Business Context and Reporting Period
Company: Danaos Corporation (Danaos)
Filing Type: Annual Report on Form 20-F
Reporting Period: Fiscal year ended December 31, 2010
Business Overview: Danaos is an international owner of containerships, chartering its fleet to major liner companies under multi-year, fixed-rate time charters. As of March 31, 2011, the company operated a fleet of 52 containerships with 13 additional newbuilding vessels under contract. The company is incorporated in the Republic of The Marshall Islands and listed on the New York Stock Exchange (NYSE: DAC).
Key Financial Metrics (Year Ended Dec 31, 2010)
| Metric | 2010 (in millions) | 2009 (in millions) |
|---|---|---|
| Operating Revenues | $359.7 | $319.5 |
| Net Loss from Continuing Operations | $(102.3) | $36.1 |
| Net Loss (Total) | $(102.3) | $36.1 |
| Net Cash Provided by Operating Activities | $78.8 | $93.2 |
| Net Cash Used in Investing Activities | $(587.7) | $(372.9) |
| Net Cash Provided by Financing Activities | $616.7 | $281.1 |
| Total Assets | $3,489.1 | $3,142.7 |
| Total Debt (Long-term + Current) | $2,565.5 | $2,331.7 |
| Stockholders' Equity | $392.4 | $405.6 |
Per Share Data: Basic and diluted net loss per share was $(1.36) for 2010, compared to net income of $0.66 per share in 2009.
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 12.6% to $359.7 million, driven primarily by the addition of nine new vessels to the fleet during 2010.
- Net Loss: The company reported a net loss of $102.3 million in 2010, a significant reversal from the $36.1 million net income in 2009. This was primarily due to:
- Impairment Loss: A one-time impairment loss of $71.5 million recorded for the cancellation of three newbuilding contracts (HN N-216, HN N-217, HN N-218).
- Derivative Losses: A loss on the fair value of derivatives increased to $137.2 million (from $63.6 million in 2009), driven by hedge ineffectiveness and realized losses on interest rate swaps due to declining LIBOR rates.
- Operating Expenses: Vessel operating expenses decreased 4.3% to $88.3 million, largely due to reduced costs for vessels placed on charterer-directed lay-up. However, General and Administrative expenses increased 60.7% to $23.3 million due to legal and advisory fees related to debt restructuring.
- Debt Restructuring: In January 2011, the company entered into a "Bank Agreement" to restructure existing credit facilities, waive prior covenant breaches, and secure approximately $425 million in new debt financing.
Guidance, Outlook, Risks, and Unusual Items
- Debt Restructuring and Covenants: The company was in breach of various covenants as of December 31, 2010. The January 2011 Bank Agreement waived these breaches and reset financial covenants (e.g., collateral coverage ratios, leverage ratios) to levels the company currently meets. The agreement restricts dividend payments until leverage ratios improve significantly.
- Dividend Policy: Cash dividends were suspended in 2009 and remain suspended. The Bank Agreement generally prohibits cash dividends or share repurchases through 2018 unless specific leverage and collateral coverage thresholds are met.
- Market Risks: The company faces significant risks from the downturn in the container shipping market, including depressed charter rates and vessel values. There is a risk that charterers (some of whom have acknowledged financial difficulties) may default on obligations or seek to renegotiate charters.
- Unusual Items:
- Impairment: $71.5 million loss on cancelled newbuildings.
- Derivatives: Significant non-cash and realized losses on interest rate swaps ($137.2 million total loss).
- Legal Proceedings: A derivative complaint was filed in November 2010 challenging amendments to the management agreement and the August 2010 stock sale. The company filed a motion to dismiss in February 2011.
- Outlook: The company expects to fund remaining newbuilding installments (approx. $1.0 billion) through existing credit facilities, new financing, and cash from operations. Management anticipates modest improvements in the market but notes that charter rates remain below historical averages.
Key Facts for Investor Verification
- Covenant Compliance: Verify the company's ongoing compliance with the reset financial covenants under the January 2011 Bank Agreement, specifically the collateral coverage ratio and leverage ratios.
- Charterer Solvency: Assess the financial health of the top six charterers, who generated 89% of 2010 revenues, as their ability to pay fixed charter rates is critical to Danaos's cash flow.
- Derivative Exposure: Monitor the impact of interest rate fluctuations on the company's swap portfolio, as hedge ineffectiveness has historically caused significant non-cash losses.
- Dividend Restrictions: Confirm that the company remains prohibited from paying dividends under the terms of its financing arrangements until leverage is reduced.
- Newbuilding Deliveries: Track the delivery schedule and financing status of the 13 contracted newbuilding vessels, as delays or cancellations could impact future revenue and liquidity.