Pangaea Logistics Solutions Ltd. — Q2 2015 Form 10-Q
Business and period: The Bermuda-based company transports dry-bulk cargo worldwide using owned, chartered, and operated vessels. This unaudited filing covers the quarter and six months ended June 30, 2015, compared with the corresponding 2014 periods. At quarter-end, it owned 14 dry-bulk vessels.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $65.1 million | $89.8 million | $160.2 million | $204.0 million |
| Operating income | $7.0 million | $3.4 million | $16.9 million | $13.4 million |
| Net income attributable to Pangaea | $5.5 million | $1.2 million | $13.1 million | $7.8 million |
| Basic and diluted EPS | $0.15 | $(0.04) | $0.37 | $0.15 |
| Operating margin | 10.7% | 3.7% | 10.6% | 6.6% |
Q2 net income was $6.0 million, including income attributable to noncontrolling interests. For the six months, net income was $15.4 million.
- Cash flow: Six-month operating cash flow was $12.8 million, versus $9.7 million in 2014. Investing used $40.6 million, primarily for vessel purchases; financing provided $32.2 million. Cash and cash equivalents ended at $34.2 million, up from $29.8 million at year-end 2014. Restricted cash was an additional $1.0 million.
- Liquidity: Current assets were $77.6 million and current liabilities $126.3 million, yielding a $48.7 million working-capital deficit. Management attributed the deficit primarily to related-party and founder-affiliated debt.
- Debt: Gross secured long-term debt was $141.4 million, including $22.2 million current and $118.0 million noncurrent net of fees. Related-party debt was $60.6 million and the line of credit was repaid. Total liabilities were $244.4 million.
- Costs and margins: Q2 voyage expenses fell 33% and charter hire expense fell 55% year over year; six-month decreases were 18% and 49%, respectively. Lower bunker prices and charter rates, alongside reduced chartered-in days, helped lift operating income despite lower revenue and higher corporate costs. General and administrative expense rose 66% in Q2 and 67% for the six-month period, largely reflecting incentive compensation and public-company costs.
Material changes and management commentary
- Q2 revenue fell 27% year over year; six-month revenue declined 21%. Management cited weak dry-bulk freight markets, fewer shipping days, and lower average TCE rates. Q2 average TCE was $10,633 per day versus $11,973; the six-month average was $11,505 versus $13,637.
- Charter revenue dropped 57% in Q2 and 73% for the six-month period, as the company limited vessel charters to committed cargo and voyage contracts. Management said fixed-rate contracts of affreightment helped temper exposure to market weakness.
- The company said cost reductions, lower bunker and charter hire costs, vessel-day optimization, and operating-cost reductions improved profitability. It provided no formal earnings or revenue guidance.
- The fleet expanded with delivery of two newbuildings in February 2015. The company sold the Bulk Cajun in February and agreed in July to sell the Bulk Discovery; the latter was classified as held for sale at quarter-end.
Risks, contingencies, and unusual items
- Covenants and collateral: The company was not in compliance with certain debt-service coverage and EBITDA-to-fixed-charge covenants at June 30 and had obtained lender waivers. It also failed a minimum vessel-value requirement on the Bulk Barents and Bulk Bothnia facility; it deposited approximately $300,000 additional collateral for each vessel on August 4. The filing reports compliance with the minimum-liquidity and collateral covenant on the newer $45 million facility.
- Funding and commitments: Related-party loans are payable on demand. Management reported written shareholder commitments to provide financial support and an agreement in principle with NBHC shareholders to convert related-party debt to equity. These arrangements and continued partner funding for newbuilding deposits are important to the company’s liquidity outlook. Shipbuilding obligations were approximately $27.5 million for the 12 months ending June 30, 2016 and $47.8 million for the following 12 months.
- Going concern and market risks: Management cited first-half profitability, positive operating cash flow, contract employment, operating flexibility, and vessel values above secured debt in assessing its ability to continue as a going concern. Results remain exposed to weak freight rates, bunker prices, floating interest rates, and the availability of financing. A 1% LIBOR increase was estimated to reduce six-month net income and cash flow by about $0.5 million.
- Derivatives and vessel item: Six-month unrealized derivative results included a $1.2 million gain, mainly related to fuel swaps; fuel swaps and FFAs had fair-value liabilities of approximately $180,000 and $31,500 at quarter-end. The company recorded a $0.6 million six-month loss on vessel sales/impairment; the filing describes a loss associated with the planned Bulk Discovery sale.
- Controls and legal matters: Management concluded disclosure controls were not effective because of previously reported material weaknesses in internal control over financial reporting. Remediation efforts included adding an accounting manager, implementing SEC reporting software, and assessing ERP alternatives. The company also faces ordinary-course disputes, principally cargo claims; management said it did not expect the described claims to have a material financial impact.
Important facts for investors to verify
- Whether covenant waivers remain effective and whether the company maintains required collateral, liquidity, and debt-service metrics.
- Whether shareholder support, related-party debt conversion, and joint-venture partner funding for newbuildings are completed on the expected terms.
- Actual cash requirements and financing for the remaining shipbuilding obligations, debt maturities, and planned drydockings.
- Progress in remediating internal-control weaknesses and whether disclosure controls become effective.
- Subsequent results from the Bulk Discovery sale and the effect of dry-bulk market rates on revenue, cash flow, and vessel values.