Danaos expects container market bounce, short-term coronavirus uncertainty

danaos

Danaos, one of the world’s largest independent owners of containerships, reported unaudited results for the fourth quarter and the year ended December 31, 2019.

Highlights for the Fourth Quarter and Year Ended December 31, 2019 :

  • Adjusted net income 1 of $38.0 million , or $2.01 per share 2 , for the three months ended December 31, 2019 compared to $36.6 million , or $2.45 per share 2 , for the three months ended December 31, 2018 , an increase of 3.8%. Adjusted net income 1 of $148.7 million , or $9.17 per share 2 , for the year ended December 31, 2019 compared to $131.2 million , or $12.35 per share 2 , for the year ended December 31, 2018 , an increase of 13.3%.
  • Operating revenues of $110.2 million for the three months ended December 31, 2019 compared to $115.6 million for the three months ended December 31, 2018 , a decrease of 4.7%. Operating revenues of $447.2 million for the year ended December 31, 2019 compared to $458.7 million for the year ended December 31, 2018 , a decrease of 2.5%.
  • Adjusted EBITDA 1 of $78.1 million for the three months ended December 31, 2019 compared to $80.2 million for the three months ended December 31, 2018 , a decrease of 2.6%. Adjusted EBITDA 1 of $310.6 million for the year ended December 31, 2019 compared to $317.8 million for the year ended December 31, 2018 , a decrease of 2.3%.
  • Total contracted operating revenues were $1.34 billion as of December 31, 2019 , with charters extending through 2028 and remaining average contracted charter duration of 4.1 years, weighted by aggregate contracted charter hire.
  • Charter coverage of 86% for the next 12 months based on current operating revenues and 68% in terms of contracted operating days.
  • Agreed to acquire one 8,463 TEU container vessel in October 2019 due to be delivered to us between March and May 2020 and acquired one 8,626 TEU container vessel in January 2020 . Both vessels have been fixed on 2 year charters and are expected to contribute $12 million to EBITDA on an annualized basis.

Three Months and Year Ended December 31, 2019
Financial Summary – Unaudited
( Expressed in thousands of United States dollars, except per share amounts )
Three months
ended
Three months
ended
Year ended Year ended
December 31, December 31, December 31, December 31,
2019 2018 2019 2018
Operating revenues $110,204 $115,631 $447,244 $458,732
Net income/(loss) $33,817 $(180,983) $131,253 $(32,936)
Adjusted net income 1 $37,969 $36,605 $148,675 $131,186
Earnings/(loss) per share, diluted 2 $1.79 $(12.12) $8.09 $(3.10)
Adjusted earnings per share, diluted 1,2 $2.01 $2.45 $9.17 $12.35
Diluted weighted average number of shares (in thousands) 2 18,927 14,939 16,221 10,623
Adjusted EBITDA 1 $78,118 $80,171 $310,565 $317,848
1     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.
    Earnings per share and weighted average number of shares give retroactive effect to the reverse stock split of 1-for-14 implemented
on May 2, 2019, for all periods presented.

Danaos’ CEO Dr. John Coustas commented:

“We are pleased to report improved earnings for the year ended December 31, 2019 . The Company’s adjusted net income of $148.7 million for 2019 increased by $17.5 million , or 13.3%, compared to adjusted net income of $131.2 million for 2018. This improvement was primarily the result of a $13.7 million decrease in total operating costs and a $15.1 million decrease in net finance expenses, partially offset by an $11.5 million decrease in operating revenues. Adjusted EBITDA for 2019 was $310.6 million , a slight decrease from $317.8 million for 2018.

“The container market, particularly for vessels larger than 5,500 TEU, strengthened throughout the course of 2019 as container volumes across all main trade lanes increased. Notwithstanding any near term headwinds related to the rapidly evolving situation in China , long term fundamentals remain intact, and the market will continue to rebalance itself through a combination of moderate trade growth, slowing fleet growth and a reduction in vessel speeds due to new and ongoing environmental initiatives. Estimates for world GDP and trade growth are in flux due to the uncertainty around the impacts of the spread of the coronavirus in China. The current drop in demand is being addressed by canceled sailings by liner companies. However, we expect this dynamic to be short term in nature and result in a demand surge when supply chains resume. In the meantime, work stoppages and slowdowns at shipyards in China will lead to delays in newbuilding deliveries, scrubber installations and dry-docking schedules.

