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EGLE > SEC Filings for EGLE > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for EAGLE BULK SHIPPING INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for EAGLE BULK SHIPPING INC.


9-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The following is a discussion of the Company's financial condition and results of operation for the three-month and nine-month periods ended September 30, 2012 and 2011. This section should be read in conjunction with the consolidated financial statements included elsewhere in this report and the notes to those financial statements.

This discussion contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the Private Securities Litigation Reform Act of 1995, and are intended to be covered by the safe harbor provided for under these sections. These statements may include words such as "believe," "estimate," "project," "intend," "expect," "plan," "anticipate," and similar expressions in connection with any discussion of the timing or nature of future operating or financial performance or other events. Forward-looking statements reflect management's current expectations and observations with respect to future events and financial performance. Where we express an expectation or belief as to future events or results, such expectation or belief is expressed in good faith and believed to have a reasonable basis. However, our forward-looking statements are subject to risks, uncertainties, and other factors, which could cause actual results to differ materially from future results expressed, projected, or implied by those forward-looking statements. The principal factors that affect our financial position, results of operations and cash flows include charter market rates, which have declined significantly from historic highs, periods of charter hire, vessel operating expenses and voyage costs, which are incurred primarily in U.S. dollars, depreciation expenses, which are a function of the cost of our vessels, significant vessel improvement costs and our vessels' estimated useful lives, and financing costs related to our indebtedness. Our actual results may differ materially from those anticipated in these forward looking statements as a result of certain factors which could include the following: (i) changes in demand in the dry bulk market, including, without limitation, changes in production of, or demand for, commodities and bulk cargoes, generally or in particular regions; (ii) greater than anticipated levels of dry bulk vessel newbuilding orders or lower than anticipated rates of dry bulk vessel scrapping;
(iii) changes in rules and regulations applicable to the dry bulk industry, including, without limitation, legislation adopted by international bodies or organizations such as the International Maritime Organization and the European Union or by individual countries; (iv) actions taken by regulatory authorities;
(v) changes in trading patterns significantly impacting overall dry bulk tonnage requirements; (vi) changes in the typical seasonal variations in dry bulk charter rates; (vii) changes in the cost of other modes of bulk commodity transportation; (viii) changes in general domestic and international political conditions; (ix) changes in the condition of the Company's vessels or applicable maintenance or regulatory standards (which may affect, among other things, our anticipated drydocking costs); (x) the outcome of our discussions with the agent of our revolving credit facility regarding the calculation of collateral covenants, (xi) the outcome of legal proceeding in which we are involved; and
(xii) and other factors listed from time to time in our filings with the Securities and Exchange Commission. This discussion also includes statistical data regarding world dry bulk fleet and orderbook and fleet age. We generated some of this data internally, and some were obtained from independent industry publications and reports that we believe to be reliable sources. We have not independently verified this data nor sought the consent of any organizations to refer to their reports in this Quarterly Report. We disclaim any intent or obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

Overview

Eagle Bulk Shipping Inc. (the "Company", "we", "us", or "our"), incorporated under the laws of the Republic of the Marshall Islands (the "Marshall Islands") and headquartered in New York City, is engaged primarily in the ocean transportation of a broad range of major and minor bulk cargoes, including iron ore, coal, grain, cement and fertilizer, along worldwide shipping routes. We operate in the Handymax sector of the dry bulk industry, with particular emphasis on the Supramax class of vessels. We own one of the largest fleets of Supramax dry bulk vessels in the world. Supramax dry bulk vessels range in size from 50,000 to 60,000 deadweight tons, or dwt. These vessels have the cargo loading and unloading flexibility of on-board cranes while offering cargo carrying capacities approaching that of Panamax dry bulk vessels, which range in size from 60,000 to 100,000 dwt and must rely on port facilities to load and offload their cargoes. We believe that the cargo handling flexibility and cargo carrying capacity of the Supramax class vessels make them attractive to charterers.

As of September 30, 2012, we owned and operated a modern fleet of 45 oceangoing vessels, 43 Supramax and 2 Handymax, with a combined carrying capacity of 2,451,259 dwt and an average age of approximately five years. In 2011, we completed our Supramax vessel newbuilding program.

