Navios Maritime Holdings (NYSE:NM) released its fourth quarter and year end earnings today. Although it did not disclose it in the press release and waited until slide six to mention it on the conference call, NM suspended dividend payments on its outstanding preferred stock due to liquidity concerns. The cash flow losses that NM suffered in its Dry Bulk Segment for the fourth quarter and that it will continue to suffer during 2016 due to the recent precipitous decline in charter rates also forced it to seek a line of credit from its affiliate Navios Acquisition Corp (NYSE:NNA). The line of credit with NNA was not disclosed in the press release but mentioned during the conference call by CEO Angeliki Frangou. No terms for the line of credit were disclosed.
As a refresher, NM consolidates the 63.8% owned Navios South American Logistics (NSAL) for GAAP reporting purposes. Navios Maritime Partners (NYSE:NMM) and Navios Acquisition Corp are accounted for as equity investments and are not consolidated. To calculate the earnings (losses) and cash flow for the Dry Bulk Segment, it is necessary to back out NSAL's results for the quarter. As a foreign company, NM is not obligated to file a 20-F with full financial statements until the end of April so I have used the consolidated financial information and the NSAL standalone financial information provided by the company to calculate some of the Dry Bulk Segment's results.
NM and its web of affiliates is a complicated corporate structure so I suggest reviewing the following in order to understand why assessing NM on an unconsolidated or segment basis is important. These articles also include prior projections of cash flow and cash balances that I will reference in this article.
- NM Takes a Liquidity Blow...
- NM's Liquidity Crisis: Why Bankruptcy Makes Sense...
- NM: Liquidity Issues will Continue to Worsen...
Dry Bulk Segment
In the following table, I use EBITDA less interest expense and payments for dry dock and special surveys to estimate cash flow losses for the Dry Bulk Segment prior to changes in working capital.
|Fourth Quarter Financial Results|
|Dry Dock and Special Survey Payments||$5.06||$1.00||$4.06|
|Cash Flow Loss for the Dry Bulk Segment||($24.95)|
The press release provided the information for consolidated and NSAL standalone EBITDA and Interest Expense. Only consolidated Dry Dock and Special Survey Payments was provided so I allocated the costs between the Dry Bulk Segment and NSAL based on fleet size and prior quarterly costs. This estimate of cash flow does not include any capital expenditure for the two ships completed and delivered during the first quarter.
My estimate of Cash Flow Loss for the Dry Bulk Segment for the fourth quarter from my last article was ($20.7 million) based on a benefit of the doubt assumption that management would maximize charter revenue by signing two year charters as old charters expired.
"I opted for revenue maximization for the charter-out renewals and assumed that all the expirations for the fourth Quarter were fixed on two-year charters-out at a 10% premium over the average of the rates posted by Alibra on December 2, 2015 unless otherwise specified on the fleet report posted on the NM website"
Management pursued a more short-term strategy (see discussion below) for its portfolio of vessels so actual fourth quarter revenues fell short of my deliberately optimistic forecast and resulted in the greater cash flow loss experienced by the Dry Bulk Segment relative to my estimates. The takeaway from the above estimate of operating cash flow before working capital changes is that the Dry Bulk Segment underperformed and likely will continue to underperform my deliberately more optimistic projections by $3 - $4 million per quarter due to management's contracting strategy. This shortfall will be mostly offset by the cash flow boost due to suspension of preferred dividends of approximately $3.7 million per quarter.
The gap between actuals and my projections for the first and second quarter of 2016 may in fact widen, however, due to the sharp decline in spot and charter rates during the first quarter and the Dry Bulk Segment's exposure to those rate declines. Although NM states on page 6 of the Q4 2015 Earnings Presentation that 65.9% of its vessel days are "fixed", 21.3% of these vessels are "fixed" on charters that price off of indices. As the indices rise and fall, so do the rates realized by NM. The real percentage of vessels with fixed charter rates is 44.6%, a negative when charter rates have fallen as hard as they have during the first quarter.
