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ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. | RevenueFor the year ended December 31, 2020, revenues
increased by $3,257,887 or 26.01%, as compared to the year ended December 31, 2019. The increase was primarily attributable to
increases in the sale of personal protective equipment due to the COVID-19 pandemic and Corrugated through our Ferguson Containers,
Inc.Cost
of RevenuesFor
the year ended December 31, 2020, cost of revenues increased by $3,879,805 or 51.57%, as compared to the year ended December
31, 2019. The increase was primarily attributable to the increase in the sale of personal protective equipment in total
consolidated revenues.Gross
ProfitFor the year ended December 31, 2020, gross
profit decreased by $612,918, or 12.28%, as compared to the year ended December 31, 2019. The decrease was primarily attributable
to the lower margin products during 2020 related to the sale of personal protective equipment. The Company’s higher margin
branded business was down during the year due to the impacts of COVID-19.Operating
ExpensesSelling, general and administrative expenses
were $12,280,192 and $14,085,195 for the years ended December 31, 2020 and 2019, respectively, representing a decrease
of $1,805,003, or 12.81%. The decrease was primarily attributable to reductions in workforce and reduced
spending due to cost controlling measures implemented in 2020. Decreases included payroll and related costs of $692,443,
travel of $295,122, freight and postage of 131,152 and professional fees of $2,199,605. The reduction in expenses was
offset by increases in stock-based compensation expense of $966,848, bad debts of $123,385 and selling expenses of $384,039.Impairment
For
the year ended December 31, 2019, impairment charges of $4,443,000 relate to an impairment charge related to our annual impairment
assessment of our brands business which is the only reporting unit with Goodwill. The amount recognized for impairment
is equal to the difference between the carrying value and the asset’s fair value. There were no impairment charges for
the year ended December 31, 2020 related our brands business.Gain
on Change in Fair Value of EarnoutFor the year ended December 31, 2019, a gain
of $520,000 was recognized related to a change in fair value of the earnout liability. The decrease in the earnout is due
to decreased actual revenues as compared to anticipated revenues at the time of acquisition of the Cloud
B business in 2019 and going forward. The impairment above was attributable to the lower than anticipated revenues going forward. Field: Page; Sequence: 40; Value: 2 Rental
IncomeRental
income was $102,815 for both the years ended December 31, 2020 and 2019.Interest
expenseInterest
expense was $3,378,131 for the year ended December 31, 2020 versus $1,299,153 in the previous year ended December
31, 2019. The increase in interest expense was related to increased borrowings of debt during 2020.Income
tax expenseIncome
tax expense was $19,197 for the year ended December 31, 2020, an increase of $41,552 or 185.72%, compared
to a benefit of $22,373 for the year ended December 31, 2019. The increase from an income tax benefit to income
tax expense is due to current year state income taxes in 2020 versus current year state income taxes in 2019 offset by a refund
for required payments for estimated foreign income taxes. Income (Loss) from discontinued operationsIncome (loss) from discontinued operations
represents the operations of divestiture of SRM Entertainment Limited. The Company made the decision to divest the amusement park
business due to the slow re-openings of amusement parks around the world and the investment that would have been needed to remain
open and the even greater investment to relaunch the business as the amusement parks begin to get back to full capacity. Income
(Loss) from discontinued operations increased to a $0.6 million loss in Fiscal 2020, compared to a loss of $0.008 million in Fiscal
2019.Gain
on Divestiture from discontinued operationsGain
from divestiture of the discontinued operations represents the gain recognized on the sale of SRM Entertainment Limited, which consisted
of 200,000 shares of common stock of a NASDAQ listed company and the net liabilities disposed of due to the sale.Non-GAAP
MeasuresEBITDA
and Adjusted EBITDAThe
Company defines EBITDA as net loss before interest, taxes and depreciation and amortization. The Company defines Adjusted EBITDA
as EBITDA, further adjusted to eliminate the impact of certain non-recurring items and other items that we do not consider in
our evaluation of our ongoing operating performance from period to period. These items will include stock-based compensation,
restructuring and severance costs, transaction costs, acquisition costs, certain other non-recurring charges and gains that the
Company does not believe reflects the underlying business performance.For
the years ended December 31, 2020 and 2019, EBITDA and Adjusted EBITDA consisted of the following: |
| | | **Years Ended December 31,** | | | | | | | | **Period over Period Change** | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| | | **2020** | | | | **2019** | | | | **$** | | | | **%** | | |
| **Revenues, net** | | $ | 15,781,319 | | | $ | 12,523,432 | | | $ | 3,257,887 | | | | 26.01 | % |
| Cost of revenues | | | 11,403,474 | | | | 7,523,669 | | | | 3,879,805 | | | | 51.57 | % |
| **Gross profit** | | | 4,377,845 | | | | 4,990,763 | | | | (612,918 | ) | | | -12.28 | % |
| | | | | | | | | | | | | | | | | |
| **Operating expenses:** | | | | | | | | | | | | | | | | |
| Selling, general and administrative | | | 12,280,192 | | | | 14,085,195 | | | | (1,805,003 | ) | | | -12.81 | % |
| Impairment | | | - | | | | 4,443,000 | | | | (4,443,000 | ) | | | -100.00 | % |
| Gain on change in fair value of earnout liability | | | - | | | | (520,000 | ) | | | 520,000 | | | | 100.00 | % |
| Total operating expenses | | | 12,280,192 | | | | 18,008,195 | | | | (5,728,003 | ) | | | -31.81 | % |
| Operating loss | | | (7,902,347 | ) | | | (13,017,432 | ) | | | (5,115,085 | ) | | | -39.29 | % |
| | | | | | | | | | | | | | | | | |
| **Other (expense) income:** | | | | | | | | | | | | | | | | |
| Rental income | | | 102,815 | | | | 102,815 | | | | - | | | | 0.00 | % |
| Interest expense | | | (3,378,131 | ) | | | (1,299,153 | ) | | | (2,078,978 | ) | | | 160.03 | % |
| Change in fair value of investment | | | (22,000 | ) | | | - | | | | (22,000 | ) | | | -100.00 | % |
| Gain on divestiture | | | 4,911,760 | | | | - | | | | 4,911,760 | | | | 100.00 | % |
| Other income | | | - | | | | 3,054 | | | | (3,054 | ) | | | -100.00 | % |
| Total other income (expense) | | | 1,614,444 | | | | (1,193,284 | ) | | | 2,807,728 | | | | -235.29 | % |
| Loss before income taxes | | | (6,287,903 | ) | | | (14,210,716 | ) | | | 7,922,813 | | | | -64.49 | % |
| Income tax (expense) benefit | | | (19,197 | ) | | | 22,373 | | | | (41,552 | ) | | | -185.72 | % |
| **Net loss from continuing operations** | | | (6,307,100 | ) | | | (14,188,343 | ) | | | 9,123,157 | | | | -55.75 | % |
| **Net loss attributable to noncontrolling interests** | | | (554,382 | ) | | | (1,269,274 | ) | | | 714,892 | | | | -56.32 | % |
| **Net loss from continuing operations attributable to Vinco Ventures, Inc.** | | | (5,752,718 | ) | | | (12,919,069 | ) | | | 7,166,351 | | | | -55.47 | % |
| **Net loss from discontinued operations attributable to Vinco Ventures, Inc.** | | | (642,632 | ) | | | (7,811 | ) | | | (634,821 | ) | | | 8,127.27 | % |
| **Gain on divestiture from discontinued operations** | | | 1,241,914 | | | | - | | | | 1,241,914 | | | | 100.00 | % |
| **Net loss attributable to Vinco Ventures, Inc.** | | $ | (5,153,436 | ) | | $ | (12,929,706 | ) | | $ | 7,776,270 | | | | -60.14 | % |
| BBIG/10-K/0001493152-21-008880 |
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. | EBITDA
and Adjusted EBITDA is a financial measure that is not calculated in accordance with accounting principles generally accepted
in the United States of America (“U.S. GAAP”). Management believes that because Adjusted EBITDA excludes (a) certain
non-cash expenses (such as depreciation, amortization and stock-based compensation) and (b) expenses that are not reflective of
the Company’s core operating results over time (such as restructuring costs, litigation or dispute settlement charges or
gains, and transaction-related costs), this measure provides investors with additional useful information to measure the Company’s
financial performance, particularly with respect to changes in performance from period to period. The Company’s management
uses EBITDA and Adjusted EBITDA (a) as a measure of operating performance, (b) for planning and forecasting in future periods,
and (c) in communications with the Company’s board of directors concerning the Company’s financial performance. The
Company’s presentation of EBITDA and Adjusted EBITDA are not necessarily comparable to other similarly titled captions of
other companies due to different methods of calculation and should not be used by investors as a substitute or alternative to
net income or any measure of financial performance calculated and presented in accordance with U.S. GAAP. Instead, management
believes EBITDA and Adjusted EBITDA should be used to supplement the Company’s financial measures derived in accordance
with U.S. GAAP to provide a more complete understanding of the trends affecting the business.Although
Adjusted EBITDA is frequently used by investors and securities analysts in their evaluations of companies, Adjusted EBITDA has
limitations as an analytical tool, and investors should not consider it in isolation or as a substitute for, or more meaningful
than, amounts determined in accordance with U.S. GAAP. Some of the limitations to using non-GAAP measures as an analytical tool
are (a) they do not reflect the Company’s interest income and expense, or the requirements necessary to service interest
or principal payments on the Company’s debt, (b) they do not reflect future requirements for capital expenditures or contractual
commitments, and (c) although depreciation and amortization charges are non-cash charges, the assets being depreciated and amortized
will often have to be replaced in the future, and non-GAAP measures do not reflect any cash requirements for such replacements. Field: Page; Sequence: 41; Value: 2 Liquidity
and Capital ResourcesFor the year ended December 31, 2020,
our operations lost $7,902,347 of which $4,623,130 was non-cash and $1,131,975 related to restructuring, severance,
transaction costs and non-recurring items.At December 31, 2020, we had total current
assets of $5,342,183 and current liabilities of $11,285,663 resulting in negative working capital of $5,943,480. At December 31,
2020, we had total assets of $28,028,207 and total liabilities of $14,505,506 resulting in stockholders’ equity of $13,522,701.The foregoing factors raise substantial
doubt about the Company’s ability to continue as a going concern for at least the next twelve months from the date of issuance
of these financial statements. The ability to continue as a going concern is dependent upon the Company’s ability to attract
significant new sources of capital, attain a reasonable threshold of operating efficiencies and achieve profitable operations
from the sale of its products.Subsequent to December 31, 2020, the Company
mitigated any substantial doubt about the Company’s ability to continue as a going concern through the raise of additional
funds of $25,300,000 through 3 separate private placements. The following are the amounts raised under each private placement:
●
In
January 2021, the Company completed closing of a debt private placement offering of $12,000,000, receiving net proceeds of $10,770,000.
●
In
January 2021, the Company completed closing of a equity private placement offering of $3,300,000, receiving net proceeds of $3,255,000.
●
In
February 2021, the Company completed the closing of a debt private placement offering of $10,000,000, receiving net proceeds of $8,950,000.
In
addition, management has considered possible mitigating factors within our management plan on our ability to continue for at least
a year from the date these financial statements are filed. The following items are management plans to alleviate any going concern
issues:
●
Raise
further capital through the sale of additional equity or the exercise of outstanding warrants.
●
Borrow
money under debt securities.
●
The
deferral of payments to related party debt holders for both principal and related interest expense.
●
Further
reduction of headcount.
●
Possible
sale of certain brands to other manufacturers.
●
Entry
into other business opportunities.
Our
operating needs include the planned costs to operate our business, including amounts required to fund working capital and capital
expenditures. Our future capital requirements and the adequacy of our available funds will depend on many factors, including our
ability to successfully commercialize our products and services, competing technological and market developments, and the need
to enter into collaborations with other companies or acquire other companies or technologies to enhance or complement our product
and service offerings.At
December 31, 2020, we had a cash and cash equivalents balance of $249,356. The Company believes through the subsequent capital
raise that the funds available to it are adequate to meet its working capital needs, debt service and capital requirements for
the next 12 months from the date of this filing.Cash
FlowsDuring
the years ended December 31, 2020 and 2019, our sources and uses of cash were as follows:Cash
Flows from Operating ActivitiesNet cash used in operating activities from
continuing operations for the year ended December 31, 2020 was $2,260,441, which included a net loss of $6,307,100
that included $1,091,849 of cash provided by changes in operating assets and liabilities which also included
stock-based compensation of $3,241,554, depreciation and amortization of $1,353,822 and amortization of debt issuance costs
of $2,357,879 offset by gains of divestitures of $4,911,761. Net cash used in operating activities from continuing operations
for the year ended December 31, 2019 was $4,641,748, which included a net loss of $14,188,343 that included
$799,886 of cash provided by changes in operating assets and liabilities which also included stock-based compensation
of $2,229,915, depreciation and amortization of $1,284,251 and amortization of debt issuance costs of $944,437.Net cash used in operating activities from
discontinued operations for the year ended December 31, 2020 and 2019 was $178,485 and $394,707, respectively.Cash
Flows from Investing ActivitiesNet cash used in investing activities was
$1,648,489 and $151,502 for the years ended December 31, 2020 and 2019, respectively. Cash used in investing activities
was mostly attributable to purchases of licensing agreements in 2020 as compared to purchases of property and equipment
in 2019.Net cash used in investing activities from
discontinued operations for the year ended December 31, 2020 and 2019 was $0 and $8,436, respectively.Cash
Flows from Financing ActivitiesCash provided by financing activities for
the year ended December 31, 2020 totaled $3,924,052, which related mostly to borrowings from notes payable, credit lines,
notes payable related parties and borrowings from convertible notes payable. Cash provided by financing activities
for the year ended December 31, 2019 totaled $3,556,381, which related mostly to borrowings from notes payable.Net cash provided by financing activities
from discontinued operations for the year ended December 31, 2020 and 2019 was $0 and $0, respectively.Off-Balance
Sheet ArrangementsWe
did not have, during the periods presented, and we do not currently have, any relationships with any organizations or financial
partnerships, such as structured finance or special purpose entities, that would have been established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited purposes. |
| | | **For the Years Ended** **December 31,** | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| | | **2020** | | | | **2019** | | |
| Net loss from continuing operations | | $ | (6,307,100 | ) | | $ | (14,188,343 | ) |
| Net loss from discontinued operations | | | 599,282 | | | | (10,637 | ) |
| Interest expense, net | | | 3,378,131 | | | | 1,298,168 | |
| Income tax expense (benefit) | | | 19,197 | | | | (22,373 | ) |
| Income tax expense (benefit) from discontinued operations | | | 12,940 | | | | 2,826 | |
| Depreciation and amortization | | | 1,381,366 | | | | 1,321,186 | |
| **EBITDA** | | | (916,184 | ) | | | (11,599,173 | ) |
| Stock-based compensation | | | 3,241,764 | | | | 2,299,915 | |
| Impairment | | | - | | | | 4,443,000 | |
| Restructuring and severance costs | | | 765,867 | | | | 446,114 | |
| Transaction and acquisition costs | | | 258,639 | | | | 447,908 | |
| Other non-recurring costs | | | 107,469 | | | | 1,520,777 | |
| Gain on divestiture | | | (6,153,674 | ) | | | - | |
| **Adjusted EBITDA** | | $ | (2,696,119 | ) | | $ | (2,441,459 | ) |
| BBIG/10-K/0001493152-21-008880 |
OPERATIONS AND OIL TANKER MARKETS | U.S. refinery throughput increased by about 0.6 million b/d to 17.1
million b/d in the fourth quarter of 2017 compared with the comparable quarter in 2016. U.S. crude oil imports decreased by about
0.4 million b/d in the fourth quarter of 2017 compared with the comparable quarter of 2016 with imports from OPEC countries decreasing
by 0.4 million b/d, a 13.8% decrease from the comparable quarter in 2016.Chinese imports of crude oil continued increasing, with 2017 showing
a 10.2% increase from 2016 with imports averaging 8.4 million b/d compared with 7.7 million b/d in 2016.During the fourth quarter of 2017, the International Flag tanker
fleet of vessels over 10,000 deadweight tons (“dwt”) increased by 1.3 million dwt as the crude fleet increased by 1.0
million dwt, while the product carrier fleet expanded by 0.3 million dwt. Year over year, the size of the tanker fleet increased
by 26.7 million dwt with the largest increases in the VLCC, Suezmax, Aframax and MR sectors.During the fourth quarter of 2017, the International Flag crude
tanker orderbook increased by 1.4 million dwt, and the product carrier orderbook remained flat.From the end of the fourth quarter of 2016 through the end of the
fourth quarter of 2017, the total tanker orderbook declined by 8.1 million dwt due to a high level of vessel deliveries combined
with relatively fewer new orders being placed in 2017.VLCC freight rates initially saw a strengthening during the fourth
quarter of 2017, reaching a peak of around $23,000 per day in October before beginning to decrease to below $10,000 per day by
the end of the quarter. This was primarily attributable to increased newbuilding deliveries further exacerbating the oversupply
situation coupled with reduced OPEC exports. Other crude segments had similar earnings patterns, although the Panamax sector, where
earnings were poor at the beginning of the quarter, saw improvement throughout the quarter and product carrier rates also improved
during the quarter from a low of around $8,000 per day in October to over $12,000 per day during December. Since OPEC has announced
their intention to continue to restrict production, and 2018 will see continued newbuilding deliveries, albeit at a lower rate
than during 2017, 2018 will likely continue to see a weakened rate environment. |
| 39 | | |
| --- | --- | --- |
| International Seaways, Inc. | | |
| INSW/10-K/0001144204-18-013984 |
RESULTS FROM VESSEL OPERATIONS | International Crude Tankers |
| 40 | | |
| --- | --- | --- |
| International Seaways, Inc. | | |
| INSW/10-K/0001144204-18-013984 |
RESULTS FROM VESSEL OPERATIONS | (a)Adjusted income/(loss) from vessel operations by segment is before general and administrative expenses, technical management
transition costs, third-party debt modification fees, separation and transition costs, and loss on disposal of vessels and other
property, including impairments.
(b)The average is calculated to reflect the addition and disposal of vessels during the year.
(c)Revenue days represent ship-operating days less days that vessels were not available for employment due to repairs, drydock
or lay-up. Revenue days are weighted to reflect the Company’s interest in chartered-in vessels.
(d)Ship-operating days represent calendar days.
(e)Vessels spot chartered-in under operating leases are related to the Company’s Crude Tankers Lightering business.The following table provides a breakdown of TCE rates achieved for
the years ended December 31, 2017, 2016 and 2015 between spot and fixed earnings and the related revenue days. The information
in these tables is based, in part, on information provided by the commercial pools in which the segment’s vessels participate
and excludes revenue and revenue days for which recoveries were recorded by the Company under its loss of hire insurance policies. |
| | | 2017 | | | | 2016 | | | | 2015 | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| TCE revenues | | $ | 178,812 | | | $ | 258,171 | | | $ | 304,182 | |
| Vessel expenses | | | (87,236 | ) | | | (84,276 | ) | | | (86,174 | ) |
| Charter hire expenses | | | (13,651 | ) | | | (9,732 | ) | | | (8,821 | ) |
| Depreciation and amortization | | | (56,302 | ) | | | (52,395 | ) | | | (51,347 | ) |
| Adjusted income from vessel operations (a) | | $ | 21,623 | | | $ | 111,768 | | | $ | 157,840 | |
| Average daily TCE rate | | $ | 20,525 | | | $ | 29,853 | | | $ | 36,839 | |
| Average number of owned vessels (b) | | | 25.0 | | | | 24.0 | | | | 24.0 | |
| Average number of vessels chartered-in under operating leases | | | 0.5 | | | | 0.3 | | | | 0.2 | |
| Number of revenue days: (c) | | | 8,712 | | | | 8,648 | | | | 8,257 | |
| Number of ship-operating days: (d) | | | | | | | | | | | | |
| Owned vessels | | | 9,137 | | | | 8,784 | | | | 8,760 | |
| Vessels bareboat chartered-in under operating leases (e) | | | - | | | | - | | | | - | |
| Vessels time chartered-in under operating leases | | | - | | | | - | | | | - | |
| Vessels spot chartered-in under operating leases | | | 173 | | | | 118 | | | | 73 | |
| INSW/10-K/0001144204-18-013984 |
RESULTS FROM VESSEL OPERATIONS | During 2017, TCE revenues for the International Crude Tankers segment
decreased by $79,359 or 31%, to $178,812 from $258,171 in 2016. Such decrease principally resulted from the impact of significantly
lower average blended rates in the VLCC, Aframax, Panamax and ULCC sectors aggregating approximately $84,155. Further contributing
to the decrease was a decrease in revenue days in the Panamax and Aframax sectors, which had the effect of decreasing revenue by
approximately $6,428. The decrease in Panamaxes and Aframax revenue days reflects 319 incremental drydock and repair days in the
current year. These declines in TCE revenues were partially offset by $6,268 in total revenues contributed by the two 2017-built
Suezmaxes and the 2010-built VLCC, which were acquired by the Company in July 2017 and November 2017, respectively. Also serving
to offset the decreases in revenue during 2017 was the increased activity levels in the Crude Tankers Lightering business, which
resulted in a $5,037 increase in Lightering revenues to $25,478 in 2017 from $20,441 in 2016. Current prices of crude oil have
generally been the same or less than future prices since the latter half of 2016 through to the end of 2017 and this has resulted
in a general decline in demand for storage of oil at sea. Accordingly, we expect to put our ULCC into layup by the end of the first
quarter of 2018 for a period of up to 18 months as it is unlikely to secure a new time charter contract for storage in the near
term. |
| | | 2017 | | | | | | | | 2016 | | | | | | | | 2015 | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| | | Spot | | | | Fixed | | | | Spot | | | | Fixed | | | | Spot | | | | Fixed | | |
| | | Earnings | | | | Earnings | | | | Earnings | | | | Earnings | | | | Earnings | | | | Earnings | | |
| ULCC: | | | | | | | | | | | | | | | | | | | | | | | | |
| Average rate | | $ | - | | | $ | 34,867 | | | $ | - | | | $ | 43,613 | | | $ | - | | | $ | 39,000 | |
| Revenue days | | | 17 | | | | 348 | | | | - | | | | 366 | | | | - | | | | 275 | |
| VLCC: | | | | | | | | | | | | | | | | | | | | | | | | |
| Average rate | | $ | 24,871 | | | $ | 33,756 | | | $ | 41,994 | | | $ | 40,737 | | | $ | 54,591 | | | $ | - | |
| Revenue days | | | 2,525 | | | | 346 | | | | 2,226 | | | | 624 | | | | 2,672 | | | | - | |
| Suezmax: | | | | | | | | | | | | | | | | | | | | | | | | |
| Average rate | | $ | 17,910 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| Revenue days | | | 317 | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Aframax: | | | | | | | | | | | | | | | | | | | | | | | | |
| Average rate | | $ | 13,392 | | | $ | - | | | $ | 21,345 | | | $ | - | | | $ | 34,042 | | | $ | - | |
| Revenue days | | | 2,419 | | | | - | | | | 2,508 | | | | - | | | | 2,439 | | | | - | |
| Panamax: | | | | | | | | | | | | | | | | | | | | | | | | |
| Average rate | | $ | 13,030 | | | $ | 14,093 | | | $ | 19,006 | | | $ | 21,094 | | | $ | 25,226 | | | $ | 15,462 | |
| Revenue days | | | 1,244 | | | | 1,278 | | | | 1,726 | | | | 1,079 | | | | 1,432 | | | | 1,362 | |
| INSW/10-K/0001144204-18-013984 |
RESULTS FROM VESSEL OPERATIONS | Vessel expenses increased by $2,960 to $87,236 in 2017 from $84,276
in 2016. The increase was primarily attributable to (i) a $2,418 increase related to the Suezmax acquisitions discussed above,
(ii) a reserve of $388 which was recorded during the second quarter of 2017 for a potential assessment by the trustees of the Marine
Navy Ratings Pension Fund (“MNRPF”), as discussed in Note 20, “Contingencies”, to the accompanying consolidated
financial statements, (iii) a $1,367 increase in drydock deviation costs incurred for the Panamax fleet, and (iv) a $900 increase
due to increased activity in the Crude Tankers Lightering business. Such increases were partially offset by a $2,079 favorable
variance in net insurance claim deductible costs in the Panamax fleet in the current year. Charter hire expenses increased by $3,919
to $13,651 in 2017 from $9,732 in 2016 as a result of an increase in chartered-in Aframaxes and workboats employed in the Crude
Tankers Lightering business in the current year. The only vessels in the segment chartered-in by the Company in either period were
the vessels chartered-in by the Crude Tankers Lightering business. Depreciation and amortization increased by $3,907 to $56,302
in 2017 from $52,395 in 2016. Such increase reflects the delivery of the two Suezmaxes and one VLCC noted above, and increased
drydock amortization.Excluding depreciation and amortization, and general and administrative
expenses, operating income for the Crude Tankers Lightering business was $5,062 for 2017 and $4,822 for 2016. Although there was
an increase in the number of full service lighterings performed in 2017, 27 as compared to 19 in 2016, the growth in operating
income between 2016 and 2017 was relatively flat, primarily due to lower margins earned on jobs performed in the third quarter
of 2017. The lower margins were as a result of increased charter hire expense, as Aframaxes were spot chartered-in at higher rates
because of significant hurricane activity during the third quarter of 2017. In addition, there were more time chartered-in workboats
in the six months ended December 31, 2017 compared to the same period in the prior year. However, the higher level of lightering
activity anticipated in the second half of 2017 did not materialize as the number of service-only and full service lighterings
declined in the second half of 2017 compared with the first six months of 2017.During 2016, TCE revenues for the International Crude Tankers segment
decreased by $46,011, or 15%, to $258,171 from $304,182 in 2015 primarily as a result of lower average daily rates in the VLCC
and Aframax sectors, which accounted for a decrease in revenue of approximately $65,267. Such decrease was mitigated to an extent
by an increase of 246 revenue days for the VLCC and Aframax fleets, which resulted from fewer drydock and repair days in 2016 and
increased revenue by approximately $11,623. Also serving to partially offset the decline in rates were increased activity levels
in the Crude Tankers Lightering business in 2016, which resulted in a $4,552 increase in revenue, and the Company’s ULCC
exiting lay-up and commencing an 11-month time charter for storage in April 2015, which was subsequently extended for 21 months
following the expiry of the initial charter period. A full year of service for the ULCC accounted for an increase in revenue of
$5,242 in 2016.Vessel expenses decreased by $1,898 to $84,276 in 2016 from $86,174
in 2015. The change in vessel expenses is primarily due to a reserve of $1,450 recorded in the third quarter of 2015 for an assessment
by the MNRPF. Charter hire expenses increased by $911 to $9,732 in 2016 from $8,821 in 2015, resulting from an increase in spot
chartered-in Aframaxes by the Crude Tankers Lightering business for utilization in the performance of full-service lighterings
during 2016. The only vessels in the segment chartered-in by the Company during either period were Aframaxes and workboats employed
in the Crude Tankers Lightering business. |
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RESULTS FROM VESSEL OPERATIONS | The following table provides a breakdown of TCE rates achieved for
the years ended December 31, 2017, 2016 and 2015 between spot and fixed earnings and the related revenue days. The information
is based, in part, on information provided by the commercial pools in which certain of the segment’s vessels participate
and excludes revenue and revenue days for which recoveries were recorded by the Company under its loss of hire insurance policies. |
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RESULTS FROM VESSEL OPERATIONS | During 2017, TCE revenues for the International Product Carriers
segment decreased by $30,131, or 24%, to $96,183 from $126,314 in 2016. This resulted primarily from declining average daily blended
rates earned in all Product Carrier fleet sectors, which accounted for $27,625 of the overall decrease. A 230-day decrease in revenue
days in the segment also contributed approximately $2,506 of the overall decrease. The decline in revenue days was driven by the
Company’s sale of a 2001-built MR, which was delivered to buyers in August 2017, and a 2004-built MR, which was delivered
to buyers in November 2017.Vessel expenses decreased by $4,512 to $54,100 in 2017 from $58,612
in 2016. The two MRs sold during 2017 had an aggregate vessel expense reduction of $1,841 year-over-year. The remaining decline
is principally attributable to a $2,991 favorable variance in net insurance claim deductible costs in the segment in the current
year. Charter hire expenses increased by $371 to $28,050 in 2017 from $27,679 in 2016, reflecting an increase in the daily charter
hire rates for the Company’s bareboat chartered-in MR fleet, which was effective beginning in the fourth quarter of 2016,
partially offset by decreases in the daily charter hire rates for the Company’s time chartered-in MR fleet which were effective
beginning in the third quarter of 2017. Depreciation and amortization decreased by $4,278 to $22,418 in 2017 from $26,696 in 2016.
Such decrease reflects (i) the impact of reductions in vessel bases that resulted from impairment charges on nine vessels recorded
in the third and fourth quarters of 2016 and two vessels in the third quarter of 2017, and (ii) the sale of the two MRs during
2017 discussed above.During 2016, TCE revenues for the International Product Carriers
segment decreased by $45,294, or 26%, to $126,314 from $171,608 in 2015. This decrease resulted primarily from a year-over-year
decrease in average daily blended rates earned by the MR fleet, which accounted for $41,291 of the total decrease, and a 255-day
decrease in MR fleet revenue days, which accounted for $4,667 of the total decrease. The reduction in revenue days was driven by
the sale of a 1998-built MR in July 2015 as well as the redelivery of an MR to its owners at the expiry of its time charter in
March 2015.Depreciation and amortization decreased by $2,067 to $26,696 in
2016 from $28,763 in 2015, principally due to the impact of reductions in vessel bases that resulted from impairment charges on
two vessels in the segment recorded in the third quarter of 2016, and the MR sale in 2015 discussed above. |
| | | 2017 | | | | | | | | 2016 | | | | | | | | 2015 | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| | | Spot | | | | Fixed | | | | Spot | | | | Fixed | | | | Spot | | | | Fixed | | |
| | | Earnings | | | | Earnings | | | | Earnings | | | | Earnings | | | | Earnings | | | | Earnings | | |
| LR2 | | | | | | | | | | | | | | | | | | | | | | | | |
| Average rate | | $ | 13,813 | | | $ | - | | | $ | 21,153 | | | $ | - | | | $ | 32,075 | | | $ | - | |
| Revenue days | | | 364 | | | | - | | | | 365 | | | | - | | | | 365 | | | | - | |
| LR1 | | | | | | | | | | | | | | | | | | | | | | | | |
| Average rate | | $ | 12,871 | | | $ | 17,040 | | | $ | 20,599 | | | $ | 21,107 | | | $ | 27,465 | | | $ | 17,337 | |
| Revenue days | | | 808 | | | | 615 | | | | 361 | | | | 1,029 | | | | 327 | | | | 929 | |
| MR | | | | | | | | | | | | | | | | | | | | | | | | |
| Average rate | | $ | 11,001 | | | $ | 5,342 | | | $ | 13,107 | | | $ | 11,309 | | | $ | 19,490 | | | $ | 7,004 | |
| Revenue days | | | 6,496 | | | | 366 | | | | 6,431 | | | | 705 | | | | 6,949 | | | | 442 | |
| INSW/10-K/0001144204-18-013984 |
GENERAL AND ADMINISTRATIVE EXPENSES | During 2016, general and administrative expenses decreased by $9,898
to $31,618 from $41,516 in 2015. The decrease was principally attributable to an approximately $11,300 decrease in non-compensation
and benefits related overhead costs incurred and allocated by OSG to INSW during the 11-month period ended November 30, 2016 that
INSW was included as a part of consolidated OSG compared with 2015. Such decrease reflected lower accounting, legal and consulting
fees incurred in the 2016 period. Further contributing to the decrease was an approximately $2,200 decline in the annual incentive
bonus expense in 2016. Certain individuals that departed OSG in conjunction with the spin-off of INSW did not receive an annual
incentive bonus for 2016, and instead received severance payments in accordance with their respective employment agreements. Partially
offsetting the above reductions was a $2,262 net increase in accounting, consulting and legal fees incurred directly by the Company
in 2016, along with an increase in foreign exchange losses in 2016 of $473 and the inclusion in the 2015 period of approximately
$604 in insurance premium credits. |
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EQUITY IN INCOME OF AFFILIATED COMPANIES | Revenue generated by the FSO joint ventures for the future years
is expected to be lower than revenue generated during 2017, as charter rates in the five-year service contracts with NOC, which
commenced in the third quarter of 2017, are lower than the charter rates included in the service contracts under which the FSO
joint ventures operated previously.Overall, over the term of the five-year service contracts with NOC
described above, the FSO joint ventures are expected to generate in excess of $180,000 of EBITDA for the Company. |
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| INSW/10-K/0001144204-18-013984 |
INTEREST EXPENSE | Interest expense was $40,438 in 2017, compared with $39,476 in 2016.
