Danaos Corporation: FY2021 Form 20-F Summary
Business context and reporting period
Danaos Corporation is a Marshall Islands-based owner and lessor of containerships, reporting under U.S. GAAP in U.S. dollars. The filing covers the fiscal year ended December 31, 2021; it does not provide a separate fourth-quarter 2021 income statement. As of February 28, 2022, Danaos owned 71 containerships totaling 436,589 TEU, primarily employed under time charters to major liner companies.
The average remaining charter duration was approximately 4.0 years at December 31, 2021, with estimated contracted revenue of $2.85 billion through 2028. Fleet utilization was 98.2% in 2021 versus 96.3% in 2020.
Key financial metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Operating revenue | $689.5 million | $461.6 million | +49.4% |
| Income from operations | $358.3 million | $199.5 million | +79.6% |
| Operating margin | 52.0% | 43.2% | +8.8 percentage points |
| Net income | $1,052.8 million | $153.6 million | +585.7% |
| Basic diluted EPS | $51.75 / $51.15 | $6.51 / $6.45 | Significant increase |
| Net cash from operations | $428.1 million | $265.7 million | +61.1% |
| Adjusted EBITDA | $508.8 million | $318.3 million | +59.8% |
| Adjusted EBITDA margin | 73.8% | 69.0% | +4.8 percentage points |
Net income and EBITDA were materially affected by non-operating items, including a $578.0 million gain on investments, principally ZIM shares, a $111.6 million gain on debt extinguishment, and $68.0 million of equity income from investments. The ZIM gain included approximately $423.0 million of unrealized appreciation on shares still held at year-end and $34.3 million of dividends. Excluding these items, reported profitability is substantially lower than GAAP net income suggests.
- Cash and cash equivalents were $129.4 million at December 31, 2021; total cash, including restricted cash, was $129.8 million.
- Gross long-term debt was $1.142 billion, and leaseback obligations were $226.5 million. Total debt and leaseback obligations were approximately $1.369 billion before applicable adjustments.
- Weighted average borrowing cost, including leaseback obligations, was 4.4% versus 4.6% in 2020.
- Stockholders’ equity increased to $2.088 billion from $1.036 billion, largely reflecting 2021 earnings and other comprehensive income.
- Cash used in investing activities was $143.1 million, including $355.7 million of vessel and asset acquisitions offset by $196.4 million of proceeds from ZIM and HMM investments.
- Cash used in financing activities was $220.9 million, including debt refinancing flows, debt repayment, leaseback payments and $30.9 million of dividends.
- Vessel operating expenses were $135.9 million, and average daily operating cost for time-chartered vessels increased to $5,986 from $5,586, primarily due to higher crew remuneration related to COVID-19.
Material changes versus prior comparable period
- Revenue growth reflected higher charter rates and utilization, additional vessels, and increased non-cash revenue recognition, including $27.6 million of amortization of below-market time charters assumed in acquisitions.
- The fleet expanded to 71 vessels at year-end from 60 in 2020, while TEU capacity increased to 436,589 from 371,262.
- Danaos acquired the remaining 51% of Gemini for $86.7 million, obtaining full ownership of five vessels and consolidating Gemini from July 1, 2021.
- Danaos acquired six 5,466-TEU vessels for an aggregate gross purchase price of $260.0 million.
- The company completed a major refinancing using a new $815 million senior secured facility, a $135 million sale-and-leaseback arrangement and $300 million of 8.5% senior notes due 2028.
- The refinancing extended maturities and reduced near-term debt service requirements, but introduced substantial secured debt, leaseback obligations and a fixed 8.5% senior-note coupon.
- Quarterly dividends were reinstated in 2021 at $0.50 per share per quarter. A $0.75 per-share dividend declared in February 2022 was paid on February 28, 2022.
Guidance, outlook, risks and unusual items
Management described the containership market as strong at year-end 2021, citing robust container demand, tight vessel availability and sharply higher charter rates. The filing referenced expected 2022 container trade growth of approximately 3% to 4% and stated that seven vessels, excluding two vessels agreed to be sold, had charters expiring in 2022. Management expected to recharter those vessels at rates at least equal to current rates if prevailing market conditions continued, but provided no formal earnings guidance.
- Two vessels, Catherine C and Leo C, were agreed to be sold for gross proceeds of $130 million, with expected delivery in November 2022.
- Contracted revenue coverage is concentrated in future periods: $850.9 million for 2022, $1.305 billion for 2023-2024, $514.8 million for 2025-2026 and $182.3 million for 2027-2028.
- There was no vessel impairment loss in 2021, and management stated that no vessel had a market value below carrying value based on its internal analysis. Vessel values remain highly cyclical and subject to estimation risk.
- There was no remaining borrowing availability under existing credit facilities. The company was required to make $95.8 million of debt principal payments and $62.0 million of leaseback payments through December 31, 2022, excluding imputed interest for the latter.
- The $815 million secured facility includes minimum liquidity of $30 million, minimum collateral coverage of 120%, maximum net debt-to-EBITDA of 6.5x and minimum EBITDA-to-net-interest expense of 2.5x.
- Most borrowings are floating-rate and reference LIBOR. Management estimated that a 10-basis-point increase in floating rates would reduce 2022 earnings by approximately $0.6 million.
- Customer concentration remains material: approximately 72% of 2021 revenue came from six customers, including 30% from CMA CGM and 17% from HMM.
- COVID-19 remains a risk to charter rates, crew changes, shipyard work, drydockings, customer credit quality and financing access. The filing also identifies risks from fuel and environmental regulation, ballast-water compliance, emissions rules, sanctions, piracy, cyberattacks and foreign-exchange movements.
- The company held 7,186,950 ZIM shares valued at $423.0 million at year-end, creating significant earnings and liquidity exposure to ZIM’s share price and dividend policy.
- The company has an unsecured $597.9 million claim against bankrupt Hanjin Shipping that is not recognized as an asset; $3.9 million was collected in 2021 as a partial payment of a separate common-benefit claim.
- Related-party transactions include management fees of $19.9 million, commissions of $10.4 million and a $1.3 million vessel-acquisition fee paid to the manager, which is controlled by the company’s largest shareholder and affiliated with the CEO.
Most important facts for investors to verify
- Whether charter rates remain strong as 2022 expirations and subsequent charter renewals occur.
- The market value, liquidity and concentration risk associated with the ZIM shareholding.
- Compliance with secured-loan and leaseback covenants, particularly collateral values, liquidity and debt-service coverage.
- The timing and economics of the Catherine C and Leo C vessel sales.
- The company’s ability to fund scheduled debt and leaseback payments while maintaining dividends and vessel-maintenance spending.
- The extent to which reported 2021 earnings were driven by unrealized ZIM gains, the debt-extinguishment gain and other non-recurring items rather than recurring charter operations.
- Customer credit quality and the concentration of revenue among major liner companies.
- Future regulatory and capital costs related to emissions, ballast-water treatment and the aging fleet.