KIRBY CORPORATION Statements contained in this Form 10-Q that are not historical facts, including, but not limited to, any projections contained herein, are forward-looking statements. These statements reflect management's reasonable judgment with respect to future events. Forward-looking 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. Actual results could differ materially from those anticipated as a result of various factors including cyclical or other downturns in demand, significant pricing competition, unanticipated additions to industry capacity, changes in the Jones Act or inUnited States maritime policy and practice, fuel costs, interest rates, weather conditions and timing, magnitude and number of acquisitions made by the Company, and the impact of the COVID-19 pandemic and the related response of governments on global and regional market conditions. Forward-looking statements are based on currently available information and Kirby assumes no obligation to update any such statements. A list of additional risk factors can be found in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 and Item 1A - Risk Factors below.
For purposes of the Management's Discussion, all net earnings (loss) per share attributable to Kirby common stockholders are "diluted earnings (loss) per share." The weighted average number of common shares applicable to diluted earnings (loss) per share were as follows (in thousands):
Three months ended June 30 ,
Six months ended
2020 2019 2020 2019
Weighted average number of common stock
- diluted 59,937 59,907 59,898 59,865
The increase in the weighted average number of common shares for the 2020 second
quarter and first six months compared with the 2019 second quarter and first six
months primarily reflected the issuance of restricted stock, the issuance of
common stock for the vesting of RSUs and the exercise of stock options,
partially offset by the exclusion of antidilutive stock options and RSUs
outstanding during the 2020 first six months.
Overview
The Company is the nation's largest domestic tank barge operator, transporting bulk liquid products throughout the Mississippi River System, on theGulf Intracoastal Waterway , coastwise along all threeUnited States coasts, and inAlaska andHawaii . The Company transports petrochemicals, black oil, refined petroleum products and agricultural chemicals by tank barge. As ofJune 30, 2020 , the Company operated a fleet of 1,131 inland tank barges with 25.6 million barrels of capacity, and an average of 324 inland towboats. The Company's coastal fleet consisted of 47 tank barges with 4.5 million barrels of capacity and an average of 44 coastal tugboats. The Company also owns and operates four offshore dry-bulk cargo barges, four offshore tugboats and one docking tugboat transporting dry-bulk commodities inUnited States coastal trade. Through its distribution and services segment, 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, railcar movers, and high capacity lift trucks for use in a variety of industrial markets, and manufactures and remanufactures oilfield service equipment, including pressure pumping units, for land-based oilfield service customers. For the 2020 second quarter, net earnings attributable to Kirby were$25,002,000 , or$0.42 per share, on revenues of$541,159,000 , compared with 2019 second quarter net earnings attributable to Kirby of$47,287,000 , or$0.79 per share, on revenues of$771,042,000 . For the 2020 first six months, net loss attributable to Kirby was$322,239,000 , or$5.38 per share, on revenues of$1,185,085,000 , compared with 2019 first six months net earnings attributable to Kirby of$91,583,000 , or$1.53 per share, on revenues of$1,515,663,000 . The 2020 second quarter included$3,339,000 before taxes,$2,674,000 after taxes, or$0.04 per share of bad debt expense and$1,354,000 before taxes,$1,085,000 after taxes, or$0.02 per share of severance expenses. The 2020 first quarter included$561,274,000 before taxes,$433,341,000 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 the distribution and services segment. See Note 8, Impairments and Other Charges for additional information. In addition, the 2020 first quarter was favorably impacted by an income tax benefit of$50,824,000 , 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 10, Taxes on Income for additional information. 18
--------------------------------------------------------------------------------
Marine Transportation
For the 2020 second quarter and first six months, the Company's marine transportation segment generated 70% and 66%, respectively, of the Company's revenue. The segment's customers include many of the major petrochemical and refining companies that operate inthe United States . Products transported include intermediate materials used to produce many of the end products used widely by businesses and consumers - plastics, fiber, 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. The Company's marine transportation segment's revenues for the 2020 second quarter and first six months decreased 6% and increased 2%, respectively, and operating income decreased 4% and increased 15%, respectively, compared with the 2019 second quarter and first six months revenues and operating income. The decreases during the second quarter were primarily due to reduced utilization in the inland and coastal markets as a result of a reduction in demand due to the COVID-19 pandemic, lower fuel rebills, retirements of two large coastal barges, and planned shipyard activity in coastal. These reductions were partially offset by the acquisition