Interest expense for the year ended December 31, 2017 is higher than interest expense for the year ended December 31, 2016 primarily
due to the higher average interest rates and outstanding principal balances under the 2017 Debt Facilities, which replaced the
INSW Facilities in June 2017. This was partially offset by lower amortization of deferred finance costs in the 2017 period aggregating
$220 attributable to costs incurred to amend the INSW Facilities in 2016 and costs related to the 2017 Debt Facilities. Refer to
Note 8, “Debt,” in the accompanying consolidated financial statements for additional information.Interest expense was $39,476 in 2016 compared with $42,970 in 2015.
The decrease in interest expense reflected the impact of the Company’s repurchases and prepayments of $152,754 in aggregate
principal amount of the INSW Term Loan in 2016. |
| | | 2017 | | | | 2016 | | | | 2015 | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Interest before impact of interest rate caps | | $ | 40,307 | | | $ | 38,959 | | | $ | 42,970 | |
| Impact of interest rate caps | | | 131 | | | | 517 | | | | - | |
| Interest expense | | $ | 40,438 | | | $ | 39,476 | | | $ | 42,970 | |
| INSW/10-K/0001144204-18-013984 |
INCOME TAX EXPENSE | EBITDA and Adjusted EBITDAEBITDA represents net income/(loss) before interest expense, income
taxes and depreciation and amortization expense. Adjusted EBITDA consists of EBITDA adjusted for the impact of certain items that
we do not consider indicative of our ongoing operating performance. EBITDA and Adjusted EBITDA are presented to provide investors
with meaningful additional information that management uses to monitor ongoing operating results and evaluate trends over comparative
periods. EBITDA and Adjusted EBITDA do not represent, and should not be considered a substitute for, net income or cash flows from
operations determined in accordance with GAAP. EBITDA and Adjusted EBITDA have limitations as analytical tools, and should not
be considered in isolation, or as a substitute for analysis of our results reported under GAAP. Some of the limitations are:
·EBITDA and Adjusted EBITDA do not reflect our cash expenditures, or future requirements for capital expenditures or contractual
commitments;
·EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs; and
·EBITDA and Adjusted EBITDA do not reflect the significant interest expense, or the cash requirements necessary to service interest
or principal payments, on our debt.While EBITDA and Adjusted EBITDA are frequently used by companies
as a measure of operating results and performance, neither of those items as prepared by the Company is necessarily comparable
to other similarly titled captions of other companies due to differences in methods of calculation.The following table reconciles net (loss)/income, as reflected in
the consolidated statements of operations set forth in Item 8, “Financial Statements and Supplementary Data,” to EBITDA
and Adjusted EBITDA: |
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| INSW/10-K/0001144204-18-013984 |
LIQUIDITY AND SOURCES OF CAPITAL | Liquidity
Working capital at December 31, 2017 was approximately $85,000 compared
with $126,000 at December 31, 2016. Current assets are highly liquid, consisting principally of cash, interest-bearing deposits
and receivables. The Company’s total cash decreased by approximately $32,000 during 2017. This decrease reflects $4,983 in
scheduled quarterly amortization of the INSW Term Loan and 2017 Term Loan Facility and the repayment of the $458,416 remaining
principal balance of the INSW Term Loan as of June 22, 2017. In addition, $173,535 in cash was used for vessel acquisitions and
betterments, $3,825 in cash was used in operating activities and $3,177 in cash was used in repurchases of the Company’s
common stock. Such cash outflows were partially offset by proceeds from the issuance of the 2017 Debt Facilities (described below),
net of issuance and deferred financing costs, of $534,933, net proceeds from drawdown and repayment activity under the 2017 Revolver
Facility (described below) of $30,000, net distributions received from affiliated companies of $40,750 and net proceeds of $18,344
from the sales of a 2001-built and a 2004-built MR.As of December 31, 2017, we had total liquidity on a consolidated
basis of $90,606 comprised of $70,606 of cash (including $10,579 of restricted cash) and $20,000 of remaining undrawn revolver
capacity. Our cash and cash equivalents balances generally exceed Federal Deposit Insurance Corporation insured limits. We place
our cash and cash equivalents in what we believe to be credit-worthy financial institutions. In addition, certain of our money
market accounts invest in U.S. Treasury securities or other obligations issued or guaranteed by the U.S. government or its agencies,
floating rate and variable demand notes of U.S. and foreign corporations, commercial paper rated in the highest category by Moody’s
Investor Services and Standard & Poor’s, certificates of deposit and time deposits, and repurchase agreements.Restricted cash of $10,579 as of December 31, 2017 represents legally
restricted cash relating to the 2017 Debt Facilities. The 2017 Debt Facilities stipulate that if annual aggregate cash proceeds
of INSW asset sales exceed $5,000, cash proceeds from each such sale are required to be reinvested in vessels within twelve months
of such sale or be used to prepay the principal balance outstanding of the INSW Facilities. Restricted cash increased to $28,509
in February 2018 following the sale of a 2002-built MR and a 2004-built MR.As of December 31, 2017, we had total debt outstanding (net of original
issue discount and deferred financing costs) of $552,937 and a total debt to total capitalization of 33.7%, which compares with
26.6% at December 31, 2016. Our debt profile reflects actions taken during 2017 (discussed further below) as well as minimal required
principal amortization.Sources, Uses and Management of CapitalNet cash used in operating activities in the year ended December
31, 2017 was $3,825. In addition to future operating cash flows, our other current sources of funds are proceeds from issuances
of equity securities, additional borrowings as permitted under our loan agreements and proceeds from the opportunistic sales of
our vessels. As described in Note 8, “Debt,” in the accompanying consolidated financial statements, in June 2017 INSW,
along with its wholly owned subsidiary, International Seaways Operating Corporation (the “Administrative Borrower”
or “ISOC”) and certain of its subsidiaries entered into secured debt facilities with a syndicate of lenders party thereto,
consisting of (i) a revolving credit facility of $50,000 and (ii) a term loan of $500,000 containing an accordion feature whereby
the 2017 Term Loan Facility could be increased up to an additional $50,000 subject to certain conditions. The 2017 Term Loan Facility
matures on June 22, 2022, and the 2017 Revolver Facility matures on December 22, 2021. The maturity dates for the 2017 Debt Facilities
are subject to acceleration upon the occurrence of certain events (as described in the credit agreement). This refinancing extended
the maturity of the Company’s debt facilities by approximately three years and provided the Company with certain structural
benefits as well.On June 22, 2017, the 2017 Term Loan Facility was drawn and the
proceeds therefrom were used to repay the $458,416 outstanding balance under the INSW Facilities and to pay certain expenses related
to the refinancing. The remaining proceeds were used for general corporate purposes, including fleet renewal and growth.On July 19, 2017, the Company drew down $50,000 under the 2017 Revolver
Facility, and on July 24, 2017, the Company entered into an amendment of the 2017 Debt Facilities to effect the increase of the
2017 Term Loan Facility by $50,000, pursuant to the accordion feature described above. Except as related to such increase, no other
terms of the 2017 Debt Facilities were amended. The net proceeds from such borrowings were used in part to finance the purchase
of two 2017-built Suezmax tankers that were delivered to the Company in July 2017. On August 18, 2017, the outstanding balance
under the 2017 Revolver Facility was repaid in full using cash on hand and proceeds of the 2001-built MR described above.We financed the purchase of the 2010-built VLCC, which was delivered
in November 2017, through a combination of cash-on-hand and a $30,000 draw on the 2017 Revolver Facility. |
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LIQUIDITY AND SOURCES OF CAPITAL | Our current uses of funds are to fund working capital requirements,
maintain the quality of our vessels, purchase vessels, comply with international shipping standards and environmental laws and
regulations, repurchase our outstanding shares and repay or repurchase our outstanding loan facilities. Fifty percent of Excess
Cash Flow (as defined in the 2017 Debt Facilities credit agreement) must be used to prepay the outstanding principal balance of
2017 Term Loan Facility. To the extent permitted under the terms of the 2017 Debt Facilities we may also use cash generated by
operations to finance capital expenditures to modernize and grow our fleet.As set forth in the 2017 Debt Facilities credit agreement, the 2017
Debt Facilities contain certain restrictions relating to new borrowings and INSW’s ability to receive cash dividends, loans
or advances from ISOC and its subsidiaries that are Restricted Subsidiaries. As of December 31, 2017, the permitted cash dividends
that can be distributed to INSW by ISOC under the 2017 Term Loan Facility was $15,000.Outlook We believe the actions we have taken have strengthened our balance
sheet as well as increased our flexibility to actively pursue fleet renewal or potential strategic opportunities that may arise
within the diverse sectors in which we operate and at the same time positioned us to continue to generate sufficient cash to support
our operations over the next twelve months ending December 31, 2018. Our balanced fleet deployment and a moderate level of predictable
cash flows from our joint ventures and contracted fixed-rate charters will enable the Company to both optimize revenue through
the current tanker market cycle and benefit from a market recovery in both the product and crude tanker sectors. We or our subsidiaries
may in the future complete additional transactions consistent with achieving the objectives of our business plan.In December 2017, the Company entered into a binding letter of intent
to acquire the holding companies for six 300,000 DWT VLCCs with an average age of 1.7 years from Euronav in connection with the
closing of Euronav’s announced acquisition of Gener8 Maritime, Inc. (“GNRT”). The $434,000 transaction (inclusive
of assumed debt) is subject to a number of closing conditions, including (i) consummation of Euronav’s announced acquisition
of GNRT, (ii) amendment of the Company’s existing credit facility as required to consummate the transaction, (iii) the Company’s
receipt of financing necessary to consummate the transaction, (iv) completion of the Company’s due diligence to its reasonable
satisfaction, (v) execution of a definitive stock purchase agreement and (vi) receipt of all required third-party consents, third-party
approvals and regulatory approvals. The transaction is expected to close in the second quarter of 2018. Either party is permitted
to terminate the LOI on or after March 31, 2018 if the parties have not entered into a definitive stock purchase agreement by such
date and the party terminating the LOI is not otherwise in breach thereof. INSW intends to fund the transaction with a combination
of available liquidity, the assumption of all or part of the debt (that is currently secured by the vessels) with an expected March
31, 2018 outstanding balance of $311,000, maturing between 2027 and 2028 and carrying a fixed annual interest rate of LIBOR plus
2.0% and other financing sources such as the proceeds from the financing of the 2010-built VLCC acquired in November 2017, as permitted
under the Company’s existing term loan, and the sale and leaseback of two modern Aframax vessels.Carrying Value of VesselsAll except one of the Company’s owned vessels are pledged
as collateral under the INSW Facilities. The following table presents information with respect to the carrying amount of the Company’s
vessels by type and indicates whether their fair market values, which are estimated by taking an average of two third-party vessel
appraisals, are below their carrying values as of December 31, 2017. The carrying value of each of the Company’s vessels
does not necessarily represent its fair market value or the amount that could be obtained if the vessel were sold. The Company’s
estimates of market values for its vessels assume that the vessels are all in good and seaworthy condition without need for repair
and, if inspected, would be certified as being in class without notations. In addition, because vessel values are highly volatile,
these estimates may not be indicative of either the current or future prices that the Company could achieve if it were to sell
any of the vessels. The Company would not record a loss for any of the vessels for which the fair market value is below its carrying
value unless and until the Company either determines to sell the vessel for a loss or determines that the vessel is impaired as
discussed below in “— Critical Accounting Policies — Vessel Impairment.” The Company believes
that the future undiscounted cash flows expected to be earned over the estimated remaining useful lives for those vessels that
have experienced declines in market values below their carrying values would exceed such vessels’ carrying values. |
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LIQUIDITY AND SOURCES OF CAPITAL | Footnotes to the following table exclude those vessels with an estimated
market value in excess of their carrying value. |
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| INSW/10-K/0001144204-18-013984 |
LIQUIDITY AND SOURCES OF CAPITAL | (1)As of December 31, 2017, the Crude Tankers segment includes vessels with an aggregate carrying value of $581,461, which the
Company believes exceeds their aggregate market value of approximately $459,000 by $122,461.
(2)As of December 31, 2017, the Product Carriers segment includes vessels with an aggregate carrying value of $281,383, which
the Company believes exceeds their aggregate market value of approximately $209,375 by $72,008. This excludes a 2002-built MR which
was held for sale as of December 31, 2017 and delivered to its buyer in January 2018.Off-Balance Sheet Arrangements As of December 31, 2017, the LNG Joint Venture had total bank debt
outstanding of $597,129 that was nonrecourse to the Company. The FSO Joint Venture’s debt matured in July 2017 and was accordingly
repaid, together with all amounts remaining under related interest rate swap agreements, by the FSO Joint Venture.The FSO Joint Venture is a party to a number of contracts: (a) the
FSO Joint Venture is an obligor pursuant to a guarantee facility agreement dated as of July 14, 2017, by and among the FSO Joint
Venture, ING Belgium NV/SA, as issuing bank, and Euronav and INSW, as guarantors (the ‘‘Guarantee Facility’’);
and (b) the FSO Joint Venture is party to two service contracts with NOC (the ‘‘NOC Service Contracts’’).INSW severally guarantees the obligations of the FSO Joint Venture
pursuant to the Guarantee Facility and severally guarantees the obligations of the FSO Joint Venture to Maersk Oil Qatar AS (“MOQ”)
under the MOQ service contracts, which contracts were novated to NOC in July 2017 (the ‘‘MOQ Guarantee’’)
for the period beginning on the novation date and severally guarantees the obligations of the FSO Joint Venture under the NOC Service
Contracts. INSW continues the MOQ Guarantee to MOQ for the period ended on the novation date of the service contracts for MOQ,
which guarantee will end when Qatari authorities determine that the FSO Joint Venture has paid all Qatari taxes owed by the FSO
Joint Venture under such service contracts through the novation date.INSW maintains a guarantee in favor of Qatar Liquefied Gas Company
Limited (2) (‘‘LNG Charterer’’) 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 guarantee, the ‘‘LNG
Performance Guarantee’’). INSW will pay QGTC an annual fee of $100 until such time that QGTC ceases to provide a guarantee
in favor of the LNG charterer relating to performance under the LNG Charter Party Agreements.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 Guarantee pursuant to the terms of the Separation
and Distribution Agreement. In connection with the OSG LNG Performance Guarantee, INSW will pay a $125 fee per year to OSG, which
will increase to $135 per year in 2018 and will be terminated if OSG ceases to provide the OSG LNG Performance Guarantee.See Note 12, “Related Parties,” to the Company’s
consolidated financial statements set forth in Item 8, “Financial Statements and Supplementary Data” for additional
information. |
| As of December 31, 2017 | | | | | | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Vessel Type | | Average Vessel Age (weighted by dwt) | | | | Number of Owned Vessels | | | | Carrying Value | | |
| | | | | | | | | | | | | |
| Crude Tankers | | | | | | | | | | | | |
| VLCC (includes ULCC) | | | 12.5 | | | | 10 | | | $ | 453,914 | |
| Suezmax | | | 0.4 | | | | 2 | | | | 115,438 | |
| Aframax | | | 12.6 | | | | 7 | | | | 146,082 | |
| Panamax | | | 15.3 | | | | 8 | | | | 60,582 | |
| *Total Crude Tankers(1)* | | | 12.1 | | | | 27 | | | $ | 776,016 | |
| | | | | | | | | | | | | |
| Product Carriers | | | | | | | | | | | | |
| LR2 | | | 3.4 | | | | 1 | | | $ | 64,376 | |
| LR1 | | | 9.0 | | | | 4 | | | | 93,054 | |
| MR | | | 11.5 | | | | 10 | | | | 168,827 | |
| *Total Product Carriers(2)* | | | 9.6 | | | | 15 | | | $ | 326,257 | |
| INSW/10-K/0001144204-18-013984 |
LIQUIDITY AND SOURCES OF CAPITAL | In addition and pursuant to an agreement between INSW and the trustees
of the OSG Ship Management (UK) Ltd. Retirement Benefits Plan (the “Scheme”), INSW guarantees the obligations of OSG
Ship Management (UK) Ltd., a subsidiary of INSW, to make payments to the Scheme. See Note 16, “Pension and other postretirement
benefit plans,” to the Company’s consolidated financial statements set forth in Item 8, “Financial Statements
and Supplementary Data,” for additional information.Aggregate Contractual ObligationsA summary of the Company’s long-term contractual obligations
as of December 31, 2017 follows: |
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LIQUIDITY AND SOURCES OF CAPITAL | (1)Amounts shown include contractual interest obligations of floating rate debt estimated based on the aggregate effective LIBOR
rate as of December 31, 2017 of 1.35% and applicable margins of 5.5% and 3.5% for the 2017 Term Loan Facility, due 2022 and the
2017 Revolver Facility due 2021, respectively. Management estimates that no prepayment will be required for the 2017 Term Loan
Facility as a result of estimated Excess Cash Flow for the year ended December 31, 2017. Amounts shown for the 2017 Term Loan Facility
for years subsequent to 2018 exclude any estimated repayment as a result of Excess Cash Flow.
(2)As of December 31, 2017, the Company had charter-in commitments for
six vessels on leases that are accounted for as operating leases. Certain of these leases provide the Company with various renewal
and purchase options. The future minimum commitments for time charters-in have been reduced to reflect estimated days that the
vessels will not be available for employment due to drydock. |
| | | | | | | | | | | | | | | | | | | | | | | Beyond | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| | | 2018 | | | | 2019 | | | | 2020 | | | | 2021 | | | | 2022 | | | | 2022 | | | | Total | | |
| 2017 Debt Facilities(1) | | $ | 67,425 | | | $ | 65,752 | | | $ | 63,879 | | | $ | 91,680 | | | $ | 454,837 | | | $ | - | | | $ | 743,573 | |
| Operating lease obligations (2) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Bareboat Charter-ins | | | 1,841 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1,841 | |
| Time Charter-ins | | | 11,849 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 11,849 | |
| Office space | | | 1,249 | | | | 1,166 | | | | 1,152 | | | | 665 | | | | - | | | | - | | | | 4,232 | |
| Total | | $ | 82,364 | | | $ | 66,918 | | | $ | 65,031 | | | $ | 92,345 | | | $ | 454,837 | | | $ | - | | | $ | 761,495 | |
| INSW/10-K/0001144204-18-013984 |
RISK MANAGEMENT | Fuel price volatility risk Historically, the Company managed its exposure to future increases
in fuel prices in the normal course of its business by entering into standalone bunker swaps. The Company’s deployment of
most of its conventional tanker fleet in commercial pools and time charters currently limits the Company’s direct exposure
to fluctuations in fuel prices as a component of voyage expenses. |
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INTEREST RATE SENSITIVITY | As of December 31, 2017, the Company had a secured term loan (2017
Term Loan) and a revolving credit facility (2017 Revolver Facility) under which borrowings bear interest at a rate based on LIBOR,
plus the applicable margin, as stated in the respective loan agreements. There was $30,000 outstanding under the 2017 Revolver
Facility as of December 31, 2017. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Fair Value at | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| | | | | | | | | | | | | | | | | | | Beyond | | | | | | | | Dec. 31, | | |
| At December 31, 2017 | | 2018 | | | | 2019 | | | | 2020 | | | | 2021 | | | | 2021 | | | | Total | | | | 2017 | | |
| Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Debt | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Variable rate debt | | $ | 24.1 | | | $ | 27.5 | | | $ | 27.5 | | | $ | 57.5 | | | $ | 440.0 | | | $ | 576.6 | | | $ | 580.9 | |
| Average interest rate | | | 6.95 | % | | | 6.95 | % | | | 6.95 | % | | | 5.91 | % | | | 6.95 | % | | | | | | | | |
| INSW/10-K/0001144204-18-013984 |
CRITICAL ACCOUNTING POLICIES | For the Company’s vessels operating in Commercial Pools, revenues
and voyage expenses are pooled and allocated to each pool’s participants on a time charter equivalent basis in accordance
with an agreed-upon formula. The formulas in the pool agreements for allocating gross shipping revenues net of voyage expenses
are based on points allocated to participants’ vessels based on cargo carrying capacity and other technical characteristics,
such as speed and fuel consumption. The selection of charterers, negotiation of rates and collection of related receivables and
the payment of voyage expenses are the responsibility of the pools. The pools may enter into contracts that earn either voyage
charter revenue or time charter revenue. Each of the pools follows the same revenue recognition principles, as applied by the Company,
in determining shipping revenues and voyage expenses, including recognizing revenue only after a charter has been agreed to by
both the pool and the customer, even if the vessel has discharged its cargo and is sailing to the anticipated load port on its
next voyage.For the pools in which the Company participates, management monitors,
among other things, the relative proportion of the Company’s vessels operating in each of the pools to the total number of
vessels in each of the respective pools and assesses whether or not the Company’s participation interest in each of the pools
is sufficiently significant so as to determine that the Company has effective control of the pool.The adoption of ASC 606, Revenue from Contracts with Customers,
in the first quarter of 2018 will not materially change the Company’s current revenue recognition for time charters, bareboat
charters and commercial pool arrangements. However, revenue recognition for voyage charters will most likely change depending on
whether such charters are determined to be service only contracts or operating leases. Such determination will require management
to exercise a significant level of judgment when evaluating the specific terms and conditions of a charter agreement. Refer to
Note 2, Summary of Significant Accounting Policies, to the accompanying consolidated financial statements for additional discussion
of the impact of the adoption of the new revenue recognition standard.Vessel Lives and Salvage ValuesThe carrying value of each of the Company’s vessels represents
its original cost at the time it was delivered or purchased less depreciation calculated using an estimated useful life of 25 years
(except for FSO service vessels for which estimated useful lives of 30 years are used and LNG Carriers for which estimated useful
lives of 35 years are used) from the date such vessel was originally delivered from the shipyard. A vessel’s carrying value
is reduced to its new cost basis (i.e. its current fair value) if a vessel impairment charge is recorded.If the estimated economic lives assigned to the
Company’s vessels prove to be too long because of new regulations, an extended period of weak markets, the broad
imposition of age restrictions by the Company’s customers, or other future events, it could result in higher
depreciation expense and impairment losses in future periods related to a reduction in the useful lives of any affected
vessels. Company management estimates the scrap value of all of its vessels to be $300 per lightweight ton. The
Company’s assumptions used in the determination of estimated salvage value take into account current scrap prices, the
historic pattern of annual average scrap rates over the five years ended December 31, 2017, which ranged from $235 to $495
per lightweight ton, estimated changes in future market demand for scrap steel and estimated future demand for vessels. Scrap
prices also fluctuate depending upon type of ship, bunkers on board, spares on board and delivery range. Market conditions
that could influence the volume and pricing of scrapping activity in 2018 and beyond include the combined impact of scheduled
newbuild deliveries and charter rate expectations for vessels potentially facing age restrictions imposed by oil majors as
well as the impact of ballast water treatment systems regulatory requirements and requirements for the use of low sulphur
fuels. These factors will influence owners’ decisions to accelerate the disposal of older vessels, especially those
with upcoming special surveys.Although management believes that the assumptions used to determine
the scrap rate for its International Flag vessels are reasonable and appropriate, such assumptions are highly subjective, in part,
because of the cyclicality of the nature of future demand for scrap steel.Vessel ImpairmentThe carrying values of the Company’s vessels may not represent
their fair market value or the amount that could be obtained by selling the vessel at any point in time since the market prices
of second-hand vessels tend to fluctuate with changes in charter rates and the cost of newbuildings. Historically, both charter
rates and vessel values tend to be cyclical. Management evaluates the carrying amounts of vessels held and used by the Company
for impairment only when it determines that it will sell a vessel or when events or changes in circumstances occur that cause management
to believe that future cash flows for any individual vessel will be less than its carrying value. In such instances, an impairment
charge would be recognized if the estimate of the undiscounted future cash flows expected to result from the use of the vessel
and its eventual disposition is less than the vessel’s carrying amount. This assessment is made at the individual vessel
level as separately identifiable cash flow information for each vessel is available. |
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| International Seaways, Inc. | | |
| INSW/10-K/0001144204-18-013984 |
CRITICAL ACCOUNTING POLICIES | In developing estimates of future cash flows, the Company must make
assumptions about future performance, with significant assumptions being related to charter rates, ship operating expenses, utilization,
drydocking requirements, residual value and the estimated remaining useful lives of the vessels. These assumptions are based on
historical trends as well as future expectations. Specifically, in estimating future charter rates, management takes into consideration
rates currently in effect for existing time charters and estimated daily time charter equivalent rates for each vessel class for
the unfixed days over the estimated remaining lives of each of the vessels. The estimated daily time charter equivalent rates used
for unfixed days are based on a combination of (i) internally forecasted rates that are consistent with forecasts provided to the
Company’s senior management and Board of Directors, and (ii) the trailing 12-year historical average rates, based on monthly
average rates published by a third party maritime research service. The internally forecasted rates are based on management’s
evaluation of current economic data and trends in the shipping and oil and gas industries. Management uses the published 12-year
historical average rates in its assumptions because it is management’s belief that the 12-year period captures a distribution
of strong and weak charter rate periods, which results in the use of an average mid-cycle rate that is more in line with management’s
forecast of a return to mid-cycle charter rate levels in the medium term. Recognizing that the transportation of crude oil and
petroleum products is cyclical and subject to significant volatility based on factors beyond the Company’s control, management
believes the use of estimates based on the combination of internally forecasted rates and 12-year historical average rates calculated
as of the reporting date to be reasonable.Estimated outflows for operating expenses and drydocking requirements
are based on historical and budgeted costs and are adjusted for assumed inflation. Utilization is based on historical levels achieved
and estimates of a residual value for recyclings are based upon published 12-year historical data or the pattern of scrap rates
used in management’s evaluation of salvage value for purposes of recording depreciation. Finally, for vessels that are being
considered for disposal before the end of their respective useful lives, the Company utilizes weighted probabilities assigned to
the possible outcomes for such vessels being sold or scraped before the end of their respective useful lives.The determination of fair value is highly judgmental. In estimating
the fair value of INSW’s vessels for purposes of Step 2 of the impairment tests, the Company considered the market and income
approaches by using a combination of third party appraisals and discounted cash flow models prepared by the Company. In preparing
the discounted cash flow models, the Company uses a methodology consistent with the methodology discussed above in relation to
the undiscounted cash flow models prepared by the Company, and discounts the cash flows using its current estimate of INSW’s
weighted average cost of capital, which ranged from 9.0% to 9.5% over the three years ended December 31, 2017.The more significant factors that could impact management’s
assumptions regarding time charter equivalent rates include (i) loss or reduction in business from significant customers, (ii)
unanticipated changes in demand for transportation of crude oil and petroleum products, (iii) changes in production of or demand
for oil and petroleum products, generally or in particular regions, (iv) greater than anticipated levels of tanker newbuilding
orders or lower than anticipated levels of tanker scrappings, and (v) changes in rules and regulations applicable to the tanker
industry, including legislation adopted by international organizations such as IMO and the EU or by individual countries. Although
management believes that the assumptions used to evaluate potential impairment are reasonable and appropriate at the time they
were made, such assumptions are highly subjective and likely to change, possibly materially, in the future.2017 Impairment Evaluation — Management gave
consideration to the following events and changes in circumstances in determining whether there were any indicators that the carrying
amounts of the vessels in the Company’s fleet were not recoverable as of December 31, 2017. Factors considered included declines
in valuations during 2017 for vessels of certain sizes and ages, any negative changes in forecasted near term charter rates, and
an increase in the likelihood that the Company will sell certain of its vessels before the end of their estimated useful lives
in conjunction with the Company’s fleet renewal program. The Company concluded that the above indicators constituted impairment
trigger events for eighteen vessels (one ULCC, one VLCC, six Aframaxes, eight Panamaxes and two LR1s) as of December 31, 2017 and
three vessels (one Panamax and two MRs) as of September 30, 2017.In developing estimates of undiscounted future cash flows for performing
Step 1 of the impairment tests, the Company utilized the methodology described above. In estimating the fair value of the vessels
for the purposes of Step 2 of the impairment tests, the Company considered the market and income approaches by using a combination
of third party appraisals, current recycling market data, and discounted cash flow models prepared by the Company. In preparing
the discounted cash flow models, the Company used a methodology consistent with the methodology described above and a weighted
average cost of capital discount rate of 9.5%. Based on the tests performed, impairment charges totaling $81,062 and $7,346 were
recorded on twelve vessels (one ULCC, one VLCC, four Aframaxes and six Panamaxes) at December 31, 2017 and three vessels (one Panamax
and two MRs) as of September 30, 2017, respectively to write-down their carrying values to their estimated fair values. |
| 52 | | |
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| International Seaways, Inc. | | |
| INSW/10-K/0001144204-18-013984 |
CRITICAL ACCOUNTING POLICIES | 2016 Impairment Evaluations — The Company had
been monitoring the industry wide decline in vessel valuations during 2016 and specifically from June 30, 2016 to September 30,
2016, and September 30, 2016 to December 31, 2016, as well as the decline in forecasted near term charter rates, and concluded
that the declines in vessel valuations and in forecasted near term charter rates constituted impairment trigger events for 28 vessels
as of September 30, 2016 and 24 vessels as of December 31, 2016. In developing estimates of undiscounted future cash flows for
performing Step 1 of the impairment tests, the Company utilized the methodology described above. In estimating the fair value of
the vessels for the purposes of Step 2 of the September 30, 2016 impairment tests, the Company developed fair value estimates that
utilized a market approach which considered an average of two vessel appraisals. Based on the tests performed, impairment charges
totaling $49,640 were recorded on two LR1s, an Aframax and a Panamax to write-down their carrying values to their estimated fair
values at September 30, 2016. In estimating the fair values of the vessels for the purposes of Step 2 of the December 31, 2016
impairment tests, the Company considered the market and income approaches by using a combination of third party appraisals and
discounted cash flow models prepared by the Company. In preparing the discounted cash flow models, the Company used a methodology
consistent with the methodology described above and a weighted average cost of capital discount rate of 9.0%. Based on the tests
performed, impairment charges aggregating $29,602 were recorded on one Panamax and seven MRs to write-down their carrying values
to their estimated fair values at December 31, 2016.2015 Impairment Evaluation — Management gave
consideration as to whether any events and changes in circumstances existed as of December 31, 2015 that could be viewed as indicators
that the carrying amounts of the vessels in the Company’s International Flag fleet were not recoverable as of December 31,
2015 and determined there were no such events or changes in circumstances.Impairment of Equity Method InvestmentsWhen events and circumstances warrant, investments accounted for
under the equity method of accounting are evaluated for impairment. If a determination is made that an other-than-temporary impairment
exists, the investment should be written down to its fair value in accordance with ASC 820, Fair Value Measurements and Disclosures,
which establishes a new cost basis. In December 2016, evidence of an other-than-temporary decline in the fair value of the Company’s
investments in its FSO joint ventures below their carrying values was identified by the Company. Specifically, management concluded
that the lower charter rate expected over the duration of the recently awarded five-year service contracts commencing in the third
quarter of 2017 was negative evidence indicating that the excess of the carrying value of the Company’s investment in these
joint ventures over their fair value was other-than-temporary as of December 31, 2016.As the Company determined that other-than-temporary impairments
existed in relation to its investments in the FSO joint ventures, impairment charges aggregating $30,475 were recorded to write
down the investments to their estimated fair values as of December 31, 2016. Such charges are included in equity in income of affiliated
companies in the accompanying consolidated statements of operations. In estimating the fair value of the Company’s investments
in the FSO joint ventures as of December 31, 2016, the Company utilized an income approach, by preparing discounted cash flow models
since there is a lack of comparable market transactions for the specially built assets held by the joint ventures. In preparing
the discounted cash flows models, the Company used a methodology largely consistent with the methodology and assumptions detailed
in the “Vessel Impairment” section above, with the exception being that as the assets owned by the joint ventures serve
under specific service contracts, the estimated charter rates for periods after the expiry of the existing contracts are based
upon management’s internally forecasted rates. The cash flows were discounted using the estimated weighted average cost of
capital for each joint venture, which approximated 9.5% and took into consideration country risk, entity size and uncertainty with
respect to the cash flows for periods beyond the current charter expiries.DrydockingWithin the shipping industry, there are two methods that are used
to account for dry dockings: (1) capitalize drydocking costs as incurred (deferral method) and amortize such costs over the period
to the next scheduled drydocking, and (2) expense drydocking costs as incurred. Since drydocking cycles typically extend over two
and a half years or five years, management uses the deferral method because management believes it provides a better matching of
revenues and expenses than the expense-as-incurred method. Pension BenefitsThe Company has obligations outstanding under the OSG Ship Management
(UK) Ltd. Retirement Benefits Plan (the “Scheme”), a defined benefit pension plan maintained by a subsidiary in the
U.K., who is the principal employer of the Scheme. The plan has been closed to new entrants and accrual since December 2007. The
Company has recorded pension benefit costs based on valuations developed by its actuarial consultants. These valuations are based
on key estimates and assumptions, including those related to the discount rates, the rates expected to be earned on investments
of plan assets and the life expectancy/mortality of plan participants. The Company is required to consider market conditions in
selecting a discount rate that is representative of the rates of return currently available on high-quality fixed income investments.
