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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x      Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended June 30, 2013, or

 

o         Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from            to           

 

Commission file number 333-174112

 

Florida East Coast Holdings Corp.

(Exact name of registrant as specified in its charter)

 

Florida

 

27-4591805

(State or Other Jurisdiction of Incorporation or Organization)

 

(I.R.S. Employer Identification No.)

 

7411 Fullerton Street, Suite 100, Jacksonville, Florida 32256

(Address of Principal Executive Offices) (Zip Code)

 

(800) 342-1131

(Registrant’s Telephone Number, Including Area Code)

 

(Former name, former address and former fiscal year, if changed since last report)

N/A

 

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 o  No o *

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

 

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):

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o  No x

 

As of July 30, 2013 there were 252,281 shares of the Registrant’s common stock outstanding.

 


*  The registrant is not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”), but files reports with the Securities and Exchange Commission voluntarily, as required by the terms of its indentures. The registrant has filed all Exchange Act reports for the preceding 12 months.

 

 

 



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EXPLANATORY NOTE

 

Unless the context indicates otherwise, the words (i) “Company,” “we,” “our,” and “us” refer collectively to Florida East Coast Holdings Corp. and its consolidated subsidiaries (including FECR Corp.), (ii) “FECR Corp.” refers to Florida East Coast Railway Corp. and its consolidated subsidiaries and predecessor entity, and (iii) “Holdings Corp.” refers to Florida East Coast Holdings Corp. on a stand-alone basis.

 

Holdings Corp. was incorporated on January 10, 2011. In January 2011, all of the equity interests in FECR Corp. were transferred from FECR Rail LLC to Holdings Corp., whereby Holdings Corp. became the direct parent of FECR Corp. Holdings Corp. is a holding company and has no direct operations or material assets other than its wholly owned interest in FECR Corp. All of Holdings Corp.’s operations are conducted through its subsidiaries. The only material differences between Holdings Corp. and FECR Corp. are the Senior PIK Toggle Notes issued by Holdings Corp. and its related accounts, including deferred financing costs, amortization, payment of interest and payment of taxes. Reclassifications in common stock and additional-paid-in capital have been made to the consolidated financial statements included in this Quarterly Report to reflect the capital structure of Holdings Corp. for the three and six months ended June 30, 2013. Where information or an explanation is provided that is substantially the same for each company, such information or explanation has been combined. Where information or an explanation is not substantially the same for each company, we have provided separate information and explanation. Pursuant to the indenture governing FECR Corp.’s outstanding notes, FECR Corp. is permitted to satisfy its reporting obligations under the indenture with respect to financial information relating to FECR Corp. by furnishing financial information relating to any direct or indirect parent company of FECR Corp. which becomes a guarantor of the notes on the terms and conditions set forth in the indenture. Holdings Corp. became a guarantor of FECR Corp.’s outstanding notes on March 14, 2012.

 

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FLORIDA EAST COAST HOLDINGS CORP.

 

INDEX TO FORM 10-Q

 

QUARTER ENDED JUNE 30, 2013

 

 

 

 

Page

Part I.

Financial Information

 

 

 

Item 1.

Financial Statements and Notes to Consolidated Financial Statements

4

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

29

 

Item 4.

Controls and Procedures

30

 

 

 

 

Part II.

Other Information

 

 

 

Item 1.

Legal Proceedings

31

 

Item 1A.

Risk Factors

32

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

33

 

Item 3.

Defaults Upon Senior Securities

33

 

Item 4.

Mine Safety Disclosures

33

 

Item 5.

Other Information

33

 

Item 6.

Exhibits

34

EX-31.1

 

 

 

EX-31.2

 

 

 

EX-32.1

 

 

 

EX-32.2

 

 

 

 

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PART I.  FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

FLORIDA EAST COAST HOLDINGS CORP.

CONSOLIDATED BALANCE SHEETS

(in thousands except for share amounts)

 

 

 

June 30,
2013

 

December 31,
2012

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

51,068

 

$

40,400

 

Restricted cash

 

126

 

126

 

Accounts receivable, net

 

39,733

 

34,380

 

Materials and supplies

 

7,353

 

3,574

 

Deferred income taxes

 

2,374

 

2,374

 

Prepaid and other current assets

 

3,959

 

2,477

 

Assets held for sale

 

 

1,839

 

Total current assets

 

104,613

 

85,170

 

Noncurrent assets:

 

 

 

 

 

Property, plant and equipment, less accumulated depreciation

 

773,633

 

772,429

 

Investments in non-affiliates

 

74

 

74

 

Intangible assets, less accumulated amortization

 

192

 

220

 

Other assets

 

14,068

 

15,104

 

Total noncurrent assets

 

787,967

 

787,827

 

Total assets

 

$

892,580

 

$

872,997

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable and accrued expenses

 

$

47,966

 

$

42,193

 

Taxes payable

 

3,691

 

326

 

Deferred revenue

 

934

 

906

 

Other current liabilities

 

1,491

 

1,035

 

Total current liabilities

 

54,082

 

44,460

 

Deferred income taxes

 

25,554

 

24,838

 

Long-term debt

 

634,978

 

625,969

 

Other long-term liabilities

 

6,541

 

12,534

 

Total liabilities

 

721,155

 

707,801

 

Stockholders’ equity:

 

 

 

 

 

Series A Perpetual Preferred Stock, $0.01 par value, 1,000,000 shares authorized, 24,151 shares issued and outstanding as of June 30, 2013 and as of December 31, 2012

 

 

 

Series B Perpetual Preferred Stock, $0.01 par value, 150,000 shares authorized and none outstanding as of June 30, 2013 and December 31, 2012

 

 

 

Common stock, $0.01 par value, 1,000,000 shares authorized; 252,281 shares issued and outstanding as of June 30, 2013 and 252,106 shares issued and outstanding as of December 31, 2012

 

3

 

3

 

Additional paid-in capital

 

286,931

 

286,085

 

Accumulated deficit

 

(114,428

)

(119,770

)

Accumulated other comprehensive loss

 

(1,081

)

(1,122

)

Total stockholders’ equity

 

171,425

 

165,196

 

Total liabilities and stockholders’ equity

 

$

892,580

 

$

872,997

 

 

The accompanying notes are an integral part of the Consolidated Financial Statements.

 

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FLORIDA EAST COAST HOLDINGS CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in thousands)

 

 

 

Three Months
Ended June 30,

 

Six Months
Ended June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Operating revenue

 

$

66,904

 

$

58,499

 

$

135,670

 

$

115,844

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Labor and benefits

 

13,618

 

11,922

 

26,657

 

24,153

 

Purchased services

 

12,409

 

11,401

 

25,147

 

20,437

 

Fuel

 

7,739

 

7,178

 

16,150

 

15,069

 

Depreciation and amortization

 

6,493

 

6,700

 

13,155

 

13,364

 

Equipment rents

 

3,898

 

3,187

 

7,916

 

6,334

 

Other

 

4,637

 

6,344

 

8,193

 

12,634

 

Total operating expenses

 

48,794

 

46,732

 

97,218

 

91,991

 

Operating income

 

18,110

 

11,767

 

38,452

 

23,853

 

Interest expense, net of interest income

 

(14,881

)

(14,371

)

(29,846

)

(28,986

)

Other income

 

4

 

77

 

55

 

79

 

Income (loss) before income taxes

 

3,233

 

(2,527

)

8,661

 

(5,054

)

Provision (benefit) for income taxes

 

(526

)

1,563

 

716

 

3,535

 

Net income (loss)

 

$

3,759

 

$

(4,090

)

$

7,945

 

$

(8,589

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

$

3,780

 

$

(4,076

)

$

7,986

 

$

(8,565

)

 

The accompanying notes are an integral part of the Consolidated Financial Statements.

