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 September 30, Nine months ended September 30,
2020 2019 2020 2019
Weighted average common stock
outstanding - diluted 59,931 59,906 59,903 59,879
The increase in the weighted average number of common shares for the 2020 third
quarter and first nine months compared with the 2019 third quarter and first
nine 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 nine 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 ofSeptember 30, 2020 , the Company operated a fleet of 1,084 inland tank barges with 24.5 million barrels of capacity, and an average of 265 inland towboats. The Company's coastal fleet consisted of 47 tank barges with 4.3 million barrels of capacity and 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 third quarter, net earnings attributable to Kirby were$27,489,000 , or$0.46 per share, on revenues of$496,567,000 , compared with 2019 third quarter net earnings attributable to Kirby of$47,987,000 , or$0.80 per share, on revenues of$666,809,000 . For the 2020 first nine months, net loss attributable to Kirby was$294,750,000 , or$4.92 per share, on revenues of$1,681,652,000 , compared with 2019 first nine months net earnings attributable to Kirby of$139,570,000 , or$2.32 per share, on revenues of$2,182,472,000 . 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.
Marine Transportation
For the 2020 third quarter and first nine months, the Company's marine transportation segment generated 65% 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. 19 -------------------------------------------------------------------------------- The Company's marine transportation segment's revenues for the 2020 third quarter and first nine months decreased 22% and 7%, respectively, and operating income decreased 55% and 17%, respectively, compared with the 2019 third quarter and first nine months revenues and operating income. The decreases were primarily due to reduced barge utilization in the inland and coastal markets and decreased spot contract pricing in the inland market, each as a result of a reduction in demand due to the COVID-19 pandemic, lower fuel rebills, retirements of three large coastal barges, and planned shipyard activity in the coastal market. These reductions were partially offset by the acquisition of the Savage fleet acquired onApril 1, 2020 and theCenac Marine Services, LLC ("Cenac") fleet acquired onMarch 14, 2019 . The 2020 third quarter was impacted by hurricanes and tropical storms along the East and Gulf Coasts and the closure of the Illinois river. For the year to date periods, the 2020 first quarter and 2019 first six months were each impacted by poor operating conditions and high delay days due to heavy fog and wind along theGulf 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 theIllinois River and a fire at a chemical storage facility on the Houston Ship Channel. For the 2020 third quarter and first nine months, the inland tank barge fleet contributed 77% and 79%, respectively, and the coastal fleet contributed 23% and 21%, respectively, of marine transportation revenues. For both the 2019 third quarter and first nine months, the inland tank barge fleet contributed 77%, and the coastal fleet contributed 23% of marine transportation revenues. During the 2020 second and third quarters, 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 averaged in the low to mid-90% range during the 2020 first quarter, the mid-80% range during the 2020 second quarter, and the low 70% range during the 2020 third quarter. In 2019, inland tank barge utilization levels averaged in the mid-90% range during both the 2019 first and second quarters and the low 90% range during the 2019 third quarter. The 2020 first quarter and 2019 first nine 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 barge utilization during those periods. Coastal tank barge utilization levels averaged in the low to mid-80% range during the 2020 first quarter and the mid-70% range during both the 2020 second and third quarters. In 2019, coastal tank barge utilization levels averaged in the low 80% range during the 2019 first quarter and the mid-80% range during both the 2019 second and third quarters. Barge 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 nine months. During the 2020 third quarter and first nine months, approximately 70% and 65%, respectively, of marine transportation's inland revenues were under term contracts, which have contract terms of 12 months or longer, and 30% and 35%, respectively, were spot contract revenues, which have contract terms of less than 12 months. During both the 2019 third quarter and first nine months, approximately 65% of marine transportation's inland revenues were under term contracts, and 35% were spot contract revenues. Inland time charters during both the 2020 third quarter and first nine months represented 67%, of the inland revenues under term contracts compared with 61% and 62%, respectively, in the 2019 third quarter and first nine 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. Rates on inland term contracts renewed in the 2020 third quarter decreased in the 1% to 3% average range compared with term contracts renewed in the 2019 third 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. Spot contract rates in the 2020 third quarter decreased approximately 10% compared to the 2019 third 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. 20 -------------------------------------------------------------------------------- During both the 2020 third quarter and first nine months, approximately 85% of coastal revenues were under term contracts, and 15% were under spot contract revenues. During both the 2019 third quarter and first nine months, approximately 80% of the coastal revenues were under term contracts and 20% were spot contract revenues. Coastal time charters during both the 2020 third quarter and first nine months represented approximately 90% of coastal revenues under term contracts compared with 85% during both the 2019 third quarter and first nine 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. Rates on coastal term contracts renewed in the 2020 third quarter decreased in the 4% to 6% average range compared with term contracts renewed in the 2019 third 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 both the 2020 second and third quarters were flat compared to the 2019 second and third quarters. The marine transportation segment operating margin was 10.1% for the 2020 third quarter compared with 17.6% for the 2019 third quarter and 12.2% for the 2020 first nine months compared to 13.6% for the 2019 first nine months.
