UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-37836-1
INTERNATIONAL SEAWAYS, INC.
(Exact name of registrant as specified in its charter)
Marshall Islands
98-0467117
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
600 Third Avenue, 39th Floor, New York, New York
10016
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: 212-578-1600
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☒
Emerging growth company ☐
Non-accelerated filer ☐
Smaller reporting company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock (no par value)
INSW
New York Stock Exchange
8.5% Senior Notes due 2023
INSW - PA
Former name, former address and former fiscal year, if changed since last report
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date. The number of shares outstanding of the issuer’s common stock as of May 2, 2022: common stock, no par value 49,660,837 shares.
INTERNATIONAL SEAWAYS, INC.CONDENSED CONSOLIDATED BALANCE SHEETSDOLLARS IN THOUSANDS(UNAUDITED)
March 31, 2022
December 31, 2021
ASSETS
Current Assets:
Cash and cash equivalents
$
74,553
97,883
Voyage receivables, net of allowance for credit losses of $27 and $31
including unbilled receivables of $113,633 and $100,137
120,465
107,096
Other receivables
7,368
5,651
Inventories
2,335
2,110
Prepaid expenses and other current assets
16,558
11,759
Current portion of derivative asset
2,061
—
Vessels held for sale
23,148
Total Current Assets
246,488
224,499
Restricted cash
1,051
1,050
Vessels and other property, less accumulated depreciation of $266,771 and $249,336
1,773,264
1,802,850
Vessels construction in progress
60,034
49,291
Deferred drydock expenditures, net
60,473
55,753
Operating lease right-of-use assets
23,425
23,168
Investments in and advances to affiliated companies
183,361
180,331
Long-term derivative asset
5,959
1,296
Time charter contracts acquired, net
502
842
Other assets
12,036
7,700
Total Assets
2,366,593
2,346,780
LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable, accrued expenses and other current liabilities
56,116
44,964
Current portion of operating lease liabilities
10,767
8,393
Current installments of long-term debt
178,391
178,715
Current portion of derivative liability
2,539
Total Current Liabilities
245,274
234,611
Long-term operating lease liabilities
10,814
12,522
Long-term debt
943,032
926,270
Long-term derivative liability
757
Other liabilities
2,023
2,288
Total Liabilities
1,201,143
1,176,448
Commitments and contingencies
Equity:
Capital - 100,000,000 no par value shares authorized; 49,641,506 and 49,612,019
shares issued and outstanding
1,588,606
1,591,446
Accumulated deficit
(422,339)
(409,338)
1,166,267
1,182,108
Accumulated other comprehensive loss
(1,401)
(12,360)
Total equity before noncontrolling interests
1,164,866
1,169,748
Noncontrolling interests
584
Total Equity
1,165,450
1,170,332
Total Liabilities and Equity
See notes to condensed consolidated financial statements
1
INTERNATIONAL SEAWAYS, INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSDOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS(UNAUDITED)
Three Months Ended March 31,
2022
2021
Shipping Revenues:
Pool revenues, including $23,271 and $17,247
from companies accounted for by the equity method
83,762
24,659
Time and bareboat charter revenues
6,175
14,698
Voyage charter revenues
11,545
7,399
101,482
46,756
Operating Expenses:
Voyage expenses
3,507
1,587
Vessel expenses
60,317
26,327
Charter hire expenses
7,309
5,741
Depreciation and amortization
27,000
16,754
General and administrative
10,166
8,181
Third-party debt modification fees
187
(Gain)/loss on disposal of vessels and other assets, net of impairments
(1,376)
11
Total operating expenses
107,110
58,601
Loss from vessel operations
(5,628)
(11,845)
Equity in income of affiliated companies
5,597
5,468
Operating loss
(31)
(6,377)
Other (expense)/income
(226)
292
Loss before interest expense and income taxes
(257)
(6,085)
Interest expense
(12,740)
(7,280)
Loss before income taxes
(12,997)
(13,365)
Income tax provision
(4)
Net loss attributable to the Company
(13,001)
Weighted Average Number of Common Shares Outstanding:
Basic and diluted
49,571,337
28,023,815
Per Share Amounts:
Basic and diluted net loss per share
(0.26)
(0.48)
2
INTERNATIONAL SEAWAYS, INC.CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)DOLLARS IN THOUSANDS(UNAUDITED)
Net loss
Other comprehensive income/(loss), net of tax:
Net change in unrealized losses on cash flow hedges
10,762
10,283
Defined benefit pension and other postretirement benefit plans:
Net change in unrecognized prior service costs
26
(8)
Net change in unrecognized actuarial losses
171
(56)
Other comprehensive income, net of tax
10,959
10,219
Comprehensive loss attributable to the Company
(2,042)
(3,146)
3
INTERNATIONAL SEAWAYS, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSDOLLARS IN THOUSANDS(UNAUDITED)
Cash Flows from Operating Activities:
Items included in net loss not affecting cash flows:
Loss on write-down of vessels and other assets
1,697
Amortization of debt discount and other deferred financing costs
855
540
Amortization of time charter hire contracts acquired
340
Deferred financing costs write-off
133
Stock compensation
1,108
1,037
Earnings of affiliated companies
(5,597)
(5,468)
Write-off of registration statement costs
694
Other – net
580
425
Items included in net loss related to investing and financing activities:
(Gain)/loss on disposal of vessels and other assets, net
(3,073)
Cash distributions from affiliated companies
2,250
2,825
Payments for drydocking
(17,570)
(8,594)
Insurance claims proceeds related to vessel operations
954
528
Changes in operating assets and liabilities:
Increase in receivables
(13,369)
(2,740)
Decrease in deferred revenue
(2,995)
Net change in inventories, prepaid expenses and other current assets, accounts
payable, accrued expenses and other current and long-term liabilities
(2,088)
(10,658)
Net cash used in operating activities
(19,781)
(21,006)
Cash Flows from Investing Activities:
Expenditures for vessels and vessel improvements
(37,989)
(3,281)
Proceeds from disposal of vessels and other property, net
24,257
(11)
Expenditures for other property
(390)
(179)
Investments in and advances to affiliated companies, net
(527)
54
Net cash used in investing activities
(14,649)
(3,417)
Cash Flows from Financing Activities:
Extinguishment of debt
(10,981)
Payments on debt
(35,284)
(15,371)
Proceeds from sale and leaseback financing, net of issuance and deferred financing costs
20,401
Payments on sale and leaseback financing
(9,085)
Borrowings on revolving credit facilities
50,000
Cash payments on derivatives containing other-than-insignificant financing element
(1,312)
Cash dividends paid
(2,980)
(1,681)
Cash paid to tax authority upon vesting of stock-based compensation
(970)
(489)
Net cash provided by/(used in) financing activities
11,101
(18,853)
Net decrease in cash, cash equivalents and restricted cash
(23,329)
(43,276)
Cash, cash equivalents and restricted cash at beginning of year
98,933
215,677
Cash, cash equivalents and restricted cash at end of period
75,604
172,401
4
INTERNATIONAL SEAWAYS, INC.CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITYDOLLARS IN THOUSANDS(UNAUDITED)
Accumulated
Other
Comprehensive
Noncontrolling
Capital
Deficit
Loss
Interests
Total
For the three months ended
Balance at January 1, 2022
Other comprehensive income
Dividends declared
(2,978)
Forfeitures of vested restricted stock awards
Compensation relating to restricted stock awards
296
Compensation relating to restricted stock units awards
501
Compensation relating to stock option awards
311
Balance at March 31, 2022
Balance at January 1, 2021
1,280,501
(275,846)
(32,613)
972,042
202
542
293
Balance at March 31, 2021
1,279,368
(289,211)
(22,394)
967,763
5
INTERNATIONAL SEAWAYS, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)
Note 1 — Basis of Presentation:
The accompanying unaudited condensed consolidated financial statements include the accounts of International Seaways, Inc. (“INSW”), a Marshall Islands corporation, and its wholly owned subsidiaries. Unless the context indicates otherwise, references to “INSW”, the “Company”, “we”, “us” or “our”, refer to International Seaways, Inc. and its subsidiaries. As of March 31, 2022, the Company’s operating fleet consisted of 84 wholly-owned, finance leased or bareboat chartered-in and time-chartered-in oceangoing vessels, including two vessels in which the Company has interests through its joint ventures, engaged primarily in the transportation of crude oil and refined petroleum products in the International Flag trade through its wholly owned subsidiaries. In addition to its operating fleet, three dual-fuel LNG-powered VLCC newbuilds are scheduled for delivery to the Company in the first quarter of 2023, bringing the total operating and newbuild fleet to 87 vessels as of March 31, 2022. Subsequent to March 31, 2022, the Company sold and delivered two Panamaxes and a Handysize product carrier to buyers (see Note 6, “Vessels”).
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. They do not include all of the information and notes required by generally accepted accounting principles in the United States. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results have been included. Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022.
The condensed consolidated balance sheet as of December 31, 2021 has been derived from the audited financial statements at that date but does not include all of the information and notes required by generally accepted accounting principles in the United States for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
All intercompany balances and transactions within INSW have been eliminated. Investments in 50% or less owned affiliated companies, in which INSW exercises significant influence, are accounted for by the equity method.
Note 2 — Merger Transaction:
Completion of Merger Transaction
On July 16, 2021 (the “Effective Time”), pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) dated as of March 30, 2021, by and among INSW, Diamond S Shipping Inc., a Republic of the Marshall Islands corporation (“Diamond S”), and Dispatch Transaction Sub, Inc., a Republic of the Marshall Islands corporation and wholly-owned subsidiary of INSW (“Merger Sub”), Merger Sub merged with and into Diamond S (the “Merger”), with Diamond S surviving such merger as a wholly owned subsidiary of INSW. Immediately following the Effective Time, the Company contributed all of the outstanding stock of Diamond S to International Seaways Operating Corporation, a direct wholly-owned subsidiary of the Company.
At the Effective Time, each common share of Diamond S (the “Diamond S Common Shares”) issued and outstanding immediately prior to the Effective Time (excluding Diamond S Common Shares owned by Diamond S, the Company, Merger Sub or any of their respective direct or indirect wholly-owned subsidiaries) was cancelled in exchange for the right to receive 0.55375 of a share of common stock of the Company (the “INSW Common Stock”) and cash payable in respect of fractional shares. The aforementioned 0.55375 exchange ratio set forth in the Merger Agreement resulted in the issuance of 22,536,647 shares of INSW Common Stock, with the pre-Merger INSW shareholders and the former Diamond S shareholders owning approximately 55.75% and 44.25%, respectively, of the 50,674,393 issued and outstanding common stock of the Company immediately following the Effective Time.
As provided for under the terms of the Merger Agreement, on July 15, 2021, prior to the Effective Time, INSW paid a special dividend to its shareholders of record as of July 14, 2021 in an aggregate amount equal to $31.5 million ($1.12 per share).
6
Note 3 — Significant Accounting Policies:
For a description of all of the Company’s material accounting policies, see Note 2, “Summary of Significant Accounting Policies,” to the Company’s consolidated financial statements as of and for the year ended December 31, 2021 included in the Company’s Annual Report on Form 10-K. The following is a summary of any changes or updates to the Company’s critical accounting policies for the current period:
Cash, cash equivalents and restricted cash — Interest-bearing deposits that are highly liquid investments and have a maturity of three months or less when purchased are included in cash and cash equivalents. Restricted cash of $1.1 million as of March 31, 2022 and December 31, 2021 represents legally restricted cash relating to the Company’s Macquarie Credit Facility (See Note 10, “Debt”). Such facilities stipulate that cash accounts be maintained which are limited in their use to pay expenses related to drydocking the vessels and servicing the debt facilities.
