Danaos Corp 4Q & 2008 Results

Thursday, March 12, 2009

Danaos Corporation (NYSE: DAC), international owner of containerships, reported unaudited results for the fourth quarter and the full year ended December 31, 2008.

Highlights for the Fourth Quarter and Full Year Ended December 31, 2008:
•    Net earnings on a comparable basis1 from continuing operations of $25.5 million or $0.47 per share and $118.7 million or $2.18 per share for the quarter and the year ended December 31, 2008, respectively, compared to $25.5 million or $0.47 per share and $107.2 million or $1.96 per share for the respective periods of 2007.
•    Net earnings on a reported basis from continuing operations of $23.8 million or $0.44 per share and $117.1 million or $2.15 for the quarter and the year ended December 31, 2008, respectively, compared to $44.6 million or $0.82 per share and $123.1 million or $2.26 per share for the respective periods of 2007.
•    Operating revenues from continuing operations of $78.7 million and $298.9 million for the quarter and the year ended December 31, 2008, respectively, compared to $71.3 million and $258.8 million for the respective periods of 2007.
•    EBITDA on a comparable basis from continuing operations of $51.3 million and $208.2 million for the quarter and the year ended December 31, 2008, respectively, compared to $45.0 million and $171.0 million for the respective periods of 2007. EBITDA on a reported basis from continuing operations of $49.6 million and $206.6 million for the quarter and the year ended December 31, 2008, respectively, compared to $64.1 million and $186.9 million for the respective periods of 2007.
•    Paid cash dividends of $0.465 per share on November 19, 2008, for the third quarter of 2008 and suspended further dividend payments until the board of directors, in consultation with management, determines that economic conditions allow dividend payments to be resumed.

Danaos’ CEO Dr. John Coustas commented:

Despite the dramatic disruptions in world trade and financial markets in the latter part of 2008, for the full year of 2008 Danaos achieved solid earnings and strong revenue growth. We report net earnings from continuing operations of $23.8 million or $0.44 per share and $117.1 million or $2.15 per share for the quarter and the year ended December 31, 2008, respectively. I find this performance highly satisfactory as it vindicates our long standing business model premises of cash flow and earnings stability. Even under these most unfavorable circumstances, when our customers are increasingly coming under pressure with regards to their own top line, we have managed to retain the vigor of our revenues.

We have come to the end of a year where global demand has unexpectedly decreased dramatically following the virtual collapse of the banking system that began in September 2008. In this challenging environment, Danaos has successfully taken delivery of six new vessels in 2008 while at the same time sold five older vessels. We are now operating a fleet of 39 containerships and have an order book of 30 more.

The drop in world consumption of durable and consumer goods has been dramatic and rapid. Unlike after the tragic events of 9/11, when world trade came to a near halt for nine-months before returning to normal activity levels, the present drop in global demand extends well beyond the borders of the United States. We now face a world wide crisis, fundamentally driven by the failure of the world banking system and, so far, the inability of the institutions, including governments, to introduce sufficient remedies to reverse the situation.

Despite Danaos’ satisfactory 2008 results, the extraordinary circumstances facing the world economy dictate that we take steps to prepare, to the extent possible, for a very challenging period of unknown duration.

1. Future revenues: We have arranged charters for all of our current and contracted vessels with some of the largest and most reliable counterparties in the shipping industry. Although the current economic situation is presenting everybody in our trade with new challenges, our chartering arrangements do not allow for unilateral modification of the prevailing terms.

We have recently arranged a one-year charter for our 4,250 TEU vessel which comes off charter in March at market rates. Following the liquidation of Senator Lines with which we had one 2,100 TEU vessel chartered until May 2010, we agreed the continuation of the charter with Hanjin Shipping, albeit at reduced rates. We have no further anticipated re-chartering until the second quarter of 2010.

