Arctic Glacier Income Fund
TSX : AG.UN

Arctic Glacier Income Fund

August 12, 2011 07:00 ET

Arctic Glacier Posts Second Quarter Results

WINNIPEG, MANITOBA--(Marketwire - Aug. 12, 2011) - Arctic Glacier Income Fund (TSX:AG.UN) today announced results for the second quarter ended June 30, 2011.

Summary of Second Quarter 2011*

  • Poor weather affected most Arctic Glacier markets
  • Sales decreased by $4.1 million or 6% compared to prior year
  • EBITDA decreased by $6.0 million compared to prior year
  • Preliminary court approval received for $12.5 million settlement of U.S. direct purchaser class action subsequent to quarter end
  • Settled Canadian direct purchaser class actions for C$2.0 million
  • Converted C$90.6 million convertible debentures to equity subsequent to quarter end
  • Lenders waived compliance with June 30, 2011 financial covenants until September 1, 2011, but a material uncertainty still exists that may cast significant doubt on the ability of the Fund to continue as a going concern

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

"The second quarter was a difficult and disappointing period," said Keith McMahon, President and CEO of Arctic Glacier Inc., the Fund's operating company. "Packaged ice sales were adversely impacted by poor weather conditions in most of Arctic Glacier's markets throughout the quarter. Sales were also affected as a result of increased competitive activity in west coast markets."

The Fund's weakened financial condition, caused by the prolonged antitrust investigation and related litigation, refinancing costs and reduced EBITDA, meant a strategic or refinancing transaction that would provide the capital necessary to retire the convertible debentures could not be completed prior to their maturity on July 31, 2011. In addition, the Fund was not in a position to negotiate an extension to these debentures. Faced with the maturity of the debentures, in the best interests of the Fund these obligations were satisfied by the issuance of units as permitted by the trust indenture. A total of 311.3 million Fund units were issued to debenture holders on August 2, 2011, increasing the issued and outstanding equity to 350.3 million units.

The special committee of the board of trustees continues to evaluate alternatives as part of the strategic and financing review subsequent to the settlement of the convertible debentures, with the intention to facilitate a financial or strategic transaction in the near future in order to establish a longer-term solution.

Arctic Glacier's most pressing current issue is to continue active discussions with lenders to secure a longer-term refinancing solution. The Fund was in breach of certain financial covenants under its credit facilities as at June 30, 2011. Subsequent to the end of the quarter, on July 29, 2011, the Fund's secured lenders waived the requirement to comply with these covenants until September 1, 2011 and discussions are ongoing to achieve longer-term relief.

Second Quarter 2011 Review

The Fund's financial disclosure for the three months ended June 30, 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 second quarter totaled $67.4 million, a decrease of $4.1 million or 6% from the same period in 2010. Sales in previously serviced markets were down by $5.3 million or 7% as poor weather in most of Arctic Glacier's markets combined with a significant increase in competitive activity that started last year in west coast markets. This was partially offset by the effect of the stronger Canadian dollar, which increased the U.S. dollar value of sales generated in Canadian markets by $0.8 million, and sales of $0.4 million generated in new markets during the quarter until the anniversary date of the expansion that began last spring.

Cost of sales totaled $60.4 million, an increase of $3.9 million or 7% compared to the second quarter of 2010. Depreciation and amortization expense comprised $9.8 million of this total in 2011, an increase of $2.0 million due primarily to a reduction in the amortization period for customer relationship assets in 2011. Cost of sales in previously serviced markets increased by $1.2 million or 2% as a significant increase in fuel prices combined with an increase in vehicle costs more than offset the effect of reduced volumes. In addition, the stronger Canadian dollar increased the U.S. dollar value of costs incurred in Canadian markets by $0.5 million and costs of $0.2 million were incurred to service customers in new markets during the quarter prior to the anniversary date of expansion into those markets.

General and administrative expenses totaled $2.6 million, compared to $2.5 million for the same period of 2010. The increase was primarily the result of severance costs related to a staff restructuring during the quarter to reduce ongoing overhead and one-time expenses related to the transition to IFRS.

Finance costs of $9.9 million were $1.3 million higher than in the same period last year. The increase was primarily due to higher average debt levels and interest rates following the March 2011 amendments, the stronger Canadian dollar and increased amortization of deferred financing charges.

