Genco Shipping & Trading Limited — 2015 Q3 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Financial statements are unaudited and presented in U.S. dollars; financial amounts below are in millions unless noted.
Business context and reporting period
Genco owns and operates drybulk vessels transporting cargo worldwide. It completed its stock-for-stock merger with Baltic Trading on July 17, 2015, making Baltic Trading wholly owned and combining the companies into one reportable segment. The fleet at the time of the filing comprised 70 vessels, with approximately 5.16 million dwt and an average age of 9.0 years.
Comparisons with 2014 require care: Genco emerged from Chapter 11 on July 9, 2014 and adopted fresh-start accounting, creating separate predecessor and successor reporting periods. The filing also restates certain 2014 predecessor results and the December 2014 allocation between Genco shareholders and noncontrolling interests.
Key financial metrics
| Metric | Three months ended September 30, 2015 | Nine months ended September 30, 2015 |
|---|---|---|
| Total revenue | $50.0 | $119.0 |
| Operating loss | $(35.3) | $(155.3) |
| Net loss | $(73.8) | $(204.9) |
| Net loss attributable to Genco | $(66.6), or $(0.95) per share | $(145.4), or $(2.29) per share |
| Operating cash flow | Not separately stated for the quarter | $(39.4) |
- Q3 revenue increased 2.4% versus the combined comparable 2014 periods, while fleet-average TCE fell 8.9% to $7,009 per available day. Fleet utilization was 98.9%.
- For the first nine months, revenue fell 27.9% versus the combined comparable 2014 periods and fleet-average TCE fell 36.3% to $5,696 per available day. Management attributed the revenue pressure principally to lower charter rates.
- Q3 operating margin was approximately negative 70.6%; net margin was approximately negative 147.6%. These figures reflect substantial impairment and other charges.
- Q3 results included a $32.5 impairment of the Jinhui investment. Nine-month operating expenses included $35.4 of vessel impairment and $1.2 loss on vessel sales, both related to the Baltic Lion and Baltic Tiger transactions. Q3 G&A and management fees were $27.0, including merger-related expenses and noncash compensation.
- At September 30, cash and cash equivalents were $44.5; restricted cash totaled $10.1. Current assets were $90.9 and current liabilities $79.2. The current ratio was approximately 1.15.
- Total debt was $462.3, including $44.2 current and $418.0 long-term. Total equity was $1,150.1. Nine-month cash flows were $(39.4) from operations, $(26.4) from investing, and $26.9 provided by financing; cash declined $38.9 from year-end 2014.
- No dividends were declared. Debt totaled $462.3 at quarter-end; the later $98.3 borrowing described below occurred after the reporting date.
Material changes, outlook, risks and unusual items
- The Baltic Trading merger expanded the fleet and increased shares outstanding; former Baltic Trading public shareholders held approximately 15.5% of the combined company at closing. Three Ultramax newbuildings were delivered during the nine months, and the Baltic Mantis was delivered October 9, 2015.
- Management described drybulk market conditions as weak, with excess vessel supply continuing to weigh on the industry. It believed available cash and internally generated cash, including credit-facility borrowings, would fund fleet operations and working capital for the next 12 months; if weakness persisted, it might seek additional debt or equity or sell assets, including vessels. No formal earnings guidance is provided.
- Minimum contracted time-charter revenue as of November 4 was estimated at $2.5 for the remainder of 2015 and $1.5 for 2016. This excludes pool and spot-market-related employment and is not a forecast of total revenue.
- Management reported collateral-maintenance pressure. The $100 million term facility measured 126.2% against a 130% requirement at September 30; Genco added the unencumbered Genco Prosperity as collateral in October. A separate shortfall under the $253 million facility earlier in the year was addressed with additional vessels and a $1.7 debt prepayment. Falling vessel values could create further covenant pressure. Management said it believed it was in compliance with the facilities at September 30.
- After quarter-end, the company drew $98.3 under a new working-capital facility, bearing interest at three-month LIBOR plus 6.125%, maturing September 2020, and secured by 13 vessels. It also drew a further $21.2 on the 2015 revolving facility in October. These borrowings add liquidity but increase debt and collateral encumbrance.
- Credit facilities generally require minimum liquidity and collateral coverage, restrict dividends, and contain other financial covenants. Management said dividends were prohibited under certain facilities, with the longest restriction running through May 1, 2017; it did not plan to resume dividends.
- Disclosure controls and procedures were not effective at September 30 because of material weaknesses involving noncontrolling-interest basis differences and accounting for non-routine transactions. Management described remediation efforts. The filing identifies prior-period restatements related to fresh-start accounting and goodwill allocation.
- Merger-related shareholder litigation remained pending, and the company said it could not reasonably estimate any loss, though it did not believe a material financial-reporting consequence was probable. Samsun, a charterer with a past payment settlement, filed for rehabilitation proceedings again in South Korea; the proposed plan remained under review.
- Other risks include volatile drybulk rates, charterer performance, vessel operating and drydocking costs, regulatory requirements and floating-rate debt exposure. Management estimated that a 1% increase in LIBOR would have increased nine-month interest expense by $3.3.
Important facts for investors to verify
- Review the reconciliation of predecessor and successor periods before treating 2014 earnings comparisons as like-for-like; fresh-start adjustments and the restatements materially affect comparability.
- Track vessel appraisals, collateral coverage and compliance with each facility’s liquidity and financial covenants, including the October collateral addition and subsequent $98.3 borrowing.
- Assess cash burn, debt service, drydocking and ballast-water-system capital requirements against management’s 12-month liquidity statement and the weak-rate outlook.
- Examine the Jinhui impairment basis, remaining investment value and whether further impairment is recorded.
- Monitor remediation of internal-control weaknesses, merger litigation, the Samsun recovery and the company’s related-party balance with MEP.