SFL .(SFL) - 2023 Q2 - Quarterly Report

Report Overview Cover Page and Introduction SFL Corporation Ltd.'s Form 6-K report provides unaudited interim financial statements and MD&A for the six months ended June 30, 2023 - The report is a Form 6-K for a foreign private issuer, SFL Corporation Ltd., filed for the month of August 2023[1] - It includes the unaudited condensed interim financial statements and related Management's Discussion and Analysis (MD&A) for the six months ended June 30, 2023[3] Unaudited Condensed Consolidated Financial Statements Unaudited Condensed Consolidated Statements of Operations Total operating revenues increased to $337.8 million, while net income sharply declined to $23.3 million for the six months ended June 30, 2023 Consolidated Statements of Operations Highlights (Six months ended June 30) | Metric | 2023 (in thousands of $) | 2022 (in thousands of $) | Change | | :--- | :--- | :--- | :--- | | Total operating revenues | 337,827 | 305,686 | ▲ 10.5% | | Net operating income | 101,791 | 135,634 | ▼ 25.0% | | Interest expense | (82,554) | (50,104) | ▲ 64.8% | | Net income | 23,264 | 104,429 | ▼ 77.7% | | Basic earnings per share | $0.18 | $0.82 | ▼ 78.0% | | Diluted earnings per share | $0.18 | $0.79 | ▼ 77.2% | Unaudited Condensed Consolidated Statements of Comprehensive Income Comprehensive income for H1 2023 significantly decreased to $24.7 million, driven by lower net income and reduced other comprehensive income Consolidated Statements of Comprehensive Income (Six months ended June 30) | Metric | 2023 (in thousands of $) | 2022 (in thousands of $) | | :--- | :--- | :--- | | Net income | 23,264 | 104,429 | | Other comprehensive income, net of tax | 1,412 | 13,887 | | Comprehensive income | 24,676 | 118,316 | Unaudited Condensed Consolidated Balance Sheets Total assets slightly decreased to $3.81 billion, with total liabilities also reducing to $2.76 billion as of June 30, 2023 Consolidated Balance Sheet Highlights | Metric | June 30, 2023 (in thousands of $) | Dec 31, 2022 (in thousands of $) | | :--- | :--- | :--- | | Cash and cash equivalents | 201,466 | 188,362 | | Total assets | 3,806,136 | 3,861,330 | | Short-term debt | 347,845 | 921,270 | | Long-term debt | 1,762,203 | 1,279,786 | | Total liabilities | 2,755,110 | 2,770,099 | | Total stockholders' equity | 1,051,026 | 1,091,231 | Unaudited Condensed Consolidated Statements of Cash Flows Net cash from operating activities increased to $231.0 million, while investing and financing activities resulted in net cash outflows for H1 2023 Consolidated Statements of Cash Flows Highlights (Six months ended June 30) | Metric | 2023 (in thousands of $) | 2022 (in thousands of $) | | :--- | :--- | :--- | | Net cash provided by operating activities | 230,962 | 166,707 | | Net cash used in investing activities | (35,544) | (106,008) | | Net cash (used in)/provided by financing activities | (182,314) | 14,871 | | Net change in cash | 13,104 | 75,570 | Unaudited Condensed Consolidated Statements of Changes in Stockholders' Equity Total stockholders' equity slightly increased to $1.051 billion, influenced by net income, dividend declarations, and share repurchases in H1 2023 - The company repurchased 527,417 shares for $4.8 million during the six months ended June 30, 2023[24] - Dividends declared in the first six months of 2023 totaled $60.9 million, compared to $16.0 million from accumulated profit in the same period of 2022 (with an additional $37.3 million from contributed surplus)[24] Notes to the Unaudited Condensed Consolidated Financial Statements Note 2: Gain on Sale of Assets and Termination of Charters The company recorded a net gain of $16.4 million from two Suezmax tanker sales and a minimal gain from two chemical tankers after impairment in H1 2023 - Sold two Suezmax tankers, Glorycrown and Everbright, for net proceeds of $84.9 million, recording a gain of $16.4 million[35] - Sold two chemical tankers, SFL Weser and SFL Elbe, for net proceeds of $19.4 million. An impairment loss of $7.4 million was recorded prior to the sale[36] Note 6: Vessels, Rigs