Attached files
file | filename |
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EX-32.1 - EXHIBIT 32.1 - Horizon Lines, Inc. | c19511exv32w1.htm |
EX-31.1 - EXHIBIT 31.1 - Horizon Lines, Inc. | c19511exv31w1.htm |
EX-32.2 - EXHIBIT 32.2 - Horizon Lines, Inc. | c19511exv32w2.htm |
EX-31.2 - EXHIBIT 31.2 - Horizon Lines, Inc. | c19511exv31w2.htm |
EXCEL - IDEA: XBRL DOCUMENT - Horizon Lines, Inc. | Financial_Report.xls |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark one)
þ | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 26, 2011
OR
o | Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number 001-32627
HORIZON LINES, INC.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
74-3123672 (I.R.S. Employer Identification No.) |
|
4064 Colony Road, Suite 200, Charlotte, North Carolina | 28211 | |
(Address of principal executive offices) | (Zip Code) |
(704) 973-7000
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such a shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12
months (or for shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See definition of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock,
as of the latest practicable date.
At July 25, 2011, 30,906,540 shares of the Registrants common stock, par value $.01 per
share, were outstanding.
HORIZON LINES, INC.
Form 10-Q Index
Form 10-Q Index
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Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT |
i
Table of Contents
PART I. FINANCIAL INFORMATION
1. Financial Statements
Horizon Lines, Inc.
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except per share data)
June 26, | December 26, | |||||||
2011 | 2010 | |||||||
Assets |
||||||||
Current assets |
||||||||
Cash |
$ | 3,389 | $ | 2,751 | ||||
Accounts receivable, net of allowance of $6,768 and
$6,959 at June 26, 2011 and December 26, 2010
respectively |
129,066 | 112,196 | ||||||
Prepaid vessel rent |
4,131 | 4,076 | ||||||
Materials and supplies |
35,665 | 29,413 | ||||||
Deferred tax asset |
3,250 | 2,964 | ||||||
Assets held for sale |
15,420 | 18,215 | ||||||
Assets of discontinued operations |
1,367 | 6,883 | ||||||
Other current assets |
13,162 | 7,406 | ||||||
Total current assets |
205,450 | 183,904 | ||||||
Property and equipment, net |
170,696 | 176,442 | ||||||
Goodwill |
314,149 | 314,149 | ||||||
Intangible assets, net |
74,910 | 80,824 | ||||||
Other long-term assets |
29,756 | 30,438 | ||||||
Total assets |
$ | 794,961 | $ | 785,757 | ||||
Liabilities and Stockholders Equity |
||||||||
Current liabilities |
||||||||
Accounts payable |
$ | 31,666 | $ | 43,413 | ||||
Current portion of long-term debt, including capital lease |
593,767 | 508,793 | ||||||
Accrued vessel rent |
3,697 | 3,697 | ||||||
Liabilities of discontinued operations |
579 | 3,699 | ||||||
Other accrued liabilities |
111,041 | 108,499 | ||||||
Total current liabilities |
740,750 | 668,101 | ||||||
Capital lease, net of current portion |
6,661 | 7,530 | ||||||
Deferred rent |
15,790 | 18,026 | ||||||
Deferred tax liability |
5,222 | 4,775 | ||||||
Other long-term liabilities |
25,030 | 47,533 | ||||||
Total liabilities |
793,453 | 745,965 | ||||||
Stockholders equity |
||||||||
Preferred stock, $.01 par value, 30,500 shares
authorized, no shares issued or outstanding |
| | ||||||
Common stock, $.01 par value, 100,000 shares authorized,
34,707 shares issued and 30,907 shares outstanding as of
June 26, 2011 and 34,546 shares issued and 30,746 shares
outstanding as of December 26, 2010 |
347 | 345 | ||||||
Treasury stock, 3,800 shares at cost |
(78,538 | ) | (78,538 | ) | ||||
Additional paid in capital |
193,758 | 193,266 | ||||||
Accumulated deficit |
(113,331 | ) | (73,843 | ) | ||||
Accumulated other comprehensive loss |
(728 | ) | (1,438 | ) | ||||
Total stockholders equity |
1,508 | 39,792 | ||||||
Total liabilities and stockholders equity |
$ | 794,961 | $ | 785,757 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
Table of Contents
Horizon Lines, Inc.
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
Quarters Ended | Six Months Ended | |||||||||||||||
June 26, | June 20, | June 26, | June 20, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Operating revenue |
$ | 307,527 | $ | 291,387 | $ | 592,881 | $ | 566,045 | ||||||||
Operating expense: |
||||||||||||||||
Cost of services (excluding depreciation
expense) |
282,151 | 242,941 | 549,483 | 484,899 | ||||||||||||
Depreciation and amortization |
11,280 | 11,030 | 22,493 | 21,875 | ||||||||||||
Amortization of vessel dry-docking |
4,081 | 3,318 | 8,158 | 6,371 | ||||||||||||
Selling, general and administrative |
22,107 | 20,959 | 46,396 | 41,476 | ||||||||||||
Legal settlement |
(19,202 | ) | | (19,202 | ) | | ||||||||||
Impairment charge |
2,818 | | 2,818 | | ||||||||||||
Miscellaneous (income) expense, net |
(52 | ) | (825 | ) | 437 | (690 | ) | |||||||||
Total operating expense |
303,183 | 277,423 | 610,583 | 553,931 | ||||||||||||
Operating income (loss) |
4,344 | 13,964 | (17,702 | ) | 12,114 | |||||||||||
Other expense: |
||||||||||||||||
Interest expense, net |
12,910 | 9,846 | 23,626 | 19,676 | ||||||||||||
Loss on modification of debt |
11 | | 630 | | ||||||||||||
Other expense, net |
14 | 6 | 30 | 5 | ||||||||||||
(Loss) income from continuing operations
before income tax (benefit) expense |
(8,591 | ) | 4,112 | (41,988 | ) | (7,567 | ) | |||||||||
Income tax (benefit) expense |
(1,585 | ) | (13 | ) | (1,671 | ) | 3 | |||||||||
Net (loss) income from continuing operations |
(7,006 | ) | 4,125 | (40,317 | ) | (7,570 | ) | |||||||||
Net income (loss) from discontinued operations |
1,590 | (475 | ) | 830 | (2,024 | ) | ||||||||||
Net (loss) income |
$ | (5,416 | ) | $ | 3,650 | $ | (39,487 | ) | $ | (9,594 | ) | |||||
Basic and diluted net (loss) income per share: |
||||||||||||||||
Continuing operations |
$ | (0.22 | ) | $ | 0.14 | $ | (1.30 | ) | $ | (0.24 | ) | |||||
Discontinued operations |
0.05 | (0.02 | ) | 0.03 | (0.07 | ) | ||||||||||
Basic and diluted net (loss) income per share |
$ | (0.17 | ) | $ | 0.12 | $ | (1.27 | ) | $ | (0.31 | ) | |||||
Number of shares used in calculations: |
||||||||||||||||
Basic |
31,018 | 30,595 | 30,971 | 30,431 | ||||||||||||
Diluted |
31,018 | 30,942 | 30,971 | 30,431 | ||||||||||||
Dividends declared per common share |
$ | | $ | 0.05 | $ | | $ | 0.10 | ||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
Table of Contents
Horizon Lines, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
Six Months Ended | ||||||||
June 26, | June 20, | |||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net loss from continuing operations |
$ | (40,317 | ) | $ | (7,570 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation |
12,332 | 11,716 | ||||||
Amortization of other intangible assets |
10,161 | 10,159 | ||||||
Amortization of vessel dry-docking |
8,158 | 6,371 | ||||||
Amortization of deferred financing costs |
2,018 | 1,700 | ||||||
Impairment charge |
2,818 | | ||||||
Legal settlement |
(19,202 | ) | | |||||
Loss on modification of debt |
630 | | ||||||
Deferred income taxes |
161 | 44 | ||||||
Gain on equipment disposals |
(368 | ) | | |||||
Gain on sale of interest in joint venture |
| (724 | ) | |||||
Stock-based compensation |
364 | 1,563 | ||||||
Accretion of interest on 4.25% convertible notes |
5,764 | 5,313 | ||||||
Accretion of interest on legal settlement |
284 | | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(19,280 | ) | (5,750 | ) | ||||
Materials and supplies |
(6,251 | ) | 2,263 | |||||
Other current assets |
(5,755 | ) | (1,226 | ) | ||||
Accounts payable |
(11,747 | ) | (2,276 | ) | ||||
Accrued liabilities |
1,554 | (6,137 | ) | |||||
Vessel rent |
(1,894 | ) | (14,115 | ) | ||||
Vessel dry-docking payments |
(7,966 | ) | (10,764 | ) | ||||
Accrued legal settlements |
(884 | ) | | |||||
Other assets/liabilities |
(838 | ) | 322 | |||||
Net cash used in operating activities |
(70,258 | ) | (9,111 | ) | ||||
Cash flows from investing activities: |
||||||||
Purchases of property and equipment |
(7,041 | ) | (5,442 | ) | ||||
Proceeds from the sale of property and equipment |
1,402 | 234 | ||||||
Proceeds from the sale of interest in joint venture |
| 1,100 | ||||||
Net cash used in investing activities |
(5,639 | ) | (4,108 | ) | ||||
Cash flows from financing activities: |
||||||||
Payments on long-term debt |
(9,375 | ) | (9,375 | ) | ||||
Borrowing under revolving credit facility |
97,500 | 75,500 | ||||||
Payments on revolving credit facility |
(9,000 | ) | (45,500 | ) | ||||
Payment of financing costs |
(6,848 | ) | | |||||
Payments on capital lease obligations |
(783 | ) | | |||||
Dividends to stockholders |
| (3,060 | ) | |||||
Common stock issued under employee stock purchase plan |
| 70 | ||||||
Net cash provided by financing activities |
71,494 | 17,635 | ||||||
Net (decrease) increase in cash from continuing operations |
(4,403 | ) | 4,416 | |||||
Net increase (decrease) in cash from discontinued operations |
5,041 | (6,263 | ) | |||||
Net increase (decrease) in cash |
638 | (1,847 | ) | |||||
Cash at beginning of period |
2,751 | 6,419 | ||||||
Cash at end of period |
$ | 3,389 | $ | 4,572 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
Table of Contents
HORIZON LINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Organization
Horizon Lines, Inc. (the Company) operates as a holding company for Horizon Lines, LLC
(Horizon Lines), a Delaware limited liability company, Horizon Logistics, LLC (Horizon
Logistics), a Delaware limited liability company, Horizon Lines of Puerto Rico, Inc. (HLPR),
a Delaware corporation, and Hawaii Stevedores, Inc. (HSI), a Hawaii corporation. Horizon Lines
operates as a Jones Act container shipping business with primary service to ports within the
continental United States, Puerto Rico, Alaska, and Hawaii. Horizon Lines also provides
container shipping services to and from Guam and Micronesia. Under the Jones Act, all vessels
transporting cargo between covered locations must, subject to limited exceptions, be built in
the U.S., registered under the U.S. flag, manned by predominantly U.S. crews, and owned and
operated by U.S.-organized companies that are controlled and 75% owned by U.S. citizens. Horizon
Lines also offers terminal services and non-vessel operating common carrier (NVOCC) services
through its subsidiary, Horizon Lines of Guam. In addition, on December 13, 2010, Horizon Lines
commenced a weekly trans-Pacific liner service between Asia and the U.S. West Coast. HLPR
operates as an agent for Horizon Lines in Puerto Rico and also provides terminal services in
Puerto Rico. Prior to the divestiture of the third-party logistics operations, Horizon Logistics
provided integrated logistics service offerings, including rail, trucking, warehousing, and
distribution.
2. Basis of Presentation
The condensed consolidated financial statements include the accounts of the Company and its
subsidiaries. All significant intercompany items have been eliminated in consolidation. Certain
prior period balances have been reclassified to conform to current period presentation.
The accompanying consolidated financial statements have been prepared assuming the Company
will continue as a going concern, which contemplates realization of assets and the satisfaction
of liabilities in the normal course of business for a reasonable period following the date of
these financial statements. As discussed in more detail in Note 3, the Company does not expect
to be in compliance with the revised debt covenants in its Senior Credit Facility upon the close
of its third fiscal quarter of 2011, which raises substantial doubt that the Company will
continue as a going concern.
During the six months ended June 26, 2011, the entire component comprising the third-party
logistics operations was discontinued and former logistics customers will no longer be customers
of the Company. As part of the divestiture, the Company has transitioned some of the operations
and personnel to other logistics providers. As such, there will not be any future cash inflows
received from these logistics customers and no cash outflows related to these operations. In
addition, the Company is not expected to have any significant continuing involvement in the
divested logistics operations. As a result, the logistics operations have been classified as
discontinued operations in all periods presented.
The accompanying unaudited interim condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and
accordingly, certain financial information has been condensed and certain footnote disclosures
have been omitted. Such information and disclosures are normally included in financial
statements prepared in accordance with generally accepted accounting principles in the United
States (GAAP). These financial statements should be read in conjunction with the consolidated
financial statements and footnotes thereto included in the Companys Annual Report on Form 10-K
for the year ended December 26, 2010. The Company uses a 52 or 53 week (every sixth or seventh
year) fiscal year that ends on the Sunday before the last Friday in December.
The financial statements as of June 26, 2011 and the financial statements for the quarters
and six months ended June 26, 2011 and June 20, 2010 are unaudited; however, in the opinion of
management, such statements include all adjustments necessary for the fair presentation of the
financial information included herein, which are of a normal recurring nature. The preparation
of consolidated financial statements in conformity with GAAP requires management to make
estimates and assumptions and to use judgment that affects the amounts reported in the financial
statements and accompanying notes. Actual results may differ from those estimates. Results of
operations for interim periods are not necessarily indicative of results for the full year.
4
Table of Contents
3. Long-Term Debt
Long-term debt consists of the following (in thousands):
June 26, | December 26, | |||||||
2011 | 2010 | |||||||
Senior credit facility |
||||||||
Term loan |
$ | 84,375 | $ | 93,750 | ||||
Revolving credit facility |
188,500 | 100,000 | ||||||
4.25% convertible senior notes |
319,178 | 313,414 | ||||||
Capital lease obligations |
8,375 | 9,159 | ||||||
Total long-term debt |
600,428 | 516,323 | ||||||
Less current portion |
(593,767 | ) | (508,793 | ) | ||||
Long-term debt, net of current portion |
$ | 6,661 | $ | 7,530 | ||||
The Company expects to experience a covenant breach under the Senior Credit Facility
in connection with the amended financial covenants upon the close of the third fiscal quarter of
2011. Noncompliance with the financial covenants in the Senior Credit Facility constitutes an
event of default, which, if not waived, could prevent the Company from borrowing under the
Senior Credit Facility and could also result in acceleration of the maturity of the Senior
Credit Facility. The indenture related to the Notes, as well as other of the Companys material
contracts, contain cross default provisions and certain acceleration clauses whereby if the
maturity of the Senior Credit Facility is accelerated, maturity of the Notes can also be
accelerated.
The Company anticipates working with its lenders and their advisors to obtain waivers and
amendments or to refinance prior to any possible covenant noncompliance; however, the Company
cannot provide assurance that it will be able to secure such amendments or a refinancing. As a
result of these factors, the Company has classified its obligations under the Notes and the
Senior Credit Facility as current liabilities in the accompanying Consolidated Balance Sheets as
of June 26, 2011 and December 26, 2010. These factors, among others, raise substantial doubt
that the Company will be able to continue as a going concern.
On March 22, 2011, the Court entered a judgment against the Company based on a plea
agreement between the Company and the U.S. Department of Justice (the DOJ) whereby the Company
was required to pay a fine of $45.0 million to resolve the investigation by the DOJ into its
domestic ocean shipping business. On April 28, 2011, the Court amended the fine imposed on the
Company by reducing the amount from $45.0 million to $15.0 million. As a result, no covenant
default exists, or is expected to exist, under the indenture related to the 4.25% Convertible
Senior Notes due 2012 (the Notes) with respect to the fine.
On June 1, 2011, the Company announced that it has entered into Restructuring Support Agreements,
dated June 1, 2011 (the Restructuring Agreements) with certain holders of a majority of its
Notes. The Restructuring Agreements relate to a refinancing of the
Companys outstanding
indebtedness with such holders and a proposed asset-based revolving loan facility of up to
$125.0 million, which remains under negotiation with a separate, third-party financial institution.
The Company has entered into amendments of the Restructuring Support
Agreements on June 10, 2011,
June 17, 2011, June 24, 2011, July 1, 2011,
July 8, 2011, and July 22, 2011. The July 22, 2011
amendment extended the deadline by which the Company is required to receive subscription
commitments from the holders.
The Company and the majority of the holders of the Notes continue to make significant progress in
negotiations concerning certain substantive modifications to the recapitalization transaction
announced on June 1, 2011, and the parties anticipate completing such negotiations and announcing
a definitive transaction in the next several weeks. There is no assurance that negotiations will
be successful.
5
Table of Contents
Senior Credit Facility
On August 8, 2007, the Company entered into a credit agreement (the Senior Credit
Facility) secured by substantially all of the owned assets of the Company. On June 11, 2009,
the Senior Credit Facility was amended resulting in a reduction in the size of the revolving
credit facility from $250.0 million to $225.0 million. On March 9, 2011, the Senior Credit
Facility was amended to waive default conditions related to the settlement agreement with the
DOJ. On June 24, 2011, the Senior Credit Facility was amended to modify the financial covenant
ratios. The terms of the Senior Credit Facility also provide for a $5.0 million swingline
subfacility and a $20.0 million letter of credit subfacility.