of the Savage fleet acquired onApril 1, 2020 . The increases for the six months are primarily due to the addition of the Savage fleet and theCenac Marine Services, LLC ("Cenac") fleet acquired onMarch 14, 2019 , partially offset by the effects of the COVID-19 pandemic on the Company's operations during the 2020 second quarter. The 2020 first quarter and 2019 first six months were impacted by poor operating conditions and high delay days due to heavy fog and wind along theGulf Coast , high water on theMississippi River System, and closures of key waterways as a result of lock maintenance projects, as well as increased shipyard days on large capacity coastal vessels. The 2019 first six months was also impacted by prolonged periods of ice on theIllinois River and a fire at a chemical storage facility on the Houston Ship Channel. For the 2020 second quarter and first six months, the inland tank barge fleet contributed 80% and 79%, respectively, and the coastal fleet contributed 20% and 21%, respectively, of marine transportation revenues. For both the 2019 second quarter and first six months, the inland tank barge fleet contributed 77%, and the coastal fleet contributed 23% of marine transportation revenues. Inland tank barge utilization levels averaged in the low to mid-90% range during the 2020 first quarter and the mid-80% range during the 2020 second quarter. In 2019, inland tank barge utilization levels averaged in the mid-90% range during both the 2019 first and second quarters. The 2020 first quarter and 2019 first six months each experienced strong demand from petrochemicals, black oil, and refined petroleum products customers. Extensive delay days due to poor operating conditions and lock maintenance projects in the 2020 first quarter and 2019 first six months slowed the transport of customer cargoes and contributed to strong utilization during those periods. Reduced demand as a result of the COVID-19 pandemic and resulting economic slowdown contributed to lower utilization during the 2020 second quarter. Coastal tank barge utilization levels averaged in the low to mid-80% range during the 2020 first quarter and the mid-70% range during the 2020 second quarter. In 2019, coastal tank barge utilization levels averaged in the low 80% range during the 2019 first quarter and the mid-80% range during the 2019 second quarter. Utilization in the coastal marine fleet continued to be impacted by the oversupply of smaller tank barges in the coastal industry during each of the 2020 and 2019 first six months. During the 2020 second quarter and first six months, approximately 65% and 60%, respectively, of marine transportation's inland revenues were under term contracts, which have contract terms of 12 months or longer, and 35% and 40%, respectively, were spot contract revenues, which have contract terms of less than 12 months. During both the 2019 second quarter and first six months, approximately 65% of marine transportation's inland revenues were under term contracts, and 35% were spot contract revenues. Inland time charters during the 2020 second quarter and first six months represented 68% and 67%, respectively, of the inland revenues under term contracts compared with 63% and 62%, respectively, in the 2019 second quarter and first six months. Rates on inland term contracts renewed in the 2020 first quarter increased in the 1% to 3% average range compared with term contracts renewed in the 2019 first quarter. Rates on inland term contracts renewed in the 2020 second quarter were flat compared with term contracts renewed in the 2019 second quarter. Spot contract rates in the 2020 first quarter increased in the 4% to 6% average range compared to the 2019 first quarter. Spot contract rates in the 2020 second quarter decreased in the 5% to 10% average range compared to the 2019 second quarter. There was no material rate increase onJanuary 1, 2020 related to annual escalators for labor and the producer price index on a number of inland multi-year contracts. 19 -------------------------------------------------------------------------------- During both the 2020 second quarter and first six months, approximately 85% of coastal revenues were under term contracts, and 15% were under spot contract revenues. During both the 2019 second quarter and first six months, approximately 80%, respectively, of the coastal revenues were under term contracts and 20% were spot contract revenues. Coastal time charters during both the 2020 second quarter and first six months each represented approximately 90%, of coastal revenues under term contracts compared with 85% during both the 2019 second quarter and first six months. Spot and term contract pricing in the coastal market are contingent on various factors including geographic location, vessel capacity, vessel type, and product serviced. Rates on coastal term contracts renewed in the 2020 first quarter increased in the 10% to 15% average range compared with term contracts renewed in the 2019 first quarter. Rates on coastal term contracts renewed in the 2020 second quarter were flat compared with term contracts renewed in the 2019 second quarter. Spot market rates in the 2020 first quarter improved in the 10% to 15% average range compared to the 2019 first quarter. Spot market rates in the 2020 second quarter were flat compared to the 2019 second quarter. The marine transportation segment operating margin was 13.5% for the 2020 second quarter compared with 13.2% for the 2019 second quarter and 13.0% for the 2020 first six months compared to 11.5% for the 2019 first six months.