and Equipment, Net Net book value of vessels, rigs, and equipment decreased to $2.59 billion, with $120.2 million in capital improvements and a $7.4 million impairment loss - Capital improvements totaled $120.2 million, mainly for the Special Periodic Survey (SPS) and other upgrades on the semi-submersible drilling rig Hercules[54] - An impairment loss of $7.4 million was recorded on two chemical tankers prior to their disposal[56][57] Note 7: Capital Improvements, Newbuildings and Vessel Purchase Deposits The company paid $112.5 million for four newbuilding dual-fuel car carriers, chartered to Volkswagen Group and K Line for future deliveries - Paid $47.3 million for two dual-fuel 7,000 CEU newbuilding car carriers, which will commence 10-year charters to Volkswagen Group upon delivery in H2 2023[60] - Paid $65.2 million for another two dual-fuel 7,000 CEU newbuilding car carriers, which will commence 10-year charters to K Line upon delivery in 2024[61] Note 12: Short-Term and Long-Term Debt Total debt principal decreased to $2.13 billion, following significant refinancing activities including new bond issuance and convertible bond redemption Debt Principal Summary | Debt Category | June 30, 2023 (in thousands of $) | Dec 31, 2022 (in thousands of $) | | :--- | :--- | :--- | | Total debt principal | 2,130,699 | 2,213,636 | | Less: Current portion | (347,845) | (921,270) | | Total long-term debt | 1,762,203 | 1,279,786 | - In February 2023, the company issued $150.0 million of 8.875% senior unsecured sustainability-linked bonds due 2027[81] - The company redeemed the full outstanding amount of its 4.875% senior unsecured convertible bonds due 2023, satisfying the remaining $84.9 million in cash at maturity[43][79] Note 13: Financial Instruments The company utilizes interest rate swaps to manage debt risks, is transitioning to SOFR, and has significant revenue concentration with top charterers - The total net notional principal amount of interest rate swap agreements was $0.4 billion as of June 30, 2023, down from $0.6 billion at year-end 2022[90] - The company is transitioning its loan and swap agreements from LIBOR to SOFR, with no material impact anticipated on financial statements[91] Top Customer Revenue Concentration (Six months ended June 30, 2023) | Charterer | % of consolidated operating revenues | | :--- | :--- | | Maersk A/S | 31% | | Evergreen Marine Corporation | 15% | | Conocophillips Skandinavia AS | 11% | | Trafigura Maritime Logistics Pte Ltd | 9% | | Golden Ocean Group Limited | 8% | Note 14: Share Capital, Additional Paid-In Capital and Contributed Surplus The Board authorized a $100 million share repurchase program, with $4.8 million in shares repurchased and two quarterly dividends declared in H1 2023 - On May 8, 2023, the Board of Directors authorized a share repurchase program for up to $100 million of the company's common shares, valid until June 30, 2024[112] - During H1 2023, the company repurchased 527,417 shares at an average price of $9.15 per share, for a total of $4.8 million[112] - The company declared two dividends of $0.24 per share each in February and May 2023[111] Note 19: Commitments and Contingent Liabilities The company has significant capital commitments for new car carriers ($194.2 million) and vessel upgrades ($57.0 million), with $2.64 billion in assets pledged - The company has committed to paying approximately $194.2 million for the construction of four newbuilding dual-fuel car carriers[145] - There are commitments of approximately $57.0 million for efficiency upgrades, including scrubbers, on six vessels, with installations expected through 2024[144] - Assets with a book value of $2.64 billion are pledged under ship mortgages as security for loan facilities[138] Note 20: Subsequent Events Subsequent events include a declared dividend, a new rig contract for Hercules, the sale of VLCC Landbridge Wisdom, and additional share repurchases - On August 17, 2023, the Board declared a dividend of $0.24 per share[147] - In August 2023, the rig Hercules secured a contract with Equinor Canada