##### 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 September 23, 2007
 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 
incorporation or organization)
    
    (I.R.S. Employer
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
  o þ o
 o þ
  At October 24, 2007, 32,660,690 shares of the Registrants common stock, par value $.01 per
share, were outstanding.




---



##### 



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 Operations
    
    
    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
    
    
    173.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    324.
    
    Controls and Procedures
    
    
    33Part II. Other Information
    
    
    341.
    
    Legal Proceedings
    
    
    341A.
    
    Risk Factors
    
    
    342.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    353.
    
    Defaults Upon Senior Securities
    
    
    354.
    
    Submission of Matters to a Vote of Security Holders
    
    
    355.
    
    Other Information
    
    
    356.
    
    Exhibits
    
    
    35Signature
    
    
    
    
    36Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   2




---



##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 1. Financial Statements
 
 Horizon Lines, Inc.
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except per share data)
 September 23,
    
    
    December 24,2007
    
    
    2006(1)AssetsCurrent assetsCash
    
    $
    9,432
    
    
    $
    93,949Accounts receivable, net of allowance of $6,726 and
$4,972 at September 23, 2007 and December 24, 2006,
respectively
    
    
    165,354
    
    
    
    120,732Deferred tax asset
    
    
    29,825
    
    
    
    11,586Prepaid vessel rent
    
    
    4,334
    
    
    
    1,163Materials and supplies
    
    
    29,969
    
    
    
    24,658Other current assets
    
    
    8,643
    
    
    
    7,103Total current assets
    
    
    247,557
    
    
    
    259,191Property and equipment, net
    
    
    186,164
    
    
    
    188,652Goodwill
    
    
    335,091
    
    
    
    306,724Intangible assets, net
    
    
    157,024
    
    
    
    167,882Other long-term assets
    
    
    35,304
    
    
    
    22,580Total assets
    
    $
    961,140
    
    
    $
    945,029Liabilities and Stockholders EquityCurrent liabilitiesAccounts payable
    
    $
    22,332
    
    
    $
    28,322Current portion of long-term debt
    
    
    4,687
    
    
    
    6,758Accrued vessel rent
    
    
    
    
    
    
    25,426Other accrued liabilities
    
    
    106,058
    
    
    
    101,122Total current liabilities
    
    
    133,077
    
    
    
    161,628Long-term debt, net of current
    
    
    598,912
    
    
    
    503,708Deferred tax liability
    
    
    33,085
    
    
    
    31,339Deferred rent
    
    
    32,649
    
    
    
    36,003Other long-term liabilities
    
    
    16,995
    
    
    
    4,074Total liabilities
    
    
    814,718
    
    
    
    736,752Stockholders equityCommon stock, $.01 par value, 50,000 shares
authorized, 33,648 shares issued and 32,648 shares
outstanding as of September 23, 2007 and 33,591 shares
issued and outstanding as of December 24, 2006
    
    
    337
    
    
    
    336Treasury stock, 1,000 shares at cost
    
    
    (28,560
    )
    
    
    Additional paid in capital
    
    
    142,586
    
    
    
    179,599Accumulated other comprehensive loss
    
    
    (935
    )
    
    
    (1,011
    )Retained earnings
    
    
    32,994
    
    
    
    29,353Total stockholders equity
    
    
    146,422
    
    
    
    208,277Total liabilities and stockholders equity
    
    $
    961,140
    
    
    $
    945,029
 
 (1)
    
    The balance sheet at December 24, 2006 has been derived from the audited financial statements of Horizon Lines, Inc.
   3




---



##### Table of Contents



Horizon Lines, Inc.
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
 Quarters Ended
    
    
    Nine Months EndedSeptember 23,
    
    
    September 24,
    
    
    September 23,
    
    
    September 24,2007
    
    
    2006
    
    
    2007
    
    
    2006Operating revenue
    
    $
    321,145
    
    
    $
    304,657
    
    
    $
    890,509
    
    
    $
    869,438Operating expense:Operating expense (excluding
depreciation expense)
    
    
    246,402
    
    
    
    229,072
    
    
    
    698,530
    
    
    
    673,421Depreciation and amortization
    
    
    10,714
    
    
    
    12,445
    
    
    
    36,765
    
    
    
    37,539Amortization of vessel dry-docking
    
    
    4,820
    
    
    
    3,362
    
    
    
    13,139
    
    
    
    11,332Selling, general and administrative
    
    
    23,481
    
    
    
    24,987
    
    
    
    66,885
    
    
    
    72,680Miscellaneous expense (income), net
    
    
    445
    
    
    
    (406
    )
    
    
    525
    
    
    
    977Total operating expense
    
    
    285,862
    
    
    
    269,460
    
    
    
    815,844
    
    
    
    795,949Operating income
    
    
    35,283
    
    
    
    35,197
    
    
    
