Attached files
file | filename |
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EX-32.2 - EX-32.2 - Horizon Lines, Inc. | d748295dex322.htm |
EX-31.2 - EX-31.2 - Horizon Lines, Inc. | d748295dex312.htm |
EX-32.1 - EX-32.1 - Horizon Lines, Inc. | d748295dex321.htm |
EX-10.2 - EX-10.2 - Horizon Lines, Inc. | d748295dex102.htm |
EXCEL - IDEA: XBRL DOCUMENT - Horizon Lines, Inc. | Financial_Report.xls |
EX-31.1 - EX-31.1 - Horizon Lines, Inc. | d748295dex311.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark one)
x | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 22, 2014
OR
¨ | 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 | 74-3123672 | |
(State or other jurisdiction of incorporation or organization) |
(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)
NOT APPLICABLE
(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 x No ¨
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 x No ¨
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 | ¨ | Accelerated Filer | ¨ | |||
Non-accelerated | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
At July 28, 2014, 39,815,900 shares of the Registrants common stock, par value $.01 per share, were outstanding.
Table of Contents
Form 10-Q Index
Page No. | ||||
1 | ||||
1 | ||||
1 | ||||
2 | ||||
Unaudited Condensed Consolidated Statements of Comprehensive Loss |
3 | |||
4 | ||||
Notes to Condensed Consolidated Financial Statements (Unaudited) |
5 | |||
2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
17 | |||
3. Quantitative and Qualitative Disclosures About Market Risk |
34 | |||
34 | ||||
35 | ||||
35 | ||||
35 | ||||
2. Unregistered Sales of Equity Securities and Use of Proceeds |
35 | |||
35 | ||||
35 | ||||
35 | ||||
35 | ||||
37 | ||||
Exhibit 10.2 |
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Exhibit 31.1 |
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Exhibit 31.2 |
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Exhibit 32.1 |
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Exhibit 32.2 |
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Exhibit 101.INS XBRL Instance Document |
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Exhibit 101.SCH XBRL Taxonomy Extension Schema Document |
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Exhibit 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document |
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Exhibit 101.DEF XBRL Taxonomy Extension Definition Linkbase Document |
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Exhibit 101.LAB XBRL Taxonomy Extension Label Linkbase Document |
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Exhibit 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document |
i
Table of Contents
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except per share data)
June 22, | December 22, | |||||||
2014 | 2013 | |||||||
Assets |
||||||||
Current assets |
||||||||
Cash |
$ | 5,228 | $ | 5,236 | ||||
Accounts receivable, net of allowance of $4,800 and $3,984 at June 22, 2014 and December 22, 2013, respectively |
122,213 | 100,460 | ||||||
Materials and supplies |
22,196 | 23,369 | ||||||
Deferred tax asset |
1,140 | 1,140 | ||||||
Other current assets |
10,428 | 8,915 | ||||||
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|
|
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Total current assets |
161,205 | 139,120 | ||||||
Property and equipment, net |
220,884 | 226,838 | ||||||
Goodwill |
198,793 | 198,793 | ||||||
Intangible assets, net |
29,110 | 35,154 | ||||||
Other long-term assets |
25,185 | 24,702 | ||||||
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|
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Total assets |
$ | 635,177 | $ | 624,607 | ||||
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Liabilities and Stockholders Deficiency |
||||||||
Current liabilities |
||||||||
Accounts payable |
$ | 41,626 | $ | 49,897 | ||||
Current portion of long-term debt, including capital leases |
13,928 | 11,473 | ||||||
Other accrued liabilities |
88,685 | 77,406 | ||||||
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|
|
|
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Total current liabilities |
144,239 | 138,776 | ||||||
Long-term debt, including capital leases, net of current portion |
541,974 | 504,845 | ||||||
Deferred tax liability |
1,610 | 1,391 | ||||||
Other long-term liabilities |
18,753 | 23,387 | ||||||
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|
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Total liabilities |
706,576 | 668,399 | ||||||
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|
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Stockholders deficiency |
||||||||
Preferred stock, $.01 par value, 30,500 shares authorized, no shares issued or outstanding |
| | ||||||
Common stock, $.01 par value, 150,000 shares authorized, 39,776 and 38,885 shares issued and outstanding as of June 22, 2014 and December 22, 2013, respectively |
1,008 | 999 | ||||||
Additional paid in capital |
384,150 | 384,073 | ||||||
Accumulated deficit |
(457,739 | ) | (429,891 | ) | ||||
Accumulated other comprehensive income |
1,182 | 1,027 | ||||||
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|
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Total stockholders deficiency |
(71,399 | ) | (43,792 | ) | ||||
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Total liabilities and stockholders deficiency |
$ | 635,177 | $ | 624,607 | ||||
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
Table of Contents
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
Quarters Ended | Six Months Ended | |||||||||||||||
June 22, | June 23, | June 22, | June 23, | |||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Operating revenue |
$ | 281,237 | $ | 259,784 | $ | 533,173 | $ | 504,275 | ||||||||
Operating expense: |
||||||||||||||||
Cost of services (excluding depreciation expense) |
230,612 | 215,015 | 457,165 | 427,599 | ||||||||||||
Depreciation and amortization |
8,589 | 9,580 | 17,041 | 19,150 | ||||||||||||
Amortization of vessel dry-docking |
4,598 | 3,178 | 9,547 | 6,210 | ||||||||||||
Selling, general and administrative |
20,262 | 18,075 | 40,383 | 37,839 | ||||||||||||
Legal settlements |
950 | | 995 | | ||||||||||||
Restructuring charge |
| 409 | 5 | 5,252 | ||||||||||||
Miscellaneous (income) expense, net |
(61 | ) | (2,449 | ) | 319 | (3,454 | ) | |||||||||
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Total operating expense |
264,950 | 243,808 | 525,455 | 492,596 | ||||||||||||
Operating income |
16,287 | 15,976 | 7,718 | 11,679 | ||||||||||||
Other expense: |
||||||||||||||||
Interest expense, net |
17,795 | 16,934 | 35,288 | 32,635 | ||||||||||||
Other income, net |
(36 | ) | (112 | ) | (108 | ) | (155 | ) | ||||||||
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|
|||||||||
Loss from continuing operations before income tax expense |
(1,472 | ) | (846 | ) | (27,462 | ) | (20,801 | ) | ||||||||
Income tax expense |
134 | 7 | 417 | 126 | ||||||||||||
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Net loss from continuing operations |
(1,606 | ) | (853 | ) | (27,879 | ) | (20,927 | ) | ||||||||
Net (loss) income from discontinued operations |
(6 | ) | (651 | ) | 31 | (929 | ) | |||||||||
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Net loss |
$ | (1,612 | ) | $ | (1,504 | ) | $ | (27,848 | ) | $ | (21,856 | ) | ||||
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Basic and diluted net loss per share: |
||||||||||||||||
Continuing operations |
$ | (0.04 | ) | $ | (0.02 | ) | $ | (0.69 | ) | $ | (0.59 | ) | ||||
Discontinued operations |
| (0.02 | ) | | (0.03 | ) | ||||||||||
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Basic and diluted net loss per share |
$ | (0.04 | ) | $ | (0.04 | ) | $ | (0.69 | ) | $ | (0.62 | ) | ||||
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Number of weighted average shares used in calculations: |
||||||||||||||||
Basic |
40,802 | 35,602 | 40,359 | 35,174 | ||||||||||||
Diluted |
40,802 | 35,602 | 40,359 | 35,174 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
Table of Contents
Unaudited Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
Quarters Ended | Six Months Ended | |||||||||||||||
June 22, | June 23, | June 22, | June 23, | |||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Net loss |
$ | (1,612 | ) | $ | (1,504 | ) | $ | (27,848 | ) | $ | (21,856 | ) | ||||
Other comprehensive income: |
||||||||||||||||
Amortization of pension and post-retirement benefit transition obligation, net of tax |
86 | 159 | 155 | 317 | ||||||||||||
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Other comprehensive income |
86 | 159 | 155 | 317 | ||||||||||||
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Comprehensive loss |
$ | (1,526 | ) | $ | (1,345 | ) | $ | (27,693 | ) | $ | (21,539 | ) | ||||
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
Table of Contents
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
Six Months Ended | ||||||||
June 22, | June 23, | |||||||
2014 | 2013 | |||||||
Cash flows from operating activities: |
||||||||
Net loss from continuing operations |
$ | (27,879 | ) | $ | (20,927 | ) | ||
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |
||||||||
Depreciation |
12,691 | 12,393 | ||||||
Amortization of other intangible assets |
4,350 | 6,757 | ||||||
Amortization of vessel dry-docking |
9,547 | 6,210 | ||||||
Amortization of deferred financing costs |
1,692 | 1,580 | ||||||
Restructuring charge |
5 | 5,252 | ||||||
Deferred income taxes |
147 | 123 | ||||||
Gain on equipment disposals |
(281 | ) | (2,598 | ) | ||||
Stock-based compensation |
(86 | ) | 1,607 | |||||
Payment-in-kind interest expense |
14,175 | 12,472 | ||||||
Non-cash interest accretion |
1,080 | 1,112 | ||||||
Other |
(117 | ) | (146 | ) | ||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(21,737 | ) | (5,016 | ) | ||||
Materials and supplies |
1,173 | 4,652 | ||||||
Other current assets |
(1,513 | ) | (796 | ) | ||||
Accounts payable |
(8,268 | ) | (4,321 | ) | ||||
Accrued liabilities |
8,934 | (3,774 | ) | |||||
Vessel rent |
| (777 | ) | |||||
Vessel dry-docking payments |
(7,280 | ) | (6,314 | ) | ||||
Legal settlement payments |
(4,128 | ) | (6,500 | ) | ||||
Other assets/liabilities |
(826 | ) | 146 | |||||
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Net cash (used in) provided by operating activities from continuing operations |
(18,321 | ) | 1,135 | |||||
Net cash used in operating activities from discontinued operations |
(94 | ) | (1,331 | ) | ||||
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Cash flows from investing activities: |
||||||||
Purchases of property and equipment |
(5,860 | ) | (96,621 | ) | ||||
Proceeds from the sale of property and equipment |
1,150 | 5,480 | ||||||
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Net cash used in investing activities |
(4,710 | ) | (91,141 | ) | ||||
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Cash flows from financing activities: |
||||||||
Issuance of debt |
| 95,000 | ||||||
Payments on ABL facility |
(37,650 | ) | (25,000 | ) | ||||
Borrowing under ABL facility |
65,650 | 15,000 | ||||||
Payment of financing costs |
(11 | ) | (5,557 | ) | ||||
Payment of long-term debt |
(3,000 | ) | (1,125 | ) | ||||
Payments on capital lease obligations |
(1,872 | ) | (996 | ) | ||||
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Net cash provided by financing activities |
23,117 | 77,322 | ||||||
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Net increase (decrease) in cash from continuing operations |
86 | (12,684 | ) | |||||
Net decrease in cash from discontinued operations |
(94 | ) | (1,331 | ) | ||||
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Net decrease in cash |
(8 | ) | (14,015 | ) | ||||
Cash at beginning of period |
5,236 | 27,839 | ||||||
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Cash at end of period |
$ | 5,228 | $ | 13,824 | ||||
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Supplemental disclosure of non-cash financing activities: |
||||||||
Conversion of debt to equity |
$ | | $ | 20 | ||||
Notes issued as payment-in-kind |
$ | 13,790 | $ | 11,933 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
Table of Contents
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 and wholly-owned subsidiary, Horizon Lines of Alaska, LLC (Horizon Lines of Alaska), a Delaware limited liability company and wholly-owned subsidiary, Horizon Logistics, LLC (Horizon Logistics), a Delaware limited liability company and wholly-owned subsidiary, Horizon Lines of Puerto Rico, Inc. (HLPR), a Delaware corporation and wholly-owned subsidiary, Hawaii Stevedores, Inc. (HSI), a Hawaii corporation and wholly-owned subsidiary, as well as Road Raiders Transportation, Inc. and Road Raiders Logistics, Inc. (collectively, Road Raiders), Delaware corporations and wholly-owned subsidiaries.
Horizon Lines operates as a Jones Act container shipping business with primary service to ports within the continental United States, Alaska, Hawaii, and Puerto Rico. 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. HLPR operates as an agent for Horizon Lines in Puerto Rico and also provides terminal services in Puerto Rico. The Company also provides certain third-party logistics services via its Road Raiders subsidiaries.
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.
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 22, 2013. 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 22, 2014 and the financial statements for the quarters and six months ended June 22, 2014 and June 23, 2013 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.
5
Table of Contents
3. Long-Term Debt
As of the dates below, long-term debt consisted of the following (in thousands):
June 22, | December 22, | |||||||
2014 | 2013 | |||||||
First lien notes |
$ | 220,920 | $ | 222,381 | ||||
Second lien notes |
201,640 | 187,129 | ||||||
$75.0 million term loan agreement |
71,851 | 73,282 | ||||||
$20.0 million term loan agreement |
19,635 | 19,572 | ||||||
ABL facility |
28,000 | | ||||||
Capital lease obligations |
12,368 | 12,415 | ||||||
6.0% convertible notes |
1,488 | 1,539 | ||||||
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Total long-term debt |
555,902 | 516,318 | ||||||
Less current portion |
(13,928 | ) | (11,473 | ) | ||||
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Long-term debt, net of current portion |
$ | 541,974 | $ | 504,845 | ||||
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On October 5, 2011, the Company issued the 6.00% Convertible Notes. On October 5, 2011, Horizon Lines issued the First Lien Notes, the Second Lien Notes, and entered into the ABL Facility. On January 31, 2013, Horizon Lines entered into the $20.0 Million Agreement and Horizon Lines Alaska Vessels, LLC (Horizon Alaska), the Companys newly formed special purpose subsidiary, entered into the $75.0 Million Agreement. The 6.00% Convertible Notes, the First Lien Notes, the Second Lien Notes, the ABL Facility, the $20.0 Million Agreement (collectively, the Horizon Lines Debt Agreements), and the $75.0 Million Agreement are defined and described below.
