DIAD S The following discussion and analysis is designed to provide a better understanding of various factors related to the results of operations and financial condition ofDiamond S Shipping Inc. ("we," "us," "our" or the "Company"). This discussion should be read in conjunction with our audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K (the "2019 Annual Report") for the year endedDecember 31, 2019 , filed with theSEC onMarch 27, 2020 , and our unaudited condensed consolidated financial statements and notes thereto contained in this report. This discussion contains a number of forward-looking statements, all of which are based on our current expectations and all of which could be affected by uncertainties and risks. Our actual results may differ materially from the results contemplated in these forward-looking statements as a result of many factors including, but not limited to, those described under "Cautionary Note on Forward-Looking Statements". Business Overview
Diamond S Shipping Inc. ("DSSI") was formed onNovember 14, 2018 under the laws of the Republic of theMarshall Islands for the purpose of receiving, via contribution from CPLP, CPLP's crude and product tanker business and combining that business with the business and operations ofDSS LP pursuant to the Transaction Agreement. For a description of the Transaction Agreement and related Merger, please see Note 1 - Business and Basis of Presentation and Note 3 - Merger Transaction in the unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. We provide seaborne transportation of crude oil, refined petroleum, and other products in the international shipping industry. As ofMarch 31, 2020 , through our wholly owned subsidiaries, we owned and operated 64 tanker vessels: 13 Suezmax crude carriers, one Aframax crude carrier and 50 MR product carriers. As of the same date, we also controlled and operated two Suezmax vessels through a joint venture.
Factors to Consider When Evaluating the Company's Results
The COVID-19 Pandemic
OnMarch 11, 2020 , theWorld Health Organization declared the recent novel coronavirus ("COVID-19") outbreak a pandemic. In response to the outbreak, many countries, ports and organizations, including those where the Company conducts a large part of its operations, have implemented measures to combat the outbreak, such as quarantines and travel restrictions. Such measures have, and will likely continue to, negatively affect the global economy. The extent to which COVID-19 will impact the Company's results of operations and financial condition, including possible impairments, will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the virus and the actions to contain or treat its impact, among others. Accordingly, an estimate of the impact of COVID-19 on the Company and its operations cannot be made at this time. However, if the pandemic worsens, additional restrictions are imposed or current restrictions are imposed for a longer period of time in response to the outbreak, it may have a material adverse effect on the Company's future results of operation and
financial condition. The Merger The Merger, as described in Note 3 - Merger Transaction in the unaudited condensed consolidated financial statements included herein, closed onMarch 27, 2019 . Our condensed consolidated financial statements include operating results for the 25 vessels acquired for 4 days and 91 days during the three months endedMarch 31, 2019 and 2020, respectively, in addition to the 41 vessels historically owned by us for the full period and the two sold vessels inSeptember 2019 .
New Credit Facilities and Refinancings
For a description of the Company's credit agreements and refinancings, please see Note 8 - Long-Term Debt in the unaudited condensed consolidated financial statements included herein. 23 Vessel Dispositions InAugust 2019 , our Board of Directors approved selling the Atlantic Aquarius and Atlantic Leo, both 2009-built MR vessels. We reached an agreement to sell the Atlantic Aquarius and Atlantic Leo, each for$16.0 million less a 1% broker commission payable to a third party. InSeptember 2019 , we completed the sale of the Atlantic Aquarius and Atlantic Leo. Share Repurchase Program OnMarch 4, 2020 , our Board of Directors approved a share repurchase program, providing authorization to repurchase up to$50 million of our common shares, effective for a period of one year. We may repurchase these shares in the open market or in privately negotiated transactions, at times and prices that we consider to be appropriate. As ofMarch 31, 2020 , we repurchased 137,289 shares for a total of$1.4 million under the share repurchase program.
