10 August 2010

PRGN: Income Statement Analysis for the June 2010 Quarter

Paragon Shipping, Inc., (NYSE: PRGN) earned $0.14 to $0.15 per diluted share, on a GAAP basis, in 2010's second quarter, which ended 30 June.  Earnings per share were less than one third of the $0.48 Paragon made in the same quarter of 2009.

Adjusted earnings per share, a non-GAAP measure that excludes various non-cash items, sank from $0.51 to $0.13.

A 50-percent increase in the weighted average number of diluted Class A common shares made the EPS decline steeper than the change in Net Income.  Equity offerings in 2009 expanded the share count.

This post reviews Paragon's Income Statement for the quarter.  We did not issue any estimates in advance of the actual results being released.  The principal sources for the analysis were the earnings announcement and the conference call presentation [pdf].

In a second article, we will provide updated figures for the financial metrics we use to analyze Cash Management, Growth, Profitability and Value.

Before getting into the details, we will take a step back to introduce the subject of today's analysis.

Paragon Shipping owns and charters ships that carry dry bulk cargoes and, now, containers.  The company is headquartered in Greece and has been operating since December 2006.  Paragon generally seeks to secure one-to-five year, fixed-rate charters for its vessels; this strategy dampens the effect of industry volatility on the company.  Paragon has secured charters for 100 percent of its fleet capacity in 2010 and 98 percent in 2011.

Paragon took a series of actions this year to expand and alter the composition of its fleet.  On 12 April, Paragon announced it would purchase for $41 million a Panamax-class dry-bulk carrier that was built in China last year.  A three-year charter for this vessel, which the company calls the "Dream Seas," was quickly arranged.  Two weeks later, on 26 April, Paragon stated that it had contracted with a Chinese shipyard for the construction of four dry-bulk vessels (two Handysize and two Kamsarmax) with Paragon having an option to procure four additional new dry-bulk vessels for delivery in late 2012.  On 6 May, Paragon announced it had exercised the purchase options for the four vessels.  On 30 June, Paragon announced it had sold one of the Kamsarmax ship-building contracts to a third party at a profit. 

On 30 June, Paragon said that it would acquire two brand new containerships built in Germany for 40 million Euros each.  This diversified the fleet into a shipping category other than dry-bulk cargoes.  Paragon took delivery of the first vessel in July, and it expects to take delivery of the second vessel this month.  Two-year, fixed-rate charters have been arranged for the containerships.  

This was followed by a 21 July agreement to sell a Handymax vessel, the "Clean Seas," which had been built in 1995.

A dry-bulk industry concern is the number of new vessels shipbuilders plan to deliver over the next few years.  An oversupply of vessels would put downward pressure on rates. 

Another concern is variations in the Chinese demand for commodities (e.g., iron ore).  The demand is sensitive to price and economic activity.

Please click here to see a 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.

Net Revenue (after commissions of 5.2 and 5.5 percent of Time charter revenue) in the June quarter decreased 30.5 percent, from $40.1 million last year to $27.9 million in the most recent three months.  Time charter equivalent (TCE, a measure of the average daily revenue produced by a vessel) fell by 21.1 percent, from $36,833 to $29,054.

Paragon operated, on average, 11 vessels in the latest quarter, down from 12 vessels one year earlier.   The decrease was due to the earlier sale of the Handymax bulk carrier MV Blue Seas.
The Income Statement has separate entries for Voyage expenses, Vessel operating expenses, and Dry-docking expenses.  To simplify the analysis, we add the three entries and treat the composite number as the Cost of Goods Sold.  CGS was $5.52 million, or 19.8 percent of the second quarter's Revenue.  This rate translates into a Gross Margin, as we define it, of 80.2 percent. 

The Gross Margin fell 750 basis points from 87.7 percent in the second quarter of 2009.  The CGS did not fall at the same pace as Revenue.

Dry-docking expenses rose from $25k to $1.1 million.

Depreciation expenses fell 6 percent, from $8.65 million to $8.13 million. As a percentage of Revenue, Depreciation increased from 21.6 percent to 29.1 percent.

We group Management fees and General and administrative expenses into the Sales, General, and Administrative category.  In the latest quarter, SG&A expenses soared from $1.89 million to $4.64 million.  The increase was due to share-based compensation rising from $152k to $2.4 million.

Paragon recorded a $588k gain on the sale of one of the Kamsarmax ship-building contracts

Subtracting the various operating expenses identified above from Revenue yields Operating Income of $10.2 million, down 46 percent from last year.  As explained above, the decline was due to lower Revenues and some higher expenses, partially offset by lower Depreciation and the one-time gain.

Non-operating expenses declined from $3.0 million to $2.9 million.

Paragon paid no income taxes in either period.

Net Income in 2010's second quarter was $7.31 million ($0.14 per share), compared to $15.8 million ($0.48 per share) in the same quarter of 2009.  

Full disclosure: Long PRGN at time of writing.

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