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



Form 10-Q



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

For the quarterly period ended September 30, 2018

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

Commission File Number 1-7615



KIRBY CORPORATION
(Exact name of registrant as specified in its charter)



Nevada
 
74-1884980
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)

55 Waugh Drive, Suite 1000
   
Houston, TX
 
77007
(Address of principal executive offices)
 
(Zip Code)

(713) 435-1000
(Registrant’s telephone number, including area code)

No Change
(Former name, former address and former fiscal year, if changed since last report)



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant 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 ☒ No

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

Large accelerated filer
 
Accelerated filer
Non-accelerated filer

Smaller reporting company
     
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

The number of shares outstanding of the registrant’s Common Stock, $.10 par value per share, on November 2, 2018 was 59,866,000.



PART I – FINANCIAL INFORMATION

Item 1.
Financial Statements

KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES

CONDENSED BALANCE SHEETS
(Unaudited)

ASSETS

   
September 30,
2018
   
December 31,
2017
 
   
($ in thousands)
 
Current assets:
           
Cash and cash equivalents
 
$
3,617
   
$
20,102
 
Accounts receivable:
               
Trade – less allowance for doubtful accounts
   
400,870
     
452,222
 
Other
   
111,221
     
106,231
 
Inventories – net
   
453,173
     
315,729
 
Prepaid expenses and other current assets
   
85,639
     
62,798
 
                 
Total current assets
   
1,054,520
     
957,082
 
                 
Property and equipment
   
5,056,335
     
4,360,882
 
Less accumulated depreciation
   
(1,494,835
)
   
(1,401,617
)
Property and equipment – net
   
3,561,500
     
2,959,265
 
                 
Goodwill
   
960,006
     
935,135
 
Other intangibles – net
   
228,958
     
232,808
 
Other assets
   
49,348
     
43,137
 
                 
Total assets
 
$
5,854,332
   
$
5,127,427
 

See accompanying notes to condensed financial statements.

1

KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES

CONDENSED BALANCE SHEETS
(Unaudited)

LIABILITIES AND STOCKHOLDERS’ EQUITY

   
September 30,
2018
   
December 31,
2017
 
   
($ in thousands)
 
Current liabilities:
           
Bank notes payable
 
$
508
   
$
3
 
Income taxes payable
   
3,765
     
191
 
Accounts payable
   
250,681
     
222,005
 
Accrued liabilities
   
237,129
     
209,760
 
Deferred revenues
   
75,843
     
48,347
 
                 
Total current liabilities
   
567,926
     
480,306
 
                 
Long-term debt – less current portion
   
1,399,423
     
992,403
 
Deferred income taxes
   
544,882
     
468,451
 
Other long-term liabilities
   
108,953
     
72,044
 
                 
Total long-term liabilities
   
2,053,258
     
1,532,898
 
                 
Contingencies and commitments
   
     
 
                 
Equity:
               
Kirby stockholders’ equity:
               
Common stock, $.10 par value per share. Authorized 120,000,000 shares, issued 65,472,000 shares
   
6,547
     
6,547
 
Additional paid-in capital
   
820,805
     
802,961
 
Accumulated other comprehensive income – net
   
(39,544
)
   
(32,405
)
Retained earnings
   
2,748,029
     
2,646,937
 
Treasury stock – at cost, 5,595,000 shares at September 30, 2018 and 5,783,000 at December 31, 2017
   
(305,926
)
   
(313,220
)
Total Kirby stockholders’ equity
   
3,229,911
     
3,110,820
 
Noncontrolling interests
   
3,237
     
3,403
 
Total equity
   
3,233,148
     
3,114,223
 
                 
Total liabilities and equity
 
$
5,854,332
   
$
5,127,427
 

See accompanying notes to condensed financial statements.

2

KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES

CONDENSED STATEMENTS OF EARNINGS
(Unaudited)

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2018
   
2017
   
2018
   
2017
 
   
($ in thousands, except per share amounts)
 
Revenues:
                       
Marine transportation
 
$
382,040
   
$
318,810
   
$
1,100,606
   
$
993,727
 
Distribution and services
   
322,805
     
222,464
     
1,148,598
     
512,580
 
Total revenues
   
704,845
     
541,274
     
2,249,204
     
1,506,307
 
                                 
Costs and expenses:
                               
Costs of sales and operating expenses
   
498,421
     
378,750
     
1,640,366
     
1,048,299
 
Selling, general and administrative
   
70,032
     
51,712
     
239,416
     
144,404
 
Taxes, other than on income
   
10,523
     
6,518
     
29,610
     
19,511
 
Depreciation and amortization
   
57,930
     
51,206
     
167,640
     
147,669
 
Loss (gain) on disposition of assets
   
(18
)
   
159
     
(2,358
)
   
199
 
Total costs and expenses
   
636,888
     
488,345
     
2,074,674
     
1,360,082
 
                                 
Operating income
   
67,957
     
52,929
     
174,530
     
146,225
 
Other income (expense)
   
1,454
     
320
     
4,586
     
(41
)
Interest expense
   
(12,345
)
   
(5,388
)
   
(34,665
)
   
(14,310
)
                                 
Earnings before taxes on income
   
57,066
     
47,861
     
144,451
     
131,874
 
Provision for taxes on income
   
(15,116
)
   
(19,072
)
   
(41,042
)
   
(49,468
)
                                 
Net earnings
   
41,950
     
28,789
     
103,409
     
82,406
 
Less: Net earnings attributable to noncontrolling interests
   
(134
)
   
(182
)
   
(520
)
   
(538
)
                                 
Net earnings attributable to Kirby
 
$
41,816
   
$
28,607
   
$
102,889
   
$
81,868
 
                                 
Net earnings per share attributable to Kirby common stockholders:
                               
Basic
 
$
0.70
   
$
0.52
   
$
1.72
   
$
1.51
 
Diluted
 
$
0.70
   
$
0.52
   
$
1.72
   
$
1.50
 

See accompanying notes to condensed financial statements.

3

KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES

CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2018
   
2017
   
2018
   
2017
 
   
($ in thousands)
 
       
Net earnings
 
$
41,950
   
$
28,789
   
$
103,409
   
$
82,406
 
Other comprehensive income (loss), net of taxes:
                               
Pension and postretirement benefits
   
438
     
507
     
855
     
15,393
 
Foreign currency translation adjustments
   
(60
)
   
(164
)
   
(69
)
   
(164
)
Reclassification to retained earnings of stranded tax effects from tax reform
   
     
     
(7,925
)
   
 
Total other comprehensive income (loss), net of taxes
   
378
     
343
     
(7,139
)
   
15,229
 
                                 
Total comprehensive income, net of taxes
   
42,328
     
29,132
     
96,270
     
97,635
 
Net earnings attributable to noncontrolling interests
   
(134
)
   
(182
)
   
(520
)
   
(538
)
                                 
Comprehensive income attributable to Kirby
 
$
42,194
   
$
28,950
   
$
95,750
   
$
97,097
 

See accompanying notes to condensed financial statements.