2. New building program: We have 30 vessels on order, all of which are chartered at reasonable charter rates with some of the largest liner companies in the world. The abrupt decline in global demand has created a clear mismatch between demand for marine container transportation and the supply of containerships. In order to address both this oversupply and the timing of our funding requirements, we have, in cooperation with our charterers, successfully delayed the delivery, so far, of five new buildings, with aggregate remaining payments of approximately $422 million, for up to eight months while we are in the final stages of pushing back the delivery of five more new buildings, with aggregate remaining payments of approximately $386 million, for two to seven months. Thus, as of today we are expecting to take delivery of seven vessels during the current year, nine in 2010 and fourteen in 2011, with aggregate remaining payments of approximately $549 million, $823 million and $807 million, respectively.

3. Financing: During the first months of 2009 we signed a new $299 million loan facility with Deutsche Schiffsbank. This additional facility, together with the available undrawn capacity under our existing credit facilities and the cash expected to be generated by our operations, is expected to cover our 2009, and a portion of our 2010, funding requirements. We are currently in discussions to arrange additional financing for the unfunded part of our new building fleet and we believe that despite the challenging current credit conditions we will be able to obtain these additional funds in time to meet our commitments, also supported by the fact that all of our new buildings are already chartered for long term periods.

The recent drop in vessel values, as well as the unprecedented drop in interest rates which has resulted in negative valuation on our interest rate swaps, have affected our compliance with certain of our financial covenants. We have either received waivers or are in discussions with the lead arrangers under our credit facilities to receive waivers covering breaches of any financial covenants, including those relating to vessel value and minimum net worth, during 2008 and 2009, however, certain of these agreements have not yet been reduced to writing and remain subject to the requisite approval of the applicable lending syndicate.

4. Dividend payments: We are announcing that we are suspending dividend payments until such time as the board of directors, in consultation with management, determines that economic conditions allow cash dividend payments to be resumed.

We firmly believe that under these circumstances of revised world growth and world demand the most prudent policy, alongside the above mentioned measures, is to suspend our dividend payments in order to position the Company to take advantage of its strong cash flow and further strengthen its balance sheet. The Board believes this decision will enhance the Company’s financial flexibility, by retaining more than $100 million in cash flow per annum that would have, at our prior dividend payment level, otherwise been devoted to dividends.

The decision of the Board also enjoys my strong support, as majority-owner, President and CEO of Danaos. Of the Company’s 54.6 million outstanding shares of common stock, more than 80% are beneficially owned by officers or directors of the Company and I believe that the retention of such significant cash sends a strong message to the marketplace and other Danaos shareholders that management and the Board remain committed to delivering flexible and sound business decisions, as well as to a total return strategy, in a challenging economic environment.

Our consistent strategy at Danaos has been to maximize total returns to shareholders by, thus far, paying substantial dividends and pursuing highly accretive growth. The latest market turn calls for a modified approach, which we believe is appropriate for the goals we have set for Danaos.

Three months ended December 31, 2008 compared to the three months ended December 31, 2007

During the quarter ended December 31, 2008, Danaos had an average of 38.7 containerships as opposed to 36.1 containerships for the same period of 2007. During the fourth quarter, we acquired one vessel and we sold two vessels. Our fleet utilization was 98.5% in the fourth quarter of 2008.

Given the sale of our entire dry bulk fleet, completed in the beginning of 2007, management has determined that the dry bulk business constituted discontinued operations. The management and discussion analysis solely reflects results from continuing operations (containerships), unless otherwise noted.

Our net income on a comparable basis remained stable at $25.5 million or $0.47 per share for each of the fourth quarter of 2008 and 2007, adjusted for a non-recurring insurance expense of $1.6 million related to prior years and recorded in the fourth quarter of 2008 as well as a non-recurring gain of $19.1 million in the fourth quarter of 2007 in relation to leasing arrangements. Our net income on a reported basis was $23.8 million or $0.44 per share for the fourth quarter of 2008, compared to $44.6 million or $0.82 per share for the fourth quarter of 2007, which represents a decrease of 46.6% or $20.8 million.

