Costamare Inc. — FY2014 Form 20-F
Reporting period: Fiscal year ended December 31, 2014; audited consolidated statements prepared under U.S. GAAP. This is an annual report, not a standalone fourth-quarter filing. Costamare owns and charters containerships, principally under fixed-rate time charters. At year-end it owned 55 vessels through wholly owned subsidiaries; fleet statistics reported as of February 27, 2015 include 59 vessels in the water and nine newbuilds on order, with some vessels held through joint ventures.
Financial performance
| Metric (US$ millions except per-share data) | 2014 | 2013 | Change |
|---|---|---|---|
| Voyage revenue | 484.0 | 414.2 | +16.9% |
| Operating income | 214.7 | 169.0 | +27.0% |
| Net income | 115.1 | 103.1 | +11.6% |
| Net income available to common shareholders | 103.2 | 101.6 | +1.6% |
| Basic and diluted EPS | $1.38 | $1.36 | +$0.02 |
| Cash from operating activities | 243.3 | 186.7 | +30.3% |
Operating margin increased to approximately 44.4% from 40.8%; net margin was approximately 23.8% versus 24.9%. Revenue growth primarily reflected vessel additions and increased ownership days, partly offset by lower charter rates on some vessels. Average fleet size increased to 54.5 from 49.6 vessels, and ownership days rose 9.7%. Utilization, excluding scheduled dry-dockings, remained high at 99.8%, compared with 99.9% in 2013.
Vessel operating expenses rose 4.1% to $120.8 million; related-party management fees increased 11.4% to $18.5 million. Depreciation increased 17.7% to $105.8 million. Interest and finance costs increased 28.3% to $95.6 million, and the company also recorded $10.2 million of swap breakage costs. Three vessel sales generated a $2.5 million net gain. Equity-method investments recorded a $3.4 million loss, mainly reflecting the company’s share of an unrealized loss related to a joint-venture swap option.
Cash, liquidity, debt and capital allocation
- Year-end cash and cash equivalents were $113.1 million. Including restricted cash, total cash liquidity was $177.2 million.
- Working capital was negative $132.4 million, improved from negative $158.4 million in 2013; current assets were $158.0 million and current liabilities $290.4 million.
- Total debt and finance lease obligations were approximately $1.77 billion at year-end, including $1.52 billion of long-term debt and $247.1 million of lease obligations. The weighted-average debt interest rate was 4.18%. Debt is principally vessel-secured and includes financial and operational covenants; the company reported no credit-facility defaults.
- Cash used in investing was $119.3 million, versus $621.1 million in 2013, reflecting lower newbuild pre-delivery payments and joint-venture investment flows. Financing used $104.3 million, including $356.6 million of debt repayments, partly offset by $256.7 million of sale-and-leaseback proceeds and $96.5 million net proceeds from the Series C preferred offering.
- Dividends paid totaled $93.1 million in 2014: $83.0 million on common stock and $10.1 million on preferred stock. The common dividend was increased to $0.28 per share quarterly during 2014. Series B and Series C preferred shares carry annual dividend rates of 7.625% and 8.50%, respectively.
Material changes, outlook and risks
- Fleet expansion continued: three newbuilds and three secondhand vessels were delivered in 2014, while three vessels were sold for scrap. As of February 27, 2015, the fleet comprised 68 vessels including nine newbuilds scheduled for delivery through Q3 2016.
- At December 31, 2014, fixed-term charters represented approximately $1.87 billion of contracted revenue, excluding joint-venture vessels. At February 27, 2015, the company reported approximately $2.0 billion including its ownership share of joint-venture contracted revenue, with a weighted-average remaining charter duration of about 4.5 years. These are contract-based estimates, not guaranteed collections.
- The market remained challenging: management cited ongoing vessel oversupply, historically low charter rates and potential further pressure from large-ship deliveries and cascading capacity. Management expected demand growth to be uncertain; the filing provides no earnings or dividend guidance.
- Customer concentration is substantial: five liner companies accounted for 94% of 2014 revenue. ZIM completed a financial restructuring in 2014; Costamare received 1.2% of ZIM’s equity and about $8.2 million principal amount of notes in connection with charter arrangements. The company recorded a $2.9 million allowance/write-off associated with amounts due from ZIM and said further charter concessions could not be ruled out.
- Vessel values were below carrying values for 17 vessels by an estimated aggregate $147.7 million, based on the company’s internal analysis. No impairment was recorded because management’s projected undiscounted cash flows exceeded carrying values; the conclusion depends on assumptions about future charter rates, costs, utilization and vessel lives.
- Newbuild and financing exposure remains material. The company’s share of remaining commitments for nine joint-venture newbuilds was approximately $286.5 million as of February 27, 2015, of which $189.8 million was expected to be funded through sale-and-leaseback financing. The proposed Costamare Partners LP offering had not been completed; the amended York framework agreement depended on that offering.
- Other key risks include negative working capital, high leverage and covenant requirements; refinancing and counterparty risk; interest-rate and foreign-currency exposure; environmental and operating liabilities; and reliance on affiliated managers and related-party arrangements. A 100-basis-point rise in interest rates was estimated to reduce 2014 net income and cash flow by approximately $2.8 million.
- Unusual history: the Rena grounding resulted in a 2012 New Zealand settlement and a fine; the filing states that management expected insurance to cover most related costs. The company reported no material pending legal proceedings. Management and the independent auditor concluded that internal control over financial reporting was effective; the financial statements received an unqualified audit opinion.
Important facts for investors to verify
- Reconcile reported cash liquidity to unrestricted cash and restricted balances, and review near-term working-capital needs, debt maturities and covenant headroom.
- Check charter expirations and renewal rates, particularly the vessels due for redelivery in 2015, and monitor the creditworthiness of major customers, including ZIM.
- Assess the assumptions supporting the no-impairment conclusion and the sensitivity of vessel values and cash flows to lower charter rates.
- Confirm remaining newbuild funding, delivery schedules and the status and terms of the proposed MLP offering and amended York framework agreement.
- Review the cost and dilution from related-party management arrangements, preferred dividends, and the sustainability of common dividends under debt restrictions and capital requirements.