Other costs totaled $1.2 million for the quarter. This amount is comprised of legal and related costs totaling $2.9 million related to the review of financing and strategic alternatives and legal costs of the DOJ antitrust investigation and related litigation totaling $0.9 million. These expenses were partially offset by a mark-to-market gain on the fair value of convertible debentures and warrants of $2.6 million, due to the weakening market price of units and debentures during the quarter.

For the second quarter of 2011, EBITDA was $14.3 million, compared with $20.3 million for the same quarter in 2010. The change was primarily driven by reduced fixed cost efficiency due to significantly lower sales volumes in most markets during the key spring ramp-up season, along with reduced prices from competitive activity, higher fuel and vehicle costs and one-time outlays for restructuring-related severance costs and the transition to IFRS accounting standards.

Because antitrust costs significantly contributed to the Fund's results in the second quarter of both years and costs of the review of financing and strategic alternatives contributed to results in the second quarter of 2011, a more appropriate measure of operating performance is to remove these costs. Accordingly, adjusted loss in the second quarter of 2011 was $12.3 million, compared to adjusted earnings of $2.3 million last year. That was equivalent to a loss of $0.32 (basic and diluted) per unit, compared to earnings of $0.06 (basic and diluted) last year. The change was due primarily to an increased valuation allowance against future tax assets that may not be fully realized, lower EBITDA this year, increased amortization and higher finance costs.

Including antitrust expenses and costs of the strategic review, net loss for the second quarter of 2011 totaled $16.1 million or $0.41 (basic and diluted) per unit, compared to net earnings of $1.1 million or $0.03 (basic and diluted) per unit in the same period of 2010.

Financial Position

As at June 30, 2011, Arctic Glacier's net debt, excluding convertible debentures, was $212.8 million compared to $186.5 million at the same time last year.

The Fund was in breach of financial covenants governing maximum leverage ratio, interest coverage ratio, fixed charge coverage ratio and minimum EBITDA levels under its credit facilities as at June 30, 2011. Subsequent to the end of the quarter, on July 29, 2011, the Fund's secured lenders have waived compliance with these covenants for the quarter ended June 30, 2011 until September 1, 2011. The Fund is continuing active discussions with these lenders to secure longer-term covenant relief, although there can be no assurance that such relief will be approved. Without the continued support of the secured lenders, there remains significant doubt that the Fund will be able to continue as a going concern.

The Fund had a working capital deficiency of $284.9 million at June 30, 2011. This resulted from the classification of $202.4 million of long-term debt as a current liability because there is no assurance that lenders will amend credit agreements or extend covenant waivers that expire on September 1, 2011. In addition, $82.5 million of convertible debentures were also classified as current liabilities on June 30, 2011 because they matured on July 31, 2011, although the principal obligation was satisfied subsequent to the end of the quarter by issuing units of the Fund in lieu of cash. Excluding the long-term debt and convertible debentures, the Fund's current assets equaled current liabilities at the end of the second quarter. That compares with a working capital balance of $14.8 million at the same time in 2010.

At June 30, 2011, the Fund had $13.7 million undrawn room on the revolving credit facility. None of this was available to the Fund due to the violation of certain financial covenants at June 30, 2011.

U.S. DOJ Investigation and Related Litigation

During the second quarter of 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 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 second quarter Management's Discussion and Analysis.

Outlook

The most pressing current issue for Arctic Glacier is the need to continue active discussions with its lenders for its revolving term credit and term loan facilities to secure a longer-term financing solution. The Fund was in breach of certain financial covenants under its credit facilities as at June 30, 2011. Subsequent to the end of the quarter, on July 29, 2011, the Fund's secured lenders waived the requirement to comply with these covenants for the quarter ended June 30, 2011 until September 1, 2011. The Fund's ability to continue as a going concern is dependent upon successfully negotiating longer-term covenant relief with its lenders.

During the quarter the Fund, under the direction of a special committee of the board of trustees and with the assistance of TD Securities, continued to evaluate alternatives as part of the strategic and financing review, subsequent to the settlement of the convertible debentures with units of the Fund, with the intention to facilitate a financial or strategic transaction in the near future in order to establish a longer-term solution.

The review of financing and strategic alternatives has identified the need to resolve remaining antitrust issues and related litigation. Considerable progress was achieved during the second quarter, when 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 state governments await resolution, although there has been no activity in this area for some time. Several civil actions are also before the courts, and 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.

