OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DOLLARS IN THOUSANDS
|
|
|
|
|
|
|
|
|
|
June 30,
2018
|
|
December 31,
2017
|
|
(unaudited)
|
|
|
ASSETS
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
130,974
|
|
|
$
|
165,994
|
|
Restricted cash
|
59
|
|
|
58
|
|
Voyage receivables, including unbilled of $6,135 and $9,919
|
18,257
|
|
|
24,209
|
|
Income tax receivable
|
835
|
|
|
1,122
|
|
Receivable from INSW
|
34
|
|
|
372
|
|
Other receivables
|
1,471
|
|
|
2,184
|
|
Inventories, prepaid expenses and other current assets
|
14,854
|
|
|
13,356
|
|
Total Current Assets
|
166,484
|
|
|
207,295
|
|
Vessels and other property, less accumulated depreciation
|
615,530
|
|
|
632,509
|
|
Deferred drydock expenditures, net
|
24,062
|
|
|
23,914
|
|
Total Vessels, Other Property and Deferred Drydock
|
639,592
|
|
|
656,423
|
|
Restricted cash - non current
|
191
|
|
|
217
|
|
Investments in and advances to affiliated companies
|
38
|
|
|
3,785
|
|
Intangible assets, less accumulated amortization
|
38,717
|
|
|
41,017
|
|
Other assets
|
22,539
|
|
|
23,150
|
|
Total Assets
|
$
|
867,561
|
|
|
$
|
931,887
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
Accounts payable, accrued expenses and other current liabilities
|
$
|
34,643
|
|
|
$
|
34,371
|
|
Current installments of long-term debt
|
—
|
|
|
28,160
|
|
Total Current Liabilities
|
34,643
|
|
|
62,531
|
|
Reserve for uncertain tax positions
|
3,254
|
|
|
3,205
|
|
Long-term debt
|
376,660
|
|
|
420,776
|
|
Deferred income taxes, net
|
84,757
|
|
|
83,671
|
|
Other liabilities
|
47,415
|
|
|
48,466
|
|
Total Liabilities
|
546,729
|
|
|
618,649
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
Common stock - Class A ($0.01 par value; 166,666,666 shares authorized; 80,713,679 and 78,277,669 shares issued and outstanding
|
807
|
|
|
783
|
|
Paid-in additional capital
|
586,414
|
|
|
584,675
|
|
Accumulated deficit
|
(260,269
|
)
|
|
(265,758
|
)
|
|
326,952
|
|
|
319,700
|
|
Accumulated other comprehensive loss
|
(6,120
|
)
|
|
(6,462
|
)
|
Total Equity
|
320,832
|
|
|
313,238
|
|
Total Liabilities and Equity
|
$
|
867,561
|
|
|
$
|
931,887
|
|
See notes to condensed consolidated financial statements
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Shipping Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time and bareboat charter revenues
|
$
|
54,543
|
|
|
$
|
72,116
|
|
|
$
|
108,437
|
|
|
$
|
151,883
|
|
Voyage charter revenues
|
40,824
|
|
|
24,109
|
|
|
87,959
|
|
|
52,458
|
|
|
95,367
|
|
|
96,225
|
|
|
196,396
|
|
|
204,341
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
Voyage expenses
|
9,402
|
|
|
5,149
|
|
|
21,654
|
|
|
10,941
|
|
Vessel expenses
|
33,656
|
|
|
32,599
|
|
|
67,160
|
|
|
68,243
|
|
Charter hire expenses
|
22,768
|
|
|
22,856
|
|
|
45,315
|
|
|
45,433
|
|
Depreciation and amortization
|
12,426
|
|
|
15,086
|
|
|
24,798
|
|
|
31,711
|
|
General and administrative
|
6,586
|
|
|
6,190
|
|
|
13,369
|
|
|
14,284
|
|
Total operating expenses
|
84,838
|
|
|
81,880
|
|
|
172,296
|
|
|
170,612
|
|
Operating income
|
10,529
|
|
|
14,345
|
|
|
24,100
|
|
|
33,729
|
|
Other income/(expense)
|
385
|
|
|
(87
|
)
|
|
(246
|
)
|
|
(880
|
)
|
Income before interest expense, reorganization items and income taxes
|
10,914
|
|
|
14,258
|
|
|
23,854
|
|
|
32,849
|
|
Interest expense
|
(7,497
|
)
|
|
(9,445
|
)
|
|
(15,573
|
)
|
|
(18,802
|
)
|
Income before reorganization items and income taxes
|
3,417
|
|
|
4,813
|
|
|
8,281
|
|
|
14,047
|
|
Reorganization items, net
|
—
|
|
|
(9
|
)
|
|
—
|
|
|
(244
|
)
|
Income before income taxes
|
3,417
|
|
|
4,804
|
|
|
8,281
|
|
|
13,803
|
|
Income tax provision
|
(362
|
)
|
|
(1,593
|
)
|
|
(1,564
|
)
|
|
(5,162
|
)
|
Net income
|
$
|
3,055
|
|
|
$
|
3,211
|
|
|
$
|
6,717
|
|
|
$
|
8,641
|
|
|
|
|
|
|
|
|
|
Weighted Average Number of Common Shares Outstanding:
|
|
|
|
|
|
|
|
|
|
Basic - Class A
|
88,367,302
|
|
|
87,769,483
|
|
|
88,237,093
|
|
|
88,309,231
|
|
Diluted - Class A
|
89,198,996
|
|
|
87,964,755
|
|
|
88,910,518
|
|
|
88,542,779
|
|
|
|
|
|
|
|
|
|
Per Share Amounts:
|
|
|
|
|
|
|
|
|
|
Basic and diluted net income - Class A
|
$
|
0.03
|
|
|
$
|
0.04
|
|
|
$
|
0.08
|
|
|
$
|
0.10
|
|
See notes to condensed consolidated financial statements
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
DOLLARS IN THOUSANDS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net income
|
$
|
3,055
|
|
|
$
|
3,211
|
|
|
$
|
6,717
|
|
|
$
|
8,641
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
Net change in unrealized gains on cash flow hedges
|
—
|
|
|
202
|
|
|
112
|
|
|
350
|
|
Defined benefit pension and other postretirement benefit plans:
|
|
|
|
|
|
|
|
Net change in unrecognized prior service costs
|
(39
|
)
|
|
—
|
|
|
(70
|
)
|
|
—
|
|
Net change in unrecognized actuarial losses
|
166
|
|
|
335
|
|
|
300
|
|
|
335
|
|
Other comprehensive income
|
127
|
|
|
537
|
|
|
342
|
|
|
685
|
|
Comprehensive income
|
$
|
3,182
|
|
|
$
|
3,748
|
|
|
$
|
7,059
|
|
|
$
|
9,326
|
|
See notes to condensed consolidated financial statements
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
DOLLARS IN THOUSANDS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2018
|
|
2017
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
Net income
|
$
|
6,717
|
|
|
$
|
8,641
|
|
Items included in net income not affecting cash flows:
|
|
|
|
|
|
Depreciation and amortization
|
24,798
|
|
|
31,711
|
|
Amortization of debt discount and other deferred financing costs
|
2,099
|
|
|
2,653
|
|
Compensation relating to restricted stock awards and stock option grants
|
1,497
|
|
|
1,699
|
|
Deferred income tax provision
|
1,057
|
|
|
2,121
|
|
Reorganization items, non-cash
|
—
|
|
|
85
|
|
Other – net
|
1,110
|
|
|
1,481
|
|
Loss on extinguishment of debt, net
|
981
|
|
|
1,189
|
|
Distributed earnings of affiliated companies
|
3,747
|
|
|
3,656
|
|
Payments for drydocking
|
(4,107
|
)
|
|
(3,305
|
)
|
SEC, Bankruptcy and IRS claim payments
|
—
|
|
|
(5,000
|
)
|
Changes in operating assets and liabilities
|
2,603
|
|
|
(20,273
|
)
|
Net cash provided by operating activities
|
40,502
|
|
|
24,658
|
|
Cash Flows from Investing Activities:
|
|
|
|
Expenditures for other property
|
(22
|
)
|
|
(11
|
)
|
Net cash used in investing activities
|
(22
|
)
|
|
(11
|
)
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
Payments on debt
|
(28,166
|
)
|
|
—
|
|
Extinguishment of debt
|
(47,000
|
)
|
|
(20,008
|
)
|
Tax withholding on share-based awards
|
(359
|
)
|
|
(1,062
|
)
|
Net cash used in financing activities
|
(75,525
|
)
|
|
(21,070
|
)
|
Net (decrease)/increase in cash, cash equivalents and restricted cash (Note 3)
|
(35,045
|
)
|
|
3,577
|
|
Cash, cash equivalents and restricted cash at beginning of period (Note 3)
|
166,269
|
|
|
206,933
|
|
Cash, cash equivalents and restricted cash at end of period (Note 3)
|
$
|
131,224
|
|
|
$
|
210,510
|
|
See notes to condensed consolidated financial statements
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
DOLLARS IN THOUSANDS
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock (1)
|
|
Paid-in Additional Capital (2)
|
|
Accumulated
Deficit
|
|
Accumulated Other Comprehensive Loss (3)
|
|
Total
|
Balance at December 31, 2017
|
$
|
783
|
|
|
$
|
584,675
|
|
|
$
|
(265,758
|
)
|
|
$
|
(6,462
|
)
|
|
$
|
313,238
|
|
Adoption of accounting standard (Note 4)
|
—
|
|
|
—
|
|
|
(1,228
|
)
|
|
—
|
|
|
(1,228
|
)
|
Net income
|
—
|
|
|
—
|
|
|
6,717
|
|
|
—
|
|
|
6,717
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
342
|
|
|
342
|
|
Forfeitures, cancellations, issuance and vesting of restricted stock awards, net
|
7
|
|
|
(366
|
)
|
|
—
|
|
|
—
|
|
|
(359
|
)
|
Compensation related to Class A options granted and restricted stock awards
|
—
|
|
|
2,122
|
|
|
—
|
|
|
—
|
|
|
2,122
|
|
Conversion of Class A warrants to common stock
|
17
|
|
|
(17
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance at June 30, 2018
|
$
|
807
|
|
|
$
|
586,414
|
|
|
$
|
(260,269
|
)
|
|
$
|
(6,120
|
)
|
|
$
|
320,832
|
|
|
|
(1)
|
Par value
$0.01
per share;
166,666,666
Class A shares authorized;
80,713,679
Class A shares outstanding as of
June 30, 2018
.
|
|
|
(2)
|
Includes
41,165,789
outstanding Class A warrants as of
June 30, 2018
.
|
|
|
(3)
|
Amounts are net of tax.
|
See notes to condensed consolidated financial statements
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
Note 1 — Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Overseas Shipholding Group, Inc., a Delaware corporation (the “Parent Company”), and its wholly owned subsidiaries (collectively, the “Company” or “OSG”, “we”, “us” or “our”). The Company owns and operates a fleet of oceangoing vessels engaged primarily in the transportation of crude oil and refined petroleum products in the U.S. Flag trades. The Company manages the operations of its fleet through its wholly owned subsidiary, OSG Bulk Ships, Inc. (“OBS”), a New York corporation.
