##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 Form 10-Q
 (Mark one)
 þ
    
    Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended June 22, 2008
 OR
 o
    
    Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to
 Commission File Number 001-32627
 HORIZON LINES, INC.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    74-3123672(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)4064 Colony Road, Suite 200, Charlotte, North Carolina
    
    28211(Address of principal executive offices)
    
    (Zip Code)
 (704) 973-7000
(Registrants telephone number, including area code)

NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)
 þ o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
  At
July 23, 2008, 29,972,376 shares of the Registrants common stock, par value $.01 per
share, were outstanding.




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##### 



HORIZON LINES, INC.
Form 10-Q Index
 Page No.Part I. Financial Information
    
    
    31. Financial Statements
    
    
    3Unaudited Condensed Consolidated Balance Sheets
    
    
    3Unaudited Condensed Consolidated Statements of Income
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flows
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    62. Managements Discussion and Analysis of Financial Condition and
Results of Operations
    
    
    183. Quantitative and Qualitative Disclosures About Market Risk
    
    
    334. Controls and Procedures
    
    
    34Part II. Other Information
    
    
    351. Legal Proceedings
    
    
    351A. Risk Factors
    
    
    352. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    363. Defaults Upon Senior Securities
    
    
    364. Submission of Matters to a Vote of Security Holders
    
    
    365. Other Information
    
    
    366. Exhibits
    
    
    37Signature
    
    
    38Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   2




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 1. Financial Statements
 Horizon Lines, Inc.
 
 Unaudited Condensed Consolidated Balance Sheets
(in thousands, except per share data)
 June 22,
    
    
    December 23,2008
    
    
    2007(1)AssetsCurrent assetsCash
    
    $
    23,953
    
    
    $
    6,276Accounts receivable, net of allowance of
$7,385 and $6,191 at June 22, 2008 and
December 23, 2007, respectively
    
    
    159,244
    
    
    
    140,820Deferred tax asset
    
    
    11,638
    
    
    
    13,792Prepaid vessel rent
    
    
    8,685
    
    
    
    4,361Materials and supplies
    
    
    35,695
    
    
    
    31,576Other current assets
    
    
    10,012
    
    
    
    10,446Total current assets
    
    
    249,227
    
    
    
    207,271Property and equipment, net
    
    
    189,735
    
    
    
    194,679Goodwill
    
    
    334,718
    
    
    
    334,671Intangible assets, net
    
    
    140,410
    
    
    
    152,031Deferred tax asset
    
    
    4,242
    
    
    
    4,060Other long-term assets
    
    
    32,070
    
    
    
    33,729Total assets
    
    $
    950,402
    
    
    $
    926,441Liabilities and Stockholders EquityCurrent liabilitiesAccounts payable
    
    $
    28,416
    
    
    $
    40,225Current portion of long-term debt
    
    
    6,543
    
    
    
    6,537Accrued vessel rent
    
    
    
    
    
    
    6,503Other accrued liabilities
    
    
    114,657
    
    
    
    95,027Total current liabilities
    
    
    149,616
    
    
    
    148,292Long-term debt, net of current
    
    
    617,196
    
    
    
    572,469Deferred rent
    
    
    29,294
    
    
    
    31,531Other long-term liabilities
    
    
    20,856
    
    
    
    19,571Total liabilities
    
    
    816,962
    
    
    
    771,863Stockholders equityCommon stock, $.01 par value, 100,000 shares
authorized, 33,733 shares issued and 29,933
shares outstanding as of June 22, 2008 and
50,000 shares authorized, 33,674 shares issued
and 31,502 shares outstanding as of
December 23, 2007
    
    
    337
    
    
    
    337Treasury stock, 3,800 and 2,172 shares at cost
as of June 22, 2008 and December 23, 2007,
respectively
    
    
    (78,538
    )
    
    
    (49,208
    )Additional paid in capital
    
    
    166,870
    
    
    
    163,760Retained earnings
    
    
    42,671
    
    
    
    39,994Accumulated other comprehensive income (loss)
    
    
    2,100
    
    
    
    (305
    )Total stockholders equity
    
    
    133,440
    
    
    
    154,578Total liabilities and stockholders equity
    
    $
    950,402
    
    
    $
    926,441
 
 (1)
    
    The balance sheet at December 23, 2007 has been derived from the
audited financial statements of Horizon Lines, Inc.   3




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##### Table of Contents



Horizon Lines, Inc.
 
 Unaudited Condensed Consolidated Statements of Income
(in thousands, except per share amounts)
 Quarters Ended
    
    
    Six Months EndedJune 22,
    
    
    June 24,
    
    
    June 22,
    
    
    June 24,2008
    
    
    2007
    
    
    2008
    
    
    2007Operating revenue
    
    $
    330,958
    
    
    $
    295,701
    
    
    $
    636,905
    
    
    $
    569,365Operating expense:Cost of services (excluding depreciation expense)
    
    
    268,699
    
    
    
    234,447
    
    
    
    521,669
    
    
    
    452,128Depreciation and amortization
    
    
    11,550
    
    
    
    12,583
    
    
    
    22,875
    
    
    
    26,050Amortization of vessel dry-docking
    
    
    4,400
    
    
    
    4,559
    
    
    
    8,775
    
    
    
    8,319Selling, general and administrative
    
    
    28,873
    
    
    
    21,510
    
    
    
    54,004
    
    
    
    43,403Miscellaneous expense (income), net
    
    
    752
    
    
    
    (303
    )
    
    
    1,297
    
    
    
    81Total operating expense
    
    
    314,274
    
    
    
    272,796
    
    
    
    608,620
    
    
    
    529,981Operating income
    
    
    16,684
    
    
    
    22,905
    
    
    
    28,285
    
    
    
    39,384Other expense:Interest expense, net
    
    
    8,147
    
    
    
    11,663
    
    
    
    17,156
    
    
    
    22,876Loss on early extinguishment of debt
    
    
    
    
    
    
    564
    
    
    
    
    
    
    
    564Other expense, net
    
    
    4
    
    
    
    25
    
    
    
