21 November 2009

PRGN: Income Statement Analysis for the September 2009 Quarter

Paragon Shipping, Inc., (NASDAQ: PRGN) earned $0.40 per share in the third quarter of 2009, down from $0.69 in the same quarter of last year.  The steepness of the earnings-per-share decline was more due to the 64-percent increase in the weighted average number of diluted shares, after two equity offerings, than the 4.9-percent decrease in Net Income.

This post reviews each row of the Income Statement for the quarter in the earnings announcement.  We also consulted the separately issued Management's Discussion and Analysis of Financial Condition and Results.

We did not issue a "look-ahead" estimate in advance of the earnings release.

In a second article, we will report Paragon's scores as measured by the GCFR financial gauges. The follow-up post will also provide the latest figures for the various financial metrics we use to analyze Cash Management, Growth, Profitability and Value.

Headquartered in Greece and operating since December 2006, Paragon owns and charters ships that carry dry bulk cargoes.  Chairman and CEO Michael Bodouroglou also controls the company, Allseas Marine S.A., that Paragon pays to manage its fleet.

e click here to see a full-sized, normalized depiction of the actual results for the just-concluded quarter, as well as the quarterly Income Statements for the last couple of years.  Please note that our organization of revenues, expenses, gains, and losses, which we use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

Revenue (after commissions totaling 5.0 percent) in the September 2009 quarter was 8.1 percent less than in the third quarter of 2008.  The average daily revenue per vessel (time charter equivalent) fell 13.8 percent on an unadjusted basis and 11.1 percent after adjustments.  The latter figure excludes non-cash "amortization of below market acquired time charters."

Paragon operated 12 vessels during the September 2009 quarter, up from an average of 11.6 vessels during the same period in 2008.

The income statement has separate entries for Voyage expenses, Vessel operating expenses, and Dry-docking expenses.  Paragon's MD&A defines how the company accounts for these and other expenses.  For our convenience, we add the three values and label the result the Cost of Goods Sold.  CGS was 12.5 percent of Revenue in the third quarter, which translates into a Gross Margin, as we define it, of 87.5 percent. The Gross Margin was 82.7 percent in the same period last year.

The nearly 5-percent improvement in Gross Margin was largely due to reductions in Voyage expenses and Dry-docking expenses of about 90 and 98 percent, respectively.

Depreciation expenses were just slightly less than last year, but these non-cash costs increased from 20.3 to 22.1 percent of Revenue.

We group Management fees and General and administrative expenses into the Sales, General, and Administrative (SG&A) category, which includes share-based compensation.  In the third quarter, this expense category increased 1.3 percent.  As a percentage of Revenue, these expenses edged up from 5.3 to 5.8 percent.

In the June quarter, Paragon recorded an asset impairment charge of $6 million on the Handymax bulk carrier MV Blue Seas.  This vessel will be sold for $17.55 million (less a 3 percent commission) later this year.  An additional impairment charge of nearly $655 thousand was recorded in the September quarter.

Besides the sale of the MV Blue Seas, no other event occurred that required Paragon to recognize lower vessel valuations.  However, investors should understand that assets can have market values that are very different from the carrying values listed on a Balance Sheet.  See this indication of lower valuations, relative to last year, for various types of bulk carriers and tankers.

When loans to Paragon are secured by its vessels, lower market values for these vessels can cause the company to default on the terms of its loan agreements.  Nervous bankers can then demand that the company repay the loan or raise cash elsewhere.  This would explain the two recent equity offerings.

Operating Income, which we define as the difference between Revenue and the operating expenses identified above, fell 6.9 percent to $22 million.  The decline was the result of lower Revenues and the impairment charge, offset to some extent by lower costs.

Other expenses of $4.1 million were mainly interest and finance costs and a loss on interest rate swaps. The swaps are intended to reduce Paragon's exposure to interest rate fluctuations.

Paragon paid no income taxes.

The bottom-line figure for Net Income was $18.0 million ($0.40 per share), compared to $18.9 million ($0.69 per share).

Paragon has raised cash in 2009 through two equity offerings, the second of which was completed on 2 October.  The number of shares outstanding increased from about 27 million shares on 31 December 2008 to more than 48 million on 2 October 2009.

Full disclosure: Long PRGN at time of writing.

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