Danaos profitable in second quarter

danaos

Danaos, one of the world’s largest independent owners of containerships, reported unaudited results for the period ended June 30, 2022.

Highlights for the Second Quarter and Half Year Ended June 30, 2022:

  • Adjusted net income1 of $157.1 million, or $7.59 per share, for the three months ended June 30, 2022 compared to $68.9 million, or $3.34 per share, for the three months ended June 30, 2021, an increase of 128.0%. Adjusted net income1 of $392.4 million, or $18.95 per share, for the six months ended June 30, 2022 compared to $126.9 million, or $6.17 per share, for the six months ended June 30, 2021, an increase of 209.2%.
  • Liquidity in cash and marketable securities was $588.2 million as of June 30, 2022.
  • Operating revenues of $250.9 million for the three months ended June 30, 2022 compared to $146.4 million for the three months ended June 30, 2021, an increase of 71.4%. Operating revenues of $480.8 million for the six months ended June 30, 2022 compared to $278.5 million for the six months ended June 30, 2021, an increase of 72.6%.
  • Adjusted EBITDA1 of $192.1 million for the three months ended June 30, 2022 compared to $103.7 million for the three months ended June 30, 2021, an increase of 85.2%. Adjusted EBITDA1 of $461.6 million for the six months ended June 30, 2022 compared to $200.0 million for the six months ended June 30, 2021, an increase of 130.8%.
  • Total contracted cash operating revenues were $2.3 billion as of June 30, 2022 and remaining average contracted charter duration was 3.6 years, weighted by aggregate contracted charter hire.
  • Contracted operating days charter coverage currently stands at 99.3% for 2022 and 79.6% for 2023 while for the next 12 months, charter coverage stands at 91.7%.
  • During the three months ended June 30, 2022, we made early prepayment of $434.1 million of debt and lease indebtedness and realized a $22.9 million gain associated with this debt extinguishment. As a result, as of June 30, 2022, Net Debt was $679.7 million, Net Debt / LTM Adjusted EBITDA was 0.9x, while 15 of the Company’s vessels are debt-free currently.
  • As of the end of July 2022, we had repurchased 409,200 shares of our common stock in the open market for $25.1 million, under our share repurchase program of up to $100 million announced in June 2022.
  • Danaos has declared a dividend of $0.75 per share of common stock for the second quarter of 2022, which is payable on August 29, 2022 to stockholders of record as of August 17, 2022.
Three and Six Months Ended June 30, 2022
Financial Summary – Unaudited
(Expressed in thousands of United States dollars, except per share amounts)
Three months Three months Six months Six months
ended June 30, ended June 30, ended June 30, ended June 30,
2022 2021 2022 2021
Operating revenues $250,923 $146,434 $480,824 $278,552
Net income $8,224 $372,837 $339,689 $669,617
Adjusted net income1 $157,110 $68,860 $392,407 $126,871
Earnings per share, diluted $0.40 $18.10 $16.40 $32.57
Adjusted earnings per share, diluted1 $7.59 $3.34 $18.95 $6.17
Diluted weighted average number of shares (in thousands) 20,708 20,599 20,712 20,557
Adjusted EBITDA1 $192,148 $103,736 $461,632 $200,018
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:

“Danaos business model continued to generate strong results in the second quarter, more than doubling our adjusted net income compared with a year ago. Given our fixed charter coverage over the next 12 months, we expect these metrics to improve further. At the same time, however, we are closely following macroeconomic conditions and the potential impacts to our industry.

A confluence of factors, including high energy prices, inflation, and the effects of the war in Ukraine, will likely result in slowing economic growth and negatively impact trade volumes. On the other hand, persistent inefficiencies on the shore side of the supply chain and Covid resurgence in China are keeping the vessel utilization high with increased waiting times in port. Additionally, the increase in fuel cost will likely prompt liner companies to reduce vessel sailing speeds as soon as vessels are available, however we do not expect this to happen until the 2nd quarter of 2023 and onwards. Environmental regulations, particularly the CII compliance, is leading liner companies to redesign their operating loops with lower speeds to ensure that they do not breach requirements and to also assure their customers that they are actively reducing CO2 emissions. These mitigating factors point to a weakening, rather than a collapse, of the market that we expect will result in rates much higher than pre-pandemic levels. For the time being charter rates are holding firm as the available tonnage is very scarce.

The company is very well positioned with a strong liquidity position and a balance sheet that can sustain a severe deterioration of economic conditions. This is reflected in the upgrades by both S&P and Moody’s to the highest level among public shipping companies, validating our efforts to create a leader in our sector.

