OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
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 International Flag and U.S. Flag trades through its wholly owned subsidiaries OSG International,
Inc. (“OIN”), a Marshall Islands corporation, and OSG Bulk Ships, Inc. (“OBS”), a New York corporation,
respectively.
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 months ended March 31, 2016, are not necessarily indicative of the results that may be expected for the year ending December
31, 2016.
The condensed consolidated balance sheet as of December 31,
2015 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, 2015 (“Form 10-K”).
The Company’s Board of Directors (the “Board”)
approved a stock dividend of Class A common stock, whereby on December 17, 2015, all shareholders of record of the Company’s
Class A and B common stock as of December 3, 2015, received a dividend of one-tenth of one share of Class A common stock for each
share of Class A common stock and Class B common stock held by them as of the record date. Accordingly, amounts previously reported
for the quarter ending March 31, 2015, with respect to income per share, outstanding Class A common shares, Class A restricted
stock units, Class A restricted shares and Class A stock options, have been restated, where appropriate. The condensed consolidated
statement of operations for the three months ended March 31, 2015 presented herein reflects increases of 52,850,854 and 52,863,944
in weighted average number of shares used to calculate basic and diluted net income per share amounts for Class A, respectively,
and a change of $(0.01) in net income per share for basic and diluted Class A and Class B.
Dollar amounts, except per share amounts are in thousands.
Note 2 — Chapter 11 Filing and Emergence from Bankruptcy:
On November 14, 2012 (the “Petition Date”), the
Company and 180 of its subsidiaries (together with OSG, the “Debtors”) filed voluntary petitions for reorganization
under Chapter 11 of the U.S. Code (the “Bankruptcy Code”) in the U.S. Bankruptcy Court for the District of Delaware
(the “Bankruptcy Court”). The Debtors filed with the Bankruptcy Court a plan of reorganization (the “Equity Plan”).
The Bankruptcy Court confirmed the Equity Plan by order entered on July 18, 2014 (the “Confirmation Order”). On August
5, 2014 (the “Effective Date”), the Equity Plan became effective and OSG emerged from bankruptcy. As of May 10, 2016,
only OSG’s case, as the Parent Company, remains open from the original 181 Chapter 11 cases.
Reorganization Items, net
Reorganization items, net represent amounts incurred subsequent
to the Petition Date as a direct result of the filing of our Chapter 11 cases and are comprised of the following:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Trustee fees
|
|
$
|
30
|
|
|
$
|
140
|
|
Professional fees
|
|
|
283
|
|
|
|
3,227
|
|
Litigation Settlement, net
|
|
|
(20,359
|
)
|
|
|
-
|
|
Litigation settlement due to class action plaintiffs
|
|
|
2,136
|
|
|
|
-
|
|
Other claim adjustments
|
|
|
-
|
|
|
|
120
|
|
|
|
$
|
(17,910
|
)
|
|
$
|
3,487
|
|
On February 12, 2016, the Company entered into an agreement
with Proskauer and four of its partners to settle the malpractice suit filed by the Company in March 2014. Settlement proceeds
totaling $20,359 net of all related out-of-pocket expenses, including legal fees, incurred by the Company during the three months
ended March 31, 2016 are included in litigation settlement, net in the table above.
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
In addition, as discussed below in Note 14, “Contingencies,”
pursuant to the terms of the Company’s settlement with members of the putative class of securities claimants, the Company
recognized an income statement charge for 15%, or $2,136, of the Net Litigation Recovery amount of $14,242 (as defined below) during
the three months ended March 31, 2016. The “Net Litigation Recovery” is the gross amount of the settlement less all
related out-of-pocket expenses, including legal fees, incurred by the Company since the inception of the action against the Proskauer
Plaintiffs (as defined in Note 14) through the date of settlement. Further, as required by the Equity Plan, the Company’s
Certificate of Incorporation and the Class B Warrant Agreement the Company will distribute 10%, or $1,423, of the Net Litigation
Recovery amount to the Class B shareholders and warrant holders in May 2016. Approximately $86 of the aforementioned $1,423, which
represents the proportional share of the Net Litigation Recovery payable to the Company’s Class B warrant holders, will be
recognized as a charge to reorganization items, net in the second quarter of 2016. The balance of $1,337 will be distributed in
the form of a special dividend to the Company’s Class B shareholders and was recorded as a reduction of retained earnings
as of March 31, 2016.
Cash paid for reorganization items, excluding the Proskauer
related settlement amounts noted above, was $526 and $6,096 for the three months ended March 31, 2016 and 2015, respectively.
Note 3 — Significant Accounting Policies:
Cash and cash equivalents
—
Interest-bearing
deposits that are highly liquid investments and have a maturity of three months or less when purchased are included in cash and
cash equivalents. Management has designated cash reserves of $5,587 and $10,583 as of March 31, 2016 and December 31, 2015, respectively,
to be utilized for the settlement of certain unsecured claims related to the Company’s emergence from bankruptcy. Such cash
reserves, which are considered restricted cash due to management’s intent regarding these funds, are included in restricted
cash in the current assets section of the condensed consolidated balance sheet based on management’s estimate of when these
funds are likely to be disbursed. Such restricted cash reserves will be subject to adjustment based upon the settlement of claims.
Additionally, restricted cash as of March 31, 2016 and December 31, 2015 includes $8,989 of legally restricted cash relating to
the OIN Facilities (as defined in Note 9, “Debt”). Such restricted cash reserves are included in the non-current assets
section of the condensed consolidated balance sheet. Activity relating to restricted cash is reflected in investing activities
in the condensed consolidated statements of cash flow.
Deferred finance charges
—
Finance charges
incurred in the arrangement and amendment of debt are deferred and amortized to interest expense on either an effective interest
method or straight-line basis over the life of the related debt.
Unamortized deferred finance charges of $2,690 and $2,922 relating
to the OBS ABL Facility and OIN Revolver Facility (each, as defined in Note 9) are included in other assets in the condensed consolidated
balance sheets as of March 31, 2016 and December 31, 2015, respectively. Unamortized deferred financing charges of $33,859 and
$41,020 relating to the OBS Term Loan and OIN Term Loan (each, as defined in Note 9) and $3,168 and $3,523 relating to the Unsecured
Senior Notes are included in long-term debt (reflecting the adoption of ASU No. 2015-03 discussed below) in the condensed consolidated
balance sheets as of March 31, 2016 and December 31, 2015, respectively. Interest expense relating to the amortization of deferred
financing charges amounted to $3,322, and $2,501 for the three months ended March 31, 2016 and 2015, respectively.
Concentration of Credit Risk
—
Financial
instruments that potentially subject the Company to concentrations of credit risk are voyage receivables due from charterers and
pools in which the Company participates. During the three months ended March 31, 2016 and 2015, the Company did not have any individual
customers who accounted for 10% or more of its revenues apart from the pools in which it participates. The pools in which the Company
participates accounted in aggregate for 83% and 77% of consolidated voyage receivables at March 31, 2016 and December 31, 2015,
respectively.
Impairment of long-lived assets
—The carrying amounts
of long-lived assets held and used by the Company are reviewed for potential impairment whenever events or changes in circumstances
indicate that the carrying amount of a particular asset may not be fully recoverable. In such instances, an impairment charge would
be recognized if the estimate of the undiscounted future cash flows expected to result from the use of the asset and its eventual
disposition is less than the asset’s carrying amount. This assessment is made at the individual vessel level since separately
identifiable cash flow information for each vessel is available. The impairment charge, if any, would be measured as the amount
by which the carrying amount of a vessel exceeded its fair value. A long-lived asset impairment charge results in a new cost basis
being established for the relevant long-lived asset.