A higher discount rate would result in a lower benefit obligation and a lower rate would result in a higher benefit obligation.
The expected rate of return on plan assets is management’s best estimate of expected returns on plan assets. A decrease in
the expected rate of return will increase net periodic benefit costs and an increase in the expected rate of return will decrease
benefit costs. The mortality assumption is management’s best estimate of the expected duration of future benefit payments
at the measurement date. The estimate is based on the specific demographics and other relevant facts and circumstances of the Scheme
and considers all relevant information available at the measurement date. Longer life expectancies would result in higher benefit
obligations and a decrease in life expectancies would result in lower benefit obligations. |
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| International Seaways, Inc. | | |
| INSW/10-K/0001144204-18-013984 |
CRITICAL ACCOUNTING POLICIES | In determining the benefit obligations at the end of year measurement
date, the Company continues to use an equivalent single weighted-average discount rate, at December 31, 2017 (2.40%) and 2016 (2.60%),
respectively. Management believes these rates to be appropriate for ongoing plans with a long duration such as Scheme. The Company
also assumed a long-term rate of return on the Scheme assets of 3.85% and 3.85% at December 31, 2017 and 2016, respectively, based
on the asset mix as of such dates and management’s estimate of the long term rate of return that could be achieved over the
remaining duration of the Scheme.Newly Issued Accounting StandardsSee Note 2, “Summary of Significant Accounting Policies,”
to the Company’s consolidated financial statements set forth in Item 8, “Financial Statements and Supplementary Data.” |
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| International Seaways, Inc. | | |
| INSW/10-K/0001144204-18-013984 |
Crude Tankers | TCE rates during the fourth quarter of 2018 were strong on the back of increasing demand for crude oil and a record number of tanker removals through scrapping. That strength carried forward into the first quarter of 2019, resulting in firm TCE rates for VLCCs, Suezmaxes, Aframaxes and Panamaxes. A combination of events, including a large influx of newbuilding deliveries during the first quarter, OPEC production quota reductions and lackluster demand due in part to the U.S.-China trade war, caused the market to soften during the second and third quarters of 2019. U.S. sanctions on Venezuela imposed at the start of 2019 also hurt the crude oil tanker markets, particularly the VLCC and Aframax sectors. Strong TCE rates in the fourth quarter of 2019 were driven by increasing crude oil demand on the back of improving trade conditions and the end of a prolonged period of refinery maintenance ahead of IMO 2020, as well as external geopolitical factors including U.S. sanctions imposed on certain entities owned by China Ocean Shipping Company (“COSCO”) due to alleged trading with Iran and the drone attack on a Saudi Arabian crude oil processing plant at Abqaiq. |
| | | | | | | | | | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| | | Quarter Ended | | | | | | | | | | | | | |
| | | December 31, 2018 | | | March 31, 2019 | | | June 30,2019 | | | September 30,2019 | | | December 31,2019 | |
| VLCC: | | | | | | | | | | | | | | | |
| Average rate | | $ | 31,728 | | $ | 31,993 | | $ | 20,038 | | $ | 22,434 | | $ | 54,102 |
| Revenue days | | | 1,187 | | | 1,134 | | | 1,065 | | | 1,068 | | | 986 |
| Suezmax: | | | | | | | | | | | | | | | |
| Average rate | | $ | 30,606 | | $ | 28,935 | | $ | 20,772 | | $ | 18,470 | | $ | 50,871 |
| Revenue days | | | 184 | | | 180 | | | 182 | | | 184 | | | 183 |
| Aframax: | | | | | | | | | | | | | | | |
| Average rate | | $ | 18,968 | | $ | 20,905 | | $ | 13,540 | | $ | 15,342 | | $ | 31,302 |
| Revenue days | | | 425 | | | 398 | | | 318 | | | 368 | | | 303 |
| Panamax: | | | | | | | | | | | | | | | |
| Average rate | | $ | 14,866 | | $ | 17,558 | | $ | 12,095 | | $ | 7,846 | | $ | 29,144 |
| Revenue days | | | 139 | | | 73 | | | 113 | | | 92 | | | 92 |
| INSW/10-K/0001558370-20-001928 |
Product Carriers | Aside of the events described above for the Crude Tankers segment, the Product Carriers market was negatively impacted during the second and third quarters of 2019 as many refineries began long maintenance periods in anticipation of IMO 2020’s implementation. MR tankers were particularly negatively impacted by the U.S. imposition of sanctions on Venezuela as a key trade of U.S. refined product exports to Venezuela became prohibited. A return of stronger demand during the latter half of 2019 and the geopolitical events discussed in the crude tanker section above helped lift rates in the Product Carriers sector during the fourth quarter of 2019.
See Note 4, “Business and Segment Reporting,” to the Company’s consolidated financial statements as set forth in Item 8, “Financial Statements and Supplementary Data,” for additional information on the Company’s segments, including equity in income of affiliated companies and reconciliations of (i) time charter equivalent revenues to shipping revenues and (ii) adjusted income/(loss) from vessel operations for the segments to loss before income taxes, as reported in the consolidated statements of operations. |
| | | | | | | | | | | | | | | | |
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| | | Quarter Ended | | | | | | | | | | | | | |
| | | December 31, 2018 | | | March 31, 2019 | | | June 30,2019 | | | September 30,2019 | | | December 31,2019 | |
| LR2 | | | | | | | | | | | | | | | |
| Average rate | | $ | 15,575 | | $ | 22,090 | | $ | 17,746 | | $ | 17,253 | | $ | 23,222 |
| Revenue days | | | 92 | | | 90 | | | 72 | | | 87 | | | 92 |
| LR1 | | | | | | | | | | | | | | | |
| Average rate | | $ | 22,165 | | $ | 24,017 | | $ | 17,271 | | $ | 15,475 | | $ | 28,652 |
| Revenue days | | | 354 | | | 339 | | | 347 | | | 506 | | | 534 |
| MR | | | | | | | | | | | | | | | |
| Average rate | | $ | 12,905 | | $ | 13,462 | | $ | 11,571 | | $ | 11,430 | | $ | 14,028 |
| Revenue days | | | 978 | | | 889 | | | 847 | | | 673 | | | 604 |
| INSW/10-K/0001558370-20-001928 |
Crude Tankers | (a)
Adjusted income/(loss) from vessel operations by segment is before general and administrative expenses, provision for credit losses, third-party debt modification fees, and loss on disposal of vessels and other property, including impairments.
(b)
The average is calculated to reflect the addition and disposal of vessels during the year. |
| | | | | | | |
| --- | --- | --- | --- | --- | --- | --- |
| | | 2019 | | | 2018 | |
| TCE revenues | | $ | 259,517 | | $ | 175,524 |
| Vessel expenses | | | (93,672) | | | (95,090) |
| Charter hire expenses | | | (35,114) | | | (23,809) |
| Depreciation and amortization | | | (59,387) | | | (54,431) |
| Adjusted income from vessel operations (a) | | $ | 71,344 | | $ | 2,194 |
| Average daily TCE rate | | $ | 26,765 | | $ | 17,780 |
| Average number of owned vessels (b) | | | 25.0 | | | 26.1 |
| Average number of vessels chartered-in under operating leases | | | 3.9 | | | 2.6 |
| Number of revenue days: (c) | | | 9,696 | | | 9,872 |
| Number of ship-operating days: (d) | | | | | | |
| Owned vessels | | | 9,125 | | | 9,544 |
| Vessels bareboat chartered-in under operating leases | | | 730 | | | 578 |
| Vessels time chartered-in under operating leases (e) | | | 359 | | | 190 |
| Vessels spot chartered-in under operating leases (e) | | | 331 | | | 174 |
| INSW/10-K/0001558370-20-001928 |
Crude Tankers | During 2019, TCE revenues for the Crude Tankers segment increased by $83,993, or 48%, to $259,517 from $175,524 in 2018, principally as a result of significantly higher average blended rates in the VLCC, Suezmax, Aframax, and Panamax sectors aggregating approximately $77,105. Further contributing to the increase was the impact of a 259-day increase in VLCC revenue days aggregating $4,685, and a $13,655 increase in revenue in the Crude Tankers Lightering business during the current year. The net increase in VLCC days was the result of the acquisitions of one 2015-built and five 2016-built VLCCs which were delivered to the Company in June 2018, partially offset by the disposals of one 2000-built and one 2001-built VLCC in 2018, and 294 more drydock, repair and other off-hire days in the current year. Partially offsetting the revenue increases was a 961-day decrease in revenue days for the Aframax and Panamax sectors, which accounted for a revenue decrease of approximately $11,487, and was driven primarily by the sale of two 2001-built Aframaxes and a 2002-built Panamax between May and October 2018 along with the re-deployment of the Company’s 2002-built Aframax into its Crude Tankers Lightering business.
Of the total 294 day increase in VLCC off-hire days highlighted above, 164 days related to five VLCCs which were out of service to have scrubbers installed during the fourth quarter of 2019. The Company expects approximately 330 and 230 of VLCC off-hire days in the first and second quarters of 2020, respectively, as it completes scrubber installations on its 10 modern VLCCs in China. The expected off-hire days are subject to change due to impacts of the coronavirus (COVID-19) and other scheduling changes.
Vessel expenses decreased by $1,418 to $93,672 in 2019 from $95,090 in 2018. The primary drivers of the decrease were (a) a $10,734 decrease in vessel expenses which resulted from the VLCC, Aframax and Panamax sales noted above and (b) the sale of the Company’s only ULCC, which was idle in 2018 prior to its sale in June 2018 and accounted for approximately $1,255 of the decrease in vessel expenses. Such decreases were partially offset by a $8,053 increase in vessel expenses associated with the VLCC acquisitions described above and increased drydock deviation costs of $2,377. Charter hire expenses increased by $11,305 to $35,114 in 2019 from $23,809 in 2018. The primary driver of the increase was a significant increase in spot and short-term time chartered-in vessels in the Crude Tankers Lightering business to support anticipated increased full service lightering activity, with an additional factor being the impact of executing sale and lease back transactions for two 2009-built Aframaxes in March 2018. Depreciation and amortization increased by $4,956 to $59,387 in 2019 from $54,431 in 2018, principally resulting from the impact of the VLCC acquisitions described above aggregating $7,072, partially offset by a reduction of $3,432 relating to the vessel sales noted above. |
| | | | | | | | | | | | | |
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| | | 2019 | | | | | | 2018 | | | | |
| | | Spot Earnings | | | Fixed Earnings | | | Spot Earnings | | | Fixed Earnings | |
| VLCC: | | | | | | | | | | | | |
| Average rate | | $ | 31,726 | | $ | - | | $ | 18,881 | | $ | 13,221 |
| Revenue days | | | 4,254 | | | - | | | 3,854 | | | 97 |
| Suezmax: | | | | | | | | | | | | |
| Average rate | | $ | 29,762 | | $ | - | | $ | 18,973 | | $ | - |
| Revenue days | | | 729 | | | - | | | 730 | | | - |
| Aframax: | | | | | | | | | | | | |
| Average rate | | $ | 20,011 | | $ | - | | $ | 12,808 | | $ | - |
| Revenue days | | | 1,386 | | | - | | | 2,020 | | | - |
| Panamax: | | | | | | | | | | | | |
| Average rate | | $ | 16,263 | | $ | 13,471 | | $ | 12,988 | | $ | 11,419 |
| Revenue days | | | 330 | | | 2,031 | | | 685 | | | 1,984 |
| INSW/10-K/0001558370-20-001928 |
Product Carriers | The following table provides a breakdown of TCE rates achieved for the years ended December 31, 2019 and 2018 between spot and fixed earnings and the related revenue days. The information is based, in part, on information provided by the commercial pools in which the segment’s vessels participate and excludes commercial pool fees/commissions averaging approximately $486, and $444 per day in 2019 and 2018, respectively, as well as revenue and revenue days for which recoveries were recorded by the Company under its loss of hire insurance policies. |
| | | | | | | |
| --- | --- | --- | --- | --- | --- | --- |
| | | 2019 | | | 2018 | |
| TCE revenues | | $ | 80,402 | | $ | 67,576 |
| Vessel expenses | | | (29,533) | | | (40,615) |
| Charter hire expenses | | | (22,398) | | | (21,101) |
| Depreciation and amortization | | | (16,152) | | | (17,862) |
| Adjusted (loss)/income from vessel operations | | $ | 12,319 | | $ | (12,002) |
| Average daily TCE rate | | $ | 15,652 | | $ | 10,594 |
| Average number of owned vessels | | | 9.9 | | | 13.3 |
| Average number of vessels chartered-in under operating leases | | | 4.5 | | | 4.8 |
| Number of revenue days | | | 5,137 | | | 6,379 |
| Number of ship-operating days: | | | | | | |
| Owned vessels | | | 3,630 | | | 4,872 |
| Vessels bareboat chartered-in under operating leases | | | - | | | 302 |
| Vessels time chartered-in under operating leases | | | 1,654 | | | 1,457 |
| INSW/10-K/0001558370-20-001928 |
Product Carriers | (1)
During the 2019 and 2018 periods, each of the Company’s LR1s participated in the Panamax International pool and transported crude oil cargoes exclusively.
During 2019, TCE revenues for the Product Carriers segment increased by $12,826, or 19%, to $80,402 from $67,576 in 2018. Approximately $22,584 of such increase was attributable to increased average blended rates earned across all Product Carrier fleets, which was partially offset by a $9,799 decline in TCE revenues driven by a 1,242-day decrease in segment revenue days. The decline in revenue days reflects the impact of (i) a 1,585-day decrease in MR revenue days in the current period, resulting primarily from the sales of seven MRs between the first quarter of 2018 and the third quarter of 2019, and the redeliveries of one time chartered-in MR during the third quarter of 2019 and two bareboat chartered-in MRs during the second quarter of 2018, partially offset by (ii) a 367- |
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| | | 2019 | | | | | | 2018 | | | | |
| | | Spot Earnings | | | Fixed Earnings | | | Spot Earnings | | | Fixed Earnings | |
| LR2 | | | | | | | | | | | | |
| Average rate | | $ | 20,242 | | $ | - | | $ | 12,729 | | $ | - |
| Revenue days | | | 341 | | | - | | | 365 | | | - |
| LR1 (1) | | | | | | | | | | | | |
| Average rate | | $ | 21,490 | | $ | - | | $ | 14,875 | | $ | - |
| Revenue days | | | 1,766 | | | - | | | 1,416 | | | - |
| MR | | | | | | | | | | | | |
| Average rate | | $ | 12,590 | | $ | - | | $ | 10,125 | | $ | 5,294 |
| Revenue days | | | 3,013 | | | - | | | 4,257 | | | 340 |
| INSW/10-K/0001558370-20-001928 |
INTEREST EXPENSE | Interest expense was $66,267 in 2019, compared with $60,231 in 2018. Interest expense incurred on the debt facilities entered into by the Company during the second quarter of 2018 (See Note 8, “Debt,” to the accompanying consolidated financial statements as set forth in Item 8, “Financial Statements and Supplementary Data”) accounted for substantially all of the period over period increases before the impact of pension and interest rate collar/cap and swaps. Partially offsetting such increases was a decrease related to the 2017 Term Loan Facility due to a $10,000 prepayment made on July 31, 2019 and a $100,000 prepayment made on October 8, 2019, both using restricted cash set aside from the proceeds of vessel sales and a portion of the proceeds from the sale of the Company’s equity interest in the LNG Joint Venture, and lower average LIBOR rates during the 2019 periods compared with the comparable periods in 2018.
Following the refinancing completed in January 2020, we anticipate cash interest expense to further decrease by approximately $15,000 on an annual basis based on current interest rates by lowering our average interest rates on the refinanced portion of our debt by 350 basis points, and our overall average interest rates by 200 basis points. |
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| --- | --- | --- | --- | --- | --- | --- |
| | | 2019 | | | 2018 | |
| Interest before items shown below | | $ | 64,085 | | $ | 58,964 |
| Interest cost on defined benefit pension obligation | | | 681 | | | 701 |
| Impact of interest rate hedge derivatives | | | 1,501 | | | 566 |
| Interest expense | | $ | 66,267 | | $ | 60,231 |
| INSW/10-K/0001558370-20-001928 |
Carrying Value of Vessels | (1)
As of December 31, 2019, the Crude Tankers segment includes vessels with an aggregate carrying value of $305,866, which the Company believes exceeds their aggregate market value of approximately $253,125 by $52,741.
(2)
As of December 31, 2019, the Product Carriers segment includes vessels with an aggregate carrying value of $257,496, which the Company believes exceeds their aggregate market value of approximately $206,500 by $50,996. |
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| At December 31, 2019 | | | Average Vessel Age (weighted by dwt) | | | Number of Owned Vessels | | | Carrying Value |
| Crude Tankers | | | | | | | | | |
| VLCC | | | 8.6 | | | 13 | | $ | 792,543 |
| Suezmax | | | 2.4 | | | 2 | | | 107,331 |
| Aframax | | | 14.1 | | | 3 | | | 73,167 |
| Panamax | | | 17.2 | | | 7 | | | 53,958 |
| Total Crude Tankers(1) | | | 9.4 | | | 25 | | $ | 1,026,999 |
| | | | | | | | | | |
| Product Carriers | | | | | | | | | |
| LR2 | | | 5.4 | | | 1 | | $ | 58,967 |
| LR1 | | | 11.0 | | | 4 | | | 83,956 |
| MR | | | 9.0 | | | 4 | | | 114,573 |
| Total Product Carriers(2) | | | 9.3 | | | 9 | | $ | 257,496 |
| INSW/10-K/0001558370-20-001928 |
Aggregate Contractual Obligations | (1)
Amounts shown include contractual interest obligations of floating rate debt estimated based on the applicable margin for the 2017 Term Loan Facility of 6.0% plus the estimated floating rates during the periods. The estimated floating rate through December 31, 2020 is 1.98% (which is both the cap and the floor rate under the Company’s interest rate collar for such period) and 1.80% thereafter, which is based on one-month LIBOR as of December 31, 2019 (which falls between the cap and floor rate under the Company’s interest rate collar for the period from January 1, 2021 through December 31, 2022).
(2)
Amounts shown include contractual interest obligations of floating rate debt estimated based on the aggregate effective three-month LIBOR rate as of December 31, 2019 of 1.89% and applicable margin for the ABN Term Loan facility of 3.25%.
(3)
Amounts shown include contractual interest obligations of floating rate debt estimated based on (i) the fixed rate stated in the related floating-to-fixed interest rate swap through the maturity date of March 21, 2025, or (ii) the effective three-month LIBOR rate for periods after the swap maturity date, plus the applicable margin for the Sinosure Credit Facility of 2.00%. The Company is a party to a floating-to-fixed interest rate swap covering the balance outstanding under the Sinosure Credit Facility that effectively converts the Company’s interest rate exposure under the Sinosure Credit Facility from a floating rate based on three-month LIBOR to a fixed LIBOR rate of 2.76%.
(4)
As of December 31, 2019, the Company had charter-in commitments for six vessels and one workboat employed in the Crude Tankers Lightering business on leases that are accounted for as operating leases. Certain of these leases provide the Company with various renewal and purchase options. The future minimum commitments for time charters-in have been reduced to reflect estimated days that the vessels will not be available for employment due to drydock and any days paid for in advance. Upon adoption of ASU 2016-02 Leases (ASC 842) on January 1, 2019, the full amounts due under bareboat charter-ins, office and other space leases, and lease component of the amounts due under long term time charter-ins are discounted and reflected on the Company’s consolidated balance sheet as lease liabilities with corresponding right of use asset balances.
(5)
Represents the Company’s commitments for the purchase and installation of ballast water treatment systems on 18 vessels, the purchase and installation of scrubbers on 10 of its VLCC tankers, and the acquisition of one 2009-built LR1 which was delivered to the Company during the first quarter of 2020. In addition, the Company is party to an agreement granting INSW the option to purchase an additional ballast water treatment system for installation before December 2020. If exercised, such option could increase the Company’s commitments by approximately $2,100.
As described above in Sources, Uses and Management of Capital, on January 28, 2020, the available amounts under the Core Term Loan Facility and the Transition Term Loan Facility were drawn in full, and $20,000 of the $40,000 available under the Core Revolving Facility was also drawn. Those proceeds, together with available cash, were used to repay or repurchase the outstanding principal balances and accrued interest payable under (i) the 2017 Debt Facilities, (ii) the ABN Term Loan Facility, and (iii) the Company’s 10.75% subordinated notes due 2023. The following table depicts the principal amortization and estimated interest payable under 2020 Debt Facilities for the next 5 years and beyond: |
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| | | | | | | | | | | | | | | | | | | Beyond | | | |
| | | | 2020 | | | 2021 | | | 2022 | | | 2023 | | | 2024 | | | 2024 | | | Total |
| 2017 Term Loan - floating rate(1) | | $ | 68,200 | | $ | 40,707 | | $ | 279,787 | | $ | - | | $ | - | | $ | - | | $ | 388,694 |
| ABN Term Loan - floating rate(2) | | | 4,622 | | | 4,438 | | | 4,257 | | | 13,116 | | | - | | | - | | | 26,433 |
| Sinosure Credit Facility - floating rate(3) | | | 36,140 | | | 35,035 | | | 33,897 | | | 32,758 | | | 31,643 | | | 167,517 | | | 336,990 |
| 8.5% Senior Notes - fixed rate | | | 2,125 | | | 2,125 | | | 2,125 | | | 26,063 | | | - | | | - | | | 32,438 |
| 10.75% Subordinated Notes - fixed rate | | | 3,003 | | | 3,631 | | | 3,631 | | | 29,747 | | | - | | | - | | | 40,012 |
| Operating lease obligations (4) | | | | | | | | | | | | | | | | | | | | | |
| Bareboat Charter-ins | | | 6,295 | | | 6,278 | | | 6,278 | | | 4,532 | | | - | | | - | | | 23,383 |
| Time Charter-ins | | | 14,084 | | | 4,660 | | | - | | | - | | | - | | | - | | | 18,744 |
| Office space | | | 1,166 | | | 838 | | | 173 | | | 178 | | | 178 | | | - | | | 2,533 |
| Vessel & vessel betterment commitments(5) | | | 50,234 | | | 349 | | | 118 | | | - | | | - | | | - | | | 50,701 |
| Total | | $ | 185,869 | | $ | 98,061 | | $ | 330,266 | | $ | 106,394 | | $ | 31,821 | | $ | 167,517 | | $ | 919,928 |
| INSW/10-K/0001558370-20-001928 |
Aggregate Contractual Obligations | (a)
Amounts shown include contractual interest obligations of floating rate debt estimated based on (i) the applicable margin for the Core Term Loan Facility of 2.60% through August 15, 2020 and 2.40% thereafter, and (ii) the fixed rate stated in the related floating-to-fixed interest rate swap of 1.97% for the $250,000 notional amount covered in the interest rate swap (as described below under Risk Management) and the effective three-month LIBOR rate of 1.80% as of January 28, 2020 for the remaining outstanding balance.
(b)
Amounts shown include contractual interest obligations of floating rate debt estimated based on the applicable margin for the Core Revolving Facility of 2.60% plus the effective three-month LIBOR rate of 1.80% as of January 28, 2020, assuming that amounts drawn on January 28, 2020 are repaid March 31, 2020.
(c)
Amounts shown include contractual interest obligations of floating rate debt estimated based on the applicable margin for the Transition Term Loan Facility of 3.50% plus the effective three-month LIBOR rate of 1.80% as of January 28, 2020. |
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| | | | | | | | | | | | | | | | | | | Beyond | | | |
| | | | 2020 | | | 2021 | | | 2022 | | | 2023 | | | 2024 | | | 2024 | | | Total |
| Core Term Loan - floating rate(a) | | $ | 40,665 | | $ | 49,192 | | $ | 47,558 | | $ | 45,869 | | $ | 44,255 | | $ | 120,300 | | $ | 347,839 |
| Core Revolving Facility - floating rate(b) | | | 20,154 | | | - | | | - | | | - | | | - | | | - | | | 20,154 |
| Transition Term Loan - floating rate(c) | | | 22,070 | | | 21,204 | | | 10,200 | | | - | | | - | | | - | | | 53,474 |
| Total | | $ | 82,889 | | $ | 70,396 | | $ | 57,758 | | $ | 45,869 | | $ | 44,255 | | $ | 120,300 | | $ | 421,467 |
| INSW/10-K/0001558370-20-001928 |
Principal (Notional) Amount (dollars in millions) by Expected Maturity and Average Interest (Swap) Rate | (1)
Includes amounts outstanding under the Sinosure Credit Facility as floating rate debt estimated based on (i) the fixed rate stated in the related floating-to-fixed interest rate swap through the swap maturity date of March 21, 2025, or (ii) the effective three-month LIBOR rate for periods after the swap maturity date, plus the applicable margin for the Sinosure Credit Facility of 2.00%.
As of December 31, 2019, the Company had secured term loans (the 2017 Term Loan Facility, the Sinosure Credit Facility, and the ABN Term Loan Facility) and a revolving credit facility (2017 Revolver Facility) under which borrowings bear interest at a rate based on LIBOR, plus the applicable margin, as stated in the respective loan agreements. As discussed in Interest rate risk section above, the Company entered into an interest rate collar agreement for 2017 Term Loan and an interest rate swap agreement for Sinosure Credit Facility to limit the floating interest rate exposure associated with the debt facilities. There was no outstanding balance under the 2017 Revolver Facility as of December 31, 2019.
The outstanding balance of the 2017 Term Loan Facility, the ABN Term Loan Facility, and 10.75% Subordinated Notes were paid off following the debt refinance transactions completed on January 28, 2020 (as discussed above). In addition, in connection with its entry into the Core Term Loan Facility, the Company also amended its existing interest rate hedging arrangements in respect of the 2017 Debt Facilities to among other things decrease the notional hedged amount to an amount of $250,000 and extend the term of such hedging arrangement to coincide with the maturity of the Core Term Loan Facility. The following table gives effect of the refinancing transaction on the Company’s debt: |
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| | | | | | | | | | | | | | | | | | Beyond | | | | | | Fair Value at | |
| At December 31, 2019 | | 2020 | | | 2021 | | | 2022 | | | 2023 | | | 2024 | | | 2024 | | | Total | | | Dec. 31, 2019 | |
| Liabilities | | | | | | | | | | | | | | | | | | | | | | | | |
| Debt | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed rate debt | | $ | - | | $ | - | | $ | - | | $ | 52.9 | | $ | - | | $ | - | | $ | 52.9 | | $ | 58.8 |
| Average interest rate | | | 9.69% | | | 9.84% | | | 10.87% | | | 10.78% | | | | | | | | | | | | |
| Variable rate debt (1) | | $ | 70.4 | | $ | 45.5 | | $ | 296.8 | | $ | 36.4 | | $ | 23.6 | | $ | 151.8 | | $ | 624.5 | | $ | 626.2 |
| Average interest rate (1) | | | 6.54% | | | 6.45% | | | 5.94% | | | 4.84% | | | 4.83% | | | 4.13% | | | | | | |
| INSW/10-K/0001558370-20-001928 |
OPERATIONS AND OIL TANKER MARKETS | U.S. refinery throughput decreased by about 0.1 million b/d to 18.8
million b/d in the fourth quarter of 2016 compared with the comparable quarter in 2015. U.S. crude oil imports increased by about
0.7 million b/d in the fourth quarter of 2016 compared with the comparable quarter of 2015 with imports from OPEC countries increasing
by 0.3 million b/d, an 11.8% increase from the comparable quarter in 2015.Chinese imports of crude oil continued increasing, with 2016 showing
a 13.6% increase from 2015 as a result of increased strategic or commercial reserve buildup and increased imports by privately
owned refineries. December imports reached 8.6 million b/d.During the fourth quarter of 2016, the International Flag tanker
fleet of vessels over 10,000 deadweight tons (“dwt”) increased by 6.9 million dwt as the crude fleet increased by 5.5
million dwt, while the product carrier fleet expanded by 1.4 million dwt. Year over year, the size of the tanker fleet increased
by 31.3 million dwt with the largest increases in the VLCCs, MRs and Aframax sectors.During the fourth quarter of 2016, the International Flag crude
tanker orderbook decreased by 6.1 million dwt, and the product carrier orderbook decreased by 1.7 million dwt.From the end of the fourth quarter of 2015 through the end of the
fourth quarter of 2016, the total tanker orderbook declined by 28.6 million dwt. due to a combination of vessel deliveries combined
with a large reduction in new orders placed in 2016, although 2016 saw limited amounts of scrappings.VLCC freight rates saw a strengthening during the fourth quarter
of 2016, reaching a peak of around $63,000 per day in December before beginning to decrease to around $50,000 per day by the end
of the quarter. This was attributable to the record Chinese imports experienced during the quarter. Other crude segments had similar
earnings patterns, although the Panamax sector saw continuous improvement throughout the quarter and product carriers also improved
during the quarter from a low of around $6,500 per day in October to around $13,000 per day by the end of the quarter. The previously
announced OPEC-led production cuts will begin to impact the tanker markets during the first quarter of 2017. In addition, 2017
will likely see the peak of the orderbook delivery schedule. The combination of these factors could put downward pressure on freight
rates. |
| 38 | |
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| International Seaways, Inc. | |
| INSW/10-K/0001144204-17-017875 |
RESULTS FROM VESSEL OPERATIONS | The increase in 2015 vessel expenses by $10,153, or 8%, to $143,925
from $133,772 resulted primarily from (i) $3,621 of additional reactivation and operating costs incurred in conjunction with the
Company’s ULCC being taken out of lay-up in the first quarter of 2015 and commencing a time charter in April 2015, (ii) $3,451
of incremental costs relating to the redelivery of one of the Company’s Panamaxes that had previously been bareboat chartered-out,
(iii) the recording of a $1,450 reserve in 2015 for an assessment by a multi-employer defined benefit pension plan covering British
crew members that served onboard INSW vessels (as well as vessels of other owners) more than 20 years ago, (iv) a $1,402 increase
in vessel expenses associated with a newbuild LR2 that was delivered in the second quarter of 2014, and (v) an increase in technical
management fees paid to V.Ships. As discussed in further detail in Note 18, “Severance Costs,” to the Company’s
consolidated financial statements set forth in Item 8, “Financial Statements and Supplementary Data,” the Company began
transferring management of its International Flag conventional tankers to V.Ships in March 2014 and completed the transfers by
September of 2014. Vessel operating expenses in 2015 included approximately $7,200 in technical management fees, compared with
approximately $4,100 in 2014. These increases in vessel expense were more than offset by a decrease in the cost of providing technical
and commercial management by the Company’s shore-based staff that were previously included in general and administrative
expenses.The $3,278, or 4%, decrease in depreciation and amortization to
$81,653 in 2015 from $84,931 in 2014 was primarily due to a $5,065 decrease in depreciation expense associated with the vessel
sales noted above. This decrease was partially offset by a $1,513 increase in depreciation expense associated with the LR2 newbuild
delivery referred to above.See Note 5, “Business and Segment Reporting,” to the
Company’s consolidated financial statements as set forth in Item 8, “Financial Statements and Supplementary Data”,
for additional information on the Company’s segments, including equity in income of affiliated companies and reconciliations
of (i) time charter equivalent revenues to shipping revenues and (ii) adjusted income from vessel operations for the segments to
income/(loss) before income taxes, as reported in the consolidated statements of operations. International Crude Tankers |
| 39 | |
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| International Seaways, Inc. | |
| INSW/10-K/0001144204-17-017875 |
RESULTS FROM VESSEL OPERATIONS | (a)Adjusted income from vessel operations by segment is before general and administrative expenses, technical management transition
costs, severance costs, separation and transition costs, and (loss)/gain on disposal of vessels and other property, including impairments.