    74,665
    
    
    
    73,489Other expense (income):Interest expense, net
    
    
    10,077
    
    
    
    12,226
    
    
    
    32,953
    
    
    
    36,250Loss on early extinguishment of debt
    
    
    37,958
    
    
    
    
    
    
    
    38,522
    
    
    
    Other expense (income), net
    
    
    25
    
    
    
    2
    
    
    
    45
    
    
    
    (184
    )(Loss) income before income tax benefit
    
    
    (12,777
    )
    
    
    22,969
    
    
    
    3,145
    
    
    
    37,423Income tax benefit
    
    
    (14,347
    )
    
    
    (29,976
    )
    
    
    (15,038
    )
    
    
    (24,289
    )Net income
    
    $
    1,570
    
    
    $
    52,945
    
    
    $
    18,183
    
    
    $
    61,712Net income per share:Basic
    
    $
    0.05
    
    
    $
    1.58
    
    
    $
    0.54
    
    
    $
    1.84Diluted
    
    $
    0.05
    
    
    $
    1.57
    
    
    $
    0.53
    
    
    $
    1.84Number of shares used in calculations:Basic
    
    
    33,131
    
    
    
    33,544
    
    
    
    33,460
    
    
    
    33,544Diluted
    
    
    33,770
    
    
    
    33,726
    
    
    
    34,066
    
    
    
    33,582Dividends declared per common share
    
    $
    0.11
    
    
    $
    0.11
    
    
    $
    0.33
    
    
    $
    0.33
   4




---



##### Table of Contents



Horizon Lines, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
 Nine Months EndedSeptember 23,
    
    
    September 24,2007
    
    
    2006Cash flows from operating activities:Net income
    
    $
    18,183
    
    
    $
    61,712Adjustments to reconcile net income to net cash (used in) provided by operating activities:Depreciation
    
    
    21,826
    
    
    
    22,868Amortization of other intangible assets
    
    
    14,939
    
    
    
    14,671Amortization of vessel dry-docking
    
    
    13,139
    
    
    
    11,332Amortization of deferred financing costs
    
    
    2,296
    
    
    
    2,413Deferred income taxes
    
    
    (20,023
    )
    
    
    (22,763
    )Gain on equipment disposals
    
    
    (281
    )
    
    
    (471
    )Stock-based compensation
    
    
    2,401
    
    
    
    686Loss on early extinguishment of debt
    
    
    38,522
    
    
    
    Accretion of interest on 11% senior discount notes
    
    
    6,062
    
    
    
    6,796Changes in operating assets and liabilitiesAccounts receivable
    
    
    (37,142
    )
    
    
    (29,579
    )Materials and supplies
    
    
    (5,761
    )
    
    
    1,254Other current assets
    
    
    (1,537
    )
    
    
    (3,877
    )Accounts payable
    
    
    (6,727
    )
    
    
    3,991Accrued liabilities
    
    
    (8,650
    )
    
    
    16,462Vessel rent
    
    
    (30,790
    )
    
    
    (5,419
    )Vessel dry-docking payments
    
    
    (15,516
    )
    
    
    (13,703
    )Other assets/liabilities
    
    
    3,545
    
    
    
    (1,577
    )Net cash (used in) provided by operating activities
    
    
    (5,514
    )
    
    
    64,796Cash flows from investing activities:Purchases of property and equipment
    
    
    (16,714
    )
    
    
    (10,381
    )Purchase of businesses, net of cash acquired
    
    
    (32,082
    )
    
    
    Proceeds from the sale of property and equipment
    
    
    3,078
    
    
    
    1,819Other investing activities
    
    
    
    
    
    
    (245
    )Net cash used in investing activities
    
    
    (45,718
    )
    
    
    (8,807
    )Cash flows from financing activities:Payments on long-term debt
    
    
    (517,074
    )
    
    
    (3,151
    )Issuance of convertible notes
    
    
    330,000
    
    
    
    Borrowing of term loan
    
    
    125,000
    
    
    
    Borrowing under revolving credit facility
    
    
    161,500
    
    
    
    Payments on revolving credit facility
    
    
    (15,000
    )
    
    
    Purchase of call spread options
    
    
    (52,541
    )
    
    
    Sale of common stock warrants
    
    
    11,958
    
    
    
    Redemption premiums
    
    
    (25,568
    )
    
    
    Dividends to stockholders
    
    
    (11,003
    )
    
    
    (11,070
    )Purchase of treasury stock
    
    
    (28,560
    )
    
    
    Payments of financing costs
    
    
    (11,929
    )
    
    
    (1,057
    )Payments on capital lease obligation
    
    
    (152
    )
    
    
    (149
    )Proceeds from exercise of stock options
    
    
    84
    
    
    
    Costs associated with initial public offering
    
    
    
    
    
    
    (158
    )Net cash used in financing activities
    
    
    (33,285
    )
    
