TBS International 10-Q 2011
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2011
o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission File Number 001-34599
TBS INTERNATIONAL PLC>
(Exact name of registrant as specified in its charter)
TBS INTERNATIONAL PLC
Form 10-Q for the Quarterly Period Ended June 30, 2011>
PART I. FINANCIAL INFORMATION
TBS INTERNATIONAL PLC AND SUBSIDIARIES
(in thousands, except share data)
The accompanying notes are an integral part of these consolidated financial statements.
TBS INTERNATIONAL PLC AND SUBSIDIARIES>
(in thousands, except share and per share data)
The accompanying notes are an integral part of these consolidated financial statements.
TBS INTERNATIONAL PLC AND SUBSIDIARIES>
The accompanying notes are an integral part of these consolidated financial statements.
TBS INTERNATIONAL PLC AND SUBSIDIARIES>
The accompanying notes are an integral part of these consolidated financial statements.
Note 1 — Business and Basis of Presentation
Nature of Business
TBS International plc ("TBSI") and all of its directly and indirectly owned subsidiaries (collectively with TBSI, the "Company", "we", "us" or "our") are engaged in the ocean transportation of dry cargo offering shipping solutions through liner, parcel, and bulk services, as well as vessel chartering supported by a fleet of multi-purpose tweendeckers and handysize and handymax bulk carriers. Substantially all subsidiaries of TBSI are non-U.S. corporations and conduct their business operations worldwide.
Basis of Presentation
The unaudited consolidated financial statements presented herein have been prepared in accordance with U.S. generally accepted accounting principles for interim financial reporting (“GAAP”) and with Article 10 of Regulation S-X and the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. All significant intercompany transactions and balances have been eliminated in the consolidated financial statements. In the opinion of management, the financial statements include all adjustments, consisting of normal recurring accruals, that are considered necessary for a fair presentation of the Company’s consolidated financial position, results of operations and cash flows for the interim periods. Operating results for the three and six month periods ended June 30, 2011 are not necessarily indicative of results that may be expected for the year ending December 31, 2011. These consolidated financial statements should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.
Effective January 28, 2011, the Company and its lenders amended various terms of the credit agreements to which they are parties, including the principal repayment schedules and waived any existing defaults. However, the Company has continued to experience a further deterioration of freight voyage rates in 2011 and along with a combination of worldwide factors, such as industry over-capacity and the negative impact on shipping demand due to adverse weather conditions and natural disasters, management does not believe that there is hope of an immediate recovery. These factors continue to adversely affect the Company’s revenues, market values of its vessels, and its future ability to maintain financial ratios as required by its credit facilities. On April 18, 2011, the Company and its lenders agreed to temporarily modify the financial covenants related to the Company’s consolidated leverage ratio, consolidated interest coverage ratio and minimum cash balance, and modified certain other terms through December 31, 2011.
Under the modified credit agreements, the minimum consolidated interest charge coverage ratio has been reduced for the quarter ended June 30, 2011, and for the quarters ending through December 31, 2011 from 3.35 to 1.00 to 2.50 to 1.00. In addition, the amendments increased the maximum consolidated leverage ratio for the same periods from 4.00 to 1.00 to 5.10 to 1.00 and reduced the minimum average weekly cash requirement from $15.0 million to $10.0 million beginning the week ending July 1, 2011 through the week ending January 1, 2012. Thereafter, the financial covenant requirements revert back to the levels set in the January 28, 2011 amendments. At June 30, 2011 and December 31, 2010, the Company was in compliance with all financial covenants relating to its debt. However, absent waivers, the Company would not have been in compliance with the value to loan requirements of the Berenberg credit facility at December 31, 2010 or June 30, 2011. In addition, absent such a waiver, the Company would not have been in compliance with the value to loan requirements of the Credit Suisse credit facility at December 31, 2010. GAAP requires that long-term loans be classified as current liabilities when either a covenant violation that gives the lender the right to call the debt has occurred at the balance sheet date, or such covenant violation would have occurred absent a waiver of those covenants, and in either case it is probable that the covenant violation will not be cured within the next twelve months. Consequently, long term debt is classified as a current liability in the consolidated balance sheet at both June 30, 2011 and December 31, 2010.
