Nordic American Tankers (US:NAT)2023-04-27 20:04PART I Key Information This section outlines material risks associated with the company, categorized by business conditions, vessel operations, indebtedness, and investment Risk Factors The company faces material risks from the Suezmax tanker industry's cyclicality, dependence on spot charter rates, environmental regulations, and debt covenants - The Suezmax tanker industry is historically cyclical and volatile, which could negatively impact revenues, earnings, and cash flow if the market becomes depressed3337 - The company is highly dependent on spot charters, making its earnings vulnerable to declines in spot charter rates, which could affect its ability to pay dividends and service debt3545 - Increasingly stringent environmental regulations, including those for ballast water discharge and greenhouse gas emissions, may impose significant additional costs and adversely affect profitability35107109 - Existing debt facilities contain restrictive covenants tied to financial ratios and vessel market values, where a breach could lead to default and foreclosure on the company's fleet35140141 - Geopolitical events, such as the Russia-Ukraine conflict and related sanctions, can disrupt trade flows, increase operating costs, and adversely affect business3568177 Information on the Company This section details the company's history, its exclusive focus on a homogenous Suezmax tanker fleet, and the highly regulated operational environment History and Development of the Company Founded in 1995, the company operates a homogenous Suezmax fleet, prioritizes quarterly dividends, and actively manages its capital structure and fleet renewal - The company's core business strategy is the "Nordic American System," which involves operating a homogenous fleet of Suezmax tankers to streamline costs and maintain flexibility202203206 - A key priority is paying quarterly cash dividends, a practice maintained for 102 consecutive quarters, supported by a low operating cash break-even level of about $8,000 per day per vessel207208 - In 2022, the company renewed its fleet by selling five older vessels and taking delivery of two newbuildings, bringing the total fleet to 19 Suezmax tankers201 - The company utilized At-the-Market (ATM) equity programs to raise capital, including a $60 million program that raised $33.6 million in gross proceeds during 2022217 Business Overview The company operates its fleet primarily in the spot market, which saw a significant earnings surge in 2022, with a positive outlook for 2023 Fleet Composition as of December 31, 2022 | Vessel | Built in | Deadweight Tons | | :--- | :--- | :--- | | Nordic Pollux | 2003 | 150,103 | | Nordic Apollo | 2003 | 159,999 | | Nordic Luna | 2004 | 150,037 | | Nordic Castor | 2004 | 150,249 | | Nordic Freedom | 2005 | 159,331 | | Nordic Sprinter | 2005 | 159,089 | | Nordic Skier | 2005 | 159,089 | | Nordic Vega | 2010 | 163,940 | | Nordic Light | 2010 | 158,475 | | Nordic Cross | 2010 | 158,475 | | Nordic Breeze | 2011 | 158,597 | | Nordic Zenith | 2011 | 158,645 | | Nordic Star | 2016 | 157,738 | | Nordic Space | 2017 | 157,582 | | Nordic Aquarius | 2018 | 157,338 | | Nordic Cygnus | 2018 | 157,526 | | Nordic Tellus | 2018 | 157,407 | | Nordic Hunter | 2022 | 157,037 | | Nordic Harrier | 2022 | 157,094 | - The majority of the fleet operates in the spot market, with four vessels on longer-term time charters; the two 2022 newbuildings are on six-year time charters220 - The Suezmax market experienced a strong recovery in 2022, with average earnings of $48,800/day, a significant increase from $5,200/day in 2021, largely due to the Russia/Ukraine conflict232 - The outlook for 2023 is positive, supported by a historically low Suezmax orderbook of just 10 vessels (1.7% of the fleet) at the start of the year, which is expected to limit fleet growth237246 Operating and Financial Review and Prospects The company's financial performance improved significantly in 2022, driven by higher charter rates, leading to profitability and enhanced liquidity Operating Results The company achieved a net income of $15.1 million in 2022, a major turnaround from a $171.3 million loss in 2021, driven by a 207.4% TCE rate increase Financial Performance Comparison (2022 vs. 2021) | Metric | 2022 | 2021 | Variance | | :--- | :--- | :--- | :--- | | Voyage Revenues | $339.3M | $191.1M | 77.6% | | Net Voyage Revenue | $168.8M | $62.8M | 168.8% | | TCE Rate per day | $24,725 | $8,043 | 207.4% | | Vessel Operating Expenses | ($63.4M) | ($67.7M) | -6.3% | | Impairment Loss on Vessels | ($0.3M) | ($60.3M) | -99.5% | | Net Income (Loss) | $15.1M | ($171.3M) | N/A | - The primary driver for the improved performance in 2022 was the 207.4% increase in the TCE rate per day, which rose from $8,043 in 2021 to $24,725 in 2022335 - Voyage expenses increased by 32.9% to $170.5 million, mainly due to a sharp rise in the average price of bunker fuel, despite lower consumption from fewer vessel days337 - Depreciation expenses decreased by 26.2% to $50.4 million, reflecting the sale of vessels and the lower carrying values of certain vessels following impairment charges taken in 2021341 Liquidity and Capital Resources The company's liquidity improved with cash rising to $59.6 million, supported by positive operating cash flow and equity issuances, while maintaining compliance with debt covenants Cash and Debt Position (as of Dec 31) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Cash and Cash Equivalents | $59.6M | $34.7M | | Restricted Cash | $3.7M | $9.9M | | 2019 Senior Secured Credit Facility (Outstanding) | $129.2M | $223.1M | | Financing of 2018-built Vessels (Outstanding) | $96.0M | $104.3M | | Financing of 2022 Newbuildings (Outstanding) | $84.9M | $0 | - The company's 2019 Senior Secured Credit Facility matures in February 2024; management expects to repay the debt from cash flows but has flexibility through its ATM program, vessel sales, or refinancing382385 - In 2022, the company raised $33.6 million in gross proceeds by issuing 14.3 million common shares through its $60 million 2022 ATM program378 Cash Flow Summary | Metric (USD '000) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net Cash from Operating Activities | 24,134 | (44,458) | 110,944 | | Net Cash Used in Investing Activities | (14,343) | (3,465) | (17,476) | | Net Cash from Financing Activities | 9,005 | 30,513 | (93,075) | Critical Accounting Estimates Vessel impairment is the most critical accounting estimate, with no new indicators identified in 2022 due to strong market recovery and higher vessel values - Vessel impairment is a critical estimate; the company recognized impairment charges of $60.3 million in 2021 but did not identify any new impairment indicators in 2022 due to positive market factors409410 Vessel Value Comparison (as of Dec 31, 2022) | Metric | Value (USD millions) | | :--- | :--- | | Total Carrying Value of Fleet | $735.1 | | Estimated Fair Market Value (Broker Average) | $955.0 | - The impairment analysis, when triggered, relies heavily on estimates of future charter rates, using broker estimates for the first two years and a 15-year historical average thereafter411413 - Vessels are depreciated over an estimated economic useful life of 25 years, with an estimated residual (scrap) value of $8.0 million per vessel423424 Directors, Senior Management and Employees This section details leadership compensation, the equity incentive plan, and key governance structures, including the Audit Committee and foreign private issuer exemptions - Aggregate cash compensation paid to directors and executive officers (five persons) was $5.5 million for the year ended December 31, 2022436 - Under its 2011 Equity Incentive Plan, the company granted 3,990,000 stock options on November 1, 2022, with a two-year vesting period and an exercise price of $3.60 per share441 - The Board has an Audit Committee consisting of a single independent director, Ms. Jenny Chu, who is the designated audit committee financial expert443602 - As a foreign private issuer, the company follows Bermuda corporate governance practices, which differ from NYSE standards, notably in not having a nominating committee444615 Major Shareholders and Related Party Transactions This section discloses principal shareholders, including the Hansson family and BlackRock, and a related party transaction involving a Board member Major Shareholders | Identity of Person | Percent of Class | | :--- | :--- | | Hansson family | 3.02% | | BlackRock, Inc | 5.82% | - A related party transaction exists with a company owned by a Board member for the use of a corporate asset, resulting in a recognized expense of $0.3 million in 2022452 Financial Information This section confirms the