Company Quick10K Filing
Overseas Shipholding Group
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 90 $158
10-Q 2019-11-08 Quarter: 2019-09-30
10-Q 2019-08-09 Quarter: 2019-06-30
10-Q 2019-05-10 Quarter: 2019-03-31
10-K 2019-03-15 Annual: 2018-12-31
10-Q 2018-11-09 Quarter: 2018-09-30
10-Q 2018-08-09 Quarter: 2018-06-30
10-Q 2018-05-09 Quarter: 2018-03-31
10-K 2018-03-12 Annual: 2017-12-31
10-Q 2017-11-09 Quarter: 2017-09-30
10-Q 2017-08-09 Quarter: 2017-06-30
10-Q 2017-05-10 Quarter: 2017-03-31
10-K 2017-03-09 Annual: 2016-12-31
10-Q 2016-11-09 Quarter: 2016-09-30
10-Q 2016-08-09 Quarter: 2016-06-30
10-Q 2016-05-10 Quarter: 2016-03-31
10-K 2016-03-01 Annual: 2015-12-31
10-Q 2015-11-09 Quarter: 2015-09-30
10-Q 2015-08-10 Quarter: 2015-06-30
10-Q 2015-05-11 Quarter: 2015-03-31
10-K 2015-03-16 Annual: 2014-12-31
10-Q 2014-11-10 Quarter: 2014-09-30
10-Q 2014-08-04 Quarter: 2014-06-30
10-Q 2014-05-12 Quarter: 2014-03-31
10-K 2014-03-13 Annual: 2013-12-31
10-Q 2013-11-12 Quarter: 2013-09-30
10-Q 2013-10-08 Quarter: 2013-06-30
10-Q 2013-09-30 Quarter: 2013-03-31
10-K 2013-08-26 Annual: 2012-12-31
10-Q 2013-08-26 Quarter: 2012-09-30
10-Q 2012-08-07 Quarter: 2012-06-30
10-Q 2012-05-07 Quarter: 2012-03-31
10-K 2012-02-29 Annual: 2011-12-31
10-Q 2011-11-04 Quarter: 2011-09-30
10-Q 2011-08-05 Quarter: 2011-06-30
10-Q 2011-05-05 Quarter: 2011-03-31
10-K 2011-03-01 Annual: 2010-12-31
10-Q 2010-11-05 Quarter: 2010-09-30
10-Q 2010-08-06 Quarter: 2010-06-30
10-Q 2010-05-07 Quarter: 2010-03-31
10-K 2010-03-01 Annual: 2009-12-31
8-K 2019-11-08 Earnings, Exhibits
8-K 2019-08-09 Earnings, Exhibits
8-K 2019-06-04 Shareholder Vote
8-K 2019-05-09 Earnings, Exhibits
8-K 2019-03-08 Earnings, Exhibits
8-K 2018-12-27 Enter Agreement, Leave Agreement, Off-BS Arrangement, Regulation FD, Exhibits
8-K 2018-12-18 Officers, Exhibits
8-K 2018-12-10 Other Events, Exhibits
8-K 2018-11-26 Regulation FD, Exhibits
8-K 2018-11-09 Earnings, Exhibits
8-K 2018-08-09 Earnings, Exhibits
8-K 2018-07-26 Other Events, Exhibits
8-K 2018-07-16 Other Events, Exhibits
8-K 2018-06-06 Shareholder Vote
8-K 2018-05-09 Earnings, Exhibits
8-K 2018-03-29 Other Events
8-K 2018-03-09 Earnings, Exhibits
8-K 2018-01-25 Earnings
OSG 2019-09-30
Note 1 &Mdash; Basis of Presentation
Note 2 &Mdash; Recently Adopted and Issued Accounting Standards
Note 3 - Revenue Recognition
Note 4 &Mdash; Earnings per Common Share
Note 5 &Mdash; Fair Value Measurements and Fair Value Disclosures
Note 6 &Mdash; Taxes
Note 7 &Mdash; Related Parties
Note 8 &Mdash; Capital Stock and Stock Compensation
Note 9 &Mdash; Accumulated Other Comprehensive Loss
Note 10 &Mdash; Leases
Note 11 &Mdash; Vessels
Note 12 &Mdash; Debt
Note 13 &Mdash; Commitments and Contingencies
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Item 4: Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-10.1 ex10-1.htm
EX-10.2 ex10-2.htm
EX-10.3 ex10-3.htm
EX-10.4 ex10-4.htm
EX-10.5 ex10-5.htm
EX-31.1 ex31-1.htm
EX-31.2 ex31-2.htm
EX-32 ex32.htm

Overseas Shipholding Group Earnings 2019-09-30

OSG 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
TNK 252 2,161 1,214 0 0 0 0 934 0%
TNP 230 3,205 1,710 0 0 0 0 1,617 0%
SB 181 1,076 593 0 0 0 0 698 0%
ASC 161 845 498 0 0 0 0 336 0%
OSG 158 1,057 724 346 0 8 68 437 0% 6.4 1%
PANL 154 459 290 258 0 19 46 230 0% 5.0 4%
DAC 149 2,680 1,989 0 0 0 0 1,694 0%
GASS 113 1,037 475 0 0 0 0 479 0%
NMCI 100 414 231 0 0 0 0 265 0%
STNG 95 4,784 2,945 0 0 0 0 83 0%

10-Q 1 form10-q.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2019

 

OR

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from          to             

 

Commission File Number: 001-06479

 

OVERSEAS SHIPHOLDING GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   13-2637623
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

 

302 Knights Run Avenue, Tampa, Florida   33602
(Address of principal executive office)   (Zip Code)

 

(813) 209-0600

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Class A Common Stock (par value $0.01 per share)   OSG   New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S–T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ] Accelerated filer [X] Non-accelerated filer [  ] Smaller reporting company [X]
      Emerging growth company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES [X] NO[  ]

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date. The number of shares outstanding of the issuer’s Class A common stock as of November 6, 2019: Class A common stock, par value $0.01 – 85,675,594 shares. Excluded from these amounts are penny warrants, which were outstanding as of November 6, 2019 for the purchase of 3,693,499 shares of Class A common stock without consideration of any withholding pursuant to the cashless exercise procedures.

 

 

 

 
 

 

TABLE OF CONTENTS

 

   

Page #

     
Part I—FINANCIAL INFORMATION  
     
Item 1. Financial Statements  
     
  Condensed Consolidated Balance Sheets as of September 30, 2019 (Unaudited) and December 31, 2018 3
     
  Condensed Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 30, 2019 and 2018 4
     
  Condensed Consolidated Statements of Comprehensive (Loss)/Income (Unaudited) for the three and nine months ended September 30, 2019 and 2018 5
     
  Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2019 and 2018 6
     
  Condensed Consolidated Statements of Changes in Equity (Unaudited) for the three and nine months ended September 30, 2019 and 2018 7
     
  Notes to Condensed Consolidated Financial Statements (Unaudited) 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 23
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 30
     
Item 4. Controls and Procedures 30
     
Part II—OTHER INFORMATION  
     
Item 1. Legal Proceedings 31
     
Item 1A Risk Factors 31
     
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 31
     
Item 3 Defaults upon Senior Securities 31
     
Item 4 Mine Safety Disclosure 32
     
Item 5 Other Information 32
     
Item 6. Exhibits 32
     
Signatures 33

 

2
 

 

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

DOLLARS IN THOUSANDS

 

   September 30,
2019
   December 31,
2018
 
   (unaudited)     
ASSETS          
Current Assets:          
Cash and cash equivalents  $49,484   $80,417 
Restricted cash   60    59 
Voyage receivables, including unbilled of $4,532 and $10,160, net of reserve for doubtful accounts   7,172    16,096 
Income tax receivable   476    439 
Other receivables   2,781    3,027 
Prepaid expenses   1,130    9,886 
Inventories and other current assets   1,998    2,456 
Total Current Assets   63,101    112,380 
Vessels and other property, less accumulated depreciation   732,675    597,659 
Deferred drydock expenditures, net   26,888    26,099 
Total Vessels, Other Property and Deferred Drydock   759,563    623,758 
Restricted cash - non current   114    165 
Investments in and advances to affiliated companies   272    3,585 
Intangible assets, less accumulated amortization   32,967    36,417 
Operating lease right-of-use assets   257,630     
Other assets   23,312    51,425 
Total Assets  $1,136,959   $827,730 
LIABILITIES AND EQUITY          
Current Liabilities:          
Accounts payable, accrued expenses and other current liabilities  $31,933   $34,678 
Current portion of operating lease liabilities   89,136     
Current portion of finance lease liabilities   4,011     
Current installments of long-term debt   30,821    23,240 
Total Current Liabilities   155,901    57,918 
Reserve for uncertain tax positions   218    220 
Noncurrent operating lease liabilities   191,046     
Noncurrent finance lease liabilities   24,075     
Long-term debt   344,696    322,295 
Deferred income taxes, net   71,456    73,365 
Other liabilities   19,982    44,464 
Total Liabilities   807,374    498,262 
Equity:          
Common stock - Class A ($0.01 par value; 166,666,666 shares authorized; 85,668,793 and 84,834,790 shares issued and outstanding)   857    848 
Paid-in additional capital   589,985    587,826 
Accumulated deficit   (254,318)   (252,014)
    336,524    336,660 
Accumulated other comprehensive loss   (6,939)   (7,192)
Total Equity   329,585    329,468 
Total Liabilities and Equity  $1,136,959   $827,730 

 

See notes to condensed consolidated financial statements

 

3
 

 

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS

(UNAUDITED)

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2019   2018   2019   2018 
Shipping Revenues:                    
                     
Time and bareboat charter revenues  $63,491   $51,033   $188,619   $159,113 
Voyage charter revenues   17,435    29,503    68,503    117,820 
    80,926    80,536    257,122    276,933 
                     
