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 September 30, 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
Rights to Purchase Common Stock
N/A
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 November 4, 2022: common stock, no par value 49,078,418 shares.
INTERNATIONAL SEAWAYS, INC.CONDENSED CONSOLIDATED BALANCE SHEETSDOLLARS IN THOUSANDS(UNAUDITED)
September 30, 2022
December 31, 2021
ASSETS
Current Assets:
Cash and cash equivalents
$
174,465
97,883
Short-term investments
80,000
Voyage receivables, net of allowance for credit losses of $161 and $31
including unbilled receivables of $225,857 and $100,137
230,141
107,096
Other receivables
7,891
5,651
Inventories
873
2,110
Prepaid expenses and other current assets
11,379
11,759
Current portion of derivative asset
4,801
—
Total Current Assets
509,550
224,499
Restricted cash
1,060
1,050
Vessels and other property, less accumulated depreciation of $310,096 and $249,336
1,707,775
1,802,850
Vessels construction in progress
101,701
49,291
Deferred drydock expenditures, net
64,013
55,753
Operating lease right-of-use assets
18,069
23,168
Investments in and advances to affiliated companies
38,109
180,331
Long-term derivative asset
6,252
1,296
Time charter contracts acquired, net
842
Other assets
13,374
7,700
Total Assets
2,459,903
2,346,780
LIABILITIES AND EQUITY
Current Liabilities:
Accounts payable, accrued expenses and other current liabilities
45,593
44,964
Current portion of operating lease liabilities
8,323
8,393
Current installments of long-term debt
166,965
178,715
Current portion of derivative liability
2,539
Total Current Liabilities
220,881
234,611
Long-term operating lease liabilities
8,087
12,522
Long-term debt
900,509
926,270
Long-term derivative liability
757
Other liabilities
1,594
2,288
Total Liabilities
1,131,071
1,176,448
Commitments and contingencies
Equity:
Capital - 100,000,000 no par value shares authorized; 49,058,615 and 49,612,019
shares issued and outstanding
1,557,875
1,591,446
Accumulated deficit
(239,876)
(409,338)
1,317,999
1,182,108
Accumulated other comprehensive income/(loss)
10,833
(12,360)
Total equity before noncontrolling interests
1,328,832
1,169,748
Noncontrolling interests
584
Total Equity
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 September 30,
Nine Months Ended September 30,
2022
2021
Shipping Revenues:
Pool revenues, including $52,722, $14,552, $107,106 and $49,656
from companies accounted for by the equity method
215,240
50,543
463,729
101,657
Time and bareboat charter revenues
8,487
13,664
22,795
40,076
Voyage charter revenues
13,102
20,609
39,984
36,143
236,829
84,816
526,508
177,876
Operating Expenses:
Voyage expenses
2,283
11,848
8,448
15,021
Vessel expenses
58,565
58,174
178,445
112,378
Charter hire expenses
7,797
5,679
22,799
17,283
Depreciation and amortization
27,728
25,806
81,984
59,639
General and administrative
11,839
8,129
32,852
23,141
Third-party debt modification fees
71
26
1,158
Merger and integration related costs
47,079
47,560
Loss/(gain) on disposal of vessels and other assets, net of impairments
139
(9,104)
(9,339)
(5,088)
Total operating expenses
108,422
147,637
316,347
269,960
Income/(loss) from vessel operations
128,407
(62,821)
210,161
(92,084)
Equity in (loss)/income of affiliated companies
(1)
5,730
434
16,573
Operating income/(loss)
128,406
(57,091)
210,595
(75,511)
Other income/(expense)
360
(113)
(440)
446
Income/(loss) before interest expense and income taxes
128,766
(57,204)
210,155
(75,065)
Interest expense
(15,332)
(10,639)
(40,630)
(24,925)
Income/(loss) before income taxes
113,434
(67,843)
169,525
(99,990)
Income tax provision
(7)
(35)
(63)
(36)
Net income/(loss)
113,427
(67,878)
169,462
(100,026)
Less: Net loss attributable to noncontrolling interests
(526)
Net income/(loss) attributable to the Company
(67,352)
(99,500)
Weighted Average Number of Common Shares Outstanding:
Basic
49,312,716
46,903,955
49,493,315
34,395,732
Diluted
49,743,700
49,758,196
Per Share Amounts:
Basic net earnings/(loss) per share
2.30
(1.44)
3.42
(2.90)
Diluted net earnings/(loss) per share
2.28
3.40
2
INTERNATIONAL SEAWAYS, INC.CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)DOLLARS IN THOUSANDS(UNAUDITED)
Other comprehensive income, net of tax:
Net change in unrealized gains/(losses) on cash flow hedges
10,112
3,180
21,840
13,002
Defined benefit pension and other postretirement benefit plans:
Net change in unrecognized prior service costs
78
31
177
16
Net change in unrecognized actuarial losses
516
229
1,176
118
Other comprehensive income, net of tax
10,706
3,440
23,193
13,136
Comprehensive income/(loss) attributable to the Company
124,133
(64,438)
192,655
(86,890)
Less: Comprehensive loss attributable to noncontrolling interests
(63,912)
(86,364)
3
INTERNATIONAL SEAWAYS, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSDOLLARS IN THOUSANDS(UNAUDITED)
Cash Flows from Operating Activities:
Items included in net income/(loss) not affecting cash flows:
Loss on write-down of vessels and other assets
1,697
3,497
Amortization of debt discount and other deferred financing costs
3,630
1,609
Amortization of time charter hire contracts acquired
1,743
Deferred financing costs write-off
610
Stock compensation
4,447
8,894
Earnings of affiliated companies
(10,017)
(16,573)
Merger and integration related costs, noncash
31,053
Write-off of registration statement costs
694
Other – net
(774)
1,184
Items included in net income/(loss) related to investing and financing activities:
Gain on disposal of vessels and other assets, net
(11,036)
(8,585)
Loss on sale of investments in affiliated companies
9,513
Cash distributions from affiliated companies
2,250
6,775
Payments for drydocking
(36,280)
(23,816)
Insurance claims proceeds related to vessel operations
4,545
Changes in operating assets and liabilities:
-
Increase in receivables
(123,045)
(6,232)
Increase/(decrease) in deferred revenue
1,009
(856)
Net change in inventories, prepaid expenses and other current assets, accounts
payable, accrued expenses and other current and long-term liabilities
7,364
(9,217)
Net cash provided by/(used in) operating activities
106,201
(49,033)
Cash Flows from Investing Activities:
Cash acquired, net of equity issuance costs related to merger
54,155
Expenditures for vessels and vessel improvements
(87,603)
(44,214)
Proceeds from disposal of vessels and other property, net
79,476
113,510
Expenditures for other property
(674)
(450)
Investments in and advances to affiliated companies, net
1,862
(6,861)
Proceeds from sale of investments in affiliated companies
138,966
Investments in short term time deposits
(80,000)
Net cash provided by investing activities
52,027
116,140
Cash Flows from Financing Activities:
Borrowings on long term debt, net of lenders' fees
641,050
59,469
Payments of deferred financing costs
(782)
(166,640)
Repayments of debt
(744,034)
Proceeds from sale and leaseback financing, net of issuance and deferred financing costs
88,791
Payments on sale and leaseback financing
(28,640)
Cash payments on derivatives containing other-than-insignificant financing elements
(3,977)
Cash dividends paid
(14,830)
(37,920)
Repurchase of common stock
(20,017)
Cash paid to tax authority upon vesting or exercise of stock-based compensation
(3,174)
(1,125)
Net cash used in financing activities
(81,636)
(150,193)
Net increase/(decrease) in cash, cash equivalents and restricted cash
76,592
(83,086)
Cash, cash equivalents and restricted cash at beginning of year
98,933
215,677
Cash, cash equivalents and restricted cash at end of period
175,525
132,591
4
INTERNATIONAL SEAWAYS, INC.CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITYDOLLARS IN THOUSANDS(UNAUDITED)
Accumulated
Other
Comprehensive
Noncontrolling
Capital
Deficit
Income/(Loss)
Interests
Total
For the nine months ended
Balance at January 1, 2022
Net income
Other comprehensive income
Dividends declared
(14,827)
Impact of deconsolidating DASM
(584)
Forfeitures of vested restricted stock awards and exercised stock options
Compensation relating to restricted stock awards
902
Compensation relating to restricted stock units awards
2,782
Compensation relating to stock option awards
763
Balance at September 30, 2022
Balance at January 1, 2021
1,280,501
(275,846)
(32,613)
972,042
Net loss
Issuance of common stock related to merger
359,256
30,478
389,734
(37,924)
Forfeitures of vested restricted stock awards
3,337
4,629
928
Balance at September 30, 2021
1,609,602
(375,346)
(19,477)
29,952
1,244,731
For the three months ended
Balance at July 1, 2022
1,583,740
(353,303)
127
1,231,148
(5,886)
(1,681)
319
1,175
225
Balance at July 1, 2021
1,278,365
(307,994)
(22,917)
947,454
Other comprehensive loss
(34,555)
(95)
2,877
3,437
317
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 September 30, 2022, the Company’s operating fleet consisted of 75 wholly-owned, finance leased or bareboat chartered-in and time-chartered-in oceangoing vessels, 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 between the first and second quarters of 2023, bringing the total operating and newbuild fleet to 78 vessels as of September 30, 2022.
