Arctic Glacier Income Fund
TSX : AG.UN

Arctic Glacier Income Fund

May 10, 2011 07:00 ET

Arctic Glacier Posts First Quarter Results

WINNIPEG, MANITOBA--(Marketwire - May 10, 2011) - Arctic Glacier Income Fund (TSX:AG.UN) today announced results for the first quarter ended March 31, 2011.

Summary *

  • Settled U.S. direct purchaser class action for $12.5 million
  • Subsequent to quarter end settled four outstanding Canadian direct purchaser class actions for a total of C$2.0 million
  • DOJ Civil Division concluded investigation with no action taken against Arctic Glacier
  • Continued expansion into new markets
  • Amended credit terms to pay litigation settlements, increase liquidity & financial flexibility
  • Entered next phase of financing and strategic alternatives review
  • Revenues totaled $22.3 million, unchanged from first quarter 2010

*Dollar amounts in U.S. currency unless otherwise specified

"Arctic Glacier's most pressing current issue is a requirement to refinance C$90.6 million in convertible debentures that mature on July 31, 2011," said Keith McMahon, President and CEO of Arctic Glacier Inc., the Fund's operating company. "During and after the first quarter of 2011 we made progress with several major initiatives to address this requirement."

Recognizing that any solution will be facilitated by a timely conclusion of Arctic Glacier's antitrust-related legal issues, the company reached settlement agreements that resolved several lawsuits in the United States and Canada. In addition, during the quarter the Civil Division of the U.S. Department of Justice advised it had concluded its investigation with no action taken against Arctic Glacier. In February the Fund announced it had advanced into the next phase of its review of financing and strategic alternatives.

To facilitate the settlement agreements and provide additional liquidity and improved financial flexibility, the Fund's lenders amended terms of its loan agreements and re-priced outstanding warrants.

First Quarter 2011 Review

The Fund's financial disclosure for the three months ended March 31, 2011 has been prepared in accordance with International Financial Reporting Standards ("IFRS"). Accordingly, comparative periods for fiscal 2010 have been restated in accordance with IFRS, including the January 1, 2010 transition date balance sheet.

Sales in the first quarter totaled $22.3 million, unchanged from the same period in 2010. Arctic Glacier's expansion into new markets that began in 2010 increased sales by $1.1 million. That acted to offset a $1.3 million decrease in previously serviced markets due to poor weather in March of this year, combined with the effect of the significant increase in competitive activity in west coast markets that began last year. The stronger Canadian dollar increased the U.S. dollar value of sales in Canadian markets by $0.2 million.

Cost of sales totaled $38.8 million, an increase of $2.6 million or 7% compared to the first quarter of 2010. The increase was primarily due to expansion into new markets, which added $1.2 million in costs and the effect of the stronger Canadian dollar, which increased the U.S. dollar value of costs in Canadian markets by $0.2 million. Cost of sales in previously serviced markets decreased by $0.6 million due to a decrease in volumes caused by poor weather in March, which more than offset the impact of increased energy and packaging costs. Cost of sales now includes depreciation and amortization expense, which totaled $9.8 million in 2011, an increase of $1.9 million due to a reduction in the amortization period for customer relationship assets in 2011.

General and administrative expenses totaled $2.5 million, compared to $1.7 million for the same period of 2010. The increase is primarily the result of higher professional fees related to technology based initiatives, increased insurance costs and higher unit based compensation costs related to unit options granted in prior years.

Finance costs of $9.0 million were $1.6 million higher than in the same period last year, owing to higher debt levels and increased borrowing rates that accompanied a refinancing concluded in February 2010 as well as increased amortization of deferred financing charges.

Other costs totaled $10.3 million compared to $3.7 million for the same period of 2010, an increase of $6.6 million. The increase includes mark-to-market adjustment of the fair value of convertible debentures and warrants of $5.4 million (as required by new accounting rules), plus the settlement of four outstanding Canadian direct purchaser class actions for a total of $2.0 million and costs of the review of financial and strategic alternatives of $0.5 million. These factors were partially offset by a gain on settlement of acquisition consideration of $1.1 million related to an acquisition in a previous year.

Legal costs of the DOJ antitrust investigation and related litigation during the first quarter of 2011 totaled $3.2 million, comprised of $2.0 million for settlement of four outstanding Canadian direct purchaser class actions and $1.2 million of legal fees and related costs. In the same period of 2010, costs in this category totaled $1.2 million.