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 statement of the results have been included. Operating results for the
three
and
six
months ended
June 30, 2018
, are not necessarily indicative of the results that may be expected for the year ending
December 31, 2018
.
The condensed consolidated balance sheet as of
December 31, 2017
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, 2017
(“Form 10-K”).
Note 2 — Chapter 11 Filing and Emergence from Bankruptcy
In October 2012, the Company disclosed that its Audit Committee, on the recommendation of management, concluded that the Company’s previously issued financial statements for at least the three years ended December 31, 2011 and associated interim periods, and for the fiscal quarters ended March 31, 2012 and June 30, 2012, should no longer be relied upon. Shortly thereafter several putative class action suits were filed in the United States District Court for the Southern District of New York against the Company. Also named as defendants were its then President and Chief Executive Officer, its then Chief Financial Officer, its then current and certain former members of its Board of the Directors, and certain Company representatives.
On November 14, 2012 (the “Petition Date”), the Parent Company and
180
of its subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). On August 5, 2014, a plan of reorganization (the “Equity Plan”) became effective and OSG emerged from bankruptcy.
On January 23, 2017, the SEC commenced an administrative proceeding, with the Company’s consent, that fully resolved an SEC investigation that was initiated in connection with the Company’s earnings restatement announced in 2012. The Company neither admitted nor denied the SEC’s allegations that the Company violated certain provisions of the Securities Act, the Exchange Act and related rules. After receiving Bankruptcy Court approval, the Company paid a
$5,000
civil penalty relating to the investigation in February 2017. The settlement with the SEC does not require any further changes to the Company’s historical financial statements. Any indemnification or contribution claims by officers or directors of the Company that could be asserted in connection with the SEC’s investigation have been released or otherwise resolved pursuant to the Equity Plan and order of the Bankruptcy Court.
On February 10, 2017, pursuant to a final decree and order of the Bankruptcy Court, OSG’s
one
remaining case, as the Parent Company, was closed.
Reorganization items, net of
$9
and
$244
for the
three
and
six
months ended
June 30, 2017
, respectively, represent amounts incurred subsequent to the Petition Date as a direct result of the filing of our Chapter 11 cases and are related to trustee and professional fees.
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
Note 3 — Recently Adopted and Issued Accounting Standards
Recently Adopted Accounting Standards
In May 2017, the FASB issued ASU 2017-09,
Compensation—Stock Compensation (ASC 718)
,
Scope of Modification Accounting,
which provides guidance in regards to a change to the terms or conditions of a share-based payment award. An entity is required to account for the effects of a modification unless all the following are met: (1) the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The guidance is to be applied prospectively to an award modified on or after the adoption date. The standard is effective for annual periods beginning after December 15, 2017 and interim periods within that reporting period. The adoption of this accounting policy had no impact on the Company’s consolidated financial statements since there were no stock award modifications during the
six
months ended
June 30, 2018
.
In March 2017, the FASB issued ASU 2017-07,
Compensation — Retirement
Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
, that will change how employers that sponsor defined benefit pension and/or other postretirement benefit plans present the net periodic benefit cost in the income statement. Under ASU 2017-07, employers will present the service cost component of net periodic benefit cost in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period. Only the service cost component will be eligible for capitalization in assets. Additionally, employers will present the other components of the net periodic benefit cost separately from the line item(s) that includes the service cost and outside of any subtotal of operating income, if one is presented. These components will not be eligible for capitalization in assets. The guidance is effective for interim and annual periods beginning after December 15, 2017. This standard must be applied retrospectively to all periods presented. The Company retrospectively adopted this standard effective January 1, 2018. The amortization of actuarial (gain)/loss and amortization of prior service credits have been reclassified from vessel expenses and general and administrative expenses to other expense in the Company's consolidated statements of operations.
The effect of the retrospective presentation change related to the net periodic cost of the Company's domestic pension and postretirement benefit plans on its consolidated statements of operations was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2017
|
($ in thousands)
|
As Previously Reported
|
|
Impact of Adoption
|
|
As Adjusted
|
Vessel expenses
|
$
|
68,173
|
|
|
$
|
70
|
|
|
$
|
68,243
|
|
General and administrative
|
14,604
|
|
|
(320
|
)
|
|
14,284
|
|
Total Operating Expenses
|
170,862
|
|
|
(250
|
)
|
|
170,612
|
|
Operating income
|
33,479
|
|
|
250
|
|
|
33,729
|
|
Other expense
|
630
|
|
|
250
|
|
|
880
|
|
In November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows (ASC 230): Restricted Cash
, which requires that amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The standard is effective for annual periods beginning after December 15, 2017 and interim periods within that reporting period. This standard must be applied retrospectively to all periods presented. The Company adopted this standard effective January 1, 2018. The prior period has been adjusted to conform to current period presentation, which resulted in a decrease of
$9,909
in net cash provided by investing activities for the
six
months ended
June 30, 2017
, related to changes in restricted cash amounts.
In October 2016, the FASB issued ASU No. 2016-16,
Income Taxes (ASC 740): Intra-Entity Transfers of Assets Other Than Inventory
, amending the accounting for income taxes. Under current guidance the recognition of current and deferred income taxes for an intra-entity asset transfer is prohibited until the asset has been sold to an outside party. The amended guidance eliminates the prohibition against immediate recognition of current and deferred income tax amounts associated with intra entity transfers of assets other than inventory. This guidance is effective for interim and annual periods beginning after December 15, 2017. The requirements of the amended guidance should be applied on a modified retrospective basis through a
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company adopted this standard effective January 1, 2018. The adoption of the standard did not have any impact to the Company's consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15,
Classification of Certain Cash Receipts and Cash Payments (ASC 230),
which amends the guidance in ASC 230 on the classification of certain cash receipts and payments in the statement of cash flows. The primary purpose of the ASU is to reduce the diversity in practice that has resulted from the lack of consistent principles on this topic with respect to (1) debt prepayment or debt extinguishment costs; (2) settlement of zero-coupon debt; (3) contingent consideration payments made after a business combination; (4) proceeds from the settlement of insurance claims; (5) proceeds from the settlement of corporate-owned life insurance policies; (6) distributions received from equity method investees; (7) beneficial interests in securitization transactions; and (8) separately identifiable cash flows and application of the predominance principle. The standard is effective for interim and annual periods beginning after December 31, 2017. The guidance requires application using a retrospective transition method. The Company adopted this standard effective January 1, 2018. The Company determined that its current accounting policies align with this standard, therefore, this standard did not have an impact on the Company's consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (ASC 606)
, to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability within industries, across industries, and across capital markets. Subsequent to the May 2014 issuance, several clarifications and updates have been issued on this topic. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The Company adopted ASC 606 effective January 1, 2018 using the modified retrospective transition method. The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings at the beginning of 2018. The comparative information has not been restated and continues to be reported under the accounting standards in effect for the period presented.
See Note 4, “Revenue Recognition,” for additional accounting policy and transition disclosures.
Recently Issued Accounting Standards
In February 2018 the FASB issued ASU 2018-02,
Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
, that gives entities the option to reclassify to retained earnings tax effects related to items that have been stranded in accumulated other comprehensive income as a result of the Tax Cuts and Jobs Act (“TCJA”). The new guidance may be applied retrospectively to each period in which the effect of the TCJA is recognized in the period of adoption. The Company must adopt this guidance for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted for periods for which financial statements have not yet been issued or made available for issuance, including the period the TCJA was enacted. The guidance, when adopted, will require new disclosures regarding a company’s accounting policy for releasing the tax effects in AOCI and permit the company the option to reclassify to retained earnings the tax effects resulting from the TCJA that are stranded in AOCI. The Company is currently evaluating how to apply the new guidance and has not determined whether it will elect to reclassify stranded amounts. The adoption of ASU 2018-02 is not expected to have a material effect on the Company's consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (ASC 842)
, which requires lessees to recognize most leases on the balance sheet. This is expected to increase both reported assets and liabilities. For public companies, the standard will be effective for the first interim reporting period within annual periods beginning after December 15, 2018, although early adoption is permitted. Lessees and lessors will be required to apply the new standard at the beginning of the earliest period presented in the financial statements in which they first apply the new guidance, using a modified retrospective transition method. The requirements of this standard include a significant increase in required disclosures. Management is analyzing the impact of the adoption of this guidance on the Company’s consolidated financial statements, including assessing changes that might be necessary to information technology systems, processes and internal controls to capture new data and address changes in financial reporting. Management expects that the Company will recognize substantial increases in reported amounts for property, plant and equipment and related lease liabilities upon adoption of the new standard. As of
June 30, 2018
, the contractual obligations for the Company’s leased vessels was approximately
$208,200
.
