<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 June 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 August 8, 1997
--------------------- ------------------
no par value 32,426,151 shares
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KANEB SERVICES, INC.
FORM 10-Q
QUARTER ENDED JUNE 30, 1997
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Income
- Three and Six Months Ended June 30, 1997 and 1996 1
Condensed Consolidated Balance Sheets
- June 30, 1997 and December 31, 1996 2
Condensed Consolidated Statements of Cash Flows
- Six Months Ended June 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.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS - EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 58,388 $ 57,215 $ 111,542 $ 112,054
--------- --------- --------- ---------
Costs and expenses:
Operating costs 38,598 38,802 74,057 77,099
Depreciation and amortization 4,176 3,678 8,389 7,552
General and administrative 1,369 1,266 2,407 2,251
--------- --------- --------- ---------
Total costs and expenses 44,143 43,746 84,853 86,902
--------- --------- --------- ---------
Operating income 14,245 13,469 26,689 25,152
Interest and other income (expense) (75) (99) (95) (132)
Interest expense (3,828) (3,752) (7,690) (7,620)
Amortization of excess of cost over fair
value of net assets of acquired business (462) (462) (923) (924)
--------- --------- --------- ---------
Income from continuing operations
before interest of outside non-
controlling partners in pipeline
partnership's net income and
income tax expense 9,880 9,156 17,981 16,476
Interest of outside non-controlling
partners in pipeline partnership's
net income (6,724) (6,764) (12,744) (12,624)
Income tax expense (449) (692) (1,001) (1,321)
--------- --------- --------- ---------
Net income 2,707 1,700 4,236 2,531
Dividends applicable to preferred stock 129 124 252 238
--------- --------- --------- ---------
Net income applicable to common stock $ 2,578 $ 1,576 $ 3,984 $ 2,293
========= ========= ========= =========
Net income per common share-primary
and fully diluted $ .08 $ .05 $ .12 $ .07
========= ========= ========= =========
Weighted average number of common
and common equivalent shares 33,099 33,652 33,347 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>
June 30, December 31,
1997 1996
--------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 23,367 $ 23,693
Accounts receivable, trade 35,581 33,157
Inventories 7,476 6,706
Prepaid expenses and other current assets 4,867 6,367
--------- ---------
Total current assets 71,291 69,923
--------- ---------
Property and equipment 374,590 373,087
Less accumulated depreciation and amortization 112,468 106,449
--------- ---------
Net property and equipment 262,122 266,638
--------- ---------
Excess of cost over fair value of net assets
of acquired business 62,260 63,183
--------- ---------
Other assets 4,923 4,947
--------- ---------
$ 400,596 $ 404,691
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 5,306 $ 4,594
Accounts payable 9,236 9,015
Accrued expenses 28,880 29,693
Accrued distribution payable 6,588 6,588
--------- ---------
Total current liabilities 50,010 49,890
--------- ---------
Long-term debt, less current portion:
Industrial field services 22,079 23,425
Pipeline and terminaling services 138,326 139,453
Parent company 23,666 23,666
--------- ---------
Total long-term debt, less current portion 184,071 186,544
--------- ---------
Net liabilities of discontinued operations 2,684 2,759
--------- ---------
Deferred income taxes and other liabilities 14,450 14,147
--------- ---------
Interest of outside non-controlling partners in
pipeline partnership 75,570 75,985
--------- ---------
Commitments and contingencies
Shareholders' equity:
Preferred stock, without par value 5,792 5,792
Common stock, without par value 4,230 4,230
Additional paid-in-capital 197,211 197,213
Accumulated deficit (107,610) (111,596)
Treasury stock, at cost (24,102) (20,631)
Cumulative foreign currency translation adjustment (1,710) 358
--------- ---------
Total shareholders' equity 73,811 75,366
--------- ---------
$ 400,596 $ 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>
Six Months Ended June 30,
-------------------------
1997 1996
-------- --------
<S> <C> <C>
Operating activities:
Net income $ 4,236 $ 2,531
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 8,389 7,552
Interest of outside non-controlling partners in
pipeline partnership 12,744 12,624
Amortization of excess of cost over fair
value of net assets acquired 923 924
Deferred income taxes 435 560
Changes in current assets and liabilities (2,284) (1,432)
-------- --------
Net cash provided by operating activities 24,443 22,759
-------- --------
Investing activities:
Capital expenditures (6,774) (5,083)
Other 635 222
-------- --------
Net cash used in investing activities (6,139) (4,861)
-------- --------
Financing activities:
Issuance of long-term debt 4,939 375
Issuance of long-term debt by pipeline partnership - 68,000
