Danaos posts 2Q profit in extremely challenging market

danaos

Danaos Corporation, one of the world’s largest independent owners of containerships, reported unaudited results for the period ended June 30, 2016.

Highlights for the Second Quarter and Half Year Ended June 30, 2016:

  • Adjusted net income of $47.7 million, or $0.43 per share, for the three months ended June 30, 2016 compared to $38.0 million, or $0.35 per share, for the three months ended June 30, 2015, an increase of 25.5%. Adjusted net income1 of $94.9 million, or $0.86 per share, for the six months ended June 30, 2016 compared to $68.6 million, or $0.62 per share, for the six months ended June 30, 2015, an increase of 38.3%.
  • Operating revenues of $137.0 million for the three months ended June 30, 2016 compared to $141.5 million for the three months ended June 30, 2015, a decrease of 3.2%. Operating revenues of $274.5 million for the six months ended June 30, 2016 compared to $280.1 million for the six months ended June 30, 2015, a decrease of 2.0%.
  • Adjusted EBITDA1 of $99.9 million for the three months ended June 30, 2016 compared to $103.1 million for the three months ended June 30, 2015, a decrease of 3.1%. Adjusted EBITDA1 of $199.2 million for the six months ended June 30, 2016 compared to $205.9 million for the six months ended June 30, 2015, a decrease of 3.3%.
  • Total contracted operating revenues were $2.8 billion2 as of June 30, 2016, with charters extending through 2028 and remaining average contracted charter duration of 6.8 years, weighted by aggregate contracted charter hire.
  • Charter coverage of 94.8%2 for the next 12 months in terms of operating revenues and 84.7% in terms of contracted operating days.

Danaos’ CEO Dr. John Coustas commented:

We are pleased to report yet another strong quarter with adjusted net income of $47.7 million, or $0.43 per share, an increase of $9.7 million, or 25.5%, from the adjusted net income of $38.0 million, or $0.35 per share, reported for the second quarter of 2015. This increase is mainly attributable to a reduction in net finance costs of $12.7 million resulting from the expiration of interest rate swaps and lower debt balances and is partially offset by a $3.2 million reduction of our EBITDA for reasons described in the discussion of our financial results. The continued de-leveraging of our balance sheet combined with the expiration of all the expensive legacy interest rate swaps, particularly given the current low interest rate environment, will result in continuously improving financing costs throughout 2016 and beyond.

The containership market continues to be extremely challenging but is now moving sideways, an indication that we have likely reached the bottom. The idle fleet now stands at approximately 6%, while global fleet utilization is hovering at around 75%. The charter market as well as asset values have fallen to historical lows as liner companies, in an effort to contain costs, are releasing surplus chartered-in capacity and seeking charter concessions and flexible hire periods from the vessel owners. We anticipate the market environment to remain unchanged for the remainder of the year, over which we will also start to experience the effect of the expanded Panama Canal which will shift demand from panamax to post-panamax vessels. We are cautiously optimistic that market fundamentals will gradually begin to improve by the spring of 2017. A combination of anticipated improving world GDP growth ad declining growth in the containership fleet will naturally begin to balance the market. Additionally, there is an expectation that consolidation in the liner industry – through alliances or otherwise – will create stability and encourage freight rate discipline which will hopefully put an end to the losses the liner companies have been reporting over the last quarters.

On July 15, 2016, in a transaction through which existing shareholders of Hyundai Merchant Marine (“HMM”) were effectively wiped out, we entered into an agreement with HMM to reduce its charter rates by 20% for the next 3.5 years, in exchange for $39 million in debt notes maturing up to 2024 and 4.6 million common shares in HMM that are expected to be freely tradable on the Stock Market Division of the Korean Exchange. After the agreed 3.5 year period, the original contracted rates will be restored. We believe that this agreement has been structured in a manner that preserves the value of our charters, and we are pleased to have reached an outcome that will strengthen the financial profile of one of our important counterparts. Separately, Hanjin Shipping has publicly announced its intention to restructure its balance sheet and seek concessions from charter owners. Discussions are ongoing, and we cannot speculate on the timing or the nature of the resolution.

