KIRBY CORP (KEX) FY 2022 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Statements contained in this Form 10-K that are not historical facts, including, but not limited to, any projections contained herein, are forward-looking statements and involve a number of risks and uncertainties. Such statements involve risks and uncertainties. Such statements can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “anticipate,” “estimate,” or “continue,” or the negative thereof or other variations thereon or comparable terminology. The actual results of the future events described in such forward-looking statements in this Form 10-K could differ materially from those stated in such forward-looking statements. Among the factors that could cause actual results to differ materially are: adverse economic conditions, industry competition and other competitive factors, adverse weather conditions such as high water, low water, tropical storms, hurricanes, tsunamis, fog and ice, tornados, COVID-19 or other pandemics, marine accidents, lock delays, fuel costs, interest rates, construction of new equipment by competitors, government and environmental laws and regulations, and the timing, magnitude and number of acquisitions made by the Company. For a more detailed discussion of factors that could cause actual results to differ from those presented in forward-looking statements, see Item 1A-Risk Factors. Forward-looking statements are based on currently available information and the Company assumes no obligation to update any such statements.

For purposes of Management’s Discussion, all net earnings per share attributable to Kirby common stockholders are “diluted earnings (loss) per share.” The weighted average number of common shares outstanding applicable to diluted earnings (loss) per share for 2022, 2021, and 2020 were 60,329,000, 60,053,000, and 59,912,000, respectively. Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 for management's discussion and analysis of financial condition and results of operations for 2021 compared to 2020.

Overview

The Company is the nation’s largest domestic tank barge operator, transporting bulk liquid products throughout the Mississippi River System, on the Gulf Intracoastal Waterway, and coastwise along all three United States coasts. The Company transports petrochemicals, black oil, refined petroleum products and agricultural chemicals by tank barge. Through KDS, the Company provides after-market service and parts for engines, transmissions, reduction gears, and related equipment used in oilfield services, marine, power generation, on-highway, and other industrial applications. The Company also rents equipment including generators, industrial compressors, and high capacity lift trucks, and refrigeration trailers for use in a variety of industrial markets, and manufactures and remanufactures oilfield service equipment, including pressure pumping units, manufactures cementing and pumping equipment as well as coil tubing and well intervention equipment, electric power generation equipment, specialized electrical distribution and control equipment, and high capacity energy storage/battery systems for oilfield service and railroad customers.

The following table summarizes key operating results of the Company (in thousands, except per share amounts):

The 2022 fourth quarter included $3.3 million before taxes, $2.4 million after taxes, or $0.04 per share of severance expense. The 2022 fourth quarter also included $0.9 million before taxes, $0.6 million after taxes, or $0.01 per share of professional fees related to the Company’s strategic alternatives review. The 2022 second quarter included $1.5 million before taxes, $1.3 million after taxes, or $0.02 per share of severance expense.

The 2021 third quarter included $340.7 million before taxes, $275.1 million after taxes, or $4.58 per share, non-cash charges related to impairment of long-lived assets related to coastal marine transportation equipment and impairment of goodwill in KMT. See Note 7, Impairments and Other Charges in the financial statements for additional information. The 2021 fourth quarter was also impacted by a one-time deferred tax provision of $5.7 million or $0.09 per share related to a change in Louisiana tax law. See Note 9, Taxes on Income for additional information.

The 2020 first quarter included $561.3 million before taxes, $433.3 million after taxes, or $7.24 per share, non-cash charges related to inventory write-downs, impairment of long-lived assets, including intangible assets and property and equipment, and impairment of goodwill in KDS. See Note 7, Impairments and Other Charges for additional information. In addition, the 2020 first quarter was favorably impacted by an income tax benefit of $50.8 million or $0.85 per share related to net operating losses generated in 2018 and 2019 used to offset taxable income generated between 2013 and 2017. See Note 9, Taxes on Income for additional information.

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Cash provided by operating activities in 2022 decreased compared to 2021 primarily due to the receipt of a tax refund of $119.5 million, including accrued interest, for the Company’s 2019 federal tax return during the 2021 first quarter, partially offset by higher revenues and operating income in both KMT and KDS in 2022 from improved business activity levels. During 2022, capital expenditures of $172.6 million included $147.2 million in KMT and $25.4 million in KDS and corporate, more fully described under cash flow and capital expenditures below.

The Company projects net cash flow from operations in 2023 of between $480 million and $580 million. The Company has applied for and been awarded grants from various government entities totaling approximately $3.5 million related to certain emission reduction projects which it expects to receive reimbursements for in 2023.

The Company’s debt-to-capitalization ratio decreased to 26.2% at December 31, 2022 from 28.7% at December 31, 2021, primarily due to repayments in 2022 under the 2024 Term Loan and an increase in total equity, which improved as a result of net earnings attributable to Kirby of $122.3 million during 2022, partially offset by treasury stock purchases of $22.9 million. The Company’s debt outstanding as of December 31, 2022 and December 31, 2021 is detailed in Long-Term Financing below.

Marine Transportation

The following table summarizes the Company’s marine transportation fleet:

The Company also owns shifting operations and fleeting facilities for dry cargo barges and tank barges on the Houston Ship Channel and in Freeport and Port Arthur, Texas, and Lake Charles, Louisiana, and a shipyard for building towboats and performing routine maintenance near the Houston Ship Channel, as well as a two-thirds interest in Osprey Line, L.L.C., which transports project cargoes and cargo containers by barge.

For 2022, 58% of the Company’s revenues were generated by KMT. The segment’s customers include many of the major petrochemical and refining companies that operate in the United States. Products transported include intermediate materials used to produce many of the end products used widely by businesses and consumers — plastics, fibers, paints, detergents, oil additives and paper, among others, as well as residual fuel oil, ship bunkers, asphalt, gasoline, diesel fuel, heating oil, crude oil, natural gas condensate and agricultural chemicals. Consequently, the Company’s marine transportation business is directly affected by the volumes produced by the Company’s petroleum, petrochemical and refining customer base.

