Danaos Corporation Reports First Quarter Results

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Danaos, one of the world’s largest independent owners of containerships, reported unaudited results for the quarter ended March 31, 2020.

Highlights for the First Quarter Ended March 31, 2020:

  • Adjusted net income1 of $33.3 million, or $1.34 per share, for the three months ended March 31, 2020 compared to $38.6 million, or $2.53 per share, for the three months ended March 31, 2019, a decrease of 13.7%.
  • Operating revenues of $106.2 million for the three months ended March 31, 2020 compared to $112.9 million for the three months ended March 31, 2019, a decrease of 5.9%.
  • Adjusted EBITDA1 of $71.9 million for the three months ended March 31, 2020 compared to $77.5 million for the three months ended March 31, 2019, a decrease of 7.2%.
  • Total contracted operating revenues were $1.3 billion as of March 31, 2020, with charters extending through 2028 and remaining average contracted charter duration of 3.8 years, weighted by aggregate contracted charter hire.
  • Charter coverage of 85% for the next 12 months based on current operating revenues and 66% in terms of contracted operating days.

Three Months Ended March 31, 2020

Financial Summary – Unaudited

(Expressed in thousands of United States dollars, except per share amounts)

Three months
ended

Three months
ended

March 31,

March 31,

2020

2019

Operating revenues

$106,196

$112,891

Net income

$29,089

$33,443

Adjusted net income1

$33,281

$38,569

Earnings per share, diluted

$1.17

$2.19

Adjusted earnings per share, diluted1

$1.34

$2.53

Diluted weighted average number of shares (in thousands)

24,789

15,237

Adjusted EBITDA1

$71,918

$77,538

Adjusted net income, adjusted earnings per share and adjusted EBITDA are non-GAAP measures. Refer to the
   reconciliation of net income to adjusted net income and net income to adjusted EBITDA.

Danaos’ CEO Dr. John Coustas commented:

“Our results for the first quarter of 2020 were not impacted by the Covid-19 pandemic, except for the increase in off-hire days related to delays in scrubber installations in Chinese shipyards. The Company’s adjusted net income of $33.3 million for the first quarter of 2020 decreased by $5.3 million when compared to the first quarter of 2019. Adjusted EBITDA for the first quarter of 2020 was $71.9 million, $5.6 million lower when compared to the first quarter of 2019.

“The Covid-19 pandemic has swiftly and dramatically disrupted the container market and caused a significant drop in container volumes. There is no doubt that the pandemic will have a very negative effect on GDP, unemployment and countless other macroeconomic indicators in the near term. Although countries are gradually starting to lift restrictions and allow economic activity to resume, the speed of any potential recovery and the long-term impact of the pandemic on consumer demand and global manufacturing supply chains is unclear. There is certainly optimism about the positive impacts of sweeping fiscal and monetary initiatives being undertaken globally, but it is too early to assess any such impacts.

“Liner companies have addressed the drop in volumes brought on by the pandemic by cancelling sailings and idling capacity. As a result, short-term charter rates have dropped by between 25% and 40%, depending on vessel size. Despite lower transportation demand, prudent capacity management, reduced bunker prices and falling interest rates have significantly alleviated pressure on the cash flows of our liner company customers. Additionally, we have recently seen several initiatives by governments in Europe and Asia to support the liner industry during this difficult period, which is a very encouraging sign.

“What is most important is that we look forward and continue to execute our strategy and maintain a solid base to withstand the current market turbulence. To that end, we are successfully managing charter renewals, albeit at lower charter rates but still at rates well above operational breakeven levels. Notwithstanding the pressure in the charter market, we are well insulated from near-term volatility due to our high charter coverage of 86% in terms of operating revenues and 66% in terms of operating days over the next 12 months. This provides significant visibility into our cash flows during this period. Also, we will not have any additional financial impact on our operating revenues related to scrubber installations. Finally, we have ample liquidity and a $1.3 billion charter backlog, which provides us with flexibility to both manage our business and react to growth opportunities that may present themselves. During the first quarter, we took delivery of Niledutch Lion, an 8,626 TEU containership built in 2008, and in early April, we took delivery of Phoebe, an 8,463 TEU containership built in 2005. Consistent with our long-standing strategy, both vessels have been contracted on two-year time charters that will contribute an incremental $12 million of EBITDA on an annualized basis.