Danaos continues to have minimal near term exposure to the weak spot market, with 95% of charter cover in terms of operating revenues for the next 12 months. Additionally, our continued focus on cost containment has reduced our daily operating costs to $5,800 per day for the second quarter. This clearly positions us as one of the most efficient operators in the industry, which is particularly beneficial in today’s environment.

Amidst this challenging economic environment we will remain singularly focused on preserving value, de-levering our balance sheet, managing our fleet efficiently and capitalizing on the resilience of our business model.

Three months ended June 30, 2016 compared to the three months ended June 30, 2015

During the three months ended June 30, 2016, Danaos had an average of 55 containerships compared to 56 containerships for the three months ended June 30, 2015. Our fleet utilization decreased to 96.9% in the three months ended June 30, 2016 compared to 99.4% in the three months ended June 30, 2015.\

Our adjusted net income amounted to $47.7 million, or $0.43 per share, for the three months ended June 30, 2016 compared to $38.0 million, or $0.35 per share, for the three months ended June 30, 2015. We have adjusted our net income in the three months ended June 30, 2016 mainly for unrealized gains on derivatives of $1.0 million, as well as a non-cash amortization charge of $4.1 million for fees related to our comprehensive financing plan (comprised of non-cash, amortizing and accrued finance fees). Please refer to the Adjusted Net Income reconciliation table, which appears later in this earnings release.

The increase of $9.7 million in adjusted net income for the three months ended June 30, 2016 compared to the three months ended June 30, 2015 is attributable to a reduction of $12.7 million in net finance costs mainly due to lower debt balances and interest rate swap expirations, a $1.4 million decrease in total operating expenses and a decrease in depreciation and amortization of $0.3 million, which were partially offset by a decrease of $4.5 million in operating revenues and a $0.2 million loss on equity investments.

On a non-adjusted basis, our net income amounted to $44.6 million, or $0.41 per share, for the three months ended June 30, 2016 compared to net income of $38.1 million, or $0.35 per share, for the three months ended June 30, 2015.

Operating Revenues
Operating revenues decreased by 3.2%, or $4.5 million, to $137.0 million in the three months ended June 30, 2016 from $141.5 million in the three months ended June 30, 2015.

Operating revenues for the three months ended June 30, 2016 reflect:

$0.6 million decrease in revenues in the three months ended June 30, 2016 compared to the three months ended June 30, 2015 due to the sale of the Federal on January 8, 2016.
$2.6 million decrease in revenues in the three months ended June 30, 2016 compared to the three months ended June 30, 2015 due to the re-chartering of certain of our vessels at lower rates.
$1.3 million decrease in revenues due to lower fleet utilization in the three months ended June 30, 2016 compared to the three months ended June 30, 2015.
Vessel Operating Expenses
Vessel operating expenses decreased by 5.4%, or $1.6 million, to $28.0 million in the three months ended June 30, 2016 from $29.6 million in the three months ended June 30, 2015. The decrease is attributable to a 3.6% decrease in the average daily operating cost per vessel while the average number of vessels in our fleet during the three months ended June 30, 2016 decreased by 1.8% compared to the three months ended June 30, 2015.

The average daily operating cost per vessel decreased to $5,802 per day for the three months ended June 30, 2016 from $6,018 per day for the three months ended June 30, 2015. 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 2.4%, or $0.8 million, to $32.1 million in the three months ended June 30, 2016 from $32.9 million in the three months ended June 30, 2015, mainly due to decreased depreciation expense for twelve vessels for which we recorded an impairment charge on December 31, 2015 and due to the decreased average number of vessels in our fleet in the three months ended June 30, 2016 following the sale of the Federal on January 8, 2016.