 

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FLORIDA EAST COAST HOLDINGS CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

 

 

Six Months Ended
June 30,

 

 

 

2013

 

2012

 

CASH FLOW FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income (loss)

 

$

7,945

 

$

(8,589

)

Adjustments to reconcile net income (loss) to cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

13,155

 

13,364

 

Amortization of debt financing fees

 

1,784

 

1,762

 

Share based compensation costs

 

845

 

1,105

 

Deferred taxes

 

716

 

3,535

 

Interest paid in kind

 

1,432

 

7,701

 

Other

 

22

 

(94

)

Changes in operating assets and liabilities:

 

 

 

 

 

Change in restricted cash

 

 

(1

)

Accounts receivable

 

(4,538

)

(1,435

)

Prepaids and other current assets

 

(1,482

)

(704

)

Materials and supplies

 

(3,779

)

(2,238

)

Other assets

 

(596

)

203

 

Accounts payable and accrued expenses

 

(1,363

)

(3,923

)

Accrued interest

 

7,136

 

 

Taxes payable

 

3,365

 

(3,316

)

Deferred revenue

 

28

 

(1,358

)

Other current liabilities

 

456

 

345

 

Other long-term liabilities

 

1,209

 

245

 

Net cash provided by operating activities

 

26,335

 

6,602

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Purchases of properties and equipment

 

(14,455

)

(10,060

)

Proceeds from disposition of assets

 

1,126

 

379

 

Net cash used in investing activities

 

(13,329

)

(9,681

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Purchase of common shares outstanding

 

(2,603

)

(535

)

Proceeds from issuance of long-term debt

 

265

 

 

Financing costs

 

 

(36

)

Net cash used in financing activities

 

(2,338

)

(571

)

Net increase (decrease) in cash and cash equivalents

 

10,668

 

(3,650

)

Cash and cash equivalents at beginning of period

 

40,400

 

30,905

 

Cash and cash equivalents at end of period

 

$

51,068

 

$

27,255

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

19,297

 

$

19,277

 

 

The accompanying notes are an integral part of the Consolidated Financial Statements.

 

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FLORIDA EAST COAST HOLDINGS CORP.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Description of the Business and Basis of Presentation

 

The accompanying Consolidated Financial Statements of Florida East Coast Holdings Corp. and its subsidiaries (the “Company” or “Holdings Corp.”) have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The Company’s rail transportation operations are conducted through its direct wholly owned subsidiary Florida East Coast Railway Corp. (“FECR Corp.”), and its indirect wholly owned subsidiaries, Florida East Coast Railway, L.L.C. and FEC Highway Services, L.L.C. (collectively, the “Railway”). The Railway operates a premiere Class II railroad along 351 miles of mainline track between Jacksonville and Miami, Florida, serving some of the most densely populated areas of Florida. Additionally, the Railway owns and operates approximately 270 miles of branch, switching and other secondary track and 115 miles of yard track, all within Florida. The Railway has the only private coastal right-of-way between Jacksonville and Miami and is the exclusive rail-service provider to the Port of Palm Beach, Port Everglades (Fort Lauderdale), and the Port of Miami.

 

Fortress Acquisition

 

On July 26, 2007, private equity funds managed by affiliates of Fortress Investment Group LLC (collectively, “Fortress”) acquired all of the outstanding stock of Florida East Coast Industries, Inc. (“FECI”), a then publicly held company. As part of the acquisition of FECI (herein referred to as the “Fortress Acquisition”), Fortress assumed a portion of FECI’s long-term debt and repaid the remaining outstanding debt and took FECI private.

 

Formation of Florida East Coast Holdings Corp.

 

Florida East Coast Holdings Corp., was incorporated in Florida on January 10, 2011 to hold the investments of the Company.

 

On January 25, 2011, FECR Rail LLC contributed all of its holdings of FECR Corp.’s common and preferred shares in exchange for 250,555 newly issued common shares of Holdings Corp. As a result, FECR Rail LLC became the immediate parent of Holdings Corp., whereas Holdings Corp. became the immediate parent of FECR Corp.

 

The following is a summary of entities included in the Consolidated Financial Statements:

 

· Florida East Coast Holdings Corp. (a wholly owned subsidiary of FECR Rail LLC)

 

· Florida East Coast Railway Corp. (also known as “Railway”) (a wholly owned subsidiary of Florida East Coast Holdings Corp.):

 

· Florida East Coast Railway, L.L.C., and its subsidiaries;

 

· FEC Highway Services, L.L.C.

 

FEC PEVT L.L.C. and FEC PEVT Corporation

 

On September 26, 2012, the Company, through its wholly owned subsidiaries, FEC PEVT, L.L.C., as borrower, and Florida East Coast Railway, L.L.C., as guarantor, entered into a State Infrastructure Bank loan (the “SIB Loan”) with the Florida Department of Transportation (“FDOT”), as lender (see additional information in Note 6). In conjunction with the SIB Loan, the Company formed FEC PEVT Corporation and FEC PEVT L.L.C. FEC PEVT L.L.C. is owned by Florida East Coast Railway, L.L.C. (99%) and FEC PEVT Corporation (1%). FEC PEVT Corporation is a wholly owned subsidiary of Florida East Coast Railway Corp. The newly formed entities are included in the Consolidated Financial Statements as discussed above.

 

2. Summary of Significant Accounting Policies

 

Principles of Consolidated Financial Statements

 

The accompanying Consolidated Financial Statements of the Company include all wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.  The Consolidated Financial Statements include all adjustments which are necessary for a fair presentation of the results for interim periods.  All such adjustments are of a normal recurring nature.

 

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Use of Estimates

 

The preparation of the Consolidated Financial Statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.

 

Reclassifications

 

Certain prior year amounts have been reclassified to conform to the current year presentation.

 

Disclosures about Fair Value of Financial Instruments

 

ASC 825, Financial Instruments, requires disclosure of the fair value of certain financial instruments. Various inputs are considered when determining the fair values of financial instruments.  These inputs are summarized below:

 

·           Level 1 — observable market inputs that are unadjusted quoted prices for identical assets or liabilities in active markets

·           Level 2 — other significant observable inputs (including quoted prices for similar securities, interest rates, credit risk, etc.)

·           Level 3 — significant unobservable inputs (including the Company’s own assumptions in determining the fair value of financial instruments)

 

The following methods and assumptions were used to estimate the fair value of each class of financial instruments held by the Company:

 

·           Current assets: cash and cash equivalents, as reflected in the consolidated balance sheets, approximate fair value because of the short-term maturity of these instruments (Level 1 inputs).

 

·           Long-term debt: the fair value of the Company’s Senior Secured Notes and Senior Payment in Kind Toggle Notes (the “Senior PIK Toggle Notes”) is based on secondary market indicators (quoted market prices) at the date of measurement (Level 2 inputs).  The fair value of the SIB Loan is based on observable market inputs (Level 1 inputs) due to the drawdown occurring within the three months ended June 30, 2013.