The Company will need to raise additional funds to facilitate principal repayments due September 30, 2011, and to remain in compliance with the minimum cash liquidity covenant. Absent the ability to raise additional capital and a significant near-term improvement in freight and charter rates, the Company will need to enter into negotiations with its lenders to seek further modifications or waivers to the financial covenants since failure to meet any of the covenants, or the Company’s inability to obtain waivers of such future covenant violations, continues to raise substantial doubt about the Company’s ability to continue as a going concern. The Company will continue its efforts to reduce operating costs and has engaged an investment banking firm to assist in obtaining additional funding. There is no guarantee that any or all of the Company’s efforts to strengthen its financial position will be successful.
Note 2 – Charter Hire Receivables
Charter hire receivables consist of the following (in thousands):
Management reviews the outstanding receivables by customer and voyage at the close of each reporting period and identifies those receivables that are deemed to be at risk for collection and provides an appropriate allowance for losses. At June 30, 2011 and December 31, 2010 the allowance for losses aggregated $1.0 million and was deemed adequate after giving consideration to all relevant facts and circumstances.
Note 3 — Fuel and Other Inventories
Fuel and other inventories consist of the following (in thousands):
Note 4 — Advances Due to/from Affiliates
The Company typically advances funds to affiliates in connection with the payment of agency fees, commissions and consulting fees. Amounts due to/from affiliates, which are entities related by common shareholders, are non-interest-bearing, due on demand, and are expected to be collected or paid in the ordinary course of business, generally within one year.
Note 5 — Fixed Assets
Fixed assets consist of the following (in thousands):
The Company had individual contracts, with China Communications Construction Company Ltd. and Nantong Yahua Shipbuilding Group Co., Ltd. ("Shipyard"), to build six multipurpose vessels with retractable tweendecks. In January and February 2011, the fourth and fifth vessels, named Omaha Belle and Comanche Maiden, respectively, were delivered. The final vessel, Maya Princess, was delivered in May 2011.
The Company capitalized interest, including loan origination fees, of $0.2 million and $0.8 million for the three and six months ended June 30, 2011, respectively, and $2.0 million and $4.0 million for the three and six months ended June 30, 2010, respectively. Capitalized interest and deferred finance costs are added to the cost of each vessel and are amortized over the estimated useful life of the respective vessel commencing on the date the vessel is placed into service.
Note 6 — Valuation of Long-Lived Assets and Goodwill
As of December 31, 2010, the Company performed an impairment review of its long-lived assets due to the continued global economic softness and its impact on the shipping industry. The Company concluded that events and circumstances occurred during the fourth quarter of 2010 that suggested a possible impairment of long-lived assets. These indicators included significant declines in freight and charter rates and asset values toward the end of 2010. As a result, the Company performed a fleet level impairment analysis of its long-lived assets, which compared undiscounted cash flows with the carrying values of the Company's long-lived assets to determine if the assets were impaired. Management made assumptions used in estimating undiscounted cash flows, which included utilization rates, revenues, capital expenditures, operating expenses and the weighted remaining useful life of the fleet of vessels. These assumptions were based on historical trends, as well as future expectations that are consistent with the plans and forecasts used by management to conduct its business. Management's impairment analysis as of December 31, 2010 indicated that future undiscounted operating cash flows at the fleet level, including vessels to be delivered during the first half of 2011, were below the vessel's carrying amount, and accordingly an impairment charge of $201.7 million was recognized in the consolidated statement of operations. The assumptions and estimates we used in our impairment analysis are highly subjective and could be negatively affected by future declines in freight or charter rates, decreases in the market value of vessels or other factors which could require the Company to record additional material impairment charges in future periods.
Due to the continuing global economic softness and its impact on the shipping industry, the Company updated its qualitative impairment analysis of long-lived assets at June 30, 2011, and concluded that there was no indication of further impairment of long-lived assets.
The provisions of Financial Accounting Standards Board (“FASB”) ASC Topic 350 – Intangibles – Goodwill and Other require an annual impairment test of goodwill or more frequently if there are indicators of impairment present. The first of two steps require the Company to compare the reporting unit’s carrying value of net assets to its fair value. If the fair value exceeds the carrying value, goodwill is not considered impaired and the Company is not required to perform further testing.