KMT’s revenues for 2022 increased 22% compared to 2021 and operating income increased 116%, compared to 2021. The increases for 2022 were primarily due to improved term and spot pricing and utilization in the inland market when compared to 2021, as well as

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higher fuel rebills in the inland and coastal markets. Revenues and operating income in 2022 were impacted by record low water levels on the Mississippi River during the 2022 fourth quarter, which increased delay days compared to 2021. Also, the 2022 first quarter was impacted by the COVID-19 Omicron variant as increased cases of the virus among the Company’s mariners led to crewing challenges, lost revenue and increased operating costs. Revenues and operating income in 2021 were impacted by Hurricane Ida which shut down almost the entire Southeast Louisiana refinery and chemical complex and key waterways for an extended period of time during the third quarter. Winter Storm Uri also heavily impacted the 2021 first quarter with the shutdown of many Gulf Coast refineries and chemical plants for an extended period of time starting in mid-February. These emergency shutdowns resulted in significantly reduced liquids production and lower volumes for the Company’s inland marine transportation market during the 2021 first quarter. For 2022 and 2021, the inland tank barge fleet contributed 79% and 76%, respectively, and the coastal fleet contributed 21% and 24%, respectively, of marine transportation revenues.

Overall inland tank barge utilization levels improved in 2022 as compared to 2021, ranging from the mid-80% range during the 2022 first quarter, the low-90% range during the 2022 second and third quarters and the 90% range in the 2022 fourth quarter. The 2022 fourth quarter utilization held steady from the 2022 third quarter despite headwinds as a result of record low water levels on the Mississippi River. During 2021, reduced demand as a result of the COVID-19 pandemic and the resulting economic slowdown contributed to lower barge utilization. Inland tank barge utilization levels ranged from the mid-70% range during the 2021 first quarter, the low to mid-80% range during the 2021 second quarter, the low-80% range during the 2021 third quarter and the mid-to high 80% range during the 2021 fourth quarter. The 2021 first quarter was impacted by reduced volumes as a result of Winter Storm Uri, whereas the 2021 second quarter was favorably impacted by the Colonial Pipeline outage in May. The 2021 third quarter was negatively impacted by Hurricane Ida.

Coastal tank barge utilization levels during 2022 averaged in the low-90% range in the 2022 first and second quarters and low to mid-90% range during the 2022 third and fourth quarters as there was modest improvement in customer demand. For 2021, coastal tank barge utilization levels averaged in the mid-70% range during the 2021 first quarter, the low to mid-70% range during the 2021 second quarter, the mid-70% range during the 2021 third quarter and the 90% range during the 2021 fourth quarter. The increase in coastal tank barge utilization during the 2021 fourth quarter was primarily due to the retirement of underutilized barges in the 2021 third quarter. Barge utilization in the coastal marine fleet continued to be impacted by the oversupply of tank barges in the coastal industry during 2022 and 2021.

Approximately 60% of the inland marine transportation revenues were under term contracts and 40% were spot contract revenues in 2022. Approximately 65% of the inland marine transportation revenues were under term contracts and 35% were spot contract revenues in 2021. Term contracts provide the operations with a reasonably predictable revenue stream. Inland time charters, which insulate the Company from revenue fluctuations caused by weather and navigational delays and temporary market declines, represented 58% of the inland revenues under term contracts during both 2022 and 2021. During 2022 and 2021, approximately 75% and 80%, respectively, of coastal revenues were under term contracts and 25% and 20%, respectively, were spot contract revenues. Coastal time charters represented approximately 90% of coastal revenues under term contracts during 2022 compared to 85% during 2021. Term contracts have contract terms of 12 months or longer, while spot contracts have contract terms of less than 12 months.

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The following table summarizes the average range of pricing changes in term and spot contracts renewed during 2022 compared to contracts renewed during the corresponding quarter of 2021:

(a)
Spot and term contract pricing in the coastal market are contingent on various factors including geographic location, vessel capacity, vessel type, and product serviced.

Effective January 1, 2022, annual escalators for labor and the producer price index on a number of inland multi-year contracts resulted in rate increases on those contracts of approximately 5%, excluding fuel.

The 2022 marine transportation operating margin was 8.4% compared to 4.8% for 2021.

Distribution and Services

The Company, through KDS, sells genuine replacement parts, provides service mechanics to overhaul and repair engines, transmissions, reduction gears and related oilfield services equipment, rebuilds component parts or entire diesel engines, transmissions and reduction gears, and related equipment used in oilfield services, marine, power generation, on-highway and other industrial applications. The Company also rents equipment including generators, industrial compressors, high capacity lift trucks, and refrigeration trailers for use in a variety of industrial markets, and manufactures and remanufactures oilfield service equipment, including pressure pumping units, manufactures cementing and pumping equipment as well as coil tubing and well intervention equipment, electric power generation equipment, specialized electrical distribution and control equipment, and high capacity energy storage/battery systems for oilfield service and railroad customers. The Company sells and manufactures various products used in oil and gas and industrial applications, including those used in hydraulic fracturing and refrigeration systems that, as compared to conventional offerings, reduce emissions. These products made up approximately 16% of KDS’s revenues in 2022.

During 2022, KDS generated 42% of the Company’s revenues, of which 82% was generated from service and parts and 18% from manufacturing. The results of KDS are largely influenced by cycles of the oilfield service industry and oil and gas operator and producer markets, marine, power generation, on-highway and other industrial markets.

Distribution and services revenues for 2022 increased 26% compared to 2021 and operating income increased 143% compared to 2021. In the commercial and industrial market, the increases in 2022 compared to 2021 were primarily attributable to strong economic activity across the U.S. which resulted in higher business levels in the marine and on-highway businesses. Increased product sales in Thermo King also contributed favorably to 2022 results. These results were partially offset by continuing supply chain constraints and delays. Results for the commercial and industrial market in 2021 were impacted by Winter Storm Uri with reduced activity levels at many locations across the southern U.S. during the 2021 first quarter. For 2022 and 2021, the commercial and industrial market contributed 56% and 63%, respectively, of the distribution and services revenues.

In the oil and gas market, revenues improved compared to 2021 due to higher oilfield activity which resulted in increased demand for new transmissions and parts in the distribution business. Although the manufacturing business was heavily impacted by supply chain delays, the business continues to experience increased orders and deliveries of new environmentally friendly pressure pumping equipment and power generation equipment for electric fracturing. For 2022 and 2021, the oil and gas market contributed 44% and 37%, respectively, of the distribution and services revenues.

The distribution and services operating margin for 2022 was 5.7% compared to 3.0% for 2021.

Outlook

Refinery and petrochemical utilization levels remain at high levels. This is favorable for the Company’s barge utilization, which is strong in both inland and coastal markets, and for pricing, which continues to increase. In KDS, despite ongoing supply chain constraints and delays, demand for the Company’s products and services continues to grow. Overall, the Company expects both KMT and KDS to deliver improved financial results in 2023. The Company continues to closely monitor the ever-changing economic landscape related to the impact of higher interest rates and possible recessionary headwinds as it moves through 2023.