 

The carrying amounts and estimated fair values of the Company’s financial instruments were as follows (in thousands):

 

 

 

June 30, 2013

 

 

 

Carrying Amount

 

Fair Value

 

Cash and cash equivalents

 

$

51,068

 

$

51,068

 

Senior Secured Notes

 

475,000

 

502,550

 

Senior PIK Toggle Notes

 

159,713

 

168,497

 

SIB Loan

 

265

 

265

 

 

The Company had no Level 3 inputs as of June 30, 2013.

 

Accumulated Comprehensive Loss

 

Comprehensive loss is the changes in equity of an enterprise except those resulting from shareholder transactions. Accumulated other comprehensive loss consists of the following (in thousands):

 

 

 

June 30,

 

December 31,

 

 

 

2013

 

2012

 

Actuarial loss associated with pension plan

 

$

(1,077

)

$

(1,118

)

Unrealized loss on marketable securities

 

(4

)

(4

)

Accumulated other comprehensive loss

 

$

(1,081

)

$

(1,122

)

 

3. Recent Accounting Pronouncements

 

In February 2013, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update to the Comprehensive Income Topic in the Accounting Standards Codifications (“ASC”). This update requires separate presentation of the components that are reclassified out of accumulated other comprehensive income either on the face of the financial statements or in

 

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the notes to the financial statements. This update also requires companies to disclose the income statement line items impacted by any significant reclassifications, such as the amortization of pension adjustments. These items are required for both interim and annual reporting for public companies and became effective for the Company beginning with the Quarterly Report on Form 10-Q for the three month period ending March 31, 2013.

 

4. Related-Party Transactions

 

Management and facility and equipment rents

 

The Company incurred net charges of $0.4 million and $0.4 million for facility rents to affiliates of FECI for the three months ended June 30, 2013 and 2012, respectively. During the six months ended June 30, 2013 and 2012, the Company incurred net charges of $0.9 million and $0.8 million, respectively for facility rents to affiliates of FECI.  In addition, the Company allocated net proceeds of zero and $0.4 million for management services related to our right-of-way and for FECI’s passenger rail program for the three months ended June 30, 2013 and 2012, respectively.  The Company allocated net proceeds of $0.1 million and $0.7 million for management services related to our right-of-way and for FECI’s passenger rail program for the six months ended June 30, 2013 and 2012, respectively.  As of June 30, 2013 and December 31, 2012, the Company did not have an outstanding net receivable or payable from or to FECI.

 

In addition, the Company allocated net proceeds of zero and $0.4 million for management services, and facility and equipment rents to affiliates of RailAmerica, Inc. (“RailAmerica”) for the three months ended June 30, 2013, and 2012, respectively.  During the six months ended June 30, 2013 and 2012, the Company allocated net proceeds of zero and $0.7 million, respectively.  Subsequent to October 1, 2012, RailAmerica is no longer considered a related party, due to a change in ownership.

 

Effective June 1, 2011, the Company entered into an agreement with RailAmerica’s wholly-owned subsidiary, Atlas Road Construction, L.L.C., to provide engineering and construction services for the Port Miami project (see Note 11).  The Company incurred net charges of zero and $0.2 million for the three months ended June 30, 2013 and 2012, respectively.  For the six months ended June 30, 2013 and 2012, the Company incurred net charges of zero and $2.2 million, respectively.

 

The Company rents chassis equipment for ordinary business operations from TRAC Intermodal, an entity indirectly owned by funds managed by affiliates of Fortress. These rents are based on current market rates for similar assets. During the three months ended June 30, 2013 and 2012, the Company incurred net charges of $0.2 million and $0.1 million, respectively.  For the six months ended June 30, 2013 and 2012, the Company incurred net charges of $0.5 million and $0.3 million, respectively.  As of June 30, 2013 and December 31, 2012, the Company had an outstanding payable of $0.2 million and $0.1 million, respectively.

 

Lease of FECI’s rail yard

 

On January 24, 2011, the Company entered into an amended and restated rail yard lease, which, among other things: extends the date to vacate to December 31, 2035 (unless the Company elects not to renew the lease); commencing on January 1, 2011, provides for an annual rental fee of $4.5 million a year (subject to a 2.5% annual increase); provides the Company the right to purchase certain land from FECI at a mutually determined fair market value; provides FECI with the right to relocate the Company (at its expense) from such land to comparable property with competitive rental rates. The lease is cancellable by the Company after five years with a two year notice requirement. The Railway paid $1.3 million and $1.3 million for the rail yard base rent for the three months ended June 30, 2013 and 2012, respectively.  During the six months ended June 30, 2013 and 2012, the Company paid $2.5 million and $2.5 million, respectively, in rail yard base rent.

 

5. Income Taxes

 

It is more likely than not that a portion of the net operating loss carryforwards will expire unused.  The Company recorded an income tax benefit of $0.5 million and an expense of $1.6 million, for the three months ended June 30, 2013 and 2012, respectively.  For the six months ended June 30, 2013 and 2012, the Company recorded income tax expense of $0.7 million and $3.5 million, respectively.  The difference between the statutory rate and the effective rate is primarily driven by the change in the valuation allowance for the three and six month periods ending June 30, 2013 and 2012, respectively.

 

A valuation allowance against deferred tax assets is required if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company established a valuation allowance of $48.2 million and $52.5 million as of June 30, 2013 and December 31, 2012, respectively, to reduce deferred tax assets to their expected realizable value.

 

The Company has net operating loss carryforwards as of June 30, 2013, as follows:

 

· U. S.—$282.6 million (expiration periods: 2029—2035)

 

· Florida—$293.9 million (expiration periods: 2029—2035)

 

The Company recognizes interest and penalties related to uncertain tax positions in its provision for income taxes. As of June 30, 2013, the Company did not believe that it had any uncertain tax positions. As of December 31, 2012, the U.S. and Florida

 

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taxing jurisdiction remains open to examination for the years 2011, 2010, and 2009.

 

6. Long-Term Debt

 

Debt consisted of the following:

 

 

 

June 30,
 2013

 

December 31,
 2012

 

 

 

(in thousands)

 

 

 

 

 

 

 

Senior Secured Notes

 

$

475,000

 

$

475,000

 

Senior PIK Toggle Notes (net of original discount of $1,624)

 

159,713

 

150,969

 

SIB Loan

 

265

 

 

 

 

 

 

 

 

Total debt

 

634,978

 

625,969

 

Less: Current maturities

 

 

 

Long-term debt, less current maturities

 

$

634,978

 

$

625,969

 

 

Interest expense was $10.5 million on the 8 1/8% Senior Secured Notes (the “Senior Secured Notes” or “8 1/8% Notes”) and $4.4 million on the Senior PIK Toggle Notes for the three months ended June 30, 2013.  Interest expense was $21.0 million on the Senior Secured Notes and $8.8 million on the Senior PIK Toggle Notes for the six months ended June 30, 2013.  Interest expense was $10.2 million on the Senior Secured Notes and $4.2 million on the Senior PIK Toggle Notes for the three months ended June 30, 2012.  Interest expense was $20.6 million on the Senior Secured Notes and $8.4 million on the Senior PIK Toggle Notes for the six months ended June 30, 2012.