In December 2010, the FASB issued Update No. 2010-28, which requires that Step 2 of the goodwill impairment test be performed if qualitative factors exist. Step 2 calculates the implied fair value of goodwill by deducting the fair value of the reporting unit's tangible and intangible assets, excluding goodwill, from the fair value of the reporting unit. The implied fair value of goodwill determined in Step 2 is then compared to the carrying value of goodwill and if the implied fair value is less than the carrying value, an impairment charge is recognized equal to the difference.
The reporting unit consists of service companies that at March 31, 2011 had recognized goodwill of $8.4 million, yet possessed an aggregate negative carrying value. Management performed a goodwill impairment test at that date due to the existence of qualitative factors indicating that it was more likely than not that goodwill had been impaired. These qualitative factors included: (a) a significant adverse change in business climate as indicated by a dramatic decline in Baltic Dry Index (a measure of the demand for shipping capacity versus the supply of dry bulk carriers), (b) impairment recorded at December 31, 2010 on vessel values, and (c) a continuing decline in the Company’s stock price and market capitalization. Determining the reporting unit’s fair value involves the use of significant judgments and assumptions and was estimated using income and market approaches through the application of a discounted cash flow methodology. The Company concluded that goodwill of $8.4 million was impaired and, as required by Update No. 2010-28, recorded an impairment charge as a cumulative-effect adjustment, which reduced retained earnings at December 31, 2010.
Note 7 — Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following (in thousands):
Note 8 — Long-Term Debt
Long-term debt consists of the following (in thousands):
Future principal payments required in accordance with the terms of the respective credit facility agreements as of June 30, 2011 are as follows (in thousands):
Loan Modification and Debt Classification
The Company did not make certain principal payments due under its credit facilities during the second half of 2010. In an effort to avoid an acceleration of the maturity of outstanding loans, the Company entered into forbearance agreements with its lenders pursuant to which the lender groups agreed to forbear from exercising their rights and remedies which arose from the Company's failure to make scheduled principal payments.
Effective January 28, 2011, the Company and its lenders amended various terms of the credit agreements, including the principal repayment schedules and waived any existing defaults. However, the Company continued to experience a further deterioration of freight voyage rates in 2011 and along with a combination of worldwide factors, such as industry over-capacity and the negative impact on shipping demand due to adverse weather conditions and natural disasters, management does not believe that there is hope of an immediate recovery. These factors continue to adversely affect the Company’s revenues, market values of its vessels, and its future ability to maintain financial ratios as required by its credit facilities. On April 18, 2011, the Company and its lenders agreed to temporarily modify the financial covenants related to the Company’s consolidated leverage ratio, consolidated interest coverage ratio and minimum cash balance, and modified certain other terms through December 31, 2011. In connection with the modifications of the debt obligations, the Company incurred $3.5 million of third party costs of which $3.2 million were recognized as an expense during the year ended December 31, 2010. In addition, the Company incurred bank fees totaling approximately $7.2 million, $3.2 million of which are not payable until December 31, 2012. Bank fees are to be amortized over the terms of the new arrangements. Of such amount, $0.5 million and $1.3 million were recognized as an expense during the three and six months ended June 30, 2011, respectively. In addition, $1.1 million of unamortized deferred financing costs were charged to operations during the six months ended June 30, 2011 as a result of the conversion of the Bank of America revolving credit facility to a term loan.
Under the modified credit agreements, the minimum consolidated interest charge coverage ratio has been reduced for the quarter ended June 30, 2011, and for the quarters ending through December 31, 2011 from 3.35 to 1.00 to 2.50 to 1.00. In addition, the amendments increased the maximum consolidated leverage ratio for the same periods from 4.00 to 1.00 to 5.10 to 1.00 and reduced the minimum average weekly cash requirement from $15.0 million to $10.0 million, beginning the week ending July 1, 2011 through the week ending January 1, 2012. Thereafter, the financial covenant requirements revert back to the levels set in the January 28, 2011 amendments. At June 30, 2011 and December 31, 2010, the Company was in compliance with all financial covenants relating to its debt. However, absent waivers, the Company would not have been in compliance with the value to loan requirements of the Berenberg credit facility at December 31, 2010 or June 30, 2011. In addition, absent such a waiver, the Company would not have been in compliance with the value to loan requirements of the Credit Suisse credit facility at December 31, 2010. GAAP requires that long-term loans be classified as current liabilities when either a covenant violation that gives the lender the right to call the debt has occurred at the balance sheet date, or such covenant violation would have occurred absent a waiver of those covenants, and in either case it is probable that the covenant violation will not be cured within the next twelve months. Consequently, long term debt is classified as a current liability in the consolidated balance sheet at both June 30, 2011 and December 31, 2010.