    
    (15,585
    )Net (decrease) increase in cash
    
    
    (84,517
    )
    
    
    40,404Cash at beginning of period
    
    
    93,949
    
    
    
    41,450Cash at end of period
    
    $
    9,432
    
    
    $
    81,854
   5




---



##### Table of Contents



HORIZON LINES, INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 1. Organization
  2. Basis of Presentation
    3. Acquisitions
    6




---



##### Table of Contents



Current assets
    
    $
    8,257Property and equipment
    
    
    4,732Intangible assets
    
    
    7,412Goodwill
    
    
    28,078Long-term assets
    
    
    51Total assets acquired
    
    
    48,530Current liabilities
    
    
    (5,515
    )Long-term liabilities
    
    
    (7,518
    )Long-term debt
    
    
    (2,646
    )Total liabilities assumed
    
    
    (15,679
    )Net assets acquired
    
    $
    32,851
   Quarter
    
    
    Quarter
    
    
    Nine Months
    
    
    Nine MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    EndedSeptember 23,
    
    
    September 24,
    
    
    September 23,
    
    
    September 24,2007
    
    
    2006
    
    
    2007
    
    
    2006(in thousands, except per share amounts)Operating revenue
    
    $
    325,950
    
    
    $
    315,399
    
    
    $
    917,743
    
    
    $
    899,445Net income
    
    
    1,555
    
    
    
    52,673
    
    
    
    18,186
    
    
    
    61,397Earnings per share (basic)
    
    
    0.05
    
    
    
    1.57
    
    
    
    0.54
    
    
    
    1.83Earnings per share (diluted)
    
    
    0.05
    
    
    
    1.56
    
    
    
    0.53
    
    
    
    1.83
 4. Income Taxes
     7




---



##### Table of Contents



5. Stock-Based Compensation
   Stock Options
   WeightedWeighted-
    
    
    Average
    
    
    AggregateAverage
    
    
    Remaining
    
    
    IntrinsicNumber of
    
    
    Exercise
    
    
    Contractual
    
    
    ValueOptions
    
    Options
    
    
    Price
    
    
    Term (years)
    
    
    (000s)Outstanding at December 24, 2006
    
    
    1,291,037
    
    
    $
    11.35Granted (a)
    
    
    329,000
    
    
    
    33.51Exercised (b)
    
    
    (7,875
    )
    
    
    10.00Forfeited
    
    
    Outstanding at September 23, 2007
    
    
    1,612,162
    
    
    $
    15.88
    
    
    
    8.66
    
    
    $
    21,992Vested or expected to vest at September 23, 2007
    
    
    1,549,566
    
    
    $
    15.71
    
    
    
    8.65
    
    
    $
    21,347Exercisable at September 23, 2007
    
    
    47,687
    
    
    $
    10.00
    
    
    
    8.13
    
    
    $
    882
 (a)
    
    On March 26, 2007, the Company granted options to certain employees of the Company and its subsidiaries to purchase shares of its common stock at a price of $33.51 per share. Each option is scheduled to cliff vest and
become fully exercisable on March 26, 2010, 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 grant date fair value of the options granted was $10.58 per share.(b)
    
    The aggregate intrinsic value of stock options exercised during the nine months ended September 23, 2007 was $0.2 million.
 Restricted Stock
   8




---



##### Table of Contents



Weighted-AverageFair ValueNumber of
    
    
    at GrantRestricted Shares
    
    Shares
    
    
    DateNonvested at December 24, 2006
    
    
    70,000
    
    
    $
    12.57Granted (a)
    
    
    237,559
    
    
    
    31.96Vested
    
    
    Forfeited
    
    
    Nonvested at September 23, 2007
    
    
    307,559
    
    
    $
    27.54
 (a)
    
    On August 28, 2007, in conjunction with the acquisition of Aero Logistics, the Company
granted 50,001 shares of restricted stock to certain employees of Aero Logistics. The shares of
restricted stock will vest on March 31, 2010 if certain performance targets are achieved,
provided the employee who was granted such restricted stock is continuously employed by the
Company and its subsidiaries through such date. The grant date fair market value of the
restricted shares was $27.50 per share.
      Employee Stock Purchase Plan
  6. Net Income per Common Share
   9




---



##### Table of Contents



Quarters EndedSeptember 23,
    
    
    September 24,2007
    
    
    2006Numerator:Net income
    
    $
    1,570
    
    
    $
    52,945Denominator:Denominator for basic income per common share:Weighted average shares outstanding
    
    
    33,131
    
    
    
    33,544Effect of dilutive securities:Stock-based compensation
    
    
    639
    
    
    
    182Denominator for diluted net income per common share
    
    
    33,770
    
    
    
