Pangaea Logistics Solutions Ltd. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; balance sheet compared with December 31, 2017. Pangaea transports dry-bulk cargo worldwide using owned, leased, and chartered vessels. Results are unaudited.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $95.3 million | $107.0 million | $271.1 million | $282.9 million |
| Net revenue | $20.3 million | $18.8 million | $54.6 million | $40.8 million |
| Income from operations | $12.1 million | $10.0 million | $28.4 million | $8.5 million |
| Net income attributable to Pangaea | $8.3 million | $7.2 million | $18.4 million | $3.8 million |
| Adjusted EBITDA | $16.6 million | $14.0 million | $42.4 million | $29.4 million |
| TCE rate per day | $13,835 | $11,822 | $13,801 | $11,093 |
Q3 net revenue margin was approximately 21.2%, versus 17.6% a year earlier; operating margin was approximately 12.7%, versus 9.4%. For the nine months, net revenue margin was approximately 20.1%, versus 14.4%, and operating margin was approximately 10.5%, versus 3.0%. Adjusted EBITDA and net revenue are non-GAAP measures as defined by the company.
- Cash flow: Nine-month operating cash flow was $27.2 million, compared with $13.7 million. Investing used $15.0 million, versus $48.2 million; financing provided $2.5 million, versus $39.3 million. Cash, cash equivalents, and restricted cash totaled $53.3 million at September 30, 2018.
- Liquidity: Working capital was $39.5 million, up from $13.0 million at year-end 2017. Current assets were $112.6 million and current liabilities $73.1 million.
- Debt and leases: Secured debt, net of fees, was $119.6 million, and capital-lease obligations were $52.4 million; the company’s combined selected measure of secured debt including capital leases was $171.9 million. The company reported compliance with its debt covenants.
- Dividends and equity: Accumulated deficit was $6.4 million at September 30, 2018, compared with a $9.6 million deficit at year-end 2017. A $5.2 million dividend payable remained outstanding.
Changes versus comparable periods
- Q3 revenue fell 11%, while net revenue rose 8% and attributable net income rose 15%. Total shipping days declined 20%, largely because prior-year contracts of affreightment had been completed; higher TCE rates supported improved net revenue.
- For the first nine months, revenue declined 4%, but net revenue rose 34% and operating income increased substantially. TCE rates rose 24%; operating results also benefited from a much smaller sale-and-leaseback loss: $0.9 million in 2018 versus $9.3 million in 2017.
- Voyage revenue declined in both comparisons as voyage days decreased. Charter revenue increased 1% in Q3 and 19% year to date. Owned-vessel operating costs and depreciation increased with fleet additions.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method. The company recorded a $2.4 million opening retained-earnings reduction; reported nine-month voyage revenue was increased by about $1.1 million versus prior accounting, while Q3 revenue was reduced by about $1.7 million. Comparative periods were not restated.
Outlook, risks, contingencies, and unusual items
- No specific financial guidance was provided. Management described dry-bulk shipping as cyclical and volatile, citing stronger Chinese demand and fewer new vessel deliveries as supportive factors. It also noted that trade protectionism and tariff uncertainty could affect demand and trade routes.
- Management said the company seeks to support liquidity through operating cash flow and long-term cargo contracts and can adjust chartered-in capacity. It cautioned that adverse markets could constrain access to additional debt or equity financing and limit expansion opportunities.
- Interest-rate exposure is material: net effective floating-rate debt exposure was $83.6 million. Management estimated that a 1% LIBOR increase would reduce quarterly net income and cash flow by approximately $0.2 million at period-opening debt levels.
- Vessel values and recoverability depend on volatile charter rates and asset prices. The company reported no impairment charge after its impairment evaluations. Fuel swaps and forward freight agreements can create earnings volatility because they generally do not qualify for hedge accounting.
- Capital leases increased following sale-and-leaseback transactions involving the Bulk Trident and Bulk PODS. On October 26, 2018, the company agreed to buy a 2009-built Supramax vessel for approximately $13 million, expected to be delivered in Q1 2019.
- Ordinary-course claims, principally cargo claims, were disclosed; management did not expect their ultimate financial impact to be material. No material risk-factor changes were reported. Disclosure controls were deemed effective, and no material internal-control changes were reported.
Investor verification points
- Assess whether stronger TCE rates can offset fewer shipping days and lower reported revenue, and review the company’s contract coverage and chartered-in commitments.
- Reconcile reported results for ASC 606’s timing effects and compare performance on a consistent accounting basis.
- Review debt maturities, balloon payments, floating-rate exposure, capital-lease commitments, and covenant headroom.
- Evaluate the cash requirements and expected returns of the announced $13 million vessel purchase alongside drydocking and other fleet investment needs.
- Monitor dry-bulk market conditions, fuel prices, vessel values, and any changes in cargo claims or other contingencies.