Danaos(DAC) - 2022 Q3 - Quarterly Report

Operating and Financial Review and Prospects Results of Operations The company's results of operations showed significant revenue growth for both the three and nine-month periods ending September 30, 2022, primarily driven by higher charter rates and fleet expansion. However, profitability was heavily influenced by the volatility of its investment in ZIM Integrated Shipping Services Ltd. ("ZIM"), with a substantial loss recognized in 2022 compared to a large gain in 2021. Operating expenses increased due to the larger fleet and inflationary pressures on crew and insurance costs. Interest expenses declined as the company actively reduced its overall indebtedness Three months ended September 30, 2022 vs 2021 In Q3 2022, operating revenues increased by 32.7% to $260.0 million, driven by higher charter rates and newly acquired vessels. This was partially offset by increased vessel operating expenses, which rose due to a larger fleet and higher daily costs ($6,173 vs $5,918). A significant $107.3 million loss on the ZIM investment was recorded, a sharp reversal from the $47.2 million gain in Q3 2021, heavily impacting net income. Interest expense decreased by 11.6% due to lower average indebtedness Q3 2022 vs Q3 2021 Key Financial Metrics | Metric | Q3 2022 (USD Million) | Q3 2021 (USD Million) | Change (%) | | :--- | :--- | :--- | :--- | | Operating Revenues | 260.0 | 195.9 | +32.7% | | Vessel Operating Expenses | 39.2 | 34.7 | +13.0% | | Depreciation | 34.1 | 31.0 | +10.0% | | Interest Expense | 16.0 | 18.1 | -11.6% | | (Loss)/Gain on Investments | (107.3) | 47.2 | -327.3% | | Dividend Income | 27.0 | 16.4 | +64.6% | - The average number of containerships in the fleet increased to 71.0 from 65.7 year-over-year, while fleet utilization saw a slight decrease from 97.7% to 97.1%[4] - The increase in vessel operating expenses was primarily due to a larger fleet and a rise in average daily operating costs to $6,173 per vessel, up from $5,918, driven by higher crew remuneration and insurance premiums related to COVID-19 and the Ukraine war[8] - The company sold all its remaining 5,686,950 ordinary shares of ZIM in Q3 2022, generating proceeds of $161.3 million but resulting in a recognized loss of $107.3 million for the quarter[16] Nine months ended September 30, 2022 vs 2021 For the first nine months of 2022, operating revenues surged 56.1% to $740.9 million, reflecting higher charter rates and a larger fleet. A significant loss of $176.4 million on the ZIM investment was recorded, compared to a $491.4 million gain in the prior-year period. However, this was partially offset by a substantial increase in dividend income from ZIM to $165.4 million. The company also recognized a $22.9 million gain on debt extinguishment from early debt repayments Nine Months 2022 vs 2021 Key Financial Metrics | Metric | Nine Months 2022 (USD Million) | Nine Months 2021 (USD Million) | Change (%) | | :--- | :--- | :--- | :--- | | Operating Revenues | 740.9 | 474.5 | +56.1% | | Vessel Operating Expenses | 118.9 | 98.7 | +20.5% | | Depreciation | 101.2 | 82.9 | +22.1% | | Gain on Debt Extinguishment | 22.9 | 111.6 | -79.5% | | (Loss)/Gain on Investments | (176.4) | 491.4 | -135.9% | | Dividend Income | 165.4 | 16.4 | +908.5% | - The average number of containerships increased to 71.0 from 61.9 in the prior-year period, with fleet utilization remaining high at 98.1%[24] - Average daily operating costs rose to $6,314 per vessel per day, compared to $6,034 in the same period of 2021, due to increased crew remuneration and insurance premiums[28] - The company sold all its ZIM ordinary shares during 2022, generating total proceeds of $246.6 million but recognizing a loss of $176.4 million for the nine-month period[38] Liquidity and Capital Resources The company's liquidity is strong, with principal funding sources from operating cash flows, vessel sales, and proceeds from its divested ZIM investment. As of September 30, 2022, the company held $556.3 million in cash and had $2.3 billion in total contracted cash revenues. Key uses of funds include vessel operating expenses, newbuilding installments, debt service, dividends, and a $100 million share repurchase program. The company has been actively deleveraging, making significant early debt and lease repayments during the period Liquidity and Debt Position as of Sep 30, 2022 | Metric | Amount (USD Million) | | :--- | :--- | | Cash and cash equivalents | 556.3 | | Total contracted cash revenues | 2,300.0 | | Outstanding