COVID-19, Oil Collapse Hurt Kirby Bottom Line
In its first-quarter earnings report May 5, Kirby Corporation reported that its marine transportation segment overcame unfavorable operating conditions and a near-record number of delay days to generate higher revenues and improved operating margins compared to a year ago.
That’s the good news.
On the downside, the COVID-19 crisis and the collapse in oil prices heavily impacted the company’s operations and profitability, particularly in its distribution and services segment.
The bottom line is that Kirby reported a net loss of $245 million, or $4.15 per share, compared with earnings of $44.3 million or $.74 per share for the 2019 first quarter. Excluding one-time items in the 2020 first quarter, net earnings were $35.5 million or $.59 per share.
Consolidated revenues for the 2020 first quarter were $643.9 million, compared with $744.6 million a year ago.
“At Kirby, our first priority is the safety, health and well-being of our employees, customers and communities,” said David Grzebinski, Kirby president and CEO. “At the onset of COVID-19, we implemented our pandemic response plan, and I am extremely proud of the initiative, dedication and commitment our employees have demonstrated during these difficult times. We have limited the direct impact of COVID-19 on our company through quarantining and other actions while maintaining business continuity.
“Unfortunately, we have also had to implement workforce reductions, furloughs and reduced work schedules in the distribution and services segment. These are difficult decisions, and I understand the impact they have on the affected employees and their families; however, these actions are necessary to allow that business to remain viable.”
The company started the year with improving market conditions in the marine business and stable conditions in distribution and services, Grzebinski said.
“Most of the first quarter was solid, but as the COVID-19 crisis deepened and energy prices collapsed, business activity levels declined in distribution and services,” he said. “Although there are many unknowns, and business levels are expected to decline for a period of time, Kirby has ample liquidity, and we expect meaningful free cash flow in 2020. As such, we remain confident that Kirby is well-positioned to overcome the current economic challenges while remaining focused on safety and serving our customers.”
Marine Transportation Segment
Kirby reported that marine transportation revenues for the 2020 first quarter were $403.3 million, compared with $368.1 million for the 2019 first quarter. Operating income for the 2020 first quarter was $50.7 million compared with $35.4 million for the 2019 first quarter. Operating margin for the 2020 first quarter was 12.6 percent compared with 9.6 percent for the 2019 first quarter.
In the inland market, average barge utilization was in the low- to mid-90 percent range during the quarter, the company reported. Operating conditions were unfavorable due to poor weather conditions, including fog and wind along the Gulf Coast and flooding on the Mississippi River, as well as lock closures on key waterways. These conditions resulted in 4,490 delay days, just short of the record 4,613 delay days in the 2019 first quarter.
Spot market and term contract pricing improved during the quarter, with spot rates increasing in the mid-single digit range sequentially and year-over-year, Kirby said. Average term contract pricing on expiring contracts increased in the low-single digits. Revenues in the inland market increased 13 percent compared to the 2019 first quarter, primarily due to improved pricing and the 2019 acquisition of Cenac Marine Services LLC. The operating margin for the inland business was in the mid-teens during the quarter and was adversely impacted by the significant delay days.
In the coastal market, barge utilization rates were in the low- to mid-80 percent range during the 2020 first quarter. Compared to the 2019 first quarter, spot market and term contract pricing was approximately 10–15 percent higher. Revenues in the coastal market were similar to the 2019 first quarter with the impact of higher pricing being offset by planned shipyard days on large-capacity vessels. During the quarter, the coastal operating margin was in the low single digits.
“In the first quarter in marine transportation, despite poor seasonal operating conditions, our inland marine business had strong activity with elevated demand, high barge utilization levels and increased pricing for both spot and term contracts,” Grzebinski said. “Similarly, tight market conditions in coastal resulted in good barge utilization and improved spot and term contract pricing.
“Since the onset of the COVID-19 pandemic, marine activity has remained relatively strong, with many customers using incremental barges to ready their supply chains, store products and relocate inventories. However, with many refineries and some chemical plants curtailing production in response to lower consumer demand, our barge utilization levels started to decline in mid-April.”
Distribution And Services Segment
Distribution and services revenues for the 2020 first quarter were $240.7 million, compared with $376.5 million for the 2019 first quarter, the company said. Operating income for the 2020 first quarter was $3.7 million compared with $37.6 million for the 2019 first quarter. The operating margin was 1.5 percent for the 2020 first quarter compared with 10 percent for the 2019 first quarter.
“Distribution and services experienced sequentially improved levels of activity in the early part of the quarter, with higher volumes of oil and gas-related transmission sales and service, as well as some construction of new pressure pumping equipment,” Grzebinski said. “However, these encouraging trends reversed in March, as oil prices rapidly declined and our major oilfield customers announced significant reductions to their 2020 activity and capital spending plans. In commercial and industrial, activity has remained relatively steady in marine repair and service, but with stay-at-home orders issued in most states, we have experienced slowing in power generation and on-highway.”
Kirby said its 2020 first quarter results were impacted by one-time items totaling $4.74 per share.
As a result of reduced demand caused by COVID-19 and the corresponding dramatic decline in oilfield activity and prices, Kirby said it expects oilfield spending reductions by its customers will be extended. As a result, the company recorded non-cash impairments of goodwill, intangible assets, fixed assets and inventory in the distribution and services segment totaling $433.3 million before-tax, $334.6 million after-tax, or $5.59 per share.
This was partially offset by a one-time tax benefit of $50.8 million or $0.85 per share related to the recent U.S. Coronavirus Aid, Relief and Economic Security Act (CARES Act). Under the legislation, net operating losses generated between 2018 and 2020 can be offset against taxable income generated between 2013 and 2017. The one-time benefit relates to 2018 and 2019 net operating loss carrybacks. As well, the 2020 net operating loss carryback will result in a lower 2020 effective tax rate, Kirby said.
Grzebinski said Kirby was withdrawing its full-year earnings guidance due to the pandemic and the recession.
“Our businesses are dealing with very volatile market conditions,” he said. “During this time, we are managing this situation day-by-day with an intense focus on the health and safety of our employees, seamless operations and uninterrupted customer service. Additionally, we are aggressively reducing costs, lowering capital spending, and focusing on cash flow.”
The company said it expects lower volume levels to persist in the marine segment for some time.
“However, the long-term nature of many of our inland term contracts and the flexibility of barging in the evolving and complex U.S. supply chain will help to insulate some of the decline in business activity,” the company said in the earnings announcement. “Opportunities for storage, product relocations, and upcoming lock maintenance projects will also help to mitigate lower demand. Also, the integration of the newly acquired Savage Inland Marine fleet [WJ, February 3] is going well, and the expected synergies are occurring.”
Kirby said it expects 2020 capital spending to be near or below $155 million, representing a year-on-year reduction of approximately 40 percent.
“While the company is committed to regulatory and recurring maintenance on the marine transportation fleet, all opportunities to defer new capital and non-essential purchases will be evaluated,” Kirby said.