Business Context and Reporting Period
Company: Genco Shipping & Trading Limited (GS&T)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: GS&T is a Marshall Islands corporation engaged in the ocean transportation of drybulk cargoes worldwide. As of September 30, 2008, the fleet consisted of 31 vessels (5 Capesize, 8 Panamax, 4 Supramax, 6 Handymax, 8 Handysize) with an aggregate capacity of approximately 2.23 million dwt and an average age of 6.5 years. The company operates primarily under time charters.
Key Financial Metrics
| Metric (in thousands, except per share) | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2007 |
|---|---|---|---|
| Revenues | $107,557 | $303,798 | $119,697 |
| Operating Income | $70,615 | $226,716 | $65,875 |
| Net Income | $62,999 | $197,884 | $49,878 |
| Earnings Per Share (Diluted) | $1.99 | $6.56 | $1.96 |
| EBITDA | $89,778 | $271,287 | $88,916 |
| Cash and Cash Equivalents | $142,455 | $142,455 | $71,496 (Dec 31, 2007) |
| Long-Term Debt | $1,129,500 | $1,129,500 | $893,000 (Dec 31, 2007) |
| Dividends Declared Per Share | $1.00 | $2.85 | $1.98 |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 135.7% for the three months and 153.8% for the nine months ended September 30, 2008, compared to the prior year periods. This was driven by a larger fleet (ownership days increased 50.3% QoQ and 47.7% YoY) and higher Time Charter Equivalent (TCE) rates (fleet average TCE increased 61.5% QoQ and 75.6% YoY).
- Profitability: Net income surged 286% for the quarter and 296.7% for the nine-month period. Operating income increased 181.3% and 244.2% respectively.
- Expense Increases: Operating expenses rose significantly due to fleet expansion. Depreciation and amortization increased 130.9% (quarter) and 125.9% (nine months). Vessel operating expenses increased 71.7% (quarter) and 72.1% (nine months).
- Asset Sales: The nine-month 2008 period included a $26.2 million gain on the sale of the vessel Genco Trader, compared to a $3.6 million gain in the prior year period.
- Investment Losses: The company held a short-term investment in Jinhui Shipping and Transportation Limited. The fair value dropped from $167.5 million (Dec 31, 2007) to $60.5 million (Sep 30, 2008), resulting in an unrealized loss of $104.7 million recorded in Other Comprehensive Income (OCI).
Guidance, Outlook, Risks, and Unusual Items
- Subsequent Event - Acquisition Cancellation: On November 3, 2008, the company cancelled the acquisition of six drybulk newbuildings (three Capesize, three Handysize) with an aggregate price of $530 million. The company forfeited deposits totaling $53 million plus interest, resulting in an estimated $54 million charge to the income statement in Q4 2008.
- Debt Repayment: Following the cancellation, the company repaid $53 million of debt associated with the deposits using operating cash flow, reducing outstanding debt under the 2007 Credit Facility to approximately $1.077 billion.
- 2008 Term Facility: A $320 million credit facility executed in September 2008 is subject to cancellation due to the acquisition cancellation. This will trigger a non-cash charge of approximately $2.3 million for unamortized deferred financing costs in Q4 2008.
- Market Risks: Management highlighted a global economic turndown, tightening credit, and weakening demand for drybulk cargoes. These factors create downward pressure on charter rates and vessel values. The company noted that if market values of vessels decline, it may be unable to meet collateral maintenance requirements (130% of borrowings) under its credit facilities.
- Dividend Policy: The Board declared a $1.00 per share dividend for Q3 2008, payable in November 2008, despite market uncertainties, based on strong cash flow for the quarter.
- Insurance Claim: The vessel Genco Hunter collided in August 2008. The company received a partial payment of $676,000 for loss of hire and expects further reimbursement for the remaining claim.
Investor Verification Checklist
- Q4 2008 Charges: Verify the impact of the $54 million deposit forfeiture and $2.3 million financing cost write-off on Q4 earnings.
- Debt Covenants: Monitor the company's ability to maintain the 130% collateral coverage ratio under the 2007 Credit Facility given potential declines in vessel market values.
- Jinhui Investment: Assess the risk of an "other-than-temporary impairment" charge on the Jinhui investment, which has declined significantly in value but was not deemed impaired as of September 30, 2008.
- Remaining Acquisitions: Confirm the status and funding of the four remaining Capesize vessels (estimated cost $385.6 million) which were not cancelled.
- Charter Expirations: Review the schedule of charter expirations (many in 2009-2010) to gauge exposure to potential rate declines in the current economic environment.