“With respect to the new IMO 2020 sulphur limits that went into effect on January 1, 2020 , the current price differential between high and low sulphur fuel oil continues to support the investment rationale for scrubbers. We have already completed the installation of scrubbers on four out of 11 vessels, and we will benefit from these scrubber installations through fixed premiums on charter rates for 3-4 year fixtures that enhance cash flows and contract coverage. We are well insulated from temporary market disruptions with high charter coverage of 86% in terms of operating revenues and 68% in terms of operating days over the next 12 months, which protects our strong cash flows.

“Danaos also is well-positioned to benefit from a rising market in the medium term. While our larger vessels remain on multi-year charters, with some charters extending through 2025, a large number of our small to mid-sized vessels will be coming off existing charters over the next two years, creating potential for incremental cash generation. Additionally, our successful equity offering in November of 2019 puts us in a strong position to opportunistically pursue growth initiatives and we have already acquired two 8,500 TEU container vessels since completing the offering. These vessels have both been fixed on two year charters and are expected to contribute an incremental $12 million of EBITDA on an annualized basis, ensuring an accretive return on our investment. Bank financing for these acquisitions has also been arranged.

“Danaos has consistently remained committed to investing in operational excellence and technological innovation, which allows us to be forerunners in preparing for environmental requirements that will shape our industry in the coming decade. 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 December 31, 2019 compared to the three months ended December 31, 2018

During the three months ended December 31, 2019 and December 31, 2018 , Danaos had an average of 55 containerships. Our fleet utilization for the three months ended December 31, 2019 was 97.0% compared to 97.9% for the three months ended December 31, 2018 .

Our adjusted net income amounted to $38.0 million , or $2.01 per share, for the three months ended December 31, 2019 compared to $36.6 million , or $2.45 per share, for the three months ended December 31, 2018 (after giving retroactive effect to the reverse stock split of 1-for-14 implemented on May 2, 2019 ). We have adjusted our net income in the three months ended December 31, 2019 for non-cash fees amortization and accrued financing fees of $4.2 million . Please refer to the Adjusted Net Income reconciliation table, which appears later in this earnings release.

The increase of $1.4 million in adjusted net income for the three months ended December 31, 2019 compared to the three months ended December 31, 2018 is attributable mainly to a $5.2 million decrease in total operating expenses, a $1.0 million decrease in net finance expenses and a $0.6 million increase in the operating performance of our equity investment in Gemini, which were partially offset by a $5.4 million decrease in operating revenues.

On a non-adjusted basis, our net income amounted to $33.8 million , or $1.79 earnings per diluted share, for the three months ended December 31, 2019 compared to net loss of $181.0 million (including impairment loss described below), or $12.12 loss per diluted share, for the three months ended December 31, 2018 (after giving retroactive effect to the reverse stock split of 1-for-14).

Operating Revenues
Operating revenues decreased by 4.7%, or $5.4 million , to $110.2 million in the three months ended December 31, 2019 from $115.6 million in the three months ended December 31, 2018 .

Operating revenues for the year ended December 31, 2019 reflect:

  • a $3.6 million decrease in revenues in the three months ended December 31, 2019 compared to the three months ended December 31, 2018 , mainly due to the re-chartering of certain of our vessels that concluded long-term charters over the last twelve months and were re-deployed at lower spot rates in the three months ended December 31, 2019 ; and
  • a $1.8 million decrease in revenues due to lower fleet utilization of our vessels in the three months ended December 31, 2019 compared to the three months ended December 31, 2018 , mainly due to scrubber installation related off hire days.