Ltd. expected to commence in Q2 2024[148] - Subsequent to the quarter end, the company repurchased an additional 566,378 shares for $5.3 million[149] Management's Discussion and Analysis of Financial Condition and Results of Operations General and Recent Developments SFL operates a diverse fleet, with H1 2023 developments including rig investment, vessel sales, new contracts, financing, and a share repurchase program - As of August 31, 2023, the company's assets include 15 dry bulk carriers, 32 container vessels, one jack-up rig, one semi-submersible drilling unit, 13 oil tankers, and 7 car carriers (including 4 under construction)[154] - Invested $120.2 million for a Special Periodic Survey (SPS) and upgrades on the drilling rig Hercules[159] - Sold two Suezmax tankers for $84.9 million and two chemical tankers for $19.4 million[162] - Secured new contracts for the rig Hercules with Galp Energia and Equinor[164][165] - Issued $150.0 million in new sustainability-linked bonds and redeemed the remaining $84.9 million of its 2023 convertible bonds[166][167] - Initiated a $100 million share repurchase program and acquired 527,417 shares for $4.8 million by June 30, 2023[175][176] Operating Results Analysis Net operating income decreased to $101.8 million, primarily due to the rig Hercules being off-hire, despite a 10.5% increase in total operating revenues - The decrease in net operating income is principally due to the rig Hercules being off-hire for its SPS and upgrades, leading to operating expenses without revenue during H1 2023[183] - Time charter revenues increased by 11% due to the acquisition of six Suezmax tankers, two product tankers, two container vessels, and one car carrier in 2022[192] - Drilling contract revenues of $37.9 million were earned from the rig Linus, which was not contributing this revenue type in the prior-year period[195] - Interest expense rose to $82.6 million from $50.1 million, driven by new debt and a significant increase in average LIBOR rates (5.15% in H1 2023 vs. 1.02% in H1 2022)[207] Liquidity and Capital Resources The company maintained $201.5 million in cash, generated $231.0 million in operating cash flow, and managed $2.78 billion in borrowings while complying with debt covenants - Cash and cash equivalents were $201.5 million as of June 30, 2023[217] - Net cash from operating activities increased to $231.0 million in H1 2023 from $166.7 million in H1 2022[218] Borrowings and Lease Liabilities Summary (as of June 30, 2023) | Category | Outstanding Balance (in millions of $) | | :--- | :--- | | Total bonds | 457.7 | | Lease debt financing | 455.5 | | U.S. dollar denominated debt | 1,217.4 | | Total borrowings | 2,130.6 | | Finance lease liabilities | 446.4 | | Finance lease liabilities in associated companies | 203.8 | | Total borrowings and lease liabilities | 2,780.8 | - The company was in compliance with all covenants under its long-term debt facilities as of June 30, 2023[225] Cautionary Statement Regarding Forward-Looking Statements Risk Factors and Forward-Looking Statements This section outlines key risks and uncertainties that could impact forward-looking statements, including economic conditions, interest rates, market volatility, and geopolitical events - The statement identifies key risks that could cause actual results to differ materially from projections[231] - Specific risks mentioned include: strength of world economies and currencies, rising interest rates, counterparty risk, cyclicality of the seaborne transportation industry, volatility of oil and gas prices, and changes in environmental regulations[232][233] - The company notes potential impacts from supply chain disruptions, the Russian-Ukrainian conflict, and significant global inflationary pressures[233] Signatures Report Authorization The report is signed and authorized by Aksel C. Olesen, Principal Financial Officer of SFL Corporation Ltd., on August 31, 2023 - The report was signed on behalf of the registrant by Aksel C. Olesen, Principal Financial Officer[237][239] - The date of the signature is August 31, 2023[239]