##### 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 24, 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)
 Yes þ No o
  o þ o
 Yes o No þ
  As of July 25, 2007, 33,717,867 shares of 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 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
    
    
    133.
    
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    274.
    
    
    Controls and Procedures
    
    
    27Part II. Other Information
    
    
    281.
    
    
    Legal Proceedings
    
    
    281A.
    
    
    Risk Factors
    
    
    282.
    
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    283.
    
    
    Defaults Upon Senior Securities
    
    
    284.
    
    
    Submission of Matters to a Vote of Security Holders
    
    
    285.
    
    
    Other Information
    
    
    286.
    
    
    Exhibits
    
    
    29Signature
    
    
    30Exhibit 10.12.2Exhibit 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 24,
    
    
    December 24,2007
    
    
    2006(1)AssetsCurrent assetsCash
    
    $
    19,134
    
    
    $
    93,949Accounts receivable, net of allowance of $6,066 and
$4,972 at June 24, 2007 and December 24, 2006,
respectively
    
    
    145,211
    
    
    
    120,732Deferred tax asset
    
    
    9,435
    
    
    
    11,586Prepaid vessel rent
    
    
    6,839
    
    
    
    1,163Materials and supplies
    
    
    27,584
    
    
    
    24,658Other current assets
    
    
    8,614
    
    
    
    7,103Total current assets
    
    
    216,817
    
    
    
    259,191Property and equipment, net
    
    
    181,154
    
    
    
    188,652Goodwill
    
    
    306,724
    
    
    
    306,724Intangible assets, net
    
    
    155,984
    
    
    
    167,882Other long-term assets
    
    
    31,424
    
    
    
    22,580Total assets
    
    $
    892,103
    
    
    $
    945,029Liabilities and Stockholders EquityCurrent liabilitiesAccounts payable
    
    $
    22,518
    
    
    $
    28,322Current portion of long-term debt
    
    
    1,987
    
    
    
    6,758Accrued vessel rent
    
    
    
    
    
    
    25,426Other accrued liabilities
    
    
    98,449
    
    
    
    101,122Total current liabilities
    
    
    122,954
    
    
    
    161,628Long-term debt, net of current
    
    
    482,771
    
    
    
    503,708Deferred tax liability
    
    
    27,823
    
    
    
    31,339Deferred rent
    
    
    33,767
    
    
    
    36,003Other long-term liabilities
    
    
    8,814
    
    
    
    4,074Total liabilities
    
    
    676,129
    
    
    
    736,752Stockholders equityCommon stock, $.01 par value, 50,000 shares
authorized and 33,636 and 33,591 shares issued and
outstanding as of June 24, 2007 and December 24,
2006, respectively
    
    
    336
    
    
    
    336Additional paid in capital
    
    
    181,571
    
    
    
    179,599Accumulated other comprehensive loss
    
    
    (961
    )
    
    
    (1,011
    )Retained earnings
    
    
    35,028
    
    
    
    29,353Total stockholders equity
    
    
    215,974
    
    
    
    208,277Total liabilities and stockholders equity
    
    $
    892,103
    
    
    $
    945,029
 
 (1)
    
    The balance sheet at December 24, 2006 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 Operations
(in thousands, except per share amounts)
 Quarters Ended
    
    
    Six Months EndedJune 24, 2007
    
    
    June 25, 2006
    
    
    June 24, 2007
    
    
    June 25, 2006Operating revenue
    
    $
    295,701
    
    
    $
    289,847
    
    
    $
    569,365
    
    
    $
    564,781Operating expense:Operating expense (excluding
depreciation expense)
    
    
    234,447
    
    
    
    224,423
    
    
    
    452,128
    
    
    
    444,347Depreciation and amortization
    
    
    12,583
    
    
    
    12,592
    
    
    
    26,050
    
    
    
    25,095Amortization of vessel dry-docking
    
    
    4,559
    
    
    
    4,557
    
    
    
    8,319
    
    
    
    7,971Selling, general and administrative
    
    
    21,510
    
    
    
    24,772
    
    
    
    43,403
    
    
    
    47,694Miscellaneous (income) expense, net
    
    
    (303
    )
    
    
    1,084
    
    
    
    81
    
    
    
    1,383Total operating expense
    
    
    272,796
    
    
    
    267,428
    
    
    
    529,981
    
    
    
