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American Commercial Lines 10-K 2008 Documents found in this filing:
Table of Contents
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Commission file
number: 000-51562
AMERICAN COMMERCIAL LINES
INC.
(812) 288-0100
(Registrant’s telephone
number, including area code)
Not applicable
Securities registered pursuant to Section 12(b) of the
Act:
Common Stock, $.01 par value per share
Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Exchange
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
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 the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act. (Check one):
Aggregate market value of common stock held by non-affiliates at
June 30, 2007 $1,473,743,634
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
Indicate the number of shares outstanding of each of the
issuer’s classes of common stock, as of the latest
practicable date.
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12,
13 or 15(d) of the Securities Exchange Act of 1934 subsequent to
the distribution of securities under a plan confirmed by a
court. Yes
þ No
o
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This annual report on
Form 10-K
includes certain “forward-looking statements” that
involve many risks and uncertainties. When used, words such as
“anticipate,” “expect,” “believe,”
“intend,” “may be,” “will be” and
similar words or phrases, or the negative thereof, unless the
context requires otherwise, are intended to identify
forward-looking statements. These forward-looking statements are
based on management’s present expectations and beliefs
about future events. As with any projection or forecast, these
statements are inherently susceptible to uncertainty and changes
in circumstances. The Company is under no obligation to, and
expressly disclaims any obligation to, update or alter our
forward-looking statements whether as a result of such changes,
new information, subsequent events or otherwise.
Important factors that could cause actual results to differ
materially from those reflected in such forward-looking
statements and that should be considered in evaluating our
outlook include, but are not limited to, the following.
See Item 1A “Risk Factors” of this annual report
on
Form 10-K
for a more detailed discussion of the foregoing and certain
other factors that could cause actual results to differ
materially from those reflected in such forward-looking
statements and that should be considered in evaluating our
outlook.
Table of Contents
PART I
The
Company
American Commercial Lines Inc. (“ACL” or the
“Company”), a Delaware corporation, is one of the
largest and most diversified marine transportation and service
companies in the United States. ACL provides barge
transportation and related services under the provisions of the
Jones Act and manufactures barges, towboats and other vessels,
including ocean-going liquid tank barges. During the fourth
quarter of 2007, ACL acquired a naval architecture and marine
engineering firm which will continue to provide architecture,
engineering and production support to its many customers in the
commercial marine industry, while providing ACL with expertise
in support of its transportation and manufacturing businesses.
Our principal executive offices are located at 1701 East Market
Street in Jeffersonville, Indiana. Our mailing address is
P.O. Box 610, Jeffersonville, Indiana 47130.
Our website address is www.aclines.com. All of our
filings with the Securities and Exchange Commission, including
our annual report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to those reports and our recent registration
statements can be accessed through the Investor Relations link
on the website.
In addition, the following information is also available on the
website.
Committee Charters:
Governance Documents:
We currently operate in two primary business segments,
transportation and manufacturing. We are the second largest
provider of dry cargo barge transportation and liquid cargo
barge transportation on the United States Inland Waterways
consisting of the Mississippi River System, its connecting
waterways and the Gulf Intracoastal Waterway (the “Inland
Waterways”), accounting for 14.8% of the total inland dry
cargo barge fleet and 13.2% of the total inland liquid cargo
barge fleet as of December 31, 2006. We do not believe that
these percentages have varied significantly during 2007, but
competitive surveys are normally not available until March of
each year. Our manufacturing subsidiary, Jeffboat LLC
(“Jeffboat”), is the second largest manufacturer of
dry cargo and tank barges in the United States. The Company also
owns a naval architecture company which provides services to
third-party customers and to the Company’s transportation
and manufacturing businesses. Comparative financial information
regarding our transportation, manufacturing and other business
segments is included in both the notes to our consolidated
financial statements and in Management’s Discussion and
Analysis of Financial Conditions and Results of Operations.
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During 2006, in separate transactions, we sold our interests in
our Venezuelan operations and the assets of our Dominican
Republic operations, both for net gains. In 2007 we had no
remaining continuing operations outside of the United States.
The disposed international operations contributed 2.3% and 6.1%,
respectively, of our combined revenues and consolidated net
income in 2006 and 3.6% and 15.3%, respectively, of combined
revenues and consolidated net income in 2005. Collectively,
these operations are treated as discontinued in all income
statements presented herein and, unless expressly stated, are
excluded from the discussion, analyses and comparisons, herein.
For the year ended December 31, 2007, we generated revenue
of $1.05 billion and net income of $44.4 million. We
generated EBITDA of $159.8 million (See “Selected
Consolidated Financial Data” for the definition of EBITDA
and a reconciliation of net income to EBITDA).
Our transportation segment’s revenues in 2007 were
$808.6 million or 77% of consolidated revenue. In 2007, our
transportation segment transported approximately
39.3 billion
ton-miles of
cargo under affreightment contracts and an additional
4.3 billion
ton-miles
under towing and day rate contracts for a total of
43.6 billion
ton-miles.
This was a decrease of 1.5 billion
ton-miles or
3.4% compared to 2006. The decreased
ton-miles
were produced with a fleet that was 5.6% smaller than the prior
year. We believe that
ton-miles,
which is computed by the extension of tons by the number of
miles transported, is the best available volume measurement for
the transportation business and is a key part of how we measure
our performance.
Our operations are tailored to service a wide variety of
shippers and freight types. As of December 31, 2007, the
2,828 barges in our fleet included 2,074 covered dry cargo
barges, 366 open dry cargo barges and 388 liquid tank barges. We
provide additional value-added services to our customers,
including third-party logistics through our BargeLink LLC joint
venture, and limited container transportation services between
Chicago and New Orleans. Our operations incorporate advanced
fleet management practices and information technology systems,
including our proprietary ACLTrac real-time GPS barge
tracking system, which allows us to effectively manage our
fleet. Our barging operations are complemented by our marine
repair, maintenance and port services (e.g. fleeting, shifting,
repairing and cleaning of barges and towboats) located
strategically throughout the Inland Waterways.
Our freight contracts are typically matched to the individual
requirements of the shipper depending on the shipper’s need
for capacity, specialized equipment, timing and geographic
coverage. As a result of the supply and demand imbalance for
barge capacity, average freight rates for commodities moved
under term contracts have increased significantly during the
past three years. We expect this trend to continue under new
term
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contracts due to the expected retirement of aged barge capacity
over the next several years, although we can make no assurance
that they will do so. Spot rates obtained over the same period,
primarily grain and to a lesser extent coal, though generally
higher as well, have been and are expected to continue to be
more volatile within and across years. This volatility is based
not only on the supply and demand for barges but additionally
weather, crop size, export demand, ocean port freight
differentials and producer market timing.
Our dry cargo barges transport a variety of bulk and non-bulk
commodities. In 2007, bulk commodities were our largest class of
cargo transported, accounting for 30.6% of our transportation
revenue, followed by grain, steel and coal. The bulk commodities
classification contains a variety of cargo segments including
salt, alumina, fertilizers, cement, ferro alloys, ore and gypsum.
We also transport chemicals, petroleum, ethanol, edible oils and
other liquid commodities with our fleet of tank barges,
accounting for approximately 27.3% of our 2007 transportation
revenue.
Jeffboat, our manufacturing segment, generated almost 23% or
$239.9 million of our consolidated revenue in 2007. Located
in Jeffersonville, Indiana, Jeffboat is a large inland
single-site shipyard and repair facility, occupying
approximately 68 acres of land and approximately
5,600 feet of frontage on the Ohio River, which we believe
to be the largest inland shipyard in the United States. Jeffboat
designs and manufactures barges and other vessels for inland
river service for third-party customers and our transportation
business. It also manufactures equipment for coastal and
offshore markets and has long employed advanced inland marine
technology. In addition, it also provides complete dry-docking
capabilities and full machine shop facilities for repair and
storage of towboat propellers, rudders and shafts. Jeffboat also
offers technically advanced marine design and manufacturing
capabilities for both inland and ocean service vessels. Jeffboat
utilizes sophisticated computer-aided design and manufacturing
systems to develop, calculate and analyze all manufacturing and
repair plans.
Historically, our transportation business has been one of
Jeffboat’s most significant customers. We believe the
synergy created by our transportation operations and
Jeffboat’s manufacturing and repair capabilities is a
competitive advantage. Our vertical integration permits
optimization of manufacturing schedules and asset utilization
between internal requirements and sales to third-party
customers. Additionally, Jeffboat’s engineers have the
opportunity to collaborate both with our barge operations and
with our naval architects on innovations that enhance towboat
performance and barge life.
Transportation. Our primary customers include
many of the major industrial and agricultural companies in the
United States. Our relationships with our top ten customers have
been in existence for between five and 30 years. We enter
into a wide variety of contracts with these customers, ranging
from single spot movements to renewable one-year contracts and
multi-year extended contracts. In many cases, these
relationships have resulted in multi-year contracts that feature
predictable tonnage requirements or exclusivity, allowing us to
plan our logistics more effectively.
In 2007, our largest ten customers accounted for approximately
28% of our revenue with no individual customer exceeding 10%. We
have many long-standing customer relationships, including
Cargill, Inc., North American Salt Company, the David J.
Joseph Company, Consolidated Grain and Barge Company, Bunge
North America, Inc., United States Steel Corporation, Nucor
Steel, Alcoa, Inc., Lyondell Chemical Company, Shell Chemical
Company, Koch Industries, DuPont and Nova Chemicals, Inc. We
also have a long-standing contractual relationship, extended
during the emergence from bankruptcy of our predecessor company
in 2005, until 2015, with Louisiana Generating LLC, a subsidiary
of NRG Energy, Inc. (“LaGen”) and Burlington Northern
Santa Fe Railway (“BNSF”).
In 2008, we anticipate that approximately 65% of our barging
revenue will be derived from customer contracts that vary in
duration but generally are one year to three years in length.
The average contract maturity is approximately two years. Our
multi-year contracts are set at a fixed price, although we do
have some multi-year contracts which contain positively stated
rate increases along with compounding adjustment provisions as
well for fuel, and, in most cases, labor cost and general
inflation, which increases stability of the contract margins.
Generally, contracts that are less than one year are priced at
the time of execution, which we
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refer to as the spot market. Grain freight is almost entirely
priced in the spot market. All of our grain freight was priced
in this manner during 2007 and 2006. In 2007, the transportation
segment generated approximately 74% of its revenues under term
contracts and spot market arrangements with customers to
transport cargoes on a per ton basis from an origin point to a
destination point along the Inland Waterways on the
Company’s barges, pushed primarily by the Company’s
towboats. These contracts are referred to as affreightment
contracts. The Company is responsible for tracking and reporting
the tonnages moved under such contracts. Due to the pricing
attractiveness of dedicated service contracts, the Company
continued to deploy more of its liquid tank fleet to that
service in 2007 decreasing by approximately 6% the portion of
the transportation segment’s total revenues generated from
affreightment contracts.
The remaining revenues of the transportation segment
(collectively “non-affreightment revenues”) are
generated either by demurrage charges for customers’
delays, beyond contractually allowed days, of our equipment
under affreightment contracts or by one of three other distinct
contractual arrangements with customers: dedicated service
contracts, outside towing contracts, or other marine services
contracts. Transportation services revenue for each contract
type is summarized in the key operating statistics table
contained in Management’s Discussion and Analysis of
Financial Condition and Results of Operations.
Our dedicated service contracts typically provide for dedicated
equipment specially configured to meet the customer’s
requirements for scheduling, parcel size and product integrity.
The contract may take the form of a “consecutive
voyages” affreightment agreement, under which the customer
commits to loading the barges on consecutive arrivals.
Alternatively, the contract may be a “day rate plus
towing” agreement under which the customer essentially
charters a barge or set of barges for a fixed daily rate and
pays a towing charge for the movement of the tow to its
destination. A “unit tow” contract provides the
customer with a set of barges and a boat for a fixed daily rate,
with the customer paying the cost of fuel. Chemical shippers
typically use dedicated service contracts to ensure reliable
supplies of specialized feedstocks to their plants. Petroleum
distillates and fuel oils generally move under “unit
tow” contracts. Many dedicated service customers also seek
capacity in the spot market for peaking requirements. Outside
towing revenue is earned by moving barges for other
affreightment carriers at a specific rate per barge move.
Transportation services revenue is earned for fleeting, shifting
and cleaning services provided to third parties. Under
charter/day rate contracts, the Company’s boats and barges
are leased to third parties who control the use (loading,
unloading, and movement) of the vessels. During 2007 and 2006 we
deployed additional barges to serve customers under charter/day
rate contracts due to strong demand and attractive, available
pricing for such service. On average, an additional 33 and 26
liquid tank barges in 2007 and 2006, respectively, were devoted
to these non-affreightment contracts when compared to the
immediately preceding years. This represented redeployment of an
additional 9% and 7%, respectively, of our average liquid tank
fleet in those years to this type of service (for an average
total of 131 and 98 tank barges or 35% and 26% of our average
liquid tanker fleet in the two years). The pricing attained for
this type of service and the increased number of barges deployed
drove charter and day rate revenue up 52% in 2007and 82%in 2006,
respectively, in comparison to the immediately preceding years.
Certain contracts that provide for a minimum level of service
are generally referred to as fixed volume, “take or
pay.” A take or pay contract requires the shipper to tender
a minimum tonnage over a defined period, suffering a “dead
freight” penalty for failure to meet the minimum volume
level. Under take or pay contracts, we typically provide a fixed
amount of equipment and dedicate it to providing the required
level of service. Electric utility companies sometimes use take
or pay agreements to ensure an adequate supply of inventory.
These contracts usually run for many years and typically have
adjustment clauses for fuel, labor and inflation.
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The following chart depicts total transportation revenues, both
affreightment and non-affreightment, and indicates the
approximate renewal dates of the term contracts. The chart also
displays expected 2008 term renewals by relative age.
Manufacturing. The primary third-party
customers of our barge and other vessel manufacturing
subsidiary, Jeffboat, are other operators within the inland
barging industry. Because barge and other vessel manufacturing
requirements for any one customer are dependent upon the
customer’s specific replacement and growth strategy, and
due to the long-lived nature of the equipment manufactured,
Jeffboat’s customer base varies from
year-to-year.
Our transportation business is a significant customer of
Jeffboat. In 2007, our transportation segment accounted for 17%
of Jeffboat’s revenue before intercompany eliminations.
At December 31, 2007, the manufacturing segment’s
approximate vessel backlog for external customers was
$429 million compared to $407 million at
December 31, 2006. The backlog consists of vessels to be
constructed under signed customer contracts or exercised
contract options that have not yet been recognized as revenue.
The backlog excludes our planned construction of internal
replacement barges. Approximately 54% of the backlog is under
contract for delivery in 2008. The backlog extends into 2010. In
January 2008 a new contract was signed for approximately
$100 million in new barge construction including options.
Contract options are not included in the computation of the
approximate vessel backlog until signed. The new contract
increased the backlog by approximately $25 million from the
year end level.
Steel is the largest component of our raw materials,
representing 70% to 90% of the raw material cost, depending on
barge type. We have established relationships with our steel
vendors and have not had an issue with obtaining the quantity or
quality of steel required to meet our commitments. The price of
steel, however, varies significantly with changes in supply and
demand. All of the contracts in our backlog contain steel price
adjustments. Because of the volatile nature of steel prices, we
pass on the cost of steel used in the production of our
customers’ barges back to our customers. Therefore, at the
time of construction, the actual price of steel may result in
contract prices that are greater than or less than those used to
calculate the backlog at the end of 2007. In addition, many of
our contracts signed in 2006 and 2007 also contain labor and
general inflation clauses which may also impact the revenue
ultimately realized on the construction of the vessels.
We believe demand for dry and liquid tank barges remains strong.
A continuing significant driver in this market is the demand to
replace all single-hull tank barges with double-hull tank
barges. By federal law, single-hull tank barges will not be
allowed to operate after 2015. All of the Company’s tank
barges have
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double hulls. In addition to barge demand, we expect that the
boat replacement cycle will drive demand for new boat
construction in 2009 and beyond. We have signed contracts to
produce five towboats for delivery in 2009 and 2010.
The price we have been able to charge for manufacturing
production has fluctuated historically based on a variety of
factors including the cost of raw materials, the cost of labor
and the demand for new barge builds compared to the barge
manufacturing capacity within the industry at the time. During
2007, we continued to increase the pricing on our barges, net of
steel costs, in response to increased demand for new barge
construction. We plan to continue increasing the pricing on our
barges, net of steel, in conjunction with the expected
additional demand for new barge construction. If demand for new
barge construction diminishes going forward, we may not be able
to increase pricing over our current levels or maintain pricing
at current levels. Additionally, at the end of 2007, we have
over $200 million related to more than 375 vessels in
our backlog that were priced under contracts or options
negotiated at lower estimated margins and with more aggressive
labor estimates than in contracts signed during 2006 and 2007.
These will result in
sub-optimal
margins as they enter production. Unsigned options in these
contracts on nearly 200 additional vessels or more than
$100 million of revenues are expected to extend the margin
impact into 2010 and 2011 if the options are exercised. As a
percent of total production, we expect that these vessels will
decline in 2008 and beyond as the underlying vessels are
completed.
Barges. As of December 31, 2007, our
total transportation fleet was 2,828 barges, consisting of
2,074 covered dry cargo barges, 366 open dry cargo barges
and 388 tank barges. We operate 531 of these dry cargo barges
and 37 of these tank barges pursuant to charter agreements. The
charter agreements have terms ranging from one to fifteen years.
Generally, we expect to be able to renew or replace our charter
agreements as they expire. Our entire existing tank barge fleet
is double-hulled. As of December 31, 2007, the average age
of our covered dry cargo barges was 20 years, and the
average age of our tank barges was 23 years, which we
believe is consistent with the industry age profile.
Towboats. As of December 31, 2007, our
barge fleet was powered by 137 Company-owned towboats and 25
additional towboats operated exclusively for us by third
parties. The size and diversity of our towboat fleet allows us
to deploy our towboats to areas of the Inland Waterways where
they can operate most effectively. For example, our towboats
with 9,000 horsepower or greater typically operate with tow
sizes of as many as 40 barges along the Lower Mississippi River,
where the river channels are wider and there are no restricting
locks and dams. Our 5,600 horsepower towboats predominantly
operate along the Ohio, Upper Mississippi and Illinois Rivers,
where the river channels are narrower and restricting locks and
dams are more prevalent. We also deploy smaller horsepower
towboats for shuttle and harbor services. In early 2007 we
acquired 20 towboats that had previously serviced both the
Company and other third parties. This acquisition significantly
increased our capacity for Gulf fleeting and canal service.