4

KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES

CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)

   
Nine months ended
September 30,
 
   
2018
   
2017
 
   
($ in thousands)
 
Cash flows from operating activities:
           
Net earnings
 
$
103,409
   
$
82,406
 
Adjustments to reconcile net earnings to net cash provided by operations:
               
Depreciation and amortization
   
167,640
     
147,669
 
Provision for deferred income taxes
   
36,838
     
32,783
 
Amortization of unearned share-based compensation
   
16,649
     
8,991
 
Amortization of major maintenance costs
   
15,600
     
15,232
 
Amortization of debt issuance costs
   
898
     
786
 
Other
   
(2,023
)
   
180
 
Decrease in cash flows resulting from changes in operating assets and liabilities, net
   
(66,707
)
   
(28,592
)
Net cash provided by operating activities
   
272,304
     
259,455
 
                 
Cash flows from investing activities:
               
Capital expenditures
   
(231,752
)
   
(133,437
)
Acquisitions of businesses and marine equipment, net of cash acquired
   
(499,227
)
   
(451,219
)
Proceeds from disposition of assets
   
27,806
     
29,743
 
Net cash used in investing activities
   
(703,173
)
   
(554,913
)
                 
Cash flows from financing activities:
               
Borrowings (payments) on bank credit facilities
   
(88,392
)
   
298,424
 
Borrowings (payments) on long-term debt
   
499,295
     
(1,065
)
Payments of debt issue costs
   
(4,276
)
   
(1,243
)
Proceeds from exercise of stock options
   
13,264
     
2,076
 
Payments related to tax withholding for share-based compensation
   
(4,821
)
   
(2,899
)
Other
   
(686
)
   
(643
)
Net cash provided by financing activities
   
414,384
     
294,650
 
Decrease in cash and cash equivalents
   
(16,485
)
   
(808
)
                 
Cash and cash equivalents, beginning of year
   
20,102
     
5,634
 
Cash and cash equivalents, end of period
 
$
3,617
   
$
4,826
 
                 
Supplemental disclosures of cash flow information:
               
Cash paid during the period:
               
Interest paid
 
$
37,175
   
$
18,390
 
Income taxes
 
$
495
   
$
19,388
 
Capital expenditures included in accounts payable
 
$
(5,554
)
 
$
8,917
 
Non-cash investing activity:
               
Stock issued in acquisition
 
$
   
$
366,554
 
Cash acquired in acquisition
 
$
2,313
   
$
98
 
Debt assumed in acquisition
 
$
   
$
13,724
 

See accompanying notes to condensed financial statements.

5

KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES

NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

(1)
BASIS FOR PREPARATION OF THE CONDENSED FINANCIAL STATEMENTS

The condensed financial statements included herein have been prepared by Kirby Corporation (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, 2017.

(2)
ACCOUNTING STANDARDS ADOPTIONS

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-14, “Compensation – Retirement Benefits - Defined Benefit Plans – General (Subtopic 715-20):  Disclosure Framework – Changes to the Disclosure Requirements for Defined Benefit Plans” which amends the annual disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by removing certain requirements, providing clarification on existing requirements and adding new requirements including adding an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted.  The amendments in this update are required to be applied on a retrospective basis to all periods presented. The Company is currently evaluating this guidance to determine the impact on its disclosures.

In February 2018, the FASB issued ASU 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the recent federal tax reform legislation. ASU 2018-02 eliminates the stranded tax effects resulting from the recent federal tax reform legislation and will improve the usefulness of information reported to financial statement users. The amendments in ASU 2018-02 will be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the recent federal tax reform legislation is recognized. ASU 2018-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in any interim period, for which financial statements have not yet been made available for issuance. The Company elected to early adopt ASU 2018-02 in the 2018 first quarter, which resulted in the reclassification of $7,925,000 from accumulated other comprehensive income (loss) to retained earnings due to the change in the federal corporate tax rate.

In March 2017, the FASB issued ASU 2017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (“ASU 2017-07”) which requires employers to include only the service cost component of net periodic pension cost and net periodic postretirement benefit cost in operating expenses. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. The standard allows only the service cost component to be eligible for capitalization when applicable. ASU 2017-07 is effective for annual and interim periods beginning after December 15, 2017 with early adoption permitted. This standard shall be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively for the capitalization of the service cost benefit in assets. The Company adopted ASU 2017-07 on January 1, 2018 and applied the standard retrospectively. The other components of net benefit cost are shown in Note 13, Retirement Plans. As a result of the adoption, for the three months and nine months ended September 30, 2017, the Company reclassified income of $433,000 and $189,000, respectively, from operating expense into non-operating expense in the condensed statement of earnings.

6

In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”) which simplifies the subsequent measurement of goodwill by eliminating Step 2 in the goodwill impairment test that required an entity to perform procedures to determine the fair value of its assets and liabilities at the testing date. An entity instead will perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying value and record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU 2017-04 will be applied prospectively and is effective for annual and interim goodwill impairment tests conducted in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment testing dates after January 1, 2017. The Company is currently evaluating the impact, if any, that the adoption of this standard will have on its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”) to create consistency in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted. The Company adopted ASU 2016-15 on January 1, 2018 and the adoption of the standard did not have a material impact on the consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”) to increase transparency and comparability among organizations by requiring recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted.    The method of adoption may be a modified retrospective approach or an approach that utilizes recognizing a cumulative-effect adjustment to the opening balance of retained earnings as of the date of adoption.  The Company has formed a project team to evaluate the impact that the adoption of this standard will have on its consolidated financial statements and disclosures. The project team has completed training on the new standard and has started lease review and documentation, including review of practical expedients available.  The project team has also selected a software package and continued to load the lease population into the system.  The Company has not selected a method of adoption and has not yet determined the effect of ASU 2016-02 on its ongoing financial reporting.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (ASC Topic 606)” (“ASU 2014-09” or “ASC 606”). ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 replaces most existing revenue recognition guidance in United States Generally Accepted Accounting Principles and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. ASU 2014-09 permits the use of either the retrospective, modified retrospective or prospective with a cumulative catch-up approach. The Company adopted ASU 2014-09 on January 1, 2018 under the modified retrospective approach with a cumulative adjustment that decreased the opening balance of retained earnings by $9,722,000. Prior period amounts were not adjusted and the prior period amounts continue to be reported under the accounting standards in effect for those periods. The cumulative adjustment primarily relates to recognition of revenue on certain contract manufacturing activities, primarily construction of new pressure pumping units in the Company’s distribution and services segment. The Company previously recognized revenue on manufacturing and assembly projects on a percentage of completion method using measurements of progress towards completion appropriate for the work performed. Upon the adoption of ASU 2014-09, the Company recognizes the revenues on contract manufacturing activities upon shipment and transfer of control versus the percentage of completion method.

