Kirby Corp. (NYSE: KEX) reported Q3 EPS of $0.46, $0.10 better than the analyst estimate of $0.36. Revenue for the quarter came in at $496.57 million versus the consensus estimate of $543.79 million.

• Third quarter 2020 earnings of $0.46 per share
• Distribution and services at breakeven as a result of significant cost reductions and improved activity
• Marine results impacted by reduced volumes and hurricanes
• Strong net cash flow provided by operating activities of $118 million and free cash flow of $81 million in the third quarter
• Expect FY2020 free cash flow of $300 to $350 million

David Grzebinski, Kirby’s President and Chief Executive Officer, commented, “The COVID-19 pandemic and the associated economic slowdown adversely impacted Kirby’s businesses during the third quarter. Although general economic activity was slightly improved and increased profitability was realized in the distribution and services segment, the marine transportation businesses experienced lower volumes and barge utilization.

“In marine transportation, our inland and coastal businesses were heavily affected by weak demand for liquid products including refined products, crude, and black oil. Throughout the third quarter, refinery utilization was well below historical norms as many of our customers experienced low consumer demand, high product inventories, and unfavorable economics. Additionally, a very active hurricane season resulted in further reductions in volumes and widespread disruptions including prolonged closures of some refineries, chemical plants, waterways, and major ports. These challenging market conditions during the quarter contributed to low barge utilization and limited spot market activity.

“In distribution and services, financial results sequentially improved during the third quarter as activity levels began to recover, and we realized the benefit of cost reductions. In commercial and industrial, activity levels in on-highway and power generation increased as lockdowns eased and economic activity rebounded. Additionally, we experienced higher utilization levels in our power generation rental fleet as a result of hurricanes along the Gulf Coast. In the oilfield, although activity remained muted, U.S. frac activity levels improved from second quarter lows, leading to modest increases in service demand and sales of pressure pumping equipment. Overall, revenues increased 10% sequentially with operating margin improving to breakeven,” Mr. Grzebinski concluded.

2020 Outlook

Commenting on the fourth quarter outlook, Mr. Grzebinski said, “Although Kirby continues to be challenged by unprecedented declines in demand as a result of the COVID-19 pandemic, our business activity and utilization levels have bottomed. Economic activity is slowly improving, and we have seen pockets of increased demand. While this is encouraging, in the fourth quarter our results are expected to be impacted by continued low barge utilization and pricing pressure, normal seasonality from weather in marine, and likely, customer budget exhaustion in distribution and services. Looking beyond 2020, while the timing and magnitude of a material economic recovery are unclear, we believe this demand driven downturn is temporary and demand will rebound sometime in 2021. In marine, as discussed before, pricing typically does not improve until barge utilization is in the mid-80% range. Nevertheless, Kirby is in a strong financial position, and we will continue to tightly manage our costs, maintain capital discipline, generate free cash flow, and pay down debt.”

In inland marine, absent potential new lockdowns related to COVID-19, Kirby expects improvement in barge utilization going forward as refinery and chemical plants along the Gulf Coast recover from recent hurricanes and economic activity gradually increases. The reopening of the Illinois River in October is also expected to contribute some sequential improvement in barge utilization. However, until a meaningful recovery in demand occurs, market conditions are expected to remain challenging. As well, increased delays from seasonal winter weather are expected to have an adverse impact on operating efficiencies. Overall, compared to the 2020 third quarter, Kirby expects inland revenues and operating margins will be flat to down slightly in the fourth quarter.

In coastal, 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 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, Kirby expects coastal fourth quarter revenues will be flat sequentially with operating margins in the negative low single digits.

In distribution and services, activity levels are slowly recovering from 2020 second quarter lows. In the fourth quarter, Kirby expects to benefit from the 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 revenue and operating income. In the oil and gas market, activity is expected to be minimal 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 demand for parts and service. In commercial and industrial, 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 hurricane season. Overall, compared to the 2020 third quarter, segment revenues are expected to modestly decline in the fourth quarter with operating margins in the negative low to mid-single digits.

On the balance sheet, as of September 30, 2020, Kirby had approximately $613 million of cash and liquidity available. The Company does not have any scheduled debt maturities until 2023. Kirby expects 2020 capital spending to be approximately $150 million, representing a year-on-year reduction of approximately 40%. The Company remains focused on good maintenance of the marine transportation fleet, but capital spending needs are limited. Overall, Kirby expects to generate net cash provided by operating activities of $450 million to $500 million, with free cash flow of $300 million to $350 million in 2020.

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