KIRBY CORPORATION

KEX
Real-time Estimate Quote. Real-time Estimate  - 05/26 01:43:01 pm
66.755USD +4.01%

KIRBY CORP Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

11/08/2021 | 04:17pm


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 and involve a number of risks and uncertainties. Such 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. The actual results of the future events described in
such forward-looking statements in this Form 10-Q could differ materially from
those stated in such forward-looking statements. Among the factors that could
cause actual results to differ materially are: adverse economic conditions,
industry competition and other competitive factors, adverse weather conditions
such as high water, low water, tropical storms, hurricanes, tsunamis, fog and
ice, tornados, COVID-19 or other pandemics, marine accidents, lock delays, fuel
costs, interest rates, construction of new equipment by competitors, government
and environmental laws and regulations, and the timing, magnitude and number of
acquisitions made by the Company. For a more detailed discussion of factors that
could cause actual results to differ from those presented in forward-looking
statements, see Item 1A-Risk Factors found in the Company's Annual Report on
Form 10­K for the year ended December 31, 2020. Forward-looking statements are
based on currently available information and the Company assumes no obligation
to update any such statements.




For purposes of 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,
2021 2020 2021 2020
Weighted average number of common
stock - diluted 60,062 59,931 60,044 59,903




Overview



The Company is the nation's largest domestic tank barge operator, 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. 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.




The following table summarizes key operating results of the Company (in
thousands, except per share amounts):






Three Months Ended September 30,


Nine Months Ended September 30,



2021 2020 2021 2020
Total revenues $ 598,920 $ 496,567 $ 1,655,394 $ 1,681,652
Net earnings (loss) attributable
to Kirby $ (264,730 ) $ 27,489 $ (257,915 ) $ (294,750 )
Net earnings (loss) per share
attributable to Kirby common
stockholders - diluted $ (4.41 ) $ 0.46 $ (4.30 ) $ (4.92 )
Net cash provided by operating
activities $ 280,362 $ 359,763
Capital expenditures $ 71,968 $ 129,371




The 2021 third quarter included $340,713,000 before taxes, $275,068,000 after
taxes, or $4.58 per share, non-cash charges related to impairment of long-lived
assets related to coastal marine transportation equipment and impairment of
goodwill in the marine transportation segment. See Note 7, Impairments and Other
Charges in the financial statements for additional information.



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 7, Impairments and Other Charges in the financial statements 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 9, Taxes on Income in the financial
statements for additional information.



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Cash provided by operating activities for the 2021 first nine months decreased
primarily due to lower revenues and operating income in the marine
transportation segment, partially offset by the receipt of a tax refund of
$119,493,000, including accrued interest, for the Company's 2019 federal tax
return. For the 2021 first nine months, capital expenditures of $71,968,000
included $61,565,000 in the marine transportation segment and $10,403,000 in the
distribution and services segment and corporate, more fully described under cash
flow and capital expenditures below.



The Company projects that capital expenditures for 2021 will be in the
$120,000,000 to $130,000,000 range. The 2021 construction program will consist
of approximately $10,000,000 for the construction of new inland towboats,
$95,000,000 to $100,000,000 primarily for capital upgrades and improvements to
existing marine equipment and facilities, and $15,000,000 to $20,000,000 for new
machinery and equipment, facilities improvements, and information technology
projects in the distribution and services segment and corporate.



The Company's debt-to-capitalization ratio decreased to 29.8% at September 30,
2021
from 32.2% at December 31, 2020, primarily due to repayments under the
Revolving Credit Facility and Term Loan in the 2021 first nine months, partially
offset by a decrease in total equity, primarily due to the net loss attributable
to Kirby of $257,915,000. The Company's debt outstanding as of September 30,
2021
and December 31, 2020 is detailed in Long-Term Financing below.


Marine Transportation






For the 2021 third quarter and first nine months, the Company's marine
transportation segment generated 57% and 59%, respectively, of the Company's
revenues. The segment's customers include many of the major petrochemical and
refining companies that operate in the 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 following table summarizes the Company's marine transportation fleet:






September 30,
2021 2020
Inland tank barges:
Owned 993 1,032
Leased 43 52
Total 1,036 1,084
Barrel capacity (in millions) 23.2


24.5




Active inland towboats (quarter average):
Owned 213 229
Chartered 30 36
Total 243 265

Coastal tank barges:
Owned 30 45
Leased 5 2
Total 35 47
Barrel capacity (in millions) 3.4 4.3

Coastal tugboats:
Owned 26 40
Chartered 9 4
Total 35 44

Offshore dry-bulk cargo barges (owned) 4


4



Offshore tugboats and docking tugboat (owned and chartered) 5



5




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The Company also owns shifting operations and fleeting facilities for dry cargo
barges and tank barges on the Houston Ship Channel and in Freeport and Port
Arthur, Texas
, and Lake Charles, Louisiana, and 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.