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 and nine months ended September 30, 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 September 30, 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.
Short-term investments - Short-term investments consist of time deposits with original maturities of between 90 and 364 days.
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
Provision for expected credit losses
130
161
During the three and nine months ended September 30, 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 96% and 93% of consolidated voyage receivables at September 30, 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 $7.1 million relating to the $750 Million Facility Revolving Loan and BoComm Lease Financing as of September 30, 2022 and $3.7 million relating to the $390 Million Facility Revolving Loan and BoComm Lease Financing (See Note 10, “Debt”) as of December 31, 2021, respectively, are included in other assets in the accompanying condensed consolidated balance sheets. Unamortized deferred financing charges of $14.9 million and $9.9 million relating to the Company’s outstanding debt facilities as of September 30, 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 $1.7 million and $3.3 million for the three and nine months ended September 30, 2022, respectively, and $0.5 million and $1.6 million for the three and nine months ended September 30, 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 and nine months ended September 30, 2022 totaled $1.2 million and $2.7 million, respectively, and $0.2 million and $0.2 million for the three and nine months ended September 30, 2021, respectively.
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 and nine months ended September 30, 2022, amortization totaled $0.1 million and $0.8 million, respectively.
7
Recently Issued Accounting Standards —In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (ASC 848), 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. 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 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 49,778 and 68,945 for the three and nine months ended September 30, 2022, respectively, and 106,384 and 73,172 for the three and nine months ended September 30, 2021, respectively. Such participating securities are allocated a portion of income, but not losses under the two-class method. As of September 30, 2022, there were 592,112 shares of restricted stock units and 537,357 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 income/(loss) attributable to the Company allocated to:
Common Stockholders
113,313
(67,494)
169,229
(99,648)
Participating securities
114
142
233
148
For the three and nine months ended September 30, 2022 earnings per share calculations, there were 430,984 and 264,881 dilutive equity awards outstanding, respectively. For the three and nine months ended September 30, 2021 earnings per share calculations, there were no dilutive equity awards outstanding. Awards of 1,298,016 and 1,236,334 for the three and nine months ended September 30, 2022, respectively, and 1,054,691 and 1,022,293 for the three and nine months ended September 30, 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, which were sold on June 7, 2022, 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, merger and integration related costs 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 and nine months ended September 30, 2022 and 2021 follows:
Crude
Product
Tankers
Carriers
Totals
Three months ended September 30, 2022:
Shipping revenues
77,071
159,758
Time charter equivalent revenues
75,192
159,355
234,546
15,771
11,931
Loss on disposal of vessels and other assets, including impairments
77
62
Adjusted income/(loss) from vessel operations
30,993
109,490
(27)
140,456
Equity in loss of affiliated companies
Investments in and advances to affiliated companies at September 30, 2022
16,301
21,808
Adjusted total assets at September 30, 2022
1,356,386
819,768
2,176,154
Three months ended September 30, 2021:
41,760
43,056
34,771
38,197
72,968
15,963
9,828
15
Gain on disposal of vessels and other property, including impairments
(224)
(8,880)
Adjusted loss from vessel operations
(9,682)
(6,994)
(15)
(16,691)
Equity in income of affiliated companies
Investments in and advances to affiliated companies at September 30, 2021
154,921
22,481
177,402
Adjusted total assets at September 30, 2021
1,520,767
772,880
2,293,647
9
Nine months ended September 30, 2022:
178,788
347,720
171,124
346,936
518,060
46,109
35,816
59
Loss/(gain) on disposal of vessels and other assets, including impairments
1,048
(10,387)
40,717
194,173
(58)
234,832
59,101
28,502
87,603
22,086
14,194
36,280
Nine months ended September 30, 2021:
111,818
66,058
101,817
61,038
162,855
42,005
17,578
56
3,791
(8,879)
(17,697)
(8,692)
(56)
(26,445)
40,791
3,423
44,214
16,518
7,298
23,816
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.
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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
(11,839)
(8,129)
(32,852)
(23,141)
(71)
(26)
(1,158)
(47,079)
(47,560)
Gain/(loss) on disposal of vessels and other assets, including impairments
(139)
9,104
9,339
5,088
Consolidated income/(loss) from vessel operations
Equity in income/(loss) of affiliated companies
Other (expense)/income
Reconciliations of total assets of the segments to amounts included in the condensed consolidated balance sheets follow:
September 30, 2021
Adjusted total assets of all segments
Corporate unrestricted cash and cash equivalents
108,897
23,694
Other unallocated amounts
28,224
15,595
Consolidated total assets
2,441,833
Note 6 — Vessels:
Impairment of Vessels and Other Property
During the nine months ended September 30, 2022, the Company gave consideration on a quarterly basis 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 September 30, 2022, the Company continued to monitor industry and market factors and intentions regarding its vessels to determine if indicators of impairment were present and determined that none of the vessels in the Company’s fleet met held-for-sale criteria as of September 30, 2022 and no held-for-use impairment indicators existed for the Company’s vessels as of September 30, 2022. During the quarter ended March 31, 2022, the Company concluded that the contracted sales of one 2004-built Panamax and two 2006-built Handysize product carriers resulted in the recognition of impairment charges aggregating $1.7 million.
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
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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, recognizing a gain of $4.5 million on the sale of the 2010-built MR and 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 $101.7 million and $49.3 million (including capitalized interest costs of $2.7 million and $0.6 million) are included in vessels construction in progress in the accompanying condensed consolidated balance sheet as of September 30, 2022 and December 31, 2021, respectively. The remaining commitments on the contracts for the construction of these vessels as of September 30, 2022 was $192.2 million, which will be funded by the BoComm Lease Financing over the course of the construction and delivery of the three vessels.
Disposal/Sales of Vessels
In addition to the sale of the 2010-built MR described above, during the nine months ended September 30, 2022, the Company also delivered a 2008-built MR, one 2002-built Panamax, one 2004-built Panamax and its remaining four 2006-built Handysize product carriers to buyers and recognized an aggregate gain of $7.6 million.
In addition, in November 2022, the Company entered into memorandum of agreement for the sale of a 2008-built MR, which is expected to be delivered to the buyer during the fourth quarter of 2022.
Note 7 — Equity Method Investments:
Investments in affiliated companies include joint ventures accounted for using the equity method, including the Company’s 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”). Pursuant to a share purchase agreement, on June 7, 2022, the Company sold its 50% ownership interest in the FSO Joint Venture, to its joint venture partner Euronav NV. The Company received, net of adjustments for working capital and expenses, approximately $140 million in cash from the sale. The Company recorded a loss on the sale of $9.5 million and reclassified the Company’s share of the unrealized losses associated with the interest rate swaps held by the FSO Joint Venture at the time of the sale of $0.1 million into earnings from accumulated other comprehensive income/(loss).
