Since I first published my findings on Aegean Marine on October 23rd, the stock is down 21%. The company reported third quarter earnings on November 15th and it seems the market is starting to realize the problems going on at the company.
Let's review the quarter and then review some of the issues I mentioned in my first article, which are all still occurring and some are getting worse. Gross spread was $23.40, flat year over year and down $2.70 from the second quarter 2012. Most problematic was volume, essentially flat at 2.7m tons. I find this problematic because the company is not utilizing the expanded fleet to increase bunker sales. The annual run rate of 10.5m tons is the same as in 2010 when the company had 9 less vessels.
The company reported earnings per share of $.17 which matched consensus analyst estimates. In my opinion, the company missed by a wide margin since the company benefited from foreign exchange gains and a low tax rate. These two boosted earnings per share by $.09 cents, $.05 from the FX gain and $.04 from the whopping 7% tax rate. In the 3rd quarter, the trend of more gross profit coming from non-core activities like voyage revenues and brokerage fees, which the company refers to as "other revenue", hit a record $10.4m or 14.1% of total gross profit.
Also in the quarter the company sold a great deal of trade receivables, something I believe to be problematic because of the cost of financing. On page 6 of the 6-K, ANW disclosed the sale of $583m in trade receivables year to date. Backing out the $398m from the first six months, the company sold $148m in the quarter easily surpassing the $22.2m provided by cash flow from operations mentioned in the earnings press release.
Even more worrisome is the company's accounts payables to third parties increased by 31% from $208m to $273m. This means the company didn't pay its suppliers in a timely manner or in other words, the company is stretching its payables to make up for the large increase in trade receivables, which increased $78m in the quarter. Aegean would only have $11m in cash vs. $77m reported on the balance sheet if it kept its accounts payable flat quarter over quarter. Historically, Aegean would simply borrow to facilitate the negative cash flow but since the company is pushing up against its debt covenants (total leverage), the company is finding new ways to mask the cash flow problem.
Also disclosed on page 10 of the 6-K, the company is again in violation of its debt covenants. The current ratio is 1.09 vs. the covenant of 1.10 and working capital is $74.5m vs. a minimum of $75m. Even though the violations are only "marginal", I think it does not bode well for the company since the covenants were recently relaxed and Aegean is attempting to roll over its senior secured credit facility due January 2013. May I add this facility has the strictest covenants of all the company's debt. I eagerly look forward to see the terms of the new facility.
To give you a sense of company management, on November 20th as the stock had sold off, the company issued a press release about the board approving a share buyback of 1m shares. This press release doesn't contain any new information. According to the 2011 20-F, the stock buyback was approved on July 20, 2011 and will last for 12 months. I'm not sure why management felt it needed to announce this old news other than an attempt to artificially prop up the stock at the same time it is negotiating the new debt facility.
Aegean is barely meeting its debt covenants at a time when refinancing in the shipping industry is getting tougher. Time will tell.
Disclosure: I am short ANW.