The Company will need to raise additional funds to facilitate principal repayments due September 30, 2011, and to remain in compliance with the minimum cash liquidity covenant. Absent the ability to raise additional capital and a significant near-term improvement in freight and charter rates, the Company will need to enter into negotiations with its lenders to seek further modifications or waivers to the financial covenants since failure to meet any of the covenants, or the Company’s inability to obtain waivers of such future covenant violations, continues to raise substantial doubt about the Company’s ability to continue as a going concern.
Credit Facility Terms
The table below summarizes the repayment terms, maturities, interest rates, interest rate benchmarks and post amendment margin rates, number of vessels and net book value of collateral for each credit facility at June 30, 2011:
Financial Covenants and Other Non Financial Requirements
The Company’s various debt agreements contain both financial covenants and other non-financial requirements that include customary restrictions on the Company’s ability to incur indebtedness or grant liens, pay dividends under certain circumstances, enter into transactions with affiliates, merge, consolidate, or dispose of assets, and change the nature of its business. The Company is required to comply with maritime laws and regulations, maintain the vessels consistent with first class ship ownership and management practice, keep appropriate accounting records and maintain specified levels of insurance. Under the financial covenants the Company is required to maintain minimum cash and cash equivalent balances, as well as certain fixed charge and leverage ratios.
The following table summarizes the financial covenants imposed by our debt agreements, as amended on January 28, 2011 and April 18, 2011:
Value to Loan Requirement
The market value of the vessels, as determined by appraisal, is required to be above specified value to loan ratios, as defined in each credit facility agreement, which range from 125% to 167% of the respective credit facility’s outstanding amount. The credit facilities require mandatory prepayment or delivery of additional security in the event that the market value of the vessels fall below specified limits. At June 30, 2011 and December 31, 2010, the Company was in compliance with all financial covenants relating to its debt. However, absent waivers, the Company would not have been in compliance with value to loan requirements on the Berenberg credit facility at December 31, 2010 or June 2011. In addition, absent such a waiver, the Company would not have been in compliance with the value to loan requirements of the Credit Suisse credit facility at December 31, 2010.
Note 9 — Derivative Financial Instruments
The Company uses derivative financial instruments, as deemed appropriate, to mitigate the impact of changing interest rates associated with its floating-rate borrowings. At June 30, 2011, the Company had outstanding derivative instruments with a notional principal amount aggregating $107.3 million, or 31.9%, of loans outstanding. All of the Company’s derivative instruments are over-the-counter instruments; however, the Company does not enter into such agreements for trading purposes. The fair value is based on the quoted market price for a similar liability or determined using inputs that are representative of readily observable market data, are actively quoted, and can be validated through external sources. The Company does not obtain collateral or other security from counterparties to the financial instruments; however, it enters into agreements only with established banking institutions. The notional, or contractual, amount of the Company’s derivative financial instruments is used to measure the amount of interest to be paid or received and does not represent an actual liability.
For a derivative instrument that is designated and qualifies as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative, representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness, are recognized in current earnings.
FASB ASC Topic 820 - Fair Value Measurements and Disclosures, which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The fair value hierarchy for disclosure of fair value measurements is as follows:
Quantitative disclosures about the fair value of the Company’s derivative hedging instruments are as follows (in thousands):
A summary of the fair value of the Company’s derivative instruments included in the consolidated balance sheets, their impact on the consolidated statements of operations and comprehensive income is as follows (in thousands):
Interest rate contracts have fixed interest rates ranging from 2.92% to 5.24%, with a weighted average rate of 4.1%. Interest rate contracts having a notional amount of $37.3 million and $61.5 million at June 30, 2011 and December 31, 2010, respectively, decrease as principal payments on the respective debt are made.