The packaged ice business in Arctic Glacier's markets - Canada and the northeastern, central and western U.S. - is highly seasonal. Demand for packaged ice in the first quarter is low, characterized by negative EBITDA and significant losses. Arctic Glacier incurs approximately 25% of its annual fixed costs in the first quarter, but typically generates less than 10% of its annual sales during this period. For the first quarter of 2011, EBITDA was negative $9.2 million, which was in line with overall expectations, compared with negative $7.5 million for the same quarter in 2010.

Because antitrust costs significantly contributed to the Fund's results in the first quarter of both years and costs of the review of financing and strategic alternatives contributed to results in the first quarter of 2011, a more appropriate measure of operating performance adjusts results to remove these costs. Accordingly, adjusted loss in the first quarter of 2011 was $31.9 million, compared to an adjusted loss of $15.4 million last year. That was equivalent to a loss of $0.82 (basic and diluted) per unit, compared to $0.39 (basic and diluted) last year. The change was due to a number of causes that included an increased valuation allowance against future tax assets that may not be fully realized, unrealized losses from mark-to-market adjustments of securities, higher interest costs, increased amortization and a higher first quarter EBITDA deficiency.

Including antitrust expenses and costs of the strategic review, net loss for the first quarter of 2011 totaled $35.6 million or $0.91 (basic and diluted) per unit, compared to a net loss of $16.1 million or $0.41 (basic and diluted) per unit in the same period of 2010.

Financial Position

As at March 31, 2011, Arctic Glacier's net debt, excluding convertible debentures, was $192.2 million compared to $178.5 million at the same time last year.

The Fund had a working capital deficiency of $96.1 million at March 31, 2011. This resulted from the classification of $84.2 million of convertible debentures as current liabilities since they mature on July 31, 2011. Excluding these debentures, the Fund's working capital deficiency at the end of the first quarter was $11.8 million. That compares with a working capital balance of $1.2 million at the same time in 2010.

In connection with the convertible debentures, the Fund announced in September 2010 the board of trustees had engaged TD Securities to assist in a comprehensive review and analysis of financing and strategic alternatives. In February 2011 the Fund further announced the process had advanced to the next phase, whereby it made available select financial information to third parties interested in entering into a confidentiality agreement and executing a strategic transaction.

At March 31, 2011 the revolving credit facility consisted of $39.6 million in undrawn room, of which $17.9 million was available liquidity within approved covenant restrictions. The Fund also had $2.2 million of cash on hand, for total available liquidity of $20.1 million.

During the first quarter, the Fund's lenders amended the Fund's leverage covenants to allow the Fund to enter into class action settlements and to increase available liquidity on the revolving credit facility and provide improved financial flexibility.

The Fund's net debt to EBITDA ratio at March 31, 2011 was 4.50 to 1 as defined in the revolving term credit facility agreement and 4.41 to 1 as defined in the term loan agreement, both compared to a maximum covenant of 4.90 to 1. This compares to 3.69 to 1 and 3.74 to 1 respectively at December 31, 2010 and 3.22 to 1 and 3.26 to 1 respectively at March 31, 2010. The Fund is in compliance with all debt covenants at March 31, 2011.

U.S. DOJ Investigation and Related Litigation

During the first quarter of 2011 the DOJ Civil Division advised the Fund it had concluded its investigation of the packaged ice industry and will take no action against the Fund or its subsidiaries. That followed an agreement with the DOJ Antitrust Division, approved by U.S. District Court in February 2010, whereby an Arctic Glacier subsidiary agreed to pay a fine of $9 million over five years. The settlement ended the Antitrust Division's investigation into the U.S. packaged ice industry as it relates in any way to the Fund, its board, management and staff in all markets. In September 2010, the subsidiary entered into a separate agreement with the Michigan Attorney General to resolve, without any admission of wrongdoing, all allegations of violations of state antitrust laws with the payment of a $350,000 settlement.

Also during the first quarter, the Fund resolved two civil actions filed by direct purchasers of packaged ice. A single purchaser in Wisconsin, whose petition for class action had previously been denied by the court, settled the suit for $3,000 plus nominal legal costs. Arctic Glacier also reached an agreement to settle the class action filed by U.S. direct purchasers of packaged ice. The agreement, which is subject to approval by U.S. District Court, provides for the Fund to pay $12.5 million in two installments.