We are also insulated from rising interest rates as we have reduced our floating rate debt to a level nearly equal to our cash and marketable securities. We will continue to use our balance sheet opportunistically, with a continued focus on state-of-the-art newbuildings with environmental profiles desired by our liner customers which also gives us great confidence about the future of our already ordered six methanol-ready green newbuildings.

We are also continuing to return value to our shareholders through our dividend and our share buyback program, which we have used to reduce our number of outstanding shares by approximately two percent.”

Three months ended June 30, 2022 compared to the three months ended June 30, 2021

During the three months ended June 30, 2022, Danaos had an average of 71.0 containerships compared to 60.0 containerships during the three months ended June 30, 2021. Our fleet utilization for the three months ended June 30, 2022 was 99.9% compared to 99.1% for the three months ended June 30, 2021.

Our adjusted net income amounted to $157.1 million, or $7.59 per share, for the three months ended June 30, 2022 compared to $68.9 million, or $3.34 per share, for the three months ended June 30, 2021. We have adjusted our net income in the three months ended June 30, 2022 for the change in fair value of our investment in ZIM Integrated Shipping Services Ltd. (“ZIM”) of $168.6 million, gain on debt extinguishment of $22.9 million and a non-cash fees amortization of $3.2 million. Please refer to the Adjusted Net Income reconciliation table, which appears later in this earnings release.

The $88.2 million increase in adjusted net income for the three months ended June 30, 2022 compared to the three months ended June 30, 2021 is attributable mainly to a $104.5 million increase in operating revenues and recognition of $13.9 million in dividends from ZIM (net of withholding taxes), which were partially offset by a $20.2 million increase in total operating expenses, a $7.8 million increase in net finance expenses and a $2.2 million decrease in our equity income from our 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 $8.2 million, or $0.40 earnings per diluted share, for the three months ended June 30, 2022 compared to net income of $372.8 million, or $18.10 earnings per diluted share, for the three months ended June 30, 2021. Our net income for the three months ended June 30, 2022 includes a total loss on our investment in ZIM of $154.7 million (net of withholding taxes on dividend) and a gain on debt extinguishment of $22.9 million.

Operating Revenues

Operating revenues increased by 71.4%, or $104.5 million, to $250.9 million in the three months ended June 30, 2022 from $146.4 million in the three months ended June 30, 2021.

Operating revenues for the three months ended June 30, 2022 reflect:

  • a $62.0 million increase in revenues in the three months ended June 30, 2022 compared to the three months ended June 30, 2021 mainly as a result of higher charter rates;
  • a $23.9 million increase in revenues in the three months ended June 30, 2022 compared to the three months ended June 30, 2021 due to the incremental revenue generated by newly acquired vessels;
  • a $2.9 million increase in revenue in the three months ended June 30, 2022 compared to the three months ended June 30, 2021 due to higher non-cash revenue recognition in accordance with US GAAP; and
  • a $15.7 million increase in revenues in the three months ended June 30, 2022 compared to the three months ended June 30, 2021 due to amortization of assumed time charters.

Vessel Operating Expenses

Vessel operating expenses increased by $7.7 million to $40.6 million in the three months ended June 30, 2022 from $32.9 million in the three months ended June 30, 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 $6,463 per vessel per day for the three months ended June 30, 2022 compared to $6,241 per vessel per day for the three months ended June 30, 2021. The average daily operating cost increased mainly due to the COVID-19 related increase in crew remuneration and increased insurance premiums between the three months ended June 30, 2022, compared to the three months ended June 30, 2021. 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 $7.7 million, to $33.8 million in the three months ended June 30, 2022 from $26.1 million in the three months ended June 30, 2021 due to recent acquisitions of 11 vessels.

Amortization of Deferred Dry-docking and Special Survey Costs

Amortization of deferred dry-docking and special survey costs increased by $0.7 million to $3.2 million in the three months ended June 30, 2022 from $2.5 million in the three months ended June 30, 2021.

General and Administrative Expenses

General and administrative expenses remained stable at $7.1 million in each of the three months ended June 30, 2022 and June 30, 2021.

Other Operating Expenses

Other Operating Expenses include Voyage Expenses.

