SFL Corp. Ltd. 2010 Form 20-F Summary
Business context and reporting period
Ship Finance International Limited, a Bermuda company listed on the NYSE, filed its annual report for the fiscal year ended December 31, 2010. The filing is an annual Form 20-F, not a standalone fourth-quarter filing, and the financial statements are prepared under U.S. GAAP.
SFL owns and leases maritime and offshore assets, including oil tankers, OBO and drybulk carriers, containerships, chemical tankers, drilling rigs and offshore supply vessels. Its strategy emphasizes diversified assets placed on medium- to long-term time or bareboat charters. As of March 22, 2011, the fleet included 29 oil tankers, eight OBOs, three drybulk carriers, nine containerships, five drilling units, six offshore supply vessels and two chemical tankers, in addition to contracted newbuildings.
Key financial metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Total operating revenues | $308.1 million | $345.2 million | Down 11% |
| Gain on sale of assets | $28.1 million | $24.7 million | Up $3.4 million |
| Net operating income | $211.8 million | $209.3 million | Up 1% |
| Net income | $165.7 million | $192.6 million | Down 14% |
| Basic EPS | $2.10 | $2.59 | Down $0.49 |
| Cash from operating activities | $153.8 million | $125.5 million | Up $28.2 million |
| Cash and cash equivalents | $87.0 million | $84.2 million | Up $2.8 million |
| Total assets | $2.88 billion | $3.06 billion | Down 6% |
| Stockholders’ equity | $828.9 million | $749.3 million | Up 11% |
| Consolidated debt | $1.92 billion | $2.14 billion | Down 10% |
Net operating margin was approximately 68.8% in 2010 versus 60.6% in 2009. Net income margin was approximately 53.8% versus 55.8%, reflecting the impact of non-operating items.
Operating revenues consisted primarily of direct financing and sales-type lease interest income of $126.8 million, finance lease service revenue of $76.9 million, bareboat charter revenue of $68.9 million and profit-sharing revenue of $30.6 million. Direct financing and sales-type lease payments received totaled $378.6 million, including $174.9 million of lease principal repayments.
Investing activities generated $77.0 million, primarily from lease repayments, distributions from associated companies and vessel-sale proceeds, partly offset by newbuilding and vessel expenditures. Financing activities used $228.0 million, including $117.2 million of cash dividends and net debt repayments.
Material changes versus the prior comparable period
- Revenue declined primarily because lease interest income and finance lease service revenue decreased as leases amortized, six non-double-hull VLCCs moved from direct-financing leases to operating leases, and vessels were sold.
- Profit-sharing revenue declined to $30.6 million from $33.0 million. Six non-double-hull tankers were removed from the profit-sharing arrangement after their 2010 anniversary dates.
- Operating expenses decreased to $124.3 million from $160.7 million. The 2009 period included a $26.8 million impairment charge on six single-hull VLCCs; no vessel impairment was recorded in 2010.
- Net income fell despite slightly higher operating income because other financial items changed from a $24.5 million net gain in 2009 to a $16.2 million net loss in 2010, largely due to adverse mark-to-market adjustments on derivatives.
- Interest expense declined to $101.4 million from $117.1 million as debt balances and average LIBOR decreased. The company repaid $90 million of related-party debt and other unsecured borrowings and refinanced part of its debt.
- Debt decreased by approximately $213 million, while equity increased by approximately $80 million. The company stated that it complied with all loan covenants at December 31, 2010.
- The active fleet remained at 61 assets at year-end, with additions including two drybulk carriers and one containership and disposals including three oil tankers and one drybulk carrier.
- Declared dividends increased to $1.34 per share in 2010 from $1.20 in 2009. Cash dividends paid totaled $117.2 million, and total dividends declared were $106.0 million.
