
   
56,572
     
55,627
     
56,520
     
55,634
 

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.
20

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.
21

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.
22

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.
23

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.
24

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):

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2013
   
%
   
2012
   
%
   
2013
   
%
   
2012
   
%
 
Marine transportation
 
$
436,181
     
79
%
 
$
349,771
     
67
%
 
$
1,278,567
     
76
%
 
$
1,027,923
     
64
%
Diesel engine services
   
114,924
     
21
     
171,553
     
33
     
395,231
     
24
     
572,184
     
36
 
 
 
$
551,105
     
100
%
 
$
521,324
     
100
%
 
$
1,673,798
     
100
%
 
$
1,600,107
     
100
%

25

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):

 
 
Three months ended
September 30,
   
Nine months ended
September 30,
 
 
 
2013
   
2012
   
%
Change
   
2013
   
2012
   
%
Change
 
Marine transportation revenues
 
$
436,181
   
$
349,771
     
25
%
 
$
1,278,567
   
$
1,027,923
     
24
%
Costs and expenses:
                                               
Costs of sales and operating expenses
   
253,093
     
208,165
     
22
     
771,654
     
622,038
     
24
 
Selling, general and administrative
   
28,132
     
24,759
     
14
     
83,547
     
78,164
     
7
 
Taxes, other than on income
   
3,341
     
2,992
     
12
     
11,179
     
9,877
     
13
 
Depreciation and amortization
   
37,968
     
32,160
     
18
     
111,724
     
95,929
     
16
 
 
   
322,534
     
268,076
     
20
     
978,104
     
806,008
     
21
 
Operating income
 
$
113,647
   
$
81,695
     
39
%
 
$
300,463
   
$
221,915
     
35
%
Operating margins
   
26.1
%
   
23.4
%
           
23.5
%
   
21.6
%
       

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:
26


Markets Serviced
 
2013 Third Quarter Revenue Distribution
   
2013 Nine Months Revenue Distribution
 
Products Moved
Drivers
Petrochemicals
   
49%
 
   
48%
 
Benzene, Styrene, Methanol, Acrylonitrile, Xylene, Caustic Soda, Butadiene, Propylene
Consumer non-durables – 70%, Consumer durables – 30%
 
               
 
     
Black Oil
   
24%
 
   
24%
 
Residual Fuel Oil, Coker Feedstock, Vacuum Gas Oil, Asphalt, Carbon Black Feedstock, Crude Oil, Ship Bunkers
Fuel for Power Plants and Ships, Feedstock for Refineries, Road Construction
 
               
 
     
Refined Petroleum Products
   
24%
 
   
24%
 
Gasoline, No. 2 Oil, Jet Fuel, Heating Oil, Naphtha, Diesel Fuel, Ethanol
Vehicle Usage, Air Travel, Weather Conditions, Refinery Utilization
 
               
 
     
Agricultural Chemicals
   
3%
 
   
4%
 
Anhydrous Ammonia, Nitrogen – Based Liquid Fertilizer, Industrial Ammonia
Corn, Cotton and Wheat Production, Chemical Feedstock Usage

Marine transportation revenues for the 2013 third quarter and first nine months increased 25% and 24%, respectively, when compared with the 2012 third quarter and first nine months, reflecting the expansion of the coastal transportation business with the acquisition of Allied on November 1, 2012 and Penn on December 14, 2012. The inland tank barge fleet contributed approximately 70% and the coastal fleet approximately 30% of the 2013 third quarter and first nine months marine transportation revenues. Equipment utilization during the 2013 third quarter and first nine months for the inland petrochemical, black oil and refined petroleum products fleets remained in the 90% to 95% range, consistent with the 2012 comparable periods.  The coastal equipment utilization for the 2013 third quarter and first nine months was in the 90% range, a major improvement over the 75% to 80% range reported for the 2012 third quarter and first nine months.

The petrochemical market, the Company’s largest market, contributed 49% and 48%, respectively, of marine transportation revenues for the 2013 third quarter and first nine months, reflecting continued strong volumes from Gulf Coast petrochemical plants for both domestic consumers and to terminals for export destinations. The 2013 third quarter and first nine months also included revenues from the 10 coastal tank barges purchased from Allied that transport petrochemicals coastwise.