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In the inland marine transportation market, conditions are expected to continue to remain favorable in 2023 driven by continued strong barge utilization, improvements in the spot market, renewals of expiring term contracts at higher rates and modest net new barge construction in the industry. The impacts of rising costs from inflationary pressures, including significantly higher fuel prices, are expected to be recovered as term contracts renew and contract escalators reprice in 2023. In coastal marine, improvements in demand and pricing are anticipated in 2023, but revenues and operating income are expected to be impacted by higher planned shipyard maintenance days and ballast water treatment installations on certain vessels during 2023.

KDS results are largely influenced by the cycles of the oil and gas, marine, power generation, on-highway and other related industrial markets. In the oil and gas market, high commodity prices, increasing rig counts, and growing well completions activity are expected to result in increased demand for original equipment manufacturer products, parts, and services as well as for new environmentally friendly pressure pumping equipment and power generation equipment for electric fracturing. In commercial and industrial, favorable economic activity is expected to result in increased demand in power generation, marine repair, and on-highway. However, ongoing supply chain issues and long lead times are expected in the near term, contributing to some volatility as deliveries of products possibly shifting between quarters in 2023 and into 2024.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company evaluates its estimates and assumptions on an ongoing basis based on a combination of historical information and various other assumptions that are believed to be reasonable under the particular circumstances. Actual results may differ from these estimates based on different assumptions or conditions. The Company believes the critical accounting policies that most impact the consolidated financial statements are described below. It is also suggested that the Company’s significant accounting policies, as described in the Company’s financial statements in Note 1, Summary of Significant Accounting Policies, be read in conjunction with this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Accounts Receivable. The Company extends credit to its customers in the normal course of business. The Company regularly reviews its accounts and estimates the amount of uncollectible receivables each period and establishes an allowance for uncollectible amounts. The amount of the allowance is based on the age of unpaid amounts, information about the current financial strength of customers, and other relevant information. Estimates of uncollectible amounts are revised each period, and changes are recorded in the period they become known. Historically, credit risk with respect to these trade receivables has generally been considered minimal because of the financial strength of the Company’s customers; however, a United States or global recession or other adverse economic condition could impact the collectability of certain customers’ trade receivables which could have a material effect on the Company’s results of operations.

Property, Maintenance and Repairs. Property is recorded at cost; improvements and betterments are capitalized as incurred. Depreciation is recorded using the straight-line method over the estimated useful lives of the individual assets. When property items are retired, sold, or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts with any gain or loss on the disposition included in the statement of earnings. Maintenance and repairs on vessels built for use on the inland waterways are charged to operating expense as incurred and includes the costs incurred in USCG inspections unless the shipyard extends the life, improves the operating capacity of the vessel, or replaces significant components of the vessel which results in the costs being capitalized. The Company’s ocean-going vessels are subject to regulatory drydocking requirements after certain periods of time to be inspected, have planned major maintenance performed and be recertified by the ABS. These recertifications generally occur twice in a five-year period. The Company defers the drydocking expenditures incurred on its ocean-going vessels due to regulatory marine inspections by the ABS and amortizes the costs of the shipyard over the period between drydockings, generally 30 or 60 months, depending on the type of major maintenance performed. Drydocking expenditures that extend the life, improve the operating capability of the vessel, or replace significant components of the vessel result in the costs being capitalized. Routine repairs and maintenance on ocean-going vessels are expensed as incurred. Interest is capitalized on the construction of new ocean-going vessels.

The Company performs an impairment assessment whenever events or changes in circumstances indicate that the carrying amount of long-lived assets may not be recoverable. If a triggering event is identified, the Company compares the carrying amount of the asset group to the estimated undiscounted future cash flows expected to result from the use of the asset group. If the carrying amount of the asset group exceeds the estimated undiscounted future cash flows, the Company measures the amount of the impairment by comparing the carrying amount of the asset group to its estimated fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. There are many assumptions and estimates underlying the determination of an impairment event or loss, if any. The assumptions and estimates include, but are not limited to, estimated fair market value of the assets and estimated future cash flows expected to be generated by these assets, which are based on additional assumptions such as asset utilization, length of service the asset will be used, and estimated salvage values. Although the Company believes its assumptions and estimates are reasonable, deviations from the assumptions and estimates could produce a materially different result.

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Goodwill. The excess of the purchase price over the fair value of identifiable net assets acquired in transactions accounted for as a purchase is included in goodwill. Management monitors the recoverability of goodwill on an annual basis, or whenever events or circumstances indicate that interim impairment testing is necessary. The amount of goodwill impairment, if any, is typically measured based on projected discounted future operating cash flows using an appropriate discount rate and valued based on the excess of a reporting unit’s carrying amount over its fair value, incorporating all tax impacts caused by the recognition of the impairment loss. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved. There are many assumptions and estimates underlying the determination of an impairment event or loss, if any. Although the Company believes its assumptions and estimates are reasonable, deviations from the assumptions and estimates could produce a materially different result.

Accrued Insurance. The Company is subject to property damage and casualty risks associated with operating vessels carrying large volumes of bulk liquid and dry cargo in a marine environment. The Company maintains insurance coverage against these risks subject to a deductible, below which the Company is liable. In addition to expensing claims below the deductible amount as incurred, the Company also maintains a reserve for losses that may have occurred but have not been reported to the Company, or are not yet fully developed. The Company uses historic experience and actuarial analysis by outside consultants to estimate an appropriate level of accrued liabilities. If the actual number of claims and magnitude were substantially greater than assumed, the required level of accrued liabilities for claims incurred but not reported or fully developed could be materially understated. The Company records receivables from its insurers for incurred claims above the Company’s deductible. If the solvency of the insurers became impaired, there could be an adverse impact on the accrued receivables and the availability of insurance.

Acquisitions

On March 31, 2022, the Company paid $3.9 million in cash to purchase assets of a gearbox repair company in KDS.

During 2021, the Company purchased four inland tank barges from a leasing company for $7.5 million in cash. The Company had been leasing the barges prior to the purchase.

On October 4, 2021, the Company paid $1.6 million in cash to purchase assets of an energy storage systems manufacturer based in Texas which have been key to the development of new power generation solutions for electric fracturing equipment.

During 2020, the Company purchased six newly constructed inland pressure barges for $39.4 million in cash.