Voyage Expenses

Voyage expenses increased by $4.4 million to $9.4 million in the three months ended June 30, 2022 from $5.0 million in the three months ended June 30, 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 decreased by 11.5%, or $2.1 million, to $16.1 million in the three months ended June 30, 2022 from $18.2 million in the three months ended June 30, 2021. The decrease in interest expense is a combined result of:

  • a $2.2 million decrease in interest expense due to a decrease in our average indebtedness by $311.1 million between the two periods (average indebtedness of $1,154.2 million in the three months ended June 30, 2022, compared to average indebtedness of $1,465.3 million in the three months ended June 30, 2021), which was partially offset by an increase in our debt service cost by 0.44%, mainly as a result of increased Libor rates;
  • a $0.7 million decrease in the amortization of deferred finance costs and debt discount;
  • a $0.7 million decrease in interest expense due to capitalized interest on our vessels under construction in the three months ended June 30, 2022 compared to none in the three months ended June 30, 2021; and
  • a $1.5 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. In May 2022, we fully repaid the facility related to the 2018 accumulated accrued interest. The remaining accumulated accrued interest of $26.9 million was recognized in gain on debt extinguishment on the repayment date.

During the three months ended June 30, 2022, we reduced debt and lease indebtedness by $467.8 million mainly as a result of $434.1 million of early debt and lease repayments and recognized a $22.9 million gain related to this early debt extinguishment. On the other hand, our indebtedness increased by $130 million following consummation of the loan agreement to finance our six 5,466 TEU vessels that were acquired in 2021.

As of June 30, 2022, our outstanding debt, gross of deferred finance costs, was $885.1 million, which includes $300 million aggregate principal amount of our Senior Notes, and our leaseback obligation was $105.8 million. These balances compare to debt of $1,165.9 million and a leaseback obligation of $237.2 million, gross of deferred finance costs, as of June 30, 2021.

Interest income decreased by $9.4 million to $0.1 million in the three months ended June 30, 2022 compared to $9.5 million in the three months ended June 30, 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/(loss) on investments

The loss on investments of $152.4 million in the three months ended June 30, 2022 consists of the loss in fair value of our shareholding interest in ZIM of $168.6 million, which was offset in part by the dividends recognized on ZIM ordinary shares of $16.2 million. In April 2022, we sold 1,500,000 of these ZIM ordinary shares resulting in proceeds to us of $85.3 million. Our remaining shareholding interest of 5,686,950 ordinary shares of ZIM has been fair valued at $268.6 million as of June 30, 2022, based on the closing price of ZIM’s ordinary shares on the NYSE on that date.

Gain on debt extinguishment

The gain on debt extinguishment of $22.9 million in the three months ended June 30, 2022, which related to our early extinguishment of debt, decreased compared to $111.6 million in the three months ended June 30, 2021, which resulted from our debt refinancing on April 12, 2021.

Equity income on investments

Equity income on investments in Gemini decreased to nil in the three months ended June 30, 2022 compared to $2.2 million in the three months ended June 30, 2021 following our acquisition and full consolidation of Gemini since July 1, 2021.

Other finance expenses

Other finance expenses decreased by $0.3 million to $0.3 million in the three months ended June 30, 2022 compared to $0.6 million in the three months ended June 30, 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 June 30, 2022 and June 30, 2021.

Other income, net

Other income, net was $0.4 million in the three months ended June 30, 2022 compared to $0.2 million in the three months ended June 30, 2021.

Income taxes

Income taxes were $2.3 million in the three months ended June 30, 2022, related to the taxes withheld on dividend income earned on ZIM ordinary shares compared to no income tax in the three months ended June 30, 2021.

Adjusted EBITDA

Adjusted EBITDA increased by 85.2%, or $88.4 million, to $192.1 million in the three months ended June 30, 2022 from $103.7 million in the three months ended June 30, 2021. As outlined above, the increase is mainly attributable to a $88.8 million increase in operating revenues (net of $15.7 million amortization of assumed time charters) and recognition of a $13.9 million dividend from ZIM (net of withholding taxes) in the three months ended June 30, 2022, which were partially offset by a $12.1 million increase in total operating expenses and a $2.2 million decrease in our equity income from our investment in Gemini following our acquisition and full consolidation of Gemini since July 1, 2021. Adjusted EBITDA for the three months ended June 30, 2022 is adjusted for a $166.4 million change in fair value of the investment in ZIM and dividend withholding taxes, a gain on debt extinguishment of $22.9 million 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.

Six months ended June 30, 2022 compared to the six months ended June 30, 2021

During the six months ended June 30, 2022, Danaos had an average of 71.0 containerships compared to 60.0 containerships during the six months ended June 30, 2021. Our fleet utilization for the six months ended June 30, 2022 was 98.7% compared to 98.9% for the six months ended June 30, 2021.

