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Horizon Lines 10-K 2008 Documents found in this filing:Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
HORIZON LINES, INC.
(704) 973-7000
(Registrant’s telephone
number, including area code)
NOT APPLICABLE
Securities registered pursuant to Section 12 (b) of
the Act:
Securities registered pursuant to Section 12 (g) of
the Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes x No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15
(d) of the Act.
Yes o No x
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such a period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past
90 days. Yes x No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(229.405) of this chapter) is not contained herein, and will not
be contained, to the best of the registrant’s knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K o
Indicate by check mark whether the Registrant is a large
accelerated filer, an accelerated filer, a
non-accelerated
filer, or a smaller reporting company. See definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer x Accelerated
filer o Non-accelerated
filer o Smaller
reporting
company o
(Do not check if a smaller
reporting company)
Indicate by check mark whether the Registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act).
Yes o No x
The aggregate market value of common stock held by
non-affiliates, computed by reference to the closing price of
the common stock as of the last business day of the
registrant’s most recently completed second fiscal quarter,
was approximately $952.2 million.
As of February 5, 2008, 29,895,009 shares of common stock,
par value $.01 per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The information required in Part III of this
Form 10-K
is incorporated by reference to the registrant’s definitive
proxy statement to be filed for the Annual Meeting of
Stockholders to be held on June 3, 2008.
Horizon Lines,
Inc.
This
Form 10-K
(including the exhibits hereto) contains “forward-looking
statements” within the meaning of the federal securities
laws. These forward-looking statements are intended to qualify
for the safe harbor from liability established by the Private
Securities Litigation Reform Act of 1995. Forward-looking
statements are those that do not relate solely to historical
fact. They include, but are not limited to, any statement that
may predict, forecast, indicate or imply future results,
performance, achievements or events. Words such as, but not
limited to, “believe,” “expect,”
“anticipate,” “estimate,”
“intend,” “plan,” “targets,”
“projects,” “likely,” “will,”
“would,” “could” and similar expressions or
phrases identify forward-looking statements.
All forward-looking statements involve risks and uncertainties.
The occurrence of the events described, and the achievement of
the expected results, depend on many events, some or all of
which are not predictable or within our control. Actual results
may differ materially from expected results.
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Factors that may cause actual results to differ from expected
results include: changes in tax laws or in their interpretation
or application (including the repeal of the application of the
tonnage tax to our trade in any one of our applicable shipping
routes); rising fuel prices; our substantial debt; restrictive
covenants under our debt agreements; decreases in shipping
volumes; our failure to renew our commercial agreements with
Maersk; labor interruptions or strikes; job related claims,
liability under multi-employer pension plans; compliance with
safety and environmental protection and other governmental
requirements; new statutory and regulatory directives in the
United States addressing homeland security concerns; the
successful
start-up of
any Jones-Act competitor; increased inspection procedures and
tighter import and export controls; restrictions on foreign
ownership of our vessels; repeal or substantial amendment of the
coastwise laws of the United States, also known as the Jones
Act; escalation of insurance costs, catastrophic losses and
other liabilities; the arrest of our vessels by maritime
claimants; severe weather and natural disasters; our inability
to exercise our purchase options for our chartered vessels; the
aging of our vessels; unexpected substantial drydocking costs
for our vessels; the loss of our key management personnel;
actions by our stockholders; adverse tax audits and other tax
matters; and legal or other proceedings to which we are or may
become subject.
In light of these risks and uncertainties, expected results or
other anticipated events or circumstances discussed in this
Form 10-K
(including the exhibits hereto) might not occur. We undertake no
obligation, and specifically decline any obligation, to publicly
update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.
See the section entitled “Risk Factors” beginning on
Page 11 in this
Form 10-K
for a more complete discussion of these risks and uncertainties
and for other risks and uncertainties. Those factors and the
other risk factors described in this
Form 10-K
are not necessarily all of the important factors that could
cause actual results or developments to differ materially from
those expressed in any of our forward-looking statements. Other
unknown or unpredictable factors also could harm our results.
Consequently, there can be no assurance that actual results or
developments anticipated by us will be realized or, even if
substantially realized, that they will have the expected
consequences to, or effects on, us. Given these uncertainties,
prospective investors are cautioned not to place undue reliance
on such forward-looking statements.
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Part I.
Our
Company
Horizon Lines, Inc., a Delaware corporation, (the
“Company” and together with its subsidiaries,
“We”) operates as a holding company for Horizon Lines,
LLC (“HL”), a Delaware limited liability company and
wholly-owned subsidiary, Horizon Logistics Holdings, LLC
(“Horizon Logistics”), a Delaware limited liability
company and wholly-owned subsidiary, and Horizon Lines of Puerto
Rico, Inc. (“HLPR”), a Delaware corporation and
wholly-owned subsidiary. The Company was formed as an
acquisition vehicle to acquire, on July 7, 2004, the equity
interest in Horizon Lines Holding Corp., a Delaware corporation
(“HLHC” or “Horizon Lines Holding”). The
foregoing acquisition and related financing and other
transactions, referred to in this
Form 10-K
collectively as the “Acquisition-Related Transactions”
or “merger,” included a merger whereby Horizon Lines
Holding became a direct wholly-owned subsidiary of the Company.
The Company was formed at the direction of Castle Harlan
Partners IV. L.P. (“CHP IV”), a private equity
investment fund managed by Castle Harlan, Inc. (“Castle
Harlan”). During 2006, the Company completed three
secondary offerings, including a secondary offering (pursuant to
a shelf registration) whereby CHP IV and other affiliated
private equity investment funds managed by Castle Harlan
divested their ownership in the Company.
Our long operating history dates back to 1956, when
Sea-Land
Service, Inc.
(“Sea-Land”)
pioneered the marine container shipping industry and established
our business. In 1958 we introduced container shipping to the
Puerto Rico market, and in 1964 we pioneered container shipping
in Alaska with the first year-round scheduled vessel service. In
1987, we began providing container shipping services between the
U.S. west coast and Hawaii and Guam through our acquisition
from an existing carrier of all of its vessels and certain other
assets that were already serving that market. In December 1999,
HLHC’s former parent, CSX Corporation sold the
international marine container operations of
Sea-Land to
the A.P. Møller Maersk Group (“Maersk”) and HLHC
continued to be owned and operated as CSX Lines, LLC, a
subsidiary of CSX Corporation. On February 27, 2003, HLHC
(which at the time was indirectly majority-owned by
Carlyle-Horizon Partners, L.P.) acquired from CSX Corporation,
which was the successor to
Sea-Land,
84.5% of CSX Lines, LLC (“Predecessor A”), and 100% of
CSX Lines of Puerto Rico, Inc., which together constitute our
business today. CSX Lines, LLC is now known as Horizon Lines,
LLC and CSX Lines of Puerto Rico, Inc. is now known as Horizon
Lines of Puerto Rico, Inc. Today, as the only Jones Act vessel
operator with one integrated organization serving Alaska, Hawaii
and Puerto Rico, we are uniquely positioned to serve customers
requiring shipping and logistics services in more than one of
these markets.
We believe that we are the nation’s leading Jones Act
container shipping and integrated logistics company, accounting
for approximately 38% of total U.S. marine container
shipments from the continental U.S. to Alaska, Puerto Rico
and Hawaii, constituting the three non-contiguous Jones Act
markets; and to Guam and Micronesia. We own or lease
21 vessels, 16 of which are fully qualified Jones Act
vessels, and approximately 22,000 cargo containers. We also
provide comprehensive shipping and sophisticated logistics
services in our markets. We have long-term access to terminal
facilities in each of our ports, operating our terminals in
Alaska, Hawaii, and Puerto Rico and contracting for terminal
services in our six ports in the continental U.S. and in
the ports in Guam, Hong Kong, Yantian and Taiwan. We, through
our wholly owned subsidiary, Horizon Logistics, offer inland
transportation for our customers through our own trucking
operations on the U.S. west coast and Alaska, and our
integrated logistics services including relationships with
third-party truckers, railroads, and barge operators in our
markets.
We ship a wide spectrum of consumer and industrial items used
everyday in our markets, ranging from foodstuffs (refrigerated
and non-refrigerated) to household goods and auto parts to
building materials and various materials used in manufacturing.
Many of these cargos are consumer goods vital to the expanding
populations in our markets, thereby providing us with a stable
base of growing
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demand for our shipping and logistics services. We have many
long-standing customer relationships with large consumer and
industrial products companies, such as Costco Wholesale
Corporation, Johnson & Johnson, Lowe’s Companies,
Inc., Safeway, Inc., Toyota Motor Corporation and Wal-Mart
Stores, Inc. We also serve several agencies of the
U.S. government, including the Department of Defense and
the U.S. Postal Service. Our customer base is broad and
diversified, with our top ten customers accounting for
approximately 35% of revenue and our largest customer accounting
for approximately 8% of revenue.