Distribution and Services
For the 2020 third quarter and first nine months, the distribution and services segment generated 35% and 34%, respectively, of the Company's revenue, of which 89% and 92%, respectively, was generated from service and parts and 11% and 8%, respectively, from manufacturing. The results of the distribution and services segment are largely influenced by cycles of the land-based 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 third quarter and first nine months decreased 31% and 42%, respectively, and operating income decreased 88% and 113%, respectively, compared with the 2019 third quarter and first nine months, revenues 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 nine 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 third quarter and first nine months. For the 2020 third quarter and first nine months, the oil and gas market contributed 28% and 27%, respectively, of the distribution and services revenues. For the 2019 third quarter and first nine months, the oil and gas market contributed 46% and 54%, respectively, of the distribution and services revenues. The commercial and industrial market revenues decreased compared to the 2019 third quarter and first nine months, primarily due to reductions in on-highway and power generation service demand as a result of the COVID19 pandemic and the resulting economic slowdown and nationwide, state, and local stay-at-home orders, partially offset by contributions from the Convoy acquisition. Demand in the marine business was also down due to reduced major overhaul activity and new engine sales. For the 2020 third quarter and first nine months, the commercial and industrial market contributed 72% and 73%, respectively, of the distribution and services revenues. For the 2019 third quarter and first nine months, the commercial and industrial market contributed 54% and 46%, respectively, of the distribution and services revenues. The distribution and services segment operating margin for the 2020 third quarter was 0.6% compared with 3.6% for the 2019 third quarter and (1.6)% for the 2020 first nine months compared to 7.0% for the 2019 first nine months. The 2020 first nine months 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. 21
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Cash Flows and Capital Expenditures
The Company continued to generate favorable operating cash flows during the 2020 first nine months with net cash provided by operating activities of$359,763,000 compared with$387,599,000 for the 2019 first nine months, a 7% decrease. The decline was driven by decreased revenues and operating income in both the marine transportation and distribution and services segments. Decreases in the marine transportation segment was driven by decreased barge utilization in the inland and coastal markets and decreased spot contract pricing in the inland market, each as a result of a reduction in demand due to the COVID-19 pandemic, partially offset by the Savage acquisition inApril 2020 and the Cenac acquisition inMarch 2019 . The decline was also partially offset by changes in certain operating assets and liabilities primarily related to reduced incentive compensation payouts in the 2020 first quarter and a larger decrease in trade accounts receivable compared to the 2019 first nine months, driven by reduced business activity levels in both the marine transportation and distribution and services segments. In addition, during the nine months endedSeptember 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 nine months, the Company generated cash of$6,538,000 and$34,490,000 , respectively, from proceeds from the disposition of assets, and$353,000 and$3,563,000 , respectively, from proceeds from the exercise of stock options. For the 2020 first nine months, cash generated and borrowings under the Company's Revolving Credit Facility were used for capital expenditures of$129,371,000 (including a decrease in accrued capital expenditures of$11,441,000 ), including$6,054,000 for inland towboat construction and$123,317,000 primarily for upgrading existing marine equipment and marine transportation and distribution and