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Danaos: Operating And Financial Review And Prospects

The following excerpt is from the company's SEC filing.

The following discussion and analysis should be read in conjunction with our interim condensed consolidated financial statements (unaudited) and the notes thereto included elsewhere in this report.

Results of Operations

Three months ended September 30, 2015 compared to three months ended September 30, 2014

During the three months ended September 30, 2015, Danaos had an average of 56.0 containerships compared to 54.0 containerships for the three months ended September 30, 2014. Our fleet utilization increased to 100.0% in the three months ended September 30, 2015 compared to 99.5% in the three months ended September 30, 2014.

Operating Revenues

Operating revenues increased by 3.6%, or $5.0 million, to $144.5 million in the three months ended September 30, 2015, from $139.5 million in the three months ended September 30, 2014.

Operating revenues for the three months ended September 30, 2015 reflect:

$3.4 million of additional revenues in the three months ended September 30, 2015 compared to the three months ended September 30, 2014, related to the

Priority

Performance

, which were added to our fleet on November 5, 2014.

$0.3 million incremental revenues in the three months ended September 30, 2015 compared to the three months ended September 30, 2014, related to revenue recognition accounting of the Zim restructuring.

$1.0 million of higher revenues in the three months ended September 30, 2015 compared to the three months ended September 30, 2014 due to improved re-chartering of some of our vessels at higher rates.

$0.3 million of additional revenues due to improved fleet utilization in the three months ended September 30, 2015 compared to the three months ended September 30, 2014.

Voyage Expenses

Voyage expenses decreased by $0.1 million, to $3.0 million in the three months ended September 30, 2015, from $3.1 million in the three months ended September 30, 2014.

Vessel Operating Expenses

Vessel operating expenses increased by 5.2%, or $1.4 million, to $28.2 million in the three months ended September 30, 2015, from $26.8 million in the three months ended September 30, 2014. The increase is mainly attributed to incremental operating expenses of $1.1 million for the vessels

which were acquired on November 5, 2014.

The average daily operating cost per vessel slightly increased to $5,669 per day for the three months ended September 30, 2015, from $5,611 per day for the three months ended September 30, 2014. Management believes that our daily operating cost ranks as one of the most competitive in the industry.

Depreciation

Depreciation expense decreased by 3.5%, or $1.2 million, to $33.2 million in the three months ended September 30, 2015, from $34.4 million in the three months ended September 30, 2014, mainly due to the lower depreciation expense on the eight 2,200 TEU vessels with respect to which we recorded an impairment charge on December 31, 2014.

Amortization of Deferred Drydocking and Special Survey Costs

Amortization of deferred dry-docking and special survey costs decreased by $0.2 million, to $0.9 million in the three months ended September 30, 2015, from $1.1 million in the three months ended September 30, 2014. The decrease is mainly due to the expiration of the amortization periods related to certain vessels over the last twelve months.

General and Administrative Expenses

General and administrative expenses increased by $0.3 million, to $5.5 million in the three months ended September 30, 2015, from $5.2 million in the three months ended September 30, 2014.

Effective January 1, 2015, our management fees were adjusted to a fee of $850 per day, a fee of $425 per vessel per day for vessels on bareboat charter and a fee of $850 per vessel per day for vessels on time charter.

Interest Expense and Interest Income

Interest expense decreased by 10.7%, or $2.1 million, to $17.6 million in the three months ended September 30, 2015, from $19.7 million in the three months ended September 30, 2014. The change in interest expense was mainly due to the decrease in our average debt by $217.4 million, to $2,875.0 million in the three months ended September 30, 2015, from $3,092.4 million in the three months ended September 30, 2014, as well as the decrease in the cost of debt service in the three months ended September 30, 2015 compared to the three months ended September 30, 2014, mainly driven by the accelerated amortization of our fixed rate debt, which bears a higher cost compared to our floating rate debt.

The Company is rapidly deleveraging its balance sheet. As of September 30, 2015, the debt outstanding was $2,860.1 million compared to $3,063.2 million as of September 30, 2014.