To support our barging fleet, we operate port service
facilities. ACL Transportation Services LLC (“ACLT”)
operates facilities throughout the Inland Waterways that provide
fleeting, shifting, cleaning and repair services for both barges
and towboats, primarily for ACL, but also for third-party
customers. Effective January 1, 2007 all of our port
service assets were controlled by ACLT which we believe enhances
the branded value of the American Commercial Lines brand. ACLT
has port service facilities in the following locations: Lemont,
Illinois; St. Louis, Missouri; Cairo, Illinois; Louisville,
Kentucky; Baton Rouge, Louisiana; Vacherie, Louisiana (Armant
fleet); Harahan, Louisiana; Marrero, Louisiana; and Houston,
Texas. Its operations consist of fleets, towboat repair shops,
dry docks, scrapping facilities and cleaning operations.
ACLT also operates a coal receiving, storage and transfer
facility in St. Louis, Missouri. Together with BNSF, we
also transport coal from mines in the Powder River Basin of
Wyoming and Montana to the LaGen power plant in Louisiana under
an agreement with LaGen. Currently these activities account for
less than 10% of our revenue. Our St. Louis terminal also
receives and stores coal from third-party shippers who source
coal
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on the BNSF and ship to inland utilities on our barges.
ACLT’s liquid terminal in Memphis, Tennessee provides
liquid tank storage for third parties and processes oily bilge
water from towboats. The oil recovered from this process is
blended for fuel used by ACL’s towboats or is sold to third
parties.
Our fleet size, diversity of cargo transported and experience
enables us to provide transportation logistics services for our
customers. We own 50% of BargeLink LLC, a joint venture with
MBLX, Inc. (“BargeLink”), based in New Orleans.
BargeLink provides third-party logistics services to
international and domestic shippers who distribute goods
primarily throughout the inland rivers. BargeLink provides and
arranges for ocean freight, customs clearance, stevedoring
(loading and unloading cargo), trucking, storage and barge
freight for its customers. BargeLink tracks customers’
shipments across multiple carriers using proprietary tracking
software developed by BargeLink.
Additionally, we also initiated container transport in our
barging operations in 2004. We are evaluating other river
gateway opportunities going forward. We also provide “stack
to stack” service, which includes local truckers for cargo
transport and terminals for container handling. This service
makes use of our existing fleet of open dry cargo barges and is
within the principal operating corridors of our dry and liquid
barging service. This pattern density creates the frequency of
service that is valued by intermodal shippers. We expect to
continue to market this kind of service as well as other
services that, to date, have been predominantly served by
“off-river” modes of transportation.
At our Lemont Terminal, located approximately 25 miles
Southwest of downtown Chicago, we have direct access to Highways
55, 355 and 294 and a truck delivery radius including Iowa,
Michigan, Indiana, Illinois, Wisconsin, and Ohio. From this
location we distribute
truck-to-barge
and
barge-to-truck
multi-modal shipments of both northbound and southbound freight
from inland river system origins and destinations in Mexico,
Texas, New Orleans, Alabama, Florida, Pennsylvania and points
between. We also have 48,000 square feet of indoor
temperature controlled space for product storage in Lemont, as
well as 35 acres for outside storage.
Transportation. Competition within the barging
industry for major commodity contracts is intense, with a number
of companies offering transportation services on the Inland
Waterways. We compete with other carriers primarily on the basis
of commodity shipping rates, but also with respect to customer
service, available routes, value-added services (including
scheduling convenience and flexibility), information timeliness,
quality of equipment, accessorial terms, freight payment terms,
free days and demurrage days.
We believe our vertical integration provides us with a
competitive advantage. By using our ACLT and Jeffboat barge and
towboat repair facilities, ACLT vessel fleeting facilities and
Jeffboat’s shipbuilding capabilities, we are able to
support our core barging business and offer a combination of
competitive pricing and high quality service to our customers.
We believe that the size and diversity of our fleet allow us to
optimize the use of our equipment and offer our customers a
broad service area, at competitive rates, with a high frequency
of arrivals and departures from key ports.
According to Informa Inc., a private forecasting service
(“Informa”), we had the largest covered dry cargo
barge fleet in the industry with almost 21% of the industry
capacity. Informa updates annual industry data in March of each
year for the prior calendar year end. We do not expect the 2007
data to be significantly different. We expect that our
concentration in 2008 on expansion of our liquid tank fleet may
result in a reduction of the percentage of industry dry cargo
fleet capacity owned by the Company. We believe our large
covered dry cargo fleet gives us a unique position in the
marketplace that allows us to service the transportation needs
of customers requiring covered barges to ship their products. It
also provides us with the flexibility to shift covered dry cargo
fleet capacity to compete in the open dry cargo barge market
simply by storing the barge covers. This adaptability allows us
to operate the barges in open barge trades for a short or long
term period of time to take advantage of market opportunities.
Carriers that have barges designed for
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open dry cargo barge service only cannot easily retrofit their
open dry cargo barges with covers without significant expense,
time and effort.
Since 1980, the industry has experienced consolidation as the
acquiring companies have moved toward attaining the widespread
geographic reach necessary to support major national customers.
Manufacturing. The inland barge and towboat
manufacturing industry competes primarily on quality of
manufacture, delivery schedule, design capabilities and price.
We consider Trinity Industries, Inc. to be Jeffboat’s most
significant competitor for the large-scale manufacture of inland
barges, although other firms have barge building capability on a
smaller scale. We believe there are a number of shipyards
located on the Gulf Coast that compete with Jeffboat for the
manufacture of towboats. In addition, certain other shipyards
may be able to reconfigure to manufacture inland barges and
related equipment.
Our historical revenue stream within any year reflects the
variance in seasonal demand, with revenues earned in the first
half of the year historically lower than those earned in the
second half of the year. Additionally, we have generally
experienced higher expenses in the winter months, because winter
conditions historically result in higher costs of operation and
reduced equipment demand, which permits scheduling major boat
maintenance. Similarly, our manufacturing costs increase in our
shipyard with seasonal precipitation, as extra shifts and lower
productivity overtime are required to maintain production
schedules.
The transportation of grain in the spot market represented
almost 25% of our annual revenues for 2007. Historically, we
have experienced the greatest degree of seasonality in our grain
transportation business
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compared to all other commodity segments, with demand generally
following the timing of the annual harvest. The demand for grain
movement generally begins in the Gulf Coast and Texas regions
and the southern portions of the Lower Mississippi River, or the
Delta area, in late summer of each year. The demand for freight
spreads north and east as the grain matures and harvest
progresses through the Ohio Valley, the Mid-Mississippi River
area, and the Illinois River and Upper Mississippi River areas.
System-wide demand generally peaks in the mid-fourth quarter.
Demand normally tapers off through the mid-first quarter, when
traffic is generally limited to the Ohio River as the Upper
Mississippi River normally closes from approximately
mid-December to mid-March, and ice conditions can hamper
navigation on the upper reaches of the Illinois River.
Fertilizer movements are timed for delivery prior to annual
planting, generally moving from late August through April. Salt
movements are heaviest in the winter, when the need for road
salt in cold weather regions drives demand, and are more ratable
throughout the balance of the year as stockpiles are replaced.
Overall demand for other bulk and liquid products delivered by
barge is more ratable throughout the year.
Spot grain movement is generally priced at or near the quoted
tariff rate for the particular river section on which the move
occurred. These tariff rates move independently based on
weather, harvest timing and other factors related specifically
to that location in addition to the overall supply and demand
relationship of available barges. The differential between peak
and trough rates has averaged 123% over the last five years.
Since the beginning of 2006, we have not negotiated term
contracts for grain movements and have, therefore accepted the
potentially greater volatility in tariff rates. The average
annual rates for the mid-Mississippi River, which we believe is
a fair indicator of the total market, increased over 60% in 2005
over 2004. Rates in 2006 rose an incremental 20% over 2005
levels. Rates in 2007 declined approximately 6% from the 2006
levels, but remained 15% above 2005 levels. While we believe our
decision to move all of our grain business to spot market
pricing favorably impacted 2006 and 2007 when compared to prior
years’ pricing levels, it has also exposed us to greater
volatility.
The chart below depicts the seasonal movements in what we
believe to be a representative tariff rate over time for a river
segment we track as part of the mid-Mississippi River. We do not
track January and February for this segment due to significantly
reduced volumes on the segment during that time frame.
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The following is a list of our executive officers and key
employees as of February 29, 2008 and their ages as of such
date and their positions and offices.
Mark R. Holden was named President and Chief Executive
Officer of ACL in January 2005 and has also served as a director
of ACL since that date. Mr. Holden has announced his
resignation from all executive positions and from the Board of
Directors effective on March 1, 2008. Prior to joining us
in 2005, Mr. Holden served in the Office of the Chief
Executive Officer and as Chief Financial Officer, since May
1995, of Wabash National Corporation, a large manufacturer of
truck trailers. Mr. Holden also served on the board of
directors of Wabash from 1995 to 2003 and on the Executive
Committee of the Board. Prior to that, Mr. Holden held a
variety of positions of increasing responsibility with Wabash
beginning in 1992. Before joining Wabash, Mr. Holden spent
12 years at an international accounting firm.
Michael P. Ryan was named President and Chief Executive
Officer effective March 1, 2008. In addition, Mr. Ryan
was elected to the Board of Directors effective March 1,
2008. He previously served as Senior Vice President, Sales and
Marketing of ACL since November 2005. Mr. Ryan has more
than 24 years of combined experience in logistics, sales,
marketing and customer service. He spent approximately
20 years in sales and marketing positions of increasing
responsibility while at Canadian National Railway Company and
CSX Corporation, Inc. and was most recently Senior Vice
President and General Manager of McCollister’s
Transportation Systems.
W. Norbert Whitlock was named Executive Vice
President, Governmental Affairs of ACL in August 2006. From
January 2005 Mr. Whitlock was Senior Vice President, Chief
Operating Officer of ACL. Since April 2004 Mr. Whitlock
served as our Chief Operating Officer and served as our
President from April 2004 through January 17, 2005.
Previously, Mr. Whitlock served as Senior Vice President,
Transportation Services of American Commercial Lines LLC from
July 2003 to April 2004, as Senior Vice President, Logistics
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Services for American Commercial Barge Line LLC and LDC from
March 2000 to June 2003 and as Senior Vice President,
Transportation Services of American Commercial Barge Line and
LDC from 1982 through March 2000.
Christopher A. Black was named Senior Vice President,
Chief Financial Officer of ACL in February 2005. Prior to
joining us, Mr. Black served as Vice President and
Treasurer of Wabash National Corporation from October 2001 to
July 2004. Prior to that, from September 2000 to October 2001,
Mr. Black served as Senior Vice President —
Corporate Banking of US Bancorp. From August 1995 to
September 2000, he held various positions at SunTrust Bank, most
recently as Director — Corporate &
Investment Banking. Prior to that, he was employed by PNC Bank
and Bank One (now JP Morgan Chase). Mr. Black has resigned
from the Company effective March 1, 2008, but will continue
as a consultant to the Company until April 30, 2008.
Nick C. Fletcher was named Senior Vice President, Human
Resources of ACL in March 2005. From February 2004 until joining
us, Mr. Fletcher was Vice President of Human Resources for
Continental Tire North America, Inc., a global manufacturer of
automotive tires and products, since February 2004. Prior to
that, he provided human resources consulting services from May
2003 to February 2004. From June 1999 until May 2003, he was
employed by Wabash National Corporation as Director of Human
Resources and as Vice President, Human Resources. Throughout his
career he has held various human resources positions with
increasing responsibility at TRW Inc., Pilkington
Libbey-Owens-Ford Co., Landis & Gyr Inc. and Siemens
Corporation.
Jerry R. Linzey was named Senior Vice President, Chief
Operating Officer of ACL in August 2006 after having served as
Senior Vice President, Manufacturing from May 2005 until then.
Prior to joining us, Mr. Linzey served as Vice President
and Senior Vice President, Manufacturing of Wabash National
Corporation from 2002 to May 2005. Prior to that, from 2000 to
2002, Mr. Linzey served as Director, North American
Operations of The Stanley Works, a large manufacturer of tools
and fasteners. From 1985 to 2000, he held various positions at
Delphi Automotive Systems, most recently as Plant
Manager — Radiator and Oil Cooler Product Lines.
Richard A. Mitchell Jr. was named Senior Vice President,
Corporate Strategy of ACL in October 2005. Prior to joining us,
Mr. Mitchell spent over 20 years in various capacities
for United Parcel Service, Inc., one of the world’s largest
integrated transportation companies. Most recently,
Mr. Mitchell served as Vice President and Group Head of the
UPS Mergers & Acquisitions Group until June 2004, and
subsequently served as Vice President of Corporate Strategy
until his departure in October 2005.
Michael J. Monahan was named Senior Vice President,
Transportation Services of ACL in September 2004. Prior to
joining ACL, Mr. Monahan served as Vice President of TECO
Barge Line, a barge transportation company, from August 2002
until August 2004, where he was responsible for the management
and operation of its river transportation assets. Before joining
TECO, Mr. Monahan was Vice President of Operations Support
for Midland Enterprises, Inc., a barge transportation and
related service company, from April 2000 until August 2002.
Kevin S. Boyle was named Vice President, Treasurer of ACL
in December 2005. Prior to joining the Company, Mr. Boyle
was Director of Planning and Development for Great Lakes
Transportation, which was sold to Canadian National Railway
Company. From 1998 to 2001, Mr. Boyle was employed by
Seabulk International, where he rose to the position of
Treasurer.
Karl D. Kintzele was named Vice President, Internal Audit
of ACL in March 2005. From October 2001 until joining us,
Mr. Kintzele served as Vice President, Internal Audit of
Wabash National Corporation since October 2001, having been
promoted from the position of Director, Internal Audit, which he
assumed in September 1999 upon joining the company. Before
joining Wabash, Mr. Kintzele spent 18 years with
Teledyne, Inc., a conglomerate of aerospace, electronics,
consumer and specialty metals components, holding positions of
increasing senior management responsibilities within the
financial and internal audit functions.
Tamra L. Koshewa was named Vice President, Finance and
Corporate Controller of ACL in July 2006. Prior to joining the
Company, Ms. Koshewa worked for ten years at General
Electric (“GE”) in several progressive financial
leadership roles, most recently as Manager, Finance —
Integration and Quality for GE’s
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Consumer and Industrial division in Louisville, Kentucky. She is
also a Certified Public Accountant and worked for KPMG prior to
joining GE.
David T. Parker was named Vice President Investor
Relations and Corporate Communications in December 2007. From
November 2006 until joining the Company Mr. Parker was
Senior Counsel for Peyron & Associates from November
2006. From March 2005 to November 2006 Mr. Parker was Vice
President, Investor Relations and Governmental Affairs for
Albertsons, Inc. From March 2003 to March 2005, Mr. Parker
had been Director of Strategic Communication and Investor
Relations for Micron Technology.
Douglas C. Ruschman was named Vice President Legal in
October 2006 and interim General Counsel and Secretary in
January 2008. He had earlier served as Vice President Law and
Administration for ACL, responsible for risk management,
insurance and tort litigation. At ACL Mr. Ruschman has also
been responsible for the Human Resources and Benefits
Departments. Prior to joining ACL in 1995 Mr. Ruschman
spent twenty years with CSX Transportation, a Class I
Railroad and fully integrated Transportation company. He held a
number of positions there, the last as the General Manager of
Litigation.
William L. Schmidt was named Vice President, Information
Technology of ACL in April 2005. Mr. Schmidt served as our
Vice President, Corporate Support from October 2003 to April
2005; Vice President, Purchasing from June 2002 to October 2003;
and Assistant Vice President, Logistics from April 2000 to June
2002. Mr. Schmidt joined us in 1995 as a Manager of Liquid
Sales before being named Assistant Vice President, Gulf Fleet
Services in 1997. Prior to joining us, Mr. Schmidt served
as Director — Projects & Business
Development of The Great Lakes Towing Company from 1990 to 1995.
Jacques J. Vanier was named Vice President, Manufacturing
of ACL in January 2007. Prior to joining us, Mr. Vanier
served as Vice President of Global Manufacturing and Operations
with Alcoa Automotive and Truck Systems. Mr. Vanier
held a variety of positions in operations and management,
manufacturing, logistics, production control and sales
throughout a twenty-one year career with Alcoa.
EMPLOYEE
MATTERS
Collective bargaining agreements. As of
December 31, 2007, approximately 1,207, or 35.5%, of our
employees were represented by unions. Approximately 1,188 of
these unionized employees are represented by General Drivers,
Warehousemen and Helpers, Local Union No. 89, which is
affiliated with the International Brotherhood of Teamsters,
Chauffeurs, Warehousemen and Helpers of America, at our Jeffboat
shipyard facility under a collective bargaining agreement that
is set to expire in April 2010. The remainder of our unionized
employees, approximately 20 positions at ACL Transportation
Services LLC’s terminal operations in St. Louis,
Missouri, are represented by the International Union of United
Mine Workers of America, District 12-Local 2452
(“UMW”), under a collective bargaining agreement that
expired in November 2007. We have been in negotiations with UMW
since October 26, 2007 for a successor agreement covering
terms and conditions of employment for production and
maintenance workers at the facility. We expect to continue
negotiations in late February, 2008. We currently cannot predict
when or if a new agreement will be reached with UMW.
The Company procures and manages insurance policies and provides
claims management services for our subsidiaries internally
through our risk management department. The company is exposed
to traditional
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hazards associated with its manufacturing and marine
transportation operations on the Inland Waterways. A program of
insurance is maintained to mitigate risk of loss to the
Company’s property, vessels and barges, loss and
contamination of cargo and as protection against personal injury
to third parties and company employees. Our general marine
liability policy insures against all operational risks for our
marine activities. Pollution liability coverage is maintained as
well. The Company has provided for adequate excess liability
coverage above the noted casualty risks. All costs of defense,
negotiation and costs incurred in liquidating a claim, such as
surveys and damage estimates, are considered insured costs. Our
personnel costs involved in managing insured claims are not
reimbursed. We evaluate our insurance coverage regularly. The
company believes that our insurance coverage is adequate.
General. Our business is subject to extensive
government regulation in the form of international treaties,
conventions, national, state and local laws and regulations, as
well as laws relating to the discharge of materials into the
environment. Because such treaties, conventions, laws and
regulations are regularly reviewed and revised by issuing
governments, we are unable to predict the ultimate cost or
impact of future compliance. In addition, we are required by
various governmental and quasi-governmental agencies to obtain
certain permits, licenses and certificates with respect to our
business operations. The types of permits, licenses and
certificates required depend upon such factors as the commodity
transported, the waters in which the vessel operates, the
nationality of the vessel’s crew, the age of the vessel and
our status as owner, operator or charterer. As of
December 31, 2007, we had obtained all material permits,
licenses and certificates necessary for operations.
