Danaos(DAC) - 2023 Q2 - Quarterly Report

Operating and Financial Review and Prospects This section provides a comprehensive overview of the company's financial performance, liquidity, capital structure, strategic investments, and fleet composition Results of Operations Operational results show mixed performance with Q2 2023 revenue decline and H1 2023 marginal increase, impacted by investment swings and lower interest expense Three months ended June 30, 2023 vs 2022 Q2 2023 saw a 3.7% revenue decline, increased operating expenses, and a significant positive swing in investment gains offsetting prior-year losses Q2 2023 vs Q2 2022 Key Financial Metrics | Metric | Q2 2023 | Q2 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Operating Revenues | $241.5M | $250.9M | -3.7% | | Vessel Operating Expenses | $41.9M | $40.6M | +3.2% | | Interest Expense | $5.9M | $16.1M | -63.4% | | Gain/(Loss) on Investments | $6.4M | ($168.6M) | N/A | | Dividend Income | $0 | $16.2M | -100% | - The decrease in operating revenue was a net result of a $5.5 million increase from higher charter rates, offset by a $5.4 million decrease from vessel disposals and a $9.8 million decrease from amortization of assumed time charters[7] - Fleet utilization was 98.7% for an average of 68.0 containerships in Q2 2023, compared to 99.9% for 71.0 ships in Q2 2022[3] - The average daily operating cost per vessel increased to $6,970 from $6,463 in the prior-year quarter, mainly due to higher repair and maintenance expenses[6] Six months ended June 30, 2023 vs 2022 H1 2023 operating revenues rose 0.9% due to higher charter rates, while net income was impacted by investment gains and the absence of ZIM dividends H1 2023 vs H1 2022 Key Financial Metrics | Metric | H1 2023 | H1 2022 | Change (%) | | :--- | :--- | :--- | :--- | | Operating Revenues | $485.0M | $480.8M | +0.9% | | Vessel Operating Expenses | $82.5M | $79.7M | +3.5% | | Interest Expense | $12.6M | $33.2M | -62.0% | | Gain/(Loss) on Investments | $6.4M | ($69.1M) | N/A | | Dividend Income | $0 | $138.4M | -100% | - The increase in operating revenue was primarily due to a $35.9 million gain from higher charter rates, which was partially offset by decreases of $8.7 million from vessel disposals and $20.0 million from amortization of assumed time charters[22] - Fleet utilization was 97.8% for an average of 68.2 containerships in H1 2023, compared to 98.7% for 71.0 ships in H1 2022[20] - The company recorded a $1.6 million gain on the sale of the vessel Amalia C in January 2023[27] Liquidity and Capital Resources The company maintains strong liquidity with $293.3 million cash and $360.0 million available credit, supported by $2.5 billion in contracted revenues Liquidity Position as of June 30, 2023 | Metric | Amount | | :--- | :--- | | Cash and cash equivalents | $293.3M | | Available borrowing capacity | $360.0M | | Total contracted cash revenues | $2.5B | | Outstanding indebtedness (gross) | $424.3M | - Principal sources of funds include operating cash flows, vessel sales, bank borrowings, and proceeds from the divested ZIM investment[37] - The company has significant contractual commitments for ten newbuilding vessels, with remaining payments totaling $634.4 million as of June 30, 2023[43] Shareholder Returns and Capital Allocation The company actively returns capital through a $0.75 per share quarterly dividend and a $100 million share repurchase program - A regular quarterly dividend of $0.75 per share was declared, payable on September 1, 2023[45] - The company has a $100 million share repurchase program. In H1 2023, 597,697 shares were repurchased for $36.0 million. Subsequent to quarter-end, an additional 15,895 shares were bought back for $1.0 million[46] Investments and Strategic Initiatives The company diversified investments by acquiring a $68.2 million stake in Eagle Bulk, investing in decarbonization R&D, and agreeing to acquire five Capesize bulk carriers - Acquired 1,552,865 shares of Eagle Bulk Shipping Inc. (Ticker: EGLE) for $68.2 million, which were valued at $74.6 million as of June 30, 2023, resulting in a $6.4 million unrealized gain[47] - Invested $4.3 million for a 49% ownership interest in Carbon Termination Technologies Corporation (CTTC), a new company focused on decarbonization R&D for the shipping industry[49] - In July 2023, reached an agreement in principle to acquire 5 Capesize bulk carriers for a total of $103 million, with expected delivery between September and October 2023[50] - The company fully divested its holdings in ZIM Integrated Shipping Services in 2022, selling the remaining shares for $161.3 million in September 2022[48] Cash Flow Analysis H1 2023 operating cash flow significantly decreased to $280.6 million due to absent ZIM dividends and prior-year prepayments, while investing activities shifted to a net cash outflow Cash Flow Summary (Six Months Ended June 30) | Cash Flow Activity | 2023 (In thousands) | 2022 (In thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $280,606 | $620,478 | | Net cash provided by/(used in) investing activities | $(100,277) | $14,286 | | Net cash used in financing activities | $(154,666) | $(431,947) | - The decrease in operating cash flow was