The June 2009 amendment to the Senior Credit Facility was intended to provide the Company
the flexibility necessary to effect the settlement of the Puerto Rico class action litigation
and to incur other antitrust related litigation expenses. The amendment revised the definition
of Consolidated EBITDA by allowing for certain charges, including (i) the Puerto Rico
settlement, or alternatively a DOJ fine, in an amount not to exceed $25 million and (ii)
litigation expenses related to antitrust litigation matters in an amount not to exceed $25
million in the aggregate and $15 million over a 12-month period, to be added back to the
calculation of Consolidated EBITDA. In addition, the Senior Credit Facility was amended to (i)
increase the spread over LIBOR and Prime based rates by 150 bps, (ii) increase the range of fees
on the unused portion of the commitment, (iii) eliminate the $150 million incremental facility,
(iv) modify the definition of Consolidated EBITDA to eliminate the term non-recurring charges,
and (v) incorporate other structural enhancements, including a step-down in the secured leverage
ratio and further limitations on the ability to make certain restricted payments. As a result of
the amendment to the Senior Credit Facility, the Company paid $3.5 million in financing costs
and recorded a loss on modification of debt of $0.1 million.
The March 2011 amendment to the Senior Credit Facility (i) increased the senior secured
leverage ratio from 2.75x to 3.50x for the fiscal quarters ending March 27, 2011 and June 26,
2011, and from 2.75x to 3.00x for the fiscal quarter ending September 25, 2011 (remaining at
2.75x for all fiscal quarters thereafter), (ii) decreased the interest coverage ratio minimum
from 3.50x to 2.50x for the fiscal quarters ending March 27, 2011 and June 26, 2011, from 3.50x
to 2.75x for the fiscal quarter ending September 25, 2011, and from 3.50x to 3.00x for the
fiscal quarter ending December 25, 2011 (remaining at 3.50x for all fiscal quarters thereafter),
(iii) increased the spread over LIBOR and Prime rates by 250 bps, and (iv) restricted cash
dividends from being paid on any class of capital stock. The amendment also revised the
definition of Consolidated EBITDA by allowing for certain charges, including (i) transaction
costs incurred in connection with obtaining the credit agreement amendment, the efforts to get
convertible bondholder waiver consent, and any other proposed refinancing costs that are not
counted as interest expense or capitalized as deferred financing fees in an amount not to exceed
$5.0 million and (ii) litigation expenses related to antitrust litigation matters in an amount
not to exceed $28 million in the aggregate, to be added back to the calculation of Consolidated
EBITDA.
The June 2011 amendment to the Senior Credit Facility (i) increased the senior secured
leverage ratio from 3.50x to 6.25x for the fiscal quarter ending June 26, 2011 and (ii)
decreased the interest coverage ratio minimum from 2.50x to 1.50x for the fiscal quarter ending
June 26, 2011.
As a result of the amendments to the Senior Credit Facility and efforts to refinance the
Companys existing debt, the Company paid $6.3 million in financing costs and recorded a loss on
modification of debt of $0.6 million during 2011.
The Company made quarterly principal payments on the term loan of approximately $1.6
million from December 31, 2007 through September 30, 2009. Effective December 31, 2009,
quarterly payments increased to $4.7 million through September 30, 2011, at which point
quarterly payments will increase to $18.8 million until final maturity on August 8, 2012. Final
maturity of the Senior Credit Facility could accelerate to February 15, 2012 unless the Notes
are refinanced, or arrangements for the refinance of the Notes have been made, in each case on
terms and conditions reasonably satisfactory to the Administrative Agent of the Senior Credit
Facility. The interest rate payable under the Senior Credit Facility varies depending on the
types of advances or loans the Company selects. Borrowings under the Senior Credit Facility bear
interest primarily at LIBOR-based rates plus a spread which ranges from 5.25% to 6.0% (LIBOR
plus 6.0% as of June 26, 2011) depending on the Companys ratio of total secured debt to EBITDA
(as defined in the Senior Credit Facility). The Company also has the option to borrow at Prime
plus a spread which ranges from 4.25% to 5.0% (Prime plus 5.0% as of June 26, 2011). The
weighted average interest rate under the Senior Credit Facility at June 26, 2011 was
approximately 7.2%, which includes the impact of the interest rate swap (as defined below). The
Company also pays a variable commitment fee on the unused portion of the commitment, ranging
from 0.375% to 0.50% (0.50% as of June 26, 2011).
The Senior Credit Facility contains customary covenants, including two financial covenants
with respect to the Companys
leverage ratio and interest coverage ratio and covenants that limit distribution of
dividends and stock repurchases. It also contains customary events of default, subject to grace
periods. The Company was in compliance with all such covenants as of June 26, 2011. As of June
26, 2011, total unused borrowing capacity under the revolving credit facility was $17.9 million,
after taking into account $188.5 million outstanding under the revolver and $18.6 million
utilized for outstanding letters of credit.
6
Table of Contents
The Company has agreed that in the event its cash balance exceeds $17.5 million, the
Company will not request borrowing under the Senior Credit Facility and, if such cash balance is
in excess of that amount for more than three consecutive business days, to reduce borrowing
under the Senior Credit Facility by the amount of the excess.
Derivative Instruments
On March 31, 2008, the Company entered into an Interest Rate Swap Agreement (the swap)
with Wachovia Bank, National Association, a current subsidiary of Wells Fargo & Co.,
(Wachovia) in the notional amount of $121.9 million. The swap expires on August 8, 2012. Under
the swap, the Company and Wachovia have agreed to exchange interest payments on the notional
amount on the last business day of each calendar quarter. The Company has agreed to pay a 3.02%
fixed interest rate, and Wachovia has agreed to pay a floating interest rate equal to the
three-month LIBOR rate. The critical terms of the swap agreement and the term loan are the same,
including the notional amounts, interest rate reset dates, maturity dates and underlying market
indices. The purpose of entering into this swap is to protect the Company against the risk of
rising interest rates by effectively fixing the base interest rate payable related to its term
loan. Interest rate differentials paid or received under the swap are recognized as adjustments
to interest expense. The Company does not hold or issue interest rate swap agreements for
trading purposes. In the event that the counter-party fails to meet the terms of the interest
rate swap agreement, the Companys exposure is limited to the interest rate differential.
The swap has been designated as a cash flow hedge of the variability of the cash flows due
to changes in LIBOR and has been deemed to be highly effective. Accordingly, the Company records
the fair value of the swap as an asset or liability on its consolidated balance sheet, and any
unrealized gain or loss is included in accumulated other comprehensive loss. As of June 26,
2011, the Company recorded a liability of $2.3 million, which is included in other accrued
liabilities in the accompanying condensed consolidated balance sheet. The liability of $2.3
million has been classified as current in order to conform to the classification of the
underlying term loan debt. The Company recorded $20 thousand and $0.2 million in other
comprehensive loss for the quarters ended June 26, 2011 and June 20, 2010, respectively, and
$0.5 million in other comprehensive loss for each of the six months ended June 26, 2011
and June 20, 2010. No hedge ineffectiveness was recorded during the quarters and
six months ended June 26, 2011 and June 20, 2010. If the hedge was deemed ineffective, or
extinguished by either counterparty, any accumulated gains or losses remaining in other
comprehensive loss would be fully recorded in interest expense during the period.
4.25% Convertible Senior Notes
On August 8, 2007, the Company issued $330.0 million aggregate principal amount of 4.25%
Convertible Senior Notes due 2012. The Notes are general unsecured obligations of the Company
and rank equally in right of payment with all of the Companys other existing and future
obligations that are unsecured and unsubordinated. The Notes bear interest at the rate of 4.25%
per annum, which is payable in cash semi-annually on February 15 and August 15 of each year. The
Notes mature on August 15, 2012, unless earlier converted, redeemed or repurchased in accordance
with their terms prior to August 15, 2012. Holders of the Notes may require the Company to
repurchase the Notes for cash at any time before August 15, 2012 if certain fundamental changes
occur.
Each $1,000 of principal of the Notes will initially be convertible into 26.9339 shares of
the Companys common stock, which is the equivalent of $37.13 per share, subject to adjustment
upon the occurrence of specified events set forth under the terms of the Notes. Upon conversion,
the Company would pay the holder the cash value of the applicable number of shares of its common
stock, up to the principal amount of the note. Amounts in excess of the principal amount, if
any, may be paid in cash or in stock, at the Companys option. Holders may convert their Notes
into the Companys common stock as follows:
| Prior to May 15, 2012, if during any calendar quarter, and only during such calendar quarter, the last reported sale price of the Companys common stock for at least 20 trading days in a period of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter exceeds 120% of the applicable conversion price in effect on the last trading day of the immediately preceding calendar quarter; | ||
| During any five business day period prior to May 15, 2012, immediately after any five consecutive trading day period (the measurement period) in which the trading price per $1,000 principal amount of notes for each day of such measurement period was less than 98% of the product of the last reported sale price of the Companys common stock on such date and the conversion rate on such date; | ||
| If, at any time, a change in control occurs or if the Company is a party to a consolidation, merger, binding share exchange or transfer or lease of all or substantially all of its assets, pursuant to which the Companys common stock would be converted into cash, securities or other assets; or | ||
| At any time after May 15, 2012 through the fourth scheduled trading day immediately preceding August 15, 2012. |
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Holders who convert their Notes in connection with a change in control may be entitled to a
make-whole premium in the form of an increase in the conversion rate. In addition, upon a change
in control, liquidation, dissolution or de-listing, the holders of the Notes may require the
Company to repurchase for cash all or any portion of their Notes for 100% of the principal
amount plus accrued and unpaid interest. As of June 26, 2011, none of the conditions allowing
holders of the Notes to convert or requiring the Company to repurchase the Notes had been met.
The Company may not redeem the Notes prior to maturity.
Concurrent with the issuance of the Notes, the Company entered into note hedge transactions
with certain financial institutions whereby if the Company is required to issue shares of its
common stock upon conversion of the Notes, the Company has the option to receive up to 8.9
million shares of its common stock when the price of the Companys common stock is between
$37.13 and $51.41 per share upon conversion, and the Company sold warrants to the same financial
institutions whereby the financial institutions have the option to receive up to 17.8 million
shares of the Companys common stock when the price of the Companys common stock exceeds $51.41
per share upon conversion. The separate note hedge and warrant transactions were structured to
reduce the potential future share dilution associated with the conversion of Notes. The cost of
the note hedge transactions to the Company was approximately $52.5 million, $33.4 million net of
tax, and was accounted for as an equity transaction. The Company received proceeds of $11.9
million related to the sale of the warrants, which was also classified as equity.
The Notes and the warrants sold in connection with the hedge transactions will have no
impact on diluted earnings per share until the price of the Companys common stock exceeds the
conversion price (initially $37.13 per share) because the principal amount of the Notes will be
settled in cash upon conversion. Prior to conversion of the Notes or exercise of the warrants,
the Company will include the effect of the additional shares that may be issued if its common
stock price exceeds the conversion price, using the treasury stock method. The call options
purchased as part of the note hedge transactions are anti-dilutive and therefore will have no
impact on earnings per share.
Fair Value of Financial Instruments
The estimated fair values of the Companys debt as of June 26, 2011 and December 26, 2010
were $556.7 million and $498.0 million, respectively. The fair value of the Notes is based on
quoted market prices. The fair value of the other long-term debt approximates carrying value.
4. Restructuring
In an effort to continue to effectively manage costs, during the fourth quarter of 2010,
the Company initiated a plan to reduce its non-union workforce by at least 10%, or approximately
65 positions. The Company substantially completed the workforce reduction initiative on January
31, 2011 by eliminating a total of 64 positions, including 35 existing and 29 open positions.
The following table presents the restructuring reserves at June 26, 2011, as well as activity
during the year (in thousands):
Balance at | Balance at | |||||||||||||||
December 26, | June 26, | |||||||||||||||
2010 | Payments | Adjustments | 2011 | |||||||||||||
Personnel related costs |
$ | 2,032 | $ | (1,079 | ) | $ | | $ | 953 | |||||||
Other associated costs |
10 | (10 | ) | | | |||||||||||
Total |
$ | 2,042 | $ | (1,089 | ) | $ | | $ | 953 | |||||||
In the consolidated balance sheet as of June 26, 2011, the reserve for restructuring costs
is recorded in other accrued liabilities.
5. Discontinued Operations
During the six months ended June 26, 2011, the entire component comprising the third-party
logistics operations was discontinued and former logistics customers will no longer be customers
of the Company. As part of the divestiture, the Company has transitioned some of the operations
and personnel to other logistics providers. As such, there will not be any future cash inflows
received from these logistics customers and no cash outflows related to these operations. In
addition, the Company is not
expected to have any significant continuing involvement in the divested logistics
operations.
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During the year ended December 26, 2010, the Company recorded a $5.0 million valuation
allowance to adjust the carrying value of the net assets of its discontinued operations to the
estimated fair value less costs to sell. As a result of better than expected cash collections of
the accounts receivable, the Company reduced the valuation allowance against the net assets of
its discontinued operations by $2.6 million during the quarter ended June 26, 2011.
The following table includes the major classes of assets that have been presented as Assets
of discontinued operations and Liabilities of discontinued operations in the Consolidated
Balance Sheets (in thousands):
June 26, | December 26, | |||||||
2011 | 2010 | |||||||
Accounts receivable, net of allowance |
$ | 2,645 | $ | 10,319 | ||||
Property and equipment, net |
| 721 | ||||||
Deferred tax asset |
114 | 648 | ||||||
Other assets |
182 | 178 | ||||||
Subtotal |
2,941 | 11,866 | ||||||
Valuation allowance |
(1,574 | ) | (4,983 | ) | ||||
Total current assets of discontinued operations |
$ | 1,367 | $ | 6,883 | ||||
June 26, | December 26, | |||||||
2011 | 2010 | |||||||
Accounts payable |
$ | 223 | $ | 890 | ||||
Other accrued liabilities |
356 | 2,809 | ||||||
Total current liabilities of discontinued operations |
$ | 579 | $ | 3,699 | ||||
The following table presents summarized financial information for the discontinued
operations included in the Consolidated Statements of Operations (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
June 26, | June 20, | June 26, | June 20, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Operating revenue |
$ | 3,099 | $ | 14,274 | $ | 13,683 | $ | 25,748 | ||||||||
Operating income (loss) |
2,145 | (479 | ) | 1,365 | (2,068 | ) | ||||||||||
Net income (loss) |
1,590 | (475 | ) | 830 | (2,024 | ) |
The following table presents summarized cash flow information for the discontinued operations
included in the Consolidated Statements of Cash Flows (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
June 26, | June 20, | June 26, | June 20, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Cash provided by (used in) operating activities |
$ | 4,507 | $ | (4,622 | ) | $ | 5,098 | $ | (6,128 | ) | ||||||
Cash used in investing activities |
| (74 | ) | (57 | ) | (135 | ) | |||||||||
Net increase (decrease) in cash from
discontinued operations |
$ | 4,507 | $ | (4,696 | ) | $ | 5,041 | $ | (6,263 | ) | ||||||
6. Assets Held for Sale and Impairment Charge
Assets
held for sale as of June 26, 2011 and December 26, 2010 includes payments for three
new cranes which are not yet placed into service. These cranes were initially purchased for use
in the Companys Anchorage, Alaska terminal and were expected to be installed and become fully
operational in December 2010. However, the Port of Anchorage Intermodal Expansion Project is
encountering delays that could continue until 2014 or beyond. As such, the Company is currently
marketing these cranes for sale and expects to complete the sale within one year. As a result of
the reclassification to assets held for sale during the
quarter ended June 26, 2011, the Company recorded an impairment charge of $2.8 million to
write down the carrying value of the cranes to their estimated fair value less costs to sell.
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7. Income Taxes
During the second quarter of 2009, the Company determined that it was unclear as to the
timing of when it will generate sufficient taxable income to realize its deferred tax assets.
Accordingly, the Company recorded a valuation allowance against its deferred tax assets. The
valuation allowance is reviewed quarterly and will be maintained until sufficient positive
evidence exists to support the reversal of the valuation allowance. In addition, until such time
that the Company determines it is more likely than not that it will generate sufficient taxable
income to realize its deferred tax assets, income tax benefits associated with future period
losses will be fully reserved.
8. Stock-Based Compensation
Stock-based compensation costs are measured at the grant date, based on the estimated fair
value of the award, and are recognized as an expense in the income statement over the requisite
service period. Compensation costs related to stock options, restricted shares, and vested
shares granted under the Amended and Restated Equity Incentive Plan (the Plan), the 2009
Incentive Compensation Plan (the 2009 Plan), and purchases under the Employee Stock Purchase
Plan, as amended (ESPP) are recognized using the straight-line method, net of estimated
forfeitures. Stock options and restricted shares granted to employees under the Plan and the
2009 Plan typically cliff vest and become fully exercisable on the third anniversary of the
grant date, provided the employee who was granted such options/restricted shares is continuously
employed by the Company or its subsidiaries through such date, and provided performance based
criteria, if any, are met. In addition, recipients who retire from the Company and meet certain
age and length of service criteria are typically entitled to proportionate vesting.
The following compensation costs are included within selling, general, and administrative
expenses on the condensed consolidated statements of operations (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
June 26, | June 20, | June 26, | June 20, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Stock options |
$ | 8 | $ | 44 | $ | 60 | $ | 321 | ||||||||
Restricted stock / vested shares |
35 | 874 | 234 | 1,157 | ||||||||||||
Restricted stock units |
39 | | 39 | | ||||||||||||
ESPP |
| 44 | 31 | 85 | ||||||||||||
Total |
$ | 82 | $ | 962 | $ | 364 | $ | 1,563 | ||||||||
Stock Options
The Companys stock option plan provides for grants of stock options to key employees at
prices not less than the fair market value of the Companys common stock on the grant date. As
of June 26, 2011, there was no unrecognized compensation costs related to stock options granted.