Concentration of Credit Risk — The allowance for credit losses is recognized as an allowance or contra-asset and reflects our best estimate of probable losses inherent in the voyage receivables balance. Activity for allowance for credit losses is summarized as follows:
(Dollars in thousands)
Allowance for Credit Losses - Voyage Receivables
Balance at December 31, 2021
31
Reversal of expected credit losses
27
We are also exposed to credit losses from off-balance sheet exposures related to guarantees of joint venture debt. See Note 7, “Equity Method Investments,” for more information on these off-balance sheet exposures.
During the three months ended March 31, 2022 and 2021, the Company did not have any individual customers who accounted for 10% or more of its revenues apart from the pools in which it participates. The pools in which the Company participates accounted in aggregate for 94% and 93% of consolidated voyage receivables at March 31, 2022 and December 31, 2021, respectively.
Deferred finance charges — Finance charges, excluding original issue discount, incurred in the arrangement and/or amendments resulting in the modification of debt are deferred and amortized to interest expense on either an effective interest method or straight-line basis over the term of the related debt. Unamortized deferred finance charges of $4.4 million and $3.7 million relating to the $390 Million Facility Revolving Loan and BoComm Lease Financing (See Note 10, “Debt”) as of March 31, 2022 and December 31, 2021, respectively, are included in other assets in the accompanying condensed consolidated balance sheets. Unamortized deferred financing charges of $9.6 million and $9.9 million relating to the Company’s outstanding debt facilities as of March 31, 2022 and December 31, 2021, respectively, are included in long-term debt in the accompanying condensed consolidated balance sheets. Interest expense relating to the amortization of deferred financing charges amounted to $0.6 million and $0.5 million for the three months ended March 31, 2022 and 2021, respectively.
Vessels construction in progress — Interest costs are capitalized to vessels during the period that vessels are under construction. Interest capitalized during the three months ended March 31, 2022 totaled $0.7 million.
Time Charter Contracts Acquired — The Company’s intangible assets consist of charter-out contracts with contractual rates in excess of fair market charter rates that were acquired as part of the Merger. These assets are amortized on a straight-line basis as a reduction of time charter revenues over the remaining term of such charters. For the three months ended March 31, 2022, amortization totaled $0.3 million.
Recently Issued Accounting Standards — In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (ASC 848),
7
which provides relief for companies preparing for discontinuation of interest rates such as LIBOR. A contract modification is eligible to apply the optional relief to account for the modifications as a continuation of the existing contracts without additional analysis and consider embedded features to be clearly and closely related to the host contract without reassessment, if all of the following criteria are met: (1) contract references a rate that will be discontinued; (2) modified terms directly replace (or have potential to replace) this reference rate; and (3) changes to any other terms that change (or have potential to change) amount and timing of cash flows must be related to replacement of the reference rate. In addition, this guidance provides relief from certain hedge accounting requirements. Hedge accounting may continue uninterrupted when critical terms change due to reference rate reform. For cash flow hedges, entities can (1) disregard potential discontinuation of a referenced interest rate when assessing whether a hedged forecasted interest payment is probable; (2) continue hedge accounting upon a change in the hedged risk as long as the hedge is still highly effective; (3) assess effectiveness of the hedge relationship in ways that essentially disregards a potential mismatch in the variable rate indices between the hedging instrument and the hedged item; and (4) disregard the requirement that individual hedged transactions must share the same risk exposure for hedges of portfolios of forecasted transactions that reference a rate affected by reference rate reform. Relief provided by this ASU is optional and expires December 31, 2022. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (ASC 848) to refine the scope of ASC 848 and to clarify some of its guidance. The Company has determined that its primary exposure to LIBOR is in relation to its floating rate debt facilities and the interest rate derivatives to which it is a party. On November 30, 2020, the benchmark administrator for the U.S. Dollar (“USD”) LIBOR announced a proposal to extend the publication of the most commonly used USD LIBOR settings until June 30, 2023. In light of this proposal, in an interagency statement, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency issued guidance, strongly encouraging banks to cease entering into new contracts that use USD LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021. Only in limited circumstances will it be appropriate for banks to enter into new contracts referencing USD LIBOR after December 31, 2021. The principal objective, and result, of these actions appears to be that legacy USD LIBOR-based instruments (i.e., those maturing after December 31, 2021) may continue to use USD LIBOR as a reference rate through June 30, 2023, without undermining the regulators’ determination that LIBOR should not be available for any other purpose. On January 25, 2021, the International Swaps and Derivatives Association, Inc. (“ISDA”), published new fallback provisions for derivatives linked to key interbank offered rates (“IBOR”) which will be incorporated into all new derivatives contracts that reference ISDA’s standard interest rate derivatives definitions. Such fallback provisions will also be included in legacy non-cleared derivatives if the counterparties have bilaterally agreed to include them or both have adhered to the IBOR fallback protocol. The Company has engaged and will continue to engage in discussions with its lending banks and the counterparties to its interest rate derivative contracts in advance of the June 30, 2023 sunset date for the USD LIBOR reference rate settings used in its agreements to evaluate the Company’s options. Based on information available today, the Company’s current view is that the Secured Overnight Financing Rate (“SOFR”) will be the alternative reference rate that the Company’s LIBOR-based agreements will transition to as the sunset date draws closer.
Note 4 — Earnings per Common Share:
Basic earnings per common share is computed by dividing earnings, after the deduction of dividends and undistributed earnings allocated to participating securities, by the weighted average number of common shares outstanding during the period.
The computation of diluted earnings per share assumes the issuance of common stock for all potentially dilutive stock options and restricted stock units not classified as participating securities. Participating securities are defined by ASC 260, Earnings Per Share, as unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents and are included in the computation of earnings per share pursuant to the two-class method.
Weighted average shares of unvested restricted common stock considered to be participating securities totaled 87,117 and 51,087 for the three months ended March 31, 2022 and 2021, respectively. Such participating securities are allocated a portion of income, but not losses under the two-class method. As of March 31, 2022, there were 196,473 shares of restricted stock units and 811,906 stock options outstanding and considered to be potentially dilutive securities.
8
Reconciliations of the numerator of the basic and diluted earnings per share computations are as follows:
Net (loss)/income attributable to the Company allocated to:
Common Stockholders
(13,006)
(13,368)
Participating securities
For the three months ended March 31, 2022 and 2021 earnings per share calculations, there were no dilutive equity awards outstanding. Awards of 1,026,418 and 944,477 for the three months ended March 31, 2022 and 2021, respectively, were not included in the computation of diluted earnings per share because inclusion of these awards would be anti-dilutive.
Note 5 — Business and Segment Reporting:
The Company has two reportable segments: Crude Tankers and Product Carriers. The Company’s investments in and equity in income of the joint ventures with two floating storage and offloading service vessels are included in the Crude Tankers Segment. Adjusted income/(loss) from vessel operations for segment purposes is defined as income/(loss) from vessel operations before general and administrative expenses, third-party debt modification fees and loss/(gain) on disposal of vessels and other property, including impairments. The accounting policies followed by the reportable segments are the same as those followed in the preparation of the Company’s condensed consolidated financial statements.
Information about the Company’s reportable segments as of and for the three months ended March 31, 2022 and 2021 follows:
Crude
Product
Tankers
Carriers
Totals
Three months ended March 31, 2022:
Shipping revenues
39,610
61,872
Time charter equivalent revenues
36,475
61,500
97,975
15,152
11,841
Loss/(gain) on disposal of vessels and other assets, including impairments
1,843
(3,219)
Adjusted income/(loss) from vessel operations
(5,842)
9,198
(7)
3,349
Investments in and advances to affiliated companies at March 31, 2022
160,298
23,063
Adjusted total assets at March 31, 2022
1,465,035
803,077
2,268,112
14,608
23,381
37,989
7,660
9,910
17,570
Three months ended March 31, 2021:
37,510
9,246
35,950
9,219
45,169
13,003
3,728
23
Loss on disposal of vessels and other assets
Adjusted loss from vessel operations
(957)
(2,673)
(23)
(3,653)
Investments in and advances to affiliated companies at March 31, 2021
137,361
7,409
144,770
Adjusted total assets at March 31, 2021
1,115,421
255,220
1,370,641
2,666
615
3,281
3,088
5,506
8,594
9
Reconciliations of time charter equivalent (“TCE”) revenues of the segments to shipping revenues as reported in the condensed statements of operations follow:
Add: Voyage expenses
Consistent with general practice in the shipping industry, the Company uses time charter equivalent revenues, which represent shipping revenues less voyage expenses, as a measure to compare revenue generated from a voyage charter to revenue generated from a time charter. Time charter equivalent revenues, a non-GAAP measure, provide additional meaningful information in conjunction with shipping revenues, the most directly comparable GAAP measure, because it assists Company management in making decisions regarding the deployment and use of its vessels and in evaluating their financial performance.
Reconciliations of adjusted income/(loss) from vessel operations of the segments to loss before income taxes, as reported in the condensed consolidated statements of operations follow:
Total adjusted income/(loss) from vessel operations of all segments
General and administrative expenses
(10,166)
(8,181)
(187)
Gain/(loss) on disposal of vessels and other assets, including impairments
1,376
Consolidated loss from vessel operations
Reconciliations of total assets of the segments to amounts included in the condensed consolidated balance sheets follow:
March 31, 2021
Adjusted total assets of all segments
Corporate unrestricted cash and cash equivalents
156,178
16,223
Other unallocated amounts
22,877
9,010
Consolidated total assets
1,552,052
Note 6 — Vessels:
Impairment of Vessels and Other Property
The Company gave consideration as to whether events or changes in circumstances had occurred since December 31, 2021, that could indicate that the carrying amounts of the vessels in the Company’s fleet may not be recoverable. During the quarter ended March 31, 2022, the Company concluded that the contracted sales of one 2004-built Panamax and one 2006-built Handysize product carrier resulted in the recognition of held for sale impairments charges aggregating $1.2 million.
In addition, the Company concluded that the subsequent execution of a memorandum of agreement in April 2022 for the sale of a 2006-built Handysize product carrier constituted an impairment triggering event. In developing estimates of undiscounted future cash
10
flows for performing Step 1 of the impairment test as of March 31, 2022, a 100% probability was attributed to the Handysize product carrier being sold before the end of its useful life. The carrying value for the product carrier was determined to be unrecoverable in the Step 1 test. In estimating the fair value of the vessel for the purposes of Step 2 of the impairment test, the Company considered the market approach by using the sale price per the memorandum of agreement. Based on the test performed, an impairment charge of $0.5 million was recorded on the 2006-built Handysize product carrier to write-down its carrying value to its estimated fair value at March 31, 2022.
The Company also recognized an aggregate loss of approximately $0.7 million during the quarter ended March 31, 2022, related to the cost to terminate the purchase and installation contracts for ballast water treatment systems on three of the Company’s MRs that were sold during 2021.