Operating Revenue
Operating revenue increased 10.4%, or $7.4 million, to $78.7 million in the quarter ended December 31, 2008, from $71.3 million in the quarter ended December 31, 2007. The increase was primarily attributable to the addition of six vessels to our fleet.

These additions to our fleet contributed revenues of $9.9 million during the three months ended December 31, 2008. In addition, two 2,200 TEU containerships, the Hyundai Future and the Hyundai Sprider, a 4,300 TEU containership, the YM Singapore and a 4,253 TEU containership the YM Vancouver, which were added to our fleet on October 2, 2007, October 15, 2007, October 9, 2007 and November 27, 2007, respectively, contributed incremental revenues of $1.8 million during the three months ended December 31, 2008 compared to the three months ended December 31, 2007. The company also sold five additional vessels.
These vessel sales reduced operating revenue by $3.9 million for the three months ended December 31, 2008 compared to the contribution by such vessels to operating revenue in the three months ended December 31, 2007.

We also had a further decrease in revenues of $0.4 million attributable to more off-hire days, which was partially offset by the re-chartering of certain vessels at higher charter rates during the three months ended December 31, 2008 compared to the three months ended December 31, 2007.

Vessel Operating Expenses
Vessel operating expenses increased 26.8%, or $5.1 million, to $24.1 million in the quarter ended December 31, 2008, from $19.0 million in the quarter ended December 31, 2007. The increase was mainly due to the increase in the average number of our vessels in our fleet under time charter during the quarter ended December 31, 2008 compared to the quarter ended December 31, 2007.

Depreciation & Amortization
Depreciation & Amortization includes Depreciation and Amortization of Deferred Dry-docking and Special Survey Costs.

Depreciation
Depreciation expense increased 20.9%, or $2.4 million, to $13.9 million in the quarter ended December 31, 2008, from $11.5 million in the quarter ended December 31, 2007. The increase in depreciation expense was due to the increased average number of vessels in our fleet during the quarter ended December 31, 2008 compared to the same period of 2007.

Amortization of Deferred Dry-docking and Special Survey Costs
Amortization of deferred dry-docking and special survey costs increased 17.6%, or $0.3 million, to $2.0 million in the quarter ended December 31, 2008, from $1.7 million in the quarter ended December 31, 2007. The increase reflects higher drydocking costs incurred, which were subject to amortization during the three months ended December 31, 2008 as compared to the same period of 2007.

General and Administrative Expenses
General and administrative expenses increased 11.1%, or $0.3 million, to $3.0 million in the quarter ended December 31, 2008, from $2.7 million in the same quarter of 2007. The increase was primarily a result of increased fees of $0.2 million paid to our Manager in the fourth quarter of 2008 compared to the same period of 2007 due to the increase in the average number of our vessels in our fleet.

Gain / (loss) on sale of vessels
The gain on sale of vessels for the three months ended December 31, 2008, reflects the sale of the Asia Express and the Sederberg resulting in an aggregate net gain of $2.0 million.

Other Operating Expenses
Other Operating Expenses include Voyage Expenses

Voyage Expenses
Voyage expenses decreased 23.8% or $0.5 million, to $1.6 million in the quarter ended December 31, 2008, from $2.1 million for the quarter ended December 31, 2007.

Interest Expense and Interest Income
Interest expense increased 69.3%, or $5.2 million, to $12.7 million in the quarter ended December 31, 2008, from $7.5 million in the quarter ended December 31, 2007. The change in interest expense was due to the increase in our average debt by $833.3 million to $2,077.6 million in the quarter ended December 31, 2008, from $1,244.3 million in the quarter ended December 31, 2007. The financing of our extensive new-building program resulted in interest capitalization, rather than such interest being recognized as an expense, of $10.3 million for the quarter ended December 31, 2008 compared to $9.8 million of capitalized interest for the quarter ended December 31, 2007.