    526,490Operating income
    
    
    22,905
    
    
    
    22,419
    
    
    
    39,384
    
    
    
    38,291Other expense (income):Interest expense, net
    
    
    11,663
    
    
    
    12,304
    
    
    
    22,876
    
    
    
    24,024Loss on early extinguishment of debt
    
    
    564
    
    
    
    
    
    
    
    564
    
    
    
    Other expense (income), net
    
    
    25
    
    
    
    (201
    )
    
    
    23
    
    
    
    (186
    )Income before income tax expense (benefit)
    
    
    10,653
    
    
    
    10,316
    
    
    
    15,921
    
    
    
    14,453Income tax expense (benefit)
    
    
    1,093
    
    
    
    3,915
    
    
    
    (691
    )
    
    
    5,686Net income
    
    $
    9,560
    
    
    $
    6,401
    
    
    $
    16,612
    
    
    $
    8,767Net income per share:Basic
    
    $
    0.28
    
    
    $
    0.19
    
    
    $
    0.49
    
    
    $
    0.26Diluted
    
    $
    0.28
    
    
    $
    0.19
    
    
    $
    0.49
    
    
    $
    0.26Number of shares used in calculations:Basic
    
    
    33,635
    
    
    
    33,544
    
    
    
    33,624
    
    
    
    33,544Diluted
    
    
    34,312
    
    
    
    33,621
    
    
    
    34,253
    
    
    
    33,587Dividends declared per common share
    
    $
    0.11
    
    
    $
    0.11
    
    
    $
    0.22
    
    
    $
    0.22
   4




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Horizon Lines, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
 Six Months EndedJune 24,
    
    
    June 25,2007
    
    
    2006Cash flows from operating activities:Net income
    
    $
    16,612
    
    
    $
    8,767Adjustments to reconcile net income to net cash (used in) provided by operating activities:Depreciation
    
    
    16,270
    
    
    
    15,314Amortization of other intangible assets
    
    
    9,780
    
    
    
    9,781Amortization of vessel dry-docking
    
    
    8,319
    
    
    
    7,971Amortization of deferred financing costs
    
    
    1,586
    
    
    
    1,596Deferred income taxes
    
    
    (1,365
    )
    
    
    5,220Gain on equipment disposals
    
    
    (354
    )
    
    
    (465
    )Stock-based compensation
    
    
    1,169
    
    
    
    384Loss on early extinguishment of debt
    
    
    564
    
    
    
    Accretion of interest on 11% senior discount notes
    
    
    4,928
    
    
    
    4,489Changes in operating assets and liabilitiesAccounts receivable
    
    
    (24,478
    )
    
    
    (14,781
    )Materials and supplies
    
    
    (3,376
    )
    
    
    1,613Other current assets
    
    
    (1,514
    )
    
    
    (766
    )Accounts payable
    
    
    (5,804
    )
    
    
    980Accrued liabilities
    
    
    (8,141
    )
    
    
    479Vessel rent
    
    
    (33,339
    )
    
    
    (6,428
    )Vessel dry-docking payments
    
    
    (9,064
    )
    
    
    (12,129
    )Other assets/liabilities
    
    
    (795
    )
    
    
    (2,634
    )Net cash (used in) provided by operating activities
    
    
    (29,002
    )
    
    
    19,391Cash flows from investing activities:Purchases of property and equipment
    
    
    (10,377
    )
    
    
    (7,218
    )Proceeds from the sale of property and equipment
    
    
    2,650
    
    
    
    1,555Net cash used in investing activities
    
    
    (7,727
    )
    
    
    (5,663
    )Cash flows from financing activities:Payments on long-term debt
    
    
    (30,636
    )
    
    
    (2,526
    )Dividends to stockholders
    
    
    (7,399
    )
    
    
    (7,380
    )Costs associated with initial public offering
    
    
    
    
    
    
    (158
    )Proceeds from exercise of stock options
    
    
    84
    
    
    
    Payments of financing costs
    
    
    (42
    )
    
    
    (834
    )Payments on capital lease obligation
    
    
    (93
    )
    
    
    (93
    )Net cash used in financing activities
    
    
    (38,086
    )
    
    
    (10,991
    )Net (decrease) increase in cash
    
    
    (74,815
    )
    
    
    2,737Cash at beginning of period
    
    
    93,949
    
    
    