Subsequent to the end of the first quarter on May 4, 2011, the Fund announced an agreement to settle all four outstanding direct purchaser actions commenced against it in Ontario and Alberta by Canadian direct purchasers of packaged ice. The agreement, which is subject to court approval, provides for Arctic Glacier to pay C$2 million in resolution of all outstanding direct purchaser claims in Ontario and Alberta.

The settlements were undertaken prior to commencement of trial, which means the company had not yet had an opportunity to produce evidence refuting the allegations. Nonetheless, Arctic Glacier has agreed to the settlements to put such legal matters behind the company and move forward.

Still ongoing are a number of state investigations to determine if state antitrust laws have been broken, although there has not been any movement in this area for some time. Also outstanding are several class action lawsuits initiated in Canada and the U.S. At this time, it is not possible to predict the timeline or final outcome of the investigations or litigation, or any potential effect they may have on the Fund or its operations.

Further information, including court decisions rendered to date, will be outlined in the Fund's first quarter Management's Discussion and Analysis.

Outlook

Arctic Glacier's principal issue is the requirement to refinance convertible debentures with a face value of C$90.6 million that mature on July 31, 2011. During the first quarter of 2011, the Fund proceeded with initiatives in several areas to address this maturity. In February the Fund's review of financing and strategic alternatives advanced to its next phase. Arctic Glacier began making select information available to third parties who wish to participate in the process and enter into a confidentiality agreement, seeking submission of proposals from interested parties regarding a financing or strategic transaction. The special board committee, with the assistance of TD Securities, will evaluate all of the alternatives available while acting in the best interests of all the stakeholders in the Fund.

The review of financing and strategic alternatives has identified the need to resolve remaining antitrust issues and related litigation and Arctic Glacier made considerable progress during the first quarter. Settlements were negotiated to resolve the U.S. direct purchaser class action lawsuit and the civil action filed in Wisconsin state court. In addition, during the first quarter the investigation conducted by the DOJ Civil Division was concluded with no action taken against Arctic Glacier. Subsequent to the first quarter, the Fund reached an agreement to resolve all the outstanding direct purchaser actions commenced against Arctic Glacier in Ontario and Alberta.

Antitrust investigations by several other states and a few civil actions await resolution. At this time it is not possible to predict the timeline or final outcome of the investigations or litigation, or any potential effect they may have on the Fund or its operations.

To enable the settlement of class actions, the Fund obtained consent from its lenders to enter into the litigation settlements in conjunction with an amendment of the Fund's credit facilities. As part of this amendment, certain covenants governing EBITDA and leverage were adjusted to enable the Fund to enter into and pay litigation settlements, increase available liquidity and provide improved financial flexibility.

All the above measures have been intended to facilitate a financial or strategic transaction prior to maturity of the debentures. However, if such a transaction is not completed prior to the maturity of the debentures, the Fund anticipates it will not have the capital necessary to retire the debentures. Under such circumstances, the Fund will satisfy its obligations by issuing Fund units to the debenture holders, as provided for by the terms of the trust indenture.

Weather strongly influences packaged-ice sales, and 2010 saw poor conditions in major west coast markets throughout the key spring and summer months, resulting in reduced sales volumes and fixed cost efficiencies. A return to historic weather norms in 2011 could improve west coast volumes and restore more characteristic margins.

Management's strategic direction is defined by a number of objectives. The first is to improve profitability by closely monitoring expenses and capital outlays. The second is to gain strength and enhance liquidity by maximizing cash flow and ensuring credit availability. Third, the Fund aims to strengthen its financial position by effectively managing balance sheet leverage. The fourth is to capitalize on business opportunities as they arise.

Arctic Glacier is determined to resolve current challenges, and as the Fund examines new initiatives to improve the business, its key operating principles remain unchanged: to provide value to its customer through superior product quality and industry leading customer service.

About Arctic Glacier

Arctic Glacier Income Fund, through its operating company, Arctic Glacier Inc., is a leading producer, marketer and distributor of high-quality packaged ice in North America, primarily under the brand name of Arctic Glacier®Premium Ice. Arctic Glacier operates 39 production plants and 48 distribution facilities across Canada and the northeast, central and western United States servicing more than 75,000 retail locations.

Arctic Glacier Income Fund trust units are listed on the Toronto Stock Exchange under the trading symbol AG.UN. There are 39.0million trust units outstanding.

