Genco Shipping & Trading Limited — Q3 2014 Form 10-Q
Reporting period: Quarter ended September 30, 2014. The company owns and operates drybulk carriers and consolidates Baltic Trading Limited. On July 9, 2014, it emerged from Chapter 11 and adopted fresh-start accounting. Accordingly, results before and after that date are for different reporting entities and are not directly comparable; MD&A combines the periods to provide indicative comparisons.
Financial results and condition
Unless otherwise noted, amounts are U.S. dollars. The combined Q3 and nine-month figures below are the company’s MD&A presentation combining predecessor and successor periods.
| Metric | Q3 2014 combined | Q3 2013 | Nine months 2014 combined | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $48.8 million | $59.4 million | $165.2 million | $145.7 million |
| Operating loss | $25.8 million | $13.4 million | $73.1 million | $70.9 million |
| Loss before reorganization items | $30.9 million | $36.5 million | $117.8 million | $136.9 million |
| Net income, including reorganization items | $869.8 million | Net loss of $37.0 million | $762.0 million | Net loss of $137.9 million |
| Voyage revenue | $48.0 million | $58.6 million | $162.7 million | $143.2 million |
| Average fleet TCE rate | $7,696 per day | $9,882 per day | $8,947 per day | $8,141 per day |
The reported net income is dominated by the $901.1 million net reorganization gain in the combined quarter, principally reflecting debt and equity restructuring and fresh-start accounting—not ordinary operating performance. The nine-month reorganization gain was $881.0 million. Fresh-start accounting also reduced vessel carrying values and changed depreciation; results and balance-sheet comparisons across the emergence date should be treated cautiously.
- Q3 performance: Voyage revenue fell 18.1% year over year, and average TCE declined 22.1%. Management attributed the weakness primarily to lower spot-market rates and excess vessel supply. Fleet utilization was 98.9%, down from 99.3%.
- Nine-month performance: Revenue rose 13.4%, with higher Capesize rates and the larger Baltic Trading fleet contributing. Average TCE increased 9.9%, although fleet utilization fell to 98.5% from 99.4%.
- Costs and margins: Combined Q3 operating expenses rose 2.4% to $74.6 million as revenue declined. General, administrative and management fees increased to $21.6 million from $7.9 million, primarily due to noncash compensation under the new management incentive plan. Vessel operating expense averaged $4,965 per vessel per day, up 3.8% year over year. Combined Q3 operating margin was approximately negative 52.8%.
- Cash flow: For the nine months, net cash used in operating activities was $57.6 million and investing activities used $31.4 million; financing activities provided $72.9 million, including the $100 million rights offering. Cash and cash equivalents were $106.6 million at September 30, versus $122.7 million at December 31, 2013. These cash-flow periods include the restructuring transition.
- Balance sheet and liquidity: At September 30, cash was $106.6 million and restricted cash was $10.2 million. Current assets were $157.3 million and current liabilities $70.1 million, implying working capital of $87.2 million. Total assets were $1.93 billion and total equity $1.48 billion.
- Debt: Total debt was approximately $405.0 million, including $32.2 million current and $372.8 million long-term; the former $1.06 billion 2007 Credit Facility and 2010 convertible notes were discharged through the reorganization. The restructured $100 million and $253 million term facilities mature August 31, 2019, carry interest at LIBOR plus 3.50%, and have financial-covenant relief through March 31, 2015. The company stated it believed it was in compliance with applicable covenants at quarter-end.
- Investments: Investments were $38.5 million, primarily Jinhui shares, compared with $77.6 million at year-end 2013. The successor period included a $13.3 million unrealized investment loss in other comprehensive income.
Material developments, outlook and risks
- Restructuring and capital structure: Chapter 11 began April 21, 2014; the company emerged July 9. Claims under the 2007 Credit Facility and 2010 Notes were exchanged for successor equity, and the plan included a $100 million rights offering. Predecessor common stock was cancelled and holders received warrants. The new management incentive plan issued 1.11 million restricted shares and 8.56 million warrants, creating potential dilution.
- Liquidity outlook: Management said cash on hand, operating cash flow and rights-offering proceeds should fund fleet operations and working capital for the next 12 months. It cautioned that liquidity depends on operating results, shipping conditions, counterparties and compliance with post-restructuring covenants. The company said it did not plan to resume dividends and was restricted from paying them under debt agreements.
- Fleet investment: Baltic Trading had contracted to acquire four 64,000-dwt Ultramax vessels for $112 million in total. The Baltic Hornet was delivered after quarter-end and partly financed with a $16.8 million loan draw; three deliveries remained expected through Q3 2015. Management noted that failure to secure financing could require refinancing existing debt or asset sales.
- Market and operating risks: Management cited weak drybulk rates, vessel oversupply, changes in commodity demand, fuel and crew costs, off-hire and drydock costs, charterer performance, and financing availability. It reported that Brazilian iron ore activity had recently supported Capesize rates and North American grain season had supported Panamax rates, but provided no numerical earnings or rate guidance.
- Commitments and contingencies: Contractual obligations totaled $581.7 million, including debt and interest, remaining vessel purchase commitments, and leases. A $0.9 million cash-collateralized bank guarantee related to a disputed charterer claim remained in escrow pending arbitration. The company also reported a rejected former office lease and possible remaining liability.
- Other notable items: The company estimated drydocking costs of $4.2 million for the remainder of 2014 and $12.1 million in 2015 for its fleet, plus $4.6 million for Baltic Trading in 2015. It expected fuel-efficiency upgrades to be installed during scheduled drydockings. It also identified potential ballast-water-system costs under future regulations.
Important facts for investors to verify
- Separate recurring operating results from the large, largely restructuring-related reported net income; review the detailed reorganization and fresh-start accounting reconciliations.
- Confirm current debt balances, amortization, interest-rate exposure, covenant thresholds and liquidity headroom, including the effect of floating-rate debt.
- Track spot and charter rates, fleet utilization, vessel off-hire and operating costs against the company’s weak Q3 TCE trend.
- Verify funding, delivery timing and remaining purchase commitments for Baltic Trading’s newbuildings, and assess potential asset-sale or refinancing needs.
- Assess potential equity dilution from the successor warrants and management incentive awards, and monitor whether Baltic Trading exercises any right to terminate its management agreement following the restructuring.