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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
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 333-165796
UNITED MARITIME GROUP, LLC
(Exact name of registrant as specified in its charter)
FLORIDA | 59-2147756 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
601 S. Harbour Island Blvd., Suite 230
Tampa, FL 33602
(Address of principal executive offices)
(813) 209-4200
(Companys telephone number, including area code)
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 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 Web site, 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 such shorter period that the registrant was required to submit and post such files). Yes ¨ 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.
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | x | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
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PART I Financial Information
ITEM 1. | FINANCIAL STATEMENTS |
United Maritime Group, LLC and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income (Loss)
(In thousands)
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
(Unaudited) | ||||||||
Revenue |
||||||||
Revenue |
$ | 76,198 | $ | 76,865 | ||||
Operating expenses |
||||||||
Operating expenses |
49,363 | 48,760 | ||||||
Maintenance and repairs |
5,568 | 5,347 | ||||||
Administrative and general |
8,867 | 8,609 | ||||||
Depreciation |
9,481 | 10,612 | ||||||
Amortization of intangible assets |
659 | 659 | ||||||
Asset retirement obligation accretion expense |
52 | 48 | ||||||
Gain on sale of assets |
(2,175 | ) | (85 | ) | ||||
Total operating expenses |
71,815 | 73,950 | ||||||
Operating income |
4,383 | 2,915 | ||||||
Other income |
261 | 36 | ||||||
Equity in loss of unconsolidated affiliate |
| (132 | ) | |||||
Interest charges: |
||||||||
Interest expense |
6,310 | 6,714 | ||||||
Interest income |
| (1 | ) | |||||
Amortization of deferred financing costs |
549 | 532 | ||||||
Net loss |
$ | (2,215 | ) | $ | (4,426 | ) | ||
Other comprehensive income (loss) |
||||||||
Change in net unrealized gain on cash flow hedges |
2,216 | 131 | ||||||
Comprehensive income (loss) |
$ | 1 | $ | (4,295 | ) | |||
The accompanying notes are an integral part of these consolidated financial statements.
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United Maritime Group, LLC and Subsidiaries
Consolidated Balance Sheets
(In thousands)
March 31, 2011 | December 31, 2010 | |||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 398 | $ | 7,481 | ||||
Accounts receivable trade, net of allowance for doubtful accounts of $434 and $486, respectively |
31,546 | 31,183 | ||||||
Materials and supplies |
21,300 | 19,081 | ||||||
Prepaid expenses and other current assets |
11,444 | 3,314 | ||||||
Total current assets |
64,688 | 61,059 | ||||||
Property and equipment |
449,987 | 457,058 | ||||||
Work in progress |
1,662 | 146 | ||||||
Accumulated depreciation |
(128,692 | ) | (124,766 | ) | ||||
Property and equipment, net |
322,957 | 332,438 | ||||||
Other assets: |
||||||||
Deferred financing costs, net of amortization of $2,118 and $1,603, respectively |
7,876 | 8,391 | ||||||
Intangible assets, net of amortization of $8,200 and $7,541, respectively |
20,769 | 21,428 | ||||||
Deferred drydocking costs, net |
4,352 | 5,743 | ||||||
Total other assets |
32,997 | 35,562 | ||||||
Total assets |
$ | 420,642 | $ | 429,059 | ||||
LIABILITIES AND MEMBERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 15,239 | $ | 11,081 | ||||
Accounts payable related parties |
375 | 1,500 | ||||||
Accrued expenses |
15,012 | 10,934 | ||||||
Deferred revenue |
5,287 | 4,195 | ||||||
Total current liabilities |
35,913 | 27,710 | ||||||
Asset retirement obligation |
2,951 | 2,899 | ||||||
Other liabilities |
9,768 | 9,570 | ||||||
Long-term debt |
231,985 | 248,985 | ||||||
Total liabilities |
280,617 | 289,164 | ||||||
Members equity |
140,025 | 139,895 | ||||||
Total liabilities and members equity |
$ | 420,642 | $ | 429,059 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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United Maritime Group, LLC and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
(Unaudited) | ||||||||
Operating activities |
||||||||
Net loss |
$ | (2,215 | ) | $ | (4,426 | ) | ||
Adjustments to reconcile net loss to net cash from operating activities: |
||||||||
Depreciation |
9,481 | 10,612 | ||||||
Amortization of intangible assets |
659 | 659 | ||||||
Amortization of deferred financing costs |
549 | 532 | ||||||
Amortization of deferred drydocking assets |
1,160 | 954 | ||||||
Accretion expense |
52 | 48 | ||||||
Stock-based compensation |
129 | 77 | ||||||
Deferred drydocking expenditures |
232 | | ||||||
Loss on equity investment of unconsolidated affiliate |
| 132 | ||||||
Gain on sale of assets |
(2,175 | ) | (85 | ) | ||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(363 | ) | 2,742 | |||||
Materials and supplies |
(2,219 | ) | (1,341 | ) | ||||
Prepaid expenses and other assets |
(5,927 | ) | (7,771 | ) | ||||
Other liabilities |
(1,319 | ) | 490 | |||||
Accounts payable and accrued expenses |
9,720 | 10,670 | ||||||
Net cash provided by operating activities |
7,764 | 13,293 | ||||||
Investing activities |
||||||||
Additions to property and equipment |
(1,977 | ) | (1,859 | ) | ||||
Proceeds from sale of assets |
4,151 | 139 | ||||||
Distributions from unconsolidated affiliate |
| 320 | ||||||
Net cash provided by (used in) investing activities |
2,174 | (1,400 | ) | |||||
Financing activities |
||||||||
Repayment of debt |
(19,003 | ) | (20,103 | ) | ||||
Asset based loan draws |
2,003 | | ||||||
Payment of deferred financing costs |
(21 | ) | (2 | ) | ||||
Net cash used in financing activities |
(17,021 | ) | (20,105 | ) | ||||
Net change in cash |
(7,083 | ) | (8,212 | ) | ||||
Cash and cash equivalents, at beginning of period |
7,481 | 11,630 | ||||||
Cash and cash equivalents, at end of period |
$ | 398 | $ | 3,418 | ||||
Supplemental disclosure of cash flow information |
||||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 1,297 | $ | 1,486 |
The accompanying notes are an integral part of these consolidated financial statements.
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United Maritime Group, LLC and Subsidiaries
Consolidated Statement of Changes in Members Equity
(In thousands, except share amounts)
(Unaudited)
Additional Paid-in Capital |
Accumulated Other Comprehensive Gain |
Retained Earnings |
Total Members Equity |
|||||||||||||||||||||
Membership Units | ||||||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||
Balance at December 31, 2010 |
100 | $ | 173,000 | $ | 3,481 | $ | 1,213 | $ | (37,799 | ) | $ | 139,895 | ||||||||||||
Net loss |
| | | | (2,215 | ) | (2,215 | ) | ||||||||||||||||
Change in fair value of derivative |
| | | 2,216 | | 2,216 | ||||||||||||||||||
Stock-based compensation |
| | 129 | | | 129 | ||||||||||||||||||
Balance at March 31, 2011 |
100 | $ | 173,000 | $ | 3,610 | $ | 3,429 | $ | (40,014 | ) | $ | 140,025 | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The Company and Nature of Business
In this quarterly report, unless the context otherwise requires, or unless specifically stated otherwise, references to the terms we, our, us and the Company refer to United Maritime Group, LLC, United Maritime Group Finance Corporation (Finance Corp.) and all of their subsidiaries that are consolidated under U.S. generally accepted accounting principles (GAAP).
Nature of Business and Principles of Consolidation
The accompanying unaudited consolidated financial statements have been prepared in accordance with GAAP. The Company has evaluated subsequent events and transactions for potential recognition or disclosure through such time as these statements were filed with the Securities and Exchange Commission, and has included those items deemed to be reportable in Note 13 (Subsequent Events).
The accompanying unaudited consolidated financial statements should be read in conjunction with our December 31, 2010 audited consolidated financial statements and the notes thereto included in the Companys Annual Report on Form 10-K. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of results of the Company for the periods covered thereby. The accompanying unaudited consolidated financial statements include the accounts of United Maritime Group, LLC (UMG) and its wholly owned subsidiaries (U.S. United Ocean Services, LLC, U.S. United Bulk Terminal, LLC, U.S. United Barge Line, LLC, U.S. United Bulk Logistics, LLC, UMG Towing Company, LLC and U.S. United Inland Services, LLC). United Maritime is a wholly owned subsidiary of GS Maritime Intermediate Holding LLC, (GS Intermediate). GS Intermediate is a wholly owned subsidiary of GS Maritime Holding LLC, (the Holding Company). The Companys principal operations are to provide transportation services by barges or ocean-going vessels and materials handling and storage for water-based transportation. All intercompany balances and transactions have been eliminated in consolidation. Neither GS Intermediate nor the Holding Company is consolidated in the accompanying unaudited consolidated financial statements.
The members liability of United Maritime is limited by all protection available under Florida limited liability company law. The life of United Maritime is indefinite.
2. Significant Accounting Policies
Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the Company to make estimates and assumptions that affect the amounts reported in the financial statements and the disclosures made in the accompanying notes. Despite the intention to establish accurate estimates and use reasonable assumptions, actual results could differ from the Companys estimates and such differences could be material.
Comprehensive Income (Loss)
Accounting Standards Codification (ASC), Comprehensive Income (ASC 220), established standards for the reporting and the display of comprehensive income (loss) and its components in a full set of general purpose financial statements. ASC 220 requires that all items that are required to be recognized under accounting standards as components of comprehensive income (loss) be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company has reported other comprehensive gains and losses in its unaudited consolidated statements of changes in members equity and on the consolidated statements of operations and comprehensive income (loss).
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable in the accompanying consolidated balance sheets are reported net of estimated allowance for doubtful accounts. Accounts receivable are uncollateralized and consist of amounts due from third-party payers. To provide for accounts receivable that could become uncollectible in the future, the Company established an allowance for doubtful accounts to reduce the carrying value of such receivables to their estimated net realizable value.