During the 2021 first nine months, the Company retired 26 inland tank barges and
returned four leased barges. The net result was a decrease of 30 inland tank
barges and approximately 907,000 barrels of capacity.



The Company's marine transportation segment's revenues for the 2021 third
quarter and first nine months increased 6% and decreased 12%, respectively, and
operating income decreased 48% and 72%, respectively, compared with the 2020
third quarter and first nine months revenues and operating income. The increase
in revenues for the 2021 third quarter was primarily due to increased fuel
rebills in the inland and coastal markets and increased tank barge utilization
in the inland market. The decreases for the 2021 first nine months were
primarily due to reduced barge utilization in the inland and coastal markets as
well as reduced term and spot pricing in the inland market when compared to
2020. The decreases were partially offset by the addition of the Savage Inland
Marine, LLC
("Savage") fleet acquired on April 1, 2020. The 2021 third quarter
benefited from improving business activity and inland market barge utilization
which were largely offset by reduced term pricing when compared to the 2020
third quarter. 2021 third quarter revenues and operating income were also
impacted by Hurricane Ida which shuttered almost the entire Southeast Louisiana
refinery
and chemical complex and key waterways for an extended period of time.
The 2021 first nine months was also heavily impacted by Winter Storm Uri during
the first quarter which shut down many Gulf Coast refineries and chemical plants
for an extended period of time starting in mid-February. These emergency
shutdowns resulted in significantly reduced liquids production and lower volumes
for the Company's inland marine transportation market during the 2021 first
quarter. The 2021 and 2020 first quarters were also impacted by poor operating
conditions including seasonal wind and fog along the Gulf Coast, flooding on the
Mississippi River, and various lock closures along the Gulf Intracoastal
Waterway
, in addition to ice on the Illinois River during the 2021 first quarter
and increased shipyard days on large capacity coastal vessels during the 2020
first quarter. For the 2021 third quarter and first nine months, the inland tank
barge fleet contributed 76% and 75%, respectively, and the coastal fleet
contributed 24% and 25%, respectively, of marine transportation revenues. 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.



Inland tank barge utilization levels averaged in the mid-70% range during the
2021 first quarter, the low to mid-80% range during the 2021 second quarter, and
the low 80% range during the 2021 third quarter. In 2020, 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. The 2021 first nine months and the 2020 second
and third quarters were impacted by reduced demand as a result of the COVID-19
pandemic and the resulting economic slowdown. The 2021 second quarter was
favorably impacted by the Colonial Pipeline outage in May. The 2021 first nine
months was also impacted by reduced volumes as a result of Winter Storm Uri
during the first quarter. The 2020 first quarter experienced strong demand from
petrochemicals, black oil, and refined petroleum products customers. In
addition, extensive delay days due to poor operating conditions and lock
maintenance projects in the 2020 first quarter slowed the transport of customer
cargoes and contributed to strong utilization.



Coastal tank barge utilization levels averaged in the mid-70% range during the
2021 first and third quarters and the low to mid­70% range during the 2021
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 and third quarters. The 2021 first nine months and the 2020 second
and third quarters were impacted by reduced demand as a result of the COVID-19
pandemic and the resulting economic slowdown. Barge utilization in the coastal
marine fleet continued to be impacted by the oversupply of tank barges in the
coastal industry in 2021 and 2020.



During both the 2021 third quarter and first nine months, approximately 65% of
marine transportation's inland revenues were under term contracts and 35% were
spot contract revenues. 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. Inland time charters during the 2021 third quarter and first
nine months represented 56% and 58%, respectively, of the inland revenues under
term contracts compared with 67% in both the 2020 third quarter and first nine
months. During both the 2021 third quarter and first nine months, approximately
80% of the coastal revenues were under term contracts and 20% were spot contract
revenues. 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. Coastal time charters represented approximately
85% of coastal revenues under term contracts during both the 2021 third quarter
and first nine months compared with approximately 90% during both the 2020 third
quarter and first nine months. Term contracts have contract terms of 12 months
or longer, while spot contracts have contract terms of less than 12 months.