In June 2010, the Company paid $3.0 million to modify one and terminate two interest rate contracts. The modified contract, which had been designated a hedging instrument, was modified to change the expiration date from June 2019 to June 2014. The modification resulted in it no longer being probable that the hedging instrument would effectively hedge future cash flows and, accordingly, the hedging instrument was dedesignated. The first terminated contract, for a notional amount of $20.0 million that was callable at the bank’s option at any time during the life of the contract, was to commence on December 29, 2014 and continue through December 29, 2019. The Company entered into the second of the terminated interest rate contracts, a receiver swap option, which gave the Company the right, but not the obligation to enter into a subsequent interest rate contract if the bank called the initial contract. The charge to other comprehensive income for these three contracts of $5.9 million was frozen and will be reclassified into earnings quarterly through June 2019. The Company did not designate the interest rate contract having the new expiration date as a hedging instrument, therefore, changes to the fair value of this contract are included as a component of interest expense in the consolidated statement of operations.
The January 2011 restructuring of the credit facilities added a LIBOR floor of 1.5% to two credit facilities. Due to these modifications, hedge accounting was discontinued for one of the hedging relationships at December 31, 2010, as the hedge is no longer expected to be highly effective. For this hedging relationship, amounts that have been accumulated in other comprehensive income were frozen and will be reclassified into earnings quarterly through December 2011. A second hedging instrument is expected to continue to be effective; however, the LIBOR floor is expected to cause some hedge ineffectiveness. The ineffective portion of this hedging instrument will be included as a component of interest expense in the consolidated statement of operations. At June 30, 2011, $1.7 million of interest expense recognized in other comprehensive income is expected to be reclassified into interest expense over the next 12 months.
Note 10— Stockholders’ Equity
Series A and Series B Preference Share>s
As a condition to restructuring the Company’s credit facilities in January 2011, its lenders required three significant shareholders (who are also key members of management, herein after “Management Shareholders”) to agree to provide up to $10.0 million of new equity in the form of preference shares. On January 28, 2011, in partial satisfaction of this requirement, these Management Shareholders purchased 30,000 Series B Preference Shares directly from the Company in a private placement at a purchase price of $100 per share for aggregate consideration of $3.0 million. Each Series B Preference Share is initially convertible into 25 Class A ordinary shares, subject to adjustments to reflect semiannual increases in liquidation value, as well as stock splits and reclassifications. Liquidation value applicable to each Series B Preference Share will increase at a rate of 6.0% per annum, compounded semiannually on June 30 and December 31 of each year through December 31, 2014. No cash dividends will accrue on the Series B Preference Shares through December 31, 2014; however, beginning January 1, 2015, cash dividends will accrue at a rate of 6.0% of the liquidation value, payable semiannually in arrears. In the event that dividends are not paid, they would accumulate as unpaid dividends and, in the event of insolvency, would be added to the liquidation preference. Subject to the availability of distributable reserves, the Company may, at its option, redeem the Series B Preference Shares, in whole or in part, on or after December 31, 2014 at a redemption price equal to the then applicable liquidation preference, plus accrued and unpaid dividends.
In May 2011, the Company conducted a rights offering, which entitled holders of the Company’s Class A and Class B ordinary shares to one non-transferable subscription right to purchase the Company’s Series A Preference Shares for each ordinary share held on the record date for the rights offering. As an integral component of the rights offering, the Management Shareholders were to act as standby purchasers and purchase up to 70,000 Series A Preference Shares. The Series A Preference Shares are identical to the Series B Preference Shares described above, except that the Series A Preference Shares are convertible only into Series A ordinary shares at an initial conversion rate of 50 Class A ordinary shares per Series A Preference Share and the Series B Preference Shares are convertible only into Class B ordinary shares at an initial conversion rate of 25 Class B ordinary shares per Series B Preference Share.
On May 31, 2011, the Company concluded the rights offering and, upon exercise of 826,000 subscription rights, issued 8,260 Series A Preference Shares for aggregate consideration of $0.8 million. In addition, the Management Shareholders purchased 70,000 Series A Preference Shares for aggregate consideration of $7.0 million.