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The amount of the provision for doubtful accounts is based upon managements assessment of historical and expected net collections, business and economic conditions, and other collection indicators. The primary tool used in managements assessment is a detailed quarterly and annual review of historical collections and write-offs of accounts receivable. The results of the detailed review of historical collections and write-off experience, adjusted for changes in trends and conditions, are used to evaluate the allowance amount for the current period. Accounts receivable are written off after collection efforts have been followed in accordance with the Companys policies.
A summary of the activity in the allowance for uncollectible accounts is as follows:
March 31 2011 |
December 31 2010 |
|||||||
(In thousands) | ||||||||
Balance, beginning of period |
$ | 486 | $ | 573 | ||||
Additions charged to provision for bad debts |
| 42 | ||||||
Accounts receivable written off (net of recoveries) |
(52 | ) | (129 | ) | ||||
Balance, end of period |
$ | 434 | $ | 486 | ||||
Inventory Costs
Materials and supplies, including fuel costs, are stated at the lower of cost or market using the average cost method.
Revenue
Revenue is primarily derived from coal, petcoke, steel-related products, phosphate, and grain transportation (among other cargoes), and transfer and storage services to unaffiliated entities. Revenue from transportation and transfer services are recognized as services are rendered. Revenue from certain transportation services is recognized using the percentage of completion method, which includes estimates of the distance traveled or time elapsed compared to the total estimated contract. Storage revenue is recognized monthly based on the volumes held at the storage facility over the contract grace period.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the related assets. Additions, replacements and betterments are capitalized; maintenance and repairs are charged to expense as incurred. Items sold or retired are removed from the assets and accumulated depreciation accounts and any resulting gains or losses are properly included in the consolidated statements of operations and comprehensive income (loss).
Planned Major Maintenance
In accordance with the guidance for planned major maintenance activities, expenditures incurred during a drydocking are deferred and amortized on a straight-line basis over the period until the next scheduled drydocking, generally two and a half years. The Company only includes in deferred drydocking costs those direct costs that are incurred as part of the vessels maintenance that is required by the Coast Guard and/or vessel classification society regulation. Direct costs include shipyard costs as well as the costs of placing the vessel in the shipyard. Expenditures for routine maintenance and repairs, whether incurred as part of the drydocking or not, are expensed as incurred.
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Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentration of credit risk consist principally of cash and trade receivables. The Company places its cash with high credit quality financial institutions. During the normal course of business, the Company extends credit to customers primarily in North America conducting business in the utility, metallurgical, phosphate and grain industries. The Company performs ongoing credit evaluations of its customers and does not generally require collateral. The customers financial condition and payment history have been considered in determining the allowance for doubtful accounts. The Company assesses the risk of non-performance of the derivatives counterparty in determining the fair value of the derivative instruments in accordance with ASC No. 820 (ASC 820), Fair Value Measurements.
Asset Impairment
The Company periodically assesses whether there has been a permanent impairment of its long-lived assets and certain intangibles held and used by the Company, in accordance with ASC No. 360 (ASC 360), Property, Plant, and Equipment and ASC No. 205, Presentation of Financial Statements. ASC 360 establishes standards for determining when impairment losses on long-lived assets have occurred and how impairment losses should be measured. The Company is required to review long-lived assets and certain intangibles, to be held and used, for impairment whenever events or circumstances indicate that the carrying value of such assets may not be recoverable. In performing such a review for recoverability, the Company is required to compare the expected future cash flows to the carrying value of long-lived assets and finite-lived intangibles. If the sum of the expected future undiscounted cash flows is less than the carrying amount of such assets and intangibles, the assets are impaired and the assets must be written down to their estimated fair market value. There were no impairments during the three months ended March 31, 2011 or March 31, 2010.
Derivative Instruments and Hedging Activities
In March 2008, the FASB issued guidance requiring entities to provide greater transparency about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for and related interpretations, and (c) how derivative instruments and related hedged items affect an entitys financial position, results of operations and cash flows. The provisions of this guidance require expanded disclosures concerning where derivatives are recorded on the consolidated balance sheet and where gains or losses are recognized in the consolidated results of operations. The Company has adopted the disclosure provisions as of January 1, 2009.
The Company applies the provisions of ASC No. 815, Derivatives and Hedging. These standards require companies to recognize derivatives as either assets or liabilities in the financial statements, to measure those instruments at fair value, and to reflect the changes in the fair values of those instruments as either components of other comprehensive income (OCI) or in net income, depending on the designation of those instruments. The changes in fair value that are recorded in OCI are not immediately recognized in current net income. As the underlying hedged transaction matures or the physical commodity is delivered, the deferred gain or loss on the related hedging instrument must be reclassified from OCI to earnings based on its value at the time of its reclassification. For effective hedge transactions, the amount reclassified from OCI to earnings is offset in net income by the amount paid or received on the underlying transaction.
We are exposed to various market risks, including changes in fuel prices. As of March 31, 2011, we have hedges in place for 2.6 million gallons for the remainder of 2011 and 2.0 million gallons for 2012. These amounts represent 59% of our estimated 2011 United Barge Line (UBL) business segment fuel exposure and 33% of our expected 2012 UBL fuel exposure. Our average heating oil swap price as of March 31, 2011 is $2.33 per gallon for 2011, and $2.55 per gallon for 2012. The Company entered into derivative contracts during 2010 and 2011 to limit the exposure to price fluctuations for physical purchases of diesel fuel which were designated as cash flow hedges for the forecasted purchases of fuel oil. The hedges are contracted to expire by December 31, 2012, and settle monthly. As of March 31, 2011 and December 31, 2010, the current asset portion of the hedges was valued at $3.4 million and $1.2 million respectively, classified as an other current asset. During the three-month period ended March 31, 2011, the Company recognized a reduction in expense of $0.4 million, and for the three-month period ended March 31, 2010, the Company recognized an expense of $0.04 million.
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ASC 820, Fair Value Measurements, requires disclosure about how fair value is determined for assets and liabilities and establishes a hierarchy for which of these assets and liabilities must be grouped based on significant levels of inputs. The three-tier fair value hierarchy, which prioritizes the inputs used in the valuation methodologies, is as follows:
Level 1Quoted prices for identical assets and liabilities in active markets.
Level 2Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3Unobservable inputs for the assets or liability.
As of March 31, 2011 and December 31, 2010, the Company held certain items that are required to be measured at fair value on a recurring basis, including fuel hedge agreements. Cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are reflected in the financial statements at their carrying value, which approximates their fair value due to their short maturity.
The following items are measured at fair value on a recurring basis subject to the disclosure requirements of ASC 820 as of March 31, 2011 and December 31, 2010.
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
March 31, 2011 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
(In thousands) | ||||||||||||||||
Other current assets: |
||||||||||||||||
Fuel hedge |
$ | 3,429 | $ | | $ | 3,429 | $ | | ||||||||
Total |
$ | 3,429 | $ | | $ | 3,429 | $ | | ||||||||
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
December 31, 2010 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
(In thousands) | ||||||||||||||||
Other current assets: |
||||||||||||||||
Fuel hedge |
$ | 1,213 | $ | | $ | 1,213 | $ | | ||||||||
Total |
$ | 1,213 | $ | | $ | 1,213 | $ | | ||||||||
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The fair value of the Companys long-term debt was based upon observable inputs other than quoted market prices (Level 2 criteria).
March 31, 2011 | ||||||||||||||||||||
Fair Value Measurement Category | ||||||||||||||||||||
Carrying | Fair | |||||||||||||||||||
Value | Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Senior Secured Notes |
$ | 190 | $ | 188 | $ | | $ | 188 | $ | | ||||||||||
Asset Based Loan |
42 | 42 | | 42 | | |||||||||||||||
Total |
$ | 232 | $ | 230 | $ | | $ | 230 | $ | | ||||||||||
December 31, 2010 | ||||||||||||||||||||
Fair Value Measurement Category | ||||||||||||||||||||
Carrying | Fair | |||||||||||||||||||
Value | Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Senior Secured Notes |
$ | 190 | $ | 194 | $ | | $ | 194 | $ | | ||||||||||
Asset Based Loan |
59 | 59 | | 59 | | |||||||||||||||
Total |
$ | 249 | $ | 253 | $ | | $ | 253 | $ | | ||||||||||
During the three months ended March 31, 2011 and 2010, respectively, there were no assets that required an adjustment to their carrying values since no impairment indicators were present.
Asset Retirement Obligations
The Company has recognized liabilities for retirement obligations associated with certain long-lived assets, in accordance with ASC No. 410, Asset Retirement and Environmental Obligations. An asset retirement obligation for a long-lived asset is recognized at fair value at inception of the obligation, if there is a legal obligation under an existing or enacted law or statute, a written or oral contract, or by legal construction under the doctrine of promissory estoppels. Retirement obligations are recognized only if the legal obligation exists in connection with or as a result of the permanent retirement, abandonment, or sale of a long-lived asset.
When the liability is initially recorded, the carrying amount of the related long-lived asset is correspondingly increased. Over time, the liability is accreted to its future value. The corresponding amount capitalized at inception is depreciated over the remaining useful life of the asset. The liability must be revalued each period based on current market prices.
The Company recognized accretion expense associated with asset retirement obligations for each of the three-month periods ended March 31, 2011 and 2010 of $0.1 million. During these periods, no new retirement obligations were incurred and no significant revision to estimated cash flows used in determining the recognized asset retirement obligations was necessary.
Deferred Financing Costs
In December, 2009, the Company incurred $10.3 million in financing costs in connection with the issuance of $200 million of senior secured notes due June 15, 2015 (the Senior Secured Notes) and the entry into a new asset based loan facility (the ABL). Such financing costs were deferred and are classified as deferred financing costs at March 31, 2011 and December 31, 2010. During each of the three-month periods ended March 31, 2011 and 2010, the Company amortized $0.5 million of these costs, respectively.
Reclassifications
Certain prior year amounts have been reclassified to conform with current year presentation. These reclassifications had no impact on net loss or members equity.