Per the terms of the Horizon Lines Debt Agreements, the Alaska SPEs (as defined below) are not required to be a party thereto and are considered Unrestricted Subsidiaries under the 6.00% Convertible Notes, the First Lien Notes, the Second Lien Notes, and the $20.0 Million Agreement. The Alaska SPEs do not guarantee any of the Horizon Lines Debt Agreements.
The 6.00% Convertible Notes are fully and unconditionally guaranteed by the Companys subsidiaries other than the Unrestricted Subsidiaries identified above. The ABL Facility, the First Lien Notes, the Second Lien Notes, and the $20.0 Million Agreement are fully and unconditionally guaranteed by the Company and each of its subsidiaries other than Horizon Lines and the Unrestricted Subsidiaries.
The ABL Facility is secured on a first-priority basis by liens on the accounts receivable, deposit accounts, securities accounts, investment property (other than equity interests of the subsidiaries and joint ventures of the Company) and cash, in each case with certain exceptions, of the Company and the Companys subsidiaries other than the Unrestricted Subsidiaries identified above (collectively, the ABL Priority Collateral). Substantially all other assets of the Company and the Companys subsidiaries, other than the assets of the Unrestricted Subsidiaries identified above, also serve as collateral for the Horizon Lines Debt Agreements (collectively, such other assets are the Secured Notes Priority Collateral).
The following table summarizes the issuers, guarantors and non-guarantors of each of the Horizon Lines Debt Agreements:
ABL Facility | $20 Million Agreement |
First Lien Notes |
Second Lien Notes |
6% Convertible Notes |
$75 Million Agreement | |||||||
Horizon Lines, Inc. |
Guarantor | Guarantor | Guarantor | Guarantor | Issuer | Non-Guarantor | ||||||
Horizon Lines, LLC |
Issuer | Issuer | Issuer | Issuer | Guarantor | Non-Guarantor | ||||||
Horizon Alaska |
Non-Guarantor | Unrestricted | Unrestricted | Unrestricted | Unrestricted | Issuer | ||||||
Horizon Vessels |
Non-Guarantor | Unrestricted | Unrestricted | Unrestricted | Unrestricted | Guarantor | ||||||
Alaska Terminals |
Non-Guarantor | Unrestricted | Unrestricted | Unrestricted | Unrestricted | Guarantor | ||||||
Other subsidiaries of the Company not specifically listed above |
Guarantor | Guarantor | Guarantor | Guarantor | Guarantor | Non-Guarantor |
6
Table of Contents
The following table lists the order of lien priority for each of the Horizon Lines Debt Agreements on the Secured Notes Priority Collateral and the ABL Priority Collateral, as applicable:
Secured Notes Priority Collateral |
ABL Priority Collateral | |||
$20 Million Agreement |
First | Second | ||
First Lien Notes |
Second | Third | ||
Second Lien Notes |
Third | Fourth | ||
6.0% Convertible Notes |
Fourth | Fifth | ||
ABL Facility |
Fifth | First |
First Lien Notes
The 11.00% First Lien Senior Secured Notes (the First Lien Notes) were issued pursuant to an indenture on October 5, 2011. The First Lien Notes bear interest at a rate of 11.0% per annum, payable semiannually, and mature on October 15, 2016. The First Lien Notes are callable at par plus accrued and unpaid interest. Horizon Lines is obligated to make mandatory prepayments of 1%, on an annual basis, of the original principal amount. These prepayments are payable on a semiannual basis and commenced on April 15, 2012.
The First Lien Notes contain affirmative and negative covenants which are typical for senior secured high-yield notes with no financial maintenance covenants. The First Lien Notes contain other covenants, including: change of control put at 101% (subject to a permitted holder exception); limitation on asset sales; limitation on incurrence of indebtedness and preferred stock; limitation on restricted payments; limitation on restricted investments; limitation on liens; limitation on dividends; limitation on affiliate transactions; limitation on sale/leaseback transactions; limitation on guarantees by restricted subsidiaries; and limitation on mergers, consolidations and sales of all/substantially all of the assets of Horizon Lines. These covenants are subject to certain exceptions and qualifications. Horizon Lines was in compliance with all such applicable covenants as of June 22, 2014.
On October 5, 2011, the fair value of the First Lien Notes was $228.4 million, which reflected Horizon Lines ability to call the First Lien Notes at 101.5% during the first year and at par thereafter. The original issue premium of $3.4 million is being amortized through interest expense through the maturity of the First Lien Notes.
Second Lien Notes
The 13.00%-15.00% Second Lien Senior Secured Notes (the Second Lien Notes) were issued pursuant to an indenture on October 5, 2011.
The Second Lien Notes bear interest at a rate of either: (i) 13% per annum, payable semiannually in cash in arrears; (ii) 14% per annum, 50% of which is payable semiannually in cash in arrears and 50% is payable in kind; or (iii) 15% per annum payable in kind, payable semiannually beginning on April 15, 2012, and maturing on October 15, 2016. The Second Lien Notes were non-callable for two years from the date of their issuance, and thereafter the Second Lien Notes are callable by Horizon Lines at (i) 106% of their aggregate principal amount, plus accrued and unpaid interest thereon in the third year, (ii) 103% of their aggregate principal amount, plus accrued and unpaid interest thereon in the fourth year, and (iii) at par plus accrued and unpaid interest thereafter.
On April 15, 2012, October 15, 2012, April 15, 2013, October 15, 2013, and April 15, 2014, Horizon Lines issued an additional $7.9 million, $8.1 million, $8.7 million, $9.4 million and $10.1 million, respectively, of Second Lien Notes to satisfy the payment-in-kind interest obligation under the Second Lien Notes. In addition, Horizon Lines has elected to satisfy its interest obligation under the Second Lien Notes due October 15, 2014 by issuing additional Second Lien Notes. As such, as of June 22, 2014, Horizon Lines has recorded $4.0 million of accrued interest as an increase to long-term debt.
The Second Lien Notes contain affirmative and negative covenants that are typical for senior secured high-yield notes with no financial maintenance covenants. The Second Lien Notes contain other covenants, including: change of control put at 101% (subject to a permitted holder exception); limitation on asset sales; limitation on incurrence of indebtedness and preferred stock; limitation on restricted payments; limitation on restricted investments; limitation on liens; limitation on dividends; limitation on affiliate transactions; limitation on sale/leaseback transactions; limitation on guarantees by restricted subsidiaries; and limitation on mergers, consolidations and sales of all/substantially all of the assets of Horizon Lines. These covenants are subject to certain exceptions and qualifications. Horizon Lines was in compliance with all such applicable covenants as of June 22, 2014.
On October 5, 2011, the fair value of the Second Lien Notes was $96.6 million. The original issue discount of $3.4 million is being amortized through interest expense through the maturity of the Second Lien Notes.
7
Table of Contents
During 2012, the Company and Horizon Lines entered into a Global Termination Agreement with Ship Finance International Limited (SFL) whereby Horizon Lines issued $40.0 million aggregate principal amount of its Second Lien Notes and warrants to purchase 9,250,000 shares of the Companys common stock at a price of $0.01 per share to satisfy its obligations for certain vessel leases. The Second Lien Notes issued to SFL (the SFL Notes) have the same terms and covenants as the Second Lien Notes issued on October 5, 2011 (the Initial Notes), except that they are subordinated to the Initial Notes in the case of a bankruptcy, and holders of the SFL Notes, so long as then held by SFL, have the option to purchase the Initial Notes in the event of a bankruptcy. On April 9, 2012, the fair value of the SFL Notes outstanding on such date approximated face value. On October 15, 2012, April 15, 2013, October 15, 2013 and April 15, 2014, Horizon Lines issued an additional $3.1 million, $3.2 million, $3.5 million and $3.7 million, respectively, of SFL Notes to satisfy the payment-in-kind interest obligation under the SFL Notes. In addition, Horizon Lines has elected to satisfy its interest obligation under the SFL Notes due October 15, 2014 by issuing additional SFL Notes. As such, as of June 22, 2014, Horizon Lines has recorded $1.5 million of accrued interest as an increase to long-term debt.
ABL Facility
On October 5, 2011, Horizon Lines entered into a $100.0 million asset-based revolving credit facility (the ABL Facility) with Wells Fargo Capital Finance, LLC (Wells Fargo). Use of the ABL Facility is subject to compliance with a customary borrowing base limitation. The ABL Facility includes an up to $30.0 million letter of credit sub-facility and a swingline sub-facility up to $15.0 million, with Wells Fargo serving as administrative agent and collateral agent. Horizon Lines has the option to request increases in the maximum commitment under the ABL Facility by up to $25.0 million in the aggregate; however, such incremental facility increases have not been committed to in advance. The ABL Facility is available to be used by Horizon Lines for working capital and other general corporate purposes.
The ABL Facility was amended on January 31, 2013 in conjunction with the $75.0 Million Agreement and $20.0 Million Agreement. In addition to allowing for the incurrence of the additional long-term debt under those agreements, amendments to the ABL Facility included, among other changes, (i) permission to make certain investments in the Alaska SPEs, including the proceeds of the $20.0 Million Agreement and the arrangements related to the charters and the sublease of the terminal facility licenses for the Vessels (as defined below), (ii) excluding the Alaska SPEs from the guarantee and collateral requirements of the ABL Facility and from the restrictions of the negative covenants and certain other provisions, (iii) weekly borrowing base reporting in the event availability under the facility falls below a threshold of (a) $14.0 million or (b) 14.0% of the maximum commitment under the ABL Facility, (iv) the exclusion of certain historical charges and expenses relating to discontinued operations and severance from the calculation of bank-defined Adjusted EBITDA, (v) the exclusion of the historical charter hire expense deriving from the Vessels from the calculation of bank-defined Adjusted EBITDA, and (vi) the inclusion of pro forma interest expense on the $75.0 Million Agreement and the $20.0 Million Agreement in the calculation of fixed charges.
The ABL Facility matures October 5, 2016 (but 90 days earlier if the First Lien Notes and the Second Lien Notes are not repaid or refinanced as of such date). The interest rate on the ABL Facility is LIBOR or a base rate plus an applicable margin based on leverage and excess availability, as defined in the agreement, ranging from (i) 1.25% to 2.75%, in the case of base rate loans and (ii) 2.25% to 3.75%, in the case of LIBOR loans. A fee ranging from 0.375% to 0.50% per annum will accrue on unutilized commitments under the ABL Facility. As of June 22, 2014, borrowings outstanding under the ABL facility totaled $28.0 million and total borrowing availability was $49.0 million. Horizon Lines had $11.4 million of letters of credit outstanding as of June 22, 2014.
The ABL Facility requires compliance with a minimum fixed charge coverage ratio test if excess availability is less than the greater of (i) $12.5 million or (ii) 12.5% of the maximum commitment under the ABL Facility. In addition, the ABL Facility includes certain customary negative covenants that, subject to certain materiality thresholds, baskets and other agreed upon exceptions and qualifications, will limit, among other things, indebtedness, liens, asset sales and other dispositions, mergers, liquidations, dissolutions and other fundamental changes, investments and acquisitions, dividends, distributions on equity or redemptions and repurchases of capital stock, transactions with affiliates, repayments of certain debt, conduct of business and change of control. The ABL Facility also contains certain customary representations and warranties, affirmative covenants and events of default, as well as provisions requiring compliance with applicable citizenship requirements of the Jones Act. Horizon Lines was in compliance with all such applicable covenants as of June 22, 2014.
$75.0 Million Term Loan Agreement
Three of Horizon Lines Jones Act-qualified vessels: the Horizon Anchorage, Horizon Tacoma, and Horizon Kodiak (collectively, the Vessels) were previously chartered. The charter for the Vessels was due to expire in January 2015. On January 31, 2013, the Company, through its newly formed subsidiary Horizon Alaska, acquired off of charter the Vessels for a purchase price of approximately $91.8 million.
On January 31, 2013, Horizon Alaska, together with two newly formed subsidiaries of Horizon Lines, Horizon Lines Alaska Terminals, LLC (Alaska Terminals) and Horizon Lines Merchant Vessels, LLC (Horizon Vessels), entered into an approximately $75.8 million term loan agreement with certain lenders and U.S. Bank National Association (U.S. Bank), as the
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administrative agent, collateral agent and ship mortgage trustee (the $75.0 Million Agreement). The obligations under the $75.0 Million Agreement are secured by a first-priority lien on substantially all of the assets of Horizon Alaska, Horizon Vessels, and Alaska Terminals (collectively, the Alaska SPEs), which primarily includes the Vessels. The operations of the Alaska SPEs are limited to a bareboat charter of the Vessels between Horizon Alaska and Horizon Lines and a sublease of a terminal facility in Anchorage, Alaska between Alaska Terminals and Horizon Lines of Alaska.
The loan under the $75.0 Million Agreement accrues interest at 10.25% per annum, payable quarterly commencing March 31, 2013. Amortization of loan principal, which commenced on March 31, 2014, is payable in equal quarterly installments, and each amortization installment will equal 2.5% of the total initial loan amount (which may increase to 3.75% upon specified events). The full remaining outstanding amount of the loan under the $75.0 Million Agreement is payable on September 30, 2016. The proceeds of the loan under the $75.0 Million Agreement were utilized by Horizon Alaska to acquire the Vessels. In connection with the borrowing under the $75.0 Million Agreement, the Alaska SPEs paid financing costs of $2.5 million during 2013, which included loan commitment fees of $1.5 million. The financing costs have been recorded as a reduction to the carrying amount of the $75.0 Million Agreement and will be amortized through non-cash interest expense through maturity of the $75.0 Million Agreement. In addition to the commitment fees of $1.5 million paid in cash at closing, the Alaska SPEs will also pay, at maturity of the $75.0 Million Agreement, an additional $0.8 million of closing fees by increasing the original $75.0 million principal amount. The Company is recording non-cash interest accretion through maturity of the $75.0 Million Agreement related to the additional closing fees.
