Business context and reporting period
Genco Shipping & Trading Limited filed this unaudited Form 10-Q for the quarter ended June 30, 2011. It owns and operates drybulk carriers worldwide and consolidates Baltic Trading Limited, despite holding 25.22% of its economic interest, because it controls 83.50% of voting power. Financial amounts below are U.S. dollars; figures are in millions unless noted.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total revenue | $99.3 | $105.3 | $200.8 | $200.0 |
| Operating income | $31.6 | $54.9 | $65.4 | $103.4 |
| Net income | $9.8 | $38.7 | $22.0 | $71.8 |
| Net income attributable to Genco | $10.1 | $36.8 | $23.5 | $70.2 |
| Basic/diluted EPS | $0.29 / $0.29 | $1.17 / $1.16 | $0.67 / $0.67 | $2.24 / $2.23 |
| Operating margin | 31.8% | 52.2% | 32.5% | 51.7% |
For the first half, operating cash flow was $83.0 million, investing cash outflow $68.3 million, and financing cash inflow $0.7 million; cash increased $15.4 million to $286.2 million. At June 30, current assets were $311.3 million and current liabilities $150.5 million (current ratio approximately 2.1). Total assets were $3.188 billion and equity $1.366 billion.
Debt facilities totaled $1.649 billion, with $110.6 million classified current; the $125 million 5% convertible notes had a $104.3 million carrying value. Cash less carrying-value debt was approximately $1.47 billion net debt, excluding restricted cash. The company reported $9.75 million restricted cash. Its interest-rate swaps had a $35.4 million liability; Jinhui stock investment was valued at $42.5 million.
Material changes versus prior periods
- Q2 revenue fell 5.7%, while first-half revenue was nearly flat, as a larger fleet offset weaker charter rates.
- Fleet-average time-charter-equivalent (TCE) earnings fell 39.8% in Q2 to $18,299 per day and 38.3% in the first half to $18,720 per day. Fleet utilization remained 99.4%.
- First-half operating income declined 36.8%, and net income 69.3%. Genco-attributable net income declined 66.5%; basic EPS fell from $2.24 to $0.67.
- Operating expenses rose with fleet expansion: first-half vessel operating costs increased 61.9%, depreciation and amortization 31.3%, and general, administrative and management fees 32.3%. Net interest expense increased to $42.5 million from $30.9 million.
- First-half operating cash flow declined from $118.0 million to $83.0 million, while investing outflow decreased substantially from $304.6 million as vessel acquisition spending and deposits were lower.
Outlook, risks and unusual items
- Management attributed weaker rates to reduced cargo availability after weather disruptions, ongoing newbuilding deliveries and a weak drybulk market; increased scrapping and the return of iron ore and coal cargoes in June partly offset pressure.
- Management estimated second-half 2011 daily vessel operating expenses of $5,000 per vessel per day. It estimated drydocking costs of $5.6 million for the remainder of 2011 and $11.9 million in 2012, with 180 and 385 off-hire days, respectively.
- Minimum contracted time-charter revenue as of July 20, 2011 was estimated at $63.0 million for the remainder of 2011, $53.0 million in 2012, $4.8 million in 2013 and $0.7 million in 2014. These estimates exclude pool and spot-related employment where rates cannot be forecast.
- The company was in compliance with its maximum leverage covenants at June 30, 2011, but warned that prolonged weak drybulk rates and expected borrowing could cause noncompliance at some point in 2011. It was seeking waivers or modifications and could consider capital raising or asset sales; success was not assured. A default could accelerate debt, restrict further borrowing and trigger a default under the convertible-note indenture.
- The collateral-maintenance covenant under the 2007 Credit Facility remained waived. Cash dividends and share repurchases remained suspended until the company can satisfy that covenant. Baltic Trading separately declared a $0.10-per-share dividend after quarter-end, expected to total approximately $2.3 million.
- Genco took delivery of the Genco Mare on July 20, 2011, funding its $29.9 million remaining purchase price with cash and a $20 million term-loan draw. One additional Metrostar vessel, the Genco Spirit, was expected in Q4 2011 for $29.9 million.
- Effective January 1, 2011, the company raised its estimated vessel scrap value from $175 to $245 per lightweight ton, reducing first-half depreciation by $1.2 million. The Jinhui investment’s unrealized first-half decline of $12.3 million was recorded in other comprehensive income, not earnings.
- Other disclosed risks include drybulk rate and vessel-supply volatility, charterer performance, operating-cost inflation, interest-rate exposure, vessel valuations and covenant collateral requirements. A 1% LIBOR increase was estimated to raise six-month interest expense by $4.6 million on unhedged debt. A roughly $1.1 million claim against Korea Line Corporation remained subject to collectibility assessment; management said it knew of no legal matter expected to have a material effect.
Most important facts for investors to verify
- Whether charter rates and fleet earnings stabilize, especially as many Genco charters were scheduled to expire from August 2011 through June 2013.
- Actual covenant headroom, the status of the 2007 collateral-maintenance waiver, and whether leverage-covenant waivers or other remedies are obtained.
- Debt repayment and liquidity needs, including vessel purchase commitments, drydock spending and the impact of interest rates on unhedged borrowings.
- Whether contracted charter revenue, management’s $5,000 second-half daily operating-cost estimate and projected off-hire days are realized.
- The market value and impairment outlook for the Jinhui investment, and the collectibility of the Korea Line claim.