Danaos(US:DAC)2022-03-02 16:00PART I Key Information This section details Danaos Corporation's consolidated capitalization as of December 31, 2021, and outlines various business, financing, environmental, management, and tax risks Risk Factors This section identifies significant business, financing, environmental, management, and tax risks, including dependency on containership demand and substantial debt levels - Key business risks include dependency on containership demand and global economic conditions, the impact of the COVID-19 pandemic, counterparty default risk, reliance on a limited number of customers, and fluctuations in vessel values24 - Financing risks are significant due to substantial debt levels, which could limit flexibility, and the need to comply with restrictive financial and collateral covenants in credit facilities25 - The company is subject to extensive environmental regulations (such as MARPOL Annex VI sulfur cap and ballast water management rules) and other industry risks, including geopolitical instability, piracy, and potential for government requisition of vessels2829143 - The business depends on its Manager, a privately held company, and key employees, including CEO Dr. John Coustas. The loss of these personnel or the Manager could adversely affect operations31 - Tax risks include the potential to pay a 4% U.S. federal income tax on U.S.-source shipping income if the company fails to qualify for the Section 883 exemption, and the risk of being classified as a Passive Foreign Investment Company (PFIC), which would result in adverse tax consequences for U.S. stockholders34226231 Consolidated Capitalization as of December 31, 2021 | Category | Actual (in thousands USD) | As Adjusted (in thousands USD) | | :--- | :--- | :--- | | Debt | | | | Total debt | $1,378,496 | $1,346,133 | | Stockholders' equity | | | | Preferred stock | — | — | | Common stock | $207 | $207 | | Additional paid-in capital | $770,676 | $770,676 | | Accumulated other comprehensive loss | ($71,455) | ($71,455) | | Retained earnings | $1,388,595 | $1,388,595 | | Total stockholders' equity | $2,088,023 | $2,088,023 | | Total capitalization | $3,466,519 | $3,434,156 | Information on the Company Danaos Corporation, a leading containership owner, charters its 71-vessel fleet on multi-year, fixed-rate agreements, managed by Danaos Shipping Co. Ltd Fleet Overview as of February 28, 2022 | Metric | Value | | :--- | :--- | | Number of Containerships | 71 | | Aggregate Capacity (TEU) | 436,589 | | Average Fleet Age (weighted by TEU) | 13.4 years | | Average Remaining Charter Duration (as of Dec 31, 2021) | 4.0 years | - The company's strategy is to charter its vessels on multi-year, fixed-rate period charters to a diverse group of major liner companies, providing stable cash flows. As of December 31, 2021, contracted revenues totaled approximately $2.85 billion through 2028239240 - Operations are managed by Danaos Shipping Co. Ltd., an entity affiliated with the CEO, under a management agreement that expires on December 31, 2024. The manager provides technical, administrative, and commercial services for fixed daily fees plus a percentage of charter hire263269 - The company is subject to extensive environmental regulations from the IMO, EU, and U.S., including rules on air emissions (MARPOL Annex VI), ballast water management (BWM Convention), and oil spills (OPA). Compliance requires significant expenditure and affects vessel operations295298303 Operating and Financial Review and Prospects Operating revenues increased by 49.4% to $689.5 million in 2021, with net income surging to $1.05 billion due to a $578.0 million gain on ZIM investment and fleet expansion Financial Performance Summary (2021 vs. 2020) | Metric | 2021 (in millions USD) | 2020 (in millions USD) | Change | | :--- | :--- | :--- | :--- | | Operating Revenues | $689.5 | $461.6 | +49.4% | | Net Income | $1,052.8 | $153.5 | +586% | | Adjusted EBITDA | $508.8 | $318.3 | +59.8% | | Net Cash from Operating Activities | $428.1 | $265.7 | +61.1% | - The significant increase in net income for 2021 was primarily due to a $578.0 million gain on the company's investment in ZIM, which included a $543.7 million change in fair value and $34.3 million in dividends385409 - In April 2021, the company completed a $1.25 billion debt refinancing using proceeds from a new $815 million senior secured credit facility, a $135 million sale-leaseback arrangement, and $300 million in 8.50% Senior Notes due 2028. This extended debt maturities and improved financial flexibility348431 - The company's fleet grew to 71 vessels by year-end 2021 from 60 in 2020, through the acquisition of six secondhand vessels and the consolidation of the five-vessel Gemini fleet after acquiring the remaining 51% equity interest346348 Directors, Senior Management and Employees This section outlines the company's leadership, including CEO Dr. John Coustas, executive compensation, board structure, and equity compensation plan - The company is led by President and CEO Dr. John Coustas, who has over 30 years of experience in the shipping industry and has managed the company since 1987556 - Executive officers received aggregate cash compensation of €1.8 million ($2.1 million) in 2021. Non-executive directors receive an annual fee of $70,000, with the audit committee chairman receiving an additional $15,000567568 - The Board of Directors is classified with staggered three-year terms. As of February 28, 2022, the board consisted of six members, with four determined to be independent under NYSE rules555573574 - The company has an equity compensation plan allowing for the grant of stock awards. In 2021, the company granted a total of 270,000 shares to executive officers, directors, and employees of the Manager, some of which were fully vested upon grant586591593 Major Shareholders and Related Party Transactions This section details major shareholders and related party transactions, highlighting DIL's 39.0% ownership and the $19.9 million in 2021 management fees to Danaos Shipping Major Shareholders as of February 28, 2022 | Shareholder | Number of Shares | Percentage of Common Stock | | :--- | :--- | :--- | | Danaos Investment Limited as Trustee of the 883 Trust (DIL) | 8,081,651 | 39.0% | | RBF Capital LLC | 1,435,161 | 6.9% | | All executive officers and