Business Context and Reporting Period
Company: Costamare Inc.
Filing Type: Form 6-K (Foreign Private Issuer)
Reporting Period: Six months ended June 30, 2011 (Unaudited)
Filing Date: July 28, 2011
Costamare Inc. is a container shipping company incorporated in the Republic of the Marshall Islands. As of June 30, 2011, the Company owned and operated a fleet of 48 container vessels with a total carrying capacity of approximately 231,128 TEU. The Company charters its vessels to leading liner operators under long-, medium-, and short-term time charters. The Company completed its Initial Public Offering (IPO) in November 2010.
Key Financial Metrics
| Financial Metric (in thousands USD) | Six Months Ended June 30, 2011 | Six Months Ended June 30, 2010 |
|---|---|---|
| Voyage Revenue | $180,279 | $178,824 |
| Operating Income | $79,508 | $89,086 |
| Net Income | $44,119 | $45,636 |
| Earnings Per Share (Basic & Diluted) | $0.73 | $0.97 |
| Net Cash Provided by Operating Activities | $83,071 | $56,049 |
| Net Cash Used in Investing Activities | ($195,536) | ($9,214) |
| Net Cash Provided by Financing Activities | $22,319 | ($56,663) |
| Cash and Cash Equivalents (End of Period) | $69,628 | $2,454 |
| Total Debt (Current + Non-Current) | $1,400,009 | $1,341,737 |
| Total Assets | $1,906,282 | $1,828,782 |
Material Changes vs. Prior Period
- Revenue: Voyage revenue increased slightly by 0.8% to $180.3 million, driven by fleet expansion despite higher operating costs.
- Profitability: Operating income decreased by 10.7% to $79.5 million. Net income declined by 3.3% to $44.1 million. The decline in operating income was primarily due to increased vessel operating expenses ($55.7M vs $51.8M) and higher depreciation ($38.0M vs $34.4M) associated with new vessel acquisitions.
- Derivative Gains/Losses: The Company recognized a loss on derivative instruments of $69,000 in 2011, a significant improvement from a loss of $10.2 million in the prior year period.
- Capital Expenditures: Investing cash outflows surged to $195.5 million compared to $9.2 million in 2010. This was driven by $145.8 million in advances for vessel acquisitions and $74.8 million in vessel additions.
- Dividends: The Company paid $30.2 million in dividends during the six-month period, compared to $10.0 million in the prior year.
Outlook, Management Commentary, and Risks
- Fleet Expansion: The Company contracted for the construction of 10 newbuild containerships (total contract price $953.7 million) and acquired 8 secondhand vessels during the period. Pre-delivery payments of $143.1 million were made in the first half of 2011.
- Charter Commitments: As of June 30, 2011, the Company had future minimum contractual charter revenues of approximately $2.98 billion over the remaining terms of its contracts (up to 150 months).
- Debt Structure: Total debt increased to $1.4 billion. The Company maintains a $1.0 billion credit facility, of which the undrawn balance was $nil as of June 30, 2011. The weighted average interest rate on long-term debt was 4.63%.
- Risks and Contingencies:
- Interest Rate Risk: The Company utilizes interest rate swaps to hedge floating rate exposure. The fair value of these swaps represented a liability of $115.9 million as of June 30, 2011.
- Liquidity: While operating cash flow was strong ($83.1M), significant capital expenditures and dividend payments reduced cash balances from $159.8M at year-end 2010 to $69.6M by mid-year 2011.
- Related Party Transactions: The Company pays management fees to Costamare Shipping (owned by the CEO) and CIEL Shipmanagement. Fees increased in 2011 due to fleet growth and new fee structures post-IPO.
- Subsequent Events: On July 11, 2011, the Company declared a quarterly dividend of $0.25 per share. On July 14, 2011, it contracted to acquire a secondhand vessel (MSC Linzie) for $55 million.
Investor Verification Checklist
- Debt Covenants: Verify compliance with financial covenants, specifically the Total Liabilities to Market Value Adjusted Total Assets ratio (limit 0.75:1) and minimum liquidity requirements ($30M or 3% of total debt).
- Derivative Valuation: Confirm the fair value of the $115.9 million interest rate swap liability and the impact of potential interest rate fluctuations on future earnings.
- Capital Expenditure Funding: Assess the ability to fund the remaining $810.6 million in newbuild payments scheduled through 2014 given the current cash balance and debt levels.
- Charter Concentration: Review the concentration of revenue from top charterers (Top 4 accounted for 77% of revenue in 2011) and the stability of long-term charter rates.
- Dividend Sustainability: Evaluate the sustainability of the dividend policy ($30.2M paid in H1 2011) against free cash flow after accounting for mandatory debt service and capital expenditures.