On February 1, 2008, the Company filed a shelf registration on
Form S-3.
The registration statement, which became effective upon filing
with the U.S. Securities and Exchange Commission,
registered for resale the $330.0 million aggregate
principal amount of 4.25% convertible senior notes due 2012 and
the shares issuable upon conversion of the notes that were part
of a private placement completed on August 8, 2007. The
notes pay interest semiannually at a rate of 4.25% per annum.
The notes are convertible under certain circumstances into cash
up to the principal amount of the notes, and shares of the
Company’s common stock or cash (at the option of the
Company) for any conversion value in excess of the principal
amount at an initial conversion rate of 26.9339 shares of
the Company’s common stock per $1,000 principal amount of
notes. This represents an initial conversion price of
approximately $37.13 per share. Concurrent with the issuance of
the notes, the Company entered into separate note hedge and
warrant transactions which were structured to reduce the
potential future share dilution associated with the conversion
of notes. The cost of the note hedge transactions was
approximately $52.5 million, $33.4 million net of tax
benefits, and the Company received proceeds of
$11.9 million related to the sale of the warrants.
The issuance of the convertible senior notes was part of a
series of transactions by which the Company refinanced its
capital structure. On August 8, 2007, the Company entered
into a credit agreement providing for a $250.0 million five
year revolving credit facility and a $125.0 million term
loan with various financial lenders (the “Senior Credit
Facility”). The Senior Credit Facility obligations are
secured by substantially all of the Company’s assets. The
terms of the Senior Credit Facility also provide for a
$20.0 million swingline subfacility and a
$50.0 million letter of credit subfacility.
On July 17, 2007, the Company launched a cash tender offer
for any and all of its outstanding 9% senior notes and
11% senior discount notes. On August 13, 2007, the
Company completed the cash tender offer with 100% of the
outstanding principal amount of the notes validly tendered. The
Company used proceeds from the sale of the convertible notes and
borrowings under the Senior Credit Facility to fund the cash
tender offer for the 9% senior notes and the
11% senior discount notes.
On November 19, 2007, the Company’s Board of Directors
authorized the Company to commence a stock repurchase program to
buy back up to $50.0 million worth of its common stock. The
program allowed the Company to purchase shares through open
market repurchases and privately negotiated transactions at a
price of $26.00 per share or less until the program’s
expiration on December 31, 2008. The Company acquired
1,172,700 shares at a total cost of $20.6 million
under this program during the fourth quarter of 2007. The
Company completed its share repurchase program in the first
quarter of 2008, acquiring an additional 1,627,500 shares
at a total cost of $29.4 million. Although the Company does
not currently intend to repurchase additional shares, the
Company will continue to evaluate market conditions and may,
subject to approval by the Company’s Board of Directors,
repurchase additional shares of its common stock in the future.
On August 22, 2007, the Company completed the acquisition
of Montebello Management, LLC (D/B/A Aero Logistics) (“Aero
Logistics”), a full service third party logistics provider,
for approximately $27.3 million in cash. As of
December 23, 2007, $0.5 million is held in escrow
pending achievement of 2008 earnings targets and has been
excluded from the purchase price. In addition, subsequent to
December 23, 2007, the Company completed its assessment of
the working capital received and
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released $0.4 million originally placed into escrow and
paid an additional $0.2 million. The additional
$0.2 million increased the total purchase to
$27.5 million. Aero Logistics designs and manages custom
freight shipping and special handling programs for customers in
service-sensitive industries including high-tech, healthcare,
energy, mining, retail and apparel. Aero Logistics offers an
array of multi-modal transportation services and fully
integrated logistics solutions to satisfy the unique needs of
its customers. Aero Logistics also operates a fleet of
approximately 90 GPS-equipped trailers under the direction of
their Aero Transportation division, which provides expedited
less-than-truckload (LTL) and full truckload (FTL) service
throughout North America.
On June 26, 2007, the Company completed the purchase of
Hawaii Stevedores, Inc. (“HSI”) for approximately
$4.1 million in cash, net of cash acquired. HSI, which
operates as a subsidiary of the Company, is a full service
provider of stevedoring and marine terminal services in Hawaii.
In 2007, a draft of a Technical Corrections Act proposed
redefining the Puerto Rico trade such that it would not qualify
for application of the tonnage tax. However, the Technical
Corrections Act, as passed, did not include any language that
will adversely affect our utilization of the tonnage tax regime.
During the first half of 2007, the Company modified its trade
route between the U.S. west coast and Asia and Guam
commencing with the deployment of newly acquired vessels. This
deployment enabled the Company to redeploy Jones Act qualified
active vessels to other Jones Act routes and to commence a new
U.S. west coast to Hawaii trade route with two of the
vessels previously deployed in the Guam trade route.
During 2007, over 85% of our revenues were generated from our
shipping and logistics services in markets where the marine
trade is subject to the coastwise laws of the United States,
also known as the Jones Act, or other U.S. maritime
cabotage laws.
The Jones Act is a long-standing cornerstone of
U.S. maritime policy. Under the Jones Act, all vessels
transporting cargo between covered U.S. ports must, subject
to limited exceptions, be built in the U.S., registered under
the U.S. flag, manned by predominantly U.S. crews, and
owned and operated by
U.S.-organized
companies that are controlled and 75% owned by
U.S. citizens.
U.S.-flagged
vessels are generally required to be maintained at higher
standards than foreign-flagged vessels and are supervised by, as
well as subject to rigorous inspections by, or on behalf of the
U.S. Coast Guard, which requires appropriate certifications
and background checks of the crew members. Our trade routes
between Alaska, Hawaii and Puerto Rico and the continental
U.S. represent the three non-contiguous Jones Act markets.
Vessels operating on these trade routes are required to be fully
qualified Jones Act vessels. Other U.S. maritime laws
require vessels operating on the trade routes between Guam, a
U.S. territory, and U.S. ports to be
U.S.-flagged
and predominantly
U.S.-crewed,
but not
U.S.-built.
Cabotage laws, which reserve the right to ship cargo between
domestic ports to domestic vessels, are not unique to the United
States; similar laws are common around the world and exist in
over 40 countries. In general, all interstate and intrastate
marine commerce within the U.S. falls under the Jones Act,
which is a cabotage law. The Jones Act enjoys broad support from
both major political parties in both houses of Congress. We
believe that the ongoing war on terrorism has further solidified
political support for the Jones Act, as a vital and dedicated
U.S. merchant marine is a cornerstone for a strong homeland
defense, as well as a critical source of trained
U.S. mariners for wartime support.
The Jones Act distinguishes the U.S. domestic shipping
market from international shipping markets. Given the limited
number of existing Jones Act qualified vessels, the high capital
investment and long delivery lead times associated with building
a new containership in the U.S., the substantial
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investment required in infrastructure and the need to develop a
broad base of customer relationships, the markets in which we
operate have been less vulnerable to over capacity and
volatility than international shipping markets.
Although the U.S. container shipping industry is affected
by general economic conditions, the industry does not tend to be
as cyclical as other sectors within the shipping industry.
Specifically, most of the cargos shipped via container vessels
consist of a wide range of consumer and industrial items as well
as military and postal loads. Since many of these types of
cargos are consumer goods vital to the expanding populations in
our markets, they provide us with a stable base of growing
demand for our shipping and logistics services.
The Jones Act markets are not as fragmented as international
shipping markets. We are one of only two major container
shipping operators currently serving the Alaska market, each
accounting for approximately 41% of total container loads
traveling from the continental U.S. to Alaska. Horizon
Lines and TOTE serve the Alaska market. We are also only one of
two container shipping companies currently serving the Hawaii
and Guam markets with an approximate 36% share of total domestic
marine container shipments from the continental U.S. to
these markets. This percentage reflects 35% and 52% shares of
total domestic marine container shipments from the continental
U.S. to Hawaii and Guam markets, respectively. Horizon
Lines and Matson Navigation Co (“Matson”) serve the
Hawaii and Guam market. In Puerto Rico, we are the largest
provider of marine container shipping, accounting for
approximately 34% of Puerto Rico’s total container loads
from the continental U.S. The Puerto Rico market is
currently served by two containership companies, Horizon Lines
and Sea Star Lines (“Sea Star”). Sea Star is an
independently operated company majority-owned by an affiliate of
TOTE. Two barge operators, Crowley and Trailer Bridge, Inc.,
also currently serve this market.