Vessel Acquisitions and Construction Commitments
In January 2022, the Company entered into memoranda of agreements for the sale of a 2010-built MR for a sale price of $16.5 million and the purchase of a 2011-built LR1 for a purchase price of $19.5 million with the same counterparty. The LR1 was delivered into our niche commercial pool, Panamax International. The Company closed both transactions during the first quarter of 2022, with a net cash outflow of $3.0 million representing the difference in value between the two vessels. The LR1 vessel replaced the MR as collateral under the $525 Million Credit Facility with no further mandatory principal repayment required.
On March 11, 2021, the Company entered into agreements to construct three dual-fuel LNG-powered VLCCs at Daewoo Shipbuilding and Marine Engineering’s shipyard. The VLCCs will be able to burn LNG in their power plant, which will significantly reduce greenhouse gas emissions. Upon delivery to the Company in the first quarter of 2023, the vessels will be employed on seven-year time charter contracts with an oil major – Shell. The total construction cost for the vessels is approximately $290.0 million, which will be paid for through a combination of cash on hand and funds drawn from the BoComm Lease Financing (See Note 10, “Debt”). Accumulated expenditures of $60.0 million and $49.3 million (including capitalized interest costs of $1.3 million and $0.6 million) are included in vessels construction in progress in the accompanying condensed consolidated balance sheet as of March 31, 2022 and December 31, 2021, respectively. The remaining commitments on the contracts for the construction of these vessels as of March 31, 2022 was $230.6 million, of which the BoComm Lease Financing is expected to provide additional funding of $230.4 million over the course of the construction and delivery of the three vessels.
Disposal/Sales of Vessels
As discussed above, during the quarter ended March 31, 2022, the Company delivered a 2010-built MR to buyers and recognized an aggregate gain of $4.6 million. Also, during the quarter ended March 31, 2022, the Company entered into memoranda of agreements for the sales of one 2002-built Panamax, one 2004-built Panamax and one 2006-built Handysize product carrier, which were delivered to the buyers in April 2022. Costs to sell (mainly bunker consumption costs) totaling $0.8 million were recognized during the quarter for these three vessels, which were classified as vessels held for sale as of March 31, 2022.
In addition, in April 2022, the Company entered into memoranda of agreements for the sale of its three remaining 2006-built Handysize product carriers and one 2008-built MR, which are expected to be delivered to their buyers during the second quarter of 2022.
Note 7 — Equity Method Investments:
Investments in affiliated companies include joint ventures accounted for using the equity method. As of March 31, 2022, the Company had a 50% interest in two joint ventures - TI Africa Limited (“TI Africa”) and TI Asia Limited (“TI Asia”), which operate two Floating Storage and Offloading Service vessels that were converted from two ULCCs (collectively the “FSO Joint Venture”).
The FSO Joint Venture is a party to a number of contracts: (a) the FSO Joint Venture is an obligor pursuant to a guarantee facility agreement dated as of July 14, 2017, by and among, the FSO Joint Venture, ING Belgium NV/SA, as issuing bank, and Euronav and INSW, as guarantors (the “Guarantee Facility”); (b) the FSO Joint Venture is party to two service contracts with NOC (the “NOC
Service Contracts”) and (c) the FSO Joint Venture is a borrower under a $220 million secured credit facility by and among TI Africa and TI Asia, as joint and several borrowers, ABN AMRO Bank N.V. and ING Belgium SA/NV, as Lenders, Mandated Lead Arrangers and Swap Banks, and ING Bank N.V., as Agent and as Security Trustee. INSW severally guarantees the obligations of the FSO Joint Venture pursuant to the Guarantee Facility.
The FSO Joint Venture drew down on a $220 million credit facility in April 2018. The Company provided a guarantee for the $110 million FSO Term Loan portion of the facility, which has an interest rate of LIBOR plus two percent and amortizes through July 2022 and September 2022. INSW’s guarantee of the FSO Term Loan has financial covenants that provide (i) INSW’s Liquid Assets shall not be less than the higher of $50 million and 5% of Total Indebtedness of INSW, (ii) INSW shall have Cash of at least $30 million and (iii) INSW shall be in compliance with the Loan to Value Test (as such capitalized terms are defined in the Company guarantee). As of March 31, 2022, the maximum aggregate potential amount of future payments (undiscounted) that INSW could be required to make in relation to its equity method investees secured bank debt and interest rate swap obligations was $13.3 million and the carrying value of the Company’s guaranty in the accompanying condensed consolidated balance sheet was nil.
Investments in and advances to affiliated companies as reflected in the accompanying condensed consolidated balance sheet as of March 31, 2022 consisted of: FSO Joint Venture of $145.1 million and Other of $38.3 million, which primarily relates to working capital deposits that the Company maintains with commercial pools in which it participates.
A condensed summary of the results of operations of the joint ventures follows:
25,887
25,846
Ship operating expenses
(14,292)
(13,931)
Income from vessel operations
11,595
11,915
(543)
(1,212)
(1,029)
(993)
Net income
10,023
9,710
Note 8 — Variable Interest Entities (“VIEs”):
Consolidated VIEs
Diamond Anglo Ship Management Pte. Ltd. — Diamond Anglo Ship Management Pte. Ltd. (“DASM”) was formed in January 2018 by Diamond S and Anglo Eastern Investment Holdings Ltd. (“AE Holdings”), a third-party, to provide ship management services to some of Diamond S’ vessels. DASM is owned 51% by the Company and 49% by AE Holdings. AE Holdings does not participate in the income or equity of DASM. The Company is considered to be the primary beneficiary of DASM as the Company has the ability to direct the activities that most significantly impact the DASM’s economic performance. The results of operations and balance sheets of DASM are included in the accompanying condensed consolidated financial statements.
Unconsolidated VIEs
As of March 31, 2022, all of the six commercial pools in which the Company participates and the two FSO joint ventures were determined to be VIEs for which the Company is not considered a primary beneficiary.
12
The following table presents the carrying amounts of assets and liabilities in the condensed consolidated balance sheet related to the unconsolidated VIEs as of March 31, 2022:
Condensed Consolidated Balance Sheet
Investments in Affiliated Companies
181,960
In accordance with accounting guidance, the Company evaluated its maximum exposure to loss related to these unconsolidated VIEs by assuming a complete loss of the Company’s investment in these VIEs. The table below compares the Company’s liability in the condensed consolidated balance sheet to the maximum exposure to loss at March 31, 2022:
Maximum Exposure toLoss
Other Liabilities
–
195,271
In addition, as of March 31, 2022, the Company had approximately $106.9 million of trade receivables from the pools that were determined to be a VIE. These trade receivables, which are included in voyage receivables in the accompanying condensed consolidated balance sheet, have been excluded from the above tables and the calculation of INSW’s maximum exposure to loss. The Company does not record the maximum exposure to loss as a liability because it does not believe that such a loss is probable of occurring as of March 31, 2022.
Note 9 — Fair Value of Financial Instruments, Derivatives and Fair Value Disclosures:
The estimated fair values of the Company’s financial instruments, other than derivatives that are not measured at fair value on a recurring basis, categorized based upon the fair value hierarchy, are as follows:
Fair Value Level
Cash and cash equivalents (1)
Level 1
$390 Million Facility Term Loan
(172,766)
(191,050)
Level 2
$525 Million Facility Term Loan
(198,265)
(216,289)
$525 Million Facility Revolving Loan
(94,193)
(44,193)
$360 Million Facility Term Loan
(96,413)
(105,325)
$360 Million Facility Revolving Loan
(38,889)
Macquarie Credit Facility
(18,950)
(19,475)
ING Credit Facility
(24,479)
(25,000)
Ocean Yield Lease Financing
(363,105)
(370,305)
BoComm Lease Financing
(14,411)
(9,608)
Toshin Lease Financing
(16,677)
(16,995)
Hyuga Lease Financing
(16,386)
n/a
COSCO Lease Financing
(51,493)
(52,746)
8.5% Senior Notes
(25,833)
(25,940)
13
Derivatives
Derivatives are recorded on a net basis by counterparty when a legal right of offset exists. The Company had the following amounts recorded on a gross basis by transaction in the accompanying unaudited condensed consolidated balance sheets related to the Company’s use of derivatives as of March 31, 2022 and December 31, 2021:
Long-term derivative assets
Current portion of derivative liabilities
Long-term derivativeliabilities
March 31, 2022:
Derivatives designated as hedging instruments:
Interest rate swaps
December 31, 2021:
(2,539)
(757)
The following tables present information with respect to gains and losses on derivative positions reflected in the condensed consolidated statements of operations or in the condensed consolidated statements of comprehensive income.
The effect of cash flow hedging relationships recognized in other comprehensive income excluding amounts reclassified from accumulated other comprehensive loss, including hedges of equity method investees, for the three months ended March 31, 2022 and 2021 follows:
9,058
7,747
Other-than-insignificant financing element of derivatives:
(466)
Total other comprehensive income
7,281
The effect of cash flow hedging relationships on the condensed consolidated statement of operations is presented excluding hedges of equity method investees. The effect of the Company’s cash flow hedging relationships on the condensed consolidated statement of operations for the three months ended March 31, 2022 and 2021 follows:
992
1,115
Discontinued hedging instruments:
Interest rate swap
582
1,593
Total interest expense
1,574
2,708
14
See Note 13, “Accumulated Other Comprehensive Loss,” for disclosures relating to the impact of derivative instruments on accumulated other comprehensive loss.
The following table presents the fair values, which are pre-tax, for assets and liabilities measured on a recurring basis (excluding investments in affiliated companies):
Derivative Assets (interest rate swaps)
8,020
Level 2(1)
Derivative Liabilities (interest rate swaps)
(3,296)
The following table summarizes the fair values of assets for which impairment charges were recognized for the three months ended March 31, 2022:
Fair Value
Total ImpairmentCharges
Crude Tankers - Vessels held for sale (1)(2)
7,561
(1,019)
Product Carriers - Vessels held for sale (1) (2)
9,850
(207)
Product Carriers - Vessels held for use (1) (2)
9,575
(471)
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Note 10 — Debt:
Debt consists of the following:
$390 Million Facility Term Loan, due 2025, net of unamortized deferred finance costs of $1,997 and $2,357
170,769
188,693
$525 Million Facility Term Loan, due 2024
198,265
216,289
$525 Million Facility Revolving Loan, due 2024
94,193
44,193
$360 Million Facility Term Loan, due 2024
96,413
105,325
$360 Million Facility Revolving Loan, due 2024
38,889
Macquarie Credit Facility, due 2025, net of unamortized deferred finance costs of $706 and $755
18,244
18,720
ING Credit Facility, due 2026, net of unamortized deferred finance costs of $513 and $546
23,966
24,454
Ocean Yield Lease Financing, due 2031, net of unamortized deferred finance costs of $3,632 and $3,799
359,474
366,506
BoComm Lease Financing, due 2030, net of unamortized deferred finance costs of $150 and $114
14,261
9,494
Toshin Lease Financing, due 2031, net of unamortized deferred finance costs of $417 and $428
16,260
16,567
COSCO Lease Financing, due 2028, net of unamortized deferred finance costs of $1,375 and $1,353
50,118
51,393
Hyuga Lease Financing, due 2031, net of unamortized deferred finance costs of $361
16,025
8.5% Senior Notes, due 2023, net of unamortized deferred finance costs of $454 and $538
24,546
24,462
1,121,423
1,104,985
Less current portion
(178,391)
(178,715)
Long-term portion
Capitalized terms used hereafter have the meaning given in these condensed consolidated financial statements or in the respective transaction documents referred to below, including subsequent amendments thereto.
