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 March 31, 1998 Number 001-05083
KANEB SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 74-1191271
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2435 North Central Expressway
Richardson, Texas 75080
(Address of principle executive offices, including zip code)
(972) 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.
Class of Common Stock Outstanding at April 30, 1998
No par value 32,180,564 shares
<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 1998
- --------------------------------------------------------------------------------
Page No.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Income - Three Months Ended
March 31, 1998 and 1997 1
Condensed Consolidated Balance Sheets - March 31, 1998
and December 31, 1997 2
Condensed Consolidated Statements of Cash Flows - Three
Months Ended March 31, 1998 and 1997 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 9
Signature
<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands -- Except Per Share Amounts)
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
1998 1997
-------- --------
Revenues $ 59,501 $ 53,154
-------- --------
Costs and expenses:
Operating costs 41,781 35,459
Depreciation and amortization 4,047 4,213
General and administrative 1,066 1,038
-------- --------
Total costs and expenses 46,894 40,710
-------- --------
Operating income 12,607 12,444
Other income (expense), net (37) (20)
Interest expense (3,745) (3,862)
Amortization of excess of cost over fair value
of net assets of acquired business (475) (461)
-------- --------
Income before interest of outside non-controlling
partners in KPP's net income and income tax expense 8,350 8,101
Interest of outside non-controlling partners in KPP's
net income (6,055) (6,020)
Income tax expense (459) (552)
-------- --------
Net income 1,836 1,529
Dividends applicable to preferred stock 150 123
-------- --------
Net income applicable to common stock $ 1,686 $ 1,406
======== ========
Earnings per common share - Basic and Diluted $ .05 $ .04
======== ========
<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
- --------------------------------------------------------------------------------
March 31, Dec. 31,
1998 1997
--------- ---------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 19,731 $ 23,025
Accounts receivable, trade 39,163 35,268
Inventories 10,138 7,079
Prepaid expenses and other current assets 5,541 5,693
--------- ---------
Total current assets 74,573 71,065
--------- ---------
Property and equipment 391,331 383,078
Less accumulated depreciation and amortization 125,273 121,717
--------- ---------
Net property and equipment 266,058 261,361
--------- ---------
Excess of cost over fair value of net assets
of acquired business 63,744 62,719
Other assets 7,586 7,128
--------- ---------
$ 411,961 $ 402,273
========= =========
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt $ 11,193 $ 5,394
Accounts payable 11,340 9,569
Accrued expenses 37,998 35,679
--------- ---------
Total current liabilities 60,531 50,642
--------- ---------
Long-term debt, less current portion:
Industrial field services 24,504 25,268
Pipeline, terminaling and product
marketing services 133,000 132,118
Parent company 23,666 23,666
--------- ---------
Total long-term debt, less current portion 181,170 181,052
--------- ---------
Deferred income taxes and other liabilities 14,850 15,903
Interest of outside non-controlling partners in KPP 75,155 76,229
Commitments and contingencies
Stockholders' equity:
Preferred stock, without par value 5,792 5,792
Common stock, without par value 4,239 4,234
Additional paid-in-capital 197,346 197,242
Accumulated deficit (99,805) (101,491)
Treasury stock, at cost (25,204) (25,216)
Accumulated other comprehensive income (loss)
- foreign currency translation adjustment (2,113) (2,114)
--------- ---------
Total stockholders' equity 80,255 78,447
--------- ---------
$ 411,961 $ 402,273
========= =========
<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
1998 1997
-------- ---------
Operating activities:
Net income $ 1,836 $ 1,529
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,047 4,213
Interest of outside non-controlling partners in
KPP 6,055 6,020
Amortization of excess of cost over fair
value of net assets acquired 475 461
Deferred income taxes 187 273
