Genco Shipping & Trading Limited — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; unaudited. Figures below are consolidated and include Baltic Trading, which Genco controlled through voting rights despite holding a 25.22% economic interest. Dollar amounts are U.S. dollars.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $94.3 million | $118.0 million | $295.1 million | $318.0 million |
| Operating income | $23.3 million | $57.8 million | $88.7 million | $161.2 million |
| Consolidated net income | $1.4 million | $38.1 million | $23.4 million | $109.9 million |
| Net income attributable to Genco | $1.6 million | $36.2 million | $25.1 million | $106.4 million |
| Basic and diluted EPS | $0.04 | $1.07 basic; $0.99 diluted | $0.71 | $3.30 basic; $3.19 diluted |
| Net cash from operations | Not separately provided for quarter | Not separately provided for quarter | $121.3 million | $189.7 million |
- Q3 operating margin was approximately 24.7%, versus 49.0% a year earlier; nine-month operating margin was approximately 30.1%, versus 50.7%.
- Fleet-average time charter equivalent (TCE) rates fell 38.7% to $16,447 per day in Q3 and 38.0% to $17,935 per day for the first nine months. Fleet utilization remained high at 99.3% and 99.4%, respectively.
- For the nine months, cash used in investing was $100.4 million, mainly vessel purchases; financing cash flow was a $39,000 net use. Cash increased $20.9 million to $291.8 million. Restricted cash was $9.8 million.
Balance sheet, debt and liquidity
- At September 30, 2011, total assets were $3.179 billion, total liabilities $1.823 billion and total equity $1.356 billion. Current assets of $318.9 million exceeded current liabilities of $185.8 million.
- Bank-facility debt was $1.650 billion; the $125 million 5.0% convertible notes had a $105.3 million carrying value. Current portion of long-term debt was $147.8 million. The notes mature in 2015.
- The company had used the full $1.2395 billion borrowing capacity under its 2007 Credit Facility. The 2007 facility’s collateral-maintenance covenant remained waived; cash dividends and share repurchases were suspended.
- Management said it was in compliance with leverage covenants at quarter-end, but would not have remained compliant with a 10% reduction in EBITDA. Given continued weak drybulk rates, management expected it likely would not meet the maximum leverage ratio at some point by the end of Q1 2012, and was discussing waivers or modifications with lenders.
Changes versus prior year and notable items
- Revenue and profitability declined despite fleet expansion. Q3 revenue fell 20.1% and Genco-attributable income fell 95.7%; nine-month revenue declined 7.2% and attributable income fell 76.4%. Lower charter rates were the primary pressure.
- Operating expenses rose as the fleet grew: nine-month vessel operating expense increased 45.6%, general and administrative and management fees 27.8%, and depreciation and amortization 25.1%. Net interest expense rose to $64.2 million from $50.1 million.
- Genco’s Jinhui investment fell in fair value from $54.7 million at year-end 2010 to $27.8 million at September 30, 2011. The $26.9 million nine-month unrealized loss was recorded in other comprehensive income; no impairment was recognized.
- Effective January 1, 2011, Genco raised estimated vessel residual scrap value from $175 to $245 per lightweight ton. This reduced depreciation by $1.9 million for the nine-month period and increased EPS by approximately $0.05.
Outlook, risks and contingencies
- Management attributed rate weakness to drybulk market conditions, including weather-related cargo disruption earlier in 2011 and a perceived slowdown in Chinese steel production from mid-October. It noted that the Baltic Dry Index had rebounded through mid-October before falling below 1,800 by November 7.
- Minimum contracted time-charter revenue was estimated at $27.8 million for the remainder of 2011, $53.5 million in 2012, $4.8 million in 2013 and $0.7 million in 2014. These figures exclude pool and spot-market-related vessels for which rates could not be estimated.
- Management expected Q4 2011 daily vessel operating expense of about $5,000 per vessel; its preliminary 2012 operating-expense budget could be about 5% above the 2011 budget. Estimated drydocking costs were $2.0 million for the remainder of 2011 and $11.2 million for 2012.
- Failure to obtain covenant waivers or amendments could lead to defaults, acceleration of debt and potentially a cross-default under the convertible-note indenture. The company said it could not assure it would obtain alternative financing; vessel sales, reduced spending or additional capital were possible responses.
- Interest-rate swaps had a $32.9 million liability fair value. A 1% LIBOR increase was estimated to add $7.0 million of interest expense for the nine-month period, applied to unhedged debt.
- Genco reported an approximately $1.1 million claim against Korea Line Corporation related to unpaid charter revenue; recognition depends on collectibility. The company reported no legal proceedings it believed would have a material effect.
- Subsequent events: Baltic Trading declared a $0.12-per-share dividend, expected to total approximately $2.7 million. On November 7, Genco drew $20 million under its $100 million term loan facility for the Genco Spirit, expected to be delivered around November 10.
Most important facts for investors to verify
- Progress and terms of lender negotiations, covenant headroom, cure periods and any potential acceleration or cross-default exposure.
- Drybulk rate trends, charter renewals and the portion of fleet revenue exposed to spot or index-linked rates.
- Liquidity needs for debt service, the Genco Spirit purchase, scheduled drydockings and other vessel commitments.
- Collateral valuations and any further decline in vessel or Jinhui investment values, including potential covenant or impairment consequences.
- Whether the stated contracted-revenue estimates, operating-cost expectations and market outlook assumptions remain current.