The $75.0 Million Agreement contains certain covenants, including a minimum EBITDA threshold and limitations on the incurrence of indebtedness, liens, asset sales, investments and dividends (all as defined in the agreement). The Alaska SPEs were in compliance with all such covenants as of June 22, 2014. The agent and the lenders under the $75.0 Million Agreement do not have any recourse to the stock or assets of the Company or any of its subsidiaries (other than the Alaska SPEs or equity interests therein). Defaults under the $75.0 Million Agreement do not give rise to any remedies under the Horizon Lines Debt Agreements.
$20.0 Million Term Loan Agreement
On January 31, 2013, the Company and those of its subsidiaries that are parties (collectively, the Loan Parties) to the existing First Lien Notes, the Second Lien Notes, and the 6.00% Convertible Notes (collectively, the Notes) entered into a $20.0 million term loan agreement with certain lenders and U.S. Bank, as administrative agent, collateral agent, and ship mortgage trustee (the $20.0 Million Agreement). The loan under the $20.0 Million Agreement matures on September 30, 2016 and accrues interest at 8.00% per annum, payable quarterly. The $20.0 Million Agreement does not provide for any amortization of principal, and the full outstanding amount of the loan is payable on September 30, 2016. Horizon Lines is not permitted to optionally prepay the $20.0 Million Agreement except for prepayment in full (together with a prepayment premium equal to 5.0% of the principal amount prepaid) following repayment in full of the First Lien Notes and the $75.0 Million Agreement.
In connection with the issuance of the $20.0 Million Agreement, Horizon Lines paid financing costs of $0.6 million during 2013. The financing costs have been recorded as a reduction to the carrying amount of the $20.0 Million Agreement and will be amortized through non-cash interest expense through maturity of the $20.0 Million Agreement.
The covenants in the $20.0 Million Agreement are substantially similar to the negative covenants contained in the indentures governing the Notes, which indentures permit the incurrence of the term loan borrowed under the $20.0 Million Agreement and the contribution of such amounts to Horizon Alaska. The proceeds of the loan borrowed under the $20.0 Million Agreement were contributed to Horizon Alaska to enable it to acquire the Vessels.
6.00% Convertible Notes
On October 5, 2011, the Company issued $178.8 million in aggregate principal amount of new 6.00% Series A Convertible Senior Secured Notes due 2017 (the Series A Notes) and $99.3 million in aggregate principal amount of new 6.00% Series B Mandatorily Convertible Senior Secured Notes (the Series B Notes and, together with the Series A Notes, collectively the 6.00% Convertible Notes). The 6.00% Convertible Notes were issued pursuant to an indenture, which the Company and the Loan Parties entered into with U.S. Bank , as trustee and collateral agent, on October 5, 2011 (the 6.00% Convertible Notes Indenture).
During 2012, the Company completed various debt-to-equity conversions of the 6.00% Convertible Notes. On October 5, 2012, all outstanding Series B Notes not previously converted into shares of the Companys common stock were mandatorily converted into Series A Notes as required by the terms of the 6.00% Convertible Notes Indenture. As of June 22, 2014, $2.0 million face value of the Series A Notes remains outstanding. The Series A Notes bear interest at a rate of 6.00% per annum, payable semiannually. The Series A Notes mature on April 15, 2017 and are convertible at the option of the holders, and at the Companys option under certain circumstances, into shares of the Companys common stock or warrants, as the case may be. Upon conversion, foreign holders may, under certain conditions, receive warrants in lieu of shares of common stock.
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Warrants
Certain warrants, not including the warrants issued to SFL, were issued pursuant to a warrant agreement, which the Company entered into with The Bank of New York Mellon Trust Company, N.A, as warrant agent, on October 5, 2011, as amended by Amendment No. 1, dated December 7, 2011 (the Warrant Agreement). Pursuant to the Warrant Agreement, each warrant entitles the holder to purchase common stock at a price of $0.01 per share, subject to adjustment in certain circumstances. In connection with a reverse stock split in December 2011, warrant holders will receive 1/25th of a share of the Companys common stock upon conversion. As of June 22, 2014 there were 1.1 billion warrants outstanding for the purchase of up to 52.1 million shares of the Companys common stock. Upon issuance, in lieu of payment of the exercise price, a warrant holder will have the right (but not the obligation) to require the Company to convert its warrants, in whole or in part, into shares of its common stock without any required payment or request that the Company withhold, from the shares of common stock that would otherwise be delivered to such warrant holder, shares issuable upon exercise of the Warrants equal in value to the aggregate exercise price.
Warrant holders will not be permitted to exercise or convert their warrants if and to the extent the shares of common stock issuable upon exercise or conversion would constitute excess shares (as defined in the Companys certificate of incorporation) if they were issued in order to abide by the foreign ownership limitations imposed by the Companys certificate of incorporation. In addition, a warrant holder who cannot establish to the Companys reasonable satisfaction that it (or, if not the holder, the person that the holder has designated to receive the common stock upon exercise or conversion) is a United States citizen will not be permitted to exercise or convert its warrants to the extent the receipt of the common stock upon exercise or conversion would cause such person or any person whose ownership position would be aggregated with that of such person to exceed 4.9% of the Companys outstanding common stock.
The warrants contain no provisions allowing the Company to force redemption, and there is no conditional obligation of the Company to redeem or convert the warrants. Each warrant is convertible into shares of the Companys common stock at an exercise price of $0.01 per share, which the Company has the option to waive. In addition, the Company has sufficient authorized and unissued shares available to settle the warrants during the maximum period the warrants could remain outstanding. As a result, the warrants do not meet the definition of an asset or liability and were classified as equity on the date of issuance, on December 22, 2013, and on June 22, 2014. The warrants will be evaluated on a continuous basis to determine if equity classification continues to be appropriate.
Fair Value of Financial Instruments
The estimated fair value of the Companys debt as of June 22, 2014 and December 22, 2013 totaled $527.8 million and $488.9 million, respectively. The fair value of the First Lien Notes and the Second Lien Notes is based upon quoted market prices. The fair value of the other long-term debt approximates carrying value.
4. Income Taxes
The Company continues to believe it will not generate sufficient taxable income to realize its deferred tax assets. Accordingly, the Company maintains 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 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, except for intraperiod allocations of income tax expense. 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.
As a result of the loss from continuing operations and income from discontinued operations and other comprehensive income during 2014, the Company is 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 22, 2014, the Company has recorded a tax benefit in continuing operations due to intraperiod allocations of income tax expense, resulting in lower net tax expense in continuing operations. The income tax expense recorded during the quarter and six months ended June 22, 2014 primarily relates to the Commonwealth of Puerto Rico, partially offset by the tax benefit associated with intraperiod allocations.
5. 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 restricted stock units (RSUs) granted under the Amended and Restated Equity Incentive Plan (the Plan), the 2009 Incentive Compensation Plan (the 2009 Plan), and the 2012 Incentive Compensation Plan (the 2012 Plan) 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. RSUs granted under the 2012 Plan typically contain a graded vesting schedule with a portion vesting each year over a three-year period.
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The following compensation costs (expense reductions) are included within selling, general, and administrative expenses on the condensed consolidated statements of operations (in thousands):
Quarters Ended | Six Months Ended | |||||||||||||||
June 22, 2014 |
June 23, 2013 |
June 22, 2014 |
June 23, 2013 |
|||||||||||||
Restricted stock units |
$ | (819 | ) | $ | (16 | ) | $ | (108 | ) | $ | 1,525 | |||||
Restricted stock |
| 21 | 22 | 82 | ||||||||||||
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|
|
|
|
|
|
|
|||||||||
Total |
$ | (819 | ) | $ | 5 | $ | (86 | ) | $ | 1,607 | ||||||
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Restricted Stock Units
There were no grants of RSUs during the first six months of 2014. The following table details grants of RSUs during 2012 and 2013:
Total RSUs |
Vesting | RSUs Vested as of |
Potential Future Vesting Dates | |||||||||||||||||||||
Grant Date |
Recipient | Outstanding | Criteria | June 22, 2014 | December 31, 2014 | March 31, 2015 | June 30, 2015 | |||||||||||||||||
July 5, 2012 |
CEO | 1,500,000 | Time - Based | 750,000 | 500,000 | | 250,000 | |||||||||||||||||
July 5, 2012 |
CEO | 1,500,000 | Performance - Based | | 1,500,000 | | | |||||||||||||||||
July 25, 2012 |
Board of Directors | 900,000 | Time - Based | 540,000 | | 360,000 | | |||||||||||||||||
July 25, 2012 |
Management | 1,109,584 | Time - Based | 665,750 | | 443,834 | | |||||||||||||||||
July 25, 2012 |
Management | 1,109,583 | Performance - Based | | | 1,109,583 | | |||||||||||||||||
December 26, 2012 |
Management | 120,834 | Time - Based | 72,500 | | 48,334 | | |||||||||||||||||
December 26, 2012 |
Management | 120,833 | Performance - Based | | | 120,833 | | |||||||||||||||||
June 1, 2013 |
Management | 87,500 | Time - Based | 52,500 | | 35,000 | | |||||||||||||||||
June 1, 2013 |
Management | 87,500 | Performance - Based | | | 87,500 | | |||||||||||||||||
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|
|
|
|
|
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2,080,750 | 2,000,000 | 2,205,084 | 250,000 |
During the quarter ended June 22, 2014, the Company revised its estimated forfeiture rate associated with the unvested time-based RSUs and reversed $1.0 million of stock-based compensation for certain RSUs due to a change in estimated requisite service period of the Chief Executive Officer of the Company. These time-based RSUs were previously expected to vest on December 31, 2014 and June 30, 2015, but the Company estimated as of June 22, 2014 that none of the remaining unvested awards will vest. The Company did not record any expense related to the Chief Executive Officers performance-based RSUs, since the Company did not expect to meet the performance criteria established for 2014.
The grant date fair value of the RSUs granted during 2012 and 2013 was determined using the closing price of the Companys common stock on the grant date. The time-based RSUs will vest solely if the employee remains in continuous employment with the Company. A portion of the performance-based RSUs would have vested on March 31, 2013 and March 31, 2014, however, the Company did not meet the performance goals established for 2012 or 2013. Accordingly, the Company did not record any expense during 2012 or 2013 related to these performance-based RSUs. Per the terms of the agreement, if any of the performance-based RSUs do not vest on their assigned performance date solely because the performance goals are not met, then such RSUs shall remain outstanding and shall be eligible to vest on subsequent performance dates to the extent performance goals are established and met for such subsequent year. The performance-based RSUs will vest on December 31, 2014 and March 31, 2015 if certain performance goals for 2014 are met and the employee remains in continuous employment with the Company.
Each vested RSU shall be settled within 30 days following termination of the employment with the Company or termination of the directors service as a member of the Board of Directors. All of the vested RSUs granted to the Companys Board of Directors shall be settled in shares of the Companys common stock. Fifty percent of the vested RSUs granted to members of the Companys management shall be settled in shares of the Companys common stock and the remaining 50% of such vested RSUs shall be settled, in the discretion of the Compensation Committee of the Board of Directors of the Company (the Compensation Committee), either in shares of the Companys common stock, cash or any combination thereof. The amount of any cash is to be determined based on the value of a share of the Companys common stock on the settlement date.
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A summary of the status of the Companys RSU awards as of June 22, 2014 is presented below:
Weighted- | ||||||||
Average | ||||||||
Fair Value | ||||||||
Number of | at Grant | |||||||
Restricted Stock Units |
Shares | Date | ||||||
Nonvested at December 22, 2013 |
5,883,917 | $ | 1.85 | |||||
Granted |
| |||||||
Vested |
(1,428,833 | ) | 1.83 | |||||
Forfeited |
| |||||||
|
|
|||||||
Nonvested at June 22, 2014 |
4,455,084 | $ | 1.86 | |||||
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|
As of June 22, 2014, there was $5.6 million of unrecognized compensation expense related to the RSUs. A total of $1.2 million is expected to be recognized over a weighted-average period of 0.7 years. As discussed above, subsequent to June 22, 2014, the Companys CEO resigned and forfeited all unvested RSUs. Accordingly, the remaining $4.4 million of unrecognized compensation expense associated with the former CEOs forfeited RSUs will not be recognized.
Restricted Stock
A summary of the status of the Companys restricted stock awards as of June 22, 2014 is presented below:
Weighted- | ||||||||
Average | ||||||||
Fair Value | ||||||||
Number of | at Grant | |||||||
Restricted Shares |
Shares | Date | ||||||
Nonvested at December 22, 2013 |
3,343 | $ | 89.75 | |||||
Granted |
| |||||||
Vested |
(3,343 | ) | $ | 89.75 | ||||
Forfeited |
| |||||||
|
|
|||||||
Nonvested at June 22, 2014 |
| |||||||
|
|
As of June 22, 2014, there was no unrecognized compensation costs related to all restricted stock awards.
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. The Company has not granted any stock options since 2008. As of both June 22, 2014 and December 22, 2013, there were outstanding and exercisable options to purchase 26,829 shares of the Companys common stock at a weighted average exercise price of $402.25 per share. The weighted average remaining contractual term of the outstanding and exercisable options is 2.0 years. As of June 22, 2014, there was no unrecognized compensation costs related to stock options.
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6. Net Loss per Common Share
Basic net loss per share is computed by dividing net loss 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 and warrants to purchase common stock, using the treasury-stock method.
