American Commercial Lines 10-K 2010
Documents found in this filing:
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Commission file number: 000-51562
AMERICAN COMMERCIAL LINES INC.
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
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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 whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants 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):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes o No þ
Aggregate market value of common stock held by non-affiliates at June 30, 2009 $146,744,518
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
APPLICABLE ONLY TO REGISTRANTS 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
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 managements 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.
American Commercial Lines Inc. (ACL or the Company), a Delaware corporation, is one of the largest and most diversified inland 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, primarily for brown-water use. ACL also provides certain naval architectural services to its customers. ACL was incorporated in 2004.
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 free of charge through the Investor Relations link on the website.
In addition, the following information is also available on the website.
We currently operate in two primary business segments, transportation and manufacturing. We are the third largest provider of dry cargo barge transportation and second largest provider of 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 12.5% of the total inland dry cargo barge fleet and 13.1% of the total inland liquid cargo barge fleet as of December 31, 2008, according to Informa Economics, Inc., a private forecasting service (Informa). We do not believe that these percentages have varied significantly during 2009, but competitive surveys are normally not available until March of each year. Our manufacturing segment is the second largest manufacturer of dry cargo and tank barges in the United States according to year end 2008 data from Criton Corporation, publisher of River Transport News (Criton). Comparative financial information regarding our transportation, manufacturing and other business segments is included in both the notes to our consolidated financial statements and in Managements Discussion and Analysis of Financial Conditions and Results of Operations. We also operate a smaller All other segments that consists of our services company, Elliott Bay Design Group LLC (Elliott Bay). This financial information includes for each segment, as defined by generally accepted accounting
principles, revenues from external customers, a measure of profit or loss and total assets for each of the last three fiscal years.
During the fourth quarter of 2007, ACL acquired a naval architecture and marine engineering firm, Elliott Bay, which provides architecture, engineering and production support to its many customers in the commercial marine industry. Elliot Bay also provides ACL with expertise in support of its transportation and manufacturing businesses. Elliott Bay is not significant to the primary operating segments of ACL.
During the second quarter of 2008, we acquired the remaining ownership interests of Summit Contracting, LLC (Summit). During 2007 ACL had made an investment equal to 30% ownership in this entity, Summit provided environmental and civil construction services to a variety of customers. Summit was sold in the fourth quarter of 2009 and is excluded from segment disclosures due to its reclassification to discontinued operations in all periods presented.
Our transportation segments 2009 revenues of $620.9 million represented 73.4% of consolidated revenue. In 2009 our transportation segment transported a total of approximately 37.1 billion ton-miles, with 34.0 billion ton-miles transported under affreightment contracts and 3.1 billion ton-miles transported under towing and day rate contracts. In total, this was a decrease of 2.4 billion ton-miles or 6.0% compared to 2008. The decreased ton-miles were produced with an average fleet that was 6.1% smaller than the prior year. We believe that ton-miles, which are computed based on the extension of tons by the number of miles transported, are the best available volume measurement for the transportation business and are a key part of how we measure our performance.
Our operations are tailored to service a wide variety of shippers and freight types. We provide additional value-added services to our customers, including third-party logistics through our BargeLink LLC joint venture. Our operations incorporate advanced fleet management practices and information technology systems which allow 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 shippers need for capacity, specialized equipment, timing and geographic coverage. Primarily as a result of strong customer demand relative to barge industry capacity, average freight rates for commodities moved under term contracts increased significantly during the period from 2003 to 2006. Due to the expected continued retirement of aged barge capacity during the next several years, we anticipate that the pricing on term contract renewals over the longer term will be flat to slightly positive during the same period, although we can make no assurance that this will occur. The current economic recession which began in the fall of 2008 reduced freight demand relative to capacity, resulting in decreased prices on both contract renewals and spot contracts since the beginning of the fourth quarter 2008. The recession also continues to significantly negatively impact our revenue mix, as many of our customers in higher margin commodities such as metals and liquid cargoes are moving less freight than in pre-recession periods.
Spot rates, primarily for grain and for a small portion of our coal shipments have also been generally higher over the last five years. However, these spot rates have been and are expected to continue to be more volatile within and across years. Grain 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. More recently, we have also seen a significant impact on liquid barge spot business as the decline in industry demand has dramatically lowered customers desire to ensure barge availability through dedicated service contracts. This shift in liquid barge demand has led to far fewer unit tow and day rate service contracts. The influx of available barges formerly occupied in this dedicated service trade, has altered the supply/demand dynamics in the liquid market, placing downward pressure on liquid spot rates.
Our dry cargo barges transport a variety of bulk and non-bulk commodities. In 2009 grain was our largest class of dry cargo transported, accounting for 31% of our transportation revenue, followed by bulk and coal. The bulk commodities classification contains a variety of cargo segments including steel, 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% of our 2009 transportation revenue.
Jeffboat, our manufacturing segment, generated more than 25% or $215.5 million of our consolidated revenue in 2009. Located in Jeffersonville, Indiana, on the Ohio River, our manufacturing segment is, we believe, one of the largest inland shipyards in the United States. The manufacturing segment designs and manufactures barges and other vessels for Inland Waterways 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. The segment also offers technically advanced marine design and manufacturing capabilities for both inland and ocean service vessels. The manufacturing segment 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 the manufacturing segments most significant customers. We believe the synergy created by our transportation operations and our manufacturing and repair capabilities is a competitive advantage. Our vertical integration allows us to source barges at cost and permits optimization of manufacturing schedules and asset utilization between internal requirements and sales to third-party customers. Additionally, manufacturing segment 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 several years, some for more than 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. The contracts vary in duration. Some contracts provide guarantees for a percentage of the customers volume shipped in certain traffic lanes.
In 2009 our ten largest customers accounted for approximately 34.7% 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., Shell Chemical Company, Koch Industries, DuPont and Nova Chemicals, Inc. We also have a long-standing contractual relationship, extended during the emergence from bankruptcy in 2005, until 2015, with Louisiana Generating LLC, a subsidiary of NRG Energy, Inc. (LaGen) and Burlington Northern Santa Fe Railway (BNSF). Many of our customers have been significantly affected by the current recession and we anticipate that some of our customers may continue to struggle in 2010. We are continuing to closely monitor the creditworthiness of our portfolio. We did experience the bankruptcy of one of our liquids customers, which had been one of our top ten customers, early in 2009, resulting in cumulative bad debt expenses totaling $1.2 million recorded in late 2008 and early 2009. Additionally, the contract with the customer was rejected in bankruptcy. The lost business with this customer impacted both our revenue and margins in 2009.
In 2010, we anticipate that approximately 53% 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. Most of our multi-year contracts are set at a fixed price, with adjustment provisions for fuel, and, in many 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 refer to as the spot market. All of our grain freight has been priced in the spot market for the past four years. In 2009 the transportation segment generated approximately 70.5% 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 Companys barges, pushed primarily by the Companys towboats. These contracts are referred to as affreightment contracts.
Our dedicated service contracts typically provide for equipment specially configured to meet the customers 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, until the economic slowdown beginning late in 2008, typically used dedicated service contracts to ensure reliable supplies of specialized feedstocks to their plants. Petroleum distillates and fuel oils have historically also moved under unit tow contracts. Many dedicated service customers formerly also sought capacity in the spot market for peaking requirements. Since the beginning of the recession, much of this business has reverted to spot market pricing and the resultant over-supply of liquid barge capacity has driven spot rates down. 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 Companys boats and barges are leased to third parties who control the use (loading, unloading, and movement) of the vessels. During 2008, 2007 and 2006 we deployed additional barges to serve customers under charter/day rate contracts due to strong demand and attractive pricing for such service. The demand for such arrangements slackened significantly in 2009. We ended 2009 with 119 barges in dedicated service. An average total of 122, 155, and 152 tank barges or 33.0%, 40.5% and 40.3% of our average liquid tanker fleet in the years 2009, 2008 and 2007 respectively, were devoted to these non-affreightment contracts. The pricing attained for this type of service and the varying number of barges deployed drove charter and day rate revenue down 15.4% in 2009, up 17% in 2008 and up 52% in 2007, respectively, in comparison to the immediately preceding year.
The remaining revenues of the transportation segment (collectively non-affreightment revenues) are generated either by demurrage charges for customers delays, beyond contractually allowed days for loading and unloading, 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 Item 7. MD&A Key Operating Statistics.
Marine services revenue is earned for fleeting, shifting and cleaning services provided to third parties.
Outside towing revenue is earned by moving barges for other affreightment carriers at a specific rate per barge move.
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 customers specific replacement and growth strategy, and due to the long-lived nature of the equipment manufactured, the manufacturing segments customer base varies from year-to-year. Our transportation business is a significant customer of the manufacturing segment. In 2009, 2008 and 2007, our transportation segment accounted for 10%, 10% and 17%, respectively, of the manufacturing segments revenue before intercompany eliminations.
At December 31, 2009, the manufacturing segments approximate vessel backlog for external customers was $49 million compared to $212 million at December 31, 2008. 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 change in the backlog from 2008 to 2009 is a result of 2009 production of units that had been included in the prior year backlog and the following factors. During 2009 we had a total of $64.6 million in new orders and options exercised. We also had cancellations of $10 million of scheduled 2009 business, and cancellations of $30 million of scheduled 2010 business. At December 31, 2009, there were no legacy contracts remaining in the backlog. We sold an additional $27 million of new orders during January 2010 which increased the backlog to $76 million at January 31, 2010. All orders in the existing backlog are expected to be produced in 2010. The backlog also excludes our planned construction of internal replacement barges.
Steel is the largest component of our raw materials, representing 50% to 90% of the raw material cost, depending on steel prices and 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. Many of the contracts in our backlog contain steel price adjustments. Because of the volatile nature of steel prices, we generally pass back to our customers the cost of steel used in the production of our customers barges. 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 2009. In addition, some of our contracts signed since 2006 also contain labor and general inflation clauses which may also impact the revenue ultimately realized on the construction of the vessels. In the current environment steel vendors have been willing to set fixed prices for delivery over the first six months of 2010. This has allowed us to establish fixed steel prices in certain near-term contracts.
The economic recession has impacted the demand for new barge construction as reflected in our reduced backlog compared to December 31, 2008. Despite lower steel prices, the current demand for new barge construction is being negatively impacted by the availability and cost of capital to our potential customers. Demand is also being impacted by lower barge freight rates driven by the current excess barge industry capacity in comparison to demand, particularly in liquids. However, as more normal levels of demand return and capital becomes more accessible and less costly, we continue to believe that future demand for dry and liquid tank barges in the two to five year time horizon will be relatively strong driven primarily by the need for replacement of retiring dry covered hopper capacity. Industry data from Informa indicates that more than 30% of the dry cargo barges in service are more than 25 years old. The aging of the in-service dry fleet is expected to continue to drive demand for replacement dry barges. We expect to build at least 50 new covered dry hopper barges in 2010 as part of our plan to improve our fleet age.
Another continuing driver of new barge demand is the requirement 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 Companys tank barges have double hulls. There are, however, still some single-hull barges in operation within the industry. The ultimate realization of the replacement activity or the timing of the replacement will likely be impacted by overall tank barge demand as the current economic environment has allowed retirement of such barges without current need for replacement. We are continuing steps to right-size our manufacturing capacity to be more efficient and profitable through all economic cycles.
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 the period from the beginning of 2007 through 2008, we were able to maintain or improve the pricing on new barge orders, net of steel costs, in response to continued demand for new barge construction. Over the longer term, when we re-enter a period of strong demand for replacement barges, we plan to continue improving the pricing on our barges, net of steel. In response to the impact of the recession, we expect that in certain situations we may need to make limited price concessions in the near term to maintain production capacity in the manufacturing segment. We believe that this strategy will best position us for when more normal future demand returns, when we expect that we will again be able to improve pricing. Unlike prior years, we do not expect to negotiate multi-year new barge construction contracts in this period of low demand; rather, we intend to negotiate limited contract durations to maintain our pricing flexibility over the longer term. At the end of 2009, we have no remaining legacy vessels in our backlog. One unsigned option on 14 to 20 additional vessels or more than $31 million of revenues for our 2011 builds remains, which may extend the negative margin impact into 2011 if the legacy option is exercised. As a percent of total production, we do not expect that these vessels will be significant to our 2011 production margin.
Barges. As of December 31, 2009, our total transportation fleet was 2,510 barges, consisting of 1,765 covered dry cargo barges, 384 open dry cargo barges and 361 tank barges. We operate 441 of these dry cargo barges and 29 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. As of December 31, 2009, the average age of our covered dry cargo barges was 20 years, the average age of our dry open barges was 30 years and the average age of our tank barges was 22 years, which we believe is consistent with the industry age profile discussed in Item 1. The Business Competition.
Towboats. As of December 31, 2009, our barge fleet was powered by 123 Company-owned towboats and 17 additional towboats operated exclusively for us by third parties. This is nine less owned boats and three less chartered boats than we operated at December 31, 2008. 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 larger horsepower towboats 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 medium 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 canal, shuttle and harbor services. During 2009 we continued to assess our boat power needs. Based on that assessment we sold nine boats during the year. We currently have an additional 13 boats which are being actively marketed and are included in assets held for sale. A summary of the number of owned boats by power class is included in Item 7. MD&A Owned Boat Counts and Average Age by Horsepower Class.
To support our barge 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. 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. Late in 2009 our maintenance shop, formerly located in Louisville, Kentucky was physically relocated to Cairo, Illinois. At that time the Company also realigned its ACLT business into two regional divisions. The Southern Division, based in Harahan, Louisiana will include the Companys network south of Baton Rouge, Louisiana. The Northern Division, based in Cairo, Illinois will include the Companys network north of Baton Rouge, Louisiana.
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 on the BNSF and ship to inland utilities on our barges. ACLTs 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 ACLs towboats or is sold to third parties. Certain of our facilities also sublease land to vendors, such as fuel vendors, which reduces our costs and augments services available to our fleets and those of 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.
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, Louisiana, 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 our manufacturing segments barge and towboat repair facilities, ACLT vessel fleeting facilities and our manufacturing segments 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 allows 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.
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. According to Informa, we had the second largest covered dry cargo barge fleet in the industry with 17.5% of the industry capacity as of December 31, 2008. We do not expect the 2009 data to be significantly different when it is reported in March 2010. 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 open dry cargo barge service only cannot easily retrofit their open dry cargo barges with covers without significant expense, time and effort.