7

The following tables summarize the financial statement line items within the Company’s condensed consolidated financial statements impacted by ASU 2014-09 for the three months and nine months ended September 30, 2018 (in thousands):

   
Three months ended September 30, 2018
 
   
As Reported
   
Balances
without
Adoption of
ASC 606
   
Effect of
Change
 
                   
Statements of earnings:
                 
Distribution and services revenues
 
$
322,805
   
$
349,805
   
$
(27,000
)
Costs of sales and operating expenses
 
$
498,421
   
$
520,721
   
$
(22,300
)
Operating income
 
$
67,957
   
$
72,657
   
$
(4,700
)
Earnings before taxes on income
 
$
57,066
   
$
61,766
   
$
(4,700
)
Provision for taxes on income
 
$
(15,116
)
 
$
(16,282
)
 
$
1,166
 
Net earnings attributable to Kirby
 
$
41,816
   
$
45,350
   
$
(3,534
)
                         
Statements of comprehensive income:
                       
Net earnings
 
$
41,950
   
$
45,484
   
$
(3,534
)
Comprehensive income attributable to Kirby
 
$
42,194
   
$
45,728
   
$
(3,534
)

   
Nine months ended September 30, 2018
 
   
As Reported
   
Balances
without
Adoption of
ASC 606
   
Effect of
Change
 
                   
Statements of earnings:
                 
Distribution and services revenues
 
$
1,148,598
   
$
1,154,398
   
$
(5,800
)
Costs of sales and operating expenses
 
$
1,640,366
   
$
1,645,166
   
$
(4,800
)
Operating income
 
$
174,530
   
$
175,530
   
$
(1,000
)
Earnings before taxes on income
 
$
144,451
   
$
145,451
   
$
(1,000
)
Provision for taxes on income
 
$
(41,042
)
 
$
(41,295
)
 
$
253
 
Net earnings attributable to Kirby
 
$
102,889
   
$
103,636
   
$
(747
)
                         
Statements of comprehensive income:
                       
Net earnings
 
$
103,409
   
$
104,156
   
$
(747
)
Comprehensive income attributable to Kirby
 
$
95,750
   
$
96,497
   
$
(747
)
                         
Statements of cash flows:
                       
Net earnings
 
$
103,409
   
$
104,156
   
$
(747
)
Provision for deferred income taxes
 
$
36,838
   
$
36,585
   
$
253
 
Decrease in cash flows resulting from changes in operating assets and liabilities, net
 
$
(66,707
)
 
$
(67,201
)
 
$
494
 

8

The following table summarizes the balance sheet line items within the Company’s condensed consolidated financial statements as of September 30, 2018 impacted by ASU 2014-09 (in thousands):

   
September 30, 2018
 
   
As Reported
   
Balances
without
Adoption of
ASC 606
   
Effect of
Change
 
Balance sheets:
                 
Trade receivables
 
$
400,870
   
$
466,599
   
$
(65,729
)
Inventories – net
 
$
453,173
   
$
395,773
   
$
57,400
 
Total assets
 
$
5,854,332
   
$
5,862,661
   
$
(8,329
)
Deferred revenues
 
$
75,843
   
$
70,372
   
$
5,471
 
Deferred income taxes
 
$
544,882
   
$
548,235
   
$
(3,353
)
Retained earnings
 
$
2,748,029
   
$
2,758,476
   
$
(10,447
)
Total liabilities and equity
 
$
5,854,332
   
$
5,862,661
   
$
(8,329
)

(3)
REVENUES

The following table sets forth the Company’s revenues by major source for the three months and nine months ended September 30, 2018 and 2017 (in thousands):

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2018
   
2017
   
2018
   
2017
 
Marine transportation segment:
                       
Inland transportation
 
$
288,573
   
$
220,177
   
$
827,848
   
$
681,879
 
Coastal transportation
   
93,467
     
98,633
     
272,758
     
311,848
 
   
$
382,040
   
$
318,810
   
$
1,100,606
   
$
993,727
 
Distribution and services segment:
                               
Oil and gas
 
$
201,475
   
$
159,492
   
$
780,825
   
$
350,295
 
Commercial and industrial
   
121,330
     
62,972
     
367,773
     
162,285
 
   
$
322,805
   
$
222,464
   
$
1,148,598
   
$
512,580
 

The Company’s revenue is measured based on consideration specified in its contracts with its customers. The Company recognizes revenue as it satisfies performance obligations in its contracts which occur as the Company delivers a service over time to its customers, or transfers control over a part or product to its customer.

Marine Transportation Revenues. The Company’s marine transportation segment utilizes contracts with its customers to transport cargo from a designated origin to a designated destination at a set rate or at a daily rate. The Company uses a voyage accounting method of revenue recognition for its marine transportation revenues which allocates voyage revenue based on the percent of the voyage completed during the period. The performance of the service is invoiced as the transaction occurs and payment is required depending on each specific customer’s credit terms.

Distribution and Services Revenues. Distribution products and services are generally sold based upon purchase orders or preferential service agreements with the customer that include fixed or determinable prices. Parts sales are recognized when control transfers to the customer, generally when title passes upon shipment to customers. Service revenue is recognized over time as the service is provided using measures of progress utilizing hours worked or costs incurred as a percentage of estimated hours or expected costs. Revenue from rental agreements is recognized on a straight-line basis over the rental period. The Company recognizes the revenues on contract manufacturing activities upon shipment and transfer of control to the customer. The transactions in the distribution and services segment are typically invoiced as parts are shipped or upon the completion of the service job. Contract manufacturing activities are generally invoiced upon shipment and the Company will often get deposits from its customers prior to starting work, or progress payments during the project depending on the credit worthiness of the customer and the size of the project.

9

Prior to the adoption of ASU 2014-09, distribution and services manufacturing and assembly projects revenue was reported on the percentage of completion method of accounting using measurements of progress towards completion appropriate for the work performed. Upon the adoption of ASU 2014-09 on January 1, 2018, the Company recognizes the revenues on contract manufacturing activities upon shipment and transfer of control versus the percentage of completion method.

Contract Assets and Liabilities. Contract liabilities represent advance consideration received from customers, and are recognized as revenue over time as the related performance obligation is satisfied. The amount of revenue recognized in the 2018 first nine months that was included in the opening contract liability balance was $39,492,000. The Company has recognized all contract liabilities within the deferred revenues financial statement caption on the balance sheet. The Company expects to recognize revenue of $35,836,000 in the 2018 fourth quarter and $40,007,000 in 2019 related to deferred revenue as of September 30, 2018. The Company did not have any contract assets at September 30, 2018 or December 31, 2017.

Performance Obligations. The Company applies the practical expedient in ASC 606-10-50-14(a) and does not disclose information about remaining performance obligations that have original expected durations of one year or less.