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The following table summarizes the average range of pricing changes in term and
spot contracts renewed during 2021 compared to contracts renewed during the
corresponding quarter of 2020:






Three Months Ended
March 31, 2021 June 30, 2021 September 30, 2021
Inland market:
Term decrease (7)% - (9)% (6)% - (8)% (2)% - (4)%
Spot decrease (25)% - (30)% (10)% - (15)% No change
Coastal market (a):
Term increase (decrease) No change No change No change
Spot increase (decrease) No change No change No change




(a)
Spot and term contract pricing in the coastal market are contingent on various
factors including geographic location, vessel capacity, vessel type, and product
serviced.



Effective January 1, 2021, annual escalators for labor and the producer price
index on a number of inland multi-year contracts resulted in rate increases on
those contracts of approximately 3%, excluding fuel.



The marine transportation segment operating margin was 5.0% for the 2021 third
quarter compared with 10.1% for the 2020 third quarter and 3.8% for the 2021
first nine months compared to 12.2% for the 2020 first nine months.



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.



For the 2021 third quarter and first nine months, the distribution and services
segment generated 43% and 41%, respectively, of the Company's revenues, of which
87% and 86%, respectively, was generated from service and parts and 13% and 14%,
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 2021 third quarter and first nine
months increased 48% and 18%, respectively, and operating income increased 900%
and 316%, respectively, compared with the 2020 third quarter and first nine
months revenues and operating income. In the commercial and industrial market,
the increases in the 2021 third quarter and first nine months compared to the
2020 third quarter and first nine months were primarily attributable to improved
economic activity across the U.S. which resulted in higher business levels in
the power generation and on-highway businesses. Increased product sales in
Thermo King also contributed favorably to the 2021 third quarter and first nine
months results. The marine repair business was down slightly compared to the
2020 third quarter and first nine months due to reduced service activity. The
commercial and industrial market 2021 first nine months was impacted by Winter
Storm Uri with reduced activity levels at many locations across the Southern
U.S.
during the first quarter. For the 2021 third quarter and first nine months,
the commercial and industrial market contributed 59% and 63%, respectively, of
the distribution and services revenues.



In the oil and gas market, revenues improved compared to the 2020 third quarter
and first nine months due to higher oilfield activity which resulted in
increased demand for new and overhauled engines, transmissions, parts, and
service. The manufacturing business also experienced increases in orders and
deliveries of new and remanufactured pressure pumping equipment as well as power
generation equipment for electric fracturing. For the 2021 third quarter and
first nine months, the oil and gas market contributed 41% and 37%, respectively,
of the distribution and services revenues.



The distribution and services segment operating margin for the 2021 third
quarter was 4.2% compared with 0.6% for the 2020 third quarter and 2.9% for the
2021 first nine months compared to (1.6)% for the 2020 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 workforce reductions.



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Outlook



Although the COVID-19 delta variant in the U.S. and around the world has created
some uncertainty which has slowed the pace of the economic recovery, the Company
expects further growth in marine transportation during the 2021 fourth quarter.
Supply chain and labor constraints and delays of key components, particularly in
distribution and services, could defer some product sales and manufacturing
deliveries into 2022 resulting in modest declines in revenue in distribution and
services during the 2021 fourth quarter.



In the inland marine transportation market, barge utilization in October
improved into the high 80% range and is expected to remain strong for the
duration of the fourth quarter as Louisiana refinery and petrochemical plants
restart and customers boost production levels to meet pend-up demand. While
ongoing navigational issues in the wake of Hurricane Ida, which have resulted in
extended closures of key waterways and contributed to some increases in barge
utilization, should subside, the onset of seasonal winter weather and continued
economic growth should result in improved barge utilization. Overall, increased
inland activity levels should yield further improvements in the spot market,
which currently represents approximately 35% of inland revenue, and contribute
to improved revenues and operating margins. During the fourth quarter and into
2022, term contracts that renewed lower over the past year should reset to
reflect the improved market conditions. Overall, inland revenues are expected to
increase in the 2021 fourth quarter with operating margins around 10%.



As of September 30, 2021, 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 285 of those over 40 years old. The Company
estimates that approximately 60 to 75 new tank barges have been ordered for
delivery in 2021 and many older tank barges, including an expected 28 by the
Company, will be retired, dependent on 2021 market conditions. Historically, 75
to 150 older inland tank barges are retired from service each year
industry-wide. The extent of the retirements is dependent on petrochemical and
refinery production levels, and crude oil and natural gas condensate movements,
both of which can have a direct effect on industry-wide tank barge utilization,
as well as term and spot contract rates.



