International Seaways, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual report, not a standalone fourth-quarter filing. Dollar amounts below are in U.S. dollars; financial figures are generally shown in millions. INSW transports crude oil and petroleum products through its Crude Tankers and Product Carriers segments. At year-end, it owned or operated 55 vessels, including chartered-in vessels, and held interests in six joint-venture vessels.
Financial performance and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Shipping revenue | $290.1 million | $398.3 million |
| Time charter equivalent (TCE) revenue | $275.0 million | $385.0 million |
| Loss from vessel operations | $108.2 million | Income of $5.9 million |
| Net loss | $106.1 million; $3.64 per share | $18.2 million; $0.62 per share |
| EBITDA / Adjusted EBITDA | $13.2 million / $117.0 million | $101.6 million / $222.0 million |
| Net cash from (used in) operating activities | $(3.8) million | $116.8 million |
Revenue fell 27% and TCE revenue fell 29%, primarily due to lower average daily charter rates. Crude Tankers TCE revenue was $178.8 million, down 31%; Product Carriers TCE revenue was $96.2 million, down 24%. Spot and pool voyage charters generated 80% of TCE revenue, compared with 76% in 2016. Adjusted EBITDA is a non-GAAP measure and should not be treated as a substitute for GAAP earnings or operating cash flow.
Net loss included $88.4 million of vessel impairment charges. Interest expense was $40.4 million, versus $39.5 million in 2016. Equity in income of affiliated companies increased to $49.0 million from $16.8 million, principally because 2016 included a $30.5 million impairment of FSO joint-venture investments.
At December 31, 2017, cash and cash equivalents were $60.0 million, restricted cash was $10.6 million, and unused revolver capacity was $20.0 million, for reported total liquidity of $90.6 million. Working capital was approximately $85 million. Debt, net of discounts and deferred financing costs, was $552.9 million; reported debt to total capitalization was 33.7%, up from 26.6%. The facilities had $30 million drawn on the revolver. Operating cash flow was negative despite positive Adjusted EBITDA, and vessel acquisitions and betterments used $173.5 million of cash.
Changes, outlook and material items
- Market and operating trends: Management described tanker rates as weak. In the fourth quarter, VLCC rates declined from an October peak near $23,000 per day to below $10,000 per day by quarter-end. The filing expected a weak rate environment to continue into 2018, citing OPEC production restrictions and continued newbuild deliveries.
- Fleet actions: INSW acquired two 2017-built Suezmaxes for $116 million and a 2010-built VLCC for $53 million during 2017. It sold two older MRs during the year and delivered two additional MRs in early 2018. The company expected to place its ULCC in lay-up by the end of the first quarter of 2018, potentially for up to 18 months.
- Proposed acquisition: A December 2017 letter of intent covered six young VLCCs for $434 million, inclusive of assumed debt. Closing was expected in the second quarter of 2018, subject to financing, approvals, due diligence, definitive agreements and other conditions. The filing described funding as a combination of liquidity, assumed debt and/or other financing. The transaction was not completed as of the filing date.
- Debt refinancing: In June 2017, INSW refinanced its prior facilities with a $500 million term loan and $50 million revolver, later increasing the term loan by $50 million. The term loan matures in 2022 and the revolver in 2021. The company reported covenant compliance and substantial headroom at year-end; debt is secured principally by vessels. A $7.0 million write-off of deferred financing costs and $9.2 million of third-party debt modification fees were recorded in connection with the refinancing.
- Joint ventures and contracted cash flows: The FSO joint ventures began new five-year service contracts in 2017. Management expected lower FSO revenue under the new contracts than under the prior contracts, while estimating more than $180 million of EBITDA for INSW over the contracts’ term. The LNG joint venture’s four carriers have long-term charters expiring in 2032–2033; its $597.1 million of debt is nonrecourse to INSW.
- Other unusual items and contingencies: A 2017 industrial accident at a leased Galveston facility caused two fatalities. Litigation against a subsidiary remained unresolved, and the company said it could not reasonably estimate a possible loss. INSW recorded a $388,000 reserve for a potential multi-employer pension assessment. In March 2018, it agreed to sell and lease back two Aframaxes and expected to recognize losses; the transactions were expected to close that month.
- Regulatory and tax risks: Future ballast-water treatment and emissions rules, including the global 0.5% sulfur fuel limit scheduled for 2020, may require significant capital or operating spending; the amount was not clearly quantified. INSW qualified for the U.S. Section 883 shipping-income tax exemption in 2017 but could not assure qualification in future years; failure could subject qualifying U.S.-source shipping income to a 4% gross-basis tax.
- Capital allocation and reporting: INSW had not paid cash dividends since its spin-off. It repurchased 160,000 shares for $3.2 million in 2017 under a $30 million authorization. Auditors gave unqualified opinions on the financial statements and internal control over financial reporting; management also reported effective disclosure controls.
Important facts for investors to verify
- Whether charter rates, fleet utilization and operating cash flow improved after 2017, particularly given the company’s high spot-market exposure.
- Whether the six-VLCC acquisition closed, its final funding mix and the resulting debt, liquidity and covenant position.
- How the $88.4 million vessel impairment affected carrying values, and whether vessel values or future impairment assumptions changed.
- Whether the Galveston litigation or pension assessments resulted in material payments or additional reserves.
- Actual spending and compliance timelines for ballast-water and emissions requirements, and continued eligibility for the Section 883 tax exemption.
- The terms, completion and financial impact of the Aframax sale-and-leaseback transactions, including the anticipated losses.
- Interpret 2016 comparisons cautiously: the spin-off from OSG occurred on November 30, 2016, and pre-spin historical information may not represent INSW as a standalone public company.