Class A and Class B Ordinary Shares
The Company has two classes of ordinary shares that are issued and outstanding: (i) Class A ordinary shares, which are listed on the NASDAQ Global Select Market under the symbol "TBSI", and (ii) Class B ordinary shares. The Class A ordinary shares and Class B ordinary shares have identical rights to dividends, surplus and assets on liquidation; however, the holders of Class A ordinary shares are entitled to one vote on all matters submitted to a vote of holders of ordinary shares, while holders of Class B ordinary shares are entitled to one-half of one vote.
The holders of Class A ordinary shares can convert their shares into Class B ordinary shares, and the holders of Class B ordinary shares can convert their shares into Class A ordinary shares at any time on a 1:1 basis. Further, the Class B ordinary shares will automatically convert into Class A ordinary shares upon their transfer to any person other than another holder of Class B ordinary shares, in each case as long as the conversion will not cause the Company to become a controlled foreign corporation, as defined in the Internal Revenue Code of 1986, as amended ("Code"), or the Class A ordinary shares cease to be regularly traded on an established securities market for purposes of Section 883 of the Code. On January 21, 2011, certain holders of Class B ordinary shares converted 1,456,156 Class B ordinary shares into 1,456,156 Class A ordinary shares.
At June 30, 2011 and December 31, 2010, warrants were outstanding for the purchase of 151,734 and 108,525, respectively, Class A ordinary shares and 228,140 and 241,065, respectively, Class B ordinary shares. Such warrants are being held by parties not affiliated with existing shareholders. The warrants are exercisable until February 8, 2015, at a price of $0.01 per share. The warrant agreement includes an anti-dilution provision that adjusts the number of shares issuable upon exercise of the warrants whenever the Company issues additional ordinary shares or other forms of equity.
The Company's Equity Incentive Plan permits stock grant recipients to elect a net settlement. Under the terms of a net settlement, the Company retains a specified number of shares to cover the recipients’ estimated statutory minimum tax liability. Such retained shares are retained by the Company as treasury stock. During the six months ended June 30, 2011, 114,876 Class A ordinary shares having a cost of $0.2 million were acquired to cover employees’ estimated payroll tax liabilities. At June 30, 2011, there were 248,440 shares of treasury stock held by the Company at a cost of $1.4 million.
Note 11 -- Comprehensive Loss
The components of comprehensive loss consist of the following (in thousands):
Note 12 — Earnings Per Ordinary Share
The following table sets forth the computation of basic and diluted net loss per share (in thousands, except share data):
As outlined in sections of FASB ASC Topic 260 – Earnings per Share, unvested share-based payment awards that contain non-forfeitable rights to dividends are participating securities that should be included in the two-class method of computing earnings per share. The two-class method of computing earnings per share is an earnings allocation formula that determines earnings (loss) per share for ordinary stock and any participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings. Our non-vested stock, consisting of time-vesting restricted shares, are considered participating securities because the share-based awards contain a non-forfeitable right to receive dividends irrespective of whether the awards ultimately vest.
The Company had 78,260 Series A Preference Shares and 30,000 Series B Preference Shares outstanding at June 30, 2011. Such shares are convertible into ordinary shares at any time at the option of the holder and, hence, are considered ordinary share equivalents for the purpose of computing dilutive earnings per share. The preference shares are convertible into 4,286,000 ordinary shares at June 30, 2011; however, they have been excluded from the computation of diluted earnings per share because their inclusion would be anti-dilutive.
In addition, at June 30, 2011 and 2010, there were outstanding exercisable warrants to purchase 151,734 and 108,525, respectively, Class A ordinary shares and 228,140 and 241,065, respectively, Class B ordinary shares. The warrants are issuable for nominal consideration upon exercise, which would have caused the warrants to be treated as outstanding for purposes of computing basic earnings per share. However, for the periods ended June 30, 2011 and 2010, the warrants have been excluded from the computation of basic and diluted earnings per share because their inclusion would be anti-dilutive.