According to Informa, the Inland Waterways fleet peaked at 23,092 barges at the end of 1998. From 1999 to 2005 the Inland Waterways fleet size was reduced by 2,407 dry cargo barges and 54 liquid tank barges for a total reduction of 2,461 barges, or 10.7%. From that date through the end of 2008 the industry fleet, net of barges scrapped, increased by 225 dry cargo barges and 149 tank barges, ending 2008 at 18,014 dry and 2,991 liquid barges, for a total fleet size of 21,005, 9.0% below the 1998 level. During 2008 the industry fleet placed 917 new dry cargo barges into service while retiring 932 dry cargo barges and expanded the liquid cargo barge fleet by 34 barges. Competition is intense for barge freight transportation. The top five carriers (by fleet size) of dry and liquid barges comprise over 62% of the industry fleet in each sector as of December 31, 2008. 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.
TOP 5 CARRIERS BY FLEET SIZE*
(as of December 31, 2008)
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 domestic utility companies, industrial and coke producers and export markets; construction commodities such as cement, limestone, sand and gravel; 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, edible oils, bio-diesel and molasses.
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 barges available to load freight. Certain spot rate contracts, particularly for grain, are subject to significant seasonal and other fluctuations. Grain rates and volume demand are also reactive to the freight cost spreads for grain export between west coast ports and through the gulf. Demand in our liquid and bulk commodity markets has been significantly impacted by the current recession, negatively impacting price, business mix and margin. We are uncertain as to the extent and timing of a recovery in these markets which are key elements to improvement in our profitability. We continue to pursue currently available volume, with the most success in our grain and legacy coal markets, focusing on productivity, prudent capital investment and cost control to enable us to be ready to capitalize on market demand shifts. We continue to believe that barge transportation remains the lowest cost and most ecologically friendly provider of domestic transportation. We continue to provide quality services to our existing customers
and to seek new customers, particularly modal conversions which offer the significant cost advantage of barge transportation for commodities currently being transported primarily by rail and truck.
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 our manufacturing segments 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 our manufacturing segment for the manufacturing of liquid tank barges. In addition, certain other shipyards may be able to reconfigure to manufacture inland barges and related equipment.
Our transportation segments revenue stream within any year reflects the variance in seasonal demand, with revenues earned in the first half of the year lower than those earned in the second half of the year. Historically, unlike the current year, grain has experienced the greatest degree of seasonality among all the commodity segments, with demand generally following the timing of the annual harvest. Increased demand for grain movement generally begins around 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. The transportation of grain in the spot market, including demurrage charges, represented 31% of our annual total transportation segment revenues for 2009 compared to 21% in 2008, despite shipping in excess of one-third more ton-miles in 2009. Average grain tariff rates for the mid-Mississippi River, which we believe is generally a directional indicator of the total market, were 337% for the year ended December 31, 2009, and 522% for the year ended December 31, 2008. The unusual harvest conditions in 2009 resulted in rates that were the lowest since 2005 and were, on average, 40% below the prior year and 15% below the average of the prior five years. The annual differential between peak and trough rates for this river segment has averaged more than 123% a year over the five prior years. We did not see the normal compressed harvest season rates in 2009 as the differential was only 68%. Our achieved grain pricing, across all river segments, was down 22% and 25% in the quarter and year ended December 31, 2009.
The chart below depicts the seasonal movements in what we believe to be a directionally 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.
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.
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. The seasonal reduction in demand also permits scheduling major boat maintenance exacerbating higher costs during that period.
Our manufacturing segments costs are also subject to seasonal variations. Costs may increase with seasonal precipitation and temperatures below 20 degrees, as extra shifts and overtime are required in certain cases to maintain production schedules.
The following is a list of our executive officers as of February 28, 2010, their ages as of such date and their positions and offices.
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 was previously Senior Vice President Sales and Marketing of ACL since November 2005. Mr. Ryan has more than 28 years of combined experience in logistics, sales, marketing and customer service. He spent approximately 22 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 McCollisters Transportation Systems.
Thomas R. Pilholski was named Senior Vice President and Chief Financial Officer of the Company in March 2008. Prior to joining the Company, Mr. Pilholski served as Chief Executive Officer of S3I, LLC (August 2005 to March 2008), Chief Financial Officer and Senior Vice President of EaglePicher Corporation (February 2002 to July 2005), Chief Financial Officer of Honeywell Consumer Products Group and other executive positions at Honeywell (June 1998 through February 2002), Chief Financial Officer of Zimmer Orthopaedic Division, a subsidiary of Bristol Myers Squibb (1992-1997), Director of BMS Audit (1988-1992) and various positions with Price Waterhouse (1977-1988). Mr. Pilholski earned his B.S. and Masters in Accounting Degree from the State University of New York at Binghamton and is a Certified Public Accountant.
Dawn R. Landry was named Senior Vice President and General Counsel in May 2008. Ms. Landry previously served as Vice President and Chief Operating Officer for Formula Telecom Solutions, Inc., a provider of operating, customer management, billing systems and solutions for telecommunications service and content providers. Ms. Landry served as an attorney with Morris, Manning & Martin, LLP, a commercial law firm representing clients throughout the U.S., and was also an attorney with Blackwell Sanders Peper Martin, LLP, a commercial law firm in the Midwest. Ms. Landry earned her J.D. degree from Creighton University.
Richard W. Spriggle was named Senior Vice President of Human Resources in November 2008. Prior to joining the Company, Mr. Spriggle worked for eleven years at Dana Corporation and served most recently as Vice President Human Resources, Vice President Administration, Global Y2K Project Manager and Vice President of Operations for North America for its Off-Highway division. Prior to that time, he worked for Ingersoll Rand, Clark Equipment Company and Westinghouse Electric Corporation in various roles of increasing responsibility. These roles ranged from financial positions early in his career to general management positions later in his career. Mr. Spriggle earned his M.B.A. degree in Finance from Fairleigh Dickinson University of New Jersey, a B.S.B.A. degree in Accounting from Shippensburg University of Pennsylvania and completed the Columbia University Executive Management program.
Collective bargaining agreements. As of December 31, 2009, approximately 700, or 27%, of our employees were represented by unions. Approximately 675 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 shipyard facility under a collective bargaining agreement that is set to expire in April 2010. Discussions regarding a replacement contract are in process. The remainder of our unionized employees, approximately 25 positions at ACL Transportation Services LLCs 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 expires in December 2010.
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 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 Companys 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 also maintains excess liability coverage above the noted casualty risks. All costs of defense, negotiation and costs incurred in settling 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 national, state and local laws and regulations, as well as laws relating to the discharge of materials into the environment. Because such 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 for our vessels depend upon such factors as the commodity transported, the waters in which the vessel operates, the nationality of the vessels crew, the age of the vessel and our status as owner, operator or charterer. As of December 31, 2009, 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, Environmental Protection Agency, federal laws and state laws.
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 are subject to U.S. Coast Guard inspection and will be required to carry certificates of inspection once the associtated regulations are promulgated by the U.S. Coast Guard. Our dry cargo barges are not subject to
U.S. Coast Guard inspection requirements, but are now subject to Environmental Protection Agency inspection and reporting 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 companys 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.
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). Our VSP and our FSP have been approved and we have complied with both since June 30, 2004. 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 cleanup costs and damages 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 cleanup costs and damages 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, 2009, we had minimal reserves for environmental matters. Any cash expenditures that are necessary to comply with applicable environmental laws or to pay for any remediation efforts will therefore result in charges to earnings if not subject to insurance claims. 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 Item 3. Legal Proceedings Environmental Litigation.
Our vessel operations are primarily regulated by the U.S. Coast Guard for occupational health and safety standards. Our shore operations are subject to the U.S. Occupational Safety and Health Administration regulations. As of December 31, 2009, 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 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. Our trademark and tradename registrations in the United States are for a ten year period and are renewable every ten years, prior to their respective expirations, as long as they are used in the regular course of trade. We believe we have current intellectual property rights sufficient to conduct our business.
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
The global economic crisis which began in 2008 is likely to continue to have detrimental impacts on our business.
During the third quarter of 2008, a global economic crisis in the credit markets began to impact the equity markets and thus far has produced a global recession. Although we cannot predict the extent, timing and full ramifications of the crisis, we believe that, at a minimum, the following risks have been heightened.
Potential recession impacts Global demand for many of the products that are currently shipped by barge may be significantly diminished by a prolonged recession. Such loss of demand has and could continue to severely impact our revenues, costs and financial condition, as it may continue to result in an oversupply of
barges reducing the rates we are able to charge for our services. Such loss of demand could also result in tow-size and barge positioning inefficiencies and negatively impact revenue price/mix/volume as occurred during the year ended December 31, 2009.
Credit availability to our customers and suppliers We believe that many of our customers and suppliers, particularly customers of our manufacturing segment, rely on liquidity from operative global credit markets. If credit availability is restricted or interest rates increase significantly, demand for our products and services may be constricted, our costs may increase and we may not be able to enforce contracts or collect on outstanding invoices.
Planning risk Our ability to plan and forecast operating results and capital needs is lessened which could lead to lower operating efficiency.
Market risk We have significant costs associated with our pension plan, the cost of which is dependent on many factors including the return on plan assets. Plan assets declined significantly in 2008. Though plan assets increased in 2009 the combined two year return for 2008 and 2009 remained below the average assumed rate of return used for actuarial estimation purposes. Further declines in the value of plan assets or continued lower than assumed returns over time could increase required expense provisions and contributions under the plan. See Note 5 to the consolidated financial statements for the year ended December 31, 2009, for disclosures related to our employee benefit plans.
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 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. During the current recession overall freight demand, particularly in the liquid barge market, has declined substantially reducing the demand for dedicated service contracts. This decline in those contracts has resulted in an oversupply of liquid barges to serve liquid spot demand and has lowered the rates we can charge for that service.
Our industry has previously suffered from an oversupply of barges relative to demand for barging services. The economic crisis that began in the fall of 2008 has led to a temporary oversupply, particularly in the liquid business. We cannot currently estimate the likely duration of this oversupply. Such oversupply may recur due to a variety of factors, including a drop in demand, overbuilding, delay in scrapping or extending useful lives through refurbishing of barges approaching the end of their useful economic lives. We believe that approximately 25% of the industrys existing dry cargo barge fleet will need to be retired or refurbished due to age over the next three to seven years. If retirement occurs, demand for barge services returns to more normal levels and new builds do not replace retired capacity, we believe that barge capacity may be constrained. However, 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 until volume demand returns.
Yields from North American and worldwide grain harvests could materially affect demand for our barging services.
Demand for dry cargo barging in North America is significantly affected 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 and exchange rates. 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 and the exchange rate, 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 can lead to reduced freight rates. We cannot assure that historical levels of U.S. grain exports will continue in the future.
Diminishing demand for new barge construction may lead to a reduction in sales volume and prices for new barges.
The prices we have been able to charge for manufacturing segment production have fluctuated historically based on a variety of factors including our customers cost and availability of debt financing, 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. From 2007 through 2008, we increased the pricing on our barges, net of steel costs, in response to increased demand for new barge construction. Though we plan to continue increasing the longer term pricing on our barges, net of steel, in conjunction with the expected additional long-term demand for new barge construction as well as inflation of our costs, the current economic crisis has affected our customers need and ability to build new barges in the near-term. If demand for new barge construction diminishes or the recession deepens or extends we may not be able to maintain or increase pricing over our current levels.
Almost all of the contracts for Jeffboat production contain steel price adjustments, though in some recent contracts we have fixed steel prices, as vendors have been willing to commit to fixed prices over a six month window, though such commitments may not be enforceable. Although the price of steel has recently declined from peak levels, the price has been volatile in recent years. Due to the steel price adjustments in the contracts, the total price incurred by our customers for new barge construction has also varied. Some customers may consider steel prices when determining to build new barges resulting in fluctuating demand for new barge construction.
Higher fuel prices, if not recouped from our customers, could dramatically increase operating expenses and adversely affect profitability.
For the years ended December 31, 2009, 2008 and 2007, fuel expenses represented 19.8%, 25.4% and 20.9% of transportation revenues. 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 (effectively on approximately a 45 day delay basis) 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, particularly in periods of rapidly changing fuel prices. Negotiated spot rates may not fully recover fuel price increases. From time to time we hedge the expected cash flows from anticipated purchases of unprotected gallons through fuel price swaps. We choose how much fuel to hedge depending on the circumstances. However, we may not effectively control our fuel price risk and may incur fuel costs higher than the spot market price. At December 31, 2009, the market value of our fuel price swaps represented an asset of approximately $4.8 million. If there are no further changes in market value prior to settlement dates in 2010 and 2011, this amount would be credited to operations as the fuel is used.
Our operating margins are impacted by certain low margin legacy contracts and by spot rate market volatility for grain volume and pricing.
We 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 or negative margin due to our inability to fully recover fuel price increases through the contract though we have recently hedged expected 2010 fuel usage at prices that should provide positive 2010 margins for this contract. This concentration of low margin business was approximately $51.1 million, $43.1 million and $43.4 million of our total revenues in 2009, 2008 and 2007 respectively.
Additionally, all of our grain shipments since the beginning of 2006 have been 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, fluctuation of ocean freight rate spreads between the Gulf of Mexico and the Pacific Northwest and the extent of demand for dry barge services in the non-grain dry bulk market. The revenues generated under such contracts, therefore, ultimately may not cover inflation, particularly for wages and fuel, in any given period. These circumstances may reduce the margins we are able to realize on the contract grain movements during 2010. Revenues from grain volumes were 31%, 30% and 22% of our total transportation segment revenues in 2009, 2008 and 2007 respectively. We expect grain to decline as a percent of transportation revenue in 2010. Our legacy coal contract combined with the potential impact of the grain spot market may lead to declines in our operating margins which could reduce our profitability.
At the end of 2009, though we have no remaining legacy vessels in our manufacturing backlog, one unsigned option on 14 to 20 additional vessels, or more than $31 million of revenues for 2011 builds remains exercisable. If exercised this option may extend the negative margin impact into 2011. As a percent of total production, we do not expect that these vessels will be significant to 2011 production margin.