A summary of stock option activity is presented below:
Weighted- | ||||||||||||||||
Weighted- | Average | Aggregate | ||||||||||||||
Average | Remaining | Intrinsic | ||||||||||||||
Number of | Exercise | Contractual | Value | |||||||||||||
Options | Options | Price | Term (years) | (000s) | ||||||||||||
Outstanding at December 26, 2010 |
1,437,713 | $ | 15.78 | |||||||||||||
Granted |
| | ||||||||||||||
Exercised |
| | ||||||||||||||
Forfeited |
(10,000 | ) | 9.38 | |||||||||||||
Expired |
(19,926 | ) | 16.95 | |||||||||||||
Outstanding at June 26, 2011 |
1,407,787 | $ | 15.81 | 5.28 | $ | | ||||||||||
Vested and exercisable at June 26, 2011 |
1,407,787 | $ | 15.81 | 5.28 | $ | | ||||||||||
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Restricted Stock
A summary of the status of the Companys restricted stock awards as of June 26, 2011 is
presented below:
Weighted- | ||||||||
Average | ||||||||
Fair Value | ||||||||
Number of | at Grant | |||||||
Restricted Shares | Shares | Date | ||||||
Nonvested at December 26, 2010 |
631,705 | $ | 5.64 | |||||
Granted |
83,565 | 3.59 | ||||||
Vested |
(22,500 | ) | 14.63 | |||||
Forfeited |
(70,500 | ) | 7.50 | |||||
Nonvested at June 26, 2011 |
622,270 | $ | 4.83 | |||||
As of June 26, 2011, there was $1.2 million of unrecognized compensation expense
related to all restricted stock awards, which is expected to be recognized over a
weighted-average period of 1.4 years.
Restricted Stock Units
On June 2, 2011, the Company granted a total of 513,317 restricted stock units (RSUs) to
all members of its Board of Directors including its interim President and Chief Executive
Officer. The Companys interim President and Chief Executive Officer received the grant of the
RSUs in his capacity as a member of the Board of Directors. Each RSU has an economic value equal
to a share of the Companys Common Stock (excluding the right to receive dividends). The RSUs
will vest June 2, 2012, subject to continued service on the Board of Directors through that
date. The RSUs will be settled in cash once the grantee ceases to serve on the Companys Board
of Directors. In accordance with the award provisions, the compensation expense recorded in the
Companys Condensed Statement of Operations reflects the straight-line amortized fair value
based on the period end closing price. Based on the value of the Companys Common Stock on June
26, 2011, there was $0.5 million of unrecognized compensation expense related to the RSUs, which
is expected to be recognized over a period of 11 months.
Employee Stock Purchase Plan
Effective April 1, 2011, the Company temporarily suspended the ESPP. There will be no
stock-based compensation expense recognized in connection with the ESPP until such time the ESPP
is reinstated.
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9. Net (Loss) Income per Common Share
Basic net (loss) income per share is computed by dividing net (loss) income by the weighted
daily average number of shares of common stock outstanding during the period. Diluted net loss
per share is based upon the weighted daily average number of shares of common stock outstanding
for the period plus dilutive potential shares of common stock, including stock options, using
the treasury-stock method.
Net (loss) income per share is as follows (in thousands, except per share amounts):
Three Months Ended | Six Months Ended | |||||||||||||||
June 26, | June 20, | June 26, | June 20, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Numerator: |
||||||||||||||||
Net (loss) income from continuing operations |
$ | (7,006 | ) | $ | 4,125 | $ | (40,317 | ) | $ | (7,570 | ) | |||||
Net income (loss) from discontinued operations |
1,590 | (475 | ) | 830 | (2,024 | ) | ||||||||||
Net (loss) income |
$ | (5,416 | ) | $ | 3,650 | $ | (39,487 | ) | $ | (9,594 | ) | |||||
Denominator: |
||||||||||||||||
Denominator for basic net (loss) income per common
share: |
||||||||||||||||
Weighted average shares outstanding |
31,018 | 30,595 | 30,971 | 30,431 | ||||||||||||
Effect of dilutive securities: |
||||||||||||||||
Stock-based compensation |
| 347 | | | ||||||||||||
Denominator for diluted net (loss) income per
common share |
31,018 | 30,942 | 30,971 | 30,431 | ||||||||||||
Basic and diluted net (loss) income per common share |
||||||||||||||||
From continuing operations |
$ | (0.22 | ) | $ | 0.14 | $ | (1.30 | ) | $ | (0.24 | ) | |||||
From discontinued operations |
0.05 | (0.02 | ) | 0.03 | (0.07 | ) | ||||||||||
Basic and diluted net (loss) income per common share |
$ | (0.17 | ) | $ | 0.12 | $ | (1.27 | ) | $ | (0.31 | ) | |||||
Certain of the Companys unvested stock-based awards contain non-forfeitable rights to
dividends. As a result, a total of 121,615 and 118,737 shares have been included in the
denominator for basic net (loss) income per share for these participating securities during the
quarters ended June 26, 2011 and June 20, 2010, respectively, and 137,873 and 122,458 shares
have been included in the denominator for basic net (loss) income per share for these
participating securities during the six months ended June 26, 2011 and June 20, 2010,
respectively. In addition, a total of 3,092 shares have been excluded from the denominator
during the quarter ended June 26, 2011, and a total of 46,463 and 204,087 shares have been
excluded from the denominator during the six months ended June 26, 2011 and June 20, 2010,
respectively as the impact would be anti-dilutive.
10. Comprehensive (Loss) Income
Comprehensive (loss) income is as follows (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||
June 26, | June 20, | June 26, | June 20, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net (loss) income |
$ | (5,416 | ) | $ | 3,650 | $ | (39,487 | ) | $ | (9,594 | ) | |||||
Change in fair value of interest rate swap |
20 | 158 | 474 | 496 | ||||||||||||
Amortization of pension and
post-retirement benefit transition
obligation |
118 | 104 | 236 | 207 | ||||||||||||
Comprehensive (loss) income |
$ | (5,278 | ) | $ | 3,912 | $ | (38,777 | ) | $ | (8,891 | ) | |||||
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11. Property and Equipment
Property and equipment consists of the following (in thousands):
June 26, | December 26, | |||||||
2011 | 2010 | |||||||
Vessels and vessel improvements |
$ | 155,269 | $ | 152,641 | ||||
Containers |
36,960 | 37,212 | ||||||
Chassis |
14,947 | 14,524 | ||||||
Cranes |
38,158 | 37,294 | ||||||
Machinery and equipment |
32,977 | 29,756 | ||||||
Facilities and land improvements |
26,578 | 26,368 | ||||||
Software |
25,920 | 23,837 | ||||||
Construction in progress |
4,404 | 7,635 | ||||||
Total property and equipment |
335,213 | 329,267 | ||||||
Accumulated depreciation |
(164,517 | ) | (152,825 | ) | ||||
Property and equipment, net |
$ | 170,696 | $ | 176,442 | ||||
12. Intangible Assets
Intangible assets consist of the following (in thousands):
June 26, | December 26, | |||||||
2011 | 2010 | |||||||
Customer contracts/relationships |
$ | 141,430 | $ | 141,430 | ||||
Trademarks |
63,800 | 63,800 | ||||||
Deferred financing costs |
21,171 | 14,906 | ||||||
Total intangibles with definite lives |
226,401 | 220,136 | ||||||
Accumulated amortization |
(151,491 | ) | (139,312 | ) | ||||
Net intangibles with definite lives |
74,910 | 80,824 | ||||||
Goodwill |
314,149 | 314,149 | ||||||
Intangible assets, net |
$ | 389,059 | $ | 394,973 | ||||
As discussed in Note 3, as result of the amendments of the Senior Credit Facility and
efforts to refinance the Companys existing debt, the Company paid $6.3 million in financing
costs during the first six months of 2011.
13. Other Accrued Liabilities
Other accrued liabilities consist of the following (in thousands):
June 26, | December 26, | |||||||
2011 | 2010 | |||||||
Vessel operations |
$ | 20,697 | $ | 20,147 | ||||
Payroll and employee benefits |
15,062 | 13,996 | ||||||
Marine operations |
11,580 | 8,777 | ||||||
Terminal operations |
9,712 | 11,863 | ||||||
Fuel |
7,805 | 8,032 | ||||||
Interest |
9,595 | 7,344 | ||||||
Legal settlements |
11,833 | 12,767 | ||||||
Restructuring |
953 | 1,853 | ||||||
Other liabilities |
23,804 | 23,720 | ||||||
Total other accrued liabilities |
$ | 111,041 | $ | 108,499 | ||||
Other accrued liabilities of $23.8 million as of June 26, 2011 includes $1.5 million
related to the unpaid portion of a
separation agreement with the Companys former chief executive officer.
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14. Fair Value Measurement
U.S. accounting standards establish a fair value hierarchy that prioritizes the inputs used
to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in
active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority
to unobservable inputs (Level 3 measurement). This hierarchy requires entities to maximize the
use of observable inputs and minimize the use of unobservable inputs when determining fair
value. The three levels of inputs used to measure fair value are as follows:
Level 1: | observable inputs such as quoted prices in active markets | ||
Level 2: | inputs other than the quoted prices in active markets that are observable either directly or indirectly | ||
Level 3: | unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions |
The Company measures the market value of its pension plan assets at the estimated market
value. The fair value of the pension plan assets is determined by using quoted market prices in
active markets.
On a recurring basis, the Company measures the interest rate swap at its estimated fair
value. The fair value of the swap is determined using the market standard methodology of netting
the discounted future fixed cash payments (or receipts) and the discounted expected variable
cash receipts (or payments). The variable cash receipts (or payments) are based on an
expectation of future interest rates (forward curves) derived from observable market interest
rate curves. The unrealized loss on the interest rate swap of $2.3 million is classified within
level 2 of the fair value hierarchy.
No other assets or liabilities are measured at fair value under the hierarchy as of June
26, 2011.
15. Pension and Post-retirement Benefit Plans
The Company provides pension and post-retirement benefit plans for certain of its union
workers. Each of the plans is described in more detail below.
Pension Plans
The Company sponsors a defined benefit plan covering approximately 30 union employees as of
June 26, 2011. The plan provides for retirement benefits based only upon years of service.
Employees whose terms and conditions of employment are subject to or covered by the collective
bargaining agreement between Horizon Lines and the International Longshore & Warehouse Union
Local 142 are eligible to participate once they have completed one year of service.
Contributions to the plan are based on the projected unit credit actuarial method and are
limited to the amounts that are currently deductible for income tax purposes. The Company
recorded net periodic benefit costs of $0.2 million during each of the quarters ended June 26,
2011 and June 20, 2010, and $0.4 million during each of the six months ended June 26, 2011 and
June 20, 2010.
The HSI pension plan covering approximately 50 salaried employees was frozen to new
entrants as of December 31, 2005. Contributions to the plan are based on the projected unit
credit actuarial method and are limited to the amounts that are currently deductible for income
tax purposes. The Company recorded net periodic benefit costs of $0.1 million during each of the
quarters ended June 26, 2011 and June 20, 2010, and $0.2 million and $0.1 million during the six months
ended June 26, 2011 and June 20, 2010, respectively.
The Company expects to make contributions to the above mentioned pension plans totaling
$1.1 million during 2011.
Post-retirement Benefit Plans
In addition to providing pension benefits, the Company provides certain healthcare (both
medical and dental) and life insurance benefits for eligible retired members (post-retirement
benefits). For eligible employees hired on or before July 1, 1996, the healthcare plan provides
for post-retirement health coverage for an employee who, immediately preceding his/her
retirement date, was an active participant in the retirement plan and has attained age 55 as of
his/her retirement date. For eligible employees hired after July 1, 1996, the plan provides
post-retirement health coverage for an employee who, immediately preceding his/her retirement
date, was an active participant in the retirement plan and has attained a combination of age and
service totaling 75 years or more as of his/her retirement date. The Company recorded net
periodic benefit costs related to the post-retirement benefits of $0.1 million during each of
the quarters ended June 26, 2011 and June 20, 2010, and $0.2 million during each of the six
months ended June 26, 2011 and June 20, 2010.
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Effective June 25, 2007, the HSI plan provides for post-retirement medical, dental and life
insurance benefits for salaried employees who had attained age 55 and completed 20 years of
service as of December 31, 2005. Any salaried employee already
receiving post-retirement medical coverage as of June 25, 2007 will continue to be covered
by the plan. For eligible union employees hired on or before July 1, 1996, the healthcare plan
provides for post-retirement medical coverage for an employee who, immediately preceding his/her
retirement date, was an active participant in the retirement plan and has attained age 55 as of
his/her retirement date. For eligible union employees hired after July 1, 1996, the plan
provides post-retirement health coverage for an employee who, immediately preceding his/her
retirement date, was an active participant in the retirement plan and has attained age 55 and
has a combination of age and service totaling 75 years or more as of his/her retirement date.
The Company recorded net periodic benefit costs of $0.1 million during each of the quarters
ended June 26, 2011 and June 20, 2010, and $0.2 million during each of the six months ended June
26, 2011 and June 20, 2010.
Other Plans
Under collective bargaining agreements, the Company participates in a number of
union-sponsored, multi-employer benefit plans. Payments to these plans are made as part of
aggregate assessments generally based on hours worked, tonnage of cargo moved, or a combination
thereof. Expense for these plans is recognized as contributions are funded. If the Company exits
these markets, it may be required to pay a potential withdrawal liability if the plans are
underfunded at the time of the withdrawal. Any adjustments would be recorded when it is probable
that a liability exists and it is determined that markets will be exited.
16. Commitments and Contingencies
Legal Proceedings
Antitrust Matters
On April 17, 2008, the Company received a grand jury subpoena and search warrant from the
United States District Court for the Middle District of Florida seeking information regarding an
investigation by the Antitrust Division of the DOJ into possible antitrust violations in the
domestic ocean shipping business. On February 23, 2011, the Company entered into a plea
agreement with the DOJ, and on March 22, 2011, the Court entered judgment accepting the
Companys plea agreement and imposed a fine of $45.0 million payable over five years without
interest and placed the Company on probation until the fine payments are completed. On April 28,
2011, the Court reduced the fine from $45.0 million to $15.0 million payable over five years
without interest. The first $1.0 million of the fine was paid on April 25, 2011 and the Company
must make payments of $1.0 million on or before the first anniversary thereof, $2.0 million on
or before the second anniversary, $3.0 million on or before the third anniversary and $4.0
million on or before each of the fourth and fifth anniversary. The plea agreement provides that
the Company will not face additional charges relating to the Puerto Rico tradelane. In addition,
the plea agreement provides that the Company will not face any additional charges in connection
with the Alaska trade, and the DOJ has indicated that the Company is not a target or subject of
any Hawaii or Guam aspects of its investigation.
As part of the courts judgment, the Company was placed on probation for five years. The
terms of the probation include that the Company: 1) file annual audited financial reports, 2)
not commit a criminal act during the probation period, 3) report any material adverse legal or
financial event, and 4) annually certify that it has an antitrust compliance program in place
that satisfies the federal sentencing guidelines requirements, including antitrust education to
key personnel.
Subsequent to the commencement of the DOJ investigation, fifty-eight purported class action
lawsuits were filed against the Company and other domestic shipping carriers (the Class Action
Lawsuits). Each of the Class Action Lawsuits purports to be on behalf of a class of individuals
and entities who purchased domestic ocean shipping services directly from the various domestic
ocean carriers. These complaints allege price-fixing in violation of the Sherman Act and seek
treble monetary damages, costs, attorneys fees, and an injunction against the allegedly
unlawful conduct. The Class Action Lawsuits were filed in the following federal district courts:
eight in the Southern District of Florida, five in the Middle District of Florida, nineteen in
the District of Puerto Rico, twelve in the Northern District of California, three in the Central
District of California, one in the District of Oregon, eight in the Western District of
Washington, one in the District of Hawaii, and one in the District of Alaska.
Thirty-two of the Class Action Lawsuits relate to ocean shipping services in the Puerto
Rico tradelane and were consolidated into a single multidistrict litigation (MDL) proceeding
in the District of Puerto Rico. On June 11, 2009, the Company entered into a settlement
agreement with the named plaintiff class representatives in the Puerto Rico MDL. Under the
settlement agreement, the Company has agreed to pay $20.0 million and to provide a base-rate
freeze as described below to resolve claims for alleged antitrust violations in the Puerto Rico
tradelane.
The base-rate freeze component of the settlement agreement provides that class members who
have contracts in the Puerto Rico trade with the Company as of the effective date of the
settlement would have the option, in lieu of receiving cash, to have their base rates frozen
for a period of two years. The base-rate freeze would run for two years from the expiration of
the contract in effect on the effective date of the settlement. All class members would be
eligible to share in the $20.0 million cash component, but only the Companys contract customers
would be eligible to elect the base-rate freeze in lieu of receiving cash.
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On July 8, 2009, the plaintiffs filed a motion for preliminary approval of the settlement
in the Puerto Rico MDL, and the Court granted preliminary approval of the settlement on July 12,
2010. The settlement is subject to final approval by the Court. The Company has paid $10.0
million into an escrow account and the settlement agreement provides that the Company was
required to pay the remaining $10.0 million after final approval of the settlement agreement by
the Court. However, on April 26, 2011, the plaintiffs advised the Company that they would not
object to the Company paying the remainder of the $10 million due under the settlement agreement
in one payment of $5.0 million within 30 days after final approval of the settlement agreement
and a second payment of $5.0 million within 60 days after final approval of the settlement
agreement.
