Pangaea Logistics Solutions Ltd. quarterly report, Q3 FY2016

Pangaea Logistics Solutions Ltd. — Q3 2016 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2016; unaudited. Pangaea transports drybulk cargo worldwide using owned and chartered vessels. Its fleet included 14 drybulk vessels, including six held through a consolidated joint venture in which Pangaea owns one-third.

Financial performance and liquidity

Metric	Q3 2016	Q3 2015	Nine months 2016	Nine months 2015
Revenue	$70.8 million	$71.2 million	$171.7 million	$231.4 million
Operating income	$7.8 million	$4.9 million	$12.0 million	$21.8 million
Consolidated net income	$6.6 million	$2.8 million	$8.8 million	$18.1 million
Net income attributable to Pangaea	$6.1 million	$3.0 million	$7.4 million	$16.1 million
EPS, basic and diluted	$0.17	$0.08	$0.21	$0.46

Operating margin was approximately 11.0% in Q3, versus 6.8% a year earlier; for the nine-month period it was approximately 7.0%, versus 9.4%.
Q3 shipping days increased 15% to 3,971, while average TCE declined to $10,480 per day from $11,849. Nine-month shipping days fell 6% to 10,290 and average TCE fell to $9,451 from $11,612.
Nine-month operating cash flow was $18.3 million, compared with $17.4 million. Investing activities used $3.7 million, versus $40.3 million in 2015; financing activities used $24.0 million, versus providing $27.3 million.
At September 30, cash and cash equivalents were $28.2 million and restricted cash was $6.5 million. Current assets were $64.0 million and current liabilities $66.4 million, a $2.4 million working-capital deficit. The filing attributes the deficit primarily to founder- and affiliate-related loans and dividends payable.
Gross secured debt was $131.7 million, including $18.0 million current; the balance sheet reports $112.0 million of secured long-term debt net of current maturities and issuance costs. Current related-party debt was $12.6 million. The company reported total assets of $354.6 million and equity of $176.2 million.

Changes versus prior comparable periods

Q3 revenue was nearly flat year over year, while operating income and attributable net income increased. Lower voyage, charter-hire, vessel-operating and general and administrative expenses supported the improvement despite weaker TCE rates and a lower COA rate.
Nine-month revenue declined 26%, reflecting weak drybulk rates, fewer shipping days and a lower rate on a major COA. Operating income fell 45% and attributable net income fell 54%.
For the nine months, voyage expense decreased 28%, charter-hire expense 29%, and general and administrative expense 23%. Lower bunker costs and cargo-relet expense contributed to the voyage-expense decline; lower charter rates and fewer chartered-in days reduced hire costs.
Cash decreased $9.3 million from year-end 2015. The company made $20.8 million of long-term debt payments and increased restricted cash by $5.0 million, while operating cash flow was positive.

Outlook, risks and unusual items

Management described the drybulk market as weak and volatile, with oversupply, historically low first-quarter rates and only modest improvement in the second and third quarters. No numerical earnings or revenue guidance was provided.
A major aluminum-producing COA counterparty filed for Chapter 11. Amended terms lowered the fixed freight rate for the remainder of 2016, reducing expected 2016 revenue by approximately $4.2 million. The counterparty’s relevant operations were approved for sale after quarter-end; there is no assurance the buyer will honor the COA. If the contract ends, vessel utilization and impairment risk could increase.
Two ultramax newbuildings carried remaining purchase obligations of $5.79 million in 2016 and $40.53 million in early 2017. After quarter-end, on October 27, the company agreed to a $21.0 million sale-leaseback for one vessel, expected to be delivered in January 2017; the filing anticipates recognizing a loss at sale. Financing for the second vessel was expected through a commercial facility or sale-leaseback.
In July, amendments deferred or rescheduled installments on several secured notes and extended certain maturities. The company said it was compliant with relevant covenants at September 30. It had previously cured a minimum-vessel-value breach on the Barents/Bothnia facility through collateral application and prepayments; additional restricted cash/collateral was maintained for the Bulk Atlantic facility.
Management cited dependence on positive operating cash flow and related-party funding for newbuilding deposits. If shareholders do not provide expected funds, replacement financing may not be available on acceptable terms. Vessel values and impairment assessments are sensitive to volatile TCE rates; a 10% reduction in projected fleet TCE rates would reduce estimated undiscounted cash flows by 14%. No impairment was recorded at September 30, 2016.
Floating-rate debt exposes the company to LIBOR movements. Management estimated a 1 percentage-point LIBOR increase would have reduced nine-month 2016 net income and cash flows by approximately $0.9 million. Fuel swaps had a $0.7 million liability at quarter-end; there were no open FFAs.
Ordinary-course cargo claims and disputes are disclosed; management did not expect their ultimate financial impact to be material. The company reported effective disclosure controls and no material changes in internal control over financial reporting.

Investor verification points

Track the aluminum COA’s treatment by the buyer and the resulting freight rates, vessel employment and impairment exposure.
Verify delivery, final funding and the accounting loss and lease obligations for the ultramax newbuildings and sale-leaseback.
Review debt maturities, covenant compliance, restricted-cash requirements and the availability and terms of related-party funding.
Monitor drybulk TCE rates, charter-market conditions, cash generation and vessel carrying values against market values.
Confirm the composition and payment timing of related-party debt, dividends payable and the working-capital deficit.