Genco Shipping & Trading Limited — Q2 2012 Form 10-Q
Business context and period. Drybulk vessel owner and operator; consolidated results include Baltic Trading Limited, which Genco controlled through 83.40% of voting power despite holding a 25.09% economic interest. This unaudited report covers the quarter and six months ended June 30, 2012. Financial statement amounts below are in U.S. dollars; dollar amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total revenue | $62.9 | $99.3 | $122.8 | $200.8 |
| Operating income (loss) | ($10.4) | $31.6 | ($23.0) | $65.4 |
| Net income (loss) | ($30.5) | $9.8 | ($66.9) | $22.0 |
| Net income (loss) attributable to Genco | ($27.7) | $10.1 | ($60.8) | $23.5 |
| Basic and diluted EPS | ($0.65) | $0.29 | ($1.50) | $0.67 |
| Net cash from operating activities | — | — | $0.6 | $83.0 |
Q2 EBITDA, a non-GAAP measure, was $26.8 million versus $65.8 million; first-half EBITDA was $52.0 million versus $133.9 million. The filing cautions that EBITDA is not a substitute for GAAP results or cash flow.
- Rates and margins: Average fleet time-charter-equivalent (TCE) fell 39.5% to $11,067 per day in Q2 and 42.4% to $10,774 per day for the first half. Fleet utilization remained high at 99.6% for Q2 and 99.4% year to date. Average daily vessel operating expense increased 11.3% to $5,232 in Q2 and 7.6% to $5,082 for the first half. Operating losses replaced prior-year operating profits.
- Cash flow: First-half operating cash flow was only $0.6 million, down from $83.0 million, while cash rose to $246.0 million from $228.0 million at year-end. Investing used $2.7 million; financing provided $20.1 million, including net proceeds of $49.9 million from the February share offering.
- Liquidity and debt at June 30: Current assets were $274.3 million and current liabilities $250.6 million. Cash plus restricted cash was $255.8 million. Long-term debt, including current maturities, was $1,561.5 million; convertible notes had $125.0 million principal and a $108.6 million carrying amount. Total liabilities were $1,721.7 million and equity $1,352.5 million.
- Interest exposure: The company had five interest-rate swaps with $356.2 million notional and a $20.4 million liability. Management estimated a 1% LIBOR increase would add $5.8 million to first-half interest expense on unhedged debt.
Material changes and management commentary
Revenue deterioration reflected much lower charter rates and additional scheduled drydock off-hire, partly offset by a larger fleet. Management attributed weaker rates to continued newbuilding deliveries and slower growth in emerging-market commodity imports; increased scrapping of older vessels partly offset those pressures. First-half vessel operating costs rose with the larger fleet and higher maintenance and crew costs. The 2012 share offering raised net proceeds of $49.9 million and increased weighted-average shares, contributing to dilution of per-share results.
Outlook, debt amendments, and risks
- Management stated that internally generated cash was expected to cover fleet operations and working capital for the following 12 months. Contracted minimum time-charter revenue as of July 27 was $23.9 million for the remainder of 2012, $7.8 million in 2013, and $3.0 million in 2014; this excludes spot/pool and certain other revenue.
- On August 1, 2012, after quarter-end, Genco amended or obtained waivers under three credit facilities. Leverage and interest-coverage covenant waivers were extended through December 31, 2013. Scheduled amortization through that date was deferred under the 2007 facility and prepaid under the other two facilities; the next scheduled amortization was stated as $55.2 million in Q1 2014.
- As part of the amendments, Genco made approximately $99.9 million of debt prepayments. Beginning September 30, excess cash above $100 million in specified pledged accounts is subject to a quarterly cash sweep. The 2007 facility margin increased from 2% to 3%; lenders also received fees and additional collateral protections. These terms constrain liquidity and financial flexibility.
- The company warned that prolonged weak drybulk rates could leave it out of covenant compliance after waivers expire. It might then need further waivers, financing, or asset sales; success is not assured. The filing also cites charterer performance, vessel supply and demand, operating costs, drydockings, regulation, and geopolitical events as risks. The 2007 facility restricts dividends and share repurchases; Genco dividends were suspended, and the amendments prohibit dividends through December 31, 2013.
- Management estimated remaining-2012 drydocking costs of $3.5 million and 125 off-hire days, and 2013 costs of $5.0 million and 140 days. A $0.8 million claim against Korea Line Corporation was outstanding; recovery depends on the rehabilitation process and collectibility assessment. Genco reported no legal proceedings it believed would have a material effect.
Important facts for investors to verify
- Whether charter rates and drybulk market conditions recover sufficiently to improve operating cash generation and covenant capacity.
- The effect of the August 2012 amendments, cash sweep, fees, prepayments, collateral requirements, and future scheduled debt service on available liquidity.
- Debt covenant compliance after the waiver period, including vessel valuations and collateral headroom; the filing says collateral valuations were below carrying values.
- Charter expirations, actual renewal terms and rates, drydock costs and off-hire, and the amount of revenue not covered by the stated contracted minimums.
- Exposure to interest-rate changes and the valuation or potential impairment of the $27.4 million Jinhui investment.