Note 13 — Contingencies
The Company is periodically a defendant in cases involving personal injury and other matters and claims that arise in the normal course of business. The Company reviews outstanding claims and proceedings internally and with external counsel as necessary to assess probability and amount of potential loss. These assessments are re-evaluated at each reporting period as new information becomes available to determine whether a reserve should be established or if any existing reserve should be adjusted. The actual cost of resolving a claim may be substantially different than the amount of any recorded reserve. In addition, because it is not permissible under GAAP to establish a litigation reserve until the loss is both probable and estimable, in some cases there may be insufficient time to establish a reserve prior to the actual incurrence of the loss, such as in the case of a quickly negotiated settlement or a verdict and judgment at trial. While any pending or threatened litigation has an element of uncertainty, the Company believes that the outcome of these lawsuits or claims, individually or combined, will not have a material adverse effect on its business or its consolidated financial position, results of operations or cash flows.
The Company, through its consolidated Brazilian joint venture, charters-in three Brazilian flagged vessels under a bareboat charter expiring in February 2013. These vessels are chartered in at a hire rate of 5,000 Brazilian Reais per vessel per day from our joint venture partner. The Company believes that the joint venture partner was responsible for costs incurred in 2010 to make the vessels seaworthy, including charter in and other vessel expenses while the vessels were under repair. These costs, which total approximately $4.0 million, were paid by the joint venture partner, who is asserting that the costs are the responsibility of the joint venture and that they should be fully reimbursed for all amounts paid. Management believes that the joint venture partner is responsible for these costs, hence the consolidated financial statements do not reflect the $4.0 million of costs paid by the joint venture partner, consisting of approximately $2.0 million in leasehold improvements and $2.0 million in vessel operating expenses.
Note 14 — Business Segments
The Company is managed as a single business unit that provides worldwide ocean transportation of dry cargo to its customers through the use of owned and chartered vessels. The vessels are operated as one fleet and when making resource allocation decisions, our chief operating decision maker evaluates voyage profitability data, which considers vessel type and route economics, but gives no weight to the financial impact of the resource allocation decision on an individual vessel basis. The Company's objective in making resource allocation decisions is to maximize its consolidated financial results, not the individual results of the respective vessels or routes.
The Company transports cargo throughout the world. Voyage revenue was generated in the following geographic areas based on the loading port location. Time charter revenue cannot be allocated to geographic region as the Company does not control the itinerary of the vessel.
Voyage revenue generated by country consists of the following (in thousands):
For the three and six months ended June 30, 2011, no customer accounted for 10% or more of voyage and time charter revenue while for the three and six months ended June 30, 2010, one customer accounted for more than 10% of time charter revenue. No customer accounted for 10% or more of charter hire receivables at either June 30, 2011 or December 31, 2010.
The following discussion of our financial condition and results of operations should be read together with the consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K for the year ended December 31, 2010. This discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “PSLRA”), including, without limitation, information within Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following cautionary statements are being made pursuant to the provisions of the PSLRA and with the intention of obtaining the benefits of the “safe harbor” provisions of the PSLRA. Although these statements reflect current expectations of our management and are based on management's beliefs and reasonable assumptions, actual results may differ materially from those in the forward-looking statements.
Forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. Except as required under federal securities laws and the rules and regulations of the SEC, we do not have any intention to update any forward-looking statements to reflect events or circumstances arising after the date of this Quarterly Report on Form 10-Q, whether as a result of new information, future events or otherwise. As a result of these risks and uncertainties, readers are cautioned not to place undue reliance on forward-looking statements included in this Quarterly Report on Form 10-Q or that may be made elsewhere from time to time by, or on behalf of, the Company. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.
Forward-looking statements include all statements that are not historical facts and can generally be identified by the use of words or phrases such as "anticipates," "believes," "estimates," "expects," "future," "intends," "plans," "targets," "projects," "sees," "seeks," "will be," “will continue,” "should," "likely," or similar expressions and phrases. Forward-looking statements may include, among other things, information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, potential growth opportunities, and the effects of future regulation and competition.
Forward-looking statements and our plans and expectations are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expressed, implied or projected. For more information, see “Risk Factors" contained in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010. In addition, our expectations and beliefs concerning future events involve risks and uncertainties, including but not limited to those set forth below:
TBS International plc, a holding company, operates through the following principal subsidiaries:
We are an ocean transportation services company that offers worldwide shipping solutions to a diverse client base of industrial shippers. We operate liner, parcel, and bulk services supported by a fleet of multipurpose tweendeckers, and handysize/handymax bulk carriers. The flexibility of our fleet allows us to carry a wide range of cargo, including industrial goods, project cargo, steel products, metal concentrates, fertilizer, salt, sugar, grain, aggregates and general cargo, which cannot be carried efficiently by container or large dry bulk carriers.
