International Seaways, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Unless otherwise stated, financial amounts below are in millions of dollars. The company operates crude tanker and product carrier fleets, with exposure largely to spot markets; it reported a 52-vessel fleet at quarter-end, including chartered-in vessels and joint-venture interests.
Financial results and liquidity
- Q3 revenue: Shipping revenue was $60.9 million, up 1.6% from $60.0 million a year earlier. TCE revenue, a non-GAAP operating measure, fell 9% to $51.3 million. Net loss widened to $47.8 million from $21.8 million; diluted loss per share was $1.64 versus $0.75.
- Nine-month results: Shipping revenue declined 23% to $169.8 million from $220.7 million. TCE revenue fell 29% to $150.1 million. Net loss was $95.9 million versus $15.4 million; diluted loss per share was $3.29 versus $0.53.
- Operating performance: Q3 loss from vessel operations was $36.0 million, including $17.4 million of vessel disposal losses and impairments. Equity-method income was $5.3 million. Adjusted EBITDA was $6.3 million in Q3 and $22.1 million for the nine months, versus $16.0 million and $94.6 million, respectively, in 2017.
- Cash flow: Nine-month operating cash flow was $1.8 million, compared with $11.1 million. Investing activities provided $96.2 million, including vessel sale proceeds and repayments of advances from joint ventures; financing activities used $44.8 million. Cash, cash equivalents and restricted cash totaled $123.9 million at September 30.
- Liquidity and debt: Working capital was approximately $76 million. Reported total liquidity was $173.9 million, comprising $123.9 million of cash including $32.3 million restricted, plus $50 million of undrawn revolver capacity. Debt, net of discounts and deferred financing costs, was $828.0 million; debt to total capitalization was 45.1%, up from 33.7% at year-end 2017. Management reported covenant compliance at September 30.
Material changes versus prior periods
- Results weakened significantly year to date, primarily due to lower average tanker rates and reduced equity income from joint ventures. Q3 TCE was also affected by lower VLCC and product carrier rates, although additional VLCC revenue days partly offset declines.
- The product-carrier segment’s TCE revenue fell 49% in Q3 and 37% year to date, reflecting weaker rates and fewer MR revenue days following vessel sales and charter redeliveries. Crude-tanker TCE revenue rose 16% in Q3 on increased vessel days, but declined 24% year to date as rates fell.
- In June, the company acquired six modern VLCCs for a stated purchase price of $434 million, including assumed debt. The transaction was financed through assumed Sinosure debt, new borrowing and securities, joint-venture proceeds, and vessel sales and sale-leasebacks. The acquisition increased fleet capacity and debt.
- Debt balances and interest expense rose following the acquisition and related financings. Nine-month interest expense was $42.0 million, versus $29.7 million in 2017.
- The company recorded a $16.4 million Q3 held-for-sale impairment related to a VLCC sale, in addition to a $0.9 million impairment on a Panamax vessel in Q2. A 2001-built VLCC and a 2001-built Aframax were delivered to buyers after quarter-end.
Outlook, risks and unusual items
- Management said its balance sheet provides flexibility for fleet renewal and potential strategic opportunities, and expects sufficient cash to support operations over the next twelve months. This is forward-looking and depends on market conditions and access to capital.
- Management described Q3 crude tanker rates as weak but somewhat improved from Q2, with marginal rate increases entering Q4; MR rates remained weak. The filing provides no numerical earnings or revenue guidance.
- Vessel markets are cyclical and exposed to charter-rate and vessel-value volatility, fleet supply, oil demand, fuel prices, and spot-market conditions. The company derived 88% of Q3 TCE revenue from the spot market.
- Environmental compliance requires significant spending. Commitments for scrubbers and ballast-water systems totaled approximately $40.7 million at quarter-end, with options that could add up to approximately $35 million. Scrubber installation, downtime, fuel-cost differentials, and IMO 2020 compliance may affect results.
- Debt service, floating-rate exposure, covenant restrictions and guarantees are important risks. The company guaranteed the FSO joint venture term loan; its maximum potential future principal payments related to investee secured debt were $98.7 million, with a recorded guarantee liability of $0.8 million. The company also disclosed broader VIE maximum exposure of $244.4 million.
- Litigation arising from a 2017 industrial accident at a leased Galveston facility remains unresolved. Claims include damages exceeding $25 million each; the company said it could not reasonably estimate a possible loss or range. A multi-employer pension assessment also remains subject to future actuarial developments.
- The company expects adoption of the new lease standard on January 1, 2019 to increase reported assets and liabilities by approximately $28–35 million, primarily for chartered-in vessels and office leases.
Important facts for investors to verify
- Whether tanker rates and spot-market demand improve enough to support operating cash flow and debt service, particularly in the MR and VLCC sectors.
- The acquired VLCCs’ realized utilization and earnings, and the company’s ability to manage the resulting debt and interest burden.
- Available unrestricted liquidity after quarter-end payments, restricted-cash requirements, scheduled amortization and environmental capital commitments.
- Ongoing compliance with debt covenants and the potential cash impact of joint-venture guarantees and other contingent obligations.
- Potential financial exposure from the Galveston litigation and future pension assessments; the filing does not provide a clear estimate of the litigation loss.