Income Taxes
—
The Company’s
quarterly income tax provision and its corresponding annual effective tax rate are based on expected income, statutory tax rates
and tax planning opportunities available in the various jurisdictions in which the Company operates. For interim financial reporting,
the Company estimates the annual effective tax rate based on projected taxable income for the full year and records a quarterly
tax provision in accordance with the expected annual effective tax rate. As the year progresses, the Company refines the estimates
of the year’s taxable income as new information becomes available, including year-to-date financial results. This continual
estimation process often results in a change to our expected annual effective tax rate for the year. When this occurs, the Company
adjusts the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date income tax
provision reflects the expected annual effective tax rate. Significant judgment is required in determining the Company’s
annual effective tax rate and in evaluating the Company’s tax positions.
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Recently Adopted Accounting Standards
In April 2015, the FASB issued ASU No. 2015-03,
Simplifying
the Presentation of Debt Issuance Costs
(ASC 835), which amends the requirement to recognize debt issuance costs as deferred
charges. The amendment requires that debt issuance costs related to a recognized debt liability be presented on the balance sheet
as a direct deduction from the carrying cost of that debt liability, consistent with debt discounts. The amendments are effective
for public companies for annual periods and interim periods within those annual periods beginning after December 15, 2015. The
Company adopted this accounting standard on January 1, 2016 and has applied the guidance retrospectively. The impact of the retrospective
adoption on the Company’s December 31, 2015 balance sheet are reductions of both other assets and long-term debt by $44,543.
Recently Issued Accounting Standards
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from
Contracts with Customers
(ASC 606) to provide a single, comprehensive revenue recognition model for all contracts with customers
to improve comparability within industries, across industries, and across capital markets. The revenue standard contains principles
that an entity will apply to determine the measurement and timing of when it is recognized. The underlying principle is that an
entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to
be entitled to in exchange for those goods or services. The FASB subsequently delayed the effective date of the revenue standard
by one year. For public companies, the revenue standard is effective for the first interim period within annual reporting periods
beginning after December 15, 2017. Reporting entities may choose to adopt the standard as of the original effective date. The requirements
of this standard include a significant increase in required disclosures. Management is analyzing the impact of the adoption of
this guidance on the Company’s consolidated financial statements, including assessing changes that might be necessary to
information technology systems, processes and internal controls to capture new data and address changes in financial reporting.
In August 2014, the FASB issued ASU No. 2014-15,
Disclosure
of Uncertainties about an Entity’s Ability to Continue as a Going Concern
(ASC 205), which explicitly requires management
to assess an entity’s ability to continue as a going concern and disclose going concern uncertainties in connection with
each annual and interim period. The new standard requires management to assess if there is substantial doubt about an entity’s
ability to continue to meet its obligations within one year after the reporting date based upon management’s consideration
of relevant conditions that are known (and reasonably knowable) at the issuance date. The new standard defines substantial doubt
and provides example indicators. Disclosures will be required if conditions give rise to substantial doubt. However, management
will need to assess if its plans will alleviate substantial doubt to determine the specific disclosures. The new standard will
be effective for all entities in the first annual period ending after December 15, 2016. Earlier application is permitted. Management
does not expect the adoption of this accounting standard to have any impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
(ASC 842), which requires lessees to recognize most leases on the balance sheet. This is expected to increase both reported
assets and liabilities. For public companies, the standard will be effective for the first interim reporting period within annual
periods beginning after December 15, 2018, although early adoption is permitted. Lessees and lessors will be required to apply
the new standard at the beginning of the earliest period presented in the financial statements in which they first apply the new
guidance, using a modified retrospective transition method. The requirements of this standard include a significant increase in
required disclosures. Management is analyzing the impact of the adoption of this guidance on the Company’s consolidated financial
statements, including assessing changes that might be necessary to information technology systems, processes and internal controls
to capture new data and address changes in financial reporting. Management expects that the Company will recognize substantial
increases in reported amounts for property, plant and equipment and related lease liabilities upon adoption of the new standard.
In March 2016, FASB issued ASU No. 2016-09,
Improvements
to Employee Share-Based Payment Accounting
(ASC 718), which simplifies several aspects of the accounting for share-based payment
transactions, including the income tax consequences, forfeitures, classification of awards as either equity or liabilities, and
classification in the statement of cash flows. The standard will be effective for annual periods beginning after December 31, 2016
and interim periods within that reporting period. Management is currently reviewing the impact of the adoption of this accounting
standard on the Company’s consolidated financial statements.
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
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 and B warrants of $0.01
per share to be nominal, warrant proceeds are ignored and the shares issuable upon Class A and B warrant exercise are included
in the calculation of Class A and B 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.
The Company’s Board approved a stock dividend of Class
A common stock, whereby on December 17, 2015, all shareholders of record of the Company’s Class A and B common stock as of
December 3, 2015, received a dividend of one-tenth of one share of Class A common stock for each share of Class A common stock
and Class B common stock held by them as of the record date. Accordingly, amounts previously reported for the quarter ending March
31, 2015, with respect to income per share, outstanding Class A common shares, Class A restricted stock units, Class A restricted
shares and Class A stock options, have been restated, where appropriate. The condensed consolidated statement of operations for
three months ended March 31, 2015 presented herein reflects increases of 52,850,854 and 52,863,944 in weighted average number of
common shares used to calculate basic and diluted net income per share amounts for Class A, respectively, and a change of $(0.01)
in net income per share for basic and diluted Class A and Class B.
Class A
There were 254,741 and 306,201 weighted average shares of unvested
Class A restricted common stock shares considered to be participating securities for the three month periods ended March 31, 2016
and 2015, respectively. Such participating securities were allocated a portion of income under the two-class method for the three
months ended March 31, 2016 and 2015. Holders of the participating securities do not participate in losses.
The computation of diluted earnings per share assumes the issuance
of common stock for all potentially dilutive stock options and restricted stock units. As of March 31, 2016 and 2015, respectively,
there were 3,525,642 and 517,369 shares of Class A stock options outstanding and 2,958,258 and 209,439 shares of unvested Class
A restricted stock units outstanding which are considered to be potentially dilutive securities.
Class B
There are no participating securities or potentially dilutive
securities relating to the Class B common stock.
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
The components of the calculation of basic earnings per share
and diluted earnings per share are as follows:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
50,739
|
|
|
$
|
42,901
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
Common stock - basic and diluted
|
|
|
|
|
|
|
|
|
Class A common stock - basic
(1)
|
|
|
568,425,634
|
|
|
|
573,434,452
|
|
Class A common stock - diluted
(2)
|
|
|
568,450,678
|
|
|
|
573,451,145
|
|
Class B common stock - basic and diluted
(3)
|
|
|
7,919,819
|
|
|
|
7,924,944
|
|
|
(1)
|
The basic weighted average common shares outstanding for
Class A common stock for the three month periods ended March 31, 2016 and 2015 were calculated using the Class A common stock
outstanding and the Class A warrants outstanding for the three month periods ended March 31, 2016 and 2015, respectively. As of
March 31, 2016, there were 373,533,508 shares of Class A common stock outstanding and 178,099,684 Class A warrants outstanding.
As of March 31, 2015, there were 348,303,150 shares of Class A common stock outstanding and 231,160,459 Class A warrants outstanding.
|
|
(2)
|
The diluted weighted average common shares outstanding
for Class A common stock for the quarters ended March 31, 2016 and 2015 were calculated using the dilutive securities, the Class
A common stock outstanding and the Class A warrants outstanding for the three month periods ended March 31, 2016 and 2015.
|
|
(3)
|
The basic and diluted weighted average common shares outstanding
for Class B common stock for the three month periods ended March 31, 2016 and 2015 were calculated using Class B common stock
outstanding and Class B warrants outstanding for the three month periods ended March 31, 2016 and 2015, respectively. As of March
31, 2016 there were 7,440,478 shares of Class B common stock outstanding and 479,341 Class B warrants outstanding. As of March
31, 2015 there were 5,711,847 shares of Class B common stock outstanding and 2,212,204 Class B warrants outstanding.
|
For quarterly earnings per share calculations, there were 25,044
and 16,693 dilutive equity awards outstanding as of March 31, 2016 and 2015, respectively. Awards of 2,574,374 and 517,369 (which
includes restricted stock units and stock options) for the three months ended March 31, 2016 and 2015, respectively, were not included
in the computation of diluted earnings per share because inclusion of these awards would be anti-dilutive.
