Horizon Lines, Inc. (NYSE: HRZ) reported financial results for the fiscal first quarter ended March 27, 2011.
As a result of previously announced plans to discontinue the logistics business, financial results are being presented on a continuing operations basis, excluding the discontinued logistics operations.
On a GAAP basis, the first-quarter net loss from continuing operations totaled $33.3 million, or $1.08 per diluted share, on revenue from continuing operations of $285.4 million. On an adjusted basis, the first-quarter net loss from continuing operations totaled $28.0 million, or $0.90 per diluted share, after excluding charges totaling $5.4 million after tax, or $0.18 per diluted share. The charges include $2.3 million associated with a severance agreement, $2.2 million for antitrust-related legal fees, $0.6 million for a loss on modification of debt, $0.5 million for the early retirement of certain union employees, and a tax impact of $(0.2) million.
In the year-ago first quarter, Horizon Lines reported a net loss from continuing operations of $11.7 million, or $0.38 per diluted share, on revenue of $274.7 million. On an adjusted basis, the net loss totaled $10.5 million, or $0.34 per diluted share, after excluding antitrust-related legal expenses and costs for early retirement of certain union employees totaling $1.2 million, or $0.04 per share.
Container volume for the 2011 first quarter totaled 71,529 loads, an 18.6% increase from 60,288 loads for the same period a year ago. The additional volume was due largely to the company's new China service, which began operating in December 2010. Excluding China, volume totaled 60,330 loads, an increase of 60 loads, or 0.1%, from 60,270 loads a year ago. Relative to the 2010 first quarter, volumes were up in Alaska and Guam, flat in Puerto Rico, and down in Hawaii.
Container rates, net of fuel, for the 2011 first quarter fell 6.4% to $3,072 from $3,283 a year ago. The decline was due to the addition of China volume with lower rates and pricing pressures in Puerto Rico. Excluding China, container rates, net of fuel, rose 1.2% to $3,324 in the first quarter from a year ago.
The company's vessels delivered 75% on-time performance, measured to the minute, in the first quarter, four percentage points above the 71% on-time performance recorded in the same quarter a year ago. Vessel utilization was 58%, compared with 60% in 2010, while vessel availability remained near 100%, driven by the company's comprehensive fleet maintenance program.
"As anticipated, the first quarter was very challenging," said Stephen H. Fraser, President and Chief Executive Officer. "The historically soft quarter was additionally impacted by the termination of various Maersk agreements, and the seasonal slowness associated with the start-up of our new China service in the post Chinese New Year period. These factors were further exacerbated by a steep decline in international rates, a sharp rise in fuel prices, and the ongoing slow business conditions in Puerto Rico and Hawaii.
"We have responded to these volatile conditions by intensely focusing on cost management and customer service," Mr. Fraser continued. "Already, we have achieved more than $18 million in annualized cost savings by reaching agreements with our vessel union partners, reducing our non-union workforce, generating rate and efficiency savings from our trucking partners, and modifying vessel leases, among other initiatives. Our quality of service has not faltered and we are pleased to have received overwhelming customer support as we work to refinance our debt and position our company for long-term success."
First-Quarter 2011 Financial Highlights
* Operating Revenue - First-quarter operating revenue from continuing operations increased 3.9% to $285.4 million from $274.7 million a year ago. The largest factors in the $10.7 million revenue gain were: a $23.2 million increase in revenue due to international activity; a $3.7 million increase in non-transportation services revenue; $2.3 million in rate/mix improvements and $2.1 million in fuel surcharges. These gains were partially offset by a $20.7 million revenue decline resulting from lost space charter revenue, approximately $19.0 million of which was related to the expired Maersk TP1 contract.
* Operating Income - The GAAP operating loss from continuing operations for the first quarter totaled $22.0 million, compared with an operating loss of $1.8 million a year ago. The 2011 GAAP operating loss includes a $2.3 million charge related to severance expenses, $2.2 million in antitrust-related legal expenses and $0.5 million for the early retirement of certain union employees. The 2010 first-quarter GAAP operating loss includes $1.0 million in antitrust-related legal expenses and $0.2 million in costs for early retirement of certain union employees. Excluding these items, the first-quarter 2011 adjusted operating loss from continuing operations totaled $17.1 million, compared with a loss of $0.6 million a year ago. The first-quarter 2011 adjusted operating loss widened from the prior year primarily due to the termination of various Maersk agreements, lower fuel recovery and higher rolling stock expense. These negative factors were partially offset by international volume increases, strong non-transportation/terminal services revenue, and a lack of vessel incidents relative to the year-ago quarter.
* EBITDA - EBITDA from continuing operations totaled negative $7.4 million for the 2011 first quarter, compared with positive $12.0 million for the same period a year ago. Adjusted EBITDA from continuing operations for the first quarter of 2011 was negative $1.8 million, compared with positive $13.3 million for 2010. EBITDA and adjusted EBITDA for the 2011 and 2010 first quarters were impacted by the same factors affecting operating income.
* Shares Outstanding - The company had a weighted daily average of 30.9 million fully diluted shares outstanding for the first quarter of 2011, compared with 30.5 million a year ago.