indebtedness (gross) | 868.1 | | Outstanding leaseback obligations (gross) | 79.6 | - The company has committed to aggregate purchase prices of $156.0 million for two 7,100 TEU vessels and $372.7 million for four 8,000 TEU vessels, with payments scheduled through 2024[52] - A quarterly dividend of $0.75 per share was declared, amounting to approximately $15.2 million, payable in November 2022[53] - Under a $100 million share repurchase program announced in June 2022, the company repurchased 466,955 shares for $28.6 million by September 30, 2022[54] External Factors Impacting Business The company's operations are affected by significant external factors. The war in Ukraine poses risks to crewing operations, trade patterns, and global economic stability. The COVID-19 pandemic continues to cause disruptions, although the container shipping market has been robust since mid-2020. Pandemic-related issues have led to increased crew remuneration and operational delays. China's Zero COVID-19 policy also presents risks of shipyard delays and increased expenses - The conflict between Russia and Ukraine could adversely affect crewing operations, as the company's Manager has offices in St. Petersburg, Odessa, and Mariupol[56] - While the COVID-19 pandemic initially caused a decline in global trade, the market rebounded sharply from H2 2020 through Q3 2022, driven by e-commerce growth and supply chain disruptions, leading to higher charter rates[59] - COVID-19 and the war in Ukraine have directly increased operating costs, with the average daily operating cost rising to $6,314 per vessel in the first nine months of 2022 due to higher crew remuneration and insurance premiums[60] - China's Zero COVID-19 policy is a continuing risk, potentially causing delays at shipyards where two of the company's newbuilds are being constructed and affecting dry-docking and repairs[61] Cash Flows For the nine months ended September 30, 2022, cash flow from operations increased significantly to $789.2 million from $296.1 million in the prior year, driven by higher revenues and dividend collections. Investing activities provided $164.5 million in cash, a reversal from a $103.8 million use of cash, mainly due to increased proceeds from the sale of ZIM shares. Financing activities used $514.2 million, a substantial increase from $164.4 million, reflecting significant early debt repayments, dividend payments, and share repurchases Cash Flow Summary (Nine Months Ended Sep 30) | Cash Flow Activity | 2022 (USD Million) | 2021 (USD Million) | | :--- | :--- | :--- | | Net cash provided by operating activities | 789.2 | 296.1 | | Net cash provided by/(used in) investing activities | 164.5 | (103.8) | | Net cash used in financing activities | (514.2) | (164.4) | - The increase in operating cash flow was primarily due to a $243.5 million increase in operating revenues and a $137.5 million increase in dividend collections from ZIM[65] - Investing cash flow was positively impacted by a $170.2 million year-over-year increase in proceeds from the sale of ZIM shares[66] - The higher use of cash in financing activities was driven by a $431.4 million increase in payments for long-term debt and leasebacks, $25.7 million more in dividend payments, and $28.6 million in share repurchases[67] Non-GAAP Financial Measures The company uses EBITDA and Adjusted EBITDA as non-GAAP measures to evaluate performance. For the nine months ended September 30, 2022, EBITDA decreased to $539.2 million from $1,014.8 million in the prior year, largely due to the negative swing in the fair value of the ZIM investment. In contrast, Adjusted EBITDA, which excludes the ZIM investment's fair value changes and other non-core items, increased significantly by $325.1 million to $674.7 million, reflecting strong core operating performance driven by higher revenues and ZIM dividends Reconciliation of Net Income to EBITDA and Adjusted EBITDA (Nine Months Ended Sep 30) | Metric (USD thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Net Income | 406,489 | 886,844 | | EBITDA | 539,168 | 1,014,761 | | Adjusted EBITDA | 674,738 | 349,639 | - The decrease in EBITDA was mainly attributed to a $518.8 million negative change related to the ZIM investment's fair value and dividends, and an $88.7 million decrease in gain on debt extinguishment[75] - The increase in Adjusted EBITDA was driven by a $229.5 million increase in operating revenues (net of amortization) and a $134.9 million increase in dividends from ZIM (net of taxes)[76] Capital Structure