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
Note 4 - Revenue Recognition
Adoption of ASC 606
On
January 1, 2018
, the Company adopted ASC 606 applying the modified retrospective method to all contracts not completed as of
January 1, 2018
. Results for reporting periods beginning after
January 1, 2018
are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period.
The impact of adopting the new standard primarily related to a change in the timing of revenue recognition for voyage charter contracts. In the past, the Company recognized revenue from voyage charters ratably over the estimated length of each voyage, calculated on a discharge-to-discharge basis. Under the new standard, the Company recognizes revenue from voyage charters ratably over the estimated length of each voyage, calculated on a load-to-discharge basis. In addition, the adoption of ASC 606 resulted in a corresponding change in the timing of recognition of voyage expenses for voyage charter contracts.
The cumulative effect of the changes made to the Company's consolidated
January 1, 2018
balance sheet for the adoption of ASC 606 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
Balance at December 31, 2017
|
|
Adjustments Due to ASC 606
|
|
Balance at January 1, 2018
|
Assets
|
|
|
|
|
|
Voyage receivables
|
$
|
24,209
|
|
|
$
|
1,336
|
|
|
$
|
25,545
|
|
Liabilities
|
|
|
|
|
|
Deferred income taxes
|
83,671
|
|
|
(108
|
)
|
|
83,563
|
|
Equity
|
|
|
|
|
|
Accumulated deficit
|
(265,758
|
)
|
|
(1,228
|
)
|
|
(266,986
|
)
|
For the
six
months ended
June 30, 2018
, revenues increased by
$1,583
, net income increased by
$1,228
and basic and diluted net income per share increased by
$0.02
per share as a result of applying ASC 606.
Revenue Recognition
Revenues are recognized when control of the promised services are transferred to the Company's customers in an amount that reflects the consideration that the Company expects to receive in exchange for those services.
Voyage Charter Revenues
The Company enters into voyage charter contracts, which are charters under which a customer pays a transportation charge, voyage freight, for the movement of a specific cargo between two or more specified ports. The Company's performance obligation under voyage charters, which consists of moving cargo from a load port to a discharge port, is satisfied over time. Accordingly, under ASC 606, the Company recognizes revenue from voyage charters ratably over the estimated length of each voyage, calculated on a load-to-discharge basis. The transaction price is in the form of a fixed fee at contract inception, which is the transportation charge. Voyage charter contracts also include variable consideration in the form of demurrage, which is additional revenue the Company receives for delays experienced in loading or unloading cargo that are not deemed to be the responsibility of the Company, calculated in accordance with specific charter terms. The Company does not include demurage in the transaction price for voyage charters as it is considered constrained since it is highly susceptible to factors outside the Company's influence. Examples of when demurrage is incurred include weather conditions and security regulations at ports. The uncertainty related to this variable consideration is resolved upon the completion of the voyage, the duration of which is generally less than
30 days
.
Lightering Revenues
The Company enters into lightering contracts, which are contracts for the off-loading of crude oil or petroleum products from large size tankers, typically, Very Large Crude Carriers, into smaller tankers or barges for discharge in ports from which the larger tankers are restricted due to the depth of the water, narrow entrances or small berths. For lightering services, the customer does not obtain or control a minor amount of the output or other utility of the vessel. Also, the customer does not have the
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
ability or right to control physical access to the vessel and there is a guaranteed monthly or annual minimum volume requirement that the fixed price that the customer pays is based on. The Company invoices the customer monthly based on either the actual barrels of cargo lightered or the monthly minimum volume requirement in the contract for services delivered over time. Annually, the Company performs a reconciliation between actual barrels lightered and the annual minimum volume requirement and, if necessary, bills the customer for amounts in excess of the minimum. Lightering contracts also include variable consideration for barrels delivered in excess of the contractual minimum. The Company does not include this variable consideration in the transaction price for lightering contracts as it is considered constrained since it is controlled by the customer. The uncertainty related to this variable consideration is resolved with the customer either on a monthly or annual basis as stipulated in the contract. Lightering revenue is included within voyage charter revenue on the consolidated statements of operations.
Time Charter Revenues
The Company enters into time charter contracts under which a customer pays a fixed daily or monthly rate for a fixed period of time for use of a vessel. The Company recognizes revenues from time charters as operating leases and are thus recognized ratably over the non-cancellable contract term, as service is performed. Customers pay voyage expenses such as fuel, canal tolls and port charges. The Company pays vessel expenses such as technical management expenses. The Company continues to evaluate the impact of the standard as it relates to non-lease components of time charter contracts and will finalize its position when the FASB’s Proposed Accounting Standards Update -
Leases (Topic 842): Targeted Improvements
becomes final, which will be consistent with the effective date and transition of the new leasing guidance in ASU 2016-02.
U.S. Maritime Security Program
Two
of the Company's reflagged U.S. Flag Product Carriers participate in the U.S. Maritime Security Program ("MSP"), which ensures that privately-owned, military-useful U.S. Flag vessels are available to the U.S. Department of Defense in the event of war or national emergency. The Company receives an annual operating-differential subsidy pursuant to the Merchant Marine Act of 1936 for each participating vessel, subject in each case to annual congressional appropriations. The subsidy is intended to reimburse owners for the additional costs of operating U.S. Flag vessels. The Company considers the MSP contract with the U.S. government as a service arrangement under ASC 606.
Contract Balances
As of
June 30, 2018
and December 31, 2017, contract balances from contracts with customers consisted of voyage receivables, including unbilled receivables, of
$17,425
and
$22,860
, respectively, net of allowance for doubtful accounts. For voyage charters, voyage freight is due to the Company upon completion of discharge at the last discharge port. For lightering contracts, the Company invoices the customer monthly based on either the actual barrels of cargo lightered or the monthly minimum volume requirement in the contract for services delivered over time. The Company routinely reviews its voyage receivables and makes provisions for probable doubtful accounts; however, those provisions are estimates and actual results could differ from those estimates and those differences may be material. Voyage receivables are deemed uncollectible and removed from accounts receivable and the allowance for doubtful accounts when collection efforts have been exhausted.
Costs to Fulfill a Contract
Under ASC 606, for voyage charters and lightering contracts, the Company capitalizes the direct costs, which are voyage expenses, of relocating the vessel to the load port to be amortized during transport of the cargo. At
June 30, 2018
, there were no such direct costs related to voyages that were not yet completed as there were no in process voyages.
Transaction Price Allocated to the Remaining Performance Obligations
The Company will generally have partially satisfied performance obligations at month-end due to voyage charters which have not been completed. At
June 30, 2018
, there were
no
voyage charters that were not yet completed.
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
Practical Expedients and Exemptions
For voyage charters, the Company expenses broker commissions, which are costs of obtaining a contract, when incurred because the amortization period is less than one year. The Company records these costs within voyage expenses in the consolidated statements of operations.
For contracts that were modified before the adoption date, the Company has not retrospectively restated the contract for those contract modifications.
Note 5 — 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. As management deemed the exercise price for the Class A warrants of
$0.01
per share to be nominal, warrant proceeds are ignored and the shares issuable upon Class A warrant exercise are included in the calculation of basic weighted average common shares outstanding for all periods.
The computation of diluted earnings per share assumes the issuance of common stock for all potentially dilutive stock options and restricted stock units. 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.
Class A
There were
no
weighted average shares of unvested Class A restricted common stock shares considered to be participating securities for the
three
and
six
months ended
June 30, 2018
. There were
125,145
and
99,814
weighted average shares of unvested Class A restricted common stock shares considered to be participating securities for the
three
and
six
months ended
June 30, 2017
, respectively. For the
three
and
six
months ended
June 30, 2017
, such participating securities were allocated a portion of income under the two-class method.
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. As of
June 30, 2018
, there were
893,215
shares of Class A restricted stock units and
866,011
Class A stock options outstanding which were considered to be potentially dilutive securities. As of
June 30, 2017
, there were
430,633
shares of Class A restricted stock units and
384,084
Class A stock options outstanding which were considered to be potentially dilutive securities.
The components of the calculation of basic earnings per share and diluted earnings per share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net income
|
$
|
3,055
|
|
|
$
|
3,211
|
|
|
$
|
6,717
|
|
|
$
|
8,641
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
Class A common stock - basic
|
88,367,302
|
|
|
87,769,483
|
|
|
88,237,093
|
|
|
88,309,231
|
|
Class A common stock - diluted
|
89,198,996
|
|
|
87,964,755
|
|
|
88,910,518
|
|
|
88,542,779
|
|
For the
three
and
six
months ended
June 30, 2018
, there were
831,694
and
673,425
dilutive equity awards outstanding, respectively. For the
three
and
six
months ended
June 30, 2017
, there were
195,272
and
233,548
dilutive equity awards outstanding, respectively. Awards of
452,758
and
491,957
(which includes restricted stock units and stock options) for the
three
and
six
months ended
June 30, 2018
were not included in the computation of diluted earnings per share because inclusion of these awards would be anti-dilutive.
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
Note 6 — Fair Value Measurements, Derivatives and Fair Value Disclosures
The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Cash and cash equivalents and restricted cash—
The carrying amounts reported in the condensed consolidated balance sheet for interest-bearing deposits approximate their fair value.
Debt—
The fair values of the Company’s publicly traded and non-public debt are estimated based on quoted market prices.
ASC 820,
Fair Value Measurements and Disclosures
, relating to fair value measurements defines fair value and established a framework for measuring fair value. The ASC 820 fair value hierarchy distinguishes between market participant assumptions developed based on market data obtained from sources independent of the reporting entity and the reporting entity's own assumptions about market participant assumptions developed based on the best information available in the circumstances. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit price. In addition, the fair value of assets and liabilities should include consideration of non-performance risk, which for the liabilities described below includes the Company's own credit risk.