    1
    
    
    
    23Income before income tax expense (benefit)
    
    
    8,533
    
    
    
    10,653
    
    
    
    11,128
    
    
    
    15,921Income tax expense (benefit)
    
    
    1,298
    
    
    
    1,093
    
    
    
    1,802
    
    
    
    (691
    )Net income
    
    $
    7,235
    
    
    $
    9,560
    
    
    $
    9,326
    
    
    $
    16,612Net income per share:Basic
    
    $
    0.24
    
    
    $
    0.28
    
    
    $
    0.31
    
    
    $
    0.49Diluted
    
    $
    0.24
    
    
    $
    0.28
    
    
    $
    0.31
    
    
    $
    0.49Number of shares used in calculations:Basic
    
    
    29,919
    
    
    
    33,635
    
    
    
    30,105
    
    
    
    33,624Diluted
    
    
    30,163
    
    
    
    34,312
    
    
    
    30,514
    
    
    
    34,253Dividends declared per common share
    
    $
    0.11
    
    
    $
    0.11
    
    
    $
    0.22
    
    
    $
    0.22
   4




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##### Table of Contents



Horizon Lines, Inc.
 
 Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
 Six Months EndedJune 22,
    
    
    June 24,2008
    
    
    2007Cash flows from operating activities:Net income
    
    $
    9,326
    
    
    $
    16,612Adjustments to reconcile net income to net cash used in operating activities:Depreciation
    
    
    12,211
    
    
    
    16,270Amortization of other intangible assets
    
    
    10,664
    
    
    
    9,780Amortization of vessel dry-docking
    
    
    8,775
    
    
    
    8,319Amortization of deferred financing costs
    
    
    1,347
    
    
    
    1,586Deferred income taxes
    
    
    1,972
    
    
    
    (1,365
    )Gain on equipment disposals
    
    
    (23
    )
    
    
    (354
    )Stock-based compensation
    
    
    2,377
    
    
    
    1,169Loss on early extinguishment of debt
    
    
    
    
    
    
    564Accretion of interest on 11% senior discount notes
    
    
    
    
    
    
    4,928Changes in operating assets and liabilities:Accounts receivable
    
    
    (18,425
    )
    
    
    (24,478
    )Materials and supplies
    
    
    (4,118
    )
    
    
    (3,376
    )Other current assets
    
    
    435
    
    
    
    (1,514
    )Accounts payable
    
    
    (11,913
    )
    
    
    (5,804
    )Accrued liabilities
    
    
    22,786
    
    
    
    (8,141
    )Vessel rent
    
    
    (12,670
    )
    
    
    (33,339
    )Vessel dry-docking payments
    
    
    (6,544
    )
    
    
    (9,064
    )Other assets/liabilities
    
    
    362
    
    
    
    (795
    )Net cash provided by (used in) operating activities
    
    
    16,562
    
    
    
    (29,002
    )Cash flows from investing activities:Purchases of property and equipment
    
    
    (7,462
    )
    
    
    (10,377
    )Purchase of business
    
    
    (198
    )
    
    
    Proceeds from the sale of property and equipment
    
    
    208
    
    
    
    2,650Net cash used in investing activities
    
    
    (7,452
    )
    
    
    (7,727
    )Cash flows from financing activities:Payments on long-term debt
    
    
    (3,267
    )
    
    
    (30,636
    )Borrowing under revolving credit facility
    
    
    73,000
    
    
    
    Payments on revolving credit facility
    
    
    (25,000
    )
    
    
    Dividends to stockholders
    
    
    (6,649
    )
    
    
    (7,407
    )Purchase of treasury stock
    
    
    (29,330
    )
    
    
    Payments of financing costs
    
    
    (137
    )
    
    
    (42
    )Payments on capital lease obligation
    
    
    (60
    )
    
    
    (93
    )Common stock issued under employee stock purchase plan
    
    
    10
    
    
    
    8Proceeds from exercise of stock options
    
    
    
    
    
    
    84Net cash provided by (used in) financing activities
    
    
    8,567
    
    
    
    (38,086
    )Net increase (decrease) in cash
    
    
    17,677
    
    
    
    (74,815
    )Cash at beginning of period
    
    
    6,276
    
    
    
    93,949Cash at end of period
    
    $
    23,953
    
    
    $
    19,134
   5




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##### Table of Contents



HORIZON LINES, INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 1. Organization
  2. Basis of Presentation
    3. Acquisitions
    Quarter Ended
    
    
    Six Months EndedJune 24,
    
    
    June 24,2007
    
    
    2007Operating revenue
    
    $
    306,399
    
    
    $
    591,794Net income
    
    
    9,180
    
    
    
    16,227Earnings per share (basic)
    
    
    0.27
    
    
    
    0.48Earnings per share (diluted)
    
    
    0.27
    
    
    
    0.48
  6




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4. Income Taxes
  5. Stock-Based Compensation
   Quarters Ended
    
    
    Six Months EndedJune 22,
    
    
    June 24,
    
    
    June 22,
    
    
    June 24,2008
    
    
    2007
    
    
    2008
    
    
    2007Stock options
    
    $
    361
    
    
    $
    483
    
    
    $
    844
    
    
    $
    701Restricted stock
    
    
    745
    
    
    
    294
    
    
    
    1,368
    
    
    
    357ESPP
    
    
    85
    
    
    
    58
    
    
    
    165
    
    
    
    111Total
    
    $
    1,191
    
    
    $
    835
    
    
    $
    2,377
    
    
    $
    1,169
  Stock Options
  Weighted-Weighted-
    
    
    Average
    
    
    AggregateAverage
    
    
    Remaining
    
    
    IntrinsicNumber of
    
    
    Exercise
    
    
    Contractual
    
    
    ValueOptions
    
    Options
    
    
    Price
    
    
    Term (years)
    
    
    (000s)Outstanding at December 23, 2007
    
    
    1,599,008
    
    
    $
    15.93Granted (a)
    
    
    199,000
    
    
    
    14.63Exercised
    
    
    Forfeited
    
    
    (163,154
    )
    
