Genco Shipping & Trading Limited — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unaudited results; dollar amounts below are in millions unless stated otherwise. Genco owns and operates a global drybulk fleet of 60 vessels with approximately 4.688 million dwt capacity.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $51.2 | $38.9 | $134.8 | $91.7 |
| Operating loss | $(23.8) | $(20.1) | $(39.6) | $(167.8) |
| Net loss | $(31.2) | $(27.5) | $(61.3) | $(192.7) |
| Net loss per share | $(0.90) | $(3.80) | $(1.80) | $(26.65) |
| Operating cash flow | Not presented separately | Not presented separately | $4.4 | $(45.9) |
| EBITDA (non-GAAP) | $(6.0) | $(1.9) | $14.5 | $(112.7) |
Q3 2017 operating and net loss margins were approximately 46% and 61% negative, respectively; nine-month margins were approximately 29% and 45% negative. Fleet-average time charter equivalent (TCE) was $8,573 per day in Q3 and $7,829 for the nine months, up 48% and 80%, respectively, year over year. Average daily vessel operating expense was $4,553 in Q3 and $4,427 for the nine months.
- Liquidity at September 30: Cash and cash equivalents were $152.5; restricted cash totaled $32.6. Current assets were $194.6 and current liabilities $37.2, leaving working capital of approximately $157.3.
- Debt: Gross debt, including accrued PIK interest, was $526.6; balance-sheet debt net of financing costs was approximately $517.0. The company reported $12.1 of current debt and $504.9 of long-term debt net of financing costs. Cash and restricted cash are not all freely available.
- Other balance-sheet items: Total assets were $1,516.5, liabilities $544.5, and equity $971.9. Vessel assets, net, were $1,281.9.
- Cash flows for nine months: Investing activities provided $18.1, mainly from vessel-sale proceeds; financing activities used $3.5, including debt repayments and preferred-stock issuance costs. Cash increased $19.1 to $152.5.
Material changes versus the prior comparable period
- Higher drybulk rates lifted Q3 voyage revenue 35% and nine-month voyage revenue 51%, despite fewer operating vessels following asset sales. Fleet-average TCE increased substantially in both periods.
- Q3 net loss widened to $31.2 from $27.5, principally in a quarter that included an $18.7 vessel impairment and higher voyage expenses; operating loss also increased. The 2016 comparison included $1.0 of service revenue from MEP, which no longer operated.
- Nine-month net loss improved markedly from $192.7 to $61.3. The prior-year period included $69.3 of vessel impairment and $2.7 of investment impairment, compared with $22.0 of vessel impairment and no investment impairment in 2017. The 2017 period also included a $7.7 gain on vessel sales.
- Operating cash flow improved from a $45.9 use to $4.4 provided. The company attributed cash-flow changes partly to improved operating results and noncash charges, with working-capital and drydocking timing also affecting the comparison.
- In January 2017, 27.1 million Series A preferred shares converted into common shares. Weighted-average shares rose to 34.1 million for the nine months from 7.2 million in 2016; this materially affects per-share comparisons.
Outlook, commentary, risks and unusual items
- Management said drybulk markets strengthened considerably in Q3 2017, citing record Chinese steel output and stronger iron ore and coal demand, while vessel supply growth was modest. It believed capital resources were sufficient to fund operations for at least the next 12 months under current market conditions. The filing provides no formal earnings or rate guidance.
- Management reported approximately $8.5 of aggregate excess cash flow at September 30. If Q3 revenue and expense levels continued, it expected the $10 threshold for cash-sweep prepayments could be exceeded as early as Q4 2017. The $400 million facility’s sweep is 100% of excess cash flow through 2018, subject to the facility’s terms and stated initial threshold.
- Management reported compliance with financial covenants under the $400 million, $98 million and 2014 term loan facilities at September 30. However, vessel valuations used for covenant purposes were below carrying values for most of the fleet; the aggregate difference was approximately $404.8, excluding specified impaired vessels. Collateral tests on the $400 million facility begin in June 2018; the 2014 term-loan collateral tests resume at year-end 2017.
- Debt is predominantly floating-rate, and the company had no interest-rate swaps. It estimated a 1% LIBOR increase would add $4.0 of interest expense for the nine-month period. The $400 million facility matures in November 2021 and permits PIK interest through 2018; $5.4 of PIK interest had accrued by September 30.
- In August, the board decided to dispose of five 1999-built vessels. Together with the Genco Surprise impairment recorded in Q2, vessel impairments totaled $22.0 in the first nine months of 2017. The filing does not specify a disposal timetable or terms.
- Most current charters were due to expire between November 2017 and July 2018, subject to charter options. Genco also reported substantial off-hire for engine repairs on the Genco Tiger and Baltic Lion; insurance reimbursements were partly received, with a remaining Baltic Lion claim awaiting approval.
- The company believed it would not qualify for the Section 883 U.S. tax exemption in 2017 and recorded estimated gross transportation tax of $0.2 for the nine months.
- A shareholder lawsuit relating to the 2015 Baltic Trading merger remained on appeal. The company said it could not reasonably estimate any loss, but did not believe an adverse resolution was probable to materially affect it. Management also cited shipping-rate and demand weakness, fleet supply, operating costs, regulation, vessel condition, charterer performance and access to financing as risks.
- Ballast-water rules may require future vessel-system installations; management estimated costs of roughly $0.7–$1.0 per vessel, in addition to drydocking costs. Estimated drydocking costs were $0.9 for the rest of 2017 and $3.4 for 2018.
Important facts for investors to verify
- Whether stronger TCE rates and market demand persisted after Q3, and the rates and utilization achieved as charters rolled over.
- Whether the expected Q4 cash sweep was triggered, the amount paid, and the resulting unrestricted liquidity.
- Current covenant headroom and vessel collateral values as testing requirements resume, given the gap between vessel carrying values and covenant valuations.
- Progress, sale timing and proceeds for the five older vessels marked for disposal, and any further impairment charges.
- Engine-repair insurance recoveries, remaining claims and any further off-hire or repair costs.
- Debt service and interest-rate exposure, including PIK accruals, scheduled amortization and the company’s ability to maintain liquidity under weaker freight markets.
- Outcome of the Baltic Trading merger appeal and any developments in the company’s U.S. gross transportation tax position.