(b)The average is calculated to reflect the addition and disposal of vessels during the year.
(c)Revenue days represent ship-operating days less days that vessels were not available for employment due to repairs, drydock
or lay-up. Revenue days are weighted to reflect the Company’s interest in chartered-in vessels.
(d)Ship-operating days represent calendar days. |
| | | 2016 | | | | 2015 | | | | 2014 | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| TCE revenues | | $ | 258,171 | | | $ | 304,182 | | | $ | 228,296 | |
| Vessel expenses | | | (84,276 | ) | | | (86,174 | ) | | | (79,271 | ) |
| Charter hire expenses | | | (9,732 | ) | | | (8,821 | ) | | | (27,283 | ) |
| Depreciation and amortization | | | (52,395 | ) | | | (51,347 | ) | | | (56,280 | ) |
| Adjusted income from vessel operations (a) | | $ | 111,768 | | | $ | 157,840 | | | $ | 65,462 | |
| Average daily TCE rate | | $ | 29,853 | | | $ | 36,839 | | | $ | 19,836 | |
| Average number of owned vessels (b) | | | 24.0 | | | | 24.0 | | | | 27.8 | |
| Average number of vessels chartered-in under operating leases | | | 0.3 | | | | 0.2 | | | | 5.5 | |
| Number of revenue days: (c) | | | 8,648 | | | | 8,257 | | | | 11,509 | |
| Number of ship-operating days: (d) | | | | | | | | | | | | |
| Owned vessels | | | 8,784 | | | | 8,760 | | | | 10,134 | |
| Vessels bareboat chartered-in under operating leases | | | - | | | | - | | | | 217 | |
| Vessels time chartered-in under operating leases | | | - | | | | - | | | | 1,555 | |
| Vessels spot chartered-in under operating leases | | | 118 | | | | 73 | | | | 246 | |
| INSW/10-K/0001144204-17-017875 |
RESULTS FROM VESSEL OPERATIONS | The following table provides a breakdown of TCE rates achieved for
the years ended December 31, 2016, 2015 and 2014 between spot and fixed earnings and the related revenue days. The information
in these tables is based, in part, on information provided by the commercial pools in which the segment’s vessels participate. |
| 40 | |
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| International Seaways, Inc. | |
| INSW/10-K/0001144204-17-017875 |
RESULTS FROM VESSEL OPERATIONS | (a)The average rates reported in the above tables for
VLCCs in 2014 represent VLCCs less than 15 years of age. The average spot TCE rates earned by the Company’s VLCCs on an overall
basis during 2014 was $24,358.
(b)The average rates reported for Aframaxes exclude TCE revenue from the Company’s International
Flag Lightering business.During 2016, TCE revenues for the International Crude Tankers segment
decreased by $46,011, or 15%, to $258,171 from $304,182 in 2015 primarily as a result of lower average daily rates in the VLCC
and Aframax sectors, which accounted for a decrease in revenue of approximately $65,267. Such decrease was mitigated to an extent
by an increase of 246 revenue days for the VLCC and Aframax fleets, which resulted from fewer drydock and repair days in the current
year and increased revenue by approximately $11,623. Also serving to partially offset the decline in rates were increased activity
levels in the Crude Tankers Lightering business in the current year, which resulted in a $4,552 increase in revenue, and the Company’s
ULCC exiting lay-up and commencing an 11-month time charter for storage in April 2015, which has subsequently been extended for
21 months following the expiry of the initial charter period. A full year of service for the ULCC accounted for an increase in
revenue of $5,242 in the current year.Vessel expenses decreased by $1,898 to $84,276 in 2016 from $86,174
in 2015. The change in vessel expenses is primarily due to the Marine Navy Ratings Pension Fund (“MNRPF”) assessment
described further below. Charter hire expenses increased by $911 to $9,732 in 2016 from $8,821 in 2015, resulting from an increase
in spot chartered-in Aframaxes by the Crude Tankers Lightering business for utilization in the performance of full-service lighterings
during 2016. The only vessels in the segment chartered-in by the Company during either period were Aframaxes and workboats employed
in the Crude Tankers Lightering business.During 2015, TCE revenues for the International Crude Tankers segment
increased by $75,886, or 33%, to $304,182 from $228,296 in 2014. Higher average daily TCE rates across all fleets in the segment
in the current year, particularly in the VLCC fleet sector, increased TCE revenues by approximately $135,676. Further contributing
to the increase in 2015 was the Company’s ULCC exiting lay-up and commencing an 11-month time charter for storage in April
2015. Partially offsetting the impact of the positive factors was a $70,500 decrease in TCE revenues attributable to a 3,530-day
decrease in revenue days. The decrease in revenue days reflected a contraction in the International Crude Tankers Lightering fleet
associated with reductions in the Company’s full service International Flag Lightering business upon the expiry of its Lightering
contracts in September 2014. Such reduction included the sales of two 1994-built Aframaxes that had been utilized in the International
Flag Lightering business, one in March 2014 and the second in September 2014, and resulted in a reduction in TCE revenue of $3,921
during 2015. Also contributing to the decrease in revenue days were 1,289 fewer chartered-in days in the Aframax fleet, as well
as the Company’s sale of a 1996-built VLCC, a 1997-built VLCC and a 2004-built Panamax in December 2014, and a 356-day increase
in drydock and repair days in 2015 compared with 2014.Vessel expenses increased by $6,903 to $86,174 in 2015 from $79,271
in 2014. The increase in vessel expenses reflects a reserve of $1,450 recorded in the third quarter of 2015 for an assessment by
the MNRPF. The MNRPF is a multi-employer defined benefit pension plan covering British crew members that served onboard INSW’s
vessels (as well as vessels of other owners) more than 20 years ago. During 2014 the trustees of the MNRPF sought court approval
for a new deficit reduction regime for participating employers. Participating employers include current employers, historic employers
that have made voluntary contributions, and historic employers such as INSW that have made no deficit contributions. The trustees
received court approval of the new deficit reduction regime in February 2015. Although the Company has not been an active member
of the plan for a number of years, because the plan is underfunded, additional assessments are possible in future years. Also contributing
to the variance in vessel expenses were an increase of $1,670 in management fees paid to V.Ships, and a $7,071 increase associated
with the reactivation in the first quarter of 2015 of the ULCC discussed above and with one of the Company’s Panamaxes that
had previously been bareboat chartered-out. Such increases were partially offset by a 1,591-day decrease in owned and bareboat
chartered-in vessels resulting from the fleet changes noted above. Charter hire expenses decreased by $18,462 to $8,821 in 2015
from $27,283 in 2014, resulting from a decrease of 1,945 chartered-in days in the current year, driven principally by the return
of vessels discussed above. The only vessels in the segment that were time chartered-in by the Company during 2015 were workboats
employed in the International Flag Lightering business. |
| | | 2016 | | | | | | | | 2015 | | | | | | | | 2014 | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| | | Spot | | | | Fixed | | | | Spot | | | | Fixed | | | | Spot | | | | Fixed | | |
| | | Earnings | | | | Earnings | | | | Earnings | | | | Earnings | | | | Earnings | | | | Earnings | | |
| ULCCs: | | | | | | | | | | | | | | | | | | | | | | | | |
| Average rate | | $ | - | | | $ | 43,613 | | | $ | - | | | $ | 39,000 | | | $ | - | | | $ | - | |
| Revenue days | | | - | | | | 366 | | | | - | | | | 275 | | | | - | | | | - | |
| VLCCs: (a) | | | | | | | | | | | | | | | | | | | | | | | | |
| Average rate | | $ | 41,994 | | | $ | 40,737 | | | $ | 54,591 | | | $ | - | | | $ | 25,803 | | | $ | 16,748 | |
| Revenue days | | | 2,226 | | | | 624 | | | | 2,672 | | | | - | | | | 3,484 | | | | 10 | |
| Suezmaxes: | | | | | | | | | | | | | | | | | | | | | | | | |
| Average rate | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 15,603 | | | $ | - | |
| Revenue days | | | - | | | | - | | | | - | | | | - | | | | 38 | | | | - | |
| Aframaxes: (b) | | | | | | | | | | | | | | | | | | | | | | | | |
| Average rate | | $ | 21,345 | | | $ | - | | | $ | 34,042 | | | $ | - | | | $ | 20,440 | | | $ | - | |
| Revenue days | | | 2,508 | | | | - | | | | 2,439 | | | | - | | | | 3,702 | | | | - | |
| Panamaxes: | | | | | | | | | | | | | | | | | | | | | | | | |
| Average rate | | $ | 19,006 | | | $ | 21,094 | | | $ | 25,226 | | | $ | 15,462 | | | $ | 22,414 | | | $ | 12,064 | |
| Revenue days | | | 1,726 | | | | 1,079 | | | | 1,432 | | | | 1,362 | | | | 1,443 | | | | 1,765 | |
| INSW/10-K/0001144204-17-017875 |
RESULTS FROM VESSEL OPERATIONS | Depreciation expense decreased by $4,933 to $51,347 in 2015 from
$56,280 in 2014, reflecting the 2014 vessel sales noted above. |
| 41 | |
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| International Seaways, Inc. | |
| INSW/10-K/0001144204-17-017875 |
RESULTS FROM VESSEL OPERATIONS | The following table provides a breakdown of TCE rates achieved for
the years ended December 31, 2016, 2015 and 2014 between spot and fixed earnings and the related revenue days. The information
is based, in part, on information provided by the commercial pools in which certain of the segment’s vessels participate. |
| International Product Carriers | | | | | | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| | | 2016 | | | | 2015 | | | | 2014 | | |
| TCE revenues | | $ | 126,314 | | | $ | 171,608 | | | $ | 118,669 | |
| Vessel expenses | | | (58,612 | ) | | | (58,118 | ) | | | (54,711 | ) |
| Charter hire expenses | | | (27,679 | ) | | | (27,981 | ) | | | (33,679 | ) |
| Depreciation and amortization | | | (26,696 | ) | | | (28,763 | ) | | | (26,893 | ) |
| Adjusted income from vessel operations | | $ | 13,327 | | | $ | 56,746 | | | $ | 3,386 | |
| Average daily TCE rate | | $ | 14,206 | | | $ | 19,043 | | | $ | 12,544 | |
| Average number of owned vessels | | | 18.0 | | | | 18.6 | | | | 18.4 | |
| Average number of vessels chartered-in under operating leases | | | 6.9 | | | | 7.2 | | | | 8.3 | |
| Number of revenue days | | | 8,891 | | | | 9,012 | | | | 9,460 | |
| Number of ship-operating days: | | | | | | | | | | | | |
| Owned vessels | | | 6,588 | | | | 6,782 | | | | 6,730 | |
| Vessels bareboat chartered-in under operating leases | | | 1,098 | | | | 1,095 | | | | 1,095 | |
| Vessels time chartered-in under operating leases | | | 1,433 | | | | 1,530 | | | | 1,934 | |
| INSW/10-K/0001144204-17-017875 |
RESULTS FROM VESSEL OPERATIONS | During 2016, TCE revenues for the International Product Carriers
segment decreased by $45,294, or 26%, to $126,314 from $171,608 in 2015. This decrease resulted primarily from a year-over-year
decrease in average daily blended rates earned by the MR fleet, which accounted for $41,291 of the total decrease, and a 255-day
decrease in MR fleet revenue days, which accounted for $4,667 of the total decrease. The reduction in revenue days was driven by
the MR sale and redelivery discussed above.Depreciation and amortization decreased by $2,067 to $26,696 in
2016 from $28,763 in 2015, principally due to the impact of reductions in vessel bases that resulted from impairment charges on
two vessels in the segment recorded in the third quarter of 2016, and the MR sale in 2015 discussed above.During 2015, TCE revenues for the International Product Carriers
segment increased by $52,939, or 45%, to $171,608 from $118,669 in 2014. Approximately $48,927 of this increase in TCE revenues
resulted primarily from a significant year over year increase in average daily blended rates earned by the MR fleet. Partially
offsetting the stronger rates for the MR fleet was a $5,663 decrease associated with a 486-day decrease in MR fleet revenue days,
primarily due to two time chartered-in vessels that were returned to their owners at the expiry of their charters. The delivery
of a newbuilt LR2 in July 2014 also resulted in $9,198 of increased TCE revenues during 2015. |
| | | 2016 | | | | | | | | 2015 | | | | | | | | 2014 | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| | | Spot | | | | Fixed | | | | Spot | | | | Fixed | | | | Spot | | | | Fixed | | |
| | | Earnings | | | | Earnings | | | | Earnings | | | | Earnings | | | | Earnings | | | | Earnings | | |
| LR2 | | | | | | | | | | | | | | | | | | | | | | | | |
| Average rate | | $ | 21,153 | | | $ | - | | | $ | 32,075 | | | $ | - | | | $ | 16,094 | | | $ | - | |
| Revenue days | | | 365 | | | | - | | | | 365 | | | | - | | | | 146 | | | | - | |
| LR1 | | | | | | | | | | | | | | | | | | | | | | | | |
| Average rate | | $ | 20,599 | | | $ | 21,107 | | | $ | 27,465 | | | $ | 17,337 | | | $ | 27,050 | | | $ | 13,829 | |
| Revenue days | | | 361 | | | | 1,029 | | | | 327 | | | | 929 | | | | 374 | | | | 1,063 | |
| MR | | | | | | | | | | | | | | | | | | | | | | | | |
| Average rate | | $ | 13,107 | | | $ | 11,309 | | | $ | 19,490 | | | $ | 7,004 | | | $ | 12,036 | | | $ | 10,630 | |
| Revenue days | | | 6,431 | | | | 705 | | | | 6,949 | | | | 442 | | | | 7,101 | | | | 776 | |
| INSW/10-K/0001144204-17-017875 |
RESULTS FROM VESSEL OPERATIONS | International Product Carriers segment vessel expenses increased
by $3,407 to $58,118 in 2015 from $54,711 in 2014. Such variance resulted from an increase of owned and bareboat chartered-in days
of 52 days, primarily attributable to the LR2 delivery discussed above, partially offset by the sale of a 1998-built MR in July
2015. Also contributing to the variance was an increase in average daily vessel expenses of $404 per day, which primarily related
to management fees paid to V.Ships, higher crew costs, and the timing of the delivery of stores and spares. Charter hire expenses
decreased by $5,698 to $27,981 in 2015 from $33,679 in 2014 reflecting 404 fewer chartered-in days in the MR fleet, as vessels
were returned to their owners at the expiry of their charters. Depreciation and amortization increased by $1,870 to $28,763 in
2015 from $26,893 in 2014, principally due to $1,513 associated with the LR2 delivery discussed above. |
| 42 | |
| --- | --- |
| International Seaways, Inc. | |
| INSW/10-K/0001144204-17-017875 |
INTEREST EXPENSE | Interest expense was $39,476 in 2016 compared with $42,970 in 2015.
The decrease in interest expense in the current year reflects the impact of the Company’s repurchases and prepayments of
$152,754 in aggregate principal amount of the INSW Term Loan in 2016. Interest expense is expected to decrease further in 2017
as a result of the principal prepayments and open market repurchases made during 2016. Refer to Note 9, “Debt” to the
Company’s consolidated financial statements as set forth in Item 8, “Financial Statements and Supplementary Data”
for additional information.Interest expense, including amortization of issuance and deferred
financing costs, commitment, administrative and other fees, was $42,970 in 2015 and was comprised primarily of $42,688 relating
to the INSW Facilities.Interest expense in 2014 was $56,258, including $17,085 associated
with the INSW Facilities. The balance of interest expense recognized during 2014 represented contractual post-petition interest
from the Petition Date through the effective date of the Equity Plan on allowed claims associated with our pre-reorganized INSW
loan agreements of $32,015 and certain rejected executory contracts. Accordingly, interest expense for the year ended December
31, 2014 is not comparable to either 2016 or 2015. |
| | | 2016 | | | | 2015 | | | | 2014 | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Interest before impact of interest rate caps | | $ | 38,959 | | | $ | 42,970 | | | $ | 56,258 | |
| Impact of interest rate caps | | | 517 | | | | - | | | | - | |
| Interest expense | | $ | 39,476 | | | $ | 42,970 | | | $ | 56,258 | |
| INSW/10-K/0001144204-17-017875 |
INCOME TAX EXPENSE | EBITDA and Adjusted EBITDAEBITDA represents net income/(loss) before interest expense, income
taxes and depreciation and amortization expense. Adjusted EBITDA consists of EBITDA adjusted for the impact of certain items that
we do not consider indicative of our ongoing operating performance. EBITDA and Adjusted EBITDA are presented to provide investors
with meaningful additional information that management uses to monitor ongoing operating results and evaluate trends over comparative
periods. EBITDA and Adjusted EBITDA do not represent, and should not be considered a substitute for, net income or cash flows from
operations determined in accordance with GAAP. EBITDA and Adjusted EBITDA have limitations as analytical tools, and should not
be considered in isolation, or as a substitute for analysis of our results reported under GAAP. Some of the limitations are:
·EBITDA and Adjusted EBITDA do not reflect our cash expenditures, or future requirements for capital expenditures or contractual
commitments;
·EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs; and
·EBITDA and Adjusted EBITDA do not reflect the significant interest expense, or the cash requirements necessary to service interest
or principal payments, on our debt.While EBITDA and Adjusted EBITDA are frequently used by companies
as a measure of operating results and performance, neither of those items as prepared by the Company is necessarily comparable
to other similarly titled captions of other companies due to differences in methods of calculation.The following table reconciles net income/(loss), as reflected in
the consolidated statements of operations set forth in Item 8, “Financial Statements and Supplementary Data,” to EBITDA
and Adjusted EBITDA: |
| 44 | |
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| International Seaways, Inc. | |
| INSW/10-K/0001144204-17-017875 |
LIQUIDITY AND SOURCES OF CAPITAL | Liquidity
Working capital at December 31, 2016 was approximately $126,000
compared with $348,000 at December 31, 2015. Current assets are highly liquid, consisting principally of cash, interest-bearing
deposits and receivables. The Company’s total cash (including restricted cash) decreased by $225,846 during the year ended
December 31, 2016. As further described below, this decrease reflects the use of $155,232 for repurchases, prepayments and regular
principal amortization of outstanding debt and $202,000 for dividends paid to OSG, offset by cash flows provided by operating activities.As of December 31, 2016, we had total liquidity on a consolidated
basis of $142,001 comprised of $92,001 of unrestricted cash and $50,000 of undrawn revolver capacity. Our cash and cash equivalents
balances generally exceed Federal Deposit Insurance Corporation insured limits. We place our cash and cash equivalents in what
we believe to be credit-worthy financial institutions. In addition, certain of our money market accounts invest in U.S. Treasury
securities or other obligations issued or guaranteed by the U.S. government, or its agencies.As of December 31, 2016, we had total debt outstanding (net of original
issue discount and deferred financing costs) of $439,651 and a total debt to total capitalization of 26.6%, which compares with
30.1% at December 31, 2015. Our debt profile reflects recent actions (discussed further below) to deleverage our balance sheet
as well as minimal scheduled amortization requirements before 2018.Restricted cash as of December 31, 2015 was legally restricted under
the INSW Facilities. The INSW Facilities stipulate that if annual aggregate cash proceeds of INSW asset sales exceed $5,000, the
net cash proceeds from each such sale are required to be reinvested in vessels within twelve months of such sale or be used to
prepay the principal balance outstanding of the INSW Facilities. In June 2016, INSW utilized restricted cash to prepay $8,832 of
outstanding principal under the INSW Term Loan.Sources, Uses and Management of CapitalNet cash provided by operating activities for the year ended December
31, 2016 was $116,768. In addition to operating cash flows, our other sources of funds are proceeds from issuances of equity securities,
additional borrowings as permitted under the INSW Facilities and proceeds from the opportunistic sales of our vessels. We or our
subsidiaries may in the future complete transactions consistent with achieving the objectives of our business plan discussed in
Item 1, “Business – Strategy.”Our current uses of funds are to fund working capital requirements,
maintain the quality of our vessels, comply with international shipping standards and environmental laws and regulations and repay
or repurchase our outstanding loan facilities. The INSW Facilities require that a portion of Excess Cash Flow (as defined in the
loan agreement) be used to prepay the outstanding principal balance of each such loan. To the extent permitted under the terms
of the INSW Facilities we may also use cash generated by operations to finance capital expenditures to modernize and grow our fleet.From our Emergence Date in August 2014 through December 2016, we
have generated and used cash through the following investing and financing activities:
·INSW FacilitiesUpon our emergence from Bankruptcy, we closed on the INSW
Facilities and drew down the full amount available under the INSW Term Loan of $628,375 and received proceeds net of issuance and
deferred financing costs of $605,561. We combined such funds with cash and cash equivalents on hand to make payments relating to
the Chapter 11 Cases.The INSW Term Loan amortizes in equal quarterly installments
in aggregate annual amounts equal to 1% of the original principal amount of the loans, adjusted for mandatory pre-payments. The
INSW Facilities require 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, commencing with the six-month period beginning July 1, 2015 (as described below), and annual periods
thereafter. We have remaining unused credit availability under the INSW Revolver Facility of $50,000.The INSW Facilities have a covenant to maintain the aggregate
Fair Market Value of the Collateral Vessels at greater than or equal to $500,000 at the end of each fiscal quarter. The Company
had substantial headroom under this covenant at December 31, 2016.The INSW Term Loan matures on August 5, 2019 and the INSW
Revolver Facility matures on February 5, 2019. The maturity dates for the INSW Facilities are subject to acceleration upon the
occurrence of certain events, including a change in control event or other events of default as defined in the respective loan
agreements. |
| 45 | |
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| International Seaways, Inc. | |
| INSW/10-K/0001144204-17-017875 |
LIQUIDITY AND SOURCES OF CAPITAL | ·Amendments to INSW FacilitiesThe first amendment to the INSW Facilities entered into
on June 3, 2015, among other things, provided for the following, subject to certain conditions described therein: (i) permitted
INSW to pay a cash dividend to OSG no later than June 30, 2015; (ii) permitted INSW to retain net cash proceeds up to $78,000 from
the sales of certain assets that occurred prior to June 3, 2015; and (iii) altered the periods during which Excess Cash Flow (as
defined in the loan agreement for the INSW Facilities) must be used to prepay the outstanding principal balance of the INSW Facilities,
from an annual period beginning January 1, 2015 to a six-month period beginning July 1, 2015 and annual periods thereafter.Pursuant to the June 3, 2015 amendment to the INSW Facilities,
INSW paid a cash dividend of $200,000 to OSG on June 26, 2015. Such amendment reduced the base Available Amount (as defined in
the loan agreement for the INSW Facilities) from $25,000 to $0. Therefore, as of December 31, 2015, no cash dividends, loans or
advances to OSG were permitted under the INSW Term Loan. The Available Amount under the INSW Term Loan increased to $132,200 in
the first quarter of 2016, after the required reports were filed with the banks.On July 18, 2016, the Company entered into a second amendment
(the “Second INSW Credit Agreement Amendment”) to the INSW Facilities. The Second INSW Credit Agreement Amendment,
among other things, amended the conditions under which the INSW Facilities permitted OSG to spin off INSW. In particular, the Second
INSW Credit Agreement Amendment permitted the distribution of OSG’s equity interests in INSW to OSG’s shareholders
in conjunction with the transfer of substantially all of INSW’s assets (subject to certain exceptions) to a new wholly-owned
subsidiary of INSW, subject to the satisfaction of other conditions set forth in the INSW Facilities and the Second INSW Credit
Agreement Amendment.On September 20, 2016, the Company entered into a third
amendment (the “Third INSW Credit Agreement Amendment”) to the INSW Facilities. The Third INSW Credit Agreement Amendment,
among other things, (i) permitted INSW to dividend up to an aggregate amount of $100,000 to OSG prior to October 14, 2016; (ii)
reduced the maximum amount of Incremental Term Loans and Incremental Revolving Loans (as defined in the INSW Facilities) the Borrowers
may obtain under the INSW Facilities to $200,000 and alters certain conditions for providing such loans; (iii) increased the amount
of certain investments the Company and its subsidiaries may make under the INSW Facilities; and (iv) required the Company to prepay
outstanding Initial Term Loans (as defined in the INSW Facilities) in an aggregate principal amount equal to $75,000 substantially
simultaneously with the effective date of the Third INSW Credit Agreement Amendment. The dividend distribution of $100,000 to OSG
and the $75,000 prepayment of the outstanding principal balance of the INSW Term Loan were completed as of September 30, 2016.On November 30, 2016, the Company entered into a fourth
amendment (the “Fourth INSW Credit Agreement Amendment”) to the INSW Facilities primarily to reflect the spin-off of
the Company from OSG. The Fourth INSW Credit Agreement Amendment, among other things, (i) removed OSG as guarantor of and party
under the facility; (ii) replaced restrictions on the movement of funds to OSG with limitations on the use of the Available Amount
to pay dividends to shareholders; (iii) restricted payments of dividends from INSW’s subsidiaries to INSW and (iv) added
or modified certain definitions.In addition to the dividend distribution described above, during
the year ended December 31, 2016, we used cash to opportunistically repurchase and retire $68,922 of the outstanding principal
under the INSW Term Loan, at an aggregate discounted price of $65,167 (a financing activity). We also made mandatory principal
prepayments of the INSW Term Loan of $83,832 (which includes $8,832 relating to restricted cash described above). The net loss
of $1,342 realized on these transactions for the year ended December 31, 2016 is included in other (expense)/income in the consolidated
statement of operations. The net loss reflects a $5,097 write-off of unamortized original issue discount and deferred financing
costs associated with the principal reductions, which were treated as partial extinguishments. Third party legal and consulting
fees (aggregating $225) incurred by the Company in relation to the open market repurchases and INSW Term Loan amendments are included
in general and administrative expenses in the consolidated statement of operations for the year ended December 31, 2016.The Available Amount for cash dividends permitted under the INSW
Term Loan was $30,200 as of December 31, 2016, after INSW’s dividend distributions to OSG of $102,000 during the year ended
December 31, 2016. Management expects that the Available Amount will increase to approximately $70,236 by the end of the first
quarter of 2017, after the required reports are filed with the banks.Outlook We believe the actions we have taken have strengthened our balance
sheet as well as increased our flexibility to actively pursue fleet renewal or potential strategic opportunities that may arise
within the diverse sectors in which we operate and at the same time positioned us to generate sufficient cash to support our operations
over the next twelve months ending December 31, 2017. Also, as we monitor the maturity profile of Company’s outstanding debt,
we will evaluate opportunities to extend or refinance the INSW Facilities in the next 12 to 15 months. |
| 46 | |
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| International Seaways, Inc. | |
| INSW/10-K/0001144204-17-017875 |
LIQUIDITY AND SOURCES OF CAPITAL | Carrying Value of VesselsAll except one of the Company’s owned vessels are pledged
as collateral under the INSW Facilities. The following table presents information with respect to the carrying amount of the Company’s
vessels by type and indicates whether their market values, which are estimated by taking an average of two third-party vessel appraisals,
are below their carrying values as of December 31, 2016. The carrying value of each of the Company’s vessels does not necessarily
represent its fair market value or the amount that could be obtained if the vessel were sold. The Company’s estimates of
market values for its International Flag vessels assume that the vessels are all in good and seaworthy condition without need for
repair and, if inspected, would be certified as being in class without notations. In addition, because vessel values are highly
volatile, these estimates may not be indicative of either the current or future prices that the Company could achieve if it were
to sell any of the vessels. The Company would not record a loss for any of the vessels for which the fair market value is below
its carrying value unless and until the Company either determines to sell the vessel for a loss or determines that the vessel is
impaired as discussed below in “— Critical Accounting Policies — Vessel Impairment.” The
Company believes that the future undiscounted cash flows expected to be earned over the estimated remaining useful lives for those
vessels that have experienced declines in market values below their carrying values would exceed such vessels’ carrying values.Footnotes to the following table exclude those vessels with an estimated
market value in excess of their carrying value. |
| 47 | |
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| International Seaways, Inc. | |
| INSW/10-K/0001144204-17-017875 |
LIQUIDITY AND SOURCES OF CAPITAL | (1)As of December 31, 2016, the International Flag Crude Tankers segment includes vessels with an aggregate carrying value of
$722,883, which the Company believes exceeds their aggregate market value of approximately $556,625 by $166,258.
(2)As of December 31, 2016, the International Flag Product Carriers segment includes vessels with an aggregate carrying value
of $306,450, which the Company believes exceeds their aggregate market value of approximately $228,125 by $78,325.Off-Balance Sheet Arrangements As of December 31, 2016, the affiliated companies in which INSW
held an equity interest had total bank debt outstanding of $714,170 of which $638,827 was nonrecourse to the Company.As of December 31, 2016, the maximum potential amount of future
principal payments (undiscounted) that INSW could be required to make relating to equity method investees secured bank debt was
$38,789 and the carrying amount of the liability related to this guarantee was $0.INSW has an interest in two joint ventures each of which converted
a ULCC into a Floating Storage and Offloading Service vessel (together, the “FSO Joint Venture”). Prior to the spin-off,
the FSO Joint Venture was party to a number of contracts to which OSG served as guarantor: (a) the FSO Joint Venture is the borrower
pursuant to a loan agreement, as amended and restated, with OSG and Euronav, each as guarantors, certain other parties thereto
and ING Bank N.V. as agent and security trustee (the ’‘Loan Agreement’’); (b) the FSO Joint Venture is
an obligor pursuant to a guarantee facility agreement, by and among, the FSO Joint Venture, those banks and financial institutions
listed therein, Nordea Bank Finland PLC, as issuing bank, Nordea Bank Norge ASA as agent and ING Bank N.V. as Security Trustee
(the ’‘Guarantee Facility’’); and (c) the FSO Joint Venture is party to two service contracts with Maersk
Oil Qatar AS (the ’‘MOQ Service Contracts’’). |
| As of December 31, 2016 | | | | | | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Vessel Type | | Average Vessel Age (weighted by dwt) | | | | Number of Owned Vessels | | | | Carrying Value | | |
| | | | | | | | | | | | | |
| International Flag Crude Tankers | | | | | | | | | | | | |
| VLCC (includes ULCC) | | | 12.1 | | | | 9 | | | $ | 446,732 | |
| Aframax | | | 11.6 | | | | 7 | | | | 180,920 | |
| Panamax | | | 14.3 | | | | 8 | | | | 103,304 | |
| *Total International Flag Crude Tankers(1)* | | | 12.3 | | | | 24 | | | $ | 730,956 | |
| | | | | | | | | | | | | |
| International Flag Product Carriers | | | | | | | | | | | | |
| LR2 | | | 2.4 | | | | 1 | | | $ | 67,080 | |
| LR1 | | | 8.1 | | | | 4 | | | | 97,702 | |
| MR | | | 11.2 | | | | 13 | | | | 201,753 | |
| *Total International Flag Product Carriers(2)* | | | 9.3 | | | | 18 | | | $ | 366,535 | |
| INSW/10-K/0001144204-17-017875 |
LIQUIDITY AND SOURCES OF CAPITAL | In connection with the Distribution on November 30, 2016, INSW now
guarantees the obligations of the FSO Joint Venture pursuant to the Loan Agreement and the Guarantee Facility (together, the ’‘ING
and Nordea Guarantees’’) and guarantees the obligations of the FSO Joint Venture pursuant to the MOQ Service Contracts
(the ’‘MOQ Guarantee’’, together with the ING and Nordea Guarantees, the ’‘INSW FSO Guarantees’’).