    
    15.27Outstanding at June 22, 2008
    
    
    1,634,854
    
    
    $
    15.84
    
    
    
    8.04
    
    
    $
    1,114Vested or expected to vest at June 22, 2008
    
    
    1,589,571
    
    
    $
    15.71
    
    
    
    8.02
    
    
    $
    1,106Exercisable at June 22, 2008
    
    
    34,562
    
    
    $
    10.00
    
    
    
    7.27
    
    
    $
    68
 (a)
    
    On April 24, 2008, the Company granted options to certain employees of the Company and its
subsidiaries to purchase shares of its common stock at a price of $14.63 per share. Each option
is scheduled to cliff vest and become fully exercisable on April 24, 2011, provided the
employee who was granted such option is continuously employed by the Company or its
subsidiaries through such date. Recipients who retire from the Company after attaining age 59 1/2
are entitled to proportionate vesting. The fair value of the options on the date of the grant
was $4.05 per share.  7




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##### Table of Contents



Restricted Stock
  Weighted-AverageFair ValueNumber of
    
    
    at GrantRestricted Shares
    
    Shares
    
    
    DateNonvested at December 23, 2007
    
    
    307,559
    
    
    $
    27.54Granted (a)
    
    
    169,077
    
    
    
    14.14Vested
    
    
    (17,440
    )
    
    
    34.42Forfeited
    
    
    (42,734
    )
    
    
    28.12Nonvested at June 22, 2008
    
    
    416,462
    
    
    $
    21.75
 (a)
    
    On June 3, 2008, the Company granted 4,502 shares of restricted stock each to all
non-employee members on the Companys Board of Directors. The grant date fair value of the
restricted shares was $13.33 per share and the shares will vest in full on June 3, 2009. On May
7, 2008, the Company granted 5,757 shares of restricted stock to the lead independent director
of the Companys Board of Directors. The grant date fair value of the restricted shares was
$10.35 per share and the shares will vest in full on June 2, 2009. On April 24, 2008, the
Company granted a total of 118,300 shares of restricted stock to certain employees of the
Company and its subsidiaries. The restricted shares will vest in full on April 24, 2011
provided an earnings per share performance target for the Companys fiscal year 2010 is met. If
such target is not met, the restricted shares may vest in full on April 24th during
each of the years 2012 through 2014, provided an earnings per share performance target for the
preceding fiscal year of the Company is met. If the restricted shares have not vested by
April 24, 2014, the restricted shares will be forfeited. In order for the restricted shares to
vest on any vesting date, the employee who was granted such restricted shares must have been
continuously employed by the Company and its subsidiaries through such date. The grant date
fair value of the restricted shares was $14.63 per share.  6. Net Income per Common Share
   Quarters Ended
    
    
    Six Months EndedJune 22,
    
    
    June 24,
    
    
    June 22,
    
    
    June 24,2008
    
    
    2007
    
    
    2008
    
    
    2007Numerator:Net income
    
    $
    7,235
    
    
    $
    9,560
    
    
    $
    9,326
    
    
    $
    16,612Denominator:Denominator for basic income per common share:Weighted average shares outstanding
    
    
    29,919
    
    
    
    33,635
    
    
    
    30,105
    
    
    
    33,624Effect of dilutive securities:Stock-based compensation
    
    
    244
    
    
    
    677
    
    
    
    409
    
    
    
    629Denominator for diluted net income per common share
    
    
    30,163
    
    
    
    34,312
    
    
    
    30,514
    
    
    
    34,253Basic net income per common share
    
    $
    0.24
    
    
    $
    0.28
    
    
    $
    0.31
    
    
    $
    0.49Diluted net income per common share
    
    $
    0.24
    
    
    $
    0.28
    
    
    $
    0.31
    
    
    $
    0.49
  8




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##### Table of Contents



7. Comprehensive Income
  Quarters Ended
    
    
    Six Months EndedJune 22,
    
    
    June 24,
    
    
    June 22,
    
    
    June 24,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income
    
    $
    7,235
    
    
    $
    9,560
    
    
    $
    9,326
    
    
    $
    16,612Change in fair value of interest rate swap
    
    
    2,373
    
    
    
    
    
    
    
    2,373
    
    
    
    Amortization of pension and
post-retirement benefit transition
obligation
    
    
    26
    
    
    
    25
    
    
    
    31
    
    
    
    50Comprehensive income
    
    $
    9,634
    
    
    $
    9,585
    
    
    $
    11,730
    
    
    $
    16,662
 8. Segment Reporting
    9




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Quarters Ended
    
    
    Six Months EndedJune 22,
    
    
    June 24,
    
    
    June 22,
    
    
    June 24,2008
    
    
    2007
    
    
    2008
    
    
    2007Operating revenue:Horizon Lines
    
    $
    323,036
    
    
    $
    294,229
    
    
    $
    620,953
    
    
    $
    566,323Horizon Logistics
    
    
    57,249
    
    
    
    45,942
    
    
    
    108,706
    
    
    
    88,718380,285
    
    
    
    340,171
    
    
    
    729,659
    
    
    
    655,041Inter-segment revenue
    
    
    (49,327
    )
    
    
    (44,470
    )
    
    
    (92,754
    )
    
    
    (85,676
    )Consolidated operating revenue
    
    $
    330,958
    
    
    $
    295,701
    
    
    $
    636,905
    
    
    $
    569,365Depreciation and amortization:Horizon Lines
    
    $
    15,217
    
    
    $
    14,709
    
    
    $
    30,201
    
    
    $
    29,542Horizon Logistics
    
    
    733
    
    
    
    2,433
    
    
    
    1,479
    
    
    
    4,94815,950
    
    
    
    17,142
    
    
    
    31,680
    
    
    
    34,490Eliminations
    
    
    
    
    
    
    
    
    
    
    (30
    )
    
    
    (121
    )Total depreciation and amortization
    
    $
    15,950
    
    
    $
    17,142
    
    
    $
    31,650
    
    
    $
    34,369Segment operating income (loss):Horizon Lines
    
    $
    18,028
    
    
    $
    25,791
    
    
    $
    30,878
    
    
    $
    44,901Horizon Logistics
    
    
    (1,344
    )
    