The share purchase agreement contains specified representations, warranties, covenants and indemnification provisions of the parties customary for transactions of this type
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.
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On July 1, 2022, the Company and AE Holding terminated their joint venture agreement, which resulted in the Company selling its 51% interest in DASM to AE Holdings. The Company received $0.8 million in cash for the sale of its interest, after certain deductions, and recognized a $0.1 million gain on the sale of the joint venture.
Prior to July 1, 2022, DASM was owned 51% by the Company and 49% by AE Holdings, AE Holdings did not participate in the income or equity of DASM, and the Company was considered to be the primary beneficiary of DASM as the Company had the ability to direct the activities that most significantly impacted DASM’s economic performance. The results of operations of DASM were included in the accompanying condensed consolidated financial statements through June 30, 2022 and the balance sheet of DASM was included in the accompanying condensed consolidated financial statements as of December 31, 2021.
Unconsolidated VIEs
As of September 30, 2022, all of the six commercial pools in which the Company participates were determined to be VIEs for which the Company is not considered a primary beneficiary.
The following table presents the carrying amounts of assets and liabilities in the condensed consolidated balance sheet related to the unconsolidated VIEs as of September 30, 2022:
Condensed Consolidated Balance Sheet
Investments in Affiliated Companies
36,708
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 September 30, 2022:
Maximum Exposure toLoss
Other Liabilities
–
In addition, as of September 30, 2022, the Company had approximately $218.2 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 September 30, 2022.
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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
Short-term investments(2)
n/a
$750 Million Facility Term Loan
(530,000)
Level 2
$390 Million Facility Term Loan
(191,050)
$525 Million Facility Term Loan
(216,289)
$525 Million Facility Revolving Loan
(44,193)
$360 Million Facility Term Loan
(105,325)
$360 Million Facility Revolving Loan
(38,889)
Macquarie Credit Facility
(17,750)
(19,475)
ING Credit Facility
(23,438)
(25,000)
Ocean Yield Lease Financing
(348,466)
(370,305)
BoComm Lease Financing
(52,841)
(9,608)
Toshin Lease Financing
(16,028)
(16,995)
Hyuga Lease Financing
(15,744)
COSCO Lease Financing
(48,986)
(52,746)
Kaiyo Lease Financing
(14,511)
Kaisha Lease Financing
(14,622)
8.5% Senior Notes
(25,940)
Derivatives
In May 2022, in connection with the refinancing of its $390 Million Facility Term Loan and $525 Million Facility Term Loan, the Company terminated all of its existing in-the-money LIBOR based interest swaps with an aggregate notional amount of approximately $358.6 million and received net cash proceeds of approximately $9.6 million, with $4.6 million of the gain expected to amortize out of accumulated other comprehensive income to earnings within the next 12 months.
With regards to the hybrid instrument associated with the Sinosure Credit Facility that was terminated in November 2021, $2.1 million of the loss is expected to amortize out of accumulated other comprehensive income to earnings within the next 12 months.
On June 2, 2022, the Company entered into amortizing interest rate swap agreements covering a notional amount of $475 million of the $750 Million Facility Term Loan with major financial institutions participating in such facility that effectively converts the Company’s interest rate exposure from a three-month SOFR floating rate to a fixed rate of 2.84% through the maturity date of February 22, 2027, effective August 22, 2022. The interest rate swap agreements, which contain no leverage features, are designated and qualify as cash flow hedges.
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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 September 30, 2022 and December 31, 2021:
Long-term derivative assets
Current portion of derivative liabilities
Long-term derivativeliabilities
September 30, 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 income/(loss), including hedges of equity method investees, for the three and nine months ended September 30, 2022 and 2021 follows:
10,559
568
21,491
5,333
Other-than-insignificant financing element of derivatives:
(435)
(1,351)
Total other comprehensive income
133
3,982
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 and nine months ended September 30, 2022 and 2021 follows:
261
1,293
(226)
3,558
Discontinued hedging instruments:
Interest rate swap
(708)
445
1,528
4,681
Total interest expense
(447)
2,821
219
8,239
See Note 13, “Accumulated Other Comprehensive Income/(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)
11,053
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 nine months ended September 30, 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)
Note 10 — Debt:
Debt consists of the following:
$750 Million Facility Term Loan, due 2027, net of unamortized deferred finance costs of $7,269
522,732
Macquarie Credit Facility, due 2025, net of unamortized deferred finance costs of $573 and $755
17,177
18,720
ING Credit Facility, due 2026, net of unamortized deferred finance costs of $448 and $546
22,990
24,454
$390 Million Facility Term Loan, due 2025, net of unamortized deferred finance costs of $2,357
188,693
$525 Million Facility Term Loan, due 2024
216,289
$525 Million Facility Revolving Loan, due 2024
44,193
$360 Million Facility Term Loan, due 2024
105,325
$360 Million Facility Revolving Loan, due 2024
38,889
Ocean Yield Lease Financing, due 2031, net of unamortized deferred finance costs of $3,341 and $3,799
345,125
366,506
BoComm Lease Financing, due 2030, net of unamortized deferred finance costs of $691 and $114
52,150
9,494
Toshin Lease Financing, due 2031, net of unamortized deferred finance costs of $387 and $428
15,642
16,567
COSCO Lease Financing, due 2028, net of unamortized deferred finance costs of $1,253 and $1,353
47,732
51,393
Hyuga Lease Financing, due 2031, net of unamortized deferred finance costs of $338
15,406
Kaiyo Lease Financing, due 2030, net of unamortized deferred finance costs of $300
14,211
Kaisha Lease Financing, due 2030, net of unamortized deferred finance costs of $313
14,309
8.5% Senior Notes, due 2023, net of unamortized deferred finance costs of $538
24,462
1,067,474
1,104,985
Less current portion
(166,965)
(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.
$750 Million Credit Facility
On May 20, 2022, International Seaways Operating Corporation (“ISOC”), the borrower, and certain of their subsidiaries entered into a credit agreement comprising $750 million of secured debt facilities (the “$750 Million Credit Facility”) with Nordea Bank Abp, New York Branch (“Nordea”), Crédit Agricole Corporate & Investment Bank (“CA-CIB”), BNP Paribas, DNB Markets Inc. and Skandinaviska Enskilda Banken AB (PUBL) (or their respective affiliates), as mandated lead arrangers and bookrunners; Danish Ship Finance A/S and ING Bank N.V., London Branch (or their respective affiliates), as mandated lead arrangers; and National Australia Bank Limited, as co-arranger. Nordea is acting as administrative agent, collateral agent and security trustee under the credit agreement, and CA-CIB is acting as sustainability coordinator. Capitalized terms used in this paragraph and elsewhere not otherwise defined herein shall have the meanings set forth in the credit agreement.
The $750 Million Credit Facility consists of (i) a five-year senior secured term loan facility in an aggregate principal amount of $530 million (the “$750 Million Facility Term Loan”) and (ii) a five-year revolving credit facility in an aggregate principal amount of $220 million (the “750 Million Facility Revolving Loan). The $750 Million Facility Term Loan contains an uncommitted accordion feature whereby, for a period of up to 24 months following the closing date, the amount of the loan thereunder may be increased up to an additional incremental $250 million (in increments of at least $10 million) for the acquisition of Additional Vessels, subject to certain conditions.
The $750 Million Credit Facility is secured by a first lien on 55 of the Company’s vessels, along with their earnings, insurances and certain other assets. In addition, both facilities are secured by liens on certain additional assets of ISOC.
On May 24, 2022, the available amount of $530 million under the $750 Million Facility Term Loan was drawn in full, and $70 million of the $220 million available under the $750 Million Facility Revolving Loan was also drawn. The loan proceeds, together with
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available cash, were used to repay (i) the $163 million outstanding principal balance under the $390 Million Credit Facility; (ii) the $284 million outstanding principal balance under the $525 Million Credit Facility; and (iii) the $127.8 million outstanding principal balance under the $360 Million Credit Facility; and to pay certain expenses related to the refinancing, including certain structuring and arrangement fees, legal and administrative fees totaling $10.5 million.