    41,450Cash at end of period
    
    $
    19,134
    
    
    $
    44,187
   5




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




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4. Income Taxes
   5. Stock-Based Compensation
   Stock Options
   7




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Weighted-Weighted-
    
    
    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 June 24, 2007
    
    
    1,612,162
    
    
    $
    15.88
    
    
    
    8.91
    
    
    $
    27,881Vested or expected to vest at June 24, 2007
    
    
    1,539,328
    
    
    $
    15.70
    
    
    
    8.90
    
    
    $
    26,893Exercisable at June 24, 2007
    
    
    47,687
    
    
    $
    10.00
    
    
    
    8.38
    
    
    $
    1,101
 (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 591/2 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 six months ended June 24, 2007 was $0.2 million.
 Restricted Stock
   Weighted-AverageFair ValueNumber of
    
    
    at GrantRestricted Shares
    
    Shares
    
    
    DateNonvested at December 24, 2006
    
    
    70,000
    
    
    $
    12.57Granted (a)
    
    
    111,593
    
    
    
    33.30Vested
    
    
    Forfeited
    
    
    Nonvested at June 24, 2007
    
    
    181,593
    
    
    $
    25.31
 (a)
    
    On June 5, 2007, the Company granted 3,487 restricted shares each to three new
members of the Board of Directors. The grant date fair market value of the restricted shares was
$34.42 per share and the shares will cliff vest on June 5, 2010. On June 5, 2007, the Company
granted 1,744 restricted shares each to all non-employee members of the Board of Directors. The
grant date fair market value of the restricted shares was $34.42 per share and the shares will vest
in full on June 5, 2008. On March 26, 2007, the Company granted 71,500 shares of restricted stock
to certain employees of the Company and its subsidiaries. The shares of restricted stock will vest
on March 26, 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 $33.51 per share. On
January 30, 2007, the Company granted 4,064 restricted shares each to three new members of the
Board of Directors. The grant date fair market value of the restricted shares was $29.53 per share
and the shares will vest in full on January 30, 2010.
 Employee Stock Purchase Plan
   8




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6. Net Income per Common Share
   Quarters endedJune 24,
    
    
    June 25,2007
    
    
    2006Numerator:Net income available to common stockholders
    
    $
    9,560
    
    
    $
    6,401Denominator:Denominator for basic income per common share:Weighted average shares outstanding
    
    
    33,635
    
    
    
    33,544Effect of dilutive securities:Stock-based compensation
    
    
    677
    
    
    
    77Denominator for diluted net income per common share
    
    
    34,312
    
    
    
    33,621Basic net income per common share
    
    $
    0.28
    
    
    $
    0.19Diluted net income per common share
    
    $
    0.28
    
    
    $
    0.19
 Six months endedJune 24,
    
    
    June 25,2007
    
    
    2006Numerator:Net income available to common stockholders
    
    $
    16,612
    
    
    $
    8,767Denominator:Denominator for basic income per common share:Weighted average shares outstanding
    
    
    33,624
    
    
    
    33,544Effect of dilutive securities:Stock-based compensation
    
    
    629
    
    
    
    43Denominator for diluted net income per common share
    
    
    34,253
    
    
    
    33,587Basic net income per common share
    
    $
    0.49
    
    
    $
    0.26Diluted net income per common share
    
    $
    0.49
    
    
    $
    0.26
 7. Total Comprehensive Income
  Quarters endedJune 24,
    
    
    June 25,2007
    
    
    2006Net income
    
    $
    9,560
    
    
    $
    6,401Amortization of pension and post-retirement benefit transition obligation
    
    
    25
    
    
    
    Change in fair value of fixed price fuel contract
    
    
    
    
    
    
    (261
    )Comprehensive income
    
    $
    9,585
    
    
    $
    6,140
  9




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Six months endedJune 25,June 24, 2007
    
    
    2006Net income
    
    $
    16,612
    
    
    $
    8,767Amortization of pension and post-retirement benefit transition obligation
    
    
    50
    
    
    
    Change in fair value of fixed price fuel contract
    
    
    
    
    
    
    (300
    )Comprehensive income
    
    $
    16,662
    
    
    $
    8,467
 8. Property and Equipment
  June 24,
    
    
    December 24,2007
    
    
    2006Vessels
    
    $
    141,502
    
    
    $
    137,129Containers
    
    
    25,105
    
    
    
