- --------------------------------------------------------------------------------
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, 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
Incorporation or Organization) Identification Number)
2435 North Central Expressway
Richardson, Texas 75080
(Address of principal 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 November 13, 1998
no par value 31,413,729 shares
- --------------------------------------------------------------------------------
<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
Page No.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Income - Three and Nine Months
Ended September 30, 1998 and 1997 1
Condensed Consolidated Balance Sheets - September 30, 1998
and December 31, 1997 2
Condensed Consolidated Statements of Cash Flows - Nine
Months Ended September 30, 1998 and 1997 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 11
Signature 11
<PAGE>
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,
---------------------- ----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues .................................. $ 105,476 $ 62,074 $ 265,469 $ 173,616
--------- --------- --------- ---------
Costs and expenses:
Operating costs ...................... 81,911 41,054 203,641 115,111
Depreciation and amortization ........ 4,192 4,041 12,441 12,430
General and administrative ........... 1,466 1,284 3,892 3,691
--------- --------- --------- ---------
Total costs and expenses ......... 87,569 46,379 219,974 131,232
--------- --------- --------- ---------
Operating income .......................... 17,907 15,695 45,495 42,384
Other income (expense), net ............... 30 79 55 (16)
Interest expense .......................... (3,918) (3,967) (11,554) (11,657)
Amortization of excess of cost over fair
value of net assets of acquired business (500) (482) (1,470) (1,405)
--------- --------- --------- ---------
Income before interest of outside non-
controlling partners in KPP's net
income and income tax expense .......... 13,519 11,325 32,526 29,306
Interest of outside non-controlling
partners in KPP's net income ........... (8,101) (7,370) (20,918) (20,114)
Income tax expense ........................ (984) (679) (1,973) (1,680)
--------- --------- --------- ---------
Net income ................................ 4,434 3,276 9,635 7,512
Dividends applicable to preferred stock ... 131 126 439 378
--------- --------- --------- ---------
Net income applicable to common stock ..... $ 4,303 $ 3,150 $ 9,196 $ 7,134
========= ========= ========= =========
Earnings per common share:
Basic .................................. $ .14 $ .10 $ .29 $ .22
========= ========= ========= =========
Diluted ................................ $ .13 $ .10 $ .28 $ .21
========= ========= ========= =========
</TABLE>
<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
- --------------------------------------------------------------------------------
September 30, December 31,
1998 1997
------------- ------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents .......................... $ 18,244 $ 23,025
Accounts receivable, trade ......................... 51,285 35,268
Inventories ........................................ 10,631 7,079
Prepaid expenses and other current assets .......... 7,658 5,693
--------- ---------
Total current assets ............................. 87,818 71,065
--------- ---------
Property and equipment ................................ 407,355 383,078
Less accumulated depreciation and amortization ........ 131,627 121,717
--------- ---------
Net property and equipment ....................... 275,728 261,361
--------- ---------
Excess of cost over fair value of net assets
of acquired business ................................. 63,001 62,719
Other assets .......................................... 8,446 7,128
--------- ---------
$ 434,993 $ 402,273
========= =========
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt .................. $ 12,113 $ 5,394
Accounts payable ................................... 16,996 9,569
Accrued expenses ................................... 43,538 35,679
--------- ---------
Total current liabilities ........................ 72,647 50,642
--------- ---------
Long-term debt, less current portion:
Industrial field services .......................... 22,711 25,268
Pipeline, terminaling and product marketing services 139,300 132,118
Parent company ..................................... 23,666 23,666
--------- ---------
Total long-term debt, less current portion ....... 185,677 181,052
--------- ---------
Deferred income taxes and other liabilities ........... 17,087 15,903
Interest of outside non-controlling partners in KPP ... 75,765 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 ......................... 197,268 197,242
Accumulated deficit ................................ (92,295) (101,491)
Unamortized restricted stock compensation .......... (141) --
Treasury stock, at cost ............................ (29,709) (25,216)
Accumulated other comprehensive income (loss)
- foreign currency translation adjustment ........ (1,337) (2,114)
--------- ---------
Total stockholders' equity ..................... 83,817 78,447
--------- ---------
$ 434,993 $ 402,273
========= =========
<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
- --------------------------------------------------------------------------------
Nine Months Ended
September 30,
---------------------
1998 1997
-------- ---------
Operating activities:
Net income .............................................$ 9,635 $ 7,512
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ..................... 12,441 12,430
Interest of outside non-controlling partners in KPP 20,918 20,114
Amortization of excess of cost over fair
