Danaos Corp annual report, Q4 FY2014

Danaos Corporation: 2014 Form 20-F Summary

Business context and reporting period

Danaos Corporation is a Marshall Islands-based owner and charterer of containerships. The filing is an annual report for the fiscal year ended December 31, 2014, filed March 10, 2015. It reports consolidated U.S. GAAP results for 2014, with comparisons to 2013 and 2012. The filing does not provide a separate fourth-quarter 2014 income statement.

Fleet at year-end: 56 containerships, approximately 334,239 TEUs; average fleet utilization was 97.5%.
During 2014, Danaos sold five older vessels and acquired two 6,402-TEU vessels, MOL Performance and MOL Priority.
Approximately 97% of 2014 revenue came from six major liner customers, creating significant customer concentration.

Financial performance and key metrics

Metric	2014	2013	Change
Operating revenues	$552.1 million	$588.1 million	Down 6.1%
Income from operations	$192.4 million	$272.5 million	Down 29.4%
Net income/(loss)	$(3.9) million	$37.5 million	Declined $41.4 million
Basic and diluted EPS	$(0.04)	$0.34	Declined $0.38
Net cash from operating activities	$192.2 million	$189.0 million	Up 1.7%
EBITDA	$238.6 million	$292.6 million	Down $54.0 million
Adjusted EBITDA	$404.0 million	$434.3 million	Down $30.3 million

Operating margin was approximately 34.9%, compared with 46.3% in 2013. Net margin was approximately negative 0.7%, compared with 6.4% in 2013.
Adjusted EBITDA margin was approximately 73.2%, compared with 73.8% in 2013. Adjusted EBITDA is a non-GAAP measure and excludes, among other items, impairment charges and derivative gains or losses.
Operating revenue declined primarily because of a $20.2 million reduction in ZIM charter revenue, $12.6 million from vessel sales, and $12.3 million from re-chartering certain vessels at lower rates.
Vessel operating expenses decreased 6.8% to $113.8 million, and average daily operating cost declined to $5,838 from $5,987.
Interest expense decreased to $80.0 million from $91.2 million as average debt and debt-servicing costs declined.
Net derivative losses were $98.7 million, compared with $126.2 million in 2013. The result included substantial realized swap losses partially offset by unrealized gains.

Liquidity, debt and capital structure

Cash and cash equivalents were $57.7 million at December 31, 2014, compared with $68.2 million at December 31, 2013. Restricted cash was $2.8 million.
Total indebtedness, including vendor financing, was approximately $3.0 billion; $224.6 million was payable within twelve months. The company had no remaining borrowing availability under its existing facilities.
Long-term debt, net of current portion, was $2.773 billion; vendor financing, net of current portion, was $17.8 million.
Total stockholders’ equity increased to $688.1 million from $598.5 million, primarily reflecting favorable accumulated other comprehensive income from interest-rate swaps.
Operating cash flow was largely absorbed by debt service. Financing activities used $214.0 million, including $221.5 million of long-term debt repayments and $57.4 million of vendor-financing repayments.
Under the Bank Agreement, substantial portions of free cash flow must be applied to debt repayment. The company expected to refinance credit facilities maturing in 2018.
Debt is secured by vessel mortgages and related collateral. The company was in compliance with its financial and collateral covenants as of December 31, 2014.
Cash dividends and share repurchases were generally prohibited unless specified leverage and collateral-coverage conditions were satisfied. No dividends were declared in 2014 or 2013.

Material changes versus the prior comparable period

Revenue fell 6.1%, while operating income fell 29.4%, reflecting lower charter revenue and a $75.8 million vessel impairment charge.
Danaos recorded a $75.8 million impairment loss on eight older vessels; no vessel impairment was recorded in 2013, although 2013 included a $19.0 million impairment of ZIM-related receivables.
The company recorded a $5.7 million gain on the sale of five vessels, compared with a $0.4 million loss on vessel sales in 2013.
Average fleet size declined to 55.9 vessels from 61.0, while utilization improved to 97.5% from 93.4%.
Operating cash flow increased modestly despite lower revenue, supported by lower financing costs, improved operating costs and working-capital movements.
Debt declined from approximately $3.224 billion at December 31, 2013 to approximately $3.015 billion at December 31, 2014, including vendor financing.
In connection with ZIM’s restructuring, Danaos accepted lower charter rates on six vessels and received approximately $49.9 million of ZIM notes and equity representing approximately 7.4% of ZIM after restructuring. Danaos also recorded $39.1 million of unearned revenue to be recognized over the remaining charter periods.

Guidance, outlook, risks and unusual items

Contracted future charter revenue totaled approximately $3.689 billion as of December 31, 2014, including $536.0 million for 2015 and approximately $2.6 billion thereafter. These amounts depend on charterer performance and exclude the potential effect of additional off-hire.
Eight vessels had charters expiring between March 2015 and January 2016. Management expected that some vessels would need to be re-chartered at depressed spot-market rates.
Management described the containership market as weak but noted potential supply-demand improvement, lower global idle capacity and improved Panamax charter rates during the first quarter of 2015. It also expected continued pressure from vessel deliveries and economic weakness, particularly in Europe.
At year-end, approximately 18% of global containership capacity was under construction. Oversupply, cascading of larger vessels into smaller trades and weak freight rates could depress charter rates and vessel values.
Interest-rate swaps had a total notional amount of approximately $2.3 billion. Swaps with a notional amount of approximately $1.6 billion were scheduled to terminate in 2015. A 10-basis-point increase in interest rates was estimated to reduce 2015 earnings by approximately $2.0 million, after considering swaps.
Reported earnings remain volatile because hedge accounting for interest-rate swaps was discontinued in 2012 and fair-value changes are recognized in earnings.
Key risks include charterer defaults or renegotiations, concentration in financially pressured liner companies, covenant breaches, vessel-value declines, refinancing risk, environmental and regulatory costs, foreign-currency exposure and limited insurance for extended off-hire.
The company identified 21 vessels whose estimated market values were below carrying values, with aggregate carrying values exceeding estimated market values by approximately $182.0 million. Management concluded that projected undiscounted cash flows supported the carrying values and therefore did not record additional impairment for those vessels.
The filing reports no material legal proceedings or other material commitments known to the company, aside from routine litigation incidental to its business.
Management and the independent auditor concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2014.

Most important facts for investors to verify

Whether charterers, especially ZIM and the other major liner customers, continue to make payments and honor contracted rates.
The timing and terms of refinancing or repayment of the large debt maturity concentrated in 2018, including the estimated final payment of approximately $1.864 billion.
Compliance with minimum cash, leverage, collateral-coverage and market-value-adjusted net-worth covenants as vessel values and charter rates change.
Re-chartering rates and utilization for the eight vessels whose charters expired or were scheduled to expire between March 2015 and January 2016.
Potential additional impairment charges if vessel values, charter rates or projected cash flows deteriorate.
The cash realizability and future valuation of ZIM notes and the ZIM equity investment received in the restructuring.
The economic impact of terminating or settling interest-rate swaps and the remaining exposure to floating interest rates.
The restrictions preventing dividends and share repurchases, as well as the potential dilution from 15 million cashless warrants expiring January 31, 2019.