The black oil market, which contributed 24% of marine transportation revenues for the 2013 third quarter and first nine months, also reflected continued strong demand, driven by steady refinery production levels, the export of refined petroleum products and fuel oils, and increased demand for crude oil and gas condensate transportation on both the inland waterway system and coastwise. The 2013 third quarter and first nine months also included revenues from the 18 coastal tank barges acquired with the acquisition of Penn, expanding the Company’s coastal black oil movements of refinery feedstocks, asphalt, crude oil and gas condensate.

The refined petroleum products market, which contributed 24% of marine transportation revenues for the 2013 third quarter and first nine months, reflected higher demand for the movement of products in the inland and coastal markets, benefiting from additional volumes from major customers and aided by the export of refined petroleum products and heavy fuel oils. The coastal refined products market was also driven by continued success in expanding the coastal customer base to inland customers with coastal requirements, as well as a colder winter in the Northeast that increased the demand for distillate products.

The agricultural chemical market, which contributed 3% and 4%, respectively, of 2013 third quarter and first nine months marine transportation revenues, saw weak demand during January and February due to winter weather and low water conditions in the Midwest. Demand increased significantly in March for both domestically produced and imported products and continued throughout the second quarter.  Demand decreased during the 2013 third quarter due to seasonality and the Midwest drought that will delay the Fall fill until the fourth quarter.
27

For the third quarter of 2013, the inland operations incurred 1,289 delay days, in line with the 1,244 delay days that occurred during the 2012 third quarter, and 49% less than the 2,520 delay days that occurred during the 2013 second quarter. For the 2013 first nine months, 5,858 delay days occurred, 20% more than the 4,879 delay days that occurred during the 2012 first nine months. Delay days measure the lost time incurred by a tow (towboat and one or more tank barges) during transit when the tow is stopped due to weather, lock conditions or other navigational factors. 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 third quarter, low water conditions on the Mississippi River System, starting in mid-May 2012 and continuing throughout the third quarter, created delays and increased transit times.

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. 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% during the 2012 third quarter and 57% during the 2012 first nine months. The 75% term contract and 25% spot contract mix provides the inland operations with a predictable revenue stream.

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. 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 the stronger demand for coastal tank barges, as well as 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 of approximately 1%, excluding fuel.

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.

Marine Transportation Costs and Expenses

Costs and expenses for the 2013 third quarter and first nine months increased 20% and 21% respectively, compared with the 2012 third quarter and first nine months. Costs of sales and operating expenses for the 2013 third quarter and first nine months increased 22% and 24%, respectively, compared with the third quarter and first nine months of 2012, primarily reflecting the 2012 fourth quarter acquisitions of Allied and Penn, as well as higher costs and expenses due to increased inland and coastal marine transportation demand. In addition, the high water and Algiers Lock issues noted above increased operating expenses during the 2013 second quarter and during the month of July.

The inland operations operated an average of 256 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. During the 2013 first nine months, the inland operations operated an average of 258 towboats, of which an average of 78 were chartered, compared with 242 towboats operated during the 2012 first nine months, of which an average of 60 were chartered. The increase in the number of towboats operated was a reflection of the higher tank barge utilization levels in the petrochemical, black oil and refined petroleum products markets during the 2013 third quarter and first nine months compared with the 2012 third quarter and first nine months, as well as higher demand for towboats associated with the high water and lock closure issues noted above. As demand increases or decreases, or as weather or water conditions dictate, the Company charters-in or releases chartered towboats in an effort to balance horsepower needs with current requirements. The Company has historically used chartered towboats for approximately one-third of its inland horsepower requirements.
28

During the 2013 third quarter, the inland operations consumed 10.6 million gallons of diesel fuel compared to 10.7 million gallons consumed during the 2012 third quarter. The average price per gallon of diesel fuel consumed during the 2013 third quarter was $3.11 compared with $3.10 for the 2012 third quarter. For the 2013 first nine months, the inland operations consumed 32.7 million gallons of diesel fuel compared to 32.4 million gallons consumed during the 2012 first nine months. The average price per gallon of diesel fuel consumed during the 2013 first nine months was $3.20 compared with $3.20 for the 2012 first nine months. Fuel escalation and de-escalation clauses on term contracts are designed to rebate fuel costs when prices decline and recover additional fuel costs when fuel prices rise; however, there is generally a 30 to 90 day delay before the contracts are adjusted. Spot contracts do not have escalators for fuel.

