International Seaways, Inc. — FY 2018 Form 10-K
Reporting period: Year ended December 31, 2018. The filing also reports unaudited quarterly results, including fourth-quarter 2018. Unless noted, financial amounts below are in U.S. dollars; annual financial-statement amounts are shown in millions.
Business context
International Seaways owns and operates tankers transporting crude oil and petroleum products, with Crude Tankers and Product Carriers as its reportable segments. At year-end, it reported 48 operating vessels, including chartered-in vessels and interests in joint-venture vessels. About 90% of 2018 TCE revenue came from spot-market exposure, up from 80% in 2017, making results sensitive to volatile tanker rates.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Shipping revenue | $270.4 million | $290.1 million |
| TCE revenue, non-GAAP | $243.1 million | $275.0 million |
| Loss from vessel operations | $54.5 million | $107.9 million |
| Net loss | $88.9 million | $106.1 million |
| Basic and diluted loss per share | $3.05 | $3.64 |
| EBITDA, non-GAAP | $43.6 million | $14.1 million |
| Adjusted EBITDA, non-GAAP | $68.3 million | $117.8 million |
| Net cash from operating activities | $(12.5) million | $17.4 million |
Annual TCE revenue fell 12%, primarily because of lower average rates and fewer Product Carrier revenue days, partly offset by more revenue days from acquired crude tankers and improved lightering activity. The reduced operating loss principally reflected lower vessel-disposal losses and impairments; it was partly offset by weaker TCE revenue and higher charter-hire costs. Adjusted EBITDA declined despite the improvement in reported EBITDA.
Fourth-quarter shipping revenue was $100.5 million and net income was $7.0 million, or $0.24 per share, compared with revenue of $69.4 million and a net loss of $90.7 million, or $3.12 per share, in fourth-quarter 2017. Fourth-quarter 2018 loss from vessel operations was $17.9 million, including a $2.5 million loss on vessel disposals and other property.
At December 31, 2018, total assets were $1.85 billion, equity was $1.01 billion and debt, net of discounts and deferred finance costs, was $810.7 million. Total debt to capitalization was 44.5%, versus 33.7% a year earlier. Consolidated liquidity was $167.6 million, comprising $117.6 million of cash and restricted cash (including $59.3 million restricted) and $50.0 million of undrawn revolver capacity. Working capital was approximately $92 million. The company reported consolidated net debt to pledged asset value of 49.9% and net debt to book capital of 40.7%.
Cash used in investing activities was more than offset by vessel-sale proceeds and joint-venture-related cash inflows; operating activities used $12.5 million. Contractual obligations totaled approximately $1.18 billion, including estimated debt payments and interest and $50.9 million of vessel-system commitments. Scheduled debt principal payments include $417.9 million in 2022.
Material changes and notable transactions
- Acquired six modern VLCCs in June 2018 for a stated purchase price of $434 million, inclusive of assumed debt. The transaction was financed through assumed debt, new borrowing and note issuance, vessel sales, sale-leasebacks and a $110 million distribution from the FSO joint venture.
- Sold older vessels and completed sale-leasebacks. The company said its fleet-renewal program reduced the owned and operated fleet’s average age from 11.5 years at the end of 2016 to 8.7 years at the end of 2018.
- Interest expense rose to $60.2 million from $41.2 million, reflecting additional debt, higher average borrowing balances and rates. The 2017 term-loan margin was increased in the 2018 amendment.
- Equity income from affiliated companies declined to $29.4 million from $49.0 million, mainly because of lower FSO and LNG joint-venture earnings.
- Recorded approximately $19.6 million of loss on vessel disposals and other property, including impairments, in 2018, down from $86.9 million in 2017. The filing identifies impairment charges related to vessels being considered for sale and a vessel held for sale.
Outlook, risks and contingencies
Management provided no specific financial guidance. It said liquidity and the balance sheet were expected to support operations over the following 12 months while preserving flexibility for fleet renewal and strategic opportunities. Management described fourth-quarter tanker rates as stronger than earlier in 2018, but noted that subsequent OPEC production cuts put downward pressure on rates.
The company contracted to install exhaust-gas cleaning systems (scrubbers) on ten modern VLCCs, with installation planned in 2019 or shortly thereafter, and anticipated more limited modifications for other vessels to use compliant low-sulfur fuel. It also had ballast-water-system purchase and installation commitments for 15 vessels, with options for up to ten more. The filing estimated system commitments of $50.9 million, potentially increasing by up to $14 million if all options were exercised. Costs, installation delays, vessel downtime, fuel availability and the uncertain spread between high- and low-sulfur fuel prices could affect returns and results.
Principal risks include the cyclical spot tanker market, vessel-value declines and further impairments, debt service and covenant compliance, counterparty and joint-venture performance, environmental regulation, and operational or casualty events. A subsidiary faced unresolved wrongful-death lawsuits arising from a 2017 Galveston accident; the company said it could not reasonably estimate potential loss. The filing also disclosed potential future assessments under a UK multi-employer pension plan for which no reserve was recorded because the amount could not be reasonably estimated. The company qualified for the U.S. Section 883 shipping-income tax exemption in 2018 but said future qualification was not assured; losing it could result in a 4% tax on U.S.-source gross shipping income.
The company reported compliance with applicable debt covenants at year-end. However, its substantial debt is largely secured by vessels, some vessel values were below carrying values, and covenants and restricted cash limit financial flexibility. The filing reports effective internal control over financial reporting and unqualified audit opinions on the 2018 financial statements and internal controls.
Important facts for investors to verify
- Whether spot tanker rates and TCE revenue recover sufficiently to restore positive operating cash flow, especially given 90% spot-market exposure.
- Debt amortization, covenant headroom, restricted-cash requirements and the implications of the large scheduled 2022 principal payment.
- Actual cost, timing, operational downtime and expected fuel savings or payback from scrubber and ballast-water-system installations.
- Whether vessel-market values support recorded carrying amounts and whether additional impairment or vessel-sale losses arise.
- Outcomes and potential exposure from the Galveston litigation, pension-plan assessments and guarantees related to joint ventures.
- Whether the company continues to qualify for the Section 883 tax exemption and how future lease accounting affects reported assets and liabilities.