Amortization of Deferred Dry-docking and Special Survey Costs
Amortization of deferred dry-docking and special survey costs increased by $0.5 million, to $1.4 million in the three months ended June 30, 2016 from $0.9 million in the three months ended June 30, 2015. The increase is mainly due to the increased payments for dry-docking and special survey costs related to certain vessels over the last six months.

General and Administrative Expenses
General and administrative expenses remained stable, amounting to $5.4 million both in the three months ended June 30, 2016, and in three months ended June 30, 2015.

Other Operating Expenses
Other Operating Expenses include Voyage Expenses.

Voyage Expenses
Voyage expenses remained stable, amounting to $3.2 million both in the three months ended June 30, 2016 and in the three months ended June 30, 2015.

Interest Expense and Interest Income
Interest expense decreased by 2.8%, or $0.6 million, to $20.6 million in the three months ended June 30, 2016 from $21.2 million in the three months ended June 30, 2015 including the amortization of deferred finance costs reclassified from other finance expenses to interest expense of $3.2 million and $3.5 million, respectively. The change in interest expense was mainly due to the decrease in our average debt by $234.0 million, to $2,686.8 million in the three months ended June 30, 2016, from $2,920.8 million in the three months ended June 30, 2015 and due to a $0.3 million decrease in the amortization of deferred finance costs.

The Company continues to rapidly deleverage its balance sheet. As of June 30, 2016, the debt outstanding gross of deferred finance costs was $2,676.9 million compared to $2,910.1 million as of June 30, 2015.

Interest income amounted to $0.9 million in the three months ended June 30, 2016 compared to $0.8 million in the three months ended June 30, 2015.

Other finance costs, net
Other finance costs, net decreased by $0.1 million, to $1.1 million in the three months ended June 30, 2016 from $1.2 million in the three months ended June 30, 2015, following the reclassification of the amortization of deferred finance costs from other finance expenses to interest expense of $3.2 million and $3.5 million, respectively.

Equity loss on investments
Equity loss on investments of $0.2 million in the three months ended June 30, 2016 relates to the investment in Gemini Shipholdings Corporation (“Gemini”), in which the Company has a 49% shareholding interest. This loss is attributed to operating losses of two out of the four vessels that have been acquired by Gemini, one of which had not yet entered into charter arrangements as of June 30, 2016.

Unrealized gain on derivatives
Unrealized gains on interest rate swaps amounted to $1.0 million in the three months ended June 30, 2016 compared to an unrealized gains of $4.5 million in the three months ended June 30, 2015. The unrealized gains were attributable to mark to market valuation of our swaps, as well as reclassification of unrealized losses from Accumulated Other Comprehensive Loss to our earnings due to the discontinuation of hedge accounting since July 1, 2012.

Realized loss on derivatives
Realized loss on interest rate swaps decreased by $12.4 million, to $2.1 million in the three months ended June 30, 2016 from $14.5 million in the three months ended June 30, 2015. This decrease is attributable to a $586.0 million decrease in the average notional amount of swaps during the three months ended June 30, 2016 compared to the three months ended June 30, 2015 as a result of swap expirations.

Adjusted EBITDA
Adjusted EBITDA decreased by 3.1%, or $3.2 million, to $99.9 million in the three months ended June 30, 2016 from $103.1 million in the three months ended June 30, 2015. As outlined earlier, this decrease is mainly attributed to a $4.5 million decrease in operating revenues and a $0.2 million loss on equity investments, partially offset by a $1.6 million decrease in total operating expenses. Adjusted EBITDA for the three months ended June 30, 2016 is adjusted mainly for unrealized gain on derivatives of $1.0 million and realized losses on derivatives of $1.1 million. Tables reconciling Adjusted EBITDA to Net Income can be found at the end of this earnings release.

Six months ended June 30, 2016 compared to the six months ended June 30, 2015

During the six months ended June 30, 2016, Danaos had an average of 55 containerships compared to 56 containerships for the six months ended June 30, 2015. Our fleet utilization decreased to 95.7% in the six months ended June 30, 2016 compared to 98.9% in the six months ended June 30, 2015.