    27,682Chassis
    
    
    14,404
    
    
    
    14,535Cranes
    
    
    17,657
    
    
    
    15,903Machinery and equipment
    
    
    20,279
    
    
    
    19,716Facilities and land improvements
    
    
    9,211
    
    
    
    8,416Software
    
    
    30,277
    
    
    
    29,887Other
    
    
    9,088
    
    
    
    7,715Total property and equipment
    
    
    267,523
    
    
    
    260,983Accumulated depreciation
    
    
    (86,369
    )
    
    
    (72,331
    )Property and equipment, net
    
    $
    181,154
    
    
    $
    188,652
 9. Intangible Assets
  June 24,
    
    
    December 24,2007
    
    
    2006Customer contracts
    
    $
    137,675
    
    
    $
    137,675Trademarks
    
    
    63,800
    
    
    
    63,800Deferred financing costs
    
    
    22,078
    
    
    
    23,075Total intangibles with definite lives
    
    
    223,553
    
    
    
    224,550Accumulated amortization
    
    
    (67,569
    )
    
    
    (56,668
    )Net intangibles with definite lives
    
    
    155,984
    
    
    
    167,882Goodwill
    
    
    306,724
    
    
    
    306,724Intangible assets, net
    
    $
    462,708
    
    
    $
    474,606
   10




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10. Accrued Liabilities
  June 24,
    
    
    December 24,2007
    
    
    2006Vessel operations
    
    $
    25,471
    
    
    $
    18,608Fuel
    
    
    13,066
    
    
    
    10,899Marine operations
    
    
    13,766
    
    
    
    9,452Terminal operations
    
    
    9,960
    
    
    
    12,400Interest
    
    
    6,421
    
    
    
    7,219Bonus
    
    
    
    
    
    
    10,500Other liabilities
    
    
    29,765
    
    
    
    32,044Total other accrued liabilities
    
    $
    98,449
    
    
    $
    101,122
 11. Long-Term Debt
  June 24,
    
    
    December 24,2007
    
    
    2006Senior credit facility
    
    $
    193,253
    
    
    $
    219,3759% senior notes
    
    
    197,014
    
    
    
    197,01411% senior discount notes
    
    
    94,491
    
    
    
    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
    
    
    484,758
    
    
    
    510,466Current portion
    
    
    (1,987
    )
    
    
    (6,758
    )Long-term debt, net of current
    
    $
    482,771
    
    
    $
    503,708
 (a)
    
    These notes matured and were repaid during January 2007.
  12. Commitments and Contingencies
 Legal Proceedings
   11




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12




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Standby Letters of Credit
  13. Recent Accounting Pronouncements
  14. Subsequent Events
    
 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
     13




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Executive Overview
 Quarter Ended
    
    
    Quarter Ended
    
    
    Six Months Ended
    
    
    Six Months EndedJune 24, 2007
    
    
    June 25, 2006
    
    
    June 24, 2007
    
    
    June 25, 2006(in thousands)Operating revenue
    
    $
    295,701
    
    
    $
    289,847
    
    
    $
    569,365
    
    
    $
    564,781Operating expense
    
    
    272,796
    
    
    
    267,428
    
    
    
    529,981
    
    
    
    526,490Operating income
    
    $
    22,905
    
    
    $
    22,419
    
    
    $
    39,384
    
    
    $
    38,291Operating ratio
    
    
    92.3
    %
    
    
    92.3
    %
    
    
    93.1
    %
    
    
    93.2
    %Revenue containers (units)
    
    
    72,894
    
    
    
    75,604
    
    
    
    139,815
    
    
    
    147,205
    14




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##### Table of Contents



Quarter Ended
    
    
    Quarter Ended
    
    
    Six Months Ended
    
    
    Six Months EndedJune 24, 2007
    
    
    June 25, 2006
    
    
    June 24, 2007
    
    
    June 25, 2006Net income
    
    $
    9,560
    
    
    $
    6,401
    
    
    $
    16,612
    
    
    $
    8,767Interest expense, net
    
    
    11,663
    
    
    
    12,304
    
    
    
    22,876
    
    
    
    24,024Income tax expense (benefit)
    
    
    1,093
    
    
    
    3,915
    
    
    
    (691
    )
    
    
    5,686Depreciation and amortization
    
    
    17,142
    
    
    
    17,149
    
    
    
