Genco Shipping & Trading Limited — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Unaudited results; amounts below are U.S. dollars. Genco owns and operates drybulk vessels and reports one operating segment.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Voyage revenue | $86.2 million | $45.4 million | $163.1 million | $83.6 million |
| Operating income (loss) | $10.9 million | $(7.2) million | $(37.5) million | $(15.8) million |
| Net income (loss) | $(1.1) million | $(14.5) million | $(56.9) million | $(30.1) million |
| Net loss per share | $(0.03) | $(0.42) | $(1.62) | $(0.89) |
| EBITDA (non-GAAP) | $22.9 million | $10.9 million | $(8.7) million | $20.4 million |
Q2 operating margin was approximately 12.6%, while net margin was approximately negative 1.3%. For the first half, operating and net margins were approximately negative 23.0% and negative 34.9%, respectively. These comparisons reflect a different mix of spot voyage charters, which increase both revenue and voyage expenses.
- Q2 fleet-average time charter equivalent (TCE) rate rose 31.3% to $10,964 per day; first-half TCE increased 46.4% to $10,716 per day. Fleet utilization was 98.4% in Q2 and 98.5% for the first half.
- Q2 voyage expenses increased to $26.0 million from $1.0 million, mainly because more vessels operated on voyage charters, where Genco bears fuel, port and related costs. Vessel operating expenses were broadly stable.
- First-half operating loss included $56.6 million of vessel impairments, principally $56.4 million for nine older vessels designated for disposal. Q2 also included a $4.5 million debt-extinguishment loss from refinancing.
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $270.0 million; restricted cash was $0.3 million. Total assets were $1.508 billion and equity was $1.028 billion.
- Gross principal debt was $460.0 million, with $45.0 million classified as current. The company refinanced its previous facilities into a five-year, $460 million secured facility maturing May 31, 2023. The facility bears interest at LIBOR plus 3.25% through 2018, with the margin thereafter depending on leverage; scheduled quarterly amortization of $15 million begins December 31, 2018, plus a $190 million maturity payment.
- Genco reported no availability under the $460 million facility at quarter-end and said it was in compliance with its financial covenants. Covenants include minimum unrestricted liquidity of the greater of $30 million or 7.5% of indebtedness, and collateral coverage of at least 135% of principal.
- First-half operating cash flow was $25.0 million, versus cash used of $1.2 million in 2017. Investing cash flow was $1.9 million; financing cash flow was $38.5 million. Cash, cash equivalents and restricted cash increased by $65.4 million to $270.3 million.
- The June equity offering of 7.015 million shares at $16.50 per share raised $109.7 million net. Shares outstanding were 41.547 million at August 8, 2018.
Changes, outlook and key risks
- Revenue nearly doubled year over year in Q2 and rose 95% for the first half, reflecting higher market rates and greater use of spot voyage charters. Q2 net loss narrowed substantially, but the first-half loss worsened, chiefly due to vessel impairment charges and the absence of prior-year vessel-sale gains.
- Management described drybulk market fundamentals as improving: global steel production was up 4.6% year to date, while net fleet growth was below 2% since year-end 2017. It said Q3 TCE booked to date was affected by strategic vessel positioning, with positioning intended to capture stronger export volumes toward late Q3 and Q4. No specific earnings or full-year financial guidance was provided.
- Fleet renewal: Genco agreed to acquire four vessels for about $141 million, with one delivered in July and three expected in Q3. It also agreed after quarter-end to acquire two Capesize vessels for $98 million. A proposed new five-year facility was expected to provide about $107 million toward six vessel purchases, subject to final documentation and customary conditions.
- Genco agreed to sell the Genco Explorer and Genco Progress for $5.6 million each, with completion expected in Q4 subject to documentation and customary conditions. The Genco Surprise was sold in August after a $0.2 million Q2 impairment. The company also designated nine older vessels for disposal and recorded related first-half impairments.
- Management said available capital resources were sufficient for operations for at least the next twelve months, while noting liquidity remains sensitive to market conditions, operating cash flow, customer and vendor financial health, and covenant compliance. Most vessel employment contracts then in place expired between August 2018 and June 2019, absent charterer options.
- Debt is floating-rate; Genco had no interest-rate swaps. It estimated a 1 percentage-point LIBOR increase would add $2.5 million to interest expense for the six-month period. Dividend payments were restricted through December 31, 2018 under the new facility, subject to stated conditions thereafter.
- Environmental cost exposure includes the IMO 2020 sulfur limit: management was evaluating scrubbers versus low-sulfur fuel and estimated scrubber installation at $2–$4 million per existing vessel. Ballast-water treatment installations and drydockings also require future spending; estimated 2019 costs were $18.9 million for drydockings and $15.4 million for ballast-water systems.
- The Baltic Trading shareholder litigation dismissal was affirmed in April 2018, and the time to seek further appeal expired. The filing reports no other proceedings expected to have a material effect. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Completion, delivery timing and final financing terms for the six announced vessel acquisitions, including definitive documentation and funding for the proposed $107 million facility.
- Progress and realized proceeds from planned vessel sales, and whether further impairments or disposal costs arise.
- Charter renewals and realized TCE rates as a substantial number of contracts expire, alongside the company’s spot-market exposure and voyage-cost burden.
- Liquidity and covenant headroom after acquisition spending, required debt amortization, and potential market or vessel-value deterioration.
- Final choices and costs for sulfur-emissions compliance and ballast-water treatment, as well as the associated drydock and off-hire schedule.