Each of our vessels is owned by us through a separate wholly owned Republic of the Marshall Islands limited liability company.

On June 20, 2012, we entered into a Fourth Amended and Restated Credit Agreement, as discussed in Note 4 to the consolidated financial statements included in this Quarterly Report and the section entitled "Liquidity and Capital Resources" below.

We maintain our principal executive offices at 477 Madison Avenue, New York, New York 10022. Our telephone number at that address is (212) 785-2500. Our website address is www.eagleships.com. Information contained on our website does not constitute part of this Quarterly Report.

Our financial performance is based on the following key elements of our business strategy:

(1) concentration in one vessel category: Supramax class of Handymax dry bulk vessels, which we believe offer size, operational and geographical advantages over Panamax and Capesize vessels;

(2) our strategy is to balance between long-term time charters and revenues generated by short-term time charters and voyage charters to maximize our financial performance throughout shipping cycles. We have entered into time and voyage charter employment contracts for all the vessels in our operating fleet. We charter some of our vessels pursuant to one- to three-year time charters to allow us to take advantage of the stable cash flow and high utilization rates that are associated with medium to long-term time charters. The vessels that are on charters whose revenues are linked to the Baltic Supramax index generally have durations of one-year or less. These index linked charters and voyage charters will provide us with the revenue upside when the market improves. We believe that this structure provides significant visibility to our future financial results and allows us to take advantage of the relatively stable cash flows and high utilization rates that are associated with medium- to long-term time charters, while at the same time providing us with the revenue upside potential from the index linked or short-term time charters or voyage charters. All the charters provide for fixed semi-monthly payments in advance. While we remain focused on securing charters with fixed base rates, we have also entered into contracts with fixed minimum rates and profit sharing arrangements, enabling us to benefit from an increasing rate environment while still minimizing downside risk. We regularly monitor the dry bulk shipping market and based on market conditions we may consider taking advantage of short-term charter rates;

(3) maintain high quality vessels and improve standards of operation through improved environmental procedures, crew training and maintenance and repair procedures; and

(4) maintain a balance between purchasing vessels as market conditions and opportunities arise and maintaining prudent financial ratios (e.g. leverage ratio).

We have employed all of our vessels in our operating fleet on time and voyage charters. The following table represents certain information about our revenue earning charters with respect to our operating fleet as of September 30, 2012:

                     Year                                                     Daily
Vessel               Built      Dwt      Charter Expiration (1)         Charter Hire Rate

Avocet (2)           2010       53,462   Oct  2012                             $9,000

Bittern (2)          2009       57,809   Oct  2012                             $7,800

Canary (2)           2009       57,809   Oct  2012                            $11,000

Cardinal             2004       55,362   Nov 2012 to Feb 2013                 Index(4)

Condor               2001       50,296   Nov 2012 to Jan 2013                 $11,000

Crane (2)            2010       57,809   Oct  2012                            $11,500

Crested Eagle        2009       55,989   Oct  2012                            $10,500

Crowned Eagle        2008       55,940   Oct  2012                           Voyage(3)

Egret Bulker         2010       57,809   Oct 2012 to Feb 2013           $17,650(5) (with 50%
                                                                     profit share over $20,000)

Falcon               2001       50,296   Dec 2012 to Feb 2013                  $8,000

Gannet Bulker        2010       57,809   Jan 2013 to May 2013           $17,650(5) (with 50%
                                                                     profit share over $20,000)

Golden Eagle         2010       55,989   Oct 2012 to Dec 2012                 $10,500

Goldeneye            2002       52,421   Oct 2012 to Jan 2013                 Index(4)

Grebe Bulker         2010       57,809   Feb 2013 to Jun 2013           $17,650(5) (with 50%
                                                                     profit share over $20,000)

Harrier              2001       50,296   Oct 2012 to Nov 2012                  $5,000

Hawk I               2001       50,296   Nov 2012                              $7,250

Ibis Bulker          2010       57,775   Mar 2013 to Jul 2013           $17,650(5) (with 50%
                                                                     profit share over $20,000)

Imperial Eagle       2010       55,989   Nov 2012 to Feb 2013                 Index(4)

Jaeger               2004       52,248   Nov 2012 to Jan 2013                 Index(4)