The levels of the fair value hierarchy established by ASC 820 are as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities
Level 2 - Quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value
of the assets or liabilities
Financial Instruments that are not Measured at Fair Value on a Recurring Basis
The estimated fair values of the Company’s financial instruments that are not measured at fair value on a recurring basis, categorized based upon the fair value hierarchy, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
Value
|
|
Fair Value
|
|
|
Level 1
|
|
Level 2
|
June 30, 2018:
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash
(1)
|
$
|
131,224
|
|
|
$
|
131,224
|
|
|
$
|
—
|
|
Total
|
$
|
131,224
|
|
|
$
|
131,224
|
|
|
$
|
—
|
|
Liabilities
|
|
|
|
|
|
|
|
|
OBS Term loan
|
375,974
|
|
|
—
|
|
|
377,747
|
|
7.5% Election 2 notes due 2021
|
296
|
|
|
—
|
|
|
298
|
|
7.5% notes due 2024
|
390
|
|
|
—
|
|
|
387
|
|
Total
|
$
|
376,660
|
|
|
$
|
—
|
|
|
$
|
378,432
|
|
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
Value
|
|
Fair Value
|
|
|
Level 1
|
|
Level 2
|
December 31, 2017:
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash
(1)
|
$
|
166,269
|
|
|
$
|
166,269
|
|
|
$
|
—
|
|
Total
|
$
|
166,269
|
|
|
$
|
166,269
|
|
|
$
|
—
|
|
Liabilities
|
|
|
|
|
|
|
|
|
OBS Term loan
|
448,251
|
|
|
—
|
|
|
441,630
|
|
7.5% Election 2 notes due 2021
|
295
|
|
|
—
|
|
|
305
|
|
7.5% notes due 2024
|
390
|
|
|
—
|
|
|
380
|
|
Total
|
$
|
448,936
|
|
|
$
|
—
|
|
|
$
|
442,315
|
|
|
|
(1)
|
Includes current and non-current restricted cash aggregating
$250
and
$275
at
June 30, 2018
and
December 31, 2017
, respectively. Restricted cash as of
June 30, 2018
and
December 31, 2017
is related to the Company's Unsecured Senior Notes.
|
Nonfinancial Instruments that are Measured at Fair Value on a Nonrecurring Basis
Vessel and Intangible Assets Impairments
During the
second
quarter of
2018
, the Company gave consideration as to whether events or changes in circumstances had occurred since
December 31, 2017
that could indicate the carrying amounts of the vessels in the Company's fleet and the carrying value of the Company's intangible assets may not be recoverable as of
June 30, 2018
. The Company concluded that no such events or changes in circumstances had occurred.
Derivatives
Interest Rate Risk
OBS was a party to an interest rate cap agreement (“Interest Rate Cap”) with a start date of
February 5, 2015
with a major financial institution covering a notional amount of
$375,000
to limit the floating interest rate exposure associated with the OBS Term Loan. The Interest Rate Cap terminated on
February 5, 2018
. The Interest Rate Cap was designated and qualified as a cash flow hedge, contained no leverage features and had a cap rate of
2.5%
through
February 5, 2017
, at which time the cap rate increased to
3.0%
through the termination date of
February 5, 2018
.
The effect of the Company’s cash flow hedging relationships on the unaudited condensed consolidated statement of operations for the
six
months ended
June 30, 2018
and 2017 was
$181
and
$551
, respectively, which represents the effective portion of loss reclassified from accumulated other comprehensive loss for interest expense associated with the Interest Rate Cap.
See Note 11, “Accumulated Other Comprehensive Loss,” for disclosures relating to the impact of derivative instruments on accumulated other comprehensive loss.
Note 7 — Debt
Exit Financing Facilities
Capitalized terms used hereafter in this Note 7 have the meanings given in this Quarterly Report on Form 10-Q or in the Company’s
2017
Annual Report on Form 10-K or in the respective transaction documents referred to below, including subsequent amendments thereto.
On the Effective Date, to support the Equity Plan, OSG and its subsidiaries entered into secured debt facilities consisting of: (i) a secured asset-based revolving loan facility of
$75,000
, among the Parent Company, OBS, certain OBS subsidiaries, Wells Fargo Bank, National Association (“Wells Fargo”) as Administrative Agent, and the other lenders party thereto (the “OBS ABL
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
Facility”), secured by a first lien on substantially all of the U.S. Flag assets of OBS and its subsidiaries and a second lien on certain other specified U.S. Flag assets and (ii) a secured term loan of
$603,000
, among the Parent Company, OBS, certain OBS subsidiaries, Jefferies Finance LLC (“Jefferies”), as Administrative Agent, and other lenders party thereto (the “OBS Term Loan”), secured by a first lien on certain specified U.S. Flag assets of OBS and its subsidiaries and a second lien on substantially all of the other U.S. Flag assets of OBS and its subsidiaries. As of
June 30, 2018
,
no
amounts had been drawn under the OBS ABL Facility. The OBS ABL Facility matures on
February 5, 2019
and the OBS Term Loan matures on
August 5, 2019
.
The OBS Term Loan amortizes in equal quarterly installments in aggregate annual amounts equal to
1%
of the original principal amount of the loans, adjusted for optional and mandatory prepayments. However, due to a
$20,000
prepayment made on
May 16, 2016
, the Company is no longer required to make the
1%
annualized principal payments. The OBS Term Loan stipulates that if annual aggregate net cash proceeds of asset sales exceed
$5,000
, the net cash proceeds from each such sale are required to be reinvested in fixed or capital assets within twelve months of such sale or be used to prepay the principal balance outstanding of the facility.
During the
six
months ended
June 30, 2018
, the Company made a mandatory prepayment of
$28,166
and an optional prepayment of
$47,000
on its OBS Term Loan. The aggregate net loss of
$981
realized on these transactions during the
six
months ended
June 30, 2018
reflects a write-off of unamortized original issue discount and deferred financing costs associated with the principal reductions and is included in other expense in the consolidated statements of operations.
The OBS Term Loan is subject to additional mandatory annual prepayments in an aggregate principal amount of up to
50%
of Excess Cash Flow. As of
June 30, 2018
, management determined that no prepayments will be required for the OBS Term Loan for 2019 because the optional prepayment made in 2018 discussed above was in excess of the amounts that would otherwise have been payable.
The Exit Financing Facilities also contain certain restrictions relating to new borrowings, and the movement of funds between OBS and OSG (as Parent Company), which is not a borrower under the Exit Financing Facilities, as set forth in the respective loan agreements. The Parent Company’s ability to receive cash dividends, loans or advances from OBS is restricted under the Exit Financing Facilities. The Available Amount for cash dividends, loans or advances to the Parent Company permitted under the OBS Term Loan was $
71,758
as of
June 30, 2018
.
The OBS Term Loan, maturing on
August 5, 2019
, has an outstanding principal balance of
$380,000
. The Company began evaluating alternatives in early 2018 to refinance the OBS Term Loan, including a broad assessment of interest rates and other prevailing conditions in the capital markets. Based on the Company's evaluations to date and current market conditions, the Company believes that it is probable that it will refinance its OBS Term Loan before it becomes due. The Company is actively engaged in the process of obtaining replacement financing.
Note 8 — Taxes
For the three months ended
June 30, 2018
and
2017
, the Company recorded income tax provisions of
$362
and
$1,593
, respectively, which represented effective tax rates of
11%
and
33%
, respectively. For the
six
months ended
June 30, 2018
and
2017
, the Company recorded income tax provisions of
$1,564
and
$5,162
, respectively, which represented effective tax rates of
19%
and
37%
, respectively. The decrease in the effective tax rate for the
2018
period compared to the
2017
period was substantially due to the reduction of the statutory federal rate from
35%
to
21%
with the signing into law the Tax Cuts and Jobs Act (“TCJA”) on
December 22, 2017
. The effective tax rate for the period in both
2018
and
2017
was different from the statutory rate primarily as a result of the income tax provision resulting from stock compensation pursuant to ASU 2016-09 offset in part by the non-taxability of income subject to U.S. tonnage tax. The effective tax rate for the
2018
period was also impacted by the TCJA interest and executive compensation deduction limitations.
The Company recorded reasonable estimates of the impact of the TCJA on the Company’s deferred tax balances as provisional estimates at
December 31, 2017
in accordance with SEC Staff Accounting Bulletin No. 118. There has been no activity through the
second
quarter that has required the Company to refine its estimate. The Company will continue to analyze additional information and guidance related to the TCJA as supplemental legislation, regulatory guidance or evolving technical interpretations become available. The Company continues to expect to complete its analysis no later than the
fourth
quarter of
2018
.
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
As of
June 30, 2018
and
December 31, 2017
, the Company recorded a noncurrent reserve for uncertain tax positions of
$3,254
and
$3,205
, respectively, after taking into consideration tax attributes, such as net operating loss carryforwards, and accrued interest and penalties of
$960
and
$911
, respectively.
The Internal Revenue Service (“IRS”) completed its examination of the Company's tax returns for fiscal years
2012
through
2015
and received notification that the Joint Committee on Taxation completed their review of the report on July 2, 2018. The proposed adjustments from the examination period relate primarily to the attribution of taxable income to a particular jurisdiction and disallowed officers compensation under Section 162(m). As previously disclosed in 2017 and previous years, the Company had recorded uncertain tax positions for several other tax positions reported in the income tax returns during these years. The final IRS report did not include any assessments related to those positions. As a result of the closure of the examination in July, it is anticipated the Company will reduce its unrecognized tax benefits for those previously reserved positions up to
$36,000
and recognize a tax benefit of up to
$22,000
within the third quarter.
Note 9 — Related Parties
Equity Method Investment
Investments in and advances to affiliated companies are comprised of the Company’s
37.5%
interest in Alaska Tanker Company, LLC (“ATC”), which manages vessels carrying Alaskan crude for BP West Coast Products, LLC (“BP”). In the first quarter of 1999, OSG, BP, and Keystone Shipping Company formed ATC to manage the vessels carrying crude oil for BP. ATC provides marine transportation services in the environmentally sensitive Alaskan crude oil trade. Each member in ATC is entitled to receive its respective share of any incentive charter hire payable by BP to ATC.