Interest income remained stable amounting to $0.9 million in the three months ended September 30, 2015 and in the three months ended September 30, 2014.

Other Finance Costs, net

Other finance costs, net decreased by $0.4 million, to $4.6 million in the three months ended September 30, 2015, from $5.0 million in the three months ended September 30, 2014. This decrease was mainly due to the $0.3 million decrease in amortizing finance fees (which were deferred and are amortized over the term of the respective credit facilities) in the three months ended September 30, 2015 compared to the three months ended September 30, 2014.

Equity loss on investments

Equity loss on investments of $1.0 million in the three months ended September 30, 2015 relates to the investment in Gemini made in August 2015.

Unrealized and realized (loss)/gain on derivatives

Unrealized gain on interest rate swaps amounted to $2.6 million in the three months ended September 30, 2015 compared to a gain of $9.1 million in the three months ended September 30, 2014. The unrealized gains were attributable to mark to market valuation of our swaps due to the discontinuation of hedge accounting since July 1, 2012, as well as reclassification of unrealized losses from Accumulated Other Comprehensive Loss to our earnings.

Realized loss on interest rate swaps decreased by $19.6 million, to $12.2 million in the three months ended September 30, 2015, from $31.8 million in the three months ended September 30, 2014. This decrease is attributable to a $1,617.4 million lower average notional amount of swaps during the three months ended September 30, 2015 compared to the three months ended September 30, 2014 as a result of swap expirations.

Nine months ended September 30, 2015 compared to nine months ended September 30, 2014

During the nine months ended September 30, 2015, Danaos had an average of 56.0 containerships compared to 56.1 containerships for the nine months ended September 30, 2014. Our fleet utilization increased to 99.2% in the nine months ended September 30, 2015 compared to 97.3% in the nine months ended September 30, 2014.

Operating revenues increased by 3.2%, or $13.2 million, to $424.6 million in the nine months ended September 30, 2015, from $411.4 million in the nine months ended September 30, 2014.

Operating revenues for the nine months ended September 30, 2015 reflect:

$9.0 million of additional revenues in the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014, related to the

$4.6 million increase in revenues in the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014, related to revenue recognition accounting of the Zim restructuring that became effective on July 16, 2014.

$1.0 million increase in revenues in the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 due to improved re-chartering of some of our vessels at higher rates.

$2.1 million decrease in revenues in the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014, related to the

Commodore

Messologi

Mytilini

, which were generating revenues in the nine months ended September 30, 2014 and were sold within 2014.

$0.7 million of additional revenues due to improved fleet utilization in the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014.

Voyage expenses decreased by $0.4 million, to $9.2 million in the nine months ended September 30, 2015, from $9.6 million in the nine months ended September 30, 2014.

Vessel operating expenses decreased by 1.0%, or $0.9 million, to $85.1 million in the nine months ended September 30, 2015, from $86.0 million in the nine months ended September 30, 2014. The reduction is attributable to an improvement in the average daily operating cost per vessel between the two periods.

The average daily operating cost per vessel decreased to $5,770 per day for the nine months ended September 30, 2015, from $5,895 per day for the nine months ended September 30, 2014, mainly as a result of an 17.7% improvement in the average Euro to Dollar exchange rate between the two periods. Management believes that our daily operating cost ranks as one of the most competitive in the industry.

Depreciation expense decreased by 3.8%, or $3.9 million, to $98.6 million in the nine months ended September 30, 2015 from $102.5 million in the nine months ended September 30, 2014, mainly due to the lower depreciation expense on the eight 2,200 TEU vessels with respect to which we recorded an impairment charge on December 31, 2014.

Amortization of deferred dry-docking and special survey costs decreased by $0.3 million, to $2.9 million in the nine months ended September 30, 2015, from $3.2 million in the nine months ended September 30, 2014. The decrease is mainly due to the expiration of the amortization periods related to certain vessels during the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014.