Our adjusted net income amounted to $94.9 million, or $0.86 per share, for the six months ended June 30, 2016 compared to $68.6 million, or $0.62 per share, for the six months ended June 30, 2015. We have adjusted our net income in the six months ended June 30, 2016 mainly for unrealized gains on derivatives of $2.1 million, as well as a non-cash amortization charge of $8.3 million for fees related to our comprehensive financing plan (comprised of non-cash, amortizing and accrued finance fees). Please refer to the Adjusted Net Income reconciliation table, which appears later in this earnings release.

The increase of $26.3 million in adjusted net income for the six months ended June 30, 2016 compared to the six months ended June 30, 2015 is mainly attributable to a reduction of $32.1 million in net finance costs mainly due to lower debt balances and interest rate swap expirations, a decrease in depreciation and amortization of $0.8 million and an increase in other income of $0.4 million, which were partially offset by a decrease of $5.6 million in operating revenues, a $0.5 million increase in total operating expenses and a $0.9 million loss on equity investments.

On a non-adjusted basis, our net income amounted to $88.8 million, or $0.81 per share, for the six months ended June 30, 2016 compared to net income of $68.4 million, or $0.62 per share, for the six months ended June 30, 2015.

Operating Revenues
Operating revenues decreased by 2.0%, or $5.6 million, to $274.5 million in the six months ended June 30, 2016 from $280.1 million in the six months ended June 30, 2015.

Operating revenues for the six months ended June 30, 2016 reflect:

$1.2 million decrease in revenues in the six months ended June 30, 2016 compared to the six months ended June 30, 2015 due to the sale of the Federal on January 8, 2016.
$2.6 million decrease in revenues in the six months ended June 30, 2016 compared to the six months ended June 30, 2015 due to the re-chartering of certain of our vessels at lower rates.
$1.8 million decrease in revenues due to lower fleet utilization in the six months ended June 30, 2016 compared to the six months ended June 30, 2015.
Vessel Operating Expenses
Vessel operating expenses remained stable, amounting to $56.9 million both in the six months ended June 30, 2016 and in the six months ended June 30, 2015. The decrease in the average number of vessels in our fleet by 1.8%, was offset by an 1.2% increase in the average daily operating cost per vessel during the six months ended June 30, 2016 compared to the six months ended June 30, 2015.

The average daily operating cost per vessel increased to $5,893 per day for the six months ended June 30, 2016 from $5,821 per day for the six months ended June 30, 2015. 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 1.8%, or $1.2 million, to $64.1 million in the six months ended June 30, 2016 from $65.3 million in the six months ended June 30, 2015, mainly due to decreased depreciation expense for twelve vessels for which we recorded an impairment charge on December 31, 2015 and due to the decreased average number of vessels in our fleet in the six months ended June 30, 2016 following the sale of the Federal on January 8, 2016.

Amortization of Deferred Dry-docking and Special Survey Costs
Amortization of deferred dry-docking and special survey costs increased by $0.3 million, to $2.4 million in the six months ended June 30, 2016 from $2.1 million in the six months ended June 30, 2015. The increase is mainly due to the increased payments for dry-docking and special survey costs related to certain vessels over the last six months.

General and Administrative Expenses
General and administrative expenses remained stable, amounting to $10.7 million both in the six months ended June 30, 2016 and in six months ended June 30, 2015.

Other Operating Expenses
Other Operating Expenses include Voyage Expenses.

Voyage Expenses
Voyage expenses increased by $0.5 million, to $6.7 million in the six months ended June 30, 2016 from $6.2 million in the six months ended June 30, 2015. The increase is mainly due to increased bunkering expenses.

Interest Expense and Interest Income
Interest expense decreased by 5.3%, or $2.3 million, to $40.8 million in the six months ended June 30, 2016 from $43.1 million in the six months ended June 30, 2015 including the amortization of deferred finance costs reclassified from other finance expenses to interest expense of $6.5 million and $7.2 million, respectively. The change in interest expense was mainly due to the decrease in our average debt by $239.3 million, to $2,712.6 million in the six months ended June 30, 2016, from $2,951.9 million in the six months ended June 30, 2015 and due to a $0.7 million decrease in the amortization of deferred finance costs.