On March 4, 2022, the Company borrowed $50.0 million under the $525 Million Facility Revolving Loan. As of March 31, 2022, the available amounts under the $390 Million Facility Revolving Loan, the $525 Million Facility Revolving Loan and the $360 Million Facility Revolving Loan were $40.0 million, $50.0 million and nil, respectively.
On January 14, 2022, the Company entered into a lease financing arrangement with Hyuga Kaiun Co., Ltd (“Hyuga”) for the sale and leaseback of a 2011-built MR, which was a $390 Million Facility Collateral Vessel, for a net sale price of $16.7 million (the “Hyuga Lease Financing”). The transaction generated net proceeds of $5.7 million, after prepaying $11.0 million of the $390 Million Facility Term Loan. Under the lease financing arrangement, the vessel is subject to a nine-year bareboat charter at a bareboat rate of $6,300 per day for the first three years, $6,200 per day for the second three years, and $6,000 per day for the last three years, with purchase options exercisable commencing at the end of the fourth year and a $1.5 million purchase obligation at the end of the nine-year term.
Kaiyo Lease Financing
On April 25, 2022, the Company entered into a lease financing arrangement with Kaiyo Ltd. (“Kaiyo”) for the sale and leaseback of a 2010-built MR, which was a $390 Million Facility Collateral Vessel, for a net sale price of $15.2 million (the “Kaiyo Lease Financing”). The transaction generated net proceeds of $5.4 million, after prepaying $9.8 million of the $390 Million Facility Term Loan. Under the lease financing arrangement, the vessel is subject to an eight-year bareboat charter at a bareboat rate of $6,250 per day for the first four years, and $6,150 per day for the remaining four years, with purchase options exercisable commencing at the end of the fourth year and a $1.5 million purchase obligation at the end of the eight-year term.
16
The closing of the Kaiyo Lease Financing reduced the number of vessels collateralizing the $390 Million Facility Term Loan to nine subsequent to March 31, 2022 and also resulted in a reduction in the scheduled future quarterly principal amortization from $7.3 million to $6.9 million.
Debt Covenants
The Company was in compliance with the financial and non-financial covenants under all of its financing arrangements as of March 31, 2022.
The $390 Million Credit Facility, the Amended and Restated $525 Million Credit Agreement, the Amended and Restated $360 Million Credit Agreement, the Macquarie Credit Facility, the ING Credit Facility and certain of the Company’s lease financing arrangements contain customary representations, warranties, restrictions and covenants applicable to the Company, the Borrower and the subsidiary guarantors (and in certain cases, other subsidiaries), including financial covenants that require the Company (i) to maintain a minimum liquidity level of the greater of $50 million and 5% of the Company’s Consolidated Indebtedness; (ii) to ensure the Company’s and its consolidated subsidiaries’ Maximum Leverage Ratio will not exceed 0.60 to 1.00 at any time; (iii) to ensure that Current Assets exceeds Current Liabilities (which is defined to exclude the current potion of Consolidated Indebtedness); and (iv) to ensure the aggregate Fair Market Value of the Collateral Vessels will not be less than 135% of the aggregate outstanding principal amount of the Term Loans and Revolving Loans of each Facility.
The 8.5% Senior Notes Indenture contains certain restrictive covenants, including covenants that, subject to certain exceptions and qualifications, restrict our ability to make certain payments if a default under the Indenture has occurred and is continuing or will result therefrom and require us to limit the amount of debt we incur, maintain a certain minimum net worth and provide certain reports. The Indenture also provides for certain customary events of default (subject, in certain cases, to receipt of notice of default and/or customary grace or cure periods). Pursuant to the limitation on borrowings covenant, the Company shall not permit Total Borrowings (as defined in the Indenture) to equal or exceed 70% of Total Assets (as defined in the Indenture). The Company shall also ensure that Net Worth (defined as Total Assets, less Intangible assets and Total Borrowings, as defined in the Indenture) exceeds $600 million pursuant to the Minimum Net Worth covenant.
The Company’s credit facilities also require it to comply with a number of covenants, including the delivery of quarterly and annual financial statements, budgets and annual projections; maintaining required insurances; compliance with laws (including environmental); compliance with the Employee Retirement Income Security Act of 1974 (“ERISA”); maintenance of flag and class of the collateral vessels; restrictions on consolidations, mergers or sales of assets; limitations on liens; limitations on issuance of certain equity interests; limitations on transactions with affiliates; and other customary covenants and related provisions.
Interest Expense
Total interest expense before the impact of capitalized interest, including amortization of issuance and deferred financing costs (for additional information related to deferred financing costs see Note 3, “Significant Accounting Policies”), commitment, administrative and other fees for all of the Company’s debt facilities for the three months ended March 31, 2022 and 2021 was $13.3 million and $7.2 million, respectively. Interest paid for the Company’s debt facilities for the three months ended March 31, 2022 and 2021 was $11.8 million and $6.3 million respectively.
Debt Modifications, Repurchases and Extinguishments
During the first quarter of 2022, the Company recognized a net loss of $0.1 million, which is included in other expense in the accompanying condensed consolidated statement of operations. The net loss reflects a write-off of $0.1 million of unamortized deferred financing costs associated with the $11.0 million principal prepayment of the $390 Million Facility Term Loan in January 2022 (in connection with the Hyuga Lease Financing transaction described above), which was treated as a partial extinguishment.
17
Note 11 — Taxes:
The Company derives substantially all of its gross income from the use and operation of vessels in international commerce. The Company’s entities that own and operate vessels are primarily domiciled in the Marshall Islands and Liberia, which do not impose income tax on shipping operations. The Company also has or had subsidiaries in various jurisdictions that perform administrative, commercial or technical management functions. These subsidiaries are subject to income tax based on the services performed in countries in which their offices are located; current and deferred income taxes are recorded accordingly.
A substantial portion of income earned by the Company is not subject to income tax. With respect to subsidiaries not subject to income tax in their respective countries of incorporation, no deferred taxes are provided for the temporary differences in the bases of the underlying assets and liabilities for tax and accounting purposes.
As of March 31, 2022, the Company believes it will qualify for an exemption from U.S. federal income taxes under Section 883 of the U.S. Internal Revenue Code of 1986, as amended (the “Code”) and U.S. Treasury Department regulations for the 2022 calendar year, so long as less than 50 percent of the total value of the Company’s stock is held by one or more shareholders who own 5% or more of the Company’s stock for more than half of the days of 2022.
The Company reviews its freight tax obligations on a regular basis and may update its assessment of its tax positions based on available information at that time. Such information may include additional legal advice as to the applicability of freight taxes in relevant jurisdictions. Freight tax regulations are subject to change and interpretation; therefore, the amounts recorded by the Company may change accordingly.
The Marshall Islands and Liberia impose tonnage taxes, which are assessed on the tonnage of certain of the Company’s vessels. These tonnage taxes are included in vessel expenses in the accompanying condensed consolidated statements of operations.
Note 12 — Capital Stock and Stock Compensation:
The Company accounts for stock-based compensation expense in accordance with the fair value method required by ASC 718, Compensation – Stock Compensation. Such fair value method requires share-based payment transactions to be measured according to the fair value of the equity instruments issued.
Restricted Stock Units and Stock Options
In April 2022, the Company granted 328,554 time-based restricted stock units (“RSUs”) to certain of its senior officers and employees. The weighted average grant date fair value of these awards was $19.63 per RSU. Each RSU represents a contingent right to receive one share of INSW common stock upon vesting. 304,650 of the RSUs awarded will vest in equal installments on each of the first three anniversaries of the grant date and 23,904 of the RSUs awarded will cliff vest on September 30, 2023.
In April 2022, the Company also awarded 124,590 performance-based RSUs to certain of its senior officers and employees. Each performance stock unit represents a contingent right to receive RSUs based upon the covered employees being continuously employed through the end of the period over which the performance goals are measured and shall vest as follows: (i) one-half of the target RSUs shall vest on December 31, 2024, subject to INSW’s return on invested capital (“ROIC”) performance in the three-year ROIC performance period relative to a target rate (the “ROIC Target”) set forth in the award agreements; and (ii) one-half of the target RSUs shall vest on December 31, 2024, subject to INSW’s three-year total shareholder return (“TSR”) performance relative to that of a performance peer group over a three-year performance period (“TSR Target”). Vesting is subject in each case to the Human Resources and Compensation Committee of the Company’s Board of Directors’ certification of achievement of the performance measures and targets no later than March 15, 2025. The weighted average grant date fair value of the awards with performance conditions was determined to be $19.63 per RSU. The weighted average grant date fair value of the TSR based performance awards which have a market condition was estimated using a Monte Carlo probability model and determined to be $20.65 per RSU.
18
Dividends
On February 28, 2022, the Company’s Board of Directors declared a regular quarterly cash dividend of $0.06 per share. Pursuant to such declaration, the Company made dividend payments totaling $3.0 million on March 28, 2022 to stockholders of record as of March 14, 2022.
Share Repurchases
In connection with the settlement of vested restricted stock units, the Company repurchased 57,726 and 22,830 shares of common stock during the three months ended March 31, 2022 and 2021, respectively, at an average cost of $16.81 and $21.42, respectively, per share (based on the market prices on the dates of vesting) from employees and certain members of management to cover withholding taxes.
As of March 31, 2022, the remaining buyback authorization under the Company’s $50.0 million stock repurchase program expiring in August 2022 was $33.3 million. No shares were acquired under repurchase programs during the three months ended March 31, 2022 and 2021.
Note 13 — Accumulated Other Comprehensive Loss:
The components of accumulated other comprehensive loss, net of related taxes, in the condensed consolidated balance sheets follow:
Unrealized gains/(losses) on derivative instruments
5,899
(4,863)
Items not yet recognized as a component of net periodic benefit cost (pension plans)
(7,300)
(7,497)
The changes in the balances of each component of accumulated other comprehensive loss, net of related taxes, during the three months ended March 31, 2022 and 2021 follow:
Unrealized gains/(losses) on cash flow hedges
Items not yet recognized as a component of net periodic benefit cost
Balance as of December 31, 2021
Current period change, excluding amounts reclassified
from accumulated other comprehensive loss
197
9,255
Amounts reclassified from accumulated other comprehensive loss
1,704
Balance as of March 31, 2022
Balance as of December 31, 2020
(24,098)
(8,515)
(64)
7,217
3,002
Balance as of March 31, 2021
(13,815)
(8,579)
19
Amounts reclassified out of each component of accumulated other comprehensive loss follow:
Statement of Operations Line Item
Reclassifications of losses on cash flow hedges:
Interest rate swaps entered into by the Company's
Equity in income of
equity method joint venture investees
130
294
affiliated companies
Interest rate swaps entered into by the Company's subsidiaries
Reclassifications of losses on discontinued hedging instruments
Interest rate swap entered into by the Company's subsidiaries
Reclassifications of losses on other-than-insignificant
financing element of derivatives:
Total before and net of tax
At March 31, 2022, the Company expects that it will reclassify $12 thousand (gross and net of tax) of net losses on derivative instruments from accumulated other comprehensive loss to earnings during the next twelve months due to the payment of variable rate interest associated with floating rate debt of INSW’s equity method investees and the interest rate swaps held by the Company.