(4)
ACQUISITIONS

On May 10, 2018, the Company completed the purchase of Targa Resources Corp.’s (“Targa”) inland tank barge business from a subsidiary of Targa for $69,250,000 in cash. Targa’s inland tank barge fleet consisted of 16 pressure barges with a total capacity of 258,000 barrels, many of which were under multi-year contracts that the Company assumed from Targa. The 16 tank barges transport petrochemicals on the Mississippi River System and the Gulf Intracoastal Waterway. As a result of the acquisition, the Company recorded $16,116,000 of goodwill and $11,000,000 of intangibles with an average amortization period of 15 years. The Company expects all of the goodwill to be deductible for tax purposes.

On March 15, 2018, the Company purchased two inland pressure tank barges from a competitor for $10,400,000 in cash. The average age of the two tank barges was five years.

On February 14, 2018, the Company completed the acquisition of Higman Marine, Inc. and its affiliated companies (“Higman”) for $421,922,000 in cash, subject to certain post-closing adjustments. Higman’s fleet consisted of 163 inland tank barges, including two barges to be leased upon completion of their construction in 2018, with 4.8 million barrels of capacity, and 75 inland towboats, transporting petrochemicals, black oil, including crude oil and natural gas condensate, and refined petroleum products on the Mississippi River System and the Gulf Intracoastal Waterway. The average age of the inland tank barges was approximately seven years and the inland towboats had an average age of approximately eight years. Financing of the acquisition was through the issuance of $500,000,000 of 4.2% senior unsecured notes due March 1, 2028 (the “2028 Notes”). The 2028 Notes were issued on February 12, 2018 in preparation for closing of the acquisition.

The Company considers Higman to be a natural extension of the current marine transportation segment, expanding the capabilities of the Company’s inland based marine transportation business and lowering the average age of its inland tank barge and towboat fleet.

10

The fair values of the assets acquired and liabilities assumed recorded at the acquisition date were as follows (in thousands):

Assets:
     
Cash
 
$
2,313
 
Accounts receivable
   
27,527
 
Prepaid expenses and other current assets
   
5,323
 
Property and equipment
   
497,951
 
Goodwill
   
8,134
 
Other assets
   
31
 
Total assets
 
$
541,279
 

Liabilities:
     
Accounts payable
   
17,012
 
Accrued liabilities
   
14,127
 
Deferred income taxes
   
42,392
 
Other long-term liabilities
   
45,826
 
Total liabilities
 
$
119,357
 
Net assets acquired
 
$
421,922
 

The analysis of the Higman fair values is substantially complete but all fair values have not been finalized pending obtaining the information necessary to complete the analysis. As additional information becomes known concerning the assets acquired and liabilities assumed, the Company may make adjustments to the opening balance sheet of Higman up to a one year period following the acquisition date.

As a result of the acquisition, the Company recorded $8,134,000 of goodwill of which the majority will be deductible for tax purposes. The Company also incurred $11,100,000 of intangible liabilities related to unfavorable contracts with a weighted average amortization period of approximately 4.9 years. Acquisition related costs of $3,379,000, consisting primarily of legal, audit and other professional fees plus other expenses, were expensed as incurred to selling, general and administrative expense in the 2018 first nine months.

Pro forma results of the acquisitions made in the 2018 first nine months have not been presented as the pro forma revenues, earnings before taxes on income, net earnings and net earnings per share would not be materially different from the Company’s actual results.

(5)
INVENTORIES

The following table presents the details of inventories as of September 30, 2018 and December 31, 2017 (in thousands):

   
September 30,
2018
   
December 31,
2017
 
             
Finished goods
 
$
336,703
   
$
242,333
 
Work in process
   
116,470
     
73,396
 
   
$
453,173
   
$
315,729
 

(6)
FAIR VALUE MEASUREMENTS

The estimated fair value of total debt outstanding at September 30, 2018 and December 31, 2017 was $1,369,932,000 and $984,017,000, respectively, which differs from the carrying amounts of $1,399,931,000 and $992,406,000, 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.

11

Certain assets are measured at fair value on a nonrecurring basis. These assets are adjusted to fair value when there is evidence of impairment. During the 2017 fourth quarter, the Company reduced certain vessels to fair value due to its decision to put certain older out-of-service vessels up for sale in its marine transportation segment. The fair value of these vessels was $12,550,000 at December 31, 2017, and is presented in prepaid expenses and other current assets.

(7)
LONG-TERM DEBT

On February 12, 2018, the Company issued $500,000,000 of 4.2% senior unsecured notes due March 1, 2028 with U.S. Bank National Association, as trustee. Interest payments of $10,500,000 are due semi-annually on March 1 and September 1 of each year, with the exception of the first payment on September 1, 2018, which was $11,608,000. The Company received cash proceeds of $495,019,000, net of the original issue discount of $705,000 and debt issuance costs of $4,276,000. The 2028 Notes are unsecured and rank equally in right of payment with the Company’s other unsecured senior indebtedness. The 2028 Notes contain certain covenants on the part of the Company, including covenants relating to liens, sale-leasebacks, asset sales and mergers, among others. The 2028 Notes also specify certain events of default, upon the occurrence of which the maturity of the notes may be accelerated, including failure to pay principal and interest, violation of covenants or default on other indebtedness, among others. The Company used the proceeds from the issuance of the 2028 Notes to fund the acquisition of Higman. The remaining net proceeds of the sale of the 2028 Notes were used for the repayment of indebtedness under the Company’s bank credit facilities.

(8)
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, 2018 and 2017 were as follows (in thousands):

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2018
   
2017
   
2018
   
2017
 
Compensation cost
 
$
3,098
   
$
3,067
   
$
16,649
   
$
8,991
 
Income tax benefit
 
$
709
   
$
1,234
   
$
4,747
   
$
3,386
 

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 awards and performance awards. On February 19, 2018, the employee stock award plan was amended to also allow for the granting of restricted stock units (“RSUs”) to selected officers and other key employees. The amendment included a provision for the continued vesting of unvested stock options and RSUs for employees who meet certain years of service and age requirements at the time of their retirement. The vesting change resulted in shorter expense accrual periods on stock options and RSUs granted after February 19, 2018 to employees who are nearing retirement and meet the service and age requirements.

The exercise price for each option equals the fair market value per share of the Company’s common stock on the date of grant. Substantially all stock options outstanding under the plan have terms of seven years and vest ratably over three years. No performance awards payable in stock have been awarded under the plan. At September 30, 2018, 1,573,527 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.