    
    (2,886
    )
    
    
    (2,593
    )
    
    
    (5,517
    )Total operating income
    
    
    16,684
    
    
    
    22,905
    
    
    
    28,285
    
    
    
    39,384Unallocated interest expense, net
    
    
    8,147
    
    
    
    11,663
    
    
    
    17,156
    
    
    
    22,876Loss on early extinguishment of debt
    
    
    
    
    
    
    564
    
    
    
    
    
    
    
    564Unallocated other expense, net
    
    
    4
    
    
    
    25
    
    
    
    1
    
    
    
    23Consolidated income before income
tax expense (benefit)
    
    $
    8,533
    
    
    $
    10,653
    
    
    $
    11,128
    
    
    $
    15,921Capital expenditures:Horizon Lines
    
    $
    3,452
    
    
    $
    6,853
    
    
    $
    6,430
    
    
    $
    10,021Horizon Logistics
    
    
    566
    
    
    
    186
    
    
    
    1,032
    
    
    
    356Total capital expenditures
    
    $
    4,018
    
    
    $
    7,039
    
    
    $
    7,462
    
    
    $
    10,377
 June 22,2008Segment assets:Horizon Lines
    
    $
    945,224Horizon Logistics
    
    
    38,068983,292Eliminations
    
    
    (32,890
    )Consolidated assets
    
    $
    950,402
  10




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##### Table of Contents



9. Property and Equipment
  June 22,
    
    
    December 23,2008
    
    
    2007Vessels
    
    $
    147,085
    
    
    $
    141,776Containers
    
    
    24,306
    
    
    
    24,522Chassis
    
    
    14,919
    
    
    
    14,923Cranes
    
    
    26,336
    
    
    
    25,179Machinery and equipment
    
    
    24,030
    
    
    
    23,923Facilities and land improvements
    
    
    12,284
    
    
    
    10,847Software
    
    
    31,422
    
    
    
    30,214Construction in progress
    
    
    18,307
    
    
    
    20,275Total property and equipment
    
    
    298,689
    
    
    
    291,659Accumulated depreciation
    
    
    (108,954
    )
    
    
    (96,980
    )Property and equipment, net
    
    $
    189,735
    
    
    $
    194,679
 10. Intangible Assets
  June 22,
    
    
    December 23,2008
    
    
    2007Customer contracts/relationships
    
    $
    145,079
    
    
    $
    144,824Trademarks
    
    
    63,800
    
    
    
    63,800Deferred financing costs
    
    
    13,007
    
    
    
    12,872Non-compete agreements
    
    
    262
    
    
    
    262Total intangibles with definite lives
    
    
    222,148
    
    
    
    221,758Accumulated amortization
    
    
    (81,738
    )
    
    
    (69,727
    )Net intangibles with definite lives
    
    
    140,410
    
    
    
    152,031Goodwill
    
    
    334,718
    
    
    
    334,671Intangible assets, net
    
    $
    475,128
    
    
    $
    486,702
 11. Accrued Liabilities
  June 22,
    
    
    December 23,2008
    
    
    2007Vessel operations
    
    $
    21,236
    
    
    $
    23,064Fuel
    
    
    21,596
    
    
    
    14,885Marine operations
    
    
    14,888
    
    
    
    9,682Terminal operations
    
    
    12,737
    
    
    
    9,278Interest
    
    
    7,249
    
    
    
    6,986Other liabilities
    
    
    36,951
    
    
    
    31,132Total other accrued liabilities
    
    $
    114,657
    
    
    $
    95,027
  11




---



##### Table of Contents



12. Long-Term Debt
  June 22,
    
    
    December 23,2008
    
    
    2007Senior credit facilityTerm loan
    
    $
    121,875
    
    
    $
    125,000Revolving credit facility
    
    
    170,000
    
    
    
    122,0004.25% convertible senior notes
    
    
    330,000
    
    
    
    330,000Other
    
    
    1,864
    
    
    
    2,006Total long-term debt
    
    
    623,739
    
    
    
    579,006Current portion
    
    
    (6,543
    )
    
    
    (6,537
    )Long-term debt, net of current
    
    $
    617,196
    
    
    $
    572,469
 Senior Credit Facility
    Derivative Instruments
    12




---



##### Table of Contents



4.25% Convertible Senior Notes
   
    
    Prior to May 15, 2012, if during any calendar quarter, and only during
such calendar quarter, if the last reported sale price of the
Companys common stock for at least 20 trading days in a period of 30
consecutive trading days ending on the last trading day of the
preceding calendar quarter exceeds 120% of the applicable conversion
price in effect on the last trading day of the immediately preceding
calendar quarter;
    
    Prior to May 15, 2012, if during the five business day period
immediately after any five consecutive trading day period (the
measurement period) in which the trading price per $1,000 principal
amount of notes for each day of such measurement period was less than
98% of the product of the last reported sale price of the Companys
common stock on such date and the conversion rate on such date;
    
    If, at any time, a change in control occurs or if the Company is a
party to a consolidation, merger, binding share exchange or transfer
or lease of all or substantially all of its assets, pursuant to which
the Companys common stock would be converted into cash, securities or
other assets; or
    
    At any time after May 15, 2012 through the fourth scheduled trading
day immediately preceding August 15, 2012.
    Other Debt
   13




---



##### Table of Contents



13. Fair Value Measurement
  Level 1:
    
    observable inputs such as quoted prices in active marketsLevel 2:
    
    inputs other than the quoted prices in active markets that are observable either
directly or indirectlyLevel 3:
    
    unobservable inputs in which there is little or no market data, which requires the
Company to develop its own assumptions
   14. Pension and Post-retirement Benefit Plans
 Pension Plans
   Post-retirement Benefit Plans
    14




---



##### Table of Contents



Other Plans
  15. Commitments and Contingencies
 Legal Proceedings
      SFL Agreements
   15