Our transportation operations are subject to regulation by the
U.S. Coast Guard, federal laws, state laws and certain
international conventions.
The majority of our inland tank barges carry regulated cargoes.
All of our inland tank barges that carry regulated cargoes are
inspected by the U.S. Coast Guard and carry certificates of
inspection. Towboats will soon become subject to U.S. Coast
Guard inspection and will be required to carry certificates of
inspection. Our dry cargo barges are not subject to
U.S. Coast Guard inspection requirements.
Additional regulations relating to homeland security, the
environment or additional vessel inspection requirements may be
imposed on the barging industry.
Jones Act. The Jones Act is a federal cabotage
law that restricts domestic non-proprietary cargo marine
transportation in the United States to vessels built and
registered in the United States. Furthermore, the Jones Act
requires that the vessels be manned by U.S. citizens and
owned by U.S. citizens. For a limited liability company to
qualify as a U.S. citizen for the purposes of domestic
trade, 75% of the company’s beneficial equity holders must
be U.S. citizens. We currently meet all of the requirements
of the Jones Act for our owned vessels.
Compliance with U.S. ownership requirements of the Jones
Act is very important to our operations, and the loss of Jones
Act status could have a significant negative effect on our
business, financial condition and results of operations. We
monitor the citizenship requirements under the Jones Act of our
employees, boards of directors and managers and beneficial
equity holders and will take action as necessary to ensure
compliance with the Jones Act.
User Fees and Fuel Tax. Federal legislation
requires that inland marine transportation companies pay a user
fee in the form of a tax assessed upon propulsion fuel used by
vessels engaged in trade along the Inland Waterways. These user
fees are designed to help defray the costs associated with
replacing major components of the waterway system, including
dams and locks, and to build new projects. Significant portions
of the Inland Waterways on which our vessels operate are
maintained by the U.S. Army Corps of Engineers.
We presently pay a federal fuel tax of 20.1 cents per gallon of
propulsion fuel consumed by our towboats in some geographic
regions. In the future, user fees may be increased or additional
user fees may be imposed to defray the costs of Inland Waterways
infrastructure and navigation support. Increases in these taxes
are normally passed through to our customers by contract.
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Homeland Security Requirements. The Maritime
Transportation Security Act of 2002 requires, among other
things, submission to and approval by the U.S. Coast Guard
of vessel and waterfront facility security plans
(“VSP” and “FSP,” respectively). The
regulations required maritime transporters to submit VSP and FSP
for approval no later than December 31, 2003 and to comply
with their VSP and FSP by June 30, 2004. Our VSP and our
FSP have been approved. As a result, we are subject to
continuing requirements to engage in training and participate in
exercises and drills.
Our operations, facilities, properties and vessels are subject
to extensive and evolving laws and regulations pertaining to air
emissions, wastewater discharges, the handling and disposal of
solid and hazardous materials, hazardous substances and wastes,
the investigation and remediation of contamination, and other
laws and regulations related to health, safety and the
protection of the environment and natural resources. As a
result, we are involved from time to time in administrative and
legal proceedings related to environmental, health and safety
matters and have incurred and will continue to incur capital
costs and other expenditures relating to such matters.
In addition to environmental laws that regulate our ongoing
operations, we are also subject to environmental remediation
liability under the Comprehensive Environmental Response
Compensation and Liability Act (“CERCLA”) and
analogous state laws, and the Oil Pollution Act of 1990
(“OPA 90”). We may be liable as a result of the
release or threatened release of hazardous substances or wastes
or other pollutants into the environment at or by our
facilities, properties or vessels, or as a result of our current
or past operations. These laws typically impose liability and
cleanup responsibility without regard to whether the owner or
operator knew of or caused the release or threatened release.
Even if more than one person may be liable for the release or
threatened release, each person covered by these environmental
laws may be held responsible for all of the investigation and
cleanup costs incurred. In addition, third parties may sue the
owner or operator of a site for damages based on personal
injury, property damage or other costs, including investigation
and cleanup costs resulting from environmental contamination.
A release or threatened release of hazardous substances or
wastes, or other pollutants into the environment at or by our
facilities, properties or vessels, as the result of our current
or past operations, or at a facility to which we have shipped
wastes, or the existence of historical contamination at any of
our properties, could result in material liability to us. We
conduct loading and unloading of dry commodities, liquids and
scrap materials on and near waterways. These operations present
a potential that some such material might be spilled or
otherwise released into the environment, thereby exposing us to
potential liability.
As of December 31, 2007, we had no reserves for these
environmental matters. Any cash expenditures required to comply
with applicable environmental laws or to pay for any remediation
efforts will therefore result in charges to earnings. We may
incur future costs related to the sites associated with the
environmental reserves. The discovery of additional sites, the
modification of existing or the promulgation of new laws or
regulations, more vigorous enforcement by regulators, the
imposition of joint and several liability under CERCLA or
analogous state laws or OPA 90 and other unanticipated events
could also result in additional environmental costs. For more
information, see “Legal Proceedings —
Environmental Litigation.”
Our vessel operations are primarily regulated by the
U.S. Coast Guard for navigation safety standards. Our shore
operations are subject to the U.S. Occupational Safety and
Health Administration regulations. As of December 31, 2007,
we were in material compliance with these regulations. However,
we may experience claims against us for work-related illness or
injury as well as further adoption of occupational health and
safety regulations.
We endeavor to reduce employee exposure to hazards incident to
our business through safety programs, training and preventive
maintenance efforts. We emphasize safety performance in all of
our operating subsidiaries. We believe that our safety
performance consistently places us among the industry leaders as
evidenced by what we believe are lower injury frequency levels
than those of many of our competitors. We
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have been certified in the American Waterway Operators
Responsible Carrier Program, which is oriented to enhancing
safety in vessel operations.
We register our material trademarks and trade names. We believe
we have current intellectual property rights sufficient to
conduct our business.
We were formed in 1953 as the holding company for a family of
barge transportation and marine service companies, the oldest of
which has an operating history dating back to 1915. In 1984, we
were acquired by CSX Corporation. For several years thereafter
we achieved significant growth through acquisitions, including:
SCNO Barge Lines, Inc. in 1988, Hines Incorporated in 1991, The
Valley Line Company in 1992, and Continental Grain
Company’s barging operations in 1996. In June 1998, we
completed a leveraged recapitalization in a series of
transactions in which the barge businesses of Vectura Group,
Inc. and its subsidiaries were combined with ours. In 2000 we
acquired the assets of Peavey Barge Line, which included the
assets of the inland marine transport divisions of ConAgra, Inc.
Late in 2000 we began to experience difficulties in meeting
certain financial covenants set forth in our recapitalized
credit facilities. In May 2002 we refinanced our existing debt
obligations with Danielson Holding Corporation
(“DHC”). This second recapitalization resulted in our
acquisition by DHC and they remained our parent company until
our emergence from bankruptcy on January 11, 2005, when
their ownership interest was extinguished.
During 2002 and through the beginning of 2003 we experienced a
decline in barging rates, reduced shipping volumes and excess
barging capacity during a period of slow economic growth and a
global economic recession. Due to these factors our revenue and
earnings did not meet expectations and our liquidity was
significantly impaired. We determined that our debt burden was
too high and that a restructuring under Chapter 11 of the
Bankruptcy Code offered us the most viable opportunity to reduce
our debts while continuing operations. We therefore filed
voluntary petitions seeking relief from our creditors pursuant
to Chapter 11 of the Bankruptcy Code on January 31,
2003. On December 30, 2004, the Bankruptcy Court entered an
order confirming a Plan of Reorganization (“Plan of
Reorganization”). We emerged from Chapter 11
protection in January 2005 with a significantly less leveraged
consolidated balance sheet. On February 2, 2007 the
Bankruptcy Court issued a Final Decree and Order that the estate
has been fully administered and the Chapter 11 case is
closed. References herein to the Company or ACL include the
Company’s predecessor.
Set forth below is a detailed discussion of risks related to our
industry and our business. In addition to the other information
in this document, you should consider carefully the following
risk factors. Any of these risks or the occurrence of any one or
more of the uncertainties described below could have a material
adverse effect on our financial condition and the performance of
our business.
RISKS
RELATED TO OUR INDUSTRY
Freight transportation rates fluctuate from
season-to-season
and
year-to-year.
Levels of dry and liquid cargo being transported on the Inland
Waterways vary based on several factors including global
economic conditions and business cycles, domestic agricultural
production and demand, international agricultural production and
demand, and foreign exchange rates. Additionally, fluctuation of
ocean freight rate spreads between the Gulf of Mexico and the
Pacific Northwest affects demand for barging on the Inland
Waterways, especially in grain movements. Grain, particularly
corn for export, has been a significant part of our business.
Since the beginning of 2006, all grain transported by us has
been under spot market contracts.
Spot grain contracts are normally priced at, or near, the quoted
tariff rates in effect for the river segment of the move. Spot
rates can vary widely from
quarter-to-quarter
and
year-to-year.
A decline in spot rates could
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negatively impact our business. The number of barges and
towboats available to transport dry and liquid cargo on the
Inland Waterways also varies from
year-to-year
as older vessels are retired and new vessels are placed into
service. The resulting relationship between levels of cargoes
and vessels available for transport affects the freight
transportation rates that we are able to charge.
Our industry has previously suffered from an oversupply of
barges relative to demand for barging services. Such oversupply
may recur due to a variety of factors, including a drop in
demand, overbuilding and delay in scrapping of barges
approaching the end of their useful economic lives. Calendar
year 2006 was the first year in eight years that more barges
were built than scrapped. We believe that approximately 25% of
the industry’s existing dry cargo barge fleet will need to
be retired due to age over the next five years. If that occurs
it will continue to constrain barge capacity. If an oversupply
of barges were to occur, it could take several years before
supply growth matches demand due to the variable nature of the
barging industry and the freight transportation industry in
general, and the relatively long life of marine equipment. Such
oversupply could lead to reductions in the freight rates that we
are able to charge.
Demand for dry cargo barging in North America is affected
significantly by the volume of grain exports flowing through
ports on the Gulf of Mexico. The volume of grain exports can
vary due to, among other things, crop harvest yield levels in
the United States and abroad. Overseas grain shortages increase
demand for U.S. grain, while worldwide over-production
decreases demand for U.S. grain. Other factors, such as
domestic ethanol demand and overseas markets acceptance of
genetically altered products, may also affect demand for
U.S. grain. Fluctuations in demand for U.S. grain
exports can lead to temporary barge oversupply, which in turn
leads to reduced freight rates. We cannot assure that historical
levels of U.S. grain exports will be maintained in the
future.
The prices we have been able to charge for Jeffboat production
have fluctuated historically based on a variety of factors
including the cost of raw materials, the cost of labor and the
demand for new barge builds compared to the barge manufacturing
capacity within the industry at the time. During 2005 we began
to increase the pricing on our barges, net of steel costs, in
response to increased demand for new barge construction. Some of
the contracts signed prior to that time (the “legacy
contracts”), including any options exercised for additional
barges, will negatively impact manufacturing segment margins due
to their lower overall pricing structure. We plan to continue
increasing the pricing on our barges, net of steel, in
conjunction with the expected additional demand for new barge
construction as well as inflation of our costs. As a percent of
total production legacy contracts will decline in 2008 and
beyond. If demand for new barge construction diminishes we may
not be able to increase pricing over our current levels or
maintain pricing at current levels.
For the years ended December 31, 2007 and 2006, fuel
expenses and related fuel usage taxes represented 23% and 22% of
transportation revenues, respectively. For the quarters ended
December 31, 2007 and 2006, fuel expenses and related fuel
usage taxes represented 24% and 20% of transportation revenues,
respectively. Fuel prices are subject to fluctuation as a result
of domestic and international events. Generally, our term
contracts contain provisions that allow us to pass through
(usually on a one month or one quarter delay) a significant
portion of any fuel expense increase to our customers, thereby
reducing, but not eliminating, our fuel price risk. Fuel price
is a key, but not the only variable in spot market pricing.
Therefore, fuel price and the timing of contractual rate
adjustments can be a significant source of
quarter-over-quarter
and
year-over-year
volatility. Negotiated spot rates may not fully recover fuel
price increases.
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Our predecessor company emerged from bankruptcy in January,
2005. Our largest term contract for the movement of coal
predates the emergence and was negotiated at a low margin.
Though it contains a fuel adjustment mechanism, the mechanism
may not fully recover increases in fuel cost. The majority of
our coal moves since bankruptcy and through the 2015 expiration
of this contract may be at a low margin. Additionally, contracts
for barge manufacturing by our shipyard negotiated prior to 2006
also commit us to lower margins and more aggressive labor hour
forecasts than we have recently achieved. Additionally, though
the contracts contain steel price escalation clauses, only a
portion adjust for increases in wage rates, which we have
experienced since they were signed. If we are unable to improve
our performance against the labor hour forecasts these contracts
may reduce margins or inhibit margin improvements from our
manufacturing division. These two concentrations of low margin
business were approximately $155 million, $192 million
and $185 million of our total revenues in 2005, 2006 and
2007, respectively. The combined legacy contract amounts in 2008
are expected to be slightly lower than 2007.
All of our grain shipments since the beginning of 2006 were
under spot market contracts. Spot rates can vary widely from
quarter-to-quarter
and
year-to-year.
The available pricing and the volume under such contracts is
impacted by many factors including global economic conditions
and business cycles, domestic agricultural production and
demand, international agricultural production and demand,
foreign exchange rates and fluctuation of ocean freight rate
spreads between the Gulf of Mexico and the Pacific Northwest.
The revenues generated under such contracts, therefore,
ultimately may not cover inflation, particularly for wages and
fuel, in any given period. The most current forecasts for 2008
grain spot rates indicate that they may be flat to down from the
rates obtained during 2007. We expect higher costs for wages and
fuel. These circumstances may reduce the margins we are able to
produce on the grain movements which we are able to contract
during 2008. Grain movements were 27%, 32% and 25% of our
transportation revenues in 2005, 2006 and 2007, respectively. We
expect grain to continue to decline as a percent of revenue in
2008.
The legacy contracts combined with the potential impact of the
grain spot market may lead to declines in our operating margins
which could reduce our profitability.
Our barging operations are affected by weather and river
conditions. Varying weather patterns can affect river levels,
contribute to fog delays and cause ice to form in certain river
areas of the United States. For example, the Upper Mississippi
River closes annually from approximately mid-December to
mid-March, and ice conditions can hamper navigation on the upper
reaches of the Illinois River during the winter months. During
hurricane season in the summer and early fall, we may be subject
to revenue loss, business interruptions and equipment and
facilities damage, particularly in the Gulf region. In addition,
adverse river conditions can affect towboat speed, tow size and
loading drafts and can delay barge movements. Terminals may also
experience operational interruptions as a result of weather or
river conditions.
Jeffboat’s waterfront facility is subject to occasional
flooding. Jeffboat’s manufacturing operation, much of which
is conducted outdoors, is also subject to weather conditions. As
a result, these operations are subject to production schedule
delays or added costs to maintain production schedules caused by
weather.
Segments of the inland barging business are seasonal.
Historically, our revenue and profits have been lower during the
first six months of the year and higher during the last six
months of the year. This seasonality is due primarily to the
timing of the North American grain harvest and seasonal weather
patterns. Our working capital requirements typically track the
rise and fall of our revenue and profits throughout the year. As
a result, adverse market or operating conditions during the last
six months of a calendar year could disproportionately adversely
affect our operating results, cash flow and working capital
requirements for the year.
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Many of the dams and locks on the Inland Waterways were built
early in the last century, and their age makes them costly to
maintain and susceptible to unscheduled maintenance outages.
Much of this infrastructure needs to be replaced, but federal
government funding of the 50% share not funded through fuel user
taxes on barge operators for new projects has historically been
limited. In addition, though the current annual government
funding levels are near the average anticipated annual need for
the foreseeable future, there can be no guarantee that these
levels will be sustained and that a larger portion of
infrastructure maintenance costs will not be imposed on
operators. The delays caused by malfunctioning dams and locks
may increase our operating costs and delay the delivery of our
cargoes. Moreover, increased diesel fuel user taxes could be
imposed in the future to fund necessary infrastructure
improvements, increasing our expenses. We may not be able to
recover increased fuel user taxes through pricing increases that
may occur.
The inland barge transportation industry is highly competitive.
Increased competition in the future could result in a
significant increase in available shipping capacity on the
Inland Waterways, which could create downward rate pressure for
us or result in our loss of business.
The volume of goods imported through the Port of New Orleans is
affected by subsidies or tariffs imposed by U.S. or foreign
governments. Demand for U.S. grain exports may be affected
by the actions of foreign governments and global or regional
economic developments. Foreign subsidies and tariffs on
agricultural products affect the pricing of and the demand for
U.S. agricultural exports. U.S. and foreign trade
agreements can also affect demand for U.S. agricultural
exports as well as goods imported into the United States.
Similarly, national and international embargoes of the
agricultural products of the United States or other countries
may affect demand for U.S. agricultural exports.
Additionally, the strength or weakness of the U.S. dollar
against foreign currencies can impact import and export demand.
These events, all of which are beyond our control, could reduce
the demand for our services.
The barging industry is subject to various laws and regulations,
including international treaties, conventions, national, state
and local laws and regulations and the laws and regulations of
the flag nations of vessels, all of which are subject to
amendment or changes in interpretation. In addition, various
governmental and quasi-governmental agencies require barge
operators to obtain and maintain permits, licenses and
certificates respecting their operations. Any significant
changes in laws or regulations affecting the inland barge
industry, or in the interpretation thereof, could cause us to
incur significant expenses. Recently enacted regulations call
for increased inspection of towboats. Interpretation of the new
regulations could result in boat delay and significantly
increased maintenance and upgrade costs for our boat fleet.
Furthermore, failure to comply with current or future laws and
regulations may result in the imposition of fines
and/or
restrictions or prohibitions on our ability to operate.
Though we work actively with regulators at all levels to avoid
inordinate impairment of our continued operations, regulations
and their interpretations may ultimately have a negative impact
on the industry. Regulation such as the Transportation Worker
Identification Credential provisions of the Homeland Security
legislation could have an impact on the ability of domestic
ports to efficiently move cargoes. This could ultimately slow
operations and increase costs.