12

The following is a summary of the stock option activity under the employee plan described above for the nine months ended September 30, 2018:

   
Outstanding Non-
Qualified or
Nonincentive Stock
Awards
   
Weighted Average
Exercise Price
 
Outstanding at December 31, 2017
   
654,655
   
$
66.45
 
Granted
   
115,797
   
$
75.50
 
Exercised
   
(283,886
)
 
$
67.71
 
Forfeited
   
(21,864
)
 
$
102.42
 
Outstanding at September 30, 2018
   
464,702
   
$
69.85
 

The following table summarizes information about the Company’s outstanding and exercisable stock options under the employee plan at September 30, 2018:

     
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
$51.23
     
90,975
     
4.3
   
$
51.23
       
57,438
   
$
51.23
    
$64.65 - $68.50
     
126,260
     
5.0
   
$
67.23
       
41,116
   
$
67.40
    
$70.65 - $75.50
     
207,156
     
4.7
   
$
74.56
       
91,359
   
$
73.36
    
$93.64 - $101.46
     
40,311
     
2.4
   
$
95.90
       
40,311
   
$
95.90
    
$51.23 - $101.46
     
464,702
     
4.5
   
$
69.85
 
$6,312,000
   
230,224
   
$
70.72
 
$3,204,000

The following is a summary of the restricted stock award activity under the employee plan described above for the nine months ended September 30, 2018:

   
Unvested
Restricted Stock
Award Shares
   
Weighted
Average Grant
Date Fair Value
Per Share
 
Nonvested balance at December 31, 2017
   
364,121
   
$
65.84
 
Vested
   
(144,240
)
 
$
72.66
 
Forfeited
   
(3,949
)
 
$
64.68
 
Nonvested balance at September 30, 2018
   
215,932
   
$
64.73
 

The following is a summary of RSU activity under the employee plan described above for the nine months ended September 30, 2018:

   
Unvested RSUs
   
Weighted
Average Grant
Date Fair Value
Per Unit
 
Nonvested balance at December 31, 2017
   
   
$
 
Granted
   
143,890
   
$
75.59
 
Forfeited
   
(2,105
)
 
$
75.50
 
Nonvested balance at September 30, 2018
   
141,785
   
$
75.59
 

The Company has a 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 automatic grants of restricted stock to nonemployee directors 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 restricted stock issued after each annual meeting of stockholders vests 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, 2018, 486,058 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.

13

The following is a summary of the stock option activity under the director plan described above for the nine months ended September 30, 2018:

   
Outstanding
Non-Qualified
or Nonincentive
Stock Options
   
Weighted
Average
Exercise Price
 
Outstanding at December 31, 2017
   
157,617
   
$
67.54
 
Granted
   
2,640
   
$
85.30
 
Exercised
   
(29,153
)
 
$
57.47
 
Outstanding at September 30, 2018
   
131,104
   
$
70.14
 

The following table summarizes information about the Company’s outstanding and exercisable stock options under the director plan at September 30, 2018:

     
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
$29.60
     
6,000
     
0.6
   
$
29.60
       
6,000
   
$
29.60
    
$41.24 – $56.45
     
31,276
     
2.2
   
$
50.61
       
31,276
   
$
50.61
    
$61.89 – $62.48
     
28,000
     
3.8
   
$
62.27
       
28,000
   
$
62.27
    
$70.65 – $99.52
     
65,828
     
5.4
   
$
86.45
       
64,508
   
$
86.48
    
$29.60 – $99.52
     
131,104
     
4.1
   
$
70.14
 
$2,114,000
   
129,784
   
$
69.98
 
$2,114,000

The following is a summary of the restricted stock award activity under the director plan described above for the nine months ended September 30, 2018:

   
Unvested
Restricted
Stock Award
Shares
   
Weighted
Average
Grant Date
Fair Value
Per Share
 
             
Nonvested balance at December 31, 2017
   
319
   
$
70.65
 
Granted
   
21,373
   
$
85.70
 
Vested
   
(847
)
 
$
79.78
 
Nonvested balance at September 30, 2018
   
20,845
   
$
85.71
 

The total intrinsic value of all stock options exercised under all of the Company’s plans was $6,709,000 and $1,585,000 for the nine months ended September 30, 2018 and 2017, respectively. The actual tax benefit realized for tax deductions from stock option exercises was $1,912,000 and $597,000 for the nine months ended September 30, 2018 and 2017, respectively.

The total intrinsic value of all the restricted stock vestings under all of the Company’s plans was $11,454,000 and $7,046,000 for the nine months ended September 30, 2018 and 2017, respectively. The actual tax benefit realized for tax deductions from restricted stock vestings was $3,264,000 and $2,654,000 for the nine months ended September 30, 2018 and 2017, respectively.

There were no RSU vestings for the nine months ended September 30, 2018.

14

As of September 30, 2018, there was $2,770,000 of unrecognized compensation cost related to nonvested stock options, $10,296,000 related to nonvested restricted stock awards and $6,227,000 related to nonvested RSUs. The stock options are expected to be recognized over a weighted average period of approximately 1.7 years, restricted stock awards over approximately 2.3 years and RSUs over approximately 4.1 years. The total fair value of options vested was $3,170,000 and $2,511,000 during the nine months ended September 30, 2018 and 2017, respectively. The fair value of the restricted stock vested was $11,454,000 and $7,046,000 for the nine months ended September 30, 2018 and 2017, respectively.

The weighted average per share fair value of stock options granted during the nine months ended September 30, 2018 and 2017 was $23.53 and $20.72, respectively. The fair value of the stock options granted during the nine months ended September 30, 2018 and 2017 was $2,787,000 and $2,616,000, 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, 2018 and 2017 were as follows:

   
Nine months ended
September 30,
 
   
2018
   
2017
 
Dividend yield
 
None
   
None
 
Average risk-free interest rate
   
2.7
%
   
2.0
%
Stock price volatility
   
27
%
   
27
%
Estimated option term
 
Six years
   
Six years
 

(9)
OTHER COMPREHENSIVE INCOME

The Company’s changes in other comprehensive income for the three months and nine months ended September 30, 2018 and 2017 were as follows (in thousands):

   
Three months ended September 30,
 
   
2018
   
2017
 
   
Gross
Amount
   
Income Tax
(Provision)
Benefit
   
Net
Amount
   
Gross
Amount
   
Income Tax
(Provision)
Benefit
   
Net
Amount
 
Pension and postretirement benefits (a):
                                   
Amortization of net actuarial loss
 
$
580
   
$
(142
)
 
$
438
   
$
822
   
$
(315
)
 
$
507
 
Foreign currency translation
   
(60
)
   
     
(60
)
   
(164
)
   
     
(164
)
Total
 
$
520
   
$
(142
)
 
$
378
   
$
658
   
$
(315
)
 
$
343
 

   
Nine months ended September 30,
 
   
2018
   
2017
 
   
Gross
Amount
   
Income Tax
(Provision)
Benefit
   
Net Amount
   
Gross
Amount
   
Income Tax
(Provision)
Benefit
   
Net
Amount
 
Pension and postretirement benefits (a):
                                   