services facilities. The Company also used$348,772,000 for acquisitions of businesses and marine equipment, more fully described under Acquisitions below. The Company's debt-to-capitalization ratio increased to 33.9% atSeptember 30, 2020 from 28.9% atDecember 31, 2019 , primarily due to borrowings under the Revolving Credit Facility to purchase the Savage fleet in the 2020 second quarter and the Convoy acquisition in the 2020 first quarter as well as the decrease in total equity, primarily from the net loss attributable to Kirby for the 2020 first nine months of$294,750,000 . The Company's debt outstanding as ofSeptember 30, 2020 andDecember 31, 2019 is detailed in Long-Term Financing below. During the 2020 first nine months, the Company acquired 92 inland tank barges from Savage with a total capacity of approximately 2.5 million barrels, purchased five newly constructed inland pressure barges, retired 74 inland tank barges, transferred one tank barge to coastal, returned one leased inland tank barge, and brought back into service 10 inland tank barges. The net result was an increase of 31 inland tank barges and approximately 1.1 million barrels of capacity during the 2020 first nine 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. The reopening of theIllinois River in October is expected to contribute to sequential improvement in barge utilization rates in the 2020 fourth quarter. Additionally, increased delays from seasonal winter weather are expected to have an adverse impact on operating efficiencies. Overall, the Company expects inland revenues and operating income to be flat to down slightly in the 2020 fourth quarter when compared to the third quarter. As ofSeptember 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 80 expected by the Company, will be retired. Historically, 75 to 150 older inland tank barges are retired from service each year industry-wide. The extent of the retirements is 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. 22 -------------------------------------------------------------------------------- In the coastal marine transportation market, the spot market is expected to remain challenging in the near term until demand for refined products and black oil materially improves. However, compared to the 2020 third quarter, reduced delays associated with recent hurricanes and tropical storms on the East and Gulf Coasts are expected to modestly benefit the fourth quarter's results. Overall, the Company expects coastal revenues to be flat sequentially, with operating margins in the negative low single digits. As ofSeptember 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 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 slowly recovering from 2020 second quarter lows. In the 2020 fourth quarter, the Company expects to benefit from gradual improvement in the economy, but a weak oil and gas market, potential customer budget exhaustion, and some seasonality will likely result in sequential reductions in revenues and operating income. Further, the oil and gas market activity is expected to be impacted as customers continue to rationalize excess pressure pumping capacity resulting in limited deliveries of new pressure pumping units. Also, many oil and gas companies are expected to slow drilling and completions activity in the fourth quarter, further reducing demands for parts and service. In the distribution and services commercial and industrial market, demand for parts and new engines in marine and on-highway is expected to increase as economic activity improves and customers complete projects. These gains, however, will be partially offset by seasonal activity reductions associated with the dry cargo harvest in marine and reduced utilization of the power generation rental fleet following the hurricane season. Overall, compared to the 2020 third quarter, segment revenues are expected to modestly decline in the 2020 fourth quarter with operating margins in the negative low to mid-single digits.
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 expects to continue to do so.
Acquisitions
During the nine 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.