The U.S. container shipping industry as a whole is
experiencing rising customer expectations for real-time shipment
status information and the on-time
pick-up and
delivery of cargo, as customers seek to optimize efficiency
through greater management of the delivery process of their
products. Commercial and governmental customers are increasingly
requiring the tracking of the location and status of their
shipments at all times and have developed a strong preference to
retrieve information and communicate using the Internet. During
2007, we established a fully-functional intermodal active radio
frequency identification (“RFID”) solution providing
customers in our Alaska trade real-time shipment visibility
during all phases of transit. The active RFID-based real-time
tracking system, when matched with Horizon’s
industry-leading web-based event management system, offers
shipment visibility and supply chain efficiencies by providing
real-time detailed shipment information throughout the
container’s transit from origin loading facility through to
final destination. A broad range of domestic and foreign
governmental agencies are also increasingly requiring access to
shipping information in automated formats for customs oversight
and security purposes.
To ensure on-time
pick-up and
delivery of cargo, shipping companies must maintain strict
vessel schedules and efficient terminal operations for
expediting the movement of containers in and out of terminal
facilities. The departure and arrival of vessels on schedule is
heavily influenced by both vessel maintenance standards (i.e.,
minimizing mechanical breakdowns) and terminal operating
discipline. Marine terminal gate and yard efficiency can be
enhanced by efficient yard layout, high-quality information
systems, and streamlined gate processes.
We manage a sales and marketing team of 117 employees
strategically located in our various ports, as well as in six
regional offices across the continental U.S., from our
headquarters in Charlotte, North Carolina. Senior sales and
marketing professionals are responsible for developing sales and
marketing strategies and are closely involved in servicing our
largest customers. All pricing activities are also centrally
coordinated from Charlotte and from Renton, Washington, enabling
us to manage our customer relationships. The marketing team
located in Charlotte is responsible for providing appropriate
market intelligence and direction to the Puerto Rico sales
organization. The marketing
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team located in Renton is responsible for providing appropriate
market intelligence and direction to the members of the team who
focus on the Hawaii, Guam and Alaska markets.
Our regional sales and marketing presence ensures close and
direct interaction with customers on a daily basis. Many of our
regional sales professionals have been servicing the same
customers for over ten years. We believe that we have the
largest sales force of all container shipping and logistics
companies active in our markets. Unlike our competitors, our
sales force cross-sells our shipping and logistics services
across all of these markets. We believe that the breadth and
depth of our relationships with our customers is the principal
driver of repeat business from our customers.
We serve a diverse base of long-standing, established customers
consisting of many of the world’s largest consumer and
industrial products companies. Such customers include Costco
Wholesale Corporation, Johnson & Johnson, Lowe’s
Companies, Inc., Safeway, Inc., Toyota Motor Corporation and
Wal-Mart Stores, Inc. In addition, we serve several agencies of
the U.S. government, including the Department of Defense
and the U.S. Postal Service.
We believe that we are uniquely positioned to serve these and
other large national customers due to our position as the only
shipping and logistics company serving all three non-contiguous
Jones Act markets and Guam and Asia. Approximately 60% of our
transportation revenue in 2007 was derived from customers
shipping with us in more than one of our markets and
approximately 33% of our transportation revenue in 2007 being
derived from customers shipping with us in all three markets.
We generate most of our revenue through customer contracts with
pre-specified rates and volumes and with durations ranging from
one to six years, providing stable revenue streams. The majority
of our customer contracts contain provisions that allow us to
implement fuel surcharges based on fluctuations in our fuel
costs. In addition, our relationships with our customers extend
far beyond the length of any given contract. For example, some
of our customer relationships extend back over 40 years and
our top ten customer relationships average 30 years.
We serve customers in numerous industries and carry a wide
variety of cargos, mitigating our dependence upon any single
customer or single type of cargo. Our customer base is broad
with no significant concentration by customer or type of cargo
shipped. For 2007, our top ten largest customers represented
approximately 32% of transportation revenue, with the largest
customer accounting for approximately 8% of transportation
revenue. During 2007, our top ten largest customers comprised
approximately 35% of total revenue, with our largest customer
accounting for approximately 8% of total revenue. Total revenue
includes transportation, non-transportation and other revenue.
Industry and market data used throughout this
Form 10-K,
including information relating to our relative position in the
shipping and logistics industries are approximations based on
the good faith estimates of our management, which are generally
based on internal surveys and sources, and other publicly
available information, including local port information. Unless
otherwise noted, financial data and industry and market data
presented herein are for a period ending in December 2007.
Our operations share corporate and administrative functions such
as finance, information technology and sales and marketing.
Centralized functions are performed primarily at our
headquarters and at our operations center in Irving, Texas.
We book and monitor all of our shipping and logistics services
with our customers through the Horizon Information Technology
System (“HITS”). HITS, our proprietary ocean shipping
and logistics information technology system, provides a platform
to accomplish a shipping transaction from start to finish in a
cost-effective, streamlined manner. HITS provides an extensive
database of information relevant to the shipment of
containerized cargo and captures all critical aspects of every
shipment
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booked with us. In a typical transaction, our customers go
on-line to make a booking or call, fax or
e-mail our
customer service department. Once applicable shipping
information is input into the booking system, a booking number
is generated. The booking information then downloads into other
systems used by our dispatch team, terminal personnel, vessel
planners, documentation team, logistics team and other teams and
personnel who work together to produce a seamless transaction
for our customers.
Our dispatch team coordinates truck
and/or rail
shipping from inland locations to the port on intermodal
bookings. We currently purchase rail services directly from the
railroads involved through confidential transportation service
contracts, except for services from CSX Transportation which are
obtained through our contract with CSX Intermodal, an affiliate
of CSX Transportation. Our terminal personnel schedule equipment
availability for containers picked up at the port. Our vessel
planners develop stowage plans and our documentation teams
process the cargo bill. We review space availability and inform
our other teams and personnel when additional bookings are
needed and when bookings need to be changed or pushed to the
next vessel. After containers arrive at the port of loading,
they are loaded on board the vessel. Once the containers are
loaded and are at sea, our destination terminal staff initiates
their process of receiving and releasing containers to our
customers. Customers accessing HITS via our internet portal have
the option to receive
e-mail
alerts as specific events take place throughout this process.
All of our customers have the option to call our customer
service department or to access HITS via our internet portal,
24 hours a day, seven days a week, to track and trace
shipments. Customers may also view their payment histories and
make payments on-line.
We maintain insurance policies to cover risks related to
physical damage to our vessels and vessel equipment, other
equipment (including containers, chassis, terminal equipment and
trucks) and property, as well as with respect to third-party
liabilities arising from the carriage of goods, the operation of
vessels and shoreside equipment, and general liabilities which
may arise through the course of our normal business operations.
We also maintain workers compensation insurance, business
interruption insurance, and directors’ and officers’
insurance providing indemnification for our directors, officers,
and certain employees for some liabilities.
Vessel
Fleet
Our management team adheres to an effective strategy for the
maintenance of our vessels. Early in our
50-year
operating history, when we pioneered Jones Act container
shipping, we recognized the vital importance of maintaining our
valuable Jones Act qualified vessels. Our on-shore vessel
management team carefully manages all of our ongoing regular
maintenance and drydocking activity. We maintain our vessels
according to our own strict maintenance procedures, which meet
or exceed U.S. government requirements. All of our vessels
are regulated pursuant to rigorous standards promulgated by the
U.S. Coast Guard and subject to periodic inspection and
certification, for compliance with these standards, by the
American Bureau of Shipping, on behalf of the U.S. Coast
Guard. Our procedures protect and preserve our fleet to the
highest standards in our industry and enable us to preserve the
usefulness of our ships. During each of the last four years, our
vessels have been in operational condition, ready to sail, over
99% of the time when they were required to be ready to sail.
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The table below lists our vessel fleet, which is the largest
containership fleet within the Jones Act markets, as of
December 23, 2007. Our vessel fleet consists of
21 vessels of varying classes and specification, 16 of
which are Jones Act qualified. Of the 16 vessels that are
actively deployed, 11 are Jones Act qualified and five Jones Act
qualified vessels are spare vessels available for seasonal and
dry-dock needs and to respond to potential new revenue
opportunities.
Eight of our vessels, the Horizon Anchorage, Horizon Tacoma,
Horizon Kodiak, Horizon Hunter, Horizon Hawk, Horizon Eagle,
Horizon Falcon and Horizon Tiger are leased, or chartered, under
charters that are due to expire in January 2015 for the Horizon
Anchorage, Horizon Tacoma and Horizon Kodiak, in 2018 for the
Horizon Hunter and in 2019 for the Horizon Hawk, Horizon Eagle,
Horizon Falcon and Horizon Tiger. Under the charter for each
chartered vessel, we generally have the following options in
connection with the expiration of the charter: (i) purchase
the vessel for its fair
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market value, (ii) extend the charter for an agreed upon
period of time at a fair market value charter rate or,
(iii) return the vessel to its owner.
