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 chartered primarily under multi-year, fixed-rate time charters to major liner companies. This Form 20-F covers the fiscal year ended December 31, 2007. The company reported results from continuing operations (containerships) and discontinued operations (drybulk carriers, which were sold in 2007).
Key Financial Metrics (Year Ended Dec 31, 2007)
| Metric | 2007 (in thousands) | 2006 (in thousands) |
|---|---|---|
| Operating Revenues | $258,845 | $205,177 |
| Net Income (Continuing Ops) | $123,098 | $65,419 |
| Net Income (Discontinued Ops) | $92,166 | $35,663 |
| Total Net Income | $215,264 | $101,082 |
| Diluted EPS (Total) | $3.95 | $2.16 |
| Operating Cash Flow | $158,270 | $151,578 |
| Total Assets | $2,071,791 | $1,297,190 |
| Total Debt | $1,356,546 | $662,316 |
| Stockholders' Equity | $624,904 | $565,852 |
Note: Figures are in thousands of U.S. dollars. Discontinued operations reflect the sale of the drybulk fleet.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues from continuing operations increased 26.1% to $258.8 million, driven by the addition of nine new vessels to the fleet and incremental revenue from vessels added in late 2006.
- Profitability Surge: Net income from continuing operations nearly doubled to $123.1 million. This was significantly aided by a non-recurring gain of $15.9 million related to the restructuring of leasing arrangements for six vessels, reversing a $12.8 million expense recorded in 2006.
- Discontinued Operations: Net income from discontinued operations rose 158.3% to $92.2 million, primarily due to an $88.6 million gain on the sale of six drybulk carriers.
- Debt Expansion: Total long-term debt increased significantly to $1.36 billion (from $662 million in 2006) to finance the acquisition of secondhand vessels and installment payments for 34 contracted newbuildings.
- Expense Increases: Depreciation increased 48.7% and vessel operating expenses increased 24.0% due to the larger fleet size. General and administrative expenses rose 56.3% due to full-year costs associated with being a public company.
Guidance, Outlook, and Risks
Outlook and Fleet Expansion: The company expects to deliver 34 contracted newbuilding containerships between July 2008 and September 2011. Upon delivery, the fleet is projected to grow to 68 vessels with a total capacity of 382,179 TEUs. Management anticipates stable cash flows due to staggered charter expirations, with no more than nine charters expiring in any 12-month period.
Dividend Policy: The company intends to pay quarterly dividends. The most recent declared dividend was $0.465 per share. Future dividends depend on cash flow generation, debt covenants, and board discretion.
Key Risks and Contingencies:
- Market Volatility: The shipping industry is cyclical. An oversupply of containership capacity could lead to reduced charter rates upon re-chartering.
- Customer Concentration: Approximately 55% of 2007 revenues were generated by four major customers (China Shipping, Hyundai, CMA-CGM, and Yang Ming).
- Purchase Options: Charterers hold options to purchase certain vessels (e.g., four vessels sold to APL-NOL in 2007/2008, and five newbuildings subject to CMA-CGM options in 2017). Exercise of these options would reduce fleet size and future revenue.
- Environmental and Legal: The company's manager entered a plea agreement regarding a 2001 oil discharge, resulting in a $500,000 penalty and a monitored environmental compliance plan. Future environmental regulations (IMO, U.S. OPA) could increase compliance costs.
- Financing Covenants: Credit facilities require maintaining specific financial ratios, including 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.
Investor Verification Checklist
- Charter Rate Sustainability: Verify the stability of multi-year fixed-rate charters against current spot market rates to assess re-chartering risk.
- Debt Service Coverage: Confirm compliance with financial covenants, specifically the EBITDA/Interest ratio and the aggregate market value of vessels relative to net debt.
- Newbuilding Delivery Schedule: Monitor the delivery timeline of the 34 contracted vessels to ensure revenue projections align with capital expenditure schedules.
- Customer Concentration: Assess the financial health of the top four charterers, which account for over half of the company's revenue.
- Dividend Sustainability: Review cash flow from operations versus dividend payout and capital expenditure requirements to gauge future dividend capacity.