Danaos Corporation 2013 Form 20-F Summary
Business context and reporting period
Danaos Corporation is a Marshall Islands-based owner and operator of containerships that charters vessels primarily to major liner companies under multi-year, fixed-rate time charters. The filing is an annual report for the fiscal year ended December 31, 2013, prepared under U.S. GAAP and audited by PricewaterhouseCoopers S.A.; it is not a standalone quarterly filing.
- Fleet at December 31, 2013: 59 vessels and 345,179 TEUs, compared with 64 vessels and 363,049 TEUs at December 31, 2012.
- Average fleet size declined to 61.0 vessels from 62.6 vessels; utilization increased to 93.4% from 93.0%.
- Approximately 95% of 2013 operating revenue came from six customers: HMM, CMA CGM, Hanjin, Yang Ming, ZIM and China Shipping.
Financial performance and key metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Operating revenue | $588.1 million | $589.0 million | Down 0.2% |
| Income from operations | $272.5 million | $153.0 million | Up 78.1% |
| Net income/(loss) | $37.5 million | $(105.2) million | Improved by $142.7 million |
| Basic and diluted EPS | $0.34 | $(0.96) | Returned to profitability |
| EBITDA | $292.6 million | $151.1 million | Up 93.7% |
| Adjusted EBITDA | $434.3 million | $431.7 million | Up 0.6% |
| Net cash from operating activities | $189.0 million | $166.6 million | Up 13.4% |
- Derived margins: operating margin was approximately 46.3%, net margin 6.4%, EBITDA margin 49.8% and adjusted EBITDA margin 73.8%.
- Vessel operating expenses were $122.1 million, down from $123.4 million, while average daily operating cost increased to $5,987 from $5,907.
- Interest expense increased to $91.2 million from $87.3 million. Other finance expenses increased to $20.1 million from $18.1 million.
- Derivative losses declined to $126.2 million from $155.2 million. The reported amount included substantial realized swap losses and non-cash fair-value effects.
- Total assets were $4.07 billion and stockholders’ equity was $598.5 million at year-end, compared with $4.21 billion and $440.3 million, respectively, in 2012.
Cash flow, debt and liquidity
- Investing activities provided $6.1 million, compared with $369.8 million used in 2012. Vessel additions were $46.8 million and vessel-sale proceeds were $52.9 million.
- Financing activities used $182.6 million, including $171.0 million of long-term debt repayments and related financing cash flows; no new long-term debt proceeds were received in 2013.
- Cash and cash equivalents increased to $68.2 million from $55.6 million. Restricted cash was $14.7 million.
- Outstanding indebtedness, including vendor financing, was approximately $3.2 billion at December 31, 2013. The filing states that $203.9 million was payable within twelve months and that no borrowing availability remained under existing facilities.
- Long-term debt was $3.11 billion, including $146.5 million current debt; Hyundai Samho vendor financing was $121.8 million, including $57.4 million current.
- The company was in compliance with its financial and collateral covenants at December 31, 2013. Debt agreements require substantial cash flow to be applied to debt repayment, restrict additional borrowing and generally prohibit dividends or share repurchases through 2018 unless leverage and collateral tests are satisfied.
Material changes versus the prior comparable period
- Profitability improved primarily because 2012 included a $129.6 million impairment charge on 13 older vessels, whereas 2013 included no vessel impairment charge.
- 2013 included a $19.0 million impairment charge related to long-term receivables from ZIM following an announced restructuring agreement in principle. The remaining ZIM receivable was $25.8 million.
- Revenue was broadly stable despite fewer vessels, reflecting incremental revenue from vessels delivered in 2012 and four secondhand vessels acquired in 2013, offset by vessel sales, lay-ups and weaker charter-market conditions.
- Danaos sold nine older vessels and acquired four secondhand vessels during 2013. The sales generated net proceeds of $52.9 million and an aggregate net loss of approximately $0.4 million.
- Operating cash flow increased despite flat revenue, aided by working-capital changes, lower interest-related cash costs and lower drydocking payments.
- Accumulated other comprehensive loss improved to $232.7 million from $353.3 million, largely due to reclassification of previously deferred derivative losses.
- The company continued its dividend suspension. No dividends were declared in 2013 or 2012.
Guidance, outlook, commentary and risks
- Management expected containership charter rates to remain under pressure in 2014 because of weak economic conditions, vessel oversupply and scheduled newbuilding deliveries, although demand growth was expected to narrowly exceed supply growth overall.
- Contracted future charter revenue was approximately $4.21 billion as of December 31, 2013, including $533.0 million for 2014 and approximately $3.1 billion thereafter. These amounts depend on charterer performance and include expected reductions in ZIM charter rates.
- Ten vessels had charters expiring between March and December 2014, and two vessels totaling 9,465 TEUs were laid up as of February 21, 2014. Re-chartering at profitable rates was uncertain.
- The benchmark one-year rate for a 4,400-TEU Panamax vessel fell to $7,500 per day in December 2013 from $36,000 in May 2008, illustrating the severity of the market downturn.
- Twenty-six vessels had estimated market values below carrying values by an aggregate approximately $187.5 million, although management concluded that undiscounted future cash flows supported their carrying values and recorded no vessel impairment in 2013.
- Interest-rate swaps had aggregate notional amounts of approximately $3.4 billion and generated $126.2 million of net derivative losses in 2013. The company discontinued hedge accounting for these swaps in 2012, increasing earnings volatility.
- Key risks include charter-rate weakness, vessel oversupply, customer concentration and counterparty credit risk, ZIM restructuring, covenant compliance, refinancing risk, high secured leverage, interest-rate and foreign-currency exposure, vessel values, environmental regulation, insurance adequacy and potential off-hire periods.
- A February 2014 agreement to sell the laid-up Marathonas for $11.5 million was completed on February 26, 2014. The company also issued 16,066 shares to manager employees after year-end.
- The filing states that the derivative shareholder lawsuit was dismissed with prejudice in July 2013 and that no material legal proceedings were pending or threatened.
Most important facts for investors to verify
- Reconcile the company’s reported net debt, current maturities and required variable amortization with operating cash flow and the 2018 debt maturity structure.
- Review all covenant calculations, including minimum unrestricted cash, collateral coverage, leverage, interest coverage and market-value-adjusted net worth.
- Assess the final terms and implementation of the ZIM restructuring, including charter-rate reductions, receivable recoveries, notes and equity received.
- Track the renewal or lay-up status and replacement rates for the ten charters expiring in 2014 and the two vessels already laid up.
- Evaluate sensitivity of vessel impairment testing to charter-rate assumptions; management’s analysis indicates that a lower-rate scenario could produce a potential $187.5 million impairment.
- Separate recurring operating performance from the substantial derivative gains and losses, impairment charges and other non-cash items included in reported earnings.
- Verify customer concentration, charterer credit quality and the collectability of contracted revenue, particularly from financially stressed liner companies.
- Confirm the continuing prohibition on dividends and share repurchases, as well as dilution risk from 15 million cashless warrants expiring January 31, 2019.