<PAGE> 1
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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
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
For the Quarterly Period Commission File
Ended September 30, 1997 Number 1-5083
KANEB SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-1191271
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2435 NORTH CENTRAL EXPRESSWAY
RICHARDSON, TEXAS 75080
(Address of principal executive offices, including zip code)
(214) 699-4000
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class of Common Stock November 12, 1997
--------------------- -----------------
No par value 32,174,051 shares
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KANEB SERVICES, INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1997
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page No.
Part I. Financial Information
<S> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Income
- Three and Nine Months Ended September 30, 1997
and 1996
1
Condensed Consolidated Balance Sheets
- September 30, 1997 and December 31, 1996 2
Condensed Consolidated Statements of Cash Flows
- Nine Months Ended September 30, 1997
and 1996
3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 5
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 7
Signature 7
</TABLE>
<PAGE> 3
KANEB SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS - EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 62,074 $ 57,010 $ 173,616 $ 169,064
----------- ----------- ----------- -----------
Costs and expenses:
Operating costs 41,054 37,795 115,111 114,894
Depreciation and amortization 4,041 3,966 12,430 11,518
General and administrative 1,284 1,265 3,691 3,516
----------- ----------- ----------- -----------
Total costs and expenses 46,379 43,026 131,232 129,928
----------- ----------- ----------- -----------
Operating income 15,695 13,984 42,384 39,136
Interest and other income (expense) 79 (17) (16) (149)
Interest expense (3,967) (3,943) (11,657) (11,563)
Amortization of excess of cost over fair
value of net assets of acquired business (482) (462) (1,405) (1,386)
----------- ----------- ---------- -----------
Income from continuing operations
before interest of outside non-
controlling partners in pipeline
partnership's net income and
income tax expense 11,325 9,562 29,306 26,038
Interest of outside non-controlling
partners in pipeline partnership's
net income (7,370) (6,675) (20,114) (19,299)
Income tax expense (679) (574) (1,680) (1,895)
----------- ----------- ----------- -----------
Net income 3,276 2,313 7,512 4,844
Dividends applicable to preferred stock 126 132 378 370
----------- ----------- ----------- -----------
Net income applicable to common stock $ 3,150 $ 2,181 $ 7,134 $ 4,474
=========== =========== =========== ===========
Net income per common share-primary
and fully diluted $ .09 $ .06 $ .21 $ .13
=========== =========== =========== ===========
Weighted average number of common
and common equivalent shares 32,831 33,652 33,201 33,652
=========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE> 4
KANEB SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
--------- ---------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 27,483 $ 23,693
Accounts receivable, trade 34,089 33,157
Inventories 7,433 6,706
Prepaid expenses and other current assets 5,439 6,367
--------- ---------
Total current assets 74,444 69,923
--------- ---------
Property and equipment 379,263 373,087
Less accumulated depreciation and amortization 116,983 106,449
--------- ---------
Net property and equipment 262,280 266,638
--------- ---------
Excess of cost over fair value of net assets
of acquired business 63,289 63,183
--------- ---------
Other assets 6,655 4,947
--------- ---------
$ 406,668 $ 404,691
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 5,534 $ 4,594
Accounts payable 8,629 9,015
Accrued expenses 30,482 29,693
Accrued distribution payable 7,212 6,588
--------- ---------
Total current liabilities 51,857 49,890
--------- ---------
Long-term debt, less current portion:
Industrial field services 25,932 23,425
Pipeline and terminaling services 137,732 139,453
Parent company 23,666 23,666
--------- ---------
Total long-term debt, less current portion 187,330 186,544
--------- ---------
Net liabilities of discontinued operations 2,309 2,759
--------- ---------
Deferred income taxes and other liabilities 14,344 14,147
--------- ---------
Interest of outside non-controlling partners in
pipeline partnership 75,742 75,985
--------- ---------
Commitments and contingencies
Shareholders' equity:
Preferred stock, without par value 5,792 5,792
Common stock, without par value 4,234 4,230
Additional paid-in-capital 197,264 197,213
Accumulated deficit (104,462) (111,596)
Treasury stock, at cost (25,243) (20,631)
Cumulative foreign currency translation adjustment (2,499) 358
--------- ---------