The obligations under the existing charters for the Horizon
Anchorage, Horizon Tacoma and Horizon Kodiak are guaranteed by
our former parent, CSX Corporation, and certain of its
affiliates. In turn, certain of our subsidiaries are parties to
the Amended and Restated Guarantee and Indemnity Agreement,
referred to herein as the GIA, with CSX Corporation and certain
of its affiliates, pursuant to which these subsidiaries have
agreed to indemnify these CSX entities if any of them should be
called upon by any owner of the chartered vessels to make
payments to such owner under the guarantees referred to above.
As summarized in the table below, our container fleet consists
of owned and leased containers of different types and sizes as
of December 23, 2007:
All of our container leases are operating leases.
In connection with the sale of the international marine
container operations of
Sea-Land by
our former parent, CSX Corporation, to Maersk, in December 1999,
our predecessor, CSX Lines, LLC and certain of its subsidiaries
entered into a number of commercial agreements with Maersk that
encompass terminal services, equipment sharing, sales agency
services, trucking services, cargo space charters, and
transportation services. These agreements, which were renewed
and amended in December 2006, generally are now scheduled to
expire at the end of 2010. Maersk is our terminal service
provider in the continental U.S., at our ports in Elizabeth, New
Jersey, Jacksonville, Florida, Houston, Texas, Tacoma,
Washington, and Oakland and Los Angeles, California. We are
Maersk’s terminal operator in Hawaii, Guam, Alaska and
Puerto Rico. We share containers with Maersk and also pool
chassis and generator sets with Maersk. We are Maersk’s
sales agent in Alaska and Puerto
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Rico, and Maersk serves as our sales agent in Canada. On the
U.S. west coast, we provide trucking services for Maersk.
Under our cargo space charter and transportation service
agreements with Maersk, we currently operate five foreign built
U.S.-flagged
vessels that sail from the U.S. west coast to Hawaii,
continuing from Hawaii on to Guam, and then from Guam on to
Yantian, China, Hong Kong and Kaohsiung, Taiwan, with a return
trip to Tacoma, Washington, and Oakland, California. We utilize
Maersk containers to carry a portion of our cargo westbound to
Hawaii and Guam, where the contents of these containers are then
unloaded. We then ship the empty Maersk containers onwards to
the three ports in Asia. When these vessels arrive in Asia,
Maersk unloads these empty containers and replaces them with
loaded containers on our vessels for the return trip to the
U.S. west coast. We use Maersk equipment on our service to
Hawaii from our U.S. west coast ports as well as from
select U.S. inland locations. We achieve significantly
greater vessel capacity utilization and revenue on this route as
a result of this arrangement. We do not transport any domestic
cargo between the U.S. mainland and Hawaii on these
vessels. We do carry some international cargo to and from Hawaii
for Maersk.
Heightened awareness of maritime security needs, brought about
by the events of September 11, 2001 and several maritime
attacks around the globe, have caused the United Nations through
its International Maritime Organization (“IMO”), the
U.S. Department of Homeland Security, through its Coast
Guard arm, and the states and local ports to adopt a more
stringent set of security procedures relating to the interface
between port facilities and vessels. In addition, the
U.S. Congress and the current administration have enacted
legislation requiring the implementation of Coast Guard approved
vessel and facility security plans.
Certain aspects of our security plans require our investing in
infrastructure upgrades to ensure compliance. We have applied in
the past and will continue to apply going forward for federal
grants to offset the incremental expense of these security
investments. While we were successful through two early rounds
of funding to secure substantial grants for specific security
projects, the current grant award criteria favor the largest
ports and stakeholder consortia applications, limiting the
available funds for stand alone private maritime industry
stakeholders. In addition, the current administration is
continuously reviewing the criteria for awarding such grants.
Such changes could have a negative impact on our ability to win
grant funding in the future. Security surcharges are evaluated
regularly and we may at times incorporate these surcharges into
the base transportation rates that we charge.
The Merchant Marine Act, 1936, as amended, permits the limited
deferral of U.S. federal income taxes on earnings from
eligible
U.S.-built
and
U.S.-flagged
vessels and
U.S.-built
containers if the earnings are deposited into a Capital
Construction Fund (“CCF”), pursuant to an agreement
with the U.S. Maritime Administration, (“MARAD”).
The amounts on deposit in a CCF can be withdrawn and used for
the acquisition, construction or reconstruction of
U.S.-built
and
U.S.-flagged
vessels or
U.S.-built
containers.
Horizon Lines has a CCF agreement with MARAD under which it
occasionally deposits into the CCF earnings attributable to the
operation of 16 of its vessels and makes withdrawals of funds
from the CCF to acquire
U.S.-built
and
U.S.-flagged
vessels and
U.S.-built
refrigeration units for our containers. During 2005, Horizon
Lines acquired with available cash of $25.2 million and the
assumption of debt of $4.5 million, the rights and
beneficial interests of the sole owner participant in two
separate trusts, the assets of which consist primarily of the
Horizon Enterprise and the Horizon Pacific, and the charters
related thereto under which Horizon Lines operates such vessels.
These vessels were subject to mortgages in the aggregate amount
of $4.5 million, which were paid on January 2, 2007.
Four used
U.S.-built
and
U.S.-flagged
vessels (Horizon Hawaii, Horizon Fairbanks,
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Horizon Navigator, and Horizon Trader) were acquired by Horizon
Lines in 2003 and 2004 for a total of $25.2 million through
the exercise of purchase options under the charters for these
vessels.
Amounts on deposit in Horizon Lines’ CCF cannot be
withdrawn for other than the qualified purposes specified in the
CCF agreement. Any nonqualified withdrawals are subject to
federal income tax at the highest marginal rate. In addition,
such tax is subject to an interest charge based upon the number
of years the funds have been on deposit. If Horizon Lines’
CCF agreement was terminated, funds then on deposit in the CCF
would be treated as nonqualified withdrawals for that taxable
year. In addition, if a vessel built, acquired, or reconstructed
with CCF funds is operated in a nonqualified operation, the
owner must repay a proportionate amount of the tax benefits as
liquidated damages. These restrictions apply (i) for
20 years after delivery in the case of vessels built with
CCF funds, (ii) ten years in the case of vessels
reconstructed or acquired with CCF funds more than one year
after delivery from the shipyard, and (iii) ten years after
the first expenditure of CCF funds in the case of vessels in
regard to which qualified withdrawals from the CCF fund have
been made to pay existing indebtedness (five years if the
vessels are more than 15 years old on the date the
withdrawal is made). In addition, the sale or mortgage of a
vessel acquired with CCF funds requires MARAD’s approval.
Our consolidated balance sheets at December 23, 2007 and
December 24, 2006 include liabilities of approximately
$13.1 million and $14.1 million, respectively, for
deferred taxes on deposits in our CCF.
As of December 23, 2007, we had 2,162 employees, of
which approximately 1,459 were represented by seven labor unions.
The table below sets forth the unions which represent our
employees, the number of employees represented by these unions
as of December 23, 2007 and the expiration dates of the
related collective bargaining agreements:
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The table below provides a breakdown of headcount by
non-contiguous Jones Act market and function for our non-union
employees as of December 23, 2007.
The mailing address of the Company’s Executive Office is
4064 Colony Road, Suite 200, Charlotte, North Carolina
28211 and the telephone number at that location is
(704) 973-7000.
The Company’s most recent SEC filings can be found on the
SEC’s website, www.sec.gov, and on the Company’s
website, www.horizonlines.com. The Company’s 2007 annual
report on
Form 10-K
will be available on the Company’s website as soon as
reasonably practicable. All such filings are available free of
charge. The contents of our website are not incorporated by
reference into this
Form 10-K.
The public may read and copy any materials the Company files
with the SEC at the SEC’s Public Reference Room at
450 Fifth Street, N.W., Washington, DC 20549. The public
may obtain information on the operation of the Public Reference
Room by calling
1-800-SEC-0330.
Fuel is a significant operating expense for our shipping
operations. The price and supply of fuel is unpredictable and
fluctuates based on events outside our control, including
geopolitical developments, supply and demand for oil and gas,
actions by OPEC and other oil and gas producers, war and unrest
in oil producing countries and regions, regional production
patterns and environmental concerns. As a result, increases in
the price of fuel, such as we are currently experiencing, may
adversely affect profitability. There can be no assurance that
our customers will agree to bear such fuel price increases via
fuel surcharges without a reduction in their volumes of business
with us nor any assurance that our future fuel hedging efforts,
if any, will be successful.
In addition, a bill has been introduced in the Senate that will
limit the sulphur content of fuel used by vessels that enter or
leave U.S. ports. As a result of any such legislation or
other laws affecting emissions of marine vessels, we may be
required to use more expensive fuels or modify our vessels which
will result in an increase in our cost of operations.