Distribution and Services
For the 2020 second quarter and first six months, the distribution and services segment generated 30% and 34%, respectively, of the Company's revenue, of which 99% and 94%, respectively, was generated from service and parts and 1% and 6%, respectively, from manufacturing. The results of the distribution and services segment are largely influenced by the economic cycles of the oilfield service and oil and gas operator and producer markets, marine, power generation, on-highway, and other industrial markets. Distribution and services revenues for the 2020 second quarter and first six months decreased 56% and 46%, respectively, and operating income decreased 161% and 117%, respectively, compared with the 2019 second quarter and first six months, revenue and operating income. The decreases were primarily attributable to reduced activity in the oilfield as a result of oil price volatility throughout 2019 and the 2020 first six months, the extensive downturn in oil and gas exploration due to low oil prices, caused in part by the COVID-19 pandemic, an oversupply of pressure pumping equipment inNorth America , and reduced spending and enhanced cash flow discipline for the Company's major oilfield customers. As a result, customer demand and incremental orders for new and remanufactured pressure pumping equipment and sales of new and overhauled transmissions and related parts and service declined during the 2020 second quarter and first six months. For the 2020 second quarter and first six months, the oil and gas market contributed 19% and 27%, respectively, of the distribution and services revenues. The commercial and industrial market revenues, which contributed 81% and 73%, respectively, of the distribution and services revenues for the 2020 second quarter and first six months, decreased compared to the 2019 second quarter and first six months, primarily due to reductions in on-highway and power generation service demand as a result of the COVID-19 pandemic and resulting economic slowdown and nationwide, state, and local stay-at-home orders, partially offset by contributions from the Convoy acquisition. Demand in the marine repair and nuclear power generation businesses remained solid in the 2020 second quarter and 2020 first six months, but were down modestly compared to the 2019 second quarter first six months due to reduced engine overhauls and engine sales. The distribution and services segment operating margin for the 2020 second quarter was (8.8)% compared with 6.3% for the 2019 second quarter and (2.6)% for the 2020 first six months compared to 8.2% for the 2019 first six months. The 2020 second quarter results were adversely impacted by the bankruptcy of a large oil and gas customer, resulting in a$3,339,000 bad debt expense charge and severance expenses of$1,354,000 as a result of continued workforce reductions. 20
--------------------------------------------------------------------------------
Cash Flows and Capital Expenditures
The Company continued to generate favorable operating cash flows during the 2020 first six months with net cash provided by operating activities of$242,144,000 compared with$188,197,000 for the 2019 first six months, a 29% increase. The improvement was driven by increased revenues and operating income in the marine transportation segment driven by the Savage acquisition inApril 2020 , the Cenac acquisition inMarch 2019 , and increased coastal pricing and inland term pricing, partially offset by decreased inland spot pricing. The improvement was also due to changes in certain operating assets and liabilities primarily related to reduced incentive compensation payouts in the 2020 first quarter and a decrease in trade accounts receivable compared to an increase in the 2019 first six months, driven by reduced business activity levels in the distribution and services segment. In addition, during the six months endedJune 30, 2020 , the Company received a tax refund of$30,606,000 for its 2018 tax return related to net operating losses being carried back to offset taxable income generated during 2013. During the 2020 and 2019 first six months, the Company generated cash of$4,918,000 and$23,364,000 , respectively, from proceeds from the disposition of assets, and$353,000 and$1,903,000 , respectively, from proceeds from the exercise of stock options. For the 2020 first six months, cash generated and borrowings under the Company's Revolving Credit Facility were used for capital expenditures of$92,830,000 (including a decrease in accrued capital expenditures of$4,936,000 ), including$5,120,000 for inland towboat construction and$87,710,000 primarily for upgrading existing marine equipment and marine transportation and distribution and services facilities. The Company also used$342,247,000 for acquisitions of businesses and marine equipment, more fully described under Acquisitions below. The Company's debt-to-capitalization ratio increased to 35.0% atJune 30, 2020 from 28.9% atDecember 31, 2019 , primarily due to borrowings under the Revolving Credit Facility to purchase the Savage fleet, which was completed onApril 1, 2020 , and the Convoy acquisition in the 2020 first quarter and the decrease in total equity, primarily from the net loss attributable to Kirby for the 2020 first six months of$322,239,000 . The Company's debt outstanding as ofJune 30, 2020 andDecember 31, 2019 is detailed in Long-Term Financing below. During the 2020 first six months, the Company acquired 92 inland tank barges from Savage with a total capacity of approximately 2.5 million barrels, purchased four newly constructed inland pressure barges, retired 27 inland tank barges, returned one leased inland tank barge, and brought back into service 10 inland tank barges. The net result was an increase of 78 inland tank barges and approximately 2.2 million barrels of capacity during the 2020 first six months. Given the current uncertainty surrounding the impact of the COVID-19 pandemic, the Company projects that capital expenditures for 2020 will be approximately$150,000,000 . The current 2020 construction program consists of$5,000,000 in progress payments on the construction of one inland towboat placed in service during the 2020 second quarter and five inland towboats to be placed in service in 2021. Approximately$130,000,000 is primarily capital upgrades and improvements to existing marine equipment and facilities. The balance of$15,000,000 will be primarily related to information technology projects in the distribution and services segment and corporate. Funding for future capital expenditures is expected to be provided through operating cash flows and borrowings under the Company's Revolving Credit Facility.
Outlook
While there remains significant uncertainty around the full impact of the COVID-19 pandemic, in the inland marine transportation market, the Company expects a slow recovery until economic activity rebounds more significantly. With barge utilization rates starting the 2020 third quarter in the mid-70% range, the Company anticipates lower average barge utilization sequentially. This is expected to have an adverse impact on revenues, however, management of the cost structure will help offset some of the weakness. Overall, the Company expects inland revenues and operating income to decline in the 2020 third quarter when compared to the second quarter. As ofJune 30, 2020 , the Company estimated there were approximately 4,000 inland tank barges in the industry fleet, of which approximately 350 were over 30 years old and approximately 260 of those over 40 years old. The Company estimates that approximately 130 to 150 tank barges have been ordered for delivery throughout 2020 and many older tank barges, including approximately 40 expected by the Company, will be retired. Historically, 75 to 150 older inland tank barges are retired from service each year industry-wide, with the extent of the retirements dependent on market conditions, petrochemical and refinery production levels, and crude oil and natural gas condensate movements, all of which can have a direct effect on industry-wide tank barge utilization, as well as term and spot contract rates. Given current market conditions as a result of the COVID-19 pandemic, the Company believes that industry retirements could be in the higher end of the historical range during 2020. 21 -------------------------------------------------------------------------------- In the coastal marine transportation market, with approximately 85% of revenues under long-term contracts and reduced shipyard activity, the Company expects modest improvements in revenues and operating income in the 2020 third quarter. During the 2020 third quarter, the Company expects to retire one aging coastal ATB that would have required uneconomic ballast water management systems at its next shipyard date. The Company also expects volumes in its coal transportation business to decline for the remainder of 2020. As ofJune 30, 2020 , the Company estimated there were approximately 280 tank barges operating in the 195,000 barrels or less coastal industry fleet, the sector of the market in which the Company operates, and approximately 20 of those were over 25 years old. The Company is aware of one announced coastal tank barge and tugboat unit in the 195,000 barrels or less category delivered during the 2020 second quarter in addition to one under construction by a competitor for delivery in 2021. The results of the distribution and services segment are largely influenced by the economic cycles of the land-based oilfield service and oil and gas operator and producer markets, marine, power generation, on-highway and other industrial markets. Activity in oil and gas is expected to remain challenged with all major customers curtailing spending for the duration of 2020. This is likely to result in only minimal levels of service and parts sales in distribution, as well as very few new orders for pressure pumping equipment in manufacturing. The Company does not expect a material improvement in activity in the short-term as many customers have significant excess pressure pumping capacity available for use. The distribution and services commercial and industrial market continues to be adversely impacted by reduced economic activity, although there have been some recent improvements in the on-highway and power generation sectors. Fleet miles in the nation's trucking industry are growing, and power generation projects which were previously deferred are being rescheduled for the coming months.