Total shareholders' equity 75,086 75,366
--------- ---------
$ 406,668 $ 404,691
========= =========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 5
KANEB SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
-------- --------
<S> <C> <C>
Operating activities:
Net income $ 7,512 $ 4,844
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 12,430 11,518
Interest of outside non-controlling partners in
pipeline partnership 20,114 19,299
Amortization of excess of cost over fair
value of net assets acquired 1,405 1,386
Deferred income taxes 552 761
Changes in current assets and liabilities 296 548
-------- --------
Net cash provided by operating activities 42,309 38,356
-------- --------
Investing activities:
Capital expenditures (9,261) (8,186)
Other (5,676) 151
-------- --------
Net cash used in investing activities (14,937) (8,035)
-------- --------
Financing activities:
Issuance of long-term debt 7,831 932
Issuance of long-term debt by pipeline partnership -- 68,000
Payments on long-term debt (4,244) (8,232)
Payments of long-term debt by pipeline partnership (1,500) (69,309)
Preferred stock dividends paid (378) (370)
Distributions to outside non-controlling partners in
pipeline partnership (20,284) (18,095)
Repurchases of common stock held in treasury (4,612) --
Stock options exercised 55
Redemption of preferred stock -- (8,025)
-------- --------
Net cash used in financing activities (23,132) (35,099)
-------- --------
Cash used in discontinued operations (450) (551)
-------- --------
Increase in cash and cash equivalents 3,790 (5,329)
Cash and cash equivalents at beginning of period 23,693 30,389
-------- --------
Cash and cash equivalents at end of period $ 27,483 $ 25,060
======== ========
Supplemental information on cash paid during the period for:
Interest $ 11,223 $ 10,559
======== ========
Income taxes $ 1,447 $ 649
======== ========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 6
KANEB SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- - --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The unaudited consolidated financial statements of Kaneb Services, Inc. and
its subsidiaries (the "Company") for the periods ended September 30, 1997
and 1996 have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis. Significant accounting
policies followed by the Company were disclosed in the notes to the
financial statements included in the Company's Form 10-K Annual Report for
the year ended December 31, 1996. In the opinion of the Company's
management, the accompanying consolidated financial statements contain the
adjustments, consisting of normal recurring accruals, necessary to present
fairly the consolidated financial position of the Company and its
consolidated subsidiaries at September 30, 1997 and the consolidated
results of their operations and their cash flows for the periods ended
September 30, 1997 and 1996. Operating results for the nine-months ended
September 30, 1997 are not necessarily indicative of the results that may
be expected for the year ended December 31, 1997.
2. NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No 128, "Earnings per share" (SFAS No.
128). This Statement establishes standards for computing and presenting
earnings per share and is effective for periods ending after December 15,
1997. The Company will adopt SFAS No. 128 for the year ending December 31,
1997, and, based on earnings per share calculations using the new standards
for the first three quarters of 1997, no changes to earnings per share data
resulted when compared to current standards, and none are anticipated in
the fourth quarter of the current year.
4
<PAGE> 7
KANEB SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- - --------------------------------------------------------------------------------
This discussion should be read in conjunction with the consolidated financial
statements of Kaneb Services, Inc. (the "Company") and notes thereto included
elsewhere in this report.
OPERATING RESULTS
INDUSTRIAL FIELD SERVICES (IN MILLIONS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
United States $ 8.7 $ 7.6 $ 25.3 $ 24.6
United Kingdom 11.0 8.7 30.5 25.5
Germany 2.7 4.0 8.8 11.6
Rest of World 6.2 4.8 13.4 14.9
------- ------- ------- -------
$ 28.6 $ 25.1 $ 78.0 $ 76.6
======= ======= ======= =======
Operating income:
United States $ .4 $ .5 $ 1.3 $ 1.5
United Kingdom 1.3 .9 3.5 1.3
Germany .1 .2 .3 .4
Rest of World .8 .5 .8 1.4
Headquarters (.2) (.3) (.6) (.7)
------- ------- ------- -------
$ 2.4 $ 1.8 $ 5.3 $ 3.9
======= ======= ======= =======
Capital expenditures $ .6 $ 1.2 $ 1.8 $ 2.3
======= ======= ======= =======
</TABLE>
This business segment provides specialized industrial field services,
including under-pressure leak sealing, on-site machining, safety and relief
valve testing and repair, passive fire protection and fugitive emissions
inspections, to the process and power industry worldwide.
