XNYS:KEX Kirby Corp Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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

Form 10-Q

 
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended June 30, 2012
 
¨
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  x    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  x    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
x
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  x
 
The number of shares outstanding of the registrant’s Common Stock, $.10 par value per share, on August 3, 2012 was 55,867,000.
 


 
 

 
 
PART I – FINANCIAL INFORMATION
 
Item 1. Financial Statements
 
KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
 
CONDENSED BALANCE SHEETS
(Unaudited)
 
ASSETS
 
 
 
June 30,
2012
 
 
December 31,
2011
 
 
 
($ in thousands)
 
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 
$
5,805
 
 
$
16,249
 
Accounts receivable:
 
 
 
 
 
 
 
 
Trade – less allowance for doubtful accounts
 
 
304,764
 
 
 
303,087
 
Other
 
 
27,890
 
 
 
32,060
 
Inventories – net
 
 
170,852
 
 
 
130,130
 
Prepaid expenses and other current assets
 
 
29,245
 
 
 
33,617
 
Deferred income taxes
 
 
15,989
 
 
 
14,186
 
 
 
 
 
 
 
 
 
 
Total current assets
 
 
554,545
 
 
 
529,329
 
 
 
 
 
 
 
 
 
 
Property and equipment
 
 
2,751,610
 
 
 
2,618,268
 
Less accumulated depreciation
 
 
(848,332
)
 
 
(796,095
)
 
 
 
 
 
 
 
 
 
Property and equipment – net
 
 
1,903,278
 
 
 
1,822,173
 
 
 
 
 
 
 
 
 
 
Goodwill – net
 
 
483,894
 
 
 
483,468
 
Other assets
 
 
124,568
 
 
 
125,441
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
3,066,285
 
 
$
2,960,411
 
 
See accompanying notes to condensed financial statements.

 
2

 

KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
 
CONDENSED BALANCE SHEETS
(Unaudited)
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
June 30,
 2012
 
 
December 31,
 2011
 
 
 
($ in thousands)
 
Current liabilities:
 
 
 
 
 
 
Current portion of long-term debt
 
$
111,627
 
 
$
39,005
 
Income taxes payable
 
 
4,363
 
 
 
4,124
 
Accounts payable
 
 
139,804
 
 
 
158,855
 
Accrued liabilities
 
 
107,872
 
 
 
117,262
 
Deferred revenues
 
 
29,663
 
 
 
39,554
 
 
 
 
 
 
 
 
 
 
Total current liabilities
 
 
393,329
 
 
 
358,800
 
 
 
 
 
 
 
 
 
 
Long-term debt – less current portion
 
 
687,905
 
 
 
763,000
 
Deferred income taxes
 
 
330,012
 
 
 
292,355
 
Other long-term liabilities
 
 
93,809
 
 
 
92,098
 
 
 
 
 
 
 
 
 
 
Total long-term liabilities
 
 
1,111,726
 
 
 
1,147,453
 
 
 
 
 
 
 
 
 
 
Contingencies and commitments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity:
 
 
 
 
 
 
 
 
Kirby stockholders’ equity:
 
 
 
 
 
 
 
 
Common stock, $.10 par value per share. Authorized 120,000,000 shares, issued 59,276,000 shares
 
 
5,928
 
 
 
5,928
 
Additional paid-in capital
 
 
360,882
 
 
 
357,294
 
Accumulated other comprehensive income – net
 
 
(53,508
)
 
 
(56,176
)
Retained earnings
 
 
1,328,136
 
 
 
1,229,641
 
Treasury stock – at cost, 3,409,000 at June 30, 2012 and 3,532,000 at December 31, 2011
 
 
(92,657
)
 
 
(94,162
)
Total Kirby stockholders’ equity
 
 
1,548,781
 
 
 
1,442,525
 
Noncontrolling interests
 
 
12,449
 
 
 
11,633
 
Total equity
 
 
1,561,230
 
 
 
1,454,158
 
 
 
 
 
 
 
 
 
 
Total liabilities and equity
 
$
3,066,285
 
 
$
2,960,411
 
 
See accompanying notes to condensed financial statements.