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3. Long-Term Debt
In connection with the acquisition of the Company, the Company incurred $305 million of debt. A first lien credit agreement (First Term Loan) provided for a $205 million term loan. A second lien credit agreement (Second Term Loan) provided for the remainder of $100 million. In December 2009, this debt was refunded with $200 million Senior Secured Notes and a $135 million asset based loan (ABL). As of March 31, 2011, the aggregate principal amount of indebtedness outstanding under the ABL was $42.0 million. As of March 31, 2011, the principal balance of the Senior Secured Notes was $190.0 million.
Interest on the Senior Secured Notes is payable semi-annually, commencing June 15, 2010. The Senior Secured Notes mature and are due on June 15, 2015. The interest rate is fixed at 11.75% per annum. No principal payments are due until maturity, subject to early required mandatory prepayment provisions set forth in the indenture governing the Senior Secured Notes.
The interest on the ABL is payable monthly, commencing December 31, 2009. No principal payments are due until maturity on December 22, 2013, subject to early required mandatory prepayment provisions set forth in the credit agreement for the ABL. The interest rate as of March 31, 2011 was 4.06%, which reflects a rate of LIBOR plus the applicable margin of 3.75%.
The following is a schedule by year of approximate future minimum debt payments as of March 31, 2011:
(In millions) | ||||
2013 |
$ | 42.0 | ||
2014 |
| |||
2015 |
190.0 | |||
Total |
$ | 232.0 | ||
The Companys debt agreements contain various restrictive covenants, including the maintenance of certain financial ratios, and limitations on capital expenditures, the ability to pay dividends, incur debt or subject assets to liens. At March 31, 2011, the Company was in compliance in all material respects with all applicable covenants set forth in the indenture governing the Senior Secured Notes and the credit agreement governing the ABL.
4. Members Equity
In December 2007, we became an independent company acquired from TECO Energy by a group consisting of Greenstreet Equity Partners LLC, Jefferies Capital Partners and AMCI Capital L.P. and affiliates. We refer to the foregoing entities collectively as the Equity Sponsors and our acquisition from TECO Energy as the Acquisition.
On December 4, 2007, GS Maritime Holding LLC (the Holding Company) issued 100,000 class A units to the Equity Sponsors and certain members of our management team. The total member contribution for the class A units was $173 million. In connection with the closing of the Acquisition, the Holding Company also issued 9,890 profit units for the benefit of directors and employees of the Company. Since that time, 6,137 profit units have been issued to employees and 3,794 profit units have been forfeited with the departure of certain employees of the Company, bringing the total number of issued and outstanding profit units to 12,233.
The Holding Company profit units are issued to certain Company employees, certain members of the Board of Directors, and others at the discretion of the Holding Companys Board of Directors. the Holding Companys Board of Directors has the discretion to issue units at any time, including profit units. The profit units granted to employees are divided into time-based and performance-based vesting. The time-based units vest over periods of up to 60 months. Assuming continued employment of the employee with the Company, 20% vest on the first anniversary of the grant date, and the remaining 80% vest in four equal installments on the second, third, fourth, and fifth anniversaries of the grant date. The performance-based units vest based on certain performance conditions being met or achieved and, in all cases, assuming continued employment. The performance conditions relate to holders of class A units receiving a specified multiple on their investment upon a liquidation event. If an employee is terminated, the Holding Company may repurchase the employees vested profit units at fair market value.
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For purposes of determining the compensation expense associated with profit unit grants, management valued the business enterprise using a variety of widely accepted valuation techniques which considered a number of factors such as the financial performance of the Company, the values of comparable companies and the lack of marketability of the Companys equity. The Company then used the binomial option pricing model to determine the fair value of these units at the time of grant using valuation assumptions consisting of the expected term in which the units will be realized; a risk-free interest rate equal to the U.S. federal treasury bond rate consistent with the term assumption; expected dividend yield, for which there is none; and expected volatility based on the historical data of equity instruments of comparable companies.
The following table identifies the various issues and their relative factors from above:
Grant Date |
Term (years) |
Risk Free Rate |
Expected Volatility |
Assumed Forfeiture Rate |
||||||||||||
December 2007 |
5 | 3.28 | % | 40.50 | % | 5.00 | % | |||||||||
August 2008 |
5 | 3.00 | % | 48.50 | % | 10.00 | % | |||||||||
March 2010 |
5 | 2.00 | % | 50.50 | % | 5.00 | % | |||||||||
October 2010 |
4 | 1.60 | % | 53.50 | % | 5.00 | % | |||||||||
November 2010 |
5 | 1.60 | % | 53.50 | % | 5.00 | % |
In accordance with ASC No. 718, the Company recorded stock-based compensation expense for the three-months ended March 31, 2011 and 2010 of $0.1 million and $0.1 million, respectively, which is included in administrative and general expense in the consolidated statements of operations and comprehensive income (loss). The activity under the plan for the three-months ended March 31, 2011 is presented below.
Profit Units Outstanding |
Weighted Average Grant Date Fair Value |
|||||||
Non-vested balance at end of period December 31, 2010 |
7,992 | $ | 455.63 | |||||
Units granted |
| | ||||||
Units forfeited |
| | ||||||
Vested |
(184 | ) | 497.90 | |||||
Non-vested balance at end of period March 31, 2011 |
7,808 | $ | 454.63 | |||||
As of March 31, 2011, there was approximately $2.9 million of total unrecognized compensation expense related to the profit units. These costs are expected to be recognized over a weighted average period of 4 years.
5. Intangible Assets and Sale-Leasebacks
The Company has assessed all acquired operating leases in order to determine whether the lease terms were favorable or unfavorable given market conditions at the Acquisition. As a result, the Company recorded a favorable lease intangible asset for $11.9 million. Also in connection with the Acquisition, an acquired intangible asset of $22.0 million was assigned to customer relationships, which is subject to amortization with a weighted average useful life of approximately 10 years.
Amortization of intangible assets is charged to expense on a straight-line basis in the accompanying consolidated statements of operations and comprehensive income (loss). If impairment events occur, the Company could accelerate the timing of purchased intangible asset charges. For each of the three-month periods ended March 31, 2011 and 2010, amortization expense related to the intangible assets acquired and the intangible liability assumed was $0.7 million.
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A summary of intangible assets at March 31, 2011 and 2010 follows (in thousands):
Asset Life | December 31, 2010 Balance |
Amortization | March 31,
2011 Balance |
|||||||||||||
Favorable Lease - Barges |
13.5 years | $ | 1,391 | $ | 27 | $ | 1,364 | |||||||||
Favorable Lease - Ocean Vessels |
6 years | 12,548 | 220 | 12,328 | ||||||||||||
Favorable Lease - Davant facility |
21 years | 964 | 8 | 956 | ||||||||||||
Unfavorable Lease - Davant facility |
22 years | (7,011 | ) | (57 | ) | (6,954 | ) | |||||||||
Customer Relationship (Contracts) |
10 years | 13,536 | 461 | 13,075 | ||||||||||||
Total |
$ | 21,428 | $ | 659 | $ | 20,769 | ||||||||||
Asset Life | December
31, 2009 Balance |
Amortization | March 31, 2010 Balance |
|||||||||||||
Favorable Lease - Barges |
13.5 years | $ | 1,498 | $ | 27 | $ | 1,471 | |||||||||
Favorable Lease - Ocean Vessels |
6 years | 13,426 | 220 | 13,206 | ||||||||||||
Favorable Lease - Davant facility |
21 years | 998 | 8 | 990 | ||||||||||||
Unfavorable Lease - Davant facility |
22 years | (7,240 | ) | (58 | ) | (7,182 | ) | |||||||||
Customer Relationship (Contracts) |
10 years | 15,382 | 462 | 14,920 | ||||||||||||
Total |
$ | 24,064 | $ | 659 | $ | 23,405 | ||||||||||
Estimated future amortization expense is as follows at March 31, 2011:
(In thousands) | ||||
2011 |
$ | 1,977 | ||
2012 |
2,636 | |||
2013 |
12,548 | |||
2014 |
1,758 | |||
2015 |
1,758 | |||
Thereafter |
92 |
6. Property and Equipment
Property and equipment consists of the following (dollars in thousands):
Average Useful Lives In Years |
March 31, 2011 |
December 31, 2010 |
||||||||||
(unaudited) | ||||||||||||
Land |
$ | 7,025 | $ | 7,025 | ||||||||
Buildings |
1 - 30 | 4,526 | 4,501 | |||||||||
Vessels |
3 - 28 | 360,771 | 368,349 | |||||||||
Terminals |
1 - 35 | 56,915 | 56,915 | |||||||||
Machinery |
1 - 20 | 11,742 | 11,284 | |||||||||
Other |
1 - 20 | 9,008 | 8,984 | |||||||||
Work in progress |
1,662 | 146 | ||||||||||
Total costs |
451,649 | 457,204 | ||||||||||
Accumulated depreciation |
(128,692 | ) | (124,766 | ) | ||||||||
Property and equipment, net |
$ | 322,957 | $ | 332,438 | ||||||||
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Table of Contents
7. Employee Postretirement Benefits
401(k) Savings Plan
The Company has a 401(k) savings plan covering substantially all employees of the Company that enables participants to save a portion of their compensation up to the limits allowed by IRS guidelines. Effective December 4, 2007, the Company and its subsidiaries employer matching contributions were 100% of up to 6% of eligible participant contributions. Effective May 5, 2009, the Company discontinued the employer contribution to this plan until further notice. Effective July 1, 2010, the Company reinstated the employer matching contribution of 50% of up to 6% of eligible participant compensation. For the three months ended March 31, 2011, the Company recognized $0.3 million in expense. This expense is reflected in the operating expenses financial statement line item in the Companys consolidated statements of operations and comprehensive income (loss).
8. Income Taxes
At the acquisition date, the Company changed the corporate structure from a corporation to a limited liability company (treated as a partnership for federal income tax purposes). As of December 4, 2007, the Company is no longer subject to federal income tax. State income taxes are immaterial in the periods presented.
9. Related Parties
The Company and its subsidiaries enter into certain transactions, in the ordinary course of business, with entities in which directors of the Company have interests. For each of the three-month periods ended March 31, 2011 and 2010, respectively, the Company incurred management fees under the financial consulting and management services agreement of approximately $0.4 million, which is classified as administrative and general expense in the Companys unaudited consolidated statements of operations and comprehensive income (loss). In addition, approximately $0.1 million and $0.2 million of expenses were incurred for the three-month periods ended March 31, 2011 and 2010, respectively, for legal services, regulatory compliance, and other services that are with related party vendors and customers.