Demand for our shipping services depends on levels of shipping
in our Jones Act markets and in the Guam market, as well as on
economic and trade growth and logistics. Cyclical or other
recessions in the continental U.S. or in these markets can
negatively affect our operating results as customers may ship
fewer containers or may ship containers only at reduced rates.
For example, shipping volume in Puerto Rico was down 8% in 2007
as compared to 2006 as a result of economic conditions
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in Puerto Rico. The economic downturn in Puerto Rico negatively
affected our earnings. We cannot predict whether or when such
downturns will occur.
During 2006, after evaluating the merits and requirements of the
tonnage tax, we elected the application of the tonnage tax
instead of the federal corporate income tax on income from our
qualifying shipping activities. Changes in tax laws or the
interpretation thereof, adverse tax audits, and other tax
matters related to such tax election or such tax may adversely
affect our future results.
During the fourth quarter of 2007, a draft of a Technical
Corrections Act proposed redefining the Puerto Rico trade to not
qualify for application of the tonnage tax. The tax writing
committee in Congress removed the tonnage tax repeal language
from the Technical Corrections Act before its passage, but we
cannot assure you that there will not be future efforts to
repeal all, or any portion of, the tonnage tax as it applies to
our shipping activities.
If We are
Unable to Implement Our Business Strategy, Our Future Results
Could be Adversely Affected.
Our future results of operations will depend in significant part
on the extent to which we can implement our business strategy
successfully. Our business strategy includes continuing to
organically grow our revenue, providing complete shipping and
logistics services, leveraging our capabilities to serve a broad
range of customers, leveraging our brand, maintaining
industry-leading information technology, pursuing strategic
acquisitions and reducing operating costs. Our strategy is
subject to business, economic and competitive uncertainties and
contingencies, many of which are beyond our control. As a
consequence, we may not be able to fully implement our strategy
or realize the anticipated results of our strategy.
If the Jones Act were to be repealed, substantially amended, or
waived and, as a consequence, competitors with lower operating
costs were to enter any of our Jones Act markets, our business
would be materially adversely affected. In addition, our
advantage as a
U.S.-citizen
operator of Jones Act vessels could be eroded by periodic
efforts and attempts by foreign interests to circumvent certain
aspects of the Jones Act. If maritime cabotage services were
included in the General Agreement on Trade in Services, the
North American Free Trade Agreement or other international trade
agreements, or if the restrictions contained in the Jones Act
were otherwise altered, the shipping of maritime cargo between
covered U.S. ports could be opened to foreign-flag or
foreign-built vessels.
In September 2005, the Department of Homeland Security issued
limited temporary waivers of the Jones Act solely to permit the
transport of petroleum and refined petroleum products in the
United States in response to the damage caused to the
nation’s oil and gas production facilities and pipelines by
Hurricanes Katrina and Rita. There can be no assurance as to the
timing of any future waivers of the Jones Act or that any such
waivers will be limited to the transport of petroleum and
refined petroleum products.
We have several commercial agreements with Maersk, an
international shipping company, that encompass terminal
services, equipment sharing, cargo space charters, sales agency
services, trucking services, and transportation services. For
example, under these agreements, Maersk provides us with
terminal services at six ports located in the continental
U.S. (Elizabeth, New Jersey; Jacksonville, Florida;
Houston, Texas; Los Angeles and Oakland, California; and Tacoma,
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Washington). In general, these agreements, which were renewed
and amended in December 2006, are currently scheduled to expire
at the end of 2010. If we fail to renew these agreements in the
future, the requirements of our business will necessitate that
we enter into substitute commercial agreements with third
parties for at least some portion of the services contemplated
under our existing commercial agreements with Maersk, such as
terminal services at our ports located in the continental
U.S. There can be no assurance that, if we fail to renew
our commercial agreements with Maersk, we will be successful in
negotiating and entering into substitute commercial agreements
with third parties and, even if we succeed in doing so, the
terms and conditions of these new agreements, individually or in
the aggregate, may be significantly less favorable to us than
the terms and conditions of our existing agreements with Maersk
or others. Furthermore, if we do enter into substitute
commercial agreements with third parties, changes in our
operations to comply with the requirements of these new
agreements (such as our use of other terminals in our existing
ports in the continental U.S. or our use of other ports in
the continental U.S.) may cause disruptions to our business,
which could be significant, and may result in additional costs
and expenses and possible losses of revenue.
As of December 23, 2007, we had 2,162 employees, of
which 1,459 were unionized employees represented by seven
different labor unions. Our industry is susceptible to work
stoppages and other adverse employee actions due to the strong
influence of maritime trade unions. We may be adversely affected
by future industrial action against efforts by our management or
the management of other companies in our industry to reduce
labor costs, restrain wage increases or modify work practices.
For example, in 2002 our operations at our U.S. west coast
ports were significantly affected by a
10-day labor
interruption by the International Longshore and Warehouse Union.
This interruption affected ports and shippers throughout the
U.S. west coast.
In addition, in the future, we may not be able to negotiate, on
terms and conditions favorable to us, renewals of our collective
bargaining agreements with unions in our industry and strikes
and disruptions may occur as a result of our failure or the
failure of other companies in our industry to negotiate
collective bargaining agreements with such unions successfully.
One of our collective bargaining agreements with our unions has
expired. Our employees who are covered under this agreement are
continuing to work under the old agreement while we negotiate a
new agreement. Our other collective bargaining agreements are
scheduled to expire from
2008-2012.
Some of our employees are covered by several maritime statutes,
including provisions of the Jones Act, the Death on the High
Seas Act, the Seamen’s Wage Act and general maritime law.
These laws typically operate to make liability limits
established by state workers’ compensation laws
inapplicable to these employees and to permit these employees
and their representatives to pursue actions against employers
for job-related injuries in federal courts. Because we are not
generally protected by the limits imposed by state workers’
compensation statutes for these employees, we may have greater
exposure for any claims made by these employees than is
customary in the United States.
We contribute to fifteen multi-employer pension plans. In the
event of a partial or complete withdrawal by us from any plan
which is underfunded, we would be liable for a proportionate
share of such plan’s unfunded vested benefits. Based on the
limited information available from plan
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administrators, which we cannot independently validate, we
believe that our portion of the contingent liability in the case
of a full withdrawal or termination would be material to our
financial position and results of operations. In the event that
any other contributing employer withdraws from any plan which is
underfunded, and such employer (or any member in its controlled
group) cannot satisfy its obligations under the plan at the time
of withdrawal, then we, along with the other remaining
contributing employers, would be liable for our proportionate
share of such plan’s unfunded vested benefits. We have no
current intention of taking any action that would subject us to
any withdrawal liability and cannot assure you that no other
contributing employer will take such action.
In addition, if a multi-employer plan fails to satisfy the
minimum funding requirements, the Internal Revenue Service,
pursuant to Section 4971 of the Internal Revenue Code of
1986, as amended, referred to herein as the Code, will impose an
excise tax of five (5%) percent on the amount of the accumulated
funding deficiency. Under Section 413(c)(5) of the Code,
the liability of each contributing employer, including us, will
be determined in part by each employer’s respective
delinquency in meeting the required employer contributions under
the plan. The Code also requires contributing employers to make
additional contributions in order to reduce the deficiency to
zero, which may, along with the payment of the excise tax, have
a material adverse impact on our financial results.
The shipping industry in general and our business and the
operation of our vessels and terminals in particular are
affected by extensive and changing safety, environmental
protection and other international, national, state and local
governmental laws and regulations. For example, our vessels, as
U.S.-flagged
vessels, generally must be maintained “in class” and
are subject to periodic inspections by the American Bureau of
Shipping or similar classification societies, and must be
periodically inspected by, or on behalf of, the U.S. Coast
Guard. In addition, the United States Oil Pollution Act of 1990
(referred to as OPA), the Comprehensive Environmental Response,
Compensation & Liability Act of 1980 (referred to as
CERCLA), and certain state laws require us, as a vessel
operator, to obtain certificates of financial responsibility and
to adopt procedures for oil or hazardous substance spill
prevention, response and clean up. In complying with these laws,
we have incurred expenses and may incur future expenses for ship
modifications and changes in operating procedures. Changes in
enforcement policies for existing requirements and additional
laws and regulations adopted in the future could limit our
ability to do business or further increase the cost of our doing
business.
We believe our vessels are maintained in good condition in
compliance with present regulatory requirements, are operated in
compliance in all material respects with applicable
safety/environmental laws and regulations and are insured
against the usual risks for such amounts as our management deems
appropriate. Our vessels’ operating certificates and
licenses are renewed periodically during the required annual
surveys of the vessels. However, there can be no assurance that
such certificates and licenses will be renewed. Also, in the
future, we may have to alter existing equipment, add new
equipment to, or change operating procedures for, our vessels to
comply with changes in governmental regulations, safety or other
equipment standards to meet our customers’ changing needs.
