Pangaea Logistics Solutions Ltd. — Q3 2017 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2017. Pangaea transports drybulk cargo worldwide using owned, leased, and chartered vessels. Results are unaudited. The company describes drybulk shipping as cyclical and volatile.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $107.0 million | $70.8 million | $282.9 million | $171.7 million |
| Income from operations | $10.0 million | $7.8 million | $8.5 million | $12.0 million |
| Net income | $8.8 million | $6.6 million | $4.6 million | $8.8 million |
| Net income attributable to Pangaea | $7.2 million | $6.1 million | $3.8 million | $7.4 million |
| Diluted earnings per share | $0.17 | $0.17 | $0.10 | $0.21 |
| Operating margin | About 9.4% | About 11.0% | About 3.0% | About 7.0% |
Cash flow and liquidity. Operating cash flow for the first nine months was $13.7 million, versus $18.3 million in 2016. Investing activities used $48.2 million, largely for vessel purchases; financing activities provided $41.4 million. Cash and cash equivalents were $29.3 million at September 30, 2017, with $4.0 million of restricted cash. Working capital was positive $22.4 million, compared with a $9.3 million deficit at December 31, 2016.
Debt and balance sheet. Secured long-term debt was $131.3 million net of financing fees, including $17.8 million current; related-party debt was $6.9 million. Capital lease obligations had a present value of $27.2 million. Total assets were $415.3 million and stockholders’ equity was $204.6 million. The company reported compliance with applicable debt covenants at quarter-end.
Material changes versus prior comparable periods
- Q3 revenue rose 51%, supported by a 34% increase in shipping days and a higher average time-charter-equivalent (TCE) rate: $11,822 per day versus $10,480.
- For the nine months, revenue increased 65% and average TCE rose to $11,093 from $9,451. Management attributed the improvement to greater shipping activity and stronger drybulk markets; the Baltic Dry Index averaged 1,035 versus 591.
- Nine-month operating income declined despite revenue growth, principally because of $9.3 million in vessel sale-and-leaseback losses. Excluding those losses, management reported adjusted operating income of $17.8 million; this is a company-provided adjustment, not GAAP income.
- Higher bunker costs and charter-hire rates weighed on results. Nine-month charter-hire expense increased to $91.1 million from $43.2 million, and charter hire rose from 25% to 32% of revenue.
- Shares outstanding increased to 43.8 million from 36.6 million at year-end 2016. Private placements issued 6.53 million shares at $2.25 per share; aggregate net proceeds were about $14.1 million, including approximately $4.4 million issued in payment of accrued dividends.
Outlook, risks, contingencies, and unusual items
- The filing provides no specific earnings or revenue guidance. Management said improving freight rates supported results, while its strategy of chartering vessels primarily for contracted business limits exposure to long-term charter-in losses but can also limit upside in a rising-rate market.
- Key exposures include drybulk-market cyclicality, vessel values, bunker fuel prices, charter-hire rates, and interest rates. A 1% LIBOR increase was estimated to reduce nine-month 2017 net income and cash flow by about $0.4 million, based on debt levels at the beginning of the period. Net effective floating-rate exposure was $52.7 million at quarter-end.
- The $9.3 million sale-and-leaseback loss comprised losses on the Bulk Destiny and Bulk Beothuk transactions. The company recognized the vessels under capital leases after the transactions.
- Other income included a settlement of a non-performance claim and recovery of approximately $0.5 million of litigation-related costs. Management said ordinary-course claims and disputes are not expected to have a material financial impact, while noting outcomes cannot be assured.
- After quarter-end, the company acquired the Bulk Pride for $13.8 million, expected to be delivered in December 2017 and financed with a commercial facility. It also acquired a 50% interest in a venture that purchased a barge for $2.4 million.
- Management reported no impairment-triggering events during Q3 and no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether stronger freight rates and shipping volumes persist, and how charter-hire and bunker costs affect margins.
- The timing and terms of financing for the Bulk Pride purchase, and the resulting debt, lease, and liquidity profile.
- Repayment and covenant requirements, including scheduled debt maturities and vessel collateral maintenance provisions.
- The effect of the 2017 share issuance and dividend conversion on per-share results and future dilution.
- Potential vessel impairment sensitivity to future TCE rates and second-hand vessel values, and the ultimate outcomes of ordinary-course claims.