10. Commitments and Contingencies
Litigation
The Company is involved in various legal proceedings that have arisen in the ordinary course of business. In the opinion of the Companys management, all such proceedings are adequately covered by insurance or, if not so covered, should not result in any liability which would have a material adverse effect on the consolidated financial position or consolidated operations of the Company.
As previously disclosed in the Companys Annual Report on Form 10-K for the year ended December 31, 2010, which was filed with the Securities and Exchange Commission on March 30, 2011, on August 9, 2010, U.S. United Ocean Services, LLC (UOS), a wholly-owned subsidiary of the Company, received a letter from The Mosaic Company (Mosaic) claiming that, as a result of a preliminary injunction affecting Mosaics South Fort Meade phosphate mine, a force majeure event had occurred under UOS contract with Mosaic (the Mosaic Agreement). We have subsequently notified Mosaic of our disagreement with their claim of force majeure.
In 2010, Mosaic shipped amounts that were below its minimum contract volume. Since October 2010, Mosaic has terminated further shipments of phosphate wet rock under the Mosaic Agreement but has continued very nominal shipments of finished phosphate dry rock as a means of providing a partial mitigation of the volume shortfall. The impact on our revenue in 2010 of Mosaics failure to ship minimum volumes was approximately $9.3 million. The impact on our revenue in 2011 of Mosaics failure to ship any volumes would be approximately $9.7 million for each fiscal quarter during which the stoppage continues. We are pursuing rights to recover deadfreight through arbitration. We are also pursuing other uses of the shipping capacity used to service the Mosaic Agreement pending Mosaics resumption of its compliance with our agreement. In the fourth quarter of 2010, we placed one UOS vessel into temporary lay-up status and placed a second vessel into the same status in the first quarter of 2011 in an effort to mitigate our exposure to the reduction in volumes from Mosaic. The Company does not expect that these efforts to mitigate consequences of Mosaics actions will compensate for our revenue losses.
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Operating Leases
The Company rents real property, boats and barges under certain non-cancelable operating leases expiring at various dates through 2029, excluding renewal options. Certain of the leases require the lessee to pay property taxes or are subject to escalating rent clauses. In addition, one lease requires contingent rental payments based on tonnage shipped. This contingent rental, as well as the related minimum rental payment, fluctuates with the Producer Price Index and the Consumer Price Index.
Rental expense for the three months ended March 31, 2011 and 2010 amounted to approximately $4.4 million and $4.0 million, respectively. Rental expense is included in the operating expenses financial statement line item in the unaudited consolidated statements of operations and comprehensive income (loss). The following is a schedule by year of approximate future minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of March 31, 2011 (dollars in thousands):
(In thousands) | ||||
2011 |
$ | 9,934 | ||
2012 |
13,073 | |||
2013 |
11,567 | |||
2014 |
6,864 | |||
2015 |
6,577 | |||
Thereafter |
40,770 | |||
Total minimum lease payments |
$ | 88,785 | ||
Other
As of March 31, 2011, certain financial institutions had issued letters of credit on behalf of the Company with an aggregate face amount of approximately $4.0 million, none of which had been drawn as of March 31, 2011.
11. Business Segments
The Company has three reportable business segments: United Barge Line, United Bulk Terminal and United Ocean Services. The Company records the corporate activity under the caption Other. The United Barge Line segment includes transporting, fleeting, shifting, and repair services along the Inland Waterways consisting of the Mississippi River, the Ohio River, the Illinois River and their tributaries (collectively known as Inland Waterways). The United Bulk Terminal segment includes barge and vessel unloading and loading as well as fleeting, shifting and storage at the terminal. The United Ocean Services segment provides transportation services on domestic and international voyages.
Management evaluates performance based on segment earnings, which is defined as operating income. The accounting policies of the reportable segments are consistent with those described in the summary of significant accounting policies. Intercompany sales are eliminated upon consolidation.
Reportable segments are business units that offer different products or services. The reportable segments are managed separately because they provide distinct products and services to internal and external customers.
- 16 -
Table of Contents
Reportable Segments | ||||||||||||||||||||||||
United Barge Line |
United Bulk Terminal |
United Ocean Services |
Other (1) | Intersegment Eliminations |
Total | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Three Months ended March 31, 2011 |
||||||||||||||||||||||||
Total revenue |
$ | 33,041 | $ | 13,737 | $ | 31,456 | $ | 3,592 | $ | | $ | 81,826 | ||||||||||||
Intersegment revenues |
| | | | (5,628 | ) | (5,628 | ) | ||||||||||||||||
Revenue from external customers |
33,041 | 13,737 | 31,456 | 3,592 | (5,628 | ) | 76,198 | |||||||||||||||||
Operating expenses |
||||||||||||||||||||||||
Operating expenses |
25,375 | 6,457 | 19,566 | | (2,035 | ) | 49,363 | |||||||||||||||||
Maintenance and repairs |
1,093 | 1,651 | 2,824 | | | 5,568 | ||||||||||||||||||
Depreciation and amortization |
3,421 | 1,375 | 5,361 | 35 | | 10,192 | ||||||||||||||||||
Gain on sale of assets |
(1,648 | ) | | (527 | ) | | | (2,175 | ) | |||||||||||||||
Administrative and general |
3,649 | 2,418 | 2,801 | 3,592 | (3,593 | ) | 8,867 | |||||||||||||||||
Total operating expenses |
31,890 | 11,901 | 30,025 | 3,627 | (5,628 | ) | 71,815 | |||||||||||||||||
Operating income (loss) |
$ | 1,151 | $ | 1,836 | $ | 1,431 | $ | (35 | ) | $ | | $ | 4,383 | |||||||||||
Total assets |
$ | 180,189 | $ | 69,739 | $ | 167,809 | $ | 375,173 | $ | (372,268 | ) | $ | 420,642 | |||||||||||
Total capital expenditures |
$ | 520 | $ | 1,173 | $ | 269 | $ | 15 | $ | | $ | 1,977 |
(1) | Other items (including corporate costs) are shown for purposes of reconciling to the Companys consolidated totals as shown in the table above. |
Reportable Segments | ||||||||||||||||||||||||
United Barge Line |
United Bulk Terminal |
United Ocean Services |
Other (1) | Intersegment Eliminations |
Total | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Three Months ended March 31, 2010 |
||||||||||||||||||||||||
Total revenue |
$ | 28,043 | $ | 13,518 | $ | 37,353 | $ | 3,143 | $ | | $ | 82,057 | ||||||||||||
Intersegment revenues |
| | | | (5,192 | ) | (5,192 | ) | ||||||||||||||||
Revenue from external customers |
28,043 | 13,518 | 37,353 | 3,143 | (5,192 | ) | 76,865 | |||||||||||||||||
Operating expenses |
||||||||||||||||||||||||
Operating expenses |
22,827 | 5,387 | 22,601 | | (2,055 | ) | 48,760 | |||||||||||||||||
Maintenance and repairs |
972 | 1,665 | 2,710 | | 5,347 | |||||||||||||||||||
Depreciation and amortization |
4,917 | 1,200 | 5,164 | 38 | | 11,319 | ||||||||||||||||||
Gain on sale of assets |
(85 | ) | | | | | (85 | ) | ||||||||||||||||
Administrative and general |
3,334 | 2,088 | 3,181 | 3,143 | (3,137 | ) | 8,609 | |||||||||||||||||
Total operating expenses |
31,965 | 10,340 | 33,656 | 3,181 | (5,192 | ) | 73,950 | |||||||||||||||||
Operating (loss) income |
$ | (3,922 | ) | $ | 3,178 | $ | 3,697 | $ | (38 | ) | $ | | $ | 2,915 | ||||||||||
Total assets |
$ | 183,498 | $ | 72,914 | $ | 186,060 | $ | 429,370 | $ | (419,845 | ) | $ | 451,997 | |||||||||||
Total capital expenditures |
$ | 156 | $ | 518 | $ | 1,185 | $ | | $ | | $ | 1,859 |
(1) | Other items (including corporate costs) are shown for purposes of reconciling to the Companys consolidated totals as shown in the table above. |
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12. Debtor Guarantor Financial Statements
In December 2009, the Company issued its Senior Secured Notes which were fully and unconditionally guaranteed on a joint and several basis by all the Companys subsidiaries. All subsidiaries are 100% owned by the Company.