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 result in lock closures as well as 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. During 2008 the number of idle barge days due to high water conditions, primarily on the Illinois and Arkansas rivers, and due to the impacts of the three hurricanes which hit the Gulf Coast were up more than one and one-half times over the prior year, to almost 42,000 idle barge days. This was equivalent to not generating any revenue from approximately 115 barges for a full year. Idle weather-related barge days declined to approximately 17,500 days in 2009 which is a more normal level. Adverse weather conditions may also affect the volume of grain produced and harvested, as well as impact harvest timing and therefore pricing. In the event of a diminished harvest, the demand for barging services will likely decrease. Additionally, marine accidents involving our or others vessels may impact our ability to efficiently operate on the Inland Waterways. Such accidents, particularly those involving spills, can effectively close sections of the Inland Waterways to marine traffic. Our manufacturing segments waterfront facility is subject to occasional flooding. Its 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. The manufacturing operation lost approximately 40 production days in both 2009 and 2008.
Seasonal fluctuations in industry demand could adversely affect our operating results, cash flow and working capital requirements.
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 compression of capacity resulting from 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.
The aging infrastructure on the Inland Waterways may lead to increased costs and disruptions in our operations.
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 and repair outages. The delays caused by malfunctioning dams and locks or by closures due to repairs or construction may increase our operating costs, delay the delivery of our cargoes and create other operational inefficiencies. This could result in interruption of our service and lower revenues. Much of this infrastructure needs to be replaced, but federal government funding has historically been limited. Funding has been supplemented by diesel fuel user taxes paid by the towing industry. There can be no guarantee that government funding levels will be sufficient to sustain infrastructure maintenance and repair costs or that a greater portion of the costs will not be imposed on operators. Diesel fuel user taxes could be imposed which would increase our costs. A lockage fee could be imposed to supplement or replace the current fuel user tax. Such a fee could increase the Companys costs in certain areas affected by the lockage fee. We may not be able to recover increased fuel user taxes or such lockage fees through pricing increases.
The inland barge transportation industry is highly competitive; increased competition could adversely affect us.
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.
Global trade agreements, tariffs and subsidies could decrease the demand for imported and exported goods, adversely affecting the flow of import and export tonnage through the Port of New Orleans and other Gulf-coast ports and the demand for barging services.
The volume of goods imported through the Port of New Orleans and other Gulf-coast ports 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.
Our failure to comply with government regulations affecting the barging industry, or changes in these regulations, may cause us to incur significant expenses or affect our ability to operate.
The barging industry is subject to various laws and regulations, including national, state and local laws and regulations, 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 and require routine inspections, monitoring, recordkeeping and reporting respecting their
vessels and 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. Enacted regulations call for increased inspection of towboats. The United States Coast Guard has been instructed in Congressional hearings to complete interpretation of the new regulations. These interpretations could result in boat delays 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 operations, regulations and their interpretations may ultimately have a negative impact on the industry. Regulations 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.
In addition, changes in environmental laws impacting the shipping business, including the passage of climate change legislation or other regulatory initiatives that restrict emissions of greenhouse gases, may require costly vessel modifications, the use of higher-priced fuel and changes in operating practices that may not all be able to be recovered through increased payments from customers.
Our maritime operations expose us to numerous legal and regulatory requirements, and violation of these regulations could result in criminal liability against us or our officers.
Because we operate in marine transportation, we are subject to numerous environmental laws and regulations. Violations of these laws and regulations in the conduct of our business could result in fines, criminal sanctions or criminal liability against us or our officers.
The Jones Act restricts foreign ownership of our stock, and the repeal, suspension or substantial amendment of the Jones Act could increase competition on the Inland Waterways and have a material adverse effect on our business.
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, 2009, we believe that we are in compliance with the ownership requirements. The Jones Act continues to be in effect and has historically been supported by the U.S. Congress and the prior administrations. 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
We are named as a defendant in lawsuits and we are in receipt of other claims and we cannot predict the outcome of such litigation and claims which may result in the imposition of significant liability.
Litigation and claims are pending relating to a collision on July 23, 2008, involving one of American Commercial Lines LLCs tank barges that was being towed by DRD Towing and the motor vessel Tintomara, operated by Laurin Maritime, at Mile Marker 97 of the Mississippi River in the New Orleans area. (See Legal Proceedings). American Commercial Lines LLC filed an action in the United States District Court for the Eastern District of Louisiana seeking exoneration from or limitation of liability. All lawsuits filed against American Commercial Lines LLC are consolidated in this action. Claims under the Oil Pollution Act of 1990 (OPA 90) are also afforded an administrative process to settle such claims. American Commercial Lines
LLC was designated a responsible party under OPA 90, and the Company performed the cleanup and is responding to OPA 90 claims. We have made demand on DRD Towing and Laurin Maritime for cleanup, defense and indemnification. However, there is no assurance that DRD Towing and Laurin Maritime or any other party that may be found responsible for the accident will have the insurance or financial resources available to provide such defense and indemnification. We have various insurance policies covering pollution, property, marine and general liability. However, there can be no assurance that our insurance coverage will be adequate. See Our Insurance May Not Be Adequate to Cover Our Losses below. We cannot predict the outcome of this litigation which may result in the imposition of significant liability.
We are facing significant litigation which may divert management attention and resources from our business.
We are facing significant litigation and investigations relating to the above discussed collision. Defense against this litigation and cooperation with investigations may require us to spend a significant amount of time and resources that may otherwise be spent on management of our business. In addition, we may in the future be the target of similar litigation or investigations. This litigation or investigations or additional litigation or investigations may result in substantial costs and divert managements attention and resources, which may seriously harm our business.
We may not be adequately insured to cover losses from our operational risks, which could have a material adverse effect on our operations. While we believe that we have satisfactory insurance coverage for pollution, property, marine and general liability, in the event that costs exceed our available insurance or additional liability is imposed on us for which we are unable to seek reimbursement, our business and operations could be materially and adversely affected. We may not be able to continue to procure adequate insurance coverage at commercially reasonable rates in the future, and some claims may not be paid. In the past stricter environmental regulations and significant environmental incidents have led to higher costs for insurance covering environmental damage or pollution, and new regulations of incidents could lead to similar increases or even make this type of insurance unavailable.
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 one-third of our current dry cargo barges will have reached 30 years of age. Though we currently have just over 300 dry barges in use greater than 30 years old, once barges begin to reach 25 to 30 years of age the cost to maintain and operate them may be so high that it may be 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. We may not be able to generate sufficient sources of liquidity to fund necessary replacement capital needs. 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.
We have experienced work stoppages by union employees in the past, and future work stoppages may disrupt our services and adversely affect our operations.
As of December 31, 2009, approximately 700 employees were represented by unions. Most of these unionized employees (approximately 675 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 shipyard facility under a three-year collective bargaining agreement that expires in April 2010. Our remaining unionized employees (approximately 25
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 expires in December 2010. Although we believe that our relations with our employees and with the recognized labor unions are generally good, we cannot assure that we will be able to reach agreement on renewal terms of these contracts or that we will not be subject to work stoppages, other labor disruption or that we will be able to pass on increased costs to our customers in the future. If there were to be a prolonged work stoppage or strike at our shipyard facility, it could have a material impact on the Companys manufacturing segments operations and financial results.
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.
Our plans for capital investment and organic growth in our transportation business are predicated on efficiency improvements which we expect to achieve through a variety of initiatives, including balanced traffic lane density, minimizing empty barge miles, reduction in non-revenue generating stationary days, better power utilization and improved fleeting, among others. 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, 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 cash flows and borrowing facilities may not be adequate for our additional capital needs and our future cash flow and capital resources may not be sufficient for payments of interest and principal of our substantial indebtedness.
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. Capital may not be continuously available to us and may not be available on commercially reasonable terms. We may need more capital than may be available under the terms of the Credit Facility and therefore we would be required either to (a) seek to increase the availability under the 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 and principal on our substantial indebtedness would increase. We may not be able to increase the availability under the Credit Facility or to obtain other sources of financing on commercially reasonable terms. 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 boat and barge fleet and to meet our obligations, including our obligations to pay the principal and interest under our indebtedness.
A significant portion of our borrowings are tied to floating interest rates which may expose us to higher interest payments should interest rates increase substantially.
At December 31, 2009, we had approximately $154.5 million of floating rate debt outstanding, which represented the outstanding balance of the New Credit Facility. Each 100 basis point increase above the LIBOR interest rate in effect at December 31, 2009, would increase our cash interest expense by approximately $1.5 million.
The indenture and the Credit Facility impose significant operating and financial restrictions on our Company and our subsidiaries, which may prevent us from capitalizing on business opportunities.
The Credit Facility and the indenture impose significant operating and financial restrictions on us. These restrictions may limit our ability, among other things, to:
As a result of these covenants and restrictions, we may be limited in how we conduct our business and we may be unable to raise additional debt or equity financing to compete effectively or to take advantage of new business opportunities.
The Credit Facility contains financial covenants, including, among others, a limit on the ratio of debt to earnings before interest, taxes, depreciation, and amortization that are effective when remaining availability is less than 17.5% of total availability. Although none of our covenants are currently in effect based on our current borrowing levels, 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 springing covenants could result in a default. Upon the occurrence of an event of default, all amounts outstanding can be declared immediately due and payable and terminate all commitments to extend further credit. If the repayment of borrowings is accelerated, we cannot provide assurance that we will have sufficient assets to repay our credit.
The loss of one or more key customers, or material nonpayment or nonperformance by one or more of our key customers, could cause a significant loss of revenue and may adversely affect profitability.
In 2009 our largest customer accounted for approximately 7.4% of our revenue, and our largest ten customers accounted for approximately 34.7% of our revenue. Many of our customers have been significantly affected by the current recession and we anticipate that some of our customers may continue to struggle in 2010. 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 services they purchase from us and we were unable to redeploy that equipment on similar terms, or if one or more of our key customers fail to pay or perform, we could experience a significant loss of revenue. In early 2009 we experienced the bankruptcy of a liquids customer, which had been one of our top ten customers and we were not successful in maintaining any volume with the successor in bankruptcy of the former customer.
One or more of our facilities or equipment 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 manufacturing segments facility could disrupt or shut down our manufacturing activities. Our insurance may not be adequate to cover our resulting losses.
A temporary or permanent closure of the river to barge traffic in the Chicago area in response to the threat of Asian carp migrating into the Great Lakes may have an adverse affect on operations in the area.
The Company has numerous customers in the Chicago and Great Lakes areas that ship freight through certain locks in the Chicago area. In the event certain of these locks are permanently closed, these customers may use other means of transportation to ship their products. In the event there are temporary or periodic closures of these locks or other river closures in the area, the Company could experience an increase in operating costs, delay in delivery of cargoes and other operational efficiencies. Such interruptions of our
service could result in lower revenues. In the event barge transportation becomes impossible or impracticable for our Lemont facility, the Company may be forced to close the Lemont facility.
Interruption or failure of our information technology and communications systems, or compliance with requirements related to controls over our information technology protocols, could impair our ability to effectively provide our services or increase our information technology costs and could damage our reputation.
Our services rely heavily on the continuing operation of our information technology and communications systems, particularly our Integrated Barge Information System. We have experienced brief systems failures in the past and may experience brief or substantial failures in the future. Some of our systems are not fully redundant, and our disaster recovery planning does not account for all eventualities. The occurrence of a natural disaster, or other unanticipated problems at our facility at which we maintain and operate our systems could result in lengthy interruptions or delays in our services and damage our reputation with our customers.
Our transportation division employees are covered by federal maritime laws that may subject us to job-related claims in addition to those provided by state laws.
Many of our employees are covered by federal maritime laws, including provisions of the Jones Act, the Longshore and Harbor Workers Act and the Seamans 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.
The loss of key personnel, including highly skilled and licensed vessel personnel, could adversely affect our business.
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.
Failure to comply with environmental, health and safety regulations could result in substantial penalties and changes to our operations.
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 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. Failure to comply with these laws and regulations may trigger a variety of administrative, civil and criminal enforcement measures, including the assessment of civil and criminal penalties, the imposition of remedial obligations, assessment of monetary penalties and the issuance of injunctions limiting or preventing some or all of our operations. 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 the federal Clean Water Act, the Comprehensive Environmental Response, Compensation, and Liability Act
(CERCLA), the Resource Conservation and Recovery Act (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 release or threatened release, each person covered by the environmental laws may be held wholly responsible for all of the cleanup costs and damages. In addition, third parties may sue the owner or operator of a site or vessel for damage based on personal injury, property damage or other costs and cleanup costs, resulting from environmental contamination. Under OPA 90 owners, operators and bareboat charterers are jointly and severally strictly liable for the discharge of oil within the internal and territorial waters, and the 200-mile exclusive economic zone around the United States. Additionally, an oil spill could result in significant liability, including fines, penalties, criminal liability and costs for natural resource damages. Most states bordering on a navigable waterway have enacted legislation providing for potentially unlimited liability for the discharge of pollutants within their waters. As of December 31, 2009, we were involved in 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, 2009, we had no significant reserves for these environmental matters. Any cash expenditures required to comply with applicable environmental laws or to pay for any remediation efforts in excess of such reserves or insurance 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.
We are subject to, and may in the future be subject to disputes or legal or other proceedings that could involve significant expenditures by us.
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, contract disputes 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 Item 3. Legal Proceedings Environmental and Other Litigation.
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, Lemont, Illinois 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. For the properties that we lease, the majority of leases are long term agreements.
The map below shows the locations of our primary transportation and manufacturing facilities, along with our Inland Waterways routes.
The most significant of our facilities among these properties, all of which we own, except as otherwise noted, are as follows.
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.
We have been involved in the following environmental 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.