Selling, general and administrative expenses for the 2013 third quarter and first nine months increased 14% and 7%, respectively, compared with the 2012 third quarter and first nine months, reflecting the acquisitions of Allied and Penn, and a 2013 first quarter severance charge of $370,000 associated with the integration of Penn's administrative functions into the Company. The 2012 first nine months included a $2,920,000 severance charge associated with the integration of Kirby Offshore Marine’s administrative functions into the Company.

Depreciation and amortization for the 2013 third quarter and first nine months increased 18% and 16%, respectively, compared with the 2012 third quarter and first nine months. The increases were primarily attributable to increased capital expenditures, including new inland tank barges and towboats, and the acquisitions of Allied and Penn.

Marine Transportation Operating Income and Operating Margins

Marine transportation operating income for the 2013 third quarter and first nine months increased 39% and 35%, respectively, compared with the 2012 third quarter and first nine months. The operating margin was 26.1% for the 2013 third quarter compared with 23.4% for the 2012 third quarter. The operating margin for the 2013 first nine months was 23.5% compared with 21.6% for the 2012 first nine months. The higher operating income and operating margin was a reflection of continued high inland utilization, leading to higher inland term and spot contract rates negotiated throughout 2012 and the 2013 first nine months, as well as higher coastal utilization, including the Allied and Penn equipment, that led to higher coastal term and spot contract rates negotiated in the 2012 fourth quarter and the 2013 first nine months.

Diesel Engine Services

The Company, through its diesel engine services segment, sells genuine replacement parts, provides service mechanics to overhaul and repair medium-speed and high-speed diesel engines, transmissions, reduction gears, pumps and compression products, maintains facilities to rebuild component parts or entire medium-speed and high-speed diesel engines, transmissions and entire reduction gears, and manufactures and remanufactures oilfield service equipment, including pressure pumping units. The Company primarily services the marine, power generation and land-based oil and gas operator and producer markets.

The following table sets forth the Company’s diesel engine services segment’s revenues, costs and expenses, operating income and operating margins for the three months and nine months ended September 30, 2013 compared with the three months and nine months ended September 30, 2012 (dollars in thousands):
29

 
 
Three months ended
September 30,
   
Nine months ended
September 30,
 
 
 
2013
   
2012
   
%
Change
   
2013
   
2012
   
%
Change
 
Diesel engine services revenues
 
$
114,924
   
$
171,553
     
(33
)%
 
$
395,231
   
$
572,184
     
(31
)%
 
                                               
Costs and expenses:
                                               
Costs of sales and operating expenses
   
91,303
     
136,825
     
(33
)
   
311,603
     
453,227
     
(31
)
Selling, general and administrative
   
11,470
     
16,880
     
(32
)
   
35,904
     
55,134
     
(35
)
Taxes, other than on income
   
352
     
453
     
(22
)
   
1,361
     
1,365
   
 
Depreciation and amortization
   
2,722
     
2,792
     
(3
)
   
8,332
     
9,183
     
(9
)
 
   
105,847
     
156,950
     
(33
)
   
357,200
     
518,909
     
(31
)
Operating income
 
$
9,077
   
$
14,603
     
(38
)%
 
$
38,031
   
$
53,275
     
(29
)%
Operating margins
   
7.9
%
   
8.5
%
           
9.6
%
   
9.3
%
       

Diesel Engine Services Revenues

The following table shows the markets serviced by the Company’s diesel engine services segment, the revenue distribution for the 2013 third quarter and first nine months and the customers for each market:

Markets Serviced
 
2013 Third Quarter Revenue Distribution
   
2013 Nine Months Revenue Distribution
 
Customers
Land-Based
   
59%
 
   
63%
 
Land-Based Oilfield Services, Oil and Gas Operators and Producers, Compression, On-Highway Transportation
 
               
    
Marine
   
31%
 
   
28%
 
Inland River Carriers – Dry and Liquid, Offshore Towing – Dry and Liquid, Offshore Oilfield Services – Drilling Rigs & Supply Boats, Harbor Towing, Dredging, Great Lake Ore Carriers
 
