Kirby Corp. (NYSE: KEX) reported Q1 EPS of $0.59, $0.15 better than the analyst estimate of $0.44. Revenue for the quarter came in at $643.93 million versus the consensus estimate of $634.02 million.

• First quarter 2020 GAAP loss per share of ($4.15), or earnings per share of $0.59 excluding one-time items of ($4.74) per share
• One-time items include asset impairments in distribution and services of ($5.59) per share, partially offset by a one-time tax benefit of $0.85 per share
• Barge markets were strong with high utilization rates in the first quarter
• Distribution and services oil and gas related activity declined sharply with oil prices
• Full year 2020 earnings per share guidance withdrawn

Response to COVID-19 and Business Conditions

David Grzebinski, Kirby’s President and Chief Executive Officer, commented, “At Kirby, our first priority is the safety, health, and well-being of our employees, customers, and communities. At the onset of COVID-19, we implemented our pandemic response plan, and I am extremely proud of the initiative, dedication, and commitment our employees have demonstrated during these difficult times. We have limited the direct impact of COVID-19 on our Company through quarantining and other actions while maintaining business continuity.

“Unfortunately, we have also had to implement workforce reductions, furloughs, and reduced work schedules in the distribution and services segment. These are difficult decisions, and I understand the impact they have on the affected employees and their families; however, these actions are necessary to allow that business to remain viable.

“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.

“Distribution and services experienced sequentially improved levels of activity in the early part of the quarter, with higher volumes of oil and gas related transmission sales and service, as well as some construction of new pressure pumping equipment. However, these encouraging trends reversed in March as oil prices rapidly declined and our major oilfield customers announced significant reductions to their 2020 activity and capital spending plans. In commercial and industrial, activity has remained relatively steady in marine repair and service, but with stay-at-home orders issued in most states, we have experienced slowing in power generation and on-highway.” Mr. Grzebinski concluded.

2020 Outlook

Commenting on the 2020 full year outlook, Mr. 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 (“Savage”) 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.

In distribution and services, activity in oil and gas is expected to materially decline 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, if any, new orders for pressure pumping equipment in manufacturing. In commercial and industrial, the Company anticipates its core markets will be impacted by reduced activity as a result of COVID-19; however, the commercial marine repair market and the Thermo-King refrigeration business are expected to remain relatively stable for the near term. The most significant impacts in commercial and industrial are expected to be seen in the on-highway sector and in power generation as customers defer maintenance spending and large capital projects. Kirby is actively managing the distribution and services cost structure through workforce reductions, furloughs, reduced work schedules, and pay freezes. Additionally, Kirby expects to consolidate additional facilities and maintain tight discretionary spending restrictions. On the balance sheet, as of March 31, 2020, Kirby had approximately $690 million of cash and liquidity available, of which $278 million was used to acquire Savage on April 1st. As a result of the ability to carryback net operating losses to prior years, the Company expects to receive tax refunds of approximately $125 million during the year. The Company does not have any scheduled debt maturities until 2023, and there is substantial room available in our bank covenants. Kirby expects 2020 capital spending to be at or below the lower end of its previously announced range of $155 million to $175 million, representing a year-on-year reduction of approximately 40%. While the Company is committed to regulatory and recurring maintenance on the marine transportation fleet, all opportunities to defer new capital and non-essential purchases will be evaluated.

Mr. 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.”

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