Payments on long-term debt (5,631) (7,240)
Payments of long-term debt by pipeline partnership (982) (68,857)
Preferred stock dividends paid (252) (238)
Distributions to outside non-controlling partners in
pipeline partnership (13,157) (12,061)
Purchase of treasury stock (3,471) -
Redemption of preferred stock - (8,025)
-------- --------
Net cash used in financing activities (18,554) (28,046)
-------- --------
Cash used in discontinued operations (76) (151)
-------- --------
Decrease in cash and cash equivalents (326) (10,299)
Cash and cash equivalents at beginning of period 23,693 30,389
-------- --------
Cash and cash equivalents at end of period $ 23,367 $ 20,090
======== ========
Supplemental information on cash paid during the period for:
Interest $ 7,734 $ 7,544
======== ========
Income taxes $ 932 $ 585
======== ========
</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 June 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 June 30, 1997 and the consolidated results of
their operations and their cash flows for the periods ended June 30, 1997
and 1996. Operating results for the six-months ended June 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 and second quarter 1997, no changes to
earnings per share data resulted when compared to current standards, and
none are anticipated in 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 Six Months Ended
June 30, June 30,
------------------ ------------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
United States $ 8.9 $ 8.8 $ 16.6 $ 17.0
United Kingdom 10.6 8.7 19.5 16.8
Germany 3.5 3.8 6.1 7.6
Rest of World 3.8 5.2 7.2 10.1
------- ------- ------- -------
$ 26.8 $ 26.5 $ 49.4 $ 51.5
======= ======= ======= =======
Operating income:
United States $ .6 $ .6 $ .9 $ 1.0
United Kingdom 1.5 .3 2.2 .4
Germany .1 .1 .2 .2
Rest of World .1 .5 - .9
Headquarters (.3) (.2) (.4) (.4)
------- ------- ------- -------
$ 2.0 $ 1.3 $ 2.9 $ 2.1
======= ======= ======= =======
Capital expenditures $ .5 $ .5 $ 1.2 $ 1.1
======= ======= ======= =======
</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 June
30, 1997 is primarily due to increased levels of business in the United Kingdom
from turnaround services, partially offset by lower levels of business from
other services in the Rest of World countries.
For the six months ended June 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 third party product and machine
sales and turnaround services which resulted in a greater amount of
higher-margin work. While Germany revenues declined, 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 which
reverted to Chinese rule at the end of the current quarter.
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 Six Months Ended
June 30, June 30,
------------------ -----------------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues $ 29.8 $ 28.8 $ 58.4 $ 56.6
======= ======= ======= =======
Operating income $ 12.9 $ 12.8 $ 24.8 $ 24.4
======= ======= ======= =======
Capital expenditures $ 1.1 $ 1.9 $ 5.2 $ 4.0
======= ======= ======= =======
</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 six months
ended June 30, 1997 primarily relates to two liquids terminaling facilities
which were acquired by KPP in the fourth quarter of 1996 in addition to
continued improvements in the profitability of a group of terminals which were
acquired by KPP in December 1995.
Other Operations
The Company's operating income increased $.1 million and $.5 million for the
three and six months ended June 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 $23.4 million at June 30, 1997, compared to
$23.7 million at December 31, 1996. For the six months ended June 30, 1997, net
cash provided by operations of $24.4 million and $4.9 million of loan proceeds
by the industrial field services unit in connection with assets and businesses
acquired effective July 1, 1997 were offset by $6.8 million of capital
expenditures, $6.6 million of long term debt payments, distributions to
outside non-controlling partners of KPP of $13.2 million and $3.5 million used
to purchase treasury stock.
6
<PAGE> 9
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: August 12, 1997 /s/ Howard C. Wadsworth
--------------------------------
Howard C. Wadsworth
Vice-President, Treasurer and
Controller
7
<PAGE> 10
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- -------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 23,367
<SECURITIES> 0
<RECEIVABLES> 36,441
<ALLOWANCES> 860
<INVENTORY> 7,476
<CURRENT-ASSETS> 71,291
<PP&E> 374,590
<DEPRECIATION> 112,468
<TOTAL-ASSETS> 400,596
<CURRENT-LIABILITIES> 50,010
<BONDS> 184,071
0
5,792
<COMMON> 4,230
<OTHER-SE> 63,789
<TOTAL-LIABILITY-AND-EQUITY> 400,596
<SALES> 0
<TOTAL-REVENUES> 111,542
<CGS> 0
<TOTAL-COSTS> 84,853
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,690
<INCOME-PRETAX> 17,981
<INCOME-TAX> 1,001
<INCOME-CONTINUING> 4,236
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,236
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
</TABLE>