In
addition, the Company expects seasonally higher activity in the power generation and the Thermo-King refrigeration businesses. As a result, the Company expects the segment operating margins to improve in the 2020 third quarter, but remain below breakeven levels.
While the COVID-19 pandemic has adversely impacted the Company's business, to date, it has not materially adversely impacted its ability to conduct its operations in either business segment. The Company has maintained business continuity and the Company expect to continue to do so.
Acquisitions
During the six months ended
OnApril 1, 2020 , the Company completed the acquisition of the inland tank barge fleet of Savage for$278,999,000 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 theMississippi River , its tributaries, and theGulf Intracoastal Waterway . The Company also acquired Savage's ship bunkering business and barge fleeting business along theGulf Coast . OnJanuary 3, 2020 , the Company completed the acquisition of substantially all the assets of Convoy for$37,180,000 in cash. Convoy is an authorized dealer forThermo King refrigeration systems for trucks, railroad cars and other land transportation markets for North andEast Texas andColorado .
Financing of the acquisitions was through borrowings under the Company's Revolving Credit Facility.
22--------------------------------------------------------------------------------
Results of Operations
For the 2020 second quarter, net earnings attributable to Kirby were$25,002,000 , or$0.42 per share, on revenues of$541,159,000 , compared with 2019 second quarter net earnings attributable to Kirby of$47,287,000 , or$0.79 per share, on revenues of$771,042,000 . For the 2020 first six months, net loss attributable to Kirby was$322,239,000 , or$5.38 per share, on revenues of$1,185,085,000 , compared with 2019 first six months net earnings attributable to Kirby of$91,583,000 , or$1.53 per share, on revenues of$1,515,663,000 . The 2020 second quarter included$3,339,000 before taxes,$2,674,000 after taxes, or$0.04 per share of bad debt expense and$1,354,000 before taxes,$1,085,000 after taxes, or$0.02 per share of severance expenses. The 2020 first quarter included$561,274,000 before taxes,$433,341,000 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 the distribution and services segment. See Note 8, Impairments and Other Charges for additional information. In addition, the 2020 first quarter was favorably impacted by an income tax benefit of$50,824,000 , 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 10, Taxes on Income for additional information.
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):
Three months ended June 30 , Six
months ended
2020 % 2019 % 2020 % 2019 %
Marine
transportation $ 380,987 70 % $ 404,286 52 % $ 784,244 66 % $ 772,407 51 %
Distribution and
services 160,172 30 366,756 48 400,841 34 743,256 49
$ 541,159 100 % $ 771,042 100 % $ 1,185,085 100 % $ 1,515,663 100 %
Marine Transportation
The Company, through its marine transportation segment, provides marine
transportation services, operating tank barges and towing vessels transporting
bulk liquid products throughout the Mississippi River System, on the Gulf
Intracoastal Waterway , coastwise along all three United States coasts and in
Alaska and Hawaii . The Company transports petrochemicals, black oil, refined
petroleum products, and agricultural chemicals by tank barge. As of June 30,
2020 , the Company operated 1,131 inland tank barges, of which 38 were leased,
with a total capacity of 25.6 million barrels, and an average of 324 inland
towboats, of which 59 were chartered. This compares with 1,067 inland tank
barges operated as of June 30, 2019 , of which 26 were leased, with a total
capacity of 23.7 million barrels, and an average of 309 inland towboats, of
which 78 were chartered.
The Company's coastal tank barge fleet as of June 30, 2020 , consisted of 47 tank
barges, of which two were leased, with 4.5 million barrels of capacity, and an
average of 44 tugboats, of which four were chartered. This compares with 49
coastal tank barges operated as of June 30, 2019 , of which two were leased, with
4.7 million barrels of capacity, and an average of 47 tugboats, of which five
were chartered. The Company owns and operates four offshore dry-bulk cargo barge
and tugboat units engaged in the offshore transportation of dry-bulk cargoes.