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Results of Operations
For the 2020 third quarter, net earnings attributable to Kirby were$27,489,000 , or$0.46 per share, on revenues of$496,567,000 , compared with 2019 third quarter net earnings attributable to Kirby of$47,987,000 , or$0.80 per share, on revenues of$666,809,000 . For the 2020 first nine months, net loss attributable to Kirby was$294,750,000 , or$4.92 per share, on revenues of$1,681,652,000 , compared with 2019 first nine months net earnings attributable to Kirby of$139,570,000 , or$2.32 per share, on revenues of$2,182,472,000 . 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 September 30 ,
Nine months ended
2020 % 2019 % 2020 % 2019 %
Marine
transportation $ 320,602 65 % $ 412,665 62 % $ 1,104,846 66 % $ 1,185,072 54 %
Distribution and
services 175,965 35 254,144 38 576,806 34 997,400 46
$ 496,567 100 % $ 666,809 100 % $ 1,681,652 100 % $ 2,182,472 100 %
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 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 ofSeptember 30, 2020 , the Company operated 1,084 inland tank barges, of which 38 were leased, with a total capacity of 24.5 million barrels, and an average of 265 inland towboats, of which 36 were chartered. This compares with 1,065 inland tank barges operated as ofSeptember 30, 2019 , of which 24 were leased, with a total capacity of 23.7 million barrels, and an average of 304 inland towboats, of which 73 were chartered. The Company's coastal tank barge fleet as ofSeptember 30, 2020 , consisted of 47 tank barges, of which two were leased, with 4.3 million barrels of capacity, and 44 tugboats, of which four were chartered. This compares with 49 coastal tank barges operated as ofSeptember 30, 2019 , of which two were leased, with 4.7 million barrels of capacity, and 48 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 inFreeport, Texas , a shipyard for building towboats and performing routine maintenance near the Houston Ship Channel, as well as a two-thirds interest inOsprey Line, L.L.C. , which transports project cargoes and cargo containers by barge. 24 -------------------------------------------------------------------------------- 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 endedSeptember 30 ,
Nine months ended
2020 2019 % Change 2020 2019 % Change
Marine transportation
revenues $ 320,602 $ 412,665 (22 )% $ 1,104,846 $ 1,185,072 (7 )%
Costs and expenses:
Costs of sales and
operating expenses 207,038 257,869 (20 ) 717,923 771,596 (7 )
Selling, general and
administrative 26,554 28,424 (7 ) 85,294 90,896 (6 )
Taxes, other than on
income 7,307 9,230 (21 ) 27,852 26,355 6
Depreciation and
amortization 47,312 44,445 6 139,295 134,861 3
288,211 339,968 (15 ) 970,364 1,023,708 (5 )
Operating income $ 32,391 $ 72,697 (55 )% $ 134,482 $ 161,364 (17 )%
Operating margins 10.1 % 17.6 % 12.2 % 13.6 %
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 Third 2020 Nine
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 27% 27% 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% 19% Gasoline, No. 2 Oil, Jet Vehicle Usage, Air
Petroleum Fuel, Heating Oil, Diesel Travel, Weather
Products Fuel, Ethanol Conditions,
Refinery
Utilization
Agricultural 3% 3% Anhydrous Ammonia, Corn, Cotton and
Chemicals Nitrogen - Based Liquid Wheat Production,
Fertilizer, Industrial Chemical Feedstock
Ammonia Usage
Marine transportation revenues for the 2020 third quarter and first nine months
decreased 22% and 7%, respectively, compared with the 2019 third quarter and
first nine months. The decrease was primarily due to reduced barge utilization
in the inland and coastal markets and decreased spot contract pricing in the
inland market, each as a result of a reduction in demand due to the COVID-19
pandemic, lower fuel rebills, retirements of three large coastal barges, and
planned shipyard activity in the coastal market. These reductions were partially
offset by the acquisition of the Savage fleet acquired on April 1, 2020 and the
Cenac fleet acquired on March 14, 2019 . The 2020 third quarter was impacted by
hurricanes and tropical storms along the East and Gulf Coasts and the closure of
the Illinois River . For the year to date periods, the 2020 first quarter and
2019 first six months were each 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 third quarter and first nine months,
the inland tank barge fleet contributed 77% and 79%, respectively, and the
coastal fleet contributed 23% and 21%, respectively, of marine transportation
revenues. For both the 2019 third quarter and first nine months, the inland
tank barge fleet contributed 77%, 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 offset decreases in marine
transportation revenues in the 2020 third quarter and first nine months as
compared to 2019.
25
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During the 2020 second and third quarters, 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 averaged in the low to mid-90%
range during the 2020 first quarter, the mid-80% range during the 2020 second
quarter, and the low 70% range during the 2020 third quarter. In 2019, inland
tank barge utilization levels averaged in the mid-90% range during both the 2019
first and second quarters and the low 90% range during the 2019 third quarter.
The 2020 first quarter and 2019 first nine 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 barge utilization during
those periods.