Operating Expenses:                    
Voyage expenses   4,424    8,481    15,762    30,135 
Vessel expenses   33,993    33,865    98,960    101,025 
Charter hire expenses   22,802    23,079    67,645    68,394 
Depreciation and amortization   13,324    12,828    38,922    37,627 
General and administrative   5,288    6,410    16,917    19,768 
Bad debt expense           4,300     
Loss on disposal of vessels and other property, including impairments, net   36        87     
Total operating expenses   79,867    84,663    242,593    256,949 
Income/(loss) from vessel operations   1,059    (4,127)   14,529    19,984 
Equity in income/(loss) of affiliated companies   156        224    (10)
Operating income/(loss)   1,215    (4,127)   14,753    19,974 
Other income, net   375    518    992    271 
Income/(loss) before interest expense and income taxes   1,590    (3,609)   15,745    20,245 
Interest expense   (6,047)   (7,828)   (19,124)   (23,401)
Loss before income taxes   (4,457)   (11,437)   (3,379)   (3,156)
Income tax benefit   694    23,385    1,075    21,821 
Net (loss)/income  $(3,763)  $11,948   $(2,304)  $18,665 
                     
Weighted Average Number of Common Shares Outstanding:                    
Basic - Class A   89,375,668    88,535,376    89,210,136    88,337,614 
Diluted - Class A   89,375,668    89,229,282    89,210,136    89,017,866 
Per Share Amounts:                    
Basic and diluted net (loss)/income - Class A  $(0.04)  $0.13   $(0.03)  $0.21 

 

See notes to condensed consolidated financial statements

 

4
 

 

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS)/INCOME

DOLLARS IN THOUSANDS

(UNAUDITED)

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2019   2018   2019   2018 
Net (loss)/income  $(3,763)  $11,948   $(2,304)  $18,665 
Other comprehensive income, net of tax:                    
Net change in unrealized gains on cash flow hedges               112 
Defined benefit pension and other postretirement benefit plans:                    
Net change in unrecognized prior service costs   (17)   (31)   (50)   (102)
Net change in unrecognized actuarial losses   102    134    303    435 
Other comprehensive income   85    103    253    445 
Comprehensive (loss)/income  $(3,678)  $12,051   $(2,051)  $19,110 

 

See notes to condensed consolidated financial statements

 

5
 

 

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

DOLLARS IN THOUSANDS

(UNAUDITED)

 

   Nine Months Ended
September 30,
 
   2019   2018 
Cash Flows from Operating Activities:          
Net (loss)/income  $(2,304)  $18,665 
Items included in net income not affecting cash flows:          
Depreciation and amortization   38,922    37,627 
Bad debt expense   4,300     
Loss on disposal of vessels and other property, including impairments, net   87     
Amortization of debt discount and other deferred financing costs   1,477    3,117 
Compensation relating to restricted stock awards and stock option grants   1,212    2,312 
Deferred income tax benefit   (1,851)   (22,328)
Interest on finance lease liabilities   941     
Non-cash operating lease expense   62,058     
Loss on extinguishment of debt, net   72    981 
Other - net       1,575 
Distributed earnings of affiliated companies   3,314    3,747 
Payments for drydocking   (11,477)   (9,629)
Operating lease right-of-use assets   5,999     
Operating lease liabilities   (61,366)    
Changes in operating assets and liabilities, net   4,368    7,630 
Net cash provided by operating activities   45,752    43,697 
Cash Flows from Investing Activities:          
Proceeds from disposals of vessels and other property   3,404     
Expenditures for vessels and vessel improvements   (105,244)   (10,116)
Expenditures for other property   (1,399)   (124)
Net cash used in investing activities   (103,239)   (10,240)
Cash Flows from Financing Activities:          
Payments on debt   (16,667)   (28,166)
Extinguishment of debt   (3,271)   (47,000)
Tax withholding on share-based awards   (294)   (359)
Issuance of debt   50,000     
Deferred financing costs for issuance of debt   (1,417)    
Payments on principal portion of finance lease liabilities   (1,847)    
Net cash provided by/(used in) financing activities   26,504    (75,525)
Net decrease in cash, cash equivalents and restricted cash   (30,983)   (42,068)
Cash, cash equivalents and restricted cash at beginning of period   80,641    166,269 
Cash, cash equivalents and restricted cash at end of period  $49,658   $124,201 

 

See notes to condensed consolidated financial statements

 

6
 

 

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

DOLLARS IN THOUSANDS

(UNAUDITED)

 

   Common Stock (1)   Paid-in Additional Capital (2)   Accumulated
Deficit
   Accumulated Other Comprehensive Loss (3)   Total 
Balance at December 31, 2017  $783   $584,675   $(265,758)  $(6,462)  $313,238 
Adoption of accounting standard           (1,228)       (1,228)
Net income           3,662        3,662 
Other comprehensive income               215    215 
Forfeitures, cancellations, issuance and vesting of restricted stock awards, net   4    (363)           (359)
Compensation related to Class A options granted and restricted stock awards       1,731            1,731 
Balance at March 31, 2018   787    586,043    (263,324)   (6,247)   317,259 
Net income           3,055        3,055 
Other comprehensive income               127    127 
Forfeitures, cancellations, issuance and vesting of restricted stock awards, net   3    (3)            
Compensation related to Class A options granted and restricted stock awards        391            391 
Conversion of Class A warrants to common stock   17    (17)            
Balance at June 30, 2018   807    586,414    (260,269)   (6,120)   320,832 
Net income           11,948        11,948 
Other comprehensive income               103    103 
Compensation related to Class A options granted and restricted stock awards       502            502 
Conversion of Class A warrants to common stock   39    (39)            
Balance at September 30, 2018  $846   $586,877   $(248,321)  $(6,017)  $333,385 
                          
Balance at December 31, 2018  $848   $587,826   $(252,014)  $(7,192)  $329,468 
Net income           3,197        3,197 
Other comprehensive income               83    83 
Forfeitures, cancellations, issuance and vesting of restricted stock awards, net   5    (299)           (294)
Compensation related to Class A options granted and restricted stock awards       1,559            1,559 
Balance at March 31, 2019   853    589,086    (248,817)   (7,109)   334,013 
Net loss           (1,738)       (1,738)
Other comprehensive income               85    85 
Forfeitures, cancellations, issuance and vesting of restricted stock awards, net   2    (3)           (1)
Compensation related to Class A options granted and restricted stock awards       454            454 
Conversion of Class A warrants to common stock   2    (2)            
Balance at June 30, 2019   857    589,535    (250,555)   (7,024)   332,813 
Net loss           (3,763)       (3,763)
Other comprehensive income               85    85 
Compensation related to Class A options granted and restricted stock awards       450            450 
Balance at September 30, 2019  $857   $589,985   $(254,318)  $(6,939)  $329,585 

 

  (1) Par value $0.01 per share; 166,666,666 Class A shares authorized; 85,668,793 Class A shares outstanding as of September 30, 2019.
  (2) Includes 19,475,470 outstanding Class A warrants as of September 30, 2019.
  (3) Amounts are net of tax.

 

See notes to condensed consolidated financial statements

 

7
 

 

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS

 

Note 1 — Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements include the accounts of Overseas Shipholding Group, Inc., a Delaware corporation (the “Parent Company”), and its wholly-owned subsidiaries (collectively, the “Company” or “OSG”, “we”, “us” or “our”). The Company owns and operates a fleet of oceangoing vessels engaged primarily in the transportation of crude oil and refined petroleum products in the U.S. Flag trade through two wholly-owned subsidiaries.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. They do not include all of the information and notes required by generally accepted accounting principles in the United States. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement of the results have been included. Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

 

The condensed consolidated balance sheet as of December 31, 2018 has been derived from the audited financial statements at that date but does not include all of the information and notes required by generally accepted accounting principles in the United States for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (“Form 10-K”).

 

Note 2 — Recently Adopted and Issued Accounting Standards

 

Recently Adopted Accounting Standards

 

In February 2016, the FASB issued ASU No. 2016-02, Leases, which is included in the ASC in Topic 842. ASU 2016-02 is intended to improve transparency and comparability of lease accounting among organizations. For leases with terms greater than 12 months, the amendments require the lease rights and obligations arising from the leasing arrangements, including operating leases, to be recognized as assets and liabilities on the balance sheet. However, the effect on the statement of operations and the statement of cash flows is largely unchanged from prior GAAP. The amendments also expand the required disclosures surrounding leasing arrangements. Subsequently, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases, ASU No. 2018-11, Targeted Improvements, ASU No. 2018-20, Narrow-Scope Improvements for Lessors, and ASU 2019-01, Codification Improvements, to clarify and amend the guidance in ASU No. 2016-02.

 

The Company adopted the standard using the modified retrospective approach effective January 1, 2019. The Company’s lease portfolio is primarily comprised of vessels chartered-in and office space. As a result of adopting this standard, the Company recorded right-of-use assets of $264,546 and lease liabilities of $280,407 at January 1, 2019. The adoption of this standard did not impact the Company’s accumulated deficit, consolidated statements of operations or consolidated statements of cash flows.

 

The Company applied the package of practical expedients that allows companies not to reassess whether any expired or expiring contracts are or contain leases, lease classification for any expired or expiring leases and initial direct costs for any expired or expiring leases. Also, the Company made the accounting policy election to keep leases with a term of 12 months or less off the balance sheet. Finally, the Company implemented changes to processes and internal controls to meet the standard’s updated reporting and disclosure requirements.

 

See Note 10, “Leases,” for additional information.

 

8
 

 

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS

 

Recently Issued Accounting Standards

 

In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20), Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans, which amends ASC 715 to add, remove and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The new guidance is effective for fiscal years ending after December 15, 2020 and is required to be applied on a retrospective basis to all periods presented. Early adoption is permitted. The Company plans to adopt this standard on January 1, 2021. The adoption of this standard is not expected to have a material effect on the Company’s consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates certain disclosure requirements for fair value measurements for all entities, requires public entities to disclose certain new information and modifies some disclosure requirements. The new guidance is effective for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years. Early adoption is permitted in interim periods, including periods for which financial statements have not been issued or financial statements have not been made available for issuance. The Company plans to adopt this standard on January 1, 2020. The adoption of this standard is not expected to have a material effect on the Company’s consolidated financial statements.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which adds a new Topic 326 and removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to maturity debt securities. Under current U.S. GAAP, entities generally recognize credit losses when it is probable that the loss has been incurred. The revised guidance will remove all recognition thresholds and will require entities to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the entity expects to collect over the instrument’s contractual life. Subsequently, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, to clarify that receivables arising from operating leases are within the scope of lease accounting standards.