Our adjusted net income amounted to $392.4 million, or $18.95 per share, for the six months ended June 30, 2022 compared to $126.9 million, or $6.17 per share, for the six months ended June 30, 2021. We have adjusted our net income in the six months ended June 30, 2022 for the change in fair value of our investment in ZIM of $69.1 million, gain on debt extinguishment of $22.9 million and a non-cash fees amortization of $6.6 million. Please refer to the Adjusted Net Income reconciliation table, which appears later in this earnings release.

The $265.5 million increase in adjusted net income for the six months ended June 30, 2022 compared to the six months ended June 30, 2021 is attributable mainly to a $202.3 million increase in operating revenues and recognition of $123.9 million in dividends from ZIM (net of withholding taxes), which were partially offset by a $39.2 million increase in total operating expenses, a $13.6 million increase in net finance expenses, a $4.0 million decrease in our equity income from our investment in Gemini following our acquisition and full consolidation of Gemini since July 1, 2021 and a partial collection of common benefit claim of $3.9 million from Hanjin Shipping in the six months ended June 30, 2021.

On a non-adjusted basis, our net income amounted to $339.7 million, or $16.40 earnings per diluted share, for the six months ended June 30, 2022 compared to net income of $669.6 million, or $32.57 earnings per diluted share, for the six months ended June 30, 2021. Our net income for the six months ended June 30, 2022 includes a total gain on our investment in ZIM of $54.8 million (net of withholding taxes on dividend) and a gain on debt extinguishment of $22.9 million.

Operating Revenues

Operating revenues increased by 72.6%, or $202.3 million, to $480.8 million in the six months ended June 30, 2022 from $278.5 million in the six months ended June 30, 2021.

Operating revenues for the six months ended June 30, 2022 reflect:

  • a $110.9 million increase in revenues in the six months ended June 30, 2022 compared to the six months ended June 30, 2021 mainly as a result of higher charter rates;
  • a $44.7 million increase in revenues in the six months ended June 30, 2022 compared to the six months ended June 30, 2021 due to the incremental revenue generated by newly acquired vessels;
  • a $14.3 million increase in revenue in the six months ended June 30, 2022 compared to the six months ended June 30, 2021 due to higher non-cash revenue recognition in accordance with US GAAP; and
  • a $32.4 million increase in revenues in the six months ended June 30, 2022 compared to the six months ended June 30, 2021 due to amortization of assumed time charters.

Vessel Operating Expenses

Vessel operating expenses increased by $15.7 million to $79.7 million in the six months ended June 30, 2022 from $64.0 million in the six months ended June 30, 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 $6,385 per vessel per day for the six months ended June 30, 2022 compared to $6,098 per vessel per day for the six months ended June 30, 2021. The average daily operating cost increased mainly due to the COVID-19 related increase in crew remuneration and increased insurance premiums between the six months ended June 30, 2022, compared to the six months ended June 30, 2021. 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 29.3%, or $15.2 million, to $67.1 million in the six months ended June 30, 2022 from $51.9 million in the six months ended June 30, 2021 due to recent acquisitions of 11 vessels.

Amortization of Deferred Dry-docking and Special Survey Costs

Amortization of deferred dry-docking and special survey costs increased by $0.9 million to $5.9 million in the six months ended June 30, 2022 from $5.0 million in the six months ended June 30, 2021.

General and Administrative Expenses

General and administrative expenses decreased by $3.5 million to $14.5 million in the six months ended June 30, 2022, from $18.0 million in the six months ended June 30, 2021. The decrease was mainly attributable to decreased stock-based compensation.

Other Operating Expenses

Other Operating Expenses include Voyage Expenses.

Voyage Expenses

Voyage expenses increased by $7.4 million to $16.6 million in the six months ended June 30, 2022 from $9.2 million in the six months ended June 30, 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 decreased by 0.3%, or $0.1 million, to $33.2 million in the six months ended June 30, 2022 from $33.3 million in the six months ended June 30, 2021. The decrease in interest expense is a combined result of:

  • a $4.3 million decrease in interest expense due to a decrease in our average indebtedness by $284.6 million between the two periods (average indebtedness of $1,254.9 million in the six months ended June 30, 2022, compared to average indebtedness of $1,539.5 million in the six months ended June 30, 2021), which was partially offset by an increase in our debt service cost by 0.31%, mainly as a result of increased Libor rates;
  • a $2.3 million decrease in the amortization of deferred finance costs and debt discount;
  • a $0.7 million decrease in interest expense due to capitalized interest on our vessels under construction in the six months ended June 30, 2022 compared to none in the six months ended June 30, 2021; and
  • a $7.2 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. In May 2022, we fully repaid the facility related to the 2018 accumulated accrued interest. The remaining accumulated accrued interest of $26.9 million was recognized in gain on debt extinguishment on the repayment date.

