Attached files
file | filename |
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EXCEL - IDEA: XBRL DOCUMENT - Horizon Lines, Inc. | Financial_Report.xls |
EX-32.2 - EX-32.2 - Horizon Lines, Inc. | d896554dex322.htm |
EX-32.1 - EX-32.1 - Horizon Lines, Inc. | d896554dex321.htm |
EX-10.2 - EX-10.2 - Horizon Lines, Inc. | d896554dex102.htm |
EX-31.1 - EX-31.1 - Horizon Lines, Inc. | d896554dex311.htm |
EX-31.2 - EX-31.2 - Horizon Lines, Inc. | d896554dex312.htm |
EX-10.1 - EX-10.1 - Horizon Lines, Inc. | d896554dex101.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark one)
x | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 22, 2015
OR
¨ | Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number 001-32627
HORIZON LINES, INC.
(Exact name of registrant as specified in its charter)
Delaware | 74-3123672 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
2550 West Tyvola Road, Suite 530, Charlotte, North Carolina | 28217 | |
(Address of principal executive offices) | (Zip Code) |
(704) 973-7000
(Registrants telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such a shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
At April 24, 2015, 40,877,063 shares of the Registrants common stock, par value $.01 per share, were outstanding.
Table of Contents
Form 10-Q Index
Page No. | ||||
1 | ||||
1 | ||||
1 | ||||
2 | ||||
Unaudited Condensed Consolidated Statements of Comprehensive Loss |
3 | |||
4 | ||||
Notes to Condensed Consolidated Financial Statements (Unaudited) |
5 | |||
2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
20 | |||
3. Quantitative and Qualitative Disclosures About Market Risk |
38 | |||
38 | ||||
39 | ||||
39 | ||||
40 | ||||
2. Unregistered Sales of Equity Securities and Use of Proceeds |
40 | |||
40 | ||||
40 | ||||
40 | ||||
40 | ||||
42 | ||||
Exhibit 31.1 |
||||
Exhibit 31.2 |
||||
Exhibit 32.1 |
||||
Exhibit 32.2 |
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Exhibit 101.INS XBRL Instance Document |
||||
Exhibit 101.SCH XBRL Taxonomy Extension Schema Document |
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Exhibit 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document |
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Exhibit 101.DEF XBRL Taxonomy Extension Definition Linkbase Document |
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Exhibit 101.LAB XBRL Taxonomy Extension Label Linkbase Document |
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Exhibit 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document |
i
Table of Contents
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except per share amounts)
March 22, 2015 |
December 21, 2014 |
|||||||
Assets |
||||||||
Current assets |
||||||||
Cash |
$ | 10,395 | $ | 8,552 | ||||
Accounts receivable, net of allowance of $1,126 and $1,051 at March 22, 2015 and December 21, 2014, respectively |
81,797 | 76,242 | ||||||
Materials and supplies |
13,480 | 15,236 | ||||||
Deferred tax asset |
2,575 | 2,575 | ||||||
Other current assets |
9,080 | 9,050 | ||||||
Assets of discontinued operations |
11,773 | 27,497 | ||||||
|
|
|
|
|||||
Total current assets |
129,100 | 139,152 | ||||||
Property and equipment, net |
177,109 | 180,291 | ||||||
Goodwill |
198,793 | 198,793 | ||||||
Intangible assets, net |
23,382 | 25,291 | ||||||
Other long-term assets |
13,836 | 15,619 | ||||||
Long-term assets of discontinued operations |
| 20,916 | ||||||
|
|
|
|
|||||
Total assets |
$ | 542,220 | $ | 580,062 | ||||
|
|
|
|
|||||
Liabilities and Stockholders Deficiency |
||||||||
Current liabilities |
||||||||
Accounts payable |
$ | 32,738 | $ | 38,255 | ||||
Current portion of long-term debt, including capital leases |
11,878 | 11,838 | ||||||
Other accrued liabilities |
63,698 | 55,237 | ||||||
Liabilities of discontinued operations |
25,599 | 46,184 | ||||||
|
|
|
|
|||||
Total current liabilities |
133,913 | 151,514 | ||||||
Long-term debt, including capital leases, net of current portion |
526,505 | 520,522 | ||||||
Deferred tax liability |
3,124 | 3,052 | ||||||
Other long-term liabilities |
24,181 | 24,010 | ||||||
Long-term liabilities of discontinued operations |
23,697 | 26,226 | ||||||
|
|
|
|
|||||
Total liabilities |
711,420 | 725,324 | ||||||
|
|
|
|
|||||
Stockholders deficiency |
||||||||
Preferred stock, $.01 par value, 30,500 shares authorized, no shares issued or outstanding |
| | ||||||
Common stock, $.01 par value, 150,000 shares authorized, 40,753 and 40,033 shares issued and outstanding as of March 22, 2015 and December 21, 2014, respectively |
1,017 | 1,010 | ||||||
Additional paid in capital |
383,527 | 383,809 | ||||||
Accumulated deficit |
(548,306 | ) | (524,484 | ) | ||||
Accumulated other comprehensive loss |
(5,438 | ) | (5,597 | ) | ||||
|
|
|
|
|||||
Total stockholders deficiency |
(169,200 | ) | (145,262 | ) | ||||
|
|
|
|
|||||
Total liabilities and stockholders deficiency |
$ | 542,220 | $ | 580,062 | ||||
|
|
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
Table of Contents
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
Quarters Ended | ||||||||
March 22, 2015 |
March 23, 2014 |
|||||||
Operating revenue |
$ | 180,913 | $ | 183,335 | ||||
Operating expense: |
||||||||
Cost of services (excluding depreciation expense) |
151,521 | 158,469 | ||||||
Depreciation and amortization |
6,079 | 7,129 | ||||||
Amortization of vessel dry-docking |
2,634 | 2,679 | ||||||
Selling, general and administrative |
19,592 | 18,893 | ||||||
Miscellaneous income, net |
(429 | ) | (292 | ) | ||||
|
|
|
|
|||||
Total operating expense |
179,397 | 186,878 | ||||||
Operating income (loss) |
1,516 | (3,543 | ) | |||||
Other expense: |
||||||||
Interest expense, net |
17,856 | 17,008 | ||||||
Gain on change in value of debt conversion features |
(2 | ) | (71 | ) | ||||
Other expense, net |
| 1 | ||||||
|
|
|
|
|||||
Loss from continuing operations before income tax expense |
(16,338 | ) | (20,481 | ) | ||||
Income tax expense |
72 | 152 | ||||||
|
|
|
|
|||||
Net loss from continuing operations |
(16,410 | ) | (20,633 | ) | ||||
Net loss from discontinued operations |
(7,412 | ) | (5,605 | ) | ||||
|
|
|
|
|||||
Net loss |
$ | (23,822 | ) | $ | (26,238 | ) | ||
|
|
|
|
|||||
Basic and diluted net loss per share: |
||||||||
Continuing operations |
$ | (0.40 | ) | $ | (0.52 | ) | ||
Discontinued operations |
(0.18 | ) | (0.14 | ) | ||||
|
|
|
|
|||||
Basic and diluted net loss per share |
$ | (0.58 | ) | $ | (0.66 | ) | ||
|
|
|
|
|||||
Number of weighted average shares used in calculations: |
||||||||
Basic |
41,305 | 39,917 | ||||||
Diluted |
41,305 | 39,917 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
Table of Contents
Unaudited Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
Quarters Ended | ||||||||
March 22, 2015 |
March 23, 2014 |
|||||||
Net loss |
$ | (23,822 | ) | $ | (26,238 | ) | ||
Other comprehensive income: |
||||||||
Amortization of pension and post-retirement benefit transition obligation, net of tax |
159 | 69 | ||||||
|
|
|
|
|||||
Other comprehensive income |
159 | 69 | ||||||
|
|
|
|
|||||
Comprehensive loss |
$ | (23,663 | ) | $ | (26,169 | ) | ||
|
|
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
Table of Contents
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
Quarters Ended | ||||||||
March 22, 2015 |
March 23, 2014 |
|||||||
Cash flows from operating activities: |
||||||||
Net loss from continuing operations |
$ | (16,410 | ) | $ | (20,633 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation |
5,016 | 4,953 | ||||||
Amortization of intangible assets |
1,063 | 2,176 | ||||||
Amortization of vessel dry-docking |
2,634 | 2,679 | ||||||
Amortization of deferred financing costs |
846 | 846 | ||||||
Gain on change in value of debt conversion features |
(2 | ) | (71 | ) | ||||
Deferred income taxes |
72 | 135 | ||||||
Gain on equipment disposals |
(333 | ) | (271 | ) | ||||
Stock-based compensation |
446 | 733 | ||||||
Payment-in-kind interest expense |
8,057 | 6,972 | ||||||
Accretion of interest on debt |
296 | 290 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(5,563 | ) | (12,345 | ) | ||||
Materials and supplies |
1,756 | (2,571 | ) | |||||
Other current assets |
(30 | ) | 697 | |||||
Accounts payable |
(5,517 | ) | 891 | |||||
Accrued liabilities |
8,794 | 11,503 | ||||||
Vessel dry-docking payments |
(1,149 | ) | (3,473 | ) | ||||
Legal settlement payments |
(358 | ) | (500 | ) | ||||
Other assets/liabilities |
147 | 121 | ||||||
|
|
|
|
|||||
Net cash used in operating activities from continuing operations |
(235 | ) | (7,868 | ) | ||||
Net cash used in operating activities from discontinued operations |
(4,863 | ) | (7,376 | ) | ||||
|
|
|
|
|||||
Cash flows from investing activities: |
||||||||
Purchases of property and equipment |
(1,969 | ) | (1,363 | ) | ||||
Proceeds from the sale of property and equipment |
845 | 719 | ||||||
|
|
|
|
|||||
Net cash used in investing activities from continuing operations |
(1,124 | ) | (644 | ) | ||||
Net cash provided by (used in) investing activities from discontinued operations |
15,784 | (455 | ) | |||||
|
|
|
|
|||||
Cash flows from financing activities: |
||||||||
Payments on ABL facility |
(9,500 | ) | (12,200 | ) | ||||
Borrowings under ABL facility |
9,500 | 25,700 | ||||||
Payments on long-term debt |
(1,875 | ) | | |||||
Payments on capital lease obligations |
(475 | ) | (380 | ) | ||||
Payment of financing costs |
| (11 | ) | |||||
|
|
|
|
|||||
Net cash (used in) provided by financing activities from continuing operations |
(2,350 | ) | 13,109 | |||||
Net cash used in financing activities from discontinued operations |
(5,369 | ) | (523 | ) | ||||
|
|
|
|
|||||
Net (decrease) increase in cash from continuing operations |
(3,709 | ) | 4,597 | |||||
Net increase (decrease) in cash from discontinued operations |
5,552 | (8,354 | ) | |||||
|
|
|
|
|||||
Net increase (decrease) in cash |
1,843 | (3,757 | ) | |||||
Cash at beginning of period |
8,552 | 5,236 | ||||||
|
|
|
|
|||||
Cash at end of period |
$ | 10,395 | $ | 1,479 | ||||
|
|
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Organization
Horizon Lines, Inc. (the Company) operates as a holding company for Horizon Lines, LLC (Horizon Lines), a Delaware limited liability company and wholly-owned subsidiary, Horizon Lines of Alaska, LLC (Horizon Lines of Alaska), a Delaware limited liability company and wholly-owned subsidiary, Horizon Lines of Puerto Rico, Inc. (HLPR), a Delaware corporation and wholly-owned subsidiary, and Hawaii Stevedores, Inc. (HSI), a Hawaii corporation and wholly-owned subsidiary.
The Company and its subsidiaries operate as a Jones Act container shipping business with primary service to ports within the continental United States, Alaska, and Hawaii (as well as Puerto Rico through January 2015 before ceasing container shipping in Puerto Rico as discussed below). Under the Jones Act, all vessels transporting cargo between covered locations must, subject to limited exceptions, be built in the U.S., registered under the U.S. flag, manned by predominantly U.S. crews, and owned and operated by U.S.-organized companies that are controlled and 75% owned by U.S. citizens. The Company and its subsidiaries also offer terminal services. HLPR operates as an agent for Horizon Lines in Puerto Rico and also provided terminal services in Puerto Rico, which were discontinued during the first quarter of 2015.
The accompanying condensed consolidated financial statements include the consolidated accounts of the Company and its majority owned subsidiaries and the related consolidated statements of operations, comprehensive loss, and cash flows. All significant intercompany accounts and transactions have been eliminated.
On November 11, 2014, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with Matson Navigation Company, Inc., a Hawaii corporation (Matson), and Hogan Acquisition Inc., a Delaware corporation and a wholly-owned Subsidiary of Matson (Merger Sub), pursuant to which Merger Sub will merge with and into the Company (the Merger), with the Company surviving the Merger and becoming a wholly-owned subsidiary of Matson. On November 11, 2014, the Company also entered into a Contribution, Assumption and Purchase Agreement (the Purchase Agreement) with The Pasha Group, a California corporation (Pasha), SR Holdings LLC, a California limited liability company and wholly-owned subsidiary of Pasha and Sunrise Operations LLC, a California limited liability company and wholly-owned subsidiary of the Company, pursuant to which Pasha will acquire the Companys Hawaii trade lane business, prior to closing of the Merger, for approximately $141.5 million in cash. The description of the Merger Agreement and the Purchase Agreement below does not purport to be complete and is qualified in its entirety by the full text of the Merger Agreement and the Purchase Agreement, as filed with our Current Report on Form 8-K filed with the Securities and Exchange Commission on November 13, 2014, as well as the Amendment No. 1 to Agreement and Plan of Merger, as filed with our current report on Form 8-K filed with the Securities and Exchange Commission on February 17, 2015.
Under the terms of the Merger Agreement, following the sale of the Companys Hawaii business (the Hawaii sale) to Pasha, if the Merger is consummated, each outstanding share of Company common stock, other than shares owned by the Company, Matson, Merger Sub and holders who are entitled to and properly exercise appraisal rights under Delaware law, will be converted into the right to receive $0.72 in cash, without interest and less any applicable withholding taxes (the per share merger consideration) and each outstanding warrant to acquire shares of Company common stock will be canceled and converted into the right to receive an amount in cash equal to the product of the per share merger consideration multiplied by the total number of shares of Company common stock subject to such warrant, without interest and less any applicable withholding taxes.
The Merger is subject to the satisfaction of a number of conditions including, among other things, completion of the Hawaii sale. The Hawaii sale is also subject to the satisfaction of a number of conditions including, among other things, satisfaction or waiver of the conditions to the completion of the Merger and regulatory approval, pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Clearance). Effective April 21, 2015, after review by the Antitrust Division of the Department of Justice, HSR Clearance was secured upon the issuance of an early termination of the premerger waiting period required under the HSR Act. Similarly, effective April 24, 2015, the state of Hawaii Antitrust Division closed its review of the Hawaii sale. Subject to the satisfaction of the remaining conditions to the completion of the Hawaii sale, the Company expects the Hawaii sale to occur before the end of the Companys fiscal second quarter. The Company currently expects to close the Merger immediately after the completion of the Hawaii sale, assuming that all of the conditions to the completion of the Merger have been satisfied when the conditions to the completion of the Hawaii sale are satisfied. However, we cannot predict with certainty either when all of the conditions to the completion of the Hawaii sale and the Merger, respectively, will be satisfied or the date of the closing of these transactions.
The Merger Agreement may be terminated under certain circumstances, including in specified circumstances in connection with a superior proposal (a Fiduciary Termination). In certain circumstances, if the Merger Agreement is terminated due to a Fiduciary Termination, the Company would be responsible to pay a termination fee to Matson of $9.5 million and reimburse Matson for all its out-of-pocket expenses incurred in connection with the Merger.
5
Table of Contents
The Purchase Agreement may be terminated under certain circumstances. If the Purchase Agreement is terminated following a Fiduciary Termination of the Merger Agreement, the Company would be required to pay a termination fee to Pasha of $5.0 million and reimburse Pasha for all its out-of-pocket expenses incurred in connection with the Hawaii sale. If the Purchase Agreement is terminated under certain circumstances, including in specified circumstances due to a governmental authority prohibiting or otherwise restraining the consummation of the Hawaii sale. Pasha would be responsible to pay the Company a termination fee of $30.0 million.
Prior to the execution of the Purchase Agreement, the Company established a wholly-owned subsidiary, Sunrise Operations LLC, to facilitate the transfer of the designated assets to Pasha if and when that transaction is consummated. Subsequent to the execution of the Purchase Agreement, the Company established four additional subsidiaries (the Additional Subsidiaries), each of which is wholly owned by Sunrise Operations LLC (the Additional Subsidiaries collectively with Sunrise Operations LLC, the Sunrise Subsidiaries). Each of the Sunrise Subsidiaries is an immaterial subsidiary or a non-guarantor within the meaning of the Companys various credit and debt agreements.
On February 25, 2015, at a special meeting (the Special Meeting) of the stockholders of the Company, the Companys stockholders approved the proposal to adopt the Merger Agreement. The issued and outstanding shares of Company common stock entitled to vote at the Special Meeting consisted of 40,540,047 shares with 34,884,148 votes cast in favor of the proposal to adopt the Merger Agreement.
The Company discontinued its liner service between the U.S. and Puerto Rico and terminal services in Puerto Rico in the first quarter of 2015. The Puerto Rico operations have been classified as discontinued operations in all periods presented.
2. Basis of Presentation
The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany items have been eliminated in consolidation.
