International Seaways, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Dollar figures below are in millions unless stated otherwise. The company operates crude tankers and product carriers; its 55-vessel fleet includes chartered-in vessels and interests in joint ventures.
Comparability note: Q1 2016 figures include carved-out historical results from former parent Overseas Shipholding Group (OSG), before the November 2016 spin-off. INSW now performs some functions previously provided by OSG, so periods may not be fully comparable.
Key financial results
| Metric | Q1 2017 | Q1 2016 | Change / context |
|---|---|---|---|
| Shipping revenue | $88.8 | $128.7 | Down 31% |
| Time charter equivalent (TCE) revenue | $84.1 | $124.7 | Down 33%, primarily from lower fleet rates |
| Income from vessel operations | $13.3 | $53.1 | Down $39.8 |
| Operating income | $27.0 | $64.7 | Includes equity-method income of $13.6 and $11.6, respectively |
| Net income | $18.1 | $59.9 | Down 70%; diluted EPS was $0.62 versus $2.05 |
| Adjusted EBITDA | $46.4 | $85.0 | Non-GAAP measure; down 45% |
| Cash from operating activities | $11.3 | $70.4 | Lower than prior year |
| Cash and cash equivalents | $101.1 | $92.0 at Dec. 31, 2016 | Quarter-end cash increased $9.1 |
| Total debt, net of discount and deferred costs | $439.9 | $445.8 at Dec. 31, 2016 | Term loan due 2019; no revolver borrowings |
Income from vessel operations was approximately 15% of shipping revenue, versus approximately 41% in Q1 2016. Net income was approximately 20% of shipping revenue, versus approximately 47%. These are calculated ratios, not company-reported margin measures.
At March 31, 2017, total assets were $1,683.3, total liabilities $482.1, and equity $1,201.2. Working capital was approximately $124 million. Consolidated liquidity was $151.1 million, comprising $101.1 million cash and $50 million of undrawn revolver capacity. Debt to total capitalization was 26.8%, compared with 26.6% at year-end 2016.
Material changes versus the prior comparable period
- TCE revenue fell $40.6 million, chiefly due to an approximately $37.4 million impact from lower average daily rates.
- Crude Tankers TCE revenue declined 36% to $56.0 million; average daily TCE fell to $27,312 from $40,428. The company cited lower rates and fewer revenue days, including additional drydock and repair days.
- Product Carriers TCE revenue declined 25% to $28.1 million; average daily TCE fell to $13,088 from $16,983.
- Lower vessel expenses, depreciation and amortization, and general and administrative expenses partly offset the revenue decline. General and administrative expense fell $1.8 million, with management attributing about $1.4 million to reduced compensation and benefits after streamlining following the spin-off.
- Charter hire expense rose to $11.4 million from $8.2 million, including higher chartering in Crude Tankers and increased rates for bareboat-chartered MR vessels.
- Equity in affiliate income increased to $13.6 million from $11.6 million, largely due to higher FSO and LNG joint venture earnings. Interest expense declined to $9.0 million from $10.7 million, reflecting 2016 term-loan repurchases and prepayments.
Cash, debt, outlook and other items
- Operating cash flow was $11.3 million; investing cash outflow was $0.5 million and financing cash outflow was $1.7 million. Drydocking payments were $7.0 million. Cash rose by $9.1 million during the quarter.
- The term loan requires quarterly amortization and may require additional prepayment of up to 50% of Excess Cash Flow. Management estimated an approximately $16.7 million mandatory prepayment due in Q1 2018, included in current debt installments. The company reported substantial headroom under its $500 million collateral-vessel-value covenant.
- Management said the balance sheet provides flexibility for fleet renewal or strategic opportunities and expects sufficient cash to support operations over the next 12 months. It will evaluate opportunities to extend or refinance the facilities. No specific earnings or rate guidance was provided.
- Market conditions were weak: management attributed declining tanker rates in part to OPEC-led production cuts and expected vessel deliveries to continue putting downward pressure on freight rates. VLCC rates fell during Q1 before rebounding somewhat in early April.
- On May 2, 2017, after quarter-end, the board authorized a stock repurchase program of up to $30 million over 24 months, subject to implementation and management discretion.
- INSW disclosed maximum potential exposure of $30.8 million under guarantees related to FSO joint-venture debt and swaps, with no guarantee liability recorded. Separately, it reported maximum exposure of $302.1 million related to certain VIEs, not recorded as a liability because management did not consider loss probable; secured FSO assets would reduce exposure. The filing also notes indemnification obligations for continuing OSG guarantees.
- Possible future contributions to multi-employer pension plans cannot currently be reasonably estimated; no reserve was recorded for those contingencies. Ordinary-course legal claims were described as not expected to be material.
- INSW believed it would qualify for the U.S. Section 883 shipping-income tax exemption for 2017, conditional on shareholder ownership tests; it cautioned that continued qualification beyond 2017 is not assured. A failure to qualify could subject U.S.-source shipping income to tax.
- Q1 2016 included a $4.5 million reorganization credit and debt-repurchase-related gains and expenses; these were absent in Q1 2017. Q1 2016 also included a $72 million dividend to OSG and substantial debt extinguishment payments.
Important facts for investors to verify
- Whether tanker rates, utilization, and drydock schedules recover or further weaken, and how they affect TCE revenue and operating cash flow.
- The basis and cash impact of the estimated $16.7 million 2018 Excess Cash Flow prepayment, debt maturity/refinancing plans, and covenant headroom.
- The nature and potential financial impact of FSO/VIE guarantees, OSG indemnities, and joint-venture obligations.
- Progress toward maintaining Section 883 tax-exemption eligibility and any potential pension-plan assessments.
- Whether the authorized share repurchase program is implemented and how any repurchases interact with liquidity, debt obligations, and fleet investment needs.