Pangaea Logistics Solutions Ltd. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Pangaea operates a global dry-bulk shipping business through owned, chartered, and jointly held vessels.
Financial and operating performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $79.5 million | $79.0 million |
| Income from operations | $4.3 million | $7.8 million |
| Net income | $4.5 million | $5.5 million |
| Net income attributable to Pangaea | $3.7 million | $4.3 million |
| Adjusted EBITDA | $8.6 million | $12.1 million |
| Net revenue | $12.7 million | $16.3 million |
| Cash provided by operating activities | $12.0 million | $2.8 million |
| Cash, cash equivalents and restricted cash at period end | $61.6 million | $32.2 million |
Revenue increased 1%, but operating income and attributable net income declined. Net revenue margin was approximately 15.9%, versus 20.6% a year earlier; operating margin was approximately 5.4%, versus 9.9%. Operating cash flow improved substantially, aided by working-capital movements, including collections of receivables and lower bunker inventory, partially offset by reduced deferred revenue.
At March 31, 2019, working capital was $39.3 million. Secured debt, net of fees, was $111.2 million; finance lease liabilities totaled $62.6 million. Total secured debt and finance lease liabilities were reported as $173.8 million, versus $166.6 million at December 31, 2018. The company reported compliance with its debt covenants.
Material changes and management commentary
- Total shipping days rose 12% to 3,938. Voyage revenue fell 6% to $65.9 million, while charter revenue increased 58% to $13.7 million as time-charter days increased.
- TCE rates declined 13% year over year to $12,029 per day. Management said this exceeded the Q1 market average of approximately $7,160 by about 68%, attributing the premium to long-term contracts of affreightment, its specialized ice-class fleet, and cargo-focused strategy.
- Voyage expenses increased 7%, primarily because average bunker costs were 8% higher. Charter hire expense increased as chartered-in days rose; vessel operating expense was broadly unchanged.
- The dry-bulk market was weak: the Baltic Dry Index averaged 689 in Q1 2019 versus 1,146 in Q1 2018. Management cited seasonality and reduced U.S. soybean shipments to China, while noting signs of market recovery after Chinese New Year and possible future supply contraction from scrapping and scrubber-related downtime.
Outlook, risks, and unusual items
- The filing provides no formal earnings or revenue guidance. Management said cash generation, securing long-term cargo contracts, and adjusting chartered-in capacity are important to liquidity and ongoing operations.
- Subsequent to quarter-end, the company contracted to build two 95,000-dwt post-Panamax vessels at approximately $38 million each, expected to be delivered in the first half of 2021; it holds options for two additional vessels.
- In May 2019, Pangaea purchased a Supramax vessel for $14 million, financed through an existing lender. NBHC also paid a $7 million dividend, two-thirds payable to noncontrolling interests.
- Derivative fair-value changes materially affected reported results: a $2.29 million net unrealized gain in Q1 2019, including fuel-swap gains partly offset by forward-freight-agreement losses. These instruments are not designated for hedge accounting, which can cause period-to-period earnings volatility.
- Key risks include cyclical freight markets, vessel-value and TCE-rate volatility, bunker-price exposure, and floating-rate debt. A 1% increase in LIBOR was estimated to reduce quarterly net income and cash flow by approximately $0.2 million. Management reported no vessel impairment-triggering events in the period.
- Ordinary-course claims and litigation are disclosed; management did not expect their ultimate financial impact to be material. The filing reports no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether operating cash flow is sustainable, given the significant contribution from working-capital changes.
- Debt and finance-lease repayment requirements, including vessel-related balloon payments and covenant headroom.
- Funding and capital commitments for the newbuilds, options, and vessel acquisitions, and their effect on liquidity.
- How freight rates, bunker prices, and derivative valuations affect earnings and cash flows.
- Whether the company can maintain its TCE premium and long-term cargo contracts in a volatile dry-bulk market.