value of net assets acquired .................... 1,470 1,405
Deferred income taxes ............................. 491 552
Changes in working capital components ............. (5,652) 296
-------- --------
Net cash provided by operating activities ........ 39,303 42,309
-------- --------
Investing activities:
Capital expenditures ................................... (10,207) (9,261)
Acquisitions of terminals and product
marketing services ................................... (16,174) --
Other, net ............................................. (2,623) (6,126)
-------- --------
Net cash used in investing activities ............ (29,004) (15,387)
-------- --------
Financing activities:
Issuance of long-term debt ............................. 21,547 7,831
Payments on long-term debt ............................. (10,203) (5,744)
Preferred stock dividends paid ......................... (439) (378)
Distributions to outside non-controlling partners in KPP (21,382) (20,284)
Common stock issued .................................... 133 55
Purchase of treasury stock ............................. (4,736) (4,612)
-------- --------
Net cash used in financing activities ............ (15,080) (23,132)
-------- --------
Increase (decrease) in cash and cash equivalents .......... (4,781) 3,790
Cash and cash equivalents at beginning of period .......... 23,025 23,693
-------- --------
Cash and cash equivalents at end of period ................$ 18,244 $ 27,483
======== ========
<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 and nine month periods ended
September 30, 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 September 30, 1998 and the consolidated results of their
operations and cash flows for the periods ended September 30, 1998 and
1997. Operating results for the three and nine months ended September 30,
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 and nine months ended September 30, 1998
and 1997 is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- -----------------
1998 1997 1998 1997
------- ------ ------- -------
(in thousands)
Net income $ 4,434 $ 3,276 $ 9,635 $ 7,512
Other comprehensive income - foreign
currency translation adjustment 750 (789) 777 (2,857)
------- ------- ------- -------
Comprehensive income $ 5,184 $ 2,487 $10,412 $ 4,655
======= ======= ======= =======
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 September 30, 1998
-------------------------------------
Net income $ 4,434
Dividends applicable to preferred stock (131)
-------
Basic earnings per share:
Income available to common stock 4,303 31,443 $ .14
========
Effect of dilutive securities:
Common stock options - 841
------- -------
Diluted earnings per share:
Income available to common stock
and assumed options exercised $ 4,303 32,284 $ .13
======= ======= ========
Three Months Ended September 30, 1997
-------------------------------------
Net income $ 3,276
Dividends applicable to preferred stock (126)
-------
Basic earnings per share:
Income available to common stock 3,150 32,301 $ .10
========
Effect of dilutive securities:
Common stock options - 620
------- -------
Diluted earnings per share:
Income available to common stock
and assumed options exercised $ 3,150 32,921 $ .10
======= ======= ========
Nine Months Ended September 30, 1998
------------------------------------
Net income $ 9,635
Dividends applicable to preferred stock (439)
-------
Basic earnings per share:
Income available to common stock 9,196 31,856 $ .29
========
Effect of dilutive securities:
Common stock options - 904
------- -------
Diluted earnings per share:
Income available to common stock
and assumed options exercised $ 9,196 32,760 $ .28
======= ======= ========
Nine Months Ended September 30, 1997
------------------------------------
Net income $ 7,512
Dividends applicable to preferred stock (378)
-------
Basic earnings per share:
Income available to common stock 7,134 32,676 $ .22
========
Effect of dilutive securities:
Common stock options - 520
------- -------
Diluted earnings per share:
Income available to common stock
and assumed options exercised $ 7,134 33,196 $ .21
======= ======= ========
<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 Nine Months Ended
September 30, September 30,
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
(in thousands)
Revenues:
United States $ 9,070 $ 8,721 $ 26,910 $ 25,335
Europe 16,338 16,655 50,139 47,944
Asia-Pacific 2,896 3,209 8,253 4,736
-------- -------- -------- --------
Total Revenues $ 28,304 $ 28,585 $ 85,302 $ 78,015
======== ======== ======== ========
Operating income:
United States $ 775 $ 335 $ 1,584 $ 1,274
Europe 1,551 1,612 3,956 3,986
Asia-Pacific 442 618 815 628
Headquarters (467) (162) (846) (606)
-------- -------- -------- --------
Total operating income $ 2,301 $ 2,403 $ 5,509 $ 5,282
======== ======== ======== ========
Capital expenditures,
excluding acquisitions $ 602 $ 511 $ 1,950 $ 1,744
======== ======== ======== ========
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 three months ended September 30, 1998, revenues for the Industrial
Field Services segment decreased slightly, when compared to the same 1997
period, due primarily to the overall weakening of economic conditions in
Asia-Pacific and Europe markets, partially offset by modest gains in the
United States. In the United States, revenues increased 4%, compared to the
same period in 1997, due primarily to improvements in on-site machining and
leak sealing services. Asia-Pacific revenues decreased by 10% in the third
quarter of 1998, compared to 1997, due primarily to declines in on-site
machining services in Australia. In Europe, revenues decreased by 2%, due
to lower other process plant services in the United Kingdom and in Germany.
