International Seaways, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; compared with Q1 2018 for operating results and December 31, 2018 for balance-sheet measures. Dollar amounts are in millions except per-share data. The company operates crude tanker and product carrier businesses and reported a fleet of 48 vessels, including chartered-in vessels and interests in joint ventures.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Shipping revenue | $101.9 | $52.0 |
| TCE revenue | $94.0 | $48.8 |
| Operating income (loss) | $27.4 | $(18.4) |
| Net income (loss) | $10.9 | $(29.3) |
| Diluted earnings (loss) per share | $0.37 | $(1.01) |
| Operating cash flow | $24.0 | $(4.5) |
| Capital expenditures for vessels and other property | $3.2 | $2.0 |
- Shipping revenue rose 96% year over year; TCE revenue rose 93%. Management attributed the improvement chiefly to stronger average rates across fleet sectors and increased lightering activity.
- Crude Tankers TCE revenue increased to $72.6 million from $29.2 million; Product Carriers TCE revenue increased to $21.4 million from $19.6 million. Adjusted segment vessel-operations results improved to income of $27.4 million from a loss of $14.1 million.
- Net income included $8.1 million of equity-method affiliate income. Interest expense increased to $17.5 million from $11.6 million, primarily reflecting debt added in 2018 and a higher margin on the 2017 Term Loan.
- GAAP operating income was $27.4 million, approximately 26.9% of shipping revenue; net income was approximately 10.7% of revenue. These percentages are calculated from reported figures.
Financial position and liquidity
- At March 31, 2019, total assets were $1.891 billion and total equity was $1.018 billion. Cash and cash equivalents were $79.5 million; restricted cash was $57.6 million.
- Working capital was approximately $92 million. The company reported total consolidated liquidity of $187.2 million, comprising $137.2 million of cash including restricted cash and $50 million of undrawn revolver capacity. It reported that cash and liquidity fell by $10.2 million shortly after quarter-end due to interest and principal payments.
- Debt, net of discount and deferred financing costs, was $805.6 million, including $57.7 million current and $748.0 million long-term. Debt to total capitalization was 44.2%, versus 44.5% at year-end 2018. The company stated it was compliant with financial covenants at quarter-end.
- Operating lease adoption added $30.6 million of right-of-use assets and $27.9 million of lease liabilities. The company said ASC 842 adoption did not affect Q1 shipping revenue or lease expense.
- Operating cash flow was $24.0 million, while investing activities provided $2.7 million and financing activities used $7.2 million. Scheduled debt payments were $6.8 million; the $6.1 million quarterly installment on the 2017 Term Loan due at quarter-end was paid on the first business day of April.
Material changes versus the prior comparable period
- Improved tanker markets and increased lightering activity drove the swing from a Q1 2018 net loss to Q1 2019 net income. The company reported that average daily rates increased across fleet sectors; Crude Tankers average daily TCE rose to $28,566 from $12,958 and Product Carriers to $16,257 from $10,771.
- Operating expenses included a $1.3 million provision for credit losses related to uncollected freight from late-2018 lightering work. Vessel expenses declined, partly due to vessel sales, while charter hire expenses rose in Crude Tankers with increased lightering activity and charter-ins.
- Q1 2018 results included a $6.6 million loss on disposal of vessels and other property; Q1 2019 recorded a $0.05 million gain.
- Operating cash flow improved from a $4.5 million use to $24.0 million provided. Investing cash flow fell from $58.8 million provided in Q1 2018, which included $57.4 million in vessel-disposal proceeds, to $2.7 million provided in Q1 2019.
Outlook, risks, and contingencies
- No quantified company earnings or rate guidance was provided. Management said its balance sheet should support operations over the next 12 months and provide flexibility for fleet renewal or strategic opportunities. It estimated no 2019 excess cash flow prepayment under the 2017 Term Loan, based on Q1 results and its projection for the rest of the year.
- Market conditions remain cyclical and rates are sensitive to oil demand, trade routes, vessel supply, and spot-market conditions. The company earned 94% of total TCE revenue in the spot market in Q1 2019, versus 84% a year earlier. Management reported Q1 crude tanker rates were lower than the strong Q4 2018 levels, citing newbuild deliveries and OPEC cuts; refinery maintenance also weighed on rates.
- Contractual commitments for scrubbers and ballast-water treatment systems totaled approximately $47.9 million, with options that could add up to approximately $14 million. The company also faces material debt service, covenant requirements, and floating-rate exposure; it uses an interest-rate cap on $350 million of the 2017 Term Loan and a swap covering the Sinosure facility.
- The company’s joint ventures had $716.2 million of bank debt, of which $628.9 million was nonrecourse. INSW’s maximum potential future payments related to equity-method investee secured debt and swaps were $88.1 million; the recorded guarantee liability was $0.6 million.
- A VIE-related maximum exposure-to-loss table reported $224.7 million, primarily reflecting investments; $13.3 million of trade receivables from the relevant pool was excluded. Management said it did not consider the maximum loss probable.
- Two wrongful-death lawsuits related to a 2017 Galveston accident remained pending against a subsidiary. The company said it could not reasonably estimate a possible loss or range; related claims by other defendants had been settled. A multi-employer pension-plan assessment also remains possible but unquantifiable; a separate recorded reserve was £57,000 (approximately $75,000), due in October 2019.
- The company believed it would qualify for the Section 883 U.S. tax exemption for 2019, subject to ownership conditions, but gave no assurance of continued qualification. Failure to qualify could subject U.S.-source shipping income to a 4% gross-basis tax.
- The board renewed a $30 million share-repurchase authorization through March 5, 2021; no program repurchases were made in Q1. The $25 million at-the-market equity program had produced no sales by quarter-end.
Important facts for investors to verify
- Whether stronger spot rates and lightering activity persist, given the company’s high spot-market exposure and the industry’s cyclical supply-and-demand risks.
- Actual cash available for operations and debt service, distinguishing unrestricted cash from restricted cash and undrawn revolver capacity.
- Debt amortization, covenant headroom, refinancing needs, and the accuracy of management’s estimate of no 2019 excess-cash-flow prepayment.
- Collection of lightering receivables and any further credit-loss provisions, following the $1.3 million Q1 charge.
- Funding and timing of the $47.9 million environmental-equipment commitments, and whether additional options are exercised.
- Developments in the Galveston litigation, pension contingencies, JV guarantees, and the company’s eligibility for the Section 883 tax exemption.