Pangaea Logistics Solutions Ltd. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing is an annual report, not a standalone fourth-quarter filing; selected Q4 figures are included below. Amounts are U.S. dollars unless stated otherwise.
Business context
Pangaea provides drybulk shipping and logistics services, using a mix of owned, jointly owned, bareboat-chartered and short-term chartered-in vessels. It transported about 25 million tons of cargo annually and averaged approximately 53 vessels in service during 2017. Its strategy emphasizes contracts of affreightment (COAs), backhaul cargoes, customized logistics and specialized ice-class trades.
Financial and operating performance
| Metric | 2017 | 2016 | Change / context |
|---|---|---|---|
| Total revenue | $385.1 million | $238.0 million | Up 62% |
| Voyage revenue | $337.7 million | $222.1 million | Up 52% |
| Charter revenue | $47.4 million | $15.9 million | Up 198% |
| Net revenue | $55.2 million | $39.8 million | Up about 39%; non-GAAP measure as defined by the company |
| Income from operations | $15.2 million | $12.9 million | Up 18%; includes $9.3 million sale-and-leaseback losses |
| Net income | $9.1 million | $9.2 million | Nearly flat |
| Net income attributable to Pangaea | $7.8 million | $7.5 million | Up about 5% |
| Basic and diluted EPS | $0.20 | $0.21 | Down from prior year |
| Adjusted EBITDA | $40.1 million | $27.0 million | Up about 48%; non-GAAP |
| Operating cash flow | $29.2 million | $19.2 million | Higher year over year |
| Capital investment / investing cash flow | $64.6 million used | $10.3 million used | Primarily vessel acquisitions |
| Cash and cash equivalents | $34.5 million | $22.3 million | Restricted cash was an additional $4.0 million |
| Working capital | $13.0 million | $(9.3) million | Improved from deficit |
Operating margin was approximately 3.9% and net margin approximately 2.4%, calculated from reported income and revenue. The company’s average time-charter-equivalent (TCE) rate rose 20% to $11,605 per day; total shipping days increased 39% to 19,346. Vessel operating expense per ownership day declined 5% to $5,384.
On the consolidated income statement, voyage expense was $160.6 million and charter-hire expense was $132.9 million in 2017; both increased substantially as activity, fuel prices and charter rates rose. Interest expense, net, was $8.0 million, compared with $5.4 million in 2016.
Liquidity, debt and capital
- At year-end, secured long-term debt was $136.6 million net of unamortized fees, including $19.0 million current. Capital-lease obligations were $26.8 million, of which $1.8 million was current. Related-party debt was a further $7.0 million. The filing’s selected-data summary reports $163.4 million of secured debt including capital leases.
- Debt payments scheduled for 2018 were $19.0 million; reported payments rise to $37.2 million in 2021 and $37.7 million in 2022, including substantial balloon maturities. Credit facilities are secured by vessels and include financial, liquidity and collateral-maintenance covenants.
- The company reported compliance with debt covenants at December 31, 2017, but disclosed a lender waiver for a minimum-liquidity breach under one facility at September 30, 2017.
- Financing cash flow was positive $47.5 million, including $35.0 million of long-term debt proceeds, $28.0 million from vessel sale-and-leasebacks, and $9.6 million of net proceeds from a private share placement; debt repayments were $25.3 million.
- Approximately 1.9 million shares were issued as in-kind payment of $4.4 million of accrued dividends. Dividends payable, all to related parties, were $7.2 million at year-end. No dividends were declared on common shares in 2017 or 2016.
Material changes and unusual items
- Improving drybulk markets and more shipping days drove annual revenue and TCE gains. The Baltic Dry Index averaged about 64% above its 2016 average.
- The company acquired its joint venture partner’s 50% interest in BVH in January 2017, obtaining full control of the Bulk Destiny and Bulk Endurance vessels. It also acquired Bulk Freedom, Bulk Pride and an interest in a deck barge.
- Two sale-and-leaseback transactions produced a combined $9.3 million loss: $4.3 million on Bulk Destiny and $4.9 million on Bulk Beothuk. The vessels remained in the fleet under capital leases.
- For Q4 2017, revenue was $102.2 million versus $66.3 million in Q4 2016; net income attributable to Pangaea was $4.1 million versus $0.1 million. Annual diluted EPS nevertheless declined to $0.20 from $0.21.
- The 2017 common-share placement and dividend conversion increased shares outstanding; year-end shares were 43.8 million, compared with 36.6 million at year-end 2016.
Outlook, risks and other disclosures
- The filing provides no numerical earnings or revenue guidance. Management described market conditions as improving, but warned that drybulk fleet supply could outpace demand in 2019 and put charter rates under pressure. Newbuilding orders increased during 2017.
- Key exposures include volatile freight rates, fuel prices, vessel values, interest rates, customer and charter-counterparty performance, vessel availability and operating interruptions. Five of the top ten customers represented 26% of revenue; one customer accounted for 12%. Two customers represented 32% of year-end receivables.
- Management cited 2018 survey costs of approximately $1.3 million for one special survey and $1.8 million for six intermediate surveys. Ballast-water treatment systems were estimated at about $0.5 million per vessel; compliance may also cause off-hire time.
- Adoption of the new revenue-recognition standard on January 1, 2018 was expected to reduce opening retained earnings by approximately $2.6 million. The company said adoption of the cited new lease, cash-flow and derivatives standards was not expected to have a material impact.
- Management reported effective disclosure controls and internal control over financial reporting at year-end; the auditor issued an unqualified opinion on the financial statements but did not attest to internal-control effectiveness. No legal proceeding was identified as likely to have a significant effect.
Important facts for investors to verify
- Review cash availability, minimum-liquidity requirements, the prior covenant waiver, and the substantial 2021–2022 balloon maturities.
- Assess whether stronger freight rates and vessel utilization can offset higher charter hire, bunker costs and the increased exposure from more speculative chartering.
- Confirm the ongoing economics and accounting of the Bulk Destiny and Bulk Beothuk sale-and-leasebacks, including lease payments and vessel ownership terms.
- Track customer and receivable concentration, collection performance, and the related-party dividend and debt balances.
- Evaluate vessel survey, drydocking and ballast-water compliance costs, and the potential effects of market supply growth and fuel regulations.