| ACCOUNTING POLICIES AND BASIS OF PRESENTATION | NOTE 2: ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Principles of Consolidation. The accompanying consolidated financial statements of the Company include all the accounts of Jack Cooper Holdings Corp. and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Foreign Currency. The Company’s financial condition and results of operations are recorded in multiple currencies, including the Canadian dollar and the Mexican peso, and an accounts receivable balance denominated in Nigerian naira. Assets and liabilities of subsidiaries whose functional currency is not the U.S. dollar were translated at the exchange rate in effect at the balance sheet date, and revenues and expenses were translated at average exchange rates for the period. Translation adjustments are included in other comprehensive income (loss). Gains and losses on certain of the Company’s intercompany loans are included in Other, net in the condensed consolidated statements of comprehensive loss due to the intercompany loans not being considered long-term investment in nature.
Use of Estimates. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions about future events relating to the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the reporting periods. Significant items subject to such estimates and assumptions include those related to workers’ compensation insurance, pension withdrawal liabilities, allowance for doubtful accounts, the recoverability and useful lives of assets, litigation provisions and income taxes. Estimates are revised when facts and circumstances change. As such, actual results could differ materially from those estimates.
Cash and Cash Equivalents. The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. At December 31, 2016 and 2015, cash equivalents consisted primarily of short-term cash deposits. At December 31, 2016 and 2015, restricted cash of $0.1 million, a long term asset within the consolidated balance sheets, represented certificates of deposits related to merchant services provided by the Company.
Revenue Recognition. The Company’s operating revenues are principally derived from its operations as a contract carrier. Carrier operating revenues are recognized when persuasive evidence of an arrangement exists, the customer takes ownership of the cargo and assumes risk of loss, collection of the relevant receivable is probable, and the contract price is fixed or determinable. Carrier operating revenues are recognized at the time the cargo is delivered and expenses are recognized as incurred. Fuel surcharges collected from customers are recognized at the time the cargo is delivered, reported gross and are included in operating revenues. Yard management, brokerage, inspections, and other revenues are recognized as the service is performed. Revenues primarily derived from the Company’s operations as a non-asset based carrier are from non-asset based ocean freight motorized vehicle transportation services. Ocean freight services revenues include the charges by the Company for carrying the shipments when the Company acts as a Non-Vessel Operating Common Carrier. Based upon the terms in the contract of carriage, gross revenues related to shipments where the Company issues a house ocean bill of lading are recognized at the time the freight is tendered to the direct carrier at origin. Costs related to the shipments are also recognized at this time.
Accounts Receivable, net. Accounts receivable are recorded at the invoiced amount and do not bear interest. Accounts receivable are typically due within 7‑30 days after the issuance of the invoice. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management considers historical losses adjusted to take into account current market conditions and the customer’s financial condition, the amount of receivable in dispute, aging and current payment patterns. The Company reviews its allowance for doubtful accounts monthly. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The allowance for doubtful accounts totaled $1. 3 million and $1.8 million as of December 31, 2016 and 2015, respectively. Following is a rollforward of the allowance for doubtful accounts activity:
Charged to
Write-offs
Beginning
Costs and
and
(in thousands)
of Year
Expenses
Recoveries
End of Year
Allowance for doubtful accounts:
December 31, 2016
$
$
$
$
December 31, 2015
$
$
$
$
December 31, 2014
$
$
$
$
Prepaid Expenses and Deposits and Other Assets. Prepaid expenses consist primarily of prepaid insurance and parts inventory. Prepaid insurance, other than workers compensation insurance, is expensed over the term of the policy. Parts inventory is expensed when placed on carrier revenue equipment.
The Company records expense estimates for the workers compensation programs based upon third-party actuarial studies. The Company’s workers compensation program for the policy period July 26, 2016 to July 26, 2017 (the “2016‑2017 Policy”) requires collateral payments totaling $5.8 million as well as $22.4 million of premium payments, the installments for which are to be paid over nine months starting July 26, 2016. The collateral balance of $3.9 million at December 31, 2016 is recorded within deposits and other assets on the consolidated balance sheets. The premium payments for the 2016‑2017 Policy, less the actuarial-estimated losses and fees incurred to-date, are reflected as prepaid assets within the consolidated balance sheets and totaled $5.6 million at December 31, 2016.