Guarantees
INSW entered into guarantee arrangements in connection with the spin-off from OSG on November 30, 2016, in favor of Qatar Liquefied Gas Company Limited (2) (“LNG Charterer”) and relating to certain LNG Tanker Time Charter Party Agreements with the LNG Charterer and each of Overseas LNG H1 Corporation, Overseas LNG H2 Corporation, Overseas LNG S1 Corporation and Overseas LNG S2 Corporation (such agreements, the “LNG Charter Party Agreements,” and such guarantees, collectively, the “LNG Performance Guarantees”).
OSG continues to provide a guarantee in favor of the LNG Charterer relating to the LNG Charter Party Agreements (such guarantees, the ‘‘OSG LNG Performance Guarantee’’). INSW will indemnify OSG for liabilities arising from the OSG LNG Performance Guarantees pursuant to the terms of the Separation and Distribution Agreement. The maximum potential liability associated with this guarantee is not estimable because obligations are only based on future non-performance events of charter arrangements. In connection with the OSG LNG Performance Guarantees, INSW will pay a
$135
fee per year to OSG, which is subject to escalation after 2018 and will be terminated if OSG ceases to provide the OSG LNG Performance Guarantee.
Note 10 — Capital Stock and Stock Compensation
Share and Warrant Repurchases
During the
six
months ended
June 30, 2018
, in connection with the vesting of restricted stock units, the Company repurchased
163,464
shares of Class A common stock at an average cost of
$2.20
per share (based on the market prices on the dates of vesting) from certain members of management to cover withholding taxes.
Warrant Conversions
During the
six
months ended
June 30, 2018
, the Company issued
1,725,801
shares of Class A common stock as a result of the exercise of
9,106,422
Class A warrants. During the
six
months ended
June 30, 2017
, the Company issued
4,477,726
shares of Class A common stock as a result of the exercise of
23,625,925
Class A warrants.
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
Stock Compensation
The Company accounts for stock compensation expense in accordance with the fair value based method required by ASC 718,
Compensation – Stock Compensation
. Such fair value based method requires share based payment transactions to be measured based on the fair value of the equity instruments issued.
Director Compensation — Restricted Stock Units
During the
three
months ended
June 30, 2018
, the Company awarded
151,300
time-based restricted stock units (“RSUs”) to its non-employee directors. The average grant date fair value of these awards was
$3.65
per RSU. Such RSUs vest in full on the first anniversary of the grant date, subject to each director continuing to provide services to the Company through such date.
Management Compensation
—
Restricted Stock Units and Stock Options
During the
three
and
six
months ended
June 30, 2018
, the Company granted
0
and
365,584
RSUs to its employees, including senior officers, respectively. The average grant date fair value of these awards was
$1.70
per RSU. Each RSU represents a contingent right to receive one share of Class A common stock upon vesting. Each award of RSUs will vest in equal installments on each of the first
three
anniversaries of the grant date.
In addition, during the
six
months ended
June 30, 2018
, the Company awarded
330,882
shares of the Company's Class A common stock to one of its senior officers, net of all taxes, which vested immediately. The average grant date fair value of these awards was
$1.70
.
During the
three
and
six
months months ended
June 30, 2018
, the Company awarded
0
and
142,060
performance-based RSUs to its senior officers. Each performance-based RSU represents a contingent right to receive RSUs based upon continuous employment through the end of a
three
-year performance period (the “Performance Period”) and shall vest as follows: (i) one-half of the target RSUs shall vest and become nonforfeitable subject to OSG’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 (the formula for ROIC is net operating profit after taxes divided by the net of total debt plus shareholders equity less cash); and (ii) one–half of the target RSUs will be subject to OSG’s three–year total shareholder return (“TSR”) performance relative to that of a performance index over a three–year TSR performance period. The index will consist of companies that comprise a combination of the oil and gas storage and transportation and marine GICS sub-industries indexes during the Performance Period. Vesting is subject in each case to the Human Resources and Compensation Committee’s certification of achievement of the performance measures and targets.
Both the ROIC Target RSUs and the TSR Target RSUs are subject to an increase up to a maximum of
106,545
target RSUs, respectively, (aggregate
213,090
target RSUs) or decrease depending on performance against the applicable measure and targets. The ROIC performance goal is a performance condition which, as of
June 30, 2018
, management believed, was considered probable of being achieved. Accordingly, for financial reporting purposes, compensation costs have been recognized. The grant date fair value of the TSR based performance awards, which have a market condition, was determined to be
$1.70
per RSU.
During the
three
and
six
months ended
June 30, 2018
, the Company awarded
0
and
494,118
stock options to certain senior officers, respectively, which vested immediately. Each stock option represents an option to purchase one share of Class A common stock for an exercise price of
$1.70
per share. The call option value of the options was
$0.92
per option. Under the grant agreement, the stock options have a holding requirement until the earliest to occur of (i) a change in control; (ii) the separation from service date, in the event of a termination of the grantee's employment by the Company without cause or by the grantee for good reason and (iii) the third anniversary of the grant date. The stock options expire on the business day immediately preceding the tenth anniversary of the award date. If a stock option grantee’s employment is terminated for cause (as defined in the applicable Form of Grant Agreement), stock options (whether then vested or exercisable or not) will lapse and will not be exercisable. If a stock option grantee’s employment is terminated for reasons other than cause, the option recipient may exercise the vested portion of the stock option but only within such period of time ending on the earlier to occur of (i) the 90th day ending after the option holder’s employment terminated and (ii) the expiration of the options, provided that if the option holder’s employment terminates for death or disability the vested portion of the option may be exercised until the earlier of (i) the first anniversary of employment termination and (ii) the expiration date of the options.
Note 11 — Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss, net of related taxes, in the condensed consolidated balance sheets follow:
|
|
|
|
|
|
|
|
|
As of
|
June 30,
2018
|
|
December 31,
2017
|
Unrealized losses on derivative instruments
|
$
|
—
|
|
|
$
|
(112
|
)
|
Items not yet recognized as a component of net periodic benefit cost (pension and other postretirement benefit plans)
|
(6,120
|
)
|
|
(6,350
|
)
|
Accumulated other comprehensive loss
|
$
|
(6,120
|
)
|
|
$
|
(6,462
|
)
|
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
The following tables present the changes in the balances of each component of accumulated other comprehensive loss, net of related taxes, during the
three
and
six
months ended
June 30, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses
on cash flow
hedges
|
|
Items not yet
recognized as a
component of net
periodic benefit
cost (pension and
other
postretirement
plans)
|
|
Total
|
|
|
|
|
|
|
Balance as of March 31, 2018
|
$
|
—
|
|
|
$
|
(6,247
|
)
|
|
$
|
(6,247
|
)
|
Current period change, excluding amounts reclassified from accumulated other comprehensive income
|
—
|
|
|
42
|
|
|
42
|
|
Amounts reclassified from accumulated other comprehensive income
|
—
|
|
|
85
|
|
|
85
|
|
Total change in accumulated other comprehensive income
|
—
|
|
|
127
|
|
|
127
|
|
Balance as of June 30, 2018
|
$
|
—
|
|
|
$
|
(6,120
|
)
|
|
$
|
(6,120
|
)
|
|
|
|
|
|
|
Balance as of March 31, 2017
|
$
|
(871
|
)
|
|
$
|
(7,141
|
)
|
|
$
|
(8,012
|
)
|
Current period change, excluding amounts reclassified from
accumulated other comprehensive income
|
(115
|
)
|
|
335
|
|
|
220
|
|
Amounts reclassified from accumulated other comprehensive income
|
317
|
|
|
—
|
|
|
317
|
|
Total change in accumulated other comprehensive income
|
202
|
|
|
335
|
|
|
537
|
|
Balance as of June 30, 2017
|
$
|
(669
|
)
|
|
$
|
(6,806
|
)
|
|
$
|
(7,475
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses
on cash flow
hedges
|
|
Items not yet
recognized as a
component of net
periodic benefit
cost (pension and
other
postretirement
plans)
|
|
Total
|
|
|
|
|
|
|
Balance as of December 31, 2017
|
$
|
(112
|
)
|
|
$
|
(6,350
|
)
|
|
$
|
(6,462
|
)
|
Current period change, excluding amounts reclassified from accumulated other comprehensive income
|
(69
|
)
|
|
61
|
|
|
(8
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
181
|
|
|
169
|
|
|
350
|
|
Total change in accumulated other comprehensive income
|
112
|
|
|
230
|
|
|
342
|
|
Balance as of June 30, 2018
|
$
|
—
|
|
|
$
|
(6,120
|
)
|
|
$
|
(6,120
|
)
|
|
|
|
|
|
|
Balance as of December 31, 2016
|
$
|
(1,019
|
)
|
|
$
|
(7,141
|
)
|
|
$
|
(8,160
|
)
|
Current period change, excluding amounts reclassified from
accumulated other comprehensive income
|
(200
|
)
|
|
335
|
|
|
135
|
|
Amounts reclassified from accumulated other comprehensive income
|
550
|
|
|
—
|
|
|
550
|
|
Total change in accumulated other comprehensive income
|
350
|
|
|
335
|
|
|
685
|
|
Balance as of June 30, 2017
|
(669
|
)
|
|
(6,806
|
)
|
|
(7,475
|
)
|
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
The income tax expense allocated to unrealized gains on cash flow hedges for the
three
and
six
months ended
June 30, 2018
was
$0
and
$69
, respectively. These amounts reflected the current period change, excluding amounts reclassified from accumulated other comprehensive loss.
Note 12 — Leases
Charters-in
As of
June 30, 2018
, the Company had commitments to charter-in
10
vessels. All of the charters-in are accounted for as operating leases and all are bareboat charters. Lease expense relating to charters-in is included in charter hire expenses in the consolidated statements of operations. The base term for
nine
vessels expires in
December 2019
. The Company holds options for the charters-in that can be exercised for
1
,
3
or
5 years
with the
1 year
option only usable once, while the
3
and
5
year options are available forever. The lease payments for the charters-in are fixed throughout the option periods and the options are on a vessel by vessel basis that can be exercised individually. The option on
one
of the Company's vessels has been extended until
December 2025
. For the remaining
nine
vessels, the Company is required to declare its intention under the options by
December 11, 2018
.