Conference Call and Webcast

Arctic Glacier will discuss first quarter 2011 results during a conference call with a live audio webcast for investors and analysts on Tuesday, May 10 at 11 am (EDT). To access the simultaneous webcast, log on to Arctic Glacier's website at www.arcticglacier.com. Please note the webcast allows participants to listen only.

Forward-Looking Statements

This news release contains forward-looking statements, which are subject to certain risks, uncertainties and assumptions. A number of factors could cause actual results to differ materially from the results discussed in these forward-looking statements, and there is no assurance that actual results will be consistent with these forward-looking statements. These forward-looking statements are made as at the date of this news release, and the Fund assumes no obligation to update or revise them, either publicly or otherwise, to reflect new events, information or circumstances.

Non-IFRS Financial Measures

EBITDA and adjusted earnings (loss) are not recognized measures under International Financial Reporting Standards (IFRS). EBITDA is defined as earnings before interest and finance costs, loan amendment fees, income taxes, depreciation, amortization, acquisition integration expenses, gains or losses on foreign exchange, impairment of property plant and equipment, goodwill impairment charges, costs of antitrust investigations and related litigation and other non-recurring expenses. EBITDA is a performance measure used by management to provide an indication of cash available for distribution from ongoing operations prior to debt service, capital expenditures and income taxes and is often used to compare companies and income trusts on the basis of ability to generate cash from ongoing operations. Adjusted earnings (loss) is defined as earnings (loss) before one-time after tax costs of antitrust investigations and related litigation, goodwill impairment and costs of the review of financing and strategic alternatives. Adjusted earnings (loss) is used by management to evaluate the ongoing profitability of the Fund by eliminating the effect of these material non-operating costs. Investors should be cautioned that EBITDA and adjusted earnings (loss) should not be construed as alternatives to earnings, cash from operating activities or other financial measures determined in accordance with IFRS as indicators of the Fund's performance. The Fund's method of calculating EBITDA and adjusted earnings (loss) may differ from other companies and income trusts and, accordingly, may not be comparable to measures used by them.

