Danaos Corp. 20-F Filing Summary (Fiscal Year Ended Dec 31, 2006)
Business Context and Reporting Period
Danaos Corporation is an international owner of containerships, incorporated in the Republic of The Marshall Islands with principal executive offices in Piraeus, Greece. The company operates a fleet of containerships under multi-year, fixed-rate time charters to major liner companies. This filing covers the fiscal year ended December 31, 2006. During this period, Danaos completed its initial public offering (IPO) in October 2006 and began trading on the New York Stock Exchange. The company also agreed to sell its entire drybulk carrier fleet (six vessels) in August 2006, with deliveries occurring in early 2007, to focus exclusively on the containership sector pending future reinvestment opportunities.
Key Financial Metrics
| Metric | 2006 (in thousands) | 2005 (in thousands) |
|---|---|---|
| Operating Revenues | $245,588 | $241,381 |
| Net Income | $101,082 | $122,850 |
| Income from Operations | $147,987 | $143,679 |
| Net Cash Provided by Operating Activities | $151,578 | $162,235 |
| Total Assets | $1,297,190 | $945,758 |
| Total Long-Term Debt | $662,316 | $666,738 |
| Stockholders' Equity | $565,852 | $262,725 |
| Diluted EPS | $2.16 | $2.77 |
Note: The significant increase in Stockholders' Equity in 2006 is primarily due to the IPO proceeds of approximately $198.2 million net of costs.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 1.7% to $245.6 million, driven by the addition of six new containerships in 2006. This growth was partially offset by lower charter rates for the drybulk fleet and the sale of one drybulk carrier during the year.
- Net Income Decline: Net income decreased 17.8% to $101.1 million. This decline was primarily caused by a non-recurring expense of approximately $13 million related to a change in U.K. tax legislation affecting leasing arrangements for six vessels, and a $16.6 million loss in "Other income/(expense), net" compared to a $0.5 million gain in 2005.
- Expense Increases: Vessel operating expenses rose 12.6% due to fleet expansion and higher industry-wide running costs (crew wages, lubricants). General and administrative expenses increased 49.0% due to new director/officer compensation and technical management fees for new vessels.
- Balance Sheet Expansion: Total assets grew 37% to $1.3 billion, reflecting significant capital expenditures ($330.1 million used in investing activities) for newbuilding vessels and secondhand acquisitions.
Guidance, Outlook, and Risks
Outlook and Strategy: Management intends to reinvest in the drybulk sector once vessel prices become attractive, though current prices are deemed too high. The company has contracted for 27 newbuilding containerships and one secondhand vessel, with deliveries expected through 2010. Most of these vessels are already under multi-year time charters. The company plans to pay quarterly dividends of $0.44 per share, subject to board discretion and cash flow availability.
Key Risks and Contingencies:
- Charter Rate Volatility: The shipping industry is cyclical. While current charters are fixed-rate, future re-chartering may occur in a depressed market, potentially reducing profitability.
- Leasing Arrangements: Six vessels are subject to complex leasing arrangements with put options. A change in U.K. tax law in 2006 increased the expected put option price, resulting in a $13 million charge. Future currency fluctuations (British Pound vs. USD) could impact the value of deposits associated with these leases.
- Customer Concentration: Two customers (APL-NOL and China Shipping) generated 26% of revenues in 2006. Loss of these customers would materially impact results.
- Environmental and Legal: The company's manager pleaded guilty to negligent discharge of oil and obstruction of justice regarding a 2001 incident, resulting in a $500,000 penalty and a three-year probation period with strict compliance monitoring.
- Derivative Exposure: The company uses interest rate swaps and foreign currency forwards to hedge risks. In 2006, the company recognized a $6.6 million loss on the fair value of derivatives.
Investor Verification Checklist
- Leasing Liability: Verify the current status and potential financial impact of the U.K. tax law changes on the six vessels under the Allco/Lloyds Bank leasing arrangements.
- Charter Expirations: Review the schedule of charter expirations, particularly for the APL-NOL vessels (APL Belgium, APL Scotland, APL Holland) where purchase options have been or may be exercised, potentially reducing fleet size.
- Dividend Sustainability: Assess whether operating cash flows will support the declared $0.44 quarterly dividend while funding the $790 million in contractual obligations for newbuilding vessels.
- Debt Covenants: Confirm continued compliance with financial covenants, specifically the requirement to maintain a market value adjusted net worth of at least $400 million and an EBITDA to net interest expense ratio of no less than 2.5 to 1.0.
- Environmental Compliance: Monitor the implementation of the environmental compliance plan mandated by the U.S. Department of Justice following the manager's guilty plea.