See Note 9, “Fair Value of Financial Instruments, Derivatives and Fair Value Disclosures,” for additional disclosures relating to derivative instruments.
Note 14 — Revenue:
Revenue Recognition
The majority of the Company's contracts for pool revenues, time and bareboat charter revenues, and voyage charter revenues are accounted for as lease revenue under ASC 842. The Company's contracts with pools are short term which are cancellable with up to 90 days' notice. As of March 31, 2022, the Company is a party to time charter out contracts with customers on one LR2, one Suezmax, one MR and one VLCC with expiry dates ranging from April 2022 to March 2023. The Company is also a party to a short-term profit share agreement to participate in a share of the profits and losses generated from a chartered-in MR commercially managed by a pool in which the Company participates. The Company’s share of earnings and charter hire expenses from this profit share agreement are included in voyage charter revenues and charter hire expenses, respectively, in the accompanying condensed consolidated statements of operations. The Company's contracts with customers for voyage charters are short term and vary in length based upon the duration of each voyage. Lease revenue for non-variable lease payments are recognized over the lease term on a straight-line basis and lease revenue for variable lease payments (e.g., demurrage) are recognized in the period in which the changes in facts and circumstances on which the variable lease payments are based occur.
Lightering services provided by the Company's Crude Tanker Lightering Business, and voyage charter contracts that do not meet the definition of a lease are accounted for as service revenues under ASC 606. In accordance with ASC 606, revenue is recognized when a customer obtains control of or consumes promised services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for these services.
20
The following table presents the Company’s revenues from leases accounted for under ASC 842 and revenues from services accounted for under ASC 606 for the three months ended March 31, 2022 and 2021:
Revenues from leases
Pool revenues
27,310
56,452
3,724
2,451
Voyage charter revenues from non-variable lease payments
2,844
3,047
5,891
Voyage charter revenues from variable lease payments
(78)
Revenues from services
Voyage charter revenues from lightering services
5,718
Total shipping revenues
17,658
7,001
13,078
1,620
Voyage charter revenues from non-variable lease payments(1)
940
574
1,514
51
5,834
Contract Balances
The following table provides information about receivables, contract assets and contract liabilities from contracts with customers, and significant changes in contract assets and liabilities balances, associated with revenue from services accounted for under ASC 606. Balances related to revenues from leases accounted for under ASC 842 are excluded from the table below.
Voyage receivables - Billed receivables
Contract assets (Unbilled voyage receivables)
Contract liabilities (Deferred revenues and off hires)
Opening balance as of January 1, 2022
2,306
225
Closing balance as of March 31, 2022
2,018
185
We receive payments from customers based on the schedule established in our contracts. Contract assets relate to our conditional right to consideration for our completed performance obligations under contracts and decrease when the right to consideration becomes unconditional or payments are received. Contract liabilities include payments received in advance of performance under contracts and are recognized when performance under the respective contract has been completed. Deferred revenues allocated to unsatisfied performance obligations will be recognized over time as the services are performed.
Performance Obligations
All of the Company’s performance obligations, and associated revenue, are generally transferred to customers over time. The expected duration of services is less than one year. Adjustments to revenue primarily relate to changes in estimates of performance obligations related to voyage charters. Adjustments in revenues from performance obligations satisfied in previous periods recognized were nil during the three months ended March 31, 2022 and 2021, respectively.
21
Costs to Obtain or Fulfill a Contract
As of March 31, 2022, there were no unamortized deferred costs of obtaining or fulfilling a contract.
Note 15 — Leases:
As permitted under ASC 842, the Company has elected not to apply the provisions of ASC 842 to short term leases, which include: (i) tanker vessels chartered-in where the duration of the charter was one year or less at inception; (ii) workboats employed in the Crude Tankers Lightering business which have a lease term of 12-months or less; and (iii) short term leases of office and other space.
Contracts under which the Company is a Lessee
The Company currently has two major categories of leases - chartered-in vessels and leased office and other space. The expenses recognized during the three months ended March 31, 2022 and 2021 for the lease component of these leases are as follows:
Operating lease cost
Vessel assets
2,418
2,421
Office and other space
227
273
43
42
Short-term lease cost
Vessel assets (1)
1,479
901
Total lease cost
4,167
3,637
Supplemental cash flow information related to leases was as follows:
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows used for operating leases
2,486
2,736
22
Supplemental balance sheet information related to leases was as follows:
(10,767)
(8,393)
(10,814)
(12,522)
Total operating lease liabilities
(21,581)
(20,915)
Weighted average remaining lease term - operating leases
4.84 years
5.15 years
Weighted average discount rate - operating leases
5.16%
5.42%
1. Charters-in of vessel assets:
As of March 31, 2022, INSW had commitments to charter in two Aframaxes and two LR1s. All of the charters-in, of which the two Aframaxes are bareboat charters with expiry dates ranging from December 2023 to March 2024 and the two LR1s are time charters with expiring dates ranging from March 2023 to April 2023, are accounted for as operating leases. The Company’s bareboat charters contain purchase options. The Company has determined that the purchase options are not reasonably certain of being exercised.
Payments of lease liabilities and related number of operating days under these operating leases as of March 31, 2022 are as follows:
Bareboat Charters-in:
Amount
Operating Days
4,730
550
2023
4,532
556
Total lease payments
9,262
1,106
less imputed interest
(494)
8,768
Time Charters-in:
3,592
1,381
210
Total lease payments (lease component only)
4,973
760
4,917
2. Office and other space:
The Company has operating leases for offices and lightering workboat dock space. These leases have expiry dates ranging from July 2023 to May 2033. The lease for the workboat dock space contains renewal options executable by the Company for periods through December 2027. We have determined that the options through December 2024 are reasonably certain to be executed by the Company, and accordingly the options are included in the lease liability and right of use asset calculations for such lease.
Payments of lease liabilities for office and other space as of March 31, 2022 are as follows:
205
229
2024
973
2025
998
2026
1,024
Thereafter
6,907
10,336
(2,440)
7,896
Contracts under which the Company is a Lessor
See Note 14, “Revenue,” for discussion on the Company’s revenues from operating leases accounted for under ASC 842.
The future minimum revenues, before reduction for brokerage commissions, expected to be received on non-cancelable time charters for one LR2, one Suezmax, one MR and one VLCC and the related revenue days as of March 31, 2022 are as follows:
Revenue Days
19,304
603
3,240
72
Future minimum revenues
22,544
675
Future minimum revenues do not include (i) the Company’s share of time charters entered into by the pools in which it participates, and (ii) the Company’s share of time charters entered into by the joint ventures, which the Company accounts for under the equity method. Revenues from a time charter are not generally received when a vessel is off-hire, including time required for normal periodic maintenance of the vessel. In arriving at the minimum future charter revenues, an estimated time off-hire to perform periodic maintenance on each vessel has been deducted, although there is no assurance that such estimate will be reflective of the actual off-hire in the future.
Note 16 — Contingencies:
INSW’s policy for recording legal costs related to contingencies is to expense such legal costs as incurred.
Multi-Employer Plans
The Merchant Navy Officers Pension Fund (“MNOPF”) is a multi-employer defined benefit pension plan covering British crew members that served as officers on board INSW’s vessels (as well as vessels of other owners). The trustees of the plan have indicated that, under the terms of the High Court ruling in 2005, which established the liability of past employers to fund the deficit on the Post 1978 section of MNOPF, calls for further contributions may be required if additional actuarial deficits arise or if other employers liable for contributions are not able to pay their share in the future. As the amount of any such assessment cannot be reasonably estimated, no reserves have been recorded for this contingency in INSW’s consolidated financial statements as of March 31, 2022. Assuming that the preliminary results of the deficit valuation as of March 31, 2021 are confirmed during 2022, showing that no deficit contributions would be required, the next deficit valuation will be as of March 31, 2024.
The Merchant Navy Ratings Pension Fund (“MNRPF”) is a multi-employer defined benefit pension plan covering British crew members that served as ratings (seamen) on board INSW’s vessels (as well as vessels of other owners) more than 20 years ago. Participating employers include current employers, historic employers that have made voluntary contributions, and historic employers such as INSW that have made no deficit contributions. Calls for contributions may be required if additional actuarial deficits arise or if
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other employers liable for contributions are unable to pay their share in the future. As the amount of any such assessment cannot be reasonably estimated, no reserves have been recorded in INSW’s consolidated financial statements as of March 31, 2022. The next deficit valuation will be as of March 31, 2023.
Spin-Off Related Agreements
On November 30, 2016, INSW was spun off from OSG as a separate publicly traded company. In connection with the spin-off, INSW and OSG entered into several agreements, including a separation and distribution agreement, an employee matters agreement and a transition services agreement. While most of the obligations under those agreements were subsequently fulfilled, certain provisions (including in particular mutual indemnification provisions under the separation and distribution agreement and the employee matters agreement) continue in force.
Legal Proceedings Arising in the Ordinary Course of Business
The Company is a party, as plaintiff or defendant, to various suits in the ordinary course of business for monetary relief arising principally from personal injuries, wrongful death, collision or other casualty and to claims arising under charter parties and other contract disputes. A substantial majority of such personal injury, wrongful death, collision or other casualty claims against the Company are covered by insurance (subject to deductibles not material in amount). Each of the claims involves an amount which, in the opinion of management, should not be material to the Company’s financial position, results of operations and cash flows.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward looking statements. Such forward-looking statements represent the Company’s reasonable expectation with respect to future events or circumstances based on various factors and are subject to various risks and uncertainties and assumptions relating to the Company’s operations, financial results, financial condition, business, prospects, growth strategy and liquidity. Accordingly, there are or will be important factors, many of which are beyond the control of the Company, that could cause the Company’s actual results to differ materially from those indicated in these statements. Undue reliance should not be placed on any forward-looking statements and consideration should be given to the following factors when reviewing any such statement. Such factors include, but are not limited to:
The Company assumes no obligation to update or revise any forward-looking statements. Forward-looking statements in this Quarterly Report on Form 10-Q and written and oral forward-looking statements attributable to the Company or its representatives after the date of this Quarterly Report on Form 10-Q are qualified in their entirety by the cautionary statement contained in this paragraph and in other reports hereafter filed by the Company with the Securities and Exchange Commission.
INTRODUCTION
This Management’s Discussion and Analysis, which should be read in conjunction with our accompanying condensed consolidated financial statements, provides a discussion and analysis of our business, current developments, financial condition, cash flows and results of operations. It is organized as follows:
General:
We are a provider of ocean transportation services for crude oil and refined petroleum products. We operate our fleet of VLCC, Suezmax, Aframax and Panamax crude tankers and LR1, LR2, MR and Handysize product carriers in the International Flag market. Our business includes two reportable segments: Crude Tankers and Product Carriers. For the three months ended March 31, 2022 and 2021, we derived 37% and 80%, respectively, of our TCE revenues from our Crude Tankers segment. Revenues from our Product Carriers segment constituted the balance of our TCE revenues in the 2022 and 2021 periods.