General and administrative expenses increased by $0.2 million, to $16.1 million in the nine months ended September 30, 2015, from $15.9 million the nine months ended September 30, 2014.

Effective January 1, 2015, our management fees were adjusted to a fee of $850 per day, a fee of $425 per vessel per day for vessels on bareboat charter and a fee of $850 per vessel per day for vessels on time charter.

Gain on sale of vessels

Gain on sale of vessels was nil in the nine months ended September 30, 2015 compared to a gain of $5.7 million in the nine months ended September 30, 2014. During the nine months ended September 30, 2014, we sold the

Marathonas

on February 26, 2014, the

on April 25, 2014, the

on May 15, 2014, the

on May 15, 2014 and the

on May 20, 2014. There were no vessel sales during the nine months ended September 30, 2015.

Interest expense decreased by 12.3%, or $7.5 million, to $53.5 million in the nine months ended September 30, 2015, from $61.0 million in the nine months ended September 30, 2014. The change in interest expense was mainly due to the decrease in our average debt by $219.7 million, to $2,926.0 million in the nine months ended September 30, 2015, from $3,145.7 million in the nine months ended September 30, 2014, as well as the decrease in the cost of debt servicing in the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014, mainly driven by the accelerated amortization of our fixed rate debt, which bears a higher cost compared to our floating rate debt.

Interest income amounted to $2.5 million in the nine months ended September 30, 2015 compared to $0.9 million in the nine months ended September 30, 2014. This increase is attributed to the interest income related to the Zim restructuring that became effective on July 16, 2014.

Other finance costs, net, decreased by $0.7 million, to $14.2 million in the nine months ended September 30, 2015, from $14.9 million in the nine months ended September 30, 2014. This decrease was due to the $0.6 million decrease in amortizing finance fees (which were deferred and are amortized over the term of the respective credit facilities) in the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014.

Equity loss on investments of $1.0 million in the nine months ended September 30, 2015 relates to the investment in Gemini made in August 2015.

Unrealized gain on interest rate swaps amounted to $11.6 million in the nine months ended September 30, 2015 compared to a gain of $19.3 million in the nine months ended September 30, 2014. The unrealized gains were attributable to mark to market valuation of our swaps due to the discontinuation of hedge accounting since July 1, 2012, as well as reclassification of unrealized losses from Accumulated Other Comprehensive Loss to our earnings.

Realized loss on interest rate swaps decreased by $49.3 million, to $47.8 million in the nine months ended September 30, 2015, from $97.1 million in the nine months ended September 30, 2014. This decrease is attributable to $1,373.8 million lower average notional amount of swaps during the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 as a result of swap expirations.

Liquidity and Capital Resources

Our principal sources of funds have been operating cash flows, vessel sales, long-term bank borrowings and a common stock sale in August 2010, as well as our initial public offering in October 2006. Our principal uses of funds have been capital expenditures to establish, grow and maintain our fleet, comply with international shipping standards, environmental laws and regulations and to fund working capital requirements, including debt repayments.

Our short-term liquidity needs primarily relate to funding our vessel operating expenses, debt interest payments and servicing the current portion of our debt obligations. Our long-term liquidity needs primarily relate to debt repayment and capital expenditures related to any further growth of our fleet. We anticipate that our primary sources of funds will be cash from operations and equity or capital markets debt financings, subject to restrictions on uses of such funds and incurrence of debt in our credit facilities.

Under our existing multi-year charters as of September 30, 2015, we had contracted revenues of $140.3 million for the remainder of 2015, $520.8 million for 2016 and, thereafter, approximately $2.6 billion. Although these expected revenues are based on contracted charter rates, we are dependent on our charterers ability and willingness to meet their obligations under these charters.

As of September 30, 2015, we had cash and cash equivalents of $96.2 million. As of September 30, 2015, we had no remaining borrowing availability under our credit facilities. As of September 30, 2015, we had $28.5 million of vendor financing outstanding, which is payable within the next twelve months, and $2,831.5 million of outstanding indebtedness, of which $254.3 million was payable within the next twelve months.