    33,726Basic net income per common share
    
    $
    0.05
    
    
    $
    1.58Diluted net income per common share
    
    $
    0.05
    
    
    $
    1.57
 Nine months EndedSeptember 23,
    
    
    September 24,2007
    
    
    2006Numerator:Net income
    
    $
    18,183
    
    
    $
    61,712Denominator:Denominator for basic income per common share:Weighted average shares outstanding
    
    
    33,460
    
    
    
    33,544Effect of dilutive securities:Stock-based compensation
    
    
    606
    
    
    
    38Denominator for diluted net income per common share
    
    
    34,066
    
    
    
    33,582Basic net income per common share
    
    $
    0.54
    
    
    $
    1.84Diluted net income per common share
    
    $
    0.53
    
    
    $
    1.84
 7. Total Comprehensive Income
  Quarters EndedSeptember 23,
    
    
    September 24,2007
    
    
    2006Net income
    
    $
    1,570
    
    
    $
    52,945Amortization of pension and post-retirement benefit transition obligation
    
    
    25
    
    
    
    Change in fair value of fixed price fuel contract
    
    
    
    
    
    
    (177
    )Comprehensive income
    
    $
    1,595
    
    
    $
    52,768
  10




---



##### Table of Contents



Nine months EndedSeptember 23,
    
    
    September 24,2007
    
    
    2006Net income
    
    $
    18,183
    
    
    $
    61,712Amortization of pension and post-retirement benefit transition obligation
    
    
    75
    
    
    
    Change in fair value of fixed price fuel contract
    
    
    
    
    
    
    (477
    )Comprehensive income
    
    $
    18,258
    
    
    $
    61,235
 8. Property and Equipment
  September 23,
    
    
    December 24,2007
    
    
    2006Vessels
    
    $
    139,717
    
    
    $
    137,129Containers
    
    
    24,627
    
    
    
    27,682Chassis
    
    
    14,691
    
    
    
    14,535Cranes
    
    
    20,752
    
    
    
    15,903Machinery and equipment
    
    
    22,189
    
    
    
    19,716Facilities and land improvements
    
    
    10,039
    
    
    
    8,416Software
    
    
    30,074
    
    
    
    29,887Other
    
    
    15,522
    
    
    
    7,715Total property and equipment
    
    
    277,611
    
    
    
    260,983Accumulated depreciation
    
    
    (91,447
    )
    
    
    (72,331
    )Property and equipment, net
    
    $
    186,164
    
    
    $
    188,652
 9. Intangible Assets
  September 23,
    
    
    December 24,2007
    
    
    2006Customer contracts/relationships
    
    $
    144,824
    
    
    $
    137,675Trademarks
    
    
    63,800
    
    
    
    63,800Deferred financing costs
    
    
    11,887
    
    
    
    23,075Non-compete agreements
    
    
    262
    
    
    
    Total intangibles with definite lives
    
    
    220,773
    
    
    
    224,550Accumulated amortization
    
    
    (63,749
    )
    
    
    (56,668
    )Net intangibles with definite lives
    
    
    157,024
    
    
    
    167,882Goodwill
    
    
    335,091
    
    
    
    306,724Intangible assets, net
    
    $
    492,115
    
    
    $
    474,606
    11




---



##### Table of Contents



10. Accrued Liabilities
  September 23,
    
    
    December 24,2007
    
    
    2006Vessel operations
    
    $
    25,809
    
    
    $
    18,608Fuel
    
    
    13,555
    
    
    
    10,899Marine operations
    
    
    14,165
    
    
    
    9,452Terminal operations
    
    
    11,511
    
    
    
    12,400Interest
    
    
    4,232
    
    
    
    7,219Bonus
    
    
    
    
    
    
    10,500Other liabilities
    
    
    36,786
    
    
    
    32,044Total other accrued liabilities
    
    $
    106,058
    
    
    $
    101,122
 11. Long-Term Debt
  September 23,
    
    
    December 24,2007
    
    
    2006New senior credit facility
    
    $
    271,500
    
    
    $
    4.25% convertible senior notes
    
    
    330,000
    
    
    
    5.26% note payable
    
    
    2,099
    
    
    
    Prior senior credit facility
    
    
    
    
    
    
    219,3759% senior notes
    
    
    
    
    
    
    197,01411% senior discount notes
    
    
    
    
    
    
    89,564Notes issued by the owner trustees of the
owner trusts and secured by mortgages on
the vessels owned by such trusts (a)
    
    
    
    
    
    
    4,513Total long-term debt
    
    
    603,599
    
    
    
    510,466Current portion
    
    
    (4,687
    )
    
    
    (6,758
    )Long-term debt, net of current
    
    $
    598,912
    
    
    $
    503,708
 (a)
    
    These notes matured and were repaid during January 2007.
 New Senior Credit Facility
    12




