Business context and reporting period
Genco Shipping & Trading Limited filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2010. It transports dry-bulk cargoes using vessels deployed on time charters, in pools, and through spot-market-linked arrangements. Results consolidate Baltic Trading Limited, which completed its IPO in March 2010; Genco held 25.35% of its economic interest but 83.59% of its voting power at quarter-end.
Genco’s fleet expanded materially through vessel acquisitions. At November 9, excluding Baltic Trading, it reported 49 vessels with about 3.649 million deadweight tons; Baltic Trading reported nine vessels with about 672,000 deadweight tons.
Financial performance and position
Unless stated otherwise, amounts are U.S. dollars in millions. Quarterly and nine-month comparisons are with the corresponding 2009 periods.
- Third quarter: Revenue was $118.0, up 27.0%; operating income was $57.8, up 15.2%; consolidated net income was $38.1, up 11.2%. Net income attributable to Genco was $36.2, up 5.7%. Basic EPS was $1.07 versus $1.10; diluted EPS was $0.99 versus $1.09.
- First nine months: Revenue was $318.0, up 12.3%; operating income was $161.2, up 1.6%; consolidated net income was $109.9, down 2.9%. Net income attributable to Genco was $106.4, down 5.9%. Basic EPS was $3.30 versus $3.62; diluted EPS was $3.19 versus $3.60.
- Margins: Operating margin was approximately 49.0% in Q3 2010 versus 54.0% in Q3 2009, and 50.7% for the first nine months versus 56.0%. Genco-attributable net margin was approximately 30.7% and 33.5%, respectively, versus 36.9% and 39.9% in the comparable periods.
- Rates and utilization: Average fleet TCE rate fell 12.8% to $26,819 per day in Q3 and 9.7% to $28,928 per day for the nine months. Fleet utilization was 98.4% in Q3 versus 99.5%, and 99.0% for both nine-month periods.
- Cash flow: Nine-month operating cash flow was $189.7 versus $166.3. Investing cash outflow was $795.2 versus $210.1, principally reflecting vessel purchases and deposits. Financing cash inflow was $682.1 versus $162.6, including equity and debt proceeds. Cash and cash equivalents ended at $264.9, up from $188.3 at year-end 2009.
- Liquidity and debt: Current assets were $304.6 and current liabilities $123.3, yielding working capital of $181.2 and a current ratio of about 2.5. Restricted cash totaled $21.0. Long-term borrowings, including current maturities, were $1,630.5; convertible notes had a $101.4 carrying value, for total debt carrying value of about $1,731.9. The notes’ principal was $125.0. Total liabilities were $1,834.4; total equity was $1,309.2.
- Other measures: Interest expense was $50.6 for the nine months versus $45.4. Ten interest-rate swaps had $756.2 notional value and a $54.4 net liability fair value. The Jinhui investment was valued at $63.7, down from $72.2 at year-end 2009. No Genco dividends were declared for the periods shown.
Material changes versus prior periods
Revenue growth primarily reflected a larger fleet, including newly delivered Genco vessels and Baltic Trading vessels, partly offset by lower charter rates. Fleet-average TCE rates declined, while vessel operating costs, general and administrative expenses, depreciation, and interest expense rose with fleet expansion and new financing. For the nine months, operating income increased only modestly and attributable earnings and EPS declined. Dilution from share issuance and convertible notes also affected per-share results.
In July, Genco issued 3.59 million common shares for net proceeds of $54.9 and $125.0 principal amount of 5.00% convertible notes due 2015. In August, it entered into $100.0 and $253.0 secured term loan facilities to help fund vessel acquisitions. Baltic Trading’s March IPO brought in $214.5 of net proceeds, as reported in financing cash flows, and introduced a noncontrolling economic interest in the consolidated results.
Outlook, commentary, risks and unusual items
- Management said internally generated cash flow, loan facilities, and offering proceeds were expected to fund fleet operations and working capital for the next 12 months. This is an expectation, not a guarantee; the filing identifies potential difficulty raising capital on acceptable terms if markets weaken.
- As of November 3, minimum contracted time-charter revenue was estimated at $97.9 for the remainder of 2010, $166.1 for 2011, $48.9 for 2012, and $1.7 for 2013. Estimates exclude pool vessels and spot-market-related charters where rates could not be estimated.
- Management described a weak freight environment early in Q3, followed by a recovery in the second half. It cited seasonal shifts in Chinese iron-ore imports and grain shipments, and noted that changes in iron-ore pricing arrangements could affect freight-rate dynamics.
- The 2007 Credit Facility’s collateral-maintenance covenant was waived; Genco said it believed it complied with other financial covenants. The waiver is consequential: Genco’s cash dividends and share repurchases remained suspended until it could satisfy the covenant. Genco said it anticipated no dividend for Q3.
- Debt facilities carry floating-rate exposure, despite swaps. Management estimated that a 1 percentage-point increase in LIBOR would have increased nine-month interest expense by $4.4, based on the unhedged portion of debt. Swaps also expose the company to counterparty and valuation risk.
- Key business risks include volatile dry-bulk freight rates, charterer performance or requests to renegotiate, fleet supply and demand, operating and drydocking costs, off-hire, regulatory and environmental requirements, and political, piracy, and insurance risks. Two customers each represented more than 10% of Q3 revenue: Cargill (28.53%) and Pacific Basin (13.18%).
- Acquisitions included related-party transactions: Genco agreed to resell three Bourbon vessels to MEP, an entity associated with Genco’s chairman; independent directors reviewed and approved the arrangement. Genco also reported technical-service fees and other transactions with related parties.
- After quarter-end, Baltic Trading took delivery of the Baltic Breeze and Baltic Wolf. On November 2, it signed a commitment letter to increase its credit facility from $100 to $150, lower the margin from LIBOR plus 3.25% to plus 3.00%, and extend the term; definitive documentation remained outstanding. Baltic Trading declared a $0.16-per-share dividend in November. Genco also completed two vessel purchases and immediate resales to MEP after quarter-end.
- Management reported no known legal proceedings expected to have a material adverse effect, and stated disclosure controls were effective with no material change in internal control during the quarter.
Most important facts for investors to verify
- Whether Genco can satisfy or renegotiate the waived collateral-maintenance covenant, and when its dividend and repurchase restrictions might change.
- Debt maturities, amortization, covenant headroom, and liquidity needs as remaining vessel acquisitions are delivered and financed.
- Realized charter rates and the extent to which rate declines, spot exposure, and near-term charter expirations affect cash generation.
- The economics, governance safeguards, and completion of the related-party vessel transactions with MEP.
- Execution and final terms of Baltic Trading’s proposed credit-facility amendment, including its dividend capacity and covenant requirements.
- Exposure to customer concentration, LIBOR increases, swap liabilities, drydocking/off-hire, and changes in vessel values.