 

In connection with the issuance of the Senior Secured Notes, FECR Corp. and certain of its subsidiaries also entered into the Asset-Based Lending (“ABL”) Facility that matures on January 25, 2015.  Availability on the ABL Facility as of June 30, 2013 was $27.0 million available for cash withdrawal, plus an additional $3.0 million standby letter of credit.

 

The Senior Secured Notes are secured by first-priority liens on substantially all of the tangible and intangible assets of FECR Corp. and its subsidiary guarantors’ (other than the ABL collateral securing the ABL Facility and other than the collateral securing the SIB Loan) and a second-priority lien on ABL collateral and SIB Loan collateral. The guarantors are defined primarily as existing and future wholly owned domestic restricted subsidiaries. FECR Corp. may redeem up to 10% of the aggregate principal amount of the Senior Secured Notes issued during any 12-month period commencing on the issue date and ending on the third anniversary thereof at a price equal to 103% of the principal amount thereof plus accrued and unpaid interest, if any. FECR Corp. may also redeem some or all of the Senior Secured Notes at any time before February, 2014 at a price equal to 100% of the aggregate principal amount thereof plus a make-whole premium. In addition, prior to February 1, 2014, FECR Corp. may redeem up to 35% of the Senior Secured Notes at a redemption price of 108.125% of the aggregate principal amount thereof with the proceeds from an equity offering. Subsequent to February 1, 2014, FECR Corp. may redeem the Senior Secured Notes at 104.063% of their principal amount. The premium then reduces to 102.031% commencing on February 1, 2015 and then 100% on February 1, 2016 and thereafter.

 

The ABL Facility and indenture governing the Senior Secured Notes contain various covenants and restrictions that limit FECR Corp. and its restricted subsidiaries’ ability to incur additional indebtedness, pay dividends, make certain investments, sell or transfer certain assets, create liens, designate subsidiaries as unrestricted subsidiaries, consolidate, merge or sell substantially all the assets, and enter into certain transactions with affiliates. It is anticipated that proceeds from any future borrowings will be used for general corporate purposes.

 

Shareholder Contribution of FECR Rail LLC

 

In 2011, FECR Rail LLC contributed an aggregate $16.0 million to the Company.

 

The proceeds of the sale of the Series B Perpetual Preferred Stock and $15.0 million of the FECR Rail LLC contribution to the Company were further contributed to FECR Corp. This contribution of $140.0 million together with the proceeds of the issuance of the Senior Secured Notes were used to repay an amount outstanding of approximately $601.2 million under the former credit facility owed by FECR Corp., to pay certain fees and expenses incurred in connection with the offering of the 8 1/8% Notes, and for general corporate purposes.

 

Senior PIK Toggle Notes

 

On February 11, 2011, Holdings Corp. sold $130.0 million of 10 1/2 / 11 1/4% Senior PIK Toggle Notes due 2017 in a private offering, for net proceeds of $127.7 million. The Senior PIK Toggle Notes are senior unsecured obligations that are not guaranteed by any of Holdings Corp.’s subsidiaries.

 

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Table of Contents

 

Holdings Corp. may redeem the notes in whole or in part at a redemption price of 107.5%, 105%, 102.5%, and 100%, plus accrued and unpaid interest thereon for the subsequent periods after August 1, 2012 as follows: August 1, 2012 through January 31, 2013; February 1, 2013 through January 31, 2014; February 1, 2014 through January 31, 2015; and February 1, 2015 and thereafter, respectively.

 

The Senior PIK Toggle Notes will pay interest semi-annually in arrears on each February 1 and August 1, commencing on August 1, 2011. Thereafter and up to February 1, 2016, Holdings Corp. may elect to pay interest on the Senior PIK Toggle Notes (1) entirely in cash at a rate of 10.5% , (2) entirely by increasing the principal amount of the note or by issuing new notes for the entire amount of the interest payment, at a rate per annum equal to the cash interest rate of 10.5% plus 75 basis points (in each case, PIK interest), or (3) 50% as cash interest and 50% as PIK interest. After February 1, 2016, interest will be payable entirely in cash.

 

The Company could be subject to certain interest deduction limitations if the Senior PIK Toggle Notes were treated as “applicable high yield discount obligations” within the meaning of Section 163(i)(1) of the Internal Revenue Code, as amended. In order to avoid such treatment, the Company would be required to redeem for cash a portion of each Senior PIK Toggle Note then outstanding at the end of the accrual period ending August 1, 2016. The portion of a Senior PIK Toggle Note required to be redeemed is an amount equal to the excess of the accrued original issue discount as of the end of such accrual period, less the amount of interest paid in cash on or before such date, less the first-year yield (the issue price of the debt instrument multiplied by its yield to maturity). The redemption price for the portion of each Senior PIK Toggle Note so redeemed would be 100% of the principal amount of such portion plus any accrued interest on the date of redemption.

 

The net proceeds of the issuance of the Senior PIK Toggle Notes were used to redeem the Company’s Series B Perpetual Preferred Stock for the carrying value of $125.0 million and accrued interest of $1.1 million. As a result, none of the Series B Perpetual Preferred Stock remains issued and outstanding.

 

The Senior Secured Notes and Senior PIK Toggle Notes will mature in fiscal 2017.

 

SIB Loan

 

On September 26, 2012, FEC PEVT, L.L.C., as borrower, and Florida East Coast Railway, L.L.C., as guarantor, each a wholly owned subsidiary of the Company, entered into the SIB Loan with FDOT. The SIB Loan provides for a loan of $30 million to fund, in part, the costs associated with the construction of a new Florida East Coast Intermodal Container Transfer Facility (the “ICTF”) in Port Everglades, Florida, which will serve the Company’s domestic and international business segments. Proceeds from the SIB Loan will be advanced by FDOT as construction proceeds on the ICTF and when the Company requests drawdown. The Company has borrowed $0.3 million under the SIB Loan for the three and six months ended June 30, 2013. The total construction cost of the ICTF construction project is approximately $53 million, $30 million of which will be funded through the SIB Loan, $18 million of which will be from a FDOT grant (the “FDOT Grant”) and the balance of $5 million from the Company’s capital budget. The Company has been awarded the entire FDOT Grant of $18 million as of December 31, 2012.

 

Interest will accrue on the advanced principal amount of the SIB Loan at the rate of 3.50% per annum, compounded annually, using an actual-days-elapsed/365 day counting convention. Both principal and interest payments are payable in annual installments as follows: interest payments commence on the SIB Loan on October 1, 2013, and principal repayments commence on the SIB Loan on October 1, 2015. The SIB Loan will be amortized over 20 years.

 

The SIB Loan is fully and unconditionally guaranteed by the Florida East Coast Railway, L.L.C. In addition, as a condition to making the SIB Loan, FDOT required a first priority lien on certain fixtures (including rail trackage) and equipment included in the collateral securing the Senior Secured Notes. The SIB Loan specifically excludes land, rail equipment and motor vehicles from its lien. As a condition to FDOT making the first loan disbursement under the SIB Loan, FEC PEVT, L.L.C. was required to post as additional collateral through July 1, 2017, a standby letter of credit in the amount of $3.0 million payable to FDOT, as beneficiary (the “Standby Letter of Credit Collateral”). On February 1, 2013, the Company posted the Standby Letter of Credit Collateral by accessing the letter of credit line of the ABL Facility, reducing availability for cash withdrawal under the ABL Facility to $27.0 million. The SIB Loan permits FEC PEVT, L.L.C, in lieu of posting the Standby Letter of Credit Collateral, at any time upon prior notice, to either pay down the principal of the SIB Loan by $3 million or substitute cash collateral.

