Pangaea Logistics Solutions Ltd. — 2015 Form 10-K
Business and period: Annual report for the fiscal year ended December 31, 2015; quarterly figures below include Q4 2015. Pangaea provides seaborne drybulk logistics and transportation, mainly through contracts of affreightment (COAs) and voyage charters, using owned and short-term chartered vessels. It averaged more than 40 vessels in service during 2015 and carried cargo to more than 100 ports. The filing was signed March 23, 2016.
Financial and operating performance
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $287.3 million | $398.3 million |
| Operating income (loss) | $20.5 million | $(2.5) million |
| Net income (loss) attributable to Pangaea | $11.3 million | $(12.1) million |
| Adjusted EBITDA | $38.6 million | $20.7 million |
| Net cash from operating activities | $26.0 million | $19.7 million |
| Cash and cash equivalents at year-end | $37.5 million | $29.8 million |
| Gross contractual third-party debt | $151.1 million | $106.2 million |
| Total assets | $367.0 million | $331.7 million |
Revenue fell about 28%, reflecting lower market rates and 17% fewer shipping days (14,094 versus 16,952). Average time-charter-equivalent (TCE) rates declined to $11,473 per day from $12,317. Voyage revenue was $266.7 million; time-charter revenue was $20.7 million. Management reduced chartered-in vessel days to align capacity with committed cargoes in the weak market. Bunker expense per day fell 44% to $5,224, and charter-hire expense declined 49% to $75.9 million. Management reported gross margin of 18.5%, compared with 7.4% in 2014.
Q4 2015: Revenue was $55.9 million, operating loss was $1.3 million, net loss was $4.8 million, and loss per share was $0.14. The quarter included a $5.4 million vessel impairment charge.
Cash flow and liquidity: Operating cash flow was $26.0 million; investing cash outflow was $64.0 million, including $44.8 million for vessel purchases and $27.2 million of newbuilding deposits; financing cash inflow was $45.7 million. Year-end current assets were $69.3 million and current liabilities $72.2 million, a $2.8 million working-capital deficit. Restricted cash was $2.0 million. The balance sheet reported $149.0 million of current and long-term third-party debt net of unamortized fees; gross contractual debt was $151.1 million. Current related-party debt was $13.3 million.
Material changes and notable items
- Results improved from a 2014 operating and net loss to 2015 operating and net income despite the sharp revenue decline. Lower fuel and charter costs, reduced exposure to uncommitted chartered capacity, and lower impairment charges contributed.
- Vessel impairment was $5.4 million in 2015, compared with $11.5 million in 2014. The 2015 charge related to the older Nordic Barents and Nordic Bothnia as weaker expected TCE rates reduced projected cash flows.
- Debt increased with vessel financing and fleet investment. In December 2015, $45.0 million of NBHC shareholder loans were converted to subsidiary equity. Related-party debt declined substantially, while gross third-party debt rose.
- The company delivered the Nordic Odin and Nordic Olympic in 2015 and took delivery of the Nordic Oasis in January 2016. Two Ultramax newbuildings were scheduled for 2017. Contractual purchase obligations were approximately $49.2 million, with $7.4 million due within one year and $41.8 million within one to three years.
- Pangaea reported no common dividends declared in 2015 or 2014. Debt agreements may restrict dividends.
Outlook, risks, and contingencies
Management described drybulk demand as weak, vessel supply as excessive, and rates as at their lowest level since 1985. It cited falling demand from China, commodity weakness, and continued vessel deliveries as pressures on rates and asset values. The company’s strategy is to prioritize COAs and backhaul cargoes, keep most charter-ins short-term, expand its owned fleet, and maintain moderate leverage. The filing gives no specific revenue, earnings, or TCE guidance.
- Covenants and collateral: The company disclosed covenant noncompliance at December 31, 2015 and waivers from facility agents. Separately, it reported that on February 22, 2016 the agent for the Nordic Barents/Bothnia facility required $3.3 million of cash collateral to cure a minimum-vessel-value breach; management expected to deposit it around March 25, 2016. Debt agreements include collateral, liquidity, leverage, and debt-service tests, as well as cross-default provisions.
- Customer bankruptcy: A COA customer responsible for 13% of 2015 revenue filed for Chapter 11 on February 8, 2016. Pangaea said it continued providing and receiving payment for post-petition services, had reserved the majority of pre-petition receivables, and did not then expect disruption.
- Concentration: Two customers represented 59% of year-end receivables; one customer represented 13% of 2015 revenue. Canada and the United States represented 41% and 35% of receivables, respectively.
- Market and operating exposures: Further rate declines, falling vessel values, fuel-price and interest-rate movements, charter and COA performance, customer credit, vessel off-hire, and access to financing could pressure earnings, liquidity, or covenant compliance. The company does not carry loss-of-hire insurance.
- Regulatory and legal matters: Environmental, emissions, ballast-water, safety, and polar-shipping requirements may increase operating or capital costs. The company reported no legal proceeding it believed likely to have a significant effect, but disclosed a shareholder lawsuit appeal secured by a $1.0 million letter of credit. It also expects vessel surveys and drydocking; survey-cost estimates differ across filing sections: one disclosure estimates five special surveys at about $4.5 million in 2016, while another estimates three drydockings at $1.5 million in 2016.
- Controls: Management concluded disclosure controls were effective at year-end and said material weaknesses identified in 2014 were remediated during 2015. The filing does not include management’s internal-control assessment or an auditor attestation for 2015.
Important facts for investors to verify
- Obtain updates on the bankrupt COA customer, including collections of pre-petition receivables and continuation or replacement of the contract.
- Confirm whether the $3.3 million collateral deposit was made and whether the company remains in compliance with all debt covenants and minimum-liquidity requirements.
- Reconcile the differing 2016 survey and drydocking cost estimates and assess expected off-hire and any unplanned repair costs.
- Review the funding and delivery schedule for the two 2017 newbuildings, related-party support, and the company’s capacity to meet debt maturities and purchase commitments.
- Assess sensitivity to drybulk rates, vessel values, floating interest rates, and customer concentration; also review the shareholder appeal and associated collateral.