Star Bulk Carriers Corp. — FY 2017 Form 20-F
Reporting period: Fiscal year ended December 31, 2017. This is an annual report, not a stand-alone fourth-quarter filing; separate Q4 results are not clearly provided in the filing text. Financial statements are prepared under U.S. GAAP and amounts below are in U.S. dollars unless stated otherwise.
Business context
Star Bulk owns and operates dry-bulk vessels transporting commodities including iron ore, coal, grain and fertilizers. At December 31, 2017, the operating fleet comprised 71 vessels; by February 27, 2018, the company reported 72 operating vessels and two Newcastlemax newbuildings scheduled for April delivery. Management expected a fully delivered fleet of 74 vessels with capacity of approximately 8.2 million dwt.
Key financial metrics
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Voyage revenue | $332.0 million | $222.0 million |
| Operating income (loss) | $38.8 million | $(109.3) million |
| Net income (loss) | $(9.8) million | $(154.2) million |
| Basic and diluted loss per share | $(0.16) | $(3.24) |
| Net cash from (used in) operating activities | $81.0 million | $(33.4) million |
| Cash and cash equivalents at year-end | $257.9 million | $181.8 million |
| Total assets | $2,145.8 million | $2,011.7 million |
| Total liabilities | $1,057.7 million | $974.5 million |
- Revenue and operating performance: Voyage revenue rose approximately 50%. Fleet time-charter-equivalent (TCE) rate increased to $10,393 per day from $6,208; utilization was 100% versus 96%. Voyage revenue less voyage expenses was $267.3 million, compared with $156.2 million.
- Margins: Operating margin was approximately 11.7% in 2017 versus a negative 49.2% in 2016; net margin was approximately negative 2.9% versus negative 69.4%. These comparisons reflect, among other items, the absence of impairment charges in 2017 and the $29.2 million impairment recorded in 2016.
- Costs and financing: Vessel operating expenses were $101.4 million, up from $98.8 million; general and administrative expenses rose to $31.0 million from $24.6 million, including $9.3 million of stock-based compensation. Interest and finance costs increased to $50.5 million from $41.2 million.
- Cash flow: Investing activities used $126.9 million, mainly for newbuilding and vessel expenditures; financing activities provided $122.0 million. Year-end working-capital surplus was $93.4 million, down from $200.3 million, primarily because debt repayments had been deferred in 2016.
- Debt and liquidity: Borrowings, including capital leases and senior notes, totaled approximately $1,027.2 million at year-end; management reported a debt-to-total-capitalization ratio of about 49%. The balance sheet showed $174.0 million of current long-term debt and $219.3 million of total current liabilities. The company also reported $15.6 million of legally restricted cash and a $51.4 million minimum-liquidity requirement not legally restricted.
Material changes versus FY 2016
- The dry-bulk market recovery drove the higher TCE rate, revenue and operating cash flow; all vessels laid up during 2016 were reactivated in 2017.
- Operating results improved from a $109.3 million loss to $38.8 million of operating income. Net loss narrowed substantially, but the company remained loss-making after financing costs, taxes and other expenses.
- 2017 included a $2.6 million net gain on vessel sales, compared with a $15.2 million net loss on sales in 2016. No impairment was recorded in 2017; 2016 included a $29.2 million impairment charge.
- In November 2017, the company issued $50 million of 8.30% senior notes due 2022 and used the proceeds to redeem its $50 million 8.00% notes due 2019. The refinancing extended maturity but increased the coupon.
- The company raised approximately $50.4 million net through a February 2017 private share placement, increasing year-end shares outstanding to 64.2 million from 56.6 million.
Outlook, risks and unusual items
- Management outlook: Management expected medium-term freight-rate improvement, citing reduced fleet growth and dry-bulk demand. It intended to keep vessels mainly in spot, short-term time-charter or voyage markets to participate in potential rate increases. This is a market view, not quantified company earnings guidance.
- Liquidity and debt actions: Management stated that cash and operating cash flow should meet liquidity needs through at least the first quarter of 2019. After the 2016 restructuring deferred principal payments and relaxed covenants, the company said it would resume repayments early under the cash-sweep mechanism. It paid $35.6 million to lenders in February 2018 for year-end excess cash. Refinancing term sheets for the Commerzbank facility and ABN AMRO balloon payments were subject to definitive documentation.
- Capital commitments: The remaining two April 2018 newbuildings required substantial delivery funding. The filing cited expected payments of $74.3 million as of February 27, 2018, with $40 million of secured financing committed for one vessel and up to $30 million expected for the other.
- Market and balance-sheet risks: The business is materially exposed to volatile spot freight rates, vessel values, fuel costs and LIBOR. As of February 27, 2018, 57 of 72 operating vessels were in the spot market and 15 were on medium- to long-term charters, averaging approximately 0.85 years remaining. Debt agreements include financial and operating restrictions, cross-default provisions and dividend limitations.
- Vessel values: At year-end, management estimated that 54 operating vessels and two newbuildings had charter-free market values below carrying amounts, with an aggregate estimated gap of $327.7 million. No impairment was recorded because management’s projected undiscounted cash flows supported the carrying values; those projections depend on market-sensitive assumptions.
- Dividends: No dividends were paid in 2017, and financing agreements prohibit dividends until deferred amounts are repaid in full, subject to other covenant conditions.
- Unusual and contingent matters: Other operating gains included a $2.1 million commercial-dispute settlement and insurance recoveries. The company’s claim against the Star Polaris shipyard remained pending for repair-cost quantification; its revenue-loss claim had been dismissed. A shareholder lawsuit concerning the 2014 acquisitions was dismissed, and the U.S. Supreme Court denied further review in November 2017.
- Other risks: One customer accounted for 14% of 2017 voyage revenue. The filing also highlights environmental compliance costs, including future low-sulfur fuel requirements, ballast-water treatment, counterparty risk, China and global trade conditions, and related-party and controlling-shareholder conflicts.
Investor facts to verify
- Confirm the actual 2018 debt repayments, cash-sweep amounts, and completion and terms of the announced refinancing transactions.
- Assess how much of the reported $257.9 million cash balance is available after restricted cash, minimum-liquidity requirements, debt service and newbuilding payments.
- Review the assumptions behind vessel impairment testing and monitor vessel market values relative to carrying values.
- Track spot-market exposure, charter renewals, freight rates, customer concentration and the impact of the 2018 low-sulfur fuel rules on costs.
- Review the 8.30% notes’ covenants and redemption terms, floating-rate debt exposure, and the expiration of interest-rate swaps in 2018.
- Consider dilution from equity incentives and the governance implications of Oaktree’s approximately 50.8% beneficial ownership as of February 27, 2018, subject to voting restrictions.
Audit and controls: Ernst & Young issued an unqualified opinion on the FY 2017 financial statements and reported effective internal control over financial reporting as of December 31, 2017.