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The Jones Act requires that, to be eligible to operate a vessel
transporting non-proprietary cargo on the Inland Waterways, the
company that owns the vessel must be at least 75% owned by
U.S. citizens at each tier of its ownership. The Jones Act
therefore restricts, directly or indirectly, foreign ownership
interests in the entities that directly or indirectly own the
vessels which we operate on the Inland Waterways. If we at any
point cease to be 75% owned by U.S. citizens, we may become
subject to penalties and risk forfeiture of our Inland Waterways
operations. As of December 31, 2007, we are in compliance
with the ownership requirements.
The Jones Act continues to be in effect and supported by the
U.S. Congress and the current administration. We cannot
assure that the Jones Act will not be repealed, further
suspended or amended in the future. If the Jones Act was to be
repealed, suspended or substantially amended and, as a
consequence, competitors with lower operating costs were to
enter the Inland Waterways market, our business likely would be
materially adversely affected. In addition, our advantages as a
U.S.-citizen
operator of Jones Act vessels could be eroded over time as there
continue to be periodic efforts and attempts by foreign
investors to circumvent certain aspects of the Jones Act.
RISKS
RELATED TO OUR BUSINESS
The average life expectancy of a dry cargo barge is 25 to
30 years. We anticipate that without further investment and
repairs by the end of 2010 approximately half of our current dry
cargo barges will have reached the end of their economic useful
lives. Once barges begin to reach 25 years of age the cost
to maintain and operate them may be so high that it is more
economical for the barges to be scrapped. If such barges are not
scrapped, additional operating costs to repair and maintain them
would likely reduce cash flows and earnings. If such barges are
scrapped and not replaced, revenue, earnings and cash flows may
decline. Though we anticipate future capital investment in dry
cargo barges, we may choose not to replace all barges that we
may scrap with new barges based on uncertainties related to
financing, timing and shipyard availability. If such barges are
replaced, significant capital outlays would be required. If the
number of barges declines over time, our ability to maintain our
hauling capacity will be decreased unless we can improve the
utilization of the fleet. If these improvements in utilization
are not achieved, revenue, earnings and cash flow could decline.
In 2006 and 2007 we invested significant capital in upgrading
and retooling our shipyard. The upgrades and retooling may not
ultimately work as planned. These projects, though designed to
increase our efficiency and reduce our exposure to weather
delays and expedite production capacity, may not generate the
level of cost savings that we estimate and may not expedite our
capacity. Significant additional capital may be required to
maintain existing production capacity and may delay our ability
to modify or augment our current upgrade plans. These delays and
additional expenditures may adversely affect our ability to meet
production schedules for external and internal builds and our
results of operations.
Our
plans for our transportation business capital investment and
organic growth are predicated on efficiency improvements which
we expect to achieve through a variety of initiatives, including
reduction in stationary days, better power utilization and
improved fleeting, among others. We may not ultimately be able
to drive efficiency to the level to achieve our current forecast
of tonnage without investing additional capital or incurring
additional costs.
We believe that our initiatives will result in improvements in
efficiency allowing us to move more tonnage per barge. If we do
not fully achieve these efficiencies, or do not achieve them as
quickly as we plan,
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we will need to incur higher repair expenses to maintain fleet
size by maintaining older barges or invest new capital as we
replace retiring capacity. Either of these options would
adversely affect our results of operations.
Our operations are capital intensive and require significant
capital investment. We intend to fund substantially all of our
needs to operate the business and make capital expenditures,
including adequate investment in our aging boat and barge fleet,
through operating cash flows and borrowings. We may need more
capital than may be available under the revolving credit
facility and therefore we would be required either to
(a) seek to increase the availability under the revolving
credit facility or (b) obtain other sources of financing.
If we incur additional indebtedness, the risk that our future
cash flow and capital resources may not be sufficient for
payments of interest on and principal of our substantial
indebtedness would increase. We may not be able to increase the
availability under the revolving credit facility or to obtain
other sources of financing on commercially reasonable terms, or
at all. If we are unable to obtain additional capital, we may be
required to curtail our capital expenditures and we may not be
able to invest in our aging barge fleet and to meet our
obligations, including our obligations to pay the principal and
interest under our indebtedness.
At December 31, 2007, we had $439.0 million of
floating rate debt outstanding, which represented the
outstanding balance of the revolving credit facility. Each
100 basis point increase in interest rates, at our existing
debt level, would increase our cash interest expense by
approximately $4.4 million annually.
Our credit agreement contains financial covenants, including a
limit on the ratio of debt to earnings before interest, taxes,
depreciation, and amortization. Although we believe none of our
covenants are considered restrictive to our operations, our
ability to meet the financial covenants can be affected by
events beyond our control, and we cannot provide assurance that
we will meet those tests. A breach of any of these covenants
could result in a default under our credit agreement. Upon the
occurrence of an event of default under our credit agreement,
the lenders could elect to declare all amounts outstanding to be
immediately due and payable and terminate all commitments to
extend further credit. If the lenders accelerate the repayment
of borrowings, we cannot provide assurance that we will have
sufficient assets to repay our credit.
Growing the business through acquisitions involves risks of
maintaining the continuity of the acquired business, including
its personnel and customer base; achievement of expected
synergies, economies of scale and cost reduction; adequacy of
returns from the acquired business to fund incremental debt or
capital costs arising from its acquisition; and possible
assumption of unanticipated costs or liabilities related to the
acquired business. Integrating and consolidating the operations
and personnel of acquired businesses into our existing
operations may result in difficulties and expense, disrupt our
business and divert management’s time and attention. As a
result of these risks, there can be no assurance that any future
acquisition will be successful or that it will not have a
material adverse effect on our business, financial condition and
results of operations.
In 2007, our largest customer, Cargill, accounted for
approximately 6% of our revenue, and our largest ten customers
accounted for approximately 28% of our revenue. If we were to
lose one or more of our large customers, or if one or more of
our large customers were to significantly reduce the amount of
barging
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services they purchased from us and we were unable to redeploy
that equipment on similar terms, or if one or more of our key
customers failed to pay or perform, we could experience a
significant loss of revenue.
One or more of our facilities may experience a major accident
and may be subject to unplanned events such as explosions,
fires, inclement weather, acts of God and transportation
interruptions. Any shutdown or interruption of a facility could
reduce the production from that facility and could prevent us
from conducting our business for an indefinite period of time at
that facility, which could substantially impair our business.
For example, such an occurrence at our Jeffboat facility could
disrupt or shut down our manufacturing activities. Our insurance
may not be adequate to cover our resulting losses.
Many of our employees are covered by federal maritime laws,
including provisions of the Jones Act, the Longshore and Harbor
Workers Act and the Seaman’s Wage Act. These laws typically
operate to make liability limits established by state
workers’ compensation laws inapplicable to these employees
and to permit these employees and their representatives to
pursue actions against employers for job-related injuries in
federal court. Because we are not generally protected by the
limits imposed by state workers’ compensation statutes for
these employees, we may have greater exposure for any claims
made by these employees than is customary in the individual
states.
As of December 31, 2007, approximately 1,207 employees
were represented by unions. Most of these unionized employees
(approximately 1,188 individuals) are represented by General
Drivers, Warehousemen and Helpers, Local Union No. 89,
affiliated with the International Brotherhood of Teamsters,
Chauffeurs, Warehousemen and Helpers of America
(“Teamsters”), at our Jeffboat shipyard facility under
a three-year collective bargaining agreement that expires in
April 2010. Our remaining unionized employees (approximately 20
positions) are represented by the International Union of United
Mine Workers of America, District 12-Local 2452 at ACL
Transportation Services LLC in St. Louis, Missouri under a
collective bargaining agreement that expired in November 2007.
We are continuing to negotiate with UMW for a successor
agreement but cannot predict when or if a new agreement will be
reached. Although we believe that our relations with our
employees and with the recognized labor unions are generally
good, we cannot assure that we will not be subject to work
stoppages or other labor disruption in the future.
We believe that our ability to successfully implement our
business strategy and to operate profitably depends on the
continued employment of our senior management team and other key
personnel, including highly skilled and licensed vessel
personnel. Specifically, experienced vessel operators, including
captains, are not quickly replaceable and the loss of high-level
vessel employees over a short period of time could impair our
ability to fully man all of our vessels. If key employees
depart, we may have to incur significant costs to replace them.
Our ability to execute our business model could be impaired if
we cannot replace them in a timely manner. Therefore, any loss
or reduction in the number of such key personnel could adversely
affect our future operating results.
Our operations, facilities, properties and vessels are subject
to extensive and evolving laws and regulations. These laws
pertain to air emissions; water discharges; the handling and
disposal of solid and
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hazardous materials and oil and oil-related products, hazardous
substances and wastes; the investigation and remediation of
contamination; and health, safety and the protection of the
environment and natural resources. As a result, we are involved
from time to time in administrative and legal proceedings
related to environmental, health and safety matters and have in
the past and will continue to incur costs and other expenditures
relating to such matters.
In addition to environmental laws that regulate our ongoing
operations, we are also subject to environmental remediation
liability. Under federal and state laws, we may be liable as a
result of the release or threatened release of hazardous
substances or wastes or other pollutants into the environment at
or by our facilities, properties or vessels, or as a result of
our current or past operations, including facilities to which we
have shipped wastes. These laws, such as CERCLA, RCRA and OPA
90, typically impose liability and cleanup responsibility
without regard to whether the owner or operator knew of or
caused the release or threatened release. Even if more than one
person may be liable for the investigation and release or
threatened release, each person covered by the environmental
laws may be held wholly responsible for all of the investigation
and cleanup costs. In addition, third parties may sue the owner
or operator of a site for damage based on personal injury,
property damage or other costs, including investigation and
cleanup costs, resulting from environmental contamination.
As of December 31, 2007 we were involved in the several
matters relating to the investigation or remediation of
locations where hazardous materials have or might have been
released or where we or our vendors have arranged for the
disposal of wastes. These matters include situations in which we
have been named or are believed to be a potentially responsible
party under applicable federal and state laws. As of
December 31, 2007, we had no reserves for these
environmental matters.
Any cash expenditures required to comply with applicable
environmental laws or to pay for any remediation efforts will
therefore result in charges to earnings. We may incur future
costs related to the sites associated with the environmental
issues, and any significant additional costs could adversely
affect our financial condition. The discovery of additional
sites, the modification of existing laws or regulations or the
promulgation of new laws or regulations, more vigorous
enforcement by regulators, the imposition of joint and several
liability under CERCLA or analogous state laws or OPA 90 and
other unanticipated events could also result in a material
adverse effect.
The nature of our business exposes us to the potential for
disputes or legal or other proceedings from time to time
relating to labor and employment matters, personal injury and
property damage, product liability matters, environmental
matters, tax matters and other matters. Specifically, we are
subject to claims on cargo damage from our customers and injury
claims from our vessel personnel. These disputes, individually
or collectively, could affect our business by distracting our
management from the operation of our business. If these disputes
develop into proceedings, these proceedings, individually or
collectively, could involve significant expenditures. We are
currently involved in several environmental matters. See
“Legal Proceedings — Environmental
Litigation.”
Not applicable.
We operate numerous land-based facilities in support of our
marine operations. These facilities include a major
manufacturing shipyard in Jeffersonville, Indiana; terminal
facilities for cargo transfer and handling at St. Louis,
Missouri and Memphis, Tennessee; port service facilities at
Lemont, Illinois, St. Louis, Missouri, Cairo, Illinois,
Louisville, Kentucky, Baton Rouge, Louisiana, Vacherie,
Louisiana, Harahan, Louisiana, Marrero, Louisiana and Houston,
Texas; boat repair facilities at Louisville, Kentucky,
St. Louis, Missouri, Harahan, Louisiana and Cairo,
Illinois; and a corporate office complex in Jeffersonville,
Indiana. In 2007 we opened a liquids division headquarters
facility in Houston, Texas. For the properties that we lease,
the majority of leases are long term agreements.
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The map below shows the locations of our primary transportation
and manufacturing facilities, along with our Inland Waterway
routes.
The most significant of our facilities among these properties,
all of which we own, except as otherwise noted, are as follows.
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We believe that our facilities are suitable and adequate for our
current needs.
The nature of our business exposes us to the potential for legal
proceedings relating to labor and employment, personal injury,
property damage and environmental matters. Although the ultimate
outcome of any legal matter cannot be predicted with certainty,
based on present information, including our assessment of the
merits of each particular claim, as well as our current reserves
and insurance coverage, we do not expect that any known legal
proceeding will in the foreseeable future have a material
adverse impact on our financial condition or the results of our
operations.
Environmental Litigation. As of
December 31, 2007 we were involved in the following matters
relating to the investigation or remediation of locations where
hazardous materials have or might have been released or where we
or our vendors have arranged for the disposal of wastes. These
matters include situations in which we have been named or are
believed to be a potentially responsible party (“PRP”)
under applicable federal and state laws.
Barge Cleaning Facilities, Port Arthur,
Texas. American Commercial Barge Line LLC
received notices from the U.S. EPA in 1999 and 2004 that it
is a potentially responsible party at the State Marine of Port
Arthur and the Palmer Barge Line Superfund Sites in Port Arthur,
Texas with respect to waste from barge cleaning at the two sites
in the early 1980s. With regard to the Palmer Barge Line
Superfund Site, we have entered into an agreement in principle
with the PRP group for all PRP cleanup costs.
PHI/Harahan Site, Harahan, Louisiana. We were
contacted in July 2005 by the State of Louisiana Department of
Environmental Quality (“DEQ”) in connection with the
investigation and cleanup of diesel
and/or jet
fuel in soil at this site. We believe the contamination was
caused by a tenant on the property and have so notified DEQ. We
completed a site investigation and a summary report has been
submitted to the state. Based upon reported levels, it is
unknown whether cleanup will be required. In January 2008, we
requested and received from DEQ a No Further Action At This Time
letter. We, therefore have no reserve for further costs in
connection with this site.
The Company reported to and discussed with the Securities and
Exchange Commission (the “SEC”) circumstances
surrounding an
e-mail sent
by the Company’s Chief Financial Officer on June 16,
2007 and the Company’s filing of a
Form 8-K
on June 18, 2007. On February 20, 2008, the SEC
requested certain documents and other information from the
Company in connection with these events. The Company is
continuing to cooperate fully with the SEC. The Company does not
believe that any inquiry by the SEC into these events will have
a material impact on the Company. However, there can be no
assurance that the SEC will not take any action against the
Company or any of its current or former employees.
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No matters were submitted to a vote of security holders during
the fourth quarter of fiscal year 2007.
Since October 7, 2005, our common stock has traded on the
NASDAQ National Market under the symbol “ACLI.” Prior
to trading on the NASDAQ National Market, our common stock was
not listed or quoted on any national exchange or market system.
The following table sets forth, for the periods indicated, the
high and low closing sale prices for our common stock as
reported on the NASDAQ National Market. These prices have been
adjusted for the February 20, 2007
two-for-one
stock split. See Note 2 to the accompanying consolidated
financial statements.
On February 21, 2008, the last sale price reported on the
NASDAQ National Market for our common stock was $17.82 per
share. As of February 21, 2008, there were approximately
55 holders of record of our common stock.
ACL has not declared or paid any cash dividends in the past and
does not anticipate declaring or paying any cash dividends on
its common shares in the foreseeable future. The timing and
amount of future cash dividends, if any, would be determined by
ACL’s board of directors and would depend upon a number of
factors, including our future earnings, capital requirements,
financial condition, obligations to lenders and other factors
that the board of directors may deem relevant. The revolving
credit facility, of which ACL is a guarantor, currently
restricts our ability to pay dividends.
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All of the shares of Common Stock repurchased by the Company in
the three months ended December 31, 2007 resulted from
elections by holders of share-based compensation grants to
execute the “cashless” exercise or vesting options of
applicable awards and the withholding of shares to pay taxes due
upon the vesting or exercise of applicable awards. During the
quarter ended December 31, 2007, the Company redeemed such
shares as presented in the table below.
As further discussed in Note 14 to the accompanying
financial statements and disclosed in the Company’s 2007
filings on Form 10Q, during the year ended
December 31, 2007 the Company acquired 12.1 million
shares of its common stock under June 7, 2007 and
August 13, 2007 Board of Directors’ authorizations to
repurchase up to $200 million and $150 million,
respectively, of ACL common stock in the open market. During
2007 the Company repurchased $300 million of its common
stock. At December 31, 2007, $50 million of the
authorized repurchase amount had not yet been purchased.
Set forth below is a line graph comparing the monthly percentage
change in the cumulative shareholder return on the
Company’s Common Stock against the cumulative total return
of the NASDAQ Stock Market Index and the Dow Jones
U.S. Marine Transportation Index. The graph presents
monthly data from October 7, 2005, the date of the
Company’s initial public offering, until December 31,
2007. The foregoing graph shall not be deemed to be filed as
part of the
Form 10-K
and does not constitute soliciting material and should not be
deemed filed or incorporated by reference into any other filing
of the Company under the Securities Act of 1933, as amended, or
the Securities Exchange Act of 1934, as amended, except to the
extent the Company specifically incorporates the graph by
reference.
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SELECTED
CONSOLIDATED FINANCIAL DATA
Set forth below is American Commercial Lines Inc. and its
predecessor company’s selected consolidated financial data
for each of the five fiscal years ended December 31, 2007.
This selected consolidated financial data is derived from
American Commercial Lines Inc.’s and its predecessor
company’s audited financial statements. The selected
consolidated financial data should be read in conjunction with
American Commercial Lines Inc.’s consolidated financial
statements and with “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.”
The selected financial data has been adjusted for the impact of
the February 20, 2007
two-for-one
stock split. The Company has been publicly traded since its
initial public offering in October 2005.
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31
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The following table reconciles net (loss) income to Adjusted
EBITDA on an historical basis:
Adjusted EBITDA has limitations as an analytical tool and should
not be considered in isolation or as a substitute for analysis
of our results as reported under U.S. generally accepted
accounting principles. Some of these limitations are:
Adjusted EBITDA is not a measurement of our financial
performance under GAAP and should not be considered as an
alternative to net income, operating income or any other
performance measures derived in accordance with GAAP or as a
measure of our liquidity. Because of these limitations, Adjusted
EBITDA should not be considered as a measure of discretionary
cash available to us to invest in the growth of our business. We
compensate for these limitations by relying primarily on our
GAAP results and using Adjusted EBITDA only as a supplement to
those GAAP results. See the statements of cash flow included in
our consolidated financial statements.
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This management’s discussion and analysis of financial
condition and results of operations (“MD&A”)
includes certain “forward-looking statements” that
involve many risks and uncertainties. When used, words such as
“anticipate,” “expect,” “believe,”
“intend,” “may be,” “will be” and
similar words or phrases, or the negative thereof, unless the
context requires otherwise, are intended to identify
forward-looking statements. These forward-looking statements are
based on management’s present expectations and beliefs
about future events. As with any projection or forecast, these
statements are inherently susceptible to uncertainty and changes
in circumstances. The Company is under no obligation to, and
expressly disclaims any obligation to, update or alter its
forward-looking statements whether as a result of such changes,
new information, subsequent events or otherwise.
