Genco Shipping & Trading Limited — Q1 2011 Form 10-Q
Business context and reporting period. Unaudited consolidated results for the three months ended March 31, 2011, compared with Q1 2010; balance-sheet comparisons are with December 31, 2010. Genco owns and operates drybulk vessels. Consolidated results include Baltic Trading, which Genco controlled through 83.51% of its voting power while holding a 25.24% economic interest at quarter-end. Dollar amounts below are U.S. dollars.
Financial performance and position
| Metric | Q1 2011 | Q1 2010 / prior date |
|---|---|---|
| Total revenue | $101.4 million | $94.7 million |
| Operating income | $33.7 million; 33.3% margin | $48.4 million; 51.1% margin |
| Net income | $12.2 million consolidated; $13.4 million attributable to Genco | $33.1 million consolidated; $33.5 million attributable to Genco |
| EPS, basic / diluted | $0.38 / $0.38 | $1.07 / $1.06 |
| Operating cash flow | $40.2 million | $55.0 million |
| Cash and cash equivalents | $275.5 million | $270.9 million at Dec. 31, 2010 |
| Bank debt | $1.647 billion | $1.643 billion at Dec. 31, 2010 |
| Total assets / equity | $3.191 billion / $1.368 billion | $3.183 billion / $1.348 billion at Dec. 31, 2010 |
Net income attributable to Genco fell 59.9%; consolidated net income fell 63.2%. Consolidated net margin was approximately 12.0%, versus 35.0% a year earlier. EBITDA, as defined by the company and not a GAAP measure, was $68.0 million versus $73.6 million.
Current assets were $299.5 million and current liabilities $121.0 million, implying working capital of approximately $178.6 million. Restricted cash was $9.75 million. The balance sheet also showed $125 million principal of 5.0% convertible notes, carried at $103.3 million. Nine interest-rate swaps had a $36.1 million fair-value liability, including $13.6 million current.
Changes versus Q1 2010
- Revenue rose 7.1%, chiefly from fleet expansion and $9.5 million of Baltic Trading revenue, partly offset by weaker charter rates. Ownership days increased 65.8%; fleet utilization remained high at 99.5% versus 99.6%.
- Average fleet TCE declined 36.7% to $19,155 per day. Rates fell across vessel classes, with the steepest listed declines in Handysize and Capesize.
- Operating expenses increased 46.4% to $67.7 million, reflecting the larger fleet, higher depreciation and amortization, and increased administrative and management costs. Vessel operating expense per ownership day was nearly flat at $4,748.
- Net interest expense increased to $21.1 million from $15.4 million, mainly because of additional debt and Baltic Trading interest costs. Cash interest paid was $22.0 million, versus $13.2 million.
- Operating cash flow decreased by $14.8 million. Investing cash use was $36.0 million, primarily vessel purchases; financing cash flow was $0.5 million, compared with $198.6 million in Q1 2010, which included Baltic Trading IPO proceeds.
Outlook, risks, and notable items
- Management attributed weak drybulk rates to weather-related export disruptions in Australia and newbuilding vessel deliveries. It warned that prolonged market weakness could impair revenue and profitability. The filing provides no earnings or rate guidance.
- Management stated it was in compliance with the leverage covenant at March 31, 2011, and would have remained compliant with a 10% EBITDA reduction. However, it warned that continued weak rates and expected borrowing for vessel purchases could cause a breach of the 5.5-to-1 maximum leverage covenant during 2011. It was seeking waivers or modifications and might seek financing or sell assets; success was not assured. A default could accelerate debt, restrict further borrowing, and potentially trigger a default under the notes.
- The collateral-maintenance covenant under the 2007 Credit Facility was waived; cash dividends and share repurchases remain suspended until the company can satisfy that covenant. Genco declared no dividend for the quarter. Baltic Trading declared a separate $0.06-per-share dividend after quarter-end.
- Future minimum time-charter revenue as of May 2, 2011 was estimated at $110.0 million for the remainder of 2011, $49.9 million in 2012 and $1.7 million in 2013. These figures exclude pool and spot-market-related vessel revenue that could not be estimated.
- Contractual obligations included $89.8 million remaining for three Metrostar vessels. On May 9, Genco drew $20 million under its $100 million term facility for the expected delivery of Genco Avra. Estimated drydocking costs were $6.9 million for the remainder of 2011 and $11.9 million in 2012.
- Effective January 1, 2011, the estimated vessel scrap value increased from $175 to $245 per lightweight ton, reducing Q1 depreciation by $0.6 million. Management reported no vessel impairment at December 31, 2010, but said estimates depend on subjective assumptions, including future charter rates.
- Cargill represented 28.64% of Q1 revenue. Genco also reported an estimated $1.1 million claim against KLC, which entered rehabilitation; any recovery depends on collectibility assessment. Management said it knew of no legal matter expected to have a material adverse effect.
Important facts for investors to verify
- Whether drybulk charter rates recover, and how quickly expiring charters are renewed or moved to spot-linked employment.
- Progress on leverage-covenant compliance, lender waivers or amendments, collateral valuations, and funding of remaining vessel purchases.
- Available liquidity after debt service, vessel deliveries, and drydocking; distinguish unrestricted cash from restricted cash.
- Debt repayment requirements, floating-rate exposure, and swap costs: management estimated a 1% LIBOR increase would add $2.2 million of interest expense for the quarter on unhedged debt.
- Charterer concentration and collection of the KLC claim; also assess the valuation sensitivity of the Jinhui investment and vessel impairment assumptions.