If any such costs are material, they could adversely affect our
financial condition.
Various government agencies within the Department of Homeland
Security (“DHS”), including the Transportation
Security Administration, the U.S. Coast Guard, and
U.S. Bureau of Customs and Border Protection, have adopted,
and may adopt in the future, new rules, policies or regulations
or changes in the interpretation or application of existing
laws, rules, policies or regulations, compliance with which
could increase our costs or result in loss of revenue.
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The Coast Guard’s new maritime security regulations, issued
pursuant to the Maritime Transportation Security Act of 2002
(“MTSA”), require us to operate our vessels and
facilities pursuant to both the maritime security regulations
and approved security plans. Our vessels and facilities are
subject to periodic security compliance verification
examinations by the Coast Guard. A failure to operate in
accordance with the maritime security regulations or the
approved security plans may result in the imposition of a fine
or control and compliance measures, including the suspension or
revocation of the security plan, thereby making the vessel or
facility ineligible to operate. We are also required to audit
these security plans on an annual basis and, if necessary,
submit amendments to the Coast Guard for its review and
approval. Failure to timely submit the necessary amendments may
lead to the imposition of the fines and control and compliance
measures mentioned above. Failure to meet the requirements of
the maritime security regulations could have a material adverse
effect on our results of operations.
DHS may adopt additional security-related regulations, including
new requirements for screening of cargo and our reimbursement to
the agency for the cost of security services. These new
security-related regulations could have an adverse impact on our
ability to efficiently process cargo or could increase our
costs. In particular, our customers typically need quick
shipping of their cargos and rely on our on-time shipping
capabilities. If these regulations disrupt or impede the timing
of our shipments, we may fail to meet the needs of our
customers, or may increase expenses to do so.
Domestic and international container shipping is subject to
various security and customs inspection and related procedures,
referred to herein as inspection procedures, in countries of
origin and destination as well as in countries in which
transshipment points are located. Inspection procedures can
result in the seizure of containers or their contents, delays in
the loading, offloading, transshipment or delivery of containers
and the levying of customs duties, fines or other penalties
against exporters or importers (and, in some cases, shipping and
logistics companies such as us). Failure to comply with these
procedures may result in the imposition of fines
and/or the
taking of control or compliance measures by the applicable
governmental agency, including the denial of entry into
U.S. waters.
We understand that, currently, only a small proportion of all
containers delivered to the United States are physically
inspected by U.S., state or local authorities prior to delivery
to their destinations. The U.S. government, foreign
governments, international organizations, and industry
associations have been considering ways to improve and expand
inspection procedures. There are numerous proposals to enhance
the existing inspection procedures, which if implemented would
likely affect shipping and logistics companies such as us. Such
changes could impose additional financial and legal obligations
on us, including additional responsibility for physically
inspecting and recording the contents of containers we are
shipping. In addition, changes to inspection procedures could
impose additional costs and obligations on our customers and
may, in certain cases, render the shipment of certain types of
cargo by container uneconomical or impractical. Any such changes
or developments may have a material adverse effect on our
business, financial condition and results of operations.
The Jones Act restricts the foreign ownership interests in the
entities that directly or indirectly own the vessels which we
operate in our Jones Act markets. If we were to seek to sell any
portion of our business that owns any of these vessels, we would
have fewer potential purchasers, since some potential purchasers
might be unable or unwilling to satisfy the foreign ownership
restrictions described above. As a result, the sales price for
that portion of our business may not attain the amount that
could be obtained in an unregulated market. Furthermore, at any
point Horizon Lines, LLC, our indirect wholly-owned subsidiary
and principal operating subsidiary, ceases to be controlled
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and 75% owned by U.S. citizens, we would become ineligible
to operate in our current Jones Act markets and may become
subject to penalties and risk forfeiture of our vessels.
Certain of our insurance coverage is provided by mutual clubs.
Mutual clubs rely on member premiums, investment reserves and
income, and reinsurance to manage liability risks on behalf of
its members. Increased investment losses, underwriting losses,
or reinsurance costs could cause insurance clubs to
substantially raise the cost of premiums, resulting not only in
higher premium costs but also higher levels of deductibles and
self-insurance retentions.
The operation of any oceangoing vessel carries with it an
inherent risk of catastrophic maritime disaster, mechanical
failure, collision, and loss of or damage to cargo. Also, in the
course of the operation of our vessels, marine disasters, such
as oil spills and other environmental mishaps, cargo loss or
damage, and business interruption due to political or other
developments, as well as maritime disasters not involving us,
labor disputes, strikes and adverse weather conditions, could
result in loss of revenue, liabilities or increased costs,
personal injury, loss of life, severe damage to and destruction
of property and equipment, pollution or environmental damage and
suspension of operations. Damage arising from such occurrences
may result in lawsuits asserting large claims.
Although we maintain insurance, including retentions and
deductibles, at levels that we believe are consistent with
industry norms against the risks described above, including loss
of life, there can be no assurance that this insurance would be
sufficient to cover the cost of damages suffered by us from the
occurrence of all of the risks described above or the loss of
income resulting from one or more of our vessels being removed
from operation. We also cannot assure you that a claim will be
paid or that we will be able to obtain insurance at commercially
reasonable rates in the future. Further, if we are negligent or
otherwise responsible in connection with any such event, our
insurance may not cover our claim.
In the event that any of the claims arising from any of the
foregoing possible events were assessed against us, all of our
assets could be subject to attachment and other judicial process.
As a result of the significant insurance losses incurred in the
September 11, 2001 attack and related concern regarding
terrorist attacks, global insurance markets increased premiums
and reduced or restricted coverage for terrorist losses
generally. Accordingly, premiums payable for terrorist coverage
have increased substantially and the level of terrorist coverage
has been significantly reduced.
Additionally, new and stricter environmental regulations have
led to higher costs for insurance covering environmental damage
or pollution, and new regulations could lead to similar
increases or even make this type of insurance unavailable.
We generally keep spare vessels in reserve available for relief
if one of our vessels in active service suffers a maritime
disaster or must be unexpectedly removed from service for
repairs. However, these spare vessels may require several days
of sailing before it can replace the other vessel, resulting in
service disruptions and loss of revenue. If more than one of our
vessels in active service suffers a maritime disaster or must be
unexpectedly removed from service, we may have to redeploy
vessels from our other trade routes, or lease one or more
vessels from third parties. We may
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suffer a material adverse effect on our business if we are
unable to rapidly deploy one of our spare vessels and we fail to
provide on-time scheduled service and adequate capacity to our
customers.
Our provision of our shipping and logistics services depends on
the continuing operation of our information technology and
communications systems, especially HITS. We have experienced
brief system failures in the past and may experience brief or
substantial failures in the future. Any failure of our systems
could result in interruptions in our service reducing our
revenue and profits and damaging our brand. Some of our systems
are not fully redundant, and our disaster recovery planning does
not account for all eventualities. The occurrence of a natural
disaster, or other unanticipated problems at our facilities at
which we maintain and operate our systems could result in
lengthy interruptions or delays in our shipping and logistics
services, especially HITS.
Crew members, suppliers of goods and services to a vessel,
shippers of cargo, lenders and other parties may be entitled to
a maritime lien against a vessel for unsatisfied debts, claims
or damages. In many jurisdictions, a claimant may enforce its
lien by either arresting or attaching a vessel through
foreclosure proceedings. Moreover, crew members may place liens
for unpaid wages that can include significant statutory penalty
wages if the unpaid wages remain overdue (e.g., double wages for
every day during which the unpaid wages remain overdue). The
arrest or attachment of one or more of our vessels could result
in a significant loss of earnings and cash flow for the period
during which the arrest or attachment is continuing.
In addition, international vessel arrest conventions and certain
national jurisdictions allow so-called sister-ship arrests,
which allow the arrest of vessels that are within the same legal
ownership as the vessel which is subject to the claim or lien.
Certain jurisdictions go further, permitting not only the arrest
of vessels within the same legal ownership, but also any
associated vessel. In nations with these laws, an association
may be recognized when two vessels are owned by companies
controlled by the same party. Consequently, a claim may be
asserted against us or any of our vessels for the liability of
one or more of the other vessels that we own.
Our operations are vulnerable to disruption as a result of
weather and natural disasters such as bad weather at sea,
hurricanes, typhoons and earthquakes. Such events will interfere
with our ability to provide the on-time scheduled service our
customers demand resulting in increased expenses and potential
loss of business associated with such events. In addition,
severe weather and natural disasters can result in interference
with our terminal operations, and may cause serious damage to
our vessels, loss or damage to containers, cargo and other
equipment and loss of life or physical injury to our employees.