 

7. Preferred Stock

 

The Company has 24,151 shares of Series A Redeemable Preferred Stock (the “preferred shares”) issued and outstanding. These preferred shares are held by FECR Rail LLC.  Dividends accumulate at the rate of 15% per annum, subject to limitations on distributions by the Company imposed by the terms of any financing, swap, or other agreement. The Company was able to redeem in whole or in part the preferred shares at any time.

 

As of June 30, 2013 and December 31, 2012, the total unpaid preferred yield was $9.9 million and $7.5 million, respectively.

 

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Table of Contents

 

8. Share-Based Compensation

 

In February 2013, the Company granted 237 restricted share units (“RSUs”) with respect to shares of common stock, par value $0.01 to certain executive officers.  The fair value at grant date was $0.5 million and the shares vest over a three-year term.  The grant date fair value of the restricted shares is based upon the market value of the Company’s common stock as of the quarterly evaluation.  Each restricted stock unit represents the right to receive one share of common stock.

 

The Company issued 175 net shares of common stock for the six months ended June 30, 2013 resulting from the vesting of RSU awards granted in previous fiscal years.

 

Exemption from the registration requirements of the Securities Act of 1933, as amended (the “Act”), for the foregoing issuances is claimed under Section 4(2) of the Act and Regulation D promulgated thereunder. The foregoing issuances were compensatory in nature and were made without cost to the recipients, other than the provision of services.

 

Share-based compensation expenses for the three months ended June 30, 2013 and 2012 were $0.5 million and $0.6 million, respectively.  Share-based compensation expenses for the six months ended June 30, 2013 and 2012 were $0.8 million and $1.1 million, respectively.

 

9. Commitments and Contingencies

 

The Company is the defendant and plaintiff in various lawsuits resulting from its operations. In the opinion of management, appropriate provisions have been made in the Consolidated Financial Statements for the estimated liability that is probable from disposition of such matters. The Company maintains comprehensive liability insurance for bodily injury and property claims, but is self-insured or maintains a significant self-insured retention for these exposures.

 

In September 2006, the Florida Department of Environmental Protection (“FDEP”) notified the Company and an adjacent property owner that they had been identified as potentially responsible parties (“PRPs”) as a result of an investigation into contaminated groundwater in Fort Pierce, Florida. As of June 30, 2013, and December 31, 2012, the Company had accrued $1.5 million and $1.5 million, respectively, related to the alleged contamination.  Of the $1.5 million accrued at June 30, 2013, $0.2 million is expected to be paid over the next year.  FDEP and the Company agreed in April 2012 that the Company’s scope of testing is complete and the Company can initiate a pilot remediation of the property.  The Company has completed the selection of a contractor and the contractor has initiated the pilot in early 2013.

 

In addition to the above site, the Company monitors a small number of other sites leased to others, or acquired by the Company or its subsidiaries. Based on management’s ongoing review and monitoring of these sites, and the ability to seek contribution or indemnification from the PRPs, the Company does not expect to incur material additional costs.

 

It is difficult to quantify future environmental costs as many issues relate to actions by third parties or changes in environmental regulations. However, based on information presently available, management believes that the ultimate disposition of currently known matters will not have a material effect on the financial position, liquidity, or results of operations of the Company.

 

In addition, the Company had accrued approximately $0.3 million and $0.6 million related to various other environmental incidents as of June 30, 2013, and December 31, 2012, respectively.

 

These liabilities are accrued when estimable and probable in accordance with the Contingencies Topic in the ASC. Actual settlements and claims received could differ. The final outcome of these matters cannot be predicted with certainty. Considering the legal defenses currently available, the liabilities that have been recorded and other factors, it is the opinion of management that none of these items individually, when finally resolved, will have a material effect on the Company’s financial condition, results of operations or liquidity. Should a number of these items occur in the same period, however, they could have a material effect on the Company’s financial condition, results of operations or liquidity in that particular period.

 

10. Track Maintenance Agreement

 

The Company entered into a Track Maintenance Agreement with an unrelated third-party customer (the “Shipper”). Under the agreement, the Shipper paid for qualified railroad track maintenance expenditures during the fiscal year in exchange for the assignment of railroad track miles, which permits the Shipper to claim certain tax credits pursuant to Section 45G of the Internal Revenue Code. The track maintenance tax credit was not renewed until January 2013; however, the extension did include retroactive tax credit reimbursement for 2012 and 2013. Therefore, no 45G maintenance reimbursement was reflected in the 2012 financial statements.  For the three and six months ended June 30, 2013, the Company has recorded $1.1 million and $4.1 million, respectively, of maintenance expenditures. The $4.1 million recorded for the six months ended June 30, 2013, includes the credits earned for 2012 and 2013. This amount is included in other expenses as a reduction to expense in the Consolidated Statements of Operations and Comprehensive Income (Loss).  As of June 30, 2013, the Company has a net outstanding receivable of $1.7 million.

 

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Table of Contents

 

11. Port Activity

 

In October 2010, Miami-Dade County, owner of the Port of Miami, was awarded a $22.8 million federal grant under the U.S. Department of Transportation’s Transportation Investment Generating Economic Recovery II (“TIGER”) program to rehabilitate the port’s rail bridge and construct new rail facilities on port property (“on-port project”). In addition to the $22.8 million TIGER grant, an additional $2.3 million will be funded by Port Miami. These projects will enable cargo to be moved directly from the port’s facility to an inland distribution center and alleviate traffic congestion in and around the port.

 

On September 20, 2011, Miami-Dade County entered into a Rail Bridge Construction Agreement with the Company. Under this agreement, the Company is responsible for the administration of the construction work for the Bascule Bridge over Biscayne Bay which connects the Company’s Port Lead to the Port of Miami. The Company is reimbursed for all of the costs incurred. For the three months ended June 30, 2013 and 2012, the Company incurred costs of zero and $1.1 million, respectively. For the six months ended June 30, 2013 and 2012, the Company incurred costs of $1.7 million and $1.6 million, respectively. As of June 30, 2013 and December 31, 2012, the Company had an outstanding receivable of $0.5 million and $2.7 million, respectively.

 

The TIGER grant also includes funding for the Port Rail Intermodal Apron (“apron”). This consists of construction of an intermodal apron running parallel to the full length of the tracks at Port Miami. The apron will include securing fencing, a radiation portal and inspection infrastructure, and crossing improvements. The Company will be reimbursed for all of the costs incurred. For the three months ended June 30, 2013 and 2012, the Company incurred costs of $0.4 million and zero, respectively. For the six months ended June 30, 2013 and 2012, the Company incurred costs of $0.4 million and zero, respectively. As of June 30, 2013 and December 31, 2012, the Company had an outstanding receivable of $0.4 million and zero, respectively.