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Note 5 — Business and Segment Reporting:
The Company has three reportable segments: International Crude
Tankers, International Product Carriers and U.S. Flag vessels. Income/(loss) from vessel operations for segment purposes is defined
as income/(loss) from vessel operations before general and administrative expenses, technical management transition costs, severance
and relocation costs and gain/(loss) on disposal of vessels. The accounting policies followed by the reportable segments are the
same as those followed in the preparation of the Company’s consolidated financial statements.
Information about the Company’s reportable segments as
of and for the three months ended March 31, 2016 and 2015 follows:
|
|
International
|
|
|
|
|
|
|
|
|
|
|
|
|
Crude
|
|
|
Product
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Tankers
|
|
|
Carriers
|
|
|
Other
|
|
|
U.S.
|
|
|
Totals
|
|
March 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shipping revenues
|
|
$
|
91,063
|
|
|
$
|
37,613
|
|
|
$
|
-
|
|
|
$
|
115,080
|
|
|
$
|
243,756
|
|
Time charter equivalent revenues
|
|
|
87,364
|
|
|
|
37,345
|
|
|
|
-
|
|
|
|
112,213
|
|
|
|
236,922
|
|
Depreciation and amortization
|
|
|
12,976
|
|
|
|
6,843
|
|
|
|
262
|
|
|
|
23,002
|
|
|
|
43,083
|
|
Gain/(loss) on disposal of vessels and other property
|
|
|
201
|
|
|
|
-
|
|
|
|
(30
|
)
|
|
|
(14
|
)
|
|
|
157
|
|
Income/(loss) from vessel operations
|
|
|
52,321
|
|
|
|
9,060
|
|
|
|
(106
|
)
|
|
|
30,465
|
|
|
|
91,740
|
|
Equity in income of affiliated companies
|
|
|
8,972
|
|
|
|
-
|
|
|
|
2,648
|
|
|
|
(15
|
)
|
|
|
11,605
|
|
Investments in and advances to affiliated companies at March 31, 2016
|
|
|
286,582
|
|
|
|
15,143
|
|
|
|
49,740
|
|
|
|
38
|
|
|
|
351,503
|
|
Total assets at March 31, 2016
|
|
|
1,129,510
|
|
|
|
502,202
|
|
|
|
49,740
|
|
|
|
967,594
|
|
|
|
2,649,046
|
|
Expenditures for vessels and vessel improvements
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
58
|
|
|
|
58
|
|
Payments for drydockings
|
|
|
1,383
|
|
|
|
1,007
|
|
|
|
-
|
|
|
|
3,527
|
|
|
|
5,917
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shipping revenues
|
|
|
73,417
|
|
|
|
43,941
|
|
|
|
92
|
|
|
|
116,092
|
|
|
|
233,542
|
|
Time charter equivalent revenues
|
|
|
66,821
|
|
|
|
43,517
|
|
|
|
92
|
|
|
|
111,212
|
|
|
|
221,642
|
|
Depreciation and amortization
|
|
|
12,445
|
|
|
|
6,977
|
|
|
|
471
|
|
|
|
17,226
|
|
|
|
37,119
|
|
Gain/(loss) on disposal of vessels and other property
|
|
|
7
|
|
|
|
(5
|
)
|
|
|
1,133
|
|
|
|
(62
|
)
|
|
|
1,073
|
|
Income/(loss) from vessel operations
|
|
|
31,991
|
|
|
|
14,276
|
|
|
|
(408
|
)
|
|
|
37,527
|
|
|
|
83,386
|
|
Equity in income of affiliated companies
|
|
|
8,457
|
|
|
|
-
|
|
|
|
3,961
|
|
|
|
(6
|
)
|
|
|
12,412
|
|
Investments in and advances to affiliated companies at March 31, 2015
|
|
|
274,042
|
|
|
|
14,027
|
|
|
|
43,304
|
|
|
|
38
|
|
|
|
331,411
|
|
Total assets at March 31, 2015
|
|
|
1,165,123
|
|
|
|
536,343
|
|
|
|
43,304
|
|
|
|
1,014,235
|
|
|
|
2,759,005
|
|
Payments for drydockings
|
|
|
1,814
|
|
|
|
23
|
|
|
|
-
|
|
|
|
6,039
|
|
|
|
7,876
|
|
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Reconciliations of time charter equivalent (“TCE”)
revenues of the segments to shipping revenues as reported in the consolidated statements of operations follow:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Time charter equivalent revenues
|
|
$
|
236,922
|
|
|
$
|
221,642
|
|
Add: Voyage expenses
|
|
|
6,834
|
|
|
|
11,900
|
|
Shipping revenues
|
|
$
|
243,756
|
|
|
$
|
233,542
|
|
Consistent with general practice in the shipping industry, the
Company uses time charter equivalent revenues, which represents shipping revenues less voyage expenses, as a measure to compare
revenue generated from a voyage charter to revenue generated from a time charter. Time charter equivalent revenues, a non-GAAP
measure, provides additional meaningful information in conjunction with shipping revenues, the most directly comparable GAAP measure,
because it assists Company management in making decisions regarding the deployment and use of its vessels and in evaluating their
financial performance.
Reconciliations of income from vessel operations of the segments
to income before reorganization items and income taxes, as reported in the condensed consolidated statements of operations follow:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Total income from vessel operations of all segments
|
|
$
|
91,740
|
|
|
$
|
83,386
|
|
General and administrative expenses
|
|
|
(17,349
|
)
|
|
|
(19,282
|
)
|
Technical management transition costs
|
|
|
-
|
|
|
|
(40
|
)
|
Severance and relocation costs
|
|
|
-
|
|
|
|
(5
|
)
|
Gain on disposal of vessels, including impairments
|
|
|
157
|
|
|
|
1,073
|
|
Consolidated income from vessel operations
|
|
|
74,548
|
|
|
|
65,132
|
|
Equity in income of affiliated companies
|
|
|
11,605
|
|
|
|
12,412
|
|
Other income
|
|
|
2,574
|
|
|
|
73
|
|
Interest expense
|
|
|
(22,659
|
)
|
|
|
(28,569
|
)
|
Reorganization items, net
|
|
|
17,910
|
|
|
|
(3,487
|
)
|
Income before income taxes
|
|
$
|
83,978
|
|
|
$
|
45,561
|
|
Reconciliations of total assets of the segments to amounts included
in the condensed consolidated balance sheets follow:
As of March 31,
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Total assets of all segments
|
|
$
|
2,649,046
|
|
|
$
|
2,759,005
|
|
Corporate unrestricted cash
(1)
|
|
|
402,005
|
|
|
|
477,321
|
|
Corporate restricted cash
(1)
|
|
|
14,576
|
|
|
|
118,010
|
|
Other unallocated amounts
|
|
|
4,994
|
|
|
|
46,037
|
|
Consolidated total assets
|
|
$
|
3,070,621
|
|
|
$
|
3,400,373
|
|
|
(1)
|
As of March 31, 2016 and 2015, OBS and its subsidiaries
had unrestricted cash balances of $134,044 and $124,968, respectively, and OIN and its subsidiaries had unrestricted cash balances
of $239,420 and $246,413, respectively. Of the restricted cash balances, $8,989 and $77,999 were held by OIN as of March 31, 2016
and 2015, respectively. The remaining balances were held by the Parent Company, OSG.
|
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Note 6 — Vessels:
Vessel Impairments and Change in Useful Lives of Vessels
The Company gave consideration as to whether events or changes
in circumstances had occurred since December 2015 that could indicate that the carrying amounts of the vessels in the Company’s
International and U.S. Flag fleets may not be recoverable as of March 31, 2016. The Company concluded that no such events or changes
in circumstances had occurred.