Net loss per share is as follows (in thousands, except per share amounts):
Quarters Ended | Six Months Ended | |||||||||||||||
June 22, | June 23, | June 22, | June 23, | |||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Numerator: |
||||||||||||||||
Net loss from continuing operations |
$ | (1,606 | ) | $ | (853 | ) | $ | (27,879 | ) | $ | (20,927 | ) | ||||
Net (loss) income from discontinued operations |
(6 | ) | (651 | ) | 31 | (929 | ) | |||||||||
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|
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Net loss |
$ | (1,612 | ) | $ | (1,504 | ) | $ | (27,848 | ) | $ | (21,856 | ) | ||||
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Denominator: |
||||||||||||||||
Denominator for basic net loss per common share: |
||||||||||||||||
Weighted average shares outstanding |
40,802 | 35,602 | 40,359 | 35,174 | ||||||||||||
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Effect of dilutive securities: |
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Stock-based compensation |
| | | | ||||||||||||
Warrants to purchase common stock |
| | | | ||||||||||||
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Denominator for diluted net loss per common share |
40,802 | 35,602 | 40,359 | 35,174 | ||||||||||||
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Basic and diluted net loss per common share: |
||||||||||||||||
From continuing operations |
$ | (0.04 | ) | $ | (0.02 | ) | $ | (0.69 | ) | $ | (0.59 | ) | ||||
From discontinued operations |
| (0.02 | ) | | (0.03 | ) | ||||||||||
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|
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Basic and diluted net loss per common share |
$ | (0.04 | ) | $ | (0.04 | ) | $ | (0.69 | ) | $ | (0.62 | ) | ||||
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|
Warrants outstanding to purchase 51.2 million and 56.4 million common shares have been excluded from the denominator for calculating diluted net loss per share during the quarters ended June 22, 2014 and June 23, 2013, respectively, as the impact would be anti-dilutive. In addition, warrants outstanding to purchase 51.3 million and 56.4 million common shares have been excluded from the denominator for calculating diluted net loss per share during the six months ended June 22, 2014 and June 23, 2013, respectively, as the impact would be anti-dilutive.
On August 27, 2012, the Company adopted a rights plan (the Rights Plan) intended to avoid an ownership change within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended, and thereby preserve the current ability of the Company to utilize certain net operating loss carryovers and other tax benefits of the Company. As part of the Rights Plan the Company authorized and declared a dividend distribution of one right (a Right) for each outstanding share of Common Stock to stockholders of record at the close of business on September 7, 2012. Each Right entitles the holder to purchase from the Company a unit consisting of one ten-thousandth of a share (a Unit) of Series A Participating Preferred Stock, par value $0.01 per share, of the Company (the Preferred Stock) at a purchase price of $8.00 per Unit, subject to adjustment (the Purchase Price). Until a Right is exercised, the holder thereof, as such, will have no separate rights as a stockholder of the Company, including the right to vote or to receive dividends in respect of Rights. The issuance of the Rights alone does not cause any change in the number of shares deliverable upon the exercise of the Companys outstanding warrants or convertible notes, or the exercise price or conversion price (as applicable) thereof. At the June 5, 2014 Annual Meeting of Stockholders, the Companys stockholders approved the Rights Plan.
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7. Property and Equipment
Property and equipment consists of the following (in thousands):
June 22, 2014 | December 22, 2013 | |||||||||||||||
Historical | Net Book | Historical | Net Book | |||||||||||||
Cost | Value | Cost | Value | |||||||||||||
Vessels and vessel improvements |
$ | 230,060 | $ | 124,887 | $ | 227,705 | $ | 129,384 | ||||||||
Containers |
39,252 | 23,401 | 39,894 | 24,710 | ||||||||||||
Chassis |
20,979 | 12,221 | 20,435 | 11,847 | ||||||||||||
Cranes |
28,115 | 12,014 | 27,409 | 12,088 | ||||||||||||
Machinery and equipment |
35,614 | 12,593 | 34,367 | 11,784 | ||||||||||||
Facilities and land improvements |
30,802 | 21,132 | 30,065 | 21,171 | ||||||||||||
Software |
24,972 | 1,440 | 24,177 | 1,041 | ||||||||||||
Construction in progress |
13,196 | 13,196 | 14,813 | 14,813 | ||||||||||||
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|
|
|
|
|
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Total |
$ | 422,990 | $ | 220,884 | $ | 418,865 | $ | 226,838 | ||||||||
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|
|
8. Intangible Assets
Intangible assets consist of the following (in thousands):
June 22, | December 22, | |||||||
2014 | 2013 | |||||||
Customer contracts/relationships |
$ | 141,430 | $ | 141,430 | ||||
Trademarks |
63,800 | 63,800 | ||||||
Deferred financing costs |
15,691 | 15,691 | ||||||
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|
|||||
Total intangibles with definite lives |
220,921 | 220,921 | ||||||
Accumulated amortization |
(191,811 | ) | (185,767 | ) | ||||
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|
|
|
|||||
Net intangibles with definite lives |
29,110 | 35,154 | ||||||
Goodwill |
198,793 | 198,793 | ||||||
|
|
|
|
|||||
Intangible assets, net |
$ | 227,903 | $ | 233,947 | ||||
|
|
|
|
9. Accrued Liabilities
Other current accrued liabilities consist of the following (in thousands):
June 22, | December 22, | |||||||
2014 | 2013 | |||||||
Vessel operations |
$ | 16,231 | $ | 12,286 | ||||
Payroll and employee benefits |
17,880 | 16,101 | ||||||
Marine operations |
7,076 | 5,382 | ||||||
Terminal operations |
10,375 | 8,477 | ||||||
Fuel |
7,247 | 5,193 | ||||||
Interest |
6,826 | 6,817 | ||||||
Legal settlements |
5,754 | 4,382 | ||||||
Restructuring |
329 | 587 | ||||||
Other liabilities |
16,967 | 18,181 | ||||||
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|
|
|
|||||
Total other current accrued liabilities |
$ | 88,685 | $ | 77,406 | ||||
|
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|
|
The Company has recorded certain of its legal settlements at their net present value and is recording accretion of the liability balance through interest expense. In addition to the current accrued liabilities related to legal settlements, the Company also has commitments to make payments after June 22, 2015. The Company is required to make payments related to the plea agreement with the Antitrust Division of the Department of Justice of $4.0 million on or before March 21, 2016, which is included in other long-term liabilities.
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10. Commitments and Contingencies
Legal Proceedings
In May 2013, the U.S. Department of Justice declined to intervene in a qui tam complaint filed in the U.S. District Court for the Central District of California by Mario Rizzo under the Federal False Claims Act, entitled United States of America, ex rel. Mario Rizzo v. Horizon Lines, LLC et al. The qui tam complaint alleges, among other things, that the Company and another defendant submitted false claims by claiming fuel surcharges in excess of what was permitted by the Department of Defense. On July 28, 2014, Horizon Lines entered into a settlement agreement which provides that the Company will pay to the United States the total sum of $0.7 million in three different installments over an approximately one year period from the date of the settlement agreement. The Company is also required to pay the relator, Mario Rizzo, $0.3 million for his attorneys fees and costs. Accordingly, during the second quarter of 2014, the Company recorded a charge of $1.0 million related to this legal settlement.
In the ordinary course of business, from time to time, the Company becomes 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 generally maintains insurance, subject to customary deductibles or self-retention amounts, and/or reserves to cover these types of claims. The Company also, from time to time, becomes involved in routine employment-related disputes and disputes with parties with which it has contractual relations. The Companys policy is to disclose contingent liabilities associated with both asserted and unasserted claims after all available facts and circumstances have been reviewed and the Company determines that a loss is reasonably possible. The Companys policy is to record contingent liabilities associated with both asserted and unasserted claims when it is probable that the liability has been incurred and the amount of the loss is reasonably estimable.
Standby Letters of Credit
The Company has standby letters of credit, primarily related to its property and casualty insurance programs, as well as customs bonds. On June 22, 2014 and December 22, 2013, these letters of credit totaled $11.4 million and $12.9 million, respectively.
11. Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, which requires entities to recognize revenue in the way it expects to be entitled for the transfer of promised goods or services to customers. When it becomes effective, the ASU will replace most of the existing revenue recognition requirements in U.S. GAAP, including industry-specific guidance. This pronouncement is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, with early application not permitted. The Company is currently evaluating the effect that this pronouncement will have on its financial statements and related disclosures.
12. Subsequent Events
On June 27, 2014, Samuel A. Woodward resigned as President and Chief Executive Officer of the Company and resigned as a member of the Companys Board of Directors. Mr. Woodwards resignations from the Company were effective June 27, 2014. Pursuant to an agreement with the Company effective June 27, 2014, Mr. Woodward will receive (i) five months of base salary totaling $0.3 million payable in accordance with regular payroll practices and (ii) continued participation for himself and his covered dependents in the Companys medical and dental benefit plans for up to eighteen months. In consideration for the payments and other benefits accruing to Mr. Woodward under the agreement, Mr. Woodward provided the Company with a general release. The Company will record a charge of $0.3 million during the third quarter of 2014 related to the payments it expects to make to its former CEO.
Following the resignation of Mr. Woodward, the Board of Directors appointed Steven L. Rubin as Interim President and Chief Executive Officer of the Company. On June 27, 2014, the Company entered into an Employment Agreement (the Agreement) with Mr. Rubin to serve as the Interim President and Chief Executive Officer. The Agreement provides that Mr. Rubin will receive a monthly base salary of $75,000. Mr. Rubin will continue to be eligible to receive annual equity compensation awards equivalent to those granted to non-employee members of the Board of Directors and will continue to vest in his outstanding equity awards as if he remained a non-employee member of the Board of Directors. Mr. Rubin will also be eligible to participate in the standard employee benefit plans generally available to executive employees of the Company, including health insurance, life and disability insurance, 401(k) plan, and paid time off and paid holidays or equivalent benefits. The Company will reimburse Mr. Rubin for up to $10,000 of his expenses incurred in connection with negotiating the Agreement. The Company may terminate Mr. Rubins employment under the Agreement without cause upon ninety (90) days
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advance notice to Mr. Rubin. If within one year of the effective date of the Agreement, the Company provides Mr. Rubin with notice that it is terminating his employment without cause and Mr. Rubin complies with certain conditions, then the Company will pay Mr. Rubin a lump-sum amount equal to six months of base salary.
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2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our consolidated financial condition and results of operations should be read in conjunction with the financial statements of the Company and notes thereto included elsewhere in this quarterly report. In this quarterly report, unless the context otherwise requires, references to we, us, and our mean the Company, together with its subsidiaries, on a consolidated basis.
Executive Overview
Quarters Ended | Six Months Ended | |||||||||||||||
June 22, 2014 |
June 23, 2013 |
June 22, 2014 |
June 23, 2013 |
|||||||||||||
($ in thousands) | ||||||||||||||||
Operating revenue |
$ | 281,237 | $ | 259,784 | $ | 533,173 | $ | 504,275 | ||||||||
Operating expense |
264,950 | 243,808 | 525,455 | 492,596 | ||||||||||||
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Operating income |
$ | 16,287 | $ | 15,976 | $ | 7,718 | $ | 11,679 | ||||||||
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Operating ratio |
94.2 | % | 93.9 | % | 98.6 | % | 97,7 | % | ||||||||
Revenue containers (units) |
62,216 | 56,159 | 117,439 | 107,480 | ||||||||||||
Average unit revenue |
$ | 4,080 | $ | 4,240 | $ | 4,119 | $ | 4,287 |
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) 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 (iii) the payment of discretionary bonuses to certain members of our management is contingent upon, among other things, the satisfaction by Horizon Lines of certain targets, which contain EBITDA and 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 tax payments and debt service requirements. 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.
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A reconciliation of net loss to EBITDA and Adjusted EBITDA is included below (in thousands):
Quarters Ended | Six Months Ended | |||||||||||||||
June 22, 2014 |
June 23, 2013 |
June 22, 2014 |
June 23, 2013 |
|||||||||||||
Net loss |
$ | (1,612 | ) | $ | (1,504 | ) | $ | (27,848 | ) | $ | (21,856 | ) | ||||
Net (loss) income from discontinued operations |
(6 | ) | (651 | ) | 31 | (929 | ) | |||||||||
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Net loss from continuing operations |
(1,606 | ) | (853 | ) | (27,879 | ) | (20,927 | ) | ||||||||
Interest expense, net |
17,795 | 16,934 | 35,288 | 32,635 | ||||||||||||
Income tax expense |
134 | 7 | 417 | 126 | ||||||||||||
Depreciation and amortization |
13,187 | 12,758 | 26,588 | 25,360 | ||||||||||||
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EBITDA |
29,510 | 28,846 | 34,414 | 37,194 | ||||||||||||
Union/other severance charges |
148 | 17 | 1,252 | 318 | ||||||||||||
Antitrust and false claims legal expenses |
790 | 35 | 1,558 | 247 | ||||||||||||
Legal settlements |
950 | | 995 | | ||||||||||||
Gain on change in value of debt conversion features |
(45 | ) | (114 | ) | (117 | ) | (159 | ) | ||||||||
Impairment charge |
| 18 | | 18 | ||||||||||||
Restructuring charge |
| 409 | 5 | 5,252 | ||||||||||||
Gain on conversion of debt |
| (5 | ) | | (5 | ) | ||||||||||
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Adjusted EBITDA |
$ | 31,353 | $ | 29,206 | $ | 38,107 | $ | 42,865 | ||||||||
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In addition to EBITDA and Adjusted EBITDA, we use various other non-GAAP measures such as adjusted net income (loss), and adjusted net income (loss) 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 income (loss) 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.