Collision Incident, Mile Marker 97 of the Mississippi River. The Company and or American Commercial Lines LLC, an indirect wholly-owned subsidiary of the Company, (ACLLLC) have been named as defendants in the following putative class action lawsuits, filed in the United States District Court for the Eastern District of Louisiana (collectively the Class Action Lawsuits): Austin Sicard et al on behalf of themselves and others similarly situated vs. Laurin Maritime (America) Inc., Whitefin Shipping Co. Limited, D.R.D. Towing Company, LLC, American Commercial Lines, Inc. and the New Orleans-Baton Rouge Steamship Pilots Association, Case No. 08-4012, filed on July 24, 2008; Stephen Marshall Gabarick and Bernard Attridge, on behalf of themselves and others similarly situated vs. Laurin Maritime (America) Inc., Whitefin Shipping Co. Limited, D.R.D. Towing Company, LLC, American Commercial Lines, Inc. and the New Orleans-Baton Rouge Steamship Pilots Association, Case No. 08-4007, filed on July 24, 2008; and Alvin McBride, on behalf of himself and all others similarly situated v. Laurin Maritime (America) Inc.; Whitefin Shipping Co. Ltd.; D.R.D. Towing Co. LLC; American Commercial Lines Inc.; The New Orleans-Baton Rouge Steamship Pilots Association, Case No. 09-cv-04494 B, filed on July 24, 2009.
The claims in the Class Action Lawsuits stem from the incident on July 23, 2008, involving one of ACLLLCs tank barges that was being towed by DRD Towing Company L.L.C., an independent towing contractor. The tank barge was involved in a collision with the motor vessel Tintomara, operated by Laurin Maritime, at Mile Marker 97 of the Mississippi River in the New Orleans area. The tank barge was carrying approximately 9,900 barrels of #6 oil, of which approximately two-thirds was released. The tank barge was damaged in the collision and partially sunk. There was no damage to the towboat. The Tintomara incurred minor damage. The Class Action Lawsuits include various allegations of adverse health and psychological damages, disruption of business operations, destruction and loss of use of natural resources, and seek unspecified economic, compensatory and punitive damages for claims of negligence, trespass and nuisance. The Class Action Lawsuits are stayed pending the outcome of the Limitation Actions referenced below. Claims under the Oil Pollution Act of 1990 (OPA 90) were dismissed without prejudice. There is a separate administrative process for making a claim under OPA 90 that must be followed prior to litigation. We are processing OPA 90 claims properly presented, documented and recoverable. The Company has also received numerous claims for personal injury, property damage and various economic damages, including notification by the National Pollution Funds Center of claims it has received. Additional lawsuits may be filed and claims submitted. The Company is in early discussions with the Natural Resource Damage Assessment Group, consisting of various State and Federal agencies, regarding the scope of environmental damage that may have been caused by the incident.
The Company and ACLLLC have also been named as defendants in the following interpleader action: Indemnity Insurance Company of North America v. DRD Towing Company, LLC; DRD Towing Group, LLC; American Commercial Lines, LLC; American Commercial Lines, Inc.; Waits Emmet & Popp, LLC, Daigle, Fisse & Kessenich; Stephen Marshall Gabarick; Bernard Attridge; Austin Sicard; Lamont L. Murphy, individually and on behalf of Murphy Dredging; Deep Delta Distributors, Inc.; David Cvitanovich; Kelly Clark; Timothy Clark, individually and on behalf of Taylor Clark, Bradley Barrosse; Tricia Barrosse; Lynn M. Alfonso, Sr.; George C. McGee; Sherral Irvin; Jefferson Magee; and Acy J. Cooper, Jr., United States District Court, Eastern District of Louisiana, Civil Action 08-4156, Section I-5, filed on August 11, 2008. This is an action brought by one of DRD Towings insurance carriers seeking court approval of distribution of insurance proceeds, if any.
ACLLLC has filed two actions in the United States District Court for the Eastern District of Louisiana seeking exoneration from or limitation of liability relating to the foregoing incident as provided for in Rule F of the Supplemental Rules for Certain Admiralty and Maritime Claims and in 46 U.S.C. sections 30501, 30505 and 30511. The trial for the consolidated action has been set for September 2010, however, the discovery process has not yet begun.
The Company participated in the USCG investigation of the matter and participated in the hearings which have concluded. A finding has not yet been announced. The Company has also received inquiries and
subpoenas from the United States Attorneys Office for the Eastern District of Louisiana. The Company is cooperating with the investigation. The Company has made demand on DRD Towing (including its insurers as an additional insured) and Laurin Maritime for reimbursement of cleanup costs, defense and indemnification. However, there is no assurance that any other party that may be found responsible for the accident will have the insurance or financial resources available to provide such defense and indemnification. The Company has various insurance policies covering pollution, property, marine and general liability. While the Company believes it has satisfactory insurance coverage, when combined with other legal remedies, for the cost of cleanup operations as well as other potential liabilities arising from the incident, there can be no assurance that the actual costs will not exceed the amount of available insurance or that the insurance companies will continue to fund the expenses of cleanup and defense. The Company paid $0.85 million in retention amounts under our insurance policies in the third quarter of 2008. If our insurance companies refuse to continue to fund the cleanup or other liabilities associated with the claims, the Company may have to pay such expenses and seek reimbursement from the insurance companies. Given the preliminary stage of the litigation, the Company is unable to determine the amount of loss, if any, the Company will incur and the impact, if any, the incident and related litigation will have on the financial condition or results of operations of the Company.
Barge Cleaning Facilities, Port Arthur, Texas. ACLLLC received notices from the U.S. EPA in 1999 and 2004 that it is a PRP 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 and reserved $0.03 million to cover this obligation. The Company has, along with other members of the PRP group, recently received an additional demand from the EPA for past costs associated with this site. We currently do not expect any significant additional funding to be paid by the Company and have not increased amounts previously reserved relative to this site.
Bulk Terminals Site, Louisville, Kentucky. Jeffboat was contacted in December 2007, by the Kentucky Environmental and Public Protection Cabinet (Cabinet) requesting information related to Jeffboats participation at the Bulk Terminals Site, Louisville, Kentucky (Site), a liquid waste disposal facility. Jeffboat sent limited liquid waste to the Site during a period in the 1970s. The Cabinet is pursuing assessment and remedy as to groundwater contamination at the Site. Jeffboat continues to participate in the PRP group in cooperation with the Cabinet. At this time, costs of participation, assessment and remedy have totaled $0.04 million. The Company has not increased amounts previously reserved for this site at this time.
Pulvair Site Group, Tennessee. In October 2008 the Company received a letter from the Pulvair Site Group, a group of potentially responsible parties (PRP Group) who are working with the State of Tennessee (the State) to remediate a contaminated property in Tennessee called the Pulvair Site. The PRP Group has alleged that Jeffboat shipped materials, including zinc, to the site which were released into the environment. The State had begun administrative proceedings against the members of the PRP group with respect to the cleanup of the Pulvair site and the group has begun to undertake cleanup. The Company is in contact with the sites PRP Group regarding settlement of its share to remediate the site contamination.
Since October 7, 2005, our common stock has traded on the NASDAQ Stock Market under the symbol ACLI. Prior to trading on the NASDAQ Stock 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 Stock Market. These prices have been adjusted for the May 26, 2009, one-for-four reverse stock split. See Note 13 to the accompanying consolidated financial statements.
On February 24, 2010, the last sale price reported on the NASDAQ Stock Market for our common stock was $23.07 per share. As of February 24, 2009, there were approximately 27 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 ACLs 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.
All of the shares of Common Stock repurchased by the Company in the three months ended December 31, 2009, resulted from elections by holders of share-based compensation grants to execute the cashless exercise of vested options or other awards and the withholding of shares to pay taxes due upon the vesting or exercise of applicable awards. During the quarter ended December 31, 2009, the Company repurchased such shares as presented in the table below.
During the year ended December 31, 2007, the Company acquired 3.0 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 completed $300 million of the total authorizations. There were no repurchases during 2008 or 2009. At
December 31, 2009, $50 million of the authorized repurchase amount had not yet been purchased. Future repurchases are not permitted under the Companys credit facility.
Cumulative Total Stockholders Return (October 2005 December 2009)
Set forth below is a line graph comparing the monthly percentage change in the cumulative shareholder return on the Companys 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 Companys initial public offering, until December 31, 2009. 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.
Set forth below is American Commercial Lines Inc.s selected consolidated financial data for each of the five fiscal years ended December 31, 2009. This selected consolidated financial data is derived from American Commercial Lines Inc.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 Managements Discussion and Analysis of Financial Condition and Results of Operations. The selected financial data has been adjusted for the impact of the May 26, 2009, one-for-four reverse stock split. The Company has been publicly traded since its initial public offering in October 2005.
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:
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, 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 EBITDA only as a supplement to those GAAP results. See the statements of cash flow included in our consolidated financial statements.
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 managements 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.
The readers of this document are cautioned that any forward-looking statements are not guarantees of future performance and involve risks and uncertainties. See the risk factors included in Item 1A. Risk Factors of this annual report on Form 10-K as well as the items described under the heading Cautionary Statement Regarding Forward-Looking Statements 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.
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 and other vessels, including ocean-going liquid tank barges. We currently operate in two primary business segments, transportation and manufacturing, and a smaller All other segment that consists of our services company, Elliott Bay. We are the third largest provider of dry cargo barge transportation and second largest provider of liquid tank barge transportation on the Inland Waterways, accounting for 12.5% of the total inland dry cargo barge fleet and 13.1% of the total inland liquid cargo barge fleet as of December 31, 2008, according to Informa. We do not believe that these percentages varied significantly during 2009, but competitive surveys are normally not available until March of each year.
Our manufacturing segment was the second largest manufacturer of dry cargo barges in the United States in 2008 according to Criton industry data. We believe this also approximates our ranking in terms of construction of 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 which allows us to effectively manage our fleet.
Elliott Bay is much smaller than either the transportation or manufacturing segment and is not significant to the primary operating segments of ACL. During the fourth quarter of 2007, we acquired Elliot Bay Design Group, a naval architecture and marine engineering firm, which provides architecture, engineering and production support to customers in the commercial marine industry, while providing ACL with expertise in support of its transportation and manufacturing businesses.
During the second quarter of 2008, we acquired the remaining ownership interests of Summit Contracting, a provider of environmental and civil construction services to a variety of customers. In May 2007 we had previously purchased a 30% ownership. We sold our equity in Summit in November 2009 and reclassified its results of operations to discontinued operations for all periods presented.
Certain of the Companys 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.
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, the price of steel, the availability of capital and general economic conditions.
As discussed in Item 1. The Business Competition the industry fleet size at the end of 2008 consisted of the second lowest number of barges in operation since 1992. Industry data for 2009 should become available in March 2010. The results are not expected to be significantly different than those in 2008.
Competition continues to be intense for barge freight transportation volumes. The top five carriers (by fleet size) of dry and liquid barges comprised approximately 66% and 63% of the respective industry fleet in each sector as of December 31, 2008. The economic recession which began in the fall of 2008 has exacerbated the competitive environment in both liquid and dry market sectors. The impact in the liquid sector has been more pronounced as fewer customers have signed or renewed dedicated service contracts to ensure liquid barge availability, freeing more barges for spot rate service in that sector.
The demand drivers for freight and freight pricing on the Inland Waterways are discussed in detail in Item 1. The Business Competition. 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 2009, 2008 and 2007 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 system and in ocean-going trade. Due to the relatively long life of the vessels produced by inland shipyards and the relative over-supply of barges built in the late 1970s and early 1980s, there has only recently been a resurgence in the demand for new barges as older barges are retired or made obsolete by U.S. Coast Guard requirements for liquid tank barges. Though this heightened demand may ultimately increase the competition within the segment over the longer term, the current recession and constriction of the credit market, despite comparatively low steel pricing, have severely restricted the near term demand for barge replacement despite the advancing age of the industry fleet. During 2009 our manufacturing segment began to focus almost exclusively on brown-water liquid and dry barge construction and our expectation is to maintain this focus for the foreseeable future.
For the years ended December 31, 2009, 2008 and 2007, the Company had a net loss of $12.1 million, net income of $48.0 million and net income of $44.4 million, respectively.
The following table displays certain individually significant drivers of non-comparability in the respective periods.
In 2009 the Companys net loss of $12.1 million was a decline of $60.1 million from the prior years net income of $48.0 million.
Non-comparable items in 2009 and 2008 are described as follows. Debt retirement expenses of $17.7 million related to the Companys first quarter debt amendment and its third quarter debt refinancing were $15.3 million higher than in 2008. During 2009 charges of $4.2 million related to manufacturing segment contract disputes and settlements were incurred. As a result of the decision to close the Houston office in early 2009, the Company incurred charges totaling $3.7 million. Reduction in force charges of $3.2 million exceeded those in 2008 by $1.3 million. These charges were partially offset by an accrued vacation reversal due to a change in vacation policy of $1.6 million.
For the full-year 2009, though average outstanding debt declined $42.6 million from the prior year levels, higher effective interest rates on outstanding balances drove after-tax interest expenses $14.1 million higher to $40.9 million. Full year 2009 results also benefitted from net gains of $20.1 million from asset management actions including boat sales, impairment adjustments and scrapping of surplus barges which exceeded 2008 totals by $7.5 million. During 2008 the $2.1 million accrual for the withdrawal from a multi-employer pension plan, which had been expensed in a prior year, was reversed as a result of a negotiated agreement with the union. Also in 2008 a $0.9 million charge related to acquired goodwill, primarily as a result of the increase in that year of the Companys weighted average cost of capital, which was utilized to discount projected cash flows of Elliot Bay Design Group at its acquisition, resulted in an excess of carrying value over the estimated fair value. This matter is further discussed in Notes 1 and 17 to the consolidated financial statements.
The 2009 decline compared to 2008 in all other operating results was primarily the result of transportation segment operating income that was $60.6 million lower, partially offset by higher operating income from our manufacturing segment and from Elliott Bay.
The primary causes of changes in segment operating income in our transportation and manufacturing segments are generally described in the segment overview below in this consolidated financial overview section and more fully described in the Operating Results by Business Segments within this Item 7.
The higher losses on discontinued operations were attributable to Summit which was sold in November 2009. The majority of the increased discontinued operations loss was due to a $4.4 million impairment of certain Summit intangibles recorded prior to its sale and to the $7.5 million loss on the sale of Summit. See Note 16 to the accompanying consolidated financial statements. Operating income from Elliot Bay was higher in 2009 compared to 2008 and resulted almost equally from higher royalties derived from its designs in 2009 and lower goodwill impairment charges in 2009 when compared to the prior year.
In 2009 EBITDA from continuing operations was $107.8 million, a decrease of 30.0% from 2008. 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.