Vessel Sales and Acquisitions
There were no vessels sold or acquired during the quarters ended
March 31, 2016 or 2015.
Note 7 – Variable Interest Entities (“VIEs”):
As of March 31, 2016, the Company participates in six commercial
pools and three joint ventures. One of the pools and the FSO joint venture were determined to be VIEs. The Company is not considered
a primary beneficiary of either the pool or the joint venture.
The following table presents the carrying amounts of assets
and liabilities in the condensed consolidated balance sheet related to the VIEs as of March 31, 2016:
|
|
Condensed
Consolidated Balance Sheet
|
|
Investments in Affiliated Companies
|
|
$
|
281,363
|
|
In accordance with accounting guidance, the Company evaluated
its maximum exposure to loss related to these VIEs by assuming a complete loss of the Company’s investment in these VIEs
and that it would incur an obligation to repay the full amount of the VIE’s outstanding secured debt. The table below compares
the Company’s liability in the condensed consolidated balance sheet to the maximum exposure to loss at March 31, 2016:
|
|
Condensed
Consolidated Balance Sheet
|
|
|
Maximum Exposure to
Loss
|
|
Other Liabilities
|
|
$
|
-
|
|
|
$
|
329,500
|
|
In addition, as of March 31, 2016, the Company had approximately
$10,262 of trade receivables from the pool that was determined to be a VIE. These trade receivables, which are included in voyage
receivables in the accompanying condensed consolidated balance sheet, have been excluded from the above tables and the calculation
of OSG’s maximum exposure to loss. The Company does not record the maximum exposure to loss as a liability because it does
not believe that such a loss is probable of occurring as of March 31, 2016. Further, the joint venture debt is secured by the joint
venture’s FSOs. Therefore, the Company’s exposure to loss under its several guarantee would first be reduced by the
fair value of such FSOs.
Note 8 — Fair Value of Financial Instruments, Derivatives
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 at March 31, 2016 are estimated based on quoted market prices.
Interest rate swaps and caps—
The fair values of
interest rate swaps and caps are the estimated amounts that the Company would receive or pay to terminate the swaps or caps at
the reporting date, which include adjustments for the counterparty or the Company’s credit risk, as appropriate, after taking
into consideration any underlying collateral securing the swap or cap agreements.
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
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- Inputs that are unobservable (for example
cash flow modeling inputs based on assumptions)
The estimated fair values of the Company’s financial instruments,
other than derivatives that are not measured at fair value on a recurring basis, categorized based upon the fair value hierarchy,
are as follows:
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
March 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
(1)
|
|
$
|
416,581
|
|
|
$
|
416,581
|
|
|
$
|
-
|
|
8.125% notes due 2018
|
|
|
(118,518
|
)
|
|
|
-
|
|
|
|
(118,518
|
)
|
OBS Term loan
|
|
|
(468,003
|
)
|
|
|
-
|
|
|
|
(468,003
|
)
|
OIN Term loan
|
|
|
(532,003
|
)
|
|
|
-
|
|
|
|
(532,003
|
)
|
7.5% Election 2 notes due 2021
|
|
|
(320
|
)
|
|
|
-
|
|
|
|
(320
|
)
|
7.5% notes due 2024
|
|
|
(415
|
)
|
|
|
-
|
|
|
|
(415
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
(1)
|
|
$
|
522,408
|
|
|
$
|
522,408
|
|
|
$
|
-
|
|
8.125% notes due 2018
|
|
|
(121,046
|
)
|
|
|
-
|
|
|
|
(121,046
|
)
|
OBS Term loan
|
|
|
(571,682
|
)
|
|
|
-
|
|
|
|
(571,682
|
)
|
OIN Term loan
|
|
|
(601,928
|
)
|
|
|
-
|
|
|
|
(601,928
|
)
|
7.5% Election 2 notes due 2021
|
|
|
(328
|
)
|
|
|
-
|
|
|
|
(328
|
)
|
7.5% notes due 2024
|
|
|
(745
|
)
|
|
|
-
|
|
|
|
(745
|
)
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
(1)
|
Includes current and non-current restricted cash aggregating
$14,576 and $19,572 at March 31, 2016 and December 31, 2015, respectively.
|
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Derivatives
Interest Rate Risk
The Company uses interest rate caps and swaps for the management
of interest rate risk exposure. At March 31, 2016, OBS and OIN were party to two separate interest rate cap agreements (“Interest
Rate Cap”) each with a start date of February 5, 2015 with major financial institutions covering notional amounts of $375,000
and $400,000, respectively, to limit the floating interest rate exposure associated with their respective term loans. The Interest
Rate Cap agreements were designated and qualified as cash flow hedges and contain no leverage features. The OBS Interest Rate Cap
has a cap rate of 2.5% through February 5, 2017, at which time the cap rate increases to 3.0% through the termination date of February
5, 2018. The OIN Interest Rate Cap has a cap rate of 2.5% through the termination date of February 5, 2017.
Tabular disclosure of derivatives location
Derivatives are recorded in the March 31, 2016 balance sheet
on a net basis by counterparty when a legal right of offset exists. The following table presents information with respect to the
fair values of derivatives reflected in the March 31, 2016 and December 31, 2015 balance sheets on a gross basis by transaction:
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
|
Balance Sheet
Location
|
|
Amount
|
|
|
Balance Sheet
Location
|
|
Amount
|
|
March 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate caps:
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
Other assets
|
|
$
|
16
|
|
|
Other liabilities
|
|
$
|
-
|
|
Total derivatives designated as hedging instruments
|
|
|
|
$
|
16
|
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate caps:
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
Other assets
|
|
$
|
102
|
|
|
Other liabilities
|
|
$
|
-
|
|
Total derivatives designated as hedging instruments
|
|
|
|
$
|
102
|
|
|
|
|
$
|
-
|
|
The
following tables present information with respect to gains and losses on derivative positions reflected in the condensed consolidated
statements of operations or in the condensed consolidated statements of other comprehensive income.
The effect of cash flow hedging relationships recognized in
other comprehensive income excluding amounts reclassified from accumulated other comprehensive loss (effective portion), including
hedges of equity method investees, for the three month periods ended March 31, 2016 and 2015 follows:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Interest rate swaps
|
|
$
|
(11,206
|
)
|
|
$
|
(7,431
|
)
|
Interest rate caps
|
|
|
(86
|
)
|
|
|
(1,187
|
)
|
Total
|
|
$
|
(11,292
|
)
|
|
$
|
(8,618
|
)
|
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
The effect of cash flow hedging relationships on the condensed
consolidated statements of operations is presented excluding hedges of equity method investees. The effect of the Company’s
cash flow hedging relationships on the condensed consolidated statement of operations for the three month periods ended March 31,
2016 and 2015 is shown below:
|
|
Statement of Operations
|
|
|
Effective Portion of Gain/(Loss)
|
|
|
|
|
Reclassified from
|
|
|
|
|
Accumulated Other Comprehensive
|
|
|
|
|
Loss
|
|
Ineffective Portion
|
|
|
|
|
Amount of
|
|
|
|
|
Amount of
|
|
|
|
Location
|
|
Gain/(Loss)
|
|
|
Location
|
|
Gain/(Loss)
|
|
For the three months ended March 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate caps
|
|
Interest expense
|
|
$
|
(28
|
)
|
|
Interest expense
|
|
$
|
-
|
|
Total
|
|
|
|
$
|
(28
|
)
|
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate caps
|
|
Interest expense
|
|
$
|
-
|
|
|
Interest expense
|
|
$
|
-
|
|
Total
|
|
|
|
$
|
-
|
|
|
|
|
$
|
-
|
|
See Note 13, “Accumulated Other Comprehensive Loss,”
for disclosures relating to the impact of derivative instruments on accumulated other comprehensive loss.