Terminals in the South Pacific Ocean, particularly in Guam, and
terminals on the east coast of the continental U.S. and in
the Caribbean are particularly susceptible to hurricanes and
typhoons. In the recent past, the terminal at our port in Guam
was seriously damaged by a typhoon and our terminal in Puerto
Rico was seriously damaged by a hurricane. These storms resulted
in damage to cranes and other equipment and closure of these
facilities. Earthquakes in Anchorage and in Guam have also
damaged our terminal facilities resulting in delay in terminal
operations and increased expenses. Any such damage will not be
fully covered by insurance.
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Other established or
start-up
shipping operators may enter our markets to compete with us for
business.
Existing non-Jones Act qualified shipping operators whose
container ships sail between ports in Asia and the
U.S. west coast could add Hawaii, Guam or Alaska as
additional stops on their sailing routes for
non-U.S. originated
or destined cargo. Shipping operators could also add Puerto Rico
as a new stop on sailings of their vessels between the
continental U.S. and ports in Europe, the Caribbean, and
Latin America for
non-U.S.
originated or destined cargo. Further, shipping operators could
introduce
U.S.-flagged
vessels into service sailing between Guam and U.S. ports,
including ports on the U.S. west coast or in Hawaii. On
these routes to and from Guam no limits would apply as to the
origin or destination of the cargo dropped off or picked up. In
addition, current or new U.S. citizen shipping operators
may order the building of new vessels by U.S. shipyards and
may introduce these
U.S.-built
vessels into Jones Act qualified service on one or more of our
trade routes. These potential competitors may have access to
financial resources substantially greater than our own. The
entry of a new competitor on any of our trade routes could
result in a significant increase in available shipping capacity
that could have a material adverse effect on our business,
financial condition, results of operations and cash flows.
We intend to exercise our purchase options for up to three of
the vessels that we have chartered upon the expiration of their
charters in January 2015. In addition, we have not determined
whether we will exercise our scheduled purchase options for the
five newly built
U.S.-flag
vessels that we have chartered. There can be no assurance that,
when these options for these eight vessels become exercisable,
the price at which these vessels may be purchased will be
reasonable in light of the fair market value of these vessels at
such time or that we will have the funds required to make these
purchases. As a result, we may not exercise our options to
purchase these vessels. If we do not exercise our options, we
may need to renew our existing charters for these vessels or
charter replacement vessels. There can be no assurance that our
existing charters will be renewed, or, if renewed, that they
will be renewed at favorable rates, or, if not renewed, that we
will be able to charter replacement vessels at favorable rates.
We believe that each of the vessels we currently operate has an
estimated useful life of approximately 45 years from the
year it was built. As of the date hereof, the average age of our
active vessels is approximately 21 years and the average
age of our Jones Act vessels is approximately 31 years. We
expect to incur increasing costs to operate and maintain the
vessels in good condition as they age. Eventually, these vessels
will need to be replaced. We may not be able to replace all of
our existing vessels with new vessels based on uncertainties
related to financing, timing and shipyard availability.
Our vessels are drydocked periodically to comply with regulatory
requirements and to affect maintenance and repairs, if
necessary. The cost of such repairs at each drydocking are
difficult to predict with certainty and can be substantial. Our
established processes have enabled us to make on average six
drydockings per year over the last five years with a minimal
impact on schedule. In addition, our vessels may have to be
drydocked in the event of accidents or other unforeseen damage.
Our insurance may not cover all of these costs. Large
unpredictable repair and drydocking expenses could significantly
decrease our profits.
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Our future success will depend, in significant part, upon the
continued services of Charles G. Raymond, our Chairman of the
Board, President and Chief Executive Officer, M. Mark Urbania,
our Executive Vice President and Chief Financial Officer , John
W. Handy, our Executive Vice President, John V. Keenan, our
President, Horizon Lines, LLC, and Brian W. Taylor, our
President, Horizon Logistics, LLC. The loss of the services of
any of these executive officers could adversely affect our
future operating results because of their experience and
knowledge of our business and customer relationships. If key
employees depart, we may have to incur significant costs to
replace them and our ability to execute our business model could
be impaired if we cannot replace them in a timely manner. We do
not expect to maintain key person insurance on any of our
executive officers.
The nature of our business exposes us to the potential for
disputes, or legal or other proceedings, from time to time
relating to labor and employment matters, personal injury and
property damage, environmental matters and other matters, as
discussed in the other risk factors disclosed in this
prospectus. In addition, as a common carrier, our tariffs,
rates, rules and practices in dealing with our customers are
governed by extensive and complex foreign, federal, state and
local regulations which are the subject of disputes or
administrative
and/or
judicial proceedings from time to time. These disputes,
individually or collectively, could harm our business by
distracting our management from the operation of our business.
If these disputes develop into proceedings, these proceedings,
individually or collectively, could involve significant
expenditures by us or result in significant changes to our
tariffs, rates, rules and practices in dealing with our
customers that could have a material adverse effect on our
future revenue and profitability.
Part of our growth strategy may include pursuing acquisitions.
Any integration process may be complex and time-consuming, may
be disruptive to our business and may cause an interruption of,
or a distraction of our management’s attention from our
business as a result of a number of obstacles, including but not
limited to:
Any of the foregoing obstacles, or a combination of them, could
negatively impact our net income and cash flows.
We completed two acquisitions in 2007. We may not be able to
consummate acquisitions in the future on terms acceptable to us,
or at all. In addition, future acquisitions are accompanied by
the risk that the obligations and liabilities of an acquired
company may not be adequately reflected in the
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historical financial statements of that company and the risk
that those historical financial statements may be based on
assumptions which are incorrect or inconsistent with our
assumptions or approach to accounting policies. Any of such
obligations, liabilities or incorrect or inconsistent
assumptions could adversely impact our results of operations.
Our Horizon Edge employee team was formed in 2006 to develop and
implement a program over a two and a half year period, extending
through 2008, with the combined goals of reducing operating
costs and enhancing customer focus and service efficiency. With
the assistance of outside advisors, we are targeting
improvements in maintenance management, marine productivity,
supply chain management and information technology. There can be
no assurance that we will realize the anticipated cost savings
related to this initiative. Also, we may not be able to sustain
any realized costs savings resulting from the Horizon Edge
program in subsequent years.
As of December 23, 2007, on a consolidated basis, we had
(i) approximately $579.1 million of outstanding
long-term debt (exclusive of outstanding letters of credit with
an aggregate face amount of $6.3 million), including
capital lease obligations, (ii) approximately
$192.8 million of aggregate trade payables, accrued
liabilities and other balance sheet liabilities (other than the
long-term debt referred to above) and (iii) a
debt-to-equity ratio of approximately 3.7:1.0.
Because we have substantial debt, we require significant amounts
of cash to fund our debt service obligations. Our ability to
generate cash to meet scheduled payments or to refinance our
obligations with respect to our debt depends on our financial
and operating performance which, in turn, is subject to
prevailing economic and competitive conditions and to the
following financial and business factors, some of which may be
beyond our control:
If our cash flow and capital resources are insufficient to fund
our debt service obligations, we could face substantial
liquidity problems and might be forced to reduce or delay
capital expenditures, dispose of material assets or operations,
seek to obtain additional equity capital, or restructure or
refinance our indebtedness. Such alternative measures may not be
successful and may not permit us to meet our scheduled debt
service obligations. In particular, in the event that we are
required to dispose of material assets or operations to meet our
debt service obligations, we cannot be sure as to the timing of
such dispositions or the proceeds that we would realize from
those dispositions. The value realized from such dispositions
will depend on market conditions and the availability of buyers,
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and, consequently, any such disposition may not, among other
things, result in sufficient cash proceeds to repay our
indebtedness. Also, the senior credit facility contains
covenants that may limit our ability to dispose of material
assets or operations or to restructure or refinance our
indebtedness. Further, we cannot provide assurance that we will
be able to restructure or refinance any of our indebtedness or
obtain additional financing, given the uncertainty of prevailing
market conditions from time to time, our high levels of
indebtedness and the various debt incurrence restrictions
imposed by the senior credit facility. If we are able to
restructure or refinance our indebtedness or obtain additional
financing, the economic terms on which such indebtedness is
restructured, refinanced or obtained may not be favorable to us.
We may incur substantial indebtedness in the future. The terms
of the senior credit facility permit us to incur or guarantee
additional indebtedness under certain circumstances. As of
December 23, 2007, we had approximately $121.7 million
of additional borrowing availability under the revolving credit
facility, subject to compliance with the financial and other
covenants and the other terms set forth therein. In addition,
our senior credit facility allows for additional term loan
borrowing availability of up to $150.0 million if certain
covenants are met. Our incurrence of additional indebtedness
would intensify the risk that our future cash flow and capital
resources may not be sufficient for payments of interest on and
principal of our substantial indebtedness.