On April 1, 2020, the Company completed the acquisition of the inland tank barge fleet of Savage Inland Marine, LLC (“Savage”) for $279 million in cash. Savage’s tank barge fleet consisted of 92 inland tank barges with approximately 2.5 million barrels of capacity and 45 inland towboats. The Savage assets that were acquired primarily move petrochemicals, refined products, and crude oil on the Mississippi River, its tributaries, and the Gulf Intracoastal Waterway. The Company also acquired Savage’s ship bunkering business and barge fleeting business along the Gulf Coast.

On January 3, 2020, the Company completed the acquisition of substantially all the assets of Convoy for $37.2 million in cash. Convoy is an authorized dealer for Thermo King refrigeration systems for trucks, railroad cars and other land transportation markets for North and East Texas and Colorado.

Financing of these purchases and acquisitions was through borrowings under the Company’s Revolving Credit Facility and cash provided by operating activities.

Results of Operations

The following table sets forth the Company’s marine transportation and distribution and services revenues and the percentage of each to total revenues for the comparable periods (dollars in thousands):

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Marine Transportation

The following table sets forth a year over year comparison of KMT’s revenues, costs and expenses, operating income and operating margins (dollars in thousands):

The following table shows the marine transportation markets serviced by the Company, the marine transportation revenue distribution, products moved and the drivers of the demand for the products the Company transports:

2022 Compared to 2021

Marine Transportation Revenues

KMT’s revenues for 2022 increased 22% compared to 2021 and operating income increased 116%, compared to 2021. The increases for 2022 were primarily due to improved term and spot pricing and utilization in the inland market when compared to 2021 as well as higher fuel rebills in the inland and coastal markets. Revenues and operating income in 2022 were impacted by record low water levels on the Mississippi River during the 2022 fourth quarter, which increased delay days compared to 2021. Also, the 2022 first quarter was impacted by the COVID-19 Omicron variant as increased cases of the virus among the Company’s mariners led to crewing challenges, lost revenue and increased operating costs. Revenues and operating income in 2021 were impacted by Hurricane Ida which shut down almost the entire Southeast Louisiana refinery and chemical complex and key waterways for an extended period of time during the third quarter. Winter Storm Uri also heavily impacted the 2021 first quarter with the shutdown of many Gulf Coast refineries and chemical plants for an extended period of time starting in mid-February. These emergency shutdowns resulted in significantly reduced liquids production and lower volumes for the Company’s inland marine transportation market during the 2021 first quarter. For 2022 and 2021, the inland tank barge fleet contributed 79% and 76%, respectively, and the coastal fleet contributed 21% and 24%, respectively, of marine transportation revenues.

Overall inland tank barge utilization levels improved in 2022 compared to 2021, ranging from the mid-80% range during the 2022 first quarter, the low-90% range during the 2022 second and third quarters and the 90% range in the 2022 fourth quarter. The 2022 fourth quarter utilization held steady from the 2022 third quarter despite headwinds as a result of record low water levels on the Mississippi River. During 2021, reduced demand as a result of the COVID-19 pandemic and the resulting economic slowdown contributed to lower barge utilization. Inland tank barge utilization levels ranged from the mid-70% range during the 2021 first quarter, the low to mid-80% range during the 2021 second quarter, the low 80% range during the 2021 third quarter and the mid-to high 80% range during the 2021 fourth quarter. The 2021 first quarter was impacted by reduced volumes as a result of Winter Storm Uri, whereas

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the 2021 second quarter was favorably impacted by the Colonial Pipeline outage in May. The 2021 third quarter was negatively impacted by Hurricane Ida.

Coastal tank barge utilization levels during 2022 averaged in the low-90% range in the 2022 first and second quarters and low to mid-90% range during the 2022 third and fourth quarters as there was some modest improvement in customer demand. For 2021, coastal tank barge utilization levels averaged in the mid-70% range during the 2021 first quarter, the low to mid-70% range during the 2021 second quarter, the mid-70% range during the 2021 third quarter and the 90% range during the 2021 fourth quarter. The increase in coastal tank barge utilization during the 2021 fourth quarter was primarily due to the retirement of underutilized barges in the 2021 third quarter. Barge utilization in the coastal marine fleet continued to be impacted by the oversupply of tank barges in the coastal industry during 2022 and 2021.

The petrochemical market, the Company’s largest market, contributed 49% of marine transportation revenues for 2022, reflecting increased volumes and utilization from Gulf Coast petrochemical plants for both domestic consumption and to terminals for export destinations as a result of improved economic conditions following the height of the COVID-19 pandemic. During the 2021 first quarter, as much as 80% of U.S. chemical plant capacity was offline at the peak of Winter Storm Uri, contributing to significantly reduced volumes and revenues; however, volumes and revenues sequentially improved in the 2021 second quarter as chemical plants resumed full operations by May. During the 2021 third quarter, volumes declined again as numerous Louisiana chemical plants were shut down for an extended period of time as a result of Hurricane Ida.

The black oil market, which contributed 28% of marine transportation revenues for 2022, reflected improved demand as refinery utilization and production levels of refined petroleum products and fuel oils increased following the height of the COVID-19 pandemic. During 2022, the Company transported crude oil and natural gas condensate produced from the Permian Basin and the Eagle Ford shale formation in Texas, both along the Gulf Intracoastal Waterway with inland vessels and in the Gulf of Mexico with coastal equipment. Additionally, the Company transported volumes of Utica natural gas condensate downriver from the Mid-Atlantic to the Gulf Coast and Canadian and Bakken crude downriver from the Midwest to the Gulf Coast. During the 2021 first quarter, U.S. refinery utilization dropped to near 40% during the peak of Winter Storm Uri, contributing to significantly reduced volumes and revenues. Although refinery utilization increased back to near 90% in the 2021 second quarter contributing to sequentially increased volumes and revenues, volumes declined again during the 2021 third quarter as Louisiana refineries were shut down for an extended period of time as a result of Hurricane Ida.

The refined petroleum products market, which contributed 20% of marine transportation revenues for 2022, reflected increased volumes in the inland market as refinery utilization and product levels improved following the height of the COVID-19 pandemic. During the 2021 first quarter, U.S. refinery utilization dropped to near 40% during the peak of Winter Storm Uri, contributing to significantly reduced volumes and revenues. Although refinery utilization increased back to near 90% in the 2021 second quarter contributing to sequentially increased volumes and revenues, volumes declined again during the 2021 third quarter as Louisiana refineries were shut down for an extended period of time as a result of Hurricane Ida.