OSG will continue to guarantee the obligations of the FSO Joint Venture pursuant to the Loan Agreement and the Guarantee Facility
(together, the ’‘OSG FSO Guarantees’’).INSW entered into guarantee arrangements in connection with the
spin-off 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 guarantee, the ’‘LNG Performance Guarantee’’). OSG will
continue to provide a guarantee in favor of the LNG Charterer relating to the LNG Charter Party Agreements (such guarantee, the
’‘OSG LNG Performance Guarantee’’ and collectively, with the OSG FSO Guarantees the ’‘Continuing
OSG Guarantees’’).In connection with the Continuing OSG Guarantees, INSW will pay
a $125 fee per year to OSG, which is subject to escalation after 2017 and will be terminated if OSG ceases to provide the OSG LNG
Performance Guarantee. INSW will indemnify OSG for liabilities arising from the Continuing OSG Guarantees pursuant to the terms
of the Separation and Distribution Agreement.See Note 13, “Related Parties,” to the Company’s
consolidated financial statements set forth in Item 8, “Financial Statements and Supplementary Data” for additional
information.In addition and pursuant to an agreement between INSW and the trustees
of the OSG Ship Management (UK) Ltd. Retirement Benefits Plan (the “Scheme”), INSW guarantees the obligations of OSG
Ship Management (UK) Ltd., a subsidiary of INSW, to make payments to the Scheme. See Note 17, “Pension Plans,” to the
Company’s consolidated financial statements set forth in Item 8, “Financial Statements and Supplementary Data,”
for additional information.Aggregate Contractual ObligationsA summary of the Company’s long-term contractual obligations
as of December 31, 2016 follows: |
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| INSW/10-K/0001144204-17-017875 |
LIQUIDITY AND SOURCES OF CAPITAL | (1)Amounts shown include contractual interest obligations of floating rate debt estimated based on the aggregate LIBOR floor rate
of 1% and applicable margins for the INSW Term Loan of 4.75%. Management estimates that no prepayment will be required for the
INSW Term Loan as a result of estimated Excess Cash Flow for the year ended December 31, 2016. Amounts shown for the INSW Term
Loan for years subsequent to 2017 exclude any estimated repayment as a result of Excess Cash Flow.
(2)As
of December 31, 2016, the Company had charter-in commitments for 7 vessels on leases that are accounted for as operating leases.
Certain of these leases provide the Company with various renewal and purchase options. The future minimum commitments for time
charters-in have been reduced to reflect estimated days that the vessels will not be available for employment due to drydock. |
| | | | | | | | | | | | | | | | | | | | | | | Beyond | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| | | 2017 | | | | 2018 | | | | 2019 | | | | 2020 | | | | 2021 | | | | 2021 | | | | Total | | |
| INSW Term Loan - floating rate(1) | | $ | 32,843 | | | | 32,484 | | | | 467,074 | | | | - | | | | - | | | | - | | | $ | 532,401 | |
| Operating lease obligations (2) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Bareboat Charter-ins | | | 7,016 | | | | 1,841 | | | | - | | | | - | | | | - | | | | - | | | | 8,857 | |
| Time Charter-ins | | | 15,440 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 15,440 | |
| Office space | | | 1,088 | | | | 998 | | | | 998 | | | | 998 | | | | 665 | | | | - | | | | 4,747 | |
| Total | | $ | 56,387 | | | $ | 35,323 | | | $ | 468,072 | | | $ | 998 | | | $ | 665 | | | $ | - | | | $ | 561,445 | |
| INSW/10-K/0001144204-17-017875 |
RISK MANAGEMENT | At December 31, 2016 and 2015, INSW was party to an Interest Rate
Cap agreement with a start date of February 5, 2015 with a major financial institution covering a notional amount of $400,000 to
limit the floating interest rate exposure associated with the INSW Term Loan. The Interest Rate Cap agreement contains no leverage
features. The INSW Interest Rate Cap, which expired on February 5, 2017, had a cap rate of 2.5%.Currency and exchange rate risk The shipping industry’s functional currency is the U.S. dollar.
All of the Company’s revenues and most of its operating costs are in U.S. dollars. The Company incurs certain operating expenses,
such as vessel and general and administrative expenses, in currencies other than the U.S. Dollar, and the foreign exchange risk
associated with these operating expenses is immaterial. If foreign exchange risk becomes material in the future, the Company may
seek to reduce its exposure to fluctuations in foreign exchange rates through the use of short-term currency forward contracts
and through the purchase of bulk quantities of currencies at rates that management considers favorable. For contracts which qualify
as cash flow hedges for accounting purposes, hedge effectiveness would be assessed based on changes in foreign exchange spot rates
with the change in fair value of the effective portions being recorded in accumulated other comprehensive loss.Fuel price volatility risk Historically, the Company managed its exposure to future increases
in fuel prices in the normal course of its business by entering into standalone bunker swaps. The Company’s deployment of
most of its conventional tanker fleet in commercial pools and time charters currently limits the Company’s direct exposure
to fluctuations in fuel prices as a component of voyage expenses. |
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| International Seaways, Inc. | |
| INSW/10-K/0001144204-17-017875 |
INTEREST RATE SENSITIVITY | *Including current portion.As of December 31, 2016, the Company had a secured term loan (INSW
Term Loan) and a revolving credit facility (INSW Revolver Facility) under which borrowings bear interest at a rate based on LIBOR,
plus the applicable margin, as stated in the respective loan agreements. There were no amounts outstanding under the INSW Revolver
Facility as of December 31, 2016. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Fair Value at | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| | | | | | | | | | | | | | | | | | | Beyond | | | | | | | | Dec. 31, | | |
| At December 31, 2016 | | 2017 | | | | 2018 | | | | 2019 | | | | 2020 | | | | 2020 | | | | Total | | | | 2016 | | |
| Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Long-term debt \* | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Variable rate debt | | $ | 6.2 | | | $ | 6.2 | | | $ | 447.6 | | | $ | - | | | $ | - | | | $ | 460.0 | | | $ | 447.9 | |
| Average interest rate | | | 5.83 | % | | | 5.83 | % | | | 5.83 | % | | | - | | | | - | | | | | | | | | |
| INSW/10-K/0001144204-17-017875 |
CRITICAL ACCOUNTING POLICIES | Revenue RecognitionThe Company generates a majority of its revenue from voyage charters,
including vessels in pools that predominantly perform voyage charters. Within the shipping industry, there are two methods used
to account for voyage charter revenue: (1) ratably over the estimated length of each voyage and (2) completed voyage. The recognition
of voyage revenues ratably over the estimated length of each voyage is the most prevalent method of accounting for voyage revenues
in the shipping industry and the method used by the Company. Under each method, voyages may be calculated on either a load-to-load
or discharge-to-discharge basis. In applying its revenue recognition method, management believes that the discharge-to-discharge
basis of calculating voyages more accurately estimates voyage results than the load-to-load basis. Since, at the time of discharge,
management generally knows the next load port and expected discharge port, the discharge-to-discharge calculation of voyage revenues
can be estimated with a greater degree of accuracy. The Company does not begin recognizing voyage revenue until a charter has been
agreed to by both the Company and the customer, even if the vessel has discharged its cargo and is sailing to the anticipated load
port on its next voyage, because it is at this time an obligation to perform is established, the charter rate is determinable for
the specified load and discharge ports and collectability is reasonably assured.Revenues from time charters and bareboat charters are accounted
for as operating leases and are thus recognized ratably over the rental periods of such charters, as service is performed. The
Company does not recognize time charter revenues during periods that vessels are off hire.For the Company’s vessels operating in Commercial Pools, revenues
and voyage expenses are pooled and allocated to each pool’s participants on a time charter equivalent basis in accordance
with an agreed-upon formula. The formulas in the pool agreements for allocating gross shipping revenues net of voyage expenses
are based on points allocated to participants’ vessels based on cargo carrying capacity and other technical characteristics,
such as speed and fuel consumption. The selection of charterers, negotiation of rates and collection of related receivables and
the payment of voyage expenses are the responsibility of the pools. The pools may enter into contracts that earn either voyage
charter revenue or time charter revenue. Each of the pools follows the same revenue recognition principles, as applied by the Company,
in determining shipping revenues and voyage expenses, including recognizing revenue only after a charter has been agreed to by
both the pool and the customer, even if the vessel has discharged its cargo and is sailing to the anticipated load port on its
next voyage.For the pools in which the Company participates, management monitors,
among other things, the relative proportion of the Company’s vessels operating in each of the pools to the total number of
vessels in each of the respective pools, and assesses whether or not the Company’s participation interest in each of the
pools is sufficiently significant so as to determine that the Company has effective control of the pool. Company management determined
that as of June 30, 2013, it had effective control of one of the pools in which the Company participated. Such pool was not a legal
entity but operated under a contractual agreement. Therefore, effective July 1, 2013 through June 30, 2014, when the Company’s
participation in this pool ended, the Company’s allocated TCE revenues for such pool were reported on a gross basis as voyage
charter revenues and voyage expenses in the consolidated statement of operations. The impact of this method of presenting earnings
for this pool for the year ended December 31, 2014 was an increase in both voyage charter revenues and voyage expenses of $40,454.Vessel Lives and Salvage ValuesThe carrying value of each of the Company’s vessels represents
its original cost at the time it was delivered or purchased less depreciation calculated using an estimated useful life of 25 years
(except for FSO service vessels for which estimated useful lives of 30 years are used and LNG Carriers for which estimated useful
lives of 35 years are used) from the date such vessel was originally delivered from the shipyard. A vessel’s carrying value
is reduced to its new cost basis (i.e. its current fair value) if a vessel impairment charge is recorded.If the estimated economic lives assigned to the
Company’s vessels prove to be too long because of new regulations, an extended period of weak markets, the broad
imposition of age restrictions by the Company’s customers, or other future events, it could result in higher
depreciation expense and impairment losses in future periods related to a reduction in the useful lives of any affected
vessels. Company management estimates the scrap value of all of its vessels to be $300 per lightweight ton. The
Company’s assumptions used in the determination of estimated salvage value take into account current scrap prices, the
historic pattern of annual average scrap rates over the five years ended December 31, 2016, which ranged from $235 to $495
per lightweight ton, estimated changes in future market demand for scrap steel and estimated future demand for vessels. Scrap
prices also fluctuate depending upon type of ship, bunkers on board, spares on board and delivery range. Market conditions
that could influence the volume and pricing of scrapping activity in 2017 and beyond include the combined impact of scheduled
newbuild deliveries and charter rate expectations for vessels potentially facing age restrictions imposed by oil majors.
These factors will influence owners’ decisions to accelerate the disposal of older vessels, especially those with
upcoming special surveys including first generation double hull vessels. |
| 50 | |
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| International Seaways, Inc. | |
| INSW/10-K/0001144204-17-017875 |
CRITICAL ACCOUNTING POLICIES | Although management believes that the assumptions used to determine
the scrap rate for its International Flag vessels are reasonable and appropriate, such assumptions are highly subjective, in part,
because of the cyclicality of the nature of future demand for scrap steel.Vessel ImpairmentThe carrying values of the Company’s vessels may not represent
their fair market value or the amount that could be obtained by selling the vessel at any point in time since the market prices
of second-hand vessels tend to fluctuate with changes in charter rates and the cost of newbuildings. Historically, both charter
rates and vessel values tend to be cyclical. Management evaluates the carrying amounts of vessels held and used by the Company
for impairment only when it determines that it will sell a vessel or when events or changes in circumstances occur that cause management
to believe that future cash flows for any individual vessel will be less than its carrying value. In such instances, an impairment
charge would be recognized if the estimate of the undiscounted future cash flows expected to result from the use of the vessel
and its eventual disposition is less than the vessel’s carrying amount. This assessment is made at the individual vessel
level as separately identifiable cash flow information for each vessel is available.In developing estimates of future cash flows, the Company must
make assumptions about future performance, with significant assumptions being related to charter rates, ship operating expenses,
utilization, drydocking requirements, residual value and the estimated remaining useful lives of the vessels. These assumptions
are based on historical trends as well as future expectations. Specifically, in estimating future charter rates, management takes
into consideration rates currently in effect for existing time charters and estimated daily time charter equivalent rates for each
vessel class for the unfixed days over the estimated remaining lives of each of the vessels. The estimated daily time charter equivalent
rates used for unfixed days are based on a combination of (i) internally forecasted rates that are consistent with forecasts provided
to the Company’s senior management and Board of Directors, and (ii) the trailing 12-year historical average rates, based
on monthly average rates published by a third party maritime research service. The internally forecasted rates are based on management’s
evaluation of current economic data and trends in the shipping and oil and gas industries. Management used the published 12-year
historical average rates in its assumptions because it is management’s belief that the 12-year period captures an even distribution
of strong and weak charter rate periods, which results in the use of an average mid-cycle rate that is more in line with management’s
forecast of a return to mid-cycle charter rate levels in the medium term. Recognizing that the transportation of crude oil and
petroleum products is cyclical and subject to significant volatility based on factors beyond the Company’s control, management
believes the use of estimates based on the combination of internally forecasted rates and 12-year historical average rates calculated
as of the reporting date to be reasonable.Estimated outflows for operating expenses and drydocking requirements
are based on historical and budgeted costs and are adjusted for assumed inflation. Finally, utilization is based on historical
levels achieved and estimates of a residual value are consistent with the pattern of scrap rates used in management’s evaluation
of salvage value.The determination of fair value is highly judgmental. In estimating
the fair value of INSW’s vessels for purposes of Step 2 of the impairment tests, the Company considered the market and income
approaches by using a combination of third party appraisals and discounted cash flow models prepared by the Company. In preparing
the discounted cash flow models, the Company uses a methodology consistent with the methodology discussed above in relation to
the undiscounted cash flow models prepared by the Company, and discounts the cash flows using its current estimate of INSW’s
weighted average cost of capital, of 9%.The more significant factors that could impact management’s
assumptions regarding time charter equivalent rates include (i) loss or reduction in business from significant customers, (ii)
unanticipated changes in demand for transportation of crude oil and petroleum products, (iii) changes in production of or demand
for oil and petroleum products, generally or in particular regions, (iv) greater than anticipated levels of tanker newbuilding
orders or lower than anticipated levels of tanker scrappings, and (v) changes in rules and regulations applicable to the tanker
industry, including legislation adopted by international organizations such as IMO and the EU or by individual countries. Although
management believes that the assumptions used to evaluate potential impairment are reasonable and appropriate at the time they
were made, such assumptions are highly subjective and likely to change, possibly materially, in the future.2016 Impairment Evaluations — The Company
has been monitoring the industry wide decline in vessel valuations during 2016 and specifically from June 30, 2016 to September
30, 2016, and September 30, 2016 to December 31, 2016, as well as the decline in forecasted near term charter rates, and concluded
that the declines in vessel valuations and in forecasted near term charter rates constituted impairment trigger events for 28 vessels
as of September 30, 2016 and 24 vessels as of December 31, 2016. In developing estimates of undiscounted future cash flows for
performing Step 1 of the impairment tests, the Company utilized the methodology described above. In estimating the fair value of
the vessels for the purposes of Step 2 of the September 30, 2016 impairment tests, the Company developed fair value estimates that
utilized a market approach which considered an average of two vessel appraisals. Based on the tests performed, impairment charges
totaling $49,640 were recorded on two LR1s, an Aframax and a Panamax to write-down their carrying values to their estimated fair
values at September 30, 2016. In estimating the fair values of the vessels for the purposes of Step 2 of the December 31, 2016
impairment tests, the Company considered the market and income approaches by using a combination of third party appraisals and
discounted cash flow models prepared by the Company. In preparing the discounted cash flow models, the Company used a methodology
consistent with the methodology described above. Based on the tests performed, impairment charges aggregating $29,602 were recorded
on one Panamax and seven MRs to write-down their carrying values to their estimated fair values at December 31, 2016. |
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| International Seaways, Inc. | |
| INSW/10-K/0001144204-17-017875 |
CRITICAL ACCOUNTING POLICIES | 2015 Impairment Evaluation — Management
gave consideration as to whether any events and changes in circumstances existed as of December 31, 2015 that could be viewed as
indicators that the carrying amounts of the vessels in the Company’s International Flag fleet were not recoverable as of
December 31, 2015 and determined there were no such events or changes in circumstances.2014 Impairment Evaluation — Management
gave consideration to the following events and changes in circumstances in determining whether there were any indicators that the
carrying amounts of the vessels in the Company’s International Flag fleet were not recoverable as of December 31, 2014:
(i)A significant year-over-year decline in third party valuation appraisals for four MRs securing the INSW Term Loan;
(ii)the impact, if any, of management’s intent to dispose of or continue to trade certain vessels during 2015; and
(iii)the impact, if any, of outsourcing technical and commercial management of the Company’ International Flag conventional
tanker fleet.Management determined that the latter two factors had no impact
on the carrying value of the Company’s International Flag fleet as of December 31, 2014. However, the decline in the third
party valuation appraisals on four modern MRs, which were built between 2009 and 2011, was deemed to be an impairment indicator
requiring the need to test the recoverability of the carrying value of these vessels. Based on tests performed, it was determined
that the vessels would generate undiscounted cash flows in excess of their December 31, 2014 carrying values over the remainder
of their useful lives.Impairment of Equity Method InvestmentsWhen events and circumstances warrant, investments accounted
for under the equity method of accounting are evaluated for impairment. If a determination is made that an other-than-temporary
impairment exists, the investment should be written down to its fair value in accordance with ASC 820, Fair Value Measurements
and Disclosures, which establishes a new cost basis. In December 2016, evidence of an other-than-temporary decline in the fair
value of the Company’s investments in its FSO joint ventures below their carrying values was identified by the Company. Specifically,
management concluded that the lower charter rate expected over the duration of the recently awarded five-year service contracts
commencing in the third quarter of 2017 was negative evidence indicating that the excess of the carrying value of the Company’s
investment in these joint ventures over their fair value was other-than-temporary as of December 31, 2016.As the Company determined that other-than-temporary impairments
existed in relation to its investments in the FSO joint ventures, impairment charges aggregating $30,475 were recorded to write
down the investments to their estimated fair values as of December 31, 2016. Such charges are included in equity in income of affiliated
companies in the accompanying consolidated statements of operations. In estimating the fair value of the Company’s investments
in the FSO joint ventures as of December 31, 2016, the Company utilized an income approach, by preparing discounted cash flow models
since there is a lack of comparable market transactions for the specially built assets held by the joint ventures. In preparing
the discounted cash flows models, the Company used a methodology largely consistent with the methodology and assumptions detailed
in the “Vessel Impairment” section above, with the exception being that as the assets owned by the joint ventures serve
under specific service contracts, the estimated charter rates for periods after the expiry of the existing contracts are based
upon management’s internally forecasted rates. The cash flows were discounted using the current estimated weighted average
cost of capital for each joint venture, which approximated 9.5% and took into consideration country risk, entity size and uncertainty
with respect to the cash flows for periods beyond the current charter expiries.DrydockingWithin the shipping industry, there are two methods that are
used to account for dry dockings: (1) capitalize drydocking costs as incurred (deferral method) and amortize such costs over the
period to the next scheduled drydocking, and (2) expense drydocking costs as incurred. Since drydocking cycles typically extend
over two and a half years or five years, management uses the deferral method because management believes it provides a better matching
of revenues and expenses than the expense-as-incurred method. |
| 52 | |
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| International Seaways, Inc. | |
| INSW/10-K/0001144204-17-017875 |
CRITICAL ACCOUNTING POLICIES | Pension BenefitsThe Company has obligations outstanding under the OSG Ship Management
(UK) Ltd. Retirement Benefits Plan (the “Scheme”), a defined benefit pension plan maintained by a subsidiary in the
U.K., who is the principal employer of the Scheme. The plan has been closed to new entrants and accrual since December 2007. The
Company has recorded pension benefit costs based on complex valuations developed by its actuarial consultants. These valuations
are based on key estimates and assumptions, including those related to the discount rates, the rates expected to be earned on investments
of plan assets and the life expectancy/mortality of plan participants. The Company is required to consider market conditions in
selecting a discount rate that is representative of the rates of return currently available on high-quality fixed income investments.
A higher discount rate would result in a lower benefit obligation and a lower rate would result in a higher benefit obligation.
The expected rate of return on plan assets is management’s best estimate of expected returns on plan assets. A decrease in
the expected rate of return will increase net periodic benefit costs and an increase in the expected rate of return will decrease
benefit costs. The mortality assumption is management’s best estimate of the expected duration of future benefit payments
at the measurement date. The estimate is based on the specific demographics and other relevant facts and circumstances of the Scheme
and considers all relevant information available at the measurement date. Longer life expectancies would result in higher benefit
obligations and a decrease in life expectancies would result in lower benefit obligations.In determining the benefit obligations at the end of year measurement
date, the Company continues to use an equivalent single weighted-average discount rate, at December 31, 2016 (2.60%) and 2015 (3.80%),
respectively. Management believes these rates to be appropriate for ongoing plans with a long duration such as Scheme. The Company
also assumed a long term rate of return on the Scheme assets of 3.85% and 5.62% at December 31, 2016 and 2015, respectively, based
on the asset mix as of such dates and management’s estimate of the long term rate of return that could be achieved over the
remaining duration of the Scheme.Newly Issued Accounting StandardsSee Note 3, “Summary of Significant Accounting Policies,”
to the Company’s consolidated financial statements set forth in Item 8, “Financial Statements and Supplementary Data.” |
| 53 | |
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| International Seaways, Inc. | |
| INSW/10-K/0001144204-17-017875 |
OPERATIONS AND OIL TANKER MARKETS | Chinese crude oil imports reached a record
10.4 million b/d in November 2018, followed by 10.3 million b/d in December. For the year, imports averaged 9.2 million b/d, an
increase of 10.1% from the 2017 average.During the fourth quarter of 2018, the tanker
fleet of vessels over 10,000 deadweight tons (“dwt”) increased by 1.8 million dwt as the crude fleet increased by 1.5
million dwt, with VLCCs growing by 2.2 million dwt while the Suezmax and Aframax fleets saw declines of 0.2 and 0.6 million dwt,
respectively. The product carrier fleet expanded by 0.4 million dwt with LR1s declining by 0.2 million dwt and MRs increasing by
0.6 million dwt. Year over year, the size of the tanker fleet increased by 6.2 million dwt with the largest increases in the VLCC,
Suezmax and MR sectors, while Aframaxes and Panamaxes saw modest growth in the fleet size as scrapping during the period tempered
newbuilding deliveries.During the fourth quarter of 2018, the crude
tanker orderbook decreased by 1.4 million dwt overall led by declines in the VLCC orderbook of 2.5 million dwt, with Aframaxes
showing a decline of 0.3 million dwt, while the Suezmax orderbook increased by 1.4 million dwt. The product carrier orderbook decreased
by 0.6 million dwt, with the Panamax orderbook increasing by 0.1 million dwt and the MR orderbook decreasing by 0.7 million dwt.From the end of the fourth quarter of 2017
through the end of the fourth quarter of 2018, the total tanker orderbook declined by 7.3 million dwt, with declines in all sectors:
VLCC 0.8 million dwt, Suezmax 1.4 million dwt, Aframax 3.2 million dwt, Panamax 0.1 million dwt and MR 1.8 million dwt.VLCC freight rates were significantly better
during the fourth quarter of 2018 compared with the third quarter of 2018, reaching two-year highs. Other crude sectors showed
similar strength. Continued strength in oil demand, reduced crude inventories, and a spike in OPEC production in the third quarter
all led to the strength in the market. MR rates began the quarter on a weak note then gradually strengthened through the rest of
the quarter and into the first quarter of 2019. The first quarter of 2019 similarly began with strength, however the OPEC cuts
during the fourth quarter have put downward pressure on rates. |
| 43 | |
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| International Seaways, Inc. | |
| INSW/10-K/0001144204-19-013398 |
RESULTS FROM VESSEL OPERATIONS | Crude Tankers |
| 44 | |
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| International Seaways, Inc. | |
| INSW/10-K/0001144204-19-013398 |
RESULTS FROM VESSEL OPERATIONS | (a)Adjusted income from vessel operations by segment is before general and administrative expenses,
third-party debt modification fees, separation and transition costs, and loss on disposal of vessels and other property, including
impairments.
(b)The average is calculated to reflect the addition and disposal of vessels during the year.
(c)Revenue days represent ship-operating days less days that vessels were not available for employment
due to repairs, drydock or lay-up. Revenue days are weighted to reflect the Company’s interest in chartered-in vessels.
(d)Ship-operating days represent calendar days.
(e)Vessels time and spot chartered-in under operating leases are related to the Company’s Crude
Tankers Lightering business.The following table provides a breakdown of
TCE rates achieved for the years ended December 31, 2018, 2017 and 2016 between spot and fixed earnings and the related revenue
days. The information in these tables is based, in part, on information provided by the commercial pools in which the segment’s
vessels participate and excludes commercial pool fees/commissions averaging approximately $721, $726 and $748 per day in 2018,
2017 and 2016, respectively, as well as revenue and revenue days for which recoveries were recorded by the Company under its loss
of hire insurance policies. |
| | | 2018 | | | | 2017 | | | | 2016 | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| TCE revenues | | $ | 175,524 | | | $ | 178,812 | | | $ | 258,171 | |
| Vessel expenses | | | (95,090 | ) | | | (87,236 | ) | | | (84,276 | ) |
| Charter hire expenses | | | (23,809 | ) | | | (13,651 | ) | | | (9,732 | ) |
| Depreciation and amortization | | | (54,431 | ) | | | (56,302 | ) | | | (52,395 | ) |
| Adjusted income from vessel operations (a) | | $ | 2,194 | | | $ | 21,623 | | | $ | 111,768 | |
| Average daily TCE rate | | $ | 17,780 | | | $ | 20,525 | | | $ | 29,853 | |
| Average number of owned vessels (b) | | | 26.1 | | | | 25.0 | | | | 24.0 | |
| Average number of vessels chartered-in under operating leases | | | 2.6 | | | | 0.5 | | | | 0.3 | |
| Number of revenue days: (c) | | | 9,872 | | | | 8,712 | | | | 8,648 | |
| Number of ship-operating days: (d) | | | | | | | | | | | | |
| Owned vessels | | | 9,544 | | | | 9,137 | | | | 8,784 | |
| Vessels bareboat chartered-in under operating leases | | | 578 | | | | - | | | | - | |
| Vessels time chartered-in under operating leases (e) | | | 190 | | | | - | | | | - | |
| Vessels spot chartered-in under operating leases (e) | | | 174 | | | | 173 | | | | 118 | |
| INSW/10-K/0001144204-19-013398 |
RESULTS FROM VESSEL OPERATIONS | During 2018, TCE revenues for the Crude Tankers
segment decreased by $3,288, or 2%, to $175,524 from $178,812 in 2017. Such decrease resulted from (i) lower average blended rates
in the VLCC, Aframax and Panamax sectors aggregating approximately $32,657, with the decline for the VLCCs being the most significant,
(ii) a decrease in revenue of $11,948 associated with the sale of the Company’s only ULCC, which was idle in 2018 prior to
its sale in June 2018, and (iii) a 424-day reduction in Aframax revenue days, which led to a revenue decline of $5,368 and was
driven by the sales of two 2001-built Aframaxes during 2018. These decreases in TCE revenues were offset substantially by an increase
of $36,792 relating to a 1,682-day increase in VLCC, Suezmax and Panamax revenue days, and a $9,134 increase in revenue in the
Crude Tankers Lightering business during the current year. The increased revenue days primarily reflected the acquisitions of (a)
two 2017-built Suezmaxes, each of which delivered to the Company in July 2017, (b) one 2010-built VLCC which delivered to the Company
in November 2017, (c) a 2015-built and five 2016-built VLCCs which delivered to the Company in June 2018, and (d) 347 fewer drydock
days in the Panamax fleet in 2018 compared with 2017. The disposals of a 2001-built VLCC that was held-for-sale as of the end of
August 2018 through its sale in October 2018, a 2000-built VLCC in April 2018 and a 2002-built Panamax in September 2018 partially
offset the impact of the increased revenue days described above. In addition, the Company sold two 2001-built Aframaxes during
2018. There was a larger disparity in the spot rates earned by the Company’s modern and older VLCCs in the current year versus
2017. VLCCs aged 15 years or less earned an average daily rate of $21,813 per day as compared to the rate for older VLCCs of $12,477
per day in 2018, while in 2017 the VLCCs under 15 years of age earned $26,968 per day as compared to the rate for older VLCCs of
$21,898 per day. The market conditions for VLCCs improved significantly during the fourth quarter of 2018 as compared to the first
three quarters of 2018 and the disparity in rates tightened, as the VLCCs aged 15 years or less earned a rate of $33,276 per day
as compared to a rate of $26,583 for the older VLCCs.Vessel expenses increased by $7,854 to $95,090
in 2018 from $87,236 in 2017. An increase of approximately $12,840 was attributable to the VLCC and Suezmax sectors and was driven
principally by the vessel acquisitions discussed above. Such increase was offset by a decrease of $3,459 in the Panamax fleet primarily
relating to lower drydock deviation costs, the timing of repairs and the delivery of spares, and the sale of a 2002-built Panamax
in September 2018. The sale of the ULCC noted above also resulted in a $1,805 decrease in vessel expenses in 2018. Charter hire
expenses increased by $10,158 to $23,809 in 2018 from $13,651 in 2017 resulting from the impact of the Company executing sale and
leaseback transactions for two 2009-built Aframaxes in March 2018 and an increase in chartered-in vessels in the Crude Tankers
Lightering business to support increased full service lightering activity, either on a spot or short-term time charter basis which
accounted for $5,316 of the increase. The bareboat charters associated with the sold and leased back Aframaxes are for periods
ranging from 70 to 73 months and contain purchase options executable by the Company, commencing in the first quarter of 2021. Depreciation
and amortization decreased by $1,871 to $54,431 in 2018 from $56,302 in 2017, principally resulting from the impact of reductions
in depreciable vessel bases that resulted from impairment charges on 13 vessels recorded in the third and fourth quarters of 2017
and the vessel sales and sale and leaseback transactions described above. These factors were offset to a large extent by the vessel
acquisitions described above.Excluding depreciation and amortization, and
general and administrative expenses, operating income for the Crude Tankers Lightering business was $8,122 for 2018 and $5,062
for 2017, with the performance in the second half of 2018 ending up much stronger than the first half. To support its operations,
the Crude Tankers Lightering business time chartered in an Aframax on a short-term basis in late June 2018. This proved to be timely
since rates on Aframaxes in the Caribbean spiked later in the year. The increase in the current year’s operating income as
compared to the prior year primarily reflects a higher volume of full service and service support only lighterings in the current
year. In 2018, 49 full service and 355 service support only lighterings were performed, as compared to 27 full service and 325
service support only lighterings in 2017. Additionally, during 2018 the Crude Tankers Lightering business utilized one of its chartered-in
Aframaxes on seven spot voyages, there were no such spot voyages performed in 2017. Increased U.S. exports will likely continue
to require transshipment during 2019, regardless of the eventuality of any deep-water terminals.During 2017, TCE revenues for the Crude Tankers
segment decreased by $79,359 or 31%, to $178,812 from $258,171 in 2016. Such decrease principally resulted from the impact of significantly
lower average blended rates in the VLCC, Aframax, Panamax and ULCC sectors aggregating approximately $84,155. Further contributing
to the decrease was a decrease in revenue days in the Panamax and Aframax sectors, which had the effect of decreasing revenue by
approximately $6,428. The decrease in Panamaxes and Aframax revenue days reflects 319 incremental drydock and repair days in 2017.