The tables below present a reconciliation of net loss to adjusted net income (loss) and net loss per share to adjusted net income (loss) per share (in thousands, except per share amounts):
Quarters Ended | Six Months Ended | |||||||||||||||
June 22, 2014 |
June 23, 2013 |
June 22, 2014 |
June 23, 2013 |
|||||||||||||
Net loss |
$ | (1,612 | ) | $ | (1,504 | ) | $ | (27,848 | ) | $ | (21,856 | ) | ||||
Net (loss) income from discontinued operations |
(6 | ) | (651 | ) | 31 | (929 | ) | |||||||||
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Net loss from continuing operations |
(1,606 | ) | (853 | ) | (27,879 | ) | (20,927 | ) | ||||||||
Adjustments: |
||||||||||||||||
Union/other severance charges |
148 | 17 | 1,252 | 318 | ||||||||||||
Antitrust and false claims legal expenses |
790 | 35 | 1,558 | 247 | ||||||||||||
Accretion of legal settlements |
214 | 240 | 498 | 504 | ||||||||||||
Legal settlements |
950 | | 995 | | ||||||||||||
Impairment charge |
| 18 | | 18 | ||||||||||||
Restructuring charge |
| 409 | 5 | 5,252 | ||||||||||||
Accretion of estimated multi-employer pension plan withdrawal liability |
| 157 | | 157 | ||||||||||||
Gain on change in value of debt conversion features |
(45 | ) | (114 | ) | (117 | ) | (159 | ) | ||||||||
Gain on conversion of debt |
| (5 | ) | | (5 | ) | ||||||||||
Tax impact of adjustments |
(64 | ) | 1 | (64 | ) | 7 | ||||||||||
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Total adjustments |
1,993 | 758 | 4,127 | 6,339 | ||||||||||||
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Adjusted net income (loss) |
$ | 387 | $ | (95 | ) | $ | (23,752 | ) | $ | (14,588 | ) | |||||
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Quarters Ended | Six Months Ended | |||||||||||||||
June 22, 2014 |
June 23, 2013 |
June 22, 2014 |
June 23, 2013 |
|||||||||||||
Net loss per share |
$ | (0.04 | ) | $ | (0.04 | ) | $ | (0.69 | ) | $ | (0.62 | ) | ||||
Net loss per share from discontinued operations |
| (0.02 | ) | | (0.03 | ) | ||||||||||
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Net loss per share from continuing operations |
(0.04 | ) | (0.02 | ) | (0.69 | ) | (0.59 | ) | ||||||||
Adjustments: |
||||||||||||||||
Union/other severance charges |
| | 0.03 | 0.01 | ||||||||||||
Antitrust and false claims legal expenses |
0.02 | | 0.04 | 0.01 | ||||||||||||
Accretion of legal settlements |
0.01 | 0.01 | 0.01 | 0.01 | ||||||||||||
Legal settlements |
0.02 | | 0.02 | | ||||||||||||
Restructuring charge |
| 0.01 | | 0.15 | ||||||||||||
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Total adjustments |
0.05 | 0.02 | 0.10 | 0.18 | ||||||||||||
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Adjusted net income (loss) per share |
$ | 0.01 | $ | | $ | (0.59 | ) | $ | (0.41 | ) | ||||||
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General
We believe that we are one of the nations leading Jones Act container shipping and integrated logistics companies. In addition, we are the only ocean carrier serving all three noncontiguous domestic markets of Alaska, Hawaii, and Puerto Rico from the continental United States. 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.
We own 13 vessels, all of which are fully qualified Jones Act vessels, and own or lease approximately 23,200 cargo containers. We provide comprehensive shipping and integrated logistics services in our markets. We have long-term access to terminal facilities in each of our ports, operating our terminals in Alaska, Hawaii, and Puerto Rico, as well as contracting for terminal services in the six ports in the continental U.S.
History
Our long operating history dates back to 1956, when Sea-Land Service, Inc. 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 an integrated organization serving Alaska, Hawaii, and Puerto Rico, we are uniquely positioned to serve our customers that require shipping and logistics services in more than one of these markets.
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 revenue and expense 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 that 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 our critical accounting policies during the quarter ended June 22, 2014. The critical accounting policies can be found in our Annual Report on Form 10-K for the fiscal year ended December 22, 2013 as filed with the Securities and Exchange Commission (SEC).
Seasonality
Our container volumes are subject to seasonal trends common in the transportation industry. Financial results in the first quarter are normally lower due to reduced loads during the winter months. 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 integrated logistics services to and from the continental U.S. and Alaska, Puerto Rico, and Hawaii. We charge our customers on a per-load basis and price our services based primarily on the length 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.
During 2013, over 90% of our revenue was generated from our shipping and integrated logistics services in markets where the marine trade is subject to the Jones Act. 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 third-party shippers lacking administrative presences in our markets, (iii) warehousing services for third parties, and (iv) other non-transportation services.
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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.
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 and vessel insurance costs. 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 22, 2014 Compared with the Quarter Ended June 23, 2013
Quarters Ended | ||||||||||||||||
June 22, 2014 |
June 23, 2013 |
Change | % Change | |||||||||||||
($ in thousands) | ||||||||||||||||
Operating revenue |
$ | 281,237 | $ | 259,784 | $ | 21,453 | 8.3 | % | ||||||||
Operating expense: |
||||||||||||||||
Vessel |
72,777 | 73,184 | (407 | ) | (0.6 | )% | ||||||||||
Marine |
57,262 | 50,567 | 6,695 | 13.2 | % | |||||||||||
Inland |
49,882 | 45,131 | 4,751 | 10.5 | % | |||||||||||
Land |
40,937 | 36,215 | 4,722 | 13.0 | % | |||||||||||
Rolling stock rent |
9,754 | 9,918 | (164 | ) | (1.7 | )% | ||||||||||
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Cost of services |
230,612 | 215,015 | 15,597 | 7.3 | % | |||||||||||
Depreciation and amortization |
8,589 | 9,580 | (991 | ) | (10.3 | )% | ||||||||||
Amortization of vessel dry-docking |
4,598 | 3,178 | 1,420 | 44.7 | % | |||||||||||
Selling, general and administrative |
20,262 | 18,075 | 2,187 | 12.1 | % | |||||||||||
Legal settlement |
950 | | 950 | 100.0 | % | |||||||||||
Restructuring charge |
| 409 | (409 | ) | (100.0 | )% | ||||||||||
Miscellaneous income, net |
(61 | ) | (2,449 | ) | 2,388 | (97.5 | )% | |||||||||
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Total operating expense |
264,950 | 243,808 | 21,142 | 8.7 | % | |||||||||||
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Operating income |
$ | 16,287 | $ | 15,976 | $ | 311 | 1.9 | % | ||||||||
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Operating ratio |
94.2 | % | 93.9 | % | 0.3 | % | ||||||||||
Revenue containers (units) |
62,216 | 56,159 | 6,057 | 10.8 | % | |||||||||||
Average unit revenue |
$ | 4,080 | $ | 4,240 | $ | (160 | ) | (3.8 | )% |
Operating Revenue. Our operating revenue increased $21.5 million, or 8.3%, during the quarter ended June 22, 2014 compared to the quarter ended June 23, 2013. This revenue increase can be attributed to the following factors (in thousands):
Revenue container volume increase |
$ | 19,779 | ||
Other non-transportation services revenue increase |
5,735 | |||
Bunker and intermodal fuel surcharges increase |
3,236 | |||
Revenue container rate decrease |
(7,297 | ) | ||
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Total operating revenue increase |
$ | 21,453 | ||
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Revenue container volumes increased in each of our markets. The volume increases in our Puerto Rico market were due to the June 2013 addition of a bi-weekly Jacksonville, Florida sailing to our southbound service between Houston, Texas and San Juan, Puerto Rico, as well as volume gains in both our northbound and southbound service between Philadelphia, Pennsylvania and San Juan. These volume increases were partially offset by volume declines resulting from new competition that entered the Houston to San Juan service in May 2013. Volume increases in our Hawaii market were primarily due to modest growth in the Hawaii economy, including construction materials and tourism, as well as an increase in automobile shipments. We also experienced marginal volume improvements in our Alaska market. Non-transportation revenue was higher due to ancillary services related to automobile processing, an increase in terminal services as a result of a delay in the culmination of the seafood season in Alaska that typically concludes during the first quarter, as well as an increase associated with certain transportation services agreements. The increase in bunker and intermodal fuel surcharges during the quarter ended June 22, 2014 was due to an increase in container volumes, partially offset by a decline in fuel surcharge per load. Bunker and intermodal fuel surcharges, which are included in our transportation revenue, accounted for approximately 21.1% of total revenue in the quarter ended June 22, 2014 and approximately 21.6% of total revenue in the quarter ended June 23, 2013. We adjust our bunker and intermodal fuel surcharges as a result of changes 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 decline in our container rates was due to a slight change in cargo mix largely due to an increase in automobile shipments, as well as increased competition in our markets.
Cost of Services. The $15.6 million increase in cost of services is primarily due to higher container volumes, the addition of a bi-weekly Jacksonville sailing to our southbound service between Houston and San Juan, and contractual rate increases.
Vessel expense, which is not primarily driven by revenue container volume, decreased $0.4 million for the quarter ended June 22, 2014 compared to the quarter ended June 23, 2013. This decrease was a result of the following factors (in thousands):
Vessel fuel costs decrease |
$ | (1,298 | ) | |
Vessel space charter expense decrease |
(130 | ) | ||
Labor and other vessel operating expense increase |
1,021 | |||
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Total vessel expense decrease |
$ | (407 | ) | |
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The $1.3 million decline in fuel costs was primarily due to lower fuel prices. The $1.0 million increase in labor and other vessel operating expense was primarily due to contractual labor rate increases and higher duplicate vessel labor costs related to the timing of dry-dockings.
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 $6.7 million increase in marine expense during the quarter ended June 22, 2014 was primarily due to higher container volumes and contractual labor increases.
Inland expense increased to $49.9 million for the quarter ended June 22, 2014 compared to $45.1 million during the quarter ended June 23, 2013. The $4.8 million rise in inland expense was primarily due to higher container volumes, as well as contractual rate increases.
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 22, 2014 |
June 23, 2013 |
% Change | ||||||||||
(in thousands) | ||||||||||||
Land expense: |
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Maintenance |
$ | 14,297 | $ | 13,494 | 5.9 | % | ||||||
Terminal overhead |
14,544 | 13,650 | 6.5 | % | ||||||||
Yard and gate |
8,949 | 7,061 | 26.7 | % | ||||||||
Warehouse |
3,147 | 2,010 | 56.5 | % | ||||||||
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Total land expense |
$ | 40,937 | $ | 36,215 | 13.0 | % | ||||||
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Non-vessel related maintenance expense increased primarily as a result of a higher level of repair activities during the second quarter of 2014. Terminal overhead expenses increased during the second quarter of 2014 primarily due to a reduction in facility rent income, as well as an increase in property taxes and license fees, partially offset by lower utilities expenses. The increase in yard and gate
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expenses was primarily due to higher equipment storage and fees associated with the monitoring of refrigerated containers, both of which were the result of an increase in container volumes, as well as contractual rate increases. The increase in warehouse expenses is primarily associated with the increase in automobile shipments and the services associated with the processing of vehicles.
Depreciation and Amortization. Depreciation and amortization was $8.6 million during the quarter ended June 22, 2014 compared to $9.6 million during the quarter ended June 23, 2013. The decrease in amortization of intangible assets was due to certain customer relationship assets becoming fully amortized.
Quarters Ended | ||||||||||||
June 22, 2014 |
June 23, 2013 |
% Change | ||||||||||
(in thousands) | ||||||||||||
Depreciation and amortization: |
||||||||||||
Depreciationowned vessels |
$ | 3,464 | $ | 3,527 | (1.8 | )% | ||||||
Depreciation and amortizationother |
2,950 | 2,755 | 7.1 | % | ||||||||
Amortization of intangible assets |
2,175 | 3,298 | (34.1 | )% | ||||||||
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Total depreciation and amortization |
$ | 8,589 | $ | 9,580 | (10.3 | )% | ||||||
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Amortization of vessel dry-docking |
$ | 4,598 | $ | 3,178 | 44.7 | % | ||||||
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Amortization of Vessel Dry-docking. Amortization of vessel dry-docking was $4.6 million during the quarter ended June 22, 2014 compared to $3.2 million for the quarter ended June 23, 2013. 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 for each vessel generally occur every two and a half years, and historically we have dry-docked approximately four vessels per year.
Selling, General and Administrative. Selling, general and administrative costs increased to $20.3 million for the quarter ended June 22, 2014 compared to $18.1 million for the quarter ended June 23, 2013, an increase of $2.2 million or 12.1%. This increase is primarily due to a $1.5 million rise in legal fees and $0.7 million related to incentive-based compensation, partially offset by $0.8 million of lower stock-based compensation expense.
Restructuring Charge. During April 2013, we moved our northeast terminal operations to Philadelphia, Pennsylvania from Elizabeth, New Jersey. The $0.4 million restructuring charge during the quarter ended June 23, 2013 was associated with the return of excess equipment and additional severance charges related to the service adjustment in Puerto Rico.
Miscellaneous Income, Net. Miscellaneous income, net decreased $2.4 million during the quarter ended June 22, 2014 compared to the quarter ended June 23, 2013, primarily as a result of lower gains on the sale of assets and higher bad debt expense.
Interest Expense, Net. Interest expense, net increased to $17.8 million for the quarter ended June 22, 2014 compared to $16.9 million for the quarter ended June 23, 2013, an increase of $0.9 million or 5.1%. This increase was primarily due to the additional Second Lien Notes we issued on October 15, 2013 and April 15, 2014 to satisfy the payment-in-kind interest obligation.
Income Tax Expense. The effective tax rate for the quarters ended June 22, 2014 and June 23, 2013 was (9.1)% and (0.8)%, respectively. We continue to believe it is unclear as to the timing of when we will generate sufficient taxable income to realize our deferred tax assets. Accordingly, we maintain a valuation allowance against our deferred tax assets. Although we have recorded a valuation allowance against our deferred tax assets, it does not affect our ability to utilize our deferred tax assets to offset future taxable income. Until such time that we determine it is more likely than not that we will generate sufficient taxable income to realize our deferred tax assets, income tax benefits associated with future-period losses will be fully reserved, except for intraperiod allocations of income tax expense. As a result, we do not expect to record a current or deferred federal tax benefit or expense and only minimal state tax provisions during those periods.
As a result of the loss from continuing operations and income from discontinued operations and other comprehensive income during the second quarter of 2014, we are required to record a tax benefit from continuing operations with an offsetting tax expense from discontinued operations and other comprehensive income.