Changes in working capital components (2,712) 1,044
-------- --------
Net cash provided by operating activities 9,888 13,540
-------- --------
Investing activities:
Capital expenditures (3,010) (2,621)
Acquisitions (6,591) --
Other, net (2,136) (563)
-------- --------
Net cash used in investing activities (11,737) (3,184)
-------- --------
Financing activities:
Issuance of long-term debt 9,028 101
Payments on long-term debt (3,315) (1,376)
Preferred stock dividends (150) (123)
Distributions to outside non-controlling partners
in KPP (7,129) (6,579)
Common stock issued 121 --
Purchase of treasury stock -- (1,480)
-------- --------
Net cash used in financing activities (1,445) (9,457)
-------- --------
Increase (decrease) in cash and cash equivalents (3,294) 899
Cash and cash equivalents at beginning of period 23,025 23,693
-------- --------
Cash and cash equivalents at end of period $ 19,731 $ 24,592
======== ========
<PAGE>
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 three month periods ended March
31, 1998 and 1997 have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis. Significant accounting
policies followed by the Company and its subsidiaries were disclosed in the
notes to the consolidated financial statements included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997. 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 March 31, 1998
and the consolidated results of their operations and cash flows for the
periods ended March 31, 1998 and 1997. Operating results for the three
months ended March 31, 1998 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1998.
2. COMPREHENSIVE INCOME
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," which establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general purpose financial statements.
Comprehensive income for the three months ended March 31, 1998 and 1997 is
as follows:
Three Months Ended
March 31,
1998 1997
------- -------
(in thousands)
Net income $ 1,836 $ 1,529
Other comprehensive income - foreign currency
translation adjustment 1 (1,355)
------- -------
Comprehensive income (loss) $ 1,837 $ 174
======= =======
Accumulated other comprehensive income at March 31, 1998 and December 31,
1997 consists of cumulative foreign translation adjustments.
<PAGE>
3. EARNINGS PER SHARE
The following is a reconciliation of basic and diluted earnings per share
(in thousands, except for per share amounts):
Net Common Per-Share
Income Shares Amount
------- ------- ---------
Three Months Ended March 31, 1998
Net income $ 1,836
Dividends applicable to preferred stock (150)
-------
Basic earnings per share:
Income available to common stock 1,686 32,189 $ 0.05
========
Effect of dilutive securities:
Common stock options -- 771
------- -------
Diluted earnings per share:
Income available to common stock
and assumed options exercised $ 1,686 32,960 $ 0.05
======= ======= ========
Three Months Ended March 31, 1997
Net income $ 1,529
Dividends applicable to preferred stock (123)
-------
Basic earnings per share:
Income available to common stock 1,406 33,121 $ 0.04
========
Effect of dilutive securities:
Common stock options -- 450
------- -------
Diluted earnings per share:
Income available to common stock
and assumed options exercised $ 1,406 33,571 $ 0.04
======= ======= ========
<PAGE>
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
Three Months Ended
March 31,
1998 1997
------- -------
(in millions)
Revenues:
United States $ 8.9 $ 7.7
Europe 15.9 14.3
Asia-Pacific 2.7 0.6
------- -------
Total revenues $ 27.5 $ 22.6
======= =======
Operating income:
United States $ 0.5 $ 0.3
Europe 0.5 0.8
Asia-Pacific 0.1 (0.1)
Headquarters (0.1) (0.1)
------- -------
Total operating income $ 1.0 $ 0.9
======= =======
Capital expenditures $ 0.6 $ 0.7
======= =======
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.
For the quarter ended March 31, 1998, revenues for the United States
increased 16%, compared to the same 1997 period, due primarily to higher
on-site machining, valve repair and other turnaround services. The 11%
increase in first quarter 1998 revenues for Europe is due primarily to
increases in passive fire protection work, on-site machining and valve
repair services. The $2.1 million increase in first quarter 1998
Asia-Pacific revenues is due primarily to the operations of Australia and
New Zealand acquired effective July 1, 1997.