    34,369
    
    
    
    33,066EBITDA
    
    $
    39,458
    
    
    $
    39,769
    
    
    $
    73,166
    
    
    $
    71,543
 Recent Developments
    General
   15




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History
  Recent Accounting Pronouncements
   Critical Accounting Policies
   FIN 48
   16




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##### Table of Contents



Results of Operations
 Operating Revenue Overview
    Operating Expense Overview
  Quarter Ended June 24, 2007 Compared with the Quarter Ended June 25, 2006
 Quarter Ended
    
    
    Quarter EndedJune 24, 2007
    
    
    June 25, 2006
    
    
    % Change(in thousands)Operating revenue
    
    $
    295,701
    
    
    $
    289,847
    
    
    
    2.0
    %Operating expense:Vessel
    
    
    93,158
    
    
    
    80,848
    
    
    
    15.2
    %Marine
    
    
    48,227
    
    
    
    48,240
    
    
    
    0.0
    %Inland
    
    
    50,028
    
    
    
    50,042
    
    
    
    0.0
    %Land
    
    
    32,046
    
    
    
    33,698
    
    
    
    (4.9
    )%Rolling stock rent
    
    
    10,988
    
    
    
    11,595
    
    
    
    (5.2
    )%Operating expense
    
    
    234,447
    
    
    
    224,423
    
    
    
    4.5
    %Depreciation and amortization
    
    
    12,583
    
    
    
    12,592
    
    
    
    (0.1
    )%Amortization of vessel drydocking
    
    
    4,559
    
    
    
    4,557
    
    
    
    0.0
    %Selling, general and administrative
    
    
    21,510
    
    
    
    24,772
    
    
    
    (13.2
    )%Miscellaneous (income) expense, net
    
    
    (303
    )
    
    
    1,084
    
    
    
    (128.0
    )%Total operating expenses
    
    
    272,796
    
    
    
    267,428
    
    
    
    2.0
    %Operating income
    
    $
    22,905
    
    
    $
    22,419
    
    
    
    2.2
    %Operating ratio
    
    
    92.3
    %
    
    
    92.3
    %
    
    
    0.0
    %Revenue containers (units)
    
    
    72,894
    
    
    
    75,604
    
    
    
    (3.6
    )%
 Operating Revenue.
 More favorable cargo mix and general rate increases
    
    $
    14,438Revenue container volume decrease
    
    
    (9,285
    )Increase in non-transportation services
    
    
    1,720Bunker and intermodal fuel surcharges included in rates
    
    
    (1,019
    )Total operating revenue increase
    
    $
    5,854
  17




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##### Table of Contents



Operating Expense.
  Labor and other vessel operating increase
    
    $
    6,633Vessel lease expense increase
    
    
    6,247Vessel fuel costs decrease
    
    
    (570
    )Total vessel expense increase
    
    $
    12,310
     Quarter Ended
    
    
    Quarter EndedJune 24, 2007
    
    
    June 25, 2006
    
    
    % Change($ in thousands)Land expense:Maintenance
    
    $
    12,474
    
    
    $
    13,322
    
    
    
    (6.4
    )%Terminal overhead
    
    
    12,283
    
    
    
    12,153
    
    
    
    1.1
    %Yard and gate
    
    
    5,486
    
    
    
    6,046
    
    
    
    (9.3
    )%Warehouse
    
    
    1,803
    
    
    
    2,177
    
    
    
    (17.2
    )%Total land expense
    
    $
    32,046
    
    
    $
    33,698
    
    
    
    (4.9
    )%
  Depreciation and Amortization.
  18




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##### Table of Contents



Amortization of Vessel Drydocking.
 Quarter Ended
    
    
    Quarter EndedJune 24, 2007
    
    
    June 25, 2006
    
    
    % Change($ in thousands)Depreciation and amortization:Depreciationowned vessels
    
    $
    2,723
    
    
    $
    2,741
    
    
    
    (0.7
    )%Depreciation and amortizationother
    
    
    4,970
    
    
    
    4,961
    
    
    
    0.2
    %Amortization of intangible assets
    
    
    4,890
    
    
    
    4,890
    
    
    
    0.0
    %Total depreciation and amortization
    
    $
    12,583
    
    
    $
    12,592
    
    
    
    0.1
    %Amortization of vessel drydocking
    
    $
    4,559
    
    
    $
    4,557
    
    
    