Fair Value Hierarchy
The following table presents the fair values, which are pre-tax,
for assets and liabilities measured on a recurring basis (excluding investments in affiliated companies):
|
|
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
Assets/(Liabilities) at March 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets (interest rate caps)
|
|
$
|
16
|
|
|
$
|
-
|
|
|
$
|
16
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets/(Liabilities) at December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Assets (interest rate caps)
|
|
$
|
102
|
|
|
$
|
-
|
|
|
$
|
102
|
(1)
|
|
(1)
|
For interest rate caps, fair values are derived using valuation
models that utilize the income valuation approach. These valuation models take into account contract terms such as maturity, as
well as other inputs such as interest rate yield curves and creditworthiness of the counterparty and the Company.
|
Note 9 — Debt:
Debt consists of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
8.125% notes due 2018, net of unamortized discount and deferred costs of $3,160 and $3,514
|
|
$
|
115,804
|
|
|
$
|
115,450
|
|
OBS term loan, due 2019, net of unamortized discount and deferred costs of $15,753 and $19,340
|
|
|
498,535
|
|
|
|
574,615
|
|
OIN term loan, due 2019, net of unamortized discount and deferred costs of $19,790 and $23,727
|
|
|
528,666
|
|
|
|
595,222
|
|
7.5% Election 2 notes due 2021, net of unamortized discount and deferred costs of $9 and $9
|
|
|
292
|
|
|
|
292
|
|
7.50% notes due 2024
|
|
|
390
|
|
|
|
684
|
|
Total debt
|
|
|
1,143,687
|
|
|
|
1,286,263
|
|
Less current portion
|
|
|
71,154
|
|
|
|
63,039
|
|
Long-term portion
|
|
$
|
1,072,533
|
|
|
$
|
1,223,224
|
|
The weighted average interest rate for debt outstanding as of
March 31, 2016 and December 31, 2015 was 5.84% and 5.81%, respectively.
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Exit Financing Facilities
Capitalized terms used hereafter have the meanings given in
this Quarterly Report on Form 10-Q or in the Company’s 2015 Annual Report on Form 10-K or in the respective transaction documents
referred to below, including subsequent amendments thereto.
As of March 31, 2016, no amounts had been drawn under the OBS
or the OIN revolving loan facilities.
The OBS Term Loan and the OIN Term Loan amortize in equal quarterly
installments in aggregate annual amounts equal to 1% of the original principal amount of the loans, adjusted for mandatory prepayments.
Each of the OBS Term Loan and the OIN Facilities stipulates that if annual aggregate net cash proceeds of asset sales exceed $5,000,
the net cash proceeds from each such sale are required to be reinvested in fixed or capital assets within twelve months of such
sale or be used to prepay the principal balance outstanding of the respective facility. The OBS Term Loan and the OIN Term Loan
are subject to additional mandatory annual prepayments in an aggregate principal amount of up to 50% of Excess Cash Flow.
Management determined that it had Excess
Cash Flow under the OBS Term Loan for the three months ended March 31, 2016 and has projected the amount of Excess Cash Flow for
the nine months ended December 31, 2016 based on the facts at March 31, 2016. The mandatory prepayment, which is estimated to be
approximately $59,386 will be due during the first quarter of 2017, and is therefore included in current installments of long-term
debt on the condensed consolidated balance sheet as of March 31, 2016. Management estimates that no prepayment will be required
for the OIN Term Loan as a result of estimated Excess Cash Flow for the year ended December 31, 2016.
Each Exit Financing Facility contains certain
restrictions relating to new borrowings, and the movement of funds between the borrowers and OSG (as Parent Company), who is not
a borrower under the Exit Financing Facilities, as set forth in the respective loan agreements. The Parent Company’s ability
to receive cash dividends, loans or advances from OBS and OIN is restricted under their respective facilities. The Available Amount
for cash dividends, loans or advances to the Parent Company permitted under the OBS Term Loan and OIN Term Loan was $51,295 and
$60,200, respectively, as of March 31, 2016, after an OIN dividend distribution to the Parent Company of $72,000 during the three
months then ended.
The OIN Facilities have a covenant to maintain the aggregate
Fair Market Value (as defined in the loan agreement for the OIN Facilities) of the Collateral Vessels at greater than or equal
to $500,000 at the end of each fiscal quarter. The Company had substantial headroom under this covenant at March 31, 2016. None
of the other Exit Financing Facilities have financial covenants.
Interest expense, including amortization of issuance and deferred
financing costs (for additional information related to deferred financing costs (see Note 3, “Significant Accounting Policies”),
commitment, administrative and other fees for the three months ended March 31, 2016 was $19,802 for the Exit Financing Facilities,
comprised of $9,114 relating to the OBS Term Loan and OBS ABL Facility and $10,688 relating to the OIN Facilities. Interest expense
for the three month period ended March 31, 2015 was $19,703 for the Exit Financing Facilities, comprised of $9,313 relating to
the OBS Term Loan and OBS ABL Facility and $10,390 relating to the OIN Facilities. Interest paid for the three months ended March
31, 2016 was $8,341 and $9,648 for the OBS Term Loan and the OIN Term Loan, respectively, and interest paid for the three months
ended March 31, 2015 was $8,062 and $9,201 for the OBS Term Loan and the OIN Term Loan, respectively.
During the three months ended March 31, 2016, the Company made
repurchases in the open market and mandatory principal prepayments under the OBS Term Loan and OIN Term Loan as follows:
Loan Facility
|
|
Mandatory
Prepayment
|
|
|
Open Market
Repurchases
|
|
|
Total
|
|
OBS Term Loan
|
|
$
|
51,295
|
|
|
$
|
27,000
|
|
|
$
|
78,295
|
|
OIN Term Loan
|
|
|
-
|
|
|
|
68,922
|
|
|
|
68,922
|
|
Total
|
|
$
|
51,295
|
|
|
$
|
95,922
|
|
|
$
|
147,217
|
|
The aggregate net gain of $2,382 realized on these transactions
during the three months ended March 31, 2016 is included in other income in the condensed consolidated statements of operations.
The net gain reflects a $4,789 write-off of unamortized original issue discount and deferred financing costs associated with the
principal reductions, which were treated as partial extinguishments. Third party legal and consulting fees (aggregating approximately
$217) incurred by the Company in relation to the open market repurchases are included in general and administrative expenses in
the condensed consolidated statements of operations for the three months ended March 31, 2016.
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Unsecured Senior Notes
During the three months ended March 31, 2016, the Company repurchased
and retired an aggregate principal amount of $294 of its 7.5% notes due 2024. The aggregate loss of $50 realized on these transactions
during the three months ended March 31, 2016, is included in other income in the condensed consolidated statements of operations.
For the three months ended March 31, 2016 and 2015, interest
expense, including administrative and other fees, of $2,786 and $8,830, respectively, was recorded relating to the Unsecured Senior
Notes and $4,869 and $17,965 of interest was paid during the three months ended March 31, 2016 and 2015, respectively.
Note 10 — Taxes:
For the three months ended March 31, 2016 and 2015, the Company
recorded income tax provisions of $33,239 and $2,660, respectively, which represent effective tax rates of 40% and 6%, respectively.
The increase in the effective tax rate for the 2016 period was substantially due to management’s determination that commencing
for the third quarter of 2015 the Company could not make an assertion that OSG’s investment in OIN was essentially permanent
in duration and the resulting inclusion of a deferred tax liability for OIN’s earnings during 2016 as part of its income
tax provision.
