Danaos profit soars in ‘exceptional’ first quarter

danaos

Danaos, one of the world’s largest independent owners of containerships, reported unaudited results for the quarter ended March 31, 2022.

Highlights for the First Quarter Ended March 31, 2022:

  • Adjusted net income1 of $235.3 million, or $11.36 per share, for the three months ended March 31, 2022 compared to $58.0 million, or $2.83 per share, for the three months ended March 31, 2021, an increase of 305.7%.
  • Net income of $331.5 million, or $16.00 per share, for the three months ended March 31, 2022 compared to $296.8 million, or $14.47 per share, for the three months ended March 31, 2021.
  • Liquidity in cash and marketable securities was $708 million as of March 31, 2022.
  • Operating revenues of $229.9 million for the three months ended March 31, 2022 compared to $132.1 million for the three months ended March 31, 2021, an increase of 74.0%.
  • Adjusted EBITDA 1 of $269.5 million for the three months ended March 31, 2022 compared to $96.3 million for the three months ended March 31, 2021, an increase of 179.9%.
  • Total contracted operating revenues were $2.7 billion as of March 31, 2022, with charters extending through 2028 and remaining average contracted charter duration of 3.8 years, weighted by aggregate contracted charter hire.
  • Charter coverage of 95.5% for the next 12 months based on current operating revenues and 96.2% in terms of contracted operating days.
  • Danaos has declared a dividend of $0.75 per share of common stock for the first quarter of 2022, which is payable on June 8, 2022 to stockholders of record as of May 27, 2022.
  • During the second quarter of 2022 we have repaid and are committed to repay early $437 million of debt and leasing obligations as a result of which 13 vessels in our fleet will become unencumbered.

Three Months Ended March 31, 2022
Financial Summary – Unaudited
(Expressed in thousands of United States dollars, except per share amounts)

Three months

ended

Three months

ended

March 31,

March 31,

2022

2021

Operating revenues

$

229,901

$

132,118

Net income

$

331,465

$

296,780

Adjusted net income1

$

235,297

$

58,011

Earnings per share, diluted

$

16.00

$

14.47

Adjusted earnings per share, diluted1

$

11.36

$

2.83

Diluted weighted average number of shares (in thousands)

20,717

20,513

Adjusted EBITDA1

$

269,484

$

96,282

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.

Danaos’ CEO Dr. John Coustas commented:

“The first quarter of 2022 was another exceptional one for Danaos. Having already seeded the future with $2.7 billion of contracted revenue, we are operating from a position of strength and confidence. This allowed us to invest in the future by ordering six vessels in the 7,000 – 8,000 TEU range, to be delivered between March and September 2024, that are ready to be converted to run on green methanol when such fuel is widely available. Our position in ZIM continues to generate solid returns, including $110 million in net dividends declared in the first quarter.

The broader market has been affected by geopolitical events, high energy prices, inflation, the interest rate outlook, and China’s “Zero-Covid” policy. Although box freight rates and charter rates have not been significantly affected, sentiment has changed, and market participants have adopted a more conservative short-term attitude. On the other hand, supply chain inefficiencies continue unabated and there is little likelihood that conditions improve this year. This has led to record profits for the liner companies and, most importantly, higher contract levels. Also, fuel oil prices are reaching levels not seen for more than a decade at the same time as supply chain disruptions have resulted in an increase in average sailing speed. Over time, the global container network will normalize as new vessels are delivered and sailing speeds are reduced to enable the industry to comply with decarbonization timelines.

In the midst of an uncertain backdrop, Danaos is well positioned to continue to execute our strategy. We are simultaneously pursuing fleet growth, returning value to shareholders, and further enhancing our balance sheet. Most recently, we have accelerated de-leveraging to minimize the impact of rising interest rates. During the second quarter of 2022 we have already repaid early $364 million in debt and lease obligations while another $73 million, for which we have issued early repayment notices, will also be repaid early through the end of the second quarter. As a result of this overall leverage reduction of $437 million, 13 vessels in our fleet will become unencumbered.

Liquidity also stands very strong. As at the end of the first quarter we had $708 million in cash and marketable securities, while during the second quarter we received $239 million of charter hire prepayment related to charter contracts for 15 of our vessels, representing partial prepayment of charter hire payable during the period from May 2022 through January 2027.

As a result of our actions, Danaos has the strongest balance sheet in the industry, which will enable us to continue to pursue attractive opportunities when they arise for the benefit of our shareholders.”

Three months ended March 31, 2022 compared to the three months ended March 31, 2021

During the three months ended March 31, 2022, Danaos had an average of 71.0 containerships compared to 60.0 containerships during the three months ended March 31, 2021. Our fleet utilization for the three months ended March 31, 2022 was 97.4% compared to 98.6% for the three months ended March 31, 2021.