 
3

 

KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
 
CONDENSED STATEMENTS OF EARNINGS
(Unaudited)
 
 
 
Three months ended
June 30,
   
Six months ended
June 30,
 
 
 
2012
   
2011
   
2012
   
2011
 
 
 
($ in thousands, except per share amounts)
 
Revenues:
 
 
   
 
   
 
   
 
 
Marine transportation
  $ 342,195     $ 266,612     $ 678,152     $ 508,289  
Diesel engine services
    169,653       170,719       400,631       228,401  
Total revenues
    511,848       437,331       1,078,783       736,690  
 
                               
Costs and expenses:
                               
Costs of sales and operating expenses
    345,916       294,909       730,275       480,408  
Selling, general and administrative
    43,199       39,047       96,299       68,504  
Taxes, other than on income
    3,907       3,723       7,821       7,224  
Depreciation and amortization
    35,197       28,213       71,671       53,406  
Loss (gain) on disposition of assets
    (69 )     (40 )     (41 )     26  
Total costs and expenses
    428,150       365,852       906,025       609,568  
 
                               
Operating income
    83,698       71,479       172,758       127,122  
Other income
    30       78       179       129  
Interest expense
    (5,901 )     (3,278 )     (11,741 )     (6,111 )
 
                               
Earnings before taxes on income
    77,827       68,279       161,196       121,140  
Provision for taxes on income
    (29,392 )     (26,050 )     (60,882 )     (46,011 )
 
                               
Net earnings
    48,435       42,229       100,314       75,129  
Less: Net earnings attributable to noncontrolling interests
    (884 )     (537 )     (1,819 )     (1,007 )
 
                               
Net earnings attributable to Kirby
  $ 47,551     $ 41,692     $ 98,495     $ 74,122  
 
                               
Net earnings per share attributable to Kirby common stockholders:
                               
Basic
  $ .85     $ .78     $ 1.76     $ 1.38  
Diluted
  $ .85     $ .77     $ 1.76     $ 1.38  
 
See accompanying notes to condensed financial statements.

 
4

 

KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
 
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
 
Three months ended
June 30,
   
Six months ended
June 30,
 
 
 
2012
   
2011
   
2012
   
2011
 
 
 
($ in thousands)
 
   
 
 
Net earnings
  $ 48,435     $ 42,229     $ 100,314     $ 75,129  
Other comprehensive income (loss), net of taxes:
                               
Pension and postretirement benefits
    (1,268 )     (122 )     (279 )     217  
Foreign currency translation adjustments
    152    
      447    
 
Change in fair value of derivative instruments
    1,420       631       2,500       1,508  
Total comprehensive income (loss), net of taxes
    304       509       2,668       1,725  
 
                               
Total comprehensive income, net of taxes
    48,739       42,738       102,982       76,854  
Net earnings attributable to noncontrolling interests
    (884 )     (537 )     (1,819 )     (1,007 )
 
                               
Comprehensive income attributable to Kirby
  $ 47,855     $ 42,201     $ 101,163     $ 75,847  
 
See accompanying notes to condensed financial statements.

 
5

 

KIRBY CORPORATION AND CONSOLIDATED SUBSIDIARIES
 
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
 
Six months ended
June 30,
 
 
 
2012
 
 
2011
 
 
 
($ in thousands)
 
Cash flows from operating activities:
 
 
 
 
 
 
Net earnings
 
$
100,314
 
 
$
75,129
 
Adjustments to reconcile net earnings to net cash provided by operations:
 
 
 
 
 
 
 
 
Depreciation and amortization
 
 
71,671
 
 
 
53,406
 
Provision for deferred income taxes
 
 
33,774
 
 
 
23,740
 
Amortization of unearned share-based compensation
 
 
4,489
 
 
 
4,490
 
Other
 
 
2,127
 
 
 
(69
)
Decrease in cash flows resulting from changes in operating assets and liabilities, net
 
 
(75,773
)
 
 
(38,871
)
Net cash provided by operating activities
 
 
136,602
 
 
 
117,825
 
 
 
 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
 
 
Capital expenditures
 
 
(153,846
)
 
 
(97,973
)
Acquisitions of businesses and marine equipment
 
 
 
 
 
(330,402
)
Proceeds from disposition of assets
 
 
6,651
 
 
 
2,180
 
Net cash used in investing activities
 
 
(147,195
)
 
 
(426,195
)
 
 
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
 
 
 
Borrowings on bank credit facilities, net
 
 
10,530
 
 
119,700
 
Payments on long-term debt, net
 
 
(13,003
)
 
 
(60
)
Proceeds from exercise of stock options
 
 
1,250
 
 
 
349
 
Excess tax benefit from equity compensation plans
 
 
2,375
 
 
 
821
 
Other
 
 
(1,003
)
 
 
(708
)
Net cash provided by financing activities
 
 
149
 
 
 
120,102
 
Decrease in cash and cash equivalents
 
 
(10,444
)
 
 
(188,268
)
 
 
 
 
 
 
 
 
 
Cash and cash equivalents, beginning of year
 
 
16,249
 
 
 
195,600
 
Cash and cash equivalents, end of period
 
$
5,805
 
 
$
7,332
 
 
 
 
 
 
 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
 
 
 
 
 
Cash paid during the period:
 
 
 
 
 
 
 
 
Interest
 
$
10,619
 
 
$
5,869
 
Income taxes
 
$
19,174
 
 
$
7,068
 
 
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 June 30, 2012 and December 31, 2011, and the results of operations for the three months and six months ended June 30, 2012 and 2011.
 