Coastal tank barge utilization levels averaged in the low to mid-80% range
during the 2020 first quarter and the mid-70% range during both the 2020 second
and third quarters. In 2019, coastal tank barge utilization levels averaged in
the low 80% range during the 2019 first quarter and the mid-80% range during
both the 2019 second and third quarters. Barge 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 nine months.
The petrochemical market, the Company's largest market, contributed 51% of
marine transportation revenues for both the 2020 third quarter and first nine
months, 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. Also, during the 2020 third quarter, the petrochemical
complex along the Gulf Coast was impacted by hurricanes and tropical storms,
further reducing barge volumes and closing critical waterways for extended
periods of time. During the quarter, U.S. chemical plant capacity utilization
was relatively stable in the low to mid-70% range.
The black oil market, which contributed 27% of marine transportation revenues
for both the 2020 third quarter and first nine months, 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 ranged between 78% and 82% through mid-August before
declining to 72% in early September as a result of hurricanes and tropical
storms along the Gulf Coast . Refinery utilization modestly improved back to 75%
by the end of the September. During the quarter, the Company continued to
transport crude oil and natural gas condensate produced from the Permian Basin
as well as reduced volumes from 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 .
The refined petroleum products market, which contributed 19% of marine
transportation revenues for both the 2020 third quarter and first nine months
reflected lower volumes in both the inland and coastal markets as a result of
reduced demand related to the COVID-19 pandemic and the impact from hurricanes
and tropical storms along the Gulf Coast during the quarter. During the
quarter, U.S. refinery utilization ranged between 78% and 82% through mid-August
before declining to 72% in early September as a result of the hurricanes.
Refinery utilization modestly improved back to 75% by the end of the September.
The agricultural chemical market, which contributed 3% of marine transportation
revenues for both the 2020 third quarter and first nine months 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.
26
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For the 2020 third quarter, the inland operations incurred 1,335 delay days, 42%
fewer than the 2,284 delay days that occurred during the 2019 third quarter.
For the first nine months of 2020, the inland operations incurred 8,640 delay
days, 16% fewer than the 10,228 delay days that occurred during the 2019 first
nine 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. Reduced delay days during the
2020 third quarter and first nine months are primarily due to lower barge
utilization, despite significant delays associated with hurricane activity along
the Gulf Coast during the third quarter. In addition, delay days for the 2020
first quarter and 2019 first six months reflected poor operating conditions due
to heavy fog and wind along the Gulf 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 the Illinois River and a fire at a chemical storage facility
on the Houston Ship Channel.
During the 2020 third quarter and first nine months, approximately 70% and 65%,
respectively, of marine transportation's inland revenues were under term
contracts, and 30% and 35%, respectively, were spot contract revenues. During
both the 2019 third quarter and first nine months, approximately 65% of marine
transportation's inland revenues were under term contracts, and 35% were spot
contract revenues. Inland time charters during both the 2020 third quarter and
first nine months represented 67% of the inland revenues under term contracts
compared with 61% and 62%, respectively, in the 2019 third quarter and first
nine 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. Rates on inland term contracts renewed in the 2020 third quarter
decreased in the 1% to 3% average range compared with term contracts renewed in
the 2019 third 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. Spot contract rates in the 2020 third
quarter decreased approximately 10% compared to the 2019 third quarter. There
was no material rate increase on January 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 third quarter and first nine months, approximately 85% of
coastal revenues were under term contracts, and 15% were under spot contract
revenues. During both the 2019 third quarter and first nine months,
approximately 80% of the coastal revenues were under term contracts and 20% were
spot contract revenues. Coastal time charters during both the 2020 third quarter
and first nine months represented approximately 90% of coastal revenues under
term contracts compared with 85% during both the 2019 third quarter and first
nine 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. Rates on coastal term contracts
renewed in the 2020 third quarter decreased in the 4% to 6% average range
compared with term contracts renewed in the 2019 third 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 both the 2020 second
and third quarters were flat compared to the 2019 second and third quarters.