The agricultural chemical market, which contributed 3% of marine transportation revenues for 2022, reflected improved demand for transportation of both domestically produced and imported products, primarily due to improved economic conditions following the height of the COVID-19 pandemic.

Inland operations incurred 10,244 delay days in 2022, 7% more than the 9,605 delay days that occurred during 2021. Delay days measure the lost time incurred by a tow (towboat and one or more tank barges) during transit when the tow is stopped due to weather, lock conditions, or other navigational factors. Delay days for 2022 and 2021 were impacted by hurricanes and tropical storms, poor operating conditions due to heavy wind and fog along the Gulf Coast, water conditions on the Mississippi River System, and closures of key waterways, including the Gulf Intracoastal Waterway, due in part to lock maintenance projects.

Approximately 60% of the inland marine transportation revenues were under term contracts and 40% were spot contract revenues in 2022. Approximately 65% of the inland marine transportation revenues were under term contracts and 35% were spot contract revenues in 2021. Term contracts provide operations with a reasonably predictable revenue stream. Inland time charters, which insulate the Company from revenue fluctuations caused by weather and navigational delays and temporary market declines, represented 58% of the inland revenues under term contracts during both 2022 and 2021. During 2022 and 2021, approximately 80% and 85%, respectively, of coastal revenues were under term contracts and 20% and 15%, respectively, were spot contract revenues. Coastal time charters represented approximately 90% of coastal revenues under term contracts during 2022 compared to 85% during 2021. Term contracts have contract terms of 12 months or longer, while spot contracts have contract terms of less than 12 months.

The following table summarizes the average range of pricing changes in term and spot contracts renewed during 2022 compared to contracts renewed during the corresponding quarter of 2021:

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(a)
Spot and term contract pricing in the coastal market are contingent on various factors including geographic location, vessel capacity, vessel type, and product serviced.

Effective January 1, 2022, annual escalators for labor and the producer price index on a number of inland multi-year contracts resulted in rate increases on those contracts of approximately 5%, excluding fuel.

Marine Transportation Costs and Expenses

Total costs and expenses for 2022 increased 18% compared to 2021. Costs of sales and operating expenses for 2022 increased 24% compared to 2021 primarily reflecting improved business activity levels, inflationary cost pressures and increased fuel costs as well as incremental costs associated with the COVID-19 Omicron variant during the 2022 first quarter.

The inland marine transportation fleet operated an average of 271 towboats during 2022, of which an average of 59 were chartered, compared to 250 during 2021, of which an average of 35 were chartered. The increase was primarily due to increasing business activity levels. Generally, variability in demand or anticipated demand, as tank barges are added to or removed from the fleet, as chartered towboat availability changes, or as weather or water conditions dictate, the Company charters in or releases chartered towboats in an effort to balance horsepower needs with current requirements. The Company has historically used chartered towboats for approximately one-fourth of its horsepower requirements.

Inland operations consumed 48.4 million gallons of diesel fuel in 2022 compared to 46.8 million gallons consumed during 2021. The average price per gallon of diesel fuel consumed during 2022 was $3.70 per gallon compared to $2.13 per gallon for 2021. Fuel escalation and de-escalation clauses are typically included in term contracts and are designed to rebate fuel costs when prices decline and recover additional fuel costs when fuel prices rise; however, there is generally a 30 to 120 day delay before contracts are adjusted. Spot contracts do not have escalators for fuel.

Selling, general and administrative expenses for 2022 increased 8% compared to 2021 as the Company was confronted with inflationary cost pressures. The increase is primarily due to higher salary and wage increases effective July 1, 2022, increased incentive compensation accruals and severance expense. Business activity levels in 2021 were impacted by COVID-19 and the resulting economic slowdown as well as Winter Storm Uri during the 2021 first quarter and Hurricane Ida during the 2021 third quarter.

Depreciation and amortization for 2022 decreased slightly compared to 2021. The decrease was primarily due to retirements, sales and impairment of marine equipment during 2022 and 2021.

Marine Transportation Operating Income and Operating Margins

KMT operating income for 2022 increased 116% compared to 2021. The operating margin was 8.4% for 2022 compared to 4.8% for 2021. The increase in operating income and operating margin were primarily due to increased barge utilization and higher term and spot contract pricing in the inland and coastal markets, partially offset by increased fuel prices as well as the impact of the COVID-19 Omicron variant during the 2022 first quarter. The 2021 results were impacted by a reduction in demand due to the COVID-19 pandemic and reduced volumes as a result of Hurricane Ida and Winter Storm Uri.

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Distribution and Services

The following table sets forth a year over year comparison of KDS’s revenues, costs and expenses, operating income (loss) and operating margins (dollars in thousands):

The following table shows the markets serviced by the Company, the revenue distribution, and the customers for each market:

2022 Compared to 2021

Distribution and Services Revenues

KDS revenues for 2022 increased 26% compared to 2021. In the commercial and industrial market, the increase was primarily attributable to strong economic activity across the U.S. which resulted in higher business levels in the marine and on-highway businesses. The commercial and industrial market’s 2021 results were impacted by Winter Storm Uri with reduced activity levels at many locations across the southern U.S. during the first quarter. For 2022 and 2021, the commercial and industrial market contributed 56% and 63%, respectively, of KDS revenues.

The oil and gas market revenues increase compared to 2021 primarily due to higher oilfield activity which resulted in increased demand for new transmissions and parts in the distribution business. Although the manufacturing business was heavily impacted by supply chain delays, the business continued to experience increased orders and deliveries of new environmentally friendly pressure pumping equipment and power generation equipment for electric fracturing. For 2022 and 2021, the oil and gas market contributed 44% and 37%, respectively, of KDS revenues.

Distribution and Services Costs and Expenses

Total costs and expenses for 2022 increased 23% compared to 2021 reflecting higher costs of sales and operating expenses as a result of inflationary cost pressures and higher demand in the marine and on-highway businesses in commercial and industrial markets, as well as increased demand in the oil and gas market due to higher oilfield activity levels.

Selling, general and administrative expenses for 2022 increased 16% compared to 2021. The increase was primarily due to salaries and costs related to the acquisition of assets of an energy storage systems manufacturer in the 2021 fourth quarter which included engineering talent required to further the Company’s electrification efforts, continued inflationary cost pressures, annual salary raises, higher incentive compensation accruals and severance expense.