Interest income increased by $1.5 million, to $2.7 million in the quarter ended December 31, 2008, from $1.2 million in the quarter ended December 31, 2007. The increase in interest income is attributed to higher average cash deposits during the three months ended December 31, 2008 as opposed to the three months ended December 31, 2007, partially offset by lower interest rates.

The restricted cash is attributed to cash raised through our revolving credit facilities designated to finance certain of our new buildings and is gradually utilized to fund progress payments of these new buildings up to their deliveries through the second quarter of 2010.

Other income/(expenses), net
Other income/(expenses), net, increased by $(20.9) million, to $(1.8) million in the quarter ended December 31, 2008, from $19.1 million in the same quarter of 2007. The change in other income/(expenses) is mainly attributed to a non-recurring gain of $19.1 million related to our leasing arrangements of the CSCL Europe, the MSC Baltic, the Maersk Derby, the Maersk Deva, the CSCL Pusan and the CSCL Le Havre and their subsequent restructuring entered into in the fourth quarter of 2007. In addition, during the fourth quarter of 2008, we recorded a non-recurring expense of $1.6 million in relation to insurance cost for the years of 2006 and 2007, which have been recorded in 2008, reflecting the contribution of our insurer to the exposure of the International Group of Protection & Indemnity (“P&I”) Clubs.

EBITDA
EBITDA on a comparable basis increased by $6.3 million, or 14.0%, to $51.3 million in the quarter ended December 31, 2008, from $45.0 million in the quarter ended December 31, 2007, adjusted for a non-recurring insurance expense of $1.6 million for prior years recorded in the fourth quarter of 2008 and a non-recurring gain of $19.1 million recorded in the fourth quarter of 2007 in relation to leasing arrangements. EBITDA on a reported basis decreased by $14.5 million, or 22.6%, to $49.6 million in the quarter ended December 31, 2008, from $64.1 million in the quarter ended December 31, 2007. A table reconciling EBITDA to net income can be found at the end of this earnings release.

Twelve months ended December 31, 2008 compared to the twelve months ended December 31, 2007

During the twelve months ended December 31, 2008, Danaos had an average of 37.7 containerships as opposed to 32.3 containerships for the same period of 2007. During the twelve months of 2008, we acquired six vessels and we sold five vessels. Our fleet utilization for the full year was 97.6%.

Given the sale of our entire dry bulk fleet, completed in the beginning of 2007, management has determined that the dry bulk business constituted discontinued operations. The management and discussion analysis solely reflects results from continuing operations (containerships), unless otherwise noted.

Our net income on a comparable basis was $118.7 million or $2.18 per share for the twelve months ended December 31, 2008 compared to $107.2 million or $1.96 per share for the twelve months ended December 31, 2007, adjusted for a non-recurring insurance expense of $1.6 million for prior years recorded in 2008 and a non-recurring gain of $15.9 million in the twelve months of 2007 in relation to leasing arrangements. This represents an increase in comparable net income of 10.7% or $11.5 million. Our net income on a reported basis was $117.1 million or $2.15 per share for the twelve months ended December 31, 2008 compared to $123.1 million or $2.26 per share for the twelve months ended December 31, 2007, a decrease of 4.9% or $6.0 million. For the first three quarters, we paid a cumulative dividend of $76.1 million. We have suspended dividend payments until the board of directors, in consultation with management, determines that economic conditions allow dividend payments to be resumed.