and Risk Management The company manages its capital structure through a mix of credit facilities, senior unsecured notes, and leaseback obligations. As of September 30, 2022, total debt was $955.2 million. The company has been actively managing its debt, including early extinguishments and refinancing activities to improve terms and reduce costs. Market risks include inflation, which affects operating expenses, and rising interest rates, which increase the cost of capital. The company currently has no outstanding interest rate swaps Credit Facilities and Indebtedness As of September 30, 2022, the company had no remaining borrowing availability under its credit facilities and was in compliance with all financial covenants. Key debt instruments include the Citibank/Natwest $815 million Facility, a new BNP Paribas/Credit Agricole $130 million Facility, and $300 million in Senior Notes. The company made significant early debt repayments in Q2 2022 and has an agreement in principle to refinance the Citibank/Natwest facility to further improve its debt profile Outstanding Debt as of Sep 30, 2022 (USD Million) | Facility | Amount | | :--- | :--- | | Citibank/Natwest $815 mil. Facility | 450.6 | | BNP Paribas/Credit Agricole $130 mil. Facility | 125.0 | | Senior Notes | 300.0 | | Total (Selected) | 875.6 | - In May 2022, the company made an early extinguishment of $270.0 million on the Citibank/Natwest facility and fully repaid loans with Macquarie Bank, Eurobank, and SinoPac[81] - Subsequent to Q3 2022, an agreement in principle was reached to refinance the remaining $437.75 million of the Citibank/Natwest facility with a new $382.5 million Revolving Credit Facility and a $55.25 million Term Loan[82][198] Market Risk The company is exposed to market risks, primarily from inflation and interest rates. Elevated inflation is impacting operating expenses, particularly energy and commodity prices. Rapidly rising interest rates, driven by central bank policies to combat inflation, are increasing the company's cost of capital. The company currently has no interest rate swaps to hedge this exposure and does not use derivatives for foreign currency risk - The company has no outstanding interest rate swap agreements to hedge against fluctuations in interest rates[88] - Elevated inflation is affecting operating expenses through higher energy and commodity prices. Rising interest rates are expected to drive a higher cost of capital for the business[90] Capitalization As of September 30, 2022, the company's total capitalization was approximately $3.38 billion, consisting of $955.2 million in total debt and $2.42 billion in total stockholders' equity. The debt is composed of secured credit facilities, unsecured senior notes, and leasing obligations Consolidated Capitalization as of Sep 30, 2022 (Actual) | Category | Amount (USD thousands) | | :--- | :--- | | Total Debt | 955,230 | | Total Stockholders' Equity | 2,422,742 | | Total Capitalization | 3,377,972 | Fleet Information As of November 7, 2022, the company's fleet consists of 71 containerships with a diverse range of sizes and charter arrangements. The fleet has a strong contract backlog with major liner companies. Additionally, the company has 6 newbuild vessels under construction, with expected deliveries in 2024, which will add modern, larger-capacity ships to its fleet Fleet Deployment The fleet deployment table as of November 7, 2022, details 71 vessels with TEU capacity ranging from 2,200 to 13,100. The vessels are on charter with major industry players like HMM, MSC, CMA CGM, and ZIM, with charter expirations extending out to 2028, providing significant revenue visibility - The fleet consists of 71 containerships as of November 7, 2022[96][98][100][101] - The company has agreed to sell two vessels, Catherine C and Leo C, for gross proceeds of $130 million, with delivery expected in November 2022[103] Vessels Under Construction The company has six newbuild vessels under construction, all scheduled for delivery in 2024. This includes two 7,100 TEU vessels from Dalian Shipbuilding and four 8,000 TEU vessels from Daehan Shipbuilding, signaling a strategic move towards larger and more modern assets Newbuild Vessel Specifications | Vessel Type | Quantity | Shipyard | Expected Delivery | | :--- | :--- | :--- | :--- | | 7,100 TEU | 2 | Dalian Shipbuilding | Q2-Q3 2024 | | 8,000 TEU | 4 | Daehan Shipbuilding | Q1-Q3 2024 | Condensed Consolidated Financial Statements (Unaudited) Condensed Consolidated Balance Sheets As of September 30, 