SFL Corp. Ltd. — FY2012 Form 20-F Summary
Business context and reporting period
Ship Finance International Limited is a Bermuda-based owner and lessor of maritime and offshore assets, including tankers, drybulk carriers, container vessels, car carriers, drilling units, rigs and offshore supply vessels. The filing is an annual Form 20-F for the fiscal year ended December 31, 2012, prepared under U.S. GAAP. The company operated a 63-unit active fleet at year-end, excluding two chartered-in containerships, and pursued long-term, predominantly fixed-rate charters.
Key financial metrics
| Metric | FY2012 | FY2011 | Change |
|---|---|---|---|
| Operating revenues | $319.7 million | $295.1 million | +8% |
| Net operating income | $207.6 million | $162.7 million | +28% |
| Net income | $185.8 million | $131.2 million | +42% |
| Basic diluted EPS | $2.31 / $2.22 | $1.66 / $1.62 | Increased |
| Declared dividends per share | $1.86 | $1.55 | +20% |
| Cash from operating activities | $86.6 million | $163.7 million | Down $77.1 million |
| Cash and cash equivalents | $60.5 million | $94.9 million | Down $34.4 million |
| Stockholders’ equity | $994.8 million | $857.1 million | +16% |
Operating margin was approximately 64.9% and net margin approximately 58.1%, based on reported operating revenues. Revenue growth was driven principally by cash-sweep profit sharing, increased time-charter revenue from fleet additions, and other asset activity. Direct-financing lease interest income fell to $65.7 million from $104.6 million, while profit-sharing revenue increased to $52.2 million from $0.5 million.
Consolidated debt was $1.83 billion at December 31, 2012, compared with $1.91 billion a year earlier. Including debt of equity-accounted subsidiaries, total borrowings were approximately $3.05 billion. Cash available to draw under secured revolving facilities and a securities facility totaled approximately $76.4 million. The company reported compliance with all loan covenants.
Material changes versus the prior comparable period
- Frontline charter amendments reduced base charter rates by $6,500 per day per vessel from January 1, 2012 through December 31, 2015, in exchange for a prior $106 million compensation payment. During the reduction period, Frontline must remit 100% of earnings above the reduced rates, subject to a $6,500 daily cap. SFL recognized $52.2 million of cash-sweep revenue in 2012.
- Frontline profit sharing increased from 20% to 25% for earnings above specified thresholds, but no 25% profit-sharing revenue was recognized in 2012 because $50 million must accumulate before recognition.
- Six vessels were sold during 2012, generating total gains of $25.7 million. SFL also recognized $21.7 million of compensation related to the termination of five Horizon Lines container-vessel charters.
- The company took delivery of five drybulk carriers and two car carriers, while vessel and equipment assets increased to $1.04 billion from $896.8 million.
- Shares outstanding increased by 6.1 million to 85.225 million, primarily from a 6.0 million-share follow-on offering that generated approximately $88.9 million net proceeds.
- Operating cash flow declined substantially because 2011 included the $106 million Frontline compensation payment and significantly higher direct-financing lease repayments.
Outlook, commentary, risks and unusual items
Management expected 2013 to remain challenging for tanker, drybulk and container markets because of excess vessel capacity, weak freight rates and continued newbuilding deliveries. The offshore drilling market remained comparatively strong, supported by oil prices and offshore exploration activity. The company expected low interest rates to continue through 2013 and used swaps and charter interest-adjustment clauses to reduce exposure.
Key risks include dependence on charterers, particularly Frontline and Seadrill-related entities; counterparty defaults or renegotiations; weak tanker, drybulk or container markets; vessel-value declines that could affect financing covenants; refinancing requirements; interest-rate and currency exposure; environmental and safety regulation; piracy, geopolitical events and sanctions; operational losses and uninsured liabilities; and potential limitations on dividends.
Frontline represented approximately 54% of 2012 operating revenue. The company had $190 million of remaining newbuilding commitments at the filing date. Its equity-accounted drilling subsidiaries had approximately $1.22 billion of debt, including a $270 million SFL guarantee. SFL Deepwater had $821.9 million of debt due in 2013 and reported a current-liability deficit of approximately $683 million while negotiating refinancing.
Subsequent events included a January 2013 issuance of $350 million of 3.25% convertible bonds, used partly to redeem the $248 million of 8.5% senior notes, which were fully redeemed on March 1, 2013. Additional vessel disposals and deliveries occurred in the first quarter of 2013.
Important facts for investors to verify
- Whether Frontline and Seadrill counterparties continue to meet charter obligations and whether Frontline’s temporary rate reductions affect future distributable cash flow.
- The refinancing and repayment status of debt at equity-accounted subsidiaries, especially SFL Deepwater’s 2013 maturity.
- Compliance with minimum-value, liquidity, working-capital and leverage covenants as vessel values and charter rates change.
- The collectability of $51.8 million due from Frontline Charterers, including disputed or partially paid charter receivables.
- Funding of the approximately $190 million newbuilding commitments and the timing and economics of the four container-vessel deliveries.
- Exposure to related-party transactions: Frontline accounted for 54% of operating revenue, and related parties provided significant chartering, management and financing arrangements.
- The sustainability of the $1.86 per-share dividend, which remains subject to board discretion, cash generation, debt restrictions and charterer performance.
- Potential impairment or valuation pressure on assets whose charter-free market values were below carrying values, despite no impairment being recorded on those vessels.