Jay(2)               2010       57,802   -                                      Spot

Kestrel I            2004       50,326   Mar 2013 to May 2013                  $9,500

Kingfisher (2)       2010       57,776   Nov 2012 to Feb 2013                  $8,900

Kite                 1997       47,195   Oct 2012 to Nov 2012                  $7,250

Kittiwake            2002       53,146   Oct 2012 to Jan 2013                 $10,500

Martin(2)            2010       57,809   Nov 2012 to Feb 2013                  $8,300

Merlin               2001       50,296   Nov 2012                            Voyage(3)

Nighthawk(2)         2011       57,809   Nov 2012                             $12,500

Oriole(2)            2011       57,809   Oct  2012                             $8,400

Osprey I             2002       50,206   Oct  2012                            Voyage(3)

Owl(2)               2011       57,809   Oct  2012                             $8,500

Peregrine            2001       50,913   Dec 2012 to Mar 2013                  $8,250

Petrel Bulker        2011       57,809   May 2014 to Sep 2014           $17,650(5) (with 50%
                                                                     profit share over $20,000)

Puffin Bulker        2011       57,809   May 2014 to Sep 2014           $17,650(5) (with 50%
                                                                     profit share over $20,000)

Redwing              2007       53,411   Oct  2012                            $10,000

Roadrunner Bulker    2011       57,809   Aug 2014 to Dec 2014           $17,650(5) (with 50%
                                                                     profit share over $20,000)

Sandpiper Bulker     2011       57,809   Aug 2014 to Dec 2014           $17,650(5) (with 50%
                                                                     profit share over $20,000)

Shrike               2003       53,343   Dec 2012 to Mar 2013                  $11,300

Skua                 2003       53,350   Oct  2012                             $8,250

Sparrow              2000       48,225   Oct  2012                             $8,500

Stellar Eagle        2009       55,989   Mar 2013 to Jun 2013                 Index(4)

Tern                 2003       50,200   Oct  2012                           $5,750(3)

Thrasher (2)         2010       53,360   Oct  2012                           $10,000(3)

Thrush               2011       53,297   Oct  2012                           $9,000(3)

Woodstar (2)         2008       53,390   Nov  2012                             $7,200

Wren (2)             2008       53,349   Oct 2012 to Nov 2012                  $13,000

(1) The date range provided represents the earliest and latest date on which the charterer may redeliver the vessel to the Company upon the termination of the charter. The time charter hire rates presented are gross daily charter rates before brokerage commissions, ranging from 0.625% to 5.00%, to third party ship brokers.
(2) The charter rate does not include any shortfall between the vessels' actual daily earnings and the $17,000 per day for which KLC is responsible. Revenue from KLC will be recognized when collectability is assured. In addition, through December 2015, we are entitled to 100% of the profits on earnings between $17,000 to $21,000 per day and a 50% profit share on earnings above $17,000 per day from January 2016 to December 2018.
(3) Upon conclusion of the previous charter, the vessel will commence a short-term charter for up to six months.
(4) Index, an average of the trailing Baltic Supramax Index.
(5) The charterer has an option to extend the charter by two periods of 11 to 13 months each.

Fleet Management

The management of our fleet includes the following functions:

Strategic management. We locate, obtain financing and insurance for, purchase and sell vessels.

Commercial management. We obtain employment for our vessels and manage our relationships with charterers.

Technical management. The technical manager performs day-to-day operations and maintenance of our vessels.

Commercial and Strategic Management

We carry out the commercial and strategic management of our fleet through our wholly owned subsidiaries, Eagle Shipping International (USA) LLC, a Republic of the Marshall Islands limited liability company that maintains its principal executive offices in New York City, and Eagle Bulk Pte. Ltd, a Singapore company. We currently have a total of fifty-three shore based personnel, including our senior management team and our office staff, who either directly or through these subsidiaries, provides the following services:

commercial operations and technical supervision;

safety monitoring;

vessel acquisition; and

financial, accounting and information technology services.

Technical Management

The technical management of a portion of our fleet is provided by our unaffiliated third party technical managers, V.Ships and Anglo Eastern International Ltd., that we believe are two of the world's largest providers of independent ship management and related services. We have also set up our own in-house technical management capability, through which we provide technical management services to several of our vessels, in order to establish a vessel management bench-mark with the external technical managers. We review the performance of the managers on an annual basis and may add or change technical managers.