 

At its meeting in October 2019, the FASB affirmed its decision to use a two-bucket approach for determining the effective dates of major accounting standards, which included the credit losses standard. Under this approach, the buckets would be defined as follows:

 

Bucket 1— All public business entities (“PBEs”) that are SEC filers (as defined in U.S. GAAP), excluding smaller reporting companies (“SRCs”) (as defined by the SEC). The credit losses standard would be effective January 1, 2020.

 

Bucket 2— All other entities, including SRCs, other PBEs that are not SEC filers, private companies, not-for-profit organizations, and employee benefit plans. The credit losses standard would be effective January 1, 2023.

 

At the annual evaluation date on June 30, 2019, the Company met the SEC definition of a smaller reporting company. Accordingly, the Company plans on adopting the credit losses standard on January 1, 2023 subject to the issuance of the final ASU from the FASB which is expected in November 2019.

 

9
 

 

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS

 

Note 3 - Revenue Recognition

 

Shipping Revenues

 

Time Charter Revenues

 

The Company enters into time charter contracts under which a customer pays a fixed daily or monthly rate for a fixed period of time for use of a vessel. The Company recognizes revenues from time charters as operating leases ratably over the noncancellable contract term. Customers generally pay voyage expenses such as fuel, canal tolls and port charges. The Company also provides the charterer with services such as technical management expenses and crew costs. While there are lease and service (non-lease) components related to time charter contracts, the predominant component of the contract is the charterer’s lease of the vessel. The non-lease components of the contract have the same timing and pattern of transfer as the underlying lease component; therefore, the Company applied the practical expedient to combine lease and non-lease components and recognizes revenue related to this service ratably over the life of the contract term.

 

Voyage Charter Revenues

 

The Company enters into voyage charter contracts, under which the customer pays a transportation charge, voyage freight, for the movement of a specific cargo between two or more specified ports. The Company’s performance obligation under voyage charters, which consists of moving cargo from a load port to a discharge port, is satisfied over time. Accordingly, under ASC 606, Revenue from Contracts with Customers, the Company recognizes revenue from voyage charters ratably over the estimated length of each voyage, calculated on a load-to-discharge basis. The transaction price is in the form of a fixed fee at contract inception, which is the transportation charge. Voyage charter contracts also include variable consideration primarily in the form of demurrage, which is additional revenue the Company receives for delays experienced in loading or unloading cargo that are not deemed to be the responsibility of the Company. The Company does not include demurrage in the transaction price for voyage charters as it is considered constrained since it is highly susceptible to factors outside the Company’s influence. Examples of when demurrage is incurred include unforeseeable weather conditions and security regulations at ports. The uncertainty related to this variable consideration is resolved upon the completion of the voyage, the duration of which is generally less than 30 days.

 

U.S. Maritime Security Program

 

Two of the Company’s U.S. Flag Product Carriers participate in the U.S. Maritime Security Program (“MSP”), which ensures that privately-owned, military-useful U.S. Flag vessels are available to the U.S. Department of Defense in the event of war or national emergency. The Company considers the MSP contract with the U.S. government a service arrangement under ASC 606. Under this arrangement, the Company receives an annual operating-differential subsidy pursuant to the Merchant Marine Act of 1936 for each participating vessel, subject in each case to annual congressional appropriations. The subsidy is intended to reimburse owners for the additional costs of operating U.S. Flag vessels; therefore, the Company has presented this subsidy as an offset to vessel expenses.

 

Contracts of Affreightment

 

The Company enters into contracts of affreightment (“COA”) to provide transportation services between specified points for a stated quantity of cargo over a specific time period, but without designating voyage schedules. The Company has COA arrangements to provide for lightering services and other arrangements based on the number of voyages. These contracts are service contracts within the scope of ASC 606 for which the underlying performance obligation is satisfied as a series of distinct services.

 

The Company’s COA include minimum purchase requirements from customers that are expressed in either fixed monthly barrels, annual minimum barrel volume requirements or annual minimum number of voyages to complete. The Company is required to transport and the charterer is required to provide the Company with a minimum volume requirement. These contract minimums represent fixed consideration within the contract which is recognized as the distinct services of delivering barrels or voyages are performed in the series over time. The Company will adjust revenue recognized for any minimum volume unexercised right.

 

COA provide the charterer with the opportunity to purchase additional transportation services above the minimum. If this is not considered a material right, the Company recognizes revenue related to the additional services at the contractual rate as the product is transferred over time. If the additional transportation service is considered a material right, the Company applies the practical alternative to allocate the transaction price to the material right. As a result, the Company may recognize revenue related to COA at an amount which is different than the invoiced amount if the Company’s estimated volume to be transported under the contract exceeds the contractual minimum.

 

10
 

 

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS

 

COA also include variable consideration primarily related to demurrage. The Company does not include this variable consideration in the transaction price for these contracts as the consideration is constrained since the obligation to deliver this service is outside the control of the Company. The uncertainty related to this variable consideration is resolved with the customer over the course of the contract term as individual voyages discharge. Revenue generated by COA is included within voyage charter revenues on the condensed consolidated statements of operations. 

 

At September 30, 2019, the Company had deferred revenue of $613 related to certain of the Company’s COA, which is included in accounts payable, accrued expenses and other current liabilities on the condensed consolidated balance sheets.

 

Disaggregated Revenue

 

The Company has disaggregated revenue from contracts with customers into categories which depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. Consequently, the disaggregation below is based on contract type. Since the terms within these contract types are generally standard in nature, the Company does not believe that further disaggregation would result in increased insight into the economic factors impacting revenue and cash flows.

 

The following table shows the Company’s shipping revenues disaggregated by nature of the charter arrangement for the three and nine months ended September 30, 2019 and 2018:

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2019   2018   2019   2018 
Time and bareboat charter revenues  $63,491   $51,033   $188,619   $159,113 
Voyage charter revenues(1)   7,369    14,705    21,063    67,988 
Contracts of affreightment revenues   10,066    14,798    47,440    49,832 
Total shipping revenues  $80,926   $80,536   $257,122   $276,933 

 

(1) Voyage charter revenues include approximately $659 and $1,320 of revenue related to short-term time charter contracts for the three months ended September 30, 2019 and 2018, respectively, and $4,516 and $7,611 for the nine months ended September 30, 2019 and 2018, respectively.

 

Voyage Receivables

 

As of September 30, 2019 and December 31, 2018, contract balances from contracts with customers consisted of voyage receivables, including unbilled receivables, of $5,221 and $12,515, respectively, net of allowance for doubtful accounts. For voyage charters, voyage freight is due to the Company upon completion of discharge at the last discharge port. For lightering contracts, the Company invoices the customer monthly based on the actual barrels of cargo lightered. The Company routinely reviews its voyage receivables and makes provisions for probable doubtful accounts; however, those provisions are estimates and actual results could differ from those estimates and those differences may be material. Voyage receivables are removed from accounts receivable and the allowance for doubtful accounts when they are deemed uncollectible. The Company deems voyage receivables uncollectible when the Company has exhausted collection efforts.

 

11
 

 

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS

 

Costs to Fulfill a Contract

 

Under ASC 606, for voyage charters and contracts of affreightment, the Company capitalizes the direct costs, which are voyage expenses, of relocating the vessel to the load port to be amortized during transport of the cargo. At September 30, 2019, the costs related to voyages that were not yet completed were not material.

 

Additionally, these contracts include out-of-pocket expense (i.e. fuel, port charges, canal tolls) incurred by the Company in fulfilling its performance obligation, which are reimbursed by the charterer at cost. The reimbursement for these fulfillment costs have been included in the Company’s estimated transaction price for the contract and recognized as revenue when performance obligations are satisfied.

 

Transaction Price Allocated to the Remaining Performance Obligations

 

As of September 30, 2019, there was an aggregate amount of $48,773 of revenue under COA which the Company will be entitled to providing services in the future. The Company expects to recognize revenue of approximately $12,682 in 2019, $32,296 in 2020 and $3,795 in 2021 under these contracts. These estimated amounts relate to the fixed consideration of contractual minimums within the contracts based on the Company’s best estimate of future services.

 

Practical Expedients and Exemptions

 

The Company’s voyage charter contracts and some of the Company’s COA have an original expected duration of one year or less; therefore, the Company has elected to apply the practical expedient, which permits the Company to not disclose the portion of the transaction price allocated to the remaining performance obligations within these contracts.

 

The Company expenses broker commissions for voyage charters, which are costs of obtaining a contract, as they are incurred because the amortization period is less than one year or are otherwise amortized as the underlying performance obligation is satisfied. The Company records these costs within voyage expenses in the consolidated statements of operations.

 

The Company has not retrospectively restated contracts that were modified before the January 1, 2018 adoption date.

 

Note 4 — Earnings per Common Share

 

Basic earnings per common share is computed by dividing earnings, after the deduction of dividends and undistributed earnings allocated to participating securities, by the weighted average number of common shares outstanding during the period. As management deemed the exercise price for the Class A warrants of $0.01 per share to be nominal, warrant proceeds are ignored and the shares issuable upon Class A warrant exercise are included in the calculation of basic weighted average common shares outstanding for all periods.

 

The computation of diluted earnings per share assumes the issuance of common stock for all potentially dilutive stock options and restricted stock units. Participating securities are defined by ASC 260, Earnings Per Share, as unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents and are included in the computation of earnings per share pursuant to the two-class method.

 

Class A

 

As of September 30, 2019, there were 1,718,865 shares of Class A restricted stock units and 1,478,756 Class A stock options outstanding, which were considered to be potentially dilutive securities. As of September 30, 2018, there were 912,315 shares of Class A restricted stock units and 866,011 Class A stock options outstanding, which were considered to be potentially dilutive securities.