The Company also owns shifting operations and fleeting facilities for dry cargo
barges and tank barges on the Houston Ship Channel and in Freeport, Texas , 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.
23
--------------------------------------------------------------------------------
The following table sets forth the Company's marine transportation segment's
revenues, costs and expenses, operating income and operating margins (dollars in
thousands):
Three months ended June 30,
Six months ended
2020 2019 % Change 2020 2019 % Change
Marine transportation
revenues $ 380,987 $ 404,286 (6 )% $ 784,244 $ 772,407 2 %
Costs and expenses:
Costs of sales and
operating expenses 244,990 267,537 (8 ) 510,885 513,727 (1 )
Selling, general and
administrative 26,816 29,255 (8 ) 58,740 62,472 (6 )
Taxes, other than on
income 11,122 9,159 21 20,545 17,125 20
Depreciation and
amortization 46,684 45,092 4 91,983 90,416 2
329,612 351,043 (6 ) 682,153 683,740 -
Operating income $ 51,375 $ 53,243 (4 )% $ 102,091 $ 88,667 15 %
Operating margins 13.5 % 13.2 % 13.0 % 11.5 %
Marine Transportation Revenues
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:
2020 Second 2020 Six
Quarter Months
Markets Revenue Revenue
Serviced Distribution Distribution Products Moved Drivers
Petrochemicals 51% 51% Benzene, Styrene, Consumer
Methanol, Acrylonitrile, non-durables - 70%,
Xylene, Naphtha, Caustic Consumer durables -
Soda, Butadiene, Propylene 30%
Black Oil 26% 26% Residual Fuel Oil, Coker Fuel for Power
Feedstock, Vacuum Gas Oil, Plants and Ships,
Asphalt, Carbon Black Feedstock for
Feedstock, Crude Oil, Refineries, Road
Natural Gas Condensate, Construction
Ship Bunkers
Refined 19% 20% Gasoline, No. 2 Oil, Jet Vehicle Usage, Air
Petroleum Fuel, Heating Oil, Diesel Travel, Weather
Products Fuel, Ethanol Conditions,
Refinery
Utilization
Agricultural 4% 3% Anhydrous Ammonia, Corn, Cotton and
Chemicals Nitrogen - Based Liquid Wheat Production,
Fertilizer, Industrial Chemical Feedstock
Ammonia Usage
Marine transportation revenues for the 2020 second quarter and first six months
decreased 6% and increased 2%, respectively, compared with the 2019 second
quarter and first six months. The decrease during the second quarter was
primarily due to reduced utilization in the inland and coastal markets as a
result of a reduction in demand due to the COVID-19 pandemic, lower fuel
rebills, retirements of two large coastal barges, and planned shipyard activity
in coastal. These reductions were partially offset by the acquisition of the
Savage fleet acquired on April 1, 2020 . The increase for the six months was
primarily due to the addition of the Savage fleet and the Cenac fleet acquired
on March 14, 2019 , partially offset by the effects of the COVID-19 pandemic on
the Company's operations during the 2020 second quarter. The 2020 first quarter
and 2019 first six months were impacted by poor operating conditions and high
delay days due to heavy fog and wind along the Gulf Coast , high water on the
Mississippi River System, and closures of key waterways as a result of lock
maintenance projects, as well as increased shipyard days on large capacity
coastal vessels. The 2019 first six months was also impacted by prolonged
periods of ice on the Illinois River and a fire at a chemical storage facility
on the Houston Ship Channel. For the 2020 second quarter and first six months,
the inland tank barge fleet contributed 80% and 79%, respectively, and the
coastal fleet contributed 20% and 21%, respectively, of marine transportation
revenues. For both the 2019 second quarter and first six months, the inland
tank barge fleet contributed 77%, respectively, and the coastal fleet
contributed 23% of marine transportation revenues. The Savage fleet was quickly
integrated into the Company's own fleet and the former Savage equipment began
operating under Company contracts soon after the acquisition closed, with former
Savage barges working with the Company's existing towboats and vice versa
resulting in differences in vessel utilization and pricing among individual
assets and the consolidated fleet. Due to this quick integration, it is not
practical to provide a specific amount of revenues for the Savage fleet but the
acquisition in April 2020 was one of the factors that drove increases in marine
transportation revenues in the 2020 first six months as compared to 2019.
24
--------------------------------------------------------------------------------
Inland tank barge utilization levels averaged in the low to mid-90% range during
the 2020 first quarter and the mid-80% range during the 2020 second quarter. In
2019, inland tank barge utilization levels averaged in the mid-90% range during
both the 2019 first and second quarters. The 2020 first quarter and 2019 first
six months each experienced strong demand from petrochemicals, black oil, and
refined petroleum products customers. Extensive delay days due to poor
operating conditions and lock maintenance projects in the 2020 first quarter and
2019 first six months slowed the transport of customer cargoes and contributed
to strong utilization during those periods. Reduced demand as a result of the
COVID-19 pandemic and resulting economic slowdown contributed to lower
utilization during the 2020 second quarter.