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and accordingly, certain financial information has been condensed and certain footnote disclosures have been omitted. Such information and disclosures are normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (GAAP). These financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Companys Annual Report on Form 10-K for the year ended December 21, 2014. The Company uses a 52 or 53 week (every sixth or seventh year) fiscal year that ends on the Sunday before the last Friday in December.
The financial statements as of March 22, 2015 and the financial statements for the quarters ended March 22, 2015 and March 23, 2014 are unaudited; however, in the opinion of management, such statements include all adjustments necessary for the fair presentation of the financial information included herein, which are of a normal recurring nature. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions and to use judgment that affects the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates. Results of operations for interim periods are not necessarily indicative of results for the full year.
3. Long-Term Debt
As of the dates below, long-term debt consisted of the following (in thousands):
March 22, 2015 |
December 21, 2014 |
|||||||
First lien notes |
$ | 219,290 | $ | 219,458 | ||||
Second lien notes |
225,351 | 217,126 | ||||||
$75.0 million term loan agreement |
66,891 | 68,544 | ||||||
$20.0 million term loan agreement |
19,746 | 19,709 | ||||||
ABL facility |
| | ||||||
Capital lease obligations |
5,494 | 5,948 | ||||||
6.0% convertible notes |
1,611 | 1,575 | ||||||
|
|
|
|
|||||
Total long-term debt |
538,383 | 532,360 | ||||||
Less current portion |
(11,878 | ) | (11,838 | ) | ||||
|
|
|
|
|||||
Long-term debt, net of current portion |
$ | 526,505 | $ | 520,522 | ||||
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|
|
|
6
Table of Contents
On October 5, 2011, the Company issued the 6.00% Convertible Notes. On October 5, 2011, Horizon Lines issued the First Lien Notes, the Second Lien Notes, and entered into the ABL Facility. On January 31, 2013, Horizon Lines entered into the $20.0 Million Agreement and Horizon Lines Alaska Vessels, LLC (Horizon Alaska), the Companys special purpose subsidiary formed for the sole purpose of acquiring vessels, entered into the $75.0 Million Agreement. The 6.00% Convertible Notes, the First Lien Notes, the Second Lien Notes, the ABL Facility, the $20.0 Million Agreement, and the $75.0 Million Agreement are defined and described below.
The Company formed the Sunrise Subsidiaries pursuant to the terms of the Purchase Agreement. The Sunrise Subsidiaries currently have no operations. Accordingly, the Sunrise Subsidiaries are each currently Immaterial Subsidiaries under the ABL Facility, the 6.00% Convertible Notes, the Second Lien Notes, and the $20.0 Million Agreement (collectively, the Horizon Lines Debt Agreements) and do not guarantee any of the Horizon Lines Debt Agreements.
Per the terms of the Horizon Lines Debt Agreements, the Alaska SPEs (as defined below) are not required to be a party thereto, and are considered Unrestricted Subsidiaries under the 6.00% Convertible Notes, the First Lien Notes, the Second Lien Notes, and the $20.0 Million Agreement. The Alaska SPEs do not guarantee any of the Horizon Lines Debt Agreements; however, they are the sole guarantors of the $75 Million Agreement.
The 6.00% Convertible Notes are fully and unconditionally guaranteed by the Companys subsidiaries other than the Immaterial Subsidiaries and Unrestricted Subsidiaries identified above. The ABL Facility, the First Lien Notes, the Second Lien Notes, and the $20.0 Million Agreement are fully and unconditionally guaranteed by the Company and each of its subsidiaries other than Horizon Lines, the Unrestricted Subsidiaries and the Immaterial Subsidiaries.
The ABL Facility is secured on a first-priority basis by liens on the accounts receivable, deposit accounts, securities accounts, investment property (other than equity interests of the subsidiaries and joint ventures of the Company) and cash, in each case with certain exceptions, of the Company and the Companys subsidiaries other than the Immaterial Subsidiaries and Unrestricted Subsidiaries identified above (collectively, the ABL Priority Collateral). Substantially all other assets of the Company and the Companys subsidiaries, other than the assets of the Immaterial Subsidiaries and the Unrestricted Subsidiaries identified above, also serve as collateral for the Horizon Lines Debt Agreements (collectively, such other assets are the Secured Notes Priority Collateral).
The following table summarizes the issuers, guarantors and non-guarantors of each of the Horizon Lines Debt Agreements:
ABL Facility |
$20 Million |
First Lien |
Second Lien |
6% Convertible |
$75 Million | |||||||
Horizon Lines, Inc. |
Guarantor | Guarantor | Guarantor | Guarantor | Issuer | Non-Guarantor | ||||||
Horizon Lines, LLC |
Issuer | Issuer | Issuer | Issuer | Guarantor | Non-Guarantor | ||||||
Horizon Alaska |
Non-Guarantor | Unrestricted | Unrestricted | Unrestricted | Unrestricted | Issuer | ||||||
Horizon Vessels |
Non-Guarantor | Unrestricted | Unrestricted | Unrestricted | Unrestricted | Guarantor | ||||||
Alaska Terminals |
Non-Guarantor | Unrestricted | Unrestricted | Unrestricted | Unrestricted | Guarantor | ||||||
Sunrise Subsidiaries |
Non-Guarantor | Non-Guarantor | Non-Guarantor | Non-Guarantor | Non-Guarantor | Non-Guarantor | ||||||
Other subsidiaries of the Company not specifically listed above |
Guarantor | Guarantor | Guarantor | Guarantor | Guarantor | Non-Guarantor |
The following table lists the order of lien priority for each of the Horizon Lines Debt Agreements on the Secured Notes Priority Collateral and the ABL Priority Collateral, as applicable:
Secured Notes Priority Collateral |
ABL Priority Collateral | |||
$20.0 Million Agreement |
First | Second | ||
First Lien Notes |
Second | Third | ||
Second Lien Notes |
Third | Fourth | ||
6.0% Convertible Notes |
Fourth | Fifth | ||
ABL Facility |
Fifth | First |
7
Table of Contents
First Lien Notes
The 11.00% First Lien Senior Secured Notes (the First Lien Notes) were issued pursuant to an indenture on October 5, 2011. The First Lien Notes bear interest at a rate of 11.0% per annum, payable semiannually beginning on April 15, 2012 and mature on October 15, 2016. The First Lien Notes are callable at par plus accrued and unpaid interest. Horizon Lines is obligated to make mandatory prepayments of 1%, on an annual basis, of the original principal amount. These prepayments are payable on a semiannual basis and commenced on April 15, 2012.
The First Lien Notes contain affirmative and negative covenants which are typical for senior secured high-yield notes with no financial maintenance covenants. The First Lien Notes contain other covenants, including: change of control put at 101% (subject to a permitted holder exception); limitation on asset sales; limitation on incurrence of indebtedness and preferred stock; limitation on restricted payments; limitation on restricted investments; limitation on liens; limitation on dividends; limitation on affiliate transactions; limitation on sale/leaseback transactions; limitation on guarantees by restricted subsidiaries; and limitation on mergers, consolidations and sales of all/substantially all of the assets of Horizon Lines. These covenants are subject to certain exceptions and qualifications. Horizon Lines was in compliance with all such applicable covenants as of March 22, 2015, and the pending transactions with Matson and Pasha (discussed in Note 1) will not cause any covenant violation associated with the First Lien Notes.
On October 5, 2011, the fair value of the First Lien Notes was $228.4 million, which reflected Horizon Lines ability to call the First Lien Notes at 101.5% during the first year and at par thereafter. The original issue premium of $3.4 million is being amortized through interest expense through the maturity of the First Lien Notes.
Second Lien Notes
The 13.00%-15.00% Second Lien Senior Secured Notes (the Second Lien Notes) were issued pursuant to an indenture on October 5, 2011.
The Second Lien Notes bear interest at a rate of either: (i) 13% per annum, payable semiannually in cash in arrears; (ii) 14% per annum, 50% of which is payable semiannually in cash in arrears and 50% is payable in kind; or (iii) 15% per annum payable in kind, payable semiannually beginning on April 15, 2012, and maturing on October 15, 2016. The Second Lien Notes were non-callable for two years from the date of their issuance, were callable by Horizon Lines at 106% of their aggregate principal amount, plus accrued and unpaid interest thereon in the third year, and thereafter the Second Lien Notes are callable by Horizon Lines at 103% of their aggregate principal amount, plus accrued and unpaid interest thereon in the fourth year, and at par plus accrued and unpaid interest thereafter.
On April 15, 2012, October 15, 2012, April 15, 2013, October 15, 2013, April 15, 2014 and October 15, 2014, and April 15, 2015, Horizon Lines issued an additional $7.9 million, $8.1 million, $8.7 million, $9.4 million, $10.1 million, $10.8 million, and $11.6 million respectively, of Second Lien Notes to satisfy the payment-in-kind interest obligation under the Second Lien Notes. As such, as of March 22, 2015, Horizon Lines has recorded $10.1 million of accrued interest for the period from October 15, 2014 to March 22, 2015, due April 15, 2015 as an increase to long-term debt.
The Second Lien Notes contain affirmative and negative covenants that are typical for senior secured high-yield notes with no financial maintenance covenants. The Second Lien Notes contain other covenants, including: change of control put at 101% (subject to a permitted holder exception); limitation on asset sales; limitation on incurrence of indebtedness and preferred stock; limitation on restricted payments; limitation on restricted investments; limitation on liens; limitation on dividends; limitation on affiliate transactions; limitation on sale/leaseback transactions; limitation on guarantees by restricted subsidiaries; and limitation on mergers, consolidations and sales of all/substantially all of the assets of Horizon Lines. These covenants are subject to certain exceptions and qualifications. Horizon Lines was in compliance with all such applicable covenants as of March 22, 2015, and the pending transactions with Matson and Pasha (discussed in Note 1) will not cause any covenant violation associated with the Second Lien Notes.
On October 5, 2011, the fair value of the Second Lien Notes was $96.6 million. The original issue discount of $3.4 million is being amortized through interest expense through the maturity of the Second Lien Notes.
During 2012, the Company and Horizon Lines entered into a Global Termination Agreement with Ship Finance International Limited (SFL) whereby Horizon Lines issued $40.0 million aggregate principal amount of its Second Lien Notes and 9,250,000 warrants that can be converted to 9,250,000 shares of the Companys common stock at a price of $0.01 per share to satisfy its obligations for certain vessel leases. The Second Lien Notes issued to SFL (the SFL Notes) have the same terms and covenants as the Second Lien Notes issued on October 5, 2011 (the Initial Notes), except that they are subordinated to the Initial Notes in the case of a bankruptcy, and holders of the SFL Notes, so long as then held by SFL, have the option to purchase the Initial Notes in the event
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of a bankruptcy. On April 9, 2012, the fair value of the SFL Notes outstanding on such date approximated face value. On October 15, 2012, April 15, 2013, October 15, 2013, April 15, 2014, October 15, 2014, and April 15, 2015, Horizon Lines issued an additional $3.1 million, $3.2 million, $3.5 million, $3.7 million, $4.0 million, and $4.3 million, respectively, of SFL Notes to satisfy the payment-in-kind interest obligation under the SFL Notes. As such, as of March 22, 2015, Horizon Lines has recorded $3.8 million of accrued interest for the period from October 15, 2014 to March 22, 2015, due April 15, 2015 as an increase to long-term debt.
ABL Facility
On October 5, 2011, Horizon Lines entered into a $100.0 million asset-based revolving credit facility (the ABL Facility) with Wells Fargo Capital Finance, LLC (Wells Fargo). Use of the ABL Facility is subject to compliance with a customary borrowing base limitation. The ABL Facility includes an up to $30.0 million letter of credit sub-facility and a swingline sub-facility up to $15.0 million, with Wells Fargo serving as administrative agent and collateral agent. Horizon Lines has the option to request increases in the maximum commitment under the ABL Facility by up to $25.0 million in the aggregate; however, such incremental facility increases have not been committed to in advance. The ABL Facility is available to be used by Horizon Lines for working capital and other general corporate purposes.
The ABL Facility was amended on January 31, 2013 in conjunction with the $75.0 Million Agreement and $20.0 Million Agreement. In addition to allowing for the incurrence of the additional long-term debt under those agreements, amendments to the ABL Facility included, among other changes, (i) permission to make certain investments in the Alaska SPEs, including the proceeds of the $20.0 Million Agreement and the arrangements related to the charters and the sublease of the terminal facility licenses for the Vessels (as defined below), (ii) excluding the Alaska SPEs from the guarantee and collateral requirements of the ABL Facility and from the restrictions of the negative covenants and certain other provisions, (iii) weekly borrowing base reporting in the event availability under the facility falls below a threshold of (a) $14.0 million or (b) 14.0% of the maximum commitment under the ABL Facility, (iv) the exclusion of certain historical charges and expenses relating to discontinued operations and severance from the calculation of bank-defined Adjusted EBITDA, (v) the exclusion of the historical charter hire expense deriving from the Vessels from the calculation of bank-defined Adjusted EBITDA, and (vi) the inclusion of pro forma interest expense on the $75.0 Million Agreement and the $20.0 Million Agreement in the calculation of fixed charges.
The ABL Facility matures October 5, 2016 (but 90 days earlier, July 7, 2016, if the First Lien Notes and the Second Lien Notes are not repaid or refinanced as of such date). The interest rate on the ABL Facility is LIBOR or a base rate plus an applicable margin based on leverage and excess availability, as defined in the agreement, ranging from (i) 1.25% to 2.75%, in the case of base rate loans and (ii) 2.25% to 3.75%, in the case of LIBOR loans. A fee ranging from 0.375% to 0.50% per annum will accrue on unutilized commitments under the ABL Facility. Horizon Lines had $10.5 million of letters of credit outstanding as of March 22, 2015, which reduced the overall borrowing availability. As of March 22, 2015, there were no borrowings outstanding under the ABL facility and total borrowing availability was $47.3 million.
The ABL Facility requires compliance with a minimum fixed charge coverage ratio test if excess availability is less than the greater of (i) $12.5 million or (ii) 12.5% of the maximum commitment under the ABL Facility. In addition, the ABL Facility includes certain customary negative covenants that, subject to certain materiality thresholds, baskets and other agreed upon exceptions and qualifications, will limit, among other things, indebtedness, liens, asset sales and other dispositions, mergers, liquidations, dissolutions and other fundamental changes, investments and acquisitions, dividends, distributions on equity or redemptions and repurchases of capital stock, transactions with affiliates, repayments of certain debt, conduct of business and change of control. The ABL Facility also contains certain customary representations and warranties, affirmative covenants and events of default, as well as provisions requiring compliance with applicable citizenship requirements of the Jones Act. Horizon Lines was in compliance with all such applicable covenants as of March 22, 2015.
Subsequent to the end of the first quarter, the ABL Facility was amended on April 22, 2015 to reduce the size of the facility from $100.0 million to $80.0 million. Horizon Lines accounts receivable balances have decreased due to the closing of the Puerto Rico operations. The decrease has resulted in a reduction in the maximum forecasted borrowing base below $80 million. The reduction in the facility size is expected to reduce Horizon Lines unused fees by approximately $0.1 million per year. In addition to this fee reduction, this amendment reduces the requirement for testing the minimum fixed charge coverage ratio, from a minimum excess availability of $12.5 million to $10.0 million and the threshold for weekly borrowing base reporting from $14.0 million to $12.0 million. The amendment also reduces the letter of credit sub-limit from $30.0 million to $20.0 million.
$75.0 Million Term Loan Agreement
Three of Horizon Lines Jones Act-qualified vessels: the Horizon Anchorage, Horizon Tacoma, and Horizon Kodiak (collectively, the Vessels) were previously chartered. The charter for the Vessels was due to expire in January 2015. For each chartered Vessel, the Company generally had the following options in connection with the expiration of the charter: (i) purchase the
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vessel for its fixed price or fair market value, (ii) extend the charter for an agreed upon period of time at a fixed price or fair market value charter rate or, (iii) return the vessel to its owner. On January 31, 2013, the Company, through its newly formed subsidiary Horizon Alaska, acquired off of charter the Vessels for a purchase price of approximately $91.8 million.
On January 31, 2013, Horizon Alaska, together with two newly formed subsidiaries of Horizon Lines, Horizon Lines Alaska Terminals, LLC (Alaska Terminals) and Horizon Lines Merchant Vessels, LLC (Horizon Vessels), entered into an approximately $75.8 million term loan agreement with certain lenders and U.S. Bank National Association (U.S. Bank), as the administrative agent, collateral agent and ship mortgage trustee (the $75.0 Million Agreement). The obligations under the $75.0 Million Agreement are secured by a first-priority lien on substantially all of the assets of Horizon Alaska, Horizon Vessels, and Alaska Terminals (collectively, the Alaska SPEs), which primarily includes the Vessels. The operations of the Alaska SPEs are limited to a bareboat charter of the Vessels between Horizon Alaska and Horizon Lines and a sublease of a terminal facility in Anchorage, Alaska between Alaska Terminals and Horizon Lines of Alaska.
The loan under the $75.0 Million Agreement accrues interest at 10.25% per annum, payable quarterly commencing March 31, 2013. Amortization of loan principal is payable in equal quarterly installments, commencing on March 31, 2014, and each amortization installment will equal 2.5% of the total initial loan amount (which may increase to 3.75% upon specified events). The full remaining outstanding amount of the loan under the $75.0 Million Agreement is payable on September 30, 2016. The proceeds of the loan under the $75.0 Million Agreement were utilized by Horizon Alaska to acquire the Vessels. In connection with the borrowing under the $75.0 Million Agreement, the Alaska SPEs paid financing costs of $2.5 million during 2013, which included loan commitment fees of $1.5 million. The financing costs have been recorded as a reduction to the carrying amount of the $75.0 Million Agreement and will be amortized through non-cash interest expense through maturity of the $75.0 Million Agreement. In addition to the commitment fees of $1.5 million paid in cash at closing, the Alaska SPEs will also pay, at maturity of the $75.0 Million Agreement, an additional $0.8 million of closing fees by increasing the original $75.0 million principal amount. The Company is recording non-cash interest accretion through maturity of the $75.0 Million Agreement related to the additional closing fees.
