Genco Shipping & Trading Limited — 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. The consolidated results include Baltic Trading Limited, which Genco controlled through 83.51% of its voting power after Baltic Trading’s March 2010 IPO. Unless otherwise noted, amounts below are U.S. dollars in millions.
Business context
Genco transports drybulk cargo worldwide. At year-end, its fleet included 49 vessels; the consolidated group also included Baltic Trading’s nine vessels. Genco reported a 6.3-year average fleet age and 99.1% fleet utilization for 2010. Its strategy is selective fleet expansion, funded through operating cash, debt and equity, while balancing fixed and market-linked charter exposure.
Financial and operating results
| Metric | 2010 | 2009 |
|---|---|---|
| Total revenue | $448.7 | $379.5 |
| Operating income | $221.3 | $210.5 |
| Net income | $147.4 | $148.6 |
| Net income attributable to Genco | $141.2 | $148.6 |
| Diluted EPS | $4.07 | $4.73 |
| Operating cash flow | $262.7 | $219.7 |
| Investing cash flow | $(870.2) | $(306.2) |
| Financing cash flow | $690.2 | $149.8 |
| Cash and cash equivalents at year-end | $270.9 | $188.3 |
| Total debt, including convertible notes | $1,746.2 | $1,327.0 |
| Total equity | $1,348.2 | $928.9 |
Operating margin was approximately 49.3% (2009: 55.5%); net income attributable to Genco was approximately 31.5% of revenue (2009: 39.2%). EBITDA, a non-GAAP measure, was $330.7 million versus $298.3 million. The filing cautions that EBITDA is not a substitute for GAAP earnings or cash flow.
Fourth-quarter 2010 unaudited results were revenue of $130.6 million, operating income of $60.1 million, net income of $37.5 million, and net income attributable to Genco of $34.8 million. Fourth-quarter 2009 figures were $96.2 million, $51.9 million, $35.5 million, and $35.5 million, respectively.
Material changes versus 2009
- Revenue rose 18.2%, principally due to fleet growth and $32.6 million of Baltic Trading revenue. Ownership days increased 36.2% as 15 vessels were delivered during 2010 and Baltic Trading contributed nine vessels.
- Despite higher revenue, average fleet TCE fell 13.4% to $27,419 per day. Lower charter rates were especially evident for Capesize and Supramax vessels. Utilization remained high and broadly stable at 99.1%.
- Operating income increased 5.1%, but net income attributable to Genco fell 5.0%; diluted EPS declined 14.0%, reflecting higher interest expense, income taxes, noncontrolling interests and a larger diluted share count.
- Vessel operating expenses increased 37.8% to $79.0 million, mainly with the larger fleet; average daily operating expense rose 1.2% to $4,852. General, administrative and management fees increased 56.7% to $29.1 million, including Baltic Trading costs and added personnel.
- Investing outflows increased with vessel purchases. Genco reported $971.2 million of vessel purchase cash outflows, partly offset by $106.6 million of proceeds from reselling three Bourbon vessels to related-party MEP at cost. Financing inflows included equity, debt and convertible-note issuance.
Liquidity, debt and outlook
- Year-end current assets were $293.7 million and current liabilities $118.0 million; cash was $270.9 million. Restricted cash was $9.0 million. Operating cash flow increased, but significant fleet investment was funded substantially by financing.
- Total facility borrowings were $1,643.9 million, plus $125.0 million principal of 5.00% convertible notes due 2015 (carrying value $102.3 million). The notes’ initial conversion price was $19.60 per share; conversion could dilute existing holders. The filing reports an effective interest rate of 9.9% on the notes’ liability component.
- Genco said it was compliant with financial covenants at December 31, 2010, but the collateral-maintenance covenant under its 2007 Credit Facility remained waived. The company reported compliance with the leverage covenant and said it would still have complied at year-end with a 10% EBITDA reduction; further rate weakness could jeopardize future compliance. The waiver also prevents Genco from resuming dividends or share repurchases until it can satisfy the collateral test.
- Management expected internally generated cash, loan facilities and offering proceeds to fund operations, working capital and capital expenditures for the following 12 months. This is management’s assessment, not a guarantee.
- For 2011, management budgeted average daily vessel operating expenses of $5,200 across the fleet. Estimated drydocking costs were $7.8 million in 2011 and $10.4 million in 2012, with estimated off-hire of 240 and 340 days, respectively. Four additional vessels were expected to be delivered between March and November 2011, with $122.3 million of remaining purchase commitments at year-end.
- Charter-market exposure remained substantial: 21 of Genco’s 49 vessels were trading at spot-linked rates or in pools as of the filing’s March 2011 fleet disclosure. The Baltic Dry Index fell to 1,043 on February 4, 2011 and stood at 1,424 on March 8. Management cited weak seasonal demand, Australian weather disruptions and newbuilding deliveries.
Risks, contingencies and unusual items
- Drybulk rates and vessel values are volatile; oversupply, weak global trade, charterer defaults, lower rechartering rates or falling collateral values could reduce earnings, cause impairment or covenant pressure. No vessel impairment was recorded for 2010, based on management’s cash-flow estimates.
- Revenue concentration is significant: Cargill and Pacific Basin together represented about 40.7% of 2010 voyage revenue. Samsun’s court-approved rehabilitation plan covers a $17.2 million claim, with $5.9 million in cash installments through 2019 and the remainder converted to shares. A separate estimated $1.1 million claim against Korea Line followed its January 2011 rehabilitation filing; collectibility was uncertain.
- Environmental regulation, pollution liability, piracy, accidents, drydock costs, insurance availability and interest-rate changes are material operating risks. A 1% LIBOR increase was estimated to add $6.6 million in annual interest expense on unhedged debt. Ten swaps covered $756.2 million notional; their year-end fair-value liability was $43.3 million.
- Related-party matters include the Bourbon vessel resales and technical services to MEP, which is controlled by the Chairman; Genco billed MEP $109.0 million in 2010, including vessel purchases and reimbursed costs. The filing says an independent board committee approved the services arrangement. Investors should review the detailed disclosures and approvals.
- Genco’s common dividends and buybacks remained suspended; no Genco dividends were declared in 2009 or 2010. Baltic Trading separately declared a $0.17-per-share dividend in February 2011.
Deloitte & Touche issued unqualified opinions on the consolidated financial statements and internal control over financial reporting as of December 31, 2010.
Most important facts for investors to verify
- Reconcile the debt figures and scheduled amortization across the balance sheet, debt notes and contractual-obligations table; confirm covenant headroom and waiver conditions.
- Assess the rate and renewal exposure of spot-linked charters, near-term expirations, vessel utilization and subsequent charter fixtures against current drybulk-market conditions.
- Verify remaining vessel delivery timing, the $122.3 million purchase commitment, related financing availability and expected drydocking cash requirements.
- Review charterer concentration and collection prospects for the Samsun and Korea Line claims, including the value and treatment of Samsun shares.
- Evaluate the effect of convertible-note dilution, related-party transactions, dividend restrictions and environmental or insurance exposures.