The income tax expense recorded during the quarter ended June 22, 2014 primarily relates to the Commonwealth of Puerto Rico, partially offset by the tax benefit associated with intraperiod allocations.
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Six Months Ended June 22, 2014 Compared with the Six Months Ended June 23, 2013
Six Months Ended | ||||||||||||||||
June 22, 2014 |
June 23, 2013 |
Change | % Change | |||||||||||||
($ in thousands) | ||||||||||||||||
Operating revenue |
$ | 533,173 | $ | 504,275 | $ | 28,898 | 5.7 | % | ||||||||
Operating expense: |
||||||||||||||||
Vessel |
150,739 | 149,422 | 1,317 | 0.9 | % | |||||||||||
Marine |
111,949 | 99,951 | 11,998 | 12.0 | % | |||||||||||
Inland |
96,721 | 87,022 | 9,699 | 11.1 | % | |||||||||||
Land |
78,299 | 71,633 | 6,666 | 9.3 | % | |||||||||||
Rolling stock rent |
19,457 | 19,571 | (114 | ) | (0.6 | )% | ||||||||||
|
|
|
|
|
|
|||||||||||
Cost of services |
457,165 | 427,599 | 29,566 | 6.9 | % | |||||||||||
Depreciation and amortization |
17,041 | 19,150 | (2,109 | ) | (11.0 | )% | ||||||||||
Amortization of vessel dry-docking |
9,547 | 6,210 | 3,337 | 53.7 | % | |||||||||||
Selling, general and administrative |
40,383 | 37,839 | 2,544 | 6.7 | % | |||||||||||
Legal settlements |
995 | | 995 | 100.0 | % | |||||||||||
Restructuring charge |
5 | 5,252 | (5,247 | ) | (99.9 | )% | ||||||||||
Miscellaneous expense (income), net |
319 | (3,454 | ) | 3,773 | (109.2 | )% | ||||||||||
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|
|
|
|
|
|||||||||||
Total operating expense |
525,455 | 492,596 | 32,859 | 6.7 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Operating income |
$ | 7,718 | $ | 11,679 | $ | (3,961 | ) | (33.9 | )% | |||||||
|
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|
|
|
|
|||||||||||
Operating ratio |
98.6 | % | 97.7 | % | 0.9 | % | ||||||||||
Revenue containers (units) |
117,439 | 107,480 | 9,959 | 9.3 | % | |||||||||||
Average unit revenue |
$ | 4,119 | $ | 4,240 | $ | (121 | ) | (2.9 | )% |
Operating Revenue. Our operating revenue increased $28.9 million, or 5.7%, during the six months ended June 22, 2014 compared to the six months ended June 23, 2013. This revenue increase can be attributed to the following factors (in thousands):
Revenue container volume increase |
$ | 32,692 | ||
Other non-transportation services revenue increase |
5,937 | |||
Bunker and intermodal fuel surcharges increase |
846 | |||
Revenue container rate decrease |
(10,577 | ) | ||
|
|
|||
Total operating revenue increase |
$ | 28,898 | ||
|
|
The increase in revenue container volume was primarily due to improved volumes in each of our Puerto Rico and Hawaii markets. The volume increases in our Puerto Rico market were due to the June 2013 addition of a bi-weekly Jacksonville, Florida sailing to our southbound service between Houston, Texas and San Juan, Puerto Rico, as well as volume gains in both our northbound and southbound service between Philadelphia, Pennsylvania and San Juan. These volume increases were partially offset by volume declines resulting from new competition that entered the Houston to San Juan service in May 2013. Volume increases in our Hawaii market were primarily due to modest growth in the Hawaii economy, including construction materials and tourism, as well as an increase in automobile shipments. Non-transportation revenue was higher due to agency services, vehicles processing services, and other terminal services provided to other vessel operators, as well as an increase associated with certain transportation services agreements. The increase in bunker and intermodal fuel surcharges during the six months ended June 22, 2014 was due to an increase in container volumes, partially offset by a decline in fuel surcharge per load. Bunker and intermodal fuel surcharges, which are included in our transportation revenue, accounted for approximately 20.9% of total revenue in the six months ended June 22, 2014 and approximately 21.9% of total revenue in the six months ended June 23, 2013. We adjust our bunker and intermodal fuel surcharges as a result of changes 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 decline in our container rates was primarily due to increased competition in our markets, as well as a slight change in cargo mix largely due to an increase in automobile shipments.
Cost of Services. The $29.6 million increase in cost of services is primarily due to higher container volumes, the addition of a bi-weekly Jacksonville sailing to our southbound service between Houston and San Juan, and contractual rate increases.
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Vessel expense, which is not primarily driven by revenue container volume, increased $1.3 million for the six months ended June 22, 2014 compared to the six months ended June 23, 2013. This increase was a result of the following factors (in thousands):
Labor and other vessel operating expense increase |
$ | 5,237 | ||
Vessel fuel costs decrease |
(1,779 | ) | ||
Vessel lease expense decrease |
(1,443 | ) | ||
Vessel space charter expense decrease |
(698 | ) | ||
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|
|||
Total vessel expense increase |
$ | 1,317 | ||
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|
The $5.2 million increase in labor and other vessel operating expense was primarily due to contractual rate increases, the addition of a bi-weekly Jacksonville sailing to our southbound service between Houston and San Juan, and higher duplicate fuel and vessel labor costs related to dry-docking transits. The $1.8 million decline in fuel costs was comprised of a $4.8 million reduction as a result of lower fuel prices, partially offset by a $3.0 million increase resulting from higher consumption as a result of more operating days in 2014 due to dry-docking transits and incremental fuel burn associated with the relief 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 $12.0 million increase in marine expense during the six months ended June 22, 2014 was primarily due to higher container volumes and contractual labor increases, as well as an increase in volume associated with our transportation services agreements.
Inland expense increased to $96.7 million for the six months ended June 22, 2014 compared to $87.0 million during the six months ended June 23, 2013. The $9.7 million rise in inland expense was primarily due to higher container volumes, as well as contractual rate increases.
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 22, 2014 |
June 23, 2013 |
% Change | ||||||||||
(in thousands) | ||||||||||||
Land expense: |
||||||||||||
Maintenance |
$ | 27,622 | $ | 26,373 | 4.7 | % | ||||||
Terminal overhead |
28,117 | 26,962 | 4.3 | % | ||||||||
Yard and gate |
17,568 | 14,600 | 20.3 | % | ||||||||
Warehouse |
4,992 | 3,698 | 35.0 | % | ||||||||
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Total land expense |
$ | 78,299 | $ | 71,633 | 9.3 | % | ||||||
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|
|
Non-vessel related maintenance expense increased primarily as a result of a higher level of repair activities during the first six months of 2014. Terminal overhead expenses increased during the first six months of 2014 primarily due to expense related to certain union employees that elected early retirement and lower facility rent sublease income, partially offset by lower utilities expenses. The increase in yard and gate expenses was primarily due to higher equipment storage and fees associated with the monitoring of refrigerated containers, both of which were the result of an increase in container volumes and terminal services activity, as well as contractual rate increases. The increase in warehouse expenses is primarily associated with the increase in automobile shipments and the services associated with the processing of vehicles.
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Depreciation and Amortization. Depreciation and amortization was $17.0 million during the six months ended June 22, 2014 compared to $19.2 million during the six months ended June 23, 2013. The increase in depreciation-owned vessels is due to the acquisition of three vessels that were previously chartered. The decrease in amortization of intangible assets was due to certain customer relationship assets becoming fully amortized.
Six Months Ended | ||||||||||||
June 22, 2014 |
June 23, 2013 |
% Change | ||||||||||
(in thousands) | ||||||||||||
Depreciation and amortization: |
||||||||||||
Depreciationowned vessels |
$ | 6,890 | $ | 6,711 | 2.7 | % | ||||||
Depreciation and amortizationother |
5,801 | 5,683 | 2.1 | % | ||||||||
Amortization of intangible assets |
4,350 | 6,756 | (35.6 | )% | ||||||||
|
|
|
|
|||||||||
Total depreciation and amortization |
$ | 17,041 | $ | 19,150 | (11.0 | )% | ||||||
|
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|
|
|||||||||
Amortization of vessel dry-docking |
$ | 9,547 | $ | 6,210 | 53.7 | % | ||||||
|
|
|
|
Amortization of Vessel Dry-docking. Amortization of vessel dry-docking was $9.5 million during the six months ended June 22, 2014 compared to $6.2 million for the six months ended June 23, 2013. 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 for each vessel generally occur every two and a half years, and historically we have dry-docked approximately four vessels per year.
Selling, General and Administrative. Selling, general and administrative costs increased to $40.4 million for the six months ended June 22, 2014 compared to $37.8 million for the six months ended June 23, 2013, an increase of $2.6 million or 6.7%. This increase is primarily due to a $2.4 million rise in legal fees and $1.1 million related to incentive-based compensation, partially offset by $1.7 million of lower stock-based compensation expense.
Restructuring Charge. During April 2013, we moved our northeast terminal operations to Philadelphia, Pennsylvania from Elizabeth, New Jersey. In association with the relocation of the terminal operations, we recorded a restructuring charge of $4.1 million during the first six months of 2013 resulting from the estimated liability for withdrawal from the Port of Elizabeths multiemployer pension plan. The remaining $1.2 million restructuring charge was associated with the return of excess equipment and additional severance charges related to the service adjustment in Puerto Rico.
Miscellaneous Expense (Income), Net. Miscellaneous expense (income), net increased $3.8 million during the six months ended June 22, 2014 compared to the six months ended June 23, 2013, primarily as a result of lower gains on the sale of assets and higher bad debt expense.
Interest Expense, Net. Interest expense, net increased to $35.3 million for the six months ended June 22, 2014 compared to $32.6 million for the six months ended June 23, 2013, an increase of $2.7 million or 8.3%. This increase was primarily due to interest expense related to the additional Second Lien Notes issued on April 15, 2013, October 15, 2013, and April 15, 2014 to satisfy the payment-in-kind interest obligation and the debt issued during the first six months of 2013 to acquire our three Alaska vessels that were previously chartered.
Income Tax Expense. The effective tax rate for the six months ended June 22, 2014 and June 23, 2013 was (1.5)% and (0.6)%, respectively. We continue to believe it is unclear as to the timing of when we will generate sufficient taxable income to realize our deferred tax assets. Accordingly, we maintain 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, except for intraperiod allocations of income tax expense. As a result, we do not expect to record a current or deferred federal tax benefit or expense and only minimal state tax provisions during those periods.
As a result of the loss from continuing operations and income from discontinued operations and other comprehensive income during the first six months of 2014, 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 22, 2014, 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.
The income tax expense recorded during the six months ended June 22, 2014 primarily relates to the Commonwealth of Puerto Rico, partially offset by the tax benefit associated with intraperiod allocations.
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Table of Contents
Liquidity and Capital Resources
Our principal sources of funds have 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, terminal operating equipment, purchase of vessels and improvements to our vessel fleet, and our information technology systems, (ii) vessel dry-docking expenditures, (iii) working capital consumption, and (iv) principal and interest payments on our existing indebtedness. Cash totaled $5.2 million at June 22, 2014. Borrowing outstanding under the ABL facility totaled $28.0 million and total borrowing availability was $49.0 million as of June 22, 2014, resulting in total liquidity of $54.2 million.
Operating Activities
Net cash used in operating activities was $18.3 million for the six months ended June 22, 2014 compared to $1.1 million of net cash provided by operating activities for the six months ended June 22, 2013. The increase in cash used in operating activities is primarily due to the following (in thousands):
Decrease in earnings adjusted for non-cash charges |
$ | (10,828 | ) | |
Increase in accounts receivable |
(16,721 | ) | ||
Decrease in accounts payable |
(3,947 | ) | ||
Increase in materials and supplies |
(3,479 | ) | ||
Increase in dry-docking payments |
(966 | ) | ||
Increase in other accrued liabilities |
12,708 | |||
Decrease in legal settlement payments |
2,372 | |||
Other changes in working capital, net |
1,405 | |||
|
|
|||
Total increase in cash used in operating activities |
$ | (19,456 | ) | |
|
|
Investing Activities
Net cash used in investing activities was $4.7 million for the six months ended June 22, 2014 compared to $91.1 million for the six months ended June 23, 2013. The $86.4 million decrease in net cash consumed is primarily due to the 2013 acquisition of three Alaska vessels that were previously chartered, partially offset by a reduction in proceeds received from the sale of assets.
Financing Activities
Net cash provided by financing activities during the six months ended June 22, 2014 was $23.1 million compared to $77.3 million for the six months ended June 23, 2013. The net cash provided by financing activities during the six months ended June 22, 2014 included a net $28.0 million borrowed under the ABL Facility. The net cash provided by financing activities during the six months ended June 23, 2013 included the issuance of $95.0 million of new debt in connection with the purchase of three Alaska vessels that were previously chartered, as well as a net $10.0 million repayment under the ABL Facility. In addition, during the six months ended June 23, 2013, we paid $5.6 million in financing costs related to fees associated with the new debt issued.
Outlook
We expect 2014 revenue container loads to be above 2013 levels. This projected volume growth takes into consideration the estimated impacts of new competition that entered the Puerto Rico Gulf service in May 2013, as well as a second vessel being added by a competitor in the Hawaii service during the fourth quarter of 2014, partially offset by the full-year impact of adding a bi-weekly Jacksonville sailing to our southbound service between Houston, Texas and San Juan, Puerto Rico.
Overall, container rates are expected to be below 2013 levels due to competitive market conditions and a slight shift in cargo mix, particularly an increase in automobile volume. The vessel capacity added in Puerto Rico in 2013 will continue to impact rates, and the new vessel capacity expected to be added in Hawaii in 2014 could also impact rates as well.
We will experience increases in expenses associated with our revenue container volumes, including our vessel payroll costs and benefits, stevedoring, port charges, wharfage, inland transportation costs, and rolling stock costs, among others. Although the number of vessels being dry-docked in 2014 is less than 2013, the costs associated with repositioning vessels and expenses related to spare vessels will slightly exceed 2013 levels. However, the majority of costs associated with repositioning vessels was incurred in the first half of 2014 whereas the costs were more evenly distributed throughout 2013.