Condensed Consolidating Balance Sheet as of March 31, 2011
Unaudited
(In thousands)
Parent | Guarantor Subsidiaries |
Eliminations | Consolidated Totals |
|||||||||||||
Assets |
||||||||||||||||
Current assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 16 | $ | 382 | $ | | $ | 398 | ||||||||
Accounts receivable trade, net of allowance for doubtful accounts |
203,161 | 37,330 | (208,945 | ) | 31,546 | |||||||||||
Materials and supplies |
| 21,300 | | 21,300 | ||||||||||||
Prepaid expenses and other current assets |
467 | 10,977 | | 11,444 | ||||||||||||
Total current assets |
203,644 | 69,989 | (208,945 | ) | 64,688 | |||||||||||
Property and equipment, net |
330 | 322,627 | | 322,957 | ||||||||||||
Investment in subsidiaries |
163,323 | | (163,323 | ) | | |||||||||||
Deferred financing costs, net of amortization |
7,876 | | | 7,876 | ||||||||||||
Other assets |
| 4,352 | | 4,352 | ||||||||||||
Intangible asset, net of amortization |
| 20,769 | | 20,769 | ||||||||||||
Total |
$ | 375,173 | $ | 417,737 | $ | (372,268 | ) | $ | 420,642 | |||||||
Liabilities and members equity |
||||||||||||||||
Current liabilities |
||||||||||||||||
Accounts payable |
$ | 5,647 | $ | 218,537 | $ | (208,945 | ) | $ | 15,239 | |||||||
Accounts payable related parties |
375 | | | 375 | ||||||||||||
Accrued expenses |
8,150 | 6,862 | | 15,012 | ||||||||||||
Deferred revenue |
| 5,287 | | 5,287 | ||||||||||||
Total current liabilities |
14,172 | 230,686 | (208,945 | ) | 35,913 | |||||||||||
Other deferred liabilities |
| 12,719 | | 12,719 | ||||||||||||
Long term debt |
231,985 | | | 231,985 | ||||||||||||
Members equity |
129,016 | 174,332 | (163,323 | ) | 140,025 | |||||||||||
Total |
$ | 375,173 | $ | 417,737 | $ | (372,268 | ) | $ | 420,642 | |||||||
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Table of Contents
Condensed Consolidating Balance Sheet as of December 31, 2010
Unaudited
(In thousands)
Parent | Guarantor Subsidiaries |
Eliminations | Consolidated Totals |
|||||||||||||
Assets |
||||||||||||||||
Current assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 7,180 | $ | 301 | $ | | $ | 7,481 | ||||||||
Accounts receivable trade, net of allowance for doubtful accounts |
219,285 | 41,768 | (229,870 | ) | 31,183 | |||||||||||
Materials and supplies |
| 19,081 | | 19,081 | ||||||||||||
Prepaid expenses and other current assets |
501 | 2,813 | | 3,314 | ||||||||||||
Total current assets |
226,966 | 63,963 | (229,870 | ) | 61,059 | |||||||||||
Property and equipment, net |
350 | 332,088 | | 332,438 | ||||||||||||
Investment in subsidiaries |
163,323 | | (163,323 | ) | | |||||||||||
Deferred financing fees, net of amortization |
8,391 | | | 8,391 | ||||||||||||
Other assets |
| 5,743 | | 5,743 | ||||||||||||
Intangible asset, net of amortization |
| 21,428 | | 21,428 | ||||||||||||
Total |
$ | 399,030 | $ | 423,222 | $ | (393,193 | ) | $ | 429,059 | |||||||
Liabilities and members equity |
||||||||||||||||
Current liabilities |
||||||||||||||||
Accounts payable |
$ | 7,871 | $ | 233,080 | $ | (229,870 | ) | $ | 11,081 | |||||||
Accounts payable related partied |
1,500 | | 1,500 | |||||||||||||
Accrued expenses |
4,893 | 6,041 | | 10,934 | ||||||||||||
Deferred revenue |
| 4,195 | 4,195 | |||||||||||||
Total current liabilities |
14,264 | 243,316 | (229,870 | ) | 27,710 | |||||||||||
Other deferred liabilities |
| 12,469 | | 12,469 | ||||||||||||
Long term debt |
248,985 | | | 248,985 | ||||||||||||
Members equity |
135,781 | 167,437 | (163,323 | ) | 139,895 | |||||||||||
Total |
$ | 399,030 | $ | 423,222 | $ | (393,193 | ) | $ | 429,059 | |||||||
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Table of Contents
Condensed Consolidating Statement of Operations
For the Three Months Ended March 31, 2011
Unaudited
(In thousands)
Parent | Guarantor Subsidiaries |
Eliminations | Consolidated Totals |
|||||||||||||
Revenue |
$ | 3,592 | $ | 78,234 | $ | (5,628 | ) | $ | 76,198 | |||||||
Operating expenses |
| 56,966 | (2,035 | ) | 54,931 | |||||||||||
Administrative and general |
3,592 | 8,868 | (3,593 | ) | 8,867 | |||||||||||
Depreciation and amortization |
35 | 10,157 | | 10,192 | ||||||||||||
Gain on sale of assets |
(2,175 | ) | (2,175 | ) | ||||||||||||
Operating (loss) income |
(35 | ) | 4,418 | | 4,383 | |||||||||||
Interest expense, net |
6,859 | | | 6,859 | ||||||||||||
Other (income) expense, net |
| (261 | ) | | (261 | ) | ||||||||||
Net (loss) income |
$ | (6,894 | ) | $ | 4,679 | $ | 0 | $ | (2,215 | ) | ||||||
Condensed Consolidating Statement of Operations
For the Three Months Ended March 31, 2010
Unaudited
(In thousands)
Parent | Guarantor Subsidiaries |
Eliminations | Consolidated Totals |
|||||||||||||
Revenue |
$ | 3,143 | $ | 78,914 | $ | (5,192 | ) | $ | 76,865 | |||||||
Operating expenses |
| 56,156 | (2,049 | ) | 54,107 | |||||||||||
Administrative and general |
3,143 | 8,603 | (3,137 | ) | 8,609 | |||||||||||
Depreciation and amortization |
38 | 11,281 | | 11,319 | ||||||||||||
Gain on sale of assets |
| (85 | ) | | (85 | ) | ||||||||||
Operating (loss) income |
(38 | ) | 2,959 | (6 | ) | 2,915 | ||||||||||
Interest expense, net |
7,245 | | | 7,245 | ||||||||||||
Other expense (income), net |
| 96 | | 96 | ||||||||||||
Net (loss) income |
$ | (7,283 | ) | $ | 2,863 | $ | (6 | ) | $ | (4,426 | ) | |||||
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Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2011
(In thousands)
Parent | Guarantor Subsidiaries |
Eliminations | Consolidated Totals |
|||||||||||||
Operating activities: |
||||||||||||||||
Net cash provided by (used in) operating activities |
$ | 9,872 | $ | (2,108 | ) | $ | | $ | 7,764 | |||||||
Investing activities: |
||||||||||||||||
Capital expenditures |
(15 | ) | (1,962 | ) | | (1,977 | ) | |||||||||
Other investing activities |
| 4,151 | | 4,151 | ||||||||||||
Net cash (provided by) used in investing activities |
(15 | ) | 2,189 | | 2,174 | |||||||||||
Financing activities: |
||||||||||||||||
Net change in debt |
(17,000 | ) | | | (17,000 | ) | ||||||||||
Other financing activities |
(21 | ) | | | (21 | ) | ||||||||||
Net cash used in financing activities |
(17,021 | ) | | | (17,021 | ) | ||||||||||
Net (decrease) increase in cash and cash equivalents |
(7,164 | ) | 81 | | (7,083 | ) | ||||||||||
Cash and cash equivalents, at beginning of period |
7,180 | 301 | | 7,481 | ||||||||||||
Cash and cash equivalents, at end of period |
$ | 16 | $ | 382 | $ | | $ | 398 | ||||||||
Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2010
(In thousands)
Parent | Guarantor Subsidiaries |
Eliminations | Consolidated Totals |
|||||||||||||
Operating activities: |
||||||||||||||||
Net cash provided by operating activities |
$ | 11,893 | $ | 1,400 | $ | | $ | 13,293 | ||||||||
Investing activities: |
||||||||||||||||
Capital expenditures |
| (1,859 | ) | | (1,859 | ) | ||||||||||
Other investing activities |
| 459 | | 459 | ||||||||||||
Net cash used in investing activities |
| (1,400 | ) | | (1,400 | ) | ||||||||||
Financing activities: |
||||||||||||||||
Net change in debt |
(20,103 | ) | | | (20,103 | ) | ||||||||||
Other financing activities |
(2 | ) | | | (2 | ) | ||||||||||
Net cash used in financing activities |
(20,105 | ) | | | (20,105 | ) | ||||||||||
Net decrease in cash and cash equivalents |
(8,212 | ) | | | (8,212 | ) | ||||||||||
Cash and cash equivalents, at beginning of period |
11,260 | 370 | | 11,630 | ||||||||||||
Cash and cash equivalents, at end of period |
$ | 3,048 | $ | 370 | $ | | $ | 3,418 | ||||||||
13. Subsequent Events
None
- 21 -
Table of Contents
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
Managements Discussion and Analysis of Financial Condition and Results of Operations
This quarterly report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements can be identified by the use of forward-looking terminology such as believes, expects, may, estimates, will, should, plans or anticipates or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and may involve significant risks and uncertainties, and that actual results may vary materially from those in the forward-looking statements as a result of various factors. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Forward-looking statements should, therefore, be considered in light of various factors, including those set forth under Forward-Looking Statements and Risk Factors in the Companys Form 10-K filed with the Securities and Exchange Commission (the SEC) on March 30, 2011, as amended by the Amendment No. 1 on Form 10-K/A filed with the SEC on April 29, 2011 (the 10-K), all of which are incorporated herein by reference. Moreover, we caution you not to place undue reliance on these forward-looking statements, which speak only as of the date they were made. We do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this quarterly report or to reflect the occurrence of unanticipated events.
The following discussion should be read in conjunction with the Companys audited and unaudited consolidated financial statements and related notes thereto in Item 1, FINANCIAL STATEMENTS in this quarterly report and the Companys audited Consolidated Financial Statements for the year ended December 31, 2010 and related Notes that are contained in the 10-K.
General
We are a leading independent provider of dry bulk marine transportation and terminal services in the U.S. We own and operate marine assets in the U.S.-flag coastwise, U.S. Government cargo preference and inland barge markets and provide foreign flag ocean services through chartered assets. We also own and operate the largest coal and petcoke terminal in the Gulf of Mexico, which is strategically located as the first inbound dry bulk terminal on the Mississippi River. We operate in three business segments: United Ocean Services, United Barge Line and United Bulk Terminal. For the quarter ended March 31, 2011, United Ocean Services top cargoes (by total revenue) consisted of coal, PL-480 shipments, petcoke and dry phosphate. United Barge Lines top cargoes (by tons transported) consisted of coal, petcoke, steel-related products and grain and United Bulk Terminals top cargoes (by tons transferred) consisted of coal and petcoke.
Beginning in the second quarter of 2011, water levels have been unusually high on the rivers on which we operate. These adverse river conditions have caused operating restrictions for our barge line that we expect will reduce total volumes moved in the second quarter from historical levels. There is also a risk that high river levels could hinder the loading and unloading of vessels at our terminal. We are currently evaluating the consequences of these adverse river conditions on our operating results; however it is too early to estimate the full impact.
United Barge Line (UBL)
UBL provides inland towboat and barge transportation services. UBL primarily performs these services under affreightment contracts, under which our customers engage us to move cargo for a per ton rate from an origin point to a destination point along the inland waterways consisting of the Mississippi River, the Ohio River, the Illinois River and their tributaries on our barges, pushed primarily by our towboats. Affreightment contracts include both term and spot market arrangements.
