Navios Maritime Partners L.P. annual report, Q4 FY2013

Navios Maritime Partners L.P. — 2013 Form 20-F

Reporting period: Fiscal year ended December 31, 2013. This is an annual report, not a standalone fourth-quarter earnings release; the filing does not provide a clear set of Q4-only financial results. Figures below are in U.S. dollars unless stated otherwise. The financial statements were prepared under U.S. GAAP and audited by PricewaterhouseCoopers S.A.

Business context

Navios Maritime Partners owns and operates drybulk and container vessels, generally chartered under medium- to long-term time charters. At year-end, its fleet included 28 vessels, counting owned and chartered-in ships. During 2013 it acquired two drybulk vessels and five 6,800-TEU containerships for $275 million. Management’s strategy is to pursue contracted cash flows and fleet growth, with the stated objective of increasing quarterly distributions over time.

Financial performance and liquidity

Metric	FY 2013	FY 2012
Time charter and voyage revenue	$198.2 million	$205.4 million
Net income	$59.0 million	$95.9 million
Basic and diluted earnings per common unit	$0.84	$1.61
Net cash from operating activities	$104.8 million	$179.1 million
Net cash used in investing activities	$382.7 million	$109.7 million
Net cash from/(used in) financing activities	$281.0 million	$(85.3) million
Operating surplus, a non-GAAP measure	$125.5 million	$148.9 million

Revenue declined 3.5%. Management attributed this principally to lower time-charter-equivalent (TCE) earnings, down to $24,284 per day from $28,907, partly offset by additional vessels entering the fleet. Available fleet days rose to 7,952 from 7,002.
Net income fell 38%. The approximate net margin was 29.8%, versus 46.7% in 2012; these margins are calculated from reported revenue and net income.
Costs increased: management fees rose 14.2% to $36.2 million, depreciation and amortization rose to $77.5 million, and net interest expense and finance costs increased 67% to $16.9 million. The weighted-average borrowing rate was 3.67%, compared with 2.90%.
Other income was $13.7 million, including a $13.3 million termination payment under a charter suspension agreement. In 2012, other income included a $22.5 million credit-default-insurance settlement, making the comparison less recurring in nature.
At December 31, 2013, cash and cash equivalents were $35.3 million and restricted cash was $34.6 million, including $33.4 million held in escrow for vessel acquisitions. Current assets were $54.5 million and current liabilities $15.6 million.
Reported long-term debt, including its current portion and net of discount, was approximately $533.3 million; gross borrowings before discount were $537.8 million. All credit facilities were fully drawn. Total assets were $1.25 billion and partners’ capital was $706.5 million.
Operating cash flow decreased 41% year over year. Investing outflows increased substantially, principally reflecting vessel acquisitions and deposits; debt and equity financing helped fund expansion. Cash increased by $3.2 million to $35.3 million.

Material changes and notable items

The five containerships acquired in December were chartered to the same counterparty under long-term charters through 2023, subject to an option to terminate after year seven. Their contribution to 2013 results was limited by their late-year delivery.
Debt financing expanded materially. The Term Loan B, including its November add-on, bore interest at LIBOR plus 4.25%, had a five-year term and only 1% scheduled amortization, with a final payment of approximately $418 million due in June 2018. The July 2012 facility also includes a substantial final payment.
Management reported compliance with debt covenants at year-end. Covenants include minimum free liquidity of at least the greater of $20 million and specified recent debt service, an EBITDA-to-interest ratio of at least 5.0:1, and restrictions on distributions when covenant or default conditions are not met.
Management tested vessels for impairment after citing continued weakness in spot markets. No impairment was recorded, although estimated carrying values for 20 vessels exceeded estimated fair values by approximately $151.9 million in aggregate. Recoverability depended on projected cash flows and assumptions including charter rates for unfixed days.
Quarterly distributions were $0.4425 per unit during 2013; the same amount was declared for the quarter ended December 31, 2013 and paid in February 2014. Total cash distributions paid in 2013 were $122.4 million. The partnership’s stated minimum quarterly distribution is $0.35 per unit, but payment is not guaranteed and is subject to reserves, cash availability, law and debt restrictions.
In February 2014, the partnership issued 6.325 million common units, including the underwriters’ option, raising approximately $104.8 million net of underwriting discounts and estimated offering costs, for fleet expansion. It also acquired the Navios Sun and Navios La Paix in January 2014.

Outlook, risks and contingencies

The filing provides no quantified earnings, revenue or distribution guidance. Management said operating cash flow was expected to meet existing short-term liquidity needs for at least the next 12 months, while noting reliance on external financing for acquisitions and expansion. It also described fixed ship-management fees through December 2015; from 2016 through 2017, the partnership expected to reimburse actual operating costs, which could make expenses and cash flows less predictable.

Drybulk and container shipping are cyclical. Vessel oversupply, weak charter markets, falling vessel values, and lower rates when charters expire could pressure earnings, liquidity and distributions.
Debt bears floating-rate exposure; the partnership did not currently hedge interest-rate increases. A 1% LIBOR increase was estimated to raise 2013 interest expense by $3.5 million.
Charterer and customer concentration is material. Four counterparties represented 55.3% of 2013 revenue; all five newly acquired containerships were chartered to one counterparty.
Distribution capacity depends on operating cash, maintenance and replacement spending, debt service, board reserves and covenant compliance. The board may change distribution policy, and debt agreements can prohibit distributions.
Related-party dependence and conflicts warrant attention: Navios Holdings affiliates provide vessel management and administrative services, and Navios Holdings has significant ownership and governance influence. Management fees and reimbursements are payable regardless of profitability.
Other disclosed exposures include environmental and safety regulation, vessel casualties and off-hire, piracy and geopolitical disruption, customer defaults, bank-deposit exposure, and possible tax changes or disputes. Certain charter credit risks were insured through 2016, subject to coverage limits and terms.
The filing reports no material pending legal proceeding and no defaults, dividend arrearages or delinquencies. Management concluded disclosure controls and internal control over financial reporting were effective as of year-end; the auditor also gave an unqualified opinion on the financial statements and internal controls.

Most important facts for investors to verify

Whether charter rates, utilization and renewal terms can sustain cash generation as drybulk charters expire, and whether the containership counterparty performs under its long-term contracts.
The 2018 Term Loan B balloon, refinancing options, floating-rate exposure, and headroom under liquidity, leverage, interest-coverage and vessel-value covenants.
The sustainability of the $0.4425 quarterly distribution relative to operating cash flow, debt service, maintenance needs and the partnership’s financing requirements.
The assumptions supporting the no-impairment conclusion, particularly forecast rates for unchartered days, and changes in vessel market values.
The economics and dilution effects of the 2013 and 2014 equity offerings and the returns expected from the vessel acquisitions.
The effect of related-party management costs and governance conflicts, including the expected shift to reimbursement of actual operating costs after 2015.