In the coastal marine transportation market, market conditions are expected to
modestly improve in the 2021 fourth quarter. Combined with the recent sale of
the Hawaiian marine equipment and the retirement of underutilized barges,
coastal barge utilization is expected to be near 90% in the fourth quarter.
Although the Hawaii equipment has been sold, the Company has chartered and will
continue to operate the assets until existing customer contracts expire at the
end of 2021. Elsewhere in the coastal market, planned shipyard activity on
several large capacity barges will likely result in an overall sequential
revenue reduction in the mid-single digits during the fourth quarter with
operating margins at or slightly below breakeven.



As of September 30, 2021, the Company estimated there were approximately 270
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 small
specialized coastal ATB in the 195,000 barrels or less category that was
delivered in the 2021 first quarter with no further coastal barges currently
under construction.



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. Seasonality in the commercial and industrial market, including reduced
marine repair activity, lower demand for Thermo King refrigeration parts and
service, and reduced utilization of the power generation rental fleet, are all
expected to contribute to sequential reductions in revenue and operating income
in the 2021 fourth quarter.



In the distribution and services oil and gas market, strong commodity prices and
oilfield activity levels are expected to yield robust demand for new
transmissions, service, and parts for the duration of the year. In
manufacturing, activity is also expected to remain strong driven by an
increasing backlog of environmentally friendly pressure pumping equipment, frac
related power generation equipment, and remanufacturing of existing conventional
equipment. However, increasing original equipment manufacturer supply chain
issues are expected to delay some sales into 2022 and result in a sequential
reduction in oil and gas revenues and operating margins. Overall, compared to
the 2021 third quarter, distribution and services revenues are expected to
decline modestly with operating margins in the low to mid-single digits.




While the Company's outlook is dependent on developments regarding the COVID-19
pandemic and related supply chain constraints, the Company has maintained
business continuity and expects to continue to do so.



Acquisition




During the nine months ended September 30, 2021, the Company purchased four
inland tank barges from a leasing company for $7,470,000 in cash. The Company
had been leasing the barges prior to the purchase. Financing of the purchase was
through cash provided by operating activities.

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Results of Operations




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 September 30,
2021 % 2020 % 2021 % 2020 %


Marine



transportation $ 338,514 57 % $ 320,602 65 % $ 972,352 59 % $ 1,104,846 66 %
Distribution
and services 260,406 43 175,965 35 683,042 41 576,806 34
$ 598,920 100 % $ 496,567 100 % $ 1,655,394 100 % $ 1,681,652 100 %




Marine Transportation



The following table sets forth the Company's marine transportation segment's
revenues, costs and expenses, operating income, and operating margin (dollars in
thousands):



Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 % Change 2021 2020 % Change
Marine transportation
revenues $ 338,514 $ 320,602 6 % $ 972,352 $ 1,104,846 (12 )%

Costs and expenses:
Costs of sales and
operating expenses 237,233 207,038 15 681,317 717,923 (5 )
Selling, general and
administrative 29,464 26,554 11 88,314 85,294 4
Taxes, other than on
income 8,422 7,307 15 23,828 27,852 (14 )
Depreciation and
amortization 46,480 47,312 (2 ) 141,560 139,295 2
321,599 288,211 12 935,019 970,364 (4 )
Operating income $ 16,915 $ 32,391 (48 )% $ 37,333 $ 134,482 (72 )%
Operating margins 5.0 % 10.1 % 3.8 % 12.2 %





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:






2021 Third
Quarter 2021 Nine Months
Markets Revenue Revenue
Serviced Distribution Distribution Products Moved Drivers
Petrochemicals 51% 50% Benzene, Styrene, Consumer
Methanol, Acrylonitrile, non-durables -
Xylene, Naphtha, Caustic 70%, Consumer
Soda, Butadiene, durables - 30%
Propylene
Black Oil 25% 26% Residual Fuel Oil, Coker Fuel for Power
Feedstock, Vacuum Gas Plants and
Oil, Asphalt, Carbon Ships, Feedstock
Black Feedstock, Crude for Refineries,
Oil, Natural Gas Road
Condensate, Ship Bunkers Construction
Refined 20% 20% Gasoline, No. 2 Oil, Jet Vehicle Usage,
Petroleum Fuel, Heating Oil, Diesel Air Travel,
Products Fuel, Ethanol Weather
Conditions,
Refinery
Utilization
Agricultural 4% 4% Anhydrous Ammonia, Corn, Cotton and
Chemicals Nitrogen - Based Liquid Wheat
Fertilizer, Industrial Production,
Ammonia Chemical
Feedstock Usage




