02 March 2011

PRGN: Income Statement Analysis for the December 2010 Quarter

Paragon Shipping, Inc., (NYSE: PRGN) earned $0.04 per diluted share on a GAAP basis in the December-ending fourth quarter of 2010, down more than 80 percent from $0.26 in the same three months of the previous year.

Adjusted earnings, a non-GAAP measure that excludes various non-cash items, sank from $0.17 to $0.08 per share in the fourth quarter.

This post reviews Paragon Shipping's Income Statement for the quarter.  We did not issue any advance estimates of the results.  The principal sources for the analysis were the earnings announcement and the accompanying slide presentation.

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.

Chairman and CEO Michael Bodouroglou also controls Allseas Marine S.A., which manages Paragon's fleet

An historic plunge in rates, as reflected in the Baltic Dry Index, has negatively affected the revenue, income, and market value of shippers.  The lower rates reflect reduced demand, due to weaker economic conditions, for bulk commodities and other goods.  Another industry concern is the large number of new vessels, which can put downward pressure on rates and cut into the value of older vessels.

In 2010, Paragon earned $22.9 million ($0.44 per share), down 65 percent from the prior year's $65.7 million ($1.69 per share).  Revenue dropped from $152.7 million to $111.7 million. 

The company's current market value is approximately $150 million, on fully diluted basis.  Equity offerings in 2009 raised funds and significantly expanded the number of common shares outstanding.

Paragon took a series of actions in 2010 to expand and alter the composition of its fleet.  The company purchased for $41 million a Panamax-class dry-bulk carrier that was built in China in 2009.  A three-year charter for this vessel, which is now called the "Dream Seas," was quickly arranged.  Soon thereafter, Paragon contracted with a Chinese shipyard for the construction of four dry-bulk vessels (two Handysize and two Kamsarmax).  Paragon then exercised an option to procure four additional new dry-bulk vessels for delivery in late 2012.  One of the Kamsarmax ship-building contracts was sold to a third party at a profit. 

In the third quarter of 2010, Paragon took delivery two brand new container ships built in Germany for €40 million each.  The Box Voyager and the Box Trader diversified the company's fleet into a shipping category other than dry-bulk cargoes.  Two-year, fixed-rate charters were arranged for the container ships.

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 in the December quarter decreased 23 percent, from $35.2 million last year to $27.1 million in the most recent three months. Net Revenue excludes commissions of 5.7 percent of Time charter revenue in the fourth quarter of 2010 and 5.1 percent in the prior-year period.

Time charter equivalent (TCE, a measure of the average daily revenue produced by a vessel) fell a steep 28.7 percent, from $32,350 to $23,053, in the December quarter.

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 $6.0 million (17.1 percent of Revenue) in 2009's fourth quarter to $6.3 million (23.2 percent of Revenue) in the latest quarter. 

These figures indicate that the Gross Margin, as we define it, declined from 82.9 percent of Revenue to 76.8 percent. 

The growth in the CGS was led by a rise in Vessel operating expenses from $5.2 million to $5.5 million. This may be due to the increase in the fleet size.

Depreciation expenses grew 9 percent, from $8.2 million to $8.9 million. As a percentage of Revenue, Depreciation increased from 23.3 percent to 33.0 percent.

We group Management fees and General & Administrative expenses into the Sales, General, and Administrative category.  In the latest quarter, SG&A expenses shot up from $7.3 million to $8.0 million.   Share-based compensation included in SG&A rose from $2.4 million to $3.4 million.

Paragon reported a $212k gain on the sale of a Handymax vessel, the MV Clean Seas, which changed hands in October 2010.  Vessel-related gains were $1.2 million in the fourth quarter of 2009.

Subtracting the various operating expenses mentioned above from Revenue yields Operating Income of $4.05 million, down 73 percent from $14.9 million last year.  As explained above, the decline was due to lower Revenues and higher expenses, especially vessel operating expenses, depreciation and share-based compensation.  In addition, one-time vessel-related gains were lower in the recent quarter.
Non-operating expenses declined from $2.2 million to $1.7 million.

Paragon paid no income taxes in either period.

Net Income in 2010's fourth quarter was $2.3 million ($0.04 per share), compared to $12.7 million ($0.26 per share) in the same quarter of 2009.  

In summary, Paragon Shipping's Revenue fell 23 percent in the December 2010 quarter, when compared to the same three months of the previous year, even though the company owned one additional vessel.  Lower charter rates resulted in significantly less daily Revenue per vessel.  Lower revenue and higher operating expenses led to substantial declines in Operating Income and Net Income.

Full disclosure: Long PRGN at time of writing.

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