 

The components of the calculation of basic earnings per share and diluted earnings per share are as follows:

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2019   2018   2019   2018 
Net (loss)/income  $(3,763)  $11,948   $(2,304)  $18,665 
                     
Weighted average common shares outstanding:                    
Class A common stock - basic   89,375,668    88,535,376    89,210,136    88,337,614 
Class A common stock - diluted   89,375,668    89,229,282    89,210,136    89,017,866 

 

For the three and nine months ended September 30, 2018, there were 693,906 and 680,252 dilutive equity awards outstanding, respectively.

 

12
 

 

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS

 

Note 5 — Fair Value Measurements and Fair Value Disclosures

 

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

 

Cash and cash equivalents and restricted cash— The carrying amounts reported in the condensed consolidated balance sheet for interest-bearing deposits approximate their fair value.

 

Debt— The fair values of the Company’s publicly traded and non-public debt are estimated based on quoted market prices.

 

ASC 820, Fair Value Measurements and Disclosures, relating to fair value measurements defines fair value and established a framework for measuring fair value. The ASC 820 fair value hierarchy distinguishes between market participant assumptions developed based on market data obtained from sources independent of the reporting entity and the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit price. In addition, the fair value of assets and liabilities should include consideration of non-performance risk, which for the liabilities described below includes the Company’s own credit risk.

 

The levels of the fair value hierarchy established by ASC 820 are as follows:

 

  Level 1 - Quoted prices in active markets for identical assets or liabilities

 

  Level 2 - Quoted prices for similar assets and liabilities in active markets or inputs that are observable

 

  Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

 

Financial Instruments that are not Measured at Fair Value on a Recurring Basis

 

The estimated fair values of the Company’s financial instruments that are not measured at fair value on a recurring basis, categorized based upon the fair value hierarchy, are as follows:

 

   Carrying   Fair Value 
   Value   Level 1   Level 2 
September 30, 2019:               
Assets               
Cash (1)  $49,658   $49,658   $ 
Total  $49,658   $49,658   $ 
Liabilities               
Term loan agreement, due 2023  $298,579   $   $305,978 
Term loan agreement, due 2024   48,855        50,150 
Term loan agreement, due 2026   27,395        27,582 
7.5% Election 2 notes due 2021   298        302 
7.5% notes due 2024   390        391 
Total  $375,517   $   $384,403 

 

13
 

 

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS

 

   Carrying   Fair Value 
   Value   Level 1   Level 2 
December 31, 2018:               
Assets               
Cash (1)  $80,641   $80,641   $ 
Total  $80,641   $80,641   $ 
Liabilities               
Term loan agreement, due 2023  $317,472   $   $325,000 
Term loan agreement, due 2026   27,376        26,500 
7.5% Election 2 notes due 2021   297        229 
7.5% notes due 2024   390        296 
Total  $345,535   $   $352,025 

 

(1) Includes current and non-current restricted cash aggregating $174 and $224 at September 30, 2019 and December 31, 2018, respectively. Restricted cash as of September 30, 2019 and December 31, 2018 was related to the Company’s Unsecured Senior Notes.

 

Nonfinancial Instruments that are Measured at Fair Value on a Nonrecurring Basis

 

Vessel and Intangible Assets Impairments

 

During the third quarter of 2019, the Company considered whether events or changes in circumstances had occurred since December 31, 2018 that could indicate the carrying amounts of the vessels in the Company’s fleet and the carrying value of the Company’s intangible assets may not be recoverable as of September 30, 2019. The Company concluded that no such events or changes in circumstances had occurred.

 

Note 6 — Taxes

 

For the three months ended September 30, 2019 and 2018, the Company recorded income tax benefits of $694 and $23,385, respectively, which represented effective tax rates of 16% and 205%, respectively. For the nine months ended September 30, 2019 and 2018, the Company recorded income tax benefits of $1,075 and $21,821, respectively, which represented effective tax rates of 32% and 691%, respectively. The decrease in the effective tax rate for the three and nine months ended September 30, 2019 compared to the three and nine months ended September 30, 2018 was substantially due to the one-time settlement of the Internal Revenue Service (“IRS”) exam of the 2012 through 2015 audit years that occurred during the third quarter of 2018, which permitted us to recognize benefits that had been previously deferred. The effective tax rate for the nine months ended September 30, 2019 was more than the statutory rate due to the discrete tax benefit recorded in the first quarter and the tonnage tax exclusion. The effective tax rate for the nine months ended September 30, 2018 was more than the statutory rate as a result of stock compensation pursuant to ASU-2016-09, Improvements to Employee Share-Based Payment Accounting, offset in part by the non-taxability of income subject to the U.S. tonnage tax. The effective rate for the 2018 period was also impacted by the settlement of the IRS audit.

 

As of September 30, 2019 and December 31, 2018, the Company recorded a non-current reserve for uncertain tax positions of $218 and $220, respectively.

 

14
 

 

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS

 

Note 7 — Related Parties

 

Equity Method Investment

 

Investments in and advances to affiliated companies are comprised of the Company’s 37.5% interest in Alaska Tanker Company, LLC (“ATC”), which manages vessels carrying Alaskan crude for BP West Coast Products, LLC (“BP”). In the first quarter of 1999, OSG, BP, and Keystone Shipping Company formed ATC to manage the vessels carrying crude oil for BP. ATC provides marine transportation services in the environmentally sensitive Alaskan crude oil trade. Each member in ATC is entitled to receive its respective share of any incentive charter hire payable by BP to ATC. The Company has accounted for the investment in ATC as an equity–method investment because the Company does not individually retain the power to significantly impact the economic performance of ATC and the Company’s maximum exposure to losses in ATC is limited to its initial capital investment in ATC, which is not material.

 

Guarantees

 

International Seaways, Inc. (“INSW”) entered into guarantee arrangements in connection with the spin-off from OSG on November 30, 2016. On October 7, 2019, INSW sold its ownership interest in their joint venture with Qatar Gas Transport Company Ltd, releasing OSG from all obligations under the guarantee arrangements.

 

Note 8 — Capital Stock and Stock Compensation

 

Share and Warrant Repurchases

 

During the nine months ended September 30, 2019, in connection with the vesting of restricted stock units (“RSUs”), the Company withheld 159,685 shares of Class A common stock at an average price of $1.84 per share (based on the market prices on the dates of vesting) from certain members of management to cover withholding taxes.

 

Warrant Conversions

 

During the nine months ended September 30, 2019, the Company issued 213,146 shares of Class A common stock as a result of the exercise of 1,128,184 Class A warrants. During the nine months ended September 30, 2018, the Company issued 5,605,911 shares of Class A common stock as a result of the exercise of 29,581,938 Class A warrants.

 

Stock Compensation

 

The Company accounts for stock compensation expense in accordance with the fair value based method required by ASC 718, Compensation – Stock Compensation. This method requires share-based payment transactions to be measured based on the fair value of the equity instruments issued.

 

Director CompensationRestricted Stock Units

 

During the nine months ended September 30, 2019, the Company awarded 357,866 time-based RSUs to its non-employee directors. The grant date fair value of these awards was $1.78 per RSU. Each RSU represents a contingent right to receive one share of Class A common stock upon vesting. These RSUs vest in full on the first anniversary of the grant date, subject to each director continuing to provide services to the Company through such date.

 

Management CompensationRestricted Stock Units and Stock Options

 

During the nine months ended September 30, 2019, the Company granted 552,598 RSUs to its employees, including senior officers, respectively. The grant date fair value of these awards was $2.02 per RSU. Each RSU represents a contingent right to receive one share of Class A common stock upon vesting. Each award of RSUs will vest in equal installments on each of the first three anniversaries of the grant date.

 

15
 

 

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS

 

In addition, during the nine months ended September 30, 2019, the Company awarded 329,121 shares of the Company’s Class A common stock to one of its senior officers, respectively, which vested immediately. The average grant date fair value of these awards was $1.90 per share.

 

During the nine months ended September 30, 2019, the Company awarded 352,258 performance-based RSUs to its senior officers, respectively. Each performance-based RSU represents a contingent right to receive RSUs based upon continuous employment through the end of a three-year performance period (the “Performance Period”) and will vest as follows: (i) one-half of the target RSUs will vest and become nonforfeitable subject to OSG’s return on invested capital (“ROIC”) performance in the three-year ROIC performance period relative to a target rate (the “ROIC Target”) set forth in the award agreements (the formula for ROIC is net operating profit after taxes divided by the net of total debt plus shareholders equity less cash); and (ii) one–half of the target RSUs will be subject to OSG’s three–year total shareholder return (“TSR Target”) performance relative to that of a performance index over a three–year TSR performance period. The index consists of companies that comprise a combination of the oil and gas storage and transportation and marine GICS sub-industries indexes during the Performance Period. Vesting is subject in each case to the Human Resources and Compensation Committee’s certification of achievement of the performance measures and targets.

 

The ROIC Target RSU award and the TSR Target RSU award is subject to an increase up to a maximum of 176,129 target RSUs combined (528,387 RSUs in total) or decrease depending on performance against the applicable measure and targets. The ROIC performance goal is a performance condition which, as of September 30, 2019, management believed was probable of being achieved. Accordingly, for financial reporting purposes, compensation costs have been recognized for these awards. The grant date fair value of the TSR based performance awards, which have a market condition, was determined to be $2.02 per RSU.

 

During the nine months ended September 30, 2019, the Company awarded 612,745 stock options to one of its senior officers, which vested immediately. Each stock option represents an option to purchase one share of Class A common stock for an exercise price of $1.89 per share. The call option value of the options was $1.02 per option. Under the grant agreement, the stock options have a holding requirement until the earliest to occur of (i) a change in control; (ii) the separation from service date, in the event of a termination of the grantee’s employment by the Company without cause or by the grantee for good reason, and (iii) the third anniversary of the grant date. The stock options expire on the business day immediately preceding the tenth anniversary of the award date. If a stock option grantee’s employment is terminated for cause (as defined in the applicable Form of Grant Agreement), stock options (whether then vested or exercisable or not) will lapse and will not be exercisable. If a stock option grantee’s employment is terminated for reasons other than cause, the option recipient may exercise the vested portion of the stock option but only within such period of time ending on the earlier to occur of (i) the 90th day ending after the option holder’s employment terminated and (ii) the expiration of the options, provided that if the option holder’s employment terminates for death or disability the vested portion of the option may be exercised until the earlier of (i) the first anniversary of employment termination and (ii) the expiration date of the options.