Over the past 18 years, we have developed our business model around key trade routes between Latin America and Japan, South Korea and China, as well as ports in North America, Africa, the Caribbean, and the Middle East. We differentiate ourselves from our competitors by offering our Five Star Service which includes: (i) ocean transportation, (ii) projects, (iii) operations, (iv) port services, and (v) strategic planning.
In order to serve those ports and trade routes not efficiently served by container and large dry bulk vessel operators, we operate regularly scheduled voyages using our fleet of multipurpose tweendeckers and handysize/handymax dry bulk carriers. Tweendeck vessels are differentiated by their retractable decks that can create separate holds, facilitating the transportation of non-containerized cargoes. At June 30, 2011, our controlled fleet totaled 52 vessels, including 50 ships that we own and two that we charter-in with an option to purchase. In March 2007, we entered into a contract for the purchase of six multipurpose vessels with retractable tweendecks. The first of these vessels was delivered in 2009; two each were delivered during 2010 and the first quarter of 2011, while the final vessel was delivered in May 2011.
As part of our comprehensive transportation service offering, we provide portside operations, related support services and solutions for challenging cargoes. In order to provide these services, we employed a professional staff of approximately 150 at June 30, 2011, with extensive experience and diverse backgrounds. In addition, our affiliate, TBS Commercial Group Ltd. has fully staffed agencies and representative offices on five continents, with local teams of commercial agents and port captains who meet regularly with customers to tailor solutions to their shipping needs. We believe this full-service approach to shipping provides a superior level of service that has resulted in the development of long-term relationships with our customers.
We have developed our long-term relationships with established and well-respected industrial shippers in diverse markets, including mining, steel manufacturing, trading, heavy industry, industrial equipment and construction and have a strong position in various trade lanes in the Far East, South America, North America, the Caribbean, the Middle East and Africa. We operate our services globally in more than 20 countries to over 300 customers through a network of affiliated service companies. Many of our customer relationships have been in place for nearly 20 years; our service offerings being utilized as an integral part of their supply chain. We believe our business model allows us to respond rapidly to our customers’ changing demands and short delivery windows, thereby increasing the value of the services we provide to them.
Vessels must be drydocked twice during a five-year cycle. Our controlled fleet of 52 vessels at June 30, 2011, would require approximately 98 drydockings over five years for an average of 20 vessels per year. The first drydocking of a newly constructed vessel, which would be a special survey of the vessel, is typically done five years after delivery of the vessel from the shipyard.
Our quarterly schedule of vessels drydocked and anticipated to be drydocked during 2011, including actual and estimated number of drydock days and metric tons of steel renewal, is as follows:
*Total MT’s of steel are not finalized until subsequent quarter. Steel quantity for the first quarter of 2011 reflects the final steel required.
We estimate vessel drydockings that require less than 100 metric tons of steel renewal will take from 20 to 30 days and vessel drydockings that require 100 to 500 metric tons of steel renewal will take from 30 to 70 days. We capitalize vessel improvements, including steel renewal and reinforcement, in connection with the first drydocking after we acquire a vessel.
New Ship Building Program
Our current business strategy includes growing our fleet through newbuildings of multipurpose tweendeckers and chartering-in vessels as needed. While we remain committed to expanding our fleet, pending a significant change in global economic conditions, we temporarily suspended any further acquisitions of secondhand vessels.
We have completed delivery of our six newbuildings. During 2011, three of those vessels, the Omaha Belle, Comanche Maiden and the Maya Princess were delivered in January, February and May, respectively. These 34,000 deadweight tons (“dwt”) vessels are a larger vessel class and their addition to our fleet is a significant milestone in the implementation of our business plan to modernize and expand our fleet.
Results of Operations
Our results of operations are largely driven by the following factors:
Comparison of the Three Months Ended June 30, 2011 to the Three Months Ended June 30, 2010
The following table presents the principal components of the Company’s revenue (in thousands):