International Seaways, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The company operates international crude oil and petroleum-products tankers through Crude Tankers and Product Carriers segments; it also holds interests in two FSO vessels through joint ventures. Unless noted, amounts below are U.S. dollars in millions.
Financial performance and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Shipping revenue | $366.2 | $270.4 |
| Time charter equivalent (TCE) revenue | $339.9 | $243.1 |
| Income (loss) from vessel operations | $55.2 | ($54.5) |
| Operating income (loss), including equity-method affiliates | $66.4 | ($25.1) |
| Net income (loss) | ($0.8) | ($88.9) |
| EBITDA / Adjusted EBITDA | $141.1 / $164.7 | $43.6 / $68.3 |
| Cash from operating activities | $87.5 | ($12.5) |
| Interest expense | $66.3 | $60.2 |
- TCE revenue increased 40%, primarily from higher average rates across fleet classes. Approximately 78% of shipping revenue and 76% of TCE revenue came from Crude Tankers.
- Income from vessel operations was approximately 15.1% of shipping revenue in 2019, versus a loss equal to approximately 20.2% in 2018. These are calculated ratios, not company-reported measures.
- Crude Tankers TCE revenue rose to $259.5 million from $175.5 million; Product Carriers TCE revenue increased to $80.4 million from $67.6 million. Adjusted segment vessel-operation income was $71.3 million and $12.3 million, respectively.
- At year-end, cash and cash equivalents were $89.7 million and restricted cash was $60.6 million. Consolidated liquidity was $200.2 million, including $50.0 million of undrawn revolver capacity; working capital was approximately $73 million.
- Year-end debt, net of discounts and deferred financing costs, was $661.1 million, down from $810.7 million. Debt to total capitalization was 33.3%, compared with 44.5% in 2018.
- Capital expenditures for vessels and vessel improvements were $36.6 million; drydocking payments were $19.5 million. Cash provided by investing activities was $107.9 million, primarily reflecting the LNG investment sale and vessel disposals.
Changes and notable transactions
- Results rebounded from 2018 as market rates strengthened. Crude tanker rates were particularly strong in the fourth quarter; fourth-quarter 2019 shipping revenue was $124.0 million and net income was $15.9 million, versus $100.5 million and $7.0 million, respectively, in fourth-quarter 2018.
- The company sold its 49.9% LNG joint-venture interest to Nakilat in October 2019 for $123.0 million, recording a $3.0 million gain. It also reclassified $21.6 million of accumulated unrealized hedge losses into earnings upon sale, a significant non-cash accounting item.
- Using restricted cash and transaction proceeds, the company prepaid $110 million of its 2017 term loan during 2019. It sold two older MR vessels and agreed to sell two Aframaxes, one delivered in January 2020; it also agreed to acquire a 2009-built LR1, delivered in February 2020.
- On January 28, 2020, the company drew $370 million under new secured facilities and used the proceeds, together with cash, to repay or repurchase specified debt, including the 2017 facilities, the ABN term loan and its 10.75% subordinated notes. Management estimated annual interest savings of approximately $15 million. Pro forma liquidity was estimated at about $150 million and debt at approximately $654 million.
Outlook, risks and contingencies
- Management said its balance sheet and fleet-renewal activity supported continued disciplined capital allocation and sufficient cash to support operations over the next twelve months. The filing gives no specific earnings or rate guidance.
- About 92% of 2019 TCE revenue was spot-market exposure, leaving results sensitive to volatile tanker rates. Most time charters then in place were due to expire during 2020.
- IMO 2020’s lower-sulfur fuel rules took effect in January 2020. The company had contracted to install scrubbers on ten modern VLCCs; three were installed by February 28, 2020. Scrubber installation downtime, fuel availability and the price spread between compliant fuel and high-sulfur fuel could affect returns. COVID-19-related shipyard delays and weaker tanker rates were identified as emerging risks as of the filing date.
- Other principal risks include industry cyclicality, debt and covenant requirements, vessel-value declines, environmental compliance and potential spill liabilities, counterparty credit, geopolitical disruption, piracy, and dependence on third-party technical and commercial managers. Pollution insurance was $1 billion per vessel per occurrence, but a catastrophic loss could exceed coverage.
- The FSO joint ventures’ current service contracts expire in 2022; discussions with the customer about later employment were preliminary. The company guaranteed FSO term-loan obligations; maximum potential future payments disclosed for related debt and swap obligations were $70.8 million, compared with a recorded guarantee liability of $0.3 million.
- Two wrongful-death lawsuits related to a 2017 Galveston accident each sought damages exceeding $25 million. The company said it could not reasonably estimate a possible loss or range; the claims remained pending. Further multi-employer pension assessments were also possible but not estimable.
- The company qualified for the Section 883 U.S. shipping-income tax exemption in 2019 but gave no assurance it would continue to qualify. Failure to qualify could subject U.S.-source shipping income to a 4% gross-basis tax.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management concluded disclosure controls and internal controls were effective at year-end.
Important facts for investors to verify
- Whether spot tanker rates and utilization remain strong enough to sustain operating cash generation after the exceptional fourth-quarter market improvement.
- Actual post-refinancing debt, unrestricted liquidity, interest savings, amortization and covenant headroom; distinguish unrestricted cash from restricted cash.
- Scrubber installation completion, downtime, operating performance and realized fuel-cost savings, alongside COVID-related shipyard and market effects.
- Outcome and potential financial exposure of the Galveston litigation and any other contingencies, including FSO-related guarantees.
- Renewal or replacement of FSO service contracts before their 2022 expiry, and the company’s ongoing qualification for the Section 883 tax exemption.
- Interpret Adjusted EBITDA alongside GAAP net loss, cash flow, interest expense and capital needs; the company cautions that its non-GAAP measures are not substitutes for these measures.