15 November 2010

PRGN: Income Statement Analysis for the September 2010 Quarter

Paragon Shipping, Inc., (NYSE: PRGN) earned $0.08 per diluted share on a GAAP basis in the September-ending third quarter of 2010, down almost 80 percent from $0.40 in the same three months of last year.

Adjusted earnings per share, a non-GAAP measure that excludes various non-cash items, sank from $0.33 to $0.17.

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 management's published discussion and analysis.

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 already secured charters for 98 percent of its fleet capacity in 2011.

In 2009, Paragon earned $65.7 million ($1.69 per share) on revenue of $152.7 million.

The company's current market value is approximately $190 million.

Paragon has taken 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. 

In the third quarter, Paragon took delivery two brand new container ships built in Germany for 40 million Euros each.  This diversifies the fleet into a shipping category other than dry-bulk cargoes.  Two-year, fixed-rate charters have been arranged for the container ships.  

Paragon sold a Handymax vessel, the "Clean Seas," which had been built in 1995.  The vessel changed hands in October 2010.

A dry-bulk industry concern is the large number of new vessels entering service, which puts downward pressure on rates.  Another concern is weaker Chinese demand for iron ore.

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 5.0 and 5.9 percent of Time charter revenue) in the September quarter decreased 29 percent, from $38.1 million last year to $27.0 million in the most recent three months.  Time charter equivalent (TCE, a measure of the average daily revenue produced by a vessel) fell by 34 percent, from $34,687 to $22,864.

Paragon operated, on average, 13.1 vessels in the latest quarter, up from 12.0 vessels one year earlier. 
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  increased from $4.8 million (12.5 percent of Revenue) in 2009's third quarter to $6.3 million (23.3 percent of Revenue) in the latest quarter. 

These figures indicate that the Gross Margin, as we define it, declined from 87.5 percent of Revenue to 76.7 percent. 

The growth in the CGS was led by a rise in Dry-docking expenses from $24 thousand to $795 thousand.

Depreciation expenses increased 2.4 percent, from $8.4 million to $8.6 million. As a percentage of Revenue, Depreciation increased from 22.1 percent to 31.8 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 $2.2 million to $4.8 million. Share-based compensation rose from $356 thousand to $2.45 million.

Subtracting the various operating expenses identified above from Revenue yields Operating Income of $7.3 million, down 67 percent from last year.  As explained above, the decline was due to lower Revenues and higher expenses, especially Dry-docking expenses and share-based compensation.

Non-operating expenses declined from $4.1 million to $3.2 million, with a $1.37 million foreign currency gain contributing to the latest quarter's results.

Paragon paid no income taxes in either period.

Net Income in 2010's third quarter was $4.1 million ($0.08 per share), compared to $18.0 million ($0.40 per share) in the same quarter of 2009.  

In summary, Paragon Shipping's Revenue fell 29 percent in the September 2010 quarter, when compared to the same three months of 2009.  Although the firm kept its vessels under contract (other than for scheduled dry-docking), and the size of its fleet expanded, lower charter rates resulted in less daily Revenue per vessel.  The combination of lower Revenue and higher operating expenses resulted in big declines in Operating Income and Net Income.

Full disclosure: Long PRGN at time of writing.

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