In 2009 $6.5 million of cash was used in investing activities during the year, as our $33.2 million capital expenditures and other investing activities of $4.4 million were largely offset by proceeds from the sale of vessels and our investment in Summit. The capital expenditures include $5 million to complete some liquid barges this year that were started in 2008 and $4 million to start construction of some internal dry barges for delivery in 2010. At December 31, 2009, we had total indebtedness of $345.5 million. At this level of debt we had $234 million in remaining availability under our bank credit facility. The bank credit facility has no maintenance financial covenants unless borrowing availability is generally less than $68 million. At December 31, 2009, debt levels we were $166 million above this threshold.
In 2008 the Companys net income increased by $3.6 million to $48.0 million.
Non-comparable items in the periods are described as follows. Debt retirement expenses in 2008 resulted from the second quarter amendment of the Companys credit facility. Debt retirement expenses in 2007 were incurred on both the retirement of the asset-based revolver in the second quarter and on the retirement of the Companys 91/2% Senior Notes in the first quarter of that year. The refinancing cost write-off in 2008 relates to refinancing costs other than to the Companys February 2009 extension of its credit facility. The retirements of debt are also discussed in Note 3 to the consolidated financial statements and in the Liquidity and Capital Resources section. Interest expense was $6.2 million higher in 2008 than in 2007, due to higher average outstanding borrowings in 2008. The multi-employer pension expense buy-out was recorded in 2007 based on managements commitment to that action. The accrual for those expenses was reversed in 2008 as a result of a negotiated agreement with the union. The acquired goodwill impairment charge resulted primarily from the increase in the Companys weighted average cost of capital utilized to discount projected cash flows of Elliot Bay Design Group resulting in an excess of carrying value over the estimated fair value for certain operations that were carrying goodwill. This matter is further discussed in Note 1 to the consolidated financial statements. Additionally, the decline of $8.1 million in operating income of the transportation segment and $2.0 million higher manufacturing segment operating income impacted the consolidated change. These changes in operating income of the segments are discussed below.
In 2008 EBITDA from continuing operations was $154.1 million, a decrease of 3.6% from 2007. 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.
In 2008 the Company invested $40.9 million in new liquid tank barges built by the manufacturing segment and barges purchased from third party lessors, $40.9 million in improvements to the existing boat and barge fleet, $7.4 million in improvements to our shipyard, $8.7 million in improvements to our facilities including our marine services facilities along the Inland Waterways, $8.5 million to acquire the remaining equity interests in Summit. During 2008 the Company realized proceeds of $4 million from the disposition of assets.
We operate in two predominant business segments: transportation and manufacturing.
In general, as illustrated in the Industry Tonnage chart contained in the Industry section above, 2009 for waterborne carriers was characterized by a continuation of weak overall demand, with declines of approximately 7.7% in total tons compared to 2008 and 15.3% compared to 2007. The volume increases in our lower margin grain and legacy coal markets, and significant volume decreases in our highest margin steel and chemicals markets drove a significant negative revenue mix shift. In our higher margin metals and chemicals markets, revenues on a fuel-neutral basis were down 61% and 38% respectively, in 2009 compared to 2008. Though there was some sequential improvement in metal market volumes during the fourth quarter 2009, it remains to be seen if the uptick is sustainable. There also has been a stabilization at low levels in our liquid chemicals business but no meaningful signs of a near term recovery in this market. Grain pricing that was $56.4 million lower, almost completely offset a 34% increase in grain ton-mile volume, driving grain revenue to only 1% above prior year.
The chart below describes in more detail the fuel neutral change in revenue dollars for major commodity classes for the years ended December 31, 2009 and 2008.
Note: % indicates Y-O-Y revenue change excluding fuel. Columns represent absolute revenue $.
Affreightment contracts comprised approximately 70.5% and 72.4% of the Companys transportation segment revenues in 2009 and 2008 respectively.
The remaining segment revenues (non-affreightment revenues) were generated either by demurrage charges related to affreightment contracts or by one of three other distinct contractual arrangements with customers: charter/day rate contracts, outside towing contracts, or other marine services contracts. See Item 1. The Business Customers and Contracts for a description of these types of contracts. Transportation services revenue for each contract type is summarized in the key operating statistics table that follows.
On average, 32 fewer liquid tank barges in 2009 were serving customers under charter/day rate contracts when compared to 2008. This decrease in the number of barges drove charter and day rate revenue down approximately 15.4% in 2009, compared to the prior year. Additionally, the decrease in barges in charter/day
rate service within the industry as a whole, increases the number of barges available for affreightment service. This increase in available barges for affreightment service has a negative impact on liquid spot rates.
The operating ratio, which is the percentage comparison of all expenses to revenues in the transportation segment declined to 94.9% in 2009 from 89.7% in 2008. This decline drove a $60.6 million decrease in the transportation segments operating income. The decrease in operating income was primarily a result of significantly lower grain freight pricing, substantial volume declines in our higher margin liquids and metals markets, and the increased costs of moving empty barges due to an imbalance of north and south bound volumes. These decreases were partially offset by reductions in personnel costs and other operating costs. Additionally, overall operating conditions for barge transportation in 2009 were more favorable than those experienced in 2008, with lost barge days down 58% from 42,000 in the prior year to a more normal 17,500 in 2009. The improved operating conditions contributed to improved boat efficiency in 2009.
Key operating statistics regarding our transportation segment for the years ended December 31, 2009, 2008 and 2007 are summarized in the following table.
Data regarding changes in our barge fleet for the fourth quarter of 2009 and the past three years ended December 31, 2009, are summarized in the following table.
Data regarding our boat fleet at December 31, 2009, is contained in the following table.
In addition to the 123 boats detailed above, the Company had 17 towboats operated exclusively for us by third parties. This is nine less owned boats and three less chartered boats than we operated at December 31, 2008. During 2009 we continued to assess our boat power needs. Based on that assessment we sold nine boats during the year. We currently have an additional 13 boats which are being actively marketed and are included in assets held for sale. The average life of a boat (with refurbishment) exceeds 50 years. During 2009 we
completed the repowering of three of our boats which moved them from the 1950 or less class to the less than 4300 class in the above summary.
The decline in manufacturing segment revenues was attributable to fewer barges built for third parties in 2009 and to lower relative steel pricing.
Manufacturing segment operating income increased $11.7 million in 2009 compared to 2008, despite the lower revenues. The $21.4 million in operating income from the manufacturing segment resulted from an increase in operating margin to 9.9%. During 2009 we advanced our Jeffboat strategic initiative to operate the shipyard more efficiently and more safely. Our improvements in safety and production efficiency, combined with more attractive contract terms, drove the improved 2009 Jeffboat margin results.
Year ended December 31, 2008 compared to December 31, 2007
The operating ratio in the transportation segment deteriorated to 89.7% from 87.6% and operating profit declined by $8.1 million in 2008. Lower transportation margins in 2008 compared to 2007 resulted primarily from wage and non-fuel cost inflation, lower ton-mile volume, lower boat productivity due to the significant increase in idle barge days in 2008 compared to 2007, higher target-based incentive compensation accruals, unrecovered fuel inflation, costs of reductions in force and an insurance deductible related to the July oil spill. Higher pricing and rates and higher scrapping income partially offset the aforementioned higher costs. Transportation cost inflation related to the higher outside fleeting, shifting and towing expenses, higher salaries and wages, higher insurance deductibles, claims costs driven by hurricane, flood and ice damage and lower gains on disposal of assets. Transportation segment operating margins were also impacted by certain items which did not occur, or occurred in substantially different amounts in the prior year. These items are enumerated in the table presented at the beginning of this consolidated financial overview and include costs of reductions in force, the insurance deductible related to an oil spill, the refinancing cost write-off unrelated to the Companys February 2009 extension of its credit facility and the multi-employer pension expense buy-out recorded in 2007. The accrual for those expenses was reversed in 2008 as a result of a negotiated agreement with the union.
Manufacturing operating expenses increased 5.5% in 2008 from 2007, due primarily to an external sales mix change to higher cost liquid tank barges year over year and by cost overruns caused by higher engineering costs and construction inefficiency surrounding one special vessel. The lower gross margins were partially offset by a $1.3 million or 0.6 point improvement as a percent of manufacturing revenue in selling, general and administrative expenses. The shipyard did improve its hours per ton of steel on the brown-water dry cargo and liquid tank barge lines. In addition, the manufacturing segment incurred a negative inventory valuation adjustment in 2007 of $3.3 million which was not repeated in 2008.
Consolidated Financial Overview Non-GAAP Financial Measure Reconciliation
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 Companys business segments. EBITDA provides us with an understanding of one aspect of earnings before the impact of investing and financing transactions and income taxes. Additionally, covenants in our debt agreements contain financial ratios based on EBITDA. 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 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.
The uncertainties surrounding the economy in general heighten the normal risks and uncertainties surrounding forward-looking information which we address in Item 1A. Risk Factors. Despite the negative economy, we continue to proactively work with our customers, focusing on barge transportations position as the lowest cost, most ecologically friendly provider of domestic transportation. During 2009 we continued to generate strong cash flow, paying down debt and strengthening our balance sheet. As discussed in the Liquidity section and in Note 3 to the consolidated financial statements, on July 7, 2009, we issued $200 million of 12.5% Senior Notes due 2017 and concurrently entered into a new four-year asset based borrowing facility providing up to $390 million of borrowing capacity. This new debt structure also provided an approximate one percent decrease in the blended interest rate to be paid on our outstanding balances from the rate in our former agreement. Additionally, the new structure does not have maintenance covenants unless our borrowing availability is generally less than $68 million. At December 31, 2009, we had available liquidity of $234 million. The covenants in the new facility include a leverage covenant which is based on only first lien senior debt, which excludes debt under the notes, while the leverage covenant in the former facility included total debt. We also enhanced our flexibility to execute sale leasebacks, sell assets, and issue additional debt under the new facility to raise additional funds, with no restrictions on capital spending.
With the four-year term on the bank agreement and eight-year term on the senior notes, we believe that we have the appropriate longer term, lower cost and more flexible capital structure that will allow us to focus on executing our tactical and strategic plans through the various economic cycles. We expect to remain disciplined in how we deploy our capital, but now have the flexibility to fully enact our cost reduction and productivity plans and to reinvest in the business when market demand and financial returns warrant such actions. Given our strategic objective to reduce the age of our fleet by replacing aging barges we presently intend to build 50 new covered dry hopper barges in 2010 for our transportation segment.
In the fourth quarter 2009, we sold Summit, a non-core asset. The sale will allow us to focus on our barge business and the key transportation strategies we must implement in our core businesses.
We do not expect any meaningful improvement in economic conditions in 2010. In spite of the economic outlook we remain focused on reducing costs, generating strong cash flow from operations and implementing our strategic initiatives.
We believe that the Company has two main drivers. One is the general economy. This component is one we cannot control. The second is executing the fundamentals of building and moving barges, and this is in our control. Improving the fundamentals of our business will be achieved by executing our major strategic initiatives. When we execute these initiatives well, improving our fundamentals, we believe we will develop a company that is profitable in tough times, and highly profitable in strong economic times. Many of our strategic initiatives are further defined in the segment descriptions in the balance of this Outlook section.
One of our strategic initiatives is ongoing examination of our recruiting, retention and organization. We reduced our total work force by 24% during 2009. Our cumulative salaried compensation reductions since
2008 now exceed $25 million and when combined with hourly reductions now total more than $50 million in total compensation cost reduction. We are continuing to make changes to drive productivity and cost-reduction throughout the organization. During the third quarter 2009, we realigned our transportation management resources to be closer to the business and the customers; positioning our most experienced barge industry managers on the river property where they can manage the people and the assets with much greater effectiveness. We believe this new model requires fewer management personnel, will reduce cost and will produce better service for our customers. By broadening the span of control of our managers and streamlining decision-making, we have eliminated one-half of the vice president and senior vice president positions in the last twenty-one months. In 2009 we took actions to defer all merit increases that would have otherwise occurred on January 1, 2009, saving an estimated $5 million this year. We expect to defer all merit increases for a minimum of six months in 2010, at which time we will reassess our ability to grant merit increases. The closing of our Houston office allows us to further streamline our operations, while continuing to reduce cost. The closure is expected to result in approximately $1.0 million in annualized savings.
Our order to cash strategic initiative is another example of improving administrative efficiency and excellence focused on capturing all work we perform, with timely and accurate billing for that work and then collecting all receivables efficiently. We are currently in a process mapping and gap analysis stage but will have a significant return as we implement identified process changes, despite its back office low profile.
We expect to continue to refine our cost structure on an ongoing basis. Our consolidated SG&A for the year ended December 31, 2009, declined by $7.5 million compared to the year ended December 31, 2008. The impact of non-comparable items was not significant to the comparison. Lower incentive compensation drove approximately $3.1 million of the decline. The remaining decline was due primarily to the net impact of our reduction in force actions and lower marketing spending.
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, create margin pressure. Competition for experienced vessel personnel was strong up to the beginning of the current recession and increases in experienced vessel personnel wage rates have exceeded the general inflation level for several years. Wages and fringe benefits declined in the fourth quarter of 2009 compared to 2008 and now are essentially flat for fiscal 2009 when compared to the prior year. Given the current decline in industry demand we anticipate that near-term wage rate pressure should diminish. Longer-term we anticipate continued pressure on labor rates, which we expect to defray through labor escalators in some of our contracts and through pricing.
We continue to challenge other selling, general and administrative expenses and expect further reductions in those costs. We eliminated our association with NASCAR and have made sustainable progress against purchased outside services, among other discretionary amounts.
Our full year capital expenditure spending in 2009 was $33.2 million, including $5 million to complete some liquid barges that were begun in late 2008, and $4 million to start construction on 50 dry hopper barges for our transportation segment to be delivered in 2010. The balance of our capital expenditures were primarily related to capitalized maintenance activities. Approximately $2.6 million of the 2009 capital expenditures will be reimbursed to the Company in 2010 under government grants we have been awarded. We believe that our capital expenditures will be in the range of $50 to $60 million in 2010 including the construction of the new dry hopper barges and our maintenance capital expenditures which extend the lives of existing vessels and other expected expenditures.
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 United States and is estimated to be operating at below current infrastructure capacity.