Vessel Operating Expenses
Vessel operating expenses decreased by 4.3%, or $1.1 million , to $24 .5 million in the three months ended December 31, 2019 from $25 .6 million in the three months ended December 31, 2018 . The average daily operating cost per vessel for vessels on time charter was $5,215 per day for the three months ended December 31, 2019 compared to $5,446 per day for the three months ended December 31, 2018 . Management believes that our daily operating cost ranks as one of 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 decreased by 9.6%, or $2.6 million , to $24.4 million in the three months ended December 31, 2019 from $27.0 million in the three months ended December 31, 2018 mainly due to decreased depreciation expense for 10 vessels for which we recorded an impairment charge on December 31, 2018 .

Amortization of Deferred Dry-docking and Special Survey Costs
Amortization of deferred dry-docking and special survey costs decreased by $0.1 million , to $2.2 million in the three months ended December 31, 2019 from $2.3 million in the three months ended December 31, 2018 . The decrease was mainly due to a decreased number of vessels dry-docked.

General and Administrative Expenses
General and administrative expenses decreased by $0.9 million , to $7.0 million in the three months ended December 31, 2019 , from $7.9 million in the three months ended December 31, 2018 . The decrease was mainly due to decreased remuneration expenses.

Other Operating Expenses
Other Operating Expenses include Voyage Expenses.

Voyage Expenses
Voyage expenses decreased by $0.2 million , to $2.8 million in the three months ended December 31, 2019 from $3.0 million in the three months ended December 31, 2018 .

Impairment Loss
We recognized an impairment loss of $210.7 million in relation to 10 of our vessels in the three months ended December 31, 2018 while we did not record any impairment loss in the three months ended December 31, 2019 .

Interest Expense and Interest Income
Interest expense decreased by 11.4%, or $2.2 million , to $17 .1 million in the three months ended December 31 , 2019 from $19.3 million in the three months ended December 31, 2018 . The decrease in interest expense is attributable to:

(i) a $0.8 million decrease in interest expense due to a $109.6 million decrease in our average debt (including leaseback obligations), to $1,575.1 million in the three months ended December 31, 2019 , compared to $1,684.7 million in the three months ended December 31, 2018 , partially offset by an increase in debt service cost by approximately 0.33%; and

(ii) a $1.4 million decrease in the amortization of deferred finance costs and debt discount related to our 2018 debt refinancing.

As of December 31, 2019 , our bank debt outstanding, gross of deferred finance costs, was $1,423.8 million and leaseback obligation was $138.2 million compared to bank debt of $1,666.2 million outstanding as of December 31, 2018 .

Interest income increased by $0.2 million to $1.7 million in the three months ended December 31, 2019 compared to $1.5 million in the three months ended December 31, 2018 .

Other finance costs, net
Other finance costs, net decreased by $0.1 million to $0.3 million in the three months ended December 31, 2019 compared to $0.4 million in the three months ended December 31, 2018 .

Equity income on investments
Equity income on investments increased by $0.6 million to $1.1 million in the three months ended December 31, 2019 compared to $0.5 million in the three months ended December 31, 2018 due to the improved operating performance of Gemini Shipholdings Corporation (“Gemini”), in which the Company has a 49% shareholding interest.

Loss on derivatives
Amortization of deferred realized losses on interest rate swaps decreased by $1.4 million to $0.9 million in the three months ended December 31, 2019 compared to $2.3 million in the three months ended December 31, 2018 due to the accelerated amortization of accumulated other comprehensive loss recognized in the three month period ended December 31, 2018 .

Other income/(expenses), net
Other income/(expenses), net was $0.1 million in income in both the three months ended December 31, 2019 and 2018.

Adjusted EBITDA
Adjusted EBITDA decreased by 2.6%, or $2 .1 million, to $78 .1 million in the three months ended December 31, 2019 from $80.2 million in the three months ended December 31, 2018 . As described above, the decrease is mainly attributable to a $5.4 million decrease in operating revenues, which was partially offset by a $2.7 million decrease in operating expenses and a $0.6 million increase in operating performance on our equity investments. Adjusted EBITDA for the three months ended December 31, 2019 is adjusted for stock based compensation of $1.2 million . Tables reconciling Adjusted EBITDA to Net Income can be found at the end of this earnings release.