The $75.0 Million Agreement contains certain covenants, including a minimum EBITDA threshold and limitations on the incurrence of indebtedness, liens, asset sales, investments and dividends (all as defined in the agreement). The Alaska SPEs were in compliance with all such covenants as of March 22, 2015. The agent and the lenders under the $75.0 Million Agreement do not have any recourse to the stock or assets of the Company or any of its subsidiaries (other than the Alaska SPEs or equity interests therein). Defaults under the $75.0 Million Agreement do not give rise to any remedies under the Horizon Lines Debt Agreements.
On January 31, 2013, the fair value of the $75.0 Million Agreement approximated face value and was classified within level 2 of the fair value hierarchy. In determining the estimated fair value of the $75.0 Million Agreement, the Company utilized a quantitatively derived rating estimate and creditworthiness analysis, a credit rating gap analysis, and an analysis of credit market transactions. These analyses were used to estimate a benchmark yield, which was compared to the stated interest rate in the $75.0 Million Agreement. The Company determined the estimated benchmark yield approximated the stated interest rate.
$20.0 Million Term Loan Agreement
On January 31, 2013, the Company and those of its subsidiaries that are parties (collectively, the Loan Parties) to the existing First Lien Notes, the Second Lien Notes, and the 6.00% Convertible Notes (collectively, the Notes) entered into a $20.0 million term loan agreement with certain lenders and U.S. Bank, as administrative agent, collateral agent, and ship mortgage trustee (the $20.0 Million Agreement). The loan under the $20.0 Million Agreement matures on September 30, 2016 and accrues interest at 8.00% per annum, payable quarterly commencing March 31, 2013 with interest calculated assuming accrual beginning January 8, 2013. The $20.0 Million Agreement does not provide for any amortization of principal, and the full outstanding amount of the loan is payable on September 30, 2016. Horizon Lines is not permitted to optionally prepay the $20.0 Million Agreement except for prepayment in full (together with a prepayment premium equal to 5.0% of the principal amount prepaid) following repayment in full of the First Lien Notes and the $75.0 Million Agreement.
In connection with the issuance of the $20.0 Million Agreement, Horizon Lines paid financing costs of $0.6 million during 2013. The financing costs have been recorded as a reduction to the carrying amount of the $20.0 Million Agreement and will be amortized through non-cash interest expense through maturity of the $20.0 Million Agreement.
The covenants in the $20.0 Million Agreement are substantially similar to the negative covenants contained in the indentures governing the Notes, which indentures permit the incurrence of the term loan borrowed under the $20.0 Million Agreement and the contribution of such amounts to Horizon Alaska. The proceeds of the loan borrowed under the $20.0 Million Agreement were contributed to Horizon Alaska to enable it to acquire the Vessels. Horizon Lines was in compliance with all covenants as of March 22, 2015.
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On January 31, 2013, the fair value of the $20.0 Million Agreement approximated face value and was classified within level 2 of the fair value hierarchy. In determining the estimated fair value of the $20.0 Million Agreement, the Company utilized a quantitatively derived rating estimate and creditworthiness analysis, a credit rating gap analysis, and an analysis of credit market transactions. These analyses were used to estimate a benchmark yield, which was compared to the stated interest rate in the $20.0 Million Agreement. The Company determined the estimated benchmark yield approximated the stated interest rate.
6.00% Convertible Notes
On October 5, 2011, the Company issued $178.8 million in aggregate principal amount of new 6.00% Series A Convertible Senior Secured Notes due 2017 (the Series A Notes) and $99.3 million in aggregate principal amount of new 6.00% Series B Mandatorily Convertible Senior Secured Notes (the Series B Notes and, together with the Series A Notes, collectively the 6.00% Convertible Notes). The 6.00% Convertible Notes were issued pursuant to an indenture, which the Company and the Loan Parties entered into with U.S. Bank, as trustee and collateral agent, on October 5, 2011 (the 6.00% Convertible Notes Indenture).
During 2012, the Company completed various debt-to-equity conversions of the 6.00% Convertible Notes. On October 5, 2012, all outstanding Series B Notes not previously converted into shares of the Companys common stock were mandatorily converted into Series A Notes as required by the terms of the 6.00% Convertible Notes Indenture. As of March 22, 2015, $2.0 million face value of the Series A Notes remains outstanding. The Series A Notes bear interest at a rate of 6.00% per annum, payable semiannually. The Series A Notes mature on April 15, 2017 and are convertible at the option of the holders, and at the Companys option under certain circumstances, into shares of the Companys common stock or warrants, as the case may be. Upon conversion, foreign holders may, under certain conditions, receive warrants in lieu of shares of common stock.
In connection with the execution of the Merger Agreement, on November 11, 2014, the Company and U.S. Bank National Association (the Trustee), as trustee and collateral agent entered into a fifth supplemental indenture (the Fifth Supplemental Indenture) to the 6.00% Convertible Notes Indenture. The Fifth Supplemental Indenture provides that, subject to the satisfaction and discharge of all secure debt that is senior to the 6.00% Convertible Notes, immediately after consummation of the Merger contemplated by the Merger Agreement, the Company will make an irrevocable deposit (the Merger Deposit) with the Trustee of an amount in cash that is sufficient to pay the principal of, premium (if any) and interest on the 6.00% Convertible Notes on the scheduled due dates through and including its stated maturity. Upon receipt of the Merger Deposit, unless and until a default or event of default with respect to the payment of principal, premium (if any) or interest on the 6.00% Convertible Notes occurs, certain covenants in the 6.00% Convertible Notes Indenture will be suspended and neither the Company nor any of its subsidiaries will be obligated to comply with such covenants. The covenants subject to suspension, include, among others, covenants regarding the Companys obligation to furnish annual and quarterly reports to the Trustee, covenants regarding restricted payments, covenants regarding restrictions on dividends and other distributions, incurrence of debt, incurrence of liens, affiliate transactions, and certain covenants regarding asset sales. The Trustee will use the Merger Deposit for payment of principal, premium (if any) and interest on the Notes pursuant to the terms of the 6.00% Convertible Notes Indenture.
The conversion rate of the remaining Series A Notes may be increased in certain circumstances to compensate the holders thereof for the loss of the time value of the conversion right (i) if at any time the Companys common stock or the common stock into which the new notes may be converted is greater than or equal to $11.25 per share and is not listed on the NYSE or NASDAQ markets or (ii) if a change of control occurs, unless at least 90% of the consideration received or to be received by holders of common stock, excluding cash payments for fractional shares, in connection with the transaction or transactions constituting the change of control, consists of shares of common stock, American Depositary Receipts or American Depositary Shares traded on a national securities exchange in the United States or which will be so traded or quoted when issued or exchanged in connection with such change of control. Upon a change of control, holders will have the right to require the Company to repurchase for cash the outstanding Series A Notes at 101% of the aggregate principal amount, plus accrued and unpaid interest.
The long-term debt and embedded conversion options associated with the 6.00% Convertible Notes were recorded on the Companys balance sheet at their fair value on October 5, 2011. On October 5, 2011, the fair value of the long-term debt portion of the Series A Notes and Series B Notes was $105.6 million and $58.6 million, respectively. The original issue discounts associated with the 6.00% Convertible Notes still outstanding are being amortized through interest expense through the maturity of the Series A Notes.
Warrants
Certain warrants, not including the warrants issued to SFL, were issued pursuant to a warrant agreement, which the Company entered into with The Bank of New York Mellon Trust Company, N.A, as warrant agent, on October 5, 2011, as amended by Amendment No. 1, dated December 7, 2011 (the Warrant Agreement). Pursuant to the Warrant Agreement, each warrant entitles the holder to purchase common stock at a price of $0.01 per share, subject to adjustment in certain circumstances. In connection with a
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reverse stock split in December 2011, warrant holders will receive 1/25th of a share of the Companys common stock upon conversion. As of March 22, 2015 there were 1.1 billion warrants outstanding for the purchase of up to 51.6 million shares of the Companys common stock. Upon issuance, in lieu of payment of the exercise price, a warrant holder will have the right (but not the obligation) to require the Company to convert its warrants, in whole or in part, into shares of its common stock without any required payment or request that the Company withhold, from the shares of common stock that would otherwise be delivered to such warrant holder, shares issuable upon exercise of the warrants equal in value to the aggregate exercise price.
Warrant holders will not be permitted to exercise or convert their warrants if and to the extent the shares of common stock issuable upon exercise or conversion would constitute excess shares (as defined in the Companys certificate of incorporation) if they were issued in order to abide by the foreign ownership limitations imposed by the Companys certificate of incorporation. In addition, a warrant holder who cannot establish to the Companys reasonable satisfaction that it (or, if not the holder, the person that the holder has designated to receive the common stock upon exercise or conversion) is a United States citizen will not be permitted to exercise or convert its warrants to the extent the receipt of the common stock upon exercise or conversion would cause such person or any person whose ownership position would be aggregated with that of such person to exceed 4.9% of the Companys outstanding common stock.
The warrants contain no provisions allowing the Company to force redemption. Each warrant is convertible into shares of the Companys common stock at an exercise price of $0.01 per share, which the holder has the option to waive. In addition, the Company has sufficient authorized and unissued shares available to settle the warrants during the maximum period the warrants could remain outstanding. As a result, the warrants do not meet the definition of an asset or liability and were classified as equity on the date of issuance, on December 21, 2014, and on March 22, 2015. The warrants will be evaluated on a continuous basis to determine if equity classification continues to be appropriate.
Fair Value of Financial Instruments
The estimated fair value of the Companys debt as of March 22, 2015 and December 21, 2014 totaled $521.3 million and $522.6 million, respectively. The fair value of the First Lien Notes and the Second Lien Notes is based upon quoted market prices. The fair value of the other long-term debt approximates carrying value.
4. Discontinued Operations
In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The amendments in ASU 2014-08 change the requirements for reporting discontinued operations in ASC 205-20. The amendments change the definition of discontinued operations by limiting discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entitys operations and financial results. The amendments require expanded disclosures for discontinued operations and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2014. The Company adopted ASU 2014-08 during the quarter ended March 22, 2015 and presented its Puerto Rico operations as discontinued operations in all periods presented.
The Company discontinued its liner service between the U.S. and Puerto Rico and terminal services in Puerto Rico in the first quarter of 2015. On March 11, 2015, Horizon Lines and HLPR sold certain of their respective terminal assets to Luis A. Ayala Colon Sucrs, Inc. (LAC) for proceeds of $7.3 million pursuant to an asset purchase agreement. LAC assumed HLPRs terminal lease with the Puerto Rico Port Authority, which reduced the Companys future minimum operating lease payments by $12.8 million. The fourth quarter 2014 restructuring charge excluded the cost of exiting the terminal lease due to the sale of assets to LAC. During the quarter ended March 22, 2015, the Company sold two vessels, the Discovery and the Trader, for proceeds of $3.8 million, which equaled book value.
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Assets and Liabilities of Discontinued Operations
The following table presents balance sheet information for the discontinued operations included in the Unaudited Condensed Consolidated Balance Sheets (in thousands):
March 22, 2015 |
December 21, 2014 |
|||||||
Assets of discontinued operations: |
||||||||
Current assets |
||||||||
Accounts receivable, net of allowance of $3,371 and $4,008 at March 22, 2015 and December 21, 2014, respectively |
$ | 5,243 | $ | 25,690 | ||||
Materials and supplies |
| 807 | ||||||
Other current assets |
416 | 1,000 | ||||||
Property and equipment, net |
6,100 | | ||||||
Other assets |
14 | | ||||||
|
|
|
|
|||||
Total current assets of discontinued operations |
$ | 11,773 | $ | 27,497 | ||||
|
|
|
|
|||||
Non-current assets |
||||||||
Property and equipment, net |
| 20,769 | ||||||
Other assets |
| 147 | ||||||
|
|
|
|
|||||
Total non-current assets of discontinued operations |
$ | | $ | 20,916 | ||||
|
|
|
|
|||||
Total assets of discontinued operations |
$ | 11,773 | $ | 48,413 | ||||
|
|
|
|
|||||
Liabilities of discontinued operations: |
||||||||
Current liabilities |
||||||||
Accounts payable |
$ | 3,433 | $ | 5,119 | ||||
Current portion of capital lease obligations |
| 5,369 | ||||||
Restructuring liabilities |
11,058 | 18,558 | ||||||
Other accrued liabilities |
11,108 | 17,138 | ||||||
|
|
|
|
|||||
Total current liabilities of discontinued operations |
25,599 | 46,184 | ||||||
|
|
|
|
|||||
Long-term liabilities |
||||||||
Other long-term liabilities |
| 3,365 | ||||||
Long-term restructuring liabilities |
23,697 | 22,861 | ||||||
|
|
|
|
|||||
Total long-term liabilities of discontinued operations |
23,697 | 26,226 | ||||||
|
|
|
|
|||||
Total liabilities of discontinued operations |
$ | 49,296 | $ | 72,410 | ||||
|
|
|
|
The assets and liabilities included in discontinued operations as of March 22, 2015 consist of trade receivables and payables expected to be settled in cash in the normal course of business, restructuring liabilities which will be settled in cash during 2015, and a multiemployer pension plan withdrawal liability which will be settled over a multi-year period. Additionally, the property and equipment in discontinued operations as of March 22, 2015, is comprised of containers and chassis stated at net realizable value. The property and equipment is held for sale at March 22, 2015, and we expect to liquidate these assets during 2015.
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Results of Operations of Discontinued Operations
The following table presents financial information for the discontinued operations included in the Unaudited Condensed Consolidated Statements of Operations (in thousands):
Quarters Ended | ||||||||
March 22, 2015 |
March 23, 2014 |
|||||||
Operating revenue |
$ | 4,166 | $ | 68,596 | ||||
Cost of services |
9,966 | 68,083 | ||||||
Depreciation and amortization |
| 1,323 | ||||||
Amortization of vessel dry-docking |
| 2,270 | ||||||
Selling, general and administrative |
1,423 | 1,284 | ||||||
Restructuring charge |
2,700 | | ||||||
Miscellaneous (income) expense |
(2,715 | ) | 624 | |||||
|
|
|
|
|||||
Operating loss |
(7,208 | ) | (4,988 | ) | ||||
Interest expense, net |
204 | 486 | ||||||
|
|
|
|
|||||
Net loss from discontinued operations before taxes |
(7,412 | ) | (5,474 | ) | ||||
Income tax expense |
| 131 | ||||||
|
|
|
|
|||||
Net loss from discontinued operations |
$ | (7,412 | ) | $ | (5,605 | ) | ||
|
|
|
|
There were no restructuring charges related to discontinued operations during the quarter ended March 23, 2014. The following table presents the restructuring reserves related to discontinued operations at December 21, 2014 and March 22, 2015, as well as activity during the quarter ended March 22, 2015 (in thousands):
Balance at December 21, 2014 |
Provision | Payments | Balance at March 22, 2015 |
|||||||||||||
Multi-employer pension plan withdrawal liability |
$ | 26,761 | $ | 835 | $ | | $ | 27,596 | ||||||||
Personnel-related costs |
5,796 | 174 | (1,903 | ) | 4,067 | |||||||||||
Operating lease termination exit costs |
7,895 | 1,021 | (5,999 | ) | 2,917 | |||||||||||
Other |
967 | 237 | (1,029 | ) | 175 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 41,419 | $ | 2,267 | $ | (8,931 | ) | $ | 34,755 | |||||||
|
|
|
|
|
|
|
|
The $2.7 million restructuring reserve charge recorded during the quarter ended March 22, 2015 was comprised of $0.8 million of accretion on the multi-employer pension plan withdrawal liability, $1.5 million of other restructuring reserve provisions and $0.4 million of asset impairments in connection with the discontinued Puerto Rico operations.
During the quarter ended March 22, 2015, withdrawal from the multiemployer ILA-PRSSA Pension Fund will result in payments over 13.8 years, that are currently estimated to be $53.8 million with annual cash outflows as follows (in thousands):
2015 |
$ | 3,900 | ||
2016 |
3,900 | |||
2017 |
3,900 | |||
2018 |
3,900 | |||
2019 |
3,900 | |||
Thereafter |
34,300 | |||
|
|
|||
Total |
$ | 53,800 | ||
|
|
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The final withdrawal liability has yet to be calculated and will vary from the amounts above.
5. Income Taxes
The Company continues to believe it will not generate sufficient taxable income to realize its deferred tax assets. Accordingly, the Company maintains a valuation allowance against its deferred tax assets. The valuation allowance is reviewed quarterly and will be maintained until sufficient positive evidence exists to support the reversal of the valuation allowance. In addition, until such time the Company determines it is more likely than not that it will generate sufficient taxable income to realize its deferred tax assets, income tax benefits associated with future-period losses will be fully reserved, except for intraperiod allocations of income tax expense. As a result, the Company does not expect to record a current or deferred federal tax benefit or expense and only minimal state tax provisions during those periods.