One of our strategic initiatives since 2005 has been business mix improvement. This category includes organic growth, rate discipline, contract success, business retention and improved portfolio mix (such as
increasing our percentage of higher margin liquids and longer term higher margin steel and bulk products). Through organic growth, which we define as the combination of new business from new and existing customers, we believe that over time our portfolio mix will eventually approach a breakdown closer to 35% liquids, 15% coal, 25% bulk, 15% grain, 5% steel and 5% emerging markets. Our mix for the full year in 2009 did not, even directionally, move closer to that goal, as many commodities that we have profitably moved in the past have not moved in quantities or at rates that they would in a more normal economic environment. During the year ended December 31, 2009, we saw a shift in our revenue portfolio, including related demurrage, which drove grain to 31% of our total revenue volume (from 21% for the full year 2008) while bulk declined to 25% (from 31% for the full year 2008) with other categories remaining fairly constant as a percent of total revenue.
During the fourth quarter and year ended December 31, 2009, we generated $12 million and $53 million respectively in new organic growth. For the quarter this includes $8 million of bulk and $4 million of liquid growth. For the year ended December 31, 2009, this includes $2 million of coal/energy, $34 million of bulk and $17 million of liquid growth. Modal conversion continues to be both a primary objective and driver in the generation of organic growth. 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 and will do so until early 2015. Although the contract contains limited fuel and general cost escalation clauses, it has been only marginally profitable. Utilizing fuel swaps we have taken action to hedge our estimated cash flow related to expected fuel usage under that legacy contract in an effort to execute the contract at more profitable levels in 2010. We expect volumes moved under this contract to decline by approximately 30% in 2010 based on forecasts provided by the customer.
Over the longer-term we expect to continue to evolve our portfolio mix of commodities. Our review of historical industry data for waterborne movement indicates that liquid commodity barge movement is generally a steady growth and demand market with generally 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. We completed the 13 remaining tank barges begun in 2008 for internal use in 2009 which essentially only partially replaced retiring liquid capacity. The significant decline in demand for liquid capacity during 2009, which depressurized the market for dedicated service contracts and, therefore, added capacity to the liquid spot market, decreasing rates, is expected to reverse as the economy recovers. However, given current demand and available rates, we do not plan to build any additional internal liquid barges until this longer term demand becomes clearer. We expect that in the current environment we will need to opportunistically pursue available loadings in our most profitable lanes.
During the past few years there has been increasing utilization of existing coal-fired power generating capacity. According to Criton the prospects for coal shipments to the power generating sector will be impacted by the current economic recession, increasing slowly in 2010 and thereafter. Distribution patterns may be further affected by flue-gas desulphurization (FGD) retrofitting and are expected to continue to negatively impact miles per trip as retrofitted plants shift to higher-sulfur coal resulting in shorter trips. Criton projects a decline in coal exports through the lower Mississippi driven by the collapse of international steel demand and the stronger U.S. dollar. In addition, increases in limestone and gypsum movement, due to clean air laws that are resulting in their use to reduce sulfur emissions from coal-fired electricity generation, have been more than offset by reductions in construction related movement.
Over the longer term, 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 Companys primary service lanes. Much of the new business is expected to emanate from 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 certain cargoes by barge that currently move via truck and rail. With ACL terminal facilities in St. Louis, Memphis and Chicago we believe we have a strong, strategically located core of base locations to begin to offer one-stop transportation services. Several of the cargo expansions in 2008 and 2009 included multi-modal solutions through our terminal locations, most recently including organic growth in steel products. Our 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, 2009, 70% of our total 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. During 2009 grain has been a more significant component of our total portfolio as the economy has impacted the markets for steel, metals-related products and liquid chemicals. Over the longer term, 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 less attractive volatility in both demand and pricing. We expect that the introduction of new demand will over time drive our grain position down to approximately 15% of our revenue base.
We did see the deferred volumes of the delayed grain harvest in the fourth quarter of 2009. Grain volumes in the quarter increased 20% from the prior year. The delay resulted in higher seasonal grain rates lasting longer into the fourth quarter. However, we did not see the traditional strong pricing surge in the 2009 harvest period, as the 2009 harvest season did not follow the compressed time frame of a more traditional grain harvest.
On a potentially positive note for 2010, the USDA recently reported that the grain harvest was at record levels and that grain exports for the current marketing year are expected to increase 7.6% from this past grain marketing year. This is not a guarantee of strong volumes or pricing for barge carriers though, as there remains an excess of barge capacity due to reduced overall shipping demand in recession-impacted markets. Grain exports via the river to the gulf should continue to remain an economically attractive choice for shippers as the freight spread between shipping on the river, versus the Pacific Northwest, continues to favor the river.
Due to the impact of the current economic crisis on our customers shipments of commodities such as steel/pig iron, fertilizer and liquid chemicals, we believe the current supply/demand relationship for dry and liquid freight will be stable on lower term contract volumes or, in the case of spot cargoes, decline in the near term. We also believe that longer term, with a stronger economy, freight rates will stabilize or moderately increase if overall barge capacity continues to decline. Our overall rates per ton-mile declined 24.5% in the quarter and 30.0% in the year ended December 31, 2009, driven by lower grain pricing, the negative mix shift into lower margin commodities, lower fuel prices which are contractually passed through to customers and lower contract renewal and spot market rates.
We have not seen any sustained change yet that would signal to us a return of higher margin metals and liquids volumes. We have seen some modest sequential volume improvements in these markets, though there is no clarity as to how much of this activity is inventory replenishment and how much may be sustained economic improvement. The industry-wide lower barge demand, and resulting barge over-capacity continues to negatively impact barge freight pricing.
The market dynamics surrounding term contracts are changing rapidly. Most of the Companys dry contracts renew during the fourth quarter of each year. Of the 48 active contracts that were scheduled for renewal in the fourth quarter, 30 were renewed at approximately a 5% blended rate reduction, nine contracts were extended on existing terms into the first quarter of 2010, four moved from term contracts to spot pricing and five contracts were lost or we chose not to re-bid. We renewed 16 contracts prior to the fourth quarter, bringing the total to 46 renewals this year. The blended price decrease on all 2009 renewals was approximately 4% with liquid renewals at 6% declines and dry renewals at 3% declines. We have also seen more significant declines in spot pricing for grain, liquids and coal.
Several of our largest and most attractive dry barge shipping contracts were renegotiated in the third and fourth quarters of 2009. These agreements were renegotiated with term extensions locking in the next four or
five years with no price compression. We anticipate that given the uncertainty of the economic environment fewer customers will feel compelled to ensure barge availability, thereby further lowering the number of charter/day-rate contracts.
If there is a rebound in liquid markets, we may see a larger portion of our liquid fleet shift to day-rate contracts, rather than affreightment contracts. However, in the current environment we saw 26 fewer barges utilized in charter/day-rate service compared to the prior year fourth quarter and 32 fewer barges compared to the full year 2008. Reductions in charter/day-rate contracts throughout the industry may return to spot rate service. This return to spot service generally results in a decline in rates available for such service in the current environment.
Overall, barge freight demand remains weak. We continue to encounter very difficult general economic and transportation market conditions. This weakness is confirmed in the January Federal Reserve Beige Book statistics and in barge freight tonnage levels reported by the Army Corps of Engineers. Our 2009 ton-mile volume decline of 6% on an overall basis mirrored the industry decline. While we experienced strong increases in our grain and legacy coal business, these are our lower margin lines of business. The significant volume declines in 2009 in our higher margin liquids and bulk businesses, especially within our metals portfolio, continued to put earnings stress on the Company. We remain committed to barging as a competitive form of transportation for the long-term as we believe our value proposition is superior to truck and rail and will continue to be a mode of transportation that shippers will continue to favor. We believe that shippers increasingly prefer the most environmentally friendly mode of transportation and the best shipping value. We believe we can offer them both.
Given the demand outlook viewed in this weak economy we continue to focus on our strategic initiatives which we believe enable the best performance in any economy. We are working to drive accidents, incidents and lost productivity costs to zero. In 2009 we achieved a safety incident record of 1.2 in Transportation which we believe challenges for the best in the industry.
Another strategic initiative is the reinvestment in our fleet in order to lower the age and increase the productivity and reliability through the measured reinvestment in new tank and dry barges. Our improving balance sheet now allows us to use our improving liquidity to reinvest in our fleet. Approximately one-third of the 2,149 barges in service in our fleet of dry cargo barges will reach 30 years of age by the end of 2010. The ultimate retirement of any barge is dependent on its specific condition, not its age. We expect to replace some of the capacity lost from barge retirement through new builds, acquisitions, liquid barge refurbishments and increased asset utilization. We anticipate building a minimum of 50 additional dry barges for internal use in 2010.
Our scheduled service strategic initiative entails establishing planned, predictable mainline and local service on our core system to improve margins on existing business and attract land-based business. This initiative is now the focus of our decentralized Operations Management team. They are standardizing operating practices system wide for efficiency gains and as a requisite step prior to launching expanded service schedules for organic growth. Our objectives in the dry markets are to pursue growth that fits within our planned scheduled service model while retaining existing business that fits in this model. We believe 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. We will tighten our network to concentrate more of our assets on higher density, more profitable traffic patterns. 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.
The optimization of our Jeffboat operation is another strategic initiative. Our objective at Jeffboat is to build the optimal number and type of barges with the right number of people, maximizing and stabilizing profitability and reducing idle time risk through the various economic and new barge demand cycles. We have reduced the staff levels by 46% and reduced the production footprint to two major lines for 2010. Longer term
we will continue to focus on maintaining the most efficient capacity level to build the optimal number and mix of hopper, deck and tank barges to provide attractive margins.
As we introduced this initiative, Jeffboat margins in 2009 clearly outpaced 2008 results. During 2009 we continued to work through legacy contracts and book market-based new build orders with a reduced overhead burden. In addition, in line with our drive to zero accident/incidence initiative, Jeffboat completed 2 million hours without a lost-time incident during 2009.
At December 31, 2009, the manufacturing segments approximate vessel backlog for external customers was $49 million compared to $212 million at December 31, 2008. The change in the backlog from 2008 to 2009 is a result of 2009 production of units that had been included in the prior year backlog and the following factors. During 2009 we had a total of $64.6 million in new orders and options exercised. We also had cancellations of $10 million of scheduled 2009 business, and cancellations of $30 million of scheduled 2010 business. We sold an additional $27 million of new orders in January 2010 which increased the January 2010 backlog to $76 million. 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 December 31, 2009. The backlog also excludes our planned construction of internal replacement barges.
We expect that external sales in 2010 will be less than 2009, as substantially fewer liquid tank barges are expected to be built than in the prior year due to the current excess of tanker capacity relative to demand for liquid barge services in the current marketplace. Our current backlog, including at least 50 dry covered barges for our transportation segment use, is sufficient to utilize our current workforce and maintain production on two lines through the third quarter 2010. Continuing inquiries and bids leave us optimistic that we will fill the remaining 25% of production capacity at Jeffboat in 2010.
We believe, based on industry estimates, capacity will continue to be taken out of the industry as older barges reach the end of their useful lives. We do not believe that longer term demand has weakened for new barges but recognize that the projected building of replacement barges may be delayed until economic and credit market conditions improve and the demand for barge freight stabilizes. From an overall barge supply standpoint, we believe that approximately 25% of the industrys existing dry cargo barges will be retired in the next three to seven 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.
During 2009 our labor hours per ton of steel, on our liquid chem barge line improved approximately 9.9% when compared to the 2008 full year results. The liquid 30,000 barrel hot oil barges labor hours per ton improved by approximately 3.9% when compared to the 2008 full year results.
Our 2009 full year hours per ton performance on 30,000 barrel clean service barges and dry hoppers represented a shortfall of 10.6% on the clean service and 1.8% on the dry hoppers when compared to the 2008 full year results. The performance on these classes of barges improved in the last half of the year with hoppers performance better than prior year and clean service only 7.6% below the prior year. We are continuing to work to minimize lost hours when line transitions occur.
AMERICAN COMMERCIAL LINES INC. OPERATING RESULTS by BUSINESS SEGMENT
Year Ended Dec. 31, 2009 as compared with Year Ended Dec. 31, 2008
(Dollars in thousands except where noted)
Revenue. Consolidated revenue decreased by $313.9 million or 27.1% to $846.0 million.
The consolidated revenue decrease was due to lower segment revenues for transportation and manufacturing segments which declined in 2009 by 30.8% and 15.4%, respectively. Professional services revenues rose by $1.8 million partially offsetting the overall decline.
Transportation segment revenues of $620.9 million decreased by approximately $276.4 million, or 30.8%, in 2009 compared to 2008. The revenue decrease was driven by 33.1% lower gross non-grain ton-mile pricing on affreightment contracts, 17.2% lower non-grain affreightment ton-mile volume, a 24.9% decline in towing ton-miles and $56.4 million in lower grain pricing that more than offset a 34% increase in grain ton-mile volume. Approximately three quarters of the overall affreightment rate decrease was attributable to lower fuel-
neutral pricing on the current year mix of commodities when compared to the prior year. This is a result of the negative revenue mix shift driven by significant volume increases in our lower rate grain and legacy coal business and significant volume declines in our higher rate metals and liquids businesses. The remainder of the decline was attributable to fuel de-escalations under the Companys contracts. On average, compared to 2008, the fuel-neutral rate on dry freight business decreased 21.9% and the liquid freight business decreased 2.0%. Total volume measured in ton-miles declined in 2009 to 37.1 billion from 39.5 billion in the prior year, a decrease of 6.0%. On average, 5.8% or 159 fewer barges operated during 2009 compared to 2008.
Revenues per average barge operated decreased 26.5% in 2009 compared to 2008. Approximately 78% of the decrease was due to lower affreightment revenue and the remainder was due to lower non-affreightment revenue. Approximately 76% of the lower affreightment revenue per barge resulted from the negative revenue impact of rate/mix/volume shift with the remainder attributable to fuel price de-escalation. On a fuel neutral basis overall ton-mile rates decreased by 22.2% in 2009 compared to 2008. The average price per gallon of fuel consumed decreased by 38.6% to $1.95 per gallon in 2009 compared to $3.17 per gallon for 2008.
The services segments revenues increased due to additional royalties from the use of Elliot Bay designs when compared to 2008. These were under a single contract for development of three ferries. No additional royalty agreements are currently in place.