 

The Company plans to establish intermodal container rail service on its own rail line leading into Port Miami at an estimated total cost of $18.3 million (“off-port project”). The Company signed an agreement with FDOT on January 24, 2011, in which FDOT will participate in funding of the “off-port project” and will reimburse the Company an estimated $9.1 million of the total cost. As of December 31, 2012, the Company had incurred approximately $18.3 million of capital expenditures related to the Port Miami off-port project. Of this amount, the Company has reduced this capital expenditure by $9.1 million with grant proceeds.

 

On March 15, 2011, the Company entered into an Assumption Agreement with Miami-Dade County. Under the agreement, the Company will perform track improvements in the Hialeah Yard to better accommodate current and future customers to include double stack containers coming from the Port of Miami. The Company will be reimbursed for all of the costs incurred. For the three months ended June 30, 2013 and 2012, the Company incurred costs of $0.4 million and zero, respectively. For the six months ended June 30, 2013 and 2012, the Company incurred costs of $0.4 million and zero, respectively. As of June 30, 2013 and December 31, 2012, the Company had an outstanding receivable of $0.4 million and zero, respectively.

 

On January 31, 2012, the Company entered into a Port Everglades Intermodal Container Transfer Facility Lease and Operating Agreement with Broward County. The agreement was ratified by Broward County on March 20, 2012. The term of the agreement is 30 years with two 10-year options. The Agreement was subject to the closing of the SIB Loan with FDOT. The SIB Loan closed on September 26, 2012. The Agreement provides the Company the land needed for the Company to construct an intermodal facility to serve its domestic and international business segments. The total construction cost is approximately $53 million, $30 million of which will be funded through the SIB Loan, $18 million of which will be from a FDOT grant and the balance of $5 million from the Company’s capital budget. The Company has been awarded the entire $18 million FDOT grant as of December 31, 2012. Upon project commencement, the Company will be reimbursed for half of the corresponding expenditures, not to exceed the $18 million FDOT grant.  For the three months ended June 30, 2013 and 2012, the Company has incurred costs of $4.8 million and zero, respectively.  For the six months ended June 30, 2013 and 2012, the Company has incurred costs of $5.7 million and zero, respectively.  As of June 30, 2013 and December 31, 2012, the Company had an outstanding receivable of $2.4 million and zero, respectively.

 

12. Impairment of Assets

 

During the fourth quarter of 2012, the Company reviewed the serviceable status of the hopper car fleet. The Company identified 227 hoppers that will no longer be used and recorded an impairment charge of $3.5 million to adjust their carrying value to their fair value (Level 2 fair value measurement) based on current scrap value obtained from third-party price quotations.  As a result, the Company classified these hopper cars as held for sale at December 31, 2012.  The Company sold 114 hoppers during the first quarter of 2013 for $1.0 million.  The remaining 113 hoppers were sold during the second quarter of 2013 for $0.8 million.  As of June 30, 2013, the Company has an outstanding receivable of $0.8 million related to the sale of the hoppers in the second quarter.

 

13. Guarantor Condensed Consolidated Financial Statements

 

Holdings Corp. was incorporated on January 10, 2011. In January 2011, all of the equity interests in FECR Corp. were transferred from FECR Rail LLC to Holdings Corp., whereby Holdings Corp. became the direct parent of FECR Corp. Holdings Corp. is a holding company and has no direct operations or material assets other than its wholly owned interest in FECR Corp. All of Holdings Corp.’s operations are conducted through its subsidiaries. The only material differences between Holdings Corp. and FECR Corp. are the separate Senior PIK Toggle Notes issued by Holdings Corp. and its related accounts, including deferred financing costs, amortization, payment of interest and payment of taxes. Where information or an explanation is provided that is substantially the same

 

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Table of Contents

 

for each company, such information or explanation has been combined. Where information or an explanation is not substantially the same for each company, we have provided separate information and explanation.

 

The Consolidating Financial Statements herein present consolidating financial data for Holdings Corp. (on a parent only basis), FECR Corp. (on an issuer only basis), an elimination column for adjustments to arrive at the information for the parent company and subsidiaries on a consolidated basis as of June 30, 2013 and December 31, 2012 and for the three and six months ended June 30, 2013 and 2012.

 

Consolidating balance sheets as of June 30, 2013.

 

 

 

Holdings Corp.
(Parent)

 

FECR Corp.
(Issuer)

 

Eliminations
for
Consolidation

 

Consolidation

 

Current assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

34

 

$

51,034

 

$

 

$

51,068

 

Restricted cash

 

 

126

 

 

126

 

Accounts receivable, net

 

 

39,733

 

 

39,733

 

Materials and supplies

 

 

7,353

 

 

7,353

 

Deferred income taxes

 

(271

)

2,645

 

 

2,374

 

Prepaid and other current assets

 

3

 

3,956

 

 

3,959

 

 

 

 

 

 

 

 

 

 

 

Total current assets

 

(234

)

104,847

 

 

104,613

 

Noncurrent assets:

 

 

 

 

 

 

 

 

 

Property, plant and equipment, less accumulated depreciation

 

 

773,633

 

 

773,633

 

Investments in affiliates

 

415,598

 

 

(415,598

)

 

Investments in non-affiliates

 

 

74

 

 

74

 

Intangible assets, less accumulated amortization

 

 

192

 

 

192

 

Other assets

 

1,429

 

17,886

 

(5,247

)

14,068

 

 

 

 

 

 

 

 

 

 

 

Total noncurrent assets

 

417,027

 

791,785

 

(420,845

)

787,967

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

416,793

 

$

896,632

 

$

(420,845

)

$

892,580

 

Current liabilities:

 

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

7,059

 

$

40,907

 

$

 

$

47,966

 

Taxes payable

 

 

3,691

 

 

3,691

 

Deferred revenue

 

 

934

 

 

934

 

Other current liabilities

 

 

1,491

 

 

1,491

 

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

7,059

 

47,023

 

 

54,082

 

Deferred income taxes

 

(271

)

25,825

 

 

25,554

 

Long-term debt

 

159,713

 

475,265

 

 

634,978

 

Other long-term liabilities

 

5,247

 

6,541

 

(5,247

)

6,541

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

171,748

 

554,654

 

(5,247

)

721,155

 

 

 

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

245,045

 

341,978

 

(415,598

)

171,425

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

416,793

 

$

896,632

 

$

(420,845

)

$

892,580

 

 

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Table of Contents

 

Consolidating balance sheets as of December 31, 2012.

