Business Context and Reporting Period
This Form 6-K filing by Ship Finance International Limited (SFL) reports preliminary financial results for the quarter ended September 30, 2012. SFL is a Bermuda-based shipping company operating a diversified fleet of vessels and offshore drilling units, primarily chartered on long-term fixed-rate contracts. The filing includes a press release dated November 29, 2012, and unaudited financial statements.
Key Financial Metrics
| Metric | Q3 2012 | Q2 2012 |
|---|---|---|
| Charter Revenues (Non-GAAP) | $179 million | $182 million |
| Total Operating Revenues (GAAP) | $74.3 million | $83.6 million |
| EBITDA (Non-GAAP) | $145 million | $150 million |
| Net Income | $34.6 million | $61.2 million |
| Earnings Per Share (Basic) | $0.44 | $0.77 |
| Cash and Cash Equivalents (Sep 30, 2012) | $66.8 million | $100.8 million |
| Total Debt (Short + Long Term) | $1.85 billion | $1.90 billion |
| Dividend Per Share | $0.39 | $0.39 |
Liquidity and Capital: As of September 30, 2012, the company held $66.8 million in cash. Subsequent to the quarter, SFL raised $89 million in equity and $105 million in senior unsecured bonds. The company also arranged a $53 million secured loan facility for recent acquisitions.
Material Changes vs. Prior Period
- Revenue Decline: GAAP operating revenues decreased from $83.6 million in Q2 to $74.3 million in Q3. This was partly due to a reduction in cash sweep income from $16.3 million to $10.2 million, as five VLCC vessels chartered to Frontline generated negative adjustments due to higher threshold rates.
- Profitability Drop: Net income fell significantly from $61.2 million to $34.6 million. This decline was driven by lower cash sweep income and a reduced gain on the sale of assets ($1.9 million in Q3 vs. $21.7 million in Q2).
- Asset Sales: The company sold the combination carrier Front Rider in Q3 for a net gain of $1.9 million. Subsequent sales of Front Climber and Front Driver in Q4 are expected to generate book gains of approximately $4.4 million combined.
- Acquisitions: In October 2012, SFL acquired two modern car carriers, adding approximately $85 million to its fixed-rate charter backlog.
Guidance, Outlook, and Risks
Dividend Policy: The Board declared a Q3 dividend of $0.39 per share and accelerated the Q4 dividend of $0.39 per share to be paid in December 2012, totaling $0.78 per share. This acceleration was intended to mitigate potential increased dividend taxation for U.S. shareholders in 2013.
Outlook: Management expects to invest the remaining portion of newly raised capital within the next four to six months. The company maintains a conservative profile, focusing on long-term charters to reputable operators. The fixed-rate charter backlog stands at approximately $5.4 billion with an average remaining term of 6.8 years.
Risks and Contingencies:
- Market Conditions: The crude oil tanker market remained at low levels, and the spot market for container and drybulk vessels is soft. However, the majority of the fleet is on long-term fixed-rate contracts, insulating the company from short-term volatility.
- Accounting Treatment: Significant assets (drilling units and container vessels) are accounted for as "investments in associates" under U.S. GAAP, meaning their operating revenues and expenses are not consolidated but reflected as equity income.
- Forward-Looking Statements: Risks include fluctuations in charter rates, vessel values, interest rates, and geopolitical events affecting shipping routes.
Investor Verification Checklist
- Verify the impact of the "cash sweep" mechanism with Frontline on future earnings, as it is volatile and dependent on spot market rates.
- Confirm the integration and performance of the two newly acquired car carriers and the associated $53 million loan facility.
- Review the "Investment in associate" accounting treatment to understand the full exposure to drilling unit and container vessel revenues not shown in consolidated operating revenue.
- Monitor the company's ability to deploy the remaining raised capital ($194 million total raised) within the projected 4-6 month timeframe.
- Assess the sustainability of the accelerated dividend policy in light of potential 2013 tax changes and market conditions.