 

Note 9 — Accumulated Other Comprehensive Loss

 

The components of accumulated other comprehensive loss, net of related taxes, in the condensed consolidated balance sheets follow:

 

As of  September 30,
2019
   December 31,
2018
 
Items not yet recognized as a component of net periodic benefit cost (pension and other postretirement benefit plans)  $(6,939)  $(7,192)
Accumulated other comprehensive loss  $(6,939)  $(7,192)

 

16
 

 

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS

 

The following tables present the changes in the balances of each component of accumulated other comprehensive loss, net of related taxes, during the three and nine months ended September 30, 2019 and 2018:

 

   Items not yet recognized as a component of net periodic benefit cost (pension and other postretirement plans) 
     
Balance as of June 30, 2019  $(7,024)
Current period change, excluding amounts reclassified from accumulated other comprehensive income   (23)
Amounts reclassified from accumulated other comprehensive income   108 
Total change in accumulated other comprehensive income   85 
Balance as of September 30, 2019  $(6,939)
      
Balance as of June 30, 2018  $(6,120)
Current period change, excluding amounts reclassified from accumulated other comprehensive income   18 
Amounts reclassified from accumulated other comprehensive income   85 
Total change in accumulated other comprehensive income   103 
Balance as of September 30, 2018  $(6,017)

 

 

   Unrealized losses on cash flow hedges   Items not yet recognized as a component of net periodic benefit cost (pension and other postretirement plans)   Total 
             
Balance as of December 31, 2018  $   $(7,192)  $(7,192)
Current period change, excluding amounts reclassified from accumulated other comprehensive income       (71)   (71)
Amounts reclassified from accumulated other comprehensive income       324    324 
Total change in accumulated other comprehensive income       253    253 
Balance as of September 30, 2019  $   $(6,939)  $(6,939)
                
Balance as of December 31, 2017  $(112)  $(6,350)  $(6,462)
Current period change, excluding amounts reclassified from accumulated other comprehensive income   (69)   79    10 
Amounts reclassified from accumulated other comprehensive income   181    254    435 
Total change in accumulated other comprehensive income   112    333    445 
Balance as of September 30, 2018  $   $(6,017)  $(6,017)

 

17
 

 

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS

 

The Company includes the service cost component for net periodic benefit cost/(income) in vessel expenses and general and administrative expenses and other components in other income/(expense) on the condensed consolidated statements of operations.

 

Note 10 — Leases

 

On January 1, 2019, the Company adopted ASC 842 applying the modified retrospective method. Results for reporting periods beginning after January 1, 2019 are presented under ASC 842, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period.

 

The Company’s lease portfolio is comprised of vessels chartered-in, office space and equipment under agreements with contractual periods ranging from less than 1 year to 16 years. Many of the Company’s leases contain one or more options to extend. The Company includes options that it is reasonably certain to exercise in its evaluation of the lease term after considering all relevant economic and financial factors. The impact of adopting this standard resulted in the recording of right-of-use assets of $264,546 and lease liabilities of $280,407 at January 1, 2019. The adoption of the standard did not impact the Company’s accumulated deficit, consolidated statements of operations or consolidated statements of cash flows. The Company calculates the initial lease liability as the present value of fixed payments, or in substance fixed payments, not yet paid and variable payments that are based on an index (e.g., CPI), measured at commencement. The Company’s leases are discounted using its incremental borrowing rate adjusted for risk based on the length of the lease term because the rate implicit in the lease is not readily determinable.

 

The Company applied the package of practical expedients that allows companies not to reassess whether any expired or expiring contracts are or contain leases, lease classification for any expired or expiring leases and initial direct costs for any expired or expiring leases. Also, the Company made the accounting policy election to keep leases with a term of 12 months or less off the balance sheet. Finally, the Company implemented changes to processes and internal controls to meet the standard’s updated reporting and disclosure requirements.

 

18
 

 

OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS

 

The Company’s lease right-of-use assets and lease liabilities at September 30, 2019 were as follows:

 

   September 30, 2019 
Operating leases     
Vessels chartered-in noncurrent operating lease assets  $254,973 
Office space noncurrent operating lease assets   2,657 
Total noncurrent operating lease assets  $257,630 
      
Vessels chartered-in operating lease liabilities     
Current portion of operating lease liabilities  $88,572 
Noncurrent operating lease liabilities   188,953 
    277,525 
Office space operating lease liabilities     
Current portion of operating lease liabilities   564 
Noncurrent operating lease liabilities   2,093 
    2,657 
Total operating lease liabilities  $280,182 
      
Finance lease     
Vessels and other property  $28,993 
Accumulated depreciation   (1,309)
Vessels and other property, less accumulated depreciation  $27,684 
      
Current portion of finance lease liabilities  $4,011 
Noncurrent finance lease liabilities   24,075 
Total finance lease liabilities  $28,086 

 

Charters-in

 

As of September 30, 2019, the Company had commitments to charter-in 11 vessels, which are all bareboat charters. During the second quarter of 2019, the Company commenced a bareboat charter for the Overseas Key West for a lease term of 10 years. Based on the length of the lease term and the remaining economic life of the vessel, it is accounted for as a finance lease. The remaining 10 chartered-in vessels are accounted for as operating leases. The right-of-use asset accounted for as a finance lease arrangement is reported in vessels and other property, less accumulated depreciation on our condensed consolidated balance sheets. The Company holds options for 10 of the vessels chartered-in that can be exercised for 1, 3 or 5 years with the 1-year option only usable once, while the 3- and 5-year options are available indefinitely. The lease payments for the charters-in are fixed throughout the option periods and the options are on a vessel-by-vessel basis that can be exercised individually. The Company exercised its option on one of its vessels to extend the term until June 2025. On December 10, 2018, the Company exercised its options to extend the terms of the other nine vessels. Terms for five of the vessels were extended for an additional three years, with terms ending in December 2022, and terms for four of the vessels were extended for an additional year, with terms ending December 2020.

 

Five of the Company’s chartered in vessels contain a deferred payment obligation (“DPO”) which relates to charter hire expense incurred by the Company in prior years and payable to the vessel owner in future periods. This DPO is due in quarterly installments with the final quarterly payment due upon lease termination.

 

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OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS

 

The future minimum commitments under these leases are as follows:

 

At September 30, 2019  Operating Leases   Finance Lease 
2019  $23,007   $1,049 
2020   90,483    4,172 
2021   73,214    4,161 
2022   89,704    4,161 
2023   26,048    4,161 
Thereafter   13,702    21,352 
Net minimum lease payments   316,158    39,056 
Less: present value discount   38,633    10,970 
Total lease liabilities  $277,525   $28,086 

 

The bareboat charters-in provide for variable lease payments in the form of profit share to the owners of the vessels calculated in accordance with the respective charter agreements or based on time charter sublease revenue. Because such amounts and the periods impacted are not reasonably estimable, they are not currently reflected in the table above. Due to reserve funding requirements and current rate forecasts, no profits are currently expected to be paid to the owners in respect of the charter term through December 31, 2019.

 

For the three and nine months ended September 30, 2019, lease expense for the 10 chartered-in vessels accounted for as operating leases was $22,802 and $67,645, respectively, which is included in charter hire expense on the condensed consolidated statements of operations and operating cash flows on the consolidated statements of cash flows. The Company recognized sublease income of $46,337 and $134,058 for the three and nine months ended September 30, 2019, respectively. For the nine months ended September 30, 2019, the Company had non-cash operating activities of $46,733 for obtaining operating right-of-use assets and liabilities.

 

For the three and nine months ended September 30, 2019, lease expense related to the Company’s finance lease was $1,309 related to amortization of the right-of-use asset and $941 related to interest on the lease liability. These are included in operating cash flows on the condensed consolidated statements of cash flows. For the nine months ended September 30, 2019, the Company had non-cash financing activities of $28,993 for obtaining finance right-of-use assets.

 

Office space

 

The Company has lease obligations for office space that generally require fixed annual rental payments and may also include escalation clauses and renewal options.

 

The future minimum commitments under lease obligations for office space, which are operating leases, as of September 30, 2019 are as follows:

 

At September 30, 2019  Amount 
2019  $167 
2020   630 
2021   631 
2022   649 
2023   474 
Thereafter   1,186 
Net minimum lease payments   3,737 
Less: present value discount   1,080 
Total lease liabilities  $2,657 

 

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OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS

 

For the three and nine months ended September 30, 2019, the rental expense for office space, which is included in general and administrative expenses on the condensed consolidated statements of operations, was $160 and $480, respectively. For the nine months ended September 30, 2019, cash paid for office space rental was $493, which is included in operating cash flows on the condensed consolidated statements of cash flows.

 

At September 30, 2019, the weighted average remaining lease term for the Company’s operating leases and finance lease was 3.72 years and 9.39 years, respectively, and the weighted average discount rate was 7.01% and 7.32%, respectively.

 

Charters-out

 

The Company enters into time charter contracts under which a customer pays a fixed daily or monthly rate for a fixed period of time for use of a vessel. The Company recognizes revenues from time charters as operating leases ratably over the noncancelable contract term. Under certain time charter contracts, the Company receives variable lease payments based on a defined profit share arrangement, which are recognized as revenue in the period in which the changes in facts and circumstances on which the variable lease payments are based occur. Customers generally pay voyage expenses such as fuel, canal tolls and port charges. The Company also provides the charterer with services such as technical management expenses and crew costs. Services are recognized ratably over the life of the contract term.

 

The Company is the lessor under its time charter contracts. For time charters, the Company applied the practical expedient to combine the lease and non-lease components for these contracts. Total time charter revenue for the three and nine months ended September 30, 2019 was equal to lease income from lease payments of $63,731 and $189,489, respectively, less straight-line adjustments of $240 and $870, respectively. The net book value of owned vessels on noncancelable time charters was equal to $206,824 at September 30, 2019.

