EuroDry Ltd. — FY2018 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2018. Although the request refers to 2018 Q4, this is an annual report; the supplied filing does not provide a standalone Q4 income statement. EuroDry was spun off from Euroseas on May 30, 2018. Historical results are carve-out results of the drybulk business contributed to EuroDry, so periods before the spin-off are not necessarily directly comparable with the standalone public company.
Business context and financial performance
EuroDry owns and operates drybulk vessels carrying commodities such as iron ore, coal and grain. It reported seven vessels in its fleet by April 1, 2019. The company relies on affiliated managers Eurobulk and Eurobulk Far East for commercial and technical management.
| Metric (USD unless stated) | 2018 | 2017 |
|---|---|---|
| Time-charter revenue | $25.93 million | $16.99 million |
| Voyage-charter revenue | — | $3.29 million |
| Net revenue, after commissions | $24.52 million | $19.16 million |
| Operating income | $3.99 million | $2.63 million |
| Net income | $1.12 million | $0.85 million |
| Net income attributable to common shareholders | $0.55 million | $0.85 million |
| Basic and diluted earnings per common share | $0.25 | $0.38 |
| Operating cash flow | $3.97 million | $2.91 million |
| Investing cash flow | $(29.05) million | $(9.64) million |
| Financing cash flow | $27.93 million | $9.28 million |
| Average TCE rate per vessel per day | $12,481 | $10,042 |
| Fleet utilization | 99.7% | 98.8% |
At December 31, 2018, total assets were $127.71 million, current assets $14.47 million and current liabilities $8.98 million. Cash and cash equivalents were $4.38 million; restricted cash totaled $3.38 million. Gross bank debt was $63.89 million, versus $38.82 million a year earlier, and total liabilities were $65.41 million. Shareholders’ equity was $43.54 million, with $18.76 million of Series B preferred shares presented as mezzanine equity. The company reported no credit-facility covenant default at year-end.
Material changes versus 2017
- Net revenue increased 28%, reflecting a 24% increase in TCE rates and more revenue-generating voyage days as the average fleet grew from 4.94 to 5.74 vessels.
- Operating income rose to $3.99 million, but common-shareholder earnings fell to $0.55 million from $0.85 million after $0.57 million of preferred dividends and higher financing costs.
- Operating expenses increased: vessel operating expenses rose to $9.18 million, drydocking expenses to $1.47 million, and general and administrative expenses to $2.35 million. Management attributed the G&A increase partly to spin-off and listing costs.
- Investing outflows increased with delivery of the Kamsarmax vessel Ekaterini and acquisition of the Panamax vessel Starlight. Debt financing supported fleet investment and refinancing.
Liquidity, debt, dividends and outlook
- Scheduled bank-loan repayments were approximately $7.07 million in 2019 and $6.91 million in 2020. The company reported $14.0 million of scheduled repayments over the next two years; it later stated that $2.2 million had been repaid by April 1, 2019, leaving $61.7 million outstanding.
- Debt is principally floating-rate LIBOR debt, with margins of 2.80%–3.75%. Management estimated that a 100-basis-point increase in rates would have reduced 2018 net income and cash flow by about $509,000, assuming the same debt profile. Two swaps covered $10 million of notional principal at year-end; they did not qualify for hedge accounting.
- EuroDry paid no common dividends in 2018. Preferred dividends of $0.57 million were paid in kind. The Series B preferred dividend rate increased to 12% from January 29, 2019 through January 2021, payable in cash, and is scheduled to rise to 14% thereafter.
- As of April 1, 2019, all vessels were employed, but charter coverage represented about 49% of remaining 2019 capacity days and 5% of 2020 capacity days. Four vessels’ time charters were scheduled to expire in 2019; two in 2020. Management described the early-2019 market as weak and volatile. The BDI had fallen sharply by mid-February 2019 before partially recovering.
- Management intended to expand selectively when market conditions supported acquisitions and to balance time-charter coverage with spot or pool employment. Industry orderbook, trade growth, vessel supply and charter rates remain key uncertainties; management noted a weaker global growth outlook.
Risks, contingencies and unusual items
- Drybulk charter rates and vessel values are cyclical and volatile. Four vessels had carrying values totaling $66.58 million that management estimated exceeded their aggregate basic charter-free market value of about $52.9 million by $13.68 million. Management concluded the vessels were recoverable under its undiscounted-cash-flow impairment test and recorded no impairment; a sale in a depressed market could nevertheless realize a loss.
- Loan covenants depend partly on vessel values and include collateral, liquidity and leverage requirements. Covenant breaches could require additional collateral or repayment, and lenders could accelerate debt or foreclose on vessels.
- Four vessels did not meet the updated IMO ballast-water guideline, with compliance costs potentially material. The company did not intend to install scrubbers for the IMO sulfur-emissions rules effective January 1, 2020, and expected higher fuel costs from low-sulfur fuel.
- 2018 included a $167,019 provision for a disputed charter and bunker claim involving Windrose, which entered bankruptcy. Management considered recovery prospects limited.
- Customer concentration remained significant: the top five charterers accounted for approximately 69% of 2018 revenue; Klaveness accounted for 32% and Amaggi 11%. The company also has substantial related-party relationships with its managers and broker, and disclosed possible conflicts of interest.
- Other material exposures include foreign-exchange and interest-rate changes, charterer default, environmental and maritime liabilities, insurance limitations, drydocking costs, and the availability of financing. The company maintained $1 billion pollution-liability coverage per vessel but noted catastrophic losses could exceed coverage. It reported no off-balance-sheet arrangements and no material litigation beyond routine matters.
Most important facts for investors to verify
- Confirm the annual reporting basis and that FY2017–FY2018 comparisons reflect carve-out versus post-spin-off operations; obtain quarterly results separately for Q4 analysis.
- Review the debt schedule, refinancing terms, restricted-cash requirements and covenant headroom, including the 2019 Eirini P refinancing term sheet.
- Track charter expirations, actual renewal rates, vessel employment and drybulk-market conditions against the limited 2020 contracted coverage.
- Assess preferred-share cash dividend requirements, redemption rights, voting and consent provisions, and their effect on cash available to common shareholders.
- Evaluate vessel market values and impairment assumptions, planned survey and ballast-water expenditures, and expected fuel-cost effects of the 2020 sulfur rules.
- Verify customer concentration, related-party management and brokerage fees, and recovery or final disposition of the Windrose claim.