Other Trends and Factors Affecting the Company's Future Results of Operations
The principal factors that have affected our results of operations, and may in the future affect results of operations, are the economic, regulatory, financial, credit, political and governmental conditions prevailing in the tanker market and shipping industry generally and in the countries and markets in which our vessels are chartered. The world economy has experienced significant economic and political upheavals in recent history. In addition, credit supply has been constrained and financial markets have been particularly turbulent. Protectionist trends, global growth and demand for the seaborne transportation of goods, including oil and oil products and overcapacity and deliveries of newly-built vessels have affected, and may further affect, the tanker market and shipping industry in general and the business, financial condition, results of operations and cash flows of
the Company. Some of the key factors that have affected our business, financial condition, results of operations and cash flows, and may in the future affect our business, financial condition, results of operations and cash flows, include the following:
· levels of oil product demand and inventories;
· supply and demand for crude oil and oil products;
· charter hire levels (under time and bareboat charters) and the ability to
re-charter vessels at competitive rates as their current charters expire;
· developments in vessel values, which may affect compliance with covenants under
credit facilities and/or debt refinancing;
· compliance with covenants in credit facilities, including covenants relating
to the maintenance of vessel value ratios;
· the level of debt and the related interest expense and amortization of
principal;
· access to debt and equity and the cost of capital required to acquire
additional vessels;
· supply and order-book of tanker vessels;
· the ability to increase the size of the fleet and make additional acquisitions
that are accretive to earnings;
· the ability of the commercial and chartering operations to successfully employ
vessels at economically attractive rates, particularly as charters expire and
the fleet expands;
· the continuing demand for crude oil and oil products from
andRussia and other emerging markets;
· the ability to comply with new maritime regulations, the more restrictive
regulations for the transport of certain products and cargoes and the increased
costs associated therewith;
· changes in fuel prices, including as a result of the imposition of sulfur
oxide emissions limits in 2020 under new regulations adopted by the IMO (for
those vessels that are not retrofitted with scrubbers);
· the effective and efficient technical management of the vessels;
24
· the costs associated with upcoming drydocking of vessels;
· the ability to obtain and maintain major international oil company approvals
and to satisfy technical, health, safety and compliance standards;
· the strength of and growth in the number of the customer relationships,
especially with major international oil companies and major commodity traders;
· the prevailing spot market rates and the number of vessels operating in the
spot market; and
· the ability to acquire and sell vessels at satisfactory prices.
Operating Data
The following table represents the operating data for the three months ended
For the Three Months Ended
March 31,
2020 2019 Change % Change
(In Thousands, Except Per Share and Share Data)
Revenue:
Spot revenue $ 187,652 $ 98,449 $ 89,203 90.6 %
Time charter revenue 22,073 4,207 17,866 424.7 %
Voyage revenue 209,725 102,656 107,069 104.3 %
Operating expenses:
Voyage expenses 74,681 41,578 33,103 79.6 %
Vessel expenses 41,536 24,801 16,735 67.5 %
Depreciation and amortization
expense 28,760 21,956 6,804 31.0 %General and administrative expenses 8,124 6,288 1,836 29.2 % Total operating expenses 153,101 94,623 58,478 61.8 % Operating income 56,624 8,033 48,591 604.9 % Other (expense) income: Total other expense - Net (11,043 ) (8,853 ) (2,190 ) 24.7 % Net income (loss) 45,581 (820 ) 46,401 (5,658.7 )% Less: Net income attributable to noncontrolling interest 537 206 331 160.7 % Net income (loss) attributable to Diamond S Shipping Inc.$ 45,044 $ (1,026 ) $
46,070 (4,490.3 )%
Net earnings (loss) per share - basic $ 1.13$ (0.04 ) $ 1.17 (2,925.0 )% Net earnings (loss) per share -diluted $ 1.12$ (0.04 ) $
1.16 (2,900.0 )%
Weighted average common shares outstanding - basic 39,891,346 27,731,252 12,160,094 43.8 % Weighted average common shares outstanding - diluted 40,159,966 27,731,252
12,428,714 44.8 % Results of Operations
Three months ended