The Dry Bulk Segment ending cash balance at 12/31/15 was approximately $95.4 million. This cash balance was boosted by a favorable change in Working Capital of approximately $40 million. Accounts Receivable and Other Current Assets declined about $15 million due to a decline in revenue during the quarter and Accounts Payable and Other Current Liabilities increased about $25 million, probably due to management delaying payment to boost year-end cash balances (a common enough practice). This increase in Accounts Payable and Other Current Liabilities will reverse during the first quarter so the Dry Bulk Segment Cash Balance will adjust down by about $25 million. I will provide a more detailed cash rollforward when the 20-F is filed.
NM took delivery of its final two ships under construction during the first quarter. The equity payment for the vessels was $43.9 million and I am assuming that $31.25 million of that amount was recorded already as Deposits for Vessels for the Dry Bulk Segment at 12/31/15. This leaves $12.25 to be paid from cash during the first quarter. My prior estimate for CapEx during the first quarter was $15 million, but this number included dry dock and special survey payments of about $5 million. My CapEx number for the first quarter may therefore be low about $2 million.
In my prior article, I projected that the Dry Bulk Segment would have a bit less than $14 million in cash at June 30, the end of the second quarter. My confidence in that projection has grown based on these fourth quarter results. I will update the full model when the 20-F is issued. To address the looming liquidity crisis at the end of June, management was forced to enter into the line of credit with NNA.
- As disclosed during the conference call, NM repurchased 1.15 million shares at a price of $.90. I have several questions about this. The price of NM's shares did not dip below $1 until January 2016. In fact on a closing price basis the low for the 4th quarter appears to have been $1.16. Who did NM buy the shares from, why did NM buy them at such a discount, and why did NM repurchase shares knowing that a preferred dividend suspension was likely?
- Speaking of $1, NM received a Continued Listing Standards Notice from the NYSE due to the stock trading below $1 for 30 consecutive days. NM has 6 months to cure.
- NM did not disclose any information regarding the line of credit from NNA. My assumption, and this is only an assumption, is that the line of credit will be collateralized by the NNA stock owned by NM. This is the snake eating its tale strategy but with a twist. Rather than sell the stock outright, management is betting that dry bulk rates will recover sufficiently by the end of 2016 so that it will be able to generate positive cash flow, payoff the line of credit, and regain control of the pledged stock. The cash burn rate for the Dry Bulk Segment during the first and second quarter of 2016 and the direction of charter rates during the next four to six months will determine if that is a good bet or not.
- NNA's stock owned by NM is currently worth approximately $150 million. Assuming an overcollateralization of 2x, NM may have a bit more room to borrow if the NNA stock price stays at its current level or increases.
- NM recorded a "$17.5 million non-cash guarantee loss relating to Navios Maritime Partners L.P. ("Navios Partners")". This is strange since NMM stated it did not have any credit issues in its dry bulk portfolio during its recent earnings conference call. If they are recording a "non-cash loss" it means that NM is recognizing an expense under the guarantee for the dry bulk assets it dropped down to NMM. If the credit was not to cash, what was credited? An intercompany receivable from NMM? There had to be some exchange of value with NMM if an expense is being recognized by NM. I sent an inquiry to NM IR and I am awaiting a response.
- The NSAL port expansion for Vale will not be completed until year end. NSAL will be a consumer of cash until then.
- The current value of NM's GP and LP interests in NMM is a mere $19 million.
NM stayed the executioner's hand by arranging the line of credit with NNA. This lifeline financing may be barely sufficient for NM to survive to year end 2016 in the hopes of a better dry bulk market in 2017 but that will be determined by how low dry bulk rates remain during March and the second quarter of this year. The Senior Notes may benefit from the NNA line of credit, at least in the near term, but I remain skeptical that there is any value to the NM preferreds and common stock.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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