Business Context and Reporting Period
Company: Ship Finance International Limited (SFL)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: First Quarter ended March 31, 2012
Filing Date: May 31, 2012
Business Overview: SFL operates a fleet of vessels and drilling rigs, primarily chartered on long-term fixed-rate contracts. The company reported preliminary financial results for Q1 2012, highlighting a strong tanker market performance and strategic restructuring of its container business.
Key Financial Metrics
| Metric | Q1 2012 | Q4 2011 |
|---|---|---|
| Total Operating Revenues (GAAP) | $84.1 million | $76.1 million |
| Charter Revenues (Non-GAAP) | $186 million | $193 million |
| EBITDA (Non-GAAP) | $154 million | $162 million |
| Net Income | $39.0 million | $30.2 million |
| Earnings Per Share (Basic) | $0.49 | $0.38 |
| Cash and Cash Equivalents | $111.6 million | $94.9 million |
| Dividend Per Share | $0.39 | $0.30 |
Liquidity and Debt: As of March 31, 2012, the company held $111.6 million in cash and cash equivalents. Total interest-bearing debt consisted of $222.4 million in short-term/current portions and $1.69 billion in long-term debt. The company remains in compliance with all financial covenants.
Material Changes vs. Prior Period
- Revenue Composition: GAAP operating revenues increased to $84.1 million from $76.1 million, driven by a $13.6 million cash sweep from Frontline and a $1.4 million profit share accrual. However, total charter revenues (including associates) decreased slightly to $186 million from $193 million.
- Profitability: Net income rose 29% to $39.0 million, and EPS increased to $0.49 from $0.38, despite a $2.9 million impairment adjustment to an investment.
- Asset Portfolio: The company took delivery of four new drybulk vessels. Conversely, it sold the VLCC Titan Orion for net proceeds of $14.7 million, recording a $2.2 million book gain.
- Container Restructuring: In April 2012, SFL terminated bareboat charters with Horizon Lines for five container vessels, receiving $40 million in second-lien bonds and equity warrants as compensation.
Guidance, Outlook, and Management Commentary
- Dividend Policy: The Board declared an increased quarterly dividend of $0.39 per share, marking the 33rd consecutive quarter of dividend payments.
- Tanker Market Outlook: Management expects a significant cash sweep contribution in Q2 2012 due to the continued strength of the VLCC tanker market, which has outperformed analyst expectations.
- Container Strategy: Following the Horizon Lines restructuring, seven container vessels are now in the spot market. Management is evaluating strategic alternatives, including carving out the container business into a separate entity to maximize value.
- Capital Expenditures: Remaining capital commitments are approximately $234 million. The company projects a net positive cash contribution of $21 million from newbuildings in the remainder of 2012, with net investments of $34 million in 2013.
- Risks: Forward-looking statements note risks related to global economic strength, currency fluctuations, charter hire rates, vessel values, and potential disruptions to shipping routes.
Investor Verification Checklist
- Accounting Treatment of Associates: Verify the impact of the "investment in associate" accounting method on consolidated revenues, as significant charter revenues ($87.7 million) and expenses are excluded from the primary income statement.
- Horizon Lines Compensation: Assess the liquidity and value of the $40 million received in second-lien bonds and warrants following the charter termination.
- Cash Sweep Sustainability: Monitor spot tanker rates to validate management's expectation of continued cash sweep contributions in Q2 2012.
- Container Business Valuation: Review the progress of the evaluation to carve out the container business, as these assets are currently exposed to volatile spot market rates.
- Deferred Equity Recognition: Note that stockholders' equity excludes $161.8 million of deferred equity related to Frontline transactions, which is amortized over time.