6. Stock-Based Compensation
Stock-based compensation costs are measured at the grant date, based on the estimated fair value of the award, and are recognized as an expense in the income statement over the requisite service period. Compensation costs related to stock options, restricted shares and restricted stock units (RSUs) granted under the Amended and Restated Equity Incentive Plan (the Plan), the 2009 Incentive Compensation Plan (the 2009 Plan), and the 2012 Incentive Compensation Plan (the 2012 Plan) are recognized using the straight-line method, net of estimated forfeitures. Stock options and restricted shares granted to employees under the Plan and the 2009 Plan typically cliff vest and become fully exercisable on the third anniversary of the grant date, provided the employee who was granted such options/restricted shares is continuously employed by the Company or its subsidiaries through such date, and provided performance based criteria, if any, are met. RSUs granted under the 2012 Plan typically contain a graded vesting schedule with a portion vesting each year over a three-year period.
The following compensation costs are included within selling, general, and administrative expenses on the condensed consolidated statements of operations (in thousands):
Quarters Ended | ||||||||
March 22, 2015 |
March 23, 2014 |
|||||||
Restricted stock units |
$ | 446 | $ | 711 | ||||
Restricted stock |
| 22 | ||||||
|
|
|
|
|||||
Total |
$ | 446 | $ | 733 | ||||
|
|
|
|
Restricted Stock Units
On August 15, 2014, the Company approved agreements to amend certain outstanding Restricted Stock Unit Agreements granted under the 2012 plan, including those Restricted Stock Unit Agreements with the Companys (i) Non-Employee Directors and (ii) Principal Executive Officer, Principal Financial Officer and its other Executive Officers (collectively, the Amended RSU Agreements).
The Restricted Stock Unit Agreements were amended to provide that vested restricted stock units will be settled solely with cash. No compensation expense was recognized for this modification as the fair value of the RSUs was lower on the modification date than the grant date fair value. These awards are now accounted for as liability awards and the liability will be adjusted to fair value each reporting period. The fair value of the RSU liability was $2.3 million as of March 22, 2015, and is based on quoted prices in active markets (Level 1 fair value measurement in the ASC 820 hierarchy).
There were no grants of RSUs during 2014 or the first quarter of 2015. The following table details grants of RSUs during 2012 and 2013:
Grant Date |
Recipient |
Total RSUs Outstanding |
Vesting Criteria |
RSUs Vested as of March 22, 2015 |
RSUs that vested on March 31, 2015 |
|||||||||||
July 25, 2012 |
CEO(a) | 150,000 | Time-Based | 90,000 | 60,000 | |||||||||||
July 25, 2012 |
Board of Directors | 750,000 | Time-Based | 450,000 | 300,000 | |||||||||||
July 25, 2012 |
Management | 1,109,584 | Time-Based | 665,750 | 428,334 | |||||||||||
July 25, 2012 |
Management | 1,109,583 | Performance-Based | | 1,070,833 |
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Grant Date |
Recipient |
Total RSUs Outstanding |
Vesting Criteria |
RSUs Vested as of March 22, 2015 |
RSUs that vested on March 31, 2015 |
|||||||||||
December 26, 2012 |
Management | 120,834 | Time-Based | 72,500 | 48,334 | |||||||||||
December 26, 2012 |
Management | 120,833 | Performance-Based | | 120,833 | |||||||||||
June 1, 2013 |
Management | 87,500 | Time-Based | 52,500 | 35,000 | |||||||||||
June 1, 2013 |
Management | 87,500 | Performance-Based | | 87,500 | |||||||||||
|
|
|
|
|||||||||||||
1,330,750 | 2,150,834 | |||||||||||||||
|
|
|
|
(a) | The RSUs granted to our CEO were previously granted in his capacity serving on the Board of Directors. |
The grant date fair value of the RSUs granted during 2012 and 2013 was determined using the closing price of the Companys common stock on the grant date. The time-based RSUs vested on March 31, 2015 if the employee remained in continuous employment with the Company. A portion of the performance-based RSUs would have vested on March 31, 2013 and March 31, 2014, however, the Company did not meet the performance goals established for 2012 or 2013. Accordingly, the Company did not record any expense during 2012 or 2013 related to these performance-based RSUs. Per the terms of the agreement, if any of the performance-based RSUs do not vest on their assigned performance date solely because the performance goals are not met, then such RSUs shall remain outstanding and shall be eligible to vest on subsequent performance dates to the extent performance goals are established and met for such subsequent year. The Company recorded expense for the performance based RSUs in 2014 because the performance criteria were met. The performance-based RSUs vested on March 31, 2015 for all employees who remained in continuous employment with the Company.
At both December 21, 2014 and March 22, 2015, 2,150,834 RSUs were nonvested, with a weighted average fair value at grant date of $1.95. As of March 22, 2015, there was $0.1 million of unrecognized compensation expense related to the RSUs, which is expected to be recognized in the second quarter of 2015.
Restricted Stock
As of March 22, 2015, there are 3,343 fully vested restricted stock awards with a weighted average fair value at grant date of $89.75. As of March 22, 2015, there was no unrecognized compensation expense related to restricted stock awards.
Stock Options
The Companys stock option plan provides for grants of stock options to key employees at prices not less than the fair market value of the Companys common stock on the grant date. The Company has not granted any stock options since 2008. As of December 21, 2014, there were outstanding and exercisable options to purchase 26,365 shares of the Companys common stock at a weighted average exercise price of $402.36 per share. During the first quarter of 2015, 1,501 options expired. As of March 22, 2015, there were outstanding and exercisable options to purchase 24,864 shares of the Companys stock at a weighted average price of $401.85 per share. The weighted average remaining contractual term of the outstanding and exercisable options is 1.3 years. As of March 22, 2015, there was no unrecognized compensation costs related to stock options.
7. Net Loss per Common Share
Basic net loss per share is computed by dividing net loss by the weighted daily average number of shares of common stock outstanding during the period. Diluted net loss per share is based upon the weighted daily average number of shares of common stock outstanding for the period plus dilutive potential shares of common stock, including stock options and warrants to purchase common stock, using the treasury-stock method.
16
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Net loss per share is as follows (in thousands, except per share amounts):
Quarters Ended | ||||||||
March 22, 2015 |
March 23, 2014 |
|||||||
Numerator: |
||||||||
Net loss from continuing operations |
$ | (16,410 | ) | $ | (20,633 | ) | ||
Net loss from discontinued operations |
(7,412 | ) | (5,605 | ) | ||||
|
|
|
|
|||||
Net loss |
$ | (23,822 | ) | $ | (26,238 | ) | ||
|
|
|
|
|||||
Denominator: |
||||||||
Denominator for basic net loss per common share: |
||||||||
Weighted average shares outstanding |
41,305 | 39,917 | ||||||
|
|
|
|
|||||
Effect of dilutive securities: |
||||||||
Stock-based compensation |
| | ||||||
Warrants to purchase common stock |
| | ||||||
|
|
|
|
|||||
Denominator for diluted net loss per common share |
41,305 | 39,917 | ||||||
|
|
|
|
|||||
Basic and diluted net loss per common share: |
||||||||
From continuing operations |
$ | (0.40 | ) | $ | (0.52 | ) | ||
From discontinued operations |
(0.18 | ) | (0.14 | ) | ||||
|
|
|
|
|||||
Basic and diluted net loss per common share |
$ | (0.58 | ) | $ | (0.66 | ) | ||
|
|
|
|
Warrants outstanding to purchase 50.8 million and 52.3 million common shares have been excluded from the denominator for calculating diluted net loss per share during the quarters ended March 22, 2015 and March 22, 2014, respectively, as the impact would be anti-dilutive.
On August 27, 2012, the Company adopted a rights plan (the Rights Plan) intended to avoid an ownership change within the meaning of Section 382 of the Internal Revenue Code of 1986, as amended, and thereby preserve the current ability of the Company to utilize certain net operating loss carryovers and other tax benefits of the Company. As part of the Rights Agreement, the Company authorized and declared a dividend distribution of one right (a Right) for each outstanding share of Common Stock to stockholders of record at the close of business on September 7, 2012. Each Right entitles the holder to purchase from the Company a unit consisting of one ten-thousandth of a share (a Unit) of Series A Participating Preferred Stock, par value $0.01 per share, of the Company (the Preferred Stock) at a purchase price of $8.00 per Unit, subject to adjustment (the Purchase Price). Until a Right is exercised, the holder thereof, as such, will have no separate rights as a stockholder of the Company, including the right to vote or to receive dividends in respect of Rights. The issuance of the Rights alone does not cause any change in the number of shares deliverable upon the exercise of the Companys outstanding warrants or convertible notes, or the exercise price or conversion price (as applicable) thereof.
8. Property and Equipment
Property and equipment consists of the following (in thousands):
March 22, 2015 | December 21, 2014 | |||||||||||||||
Historical Cost |
Net Book Value |
Historical Cost |
Net Book Value |
|||||||||||||
Vessels and vessel improvements |
$ | 195,260 | $ | 112,606 | $ | 195,214 | $ | 115,414 | ||||||||
Containers |
33,258 | 19,772 | 34,509 | 21,037 | ||||||||||||
Chassis |
11,830 | 4,781 | 11,174 | 4,403 | ||||||||||||
Cranes |
19,878 | 9,102 | 19,878 | 9,430 | ||||||||||||
Machinery and equipment |
26,075 | 9,150 | 26,441 | 9,409 | ||||||||||||
Facilities and land improvements |
14,635 | 8,952 | 14,635 | 9,155 | ||||||||||||
Software |
24,939 | 967 | 24,939 | 1,167 | ||||||||||||
Construction in progress |
11,779 | 11,779 | 10,276 | 10,276 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 337,654 | $ | 177,109 | $ | 337,066 | $ | 180,291 | ||||||||
|
|
|
|
|
|
|
|
17
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9. Intangible Assets
Intangible assets consist of the following (in thousands):
March 22, 2015 |
December 21, 2014 |
|||||||
Customer contracts/relationships |
$ | 141,430 | $ | 141,430 | ||||
Trademarks |
63,800 | 63,800 | ||||||
Deferred financing costs |
15,691 | 15,691 | ||||||
|
|
|
|
|||||
Total intangibles with definite lives |
220,921 | 220,921 | ||||||
Accumulated amortization |
(197,539 | ) | (195,630 | ) | ||||
|
|
|
|
|||||
Net intangibles with definite lives |
23,382 | 25,291 | ||||||
Goodwill |
198,793 | 198,793 | ||||||
|
|
|
|
|||||
Intangible assets, net |
$ | 222,175 | $ | 224,084 | ||||
|
|
|
|
18
Table of Contents
10. Accrued Liabilities
Other current accrued liabilities consist of the following (in thousands):
March 22, 2015 |
December 21, 2014 |
|||||||
Vessel operations |
$ | 9,527 | $ | 7,969 | ||||
Payroll and employee benefits |
14,132 | 13,552 | ||||||
Marine operations |
5,901 | 5,281 | ||||||
Terminal operations |
6,555 | 6,692 | ||||||
Fuel |
2,389 | 1,004 | ||||||
Interest |
12,600 | 6,588 | ||||||
Legal settlements |
233 | 642 | ||||||
Other liabilities |
12,361 | 13,509 | ||||||
|
|
|
|
|||||
Total other current accrued liabilities |
$ | 63,698 | $ | 55,237 | ||||
|
|
|
|
11. Commitments and Contingencies
Legal Proceedings
On November 25, 2014, a putative stockholder class action complaint was filed in the Court of Chancery of the State of Delaware, captioned Joshua Loken v. Horizon Lines, Inc., et al., Case No. 10399-VCL (the Loken Action). The complaint names as defendants each member of the Companys Board (the Individual Defendants), the Company, and Matson Navigation Company, Inc., Matson, Inc., and Hogan Acquisition, Inc. (collectively, the Matson Companies). The complaint generally alleges that the Individual Defendants breached their fiduciary duties of good faith, loyalty and due care when they negotiated and authorized the execution of the November 11, 2014 Merger Agreement with Matson and that each of the Company and the Matson Companies aided and abetted the purported breaches of fiduciary duties. The relief sought includes, among other things, an injunction prohibiting the consummation of the Merger, or, in the alternative, rescission of the Merger Agreement in the event the Merger is consummated, with damages of an unspecified amount.
On December 1, 2014, a putative stockholder class action complaint was filed in the Court of Chancery of the State of Delaware, captioned J. Cola Inc. v. Horizon Lines, Inc., et al., Case No. 10412-VCL (the J. Cola Action). The complaint names as defendants the Individual Defendants, the Company, and the Matson Companies. The complaint generally alleges that the Individual Defendants breached their fiduciary duties of good faith, loyalty and due care when they negotiated and authorized the execution of the November 11, 2014 Merger Agreement with Matson and that each of the Company and the Matson Companies aided and abetted the purported breaches of fiduciary duties. On January 9, 2015, Plaintiff in the J. Cola Action filed an amended complaint, adding a cause of action for breach of the directors fiduciary duty of disclosure in connection with the Companys December 23, 2014 Proxy Statement, which Plaintiff claims omitted material information and/or included materially misleading information. The relief sought includes, among other things, an injunction prohibiting the consummation of the Merger, or, in the alternative, rescission of the Merger Agreement in the event the Merger is consummated, with damages of an unspecified amount.
On December 2, 2014, a putative stockholder class action complaint was filed in the Court of Chancery of the State of Delaware, captioned Finn Kristiansen v. Jeffrey A. Brodsky, et al., Case No. 10418-VCL (the Kristiansen Action). The complaint names as defendants the Individual Defendants, the Company, and the Matson Companies. The complaint generally alleges that the Individual Defendants breached their fiduciary duties of good faith, loyalty and due care when they negotiated and authorized the execution of the November 11, 2014 Merger Agreement with Matson and that each of the Company and the Matson Companies aided and abetted the purported breaches of fiduciary duties. On January 9, 2015, Plaintiff in the Kristiansen Action filed an amended complaint, adding a cause of action for breach of the directors fiduciary duty of disclosure in connection with the Companys December 23, 2014 Proxy Statement, which Plaintiff claims omitted material information and/or included materially misleading information. The relief sought includes, among other things, an injunction prohibiting the consummation of the Merger, or, in the alternative, rescission of the Merger Agreement in the event the Merger is consummated, with damages of an unspecified amount.
On January 29, 2015, a putative stockholder class action complaint was filed in the Court of Chancery of the State of Delaware, captioned Frederick Schwartz v. Jeffrey A. Brodsky, et al., Case No. 10594-VCL (the Schwartz Action). The complaint names as defendants the Individual Defendants, the Company, and the Matson Companies. The complaint generally alleges that the Individual Defendants breached their fiduciary duties of good faith, loyalty, due care when they negotiated and authorized the execution of the November 11, 2014 Merger Agreement with Matson and that each of the Company and the Matson Companies aided and abetted the purported breaches of fiduciary duties. The complaint also alleges that the Individual Defendants breached their fiduciary duty of
19
Table of Contents
disclosure in connection with the Companys December 23, 2014 Proxy Statement, which Plaintiff claims omitted material information and/or included materially misleading information. The relief sought includes, among other things, an injunction prohibiting the consummation of the Merger, or, in the alternative, rescission of the Merger Agreement in the event the Merger is consummated, with damages of an unspecified amount.
On February 5, 2015, the Court of Chancery of the State of Delaware issued an order consolidating the Loken Action, J. Cola Action, Kristiansen Action, and Schwartz Action into In re Horizon Lines, Inc. Stockholders Litigation, Consolidated C.A. 10399-VCL (the Consolidated Action). On February 13, 2015, the defendants and the plaintiffs in the Consolidated Action reached an agreement in principle, subject to the courts approval (the Memorandum of Understanding), providing for the settlement and dismissal, with prejudice, of the Consolidated Action. Pursuant to such Memorandum of Understanding, the Company agreed to make additional disclosures to the Companys stockholders through a supplement to the Companys Definitive Proxy Statement and the Company and Matson agreed to amend the Merger Agreement in order to reduce the amount of the termination fee payable by the Company to Matson under certain circumstances pursuant to Section 7.3(a) of the Merger Agreement from $17.1 million to $9.5 million. On February 13, 2015, the Company, Matson and Merger Sub entered into Amendment No. 1 to the Merger Agreement, as described above. The Company and its Board of Directors believe that the claims in the Actions are entirely without merit and, in the event the settlement does not resolve them, intend to contest them vigorously.
In the ordinary course of business, from time to time, the Company becomes involved in various legal proceedings. These relate primarily to claims for loss or damage to cargo, employees personal injury claims, and claims for loss or damage to the person or property of third parties. The Company generally maintains insurance, subject to customary deductibles or self-retention amounts, and/or reserves to cover these types of claims. The Company also, from time to time, becomes involved in routine employment-related disputes and disputes with parties with which it has contractual relations. The Companys policy is to disclose contingent liabilities associated with both asserted and unasserted claims after all available facts and circumstances have been reviewed and the Company determines that a loss is reasonably possible. The Companys policy is to record contingent liabilities associated with both asserted and unasserted claims when it is probable that the liability has been incurred and the amount of the loss is reasonably estimable.
Standby Letters of Credit
The Company has standby letters of credit, primarily related to its property and casualty insurance programs, as well as customs bonds. On March 22, 2015 and December 21, 2014, these letters of credit totaled $10.5 million and $11.4 million, respectively.
12. Recent Accounting Pronouncements
In May 2014, FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires entities to recognize revenue in the amount it expects to be entitled for the transfer of promised goods or services to customers. When it becomes effective, the ASU will replace most of the existing revenue recognition requirements in U.S. GAAP, including industry-specific guidance. This pronouncement is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, with early application not permitted. ASU 2014-09 provides alternative methods of initial adoption, including retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the pronouncement recognized at the date of initial application. The Company is currently evaluating the effect that this pronouncement will have on its financial statements and related disclosures.
13. Subsequent Events
As further discussed in Note 3, the ABL facility was amended on April 22, 2015 to reduce the size of the facility from $100 million to $80 million, as well as to modify certain other covenants.