Amortization of net actuarial loss
 
$
1,739
   
$
(423
)
 
$
1,316
   
$
2,939
   
$
(1,125
)
 
$
1,814
 
Actuarial gains (losses)
   
(609
)
   
148
     
(461
)
   
22,014
     
(8,435
)
   
13,579
 
Adoption of ASU 2018-02 – reclassification to retained earnings
   
     
(7,925
)
   
(7,925
)
   
     
     
 
Foreign currency translation
   
(69
)
   
     
(69
)
   
(164
)
   
     
(164
)
Total
 
$
1,061
   
$
(8,200
)
 
$
(7,139
)
 
$
24,789
   
$
(9,560
)
 
$
15,229
 


(a)
Actuarial gains/(losses) are amortized into other income (expense). (See Note 13 – Retirement Plans)

15

(10)
SEGMENT DATA

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

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

Distribution and Services — Provides after-market services and parts for engines, transmissions, reduction gears and related equipment used in oilfield service, marine, power generation, mining, on-highway, and other industrial applications. The Company also rents equipment including generators, fork lifts, pumps and compressors for use in a variety of industrial markets, and manufactures and remanufactures oilfield service equipment, including pressure pumping units, for the oilfield service and oil and gas operator and producer 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, and before income taxes, interest, gains or losses on disposition of assets, other nonoperating income, noncontrolling interests, accounting changes, and nonrecurring items. Intersegment revenues, based on market-based pricing, of the distribution and services segment from the marine transportation segment of $5,837,000 and $21,757,000 for the three months and nine months ended September 30, 2018, respectively, and $4,967,000 and $15,342,000 for the three months and nine months ended September 30, 2017, respectively, have been eliminated from the tables below. The related intersegment profit of $584,000 and $2,176,000 for the three months and nine months ending September 30, 2018, respectively, and $497,000 and $1,534,000 for the three months and nine months ending September 30, 2017, respectively, have also been eliminated from the tables below.

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, 2018 and 2017 and total assets as of September 30, 2018 and December 31, 2017 (in thousands):

   
Three months ended September 30,
   
Nine months ended September 30,
 
   
2018
   
2017
   
2018
   
2017
 
Revenues:
                       
Marine transportation
 
$
382,040
   
$
318,810
   
$
1,100,606
   
$
993,727
 
Distribution and services
   
322,805
     
222,464
     
1,148,598
     
512,580
 
   
$
704,845
   
$
541,274
   
$
2,249,204
   
$
1,506,307
 
Segment profit (loss):
                               
Marine transportation
 
$
48,517
   
$
35,649
   
$
102,925
   
$
106,992
 
Distribution and services
   
23,914
     
21,947
     
101,069
     
51,983
 
Other
   
(15,365
)
   
(9,735
)
   
(59,543
)
   
(27,101
)
   
$
57,066
   
$
47,861
   
$
144,451
   
$
131,874
 

   
September 30,
2018
   
December 31,
2017
 
Total assets:
           
Marine transportation
 
$
4,191,514
   
$
3,485,099
 
Distribution and services
   
1,601,407
     
1,567,085
 
Other
   
61,411
     
75,243
 
   
$
5,854,332
   
$
5,127,427
 

16

The following table presents the details of “Other” segment loss for the three months and nine months ended September 30, 2018 and 2017 (in thousands):

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2018
   
2017
   
2018
   
2017
 
General corporate expenses
 
$
(4,492
)
 
$
(4,508
)
 
$
(31,822
)
 
$
(12,551
)
Gain (loss) on disposition of assets
   
18
     
(159
)
   
2,358
     
(199
)
Interest expense
   
(12,345
)
   
(5,388
)
   
(34,665
)
   
(14,310
)
Other income (expense)
   
1,454
     
320
     
4,586
     
(41
)
   
$
(15,365
)
 
$
(9,735
)
 
$
(59,543
)
 
$
(27,101
)

General corporate expenses for the nine months ended September 30, 2018 include $18,057,000 of one-time non-deductible expense related to the retirement of the Company’s executive Chairman of the Board of Directors, effective April 30, 2018. He will continue to serve as Chairman of the Board in a non-executive role.

The following table presents the details of “Other” total assets as of September 30, 2018 and December 31, 2017 (in thousands):

   
September 30,
2018
   
December 31,
2017
 
General corporate assets
 
$
59,229
   
$
73,353
 
Investment in affiliates
   
2,182
     
1,890
 
   
$
61,411
   
$
75,243
 

(11)
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, 2018 and 2017 were as follows (in thousands):

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2018
   
2017
   
2018
   
2017
 
Earnings (loss) before taxes on income:
                       
United States
 
$
57,980
   
$
47,861
   
$
147,506
   
$
131,874
 
Foreign
   
(914
)
   
     
(3,055
)
   
 
   
$
57,066
   
$
47,861
   
$
144,451
   
$
131,874
 
Provision for taxes on income:
                               
Federal:
                               
Current
 
$
   
$
3,617
   
$
   
$
13,605
 
Deferred
   
13,457
     
14,132
     
36,350
     
32,783
 
State and local:
                               
Current
   
1,559
     
1,323
     
3,965
     
3,080
 
Deferred
   
     
     
488
     
 
Foreign - current
   
100
     
     
239
     
 
   
$
15,116
   
$
19,072
   
$
41,042
   
$
49,468
 

17

(12)
EARNINGS PER SHARE

The following table presents the components of basic and diluted earnings per share for the three months and nine months ended September 30, 2018 and 2017 (in thousands, except per share amounts):

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2018
   
2017
   
2018
   
2017
 
Net earnings attributable to Kirby
 
$
41,816
   
$
28,607
   
$
102,889
   
$
81,868
 
Undistributed earnings allocated to restricted shares
   
(166
)
   
(213
)
   
(438
)
   
(599
)
Income available to Kirby common stockholders - basic
   
41,650
     
28,394
     
102,451
     
81,269
 
Undistributed earnings allocated to restricted shares
   
166
     
213
     
438
     
599
 
Undistributed earnings reallocated to restricted shares
   
(165
)
   
(213
)
   
(437
)
   
(599
)
Income available to Kirby common stockholders - diluted
 
$
41,651
   
$
28,394
   
$
102,452
   
$
81,269
 
                                 
Shares outstanding:
                               
Weighted average common stock issued and outstanding
   
59,875
     
55,177
     
59,782
     
54,364
 
Weighted average unvested restricted stock
   
(237
)
   
(412
)
   
(255
)
   
(398
)
Weighted average common stock outstanding - basic
   
59,638
     
54,765
     
59,527
     
53,966
 
Dilutive effect of stock options and restricted stock units
   
146
     
38
     
141
     
55
 
Weighted average common stock outstanding - diluted
   
59,784
     
54,803
     
59,668
     
54,021
 
                                 
Net earnings per share attributable to Kirby common stockholders:
                               
Basic
 
$
0.70
   
$
0.52
   
$
1.72
   
$
1.51
 
Diluted
 
$
0.70
   
$
0.52
   
$
1.72
   
$
1.50
 

Certain outstanding options to purchase approximately 189,000 and 548,000 shares of common stock were excluded in the computation of diluted earnings per share as of September 30, 2018 and 2017, respectively, as such stock options would have been antidilutive.