Technical management includes managing day-to-day vessel operations, performing general vessel maintenance, ensuring regulatory and classification society compliance, supervising the maintenance and general efficiency of vessels, arranging our hire of qualified officers and crew, arranging and supervising drydocking and repairs, purchasing supplies, spare parts and new equipment for vessels, appointing supervisors and technical consultants and providing technical support. Our technical managers also manage and process all crew insurance claims. Our technical managers maintain records of all costs and expenditures incurred in connection with their services that are available for our review on a daily basis. Our technical managers are members of marine contracting associations which arrange bulk purchasing thereby enabling us to benefit from economies of scale.

Our third-party technical managers are paid a fixed management fee for each vessel in our operating fleet for the technical management services provided. For the three-month periods ended September 30, 2012 and 2011, the technical management fee averaged $10,203 and $9,655 per vessel per month, respectively. Management fees paid to our third-party technical managers are recorded under Vessel Expenses.

Value of Assets and Cash Requirements

The replacement costs of comparable new vessels may be above or below the book value of our fleet. The market value of our fleet may be below book value when market conditions are weak and exceed book value when markets conditions are strong. Customary with industry practice, we may consider asset redeployment which at times may include the sale of vessels at less than their book value. The Company's results of operations and cash flow may be significantly affected by future charter markets.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations is based upon our interim, unaudited, consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, and the rules and regulations of the SEC which apply to interim financial statements. The preparation of those financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues, expenses and fair value of derivative and warrants and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions and conditions.

Critical accounting policies are those that reflect significant judgments of uncertainties and potentially result in materially different results under different assumptions and conditions. As the discussion and analysis of our financial condition and results of operations is based upon our interim, unaudited, consolidated financial statements, they do not include all of the information on critical accounting policies normally included in consolidated financial statements. Accordingly, a detailed description of these critical accounting policies should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Reports on Form 10-K. There have been no material changes from the "Critical Accounting Policies" previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on March 15, 2012.

Use of Estimates: The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The significant estimates and assumptions of the Company are stock-based compensation, the useful lives of fixed assets and intangibles, depreciation and amortization, the allowances for bad debt, and the fair value of derivative and warrants.

Results of Operations for the three and nine month periods ended September 30, 2012 and 2011:

Fleet Data



We believe that the measures for analyzing future trends in our results of
operations consist of the following:



                                                   Three Months Ended                       Nine Months Ended
                                           September 30,        September 30,       September 30,       September 30,
                                               2012                 2011                2012                2011

Ownership Days                                      4,140                3,938              12,330              11,168
Chartered-in under operating lease Days                58                  582                  90               2,240
Available Days                                      4,198                4,489              12,372              13,336
Operating Days                                      4,172                4,464              12,275              13,243
Fleet Utilization                                    99.4 %               99.4 %              99.2 %              99.3 %

Ownership days: We define ownership days as the aggregate number of days in a period during which each vessel in our fleet has been owned by us. Ownership days are an indicator of the size of our fleet over a period and affect both the amount of revenues and the amount of expenses that we record during a period. Ownership days for the three month period ended September 30, 2012, increased 5% from the corresponding period in 2011 as we operated 45 vessels in the third quarter of 2012 compared to 44 vessels in the corresponding period in 2011.

Chartered-in under operating lease days: We define chartered-in under operating lease days as the aggregate number of days in a period during which we chartered-in vessels.

Available days: We define available days as the number of our ownership days less the aggregate number of days that our vessels are off-hire due to vessel familiarization upon acquisition, scheduled repairs or repairs under guarantee, vessel upgrades or special surveys and the aggregate amount of time that we spend positioning our vessels. The shipping industry uses available days to measure the number of days in a period during which vessels should be capable of generating revenues. During the nine-month period ended September 30, 2012, the Company drydocked three vessels as compared to one in the comparable period in 2011.

Operating days: We define operating days as the number of our available days in a period less the aggregate number of days that our vessels are off-hire due to any reason, including unforeseen circumstances. The shipping industry uses operating days to measure the aggregate number of days in a period during which vessels actually generate revenues.