(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, 2011.
 
(2)
ACCOUNTING STANDARDS ADOPTIONS
 
In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” ASU 2011-05 requires entities to present components of comprehensive income in either a single continuous statement of comprehensive income or two separate but consecutive statements that would include reclassification adjustments for items that are reclassified from other comprehensive income (“OCI”) to net income on the face of the financial statements. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  The adoption of ASU 2011-05 in the first quarter of 2012 did not have an impact on the Company’s consolidated financial statements except that the Company has applied these provisions to its presentation of consolidated financial statements.
 
In December 2011, the FASB issued ASU 2011-12, “Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” (“ASU 2011-12”). The amendments to the Codification in ASU 2011-12 are effective at the same time as the amendments in ASU 2011-05, so that entities will not be required to comply with the presentation requirements in ASU 2011-05 that ASU 2011-12 is deferring. The amendments are being made to allow the FASB time to reevaluate whether to present on the face of the financial statements the effects of reclassifications out of accumulated OCI on the components of net income and OCI for all periods presented. ASU 2011-12 will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of ASU 2011-12 did not have a material impact on the Company’s consolidated financial statements.
 
(3)
ACQUISITIONS
 
On December 15, 2011, the Company completed the purchase of the coastal tank barge fleet of Seaboats, Inc. and affiliated companies (“Seaboats”) consisting of three 80,000 barrel coastal tank barges and tugboats for $42,745,000 in cash. The three coastal tank barges and tugboats currently operate along the United States East Coast and had an average age of five years.
 
On July 1, 2011, the Company completed the acquisition of K-Sea Transportation Partners L.P. (“K-Sea”), an operator of tank barges and tugboats participating in the coastal transportation primarily of refined petroleum products in the United States. The total value of the transaction was $603,427,000, excluding transaction fees, consisting of $227,617,000 of cash paid to K-Sea common and preferred unit holders and the general partner, $262,791,000 of cash to retire K-Sea’s outstanding debt, and $113,019,000 through the issuance of 1,939,234 shares of Company common stock valued at $58.28 per share, the Company’s closing share price on July 1, 2011.
 
On April 17, 2012, the Company changed the name of K-Sea to Kirby Offshore Marine, LLC (“Kirby Offshore Marine”) to more fully integrate the Company’s coastal operations with the Company’s inland marine transportation operations.  The acquired company is referred to in this report as either K-Sea or Kirby Offshore Marine, depending on the context.
 
On the acquisition date, Kirby Offshore Marine’s fleet, comprised of 57 coastal tank barges with a capacity of 3.8 million barrels and 63 tugboats, operated along the East Coast, West Coast and Gulf Coast of the United States, as well as in Alaska and Hawaii. Kirby Offshore Marine’s tank barge fleet, 54 of which were double hulled and had an average age of approximately nine years, is one of the youngest fleets in the coastal trade. Kirby Offshore Marine’s customers include major oil companies and refiners, many of which are current Company customers for inland tank barge services. Kirby Offshore Marine has operating facilities in New York, Philadelphia, Seattle and Honolulu.

 
7

 

On April 15, 2011, the Company purchased United Holdings LLC (“United”), a distributor and service provider of engine and transmission related products for the oil and gas services, power generation and on-highway transportation industries, and manufacturer of oilfield service equipment. The purchase price was $271,192,000 in cash, plus a three-year earnout provision for up to an additional $50,000,000 payable in 2014, dependent on achieving certain financial targets. United, headquartered in Oklahoma City, Oklahoma with 21 locations across seven states, distributes and services equipment and parts for Allison Transmission (“Allison”), MTU Detroit Diesel (“MTU”), Daimler Trucks NA (“Daimler”), and other diesel and natural gas engines. United also manufactures oilfield service equipment, including hydraulic fracturing equipment. United’s principal customers are oilfield service companies, oil and gas operators and producers, compression companies and on-highway transportation companies.
 
On February 24, 2011, the Company purchased 21 inland and offshore tank barges and 15 inland towboats and offshore tugboats from Enterprise Marine Services LLC (“Enterprise”) for $53,200,000 in cash. Enterprise provided transportation and delivery services for ship bunkers (engine fuel) to cruise ships, container ships and freighters primarily in the Miami, Port Everglades and Cape Canaveral, Florida area, the three largest cruise ship ports in the United States, as well as Tampa, Florida, Mobile, Alabama and Houston, Texas.
 