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The Company's marine transportation segment's revenues for the 2021 third
quarter and first nine months increased 6% and decreased 12%, respectively,
compared with the 2020 third quarter and first nine months revenues. The
increase for the 2021 third quarter was primarily due to increased fuel rebills
in the inland and coastal markets and increased tank barge utilization in the
inland market. The decrease for the 2021 first nine months was primarily due to
reduced barge utilization in the inland and coastal markets as well as reduced
term and spot pricing in the inland market when compared to 2020. The decrease
was partially offset by the addition of the Savage fleet acquired on April 1,
2020
. The 2021 third quarter benefited from improving business activity and
inland market barge utilization which were largely offset by reduced term
pricing when compared to the 2020 third quarter. 2021 third quarter revenues and
operating income were also impacted by Hurricane Ida which shuttered almost the
entire Southeast Louisiana refinery and chemical complex and key waterways for
an extended period of time. The 2021 first nine months was also heavily impacted
by Winter Storm Uri during the first quarter which shut down many Gulf Coast
refineries and chemical plants for an extended period of time starting in
mid-February. These emergency shutdowns resulted in significantly reduced
liquids production and lower volumes for the Company's inland marine
transportation market during the 2021 first quarter. The 2021 and 2020 first
quarters were also impacted by poor operating conditions including seasonal wind
and fog along the Gulf Coast, flooding on the Mississippi River, and various
lock closures along the Gulf Intracoastal Waterway, in addition to ice on the
Illinois River during the 2021 first quarter and increased shipyard days on
large capacity coastal vessels during the 2020 first quarter. For the 2021 third
quarter and first nine months, the inland tank barge fleet contributed 76% and
75%, respectively, and the coastal fleet contributed 24% and 25%, respectively,
of marine transportation revenues. 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.



Inland tank barge utilization levels averaged in the mid-70% range during the
2021 first quarter, the low to mid-80% range during the 2021 second quarter, and
the low 80% range during the 2021 third quarter. In 2020, 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. The 2021 first nine months and the 2020 second
and third quarters were impacted by reduced demand as a result of the COVID-19
pandemic and the resulting economic slowdown. The 2021 second quarter was
favorably impacted by the Colonial Pipeline outage in May. The 2021 first nine
months was also impacted by reduced volumes as a result of Winter Storm Uri
during the first quarter. The 2020 first quarter experienced strong demand from
petrochemicals, black oil, and refined petroleum products customers. In
addition, extensive delay days due to poor operating conditions and lock
maintenance projects in the 2020 first quarter slowed the transport of customer
cargoes and contributed to strong utilization.



Coastal tank barge utilization levels averaged in the mid-70% range during the
2021 first and third quarters and the low to mid­70% range during the 2021
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 and third quarters. The 2021 first nine months and the 2020 second
and third quarters were impacted by reduced demand as a result of the COVID-19
pandemic and the resulting economic slowdown. Barge utilization in the coastal
marine fleet continued to be impacted by the oversupply of tank barges in the
coastal industry in 2021 and 2020.



The petrochemical market, the Company's largest market, contributed 51% and 50%
of marine transportation revenues for the 2021 third quarter and first nine
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 2021 first quarter, as much as 80%
of U.S. chemical plant capacity was offline at the peak of Winter Storm Uri,
contributing to significantly reduced volumes and revenues; however, volumes and
revenues sequentially improved in the 2021 second quarter as chemical plants
resumed full operations by May. During the 2021 third quarter, volumes declined
again as numerous Louisiana chemical plants were shut down for an extended
period of time as a result of Hurricane Ida.



The black oil market, which contributed 25% and 26% of marine transportation
revenues for the 2021 third quarter and first nine 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 2021 first quarter, U.S. refinery utilization dropped to near 40%
during the peak of Winter Storm Uri, contributing to significantly reduced
volumes and revenues. Although refinery utilization increased back to near 90%
in the 2021 second quarter contributing to sequentially increased volumes and
revenues, volumes declined again during the 2021 third quarter as Louisiana
refineries were shut down for an extended period of time as a result of
Hurricane Ida. During the 2021 third quarter and first nine months, 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
.



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The refined petroleum products market, which contributed 20% of marine
transportation revenues for both the 2021 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. In addition, during the 2021
first quarter, U.S. refinery utilization dropped to near 40% during the peak of
Winter Storm Uri, contributing to significantly reduced volumes and revenues.
Although refinery utilization increased back to near 90% in the 2021 second
quarter contributing to sequentially increased volumes and revenues, volumes
declined again during the 2021 third quarter as Louisiana refineries were shut
down for an extended period of time as a result of Hurricane Ida.