These declines in TCE revenues were partially offset by $6,268 in total revenues contributed by the two 2017-built Suezmaxes and
the 2010-built VLCC, which were acquired by the Company in July 2017 and November 2017, respectively. Also serving to offset the
decreases in revenue during 2017 were the increased activity levels in the Crude Tankers Lightering business, which resulted in
a $5,037 increase in Lightering revenues to $25,478 in 2017 from $20,441 in 2016.Vessel expenses increased by $2,960 to $87,236
in 2017 from $84,276 in 2016. The increase was primarily attributable to (i) a $2,418 increase related to the Suezmax acquisitions
discussed above, (ii) a reserve of $388 which was recorded during the second quarter of 2017 for a potential assessment by the
trustees of the Marine Navy Ratings Pension Fund (“MNRPF”), as discussed in Note 20, “Contingencies,” to
the Company’s consolidated financial statements as set forth in Item 8, “Financial Statements and Supplementary Data,”
(iii) a $1,367 increase in drydock deviation costs incurred for the Panamax fleet, and (iv) a $900 increase due to increased activity
in the Crude Tankers Lightering business. Such increases were partially offset by a $2,079 favorable variance in net insurance
claim deductible costs in the Panamax fleet in 2017. Charter hire expenses increased by $3,919 to $13,651 in 2017 from $9,732 in
2016 as a result of an increase in chartered-in Aframaxes and workboats employed in the Crude Tankers Lightering business in the
2017. The only vessels in the segment chartered-in by the Company in either 2017 or 2016 were the vessels chartered-in by the Crude
Tankers Lightering business. Depreciation and amortization increased by $3,907 to $56,302 in 2017 from $52,395 in 2016. Such increase
reflects the delivery of the two Suezmaxes and one VLCC noted above and increased drydock amortization. |
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| INSW/10-K/0001144204-19-013398 |
RESULTS FROM VESSEL OPERATIONS | Excluding depreciation and amortization, and
general and administrative expenses, operating income for the Crude Tankers Lightering business was $5,062 for 2017 and $4,822
for 2016. Although there was an increase in the number of full service lighterings performed in 2017, 27 as compared to 19 in 2016,
the growth in operating income between 2016 and 2017 was relatively flat, primarily due to lower margins earned on jobs performed
in the third quarter of 2017. The lower margins were as a result of increased charter hire expense, as Aframaxes were spot chartered-in
at higher rates because of significant hurricane activity during the third quarter of 2017. In addition, there were more time chartered-in
workboats in the six months ended December 31, 2017 compared to the same period in 2016. However, the higher level of lightering
activity anticipated in the second half of 2017 did not materialize as the number of service-only and full service lighterings
declined in the second half of 2017 compared with the first six months of 2017.Product Carriers |
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| INSW/10-K/0001144204-19-013398 |
RESULTS FROM VESSEL OPERATIONS | The following table provides a breakdown of
TCE rates achieved for the years ended December 31, 2018, 2017 and 2016 between spot and fixed earnings and the related revenue
days. The information is based, in part, on information provided by the commercial pools in which certain of the segment’s
vessels participate and excludes commercial pool fees/commissions averaging approximately $444, $404 and $442 per day in 2018,
2017 and 2016, respectively, as well as revenue and revenue days for which recoveries were recorded by the Company under its loss
of hire insurance policies. |
| | | 2018 | | | | 2017 | | | | 2016 | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| TCE revenues | | $ | 67,576 | | | $ | 96,183 | | | $ | 126,314 | |
| Vessel expenses | | | (40,615 | ) | | | (54,100 | ) | | | (58,612 | ) |
| Charter hire expenses | | | (21,101 | ) | | | (28,050 | ) | | | (27,679 | ) |
| Depreciation and amortization | | | (17,862 | ) | | | (22,418 | ) | | | (26,696 | ) |
| Adjusted (loss)/income from vessel operations | | $ | (12,002 | ) | | $ | (8,385 | ) | | $ | 13,327 | |
| Average daily TCE rate | | $ | 10,594 | | | $ | 11,105 | | | $ | 14,206 | |
| Average number of owned vessels | | | 13.3 | | | | 17.5 | | | | 18.0 | |
| Average number of vessels chartered-in under operating leases | | | 4.8 | | | | 6.9 | | | | 6.9 | |
| Number of revenue days | | | 6,379 | | | | 8,662 | | | | 8,891 | |
| Number of ship-operating days: | | | | | | | | | | | | |
| Owned vessels | | | 4,872 | | | | 6,378 | | | | 6,588 | |
| Vessels bareboat chartered-in under operating leases | | | 302 | | | | 1,093 | | | | 1,098 | |
| Vessels time chartered-in under operating leases | | | 1,457 | | | | 1,408 | | | | 1,433 | |
| INSW/10-K/0001144204-19-013398 |
RESULTS FROM VESSEL OPERATIONS | During 2018, TCE revenues for the Product
Carriers segment decreased by $28,607, or 30%, to $67,576 from $96,183 in 2017. A 2,265-day decrease in MR revenue days, driven
by the sales of seven MRs between August 2017 and December 2018 and the redelivery of three MRs to their owners between December
2017 and June 2018 at the expiry of their respective bareboat charters, contributed approximately $23,288 of the overall decrease.
Period-over-period decreases in average daily blended rates earned by all Product Carrier fleet sectors also accounted for a decrease
in revenue of approximately $5,012.Vessel expenses decreased by $13,485 to $40,615
in 2018 from $54,100 in 2017, which was principally attributable to a 2,297-day decrease in owned and bareboat chartered-in days,
as detailed above. Charter hire expenses decreased by $6,949 to $21,101 in 2018 from $28,050 in 2017, reflecting the redeliveries
described above along with decreases in the daily charter rates for the Company’s time chartered-in MR fleet, which were
effective in the third quarter of 2017. Depreciation and amortization decreased by $4,556 to $17,862 in 2018 from $22,418 in 2017
resulting primarily from the vessel sales noted above and reductions in depreciable vessel bases that resulted from impairment
charges on two vessels recorded in the third quarter of 2017. |
| | | 2018 | | | | | | | | 2017 | | | | | | | | 2016 | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| | | Spot | | | | Fixed | | | | Spot | | | | Fixed | | | | Spot | | | | Fixed | | |
| | | Earnings | | | | Earnings | | | | Earnings | | | | Earnings | | | | Earnings | | | | Earnings | | |
| LR2 | | | | | | | | | | | | | | | | | | | | | | | | |
| Average rate | | $ | 12,729 | | | $ | - | | | $ | 13,813 | | | $ | - | | | $ | 21,153 | | | $ | - | |
| Revenue days | | | 365 | | | | - | | | | 364 | | | | - | | | | 365 | | | | - | |
| LR1 | | | | | | | | | | | | | | | | | | | | | | | | |
| Average rate | | $ | 14,875 | | | $ | - | | | $ | 12,871 | | | $ | 17,040 | | | $ | 20,599 | | | $ | 21,107 | |
| Revenue days | | | 1,416 | | | | - | | | | 808 | | | | 615 | | | | 361 | | | | 1,029 | |
| MR | | | | | | | | | | | | | | | | | | | | | | | | |
| Average rate | | $ | 10,125 | | | $ | 5,294 | | | $ | 11,001 | | | $ | 5,342 | | | $ | 13,107 | | | $ | 11,309 | |
| Revenue days | | | 4,257 | | | | 340 | | | | 6,496 | | | | 366 | | | | 6,431 | | | | 705 | |
| INSW/10-K/0001144204-19-013398 |
RESULTS FROM VESSEL OPERATIONS | During 2017, TCE revenues for the International
Product Carriers segment decreased by $30,131, or 24%, to $96,183 from $126,314 in 2016. This resulted primarily from declining
average daily blended rates earned in all Product Carrier fleet sectors, which accounted for $27,625 of the overall decrease. A
230-day decrease in revenue days in the segment also contributed approximately $2,506 of the overall decrease. The decline in revenue
days was driven by the Company’s sale of a 2001-built MR, which was delivered to buyers in August 2017, and a 2004-built
MR, which was delivered to buyers in November 2017.Vessel expenses decreased by $4,512 to $54,100
in 2017 from $58,612 in 2016. The two MRs sold during 2017 had an aggregate vessel expense reduction of $1,841 year-over-year.
The remaining decline was principally attributable to a $2,991 favorable variance in net insurance claim deductible costs in the
segment in 2017. Charter hire expenses increased by $371 to $28,050 in 2017 from $27,679 in 2016, reflecting an increase in the
daily charter hire rates for the Company’s bareboat chartered-in MR fleet, which was effective beginning in the fourth quarter
of 2016, partially offset by decreases in the daily charter hire rates for the Company’s time chartered-in MR fleet, which
were effective beginning in the third quarter of 2017. Depreciation and amortization decreased by $4,278 to $22,418 in 2017 from
$26,696 in 2016. Such decrease reflects (i) the impact of reductions in depreciable vessel bases that resulted from impairment
charges on nine vessels recorded in the third and fourth quarters of 2016 and two vessels in the third quarter of 2017, and (ii)
the sale of the two MRs during 2017 discussed above. |
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| INSW/10-K/0001144204-19-013398 |
SEPARATION AND TRANSITION COSTS | INSW and OSG also entered into a transition
services agreement (the “TSA” or “Transition Services Agreement”) pursuant to which both parties agreed
to provide each other with specified services for a limited time to help ensure an orderly transition following the Distribution.
The Transition Services Agreement specifies the calculation of the costs for these services. Pursuant to the terms of the agreement,
OSG provided certain administrative services, including administrative support services related to benefit plans, human resources
and legal services, for a transitional period after the spin-off. Similarly, INSW agreed to provide certain limited transition
services to OSG, including services relating to accounting activities and information and data provision services. The Transition
Services Agreement terminated on June 30, 2017.During the year ended December 31, 2017 and
2016, INSW earned fees totaling $63 and $27, respectively, for services provided to OSG pursuant to the terms of the Transition
Services Agreement and incurred fees totaling $731and $31, respectively, for services received from OSG, including INSW’s
share of the compensation costs of former OSG corporate employees providing services to one or both companies during the defined
transitional period, which ended on June 30, 2017. |
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| INSW/10-K/0001144204-19-013398 |
OTHER EXPENSE | Other expense of $1,346 for the year ended
December 31, 2016 was primarily related to a net loss of $1,342 realized on the repurchases and mandatory principal prepayments
of the then outstanding INSW Term Loan, which included a $5,097 write-off of unamortized original issue discount and deferred financing
costs associated with such principal reductions, net of $3,755 discount on repurchase of debt. These transactions were accounted
for as partial extinguishments of debt. |
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| INSW/10-K/0001144204-19-013398 |
INTEREST EXPENSE | Interest expense was $60,231 in 2018, compared
with $41,247 in 2017. Interest expense incurred on the debt facilities entered into by the Company during the second quarter of
2018 (as discussed in Note 8, “Debt,” to the accompanying consolidated financial statements as set forth in Item 8,
“Financial Statements and Supplementary Data”) accounted for $12,802 of the increase, and the balance of the increase
before the impact of pension and interest rate caps and swaps was primarily due to the higher average interest rates and average
outstanding principal balances under the 2017 Debt Facilities, which replaced the INSW Facilities in June 2017.Interest expense for the year ended December
31, 2017 was higher than interest expense for the year ended December 31, 2016 primarily due to the higher average interest rates
and outstanding principal balances under the 2017 Debt Facilities, which replaced the INSW Facilities in June 2017. This was partially
offset by lower amortization of deferred finance costs in the 2017 period aggregating $220 attributable to costs incurred to amend
the INSW Facilities in 2016 and costs related to the 2017 Debt Facilities. Refer to Note 8, “Debt,” in the accompanying
consolidated financial statements as set forth in Item 8, “Financial Statements and Supplementary Data” for additional
information. |
| | | 2018 | | | | 2017 | | | | 2016 | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Interest before items shown below | | $ | 58,964 | | | $ | 40,307 | | | $ | 38,959 | |
| Interest cost on benefit obligation | | | 701 | | | | 809 | | | | 886 | |
| Impact of interest rate caps and swaps | | | 566 | | | | 131 | | | | 517 | |
| Interest expense | | $ | 60,231 | | | $ | 41,247 | | | $ | 40,362 | |
| INSW/10-K/0001144204-19-013398 |
EBITDA AND ADJUSTED EBITDA | ·EBITDA and Adjusted EBITDA do not reflect our cash expenditures, or future requirements for capital
expenditures or contractual commitments;
·EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital
needs; and
·EBITDA and Adjusted EBITDA do not reflect the significant interest expense, or the cash requirements
necessary to service interest or principal payments, on our debt.While EBITDA and Adjusted EBITDA are frequently
used by companies as a measure of operating results and performance, neither of those items as prepared by the Company is necessarily
comparable to other similarly titled captions of other companies due to differences in methods of calculation.The following table reconciles net loss, as
reflected in the consolidated statements of operations set forth in Item 8, “Financial Statements and Supplementary Data,”
to EBITDA and Adjusted EBITDA: |
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| INSW/10-K/0001144204-19-013398 |
LIQUIDITY AND SOURCES OF CAPITAL | Restricted cash of $59,331 as of December
31, 2018 represents legally restricted cash relating to the 2017 Term Loan, the Sinosure Credit Facility, the ABN Term Loan Facility,
and the 10.75% Subordinated Notes. Such facilities stipulate that cash accounts be maintained which are limited in their use to
pay expenses related to drydocking the vessels and servicing the debt facilities and, in the case of the 2017 Term loan, that cash
proceeds from the sale of collateral vessels be reinvested in vessels within 12 months of such sale or be used to prepay the principal
amount outstanding of the INSW Facilities.As of December 31, 2018, we had total debt
outstanding (net of original issue discount and deferred financing costs) of $810,667 and a total debt to total capitalization
of 44.5%, which compares with 33.7% at December 31, 2017. Our debt profile reflects actions taken during 2018 as discussed further
below.Sources, Uses and Management of CapitalWe have maintained a strong balance sheet
which has allowed us to take advantage of attractive strategic opportunities during the low end of the tanker cycle. Through disciplined
capital allocation and without issuing equity, we successfully funded over $600,000 worth of vessel acquisitions between July 2017
and June 2018 using cash generated from operations, proceeds from the sale of older vessels and the issuance or assumption of debt
while maintaining what we believe to be a reasonable financial leverage for the current point in the tanker cycle and one of the
lowest loan to value profiles in public company shipping sector.In addition to future operating cash flows,
our other future sources of funds are proceeds from issuances of equity securities, additional borrowings as permitted under our
loan agreements and proceeds from the opportunistic sales of our vessels.Our current uses of funds are to fund working
capital requirements, maintain the quality of our vessels, purchase vessels, comply with international shipping standards and environmental
laws and regulations, repurchase our outstanding shares and repay or repurchase our outstanding loan facilities.The Company has contractual commitments for
the purchase and installation of marine exhaust gas cleaning systems (“Scrubbers”) on 10 of its modern VLCCs. The Company
also has contractual commitments for the purchase and installation of ballast water treatment systems on 15 vessels with options
for the purchase and installation of systems for up to an additional 10 vessels in the Company’s fleet as of December 31,
2018. These systems are intended to be funded with available liquidity, proceeds from the sales of vessels, and proceeds from the
issuance of equity and/or debt as permitted under the Company’s existing debt facilities. As of December 31, 2018, the Company’s
aggregate purchase commitments for these systems are approximately $50,931 (see Aggregate Contractual Obligations Table below)
and could increase by up to an additional $14,000 if all the remaining options for the additional units are exercised. Such options
expire between May 2019 and December 2020.On October 19, 2018, the Company filed a Registration
Statement on Form S-3 (“Shelf Registration”) with the Securities and Exchange Commission (“SEC”). Following
the effective date of the Shelf Registration, the Company may from time to time offer equity or debt securities at an aggregate
offering price not to exceed $100,000. This Shelf Registration replaced the remaining $75,000 balance of a shelf registration on
Form S-3 that was declared effective in May 2018.As described in Item 5, “Market for
Registrant’s Common Equity, Related Stock Matters and Issuer Purchases of Equity Securities,” on January 9, 2019, the
Company entered into an Equity Distribution Agreement (the “Distribution Agreement”) with Evercore Group L.L.C. and
Jefferies LLC, as our sales agents, relating to the common shares of the Company. In accordance with the terms of the Distribution
Agreement, we may offer and sell common shares having an aggregate offering price of up to $25,000 from time to time through the
sales agents.The sales agents are not required to sell
any specific number or dollar amount of our common shares but will use their commercially reasonable efforts, as our agents and
subject to the terms of the Distribution Agreement, to sell the common shares offered, as instructed by us.We intend to use the net proceeds of this
offering, after deducting the sales agents’ commissions and our offering expenses, for general corporate purposes. This may
include, among other things, additions to working capital, repayment or refinancing of existing indebtedness or other corporate
obligations, financing of capital expenditures (including the purchase of marine exhaust gas cleaning systems that reduce sulfur
emissions to comply with upcoming implementation of new IMO standards) and acquisitions and investment in existing and future projects.
As of the date hereof, the Company has neither sold or undertaken to sell any shares pursuant to the Distribution Agreement. |
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LIQUIDITY AND SOURCES OF CAPITAL | Also, on March 5, 2019, the Company’s
Board of Directors approved a resolution to reauthorizing the Company’s $30,000 stock repurchase program for another 24-month
period ending March 5, 2021.As described in Item 1, “Business — Overview
and Recent Developments,” on April 18, 2018, the Company entered into a stock purchase and sale agreement with Euronav for
the purchase of the holding companies for six VLCCs from Euronav for an aggregate price of $434,000, inclusive of any assumed debt,
in connection with the closing of Euronav’s acquisition of Gener8 Maritime, Inc. (the ‘Transaction”). In connection
with the Transaction and in order to finance portions of the consideration in connection therewith, and for other general corporate
purposes, as applicable, the Company completed the following transactions during the first half of 2018:
(i)Sale of five of its vessels comprising one VLCC tanker, one Aframax tanker, and three MR tankers (one
of which the Company agreed to sell in 2017) for approximately $54,850 in net proceeds;
(ii)Entry into sale-leaseback transactions yielding approximately $39,300 in net proceeds in respect of
two Aframax tankers in the first quarter of 2018;
(iii)Refinancing of its FSO Joint Venture pursuant to which on March 29, 2018, the FSO Joint Venture entered
into a $220,000 Senior Secured Credit Facility. Such agreement is made up of a term loan of $110,000 and a revolving credit facility
of $110,000 available to the FSO Joint Venture. The FSO Joint Venture drew down the facility in full on April 26, 2018 and distributed
$110,000 of the loan proceeds to the Company;
(iv)Sale of $25,000 of its 8.50% notes (the "8.50% Senior Notes") in an SEC-registered offering
on May 31, 2018;
(v)Sale of $30,000 of its 10.75% subordinated step-up notes due 2023 (the "10.75% Subordinated Notes")
in a private placement to certain funds and accounts managed by BlackRock, Inc. ("BlackRock") on June 13, 2018;
(vi)Entry into a credit agreement, secured by the Seaways Raffles, a 2010-built VLCC tanker, and dated
as of June 7, 2018, by and among Seaways Shipping Corporation, a Marshall Islands corporation and wholly-owned subsidiary of the
Company, the Company (as a guarantor), certain other guarantors which are subsidiaries of the Company, lenders named therein and
ABN AMRO Capital USA LLC as lead arranger and facility agent (the "ABN Term Loan Facility"), and the related $28,463
drawdown thereunder on June 12, 2018;
(vii)Entry into a second amendment (the "2017 Debt Facilities Second Amendment") of the Credit
Agreement dated as of June 22, 2017 (as amended by that certain First Amendment to Credit Agreement dated as of July 24, 2017 and
by the 2017 Debt Facilities Second Amendment, the "2017 Term Loan Facility"), by and among the Company, International
Seaways Operating Corporation ("ISOC"), OIN Delaware LLC, the Subsidiary Guarantors from time to time party thereto,
the Lenders from time to time party thereto, Jefferies Finance LLC, as administrative agent for the Lenders and as collateral agent
and mortgage trustee for the Secured Parties, Skandinaviska Enskilda Banken AB (publ), as swingline lender with effect as of the
Closing Date;
(viii)The assumption of outstanding debt under the Sinosure Credit Facility (as defined below) with effect
as of June 14, 2018; and
(ix)Sale of the Seaways Laura Lynn, to Euronav in late June 2018 for approximately $32,300 in net proceeds.The balance payable to Euronav for the other
assets and liabilities of the vessel holding companies acquired was determined to be $20,935 and was paid in full to Euronav in
October 2018.The following is a summary description
of some of the key terms of the various debt facilities that were sources of capital to the Company during 2018. See Note 8, “Debt,”
in the accompanying consolidated financial statements as set forth in Item 8, “Financial Statements and Supplementary Data,”
for additional information.ABN Term Loan FacilityOn June 7, 2018, the Company entered into
the ABN Term Loan Facility. Subsequently on June 12, 2018, the Company borrowed approximately $28,463 secured by the Seaways
Raffles vessel. The ABN Term Loan Facility bears interest at a rate of 3-month LIBOR plus a margin of 3.25% and is repayable in
19 quarterly installments of approximately $869 with a balloon repayment payable on the maturity date in 2023. Additionally, the
ABN Term Loan Facility includes certain financial covenants and is guaranteed by the Company. The Company's guarantee is unsecured.
The Company used the proceeds from the ABN Term Loan Facility to fund a portion of the Transaction.2017 Debt Facilities Second AmendmentOn June 14, 2018, the Company entered into
the 2017 Debt Facilities Second Amendment. The amendment (i) increased the interest rate margin from 4.50% per annum to 5.00% per
annum for loans determined by the Alternate Base Rate (as defined in the 2017 Term Loan Facility) and from 5.50% per annum to 6.00%
per annum for any loan determined by reference to the LIBOR Rate and (ii) allowed a dividend of $110,000 to be made from the Company's
FSO Joint Venture to the Company without incorporating such funds into the cash sweep provisions of the 2017 Term Loan Facility,
(iii) permitted the acquisition of the holding companies of the six VLCCs as Unrestricted Subsidiaries and permitted those entities
and their assets to be subject to the Sinosure Credit Facility and be subject to its liens and permitted the funding of the certain
liquidity and other accounts in connection with that acquisition and (iv) made certain other amendments to covenants under the
2017 Term Loan Facility. As a condition to the effectiveness of the 2017 Debt Facilities Second Amendment, the Company prepaid
$60,000 of the amount outstanding under the facility together with a premium equal to 1% of the $60,000 prepayment and paid a fee
to the lenders of 1% of the 2017 Term Loan Facility debt outstanding after that repayment. |
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| INSW/10-K/0001144204-19-013398 |
LIQUIDITY AND SOURCES OF CAPITAL | Seventy-five percent of Excess Cash Flow (as
defined in the 2017 Debt Facilities credit agreement) must be used to prepay the outstanding principal balance of 2017 Term Loan
Facility. To the extent permitted under the terms of the 2017 Debt Facilities we may also use cash generated by operations to finance
capital expenditures to modernize and grow our fleet. The 2017 Debt Facilities contain certain restrictions relating to new borrowings
and INSW’s ability to receive cash dividends, loans or advances from ISOC and its subsidiaries that are Restricted Subsidiaries.
As of December 31, 2018, the permitted cash dividends that can be distributed to INSW by ISOC under the 2017 Term Loan Facility
was $12,500.Sinosure Credit FacilityAs part of the Transaction, the Company acceded
as a guarantor to that certain China Export & Credit Insurance Corporation ("Sinosure") facility agreement originally
dated November 30, 2015, as supplemented by a supplemental agreement dated December 28, 2015, as amended and restated by an amending
and restating deed dated June 29, 2016, as supplemented by a supplemental agreement dated November 8, 2017, as supplemented by
a consent, supplemental and amendment letter, dated April 2, 2018 (the facility agreement as of such date, the "Original Sinosure
Facility") and as amended and restated by an amending and restating agreement dated June 13, 2018 (the "2018 Amending
and Restating Agreement"), by and among Gener8 Maritime Subsidiary VII, Inc., Seaways Holding Corporation, a wholly owned
subsidiary of the Company, the Company, Citibank, N.A. (London Branch), The Export-Import Bank of China and Bank of China (New
York Branch) (and its successors and assigns) and certain other parties thereto (the "Sinosure Credit Facility"). The
Sinosure Credit Facility is a term loan facility comprised of six loans, each secured by one of the six VLCCs acquired. As of June
14, 2018, it had a principal amount outstanding of approximately $310,968 and bears interest at a rate of LIBOR plus a margin of
2%. Each loan under the Sinosure Credit Facility requires quarterly amortization payments of 12/3% (based
on the original outstanding amount of each Vessel loan) together with a balloon repayment payable on the termination date of each
loan. Each of the loans under the Sinosure Credit Facility will mature 144 months after its initial utilization date. The 2018
Amending and Restating Agreement effects certain amendments to the Original Sinosure Facility as agreed between the parties thereto
and necessitated by the Transaction. The Sinosure Credit Facility is guaranteed by the Company and Seaways Holding Corporation.In conjunction with the Transaction, the Company
acquired a pay-fixed, receive-variable interest rate swap agreement with a major financial institution that effectively fixes the
interest rate on the entire variable interest rate borrowings outstanding under the Sinosure Credit Facility. The Interest Rate
Swap contains no leverage features. In July 2018, the Company amended the interest rate swap agreement to increase the fixed rate
from 2.05% to 2.99%, effective September 21, 2018. The maturity date of March 21, 2022 remained unchanged. In conjunction with
such amendment, the Company received a cash settlement of $7,677 from the counterparty to the transaction.The Sinosure Credit Facility contains certain
collateral maintenance and financial covenants with which the obligors (as defined in the Sinosure Credit Facility) are required
to comply. One such covenant is the Interest Expense Coverage Ratio covenant (the “ICR Covenant”), which for Seaways
Holding Corporation, shall not be less than 2.00 to 1.00 during the period commencing on July 1, 2018 through June 30, 2019 and
will be calculated on a trailing six, nine and twelve-month basis from December 31, 2018, March 31, 2019 and June 30, 2019, respectively.
For the Company, the interest expense coverage ratio shall not be less than 2.25 to 1.00 for the period commencing on July 1, 2019
through June 30, 2020 and no less than 2.50 to 1.00 for the period commencing on July 1, 2020 and thereafter and shall be calculated
on a trailing twelve-month basis. Under the terms of the Sinosure Credit Facility, a potential breach of the ICR Covenant by an
Obligor on a test date (December 31, March 31, June 30 and September 30) (a “Test Date”) falling on or prior December
31, 2019 can be cured or remedied by the deposit of additional cash and cash equivalents into a restricted Minimum Liquidity Account.
The amount of cash and cash equivalents required to be so deposited is calculated by reference to the Consolidated EBITDA of Seaways
Holding Corporation (the “ICR Cure Mechanism”). However, any such remedy and the form of the same for a potential breach
of the ICR Covenant on a Test Date falling on or after January 1, 2020, shall be considered and determined by the Lenders in their
absolute discretion.On March 1, 2019, the Sinosure Credit
Facility lenders consented to extending the ICR Cure Mechanism discussed above based on the Consolidated EBITDA of Seaways
Holding Corporation for an additional period of one year to Test Dates falling on or prior to December 31, 2020. 8.5% Senior NotesOn May 31, 2018, the Company completed a registered
public offering of $25,000 aggregate principal amount of its 8.50% senior unsecured notes due 2023 (the “8.5% Senior Notes”),
which resulted in aggregate net proceeds to the Company of approximately $23,458, after deducting commissions and estimated expenses. |
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| INSW/10-K/0001144204-19-013398 |
LIQUIDITY AND SOURCES OF CAPITAL | The Company issued the Notes under an indenture
dated as of May 31, 2018 (the “Base Indenture”), between the Company and The Bank of New York Mellon, as trustee (the
“Trustee”), as supplemented by a supplemental indenture dated as of May 31, 2018 (the “First Supplemental Indenture”
and, together with the Base Indenture, the “Indenture”), between the Company and the Trustee. The Notes will mature
on June 30, 2023 and bear interest at a rate of 8.50% per annum. Interest on the Notes will be payable in arrears on March 30,
June 30, September 30 and December 30 of each year, commencing on September 30, 2018. The terms of the Indenture, among other things,
limit the Company’s ability to merge, consolidate or sell assets.The Company may redeem the Notes at its option,
in whole or in part, at any time on or after June 30, 2020 at a redemption price equal to 100% of their principal amount, plus
accrued and unpaid interest to, but excluding, the redemption date. In addition, if the Company undergoes a Change of Control (as
defined in the Indenture) the Company may be required to repurchase all of the Notes at a purchase price equal to 101% of the principal
amount of the Notes, plus accrued and unpaid interest (including additional interest, if any), to, but excluding, the repurchase
date.The Indenture contains certain restrictive
covenants, including covenants that, subject to certain exceptions and qualifications, restrict our ability to make certain payments
if a default under the Indenture has occurred and is continuing or will result therefrom and require us to limit the amount of
debt we incur, maintain a certain minimum net worth and provide certain reports. The Indenture also provides for certain customary
events of default (subject, in certain cases, to receipt of notice of default and/or customary grace or cure periods).10.75% Subordinated NotesOn June 13, 2018, the Company completed the
Private Placement to certain funds and accounts managed by BlackRock. The 10.75% Subordinated Notes were issued under an indenture
(the "Subordinated Notes Indenture"), between the Company and GLAS Trust Company LLC, as trustee (the "Subordinated
Notes Trustee"). The 10.75% Subordinated Notes are unsecured and rank junior to the 8.5% Senior Notes, the Company's guarantees
of the 2017 Term Loan Facility, the ABN Term Loan Facility and Sinosure Credit Facility and other unsubordinated indebtedness of
the Company. The Private Placement resulted in aggregate proceeds to the Company of approximately $28,000, after deducting fees
paid to the purchasers of those notes and estimated expenses. The Company used the net proceeds from the Private Placement, together
with the net proceeds from the 8.5% Senior Notes, to fund a portion of the Transaction and the offer to prepay a portion of the
obligation of ISOC under the 2017 Term Loan Facility.The 10.75% Subordinated Notes bear interest
from June 13, 2018 at an annual rate of 10.75%; provided that the 10.75% Subordinated Notes shall bear interest at the rate of
13.00% per annum beginning on the earlier of (i) December 15, 2020 and (ii) if the Refinance Date (as defined below) has occurred,
the later of the Refinance Date and June 15, 2020. Interest on the 10.75% Subordinated Notes is payable quarterly in arrears on
the 15th day of March, June, September and December of each year, commencing on September 15, 2018.The stated maturity date of the 10.75% Subordinated
Notes is June 15, 2023; provided that in certain circumstances after the indebtedness outstanding under the 2017 Term Loan Facility
(as amended by the 2017 Debt Facilities Second Amendment) ceases to be outstanding (such date, the "Refinance Date"),
the stated maturity of the 10.75% Subordinated Notes will become June 15, 2022. The 10.75% Subordinated Notes may be redeemed,
in whole or in part, at any time prior to June 15, 2020, at a redemption price equal to 100% of the aggregate principal amount
of the 10.75% Subordinated Notes being redeemed, plus accrued and unpaid interest to, but not including, the date of redemption,
plus a "make-whole" premium. On or after June 15, 2020, the Subordinated Notes may be redeemed at par, plus
accrued and unpaid interest.The Subordinated Notes Indenture contains
covenants restricting the ability of the Company and its subsidiaries to incur additional indebtedness, sell assets, incur liens,
amend the 2017 Term Loan Facility, enter into sale and leaseback transactions and enter into certain extraordinary transactions.