    0.0
    %
 Selling, General and Administrative.
 Miscellaneous (Income) Expense, Net
 Interest Expense, Net.
 Loss on Early Extinguishment of Debt.
 Income Tax Expense.
  19




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##### Table of Contents



Six Months Ended June 24, 2007 Compared with the Six Months Ended June 25, 2006
 Six Months Ended
    
    
    Six Months EndedJune 24, 2007
    
    
    June 25, 2006
    
    
    % Change(in thousands)Operating revenue
    
    $
    569,365
    
    
    $
    564,781
    
    
    
    0.8
    %Operating expense:Vessel
    
    
    175,880
    
    
    
    160,429
    
    
    
    9.6
    %Marine
    
    
    93,992
    
    
    
    95,217
    
    
    
    (1.3
    )%Inland
    
    
    96,181
    
    
    
    97,591
    
    
    
    (1.4
    )%Land
    
    
    64,065
    
    
    
    68,206
    
    
    
    (6.1
    )%Rolling stock rent
    
    
    22,010
    
    
    
    22,904
    
    
    
    (3.9
    )%Operating expense
    
    
    452,128
    
    
    
    444,347
    
    
    
    1.8
    %Depreciation and amortization
    
    
    26,050
    
    
    
    25,095
    
    
    
    3.8
    %Amortization of vessel drydocking
    
    
    8,319
    
    
    
    7,971
    
    
    
    4.4
    %Selling, general and administrative
    
    
    43,403
    
    
    
    47,694
    
    
    
    (9.0
    )%Miscellaneous expense, net
    
    
    81
    
    
    
    1,383
    
    
    
    (94.1
    )%Total operating expenses
    
    
    529,981
    
    
    
    526,490
    
    
    
    0.7
    %Operating income
    
    $
    39,384
    
    
    $
    38,291
    
    
    
    2.9
    %Operating ratio
    
    
    93.1
    %
    
    
    93.2
    %
    
    
    0.1
    %Revenue containers (units)
    
    
    139,815
    
    
    
    147,205
    
    
    
    (5.0
    )%
 Operating Revenue.
 More favorable cargo mix and general rate increases
    
    $
    27,687Revenue container volume decrease
    
    
    (25,135
    )Increase in other non-transportation services
    
    
    2,059Bunker and intermodal fuel surcharges included in rates
    
    
    (27
    )Total operating revenue increase
    
    $
    4,584
   20




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##### Table of Contents



Operating Expense.
  Labor and other vessel operating increase
    
    $
    9,382Vessel lease expense increase
    
    
    8,252Vessel fuel costs decrease
    
    
    (2,183
    )Total vessel expense increase
    
    $
    15,451
     Six Months Ended
    
    
    Six Months EndedJune 24, 2007
    
    
    June 25, 2006
    
    
    % Change($ in thousands)Land expense:Maintenance
    
    $
    24,659
    
    
    $
    26,443
    
    
    
    (6.7
    )%Terminal overhead
    
    
    24,553
    
    
    
    24,616
    
    
    
    (0.3
    )%Yard and gate
    
    
    11,251
    
    
    
    13,166
    
    
    
    (14.5
    )%Warehouse
    
    
    3,602
    
    
    
    3,981
    
    
    
    (9.5
    )%Total land expense
    
    $
    64,065
    
    
    $
    68,206
    
    
    
    (6.1
    )%
  Depreciation and Amortization.
  21




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##### Table of Contents



Amortization of Vessel Drydocking.
 Six Months Ended
    
    
    Six Months EndedJune 24, 2007
    
    
    June 25, 2006
    
    
    % Change($ in thousands)Depreciation and amortization:Depreciationowned vessels
    
    $
    5,452
    
    
    $
    5,438
    
    
    
    0.3
    %Depreciation and amortizationother
    
    
    10,818
    
    
    
    9,877
    
    
    
    9.5
    %Amortization of intangible assets
    
    
    9,780
    
    
    
    9,780
    
    
    
    0.0
    %Total depreciation and amortization
    
    $
    26,050
    
    
    $
    25,095
    
    
    
    3.8
    %Amortization of vessel drydocking
    
    $
    8,319
    
    
    $
    7,971
    
    
    
    4.4
    %
 Selling, General and Administrative.
 Miscellaneous Expense, Net
 Interest Expense, Net.
 Income Tax (Benefit) Expense.
 Seasonality
  Liquidity and Capital Resources
   22