               
    
Power Generation
   
10%
 
   
9%
 
Standby Power Generation, Pumping Stations

Diesel engine services revenues for the 2013 third quarter and first nine months decreased 33% and 31%, respectively, when compared with the 2012 third quarter and first nine months. The decrease for both 2013 periods was primarily attributable to a continuation of lower demand for the manufacturing of oil service equipment and the sale and service of land-based diesel engines, transmissions and parts.  The market for the remanufacturing of older pressure pumping units 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 Midwest and Gulf Coast inland customers, and East Coast and Gulf Coast offshore customers.   The power generation market, consisting of major engine-generator set upgrades and parts sales for both domestic and international power generation customers, was stable.
30

Diesel Engine Services Costs and Expenses

Costs and expenses for the 2013 third quarter and first nine months decreased 33% and 31%, respectively, compared with the 2012 third quarter and first nine months. The comparable decreases in cost of sales and operating expenses for both 2013 periods were primarily attributable to the lower demand for the land-based market as described above. Selling, general and administrative expenses for the 2013 third quarter and first nine months decreased 32% and 35%, respectively, when compared with the corresponding 2012 periods. The 2013 third quarter included a $7,900,000 before taxes credit and the 2013 first nine months a $18,300,000 before taxes credit resulting from a 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 for the 2012 third quarter and a $3,900,000 before taxes charge for the 2012 first nine months, resulting from a net increase in the fair value of the contingent earnout liability.  The 2013 third quarter also included a reduction in force charge in the marine high-speed sector, as well as higher warranty reserves and certain employee related costs in the land-based sector related to personnel changes.

Diesel Engine Services Operating Income and Operating Margins

Diesel engine services operating income for the 2013 third quarter decreased 38% compared with the 2012 third quarter. For the 2013 first nine months, diesel engine services operating income decreased 29% compared with the 2012 first nine months. The decreases primarily reflected the significant reduction in the number of pressure pumping units manufactured and the decline in the sale and service of land-based diesel engines, transmissions and parts during the 2013 third quarter and first nine months compared with the 2012 corresponding periods. In addition, the 2013 third quarter and first nine months operating income included the $7,900,000 and $18,300,000, respectively, earnout credit noted above.

The operating margin for the 2013 third quarter was 7.9% compared with 8.5% for the 2012 third quarter and 9.6% for the 2013 first nine months compared with 9.3% for the 2012 first nine months. The 2013 third quarter and first nine months operating margin primarily reflected the weaker land-based oil services market but benefited from the $7,900,000 and $18,300,000, respectively, earnout credit noted above.

General Corporate Expenses

General corporate expenses for the 2013 third quarter were $4,610,000, a 27% increase compared with $3,621,000 for the third quarter of 2012. For the first nine months of 2013, general corporate expenses were $11,784,000, a 20% increase compared with $9,796,000 for the first nine months of 2012. The increases were primarily due to higher employee incentive compensation accruals, employee recruiting costs, and additional corporate personnel and related costs to support the Allied and Penn acquisitions.

Gain on Disposition of Assets

The Company reported a net gain on disposition of assets of $223,000 for the 2013 third quarter compared with a net loss of $40,000 for the 2012 third quarter. For the 2013 first nine months, the Company reported a net gain on disposition of assets of $728,000 compared with a net gain of $1,000 for the first nine months of 2012. The net gains and losses were predominantly from the sale or retirement of marine equipment and the sale of a diesel engine services facility during the 2013 second quarter.

Other Income (Expense)

The following table sets forth other income, noncontrolling interests and interest expense 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):

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2013
   
2012
 
%
Change
   
2013
   
2012
   
%
Change
 
Other income (expense)
 
$
60
   
$
(56
)
%
 
$
236
   
$
123
     
92
%
Noncontrolling interests
 
$
(573
)
 
$
(676
)
   
(15
)%
 
$
(2,246
)
 
$
(2,495
)
   
(10
)%
Interest expense
 
$
(6,694
)
 
$
(6,056
)
   
11
%
 
$
(21,901
)
 
$
(17,797
)
   