In addition, the Subordinated Notes Indenture prohibits the Company from paying any dividends unless certain financial and other
conditions are satisfied. The Subordinated Notes Indenture also contains events of default consistent with those under the 2017
Term Loan Facility.The 10.75% Subordinated Notes have not been
registered under the Securities Act of 1933, as amended (the "Securities Act"), and may not be offered or sold except
pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act.On September 17, 2018, the Company repurchased
$2,069 of the 10.75% Subordinated Notes at a price equal to 100% of the principal amount. |
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| International Seaways, Inc. | |
| INSW/10-K/0001144204-19-013398 |
LIQUIDITY AND SOURCES OF CAPITAL | On December 28, 2018, the Company entered
into a supplemental indenture (the “First Supplemental Indenture”) with the Subordinated Notes Trustee to amend the
terms of the 10.75% Subordinated Notes to, among other matters, more closely reflect the asset sale provisions of the 2017 Term
Loan Facility. As a condition to the effectiveness of the First Supplemental Amendment, the Company paid a fee to the holders of
the Notes of 0.50% of the outstanding amounts of the Notes.Outlook We believe our balance sheet gives us flexibility
to continue pursuing fleet renewal or potential strategic opportunities that may arise within the diverse sectors in which we operate
and at the same time positions us to generate sufficient cash to support our operations over the next twelve months. We or our
subsidiaries may in the future complete transactions consistent with achieving the objectives of our business plan.Carrying Value of VesselsAll of the Company’s owned vessels are
pledged as collateral under certain of the Company’s debt facilities including the 2017 Debt Facilities, Sinosure Credit
Facility, and ABN Term Loan Facility. The following table presents information with respect to the carrying amount of the Company’s
pledged vessels by type and indicates whether their fair market values, which are estimated by taking an average of two third-party
vessel appraisals, are below their carrying values as of December 31, 2018. The carrying value of each of the Company’s vessels
does not necessarily represent its fair market value or the amount that could be obtained if the vessel were sold. The Company’s
estimates of market values for its vessels assume that the vessels are all in good and seaworthy condition without need for repair
and, if inspected, would be certified as being in class without notations. In addition, because vessel values are highly volatile,
these estimates may not be indicative of either the current or future prices that the Company could achieve if it were to sell
any of the vessels. The Company would not record a loss for any of the vessels for which the fair market value is below its carrying
value unless and until the Company either determines to sell the vessel for a loss or determines that the vessel is impaired as
discussed below in “Critical Accounting Policies — Vessel Impairment.” The Company believes that the
future undiscounted cash flows expected to be earned over the estimated remaining useful lives for those vessels that have experienced
declines in market values below their carrying values would exceed such vessels’ carrying values.Footnotes to the following table exclude
those vessels with an estimated market value in excess of their carrying value. |
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| INSW/10-K/0001144204-19-013398 |
LIQUIDITY AND SOURCES OF CAPITAL | (1)As of December 31, 2018, the Crude Tankers segment includes vessels with an aggregate carrying
value of $429,045, which the Company believes exceeds their aggregate market value of approximately $341,625 by $87,420.
(2)As of December 31, 2018, the Product Carriers segment includes vessels with an aggregate carrying
value of $269,645, which the Company believes exceeds their aggregate market value of approximately $202,300 by $67,345. |
| As of December 31, 2018 | | | | | | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Vessel Type | | Average Vessel Age (weighted by dwt) | | | | **Number of Owned** **Vessels** | | | | Carrying Value | | |
| | | | | | | | | | | | | |
| Crude Tankers | | | | | | | | | | | | |
| VLCC | | | 7.6 | | | | 13 | | | $ | 797,332 | |
| Suezmax | | | 1.4 | | | | 2 | | | | 111,425 | |
| Aframax | | | 13.1 | | | | 3 | | | | 76,793 | |
| Panamax | | | 16.2 | | | | 7 | | | | 53,910 | |
| *Total Crude Tankers(1)* | | | 8.4 | | | | 25 | | | $ | 1,039,460 | |
| | | | | | | | | | | | | |
| Product Carriers | | | | | | | | | | | | |
| LR2 | | | 4.4 | | | | 1 | | | $ | 61,672 | |
| LR1 | | | 10.0 | | | | 4 | | | | 88,604 | |
| MR | | | 10.0 | | | | 6 | | | | 135,148 | |
| *Total Product Carriers(2)* | | | 9.1 | | | | 11 | | | $ | 285,424 | |
| INSW/10-K/0001144204-19-013398 |
LIQUIDITY AND SOURCES OF CAPITAL | Off-Balance Sheet Arrangements As of December 31, 2018, the FSO Joint Venture
and the LNG Joint Venture had total bank debt outstanding of $739,071, of which $646,038 was nonrecourse to the Company.The FSO Joint Venture is a party to a number
of contracts: (a) the FSO Joint Venture is an obligor pursuant to a guarantee facility agreement dated as of July 14, 2017, by
and among, the FSO Joint Venture, ING Belgium NV/SA, as issuing bank, and Euronav and INSW, as guarantors (the ‘‘Guarantee
Facility’’); (b) the FSO Joint Venture is party to two service contracts with NOC (the ‘‘NOC Service Contracts’’);
and (c) the FSO Joint Venture is a borrower under a $220,000 secured credit facility by and among TI Africa and TI Asia, as joint
and several borrowers, ABN AMRO Bank N.V. and ING Belgium SA/NV, as Lenders, Mandated Lead Arrangers and Swap Banks, and ING Bank
N.V., as Agent and as Security Trustee.INSW severally guarantees the obligations
of the FSO Joint Venture pursuant to the Guarantee Facility and severally guarantees the obligations of the FSO Joint Venture to
Maersk Oil Qatar AS (“MOQ”) under the MOQ service contracts, which contracts were novated to NOC in July 2017 (the
‘‘MOQ Guarantee’’) for the period beginning on the novation date and severally guarantees the obligations
of the FSO Joint Venture under the NOC Service Contracts. The MOQ Guarantee expired following the receipt of the notification letter
from the Qatari tax authorities in January 2019 that the FSO Joint Venture has paid all Qatari taxes owed by the FSO Joint Venture
under such service contracts through the novation date.The FSO Joint Venture drew down on a $220,000
secured credit facility on April 26, 2018 (See Note 6, “Equity Method Investments” to the Company’s consolidated
financial statements as set forth in Item 8, “Financial Statements and Supplementary Data”) The Company provided a
guarantee for the $110,000 FSO Term Loan portion of the facility, which has an interest rate of LIBOR plus two percent and amortizes
over the remaining terms of the NOC Service Contracts, which expire in July 2022 and September 2022. INSW’s guarantee of
the FSO Term Loan has financial covenants that provide (i) INSW’s Liquid Assets shall not be less than the higher of $50,000
and 5% of Total Indebtedness of INSW, (ii) INSW shall have Cash of at least $30,000 and (iii) INSW is in compliance with the Loan
to Value Test (as such capitalized terms are defined in the Company guarantee or in the case of the Loan to Value Test, as defined
in the credit agreement underlying the Company’s 2017 Debt Facilities (see Note 8, “Debt,” to the accompanying
consolidated financial statements). The FSO Joint Venture has entered into floating-to-fixed interest rate swap agreements with
the aforementioned Swap Banks, which cover the notional amounts outstanding under the FSO Loan Facility and pay fixed rates of
approximately 4.858% and receive a floating rate based on LIBOR. These agreements have an effective date of June 29, 2018, and
maturity dates ranging from July to September 2022. As of December 31, 2018, the maximum aggregate amount of potential secured
bank debt principal payments (undiscounted) and interest rate swap obligations that INSW could be required to make was $93,548
and the carrying value of the Company’s guaranty in the accompanying consolidated balance sheet was $673.INSW maintains a guarantee in favor of Qatar
Liquefied Gas Company Limited (2) (‘‘LNG Charterer’’) 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 guarantee,
the ‘‘LNG Performance Guarantee’’). INSW will pay QGTC an annual fee of $100 until such time that QGTC
ceases to provide a guarantee in favor of the LNG charterer relating to performance under the LNG Charter Party Agreements.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 Guarantee pursuant to the terms of the Separation
and Distribution Agreement. In connection with the OSG LNG Performance Guarantee, INSW paid a $135 annual fee to OSG for 2018,
which will increase to $145 in 2019 and will be terminated if OSG ceases to provide the OSG LNG Performance Guarantee.See Note 12, “Related Parties,”
to the Company’s consolidated financial statements set forth in Item 8, “Financial Statements and Supplementary Data”
for additional information.In addition and pursuant to an agreement between
INSW and the trustees of the OSG Ship Management (UK) Ltd. Retirement Benefits Plan (the “Scheme”), INSW guarantees
the obligations of INSW Ship Management UK Ltd., a subsidiary of INSW, to make payments to the Scheme. See Note 17, “Pension
and other postretirement benefit plans,” to the Company’s consolidated financial statements set forth in Item 8, “Financial
Statements and Supplementary Data,” for additional information. |
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| INSW/10-K/0001144204-19-013398 |
LIQUIDITY AND SOURCES OF CAPITAL | Aggregate Contractual ObligationsA summary of the Company’s long-term
contractual obligations as of December 31, 2018 follows: |
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| INSW/10-K/0001144204-19-013398 |
LIQUIDITY AND SOURCES OF CAPITAL | (1)Amounts shown include contractual interest obligations of floating rate debt estimated based on the
aggregate effective one-month LIBOR rate as of December 31, 2018 of 2.53% and applicable margin for the 2017 Term Loan Facility
of 6.0%. Management estimates that no prepayment will be required in 2019 for the 2017 Term Loan Facility as a result of estimated
Excess Cash Flow for the year ended December 31, 2018. Amounts shown for 2020 and beyond exclude any estimated repayment as a result
of Excess Cash Flow.
(2)Amounts shown include contractual interest obligations of floating rate debt estimated based on the
aggregate effective three-month LIBOR rate as of December 31, 2018 of 2.78% and applicable margin for the ABN Term Loan facility
of 3.25%.
(3)Amounts shown include contractual interest obligations of floating rate debt estimated based on (i)
the fixed rate stated in the related floating-to-fixed interest rate swap through the swap maturity date of March 21, 2022, or
(ii) the effective three-month LIBOR rate for periods after the swap maturity date, plus the applicable margin for the Sinosure
Credit Facility of 2.00%. The Company is a party to a floating-to-fixed interest rate swap covering the entire variable interest
rate borrowings outstanding under the Sinosure Credit Facility that effectively converts the Company’s interest rate exposure
under the Sinosure Credit Facility from a floating rate based on 3-month LIBOR to a fixed LIBOR rate of 2.99%.
(4)As of December 31, 2018, the Company had charter-in commitments for six vessels on leases that are
accounted for as operating leases. Certain of these leases provide the Company with various renewal and purchase options. The future
minimum commitments for time charters-in have been reduced to reflect estimated days that the vessels will not be available for
employment due to drydock. Upon adoption of ASU 2018-11, Leases (ASC 842), on January 1, 2019, a majority of the amounts
due under these operating lease obligations will be reflected on the Company’s consolidated balance sheet as lease liabilities
with corresponding right of use asset balances. See Note 2, “Summary of Significant Accounting Policies,” in the accompanying
consolidated financial statements set forth in Item 8, “Financial Statements and Supplementary Data,” for additional
information relating to the impact of the Company’s adoption of ASC 842.
(5)Represents the Company’s commitments for the purchase and installation of ballast water treatment
systems on 15 vessels and the purchase and installation of scrubbers on 10 of its VLCC tankers. In addition, the Company is party
to agreements granting INSW the option to purchase additional ballast water treatment systems for installation between 2019 and
2021 on 10 vessels. If exercised, these options could increase the Company’s commitments by up to approximately $14,000.
The Company’s ability to exercise the options expires between May 2019 and December 2020. |
| | | | | | | | | | | | | | | | | | | | | | | Beyond | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| | | 2019 | | | | 2020 | | | | 2021 | | | | 2022 | | | | 2023 | | | | 2023 | | | | Total | | |
| 2017 Term Loan - floating rate(1) | | $ | 63,865 | | | | 61,847 | | | | 59,624 | | | | 406,777 | | | | - | | | | - | | | $ | 592,113 | |
| ABN Term Loan - floating rate(2) | | | 5,029 | | | | 4,820 | | | | 4,604 | | | | 4,392 | | | | 13,168 | | | | - | | | | 32,013 | |
| Sinosure Credit Facility - floating rate(3) | | | 37,957 | | | | 36,802 | | | | 35,573 | | | | 33,955 | | | | 32,810 | | | | 202,297 | | | | 379,394 | |
| 8.5% Senior Notes - fixed rate | | | 2,125 | | | | 2,125 | | | | 2,125 | | | | 2,125 | | | | 26,063 | | | | - | | | | 34,563 | |
| 10.75% Subordinated Notes - fixed rate | | | 3,003 | | | | 3,003 | | | | 3,631 | | | | 3,631 | | | | 29,747 | | | | - | | | | 43,015 | |
| Operating lease obligations (4) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Bareboat Charter-ins | | | 6,278 | | | | 6,295 | | | | 6,278 | | | | 6,278 | | | | 4,782 | | | | - | | | | 29,911 | |
| Time Charter-ins | | | 12,934 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 12,934 | |
| Office space | | | 1,219 | | | | 1,152 | | | | 665 | | | | - | | | | - | | | | - | | | | 3,036 | |
| Vessel betterment commitments(5) | | | 42,134 | | | | 8,561 | | | | 118 | | | | 118 | | | | - | | | | - | | | | 50,931 | |
| Total | | $ | 174,544 | | | $ | 124,605 | | | $ | 112,618 | | | $ | 457,276 | | | $ | 106,570 | | | $ | 202,297 | | | $ | 1,177,910 | |
| INSW/10-K/0001144204-19-013398 |
RISK MANAGEMENT | The Company is party to an Interest Rate Cap
agreement with a major financial institution covering a notional amount of $350,000 to limit the floating interest rate exposure
associated with the 2017 Term Loan. The Interest Rate Cap agreement contains no leverage features and has a cap rate of 2.605%
through the termination date of December 31, 2020. Additionally, the Company is party to an Interest Rate Swap agreement with a
major financial institution covering the entire currently outstanding notional amount of the Sinosure Credit Facility. The Interest
Rate Swap agreement contains no leverage features and has a fixed rate of 2.99% through the termination date of March 21, 2022.Currency and exchange rate risk The shipping industry’s functional currency
is the U.S. dollar. All of the Company’s revenues and most of its operating costs are in U.S. dollars. The Company incurs
certain operating expenses, such as vessel and general and administrative expenses, in currencies other than the U.S. Dollar, and
the foreign exchange risk associated with these operating expenses is immaterial. If foreign exchange risk becomes material in
the future, the Company may seek to reduce its exposure to fluctuations in foreign exchange rates through the use of short-term
currency forward contracts and through the purchase of bulk quantities of currencies at rates that management considers favorable.
For contracts which qualify as cash flow hedges for accounting purposes, hedge effectiveness would be assessed based on changes
in foreign exchange spot rates with the change in fair value of the effective portions being recorded in accumulated other comprehensive
loss.Fuel price volatility risk Historically, the Company managed its exposure
to future increases in fuel prices in the normal course of its business by entering into standalone bunker swaps. The Company’s
deployment of most of its conventional tanker fleet in commercial pools and time charters currently limits the Company’s
direct exposure to fluctuations in fuel prices as a component of voyage expenses. As discussed in Item 1, “Business — Overview
and Recent Developments,” there is considerable uncertainty about the impact that the low-sulfur fuel oil requirements of
the IMO 2020 Regulations set to take effect on January 1, 2020 will have on fuel prices, particularly the forecasted spread between
HFO and low-sulfur fuel between 2020 and 2023. In addition to the Company’s current plans to install scrubbers on certain
vessels in its fleet, significant consideration will also be given to other ways of managing the risk of volatility in the price
spread between HFO and low-sulfur fuel as well as the risk of limited supply of compliant fuel along the routes that the Company’s
vessels typically travel. |
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| INSW/10-K/0001144204-19-013398 |
INTEREST RATE SENSITIVITY | (1)Includes amounts outstanding under the Sinosure Credit Facility as floating rate debt estimated based
on (i) the fixed rate stated in the related floating-to-fixed interest rate swap through the swap maturity date of March 21, 2022,
or (ii) the effective three-month LIBOR rate for periods after the swap maturity date, plus the applicable margin for the Sinosure
Credit Facility of 2.00%. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fair Value at | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| | | | | | | | | | | | | | | | | | | | | | | Beyond | | | | | | | | Dec. 31, | | |
| At December 31, 2018 | | 2019 | | | | 2020 | | | | 2021 | | | | 2022 | | | | 2023 | | | | 2023 | | | | Total | | | | 2018 | | |
| Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Debt | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed rate debt | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | 52.9 | | | $ | - | | | $ | 52.9 | | | $ | 52.1 | |
| Average interest rate | | | 9.69 | % | | | 9.69 | % | | | 9.85 | % | | | 10.87 | % | | | 10.78 | % | | | | | | | | | | | | |
| Variable rate debt (1) | | $ | 51.6 | | | $ | 51.6 | | | $ | 51.6 | | | $ | 417.9 | | | $ | 36.4 | | | $ | 175.3 | | | $ | 784.4 | | | $ | 779.7 | |
| Average interest rate (1) | | | 7.13 | % | | | 7.16 | % | | | 7.19 | % | | | 6.52 | % | | | 4.82 | % | | | 4.79 | % | | | | | | | | |
| INSW/10-K/0001144204-19-013398 |
INTEREST RATE SENSITIVITY | As of December 31, 2018, the Company had secured
term loans (the 2017 Term Loan Facility, the Sinosure Credit Facility, and the ABN Term Loan Facility) and a revolving credit facility
(2017 Revolver Facility) under which borrowings bear interest at a rate based on LIBOR, plus the applicable margin, as stated in
the respective loan agreements. As discussed in Interest Rate Risk section above, the Company entered into an Interest Rate Cap
agreement for 2017 Term Loan and an Interest Rate Swap agreement for Sinosure Credit Facility to limit the floating interest rate
exposure associated with the debt facilities. There was no outstanding balance under the 2017 Revolver Facility as of December
31, 2018. |
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| INSW/10-K/0001144204-19-013398 |
CRITICAL ACCOUNTING POLICIES | As the Company’s performance obligations
are services which are received and consumed by its customers as it performs such services, revenues are recognized over time proportionate
to the days elapsed since the service commencement compared to the total days anticipated to complete the service. The minimum
duration of services is less than one year for each of the Company’s current contracts.Demurrage earned during a voyage charter represents
variable consideration. The Company estimates demurrage at contract inception using either the expected value or most likely amount
approaches. Such estimate is reviewed and updated over the term of the voyage charter contract.The Company has elected the practical expedient
to expense costs to obtain a contract with a customer (e.g. broker commissions) as incurred rather than defer and amortize such
costs as the amortization period would be expected to be one year or less. Vessel Lives and Salvage ValuesThe carrying value of each of the Company’s
vessels represents its original cost at the time it was delivered or purchased less depreciation calculated using an estimated
useful life of 25 years (except for FSO service vessels for which estimated useful lives of 30 years are used and LNG Carriers
for which estimated useful lives of 35 years are used) from the date such vessel was originally delivered from the shipyard. A
vessel’s carrying value is reduced to its new cost basis (i.e. its current fair value) if a vessel impairment charge is recorded.If the estimated economic lives assigned to
the Company’s vessels prove to be too long because of new regulations, an extended period of weak markets, the broad imposition
of age restrictions by the Company’s customers, or other future events, it could result in higher depreciation expense and
impairment losses in future periods related to a reduction in the useful lives of any affected vessels. Company management estimates
the scrap value of all of its vessels to be $300 per lightweight ton. The Company’s assumptions used in the determination
of estimated salvage value take into account current scrap prices, the historic pattern of annual average scrap rates over the
five years ended December 31, 2018, which ranged from $235 to $495 per lightweight ton, estimated changes in future market demand
for scrap steel and estimated future demand for vessels. Scrap prices also fluctuate depending upon type of ship, bunkers on board,
spares on board and delivery range. Market conditions that could influence the volume and pricing of scrapping activity in 2019
and beyond include the combined impact of scheduled newbuild deliveries and charter rate expectations for vessels potentially facing
age restrictions imposed by oil majors as well as the impact of ballast water treatment systems regulatory requirements and IMO
2020 requirements for the use of low-sulfur fuels. These factors will influence owners’ decisions to accelerate the disposal
of older vessels, especially those with upcoming special surveys.Although management believes that the assumptions
used to determine the scrap rate for its vessels are reasonable and appropriate, such assumptions are highly subjective, in part,
because of the cyclicality of the nature of future demand for scrap steel.Vessel ImpairmentThe carrying values of the Company’s
vessels may not represent their fair market value or the amount that could be obtained by selling the vessel at any point in time
since the market prices of second-hand vessels tend to fluctuate with changes in charter rates and the cost of newbuildings. Historically,
both charter rates and vessel values tend to be cyclical. Management evaluates the carrying amounts of vessels held and used by
the Company for impairment only when it determines that it will sell a vessel or when events or changes in circumstances occur
that cause management to believe that future cash flows for any individual vessel will be less than its carrying value. In such
instances, an impairment charge would be recognized if the estimate of the undiscounted future cash flows expected to result from
the use of the vessel and its eventual disposition is less than the vessel’s carrying amount. This assessment is made at
the individual vessel level as separately identifiable cash flow information for each vessel is available.In developing estimates of future cash flows,
the Company must make assumptions about future performance, with significant assumptions being related to charter rates, ship operating
expenses, utilization, drydocking requirements, residual value and the estimated remaining useful lives of the vessels. These assumptions
are based on historical trends as well as future expectations. Specifically, in estimating future charter rates, management takes
into consideration rates currently in effect for existing time charters and estimated daily time charter equivalent rates for each
vessel class for the unfixed days over the estimated remaining lives of each of the vessels. The estimated daily time charter equivalent
rates used for unfixed days are based on a combination of (i) internally forecasted rates that are consistent with forecasts provided
to the Company’s senior management and Board of Directors, and (ii) the trailing 12-year historical average rates, based
on monthly average rates published by a third party maritime research service. The internally forecasted rates are based on management’s
evaluation of current economic data and trends in the shipping and oil and gas industries. Management uses the published 12-year
historical average rates in its assumptions because it is management’s belief that the 12-year period captures a distribution
of strong and weak charter rate periods, which results in the use of an average mid-cycle rate that is more in line with management’s
forecast of a return to mid-cycle charter rate levels in the medium term. Recognizing that the transportation of crude oil and
petroleum products is cyclical and subject to significant volatility based on factors beyond the Company’s control, management
believes the use of estimates based on the combination of internally forecasted rates and 12-year historical average rates calculated
as of the reporting date to be reasonable. |
| 60 | |
| --- | --- |
| International Seaways, Inc. | |
| INSW/10-K/0001144204-19-013398 |
CRITICAL ACCOUNTING POLICIES | Estimated outflows for operating expenses
and drydocking requirements are based on historical and budgeted costs and are adjusted for assumed inflation. Utilization is based
on historical levels achieved and estimates of a residual value for recyclings are based upon published 12-year historical data
or the pattern of scrap rates used in management’s evaluation of salvage value for purposes of recording depreciation. Finally,
for vessels that are being considered for disposal before the end of their respective useful lives, the Company utilizes weighted
probabilities assigned to the possible outcomes for such vessels being sold or scraped before the end of their respective useful
lives.The determination of fair value is highly
judgmental. In estimating the fair value of INSW’s vessels for purposes of Step 2 of the impairment tests, the Company considers
the market and income approaches by using a combination of third party appraisals and discounted cash flow models prepared by the
Company. In preparing the discounted cash flow models, the Company uses a methodology consistent with the methodology discussed
above in relation to the undiscounted cash flow models prepared by the Company and discounts the cash flows using its current estimate
of INSW’s weighted average cost of capital.The more significant factors that could impact
management’s assumptions regarding time charter equivalent rates include (i) loss or reduction in business from significant
customers, (ii) unanticipated changes in demand for transportation of crude oil and petroleum products, (iii) changes in production
of or demand for oil and petroleum products, generally or in particular regions, (iv) greater than anticipated levels of tanker
newbuilding orders or lower than anticipated levels of tanker scrappings, and (v) changes in rules and regulations applicable to
the tanker industry, including legislation adopted by international organizations such as IMO and the EU or by individual countries.
Although management believes that the assumptions used to evaluate potential impairment are reasonable and appropriate at the time
they were made, such assumptions are highly subjective and likely to change, possibly materially, in the future.2018 Impairment Evaluation — Management
gave consideration on a quarterly basis to the following events and changes in circumstances in determining whether there were
any indicators that the carrying amounts of the vessels in the Company’s fleet were not recoverable. Factors considered included
declines in valuations during 2018 for vessels of certain sizes and ages, any negative changes in forecasted near term charter
rates, and an increase in the likelihood that the Company will sell certain of its vessels before the end of their estimated useful
lives in conjunction with the Company’s fleet renewal program. The Company concluded that the increased likelihood of disposal
prior to the end of their respective useful lives constituted impairment triggering events for one Panamax and two Aframaxes that
were being actively marketed for sale as of June 30, 2018; one VLCC that was held-for-sale as of September 30, 2018; and as of
December 31, 2018, one MR that has an increased likelihood of disposal prior to the end of its useful life.In developing estimates of undiscounted future
cash flows for performing Step 1 of the impairment tests as of June 30, 2018, the Company utilized weighted probabilities assigned
to possible outcomes for each of the three vessels for which impairment trigger events were determined to exist. The Company entered
into a memorandum of agreement for the sale of the Panamax vessel in early July 2018. Accordingly, a 100% probability was attributed
to the vessel being sold before the end of its useful life. As the Company is considering selling the other two vessels as a part
of its fleet renewal program, 50% probabilities were assigned to the possibility that the two Aframax vessels would be sold prior
to the end of their respective useful lives. In estimating the fair value of the vessels for the purposes of Step 2 of the impairment
tests, the Company considered the market approach by using the sales price per the memorandum of agreement. Based on the tests
performed, the sum of the undiscounted cash flows for each of the two Aframax vessels was more than its carrying value as of June
30, 2018 and the sum of the undiscounted cash flows for the Panamax vessel was less than its carrying value as of June 30, 2018.
Accordingly, an impairment charge totaling $948 was recorded for the Panamax vessel to write-down its carrying value to its estimated
fair value at June 30, 2018.Held-for-sale impairment charges aggregating
$16,419 were recorded during the third quarter of 2018 including (i) a charge of $14,226 to write the value of the VLCC held-for-sale
at September 30, 2018 down to its estimated fair value; (ii) a charge of $361 for estimated costs to sell the vessel; and (iii)
a charge of $1,832 for the write-off of other assets associated with the operations of the vessel. The amount of the charge to
write down the vessel to its fair value was determined using the market approach by utilizing the sales price as per the memorandum
of agreement associated with the sale of the vessel.In developing estimates of undiscounted future
cash flows for performing Step 1 of the impairment test as of December 31, 2018, the Company utilized weighted probabilities assigned
to possible outcomes for the MR for which an impairment triggering event was determined to exist. As the Company is considering
selling the MR as a part of its fleet renewal program, a 50% probability was assigned to the possibility that the vessel will be
sold prior to the end of its useful life. In estimating the fair value of the vessel for the purposes of Step 2 of the impairment
test, the Company considered the market approach by utilizing a combination of third party appraisals and recently executed vessel
sale transactions. Based on the tests performed, the sum of the undiscounted cash flows for the vessel was less than its carrying
value as of December 31, 2018. Accordingly, an impairment charge totaling $1,670 was recorded to write-down the vessel’s
carrying value to its estimated fair value at December 31, 2018. |
| 61 | |
| --- | --- |
| International Seaways, Inc. | |
| INSW/10-K/0001144204-19-013398 |
CRITICAL ACCOUNTING POLICIES | 2017 Impairment Evaluation — Management
gave consideration to the following events and changes in circumstances in determining whether there were any indicators that the
carrying amounts of the vessels in the Company’s fleet were not recoverable as of December 31, 2017. Factors considered included
declines in valuations during 2017 for vessels of certain sizes and ages, any negative changes in forecasted near term charter
rates, and an increase in the likelihood that the Company will sell certain of its vessels before the end of their estimated useful
lives in conjunction with the Company’s fleet renewal program. The Company concluded that the above indicators constituted
impairment trigger events for eighteen vessels (one ULCC, one VLCC, six Aframaxes, eight Panamaxes and two LR1s) as of December
31, 2017 and three vessels (one Panamax and two MRs) as of September 30, 2017.In developing estimates of undiscounted future
cash flows for performing Step 1 of the impairment tests, the Company utilized the methodology described above. In estimating the
fair value of the vessels for the purposes of Step 2 of the impairment tests, the Company considered the market and income approaches
by using a combination of third party appraisals, current recycling market data, and discounted cash flow models prepared by the
Company. In preparing the discounted cash flow models, the Company used a methodology consistent with the methodology described
above and a weighted average cost of capital discount rate of 9.5%. Based on the tests performed, impairment charges totaling $81,062
and $7,346 were recorded on twelve vessels (one ULCC, one VLCC, four Aframaxes and six Panamaxes) at December 31, 2017 and three
vessels (one Panamax and two MRs) as of September 30, 2017, respectively to write-down their carrying values to their estimated
fair values.2016 Impairment Evaluations —
The Company had been monitoring the industry wide decline in vessel valuations during 2016 and specifically from June 30, 2016
to September 30, 2016, and September 30, 2016 to December 31, 2016, as well as the decline in forecasted near term charter rates,
and concluded that the declines in vessel valuations and in forecasted near term charter rates constituted impairment trigger events
for 28 vessels as of September 30, 2016 and 24 vessels as of December 31, 2016. In developing estimates of undiscounted future
cash flows for performing Step 1 of the impairment tests, the Company utilized the methodology described above. In estimating the
fair value of the vessels for the purposes of Step 2 of the September 30, 2016 impairment tests, the Company developed fair value
estimates that utilized a market approach which considered an average of two vessel appraisals. Based on the tests performed, impairment
charges totaling $49,640 were recorded on two LR1s, an Aframax and a Panamax to write-down their carrying values to their estimated
fair values at September 30, 2016. In estimating the fair values of the vessels for the purposes of Step 2 of the December 31,
2016 impairment tests, the Company considered the market and income approaches by using a combination of third party appraisals
and discounted cash flow models prepared by the Company. In preparing the discounted cash flow models, the Company used a methodology
consistent with the methodology described above and a weighted average cost of capital discount rate of 9.0%. Based on the tests
performed, impairment charges aggregating $29,602 were recorded on one Panamax and seven MRs to write-down their carrying values
to their estimated fair values at December 31, 2016.Impairment of Equity Method InvestmentsWhen events and circumstances warrant, investments
accounted for under the equity method of accounting are evaluated for impairment. If a determination is made that an other-than-temporary
impairment exists, the investment should be written down to its fair value in accordance with ASC 820, Fair Value Measurements
and Disclosures, which establishes a new cost basis. There were no indicators of an other-than-temporary impairment of the
Company’s equity method investments as of December 31, 2018 and 2017, respectively.In December 2016, evidence of an other-than-temporary
decline in the fair value of the Company’s investments in its FSO Joint Venture below its carrying value was identified by
the Company. Specifically, management concluded that the lower charter rate expected over the duration of the then recently awarded
five-year service contracts commencing in the third quarter of 2017 was negative evidence indicating that the excess of the carrying
value of the Company’s investment in the FSO Joint Venture over its fair value was other-than-temporary as of December 31,
2016.As the Company determined that other-than-temporary
impairments existed in relation to its investment in the FSO Joint Venture, impairment charges aggregating $30,475 were recorded
to write down the investment to its estimated fair values as of December 31, 2016. Such charges are included in equity in income
of affiliated companies in the accompanying consolidated statements of operations. In estimating the fair value of the Company’s
investments in the FSO Joint Venture as of December 31, 2016, the Company utilized an income approach, by preparing discounted
cash flow models since there is a lack of comparable market transactions for the specially built assets held by the FSO Joint Venture.