ARCTIC GLACIER INCOME FUND
Interim Condensed Consolidated Statement of Financial Position
As at March 31, 2011 and 2010 (unaudited), December 31, 2010 (unaudited) and January 1, 2010 (unaudited)
(thousands of U.S. dollars)March 31, 2011March 31,
2010
December 31, 2010January 1, 2010 (1)
ASSETS
Current assets
Cash$2,156$4,626$9,240$727
Accounts receivable9,0379,31811,80412,011
Inventories14,59811,55710,4938,688
Prepaids4,4485,7733,7035,168
30,23931,27435,24026,594
Deferred tax asset13,4704,59113,415-
Property, plant and equipment135,798140,388137,388142,142
Intangible assets100,806110,525105,570112,219
Goodwill72,303147,46571,762146,807
$352,616$434,243$363,375$427,762
LIABILITIES AND UNITHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities$19,236$19,585$15,277$15,455
Provisions260332335314
Antitrust related litigation settlements13,741-11,393-
Other financial liabilities5,9077,8278,2287,337
Convertible debentures84,248-74,490-
Principal due within one year on long-term debt2,9202,3392,39161,099
126,31230,083112,11484,205
Unit options1821,074801,153
Warrants430662--
Long-term debt191,401180,830176,522101,960
Convertible debentures-84,652-78,673
Deferred tax liability1,8051,6144,4547,623
Unitholders' equity
Units325,170325,170325,170325,170
Deficit(286,517)(187,103)(250,893)(171,022)
Accumulated other comprehensive loss(6,167)(2,739)(4,072)-
32,486135,32870,205154,148
$352,616$434,243$363,375$427,762
(1)The January 1, 2010 statement of financial position represents the opening IFRS statement of financial position as at the date of transition to IFRS.
ARCTIC GLACIER INCOME FUND
Interim Condensed Consolidated Statement of Operations
Three months ended March 31, 2011 and 2010 (unaudited)
(thousands of U.S. dollars, except per unit amounts)20112010
Sales$22,281$22,341
Cost of sales38,76736,120
(16,486)(13,779)
General and administrative expenses2,4911,687
Operating loss(18,977)(15,466)
Finance costs8,9947,438
Other costs10,2853,711
Loss before income taxes(38,256)(26,615)
Income taxes
Current112170
Deferred (reduction)(2,744)(10,704)
(2,632)(10,534)
Loss for the period$(35,624)$(16,081)
Loss per unit – basic and diluted$(0.91)$(0.41)
ARCTIC GLACIER INCOME FUND
Interim Condensed Consolidated Statement of Comprehensive Loss
Three months ended March 31, 2011 and 2010 (unaudited)
(thousands of U.S. dollars)20112010
Loss for the period$(35,624)$(16,081)
Other comprehensive income (loss)
Net unrealized foreign currency translation loss(2,095)(2,739)
Comprehensive loss for the period$(37,719)$(18,820)
ARCTIC GLACIER INCOME FUND
Interim Condensed Consolidated Statement of Changes in Unitholders' Equity
Three months ended March 31, 2011 and March 31, 2010 (unaudited)
(thousands of U.S. dollars)20112010
Units
Balance, beginning and end of period$325,170$325,170
Deficit
Balance, beginning of period(250,893)(171,022)
Loss for the period(35,624)(16,081)
Balance, end of period(286,517)(187,103)
Accumulated other comprehensive income (loss)
Balance, beginning of period(4,072)-
Other comprehensive loss(2,095)(2,739)
Balance, end of period(6,167)(2,739)
Total Unitholders' Equity$32,486$135,328
ARCTIC GLACIER INCOME FUND
Interim Condensed Consolidated Statement of Cash Flows
Three months ended March 31, 2011 and 2010 (unaudited)
(thousands of U.S. dollars)20112010
Cash from (used in):
Operating activities
Loss for the period$(35,624)$(16,081)
Adjustments for:
Depreciation and amortization9,7577,883
Finance costs8,9947,438
Interest paid(9,109)(5,935)
Recognition of rents on a straight-line basis179179
Unit-based compensation expense99(111)
Loss (gain) on disposals of non-current assets(7)74
Gain on settlement of acquisition payable(1,091)-
Unrealized loss on convertible debentures7,6563,128
Unrealized gain on warrants-(900)
Unrealized loss on US denominated debt-284
Future income tax reduction(2,744)(10,704)
Antitrust related litigation settlements1,993-
(19,897)(14,745)
Changes in non-cash working capital items2,1373,279
(17,760)(11,466)
Investing activities
Additions to property, plant and equipment(2,759)(3,501)
Proceeds from disposal of property, plant and equipment8052
Additions to intangibles(23)-
(2,702)(3,449)
Financing activities
Proceeds from long-term debt17,000189,676
Principal repayments on long-term debt(1,051)(153,132)
Payment of deferred financing charges(2,587)(17,753)
13,36218,791
Foreign exchange gain on cash held in foreign currency1623
Increase (decrease) in cash(7,084)3,899
Cash, beginning of period9,240727
Cash, end of period$2,156$4,626
ARCTIC GLACIER INCOME FUND
Reconciliation of Adjusted Loss
Three months ended March 31, 2011 and 2010 (unaudited)
(in thousands of U.S. dollars)20112010
Loss for the period$(35,624)$(16,081)
Add costs of antitrust investigations and related litigation (1)3,220720
Add review of financing and strategic alternatives500-
Adjusted loss$(31,904)$(15,361)
Loss per unit – basic and diluted$(0.91)$(0.41)
Adjusted loss per unit – basic and diluted$(0.82)$(0.39)
(1)Net of tax effect of $nil since 2011 future tax recoveries are offset by valuation against future tax assets in U.S. subsidiaries which may not be fully realized (2010 - $480).
ARCTIC GLACIER INCOME FUND
Reconciliation of EBITDA
Three months ended March 31, 2011 and 2010 (unaudited)
(in thousands of U.S. dollars)20112010
Loss for the period$(35,624)$(16,081)
Add/(deduct):
Depreciation and amortization9,7577,883
Loss (gain) on disposal of non-current assets(7)74
Finance costs8,9947,438
Other costs10,2853,711
Income tax reduction(2,632)(10,534)
EBITDA$(9,227)$(7,509)

The Toronto Stock Exchange does not approve or disapprove of the adequacy or accuracy of this release.

Contact Information

  • Arctic Glacier Income Fund
    Keith McMahon
    President & CEO
    Toll free investor relations phone: 1-888-573-9237

    Arctic Glacier Income Fund
    Doug Bailey
    Chief Financial Officer
    Toll free investor relations phone: 1-888-573-9237
    www.arcticglacier.com