---



##### Table of Contents



Standby Letters of Credit
  16. Recent Accounting Pronouncements
  Quarter Ended June 22, 2008
    
    
    Six Months Ended June 22, 2008As
    
    
    
    
    
    
    As
    
    
    As
    
    
    
    
    
    
    AsReported
    
    
    Adjustments
    
    
    Adjusted
    
    
    Reported
    
    
    Adjustments
    
    
    AdjustedInterest expense, net
    
    $
    8,147
    
    
    $
    2,206
    
    
    $
    10,353
    
    
    $
    17,156
    
    
    $
    4,357
    
    
    $
    21,513Income tax expense
    
    
    1,298
    
    
    
    (829
    )
    
    
    469
    
    
    
    1,802
    
    
    
    (1,638
    )
    
    
    164Net income
    
    
    7,235
    
    
    
    (1,377
    )
    
    
    5,858
    
    
    
    9,326
    
    
    
    (2,719
    )
    
    
    6,607Net income per shareBasic
    
    
    0.24
    
    
    
    (0.05
    )
    
    
    0.19
    
    
    
    0.31
    
    
    
    (0.09
    )
    
    
    0.22Diluted
    
    
    0.24
    
    
    
    (0.05
    )
    
    
    0.19
    
    
    
    0.31
    
    
    
    (0.09
    )
    
    
    0.22
 Year Ended December 23, 2007As
    
    
    
    
    
    
    AsReported
    
    
    Adjustments
    
    
    AdjustedInterest expense, net
    
    $
    41,672
    
    
    $
    3,204
    
    
    $
    44,876Income tax benefit
    
    
    (13,983
    )
    
    
    (1,205
    )
    
    
    (15,188
    )Net income
    
    
    28,859
    
    
    
    (1,999
    )
    
    
    26,860Net income per shareBasic
    
    
    0.87
    
    
    
    (0.06
    )
    
    
    0.81Diluted
    
    
    0.85
    
    
    
    (0.06
    )
    
    
    0.79
  16




---



##### Table of Contents



Fiscal Year2008
    
    $
    8,9012009
    
    
    10,0112010
    
    
    11,0602011
    
    
    11,7652012
    
    
    4,821
  Hedging Activities
 Financial Statements
     17




---



##### Table of Contents



2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Executive Overview
  Quarters Ended
    
    
    Six Months EndedJune 22,
    
    
    June 24,
    
    
    June 22,
    
    
    June 24,2008
    
    
    2007
    
    
    2008
    
    
    2007($ in thousands)Operating revenue
    
    $
    330,958
    
    
    $
    295,701
    
    
    $
    636,905
    
    
    $
    569,365Operating expense
    
    
    314,274
    
    
    
    272,796
    
    
    
    608,620
    
    
    
    529,981Operating income
    
    $
    16,684
    
    
    $
    22,905
    
    
    $
    28,285
    
    
    $
    39,384Operating ratio
    
    
    95.0
    %
    
    
    92.3
    %
    
    
    95.6
    %
    
    
    93.1
    %Revenue containers (units)
    
    
    71,169
    
    
    
    72,894
    
    
    
    137,399
    
    
    
    139,815
  Quarters Ended
    
    
    Six Months EndedJune 22,
    
    
    June 24,
    
    
    June 22,
    
    
    June 24,2008
    
    
    2007
    
    
    2008
    
    
    2007(in thousands)Net income
    
    $
    7,235
    
    
    $
    9,560
    
    
    $
    9,326
    
    
    $
    16,612Interest expense, net
    
    
    8,147
    
    
    
    11,663
    
    
    
    17,156
    
    
    
    22,876Income tax expense (benefit)
    
    
    1,298
    
    
    
    1,093
    
    
    
    1,802
    
    
    
    (691
    )Depreciation and amortization
    
    
    15,950
    
    
    
    17,142
    
    
    
    31,650
    
    
    
    34,369EBITDA
    
    $
    32,630
    
    
    $
    39,458
    
    
    $
    59,934
    
    
    $
    73,166
  18




---



##### Table of Contents



Recent Developments
  General
   History
  Critical Accounting Policies
   Seasonality
  Results of Operations
 Operating Revenue Overview
   19




---



##### Table of Contents



Cost of Services Overview
  Quarter Ended June 22, 2008 Compared with the Quarter Ended June 24, 2007
 Horizon Lines Segment
  Quarters EndedJune 22,
    
    
    June 24,2008
    
    
    2007
    
    
    Change
    
    
    % Change($ in thousands)Operating revenue
    
    $
    322,170
    
    
    $
    294,229
    
    
    $
    27,941
    
    
    
    9.5
    %Operating expense:Vessel
    
    
    109,943
    
    
    
    93,158
    
    
    
    16,785
    
    
    
    18.0
    %Marine
    
    
    50,969
    
    
    
    48,226
    
    
    
    2,743
    
    
    
    5.7
    %Inland
    
    
    53,086
    
    
    
    49,569
    
    
    
    3,517
    
    
    
    7.1
    %Land
    
    
    37,119
    
    
    
    31,569
    
    
    
    5,550
    
    
    
    17.6
    %Rolling stock rent
    
    
    10,830
    
    
    
    10,988
    
    
    
    (158
    )
    
    
    (1.4
    )%Cost of services
    
    
    261,947
    
    
    
    233,510
    
    
    
    28,437
    
    
    
    12.2
    %Depreciation and amortization
    
    
    10,817
    
    
    
    10,150
    
    
    
    667
    
    
    
    6.6
    %Amortization of vessel dry-docking
    
    
    4,400
    
    
    
    4,559
    
    
    
    (159
    )
    
    
    (3.5
    )%Selling, general and administrative
    
    
    26,262
    
    
    
    20,569
    
    
    
    5,693
    
    
    
    27.7
    %Miscellaneous expense (income), net
    
    
    716
    
    
    
    (350
    )
    
    
    1,066
    
    
    
    304.6
    %Total operating expense
    
    
    304,142
    
    
    
    268,438
    
    
    
    35,704
    
    
    