In preparing the discounted cash flows models, the Company used a methodology largely consistent with the methodology and assumptions
detailed in the “Vessel Impairment” section above, with the exception being that as the assets owned by the FSO Joint
Venture serve under specific service contracts, the estimated charter rates for periods after the expiry of the existing contracts
are based upon management’s internally forecasted rates. The cash flows were discounted using the estimated weighted average
cost of capital for each joint venture, which approximated 9.5% and took into consideration country risk, entity size and uncertainty
with respect to the cash flows for periods beyond the current charter expiries. |
| 62 | |
| --- | --- |
| International Seaways, Inc. | |
| INSW/10-K/0001144204-19-013398 |
CRITICAL ACCOUNTING POLICIES | DrydockingWithin the shipping industry, there are two
methods that are used to account for dry dockings: (1) capitalize drydocking costs as incurred (deferral method) and amortize such
costs over the period to the next scheduled drydocking, and (2) expense drydocking costs as incurred. Since drydocking cycles typically
extend over two and a half years or five years, management uses the deferral method because management believes it provides a better
matching of revenues and expenses than the expense-as-incurred method. Pension BenefitsThe Company has obligations outstanding under
the OSG Ship Management (UK) Ltd. Retirement Benefits Plan (the “Scheme”), a defined benefit pension plan maintained
by a subsidiary in the U.K., who is the principal employer of the Scheme. The plan has been closed to new entrants and accrual
since December 2007. The Company has recorded pension benefit costs based on valuations developed by its actuarial consultants.
These valuations are based on key estimates and assumptions, including those related to the discount rates, the rates expected
to be earned on investments of plan assets and the life expectancy/mortality of plan participants. The Company is required to consider
market conditions in selecting a discount rate that is representative of the rates of return currently available on high-quality
fixed income investments. A higher discount rate would result in a lower benefit obligation and a lower rate would result in a
higher benefit obligation. The expected rate of return on plan assets is management’s best estimate of expected returns on
plan assets. A decrease in the expected rate of return will increase net periodic benefit costs and an increase in the expected
rate of return will decrease benefit costs. The mortality assumption is management’s best estimate of the expected duration
of future benefit payments at the measurement date. The estimate is based on the specific demographics and other relevant facts
and circumstances of the Scheme and considers all relevant information available at the measurement date. Longer life expectancies
would result in higher benefit obligations and a decrease in life expectancies would result in lower benefit obligations.In determining the benefit obligations at
the end of year measurement date, the Company continues to use an equivalent single weighted-average discount rate, at December
31, 2018 (2.80%) and 2017 (2.40%), respectively. Management believes these rates to be appropriate for ongoing plans with a long
duration such as Scheme. The Company also assumed a long-term rate of return on the Scheme assets of 4.46% and 3.85% at December
31, 2018 and 2017, respectively, based on the asset mix as of such dates and management’s estimate of the long-term rate
of return that could be achieved over the remaining duration of the Scheme.Newly Issued Accounting StandardsSee Note 2, “Summary of Significant
Accounting Policies,” to the Company’s consolidated financial statements set forth in Item 8, “Financial Statements
and Supplementary Data.” |
| 63 | |
| --- | --- |
| International Seaways, Inc. | |
| INSW/10-K/0001144204-19-013398 |
Precious Metals Sales | For the
years ended December 31, 2020 and 2019, the EBITDA for precious
metals was $174,079 and $194,239, respectively. |
| Precious Metal Sales Silver/Gold | For the Year Ended December 31, | |
| --- | --- | --- |
| | 2020 | 2019 |
| Ounces Gold Shipped (Au) | 30.79 | 48.13 |
| Ounces Silver Shipped (Ag) | 11,434 | 11,714 |
| Revenues | $174,079 | $194,239 |
| UAMY/10-K/0001654954-21-003567 |
Precious Metals Sales | During
the period ending December 31, 2020, the most significant factors
affecting our financial performance were as follows:
●
The
death of John Lawrence, the Company’s previous President and
Chairman, which created the opportunity to renegotiate existing
supply and processing contracts,
●
The
continuing decline of antimony prices,
●
An
assessment against US Antimony from the Mexican tax authority (SAT)
in the amount of $1,120,730 regarding a lawsuit the Company had
been in involved in since 2016.
●
A
private placement of 5,742,858 shares of the Company’s common
stock sold in July of 2020.
●
A
50% decrease in Canadian supply of sodium antimonate.
●
The
consequences of the Covid-19 pandemic to antimony and zeolite sales
and corresponding increase costs of freight.
During the period ended December 31, 2019, the
most significant event affecting our financial performance was the
continued low price of antimony. This decrease in prices caused us
to re-evaluate our commitment to the two antimony mines we were
purchasing in Mexico. We made the decision that with the depressed
prices and the cost of developing the mines, it was in our
best interest to abandon these properties and look at re-acquiring
them in the future if antimony prices improved. It was decided that
our resources should be directed to completing our precious metals
facility at Puerto Blanco and starting precious metals production
in 2021. In connection with the low antimony prices, we negotiated
a lower cost agreement with our North American supplier which will
help us with future cash flow.
Our
plan for the remainder of 2021 is to process
approximately:
●
1,300
tons of mined rock from the Los Juarez property. 2,000 tons have
already been moved to the Puerto Blanco facility. It is estimated
that we have 10,000 tons of mined rock at the Los Juarez
property.
●
At
least 720 tons of ore from the Wadley mines at the Madero Smelting
facility.
●
300
tons of milled tailings at the Puerto Blanco facility.
●
60
tons of stibnite ore at Puerto Blanco facility for the generation
of concentrates specifically for the production of antimony
trisulfide for the Defense Logistic Agency (DLA).
In
addition to the processing goals stated above, US Antimony intends
to continue to improve its production capacity and sales of zeolite
at its subsidiary Bear River Zeolite (BRZ). Funds obtained in early
2021 from two public placements of stock will assist greatly to
this goal as well as the improvement of the facilities in Madero,
Thompson Falls, Puerto Blanco, and Los Juarez.
In
2020, we only received 50% of our expected supply from North
American sources. We anticipated increasing the raw material from
Mexico and the resumption of normal shipments from our North
American supplier in 2019, but these plans did not materialize due
to low overall metal prices and the low antimony prices in
particular.
In both
2020 and 2019, the Puerto Blanco mill circuits were utilized less
than 2% of their capacity, but with the completion of the cyanide
leach circuit we expect it to be fully utilized processing precious
metals ore from the Los Juarez mine. Some antimony will be realized
as a by-product of processing the Los Juarez ore. In 2020, US
Antimony has been involved in renegotiating its supply contract
with its North American source, that will likely result in a mutual
improvement in the supply contract. Additionally, the price of
antimony in early 2021 is double what it was in 2019.
The
estimated recovery of precious metals per metric ton, after the
caustic leach and cyanide leach circuits, is as follows at Los
Juarez: |
| Earnings before income taxes | | |
| --- | --- | --- |
| depreciation and amortization | | |
| For the years ended December 31, 2020 and 2019 | | |
| | | |
| Antimony - Combined USA | | |
| and Mexico | 2020 | 2019 |
| Lbs of Antimony Metal USA | 514,837 | 794,770 |
| Lbs of Antimony Metal Mexico | 300,473 | 771,815 |
| Total Lbs of Antimony Metal Sold | 815,310 | 1,566,585 |
| Average Sales Price/Lb Metal | $3.61 | $3.48 |
| Net loss/Lb Metal | $(4.46) | $(2.74) |
| | | |
| Gross antimony revenue | $2,942,628 | $5,450,649 |
| | | |
| Cost of sales - domestic | (1,722,571) | (2,870,566) |
| Cost of sales - Mexico | (1,425,383) | (4,103,125) |
| Operating expenses | (3,134,889) | (1,451,267) |
| Non-operating expenses | 21,808 | 87,798 |
| Loss on mineral properties | (318,502) | (1,409,022) |
| | (6,579,537) | (9,746,182) |
| | | |
| Net loss - antimony | (3,636,909) | (4,295,533) |
| Depreciation,& amortization | 616,388 | 640,457 |
| EBITDA - antimony | $(3,020,521) | $(3,655,076) |
| | | |
| Precious Metals | | |
| Ounces sold | | |
| Gold | 31 | 48 |
| Silver | 11,434 | 11,714 |
| | | |
| Gross precious metals revenue | $174,079 | $194,239 |
| Production costs | (86,835) | (69,067) |
| Net income - precious metals | 87,244 | 125,172 |
| Depreciation | 86,835 | 69,067 |
| EBITDA - precious metals | $174,079 | $194,239 |
| | | |
| Zeolite | | |
| Tons sold | 10,661 | 13,680 |
| Average Sales Price/Ton | $198.75 | $191.75 |
| Net income (Loss)/Ton | $24.66 | $36.36 |
| | | |
| Gross zeolite revenue | $2,118,823 | $2,623,117 |
| Cost of sales | (1,795,043) | (2,041,498) |
| Operating expenses | (57,049) | (68,567) |
| Non-operating expenses | (3,870) | (15,582) |
| Net income - zeolite | 262,861 | 497,470 |
| Depreciation | 182,620 | 186,466 |
| EBITDA - zeolite | $445,481 | $683,936 |
| | | |
| Company-wide | | |
| Gross revenue | $5,235,530 | $8,268,005 |
| Production costs | (5,029,832) | (9,084,256) |
| Operating expenses | (3,191,938) | (1,519,834) |
| Non-operating expenses | 17,938 | 72,216 |
| Loss on mineral properties | (318,502) | (1,409,022) |
| Net income (loss) | (3,286,804) | (3,672,891) |
| Depreciation,& amortization | 885,843 | 895,990 |
| EBITDA | $(2,400,961) | $(2,776,901) |
| UAMY/10-K/0001654954-21-003567 |
Financial Condition and Liquidity | Our net
working capital increased for the year ended December 31, 2020 from
a negative amount of $2,695,926 at the beginning of the year to a
negative amount of $2,669,382 at the end of 2020. Current assets
increased due to an increase in cash and cash equivalents. Our
current liabilities increased by $501,862, which included a
decrease of approximately $584,000 in accounts payables and
payables to related parties, but an overall increase due to Mexican
export tax liability. Capital improvements were paid for with cash
and debt.
For the
year ending December 31, 2021, we are planning to use funds
acquired from the two stock offerings raised in Q1 2021 to make
significant improvements to our operations at Madero, Puerto
Blanco, Bear River Zeolite, and Thompson Falls facilities with the
goal of increasing production and decreasing costs. |
| Financial Condition and Liquidity | 2020 | 2019 |
| --- | --- | --- |
| | | |
| Current assets | $1,808,161 | $1,279,755 |
| Current liabilities | (4,477,543) | (3,975,681) |
| Net Working Capital | $(2,669,382) | $(2,695,926) |
| | | |
| | | |
| | 2020 | 2019 |
| Cash provided (used) by operations | $(1,305,664) | $(11,355) |
| Cash provided (used) by investing: | | |
| Cash used for capital outlay | (243,091) | (792,925) |
| Proceeds from sale of land | - | 400,000 |
| Cash provided (used) by financing: | | |
| Proceeds from notes payable to bank, net of payments | (97,066) | 13,149 |
| Principal paid on long-term debt | (46,670) | (127,683) |
| Advances from related party | - | 237,400 |
| Payments on advances from related parties | (83,419) | (35,066) |
| Proceeds from CARES Act note payable | 443,400 | |
| Stock issued for cash | 1,813,068 | 404,199 |
| Checks issued and payable | 69,052 | (28,849) |
| Net change in cash and restricted cash | $549,610 | $58,870 |
| UAMY/10-K/0001654954-21-003567 |
HIGHLIGHTS 2015 | Precious Metal Sales |
| Antimony Sales in Pounds | | 2011 | | | | 2012 | | | | 2013 | | | | 2014 | | | | 2015 | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| USA | | | 1,179,973 | | | | 103,114 | | | | 931,789 | | | | 1,141,436 | | | | 1,381,971 | |
| Mexico | | | 221,450 | | | | 372,046 | | | | 647,393 | | | | 596,368 | | | | 1,105,350 | |
| Total Sale in Pounds | | | 1,401,423 | | | | 1,403,210 | | | | 1,579,182 | | | | 1,727,804 | | | | 2,487,321 | |
| Total sales in Dollars | | $ | 10,406,636 | | | $ | 8,753,449 | | | $ | 8,375,158 | | | $ | 8,132,410 | | | $ | 9,863,933 | |
| Average price per pound | | $ | 7.43 | | | $ | 6.24 | | | $ | 530.00 | | | $ | 4.71 | | | $ | 3.97 | |
| UAMY/10-K/0001354488-16-006768 |
ANTIMONY MARKET | 2.
The “Mexican excess production costs” include (1) holding costs for Los Juarez, Wadley, Soyatal, Guadalupe, and the Puerto Blanco mill, and (2) the write-down of significant concentrates and direct shipping ore (DSO) mined in 2013 and 2014 at Wadley, Soyatal, and other properties. These costs are included in our production costs and have a very severe impact on profitability. In 2015, they added $1,086,440 to the costs of the production of antimony. These costs amounted to $.98 per pound of antimony production in Mexico. |
| Division | Operation | Description | | Amount | | |
| --- | --- | --- | --- | --- | --- | --- |
| BRZ | Zeolite | VSI Line 1 construction | | $ | 67,682 | |
| BRZ | Zeolite | Caterpillar 235 Excavator | | | 29,831 | |
| BRZ | Zeolite | Permitting | | | 15,310 | |
| BRZ | Zeolite | Major Equipment Repairs | | | 83,415 | |
| USAC Montana | Antimony and precious metals | Plant and Office Equipment | | | 3,728 | |
| USAC Montana | Antimony and precious metals | Two Caterpillar Forklifts | | | 58,600 | |
| USAMSA | Madero | Buildings | | | 1,835 | |
| USAMSA | Madero | Capitalized interest | | | 4,542 | |
| USAMSA | Madero | Permitting | | | 56,461 | |
| USAMSA | Madero | Plant construction | | | 3,820 | |
| USAMSA | Madero | Leach Circuit | | | 107,023 | |
| USAMSA | Madero | IVA Tax on Equipment | | | 36,619 | |
| USAMSA | Puerto Blanco | Buildings | | | 10,395 | |
| USAMSA | Puerto Blanco | Permitting | | | 48,299 | |
| USAMSA | Puerto Blanco | Leach Circuit | | | 1,734 | |
| USAMSA | Puerto Blanco | 500 Ton Ball Mill | | | 15,095 | |
| USAMSA | Puerto Blanco | Land Payments San Miguel | | | 125,000 | |
| USAMSA | Puerto Blanco | Permitting | | | 20,825 | |
| USAMSA | Guadalupe | Property purchase | | | 1,559,615 | |
| USAMSA | Guadalupe | Capitalized amortization | | | 14,591 | |
| USAMSA | Guadalupe | Permitting | | | 2,502 | |
| USAMSA | Soyatal | Permitting | | | 2,593 | |
| USAMSA | Soyatal | Capitalized amortization | | | 42,498 | |
| USAMSA | Wadley | Plant Improvements | | | 77,333 | |
| USAMSA | Wadley | Used Truck | | | 1,385 | |
| USAMSA | OTHER | Software | | | 4,165 | |
| HILLGROVE | OTHER | Building construction | | | 44,136 | |
| HILLGROVE | OTHER | Permiting | | | 4,200 | |
| HILLGROVE | OTHER | Plant | | | 914,069 | |
| HILLGROVE | OTHER | Equipment | | | 94,016 | |
| | | | | $ | 3,451,317 | |
| UAMY/10-K/0001354488-16-006768 |
ZEOLITE OPERATIONS | The oil and gas and mining industries could become a large application for BRZ zeolite used for remediation. |
| Application | | Percent by dollars | | | | Percent by tons | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Animal feed | | | 41.46 | | | | 30.35 | |
| Water filtration | | | 18.34 | | | | 20.00 | |
| Soil amendment | | | 14.85 | | | | 18.20 | |
| Traction control | | | 9.02 | | | | 11.20 | |
| Air filtration | | | 8.68 | | | | 12.50 | |
| Oil and gas | | | 2.06 | | | | 2.80 | |
| Home and miscellaneous | | | 1.41 | | | | 0.70 | |
| Odor control | | | 1.38 | | | | 1.10 | |
| Synthetic turf | | | 0.83 | | | | 0.80 | |
| Absorption | | | 0.66 | | | | 0.90 | |
| Remediation | | | 0.50 | | | | 0.80 | |
| Litter | | | 0.35 | | | | 0.30 | |
| Distribution | | | 0.33 | | | | 0.20 | |
| Pest control | | | 0.25 | | | | 0.30 | |
| Pigment | | | 0.08 | | | | 0.07 | |
| Total | | | 100 | | | | 100 | |
| UAMY/10-K/0001354488-16-006768 |
Item 1. Description of Business | Antimony DivisionOur antimony smelter and precious metals plant is located in the Burns Mining District of Sanders County, Montana, approximately 15 miles west of Thompson Falls, MT. We hold 2 patented mill sites where the plant is located. We have no "proven reserves" or "probable reserves" of antimony, as these terms are defined by the Securities and Exchange Commission. Environmental restrictions preclude mining at this site.Mining was suspended in December 1983, because antimony could be purchased more economically from foreign sources.For 2015, and since 1983, we relied on foreign sources for raw materials, and there are risks of interruption in procurement from these sources and/or volatile changes in world market prices for these materials that are not controllable by us. We have developed sources of antimony in Mexico but we are still depending on foreign companies for raw material in the future. We expect more raw materials from our own properties for 2016 and later years. We continue working with suppliers in North America, Central America, Europe, Australia, and South America.We currently own 100% of the common stock, equipment, and the leases on real property of United States Antimony, Mexico S.A. de C.V. or USAMSA, which was formed in April 1998. We currently own 100% of the stock in Antimony de Mexico SA de CV (AM) which owns the San Miguel concession of the Los Juarez property. USAMSA has three divisions (1) the Madero smelter in Coahuila that started expanded operations in late 2012, (2) the Puerto Blanco flotation mill and oxide circuit in Guanajuato that started operating on a test basis in late 2012 and is ramping up for 2016, and (3) mining properties that include the Los Juarez mineral deposit with concessions in Queretaro, the Wadley mining concessionin San Lis Potosi, the Soyatal deposits in Queretaro, and the Guadalupe properties in Zacatecas.In our existing operations in Montana, we produce antimony oxide, sodium antimonate, antimony metal, and precious metals. Antimony oxide is a fine, white powder that is used primarily in conjunction with a halogen to form a synergistic flame retardant system for plastics, rubber, fiberglass, textile goods, paints, coatings and paper. Antimony oxide is also used as a color fastener in paint, as a catalyst for production of polyester resins for fibers and film, as a catalyst for production of polyethelene pthalate in plastic bottles, as a phosphorescent agent in fluorescent light bulbs, and as an opacifier for porcelains. Sodium antimonate is primarily used as a fining agent (degasser) for glass in cathode ray tubes and as a flame retardant. We also sell antimony metal for use in bearings, storage batteries and ordnance.We estimate (but have not independently confirmed) that our present share of the domestic market and international market for antimony oxide products is approximately 4% and less than 1%, respectively. We are the only significant U.S. producer of antimony products, while China supplies 92% of the world antimony demand. We believe we are competitive both domestically and world-wide due to the following:
·
We have a reputation for quality products delivered on a timely basis.
·
We are a non-Chinese producer of antimony products.
·
We have two of the three operating antimony smelters in North and Central America.
·
We are the sole domestic producer of antimony products.
·
We can ship on short notice to domestic customers.
·
We are vertically integrated, with raw materials from our own mines, mills, and smelter in Mexico, along with the raw materials from exclusive supply agreements we have with numerous ore and raw material suppliers.
·
As a vertically integrated company, we will have more control over our raw material costs.
Following is a five year schedule of our antimony sales: |
| Precious Metals Sales | | | | | | | | | | | | | | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Silver/Gold | | | | | | | | | | | | | | | | | | | | |
| Montana | | 2011 | | | | 2012 | | | | 2013 | | | | 2014 | | | | 2015 | | |
| Ounces Gold Shipped (Au) | | | 161.71 | | | | 102.32 | | | | 59.74 | | | | 64.77 | | | | 89.12 | |
| Ounces Silver Shipped (Ag) | | | 17,472.99 | | | | 20,237.70 | | | | 22,042.46 | | | | 29,480.22 | | | | 30,420.75 | |
| Revenues | | $ | 667,813 | | | $ | 647,554 | | | $ | 347,016 | | | $ | 461,083 | | | $ | 491,426 | |
| Mexico | | | | | | | | | | | | | | | | | | | | |
| Ounces Gold Shipped (Au) | | | | | | | | | | | 1.780 | | | | | | | | | |
| Ounces Silver Shipped (Ag) | | | | | | | | | | | 1,053.240 | | | | | | | | | |
| Revenues | | | | | | | | | | $ | 22,690 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Total Revenues | | $ | 667,813 | | | $ | 647,554 | | | $ | 369,706 | | | $ | 461,083 | | | $ | 491,426 | |
| UAMY/10-K/0001354488-16-006768 |
Item 1. Description of Business | Concentration of Sales:During the two years ended December 31, 2015, the following sales were made to our three largest customers: |
| Schedule of Antimony Sales | | | | | | | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| | | Metal | | | | | | | | Average | | |
| Year | | Contained | | | | $ | | | | Price/Lb | | |
| 2015 | | | 2,487,321 | | | $ | 9,863,933 | | | $ | 3.97 | |
| 2014 | | | 1,727,804 | | | $ | 8,132,410 | | | $ | 4.71 | |
| 2013 | | | 1,579,182 | | | $ | 8,375,158 | | | $ | 5.30 | |
| 2012 | | | 1,403,210 | | | $ | 8,753,449 | | | $ | 6.24 | |
| 2011 | | | 1,401,423 | | | $ | 10,406,636 | | | $ | 7.43 | |
| UAMY/10-K/0001354488-16-006768 |
Item 1. Description of Business | While the loss of one of our three largest customers would be a problem in the short term, we have numerous requests from potential buyers that we cannot fill, and we could quickly, in the present market conditions, be able to replace the lost sales. Loss of all three of our largest customers would be more serious and may affect our profitability.Marketing: We employ full-time marketing personnel and have negotiated various commission-based sales agreements with other chemical distribution companies.Antimony Price Fluctuations: Our operating results have been, and will continue to be, related to the market prices of antimony metal, which have fluctuated widely in recent years. The volatility of prices is illustrated by the following table, which sets forth the average prices of antimony metal per pound, as reported by sources deemed reliable by us. |
| Sales to Three | | For the Year Ended | | | | | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Largest Customers | | December 31, 2015 | | | | December 31, 2014 | | |
| Alpha Gary Corporation | | $ | 3,142,586 | | | $ | 3,289,766 | |
| East Penn Manufacturing Inc | | | 1,236,250 | | | | 720,966 | |
| General Electric | | | | | | | | |
| Kohler Corporation | | | 1,736,914 | | | | 2,091,565 | |
| Polymer Products Inc. | | | - | | | | - | |
| | | $ | 6,115,750 | | | $ | 6,102,297 | |
| % of Total Revenues | | | 46.65 | % | | | 56.45 | % |
| UAMY/10-K/0001354488-16-006768 |
Item 1. Description of Business | A six year price range of our sales prices for antimony oxide and antimony metal, per pound, was as follows: |
| | | USA | | | | Rotterdam | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| | | Average | | | | Average | | |
| Year | | Price/Lb | | | | Price/Lb | | |
| 2015 | | $ | 3.41 | | | $ | 3.32 | |
| 2014 | | $ | 4.40 | | | $ | 4.31 | |
| 2013 | | $ | 4.73 | | | $ | 4.78 | |
| 2012 | | $ | 5.86 | | | $ | 5.71 | |
| 2011 | | $ | 6.97 | | | $ | 7.05 | |
| UAMY/10-K/0001354488-16-006768 |
Item 1. Description of Business | Antimony metal prices are determined by a number of variables over which we have no control. These include the availability and price of imported metals, the quantity of new metal supply, and industrial and commercial demand. If metal prices decline and remain depressed, our revenues and profitability may be adversely affected.We use various antimony raw materials to produce our products. We currently obtain antimony raw material from sources in North America, Mexico, Europe, South America, Central America, and Australia.Zeolite DivisionWe own 100% of Bear River Zeolite Company, (BRZ), an Idaho corporation that was incorporated on June 1, 2000. BRZ has a lease with Webster Farm, L.L.C. that entitles BRZ to surface mine and process zeolite on property located near Preston, Idaho, in exchange for a royalty payment. In 2010 the royalty was adjusted to $10 per ton sold. The current minimum annual royalty is $60,000. In addition, BRZ has more zeolite on U.S. Bureau of Land Management land. A company controlled by the estate of Al Dugan, a significant stockholder and, as such, an affiliate of USAC, receives a payment equal to 3% of net sales on zeolite products. William Raymond and Nancy Couse are paid a royalty that varies from $1 to $5 per ton. On a combined basis, royalties vary from 8%-13%. BRZ has constructed a processing plant on the property and it has improved its productive capacity. In addition to a large amount of fully depreciated equipment that has been transferred from the USAC division, we have spent approximately $3,712,000 to purchase and construct the processing plant as of December 31, 2015.We have no "proven reserves" or "probable reserves" of zeolite, as these terms are defined by the Securities and Exchange Commission."Zeolite" refers to a group of industrial minerals that consist of hydrated aluminosilicates that hold cations such as calcium, sodium, ammonium, various heavy metals, and potassium in their crystal lattice. Water is loosely held in cavities in the lattice. BRZ zeolite is regarded as one of the best zeolites in the world due to its high CEC of approximately 180 meq/100 gr., its hardness and high clinoptilolite content, its absence of clay minerals, and its low sodium content. BRZ's zeolite deposits’ characteristics which the mineral useful for a variety of purposes including:
·
Soil Amendment and Fertilizer. Zeolite has been successfully used to fertilize golf courses, sports fields, parks and common areas, and high value agricultural crops
·
Water Filtration. Zeolite is used for particulate, heavy metal and ammonium removal in swimming pools, municipal water systems, fisheries, fish farms, and aquariums.
·
Sewage Treatment. Zeolite is used in sewage treatment plants to remove nitrogen and as a carrier for microorganisms.
·
Nuclear Waste and Other Environmental Cleanup. Zeolite has shown a strong ability to selectively remove strontium, cesium, radium, uranium, and various other radioactive isotopes from solution. Zeolite can also be used for the cleanup of soluble metals such as mercury, chromium, copper, lead, zinc, arsenic, molybdenum, nickel, cobalt, antimony, calcium, silver and uranium.
·
Odor Control. A major cause of odor around cattle, hog, and poultry feed lots is the generation of the ammonium in urea and manure. The ability of zeolite to absorb ammonium prevents the formation of ammonia gas, which disperses the odor.
·
Gas Separation. Zeolite has been used for some time to separate gases, to re-oxygenate downstream water from sewage plants, smelters, pulp and paper plants, and fish ponds and tanks, and to remove carbon dioxide, sulfur dioxide and hydrogen sulfide from methane generators as organic waste, sanitary landfills, municipal sewage systems and animal waste treatment facilities.
·
Animal Nutrition. Feeding up to 2% zeolite increases growth rates, decreases conversion rates, prevents worms, and increases longevity.
·
Miscellaneous Uses. Other uses include catalysts, petroleum refining, concrete, solar energy and heat exchange, desiccants, pellet binding, horse and kitty litter, floor cleaner and carriers for insecticides, pesticides and herbicides.
Environmental MattersOur exploration, development and production programs conducted in the United States are subject to local, state and federal regulations regarding environmental protection. Some of our production and mining activities are conducted on public lands. We believe that our current discharge of waste materials from our processing facilities is in material compliance with environmental regulations and health and safety standards. The U.S. Forest Service extensively regulates mining operations conducted in National Forests. Department of Interior regulations cover mining operations carried out on most other public lands. All operations by us involving the exploration for or the production of minerals are subject to existing laws and regulations relating to exploration procedures, safety precautions, employee health and safety, air quality standards, pollution of water sources, waste materials, odor, noise, dust and other environmental protection requirements adopted by federal, state and local governmental authorities. We may be required to prepare and present data to these regulatory authorities pertaining to the effect or impact that any proposed exploration for, or production of, minerals may have upon the environment. Any changes to our reclamation and remediation plans, which may be required due to changes in state or federal regulations, could have an adverse effect on our operations. The range of reasonably possible loss in excess of the amounts accrued, by site, cannot be reasonably estimated at this time.We accrue environmental liabilities when the occurrence of such liabilities is probable and the costs are reasonably estimable. The initial accruals for all our sites are based on comprehensive remediation plans approved by the various regulatory agencies in connection with permitting or bonding requirements. Our accruals are further based on presently enacted regulatory requirements and adjusted only when changes in requirements occur or when we revise our estimate of costs to comply with existing requirements. As remediation activity has physically commenced, we have been able to refine and revise our estimates of costs required to fulfill future environmental tasks based on contemporaneous cost information, operating experience, and changes in regulatory requirements. In instances where costs required to complete our remaining environmental obligations are clearly determined to be in excess of the existing accrual, we have adjusted the accrual accordingly. When regulatory agencies require additional tasks to be performed in connection with our environmental responsibilities, we evaluate the costs required to perform those tasks and adjust our accrual accordingly, as the information becomes available. In all cases, however, our accrual at year-end is based on the best information available at that time to develop estimates of environmental liabilities.Antimony Processing SiteWe have environmental remediation obligations at our antimony processing site near Thompson Falls, Montana ("the Stibnite Hill Mine Site"). We are under the regulatory jurisdiction of the U.S. Forest Service and subject to the operating permit requirements of the Montana Department of Environmental Quality. At December 31, 2014 and 2015, we have accrued $100,000 to fulfill our environmental responsibilities. |
| | | Oxide | | | | Metal | | | | Combined | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| | | Average | | | | Average | | | | Average | | |
| Year | | Price/Lb | | | | Price/Lb | | | | Price/Lb | | |
| 2015 | | $ | 3.34 | | | $ | 3.71 | | | $ | 3.97 | |
| 2014 | | $ | 4.00 | | | $ | 4.18 | | | $ | 4.71 | |
| 2013 | | $ | 4.41 | | | $ | 4.69 | | | $ | 5.30 | |
| 2012 | | $ | 5.14 | | | $ | 5.58 | | | $ | 6.24 | |
| 2011 | | $ | 6.16 | | | $ | 7.42 | | | $ | 7.43 | |
| 2010 | | $ | 3.67 | | | $ | 4.42 | | | $ | 4.34 | |
| UAMY/10-K/0001354488-16-006768 |
LOS JUAREZ GROUP | The concessions collectively constitute 720 hectares. The claims are accessed by roads that lead to highways. |
| 1. | San Miguel I and II are being purchased by a USAC subsidiary, Antimonio de Mexico, S. A. de C. V (AM), for $1,480,500. To date, we have paid $1,415,500 on the property, and have incurred significant permitting costs. The property consists of 40 hectares. |
| --- | --- |
| 2. | San Juan I and II are concessions owned by AM and include 466 hectares. |
| 3. | San Juan III is held by a lease agreement by AM in which we will pay a 10% royalty, based on the net smelter returns from another USAC Mexican subsidiary, named United States Antimony Mexico, S. A. de C. V. or USAMSA. It consists of 214 hectares. |
| | |
| UAMY/10-K/0001354488-16-006768 |
Item 5 Market for Common Equity and Related Stockholder Matters | The approximate number of holders of record of our common stock at March 30, 2016, is 2,500.We have not declared or paid any dividends to our stockholders during the last five years and do not anticipate paying dividends on our common stock in the foreseeable future. Instead, we expect to retain earnings for the operation and expansion of our business. |
| 2015 | | High | | | | Low | | |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| First Quarter | | $ | 0.91 | | | $ | 0.48 | |
| Second Quarter | | | 1.65 | | | | 0.52 | |
| Third Quarter | | | 0.79 | | | | 0.35 | |
| Fourth Quarter | | | 0.46 | | | | 0.24 | |
| | | | | | | | | |
| 2014 | | High | | | | Low | | |
| First Quarter | | $ | 2.14 | | | $ | 1.67 | |
| Second Quarter | | | 2.17 | | | | 1.41 | |
| Third Quarter | | | 1.76 | | | | 1.15 | |
| Fourth Quarter | | | 1.35 | | | | 0.60 | |
| UAMY/10-K/0001354488-16-006768 |