Seaspan's Earnings Sink in the Second Quarter After Modifying Contracts

Last quarter, Seaspan (ATCO) modified a contract with one of its largest customers. The shipping company allowed this customer to terminate the leases on seven vessels in exchange for a big one-time payment. While Seaspan subsequently rechartered those ships with new customers, the contracts were at lower market rates. That shift put pressure on the company's financial results during the second quarter.

Seaspan results: The raw numbers

Data source: Seaspan.

What happened with Seaspan this quarter?

• Seaspan's revenue dipped 2% versus the year-ago period, primarily due to the contract modification on seven vessels. That more than offset the positive effect of the new ships added to the fleet over the past year.
• Operating earnings fell 7.5% to $110.4 million, due primarily to an increase in lease operating expenses. Meanwhile, net earnings plunged because the company recorded a loss as a result of changes in the value of its financial hedges.
• Cash from operating activities, on the other hand, zoomed 195% to $369.9 million, thanks to the receipt of a $227 million one-time payment resulting from the charter modification agreement with a customer.
• The company also boosted its liquidity and financial flexibility by securing an innovative $1 billion portfolio financing program. The agreement will enable the company to streamline its borrowings by allowing it to refinance 12 existing credit facilities into one program.

Image source: Getty Images.

What management had to say 

CEO Bing Chen commented on the company's progress during the quarter:

I'm proud of our team for delivering another stronger than expected second quarter operating results. Our continued drive for operational excellence allowed us to deliver better than anticipated operating earnings, while investing in and building on our integrated platform to consistently enhance our customer-centric approach. In particular, we've continued to sign multi-year contracts with customers, maintaining our industry leading utilization rate of 98.7%. Our team is building a solid track record for executing on the promises we have made to our customers, employees, financing partners and our shareholders.

The contract modification clouded Seaspan's solid quarter. One of the highlights was the decline in the company's operating cost per ownership day, which has fallen 7% over the past year and is helping improve the company's underlying profitability.

Meanwhile, Seaspan continues to shore up its balance sheet. "The closing of our innovative $1 billion portfolio financing program this quarter marked an important step toward reshaping our capital structure," stated CFO Ryan Courson. He further noted: "Beyond an improved cost of debt and maturity profile, this structure provides us with significant financial flexibility to optimize Seaspan's capital structure going forward, while simplifying and consolidating our credit facilities. With the foundation now laid for growth, we intend to continue executing on capital allocation opportunities to drive shareholder value." As a result of these and other moves, the company ended the quarter with a net debt-to-equity ratio of 1, half the level of the year-ago period. 

Looking forward 

A solid showing through the first half of the year gave Seaspan management the confidence to revise its full-year forecast. It increased the low end of its revenue outlook by $15 million, tightening the range to between $1.115 billion and $1.12 billion. Seaspan also reduced the top end of its operating expense forecast by $10 million. That revised outlook has the company on track to earn more money this year than it initially expected.