The increases in revenues and operating income for the three months ended
September 30, 1997 is primarily due to increased levels of business in the
United Kingdom and United States from turnaround services in addition to
increased third party product and machine sales in the United Kingdom. The
increase in the Rest of World operations for the three months ended
September 30, 1997 is primarily due to operations in Australia and New
Zealand acquired effective July 1, 1997.
For the nine months ended September 30, 1997, increases in core operations
in the United Kingdom were partially offset by decreases in the Rest of
World operations. The increase in revenues and operating income for the
United Kingdom is primarily attributable to increased turnaround services
and third party product and machine sales which resulted in a greater
amount of higher-margin work. While Germany revenues declined as a result
of a large pipeline engineering contract that was completed last year,
changes in mix to higher margin services resulted in about the same total
operating income. The Rest of World decreases in revenues and operating
income is primarily attributable to lower levels of business, including
expected declines in Hong Kong resulting from the transition to Chinese
rule, partially offset by the Australia and New Zealand operations acquired
effective July 1, 1997.
5
<PAGE> 8
KANEB SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- - --------------------------------------------------------------------------------
PIPELINE AND TERMINALING SERVICES (IN MILLIONS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues $ 31.4 $ 30.0 $ 89.8 $ 86.6
======= ======= ======= =======
Operating income $ 13.9 $ 12.8 $ 38.7 $ 37.2
======= ======= ======= =======
Capital expenditures $ 2.0 $ 2.3 $ 7.2 $ 6.3
======= ======= ======= =======
</TABLE>
This business segment includes the operations of Kaneb Pipe Line Partners,
L.P. ("KPP") which provides transportation services of refined petroleum
products through a pipeline system that extends through the Midwest and
Eastern Rocky Mountain areas. Additionally, KPP provides terminaling and
storage services for petroleum products and specialty liquids. The Company
operates, manages and controls the pipeline and terminaling operations of
KPP through its 2% general partner interest and a 31% limited partner
interest in the partnership.
The increase in revenues and operating income for the three and nine months
ended September 30, 1997 primarily relates to continued improvements in the
profitability of a group of terminals which were acquired by KPP in
December 1995 in addition to two liquids terminaling facilities which were
acquired by KPP in the fourth quarter of 1996.
Other Operations
The Company's operating income increased $.1 million and $.6 million for
the three and nine months ended September 30, 1997 over the comparable 1996
periods related to subsidiaries that provide information services to
financial and retail customers.
Financial Condition
Cash and cash equivalents were $27.5 million at September 30, 1997,
compared to $23.7 million at December 31, 1996. For the nine months ended
September 30, 1997, net cash provided by operations of $42.3 million and
$3.3 million of net loan proceeds by the industrial field services unit in
connection with assets and businesses acquired effective July 1, 1997 were
offset by $9.3 million of capital expenditures, $5.7 million of long term
debt payments, distributions to outside non-controlling partners of KPP of
$20.3 million and $4.6 million used to purchase treasury stock.
6
<PAGE> 9
KANEB SERVICES, INC. AND SUBSIDIARIES
- - --------------------------------------------------------------------------------
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27. Financial Data Schedule
(b) Reports on Form 8-K. None
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned.
KANEB SERVICES, INC.
(Registrant)
Date: November 13, 1997 /s/ Howard C. Wadsworth
----------------------------------------
Howard C. Wadsworth
Vice-President, Treasurer and Controller
7
<PAGE> 10
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibits Description
-------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 27,483
<SECURITIES> 0
<RECEIVABLES> 34,943
<ALLOWANCES> 854
<INVENTORY> 7,433
<CURRENT-ASSETS> 74,444
<PP&E> 379,263
<DEPRECIATION> 116,983
<TOTAL-ASSETS> 406,668
<CURRENT-LIABILITIES> 51,857
<BONDS> 187,330
0
5,792
<COMMON> 4,234
<OTHER-SE> 65,060
<TOTAL-LIABILITY-AND-EQUITY> 406,668
<SALES> 0
<TOTAL-REVENUES> 173,616
<CGS> 0
<TOTAL-COSTS> 131,232
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,657
<INCOME-PRETAX> 29,306
<INCOME-TAX> 1,680
<INCOME-CONTINUING> 7,512
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,512
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
</TABLE>