mainly due to the absence of $126.6 million in ZIM dividends and a $261.4 million decrease in cash operating revenues related to a charter prepayment that occurred in 2022[53] - The shift to cash used in investing activities was driven by $74.4 million in net investments (including Eagle Bulk) and the absence of $85.3 million in proceeds from ZIM share sales that occurred in 2022[54] Non-GAAP Financial Measures Adjusted EBITDA decreased by $105.3 million to $356.3 million in H1 2023, primarily due to the non-recurrence of ZIM dividend income Reconciliation of Net Income to Adjusted EBITDA (Six Months Ended June 30) | Metric (In thousands) | 2023 | 2022 | | :--- | :--- | :--- | | Net income | $293,222 | $339,689 | | EBITDA | $362,189 | $429,707 | | Adjusted EBITDA | $356,366 | $461,632 | - The decrease in Adjusted EBITDA was mainly due to the non-recurrence of the ZIM dividend, partially offset by a $24.2 million increase in operating revenues (excluding amortization of assumed time charters)[62] Debt and Financing Structure As of June 30, 2023, total outstanding debt was $424.3 million, with $360.0 million available under a revolving credit facility and 44 unencumbered vessels Outstanding Principal Debt as of June 30, 2023 | Credit Facility | Outstanding Principal (in millions) | | :--- | :--- | | BNP Paribas/Credit Agricole Facility | $110.0 | | Alpha Bank Facility | $51.5 | | Citibank Revolving Credit Facility | $0 | | Senior Notes | $262.8 | - As of June 30, 2023, 44 of the company's vessels were unencumbered[64] - The 8.500% Senior Notes mature on March 1, 2028. The company repurchased $37.2 million of these notes in December 2022[65][67][68] Market Risk and External Factors The company faces market risks from interest rate fluctuations, inflation, geopolitical conflicts, and the inherent volatility of its newly entered dry bulk shipping sector - Elevated inflation and rising interest rates may increase operating expenses and the cost of capital[71] - The conflict in Ukraine adversely affects crewing operations and global trade, creating economic uncertainty[51] - The company highlights the cyclical and volatile nature of the dry bulk shipping industry as a new risk factor following its recent acquisitions in the sector[86] - The company currently has no outstanding interest rate swap agreements to hedge against interest rate fluctuations[69] Capitalization As of June 30, 2023, total capitalization was $3.21 billion, comprising $424.3 million in debt and $2.79 billion in stockholders' equity Consolidated Capitalization as of June 30, 2023 (Actual) | Category | Amount (US Dollars in thousands) | | :--- | :--- | | Total debt | $424,266 | | Total stockholders' equity | $2,789,482 | | Total capitalization | $3,213,748 | Fleet Profile As of August 3, 2023, the fleet comprises 68 containerships, with 10 newbuilds under construction and an agreement to acquire 5 Capesize dry bulk vessels - The fleet deployment profile as of August 3, 2023, details charter arrangements for 68 vessels with various charterers like HMM, Hapag Lloyd, MSC, and CMA CGM[78] - There are 10 containerships under construction, ranging in size from 6,014 TEU to 8,258 TEU, with deliveries scheduled from Q3 2024 to Q4 2026[84] - The company has agreed to acquire 5 Capesize dry bulk vessels, built between 2010 and 2012, with an aggregate capacity of 879,306 DWT[82] Financial Statements and Notes (Unaudited) This section presents the unaudited condensed consolidated financial statements and detailed notes on key accounting policies, balances, and contractual commitments Condensed Consolidated Financial Statements Unaudited H1 2023 financial statements show stable assets, decreased liabilities to $695.0 million, increased equity to $2.79 billion, and net income of $293.2 million Condensed Consolidated Balance Sheet Highlights | Metric (in thousands) | June 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total current assets | $487,783 | $372,521 | | Total assets | $3,484,432 | $3,400,228 | | Total current liabilities | $185,072 | $228,407 | | Total liabilities | $694,950 | $839,814 | | Total stockholders' equity | $2,789,482 | $2,560,414 | Condensed Consolidated Statement of Income Highlights (Six Months Ended) | Metric (in thousands) | June 30, 2023 | June 30, 2022 | | :--- | :--- | :--- | | Operating Revenues | $485,053 | $480,824 | | Income From Operations | $302,097 | $296,888 | | Net Income | $293,222 | $339,689 | | Diluted EPS | $14.51 | $16.40 | Key Notes to Financial Statements Key notes detail $634.4 million in new vessel commitments, $2.55 billion in future charter revenues, and $36.0 million in H1 2023 share repurchases - The company has remaining contractual commitments of $634.4 million for vessel construction as of June 30, 2023[118] - In January 2023, the company gave early termination notice and fully repaid its outstanding leaseback obligation on May 12, 2023, resulting in a $2.3 million loss[124] - Future minimum payments expected to be received on non-cancellable time charters totaled $2.55 billion as of June 30, 2023[152] - Under its share repurchase program, the company repurchased 597,697 shares for $36.0 million in the six months ended June 30, 2023[146]