(13)
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.

On April 12, 2017, the Company amended its pension plan to cease all benefit accruals for periods after May 31, 2017 for certain participants. Participants grandfathered and not impacted were those, as of the close of business on May 31, 2017, who either (a) had completed 15 years of pension service or (b) had attained age 50 and completed 10 years of pension service. Participants non-grandfathered are eligible to receive discretionary 401(k) plan contributions. The Company did not incur any one-time charges related to this amendment but the pension plan’s projected benefit obligation decreased by $33,433,000.

The Company’s pension plan funding strategy is to make annual contributions in amounts equal to or greater than amounts necessary to meet minimum government funding requirements. The plan’s benefit obligations are 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 during 2018.

On February 14, 2018, with the acquisition of Higman, the Company assumed Higman’s pension plan for its inland vessel personnel and office staff. On March 27, 2018, the Company amended the Higman pension plan to close it to all new entrants and cease all benefit accruals for periods after May 15, 2018 for all participants. The Company did not incur any one-time charges related to this amendment but the Higman pension plan’s projected benefit obligation decreased by $3,692,000. The Company made a pension contribution to the Higman plan of $6,717,000 in March 2018 to complete all required funding for the 2016 and 2017 years and make its 2018 first quarter contribution. The Company expects to make additional contributions to the Higman pension plan of approximately $1,385,000 in the fourth quarter of 2018 for the 2018 year.

18

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, 2018 and 2017 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:
 
2018
   
2017
   
2018
   
2017
 
Service cost
 
$
1,722
   
$
1,742
   
$
   
$
 
Interest cost
   
3,939
     
3,320
     
12
     
14
 
Expected return on plan assets
   
(5,696
)
   
(4,595
)
   
     
 
Amortization of actuarial loss
   
723
     
981
     
6
     
7
 
Net periodic benefit cost
 
$
688
   
$
1,448
   
$
18
   
$
21
 

   
Pension Benefits
 
   
Pension Plan
   
SERP
 
   
Nine months ended
September 30,
   
Nine months ended
September 30,
 
Components of net periodic benefit cost:
 
2018
   
2017
   
2018
   
2017
 
Service cost
 
$
5,816
   
$
8,934
   
$
   
$
 
Interest cost
   
11,544
     
10,409
     
36
     
43
 
Expected return on plan assets
   
(16,712
)
   
(13,600
)
   
     
 
Amortization of actuarial loss
   
2,168
     
3,419
     
18
     
21
 
Net periodic benefit cost
 
$
2,816
   
$
9,162
   
$
54
   
$
64
 

The components of net periodic benefit cost for the Company’s postretirement benefit plan for the three months and nine months ended September 30, 2018 and 2017 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,
 
   
2018
   
2017
   
2018
   
2017
 
Components of net periodic benefit cost:
                       
Service cost
 
$
   
$
   
$
   
$
 
Interest cost
   
6
     
6
     
18
     
20
 
Amortization of actuarial gain
   
(149
)
   
(166
)
   
(447
)
   
(501
)
Net periodic benefit cost
 
$
(143
)
 
$
(160
)
 
$
(429
)
 
$
(481
)

(14)
CONTINGENCIES

On October 13, 2016, the tug Nathan E. Stewart and barge DBL 55, an articulated tank barge and tugboat unit (“ATB”), ran aground at the entrance to Seaforth Channel on Atholone Island, British Columbia. The grounding resulted in a breach of a portion of the Nathan E. Stewart’s fuel tanks causing a discharge of diesel fuel into the water. The USCG and the National Transportation Safety Board (“NTSB”) designated the Company as a party of interest in their investigation as to the cause of the incident. The Canadian authorities including Transport Canada and the Canadian Transportation Safety Board investigated the cause of the incident. On October 10, 2018, the Heiltsuk First Nation filed a civil action against a subsidiary of the Company, the master and pilot of the tug, the vessels and the Canadian government seeking unquantified damages as a result of the incident.  On the same date, the Canadian government filed charges against the subsidiary and the vessels for violations of the Canadian Fisheries Act, the Migratory Birds Convention Act, the Pilotage Act and the Shipping Act of 2001. The Company is preparing its responses and is unable to estimate the potential exposure in either proceeding. The Company has various insurance policies covering liabilities including pollution, property, marine and general liability and believes that it has satisfactory insurance coverage for the cost of cleanup and salvage operations as well as other potential liabilities arising from the incident. The Company believes it has accrued adequate reserves for the incident and does not expect the incident to have a material adverse effect on its business or financial condition.

19

On March 22, 2014, two tank barges and a towboat (the M/V Miss Susan), owned by Kirby Inland Marine, LP, a wholly owned subsidiary of the Company, were involved in a collision with the M/S Summer Wind on the Houston Ship Channel near Texas City, Texas. The lead tank barge was damaged in the collision resulting in a discharge of intermediate fuel oil from one of its cargo tanks. The USCG and the NTSB named the Company and the Captain of the M/V Miss Susan, as well as the owner and the pilot of the M/S Summer Wind, as parties of interest in their investigation as to the cause of the incident. Sea Galaxy Ltd is the owner of the M/S Summer Wind. The Company is participating in the natural resource damage assessment and restoration process with federal and state government natural resource trustees. The Company believes it has adequate insurance coverage for pollution, marine and other potential liabilities arising from the incident. The Company believes it has accrued adequate reserves for the incident and does not expect the incident to have a material adverse effect on its business or financial condition.

In addition, the Company is involved in various legal and other proceedings which are incidental to the conduct of its business, none of which in the opinion of management will have a material effect on the Company’s financial condition, results of operations or cash flows. Management believes that it has recorded adequate reserves and believes that it has adequate insurance coverage or has meritorious defenses for these other claims and contingencies.

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 is $23,719,000 at September 30, 2018, including $8,857,000 in letters of credit and $14,862,000 in performance bonds. All of these instruments have an expiration date within three years. The Company does not believe demand for payment under these instruments is likely and expects no material cash outlays to occur regarding these instruments.

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, and tornadoes, 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, 2017. Forward-looking statements are based on currently available information and the Company assumes no obligation to update any such statements.