Deposits and other assets primarily consist of workers compensations insurance collateral deposits for its workers compensation policy periods since July 26, 2009, workers compensation prepaid insurance in excess of estimated losses for the policy periods between July 26, 2009 and July 26, 2016 (the “2009‑2016 Policies”), and other deposits primarily associated with building operating leases and related utilities.
The Company’s workers compensation programs for the 2009‑2016 Policies require payments to the insurance carrier following a formula that is proprietary to the insurance carrier. The balance of such payments in excess of the actuarially determined liabilities for the 2009‑2016 Policies totaled $13.0 million and $9.6 million at December 31, 2016 and December 31, 2015, respectively.
Long-Lived Assets. Purchases of property and equipment are recorded at cost. Costs related to refurbishment and improvements of idle or used carrier revenue equipment are capitalized as incurred. These costs, and the associated equipment, are classified as construction in progress until placed into service, at which time they are reclassified as carrier revenue equipment. Repairs and maintenance costs are expensed as incurred. Purchased intangible assets and property and equipment associated with acquisitions are recorded at their estimated fair value at the time of acquisition.
Property and equipment as of December 31, 2016 and 2015 were as follows:
(in thousands)
2016
2015
Land
$
$
Carrier revenue equipment
Buildings and equipment
Leasehold improvements
Construction in process
Less: accumulated depreciation
Property and equipment, net
$
$
The Company identified certain assets that meet the criteria for assets held for sale classification. The Company had approximately $0.1 million and $1.9 million in assets held for sale as of December 31, 2016 and December 31, 2015, respectively, in the consolidated balance sheets. These assets primarily consist of tractors and trailers that do not fit the Company’s fleet needs as of December 31, 2016 and 2015, and as of December 31, 2015 included real property at one location that the Company sold for $1.8 million during the quarter ended June 30, 2016. The Company plans to sell substantially all of these identified assets during 2016 and, as such, the assets were measured at fair value less cost to sell.
Depreciation and amortization is calculated on the straight-line method over the shorter of the lease term or estimated useful life of the asset. Carrier revenue equipment includes new and used rigs that have an estimated useful life of 9‑12 years and refurbishments and modifications to rigs that have an estimated useful life of 5‑7 years. Depreciation expense of property and equipment totaled $ 47. 1 million, $ 47.5 million and $ 46.3 million for the years ended December 31, 2016, 2015 and 2014, respectively. Amortization expense of intangibles totaled $ 2. 1 million, $ 3.4 million and $4.2 million for the years ended December 31, 2016, 2015 and 2014, respectively.
The estimated useful lives for each major classification of long-lived asset are as follows:
Carrier revenue equipment
5
-
12
years
Buildings and equipment
3
-
15
years
Leasehold improvements
1
-
5
years
Finite-lived intangibles
3
-
10
years
The Company performs periodic reviews of the appropriateness of depreciable lives for each category of property and equipment, taking into consideration actual usage, physical wear and tear, and replacement history to determine remaining life of its asset base.
Long-lived assets, such as property and equipment and purchased intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party appraisals, as necessary.
Goodwill and Indefinite-Lived Intangibles. Goodwill and other indefinite-lived intangible assets, not subject to amortization, are evaluated annually for impairment as of November 30 or more frequently if circumstances indicate that impairment may exist. In assessing indefinite-lived assets not subject to amortization (certain of our customer relationships) the Company assesses qualitative factors to determine if it is more likely than not that the fair value of the customer relationship exceeds its carrying value. If the qualitative assessment is inconclusive, the Company performs Step 1 of a two-step process to compare the fair value of the customer relationship to the carrying value. If Step 1 indicates the fair value is less than the carrying value, the Company performs Step 2 of the assessment to determine the difference between the implied fair value of the customer relationship and the carrying amount. Based on qualitative factors, the Company determined that it is not more likely than not that the fair value of the customer relationship is less than its carrying amount. In assessing goodwill for impairment, the Company initially evaluates qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment is not conclusive and it is necessary to calculate the fair value of a reporting unit, then a two-step process is utilized to test goodwill for impairment. First, a comparison of the fair value of the applicable reporting unit with the aggregate carrying value, including goodwill, is performed utilizing an income approach and market approach. The income approach develops an estimated fair value based on a discounted cash flow, where the estimated fair value is calculated by discounting projected future cash flows. The market approach compares actual market transactions of businesses that are similar to those of the Company. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, the second step of the goodwill impairment test is performed to determine the amount of impairment loss. The second step includes comparing the implied fair value of the affected reporting unit’s goodwill with the carrying value of that goodwill. Some of the key assumptions utilized in determining future projected cash flows include estimated growth rates, expected future pricing and costs, and future capital expenditures requirements. In addition, market multiples of publicly traded guideline companies are also considered. The Company considers the relative strengths and weaknesses inherent in the valuation methodologies utilized in each approach and consults with a third-party valuation specialist to assist in determining the fair value.