As of March 31, 2016 and December 31, 2015, the Company recorded
a noncurrent reserve for uncertain tax positions of $2,529 and $2,520, respectively, after taking into consideration tax attributes,
such as net operating loss carryforwards, and accrued interest of $712 and $702, respectively.
As of March 31, 2016, the Company has recorded a deferred tax
liability of $70,601 related to the excess of OSG’s investment in OIN for financial reporting purposes over the tax basis
of such investment, as management does not believe that it can make an assertion that OSG’s investment in OIN is essentially
permanent in duration. If management maintains this position in future periods, that is, does not make an assertion that OSG’s
investment in OIN is essentially permanent in duration, then the Company will be required to record a provision for deferred income
taxes on the increase in the undistributed earnings of its foreign operations during such period at the statutory tax rate. At
the current time, management does not believe that it will be able to make the assertion that OSG’s investment in OIN is
essentially permanent in duration during 2016 and, accordingly, expects to record a provision for deferred income taxes on the
increase in the undistributed earnings of its foreign operations during the balance of 2016.
During the quarter ended March 31, 2016, the Company was notified
by the Internal Revenue Service that it will commence a tax examination for the years 2012 through 2014, as a result of the refund
claim of $54,884, which was received in the fourth quarter of 2015, from the carryback of the 2014 net operating loss to 2012 and
2013.
Note 11 — Capital Stock and Stock Compensation:
Share and Warrant Repurchases
During the three months ended March 31, 2016, the Company repurchased
460,900 shares of its Class A common stock in open-market purchases on the NYSE MKT at an average price of $2.11 per share, for
a total cost of $971. In addition, during the three months ended March 31, 2016, the Company repurchased 24,999,078 Class A warrants
in private transaction with non-affiliates at an average cost of $2.28 per warrant for a total cost of $56,990. Subsequent to March
31, 2016, the Company repurchased an additional 35,000 shares of Class A common stock for a total cost of $70, at an average price
of $2.00 per share.
In connection with the vesting of restricted stock units during
the first quarter of 2016, the Company repurchased 124,538 shares of Class A common stock at an average cost of $2.47 per share
from certain members of management to cover withholding taxes.
Warrant Conversions
During the three months ended March 31, 2016, the Company issued
9,075,565 shares of Class A common stock and 46,997 shares of Class B common stock as a result of the exercise of 8,285,284 Class
A warrants and 46,997 Class B warrants, respectively. During the three months ended March 31, 2015, the Company issued 694,517
shares of Class B common stock as a result of the exercise of 695,945 Class B warrants.
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Stock Compensation
The Company accounts for stock compensation expense in accordance
with the fair value based method required by ASC 718,
Compensation – Stock Compensation
. Such fair value based method
requires share based payment transactions to be measured based on the fair value of the equity instruments issued.
Management Compensation - Restricted Stock Units and Stock
Options
During the three months ended March 31, 2016, the Company granted
719,119 time-based restricted stock units (“RSUs”) to its senior officers. The weighted average grant date fair value
of these awards was $1.97 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.
During the three months ended March 31, 2016, the Company awarded
719,119 performance-based RSUs to its senior officers. Each performance stock unit represents a contingent right to receive RSUs
based upon the covered employees being continuously employed through the end of the period over which the performance goals are
measured and shall vest as follows: (i) one-third of the target RSUs shall vest on December 31, 2018, subject to OSG’s three-year
earnings per share (“EPS”) performance in the three-year EPS performance period relative to a compounded annual growth
rate (the “EPS Target”) set forth in the award agreements; (ii) one-third of the target RSUs shall vest on December
31, 2018, 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; and (iii) one-third of the
target RSUs will be subject to OSG’s three-year total shareholder return (“TSR”) performance relative to that
of a performance peer group over a three-year TSR performance period (“TSR Target”). Vesting is subject in each case
to the Human Resources and Compensation Committee’s certification of achievement of the performance measures and targets
no later than March 31, 2019. The EPS Target and ROIC Target are performance conditions which, as of March 31, 2016, management
believes, are not yet considered probable of being achieved. Accordingly, for financial reporting purposes, no compensation costs
will be recognized for these awards until it becomes probable that the performance conditions will be achieved. The grant date
fair value of the TSR based performance awards, which has a market condition, was determined to be $1.97 per RSU.
In addition, during the three months ended March 31, 2016, the
Company granted 231,280 performance-based RSUs (which represented the 2016 tranche of the awards made on October 12, 2015) to certain
members of senior management. The grant date fair value of the performance awards was determined to be $1.97 per RSU. Each performance
stock unit represents a contingent right to receive RSUs based upon certain performance related goals being met and the covered
employees being continuously employed through the end of the period over which the performance goals are measured. These performance
awards will vest on December 31, 2016, subject in each case to the Human Resources and Compensation Committee’s certification
of achievement of the performance measures and targets no later than March 31, 2017. Achievement of the performance condition in
this award was considered probable at March 31, 2016, and accordingly, compensation cost has been recognized commencing on March
30, 2016, the date of the award.
During the three months ended March 31, 2016, the Company awarded
to certain senior officers an aggregate of 1,914,413 stock options. Each stock option represents an option to purchase one share
of Class A common stock for an exercise price for $1.97 per share. The grant date fair value of the options was $0.58 per option.
Note 12 — Accumulated Other Comprehensive Loss:
The components of accumulated other comprehensive loss, net
of related taxes, in the condensed consolidated balance sheets follow:
|
|
March 31,
|
|
|
December 31,
|
|
As of
|
|
2016
|
|
|
2015
|
|
Unrealized losses on derivative instruments
|
|
$
|
(61,585
|
)
|
|
$
|
(54,620
|
)
|
Items not yet recognized as a component of net periodic benefit cost (pension and other postretirement benefit plans)
|
|
|
(18,486
|
)
|
|
|
(18,841
|
)
|
|
|
$
|
(80,071
|
)
|
|
$
|
(73,461
|
)
|
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
The changes in the balances of each component of accumulated
other comprehensive loss, net of related taxes, during the three months ended March 31, 2016 and 2015 follow:
|
|
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, 2015
|
|
$
|
(54,620
|
)
|
|
$
|
(18,841
|
)
|
|
$
|
(73,461
|
)
|
Current period change, excluding amounts reclassified from accumulated other comprehensive loss
|
|
|
(11,265
|
)
|
|
|
355
|
|
|
|
(10,910
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
4,300
|
|
|
|
-
|
|
|
|
4,300
|
|
Total change in accumulated other comprehensive loss
|
|
|
(6,965
|
)
|
|
|
355
|
|
|
|
(6,610
|
)
|
Balance as of March 31, 2016
|
|
$
|
(61,585
|
)
|
|
$
|
(18,486
|
)
|
|
$
|
(80,071
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2014
|
|
$
|
(61,547
|
)
|
|
$
|
(21,833
|
)
|
|
$
|
(83,380
|
)
|
Current period change, excluding amounts reclassified from accumulated other comprehensive loss
|
|
|
(8,302
|
)
|
|
|
496
|
|
|
|
(7,806
|
)
|
Amounts reclassified from accumulated other comprehensive loss
|
|
|
4,726
|
|
|
|
-
|
|
|
|
4,726
|
|
Total change in accumulated other comprehensive loss
|
|
|
(3,576
|
)
|
|
|
496
|
|
|
|
(3,080
|
)
|
Balance as of March 31, 2015
|
|
$
|
(65,123
|
)
|
|
$
|
(21,337
|
)
|
|
$
|
(86,460
|
)
|
Amounts reclassified out of each component of accumulated other
comprehensive loss follow:
|
|
Three Months Ended
|
|
|
|
|
|
March 31,
|
|
|
|
Accumulated Other Comprehensive Income Component
|
|
2016
|
|
|
2015
|
|
|
Statement of Operations
Line Item
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps entered into by the Company's equity method joint venture investees
|
|
$
|
(4,272
|
)
|
|
$
|
(4,726
|
)
|
|
Equity in income of affiliated companies
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate caps entered into by the Company's subsidiaries
|
|
|
(28
|
)
|
|
|
-
|
|
|
Interest expense
|
|
|
$
|
(4,300
|
)
|
|
$
|
(4,726
|
)
|
|
Total before and net of tax
|
See Note 8, “Fair Value of Financial Instruments, Derivatives
and Fair Value Disclosures,” for additional disclosures relating to derivative instruments.