20

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, 2018 and 2017 were as follows (in thousands):

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2018
   
2017
   
2018
   
2017
 
Weighted average number of common stock - diluted
   
59,784
     
54,803
     
59,668
     
54,021
 

The increase in the weighted average number of common shares for the 2018 third quarter and first nine months compared with the 2017 third quarter and first nine months primarily reflected the issuance of 5,696,259 shares of common stock associated with the acquisition of Stewart & Stevenson LLC (“S&S”) on September 13, 2017, and 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, 2018, the Company operated a fleet of 981 inland tank barges with 21.6 million barrels of capacity, and operated an average of 282 inland towboats. The Company’s coastal fleet consisted of 54 tank barges with 5.1 million barrels of capacity and 50 coastal tugboats. The Company also owns and operates five offshore dry-bulk cargo barges, five offshore tugboats and one docking tugboat transporting dry-bulk commodities in United States coastal trade. Through its distribution and services segment, the Company provides after-market service and parts for engines, transmissions, reduction gears, and related equipment used in oilfield services, marine, mining, power generation, on-highway, and other industrial applications. The Company also rents equipment including generators, fork lifts, pumps and compressors for use in a variety of industrial markets, and manufactures and remanufactures oilfield service equipment, including pressure pumping units, for the oilfield service and oil and gas operator and producer markets.

For the 2018 third quarter, net earnings attributable to Kirby were $41,816,000, or $0.70 per share, on revenues of $704,845,000, compared with 2017 third quarter net earnings attributable to Kirby of $28,607,000, or $0.52 per share, on revenues of $541,274,000.  For the 2018 first nine months, net earnings attributable to Kirby were $102,889,000, or $1.72 per share, on revenues of $2,249,204,000, compared with 2017 first nine months net earnings attributable to Kirby of $81,868,000, or $1.50 per share, on revenues of $1,506,307,000.  The 2018 third quarter and first nine months reflected the integration of Targa’s pressure barge fleet, acquired on May 10, 2018, and the integration of Higman, acquired on February 14, 2018.  The 2018 second quarter included a one-time non-deductible expense of $18,057,000, or $0.30 per share, related to the retirement of Joseph H. Pyne as executive Chairman of the Board of Directors, effective April 30, 2018.  The 2018 first quarter included $3,261,000 before taxes, or $0.04 per share, of one-time transaction costs associated with the Higman acquisition, as well as $2,912,000 before taxes, or $0.04 per share, of severance and retirement expenses, primarily related to cost reduction initiatives in the coastal marine transportation market and the integration of Higman.  In addition, the 2018 first quarter included $3,938,000 before taxes, or $0.05 per share, of non-cash expenses related to an amendment to the employee stock award plan.  The result of the amendment is shorter expense accrual periods on stock options and RSUs granted after February 19, 2018 to employees who are nearing retirement and meet certain years of service and age requirements.  The 2017 third quarter and first nine months were negatively impacted by pre-tax expenses related to the acquisition of S&S of $764,000, or $0.01 per share, and $1,471,000, or $0.02 per share, respectively.

Marine Transportation

For the 2018 third quarter and first nine months, the Company’s marine transportation segment generated 54% and 49%, respectively, of the Company’s revenue. 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, natural gas condensate and agricultural chemicals. Consequently, the Company’s marine transportation business is directly affected by the volumes produced by the Company’s petroleum, petrochemical and refining customer base.

21

The Company’s marine transportation segment’s revenues for the 2018 third quarter and first nine months increased 20% and 11%, respectively, when compared with the 2017 third quarter and first nine months revenues.  The increases were primarily due to the addition of the Higman inland tank barges acquired on February 14, 2018 and the Targa pressure barges acquired on May 10, 2018, and improved barge utilization and spot contract pricing in the inland market.  Partially offsetting these increases were lower term and spot contract pricing in the coastal market, weaker average term contract pricing in the inland market in the 2018 first half, poor seasonal weather conditions in the first four months of 2018, and fewer coastal tank barges available with the impairment and retirement of 12 tank barges in the 2017 fourth quarter.  The segment’s operating income for the 2018 third quarter increased 36% compared with the 2017 third quarter due to the acquisitions of Higman and Targa’s pressure barge fleet, improved term and spot contract pricing in the inland market, and improved barge utilization in the inland market.  The segment’s operating income decreased 4% for the 2018 first nine months compared with the 2017 first nine months primarily due to lower coastal term and spot contract pricing, weaker average inland term contract pricing in the 2018 first half, and poor seasonal weather conditions in the first four months of 2018.  The 2018 first nine months were also impacted by the Higman transaction costs, severance and retirement costs, and the amendment to the employee stock award plan; all of which were incurred in the 2018 first quarter and are discussed above.  For the 2018 and 2017 third quarters and first nine months, the inland tank barge fleet contributed 76% and 69%, respectively, and the coastal fleet contributed 24% and 31%, respectively, of marine transportation revenues.

Tank barge utilization levels of the Company’s inland marine transportation markets were in the low to mid-90% range during the 2018 third quarter compared with the high 80% to low 90% range during the 2018 second quarter and mid-80% to mid-90% range during the 2017 third quarter.  Increasing volumes from petrochemical and black oil customers, lock infrastructure projects in Louisiana as well as on the Ohio River, and refinery turnarounds contributed to increased utilization during the 2018 third quarter compared to the 2018 second quarter.  Lower utilization levels in the 2017 third quarter were due to deteriorated operating conditions for the Company’s inland marine transportation markets after Hurricane Harvey made land-fall on the Gulf Coast at the end of August 2017. Unrelated and coinciding infrastructure repairs on the upper Mississippi River further decreased operating efficiency in September 2017.

Coastal tank barge utilization levels were in the 80% range during the 2018 second and third quarters compared with the high 70% range during the 2018 first quarter and low 60% to mid-60% range during the 2017 third quarter. The improvement in utilization in 2018 primarily reflected the impairment and retirement of 12 out-of-service coastal barges during the 2017 fourth quarter. Utilization in the coastal marine fleet continued to be impacted by the oversupply of tank barges in the coastal industry. 

During the 2018 third quarter and first nine months, approximately 65% of marine transportation inland revenues were under term contracts and 35% were spot contract revenues. For the 2017 third quarter and first nine months, approximately 75% of inland revenues were under term contracts and 25% were spot contract revenues.  Inland time charters during the 2018 third quarter and first nine months represented 58% and 59%, respectively, of the revenues under term contracts compared with 48% in the 2017 third quarter and first nine months. Rates on inland term contracts renewed in the 2018 first quarter decreased in the 4% to 6% average range compared with term contracts renewed in the first quarter of 2017. Rates on inland term contracts renewed in the 2018 second quarter increased in the 1% to 3% average range compared with term contracts renewed in the second quarter of 2017.  In the 2018 third quarter, rates on inland term contracts renewed increased in the 3% to 5% average range compared with term contracts renewed in the third quarter of 2017.  Spot contract rates increased in the 3% to 5% range in the 2018 third quarter compared to the 2018 second quarter and increased in the 20% to 25% range compared to the 2017 third quarter.  Effective January 1, 2018, 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 1.0%, excluding fuel.

22