The agricultural chemical market, which contributed 4% of marine transportation
revenues for both the 2021 third quarter and first nine months, saw modest
reductions in demand for transportation of both domestically produced and
imported products, primarily due to reduced demand associated with the COVID-19
pandemic.



For the 2021 third quarter, the inland operations incurred 1,499 delay days, 12%
more than the 1,335 delay days that occurred during the 2020 third quarter. For
the 2021 first nine months, the inland operations incurred 7,275 delay days, 16%
fewer than the 8,640 delay days that occurred during the 2020 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. Delay days for the 2021 and 2020 first nine
months reflected poor operating conditions due to heavy wind and fog along the
Gulf Coast, high water conditions on the Mississippi River System, and closures
of key waterways as a result of lock maintenance projects during the 2021 and
2020 first quarters. The decrease in delay days in the 2021 first nine months
reflects reduced volumes and barge utilization compared to the 2020 first nine
months while the increase in delay days in the 2021 third quarter reflects the
impacts of Hurricane Ida as well as significant lock closures along the Gulf
Intracoastal Waterway
compared to the 2020 third quarter.



During both the 2021 third quarter and first nine months, approximately 65% of
marine transportation's inland revenues were under term contracts and 35% were
spot contract revenues. 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. Inland time charters during the 2021 third quarter and first
nine months represented 56% and 58%, respectively, of the inland revenues under
term contracts compared with 67% in both the 2020 third quarter and first nine
months. During both the 2021 third quarter and first nine months, approximately
80% of the coastal revenues were under term contracts and 20% were spot contract
revenues. 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. Coastal time charters represented approximately
85% of coastal revenues under term contracts during both the 2021 third quarter
and first nine months compared with approximately 90% during both the 2020 third
quarter and first nine months.




The following table summarizes the average range of pricing changes in term and
spot contracts renewed during 2021 compared to contracts renewed during the
corresponding quarter of 2020:






Three Months Ended
March 31, 2021 June 30, 2021 September 30, 2021
Inland market:
Term decrease (7)% - (9)% (6)% - (8)% (2)% - (4)%
Spot decrease (25)% - (30)% (10)% - (15)% No change
Coastal market (a):
Term increase (decrease) No change No change No change
Spot increase (decrease) No change No change No change




(a)
Spot and term contract pricing in the coastal market are contingent on various
factors including geographic location, vessel capacity, vessel type, and product
serviced.



Effective January 1, 2021, annual escalators for labor and the producer price
index on a number of inland multi-year contracts resulted in rate increases on
those contracts of approximately 3%, excluding fuel.




Marine Transportation Costs and Expenses






Costs and expenses for the 2021 third quarter and first nine months increased
12% and decreased 4%, respectively, compared with the 2020 third quarter and
first nine months. Costs of sales and operating expenses for the 2021 third
quarter and first nine months increased 15% and decreased 5%, respectively,
compared with the 2020 third quarter and first nine months, respectively. The
decreases during the 2021 first nine months primarily reflect to cost reductions
across the segment, including a reduction in towboats during the 2020 last nine
months and the 2021 first quarter and a reduction in maintenance expenses during
the first half of the year, partially offset by the addition of the Savage fleet
in April 2020. The increases during the 2021 third quarter primarily reflect
increased fuel costs and maintenance expenses as business activity levels
improved.



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The inland marine transportation fleet operated an average of 243 towboats
during the 2021 third quarter, of which an average of 30 were chartered,
compared with 265 during the 2020 third quarter, of which an average of 36 were
chartered. The decrease was primarily due to reduced horsepower requirements as
a result of a smaller barge fleet, crewing issues associated with the COVID-19
delta variant, and reduced activity as a result of the impacts of Hurricane Ida.
Generally, as demand or anticipated demand increases or decreases, as new tank
barges are added to or removed from 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 2021 third quarter, the inland operations consumed 11.8 million
gallons of diesel fuel compared to 10.2 million gallons consumed during the 2020
third quarter. The average price per gallon of diesel fuel consumed during the
2021 third quarter was $2.24 per gallon compared with $1.27 per gallon for the
2020 third quarter. During the 2021 first nine months, the inland operations
consumed 34.4 million gallons of diesel fuel compared to 36.3 million gallons
consumed during the 2020 first nine months. The average price per gallon of
diesel fuel consumed during the 2021 first nine months was $1.99 per gallon
compared with $1.47 per gallon for the 2020 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 2021 third quarter and
first nine months increased 11% and 4%, respectively, compared with the 2020
third quarter and first nine months. The increase in the 2021 third quarter was
primarily due to higher incentive compensation accruals, medical costs, and
professional fees.