---



##### Table of Contents



4.25% Convertible Senior Notes
    
    
    Prior to May 15, 2012, if during any calendar
quarter after the calendar quarter ending September 30,
2007, 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.
    13




---



##### Table of Contents



Long-term Note Payable
  Prior Senior Credit Facility
  12. Pension and Post-retirement Benefit Plans
 Pension Plans
    14




---



##### Table of Contents



Post-retirement Benefit Plans
   Other Plans
  13. Commitments and Contingencies
 Legal Proceedings
     15




---



##### Table of Contents



Standby Letters of Credit
  14. Recent Accounting Pronouncements
    16




---



##### Table of Contents



2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Executive Overview
 Quarter Ended
    
    
    Quarter Ended
    
    
    Nine Months Ended
    
    
    Nine Months EndedSeptember 23, 2007
    
    
    September 24, 2006
    
    
    September 23, 2007
    
    
    September 24, 2006(in thousands)Operating revenue
    
    $
    321,145
    
    
    $
    304,657
    
    
    $
    890,509
    
    
    $
    869,438Operating expense
    
    
    285,862
    
    
    
    269,460
    
    
    
    815,844
    
    
    
    795,949Operating income
    
    $
    35,283
    
    
    $
    35,197
    
    
    $
    74,665
    
    
    $
    73,489Operating ratio
    
    
    89.0
    %
    
    
    88.4
    %
    
    
    91.6
    %
    
    
    91.5
    %Revenue containers (units)
    
    
    74,759
    
    
    
    77,108
    
    
    
    214,574
    
    
    
    224,313
    Quarter Ended
    
    
    Quarter Ended
    
    
    Nine Months Ended
    
    
    Nine Months EndedSeptember 23, 2007
    
    
    September 24, 2006
    
    
    September 23, 2007
    
    
    September 24, 2006Net income
    
    $
    1,570
    
    
    $
    52,945
    
    
    $
    18,183
    
    
    $
    61,712Interest expense, net
    
    
    10,077
    
    
    
    12,226
    
    
    
    32,953
    
    
    
    36,250Income tax benefit
    
    
    (14,347
    )
    
    
    (29,976
    )
    
    
    (15,038
    )
    
    
    (24,289
    )Depreciation and amortization
    
    
    15,534
    
    
    
    15,807
    
    
    
    49,904
    
    
    
    48,871EBITDA
    
    $
    12,834
    
    
    $
    51,002
    
    
    $
    86,002
    
    
    $
    122,544
  17




---



##### Table of Contents



Recent Developments
       General
  History
   18




---



##### Table of Contents



Recent Accounting Pronouncements
    Critical Accounting Policies
   FIN 48
  Results of Operations
 Operating Revenue Overview
   19




---



##### Table of Contents



Operating Expense Overview
  Quarter Ended September 23, 2007 Compared with the Quarter Ended September 24, 2006
 Quarter Ended
    
    
    Quarter EndedSeptember 23, 2007
    
    
    September 24, 2006
    
    
    % Change(in thousands)Operating revenue
    
    $
    321,145
    
    
    $
    304,657
    
    
    
    5.4
    %Operating expense:Vessel
    
    
    93,914
    
    
    
    81,961
    
    
    
    14.6
    %Marine
    
    
    53,213
    
    
    
    48,729
    
    
    
    9.2
    %Inland
    
    
    52,695
    
    
    
    53,555
    
    
    
    (1.6
    )%Land
    
    
    34,827
    
    
    
    34,195
    
    
    
    1.8
    %Rolling stock rent
    
    
    11,753
    
    
    
    10,632
    
    
    
    10.5
    %Operating expense
    
    
    246,402
    
    
    
    229,072
    
    
    
    7.6
    %Depreciation and amortization
    
    
    10,714
    
    
    
    12,445
    
    
    
    (13.9
    )%Amortization of vessel drydocking
    
    
    4,820
    
    
    
    3,362
    
    
    
    43.4
    %Selling, general and administrative
    
    
    23,481
    
    
    
    24,987
    
    
    
    (6.0
    )%Miscellaneous expense (income), net
    
    
    445
    
    
    
    (406
    )
    
    
    (209.6
    )%Total operating expenses
    
    
    285,862
    
    
    
    269,460
    
    
    
    6.1
    %Operating income
    
    $
    35,283
    
    
    $
    35,197
    
    
    
    0.2
    %Operating ratio
    
    
    89.0
    %
    
    
    88.4
    %
    
    
    0.6
    %Revenue containers (units)
    
    
    74,759
    
    
    
    77,108
    
    
    
    (3.0
    )%
 Operating Revenue.
 More favorable cargo mix and general rate increases
    