    13.3
    %Operating income
    
    $
    18,028
    
    
    $
    25,791
    
    
    $
    (7,763
    )
    
    
    (30.1
    )%Operating ratio
    
    
    94.4
    %
    
    
    91.2
    %
    
    
    
    
    
    
    3.2
    %Revenue containers (units)
    
    
    71,169
    
    
    
    72,894
    
    
    
    (1,725
    )
    
    
    (2.4
    )%
  20




---



##### Table of Contents



Operating Revenue.
 Bunker and intermodal fuel surcharges included in rates
    
    $
    18,352General rate increases
    
    
    6,754Increase in non-transportation services
    
    
    4,614Revenue related to acquisition of HSI
    
    
    4,449Revenue container volume decrease
    
    
    (6,228
    )Total operating revenue increase
    
    $
    27,941
  Cost of Services.
  Vessel fuel costs increase
    
    $
    16,303Vessel lease expense increase
    
    
    2,061Labor and other vessel operating decrease
    
    
    (1,579
    )Total vessel expense increase
    
    $
    16,785
     21




---



##### Table of Contents



Quarters EndedJune 22,
    
    
    June 24,2008
    
    
    2007
    
    
    % Change(in thousands)Land expense:Maintenance
    
    $
    13,549
    
    
    $
    12,340
    
    
    
    9.8
    %Terminal overhead
    
    
    14,793
    
    
    
    12,095
    
    
    
    22.3
    %Yard and gate
    
    
    6,585
    
    
    
    5,462
    
    
    
    20.6
    %Warehouse
    
    
    2,192
    
    
    
    1,672
    
    
    
    31.1
    %Total land expense
    
    $
    37,119
    
    
    $
    31,569
    
    
    
    17.6
    %
  Depreciation and Amortization.
 Quarters EndedJune 22,
    
    
    June 24,2008
    
    
    2007
    
    
    % Change(in thousands)Depreciation and amortization:Depreciationowned vessels
    
    $
    2,554
    
    
    $
    2,723
    
    
    
    (6.2
    )%Depreciation and amortizationother
    
    
    3,184
    
    
    
    2,537
    
    
    
    25.5
    %Amortization of intangible assets
    
    
    5,079
    
    
    
    4,890
    
    
    
    3.9
    %Total depreciation and amortization
    
    $
    10,817
    
    
    $
    10,150
    
    
    
    6.6
    %Amortization of vessel dry-docking
    
    $
    4,400
    
    
    $
    4,559
    
    
    
    (3.5
    )%
 Amortization of Vessel Dry-docking.
 Selling, General and Administrative.
 Miscellaneous Expense (Income), Net
  22




---



##### Table of Contents



Horizon Logistics Segment
  Quarters EndedJune 22,
    
    
    June 24,2008
    
    
    2007
    
    
    Change
    
    
    % Change(in thousands)Operating revenue
    
    $
    8,788
    
    
    $
    1,472
    
    
    $
    7,316
    
    
    
    497.0
    %Operating expense:Inland
    
    
    5,992
    
    
    
    459
    
    
    
    5,533
    
    
    
    1,205.4
    %Land
    
    
    657
    
    
    
    476
    
    
    
    181
    
    
    
    38.0
    %Rolling stock rent
    
    
    103
    
    
    
    
    
    
    
    103
    
    
    
    100.0
    %Cost of services
    
    
    6,752
    
    
    
    935
    
    
    
    5,817
    
    
    
    622.1
    %Depreciation and amortization
    
    
    733
    
    
    
    2,433
    
    
    
    (1,700
    )
    
    
    (70.0
    )%Selling, general and administrative
    
    
    2,611
    
    
    
    941
    
    
    
    1,670
    
    
    
    177.5
    %Miscellaneous expense, net
    
    
    36
    
    
    
    49
    
    
    
    (13
    )
    
    
    (26.5
    )%Total operating expense
    
    
    10,132
    
    
    
    4,358
    
    
    
    5,774
    
    
    
    132.5
    %Operating loss
    
    $
    (1,344
    )
    
    $
    (2,886
    )
    
    $
    1,542
    
    
    
    53.4
    %
 Operating Revenue.
 Cost of Services.
 Depreciation and Amortization.
 Quarters EndedJune 22,
    
    
    June 24,2008
    
    
    2007
    
    
    % Change(in thousands)Depreciation and amortization:Depreciation and amortizationother
    
    $
    489
    
    
    $
    2,433
    
    
    
    (80.0
    )%Amortization of intangible assets
    
    
    244
    
    
    
    
    
    
    
    100.0
    %Total depreciation and amortization
    
    $
    733
    
    
    $
    2,433
    
    
    
    (70.0
    )%
 Selling, General and Administrative.
 Unallocated Expenses
 Interest Expense, Net.
 Income Tax Expense.
  23




---



##### Table of Contents



Six Months Ended June 22, 2008 Compared with the Six Months Ended June 24, 2007
 Horizon Lines Segment
 Six Months EndedJune 22,
    
    
    June 24,2008
    
    
    2007
    
    
    Change
    
    
    % Change($ in thousands)Operating revenue
    
    $
    620,015
    
    
    $
    566,322
    
    
    $
    53,693
    
    
    
    9.5
    %Operating expense:Vessel
    
    
    213,370
    
    
    
    175,880
    
    
    
    37,490
    
    
    
    21.3
    %Marine
    
    
    100,196
    
    
    
    93,992
    
    
    
    6,204
    
    
    
    6.6
    %Inland
    
    
    100,098
    
    
    
    95,214
    
    
    
    4,884
    
    
    
    5.1
    %Land
    
    
    72,321
    
    
    
    63,101
    
    
    
    9,220
    
    
    
    14.6
    %Rolling stock rent
    
    
    22,837
    
    
    
    22,010
    
    
    
    827
    
    
    
    3.8
    %Cost of services
    
    
    508,822
    
    
    
    450,197
    
    
    
    58,625
    
    
    
    13.0
    %Depreciation and amortization
    
    
    21,426
    
    
    
    21,223
    
    
    
    203
    
    
    
