Danaos(US:DAC)2023-03-08 16:00Forward-Looking Information This section outlines forward-looking statements, their inherent risks, and key factors that could affect future financial results - This report contains forward-looking statements based on management's current expectations and projections. These statements are identified by words such as "anticipate," "believe," "expect," and are subject to various risks and uncertainties that could cause actual results to differ materially1415 - Key factors that could affect future financial results include, but are not limited to: future operating results, the impact of the COVID-19 pandemic and the war in Ukraine, business strategies, market conditions, charter rates, financial condition and liquidity, performance of charterers, changes in regulations, and potential litigation15 PART I Item 3. Key Information This section details the company's capitalization and outlines significant business, financial, and regulatory risks Capitalization and Indebtedness As of December 31, 2022, Danaos Corporation reported total debt of $510.9 million and stockholders' equity of $2.56 billion Consolidated Capitalization as of December 31, 2022 | | Actual (in thousands) | As Adjusted (in thousands) | | :--- | :--- | :--- | | Debt: | | | | Senior unsecured notes | $262,766 | $262,766 | | BNP Paribas/Credit Agricole $130 mil. Facility | $120,000 | $115,000 | | Alpha Bank $55.25 mil. Facility | $55,250 | $53,375 | | Leasing obligations | $72,925 | $68,590 | | Total debt | $510,941 | $499,731 | | Stockholders' equity: | | | | Common stock | $203 | $203 | | Additional paid-in capital | $748,109 | $748,109 | | Accumulated other comprehensive loss | ($74,209) | ($74,209) | | Retained earnings | $1,886,311 | $1,886,311 | | Total stockholders' equity | $2,560,414 | $2,560,414 | | Total capitalization | $3,071,355 | $3,060,145 | Risk Factors The company faces significant risks from market volatility, customer concentration, substantial debt, and regulations - The company's profitability is highly dependent on the cyclical and volatile containership market. Charter rates, which reached all-time highs in 2021, declined to pre-pandemic levels by the end of 2022. For example, the one-year daily rate for a 4,400 TEU Panamax containership fell from $100,000 at the end of 2021 to $24,300 at the end of December 202237 - A significant portion of revenue comes from a limited number of customers. In 2022, approximately 73% of operating revenues were generated by six customers, with CMA CGM, MSC, and HMM accounting for 26%, 13%, and 12%, respectively50 - The company has substantial debt of $510.9 million as of December 31, 2022. Credit facilities contain financial covenants, including maintaining specified collateral coverage ratios, which could be breached if vessel values decline or charter rates fall, potentially leading to debt acceleration9895 - The company is subject to increasing environmental regulations, such as the IMO's 0.5% sulfur cap on marine fuel and new energy efficiency (EEXI) and carbon intensity (CII) standards, which could require significant capital expenditures and increase operating costs109113 - As a foreign corporation, the company may be subject to a 4% U.S. federal income tax on its U.S.-source shipping income if it does not qualify for an exemption under Section 883 of the U.S. Internal Revenue Code. There is also a risk of being classified as a Passive Foreign Investment Company (PFIC), which could result in adverse U.S. tax consequences for U.S. stockholders164167 Item 4. Information on the Company Danaos Corporation owns 68 containerships and 6 newbuildings, chartered long-term, managed by a related party, and subject to extensive regulations Business Overview and Fleet Danaos owns 68 containerships and 6 newbuildings, with $2.1 billion in contracted revenues and 3.4 years average charter duration Fleet and Contracted Revenue Status | Metric | Value | | :--- | :--- | | Operating Fleet (as of Mar 7, 2023) | 68 containerships | | Total TEU Capacity | 421,293 TEU | | Newbuildings (as of Mar 7, 2023) | 6 containerships | | Total Newbuild TEU Capacity | 46,200 TEU | | Contracted Revenue (as of Dec 31, 2022) | ~$2.1 billion | | Average Remaining Charter Duration | 3.4 years (weighted) | - The company has 6 containerships under construction, with expected delivery in 2024. These include two 7,100 TEU vessels and four 8,000 TEU vessels184 - In 2022, the company sold two vessels, Catherine C and Leo C, for gross proceeds of $130 million. It also agreed to sell the Amalia C, which was delivered in January 2023183 - The company sold its remaining 7,186,950 ordinary shares of ZIM for net proceeds of $246.6 million in 2022 and received $147.1 million in dividends from ZIM during the year186 Management and Competition The company's fleet is managed by a related party, competing in a highly competitive market where its large fleet and long-term contracts are key advantages - Operations are managed by Danaos Shipping Co. Ltd., an entity affiliated with CEO Dr. John Coustas, under a