The future minimum commitments and related number of operating days under these operating leases are as follows:
|
|
|
|
|
|
|
|
|
At June 30, 2018
|
|
Amount
|
|
Operating Days
|
2018
|
|
$
|
46,081
|
|
|
1,840
|
|
2019
|
|
111,819
|
|
|
3,470
|
|
2020
|
|
9,168
|
|
|
366
|
|
2021
|
|
9,143
|
|
|
365
|
|
2022
|
|
9,143
|
|
|
365
|
|
Thereafter
|
|
22,846
|
|
|
912
|
|
Net minimum lease payments
|
|
$
|
208,200
|
|
|
7,318
|
|
The bareboat charters-in provide for the payment of profit share to the owners of the vessels calculated in accordance with the respective charter agreements. Because such amounts and the periods impacted are not reasonably estimable, they are not currently reflected in the table above. Due to reserve funding requirements and current rate forecasts, no profits are currently expected to be paid to the owners in respect of the charter term through
December 31, 2019
.
Charters-out
The future minimum revenues, before reduction for brokerage commissions and which include rent escalations, expected to be received on noncancelable time charters and certain contract of affreightments (“COAs”) for which minimum annual revenues can be reasonably estimated and the related revenue days (revenue days represent calendar days, less days that vessels are not available for employment due to repairs, drydock or lay-up) are as follows:
|
|
|
|
|
|
|
|
|
At June 30, 2018
|
|
Amount
|
|
Revenue
Days
|
2018
|
|
$
|
107,259
|
|
|
1,963
|
|
2019
|
|
132,426
|
|
|
2,090
|
|
2020
|
|
43,570
|
|
|
532
|
|
2021
|
|
26,624
|
|
|
324
|
|
2022
|
|
30,675
|
|
|
365
|
|
Thereafter
|
|
77,464
|
|
|
886
|
|
Net minimum lease receipts
|
|
$
|
418,018
|
|
|
6,160
|
|
Future minimum revenues do not include COAs for which minimum annual revenues cannot be reasonably estimated. Revenues from those COAs that are included in the table above,
$11,394
(
2018
),
$23,031
(
2019
) and
$6,356
(
2020
), are based
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
on minimum annual volumes of cargo to be loaded during the contract periods at a fixed price and do not contemplate early termination of the COAs as provided in the agreements. Amounts that would be due to the Company in the event of the cancellation of the COA contracts have not been reflected in the table above. 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 13 — Vessels
In June 2018,
one
of the Company's ATBs was berthed to the dock when a third-party ship transiting the channel hit the Company's ATB causing structural damage to the Company's ATB and damage to the dock. The cost of repairs are expected to be covered by existing insurance policies and the Company is seeking recovery of its lost earnings.
In July 2018, the Company signed binding contracts with Hyundai Mipo Dockyard Company Ltd. for the construction of
two
50,000
deadweight tons class product chemical tankers for anticipated delivery to the Company during the second half of
2019
. The Company's annual commitments under the contracts are
$15,000
in the remainder of
2018
and
$60,000
in
2019
, of which the majority is due when the vessels are accepted by the Company.
Additionally, in July 2018, the Company signed a binding contract with Gunderson Marine LLC for the construction of
one
, approximately
204,000
BBL, oil and chemical tank barge for anticipated delivery to the Company during the first half of 2020. The Company's annual commitments under the contract are
$10,190
in the remainder of
2018
,
$35,665
in
2019
and $
5,095
in
2020
.
Note 14 — Contingencies
The Company’s policy for recording legal costs related to contingencies is to expense such legal costs as incurred.
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 (including without limitation exposure to asbestos and other toxic materials), wrongful death, collision or other casualty and to claims arising under charter parties. 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, are not expected to be material to the Company’s financial position, results of operations and cash flows.
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including this MD&A section, contains "forward-looking statements" within the meaning of the federal securities laws. These forward-looking statements include, among others, statements about our beliefs, plans, objectives, goals, expectations, estimates and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors, many of which are beyond our control. The words "may," "could," "should," "would," "believe," "anticipate," "estimate," "expect," "intend," "plan," "target," "goal," and similar expressions are intended to identify forward-looking statements.
All forward-looking statements, by their nature, are subject to risks and uncertainties. Our actual future results may differ materially from those set forth in our forward-looking statements. Please see the section titled “Forward-Looking Statements” and Item 1A. Risk Factors of our
2017
Report on Form 10-K, as updated in our subsequent quarterly reports filed on Form 10-Q and in our other filings made from time to time with the SEC after the date of this report.
However, other factors besides those listed in our Quarterly Report or in our Annual Report also could adversely affect our results, and you should not consider any such list of factors to be a complete set of all potential risks or uncertainties. Such factors include, but are not limited to:
|
|
•
|
the highly cyclical nature of OSG’s industry;
|
|
|
•
|
the market value of vessels fluctuates significantly;
|
|
|
•
|
an increase in the supply of Jones Act vessels without a commensurate increase in demand;
|
|
|
•
|
changing economic, political and governmental conditions in the United States or abroad and general conditions in the oil and natural gas industry;
|
|
|
•
|
changes in fuel prices;
|
|
|
•
|
the adequacy of OSG’s insurance to cover its losses, including in connection with maritime accidents or spill events;
|
|
|
•
|
constraints on capital availability;
|
|
|
•
|
acts of piracy, terrorist attacks and international hostilities and instability;
|
|
|
•
|
the Company’s compliance with 46 U.S.C. sections 50501 and 55101 (commonly known as the “Jones Act”) and the heightened exposure to the Jones Act market fluctuations and reduced diversification following the spin-off from OSG on November 30, 2016 of International Seaways, Inc. (INSW), which owned or leased OSG’s fleet of International Flag vessels;
|
|
|
•
|
the effect of the Company’s indebtedness on its ability to finance operations, pursue desirable business operations and successfully run its business in the future;
|
|
|
•
|
the Company’s ability to generate sufficient cash to service its existing indebtedness and to comply with existing debt covenants, as well as the Company’s ability to refinance or repay existing indebtedness at or prior to maturity;
|
|
|
•
|
changes in demand in specialized markets in which the Company currently trades;
|
|
|
•
|
competition within the Company’s industry and OSG’s ability to compete effectively for charters;
|
|
|
•
|
the Company’s ability to renew its time charters when they expire or to enter into new time charters, to replace its operating leases on favorable terms;
|
|
|
•
|
the Company’s ability to realize benefits from its acquisitions or other strategic transactions;
|
|
|
•
|
the loss of, or reduction in business by, the Company's largest customers;
|
|
|
•
|
refusal of certain customers to use vessels of a certain age;
|
|
|
•
|
the Company's significant operating leases could be replaced on less favorable terms or may not be replaced;
|
|
|
•
|
changes in credit risk with respect to the Company’s counterparties on contracts or the failure of contract counterparties to meet their obligations;
|
|
|
•
|
increasing operating costs, unexpected drydock costs or increasing capital expenses as the Company’s vessels age, including increases due to limited shipbuilder warranties of the consolidation of suppliers;
|
|
|
•
|
unexpected drydock costs for the Company's vessels;
|
|
|
•
|
the potential for technological innovation to reduce the value of the Company’s vessels and charter income derived therefrom;
|
|
|
•
|
the impact of an interruption in or failure of the Company’s information technology and communication systems upon the Company’s ability to operate or a cybersecurity breach;
|
|
|
•
|
work stoppages or other labor disruptions by the unionized employees of OSG or other companies in related industries or the impact of any potential liabilities resulting from withdrawal from participation in multiemployer plans;
|
|
|
•
|
the Company’s ability to attract, retain and motivate key employees;
|
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
|
|
•
|
ineffective internal controls;
|
|
|
•
|
the impact of a delay or disruption in implementing new technological and management systems;
|
|
|
•
|
the impact of potential changes in U.S. tax laws;
|
|
|
•
|
limitations on U.S. coastwise trade, or the waiver, modification or repeal of the Jones Act limitations, or changes in international trade agreements;
|
|
|
•
|
government requisition of the Company’s vessels during a period of war or emergency;
|
|
|
•
|
the Company’s compliance with complex laws, regulations and in particular, environmental laws and regulations, including those relating to the emission of greenhouse gases and ballast water treatment;
|
|
|
•
|
the inability to clear oil majors’ risk assessment process;
|
|
|
•
|
the impact of litigation, government inquiries and investigations;
|
|
|
•
|
the arrest of OSG’s vessels by maritime claimants;
|
|
|
•
|
the Company's U.S. federal income tax position in respect of certain credit agreement borrowings used by INSW is not free from doubt;
|
|
|
•
|
the Company’s ability to use its net operating loss carryforwards;
|
|
|
•
|
the market price of the Company's securities fluctuates significantly;
|
|
|
•
|
the Company's ability to sell warrants may be limited and the exercise of outstanding warrants may result in substantial dilution;
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•
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the Company's common stock is subject to restrictions on foreign ownership;
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•
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OSG is a holding company and depends on the ability of its subsidiaries to distribute funds to it in order to satisfy its financial obligations or pay dividends;
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•
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some provisions of Delaware law and the Company’s governing documents could influence its ability to effect a change of control; and
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•
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securities analysts may not initiate coverage or continue to cover the Company’s securities.
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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 SEC.
Business Overview
OSG is a publicly traded tanker company providing energy transportation services for crude oil and petroleum products in the U.S. Flag markets. OSG is a major operator of tankers and ATBs in the Jones Act industry. OSG’s
23
-vessel U.S. Flag fleet consists of seven ATBs, two lightering ATBs, three shuttle tankers, nine MR tankers and two non-Jones Act MR tankers that participate in the U.S. Maritime Security Program (“MSP”). OSG is committed to setting high standards of excellence for its quality, safety and environmental programs. OSG is recognized as one of the world’s most customer-focused marine transportation companies and is headquartered in Tampa, FL. Our revenues are derived from time charter agreements for specific periods of time at fixed daily amounts, as well as from chartering-out vessels for specific voyages where typically we earn freight revenue at spot market rates.