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
The income tax expense/(benefit) allocated to each component
of other comprehensive loss follows:
|
|
Tax (expense)/ benefit on
unrealized gains/(losses)
on cash flow hedges
|
|
|
Tax (expense)/ benefit on
items not yet recognized
as a component of net
periodic benefit cost
|
|
For the three months ended March 31, 2016
|
|
|
|
|
|
|
|
|
Current period change excluding amounts reclassified from accumulated other comprehensive income
|
|
$
|
27
|
|
|
$
|
-
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
-
|
|
|
|
-
|
|
Total change in accumulated other comprehensive income
|
|
$
|
27
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2015
|
|
|
|
|
|
|
|
|
Current period change excluding amounts reclassified from accumulated other comprehensive income
|
|
$
|
316
|
|
|
$
|
-
|
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
-
|
|
|
|
-
|
|
Total change in accumulated other comprehensive income
|
|
$
|
316
|
|
|
$
|
-
|
|
Note 13 — Leases:
1. Charters-in:
As of March 31, 2016, the Company had commitments to charter
in 17 vessels. All of the charters-in are accounted for as operating leases, of which 13 are bareboat charters and four are time
charters. Lease expense relating to charters-in is included in charter hire expenses in the condensed consolidated statements of
operations. The future minimum commitments and related number of operating days under these operating leases are as follows:
Bareboat Charters-in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2016
|
|
Amount
|
|
|
Operating Days
|
|
2016
|
|
$
|
74,224
|
|
|
|
3,575
|
|
2017
|
|
|
98,219
|
|
|
|
4,713
|
|
2018
|
|
|
93,200
|
|
|
|
3,929
|
|
2019
|
|
|
111,819
|
|
|
|
3,470
|
|
2020
|
|
|
9,168
|
|
|
|
366
|
|
Thereafter
|
|
|
41,007
|
|
|
|
1,637
|
|
Net minimum lease payments
|
|
$
|
427,637
|
|
|
|
17,690
|
|
Time Charters-in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2016
|
|
Amount
|
|
|
Operating Days
|
|
2016
|
|
$
|
19,879
|
|
|
|
1,717
|
|
2017
|
|
|
12,819
|
|
|
|
989
|
|
Net minimum lease payments
|
|
$
|
32,698
|
|
|
|
2,706
|
|
The future minimum commitments for time charters-in
excludes amounts with respect to vessels chartered-in where the duration of the charter was one year or less at the inception
but includes amounts with respect to workboats employed in the International Crude Tankers Lightering business. Time charter-in
commitments have been reduced to reflect estimated days that the vessels will not be available for employment due to drydock because
the Company does not pay time charter hire when time chartered-in vessels are not available for its use. Certain of the bareboat
charters-in provide for the payment of profit share to the owners of the vessels calculated in accordance with the respective
charter agreements. 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, no profits are expected to be paid to the owners before 2018, in respect
of the year ending December 31, 2017. Certain of the charters in the above tables also provide the Company with renewal and purchase
options.
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
2. Charters-out:
The future minimum revenues, before reduction for brokerage
commissions, expected to be received on noncancelable time charters and certain contracts of affreightment (“COAs”)
for which minimum annual revenues can be reasonably estimated and the related revenue days (revenue days represent calendar days,
less days that vessels are not available for employment due to repairs, drydock or lay-up) are as follows:
At March 31, 2016
|
|
Amount
|
|
|
Revenue
Days
|
|
2016
|
|
$
|
338,563
|
|
|
|
7,637
|
|
2017
|
|
|
236,278
|
|
|
|
4,363
|
|
2018
|
|
|
144,882
|
|
|
|
2,005
|
|
2019
|
|
|
78,068
|
|
|
|
933
|
|
2020
|
|
|
43,766
|
|
|
|
532
|
|
Thereafter
|
|
|
134,438
|
|
|
|
1,570
|
|
Net minimum lease payments
|
|
$
|
975,995
|
|
|
|
17,040
|
|
Future minimum revenues do not include (1) the Company’s
share of time charters entered into by the pools in which it participates, (2) the Company’s share of time charters entered
into by the joint ventures, which the Company accounts for under the equity method and (3) COAs for which minimum annual revenues
cannot be reasonably estimated. Revenues from those COAs that are included in the table above, $22,419 (2016), $24,294 (2017),
$22,698 (2018), $23,031 (2019) and $6,356 (2020), are based on minimum annual volumes of cargo to be loaded during the contract
periods at a fixed price and do not contemplate early termination of the COAs as provided in the agreements. Amounts that would
be due to the Company in the event of the cancellation of the COA contracts have not been reflected in the table above. 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 there is no assurance that such estimate will be reflective of the actual off-hire in the
future.
3. Office Space:
During the three months ended March 31, 2016, the Company entered
into a 60-month lease agreement for office space for its New York headquarters. Future annual minimum lease payments will be approximately
$935.
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Note 14 — Contingencies:
The Company’s policy for recording legal costs related
to contingencies is to expense such legal costs as incurred.
Class Action Lawsuits and Derivative Actions
The Company has fully and finally resolved all potential direct
claims by members of the putative class of securities claimants through a settlement effectuated through the Equity Plan, which
became effective on August 5, 2014. Under the terms of that settlement, the Equity Plan provides for full satisfaction of the claims
of the putative class through (i) $7,000 in cash, which was paid on August 5, 2014, (ii) $3,000 in cash, which was paid by the
Company on August 5, 2015, (iii) any remaining cash in the Class E1 Disputed Claims Reserve established by the Equity Plan following
resolution of all other Class E1 claims, which was paid on October 5, 2015, (iv) 15% (or $2,136) of the Net Litigation Recovery
in the action against Proskauer (described below), which was paid on April 5, 2016, (v) $5,000 in cash, following the entry of
a final order resolving the Proskauer action, which was paid on March 17, 2016, and (vi) proceeds of any residual interest the
Company has in certain director and officer insurance policies.
The settled claims stem from the Company’s filing of a
Form 8-K on October 22, 2012 disclosing that on October 19, 2012 the Audit Committee of the Board of Directors of the Company,
on the recommendation of management, concluded that the Company’s previously issued financial statements for at least the
three years ended December 31, 2011 and associated interim periods, and for the fiscal quarters ended March 31, 2012 and June 30,
2012, should no longer be relied upon. Shortly thereafter several putative class action suits were filed in the United States District
Court for the Southern District of New York (the “Southern District”) against the Company, its then President and Chief
Executive Officer, its then Chief Financial Officer, its then current and certain former members of its Board of the Directors,
its current independent registered public accounting firm, and underwriters of the Company’s public offering of notes in
March 2010 (the “Offering”). The Company’s former independent registered public accounting firm was later added
as a defendant. Subsequent to the Company’s filing for relief under Chapter 11, these suits were consolidated and the plaintiffs
filed an amended complaint that does not name the Company as a defendant. The consolidated suit is purportedly on behalf of purchasers
of Company securities between March 1, 2010 and October 19, 2012 and purchasers of notes in the Offering. The plaintiffs alleged
that documents that the Company filed with the SEC were defective, inaccurate and misleading, that the plaintiffs relied on such
documents in purchasing the Company’s securities, and that, as a result, the plaintiffs suffered losses. The plaintiffs asserted
claims under the Securities Act against all defendants and claims under the Securities Exchange Act of 1934 (the “Exchange
Act”) against the then former President and former Chief Financial Officer of the Company. Following additional amendments
on plaintiffs’ Exchange Act claims and motion to dismiss briefing, on April 28, 2014, the Southern District denied the motion
to dismiss the Exchange Act claims filed by the then former President and former Chief Financial Officer on the third amended complaint.
