To say Horizon Lines Inc. (NYSE: HRZ) is sailing in choppy waters may be a gross understatement, the reality is they appear to be clinging to a life raft as they continue to be battered by wave after wave of unsettling news. A $45 million settlement tied to a guilty plea related to price fixing, a $1.77 million settlement associated with a class action suit involving the Puerto Rican government and others, the prospect of future litigation and settlements with shipping customers in Hawaii, Guam and Alaska, an aging shipping fleet, tougher economic conditions, and have all been factors that have led many to doubt that the shipping company will b capable of weathering the storm. Among those with serious concerns is the accounting firm Ernst & Young which has suggested “substantial doubt” that Horizon could continue to operate.
HRZ has been taking on water for some time and their fourth quarter financials released in early March painted a grim picture for the future as Executive Vice President and Chief Operating Officer Brian W. Taylor stated, “The fourth-quarter turned out to be very challenging, due to lower-than-anticipated volumes in Hawaii, particularly in the latter months of the quarter, increased fuel prices, continuing rate pressures in Puerto Rico, and anticipated start-up costs related to our new China service.”
It didn’t take long for shares to tumble as they went from a high of 5.75 on February 17, 2011 down to a low of 0.83 on April 1, 2011; a slide that was aided by rumors that HRZ was looking at filing for bankruptcy. As of Tuesday shares in the company were moving between 1.59 and 2.07, both figures being significantly lower than their 50-day moving average of 3.74 and 200-day moving average of 4.13.
If shareholders are expecting a return to those 50-day or 200-day numbers anytime soon they may want to revisit the words of Michael T. Avara, Executive Vice President and Chief Financial Officer, who mentioned “We expect the seasonal weakness typical in the first quarter to be exaggerated by start-up costs associated with our new China service and the corresponding loss of steady month-to-month revenue from our previous TP1 agreement with Maersk, but we also anticipate improving growth as the year progresses.” Avara went on to say “Our progress in 2011 will continue to be influenced by the pace and breadth of economic recovery in our tradelanes, the success of our start-up in China, and the continued high fuel costs and ongoing pricing pressures in Puerto Rico.”
Those comments are hardly inspiring given the fact that the economic conditions of the territories HRZ serves will likely remain stressed, fuel prices are expected to remain high, and China’s history of keeping a tight rein on economic growth within the country could limit opportunities for HRZ to see their new Five Star Express service between the U.S. West Coast and China thrive.
Adding to the problems for HRZ is the potential lawsuits that still exist due to the antitrust case which involved price-fixing on Puerto Rican shipping routes between 2002 and 2008. The length of time itself is staggering and will almost certainly result in a closer examination of prices in other HRZ serviced shipping routes during that period.
The $45 million settlement related to that antitrust lawsuit, to be paid over five years, has put HRZ in a difficult position where they could default on debt and in their annual filing the company said as much, “The payment of the fine may have a substantial and material effect on our financial position, liquidity and cash flow .” HRZ stated that default was likely in the second quarter unless they worked out a deal with debtholders but that isn’t their only issue, they are also facing default on their senior lending facility in the third quarter.
While Horizon has insisted they will not sell their container liner assets despite the grim outlook they could look to sell its logistic operations, but that would not include their Sea-Logix trucking operation, warehouse operation or Horizon Services Group, the company’s information-technology operation. HRZ has said they would be looking at creative solutions to remedy their financial condition which could lead to a debt for equity swap to avoid bankruptcy.
Aside from their financial problems HRZ, which owns or leases a fleet of 20 U.S.-flag container ships, is currently operating 12 vessels that have an average age of 36 years. According to analysts HRZ will need to upgrade these ships and they are looking at an investment of more than $1.2 billion over the next decade. Trying to secure money for that investment will obviously be problematic given the current financial condition of the company and the legal matters surrounding their future.
Earlier this month HRZ announced that they would be raising their fuel surcharge for service between Hawaii and the Mainland from 35 percent to 43.5 percent, and its surcharge for service to Guam, the Commonwealth of Northern Mariana Islands, and Micronesia from 36.5 percent to 45 percent. Those changes will go into effect in May and while these increases are in line with their competitors it remains to be seen if it will help their profit margins.
All of this news doesn’t bode well for HRZ and when it’s looked at as a collective whole the picture can’t be painted in a good light even by the company. Perhaps the opening paragraph of the Executive Summary in their most recent 10-K says it all, “The economic recovery has continued at a slow and uneven pace. Persistent high unemployment and uncertainty in the economy have adversely affected consumers and negatively impacted their spending. In addition, construction spending remains at depressed levels and many state governments are enacting spending cutbacks, including workforce reductions and furloughs. As a result of the still uncertain macroeconomic environment and our specific challenges such as the start up of our international operations, volatile fuel prices, and rate pressures in Puerto Rico and in international markets, we remain focused on a series of successful cost management efforts.”