The $70 million drawn under the $750 Million Facility Revolving Loan was repaid on June 15, 2022, using a portion of the proceeds from the sale of the FSO Joint Venture (see Note 7, “Equity Method Investments”).
Interest on the $750 Million Credit Facility is calculated based upon Adjusted Term SOFR plus the Applicable Margin. The Applicable Margin is currently 2.40%. The facilities also include a sustainability-linked pricing mechanism. The adjustment in pricing will be linked to three factors:
The Company is required to deliver annually, commencing in July 2023, a sustainability certificate for the preceding calendar year setting out the sustainability-related calculations required under the credit agreement. If the Company achieves all of the targets set out in the credit agreement, the Applicable Margin will be decreased by 0.05% per annum, while if the Company fails to achieve any of the targets set out in the credit agreement, the Applicable Margin will be increased by that same amount (but in no case will any such adjustment result in the Applicable Margin being increased or decreased from the otherwise-applicable Applicable Margin by more than 0.05% per annum in the aggregate).
The $750 Million Facility Term Loan amortizes in 19 quarterly installments of approximately $30.6 million (other than the final payment of $9.8 million) commencing November 20, 2022. The maturity date of the $750 Million Credit Facility is May 20, 2027, and is subject to acceleration upon the occurrence of certain events (as described in the credit agreement).
The $750 Million Credit Facility contains customary representations, warranties, restrictions and covenants applicable to the Company, ISOC and the subsidiary guarantors (and in certain cases, other subsidiaries).
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 $2.0 million purchase obligation at the end of the nine-year term.
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
18
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.
On May 12, 2022, the Company entered into a lease financing arrangement with Kabushiki Kaisha (“Kaisha”) for the sale and leaseback of a 2010-built MR, which was a $525 Million Facility Collateral Vessel, for a net sale price of $15.2 million (the “Kaisha Lease Financing”). The transaction generated net proceeds of $10.6 million, after prepaying $4.6 million of the $525 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.
On August 5, 2022, the Company redeemed the $25 million aggregate principal outstanding of the 8.5% Senior Notes due June 2023.
Debt Covenants
The Company was in compliance with the financial and non-financial covenants under all of its financing arrangements as of September 30, 2022.
The $750 Million Credit Facility, 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 (the “Indenture”), which was terminated in conjunction with the August 5, 2022 redemption described above, contained certain covenants that required the Company to (i) not permit Total Borrowings (as defined in the Indenture) to equal or exceed 70% of Total Assets (as defined in the Indenture), and (ii) ensure that Net Worth (defined as Total Assets, less Intangible Assets and Total Borrowings, as defined in the Indenture) exceeded $600 million pursuant to the Minimum Net Worth covenant in the Indenture.
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 and nine months ended September 30, 2022 was $16.4 million and $43.0 million, respectively, and for the three and nine months ended September 30, 2021 was $10.7 million and $24.8 million, respectively. Interest paid for the Company’s debt facilities for the three and nine months ended September 30, 2022 was $14.0 million and $36.6 million respectively, and for the three and nine months ended September 30, 2021 was $10.8 million and $23.2 million respectively.
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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.
During the second quarter of 2022, the Company recognized a net loss of $0.2 million, which is included in other expense in the accompanying condensed consolidated statement of operations. The net loss reflects a write-off of unamortized deferred financing costs associated with the $10.0 million principal prepayment of the $390 Million Facility Term Loan in April 2022 (in connection with the Kaiyo Lease Financing transaction described above), which was treated as a partial extinguishment.
During the third quarter of 2022, the Company recognized a net loss of $0.4 million, which is included in other expense in the accompanying condensed consolidated statement of operations. The net loss reflects a write-off of unamortized deferred financing costs associated with the $25.0 million principal prepayment of the 8.5% Senior Notes in August 2022.
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.
The Company qualifies 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, as less than 50 percent of the total value of the Company’s stock was 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 Common Stock
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During the nine months ended September 30, 2022, the Company awarded a total of 41,718 restricted common stock shares to its non-employee directors. The weighted average fair value of INSW’s stock on the measurement date of such awards was $24.45 per share. Such restricted share awards vest in full on the earlier of the next annual meeting of the stockholders or June 3, 2023, subject to each director continuing to provide services to INSW through such date. The restricted share awards granted may not be transferred, pledged, assigned or otherwise encumbered prior to vesting. Prior to the vesting date, a holder of restricted share awards otherwise has all the rights of a shareholder of INSW, including the right to vote such shares and the right to receive dividends paid with respect to such shares at the same time as common shareholders generally.
Restricted Stock Units and Stock Options
During the nine months ended September 30, 2022, the Company granted 327,906 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 $19.65 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 23,256 of the RSUs awarded will cliff vest on September 30, 2023.
During the nine months ended September 30, 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.
During the nine months ended September 30, 2022, 274,549 stock options were exercised by certain senior officers and employees at an average exercise price of $18.52 per share. After withholdings for taxes and exercise costs, the Company issued a total of 51,075 shares in conjunction with these transactions.
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.
On June 7, 2022, the Company’s Board of Directors declared a regular quarterly cash dividend of $0.12 per share. Pursuant to such declaration, the Company made dividend payments totaling $6.0 million on June 29, 2022 to stockholders of record as of June 17, 2022.
On August 4, 2022, the Company’s Board of Directors declared a regular quarterly cash dividend of $0.12 per share. Pursuant to such declaration, the Company made dividend payments totaling $6.0 million on September 28, 2022 to stockholders of record as of September 14, 2022.
On November 7, 2022, the Company’s Board of Directors declared a regular quarterly cash dividend of $0.12 per share and a special dividend of $1.00 per share. Pursuant to such declaration, the Company will make both dividend payments on December 22, 2022 to stockholders of record as of December 8, 2022.
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Share Repurchases
In August 2022, the Company’s Board of Directors authorized an increase in the share repurchase program to $60.0 million from $33.3 million and extended the expiration of the program to December 31, 2023. During the three months ended September 30, 2022, the Company repurchased and retired 687,740 shares of its common stock in open-market purchases, at an average price of $29.08 per share, for a total cost of $20.0 million. As of September 30, 2022, the remaining buyback authorization under the Company’s $60.0 million stock repurchase program expiring in December 2023 was $40.0 million. No shares were acquired under repurchase programs during the nine months ended September 30, 2021.
In connection with the settlement of vested restricted stock units and exercise of stock options, the Company repurchased 223,926 and 308,405 shares of common stock during the three and nine months ended September 30, 2022, respectively, at an average cost of $30.22 and $26.78, respectively, per share (based on the market prices on the dates of vesting) from employees and certain members of management to cover withholding taxes and cost of options exercised. Similarly, the Company repurchased 5,090 and 56,065 shares of common stock during the three and nine months ended September 30, 2021, respectively, at an average cost of $18.62 and $20.06, respectively, per share.
Rights Agreement
On May 8, 2022, the Company entered into a shareholder rights plan in the form of a Rights Agreement (the “Rights Agreement”), dated as of May 8, 2022, between the Company and Computershare Trust Company, N.A., as rights agent. The Rights Agreement was approved by the Company’s Board of Directors. In connection with the Rights Agreement, the Company’s Board of Directors authorized and declared a dividend distribution of one right (a “Right”) for each outstanding share of common stock, no par value, of the Company. The dividend was payable on May 19, 2022 to stockholders of record at the close of business on such date. While the Rights Agreement was effective immediately, the Rights become exercisable only if a person or group acquires beneficial ownership, as defined in the Rights Agreement, of 17.5% or more of the Company’s common stock in a transaction not approved by the Company's Board of Directors. In that situation, each holder of a Right (other than the acquiring person or group) will have the right to purchase, upon payment of the then-current exercise price, a number of shares of Company common stock having a market value of twice the exercise price of the Right. In addition, at any time after a person or group acquires 17.5% or more of the Company’s common stock (unless such person or group acquires 50% or more), the Company’s Board of Directors may exchange one share of the Company’s common stock for each outstanding Right (other than Rights owned by such person or group, which would have become null and void). The Rights Agreement will expire on May 7, 2023. The Company’s Board of Directors may consider an earlier termination of the Rights Agreement if market and other conditions warrant.