Operating Revenue
Operating revenue increased 15.5%, or $40.1 million, to $298.9 million in the twelve months ended December 31, 2008, from $258.8 million in the twelve months ended December 31, 2007. The increase was primarily attributed to the addition of six vessels to our fleet.
These additions to our fleet contributed revenues of $22.0 million during the twelve months ended December 31, 2008. In addition, two 4,300 TEU containerships, the YM Colombo and the YM Singapore, five 2,200 TEU containerships, the Hyundai Vladivostok, the Hyundai Advance, the Hyundai Stride, Hyundai Future and Hyundai Sprinter and two 4,253 TEU containerships, the YM Seattle and the YM Vancouver, which were added to our fleet on March 12, 2007, on October 9, 2007, on July 23, 2007, on August 20, 2007, on September 5, 2007, October 2, 2007, October 15, 2007, September 10, 2007 and November 27, 2007, respectively, contributed incremental revenues of $44.5 million during the twelve months ended December 31, 2008 compared to the twelve months ended December 31, 2007. In addition since January 1, 2007, the Company sold eight vessels.
These sales reduced operating revenue by $23.6 million for the twelve months ended December 31, 2008 compared to the contribution by such vessels to operating revenue in the prior year.

We also had a further decrease in revenues of $2.8 million attributable to more off-hire days and re-chartering of certain vessels at lower charter rates during the twelve months ended December 31, 2008 compared to the twelve months ended December 31, 2007.

Vessel Operating Expenses
Our daily operating expenses per vessel between the twelve month periods of 2007 and 2008 increased by 4.0%. The increase was mainly due to higher crew wages and total repair & maintenance costs.

Vessel operating expenses increased 35.8% or $23.5 million, to $89.2 million in the twelve months ended December 31, 2008, from $65.7 million in the twelve months ended December 31, 2007. The increase was mainly due to the increase in the average number of our vessels in our fleet under time charter during the twelve months ended December 31, 2008 compared to the twelve months ended December 31, 2007.

Depreciation & Amortization
Depreciation & Amortization includes Depreciation and Amortization of Deferred Dry-docking and Special Survey Costs.

Depreciation
Depreciation expense increased 25.6%, or $10.4 million, to $51.0 million in the twelve months ended December 31, 2008, from $40.6 million in the twelve months ended December 31, 2007. The increase in depreciation expense was due to the increased average number of vessels in our fleet during the twelve months ended December 31, 2008 compared to the same period of 2007.

Amortization of Deferred Dry-docking and Special Survey Costs
Amortization of deferred dry-docking and special survey costs increased 19.7%, or $1.2 million, to $7.3 million in the twelve months ended December 31, 2008, from $6.1 million in the twelve months ended December 31, 2007. The increase reflects higher dry-docking costs incurred, which were subject to amortization during the twelve months ended December 31, 2008 as compared to the same period of 2007.

General and Administrative Expenses
General and administrative expenses increased 16.0%, or $1.6 million, to $11.6 million in the twelve months ended December 31, 2008, from $10.0 million in the same period of 2007. The increase was primarily a result of increased fees of $1.2 million paid to our Manager in the twelve months ended December 31, 2008 compared to the same period of 2007, attributed to the increase in the average number of our vessels in our fleet.

Gain / (loss) on sale of vessels
The gain on sale of vessels for the twelve months ended December 31, 2008, reflects the sale of the APL Belgium, the Winterberg, the Maersk Constantia, the Asia Express and the Sederberg for $44.5 million, $11.2 million, $15.8 million, $10.2 million and $4.9 million, respectively, resulting in an aggregate net gain of $16.9 million.

Other Operating Expenses
Other Operating Expenses include Voyage Expenses

Voyage Expenses
Voyage expenses remained stable at $7.5 million in the twelve months ended December 31, 2008 and December 31, 2007.

Interest Expense and Interest Income
Interest expense increased 72.1%, or $15.8 million, to $37.7 million in the twelve months ended December 31, 2008, from $21.9 million in the twelve months ended December 31, 2007. The change in interest expense was due to the increase in our average debt by $882.8 million to $1,715.4 million in the twelve months ended December 31, 2008 from $832.6 million in the twelve months ended December 31, 2007. Our extensive new-building program resulted in interest capitalization, rather than such interest being recognized as an expense, of $36.9 million for the twelve months ended December 31, 2008 as opposed to $22.9 million of capitalized interest for the twelve months ended December 31, 2007.