On February 9, 2011, the Company purchased from Kinder Morgan Petcoke, L.P. (“Kinder Morgan”) for $4,050,000 in cash a 51% interest in Kinder Morgan’s shifting operation and fleeting facility for dry cargo barges and tank barges on the Houston Ship Channel. Kinder Morgan retained the remaining 49% interest and the Company will manage the operation. In addition, the Company purchased a towboat from Kinder Morgan for $1,250,000 in cash.
 
The following unaudited pro forma results present consolidated financial information as if the United and K-Sea acquisitions had been completed as of January 1, 2011. The pro forma results do not include the acquisitions of Seaboats, Enterprise and Kinder Morgan described above as the effect of these acquisitions would not be materially different from the Company’s actual results.
 
The pro forma results include the amortization associated with the acquired intangible assets, interest expense associated with the debt used to fund a portion of the acquisitions, the impact of the additional shares issued in connection with the K-Sea acquisition, the impact of certain fair value adjustments such as depreciation adjustments related to adjustments to property and equipment and standardization of accounting policies. The pro forma results do not include any cost savings or potential synergies related to the acquisitions nor any integration costs. The pro forma results should not be considered indicative of the results of operations or financial position of the combined companies had the acquisitions been consummated as of January 1, 2011 and are not necessarily indicative of results of future operations of the Company.
 
The following table sets forth the Company’s pro forma revenues, net earnings attributable to Kirby, basic net earnings per share and fully diluted net earnings per share attributable to Kirby common stockholders (unaudited and in thousands, except per share amounts):
 
 
 
Three months ended
June 30,
   
Six months ended
June 30,
 
 
 
2012
   
2011
Pro forma
   
2012
   
2011
Pro forma
 
Revenues
  $ 511,848     $ 528,025     $ 1,078,783     $ 992,177  
Net earnings attributable to Kirby
  $ 47,551     $ 35,367     $ 98,495     $ 69,583  
Net earnings per share attributable to Kirby common stockholders:
                               
Basic
  $ .85     $ .64     $ 1.76     $ 1.25  
Diluted
  $ .85     $ .63     $ 1.76     $ 1.25  

(4)
INVENTORIES
 
The following table presents the details of inventories as of June 30, 2012 and December 31, 2011 (in thousands):
 
 
 
June 30,
2012
 
 
December 31,
2011
 
Finished goods
 
$
144,188
 
 
$
111,931
 
Work in process
 
 
26,664
 
 
 
18,199
 
 
 
$
170,852
 
 
$
130,130
 

 
8

 

(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 at June 30, 2012 (in thousands):
 
 
 
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
 
$
 
 
$
5,716
 
 
$
 
 
$
5,716
 
Contingent earnout liability
 
 
 
 
 
 
 
 
26,900
 
 
 
26,900
 
 
 
$
 
 
$
5,716
 
 
$
26,900
 
 
$
32,616
 
 
The following table summarizes the assets and liabilities measured at fair value on a recurring basis at December 31, 2011 (in thousands):
 
 
 
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
 
$
 
 
$
9,597
 
 
$
 
 
$
9,597
 
Contingent earnout liability
 
 
 
 
 
 
 
 
22,600
 
 
 
22,600
 
 
 
$
 
 
$
9,597
 
 
$
22,600
 
 
$
32,197
 
 
The fair value of the Company’s derivative instruments is more fully described below in Note 6, Derivative Instruments.
 
In connection with the acquisition of 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 increase in the fair value of the earnout liability of $100,000 for the three months ended June 30, 2012 and $4,300,000 for the six months ended June 30, 2012 was charged to selling, general and administrative expense. As of June 30, 2012, the Company had recorded an earnout liability of $26,900,000.
 
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. The Company is of the opinion that amounts included in the consolidated financial statements for outstanding debt materially represent the fair value of such debt due to their variable interest rates.

 
9

 

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 six months ended June 30, 2012, 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 and expects to continue to utilize derivative financial instruments with respect to a portion of its interest rate risks to achieve a more predictable cash flow by reducing its exposure to interest rate fluctuations. These transactions generally are interest rate swap agreements and are entered into with large multinational banks. Derivative financial instruments related to the Company’s interest rate risks are intended to reduce the Company’s exposure to increases in the benchmark interest rates underlying the Company’s floating rate senior notes, variable rate term loan and variable rate bank revolving credit facility.
 