Debt, liquidity and commitments
Consolidated debt at December 31, 2010 consisted primarily of $296.1 million of 8.5% senior notes due 2013, $79.0 million of NOK-denominated bonds due 2014 and $1.55 billion of floating-rate U.S. dollar debt due through 2019. Including equity-accounted subsidiaries, contractual debt repayments totaled approximately $3.67 billion, and total contractual cash obligations, including interest and vessel purchases, totaled approximately $4.30 billion.
The company had $93 million of cash and restricted cash at year-end and believed charter cash flows would fund short- and medium-term debt service and working-capital needs. At March 22, 2011, remaining commitments under newbuilding contracts totaled approximately $157 million; the year-end commitment disclosure reported $195.5 million of newbuilding commitments.
Interest-rate swaps fixed approximately $2.2 billion of floating-rate debt, including equity-accounted subsidiaries. Management estimated that a one-percentage-point interest-rate change would affect annual interest expense by approximately $6.0 million, including the effect of contractual interest-adjustment clauses.
Guidance, outlook, commentary and risks
- Management expected continued growth through selective acquisitions, asset diversification and medium- to long-term fixed-rate charters. No formal earnings guidance was provided.
- 2011 market commentary indicated continued weakness and volatility in tanker rates because of fleet growth and newbuilding deliveries; relatively healthy conditions for smaller drybulk vessels; slower but improving containership rates; and continued strength in offshore drilling and supply markets.
- Post-year-end activity included the acquisition of the Soehanah jack-up rig, delivery of the SFL Sara drybulk carrier, additional drybulk financing, a $125 million convertible bond issue due 2016, sales of two single-hull VLCCs and an agreement involving two 13,800-TEU containerships with 15-year charters.
- Cash distributions remain discretionary and subject to debt covenants, charterer performance, subsidiary restrictions and the availability of distributable cash. A $0.38 per share cash dividend was declared on February 18, 2011.
- Frontline accounted for approximately 70% of 2010 operating revenues, creating substantial customer and counterparty concentration. Seadrill guarantees the charters for the drilling units held in equity-accounted subsidiaries.
- Key risks include high leverage and refinancing needs, vessel-value declines and covenant pressure, floating-rate exposure, volatile charter and day rates, charterer defaults, dependence on Frontline and Seadrill affiliates, purchase options, single-hull tanker phase-outs, environmental and safety regulation, piracy, political disruption, sanctions, insurance limitations and litigation.
- The filing identifies related-party conflicts because Hemen and associated trusts had approximately 43.1% ownership and interests in Frontline, Seadrill, Golden Ocean and Deep Sea. Related-party charter, management and financing arrangements may not be as favorable as comparable arm’s-length arrangements.
- The company believes it is not a passive foreign investment company and qualifies for the U.S. shipping-income exemption under Section 883, but states that the IRS or a court could reach a different conclusion. Liberian tax exemption status also remains dependent on the validity of applicable regulations and legislation.
- Management reported effective disclosure controls and internal control over financial reporting, and the independent auditor issued an unqualified opinion.
Most important facts for investors to verify
- Reconcile consolidated debt of $1.92 billion with approximately $3.7 billion of total indebtedness including equity-accounted subsidiaries and review maturities, guarantees and covenant requirements.
- Assess Frontline’s approximately 70% revenue contribution, restricted cash support and guarantees, including the weaker protections for Frontline Shipping III.
- Review the sustainability of dividends against operating cash flow, debt service, newbuilding commitments and contractual distribution restrictions.
- Evaluate the effect of single-hull tanker sales and phase-outs, charter termination options, vessel purchase options and expected changes in lease accounting.
- Review derivative valuations, hedge effectiveness and the estimated $602 million net interest-rate exposure, including the potential impact of higher LIBOR and NIBOR.
- Confirm the status, cost and financing of post-year-end acquisitions and newbuildings, including the $125 million convertible bonds and the two large containership transactions.
- Examine related-party transactions, affiliate guarantees, management fees and potential conflicts involving Hemen-controlled or affiliated companies.
- Confirm tax positions concerning U.S. Section 883 eligibility, PFIC status and Liberian tax treatment.