Pangaea Logistics Solutions Ltd. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; interim financial statements are unaudited. Pangaea provides worldwide drybulk ocean transportation through owned, chartered, and operated vessels.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | H1 2019 | H1 2018 |
|---|---|---|---|---|
| Revenue | $83.3 million | $96.8 million | $162.8 million | $175.8 million |
| Income from operations | $6.8 million | $8.4 million | $11.1 million | $16.2 million |
| Net income | $5.2 million | $6.9 million | $9.6 million | $12.4 million |
| Net income attributable to Pangaea | $4.0 million | $5.8 million | $7.7 million | $10.1 million |
| Adjusted EBITDA | $11.3 million | $13.7 million | $19.9 million | $25.8 million |
| Operating margin | 8.2% | 8.7% | 6.8% | 9.2% |
| EPS, diluted | $0.09 | $0.13 | $0.18 | $0.24 |
Margins shown are calculated as operating income divided by revenue. Q2 TCE rate was $12,933 per day, down 6% year over year; H1 TCE was $12,458 per day, versus $13,783. Management said Q2 TCE exceeded the cited market average by approximately 49%, supported by long-term contracts of affreightment, a specialized fleet, and its cargo-focused strategy.
Cash flow and liquidity: H1 operating cash flow was $19.6 million, compared with $20.8 million a year earlier. Investing cash use was $33.5 million, primarily reflecting $25.6 million for vessels and improvements and $7.7 million for newbuild deposits. Financing provided $1.5 million; cash, cash equivalents, and restricted cash declined $12.5 million to $43.7 million. Working capital was $28.5 million, down from $34.5 million at year-end 2018.
Debt and assets: At June 30, total secured debt, including finance lease liabilities, was $178.5 million, compared with $166.6 million at December 31, 2018. Secured long-term debt, net of fees, was $102.4 million, with $15.0 million current; finance lease liabilities totaled $61.1 million. Total assets were $459.2 million and stockholders’ equity was $237.7 million. The company reported compliance with its disclosed debt covenants.
Material changes versus comparable periods
- Q2 revenue declined 14% year over year, with shipping days down 17%. Voyage revenue fell 5%; charter revenue fell 61%, reflecting 52% fewer time-charter days.
- Q2 charter hire expense fell 40% as chartered-in days declined. However, vessel operating expense rose 11%, and general and administrative expense increased from $4.4 million to $5.4 million, primarily due to incentive compensation timing and accruals.
- Q2 operating income fell to $6.8 million from $8.4 million, and attributable net income fell to $4.0 million from $5.8 million. H1 revenue decreased 7%, while operating income declined 32% and attributable net income declined 23%.
- The company acquired the vessel Bulk Spirit for $13.0 million in February and Bulk Independence in May, funded in part by a $13.0 million finance lease and $14.0 million of new secured borrowing. It also fully repaid a $13.0 million term facility in June.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or revenue guidance. Management cited positive operating cash flow, long-term customer contracts, and flexibility to adjust chartered-in capacity as factors supporting liquidity and operations. It cautioned that adverse markets could limit access to debt or equity financing and restrict expansion.
- Drybulk shipping is cyclical and volatile. The BDI averaged 1,154 in Q2 2019 versus 1,272 a year earlier, though it rose from 689 at the end of Q1 to 1,354 at the end of Q2. Freight rates, vessel values, fuel prices, and vessel supply and demand can affect results.
- Derivative instruments are not designated for hedge accounting and can cause period-to-period earnings volatility. H1 2019 reported a $2.5 million unrealized derivative gain, including a $2.4 million gain on fuel swaps; Q2 included a $342,000 fuel-swap loss and a $557,000 FFA gain.
- On April 30, the company contracted to build two 95,000-dwt post-Panamax vessels at approximately $38 million each, with options for two more. The vessels are expected in the first half of 2021; a $7.7 million deposit was paid, with further installments due at launching and delivery.
- After quarter-end, Pangaea agreed to acquire a drybulk vessel for $14.1 million, expected to be delivered in September 2019. On August 12, it declared a $0.035-per-share quarterly dividend.
- The company reported ordinary-course asserted claims, principally cargo claims, but management did not expect their ultimate financial impact to be material. It reported no material changes to previously disclosed risk factors, no off-balance-sheet arrangements, and effective disclosure controls.
Important facts for investors to verify
- Whether freight rates, shipping days, and TCE performance recover sufficiently to offset the year-over-year declines in revenue and earnings.
- Cash generation and liquidity after vessel purchases, newbuild installments, debt service, lease payments, and dividends.
- The total funding requirements and delivery terms for the two newbuilds, and whether the options for two additional vessels are exercised.
- Debt and finance lease obligations, maturity and balloon-payment exposure, floating-rate sensitivity, and continued covenant compliance.
- The effect of fuel and freight derivative fair-value movements on reported earnings, and the assumptions supporting vessel impairment assessments.