From time to time, the Company hedges its exposure to fluctuations in short-term interest rates under its variable rate bank revolving credit facility and floating rate senior notes by entering into interest rate swap agreements. The interest rate swap agreements are designated as cash flow hedges, therefore, the changes in fair value, to the extent the swap agreements are effective, are recognized in OCI until the hedged interest expense is recognized in earnings. The current swap agreements effectively convert the Company’s interest rate obligation on the Company’s variable rate senior notes from quarterly floating rate payments based on the London Interbank Offered Rate (“LIBOR”) to quarterly fixed rate payments. As of June 30, 2012, the Company had a total notional amount of $200,000,000 of interest rate swaps designated as cash flow hedges for its variable rate senior notes as follows (dollars in thousands):
 
Notional
Amount
 
      Effective date
 
    Termination date
 
Fixed
 pay rate
 
      Receive rate
$ 100,000  
March 2006
 
February 2013
    5.45%  
Three-month LIBOR
$ 50,000  
November 2008
 
February 2013
    3.50%  
Three-month LIBOR
$ 50,000  
May 2009
 
February 2013
    3.795%  
Three-month LIBOR
 
Foreign Currency Risk Management
 
From time to time, the Company has utilized and expects to continue to utilize 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 June 30, 2012, the Company had forward contracts with notional amounts aggregating $3,096,000 to hedge its exposure to foreign currency rate fluctuations in expected foreign currency transactions. These contracts expire on various dates beginning in the third quarter of 2012 and ending in the first quarter of 2014. These forward contracts are designated as cash flow hedges, therefore, the changes in fair value, to the extent the forward contracts are effective, are recognized in OCI until the forward contracts expire and are recognized in cost of sales and operating expenses.

 
10

 

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 June 30, 2012 and December 31, 2011 (in thousands):
 
Liability Derivatives
 
Balance Sheet
Location
 
June 30,
2012
 
 
December 31,
2011
 
Derivatives designated as hedging instruments under ASC 815:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts
 
Other accrued liabilities
 
$
118
 
 
$
363
 
Foreign currency contracts
 
Other long-term liabilities
 
 
19
 
 
 
32
 
Interest rate contracts
 
Other accrued liabilities
 
 
5,579
 
 
 
Interest rate contracts
 
Other long-term liabilities
 
 
 
 
9,202
 
Total derivatives designated as hedging instruments under ASC 815
 
 
 
$
5,716
 
 
$
9,597
 
Total liability derivatives
 
 
 
$
5,716
 
 
$
9,597
 
 
Fair value amounts were derived as of June 30, 2012 and December 31, 2011 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.
 
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 six months ended June 30, 2012 and 2011 (in thousands):
 
 
 
 
 
Amount of Gain (Loss)
Recognized in OCI on
Derivatives (Effective
Portion)
 
 
Amount of Gain (Loss)
Reclassified from
Accumulated OCI into
Income (Effective Portion)
 
 
 
Location of Gain (Loss) Reclassified from
 
Three months ended
 
 
Three months ended
 
Derivatives in ASC 815 Cash
 
Accumulated OCI into Income
 
June 30,
 
 
June 30,
 
Flow Hedging Relationships:
 
(Effective Portion)
 
2012
 
 
2011
 
 
2012
 
 
2011
 
Interest rate contracts
 
Interest expense
 
$
2,030
 
 
$
694
 
 
$
(2,056
)
 
$
(2,152
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
Cost and sales of operating expenses
 
 
172
 
 
 
309
 
 
 
 
 
 
                              (43
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
2,202
 
 
$
1,003
 
 
$
(2,056
)
 
$
(2,195
)
 
 
 
 
 
Amount of Gain (Loss)
Recognized in OCI on
Derivatives (Effective
Portion)
 
 
Amount of Gain (Loss)
Reclassified from
Accumulated OCI into
Income (Effective Portion)
 
 
 
Location of Gain (Loss) Reclassified from
 
Six months ended
 
 
Six months ended
 
Derivatives in ASC 815 Cash
 
Accumulated OCI into Income
 
June 30,
 
 
June 30,
 
Flow Hedging Relationships:
 
(Effective Portion)
 
2012
 
 
2011
 
 
2012
 
 
2011
 
Interest rate contracts
 
Interest expense
 
$
3,623
 
 
$
2,655
 
 
$
(4,100
)
 
$
(4,277
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
Cost and sales of operating expenses
 
 
249
 
 
 
(551
)
 
 
(2
)
 
 
(43)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
$
3,872
 
 
$
2,104
 
 
$
(4,102
)
 
$
(4,320
)

 
11

 

The Company anticipates $3,626,000 of net losses on interest rate swap agreements included in accumulated OCI will be transferred into earnings over the next year based on current interest rates. Gains or losses on interest rate swap agreements offset increases or decreases in rates of the underlying debt, which results in a fixed rate for the underlying debt. The Company also expects $69,000 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 six months ended June 30, 2012 and 2011 were as follows (in thousands):

 
 
Three months ended
June 30,
   
Six months ended
June 30,
 
 
2012
   
2011
   
2012
   
2011
Compensation cost
  $ 2,583     $ 2,530     $ 4,489     $ 4,490  
Income tax benefit
  $ 987     $ 973     $ 1,715     $ 1,720  

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 payable in cash or stock. 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 made under the plan.  At June 30, 2012, 2,905,582 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.