Our adjusted net income amounted to $235.3 million, or $11.36 per share, for the three months ended March 31, 2022 compared to $58.0 million, or $2.83 per share, for the three months ended March 31, 2021. We have adjusted our net income in the three months ended March 31, 2022 for the change in fair value of our investment in ZIM Integrated Shipping Services Ltd. (“ZIM”) of $99.5 million and a non-cash fees amortization and accrued finance fees charge of $3.4 million. Please refer to the Adjusted Net Income reconciliation table, which appears later in this earnings release.

The $177.3 million increase in adjusted net income for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 is attributable mainly to a $97.8 million increase in operating revenues and recognition of a $110.0 million dividend from ZIM (net of withholding taxes), which were partially offset by a $22.9 million increase in total operating expenses, a $5.8 million increase in net finance expenses and a $1.8 million decrease in our equity income on investment in Gemini Shipholdings Corporation (“Gemini”) following our acquisition and full consolidation of Gemini since July 1, 2021.

On a non-adjusted basis, our net income amounted to $331.5 million, or $16.00 earnings per diluted share, for the three months ended March 31, 2022 compared to net income of $296.8 million, or $14.47 earnings per diluted share, for the three months ended March 31, 2021. Our net income for the three months ended March 31, 2022 includes a total gain on our investment in ZIM of $209.5 million (net of withholding taxes on dividend).

Operating Revenues

Operating revenues increased by 74.0%, or $97.8 million, to $229.9 million in the three months ended March 31, 2022 from $132.1 million in the three months ended March 31, 2021.

Operating revenues for the three months ended March 31, 2022 reflect:

  • a $48.9 million increase in revenues in the three months ended March 31, 2022 compared to the three months ended March 31, 2021 mainly as a result of higher charter rates;
  • a $20.8 million increase in revenues in the three months ended March 31, 2022 compared to the three months ended March 31, 2021 due to the incremental revenue generated by newly acquired vessels;
  • a $11.4 million increase in revenue in the three months ended March 31, 2022 compared to the three months ended March 31, 2021 due to higher non-cash revenue recognition in accordance with US GAAP; and
  • a $16.7 million increase in revenues in the three months ended March 31, 2022 compared to the three months ended March 31, 2021 due to amortization of assumed time charters.

Vessel Operating Expenses

Vessel operating expenses increased by $8.1 million to $39.2 million in the three months ended March 31, 2022 from $31.1 million in the three months ended March 31, 2021, primarily as a result of the increase in the average number of vessels in our fleet and an increase in the average daily operating cost for vessels on time charter to $6,307 per vessel per day for the three months ended March 31, 2022 compared to $5,954 per vessel per day for the three months ended March 31, 2021. The average daily operating cost increased mainly due to the COVID-19 related increase in crew remuneration and insurance expenses due to increased insured values of the vessels. Management believes that our daily operating costs remain 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 29.5%, or $7.6 million, to $33.4 million in the three months ended March 31, 2022 from $25.8 million in the three months ended March 31, 2021 due to recent acquisitions of eleven vessels.

Amortization of Deferred Dry-docking and Special Survey Costs

Amortization of deferred dry-docking and special survey costs increased by $0.2 million to $2.7 million in the three months ended March 31, 2022 from $2.5 million in the three months ended March 31, 2021.

General and Administrative Expenses

General and administrative expenses decreased by $3.5 million to $7.4 million in the three months ended March 31, 2022, from $10.9 million in the three months ended March 31, 2021. The decrease was mainly attributable to decreased stock-based compensation expenses.

Other Operating Expenses

Other Operating Expenses include Voyage Expenses.

Voyage Expenses

Voyage expenses increased by $3.0 million to $7.2 million in the three months ended March 31, 2022 from $4.2 million in the three months ended March 31, 2021 primarily as a result of the increase in commissions due to the increase in revenue per vessel and the increase in the average number of vessels in our fleet.

Interest Expense and Interest Income

Interest expense increased by 13.2%, or $2.0 million, to $17.1 million in the three months ended March 31, 2022 from $15.1 million in the three months ended March 31, 2021. The increase in interest expense is a combined result of:

  • a $5.6 million reduction in the recognition through our income statement of accumulated accrued interest that had been accrued in 2018 in relation to two of our credit facilities that were refinanced on April 12, 2021. As a result of the refinancing, the recognition of such accumulated interest has decreased;
  • a $2.1 million decrease in interest expense due to a decrease in our average indebtedness by $257.8 million between the two periods (average indebtedness of $1,356.7 million in the three months ended March 31, 2022, compared to average indebtedness of $1,614.5 million in the three months ended March 31, 2021), which was partially offset by an increase in our debt service cost by approximately 0.2%; and
  • a $1.5 million decrease in the amortization of deferred finance costs and debt discount related to our 2018 debt refinancing.