 

 

 

Holdings Corp.
(Parent)

 

FECR Corp.
(Issuer)

 

Eliminations
for
Consolidation

 

Consolidation

 

Current assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

34

 

$

40,366

 

$

 

$

40,400

 

Restricted cash

 

 

126

 

 

126

 

Accounts receivable, net

 

 

34,380

 

 

34,380

 

Materials and supplies

 

 

3,574

 

 

3,574

 

Deferred income taxes

 

(271

)

2,645

 

 

2,374

 

Prepaid and other current assets

 

1

 

2,476

 

 

2,477

 

Assets held for sale

 

 

1,839

 

 

1,839

 

 

 

 

 

 

 

 

 

 

 

Total current assets

 

(236

)

85,406

 

 

85,170

 

Noncurrent assets:

 

 

 

 

 

 

 

 

 

Property, plant and equipment, less accumulated depreciation

 

 

772,429

 

 

772,429

 

Investments in affiliates

 

415,597

 

 

(415,597

)

 

Investments in non-affiliates

 

 

74

 

 

74

 

Intangible assets, less accumulated amortization

 

 

220

 

 

220

 

Other assets

 

1,606

 

16,139

 

(2,641

)

15,104

 

 

 

 

 

 

 

 

 

 

 

Total noncurrent assets

 

417,203

 

788,862

 

(418,238

)

787,827

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

416,967

 

$

874,268

 

$

(418,238

)

$

872,997

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

 

$

42,193

 

$

 

$

42,193

 

Taxes payable

 

 

326

 

 

326

 

Deferred revenue

 

 

906

 

 

906

 

Other current liabilities

 

 

1,035

 

 

1,035

 

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

 

44,460

 

 

44,460

 

Deferred income taxes

 

(271

)

25,109

 

 

24,838

 

Long-term debt

 

150,969

 

475,000

 

 

625,969

 

Other long-term liabilities

 

9,802

 

5,373

 

(2,641

)

12,534

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

160,500

 

549,942

 

(2,641

)

707,801

 

 

 

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

256,467

 

324,326

 

(415,597

)

165,196

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

416,967

 

$

874,268

 

$

(418,238

)

$

872,997

 

 

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Table of Contents

 

Consolidating statement of operations for the three months ended June 30, 2013.

 

 

 

Holdings Corp.
(Parent)

 

FECR Corp.
(Issuer)

 

Eliminations
for
Consolidation

 

Consolidation

 

Operating revenue

 

$

 

$

66,904

 

$

 

$

66,904

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Labor and benefits

 

 

13,618

 

 

13,618

 

Purchased services

 

 

12,409

 

 

12,409

 

Fuel

 

 

7,739

 

 

7,739

 

Depreciation and amortization

 

 

6,493

 

 

6,493

 

Equipment rents

 

 

3,898

 

 

3,898

 

Other

 

 

4,637

 

 

4,637

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

 

48,794

 

 

48,794

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

18,110

 

 

18,110

 

 

 

 

 

 

 

 

 

 

 

Interest expense (net of interest income)

 

(4,401

)

(10,480

)

 

(14,881

)

Other income

 

 

4

 

 

4

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

(4,401

)

7,634

 

 

3,233

 

Benefit for income taxes

 

 

(526

)

 

(526

)

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(4,401

)

$

8,160

 

$

 

$

3,759

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

$

(4,401

)

$

8,181

 

$

 

$

3,780

 

 

Consolidating statement of operations for the three months ended June 30, 2012.

 

 

 

Holdings Corp.
(Parent)

 

FECR Corp.
(Issuer)

 

Eliminations
for
Consolidation

 

Consolidation

 

Operating revenue

 

$

 

$

58,499

 

$

 

$

58,499

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Labor and benefits

 

 

11,922

 

 

11,922

 

Purchased services

 

(6

)

11,407

 

 

11,401

 

Fuel

 

 

7,178

 

 

7,178

 

Depreciation and amortization

 

 

6,700

 

 

6,700

 

Equipment rents

 

 

3,187

 

 

3,187

 

Other

 

 

6,344

 

 

6,344

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

(6

)

46,738

 

 

46,732

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

6

 

11,761

 

 

11,767

 

 

 

 

 

 

 

 

 

 

 

Interest expense (net of interest income)

 

(4,224

)

(10,147

)

 

(14,371

)

Other expense

 

 

77

 

 

77

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

(4,218

)

1,691

 

 

(2,527

)

Provision for income taxes

 

 

1,563

 

 

1,563

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(4,218

)

$

128

 

$

 

$

(4,090

)

 

 

 

 

 

 

 

 

 

 

Comprehensive loss

 

$

(4,218

)

$

(142

)

$

 

$

(4,076

)

 

16



Table of Contents

 

Consolidating statement of operations for the six months ended June 30, 2013.

 

 

 

Holdings Corp.
(Parent)

 

FECR Corp.
(Issuer)

 

Eliminations
for
Consolidation

 

Consolidation

 

Operating revenue

 

$

 

$

135,670

 

$

 

$

135,670

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Labor and benefits

 

 

26,657

 

 

26,657

 

Purchased services

 

 

25,147

 

 

25,147

 

Fuel

 

 

16,150

 

 

16,150

 

Depreciation and amortization

 

 

13,155

 

 

13,155

 

Equipment rents

 

 

7,916

 

 

7,916

 

Other

 

 

8,193

 

 

8,193

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

 

97,218

 

 

97,218

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

38,452

 

 

38,452

 

 

 

 

 

 

 

 

 

 

 

Interest expense (net of interest income)

 

(8,820

)

(21,026

)

 

(29,846

)

Other income

 

 

55

 

 

55

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

(8,820

)

17,481

 

 

8,661

 

Provision for income taxes

 

 

716

 

 

716

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(8,820

)

$

16,765

 

$

 

$

7,945

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

$

(8,820

)

$

16,806

 

$

 

$

7,986

 

 

Consolidating statement of operations for the six months ended June 30, 2012.

 

 

 

Holdings Corp.
(Parent)

 

FECR Corp.
(Issuer)

 

Eliminations
for
Consolidation

 

Consolidation

 

Operating revenue

 

$

 

$

115,844

 

$

 

$

115,844

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Labor and benefits

 

 

24,153

 

 

24,153

 

Purchased services

 

 

20,437

 

 

20,437

 

Fuel

 

 

15,069

 

 

15,069

 

Depreciation and amortization

 

 

13,364

 

 

13,364

 

Equipment rents

 

 

6,334

 

 

6,334

 

Other

 

 

12,634

 

 

12,634

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

 

91,991

 

 

91,991

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

23,853

 

 

23,853

 

 

 

 

 

 

 

 

 

 

 

Interest expense (net of interest income)

 

(8,374

)

(20,612

)

 

(28,986

)

Other expense

 

 

79

 

 

79

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

(8,374

)

3,320

 

 

(5,054

)

Provision for income taxes

 

 

3,535

 

 

3,535

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(8,374

)

$

(215

)

$

 

$

(8,589

)

 

 

 

 

 

 

 

 

 

 

Comprehensive loss

 

$

(8,374

)

$

(191

)

$

 

$

(8,565

)

 

17



Table of Contents

 

Consolidating statement of cash flows for the six months ended June 30, 2013.

 

 

 

Holdings Corp.
(Parent)

 

FECR Corp.
(Issuer)

 

Eliminations
for
Consolidation

 

Consolidation

 

CASH FLOW FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(8,820

)

$

16,765

 

$

 

$

7,945

 

Adjustments to reconcile net income (loss) to cash provided by operating activities:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

13,155

 

 

13,155

 

Amortization of debt financing fees

 

327

 

1,457

 

 

1,784

 

Share-based compensation costs

 

 

845

 

 

845

 

Deferred taxes

 

 

716

 

 

716

 

Interest paid in kind

 

1,432

 

 

 

1,432

 

Other

 

 

22

 

 

22

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(4,538

)

 

(4,538

)

Prepaid and other current assets

 

(2

)

(1,480

)

 

(1,482

)

Materials and supplies

 

 

(3,779

)

 

(3,779

)

Other assets

 

 

(3,204

)

2,608

 

(596

)

Accounts payable and accrued expenses

 

 

(1,363

)

 

(1,363

)

Accrued interest

 

7,058

 

78

 

 

7, 136

 

Taxes payable

 

 