    $
    12,251Revenue container volume decrease
    
    
    (8,254
    )Revenue related to acquisitions
    
    
    7,727Increase in non-transportation services
    
    
    4,209Bunker and intermodal fuel surcharges included in rates
    
    
    555Total operating revenue increase
    
    $
    16,488
  20




---



##### Table of Contents



Operating Expense.
  Labor and other vessel operating increase
    
    $
    3,485Vessel lease expense increase
    
    
    8,182Vessel fuel costs increase
    
    
    286Total vessel expense increase
    
    $
    11,953
     Quarter Ended
    
    
    Quarter EndedSeptember 23, 2007
    
    
    September 24, 2006
    
    
    % Change($ in thousands)Land expense:Maintenance
    
    $
    12,792
    
    
    $
    13,564
    
    
    
    (5.7
    )%Terminal overhead
    
    
    13,353
    
    
    
    11,980
    
    
    
    11.5
    %Yard and gate
    
    
    6,352
    
    
    
    6,498
    
    
    
    (2.2
    )%Warehouse
    
    
    2,330
    
    
    
    2,153
    
    
    
    8.2
    %Total land expense
    
    $
    34,827
    
    
    $
    34,195
    
    
    
    1.8
    %
   21




---



##### Table of Contents



Depreciation and Amortization.
 Amortization of Vessel Drydocking.
 Quarter Ended
    
    
    Quarter EndedSeptember 23, 2007
    
    
    September 24, 2006
    
    
    % Change($ in thousands)Depreciation and amortization:Depreciationowned vessels
    
    $
    2,273
    
    
    $
    2,731
    
    
    
    (16.8
    )%Depreciation and amortizationother
    
    
    3,283
    
    
    
    4,824
    
    
    
    (31.9
    )%Amortization of intangible assets
    
    
    5,158
    
    
    
    4,890
    
    
    
    5.5
    %Total depreciation and amortization
    
    $
    10,714
    
    
    $
    12,445
    
    
    
    (13.9
    )%Amortization of vessel drydocking
    
    $
    4,820
    
    
    $
    3,362
    
    
    
    43.4
    %
 Selling, General and Administrative.
 Miscellaneous Expense (Income), Net
 Interest Expense, Net.
 Loss on Early Extinguishment of Debt.
 Income Tax Benefit.
  22




---



##### Table of Contents



Nine Months Ended September 23, 2007 Compared with the Nine Months Ended September 24, 2006
 Nine Months Ended
    
    
    Nine Months EndedSeptember 23, 2007
    
    
    September 24, 2006
    
    
    % Change(in thousands)Operating revenue
    
    $
    890,509
    
    
    $
    869,438
    
    
    
    2.4
    %Operating expense:Vessel
    
    
    269,793
    
    
    
    242,390
    
    
    
    11.3
    %Marine
    
    
    147,206
    
    
    
    143,946
    
    
    
    2.3
    %Inland
    
    
    148,877
    
    
    
    151,146
    
    
    
    (1.5
    )%Land
    
    
    98,892
    
    
    
    102,404
    
    
    
    (3.4
    )%Rolling stock rent
    
    
    33,762
    
    
    
    33,535
    
    
    
    0.7
    %Operating expense
    
    
    698,530
    
    
    
    673,421
    
    
    
    3.7
    %Depreciation and amortization
    
    
    36,765
    
    
    
    37,539
    
    
    
    (2.1
    )%Amortization of vessel drydocking
    
    
    13,139
    
    
    
    11,332
    
    
    
    15.9
    %Selling, general and administrative
    
    
    66,885
    
    
    
    72,680
    
    
    
    (8.0
    )%Miscellaneous expense, net
    
    
    525
    
    
    
    977
    
    
    
    (46.3
    )%Total operating expenses
    
    
    815,844
    
    
    
    795,949
    
    
    
    2.5
    %Operating income
    
    $
    74,665
    
    
    $
    73,489
    
    
    
    1.6
    %Operating ratio
    
    
    91.6
    %
    
    
    91.5
    %
    
    
    (0.1
    )%Revenue containers (units)
    
    
    214,574
    
    
    
    224,313
    
    
    
    (4.3
    )%
 Operating Revenue.
 More favorable cargo mix and general rate increases
    
    $
    40,051Revenue container volume decrease
    
    
    (33,502
    )Revenue related to acquisitions
    
    
    7,727Increase in other non-transportation services
    
    
    6,267Bunker and intermodal fuel surcharges included in rates
    
    
    528Total operating revenue increase
    
    $
    21,071
  Operating Expense.
  23




---



##### Table of Contents



Labor and other vessel operating increase
    
    $
    12,866Vessel lease expense increase
    
    
    16,434Vessel fuel costs decrease
    
    
    (1,897
    )Total vessel expense increase
    
    $
    27,403
     Nine Months Ended
    
    
    Nine Months EndedSeptember 23, 2007
    
    
    September 24, 2006
    
    
    % Change($ in thousands)Land expense:Maintenance
    
    $
    37,451
    
    
    $
    40,007
    
    
    
