Danaos Corporation: FY2012 Form 20-F Summary
Business context and reporting period
Danaos Corporation is a Marshall Islands-based owner and operator of containerships, chartering vessels primarily to major liner companies under multi-year fixed-rate time and bareboat charters. The filing covers the fiscal year ended December 31, 2012, prepared under U.S. GAAP and audited by PricewaterhouseCoopers S.A. The source provides annual results rather than standalone fourth-quarter results.
At December 31, 2012, the fleet comprised 64 containerships with 363,049 TEUs. The company completed its extensive newbuilding program during 2012, taking delivery of six vessels, including five 13,100-TEU vessels. Fleet utilization was 93.0%, compared with 97.6% in 2011, primarily because seven vessels were laid up for an aggregate 1,349 days.
Key financial metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Operating revenue | $589.0 million | $468.1 million | +25.8% |
| Income from operations | $153.0 million | $205.2 million | -25.5% |
| Operating margin | 26.0% | 43.8% | Down |
| Net income/(loss) | $(105.2) million | $13.4 million | Turned to loss |
| Net margin | (17.9%) | 2.9% | Down |
| Basic and diluted EPS | $(0.96) | $0.12 | Down |
| EBITDA | $151.1 million | $192.1 million | -21.3% |
| Adjusted EBITDA | $431.7 million | $318.6 million | +35.5% |
| Net cash from operating activities | $166.6 million | $59.5 million | +180.0% |
| Net cash used in investing activities | $(369.8) million | $(644.6) million | Lower outflow |
| Net cash from financing activities | $207.5 million | $406.6 million | Lower inflow |
Revenue growth was driven primarily by the larger fleet and six vessel deliveries, which contributed $88.8 million of revenue. This benefit was partly offset by increased off-hire and lay-up activity, including $18.5 million of estimated revenue lost from vessels laid up.
Operating expenses increased to $123.4 million from $119.1 million, while depreciation increased 35.5% to $143.9 million because of the larger and more expensive fleet. Interest expense increased 58.4% to $87.3 million as average debt rose to approximately $3.3 billion. Realized and unrealized derivative losses were $155.2 million, compared with $121.4 million in 2011.
Cash and cash equivalents were $55.6 million at year-end, with total restricted cash of $3.3 million. Total current assets were $98.7 million versus current liabilities of $365.3 million. Total debt, including vendor financing, was approximately $3.4 billion; $182.5 million was payable within twelve months. Total stockholders’ equity was $440.3 million.
Material changes versus the prior comparable period
- Revenue increased 25.8% as average fleet size rose to 62.6 vessels from 54.9.
- Fleet utilization declined because of seven laid-up vessels and 1,613 total off-hire days, compared with 477 days in 2011.
- Income from operations fell despite higher revenue, reflecting a $129.6 million impairment charge, higher depreciation, and increased operating and voyage expenses.
- The company reported a $105.2 million net loss, versus $13.4 million of net income in 2011.
- Adjusted EBITDA increased substantially after excluding impairment, derivative losses and other specified items; however, reported EBITDA declined to $151.1 million.
- Operating cash flow improved materially, but remained insufficient to fund $369.8 million of investing outflows without substantial financing.
- Vessel construction advances declined from $524.3 million to zero as all newbuildings were delivered.
- Debt increased from approximately $3.1 billion, including vendor financing, at year-end 2011 to approximately $3.4 billion at year-end 2012.
- Five 13,100-TEU vessels were delivered under 12-year charters, increasing long-term contracted revenue but also increasing leverage and fixed obligations.
Guidance, outlook, commentary, risks and unusual items
Management expected containership demand to increase modestly in 2013 but stated that freight and charter rates would remain under pressure because of weak European demand and scheduled newbuilding deliveries. The company cited an orderbook equal to approximately 21% of global fleet capacity at the beginning of the fourth quarter of 2012 and an idle fleet equal to approximately 3.4% of global capacity at the end of September 2012.
The company had contracted charter revenue of approximately $577.0 million for 2013, $1.1 billion for 2014–2015, $1.0 billion for 2016–2017, $1.9 billion for 2018–2022 and $303.7 million for 2023–2028, or $4.9 billion in total. These amounts depend on charterer performance and exclude the potential impact of additional off-hire.
- Six vessels aggregating 24,355 TEUs were laid up as of February 22, 2013, and eight other vessels had charters expiring between March and December 2013. Re-chartering could occur at materially lower or unprofitable rates.
- Approximately 91% of 2012 revenue came from six liner customers, increasing counterparty concentration. ZIM’s 17.5% charter-hire payment deferral was extended through June 30, 2013.
- The company recorded a $129.6 million impairment loss on 13 older vessels because of depressed vessel values and weak charter markets. Further impairment charges remain possible.
- On July 1, 2012, the company discontinued hedge accounting for interest-rate swaps, increasing earnings volatility. Derivative losses were $155.2 million in 2012, and swap liabilities had a fair value of $307.0 million at year-end.
- The Bank Agreement required application of 92.5% of Actual Free Cash Flow to additional debt repayment until specified leverage conditions are met, and 89.5% thereafter through maturity. Scheduled principal payments under covered facilities began after May 15, 2013.
- All credit facilities were secured, no borrowing availability remained, and covenant compliance depended significantly on vessel values, charter cash flows, liquidity and EBITDA.
- Cash dividends and share repurchases were generally prohibited through 2018 unless leverage and vessel-value conditions were satisfied. No dividends were declared in 2012.
- The company sold the Independence for $7.0 million in February 2013 and delivered the Henry to buyers for $6.1 million on February 28, 2013.
- A shareholder derivative lawsuit challenging management-agreement amendments and the 2010 equity issuance remained pending; management did not expect a material effect.
- A potential U.K. tax indemnity related to a prior structured finance transaction was released in February 2013 after HMRC determined that no tax was payable.
Most important facts for an investor to verify
- Reconcile the filing’s annual figures with the requested fourth-quarter period; the source does not provide clear standalone Q4 financial statements.
- Review debt maturities, variable cash-flow-based amortization, vendor financing repayments and the December 2018 balloon obligations.
- Test covenant headroom using current vessel valuations, charter-inclusive collateral values, EBITDA, liquidity and net leverage.
- Assess charterer credit quality and concentration, particularly the exposure to Hyundai, CMA CGM, Hanjin, ZIM and other major liner companies.
- Confirm the status and rates of the six laid-up vessels and the eight charters expiring during 2013.
- Evaluate the sustainability of operating cash flow after interest, swap payments, maintenance capital expenditures and mandatory debt repayments.
- Review the assumptions supporting the $129.6 million impairment test and the possibility of additional vessel impairments.
- Analyze the economic effect of the $307.0 million negative fair value of interest-rate swaps and the post-July 2012 accounting change.
- Verify restrictions on dividends, equity proceeds, asset sales and additional borrowing under the Bank Agreement.
- Consider customer concentration, environmental and regulatory costs, foreign-currency exposure, sanctions compliance and the pending derivative litigation.