Operating costs for UBL consist primarily of crewing, insurance, port costs, lease, maintenance and repairs, and fuel. Most of our term contracts have fuel price mechanisms which limit our exposure to changes in fuel price. However, our spot contracts do not have this mechanism and we therefore bear the risk of fuel price increases. In order to limit our exposure, we currently hedge 25% to 75% of our expected fuel exposure over the next twenty-four month period.
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We primarily utilize our owned fleet of towboats for transporting our barges. To the extent one or more of our towboats has unused capacity, we use the vessel to provide outside towing services. Outside towing revenue is earned by moving barges for third party affreightment carriers at a specific rate per barge per mile moved. These barges are typically added to our existing tows. On limited occasions, we have contracted for the use of third party towboats.
United Bulk Terminal (UBT)
UBT provides transfer, storage and blending services as well as fleeting and shifting services at our facility. Blending is the process of combining multiple grades of coal or petroleum coke cargoes based on customer specifications. Contract types for UBT are primarily based on transfer of cargo (i) from barge to storage to vessel or (ii) from barge directly to vessel. These contracts include a storage allowance and rate structure for storage charges. They include a transfer rate that may contain annual escalation clauses. Within most of its contracts, UBT provides production guarantees to its customers. Production guarantees relate to the tons per hour rate that UBT will guarantee to load or unload their vessels. If they are not met, UBT owes demurrage to the customer; if they are met, UBT earns despatch, which is compensation for loading and unloading faster than the guaranteed rate. The majority of UBT revenue is generated from the transfer of cargoes.
Operating costs for UBT consist primarily of leases related to the property, power consumption, employee costs, and maintenance and repairs of facility equipment.
United Ocean Services (UOS)
UOS provides transportation services on domestic and international voyages. These services are contracted under single or consecutive voyage charters on a spot basis, or long-term contracts ranging from one to ten years. Most of the international voyages are performed under cargo preference programs, the most significant of which is Public Law 480 (PL-480). We charge for these services either on a per ton or per day basis. Under a per ton contract, we are generally responsible for all expenses including fuel. Revenues under these contracts are based on a per ton rate. We bear the risk of time lost due to weather, maintenance, and delay at docks which are not covered by demurrage. Demurrage is compensation due from the customer when there are delays at the dock that prevent the vessel from loading or unloading within the contract terms. Our contracts have fuel price mechanisms that limit our exposure to changes in fuel price. We also time charter our vessels, such that the customer has exclusive use of a particular vessel for a specified time period and rates are on a per day basis. We pay expenses related to the vessels maintenance and operation and the charterer is responsible for all voyage costs, including port charges and fuel.
Rates for UOS movements are based on the amount of freight demand relative to the availability of vessels to meet that demand. In the coastwise market, a significant portion of the movements are based on long-term contractual relationships. Vessels are often customized or particularly suited for individual customers, cargoes or trades. There has been a reduction in new movements and spot opportunities due to the economic downturn. Cargo volumes in the preference trade are based on funding for such programs and the availability of U.S.-flag vessels. If customer requirements for movements of cargoes are reduced or spot employment is not available as a vessel completes its last movement, the vessel may be idle and not generate revenue. If this situation exists for an extended period of time, we may place a vessel in lay up status. While in lay up, all machinery is shut down, the crew is removed and the vessel is secured. Lay up minimizes the costs associated with the vessel, particularly fuel and crew costs. Restoring a vessel back to active service may require time to hire crews and perform dry-docking or other maintenance required to ensure the vessel is fully compliant with Class and Coast Guard regulations.
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Operating costs for UOS consist primarily of crewing, insurance, maintenance, lease, fuel and voyage-specific port and direct costs. Maintenance costs materially fluctuate in relation to the number and extent of regulatory drydockings in any given period. The cost associated with the U.S. Coast Guard and classification society mandated drydocking of vessels are accounted for as follows: (i) regulatory maintenance expenses are recorded as deferred costs and amortized over the period until the next scheduled dry-docking, (ii) routine maintenance expenses, such as inspections, docking costs and other normal expenditures, are expensed as incurred and (iii) costs relating to major steelwork, coatings or any other work that extends the life of the vessel are capitalized. Due to the age of our fleet and the nature of marine transportation, we have spent significant time and capital maintaining our vessels to ensure they are operating efficiently and safely.
As previously disclosed in the Companys Annual Report on Form 10-K for the year ended December 31, 2010, which was filed with the Securities and Exchange Commission on March 30, 2011, on August 9, 2010, U.S. United Ocean Services, LLC (UOS), a wholly-owned subsidiary of the Company, received a letter from The Mosaic Company (Mosaic) claiming that, as a result of a preliminary injunction affecting Mosaics South Fort Meade phosphate mine, a force majeure event had occurred under UOS contract with Mosaic (the Mosaic Agreement).
In 2010, Mosaic shipped amounts that were below its minimum contract volume. Since October 2010, Mosaic has terminated further shipments of phosphate wet rock under the Mosaic Agreement but has continued very nominal shipments of finished phosphate dry rock as a means of providing a partial mitigation of the volume shortfall. The impact on our revenue in 2010 of Mosaics failure to ship minimum volumes was approximately $9.3 million. The impact on our revenue in 2011 of Mosaics failure to ship any volumes would be approximately $9.7 million for each fiscal quarter during which the stoppage continues. We are pursuing rights to recover deadfreight through arbitration. We are also pursuing other uses of the shipping capacity used to service the Mosaic Agreement pending Mosaics resumption of its compliance with our agreement. In the fourth quarter of 2010, we placed one UOS vessel into temporary lay-up status and placed a second vessel into the same status in the first quarter of 2011 in an effort to mitigate our exposure to the reduction in volumes from Mosaic. The Company does not expect that these efforts to mitigate consequences of Mosaics actions will fully compensate for our revenue losses.
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Business Segment Selected Financial Data
The following table sets forth, for the periods indicated, amounts derived from our unaudited consolidated financial statements:
Three-months Ended March 31, 2011 |
Three-months Ended March 31, 2010 |
|||||||
(Dollars in thousands) | ||||||||
Statement of Operations: |
||||||||
Revenue: |
||||||||
UBL |
33,041 | 28,043 | ||||||
UBT |
13,737 | 13,518 | ||||||
UOS |
31,456 | 37,353 | ||||||
Other and eliminations |
(2,036 | ) | (2,049 | ) | ||||
Total |
$ | 76,198 | $ | 76,865 | ||||
Operating expenses: (1) |
||||||||
UBL |
26,468 | 23,799 | ||||||
UBT |
8,108 | 7,052 | ||||||
UOS |
22,390 | 25,311 | ||||||
Other and eliminations |
(2,035 | ) | (2,055 | ) | ||||
Total |
$ | 54,931 | $ | 54,107 | ||||
Operating income (loss): |
||||||||
UBL |
1,151 | (3,922 | ) | |||||
UBT |
1,836 | 3,178 | ||||||
UOS |
1,431 | 3,697 | ||||||
Other and eliminations |
(35 | ) | (38 | ) | ||||
Total |
$ | 4,383 | $ | 2,915 | ||||
Balance Sheet (at end of period): |
||||||||
Total assets: |
||||||||
UBL |
180,189 | 183,498 | ||||||
UBT |
69,739 | 72,914 | ||||||
UOS |
167,809 | 186,060 | ||||||
Other and eliminations |
2,905 | 9,525 | ||||||
Total |
$ | 420,642 | $ | 451,997 | ||||
(1) | Excludes administrative and general expenses, depreciation and amortization and (gain)/loss on sale of assets. |
History and Transactions
We began operations in 1959 to provide waterborne transportation services for the coal purchased as fuel for Tampa Electric Companys power generation facilities. We were part of Tampa Electric Company until 1980, when we became a wholly owned subsidiary as part of TECO Energys broader diversification. In December 2007, we became an independent company acquired from TECO Energy by a group consisting of Greenstreet Equity Partners LLC, Jefferies Capital Partners and AMCI Capital L.P. and affiliates.
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Basis of Presentation
The accompanying unaudited consolidated financial statements include the consolidated accounts of the Company for the periods prescribed for this reporting period.
These statements have been prepared using our basis in the assets and liabilities acquired in the purchase transaction. The Acquisition was treated as a purchase and the assets so acquired were valued on our books at our assessments of their fair market value, as described below.
The unaudited consolidated financial statements included in this quarterly report may not necessarily reflect the consolidated financial position, operating results, changes in members equity and cash flows of the Company in the future.
Critical Accounting Policies
Preparation of our financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of sales and expenses during the reporting period. Our critical accounting policies, including the assumptions and judgments underlying them, are disclosed in Item 1 of this quarterly report under the caption NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 2: Significant Accounting Policies. The accompanying consolidated financial statements have been prepared on a going concern basis, which assumes continuity of operations and realization of assets and settlement of liabilities in the ordinary course of business. Critical accounting estimates that affect the reported amounts of assets and liabilities on a going concern basis include amounts recorded as reserves for doubtful accounts, insurance claims and related receivable amounts, revenues and expenses on vessels using the percentage-of-completion method, valuation of fuel hedges, estimates of future cash flows used in impairment evaluations, liabilities for unbilled barge and boat maintenance, liabilities for unbilled harbor and towing services, and depreciable lives of long-lived assets. Estimates have varied from actual results due to specific events occurring that were unknown at the time of the estimate. Those events include items such as acquiring a back haul trip when it was not planned, unplanned vessel maintenance required and medical and property insurance claims.
Accounts Receivable and Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses from the inability of our customers to make required payments, which are provided for in bad debt expense. We determine the adequacy of this allowance by regularly reviewing our accounts receivable aging and evaluating individual customers receivables, considering customers financial condition, credit history and other current economic conditions. If a customers financial condition were to deteriorate which might impact its ability to make payment, then additional allowances may be required.
