Danaos Corporation — FY2011 Form 20-F Summary
Business context and reporting period
Danaos is a Marshall Islands corporation that owns and charters containerships to major liner companies. The filing is an audited annual report for the year ended December 31, 2011, prepared under U.S. GAAP; it is not a standalone fourth-quarter filing, and the source text does not provide a separate Q4 income statement.
At December 31, 2011, the company operated 59 containerships with aggregate capacity of 291,149 TEUs. The average fleet size was 54.9 vessels, and fleet utilization was 97.6%.
Key financial metrics
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Operating revenue | $468.1 million | $359.7 million | +30.1% |
| Income from operations | $205.2 million | $86.2 million | +138.1% |
| Net income/(loss) | $13.4 million | $(102.3) million | Returned to profit |
| Basic and diluted EPS | $0.12 | $(1.36) | Improved |
| Operating margin | Approximately 43.8% | Approximately 24.0% | Improved |
| Net margin | Approximately 2.9% | Approximately (28.5)% | Improved |
| EBITDA | $192.1 million | $24.1 million | + $168.0 million |
| Adjusted EBITDA | $318.6 million | $243.8 million | +30.7% |
| Cash flow from operating activities | $59.5 million | $78.8 million | $(19.3) million |
| Cash used in investing activities | $(644.6) million | $(587.7) million | More investment spending |
| Cash provided by financing activities | $406.6 million | $616.7 million | $(210.1) million |
| Cash and cash equivalents | $51.4 million | $229.8 million | $(178.5) million |
Operating expenses included $119.1 million of vessel operating expenses, $106.2 million of depreciation, $10.8 million of voyage expenses and $21.0 million of general and administrative expenses. Interest expense was $55.1 million, while realized and unrealized derivative losses were $121.4 million.
At year-end, total assets were $4.0 billion and stockholders’ equity was $442.5 million. Long-term debt was $3.002 billion and vendor financing was $65.1 million, for total reported debt and vendor financing of approximately $3.067 billion. Current assets were $93.3 million versus current liabilities of $231.7 million, implying an approximate current ratio of 0.40x.
Material changes versus the prior comparable period
- Revenue increased primarily because the company added nine vessels during 2011, contributing approximately $74.0 million of revenue.
- Operating income improved substantially because 2010 included a $71.5 million impairment charge related to three cancelled newbuildings; no impairment loss was recorded in 2011.
- Net income improved despite a $30.8 million increase in vessel operating expenses, a $29.2 million increase in depreciation and a $13.9 million increase in interest expense.
- Operating cash flow declined 24.5% because of higher interest costs, including realized swap losses, and higher drydocking payments.
- Investing cash outflows increased to $644.6 million, reflecting substantial newbuilding installment payments and vessel additions.
- The company completed a comprehensive financing plan in 2011. The Bank Agreement became effective March 4, 2011, waived prior covenant breaches as of December 31, 2010, revised amortization and covenant terms, and provided approximately $425 million of new debt financing commitments.
- The company issued 15 million cashless-exercise warrants to lenders at a $7.00 exercise price, expiring January 31, 2019. The warrants do not provide cash proceeds upon exercise and may dilute existing shareholders.
- Cash dividends remained suspended. Financing agreements generally prohibit dividends and share repurchases unless leverage and vessel-value thresholds are satisfied for four consecutive quarters.
Guidance, outlook, management commentary, risks and unusual items
Management expected three additional 13,100-TEU newbuildings to be delivered during the second quarter of 2012. At March 30, 2012, the fleet had expanded to 62 vessels, including three vessels laid up, with three additional newbuildings under construction. The company expected to have 65 vessels and 365,179 TEUs after delivery of the remaining vessels.
Contracted future charter revenue was approximately $5.49 billion as of December 31, 2011, including $578.6 million for 2012 and $569.8 million for 2013. These amounts depend on charterer performance and exclude the risk that vessels may be off-hire or that charterers may default, renegotiate or terminate contracts.
Management stated that containership charter rates deteriorated sharply beginning in the third quarter of 2011 and expected rates to remain under pressure in 2012 because of weak global demand, European economic uncertainty and vessel oversupply. The average daily charter rate for an approximately 4,400-TEU vessel fell from $28,500 in March 2011 to $8,250 in February 2012.
- Three vessels aggregating 11,767 TEUs were laid up as of March 30, 2012. Charters for 10 additional vessels were scheduled to expire between April and December 2012, creating significant re-chartering risk.
- Approximately 85% of 2011 revenue came from six customers, increasing counterparty concentration. Major charterers included Hanjin, Hyundai, CMA CGM, China Shipping, Yang Ming and ZIM.
- The company had outstanding indebtedness of approximately $3.2 billion as of March 30, 2012, including vendor financing, and approximately $224.5 million of undrawn credit capacity. Remaining payments for the three contracted newbuildings were approximately $255.3 million.
- Bank facilities require substantial cash sweep payments: generally 92.5% of actual free cash flow through the earlier of leverage reduction below 6:1 or May 15, 2015, and 89.5% thereafter through maturity.
- Debt facilities contain collateral, liquidity, leverage, interest coverage and market-value-adjusted net-worth covenants. The company reported compliance as of December 31, 2011 and expected compliance for the following 12 months based on prevailing rates and vessel values.
- Fifteen vessels had estimated market values below carrying values by approximately $83.6 million in aggregate. Management concluded that undiscounted projected cash flows supported the carrying values and recorded no impairment.
- Interest-rate swaps had aggregate notional amounts of approximately $3.6 billion and a net fair-value liability of approximately $408.5 million. Derivative losses materially affected earnings and cash flow, and the company remained over-hedged during 2011.
- The company is exposed to foreign-currency risk because approximately 39% of vessel operating expenses were incurred in currencies other than the U.S. dollar; this exposure was not hedged.
- A shareholder derivative lawsuit challenging management agreement amendments and aspects of the 2010 equity issuance remained pending. Management stated that it did not expect the case to have a significant financial effect.
- Environmental regulation, vessel operating incidents, piracy, sanctions compliance, insurance availability, charterer credit risk and potential covenant breaches remain material risks.
Most important facts for an investor to verify
- Verify the company’s current charter coverage, re-chartering results and utilization for vessels whose contracts expired or were scheduled to expire after 2011.
- Verify compliance with all debt covenants, required cash sweeps, collateral coverage ratios and minimum liquidity requirements.
- Reconcile total debt, vendor financing, scheduled amortization and the company’s ability to refinance or repay debt at the 2018 maturities.
- Assess the financial condition and payment performance of major charterers, particularly those representing the largest portions of revenue.
- Review the fair value and cash-flow effects of the interest-rate swaps, including the end of the over-hedged position and any future derivative losses.
- Evaluate vessel market values, impairment sensitivity and the potential effect of continued weak charter rates on covenant compliance.
- Confirm delivery, financing and charter commencement for the three remaining newbuildings and the associated capital commitments.
- Confirm that dividend restrictions remain in effect and that no dividend reinstatement should be assumed without satisfaction of the lender conditions.