Coastal tank barge utilization levels averaged in the low to mid-80% range
during the 2020 first quarter and the mid-70% range during the 2020 second
quarter. In 2019, coastal tank barge utilization levels averaged in the low 80%
range during the 2019 first quarter and the mid-80% range during the 2019 second
quarter. Utilization in the coastal marine fleet continued to be impacted by
the oversupply of smaller tank barges in the coastal industry during each of the
2020 and 2019 first six months.
The petrochemical market, the Company's largest market, contributed 51% of
marine transportation revenues for both the 2020 second quarter and first six
months, respectively, reflecting reduced volumes from Gulf Coast petrochemical
plants for both domestic consumption and to terminals for export destinations as
a result of the COVID-19 pandemic. During the quarter, U.S. chemical plant
capacity utilization declined from 75% in March to 71% in April before improving
to 73% in June.
The black oil market, which contributed 26% of marine transportation revenues
for both the 2020 second quarter and first six months, respectively, reflected
reduced demand as refinery production levels and the export of refined petroleum
products and fuel oils declined as a result of the COVID-19 pandemic. During
the quarter, U.S. refinery utilization declined from 82% in early April to a low
of 68% in May before rebounding to 75% at the end of June. During the quarter,
the Company continued to transport crude oil and natural gas condensate produced
from the Eagle Ford and Permian Basin shale formations 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 .
The refined petroleum products market, which contributed 19% and 20% of marine
transportation revenues for the 2020 second quarter and first six months,
respectively, reflected lower volumes in both the inland and coastal markets as
a result of reduced demand related to the COVID-19 pandemic. During the
quarter, U.S. refinery utilization declined from 82% in early April to a low of
68% in May before rebounding to 75% at the end of June.
The agricultural chemical market, which contributed 4% and 3% of marine transportation revenues for the 2020 second quarter and first six months, respectively, saw modest reductions in demand for transportation of both domestically produced and imported products during the quarter, primarily due to reduced demand associated with the COVID-19 pandemic.
For the 2020 second quarter, the inland operations incurred 2,815 delay days, 16% fewer than the 3,331 delay days that occurred during the 2019 second quarter. For the first six months of 2020, the inland operations incurred 7,305 delay days, 8% fewer than the 7,944 delay days that occurred during the 2019 first six months. 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 the 2020 first quarter and 2019 first six months reflected poor operating conditions due to heavy fog and wind along theGulf Coast , high water conditions on the Mississippi River System, and closures of key waterways as a result of lock maintenance projects. The 2019 first six months was also impacted by prolonged periods of ice on theIllinois River and a fire at a chemical storage facility on the Houston Ship Channel. 25 -------------------------------------------------------------------------------- During the 2020 second quarter and first six months, approximately 65% and 60%, respectively, of marine transportation's inland revenues were under term contracts, which have contract terms of 12 months or longer, and 35% and 40%, respectively, were spot contract revenues, which have contract terms of less than 12 months. During both the 2019 second quarter and first six months, approximately 65% of marine transportation's inland revenues were under term contracts, and 35% were spot contract revenues. Inland time charters during the 2020 second quarter and first six months represented 68% and 67%, respectively, of the inland revenues under term contracts compared with 63% and 62%, respectively, in the 2019 second quarter and first six months. Rates on inland term contracts renewed in the 2020 first quarter increased in the 1% to 3% average range compared with term contracts renewed in the 2019 first quarter. Rates on inland term contracts renewed in the 2020 second quarter were flat compared with term contracts renewed in the 2019 second quarter. Spot contract rates in the 2020 first quarter increased in the 4% to 6% average range compared to the 2019 first quarter. Spot contract rates in the 2020 second quarter decreased in the 5% to 10% average range compared to the 2019 second quarter. There was no material rate increase onJanuary 1, 2020 related to annual escalators for labor and the producer price index on a number of inland multi-year contracts. During both the 2020 second quarter and first six months, approximately 85% of coastal revenues were under term contracts, and 15% were under spot contract revenues. During both the 2019 second quarter and first six months, approximately 80%, respectively, of the coastal revenues were under term contracts and 20% were spot contract revenues. Coastal time charters during both the 2020 second quarter and first six months each represented approximately 90%, of coastal revenues under term contracts compared with 85% during both the 2019 second quarter and first six months. Spot and term contract pricing in the coastal market are contingent on various factors including geographic location, vessel capacity, vessel type, and product serviced. Rates on coastal term contracts renewed in the 2020 first quarter increased in the 10% to 15% average range compared with term contracts renewed in the 2019 first quarter. Rates on coastal term contracts renewed in the 2020 second quarter were flat compared with term contracts renewed in the 2019 second quarter. Spot market rates in the 2020 first quarter improved in the 10% to 15% average range compared to the 2019 first quarter. Spot market rates in the 2020 second quarter were flat compared to the 2019 second quarter.
