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Impairment Charges Scuttle Ship Finance's Earnings in the Third Quarter

By Asit Sharma - Nov 21, 2019 at 2:35PM

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The maritime leasing company reported solid charter hire activity, but vessel impairments impacted its bottom line.

Maritime vessel owner-lessor Ship Finance International ( SFL 0.00% ) continued to see stable operating income in its third quarter of 2019, and maintained its robust backlog during the period. However, vessel fair-market adjustments resulted in significant noncash charges that reduced the shipping industry specialist's net income. As we walk through the quarter below, note that all comparative numbers refer to those of the prior-year quarter.

Ship Finance results: A bird's-eye view

Metric Q3 2019 Q3 2018 Change
Revenue $111.5 million $110.9 million 0.5%
Net income $3.8 million $28.1 million (86.5%)
Diluted earnings per share $0.04 $0.26 (84.6%)

Data source: Ship Finance International.

Key highlights from the quarter

A cargo ship stacked with colorful containers entering a port.

Image source: Getty Images.

  • Ship Finance received $152 million in charter hire during the quarter. In addition to $112 million in revenue booked under generally accepted accounting principles, or GAAP, it secured $11.7 million in charter hire under "repayment of investment in finance leases and vessel loans;" these amounts appear in its statement of cash flows. The company also counted $27 million in charter hire received by its 100%-owned subsidiaries. These subsidiaries are classed as investments on its balance sheet, and their revenue doesn't run through the organization's income statement.
  • Ship Finance's liner fleet generates its largest revenue stream. Currently, the fleet consists of 48 container vessels and two car carriers. The fleet garnered $81 million in charter hire over the last three months. During the quarter, the company acquired three container vessels of between 2,400 and 4,400 TEU (20-foot equivalent unit, a standardized measure of a vessel's cargo-carrying capacity). These vessels were immediately leased to a "leading global container line" on 5.5-year bareboat charters expiring in 2025.
  • Ship Finance was informed that two container vessels on long-term lease to Korean shipping operator Heung-A will not have their purchase options exercised next year. Consequently, the company recorded a $25 million impairment charge on the vessels to bring their book values down to estimated market values. The adjustment was responsible for the disparity in net income between the current and prior periods as seen in the table above.
  • Tanker revenue benefited from a rise in rates during the quarter. The organization's 12 tankers generated $13.7 million in charter hire during the period.
  • Ship Finance's 22 dry bulk carriers contributed $27.6 million in charter hire, while its three offshore drilling rigs contributed approximately $27 million to the top line over the last three months.
  • The company's fixed-rate charter backlog across its fleet of 92 vessels and rigs stood at $3.7 billion, unchanged sequentially from the second quarter. Weighted by charter revenue, its average remaining charter term reached 7.8 years at quarter-end.
  • The enterprise achieved roughly $90 million in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) from operations in the third quarter and $27 million in EBITDA from its nonconsolidated, 100%-owned subsidiaries.
  • Ship Finance declared a dividend of $0.35, its 62nd consecutive quarterly dividend.

Management's comments on the quarter

Setting aside the large noncash impairment charge, Ship Finance reported a fairly strong quarter in terms of adjusted earnings on Thursday. In the earnings release, CEO Ole Hjertaker commented on the Bermuda-based organization's attractive market niche as an alternate-leasing provider:

In an environment where traditional capital sources for the maritime industries remain constrained, we see many growth opportunities for SFL, and our strong liquidity position and constant focus on balance sheet management supports the continued growth in our asset base.

With a versatile toolbox, including time charters, bareboat charters and financing structures, SFL is able to provide our customers with competitive tailor made solutions, demonstrated by our most recent transactions. We continuously evaluate new investment opportunities and expect to see new projects materialize in the coming months.

Ship Finance's stable cash flows and healthy balance sheet certainly supply it with deal-making ability. Hjertaker's comments appear to signal imminent vessel acquisition and leasing transactions over the next one to two quarters.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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