Revenue Recognition
Revenue is primarily derived from coal, petcoke, steel-related products, phosphate and grain transportation (among other cargoes), and transfer and storage services to unaffiliated entities. Revenues from transportation and transfer services are recognized as services are rendered. Revenue from certain transportation services is recognized using the percentage of completion method, which includes estimates of the distance traveled and/or time elapsed compared to the total estimated contract. Storage revenue is recognized monthly based on the volumes held at the storage facility over the contract grace period.
Inventories
Materials and supplies, including fuel costs, are stated at the lower of cost or market using the average cost method. We regularly review inventory on hand and record provisions based on those reviews. Our term contracts contain provisions that allow us to pass through a significant portion of any fuel expense increase to our customer, thereby reducing, but not eliminating, our fuel price risk. We cannot predict the occurrence of market fluctuations that may significantly increase the costs of materials and supplies.
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Property and Equipment
Property and equipment are stated at cost. As a result of the acquisition and the related application of purchase accounting to the acquired assets and liabilities, there is a new basis of property and equipment subsequent to the Acquisition date. There are items that could affect this basis, which include assumptions that there is responsible ownership and management, competent crewing and ongoing maintenance, there are no significant potential environmental hazards associated with the equipment and the vessels are in compliance with all applicable international, federal, state or local regulations. Management is not aware of any impending events or situations that would negatively affect in any material respect the key assumptions used in the analysis.
Planned Major Maintenance
Expenditures incurred during a drydocking are deferred and amortized on a straight-line basis over the period until the next scheduled drydocking, generally two and a half years. The Company only includes in deferred drydocking costs those direct costs that are incurred as part of the vessels maintenance that is required by the Coast Guard and/or classification society regulations. Direct costs include shipyard costs as well as the costs of placing the vessel in the shipyard. Expenditures for routine maintenance and repairs, whether incurred as part of the drydocking or not, are expensed as incurred. If unforeseen maintenance issues were discovered during the drydocking process, expenditures could be higher than anticipated.
Asset Retirement Obligations
An asset retirement obligation for a long-lived asset is recognized at fair value at inception of the obligation, if there is a legal obligation under an existing or enacted law or statute, a written or oral contract, or by legal construction under the doctrine of promissory estoppels. Retirement obligations are recognized only if the legal obligation exists in connection with or as a result of the permanent retirement, abandonment, or sale of a long-lived asset.
When the liability is initially recorded, the carrying amount of the related long-lived asset is correspondingly increased. Over time, the liability is accreted to its future value. The corresponding amount capitalized at inception is depreciated over the remaining useful life of the asset. The liability must be revalued each period based on current market prices.
No new retirement obligations were incurred and no significant revision to estimated cash flows used in determining the recognized asset retirement obligations were necessary for the three months ended March 31, 2011. Unforeseen or unknown conditions of future long-lived assets or new governmental regulations applicable to such assets may result in unexpected retirement obligation costs.
Derivative Instruments and Hedging Activities
The Derivative and Hedging Topic of the FASB Codification requires companies to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for, and (c) how derivative instruments and related hedged items affect an entitys financial position, financial performance, and cash flows. This Topic also requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.
As required by the Derivative and Hedging Topic of the FASB Codification, we record all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. We may enter into derivative contracts that are intended to economically hedge certain of our risk, even though hedge accounting does not apply or we elect not to apply hedge accounting. If, due to unexpected market changes, the hedge product is not sufficient to cover our usage and price fluctuations, our expenses may be significantly impacted.
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Long-lived Assets
The Company reviews long-lived assets for impairment annually or whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company performs undiscounted operating cash flow analyses to determine if impairment exists. If impairment is determined to exist, any related impairment loss is calculated based on the assets fair value and the discounted cash flow. There were no indications of impairment during the three months ended March 31, 2011 or March 31, 2010. An unexpected change in vessel market value could create an impairment, thereby resulting in an undetermined loss on the vessel.
Results of Operations
Three Months Ended March 31, 2011 Compared With Three Months Ended March 31, 2010
Revenue. Revenue decreased to $76.2 million for the three months ended March 31, 2011 compared to $76.9 million for the three months ended March 31, 2010, a decrease of $0.7 million or 1%.
UBL total revenue increased to $33.0 million for the three months ended March 31, 2011 from $28.0 million for the three months ended March 31, 2010, an increase of $5.0 million or 18%. UBL revenue from open freight, which is generally coal and petcoke, increased to $14.3 million for the three months ended March 31, 2011 from $10.6 million for the three months ended March 31, 2010, an increase of $3.7, million or 35%. This increase was equally attributable to higher volumes and increased rates. Revenue from covered freight, which is generally weather-sensitive cargoes such as grain and fertilizers, increased to $8.0 million for the three months ended March 31, 2011 from $6.2 million for the three months ended March 31, 2010, an increase of $1.8 million or 29%. This increase was due to increases in northbound volumes coupled with an overall increase in both southbound and northbound rates. UBL outside towing revenue earned by moving barges for other barge owners increased to $4.0 million for the three months ended March 31, 2011 from $3.4 million for the three months ended March 31, 2010, an increase of $0.6 million or 18%. This increase was due to an increase in outside towing volume coupled with a slight rate increase. UBL other revenue increased to $2.0 million for the three months ended March 31, 2011 from $1.4 million for the three months ended March 31, 2010, an increase of $0.6 million or 43%. This increase was primarily due to increased fleeting services.
UBT total revenue increased to $13.7 million for the three months ended March 31, 2011 from $13.5 million for the three months ended March 31, 2010, an increase of $0.2 million or 1%. This increase resulted from fewer barge delays at the terminal.
UOS total revenue decreased to $31.5 million for the three months ended March 31, 2011 from $37.4 million for the three months ended March 31, 2010, a decrease of $5.9 million or 16%. UOS revenue from contracts decreased to $14.0 million for the three months ended March 31, 2011 from $17.0 for the three months ended March 31, 2010, a decrease of $3.0 million or 18%. This decrease was primarily due to reductions in Mosaic volumes, partially offset by volumes transported for a grain customer previously captured as spot revenue. The combined UOS revenues from PL-480, spot and time charter decreased to $16.5 million for the three months ended March 31, 2011 from $19.9 million for the three months ended March 31, 2010, a decrease of $3.4 million, or 17%. Cargo moves in the comparable period in 2010 required more inland cargo services, which had increased both the revenue and the port costs in the comparable 2010 period.
Operating Expenses. Operating expenses increased to $54.9 million for the three months ended March 31, 2011 from $54.1 million for the three months ended March 31, 2010, an increase of $0.8 million or 1%. Operating expenses for the three months ended March 31, 2011 were 72% of operating revenue, and for the three months ended March 31, 2010, were 70% of revenue. The increase was attributable to higher fuel costs, lease and charter costs and maintenance costs, offset by a decrease in port costs.
Operating expenses for UBL increased to $26.5 million for the three months ended March 31, 2011 from $23.8 million for the three months ended March 31, 2010, an increase of $2.7 million or 11%. The largest increase in UBL operating expenses for the three months ended March 31, 2011 was attributable to higher fuel costs, port costs, leasing costs, which impacted direct costs by $2.0 million.
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Operating expenses for UBT increased to $8.1 million for the three months ended March 31, 2011 from $7.0 million for the three months ended March 31, 2010, an increase of $1.1 million or 16%. The increase in UBT operating expenses for the three months ended March 31, 2011 was primarily driven by higher lease and charter costs and port costs.
Operating expenses for UOS decreased to $22.4 million for the three months ended March 31, 2011 from $25.3 million for the three months ended March 31, 2010, a decrease of $2.9 million or 11%. The decrease in UOS operating expenses for the three months ended March 31, 2011 was primarily attributable to lower port costs of $2.6 million as a result of fewer cargo moves requiring inland cargo services, as noted above.
Administrative and general. Administrative and general costs increased to $8.9 million for the three months ended March 31, 2011 from $8.6 million for the three months ended March 31, 2010, an increase of $0.3 million, or 3%. The increase was primarily attributable to higher property tax expense.
Depreciation and Amortization. Depreciation and amortization decreased to $10.2 million for the three months ended March 31, 2011 from $11.3 million for the three months ended March 31, 2010, a decrease of $1.1 million or 10%. Substantially all of the decrease is due to assets fully depreciating.
Other Income. Other income increased to a gain of $2.4 million for the three months ended March 31, 2011 from zero for the three months ended March 31, 2010, an increase of $2.4 million. The gain in 2011 results from the sale of UOS and UBL barges and from the sale of scrap material.
Interest Expense. Interest expense decreased to $6.9 million for the three months ended March 31, 2011 from $7.2 million for the three months ended March 31, 2010, a decrease of $0.3 million or 4%. This decrease was due primarily to the decrease in principal on the Senior Secured Notes and ABL year over year.
Income Taxes. The Company is a limited liability company and is treated as a partnership for federal income tax purposes. Therefore, it records no income tax provision.
Liquidity and Capital Resources
Our funding requirements include (i) maintenance of our marine fleet and terminal facility, (ii) interest payments and (iii) other working capital requirements. We do not currently anticipate any significant purchases of additional ocean-going vessels or inland towboats or barges. Our primary sources of liquidity are cash generated from operations and borrowings under our senior credit facilities. As referenced above under the heading Item 2 - Managements Discussion and Analysis of Financial Condition and Results of Operations United Barge Line UBL, we do not expect the adverse river conditions impacting UBL to have a material negative impact on our liquidity position, but we continue to monitor the situation as it evolves. However, we can provide no assurance that there will be no significant impact on UMGs business if river conditions worsen.
We believe that our operating cash flow and amounts available for borrowing under our ABL will be adequate to fund our capital expenditures and working capital requirements for the next twelve months. Our ABL provides for available borrowings of up to $135 million subject to the borrowing base, and is secured by substantially all the assets of the borrowers and the guarantors on a first priority basis. As of March 31, 2011, our asset base would have allowed us to have access to the entire committed amount of $135 million, less $6.7 million of adjustments pursuant to the borrowing base, and as of such date, we had borrowed $42.0 million. We must comply with certain financial and other covenants under the ABL. While we currently believe that we will be able to meet all of the financial covenants imposed by our ABL, there is no assurance that we will in fact be able to do so or that, if we do not, we will be able to obtain from our lenders waivers of default or amendments to the ABL in the future.
