Danaos Corporation 2015 Form 20-F Summary
Business context and reporting period
Danaos is a Marshall Islands corporation that owns and charters containerships under primarily multi-year, fixed-rate time charters to major liner companies. This Form 20-F reports the fiscal year ended December 31, 2015, rather than a standalone fourth quarter. Financial statements are prepared under U.S. GAAP and audited by PricewaterhouseCoopers S.A.
At December 31, 2015, the consolidated fleet comprised 56 vessels with 334,239 TEU of capacity. As of February 29, 2016, the operating fleet comprised 55 vessels with 329,588 TEU. Danaos also held a 49% equity interest in Gemini, which owned four additional vessels as of that date and was not consolidated.
Key financial metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Operating revenue | $567.9 million | $552.1 million | +2.9% |
| Income from operations | $244.4 million | $192.4 million | +27.0% |
| Net income/(loss) | $117.0 million | $(3.9) million | Improved by $120.9 million |
| Basic and diluted EPS | $1.07 | $(0.04) | Improved by $1.11 |
| Net cash from operating activities | $271.7 million | $192.2 million | +41.4% |
| EBITDA | $341.3 million | $238.6 million | +43.0% |
| Adjusted EBITDA | $418.3 million | $404.0 million | +3.5% |
| Fleet utilization | 99.0% | 97.5% | +1.5 percentage points |
Calculated margins were approximately 43.0% for operating income, 20.6% for net income, 60.1% for EBITDA and 73.7% for adjusted EBITDA. Adjusted EBITDA is a non-GAAP measure and excludes, among other items, impairment, vessel-sale gains or losses, and realized and unrealized derivative gains or losses.
- Voyage expenses declined to $12.3 million from $13.0 million.
- Vessel operating expenses declined 1.0% to $112.7 million; average daily operating cost decreased 2.0% to $5,720.
- Interest expense declined 12.0% to $70.4 million, reflecting lower average debt and lower debt-servicing costs.
- Net derivative losses declined to $39.9 million from $98.7 million, primarily because realized swap losses fell to $56.2 million from $123.6 million.
- Cash and cash equivalents were $72.3 million, with restricted cash of $2.8 million. Total current assets were $127.6 million versus current liabilities of $312.1 million.
- Total debt was $2.775 billion, including $270.0 million due within twelve months. Stockholders’ equity increased to $841.9 million from $688.1 million.
- Contracted future charter revenue totaled approximately $3.16 billion as of December 31, 2015, including $524.7 million for 2016 and $491.0 million for 2017.
Material changes versus the prior comparable period
- Revenue increased despite no vessel acquisitions or sales during 2015, driven by the full-year contribution from the two vessels acquired in November 2014, revenue recognition related to the ZIM restructuring, improved re-chartering, and higher utilization.
- Operating income improved materially because of higher revenue, lower operating costs, lower depreciation and a smaller impairment charge.
- Net income turned positive from a 2014 loss. The improvement was significantly affected by lower derivative losses and a reduction in impairment expense.
- Impairment expense declined to $41.1 million from $75.8 million, consisting of $39.0 million for twelve older vessels held and used and $2.1 million for the vessel Federal held for sale.
- Operating cash flow increased by $79.5 million, while financing cash outflows increased to $243.9 million because of higher debt repayments.
- Total debt declined from $3.015 billion at December 31, 2014 to $2.775 billion at December 31, 2015. Vendor financing of $64.4 million was fully repaid during 2015.
- Investing cash flow changed from $11.4 million provided in 2014 to $13.3 million used in 2015, reflecting a $13.2 million investment in affiliates, including Gemini, and substantially lower vessel-sale proceeds.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide formal earnings guidance. Management expects contracted charter revenue, operating cash flow and permitted equity or debt financings to support liquidity needs through the 2018 maturity of the Bank Agreement, subject to charterer performance and covenant compliance. Management expects to refinance debt at maturity.
- The containership market deteriorated sharply from mid-2015. A benchmark one-year rate for a 4,400 TEU Panamax vessel declined from $15,000 per day in the first half of 2015 to $6,000 per day in December 2015.
- Approximately 7% of global containership capacity was idle at year-end 2015, while vessels under construction represented approximately 19% of the existing global fleet. Oversupply may pressure charter rates and vessel values.
- Nine Danaos vessels had charters expiring between March and October 2016; two Gemini vessels were unemployed as of February 29, 2016. Re-chartering may occur at substantially lower rates.
- Hyundai Merchant Marine, which generated approximately 28% of 2015 revenue and chartered 13 Danaos vessels, was seeking concessions from charter-owners. Six major customers generated approximately 99% of 2015 revenue.
- The company was in compliance with its debt covenants at December 31, 2015, but the financing arrangements require substantial cash flow to be used for debt repayment and contain increasingly stringent covenant levels through 2018.
- Debt maturities include estimated principal payments of $269.5 million in 2016, $313.5 million in 2017 and $2.115 billion in 2018, including an estimated $1.833 billion final payment under the Bank Agreement.
- Cash dividends and share repurchases remain generally prohibited unless leverage and vessel-value tests are satisfied for four consecutive quarters. No dividends were declared in 2015.
- Interest-rate swaps had total notional amounts of $775 million at year-end 2015 and were scheduled to terminate in 2016. A 10-basis-point increase in floating interest rates was estimated to reduce 2016 earnings by approximately $2.1 million.
- On January 8, 2016, Danaos completed the sale of Federal for gross proceeds of $7.2 million. Gemini acquired NYK Leo on February 4, 2016, and Danaos subscribed $1.47 million for additional Gemini equity on March 3, 2016.
- Management identified 24 vessels with estimated market values below carrying values, with aggregate carrying values exceeding estimated market values by approximately $252.6 million. No additional impairment was recorded because management concluded that projected undiscounted cash flows supported recoverability.
- Related-party management fees were approximately $17.4 million in 2015, and commissions paid to the manager were approximately $6.9 million. Danaos’s controlling shareholder also controls the manager.
Most important facts for investors to verify
- Re-chartering rates, utilization and employment status for the nine vessels whose charters expired or were scheduled to expire during 2016.
- Hyundai Merchant Marine’s ability to honor existing charter obligations and any concessions or restructurings affecting Danaos revenue.
- Compliance with collateral coverage, liquidity, leverage and interest-coverage covenants as charter rates and vessel values change.
- The company’s ability to refinance or repay the large debt balance due in 2018, including the estimated $1.833 billion final payment.
- The recoverability of vessel carrying values and the potential for additional impairment charges if charter rates or vessel values deteriorate.
- The reliability and collectability of approximately $3.16 billion of contracted charter revenue, given the concentration of revenue among six financially pressured liner companies.
- The value and payment terms of the ZIM notes and equity investment, as well as the effect of prior ZIM charter-rate reductions.
- The financial performance, employment status and funding requirements of Gemini, which generated a $1.9 million equity-method loss in 2015.
- The effect of swap expirations, floating-rate exposure, foreign-currency expenses and future environmental compliance costs on cash flow and earnings.