Year ended December 31, 2019 compared to the year ended December 31, 2018

During the year ended December 31, 2019 and December 31, 2018 , Danaos had an average of 55 containerships. Our fleet utilization for the year ended December 31, 2019 was 98.3% compared to 96.8% for the year ended December 31, 2018 .

Our adjusted net income amounted to $148.7 million , or $9.17 per share, for the year ended December 31, 2019 compared to $131.2 million , or $12.35 per share, for the year ended December 31, 2018 (after giving retroactive effect to the reverse stock split of 1-for-14 implemented on May 2, 2019 ). We have adjusted our net income in the year ended December 31, 2019 for non-cash fees amortization and accrued financing fees of $17.4 million . Please refer to the Adjusted Net Income reconciliation table, which appears later in this earnings release.

The increase of $17.5 million in adjusted net income for the year ended December 31, 2019 compared to the year ended December 31, 2018 is attributable to a $15.1 million decrease in net finance expenses, a $13.7 million decrease in total operating expenses and a $0.2 million increase in the operating performance of our equity investment in Gemini, which were partially offset by a $11.5 million decrease in operating revenue.

On a non-adjusted basis, our net income amounted to $131.2 million , or $8.09 per diluted share, for the year ended December 31, 2019 compared to a net loss of $32.9 million (including gain on debt extinguishment, impairment loss and refinancing-related professional fees described below), or $3.10 loss per diluted share, for the year ended December 31, 2018 (after giving retroactive effect to the reverse stock split of 1-for-14).

Operating Revenues
Operating revenues decreased by 2.5%, or $11.5 million , to $447.2 million in the year ended December 31, 2019 from $458.7 million in the year ended December 31, 2018 .

Operating revenues for the year ended December 31, 2019 reflect:

  • a $13.6 million decrease in revenues in the year ended December 31, 2019 compared to the year ended December 31, 2018 , mainly due to the re-chartering of certain of our vessels that concluded long-term charters over the last twelve months and were re-deployed at lower spot rates in the year ended December 31, 2019 ; and
  • a $2.1 million increase in revenues due to higher fleet utilization of our vessels in the year ended December 31, 2019 compared to the year ended December 31, 2018 .

Vessel Operating Expenses
Vessel operating expenses decreased by 2.0%, or $2.1 million , to $102 .5 million in the year ended December 31, 2019 from $104 .6 million in the year ended December 31, 2018 . The average daily operating cost per vessel for vessels on time charter was $5,506 per day for the year ended December 31, 2019 compared to $5,619 per day for the year ended December 31, 2018 . Management believes that our daily operating cost ranks as one of 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 decreased by 10.5%, or $11.3 million , to $96.5 million in the year ended December 31, 2019 from $107.8 million in the year ended December 31, 2018 mainly due to decreased depreciation expense for 10 vessels for which we recorded an impairment charge on December 31, 2018 .

Amortization of Deferred Dry-docking and Special Survey Costs
Amortization of deferred dry-docking and special survey costs decreased by $0.5 million , to $8.7 million in the year ended December 31, 2019 compared to $9.2 million in the year ended December 31, 2018 . The decrease was mainly due to a decreased number of vessels dry-docked.

General and Administrative Expenses
General and administrative expenses increased by $0.5 million , to $26.8 million in the year ended December 31, 2019 , from $26.3 million in the year ended December 31, 2018 . The increase was mainly due to increased share based compensation costs.

Other Operating Expenses
Other Operating Expenses include Voyage Expenses.

Voyage Expenses
Voyage expenses decreased by $0.6 million , to $11.6 million in the year ended December 31, 2019 from $12.2 million in the year ended December 31, 2018 . The decrease was mainly due to decreased bunkering expenses.

Impairment Loss
We recognized an impairment loss of $210.7 million in relation to 10 of our vessels in the year ended December 31, 2018 while we did not record any impairment in the year ended December 31, 2019 .