    1.0
    %Amortization of vessel dry-docking
    
    
    8,775
    
    
    
    8,319
    
    
    
    456
    
    
    
    5.5
    %Selling, general and administrative
    
    
    48,884
    
    
    
    41,680
    
    
    
    7,204
    
    
    
    17.3
    %Miscellaneous expense, net
    
    
    1,230
    
    
    
    2
    
    
    
    1,228
    
    
    
    61,400
    %Total operating expense
    
    
    589,137
    
    
    
    521,421
    
    
    
    67,716
    
    
    
    13.0
    %Operating income
    
    $
    30,878
    
    
    $
    44,901
    
    
    $
    (14,023
    )
    
    
    (31.2
    )%Operating ratio
    
    
    95.0
    %
    
    
    92.1
    %
    
    
    
    
    
    
    3.1
    %Revenue containers (units)
    
    
    137,399
    
    
    
    139,815
    
    
    
    (2,416
    )
    
    
    (1.7
    )%
 Operating Revenue.
 Bunker and intermodal fuel surcharges included in rates
    
    $
    32,912General rate increases
    
    
    13,771Revenue related to acquisition of HSI
    
    
    8,646Increase in non-transportation services
    
    
    7,059Revenue container volume decrease
    
    
    (8,695
    )Total operating revenue increase
    
    $
    53,693
  Cost of Services.
  24




---



##### Table of Contents



Vessel fuel costs increase
    
    $
    31,593Vessel lease expense increase
    
    
    8,203Labor and other vessel operating decrease
    
    
    (2,306
    )Total vessel expense increase
    
    $
    37,490
     Six Months EndedJune 22,
    
    
    June 24,2008
    
    
    2007
    
    
    % Change(in thousands)Land expense:Maintenance
    
    $
    26,112
    
    
    $
    24,382
    
    
    
    7.1
    %Terminal overhead
    
    
    28,677
    
    
    
    24,184
    
    
    
    18.6
    %Yard and gate
    
    
    13,477
    
    
    
    11,203
    
    
    
    20.3
    %Warehouse
    
    
    4,055
    
    
    
    3,332
    
    
    
    21.7
    %Total land expense
    
    $
    72,321
    
    
    $
    63,101
    
    
    
    14.6
    %
   25




---



##### Table of Contents



Depreciation and Amortization.
 Six Months EndedJune 22,
    
    
    June 24,2008
    
    
    2007
    
    
    % Change(in thousands)Depreciation and amortization:Depreciationowned vessels
    
    $
    5,051
    
    
    $
    5,452
    
    
    
    (7.4
    )%Depreciation and amortizationother
    
    
    6,220
    
    
    
    5,990
    
    
    
    3.8
    %Amortization of intangible assets
    
    
    10,155
    
    
    
    9,781
    
    
    
    3.8
    %Total depreciation and amortization
    
    $
    21,426
    
    
    $
    21,223
    
    
    
    1.0
    %Amortization of vessel dry-docking
    
    $
    8,775
    
    
    $
    8,319
    
    
    
    5.5
    %
 Amortization of Vessel Dry-docking.
 Selling, General and Administrative.
 Miscellaneous Expense, Net
 Horizon Logistics Segment
 Six Months EndedJune 22,
    
    
    June 24,2008
    
    
    2007
    
    
    Change
    
    
    % Change(in thousands)Operating revenue
    
    $
    16,890
    
    
    $
    3,043
    
    
    $
    13,847
    
    
    
    455.0
    %Operating expense:Inland
    
    
    11,375
    
    
    
    967
    
    
    
    10,408
    
    
    
    1,076.3
    %Land
    
    
    1,262
    
    
    
    964
    
    
    
    298
    
    
    
    30.9
    %Rolling stock rent
    
    
    210
    
    
    
    
    
    
    
    210
    
    
    
    100.0
    %Cost of services
    
    
    12,847
    
    
    
    1,931
    
    
    
    10,916
    
    
    
    565.3
    %Depreciation and amortization
    
    
    1,449
    
    
    
    4,827
    
    
    
    (3,378
    )
    
    
    (70.0
    )%Selling, general and administrative
    
    
    5,120
    
    
    
    1,723
    
    
    
    3,397
    
    
    
    197.2
    %Miscellaneous expense, net
    
    
    67
    
    
    
    79
    
    
    
    (12
    )
    
    
    (15.2
    )%Total operating expenses
    
    
    19,483
    
    
    
    8,559
    
    
    
    10,924
    
    
    
    127.6
    %Operating loss
    
    $
    (2,593
    )
    
    $
    (5,517
    )
    
    $
    2,924
    
    
    
    53.0
    %
 Operating Revenue.
  26




---



##### Table of Contents



Cost of Services.
 Depreciation and Amortization.
 Six Months EndedJune 22,
    
    
    June 24,2008
    
    
    2007
    
    
    % Change(in thousands)Depreciation and amortization:Depreciation and amortizationother
    
    $
    941
    
    
    $
    4,827
    
    
    
    (80.5
    )%Amortization of intangible assets
    
    
    508
    
    
    
    
    
    
    
    100.0
    %Total depreciation and amortization
    
    $
    1,449
    
    
    $
    4,827
    
    
    
    (70.0
    )%
 Selling, General and Administrative.
 Unallocated Expenses
 Interest Expense, Net.
 Income Tax Expense (Benefit).
 Liquidity and Capital Resources
   27




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##### Table of Contents



Operating Activities
  Decrease in vessel payments in excess of accrual
    
    $
    20,669Increase in accounts payable and accrued liabilities, net
    
    
    11,819Decrease in management bonus payments in excess of accrual
    
    
    12,998Decrease in accounts receivable
    
    
    6,053Other increases in working capital, net
    
    
    5,214Earnings adjusted for non-cash charges
    
    
    (11,189
    )$
    45,564
 Investing Activities
  Financing Activities
   Outlook
   28




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##### Table of Contents



Capital Requirements
   Long-Term Debt
 Senior Credit Facility
    Derivative Instruments
    29




