Pangaea Logistics Solutions Ltd. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. The company provides worldwide dry-bulk ocean transportation through owned, chartered and operated vessels. Interim financial statements are unaudited.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $96.8 million | $91.4 million | $175.8 million | $175.9 million |
| Operating income (loss) | $8.4 million | $(1.2) million | $16.2 million | $(1.5) million |
| Net income (loss) attributable to Pangaea | $5.8 million | $(4.7) million | $10.1 million | $(3.4) million |
| Adjusted EBITDA | $13.7 million | $7.4 million | $25.8 million | $15.3 million |
| Net revenue | $18.1 million | $10.6 million | $34.3 million | $22.0 million |
| Basic / diluted EPS | $0.14 / $0.13 | $(0.13) / $(0.13) | $0.24 / $0.24 | $(0.10) / $(0.10) |
Calculated operating margin was approximately 8.7% in Q2 2018 versus negative 1.3% in Q2 2017; for the first half it was approximately 9.2% versus negative 0.9%. Management’s non-GAAP net revenue measure was 18.7% of Q2 revenue, compared with 11.6% a year earlier.
Cash, debt and liquidity
- June 30 cash and cash equivalents were $48.9 million, with $3.5 million restricted; cash, cash equivalents and restricted cash totaled $52.4 million.
- Working capital was $29.2 million, up from $13.0 million at December 31, 2017.
- Secured long-term debt, net of fees and current portion, was $107.1 million; current secured debt was $17.3 million. Capital lease obligations totaled $38.8 million. Management reported total secured debt including capital leases of $163.2 million. Current related-party debt was $4.5 million.
- First-half operating cash flow was $20.8 million, versus $8.4 million in 2017. Investing used $2.8 million, versus $47.7 million; financing used $4.1 million, versus providing $44.4 million.
- The company reported compliance with applicable debt covenants at June 30, 2018.
Material changes and management commentary
- Q2 revenue rose 6% despite shipping days falling 8% to 4,283. TCE rates increased 21% to $13,728 per day, and management said the company’s average was about 27% above the cited market average. First-half TCE rates rose 29% to $13,783 per day while shipping days declined 13%.
- Improved dry-bulk market conditions lifted Q2 net revenue 71%. Charter revenue increased 34%; charter hire and voyage expenses were lower, while vessel operating costs, general and administrative expense, and depreciation increased.
- First-half revenue was essentially flat year over year: lower voyage revenue, reflecting fewer voyage days, was offset by higher charter revenue. Lower voyage costs included minimal relet expense in 2018 compared with $3.9 million in 2017.
- The company adopted ASC 606 in January 2018 using the modified retrospective method. The adoption increased reported first-half 2018 net income by $2.1 million and recorded a $2.4 million reduction to beginning retained earnings; prior-year comparative results were not restated. The filing’s reconciliation shows a $2.7 million increase in first-half voyage revenue from adoption.
- Q2 included a $0.9 million loss on the sale and leaseback of the m/v Bulk Trident, compared with a $4.9 million loss on the m/v Bulk Beothuk transaction a year earlier. The first-half 2017 comparison also included a $9.2 million aggregate sale-and-leaseback loss.
Outlook, risks and contingencies
- No specific earnings or revenue guidance is provided. Management described dry-bulk market fundamentals as improving, citing demand outpacing fleet growth, low new-vessel ordering and stronger published rates. It noted that the industry remains cyclical and volatile.
- The company expects to fund routine drydockings and related capital needs with operating cash flow, and may consider additional debt or equity financing; it cautioned that financing may not be available on acceptable terms.
- Vessel values and recoverability depend on volatile TCE rates and other assumptions. The company identified impairment triggers associated with sale-and-leaseback transactions, tested vessel groups, and recorded no impairment because estimated undiscounted cash flows exceeded carrying values.
- Floating-rate debt creates LIBOR exposure: a 1% increase was estimated to reduce quarterly net income and cash flow by approximately $0.1 million. The company’s net effective floating-rate debt exposure was $52.3 million at June 30.
- Management said ordinary-course claims, principally cargo claims, are not expected to have a material financial impact after final disposition, while noting outcomes cannot be assured. No material changes to previously disclosed risk factors were reported.
- Subsequent event: the m/v Bulk PODS was delivered August 1 and, on August 2, entered an $16.8 million sale-and-leaseback arrangement for an eight-year bareboat charter; a $2.0 million hire down payment is deducted from the sale proceeds.
Important facts for investors to verify
- How much of reported first-half earnings improvement reflects the one-time timing and accounting effects of ASC 606, versus underlying operating performance?
- Whether higher TCE rates and improved dry-bulk conditions persist, particularly given fewer shipping days and the industry’s cyclicality.
- The full cash-flow and debt implications of the Trident and PODS sale-and-leaseback transactions, including lease payments and purchase options.
- Whether liquidity and covenant headroom remain adequate as debt maturities, capital lease obligations, vessel needs and interest costs evolve.
- The assumptions supporting vessel impairment tests, including forecast TCE rates and second-hand vessel values.