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##### Table of Contents



Operating Activities
 Six Months Ended
    
    
    Six Months EndedJune 24, 2007
    
    
    June 25, 2006(in thousands)Cash flows (used in) provided by operating activitiesNet income
    
    $
    16,612
    
    
    $
    8,767Adjustments to reconcile net income to net cash (used in) provided by operating activities:Depreciation
    
    
    16,270
    
    
    
    15,314Amortization of other intangible assets
    
    
    9,780
    
    
    
    9,781Amortization of vessel drydocking
    
    
    8,319
    
    
    
    7,971Amortization of deferred financing costs
    
    
    1,586
    
    
    
    1,596Deferred income taxes
    
    
    (1,365
    )
    
    
    5,220Stock-based compensation
    
    
    1,169
    
    
    
    384Loss on extinguishment of debt
    
    
    564
    
    
    
    Accretion of interest on 11% senior discount notes
    
    
    4,928
    
    
    
    4,489Subtotal
    
    
    41,251
    
    
    
    44,755Earnings adjusted for non-cash charges
    
    
    57,863
    
    
    
    53,522Changes in operating assets and liabilities:Accounts receivable
    
    
    (24,478
    )
    
    
    (14,781
    )Materials and supplies
    
    
    (3,376
    )
    
    
    1,613Other current assets
    
    
    (1,514
    )
    
    
    (766
    )Accounts payable
    
    
    (5,804
    )
    
    
    980Accrued liabilities
    
    
    (8,141
    )
    
    
    479Vessel rent
    
    
    (33,339
    )
    
    
    (6,428
    )Other assets / liabilities
    
    
    (795
    )
    
    
    (2,634
    )Changes in operating assets and liabilities
    
    
    (77,447
    )
    
    
    (21,537
    )Gain on equipment disposals
    
    
    (354
    )
    
    
    (465
    )Vessel drydocking payments
    
    
    (9,064
    )
    
    
    (12,129
    )Net cash (used in) provided by operating activities
    
    $
    (29,002
    )
    
    $
    19,391
  Investing Activities
   23




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##### Table of Contents



Financing Activities
  Capital Requirements
   Contractual Obligations and Off-Balance Sheet Arrangements
  Total
    
    
    Remaining
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    AfterObligations
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2011Principal obligations:Senior credit facility
    
    $
    193,253
    
    
    $
    994
    
    
    $
    1,987
    
    
    $
    1,987
    
    
    $
    48,189
    
    
    $
    140,096
    
    
    $
    9% senior notes
    
    
    197,014
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    197,01411% senior discount notes
    
    
    102,505
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    102,505Operating leases (2)
    
    
    755,279
    
    
    
    45,128
    
    
    
    99,990
    
    
    
    98,576
    
    
    
    95,869
    
    
    
    56,927
    
    
    
    358,789Capital lease obligations
    
    
    258
    
    
    
    97
    
    
    
    161
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Subtotal
    
    
    1,248,309
    
    
    
    46,219
    
    
    
    102,138
    
    
    
    100,563
    
    
    
    144,058
    
    
    
    197,023
    
    
    
    658,308Interest obligations:Senior credit facility
    
    
    57,051
    
    
    
    8,136
    
    
    
    15,116
    
    
    
    14,503
    
    
    
    13,976
    
    
    
    5,320
    
    
    
    9% senior notes
    
    
    112,296
    
    
    
    8,865
    
    
    
    17,731
    
    
    
    17,731
    
    
    
    17,731
    
    
    
    17,731
    
    
    
    32,50711% senior discount notes
    
    
    56,380
    
    
    
    
    
    
    
    5,638
    
    
    
    11,276
    
    
    
    11,276
    
    
    
    11,276
    
    
    
    16,914Subtotal
    
    
    225,727
    
    
    
    17,001
    
    
    
    38,485
    
    
    
    43,510
    
    
    
    42,983
    
    
    
    34,327
    
    
    
    49,421Total principal and interest
    
    $
    1,474,036
    
    
    $
    63,220
    
    
    $
    140,623
    
    
    $
    144,073
    
    
    $
    187,041
    
    
    $
    231,350
    
    
    $
    707,729Other commercial commitments:Standby letters of credit (3)
    
