Business Context and Reporting Period
Company: Ship Finance International Limited (SFL)
Filing Type: Annual Report on Form 20-F
Reporting Period: Fiscal year ended December 31, 2007
Business Overview: SFL is a Bermuda-based international ship-owning company engaged in the ownership and operation of vessels and offshore assets. The fleet includes oil tankers, drybulk carriers, container vessels, jack-up drilling rigs, and offshore supply vessels. The company's strategy focuses on generating stable cash flows through medium to long-term time and bareboat charters. A significant portion of the fleet is chartered to related parties, primarily the Frontline Charterers (subsidiaries of Frontline Ltd.), under long-term finance leases.
Key Financial Metrics (Year Ended Dec 31, 2007)
| Metric | 2007 (in millions) | 2006 (in millions) |
|---|---|---|
| Total Operating Revenues | $398.8 | $424.7 |
| Net Operating Income | $304.9 | $293.7 |
| Net Income | $167.7 | $180.8 |
| Earnings Per Share (Basic) | $2.31 | $2.48 |
| Cash Flow from Operating Activities | $202.4 | $210.2 |
| Total Assets | $2,950.0 | $2,553.7 |
| Total Debt (Long-term + Current) | $2,270.0 | $1,915.2 |
| Stockholders' Equity | $614.5 | $600.5 |
| Cash and Cash Equivalents | $78.3 | $64.6 |
| Cash Dividends Paid | $159.3 | $149.1 |
Note: All figures are in thousands of dollars unless otherwise noted. The filing text does not provide a specific "margin" percentage, but Net Operating Income represents approximately 76.5% of Total Operating Revenues for 2007.
Material Changes vs. Prior Period
- Revenue Decline: Total operating revenues decreased by 6% to $398.8 million. This was primarily driven by a 33% drop in profit-sharing revenues ($52.5 million vs. $78.9 million in 2006) due to lower average charter rates earned by Frontline Charterers in the spot market. Additionally, time charter revenues declined as third-party charters expired and were reclassified as finance lease income.
- Net Income Decrease: Net income fell 7% to $167.7 million. While operating income increased slightly, this was offset by a 15% increase in interest expense (due to higher borrowing levels) and a $14.5 million net cost from mark-to-market valuation changes on financial instruments (derivatives).
- Debt Expansion: Total debt increased by 18.5% to $2.27 billion to fund fleet expansion, including the acquisition of jack-up drilling rigs, container vessels, and offshore supply vessels.
- Asset Growth: Total assets grew 15.5% to $2.95 billion, reflecting significant additions to the fleet and newbuilding contracts.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Management Commentary
Management anticipates continued growth in the offshore market and strong tanker markets in 2008. The company plans to expand its asset base through newbuilding orders and second-hand acquisitions. Profit-sharing revenues remain volatile and dependent on spot market rates. The company declared a quarterly dividend of $0.55 per share in Q1 2008.
Key Risks
- Concentration Risk: Frontline Charterers accounted for 78% of operating revenues in 2007. The company's ability to pay dividends depends heavily on these charterers' ability to pay.
- Regulatory Phase-Out: Nine non-double hull tankers in the fleet face accelerated phase-out dates (2010) under IMO regulations, potentially limiting their tradeability and value.
- Interest Rate Exposure: The company has significant floating-rate debt ($1.82 billion). While swaps fix rates on $884 million, a 1% change in rates could impact interest expense by approximately $8 million annually.
- PFIC Status: There is a risk that the IRS could classify the company as a Passive Foreign Investment Company (PFIC), which would have adverse tax consequences for U.S. shareholders.
Unusual Items
- Derivative Valuation: A $14.5 million net loss was recorded in "Other financial items" due to mark-to-market adjustments on interest rate swaps, bond swaps, and equity swaps.
- Share Repurchase Program: The Board approved a program to repurchase up to 7 million shares, initially financed through Total Return Swaps (TRS). As of March 2008, approximately 692,000 shares were held under this arrangement.
Investor Verification Checklist
- Related Party Dependence: Verify the financial health of Frontline Charterers and their ability to meet charterhire obligations, given they represent the vast majority of revenue.
- Non-Double Hull Fleet: Assess the remaining useful life and marketability of the nine non-double hull tankers subject to 2010 phase-out regulations.
- Debt Covenants: Confirm compliance with financial covenants, specifically the requirement to maintain a shareholder equity to total assets ratio of not less than 20% and minimum cash balances.
- Derivative Exposure: Review the impact of Total Return Swaps (TRS) on earnings volatility and the potential for mark-to-market losses if share prices decline.
- Profit Sharing Volatility: Monitor spot market rates for tankers and offshore rigs, as these directly influence the variable profit-sharing component of revenue.