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Subject to certain conditions, the indenture governing the Senior Secured Notes requires us on an annual basis to offer to repurchase a portion of these notes or, at our option, repay a portion of the outstanding balance under the ABL, in each case with 50% of our Excess Cash Flow (as defined in the indenture). If we elect to repurchase our Senior Secured Notes, the purchase price will be equal to 100% of the principal amount, plus accrued and unpaid interest and any Special Interest (as defined in the indenture) to the date of purchase. If the aggregate purchase price of the Senior Secured Notes tendered exceeds the amount of our offer, the trustee under our indenture will select the notes to be accepted for purchase on a pro rata basis. Based on our 2010 Excess Cash Flow, we offered to repurchase up to $4.5 million of outstanding Senior Secured Notes, which reflects a credit, as permitted in the indenture, for 2010 open market purchases of $10 million. Our offer to repurchase was not accepted during the second quarter of 2011. The foregoing disclosure is being provided solely as part of our managements discussion and analysis of our business and liquidity and is not an offer to repurchase or a solicitation of tenders of Senior Secured Notes.
Notwithstanding our ongoing dispute with Mosaic, we believe that our operating cash flow and amounts available for borrowing under the ABL will be adequate to fund our capital expenditures and working capital requirements for the next twelve months.
The following were the net changes in operating, investing and financing activities for the periods presented:
Three Months Ended March 31, | ||||||||
2011 | 2010 | |||||||
(In thousands) | ||||||||
Cash flows provided by (used in): |
||||||||
Operating activities |
$ | 7,764 | $ | 13,293 | ||||
Investing activities |
2,174 | (1,400 | ) | |||||
Financing activities |
(17,021 | ) | (20,105 | ) | ||||
Net decrease in cash and cash equivalents |
$ | (7,083 | ) | $ | (8,212 | ) | ||
Cash Flows Provided by Operating Activities
Net cash provided by operating activities was $7.8 million for the three months ended March 31, 2011 as compared to $13.3 million for the three months ended March 31, 2010, a decrease of $5.5 million. Cash from operating activities decreased due to higher working capital requirements.
Cash Flows Provided by Investing Activities
Net cash provided by investing activities was $2.2 million for the three months ended March 31, 2011 as compared to net cash used in investing activities of $1.4 million for the three months ended March 31, 2010, an increase in net cash provided of $3.6 million. The increase in net cash provided by investing activities was primarily attributable to proceeds from the sale of UOS and UBL assets.
Cash Flows Provided by Financing Activities
Net cash used in financing activities was $17.0 million for the three months ended March 31, 2011 as compared to net cash used in financing activities of $20.1 million for the three months ended March 31, 2010, a decrease in net cash used of $3.1 million. The decrease in net cash used in financing activities was primarily attributable to the decrease in our outstanding indebtedness. During the quarter, the Company did not repurchase any Senior Secured Notes, but may, from time to time, make additional open market, privately negotiated or other purchases.
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Capital Expenditures
In 2011, we expect capital expenditures for maintenance and improvement of our vessel fleet, terminal and general capital equipment to be approximately $20 million. During the three months ended March 31, 2011, we incurred $2.0 million in capital expenditures.
Drydock expenditures for our ocean-going vessels are driven by Coast Guard and vessel classification society regulations and managements own strict maintenance guidelines and associated drydocking schedules, which require vessel drydocking twice every five years. Management expects up to three of our vessels to drydock in 2011 and up to two in 2012. Although actual costs cannot presently be estimated with certainty, management also expects that future overhauls of both ocean-going and inland vessels in the next three to five years may require significantly higher capital expenditures due to new and anticipated environmental regulations that would require upgrades for reduced air emissions upon the remanufacture of marine diesel engines and the installation of ballast water management systems.
Contractual Obligations
The following is a tabular summary of our future contractual obligations as of March 31, 2011 for the categories set forth below, assuming only scheduled amortizations and repayment at maturity:
2011 | 2012 | 2013 | 2014 | 2015 | After 2015 |
Total Obligations |
||||||||||||||||||||||
(In millions of dollars) | ||||||||||||||||||||||||||||
Senior Secured Notes |
$ | | $ | | $ | | $ | | $ | 190.0 | $ | | $ | 190.0 | ||||||||||||||
Interest on Senior Secured Notes (1) |
22.3 | 22.3 | 22.3 | 22.3 | 11.2 | | 100.4 | |||||||||||||||||||||
Asset Based Loan |
| | 42.0 | | | | 42.0 | |||||||||||||||||||||
Interest on ABL (2) |
1.3 | 1.7 | 1.7 | | | | 4.7 | |||||||||||||||||||||
Operating leases |
9.9 | 13.1 | 11.6 | 6.9 | 6.6 | 40.8 | 88.9 | |||||||||||||||||||||
Total |
$ | 33.5 | $ | 37.1 | $ | 77.6 | $ | 29.2 | $ | 207.8 | $ | 40.8 | $ | 426.0 | ||||||||||||||
(1) | Interest is calculated based on a fixed per annum rate of 11.75%. |
(2) | The contractual obligations related to the ABL are calculated based on the level of borrowings at March 31, 2011, and the interest rate at that time of 4.06% and 0.75% calculated on the unused commitment line. |
Off Balance Sheet, Pension and Other Post-Employment Benefit Liabilities
We do not have any off balance sheet liabilities or any pension or other post-employment benefit liabilities. See the notes to the financial statements in Item 1, Note 2 for new accounting policies.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
Market Risk
Fuel Hedging Policy
We are exposed to various market risks, including changes in fuel prices. As of March 31, 2011, we have hedges in place for 2.6 million gallons for the remainder of 2011 and 2.0 million gallons for 2012. These amounts represent 59% of our estimated 2011 UBL fuel exposure and 33% of our expected 2012 UBL fuel exposure. Our average heating oil swap price as of March 31, 2011 is $2.33 per gallon for 2011, and $2.55 per gallon for 2012.
Derivative Instruments and Hedging Activities
Please see the Notes to the Consolidated Financial Statements for details.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentration of credit risk consist principally of cash and trade receivables. The Company places its cash with high credit quality financial institutions. During the normal course of business, the Company extends credit to customers primarily in North America conducting business in the utility, metallurgical, phosphate and grain industries. The Company performs ongoing credit evaluations of its customers and does not generally require collateral. The customers financial condition and payment history have been considered in determining the allowance for doubtful accounts. The Company assesses the risk of nonperformance of the derivatives in determining the fair value of the derivatives instruments in accordance with ASC No. 820, Fair Value Measurements.
ITEM 4. | CONTROLS AND PROCEDURES. |
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by SEC Rule 15d-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2011.
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ITEM 1. | LEGAL PROCEEDINGS. |
The Company is involved in various legal proceedings that have arisen in the ordinary course of business. In the opinion of the Companys management, all such proceedings are adequately covered by insurance or, if not so covered, should not result in any liability which would have a material adverse effect on the consolidated financial position or consolidated operations of the Company.
As previously disclosed in the Companys Annual Report on Form 10-K for the year ended December 31, 2010, which was filed with the Securities and Exchange Commission on March 30, 2011, on August 9, 2010, United Ocean Services, LLC (UOS), a wholly-owned subsidiary of the Company, received a letter from The Mosaic Company (Mosaic) claiming that, as a result of a preliminary injunction affecting Mosaics South Fort Meade phosphate mine, a force majeure event had occurred under UOS contract with Mosaic (the Mosaic Agreement).
In 2010, Mosaic shipped amounts that were below its minimum contract volume. Since October 2010, Mosaic has terminated further shipments of phosphate wet rock under the Mosaic Agreement but has continued very nominal shipments of finished phosphate dry rock as a means of providing a partial mitigation of the volume shortfall. The impact on our revenue in 2010 of Mosaics failure to ship minimum volumes was approximately $9.3 million. The impact on our revenue in 2011 of Mosaics failure to ship any volumes would be approximately $9.7 million for each fiscal quarter during which the stoppage continues. We are pursuing rights to recover deadfreight through arbitration. We are also pursuing other uses of the shipping capacity used to service the Mosaic Agreement pending Mosaics resumption of its compliance with our agreement. In the fourth quarter of 2010, we placed one UOS vessel into temporary lay-up status and placed a second vessel into the same status in the first quarter of 2011 in an effort to mitigate our exposure to the reduction in volumes from Mosaic. The Company does not expect that these efforts to mitigate consequences of Mosaics actions will fully compensate for our revenue losses.
ITEM 1A. | RISK FACTORS. |
There have not been any material changes in our risk factors as previously disclosed in our Form 10-K, Item 1A as of December 31, 2010 (Commission File Number 333-165796).
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Jason Grant, our Chief Financial Officer, is required under his employment agreement to purchase at least $300,000 worth of class A units of GS Maritime Holding LLC, our ultimate parent company. On April 25, 2011, Mr. Grant purchased 173 class A units in accordance with his employment agreement. Mr. Grant paid $300,000 in cash for the class A units. The class A units have not been registered under the Securities Act of 1933, as amended (the Securities Act), or the securities laws of any state. The class A units were issued to Mr. Grant in reliance on the exemptions from registration afforded by Section 4(2) of the Securities Act, Rule 506 of Regulation D under the Securities Act and corresponding provisions of state securities laws, which exempt transactions by an issuer not involving any public offering.
ITEM 6. | EXHIBITS. |
The exhibits required to be filed by Item 601 of Regulation S-K are listed in the Exhibit Index, which is attached hereto and incorporated by reference herein.
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Pursuant to the requirements of the Securities Exchange Act of 1934, United Maritime Group, LLC has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
UNITED MARITIME GROUP, LLC | ||
By: | /s/ Jason Grant | |
Jason Grant | ||
Chief Financial Officer (duly authorized signatory and principal financial officer of the Company) | ||
Date: May 13, 2011 |
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EXHIBIT INDEX
Exhibit |
Description | |
31.1 | Certificate of the Chief Executive Officer of the Company, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2 | Certificate of the Chief Financial Officer of the Company, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Written Statement of Steven Green, Chief Executive Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Written Statement of Jason Grant, Chief Financial Officer of the Company 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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