The Company’s Board of Directors adopted the Rights Agreement to enable all stockholders of the Company to realize the long-term value of their investment in the Company. The Rights Agreement is not intended to prevent an acquisition of the Company on terms that the Board considers favorable to, and in the best interests of, all stockholders. Rather, the Rights Agreement aims to reduce the likelihood that any person or group gains control of the Company through open market accumulation, or other tactics potentially disadvantaging the interests of all stockholders, without paying all stockholders an appropriate control premium or providing the Company’s Board of Directors sufficient time to make informed decisions in the best interest of all stockholders.
Note 13 — Accumulated Other Comprehensive Income/(Loss):
The components of accumulated other comprehensive income/(loss), net of related taxes, in the condensed consolidated balance sheets follow:
Unrealized gains/(losses) on derivative instruments
16,977
(4,863)
Items not yet recognized as a component of net periodic benefit cost (pension plans)
(6,144)
(7,497)
22
The changes in the balances of each component of accumulated other comprehensive income/(loss), net of related taxes, during the three and nine months ended September 30, 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 June 30, 2022
6,865
(6,738)
Current period change, excluding amounts reclassified
from accumulated other comprehensive income/(loss)
594
11,153
Amounts reclassified from accumulated other comprehensive income/(loss)
Balance as of September 30, 2022
Balance as of June 30, 2021
(14,276)
(8,641)
260
393
3,047
Balance as of September 30, 2021
(11,096)
(8,381)
Balance as of December 31, 2021
1,353
22,844
349
Balance as of December 31, 2020
(24,098)
(8,515)
134
4,116
9,020
23
Amounts reclassified out of each component of accumulated other comprehensive income/(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
226
781
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 September 30, 2022, the Company expects that it will reclassify $5.3 million (gross and net of tax) of net gain on derivative instruments from accumulated other comprehensive income/(loss) to earnings during the next twelve months attributable to 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 September 30, 2022, the Company is a party to time charter out contracts with customers on one MR, one LR2, one Suezmax, and one VLCC with expiry dates ranging from March 2023 to August 2024. 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 is recognized over the lease term on a straight-line basis and lease revenue for variable lease payments (e.g., demurrage) is 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.
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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 and nine months ended September 30, 2022 and 2021:
Revenues from leases
Pool revenues
60,710
154,530
6,575
1,912
Voyage charter revenues from non-variable lease payments(1)
567
3,312
3,879
Voyage charter revenues from variable lease payments
Revenues from services
Voyage charter revenues from lightering services
9,219
Total shipping revenues
18,763
31,780
9,900
3,764
Voyage charter revenues from non-variable lease payments
6,696
7,389
14,085
450
123
573
5,951
133,186
330,543
16,503
6,292
5,648
10,952
16,600
(67)
(5)
23,389
51,666
49,991
33,054
7,022
Voyage charter revenues from non-variable lease payments(2)
8,423
8,871
17,294
174
624
18,225
25
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
Closing balance as of September 30, 2022
3,170
5,302
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 and nine months ended September 30, 2022 and 2021, respectively.
Costs to Obtain or Fulfill a Contract
As of September 30, 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 and nine months ended September 30, 2022 and 2021 for the lease component of these leases are as follows:
Operating lease cost
Vessel assets
2,849
2,108
7,748
6,999
Office and other space
228
501
683
43
129
Short-term lease cost
Vessel assets (1)
1,737
1,322
4,749
3,278
Total lease cost
4,857
3,974
13,309
11,452
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
7,952
8,058
Supplemental balance sheet information related to leases was as follows:
(8,323)
(8,393)
(8,087)
(12,522)
Total operating lease liabilities
(16,410)
(20,915)
Weighted average remaining lease term - operating leases
5.49 years
5.15 years
Weighted average discount rate - operating leases
5.16%
5.42%
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1. Charters-in of vessel assets:
As of September 30, 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 determined on the lease commencement dates that the purchase options were not reasonably certain of being exercised. As of September 30, 2022, events have not occurred that would require a reassessment of such determinations.
Payments of lease liabilities and related number of operating days under these operating leases as of September 30, 2022 are as follows:
Bareboat Charters-in:
Amount
Operating Days
1,582
184
2023
4,532
556
Total lease payments
6,114
740
less imputed interest
(225)
5,889
Time Charters-in:
1,215
1,381
210
Total lease payments (lease component only)
2,596
394
(13)
2,583
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 September 30, 2022 are as follows:
68
2024
973
2025
998
2026
1,024
Thereafter
6,908
10,200
(2,262)
7,938
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.
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The future minimum revenues, before reduction for brokerage commissions, expected to be received on non-cancelable time charters for one MR, one LR2, one Suezmax and one VLCC and the related revenue days as of September 30, 2022 are as follows:
Revenue Days
9,940
332
22,055
809
7,280
224
Future minimum revenues
39,275
1,365
Future minimum revenues do not include the Company’s share of time charters entered into by the pools in which it participates. 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 September 30, 2022. Assuming that the preliminary results of the deficit valuation as of June 30, 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 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 September 30, 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
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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:
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General:
We are a provider of ocean transportation services for crude oil and refined petroleum products. We operate our fleet of VLCC, Suezmax, and Aframax crude tankers and LR1, LR2, and MR product carriers in the International Flag market. Our business includes two reportable segments: Crude Tankers and Product Carriers. For the three and nine months ended September 30, 2022, we derived 68% and 67%, respectively, of our TCE revenues from our Product Carriers segment compared with 52% and 37% for the three and nine months ended September 30, 2021, respectively. Revenues from our Crude Tankers segment constituted the balance of our TCE revenues in the 2022 and 2021 periods.
As of September 30, 2022, the Company’s operating fleet consisted of 75 wholly-owned, finance leased or bareboat chartered-in and time-chartered-in vessels aggregating 8.2 million deadweight tons (“dwt”). In addition to our operating fleet of 75 vessels, three dual-fuel LNG-powered VLCC newbuilds are scheduled for delivery to the Company between the first and second quarters of 2023, bringing the total operating and newbuild fleet to 78 vessels.
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 operate 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 96% of our total TCE revenues in the spot market for the three and nine months ended September 30, 2022, respectively, compared with 80% and 76% for the three and nine months ended September 30, 2021, respectively.
The following is a discussion and analysis of our financial condition as of September 30, 2022 and results of operations for the three and nine months ended September 30, 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,
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certain statements regarding our market position in this report are based on information derived from internal market studies and 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 third quarter of 2022 at 100.0 million barrels per day (“b/d”), up 1.2% from the same quarter in 2021. The estimate for global oil consumption in 2023 is 101.3 million b/d, an increase of 1.7% over 2022’s estimated 99.6 million b/d. OECD demand in 2023 is estimated to increase by 0.2% to 46.4 million b/d, while non-OECD demand is estimated to increase by 2.4% to 54.8 million b/d.
Global oil production in the third quarter of 2022 was 100.7 million b/d, an increase of 4.6% from the third quarter of 2021. OPEC crude oil production averaged 29.4 million b/d in the third quarter of 2022, an increase of 0.8 million b/d from the second quarter of 2022, and an increase of 2.5 million b/d from the third quarter of 2021. Non-OPEC production increased by 1.6 million b/d to 65.9 million b/d in the third quarter of 2022 compared with the third quarter of 2021. Oil production in the U.S. in the third quarter of 2022 increased by 1.1% to 11.8 million b/d compared to the second quarter of 2022 and increased by 4.0% from the third quarter of 2021.