Arctic Glacier's financial performance is strongly influenced by weather, and the second quarter saw poor conditions in most markets through the period until late June. By comparison, weather in the northeastern U.S. and central Canada was above average during the same quarter in 2010. Management is encouraged that weather patterns in July 2011 in many of Arctic Glacier's markets have been favorable for sales of packaged ice. However, there is no assurance that favorable weather will continue through the Fund's peak selling season this year or if it will be sufficient to resolve the breach of the covenants.

As the Fund examines financing alternatives, management continues to carefully manage its cash position and operating and capital expenditures to ensure sufficient liquidity for operations.

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 customers 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 350.3 million trust units outstanding.

Conference Call and Webcast

Arctic Glacier will discuss second quarter 2011 results during a conference call with a live audio webcast for investors and analysts on Friday, August 12 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, gains or losses on foreign exchange, impairment of property plant and equipment, goodwill impairment charges, costs of antitrust investigations and related litigation, cost of review of financing and strategic alternatives 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 cost of 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 June 30, 2011 and 2010 (unaudited), and December 31, 2010 (unaudited)
(thousands of U.S. dollars) June 30, 2011 June 30,
2010
December 31,
2010
ASSETS
Current assets
Cash$- $5,239 $9,240
Accounts receivable 31,456 31,109 11,804
Inventories 15,171 13,563 10,493
Prepaids 4,992 5,416 3,703
51,619 55,327 35,240
Deferred tax asset 4,628 3,170 13,415
Property, plant and equipment 134,806 140,254 137,388
Intangible assets 96,141 108,644 105,570
Goodwill 72,417 146,390 71,762
$359,611 $453,785 $363,375
LIABILITIES AND UNITHOLDERS' EQUITY
Current liabilities
Bank indebtedness$2,555 $- $-
Accounts payable and accrued liabilities 25,355 28,714 15,277
Provisions 269 344 335
Antitrust related litigation settlements 14,162 - 11,393
Other financial liabilities 6,331 9,162 8,228
Convertible debentures 82,457 - 74,490
Principal due within one year on long-term debt 205,345 2,326 2,391
336,474 40,546 112,114
Unit options 16 973 80
Warrants 28 299 -
Long-term debt 4,883 189,461 176,522
Convertible debentures - 79,393 -
Deferred tax liability 5,077 2,893 7,254
Unitholders' equity
Units 325,170 325,170 325,170
Deficit (305,440) (185,975) (253,693)
Accumulated other comprehensive income (loss) (6,597) 1,025 (4,072)
13,133 140,220 67,405
$359,611 $453,785 $363,375
ARCTIC GLACIER INCOME FUND
Interim Condensed Consolidated Statement of Operations
Three and six months ended June 30, 2011 and 2010 (unaudited)
Three Months Six Months
(thousands of U.S. dollars, except per unit amounts) 2011 2010 2011 2010
Sales$67,405 $71,457 $89,686 $93,798
Cost of sales 60,403 56,533 99,170 92,653
7,002 14,924 (9,484) 1,145
General and administrative expenses 2,595 2,477 5,086 4,164
Operating earnings (loss) 4,407 12,447 (14,570) (3,019)
Finance costs 9,906 8,647 18,900 16,085
Other costs 1,175 (138) 11,460 3,573
Earnings (loss) before income taxes (6,674) 3,938 (44,930) (22,677)
Income taxes
Current 139 85 251 255
Deferred (reduction) 9,310 2,725 6,566 (7,979)
9,449 2,810 6,817 (7,724)
Earnings (loss) for the period$(16,123)$1,128 $(51,747)$(14,953)
Earnings (loss) per unit – basic and diluted$(0.41)$0.03 $(1.33)$(0.38)
ARCTIC GLACIER INCOME FUND
Interim Condensed Consolidated Statement of Comprehensive Income (Loss)
Three and six months ended June 30, 2011 and 2010 (unaudited)
Three Months Six Months
(thousands of U.S. dollars) 2011 2010 2011 2010
Earnings (loss) for the period$(16,123)$1,128$(51,747)$(14,953)