Overall, operating income increased $0.1 million in the first quarter of
1998, compared to the same prior year period, due to the improvements in
revenues and operating income for the United States and Asia-Pacific, which
were partially offset by high margin, nonrecurring sales in Europe in the
first quarter of 1997.
<PAGE>
Pipeline, Terminaling and Product Marketing Services
Three Months Ended
March 31,
1998 1997
------- -------
(in millions)
Revenues:
Pipeline and terminaling $ 28.1 $ 28.6
Product marketing 1.9 --
------- -------
$ 30.0 $ 28.6
======= =======
Operating income $ 11.9 $ 11.9
======= =======
Capital expenditures,
excluding acquisitions $ 2.4 $ 1.9
======= =======
This business segment includes the operations of Kaneb Pipe Line Partners,
L.P. ("KPP") and the Company's product marketing business acquired in late
March 1998. KPP provides transportation services of refined petroleum
products through a pipeline system that extends through the Midwest and
Eastern Rocky Mountain areas and 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 product marketing business provides motor fuel wholesale
marketing services throughout the Midwest and Rocky Mountain regions, as
well as California.
For the quarter ended March 31, 1998, pipeline and terminaling revenues
decreased $0.5 million, compared to the same 1997 period, due to a $0.7
million decrease in terminaling revenues, partially offset by a $0.2
million increase in pipeline revenues. The decrease in first quarter 1998
terminaling revenues resulted primarily from lower rates realized for
storage, due to a larger proportionate volume of lower-rate products being
stored in the first quarter of 1998, compared to the same period in 1997.
The increase in the first quarter 1998 pipeline revenues is due to an 11%
increase in volumes shipped, when compared to the same period in 1997.
Capital expenditures of $2.4 million for the first quarter of 1998 relate
to the maintenance of existing operations.
Other Operations
The Company recorded revenues of $2.0 million and operating income of $0.7
million in each of the first quarters ended March 31, 1998 and 1997,
related to subsidiaries that provide information processing, payment and
collection services primarily to financial institutions.
Financial Condition
During the first three months of 1998, the Company's working capital
requirements for operations and capital expenditures (excluding
acquisitions) were funded through the use of internally generated funds.
Cash provided by operations was $9.9 million and $13.5 million for the
periods ended March 31, 1998 and 1997, respectively. Capital expenditures
were $3.0 million in the 1998 period compared to $2.6 million in 1997.
Consolidated capital expenditures have been estimated at $10 million to $15
million, depending upon the economic environment and the needs of the
business. Capital expenditures in 1998 are expected to be funded by
internally generated funds.
Additional information related to the sources and uses of cash is presented
in the financial statements included in this report.
<PAGE>
KANEB SERIVCES, 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 - Registrant's Current Report on Form 8-K,
dated April 9, 1998 (SEC File No. 001-05083), was filed to
report, in Item 5, the declaration of a dividend in connection
with the adoption of a replacement Stockholder's Rights Plan.
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.
DATED: May 12, 1998
KANEB SERVICES, INC.
(Registrant)
//s//
Michael R. Bakke
Controller
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Mar-31-1998
<CASH> 19,731
<SECURITIES> 0
<RECEIVABLES> 39,745
<ALLOWANCES> 582
<INVENTORY> 10,138
<CURRENT-ASSETS> 74,573
<PP&E> 391,331
<DEPRECIATION> 125,273
<TOTAL-ASSETS> 411,961
<CURRENT-LIABILITIES> 60,531
<BONDS> 181,170
0
5,792
<COMMON> 4,239
<OTHER-SE> 70,224
<TOTAL-LIABILITY-AND-EQUITY> 411,961
<SALES> 0
<TOTAL-REVENUES> 59,501
<CGS> 0
<TOTAL-COSTS> 46,894
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,745
<INCOME-PRETAX> 2,295
<INCOME-TAX> 459
<INCOME-CONTINUING> 1,836
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,836
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