As of March 31, 2022, the Company’s operating fleet consisted of 84 wholly-owned, finance leased or bareboat chartered-in and time-chartered-in vessels aggregating 9.4 million deadweight tons (“dwt”), including two FSO service vessels in which we have ownership interests through joint venture partnerships. In addition to our operating fleet of 84 vessels, three dual-fuel LNG-powered VLCC newbuilds are scheduled for delivery to the Company in the first quarter of 2023, bringing the total operating and newbuild fleet to 87 vessels. Subsequent to March 31, 2022, the Company sold and delivered two Panamaxes and a Handysize product carrier to buyers.
The Company’s revenues are highly sensitive to patterns of supply and demand for vessels of the size and design configurations owned and operated by the Company and the trades in which those vessels operate. Rates for the transportation of crude oil and refined petroleum products from which the Company earns a substantial majority of its revenues are determined by market forces such as the supply and demand for oil, the distance that cargoes must be transported, and the number of vessels expected to be available at the time such cargoes need to be transported. The demand for oil shipments is significantly affected by the state of the global economy, levels of U.S. domestic and international production and OPEC exports. The number of vessels is affected by newbuilding deliveries and by the removal of existing vessels from service, principally through storage, recycling or conversions. The Company’s revenues are also affected by its vessel employment strategy, which seeks to achieve the optimal mix of spot (voyage charter) and long-term (time or bareboat charter) charters. Because shipping revenues and voyage expenses are significantly affected by the mix between voyage charters and time charters, the Company measures the performance of its fleet of vessels based on TCE revenues. Management makes economic decisions based on anticipated TCE rates and evaluates financial performance based on TCE rates achieved. In order to take advantage of market conditions and optimize economic performance, management employs all of
the Company’s LR1 product carriers, which currently participate in the Panamax International pool, in the transportation of crude oil cargoes. Our revenues are derived predominantly from spot market voyage charters and our vessels are predominantly employed in the spot market via market-leading commercial pools. We derived approximately 94% and 69% of our total TCE revenues in the spot market for the three months ended March 31, 2022 and 2021, respectively.
The following is a discussion and analysis of our financial condition as of March 31, 2022 and results of operations for the three months ended March 31, 2022 and 2021. You should consider the foregoing when reviewing the condensed consolidated financial statements and this discussion and analysis. You should read this section together with the condensed consolidated financial statements, including the notes thereto. This Quarterly Report on Form 10-Q includes industry data and forecasts that we have prepared based, in part, on information obtained from industry publications and surveys. Third-party industry publications, surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable. In addition, certain statements regarding our market position in this report are based on information derived from internal market studies and
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research reports. Unless we state otherwise, statements about the Company’s relative competitive position in this report are based on our management’s beliefs, internal studies and management’s knowledge of industry trends.
Operations and Oil Tanker Markets:
The International Energy Agency (“IEA”) estimates global oil consumption for the first quarter of 2022 at 98.5 million barrels per day (“b/d”), up 4.5% from the same quarter in 2021. The estimate for global oil consumption for 2022 is 99.4 million b/d, an increase of 1.9% over 2021. OECD demand in 2022 is estimated to increase by 2.5% to 45.9 million b/d, while non-OECD demand is estimated to increase by 1.3% to 53.4 million b/d.
Global oil production in the first quarter of 2022 was 98.7 million b/d, an increase of 7.1% from the first quarter of 2021. OPEC crude oil production averaged 28.4 million b/d in the first quarter of 2022, an increase of 0.7 million b/d from the fourth quarter of 2021, and an increase of 3.3 million b/d from the first quarter of 2021. Non-OPEC production increased by 3.1 million b/d to 65.0 million b/d in the first quarter of 2022 compared with the first quarter of 2021. Oil production in the U.S. in the first quarter of 2022 decreased by 1.3% to 11.4 million b/d compared to the fourth quarter of 2021 and increased by 2.8% from the first quarter of 2021.
U.S. refinery throughput increased by 0.3 million b/d to 15.9 million b/d in the first quarter of 2022 compared with the fourth quarter of 2021. U.S. crude oil imports in the first quarter of 2022 increased by 0.6 million b/d to 6.4 million b/d compared with the first quarter of 2021, with imports from OPEC countries increasing by 0.5 million b/d and imports from non-OPEC countries increasing by 0.1 million b/d.
Due to increasing pandemic-related lockdowns, China’s crude oil imports declined to 10.1 million b/d in March 2022, down from 11.7 million b/d in March 2021, a decline of 14% year over year. China’s crude oil imports averaged 10.4 million b/d during the first quarter of 2022, down 8% from the first quarter of 2021.
As a result of rising oil demand outpacing production of crude oil and refined products and significant increases in the current prices of crude oil, global inventories continued to be drawn down during the first quarter of 2022 to levels that are significantly below the average over the last five years. Total commercial stocks in the OECD have declined by approximately 372 million barrels in the 12 months ending February 2022, with crude stocks declining by 193 million barrels and products by 179 million barrels. Large draws in inventories have negatively impacted tanker market earnings.
During the first quarter of 2022, the tanker fleet of vessels over 10,000 dwt increased, net of vessels recycled, by 4.6 million dwt. The crude fleet increased by 4.4 million dwt, with VLCCs growing by 1.9 million dwt, Suezmaxes by 1.9 million dwt, and Aframaxes by 0.6 million dwt. The product carrier fleet increased by 0.2 million dwt. Year-over-year, the size of the tanker fleet increased by 8.8 million dwt with the VLCCs, Suezmaxes, Aframaxes and MRs increasing by 5.1 million dwt, 0.9 million dwt, 2.0 million dwt and 1.5 million dwt, respectively. The LR1/Panamax fleet declined by 0.8 million dwt.
During the first quarter of 2022, the tanker orderbook declined by 6.9 million dwt overall compared with the fourth quarter of 2021. The crude tanker orderbook decreased by 6.1 million dwt, with decreases in the VLCC, Suezmax and Aframax sectors of 2.5 million dwt, 2.1 million dwt and 1.6 million dwt, respectively. The product carrier orderbook decreased by 0.8, all in the MR sector. Year-over-year, the total tanker orderbook decreased by 13.9 million dwt, with all sectors seeing declines.
After a weak 2021, crude tanker rates remained under pressure and operated at or below industry average cash breakeven levels. Subsequent to the Russian invasion of Ukraine, the market developed into two tiers, with operators willing to call Russian ports receiving a premium in rates while the rest of the market initially stagnated. However, as more and more companies are self-sanctioning on Russian-related activities, combined with government-imposed sanctions placed on the Sovcomflot fleet, inefficiencies have developed in the market which has led to a general strengthening in rates, especially on small to mid-size tonnage. The VLCC market continues to be weak based on low Chinese demand, although rates in this sector have also improved as a result of the aforementioned inefficiencies in the market.
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The pandemic involving the novel coronavirus (COVID-19) has adversely affected the Company’s business, operations and financial results, and will likely continue to do so. See Item 1A, Risk Factors in our December 31, 2021 Form 10-K – The current pandemic involving the novel coronavirus (COVID-19) has adversely affected the Company’s business, operations and financial results, and will likely continue to do so.
Update on Critical Accounting Estimates and Policies:
The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require the Company to make estimates in the application of its accounting policies based on the best assumptions, judgments and opinions of management. For a description of all of the Company’s material accounting policies, see Note 2, “Summary of Significant Accounting Policies,” to the Company’s consolidated financial statements as of and for the year ended December 31, 2021 included in the Company’s Annual Report on Form 10-K. See Note 3, “Significant Accounting Policies,” to the accompanying condensed consolidated financial statements for any changes or updates to the Company’s critical accounting policies for the current period.
Results from Vessel Operations:
During the first quarter of 2022, results from vessel operations increased by $6.2 million to a loss of $5.6 million from a loss of $11.8 million in the first quarter of 2021. Such increase resulted principally from a $52.8 million increase in TCE revenues, substantially offset by increased vessel expenses and depreciation and amortization, which are reflective of the Company’s larger post-Merger fleet.
The increase in TCE revenues in the first quarter of 2022 of $52.8 million, or 117%, to $98.0 million from $45.2 million in the corresponding quarter of the prior year reflects a net aggregate $22.3 million rates-based increase resulting from higher average daily rates earned across INSW’s fleet sectors, with the exception of the VLCCs. Significant days-based increases in the Suezmax and MR fleets, which reflected the growth in the vessel count in these fleets that resulted from the Merger, also contributed a total of $30.4 million to the increase in TCE revenues.
See Note 5, “Business and Segment Reporting,” to the accompanying condensed consolidated financial statements for additional information on the Company’s segments, including equity in income of affiliated companies and reconciliations of (i) time charter equivalent revenues to shipping revenues and (ii) adjusted income/(loss) from vessel operations for the segments to loss before income taxes, as reported in the condensed consolidated statements of operations.
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Crude Tankers
(Dollars in thousands, except daily rate amounts)
TCE revenues
(23,222)
(19,843)
(3,943)
(4,061)
(15,152)
(13,003)
Adjusted loss from vessel operations (a)
Average daily TCE rate
15,429
18,258
Average number of owned vessels (b)
20.0
21.0
Average number of vessels chartered-in
9.0
2.0
Number of revenue days (c)
2,364
1,969
Number of ship-operating days: (d)
Owned vessels
1,800
1,890
Vessels bareboat chartered-in under operating leases (e)
810
180
The following table provides a breakdown of TCE rates achieved for the three months ended March 31, 2022 and 2021, between spot and fixed earnings and the related revenue days. The information in this table is based, in part, on information provided by the commercial pools in which the segment’s vessels participate and excludes commercial pool fees/commissions averaging approximately $732 and $612 per day for the three months ended March 31, 2022 and 2021, respectively, as well as activity in the Crude Tankers Lightering business and revenue and revenue days for which recoveries were recorded by the Company under its loss of hire insurance policies.
Spot Earnings
Fixed Earnings
VLCC:
Average rate
12,269
45,179
15,721
47,438
Revenue days
801
35
759
155
Suezmax:
13,610
26,618
12,215
1,060
90
Aframax:
13,216
11,665
307
270
Panamax:
20,551
14,172
10,688
70
516
During the first quarter of 2022, TCE revenues for the Crude Tankers segment increased by $0.6 million, or 1%, to $36.5 million from $35.9 million in the first quarter of 2021. Such increase principally resulted from (i) a $11.7 million days-based increase in the Suezmax fleet which reflected the Company’s acquisition of 13 Suezmaxes as a part of the Merger and (ii) an aggregate rates-based increase in the Suezmax, Panamax and Aframax fleets of $2.7 million due to higher average daily blended rates in these sectors. These
increases were substantially offset by (iii) a $6.4 million rates-based decline in the VLCC sector, (iv) a $6.0 million days-based decrease in the Panamax fleet driven by the sale of four 2002-built Panamaxes and one 2003-built Panamax between August and December of 2021, and (v) a $1.6 million days-based decline in the VLCC fleet reflecting the sale of a 2002-built VLCC in July 2021. In April 2022. the Company also took advantage of the strong current demand for steel to recycle its two remaining Panamaxes, one of which was built in 2002 and the other in 2004.
Vessel expenses increased by $3.4 million to $23.2 million in the first quarter of 2022 from $19.8 million in the first quarter of 2021. Such increase was driven by the vessels acquired in the Merger, partially offset by the impact of the vessel sales described above. Depreciation and amortization increased by $2.2 million to $15.2 million in the current quarter from $13.0 million in the prior year’s quarter. Such increase resulted principally from the net impact of the changes in the Suezmax and Panamax fleets noted above.