Fleet utilization: We calculate fleet utilization by dividing the number of our operating days during a period by the number of our available days during the period. The shipping industry uses fleet utilization to measure a company's efficiency in finding suitable employment for its vessels and minimizing the amount of days that its vessels are off-hire for reasons other than scheduled repairs or repairs under guarantee, vessel upgrades, special surveys or vessel positioning. Our fleet continues to perform at high utilization rates.

Revenues

Our revenues are derived from time and voyage charters. As is common in the shipping industry, we pay commissions ranging from 0.625% to 5.00% of the total daily charter hire rate of each charter to unaffiliated ship brokers and in-house brokers associated with the charterers, depending on the number of brokers involved with arranging the charter.

Gross time and voyage charter revenues in the quarter ended September 30, 2012 were $48,895,357 compared with $83,987,828 recorded in the comparable quarter in 2011. The decrease in gross revenues is attributable primarily to lower charter rates and a decrease in voyage charter revenues in the quarter ended September 30, 2012 of $5,148,210 compared to $19,218,936 in the comparable quarter in 2011. Gross revenues recorded in the quarter ended September 30, 2012 and 2011, include an amount of $1,139,972 and $1,267,242, respectively, relating to the non-cash amortization of fair value below contract value of time charters acquired. Brokerage commissions incurred on revenues earned in the quarter ended September 30, 2012 and 2011 were $2,040,686 and $3,664,459, respectively. Net revenues during the quarter ended September 30, 2012 and 2011, were $46,854,671 and $80,323,369, respectively.

Gross time and voyage charter revenues in the nine-month period ended September 30, 2012 were $154,255,768 compared with $255,505,905 recorded in the comparable period in 2011. The decrease in gross revenues is attributable primarily tolower charter rates and a decrease in voyage charter revenues in the nine-month period ended September 30, 2012 of $21,367,738, compared to $63,426,973 in the comparable nine-month period in 2011. Gross revenues recorded in the nine-month period ended September 30, 2012 and 2011, include an amount of $3,574,012 and $3,833,571, respectively, relating to the non-cash amortization of fair value below contract value of time charters acquired. Brokerage commissions incurred on revenues earned in the nine-month period ended September 30, 2012 and 2011 were $6,247,464 and $12,084,373, respectively. Net revenues during the nine-month period ended September 30, 2012 and 2011, were $148,008,304 and $243,421,532, respectively.

Voyage expenses

Voyage expenses for the three-month period ended September 30, 2012 were $6,480,233 compared to $11,995,164 in the comparable quarter in 2011. The decrease in voyage expenses is attributable to reduction in voyage charter revenues and in port charges in the quarter ended September 30, 2012.

Voyage expenses for the nine-month period ended September 30, 2012 were $20,370,857 compared to $35,941,960 in the comparable period in 2011. The decrease in voyage expenses is attributable to reduction in voyage charter revenues and in port charges for the nine-month period ended September 30, 2012.

Vessel Expenses

Vessel expenses for the three-month period ended September 30, 2012 were $21,246,653 compared to $22,000,678 in the comparable quarter in 2011. Vessel expenses for the three-month period ended September 30, 2012 included $19,875,688 in vessel operating costs and $1,370,966 in technical management fees. Vessel expenses for the comparable period in 2011 included $20,757,179, in vessel operating costs and $1,243,499 in technical management fees.

Vessel expenses for the nine-month period ended September 30, 2012 were $67,557,977 compared to $62,763,849 in the comparable nine-month period ended September 30, 2011. The increase in vessel expense is attributable to a larger fleet size in operation for the nine-month period of 2012, increases in vessel crew cost and insurance costs. Vessel expenses for the nine-month period ended September 30, 2012 included $63,415,812 in vessel operating costs and $4,142,165 in technical management fees. Vessel expenses for the nine-month period ended September 30, 2011 included $59,066,954 in vessel operating costs and $3,696,895 in technical management fees.

Vessel operating expenses include crew wages and related costs, the cost of insurance, expenses relating to repairs and maintenance, the cost of spares and consumable stores and related inventory, tonnage taxes, pre-operating costs associated with the delivery of acquired vessels including providing the newly acquired vessels with initial provisions and stores, other miscellaneous . . .

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