Pangaea Logistics Solutions Ltd. — Q3 2019 Form 10-Q
Business and period: The company operates dry-bulk vessels and provides worldwide ocean transportation. This unaudited filing covers the quarter and nine months ended September 30, 2019; comparisons are with the same 2018 periods unless noted.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $118.9 million | $95.3 million | $281.7 million | $271.1 million |
| Income from operations | $13.1 million | $12.1 million | $24.1 million | $28.4 million |
| Net income attributable to Pangaea | $8.3 million | $8.3 million | $16.1 million | $18.4 million |
| Diluted EPS | $0.19 | $0.19 | $0.37 | $0.43 |
| Adjusted EBITDA | $17.7 million | $16.6 million | $37.7 million | $42.4 million |
| Operating cash flow | Not separately presented | Not separately presented | $23.4 million | $27.2 million |
Q3 operating margin was approximately 11.0% of revenue, versus 12.7% a year earlier; nine-month operating margin was 8.6%, versus 10.5%. Q3 net income attributable to Pangaea was broadly flat, while nine-month net income attributable to Pangaea declined approximately 13%. Net revenue, the company’s non-GAAP measure of revenue less direct transportation costs, was $20.5 million for Q3 and $49.8 million for the nine months, down about 9% for the nine-month comparison.
Q3 TCE rate was $15,915 per day, up 13% year over year; management said this was about 16% above the market average. Shipping days rose 12% in Q3. For the nine months, TCE was $13,779 per day versus $13,897, and shipping days increased 1%.
Liquidity, debt and investment
- At September 30, cash and cash equivalents were $34.2 million; including restricted cash, total cash was $36.7 million, down from $56.1 million at December 31, 2018. Working capital was $23.7 million, versus $34.5 million at year-end.
- Nine-month operating cash flow of $23.4 million was below $27.2 million in 2018. Investing used $48.2 million, primarily for vessels and improvements ($40.2 million) and newbuild deposits ($7.7 million). Financing provided $5.3 million. Cash, cash equivalents and restricted cash decreased $19.4 million.
- Secured debt, net of fees, was $112.3 million; finance lease liabilities were $72.0 million. Together, secured debt and finance lease liabilities were approximately $184.3 million, compared with $166.6 million at December 31, 2018. Total liabilities were approximately $237.7 million.
- The company reported compliance with the disclosed debt and lease covenants at September 30. It also reported no off-balance-sheet arrangements.
Material changes, outlook and risks
- Q3 revenue grew 25%, driven by higher voyage days and TCE rates. Charter hire expense rose 47% amid higher market hire rates and more chartered-in days; voyage expense rose 23%. These cost increases constrained margin growth.
- For the nine months, revenue increased 4%, but higher voyage, charter hire and vessel operating expenses contributed to lower operating income and Adjusted EBITDA. The company reported a $2.2 million nine-month unrealized derivative gain, compared with $0.5 million in 2018; derivative fair-value movements can add period-to-period volatility.
- The company ordered four 95,000-dwt high-ice-class vessels for delivery in 2021: two at approximately $38.3 million each and two at approximately $37.7 million each. It had deposited $7.7 million by quarter-end. Planned sale-and-leaseback financing involves selling the completed vessels at the lesser of approximately $32 million or 85% of fair market value, followed by 15-year bareboat leases and a $2.5 million purchase obligation at year 15. Management expected finance-lease accounting.
- In October, the company agreed to sell Bulk Juliana for $6.5 million, with an expected loss of approximately $3.7 million, and Bulk Patriot for $4.5 million, with an expected loss of approximately $4.9 million. Deliveries were expected in late November and December 2019, respectively.
- On November 7, the company declared a quarterly dividend of $0.035 per common share. No formal earnings or operating guidance was provided in the filing.
- Management describes dry bulk shipping as cyclical and volatile. Results depend on freight demand, vessel supply, charter rates, fuel costs, vessel values and the ability to obtain financing. The company noted that vessel values and TCE rates are volatile and used rate sensitivity scenarios in impairment assessments; it identified no impairment triggering events in the current periods. It also cited ballast-water-system costs of approximately $0.5–$0.7 million per vessel and potential downtime for installation.
- Ordinary-course claims, principally cargo claims, are disclosed; management believes their ultimate financial impact would not be material. The filing states there were no material changes to previously reported risk factors or market-risk disclosures.
Important facts for investors to verify
- Whether higher freight rates and TCE performance can be sustained, and how charter hire and voyage costs affect margins.
- Funding, payment schedules, sale-and-leaseback terms and long-term lease obligations for the four newbuild vessels.
- Liquidity and covenant headroom in light of reduced cash, planned vessel investment, debt maturities and finance lease payments.
- Completion and final proceeds/losses from the Bulk Juliana and Bulk Patriot sales.
- Exposure to fuel and freight derivatives, vessel-value changes, and the potential costs and operating disruption from environmental compliance requirements.