management agreement with a term expiring on December 31, 2024190194 Management Fees for 2023 | Fee Type | Amount | | :--- | :--- | | Daily Management Fee | $850 | | Daily Vessel Fee (Time Charter) | $850 | | Daily Vessel Fee (Bareboat Charter) | $425 | | Commission on Freight/Charter Hire | 1.25% | | Fee on Vessel Sale/Purchase | 0.5% of contract price | | Newbuilding Supervision Fee | $725,000 per vessel | - The company faces substantial competition from experienced shipping companies, including state-sponsored entities and those financed by the German KG system, which may offer lower charter rates due to tax benefits19976 Regulation and Compliance The company's operations are subject to extensive international and U.S. environmental, safety, and security regulations - All vessels must be certified as "in class" by a classification society, requiring annual, intermediate, and special surveys. For 2023, 24 vessels are scheduled for drydocking203137209 - The company is subject to IMO regulations, including the global 0.5% sulfur cap on marine fuel (effective Jan 2020) and new energy efficiency (EEXI) and carbon intensity (CII) rules aimed at reducing greenhouse gas emissions, which came into force in January 2023226251 - Compliance with U.S. environmental laws is critical, including the Oil Pollution Act (OPA), which imposes strict liability for oil spills, and the Clean Water Act (CWA), which regulates ballast water discharges through the Vessel General Permit (VGP)230241 - Vessel security is managed under the International Ship and Port Facilities Security (ISPS) Code and the U.S. Maritime Transportation Security Act (MTSA), requiring security plans and certifications. The company must also address maritime cyber risks in its Safety Management Systems as of January 2021256259 Item 5. Operating and Financial Review and Prospects This section analyzes financial performance, noting 44.1% revenue growth to $993.3 million, decreased net income due to ZIM share losses, and significant debt reduction Results of Operations Operating revenues rose 44.1% to $993.3 million in 2022, but net income fell to $559.2 million due to ZIM investment losses Consolidated Financial Highlights (Years ended Dec 31) | (In thousands) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Operating revenues | $993,344 | $689,505 | $461,594 | | Income from operations | $653,436 | $358,259 | $199,480 | | Net income | $559,210 | $1,052,841 | $153,550 | | Diluted EPS | $27.28 | $51.15 | $6.45 | | Adjusted EBITDA | $851,160 | $508,803 | $318,331 | - 2022 vs. 2021: The $303.8 million (44.1%) increase in operating revenue was primarily driven by a $260.6 million increase from higher charter rates and a $55.8 million increase from newly acquired vessels. The significant drop in net income was mainly due to a loss on ZIM investments in 2022 compared to a large gain in 2021312313323 - 2021 vs. 2020: The $227.9 million (49.4%) increase in operating revenue was driven by a $107.9 million increase from higher charter rates and improved utilization, and a $55.7 million increase from new vessels. Net income surged due to these revenue gains and a $543.7 million gain on ZIM investments333334344 Liquidity and Capital Resources The company's liquidity is supported by operating cash flows, with $267.7 million cash and $382.5 million credit available, and debt significantly reduced to $510.9 million Cash Flow Summary (Years ended Dec 31) | (In thousands) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | $934,741 | $428,111 | $265,679 | | Net cash from/(used in) investing activities | $176,572 | ($143,148) | ($170,736) | | Net cash used in financing activities | ($973,401) | ($220,870) | ($168,450) | - Total outstanding debt (including leaseback obligations) was reduced by $857.6 million during 2022, from $1,368.5 million at year-end 2021 to $510.9 million at year-end 2022354321 - The company has a share repurchase program of up to $100 million, under which it repurchased 466,955 shares for $28.6 million as of December 31, 2022359 Contractual Obligations as of December 31, 2022 | (In thousands) | Total | Less than 1 year | 2 – 3 years | 4 – 5 years | More than 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Long-term debt obligations | $438,016 | $27,500 | $36,400 | $111,350 | $262,766 | | Long-term leaseback obligations | $72,925 | $27,469 | $45,456 | — | — | | Payments for newbuilding vessels | $343,839 | $31,200 | $312,639 | — | — | | Payments to our manager | $64,006 | $33,719 | $30,287 | — | — | Critical Accounting Estimates Vessel impairment is a critical accounting estimate, assessed by comparing carrying value to projected cash flows, with no impairment recorded in 2022 - The company evaluates vessels for impairment by comparing their carrying value to undiscounted projected net operating cash flows. This analysis is highly sensitive to assumptions about future charter rates for non-contracted periods409 - For future charter rate estimates, management uses a benchmark of 5 to 15-year historical averages to account for market volatility