U.S. refinery throughput increased by 0.8 million b/d to 16.9 million b/d in the third quarter of 2022 compared with the second quarter of 2022. U.S. crude oil imports in the third quarter of 2022 increased by 0.2 million b/d to 6.6 million b/d compared with the third quarter of 2021, with imports from non-OPEC countries remaining flat and imports from OPEC countries increasing by 0.2 million b/d.
After continuing pandemic-related lockdowns, and refinery maintenance, China’s crude oil imports rebounded to 10.2 million b/d in September 2022, up 0.7 million b/d from August 2022, and the highest level since May 2022.
As a result of continued rising oil demand outpacing production of crude oil and refined products and the resulting increases in the prices of crude oil, global inventories continued to be drawn down during the third quarter of 2022 to levels that are significantly below the average over the last five years. In the OECD, total crude stocks have remained steady but product stocks have declined by approximately 110 million barrels in the 12 months ending August 2022.
During the third quarter of 2022, the tanker fleet of vessels over 10,000 dwt increased, net of vessels recycled, by 5.5 million dwt. The crude fleet increased by 5.0 million dwt, with VLCCs growing by 2.1 million dwt, Suezmaxes by 1.7 million dwt, and Aframaxes by 1.2 million dwt. The product carrier fleet increased by 0.5 million dwt. Year-over-year, the size of the tanker fleet increased by 17.5 million dwt with the VLCCs, Suezmaxes, Aframaxes and MRs increasing by 9.5 million dwt, 4.1 million dwt, 2.0 million dwt and 2.3 million dwt, respectively. The LR1/Panamax fleet declined by 0.5 million dwt.
During the third quarter of 2022, the tanker orderbook declined by 4.7 million dwt overall compared with the second quarter of 2022. The crude tanker orderbook decreased by 4.5 million dwt, with decreases in the VLCC, Suezmax and Aframax sectors of 1.8 million dwt, 1.9 million dwt and 0.8 million dwt respectively. The product carrier orderbook decreased by 0.2 million dwt, with LR1s declining by 0.2 million dwt and MRs remaining flat. Year-over-year, the total tanker orderbook decreased by 20.8 million dwt, with all sectors seeing declines.
All segments enjoyed better markets during the third quarter compared with the second quarter of 2022. Continued disruptions to global crude and product flows resulting from the Russian invasion of Ukraine had positive impacts on rates for all of our segments during the third quarter of 2022 due to the continued trade flow inefficiencies in the market. (See Item 1A, Risk Factors in our March 31, 2022 Form 10-Q - The war between Russia and Ukraine could adversely affect INSW’s business). The recently announced OPEC+ production cut of 2.0 million b/d from quotas could have a negative impact on tanker earnings going forward. However, some market participants anticipate that the actual production cut will only be around 1.3 million b/d, and the impacts of this cut could also be tempered by increased production in the West.
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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 third quarter of 2022, results from vessel operations increased by $191.2 million to income of $128.4 million from a loss of $62.8 million in the third quarter of 2021. Such increase resulted principally from a $161.6 million period-over-period increase in TCE revenues and $47.1 million in merger and integration related costs incurred in the third quarter of 2021 related to the Company’s Merger with Diamond S. Such items were partially offset by $9.1 million in gain on the disposal of vessels recorded in the prior year’s quarter.
The increase in TCE revenues in the third quarter of 2022 of $161.6 million, or 221%, to $234.5 million from $73.0 million in the corresponding quarter of the prior year reflects a net aggregate $156.9 million rates-based increase resulting from higher average daily rates earned across all of INSW’s various fleet sectors.
During the first nine months of 2022, results from vessel operations increased by $302.2 million to income of $210.2 million from a loss of $92.1 million in the first nine months of 2021. Such increase resulted principally from a $355.2 million period-over-period increase in TCE revenues and the 2021 merger and integration related costs described above, 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 nine months of 2022 of $355.2 million, or 218%, to $518.1 million from $162.9 million in the corresponding period of the prior year reflects a net aggregate $273.7 million rates-based increase resulting from higher average daily rates earned across all of INSW’s fleet sectors. Significant days-based increases in the Suezmax and MR fleets, which reflects the growth in the vessel count in these fleets that resulted from the Merger, also contributed a total of $75.5 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 income/(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
(24,713)
(24,384)
(72,525)
(65,327)
(3,715)
(4,106)
(11,773)
(12,182)
(15,771)
(15,963)
(46,109)
(42,005)
Adjusted income/(loss) from vessel operations (a)
Average daily TCE rate
33,993
12,845
24,700
15,710
Average number of owned vessels (b)
18.0
30.5
18.7
24.2
Average number of vessels chartered-in
9.0
2.0
9.1
Number of revenue days (c)
2,212
2,707
6,928
6,481
Number of ship-operating days: (d)
Owned vessels
1,656
2,810
5,114
6,611
Vessels bareboat chartered-in under operating leases (e)
828
2,457
546
Vessels spot chartered-in under operating leases (f)
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The following tables provide a breakdown of TCE rates achieved for the three and nine months ended September 30, 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 $985 and $667 per day for the three months ended September 30, 2022 and 2021, respectively, and $837 and $635 per day for the nine months ended September 30, 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
24,427
43,905
10,686
43,893
Revenue days
812
92
761
Suezmax (1):
34,244
27,685
10,650
26,604
849
748
90
Aframax:
38,287
11,361
25,746
366
276
76
Panamax:
9,755
11,054
151
264
17,739
44,111
13,345
45,517
2,421
218
2,170
338
23,090
27,004
12,189
2,872
273
1,110
29,215
10,554
999
20,166
12,812
11,046
70
1,303
During the third quarter of 2022, TCE revenues for the Crude Tankers segment increased by $40.4 million, or 116%, to $75.2 million from $34.8 million in the third quarter of 2021. Such increase principally resulted from (i) an aggregate rates-based increase in the Suezmax, VLCC and Aframax fleets of $42.5 million due to higher average daily blended rates in these sectors. Such increase was partially offset by (ii) a $4.3 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 2021 and the Company taking advantage of the strong demand for steel to recycle its two remaining Panamaxes in April 2022.
Vessel expenses increased by $0.3 million to $24.7 million in the third quarter of 2022 from $24.4 million in the third quarter of 2021. Such increase was driven by larger drydock deviation and average daily crewing costs, and the timing and cost of stores and spares, offset substantially by the impact of the sales in the Panamax fleet described above. Charter hire expenses decreased by $0.4 million to $3.7 million from $4.1 million in the third quarter of 2021 due to lower charter hire expense spend in our Crude Tankers Lightering
37
business. Depreciation and amortization decreased by $0.2 million to $15.8 million in the current quarter from $16.0 million in the third quarter of 2021. Such decrease resulted principally from the impacts of the Panamax sales noted above, offset to a large degree by the impacts of drydockings and ballast water treatment system and scrubber installations performed during 2021 and 2022. The scrubber installation on one of the Company’s 2012-built Suezmaxes was completed in September 2022.
Excluding depreciation and amortization and general and administrative expenses, operating income for the Crude Tankers Lightering business was $4.1 million for the third quarter of 2022 compared to $1.3 million for the third quarter of 2021, with the increase principally attributable to performing 126 service support only lighterings during the three months ended September 30, 2022, which is an increase of 39 when compared to the 87 performed during the three months ended September 30, 2021.
During the first nine months of 2022, TCE revenues for the Crude Tankers segment increased by $69.3 million, or 68%, to $171.1 million from $101.8 million in the first nine months of 2021. Such increase principally resulted from (i) an aggregate rates-based increase in the Suezmax, Aframax, VLCC and Panamax fleets of $61.2 million due to higher average daily blended rates in these sectors and (ii) a $18.0 million days-based increase in the Suezmax fleet which reflected the Company’s acquisition of 13 Suezmaxes as a part of the Merger, two of which have been subsequently disposed of by the Company. These increases were partially offset by a $17.0 million days-based decrease in the Panamax fleet driven by the sale of all seven vessels in this fleet between August 2021 and April 2022 described above.