absence of material legal proceedings and outlines the company's quarterly dividend policy and distributions for 2022 - The company is not currently a party to any lawsuit that would have a material adverse effect on its financial position456 Quarterly Dividends Per Share (2022) | Period | 2022 | | :--- | :--- | | 1st Quarter | $0.01 | | 2nd Quarter | $0.02 | | 3rd Quarter | $0.03 | | 4th Quarter | $0.05 | | Total | $0.11 | - A dividend of $0.15 per share for Q4 2022 was declared and paid to shareholders on March 28, 2023458 Additional Information This section details the company's corporate structure, shareholder rights agreement, and favorable tax status in Bermuda and the U.S - The company has a Shareholder Rights Agreement (poison pill) that becomes exercisable if a person or group acquires 15% or more of the company's common shares without Board approval486487 - As a Bermuda-exempted company, NAT is not subject to Bermuda income, profits, or capital gains tax and has received an assurance this status will be maintained until March 31, 2035517 - The company believes it qualifies for the exemption under Section 883 of the U.S. Internal Revenue Code, making its U.S.-source shipping income exempt from U.S. federal income tax525530 - The company believes it has not been a Passive Foreign Investment Company (PFIC) for taxable years after 2004 and does not anticipate becoming one549 Quantitative and Qualitative Disclosures about Market Risk The company is primarily exposed to interest rate risk from variable-rate debt and spot market risk from its vessel chartering strategy - The company is exposed to interest rate risk from its variable-rate borrowings; a 100 basis point increase in LIBOR would have increased interest expense by approximately $3.1 million for 2022582584 - The company is exposed to spot market risk; a $1,000 per day per vessel decrease in the spot market rate would have decreased 2022 voyage revenue by an estimated $6.8 million585586 PART II Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective, and a prior-year material weakness was successfully remediated - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022592 - Based on the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2022, which was confirmed by KPMG AS596597 - The company successfully remediated the material weakness identified in its 2021 annual report, which related to controls over a manual journal entry in the consolidation process599600 Other Information (Items 16A-16I) This section covers governance topics, including the designation of a financial expert, accountant fees, and reliance on home country governance practices - The Board of Directors has designated Ms. Chu as the "audit committee financial expert"602 Principal Accountant Fees (KPMG AS) | Fiscal Year | Audit Fees | | :--- | :--- | | 2022 | $836,921 | | 2021 | $886,650 | - The company's corporate governance practices differ from NYSE standards, including having an audit committee with only one member and lacking a nominating/corporate governance committee615 PART III Financial Statements This section presents the audited consolidated financial statements for the three years ended December 31, 2022, showing a return to profitability Consolidated Statement of Operations Highlights | Metric (USD '000) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Voyage Revenues | 339,340 | 191,075 | 354,619 | | Net Operating Income (Loss) | 41,867 | (144,463) | 81,227 | | Net Income (Loss) | 15,101 | (171,328) | 50,033 | | Basic and Diluted EPS | 0.07 | (1.05) | 0.34 | Consolidated Balance Sheet Highlights | Metric (USD '000) | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | 142,662 | 107,108 | | Vessels, Net | 735,134 | 715,263 | | Total Assets | 879,883 | 851,152 | | Total Current Liabilities | 72,414 | 67,645 | | Long-Term Debt | 266,337 | 283,411 | | Total Shareholders' Equity | 539,982 | 498,223 | Consolidated Statement of Cash Flows Highlights | Metric (USD '000) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net Cash from Operating Activities | 24,134 | (44,458) | 110,944 | | Net Cash from Investing Activities | (14,343) | (3,465) | (17,476) | | Net Cash from Financing Activities | 9,005 | 30,513 | (93,075) | Exhibits This section lists all exhibits filed with the annual report, including organizational documents, agreements, and required CEO and CFO certifications