Depreciation and amortization for 2022 decreased 18% compared to 2021. The decrease was primarily due to sales of property and equipment and reduced capital spending during 2021.

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Distribution and Services Operating Income (Loss) and Operating Margins

Operating income for KDS for 2022 increased 143% compared to 2021. The operating margin was 5.7% for 2022 compared to 3.0% for 2021. The results reflect increased business levels in both the commercial and industrial and oil and gas markets, partially offset by higher costs and expenses due to increased activity levels.

General Corporate Expenses

General corporate expenses for 2022, 2021, and 2020 were $18.6 million, $13.8 million and $11.1 million, respectively. General corporate expenses were higher in 2022 than 2021 primarily due to increased salaries and wages, higher incentive compensation accruals, higher legal and professional fees, and severance expense.

Gain on Disposition of Assets

The Company reported net gains on disposition of assets of $8.3 million, $5.8 million, and $0.1 million in 2022, 2021, and 2020, respectively. The net gains were predominantly from the sales or retirements of marine equipment.

Other Income and Expenses

The following table sets forth a year over year comparison of impairments and other charges, other income, noncontrolling interests, and interest expense (dollars in thousands):

Impairments and Other Charges

No impairments were recognized during 2022. For 2021, impairments and other charges includes $340.7 million before taxes, $275.1 million after taxes, or $4.58 per share, non-cash charges related to impairment of long-lived assets related to coastal marine transportation equipment and impairment of goodwill in KMT.

See Note 7, Impairments and Other Charges for additional information.

Other Income

Other income for 2022, 2021, and 2020 includes income of $13.9 million, $8.2 million and $6.2 million, respectively, for all components of net benefit costs except the service cost component related to the Company’s defined benefit plans.

Interest Expense

The following table sets forth average debt, average interest rate, and capitalized interest excluded from interest expense (dollars in thousands):

Interest expense for 2022 increased 5% compared to 2021, primarily due to a higher average interest rate, partially offset by a lower average debt outstanding as a result of debt repayments.

(Provision) Benefit for Taxes on Income

On November 13, 2021, the voters of the state of Louisiana approved a constitutional amendment that removed the corporate tax deduction for federal income taxes paid and lowered the corporate income tax rate from 8% to 7.5% effective January 1, 2022. The result of the amendment was an increase in the effective Louisiana state income tax rate, net of deduction for federal income tax, from 6.3% to 7.5%. As a result of the amendment, the Company recognized a one-time deferred tax provision of $5.7 million during the

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fourth quarter of 2021 due to remeasuring the Company’s Louisiana and U.S. deferred tax assets and liabilities based on the new effective Louisiana state income tax rate.

Financial Condition, Capital Resources and Liquidity

Balance Sheet

The following table sets forth a year over year comparison of the significant components of the balance sheets (dollars in thousands):

2022 Compared to 2021

Current assets as of December 31, 2022 increased 21% compared to December 31, 2021. Trade accounts receivable increased 16% primarily due to increased business activity in both KMT and KDS. Other accounts receivable decreased 24%, primarily due to recoveries on the settlement of insurance claims. Inventories increased by 39% primarily due to higher activity and the impact of supply chain delays in KDS resulting in buildup for projects that are expected to be delivered in 2023.

Property and equipment, net of accumulated depreciation, at December 31, 2022 decreased 1% compared to December 31, 2021. The decrease reflected $193.9 million of depreciation expense and $31.0 million of property disposals, partially offset by $175.6 million of capital additions (including accrued capital expenditures) and $3.9 million primarily related to the acquisition of assets during 2022, more fully described under Cash Flows and Capital Expenditures below.

Operating lease right-of-use assets as of December 31, 2022 decreased 8% compared to December 31, 2021, primarily due to lease amortization expense, partially offset by new leases acquired.

Other intangibles, net, as of December 31, 2022 decreased 14% compared to December 31, 2021, primarily due to amortization.

Other assets as of December 31, 2022 increased 31% compared to December 31, 2021, primarily due to an increase in pension assets.

Current liabilities as of December 31, 2022 increased 18% compared to December 31, 2021. Accounts payable increased 40%, primarily due to higher business activity levels in KMT and KDS. Accrued liabilities decreased 13%, primarily due to the settlement of insurance claims. Deferred revenues increased 64%, primarily due to deposits on equipment expected to be shipped in 2023 in KDS.

Long-term debt, net – less current portion, as of December 31, 2022, decreased 7% compared to December 31, 2021, primarily reflecting repayments of $145.0 million under the Term Loans, partially offset by the issuance of $60 million of debt under the 3.46% series A notes on October 20, 2022. Net debt discounts and deferred issuance costs were $3.7 million (excluding $1.8 million attributable to the Revolving Credit Facility included in other assets on the balance sheet) at December 31, 2022 and $3.6 million at December 31, 2021.

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Deferred income taxes as of December 31, 2022 increased 9% compared to December 31, 2021, primarily reflecting the 2022 deferred tax provision of $37.8 million.

Operating lease liabilities – less current portion, as of December 31, 2022 decreased 11% compared to December 31, 2021, primarily due to lease payments made, partially offset by new leases acquired and liability accretion.

Other long-term liabilities as of December 31, 2022 decreased 67% compared to December 31, 2021, primarily due to a decrease in pension liabilities and amortization of intangible liabilities.

Total equity as of December 31, 2022 increased 5% compared to December 31, 2021, primarily due to net earnings attributable to Kirby of $122.3 million and other comprehensive income of $42.8 million for 2022, partially offset by treasury stock purchases of $22.9 million.

Retirement Plans

The Company sponsors a defined benefit plan for its inland vessel personnel and shore based tankermen. The plan benefits are based on an employee’s years of service and compensation. The plan assets consist primarily of equity and fixed income securities. The Company’s pension plan funding strategy is to make annual contributions in amounts equal to or greater than amounts necessary to meet minimum government funding requirements. No pension contributions to that plan were made in 2022, 2021 or 2020.

On April 12, 2017, the Company amended its pension plan to cease all benefit accruals for periods after May 31, 2017 for certain participants. Participants grandfathered and not impacted were those, as of the close of business on May 31, 2017, who either (a) had completed 15 years of pension service or (b) had attained age 50 and completed 10 years of pension service. Participants non-grandfathered are eligible to receive discretionary 401(k) plan contributions.