Manufacturing revenues were $215.5 million for the full-year 2009 compared to $254.8 million for 2008. This decrease was driven by sales of 81 fewer barges and lower steel pricing. During the year manufacturing sold 130 dry cargo barges, 43 tank barges and four special vessels compared to 191 dry cargo barges, 53 tank barges, 10 hybrid barges and four special vessels during 2008.
Operating Expense. Consolidated operating expense decreased by $266.5 million or 25.2% to $791.9 million.
Transportation segment operating expenses decreased by $215.8 million, primarily due to $104.7 million lower fuel expenses and $79.2 million lower non-labor variable costs.
The Transportation segments selling, general and administrative expenses (SG&A) declined by $8.8 million. Gains on sales of surplus assets, net of impairment charges for additional boats identified for sale, increased $19.3 million from prior year levels. The lower fuel cost was due both to 8.7 million fewer gallons consumed and the lower average price per gallon. The non-labor variable cost reductions were primarily in outside charter, towing, fleeting and shifting as well as lower boat and barge repair expenses, lower cost of barges scrapped in the current year and lower training costs. The SG&A savings were driven primarily by approximately $4.2 million in lower salaries due to the impact of previous reductions in force, lower incentive award expenses, lower marketing and lower outside services costs. The excess of the costs of the 2009 reductions in force and Houston office closure compared to similar costs in the prior year was essentially offset by the $1.5 million write-off of bank fees not related to a successful refinancing in 2008.
Manufacturing segment operating expenses decreased $51.0 million due to a fewer number of barges produced and lower steel costs, partially offset by the $2.3 million cost related to a customer contract dispute. The decline was also partially driven by the 2008 $5.5 million loss on a special vessel that was in process at that year end.
Operating Income. Consolidated operating income declined $47.4 million to $54.2 million.
Operating income as a percent of consolidated revenues declined to 6.4% in 2009, compared to 8.8% in 2008. The decline was primarily a result of revenues decreasing more rapidly than expenses, thereby leading to the deterioration in the operating ratio in the transportation segment to 94.9% from 89.7% which more than offset an increase of $11.7 million in manufacturing segment operating income. The $21.4 million in operating income from the manufacturing segment resulted from an increase in operating margin to 9.9% in 2009 compared to 3.8% in 2008. The increased margin was due to a more favorable mix of non-legacy market priced barges produced, gains in labor productivity per ton of steel on the majority of barges produced, the prior year loss on one special vessel and current year safe operations.
The $60.6 million decline in transportation segment operating income to $31.6 million resulted primarily from an $84.9 million decline in non-grain price/volume/mix margin as higher margin metals and liquids commodity volumes continued to be weak throughout the year. The 34% increase in grain volume did not offset the $56.4 million decline in grain pricing, lowering grain-related margins by approximately $14.8 million. The incremental cost of relocating empty barges during 2009 was estimated to be $18.3 million. These negative impacts were partially offset by $37.3 million in improved boat productivity, $8.5 million lower SG&A spending, $7.5 million in gains from asset management transactions and $4.1 in other cost reductions. The improved boat productivity is attributable to cost and crewing productivity, more favorable weather related operating conditions, lower repair and uninsured claims expenses, and other operations-related cost savings. The lower SG&A is attributable to the lower salaried wage base in 2009 as a result of reduction in force actions, decreases in bonus accruals, decreased bank fees and less advertising spending offset by the cost of the Houston office closure and bad debt attributable to the bankruptcy of a customer.
Interest Expense. Interest expense was $40.9 million, an increase of $14.1 million from 2008. The increase was due entirely to higher interest rates as the average outstanding debt balance declined $42.6 million from the prior year.
Debt Retirement Expense. Debt retirement expense was $17.7 million in 2009, due to the refinancing of the Companys debt in July 2009 and the extension of the prior credit agreement in February 2009. Debt retirement expense was $2.4 million in 2008 due to the amendment of the credit agreement in effect in that year.
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 purposes and the relatively constant amounts of permanent differences in relation to the level of book taxable income or loss in the respective periods.
Discontinued Operations, Net of Taxes. The loss from discontinued operations in 2009 arose primarily from an impairment charge of $4.4 million related to Summit intangibles recognized in the third quarter and a $7.5 million loss on the sale of Summit in November 2009 net of the tax benefit of those charges. Net income from discontinued operations in 2008 resulted from favorable resolution of contingencies related to the 2006 sale of the Venezuela operations in that year and from the net of tax operating results of Summit in 2008.
Net (Loss) Income. Net income decreased $60.1 million from the prior year to a net loss of $12.1 million due to the reasons noted above.
AMERICAN COMMERCIAL LINES INC. OPERATING RESULTS by BUSINESS SEGMENT
Year Ended December 31, 2008 as compared with Year Ended December 31, 2007
(Dollars in thousands except where noted)
Revenue. Consolidated revenue increased by $109.6 million or 10.4% to $1,160 million.
The increase in consolidated revenue was driven by higher affreightment rates and towing/charter day rate revenue which exceeded the revenue impact of lower ton-mile volumes. Approximately $83.7 million of the higher affreightment rates was driven by fuel price adjustment clauses in our contracts and approximately $46 million in price/rate increases. Approximately $15 million of the increase was driven by an external revenue mix shift by the manufacturing segment which built less total barges, but a higher concentration of higher priced liquid tank barges than in 2007.
Transportation segment revenue increased $88.7 million or 11.0% to $897.3 million in the year ended December 31, 2008 compared with 2007. Higher affreightment pricing and increased revenue from towing and
charter day rate contracts offset lower volumes driving the increase. Higher scrapping revenue and higher demurrage also contributed to the increase. Rates per ton-mile increased 21.0% on a gross basis and 8.4% on a fuel-neutral basis from the prior year. Total ton-mile volume declined by 9.5% from 2007.
Revenue per average barge operated for 2008 increased 18.3% to $327,830 from $277,018 in 2007. Average fuel neutral rates per ton-mile for dry cargo freight and liquid cargo freight increased 7.8% and 12.9% respectively for 2008 as compared to 2007. On a blended basis average fuel neutral rates per ton-mile were up 8.4% year over year.
During the year, manufacturing sold 191 dry cargo barges, 53 tank barges, 10 hybrid vessels and four special vessels compared to 311 dry cargo barges, 28 tank barges and two special vessels during 2007.
Operating Expense. Consolidated operating expense increased by 12.3% to $1,058.4 million or 91.2% of consolidated revenue.
Transportation and services expenses increased 14.6%, or $103.4 million, from 2007.
Fuel costs per gallon escalated almost 50% to an average of $3.17 per gallon for the year ended December 31, 2008, from 2007 levels driving direct fuel expenses to a $58.3 million year over year variance (or a 34.5% full year increase). Taxes on fuel usage declined slightly due to lower consumption. The increase in materials, supplies and other expenses of $25.5 million (or 9.1%) was driven by higher costs of outside towing, fleeting and shifting costs (approximately $10 million of which was driven by the higher fuel prices passed through to us by vendors) and by higher claims expenses related to three hurricane events and unfavorable operating conditions. The increase of $7.1 million in labor, training and fringe benefit costs resulted primarily from higher target-based incentive earnings and inflation in labor rates as the number of vessel employees was relatively constant year over year. The increase was partially offset by the reversal in 2008 of a $2.1 million accrual for withdrawal from a multi-employer pension plan for certain represented employees which was expensed in 2007. This resulted from a settlement with the represented employees who bargained to continue to participate in the plan. The $2.4 million increase in operating expenses was due to the consolidation of the service company which we acquired in late 2007. This included $0.9 million representing impairment of acquired goodwill. The impairment resulted primarily from increases in the Companys weighted average cost of capital used to discount the expected cash flows of the service company to determine estimated fair value resulting in an excess of fair value over the estimated fair value for certain operations that were carrying goodwill. Costs related to our scrapping operations, mostly the remaining book value of scrapped barges, decreased by $2.4 million in the year ended December 31, 2008, compared to 2007. $2.4 million in lower gains on sales of assets as a result of a lower number of barges sold for scrap in 2008 (partially offset by the gain on the sale of five boats) drove a decrease of $2.4 million in total gains on dispositions for the year ended December 31, 2008, compared to 2007. $4.2 million of the $8.8 million increase in selling, general and administrative expenses was due to the consolidation of the service company which we acquired in late 2007. The increase in the transportation segment of $5.9 million was driven by $3.8 million higher target-based incentive compensation accruals, $1.9 million cost of the 2008 reduction in force, the refinancing costs not related to the Companys February 2009 extension of its credit facility of $1.5 million written off in the fourth quarter and $1 million in higher marketing expenses, partially offset by lower provisions for bad debts and lower employee relocation expenses.
Manufacturing operating expenses (external) increased 5.5% or $12.9 million in 2008 from 2007 due primarily to an external sales mix change to higher cost liquid tank barges year over year and by cost overruns caused by higher engineering costs and construction inefficiency surrounding one special vessel. The lower gross margins were partially offset by a $1.3 million or 0.6 point improvement as a percent of manufacturing revenue in selling, general and administrative expenses.
Operating Income. Operating income declined $6.7 million to $101.6 million due to the reasons noted above. The decrease was primarily the result of the deterioration in the operating ratio, which is the percentage that all expenses bear to revenues, in transportation to 89.7% from 87.6%. In the transportation segment labor and fringe benefits along with material, supplies and other were 47.2% of segment revenue compared to 48.3% for 2007, increasing $32.6 million. Fuel expenses increased from 20.9% for 2007 to 25.4% in 2008.
Selling, general and administrative expenses increased by 0.2 points as a percent of consolidated revenue in 2008 compared to 2007, increasing $8.8 million.
Interest Expense. Interest expense increased $6.3 million to $26.8 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 Companys 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 2008 was 5.2% compared to 6.6% in 2007.
Debt Retirement Expenses. Debt retirement expenses decreased from those incurred on the retirement of $119.5 million of the Companys 9.5% Senior Notes in the first quarter of 2007 and the replacement of the 2007 asset based revolver with the Companys new revolving credit facility to $2.4 million in 2008. The 2008 debt retirement expenses represent the write-off associated with the second quarter 2008 amendment of the revolving credit facility.
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 2008 was 36.5%. The effective tax rate was 33.0% for 2007. The lower rate in the prior year was due to the recognition of a previously unrecognized deferred tax asset for which realization is believed to be probable.
Net Income. Net income increased $3.6 million in 2008 from 2007 to $48.0 million due to the reasons noted above.
Beginning in 2008 and continuing through much of 2009, the United States and global economies experienced a period of economic uncertainty, and the related capital markets experienced significant disruption. We expect that the ramifications of these conditions will continue into fiscal year 2010. Despite these anticipated economic conditions, based on past performance and current expectations we believe that cash generated from operations and the liquidity available under our capital structure, described below, will satisfy the working capital needs, capital expenditures and other liquidity requirements associated with our operations in 2010.
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 at December 31, 2009, were cash generated from operations and borrowings under our revolving credit facility and outstanding balances under the Senior Notes. Other potential sources include sale leaseback transactions for productive assets and, to a lesser extent, barge scrapping activity and cash proceeds from the sale of non-core assets and assets not needed for future operations. We currently expect our 2010 capital expenditures will be in the range of $50 to $60 million, above the $33.2 million in 2009, but well below the almost $110 million in 2008.
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.
As discussed in Note 3 to the consolidated financial statements, on February 20, 2009, the Company signed an amendment (Amendment No. 6), which amended our then-existing credit facility, dated as of April 27, 2007. Amendment and facility fees for Amendment No. 6 totaled approximately $21 million. The $17.7 million of these costs which had not yet been amortized were written off in July 2009, when Amendment No. 6 was replaced with the new facilities described below.
On July 7, 2009, Commercial Barge Line Company (CBL), a direct wholly owned subsidiary of ACL, issued $200 million aggregate principal amount of 12.5% senior secured second lien notes due July 15, 2017, (the Notes). The issue price was 95.181% of the principal amount of the Notes. The Notes are guaranteed by ACL and by certain of CBLs existing and future domestic subsidiaries. Simultaneously with CBLs issuance of the notes ACL closed a new four year $390 million senior secured first lien asset-based revolving
credit facility (the Credit Facility ) also guaranteed by CBL, ACL and certain other direct wholly owned subsidiaries of CBL. Proceeds from the Notes, together with borrowings under the Credit Facility, were used to repay ACLs then-existing credit facility, to pay certain related transaction costs and expenses and for general corporate purposes.
Our debt level under our revolving credit facility and senior notes outstanding totaled $345.4 million at the end of the year. This was a reduction of $64.0 million during 2009 before consideration of original issue discount, despite paying approximately $40 million to amend our credit facility in February 2009 and to complete the July 2009 refinancing. We were in compliance with all debt covenants on December 31, 2009. The liquidity available under our credit agreement on December 31, 2009, was approximately $234 million compared to $66 million at June 30, 2009, under our prior credit facility. Additionally, we are allowed to sell certain assets and consummate sale leaseback transactions on other assets to enhance our liquidity position. The Company also has the ability to quickly access capital markets under its $200 million shelf registration, though we consider this a less likely option at this time.
The new Credit Facility has no maintenance covenants unless borrowing availability is generally less than $68 million. This is $166 million less than the availability at December 31, 2009. Should the springing covenants be triggered, they are less restrictive in the Credit Facility than under the prior agreement, as the leverage calculation includes only first lien senior debt, excluding debt under the Notes, while the former facility leverage ratio included total debt. In addition the Credit Facility place no restrictions on capital spending.
With the four-year term on the Credit Facility and eight-year term on the Notes we believe that we have an appropriate longer term, lower cost, and more flexible capital structure that will provide adequate liquidity and allow us to focus on executing our tactical and strategic plans through the various economic cycles.
As of December 31, 2009, we had total indebtedness of $345.5 million. Our revolver debt balance was $154.5 million at December 31, 2009. We had $234 million of availability under the revolver compared to $66 million at June 30, 2009, under our prior credit facility. The current bank credit facility has no maintenance financial covenants unless borrowing availability is generally less than $68 million. Thus at $234 million of availability we are $166 million above this threshold. All additional debt relates to a small holdback note associated with our acquisition of Elliot Bay. The note bears interest at 5.5% and is payable in 2010. Availability under the revolving credit facility was also reduced by the $1.5 million of outstanding letters of credit. The Company was in compliance with all covenants at December 31, 2009.