Marine Transportation Costs and Expenses
Costs and expenses for the 2020 second quarter decreased 6% compared with the 2019 second quarter and were flat for the 2020 first six months compared to the 2019 first six months. Costs of sales and operating expenses for the 2020 second quarter and first six months decreased 8% and 1%, respectively, compared with the 2019 second quarter and first six months, primarily due cost reductions across the segment, including a reduction in towboats during the second quarter and a reduction in maintenance expenses, partially offset by the addition of the Savage fleet inApril 2020 and the Cenac fleet inMarch 2019 . The inland marine transportation fleet operated an average of 324 towboats during the 2020 second quarter, of which an average of 59 were chartered, compared with 309 during the 2019 second quarter, of which an average of 78 were chartered. The increase was primarily due to the addition of inland towboats with the Savage acquisition onApril 1, 2020 , partially offset by towboats released during the 2020 second quarter. Generally, as demand or anticipated demand increases or decreases, as new tank barges are added to 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. During the 2020 second quarter, the inland operations consumed 13.5 million gallons of diesel fuel compared to 12.6 million gallons consumed during the 2019 second quarter. The average price per gallon of diesel fuel consumed during the 2020 second quarter was$1.12 per gallon compared with$2.24 per gallon for the 2019 second quarter. During the 2020 first six months, the inland operations consumed 26.1 million gallons of diesel fuel compared to 24.0 million gallons consumed during the 2019 first six months. The average price per gallon of diesel fuel consumed during the 2020 first six months was$1.55 per gallon compared with$2.09 per gallon for the 2019 first six months. Fuel escalation and de-escalation clauses on term contracts 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 90 day delay before contracts are adjusted. Spot contracts do not have escalators for fuel. 26 -------------------------------------------------------------------------------- Selling, general and administrative expenses for the 2020 second quarter and first six months decreased 8% and 6%, respectively, compared with the 2019 second quarter and first six months. The decrease is primarily due to aggressive cost reduction initiatives throughout the organization as a result of the uncertainty surrounding the COVID-19 pandemic. Taxes, other than on income, for the 2020 second quarter and first six months increased 21% and 20%, respectively, compared with the 2019 second quarter and first six months, primarily due to higher property taxes on marine transportation equipment, including the Savage and Cenac fleets, and higher waterway use taxes due to higher business activity levels, primarily due to the Savage and Cenac acquisitions.
Marine Transportation Operating Income and Operating Margins
Marine transportation operating income for the 2020 second quarter and first six months decreased 4% and increased 15%, respectively, compared with the 2019 second quarter and first six months. The 2020 second quarter operating margin was 13.5% compared with 13.2% for the 2019 second quarter and 13.0% for the 2020 first six months compared to 11.5% for the 2019 first six months. The operating income decrease in the 2020 second quarter compared to the 2019 second quarter was primarily due to reduced utilization and spot contract pricing in the inland and coastal markets as a result of a deduction in demand due to the COVID-19 pandemic, partially offset by the Savage acquisition. The operating income increase in the 2020 first six months compared to the 2019 first six months was primarily due to the Savage and Cenac acquisitions and increased term contract pricing, partially offset by the effects of the COVID-19 pandemic.
Distribution and Services
The Company, through its distribution and services segment, 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, railcar movers, and high capacity lift trucks for use in a variety of industrial markets, and manufactures and remanufactures oilfield service equipment, including pressure pumping units, for land-based oilfield service customers.
The following table sets forth the Company's distribution and services segment's revenues, costs and expenses, operating income (loss) and operating margins (dollars in thousands):
Three months ended June 30 ,
Six months ended
2020 2019 % Change 2020 2019 % Change
Distribution and
services revenues $ 160,172 $ 366,756 (56 )% $ 400,841 $ 743,256 (46 )%
Costs and expenses:
Costs of sales and
operating expenses 128,549 295,958 (57 ) 316,222 586,423 (46 )
Selling, general and
administrative 37,225 37,195 - 75,197 74,586 1
Taxes, other than on
income 1,912 1,411 36 3,882 3,428 13
Depreciation and
amortization 6,633 9,064 (27 ) 15,969 18,082 (12 )
174,319 343,628 (49 ) 411,270 682,519 (40 )
Operating income
(loss) $ (14,147 ) $ 23,128 (161 )% $ (10,429 ) $ 60,737 (117 )%
Operating margins (8.8 )% 6.3 % (2.6 )% 8.2 %
27--------------------------------------------------------------------------------
Distribution and Services Revenues
The following table shows the markets serviced by the Company's distribution and
services segment, the revenue distribution, and the customers for each market:
2020 Second 2020 Six
Quarter Months
Revenue Revenue
Markets Serviced Distribution Distribution Customers
Oil and Gas 19% 27% Oilfield Services, Oil and Gas
Operators and Producers
Commercial and Industrial 81% 73% Inland River Carriers - Dry and Liquid,
Offshore Towing - Dry and Liquid,
Offshore Oilfield Services - Drilling
Rigs & Supply Boats, Harbor Towing,
Dredging, Great Lakes Ore Carriers,
Pleasure Crafts, On and Off-Highway
Transportation, Power Generation,
Standby Power Generation, Pumping
Stations, Mining
Distribution and services revenues for the 2020 second quarter and first six
months decreased 56% and 46%, respectively, compared with the 2019 second
quarter and first six months, revenue. The decreases were primarily attributable
to reduced activity in the oilfield as a result of oil price volatility
throughout 2019 and the 2020 first six months, the extensive downturn in oil and
gas exploration due to low oil prices, caused in part by the COVID-19 pandemic,
an oversupply of pressure pumping equipment in North America , and reduced
spending and enhanced cash flow discipline for the Company's major oilfield
customers. As a result, customer demand and incremental orders for new and
remanufactured pressure pumping equipment and sales of new and overhauled
transmissions and related parts and service declined during the 2020 second
quarter and first six months. For the 2020 second quarter and first six months,
the oil and gas market contributed 19% and 27%, respectively, of the
distribution and services revenues.