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##### Table of Contents



4.25% Convertible Senior Notes
   
    
    Prior to May 15, 2012, if during any calendar quarter, and only during
such calendar quarter, if the last reported sale price of the
Companys common stock for at least 20 trading days in a period of 30
consecutive trading days ending on the last trading day of the
preceding calendar quarter exceeds 120% of the applicable conversion
price in effect on the last trading day of the immediately preceding
calendar quarter;
    
    Prior to May 15, 2012, if during the five business day period
immediately after any five consecutive trading day period (the
measurement period) in which the trading price per $1,000 principal
amount of notes for each day of such measurement period was less than
98% of the product of the last reported sale price of the Companys
common stock on such date and the conversion rate on such date;
    
    If, at any time, a change in control occurs or if the Company is a
party to a consolidation, merger, binding share exchange or transfer
or lease of all or substantially all of its assets, pursuant to which
the Companys common stock would be converted into cash, securities or
other assets; or
    
    At any time after May 15, 2012 through the fourth scheduled trading
day immediately preceding August 15, 2012.
    Interest Rate Risk
   30




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##### Table of Contents



Ratio of Earnings to Fixed Charges
  Quarter Ended
    
    
    Six Months EndedJune 22, 2008
    
    
    June 22, 2008Pretax income
    
    $
    8,533
    
    
    $
    11,128Interest expense
    
    
    8,216
    
    
    
    17,259Rentals
    
    
    8,738
    
    
    
    17,691Total fixed charges
    
    $
    16,954
    
    
    $
    34,950Pretax earnings plus fixed charges
    
    $
    25,487
    
    
    $
    46,078Ratio of earnings to fixed charges
    
    
    1.50
    x
    
    
    1.32
    x
  Recent Accounting Pronouncements
  Quarter Ended June 22, 2008
    
    
    Six Months Ended June 22, 2008As
    
    
    
    
    
    
    As
    
    
    As
    
    
    
    
    
    
    AsReported
    
    
    Adjustments
    
    
    Adjusted
    
    
    Reported
    
    
    Adjustments
    
    
    AdjustedInterest expense, net
    
    $
    8,147
    
    
    $
    2,206
    
    
    $
    10,353
    
    
    $
    17,156
    
    
    $
    4,357
    
    
    $
    21,513Income tax expense
    
    
    1,298
    
    
    
    (829
    )
    
    
    469
    
    
    
    1,802
    
    
    
    (1,638
    )
    
    
    164Net income
    
    
    7,235
    
    
    
    (1,377
    )
    
    
    5,858
    
    
    
    9,326
    
    
    
    (2,719
    )
    
    
    6,607Net income per shareBasic
    
    
    0.24
    
    
    
    (0.05
    )
    
    
    0.19
    
    
    
    0.31
    
    
    
    (0.09
    )
    
    
    0.22Diluted
    
    
    0.24
    
    
    
    (0.05
    )
    
    
    0.19
    
    
    
    0.31
    
    
    
    (0.09
    )
    
    
    0.22
  31




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##### Table of Contents



Year Ended December 23, 2007As
    
    
    
    
    
    
    AsReported
    
    
    Adjustments
    
    
    AdjustedInterest expense, net
    
    $
    41,672
    
    
    $
    3,204
    
    
    $
    44,876Income tax benefit
    
    
    (13,983
    )
    
    
    (1,205
    )
    
    
    (15,188
    )Net income
    
    
    28,859
    
    
    
    (1,999
    )
    
    
    26,860Net income per shareBasic
    
    
    0.87
    
    
    
    (0.06
    )
    
    
    0.81Diluted
    
    
    0.85
    
    
    
    (0.06
    )
    
    
    0.79
  Fiscal Year2008
    
    $
    8,9012009
    
    
    10,0112010
    
    
    11,0602011
    
    
    11,7652012
    
    
    4,821
       32




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##### Table of Contents



Forward Looking Statements
      
 3. Quantitative and Qualitative Disclosures About Market Risk
     33




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##### Table of Contents



4. Controls and Procedures
 Disclosure Controls and Procedures
  Internal Control over Financial Reporting
  Changes in Internal Control
   34




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##### Table of Contents



PART II. OTHER INFORMATION
 
 1. Legal Proceedings
      
 1A. Risk Factors
  The Company has received a Department of Justice subpoena, and a government investigation
could have a material effect on our business.
    35




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##### Table of Contents



2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 3. Defaults Upon Senior Securities
  
 4. Submission of Matters to a Vote of Security-Holders
  (a)
    
    Elect to the Board of Directors of the Company the three Class III
directors named as the Companys nominees in the Proxy Statement for
the Annual Meeting, filed with the SEC on April 18, 2008, as follows:
 SharesWithholdingNominee
    
    Shares Voting For
    
    
    Authority to VoteThomas P. Storrs
    
    
    24,762,128
    
    
    
    86,977Charles G. Raymond
    
    
    24,749,987
    
    
    
    99,118James W. Down
    
    
    24,751,971
    
    
    
    96,134
  (b)
    
    Approve an amendment to the Companys certificate of incorporate to
increase the number of authorized shares of its common stock, par
value $0.01 per share from 50,000,000 to 100,000,000.
 For
    
    Against
    
    Abstain22,264,093
    
    2,577,098
    
    7,914
 (c)
    
    Ratify the action of the Audit Committee of the Board of Directors in
appointing Ernst & Young LLP as independent registered public
accounting firm for the 2008 fiscal year.
 For
    
    Against
    
    Abstain24,797,070
    
    22,185
    
    29,850
 
 5. Other Information
   36




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##### Table of Contents



6. Exhibits
 31.1*
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2*
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1*
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.32.2*
    
    Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
 *
    
    Filed herewith.  37




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##### Table of Contents



SIGNATURE
   HORIZON LINES, INC.By:
    /s/ MICHAEL T. AVARAMichael T. AvaraSenior Vice President & Chief Financial Officer
(Principal Financial Officer & Authorized Signatory)  38




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNo.
    
    Description31.1*
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2*
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1*
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.32.2*
    
    Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
 *
    
    Filed herewith.  39