23
%

31

Interest Expense

Interest expense for the 2013 third quarter and first nine months increased 11% and 23%, respectively, compared with the 2012 third quarter and first nine months. The increase for both periods was primarily the result of borrowings under the revolving credit facility to finance the November 2012 Allied acquisition, as well as the new senior notes to finance the December 2012 Penn acquisition. During the 2013 and 2012 third quarters, the average debt and average interest rate, including the effect of interest rate swaps for the 2012 third quarter, were $947,919,000 and 2.8%, and $783,403,000 and 3.1%, respectively. For the first nine months of 2013 and 2012, the average debt and average interest rate, including the effect of interest rate swaps up through February 28, 2013, the date of the expiration of the swaps, were $1,036,587,000 and 2.8%, and $778,668,000 and 3.1%, respectively.

Financial Condition, Capital Resources and Liquidity

Balance Sheet

Total assets as of September 30, 2013 were $3,661,312,000 compared with $3,653,128,000 as of December 31, 2012. The following table sets forth the significant components of the balance sheet as of September 30, 2013 compared with December 31, 2012 (dollars in thousands):

 
 
September 30,
2013
   
December 31,
2012
   
%
Change
 
Assets:
 
   
   
 
Current assets
 
$
535,183
   
$
596,256
     
(10
)%
Property and equipment, net
   
2,367,048
     
2,315,165
     
2
 
Goodwill, net
   
591,362
     
596,030
     
(1
)
Other assets
   
167,719
     
145,677
     
15
 
 
 
$
3,661,312
   
$
3,653,128
   
%
Liabilities and stockholders’ equity:
                       
Current liabilities
 
$
325,251
   
$
355,020
     
(8
)%
Long-term debt – less current portion
   
860,930
     
1,070,110
     
(20
)
Deferred income taxes
   
485,018
     
426,096
     
14
 
Other long-term liabilities
   
77,858
     
94,848
     
(18
)
Total equity
   
1,912,255
     
1,707,054
     
12
 
 
 
$
3,661,312
   
$
3,653,128
   
%

Current assets as of September 30, 2013 decreased 10% compared with December 31, 2012. Trade accounts receivable decreased 2%, primarily a reflection of better collection efforts.  Other accounts receivable decreased 25%, primarily a reflection of an overpayment of federal income taxes as of December 31, 2012.  Inventory in the diesel engine services segment decreased 22%, primarily due to a reduction in the number of engines and transmissions on hand at the Company’s land-based diesel engine service facilities that were purchased in 2012 for specific customers and sold in 2013, and the sale of pressure pumping units held on hand.

Property and equipment, net of accumulated depreciation, at September 30, 2013 increased 2% compared with December 31, 2012. The increase reflected $207,047,000 of capital expenditures for the 2013 first nine months, more fully described under Capital Expenditures below, less $115,858,000 of depreciation expense for the 2013 first nine months and $29,584,000 of property disposals during the 2013 first nine months.

Other assets at September 30, 2013 increased 15% compared with December 31, 2012 primarily due to deferred major maintenance dry-dock expenditures on ocean-going vessels during the 2013 first nine months.

Current liabilities as of September 30, 2013 decreased 8% compared with December 31, 2012.  At September 30, 2013, none of the long-term debt was classified as current due to prepayments of the term loan during the 2013 first nine months, compared with $65,000,000 classified as current portion of long-term debt at December 31, 2012.  Income taxes payable increased 381% due to the timing of federal income tax payments.  Accrued liabilities increased 7% primarily from higher property tax accruals, marine insurance claim reserves and warranty reserves, partially offset by payments during the 2013 first nine months of employee incentive compensation accrued during 2012. Deferred revenues increased 113%, primarily reflecting increased advanced billings for coastal transportation customers.
32

Long-term debt, less current portion, as of September 30, 2013 decreased 20% compared with December 31, 2012, reflecting payments on the revolving credit facility and term loan during the 2013 first nine months.

Deferred income taxes as of September 30, 2013 increased 14% compared with December 31, 2012. The increase was primarily due to the 2013 first nine months deferred tax provision of $68,523,000. The deferred tax provision was primarily due to bonus tax depreciation on qualifying expenditures due to the American Taxpayers Relief Act of 2012 that provides 50% bonus tax depreciation for capital investments placed in service through December 31, 2013.