On March 18, 2015, OSG’s former independent registered public accounting firm moved for summary judgment and on May 29, 2015,
the Southern District issued an order granting that motion. On July 1, 2015, the plaintiffs noticed an appeal of that order to
the U.S. Court of Appeals for the Second Circuit. On September 2, 2015, the plaintiffs and OSG’s former independent registered
public accounting firm filed a stipulation withdrawing that appeal with prejudice. On August 6, 2015, the plaintiffs moved for
the Southern District to preliminarily approve settlements with respect to all of the plaintiffs’ remaining claims, including
settlements with former officers and directors of the Company, the Company’s former underwriters, and the Company’s
current independent registered public accounting firm that contemplate payments of $10,500, $4,000 and $1,750, respectively, on
behalf of such defendants. On August 12, 2015, the Southern District preliminarily approved those settlements, and on December
2, 2015, entered orders that (a) certified the proposed class for settlement purposes, (b) approved a plan of allocation for distribution
of settlement proceeds, (c) finally approved those settlements, and (d) entered final orders of judgment dismissing the remaining
defendants from the action.
The plaintiffs in the Southern District action filed a proof
of claim against the Company in the Bankruptcy Court. Pursuant to a settlement with such plaintiffs and the putative class on whose
behalf their claim is filed, their direct claims against the Company are fully and finally resolved based on the Equity Plan treatment
described above. Separately, certain of the defendants in the Southern District have filed claims in the Bankruptcy Court against
the Company for indemnification or reimbursement based on potential losses incurred in connection with such action. Each of those
indemnification claims, asserted by certain former directors and officers of the Company, have been released pursuant to the Equity
Plan or otherwise resolved by the Reorganized Debtors. In addition, the indemnification claims asserted by the Company’s
former underwriters have been resolved and paid pursuant to the orders of the Bankruptcy Court and the Equity Plan. On October
5, 2015, following the resolution of all disputed Class E1 claims, the Reorganized Debtors disbursed the remaining funds in the
Disputed Claims Reserve for Class E1 to representatives of the putative class in accordance with the Equity Plan and Confirmation
Order The Equity Plan and orders of the Bankruptcy Court foreclose the defendants in the Southern District from pursuing any other
or further remedies against the Company.
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
Proskauer Action
On February 23, 2014, Proskauer and four
of its partners (the “Proskauer Plaintiffs”) filed an action in the Supreme Court of the State of New York, County
of New York (the “Supreme Court”) against the then Senior Vice President, General Counsel and Secretary and the former
Chief Financial Officer alleging that the defendants engaged in tortious and fraudulent conduct that caused significant harm to
the Proskauer Plaintiffs and the Company. The Proskauer Plaintiffs alleged that the defendants made false representations and
thereby deceived and misled Proskauer into providing legal advice to the Company, which was the subject of the Company’s
malpractice suit against Proskauer and four of its partners filed on November 18, 2013 in the Bankruptcy Court. On May 1, 2014,
the defendants in the action filed by the Proskauer Plaintiffs filed motions to dismiss the action. On June 9, 2014, the Proskauer
Plaintiffs filed an amended complaint that included certain additional factual allegations and an additional claim against the
former Chief Financial Officer of the Company. On July 18, 2014, the defendants filed motions to dismiss the Proskauer Plaintiffs’
amended complaint. On January 15, 2015, the Supreme Court dismissed the Proskauer Plaintiffs’ amended complaint in its entirety
against the defendants. On March 2, 2015, the Proskauer Plaintiffs filed a notice of appeal of the Supreme Court’s decision
to the Appellate Division of the Supreme Court, First Department (the “Appellate Court”). Proskauer filed its appellant’s
brief on August 17, 2015. The appellees filed their response briefs on October 30, 2015 and Proskauer filed its reply brief on
November 13, 2015. On February 12, 2016, as part of the settlement agreement between the Company and Proskauer and four of its
partners, the Proskauer Plaintiffs agreed to withdraw their appeal of the Supreme Court’s dismissal of the amended complaint
against the defendants and on March 31, 2016, the Appellate Court dismissed the appeal.
On February 21, 2014, the Bankruptcy Court declined to hear
the Company’s malpractice claims against Proskauer and four of its partners that were filed on November 18, 2013 under the
doctrine of permissive abstention, and on March 11, 2014, the Company re-filed its malpractice claims against such defendants in
the Supreme Court. On April 11, 2014, Proskauer and four of its partners filed a motion to dismiss the malpractice action, and
on September 10, 2014, the Supreme Court denied the motion to dismiss the legal malpractice claim for breach of duty of care but
granted the motion to dismiss the legal malpractice claim for breach of duty of loyalty as subsumed within the duty of care claim.
Proskauer and four of its partners appealed this decision to the Appellate Division of the Supreme Court, First Department and
on July 2, 2015, the appellate court affirmed the Supreme Court’s denial of Proskauer’s motion to dismiss. In addition,
on December 3, 2014, the Company filed a motion with the Supreme Court for partial summary judgment on whether the “joint
and several” liability provisions of certain of the Company’s prior loan agreements, which are the focus of the malpractice
action, are unambiguous as a matter of law. The Supreme Court denied that motion as being procedurally premature on July 24, 2015.
On May 20, 2015, the Supreme Court issued a scheduling order
for discovery in the Company’s malpractice action against Proskauer. Under the terms of that scheduling order, all discovery
was to be completed by April 15, 2016. On October 16, 2015, the parties agreed to extend the deadline for all discovery to be completed
to August 1, 2016, and the Court issued a revised scheduling order.
On February 12, 2016, the Company entered into an agreement
with Proskauer and four of its partners to settle the malpractice suit. See Note 2, “Chapter 11 Filing and Emergence from
Bankruptcy,” for additional information.
On March 3, 2016, pursuant to the settlement agreement with
Proskauer, the Supreme Court entered an order discontinuing the Proskauer action with prejudice, which order has become final and
nonappealable.
SEC Investigation
On November 13, 2012, the Company received from the staff of
the SEC’s Division of Enforcement (the “Staff”) a request for documents relating to the statements in the Company’s
October 22, 2012 Form 8-K. On January 29, 2013, the SEC issued a formal order of private investigation of the Company. The Company
has provided documents to the SEC and intends to continue to cooperate fully with the SEC’s investigation.
The Equity Plan provides for funding for potential liabilities
that the SEC may assert in connection with its proof of claim (the “SEC Claim”) to the extent that the SEC Claim is
allowed. The SEC filed the SEC Claim in respect of contingent and unliquidated amounts that the SEC may assert against the Company
as a result of the outcome of its investigation of the Company and certain of its advisors. Pursuant to the Equity Plan, the Debtors
will fund a cash reserve of up to $5,000 to satisfy any liabilities on account of the SEC Claim, solely to the extent and upon
the entry of a final order of the Bankruptcy Court providing that the SEC Claim or any portion thereof is allowed. The SEC and
the Debtors have agreed that there is no inference, assertion, concession, admission, determination or conclusion that should be
drawn from the establishment of the reserve, as the SEC’s investigation of the Company, its advisors and individuals inside
and outside of the Company is ongoing, and the SEC will make a determination of whether there were securities laws violations only
at the conclusion of its investigation. The SEC has reached no such conclusion, and the Staff sought a reserve solely in recognition
of the fact that the SEC had not completed its investigation prior to the Equity Plan’s confirmation.
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, should not be material to the Company’s financial position, results of operations and cash flows.
OVERSEAS SHIPHOLDING GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS