Business context and reporting period
Genco Shipping & Trading Limited filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2010. It transports drybulk cargoes worldwide. Consolidated results include Baltic Trading Limited, which completed its IPO in March; Genco held 25.35% of its economic interest but 83.59% of its voting power at quarter-end.
Financial performance and position
Amounts are U.S. dollars in millions except per-share data and where noted.
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $105.3 | $93.7 | $200.0 | $190.4 |
| Operating income | $54.9 | $53.3 | $103.4 | $108.4 |
| Net income | $38.7 | $37.6 | $71.8 | $78.9 |
| Net income attributable to Genco | $36.8 | $37.6 | $70.2 | $78.9 |
| Genco diluted EPS | $1.16 | $1.20 | $2.23 | $2.51 |
| EBITDA, as defined by the company | $79.3 | $73.9 | $152.9 | $150.0 |
- Q2 operating margin was approximately 52.2% versus 56.8% a year earlier; six-month margin was approximately 51.7% versus 57.0%. Genco-attributable net margin was approximately 34.9% in Q2 and 35.1% for the six months, compared with 40.1% and 41.4%, respectively.
- Fleet-average time-charter-equivalent (TCE) rates declined 5.7% in Q2 to $30,405 per day and 7.3% for the six months to $30,326 per day. Fleet utilization remained high at 99.4% in Q2 and 99.5% for the half-year.
- Operating cash flow was $118.0 million for the six months, versus $109.8 million. Investing used $304.6 million, principally for vessel purchases and deposits; financing provided $194.4 million, largely from Baltic Trading’s IPO. Cash increased $7.9 million to $196.1 million.
- At June 30, total assets were $2,583.3 million, total liabilities $1,396.6 million and total equity $1,186.7 million, including $214.1 million of noncontrolling interest. Cash was $196.1 million, plus $12.0 million of restricted cash.
- Total debt was $1,312.0 million, comprising $1,302.0 million under Genco’s 2007 facility and $10.0 million under Baltic Trading’s facility. Genco had used the full borrowing capacity of its 2007 facility. The current portion of long-term debt was $50.0 million. Current assets of $233.9 million compared with current liabilities of $80.1 million.
- Ten interest-rate swaps had $756.2 million of notional principal and a $50.8 million fair-value liability. The Jinhui investment was $53.3 million, down from $72.2 million at year-end; the filing reported no impairment.
Material changes versus prior comparable periods
- Revenue increased 12.4% in Q2 and 5.1% for the first half, mainly from a larger fleet and $7.0 million of Baltic Trading revenue. Lower charter rates partly offset fleet growth.
- Despite higher revenue, first-half operating income fell 4.6%, net income 9.0%, Genco-attributable income 11.0% and diluted EPS 11.2%. Higher vessel operating costs, G&A and depreciation contributed; net interest expense also rose.
- Q2 net income attributable to Genco declined 2.3%, although consolidated net income rose 2.8%; the difference reflects the newly recognized noncontrolling interest in Baltic Trading.
- Fleet operating days increased 19.9% in Q2 and 14.9% for the six months. Lower average TCE rates, particularly for Capesize and Supramax vessels, pressured earnings; first-half fleet-average daily operating expense decreased 1.0% to $4,697.
- Genco’s shareholder equity rose to $972.6 million from $928.9 million at year-end, while total equity increased to $1,186.7 million, principally reflecting Baltic Trading’s IPO and its resulting noncontrolling interest. Accumulated other comprehensive income shifted from $13.6 million to a $14.1 million deficit, including investment, currency-translation and hedge losses.
Outlook, financing, risks and unusual items
- Management expected operating cash flow and planned financing to cover fleet operations and working capital for the next 12 months. This expectation depended in part on vessel acquisitions and financing arrangements proceeding as planned; the filing gives no earnings or revenue guidance.
- Genco agreed to acquire 16 drybulk vessels from Bourbon for $545 million, intending to retain 13 and resell three at an aggregate purchase price of approximately $105 million to Maritime Equity Partners (MEP), a related party with ties to the chairman. Genco also agreed to acquire five Handysize vessels for $166.3 million. Baltic Trading separately contracted for vessel acquisitions. Deliveries, charterer consents, closing conditions and financing remained relevant uncertainties.
- Subsequent to quarter-end, Genco completed offerings of $125 million principal amount of 5.00% convertible notes due 2015 and 3,593,750 common shares. It also obtained commitment letters for $253 million and $100 million secured term-loan facilities to finance vessel purchases. Availability depended on definitive documents, vessel deliveries and other conditions.
- The collateral-maintenance covenant under Genco’s 2007 credit facility was waived; cash dividends and share repurchases remained suspended until the covenant could be satisfied. No Genco dividend was declared for Q2. Baltic Trading announced a separate $0.16-per-share dividend after quarter-end.
- Management described seasonal freight-market weakness in Q2, linked to slower Chinese iron-ore imports, the end of the South American grain season, changes to iron-ore pricing and reduced port congestion. The Baltic Dry Index ranged from 1,700 to 4,209 during the quarter and was 1,977 on August 2.
- Key risks include drybulk freight-rate and vessel-supply volatility, charterer performance, operating-cost increases, vessel delivery and financing execution, and interest-rate exposure. A 1% LIBOR increase was estimated to raise six-month interest expense by $2.72 million on the unhedged debt portion. Two customers represented more than 10% of Q2 revenue: Cargill at 27.61% and Pacific Basin at 12.01%.
- Cash and cash equivalents were held at two financial institutions and were not insured against their default; vessel deposits and swap agreements also involved DnB NOR counterparty exposure. The filing disclosed no legal matter believed likely to have a material adverse effect. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the Bourbon and Metrostar acquisitions, related-party resale to MEP, charter transfers and planned secured facilities closed on the stated terms and schedule.
- Whether the 2007 facility’s collateral-maintenance waiver was extended or cured, and the resulting constraints on Genco dividends, repurchases and borrowing capacity.
- Actual vessel deliveries, charter coverage and realized TCE rates relative to the market weakness and management’s expectation of $5,100 daily vessel operating expense in the second half of 2010.
- The effect of the convertible notes, share issuance, new secured debt and future repayment obligations on dilution, leverage and liquidity.
- Changes in swap fair value, Jinhui’s market value, major-customer concentration and the related-party arrangements disclosed in the filing.