Marine Transportation Costs and Expenses
Costs and expenses for the 2020 third quarter and first nine months decreased 15% and 5%, respectively, compared with the 2019 third quarter and first nine months. Costs of sales and operating expenses for the 2020 third quarter and first nine months decreased 20% and 7%, respectively, compared with the 2019 third quarter and first nine months, primarily due to cost reductions across the segment, including a reduction in towboats during the second and third quarters 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 265 towboats during the 2020 third quarter, of which an average of 36 were chartered, compared with 304 during the 2019 third quarter, of which an average of 73 were chartered. The decrease was primarily due to the chartered towboats released during the 2020 second and third quarters, partially offset by the addition of inland towboats with the Savage acquisition inApril 2020 . 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. 27 -------------------------------------------------------------------------------- During the 2020 third quarter, the inland operations consumed 10.2 million gallons of diesel fuel compared to 13.2 million gallons consumed during the 2019 third quarter. The average price per gallon of diesel fuel consumed during the 2020 third quarter was$1.27 per gallon compared with$2.00 per gallon for the 2019 third quarter. During the 2020 first nine months, the inland operations consumed 36.3 million gallons of diesel fuel compared to 37.2 million gallons consumed during the 2019 first nine months. The average price per gallon of diesel fuel consumed during the 2020 first nine months was$1.47 per gallon compared with$2.06 per gallon for the 2019 first nine 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.
Selling, general and administrative expenses for the 2020 third quarter and first nine months decreased 7% and 6%, respectively, compared with the 2019 third quarter and first nine 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 third quarter and first nine months decreased 21% and increased 6%, respectively, compared with the 2019 third quarter and first nine months. The decrease for the 2020 third quarter is due primarily to lower property taxes on marine equipment and lower waterway use taxes due to reduced activity as well as lower state franchise taxes. The increase during the 2020 first nine months is primarily due to higher property taxes on marine transportation equipment, including the Savage and Cenac fleets.
Marine Transportation Operating Income and Operating Margins
Marine transportation operating income for the 2020 third quarter and first nine
months decreased 55% and 17%, respectively, compared with the 2019 third quarter
and first nine months. The 2020 third quarter operating margin was 10.1%
compared with 17.6% for the 2019 third quarter and 12.2% for the 2020 first nine
months compared to 13.6% for the 2019 first nine months. The decreases in
operating income and operating margin were primarily due to reduced barge
utilization in the inland and coastal markets and reduced spot contract pricing
in the inland market, each as a result of a reduction in demand due to the
COVID-19 pandemic, partially offset by aggressive cost reductions throughout the
organization, including chartered towboats released during the 2020 second and
third quarters.
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.
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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 September 30 ,
Nine months ended
2020 2019 % Change 2020 2019 % Change
Distribution and
services revenues $ 175,965 $ 254,144 (31 )% $ 576,806 $ 997,400 (42 )%
Costs and expenses:
Costs of sales and
operating expenses 133,726 200,645 (33 ) 449,948 787,068 (43 )
Selling, general and
administrative 33,098 33,608 (2 ) 108,295 108,194 -
Taxes, other than on
income 1,754 1,674 5 5,636 5,102 10
Depreciation and
amortization 6,283 9,085 (31 ) 22,252 27,167 (18 )
174,861 245,012 (29 ) 586,131 927,531 (37 )
Operating income
(loss) $ 1,104 $ 9,132 (88 )% $ (9,325 ) $ 69,869 (113 )%
Operating margins 0.6 % 3.6 % (1.6 )% 7.0 %
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 Third 2020 Nine
Quarter Months
Revenue Revenue
Markets Serviced Distribution Distribution Customers
Oil and Gas 28% 27% Oilfield Services, Oil and Gas
Operators and Producers
Commercial and Industrial 72% 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 third quarter and first nine
months decreased 31% and 42%, respectively, compared with the 2019 third quarter
and first nine months. The decrease was primarily attributable to reduced
activity in the oilfield as a result of oil price volatility throughout 2019 and
the 2020 first nine 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 third quarter and first nine months.
For the 2020 third quarter and first nine months, the oil and gas market
contributed 28% and 27%, respectively, of the distribution and services
revenues. For the 2019 third quarter and first nine months, the oil and gas
market contributed 46% and 54%, respectively, of the distribution and services
revenues.