 

The future minimum revenues, including rent escalations, which is equal to lease payments expected to be received over the noncancelable time charters term are as follows:

 

At September 30, 2019  Amount 
2019  $65,197 
2020   163,424 
2021   47,324 
2022   30,675 
2023   31,405 
Thereafter   46,059 
Net minimum lease receipts  $384,084 

 

Revenues from a time charter are not generally received when a vessel is off-hire, including time required for normal periodic maintenance of the vessel. In arriving at the minimum future charter revenues, an estimated time off-hire to perform periodic maintenance on each vessel has been deducted, although it cannot be assured that such estimate will be reflective of the actual off-hire in the future.

 

Note 11 — Vessels

 

On September 30, 2019, the Company took delivery of two 50,000 DWT class product and chemical tankers at Hyundai Mipo Dockyard Co., Ltd. The tankers, named the Overseas Gulf Coast and Overseas Sun Coast, will be operating in the international market under the Marshall Islands flag, with both vessels having entered into one-year time charters.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS

 

In September 2019, the Company sold one of its ATBs for $1,234, net of broker commissions. As a result of the sales, the Company recognized an immaterial gain, which is included in loss on disposal of vessels and other property, including impairments on the condensed consolidated statements of operations.

 

In May and June 2019, the Company sold two of its ATBs for $1,101 and $1,069, respectively, net of broker commissions. As a result of the sales, the Company recognized an immaterial loss, which is included in loss on disposal of vessels and other property, including impairments on the condensed consolidated statements of operations.

 

In July 2018 and January 2019, the Company signed binding contracts with Gunderson Marine LLC for the construction of two approximately 204,000 BBL, oil and chemical tank barges. The anticipated delivery of the barges to the Company is during the first and second half of 2020, respectively. The Company’s annual commitments under the contracts are $24,382 for the remainder of 2019 and $36,438 in 2020.

 

For the nine months ended September 30, 2019, the Company had approximately $5,600 of non-cash investing activities for the accrual of capital expenditures related to the Company’s newbuilds.

 

Note 12 — Debt

 

During September 2019, in connection with the Company’s sale of one of its ATBs, the Company made a mandatory prepayment of $1,132 on its term loan due in 2023. The aggregate loss realized on this transaction, which related to the write-off of unamortized deferred finance costs, was not material.

 

In August 2019, two of the Company’s subsidiaries entered into loans in an aggregate principal amount of $50,000 to finance the Overseas Gulf Coast and the Overseas Sun Coast. The loans are secured by first preferred ship mortgages on the vessels and a guaranty from the Company. Funding occurred on delivery of the vessels on September 30, 2019, with $45,157 used to fund the final payment for the vessels. The loans bear a fixed rate of interest of 5.54% and have a 5-year term maturing on September 30, 2024 with a 17-year amortization schedule. The annual principal payments required to be made for the loans are $624 for the remainder of 2019, $2,586 in 2020, $2,733 in 2021, $2,888 in 2022, $3,052 in 2023 and $38,117 thereafter.

 

During May 2019 and June 2019, in connection with the Company’s sale of two of its ATBs, the Company made mandatory prepayments of $1,086 and $1,054, respectively, on its term loan due in 2023. The aggregate losses realized on these transactions, which related to the write-off of unamortized deferred finance costs, were not material.

 

Note 13 — Commitments and Contingencies

 

At September 30, 2019, the Company had aggregate capital commitments of $60,820, net of progress payments already made aggregating to $40,852, for the construction of two barges scheduled for delivery in the second quarter of 2020 and in the fourth quarter of 2020. The contracts for these barges require progress payments during the construction periods with a final payment due on delivery. The Company has made all required progress payments to date and expects to make remaining payments, including those due on delivery, with financing that the Company will need to obtain, operating cash flow and cash on hand. The Company is currently in discussion with potential lenders to obtain such financing, but the Company has not yet obtained the necessary financing.

 

Legal Proceedings Arising in the Ordinary Course of Business

 

The Company is a party, as plaintiff or defendant, to various suits in the ordinary course of business for monetary relief arising principally from personal injuries (including without limitation exposure to asbestos and other toxic materials), wrongful death, collision or other casualty and to claims arising under charter parties. A substantial majority of such personal injury, wrongful death, collision or other casualty claims against the Company are covered by insurance (subject to deductibles not material in amount). Each of the claims involves an amount which, in the opinion of management, are not expected to be material to the Company’s financial position, results of operations and cash flows.

 

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OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q, including this MD&A section, contains “forward-looking statements” within the meaning of the federal securities laws. These forward-looking statements include, among others, statements about our beliefs, plans, objectives, goals, expectations, estimates and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors, many of which are beyond our control. The words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan,” “target,” “goal,” and similar expressions are intended to identify forward-looking statements.

 

All forward-looking statements, by their nature, are subject to risks and uncertainties. Our actual future results may differ materially from those set forth in our forward-looking statements. Please see the section titled “Forward-Looking Statements” and Item 1A. Risk Factors of our 2018 Report on Form 10-K, as updated in our subsequent quarterly reports filed on Form 10-Q and in our other filings made from time to time with the SEC after the date of this report.

 

Other factors besides those listed in our Quarterly Report or in our Annual Report also could adversely affect our results, and you should not consider any such list of factors to be a complete set of all potential risks or uncertainties. Such factors include, but are not limited to:

 

  the highly cyclical nature of OSG’s industry;
  the market value of vessels fluctuates significantly;
  an increase in the supply of Jones Act vessels without a commensurate increase in demand;
  changing economic, political and governmental conditions in the United States or abroad and general conditions in the oil and natural gas industry;
  changes in fuel prices;
  the adequacy of OSG’s insurance to cover its losses, including in connection with maritime accidents or spill events;
  constraints on capital availability;
  public health threats;
  acts of piracy on ocean-going vessels or terrorist attacks and international hostilities and instability;
  the Company’s compliance with 46 U.S.C. sections 50501 and 55101 (commonly known as the “Jones Act”) and the heightened exposure to the Jones Act market fluctuations, including stockholder citizenship requirements imposed on us by the Jones Act;
  the effect of the Company’s indebtedness on its ability to finance operations, pursue desirable business operations and successfully run its business in the future;
  the Company’s ability to generate sufficient cash to service its indebtedness and to comply with debt covenants;
  changes in demand in specialized markets in which the Company currently trades;
  competition within the Company’s industry and OSG’s ability to compete effectively for charters;
  the Company’s ability to renew its time charters when they expire or to enter into new time charters, to replace its operating leases on favorable terms or the loss of a large customer;
  the Company’s ability to realize benefits from its acquisitions or other strategic transactions;
  the loss of, or reduction in business by, the Company’s largest customers;
  refusal of certain customers to use vessels of a certain age;
  the Company’s significant operating leases could be replaced on less favorable terms or may not be replaced;
  changes in credit risk with respect to the Company’s counterparties on contracts or the failure of contract counterparties to meet their obligations;
  increasing operating costs, unexpected drydock costs or increasing capital expenses as the Company’s vessels age, including increases due to limited shipbuilder warranties or the consolidation of suppliers;
  the Company’s compliance with complex laws, regulations and in particular, environmental laws and regulations, including those relating to the emission of greenhouse gases and ballast water treatment;
  the inability to clear oil majors’ risk assessment processes;

 

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OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

 

  the potential for technological innovation to reduce the value of the Company’s vessels and charter income derived therefrom;
  the impact of an interruption in, failure or breach of the Company’s information technology and communication systems upon the Company’s ability to operate or a cybersecurity breach;
  work stoppages or other labor disruptions by the unionized employees of OSG or other companies in related industries or the impact of any potential liabilities resulting from withdrawal from participation in multiemployer plans;
  the Company’s ability to attract, retain and motivate key employees;
  ineffective internal controls;
  the impact of potential changes in U.S. tax laws;
  limitations on U.S. coastwise trade, the waiver, modification or repeal of the Jones Act limitations or changes in international trade agreements;
  government requisition of the Company’s vessels during a period of war or emergency;
  the impact of litigation, government inquiries and investigations;
  the arrest of OSG’s vessels by maritime claimants;
  the Company’s ability to use its net operating loss carryforwards;
  market price of the Company’s securities fluctuates significantly;
  the Company’s ability to sell warrants may be limited and the exercise of outstanding warrants may result in substantial dilution;
  the Company’s common stock is subject to restrictions on foreign ownership;
  OSG is a holding company and depends on the ability of its subsidiaries to distribute funds to it in order to satisfy its financial obligations or pay dividends;
  some provisions of Delaware law and the Company’s governing documents could influence its ability to effect a change of control; and
  securities analysts may not initiate coverage or continue to cover the Company’s securities.

 

The Company assumes no obligation to update or revise any forward looking statements. Forward looking statements in this Quarterly Report on Form 10-Q and written and oral forward looking statements attributable to the Company or its representatives after the date of this Quarterly Report on Form 10-Q are qualified in their entirety by the cautionary statement contained in this paragraph and in other reports hereafter filed by the Company with the SEC. Capitalized terms used in this Quarterly Report on Form 10-Q have the meanings given in the Company’s 2018 Annual Report on Form 10-K.

 

Business Overview

 

OSG is a publicly traded tanker company providing energy transportation services for crude oil and petroleum products in the U.S. Flag markets. OSG is a major operator of tankers and ATBs in the Jones Act industry. OSG’s 21-vessel U.S. Flag fleet consists of two conventional ATBs, two lightering ATBs, three shuttle tankers, 10 conventional MR tankers, two non-Jones Act MR tankers that participate in the U.S. Maritime Security Program (“MSP”), all of which are U.S. flagged, as well as two Marshall Island flagged non-Jones Act MR tankers trading in international markets. OSG is committed to setting high standards of excellence for its quality, safety and environmental programs. OSG is recognized as one of the world’s most customer-focused marine transportation companies and is headquartered in Tampa, FL. Our revenues are derived predominantly from time charter agreements for specific periods of time at fixed daily amounts. We also charter-out vessels for specific voyages where we typically earn freight revenue at spot market rates.

