Genco Shipping & Trading Limited — 2018 Form 10-K
Business context and reporting period. This is the annual report for the fiscal year ended December 31, 2018, not a standalone Q4 filing; unaudited quarterly results are also reported. Genco transports drybulk commodities worldwide. At year-end it reported 59 vessels; the filing describes a 58-vessel fleet after the January 2019 sale of one vessel. The fleet’s carrying capacity was approximately 5.1 million dwt, with an average age of about nine years.
Financial performance and position
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $367.5 million | $209.7 million |
| Operating income (loss) | $0.5 million | $(29.6) million |
| Net loss | $(32.9) million | $(58.7) million |
| Net loss per share | $(0.86) | $(1.71) |
| EBITDA (non-GAAP) | $65.3 million | $42.0 million |
| Cash from operating activities | $65.9 million | $24.1 million |
| Cash, including restricted cash, at year-end | $202.8 million | $204.9 million |
| Debt, including current and long-term debt, net of financing costs | $535.1 million | $515.4 million |
FY 2018 operating margin was approximately 0.1%; net margin was approximately negative 9.0%. At December 31, 2018, total debt principal was $551.4 million, including $66.3 million classified as current. The company reported $197.5 million of unrestricted cash and $5.3 million of restricted cash. It was in compliance with the financial covenants under both principal credit facilities.
For Q4 2018, revenue was $112.2 million, operating income $26.0 million, net income $18.3 million, and diluted EPS $0.44. In Q4 2017, revenue was $74.9 million, operating income $10.0 million, net income $2.6 million, and diluted EPS $0.07.
Material changes versus the prior year
- Revenue rose 75.3%, principally reflecting greater use of spot voyage charters and higher spot-market rates. Average fleet TCE increased 34.1%, to $11,364 per day from $8,474; fleet utilization was 98.5% versus 98.1%.
- Voyage expenses rose to $114.9 million from $25.3 million as Genco bore fuel and port costs on more voyage charters. Vessel operating expenses were broadly flat at $97.4 million; average daily vessel operating expense declined slightly to $4,379 from $4,417.
- Despite reaching slight operating profitability, Genco remained in net loss, due in part to $56.6 million of vessel impairment charges and $33.1 million of interest expense. It also recorded a $4.5 million loss on debt extinguishment related to refinancing.
- Operating cash flow increased to $65.9 million. Investing cash outflow was $195.4 million, principally reflecting $241.9 million of vessel purchases, partly offset by vessel-sale proceeds. Financing cash inflow was $127.3 million, including debt borrowings and the equity offering.
Financing, outlook, and key risks
- In 2018, Genco refinanced prior facilities with a five-year $460 million secured facility and borrowed $108 million to help finance six vessel acquisitions. It also issued 7.015 million shares at $16.50 per share, receiving approximately $109.6 million net. At year-end, neither facility had remaining borrowing availability.
- In February 2019, lenders added an optional tranche of up to $35 million to finance up to 90% of scrubber costs. Genco expects scrubber installation on 17 Capesize vessels during 2019; estimated installed cost is about $2.25 million per vessel. It expects other vessels to use compliant low-sulfur fuel from 2020.
- Genco contracted ballast-water treatment systems for 47 vessels. Estimated 2019 spending included $19.8 million for drydocking, $13.8 million for ballast-water systems, and $38.3 million for scrubbers; estimated 2019 off-hire was 875 days. These are estimates, not earnings guidance.
- Management expected 2019 average daily vessel operating expenses of approximately $4,525. It stated that capital resources were expected to fund operations for at least 12 months, while noting higher expected cash expenditures for debt amortization and regulatory upgrades. No explicit revenue or earnings forecast was provided.
- Spot-market exposure creates earnings and fuel-cost volatility. As of March 4, 2019, approximately 55% of vessels were employed on spot voyage or spot-related time charters; most listed charters expired between March and July 2019. Management cited market uncertainty from trade tensions, Chinese coal restrictions, seasonal factors, weather, and disruption to Brazilian iron-ore shipments.
- Other material risks include floating-rate debt (a 1% LIBOR increase was estimated to add $5.3 million of annual interest expense), vessel-value declines and collateral covenants, environmental compliance costs, charterer credit risk, and potential liquidity pressure in a prolonged freight-market downturn. The company had not paid dividends since 2008 and said it did not currently plan to resume them.
The 2015 Baltic Trading shareholder litigation was dismissed with prejudice; the appellate dismissal was affirmed in 2018 and the appeal period expired. The independent auditor gave an unqualified opinion on the financial statements and internal controls; management also concluded internal controls were effective at year-end.
Investor verification priorities
- Check current charter coverage, realized TCE rates, and the renewal terms for the large number of short-dated charters.
- Track unrestricted liquidity, scheduled debt amortization, covenant headroom, and the terms and actual use of the $35 million scrubber tranche.
- Compare actual scrubber, ballast-water, and drydocking costs and off-hire with management’s estimates, including the impact of compliant-fuel prices.
- Review vessel valuations and impairment assumptions: year-end covenant valuations were below carrying values for most vessels, although Genco reported covenant compliance.
- Assess the effects of spot-market fuel exposure, trade-flow disruptions, and the 2018 equity issuance on cash generation and per-share performance.