directors as a group (8 persons) | 8,497,565 | 41.0% | - The company's manager, Danaos Shipping Co. Ltd., is controlled by DIL, a trust for the benefit of CEO Dr. John Coustas and his family. This creates a significant related party relationship595 Fees Paid to Manager (Danaos Shipping) | Year | Management Fees (in millions USD) | | :--- | :--- | | 2021 | $19.9 | | 2020 | $17.7 | | 2019 | $16.8 | - On July 1, 2021, the company exercised its option to acquire the remaining 51% equity interest in Gemini Shipholdings Corporation from Virage International Ltd., a company controlled by DIL, for $86.7 million in cash612 Financial Information This section details legal proceedings, including a $597.9 million claim against Hanjin Shipping, and the reinstatement of the quarterly cash dividend policy - The company is involved in legal proceedings related to the 2016 bankruptcy of Hanjin Shipping. It has a total unsecured claim of $597.9 million and received a partial payment of $3.9 million in January 2021633635636 - The company reinstated its quarterly cash dividend policy in 2021. It paid three dividends of $0.50 per share each during 2021, totaling $30.9 million. A dividend of $0.75 per share was declared on February 7, 2022, and paid on February 28, 2022638 Additional Information This section covers corporate structure, anti-takeover provisions, and tax considerations, including the Section 883 exemption and PFIC status - As of December 31, 2021, the company had 20,716,738 shares of common stock outstanding. A 1-for-14 reverse stock split was effected on May 2, 2019641642 - The company's articles of incorporation include several anti-takeover provisions, such as a classified board of directors with staggered three-year terms, authorization to issue 'blank check' preferred stock, and prohibitions on certain business combinations with 'interested stockholders' who own 15% or more of voting stock652653660 - The company is a Marshall Islands corporation and is not subject to income or capital gains tax there. It believes it qualifies for the Section 883 exemption from U.S. federal income tax on its U.S.-source shipping income, but this is subject to satisfying either the 50% Ownership Test or the Publicly-Traded Test, which includes avoiding the '5 Percent Override Rule'671681687 - The company believes it should not be treated as a Passive Foreign Investment Company (PFIC) for the 2021 taxable year, but notes legal uncertainties exist, particularly regarding the characterization of time charter income as services versus rental income709 Quantitative and Qualitative Disclosures About Market Risk This section details market risks, including interest rate risk on floating-rate debt and foreign currency exposure, with 24.0% of 2021 operating expenses in non-USD currencies - The company is exposed to interest rate risk from its floating-rate debt. A hypothetical 10 basis point increase in interest rates would result in an estimated $0.6 million decrease in earnings for 2022741 - The company has foreign currency exchange risk because it generates all revenues in U.S. dollars but incurs a portion of its operating expenses in other currencies. In 2021, approximately 24.0% of operating expenses were denominated in non-U.S. dollar currencies, primarily the Euro742 - As of the report date, the company had no outstanding interest rate swap agreements. Previously used swaps were de-designated from hedge accounting on July 1, 2012, but deferred losses from that period are still being amortized into earnings732739 PART II Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021, confirmed by an unqualified auditor opinion - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2021749 - Based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), management concluded that the company's internal control over financial reporting was effective as of December 31, 2021753754 - The independent auditor, PricewaterhouseCoopers S.A., provided an attestation report confirming the effectiveness of the company's internal control over financial reporting as of December 31, 2021756 Corporate Governance and Other Matters This section details corporate governance, including the audit committee financial expert, accountant fees, and differences from NYSE standards as a foreign private issuer - The Board of Directors has identified Myles R. Itkin as the audit committee financial expert758 Principal Accountant Fees (PricewaterhouseCoopers S.A.) | Service Category | 2021 (in thousands USD) | 2020 (in thousands USD) | | :--- | :--- | :--- | | Audit fees | $497.1 | $456.4 | | Audit-related fees | — | — | | Total fees | $497.1 | $456.4 | - As a foreign private issuer, the company's corporate governance practices differ from NYSE standards for U.S. domestic companies. Key differences include having a non-independent director on the Nominating and Corporate Governance Committee and not requiring shareholder approval for certain equity issuances, as permitted by Marshall Islands law769770771 PART III Financial Statements This section presents the audited consolidated financial statements for 2019-2021, prepared under U.S. GAAP, with an unqualified opinion from PricewaterhouseCoopers S.A - The report includes the audited consolidated financial statements for the three years ended December 31, 2021, prepared in conformity with U.S. GAAP777784 - The independent registered public accounting firm, PricewaterhouseCoopers S.A., provided an unqualified opinion on both the consolidated financial statements and the company's internal control over financial reporting as of December 31, 2021785786 - A critical audit matter identified was the valuation of time charters assumed on the acquisition of vessels, which involved significant management judgment regarding assumptions like prevailing market charter rates793794 Exhibits This section lists all exhibits filed with the annual report, including corporate documents, major financing agreements, and management agreements - Key exhibits filed with the report include foundational corporate documents, major financing agreements, and related party agreements778 - Significant contracts listed as exhibits are the Indenture for the Senior Notes, the Amended and Restated Management Agreement with Danaos Shipping, and the $815 million Senior Secured Credit Facility agreement778