Danaos Corp annual report, Q4 FY2017

Danaos Corporation — 2017 Form 20-F Summary

Reporting period: Fiscal year ended December 31, 2017. The filing is an annual Form 20-F, not a quarterly filing. Financial statements are prepared under U.S. GAAP and audited by PricewaterhouseCoopers S.A.

Business context

Danaos owns and charters containerships primarily to major liner companies under time and bareboat charters. As of February 28, 2018, the company owned 55 containerships with aggregate capacity of 327,616 TEU. Danaos also held a 49% equity interest in Gemini, which owned four additional containerships totaling 23,998 TEU; Gemini was not consolidated.

Financial performance and key metrics

Metric	2017	2016	Change
Operating revenue	$451.7 million	$498.3 million	Down 9.4%
Income/(loss) from operations	$187.5 million	$(212.6) million	Improved by $400.1 million
Net income/(loss)	$83.9 million	$(366.2) million	Improved by $450.1 million
Basic and diluted EPS	$0.76	$(3.34)	Improved by $4.10
Adjusted EBITDA	$310.4 million	$350.6 million	Down 11.5%
Net cash from operating activities	$181.1 million	$262.0 million	Down 30.9%
Cash and cash equivalents	$66.9 million	$73.7 million	Down $6.8 million
Total assets	$3.0 billion	$3.1 billion	Down $140.7 million
Stockholders’ equity	$548.7 million	$487.7 million	Up $61.0 million

Calculated margins were approximately 41.5% operating margin, 18.6% net margin, and 68.7% adjusted EBITDA margin in 2017. Adjusted EBITDA is a non-GAAP measure and excludes specified items including impairment, bad debt, refinancing fees, securities losses and derivative effects.

Fleet utilization increased to 96.4% from 94.6% in 2016. Excluding off-charter days for former Hanjin vessels, utilization increased to 97.9% from 97.3%.
Voyage expenses declined to $12.6 million from $13.9 million, while vessel operating expenses declined to $107.0 million from $109.4 million.
Average daily operating cost per time-chartered vessel increased modestly to $5,661 from $5,637.
Interest expense increased to $86.6 million from $83.0 million, despite lower average debt, primarily because of higher LIBOR and borrowing costs.
The weighted-average borrowing rate increased to 3.1% from 2.6%. Danaos had no outstanding interest-rate swaps at year-end.
Net cash used in financing activities was $189.7 million, principally reflecting debt repayments. Cash decreased by $6.8 million during 2017.

Material changes versus 2016

Revenue fell $46.6 million, principally because eight Hanjin charters were cancelled and replacement charters generated substantially lower rates. Revenue from those vessels improved during the second half of 2017 as they were rechartered, but remained below the former contracted levels.
No vessel impairment loss was recorded in 2017, compared with a $415.1 million impairment loss on 25 vessels in 2016. The absence of this charge was the primary reason for the return to reported profitability.
Bad debt expense fell from $15.8 million in 2016 to zero in 2017. The 2016 charge related to unpaid Hanjin charter hire.
Equity income from Gemini was $1.0 million, compared with a $16.2 million equity loss in 2016, when Gemini recorded vessel impairment losses.
Other expenses declined to $15.8 million from $41.6 million, although 2017 included $14.3 million of professional fees related to lender refinancing discussions and a $2.4 million loss on the sale of HMM notes.
Adjusted EBITDA declined despite improved operating conditions because lower charter revenue outweighed lower operating expenses and improved equity-accounted results.
Other comprehensive loss was $22.9 million in 2017, including $26.6 million of unrealized losses on available-for-sale ZIM and HMM notes.

Debt, liquidity and going-concern matters

Gross debt was $2.341 billion at December 31, 2017, or $2.330 billion net of deferred finance costs. All indebtedness was secured and there was no remaining borrowing availability.
Approximately $2.259 billion of principal was scheduled for repayment by December 31, 2018, including a $2.055 billion final payment under the Bank Agreement.
Because of breaches of minimum security cover, consolidated net leverage and consolidated net worth covenants, substantially all debt was classified as current. Current liabilities of $2.380 billion substantially exceeded current assets of $126.0 million.
As of February 28, 2018, Danaos had not refinanced approximately $2.1 billion of debt due in 2018 and was negotiating a restructuring with lenders.
The filing states that the company lacked sufficient cash or other resources to fund the 2018 balloon payments and that these conditions raised substantial doubt about its ability to continue as a going concern.
Management stated that operating cash flow was sufficient for operational obligations and scheduled debt service through the 2018 maturity date, assuming lenders did not accelerate the debt and charterers performed.
The financial statements were prepared on a going-concern basis and contain no adjustments that might result if the company could not continue operations.

Guidance, outlook, risks and unusual items

Contracted charter revenue as of December 31, 2017 totaled approximately $1.738 billion, including $366.9 million for 2018, $593.4 million for 2019–2020, $489.6 million for 2021–2022, $284.7 million for 2023–2027 and $3.4 million for 2028. These amounts depend on charterer performance and estimated off-hire days.
Twenty vessels had charters scheduled to expire between March and November 2018. Management expected that many would need to be rechartered at prevailing low spot-market rates.
Management reported that containership charter rates improved in 2017 and expected demand to continue rising in 2018, but also expected fleet growth and continued pressure on charter rates, particularly for larger vessels.
Revenue concentration remained high: approximately 92% of 2017 revenue came from five customers, with HMM representing 31%, CMA CGM 34% and Yang Ming 14%.
Hanjin’s bankruptcy resulted in cancelled charters for eight vessels. Danaos filed an unsecured claim of $597.9 million for unpaid charter hire and related amounts; the claim was not recorded as an asset.
Vessel values remained below carrying value for 28 vessels by an aggregate estimated amount of approximately $590.5 million, although management concluded that the vessels would recover their carrying values over their remaining useful lives and recorded no 2017 impairment.
Key risks include prolonged weak charter rates, vessel oversupply, charterer defaults or renegotiations, lender acceleration or foreclosure, refinancing failure, LIBOR and foreign-currency exposure, environmental compliance costs, and concentration of revenue among a small number of liner companies.
Cash dividends had been suspended since 2009 and remained generally prohibited under financing arrangements unless specified leverage and collateral conditions were satisfied.

Important facts for investors to verify

Progress and final terms of the restructuring or refinancing of approximately $2.1 billion to $2.3 billion of 2018 debt.
Whether lenders waive covenant breaches or exercise acceleration, foreclosure or cross-default rights.
Rechartering rates, utilization and employment status for the 20 vessels whose charters were scheduled to expire in 2018.
Actual collections, if any, from the $597.9 million unsecured Hanjin claim, which was not recognized on the balance sheet.
Valuation and impairment sensitivity for the 28 vessels whose estimated market values were below carrying values at year-end.
Credit quality and recoverability of the $34.6 million fair value of ZIM and HMM notes, which carried $26.6 million of unrealized losses.
Customer concentration, particularly exposure to HMM, CMA CGM, Yang Ming and other financially pressured liner companies.
Compliance costs and capital requirements associated with the IMO sulfur cap, ballast-water rules and other environmental regulations.