The commercial and industrial market revenues decreased compared to the 2019
third quarter and first nine months, primarily due to reductions in on-highway
and power generation service demand as a result of the COVID19 pandemic and the
resulting economic slowdown and nationwide, state, and local stay-at-home
orders, partially offset by contributions from the Convoy acquisition. Demand
in the marine business was also down due to reduced major overhaul activity and
new engine sales. For the 2020 third quarter and first nine months, the
commercial and industrial market contributed 72% and 73%, respectively, of the
distribution and services revenues. For the 2019 third quarter and first nine
months, the commercial and industrial market contributed 54% and 46%,
respectively, of the distribution and services revenues.
29--------------------------------------------------------------------------------
Distribution and Services Costs and Expenses
Costs and expenses for the 2020 third quarter and first nine months decreased 29% and 37%, respectively, compared with the 2019 third quarter and first nine months. Costs of sales and operating expenses for the 2020 third quarter and first nine months decreased 33% and 43%, respectively, compared with the 2019 third quarter and first nine 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 third quarter decreased 2% compared to the 2019 third quarter and were flat for the 2020 first nine months compared to the 2019 first nine months. The decrease in the 2020 third quarter was primarily due to cost reduction initiatives throughout the organization as a result of the uncertainty surrounding the COVID-19 pandemic, partially offset by the Convoy acquisition. For the 2020 first nine months, cost reductions were also offset by a bad debt expense charge of$3,339,000 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, each recorded during the 2020 second quarter. Depreciation and amortization for the 2020 third quarter and first nine months decreased 31% and 18%, respectively, compared with the 2019 third quarter and first nine months. The decrease was primarily due to lower amortization of intangible assets other than goodwill, which were impaired during the 2020 first quarter.
Distribution and Services Operating Income (Loss) and Operating Margins
Operating income for the distribution and services segment for the 2020 third quarter and first nine months decreased 88% and 113%, respectively, compared with the 2019 third quarter and first nine months. The operating margin for the 2020 third quarter was 0.6% compared with 3.6% for the 2019 third quarter and (1.6)% for the 2020 first nine months compared to 7.0% for the 2019 first nine months. The results primarily reflected a decrease in margins in the commercial and industrial market and losses in the oil and gas market.
(Gain) Loss on Disposition of Assets
The Company reported a net loss on disposition of assets of$316,000 for the 2020 third quarter compared to$374,000 for the 2019 third quarter. The Company reported a net loss on disposition of assets of$13,000 for the 2020 first nine months compared to a net gain of$4,901,000 for the 2019 first nine months.
The
net gains and losses were primarily from sales of marine equipment. The 2019 first nine 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 September 30 ,
Nine months ended
2020 2019 % Change 2020 2019 % Change
Impairments and other
charges $ - $ - - % $ (561,274 ) $ - N/A
Other income $ 1,172 $ 864 36 % $ 6,185 $ 2,677 131 %
Noncontrolling
interests $ (204 ) $ (163 ) 25 % $ (743 ) $ (477 ) 56 %
Interest expense $ (11,809 ) $ (14,310 ) (17 )% $ (37,316 ) $ (43,026 ) (13 )%
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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 third quarters includes income of$1,154,000 and$865,000 , respectively, and the 2020 and 2019 first nine months includes income of$4,793,000 and$2,591,000 , 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 September 30, Nine months ended September 30,
2020 2019 2020 2019
Average debt $ 1,609,367 $ 1,513,607 $ 1,583,846 $ 1,538,097
Average interest rate 2.9 % 3.7 % 3.1 % 3.8 %
Capitalized interest $ - $ 137 $ - $ 962
Interest expense for the 2020 third quarter and first nine months decreased 17%
and 13%, respectively, compared with the 2019 third quarter and first nine
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 nine 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 nine months endedSeptember 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 atSeptember 30, 2020 . The 2020 third quarter generated an effective tax rate benefit as a result of such carrybacks and resulted in a lower effective tax rate for 2020. 31
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