Interest income increased 32.7%, or $1.6 million, to $6.5 million in the twelve months ended December 31, 2008, from $4.9 million in the twelve months ended December 31, 2007. The increase in interest income is mainly attributed to higher average cash deposits, partially offset by lower interest rates, during the twelve months ended December 31, 2008 as opposed to the twelve months ended December 31, 2007.

The restricted cash is attributed to cash raised through our revolving credit facilities designated to finance certain of our new buildings and is gradually utilized to fund progress payments of these new buildings up to their deliveries through the second quarter of 2010.

Other income/(expenses), net
Other income/(expenses), net, increased by $(15.7) million, to $(1.1) million in the twelve months ended December 31, 2008, from $14.6 million in the same period of 2007. The change in other income/(expenses) is mainly attributed to a non-recurring net gain of $15.9 million related to our leasing arrangements of the CSCL Europe, the MSC Baltic, the Maersk Derby, the Maersk Deva, the CSCL Pusan and the CSCL Le Havre and their subsequent restructuring entered into in 2007. In addition, during the fourth quarter of 2008 we recorded a non-recurring expense of $1.6 million in relation to insurance expenses for the years of 2006 and 2007, which have been recorded in 2008 reflecting the contribution of our insurer to the exposure of the International Group of P&I Clubs.

EBITDA
EBITDA on a comparable basis increased by $37.2 million, or 21.8%, to $208.2 million in the twelve months ended December 31, 2008, from $171.0 million in the twelve months ended December 31, 2007, adjusted for a non-recurring insurance expense of $1.6 million for the years of 2006 and 2007 recorded in 2008 and a non-recurring net gain of $15.9 million in relation to leasing arrangements and their subsequent restructuring entered into in 2007. EBITDA on a reported basis increased by $19.7 million, or 10.5%, to $206.6 million in the twelve months ended December 31, 2008, from $186.9 million in the twelve months ended December 31, 2007. A table reconciling EBITDA to net income can be found at the end of this earnings release.

Dividend Payment
On October 24, 2008, the Board of Directors declared a dividend of $0.465 per common share for the third quarter of 2008 for all shareholders of record as of the close of business on November 5, 2008, paid on November 19, 2008. We have suspended further dividend payments until the board of directors, in consultation with management, determines that economic conditions allow dividend payments to be resumed.

Recent News
On February 2, 2009, we entered into a credit facility with Deutsche Schiffsbank, Credit Suisse, and Emporiki Bank of $299.0 million in relation to pre and post-delivery financing for five new-building vessels, the HN 1698, the HN N-220, the HN N-223, the HN N-215 and the HN Z0001, which are currently under construction and are scheduled to be gradually delivered to us from the first quarter of 2009 until the end of the second quarter of 2010. The interest rate on the credit facility will be LIBOR plus margin.

Based on the unaudited financial statements for 2008 and valuations of our fleet as of December 2008 that we received from two independent ship brokers, we determined that we were in breach of covenants under certain of our credit facilities. Substantially all of our long-term debt continues to be classified as non-current as of December 31, 2008 because our debt covenant violations as of December 31, 2008 have been (or are expected to be) waived by our lenders and the relevant covenants have been (or are expected to be) amended to levels that we expect to be able to comply with in future periods. To the extent that we are unable to finalize formalization of these waivers and amendments prior to the issuance of our audited financial statements, any long-term debt for which we have been unable to secure waivers and, where applicable, amended covenants, will be required to be classified as current, reflecting our lenders' ability to call that debt at any time at their option.

On October 24, 2008, the Company’s Board of Directors approved a share repurchase program for the repurchase, from time to time, of up to 1,000,000 shares of the Company's common stock (par value $0.01). As at December 31, 2008, the Company had re-acquired 15,000 shares for an aggregate purchase price of $88,156, which has been reported as treasury stock.

On January 2, 2009, the Company took delivery of the new-building 4,253 TEU vessel, the Zim Monaco. The vessel has been deployed on a 12-year time charter with one of the world’s major liner companies.

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