Pangaea Logistics Solutions Ltd. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; financial statements are unaudited. Pangaea transports dry-bulk cargo worldwide and reported one operating segment. It owned 14 vessels at quarter-end. The 2014 comparison reflects Bulk Partners’ historical operations following the October 2014 reverse acquisition, so share-count and EPS comparisons require care.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $95.1 million | $114.2 million |
| Operating income | $9.9 million | $10.1 million |
| Net income | $9.3 million | $7.7 million |
| Net income attributable to Pangaea | $7.6 million | $6.6 million |
| Basic and diluted EPS | $0.22 | $0.17 |
| Operating cash flow | $11.2 million | $10.4 million |
| Capital spending on vessels, net of vessel-sale proceeds | $40.3 million used | $14.4 million used |
- Revenue fell 17%; operating income was nearly flat. Operating margin was approximately 10.5%, versus 8.8% in Q1 2014. Net income attributable to Pangaea was about 8.0% of revenue, versus 5.8%.
- Cash and cash equivalents were $42.6 million at March 31, up from $29.8 million at year-end; restricted cash was $1.0 million. Total assets were $369.3 million.
- Current assets were $83.7 million and current liabilities $136.7 million. Management reports a $53.9 million working-capital deficit; the balance-sheet totals imply approximately $53.0 million, a difference to verify.
- Secured debt was $146.4 million, including $22.4 million current portion; related-party current debt was $61.7 million, and the line of credit was $3.0 million. The company drew a $45 million secured facility to finance two new vessels.
Material changes and management commentary
- Average time-charter-equivalent (TCE) rate declined 19% to $12,251 per shipping day, reflecting weak dry-bulk markets and a historically low Baltic Dry Index. Shipping days declined 7% to 4,065.
- Voyage revenue decreased 1% to $90.6 million. Charter revenue fell 80% to $4.5 million as time-charter days dropped 67%; management said it chartered vessels mainly to meet committed cargo contracts.
- Voyage expense fell 6% to $45.3 million, including a 35% reduction in bunker costs, partly offset by approximately $6.5 million of cargo-relet expense. Charter-hire expense fell 44% to $24.7 million, reflecting fewer chartered-in days and lower hire rates.
- Vessel operating expense rose 13% to $7.8 million, in part because ownership days increased with new deliveries. General and administrative expense rose 67% to $4.3 million, including higher incentive compensation and public-company, professional, accounting, and legal costs.
- The company generated positive operating cash flow, but vessel purchases drove $40.3 million of net investing cash outflow; financing activities provided $41.9 million, including $45 million of new long-term borrowing. Cash increased $12.8 million during the quarter.
Outlook, risks, contingencies, and unusual items
- No numerical earnings or revenue guidance is provided. Management cited committed contracts of affreightment, positive operating cash flow, first-quarter profitability despite weak markets, and ability to adjust chartering as liquidity supports. It also cautioned that further financing may not be available on acceptable terms.
- Management said certain common shareholders had written agreements to provide financial support in the form of loans; it also reported an agreement in principle to convert NBHC-related debt to equity. NBHC and BVH newbuilding deposits rely on shareholder loans, and replacement financing may not be available if shareholders do not fund scheduled amounts.
- The company was not in compliance with specified debt-service coverage / EBITDA-to-fixed-charges covenants under certain facilities at March 31 and had obtained lender waivers. This raises refinancing and covenant risk. It reported compliance with the covenants on its Nordic vessel facilities.
- At quarter-end, floating-rate debt exposure was approximately $106.4 million. Management estimated a 1 percentage-point LIBOR increase would reduce quarterly net income and cash flows by about $1.1 million. Fuel swaps had a $0.6 million liability; there were no open forward freight agreements.
- Shipbuilding obligations were approximately $29.0 million for the twelve months ending March 31, 2016 and $46.3 million for the following twelve months. Management expected to drydock six vessels in 2015 at an estimated $3.4 million cost. Ordinary-course claims and cargo disputes are disclosed; management did not expect their ultimate financial impact to be material.
- Subsequent events: the company repaid its $3.0 million line-of-credit borrowing on April 13, 2015; on May 4 it agreed to acquire an additional 24.5% of NBH, increasing ownership to 75.5%. Restricted-share awards to employees and directors were also disclosed.
- Disclosure controls and procedures were deemed ineffective for the quarter because of material weaknesses in internal control over financial reporting. Remediation plans include hiring an accounting manager, implementing SEC-reporting software, and assessing ERP systems.
Important facts for investors to verify
- The working-capital deficit stated by management ($53.9 million) versus the approximately $53.0 million implied by reported current assets and liabilities.
- Terms, duration, and enforceability of shareholder support commitments and the proposed NBHC debt-to-equity conversion; availability of funds for construction obligations.
- Status of covenant waivers, ongoing compliance, and upcoming debt maturities, including substantial balloon payments.
- Progress and effectiveness of internal-control remediation and the effect of any remaining material weaknesses.
- Whether weak TCE rates, charter revenue, and shipping-market conditions persist, and how cargo-relet costs and vessel deliveries affect future margins and cash needs.