Taxes, other than on income, for the 2021 third quarter and first nine months
increased 15% and decreased 14%, respectively, compared with the 2020 third
quarter and first nine months. The increase during the 2021 third quarter
primarily reflected higher property taxes on marine transportation equipment due
to a favorable adjustment in the 2020 third quarter and higher waterway use
taxes, while the decrease for the first nine months reflected lower property
taxes on marine transportation equipment during the first half of the year.



Depreciation and amortization for the 2021 third quarter and first nine months
decreased 2% and increased 2%, respectively, compared to the 2020 third quarter
and first nine months. The decrease in the 2021 third quarter primarily reflects
retirements of marine equipment during the 2020 fourth quarter and the 2021
first nine months while the increase in the first nine months reflects the
acquisition of the Savage fleet in April 2020.




Marine Transportation Operating Income and Operating Margin






Marine transportation operating income for the 2021 third quarter and first nine
months decreased 48% and 72%, respectively, compared with the 2020 third quarter
and first nine months. The 2021 third quarter operating margin was 5.0% compared
with 10.1% for the 2020 third quarter. The 2021 first nine months operating
margin was 3.8% compared with 12.2% for the 2020 first nine months. The
decreases in operating income and operating margin were primarily due to reduced
barge utilization in the inland and coastal markets as well as decreased term
and spot contract pricing in the inland market, each as a result of a reduction
in demand due to the COVID-19 pandemic and reduced volumes as a result of
Hurricane Ida and Winter Storm Uri along with increased maintenance costs during
the 2021 third quarter. Operating margins for the 2021 third quarter and first
nine months were also impacted by the increased cost of diesel fuel.



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Distribution and Services




The following table sets forth the Company's distribution and services segment's
revenues, costs and expenses, operating income (loss), and operating margin
(dollars in thousands):






Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 % Change 2021 2020 % Change
Distribution and
services revenues $ 260,406 $ 175,965 48 % $ 683,042 $ 576,806 18 %

Costs and expenses:
Costs of sales and
operating expenses 207,877 133,726 55 537,100 449,948 19
Selling, general and
administrative 35,002 33,098 6 104,477 108,295 (4 )
Taxes, other than on
income 1,470 1,754 (16 ) 4,620 5,636 (18 )
Depreciation and
amortization 5,018 6,283 (20 ) 16,739 22,252 (25 )
249,367 174,861 43 662,936 586,131 13
Operating income
(loss) $ 11,039 $ 1,104 900 % $ 20,106 $ (9,325 ) 316 %
Operating margins 4.2 % 0.6 % 2.9 % (1.6 )%





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:



2021 Third
Quarter 2021 Nine Months
Revenue Revenue
Markets Serviced Distribution Distribution Customers
Commercial and Industrial 59% 63% 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
Oil and Gas 41% 37% Oilfield Services, Oil and Gas
Operators and Producers




Distribution and services revenues for the 2021 third quarter and first nine
months increased 48% and 18%, respectively, compared with the 2020 third quarter
and first nine months revenues. In the commercial and industrial market, the
increase in the 2021 third quarter and first nine months compared to the 2020
third quarter and first nine months was primarily attributable to improved
economic activity across the U.S. which resulted in higher business levels in
the power generation and on-highway businesses. Increased product sales in
Thermo King also contributed favorably to the 2021 third quarter and first nine
months results. The marine repair business was down slightly compared to the
2020 third quarter and first nine months due to reduced service activity. The
commercial and industrial market 2021 first nine months was impacted by Winter
Storm Uri with reduced activity levels at many locations across the Southern
U.S.
during the first quarter. For the 2021 third quarter and first nine months,
the commercial and industrial market contributed 59% and 63%, respectively, of
the distribution and services revenues.



In the oil and gas market, revenues improved compared to the 2020 third quarter
and first nine months due to higher oilfield activity which resulted in
increased demand for new and overhauled engines, transmissions, parts, and
service. The manufacturing business also experienced increases in orders and
deliveries of new and remanufactured pressure pumping equipment as well as power
generation equipment for electric fracturing. For the 2021 third quarter and
first nine months, the oil and gas market contributed 41% and 37%, respectively,
of the distribution and services revenues.

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Distribution and Services Costs and Expenses






Costs and expenses for the 2021 third quarter and first nine months increased
43% and 13%, respectively, compared with the 2020 third quarter and first nine
months. Costs of sales and operating expenses for the 2021 third quarter and
first nine months increased 55% and 19%, respectively, compared with the 2020
third quarter and first nine months, reflecting higher demand in the on-highway
and power generation businesses in commercial and industrial markets in the 2021
third quarter. The increase also reflects higher demand for new and overhauled
transmissions and related parts and service and increased demand for new
pressure pumping equipment in the oil and gas market.



