International Seaways, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual filing, not a standalone fourth-quarter report; selected fourth-quarter results are included below. Dollar amounts are in U.S. dollars.
Business context and reporting period
International Seaways owns and operates crude oil and refined petroleum product tankers, primarily in international markets, and reports International Crude Tankers and International Product Carriers segments. At year-end, it reported an operating fleet of 55 vessels, including seven chartered-in vessels, plus ownership interests in six LNG and FSO joint-venture vessels. The company was spun off from Overseas Shipholding Group (OSG) on November 30, 2016. Results for periods before the spin-off are carved out from OSG’s records and include allocated parent-company costs, so they may not reflect the costs of operating independently.
Key financial metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Shipping revenue | $398.3 million | $497.6 million |
| Time charter equivalent (TCE) revenue, non-GAAP | $385.0 million | $475.8 million |
| Income from vessel operations | $5.9 million | $176.3 million |
| Operating income | $22.8 million | $221.9 million |
| Net income (loss) | $(18.2) million | $173.2 million |
| EBITDA / Adjusted EBITDA, non-GAAP | $101.6 million / $222.0 million | $297.9 million / $299.2 million |
| Cash provided by operating activities | $116.8 million | $222.7 million |
| Cash and cash equivalents at year-end | $92.0 million | $308.9 million |
| Debt, net of discount and deferred financing costs | $439.7 million | $595.2 million |
At December 31, 2016, total liquidity was $142.0 million, including $92.0 million of unrestricted cash and $50.0 million of undrawn revolver capacity. Working capital was approximately $126 million and debt-to-total-capitalization was 26.6%. The term loan matures in 2019; the company reported substantial headroom under its $500 million minimum collateral-vessel-value covenant. No amount was drawn on the revolver.
There was no standard operating-margin metric highlighted in the filing. TCE revenue is a non-GAAP measure; it should not be treated as a substitute for GAAP revenue or cash flow.
Material changes versus prior comparable periods
- Full-year shipping revenue and TCE revenue each fell about 20% from 2015. Management attributed the TCE decline principally to weaker rates in the MR, VLCC and Aframax markets, partly offset by more revenue days in some crude-tanker classes.
- Net results swung from $173.2 million of income in 2015 to an $18.2 million loss in 2016. The year included $79.2 million of vessel impairment charges, a $30.5 million impairment of FSO joint-venture investments, and $9.0 million of spin-off separation and transition costs.
- Adjusted EBITDA declined to $222.0 million from $299.2 million. Cash from operations fell to $116.8 million from $222.7 million.
- The company paid $202 million in dividends to OSG during 2016 and used cash for debt repayments and repurchases. It repurchased $68.9 million of term-loan principal and made $83.8 million in mandatory prepayments, including $8.8 million from restricted cash. Year-end cash consequently declined substantially.
- Spot-market voyage charters generated 76% of 2016 TCE revenue, compared with 90% in 2015; time and bareboat charters made up the balance. Average daily TCE rates declined in both segments: crude tankers to $29,853 from $36,839, and product carriers to $14,206 from $19,043.
Fourth quarter: Shipping revenue was $85.8 million versus $125.0 million in fourth-quarter 2015. The company reported a $57.8 million net loss versus $37.6 million of income. Fourth-quarter vessel-operation loss was $28.5 million; the quarter included $29.7 million of vessel impairment charges and a $30.5 million FSO-investment impairment.
Outlook, management commentary, risks and unusual items
- Management said liquidity and balance-sheet actions positioned the company to fund operations for the 12 months ending December 31, 2017. It planned to evaluate extending or refinancing its credit facilities over the following 12–15 months. The filing does not provide numerical earnings or revenue guidance.
- Management noted that OPEC-led production cuts were expected to affect tanker markets in early 2017 and that 2017 was likely to be the peak year for scheduled tanker deliveries; together, these factors could pressure freight rates. Industry conditions remain cyclical and spot rates volatile.
- The FSO joint venture received a letter of award for a five-year service contract expected to begin when existing contracts expire in 2017. If definitive contracts are completed, the JV expects more than $360 million of revenue over the full term, excluding reimbursed operating expenses. The award remained subject to negotiation and documentation, with no assurance of completion.
- Environmental compliance may require material spending, particularly for ballast-water treatment and emissions requirements. The company also identified risks from vessel-value declines, impairment, debt service and covenants, charter-rate weakness, counterparty performance, and reliance on outsourced technical and commercial managers.
- Several time and bareboat charters were due to expire in 2017. Seven charter-in vessels were scheduled for redelivery between 2017 and 2018; certain renewal and purchase options were above market.
- The company was exempt from U.S. tax on qualifying U.S.-source shipping income under Section 883 in 2016, but said future qualification was uncertain. Loss of the exemption could subject qualifying U.S.-source shipping income to a 4% gross-basis tax.
- Management reported effective disclosure controls as of year-end. The filing did not include management’s assessment of internal control over financial reporting because of the transition period for newly public companies. The auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Whether the FSO five-year contracts were finalized, and the resulting actual rates, revenue, and JV debt refinancing or repayment.
- Subsequent freight-rate and vessel-value trends, and whether further vessel or investment impairments, asset sales, or covenant pressure arose.
- Actual operating cash generation and liquidity after the $202 million OSG dividend and 2016 debt reductions; also confirm upcoming debt maturities and refinancing progress.
- Charter renewals and redeliveries in 2017–2018, including whether vessels were redeployed at acceptable rates and whether leases were replaced on favorable terms.
- Whether INSW qualified for the Section 883 exemption after the spin-off and the effect of any change in tax status.
- Progress in replacing OSG-provided services and the final allocation or true-up of spin-off costs; historical results include parent-company allocations and are not fully comparable with standalone operations.
- Potential costs of environmental rules and any developments in the disclosed pension, guarantee, legal, or other contingencies.