We expect 2014 financial results to approximate 2013 results, with 2014 adjusted EBITDA projected between $90.0 million and $95.0 million, compared with $95.2 million in fiscal 2013.
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Table of Contents
Based on our current level of operations, we believe cash flow from operations and borrowings available under the ABL Facility will be adequate to support our business plans. We expect total liquidity during the remainder of 2014 to range from a low of approximately $58.0 million during the third quarter, then build over the balance of the year and end 2014 at approximately $78.0 million.
Capital Requirements and Commitments
Based upon our current level of operations, we believe cash flow from operations and available cash, together with borrowings available under the ABL Facility, will be adequate to meet our liquidity needs for the next twelve months.
During the next twelve months, we expect to spend approximately $23.0 million and $20.0 million on capital expenditures and dry-docking expenditures, respectively. Such capital expenditures will include vessel modifications, rolling stock, and terminal infrastructure and equipment.
We also expect to spend approximately $6.3 million during the next twelve months for legal settlements and legal expenses associated with the antitrust investigation and the qui tam actions.
In addition to the dry-docking and capital expenditures, antitrust and other legal settlements and qui tam-related legal fees, we expect to utilize cash flows to make principal and interest payments. Due to the seasonality within our business and the above mentioned payments and expenses, we will utilize borrowings under the ABL Facility during the next twelve months.
Long-Term Debt
On October 5, 2011, we issued the 6.00% Convertible Notes. On October 5, 2011, Horizon Lines issued the First Lien Notes, the Second Lien Notes, and entered into the ABL Facility. On January 31, 2013, Horizon Lines entered into the $20.0 Million Agreement and Horizon Lines Alaska Vessels, LLC (Horizon Alaska), our newly formed special purpose subsidiary, entered into the $75.0 Million Agreement. The 6.00% Convertible Notes, the First Lien Notes, the Second Lien Notes, the ABL Facility, the $20.0 Million Agreement (collectively, the Horizon Lines Debt Agreements), and the $75.0 Million Agreement are defined and described below.
Per the terms of the Horizon Lines Debt Agreements, the Alaska SPEs (as defined below) are not required to be a party thereto and are considered Unrestricted Subsidiaries under the 6.00% Convertible Notes, the First Lien Notes, the Second Lien Notes, and the $20.0 Million Agreement. The Alaska SPEs do not guarantee any of the Horizon Lines Debt Agreements.
The 6.00% Convertible Notes are fully and unconditionally guaranteed by the Companys subsidiaries other than the Unrestricted Subsidiaries identified above. The ABL Facility, the First Lien Notes, the Second Lien Notes, and the $20.0 Million Agreement are fully and unconditionally guaranteed by the Company and each of its subsidiaries other than Horizon Lines and the Unrestricted Subsidiaries.
The ABL Facility is secured on a first-priority basis by liens on the accounts receivable, deposit accounts, securities accounts, investment property (other than equity interests of the subsidiaries and joint ventures of the Company) and cash, in each case with certain exceptions, of the Company and the Companys subsidiaries other than the Unrestricted Subsidiaries identified above (collectively, the ABL Priority Collateral). Substantially all other assets of the Company and the Companys subsidiaries, other than the assets of the Unrestricted Subsidiaries identified above, also serve as collateral for the Horizon Lines Debt Agreements (collectively, such other assets are the Secured Notes Priority Collateral).
The following table summarizes the issuers, guarantors and non-guarantors of each of the Horizon Lines Debt Agreements:
ABL Facility |
$20 Million Agreement |
First Lien Notes |
Second Lien Notes |
6% Convertible Notes |
$75 Million Agreement | |||||||
Horizon Lines, Inc. |
Guarantor | Guarantor | Guarantor | Guarantor | Issuer | Non-Guarantor | ||||||
Horizon Lines, LLC |
Issuer | Issuer | Issuer | Issuer | Guarantor | Non-Guarantor | ||||||
Horizon Alaska |
Non-Guarantor | Unrestricted | Unrestricted | Unrestricted | Unrestricted | Issuer | ||||||
Horizon Vessels |
Non-Guarantor | Unrestricted | Unrestricted | Unrestricted | Unrestricted | Guarantor | ||||||
Alaska Terminals |
Non-Guarantor | Unrestricted | Unrestricted | Unrestricted | Unrestricted | Guarantor | ||||||
Other subsidiaries of the Company not specifically listed above |
Guarantor | Guarantor | Guarantor | Guarantor | Guarantor | Non-Guarantor |
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Table of Contents
The following table lists the order of lien priority for each of the Horizon Lines Debt Agreements on the Secured Notes Priority Collateral and the ABL Priority Collateral, as applicable:
Secured Notes Priority Collateral |
ABL Priority Collateral | |||
$20 Million Agreement |
First | Second | ||
First Lien Notes |
Second | Third | ||
Second Lien Notes |
Third | Fourth | ||
6.0% Convertible Notes |
Fourth | Fifth | ||
ABL Facility |
Fifth | First |
First Lien Notes
The 11.00% First Lien Senior Secured Notes (the First Lien Notes) were issued pursuant to an indenture on October 5, 2011. The First Lien Notes bear interest at a rate of 11.0% per annum, payable semiannually, and mature on October 15, 2016. The First Lien Notes are callable at par plus accrued and unpaid interest. Horizon Lines is obligated to make mandatory prepayments of 1%, on an annual basis, of the original principal amount. These prepayments are payable on a semiannual basis and commenced on April 15, 2012.
The First Lien Notes contain affirmative and negative covenants which are typical for senior secured high-yield notes with no financial maintenance covenants. The First Lien Notes contain other covenants, including: change of control put at 101% (subject to a permitted holder exception); limitation on asset sales; limitation on incurrence of indebtedness and preferred stock; limitation on restricted payments; limitation on restricted investments; limitation on liens; limitation on dividends; limitation on affiliate transactions; limitation on sale/leaseback transactions; limitation on guarantees by restricted subsidiaries; and limitation on mergers, consolidations and sales of all/substantially all of the assets of Horizon Lines. These covenants are subject to certain exceptions and qualifications. Horizon Lines was in compliance with all such applicable covenants as of June 22, 2014.
On October 5, 2011, the fair value of the First Lien Notes was $228.4 million, which reflected Horizon Lines ability to call the First Lien Notes at 101.5% during the first year and at par thereafter. The original issue premium of $3.4 million is being amortized through interest expense through the maturity of the First Lien Notes.
Second Lien Notes
The 13.00%-15.00% Second Lien Senior Secured Notes (the Second Lien Notes) were issued pursuant to an indenture on October 5, 2011.
The Second Lien Notes bear interest at a rate of either: (i) 13% per annum, payable semiannually in cash in arrears; (ii) 14% per annum, 50% of which is payable semiannually in cash in arrears and 50% is payable in kind; or (iii) 15% per annum payable in kind, payable semiannually beginning on April 15, 2012, and maturing on October 15, 2016. The Second Lien Notes were non-callable for two years from the date of their issuance, and thereafter the Second Lien Notes are callable by Horizon Lines at (i) 106% of their aggregate principal amount, plus accrued and unpaid interest thereon in the third year, (ii) 103% of their aggregate principal amount, plus accrued and unpaid interest thereon in the fourth year, and (iii) at par plus accrued and unpaid interest thereafter.
On April 15, 2012, October 15, 2012, April 15, 2013, October 15, 2013 and April 15, 2014, Horizon Lines issued an additional $7.9 million, $8.1 million, $8.7 million, $9.4 million and $10.1 million, respectively, of Second Lien Notes to satisfy the payment-in-kind interest obligation under the Second Lien Notes. In addition, Horizon Lines elected to satisfy its interest obligation under the Second Lien Notes due October 15, 2014 by issuing additional Second Lien Notes. As such, as of June 22, 2014, Horizon Lines has recorded $4.0 million of accrued interest as an increase to long-term debt.
The Second Lien Notes contain affirmative and negative covenants that are typical for senior secured high-yield notes with no financial maintenance covenants. The Second Lien Notes contain other covenants, including: change of control put at 101% (subject to a permitted holder exception); limitation on asset sales; limitation on incurrence of indebtedness and preferred stock; limitation on restricted payments; limitation on restricted investments; limitation on liens; limitation on dividends; limitation on affiliate transactions; limitation on sale/leaseback transactions; limitation on guarantees by restricted subsidiaries; and limitation on mergers, consolidations and sales of all/substantially all of the assets of Horizon Lines. These covenants are subject to certain exceptions and qualifications. Horizon Lines was in compliance with all such applicable covenants as of June 22, 2014.
On October 5, 2011, the fair value of the Second Lien Notes was $96.6 million. The original issue discount of $3.4 million is being amortized through interest expense through the maturity of the Second Lien Notes.
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Table of Contents
During 2012, we entered into a Global Termination Agreement with Ship Finance International Limited (SFL) whereby Horizon Lines issued $40.0 million aggregate principal amount of its Second Lien Notes and warrants to purchase 9,250,000 shares of our common stock at a price of $0.01 per share to satisfy its obligations for certain vessel leases. The Second Lien Notes issued to SFL (the SFL Notes) have the same terms as the Second Lien Notes issued on October 5, 2011 (the Initial Notes), except that they are subordinated to the Initial Notes in the case of a bankruptcy, and holders of the SFL Notes, so long as then held by SFL, have the option to purchase the Initial Notes in the event of a bankruptcy. On April 9, 2012, the fair value of the SFL Notes outstanding on such date approximated face value. On October 15, 2012, April 15, 201,3October 15, 2013 and April 15, 2014, Horizon Lines issued an additional $3.1 million, $3.2 million, $3.5 million and $3.7 million, respectively, of SFL Notes to satisfy the payment-in-kind interest obligation under the SFL Notes. In addition, Horizon Lines elected to satisfy its interest obligation under the SFL Notes due October 15, 2014 by issuing additional SFL Notes. As such, as of June 22, 2014, Horizon Lines has recorded $1.5 million of accrued interest as an increase to long-term debt.
ABL Facility
On October 5, 2011, Horizon Lines entered into a $100.0 million asset-based revolving credit facility (the ABL Facility) with Wells Fargo Capital Finance, LLC (Wells Fargo). Use of the ABL Facility is subject to compliance with a customary borrowing base limitation. The ABL Facility includes an up to $30.0 million letter of credit sub-facility and a swingline sub-facility up to $15.0 million, with Wells Fargo serving as administrative agent and collateral agent. Horizon Lines has the option to request increases in the maximum commitment under the ABL Facility by up to $25.0 million in the aggregate; however, such incremental facility increases have not been committed to in advance. The ABL Facility is available to be used by Horizon Lines for working capital and other general corporate purposes.
The ABL Facility was amended on January 31, 2013 in conjunction with the $75.0 Million Agreement and the $20.0 Million Agreement. In addition to allowing for the incurrence of the additional long-term debt under those agreements, amendments to the ABL Facility included, among other changes, (i) permission to make certain investments in the Alaska SPEs, including the proceeds of the $20.0 Million Agreement and the arrangements related to the charters and the sublease of the terminal facility licenses for the Vessels (as defined below), (ii) excluding the Alaska SPEs from the guarantee and collateral requirements of the ABL Facility and from the restrictions of the negative covenants and certain other provisions, (iii) weekly borrowing base reporting in the event availability under the facility falls below a threshold of (a) $14.0 million or (b) 14.0% of the maximum commitment under the ABL Facility, (iv) the exclusion of certain historical charges and expenses relating to discontinued operations and severance from the calculation of bank-defined Adjusted EBITDA, (v) the exclusion of the historical charter hire expense deriving from the Vessels from the calculation of bank-defined Adjusted EBITDA, and (vi) the inclusion of pro forma interest expense on the $75.0 Million Agreement and the $20.0 Million Agreement in the calculation of fixed charges.
The ABL Facility matures October 5, 2016 (but 90 days earlier if the First Lien Notes and the Second Lien Notes are not repaid or refinanced as of such date). The interest rate on the ABL Facility is LIBOR or a base rate plus an applicable margin based on leverage and excess availability, as defined in the agreement, ranging from (i) 1.25% to 2.75%, in the case of base rate loans and (ii) 2.25% to 3.75%, in the case of LIBOR loans. A fee ranging from 0.375% to 0.50% per annum will accrue on unutilized commitments under the ABL Facility. As of June 22, 2014, borrowings outstanding under the ABL facility totaled $28.0 million and total borrowing availability was $49.0 million. Horizon Lines had $11.4 million of letters of credit outstanding as of June 22, 2014.
The ABL Facility requires compliance with a minimum fixed charge coverage ratio test if excess availability is less than the greater of (i) $12.5 million or (ii) 12.5% of the maximum commitment under the ABL Facility. In addition, the ABL Facility includes certain customary negative covenants that, subject to certain materiality thresholds, baskets and other agreed upon exceptions and qualifications, will limit, among other things, indebtedness, liens, asset sales and other dispositions, mergers, liquidations, dissolutions and other fundamental changes, investments and acquisitions, dividends, distributions on equity or redemptions and repurchases of capital stock, transactions with affiliates, repayments of certain debt, conduct of business and change of control. The ABL Facility also contains certain customary representations and warranties, affirmative covenants and events of default, as well as provisions requiring compliance with applicable citizenship requirements of the Jones Act. Horizon Lines was in compliance with all such applicable covenants as of June 22, 2014.
$75.0 Million Term Loan Agreement
Three of Horizon Lines Jones Act-qualified vessels: the Horizon Anchorage, Horizon Tacoma, and Horizon Kodiak (collectively, the Vessels) were previously chartered. The charter for the Vessels was due to expire in January 2015. On January 31, 2013, we, through our newly formed subsidiary Horizon Alaska, acquired off of charter the Vessels for a purchase price of approximately $91.8 million.