2022, total assets were $3.70 billion, a slight increase from $3.63 billion at year-end 2021. The increase was primarily driven by a significant rise in cash and cash equivalents to $556.3 million. Total liabilities decreased to $1.27 billion from $1.54 billion, mainly due to reductions in long-term debt and leaseback obligations. Consequently, total stockholders' equity grew to $2.42 billion from $2.09 billion Balance Sheet Summary (USD thousands) | Account | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | 556,343 | 129,410 | | Total Assets | 3,696,288 | 3,627,125 | | Total Liabilities | 1,273,546 | 1,539,102 | | Total Stockholders' Equity | 2,422,742 | 2,088,023 | Condensed Consolidated Statements of Income For the nine months ended September 30, 2022, the company reported net income of $406.5 million, or $19.75 per diluted share. This is a decrease from $886.8 million, or $43.11 per diluted share, in the same period of 2021. The decline was primarily due to a $176.4 million loss on investments in 2022 compared to a $491.4 million gain in 2021, despite a strong increase in operating revenues Income Statement Summary (Nine Months Ended Sep 30) | Account (USD thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Operating Revenues | 740,861 | 474,467 | | Income From Operations | 463,037 | 242,623 | | (Loss)/Gain on Investments | (176,386) | 491,404 | | Net Income | 406,489 | 886,844 | | Diluted EPS ($) | 19.75 | 43.11 | Notes to the Unaudited Condensed Consolidated Financial Statements The notes provide detailed information supporting the financial statements. Key disclosures include the basis of presentation, significant accounting policies, details on fixed assets and newbuilding commitments, debt structure and covenants, financial instruments, stockholders' equity activities including dividends and share repurchases, lease arrangements, and subsequent events such as a major debt refinancing Note 4: Fixed Assets & Right-of-use Assets This note details commitments for new vessel constructions, including four 8,000 TEU vessels for $372.7 million and two 7,100 TEU vessels for $156.0 million. It also discloses an agreement to sell two vessels for $130.0 million. As of September 30, 2022, two vessels with a carrying value of $251.1 million were subject to leasing obligations - The company has entered into contracts for the construction of six new vessels with an aggregate purchase price of $528.7 million, with deliveries expected in 2024[143] Note 8: Long-Term Debt, net Total long-term debt was $868.1 million as of September 30, 2022. The company actively managed its debt profile in 2022, including an early extinguishment of $270.0 million on its main facility and full repayment of three other loans, resulting in a net gain of $22.9 million. A new $130.0 million facility was secured. The company was in compliance with all financial covenants, which include maintaining minimum liquidity and leverage ratios - In Q2 2022, the company made early repayments on four separate loan facilities, including a $270.0 million principal reduction on the Citibank/Natwest facility[158] - Financial covenants require maintaining minimum liquidity of $30.0 million, a maximum debt-to-EBITDA ratio of 6.5x, and a minimum EBITDA-to-net interest expense ratio of 2.5x[165] Note 11: Stockholders' Equity During the first nine months of 2022, the company declared and paid dividends totaling $46.3 million ($2.25 per share). Under its $100 million share repurchase program announced in June 2022, the company repurchased 466,955 shares for $28.6 million by September 30, 2022 - The company paid dividends of $0.75 per share in each of the first three quarters of 2022, totaling $46.3 million[180] - A $100 million share repurchase program was initiated in June 2022, with $28.6 million utilized to buy back 466,955 shares by the end of Q3 2022[181] Note 15: Subsequent Events Subsequent to the reporting period, the company declared another quarterly dividend of $0.75 per share. More significantly, it reached an agreement in principle with Citibank and Alpha Bank to refinance the outstanding $437.75 million balance of its largest credit facility with two new facilities, expected to be finalized by year-end 2022 - A dividend of $0.75 per share was declared, payable on November 30, 2022[196] - An agreement in principle was reached to refinance the $437.75 million Citibank/Natwest facility into a new $382.5 million Revolving Credit Facility and a $55.25 million Term Loan, improving the debt structure[198]