Some class members have elected to opt-out of the settlement, and the customers that have
elected to opt-out of the settlement and customers not part of the settlement class may file
lawsuits containing allegations similar to those made in the Puerto Rico MDL and seek the same
type of damages under the Sherman Act as sought in the Puerto Rico MDL. The Company is not able
to determine whether or not any actions will be brought against it or whether or not a negative
outcome would be probable if brought against the Company, or a reasonable range for any such
outcome, and has made no provisions for any potential proceedings in the accompanying financial
statements. Given the volume of commerce involved in the Puerto Rico shipping business, an
adverse ruling in a potential civil antitrust proceeding could subject the Company to
substantial civil damages given the treble damages provisions of the Sherman Act.
In addition, the Company has actively engaged in discussions with a number of shippers in
the Puerto Rico trade that have opted out of the MDL settlement. The Company has reached
commercial agreements or is seeking to reach commercial agreements with certain of those
shippers, with the condition that the shipper relinquishes any existing antitrust claims. In
some cases, as part of the agreement, the Company has agreed to, or is seeking to agree to,
future discounts which will be charged against operating revenue if and when the discount is
earned and certain other conditions are met.
Twenty-five of the fifty-eight Class Action Lawsuits relate to ocean shipping services in
the Hawaii and Guam tradelanes and were consolidated into a MDL proceeding in the Western
District of Washington. On March 20, 2009, the Company filed a motion to dismiss the claims in
the Hawaii and Guam MDL. On August 18, 2009, the United States District Court for the Western
District of Washington entered an order dismissing, without prejudice, the Hawaii and Guam MDL.
In dismissing the complaint, however, the plaintiffs were granted thirty days to amend their
complaint. After several extensions, the plaintiffs filed an amended consolidated class action
complaint on May 28, 2010. On July 12, 2010, the Company filed a motion to dismiss the
plaintiffs amended complaint. The motion to dismiss the amended complaint was granted with
prejudice on December 1, 2010. The plaintiffs appealed the Courts decision to dismiss the
amended complaint with the United States Court of Appeals for the Ninth Circuit and the appeal
has been briefed by the parties. Oral argument has been set for September 1, 2011. The Company
intends to vigorously defend against this purported class action lawsuit.
One district court case remains in the District of Alaska, relating to the Alaska
tradelane. The Company and the class plaintiffs have agreed to stay the Alaska litigation, and
the Company intends to vigorously defend against the purported class action lawsuit in Alaska.
In addition, on July 9, 2008, a complaint was filed by Caribbean Shipping Services, Inc. in
the Circuit Court, 4th Judicial Circuit in and for Duval County, Florida, against the Company
and other domestic shipping carriers alleging price-fixing in violation of the Florida Antitrust
Act and the Florida Deceptive and Unlawful Trade Practices Act. The complaint seeks treble
damages, injunctive relief, costs and attorneys fees. The case is not brought as a class
action. On October 27, 2008, the Company filed a motion to dismiss. The motion to dismiss is
pending.
In February 2011, the Commonwealth of Puerto Rico filed a lawsuit against the Company
seeking monetary damages in its own right and on behalf of a class of persons who allegedly paid
inflated prices for goods imported to Puerto Rico as a result of alleged price-fixing by the
defendants in violation of the Puerto Rico Monopolies and Restraint of Trade Act. In addition,
two lawsuits have been filed against the Company as putative class-action lawsuits on behalf of
indirect purchasers, one of which is pending in the Court of First Instance for the Commonwealth
of Puerto Rico and the other is pending in the United States District Court for the District of
Puerto Rico.
On March 31, 2011, the Company entered into a settlement agreement with the Commonwealth of
Puerto Rico and the named plaintiffs, individually and representing the indirect purchasers, to
resolve claims relating to the Puerto Rico trade. The settlement agreement was entered into by
the parties pursuant to a Memorandum of Understanding, dated February 22, 2011.
Under the settlement agreement, the plaintiffs and the Commonwealth of Puerto Rico agreed
to settle claims alleged in the three lawsuits filed against the Company and the other
defendants. Pursuant to the Settlement Agreement, each of the defendants will pay a one-third
share of the total settlement amount of $5.3 million. Accordingly, the Company has agreed to pay
$1.8 million as its share of the settlement amount. If the settlement agreement is finally
approved, the settling defendants will receive a full release from the named plaintiffs, from
the members of the settlement class, and from the Commonwealth of Puerto Rico in its own right
and as parens patriae. The court granted preliminary approval of the settlement agreement on
April 26, 2011. The Court granted final approval to the settlement agreement on July 19, 2011
and the Company made the final settlement payment
on July 29, 2011.
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On December 31, 2008, a securities class action lawsuit was filed against the Company by
the City of Roseville Employees Retirement System in the United States District Court for the
District of Delaware. The complaint purported to be on behalf of purchasers of the Companys
common stock. The complaint alleged, among other things, that the Company made material
misstatements and omissions in connection with alleged price-fixing in the Companys shipping
business in Puerto Rico in violation of antitrust laws. The Company filed a motion to dismiss,
and the Court granted the motion to dismiss on November 13, 2009 with leave to file an amended
complaint. The plaintiff filed an amended complaint on December 23, 2009, and the Company filed
a motion to dismiss the amended complaint on February 12, 2010. The Companys motion to dismiss
the amended complaint was granted with prejudice on May 18, 2010. On June 15, 2010, the
plaintiff appealed the Courts decision to dismiss the amended complaint. The Company filed its
opposition brief with the Court of Appeals on December 22, 2010 and the plaintiffs filed their
reply brief on February 2, 2011. Oral argument was held on June 23, 2011.
Through June 26, 2011, the Company has incurred approximately $31.3 million in legal and
professional fees associated with the DOJ investigation, the antitrust related litigation, and
other related legal proceedings.
Environmental Matters
The Company is subject to numerous laws and regulations relating to environmental matters
and related record keeping and reporting. The Company has been advised that the U.S. Coast Guard
and the offices of the U.S. Attorney for the Northern and Central Districts of California are
investigating matters involving two of the Companys vessels. The Company is fully and
proactively cooperating with these investigations. During the year ended December 26, 2010, the
Company recorded a provision in its Consolidated Statement of Operations of $0.5 million related
to these contingencies. During the quarter ended June 26, 2011, the Company recorded an
additional $1.0 million for a total of $1.5 million, which represents the Companys best
estimate of the potential liability. It is possible that the outcome of the investigation could
result in a fine greater than $1.5 million or other actions against the Company
that could have an adverse effect on the Companys business and operations.
In the ordinary course of business, from time to time, the Company and its subsidiaries
become involved in various legal proceedings. These relate primarily to claims for loss or
damage to cargo, employees personal injury claims, and claims for loss or damage to the person
or property of third parties. The Company and its subsidiaries generally maintain insurance,
subject to customary deductibles or self-retention amounts, and/or reserves to cover these types
of claims. The Company and its subsidiaries also, from time to time, become involved in routine
employment-related disputes and disputes with parties with which they have contractual
relations.
SFL Agreements
In April 2006, the Company completed a series of agreements with Ship Finance International
Limited and certain of its subsidiaries (SFL) to charter five non-Jones Act qualified
container vessels. The bareboat charter for each vessel is a hell or high water charter, and
the obligation of the Company to pay charter hire thereunder for the vessel is absolute and
unconditional. The aggregate annual charter hire for the five vessels is approximately $32.0
million. Under the charters, the Company is responsible for crewing, insuring, maintaining, and
repairing each vessel and for all other operating costs with respect to each vessel. The term of
each of the bareboat charters is twelve years from the date of delivery of the related vessel,
with a three year renewal option exercisable by the Company. In addition, the Company has the
option to purchase all of the vessels following the five, eight, twelve, and, if applicable,
fifteen year anniversaries of the date of delivery at pre-agreed purchase prices. If the Company
elects to purchase all of the vessels after the five or eight year anniversary date, it will
have the right to assume the outstanding debt related to each purchased vessel, and the amount
of the debt so assumed will be credited against the purchase price paid for the vessels. If the
Company elects not to purchase the vessels at the end of the initial twelve-year period and SFL
sells the vessels for less than a specified amount, the Company is responsible for paying the
amount of such shortfall, which shall not exceed $3.8 million per vessel. If the vessels are to
be sold by SFL to an affiliated party for less than a different specified amount, the Company
has the right to purchase the new vessels for that different specified amount.
The Company has an interest in the variable interest entities (VIE) created in
conjunction with the SFL transactions. However, based on a qualitative assessment as of June 26,
2011, the Company has determined it is not the primary beneficiary of the VIEs. The Companys
power to direct activities that most significantly impact the VIEs economic performance is
limited to the maintenance and repair of the vessels. The Companys maintenance and repair
activities are performed primarily to conform to the requirements of the U.S. Coast Guard and to
maintain the vessels on-time departure and arrival schedules. The Companys obligation to
absorb losses related to the residual guarantee or receive benefits related to the pre-agreed
purchase price at the end of the twelve-year period are not considered to be significant to the
cash flows of the VIE.
Certain contractual obligations and off-balance sheet obligations arising from this
transaction include the annual operating lease obligations and the residual guarantee. The
Company is accounting for the leases as operating leases. The residual guarantee is recorded at
its fair value of approximately $0.3 million as a liability on the Companys consolidated
balance sheets
as of June 26, 2011 and December 26, 2010.
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Standby Letters of Credit
The Company has standby letters of credit primarily related to its property and casualty
insurance programs. On June 26, 2011 and December 26, 2010, amounts outstanding on these letters
of credit totaled $18.6 million and $11.3 million, respectively.
17. Recent Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (FASB) issued an amendment to
the accounting for fair value measurements and disclosures. This amendment details additional
disclosures on fair value measurements, requires a gross presentation of activities within a
Level 3 roll-forward, and adds a new requirement to disclose transfers in and out of Level 1 and
Level 2 measurements. The new disclosures are required of all entities that are required to
provide disclosures about recurring and nonrecurring fair value measurements. This amendment is
effective in the first interim or reporting period beginning after December 15, 2009, with an
exception for the gross presentation of Level 3 roll-forward information, which is required for
annual reporting periods beginning after December 15, 2010, and for interim reporting periods
within those years. The adoption of the provisions of this amendment required in the first
interim period after December 15, 2009 did not have a material impact on the Companys financial
statement disclosures. In addition, the adoption of the provisions of this amendment during the
quarter ended March 27, 2011 did not have a material impact on the Companys financial statement
disclosures.
18. Subsequent Events
The Company has evaluated subsequent events and transactions for potential recognition or
disclosure through such time these statements were filed with the Securities and Exchange
Commission, and has determined there were no other items deemed to be reportable.
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2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our consolidated financial condition and results
of operations should be read in conjunction with the financial statements of the Company and
notes thereto included elsewhere in this quarterly report. In this quarterly report, unless the
context otherwise requires, references to we, us, and our mean the Company, together with
its subsidiaries, on a consolidated basis.
Executive Overview
Softening trans-Pacific freight rates associated with our new China service, as well as the
steep and persistent rise in fuel prices caused our second quarter 2011 results of operations to
decline compared to the second quarter of 2010. In addition, the loss of steady month to month
revenue from our previous trans-Pacific agreement and the expiration of certain equipment
sharing agreements with Maersk also negatively impacted our 2011 results of operations as
compared to 2010. We have undertaken efforts to reduce expenses and preserve liquidity,
including, significantly reducing operating costs, seeking to restructure the terms of our
existing indebtedness and pursuing the sale of selected assets.
The economic recovery in our domestic markets has continued at a slow and uneven pace.
Persistent high unemployment and uncertainty in the economy have affected consumers and impacted
their spending. In addition, construction spending remains at depressed levels and many state
governments are enacting spending cutbacks, including workforce reductions and furloughs. As a
result of the still uncertain macroeconomic environment and our specific challenges such as rate
pressures in the China and Puerto Rico markets and volatile fuel prices, we remain focused on a
series of successful cost management efforts.
Container volumes during the quarter and six months ended June 26, 2011 increased over the
quarter and six months ended June 20, 2010 due to the commencement of our China service.
Operating revenue for the quarter and six months ended June 26, 2011 increased as a result of
the higher container volumes, higher fuel surcharges, and improved third party terminal
services, which was partially offset by the loss of revenue under various transportation
services agreements.
The increase in operating expense during the quarter and six months ended June 26, 2011 is
primarily due to higher fuel prices and transportation expenses associated with the container
volumes in our China service, and an increase in selling, general and administrative expenses.
The increase in selling, general and administrative expenses is largely due to a separation
agreement with our former chief executive officer, an increase in legal and professional
expenses associated with the Department of Justice (DOJ) antitrust investigation and related
legal proceedings, costs incurred in conjunction with our refinancing efforts, and expenses
associated with our international operations, partially offset by a reversal of a portion of the
charge recorded for the DOJ settlement and a decrease in stock-based compensation expense.
Quarters Ended | Six Months Ended | |||||||||||||||
June 26, | June 20, | June 26, | June 20, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
($ in thousands) | ||||||||||||||||
Operating revenue |
$ | 307,527 | $ | 291,387 | $ | 592,881 | $ | 566,045 | ||||||||
Operating expense |
303,183 | 277,423 | 610,583 | 553,931 | ||||||||||||
Operating income (loss) |
$ | 4,344 | $ | 13,964 | $ | (17,702 | ) | $ | 12,114 | |||||||
Operating ratio |
98.6 | % | 95.2 | % | 103.0 | % | 97.9 | % | ||||||||
Revenue containers (units) |
75,208 | 64,596 | 146,737 | 124,884 | ||||||||||||
Average unit revenue |
$ | 3,852 | $ | 3,934 | $ | 3,792 | $ | 3,944 |
We believe that in addition to GAAP based financial information, EBITDA and Adjusted EBITDA
are meaningful disclosures for the following reasons: (i) EBITDA and Adjusted EBITDA are
components of the measure used by our board of directors and management team to evaluate our
operating performance, (ii) the senior credit facility contains covenants that require us to
maintain certain interest expense coverage and leverage ratios, which contain EBITDA and
Adjusted EBITDA as components, and restrict certain cash payments if certain ratios are not met,
subject to certain exclusions, and our management team uses EBITDA and Adjusted EBITDA to
monitor compliance with such covenants, (iii) EBITDA and Adjusted EBITDA are components of the
measure used by our management team to make day-to-day operating decisions, (iv) EBITDA and
Adjusted EBITDA are components of the measure used by our management to facilitate internal
comparisons to competitors results and the marine container shipping and logistics industry in
general and (v) the payment of discretionary bonuses to certain members of our management is
contingent upon, among other things, the satisfaction by us of certain targets, which contain
EBITDA and
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Adjusted EBITDA as components. We acknowledge that there are limitations when using EBITDA
and Adjusted EBITDA. EBITDA and Adjusted EBITDA are not recognized terms under GAAP and do not
purport to be an alternative to net income as a measure of operating performance or to cash
flows from operating activities as a measure of liquidity. Additionally, EBITDA and Adjusted
EBITDA are not intended to be a measure of free cash flow for managements discretionary use, as
it does not consider certain cash requirements such as debt service, capital expenditures, and
dry-docking payments. Because all companies do not use identical calculations, this presentation
of EBITDA and Adjusted EBITDA may not be comparable to other similarly titled measures of other
companies. The EBITDA amounts presented below contain certain charges that our management team
excludes when evaluating our operating performance, for making day-to-day operating decisions
and that have historically been excluded from EBITDA to arrive at Adjusted EBITDA when
determining the payment of discretionary bonuses.
A reconciliation of net (loss) income to EBITDA and Adjusted EBITDA is included below (in
thousands):
Quarters Ended | Six Months Ended | |||||||||||||||
June 26, | June 20, | June 26, | June 20, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net (loss) income |
$ | (5,416 | ) | $ | 3,650 | $ | (39,487 | ) | $ | (9,594 | ) | |||||
Net income (loss) from
discontinued operations |
1,590 | (475 | ) | 830 | (2,024 | ) | ||||||||||
Net (loss) income from
continuing operations |
(7,006 | ) | 4,125 | (40,317 | ) | (7,570 | ) | |||||||||
Interest expense, net |
12,910 | 9,846 | 23,626 | 19,676 | ||||||||||||
Income tax (benefit) expense |
(1,585 | ) | (13 | ) | (1,671 | ) | 3 | |||||||||
Depreciation and amortization |
15,361 | 14,348 | 30,651 | 28,246 | ||||||||||||
EBITDA |
19,680 | 28,306 | 12,289 | 40,355 | ||||||||||||
Impairment charge |
2,818 | | 2,818 | | ||||||||||||
Department of Justice
antitrust investigation
costs |
949 | 1,030 | 3,128 | 1,988 | ||||||||||||
Loss on modification of
debt/other refinancing costs |
889 | | 1,508 | | ||||||||||||
Union/other severance charge |
151 | 97 | 2,964 | 360 | ||||||||||||
Legal settlements |
(18,202 | ) | | (18,202 | ) | | ||||||||||
Adjusted EBITDA |
$ | 6,285 | $ | 29,433 | $ | 4,505 | $ | 42,703 | ||||||||
In addition to EBITDA and Adjusted EBITDA, we use various other non-GAAP measures such as
adjusted net (loss) income and adjusted net (loss) income per share. As with EBITDA and Adjusted
EBITDA, the measures below are not recognized terms under GAAP and do not purport to be an
alternative to net (loss) income as a measure of operating performance or to cash flows from
operating activities as a measure of liquidity. Similar to the amounts presented for EBITDA and
Adjusted EBITDA, because all companies do not use identical calculations, the amounts below may
not be comparable to other similarly titled measures of other companies.