On February 14, 2018, with the acquisition of Higman Marine, Inc. (“Higman”), the Company assumed Higman’s pension plan (the “Higman Pension Plan”) for its inland vessel personnel and office staff. On March 27, 2018, the Company amended the Higman Pension Plan to close it to all new entrants and cease all benefit accruals for periods after May 15, 2018 for all participants. The Company made contributions to the Higman Pension Plan of $0.9 million, $0.5 million and $2.2 million for the years ended December 31, 2022, 2021 and 2020, respectively.

The aggregate fair value of plan assets of the Company’s pension plans was $341.1 million and $430.8 million at December 31, 2022, and December 31, 2021, respectively.

The Company’s investment strategy focuses on total return on invested assets (capital appreciation plus dividend and interest income). The primary objective in the investment management of assets is to achieve long-term growth of principal while avoiding excessive risk. Risk is managed through diversification of investments within and among asset classes, as well as by investing in asset classes offering sufficient liquidity and trading history.

The Company makes various assumptions when determining defined benefit plan costs including, but not limited to, the current discount rate and the expected long-term return on plan assets. Discount rates are determined annually and are based on a yield curve that consists of a hypothetical portfolio of high quality corporate bonds with maturities matching the projected benefit cash flows. The Company used discount rates of 5.5% for both the Kirby pension plan and the Higman pension plan in 2022 and 3.0% for the Kirby pension plan and 3.1% for the Higman pension plan in 2021. The Company estimates that every 0.1% decrease in the discount rate results in an increase in the accumulated benefit obligation (“ABO”) of approximately $3.7 million. The Company assumed that plan assets would generate a long-term rate of return of 6.75% in both 2022 and 2021. The Company developed its expected long-term rate of return assumption by evaluating input from investment consultants and comparing historical returns for various asset classes with its actual and targeted plan investments. The Company believes that long-term asset allocation, on average, will approximate the targeted allocation.

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Long-Term Financing

The following table summarizes the Company’s outstanding debt (in thousands):

(a)
Variable interest rate of 5.8% at December 31, 2022.

(b)
Variable interest rate of 1.5% at December 31, 2021.

(c)
Excludes $1.8 million attributable to the 2027 Revolving Credit Facility included in other assets at December 31, 2022 and $1.4 million attributable to the 2024 Revolving Credit Facility included in other assets at December 31, 2021.

At the beginning of 2022, the Company had an amended and restated credit agreement (the “2024 Credit Agreement”) with a group of commercial banks, with JPMorgan Chase Bank, N.A. as the administrative agent bank, that allowed for an $850 million unsecured revolving credit facility (the “2024 Revolving Credit Facility”) and an unsecured term loan (the “2024 Term Loan”) with a maturity date of March 27, 2024. The 2024 Term Loan was prepayable, in whole or in part, without penalty.

On July 29, 2022, the Company entered into a new credit agreement (the “2027 Credit Agreement”) with a group of commercial banks, with JPMorgan Chase Bank, N.A. as the administrative agent bank that allows for a $500 million unsecured revolving credit facility (the “2027 Revolving Credit Facility”) and a $250 million unsecured term loan (the “2027 Term Loan”) with a maturity date of July 29, 2027. The 2027 Credit Agreement replaced the 2024 Credit Agreement. In conjunction with entering into the 2027 Credit Agreement, on July 29, 2022, the Company borrowed $35 million under the 2027 Revolving Credit Facility and $250 million under the 2027 Term Loan to repay borrowings under the 2024 Term Loan. In the fourth quarter of 2022, the Company repaid $80.0 million under the 2027 Term Loan prior to scheduled maturities. As a result, no repayments are required until June 30, 2025. Outstanding letters of credit under the 2027 Revolving Credit Facility were $5.1 million and available borrowing capacity was $494.9 million as of December 31, 2022.

The 2027 Term Loan is repayable in quarterly installments with no repayments required until June 30, 2025, in increasing percentages of the original principal amount of the loan, with the remaining unpaid balance of approximately $43.8 million payable upon maturity, assuming no prepayment. Borrowings under the 2027 Credit Agreement may be used for general corporate purposes including acquisitions. The 2027 Revolving Credit Facility includes a $25 million commitment which may be used for standby letters of credit.

The Company has $350 million of 3.29% senior unsecured notes due February 27, 2023 (the “2023 Notes”). No principal payments are required until maturity.

On February 3, 2022, the Company entered into a note purchase agreement for the issuance of $300 million of unsecured senior notes with a group of institutional investors, consisting of $60 million of 3.46% series A notes (“Series A Notes”) and $240 million of 3.51% series B notes (“Series B Notes”), each due January 19, 2033 (collectively, the “2033 Notes”). The Series A Notes were issued on October 20, 2022, and the Series B Notes were issued on January 19, 2023. No principal payments will be required until maturity. Beginning in 2023, interest payments of $5.3 million are due semi-annually on January 19 and July 19 of each year, with the exception of the first payment on January 19, 2023, which was $0.5 million.

The Company has a $10.0 million line of credit (“Credit Line”) with Bank of America, N.A. (“Bank of America”) for short-term liquidity needs and letters of credit, with a maturity date of June 30, 2024. Outstanding letters of credit under the $10.0 million credit line were $0.6 million and available borrowing capacity was $9.4 million as of December 31, 2022.

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As of December 31, 2022, the Company was in compliance with all covenants under its debt instruments. For additional information about the Company’s debt instruments, see Note 5, Long-Term Debt.

Cash Flow and Capital Expenditures

The Company generated net cash provided by operating activities of $294.1 million, $321.6 million, and $444.9 million for the years ended December 31, 2022, 2021, and 2020, respectively. The 9% decrease in 2022 as compared to 2021 was primarily due to a tax refund of $119.5 million, including accrued interest, for the Company’s 2019 federal tax return which was received in the 2021 first quarter. As activity levels increased in 2022, KMT and KDS saw increased revenues and operating income. However, inventory levels increased approximately 39% in 2022 as a result of higher activity and having to manage supply chain constraints seen especially in KDS during 2022. Accounts receivable increased during 2022 because of increased revenues which was offset by higher levels of accounts payable due to the increased business activity levels. Increases in KMT revenues and operating income were driven by increased barge utilization and higher term and spot contract pricing in the inland and coastal markets during 2022. KMT revenues and operating income during 2021 were negatively impacted by Winter Storm Uri in the 2021 first quarter and Hurricane Ida in the 2021 third quarter.