Interest Expense and Interest Income
Interest expense decreased by 15.9%, or $13.6 million , to $72 .1 million in the year ended December 31, 2019 from $85.7 million in the year ended December 31, 2018 . The decrease in interest expense is attributable to:

(i)   a $28.2 million decrease in interest expense on two of our credit facilities for which we recognized an interest expense accrual in the third quarter of 2018, which has been classified on our balance sheet under “Accumulated accrued interest” and represents future interest expense for the relevant facilities that has been recognized in advance as a result of the application of TDR accounting in connection with our 2018 debt refinancing;

(ii)  a $12.7 million increase in interest expense due to an increase in debt service cost of approximately 1.89%, partially offset by a $435.0 million decrease in our average debt (including leaseback obligations), to $1,616.0 million in the year ended December 31, 2019 , compared to $2,051.0 million in the year ended December 31, 2018 ; and

(iii) a $1.9 million increase in the amortization of deferred finance costs and debt discount related to our 2018 debt refinancing.

As of December 31, 2019 , our bank debt outstanding, gross of deferred finance costs, was $1,423.8 million and leaseback obligation was $138.2 million compared to bank debt of $1,666.2 million outstanding as of December 31, 2018 .

Interest income increased by $0.6 million to $6.4 million in the year ended December 31, 2019 compared to $5.8 million in the year ended December 31, 2018 .

Other finance costs, net
Other finance costs, net decreased by $0.3 million , to $2.7 million in the year ended December 31, 2019 from $3.0 million in the year ended December 31, 2018 .

Equity income on investments
Equity income on investments increased by $0.2 million to $1.6 million in the year ended December 31, 2019 compared to $1.4 million in the year ended December 31, 2018 due to the improved operating performance of Gemini, in which the Company has a 49% shareholding interest.

Gain on debt extinguishment
The gain on debt extinguishment of $116.4 million in the year ended December 31, 2018 related to our 2018 debt refinancing and consists of debt principal reduction net of refinancing related fees.

Loss on derivatives
Amortization of deferred realized losses on interest rate swaps decreased by $1.5 million to $3.6 million in the year ended December 31, 2019 compared to $5.1 million in the year ended December 31, 2018 mainly due to the accelerated amortization of accumulated other comprehensive loss recognized in the year ended December 31, 2018 .

Other income/(expenses), net
Other income/(expenses), net was $0.6 million in income in the year ended December 31, 2019 compared to $50.5 million in expenses in the year ended December 31, 2018 mainly due to $51.3 million of refinancing-related professional fees in the prior year.

Adjusted EBITDA
Adjusted EBITDA decreased by 2.3%, or $7 .2 million, to $310 .6 million in the year ended December 31, 2019 from $317.8 million in the year ended December 31, 2018 . As described above, this decrease is mainly attributable to a $11.5 million decrease in operating revenue and a $1.2 million increase in other finance costs, which were partially offset by a $5.3 million decrease in operating expenses and a $0.2 million increase in operating performance on our equity investments. Adjusted EBITDA for the year ended December 31, 2019 is adjusted for stock based compensation of $4.2 million . Tables reconciling Adjusted EBITDA to Net Income can be found at the end of this earnings release.

Recent Developments

On December 2, 2019 , we completed the sale of 9,418,080 shares in the public offering for aggregate gross proceeds of $56.5 million . We will use the net proceeds of the offering for capital expenditures, including vessel acquisitions, and for other general corporate purposes.

On October 2, 2019 , we entered into an agreement to acquire an 8,463 TEU container vessel built in 2005 for a gross purchase price of $25.0 million . This vessel is expected to be delivered to us between March and May 2020 and has already been fixed for a period of 2 years to one of the world’s leading liner companies.

On January 13, 2020 , we entered into an agreement to acquire an 8,626 TEU container vessel built in 2008 for a gross purchase price of $28.0 million . This vessel was delivered to us on January 23, 2020 and has been fixed on a 2 year charter due to commence at the beginning of March 2020 . The vessel was renamed to Niledutch Lion.

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