On February 15, 2012, the Board of Directors approved amendments to the employee plan, subject to stockholder approval, to (1) increase the number of shares that may be issued under the plan from 3,000,000 shares to 5,000,000 shares and (2) increase the maximum amount of cash that may be paid to any participant pursuant to any performance awards under the plan during any calendar year from $3,000,000 to $5,000,000.  The amendments were approved by the stockholders at the Annual Meeting of Stockholders held on April 24, 2012.

           The following is a summary of the stock option activity under the employee plan described above for the six months ended June 30, 2012:
 
 
 
Outstanding
Non-Qualified or
Nonincentive
Stock Options
   
Weighted
Average
Exercise
Price
Outstanding at December 31, 2011
    445,674     $ 36.81
Granted
    99,906     $ 65.80
Exercised
 
    $
Forfeited
    (1,635 )   $ 58.28
Outstanding at June 30, 2012
    543,945     $ 42.07
 
 
The following table summarizes information about the Company’s outstanding and exercisable stock options under the employee plan at June 30, 2012:
 
 
 
 
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
 
$
23.98 - $32.56
 
226,450
 
 
2.9
 
 
$
27.72
 
 
 
 
 
 
193,115
 
 
$
26.90
 
 
 
 
$
34.40 - $36.35
 
24,000
 
 
1.9
 
 
$
34.73
 
 
 
 
 
 
22,666
 
 
$
34.63
 
 
 
 
$
46.74 - $48.65
 
192,772
 
 
3.2
 
 
$
47.48
 
 
 
 
 
 
125,718
 
 
$
47.87
 
 
 
 
$
58.28 - $66.72
 
100,723
 
 
6.6
 
 
$
65.74
 
 
 
 
 
 
817
 
 
$
58.28
 
 
 
 
$
23.98 - $66.72
 
543,945
 
 
3.7
 
 
$
42.07
 
 
$
2,724,000
 
 
 
342,316
 
 
$
35.19
 
 
$
4,070,000
 

 
12

 

The following is a summary of the restricted stock award activity under the employee plan described above for the six months ended June 30, 2012:
 
 
 
Unvested
Restricted Stock
Award Shares
 
 
Weighted
Average
Grant Date
Fair Value
Per Share
 
Nonvested balance at December 31, 2011
 
 
475,632
 
 
$
36.43
 
Granted
 
 
120,913
 
 
$
67.88
 
Vested
 
 
(162,226
)
 
$
34.96
 
Forfeited
 
 
(7,192
)
 
$
57.02
 
Nonvested balance at June 30, 2012
 
 
427,127
 
 
$
45.55
 
 
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 June 30, 2012, 685,535 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 and competent independent directors.
 
On February 15, 2012, the Board of Directors approved amendments to the director plan, subject to stockholder approval, to increase the number of shares that may be issued under the plan from 1,000,000 shares to 1,500,000 shares.  The amendment was approved by the stockholders at the Annual Meeting of Stockholders held on April 24, 2012.

The following is a summary of the stock option activity under the director plan described above for the six months ended June 30, 2012:
 
 
 
Outstanding
Non-Qualified or
Nonincentive
Stock Options
 
 
Weighted
Average
Exercise
Price
 
Outstanding at December 31, 2011
 
 
353,625
 
 
$
39.05
 
Granted
   
56,306
   
$
62.48
 
Exercised
 
 
(43,993
)
 
$
28.41
 
Outstanding at June 30, 2012
 
 
365,938
 
 
$
43.94
 
 
 
The following table summarizes information about the Company’s outstanding and exercisable stock options under the director plan at June 30, 2012:
 
 
 
 
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
 
$
12.69 - $17.88
 
30,000
 
 
1.4
 
 
$
15.81
 
 
 
 
 
 
30,000
 
 
$
15.81
 
 
 
 
$
20.28 - $29.60
 
48,000
 
 
5.3
 
 
$
26.10
 
 
 
 
 
 
48,000
 
 
$
26.10
 
 
 
 
$
35.17 - $36.82
 
74,036
 
 
4.2
 
 
$
35.86
 
 
 
 
 
 
74,036
 
 
$
35.86
 
 
 