Other comprehensive income (loss)
Net unrealized foreign currency translation income (loss) (430) 3,764 (2,525) 1,025
Comprehensive income (loss) for the period$(16,553)$4,892$(54,272)$(13,928)
ARCTIC GLACIER INCOME FUND
Interim Condensed Consolidated Statement of Changes in Unitholders' Equity
Six months ended June 30, 2011 and June 30, 2010 (unaudited)
Six Months
(thousands of U.S. dollars) 2011 2010
Units
Balance, beginning and end of period$325,170 $325,170
Deficit
Balance, beginning of period (253,693) (171,022)
Loss for the period (51,747) (14,953)
Balance, end of period (305,440) (185,975)
Accumulated other comprehensive income (loss)
Balance, beginning of period (4,072) -
Other comprehensive income (loss) (2,525) 1,025
Balance, end of period (6,597) 1,025
Total Unitholders' Equity$13,133 $140,220
ARCTIC GLACIER INCOME FUND
Interim Condensed Consolidated Statement of Cash Flow
Six months ended June 30, 2011 and 2010 (unaudited)
Six Months
(thousands of U.S. dollars)2011 2010
Cash from (used in):
Operating activities
Loss for the period$(51,747)$(14,953)
Adjustments for:
Depreciation and amortization 19,565 15,685
Finance costs 18,900 16,085
Interest paid (15,639) (11,539)
Recognition of rents on a straight-line basis 319 358
Unit-based compensation expense (66) (173)
Loss on disposals of non-current assets 42 103
Gain on settlement of acquisition payable (1,091) -
Unrealized loss on convertible debentures 5,455 1,756
Unrealized gain on warrants (399) (1,241)
Unrealized loss on US denominated debt - 283
Deferred income tax (reduction) 6,566 (7,979)
Antitrust related litigation settlements 1,993 -
(16,102) (1,615)
Changes in non-cash working capital items (15,332) (11,069)
(31,434) (12,684)
Investing activities
Additions to property, plant and equipment (6,733) (10,859)
Proceeds from disposal of property, plant and equipment 177 134
Additions to intangibles (200) -
(6,756) (10,725)
Financing activities
Proceeds from long-term debt 30,300 212,598
Principal repayments on long-term debt (1,077) (166,572)
Payment of deferred financing charges (2,799) (18,053)
26,424 27,973
Foreign exchange gain on cash held in foreign currency (29) (52)
Increase (decrease) in cash (11,795) 4,512
Cash, beginning of period 9,240 727
Cash (bank indebtedness), end of period$(2,555)$5,239
ARCTIC GLACIER INCOME FUND
Reconciliation of Adjusted Loss
Three and six months ended June 30, 2011 and 2010 (unaudited)
Three MonthsSix Months
(in thousands of U.S. dollars)2011 20102011 2010
Earnings (loss) for the period$(16,123)$1,128$(51,747)$(14,953)
Add costs of antitrust investigations and related litigation (1) 907 1,175 4,127 1,895
Add costs of review of financing and strategic alternatives 2,868 - 3,368 -
Adjusted earnings (loss)$(12,348)$2,303$(44,252)$(13,058)
Earnings (loss) per unit – basic and diluted$(0.41)$0.03$(1.33)$(0.38)
Adjusted earnings (loss) per unit – basic and diluted$(0.32)$0.06$(1.13)$(0.33)
(1)Net of tax effect of $nil and nil for the three and six months ended June 30, 2011 since 2011 future tax recoveries are offset by valuation against future tax assets in U.S. subsidiaries which may not be fully realized (2010 - $400 and $880).
ARCTIC GLACIER INCOME FUND
Reconciliation of EBITDA
Three and six months ended June 30, 2011 and 2010 (unaudited)
Three Months Six Months
(in thousands of U.S. dollars)2011 2010 2011 2010
Earnings (loss) for the period$(16,123)$1,128 $(51,747)$(14,953)
Add (deduct):
Depreciation and amortization 9,808 7,802 19,565 15,685
Loss on disposal of non-current assets 49 29 42 103
Finance costs 9,906 8,647 18,900 16,085
Other costs 1,175 (138) 11,460 3,573
Income taxes 9,449 2,810 6,817 (7,724)
EBITDA$14,264 $20,278 $5,037 $12,769

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
    1-888-573-9237

    Arctic Glacier Income Fund
    Doug Bailey
    Chief Financial Officer
    1-888-573-9237

    Toll free investor relations phone:
    1-888-573-9237
    www.arcticglacier.com