 

The following is a discussion and analysis of our financial condition and results of operations for the three and nine months ended September 30, 2019 and 2018. You should consider the foregoing when reviewing the condensed consolidated financial statements, including the notes thereto, and this discussion and analysis. This Quarterly Report on Form 10-Q includes industry data and forecasts that we have prepared based in part on information obtained from industry publications and surveys. Third-party industry publications, surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable. In addition, certain statements regarding our market position in this report are based on information derived from internal market studies and research reports. Unless we state otherwise, statements about the Company’s relative competitive position in this report are based on management’s beliefs, internal studies and management’s knowledge of industry trends.

 

All dollar amounts are in thousands, except daily dollar amounts and per share amounts.

 

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Operations and Oil Tanker Markets

 

Our revenues are highly sensitive to patterns of supply and demand for vessels of the size and design configurations owned and operated by us and the trades in which those vessels operate. Rates for the transportation of crude oil and refined petroleum products are determined by market forces such as the supply and demand for oil, the distance that cargoes must be transported and the number of vessels expected to be available at the time such cargoes need to be transported. In the Jones Act trades within which the substantial majority of our vessels operate, demand factors for transportation are affected almost exclusively by supply and distribution decisions of oil producers, refiners and distributors based in the United States. Further, the demand for U.S. domestic oil shipments is significantly affected by the state of the U.S. and global economy, the level of imports into the U.S. from OPEC and other foreign producers, oil production in the United States, and the relative price differentials of U.S. produced crude oil and refined petroleum products as compared with comparable products sourced from or destined for foreign markets, including the cost of transportation on international flag vessels to or from those markets. The number of vessels is affected by newbuilding deliveries and by the removal of existing vessels from service, principally through storage, deletions, or conversions. Our revenues are also affected by the mix of charters between spot (voyage charter which includes short-term time charter) and long-term (time or bareboat charter).

 

We consider attaining the stability of cash flow offered by time charters to be a fundamental characteristic of the objectives of our chartering approach. As such, we have generally sought to pursue an overall chartering strategy that covers the majority of available vessel operating days with medium-term charters or contracts of affreightment. Medium-term charters may not always be remunerative, nor prove achievable under certain market conditions. Therefore, during periods of uncertainty in our markets, more of our vessels could be exposed to the spot market, which is more volatile and less predictable. Because shipping revenues and voyage expenses are significantly affected by the mix between voyage charters and time charters, we manage our vessels based on time charter equivalent (“TCE”) revenues and TCE rates, which are non-GAAP measures. TCE revenues equal GAAP shipping revenues, less voyage expenses. TCE rates are determined by dividing TCE revenues by revenue days. These measures are reported because management makes economic decisions based on anticipated TCE rates and evaluates financial performance based on TCE rates achieved.

 

TCE rates for Jones Act Product Carriers and large ATBs available for service in the spot market increased during the third quarter of 2019 compared to third quarter of 2018 for each class of vessel. The increase can be attributed to higher demand for coastwise crude oil transportation driven by the discount of domestic to international crude prices. In addition, the new construction phase of vessels with deliveries from 2015 to 2018 has ended and the supply of vessels has tightened through scrapping, lay ups and sales out of Jones Act service.

 

As of September 30, 2019, the industry’s entire Jones Act fleet of Product Carriers and large ATBs (defined as vessels having carrying capacities of between 140,000 barrels and 350,000 barrels, which excludes numerous tank barges below 140,000 barrel capacity and 11 much larger tankers dedicated exclusively to the Alaskan crude oil trade) consisted of 88 vessels, compared with 93 vessels as of September 30, 2018. There were no new deliveries and one large ATB scrapped during the third quarter of 2019.

 

The industry’s firm Jones Act orderbook as of September 30, 2019 consisted of two large ATBs with deliveries scheduled in the first half and second half of 2020, both of which were our orders. We ordered the new build ATBs in July 2018 and January 2019. The contract is with Gunderson Marine LLC for the construction of these two, approximately 204,000 BBL, oil and chemical tank barges, which will participate in the Jones Act trade.

 

Delaware Bay lightering volumes averaged 92,000 b/d in the third quarter of 2019 compared with 158,000 b/d in the third quarter of 2018. In June 2019, one of our lightering customers, Philadelphia Energy Solutions (“PES”), suffered an explosion and fire at their refinery in the Delaware Bay. The refinery has been shut down since the fire. In July 2019, PES filed for protection under Chapter 11 of U.S. Bankruptcy Code. Due to the expected reduction in lightering volumes, we have redeployed one of our two lightering ATBs to the U.S. Gulf of Mexico for alternative employment.

 

Critical Accounting Policies

 

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require the Company to make estimates in the application of its accounting policies based on the best assumptions, judgments and opinions of management. For a description of all of the Company’s material accounting policies, see Note 3, “Summary of Significant Accounting Policies,” to the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for 2018.

 

The Company adopted ASU No. 2016-02, Leases, effective January 1, 2019. Under the new standard, the Company recognized right-of-use assets of $264,546 and lease liabilities of $280,407 at January 1, 2019. See Note 10, “Leases,” for additional accounting policy and transition disclosures.

 

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Results of Vessel Operations

 

During the three months ended September 30, 2019, shipping revenues increased by $390, or 0.5%, compared to the same period in 2018. The increase primarily resulted from (a) an increase in average daily rates earned by the Company’s fleet, (b) decreased spot market exposure, and (c) a decrease in drydock, which is an out of service period used to perform required major maintenance to continue trading and maximize a vessel’s useful life, and repair days. The increase was offset by two fewer vessels in operation during the third quarter of 2019 compared to the third quarter of 2018. During the nine months ended September 30, 2019, shipping revenues decreased $19,811, or 7.2%, compared to the same period in 2018. The decrease primarily resulted from fewer Government of Israel voyages and two fewer vessels in operation.

 

Reconciliation of TCE revenues, a non-GAAP measure, to shipping revenues as reported in the consolidated statements of operations follows:

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2019   2018   2019   2018 
Time charter equivalent revenues  $76,502   $72,055   $241,360   $246,798 
Add: Voyage expenses   4,424    8,481    15,762    30,135 
Shipping revenues  $80,926   $80,536   $257,122   $276,933 

 

The following tables provide a breakdown of TCE rates achieved for the three and nine months ended September 30, 2019 and 2018 between spot and fixed earnings and the related revenue days.

 

   2019   2018 
Three Months Ended September 30,  Spot Earnings   Fixed Earnings   Spot Earnings   Fixed Earnings 
Jones Act Handysize Product Carriers:                    
Average rate  $2,825   $57,494   $17,133   $56,999 
Revenue days   184    1,009    276    797 
Non-Jones Act Handysize Product Carriers:                    
Average rate  $32,809   $12,810   $16,541   $ 
Revenue days   92    91    184     
ATBs:                    
Average rate  $938   $21,507   $15,233   $22,171 
Revenue days   14    166    235    224 
Lightering:                    
Average rate  $56,923   $   $65,023   $ 
Revenue days   179        158     

 

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OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

 

   2019   2018 
Nine Months Ended September 30,  Spot Earnings   Fixed Earnings   Spot Earnings   Fixed Earnings 
Jones Act Handysize Product Carriers:                    
Average rate  $20,635   $57,192   $30,931   $60,759 
Revenue days   431    2,950    894    2,315 
Non-Jones Act Handysize Product Carriers:                    
Average rate  $25,213   $12,319   $28,506   $ 
Revenue days   303    242    526     
ATBs:                    
Average rate  $18,573   $21,565   $16,620   $22,438 
Revenue days   188    685    764    740 
Lightering:                    
Average rate  $65,984   $   $66,648   $ 
Revenue days   529        513     

 

During the third quarter of 2019, TCE revenues increased by $4,447, or 6.2%, to $76,502 from $72,055 in the third quarter of 2018. The increase primarily resulted from (a) an increase in average daily rates earned by the Company’s fleet, (b) decreased spot market exposure, (c) 61 day decrease in scheduled drydocking, and (d) 78 day decrease in unplanned repair days, including one vessel that was hit by a third-party ship in 2018. The increase was offset by two fewer vessels in operation during the third quarter of 2019 compared to the third quarter of 2018.

 

Vessel expenses remained stable at $33,993 in the third quarter of 2019 compared to $33,865 in the third quarter of 2018. Depreciation and amortization increased by $496, or 3.9%, to $13,324 in the third quarter of 2019 compared to $12,828 in the third quarter of 2018. The increase was due to an increase in amortization of drydock costs.

 

During the nine months ended September 30, 2019, TCE revenues decreased by $5,438, or 2.2%, to $241,360 from $246,798 during the nine months ended September 30, 2018. The decrease primarily resulted from two less Government of Israel voyages and two fewer vessels in operation during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018.

 

Vessel expenses decreased 2.0%, or $2,065, to $98,960 for the nine months ended September 30, 2019 from $101,025 for the same period in 2018 primarily due to cost reductions during 2019, as well as, two fewer vessels in operation during 2019. Depreciation and amortization increased $1,295, or 3.4%, to $38,922 for the nine months ended September 30, 2019 compared to $37,627 during the nine months ended September 30, 2018. The increase was due to an increase in amortization of drydock costs.

 

In June 2019, one of our lightering customers, PES, suffered an explosion and fire at their refinery in the Delaware Bay. The PES refinery complex, which consists of two refineries, has been shut down since the fire. Due to the expected reduction in lightering volumes, we redeployed one of our two lightering ATBs to the U.S. Gulf of Mexico for alternative employment. In July 2019, PES filed a Chapter 11 bankruptcy petition. At September 30, 2019, we had outstanding receivables from PES of approximately $4,300. The ultimate recovery of these receivables is currently unknown. We established a loss provision equal to $4,300. We are working diligently to maximize our recovery.