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The tables below present a reconciliation of net (loss) income to adjusted net (loss)
income and net (loss) income per share to adjusted net (loss) income per share (in thousands,
except per share amounts):
Quarters Ended | Six Months Ended | |||||||||||||||
June 26, | June 20, | June 26, | June 20, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net (loss) income |
$ | (5,416 | ) | $ | 3,650 | $ | (39,487 | ) | $ | (9,594 | ) | |||||
Net income (loss) from discontinued operations |
1,590 | (475 | ) | 830 | (2,024 | ) | ||||||||||
Net (loss) income from continuing operations |
(7,006 | ) | 4,125 | (40,317 | ) | (7,570 | ) | |||||||||
Adjustments: |
||||||||||||||||
Impairment charge |
2,818 | | 2,818 | | ||||||||||||
Department of Justice antitrust
investigation costs |
949 | 1,030 | 3,128 | 1,988 | ||||||||||||
Loss on modification of debt/other
refinancing costs |
889 | | 1,508 | | ||||||||||||
Union/other severance charge |
151 | 97 | 2,964 | 360 | ||||||||||||
Accretion of legal settlement |
45 | | 284 | | ||||||||||||
Legal settlements |
(18,202 | ) | | (18,202 | ) | | ||||||||||
Tax impact of adjustments |
(521 | ) | (7 | ) | (775 | ) | (5 | ) | ||||||||
Total adjustments |
(13,871 | ) | 1,120 | (8,275 | ) | 2,343 | ||||||||||
Adjusted net (loss) income |
$ | (20,877 | ) | $ | 5,245 | $ | (48,592 | ) | $ | (5,227 | ) | |||||
Quarters Ended | Six Months Ended | |||||||||||||||
June 26, | June 20, | June 26, | June 20, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net (loss) income per share |
$ | (0.17 | ) | $ | 0.12 | $ | (1.27 | ) | $ | (0.31 | ) | |||||
Net income (loss) per share from
discontinued operations |
0.05 | (0.02 | ) | 0.03 | (0.07 | ) | ||||||||||
Net (loss) income per share from
continuing operations |
(0.22 | ) | 0.14 | (1.30 | ) | (0.24 | ) | |||||||||
Adjustments: |
||||||||||||||||
Impairment charge |
0.09 | | 0.09 | | ||||||||||||
Department of Justice antitrust
investigation costs |
0.03 | 0.03 | 0.10 | 0.06 | ||||||||||||
Loss on modification of
debt/other refinancing costs |
0.03 | | 0.05 | | ||||||||||||
Union/other severance charge |
| | 0.10 | 0.01 | ||||||||||||
Accretion of legal settlement |
| | 0.01 | | ||||||||||||
Legal settlement |
(0.59 | ) | | (0.59 | ) | | ||||||||||
Tax impact of adjustments |
(0.01 | ) | | (0.03 | ) | | ||||||||||
Total adjustments |
(0.45 | ) | 0.03 | (0.27 | ) | 0.07 | ||||||||||
Adjusted net (loss) income per share |
$ | (0.67 | ) | $ | 0.17 | $ | (1.57 | ) | $ | (0.17 | ) | |||||
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General
We believe that we are the nations leading Jones Act container shipping and integrated
logistics company, accounting for approximately 36% of total U.S. marine container shipments
from the continental U.S. to Alaska, Puerto Rico and Hawaii, constituting the three
non-contiguous Jones Act markets, and to Guam and Micronesia. Under the Jones Act, all vessels
transporting cargo between U.S. ports must, subject to limited exceptions, be built in the U.S.,
registered under the U.S. flag,
manned by predominantly U.S. crews, and owned and operated by U.S.-organized companies that
are controlled and 75% owned by U.S. citizens. In addition, on December 13, 2010, we commenced
our own weekly trans-Pacific liner service between Asia and the U.S. West Coast. Our Five Star
Express (FSX) service connects with our warehousing and distribution capabilities on the U.S.
West Coast and intermodal rail service to inland destinations to create an integrated
import/export solution. Using scheduled intermodal service from Los Angeles every week, we offer
express inland service to Kansas City, Dallas, Chicago, Memphis, Atlanta and Charlotte.
History
Our long operating history dates back to 1956, when Sea-Land pioneered the marine container
shipping industry and established our business. In 1958, we introduced container shipping to the
Puerto Rico market, and in 1964 we pioneered container shipping in Alaska with the first
year-round scheduled vessel service. In 1987, we began providing container shipping services
between the U.S. West Coast and Hawaii and Guam through our acquisition from an existing carrier
of all of its vessels and certain other assets that were already serving that market. Today, as
the only Jones Act vessel operator with one integrated organization serving Alaska, Hawaii, and
Puerto Rico, we are uniquely positioned to serve customers requiring shipping and logistics
services in more than one of these markets. In addition to these domestic markets, we have been
serving the international market with vessels operating between the U.S. West Coast and Asia
since the inception of our space charter agreements with Maersk Line in December 1999.
Critical Accounting Policies
We prepare our financial statements in conformity with accounting principles generally
accepted in the United States of America. The preparation of our financial statements requires
us to make estimates and assumptions in the reported amounts of revenues and expenses during the
reporting period and in reporting the amounts of assets and liabilities, and disclosures of
contingent assets and liabilities at the date of our financial statements. Since many of these
estimates and assumptions are based upon future events which cannot be determined with
certainty, the actual results could differ from these estimates.
We believe that the application of our critical accounting policies, and the estimates and
assumptions inherent in those policies, are reasonable. These accounting policies and estimates
are periodically reevaluated and adjustments are made when facts or circumstances dictate a
change. Historically, we have found the application of accounting policies to be appropriate and
actual results have not differed materially from those determined using necessary estimates.
There have been no material changes to the Companys critical accounting policies during the six
months ended June 26, 2011. The critical accounting policies can be found in the Companys
Annual Report on Form 10-K for the fiscal year ended December 26, 2010 as filed with the
Securities and Exchange Commission (SEC).
Seasonality
Our container volumes are subject to seasonal trends common in the transportation industry,
including our China service. Financial results in the first quarter are normally lower due to
reduced loads during the winter months, and as a result of the Chinese New Years affect on our
China service. Volumes typically build to a peak in the third quarter and early fourth quarter,
which generally results in higher revenues, improved margins, and increased earnings and cash
flows.
Results of Operations
Operating Revenue Overview
We derive our revenue primarily from providing comprehensive shipping and logistics
services to and from the continental U.S. and Alaska, Puerto Rico, Hawaii, Guam and Asia. We
charge our customers on a per load basis and price our services based primarily on the cost of
inland and ocean cargo transportation hauls, type of cargo, and other requirements such as
shipment timing and type of container. In addition, we assess fuel surcharges on a basis
consistent with industry practice and at times may incorporate these surcharges into our basic
transportation rates. There is occasionally a timing disparity between volatility in our fuel
costs and related adjustments to our fuel surcharges (or the incorporation of adjusted fuel
surcharges into our base transportation rates) that may result in variances in our fuel
recovery.
Over 80% of our revenue was generated from our shipping and logistics services in markets
where the marine trade is subject to the Jones Act or other U.S. maritime laws. The balance of
our revenue was derived from (i) vessel loading and unloading services that we provide for
vessel operators at our terminals, (ii) agency services that we provide for other carriers
lacking administrative presences in our markets, (iii) shipping services in the Asia to U.S.
coast market, (iv) warehousing services for third-parties, and (v) other non-transportation
services.
As used in this Form 10-Q, the term revenue containers refers to containers that are
transported for a charge, as opposed to empty containers.
22
Table of Contents
Cost of Services Overview
Our cost of services consist primarily of vessel operating costs, marine operating costs,
inland transportation costs, land costs and rolling stock rent. Our vessel operating costs
consist primarily of vessel fuel costs, crew payroll costs and benefits, vessel maintenance
costs, space charter costs, vessel insurance costs and vessel rent. We view our vessel fuel
costs as subject to potential fluctuation as a result of changes in unit prices in the fuel
market. Our marine operating costs consist of stevedoring, port charges, wharfage and various
other costs to secure vessels at the port and to load and unload containers to and from vessels.
Our inland transportation costs consist primarily of the costs to move containers to and from
the port via rail, truck or barge. Our land costs consist primarily of maintenance, yard and
gate operations, warehousing operations and terminal overhead in the terminals in which we
operate. Rolling stock rent consists primarily of rent for street tractors, yard equipment,
chassis, gensets and various dry and refrigerated containers.
Quarter Ended June 26, 2011 Compared with the Quarter June 20, 2010
Quarters Ended | ||||||||||||||||
June 26, | June 20, | |||||||||||||||
2011 | 2010 | Change | % Change | |||||||||||||
($ in thousands) | ||||||||||||||||
Operating revenue |
$ | 307,527 | $ | 291,387 | $ | 16,140 | 5.5 | % | ||||||||
Operating expense: |
||||||||||||||||
Vessel |
117,040 | 98,454 | 18,586 | 18.9 | % | |||||||||||
Marine |
61,603 | 53,622 | 7,981 | 14.9 | % | |||||||||||
Inland |
54,806 | 45,256 | 9,550 | 21.1 | % | |||||||||||
Land |
36,985 | 35,591 | 1,394 | 3.9 | % | |||||||||||
Rolling stock rent |
11,717 | 10,018 | 1,699 | 17.0 | % | |||||||||||
Cost of services |
282,151 | 242,941 | 39,210 | 16.1 | % | |||||||||||
Depreciation and amortization |
11,280 | 11,030 | 250 | 2.3 | % | |||||||||||
Amortization of vessel dry-docking |
4,081 | 3,318 | 763 | 23.0 | % | |||||||||||
Selling, general and administrative |
22,107 | 20,959 | 1,148 | 5.5 | % | |||||||||||
Impairment charge |
2,818 | | 2,818 | 100.0 | % | |||||||||||
Legal settlement |
(19,202 | ) | | (19,202 | ) | (100.0 | )% | |||||||||
Miscellaneous income, net |
(52 | ) | (825 | ) | 773 | (93.7 | )% | |||||||||
Total operating expense |
303,183 | 277,423 | 25,760 | 9.3 | % | |||||||||||
Operating income |
$ | 4,344 | $ | 13,964 | $ | (9,620 | ) | (68.9 | )% | |||||||
Operating ratio |
98.6 | % | 95.2 | % | 3.4 | % | ||||||||||
Revenue containers (units) |
75,208 | 64,596 | 10,612 | 16.4 | % | |||||||||||
Average unit revenue |
$ | 3,852 | $ | 3,934 | $ | (82 | ) | (2.1 | )% |
Operating Revenue. Our operating revenue increased $16.1 million, or 5.5% during the
quarter ended June 26, 2011 as compared to the quarter ended June 20, 2010. This revenue
increase can be attributed to the following factors (in thousands):
International revenue |
$ | 29,280 | ||
Bunker and intermodal fuel surcharges increase |
13,966 | |||
Other non-transportation revenue increase |
1,025 | |||
Domestic revenue container rate increase |
1,366 | |||
Domestic revenue container volume decrease |
(9,493 | ) | ||
Space charter revenue decrease |
(20,004 | ) | ||
Total operating revenue increase |
$ | 16,140 | ||
The increase in international revenue is due to the commencement of our FSX service in
December 2010. Bunker and intermodal fuel surcharges, which are included in our transportation
revenue, accounted for approximately 20.7% of total revenue in the quarter ended June 26, 2011
and approximately 15.0% of total revenue in the quarter ended June 20, 2010. We adjust our
bunker and intermodal fuel surcharges as a result of fluctuations in the cost of bunker fuel for
our vessels, in addition to diesel fuel fluctuations passed on to us by our truck, rail, and
barge service providers. Fuel surcharges are evaluated regularly as the price of fuel
fluctuates, and we may at times incorporate these surcharges into our base transportation rates
that we charge. The
increase in other non-transportation revenue is primarily due to third party terminal
services. The increase in revenue resulting from higher container rates is associated with
general rate increases to help offset contractual increases in our operating expenses. The
decrease in domestic revenue container volume due to continued soft market conditions in our
Puerto Rico and Hawaii markets was partially offset by improvements in our Alaska and Guam
tradelanes. The decrease in space charter revenue is primarily due to the expiration of our
trans-Pacific agreements with Maersk in December 2010.
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Table of Contents
Cost of Services. The $39.2 million increase in cost of services is primarily due to higher
fuel costs as a result of increased fuel prices, incremental variable costs associated with our
FSX service that was not operating in the second quarter of 2010, and higher marine costs due to
the expiration of certain equipment sharing arrangements.
Vessel expense, which is not primarily driven by revenue container volume, increased $18.6
million for the quarter ended June 26, 2011 compared to the quarter ended June 20, 2010. This
increase can be attributed to the following factors (in thousands):
Vessel fuel costs increase |
$ | 18,441 | ||
Labor and other vessel operating expense increase |
981 | |||
Vessel space charter expense decrease |
(127 | ) | ||
Vessel lease expense decrease |
(709 | ) | ||
Total vessel expense increase |
$ | 18,586 | ||
The $18.4 million of higher fuel costs is comprised of a $19.3 million increase due to
rising fuel prices, slightly offset by a $0.9 million decrease due to fewer vessel operating
days during 2011. The increase in labor and other vessel operating expense is due to a $1.0
million provision recorded related to the U.S. Coast Guard and the offices of the U.S. Attorney
for the Northern and Central Districts of California investigations involving two of our
vessels. The decrease in vessel lease expense is due to the amendment of the charter hire
payments to reflect concessions for certain of our vessels.
Marine expense is comprised of the costs incurred to bring vessels into and out of port,
and to load and unload containers. The types of costs included in marine expense are stevedoring
and associated benefits, pilotage fees, tug fees, government fees, wharfage fees, dockage fees,
and line handler fees. The $8.0 million increase in marine expense during the quarter ended June
26, 2011 is primarily due to the increase in container volumes related to our FSX service and
the associated lift costs to reposition empty containers, as well as additional lift costs due
to the expiration of equipment sharing agreements.
The $9.6 million increase in inland expense is primarily due to the increase in volumes as
a result of the launch of our FSX service and higher fuel costs.
Land expense is comprised of the costs included within the terminal for the handling,
maintenance, and storage of containers, including yard operations, gate operations, maintenance,
warehouse, and terminal overhead. The increase in land expense can be attributed to the
following (in thousands):
Quarters Ended | ||||||||||||
June 26, | June 20, | |||||||||||
2011 | 2010 | % Change | ||||||||||
(in thousands) | ||||||||||||
Land expense: |
||||||||||||
Maintenance |
$ | 13,974 | $ | 12,787 | 9.3 | % | ||||||
Terminal overhead |
14,173 | 13,762 | 3.0 | % | ||||||||
Yard and gate |
7,112 | 6,913 | 2.9 | % | ||||||||
Warehouse |
1,726 | 2,129 | (18.9 | )% | ||||||||
Total land expense |
$ | 36,985 | $ | 35,591 | 3.9 | % | ||||||
Non-vessel related maintenance expenses increased primarily due to higher fuel costs
and additional repair and maintenance activities. Terminal overhead increased primarily due to
higher utilities expenses.
Rolling stock expense increased $1.7 million during the quarter ended June 26, 2011 as
compared to the quarter ended June 20, 2010. This increase is due to a higher quantity of leased
containers and chassis to fund our international and Hawaii operations.
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Table of Contents
Depreciation and Amortization. Depreciation and amortization was $11.3 million during the
quarter ended June 26, 2011 as compared to $11.0 during the quarter ended June 20, 2010. The
increase in depreciation and amortization-other is primarily due
to additional owned containers to support our international operations and the depreciation
associated with certain modifications to leased vessels.
Quarters Ended | ||||||||||||
June 26, | June 20, | |||||||||||
2011 | 2010 | % Change | ||||||||||
(in thousands) | ||||||||||||
Depreciation and amortization: |
||||||||||||
Depreciationowned vessels |
$ | 2,394 | $ | 2,332 | 2.7 | % | ||||||
Depreciation and amortizationother |
3,803 | 3,620 | 5.1 | % | ||||||||
Amortization of intangible assets |
5,083 | 5,078 | 0.0 | % | ||||||||
Total depreciation and amortization |
$ | 11,280 | $ | 11,030 | 2.3 | % | ||||||
Amortization of vessel dry-docking |
$ | 4,081 | $ | 3,318 | 23.0 | % | ||||||
Amortization of Vessel Dry-docking. Amortization of vessel dry-docking was $4.1
million during the quarter ended June 26, 2011 compared to $3.3 million for the quarter ended
June 20, 2010. Amortization of vessel dry-docking fluctuates based on the timing of
dry-dockings, the number of dry-dockings that occur during a given period, and the amount of
expenditures incurred during the dry-dockings. Dry-dockings generally occur every two and a half
years and historically we have dry-docked approximately six vessels per year.
Selling, General and Administrative. Selling, general and administrative costs increased to
$22.1 million for the quarter ended June 26, 2011 compared to $21.0 million for the quarter
ended June 20, 2010, an increase of $1.1 million or 5.5%. This increase is primarily comprised
of $0.8 million of costs incurred in connection with the U.S. Coast Guard and U.S. Attorneys
investigation of two of our vessels and $0.3 million of costs related to our international
operations, partially offset by a $0.8 million reduction in stock-based compensation expense.