In 2009 we had a significant increase in interest costs arising from the February 2009 amendment to our former credit facility and our July 2009 refinancing. Our current average interest rate, like most companies who have refinanced since the economic crisis began, increased significantly from 2008. Even though we have reduced our outstanding debt balances, interest expense was $14.1 million higher in 2009 than in 2008.
Despite a very difficult economic environment we continue to generate positive cash flow. We have continued to focus on increasing available liquidity through reduced capital spending, selling excess assets, working capital management and cash flow from optimizing our operations. Our cash flow from operations was $129.3 million for the 2009 full year which was $6.5 million higher than the 2008 full year. In 2009 $6.5 million of cash was used in investing activities during the year, as our $33.2 million capital expenditures and other investing activities of $4.4 million were largely offset by proceeds from the sale of vessels and our investment in Summit. The capital expenditures include $5 million to complete some liquid barges this year that were started in 2008 and $4 million to start construction of some internal dry barges for delivery in 2010. Our 2009 total cash flow after investing activities but before financing activities was $122.8 million, including more than $28.4 million in asset sale proceeds. We continued to better manage receivables by lowering our days sales outstanding. Receivables also decreased due to reduced sales. We have also improved our steel inventory and supply chain processes in our shipyard through improved inventory forecasting, delivery
scheduling, and reducing safety stocks. These actions have generated $10 million in steel inventory savings to date, exclusive of lower steel prices. Also the Senior Notes require a semi-annual interest payment and $12.0 million of accrued interest included in the December 31, 2009, consolidated balance sheet was paid in January 2010.
Net cash used in financing activities in 2009 was $122.8 million, compared to net cash used in financing activities of $22.4 in 2008. Cash used in financing activities in 2009 resulted primarily from the $40.5 million payment of fees for the February 2009 amendment of the credit agreement the subsequent issuance of the Notes and the new revolving facility. Cash used in financing activities was also a result of a net reduction of $64 million in outstanding borrowing, a $6.5 million decrease in bank overdrafts on operating accounts and a $2.2 million negative tax impact of share-based compensation. The negative tax impact occurred as restricted shares vested at prices lower than their value on date of grant. In 2008 repayments of our credit facility used approximately $20.5 million, bank overdrafts increased by $1.8 million and debt costs of $4.9 million were paid. The impact of the tax benefit of share-based compensation and exercise price of stock options exceeded the purchase cost of treasury shares from cashless exercises in the share-based plans by approximately $1.1 million.
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. The Business Seasonality.
In September 2006, the Financial Accounting Standards Board (FASB) issued guidance now contained in Accounting Standards Codification (ASC) Section 715, Compensation Retirement Benefits. The standard requires plan sponsors of defined benefit pension and other postretirement benefit plans (collectively, postretirement benefit plans) to recognize the funded status of their postretirement benefit plans in the consolidated balance sheet, measure the fair value of plan assets and benefit obligations as of the date of the fiscal year-end consolidated balance sheet, and provide additional disclosures. Most of the provisions of the revised standard were previously adopted in 2006 with the impacts as disclosed in previous filings. The standard also required, beginning in 2008, a change in the measurement date of its postretirement benefit plans to December 31 versus the September 30 measurement date used previously. This provision was adopted as of January 1, 2008, and resulted in a charge of $0.8 million ($0.5 million after-tax). This amount was recorded as an adjustment to retained earnings in January 2008.
In December 2007 the FASB issued guidance now contained in ASC Section 805, Business Combinations. This revision to accounting standards 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. This guidance was effective for the Company beginning January 1, 2009. The standard retains the fundamental requirements contained in previously existing standards that the acquisition method of accounting (which was previously called the purchase method) be used for all business combinations. The revised standard also retains the previous guidance for identifying and recognizing intangible assets separately from goodwill. The revised standard 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, replacing previous guidances cost-allocation process. The revised standard 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 and 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. The Company has not made any acquisitions subject to the new standard but will apply the provisions of the standard to future acquisitions, as required.
In December 2007 the FASB issued guidance now contained in ASC Section 810, Consolidation. The revised guidance requires that the ownership interests in subsidiaries held by third parties be presented in the consolidated statement of financial position within equity, but separate from the parents equity. The amount of consolidated net income attributable to the parent and to the non-controlling interest must be clearly identified and presented on the face of the consolidated statement of income. Changes in a parents ownership interest while the parent retains its controlling financial interest must be accounted for as equity transactions. The revised guidance 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. The revised guidance was effective January 1, 2009, for the Company. The Company has no significant subsidiaries with non-controlling interests held by third parties. Therefore, the adoption of this standard did not have a significant impact on our financial statements.
In December 2007 the FASB issued guidance now contained in ASC Section 815, Derivatives and Hedging which requires expanded disclosure surrounding derivative instruments and hedging activities. This guidance encourages, but does not require, comparative disclosures for earlier periods at initial adoption. This guidance was effective January 1, 2009, for the Company. We have adopted the guidance and the revised disclosure requirements are included herein.
In September 2006 the FASB issued standards now contained in ASC Section 820, Fair Value Measurements and Disclosures which 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 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 risks (those inherent in the valuation process and risks that an obligation may not be fulfilled) and for any restriction on an asset if a market participant would consider these factors in valuation. This Statement does not eliminate the practicability exceptions to fair value measurements in many other accounting pronouncements. Certain provisions of the standard became effective for the Company on January 1, 2008. The impact of adopting this standard did not have a significant impact on the Companys 2008 financial statements. Certain requirements of the standard related to non-financial assets and liabilities were not required for the Company until January 1, 2009. Adoption of those requirements did not have a material impact on the Company in 2009.
In July 2009 the FASB issued Accounting Standards Update (ASU) No. 2009-01, which includes the previously issued SFAS No. 168, The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162 (SFAS 168) in its entirety, including the accounting standards update instructions contained in Appendix B of the Statement. With the ASUs issuance the ASC became the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date the codification superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the codification became non-authoritative. Following this ASU, the FASB will not issue new standards in the form of statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it will issue ASUs. The Board will not consider ASUs as authoritative in their own right. ASUs will serve only to update the codification, provide background information about the guidance, and provide the bases for conclusions on the change(s) in the codification. This standard does not change existing standards except as to the designation of the GAAP hierarchy.
Subsequent to July 2009 the FASB has issued additional ASUs. Several were technical corrections to the codification. ASUs considered to have a potential impact on the Company where the impact is not yet determined are discussed as follows.
ASU No. 2009-05, issued in August 2009, represents an amendment to ASC Section 820, Fair Value Measurements and Disclosures concerning measuring liabilities at fair value. The update clarifies that in circumstances where there is not a quoted price in an active market for an identical liability, fair value of a liability is to be measured using one or more of the following techniques: use of a quoted price of an identical liability when traded as an asset, use of a quoted price for a similar liability or a similar liability traded as an asset or another valuation technique consistent with ASC Section 820 such as an income approach (present valuation) or a market approach. The ASU is effective in the first reporting period after its issuance. It is not anticipated that this ASU will have a material impact on the Company.
ASU No. 2010-06, issued in January 2010, represents an amendment to ASC Section 820, Fair Value Measurements and Disclosures requiring new disclosures regarding 1) transfers in and out of level 1 and 2 (fair values based on active markets for identical or similar investments, respectively) and 2) purchases, sales, issuances and settlements rollforwards of level 3 (fair value based on unobservable inputs) investments. The ASU also amends required levels of disaggregation of asset classes and expands information required as to inputs and valuation techniques for recurring and non-recurring level 2 and 3 measurements. With the exception of the disclosures in 2 above, the new disclosures will become effective for interim and annual reporting periods beginning after December 15, 2009. Items in 2 above become effective one year later. Although it will expand the Companys disclosures the change will not have a material effect on the Company.
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 estimates 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 receivable amounts, deferred tax liabilities, assets held for sale, environmental liabilities, 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, estimates of future cash flows used in impairment evaluations, liabilities for unbilled barge and boat maintenance, liabilities for unbilled harbor and towing services, estimated sub-lease recoveries and depreciable lives of long-lived assets.
The primary source of the Companys 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 customers 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.
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.
Revenue from unit tow equipment day rate contracts is recognized based on the number of days services are performed during the period.
Marine manufacturing revenue is recognized based on the completed contract or the percentage-of-completion method depending on the length of the construction 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. ACL uses the percentage-of-completion method of recognizing revenue and expenses related to the construction of these longer-term production vessels based on labor hour incurred as a percent of estimated total hours for each vessel. These vessels have expected construction periods of more than 90 days in length and include ocean-going barges and towboats.
ACL uses the completed contract method for barges built for Inland Waterways use which typically have construction periods of 90 days or less. Contracts are considered complete when title has passed, the customer
has accepted the vessel and there is no substantial continuing involvement by the Company with the vessel. Losses are accrued if manufacturing costs are expected to exceed manufacturing contract revenue.
Harbor services, terminal, repair and other revenue are recognized as services are provided.
Revenue from the Companys professional service company is recorded primarily on the percentage of completion method wherein the direct costs incurred to date over the estimated total direct costs of a contract times the total revenues under the contract determines revenues to be recorded for any contract.
Inventory is carried at the lower of cost or market, based on a weighted average cost method. Our port-services 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 $0.1 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 expense by $0.4 million. The Company is fully insured for post-65 retiree medical so changes in health care cost trends would not affect our post-retirement medical expense in the near term.
We were self-insured and we self-administered the medical benefit plans covering most of our employees for service dates before September 1, 2005. We hired and continue the use of a third-party claims administrator to process claims with service dates on or after September 1, 2005. We remain self-insured up to $0.25 million 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 our 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 and again in August 2008, in February 2009 and in June 2009 in connection with debt refinancings. No impairment indicators were present at December 31, 2009 or 2008, in our transportation or manufacturing segments. Given the on-going decline in the cash flows from our Summit entity we did reassess the recoverability of the long-lived assets during the third quarter 2009. Our revised estimated gross cash flows did not exceed the recorded value of the assets as of the end of the third quarter indicating impairment. Given the indication of impairment, we wrote off approximately $4.4 million of long-lived assets and intangibles in the third quarter of 2009 based on the underlying estimated fair values of those assets. Changes to the estimated future cash flows or to the Companys evaluation of its weighted average cost of capital are critical accounting estimates and could result in material changes to our recorded results.
In connection with our acquisition of the McKinney assets and Elliott Bay Design Group in 2007 and the acquisition of the remaining equity interests in Summit in 2008, the excess of the purchase price over the fair value of the acquired identifiable tangible and intangible assets and liabilities was recorded as goodwill. Goodwill is not amortized, but is subject to, at least annually, an evaluation for impairment. Such an evaluation requires estimates of the fair value of the reporting unit (commonly defined as one level below an operating segment) to which the acquired assets are attached. Due primarily to changes in the Companys weighted average cost of capital since the acquisition date, rather than to changes in the expected underlying cash flows, which resulted in an excess of the carrying value over the estimated fair value of the operations, we concluded that the acquisition goodwill on Summit was completely impaired, that the acquisition goodwill on EBDG was partially impaired and that the acquisition goodwill on the McKinney purchase was not impaired. An impairment charge of $1.1 million was recorded in 2008, of which $0.2 is now recorded in discontinued operations, related to these evaluations. Changes to the estimated future cash flows or to the Companys evaluation of its weighted average cost of capital are critical accounting estimates and could result in material changes to our recorded results. Our goodwill evaluation in 2009 did not result in any goodwill impairments.
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 of less than one thousand dollars 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 licenses 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 assets 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.
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, 2009, fuel expenses for fuel purchased directly and used by our boats represented 20% of our transportation revenues. Each one cent per gallon rise in fuel price increases our annual operating expense by approximately $0.6 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 only to long-term changes in fuel pricing. All of our grain movements, which comprised 31% of our total transportation segment revenues in 2009, 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. We also believe that fuel is a significant element of the economic model of our vendors on the river, with increases passed through to us in the form of higher costs for external shifting and towing. From time to time we have utilized derivative instruments to manage volatility in addition to our contracted rate adjustment clauses. In 2008 and 2009, we entered into fuel price swaps with commercial banks for a portion of our expected fuel usage. 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, 2009, a net asset of approximately $4.8 million has been recorded in the consolidated balance sheet and the gain on the hedge instrument recorded in Other Comprehensive Income. The fuel swap agreements require that we, in some circumstances, post a deposit for a portion of any loss position. At December 31, 2009, we had no deposits outstanding. Our amended credit agreement places certain limits on our ability to provide cash collateral on these agreements. Ultimate gains or losses will not be determinable until the fuel swaps are settled. Realized losses from our hedging program of $10.3 million in 2009 and $0.9 million in 2008 were recorded during the respective periods. We believe that the hedge program can decrease the volatility of our results and protects us against fuel costs greater than our swap price. Further information regarding our hedging program is contained in Note 8 to our consolidated financial statements. We may increase the quantity hedged based upon active monitoring of fuel pricing outlooks by the management team.
At December 31, 2009, we had $154.5 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. Each 100 basis point increase in interest rates, at our existing debt level, would increase our cash interest expense by approximately $1.5 million annually. This amount would be mitigated by the cash tax deductibility of the increased interest payments.
The Company currently has no direct exposure to foreign currency exchange risk although exchange rates do impact the volume of goods imported and exported which are transported by barge.
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 for the Company (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, 2009, 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 as of December 31, 2009.
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.
Board of Directors and Stockholders American Commercial Lines Inc.
We have audited American Commercial Lines Inc.s internal control over financial reporting as of December 31, 2009, 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 Inc.s 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 Managements Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the companys 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 companys 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 companys 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 companys 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 Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, 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, 2009, and December 31, 2008, and the related consolidated statements of operations, stockholders equity, and cash flows for each of the three years in the period ended December 31, 2009 and our report dated March 10, 2010 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
March 10, 2010
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, 2009 and 2008, and the related consolidated statements of operations, shareholders equity, and cash flows for each of the three years in the period ended December 31, 2009. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Companys 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, 2009 and 2008, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, 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 authoritative guidance on Employers Accounting for Defined Benefit Pension and Other Postretirement Plans in 2008.
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.s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 10, 2010 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
March 10, 2010
AMERICAN COMMERCIAL LINES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of the consolidated financial statements.
AMERICAN COMMERCIAL LINES INC.
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of the consolidated financial statements.
AMERICAN COMMERCIAL LINES INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY