Danaos Corporation 2019 Form 20-F Summary
Business Context and Reporting Period
Danaos Corporation is a Marshall Islands-based owner and lessor of containerships. The filing is an annual report for the fiscal year ended December 31, 2019, prepared under U.S. GAAP and audited by PricewaterhouseCoopers S.A. The company operated an average of 55 vessels during 2019, with 327,616 TEU of capacity at year-end. As of February 27, 2020, Danaos owned 56 vessels totaling 336,242 TEU and held a 49% equity interest in Gemini, which owned five additional vessels.
Key Financial Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Operating revenue | $447.2 million | $458.7 million | Down 2.5% |
| Income from operations | $201.1 million | $(12.1) million | Improved by $213.2 million |
| Net income/(loss) | $131.3 million | $(32.9) million | Improved by $164.2 million |
| Diluted EPS | $8.09 | $(3.10) | Improved |
| Adjusted EBITDA | $310.6 million | $317.8 million | Down 2.3% |
| Net cash from operations | $219.9 million | $164.7 million | Up 33.5% |
| Cash and cash equivalents | $139.2 million | $77.3 million | Up $61.9 million |
| Total assets | $2.683 billion | $2.680 billion | Approximately flat |
| Stockholders’ equity | $881.7 million | $690.9 million | Up $190.8 million |
- Operating margin was approximately 45.0% in 2019, compared with a negative operating margin in 2018. Net margin was approximately 29.4% in 2019.
- Adjusted EBITDA margin was approximately 69.5% in 2019, compared with approximately 69.3% in 2018.
- Vessel operating expenses declined 2.0% to $102.5 million, and average daily operating cost for time-chartered vessels declined to $5,506 from $5,619.
- Fleet utilization increased to 98.3% from 96.8%; non-scheduled off-hire days declined to 153 from 360.
- Operating cash flow exceeded capital spending and investing cash uses, but financing activities consumed $136.6 million, primarily through debt repayments and financing-related payments.
- Gross bank debt was $1.424 billion at year-end, excluding deferred finance costs and including the current portion. Leaseback obligations were $138.2 million, bringing debt and leaseback obligations to approximately $1.562 billion before other accrued debt-related items.
- Weighted average borrowing cost, including leaseback obligations, increased to 6.1% from 4.3%. All debt was secured, and there was no remaining borrowing availability under existing credit facilities.
Material Changes Versus the Prior Comparable Period
- Revenue declined because vessels rolling off long-term charters were redeployed at lower spot-market rates, partially offset by improved utilization.
- Net income benefited from the absence of the $210.7 million vessel impairment charge recorded in 2018, lower interest expense, and the absence of $51.3 million of refinancing-related professional fees recorded in 2018.
- 2018 results included a $116.4 million gain on debt extinguishment related to the comprehensive 2018 refinancing; no comparable gain was recorded in 2019.
- Interest expense declined 15.9% to $72.1 million, reflecting lower average debt and the accounting treatment of the 2018 refinancing, partly offset by higher debt-service costs and amortization of financing costs.
- The company completed a December 2019 public offering of 9.4 million shares, generating $54.4 million of net proceeds. Shares outstanding increased to 24.8 million from 15.2 million at year-end 2018.
- In April 2019, Danaos completed a sale-and-leaseback refinancing of Hyundai Honour and Hyundai Respect. Net proceeds of $144.8 million were used to repay secured debt.
- No vessel impairment was recorded in 2019. However, management identified 34 vessels whose estimated market values were below carrying value by an aggregate approximately $574 million; management concluded that projected undiscounted cash flows supported the carrying values.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- Management expected containership supply growth to slightly exceed demand in 2020, with charter rates remaining under pressure. Global fleet capacity was estimated to grow 3.1% in 2020 after approximately 4% growth in 2019.
- Twenty-eight of Danaos’s vessels had charters scheduled to expire in 2020 as of February 27, 2020. Re-chartering these vessels at prevailing low rates could reduce revenue, earnings and covenant headroom.
- Contracted charter revenue as of December 31, 2019 totaled approximately $1.300 billion, including $383.4 million for 2020, but depends on charterer performance. Five customers generated approximately 87% of 2019 revenue; CMA CGM, HMM and Yang Ming accounted for 36%, 24% and 13%, respectively.
- Key liquidity requirements include $119.7 million of scheduled fixed debt principal repayments in 2020, variable cash-flow-based amortization, $32.6 million of scheduled 2020 leaseback installments, and approximately $19.0 million of remaining scrubber installation costs.
- The company agreed to install scrubbers on nine vessels at an estimated total cost of $37.2 million. It had paid $18.2 million by year-end 2019.
- Debt agreements require minimum liquidity of $30 million, minimum interest coverage of 2.50x, collateral coverage tests, leverage limits and market-value-adjusted net worth requirements. Noncompliance could permit acceleration of debt and foreclosure on vessels.
- Charterer concentration and counterparty risk remain significant. The filing highlights prior Hanjin charter cancellations, HMM charter-rate reductions and ZIM restructuring-related rate reductions. Danaos has an unsecured claim of approximately $597.9 million against bankrupt Hanjin Shipping, which is not recognized as an asset; a separate $6.1 million common-benefit claim plus interest and legal costs was confirmed by the Korean Supreme Court.
- Other risks include weak container trade, vessel oversupply, vessel-value volatility, floating-rate debt exposure, LIBOR transition risk, foreign-currency expenses, environmental compliance costs, sanctions, piracy, insurance limitations and potential impacts from the coronavirus outbreak noted in the filing.
- Danaos had no outstanding interest-rate swaps at year-end 2019. Management estimated that a 10-basis-point increase in floating interest rates would reduce 2020 earnings by approximately $1.4 million.
- The company had not paid dividends since 2008. Following the 2019 equity offering, dividends became permitted under the credit agreements subject to covenant compliance, available cash, distributable reserves and board approval; no dividend policy or declaration was adopted.
- Subsequent events included delivery of an 8,626 TEU vessel in January 2020 and agreements to acquire two additional containerships, including one for $23.6 million expected to be delivered by May 2020.
Most Important Facts for Investors to Verify
- Whether charter renewals for the 28 vessels expiring in 2020 have been completed and at what rates.
- Actual compliance with minimum liquidity, collateral, leverage, interest coverage and market-value-adjusted net worth covenants.
- Cash available after scheduled debt amortization, leaseback payments, scrubber expenditures, drydockings and vessel acquisitions.
- Current market values and impairment sensitivity for the 34 vessels identified as having estimated market values below carrying value.
- Financial condition and payment performance of major charterers, particularly HMM, CMA CGM, Yang Ming, ZIM and other concentrated counterparties.
- Progress and financing terms for the contracted and recently acquired vessels.
- Resolution and recoverability of the $597.9 million Hanjin unsecured claim.
- Potential effects of floating interest rates, LIBOR replacement, environmental rules and low-sulfur-fuel compliance costs.
- Whether and when the board initiates dividend payments, given substantial debt obligations and limited borrowing availability.