 
$
41.24 - $62.48
 
213,902
 
 
8.2
 
 
$
54.68
 
 
 
 
 
 
158,172
 
 
$
51.93
 
 
 
 
$
12.69 - $62.48
 
365,938
 
 
6.4
 
 
$
43.94
 
 
$
1,150,000
 
 
 
310,208
 
 
$
40.61
 
 
$
2,008,000
 

 
13

 

The following is a summary of the restricted stock award activity under the director plan described above for the six months ended June 30, 2012:
 
 
 
Unvested
Restricted Stock
Award Shares
 
 
Weighted
Average
Grant Date
Fair Value
Per Share
 
Nonvested balance at December 31, 2011
 
 
1,748
 
 
$
58.07
 
Granted
   
10,383
   
$
62.99
 
Vested
 
 
(2,093
)
 
$
58.88
 
Nonvested balance at June 30, 2012
 
 
10,038
 
 
$
62.99
 
 
The total intrinsic value of all stock options exercised under all of the Company’s plans was $1,612,000 and $1,477,000 for the six months ended June 30, 2012 and 2011, respectively. The actual tax benefit realized for tax deductions from stock option exercises was $616,000 and $566,000 for the six months ended June 30, 2012 and 2011, respectively.
 
The total intrinsic value of all the restricted stock vestings under all of the Company’s plans was $11,004,000 and $7,199,000 for the six months ended June 30, 2012 and 2011, respectively. The actual tax benefit realized for tax deductions from restricted stock vestings was $4,204,000 and $2,757,000 for the six months ended June 30, 2012 and 2011, respectively.
 
As of June 30, 2012, there was $3,856,000 of unrecognized compensation cost related to nonvested stock options and $17,270,000 related to restricted stock. The stock options are expected to be recognized over a weighted average period of approximately 1.5 years and restricted stock over approximately 3.1 years. The total fair value of options vested was $1,326,000 and $1,438,000 during the six months ended June 30, 2012 and 2011, respectively. The fair value of the restricted stock vested was $11,004,000 and $7,199,000 for the six months ended June 30, 2012 and 2011, respectively.
 
The weighted average per share fair value of stock options granted during the six months ended June 30, 2012 and 2011 was $22.15 and $18.81, respectively. The fair value of the stock options granted during the six months ended June 30, 2012 and 2011 was $3,461,000 and $3,031,000, 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 six months ended June 30, 2012 and 2011 were as follows:

 
 
Six months ended
June 30,
 
 
 
2012
   
2011
 
Dividend yield
 
None
   
None
 
Average risk-free interest rate
  1.1%     2.4%  
Stock price volatility
  33%     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 six months ended June 30, 2012 and 2011 were as follows (in thousands):
 
 
 
Three months ended June 30,
 
 
 
2012
 
 
2011
 
 
 
Gross
Amount
 
 
Income
Tax
(Provision)
Benefit
 
 
Net
Amount
 
 
Gross
Amount
 
 
Income
Tax
(Provision)
Benefit
 
 
Net
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pension and postretirement benefits
 
$
       (2,057
)
 
$
789
 
 
$
(1,268)
 
 
$
(202)
 
 
$
80
 
 
$
(122)
 
Foreign currency translation adjustments
 
 
152
 
 
 
 
 
 
152
 
 
 
 
 
 
 
 
 
 
Change in fair value of derivative instruments
 
 
2,202
 
 
 
(782
)
 
 
1,420
 
 
 
1,004
 
 
 
(373
)
 
 
631
 
Total
 
$
297
 
 
$
7
 
 
$
304
 
 
$
802
 
 
$
(293
)
 
$
509
 
 
 
 
Six months ended June 30,
 
 
 
2012
 
 
2011
 
 
 
Gross
Amount
 
 
Income
Tax
(Provision)
Benefit
 
 
Net
Amount
 
 
Gross
Amount
 
 
Income
Tax
(Provision)
Benefit
 
 
Net
Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pension and postretirement benefits
 
$
 (456)
 
 
$
177
 
 
$
(279)
 
 
$
347
 
 
$
(130
)
 
$
217
 
Foreign currency translation adjustments
 
 
447
 
 
 
 
 
 
447
 
 
 
 
 
 
 
 
 
 
Change in fair value of derivative instruments
 
 
3,872
 
 
 
(1,372
)
 
 
2,500
 
 
 
2,282
 
 
 
(774
)
 
 
1,508
 
Total
 
$
3,863
 
 
$
(1,195
)
 
$
2,668
 
 
$
2,629
 
 
$
(904
)
 
$
1,725
 

 
14

 

(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, along all three United States coasts, Alaska and Hawaii and, to a lesser extent, United States coastal transportation of dry-bulk cargoes. The principal products transported include petrochemicals, black oil products, 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, and distributes and services high-speed diesel engines, transmissions, pumps and compression products, and manufactures and remanufactures oilfield service equipment, including hydraulic fracturing equipment, for the land-based pressure pumping and oilfield service markets.