3,365

 

 

3,365

 

Deferred revenue

 

 

28

 

 

28

 

Other current liabilities

 

 

456

 

 

456

 

Other long-term liabilities

 

2,608

 

1,209

 

(2,608

)

1,209

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

2,603

 

23,732

 

 

26,335

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Purchases of properties and equipment

 

 

(14,455

)

 

(14,155

)

Proceeds from disposition of assets

 

 

1,126

 

 

1,126

 

 

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

 

(13,329

)

 

(13,329

)

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Purchase of common stock outstanding

 

(2,603

)

 

 

(2,603

)

Proceeds from issuance of long-term debt

 

 

265

 

 

265

 

 

 

 

 

 

 

 

 

 

 

Net cash (used in) provided by financing activities

 

(2,603

)

265

 

 

(2,338

)

 

 

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

 

10,668

 

 

10,668

 

Cash and cash equivalents at beginning of period

 

34

 

40,366

 

 

40,400

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

34

 

$

51,034

 

$

 

$

51,068

 

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

 

$

19,297

 

$

 

$

19,297

 

 

18



Table of Contents

 

Consolidating statement of cash flows for the six months ended June 30, 2012.

 

 

 

Holdings Corp.
(Parent)

 

FECR Corp.
(Issuer)

 

Eliminations
for
Consolidation

 

Consolidation

 

CASH FLOW FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Net loss

 

$

(8,374

)

$

(215

)

$

 

$

(8,589

)

Adjustments to reconcile net loss to cash provided by operating activities:

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

13,364

 

 

13,364

 

Amortization of debt financing fees

 

314

 

1,448

 

 

1,762

 

Share-based compensation costs

 

 

1,105

 

 

1,105

 

Deferred taxes

 

 

3,535

 

 

3,535

 

Interest paid in kind

 

7,701

 

 

 

7,701

 

Other

 

 

(94

)

 

 

(94

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

Change in restricted cash

 

 

(1

)

 

(1

)

Accounts receivable

 

 

(1,435

)

 

(1,435

)

Prepaid and other current assets

 

(2

)

(702

)

 

(704

)

Materials and supplies

 

 

(2,238

)

 

(2,238

)

Other assets

 

(5

)

(327

)

535

 

203

 

Accounts payable and accrued expenses

 

(6

)

(3,917

)

 

(3,923

)

Taxes payable

 

 

(3,316

)

 

(3,316

)

Deferred revenue

 

 

(1,358

)

 

(1,358

)

Other current liabilities

 

 

345

 

 

345

 

Other long-term liabilities

 

897

 

(117

)

(535

)

245

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

525

 

6,077

 

 

6,602

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Purchases of properties and equipment

 

 

(10,060

)

 

(10,060

)

Proceeds from disposition of assets

 

 

379

 

 

379

 

 

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

 

(9,681

)

 

(9,681

)

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Purchase of common stock outstanding

 

(535

)

 

 

(535

)

Financing costs

 

 

(36

)

 

(36

)

 

 

 

 

 

 

 

 

 

 

Net cash used in financing activities

 

(535

)

(36

)

 

(571

)

 

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(10

)

(3,640

)

 

(3,650

)

Cash and cash equivalents at beginning of period

 

44

 

30,861

 

 

30,905

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at end of period

 

$

34

 

$

27,221

 

$

 

$

27,255

 

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

 

$

19,277

 

$

 

$

19,277

 

 

19



Table of Contents

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

 

This management’s discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks and uncertainties. You should read the following discussion in conjunction with our historical consolidated financial statements and the notes thereto included in this Quarterly Report on Form 10-Q and our annual consolidated financial statements and notes thereto included in our annual report on Form 10-K filed with the SEC on March 13, 2013. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those listed under “Risk Factors.”

 

Overview

 

We own and operate a premier 351-mile freight railroad along the east coast of Florida from Jacksonville to Miami. Our railroad is one of only two major freight railroads serving Florida. We operate at a high level of density, which means that we carry a high number of units per track mile. In 2012, we carried approximately 1,304 units per mainline track mile, which we believe is more than any of the Class I railroads in the United States.

 

In 2012, we transported over 457,000 units on our railroad comprising various types of freight for over 500 customers. We transport products such as intermodal containers and trailers, crushed rock (aggregate), automobiles, food, and other industrial products. We are a major hauler of aggregate in the State of Florida and a key conduit for the transportation of automobiles into South Florida.

 

We provide a direct route through some of the most highly congested regions of the State of Florida, and we believe that we are able to haul freight often more quickly and more cost effectively than other modes of transportation, such as trucking, as one train can haul the equivalent of up to 280 trucks.

 

We have direct access to the major south Florida ports of Miami, Everglades (Fort Lauderdale) and Palm Beach through which we transport intermodal containers. We believe that our unique positioning to these ports will help us continue our intermodal volume growth.

 

Our Business

 

We generate rail-operating revenues primarily from both the movement of freight in conventional freight cars and intermodal shipments of containers and trailers on flatcars. We count each move of a freight car, container or trailer on our line as one unit. We also generate revenue from dray moves (drayage is the movement of containers or trailers by truck to and from the rail yard). Non-freight operating revenues are derived from car hire and demurrage (allowing our customers and other railroads to use our railcars for storage or transportation in exchange for a daily fee), real estate and equipment lease income, ancillary dray charges, switching (managing and positioning railcars within a customer’s facility), and other transportation services.

 

Our operating expenses consist of salaries (approximately 70% of our work force is covered by collective bargaining agreements), related payroll taxes and employee benefits, depreciation (primarily reflecting our capital requirements for maintaining current operations), insurance and casualty claim expenses, diesel fuel, repairs billed to/from others (generally, a net credit received from repairs of foreign cars on our line less repairs paid by us for our cars on a foreign line), property taxes, material and supplies, purchased services (contract labor and professional services), and other expenses.

 

Managing Business Performance

 

We manage our business performance by attempting to (i) grow our freight and non-freight revenue, (ii) drive financial improvements through a variety of cost-savings initiatives, (iii) strive to utilize assets to maximum capacity while still supporting future growth, and (iv) continued focus on safety to lower the risks and costs associated with operating our business.

 

Changes in units and revenue per unit (“RPU”) have a direct impact on freight revenue.  Because we believe there is significant value in the premier, niche railroad that we operate with high efficiency, we will continue to focus on yield management efforts that reflect the value of our freight network.  This focus may allow us to improve our freight RPU. As a consequence, our operating ratio, which we define as total operating expenses divided by total operating revenues, continues to be a key metric which we evaluate. We deem operating ratio as an important metric to measure our operational performance, however, operating ratio is not a measure as defined under U.S. GAAP.

 

Second Quarter 2013 Highlights

 

·                    Operating revenue increased $8.4 million primarily driven by higher volume.

 

20



Table of Contents

 

·                    Expenses increased $2.1 million mostly driven by labor & benefits and purchased services, partially offset by a reduction in other expenses.

 

·                    Operating income increased $6.3 million, or 53.9%, to $18.1 million.

 

·                    Operating ratio was a second quarter record of 72.9%.

 

 

 

Three Months ended June 30,

 

Six Months ended June 30,

 

 

 

2013

 

2012

 

2013

 

2012

 

Volume

 

117,925

 

109,513

 

$

249,245

 

222,063

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)