* Liquidity, Credit Facility Compliance & Debt Structure - As of March 27, 2011, the company had total liquidity of $29.4 million, consisting of $5.8 million in cash and $23.6 million of effective revolver availability. The company's trailing 12-month interest coverage and senior secured leverage ratios were 2.99 times and 3.20 times, respectively, in compliance with the credit agreement requirement of above 2.5 times and below 3.50 times, respectively. Funded debt outstanding totaled $585.3 million, compared with $532.9 at the end of the fourth quarter, and $577.8 million a year-ago. The funded debt outstanding at March 27, 2011, consisted of $246.6 million in senior secured debt, $330.0 million in convertible notes, and $8.7 million of capital lease obligations, at a weighted average interest rate of 5.41%.
Liquidity in the current quarter has contracted, due to shortened payment terms established by certain suppliers after the company filed its 2010 Form 10-K report containing a going-concern audit opinion. The company remains current with all of its vendors.
The company's senior secured debt matures in August 2012, but the maturity will accelerate to February 2012 if the convertible notes are not refinanced or if arrangements are not made for their refinancing by that date. In addition, the company anticipates a covenant default under the senior credit facility in connection with the amended financial covenants upon the close of the second quarter of 2011. Noncompliance with the financial covenants constitutes an event of default, which, if not waived, could prevent the company from borrowing under the senior credit facility and could also result in acceleration of the maturity of the facility. The company anticipates working with its lenders to obtain waivers and amendments or to refinance prior to any possible covenant noncompliance. As a result of these factors, the company has classified all of its outstanding debt as current.
Please see attached schedules for the reconciliation of first-quarter 2011 and 2010 reported GAAP results and Non-GAAP adjusted results.
First-Quarter Tradelane Review
First-quarter volume in Alaska was up from a year ago, but, as expected, business was seasonally slow. Horizon Lines continued to benefit from its terminal services operations, and also experienced solid volume in segments including seafood supplies, groceries and refrigerated commodities. The company expects volumes to grow through the normally strong summer season.
In Hawaii, first-quarter volume was down from a year ago, as the business environment remained flat due to ongoing softness in construction and state government fiscal constraints. The company believes the steady military sector and continuing strength in tourism, even in the wake of the Japan disaster, could lead to modest volume growth as the year progresses.
Volumes in Puerto Rico were steady relative to a year ago, due partly to inventory replenishment after the holiday shopping season. Puerto Rico remains in a recession, which was exacerbated in the first quarter by the sharp rise in fuel prices, as the region's electric power grid is fueled by petroleum. The company expects volumes to remain steady as the year progresses, although the business environment will continue to be challenged by ongoing rate pressures.
The company's new China service is operating in a highly competitive international tradelane. The seasonally slow first quarter was further negatively impacted by over-capacity, sharp rate declines and rapidly rising fuel prices. Despite the reduced rates, Horizon Lines experienced solid customer demand in the quarter and was able to ramp-up to volume expectations. Looking forward, the company is encouraged by the improving mix of customers, although challenges remain in rising fuel costs and the tradelane's ongoing over-capacity situation, which continues to pressure pricing.
In Guam, first-quarter volume improved from a year ago, due to service and schedule improvements, construction projects and additional military volume to support humanitarian missions to Japan. Looking forward, the company is encouraged by the construction projects related to the military build-up.
Outlook & Refinancing Update
Overall, the company continues to expect 2011 to be a challenging year, due to the uncertain rate environment impacting its new China service and the loss of steady revenue under the previous trans-Pacific agreement with Maersk. Additionally, fuel prices remain high and volatile, and rate pressures continue in the Puerto Rico market.
"We expect to partially offset the difficult operating environment through cost savings and modest volume improvements in our domestic markets during 2011, as overall customer support remains strong," Mr. Fraser said. "We expect positive EBITDA contribution from Alaska, Puerto Rico and Hawaii, partially offset by a negative EBITDA performance from our new FSX service in its start-up year. Although our FSX service will incur losses on a standalone basis this year, we are encouraged by our China tradelane's EBITDA improvement potential over the longer term. As a result of these factors, we currently expect 2011 adjusted EBITDA will be in excess of $80.0 million."
Mr. Fraser concluded: "Regarding our refinancing efforts, the company and its representatives have been engaged in constructive discussions with our banks, bondholders and their advisors, as well as with other potential lenders. These discussions are ongoing. We are greatly encouraged that our fine related to antitrust violations in the Puerto Rico tradelane has been reduced to $15.0 million from $45.0 million. The fine reduction should give our business partners renewed confidence in our company's ability to continue supporting our customers. We look forward to executing a comprehensive refinancing that will better position Horizon Lines for long-term success."
As a result of the reduced fine, the company expects in the second quarter to reverse $19.2 million of the $30.0 million charge recorded on a present-value basis during the fourth quarter of 2010 related to the legal settlement.
Use of Non-GAAP Measures
Horizon Lines reports its financial results in accordance with U.S. generally accepted accounting principles (GAAP). The company also believes that the presentation of certain non-GAAP measures, i.e., EBITDA, free cash flow and results excluding certain costs and expenses, provides useful information for the understanding of its ongoing operations and enables investors to focus on period-over-period operating performance without the impact of significant special items. The company further feels these non-GAAP measures enhance the user's overall understanding of the company's current financial performance relative to past performance and provide a better baseline for modeling future earnings expectations. Non-GAAP measures are reconciled in the financial tables accompanying this news release. The company cautions that non-GAAP measures should be considered in addition to, but not as a substitute for, the company's reported GAAP results.