See the risk factors included in Item 1A of this annual
report on
Form 10-K
for a detailed discussion of important factors that could cause
actual results to differ materially from those reflected in such
forward-looking statements. The potential for actual results to
differ materially from such forward-looking statements should be
considered in evaluating our outlook.
This MD&A is provided as a supplement to the accompanying
consolidated financial statements and footnotes to help provide
an understanding of the financial condition, changes in
financial condition and results of operations of American
Commercial Lines Inc. MD&A should be read in conjunction
with, and is qualified in its entirety by reference to, the
accompanying consolidated financial statements and footnotes.
MD&A is organized as follows.
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We are one of the largest and most diversified marine
transportation and services companies in the United States,
providing barge transportation and related services under the
provisions of the Jones Act, as well as the manufacturing of
barges, towboats and other vessels, including ocean-going liquid
tank barges. We are the second largest provider of dry cargo
barge transportation and liquid tank barge transportation on the
United States Inland Waterways, consisting of the Mississippi
River System, its connecting waterways and the Gulf Intracoastal
Waterway (the “Inland Waterways”), accounting for
14.8% of the total inland dry cargo barge fleet and 13.2% of the
total inland liquid cargo barge fleet as of December 31,
2006, according to Informa Economics, Inc., a private
forecasting service (“Informa”). We do not believe
that these percentages have varied significantly during 2007,
but competitive surveys are normally not available until March
of each year.
Our manufacturing subsidiary, Jeffboat LLC
(“Jeffboat”), was the second largest manufacturer of
dry cargo barges in the United States in 2006 according to
Criton Corporation, publisher of River Transport News. We
believe this also approximates our ranking in terms of
construction of liquid tank barges (including both inland and
ocean-going liquid tank barges).
We provide additional value-added services to our customers,
including warehousing and third-party logistics through our
BargeLink LLC joint venture. Our operations incorporate advanced
fleet management practices and information technology systems,
including our proprietary ACLTrac real-time GPS barge
tracking system, which allows us to effectively manage our fleet.
During the fourth quarter of 2007, we acquired a naval
architecture and marine engineering firm which will continue to
provide architecture, engineering and production support to its
many customers in the commercial marine industry, while
providing ACL with expertise in support of its transportation
and manufacturing businesses.
Certain of the Company’s international operations have been
recorded as discontinued operations in all periods presented due
to the sale of all remaining international operations in 2006.
Operations ceased in the Dominican Republic in the third quarter
of 2006 and operations ceased in Venezuela in the fourth quarter
2006 See Note 16 — Discontinued Operations.
Transportation Industry. Barge market behavior
is driven by the fundamental forces of supply and demand,
influenced by a variety of factors including the size of the
Inland Waterways barge fleet, local weather patterns, navigation
circumstances, domestic and international consumption of
agricultural and industrial products, crop production, trade
policies foreign exchange rates and the price of steel.
According to Informa, from 1998 to 2006, the Inland Waterways
fleet size was reduced by 2,395 dry cargo barges and
99 liquid tank barges, for a total reduction of 2,494
barges, or 10.8%. The 2006 year-end Inland Waterways fleet
consisted of 17,885 dry cargo barges and 2,809 liquid tank
barges or a combined total of 20,694 barges. Industry data for
2006 indicates that 2006 was the first year in eight years that
more barges were built than scrapped, with nominal net additions
of 15 liquid tank barges and 12 dry cargo barges or an increase
of 0.1%. This overall level, therefore, represents the second
lowest number of barges in operation within our industry since
1992. Competition is intense for barge freight transportation.
Industry data for 2007 should become available in March 2008 but
is not expected to significantly impact this trend. The top five
carriers (by fleet size) of dry and liquid barges comprised over
60% of the industry fleet in each sector as of December 31,
2006. The average economic useful life of a dry cargo barge is
generally estimated to be between 25 and 30 years and
between 30 and 35 years for liquid tank barges.
The demand for dry cargo freight on the Inland Waterways is
driven by the production volumes of dry bulk commodities
transported by barge as well as the attractiveness of barging as
a means of freight transportation. Historically, the major
drivers of demand for dry cargo freight are coal for utility
companies, industrial and coke producers, and export markets;
construction commodities such as cement and limestone;
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and coarse grain, such as corn and soybeans, for export markets.
Other commodity drivers include products used in the
manufacturing of steel, finished and partially-finished steel
products, ores, salt, gypsum, fertilizer and forest products.
The demand for our liquid freight is driven by the demand for
bulk chemicals used in domestic production, including styrene,
methanol, ethylene glycol, propylene oxide, caustic soda and
other products. It is also affected by the demand for clean
petroleum products and agricultural-related products such as
ethanol, vegetable oil, bio-diesel and molasses. Additionally,
the volume of goods imported through the port of New Orleans
impacts freight demand.
Freight rates in both the dry and liquid freight markets are a
function of the relationship between the amount of freight
demand for these commodities and the number of available barges.
Certain spot rate contracts, particularly for grain, are subject
to significant seasonal fluctuations and also react to weather,
crop size, producer market timing and export estimates through
the Port of New Orleans. We believe that the supply and demand
relationship for bulk and liquid freight will remain steady with
freight rates steady to moderately higher.
For purposes of industry analysis the commodities transported in
the Inland Waterways can be broadly divided into four
categories: grain, bulk, coal, and liquids. Using these broad
cargo categories the following graph depicts the total millions
of tons shipped through the United States Inland Waterways for
2007, 2006 and 2005 by all carriers according to data from the
US Army Corps of Engineers Waterborne Commerce Statistics Center
(the “Corps”) . The Corps does not estimate
ton-miles,
which we believe is a more accurate volume metric. Note that the
most recent periods are typically estimated for the Corps’
purposes by lockmasters and retroactively adjusted as shipper
data is received.
Source: U.S. Army Corps of Engineers Waterborne Commerce
Statistics Center
The Manufacturing Industry. Our manufacturing
segment competes with companies also engaged in building
equipment for use on both the Inland Waterways and in
ocean-going trade. Based on available industry data, we believe
our manufacturing segment is the second largest manufacturer of
dry cargo and liquid tank barges for Inland Waterways use in the
United States. Due to the relatively long life of the vessels
produced by inland shipyards and the relative oversupply of
barges built in the late 1970’s and early 1980’s there
has only recently been a resurgence in the demand for new barges
as older barges are retired or liquid tank barges are made
obsolete by U.S. Coast Guard requirements. This heightened
demand may ultimately increase the competition within the
segment.
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In 2007 the Company’s net income decreased by
$47.9 million or 51.9% to $44.4 million.
In 2007, after-tax debt retirement expenses of
$16.0 million were incurred on both the retirement of the
asset-based revolver in the second quarter and on the retirement
of the Company’s
91/2% Senior
Notes in the first quarter. In 2006 after tax debt retirement
expenses of $0.9 million were incurred. The retirement of
the asset-based revolver and the Senior Notes is also discussed
in Note 3 to the consolidated financial statements and in
the “Liquidity and Capital Resources” section.
During the year ended December 31, 2006, the Company’s
former international operations (including the after tax gain of
approximately $4.8 million on the sale of its Venezuelan
operations) contributed $5.7 million, net of tax to net
income in that year. This contribution to net income is recorded
in discontinued operations in the consolidated income statement.
Exclusive of these significant items, income decreased
$27.1 million or 31.0% for the year ended December 31,
2007 compared to 2006. Operating income for the transportation
segment declined by $44.1 million and the manufacturing
segment operating income was essentially flat. Interest costs
increased $2.2 million and other income declined by
$1.3 million. Income tax expense, exclusive of the tax
benefit related to debt retirement expenses declined by
$20.6 million on the lower income base.
In 2007 EBITDA was $159.8 million, a decrease of 24.6% over
2006. EBITDA as a percent of combined revenue (inclusive of
revenue from discontinued operations) declined to 15.2% for the
year compared to 22.0% in 2006. See the table at the end of this
Consolidated Financial Overview and Selected Financial Data for
a definition of EBITDA and a reconciliation of EBITDA to
consolidated net income.
The decline in operating results in 2007 was driven by a decline
in operating margin, higher interest costs and lower other
income, partially offset by lower income tax expense. Lower
transportation margins resulted from cost inflation in excess of
revenue growth. Margins were impacted by grain
ton-mile
rates and grain volumes which declined 7% and 18% respectively,
year-over-year. Cost inflation related to increases in the
number of vessel employees; fuel costs, particularly during the
fourth quarter during which cost per gallon were 34% higher than
the prior year; vessel repair costs; and selling, general and
administrative expenses. These costs were partially offset by
higher scrapping income and gains from the disposal of assets
and improved barging productivity. Transportation margins were
also impacted by the expense associated with the withdrawal from
the multi-employer pension plan pertaining to certain
represented terminal employees. Lower manufacturing margins
resulted primarily from inefficiency associated with the 28%
increase in the number of barges produced and overall 11% higher
labor rates associated with the new contract for the 1,188
represented employees.
During the second and third quarters of 2007 the Company
substantially increased its leverage by purchasing
$300 million of its common stock in the open market. This
represented almost 20% of the previously outstanding shares of
our common stock. The acquisition was funded with proceeds from
borrowing under the Company’s $600 million revolving
credit facility and increased our debt to prior-four-quarter
EBITDA ratio to 2.74 to 1.0 at December 31, 2007.
In 2007 the Company invested $37.4 million in new barges
built by the manufacturing segment, $36.0 million in
improvements to the existing boat and barge fleet,
$7.2 million in improvements to our shipyard,
$24.1 million in improvements to our facilities including
our marine services facilities along the Inland Waterways,
$15.6 million for 20 boats and other assets acquired in the
McKinney acquisition, $6.2 million for a minority
investment in Summit Contracting, LLC (“Summit”),
$4.3 million for the acquisition of Elliott Bay Design
Group, Ltd. (“EBDG”) and $4.5 million in the buy
out of an existing operating lease covering 35 hopper barges.
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In 2006 the Company’s income from continuing operations
increased $76.6 million to $86.6 million over the year
ended December 31, 2005. In 2006, EBITDA from continuing
operations was $203.5 million, an improvement of 95.7% over
2005. EBITDA from continuing operations as a percent of
consolidated revenue improved to 21.6% for the year compared to
14.5% in 2005.
The improved operating results in 2006 were driven primarily by
increased transportation and manufacturing revenues, a 10.8%
improvement in transportation operating margins, lower interest
and debt retirement expenses and selling, general and
administrative expenses that were essentially flat year over
year as a percent of revenue. The increased revenues resulted
primarily from pricing leverage and tonnage growth in our
transportation business and greater external volume and pricing
in our manufacturing business. The lower interest expense was
driven primarily by lower outstanding average debt balances in
2006, compared to 2005 and lower debt retirement expenses in
2006. Consolidated operating margin improved to 16.1% in 2006
from 7.2% for 2005.
In 2006 the Company invested $34.1 million in new
Jeffboat-built barges, $22.7 million in improvements to the
existing boat and barge fleet, $17.3 million in
improvements to our shipyard and $15.9 million in
improvements to our facilities including our marine services
facilities along the Inland Waterways.
As discussed in Item 1, Part 1, under “Bankruptcy
Filing and Emergence” and in earlier filings, we emerged
from Chapter 11 protection in January 2005 with a
significantly less leveraged consolidated balance sheet. We also
generated net cash proceeds of $144.9 million from our
initial public offering in 2005. In 2005, capital expenditures
were $47.3 million. Capital expenditures in 2005 included
$15.3 million for the construction of 16 tank barges and
$8.9 million of
construction-in-progress
expenditures for tank barges that were delivered in 2006. Other
capital expenditures of $23.1 million in 2005 were
primarily for marine equipment maintenance and maintenance for
the Jeffboat manufacturing facility. In 2005, we purchased for
$2.5 million the remaining 50% interest of an equity
investment in Vessel Leasing LLC, which was merged into ACL.
Additionally, proceeds from property dispositions provided
$14.9 million in cash in 2005.
We operate in two predominant business segments: transportation
and manufacturing.
In recent years the attractive nature of non-affreightment
charter and day rate contracts have absorbed more of our
available tank barge fleet, resulting in a reduction in the
ratio of our affreightment revenues to total transportation
segment revenues.
Affreightment contracts for the year ended December 31,
2007 comprised approximately 74% or $595 million of the
Company’s transportation segment’s total revenues
compared to, for the years ended December 31, 2006 and 2005
respectively, $635 million and $482 million or
approximately 81% in each year. Under such contracts our
customers hire us to move cargo for a per ton rate from an
origin point to a destination point along the Inland Waterways
on the Company’s barges, pushed primarily by the
Company’s towboats. Affreightment contracts include both
term and spot market arrangements. The Company is responsible
for tracking and reporting the tonnage moved under such
contracts.
The remaining segment revenues (“non-affreightment
revenues”) were generated either by demurrage charges
related to affreightment contracts or by other contractual
arrangements with customers: charter/day rate contracts; outside
towing contracts; or other marine services contracts.
Transportation revenue for each contract type is summarized in
the key operating statistics table below.
Outside towing revenue is earned by moving barges for other
affreightment carriers at a specific rate per barge move. Marine
services revenue is earned for fleeting, shifting and cleaning
services provided to third parties or from the sale of barges
tolled for scrap.
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During 2007 and 2006, we deployed additional barges to serve
customers under charter/day rate contracts due to strong demand
and attractive, available pricing for such service. On average,
an additional 33 and 26 liquid tank barges in 2007 and 2006
respectively were devoted to these non-affreightment contracts.
This represented redeployment of an additional 9% and 7%
respectively of our average liquid tank fleet in those years to
this type of service (for an average total of 131 and 98 tank
barges or 35% and 26% of our average liquid tanker fleet in
those two years). This also caused gross
ton-miles
reported under affreightment contracts to be lower than if there
had been no shift in barge deployment.
Key operating statistics regarding our transportation segment
are summarized in the following table.
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Data regarding changes in our barge fleet for the fourth quarter
of 2007 and the past three years ended December 31, 2007
are summarized in the following table.
Data regarding our boat fleet at December 31, 2007 is
contained in the following table.
In addition to the 137 boats detailed above, the Company had 25
chartered boats in service at December 31, 2007. The
average life of a boat (with refurbishment) exceeds
50 years. One owned boat is included in assets held for
sale at December 31, 2007. During the first quarter of 2007
the Company entered into an agreement to purchase twenty
towboats (and related equipment and supplies) from McKinney for
$15.6 million in cash. The transaction doubled the size of
ACL’s Gulf-region fleet.
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Transportation segment revenue increased $21.3 million or
2.7% to $808.6 million in the year ended December 31,
2007 compared with 2006. Higher scrapping revenue and higher
charter revenue, a result of the acquisition of the McKinney
boats early in the year, drove the transportation revenue
increase. Strength in our total liquid business portfolio and
the rate gains we have seen in bulk pricing were almost
completely offset by lower grain volume and pricing and, to a
lesser extent, by lower bulk volume. Coal volumes increased
significantly, though largely offset by lower pricing.
Our dry business for the year ended December 31, 2007 was
impacted by significant weakness in both grain volume and
pricing compared to the prior year. Grain pricing improved in
the second half of the year as the harvest season progressed.
However, for the full year ended December 31, 2007 it
remained down 7.4% from the prior year’s level. Our grain
ton-mile
volume declined 18.1% in the year ended December 31, 2007
compared to 2006. We believe that several factors have driven
the decline in grain volume. First, the absence in 2007 of the
significant carryover grain demand experienced in the first half
of 2006 as a result of the 2005 hurricanes. Second, we believe
that the market dynamics related to the current crop year have
resulted in delays in movement to market of what is estimated to
be a record export crop, as farm interests try to maximize their
return. This resulted in a high number of loaded barges held in
demurrage status at unloading points in the Gulf that were not
able to be redeployed. Consistent with our objective to increase
our asset utilization, during the third quarter of 2007 we
announced certain increases in demurrage rates on our dry fleet.
These increases, unlike those implemented in the prior year,
were not followed by other dry cargo haulers. In the fourth
quarter, of 2007 due to the highly competitive nature of the
grain market, we eased the increased rates, though still
maintained our position at the high end of the market.
The average annual grain rates for the mid-Mississippi River,
which we believe are the most representative of the total
market, increased over 60% in 2005 and by over 20% in 2006.
Though grain rates declined in 2007 by approximately 6% from
their 2006 level, they remained 15% above the 2005 rates. The
annual differential between peak and trough rates has averaged
123% for the last five years. Though quoted tariff rates are a
general indicator of the market, the
year-over-year
change in quoted tariff rates will not match our change in grain
rates per
ton-mile due
to timing of shipment volume and river segment mix. The average
mid-Mississippi tariff rates for both the years ended
December 31, 2007 and 2006 respectively were approximately
419% and 444%.
2007 year-to-date
average mid-Mississippi tariff rates are second only to the same
period of 2006, and substantially higher than the trailing five
year average.
Excluding the
year-over-year
impact of grain, average dry rates per
ton-mile
increased 4.2% in the year ended December 31, 2007 compared
to 2006. Stronger term contract pricing on bulk cargoes was
substantially offset by a smaller portion of the 2007 coal
tonnage moving in the higher margin spot market than the portion
moved in the spot market in the prior year. Our coal volume
increased 18.0% during 2007 compared to 2006. Bulk cargo volume
was up in the fourth quarter of 2007 compared to the prior year,
but ended 2007 down 4.6% compared to the year ended
December 31, 2006. We believe the bulk volume decreases are
attributable to the weakness of the U.S. dollar and the
housing market, particularly for commodities such as cement. For
the year ended December 31, 2007, one-third of the impact
of higher bulk pricing was offset by the decline in bulk volume
in comparison to 2006.
The overall positive performance of the dry portfolio excluding
grain offset almost half of the combined price and volume
weakness in grain for the year ended December 31, 2007
compared to 2006.
Another contributing factor to lower
year-over-year
volume for the year ended December 31, 2007 was Inland
Waterways’ weather conditions for the year were much more
seasonally normal than the exceptionally good conditions
experienced in 2006. In 2007 the upper river systems closed for
20 to 25 days early in the year due to icing compared to no
icing in 2006. Also significant Gulf fog conditions were more
severe in 2007 compared to the prior year.