Voyage revenue Voyage revenue increased by$107.0 million to$209.7 million during the three months endedMarch 31, 2020 as compared to$102.7 million for the three months endedMarch 31, 2019 . The$107.0 million increase was principally driven by a 52.8% increase in revenue days due to an additional 2,127 revenue days during the three months endedMarch 31, 2020 due to the acquisition of the 25 vessels in the Merger coupled with strong market conditions in both the crude tankers and product carriers segments. 25 Voyage Expenses
Voyage expenses primarily consist of bunkers, port expenses, canal dues and commissions. Commissions were paid to shipbrokers for negotiating and arranging charter party agreements on the Company's behalf. Voyage expenses incurred during time and pools are paid for by the charterer or pool manager, except for commissions, which were paid for by the Company. Voyage expenses incurred during voyage charters were paid for by the Company. Voyage expenses increased by$33.1 million to$74.7 million during the three months endedMarch 31, 2020 as compared to$41.6 million for the three months endedMarch 31, 2019 . The$33.1 million increase in voyage expenses was driven by a 30.1% increase in spot revenue days due to the Merger. Vessel Expenses Vessel expenses include crew wages and associated costs, the cost of insurance premiums, expenses relating to repairs and maintenance, lubricants and spare parts, technical management fees and other miscellaneous expenses. Vessel expenses increased by$16.7 million to$41.5 million during the three months endedMarch 31, 2020 as compared to$24.8 million for the three months endedMarch 31, 2020 . The$16.7 million increase in vessel expenses was driven a 51.3% increase in vessel operating days, which consists of an increase of 2,175 vessel operating days due to the Merger, offset by a decrease of 180 vessel operating days as a result of the sales of the Atlantic Aquarius andAtlantic Leo, which occurred inSeptember 2019 .
Vessel Depreciation and Amortization Expense
We depreciate the cost of our vessels on a straight-line basis over the expected useful life of each vessel. Depreciation is based on the cost of the vessel less its estimated residual value. We estimate the useful life of our vessels to be 25 years, and we estimate the residual value by taking the estimated scrap value of$300 per lightweight ton times the weight of the ship in lightweight tons. We continue to monitor changes in the oil and petroleum product supply chain that might have an impact on the useful operating life of our assets. Depreciation and amortization expense increased by$6.8 million to$28.8 million during the three months endedMarch 31, 2020 as compared to$21.0 million during the three months endedMarch 31, 2019 . This increase is due to the added depreciation expense for the 25 vessels acquired in the Merger, offset by the decrease in the depreciation and amortization expense related to the sale of the Atlantic Aquarius and Atlantic Leo inSeptember 2019 .
General and Administrative Expenses
For the three months endedMarch 31, 2020 and 2019, general and administrative expenses were$8.1 million and$6.3 million , respectively. The$1.8 million increase was primarily due to stock-based compensation costs, legal fees in connection with the annual filings and an increase in headcount to maintain the infrastructure of a public company and to manage a larger fleet employed in
the spot market. Total Other Expense, net Total other expense, net, which includes term loan interest, amortization of deferred financing charges and commitment fees and net of interest income, was$11.0 million for the three months endedMarch 31, 2020 compared to$8.9 million for the three months endedMarch 31, 2019 . The increase of$2.1 million was primarily driven by an increase in average debt balance due to entering into the$360 Million Facility onMarch 27, 2019 .
Net Income Attributable to Noncontrolling Interest
The net income attributable to noncontrolling interest was net income of$0.5 million for the three months endedMarch 31, 2020 compared to net income of$0.2 million for the three months endedMarch 31, 2019 . The net income attributable to noncontrolling interest primarily represents a 49% interest inNT Suez Holdco LLC , which owns and operates two Suezmax vessels and is 51%
owned by the Company. 26
Liquidity and Capital Resources
As ofMarch 31, 2020 andDecember 31, 2019 , total cash, cash equivalents and restricted cash were$116.6 million and$89.2 million , including restricted cash of$5.7 million and$5.6 million , respectively. As ofMarch 31, 2020 andDecember 31, 2019 , the Company had$20.0 million and$15.0 million available and undrawn under its credit facilities, respectively.
