Pangaea Logistics Solutions Ltd. — Q1 2018 Form 10-Q
Business and period: Bermuda-based drybulk vessel owner, charterer and operator. This unaudited report covers the three months ended March 31, 2018, compared with Q1 2017.
Financial performance
- Revenue: $79.0 million, down 6.5% from $84.5 million. Voyage revenue fell 9% to $70.3 million, while charter revenue rose 28% to $8.7 million.
- Profitability: Operating income was $7.8 million, versus an operating loss of $0.4 million. Net income attributable to Pangaea was $4.3 million, compared with $1.3 million; diluted EPS was $0.10 versus $0.04.
- Operating measures: Net revenue, as defined by the company, increased to $16.3 million from $11.4 million. Adjusted EBITDA rose to $12.1 million from $7.9 million. TCE rates increased 39% to $13,849 per day; shipping days fell 19% to 3,524.
- Cash flow: Operating activities provided $2.8 million, compared with $2.4 million. Investing used $0.4 million, versus $38.7 million, largely reflecting lower vessel investment. Financing used $8.7 million, compared with providing $35.7 million in Q1 2017. Cash, cash equivalents and restricted cash decreased $6.3 million to $32.2 million.
- Margins and costs: Net revenue was approximately 20.6% of revenue, up from 13.5%. Voyage and charter-hire expenses declined, while vessel operating expenses, general and administrative expenses, and depreciation increased.
- Liquidity and debt: Unrestricted cash was $28.2 million, with $4.0 million restricted. Working capital was $14.3 million, compared with $13.0 million at year-end 2017. Secured debt, net of fees, was $131.9 million; capital lease obligations were $26.4 million. The company reported total secured debt including capital leases of approximately $158.2 million. Debt maturities include a substantial $70.1 million due in the year ending March 31, 2022.
Material changes and drivers
- Management attributed lower revenue mainly to 19% fewer shipping days, following completion of two long-term contracts of affreightment during 2017. Improved freight rates nevertheless lifted TCE and net revenue.
- The company said its Q1 TCE rate exceeded the reported market average by approximately $2,800 per day, or 25%. It described the drybulk market as improving; the Baltic Dry Index averaged 1,146 versus 996 in Q1 2017.
- Voyage expenses fell 27%, partly because Q1 2017 included $3.4 million of relet expenses, compared with minimal relet expense in Q1 2018. Charter-hire days declined, but average hire rates increased 46%.
- Q1 2017 included a $4.3 million loss on the sale and leaseback of a vessel; there was no comparable loss in Q1 2018. Derivative results moved from a net gain in Q1 2017 to a net loss in Q1 2018.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method. The company recorded a $2.4 million opening retained-earnings adjustment. For Q1, adoption increased reported revenue by $2.6 million and net income by $1.7 million versus prior accounting; comparative periods were not restated.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance was provided. Management cited ongoing market improvement, the importance of securing long-term cargo contracts, and its ability to adjust chartered-in vessel commitments to cargo needs. The filing cautions that industry conditions and results are cyclical and volatile.
- Interest-rate exposure: net effective floating-rate debt exposure was $64.3 million. Management estimated that a 1% LIBOR increase would reduce quarterly net income and cash flow by approximately $0.1 million, based on period-opening debt.
- Freight and fuel derivatives can create period-to-period earnings volatility and were not designated for hedge accounting. Q1 2018 included a $0.6 million unrealized net derivative loss, versus a $2.0 million net gain in Q1 2017.
- Vessel values and impairment assessments depend on volatile future TCE rates and other estimates. No impairment-triggering event was identified in Q1 2018, and no recoverability test was performed.
- On April 12, 2018, the company agreed to buy a 2006-built Panamax vessel for approximately $14.3 million, expected to be delivered in Q2. On April 19, it agreed to sell and lease back Bulk Trident for $15.0 million under an eight-year bareboat charter, with a $2.0 million hire prepayment deducted at delivery.
- The company reported compliance with its debt covenants at quarter-end. It disclosed ordinary-course claims and disputes, principally cargo claims, and said management did not expect their ultimate financial impact to be material. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- How much of the reported earnings improvement reflects stronger underlying rates and cost performance versus the $1.7 million Q1 net-income benefit from ASC 606 adoption.
- Whether shipping days, contract coverage and TCE premiums can be sustained as market rates and charter-hire costs change.
- The funding and liquidity impact of the vessel purchase, Bulk Trident sale-leaseback, debt maturities and required vessel drydockings.
- Exposure to LIBOR increases, derivative mark-to-market changes, and vessel-value declines that could affect covenant headroom or impairment assessments.