    $
    5,934
    
    
    $
    5,934
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Surety bonds (4)
    
    
    5,382
    
    
    
    5,379
    
    
    
    2
    
    
    
    1
    
    
    
    
    
    
    
    Other commercial commitments
    
    $
    11,316
    
    
    $
    11,313
    
    
    $
    2
    
    
    $
    1
    
    
    $
    
    
    
    $
    
    
    
    $
    
 (1)
    
    Included in contractual obligations are scheduled interest payments. Interest payments
on the senior credit facility are variable and are based as of June 24, 2007 upon the London
Inter-Bank Offered Rate (LIBOR) plus 2.25%. The three-month LIBOR / swap curve has been
utilized to estimate interest payments on the senior credit facility. Interest on the 9%
senior notes is fixed and is paid semi-annually on May 1 and November 1 of each year until
maturity on November 1, 2012. Interest on the 11% senior discount notes is fixed. However, no
cash interest will accrue prior to April 1, 2008. Thereafter, cash interest will accrue at a
rate of 11.0% per annum and will be payable on April 1 and October 1 of each year, commencing
on October 1, 2008 and continuing until maturity on April 1, 2013.(2)
    
    The above contractual obligations table does not include the residual guarantee related to
our transaction with SFL. 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.
  24




---



##### Table of Contents



(3)
    
    The standby letters of credit include $4.8 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 $3.8 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
       25




---



##### Table of Contents



Interest Rate Risk
  Credit Ratings
   StandardMoody's
    
    & Poor'sSenior secured credit facility
    
    Ba1, LGD2, 20%
    
    BB9% senior notes due 2012
    
    B2, LGD4, 69%
    
    B11% senior discount notes due 2013
    
    B3, LGD 6, 93%
    
    BRating outlook
    
    Stable, PD
    
    Stable
 Ratio of Earnings to Fixed Charges
  Quarter Ended
    
    
    Six Months EndedJune 24, 2007
    
    
    June 24, 2007Pretax income
    
    $
    10,653
    
    
    $
    15,921Interest expense
    
    
    11,918
    
    
    
    23,754Rentals
    
    
    7,921
    
    
    
    14,434Total fixed charges
    
    $
    19,839
    
    
    $
    38,188Pretax earnings plus fixed charges
    
    $
    30,492
    
    
    $
    54,109Ratio of earnings to fixed charges
    
    
    1.54x
    
    
    
    1.42x
  26




---



##### Table of Contents



3. Quantitative and Qualitative Disclosures About Market Risk
    
 4. Controls and Procedures
    27




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 1. Legal Proceedings
  
 1A. Risk Factors
  
 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 four Class II directors
named as the Companys nominees in the Proxy Statement for the Annual Meeting, filed
with the SEC on April 18, 2007, as follows:
 Shares WithholdingNominee
    
    Shares Voting For
    
    
    Authority to VoteAdmiral Vern Clark U.S.N. (Ret.)
    
    
    28,864,356
    
    
    
    88,756Dan A. Colussy
    
    
    28,857,268
    
    
    
    95,844William J. Flynn
    
    
    28,816,514
    
    
    
    136,598Francis Jungers
    
    
    28,714,558
    
    
    
    100,443
  (b)
    
    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
2007 fiscal year.
 For
    
    Against
    
    Abstain28,929,311
    
    4,888
    
    18,912
 (c)
    
    Amend the Companys certificate of incorporation to increase the maximum
number of directors from 11 to 13.
 For
    
    Against
    
    Abstain28,879,467
    
    50,310
    
    23,331
 
 5. Other Information
   28




---



##### Table of Contents



6. Exhibits
 10.12.2 ++
    
    Amendment No. 2 to TP1 Space Charter and Transportation Contract,
dated July 2, 2007.31.1*
    
    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.++
    
    Portions of this document were omitted and filed separately pursuant
to a request for confidential treatment in accordance with Rule 24b-2
of the Exchange Act.
  29




---



##### Table of Contents



SIGNATURE
   HORIZON LINES, INC.By:
    /s/ M. Mark UrbaniaM. Mark UrbaniaSenior Vice President & Chief Financial Officer(Principal Financial Officer & Authorized Signatory) 
  30




---



##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description10.12.2 ++
    
    Amendment No. 2 to TP1 Space Charter and Transportation Contract,
dated July 2, 2007.31.1*
    
    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.