On April 23, 2015, and subsequent to the Companys receipt of HSR Clearance, the Company sent redemption notices to the holders of its First Lien Notes and Second Lien Notes in contemplation of the transactions with Matson and Pasha closing during the second quarter of 2015. We cannot predict with certainty whether or when the conditions for closing the transactions will be satisfied or whether the First Lien and Second Lien Notes will be redeemed.
2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our consolidated financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements of the Company and notes thereto included elsewhere in this quarterly report. In this quarterly report, unless the context otherwise requires, references to we, us, and our mean the Company, together with its subsidiaries, on a consolidated basis.
20
Table of Contents
Executive Overview Continuing Operations
Quarters Ended | ||||||||
March 22, 2015 |
March 23, 2014 |
|||||||
($ in thousands) | ||||||||
Operating revenue |
$ | 180,913 | $ | 183,335 | ||||
Operating expense |
179,397 | 186,878 | ||||||
|
|
|
|
|||||
Operating income (loss) |
$ | 1,516 | $ | (3,543 | ) | |||
|
|
|
|
|||||
Operating ratio |
99.2 | % | 101.9 | % | ||||
Revenue containers (units) |
37,754 | 35,964 | ||||||
Average unit revenue |
$ | 4,792 | $ | 5,098 |
We believe that in addition to GAAP based financial information, EBITDA and Adjusted EBITDA are meaningful disclosures for the following reasons: (i) EBITDA and Adjusted EBITDA are components of the measure used by our board of directors and management team to evaluate our operating performance, (ii) EBITDA and Adjusted EBITDA are components of the measure used by our management to facilitate internal comparisons to competitors results and the marine container shipping and logistics industry in general and (iii) the payment of discretionary bonuses to certain members of our management is contingent upon, among other things, the satisfaction by Horizon Lines of certain targets, which contain EBITDA and Adjusted EBITDA as components. We acknowledge that there are limitations when using EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA are not recognized terms under GAAP and do not purport to be an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Additionally, EBITDA and Adjusted EBITDA are not intended to be a measure of free cash flow for managements discretionary use, as it does not consider certain cash requirements such as tax payments and debt service requirements. Because all companies do not use identical calculations, this presentation of EBITDA and Adjusted EBITDA may not be comparable to other similarly titled measures of other companies. The EBITDA amounts presented below contain certain charges that our management team excludes when evaluating our operating performance, for making day-to-day operating decisions and that have historically been excluded from EBITDA to arrive at Adjusted EBITDA when determining the payment of discretionary bonuses.
21
Table of Contents
A reconciliation of net loss to EBITDA and Adjusted EBITDA is included below (in thousands):
Quarters Ended | ||||||||
March 22, 2015 |
March 23, 2014 |
|||||||
Net loss |
$ | (23,822 | ) | $ | (26,238 | ) | ||
Net loss from discontinued operations |
(7,412 | ) | (5,605 | ) | ||||
|
|
|
|
|||||
Net loss from continuing operations |
(16,410 | ) | (20,633 | ) | ||||
Interest expense, net |
17,856 | 17,008 | ||||||
Income tax expense |
72 | 152 | ||||||
Depreciation and amortization |
8,713 | 9,808 | ||||||
|
|
|
|
|||||
EBITDA |
10,231 | 6,335 | ||||||
Transaction related expenses |
3,024 | 910 | ||||||
Union/other severance charges |
| 341 | ||||||
Antitrust and false claims legal expenses |
73 | 578 | ||||||
Gain on change in value of debt conversion features |
(2 | ) | (71 | ) | ||||
|
|
|
|
|||||
Adjusted EBITDA |
$ | 13,326 | $ | 8,093 | ||||
|
|
|
|
In addition to EBITDA and Adjusted EBITDA, we use various other non-GAAP measures such as adjusted net income (loss), and adjusted net income (loss) per share. As with EBITDA and Adjusted EBITDA, the measures below are not recognized terms under GAAP and do not purport to be an alternative to net income (loss) as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. Similar to the amounts presented for EBITDA and Adjusted EBITDA, because all companies do not use identical calculations, the amounts below may not be comparable to other similarly titled measures of other companies.
The tables below present a reconciliation of net loss to adjusted net loss and net loss per share to adjusted net loss per share (in thousands, except per share amounts):
Quarters Ended | ||||||||
March 22, 2015 |
March 23, 2014 |
|||||||
Net loss |
$ | (23,822 | ) | $ | (26,238 | ) | ||
Net loss from discontinued operations |
(7,412 | ) | (5,605 | ) | ||||
|
|
|
|
|||||
Net loss from continuing operations |
(16,410 | ) | (20,633 | ) | ||||
Adjustments: |
||||||||
Transaction related expenses |
3,024 | 910 | ||||||
Antitrust and false claims legal expenses |
73 | 578 | ||||||
Gain on change in value of debt conversion features |
(2 | ) | (71 | ) | ||||
Union/other severance charges |
| 341 | ||||||
|
|
|
|
|||||
Total adjustments |
3,095 | 1,758 | ||||||
|
|
|
|
|||||
Adjusted net loss |
$ | (13,315 | ) | $ | (18,875 | ) | ||
|
|
|
|
22
Table of Contents
Quarters Ended | ||||||||
March 22, 2015 |
March 23, 2014 |
|||||||
Net loss per share |
$ | (0.58 | ) | $ | (0.66 | ) | ||
Net loss per share from discontinued operations |
(0.18 | ) | (0.14 | ) | ||||
|
|
|
|
|||||
Net loss per share from continuing operations |
(0.40 | ) | (0.52 | ) | ||||
Adjustments: |
||||||||
Transaction related expenses |
0.08 | 0.02 | ||||||
Antitrust and false claims legal expenses |
| 0.02 | ||||||
Gain on change in value of debt conversion features |
| | ||||||
Union/other severance charges |
| 0.01 | ||||||
|
|
|
|
|||||
Total adjustments |
0.08 | 0.05 | ||||||
|
|
|
|
|||||
Adjusted net loss per share |
$ | (0.32 | ) | $ | (0.47 | ) | ||
|
|
|
|
Recent Developments
Transactions with Matson and Pasha
In November 2014, the Company announced that it had entered into an Agreement and Plan of Merger with Matson (the Merger Agreement) with Matson Navigation Company, Inc. to merge the Company with a subsidiary of Matson, with the Company becoming a wholly-owned subsidiary of Matson for consideration of $0.72 per share (the Merger). The Company also announced that it had entered into a purchase agreement (the Purchase Agreement) with The Pasha Group (Pasha) to sell the Companys Hawaii trade lane business for approximately $141.5 million in cash. The Merger with Matson is subject to, among other things, the sale of the Companys Hawaii business to Pasha. The sale of the Companys Hawaii business is subject to a number of conditions including, among other things, the satisfaction or waiver of the conditions to the completion of the Merger with Matson and regulatory approvals pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (HSR Clearance). Effective April 21, 2015, after review by the Antitrust Division of the Department of Justice, HSR Clearance was secured upon the issuance of an early termination of the premerger waiting period required under the HSR Act. Similarly, effective April 24, 2015, the state of Hawaii Antitrust Division closed its review of the Hawaii sale. Subject to the satisfaction of the remaining conditions to the completion of the sale of the Companys Hawaii business to Pasha, the Company expects the close of this transaction before the end of the Companys fiscal second quarter. The Company currently expects to close the Merger with Matson immediately after the completion of the sale of the Companys Hawaii business to Pasha, assuming that all of the conditions to the completion of both transactions have been satisfied. However, we can predict with certainty neither when all of the conditions to these transactions will be satisfied nor the date of the closing of these transactions.
The description of the Merger Agreement and the Purchase Agreement does not purport to be complete and is qualified in its entirety by the full text of the Merger Agreement and the Purchase Agreement, as filed with our Current Report on Form 8-K filed with the Securities and Exchange Commission on November 13, 2014, as well as the Amendment No. 1 to the Agreement and Plan of Merger dated as of November 11, 2014, as filed with our current report on Form 8-K filed with the Securities and Exchange Commission on February 17, 2015.
Discontinuance of Puerto Rico Service
The Company discontinued its liner service between the U.S. and Puerto Rico and terminal services in the first quarter of 2015. The Puerto Rico operations have been classified as discontinued operations in all periods presented.
General
We believe that we are the only ocean carrier serving both domestic markets of Alaska and Hawaii from the continental U.S. Under the Jones Act, all vessels transporting cargo between U.S. ports must, subject to limited exceptions, be built in the U.S., registered under the U.S. flag, manned by predominantly U.S. crews, and owned and operated by U.S.-organized companies that are controlled and 75% owned by U.S. citizens.
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We own 11 fully qualified Jones Act vessels, seven of which are deployed in Alaska and Hawaii and four of which are surplus, and are not specific to any given market. Two of our surplus vessels are included in assets of discontinued operations. We own or lease approximately 16,000 cargo containers for use in our Alaska and Hawaii markets. Additionally, as of the date hereof, we are in the process of selling approximately 700 containers and exiting leases covering approximately 1,000 container operating leases in connection with the exit of the Puerto Rico market. We provide comprehensive shipping and integrated logistics services in our markets. We have access to terminal facilities in each of our ports, operating our terminals in Alaska and Hawaii, as well as contracting for terminal services in three ports in the continental U.S.
History
Our long operating history dates back to 1956, when Sea-Land Service, Inc. pioneered the marine container shipping industry and established our business. In 1958, we introduced container shipping to the Puerto Rico market, and in 1964 we pioneered container shipping in Alaska with the first year-round scheduled vessel service. In 1987, we began providing container shipping services between the U.S. west coast and Hawaii through our acquisition from an existing carrier of all of its vessels and certain other assets that were already serving that market.
Critical Accounting Policies
We prepare our financial statements in conformity with accounting principles generally accepted in the United States of America. The preparation of our financial statements requires us to make estimates and assumptions in the reported amounts of revenue and expense during the reporting period and in reporting the amounts of assets and liabilities, and disclosures of contingent assets and liabilities at the date of our financial statements. Since many of these estimates and assumptions are based upon future events which cannot be determined with certainty, the actual results could differ from these estimates.
We believe that the application of our critical accounting policies, and the estimates and assumptions inherent in those policies, are reasonable. These accounting policies and estimates are periodically reevaluated and adjustments are made when facts or circumstances dictate a change. Historically, we have found the application of accounting policies to be appropriate and actual results have not differed materially from those determined using necessary estimates.
There have been no material changes to the Companys critical accounting policies during the quarter ended March 22, 2015. The critical accounting policies can be found in the Companys Annual Report on Form 10-K for the fiscal year ended December 21, 2014 as filed with the Securities and Exchange Commission (SEC).
Seasonality
Our container volumes are subject to seasonal trends common in the transportation industry. Financial results in the first quarter are normally lower due to reduced loads during the winter months. Volumes typically build to a peak in the third quarter and early fourth quarter, which generally results in higher revenues, improved margins, and increased earnings and cash flows.
Results of Continuing Operations
Operating Revenue Overview
We derive our revenue primarily from providing comprehensive shipping and integrated logistics services to and from the continental U.S., Alaska and Hawaii. We charge our customers on a per load basis and price our services based primarily on the length of inland and ocean cargo transportation hauls, type of cargo, and other requirements such as shipment timing and type of container. In addition, we assess fuel surcharges on a basis consistent with industry practice and at times may incorporate these surcharges into our basic transportation rates. There is occasionally a timing disparity between volatility in our fuel costs and related adjustments to our fuel surcharges (or the incorporation of adjusted fuel surcharges into our base transportation rates) that may result in variances in our fuel recovery.
During 2014, over 90% of our revenue was generated from our shipping and integrated logistics services in markets where the marine trade is subject to the Jones Act. The balance of our revenue was derived from (i) vessel loading and unloading services that we provide for vessel operators at our terminals, (ii) agency services that we provide for third-party shippers lacking administrative presences in our markets, (iii) warehousing services for third parties, and (iv) other non-transportation services.
As used in this Form 10-Q, the term revenue containers refers to containers that are transported for a charge, as opposed to empty containers.
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Cost of Services Overview
Our cost of services consist primarily of vessel operating costs, marine operating costs, inland transportation costs, land costs and rolling stock rent. Our vessel operating costs consist primarily of vessel fuel costs, crew payroll costs and benefits, vessel maintenance costs, space charter costs, vessel insurance costs and vessel rent. We view our vessel fuel costs as subject to potential fluctuation as a result of changes in unit prices in the fuel market. Our marine operating costs consist of stevedoring, port charges, wharfage and various other costs to secure vessels at the port and to load and unload containers to and from vessels. Our inland transportation costs consist primarily of the costs to move containers to and from the port via rail, truck or barge. Our land costs consist primarily of maintenance, yard and gate operations, warehousing operations and terminal overhead in the terminals in which we operate. Rolling stock rent consists primarily of rent for street tractors, yard equipment, chassis, gensets and various dry and refrigerated containers.
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Quarter Ended March 22, 2015 Compared with the Quarter Ended March 23, 2014
Quarters Ended | ||||||||||||||||
March 22, 2015 |
March 23, 2014 |
Change | % Change | |||||||||||||
($ in thousands) | ||||||||||||||||
Operating revenue |
$ | 180,913 | $ | 183,335 | $ | (2,422 | ) | (1.3 | )% | |||||||
Operating expense: |
||||||||||||||||
Vessel |
38,114 | 51,582 | (13,468 | ) | (26.1 | )% | ||||||||||
Marine |
43,897 | 42,247 | 1,650 | 3.9 | % | |||||||||||
Inland |
33,775 | 32,073 | 1,702 | 5.3 | % | |||||||||||
Land |
28,779 | 25,936 | 2,843 | 11.0 | % | |||||||||||
Rolling stock rent |
6,956 | 6,631 | 325 | 4.9 | % | |||||||||||
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Cost of services |
151,521 | 158,469 | (6,948 | ) | (4.4 | )% | ||||||||||
Depreciation and amortization |
6,079 | 7,129 | (1,050 | ) | (14.7 | )% | ||||||||||
Amortization of vessel dry-docking |
2,634 | 2,679 | (45 | ) | (1.7 | )% | ||||||||||
Selling, general and administrative |
19,592 | 18,893 | 699 | 3.7 | % | |||||||||||
Miscellaneous income, net |
(429 | ) | (292 | ) | (137 | ) | 46.9 | % | ||||||||
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Total operating expense |
179,397 | 186,878 | (7,481 | ) | (4.0 | )% | ||||||||||
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Operating income (loss) |
$ | 1,516 | $ | (3,543 | ) | $ | 5,421 | (142.8 | )% | |||||||
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Operating ratio |
99.2 | % | 101.9 | % | (2.8 | )% | ||||||||||
Revenue containers (units) |
37,754 | 35,964 | 1,970 | 5.0 | % | |||||||||||
Average unit revenue |
$ | 4,792 | $ | 5,098 | $ | (331 | ) | (6.0 | )% |
Operating Revenue. Our operating revenue decreased $2.4 million, or 1.3%, during the quarter ended March 22, 2015 compared to the quarter ended March 23, 2014. This revenue decrease can be attributed to the following factors (in thousands):
Revenue container rate decrease |
$ | (8,180 | ) | |
Bunker and intermodal fuel surcharges decrease |
(4,969 | ) | ||
Revenue container volume increase |
6,692 | |||
Other non-transportation services revenue increase |
4,035 | |||
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Total operating revenue decrease |
$ | (2,422 | ) | |
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The decrease in our container rates was primarily due to a change in cargo mix largely due to automobile shipments in Hawaii as well as increased competition in our markets. Bunker and intermodal fuel surcharges, which are included in our transportation revenue, accounted for approximately 15.5% of total revenue in the quarter ended March 22, 2015 and approximately 18.0% of total revenue in the quarter ended March 23, 2014. We adjust our bunker and intermodal fuel surcharges as a result of changes in the cost of bunker fuel for our vessels, in addition to diesel fuel fluctuations passed on to us by our truck, rail, and barge service providers. Fuel surcharges are evaluated regularly as the price of fuel fluctuates, and we may at times incorporate these surcharges into our base transportation rates that we charge. The increase in revenue container volume was primarily due to improved volumes in our Hawaii market, partially offset by a slight decline in volumes in our Alaska market. Volume increases in our Hawaii market were primarily due to modest growth in the Hawaii economy, including construction materials and tourism, as well as an increase in automobile shipments. The increase in non-transportation revenue was primarily due to higher ancillary services related to automobile processing, increased vessel loading and unloading activities, as well as an increase associated with certain transportation services agreements.
Cost of Services. The $6.9 million decrease in cost of services is primarily due to lower fuel prices, partially offset by increases in inland expense, maintenance expense, and warehouse expenses.
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Vessel expense, which is not primarily driven by revenue container volume, decreased $13.5 million for the quarter ended March 22, 2015 compared to the quarter ended March 23, 2014. This decrease was a result of the following factors (in thousands):
Vessel fuel costs decrease |
$ | (13,437 | ) | |
Vessel space charter expense decrease |
(621 | ) | ||
Labor and other vessel operating expense increase |
588 | |||
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Total vessel expense decrease |
$ | (13,468 | ) | |
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The $13.4 million decrease in fuel costs was comprised of a $13.9 million reduction as a result of lower fuel prices, a $1.7 million decrease from less operating days due to our dry-docking schedule, partially offset by a $1.9 million increase in consumption. The increase in consumption was primarily due to disruptions in vessel schedules as a result of productivity losses in connection with the west coast ILWU negotiations and resulting congestion impact and higher costs. The $0.6 million decrease in vessel space charter expense was due to better utilization of our vessel capacity. The $0.6 million increase in labor and other vessel operating expense was primarily due to contractual rate increases and higher layup costs.