Vessel expenses increased by $7.2 million to $72.5 million in the first nine months of 2022 from $65.3 million in the first nine months 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 $4.1 million to $46.1 million in the nine months ended September 30, 2022 from $42.0 million in the prior year’s comparable period. 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 $8.1 million during the first nine months of 2022 compared to $3.6 million for the first nine months of 2021. Incremental lightering activity in the current year’s period drove the increase, as one full-service lightering and 310 service support only lighterings were performed in the current year’s period, as compared to 253 service support only lighterings in the prior year’s period.
Product Carriers
(33,852)
(33,790)
(105,921)
(47,050)
(4,082)
(1,573)
(11,026)
(5,102)
(11,931)
(9,828)
(35,816)
(17,578)
35,186
9,448
26,135
10,267
Average number of owned vessels
41.0
47.3
44.4
22.6
8.0
1.3
6.8
Number of revenue days
4,529
4,043
13,275
5,945
Number of ship-operating days:
3,772
4,354
12,118
6,164
Vessels bareboat chartered-in under operating leases (a)
460
1,099
Vessels time chartered-in under operating leases
277
124
768
368
38
The following tables provide a breakdown of TCE rates achieved for the three and nine months ended September 30, 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 $763 and $610 per day for the three months ended September 30, 2022 and 2021, respectively, and $631 and $681 per day for the nine months ended September 30, 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:
17,149
17,797
89
LR1(1):
40,973
12,476
830
523
MR(2):
35,986
10,000
15,730
3,411
2,668
Handy:
6,311
17,146
17,787
270
29,701
13,634
2,294
1,438
27,191
21,023
9,797
9,912
75
3,453
14,167
469
During the third quarter of 2022, TCE revenues for the Product Carriers segment increased by $121.2 million, or 317%, to $159.4 million from $38.2 million in the third quarter of 2021. The growth in TCE revenues was primarily as a result of substantial period-over-period increases in average daily blended rates earned by the MR and LR1 fleet sectors, which accounted for a rates-based increase of approximately $114.5 million. Also contributing to the increased TCE revenues were days-based increases. In conjunction with the Merger, the Company acquired 44 MRs. The Company subsequently sold seven of the MRs during the third quarter of 2021, one during March 2022, and one during the second quarter of 2022. The net effect of these transactions, and 305 fewer off-hire days
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during the current period, were the primary drivers of a 501-day increase in MR revenue days during the current year’s quarter, which contributed a $4.6 million days-based increase in TCE revenues. Additionally, there was a $3.7 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, and (ii) the purchase of a 2011-built LR1 in February 2022, partially offset by (iii) 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 in the fourth quarter of 2021, and the remaining four during the second quarter of 2022. These Handysizes contributed a total of $1.6 million in TCE revenues during the third quarter of 2021, and no TCE revenues during the third quarter of 2022.
Vessel expenses increased by $0.1 million to $33.9 million in the third quarter of 2022 from $33.8 million in the third quarter of 2021. Such increase reflects the impacts of the net increase in MR operating days and the purchase of the 2011-built LR1 described above, offset in large part by the Handysize sales noted above. Charter hire expenses increased by $2.5 million to $4.1 million in the current quarter from $1.6 million in the third quarter of 2021, primarily as a result of the time chartered-in LR1s described above. Depreciation and amortization increased by $2.1 million to $11.9 million in the current quarter from $9.8 million in the prior year’s quarter. Such increase resulted primarily from the additions to the MR and LR1 fleets noted above, offset by the sales of the Handysize vessels.
During the first nine months of 2022, TCE revenues for the Product Carriers segment increased by $285.9 million, or 468%, to $346.9 million from $61.0 million in the first nine months of 2021. The net effect of the Merger and subsequent vessel sales discussed above, partially offset by 354 more off-hire days during the current period (primarily drydock related), were the primary drivers of a 6,348-day increase in MR revenue days during the current year’s period, which contributed a $57.6 million days-based increase in TCE revenues. Additionally, there was a $11.1 million days-based increase in the LR1 fleet, which reflected the transactions described above and 149 fewer off-hire days in the current period. The Handysize vessels that were acquired as part of the Merger and subsequently sold contributed a total of $6.4 million in TCE revenues during the first nine months of 2022, versus $1.6 million in the prior year’s period. Consistent with the quarter-over-quarter discussion above, the strong rate environment for Product Carriers in 2022 accounted for a rates-based increase in TCE revenues of approximately $212.6 million for the nine months ended September 30, 2022 compared to the equivalent 2021 period.
Vessel expenses increased by $58.9 million to $105.9 million in the first nine months of 2022 from $47.1 million in the first nine months of 2021. Such increase reflects additions to the fleet as a result of the Merger. Charter hire expenses increased by $5.9 million to $11.0 million in the current period from $5.1 million in the prior year’s period, primarily as a result of the time chartered-in LR1s described above. Depreciation and amortization increased by $18.2 million to $35.8 million in the current period from $17.6 million in the prior year’s period. Such increase resulted primarily from the net vessel additions noted above.
General and Administrative Expenses:
During the third quarter of 2022, general and administrative expenses increased by $3.7 million to $11.8 million from $8.1 million in the third quarter of 2021. The primary drivers for such increase were comprised of (i) increased compensation and benefits costs, of which $2.1 million relates to increases in the estimated annual employee bonus accrual based upon the Company’s strong operating and financial performance thus far in 2022, and $0.4 million relates to non-cash stock compensation, (ii) $0.5 million of costs relating to shareholder activism-related matters, and (iii) increased travel and entertainment expenses of $0.4 million reflecting the impact of the lifting of COVID-19 related travel restrictions.
For the nine months ended September 30, 2022, general and administrative expenses increased by $9.7 million to $32.9 million from $23.1 million for the same period in 2021. The primary drivers of the increase were comprised of (i) increased compensation and benefits costs of $5.2 million, of which $2.1 million relates to increases in the estimated annual employee bonus accrual based upon the Company’s strong operating and financial performance thus far in 2022, and $0.9 million relates to non-cash stock compensation, (ii) $2.0 million of costs relating to shareholder activism-related matters, financing and corporate projects that were ultimately not pursued to completion, and increased insurance costs, and (iii) increased travel and entertainment expenses of $0.8 million reflecting the impact of the lifting of COVID-19 related travel restrictions.
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Equity in Income of Affiliated Companies:
During the three and nine months ended September 30, 2022, equity in income of affiliated companies decreased by $5.7 million and $16.1 million compared with the corresponding 2021 periods. These decreases were attributable to the sale of the Company’s interest in the FSO joint ventures on June 7, 2022. The Company recorded a loss on such sale of $9.5 million.
Interest Expense:
The components of interest expense are as follows:
Interest before items shown below
16,872
7,897
42,766
16,631
Interest cost on defined benefit pension obligation
109
95
351
287
Impact of interest rate hedge derivatives
220
Capitalized interest
(1,202)
(174)
(2,707)
(232)
15,332
10,639
40,630
24,925
Interest expense was $15.3 million and $10.6 million for the three months ended September 30, 2022 and 2021, respectively, and $40.6 million and $24.9 million for the nine months ended September 30, 2022 and 2021, respectively. These increases are attributable to higher average outstanding debt balances in the current year periods compared to the 2021 periods 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 May 2022 with resulting higher principal amounts outstanding. In addition, higher average floating interest rates during the second and third quarters 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:
The Company qualifies 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 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 2022. 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 income/(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
41
with GAAP. 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:
63
(312)
EBITDA
156,494
(31,710)
292,139
(15,738)
Amortization of time charter contracts acquired
159
Loss/(gain) on disposal of vessels and other property, including impairments
Gain on sale of interest in DASM
(135)
Write-off of deferred financing costs
Adjusted EBITDA
157,078
8,034
294,788
28,503
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 September 30, 2022 and December 31, 2021 was positive $288.7 million and negative $10.1 million, respectively. Current assets are highly liquid, consisting principally of cash, interest-bearing deposits, short-term investments consisting of time deposits with original maturities of between 90 and 180 days, and receivables. Current liabilities include current installments of long-term debt of $167.0 million and $178.7 million at September 30, 2022 and December 31, 2021, respectively.