    (6.4
    )%Terminal overhead
    
    
    37,907
    
    
    
    36,596
    
    
    
    3.6
    %Yard and gate
    
    
    17,603
    
    
    
    19,664
    
    
    
    (10.5
    )%Warehouse
    
    
    5,931
    
    
    
    6,137
    
    
    
    (3.4
    )%Total land expense
    
    $
    98,892
    
    
    $
    102,404
    
    
    
    (3.4
    )%
  Depreciation and Amortization.
  24




---



##### Table of Contents



Amortization of Vessel Drydocking.
 Nine Months Ended
    
    
    Nine Months EndedSeptember 23, 2007
    
    
    September 24, 2006
    
    
    % Change($ in thousands)Depreciation and amortization:Depreciationowned vessels
    
    $
    7,724
    
    
    $
    8,169
    
    
    
    (5.4
    )%Depreciation and amortizationother
    
    
    14,102
    
    
    
    14,699
    
    
    
    (4.1
    )%Amortization of intangible assets
    
    
    14,939
    
    
    
    14,671
    
    
    
    1.8
    %Total depreciation and amortization
    
    $
    36,765
    
    
    $
    37,539
    
    
    
    (2.1
    )%Amortization of vessel drydocking
    
    $
    13,139
    
    
    $
    11,332
    
    
    
    15.9
    %
 Selling, General and Administrative.
 Miscellaneous Expense, Net
 Interest Expense, Net.
 Income Tax Benefit.
 Seasonality
   25




---



##### Table of Contents



Liquidity and Capital Resources
  Operating Activities
 Nine Months Ended
    
    
    Nine Months EndedSeptember 23, 2007
    
    
    September 24, 2006(in thousands)Cash flows (used in) provided by operating activitiesNet income
    
    $
    18,183
    
    
    $
    61,712Adjustments to reconcile net income to net cash (used in) provided by operating activities:Depreciation
    
    
    21,826
    
    
    
    22,868Amortization of other intangible assets
    
    
    14,939
    
    
    
    14,671Amortization of vessel drydocking
    
    
    13,139
    
    
    
    11,332Amortization of deferred financing costs
    
    
    2,296
    
    
    
    2,413Deferred income taxes
    
    
    (20,023
    )
    
    
    (22,763
    )Stock-based compensation
    
    
    2,401
    
    
    
    686Loss on extinguishment of debt
    
    
    38,522
    
    
    
    Accretion of interest on 11% senior discount notes
    
    
    6,062
    
    
    
    6,796Subtotal
    
    
    79,162
    
    
    
    36,003Net earnings adjusted for non-cash charges
    
    
    97,345
    
    
    
    97,715Changes in operating assets and liabilities:Accounts receivable
    
    
    (37,142
    )
    
    
    (29,579
    )Materials and supplies
    
    
    (5,761
    )
    
    
    1,254Other current assets
    
    
    (1,537
    )
    
    
    (3,877
    )Accounts payable
    
    
    (6,727
    )
    
    
    3,991Accrued liabilities
    
    
    (8,650
    )
    
    
    16,462Vessel rent
    
    
    (30,790
    )
    
    
    (5,419
    )Other assets / liabilities
    
    
    3,545
    
    
    
    (1,577
    )Changes in operating assets and liabilities
    
    
    (87,062
    )
    
    
    (18,745
    )Gain on equipment disposals
    
    
    (281
    )
    
    
    (471
    )Vessel drydocking payments
    
    
    (15,516
    )
    
    
    (13,703
    )Net cash (used in) provided by operating activities
    
    $
    (5,514
    )
    
    $
    64,796
   26




---



##### Table of Contents



Investing Activities
  Financing Activities
  Capital Requirements
    27




---



##### Table of Contents



Contractual Obligations and Off-Balance Sheet Arrangements
  Total
    
    
    Remaining
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    AfterObligations
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2011Principal obligations:Senior credit facility
    
    $
    271,500
    
    
    $
    
    
    
    $
    6,250
    
    
    $
    6,250
    
    
    $
    18,750
    
    
    $
    18,750
    
    
    $
    221,5004.25% convertible senior notes
    
    
    330,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    330,0005.26% note payable
    
    
    2,099
    
    
    
    69
    
    
    
    286
    
    
    
    302
    
    
    
    318
    
    
    
    335
    
    
    
    789Operating leases (1)
    
    
    740,190
    
    
    
    23,615
    
    
    
    99,289
    
    
    
    97,785
    
    
    
    95,026
    
    
    
    57,672
    
    
    
    366,803Capital lease obligations
    
    
    122
    
    
    
    20
    
    
    
    102
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Subtotal
    
    
    1,343,911
    
    
    
    23,704
    
    
    
    105,927
    
    
    
    104,337
    
    
    
    114,094
    
    
    
    76,757
    
    
    