Non-affreightment revenues, particularly liquid charter and day
rate contracts and fleeting, shifting and towing revenues,
increased 40.0% over the prior year, more than offsetting
declines in revenue from affreightment contracts during the same
period. Revenues per average barge increased 8.8% in the year
ended December 31, 2007 over their full year 2006 level.
During the year ended December 31, 2007 we operated 5.6%
fewer barges on average than in 2006.
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Labor inefficiencies in the shipyard driven by the production
ramp-up, and
higher average labor rates resulted in 3.9% lower gross margins
on external sales in the manufacturing segment in the year ended
December 31, 2007 compared to 2006. The lower gross margins
were partially offset by a 1.9% improvement in selling, general
and administrative expenses as a percent of manufacturing
revenue. The improvement in selling, general and administrative
costs resulted from lower incentive and employee related
expenses. In total, 89 more barges were completed in 2007 than
in 2006. During 2007, 23 fewer barges were produced for internal
use than in the prior year, three fewer tank barges and 20 fewer
dry barges. In 2007, external production increased by 112
barges. Three more liquid tank barges and 109 more dry cargo
barges were sold than in the prior year. We continue to believe
there is no sign of over-production in the industry and that
most of the production is for replacement demand. We have seen
continued labor inefficiencies in the manufacturing business
where we have added over 25.1% to our workforce in 2007 to
support the increases in production levels. Additionally we have
not yet fully received the benefits of several major capital
projects undertaken over the past two years.
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Consolidated
Financial Overview — Non-GAAP Financial Measure
Reconciliation
AMERICAN
COMMERCIAL LINES INC. NET INCOME TO
EBITDA RECONCILIATION
Management considers EBITDA to be a meaningful indicator of
operating performance and uses it as a measure to assess the
operating performance of the Company’s business segments.
EBITDA provides us with an understanding of one aspect of
earnings before the impact of investing and financing
transactions and income taxes. EBITDA should not be construed as
a substitute for net income or as a better measure of liquidity
than cash flow from operating activities, which is determined in
accordance with generally accepted accounting principles
(“GAAP”). EBITDA excludes components that are
significant in understanding and assessing our results of
operations and cash flows. In addition, EBITDA is not a term
defined by GAAP and
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as a result our measure of EBITDA might not be comparable to
similarly titled measures used by other companies.
The Company believes that EBITDA is relevant and useful
information, which is often reported and widely used by
analysts, investors and other interested parties in our
industry. Accordingly, the Company is disclosing this
information to allow a more comprehensive analysis of its
operating performance.
Transportation: We believe that our value
proposition is to deliver the safest, cleanest, most cost
effective and innovative transportation solutions to our
customers. Barge transportation is widely recognized as the
lowest cost, cleanest, safest and most fuel efficient mode of
transportation in the U.S. and is estimated to be operating
at only 50% of infrastructure capacity. We expect over the next
few years to significantly change our portfolio mix of
commodities and increase the capacity of our liquid fleet.
During 2007 our transportation revenues were comprised of 31%
bulk, 27% liquids, 25% grain, 9% steel and 8% coal. During 2006,
our transportation revenues were comprised of 32% grain, 28%
bulk, 24% liquids, 8% coal and 8% steel. We intend to pursue a
comprehensive sales and marketing program involving freight that
has traditionally been moved by barge as well as freight that is
currently “off-river” to convert the Company’s
portfolio mix of business to 40% liquids, 20% coal, 20% bulk,
10% grain, 5% steel and 5% emerging markets.
Consistent with our strategic vision, we plan to continue
growing our liquids business, and reshaping its dry business by
pursuing the following strategies.
Though the re-balancing of the transportation portfolio is
expected to take some time, we have begun to make tangible
progress. Our stationary days per barge loading improved by
almost one full day in the year ended December 31, 2007
compared with 2006.
In 2006, the Company established a new pricing and equipment
allocation program in its liquids business. All new contracts
featured market-based pricing and terms designed to allow us to
optimize asset utilization. We believe that the liquids business
remains our fastest growing, most ratable profit opportunity.
Our review of historical industry data for waterborne movement
indicates that liquid commodity barge movement is a very steady
growth and demand market with less volatility than certain dry
commodities such as grain. Management believes its liquid tank
barge fleet is comparable to the industry in both condition and
age.
In addition, we introduced to the market limited scheduled barge
service which provides shippers the ability to measure
“on-time” service. In 2007 we achieved an 86% on time
record for this service.
Year-to-date,
through the addition of new barges and barge refurbishment, the
barrel capacity of our liquid fleet has increased 4.8%. All of
the barges built by our manufacturing division for the
transportation division in 2008 are expected to be liquid cargo
barges, further expanding our liquids capacity.
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Our objectives are similar in the dry markets, pursuing growth
that fits within our scheduled service model while retaining
existing business that fits in this model. Management believes
the key to our success in the dry markets will again be driven
by producing a more valuable transportation service product to
compete for more new, ratable business against other
transportation modes. This is also a key to increased dry fleet
efficiency. We are focused on improving asset turn rates through
reduction of average stationary days per barge loading. We
expect to continue to focus our efforts on moving more ratable
coal and capturing distressed rail movements. New coal business
is expected to be market-priced. The majority of our existing
coal volume moves under a legacy contract. Although the contract
contains fuel and general cost escalation clauses, it is only
marginally profitable. Pet coke, alumina and outbound steel have
offered some early progress in our dry portfolio rebalancing. As
we move to replace a portion of the grain moved by barge, we
continue to seek expansion in large, ratable dry shipments with
existing and new customers in the Company’s primary service
lanes. Many of the cargoes we are testing are conversions from
other modes of transportation, primarily rail. The Company
expects to continue to offer these modal alternatives in
chemicals as well as in new target markets such as forest
products/lumber, coal/scrubber stone, energy products, and in
emerging markets like municipal solid waste. We believe that
there is significant opportunity to move by barge certain
cargoes that currently move via truck and rail.
Over the past few years, there has been increasing utilization
of existing coal-fired power generating capacity. Continued
volatility in the price of natural gas, and increasing demand
for coke (used in the production of steel), have resulted in
increased demand for both steam coal and metallurgical coal.
According to Criton Corporation, the high spot and forward
prices of natural gas and oil, increased utilization and
expansion of existing coal-fired power plants, new construction
of coal-fired power plants, retrofitting of existing plants for
flue-gas desulphurization (FGD), strong steel demand and the
weak dollar are expected to contribute to continued growth in
demand for coal tonnage. Distribution patterns may be affected
by FGD retrofitting and may negatively impact miles per trip. In
addition, due to clean air laws that are resulting in the use of
limestone to reduce sulfur emissions from coal-fired electricity
generation, we expect to see increases in limestone and, to a
lesser extent, gypsum movements by barge.
A combination of growth in coal demand and continued constrained
rail capacity is expected to result in an increasing commitment
of existing barging capacity to dedicated transport of coal, as
coal-fired power plants move to ensure uninterrupted delivery of
their fuel supplies. This is expected to have a secondary
benefit of diverting existing barging capacity from other dry
trades, particularly grain and other spot market transactions,
which in turn may have a further positive effect on freight
rates, in an environment of level to declining barge capacity
over the next several years.
We believe terminaling and transloading will become a more
prominent part of the strategy going forward as we begin to
expand our
dock-to-dock
offerings, to include
dock-to-door
and
door-to-door
options. With ACL facilities in St. Louis, Memphis, New
Orleans and Chicago, we believe we have a strong, strategically
located core of base locations to begin to offer one-stop
transportation services. In fact, several of the cargo
expansions in 2007 included multi-modal solutions through our
terminal locations. Our new Lemont, Illinois facility, located
just outside of Chicago, provides terminaling and warehousing
services for clients shipping and receiving their products by
barge. Through Lemont, we are transloading products to be routed
to or through Chicago. The Lemont facility also handles products
manufactured in the greater Chicago area which are destined to
the southern United States and to export markets.
At December 31, 2007, 73% of our fleet consisted of covered
hopper barges. The demand for coarse grain freight, particularly
transport demand for corn, has been an important driver of our
revenue. We expect grain to still be a component of our future
business mix. However, the grain flows we expect to pursue going
forward are the ratable, predictable flows. Smaller, more
targeted, export grain programs that run ratably throughout the
year are likewise attractive as they are not as susceptible to
volatile price swings and seasonal harvest cycles. The complex
interrelationships of agricultural supply/demand, the weather,
ocean going freight rates and other factors lead to a high
degree of unattractive volatility in both demand and pricing.
Our service commitment is to build and maintain a covered barge
fleet that handles ratable, profitable commodities. We expect
that the introduction of new demand will over time drive our
grain position down to approximately 10% of our revenue base.
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Although we expect to significantly reduce our exposure to
seasonal grain moves, grain is still expected to be both an
important commodity for us and, as circumstances allow, a
tactical opportunity. The United States Department of
Agriculture (the “USDA”) forecasted, as of the
January 11, 2008, corn exports of 2.13 billion bushels
for the 2006/2007 crop year equal to the 2.13 billion
bushels for the 2005/2006 crop year. Crop years are measured
from September 1 through August 31 of the next calendar year.
The total 2006/2007 corn harvest was estimated to be
approximately 10.5 billion bushels, below the prior two
year’s 11.1 billion and 11.8 billion bushel
estimates. We believe that the estimated corn harvest size and
export demand will result in a significant opportunity for barge
transportation service for export grain through the port of New
Orleans.
According to Informa, from 1998 to 2006 the Inland Waterways
fleet size was reduced by 2,395 dry cargo barges and 99 liquid
tank barges, for a total reduction of 2,494 barges, or 10.8%.
The 2006 year-end Inland Waterways fleet consisted of
17,885 dry cargo barges and 2,809 liquid tank barges or a
combined total of 20,694 barges. Industry data for 2006
indicates that 2006 was the first year in eight years that more
barges were built than scrapped, with net additions of 15 liquid
tank barges and 12 dry cargo barges. This overall level
represents the second lowest number of barges in operation
within our industry since 1992. We believe capacity will
continue to be taken out of the industry as older barges reach
the end of their useful lives. From an overall barge supply
standpoint, we believe that approximately 25% of the
industry’s existing dry cargo barges will be retired in the
next four to eight years. We also believe that a like number of
barges will be built during this period, although the exact
number of additions or reductions in any given year is difficult
to estimate. The average economic useful life of a dry cargo
barge is generally estimated to be between 25 and 30 years
and between 30 and 35 years for liquid tank barges. Our
fleet of dry cargo barges will see over half of the 2,440 barges
in service reach 30 years of age by the end of 2010. We may
replace lost capacity through new builds, acquisitions, barge
refurbishments and increased asset utilization.
Freight rates in both the dry and liquid freight markets are a
function of the relationship between the amount of freight
demand and the number of barges available to load freight.
Notwithstanding the decline in grain freight rates for the year
ended December 31, 2007 compared with 2006, we believe the
current supply/demand relationship for dry cargo freight
indicates that recent improvements in contract market freight
rates will stabilize in the near term with the possibility of
further moderate increases in freight rates in the future if
capacity continues to decline. If the fuel price increases
experienced in the fourth quarter of 2007 are sustained,
contractual fuel rate adjustment clauses will also drive
increases in rates. We believe the supply/demand relationship
for liquid freight will also continue to benefit from tightened
supply/demand dynamics in the industry.
We may continue to shift a larger portion of our liquid fleet
business to day rate contracts, rather than affreightment
contracts. Such a shift may result in a reduction in tonnage but
an increase in revenues per barge as we would be paid a per diem
rate regardless of the tonnage moved. We anticipate
approximately $220 million in contract renewals in 2008,
primarily in the fourth quarter. We expect that we will be able
to continue to achieve meaningful increases in contract rates on
a fuel neutral basis. Of the expected renewals, 64%, 13% and 23%
of the renewable contracts, are one, two and three years or
older, respectively.
From an expense standpoint, fuel price increases may reduce
profitability in three primary ways. First, contractual
protection in the Company’s newest term contracts operate
on a one month lag thereby exposing us to a one month delay in
recovering higher prices. Some older term contracts are adjusted
quarterly thus lengthening our exposure. We have been changing
the frequency of rate adjustments for fuel price from quarterly
to monthly as we renew our contracts. Second, fuel rates may
move ahead of booked-forward spot market pricing. Third, fuel
expense is a significant component of the cost structure of
other fleeting, shifting and towing vendors that we use. These
costs are passed through to us in higher rates for such services
and we are generally unable to pass these increases through to
our customers. In the year ended December 31, 2007, we
believe we recovered approximately 90% of our direct fuel cost
through the fuel rate adjustment clauses in our contracts and
through spot rate pricing. The decline in our recovery rate that
occurred in the fourth quarter of 2007 was primarily the result
of the rapid escalation of fuel costs in that quarter. The 34%
increase in fuel rates lowered our quarterly recovery percentage
to 76% in the stand-alone quarter, resulting in approximately
$12 million in exposure to fuel increases. In anticipation
of further instability in fuel pricing, as of
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December 31, 2007, we entered into fuel swap contracts
fixing the price on 200,000 gallons per month at $2.605 per
gallon for each of the first six months of 2008. The value of
the swaps at year end was insignificant.
Increases in wages and other costs, if they are not recoverable
under contract adjustment clauses or through rates we are able
to obtain in the market, would also create margin pressure. We
would also expect to experience continued pressure on labor
rates, which we expect to defray through labor escalators in
certain of our contracts and through pricing. Competition for
experienced vessel personnel is strong, and increases in
experienced vessel personnel wage rates has been exceeding the
general inflation level for several years. We expect this trend
to continue and may not be able to recover such increases over
time.
Manufacturing. At December 31, 2007, our
manufacturing segment’s vessel manufacturing backlog for
external customers was approximately $429 million of
contracted revenue with expected deliveries extending into the
second half of 2010, an increase of approximately
$22 million from the end of 2006. In January 2008 a new
contract for approximately $100 million of additional
barges, including options, was signed. Contract options are not
included in the computation of the approximate vessel backlog
until signed. The new contract increased the backlog by
approximately $25 million from the year end level. All of
the contracts in the backlog contain steel price adjustments.
The actual price of steel at the time of construction may result
in contract prices that are greater than or less than those used
to calculate the backlog at the end of 2007. All of the
contracts booked during 2006 and 2007 are expected to exceed our
minimum acceptable operating margin when they enter production.
This backlog excludes option units in booked contracts and our
planned construction of internal replacement barges. We are
focused on reducing labor costs relative to our bid
specifications. Additionally, at the end of 2007 we have over
$200 million related to more than 375 vessels in our
backlog that were priced under contracts or options negotiated
at lower estimated margins and with more aggressive labor
estimates than in contracts signed during 2006 and 2007, which
will result in margin pressure as they enter production.
Approximately 60 to 65% of this $200 million lower margin
business is expected to be produced in 2008. Unsigned options in
these contracts on nearly 200 additional vessels or more than
$100 million of revenues are expected to extend the margin
impact into 2010 and 2011 if the options are exercised. We
expect that these pressures will decline as a percent of total
production in 2008 and beyond as the underlying vessels are
completed. All legacy contracts contain steel price escalation
clauses, however, some option barges are not covered by labor or
other cost escalation clauses. We expect that 2008 revenues in
our manufacturing segment will exceed 2007 revenues, though the
number of barges produced is expected to decline. The increase
is due to an expected sales mix shift to more higher priced
liquid cargo barges.
During 2006 we sought and were granted certain job creation, job
training and investment tax incentives from the state of Indiana
that could result in a maximum of $11.3 million of capital
in the form of tax credits and tax abatements to enhance our
ability to expand and improve our existing shipyard capability
both through investment in the physical plant and in our
employees depending on the expansion of the number of jobs,
capital investment and other factors. If the aggressive annual
job creation and other targets are not met, any credit achieved
could be significantly less than the maximum available. At
December 31, 2007 we were not at targeted employment levels.
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AMERICAN
COMMERCIAL LINES INC. OPERATING RESULTS by BUSINESS SEGMENT
Year Ended December 31, 2007 as compared with Year Ended December 31, 2006 (Dollars in thousands except where noted) (Unaudited)
Revenue. Consolidated revenue increased by
$107.8 million or 11.4% to $1.05 billion.
The increase in consolidated revenue was driven by higher levels
of manufacturing segment external sales during the year ended
December 31, 2007 compared to 2006. Three more liquid tank
barges and 109 more dry cargo barges were delivered during 2007
than in 2006, driving $84.7 million of the increase in
revenues. Transportation revenues increased $21.3 million,
primarily due to higher barge scrapping revenue and, to a lesser
extent the increased revenues from the total liquid portfolio of
business, strong bulk pricing, and higher coal volume which was
almost offset by lower grain rate and volume and coal rate
declines. Charter revenue from contracts acquired with the
McKinney vessels in early 2007 also contributed to the revenue
increase.
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Revenue per average barge operated for 2007 increased 8.8% to
$277,018 from $254,640 in 2006. Average fuel neutral rates per
ton-mile for
dry cargo freight and liquid cargo freight decreased 1.2% and
increased 13.4%, respectively, for 2007 as compared to 2006. On
a blended basis, average fuel neutral rates per
ton-mile
were flat year over year. Liquid volume under affreightment
contracts was down 14%. This decline was attributable to the
impact of the redeployment of on average, 33 more liquid tank
barges to day rate contracts during 2007 as compared to 2006.
This higher level of deployment and higher rates for this type
of service drove charter and day rate revenue up 52% or
$22.5 million
year-over-year.
Liquid demand continues to be strong, led by petro-chemical and
refined product markets. Overall volume increases in the market
included increased volumes of ethanol and bio-diesel, which has
led to customers entering day rate contracts to ensure that
their logistics requirements are met. Dry volume was down year
over year primarily attributable to lower grain volume and
weaker bulk imports. Grain volume loss was attributable to the
absence of the prior year’s carryover grain demand as a
result of the 2005 hurricanes, and due to the current year
timing of the grain export market. Bulk volume loss was
attributable to the impact of the weak U.S. dollar on
imports and the slowdown in the U.S. economy, particularly
housing. Additionally, our naval architecture firm, acquired in
the fourth quarter of 2007 had revenues of $1.8 million.
Operating Expense. Consolidated operating
expense increased by 19.2% to $942.2 million or 89.7% of
consolidated revenue.
Transportation expenses increased 10.4%, or $67.0 million,
over 2006 due to the following factors.