“The strength of our company and our strong relationships in the finance community is demonstrated by the financing arrangements executed in the midst of the pandemic. On May 12, 2020 we concluded a $139.1 million re-financing of the existing sale & leaseback transaction for two of our 13,100 TEU vessels at a significantly lower cost compared to the previous financing arrangement. This will result in approximately $7.5 million of interest cost savings on an annualized basis. Additionally, lower US$ Libor interest rates, which are currently lower by 2% when compared to 2019, will further contribute to reducing cash finance costs. For illustrative purposes, we will save approximately $28 million on an annualized basis based on $1.4 billion of bank debt outstanding at the end of the first quarter and current Libor rates. We have further arranged debt financing for the new vessels through a $24 million credit facility that we entered into at the beginning of April 2020.

“We remain committed to operational excellence and technological innovation, which allows us to continually deliver a high quality service to our customers. Our commitment has enabled us to maintain our leadership position in the container shipping industry throughout multiple market cycles. These are the attributes that will enhance shareholder value far and above the steel value of our fleet.”

Three months ended March 31, 2020 compared to the three months ended March 31, 2019

During the three months ended March 31, 2020, Danaos had an average of 55.7 containerships compared to 55 containerships during the three months ended March 31, 2019. Our fleet utilization for the three months ended March 31, 2020 was 91.3% compared to 98.2% for the three months ended March 31, 2019. Adjusted fleet utilization, excluding the effect of 188 days of incremental off-hire due to shipyard delays related to the COVID-19 pandemic, was 95% in the three months ended March 31, 2020.

Our adjusted net income amounted to $33.3 million, or $1.34 per share, for the three months ended March 31, 2020 compared to $38.6 million, or $2.53 per share, for the three months ended March 31, 2019. We have adjusted our net income in the three months ended March 31, 2020 for a non-cash fees amortization and accrued finance fees charge of $4.2 million. Please refer to the Adjusted Net Income reconciliation table, which appears later in this earnings release.

The decrease of $5.3 million in adjusted net income for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 is attributable mainly to a $6.7 million decrease in operating revenues, of which $3.2 million relates to incremental off-hire due to shipyard delays related to the COVID-19 pandemic, and a $0.6  million increase in operating expenses, which were partially offset by a $1.6 million increase in the operating performance of our equity investment in Gemini Shipholdings Corporation (“Gemini”) and a $0.4 million decrease in net finance expenses.

On a non-adjusted basis, our net income amounted to $29.1 million, or $1.17 earnings per diluted share, for the three months ended March 31, 2020 compared to net income of $33.4 million, or $2.19 earnings per diluted share, for the three months ended March 31, 2019.

Operating Revenues
Operating revenues decreased by 5.9%, or $6.7 million, to $106.2 million in the three months ended March 31, 2020 from $112.9 million in the three months ended March 31, 2019.

Operating revenues for the three months ended March 31, 2020 reflect:

  • a $6.1 million decrease in revenues due to lower fleet utilization of our vessels in the three months ended March 31, 2020 compared to the three months ended March 31, 2019 mainly due to the scheduled installation of scrubbers and dry-dockings of our vessels, of which $3.2 million relates to incremental delays in the Chinese shipyards where these activities were being performed due to the COVID-19 pandemic.
  • a $1.7 million decrease in revenues in the three months ended March 31, 2020 compared to the three months ended March 31, 2019 as a result of lower re-chartering rates for certain of our vessels. This decrease is due to a $4.5 million decrease in revenues due to the re-chartering of four vessels in our fleet that concluded long-term charters over the last twelve months and were re-deployed at the prevailing lower spot rates in the three months ended March 31, 2020, partially offset by a $2.8 million improvement from the re-chartering of other vessels in the fleet.
  • a $5.1 million increase in revenues in the three months ended March 31, 2020 compared to the three months ended March 31, 2019 as a result of contractual increases in charter rates of vessels under long-term charters.
  • a $4.9 million decrease in revenues in the three months ended March 31, 2020 compared to the three months ended March 31, 2019 due to lower non-cash revenue recognition in accordance with US GAAP.
  • a $0.9 million increase in revenues in the three months ended March 31, 2020 compared to the three months ended March 31, 2019 due to the acquisition of a new vessel.

Vessel Operating Expenses
Vessel operating expenses increased by $0.1 million to $26.0 million in the three months ended March 31, 2020 from $25.9 million in the three months ended March 31, 2019, primarily as a result of the increase in the average number of vessels in our fleet, partially offset by an overall decrease in the average daily operating cost of $5,522 per vessel per day for vessels on time charter for the three months ended March 31, 2020 compared to $5,636 per day for the three months ended March 31, 2019. Management believes that our daily operating cost are among the most competitive in the industry.

Depreciation & Amortization
Depreciation & Amortization includes Depreciation and Amortization of Deferred Dry-docking and Special Survey Costs.

