August 14, 2006
TRAILER BRIDGE INC (TRBR)
Management's Discussion and Analysis of Financial Condition and Results of Operations.
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Operating Statement - Margin Analysis
(% of Operating Revenues)
Three Months
Ended June 30,
-------------------
2006 2005
--------- ---------
Operating Revenues 100.0 % 100.0 %
Salaries, wages, and benefits 14.6 15.1
Rent and purchased transportation 23.6 19.8
Fuel 14.6 11.6
Operating and maintenance (excluduing depreciation below) 21.7 21.8
Dry-docking 37.2 --
Taxes and licenses 0.5 0.5
Insurance and claims 3.7 3.4
Communications and utilities 0.5 0.4
Depreciation and amortization 5.3 3.8
(Gain) Loss on sale of equipment 0.1 1.1
Other operating expenses 4.4 3.8
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Total Operating Expenses 126.2 81.3
Operating income (26.2 ) 18.7
Net interest expense (9.8 ) (9.5 )
(Provision) Benefit for income taxes 0.0 0.0
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Net (loss) income -36.0 % 9.2 %
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The Company's operating ratio, accounting for its dry-docking cost using the expense-as-incurred method rather than the defer-and-amortize method, deteriorated from 81.3% during the three months ended June 30, 2005 to 126.2% during the three months ended June 30, 2006. The Company's operating ratio using the defer-and-amortize method resulted in a deterioration from 81.7% during the three months ended June 30, 2005 to 90.3% during the three months ended June 30, 2006.
The table below presents accounting for dry-docking costs using the defer-and-amortize method, which is the predominant method used by the Company's peers, using a 5 year amortization period, consistent with the time between regulatory dry-docking requirments.
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Operating Statement, As Adjusted - Margin Analysis
(% of Operating Revenues)
Three Months
Ended June 30,
----------------------
2006 2005
------------ ---------
Operating Revenues 100.0 % 100.0 %
Salaries, wages, and benefits 14.6 15.1
Rent and purchased transportation 23.6 19.8
Fuel 14.6 11.6
Operating and maintenance (excluding depreciation below) 21.7 21.8
Dry-docking -- --
Dry-docking amortization 1.3 0.4
Taxes and licenses 0.5 0.5
Insurance and claims 3.7 3.4
Communications and utilities 0.5 0.4
Depreciation and amortization 5.3 3.8
(Gain) Loss on sale of equipment 0.1 1.1
Other operating expenses 4.4 3.8
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Total Operating Expenses 90.3 81.7
Operating income 9.7 18.3
Net interest expense (9.9 ) (9.5 )
(Provision) Benefit for income taxes 0.0 0.0
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Net income, as adjusted -0.2 % 8.8 %
------------ ---------
Reconciling Operating Statement to Operating Statement, as
adjusted
Dry-docking as recorded (37.2 ) --
Dry-docking as adjusted for the defer-and-amortize method 1.3 0.4
------------ ---------
Difference (35.7 ) 0.4
Net Income % as reflected in the Operating Statement - Margin
Analysis (36.0 %) 9.2 %
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Revenues
The following table sets forth by percentage and dollar, the changes in the Company's revenue by sailing route and freight carried:
Volume & Revenue Changes in the second quarter of 2006 compared to 2005
Overall Southbound Northbound
--------- ------------- -------------
Volume Percent Change:
Core container & trailer -13.8 % -15.4 % -9.1 %
Auto and other cargos -40.6 % -42.5 % -8.4 %
SOLs (Shipper Owned Equipment Loads) 20.0 % 8.9 % 118.4 %
Revenue Change ($millions):
Core container & trailer $ (1.8 ) $ (1.8 ) $ 0.0
Auto and other cargos (1.5 ) (1.5 ) 0.0
SOLs (Shipper Owned Equipment Loads) 0.1 0.1 0.0
Other Revenues 1.0
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Total Revenue Change $ (2.2 )
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The substitution of the smaller TBC vessel resulted in less overall capacity during the quarter. The dry docking of one RORO vessel has also resulted in the temporary loss of some trailer/SOL RORO cargos that were unable to wait for our every other week RORO sailing. This volume is expected to return when our scheduled dry dockings are complete during the third quarter of 2006. Vessel capacity utilization on the core continental U.S. to Puerto Rico traffic lane was 82.9% for the three months ended June 30, 2006 compared to 91.0% for the three months ended June 30, 2005. The lower utilization was primarily due to the substitution of a TBC vessel for a RORO vessel for the entire quarter, the loss of one account and softened overall market conditions primarily related to Puerto Rico government fiscal difficulties.
Revenue for the three months ended June 30, 2006 was $25.0 million, compared to $27.2 million for the three months ended June 30, 2005. The decrease in revenue was primarily due to a decrease in southbound container volume. The Company's fuel surcharge is included in the Company's revenues and amounted to $4.0 million during the three months ended June 30, 2006 compared to $2.6 million in the three months ended June 30, 2005. This increase in the fuel surcharges results from increases in fuel costs. The Company's charterhire is included in the Company's revenues and amounted to $0.4 million during the three months ended June 30, 2006 compared to $0.4 million charterhire in the three months ended June 30, 2005. Charterhire is rental revenue for vessels not in use in liner service.
Operating Expenses
Salaries, wages and benefits decreased by $0.5 million or 11.2% due primarily to decreases in incentive based compensation. Purchased transportation other increased $0.5 million or 9.1% due to an increased use of and increased rates for third party over-the-road transportation, including fuel surcharges. Fuel increased by $0.5 million or 15.6% due to increases in fuel prices during the period. Operating and maintenance expenses decreased by $0.5 million or 8.7%, primarily due to lower inland transportation equipment maintenance costs. Dry-docking expense increased by $9.3 million due to the completion of dry-docking of the first RORO vessel, the complete dry-docking of the second RORO vessel and the dry-docking of one TBC vessel during the current period. Depreciation and amortization expense increased by $0.3 million or 27.2%, primarily due to the upgrade of the Company's tractor fleet. Other Operating Expenses increased by $0.1 million or 9.1% due to an increase in the period expenses related to the Company allowance for doubtful accounts. The Company's operating ratio, accounting for its dry-docking cost using the expense-as-incurred method, deteriorated from 81.3% during the three months ended June 30, 2005 to 126.2% during the three months ended June 30, 2006. The Company's operating ratio, as adjusted to account for dry-docking using the defer-and-amortize method like its peers, deteriorated less dramatically from 81.7% during the three months ended June 30, 2005 to 90.3% during the three months ended June 30, 2006.
As a result of the factors described above, the Company reported a net loss of $9.0 million or $.76 per share for the three months ended June 30, 2006 compared to net income of $2.5 million or $.21 per share in the same period in 2005. The Company would have reported a net loss of $40,370 or $.00 per share for the three months ended June 30, 2006 compared to net income of $2.4 million or $.20 per share in the same period in 2005 accounting for its dry-docking cost under the defer-and-amortize method.
The Company believes that in addition to the GAAP based financial information provided below, which reflects the Company's operating results based on the Company's election to account for its dry-docking cost using the expense-as-incurred method, the operating results should also be adjusted utilizing the defer-and-amortize method of accounting so as not to distort the operating results due to an expense that occurs once every five years. As result of the Company's use of the preferable expense-as-incurred method, the Company is not permitted to change to a less preferable method even though it is predominantly used by its competitors. However, the Company believes this is a meaningful disclosure because: (i) During accounting periods where multiple dry-dockings are performed, operating results are distorted and are not comparable to prior periods or to industry peers, and management and the Company's board of directors believe providing this measure to Shareholders will assist them in making meaningful industry comparisons. (ii) Both of the Company's RORO vessels underwent regulatory dry-dockings in the first half of 2006, and therefore dry-docking will not be required again until 2011. Note that the dry-docking cost related to the RORO vessels that have three decks, each 736' long are significantly more than the cost of dry-docking the TBC vessels that have a single deck that is 400' long and are newer than the RORO vessels.
(iii)The defer-and-amortize method of accounting for dry-docking cost is the predominant method used by the Company's industry peer group, (iv) The Company's board of directors and management team evaluates the Company's operating performance compared to the industry peer group. A table including the Company's operating results adjusted basis utilizing the defer-and-amortize method to account for dry-docking cost using a 5-year straight line amortization period beginning when the vessel resumes service is included below:
Three Months
Ended June 30,
-------------------------------
2006 2005
----------------- -------------
Operating income, expense-as-incurred method, as
reported $ (6,531,887 ) $ 5,095,066
add back: dry docking - expense-as-incurred method 9,270,595 --
subtract: dry docking - defer and amortize method (316,108 ) (109,305 )
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Operating income, defer and amortize method, as
adjusted $ 2,422,600 $ 4,985,761
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Operating ratio, expense-as-incurred method 126.2 % 81.3 %
Operating ratio, defer and amortize method 90.3 % 81.7 %
Net (loss) income, expense-as-incurred method, as
reported $ (8,994,857 ) $ 2,510,292
add back: dry docking - expense-as-incurred method 9,270,595 --
subtract: dry docking - defer and amortize method (316,108 ) (109,305 )
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Net income, defer and amortize method, as adjusted $ (40,370 ) $ 2,400,987
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Earnings per shares basic, expense-as-incurred, as
reported $ (0.76 ) $ 0.21
add back: dry docking - expense-as-incurred method,
per share 0.79 --
subtract: dry docking - defer and amortize, per
share (0.03 ) (0.01 )
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Earnings per shares basic, defer and amortize, as
adjusted $ (0.00 ) $ 0.20
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Six Months Ended June 30, 2006 Compared to the Six Months Ended June 30, 2005
During the six months that ended June 30, 2006, the Company had one of its RORO vessels in dry-dock at all times. The Company replaced a RORO vessel with one its TBC vessels during the entire period. The substitution of the smaller TBC vessel resulted in less overall capacity during the six months ended June 30, 2006. A RORO vessel offers 44% more total capacity compared to a TBC vessel and that capacity is more flexible and has significant advantages in terms of loading and unloading cargo that is not containerized.
The following table sets forth the indicated items as a percentage of net revenues for six months ended June 30, 2006 and 2005:
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Operating Statement - Margin Analysis(%
of Operating Revenues)
Six Months
Ended June 30,
-------------------
2006 2005
--------- ---------
Operating Revenues 100.0 % 100.0 %
Salaries, wages, and benefits 14.6 15.9
Rent and purchased transportation 23.2 20.5
Fuel 14.1 11.8
Operating and maintenance (excluding depreciation below) 21.5 22.3
Dry-docking 24.7 0.5
Taxes and licenses 0.4 0.5
Insurance and claims 3.4 3.1
Communications and utilities 0.5 0.5
Depreciation and amortization 5.3 4.0
(Gain) Loss on sale of equipment 0.1 0.6
Other operating expenses 4.2 3.6
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Total Operating Expenses 112.0 83.3
Operating income (12.0 ) 16.7
Net interest expense (9.5 ) (9.9 )
(Provision) Benefit for income taxes (0.0 ) 0.0
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Net (loss) income -21.5 % 6.8 %
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The Company's operating ratio, accounting for its dry-docking cost using the expense-as-incurred method rather than the defer-and-amortize method, deteriorated from 83.3% during the six months ended June 30, 2005 to 112.0% during the six months ended June 30, 2006. The Company's operating ratio using the defer-and-amortize method resulted in a less dramatic deterioration from 83.2% during the six months ended June 30, 2005 to 88.1% during the six months ended June 30, 2006.
The table below is presented accounting for dry-docking costs using the defer-and-amortize method, which is the predominant method used by the Company's peers, using a 5 year amortization period, consistent with the time between regulatory dry-docking requirements.
Operating Statement, As Adjusted - Margin Analysis(%
of Operating Revenues)
Six Months
Ended June 30,
-------------------------
2006 2005
------------ ------------
Operating Revenues 100.0 % 100.0 %
Salaries, wages, and benefits 14.6 15.9
Rent and purchased transportation 23.2 20.5
Fuel 14.1 11.8
Operating and maintenance (excluding depreciation below) 21.5 22.3
Dry-docking -- --
Dry-docking amortization 0.8 0.4
Taxes and licenses 0.4 0.5
Insurance and claims 3.4 3.1
Communications and utilities 0.5 0.5
Depreciation and amortization 5.3 4.0
(Gain) Loss on sale of equipment 0.1 0.6
Other operating expenses 4.2 3.6
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Total Operating Expenses 88.1 83.2
Operating income 11.9 16.8
Net interest expense (9.5 ) (9.9 )
(Provision) Benefit for income taxes (0.0 ) 0.0
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Net income, as adjusted 2.4 % 6.8 %
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Reconciling Operating Statement to Operating Statement,
as adjusted
Dry-docking as recorded (24.7 ) (0.5 )
Dry-docking as adjusted for the defer-and-amortize
method 0.8 0.4
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Difference (23.9 ) (0.1 )
Net Income % as reflected in the Operating Statement -
Margin Analysis (21.5 %) 6.8 %
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Revenues
The following table sets forth by percentage and dollar, the changes in the Company's revenue by sailing route and freight carried:
Volume & Revenue Changes in the first six months of 2006 compared to 2005
Overall Southbound Northbound
--------- ------------- -------------
Volume Percent Change:
Core container & trailer -9.0 % -11.1 % -2.0 %
Auto and other cargos -29.7 % -31.2 % -1.7 %
SOLs (Shipper Owned Equipment Loads) 1.9 % -12.9 % 187.5 %
Revenue Change ($millions):
Core container & trailer $ (1.4 ) $ (1.7 ) $ 0.3
Auto and other cargos (2.0 ) (2.0 ) 0.0
SOLs (Shipper Owned Equipment Loads) (0.1 ) (0.1 ) 0.0
Other Revenues 2.2
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Total Revenue Change $ (1.3 )
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The substitution of the smaller TBC vessel resulted in less overall capacity during the period. The dry docking of the RORO vessels has also resulted in the temporary loss of some trailer/SOL RORO cargos that were unable to wait for our every other week RORO sailing. This volume is expected to return when our scheduled dry dockings are complete during the third quarter of 2006. Vessel capacity utilization on the core continental U.S. to Puerto Rico traffic lane was 85.4% for the six months ended June 30, 2006 compared to 91.6% for the six months ended June 30, 2005. The lower utilization is primarily due to substitution of a TBC vessel for a RORO vessel for the entire period, loss of one account and softened overall market conditions primarily related to Puerto Rico government fiscal difficulties.
Revenue for the six months ended June 30, 2006 was $50.2 million, compared to $51.5 million for the six months ended June 30, 2005. The decrease in revenue was primarily due to a decrease in southbound container volume. The Company's fuel surcharge is included in the Company's revenues and amounted to $7.8 million during the six months ended June 30, 2006 compared to $4.8 million in the six months ended June 30, 2005. This increase in the fuel surcharges results from increases in fuel costs incurred. The Company's charterhire is included in the Company's revenues and amounted to $0.6 million during the six months ended June 30, 2006 compared to $0.9 millions charterhire in the six months ended June 30, 2005. Charterhire is rental revenue for vessels not in use in liner service.
Operating Expenses
Salaries, wages and benefits decreased by $0.9 million or 10.5% due primarily to decreases in incentive based compensation. Purchased transportation other increased $1.1 million or 10.0% due to an increased use of and increased rates for third party over-the-road transportation, including fuel surcharges. Fuel . . .
CRITICAL ACCOUNTING POLICIES
The Company believes that there have been no significant changes to its critical accounting policies during the three months ended March 31, 2006, as compared to those the Company disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations in its Annual Report on Form 10-K for the year ended December 31, 2005.
©1998 Trailer Bridge, Inc.