The following is a discussion and analysis of our financial condition and results of operations for the
three
and
six
months ended
June 30, 2018
and
2017
. You should consider the foregoing when reviewing the condensed consolidated financial statements, including the notes thereto, and this discussion and analysis. This Quarterly Report on Form 10-Q includes industry data and forecasts that we have prepared based in part on information obtained from industry publications and surveys. Third-party industry publications, surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable. In addition, certain statements regarding our market position in this report are based on information derived from internal market studies and research reports. Unless we state otherwise, statements about the Company’s relative competitive position in this report are based on management's beliefs, internal studies and management's knowledge of industry trends.
All dollar amounts are in thousands, except daily dollar amounts and per share amounts.
Operations and Oil Tanker Markets
Our revenues are highly sensitive to patterns of supply and demand for vessels of the size and design configurations owned and operated by us and the trades in which those vessels operate. Rates for the transportation of crude oil and refined petroleum products 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. In the Jones Act Trades within which the substantial majority of our vessels operate, demand factors for transportation are affected almost exclusively
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
by supply and distribution decisions of oil producers, refiners and distributors based in the United States. Further, the demand for U.S. domestic oil shipments is significantly affected by the state of the U.S. and global economy, the level of imports into the U.S. from OPEC and other foreign producers, oil production in the United States, and the relative price differentials of U.S. produced crude oil and refined petroleum products as compared with comparable products sourced from or destined for foreign markets, including the cost of transportation on international flag vessels to or from those markets. The number of vessels is affected by newbuilding deliveries and by the removal of existing vessels from service, principally through storage, deletions, or conversions. Our revenues are also affected by the mix of charters between spot (voyage charter which includes short-term time charter) and long-term (time or bareboat charter).
We consider attaining the stability of cash flow offered by time charters to be a fundamental characteristic of the objectives of our chartering approach. As such, we seek, over time, to pursue an overall chartering strategy that covers the majority of available vessel operating days with medium-term charters or contracts of affreightment. Medium-term charters may not always be remunerative, nor prove achievable under certain market conditions. As such, during periods of uncertainty in our markets, more of our vessels could be exposed to the spot market, which is more volatile and less predictable. Because shipping revenues and voyage expenses are significantly affected by the mix between voyage charters and time charters, we manage our vessels based on time charter equivalent (“TCE”) revenues and TCE rates, which are non-GAAP measures. TCE revenues equal GAAP shipping revenues, less voyage expenses. TCE rates are determined by dividing TCE revenues by revenue days. These measures are used because management makes economic decisions based on anticipated TCE rates and evaluates financial performance based on TCE rates achieved.
Estimated TCE rates for Jones Act Product Carriers and large ATBs available for service in the spot market increased during the
second
quarter of
2018
compared to
second
quarter of
2017
for each class of vessel. The increase can be attributed to higher demand for coastwise crude oil transportation driven by the discount of domestic to international crude prices. In addition, the new construction phase of vessels is winding down and the supply of vessels are beginning to tighten through scrapping, lay ups and sales out of Jones Act service.
As of
June 30, 2018
, the industry’s entire Jones Act fleet of Product Carriers and large ATBs (defined as vessels having carrying capacities of between 140,000 barrels and 350,000 barrels, which excludes numerous tank barges below 140,000 barrel capacity and 11 much larger tankers dedicated exclusively to the Alaskan crude oil trade) consisted of 95 vessels, compared with 93 vessels as of
June 30, 2017
. There was one large ATB delivery and one tanker scrapped in the second quarter of 2018.
The industry’s firm Jones Act orderbook as of
June 30, 2018
consisted of one large ATB with delivery scheduled in the third quarter of
2018
. In July 2018, the Company signed a binding contract with Gunderson Marine LLC for the construction of
one
, approximately 204,000 BBL, oil and chemical tank barge for anticipated delivery to the Company during the first half of 2020, which will participate in the Jones Act trade.
Delaware Bay lightering volumes averaged 161,000 b/d in the the second quarter of 2018 compared with 132,000 b/d in the first quarter of 2018 and 174,000 b/d in the second quarter of 2017. The decrease primarily resulted from a customer performing refinery maintenance partially offset by another customer having increased refinery utilization.
Critical Accounting 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 3, “Summary of Significant Accounting Policies,” to the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for
2017
.
The Company adopted ASU No. 2014-09,
Revenue from Contracts with Customers (ASC 606),
effective January 1, 2018. Under the new standard, the Company recognizes revenue from voyage charters ratably over the estimated length of each voyage, calculated on a load-to-discharge basis. Under existing U.S. GAAP in 2017 and prior, voyage revenues and expenses were recognized ratably over the estimated length of each voyage, calculated on a discharge-to-discharge basis. See Note 4, “Revenue Recognition,” for additional accounting policy and transition disclosures.
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Results of Vessel Operations
During the
three
and
six
months ended
June 30, 2018
, shipping revenues decreased by
$858
and
$7,945
or
0.9%
and
3.9%
, respectively, compared to the same period in
2017
. The decrease primarily resulted from weakening market conditions, reduced charter rates as well as two fewer vessels in operation during the
second
quarter
2018
compared to same period in
2017
.
Reconciliation of TCE revenues, a non-GAAP measure, to shipping revenues as reported in the consolidated statements of operations follows:
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Three Months Ended June 30,
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Six Months Ended June 30,
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2018
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2017
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2018
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2017
|
Time charter equivalent revenues
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$
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85,965
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|
|
$
|
91,076
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$
|
174,742
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|
$
|
193,400
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Add: Voyage expenses
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9,402
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5,149
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21,654
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|
10,941
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|
Shipping revenues
|
$
|
95,367
|
|
|
$
|
96,225
|
|
|
$
|
196,396
|
|
|
$
|
204,341
|
|
The following tables provide a breakdown of TCE rates achieved for the
three
and
six
months ended
June 30, 2018
and
2017
, between spot and fixed earnings and the related revenue days.
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2018
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2017
|
Three Months Ended June 30,
|
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Spot Earnings
|
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Fixed Earnings
|
|
Spot Earnings
|
|
Fixed Earnings
|
Jones Act Handysize Product Carriers:
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Average rate
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$
|
32,180
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|
$
|
60,953
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|
|
$
|
18,288
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|
|
$
|
63,796
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Revenue days
|
|
282
|
|
|
795
|
|
|
173
|
|
|
900
|
|
Non-Jones Act Handysize Product Carriers:
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|
|
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Average rate
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$
|
32,493
|
|
|
$
|
—
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|
|
$
|
28,169
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|
|
$
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12,836
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Revenue days
|
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163
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|
|
—
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|
|
91
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|
|
91
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ATBs:
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|
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|
|
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Average rate
|
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$
|
20,679
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|
|
$
|
23,629
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|
|
$
|
7,234
|
|
|
$
|
26,047
|
|
Revenue days
|
|
268
|
|
|
255
|
|
|
202
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|
|
488
|
|
Lightering:
|
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|
|
|
|
|
|
|
|
|
|
|
Average rate
|
|
$
|
63,999
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|
|
$
|
—
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|
|
$
|
69,183
|
|
|
$
|
—
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|
Revenue days
|
|
182
|
|
|
—
|
|
|
182
|
|
|
—
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|
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|
|
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|
|
|
|
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|
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|
2018
|
|
2017
|
Six Months Ended June 30,
|
|
Spot Earnings
|
|
Fixed Earnings
|
|
Spot Earnings
|
|
Fixed Earnings
|
Jones Act Handysize Product Carriers:
|
|
|
|
|
|
|
|
|
|
|
|
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Average rate
|
|
$
|
37,109
|
|
|
$
|
62,852
|
|
|
$
|
26,361
|
|
|
$
|
63,421
|
|
Revenue days
|
|
619
|
|
|
1,515
|
|
|
245
|
|
|
1,889
|
|
Non-Jones Act Handysize Product Carriers:
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|
|
|
|
|
|
|
|
|
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Average rate
|
|
$
|
34,939
|
|
|
$
|
—
|
|
|
$
|
30,353
|
|
|
$
|
13,997
|
|
Revenue days
|
|
342
|
|
|
—
|
|
|
203
|
|
|
159
|
|
ATBs:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average rate
|
|
$
|
16,508
|
|
|
$
|
23,300
|
|
|
$
|
11,856
|
|
|
27,802
|
|
Revenue days
|
|
530
|
|
|
516
|
|
|
382
|
|
|
1,012
|
|
Lightering:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average rate
|
|
$
|
67,372
|
|
|
$
|
—
|
|
|
$
|
72,137
|
|
|
$
|
—
|
|
Revenue days
|
|
355
|
|
|
—
|
|
|
362
|
|
|
—
|
|
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
During the
second
quarter of
2018
, TCE revenues decreased by $
5,111
, or
5.6%
, to
$85,965
from $
91,076
in the
second
quarter of
2017
. The total number of revenue days decreased from
2,127
days in
2017
to
1,945
days in
2018
. This decrease was primarily due to the reduction of two vessels in operation in the
second
quarter
2018
compared to
second
quarter
2017
.
Vessel expenses increased
3.2%
, or $
1,057
, to $
33,656
in the
second
quarter of
2018
from $
32,599
in the
second
quarter of
2017
primarily due to an increase in repair costs. Depreciation and amortization decreased by $
2,660
to $
12,426
in the
second
quarter of
2018
from $
15,086
in the
second
quarter of
2017
primarily resulting from impairment charges recorded in prior years which reduced the carrying value and related depreciation expense of the rebuilt Jones Act ATBs that operate in the U.S. Gulf coastwise trade.