Marine expense is comprised of the costs incurred to bring vessels into and out of port, and to load and unload containers. The types of costs included in marine expense are stevedoring and associated benefits, pilotage fees, tug fees, government fees, wharfage fees, dockage fees, and line handler fees. The $1.7 million increase in marine expense during the quarter ended March 22, 2015 was primarily due to higher container volumes and contractual labor increases.
Inland expense increased to $33.8 million for the quarter ended March 22, 2015 compared to $32.1 million during the quarter ended March 24, 2013. The $1.7 million rise in inland expense was primarily due to higher volumes, as well as contractual rate increases.
Land expense is comprised of the costs included within the terminal for the handling, maintenance, and storage of containers, including yard operations, gate operations, maintenance, warehouse, and terminal overhead. The increase in land expense can be attributed to the following (in thousands):
Quarters Ended | ||||||||||||
March 22, 2015 |
March 23, 2014 |
% Change | ||||||||||
(in thousands) | ||||||||||||
Land expense: |
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Terminal Overhead |
$ | 10,899 | $ | 9,671 | 12.7 | % | ||||||
Maintenance |
8,842 | 8,628 | 2.5 | % | ||||||||
Yard and gate |
5,984 | 5,885 | 1.7 | % | ||||||||
Warehouse |
3,054 | 1,752 | 74.3 | % | ||||||||
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Total land expense |
$ | 28,779 | $ | 25,936 | 11.0 | % | ||||||
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The increase in terminal overhead is primarily due to higher contractual wage increases for non-exempt terminal employees, higher utilities expenses associated with terminal services, and expenses associated with ancillary services for vehicle processing. The increase in warehouse expenses is primarily associated with the increase in the automobile shipments and the services associated with the processing of vehicles.
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Depreciation and Amortization. Depreciation and amortization was $6.1 million during the quarter ended March 22, 2015 compared to $7.1 million during the quarter ended March 23, 2014. The decrease in amortization of intangible assets was primarily due to certain customer relationship assets becoming fully amortized.
Quarters Ended | ||||||||||||
March 22, 2015 |
March 23, 2014 |
% Change | ||||||||||
(in thousands) | ||||||||||||
Depreciation and amortization: |
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Depreciationowned vessels |
$ | 2,852 | $ | 3,006 | (5.1 | )% | ||||||
Depreciation and amortizationother |
2,164 | 1,947 | 11.1 | % | ||||||||
Amortization of intangible assets |
1,063 | 2,176 | (51.1 | )% | ||||||||
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Total depreciation and amortization |
$ | 6,079 | $ | 7,129 | (14.7 | )% | ||||||
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Amortization of vessel dry-docking |
$ | 2,634 | $ | 2,679 | (1.7 | )% | ||||||
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Amortization of Vessel Dry-docking. Amortization of vessel dry-docking was $2.6 million during the quarter ended March 22, 2015 compared to $2.7 million for the quarter ended March 23, 2014. Amortization of vessel dry-docking fluctuates based on the timing of dry-dockings, the number of dry-dockings that occur during a given period, and the amount of expenditures incurred during the dry-dockings. Dry-dockings for each vessel generally occur every two and a half years, and historically we have dry-docked approximately three vessels per year.
Selling, General and Administrative. Selling, general and administrative costs increased to $19.6 million for the quarter ended March 22, 2015 compared to $18.9 million for the quarter ended March 23, 2014, an increase of $0.7 million or 3.7%. This increase is primarily due to $2.1 million of higher transaction related expenses, partially offset by a $0.7 million decrease in professional fees, a $0.3 million decline in stock compensation expense and a $0.5 million reduction in false claims legal expenses.
Miscellaneous Income, Net. Miscellaneous income increased to $0.4 million for the quarter ended March 22, 2015 compared to $0.3 million for the quarter ended March 23, 2014, an increase of $0.1 million or 46.6%.
Interest Expense, Net. Interest expense, net increased to $17.9 million for the quarter ended March 22, 2015 compared to $17.0 million for the quarter ended March 23, 2014, an increase of $0.9 million or 5.0%. This increase was primarily due to a $1.0 million increase in interest related to the Second Lien Notes due to higher outstanding balances partially offset by a $0.1 decrease in interest related to the $75.0 million term loan agreement as a result of lower outstanding balances.
Income Tax Expense. The effective tax rate for the quarters ended March 22, 2015 and March 23, 2014 was (0.5)% and (0.7)%, respectively. We continue to believe it is unclear as to the timing of when we will generate sufficient taxable income to realize our deferred tax assets. Accordingly, we maintain a valuation allowance against our deferred tax assets. Although we have recorded a valuation allowance against our deferred tax assets, it does not affect our ability to utilize our deferred tax assets to offset future taxable income. Until such time that we determine it is more likely than not that we will generate sufficient taxable income to realize our deferred tax assets, income tax benefits associated with future-period losses will be fully reserved, except for intraperiod allocations of income tax expense. As a result, we do not expect to record a current or deferred federal tax benefit or expense and only minimal state tax provisions during those periods.
Net Loss from Discontinued Operations. Net loss from discontinued operations increased to $7.4 million for the quarter ended March 22, 2015 compared to $5.6 million for the quarter ended March 23, 2014, an increase of $1.8 million. The increase was primarily due to a $2.2 million increase in operating loss offset by a $0.3 million decrease in capital lease interest expense and a $0.1 million decrease income tax expense. The operating loss during the quarter ended March 23, 2014 represented three full months of operations, whereas the quarter ended March 22, 2015 represented a 94% drop in revenue due to the discontinuance of liner services in January 2015 and the discontinuance of terminal services during March 2015.
Liquidity and Capital Resources
Our principal sources of funds have been (i) earnings before non-cash charges and (ii) borrowings under debt arrangements. Our principal uses of funds have been (i) capital expenditures on our container fleet, terminal operating equipment, purchase of vessels and improvements to our vessel fleet, and our information technology systems, (ii) vessel dry-docking expenditures,
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(iii) working capital consumption, and (iv) principal and interest payments on our existing indebtedness. Cash totaled $10.4 million at March 22, 2015. There were no borrowings outstanding under the ABL facility and total borrowing availability was $47.3 million as of March 22, 2015, resulting in total liquidity of $57.7 million.
Operating Activities
Net cash used in operating activities from continuing operations was $0.2 million for the quarter ended March 22, 2015 compared to $7.9 million for the quarter ended March 24, 2013. The decrease in cash used in operating activities is primarily due to the following (in thousands):
Decrease in accounts receivable |
$ | 6,782 | ||
Decrease in materials and supplies |
4,327 | |||
Increase in earnings adjusted for non-cash charges |
3,876 | |||
Decrease in vessel dry docking payments |
2,324 | |||
Decrease in legal settlement payments |
142 | |||
Increase in other assets/liabilities |
26 | |||
Decrease in accounts payable |
(6,408 | ) | ||
Decrease in accrued liabilities |
(2,709 | ) | ||
Increase in other current assets |
(727 | ) | ||
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Total decrease |
$ | 7,633 | ||
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Investing Activities
Net cash used in investing activities from continuing operations was $1.1 million for the quarter ended March 22, 2015 compared to $0.6 million for the quarter ended March 23, 2014. The $0.5 million increase in net cash consumed is primarily due to purchases of property plant and equipment partially offset by a reduction in proceeds received from the sale of assets.
Financing Activities
Net cash used in financing activities from continuing operations during the quarter ended March 22, 2015 was $2.4 million compared to $13.1 million of net cash provided by financing activities for quarter ended March 24, 2013. The net cash used by financing activities during the quarter ended March 22, 2015 included a $1.9 million repayment of long-term debt. The net cash provided by financing activities during the quarter ended March 23, 2014 included a net $13.5 million borrowed under the ABL Facility.
Cash Flows of Discontinued Operations
Net cash used in operating activities from discontinued operations was $4.9 million for the quarter ended March 22, 2015 compared to $7.4 million from the quarter ended March 23, 2014. The $2.5 million decrease in cash used was primarily due to a $22.0 million decrease in accounts receivable partially offset by a $17.6 million decrease in accrued liabilities and a $1.8 million increase in net loss from discontinued operations.
Net cash provided by investing activities from discontinued operations was $15.8 million for the quarter ended March 22, 2015 compared to net cash used of $0.5 million from the quarter ended March 23, 2014. Proceeds from the sale of property and equipment, including the San Juan terminal assets, vessels, containers, chassis and gensets were $15.8 million for the quarter ended March 22, 2015. During the quarter ended March 23, 2014, $0.6 million of property and equipment were purchased and $0.1 million of proceeds were received from sale of property and equipment.
Net cash used in financing activities from discontinued operations was $5.4 million for the quarter ended March 22, 2015 compared to $0.5 million for the quarter ended March 23, 2014 and consisted of payments on capital lease obligations during both periods.
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Outlook
The 2015 outlook does not contemplate the consummation of the sale of our Hawaii business to Pasha or the consummation of the Merger of the remainder of the Company into a subsidiary of Matson as the timing and certainty of such transactions are unknown at this time.
We anticipate that our 2015 continuing operations will include our shipping and integrated logistics services to and from the continental U.S. and Alaska and Hawaii, vessel loading and unloading services that we provide for vessel operators at our terminals, agency services, and other non-transportation services. We discontinued our Puerto Rico operations during the first quarter of 2015.
We expect 2015 revenue container loads in our two remaining markets to be above 2014 levels due to anticipated modest volume growth in both markets we serve. Overall, revenue container rates are expected to decline slightly in 2015 largely due to cargo mix.
We will experience increases in expenses associated with our revenue container volumes, including our vessel payroll costs and benefits, stevedoring, port charges, wharfage, inland transportation costs, and rolling stock costs, among others.
We expect four vessel dry-dockings in 2015 compared with two vessel dry-dockings in 2014. However, in 2014 one of the vessel dry-dockings resulted in negligible repositioning and incremental costs. As a result, we expect the costs associated with repositioning vessels and expenses related to spare vessels will meaningfully exceed 2014 levels.
Our operations share corporate and administrative functions such as finance, information technology, human resources, and legal. Centralized functions are performed primarily at our Charlotte, North Carolina, headquarters and at our operations center in Irving, Texas. Due to the discontinuation of our Puerto Rico operations, we will evaluate the appropriate level of resources to support our Alaska and Hawaii tradelanes throughout 2015. However, many of these expenses will continue for a portion of 2015.
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In addition, we expect net cash inflows of approximately $3.5 million associated with restructuring charges and the wind-down of our Puerto Rico business during 2015. Proceeds from the sale of assets are expected to exceed cash outflows associated with restructuring.
Based on our current level of operations, we believe cash flows from operations and borrowings available under the ABL Facility will be adequate to support our business plans.
Capital Requirements and Commitments
Based upon our current level of operations, we believe cash flow from operations and available cash, together with borrowings available under the ABL Facility, will be adequate to meet our liquidity needs for the next twelve months.
During the next twelve months, we expect to spend approximately $36.2 million and $17.0 million on capital expenditures and dry-docking expenditures, respectively. Capital expenditures are expected to include $14.4 million related to the exhaust gas cleaning systems for our three Alaska vessels, other vessel modifications, rolling stock, and terminal infrastructure and equipment. Terminal infrastructure expenditures include approximately $3.5 million related to the expected installation of a crane in our Kodiak, Alaska facility. We also expect to spend approximately $4.5 million during the next twelve months for legal settlements associated with the DOJ antitrust settlement and the qui tam actions. In addition, we expect cash outflows of approximately $9.0 million in transaction related expenses.
In addition to outflows discussed above, we expect to utilize cash flows to make principal and interest payments. Due to the seasonality within our business and the above mentioned payments and expenses, we will utilize borrowings under the ABL Facility during the next twelve months.
Long-Term Debt
On October 5, 2011, the Company issued the 6.00% Convertible Notes. On October 5, 2011, Horizon Lines issued the First Lien Notes, the Second Lien Notes, and entered into the ABL Facility. On January 31, 2013, Horizon Lines entered into the $20.0 Million Agreement and Horizon Lines Alaska Vessels, LLC (Horizon Alaska), the Companys special purpose subsidiary formed for the sole purpose of acquiring vessels, entered into the $75.0 Million Agreement. The 6.00% Convertible Notes, the First Lien Notes, the Second Lien Notes, the ABL Facility, the $20.0 Million Agreement, and the $75.0 Million Agreement are defined and described below.
The Company formed Sunrise Operations LLC and each of its downstream subsidiaries (the Sunrise Subsidiaries) pursuant to the terms of the Purchase Agreement. The Sunrise Subsidiaries currently have no operations. Accordingly, the Sunrise Subsidiaries are each currently Immaterial Subsidiaries under the ABL Facility, the 6.00% Convertible Notes, the Second Lien Notes, and the $20.0 Million Agreement (collectively, the Horizon Lines Debt Agreements) and do not guarantee any of the Horizon Lines Debt Agreements.
Per the terms of the Horizon Lines Debt Agreements, the Alaska SPEs (as defined below) are not required to be a party thereto, and are considered Unrestricted Subsidiaries under the 6.00% Convertible Notes, the First Lien Notes, the Second Lien Notes, and the $20.0 Million Agreement. The Alaska SPEs do not guarantee any of the Horizon Lines Debt Agreements; however, they are the sole guarantors of the $75 Million Agreement.
The 6.00% Convertible Notes are fully and unconditionally guaranteed by the Companys subsidiaries other than the Immaterial Subsidiaries and Unrestricted Subsidiaries identified above. The ABL Facility, the First Lien Notes, the Second Lien Notes, and the $20.0 Million Agreement are fully and unconditionally guaranteed by the Company and each of its subsidiaries other than Horizon Lines, the Unrestricted Subsidiaries and the Immaterial Subsidiaries.
The ABL Facility is secured on a first-priority basis by liens on the accounts receivable, deposit accounts, securities accounts, investment property (other than equity interests of the subsidiaries and joint ventures of the Company) and cash, in each case with certain exceptions, of the Company and the Companys subsidiaries other than the Immaterial Subsidiaries and Unrestricted Subsidiaries identified above (collectively, the ABL Priority Collateral). Substantially all other assets of the Company and the Companys subsidiaries, other than the assets of the Immaterial Subsidiaries and the Unrestricted Subsidiaries identified above, also serve as collateral for the Horizon Lines Debt Agreements (collectively, such other assets are the Secured Notes Priority Collateral).
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The following table summarizes the issuers, guarantors and non-guarantors of each of the Horizon Lines Debt Agreements:
ABL Facility |
$20 Million |
First Lien |
Second Lien |
6% Convertible |
$75 Million | |||||||
Horizon Lines, Inc. |
Guarantor | Guarantor | Guarantor | Guarantor | Issuer | Non-Guarantor | ||||||
Horizon Lines, LLC |
Issuer | Issuer | Issuer | Issuer | Guarantor | Non-Guarantor | ||||||
Horizon Alaska |
Non-Guarantor | Unrestricted | Unrestricted | Unrestricted | Unrestricted | Issuer | ||||||
Horizon Vessels |
Non-Guarantor | Unrestricted | Unrestricted | Unrestricted | Unrestricted | Guarantor | ||||||
Alaska Terminals |
Non-Guarantor | Unrestricted | Unrestricted | Unrestricted | Unrestricted | Guarantor | ||||||
Sunrise Subsidiaries |
Non-Guarantor | Non-Guarantor | Non-Guarantor | Non-Guarantor | Non-Guarantor | Non-Guarantor | ||||||
Other subsidiaries of the Company not specifically listed above |
Guarantor | Guarantor | Guarantor | Guarantor | Guarantor | Non-Guarantor |
The following table lists the order of lien priority for each of the Horizon Lines Debt Agreements on the Secured Notes Priority Collateral and the ABL Priority Collateral, as applicable:
Secured Notes Priority Collateral |
ABL Priority Collateral | |||
$20.0 Million Agreement |
First | Second | ||
First Lien Notes |
Second | Third | ||
Second Lien Notes |
Third | Fourth | ||
6.0% Convertible Notes |
Fourth | Fifth | ||
ABL Facility |
Fifth | First |
First Lien Notes
The 11.00% First Lien Senior Secured Notes (the First Lien Notes) were issued pursuant to an indenture on October 5, 2011. The First Lien Notes bear interest at a rate of 11.0% per annum, payable semiannually beginning on April 15, 2012 and mature on October 15, 2016. The First Lien Notes are callable at par plus accrued and unpaid interest. Horizon Lines is obligated to make mandatory prepayments of 1%, on an annual basis, of the original principal amount. These prepayments are payable on a semiannual basis and commenced on April 15, 2012.
The First Lien Notes contain affirmative and negative covenants which are typical for senior secured high-yield notes with no financial maintenance covenants. The First Lien Notes contain other covenants, including: change of control put at 101% (subject to a permitted holder exception); limitation on asset sales; limitation on incurrence of indebtedness and preferred stock; limitation on restricted payments; limitation on restricted investments; limitation on liens; limitation on dividends; limitation on affiliate transactions; limitation on sale/leaseback transactions; limitation on guarantees by restricted subsidiaries; and limitation on mergers, consolidations and sales of all/substantially all of the assets of Horizon Lines. These covenants are subject to certain exceptions and qualifications. Horizon Lines was in compliance with all such applicable covenants as of March 22, 2015, and the pending transactions with Matson and Pasha (discussed in Note 1) will not cause any covenant violation associated with the First Lien Notes.
On October 5, 2011, the fair value of the First Lien Notes was $228.4 million, which reflected Horizon Lines ability to call the First Lien Notes at 101.5% during the first year and at par thereafter. The original issue premium of $3.4 million is being amortized through interest expense through the maturity of the First Lien Notes.
