Pangaea Logistics Solutions Ltd. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; unaudited. Pangaea transports drybulk cargo worldwide using owned, chartered, and jointly owned vessels.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $91.4 million | $57.0 million | $175.9 million | $100.9 million |
| Operating income (loss) | $(1.2) million | $0.8 million | $(1.5) million | $4.3 million |
| Net income (loss) attributable to Pangaea | $(4.7) million | $0.1 million | $(3.4) million | $1.3 million |
| Operating cash flow | Not separately provided | Not separately provided | $8.4 million | $10.0 million |
- Q2 average TCE rate rose 30% to $11,333 per day; shipping days rose 35% to 4,661. For the first half, TCE increased to $10,664 per day from $8,804, and shipping days increased 42% to 9,003.
- Q2 operating loss included a $4.9 million loss on the sale and leaseback of the vessel Bulk Beothuk. First-half operating loss included $9.2 million of sale-and-leaseback losses; management reported operating income of $7.7 million excluding those losses.
- Q2 charter hire expense increased to $33.2 million from $15.0 million, and voyage expense rose to $38.6 million from $26.8 million. Higher shipping activity and higher fuel and charter rates contributed to the increases.
- At June 30, cash and cash equivalents were $29.4 million, with another $4.0 million restricted. Working capital was $9.2 million, compared with a $9.3 million deficit at December 31, 2016.
- First-half investing cash outflow was $47.7 million, principally for vessel purchases. Financing cash inflow was $46.5 million; cash increased $7.1 million during the period.
- Gross secured long-term debt was $138.1 million, including $18.3 million current; secured long-term debt net of current maturities and fees was $117.7 million. Capital lease obligations totaled $27.7 million, of which $1.7 million was current.
Material changes and transactions
- Revenue grew 61% in Q2 and 74% for the first half year over year, reflecting increased shipping days and improved drybulk market rates. The Baltic Dry Index averaged 1,096 in Q2 2017 versus 563 in Q2 2016.
- Operating results deteriorated despite higher revenue, as bunker fuel and charter hire costs rose and the company recorded sale-and-leaseback losses. Higher net interest expense also reflected the Bulk Destiny lease and Bulk Endurance acquisition.
- Pangaea acquired its joint venture partner’s interest in BVH in January 2017, making BVH wholly owned. It acquired Bulk Freedom in June and took delivery of Bulk Endurance in January.
- In June, the company issued 3.94 million shares to institutional and accredited investors for net proceeds of $8.3 million. A further 2.60 million shares were issued to insider investors in August, partly in lieu of accrued dividends. Total shares outstanding were 43.8 million as of August 9; the transactions diluted holders who did not participate proportionately.
Outlook, risks, and unusual items
- No specific earnings or revenue guidance is provided. Management said drybulk rates had improved from fall 2016 through March 2017 but had surrendered some gains since then. The market is described as cyclical and volatile.
- The company charters in vessels primarily to serve contracted business. Management says this limits exposure to losses from long-term charter commitments but can also constrain upside when rates rise.
- Higher bunker costs, charter hire rates, and interest rates may pressure results. At June 30, net effective floating-rate debt exposure was $55.6 million; a 1% LIBOR increase was estimated to reduce first-half net income and cash flow by approximately $0.2 million.
- Freight and fuel derivatives are not designated for hedge accounting and can cause period-to-period earnings volatility. Q2 included an approximately $1.7 million loss on forward freight agreements; first-half results included an approximately $1.1 million gain on those agreements and a $0.6 million loss on fuel swaps.
- Management identified vessel-value impairment indicators but recorded no impairment after estimating undiscounted cash flows above carrying values. A 10% reduction in estimated fleet TCE rates would reduce projected undiscounted operating cash flows by 17%, according to the filing.
- Management cited the ability to generate positive operating cash flow and secure long-term customer contracts in assessing liquidity. It also cautioned that future debt or equity financing may not be available on acceptable terms. All disclosed debt covenants were reported in compliance at June 30.
- Ordinary-course claims and litigation remain possible; management believes any eventual financial impact would not be material. A litigation settlement resulted in a $462,000 recovery recognized in Q2 other income. No material change to previously disclosed risk factors was reported.
Key facts for investors to verify
- Whether improved freight rates and shipping activity can offset rising bunker, charter hire, and financing costs.
- The cash-flow and balance-sheet effects of vessel purchases, sale-and-leaseback financing, debt maturities, and capital lease payments.
- The terms and dilution impact of the June and August 2017 share issuances, including the in-kind settlement of accrued dividends.
- Exposure to volatile vessel values, TCE assumptions, floating interest rates, and unhedged or non-hedge-accounted derivatives.
- Whether operating cash generation and available liquidity remain adequate for working capital and planned vessel-related expenditures.