The commercial and industrial market revenues, which contributed 81% and 73%,
respectively, of the distribution and services revenues for the 2020 second
quarter and first six months, decreased compared to the 2019 second quarter and
first six months, primarily due to reductions in on-highway and power generation
service demand as a result of the COVID-19 pandemic and resulting economic
slowdown and nationwide, state, and local stay-at-home orders, partially offset
by contributions from the Convoy acquisition. Demand in the marine repair and
nuclear power generation businesses remained solid in the 2020 second quarter
and 2020 first six months, but were down modestly compared to the 2019 second
quarter first six months due to reduced engine overhauls and engine sales.
Distribution and Services Costs and Expenses
Costs and expenses for the 2020 second quarter and first six months decreased 49% and 40%, respectively, compared with the 2019 second quarter and first six months. Costs of sales and operating expenses for the 2020 second quarter and first six months decreased 57% and 46%, respectively, compared with the 2019 second quarter and first six months, reflecting lower demand for new and overhauled transmissions and related parts and service and reduced demand for new pressure pumping equipment in the oil and gas market. Selling, general and administrative expenses for the 2020 second quarter was flat compared with the 2019 second quarter and increased 1% for the 2020 first six months compared to the 2019 first six months. The increase was primarily due to a bad debt expense charge of$3,339,000 recorded during the 2020 second quarter as a result of the bankruptcy of a large oil and gas customer and$1,354,000 of severance expense as a result of continued workforce reductions, partially offset by aggressive cost reduction initiatives throughout the organization as a result of the uncertainty surrounding the COVID-19 pandemic. Depreciation and amortization for the 2020 second quarter and first six months decreased 27% and 12% compared with the 2019 second quarter and first six months. The decrease was primarily due lower amortization of intangible assets other than goodwill, which were impaired during the 2020 first quarter. 28
--------------------------------------------------------------------------------
Distribution and Services Operating Income (Loss) and Operating Margins
Operating income for the distribution and services segment for the 2020 second quarter and first six months decreased 161% and 117%, respectively, compared with the 2019 second quarter and first six months. The operating margin for the 2020 second quarter was (8.8)% compared with 6.3% for the 2019 second quarter and (2.6)% for the 2020 first six months compared to 8.2% for the 2019 first six months. The results primarily reflected a decrease in margins in the commercial and industrial market and losses in oil and gas market.
(Gain) Loss on Disposition of Assets
The Company reported a net loss on disposition of assets of$189,000 for the 2020 second quarter compared with a net gain of$3,118,000 for the 2019 second quarter. The Company reported a net gain on disposition of assets of$303,000 for the 2020 first six months compared to$5,275,000 for the 2019 first six months. The net gains were primarily from sales of marine equipment. The 2019 first six months also included sales of distribution and services' properties.
Other Income and Expenses
The following table sets forth impairments and other charges, other income, noncontrolling interests and interest expense (dollars in thousands):
Three months ended June 30 ,
Six months ended
2020 2019 % Change 2020 2019 % Change
Impairments and other
charges $ - $ - - % $ (561,274 ) $ - N/A
Other income $ 2,290 $ 2,381 (4 )% $ 5,013 $ 1,813 177 %
Noncontrolling
interests $ (261 ) $ (153 ) 71 % $ (539 ) $ (314 ) 72 %
Interest expense $ (12,708 ) $ (15,515 ) (18 )% $ (25,507 ) $ (28,716 ) (11 )%
Impairments and Other Charges
Impairments and other charges includes$561,274,000 before taxes,$433,341,000 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 the distribution and services segment. See Note 8, Impairments and Other Charges for additional information. Other Income Other income for the 2020 and 2019 second quarters includes income of$1,467,000 and$1,280,000 , respectively, and the 2020 and 2019 first six months includes income of$3,639,000 and$1,726,000 , 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):
Three months ended June 30, Six months ended June 30,
2020 2019 2020 2019
Average debt $ 1,700,111 $ 1,641,311 $ 1,571,072 $ 1,550,342
Average interest rate 3.0 % 3.8 % 3.2 % 3.8 %
Capitalized interest $ - $ 182 $ - $ 825
Interest expense for the 2020 second quarter and first six months decreased 18%
and 11%, respectively, compared with the 2019 second quarter and first six
months, primarily due to a lower average interest rate, partially offset by
higher average debt outstanding as a result of borrowings to finance the Convoy
acquisition in January 2020 and the Savage acquisition in April 2020 .
(Provision) Benefit for Taxes on Income
During the first six months of 2020, pursuant to provisions of the CARES Act, net operating losses generated during 2018 through 2020 were used to offset taxable income generated between 2013 through 2017. This caused a reduction in the effective tax rate during the six months endedJune 30, 2020 as net operating losses carried back to tax years 2013 through 2017 were applied at the higher federal statutory tax rate of 35% compared to the statutory rate of 21% currently in effect atJune 30, 2020 . The 2020 second quarter generated an effective tax rate benefit as a result of such carrybacks and resulted in a lower effective tax rate for 2020. 29
--------------------------------------------------------------------------------
© Edgar Online, source