Second Lien Notes
The 13.00%-15.00% Second Lien Senior Secured Notes (the Second Lien Notes) were issued pursuant to an indenture on October 5, 2011.
The Second Lien Notes bear interest at a rate of either: (i) 13% per annum, payable semiannually in cash in arrears; (ii) 14% per annum, 50% of which is payable semiannually in cash in arrears and 50% is payable in kind; or (iii) 15% per annum payable in kind, payable semiannually beginning on April 15, 2012, and maturing on October 15, 2016. The Second Lien Notes were non-callable for two years from the date of their issuance, were callable by Horizon Lines at 106% of their aggregate principal amount, plus accrued and unpaid interest thereon in the third year, and thereafter the Second Lien Notes are callable by Horizon Lines at 103% of their aggregate principal amount, plus accrued and unpaid interest thereon in the fourth year, and at par plus accrued and unpaid interest thereafter.
On April 15, 2012, October 15, 2012, April 15, 2013, October 15, 2013, April 15, 2014 and October 15, 2014, and April 15, 2015, Horizon Lines issued an additional $7.9 million, $8.1 million, $8.7 million, $9.4 million, $10.1 million, $10.8 million, and $11.6 million respectively, of Second Lien Notes to satisfy the payment-in-kind interest obligation under the Second Lien Notes. As such, as of March 22, 2015, Horizon Lines has recorded $10.1 million of accrued interest for the period from October 15, 2014 to March 22, 2015, due April 15, 2015 as an increase to long-term debt.
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The Second Lien Notes contain affirmative and negative covenants that are typical for senior secured high-yield notes with no financial maintenance covenants. The Second Lien Notes contain other covenants, including: change of control put at 101% (subject to a permitted holder exception); limitation on asset sales; limitation on incurrence of indebtedness and preferred stock; limitation on restricted payments; limitation on restricted investments; limitation on liens; limitation on dividends; limitation on affiliate transactions; limitation on sale/leaseback transactions; limitation on guarantees by restricted subsidiaries; and limitation on mergers, consolidations and sales of all/substantially all of the assets of Horizon Lines. These covenants are subject to certain exceptions and qualifications. Horizon Lines was in compliance with all such applicable covenants as of March 22, 2015, and the pending transactions with Matson and Pasha (discussed in Note 1) will not cause any covenant violation associated with the Second Lien Notes.
On October 5, 2011, the fair value of the Second Lien Notes was $96.6 million. The original issue discount of $3.4 million is being amortized through interest expense through the maturity of the Second Lien Notes.
During 2012, the Company and Horizon Lines entered into a Global Termination Agreement with Ship Finance International Limited (SFL) whereby Horizon Lines issued $40.0 million aggregate principal amount of its Second Lien Notes and 9,250,000 warrants that can be converted to 9,250,000 shares of the Companys common stock at a price of $0.01 per share to satisfy its obligations for certain vessel leases. The Second Lien Notes issued to SFL (the SFL Notes) have the same terms and covenants as the Second Lien Notes issued on October 5, 2011 (the Initial Notes), except that they are subordinated to the Initial Notes in the case of a bankruptcy, and holders of the SFL Notes, so long as then held by SFL, have the option to purchase the Initial Notes in the event of a bankruptcy. On April 9, 2012, the fair value of the SFL Notes outstanding on such date approximated face value. On October 15, 2012, April 15, 2013, October 15, 2013, April 15, 2014, October 15, 2014, and April 15, 2015, Horizon Lines issued an additional $3.1 million, $3.2 million, $3.5 million, $3.7 million, $4.0 million, and $4.3 million, respectively, of SFL Notes to satisfy the payment-in-kind interest obligation under the SFL Notes. As such, as of March 22, 2015, Horizon Lines has recorded $3.8 million of accrued interest for the period from October 15, 2014 to March 22, 2015, due April 15, 2015 as an increase to long-term debt.
ABL Facility
On October 5, 2011, Horizon Lines entered into a $100.0 million asset-based revolving credit facility (the ABL Facility) with Wells Fargo Capital Finance, LLC (Wells Fargo). Use of the ABL Facility is subject to compliance with a customary borrowing base limitation. The ABL Facility includes an up to $30.0 million letter of credit sub-facility and a swingline sub-facility up to $15.0 million, with Wells Fargo serving as administrative agent and collateral agent. Horizon Lines has the option to request increases in the maximum commitment under the ABL Facility by up to $25.0 million in the aggregate; however, such incremental facility increases have not been committed to in advance. The ABL Facility is available to be used by Horizon Lines for working capital and other general corporate purposes.
The ABL Facility was amended on January 31, 2013 in conjunction with the $75.0 Million Agreement and $20.0 Million Agreement. In addition to allowing for the incurrence of the additional long-term debt under those agreements, amendments to the ABL Facility included, among other changes, (i) permission to make certain investments in the Alaska SPEs, including the proceeds of the $20.0 Million Agreement and the arrangements related to the charters and the sublease of the terminal facility licenses for the Vessels (as defined below), (ii) excluding the Alaska SPEs from the guarantee and collateral requirements of the ABL Facility and from the restrictions of the negative covenants and certain other provisions, (iii) weekly borrowing base reporting in the event availability under the facility falls below a threshold of (a) $14.0 million or (b) 14.0% of the maximum commitment under the ABL Facility, (iv) the exclusion of certain historical charges and expenses relating to discontinued operations and severance from the calculation of bank-defined Adjusted EBITDA, (v) the exclusion of the historical charter hire expense deriving from the Vessels from the calculation of bank-defined Adjusted EBITDA, and (vi) the inclusion of pro forma interest expense on the $75.0 Million Agreement and the $20.0 Million Agreement in the calculation of fixed charges.
The ABL Facility matures October 5, 2016 (but 90 days earlier, July 7, 2016, if the First Lien Notes and the Second Lien Notes are not repaid or refinanced as of such date). The interest rate on the ABL Facility is LIBOR or a base rate plus an applicable margin based on leverage and excess availability, as defined in the agreement, ranging from (i) 1.25% to 2.75%, in the case of base rate loans and (ii) 2.25% to 3.75%, in the case of LIBOR loans. A fee ranging from 0.375% to 0.50% per annum will accrue on unutilized commitments under the ABL Facility. Horizon Lines had $10.5 million of letters of credit outstanding as of March 22, 2015, which reduced the overall borrowing availability. As of March 22, 2015, there were no borrowings outstanding under the ABL facility and total borrowing availability was $47.3 million.
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The ABL Facility requires compliance with a minimum fixed charge coverage ratio test if excess availability is less than the greater of (i) $12.5 million or (ii) 12.5% of the maximum commitment under the ABL Facility. In addition, the ABL Facility includes certain customary negative covenants that, subject to certain materiality thresholds, baskets and other agreed upon exceptions and qualifications, will limit, among other things, indebtedness, liens, asset sales and other dispositions, mergers, liquidations, dissolutions and other fundamental changes, investments and acquisitions, dividends, distributions on equity or redemptions and repurchases of capital stock, transactions with affiliates, repayments of certain debt, conduct of business and change of control. The ABL Facility also contains certain customary representations and warranties, affirmative covenants and events of default, as well as provisions requiring compliance with applicable citizenship requirements of the Jones Act. Horizon Lines was in compliance with all such applicable covenants as of March 22, 2015.
Subsequent to the end of the first quarter, the ABL Facility was amended on April 22, 2015 to reduce the size of the facility from $100.0 million to $80.0 million. Horizon Lines accounts receivable balances have decreased due to the closing of the Puerto Rico operations. The decrease has resulted in a reduction in the maximum forecasted borrowing base below $80 million. The reduction in the facility size is expected to reduce Horizon Lines unused fees by approximately $0.1 million per year. In addition to this fee reduction, this amendment reduces the requirement for testing the minimum fixed charge coverage ratio, from a minimum excess availability of $12.5 million to $10.0 million and the threshold for weekly borrowing base reporting from $14.0 million to $12.0 million. The amendment also reduces the letter of credit sub-limit from $30.0 million to $20.0 million.
$75.0 Million Term Loan Agreement
Three of Horizon Lines Jones Act-qualified vessels: the Horizon Anchorage, Horizon Tacoma, and Horizon Kodiak (collectively, the Vessels) were previously chartered. The charter for the Vessels was due to expire in January 2015. For each chartered Vessel, the Company generally had the following options in connection with the expiration of the charter: (i) purchase the vessel for its fixed price or fair market value, (ii) extend the charter for an agreed upon period of time at a fixed price or fair market value charter rate or, (iii) return the vessel to its owner. On January 31, 2013, the Company, through its newly formed subsidiary Horizon Alaska, acquired off of charter the Vessels for a purchase price of approximately $91.8 million.
On January 31, 2013, Horizon Alaska, together with two newly formed subsidiaries of Horizon Lines, Horizon Lines Alaska Terminals, LLC (Alaska Terminals) and Horizon Lines Merchant Vessels, LLC (Horizon Vessels), entered into an approximately $75.8 million term loan agreement with certain lenders and U.S. Bank National Association (U.S. Bank), as the administrative agent, collateral agent and ship mortgage trustee (the $75.0 Million Agreement). The obligations under the $75.0 Million Agreement are secured by a first-priority lien on substantially all of the assets of Horizon Alaska, Horizon Vessels, and Alaska Terminals (collectively, the Alaska SPEs), which primarily includes the Vessels. The operations of the Alaska SPEs are limited to a bareboat charter of the Vessels between Horizon Alaska and Horizon Lines and a sublease of a terminal facility in Anchorage, Alaska between Alaska Terminals and Horizon Lines of Alaska.
The loan under the $75.0 Million Agreement accrues interest at 10.25% per annum, payable quarterly commencing March 31, 2013. Amortization of loan principal is payable in equal quarterly installments, commencing on March 31, 2014, and each amortization installment will equal 2.5% of the total initial loan amount (which may increase to 3.75% upon specified events). The full remaining outstanding amount of the loan under the $75.0 Million Agreement is payable on September 30, 2016. The proceeds of the loan under the $75.0 Million Agreement were utilized by Horizon Alaska to acquire the Vessels. In connection with the borrowing under the $75.0 Million Agreement, the Alaska SPEs paid financing costs of $2.5 million during 2013, which included loan commitment fees of $1.5 million. The financing costs have been recorded as a reduction to the carrying amount of the $75.0 Million Agreement and will be amortized through non-cash interest expense through maturity of the $75.0 Million Agreement. In addition to the commitment fees of $1.5 million paid in cash at closing, the Alaska SPEs will also pay, at maturity of the $75.0 Million Agreement, an additional $0.8 million of closing fees by increasing the original $75.0 million principal amount. The Company is recording non-cash interest accretion through maturity of the $75.0 Million Agreement related to the additional closing fees.
The $75.0 Million Agreement contains certain covenants, including a minimum EBITDA threshold and limitations on the incurrence of indebtedness, liens, asset sales, investments and dividends (all as defined in the agreement). The Alaska SPEs were in compliance with all such covenants as of March 22, 2015. The agent and the lenders under the $75.0 Million Agreement do not have any recourse to the stock or assets of the Company or any of its subsidiaries (other than the Alaska SPEs or equity interests therein). Defaults under the $75.0 Million Agreement do not give rise to any remedies under the Horizon Lines Debt Agreements.
On January 31, 2013, the fair value of the $75.0 Million Agreement approximated face value and was classified within level 2 of the fair value hierarchy. In determining the estimated fair value of the $75.0 Million Agreement, the Company utilized a quantitatively derived rating estimate and creditworthiness analysis, a credit rating gap analysis, and an analysis of credit market transactions. These analyses were used to estimate a benchmark yield, which was compared to the stated interest rate in the $75.0 Million Agreement. The Company determined the estimated benchmark yield approximated the stated interest rate.
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$20.0 Million Term Loan Agreement
On January 31, 2013, the Company and those of its subsidiaries that are parties (collectively, the Loan Parties) to the existing First Lien Notes, the Second Lien Notes, and the 6.00% Convertible Notes (collectively, the Notes) entered into a $20.0 million term loan agreement with certain lenders and U.S. Bank, as administrative agent, collateral agent, and ship mortgage trustee (the $20.0 Million Agreement). The loan under the $20.0 Million Agreement matures on September 30, 2016 and accrues interest at 8.00% per annum, payable quarterly commencing March 31, 2013 with interest calculated assuming accrual beginning January 8, 2013. The $20.0 Million Agreement does not provide for any amortization of principal, and the full outstanding amount of the loan is payable on September 30, 2016. Horizon Lines is not permitted to optionally prepay the $20.0 Million Agreement except for prepayment in full (together with a prepayment premium equal to 5.0% of the principal amount prepaid) following repayment in full of the First Lien Notes and the $75.0 Million Agreement.
In connection with the issuance of the $20.0 Million Agreement, Horizon Lines paid financing costs of $0.6 million during 2013. The financing costs have been recorded as a reduction to the carrying amount of the $20.0 Million Agreement and will be amortized through non-cash interest expense through maturity of the $20.0 Million Agreement.
The covenants in the $20.0 Million Agreement are substantially similar to the negative covenants contained in the indentures governing the Notes, which indentures permit the incurrence of the term loan borrowed under the $20.0 Million Agreement and the contribution of such amounts to Horizon Alaska. The proceeds of the loan borrowed under the $20.0 Million Agreement were contributed to Horizon Alaska to enable it to acquire the Vessels. Horizon Lines was in compliance with all covenants as of March 22, 2015.
On January 31, 2013, the fair value of the $20.0 Million Agreement approximated face value and was classified within level 2 of the fair value hierarchy. In determining the estimated fair value of the $20.0 Million Agreement, the Company utilized a quantitatively derived rating estimate and creditworthiness analysis, a credit rating gap analysis, and an analysis of credit market transactions. These analyses were used to estimate a benchmark yield, which was compared to the stated interest rate in the $20.0 Million Agreement. The Company determined the estimated benchmark yield approximated the stated interest rate.
6.00% Convertible Notes
On October 5, 2011, the Company issued $178.8 million in aggregate principal amount of new 6.00% Series A Convertible Senior Secured Notes due 2017 (the Series A Notes) and $99.3 million in aggregate principal amount of new 6.00% Series B Mandatorily Convertible Senior Secured Notes (the Series B Notes and, together with the Series A Notes, collectively the 6.00% Convertible Notes). The 6.00% Convertible Notes were issued pursuant to an indenture, which the Company and the Loan Parties entered into with U.S. Bank , as trustee and collateral agent, on October 5, 2011 (the 6.00% Convertible Notes Indenture).
During 2012, the Company completed various debt-to-equity conversions of the 6.00% Convertible Notes. On October 5, 2012, all outstanding Series B Notes not previously converted into shares of the Companys common stock were mandatorily converted into Series A Notes as required by the terms of the 6.00% Convertible Notes Indenture. As of March 22, 2015, $2.0 million face value of the Series A Notes remains outstanding. The Series A Notes bear interest at a rate of 6.00% per annum, payable semiannually. The Series A Notes mature on April 15, 2017 and are convertible at the option of the holders, and at the Companys option under certain circumstances, into shares of the Companys common stock or warrants, as the case may be. Upon conversion, foreign holders may, under certain conditions, receive warrants in lieu of shares of common stock.
In connection with the execution of the Merger Agreement, on November 11, 2014, the Company and U.S. Bank National Association (the Trustee), as trustee and collateral agent entered into a fifth supplemental indenture (the Fifth Supplemental Indenture) to the 6.00% Convertible Notes Indenture. The Fifth Supplemental Indenture provides that, subject to the satisfaction and discharge of all secure debt that is senior to the 6.00% Convertible Notes, immediately after consummation of the Merger contemplated by the Merger Agreement, the Company will make an irrevocable deposit (the Merger Deposit) with the Trustee of an amount in cash that is sufficient to pay the principal of, premium (if any) and interest on the 6.00% Convertible Notes on the scheduled due dates through and including its stated maturity. Upon receipt of the Merger Deposit, unless and until a default or event of default with respect to the payment of principal, premium (if any) or interest on the 6.00% Convertible Notes occurs, certain covenants in the 6.00% Convertible Notes Indenture will be suspended and neither the Company nor any of its subsidiaries will be obligated to comply with such covenants. The covenants subject to suspension, include, among others, covenants regarding the Companys obligation to furnish annual and quarterly reports to the Trustee, covenants regarding restricted payments, covenants regarding restrictions on dividends and other distributions, incurrence of debt, incurrence of liens, affiliate transactions, and certain covenants regarding asset sales. The Trustee will use the Merger Deposit for payment of principal, premium (if any) and interest on the Notes pursuant to the terms of the 6.00% Convertible Notes Indenture.
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The conversion rate of the remaining Series A Notes may be increased in certain circumstances to compensate the holders thereof for the loss of the time value of the conversion right (i) if at any time the Companys common stock or the common stock into which the new notes may be converted is greater than or equal to $11.25 per share and is not listed on the NYSE or NASDAQ markets or (ii) if a change of control occurs, unless at least 90% of the consideration received or to be received by holders of common stock, excluding cash payments for fractional shares, in connection with the transaction or transactions constituting the change of control, consists of shares of common stock, American Depositary Receipts or American Depositary Shares traded on a national securities exchange in the United States or which will be so traded or quoted when issued or exchanged in connection with such change of control. Upon a change of control, holders will have the right to require the Company to repurchase for cash the outstanding Series A Notes at 101% of the aggregate principal amount, plus accrued and unpaid interest.
