Genco Shipping & Trading Limited — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Unless noted otherwise, amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions. The company operates a global drybulk shipping fleet.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Voyage revenue | $92.3m | $51.2m | $255.3m | $134.8m |
| Operating income (loss) | $12.1m | ($23.8m) | ($25.5m) | ($39.6m) |
| Net income (loss) | $5.7m | ($31.2m) | ($51.2m) | ($61.3m) |
| Basic EPS | $0.14 | ($0.90) | ($1.37) | ($1.80) |
| Operating cash flow | Not presented quarterly | $43.4m | $3.7m |
- Q3 operating margin was approximately 13.1% and net margin 6.2%; nine-month operating and net margins were negative, approximately 10.0% and 20.1%, respectively.
- Average fleet time-charter-equivalent (TCE) rate increased 26.6% to $10,696 per day in Q3 and 39.1% to $10,710 per day for the nine-month period. Fleet utilization was 98.5% in both 2018 periods.
- Management-reported EBITDA, a non-GAAP measure, was $29.6m in Q3 versus negative $6.0m, and $20.9m for nine months versus $14.5m.
- At September 30, cash and cash equivalents were $165.7m, with a further $0.3m restricted. Current assets were $237.3m and current liabilities $109.6m, representing working capital of $127.7m. Operating cash flow improved, while cash, cash equivalents and restricted cash fell from $204.9m at year-end 2017 to $166.0m.
- Gross debt principal was $568.0m; balance-sheet debt, net of financing costs, was $550.8m, including $66.3m current. Gross debt less cash and cash equivalents was approximately $402.3m. Debt is floating-rate; a 1 percentage-point LIBOR increase was estimated to add $3.8m to interest expense for the nine-month period.
Changes versus prior comparable periods
- Q3 revenue rose 80.3% year over year and the company returned to quarterly profitability. Nine-month revenue rose 89.4%, but the company remained loss-making.
- Higher rates and greater use of spot voyage charters drove revenue growth. Voyage expenses rose substantially because the owner bears fuel and port costs on voyage charters; accordingly, revenue and expense comparisons reflect a different charter mix as well as market improvement.
- ASC 606 was adopted in 2018 using the modified retrospective method. It changed timing and contract-cost accounting for spot voyage charters; Q3 reported revenue was $2.9m lower and net income $1.8m lower than under the prior method. Prior-year amounts were not restated.
- Nine-month 2018 results included $56.6m of vessel impairment, compared with $22.0m in 2017, and a $4.5m loss on debt extinguishment. Impairments related mainly to nine older vessels designated for disposal. Q3 2018 had no impairment, compared with $18.7m in Q3 2017.
- Six vessels were acquired in Q3 for approximately $239m in aggregate; the company also sold two vessels during the quarter. A June equity offering of 7.015m shares generated $109.7m net proceeds, increasing shares outstanding.
Liquidity, capital allocation and outlook
- In June, the company refinanced prior facilities with a five-year $460m secured facility; in August, it added a $108m secured facility to help finance six vessel acquisitions. Both were fully drawn at quarter-end. The company said it believed it was in compliance with both facilities’ covenants.
- Quarterly principal amortization under the facilities was scheduled to begin December 31, 2018, totaling approximately $16.6m. The company stated that capital resources were sufficient to fund operations for at least the next twelve months, while noting higher expected cash needs from debt amortization and environmental upgrades.
- Management described drybulk market conditions as stronger than in Q2, citing higher freight rates, strong raw-material demand and reduced newbuilding deliveries. Its commercial strategy favors short-term employment to retain flexibility in a potentially rising market. No formal earnings or rate guidance was provided; most current charters were due to expire between November 2018 and June 2019.
- The company planned scrubber installations on its 17 Capesize vessels in 2019, estimated at about $2m per vessel, and was discussing financing for a significant portion. It also planned to install ballast-water treatment systems on 41 vessels; estimated 2019 system costs were $14m, in addition to drydocking costs and off-hire. Vessels without scrubbers are expected to use more expensive compliant low-sulfur fuel from 2020.
- Risks include volatile drybulk rates and trade demand, charterer performance, floating-rate debt, vessel valuations and covenant collateral requirements, environmental compliance costs and fuel availability/pricing. The filing notes vessel covenant valuations were below carrying values for most vessels, with an aggregate difference of $276.2m for the specified fleet comparison, despite reported covenant compliance.
- Subsequent events: the Genco Cavalier sale closed in October; $4.9m of net proceeds remained restricted for 120 days pending replacement collateral or debt prepayment. Genco Muse was contracted for sale. Management expected approximately $1.2m net gain from the Genco Explorer, Muse and Cavalier sales in Q4, excluding sale expenses.
- A longstanding Baltic Trading shareholder lawsuit was dismissed, and the appeal period expired. The company said it knew of no other legal proceedings expected to have a material effect.
Important facts for investors to verify
- Whether subsequent vessel sales, proceeds, and any required prepayments or replacement collateral complied with facility terms.
- Debt amortization, covenant headroom, collateral values, and the effect of further LIBOR increases on cash interest.
- Realized charter rates as near-term fixtures expire, and whether the improved TCE rates persist.
- Actual scrubber and ballast-water system costs, financing, installation timing, off-hire losses, and low-sulfur fuel availability and cost.
- How ASC 606 timing effects and the unusually large vessel impairments affect comparability, cash generation, and reported asset values.