During 2022, 2021, and 2020, the Company generated cash of $36.9 million, $51.3 million, and $17.3 million, respectively, from proceeds from the disposition of assets, and $3.9 million, $0.6 million, and $0.4 million, respectively, from proceeds from the exercise of stock options.

For 2022, cash generated was used for capital expenditures of $172.6 million (net of an increase in accrued capital expenditures of $3.0 million), including $8.3 million for inland towboat construction and $164.3 million primarily for upgrading existing marine equipment and marine transportation and distribution and services facilities. The Company also used $3.9 million for acquisitions of businesses and marine equipment, more fully described under Acquisitions above.

For 2021, cash generated was used for capital expenditures of $98.0 million (net of an increase in accrued capital expenditures of $18.6 million), including $6.2 million for inland towboat construction and $91.8 million primarily for upgrading existing marine equipment and marine transportation and distribution and services facilities. The Company also used $9.1 million for acquisitions of businesses and marine equipment, more fully described under Acquisitions above.

Treasury Stock Purchases

During 2022, the Company purchased 0.4 million shares of its common stock for $22.9 million, at an average price of $59.32 per share. The Company did not purchase any treasury stock during 2021 or 2020. On January 30, 2023, the Board approved a five million share increase in the Company’s repurchase authorization. As of February 17, 2023, the Company had approximately 6.0 million shares available under its existing repurchase authorizations. Historically, treasury stock purchases have been financed through operating cash flows and borrowings under the Company’s Revolving Credit Facility. The Company is authorized to purchase its common stock on the New York Stock Exchange and in privately negotiated transactions. When purchasing its common stock, the Company is subject to price, trading volume and other market considerations. Shares purchased may be used for reissuance upon the exercise of stock options or the granting of other forms of incentive compensation, in future acquisitions for stock or for other appropriate corporate purposes.

Liquidity and Capital Resources

Funds generated from operations are available for acquisitions, capital expenditure projects, common stock repurchases, repayments of borrowings and for other corporate and operating requirements. In addition to net cash flow provided by operating activities, as of February 17, 2023, the Company had cash equivalents of $316.5 million, availability of $494.9 million under its Revolving Credit Facility and $9.4 million available under its Credit Line.

Neither the Company, nor any of its subsidiaries, is obligated on any debt instrument, swap agreement, or any other financial instrument or commercial contract which has a rating trigger, except for pricing grids on its 2027 Credit Agreement.

The Company expects to continue to be able to fund expenditures for acquisitions, capital construction projects, common stock repurchases, repayment of borrowings, and for other operating requirements both in the short term and in the long term from a combination of available cash and cash equivalents, funds generated from operating activities, and available financing arrangements.

The 2027 Revolving Credit Facility’s commitment is in the amount of $500 million and expires July 29, 2027. The 2023 Notes do not mature until February 27, 2023 and require no prepayments. The Company intends to use a combination of the proceeds from the issuance of the 2033 Notes in October 2022 and January 2023 and availability under the 2027 Revolving Credit Facility to repay the 2023 Notes upon maturity. The 4.2% senior unsecured notes do not mature until March 1, 2028 and require no prepayments. The 2027 Term Loan in the amount of $250 million is subject to quarterly installments, beginning June 30, 2025, in increasing percentages of the

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original principal amount of the loan, with the remaining unpaid balance of approximately $43.8 million payable on July 29, 2027, assuming no prepayments. The 2027 Term Loan is prepayable, in whole or in part, without penalty.

There are numerous factors that may negatively impact the Company’s cash flow in 2023. For a list of significant risks and uncertainties that could impact cash flows, see Note 14, Contingencies and Commitments in the financial statements, and Item 1A — Risk Factors. Amounts available under the Company’s existing financing arrangements are subject to the Company continuing to meet the covenants of the credit facilities as described in Note 5, Long-Term Debt in the financial statements.

The Company has issued guaranties or obtained standby letters of credit and performance bonds supporting performance by the Company and its subsidiaries of contractual or contingent legal obligations of the Company and its subsidiaries incurred in the ordinary course of business. The aggregate notional value of these instruments is $19.3 million at December 31, 2022, including $12.2 million in letters of credit and $7.1 million in performance bonds. All of these instruments have an expiration date within two years. The Company does not believe demand for payment under these instruments is likely and expects no material cash outlays to occur in connection with these instruments.

The Company’s marine transportation term contracts typically contain fuel escalation clauses, or the customer pays for the fuel. However, there is generally a 30 to 120 day delay before contracts are adjusted depending on the specific contract. In general, the fuel escalation clauses are effective over the long-term in allowing the Company to recover changes in fuel costs due to fuel price changes. However, the short-term effectiveness of the fuel escalation clauses can be affected by a number of factors including, but not limited to, specific terms of the fuel escalation formulas, fuel price volatility, navigating conditions, tow sizes, trip routing, and the location of loading and discharge ports that may result in the Company over or under recovering its fuel costs. The Company’s spot contract rates generally reflect current fuel prices at the time the contract is signed but do not have escalators for fuel.

The Company currently leases various facilities and equipment under cancelable and noncancelable operating leases. Future minimum lease payments under operating leases that have initial noncancelable lease terms in excess of one year are detailed in Note 6, Leases. Lease payments for towing vessels exclude non-lease components. The Company estimates that non-lease components comprise approximately 70% of charter rental costs, related to towboat crew costs, maintenance and insurance.

The Company’s pension plan funding strategy is to make annual contributions in amounts equal to or greater than amounts necessary to meet minimum government funding requirements. The ABO is based on a variety of demographic and economic assumptions, and the pension plan assets’ returns are subject to various risks, including market and interest rate risk, making an accurate prediction of the pension plan contribution difficult resulting in the Company electing to only make an expected pension contribution forecast of one year. As of December 31, 2022, the Company’s pension plan funding was 105% of the pension plans’ ABO, including the Higman pension plan. The Company expects to make additional pension contributions of $8.4 million in 2023.

While inflationary pressures have increased in the second half of 2021 and into 2022, the Company has certain mechanisms designed to help mitigate the impacts of rising costs. For example, KMT has long-term contracts which generally contain cost escalation clauses whereby certain costs, including fuel as noted above, can be largely passed through to its customers. Spot contract rates include the cost of fuel and are subject to market volatility. In KDS, the cost of major components for large manufacturing orders is secured with suppliers at the time a customer order is finalized, which limits exposure to inflation. The repair portion of KDS is based on prevailing current market rates.

Accounting Standards

For a discussion of recently issued accounting standards, see Note 1, Summary of Significant Accounting Policies.