Generally, the primary sources of funds have been cash from operations and undrawn amounts under credit facilities.
Effective upon completion of the Merger, the Company has indebtedness outstanding under a new term loan and revolving credit facility, arranged in connection with the Merger, and indebtedness under previously existing credit facilities of the Company. Refer to Note 8 - Long-Term Debt in our unaudited condensed consolidated financial statements included herein. OnDecember 27, 2019 , we refinanced (i) the$460 Million Facility, (ii) the$235 Million Facility, and (iii) the$75 Million Facility with the proceeds of the$525 Million Facility.
At
Passage of environmental legislation or other regulatory initiatives have in the past had, and may in the future may have, a significant impact on our operations. Regulatory measures can increase required costs related to operating and maintaining our vessels and may require us to retrofit our vessels with new equipment to comply with new or existing regulations. Among other capital expenditures, in connection with theInternational Maritime Organization's new limits for sulfur oxide emissions effectiveJanuary 1, 2020 , we contracted for the purchase and installation of scrubbers on five of our Suezmax vessels. Two of these scrubbers have been installed and the remaining three are expected to be installed before the end of 2020. The total aggregate capital expenditures for these five scrubbers is approximately$15.7 million , of which$7.7 million has been paid as ofMarch 31, 2020 . We may, in the future, determine to purchase additional scrubbers for installation on other vessels that we own or operate. In addition, with respect to vessels that are not retrofitted with scrubbers, we expect to incur expenditures to ensure those vessels are capable of efficiently using low-sulfur fuel, which expenditures are not expected to be significant or which have not yet been determined. We entered into contracts to install ballast water treatment systems on 15 of our vessels for a total estimated cost of$16.9 million , of which$12.6 million has been paid as ofMarch 31, 2020 . These vessels have compliance dates that require such installations to be completed in 2019 and 2020. We believe that we have sufficient capital resources to fund our operations and anticipated capital requirements for the next twelve months. However, should market conditions deteriorate beyond third-party forecasts, we would consider a number of liquidity enhancing measures, which could include refinancing a portion of our senior debt, exploring unsecured debt instruments, asset sales and sale-leaseback transactions on certain of our assets. Cash Flows
The following table summarizes the Company's cash and cash equivalents provided by or used in operating, financing and investing activities for the periods presented below (presented in millions):
For the Three Months Ended
March 31,
2020 2019Net Cash Provided by Operating Activities$ 70.9 $ 5.9 Net Cash Used in Investing Activities (1.5 ) (313.1 ) Net Cash (Used in) Provided by Financing Activities (42.1 )
300.4
27
Net Cash Provided by Operating Activities
Net cash provided by operating activities during the three months endedMarch 31, 2020 and 2019 was$70.9 million and$5.9 million , respectively. The increase of$40.0 million was mainly attributable to more revenue days and higher charter rates that increased our revenues, and overall net income for the three months endedMarch 31, 2020 , when compared to the three months endedMarch 31, 2019 .
Net cash used in investing activities refers primarily to cash used for vessel acquisitions and improvements, and the Merger. Net cash used by investing activities during the three months endedMarch 31, 2020 and 2019 was$1.5 million and$313.1 million , respectively. The$1.5 million net cash used by investing activities during the three months endedMarch 31, 2020 was for additions to vessels and other property, while the$313.1 million net cash used by investing activities during the three months endedMarch 31, 2019 included the consideration paid in connection with the Merger, with$292.7 million paid to CPLP to acquire the vessels, and$17.8 million paid in transaction costs.
