October 24, 2008
Horizon Line reports solid third quarter, but cuts earnings guidance
Despite a third quarter in which it grew operating income and repaid $12.5 million of oustanding debt, U.S.-flag containership operator Horizon Lines, Inc. (NYSE:HRZ) has cut its earnings guidance for the full year in expectation of weak economic conditions in Puerto Rico and Hawaii.
"Our company performed well in the face of increased challenges during the third-quarter," said Chuck Raymond, Chairman, President and CEO of ), reporting results for the third quarter ended September 21, 2008. "Volumes were negatively impacted by continued weakness in our Puerto Rico market, which was exacerbated by five tropical storms including three hurricanes, and by a sharper-than-anticipated slowdown in Hawaii, where a steep drop in tourism pressured the economy. Although fuel prices moderated somewhat during the period, they remained high; on average, 82% above their levels of a year ago.
"Despite these challenges, we grew revenue 3.1% during the quarter, excluding the impact of fuel recovery, through a combination of rate and mix," Mr. Raymond said. "We contained costs through measures including strict fuel conservation while preserving our high standards of vessel on-time performance, and we continued to position our logistics business for long-term organic growth opportunities."
"Just as importantly, we repaid $12.5 million of outstanding debt under our revolving credit facility during the quarter," Mr. Raymond continued. "We finished the quarter with strong corporate liquidity and comfortably in compliance with our credit facility financial covenants."
On a GAAP basis, net income for the quarter was $12.5 million, or $0.42 per diluted share, on revenue of $352.6, compared with net income of $1.6 million, or $0.05 per diluted share, on revenue of $321.1 million for third quarter of 2007.
Adjusted net income for the third quarter was $16.2 million, or $0.53 per diluted share, compared with adjusted net income of $20.7 million, or $0.61 per diluted share, in the 2007 third quarter. Adjusted 2008 results exclude anti-trust related legal expenses totaling $4.6 million, or $0.11 per diluted share. Adjusted 2007 results excluded a loss on extinguishment of debt of $38.0 million and a tonnage tax deferred revaluation benefit of $4.8 million, or $0.56 per diluted share.
Operating Revenue - The 9.8% growth in operating revenue for the quarter to $352.6 million from $321.1 million for the third quarter of 2007 was driven by a combination of rate improvement, revenue from the Aero Logistics acquisition, and higher fuel surcharges, which more than offset a 4% volume decline and lower Hawaii Stevedores revenue resulting from the Hawaii slowdown. Revenue per container increased by $441, or 12%, from the same period a year ago.
Operating Income - Operating income for the third quarter of 2008 was $21.8 million, compared with $35.3 million for the third quarter of 2007. The decline in operating income primarily reflects lower overall container volume, increased fuel costs, and legal fees related to the antitrust investigation. The decline was slightly offset by rate improvements. Adjusted operating income totaled $26.4 million for the 2008 third quarter.
Adjusted EBITDA - Adjusted EBITDA for the 2008 third quarter was $42.2 million, compared with $50.8 million for the 2007 third quarter. Adjusted EBITDA was impacted by the same factors affecting operating income.
Shares Outstanding - As a result of share repurchases completed in the first quarter of 2008, the company had a weighted daily average of 30.2 million diluted shares outstanding for the third quarter of 2008, compared with 33.8 million for the third quarter of 2007.
Nine-Month Results - For the 2008 nine-month period, operating revenue increased 11.1% to $989.5 million from $890.5 million for the same period of 2007. EBITDA was $97.6 million compared with $86.0 million a year ago. Adjusted EBITDA, excluding the items previously mentioned as well as 2008 second-quarter severance cost related to early retirement for specific union employees, was $105.4 million versus $124.5 million. Nine-month net income totaled $21.9 million, or $0.72 per diluted share, compared with $18.2 million, or $0.53 per diluted share for the same period last year. Adjusted net income was $28.1 million, or $0.92 per diluted share, compared with $35.2 million, or $1.03 per diluted share, a year ago, which excludes the after-tax loss related to the extinguishment of debt mentioned above, as well as a $7.3 million deferred tax revaluation benefit.
Mr. Raymond concluded: "In this increasingly uncertain economic environment, our company remains well positioned to continue serving our customers and operating from a foundation of financial strength. We are well capitalized, operating with strong liquidity, well within our financial covenants, and have no refinancing needs until mid-2012. That said, as we budget for 2009, we will do so with the intention of conserving cash and removing costs from our organization wherever possible.
"Looking at our liner markets, we expect Puerto Rico's economy to remain weak and Hawaii's to soften further in the fourth quarter, as visitor volumes from the U.S. and Japan continue to contract sharply. Our Alaska tradelane remains stable, with the economy there buoyed by still relatively high oil prices. As a Jones Act carrier, Horizon Lines plays a crucial role delivering basic food, clothing and shelter to customers and consumers in these three tradelanes, regardless of economic cycles. As we move forward, we will remain focused on serving our customers well and operating our company so that it remains financially strong through this difficult environment. We also expect our business supplying the U.S. military in Guam, and to a lesser extent Hawaii and Alaska, to continue providing stability to earnings and cash flow.
"Regarding logistics, we plan to continue to grow this business without acquisitions for the foreseeable future. Organic expansion of our logistics business offers long-term growth opportunity with minimal capital investment requirements beyond those that we are making in people."
Based on management's expectations for a continued recession in Puerto Rico, further weakening in the Hawaii economy, and continuing volatility in fuel prices, guidance for the full year 2008 has been adjusted as follows:
Revenue: $1.270-$1.290 billion, compared with earlier guidance of $1.335-$1.365 billion
Adjusted EBITDA): $120-$130 million, compared with earlier guidance of $135-$150 million
Adjusted Diluted EPS: $0.68-$0.96, compared with earlier guidance of $1.03-$1.43
Adjusted Free Cash Flow: $29-$36 million, compared with earlier guidance of $40-$59 million