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On January 31, 2013, Horizon Alaska, together with two newly formed subsidiaries of Horizon Lines, Horizon Lines Alaska Terminals, LLC (Alaska Terminals) and Horizon Lines Merchant Vessels, LLC (Horizon Vessels), entered into an approximately $75.8 million term loan agreement with certain lenders and U.S. Bank National Association (U.S. Bank), as the administrative agent, collateral agent and ship mortgage trustee (the $75.0 Million Agreement). The obligations under the $75.0 Million Agreement are secured by a first priority lien on substantially all of the assets of Horizon Alaska, Horizon Vessels and Alaska Terminals (collectively, the Alaska SPEs), which primarily includes the Vessels. The operations of the Alaska SPEs are limited to a bareboat charter of the Vessels between Horizon Alaska and Horizon Lines and a sublease of a terminal facility in Anchorage, Alaska between Alaska Terminals and Horizon Lines of Alaska, LLC.
The loan under the $75.0 Million Agreement accrues interest at 10.25% per annum, payable quarterly commencing March 31, 2013. Amortization of loan principal is payable in equal quarterly installments, which commenced on March 31, 2014, and each amortization installment will equal 2.5% of the total initial loan amount (which may increase to 3.75% upon specified events). The full remaining outstanding amount of the loan under the $75.0 Million Agreement is payable on September 30, 2016. The proceeds of the loan under the $75.0 Million Agreement were utilized by Horizon Alaska to acquire the Vessels. In connection with the borrowing under the $75.0 Million Agreement, the Alaska SPEs paid financing costs of $2.5 million during 2013, which included loan commitment fees of $1.5 million. The financing costs have been recorded as a reduction to the carrying amount of the $75.0 Million Agreement and will be amortized through non-cash interest expense through maturity of the $75.0 Million Agreement. In addition to the commitment fees of $1.5 million paid in cash at closing, the Alaska SPEs will also pay, at maturity of the $75.0 Million Agreement, an additional $0.8 million of closing fees by increasing the original $75.0 million principal amount. We are recording non-cash interest accretion through maturity of the $75.0 Million Agreement related to the additional closing fees.
The $75.0 Million Agreement contains certain covenants, including a minimum EBITDA threshold and limitations on the incurrence of indebtedness, liens, asset sales, investments and dividends (all as defined in the agreement). The Alaska SPEs were in compliance with all such covenants as of June 22, 2014. The agent and the lenders under the $75.0 Million Agreement do not have any recourse to our stock or assets (other than the Alaska SPEs or equity interests therein). Defaults under the $75.0 Million Agreement do not give rise to any remedies under the Horizon Lines Debt Agreements.
$20.0 Million Term Loan Agreement
On January 31, 2013, we and those of our subsidiaries that are parties (collectively, the Loan Parties) to the existing First Lien Notes, the Second Lien Notes, and the 6.00% Convertible Notes (collectively, the Notes) entered into a $20.0 million term loan agreement with certain lenders and U.S. Bank, as administrative agent, collateral agent, and ship mortgage trustee (the $20.0 Million Agreement). The loan under the $20.0 Million Agreement matures on September 30, 2016 and accrues interest at 8.00% per annum, payable quarterly commencing March 31, 2013 with interest calculated assuming accrual beginning January 8, 2013. The $20.0 Million Agreement does not provide for any amortization of principal, and the full outstanding amount of the loan is payable on September 30, 2016. We are not permitted to optionally prepay the $20.0 Million Agreement except for prepayment in full (together with a prepayment premium equal to 5.0% of the principal amount prepaid) following repayment in full of the First Lien Notes and the $75.0 Million Agreement.
In connection with the issuance of the $20.0 Million Agreement, Horizon Lines paid financing costs of $0.6 million during 2013. The financing costs have been recorded as a reduction to the carrying amount of the $20.0 Million Agreement and will be amortized through non-cash interest expense through maturity of the $20.0 Million Agreement.
The covenants in the $20.0 Million Agreement are substantially similar to the negative covenants contained in the indentures governing the Notes, which indentures permit the incurrence of the term loan borrowed under the $20.0 Million Agreement and the contribution of such amounts to Horizon Alaska. The proceeds of the loan borrowed under the $20.0 Million Agreement were contributed to Horizon Alaska to enable it to acquire the Vessels.
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6.00% Convertible Notes
On October 5, 2011, we issued $178.8 million in aggregate principal amount of new 6.00% Series A Convertible Senior Secured Notes due 2017 (the Series A Notes) and $99.3 million in aggregate principal amount of new 6.00% Series B Mandatorily Convertible Senior Secured Notes (the Series B Notes and, together with the Series A Notes, collectively the 6.00% Convertible Notes). The 6.00% Convertible Notes were issued pursuant to an indenture, which we and the Loan Parties entered into with U.S. Bank, as trustee and collateral agent, on October 5, 2011 (the 6.00% Convertible Notes Indenture).
During 2012, we completed various debt-to-equity conversions of the 6.00% Convertible Notes. On October 5, 2012, all outstanding Series B Notes not previously converted into shares of our common stock were mandatorily converted into Series A Notes as required by the terms of the 6.00% Convertible Notes Indenture. As of June 22, 2014, $2.0 million face value of the Series A Notes remains outstanding.
Warrants
Certain warrants, not including the warrants issued to SFL, were issued pursuant to a warrant agreement, which we entered into with The Bank of New York Mellon Trust Company, N.A, as warrant agent, on October 5, 2011, as amended by Amendment No. 1, dated December 7, 2011 (the Warrant Agreement). Pursuant to the Warrant Agreement, each warrant entitles the holder to purchase common stock at a price of $0.01 per share, subject to adjustment in certain circumstances. In connection with a reverse stock split in December 2011, warrant holders will receive 1/25th of a share of our common stock upon conversion. As of June 22, 2014, there were 1.1 billion warrants outstanding for the purchase of up to 52.1 million shares of our common stock. Upon issuance, in lieu of payment of the exercise price, a warrant holder will have the right (but not the obligation) to require us to convert our warrants, in whole or in part, into shares of our common stock without any required payment or request that we withhold, from the shares of common stock that would otherwise be delivered to such warrant holder, shares issuable upon exercise of the Warrants equal in value to the aggregate exercise price.
Warrant holders will not be permitted to exercise or convert their warrants if and to the extent the shares of common stock issuable upon exercise or conversion would constitute excess shares (as defined in our certificate of incorporation) if they were issued in order to abide by the foreign ownership limitations imposed by our certificate of incorporation. In addition, a warrant holder who cannot establish to our reasonable satisfaction that it (or, if not the holder, the person that the holder has designated to receive the common stock upon exercise or conversion) is a United States citizen will not be permitted to exercise or convert its warrants to the extent the receipt of the common stock upon exercise or conversion would cause such person or any person whose ownership position would be aggregated with that of such person to exceed 4.9% of our outstanding common stock.
The warrants contain no provisions allowing us to force redemption, and we have no conditional obligation to redeem or convert the warrants. Each warrant is convertible into shares of our common stock at an exercise price of $0.01 per share, which we have the option to waive. In addition, we have sufficient authorized and unissued shares available to settle the warrants during the maximum period the warrants could remain outstanding. As a result, the warrants do not meet the definition of an asset or liability and were classified as equity on the date of issuance, on December 22, 2013, and on June 22, 2014. The warrants will be evaluated on a continuous basis to determine if equity classification continues to be appropriate.
Goodwill
We review our goodwill, intangible assets and long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be recoverable, and also review goodwill annually. As of June 22, 2014, the carrying value of goodwill was $198.8 million. Earnings estimated to be generated are expected to support the carrying value of goodwill. However, should our operating results be lower 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.
Interest Rate Risk
Our primary interest rate exposure relates to the ABL Facility. As of June 22, 2014, we had $28.0 million outstanding under the ABL Facility. The interest rate on the ABL Facility is based on LIBOR or a base rate plus an applicable margin based on leverage and excess availability, as defined in the agreement, ranging from (i) 1.25% to 2.75%, in the case of base rate loans and (ii) 2.25% to 3.75%, in the case of LIBOR loans. Each quarter point change in interest rates would result in a $0.1 million change in annual interest expense on the ABL facility.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, which requires entities to recognize revenue in the way it expects to be entitled for the transfer of promised goods or services to customers. When it becomes effective, the ASU will replace most of the
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existing revenue recognition requirements in U.S. GAAP, including industry-specific guidance. This pronouncement is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, with early application not permitted. We are currently evaluating the effect that this pronouncement will have on our financial statements and related disclosures.
Forward Looking Statements
This Form 10-Q (including the exhibits hereto) 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:
| unfavorable economic conditions in the markets we serve, despite general economic improvement elsewhere, |
| our substantial leverage may restrict cash flow and thereby limit our ability to invest in our business, |
| the vessels in our fleet continue to age, and we may not have the resources to replace our vessels, |
| our ability to obtain financing on acceptable terms to pay for the potential vessel repowering project, |
| our ability to manage the potential vessel repowering project effectively to deliver the results we hope to achieve, |
| volatility in fuel prices, |
| decreases in shipping volumes, |
| our ability to maintain adequate liquidity to operate our business, |
| our ability to refinance our existing indebtedness, |
| our ability to make interest payments on our outstanding indebtedness, |
| work stoppages, strikes, and other adverse union actions, including those by workers who perform services for us but are not our employees, |
| government investigations and legal proceedings, |
| suspension or debarment by the federal government, |
| failure to comply with safety and environmental protection and other governmental requirements, |
| failure to comply with the terms of our probation, |
| increased inspection procedures and tighter import and export controls, |
| the start-up of any additional Jones-Act competitors, |
| repeal or substantial amendment of the coastwise laws of the United States, also known as the Jones Act, |
| catastrophic losses and other liabilities, |
| failure to comply with the various ownership, citizenship, crewing, and build requirements dictated by the Jones Act, |
| the arrest of our vessels by maritime claimants, |
| severe weather and natural disasters, or |
| 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 22, 2013, 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.
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3. Quantitative and Qualitative Disclosures About Market Risk
We maintain policies for managing risk related to exposure to variability in interest rates, fuel prices and other relevant market rates and prices, which includes entering into derivative instruments in order to mitigate our risks. We do not currently have any derivative instruments outstanding.
Our exposure to market risk for changes in interest rates is limited to our ABL Facility and one of our operating leases. The interest rate for our ABL Facility is currently indexed to LIBOR of one, two, three, or six months as selected by us (or nine or twelve months, if available, and consented to by the Lenders), or the Alternate Base Rate as defined in the ABL Facility. One of our operating leases is currently indexed to LIBOR of one month.
In addition, at times we utilize derivative instruments tied to various indexes to hedge a portion of our quarterly exposure to bunker fuel price increases. These instruments consist of fixed price swap agreements. We do not use derivative instruments for trading purposes. Credit risk related to the derivative financial instruments is considered minimal and is managed by requiring high credit standards for counterparties. We currently do not have any bunker fuel price hedges in place.
Changes in fair value of derivative financial instruments are recorded as adjustments to the assets or liabilities being hedged in the statement of operations or in accumulated other comprehensive income (loss), depending on whether the derivative is designated and qualifies for hedge accounting, the type of hedge transaction represented, and the effectiveness of the hedge.
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 22, 2014, that have materially affected or are reasonably likely to materially affect, the Companys internal control over financial reporting.
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In May 2013, the U.S. Department of Justice declined to intervene in a qui tam complaint filed in the U.S. District Court for the Central District of California by Mario Rizzo under the Federal False Claims Act, entitled United States of America, ex rel. Mario Rizzo v. Horizon Lines, LLC et al. The qui tam complaint alleges, among other things, that we and another defendant submitted false claims by claiming fuel surcharges in excess of what was permitted by the Department of Defense. On July 28, 2014, Horizon Lines entered into a settlement agreement which provides that we will pay to the United States the total sum of $0.7 million in three different installments over an approximately one year period from the date of the settlement agreement. We are also required to pay the relator, Mario Rizzo, $0.3 million for his attorneys fees and costs. Accordingly, during the second quarter of 2014, we recorded a charge of $1.0 million related to this legal settlement.
In the ordinary course of business, from time to time, we 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 generally maintain insurance, subject to customary deductibles or self-retention amounts, and/or reserves to cover these types of claims. We also, from time to time, become involved in routine employment-related disputes and disputes with parties with which it has contractual relations. Our policy is to disclose contingent liabilities associated with both asserted and unasserted claims after all available facts and circumstances have been reviewed and we determines that a loss is reasonably possible. Our policy is to record contingent liabilities associated with both asserted and unasserted claims when it is probable that the liability has been incurred and the amount of the loss is reasonably estimable.
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 22, 2013, as filed with the SEC.
2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
3. Defaults Upon Senior Securities
None.
None.
None.
3.1 | Second Amended and Restated Bylaws of Horizon Lines, Inc., as amended through May 1, 2014 (filed as Exhibit 3.1 to the Companys report on Form 8-K filed May 5, 2014). | |
10.1 | Employment Agreement, between Horizon Lines, Inc. and Steven L. Rubin (filed as Exhibit 10.1 to the Companys report on Form 8-K filed July 1, 2014) | |
10.2* | Settlement Agreement, dated July 28, 2014 | |
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.
|
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101.INS** | XBRL Instance Document | |
101.SCH** | XBRL Taxonomy Extension Schema Document | |
101.CAL** | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF** | XBRL Taxonomy Extension Definition 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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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 30, 2014
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 |
Description | |
3.1 | Second Amended and Restated Bylaws of Horizon Lines, Inc., as amended through May 1, 2014 (filed as Exhibit 3.1 to the Companys report on Form 8-K filed May 5, 2014). | |
10.1 | Employment Agreement, between Horizon Lines, Inc. and Steven L. Rubin (filed as Exhibit 10.1 to the Companys report on Form 8-K filed July 1, 2014) | |
10.2* | Settlement Agreement, dated July 28, 2014 | |
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.DEF** | XBRL Taxonomy Extension Definition 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. |