Net cash (used in) provided by financing activities during the three months endedMarch 31, 2020 and 2019 was($42.1) million and$300.4 million , respectively. The change in cash (used in) provided by financing activities was due to the financing activities that we engaged in during the two comparable periods. During the three months endedMarch 31, 2020 , the main outflows of cash for financing activities consisted of making debt payments of$38.6 million , making a$1.6 million distribution to the noncontrolling interest in theNT Suez Holdco LLC entity, and paying$1.4 million to repurchase shares under the share repurchase program. During the three months endedMarch 31, 2019 we had borrowings under the$360 Million Facility, consisting of$300 million in the term loan drawn and$45 million , which were offset by$26.4 million repaid on lines of credit that were cancelled in connection with the Merger, and$6.5 million in deferred financing costs paid in connection with the$360 Million Facility.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Contractual Obligations and Contingencies
The following table summarizes the Company's long-term contractual obligations
as of
Payment due by period
Less than 1 More than 5
Total year 1 - 3 years 3 - 5 years years
Long-term Debt
Obligations $ 855,713 $ 100,792 $ 307,421 $ 447,500 $ -Interest Obligations(1) 73,523 19,936 35,339 18,248 - Capital Obligations (scrubbers and ballast water treatment systems) 11,819 11,819 -
- -
Lease Obligations 6,930 680 1,909 2,401 1,940
Total: $ 947,985 $ 133,227 $ 344,669 $ 468,149 $ 1,940 (1) Interest has been estimated based on the LIBOR forward rates and the
prescribed margin for each of our facilities. Refer to Note 8 - Long-Term
Debt of our unaudited condensed consolidated financial statements contained
herein.
Critical Accounting Policies
The Company's condensed consolidated financial statements are prepared in
accordance with U.S. GAAP. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amount of assets and liabilities, revenues and expenses and related disclosure
of contingent assets and liabilities at the date of our financial statements.
Actual results may differ from these estimates under different assumptionsor conditions. 28 Critical accounting policies are those that reflect significant judgments or uncertainties, and which could potentially result in materially different results under different assumptions and conditions. The Company has described below what its management believes are its most critical accounting policies. For a description of all of the Company's significant accounting policies, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - B. Liquidity and Capital Resources - Critical Accounting Policies and Note 2 - Summary of Significant Accounting Policies, each contained in our 2019 Annual Report, and in Note 2 - Summary of Significant Accounting Policies in our unaudited condensed consolidated financial statements included herein, for further information. Revenue Recognition
During the three months ended
We recognize revenues over the term of the time charter when there is a time charter agreement, where the rate is fixed or determinable, service is provided and collection of the related revenue is reasonably assured. We do not recognize revenue during days the vessel is off-hire. Where the time charter contains a profit or loss sharing arrangement, the profit or loss is recognized based on amounts earned or incurred as of the reporting date. For the three months endedMarch 31, 2020 and 2019, pursuant to the new revenue recognition guidance, which was adopted as ofJanuary 1, 2019 , revenue for spot market voyage charters is recognized ratably over the total transit time of each voyage, which commences at the time the vessel arrives at the loading port and ends at the time the discharge of cargo is completed at the discharge port. Previously, revenue was recognized on the later of when the vessel departed from its last discharge port or when an agreement was entered into with the charterer, and ended at the time the discharge of cargo was completed at the discharge port. In time charters, operating costs including crews, maintenance and insurance are typically paid by the owner of the vessel and specified voyage costs such as fuel and port charges are paid by the charterer. These voyage expenses are borne by us when the vessels are engaged in spot market voyage charters. As such, there are significantly higher voyage expenses for spot market voyage charters as compared to time charters.Vessel Lives and Impairment
The carrying value of each of the Company's vessels represents its original cost (contract price plus initial expenditures) at the time of delivery or purchase less accumulated depreciation or impairment charges. The carrying values of vessels may not represent their fair market value at any point in time since the market prices of secondhand vessels tend to fluctuate with changes in charter rates and the cost of newbuildings. In recent years changing market conditions resulted in a decrease in charter rates and values of assets. We consider these market developments as indicators of potential impairment of the carrying amount of its assets. In developing estimates of future undiscounted cash flows, we make assumptions and estimates about the vessels' future performance, with the significant assumptions being related to charter rates, fleet utilization, vessels' operating expenses, vessels' capital expenditures and drydocking requirements, vessels' residual value and the estimated remaining useful life of each vessel. The assumptions used to develop estimates of future undiscounted cash flows are based on historical trends. Specifically, we utilize the rates currently in effect for the duration of their current time charters, without assuming additional profit-sharing. For periods of time where the vessels are not fixed on time charters, we utilize an estimated daily time charter equivalent for its vessels' unfixed days based on the most recent ten year historical one-year
time charter average. Although we believe that the assumptions used to evaluate potential impairment are reasonable and appropriate at the time they were made, such assumptions are highly subjective and likely to change, possibly materially, in the future. In recent years, the market values of vessels have experienced particular volatility, with substantial declines in many of the charter-free market value, or basic market value, of various vessel classes. As a result, the market value of our vessels may have declined below their carrying values, even though we did not impair their carrying values under our impairment accounting policy. This is due to management's projection that future undiscounted cash flows expected to be earned by such vessels over their operating lives will exceed such vessels' carrying amounts.