Impairment Charge. We have made payments for three new cranes which are not yet placed into
service. These cranes were initially purchased for use in our Anchorage, Alaska terminal and
were expected to be installed and become fully operational in December 2010. However, the Port
of Anchorage Intermodal Expansion Project is encountering delays that could continue until 2014
or beyond. As such, we are currently marketing these cranes for sale and expect to complete the
sale within one year. As a result of the reclassification to assets held for sale during the
quarter ended June 26, 2011, we recorded an impairment charge of $2.8 million to write down the
carrying value of the cranes to their estimated fair value less costs to sell.
Legal Settlement. As discussed in Legal Proceedings, on March 22, 2011, the Court entered a
judgment against us whereby we were required to pay a fine of $45.0 million to resolve the
investigation by the DOJ. On April 28, 2011, the Court reduced the fine from $45.0 million to
$15.0 million payable over five years without interest. During the second quarter of 2011, we to
reversed $19.2 million of the $30.0 million charge recorded during the year ended December 26,
2010 related to this legal settlement.
Miscellaneous Income, Net. Miscellaneous income, net decreased $0.8 million during the
quarter ended June 26, 2011 compared to the quarter ended June 20, 2010 primarily as a result of
higher bad debt expense and the sale of our interest in a joint venture during the quarter ended
June 20, 2010, partially offset by an increase in the gain on sale of assets.
Interest Expense, Net. Interest expense, net increased to $12.9 million for the quarter
ended June 26, 2011 compared to $9.8 million for the quarter ended June 20, 2010, an increase of
$3.1 million or 31.6%. This increase is primarily a result of higher debt balances outstanding,
an increase in interest rates due to the amendment to the Senior Credit Facility, interest
associated with a capital lease, and the accretion of non-cash interest related to our legal
settlements.
Income Tax (Benefit) Expense. The effective tax rate for the quarters ended June 26, 2011
and June 20, 2010 was 18.4% and 0.3%, respectively. As a result of the loss from continuing
operations and income from discontinued operations and other comprehensive income during the
quarter ended June 26, 2011, we are required to record a tax benefit from continuing operations
with an offsetting tax expense from discontinued operations and other comprehensive income. For
the quarter ended June 26, 2011, we have recorded a tax benefit in continuing operations equal
to the income from discontinued operations and other comprehensive income multiplied by the
statutory tax rate. During the second quarter of 2009, we determined that it was unclear as to
the timing of when we will generate sufficient taxable income to realize our deferred tax
assets. Accordingly, we recorded a valuation allowance against our deferred tax assets. Although
we have recorded a valuation allowance against our deferred tax assets, it does not affect our
ability to utilize our deferred tax assets to offset future taxable income. Until such time that
we determine it is more likely than not that we will generate sufficient taxable income to
realize our deferred tax assets, income tax benefits associated with future period losses will
be fully reserved. As a result, the Company does not expect to record a current
or deferred federal tax benefit or expense, and only minimal state tax provisions during
those periods.
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Table of Contents
Six Months Ended June 26, 2011 Compared with the Six months June 20, 2010
Six months Ended | ||||||||||||||||
June 26, | June 20, | |||||||||||||||
2011 | 2010 | Change | % Change | |||||||||||||
($ in thousands) | ||||||||||||||||
Operating revenue |
$ | 592,881 | $ | 566,045 | $ | 26,836 | 4.7 | % | ||||||||
Operating expense: |
||||||||||||||||
Vessel |
225,210 | 200,899 | 24,311 | 12.1 | % | |||||||||||
Marine |
121,771 | 105,538 | 16,233 | 15.4 | % | |||||||||||
Inland |
104,683 | 87,202 | 17,481 | 20.0 | % | |||||||||||
Land |
74,556 | 71,437 | 3,119 | 4.4 | % | |||||||||||
Rolling stock rent |
23,263 | 19,823 | 3,440 | 17.4 | % | |||||||||||
Cost of services |
549,483 | 484,899 | 64,584 | 13.3 | % | |||||||||||
Depreciation and amortization |
22,493 | 21,875 | 618 | 2.8 | % | |||||||||||
Amortization of vessel dry-docking |
8,158 | 6,371 | 1,787 | 28.0 | % | |||||||||||
Selling, general and administrative |
46,396 | 41,476 | 4,920 | 11.9 | % | |||||||||||
Impairment charge |
2,818 | | 2,818 | 100.0 | % | |||||||||||
Legal settlement |
(19,202 | ) | | (19,202 | ) | (100.0 | )% | |||||||||
Miscellaneous expense (income), net |
437 | (690 | ) | 1,127 | (163.3 | )% | ||||||||||
Total operating expense |
610,583 | 553,931 | 56,652 | 10.2 | % | |||||||||||
Operating (loss) income |
$ | (17,702 | ) | $ | 12,114 | $ | (29,816 | ) | (246.1 | )% | ||||||
Operating ratio |
103.0 | % | 97.9 | % | 5.1 | % | ||||||||||
Revenue containers (units) |
146,737 | 124,884 | 21,853 | 17.5 | % | |||||||||||
Average unit revenue |
$ | 3,792 | $ | 3,944 | $ | (152 | ) | (3.9 | )% |
Operating Revenue. Our operating revenue increased $26.8 million, or 4.7% during the six
months ended June 26, 2011 as compared to the six months ended June 20, 2010. This revenue
increase can be attributed to the following factors (in thousands):
International revenue |
$ | 52,461 | ||
Bunker and intermodal fuel surcharges increase |
16,064 | |||
Other non-transportation revenue increase |
4,697 | |||
Domestic revenue container rate increase |
3,637 | |||
Domestic revenue container volume decrease |
(9,336 | ) | ||
Space charter revenue decrease |
(40,687 | ) | ||
Total operating revenue increase |
$ | 26,836 | ||
The increase in international revenue is due to the commencement of our FSX service in
December 2010. Bunker and intermodal fuel surcharges, which are included in our transportation
revenue, accounted for approximately 18.6% of total revenue in the six months ended June 26,
2011 and approximately 14.8% of total revenue in the six months ended June 20, 2010. We adjust
our bunker and intermodal fuel surcharges as a result of fluctuations in the cost of bunker fuel
for our vessels, in addition to diesel fuel fluctuations passed on to us by our truck, rail, and
barge service providers. Fuel surcharges are evaluated regularly as the price of fuel
fluctuates, and we may at times incorporate these surcharges into our base transportation rates
that we charge. The increase in other non-transportation revenue is primarily due to higher
third party terminal services. The increase in revenue due to higher container rates results
from general rate increases to help offset contractual increases in our operating expenses. The
decrease in revenue container volume due to continued soft market conditions in our Puerto Rico
and Hawaii markets was partially offset by improvements in our Alaska and Guam tradelanes. The
decrease in space charter revenue is due to the expiration of our trans-Pacific agreements with
Maersk in December 2010.
Cost of Services. The $64.6 million increase in cost of services is primarily due to higher
fuel costs as a result of rising fuel prices, incremental variable costs associated with our FSX
service operating for the first full six months, and higher marine costs due to the expiration
of certain equipment sharing arrangements.
26
Table of Contents
Vessel expense, which is not primarily driven by revenue container volume, increased $24.3
million for the six months ended June 26, 2011 compared to the six months ended June 20, 2010.
This increase can be attributed to the following factors (in thousands):
Vessel fuel costs increase |
$ | 26,932 | ||
Labor and other vessel operating expense increase |
219 | |||
Vessel lease expense decrease |
(1,331 | ) | ||
Vessel space charter expense decrease |
(1,509 | ) | ||
Total vessel expense increase |
$ | 24,311 | ||
The $26.9 million of higher in fuel costs is comprised of a $27.9 million increase due
to rising fuel prices, slightly offset by a $1.0 million decrease due to fewer vessel operating
days during 2011 and slight improvements in daily consumption. The increase in labor and other
vessel operating expense is due to a $1.0 million provision recorded related to the U.S. Coast
Guard and the offices of the U.S. Attorney for the Northern and Central Districts of California
investigations involving two of our vessels, partially offset by labor savings from our vessel
union partners. During the six months ended June 20, 2010 we purchased more space from a
competitor due to unusually harsh winter weather conditions and mechanical issues that resulted
in vessel downtime. We were not required to purchase this additional space from competitors
during the six months ended June 26, 2011. The decrease in vessel lease expense is due to the
amendment of the charter hire payments to reflect concessions for certain of our vessels.
Marine expense is comprised of the costs incurred to bring vessels into and out of port,
and to load and unload containers. The types of costs included in marine expense are stevedoring
and associated benefits, pilotage fees, tug fees, government fees, wharfage fees, dockage fees,
and line handler fees. The $16.2 million rise in marine expense during the six months ended June
26, 2011 is primarily due to the increase in container volumes due to our FSX service and the
associated lift costs to reposition empty containers, as well as additional lift costs due to
the expiration of equipment sharing agreements.
The $17.5 million increase in inland expense is primarily due to the growth in volumes as a
result of the launch of our FSX service and higher fuel costs.
Land expense is comprised of the costs included within the terminal for the handling,
maintenance, and storage of containers, including yard operations, gate operations, maintenance,
warehouse, and terminal overhead. The increase in land expense can be attributed to the
following (in thousands):
Six months Ended | ||||||||||||
June 26, | June 20, | |||||||||||
2011 | 2010 | % Change | ||||||||||
(in thousands) | ||||||||||||
Land expense: |
||||||||||||
Maintenance |
$ | 27,983 | $ | 25,816 | 8.4 | % | ||||||
Terminal overhead |
28,374 | 27,061 | 4.9 | % | ||||||||
Yard and gate |
14,841 | 14,473 | 2.5 | % | ||||||||
Warehouse |
3,358 | 4,087 | (17.8 | )% | ||||||||
Total land expense |
$ | 74,556 | $ | 71,437 | 4.4 | % | ||||||
Non-vessel related maintenance expenses increased primarily due to higher fuel costs
and additional repair and maintenance activities due to the increase in the number of containers
and chassis in our fleet. Terminal overhead increased primarily due to higher utilities
expenses.
Rolling stock expense increased $3.4 million during the six months ended June 26, 2011 as
compared to the six months ended June 20, 2010. This increase is due to a larger quantity of
leased containers and chassis to fund our international and Hawaii operations.
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Table of Contents
Depreciation and Amortization. Depreciation and amortization was $22.5 million during the
six months ended June 26, 2011 as compared to $21.9 during the six months ended June 20, 2010.
The increase in depreciation and amortization-other is primarily due to additional owned
containers to support our international operations and the depreciation associated with certain
modifications to leased vessels.
Six months Ended | ||||||||||||
June 26, | June 20, | |||||||||||
2011 | 2010 | % Change | ||||||||||
(in thousands) | ||||||||||||
Depreciation and amortization: |
||||||||||||
Depreciationowned vessels |
$ | 4,796 | $ | 4,666 | 2.8 | % | ||||||
Depreciation and amortizationother |
7,536 | 7,050 | 6.9 | % | ||||||||
Amortization of intangible assets |
10,161 | 10,159 | 0.0 | % | ||||||||
Total depreciation and amortization |
$ | 22,493 | $ | 21,875 | 2.8 | % | ||||||
Amortization of vessel dry-docking |
$ | 8,158 | $ | 6,371 | 28.0 | % | ||||||
Amortization of Vessel Dry-docking. Amortization of vessel dry-docking was $8.2
million during the six months ended June 26, 2011 compared to $6.4 million for the six months
ended June 20, 2010. Amortization of vessel dry-docking fluctuates based on the timing of
dry-dockings, the number of dry-dockings that occur during a given period, and the amount of
expenditures incurred during the dry-dockings. Dry-dockings generally occur every two and a half
years and historically we have dry-docked approximately six vessels per year.
Selling, General and Administrative. Selling, general and administrative costs increased to
$46.4 million for the six months ended June 26, 2011 versus $41.5 million for the six months
ended June 20, 2010, an increase of $4.9 million or 11.9%. This increase is primarily comprised
of a $2.3 million charge related to a separation agreement with our former chief executive
officer, a $1.1 million increase in legal and professional fees expenses associated with the
Department of Justice antitrust investigation and related legal proceedings, $1.1 million of
costs incurred in connection with the U.S. Coast Guard and U.S. Attorneys investigation of two
of our vessels, and $0.8 million of costs related to our international operations, partially
offset by a $1.2 million reduction in stock-based compensation expense.
Impairment Charge. We have made payments for three new cranes which are not yet placed into
service. These cranes were initially purchased for use in our Anchorage, Alaska terminal and
were expected to be installed and become fully operational in December 2010. However, the Port
of Anchorage Intermodal Expansion Project is encountering delays that could continue until 2014
or beyond. As such, we are currently marketing these cranes for sale and expect to complete the
sale within one year. As a result of the reclassification to assets held for sale during the
quarter ended June 26, 2011, we recorded an impairment charge of $2.8 million to write down the
carrying value of the cranes to their estimated fair value less costs to sell.
Legal Settlement. As discussed in Legal Proceedings, on March 22, 2011, the Court entered a
judgment against us whereby we were required to pay a fine of $45.0 million to resolve the
investigation by the DOJ. On April 28, 2011, the Court reduced the fine from $45.0 million to
$15.0 million payable over five years without interest. During the second quarter of 2011, we to
reversed $19.2 million of the $30.0 million charge recorded during the year ended December 26,
2010 related to this legal settlement.
Miscellaneous Expense (Income), Net. Miscellaneous expense (income), net increased $1.1
million during the six months ended June 26, 2011 compared to the six months ended June 20, 2010
primarily as a result of higher bad debt expense and the sale of our interest in a joint venture
during the six months ended June 20, 2010, partially offset by an increase in the gain on sale
of assets.
Interest Expense, Net. Interest expense, net increased to $23.6 million for the six months
ended June 26, 2011 compared to $19.7 million for the six months ended June 20, 2010, an
increase of $3.9 million or 19.8%. This increase is primarily a result of higher debt balances
outstanding, a rise in interest rates due to the amendment to the Senior Credit Facility,
interest associated with a capital lease, and the accretion of non-cash interest related to our
legal settlements.
28
Table of Contents
Income Tax (Benefit) Expense. The effective tax rate for the six months ended June 26, 2011
and June 20, 2010 was 4.0% and 0.0%, respectively. As a result of the loss from continuing
operations and income from discontinued operations and other comprehensive income during the six
months ended June 26, 2011, we are required to record a tax benefit from continuing operations
with an offsetting tax expense from discontinued operations and other comprehensive income. For
the six months ended June 26, 2011, we have recorded a tax benefit in continuing operations
equal to the income from discontinued operations
and other comprehensive income multiplied by the statutory tax rate. During the second six
months of 2009, we determined that it was unclear as to the timing of when we will generate
sufficient taxable income to realize our deferred tax assets. Accordingly, we recorded a
valuation allowance against our deferred tax assets. Although we have recorded a valuation
allowance against our deferred tax assets, it does not affect our ability to utilize our
deferred tax assets to offset future taxable income. Until such time that we determine it is
more likely than not that we will generate sufficient taxable income to realize our deferred tax
assets, income tax benefits associated with future period losses will be fully reserved. As a
result, the Company does not expect to record a current or deferred federal tax benefit or
expense, and only minimal state tax provisions during those periods.
Liquidity and Capital Resources
Our principal sources of funds have historically been (i) earnings before non-cash charges
and (ii) borrowings under debt arrangements. Our principal uses of funds have been (i) capital
expenditures on our container fleet, our terminal operating equipment, improvements to our owned
and leased vessel fleet, and our information technology systems, (ii) vessel dry-docking
expenditures, (iii) working capital consumption, (iv) principal and interest payments on our
existing indebtedness, and (v) dividend payments to our common stockholders. Cash totaled $3.4
million at June 26, 2011. As of June 26, 2011, total unused borrowing capacity under the
revolving credit facility was $17.9 million, after taking into account $188.5 million
outstanding under the revolver and $18.6 million utilized for outstanding letters of credit.
Operating Activities
Net cash used in operating activities was $70.3 million for the six months ended June 26,
2011 compared to $9.1 million for the six months ended June 20, 2010. The increase in cash used
in operating activities is primarily due to the following (in thousands):
Earnings adjusted for non-cash charges |
$ | (45,402 | ) | |
Increase in accounts receivable |
(13,530 | ) | ||
Decrease in accounts payable |
(9,471 | ) | ||
Increase in materials and supplies |
(8,514 | ) | ||
Other changes in working capital, net |
751 | |||
Decrease in payments related to dry-dockings |
2,798 | |||
Decrease in payments related to vessel leases |
12,221 | |||
$ | (61,147 | ) | ||
Investing Activities
Net cash used in investing activities was $5.6 million for the six months ended June 26,
2011 compared to $4.1 million for the six months ended June 20, 2010. The increase is due to a
$1.6 million increase in capital spending and $1.1 million of proceeds received from our
interest in a joint venture in 2010, partially offset by an increase of $1.2 million in proceeds
from the sale of equipment in 2011.
Financing Activities
Net cash provided by financing activities during the six months ended June 26, 2011 was
$71.5 million compared to $17.6 million for the six months ended June 20, 2010. The net cash
provided by financing activities during the six months ended June 26, 2011 included $79.1
million, net of payments, borrowed under the Senior Credit Facility as compared to $20.6
million, net of payments, borrowed under the Senior Credit Facility during the six months ended
June 20, 2010. In addition, during the six months ended June 26, 2011, we paid $6.8 million in
financing costs related to fees associated with the amendment to the Senior Credit Facility, our
efforts to obtain consent from our convertible noteholders, and our overall refinancing efforts.
Dividend payments to stockholders during the six months ended June 20, 2010 were $3.1 million.
Capital Requirements and Commitments
During the second quarter of 2011, liquidity contracted significantly due to shortened
payment terms established by certain suppliers. As of the date hereof, total unused borrowing
capacity under the revolving credit facility is $17.9 million, after taking into account $188.5
million outstanding under the revolver and $18.6 million utilized for outstanding letters of
credit.
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We are closely managing our cash flows, including capital spending and deploying various
cost savings initiatives, based on overall business conditions including extremely high fuel
prices and rate pressures. We have achieved more than $18.0 million in annualized cost savings
by reaching agreements with our vessel partners, a reduction in non-union workforce, and rate
and efficiency savings from our trucking partners, among other numerous initiatives. We will
defer or limit capital additions where
economically feasible. Based upon our current level of operations and assuming we are able
to obtain relief from our lenders if we breach a covenant in our Senior Credit Facility, we
believe that cash flow from operations and available cash, together with borrowings available
under the Senior Credit Facility, will be adequate to meet our liquidity needs throughout 2011.
In addition, we have agreed that in the event our cash balance exceeds $17.5 million, we
will not request borrowing under the Senior Credit Facility and, if such balance is in excess of
that amount for more than three consecutive business days, to reduce borrowing under the Senior
Credit Facility by the amount of the excess.
We intend to utilize our cash flows for working capital needs, capital expenditures,
dry-docking payments, debt repayments, to pay a portion of the criminal fine imposed on us in
connection with our guilty plea for certain alleged antitrust violations, and to fund the
potential settlement in the Puerto Rico MDL. During the
next twelve months, we expect to spend approximately $26.0 million and $28.0 million on capital
expenditures and dry-docking expenditures, respectively. Such capital expenditures will include
terminal infrastructure and equipment, and vessel regulatory, modification, and maintenance
initiatives. We also expect to spend approximately $12.0 million during the remainder of 2011
for settlements and expenses associated with the antitrust related legal matters. Due to the
seasonality within our business, we utilized borrowings under the senior credit facility in the
first half of 2011, but plan to repay such borrowings in the second half of the year.
Although we amended our Senior Credit Facility in March 2011 and in June 2011, we do not
expect to be in compliance with the amended financial covenants upon the close of the third
fiscal quarter of 2011. Noncompliance with the financial covenants in the Senior Credit Facility
constitutes an event of default, which, if not waived, could prevent the Company from borrowing
under the Senior Credit Facility and could also result in acceleration of the maturity of the
Senior Credit Facility. The indenture related to the 4.25% Convertible Senior Notes due 2012
(the Notes) contains cross default provisions and certain acceleration clauses whereby if the
maturity of the Senior Credit Facility is accelerated, maturity of the Notes can also be
accelerated.
Due to the expected non-compliance with the amended financial covenants and the cross
default provisions, we have classified our obligations under the Notes and Senior Credit
Facility as current liabilities in the accompanying Consolidated Balance Sheet as of June 26,
2011 and December 26, 2010. These factors, among others, raise substantial doubt that we will be
able to continue as a going concern.
On June 1, 2011, we announced that we had entered into Restructuring Support Agreements, dated
June 1, 2011 (the Restructuring Agreements) with certain holders of a majority of our Notes.
The Restructuring Agreements relate to a refinancing of our outstanding indebtedness with such
holders and a proposed asset-based revolving loan facility of up to
$125.0 million, which remains
under negotiation with a separate, third-party financial institution.
We have entered into amendments of the Restructuring Support Agreements on June 10, 2011,
June 17, 2011, June 24, 2011, July 1, 2011, July 8, 2011, and July 22, 2011. The July 22, 2011
amendment extended the deadline by which we are required to receive subsription commitments from
the holders.
We and the majority of the holders of the Notes continue to make significant progress in
negotiations concerning certain substantive modifications to the recapitalization transaction
announced on June 1, 2011, and the parties anticipate completing such negotiations and announcing
a definitive transaction in the next several weeks. There is no assurance that negotiations
will be successful.
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Long-Term Debt
Senior Credit Facility
On August 8, 2007, we entered into a credit agreement (the Senior Credit Facility)
secured by substantially all our owned assets. On June 11, 2009, the Senior Credit Facility was
amended resulting in a reduction in the size of the revolving credit facility from $250.0
million to $225.0 million. The Senior Credit Facility was further amended on March 9, 2011. On
June 24, 2011, the Senior Credit Facility was amended to modify the financial covenant ratios.
The terms of the Senior Credit Facility also provide for a $5.0 million swingline subfacility
and a $20.0 million letter of credit subfacility.
The June 2009 amendment to the Senior Credit Facility was intended to provide us the
flexibility that we need to effect the settlement of the Puerto Rico class action litigation and
to incur other antitrust related litigation expenses. The amendment revised the definition of
Consolidated EBITDA by allowing for certain charges, including (i) the Puerto Rico settlement,
or alternatively a DOJ fine in an amount not to exceed $25 million and (ii) litigation expenses
related to antitrust litigation matters in an amount not to exceed $25 million in the aggregate
and $15 million over a 12-month period, to be added back to the calculation of Consolidated
EBITDA. In addition, the Senior Credit Facility was amended to (i) increase the spread over
LIBOR and Prime based rates by 150 bps, (ii) increase the range of fees on the unused portion of
the commitment, (iii) eliminate the $150 million incremental facility, (iv) modify the
definition of Consolidated EBITDA to eliminate the term non-recurring charges, and (v)
incorporate other structural enhancements, including a step-down in the secured leverage ratio
and further limitations on the ability to make certain restricted payments. As a result of the
amendment to the Senior Credit Facility, we paid $3.5 million in financing costs and recorded a
loss on modification of debt of $0.1 million.
The March 2011 amendment waives default conditions related to the recently announced
settlement agreement with the DOJ. In addition, the Senior Credit Facility was amended to (i)
increase the senior secured leverage ratio from 2.75x to 3.50x for the fiscal quarters ending
March 27, 2011 and June 26, 2011, and from 2.75x to 3.00x for the fiscal quarter ending
September 25, 2011 (remaining at 2.75x for all fiscal quarters thereafter), (ii) decrease the
interest coverage ratio minimum from 3.50x to 2.50x for the fiscal quarters ending March 27,
2011 and June 26, 2011, from 3.50x to 2.75x for the fiscal quarter ending September 25, 2011,
and from 3.50x to 3.00x for the fiscal quarter ending December 25, 2011 (remaining at 3.50x for
all fiscal quarters thereafter), (iii) increase the spread over LIBOR and Prime rates by 250
bps, and (iv) restrict cash dividends from being paid on any class of capital stock. The
amendment also revises the definition of Consolidated EBITDA by allowing for certain charges,
including (i) transaction costs incurred in connection with obtaining the credit agreement
amendment, the convertible bondholder waiver consent, and any other proposed refinancing costs
that are not counted as interest expense or capitalized as deferred financing fees in an amount
not to exceed $5.0 million and (ii) litigation expenses related to antitrust litigation matters
in an amount not to exceed $28.0 million in the aggregate, to be added back to the calculation
of Consolidated EBITDA.
The June 2011 amendment to the Senior Credit Facility (i) increased the senior secured
leverage ratio from 3.50x to 6.25x for the fiscal quarter ending June 26, 2011 and (ii)
decreased the interest coverage ratio minimum from 2.50x to 1.50x for the fiscal quarter ending
June 26, 2011.
As a result of the amendments to the Senior Credit Facility and efforts to refinance our
existing debt, we paid $6.3 million in financing costs and recorded a loss on modification of
debt of $0.6 million.
We made quarterly principal payments on the term loan of approximately $1.6 million from
December 31, 2007 through September 30, 2009. Effective December 31, 2009, quarterly payments
increased to $4.7 million through September 30, 2011, at which point quarterly payments will
increase to $18.8 million until final maturity on August 8, 2012. The interest rate payable
under the Senior Credit Facility varies depending on the types of advances or loans we select.
Borrowings under the Senior Credit Facility bear interest primarily at LIBOR-based rates plus a
spread which ranges from 5.25% to 6.0% (LIBOR plus 6.0% as of June 26, 2011) depending on our
ratio of total secured debt to EBITDA (as defined in the Senior Credit Facility). We also have
the option to borrow at Prime plus a spread which ranges from 4.25% to 5.0% (Prime plus 5.0% as
of June 26, 2011). The weighted average interest rate under the Senior Credit Facility at June
26, 2011 was approximately 7.2%, which includes the impact of the interest rate swap (as defined
below). We also pay a variable commitment fee on the unused portion of the commitment, ranging
from 0.375% to 0.50% (0.50% as of June 26, 2011).
The Senior Credit Facility contains customary affirmative and negative covenants and
warranties, including two financial covenants with respect to our leverage and interest coverage
ratio. The March 2011 amendment prohibits the payment of dividends on our common stock in
addition to other restrictions, including restrictions on debt issuances, acquisitions,
investments, liens, restricted payments, asset sales, sale leasebacks, and amendment of the
outstanding 4.25% Convertible Senior Notes due 2012. It also contains customary events of
default, subject to grace periods. We were in compliance with all such covenants as of June 26,
2011.
We have agreed that in the event our cash balance exceeds $17.5 million, we will not
request borrowing under the Senior
Credit Facility and, if such cash balance is in excess of that amount for more than three
consecutive business days, to reduce borrowing under the Senior Credit Facility by the amount of
the excess.
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Derivative Instruments
On March 31, 2008, we entered into an Interest Rate Swap Agreement (the swap) with
Wachovia Bank, National Association, a current subsidiary of Wells Fargo & Co., (Wachovia) in
the notional amount of $121.9 million. The swap expires on August 8, 2012. Under the swap, the
Company and Wachovia have agreed to exchange interest payments on the notional amount on the
last business day of each calendar quarter. We have agreed to pay a 3.02% fixed interest rate,
and Wachovia has agreed to pay a floating interest rate equal to the three-month LIBOR rate. The
critical terms of the swap agreement and the term loan are the same, including the notional
amounts, interest rate reset dates, maturity dates and underlying market indices. The purpose of
entering into this swap is to protect us against the risk of rising interest rates by
effectively fixing the base interest rate payable related to our term loan.
The swap has been designated as a cash flow hedge of the variability of the cash flows due
to changes in LIBOR and has been deemed to be highly effective. Accordingly, we record the fair
value of the swap as an asset or liability on our consolidated balance sheet, and any unrealized
gain or loss is included in accumulated other comprehensive loss. As of June 26, 2011, we
recorded a liability of $2.3 million, which is included in other accrued liabilities in the
accompanying consolidated balance sheet. We also recorded $20 thousand and $0.2 million in other
comprehensive loss for the quarters ended June 26, 2011 and June 20, 2010, respectively, and
$0.5 million in other comprehensive loss for each of the six months ended June 26, 2011
and June 20, 2010. No hedge ineffectiveness was recorded during the quarters and
six months ended June 26, 2011 and June 20, 2010. If the hedge was deemed ineffective, or
extinguished by either counterparty, any accumulated gains or losses remaining in other
comprehensive loss would be fully recorded in interest expense during the period.
4.25% Convertible Senior Notes
On August 8, 2007, we issued $330.0 million aggregate principal amount of 4.25% Convertible
Senior Notes due 2012 (the Notes). The Notes are general unsecured obligations of the Company
and rank equally in right of payment with all of our other existing and future obligations that
are unsecured and unsubordinated. The Notes bear interest at the rate of 4.25% per annum, which
is payable in cash semi-annually on February 15 and August 15 of each year. The Notes mature on
August 15, 2012, unless earlier converted, redeemed or repurchased in accordance with their
terms prior to August 15, 2012. Holders of the Notes may require us to repurchase the Notes for
cash at any time before August 15, 2012 if certain fundamental changes occur.
Each $1,000 of principal of the Notes will initially be convertible into 26.9339 shares of
our common stock, which is the equivalent of $37.13 per share, subject to adjustment upon the
occurrence of specified events set forth under the terms of the Notes. Upon conversion, we would
pay the holder the cash value of the applicable number of shares of our common stock, up to the
principal amount of the note. Amounts in excess of the principal amount, if any, may be paid in
cash or in stock, at our option. Holders may convert their Notes into our common stock as
follows:
| Prior to May 15, 2012, if during any calendar quarter, and only during such calendar quarter, the last reported sale price of our common stock for at least 20 trading days in a period of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter exceeds 120% of the applicable conversion price in effect on the last trading day of the immediately preceding calendar quarter; | ||
| During any five business day period prior to May 15, 2012, immediately after any five consecutive trading day period (the measurement period) in which the trading price per $1,000 principal amount of notes for each day of such measurement period was less than 98% of the product of the last reported sale price of our common stock on such date and the conversion rate on such date; | ||
| If, at any time, a change in control occurs or if we are a party to a consolidation, merger, binding share exchange or transfer or lease of all or substantially all of its assets, pursuant to which the Companys common stock would be converted into cash, securities or other assets; or | ||
| At any time after May 15, 2012 through the fourth scheduled trading day immediately preceding August 15, 2012. |
Holders who convert their Notes in connection with a change in control may be entitled to a
make-whole premium in the form of an increase in the conversion rate. In addition, upon a change
in control, liquidation, dissolution or de-listing, the holders of the Notes may require us to
repurchase for cash all or any portion of their Notes for 100% of the principal amount plus
accrued and unpaid interest. As of June 26, 2011, none of the conditions allowing holders of the
Notes to convert or requiring us to repurchase the Notes had been met. We may not redeem the
Notes prior to maturity.
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Concurrent with the issuance of the Notes, we entered into note hedge transactions with
certain financial institutions whereby if we are required to issue shares of our common stock
upon conversion of the Notes, we have the option to receive up to 8.9 million shares of our
common stock when the price of our common stock is between $37.13 and $51.41 per share upon
conversion, and we sold warrants to the same financial institutions whereby the financial
institutions have the option to receive up to 17.8 million shares of our common stock when the
price of our common stock exceeds $51.41 per share upon conversion. The separate note hedge and
warrant transactions were structured to reduce the potential future share dilution associated
with the conversion of Notes. The cost of the note hedge transactions to the Company was
approximately $52.5 million, $33.4 million net of tax, and has been accounted for as an equity
transaction. We received proceeds of $11.9 million related to the sale of the warrants, which
has also been classified as equity.
The Notes and the warrants sold in connection with the hedge transactions will have no
impact on diluted earnings per share until the price of the Companys common stock exceeds the
conversion price (initially $37.13 per share) because the principal amount of the Notes will be
settled in cash upon conversion. Prior to conversion of the Notes or exercise of the warrants,
we will include the effect of the additional shares that may be issued if our common stock price
exceeds the conversion price, using the treasury stock method. The call options purchased as
part of the note hedge transactions are anti-dilutive and therefore will have no impact on
earnings per share.
Goodwill
We review our goodwill for impairment
whenever events or changes in circumstances indicate that the carrying amounts
of goodwill may not be recoverable, and also review goodwill annually. As of
June 26, 2011, the carrying value of our goodwill was $314.1 million.
Earnings estimated to be generated are expected to support the carrying value
of goodwill. However, should our operating results differ from what is expected
or other triggering events occur, it could imply that our goodwill may not be
recoverable and may result in the recognition of a non-cash write down of
goodwill.
Outlook
We expect considerable improvement in our financial performance, relative to the first half
performance, in the remainder of 2011 due to seasonality, stabilizing fuel prices, and more
secure market conditions. In the first half, our performance was negatively impacted by the
Japanese earthquake, excess capacity in our tradelanes, and concerns over our ability to
successfully refinance our existing debt. However, we expect the depressed rate environment
impacting our new China service and, and to a lesser extent the
ongoing rate pressures in our Puerto Rico tradelane to continue.
Overall, we expect adjusted EBITDA to improve in the second half from
the same period a year ago, due to stabilizing fuel prices and more
secure conditions in our Jones Act markets.
In light of the rate environments and the loss of certain agreements with Maersk, towards
the end of 2010 and beginning of 2011, we commenced efforts to reduce expenses. Our cost savings
initiatives include savings from a reduction in our non-union workforce, labor savings from our
vessel union partners, efficiency savings from our trucking partners, and vessel lease
reductions, among numerous other initiatives. We continue to explore and implement cost savings
and to preserve liquidity, including, seeking to restructure the terms of our existing
indebtedness and pursuing the sale of selected assets.
We do not expect to be in compliance with financial covenants in our Senior Credit Facility
upon the close of our third fiscal quarter of 2011. If we are in breach of our covenants, we
will work with our lenders to seek an amendment or waiver of such breach. Additional financing
resources will be required to refinance existing indebtedness that could become due within the
next twelve months. We and our representatives have been engaged in discussions with our banks,
bondholders and their advisors, as well as with other potential lenders; however, we cannot
assure you that we will be able to secure such amendments or a refinancing.
Interest Rate Risk
Our primary interest rate exposure relates to the Senior Credit Facility. As of June 26,
2011, we had outstanding an $84.4 million term loan and $188.5 million under the revolving
credit facility, which bear interest at variable rates.
On March 31, 2008, we entered into an Interest Rate Swap Agreement (the swap) on our term
loan with Wachovia in the notional amount of $121.9 million. The swap expires on August 8, 2012.
Under the swap, the Company and Wachovia have agreed to exchange interest payments on the
notional amount on the last business day of each calendar quarter. We have agreed to pay a 3.02%
fixed interest rate, and Wachovia has agreed to pay a floating interest rate equal to the
three-month LIBOR rate. The critical terms of the swap agreement and the term loan are the same,
including the notional amounts, interest rate reset dates, maturity dates and underlying market
indices. The purpose of entering into this swap is to protect the Company against the risk of
rising interest rates by effectively fixing the base interest rate payable related to our term
loan. Interest rate differentials paid or received under the swap are recognized as adjustments
to interest expense. We do not hold or issue interest rate swap agreements for trading purposes.
In the event that the counter-party fails to meet the terms of the interest rate swap agreement,
our exposure is limited to the interest rate differential.
Each quarter point change in interest rates would result in a $0.5 million change in annual
interest expense on the revolving credit facility.
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Recent Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (FASB) issued an amendment to
the accounting for fair value measurements and disclosures. This amendment details additional
disclosures on fair value measurements, requires a gross presentation of activities within a
Level 3 roll-forward, and adds a new requirement to disclose transfers in and out of Level 1 and
Level 2 measurements. The new disclosures are required of all entities that are required to
provide disclosures about recurring and nonrecurring fair value measurements. This amendment is
effective in the first interim or reporting period beginning after December 15, 2009, with an
exception for the gross presentation of Level 3 roll-forward information, which is required for
annual reporting periods beginning after December 15, 2010, and for interim reporting periods
within those years. The adoption of the provisions of this amendment required in the first
interim period after December 15, 2009 did not have a material impact on our financial statement
disclosures. In addition, the adoption of the provisions of this amendment during the quarter
ended March 27, 2011 did not have a material impact on our financial statement disclosures.
Forward Looking Statements
This Form 10-Q contains forward-looking statements within the meaning of the federal
securities laws. These forward-looking statements are intended to qualify for the safe harbor
from liability established by the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are those that do not relate solely to historical fact. They include,
but are not limited to, any statement that may predict, forecast, indicate or imply future
results, performance, achievements or events. Words such as, but not limited to, believe,
expect, anticipate, estimate, intend, plan, targets, projects, likely, will,
would, could and similar expressions or phrases identify forward-looking statements.
All forward-looking statements involve risks and uncertainties. The occurrence of the
events described, and the achievement of the expected results, depend on many events, some or
all of which are not predictable or within our control. Actual results may differ materially
from expected results.
Factors that may cause actual results to differ from expected results include:
| our ability to maintain adequate liquidity to operate our business, | ||
| our ability to refinance, repay, or extend our indebtedness when it becomes due or if maturity is accelerated, | ||
| our ability to obtain waivers or reach agreements with respect to covenants relating to our indebtedness that we expect to breach at the close of the third quarter of 2011, | ||
| volatility in fuel prices | ||
| cyclical nature of international shipping industry and resulting volatile changes in freight rates, | ||
| decreases in shipping volumes, | ||
| our ability to continue as a going concern, | ||
| failure to comply with the terms of our probation imposed by the court in connection with our plea relating to antitrust matters, | ||
| any new adverse developments relating to antitrust matters in any of our trades, | ||
| failure to resolve or successfully defend pending and future civil antitrust claims or our pending securities litigation, | ||
| government investigations related to environmental regulations including recordkeeping and reporting requirements for vessel generated pollution and any other government investigations and legal proceedings, | ||
| suspension or debarment by the federal government, | ||
| compliance with safety and environmental protection and other governmental requirements, | ||
| increased inspection procedures and tighter import and export controls, |
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| repeal or substantial amendment of the coastwise laws of the United States, also known as the Jones Act, | ||
| catastrophic losses and other liabilities, | ||
| the arrest of our vessels by maritime claimants, | ||
| severe weather and natural disasters, or | ||
| the aging of our vessels and unexpected substantial dry-docking or repair costs for our vessels. |
In light of these risks and uncertainties, expected results or other anticipated events or
circumstances discussed in this Form 10-Q (including the exhibits hereto) might not occur. We
undertake no obligation, and specifically decline any obligation, to publicly update or revise
any forward-looking statements, even if experience or future developments make it clear that
projected results expressed or implied in such statements will not be realized, except as may be
required by law.
See the section entitled Risk Factors in our Form 10-K for the fiscal year ended December
26, 2010 as filed with the SEC, for a more complete discussion of these risks and uncertainties
and for other risks and uncertainties. Those factors and the other risk factors described
therein are not necessarily all of the important factors that could cause actual results or
developments to differ materially from those expressed in any of our forward-looking statements.
Other unknown or unpredictable factors also could harm our results. Consequently, there can be
no assurance that actual results or developments anticipated by us will be realized or, even if
substantially realized, that they will have the expected consequences to, or effects on, us.
Given these uncertainties, prospective investors are cautioned not to place undue reliance on
such forward-looking statements.
3. Quantitative and Qualitative Disclosures About Market Risk
We maintain a policy for managing risk related to exposure to variability in interest
rates, fuel prices, and other relevant market rates and prices. Our policy includes entering
into derivative instruments in order to mitigate our risks.
Exposure relating to our Senior Credit Facility and our exposure to bunker fuel price
increases are discussed in our Form 10-K for the year ended December 26, 2010. There have been
no material changes to these market risks since December 26, 2010.
There have been no material changes in the quantitative and qualitative disclosures about
market risk since December 26, 2010. Information concerning market risk is incorporated by
reference to Part II, Item 7A Quantitative and Qualitative Disclosures about Market Risk of
our Form 10-K for the fiscal year ended December 26, 2010.
4. Controls and Procedures
Disclosure Controls and Procedures
The Companys management, including the Companys Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of the Companys disclosure controls and
procedures as of the end of the period covered by this report. Based on such evaluation, each of
the Companys Chief Executive Officer and Chief Financial Officer has concluded that the
Companys disclosure controls and procedures are effective.
Changes in Internal Control
There were no changes in the Companys internal control over financial reporting during the
Companys fiscal quarter ending June 26, 2011 that have materially affected, or are reasonably
likely to materially affect, the Companys internal control over financial reporting.
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PART II. OTHER INFORMATION
1. Legal Proceedings
Antitrust Matters
On April 17, 2008, we received a grand jury subpoena and search warrant from the United
States District Court for the Middle District of Florida seeking information regarding an
investigation by the Antitrust Division of the DOJ into possible antitrust violations in the
domestic ocean shipping business. On February 23, 2011, we entered into a plea agreement with
the DOJ, and on March 22, 2011, the Court entered judgment accepting our plea agreement and
imposed a fine of $45.0 million payable over five years without interest and placed us on
probation until the fine payments are completed. On April 28, 2011, the Court reduced the fine
from $45.0 million to $15.0 million payable over five years without interest. The first $1.0
million of the fine was paid on April 25, 2011 and we must make payments of $1.0 million on or
before the first anniversary thereof, $2.0 million on or before the second anniversary, $3.0
million on or before the third anniversary and $4.0 million on or before each of the fourth and
fifth anniversary. The plea agreement provides that we will not face additional charges relating
to the Puerto Rico tradelane. In addition, the plea agreement provides that we will not face any
additional charges in connection with the Alaska trade, and the DOJ has indicated that we are
not a target or subject of any Hawaii or Guam aspects of its investigation.
As part of the courts judgment, we were placed on probation for five years. The terms of
the probation include that the Company: 1) file annual audited financial reports, 2) not commit
a criminal act during the probation period, 3) report any material adverse legal or financial
event, and 4) annually certify that it has an antitrust compliance program in place that
satisfies the federal sentencing guidelines requirements, including antitrust education to key
personnel.
Subsequent to the commencement of the DOJ investigation, fifty-eight purported class action
lawsuits were filed against us and other domestic shipping carriers (the Class Action
Lawsuits). Each of the Class Action Lawsuits purports to be on behalf of a class of individuals
and entities who purchased domestic ocean shipping services directly from the various domestic
ocean carriers. These complaints allege price-fixing in violation of the Sherman Act and seek
treble monetary damages, costs, attorneys fees, and an injunction against the allegedly
unlawful conduct. The Class Action Lawsuits were filed in the following federal district courts:
eight in the Southern District of Florida, five in the Middle District of Florida, nineteen in
the District of Puerto Rico, twelve in the Northern District of California, three in the Central
District of California, one in the District of Oregon, eight in the Western District of
Washington, one in the District of Hawaii, and one in the District of Alaska.
Thirty-two of the Class Action Lawsuits relate to ocean shipping services in the Puerto
Rico tradelane and were consolidated into a single multidistrict litigation (MDL) proceeding
in the District of Puerto Rico. On June 11, 2009, we entered into a settlement agreement with
the named plaintiff class representatives in the Puerto Rico MDL. Under the settlement
agreement, we have agreed to pay $20.0 million and to provide a base-rate freeze as described
below to resolve claims for alleged antitrust violations in the Puerto Rico tradelane.
The base-rate freeze component of the settlement agreement provides that class members who
have contracts in the Puerto Rico trade with us as of the effective date of the settlement would
have the option, in lieu of receiving cash, to have their base rates frozen for a period of
two years. The base-rate freeze would run for two years from the expiration of the contract in
effect on the effective date of the settlement. All class members would be eligible to share in
the $20.0 million cash component, but only our contract customers would be eligible to elect the
base-rate freeze in lieu of receiving cash.
On July 8, 2009, the plaintiffs filed a motion for preliminary approval of the settlement
in the Puerto Rico MDL, and the Court granted preliminary approval of the settlement on July 12,
2010. The settlement is subject to final approval by the Court. We have paid $10.0 million into
an escrow account and the settlement agreement provides that we were required to pay the
remaining $10.0 million after final approval of the settlement agreement by the Court. However,
on April 26, 2011, the plaintiffs advised us that they would not object to us paying the
remainder of the $10 million due under the settlement agreement in one payment of $5.0 million
within 30 days after final approval of the settlement agreement and a second payment of $5.0
million within 60 days after final approval of the settlement agreement.
Some class members have elected to opt-out of the settlement, and the customers that have
elected to opt-out of the settlement and customers not part of the settlement class may file
lawsuits containing allegations similar to those made in the Puerto Rico MDL and seek the same
type of damages under the Sherman Act as sought in the Puerto Rico MDL. We are not able to
determine whether or not any actions will be brought against us or whether or not a negative
outcome would be probable if brought against us, or a reasonable range for any such outcome, and
have made no provisions for any potential proceedings in the accompanying financial statements.
Given the volume of commerce involved in the Puerto Rico shipping business, an adverse ruling in
a potential civil antitrust proceeding could subject us to substantial civil damages given the
treble damages provisions of the Sherman Act.
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In addition, we have actively engaged in discussions with a number of shippers in the
Puerto Rico trade that have opted out of the MDL settlement. We have reached commercial
agreements or are seeking to reach commercial agreements with certain of those shippers, with
the condition that the shipper relinquishes any existing antitrust claims. In some cases, as
part of the agreement, we have agreed to, or are seeking to agree to, future discounts which
will be charged against operating revenue if and when the discount is earned and certain other
conditions are met.
Twenty-five of the fifty-eight Class Action Lawsuits relate to ocean shipping services in
the Hawaii and Guam tradelanes and were consolidated into a MDL proceeding in the Western
District of Washington. On March 20, 2009, we filed a motion to dismiss the claims in the Hawaii
and Guam MDL. On August 18, 2009, the United States District Court for the Western District of
Washington entered an order dismissing, without prejudice, the Hawaii and Guam MDL. In
dismissing the complaint, however, the plaintiffs were granted thirty days to amend their
complaint. After several extensions, the plaintiffs filed an amended consolidated class action
complaint on May 28, 2010. On July 12, 2010, we filed a motion to dismiss the plaintiffs
amended complaint. The motion to dismiss the amended complaint was granted with prejudice on
December 1, 2010. The plaintiffs appealed the Courts decision to dismiss the amended complaint
with the United States Court of Appeals for the Ninth Circuit and the appeal has been briefed by
the parties. Oral argument has been set for September 1, 2011. We intend to vigorously defend
against this purported class action lawsuit.
One district court case remains in the District of Alaska, relating to the Alaska
tradelane. We and the class plaintiffs have agreed to stay the Alaska litigation, and we intend
to vigorously defend against the purported class action lawsuit in Alaska.
In addition, on July 9, 2008, a complaint was filed by Caribbean Shipping Services, Inc. in
the Circuit Court, 4th Judicial Circuit in and for Duval County, Florida, against us and other
domestic shipping carriers alleging price-fixing in violation of the Florida Antitrust Act and
the Florida Deceptive and Unlawful Trade Practices Act. The complaint seeks treble damages,
injunctive relief, costs and attorneys fees. The case is not brought as a class action. On
October 27, 2008, we filed a motion to dismiss. The motion to dismiss is pending.
In February 2011, the Commonwealth of Puerto Rico filed a lawsuit against us seeking
monetary damages in its own right and on behalf of a class of persons who allegedly paid
inflated prices for goods imported to Puerto Rico as a result of alleged price-fixing by the
defendants in violation of the Puerto Rico Monopolies and Restraint of Trade Act. In addition,
two lawsuits have been filed against us as putative class-action lawsuits on behalf of indirect
purchasers, one of which is pending in the Court of First Instance for the Commonwealth of
Puerto Rico and the other is pending in the United States District Court for the District of
Puerto Rico.
On March 31, 2011, we entered into a settlement agreement with the Commonwealth of Puerto
Rico and the named plaintiffs, individually and representing the indirect purchasers, to resolve
claims relating to the Puerto Rico trade. The settlement agreement was entered into by the
parties pursuant to a Memorandum of Understanding, dated February 22, 2011.
Under the settlement agreement, the plaintiffs and the Commonwealth of Puerto Rico agreed
to settle claims alleged in the three lawsuits filed against us and the other defendants.
Pursuant to the Settlement Agreement, each of the defendants will pay a one-third share of the
total settlement amount of $5.3 million. Accordingly, we have agreed to pay $1.8 million as our
share of the settlement amount. If the settlement agreement is finally approved, the settling
defendants will receive a full release from the named plaintiffs, from the members of the
settlement class, and from the Commonwealth of Puerto Rico in its own right and as parens
patriae. The court granted preliminary approval of the settlement agreement on April 26, 2011.
The Court granted final approval to the settlement agreement on July 19, 2011 and we made the
final settlement payment on July 29, 2011.
On December 31, 2008, a securities class action lawsuit was filed against us by the City of
Roseville Employees Retirement System in the United States District Court for the District of
Delaware. The complaint purported to be on behalf of purchasers of our common stock. The
complaint alleged, among other things, that we made material misstatements and omissions in
connection with alleged price-fixing in our shipping business in Puerto Rico in violation of
antitrust laws. We filed a motion to dismiss, and the Court granted the motion to dismiss on
November 13, 2009 with leave to file an amended complaint. The plaintiff filed an amended
complaint on December 23, 2009, and we filed a motion to dismiss the amended complaint on
February 12, 2010. Our motion to dismiss the amended complaint was granted with prejudice on May
18, 2010. On June 15, 2010, the plaintiff appealed the Courts decision to dismiss the amended
complaint. We filed our opposition brief with the Court of Appeals on December 22, 2010 and the
plaintiffs filed their reply brief on February 2, 2011. Oral argument was held on June 23, 2011.
Through June 26, 2011, we have incurred approximately $31.3 million in legal and
professional fees associated with the DOJ investigation, the antitrust related litigation, and
other related legal proceedings.
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Environmental Matters
We are subject to numerous laws and regulations relating to environmental matters and
related record keeping and reporting.
We have been advised that the U.S. Coast Guard and the offices of the U.S. Attorney for the
Northern and Central Districts of California are investigating matters involving two of our
vessels. We are fully and proactively cooperating with these investigations. During the year
ended December 26, 2010, we recorded a provision in our Consolidated Statement of Operations of
$0.5 million related to these contingencies. During the quarter ended June 26, 2011, we recorded
an additional $1.0 million for a total of $1.5 million, which represents our best estimate of
the potential liability. It is possible that the outcome of the investigation could result in a
fine greater than $1.5 million or other actions against us that could have an
adverse effect on our business and operations.
In the ordinary course of business, from time to time, we and our subsidiaries become
involved in various legal proceedings. These relate primarily to claims for loss or damage to
cargo, employees personal injury claims, and claims for loss or damage to the person or
property of third parties. We and our subsidiaries generally maintain insurance, subject to
customary deductibles or self-retention amounts, and/or reserves to cover these types of claims.
We and our subsidiaries also, from time to time, become involved in routine employment-related
disputes and disputes with parties with which they have contractual relations.
1A. Risk Factors
There have been no material changes from our risk factors as previously reported in our
Annual Report on Form 10-K for the fiscal year ended December 26, 2010, as filed with the SEC.
2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
3. Defaults Upon Senior Securities
None.
4. Reserved
5. Other Information
None.
6. Exhibits
31.1 | * | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
31.2 | * | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
32.1 | * | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
32.2 | * | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
101.INS | ** | XBRL
Instance Document |
|
101.SCH | ** | XBRL
Taxonomy Extension Schema Document |
|
101.CAL | ** | XBRL
Taxonomy Extension Calculation Linkbase Document |
|
101.LAB | ** | XBRL
Taxonomy Extension Label Linkbase Document |
|
101.PRE | ** | XBRL
Taxonomy Extension Presentation Linkbase Document |
* | Filed herewith. | |
** | Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: July 29, 2011
HORIZON LINES, INC. |
||||
By: | /s/ MICHAEL T. AVARA | |||
Michael T. Avara | ||||
Executive Vice President & Chief Financial Officer (Principal Financial Officer & Authorized Signatory) |
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EXHIBIT INDEX
Exhibit | |||
No. | Description | ||
31.1 | * | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
31.2 | * | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
32.1 | * | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
32.2 | * | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
101.INS | ** | XBRL
Instance Document |
|
101.SCH | ** | XBRL
Taxonomy Extension Schema Document |
|
101.CAL | ** | XBRL
Taxonomy Extension Calculation Linkbase Document |
|
101.LAB | ** | XBRL
Taxonomy Extension Label Linkbase Document |
|
101.PRE | ** | XBRL
Taxonomy Extension Presentation Linkbase Document |
** | Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
* | Filed herewith. |