During the first
six
months of
2018
, TCE revenues decreased by
$18,658
, or
9.6%
, to
$174,742
from
$193,400
in the first
six
months of
2017
. This decrease is due to the reduction of two vessels in operation and a larger proportion of our fleet being traded in the spot markets at effective rates lower than the time charter they were previously earning. Also, the total number of revenue days decreased from
4,252
days in
2017
to
3,877
days in
2018
, which primarily related to the reduction of two vessels in operation.
Vessel expenses decreased
1.6%
or
$1,083
to
$67,160
for the
six
months ended
June 30, 2018
from
$68,243
for the same period in
2017
primarily due to cost reductions during 2018 as well as two fewer vessels in operation during 2018. Depreciation and amortization decreased by
$6,913
to
$24,798
for the
six
months ended
June 30, 2018
from
$31,711
for the same period in
2017
primarily resulting from impairment charges recorded in prior years which reduced the carrying value and related depreciation expense of the rebuilt Jones Act ATBs that operate in the U.S. Gulf coastwise trade.
Our two reflagged U.S. Flag Product Carriers participate in the U.S. Maritime Security Program (the “Program”), which ensures that militarily useful U.S. Flag vessels are available to the U.S. Department of Defense in the event of war or national emergency. We receive an annual subsidy, subject in each case to annual congressional appropriations, which is intended to offset the increased cost incurred by such vessels from operating under the U.S. Flag. For fiscal year
2018
, we expect to receive $5,000 for each vessel. This funding level is expected to continue through 2020, and increase to $5,200 beginning in 2021, subject to congressional funding. During fiscal year
2017
, we received $5,400 and $4,500 annual subsidy for each vessel, respectively. We do not receive a subsidy for any days for which either of the two vessels operate under a time charter to a U.S. government agency.
In June 2018,
one
of the Company's ATBs was berthed to the dock when a third-party ship transiting the channel hit the Company's ATB causing structural damage to the Company's ATB and damage to the dock. The cost of repairs are expected to be covered by existing insurance policies and the Company is seeking recovery of its lost earnings.
General and Administrative Expenses
During the
second
quarter of
2018
, general and administrative expenses increased by
$396
to $
6,586
from $
6,190
in the
second
quarter of
2017
. This increase was primarily driven by higher compensation and benefit costs as well as an increase in legal and consulting fees.
During the
six
months ended
June 30, 2018
, general and administrative expenses decreased by
$915
to
$13,369
from
$14,284
in the first
six
months of
2017
. This decrease was primarily driven by lower IT related costs.
Interest Expense
Interest expense was $
7,497
and
$15,573
for the
three
and
six
months ended
June 30, 2018
compared with $
9,445
and
$18,802
for the
three
and
six
months ended
June 30, 2017
. The decrease in interest expense was primarily associated with the impact of the prepayments of $75,166 during the
six
months ended
June 30, 2018
for our OBS Term Loan and our redemption of the 8.125% Senior Notes.
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
Income Taxes
For the three months ended
June 30, 2018
and
2017
, we recorded income tax provisions of
$362
and
$1,593
, respectively, which represented effective tax rates of
11%
and
33%
, respectively. For the
six
months ended
June 30, 2018
and
2017
, we recorded income tax provisions of
$1,564
and
$5,162
, respectively, which represented effective tax rates of
19%
and
37%
, respectively. The decrease in the effective tax rate for the
2018
period compared to the
2017
period was substantially due to the reduction of the statutory federal rate from
35%
to
21%
with the enactment of the Tax Cuts and Jobs Act (“TCJA”) on
December 22, 2017
. We recorded reasonable estimates of the impact of the TCJA on our deferred tax balances as provisional estimates at
December 31, 2017
in accordance with SEC Staff Accounting Bulletin No. 118. There has been no activity through the
second
quarter that has required us to refine our estimate. We will continue to analyze additional information and guidance related to the TCJA as supplemental legislation, regulatory guidance or evolving technical interpretations become available. We continue to expect to complete our analysis no later than the
fourth
quarter of
2018
.
The Internal Revenue Service (“IRS”) completed its examination of the Company's tax returns for fiscal years
2012
through
2015
and received notification that the Joint Committee on Taxation completed their review of the report on July 2, 2018. As a result of the closure of the examination in July, it is anticipated the Company will reduce its unrecognized tax benefits for those previously reserved positions up to
$36,000
and recognize a tax benefit of up to
$22,000
within the third quarter. Refer to Note 8 - “Taxes,” for further details.
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
June 30, 2018
was approximately $
132,000
compared with approximately $
145,000
at
December 31, 2017
. The decrease in working capital is primarily related to the mandatory prepayment of
$28,166
and an optional prepayment of
$47,000
the Company made on its OBS Term Loan. The decrease was offset by increases to working capital as a result of timing of receivable collections and accounts payable payments made at
June 30, 2018
compared to
December 31, 2017
, as well as, the Company generated cash flow from operations during the current year.
As of
June 30, 2018
, we had total liquidity on a consolidated basis of $
206,224
, comprised of $
131,224
of cash (including $
250
of restricted cash) and
$75,000
of undrawn revolver capacity. We manage our cash in accordance with our intercompany cash management system subject to the requirements of our Exit Financing Facilities. Our cash and cash equivalents, as well as our restricted cash balances, generally exceed Federal Deposit Insurance Corporation insurance limits. We place our cash, cash equivalents and restricted cash 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.
As of
June 30, 2018
, we had total debt outstanding (net of original issue discount and deferred financing costs) of $
376,660
and a total debt to total capitalization of
54.0%
, compared to
58.7%
at December 31, 2017.
Restricted cash as of
June 30, 2018
is related to the Unsecured Senior Notes.
The OBS Term Loan, maturing on
August 5, 2019
, has an outstanding principal balance of
$380,000
. The Company began evaluating alternatives in early 2018 to refinance the OBS Term Loan, including a broad assessment of interest rates and other prevailing conditions in the capital markets. Based on the Company's evaluations to date and current market conditions, the Company believes that it is probable that it will refinance its OBS Term Loan before it becomes due. The Company is actively engaged in the process of obtaining replacement financing.
Sources, Uses and Management of Capital
We generate significant cash flows through our complementary mix of time charters, voyage charters and contracts of affreightment. Net cash provided by operating activities in the
six
months ended
June 30, 2018
was $
40,502
. In addition to operating cash flows, our other sources of funds may include additional borrowings as permitted under the Exit Financing Facilities, proceeds from issuances of equity securities and proceeds from the opportunistic sales of our vessels. In the past we
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
also have been able to obtain funds from the issuance of long-term debt securities. We expect to continue to engage in similar transactions, from time to time, consistent with achieving the objectives of our business plan.
We use capital to fund working capital requirements, maintain the quality of our vessels, comply with U.S. and international shipping standards and environmental laws and regulations, repay or repurchase our outstanding debt and to repurchase our common stock from time to time. The OBS Term Loan requires that a portion of Excess Cash Flow (as defined in the term loan agreement) be used to prepay the outstanding principal balance of such loan. To the extent permitted under the terms of the Exit Financing Facilities we may also use cash generated by operations to finance capital expenditures to modernize and grow our fleet.
During the
six
months ended
June 30, 2018
, the Company made a mandatory prepayment of
$28,166
and an optional prepayment of
$47,000
on its OBS Term Loan. The aggregate net loss of
$981
realized on these transactions during the
six
months ended
June 30, 2018
reflected write-off of unamortized original issue discount and deferred financing costs associated with the principal reductions and is in included in other income/(expense) in the consolidated statements of operations.
The Parent Company’s ability to receive cash dividends, loans or advances from OBS is restricted under the OBS Term Loan. The Available Amount for additional cash dividends, loans or advances to the Parent Company permitted under the OBS Term Loan was $
71,758
as of
June 30, 2018
.
Future Commitments
In July 2018, the Company signed binding contracts with Hyundai Mipo Dockyard Company Ltd. for the construction of
two
50,000
deadweight tons class product chemical tankers for anticipated delivery to the Company during the second half of
2019
. The Company's annual commitments under the contracts are
$15,000
in the remainder of
2018
and
$60,000
in
2019
, of which the majority is due when the vessels are accepted by the Company.
Additionally in July 2018, the Company signed a binding contract with Gunderson Marine LLC for the construction of
one
, approximately 204,000 BBL, oil and chemical tank barge for anticipated delivery to the Company during the first half of 2020. The Company's annual commitments under the contract are
$10,190
in the remainder of
2018
,
$35,665
in
2019
and $
5,095
in
2020
.
Off-Balance Sheet Arrangements
INSW entered into guarantee arrangements in connection with the spin-off with OSG on November 30, 2016, in favor of Qatar Liquefied Gas Company Limited (2) (“LNG Charterer”) and relating to certain LNG Tanker Time Charter Party Agreements with the LNG Charterer and each of Overseas LNG H1 Corporation, Overseas LNG H2 Corporation, Overseas LNG S1 Corporation and Overseas LNG S2 Corporation (such agreements, the “LNG Charter Party Agreements,” and such guarantees, collectively, the “LNG Performance Guarantees”).
OSG continues to provide a guarantee in favor of the LNG Charterer relating to the LNG Charter Party Agreements (such guarantees, the ‘‘OSG LNG Performance Guarantee’’). INSW will indemnify OSG for liabilities arising from the OSG LNG Performance Guarantees pursuant to the terms of the Separation and Distribution Agreement. The maximum potential liability associated with this guarantee is not estimable because obligations are only based on future non-performance events of charter arrangements. In connection with the OSG LNG Performance Guarantees, INSW will pay a
$135
fee per year to OSG, which is subject to escalation after
2018
and will be terminated if OSG ceases to provide the OSG LNG Performance Guarantee.
Item 3: Quantitative and Qualitative Disclosures about Market Risk
During the
six
months ended
June 30, 2018
, there were no material changes to our disclosures about market risk. For an in-depth discussion of our market risks, see “Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K for the year ended
December 31, 2017
.
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES