Costamare Inc. annual report, Q4 FY2015

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Business context and reporting period

Costamare Inc. filed this Form 20-F for the fiscal year ended December 31, 2015. It owns containerships and primarily charters them to liner companies under time charters. The filing reports annual results, not standalone fourth-quarter results; it does not provide a clear value for Q4-only revenue or profit. Financial statements are audited and prepared under U.S. GAAP.

Key financial metrics

  • Revenue: Voyage revenue was $490.4 million, up 1.3% from $484.0 million in 2014.
  • Profit: Operating income was $217.9 million versus $214.7 million; net income was $143.8 million versus $115.1 million. Net income available to common stockholders was $125.9 million, or $1.68 per diluted share, compared with $103.2 million, or $1.38 per share. Approximate operating and net margins were 44.4% and 29.3%, respectively.
  • Cash flow: Operating cash flow was $244.7 million, investing cash outflow was $43.0 million, and financing cash outflow was $214.7 million. Cash and cash equivalents fell $13.0 million to $100.1 million. Dividends paid totaled $102.3 million.
  • Liquidity: Cash, cash equivalents and restricted cash totaled $162.8 million at year-end. Working capital was negative $126.9 million. Current assets were $145.1 million and current liabilities $272.0 million.
  • Debt and equity: Total debt, including finance lease obligations and current maturities, was approximately $1.56 billion, down from $1.52 billion in 2014? The filing’s selected-data table reports $1.520 billion for 2014 and $1.323 billion for 2015 for long-term debt including current portion; adding $233.6 million of lease obligations gives approximately $1.557 billion in 2015. Total stockholders’ equity was $963.5 million. The weighted-average interest rate on long-term debt was 4.22%.
  • Fleet and contracts: The company averaged 54.9 vessels during 2015. At April 20, 2016, its fleet comprised 60 vessels in the water and 12 newbuilds on order; the filing reports approximately $1.8 billion of contracted revenue at that date, including its share of joint-venture revenue.

Material changes versus the prior comparable period

  • Revenue rose modestly, primarily reflecting vessels delivered in 2014 and higher rates on certain vessels, partly offset by vessel disposals and increased off-hire, mainly for dry-docking.
  • Net income increased by $28.7 million. Lower interest and finance costs and a larger derivative gain contributed; the 2015 derivative gain was $16.9 million versus $5.5 million in 2014. The 2014 comparison included $10.2 million of swap breakage costs.
  • Operating expenses declined 3.0% to $117.2 million, while related-party management fees rose 2.2% to $18.9 million. Reported 2015 general and administrative expenses included an $8.6 million non-cash share-based compensation component.
  • Debt repayments reduced reported long-term debt, while the company issued $96.6 million net proceeds of Series D preferred shares. Dividends paid increased from $93.1 million in 2014 to $102.3 million in 2015.

Outlook, risks and unusual items

  • Management described a weak containership market: 2015 demand growth was subdued, vessel supply expanded faster than demand, and charter rates and vessel values came under pressure. The year-end order book equaled 19% of existing fleet capacity, with most capacity for vessels above 8,000 TEU.
  • No formal earnings or revenue guidance is provided. Management stated it expects operating cash flow and borrowing capacity to support liquidity needs, but cautioned that future financing may not be available on acceptable terms.
  • Charter expirations are a key exposure. As of April 20, 2016, 18 of 60 vessels in the water had charters expiring before year-end, four vessels were not employed, and five newbuilds lacked secured employment. The filing also cites significant 2018 expirations.
  • Customer concentration is high: five major liner customers represented 95% of 2015 revenue. ZIM’s 2014 restructuring resulted in charter extensions and the receipt of equity and notes; further concessions or impairment of those securities remain possible.
  • Newbuild investment creates funding and delivery risks. At April 20, 2016, the company’s share of remaining commitments for 12 newbuilds was approximately $282.3 million, of which $177.8 million was covered by committed sale-and-leaseback financing.
  • Management recorded no vessel impairment for 2015 using projected cash flows based partly on a ten-year historical average charter rate. An internal discounted-cash-flow analysis indicated that 25 vessels had estimated market values below carrying values, with a reported aggregate gap of $277.7 million; management concluded their carrying values remained recoverable over their useful lives.
  • Other material risks include negative working capital, debt covenants and collateral-value tests, interest-rate and currency exposure, shipowner and charterer counterparty risk, environmental regulation, and dependence on related-party managers. The filing reports no credit-facility defaults and no material pending litigation known to management.
  • The common dividend was $0.29 per share per quarter through the February 2016 payment; the board declared the next quarterly dividend in April 2016. Future payments remain discretionary and subject to cash needs, law and financing restrictions. Preferred shares carry annual stated rates of 7.625% (Series B), 8.50% (Series C) and 8.75% (Series D).
  • An estimate change increased vessel residual values from $250 to $300 per lightweight ton, reducing 2015 depreciation and increasing net income by $5.4 million, or $0.07 per common share. The auditor issued unqualified opinions on the financial statements and internal controls.

Important facts for investors to verify

  • Reconcile debt figures across long-term borrowings, current maturities and finance leases, and review near-term principal payments, balloon maturities and covenant headroom.
  • Check cash available after restricted balances, scheduled debt service, preferred dividends, common dividends and remaining newbuild contributions.
  • Review vessel-by-vessel charter expiry, renewal and employment status, especially 2016 and 2018 expirations and unchartered newbuilds.
  • Assess exposure to the five largest customers, including ZIM’s notes and equity, and confirm the collectability and carrying values of those instruments.
  • Evaluate the assumptions behind the no-impairment conclusion against current charter rates and vessel values, and distinguish derivative fair-value gains from recurring operating performance.
  • Review related-party management fees, share-based compensation and termination provisions, and confirm the effect of the joint-venture ownership interests on reported revenue and cash flows.