Selling, general and administrative expenses for the 2021 third quarter and
first nine months increased 6% and decreased 4%, respectively, compared to the
2020 third quarter and first nine months. The increase for the 2021 third
quarter is primarily due to increased incentive compensation accruals, medical
costs, and warranty accruals, while the decrease for the first nine months was
primarily due to 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 workforce reductions each during the 2020 second quarter.



Depreciation and amortization for the 2021 third quarter and first nine months
decreased 20% and 25%, respectively, compared to the 2020 third quarter and
first nine months. The decrease during the 2021 first nine months was primarily
due to lower amortization of intangible assets other than goodwill, which were
impaired during the 2020 first quarter. The decrease during the 2021 third
quarter also reflected certain equipment and leasehold improvements acquired
from Stewart & Stevenson LLC becoming fully depreciated during 2020.




Distribution and Services Operating Income (Loss) and Operating Margin






Operating income for the distribution and services segment for the 2021 third
quarter and first nine months increased 900% and 316%, respectively, compared
with the 2020 third quarter and first nine months. The operating margin for the
2021 third quarter was 4.2% compared with 0.6% for the 2020 third quarter and
2.9% for the 2021 first nine months compared to (1.6)% for the 2020 first nine
months. The results reflect increased business levels in both the commercial and
industrial and oil and gas markets and a return to profitability, partially
offset by higher costs and expenses.



General Corporate Expenses




General corporate expenses for the 2021 third quarter and first nine months
increased compared to the 2020 third quarter and first nine months primarily due
to costs related to Hurricane Ida.



(Gain) Loss on Disposition of Assets






The Company reported a net gain on disposition of assets of $830,000 for the
2021 third quarter compared with a net loss of $316,000 for the 2020 third
quarter. The Company reported a net gain on disposition of assets of $5,082,000
for the 2021 first nine months compared with a net loss of $13,000 for the 2020
first nine months. The net gains and losses were primarily from sales of marine
equipment.



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 September 30,
2021 2020 % Change 2021 2020 % Change
Impairments and
other charges $ (340,713 ) $ - N/A $ (340,713 ) $ (561,274 ) (39 )%
Other income $ 1,832 $ 1,172 56 % $ 8,146 $ 6,185 32 %
Noncontrolling
interests $ 422 $ (204 ) 307 % $ 5 $ (743 ) 101 %
Interest expense $ (10,500 ) $ (11,809 ) (11 )% $ (32,172 ) $ (37,316 ) (14 )%





Impairments and Other Charges






Impairments and other charges in the 2021 third quarter and first nine months
includes $340,713,000 before taxes, $275,068,000 after taxes, or $4.58 per
share, non-cash charges related to impairment of long-lived assets related to
coastal marine transportation equipment and impairment of goodwill in the marine
transportation segment. See Note 7, Impairments and Other Charges in the
financial statements for additional information.



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Impairments and other charges in the 2020 first nine months 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 7, Impairments
and Other Charges in the financial statements for additional information.



Other Income



Other income for the 2021 and 2020 third quarters include income of $1,684,000
and $1,154,000, respectively, and the 2021 and 2020 first nine months include
income of $5,992,000 and $4,793,000, respectively, for all components of net
benefit costs except the service cost component related to the Company's defined
benefit plans. Other income for the 2021 first nine months also includes
interest income from the Company's 2019 federal income tax refund received in
February 2021.



Noncontrolling Interests




Noncontrolling interests for the 2021 third quarter and first nine months
includes an allocation of the non-cash impairment charge of $844,000.






Interest Expense



The following table sets forth average debt and average interest rate (dollars
in thousands):



Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Average debt $ 1,238,263 $ 1,609,367 $ 1,328,830 $ 1,583,846
Average interest rate 3.3 % 2.9 % 3.2 % 3.1 %




Interest expense for the 2021 third quarter and first nine months decreased 11%
and 14%, respectively, compared with the 2020 third quarter and first nine
months, primarily due to a lower average debt outstanding as a result of debt
repayments since the 2020 first quarter. There was no capitalized interest
excluded from interest expense during the 2021 or 2020 first nine months.



Benefit for Taxes on Income



During the 2020 third quarter and first nine months, 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. 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% in
effect at September 30, 2020. The Company generated an effective tax rate
benefit in the 2020 third quarter and first nine months as a result of such
carrybacks.



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