As of March 31, 2022, our outstanding debt, gross of deferred finance costs, was $1,118.6 million, which includes $300 million aggregate principal amount of our Senior Notes, and our leaseback obligation was $210.2 million. These balances compare to debt of $1,306.8 million and a leaseback obligation of $117.5 million as of March 31, 2021. See “Recent Developments” below.

Interest income decreased by $2.0 million to nil in the three months ended March 31, 2022 compared to $2.0 million in the three months ended March 31, 2021 mainly as a result of full collection of accrued interest on ZIM and HMM bonds, which were redeemed by the issuers thereof in the year 2021.

Gain on investments

The gain on investments of $221.7 million in the three months ended March 31, 2022 consists of the change in fair value of our shareholding interest in ZIM of $99.5 million and dividends recognized on ZIM ordinary shares of $122.2 million. Our remaining shareholding interest of 7,186,950 ordinary shares of ZIM has been fair valued at $522.6 million as of March 31, 2022, based on the closing price of ZIM’s ordinary shares on the NYSE on that date. Subsequently, in April 2022, we sold 1,500,000 of these ZIM ordinary shares resulting in proceeds to us of $85.3 million.

Equity income on investments

Equity income on investments in Gemini decreased to nil in the three months ended March 31, 2022 compared to $1.8 million in the three months ended March 31, 2021 following our acquisition and full consolidation of Gemini since July 1, 2021.

Other finance expenses, net

Other finance expenses, net increased by $0.1 million to $0.6 million in the three months ended March 31, 2022 compared to $0.5 million in the three months ended March 31, 2021.

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, 2022 and March 31, 2021.

Other income, net

Other income, net was $0.5 million in the three months ended March 31, 2022 compared to $4.0 million in the three months ended March 31, 2021. The decrease was mainly due to the collection from Hanjin Shipping of $3.9 million as a partial payment of common benefit claim and interest in the three months ended March 31, 2021.

Income taxes

Income taxes were $12.2 million in the three months ended March 31, 2022, related to the taxes withheld on dividend income earned on ZIM ordinary shares and compared to no income tax in the three months ended March 31, 2021.

Adjusted EBITDA

Adjusted EBITDA increased by 179.9%, or $173.2 million, to $269.5 million in the three months ended March 31, 2022 from $96.3 million in the three months ended March 31, 2021. As outlined above, the increase is mainly attributable to a $81.1 million increase in operating revenues (net of $16.7 million amortization of assumed time charters) and recognition of a $110.0 million dividend from ZIM (net of withholding taxes) in the three months ended March 31, 2022, which were partially offset by a $16.1 million increase in total operating expenses and a $1.8 million decrease in equity investment in Gemini following our acquisition and full consolidation since July 1, 2021. Adjusted EBITDA for the three months ended March 31, 2022 is adjusted for a $111.8 million change in fair value of the investment in ZIM and dividend withholding taxes and stock-based compensation of $0.1 million. Tables reconciling Adjusted EBITDA to Net Income can be found at the end of this earnings release.

Dividend Payment

Danaos has declared a dividend of $0.75 per share of common stock for the first quarter of 2022, which is payable on June 8, 2022 to stockholders of record as of May 27, 2022.

Recent Developments

In March 2022, we entered into an agreement to build two 7,100 TEU container vessels in Dalian Shipbuilding in China for a contracted price of $156 million and in April 2022, we entered into an agreement to build four 8,000 TEU container vessels in Daehan Shipbuilding in South Korea for a contracted price of $372.7 million. All these fuel-efficient vessels are expected to be delivered to us in 2024.

In April 2022, we sold 1,500,000 ordinary shares of ZIM resulting in proceeds of $85.3 million.

On May 12, 2022, we early extinguished our leasing obligation amounting to $97.4 million as of March 31, 2022 related to the vessels CMA CGM Melisande, CMA CGM Attila, CMA CGM Tancredi, CMA CGM Bianca and CMA CGM Samson and we also early extinguished $270.0 million of the outstanding Natwest loan principal of the Citibank/Natwest $815 mil. Facility, which reduced the future quarterly installments of the remaining facility to $12.9 million and the balloon payment at maturity was reduced to $309.0 million. Additionally, on May 12, 2022, we sent notice of early full repayment to our lenders related to (i) $43 million loan outstanding with the Macquarie Bank to be fully repaid on June 30, 2022, (ii) $20.55 million loan outstanding with Eurobank to be fully repaid on May 25, 2022 and (iii) $9.8 million loan outstanding with SinoPac to be fully repaid on July 1, 2022.

In April 2022, we entered into a preliminary term sheet agreement for a $130.0 million loan facility with major financial institutions, subject to final documentation, which will be secured by our six 5,466 TEU sister vessels acquired in 2021. This facility is expected to be drawn down in the 2nd quarter of 2022.

 

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