For the nine months ended September 30, 1998, Industrial Field Services
revenues increased by 9%, compared to the same period in 1997, due to
overall improvements in each of the three geographical areas. In the United
States, revenues increased 6% due primarily to improvements in on-site
machining and leak sealing services. In Europe, revenues increased by 5%
due primarily to increases in passive fire protection and leak sealing
services. The increase in Asia-Pacific revenues is primarily attributable
to the operations of Australia acquired effective July 1, 1997.
Overall, Industrial Field Services operating income decreased by $0.1
million for the quarter ended September 30, 1998, compared to the same
prior year period, due to decreases in revenues and operating income in
Asia-Pacific and Europe, a result of the overall weakening of economic
conditions in these regions. For the nine months ended September 30, 1998,
operating income increased by $0.2 million, compared to 1997, due to
overall increases in revenues and operating income in the United States and
in Asia-Pacific primarily attributable to the operations of Australia
acquired effective July 1, 1997.
Pipeline, Terminaling and Product Marketing Services
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
(in thousands)
Revenues:
Pipeline and terminaling $ 33,709 $ 31,465 $ 92,332 $ 89,837
Product marketing 36,027 -- 75,653 --
-------- -------- -------- --------
$ 69,736 $ 31,465 $167,985 $ 89,837
======== ======== ======== ========
Operating income $ 15,896 $ 13,862 $ 41,022 $ 38,669
======== ======== ======== ========
Capital expenditures,
excluding acquisitions $ 2,274 $ 1,919 $ 8,048 $ 7,162
======== ======== ======== ========
This business segment includes the operations of Kaneb Pipe Line Partners,
L.P. ("KPP") and the Company's petroleum products 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 chemicals. 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 petroleum products marketing
business provides motor fuel wholesale marketing services throughout the
Midwest and Rocky Mountain regions, as well as California.
For the three months ended September 30, 1998, revenues for the Pipeline
and Terminaling business increased by $2.2 million, or 7%, when compared to
1997, due to a $1.1 million increase in revenues in each of the pipeline
and terminaling businesses. For the nine months ended September 30, 1998,
pipeline and terminaling revenues increased by $2.5 million, or 3%, due to
a $1.7 million increase in pipeline revenues and a $0.8 million increase in
terminaling revenues. The increase in pipeline revenues for the three and
nine months ended September 30, 1998 is due to increases in volumes
shipped, when compared to the same periods in 1997. The increase in
terminaling revenues for the three and nine months ended September 30, 1998
is due to an increase in tank utilization resulting from favorable market
conditions.
The $2.0 million increase in operating income for the quarter ended
September 30, 1998, compared to 1997, is due primarily to a $0.8 million
increase in pipeline operating income, a $0.9 million increase in
terminaling operating income and $0.2 million from the petroleum products
marketing business acquired in March 1998. For the nine months ended
September 30, 1998, operating income increased by $2.4 million, compared to
1997, due primarily to a $1.4 million increase in pipeline operating
income, a $0.2 million increase in terminaling operating income and $0.6
million from the petroleum products marketing business.
Capital expenditures of $2.3 million and $8.0 million for the three and
nine months ended September 30, 1998, respectively, relate to the
maintenance of existing operations.