On January 24, 2011, we entered into a definitive agreement, which we refer to as the Bank Agreement, which became effective on March 4, 2011, in respect of our existing financing arrangements (other than our credit facilities with the Export Import Bank of Korea (KEXIM) and with KEXIM and ABN Amro), and for new credit facilities, which we refer to as the January 2011 Credit Facilities, from certain of our lenders aggregating $424.75 million. We are required under the Bank Agreement to apply a substantial portion of our cash from operations to the repayment of principal under our financing arrangements. We currently expect that the remaining portion of our cash from operations will be sufficient to fund all of our other obligations. Under the Bank Agreement, we are subject to limits on our ability to incur additional indebtedness without our lenders consent and requirements for the application of proceeds from any future vessel sales or financings, including sales of equity, as well as other transactions. See Item 5. Operating and Financial Review and Prospects, as well as Note 12, Long-term Debt to our consolidated financial statements in our Annual Report on Form 20 -F for the year ended December 31, 2014 filed with the Securities and Exchange Commission on March 10, 2015.

As of September 30, 2015, we were in compliance with the financial and collateral coverage covenants under our debt arrangements. We believe that continued future compliance with the terms of these agreements will allow us to satisfy our liquidity needs. We anticipate that our primary sources of funds described above, including future equity or debt financings in the case of any further growth of our fleet to the extent permitted under our credit facilities, will be sufficient to satisfy all of the short-term and long-term liquidity needs described above, up to the 2018 maturity of the credit facilities under our Bank Agreement, which we expect to refinance at such time.

Our board of directors determined in 2009 to suspend the payment of further cash dividends as a result of market conditions in the international shipping industry and in order to conserve cash to be applied toward the financing of our then extensive newbuilding program. Under the Bank Agreement and the Sinosure-CEXIM credit facility, we are not permitted to pay cash dividends or repurchase shares of our capital stock unless (i) our consolidated net leverage is below 6:1 for four consecutive quarters and (ii) the ratio of the aggregate market value of our vessels to our outstanding indebtedness exceeds 125% for four consecutive quarters and provided that an event of default has not occurred and we are not, and after giving effect to the payment of the dividend, in breach of any covenant.

We have 15,000,000 outstanding warrants, which will expire on January 31, 2019, with an exercise price of $7.00 per share. We will not receive any cash upon exercise of the warrants as the warrants are only exercisable on a cashless basis.

In July 2014, ZIM and its creditors entered into definitive documentation effecting ZIMs restructuring with its creditors. The terms of the restructuring included a reduction in the charter rates payable by ZIM under its time charters, expiring in 2020 or 2021, for six of our vessels. The terms also included our receipt of approximately $49.9 million aggregate principal amount of unsecured, interest bearing ZIM notes maturing in 2023 (consisting of $8.8 million of 3% Series 1 Notes due 2023 amortizing subject to available cash flow in accordance with a corporate cash sweep mechanism,

and $41.1 million of 5% Series 2 Notes due 2023 non-amortizing (of the 5% interest rate, 3% is payable quarterly in cash and 2% is payable in kind, accrued quarterly with deferred cash payment on maturity)) and ZIM shares representing approximately 7.4% of the outstanding ZIM shares immediately after the restructuring, in exchange for such charter rate reductions and cancellation of ZIMs other obligations to us which relate to the outstanding long term receivable as of December 31, 2013. See Note 7 to our unaudited condensed consolidated financial statements (unaudited) included in this report.

Cash Flows

Net Cash Provided by Operating Activities

Net cash flows provided by operating activities increased by $59.4 million, to $202.2 million provided by operating activities in the nine months ended September 30, 2015 compared to $142.8 million provided by operating activities in the nine months ended September 30, 2014. The increase was mainly the result of a reduction in realized losses from derivatives of $49.4 million, reduced interest expense of $7.5 million and lower payments for dry-docking and special survey costs by $2.7 million in the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014.