Any one event or a combination of events such as a change in the business climate, a negative change in relationships with significant customers, and changes to strategic decisions, could require an interim assessment prior to the next required annual assessment.
Deferred Financing Costs. Amortization of deferred financing costs for the years ended December 31, 2016, 2015 and 2014 was $3.0 million, $3.2 million and $2.3 million, respectively, which is reflected in interest expense, net on the consolidated statements of comprehensive loss. Costs incurred to obtain debt financing are capitalized and amortized to interest expense using the effective interest method. During 2016, the Company capitalized $1.9 million of deferred financing costs related to the issuance of the Solus Term Loan. During 2015, the Company capitalized $2.6 million of deferred financing costs related to the issuance of the MSD Term Loan and the subsequent amendment to the MSD Term Loan.
Income Taxes. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets are recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term “more likely than not” means a likelihood of more than 50 percent. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is more likely than not of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company records interest and penalties related to unrecognized tax benefits as a component of income tax expense.
Claims and Self Insurance Accruals. Liabilities for loss contingencies arising from claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the claim settlement costs that insurance does not cover can be reasonably estimated. Unallocated loss expenses and claims handling expenses incurred in connection with loss contingencies are expensed as incurred. We self-insure our cargo claims, workers’ compensation program, and auto and general liability, up to certain limits. Previously, the Company was fully insured for auto and general liability costs incurred, subject to annual policy limits, for commercial general liability and auto liability claims through September 30, 2016. In addition, the Company retains liability for a significant portion of risks related to workers’ compensation, cargo claims, general liability and auto liability claims, including current and long-term portions, related to events occurring prior to July 27, 2009 when the Company entered into its arrangement with its workers’ compensation provider for the 2009‑2016 Policies and the 2016‑2017 Policy carrier. The 2016‑2017 Policy effective July 26, 2016 includes a stop-loss of $0.5 million per claim, over which amount the Company has no liability.
The Company measures the liabilities associated with self-insurance policies primarily through actuarial methods, which include estimates for the aggregate liability of claims incurred and an estimate of incurred but not reported claims, on an undiscounted basis as timing of the cash outflows to satisfy the liability is not fixed or reliably determinable. These estimates are based on historical loss experience and judgments about the present and expected levels of claim frequency and severity and the time required to settle claims. The effect of future inflation for costs is considered in the analysis. Adjustments to previously established reserves are included in operating results in the year of adjustment. The accrual for workers’ compensation claims totaled $3.0 million and $6.9 million at December 31, 2016 and 2015, respectively, and is inclusive of claims reserves, including the current portion of $0.4 million and $6.9 million, respectively, which are recorded in accounts payable and other accrued liabilities. Expense for workers’ compensation is recognized in operating expenses – compensation and benefits on the consolidated statements of comprehensive loss. We present estimated insurance reserves without reduction for related per-claim insurance maximum exposure retention amounts for which corresponding assets have been recorded of $0.0 million and $1.6 million as of December 31, 2016 and 2015, respectively.
The accrual for cargo claims totaled $4.9 million and $5.1 million at December 31, 2016 and 2015, respectively, and is included in other accrued liabilities. Liabilities for self-insurance for group health claims are included in accounts payable and totaled $1.6 million and $1.9 million as of December 31, 2016 and 2015, respectively. Following is a rollforward of the claims and insurance reserve accounts activity:
Charged to
Beginning
Costs and
Payments
(in thousands)
of Year
Expenses
and Other
End of Year
Claims reserves:
December 31, 2016
$
$
December 31, 2015
$
$
December 31, 2014
$
$
Fair Value Measurements. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
·
Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
·
Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
·
Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.