Manufacturing operating expenses increased 57.7% or
$85.0 million in 2007 over 2006 due primarily to a 112
barge increase in the number of barges sold externally year over
year. Labor inefficiencies in the shipyard
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driven by the production
ramp-up and
higher average labor rates, resulted in 3.9% lower gross margins
on external sales in the manufacturing segment in 2007 compared
to 2006. The lower gross margins were partially offset by a 1.9%
improvement as a percent of manufacturing revenue in selling,
general and administrative expenses. The improvement in selling,
general and administrative costs resulted from lower incentive
and employee related expenses. In total, 89 more barges were
completed in 2007 than in 2006. During 2007, 23 fewer barges
were produced for internal use than in the prior year, three
fewer tank barges and 20 fewer dry cargo barges. During 2007 the
external production increase of 112 barges consisted of three
additional liquid tank barges and109 additional dry cargo barges
than produced in the prior year.
Operating Income. Operating income declined
$44.2 million to $108.2 million. Operating income as a
percent of consolidated revenue fell to 10.3% compared to 16.2%
in 2006. The decrease was primarily the result of the decline in
the operating ratio in transportation to 87.6% from 81.7%. In
the transportation segment labor and fringe benefits along with
material, supplies and other were 48.4% of segment revenue
compared to 43.2% for 2006, increasing $51.2 million in
dollar terms. Fuel and fuel usage tax expenses increased from
22.2% for 2006 to 23.0% in 2007, primarily due to a 34% increase
in per gallon costs in the fourth quarter of 2007. Selling,
general and administrative expenses declined by 0.5% as a
percent of consolidated revenue in 2007 compared to 2006, though
increasing $2.4 million in dollar terms.
Interest Expense. Interest expense increased
$2.2 million to $20.6 million. This increase was
driven by the higher average outstanding debt balance. The debt
balance was increased to fund the repurchase of
$300 million of the Company’s common stock under two
separate Board of Directors authorizations. The shares were
repurchased in the second and third quarters of 2007. The
average interest rate for 2007 was 6.7% compared to 6.3% in 2006.
Debt Retirement Expenses. Debt retirement
expenses increased due to the retirement of $119.5 million
of the Company’s
91/2% Senior
Notes in the first quarter of 2007 and the replacement of the
asset based revolver with the Company’s new revolving
credit facility.
Other Income. Other income was lower in 2007
by $1.3 million compared to 2006 primarily due to the
$1.0 million reversal of a litigation accrual in the first
quarter of 2006 related to the bankruptcy of our predecessor
company. The litigation was settled in 2006.
Income Tax Expense. The effective rate for
income tax is equal to the federal and state statutory rates
after considering the deductibility of state income taxes for
federal income taxes. The effective tax rate for 2007 was 33.0%
as compared to 36.5% in 2006. The lower rate in the current year
was due to the recognition of a previously unrecognized deferred
tax asset for which realization is believed to be probable.
Discontinued Operations, Net of Income
Tax. Net income from discontinued operations
decreased $5.7 million due primarily to the prior year gain
on the sale of our Venezuelan business ($4.8 million, net
of income tax) and the 2006 partial year of operations of
businesses sold in 2006.
Net Income. Net income decreased
$47.9 million in 2007 over 2006 to $44.4 million due
to the reasons noted above.
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AMERICAN
COMMERCIAL LINES INC. OPERATING RESULTS by BUSINESS SEGMENT
Year Ended December 31, 2006 as compared with Year Ended December 31, 2005 (Dollars in thousands except where noted) (Unaudited)
Revenue. Consolidated revenue increased by
$227.6 million or 31.8% to $942.6 million.
Improving industry fundamentals drove significant increases in
revenue rates during 2006 compared to 2005. Affreightment
contracts comprised approximately 81% or $635 million of
the Company’s transportation segment’s total revenues
for 2006 compared to $483 million or 82% of the
transportation segment’s 2005 total revenues.
Transportation segment revenue increased $193.1 million
primarily due to higher contract and spot rates on affreightment
contracts. These higher rates drove a $141.7 million
increase in revenue. Higher affreightment
ton-mile
volumes resulted in an $11.2 million increase in revenue.
Total
ton-miles
increased 5.5% over 2005. As previously discussed, gross liquid
affreightment
ton-miles
were offset by the higher revenue from the deployment of a
higher proportion of our liquid tank barge fleet to day rate
contracts. Dry
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affreightment
ton-miles
increased 5.9% due to strong demand, particularly grain freight
demand which resulted from the rollover of the hurricanes in
2005. Outside towing, charter and day rate, demurrage, fleeting,
shifting and cleaning increased $40.5 million.
Revenue per barge operated for 2006 increased 37.4% to $252,640
from $185,282 in 2005. Average fuel neutral rates per
ton-mile for
dry cargo freight and liquid cargo freight increased 23.7% and
11.7% respectively for 2006 as compared to 2005. On a blended
basis average fuel neutral rates per
ton-mile
increased 20.9% for the year. Liquid volume under affreightment
contracts was down 8.5%. This decline was attributable to the
impact of the redeployment of, on average, 26 more liquid tank
barges to day rate contracts during 2006 as compared to 2005.
This redeployment drove charter and day rate revenue up
$19.5 million
year-over-year.
Liquid demand continues to be strong, led by petro-chemical and
refined product markets. Increased volumes of ethanol and
bio-diesel have led to customers entering day rate contracts to
ensure that their logistics requirements are met. Dry volume was
led by corn exports, which benefited from the ocean freight
spread favoring corn exportation from the central Gulf over the
Pacific Northwest and an anticipated reduction of corn exports
by China.
Manufacturing segment revenue from sales to third parties
increased $34.5 million in 2006 over 2005. Barges sold
included 157 more dry cargo barges and 39 fewer liquid tank
barges than in 2005.
Operating Expense. Consolidated operating
expense increased by 19.9% to $790.1 million.
Transportation expenses increased 18.1%, or $98.6 million,
over 2005 primarily due to $37.0 million higher materials,
supplies and other expense, $30.2 million in higher fuel
expense, $15.7 million higher selling, general and
administrative expenses and $7.8 million higher labor and
fringe benefits. The increase in fuel expense was driven by a 29
cent per gallon increase in price in addition to
3.9 million more gallons consumed. The increase in
materials, supplies and other expense was driven by higher
expenses for boat and barge repairs ($13.9 million), boats
and crews chartered ($11.4 million), and outside shifting
and towing ($8.2 million as a result of higher prices for
such services and higher volume). The increase in selling,
general and administrative expenses was due to higher incentive
and share-based compensation costs and other employee expenses,
increased consulting expenses regarding compliance with
Section 404 of the Sarbanes-Oxley Act, higher legal costs,
and higher marketing expenses.
Manufacturing operating expenses related to external sales
increased 28.0% or $32.2 million over 2005, due primarily
to the higher volume of external barges sold. In 2006, 229
barges were sold to external customers compared to 111 in 2005.
Gross margins improved from 7.1% in 2005 to 8.8% in 2006. The
improvement was due primarily to the higher external sales
volume, offset partially by labor inefficiencies associated with
the start-up
of our covered dry hopper barge line in the third quarter and
the change in the mix of external barges sold with 39 fewer
liquid tank barges in 2006.
Operating Income. Operating income of
$152.4 million rose $96.7 million. Operating income,
as a percent of consolidated revenue rose to 16.2% compared to
7.8% in 2005. The increase was primarily the result of
improvement in the operating ratio in transportation to 81.7%
from 91.6%. In the transportation segment labor and fringe
benefits, along with material, supplies and other, were 43.2% of
segment revenue compared to 49.7% for 2005, despite increasing
$44.7 million in dollar terms. Depreciation and
amortization, which were relatively unchanged in dollars,
represented 5.8% of revenues compared to 7.6% for 2005. Fuel
costs decreased from 21.4% for 2005 to 20.0% in 2006. Selling,
general and administrative expenses increased slightly as a
percentage of revenue to 7.0% from 6.7% in 2005.
Interest Expense. Interest expenses decreased
by $13.2 million to $18.4 million. The decrease was
due to lower outstanding debt balances. Additionally, an
increase in interest due to a higher LIBOR base interest rate
was partially offset by lower rate margins. LIBOR is the primary
base rate for borrowings under our asset based revolver.
Debt Retirement Expenses. The decline of
$10.3 million was attributable to expenses incurred in 2005
that were not repeated in 2006. These included $7.9 million
in prepayment penalties and $3.8 million in accelerated
amortization of debt issuance and debt discount cost from the
early retirement of $70.0 million of our 2015 Senior Notes
and 100% of the principal of our former MARAD guaranteed bonds.
We did incur
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$1.4 million of debt retirement expenses related to the
retirement during 2006 of $10.5 million in face value of
our 9.5% Senior Notes at a premium.
Other Income. Other income increased by
$2.0 million to $3.8 million in 2006. The reversal of
$1.0 million of legal reserves related to our bankruptcy
and $1.0 million in insurance recoveries related to costs
of environmental matters that were incurred by the Company or
its predecessor recorded in 2006 drove the increase. These items
were partially offset by lower interest income from improved
cash management.
Income Tax Expense. The effective rate for
income tax is equal to the federal and state statutory rates
after considering the deductibility of state income taxes for
federal income taxes. The effective tax rate was 36.5% for 2006
as compared to 29.3% for 2005. The lower rate in the prior year
was primarily due to the significance of permanent differences
to income from continuing operations in 2005.
Discontinued Operations, Net of Income
Tax. Net income from discontinued operations
increased by $3.8 million due primarily to the gain on the
sale of our Venezuelan business ($4.8 million, net of
income tax) offset by the losses from the partial year operation
of that business when compared to the full year of operations in
2005. The third and fourth quarters were seasonally the
strongest operating quarters for the business sold in October
2006.
Net Income. Net income increased
$80.4 million in 2006 over 2005 to $92.3 million due
to the reasons noted above.
Based on past performance and current expectations, we believe
that cash generated from operations and our ability to access
capital markets will satisfy the working capital needs, capital
expenditures, stock repurchases and other liquidity requirements
associated with our operations in the near term. Our funding
requirements include capital expenditures (including new barge
purchases), vessel and barge fleet maintenance, interest
payments and other working capital requirements. Our primary
sources of liquidity are cash generated from operations,
borrowings under our revolving credit facility, sale and
leaseback transactions for productive assets and, to a lesser
extent, barge scrapping activity and cash proceeds from the sale
of non-core assets.
Our cash operating costs consist primarily of purchased
services, materials and repairs, fuel, labor and fringe benefits
and taxes (collectively presented as Cost of Sales on the
consolidated statements of operations) and selling, general and
administrative costs.
Capital expenditures are a significant use of cash in our
operations totaling $109.3 million in the year ended
December 31, 2007 for property additions and capital
expenditures (which included $4.5 million for the
acquisition of certain dry hopper barges on which a pre-existing
operating lease had expired). We also expended
$15.6 million for towboats and certain inventoried assets
in the McKinney acquisition, $6.2 million for the
investment in Summit and $4.3 million for the acquisition
of EBDG. Capital is expended primarily to fund the building of
new barges to replace retiring barges, to increase the useful
life or enhance the value of towboats and barges, and to replace
or improve equipment used in manufacturing or other lines of
business. Other capital expenditures are made for vessel and
facility improvements and maintenance that extend the useful
life or enhance the function of our assets. Sources of funding
for these capital expenditures and other investments include
cash flow from operations, borrowings under the bank revolving
credit facility and, to a lesser extent, proceeds from barge
scrapping activities.
On April 27, 2007, the Company entered into an agreement
which provided for a five-year $400,000 revolving credit
facility with a $200,000 expansion option. The new revolving
credit facility replaced the previous $250,000 asset-based
revolver that was entered into on February 11, 2005. On
August 17, 2007, the Company elected to utilize the
$200,000 expansion option under its revolving credit facility
and obtained lender commitments for the additional $200,000
which increased the total facility size to $600,000. As of
December 31, 2007, we had total indebtedness of
$439.8 million. During 2007, the Board of Directors
authorized the repurchase of up to $350 million of our
common stock. Advances of $300 million on the
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revolving credit facility were used to fund stock repurchased in
the open market. At December 31, 2007 the Company had
$50 million authorized but unpurchased under the stock
repurchase program.
The revolving credit facility contains certain covenants
including a total leverage ratio, fixed charge coverage ratio
and minimum net worth as defined in the facility loan agreement.
Through March 31, 2008 the Company’s total leverage
ratio as defined in the revolving credit facility cannot be
greater than 3.25 to 1.0. However, beginning April 1, 2008
the total leverage ratio is reduced per the amended agreement to
3.0 to 1.0. This reduction in the maximum total leverage ratio
may limit the company’s ability to borrow the full amount
of the revolving credit facility if the sum of adjusted EBITDA
for each of the prior-four-quarters is not sufficient. If the
Company does not remain in compliance with these covenants or if
the Company does not obtain an applicable waiver from such
noncompliance, the Company may not be able to borrow additional
funds when and if it becomes necessary, it may incur higher
borrowing costs and face more restrictive covenants, and the
lenders could accelerate all amounts outstanding to be
immediately due and payable. For further discussion on these
covenants, see “Item 1A — Risk
Factors.” The revolving credit facility is secured by the
tangible and intangible assets of the Company.
Under the April 27, 2007 credit agreement, interest rates
vary based on a quarterly determination of the Company’s
consolidated leverage ratio, as defined by the agreement. Based
on the calculation the LIBOR margin that the Company is
obligated to pay on borrowings under the agreement is currently
150 basis points, consistent with the prior quarter’s
computation.
Net cash provided by operating activities was
$115.8 million in the year ended December 31, 2007, as
compared to $135.8 million in the year ended
December 31, 2006. The
year-over-year
decrease in net cash provided by operating activities in 2007 as
compared to 2006 was due primarily to the $47.9 million
decline in net income, offset by debt retirement expenses of
$23.9 million which are a financing cash flow.
Net cash provided by operating activities during the year ended
December 31, 2007 was used primarily to fund capital
expenditures and the investments in McKinney, Summit and EBDG.
Net cash used in investing activities was $131.3 million in
the year ended December 31, 2007 and $63.9 million in
the year ended December 31, 2006. Capital expenditures were
$109.3 million and $90.0 million in the years ended
December 31, 2007 and 2006, respectively. In addition, net
cash used in investing activities included $15.6 million
for the acquisition of towboats and certain assets in the
McKinney acquisition, $6.2 million for the investment in
Summit Contracting and $4.3 million for the investment in
EBDG.
Proceeds from property dispositions were $7.4 million in
the year ended December 31, 2007. A gain on property
dispositions in 2007 of $3.4 million has been recorded as a
reduction of operating expense in the consolidated income
statements.
Net cash provided by financing activities was $15.4 million
in the year ended December 31, 2007, compared to net cash
used in financing activities of $80.7 million in the year
ended December 31, 2006. Significant financing activities
in 2007 consisted of borrowing on the revolving credit facility
of $439.0 million for repayment of $119.5 million in
Senior Notes and the related tender premium and debt costs of
$21.0 million. Additionally, $300.1 million of cash
was used to purchase the Company’s common stock under the
Stock Repurchase Program. Net other financing activities in
2007, a provision of $1.2 million, resulted from the excess
of the tax benefit of share based compensation and the exercise
of stock options over uses associated with the acquisition of
treasury shares from “cashless exercises” under the
share based compensation program, change in outstanding checks
and other financing activities. Cash provided by financing
activities in 2007 also included the $15.9 million in
proceeds of a sale and leaseback transaction involving 28
barges. The gain on the sale leaseback transaction was deferred
and will be recognized as a reduction of lease expense over the
ten-year term of the lease. Cash used by financing activities in
2006 of $81.9 million resulted primarily from
$70.0 million of repayments of the credit facility and
$10.5 million of the Senior Notes.
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Contractual
Obligations and Commercial Commitment Summary
A summary of the Company’s known contractual commitments
under debt and lease agreements as of December 31, 2007,
appears below.
The interest rate and term assumptions used in these
calculations are contained in the following table.
For additional disclosures regarding these obligations and
commitments, see Note 3 to the accompanying consolidated
financial statements.
The seasonality of our business is discussed in Item 1,
Part I, under “Seasonality”.
As of the beginning of 2007 we adopted Financial Accounting
Standards Board (“FASB”) Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes — an
interpretation of FASB Statement No. 109”
(“FIN 48”). FIN 48 requires that we
recognize in our financial statements the impact of tax
positions if those positions are more likely than not of being
sustained on audit, based on the technical merits of the
positions. There was no cumulative effect of the change in
accounting principle recorded as an adjustment to opening
retained earnings, due primarily to fresh start accounting for
tax purposes adopted upon the emergence of the Company’s
predecessor from bankruptcy in January 2005. The Company
currently has no unrecorded tax benefits. The Company also has
no amounts accrued for interest and penalties. Tax years 2005
and forward remain open to examination by the major taxing
jurisdictions to which we are subject.
In September 2006 the FASB issued SFAS No. 157, Fair
Value Measurements (“SFAS 157”). SFAS 157
defines fair value, establishes a framework for measuring fair
value in accordance with generally accepted accounting
principles, and expands disclosures about fair value
measurements. The standard defines fair value as the price
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants (knowledgeable,
independent, able, willing parties) at any measurement date. The
standard
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assumes highest and best use defined from the perspective of a
market participant. Transactions costs are excluded from fair
value. The standard creates a hierarchy of fair value
determination where Level 1 is active market quotes for
identical assets, Level 2 is active market quotes for
similar assets and Level 3 is for fair value determined
through unobservable inputs. Fair value must account for risk
(those inherent in the valuation process, risk that an
obligation may not be fulfilled) and for any restriction on an
asset if a market participant would consider in valuation. This
Statement does not eliminate the practicability exceptions to
fair value measurements in many accounting pronouncements
including APB Opinion No. 29, “Accounting for
Nonmonetary Transactions”, FASB Statements No. 87,
“Employers’ Accounting for Pensions”,
No. 106, “Employers’ Accounting for
Postretirement Benefits Other Than Pensions”, No. 107,
“Disclosures about Fair Value of Financial
Instruments”, No. 141, “Business
Combinations”, No. 143, “Accounting for Asset
Retirement Obligations”, No. 146, “Accounting for
Costs Associated with Exit or Disposal Activities”, and
No. 153, “Exchanges of Nonmonetary Assets”. The
provisions of SFAS 157 are effective for fiscal years
beginning after November 15, 2007. SFAS 157 transition
provisions for certain instruments requires cumulative-effect
adjustments to beginning retained earnings. The Company has no
instruments requiring this treatment. Therefore, the impact of
SFAS 157 on the Company will be prospective through
earnings or other comprehensive income, as appropriate. We do
not believe that the implementation of SFAS 157 will have a
significant impact on the Company’s financial statements on
adoption. Subsequent to its adoption fair value measurements
made by the Company in preparing its financial reporting will be
made per its provisions, where required, but are not expected to
materially impact the financial position or results of
operations of the Company.