Excluding depreciation and amortization and general and administrative expenses, operating income for the Crude Tankers Lightering business was $0.9 million for the first quarter of 2022 compared to $0.7 million for the first quarter of 2021. 80 service support only lighterings were performed during each period.
Product Carriers
(37,094)
(6,484)
(3,367)
(1,680)
(11,841)
(3,728)
14,362
10,720
Average number of owned vessels
48.2
10.0
5.6
1.2
Number of revenue days
4,282
860
Number of ship-operating days:
4,341
900
Vessels bareboat chartered-in under operating leases (a)
257
Vessels time chartered-in under operating leases
245
108
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The following table provides a breakdown of TCE rates achieved for the three months ended March 31, 2022 and 2021, between spot and fixed earnings and the related revenue days. The information in this table is based, in part, on information provided by the commercial pools in which the segment’s vessels participate and excludes commercial pool fees/commissions averaging approximately $618 and $634 per day for the three months ended March 31, 2022 and 2021, respectively, as well as revenue and revenue days for which recoveries were recorded by the Company under its loss of hire insurance policies.
LR2:
17,145
17,780
LR1(1):
20,300
12,860
678
374
MR:
14,030
15,119
7,449
3,115
56
375
Handy:
12,251
343
During the first quarter of 2022, TCE revenues for the Product Carriers segment increased by $52.3 million, or 567%, to $61.5 million from $9.2 million in the first quarter of 2021. In conjunction with the Merger, the Company acquired 44 MRs. The Company subsequently sold seven of the MRs during the third quarter of 2021, and one during March 2022. The net effect of these transactions, partially offset by 413 more offhire days during the current period (primarily drydock related), were the primary drivers of a 2,796-day increase in MR revenue days during the current year’s quarter, which contributed a $18.6 million days-based increase in TCE revenues. Additionally, there was a $3.6 million days-based increase in the LR1 fleet, which reflected (i) the deliveries of two time chartered-in 2008-built LR1s between August and October 2021, and one time chartered-in 2009-built LR1 in February 2022, (ii) the purchase of a 2011-built LR1 in February 2022, and (iii) 134 fewer off-hire days in the current period, partially offset by (iv) the redelivery of a 2006-built LR1 to its owners at the expiry of its two year charter in August 2021. The Company also acquired six Handysize vessels in the Merger, and subsequently sold two of them in the fourth quarter of 2021. These Handysizes contributed a total of $4.0 million in TCE revenues during the current quarter. In April 2022, the Company entered into memoranda of agreements for the sales of its three remaining Handysize product carriers and one 2008-built MR, which are expected to be delivered to the buyers during the second quarter of 2022. Also contributing significantly to the growth in TCE revenues were period-over-period increases in average daily blended rates earned by the MR and LR1 fleet sectors, which accounted for a rates-based increase in TCE revenues of approximately $26.1 million.
Vessel expenses increased by $30.6 million to $37.1 million in the first quarter of 2022 from $6.5 million in the first quarter of 2021. Such increase reflects additions to the fleet as a result of the Merger. Charter hire expenses increased by $1.7 million to $3.4 million in the current quarter from $1.7 million in the prior year’s quarter, primarily as a result of the time chartered-in LR1s described above. Depreciation and amortization increased by $8.1 million to $11.8 million in the current quarter from $3.7 million in the prior year’s quarter. Such increase resulted primarily from the additions to the MR and Handysize fleets noted above.
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General and Administrative Expenses:
During the first quarter of 2022, general and administrative expenses increased by $2.0 million to $10.0 million from $8.2 million in the first quarter of 2021. The primary drivers for such increase were principally related to the Merger and comprised of (i) increased compensation and benefits costs of $1.2 million, (ii) increased insurance costs of $0.3 million, reflecting in part $0.1 million of non-cash amortization of a prepaid Directors & Officers run-off policy related to the Merger, (iii) increased communications and technology expenses of $0.2 million, and (iv) increased travel and entertainment expenses of $0.1 million as COVID-19 related travel restrictions are being rolled back.
Interest Expense:
The components of interest expense are as follows:
Interest before items shown below
11,701
4,477
Interest cost on defined benefit pension obligation
125
95
Impact of interest rate hedge derivatives
Capitalized interest
(660)
12,740
7,280
Interest expense was $12.7 million and $7.3 million for the three months ended March 31, 2022 and 2021, respectively. The quarter-over-quarter increase is attributable to higher average outstanding debt balances in the current year period compared to the 2021 period principally attributable to the debt that was assumed in connection with the Merger, the Macquarie Credit Facility and the refinancing of then existing debt between November 2021 and January 2022 with resulting higher principal amounts outstanding. In addition, higher average LIBOR rates during the first quarter of 2022 compared with the corresponding periods of 2021 contributed to such increase. See Note 10, “Debt,” in the accompanying condensed consolidated financial statements for further information on the Company’s debt facilities.
Taxes:
As of March 31, 2022, the Company believes it will qualify for an exemption from U.S. federal income taxes under Section 883 of the U.S. Internal Revenue Code of 1986, as amended (the “Code”) and U.S. Treasury Department regulations for the 2022 calendar year, so long as less than 50 percent of the total value of the Company’s stock is held by one or more shareholders who own 5% or more of the Company’s stock for more than half of the days of 2022. There can be no assurance at this time that INSW will continue to qualify for the Section 883 exemption beyond calendar year 2021. Should the Company not qualify for the exemption in the future, INSW will be subject to U.S. federal income taxation of 4% of its U.S. source shipping income on a gross basis without the benefit of deductions. Shipping income that is attributable to transportation that begins or ends, but that does not both begin and end, in the U.S. will be considered to be 50% derived from sources within the United States. Shipping income attributable to transportation that both begins and ends in the U.S. would be considered to be 100% derived from sources within the United States, but INSW does not and cannot engage in transportation that gives rise to such income.
EBITDA and Adjusted EBITDA:
EBITDA represents net loss before interest expense, income taxes and depreciation and amortization expense. Adjusted EBITDA consists of EBITDA adjusted for the impact of certain items that we do not consider indicative of our ongoing operating performance. EBITDA and Adjusted EBITDA are presented to provide investors with meaningful additional information that management uses to monitor ongoing operating results and evaluate trends over comparative periods. EBITDA and Adjusted EBITDA do not represent, and should not be considered a substitute for, net income or cash flows from operations determined in accordance with GAAP.
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EBITDA and Adjusted EBITDA have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analysis of our results reported under GAAP. Some of the limitations are:
While EBITDA and Adjusted EBITDA are frequently used by companies as a measure of operating results and performance, neither of those items as prepared by the Company is necessarily comparable to other similarly titled captions of other companies due to differences in methods of calculation.
The following table reconciles net income/(loss), as reflected in the condensed consolidated statements of operations, to EBITDA and Adjusted EBITDA:
EBITDA
26,743
10,669
Amortization of time charter contracts acquired
Write-off of deferred financing costs
Adjusted EBITDA
26,027
10,680
Liquidity and Sources of Capital:
Our business is capital intensive. Our ability to successfully implement our strategy is dependent on the continued availability of capital on attractive terms. In addition, our ability to successfully operate our business to meet near-term and long-term debt repayment obligations is dependent on maintaining sufficient liquidity.
Liquidity
Working capital at March 31, 2022 and December 31, 2021 was approximately positive $1.2 million and negative $10.1 million, respectively. Current liabilities include current installments of long-term debt of $178.4 million and $178.7 million at March 31, 2022 and December 31, 2021, respectively. Such amounts are excluded from the definition of current liabilities for purposes of the working capital covenant in the Company’s debt facilities. Current assets are highly liquid, consisting principally of cash, interest-bearing deposits and receivables.
The Company’s total cash decreased by $23.3 million during the three months ended March 31, 2022. This decrease reflects cash used in operating activities of $19.8 million, $38.4 million in expenditures for vessels and other property including construction costs for three dual-fuel LNG-powered VLCCs, $0.5 million net working capital deposits made to commercial pools in which the Company’s vessels operate, debt extinguishment of $11.0 million, scheduled principal amortization for the Company’s debt facilities and lease financing arrangements totaling $44.4 million, and cash dividends of $3.0 million. Such cash outflows were partially offset by proceeds from disposal of vessels and other assets of $24.3 million, proceeds from issuance of lease financing, net of issuance and deferred financing costs of $20.4 million, and $50.0 million in net borrowings on revolving credit facilities.
Our cash and cash equivalents balance generally exceed Federal Deposit Insurance Corporation insured limits. We place our cash and cash equivalents in what we believe to be credit-worthy financial institutions. In addition, certain of our money market accounts invest in U.S. Treasury securities or other obligations issued or guaranteed by the U.S. government or its agencies, floating rate and variable demand notes of U.S. and foreign corporations, commercial paper rated in the highest category by Moody’s Investor Services and Standard & Poor’s, certificates of deposit and time deposits, asset-backed securities, and repurchase agreements.
As of March 31, 2022, we had total liquidity on a consolidated basis of $165.6 million comprised of $75.6 million of cash (including $1.1 million of restricted cash) and $90.0 million of undrawn revolver capacity. Restricted cash of $1.1 million as of March 31, 2022 and December 31, 2021, respectively, represents legally restricted cash relating to the Macquarie Credit Facility, which is collateralized by three LR1 product carriers.
As of March 31, 2022, we had total debt outstanding (net of original issue discount and deferred financing costs) of $1,121.4 million and net debt to total capitalization (including noncontrolling interests) of 47.3%, compared with 46.2% at December 31, 2021.
Sources, Uses and Management of Capital
We have maintained a strong balance sheet, which has allowed us to take advantage of attractive strategic opportunities during the low end of the tanker cycle and we have maintained what we believe to be a prudent financial leverage for the current point in the tanker cycle.
In addition to future operating cash flows, our other future sources of funds are proceeds from issuances of equity securities, additional borrowings as permitted under our loan agreements and proceeds from the opportunistic sales of our vessels. Our current uses of funds are to fund working capital requirements, maintain the quality of our vessels, purchase vessels, pay newbuilding construction costs, comply with international shipping standards and environmental laws and regulations, repay or repurchase our outstanding loan facilities, pay a regular quarterly cash dividend, and from time-to-time, repurchase shares of our common stock.
The following is a summary of the significant capital allocation activities the Company executed during the first quarter of 2022 and sources of capital the Company has at its disposal for future use as well as the Company’s current commitments for future uses of capital:
Continuing our post-merger fleet optimization program, in January 2022, the Company entered into memoranda of agreements for the sale of a 2010-built MR for a sale price of $16.5 million and the purchase of a 2011-built LR1 for a purchase price of $19.5 million with the same counterparty. The LR1 was delivered into our niche commercial pool, Panamax International, which has historically outperformed the market. The Company closed both transactions during the first quarter of 2022, with a net cash outflow of $3.0 million representing the difference in value between the two vessels. During the first quarter of 2022, the Company also entered into memoranda of agreements for the sales of one 2002-built Panamax, one 2004-built Panamax and one 2006-built Handysize product carrier all of which were delivered to the buyers in April 2022. In addition, in April 2022, the Company entered into memoranda of agreements for the sale of its three remaining 2006-built Handysize product carriers and one 2008-built MR, which are expected to be delivered to their buyers during the second quarter of 2022. The aggregate net proceeds expected from the sale of these seven vessels after the prepayment of associated debt is approximately $49.9 million, of which $10.2 million was received as of March 31, 2022.