The long-term debt and embedded conversion options associated with the 6.00% Convertible Notes were recorded on the Companys balance sheet at their fair value on October 5, 2011. On October 5, 2011, the fair value of the long-term debt portion of the Series A Notes and Series B Notes was $105.6 million and $58.6 million, respectively. The original issue discounts associated with the 6.00% Convertible Notes still outstanding are being amortized through interest expense through the maturity of the Series A Notes.
Warrants
Certain warrants, not including the warrants issued to SFL, were issued pursuant to a warrant agreement, which the Company entered into with The Bank of New York Mellon Trust Company, N.A, as warrant agent, on October 5, 2011, as amended by Amendment No. 1, dated December 7, 2011 (the Warrant Agreement). Pursuant to the Warrant Agreement, each warrant entitles the holder to purchase common stock at a price of $0.01 per share, subject to adjustment in certain circumstances. In connection with a reverse stock split in December 2011, warrant holders will receive 1/25th of a share of the Companys common stock upon conversion. As of March 22, 2015 there were 1.1 billion warrants outstanding for the purchase of up to 51.6 million shares of the Companys common stock. Upon issuance, in lieu of payment of the exercise price, a warrant holder will have the right (but not the obligation) to require the Company to convert its warrants, in whole or in part, into shares of its common stock without any required payment or request that the Company withhold, from the shares of common stock that would otherwise be delivered to such warrant holder, shares issuable upon exercise of the warrants equal in value to the aggregate exercise price.
Warrant holders will not be permitted to exercise or convert their warrants if and to the extent the shares of common stock issuable upon exercise or conversion would constitute excess shares (as defined in the Companys certificate of incorporation) if they were issued in order to abide by the foreign ownership limitations imposed by the Companys certificate of incorporation. In addition, a warrant holder who cannot establish to the Companys reasonable satisfaction that it (or, if not the holder, the person that the holder has designated to receive the common stock upon exercise or conversion) is a United States citizen will not be permitted to exercise or convert its warrants to the extent the receipt of the common stock upon exercise or conversion would cause such person or any person whose ownership position would be aggregated with that of such person to exceed 4.9% of the Companys outstanding common stock.
The warrants contain no provisions allowing the Company to force redemption. Each warrant is convertible into shares of the Companys common stock at an exercise price of $0.01 per share, which the holder has the option to waive. In addition, the Company has sufficient authorized and unissued shares available to settle the warrants during the maximum period the warrants could remain outstanding. As a result, the warrants do not meet the definition of an asset or liability and were classified as equity on the date of issuance, on December 21, 2014, and on March 22, 2015. The warrants will be evaluated on a continuous basis to determine if equity classification continues to be appropriate.
Goodwill
We review our goodwill, intangible assets and long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amounts of these assets may not be recoverable, and also review goodwill annually. As of March 22, 2015, the carrying value of goodwill was $198.8 million. Based on our impairment analyses performed during the fourth quarter of 2014, we concluded that our goodwill was not impaired at that time. However, should our operating results be lower from what is expected or other triggering events occur, it could imply that our goodwill may not be recoverable and may result in the recognition of a non-cash write down of goodwill in fiscal 2015.
Interest Rate Risk
Our primary interest rate exposure relates to the ABL Facility. As of March 22, 2015, we had no borrowings outstanding under the ABL Facility. The interest rate on the ABL Facility is based on LIBOR or a base rate plus an applicable margin based on leverage and excess availability, as defined in the agreement, ranging from (i) 1.25% to 2.75%, in the case of base rate loans and (ii) 2.25% to 3.75%, in the case of LIBOR loans. Each quarter point change in interest rates would result in a $0.1 million change in annual interest expense on the ABL facility.
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Recent Accounting Pronouncements
In May 2014, FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires entities to recognize revenue in the amount it expects to be entitled for the transfer of promised goods or services to customers. When it becomes effective, the ASU will replace most of the existing revenue recognition requirements in U.S. GAAP, including industry-specific guidance. This pronouncement is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, with early application not permitted. ASU 2014-09 provides alternative methods of initial adoption, including retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the pronouncement recognized at the date of initial application. The Company is currently evaluating the effect that this pronouncement will have on its financial statements and related disclosures.
Forward Looking Statements
This Form 10-Q (including the exhibits hereto) contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are those that do not relate solely to historical fact. They include, but are not limited to, any statement that may predict, forecast, indicate or imply future results, performance, achievements or events. Words such as, but not limited to, believe, expect, anticipate, estimate, intend, plan, targets, projects, likely, will, would, could and similar expressions or phrases identify forward-looking statements.
All forward-looking statements involve risks and uncertainties. The occurrence of the events described, and the achievement of the expected results, depend on many events, some or all of which are not predictable or within our control. Actual results may differ materially from expected results.
Factors that may cause actual results to differ from expected results include:
| our ability to consummate the transaction with Pasha to sell our Hawaii business or the merger transaction with Matson, |
| unexpected costs, litigation and other operational complications that may arise from these proposed transactions, |
| our business may suffer as a result of uncertainty surrounding the proposed merger and the Hawaii sale, including adverse impact on relationships with customers, suppliers and regulators; |
| the Companys inability to retain and if necessary, attract key employees, particularly during the pendency of the merger and the Hawaii sale; |
| diversion of managements attention from ongoing business operations during the pendency of the merger and the Hawaii sale; |
| a governmental authority prohibiting or otherwise restraining the transaction with Pasha to sell our Hawaii business or the merger transaction with Matson, |
| our substantial leverage may restrict cash flow and thereby limit our ability to invest in our business, |
| our ability to maintain adequate liquidity to operate our business, |
| our ability to make interest payments on our outstanding indebtedness, |
| our ability to manage the exhaust gas cleaning systems initiative effectively to deliver the results we hope to achieve, |
| our ability to mitigate expenses and increased charges associated with the shutdown of our Puerto Rico tradelane, |
| volatility in fuel prices, |
| work stoppages, strikes, and other adverse union actions, |
| the vessels in our fleet continue to age, and we may not have the resources to replace our vessels, |
| decreases in shipping volumes, |
| failure to comply with safety and environmental protection and other governmental requirements, |
| increased inspection procedures and tighter import and export controls, |
| the start-up of any additional Jones-Act competitors, |
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| the ability to effectively compete as competitors deploy additional tonnage, |
| repeal or substantial amendment of the coastwise laws of the United States, also known as the Jones Act, |
| catastrophic losses and other liabilities, |
| failure to comply with the various ownership, citizenship, crewing, and build requirements dictated by the Jones Act, |
| the arrest of our vessels by maritime claimants, |
| severe weather and natural disasters, or |
| unexpected substantial dry-docking or repair costs for our vessels. |
In light of these risks and uncertainties, expected results or other anticipated events or circumstances discussed in this Form 10-Q (including the exhibits hereto) might not occur. We undertake no obligation, and specifically decline any obligation, to publicly update or revise any forward-looking statements, even if experience or future developments make it clear that projected results expressed or implied in such statements will not be realized, except as may be required by law.
See the section entitled Risk Factors in our Form 10-K for the fiscal year ended December 21, 2014, as filed with the SEC for a more complete discussion of these risks and uncertainties and for other risks and uncertainties. Those factors and the other risk factors described therein are not necessarily all of the important factors that could cause actual results or developments to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could harm our results. Consequently, there can be no assurance that actual results or developments anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, us. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements.
3. Quantitative and Qualitative Disclosures About Market Risk
We maintain policies for managing risk related to exposure to variability in interest rates, fuel prices and other relevant market rates and prices, which includes entering into derivative instruments in order to mitigate our risks. We do not currently have any derivative instruments outstanding.
Our exposure to market risk for changes in interest rates is limited to our ABL Facility and one of our operating leases. The interest rate for our ABL Facility is currently indexed to LIBOR of one, two, three, or six months as selected by us (or twelve months, if available, and consented to by the Lenders), or the Alternate Base Rate as defined in the ABL Facility. One of our operating leases is currently indexed to LIBOR of one month.
In addition, at times we utilize derivative instruments tied to various indexes to hedge a portion of our quarterly exposure to bunker fuel price increases. These instruments consist of fixed price swap agreements. We do not use derivative instruments for trading purposes. Credit risk related to the derivative financial instruments is considered minimal and is managed by requiring high credit standards for counterparties. We currently do not have any bunker fuel price hedges in place.
Changes in fair value of derivative financial instruments are recorded as adjustments to the assets or liabilities being hedged, in the statement of operations or in accumulated other comprehensive income (loss), depending on whether the derivative is designated and qualifies for hedge accounting, the type of hedge transaction represented, and the effectiveness of the hedge.
Disclosure Controls and Procedures
The Companys management, including the Companys Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Companys disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, each of the Companys Chief Executive Officer and Chief Financial Officer has concluded that the Companys disclosure controls and procedures are effective.
Changes in Internal Control
There were no changes in the Companys internal control over financial reporting during the Companys fiscal quarter ending March 22, 2015, that have materially affected or are reasonably likely to materially affect, the Companys internal control over financial reporting.
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On November 25, 2014, a putative stockholder class action complaint was filed in the Court of Chancery of the State of Delaware, captioned Joshua Loken v. Horizon Lines, Inc., et al., Case No. 10399-VCL (the Loken Action). The complaint names as defendants each member of the Companys Board (the Individual Defendants), the Company, and Matson Navigation Company, Inc., Matson, Inc., and Hogan Acquisition, Inc. (collectively, the Matson Companies). The complaint generally alleges that the Individual Defendants breached their fiduciary duties of good faith, loyalty and due care when they negotiated and authorized the execution of the November 11, 2014 Merger Agreement with Matson and that each of the Company and the Matson Companies aided and abetted the purported breaches of fiduciary duties. The relief sought includes, among other things, an injunction prohibiting the consummation of the Merger, or, in the alternative, rescission of the Merger Agreement in the event the Merger is consummated, with damages of an unspecified amount.
On December 1, 2014, a putative stockholder class action complaint was filed in the Court of Chancery of the State of Delaware, captioned J. Cola Inc. v. Horizon Lines, Inc., et al., Case No. 10412-VCL (the J. Cola Action). The complaint names as defendants the Individual Defendants, the Company, and the Matson Companies. The complaint generally alleges that the Individual Defendants breached their fiduciary duties of good faith, loyalty and due care when they negotiated and authorized the execution of the November 11, 2014 Merger Agreement with Matson and that each of the Company and the Matson Companies aided and abetted the purported breaches of fiduciary duties. On January 9, 2015, Plaintiff in the J. Cola Action filed an amended complaint, adding a cause of action for breach of the directors fiduciary duty of disclosure in connection with the Companys December 23, 2014 Proxy Statement, which Plaintiff claims omitted material information and/or included materially misleading information. The relief sought includes, among other things, an injunction prohibiting the consummation of the Merger, or, in the alternative, rescission of the Merger Agreement in the event the Merger is consummated, with damages of an unspecified amount.
On December 2, 2014, a putative stockholder class action complaint was filed in the Court of Chancery of the State of Delaware, captioned Finn Kristiansen v. Jeffrey A. Brodsky, et al., Case No. 10418-VCL (the Kristiansen Action). The complaint names as defendants the Individual Defendants, the Company, and the Matson Companies. The complaint generally alleges that the Individual Defendants breached their fiduciary duties of good faith, loyalty and due care when they negotiated and authorized the execution of the November 11, 2014 Merger Agreement with Matson and that each of the Company and the Matson Companies aided and abetted the purported breaches of fiduciary duties. On January 9, 2015, Plaintiff in the Kristiansen Action filed an amended complaint, adding a cause of action for breach of the directors fiduciary duty of disclosure in connection with the Companys December 23, 2014 Proxy Statement, which Plaintiff claims omitted material information and/or included materially misleading information. The relief sought includes, among other things, an injunction prohibiting the consummation of the Merger, or, in the alternative, rescission of the Merger Agreement in the event the Merger is consummated, with damages of an unspecified amount.
On January 29, 2015, a putative stockholder class action complaint was filed in the Court of Chancery of the State of Delaware, captioned Frederick Schwartz v. Jeffrey A. Brodsky, et al., Case No. 10594-VCL (the Schwartz Action). The complaint names as defendants the Individual Defendants, the Company, and the Matson Companies. The complaint generally alleges that the Individual Defendants breached their fiduciary duties of good faith, loyalty, due care when they negotiated and authorized the execution of the November 11, 2014 Merger Agreement with Matson and that each of the Company and the Matson Companies aided and abetted the purported breaches of fiduciary duties. The complaint also alleges that the Individual Defendants breached their fiduciary duty of disclosure in connection with the Companys December 23, 2014 Proxy Statement, which Plaintiff claims omitted material information and/or included materially misleading information. The relief sought includes, among other things, an injunction prohibiting the consummation of the Merger, or, in the alternative, rescission of the Merger Agreement in the event the Merger is consummated, with damages of an unspecified amount.
On February 5, 2015, the Court of Chancery of the State of Delaware issued an order consolidating the Loken Action, J. Cola Action, Kristiansen Action, and Schwartz Action into In re Horizon Lines, Inc. Stockholders Litigation, Consolidated C.A. 10399-VCL (the Consolidated Action). On February 13, 2015, the defendants and the plaintiffs in the Consolidated Action reached an agreement in principle, subject to the courts approval (the Memorandum of Understanding), providing for the settlement and dismissal, with prejudice, of the Consolidated Action. Pursuant to such Memorandum of Understanding, the Company agreed to make additional disclosures to the Companys stockholders through a supplement to the Companys Definitive Proxy Statement and the Company and Matson agreed to amend the Merger Agreement in order to reduce the amount of the termination fee payable by the Company to Matson under certain circumstances pursuant to Section 7.3(a) of the Merger Agreement from $17.1 million to $9.5 million. On February 13, 2015, the Company, Matson and Hogan Acquisition, Inc. entered into Amendment No. 1 to the Merger Agreement, as described above. The Company and its Board of Directors believe that the claims in the Actions are entirely without merit and, in the event the settlement does not resolve them, intend to contest them vigorously.
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In the ordinary course of business, from time to time, the Company becomes involved in various legal proceedings. These relate primarily to claims for loss or damage to cargo, employees personal injury claims, and claims for loss or damage to the person or property of third parties. The Company generally maintains insurance, subject to customary deductibles or self-retention amounts, and/or reserves to cover these types of claims. The Company also, from time to time, becomes involved in routine employment-related disputes and disputes with parties with which it has contractual relations. The Companys policy is to disclose contingent liabilities associated with both asserted and unasserted claims after all available facts and circumstances have been reviewed and the Company determines that a loss is reasonably possible. The Companys policy is to record contingent liabilities associated with both asserted and unasserted claims when it is probable that the liability has been incurred and the amount of the loss is reasonably estimable.
There have been no material changes from our risk factors as previously reported in our Annual Report on Form 10-K for the fiscal year ended December 21, 2014, as filed with the SEC.
2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
3. Defaults Upon Senior Securities
None.
None.
None.
2.1 | Amendment No. 1 to Agreement and Plan of Merger, dated as of February 13, 2015, by and among Matson Navigations Company, Inc., Hogan Acquisition Inc. and Horizon Lines, Inc. (filed as Exhibit 2.1 to the Companys report on Form 8-K filed February 17, 2015). | |
2.2 | Asset Purchase Agreement, dated March 11, 2015, by and among Horizon Lines of Puerto Rico, Inc., Horizon Lines, LLC and Luis A. Ayala Colon Sucres, Inc. (filed as Exhibit 2.1 to the Companys report on Form 8-K filed March 13, 2015). | |
10.1 | Port of Kodiak Terminal Operation Contract (Piers II and III), dated March 1, 2015, between the City of Kodiak, Alaska and Horizon Lines of Alaska, LLC. | |
10.2 | Port of Kodiak Preferential Use Agreement (Pier III), dated March 1, 2015, between the City of Kodiak, Alaska and Horizon Lines of Alaska, LLC. | |
31.1* | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2* | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1* | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2* | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS** | XBRL Instance Document | |
101.SCH** | XBRL Taxonomy Extension Schema Document | |
101.CAL** | XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF** |
XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB** | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE** | XBRL Taxonomy Extension Presentation Linkbase Document |
* | Filed herewith. |
** | Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: May 1, 2015
HORIZON LINES, INC. | ||
By: | /s/ MICHAEL T. AVARA | |
Michael T. Avara | ||
Executive Vice President & Chief Financial Officer (Principal Financial Officer & Authorized Signatory) |
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EXHIBIT INDEX
Exhibit No. |
Description | |
2.1 | Amendment No. 1 to Agreement and Plan of Merger, dated as of February 13, 2015, by and among Matson Navigations Company, Inc., Hogan Acquisition Inc. and Horizon Lines, Inc. (filed as Exhibit 2.1 to the Companys report on Form 8-K filed February 17, 2015). | |
2.2 | Asset Purchase Agreement, dated March 11, 2015, by and among Horizon Lines of Puerto Rico, Inc., Horizon Lines, LLC and Luis A. Ayala Colon Sucres, Inc. (filed as Exhibit 2.1 to the Companys report on Form 8-K filed March 13, 2015). | |
10.1 | Port of Kodiak Terminal Operation Contract (Piers II and III), dated March 1, 2015, between the City of Kodiak, Alaska and Horizon Lines of Alaska, LLC. | |
10.2 | Port of Kodiak Preferential Use Agreement (Pier III), dated March 1, 2015, between the City of Kodiak, Alaska and Horizon Lines of Alaska, LLC. | |
31.1* | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2* | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1* | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2* | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
101.INS** | XBRL Instance Document | |
101.SCH** | XBRL Taxonomy Extension Schema Document | |
101.CAL** | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF** | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB** | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE** | XBRL Taxonomy Extension Presentation Linkbase Document |