 

Our two U.S. Flag Product Carriers participate in the MSP, which ensures that militarily useful U.S. Flag vessels are available to the U.S. Department of Defense in the event of war or national emergency. We receive an annual subsidy, subject in each case to annual congressional appropriations, which is intended to offset the increased cost incurred by such vessels from operating under the U.S. Flag. For fiscal year 2019, we expect to receive $5,000 for each vessel. This subsidy is expected to continue through 2020, and increase to $5,200 beginning in 2021, subject to congressional appropriation. During fiscal year 2018, we received a $5,000 annual subsidy for one of our participating MSP vessels and a $4,600 annual subsidy for the other participating MSP vessel. We do not receive a subsidy for any days for which either of the two vessels operate under a time charter to a U.S. government agency.

 

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OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

 

General and Administrative Expenses

 

During the third quarter of 2019, general and administrative expenses decreased by $1,122 to $5,288 from $6,410 in the third quarter of 2018. This decrease was primarily driven by reduced compensation and benefit costs, as well as reduced legal, accounting and consulting fees.

 

During the nine months ended September 30, 2019, general and administrative expenses decreased by $2,851 to $16,917 from $19,768 for the nine months ended September 30, 2018. This decrease was primarily driven by reduced compensation and benefit costs, as well as reduced legal, accounting and consulting fees.

 

Interest Expense

 

Interest expense was $6,047 and $19,124 for the three and nine months ended September 30, 2019, respectively, compared with $7,828 and $23,401 for the three and nine months ended September 30, 2018, respectively. The decrease in interest expense was primarily associated with the impact of the refinancing of our term loan at the end of 2018 and interest capitalized during 2019 due to vessels under construction.

 

Income Taxes

 

For the three months ended September 30, 2019 and 2018, we recorded income tax benefits of $694 and $23,385, respectively, which represented effective tax rates of 16% and 205%, respectively. For the nine months ended September 30, 2019 and 2018, we recorded income tax benefits of $1,075 and $21,821, respectively, which represented effective tax rates of 32% and 691%, respectively. The decrease in the effective tax rate for the three and nine months ended September 30, 2019 compared to the three and nine months ended September 30, 2018 was substantially due to the one-time settlement of the Internal Revenue Service (“IRS”) exam of the 2012 through 2015 audit years that occurred during the third quarter of 2018, which permitted us to recognize benefits that had been previously deferred. The effective tax rate for the nine months ended September 30, 2019 was more than the statutory rate due to the discrete tax benefit recorded in the first quarter and the tonnage tax exclusion. The effective tax rate for the nine months ended September 30, 2018 was more than the statutory rate as a result of stock compensation pursuant to ASU-2016-09, Improvements to Employee Share-Based Payment Accounting, offset in part by the non-taxability of income subject to the U.S. tonnage tax. The effective rate for the 2018 period was also impacted by the settlement of the IRS audit.

 

Liquidity and Sources of Capital

 

Our business is capital intensive. Our ability to successfully implement our strategy is dependent on the continued availability of capital on attractive terms. In addition, our ability to successfully operate our business to meet near-term and long-term debt repayment obligations is dependent on maintaining sufficient liquidity.

 

Liquidity

 

Working capital at September 30, 2019 was approximately $(93,000) compared with approximately $54,000 at December 31, 2018. This decrease was due to our recording of the current portion of operating and finance lease liabilities due to the adoption of ASU No. 2016-02, Leases, and progress payments we made for the construction of two barges. The decrease was offset by an increase to working capital as a result of timing of accounts payable payments made at September 30, 2019 compared to December 31, 2018. Excluding the current portion of operating and finance lease liabilities, working capital was approximately $346.

 

As of September 30, 2019, we had total liquidity on a consolidated basis comprised of $49,658 of cash (including $174 of restricted cash). We manage our cash in accordance with our intercompany cash management system subject to the requirements of our debt facilities. Our cash and cash equivalents, as well as our restricted cash balances, generally exceed Federal Deposit Insurance Corporation insurance limits. We place our cash, cash equivalents and restricted cash in what we believe to be credit-worthy financial institutions. In addition, certain of our money market accounts invest in U.S. Treasury securities or other obligations issued or guaranteed by the U.S. government or its agencies. Restricted cash as of September 30, 2019 was related to requirements under the Unsecured Senior Notes.

 

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OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

 

As of September 30, 2019, we had voyage receivables of $7,172 compared to $16,096 as of December 31, 2018. The decrease in voyage receivables primarily relates to timing of collections from our customers and fewer vessels in operations in 2019.

 

As of September 30, 2019, we had total debt outstanding (net of original issue discount and deferred financing costs) of $375,517 and a total debt to total capitalization of 53.3%, compared to $345,535 and 51.2%, respectively, at December 31, 2018.

 

At September 30, 2019, the Company had aggregate capital commitments of $60,820, net of progress payments already made aggregating to $40,852, for the construction of two barges scheduled for delivery in the second quarter of 2020 and in the fourth quarter of 2020. The contracts for these barges require progress payments during the construction periods with a final payment due on delivery. The Company has made all required progress payments to date, and the Company expects to make remaining payments, including those due on delivery, with financing that the Company will need to obtain, operating cash flow and cash on hand. The Company is currently in discussion with potential lenders to obtain such financing.

 

Sources, Uses and Management of Capital

 

We generate significant cash flows through our complementary mix of time charters, voyage charters and contracts of affreightment. Net cash provided by operating activities during the nine months ended September 30, 2019 was $45,752. In addition to operating cash flows, our other current potential sources of funds are proceeds from additional issuances of equity securities, additional borrowings and proceeds from the opportunistic sales of our vessels. In the past, we have also obtained funds from the issuance of long-term debt securities.

 

We use capital to fund working capital requirements, maintain the quality of our vessels, comply with U.S. and international shipping standards and environmental laws and regulations, repay or repurchase our outstanding loan facilities and to repurchase our common stock from time to time. We may also use cash generated by operations to finance capital expenditures to modernize and grow our fleet.

 

We are presently assessing the impact of the expected discontinuation of LIBOR in 2021.

 

In August 2019, two of the Company’s subsidiaries entered into loans in an aggregate principal amount of $50,000 to finance the Overseas Gulf Coast and the Overseas Sun Coast. The loans are secured by first preferred ship mortgages on the vessels and a guaranty from the Company. Funding occurred on delivery of the vessels on September 30, 2019, with $45,157 used to fund the final payment for the vessels. The loans bear a fixed rate of interest of 5.54% and have a 5-year term maturing on September 30, 2024 with a 17-year amortization schedule. The annual principal payments required to be made for the loans are $624 for the remainder of 2019, $2,586 in 2020, $2,733 in 2021, $2,888 in 2022, $3,052 in 2023 and $38,117 thereafter.

 

Commitments

 

In July 2018 and January 2019, the Company signed binding contracts with Gunderson Marine LLC for the construction of two approximately 204,000 BBL, oil and chemical tank barges. The anticipated delivery of the barges to the Company is during the first and second half of 2020, respectively. The Company’s annual commitments under the contracts are $24,382 for the remainder of 2019 and $36,438 in 2020.

 

Off-Balance Sheet Arrangements

 

INSW entered into guarantee arrangements in connection with the spin-off from OSG on November 30, 2016. On October 7, 2019, INSW sold its ownership interest in their joint venture with Qatar Gas Transport Company Ltd, releasing OSG from all obligations under the guarantee arrangements.

 

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OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

 

Item 3: Quantitative and Qualitative Disclosures about Market Risk

 

Since December 31, 2018, there were no material changes to our disclosures about market risk. For an in-depth discussion of our market risks, see “Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2018.

 

Item 4: Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s current disclosure controls and procedures were effective as of September 30, 2019 to ensure that information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act is (i) recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to the Company’s management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

 

There was no change in the Company’s internal control over financial reporting during the nine months ended September 30, 2019 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We are party to lawsuits arising out of the normal course of business. In management’s opinion, there is no known pending litigation, the outcome of which would, individually or in the aggregate, have a material effect on our consolidated results of operations, financial position or cash flows.

 

Item 1A. Risk Factors

 

In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors discussed in Part I, Item 1A. “Risk Factors” in our 2018 Form 10-K, and as may be updated in our subsequent quarterly reports. The risks described in our 2018 Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results. There have been no material changes in our risk factors from those disclosed in our 2018 Form 10-K.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults upon senior securities

 

None.

 

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OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other information

 

None.

 

Item 6. Exhibits

 

31.1   Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a), as amended.
     
31.2   Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a), as amended.
     
32   Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
     
10.1   Form of Overseas Shipholding Group, Inc. Non-Employee Director Incentive Compensation Plan Time-Based Restricted Stock Unit Award Agreement, Form “Non-Employee Director”.
     
10.2   Loan and Security Agreement dated as of August 7, 2019, among the Registrant, certain subsidiary of the Registrant and Banc of America Leasing & Capital, LLC as lender.
     
10.3   Loan and Security Agreement dated as of August 7, 2019, among the Registrant, certain subsidiary of the Registrant and Pacific Western Bank as lender.
     
10.4   First Amendment to Loan and Security Agreement dated as of September 30, 2019, among the Registrant, certain subsidiary of the Registrant and Banc of America Leasing & Capital, LLC as lender.
     
10.5   First Amendment to Loan and Security Agreement dated as of September 30, 2019, among the Registrant, certain subsidiary of the Registrant and Pacific Western Bank as lender.
     
EX-101.INS   XBRL Instance Document
     
EX-101.SCH   XBRL Taxonomy Extension Schema
     
EX-101.CAL   XBRL Taxonomy Extension Calculation Linkbase
     
EX-101.DEF   XBRL Taxonomy Extension Definition Linkbase
     
EX-101.LAB   XBRL Taxonomy Extension Label Linkbase
     
EX-101.PRE   XBRL Taxonomy Extension Presentation Linkbase

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  OVERSEAS SHIPHOLDING GROUP, INC.
                          (Registrant)
   
Date: November 8, 2019 /s/ Samuel H. Norton
  Samuel H. Norton
  Chief Executive Officer
   
Date: November 8, 2019 /s/ Richard Trueblood
  Richard Trueblood
  Chief Financial Officer
  (Mr. Trueblood is the Principal Financial Officer and has been duly authorized to sign on behalf of the Registrant)

 

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