Despite taking a one-time tax benefit of $50.8 million from the CARES (Coronavirus Aid, Relief, and Economic Security) Act barge giant Kirby Corporation (NYSE: KEX) reported a net loss of $248.5 for the first quarter ended March 31, 2020, compared with earnings of $44.3 million for the 2019 first quarter. Excluding one-time items in the 2020 first quarter, net earnings were $35.3 million per share. Consolidated revenues for the 2020 first quarter were $643.9 million compared with $744.6 million reported for the 2019 first quarter.
Commenting on the company’s response to COVID-19 and business conditions, Kirby President and CEO David Grzebinski said that, at the onset of COVID-19, the company had implemented its pandemic response plan.
“We have limited the direct impact of COVID-19 on our Company through quarantining and other actions while maintaining business continuity,” said Grzebinski . “Unfortunately, we have also had to implement workforce reductions, furloughs, and reduced work schedules in the distribution and services segment. These are difficult decisions, and I understand the impact they have on the affected employees and their families; however, these actions are necessary to allow that business to remain viable.
“Kirby started the year with improving market conditions in our marine businesses and stable conditions in distribution and services. Most of the first quarter was solid, but as the COVID-19 crisis deepened and energy prices collapsed, business activity levels declined in distribution and services. Although there are many unknowns and business levels are expected to decline for a period of time, Kirby has ample liquidity, and we expect meaningful free cash flow in 2020. As such, we remain confident that Kirby is well-positioned to overcome the current economic challenges while remaining focused on safety and serving our customers.
“In the first quarter in marine transportation, despite poor seasonal operating conditions, our inland marine business had strong activity with elevated demand, high barge utilization levels, and increased pricing for both spot and term contracts. Similarly, tight market conditions in coastal resulted in good barge utilization and improved spot and term contract pricing. Since the onset of the COVID-19 pandemic, marine activity has remained relatively strong with many customers using incremental barges to ready their supply chains, store products, and relocate inventories. However, with many refineries and some chemical plants curtailing production in response to lower consumer demand, our barge utilization levels started to decline in mid-April.”
Kirby’s marine transportation revenues for the 2020 first quarter were $403.3 million compared with $368.1 million for the 2019 first quarter. Operating income for the 2020 first quarter was $50.7 million compared with $35.4 million for the 2019 first quarter. Operating margin for the 2020 first quarter was 12.6% compared with 9.6% for the 2019 first quarter.
In the inland market, average barge utilization was in the low to mid-90% range during the quarter. Operating conditions were unfavorable due to poor weather conditions, including fog and wind along the Gulf Coast and flooding on the Mississippi River, as well as lock closures on key waterways. These conditions resulted in 4,490 delay days which were similar to the record 4,613 delay days in the 2019 first quarter. Spot market and term contract pricing improved during the quarter, with spot rates increasing in the mid-single digit range sequentially and year-over-year. Average term contract pricing on expiring contracts increased in the low-single digits. Revenues in the inland market increased 13% compared to the 2019 first quarter primarily due to the contribution from the Cenac acquisition and improved pricing. The operating margin for the inland business was in the mid-teens during the quarter and was adversely impacted by the significant delay days.
In the coastal market, barge utilization rates were in the low to mid-80% range during the 2020 first quarter. Compared to the 2019 first quarter, spot market and term contract pricing was approximately 10% to 15% higher. Revenues in the coastal market were similar to the 2019 first quarter with the impact of higher pricing being offset by planned shipyard days on large capacity vessels. During the quarter, the coastal operating margin was in the low single digits.
Kirby’s 2020 first quarter results were impacted by one-time items totaling $4.74 per share. As a result of reduced demand caused by COVID-19 and the corresponding dramatic decline in oilfield activity and prices, Kirby has an expectation that oilfield spending reductions by its customers will be extended. As a result, the Company recorded non-cash impairments of goodwill, intangible assets, fixed assets, and inventory in the distribution and services segment totaling $433.3 million before-tax, $334.6 million after-tax, or $5.59 per share. This was partially offset by a one-time tax benefit of $50.8 million or $0.85 per share related to the recent U.S. CARES Act legislation. Under the CARES Act, net operating losses generated between 2018 and 2020 can be offset against taxable income generated between 2013 and 2017. The one-time benefit relates to 2018 and 2019 net operating loss carrybacks. As well, the 2020 net operating loss carryback will result in a lower 2020 effective tax rate.
Commenting on the 2020 full year outlook, Grzebinski said, “As a result of the COVID-19 pandemic and many unknowns surrounding the depth of the global recession and the potential impact on future demand, we are withdrawing our full year earnings guidance. Our businesses are dealing with very volatile market conditions. During this time, we are managing this situation day-by-day with an intense focus on the health and safety of our employees, seamless operations, and uninterrupted customer service. Additionally, we are aggressively reducing costs, lowering capital spending, and focusing on cash flow.”
In inland marine, as a result of the mounting headwinds associated with COVID-19 and reduced consumer demand for petrochemicals, crude oil, and refined products, activity and barge utilization levels have declined to levels around 90% in recent weeks. With refineries and petrochemical plants reducing utilization rates to align with declining demand, Kirby expects low volume levels to persist until economic activity resumes. However, the long-term nature of many of our inland term contracts and the flexibility of barging in the evolving and complex U.S. supply chain will help to insulate some of the decline in business activity. Opportunities for storage, product relocations, and upcoming lock maintenance projects will also help to mitigate lower demand. Also, the integration of the newly acquired Savage Inland Marine fleet is going well and the expected synergies are occurring.
In the coastal market, although approximately 85% of revenues are under term contracts, quarterly revenues and barge utilization are expected to decline in the near-term as a result of COVID-19. During the second quarter, Kirby’s barge utilization has experienced a slight softening, particularly related to spot moves of refined products as customer refinery runs and demand have declined. Additionally, labor constraints in the shipyard industry as a result of the pandemic have resulted in delays and extended shipyards for several of Kirby’s large capacity vessels. As previously announced, Kirby’s retirement of four aging coastal barges, as well as anticipated activity reductions in the coal transportation business will have an impact on the full year.
Grzebinski concluded, “I expect 2020 will be a solid year for Kirby despite the obvious challenges. We are well-prepared to weather the challenges presented by COVID-19. In marine, although we anticipate a decline in volumes and barge utilization, we believe as in past cycles that our marine customer contracts and the variable nature of our cost structure will help to minimize the impact on our operating margins. The integration of Savage is going well despite the headwinds from COVID-19, and I’m optimistic that we can quickly realize synergies that will result in a favorable contribution from this acquisition. In D&S, the strong pull-back in the oil and gas sector has reduced our expectations for this segment; however, we have taken aggressive actions to reduce our cost structure and limit the impact on cashflow. Finally, Kirby is in a strong position with respect to liquidity and cash flow generation. We expect to have significant free cash flow in 2020 in the range of $250 to $350 million and intend to direct our cash flow towards debt repayment, enhancing liquidity, and strengthening our balance sheet.”