and cyclicality412 - As of December 31, 2022, an impairment assessment was performed due to market volatility. The assessment concluded that no impairment was required for any vessel in the fleet411415 Item 6. Directors, Senior Management and Employees This section details the company's leadership, board structure, and compensation, including €2.0 million in executive cash compensation for 2022 Directors and Executive Officers (as of March 7, 2023) | Name | Age | Position | | :--- | :--- | :--- | | Dr. John Coustas | 66 | President and CEO and Class I Director | | Iraklis Prokopakis | 72 | Senior Vice President, COO, Treasurer and Class II Director | | Evangelos Chatzis | 49 | Chief Financial Officer and Secretary | | Dimitris Vastarouchas | 55 | Deputy Chief Operating Officer | | Petros Christodoulou | 62 | Class I Director | | Myles R. Itkin | 75 | Class I Director | | William Repko | 73 | Class III Director | | Richard Sadler | 61 | Class III Director | - Aggregate cash compensation for executive officers was €2.0 million ($2.1 million) for the year ended December 31, 2022. Non-cash share-based compensation expense for executives was $5.4 million441 - A defined benefit retirement plan for executive officers was established effective December 14, 2022, with a prior service cost of $14.2 million recognized in Other Comprehensive Income442 - The company has an equity compensation plan allowing for awards of common stock. In 2022, 100,000 fully vested shares were granted to executive officers459464 Item 7. Major Shareholders and Related Party Transactions This section outlines related party transactions, primarily with Danaos Shipping Co. Ltd., the company's manager and largest shareholder - The company's manager, Danaos Shipping Co. Ltd., is ultimately owned by a trust for the benefit of CEO Dr. John Coustas and his family. This entity is also the company's largest stockholder467 - Management fees paid to the Manager amounted to approximately $21.9 million in 2022, $19.9 million in 2021, and $17.7 million in 2020469 - On July 1, 2021, the company acquired the remaining 51% equity interest in Gemini Shipholdings Corporation from Virage International Ltd., a company controlled by its largest stockholder, for $86.7 million in cash481 Major Shareholders (as of March 7, 2023) | Beneficial Owner | Number of Shares | Percentage of Common Stock | | :--- | :--- | :--- | | Danaos Investment Limited as Trustee of the 883 Trust | 9,048,502 | 44.5% | | RBF Capital LLC | 1,435,161 | 7.1% | | All executive officers and directors as a group (8 persons) | 9,315,502 | 45.8% | Item 8. Financial Information This section refers to full financial statements, details legal proceedings including a $597.9 million claim against Hanjin Shipping, and outlines the company's dividend policy - The company has an unsecured claim of $597.9 million against the bankrupt Hanjin Shipping, which is not recognized on the balance sheet. A partial payment of $3.9 million on a separate common benefit claim was received in January 2021497499500 - The company reinstated quarterly dividends in 2021. In 2022, it paid four quarterly dividends of $0.75 per share. A dividend of $0.75 per share was also declared for Q1 2023, payable in March 2023502 Item 10. Additional Information This section details corporate structure, anti-takeover provisions, and tax implications as a Marshall Islands corporation, including potential U.S. federal income tax and PFIC risks - As of March 7, 2023, the company had 20,349,702 shares of common stock outstanding. Authorized capital consists of 750 million common shares and 100 million blank check preferred shares507 - The company's articles of incorporation include several anti-takeover provisions, such as a classified board with staggered three-year terms, the ability to issue blank check preferred stock without shareholder approval, and prohibitions on certain business combinations with "interested stockholders" (owners of 15% or more)518519521526 - As a Marshall Islands corporation not conducting business there, the company is not subject to Marshall Islands income tax. However, its U.S.-source shipping income could be subject to a 4% U.S. federal income tax unless it qualifies for an exemption under Section 883 of the U.S. tax code534545 - There is a risk the company could be classified as a Passive Foreign Investment Company (PFIC), which would subject U.S. Holders to a disadvantageous tax regime unless they make a QEF or mark-to-market election. The company believes it was not a PFIC for the 2022 taxable year567571 Item 11. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from interest rate fluctuations and unhedged foreign currency exchange rates, with a 10 basis point rate increase impacting 2023 interest expense by $145,000 - The company currently has no outstanding interest rate swap agreements. It previously used swaps for hedging, and deferred realized losses from these past hedges are being amortized into earnings, with $3.6 million reclassified in 2022590597 - A sensitivity analysis indicates that a 10 basis point (0.10%) increase in interest rates would result in a $145,000 increase in interest expense for 2023 based on floating rate debt outstanding at year-end 2022598 - The company has foreign currency exchange risk as all revenues are in U.S. dollars, while approximately 22.4% of operating expenses in 2022 were in other currencies, mainly Euros. This exposure is not hedged599 PART II Item 15. Controls and Procedures Management and Deloitte concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2022 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022605 - Management's annual report on internal control over financial reporting concluded that, as of December 31, 2022, the company's internal control over financial reporting was effective based on the COSO framework609610 - The independent auditor, Deloitte Certified Public Accountants S.A., provided an unqualified attestation report on the effectiveness of the company's internal control over financial reporting as of December 31, 2022612 Item 16. Corporate Governance and Other Disclosures This section covers corporate governance, including the audit committee, auditor change to Deloitte in May 2022, share repurchase program, and differences from NYSE governance standards as a foreign private issuer - The Board of Directors has determined that Myles R. Itkin qualifies as an audit committee financial expert614 - On May 11, 2022, the company dismissed PricewaterhouseCoopers S.A. ("PwC") and engaged Deloitte Certified Public Accountants S.A. as its new independent registered public accounting firm. There were no disagreements with PwC on any accounting principles or practices627629 Principal Accountant Fees (in thousands) | Firm | Year | Audit Fees | Audit-related Fees | Total Fees | | :--- | :--- | :--- | :--- | :--- | | Deloitte | 2022 | $332.5 | $0 | $332.5 | | PwC | 2021 | $497.1 | $0 | $497.1 | - Under its $100 million share repurchase program announced in June 2022, the company repurchased 466,955 shares for $28.6 million through December 31, 2022624625 - As a foreign private issuer, the company follows certain home country (Marshall Islands) governance practices instead of NYSE rules, notably regarding shareholder approval for equity compensation plans and certain share issuances, and the composition of its nominating committee633634 PART III Item 18. Financial Statements This section contains the audited consolidated financial statements for 2022 and Deloitte's unqualified auditor's reports, highlighting vessel impairment as a critical audit matter Auditor's Report and Opinion Deloitte issued unqualified opinions on the 2022 financial statements and internal control over financial reporting, identifying vessel impairment as a critical audit matter - Deloitte issued an unqualified opinion on the Company's financial statements for the year ended December 31, 2022649 - Deloitte also issued an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of December 31, 2022661 - The critical audit matter identified was the impairment of long-lived assets, specifically the significant and subjective assumptions related to estimating future charter rates for unfixed days used in the undiscounted cash flow analysis654657658 Consolidated Financial Statements As of December 31, 2022, total assets were $3.40 billion, liabilities $839.8 million, and stockholders' equity $2.56 billion, with $559.2 million net income Consolidated Balance Sheet Highlights (as of Dec 31) | (In thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Total current assets | $372,521 | $632,492 | | Total non-current assets | $3,027,707 | $2,994,633 | | Total assets | $3,400,228 | $3,627,125 | | Total current liabilities | $228,407 | $319,307 | | Total long-term liabilities | $611,407 | $1,219,795 | | Total liabilities | $839,814 | $1,539,102 | | Total stockholders' equity | $2,560,414 | $2,088,023 | Consolidated Income Statement Highlights (Year ended Dec 31, 2022) | (In thousands) | 2022 | | :--- | :--- | | Operating Revenues | $993,344 | | Income from Operations | $653,436 | | Net Income | $559,210 | Notes to the Consolidated Financial Statements The notes detail accounting policies, fleet assets, newbuilding commitments, debt restructuring, related party transactions, and executive compensation plans - On July 1, 2021, the company acquired the remaining 51% of Gemini Shipholdings for $86.7 million, resulting in a $64.1 million gain on its previously held equity interest and full consolidation of Gemini's five vessels771 - The company has commitments for six newbuilding vessels with remaining payments of $31.2 million in 2023 and $312.6 million in 2024781 - In 2022, the company significantly restructured its debt, extinguishing the $815 million Citibank/Natwest facility and replacing it with a new $382.5 million revolving credit facility and a $55.25 million facility from Alpha Bank. It also repurchased $37.2 million of its senior notes813818 - A defined benefit retirement plan for executive officers was established in December 2022, recognizing a prior service cost of $14.2 million861