The Company continues to rapidly deleverage its balance sheet. As of June 30, 2016, the debt outstanding gross of deferred finance costs was $2,676.9 million compared to $2,910.1 million as of June 30, 2015.

Interest income amounted to $1.8 million in the six months ended June 30, 2016 compared to $1.7 million in the six months ended June 30, 2015.

Other finance costs, net
Other finance costs, net decreased by $0.1 million, to $2.2 million in the six months ended June 30, 2016 from $2.3 million in the six months ended June 30, 2015, following the reclassification of the amortization of deferred finance costs from other finance expenses to interest expense of $6.5 million and $7.2 million, respectively.

Equity loss on investments
Equity loss on investments of $0.9 million in the six months ended June 30, 2016 relates to the investment in Gemini Shipholdings Corporation (“Gemini”), in which the Company has a 49% shareholding interest. This loss is attributed to operating losses of two out of the four vessels that have been acquired by Gemini, one of which had not yet entered into charter arrangements as of June 30, 2016.

Unrealized gain on derivatives
Unrealized gains on interest rate swaps amounted to $2.1 million in the six months ended June 30, 2016 compared to an unrealized gains of $8.9 million in the six months ended June 30, 2015. The unrealized gains were attributable to mark to market valuation of our swaps, as well as reclassification of unrealized losses from Accumulated Other Comprehensive Loss to our earnings due to the discontinuation of hedge accounting since July 1, 2012.

Realized loss on derivatives
Realized loss on interest rate swaps decreased by $30.4 million, to $5.3 million in the six months ended June 30, 2016 from $35.7 million in the six months ended June 30, 2015. This decrease is attributable to a $828.8 million decrease in the average notional amount of swaps during the six months ended June 30, 2016 compared to the six months ended June 30, 2015 as a result of swap expirations.

Adjusted EBITDA
Adjusted EBITDA decreased by 3.3%, or $6.7 million, to $199.2 million in the six months ended June 30, 2016 from $205.9 million in the six months ended June 30, 2015. As outlined earlier, this decrease is mainly attributed to a $5.6 million decrease in operating revenues, a $0.5 million increase in total operating expenses and a $0.9 million loss on equity investments. Adjusted EBITDA for the six months ended June 30, 2016 is adjusted mainly for unrealized gain on derivatives of $2.1 million and realized losses on derivatives of $3.3 million. Tables reconciling Adjusted EBITDA to Net Income can be found at the end of this earnings release.

Recent news

HMM
On July 15, 2016, we entered into a charter restructuring agreement with HMM as part of the agreements it reached with its creditors and owners of its chartered-in fleet in connection with the restructuring of its obligations. The charter restructuring agreement provides for a 20% reduction, for the period until December 31, 2019 (or earlier charter expiration in the case of eight vessels), in the charter hire rates payable for thirteen of our vessels currently employed with HMM. In exchange, under the charter restructuring agreement we received (i) $6.2 million principal amount of senior, unsecured, non-amortizing loan notes, which accrue interest at 3% per annum payable on maturity in December 2022, (ii) $32.8 million principal amount of senior, unsecured loan notes, amortizing subject to available cash flows, which accrue interest at 3% per annum payable on maturity in July 2024 and (iii) 4,637,558 HMM shares issued on July 23, 2016, which will be freely tradable on the Stock Market Division of the Korean Exchange from August 5, 2016 onwards.

AGM Results
On July 29, 2016, at our annual meeting of stockholders, Mr. William Repko and Mr. Miklόs Konkoly-Thege were re-elected as Class III directors, each for a three-year term expiring at the annual meeting of our stockholders in 2019. Our stockholders also ratified the appointment of PricewaterhouseCoopers S.A. as our independent auditors.

LEAVE A COMMENT

×

Comments are closed.