The following table sets forth the Company’s revenues and profit or loss by reportable segment for the three months and six months ended June 30, 2012 and 2011 and total assets as of June 30, 2012 and December 31, 2011 (in thousands):
 
   
Three months ended
June 30,
   
Six months ended
June 30,
 
 
 
2012
   
2011
   
2012
   
2011
 
Revenues:
 
 
   
 
   
 
   
 
 
Marine transportation
  $ 342,195     $ 266,612     $ 678,152     $ 508,289  
Diesel engine services
    169,653       170,719       400,631       228,401  
 
  $ 511,848     $ 437,331     $ 1,078,783     $ 736,690  
Segment profit (loss):
                               
Marine transportation
  $ 71,730     $ 58,361     $ 140,220     $ 111,059  
Diesel engine services
    15,118       17,611       38,672       24,217  
Other
    (9,021 )     (7,693 )     (17,696 )     (14,136 )
 
  $ 77,827     $ 68,279     $ 161,196     $ 121,140  
 
 
 
June 30,
2012
 
 
December 31,
2011
 
Total assets:
 
 
 
 
 
 
Marine transportation
 
$
2,383,484
 
 
$
2,307,821
 
Diesel engine services
 
 
648,597
 
 
 
608,886
 
Other
 
 
34,204
 
 
 
43,704
 
 
 
$
3,066,285
 
 
$
2,960,411
 

 
15

 
 
The following table presents the details of “Other” segment loss for the three months and six months ended June 30, 2012 and 2011 (in thousands):
 
 
 
Three months ended
June 30,
   
Six months ended
June 30,
 
 
 
2012
   
2011
   
2012
   
2011
 
                         
General corporate expenses
  $ (3,219 )   $ (4,533 )   $ (6,175 )   $ (8,128 )
Gain (loss) on disposition of assets
    69       40       41       (26 )
Interest expense
    (5,901 )     (3,278 )     (11,741 )     (6,111 )
Other income
    30       78       179       129  
 
  $ (9,021 )   $ (7,693 )   $ (17,696 )   $ (14,136 )

The following table presents the details of “Other” total assets as of June 30, 2012 and December 31, 2011 (in thousands):
 
 
 
June 30,
2012
 
 
December 31,
2011
 
General corporate assets
 
$
30,340
 
 
$
40,022
 
Investment in affiliates
 
 
3,864
 
 
 
3,682
 
 
 
$
34,204
 
 
$
43,704
 

(10)
TAXES ON INCOME
 
Earnings before taxes on income and details of the provision for taxes on income for the three months and six months ended June 30, 2012 and 2011 were as follows (in thousands):
 
   
Three months ended
June 30,
   
Six months ended
June 30,
 
 
 
2012
   
2011
   
2012
   
2011
 
                         
Earnings before taxes on income – United States
  $ 77,827     $ 68,279     $ 161,196     $ 121,140  
Provision for taxes on income:
                               
Federal:
                               
Current
  $ 10,416     $ 12,982     $ 20,096     $ 16,985  
Deferred
    15,591       9,930       33,774       23,740  
State and local
    3,385       3,138       7,012       5,286  
 
  $ 29,392     $ 26,050     $ 60,882     $ 46,011  

(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 six months ended June 30, 2012 and 2011 (in thousands, except per share amounts):
 
   
Three months ended
June 30,
   
Six months ended
June 30,
 
 
 
2012
   
2011
   
2012
   
2011
 
                         
Net earnings attributable to Kirby
  $ 47,551     $ 41,692     $ 98,495     $ 74,122  
Undistributed earnings allocated to restricted shares
    (375 )     (370 )     (769 )     (656 )
Income available to Kirby common stockholders - basic
    47,176       41,322       97,726       73,466  
Undistributed earnings allocated to restricted shares
    375       370       769       656  
Undistributed earnings reallocated to restricted shares
    (374 )     (369 )     (765 )     (653 )
Income available to Kirby common stockholders - diluted
  $ 47,177     $ 41,323     $ 97,730     $ 73,469  
                                 
Shares outstanding:
                               
Weighted average common stock issued and outstanding
    55,869       53,685       55,839       53,662  
Weighted average unvested restricted stock
    (441 )     (476 )     (436 )     (474 )
Weighted average common stock outstanding - basic
    55,428       53,209       53,403       53,188  
Dilutive effect of stock options
    212       218       235       210  
Weighted average common stock outstanding - diluted