Pangaea Logistics Solutions Ltd. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed March 20, 2019. This is an annual report, not a standalone fourth-quarter filing. The company provides drybulk shipping and logistics services, using owned and chartered-in vessels across voyage charters, time charters and contracts of affreightment (COAs).
Financial performance and position
| Metric | FY2018 | FY2017 |
|---|---|---|
| Total revenue | $373.0 million | $385.9 million |
| Net revenue (non-GAAP company measure) | $71.0 million | $55.2 million |
| Income from operations | $36.1 million | $16.0 million |
| Net income | $24.0 million | $9.1 million |
| Net income attributable to Pangaea | $17.8 million; $0.42 per diluted share | $7.8 million; $0.20 per diluted share |
| Adjusted EBITDA (non-GAAP) | $54.6 million | $40.1 million |
| Cash provided by operating activities | $40.1 million | $29.2 million |
| Cash and restricted cash at year-end | $56.1 million | $38.5 million |
| Working capital | $34.5 million | $13.0 million |
| Secured debt, including capital lease obligations | $166.6 million | $163.4 million |
Net revenue was approximately 19.0% of revenue versus 14.3% in 2017; operating margin was approximately 9.7% versus 4.2%. Revenue declined about 3% while income from operations more than doubled. The company reported no income tax expense for either year, citing its claimed exemption for qualifying shipping income.
Cash flow from operations exceeded investing cash outflow of $17.5 million; investing outflows were $64.6 million in 2017. Financing activities used $5.0 million in 2018, versus providing $45.4 million in 2017. The balance sheet reported $115.5 million of secured debt net of fees, including $20.1 million current, and $51.0 million of capital lease obligations, including $5.4 million current. Cash alone was $53.6 million; restricted cash was $2.5 million.
Changes versus the prior year
- Total shipping days fell 16% to 16,251, primarily after two long-term contracts ended in 2017. Voyage days declined 18%; chartered-in days fell 29% to 9,650.
- Average TCE rates rose to $14,019 per day from $11,605, approximately 21% higher. Management cited stronger drybulk demand, including from China and coal, and fewer newbuilding deliveries; the BDI averaged 1,345 versus 1,137.
- Charter and voyage expenses decreased with fewer operating days, while vessel operating expenses rose 9% to $39.8 million, reflecting a larger owned fleet. Total revenue fell as higher rates only partly offset reduced shipping activity.
- Losses on vessel sale-and-leaseback transactions declined to $0.9 million from $9.3 million. 2018 included $27.8 million of sale-and-leaseback proceeds, used to support operating and investment activities.
- Net income included a $3.9 million unrealized derivative loss, mainly from fuel swaps after fuel prices dropped late in the year. In Q4, consolidated net income was $1.3 million, but Pangaea-attributable results were a $0.5 million loss; the quarter included a $4.3 million unrealized derivative loss.
- The company adopted ASC 606 in 2018 using the modified retrospective method. Adoption increased reported 2018 revenue by $3.0 million and net income by $2.0 million compared with prior accounting, and reduced opening retained earnings by $2.4 million. 2017 was not restated.
Outlook, risks and unusual items
Management stated that operating cash flows, cash on hand and borrowing availability should cover operating and capital needs for the next 12 months and the foreseeable future. No specific earnings or revenue guidance was provided. Strategy includes expanding COAs and backhaul cargoes, growing the owned fleet, and maintaining short-term charter-in flexibility. One additional Supramax was delivered in February 2019 for an approximately $13 million purchase price, financed through a bareboat arrangement accounted for as a finance lease.
- Shipping-market exposure: Drybulk rates, vessel values and demand are cyclical. Management noted trade-war and protectionism uncertainty; a downturn could pressure earnings, liquidity and loan covenant headroom.
- Customer concentration: Two customers generated approximately 19% of revenue and the top ten 38% in 2018. Two customers represented 25% of year-end receivables.
- Debt and liquidity restrictions: Debt facilities include leverage, coverage, minimum liquidity and vessel-collateral covenants, dividend restrictions and certain cross-default provisions. The company reported compliance at December 31, 2018. Scheduled debt principal payments were $20.1 million in 2019 and $22.0 million in 2020; large balloon payments are also included in later maturities.
- Fuel, rates and derivatives: Fuel is a major voyage cost. Fuel swaps were a $3.2 million liability and FFAs a $0.1 million liability at year-end; margin deposits were $1.8 million. Derivatives were not designated for hedge accounting, so fair-value changes can increase reported earnings volatility.
- Regulatory and fleet costs: Ballast-water treatment systems are estimated to cost $0.5–$0.7 million per vessel. The 2020 global sulfur limit may increase fuel costs, and compliance, drydocking and off-hire could affect earnings and vessel availability.
- Related parties and dividends: The company repaid a $2.0 million founder-affiliated promissory note in February 2018 and reduced its 2011 Founders Note balance to $2.6 million. Accrued dividends payable to related parties were $4.1 million at year-end. No common dividends were declared in 2018 or 2017.
- Contingencies and controls: Management said ordinary-course claims were not expected to have a material impact; it reported no significant pending or threatened legal proceedings. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not provide an internal-control attestation because the company qualified for the smaller-reporting-company exemption.
Most important facts for investors to verify
- Reconcile the reported TCE comparisons and annual totals across the filing: the selected-data table and MD&A contain slightly different 2017 revenue and TCE figures.
- Assess the sustainability of improved rates and margins against the reduced shipping-day base and expiration of long-term contracts.
- Review debt and lease maturities, balloon payments, collateral values, covenant thresholds and available liquidity, including the effect of further vessel acquisitions.
- Evaluate customer concentration, receivable collectability and the company’s capacity to renew or replace major COAs.
- Track fuel-swap and FFA exposures, required margin collateral, regulatory retrofit costs and the accounting effects of ASC 606 and lease-standard adoption.