Horizon Lines Reports First-Quarter Financial Results

News Release Horizon Lines, Inc. (Corporate Headquarters) April 29, 2011

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Seasonally Soft Quarter Further Impacted by China
Service Start-up, High Fuel Prices and Slow Recovery in Domestic
Economies
Constructive Discussions on Debt Refinancing
Ongoing
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CHARLOTTE, NC (April 29, 2011) - Horizon
Lines, Inc. (NYSE: HRZ) today 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</TD></TR></TBODY></TABLE></DIV></BODY></HTML>