Net Cash Provided by/(Used in) Investing Activities

Net cash flows (used in)/provided by investing activities decreased by $57.5 million, to $8.1 million used in investing activities in the nine months ended September 30, 2015 compared to $49.4 million provided by investing activities in the nine months ended September 30, 2014. The difference reflects nil net proceeds from sale of vessels in the nine months ended September 30, 2015 compared to $50.6 million in the nine months ended September 30, 2014, which was partially offset by cash used for investments in affiliates of $7.4 million and vessel additions of $0.7 million in the nine months ended September 30, 2015 compared to vessels additions of $1.2 million in the nine months ended September 30, 2014.

Net Cash Used in Financing Activities

Net cash flows used in financing activities decreased by $40.1 million, to $155.6 million used in financing activities in the nine months ended September 30, 2015 compared to $195.7 million used in financing activities in the nine months ended September 30, 2014. The decrease is mainly due to the decrease in debt payments by $15.3 million and movement in restricted cash of $25.5 million in the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014.

Non-GAAP Financial Measures

We report our financial results in accordance with U.S. generally accepted accounting principles (GAAP). Management believes, however, that certain non-GAAP financial measures used in managing the business may provide users of this financial information additional meaningful comparisons between current results and results in prior operating periods. Management believes that these non-GAAP financial measures can provide additional meaningful reflection of underlying trends of the business because they provide a comparison of historical information that excludes certain items that impact the overall comparability. Management also uses these non-GAAP financial measures in making financial, operating and planning decisions and in evaluating our performance. See the tables below for supplemental financial data and corresponding reconciliations to GAAP financial measures. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, our reported results prepared in accordance with GAAP.

EBITDA and Adjusted EBITDA

EBITDA represents net income before interest income and expense, taxes, depreciation, as well amortization of deferred drydocking & special survey costs, amortization of deferred realized losses of cash flow interest rate swaps, amortization of finance costs and finance costs accrued. Adjusted EBITDA represents net income before interest income and expense, taxes, depreciation, amortization of deferred drydocking & special survey costs, amortization of deferred realized losses of cash flow interest rate swaps, amortization of finance costs and finance costs accrued, unrealized (gain)/loss on derivatives, realized gain/(loss) on derivatives and gain/(loss) on sale of vessels. We believe that EBITDA and Adjusted EBITDA assist investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance and because they are used by certain investors to measure a companys ability to service and/or incur indebtedness, pay capital expenditures and meet working capital requirements. EBITDA and Adjusted EBITDA are also used: (i) by prospective and current customers as well as potential lenders to evaluate potential transactions; and (ii) to evaluate and price potential acquisition candidates. Our EBITDA and Adjusted EBITDA may not be comparable to that reported by other companies due to differences in methods of calculation.

EBITDA and Adjusted EBITDA have limitations as analytical tools, and should not be considered in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Some of these limitations are: (i) EBITDA/Adjusted EBITDA does not reflect changes in, or cash requirements for, working capital needs; and (ii) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and EBITDA/Adjusted EBITDA do not reflect any cash requirements for such capital expenditures. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Because of these limitations, EBITDA/Adjusted EBITDA should not be considered as principal indicators of our performance.

EBITDA and Adjusted EBITDA Reconciliation to Net Income

Nine Months

ended

September 30,

2015

2014

(In thousands)

Net income

110,482

47,456

98,558

102,471

Amortization of deferred drydocking & special survey costs

Amortization of deferred realized losses of cash flow interest rate swaps

Amortization of finance costs

10,661

11,374

Finance costs accrued (Exit Fees under our Bank Agreement)

(2,549

53,520

60,951

279,344

230,414

(Gain)/loss on sale of vessels

(5,709

Realized loss on derivatives

44,833

94,146

Unrealized gain on derivatives

(11,551

(19,340

Adjusted EBITDA

312,626

299,511

EBITDA and Adjusted EBITDA Reconciliation to Net Cash Provided by Operating Activities

Net cash provided by operating...


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