During the six months ended June 30, 2022, we reduced debt and lease indebtedness by $507.6 million mainly as a result of $434.1 million of early debt and lease repayments and recognized a $22.9 million gain related to this early debt extinguishment. On the other hand, our indebtedness increased by $130 million following consummation of the loan agreement to finance our six 5,466 TEU vessels that were acquired in 2021.

As of June 30, 2022, our outstanding bank debt, gross of deferred finance costs, was $885.1 million, which includes $300 million aggregate principal amount of our Senior Notes, and our leaseback obligation was $105.8 million. These balances compare to bank debt of $1,165.9 million and a leaseback obligation of $237.2 million, gross of deferred finance costs, as of June 30, 2021.

Interest income decreased by $11.4 million to $0.1 million in the six months ended June 30, 2022 compared to $11.5 million in the six months ended June 30, 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/(loss) on investments

The gain on investments of $69.3 million in the six months ended June 30, 2022 consists of the change in fair value of our shareholding interest in ZIM of $69.1 million and dividends recognized on ZIM ordinary shares of $138.4 million. In April 2022, we sold 1,500,000 of these ZIM ordinary shares resulting in proceeds to us of $85.3 million. Our remaining shareholding interest of 5,686,950 ordinary shares of ZIM has been fair valued at $268.6 million as of June 30, 2022, based on the closing price of ZIM’s ordinary shares on the NYSE on that date.

Gain on debt extinguishment

The gain on debt extinguishment of $22.9 million in the six months ended June 30, 2022, which related to our early extinguishment of debt, decreased compared to $111.6 million in the six months ended June 30, 2021, which resulted from our debt refinancing on April 12, 2021.

Equity income on investments

Equity income on investments in Gemini decreased to nil in the six months ended June 30, 2022 compared to $4.0 million in the six months ended June 30, 2021 following our acquisition and full consolidation of Gemini since July 1, 2021.

Other finance expenses

Other finance expenses decreased by $0.1 million to $0.9 million in the six months ended June 30, 2022 compared to $1.0 million in the six months ended June 30, 2021.

Loss on derivatives

Amortization of deferred realized losses on interest rate swaps remained stable at $1.8 million in each of the six months ended June 30, 2022 and June 30, 2021.

Other income, net

Other income, net was $0.9 million in the six months ended June 30, 2022 compared to $4.1 million in the six months ended June 30, 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 six months ended June 30, 2021.

Income taxes

Income taxes were $14.5 million in the six months ended June 30, 2022, related to the taxes withheld on dividend income earned on ZIM ordinary shares and compared to no income tax in the six months ended June 30, 2021.

Adjusted EBITDA

Adjusted EBITDA increased by 130.8%, or $261.6 million, to $461.6 million in the six months ended June 30, 2022 from $200.0 million in the six months ended June 30, 2021. As outlined above, the increase is mainly attributable to a $169.9 million increase in operating revenues (net of $32.4 million amortization of assumed time charters) and a recognition of a $123.9 million dividend from ZIM (net of withholding taxes) in the six months ended June 30, 2022, which were partially offset by a $24.3 million increase in total operating expenses, a $4.0 million decrease in our equity income from our investment in Gemini following our acquisition and full consolidation of Gemini since July 1, 2021 and a partial collection of common benefit claim of $3.9 million from Hanjin Shipping in the six months ended June 30, 2021. Adjusted EBITDA for the six months ended June 30, 2022 is adjusted for a $54.6 million change in fair value of the investment in ZIM and dividend withholding taxes, a gain on debt extinguishment of $22.9 million and stock based compensation of $0.2 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 second quarter of 2022, which is payable on August 29, 2022 to stockholders of record as of August 17, 2022.

Recent Developments

As of the end of July 2022, we had repurchased 409,200 shares of our common stock in the open market for $25.1 million, under our share repurchase program of up to $100 million announced in June 2022.

Subsequent to June 30, 2022 we terminated, as planned, the finance lease liability related to our vessels Suez Canal and Kota Lima and assumed full ownership of these vessels. As a result, 15 of our vessels are currently debt-free.

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