Business context and reporting period
Genco Shipping & Trading Limited filed this Form 10-K for the fiscal year ended December 31, 2012; it is an annual report, not a standalone fourth-quarter filing. The company transports drybulk cargo worldwide. Its consolidated results include Baltic Trading, which Genco controls through voting rights. Genco’s fleet had 53 vessels and Baltic Trading’s had nine at year-end.
Most of Genco’s vessels were exposed to spot-market rates: management reported approximately 85% of its vessels, excluding Baltic Trading, were on spot-related charters or in a spot-market pool. Fleet utilization remained high at 99.2%.
Financial performance and position
| Metric | 2012 | 2011 |
|---|---|---|
| Total revenue | $226.5 million | $392.2 million |
| Operating income (loss) | $(69.3) million | $112.6 million |
| Operating margin | Approximately (30.6)% | Approximately 28.7% |
| Net income (loss), consolidated | $(157.8) million | $25.1 million |
| Net income (loss) attributable to Genco | $(144.9) million | $25.4 million |
| Basic and diluted earnings (loss) per share | $(3.47) | $0.72 |
| EBITDA, as defined by the company | $82.5 million | $249.1 million |
| Net cash from (used in) operating activities | $(18.8) million | $158.2 million |
| Cash and cash equivalents at year-end | $72.6 million | $228.0 million |
| Total debt, including convertible notes at carrying value | $1,524.4 million | $1,694.4 million |
| Total shareholders’ equity | $1,261.2 million | $1,361.6 million |
Amounts are consolidated and in U.S. dollars. EBITDA is a non-GAAP measure and is not a measure of liquidity or cash flow. Year-end current assets were $102.5 million and current liabilities were $25.7 million; restricted cash of $10.2 million was classified as noncurrent. No dividends were declared by Genco in 2012.
Material changes versus the prior year
- Voyage revenue fell 42.6%, principally because charter rates declined. Average fleet time-charter-equivalent (TCE) revenue fell 45.0%, to $9,706 per day from $17,644.
- Operating expenses rose 5.8% to $295.8 million, including higher vessel operating costs, general and administrative expenses, and depreciation. Average daily vessel operating expense increased 4.5%, to $5,038.
- Genco moved from operating profit and net income in 2011 to operating and net losses in 2012. Operating cash flow also turned negative.
- Cash declined by $155.4 million. Genco repaid $99.9 million under its credit-facility amendments and completed a February 2012 equity offering of 7.5 million shares, generating $49.9 million in net proceeds.
- Reported total debt declined 10.0%, while shareholder equity fell 7.4%. The year-end balance sheet included $1.413 billion of long-term bank debt and $110.9 million carrying value for the convertible notes.
Outlook, liquidity, risks and unusual items
- Liquidity and debt service: Management said cash on hand and internally generated cash flow were expected to fund fleet operations and working capital for the next 12 months. However, it anticipated that weak drybulk rates could prevent required debt payments beginning in the first quarter of 2014. Scheduled amortization then totaled $55.2 million. The company also warned that it might fail minimum-cash covenants at or after that time, or earlier if market weakness persisted.
- Covenants and collateral: Waivers of maximum-leverage and interest-coverage covenants ran through December 31, 2013; minimum-cash covenants were not waived. Genco reported year-end compliance but warned that compliance could become difficult when waivers expired. It estimated that collateral values under the $100 million and $253 million term loans could fall approximately 2.5% and 5%, respectively, before triggering collateral-maintenance noncompliance. Failure to obtain further waivers, refinance, raise capital or sell assets could lead to default and acceleration of debt.
- Rates and near-term trading: The drybulk market remained weak; the 2012 Baltic Dry Index averaged 920, compared with a 10-year average of 3,504. Management expected the recent rate downturn to adversely affect first-quarter 2013 revenue and results. Approximately 85% of Genco’s vessels were rate-exposed, and future spot rates are not assured.
- Contract cover: Minimum future time-charter revenue disclosed as of early February 2013 was $20.2 million for 2013 and $3.5 million for 2014. These figures exclude pool vessels, spot-related charters and profit sharing, so they do not represent total forecast revenue.
- Other risks: Cargill represented 31.3% of 2012 voyage revenue, and the top 10 charterers collectively represented approximately 77% of revenue. The filing also highlights vessel-value and impairment risk, interest-rate exposure, customer credit risk, regulation and environmental costs, piracy, and the possibility of higher crew, insurance, maintenance and drydocking expenses.
- Unusual items and estimates: Genco recorded a $1.3 million expense for vacating an office lease. It received only half of the $0.5 million Samsun settlement payment due in 2012 and recorded $0.3 million of related income; the KLC settlement produced only $2,000 of income. Despite lender vessel valuations being below carrying values, Genco recorded no vessel impairment, relying on estimated undiscounted future cash flows; those estimates depend materially on future charter rates.
- Dividend and subsequent event: Genco’s dividends and share repurchases remained suspended, with the credit agreements prohibiting them through December 31, 2013. Separately, Baltic Trading declared a $0.01-per-share dividend in February 2013.
Deloitte issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Important facts for investors to verify
- Cash available to Genco itself, excluding Baltic Trading, and the company’s ability to maintain minimum-cash requirements while meeting the $55.2 million first-quarter 2014 amortization.
- Any amendments, waivers, refinancing, asset sales or capital raises addressing covenant compliance and upcoming debt payments.
- Actual charter rates, vessel employment and operating cash flow after year-end, especially given spot exposure and limited disclosed fixed-rate contract cover.
- Current vessel appraisals and the assumptions supporting the no-impairment conclusion, including the sensitivity of projected cash flows to lower charter rates.
- Charterer payment quality and revenue concentration, particularly Cargill’s exposure, as well as collection of the Samsun and KLC settlement amounts.