The Company’s total cash increased by $76.6 million during the nine months ended September 30, 2022. This increase reflects cash provided by operating activities of $106.2 million, proceeds from the sale of the Company’s 50% ownership interest in the FSO Joint Venture of $140.1, proceeds from disposal of vessels and other assets of $79.5 million, and proceeds from issuance of lease financing,
42
net of issuance and deferred financing costs, of $88.8 million. Such cash inflows were partially offset by $87.6 million in expenditures for vessels and other property including construction costs for three dual-fuel LNG-powered VLCCs, a net outflow of $106.6 million related to debt extinguishment, scheduled principal amortization for the Company’s secured debt facilities and lease financing arrangements and the refinancing of the $390 Million Credit Facility, $525 Million Credit Facility and $360 Million Credit Facility, and $25.0 million to redeem the aggregate principal outstanding of the 8.5% Senior Notes that were due in June 2023, $20.0 million in expenditures made under the Company’s stock repurchase program, $80.0 million of cash invested in the short-term investments described above and cash dividends of $14.8 million.
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 September 30, 2022, we had total liquidity on a consolidated basis of $475.5 million comprised of $175.5 million of cash (including $1.1 million of restricted cash), $80.0 million of short-term investments and $220.0 million of undrawn revolver capacity. Restricted cash of $1.1 million as of September 30, 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 September 30, 2022, we had total debt outstanding (net of original issue discount and deferred financing costs) of $1,067.5 million and net debt to total capitalization of 37.9%, 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 nine months 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:
During the first quarter of 2022, the Company’s Board of Directors declared a regular quarterly cash dividend of $0.06 per share. The regular quarterly dividend was subsequently doubled to $0.12 per share for the second and third quarters of 2022. Pursuant to such dividend declarations, the Company made dividend payments totaling $14.8 million during the nine months ended September 30, 2022. The Company’s Board of Directors declared a regular quarterly cash dividend of $0.12 per share of common stock and a special dividend of $1.00 per share of common stock on November 7, 2022. Both dividends will be paid on December 22, 2022 to stockholders of record as of December 8, 2022.
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, recognizing a gain of $4.5 million on the sale of the 2010-built MR and 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. During the nine months ended September 30, 2022, the Company also delivered a 2008-built MR, one 2002-built Panamax,
one 2004-built Panamax and four 2006-built Handysize product carriers to buyers. The aggregate net proceeds from the sale of these seven vessels after the prepayment of associated debt was approximately $54.0 million.
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.
On May 20, 2022, International Seaways Operating Corporation, the borrower, and certain of their subsidiaries entered into a credit agreement comprising $750 million of secured debt facilities (the “$750 Million Credit Facility”) with Nordea Bank Abp, New York Branch (“Nordea”), Crédit Agricole Corporate & Investment Bank (“CA-CIB”), BNP Paribas, DNB Markets Inc. and Skandinaviska Enskilda Banken AB (PUBL) (or their respective affiliates), as mandated lead arrangers and bookrunners; Danish Ship Finance A/S and ING Bank N.V., London Branch (or their respective affiliates), as mandated lead arrangers; and National Australia Bank Limited, as co-arranger. Nordea is acting as administrative agent, collateral agent and security trustee under the credit agreement, and CA-CIB is acting as sustainability coordinator. Capitalized terms used in this paragraph and elsewhere not otherwise defined herein shall have the meanings set forth in the credit agreement.
The $750 Million Credit Facility consists of (i) a five-year senior secured term loan facility in an aggregate principal amount of $530 million (the “$750 Million Facility Term Loan”) and (ii) a five-year revolving credit facility in an aggregate principal amount of $220 million (the “750 Million Facility Revolving Loan. The $750 Million Facility Term Loan contains an uncommitted accordion feature whereby, for a period of up to 24 months following the closing date, the amount of the loan thereunder may be increased up to an additional incremental $250 million (in increments of at least $10 million) for the acquisition of Additional Vessels, subject to certain conditions.
On May 24, 2022, the available amount of $530 million under the $750 Million Facility Term Loan was drawn in full, and $70 million of the $220 million available under the $750 Million Facility Revolving Loan was also drawn. Those proceeds, together with available cash, were used (i) to repay the $163 million outstanding principal balance under the $390 Million Credit Facility; (ii) to repay the $284 million outstanding principal balance under the $525 Million Credit Facility; (iii) to repay the $128 million outstanding principal balance under the $360 Million Credit Facility; and to pay certain expenses related to the refinancing, including certain structuring and arrangement fees, legal and administrative fees totaling $10.5 million.
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The $70 million drawn under the $750 Million Facility Revolving Loan was repaid on June 15, 2022, using a portion of the proceeds from the sale of the FSO Joint Venture.
In August 2022, the Company’s Board of Directors authorized an increase in the share repurchase program to $60.0 million from $33.3 million and extended the expiration of the program to December 31, 2023. During the third quarter of 2022, share repurchases of $20.0 million were executed under such program.
As of September 30, 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 19 ballast water treatment systems and the final outstanding installment payments due for the installation of a scrubber on one Suezmax and six ballast water treatment systems that have been installed as of September 30, 2022. The Company’s debt service commitments and aggregate purchase commitments for vessel construction and betterments as of September 30, 2022, are presented in the Aggregate Contractual Obligations Table below.
Outlook
We executed various liquidity enhancing initiatives during 2021 and 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. 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
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 September 30, 2022 follows:
Beyond
2027
$750 Million Facility Term Loan - floating rate(1)
37,651
152,127
143,438
134,699
127,349
9,945
605,209
Macquarie Credit Facility - floating rate(2)
1,000
3,680
3,055
12,885
20,620
ING Credit Facility - floating rate(2)
822
3,182
3,087
2,980
17,459
27,530
Ocean Yield Lease Financing - floating rate(2)
13,460
52,138
50,242
48,075
46,047
277,185
487,147
COSCO Lease Financing - floating rate(2)
2,158
8,457
8,072
7,697
7,321
30,819
64,524
BoComm Lease Financing - fixed rate(3)
24,255
23,827
23,761
211,756
307,360
Toshin Lease Financing - fixed rate(3)
558
2,418
2,223
2,160
11,308
20,827
Hyuga Lease Financing - fixed rate(3)
2,268
2,456
2,232
10,808
20,563
Kaiyo Lease Financing - fixed rate(3)
750
2,063
2,410
8,769
18,492
Kaisha Lease Financing - fixed rate(3)
563
2,437
2,225
8,929
18,654
Operating lease obligations(4)
Bareboat Charter-ins
Time Charter-ins
1,777
3,053
4,830
Vessel and vessel betterment commitments(5)
8,531
13,314
914
22,759
69,487
273,966
242,787
240,174
231,988
576,427
1,634,829
45
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 SOFR 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
46
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 September 30, 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 September 30, 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
You should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our 2021 Form 10-K and in Part II, Item 1A, “Risk Factors” in our Quarterly Report on Form 10-Q for the quarters ended March 31, 2022 and June 30, 2022. The risks described in those documents 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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended September 30, 2022, the Company repurchased and retired 687,740 shares of its common stock in open-market purchases, at an average price of $29.08 per share, for a total cost of $20.0 million. As of September 30, 2022, the maximum number of shares that may still be purchased under the program is 1,138,138 shares, which was determined by dividing the remaining buyback authorization ($40.0 million) by the September 30, 2022 closing price of the Company’s common stock. Future buybacks under the stock repurchase program will be at the discretion of our Board of Directors and subject to limitations under the Company’s debt facilities.
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 the cost of stock options exercised
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by certain members of management and 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.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Item 6. Exhibits
**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)
49
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: November 8, 2022
/s/ Lois K. Zabrocky
Lois K. Zabrocky
Chief Executive Officer
/s/ Jeffrey D. Pribor
Jeffrey D. Pribor
Chief Financial Officer
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