    919,092Interest obligations (2):Senior credit facility
    
    
    80,725
    
    
    
    4,988
    
    
    
    16,133
    
    
    
    17,091
    
    
    
    16,208
    
    
    
    15,149
    
    
    
    11,1564.25% convertible senior notes
    
    
    70,125
    
    
    
    
    
    
    
    14,025
    
    
    
    14,025
    
    
    
    14,025
    
    
    
    14,025
    
    
    
    14,025Subtotal
    
    
    150,850
    
    
    
    4,988
    
    
    
    30,158
    
    
    
    31,116
    
    
    
    30,233
    
    
    
    29,174
    
    
    
    25,181Total principal and interest
    
    $
    1,494,761
    
    
    $
    28,692
    
    
    $
    136,085
    
    
    $
    135,453
    
    
    $
    144,327
    
    
    $
    105,931
    
    
    $
    944,273Other commercial commitments:Standby letters of credit (3)
    
    $
    6,629
    
    
    $
    6,629
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Surety bonds (4)
    
    
    5,694
    
    
    
    4,165
    
    
    
    1,528
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    Other commercial commitments
    
    $
    12,323
    
    
    $
    10,794
    
    
    $
    1,528
    
    
    $
    1
    
    
    $
    
    
    
    $
    
    
    
    $
    
 (1)
    
    The above contractual obligations table does not include the residual guarantee related
to our transaction with Ship Finance Limited. If Horizon Lines does not elect to purchase the
vessels at the end of the initial twelve year period and the vessel owners sell the vessels
for less than a specified amount, Horizon Lines is responsible for paying the amount of such
shortfall which will not exceed $3.8 million per vessel. Such residual guarantee has been
recorded at its fair value of approximately $0.2 million as a liability.(2)
    
    Included in contractual obligations are scheduled interest payments. Interest payments on the
senior credit facility are variable and are based as of September 23, 2007 upon the London
Inter-Bank Offered Rate (LIBOR) plus 1.50%. The three-month LIBOR / swap curve has been
utilized to estimate interest payments on the senior credit facility. Interest on the 4.25%
convertible senior notes is fixed and is paid semi-annually on February 15 and August 15 of
each year, beginning on February 15, 2008, until maturity on August 15, 2012.(3)
    
    The standby letters of credit include $5.5 million in letters of credit that serve as
collateral on state workers compensation and auto liability policies and $1.1 million in
letters of credit that serve as security for all bonds excluding U.S. Customs bonds.(4)
    
    Includes $4.1 million in U.S. customs bonds, $0.4 million in bonds for payment of taxes
levied under the Excise Tax Act of the Commonwealth of Puerto Rico of 1987 and $1.2 million in
utility or lease bonds. We have the financial ability and intention to satisfy our
obligations.
 Long-Term Debt
 New Senior Credit Facility
   28




---



##### Table of Contents



4.25% Convertible Senior Notes
    
    
    Prior to May 15, 2012, if during any calendar
quarter after the calendar quarter ending September 30,
2007, 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.
   29




---



##### Table of Contents



Long-term Note Payable
  Prior Senior Credit Facility
  9% Senior Notes and 11% Senior Discount Notes
   30




---



##### Table of Contents



Interest Rate Risk
  Credit Ratings
   StandardMoodys
    
    & PoorsSenior secured credit facility
    
    Ba1, LGD2, 18%
    
    BB+4.25% convertible senior notes due 2012
    
    B3, LGD5, 84%
    
    BRating outlook
    
    Stable
    
    Stable
 Ratio of Earnings to Fixed Charges
  Quarter Ended
    
    
    Nine Months EndedSeptember 23, 2007
    
    
    September 23, 2007Pretax (loss) income
    
    $
    (12,777
    )
    
    $
    3,145Interest expense
    
    
    10,355
    
    
    
    34,110Rentals
    
    
    8,706
    
    
    
    22,209Total fixed charges
    
    $
    19,061
    
    
    $
    56,319Pretax earnings plus fixed charges
    
    $
    6,284
    
    
    $
    59,464Ratio of earnings to fixed charges
    
    
    
    
    
    
    1.06x
   31




---



##### Table of Contents



Forward Looking Statements
      
 3. Quantitative and Qualitative Disclosures About Market Risk
     32




---



##### Table of Contents



4. Controls and Procedures
    33




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 1. Legal Proceedings
     
 1A. Risk Factors
  The accounting method for convertible debt securities with net share settlement, like our
Convertible Notes, may be subject to change.
   34




---



##### 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
  
 5. Other Information
  
 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.
  35




---



##### Table of Contents



SIGNATURE
   HORIZON LINES, INC.By:
    /s/ M. Mark UrbaniaM. Mark UrbaniaExecutive Vice President & Chief Financial Officer
(Principal Financial Officer & Authorized Signatory)  36




---



##### 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.
  37