Deferred Drydocking Costs and Amortization
We use the deferral method of accounting for drydocking costs. Under the deferral method, drydocking costs are deferred and amortized on a straight-line basis over the useful life of the drydock, which is estimated to be approximately 30 to 60 months. Management uses judgment when estimating the period between drydocks performed, which can result in adjustments to the estimated amortization of drydock expense if drydocks occur earlier or later than originally estimated. We update our estimate of a vessel's next scheduled drydock as necessary. If the vessel is disposed of before the next drydock, the remaining balance in deferred drydock is written-off as a component of the gain or loss upon disposal of vessels. We defer the costs associated with drydocking as they occur and amortize these costs on a straight-line basis over the period between drydocking. Deferred drydocking costs include actual costs incurred at the drydock yard, cost of travel, lodging and subsistence of our personnel sent to the drydocking site to supervise, and the cost of hiring a third party to oversee the drydocking. Expenditures for normal maintenance and repairs, whether incurred as part of the drydock or not, are expensed as incurred. If the vessel is drydocked earlier than originally anticipated, any remaining deferred drydock costs that have not been amortized are expensed at the beginning of the next drydock. 29
Recent Accounting Pronouncements
New Accounting Standards to be Implemented
InFebruary 2016 , the FASB issued ASU No. 2016-02, "Leases (Topic 842)" ("ASU 2016-02"), which establishes a comprehensive new lease accounting model. ASU 2016-02 clarifies the definition of a lease, requires a dual approach to lease classification similar to current lease classifications, and causes lessees to recognize leases on the balance sheet as a lease liability with a corresponding right-of-use asset for leases with a lease term of more than twelve months. For the Company, ASU 2016-02 is effective for annual periods beginning afterDecember 15, 2020 , and interim reporting periods within annual reporting periods beginning afterDecember 15, 2021 , with early adoption permitted. The most significant effects of adoption relate to the recognition of right-of-use assets and lease liabilities on the balance sheet for operating leases and providing new disclosures about our leasing activities. We are currently analyzing our contracts and will then calculate the right-of-use assets and lease liabilities as ofJanuary 1, 2021 based on the present value of our remaining minimum lease payments, primarily due to the recognition of right-of-use assets and lease liabilities with respect to operating leases. InJune 2016 , the FASB issued ASU No. 2016-13, "Financial Instruments-Credit Losses (Topic 326)" ("ASU 2016-13"), which amends several aspects of the measurement of credit losses on financial instruments based on an estimate of current expected credit losses. ASU 2016-13 will apply to loans, accounts receivable, trade receivables, other financial assets measured at amortized cost, loan commitments and other off-balance sheet credit exposures. ASU 2016-13 will also apply to debt securities and other financial assets measured at fair value through other comprehensive income. For the Company, ASU 2016-13 is effective for annual periods beginning afterDecember 15, 2020 , and interim reporting periods within annual reporting periods beginning afterDecember 15, 2021 , with early adoption permitted. We are currently evaluating the potential impact of this pronouncement on the condensed consolidated financial statements.
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