Recently Issued Accounting Standards. In January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-01 which clarifies the definition of a business to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The standard introduces a screen for determining when assets acquired are not a business and clarifies that a business must include, at a minimum, an input and a substantive process that contribute to an output to be considered a business. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company does not expect this new guidance to have a material impact on its consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18 which clarifies the presentation requirements of restricted cash within the statement of cash flows. The changes in restricted cash and restricted cash equivalents during the period should be included in the beginning and ending cash and cash equivalents balance reconciliation on the statement of cash flows. When cash, cash equivalents, restricted cash or restricted cash equivalents are presented in more than one line item within the statement of financial position, an entity shall calculate a total cash amount in a narrative or tabular format that agrees to the amount shown on the statement of cash flows. Details on the nature and amounts of restricted cash should also be disclosed. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company does not expect this new guidance to have a material impact on its consolidated financial statements.
In August 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-15, Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments. This ASU is intended to clarify the presentation and classification in the statement of cash flows for specific cash receipt and payment transactions, including debt prepayment or extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims and corporate-owned life insurance policies, and distributions received from equity method investees. This standard is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company does not expect this new guidance to have a material impact on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting, which provides for simplification of certain aspects of employee share-based payment accounting including income taxes, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The standard will be effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years and will be applied either prospectively, retrospectively or using a modified retrospective transition approach depending on the area covered in this update. The Company does not expect the adoption of this guidance to have any significant impact on its financial position, results of operations or cash flows.
In February 2016, the FASB issued ASU 2016-02, Leases, which requires lessees to recognize a lease liability and a right of use asset on its balance sheet for all leases, including operating leases, with a term greater than 12 months. The update also expands the required quantitative and qualitative disclosures surrounding leases. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. This update is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with earlier application permitted. We expect to adopt the new standard on its effective date. This update will be applied using a modified retrospective transition approach for leases existing at, or entered into, after the beginning of the earliest comparative period presented in the financial statements. The Company is currently evaluating the effect adoption of this update will have on its consolidated financial statements,
In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest, which amends the current guidance to change the manner in which debt issuance costs are presented on an entity’s balance sheet. This new guidance requires the Company to present debt issuance costs related to recognized debt liabilities on the balance sheet as a direct deduction from the debt liability, as opposed to the previous guidance that provides for presentation of the cost of issuing debt as a separate asset. ASU 2015-03 required retrospective application to all prior periods presented in the financial statements. This new guidance was effective for the Company in the first quarter of 2016. As a result of adopting this standard on January 1, 2016, deferred financing costs of $10.1 million as of December 31, 2015 previously reported within long-term assets, were reclassified to long-term debt in the consolidated balance sheets. As of December 31, 2016, $9.4 million of deferred financing costs were reported within long-term debt in the consolidated balance sheet.
In August 2014, the FASB issued guidance on the disclosure of uncertainties about an entity’s ability to continue as a going concern. This standard provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The guidance is effective for annual reporting periods ending after December 15, 2016, and early adoption is permitted. The guidance will be applicable to the Company’s financial statements for fiscal year 2016, and for interim periods thereafter, and the Company adopted this guidance in the fourth quarter of 2016, which had no effect on the consolidated financial statements as of December 31, 2016.
In May 2014, the FASB issued guidance on revenue recognition. This guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This guidance also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB agreed to a one-year deferral of the effective date of the new revenue recognition guidance so that it is now effective for interim and annual periods beginning after December 15, 2017. The new guidance will become effective for the Company beginning with the first quarter of 2018 and can be adopted either retrospectively to each prior reporting period presented or as a cumulative effect adjustment as of the date of adoption. The Company has not yet completed its final review of the impact of the new standard and is still evaluating disclosure requirements under the new standard. We will continue to evaluate the standard as well as additional changes, modifications or interpretations to determine the impact on our financial statements and disclosures. The Company expects to adopt the new standard using the cumulative effect adjustment as of the date of adoption. |