On January 14, 2022, the Company entered into a lease financing arrangement with Hyuga Kaiun Co., Ltd (“Hyuga”) for the sale and leaseback of a 2011-built MR, which was a $390 Million Facility Collateral Vessel, for a net sale price of $16.7 million (the “Hyuga Lease Financing”). The transaction generated net proceeds of $5.7 million, after prepaying $11.0 million of the $390 Million Facility Term Loan. Under the lease financing arrangement, the vessel is subject to a nine-year bareboat charter at a bareboat rate of $6,300 per day for the first three years, $6,200 per day for the second three years, and $6,000 per day for the last three years, with
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purchase options exercisable commencing at the end of the fourth year and a $1.5 million purchase obligation at the end of the nine-year term.
The closing of the Kaiyo Lease Financing reduced the number of vessels collateralizing the $390 Million Facility Term Loan to nine subsequent to March 31, 2022, and also resulted in a reduction in the scheduled future quarterly principal amortization from $7.3 million to $6.9 million.
On March 4, 2022, the Company borrowed $50.0 million under the $525 Million Facility Revolving Loan.
As of March 31, 2022, the Company has vessel construction commitments for three dual-fuel LNG-powered VLCCs. The Company also has contractual commitments for the purchase and installation of ballast water treatment systems on 15 vessels and the installation of a scrubber on one Suezmax. The Company’s debt service commitments and aggregate purchase commitments for vessel construction and betterments as of March 31, 2022, are presented in the Aggregate Contractual Obligations Table below.
Outlook
We executed various liquidity enhancing initiatives during 2021 and the first quarter of 2022 that significantly diversified our financing sources and spread our debt maturities out between 2025 and 2031, putting the Company in a strong position to navigate through any period of weaker rates during 2022. Our balance sheet and diverse fleet, positions us to support our operations over the next twelve months as we continue to advance our disciplined capital allocation strategy and provides us with flexibility to continue pursuing potential strategic opportunities that may arise within the diverse sectors in which we operate.
Off-Balance Sheet Arrangements
As of March 31, 2022, the FSO Joint Venture had total bank debt outstanding of $26.5 million, of which $13.2 million was nonrecourse to the Company.
The FSO Joint Venture is a party to a number of contracts: (a) the FSO Joint Venture is an obligor pursuant to a guarantee facility agreement dated as of July 14, 2017, by and among, the FSO Joint Venture, ING Belgium NV/SA, as issuing bank, and Euronav and INSW, as guarantors (the “Guarantee Facility”); (b) the FSO Joint Venture is party to two service contracts with NOC (the “NOC Service Contracts”) and (c) the FSO Joint Venture is a borrower under a $220 million secured credit facility by and among TI Africa and TI Asia, as joint and several borrowers, ABN AMRO Bank N.V. and ING Belgium SA/NV, as Lenders, Mandated Lead Arrangers and Swap Banks, and ING Bank N.V., as Agent and as Security Trustee. INSW severally guarantees the obligations of the FSO Joint Venture pursuant to the Guarantee Facility.
The FSO Joint Venture drew down on a $220 million credit facility in April 2018. The Company provided a guarantee for the $110 million FSO Term Loan portion of the facility, which has an interest rate of LIBOR plus two percent and amortizes through July 2022 and September 2022. INSW’s guarantee of the FSO Term Loan has financial covenants that provide (i) INSW’s Liquid Assets shall not be less than the higher of $50 million and 5% of Total Indebtedness of INSW, (ii) INSW shall have Cash of at least $30 million and (iii) INSW shall be compliance with the Loan to Value Test (as such capitalized terms are defined in the Company guarantee). As of September 30, 2021, the maximum aggregate potential amount of future payments (undiscounted) that INSW could be required to make in relation to its equity method investees secured bank debt and interest rate swap obligations was $13.3 million and the carrying value of the Company's guaranty in the accompanying condensed consolidated balance sheets was nil.
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In addition, and pursuant to an agreement between INSW and the trustees of the OSG Ship Management (UK) Ltd. Retirement Benefits Plan (the “Scheme”), INSW guarantees the obligations of INSW Ship Management UK Ltd., a subsidiary of INSW, to make payments to the Scheme.
Aggregate Contractual Obligations
A summary of the Company’s long-term contractual obligations as of March 31, 2022 follows:
Beyond
2027
$390 Million Facility Term Loan - floating rate(1)
28,863
37,003
35,398
92,774
194,038
$525 Million Facility Term Loan - floating rate(2)
58,395
75,753
73,471
207,619
$525 Million Facility Revolving Loan - floating rate(3)
2,274
2,857
94,849
99,980
$360 Million Facility Term Loan - floating rate(4)
29,934
37,734
34,335
102,003
$360 Million Facility Revolving Loan - floating rate(3)
930
1,220
39,177
41,327
Macquarie Credit Facility - floating rate(4)
2,537
3,246
2,672
12,801
21,256
ING Credit Facility - floating rate(4)
1,994
2,621
2,572
2,520
17,051
26,758
Ocean Yield Lease Financing - floating rate(4)
33,604
43,493
42,342
40,961
39,698
257,227
457,325
COSCO Lease Financing - floating rate(4)
5,584
7,245
6,996
6,753
6,509
29,712
62,799
BoComm Lease Financing - fixed rate(5)
24,271
23,827
23,762
211,755
307,377
Toshin Lease Financing - fixed rate(5)
1,674
2,223
2,160
11,307
21,942
Hyuga Lease Financing - fixed rate(5)
1,701
2,268
2,456
2,232
10,808
21,697
8.5% Senior Notes - fixed rate
1,594
26,063
27,657
Operating lease obligations(6)
Bareboat Charter-ins
Time Charter-ins
7,537
3,053
10,590
Vessel and vessel betterment commitments(7)
12,077
770
164
13,011
193,633
274,776
361,455
184,961
92,436
527,716
1,634,977
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Risk Management:
The Company is exposed to market risk from changes in interest rates, which could impact its results of operations and financial condition. The Company manages this exposure to market risk through its regular operating and financing activities and, when deemed appropriate, through the use of derivative financial instruments. To manage its interest rate risk in a cost-effective manner, the Company, from time-to-time, enters into interest rate swap, collar or cap agreements, in which it agrees to exchange various combinations of fixed and variable interest rates based on agreed upon notional amounts or to receive payments if floating interest rates rise above a specified cap rate. The Company uses such derivative financial instruments as risk management tools and not for speculative or trading purposes. In addition, derivative financial instruments are entered into with a diversified group of major financial institutions in order to manage exposure to nonperformance on such instruments by the counterparties.
The Company uses interest rate swaps for the management of interest rate risk exposure associated with changes in LIBOR interest rate payments due on its credit facilities.
Available Information
The Company makes available free of charge through its internet website, www.intlseas.com, its Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission.
The public may also read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E. Washington D.C. 20549 (information on the operation of the Public Reference Room is available by calling the SEC at 1-800-SEC-0330). The SEC also maintains a web site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at https://www.sec.gov.
The Company also makes available on its website, its corporate governance guidelines, its Code of Business Conduct and Ethics, insider trading policy, anti-bribery and corruption policy and charters of the Audit Committee, the Human Resources and Compensation Committee and the Corporate Governance and Risk Assessment Committee of the Board of Directors. The Company is required to disclose any amendment to a provision of its Code of Business Conduct and Ethics. The Company intends to use its website as a method of disseminating this disclosure, as permitted by applicable SEC rules. Any such disclosure will be posted to the Company website within four business days following the date of any such amendment. Neither our website nor the information contained on that site, or connected to that site, is incorporated by reference into this Quarterly Report on Form 10-Q.
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ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s current disclosure controls and procedures were effective as of March 31, 2022 to ensure that information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There was no change in the Company’s internal control over financial reporting during the three months ending March 31, 2022 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. On July 16, 2021, the Company completed the Merger with Diamond S and in our 2021 Annual Report on Form 10-K, we excluded Diamond S from our internal control over financial reporting. This exclusion was in accordance with the U.S. Securities and Exchange Commission’s general guidance that a recently acquired business may be omitted from the assessment scope for up to one year from the date of acquisition. The Company has extended its oversight and monitoring processes that support our internal control over financial reporting, as well as our disclosure controls and procedures, to the acquired operations of Diamond S and we will incorporate Diamond S into our annual assessment of internal control over financial reporting for our fiscal year ending December 31, 2022.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
See Note 16, “Contingencies,” to the accompanying condensed consolidated financial statements for a description of the current legal proceedings, which is incorporated by reference in this Part II, Item 1.
Item 1A. Risk Factors
In addition to the other information set forth below in this Quarterly Report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our 2021 Form 10-K. The risks described in that document are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. There have been no material changes in our risk factors from those disclosed in our 2021 Form 10-K, except for the following:
Risks Related to Our Industry
The war between Russia and Ukraine could adversely affect INSW’s business
On February 24, 2022, Russia invaded Ukraine, commencing a war between the two countries. The outbreak of the war has resulted in several countries and international organizations, such as the United States, the United Kingdom, the EU and Japan, imposing trade and investment sanctions against Russia and Belarus which are expected to adversely affect the global economy, including INSW’s ability to transport crude oil and refined petroleum products throughout the world. The ultimate outcome of these events and their overall effect on INSW is uncertain. These events have exacerbated many of the risks we face as a tanker industry participant, including the following:
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
No stock repurchases were made during the three months ended March 31, 2022 other than shares withheld to cover tax withholding liabilities relating to the vesting of outstanding restricted stock units held by certain members of management.
See Note 12, “Capital Stock and Stock Compensation,” to the accompanying condensed consolidated financial statements for additional information about the stock repurchase plan and a description of shares withheld to cover tax withholding liabilities relating to the vesting of previously-granted equity awards to certain members of management, which is incorporated by reference in this Part II, Item 2.
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Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Item 6. Exhibits
*10.1
Form of Amendment No. 7 to Ms. Zabrocky Employment Agreement (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated April 12, 2022 and incorporated herein by reference).
*10.2
Form of Amendment No. 4 to Mr. Pribor Employment Agreement (filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K dated April 12, 2022 and incorporated herein by reference).
*10.3
Form of Amendment No. 5 to Mr. Small Employment Agreement (filed as Exhibit 10.3 to the Registrant’s Current Report on Form 8-K dated April 12, 2022 and incorporated herein by reference).
*10.4
Form of Amendment No. 6 to Mr. Oshodi Employment Agreement (filed as Exhibit 10.4 to the Registrant’s Current Report on Form 8-K dated April 12, 2022 and incorporated herein by reference).
**31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), as amended.
**31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as amended.
**32
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
EX-101.INS
Inline XBRL Instance Document
EX-101.SCH
Inline XBRL Taxonomy Extension Schema
EX-101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase
EX-101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase
EX-101.LAB
Inline XBRL Taxonomy Extension Label Linkbase
EX-101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase
EX-104
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
Date: May 4, 2022
/s/ Lois K. Zabrocky
Lois K. Zabrocky
Chief Executive Officer
/s/ Jeffrey D. Pribor
Jeffrey D. Pribor
Chief Financial Officer