Other Operations
The Company recorded revenues of $7.4 million and $12.2 million for the
three and nine months ended September 30, 1998, respectively, compared to
$2.0 and $5.8 million for the three and nine months ended September 30,
1997, related to subsidiaries that provide information processing, payment
and collection services primarily to financial institutions. Related
operating income for the three and nine months ended September 30, 1998 was
$1.2 million and $2.9 million, respectively, compared to $0.8 million and
$2.2 million for the three and nine months ended September 30, 1997
Liquidity and Capital Resources
During the first nine 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 $39.3 million and $42.3 million for the
nine months ended September 30, 1998 and 1997, respectively. Capital
expenditures (excluding acquisitions) were $10.2 million for the nine
months ended September 30, 1998, compared to $9.3 million in 1997. 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.
Year 2000 Issue
Although the Company believes that most of its activities and operations
are not materially impacted by Year 2000 Issues ("Y2K"), the Company
recognizes the challenges associated with Y2K and has undertaken a review
and testing of its computer systems to identify Y2K-related issues
associated with any items of software or hardware used in its business
operations. Most of the software systems used by the Company are licensed
from third parties and are Y2K compliant or will be upgraded to Y2K
compliant releases over the next year. This issue is being addressed by the
Company in multiple phases, including assessment, remediation, testing and
implementation, and progress is being monitored by the Company's senior
management. All material systems, on a world-wide basis, including
non-information technology systems which may house non-compliant, imbedded
technology, such as office machines, are being evaluated.
In addition to addressing the Company's own systems, as described above,
the Company must assess the state of readiness of the systems of other
entities with which it does business. Failure by these third parties to
adequately resolve their Y2K problems could have a material adverse effect
on the Company's operations.
The Company believes its success in being Y2K compliant will not be
conclusively known until the year 2000 is actually reached. Although
failure by one or more of the Company's own systems could result in lost
revenues and/or additional expenses required to carry out manual processing
of transactions, the Company cannot predict the effect that external forces
could have on its business. Failures by banking institutions, the
telecommunications industry and others could have far-reaching effects on
the Company and the entire economy.
The Company expects to complete its Y2K program in a timely manner.
However, the Company believes that it is not possible to determine with
certainty that all Y2K problems affecting the Company have been identified
or corrected. The number of devices that could be affected and the
interactions among these devices are simply too numerous. In addition, the
Company cannot accurately predict how many failures related to the Y2K
problem will occur or the severity, duration or financial consequences of
such failures. The Company is in the process of evaluating and hiring an
outside Y2K consultant to assist the Company in meeting its goals and in
developing contingency plans to define and address the worst-case scenario
likely to be faced by the Company. The plan is expected to be in place in
by the end of the first quarter of 1999.
Expenses incurred by the Company during 1997, and the first three quarters
of 1998, related to assessing, remediating and testing its information
technology systems, which was not material, have been expensed as incurred
and funded from operations. The Company does not anticipate that the cost
to become fully Y2K compliant will be material.
This entire section is hereby designated a "Year 2000 Readiness
Disclosure", as defined in the Year 2000 Information and Readiness
Disclosure Act.
<PAGE>
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 August 14,
1998, (SEC File No. 001-05083).
Registrant's Current Report on Form 8-K, dated November 6,
1998, (SEC File No. 001-05083).
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 16, 1998 //s//
---------------------------
Michael R. Bakke
Controller
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Sep-30-1998
<CASH> 18,244
<SECURITIES> 0
<RECEIVABLES> 51,997
<ALLOWANCES> 712
<INVENTORY> 10,631
<CURRENT-ASSETS> 87,818
<PP&E> 407,355
<DEPRECIATION> 131,627
<TOTAL-ASSETS> 434,993
<CURRENT-LIABILITIES> 72,647
<BONDS> 185,677
0
5,792
<COMMON> 4,239
<OTHER-SE> 73,786
<TOTAL-LIABILITY-AND-EQUITY> 434,993
<SALES> 0
<TOTAL-REVENUES> 265,469
<CGS> 0
<TOTAL-COSTS> 219,974
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,554
<INCOME-PRETAX> 11,608
<INCOME-TAX> 1,973
<INCOME-CONTINUING> 9,635
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,635
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.28
</TABLE>