In February 2007 the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities
(“SFAS 159”). SFAS 159 allows entities to
voluntarily choose, at specified election dates, to measure many
financial assets and financial liabilities (as well as certain
non-financial instruments that are similar to financial
instruments) at fair value (the “fair value option”).
The election is made on an
instrument-by-instrument
basis and is irrevocable. If the fair value option is elected
for an instrument, SFAS 159 specifies that all subsequent
changes in fair value for that instrument shall be reported in
earnings. SFAS 159 is effective as of the beginning of an
entity’s first fiscal year that begins after
November 15, 2007. As of December 31, 2007 we had not
yet adopted SFAS 157 and, therefore, were not eligible to
early adopt SFAS 159. We do not intend to elect the fair
value option allowed by this standard for any pre-existing
financial assets or liabilities and, therefore, we do not
believe that adoption of SFAS 159 will have a significant
effect on the Company’s financial statements on adoption.
In December 2007 the FASB issued SFAS No. 141 revised
2007 “Business Combinations”
(“SFAS 141(R)”). SFAS 141(R) applies to all
transactions or other events in which an entity obtains control
of one or more businesses. It does not apply to formation of a
joint venture, acquisition of an asset or a group of assets that
does not constitute a business or a combination between entities
or businesses under common control. SFAS 141(R) is
effective as of the beginning of an entity’s first fiscal
year that begins after December 15, 2008. Early adoption of
SFAS 141(R) is prohibited. SFAS 141(R) retains the
fundamental requirements in Statement 141 that the acquisition
method of accounting (which Statement 141 called the purchase
method) be used for all business combinations. SFAS 141(R)
retains the guidance in Statement 141 for identifying and
recognizing intangible assets separately from goodwill.
SFAS 141(R) requires an acquirer to recognize the assets
acquired, the liabilities assumed, and any non-controlling
interest in the acquiree at the acquisition date, measured at
their fair values as of that date, with limited exceptions
specified in the Statement. That replaces Statement 141’s
cost-allocation process. SFAS 141(R) requires
acquisition-related costs and restructuring costs that the
acquirer expected but was not obligated to incur to be
recognized separately from the acquisition. It also requires
entities to measure the non-controlling interest in the acquiree
at fair value will result in recognizing the goodwill
attributable to the non-controlling interest in addition to that
attributable to the acquirer. This Statement requires an
acquirer to recognize assets acquired and liabilities assumed
arising from contractual contingencies as of the acquisition
date, measured at their acquisition-date fair values. Early
adoption of SFAS 141(R) is prohibited. The Company will
apply the provisions of the standard to future acquisitions, as
required.
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In December 2007 the FASB issued SFAS No. 160
“Non-controlling Interests in Consolidated Financial
Statements” (“SFAS 160”). SFAS 160
requires that the ownership interests in subsidiaries held by
third parties presented in the consolidated statement of
financial position within equity, but separate from the
parent’s equity. The amount of consolidated net income
attributable to the parent and to the non-controlling interest
be clearly identified and presented on the face of the
consolidated statement of income. Changes in a parent’s
ownership interest while the parent retains its controlling
financial interest must be accounted for as equity transactions.
SFAS 160 requires that entities provide sufficient
disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the non-controlling
owners. SFAS 160 is effective as of the beginning of an
entity’s first fiscal year that begins after
December 15, 2008. Early adoption of SFAS 160 is
prohibited. We are still evaluating the expected impact of
SFAS 160 at this time.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect our reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and
expenses for the same period. Actual results could differ from
those estimates.
The accompanying consolidated financial statements have been
prepared on a going concern basis, which assumes continuity of
operations and realization of assets and settlement of
liabilities in the ordinary course of business. Critical
accounting policies that affect the reported amounts of assets
and liabilities on a going concern basis include amounts
recorded as reserves for doubtful accounts, reserves for
obsolete and slow moving inventories, pension and
post-retirement liabilities, incurred but not reported medical
claims, insurance claims and related insurance receivables,
deferred tax liabilities, assets held for sale, revenues and
expenses on special vessels using the
percentage-of-completion
method, environmental liabilities, valuation allowances related
to deferred tax assets, expected forfeitures of share-based
compensation, liabilities for unbilled barge and boat
maintenance, liabilities for unbilled harbor and towing services
and depreciable lives of long-lived assets.
The primary source of the Company’s revenue, freight
transportation by barge, is recognized based on
percentage-of-completion.
The proportion of freight transportation revenue to be
recognized is determined by applying a percentage to the
contractual charges for such services. The percentage is
determined by dividing the number of miles from the loading
point to the position of the barge as of the end of the
accounting period by the total miles from the loading point to
the barge destination as specified in the customer’s
freight contract. The position of the barge at accounting period
end is determined by locating the position of the boat with the
barge in tow through use of a global positioning system. The
recognition of revenue based upon the percentage of voyage
completion results in a better matching of revenue and expenses.
The deferred revenue balance in current liabilities represents
the uncompleted portion of in-process contracts.
The recognition of revenue generated from contract rate
adjustments occurs based on the percentage of voyage completion
method. The rate adjustment occurrences are defined by contract
terms. They typically occur monthly or quarterly, are based on
recent historical inflation measures, including fuel, labor
and/or
general inflation, and are invoiced at the adjusted rate levels
in the normal billing process.
The recognition of revenue due to shortfalls on take or pay
contracts occurs at the end of each declaration period. A
declaration period is defined as the time period in which the
contract volume obligation was to be met. If the volume was not
met during that time period, then the amount of billable revenue
resulting from the failure to perform will be calculated and
recognized.
Day rate plus towing contracts have a twofold revenue stream.
The day rate, a daily charter rate for the equipment, is
recognized for the amount of time the equipment is under charter
during the period. The towing portion of the rate is recognized
once the equipment has been placed on our boat to be moved for
the customer.
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Revenue from unit tow equipment day rate contracts is recognized
based on the number of days services are performed during the
period.
Beginning in the second quarter of 2007, ocean-going vessels
became a material portion of the production volume of the
manufacturing segment. These vessels are significantly more
expensive and take substantially longer to construct than
typical barges for use on the Inland Waterways system. The
percentage-of-completion
method of recognizing revenue and expenses is used related to
the construction of these longer-term production vessels. These
vessels have expected construction periods of over 90 days
in length and include ocean-going barges, which we currently
produce, and towboats, which we expect to begin producing in the
future.
Other marine manufacturing and marine service revenue is
recognized based on the completed contract method due to the
short term nature of contracts. Losses are accrued on any
contracts if manufacturing costs are expected to exceed
manufacturing contract revenue.
Harbor services, terminal, repair and other revenue are
recognized as services are provided.
Inventory is carried at the lower of cost or market, based on a
weighted average cost method. Our port services’ supplies
and parts inventory is carried net of reserves for obsolete and
slow moving inventories.
Harbor and towing service charges are estimated and recognized
as services are received. Estimates are based upon recent
historical charges by specific vendor for the type of service
charge incurred and upon published vendor rates. Service events
are recorded by vendor and location in our barge tracking
system. Vendor charges can vary based upon the number of boat
hours required to complete the service, the grouping of barges
in vendor tows and the quantity of man hours and materials
required. Our management believes it has recorded sufficient
liabilities for these services. Changes to these estimates could
have a significant impact on our financial results.
Liabilities for insurance claim loss deductibles include
accruals for the uninsured portion of personal injury, property
damage, cargo damage and accident claims. These accruals are
estimated based upon historical experience with similar claims.
The estimates are recorded upon the first report of a claim and
are updated as new information is obtained. The amount of the
liability is based on the type and severity of the claim and an
estimate of future claim development based on current trends and
historical data. Our management believes it has recorded
sufficient liabilities for these claims. These claims are
subject to significant uncertainty related to the results of
negotiated settlements and other developments. As claims
develop, we may have to change our estimates, and these changes
could have a significant impact on our consolidated financial
statements.
Assets and liabilities of our defined benefit plans are
determined on an actuarial basis and are affected by the
estimated market value of plan assets, estimates of the expected
return on plan assets and discount rates. Actual changes in the
fair market value of plan assets and differences between the
actual return on plan assets and the expected return on plan
assets will affect the amount of pension expense ultimately
recognized, impacting our results of operations. The liability
for post-retirement medical benefits is also determined on an
actuarial basis and is affected by assumptions including the
discount rate and expected trends in health care costs.
Changes in the discount rate and differences between actual and
expected health care costs will affect the recorded amount of
post-retirement benefits expense, impacting our results of
operations. A 0.25% change in the discount rate would affect
pension expense by $0.2 million and post-retirement medical
expense by $0.03 million, respectively. A 0.25% change in
the expected return on plan assets would affect pension
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expense by $0.3 million. A 5% change in health care cost
trends would affect post-retirement medical expense by
$0.05 million.
We self-insured and self-administered the medical benefit plans
covering most of our employees for service dates before
September 1, 2005. We hired a third-party claims
administrator to process claims with service dates on or after
September 1, 2005. We remain self-insured up to $175,000
per individual, per policy year. We estimate our liability for
claims incurred by applying a lag factor to our historical
claims and administrative cost experience. A 10% change in the
estimated lag factor would have a $0.2 million effect on
operating income. The validity of the lag factor is evaluated
periodically and revised if necessary. Although management
believes the current estimated liabilities for medical claims
are reasonable, changes in the lag in reporting claims, changes
in claims experience, unusually large claims and other factors
could materially affect the recorded liabilities and expense,
impacting financial condition and results of operations.
Properties and other long-lived assets are reviewed for
impairment whenever events or business conditions indicate the
carrying amount of such assets may not be fully recoverable.
Initial assessments of recoverability are based on estimates of
undiscounted future net cash flows associated with an asset or a
group of assets. These estimates are subject to uncertainty. Our
significant assets were appraised by independent appraisers in
connection with our application of fresh-start reporting on
December 31, 2004. No impairment indicators were present at
December 31, 2007 or 2006.
Asset capitalization policies have been established by
management to conform to generally accepted accounting
principles. All expenditures for property, buildings or
equipment with economic lives greater than one year are recorded
as assets and amortized over the estimated economic useful life
of the individual asset. Generally, individual expenditures less
than $1,000 are not capitalized. An exception is made for
program expenditures, such as personal computers, that involve
multiple individual expenditures with economic lives greater
than one year. The costs of purchasing or developing software
are capitalized and amortized over the estimated economic life
of the software.
Repairs that extend the original economic life of an asset or
that enhance the original functionality of an asset are
capitalized and amortized over the asset’s estimated
economic life. Capitalized expenditures include major steel
re-plating of barges that extends the total economic life of the
barges, repainting the entire sides or bottoms of barges which
also extends their economic life or rebuilding boat engines,
which enhances the fuel efficiency or power production of the
boats.
Routine engine overhauls that occur on a one to three year cycle
are expensed when they are incurred. Routine maintenance of boat
hulls and superstructures as well as propellers, shafts and
rudders are also expensed as incurred. Routine repairs to
barges, such as steel patching for minor hull damage, pump and
hose replacements on tank barges or hull reinforcements, are
also expensed as incurred.
This MD&A includes certain “forward-looking
statements” that involve many risks and uncertainties. When
used, words such as “anticipate,” “expect,”
“believe,” “intend,” “may be,”
“will be” and similar words or phrases, or the
negative thereof, unless the context requires otherwise, are
intended to identify forward-looking statements. These
forward-looking statements are based on management’s
present expectations and beliefs about future events. As with
any projection or forecast, these statements are inherently
susceptible to uncertainty and changes in circumstances. The
Company is under no obligation to, and expressly disclaims any
obligation to, update or alter its forward-looking statements
whether as a result of such changes, new information, subsequent
events or otherwise.
See “Risk factors” in Item 1A, Part 1 of
this
Form 10-K
for a detailed discussion of important factors that could cause
actual results to differ materially from those reflected in such
forward-looking statements.
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The potential for actual results to differ materially from such
forward-looking statements should be considered in evaluating
our outlook.
Market risk is the potential loss arising from adverse changes
in market rates and prices, such as fuel prices and interest
rates, and changes in the market value of financial instruments.
We are exposed to various market risks, including those which
are inherent in our financial instruments or which arise from
transactions entered into in the course of business. A
discussion of our primary market risk exposures is presented
below.
For the year ended December 31, 2007, fuel expenses for
fuel purchased directly and used by our boats represented 20.9%
of our transportation revenues. Each one cent per gallon rise in
fuel price increases our annual operating expense by
approximately $0.8 to $0.9 million. We partially mitigate
our direct fuel price risk through contract adjustment clauses
in our term contracts. Contract adjustments are deferred either
one quarter or one month, depending primarily on the age of the
term contract. We have been increasing the frequency of contract
adjustments to monthly as contracts renew to further limit our
timing exposure. Additionally, fuel costs are only one element
of the potential movement in spot market pricing, which
generally respond to only long-term changes in fuel pricing. All
of our grain movements, which comprised 24.8% of our total
transportation segment revenues in 2007, are priced in the spot
market. Despite these measures fuel price risk impacts us for
the period of time from the date of the price increase until the
date of the contract adjustment (either one month or one
quarter), making us most vulnerable in periods of rapidly rising
prices. During the fourth quarter of 2007, our average price per
gallon for fuel rose to $2.52 per gallon from $2.21 in the third
quarter and $1.88 per gallon in the prior year. We were unable
to recover approximately $12 million of the direct fuel
price increase in the fourth quarter of 2007. We also believe
that fuel is a significant element of the economic model of our
operating partners on the river, with increases passed through
to us in the form of higher costs for external fleeting,
shifting and towing. From time to time we have utilized
derivative instruments to manage volatility in addition to our
contracted rate adjustment clauses. In December 2007, we entered
into fuel price swaps with commercial banks for
200,000 gallons per month for each of the first six months
of 2008, or a total of 1.2 million gallons of our expected
fuel usage at $2.605 per gallon. These derivative instruments
have been designated and accounted for as cash flow hedges, and
to the extent of their effectiveness, changes in fair value of
the hedged instrument will be accounted for through Other
Comprehensive Income until the fuel hedged is used at which time
the gain or loss on the hedge instruments will be recorded as
fuel expense. At December 31, 2007, a net liability of
$0.03 million has been recorded in the consolidated balance
sheet and the loss on the hedge instrument recorded in Other
Comprehensive Income. We may increase the quantity hedged or add
additional months based upon active monitoring of fuel pricing
outlooks by the management team.
At December 31, 2007, we had $439.0 million of
floating rate debt outstanding, which represented the
outstanding balance of the revolving credit facility. If
interest rates on our floating rate debt increase significantly,
our cash flows could be reduced, which could have a material
adverse effect on our business, financial condition and results
of operations. A 100 basis point increase in interest
rates, at our existing debt level, would increase our cash
interest expense by approximately $4.4 million annually. At
December 31, 2007 the Company had only the floating rate
debt of $439.0 million and a term note payable of
$0.8 million arising from the EBDG acquisition. The term
note bears a fixed interest rate of 5.5%.
The Company currently has no exposure to foreign currency
exchange risk.
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The consolidated financial statements appearing in this filing
on
Form 10-K
have been prepared by management, which is responsible for their
preparation, integrity and fair presentation. The statements
have been prepared in accordance with accounting principles
generally accepted in the United States, which requires
management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and
accompanying notes.
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined
in
Rules 13a-15(f)
and
15d-15(f) of
the Securities Exchange Act of 1934, as amended). Our internal
control system was designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles.
All internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined
to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation.
Further, because of changes in conditions, the effectiveness of
an internal control system may vary over time.
Under the supervision and with the participation of our
management, including our Chief Executive Officer (CEO) and
Chief Financial Officer (CFO), we conducted an evaluation of the
effectiveness of our internal control over financial reporting
as of December 31, 2007 based on the framework in Internal
Control — Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
Based on that evaluation, our management concluded our internal
control over financial reporting was effective to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with generally accepted
accounting principles as of December 31, 2007.
Ernst & Young LLP, an independent registered public
accounting firm, has audited and reported on the consolidated
financial statements of American Commercial Lines Inc. and the
effectiveness of our internal control over financial reporting.
The reports of Ernst & Young LLP are contained in this
Annual Report.
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Board of Directors and Stockholders American Commercial Lines
Inc.
We have audited American Commercial Lines’ internal control
over financial reporting as of December 31, 2007, based on
criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). American Commercial
Lines’ management is responsible for maintaining effective
internal control over financial reporting, and for its
assessment of the effectiveness of internal control over
financial reporting included in the accompanying
“Management’s Report on Internal Control over
Financial Reporting”. Our responsibility is to express an
opinion on the company’s internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, American Commercial Lines maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2007, based on the COSO
criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of American Commercial Lines Inc. as
of December 31, 2007 and December 31, 2006, and the
related consolidated statements of income, stockholder’s
equity, and cash flows for each of the three years in the period
ended December 31, 2007 and our report dated
February 22, 2008 expressed an unqualified opinion thereon.
Louisville, Kentucky
February 22, 2008
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Board of Directors and Stockholders American Commercial Lines
Inc.
We have audited the accompanying consolidated balance sheets of
American Commercial Lines Inc. as of December 31, 2007 and
2006, and the related consolidated statements of income,
shareholders’ equity, and cash flows for each of the three
years in the period ended December 31, 2007. Our audits
also included the financial statement schedule listed at in the
Index at Item 15(a)(2). These financial statements and
schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of American Commercial Lines Inc. at
December 31, 2007 and 2006, and the consolidated results of
their operations and their cash flows for each of the three
years in the period ended December 31, 2007, in conformity
with U.S. generally accepted accounting principles. Also,
in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 1 to the consolidated financial
statements, the Company adopted the provisions of Financial
Accounting Standards Board Statements of Financial Accounting
Standards No. 123R, Share-Based Payment, and
No. 158, Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106, and 132(R), in 2006.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of American Commercial Lines Inc. internal control
over financial reporting as of December 31, 2007, based on
criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 22, 2008
expressed an unqualified opinion thereon.
/s/ ERNST &
YOUNG LLP
Louisville, Kentucky
February 22, 2008
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AMERICAN
COMMERCIAL LINES INC.
CONSOLIDATED
INCOME STATEMENTS
The accompanying notes are an integral part of the consolidated
financial statements.
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AMERICAN
COMMERCIAL LINES INC.
CONSOLIDATED
BALANCE SHEETS
The accompanying notes are an integral part of the consolidated
financial statements.
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AMERICAN
COMMERCIAL LINES INC.
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
The accompanying notes are an integral part of the consolidated
financial statements.
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AMERICAN
COMMERCIAL LINES INC. CONSOLIDATED
STATEMENTS
OF CASH FLOWS
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