Depreciation
Depreciation expense increased by 3.4%, or $0.8 million, to $24.6 million in the three months ended March 31, 2020 from $23.8 million in the three months ended March 31, 2019 mainly due to the installation of scrubbers on four of our vessels and the acquisition of the vessel Niledutch Lion in the three months ended March 31, 2020.

Amortization of Deferred Dry-docking and Special Survey Costs
Amortization of deferred dry-docking and special survey costs increased by $0.1 million to $2.3 million in the three months ended March 31, 2020 from $2.2 million in the three months ended March 31, 2019.

General and Administrative Expenses
General and administrative expenses decreased by $1.1 million to $5.8 million in the three months ended March 31, 2020, from $6.9 million in the three months ended March 31, 2019. The decrease was mainly due to decreased share based compensation and professional fees.

Other Operating Expenses
Other Operating Expenses include Voyage Expenses.

Voyage Expenses
Voyage expenses increased by $0.7 million to $4.0 million in the three months ended March 31, 2020 from $3.3 million in the three months ended March 31, 2019 mainly due to increased bunkering expenses.

Interest Expense and Interest Income
Interest expense decreased by 8.4%, or $1.5 million, to $16.3 million in the three months ended March 31, 2020 from $17.8 million in the three months ended March 31, 2019. The decrease in interest expense is attributable to:

(i) a $0.6 million decrease in interest expense due to a $112.1 million decrease in our average debt (including leaseback obligations), to $1,544.2 million in the three months ended March 31, 2020, compared to $1,656.3 million in the three months ended March 31, 2019; and

(ii) a $0.9 million decrease in the amortization of deferred finance costs and debt discount related to our 2018 debt refinancing.

As of March 31, 2020, our bank debt outstanding, gross of deferred finance costs, was $1,396.3 million and our leaseback obligation was $134.3 million compared to bank debt of $1,641.7 million as of March 31, 2019.

Interest income increased by $0.1 million to $1.7 million in the three months ended March 31, 2020 compared to $1.6 million in the three months ended March 31, 2019.

Other finance costs, net
Other finance costs, net increased by $0.3 million to $0.6 million in the three months ended March 31, 2020 compared to $0.3 million in the three months ended March 31, 2019.

Equity income/(loss) on investments
Equity income/(loss) on investments increased by $1.6 million to $1.5 million of income on investments in the three months ended March 31, 2020 compared to a $0.1 million loss on investments in the three months ended March 31, 2019 due to the improved operating performance of Gemini, in which the Company has a 49% shareholding interest.

Loss on derivatives
Amortization of deferred realized losses on interest rate swaps remained stable at $0.9 million in each of the three months ended March 31, 2020 and March 31, 2019.

Other income, net
Other income, net was $0.2 million in income in the three months ended March 31, 2020 compared to nil in the three months ended March 31, 2019.

Adjusted EBITDA
Adjusted EBITDA decreased by 7.2%, or $5.6 million, to $71.9 million in the three months ended March 31, 2020 from $77.5 million in the three months ended March 31, 2019. As outlined above, the decrease is mainly attributable to a $6.7 million decrease in operating revenues, of which $3.2 million relates to the impact of the COVID-19 pandemic described above, a $0.3 million increase in other finance expenses and a $0.2 million increase in operating expenses, which were partially offset by a $1.6 million increase in the operating performance of our equity investees. Adjusted EBITDA for the three months ended March 31, 2020 is adjusted for stock based compensation of $0.3 million. Tables reconciling Adjusted EBITDA to Net Income can be found at the end of this earnings release.

Recent Developments
In 2020, we acquired one 8,463 TEU container vessel and one 8,626 TEU container vessel,  both of which have been fixed on two-year charters and in the aggregate are expected to contribute approximately $12 million to EBITDA on an annualized basis. Additionally, we entered into an agreement to acquire an 8,533 TEU vessel, which is expected to be delivered to us in the second quarter of 2020.

On April 8, 2020, we entered into a loan agreement with Macquarie Bank for an amount of up to $24 million drawn down in full on April 9, 2020. The loan was used to partially finance the acquisition costs of the vessels Niledutch Lion and Phoebe.

On May 12, 2020, we refinanced the existing leaseback obligation related to the vessels Hyundai Honour and Hyundai Respect with a new sale and leaseback arrangement amounting to $139.1 million with a four-year term, at the end of which we will reacquire these vessels for an aggregate amount of $36.0 million or earlier, at our option, for a purchase price set forth in the agreement. This arrangement was recorded as a financing transaction and recognized as a financial liability.

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