The senior credit facility contains covenants that, among other
things, restrict the ability of us and our subsidiaries to:
In addition, under the senior credit facility, we are required
to comply with financial covenants, comprised of leverage and
interest coverage ratio requirements. Our ability to comply with
these covenants will depend on our ongoing financial and
operating performance, which in turn will be subject to economic
conditions and to financial, market and competitive factors,
many of which are beyond our control, and will be substantially
dependent on our financial and operating performance which, in
turn, is subject to prevailing economic and competitive
conditions and to various financial and business factors,
including those discussed in the other risk factors disclosed in
this
Form 10-K,
some of which may be beyond our control.
Under our senior credit facility we are required, subject to
certain exceptions, to make mandatory prepayments of amounts
under the senior credit facility with all or a portion of the
net proceeds of certain asset sales and events of loss, certain
debt issuances, certain equity issuances and a portion of their
excess cash flow. Our circumstances at the time of any such
prepayment, particularly our liquidity and ability to access
funds, cannot be anticipated at this time. Any such prepayment
could, therefore, have a material adverse effect on us.
Mandatory prepayments are first applied to the outstanding term
loans and, after all of the term loans are paid in full, then
applied to reduce the loans
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under the revolving credit facility with corresponding
reductions in revolving credit facility commitments.
The required payments on our substantial indebtedness and future
indebtedness, as well as the restrictive covenants contained in
the senior credit facility could significantly impair our
operating and financial condition. For example, these required
payments and restrictive covenants could:
We may incur substantial indebtedness in the future. Our
incurrence of additional indebtedness would intensify the risks
described above.
The revolving credit and term loan portions of our senior credit
facility bear interest at variable rates. As of
December 23, 2007, we had outstanding a $125.0 million
term loan and $122.0 million under the revolving credit
facility, which bear interest at variable rates. The interest
rates applicable to the senior credit facility vary with the
prevailing corporate base rate offered by the administrative
agent under the senior credit facility or with LIBOR. If these
rates were to increase significantly, our ability to borrow
additional funds may be reduced and the risks related to our
substantial indebtedness would intensify. Each quarter point
change in interest rates would result in a $0.3 million
change in annual interest expense on each of the term loan and
the revolving credit facility. Accordingly, a significant rise
in interest rates would adversely affect our financial results.
Our certificate of incorporation contains provisions voiding
transfers of shares of any class or series of our capital stock
that would result in
non-U.S. citizens,
in the aggregate, owning in excess of 19.9% of the shares of
such class or series. In the event that this transfer
restriction would be ineffective, our certificate of
incorporation provides for the automatic transfer of such excess
shares to a trust specified therein. These trust provisions also
apply to excess shares that would result from a change in the
status of a record or beneficial owner of shares of our capital
stock from a U.S. citizen to a
non-U.S. citizen.
In the event that these trust transfer provisions would also be
ineffective, our certificate of incorporation permits us to
redeem such excess shares. However, we may not be able to redeem
such excess shares because our operations may not have generated
sufficient excess cash flow to fund such a redemption. If such a
situation occurs, there is no guarantee that we will be able
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to obtain the funds necessary to effect such a redemption on
terms satisfactory to us or at all. The senior credit facility
permits upstream payments from our subsidiaries, subject to
exceptions, to the Company to fund redemptions of excess shares.
If, for any of the foregoing reasons or otherwise, we are unable
to effect such a redemption when such ownership of shares by
non-U.S. citizens
is in excess of 25.0% of such class or series, or otherwise
prevent
non-U.S. citizens
in the aggregate from owning shares in excess of 25.0% of any
such class or series, or fail to exercise our redemption right
because we are unaware that such ownership exceeds such
percentage, we will likely be unable to comply with applicable
maritime laws. If all of the citizenship-related safeguards in
our certificate of incorporation fail at a time when ownership
of shares of any class or series of our stock is in excess of
25.0% of such class or series, we will likely be required to
suspend our Jones Act operations. Any such actions by
governmental authorities would have a severely detrimental
impact on our results of operations.
We require continuing, significant cash flow in order for us to
make payments of regular dividends to our stockholders. However,
we have no operations of our own and have derived, and will
continue to derive, all of our revenues and cash flow from our
subsidiaries. Our subsidiaries are separate and distinct legal
entities and have no obligation, contingent or otherwise, to
make funds available to us. They may not have sufficient funds
or assets to permit payments to us in amounts sufficient to fund
future dividend payments. Also, our subsidiaries are subject to
contractual restrictions (including with their secured and
unsecured creditors) that may limit their ability to upstream
cash indirectly or directly to us. Thus, there is a significant
risk that we may not have the requisite funds to make regular
dividend payments in the future. In addition, we may elect not
to pay dividends as a substantial portion of our future earnings
will be utilized to make payments of principal and interest on
our indebtedness and to fund the development and growth of our
business.
None
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We lease all of our facilities, including our terminal and
office facilities located at each of the ports upon which our
vessels call as well as our central sales and administrative
offices and regional sales offices. The following table sets
forth the locations, descriptions, and square footage of our
significant facilities as of December 23, 2007:
In the ordinary course of business, from time to time, the
Company and its subsidiaries become involved in various legal
proceedings which management believes will not have a material
adverse effect on the Company’s financial position or
results of operations. These relate primarily to claims for loss
or damage to cargo, employees’ personal injury claims, and
claims for loss or damage to the person or property of third
parties. The Company and its subsidiaries generally maintain
insurance, subject to customary deductibles or self-retention
amounts,
and/or
reserves to cover these types of claims. The Company and its
subsidiaries also, from time to time, become involved in routine
employment-related disputes and disputes with parties with which
they have contracts.
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For several years, there have been two actions pending before
the Surface Transportation Board (“STB”) involving HL.
The first action, brought by the Government of Guam in 1998 on
behalf of itself and its citizens against HL and Matson
Navigation Co. (“Matson”), seeks a ruling from the STB
that HL’s Guam shipping rates, which are based on published
tariff rates, during
1996-1998
were “unreasonable” under the Interstate Commerce
Commission Termination Act of 1995 (“ICCTA”), and an
order awarding reparations to Guam and its citizens. On
September 18, 2007, the Government of Guam filed a motion
to dismiss its complaint with the STB citing the STB’s
ruling on the methodology for determining the rate
reasonableness. The Government of Guam stated it could no longer
proceed with its rate challenge. As a result, this case was
dismissed by the STB on October 12, 2007.
The second action before the STB involving HL, brought by DHX,
Inc. (“DHX”) in 1999 against HL and Matson, challenged
the reasonableness of certain rates and practices of HL and
Matson. DHX was seeking $11.0 million in damages. On
December 13, 2004, the STB (i) dismissed all of the
allegations of unlawful activity contained in DHX’s
complaint; (ii) found that HL met all of its tariff filing
obligations; and (iii) reaffirmed the STB’s earlier
holdings that the anti-discrimination provisions of the
Interstate Commerce Act, which were repealed by the ICCTA, are
no longer applicable to HL’s business. On June 13,
2005, the STB issued a decision that denied DHX’s motion
for reconsideration and denied the alternative request by DHX
for clarification of the STB’s December 13, 2004
decision. On August 5, 2005, DHX filed a Notice of Appeal
with the United States Court of Appeals for the Ninth Circuit
challenging the STB’s order dismissing its complaint. DHX
filed an appellate brief on November 10, 2005. HL submitted
its response to the DHX brief on January 25, 2006, and oral
argument was held on June 4, 2007. On August 30, 2007,
the court of appeals affirmed, in all material respects, the
decision of the STB. The Company has been advised by DHX that it
does not intend to pursue this matter further.
There were no matters submitted to a vote of security holders
through the solicitation of proxies or otherwise during the
fourth quarter of fiscal 2007.
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The Company’s Common Stock is traded on the New York Stock
Exchange under the ticker symbol HRZ. As of January 31,
2008, there were approximately 4,907 holders of record of the
Common Stock. The following table sets forth the intraday high
and low sales price of the Company’s common stock on the
New York Stock Exchange for the fiscal periods presented.
On January 31, 2008, our Board of Directors declared a
quarterly cash dividend of $0.11 per share for our common stock,
which is payable on March 15, 2008 to holders of record at
the close of business on March 1, 2008. We regularly pay
quarterly dividends as set forth in the table above. We
currently expect that comparable cash dividends will continue to
be paid in the future although we have no commitment to do so.
On August 8, 2007, the Company sold $330.0 million
aggregate principal amount of its 4.25% Convertible Senior
Notes due 2012 (the “Notes”) through offerings to
qualified institutional buyers pursuant to Rule 144A under
the Securities Act of 1933, as amended. The Company offered and
sold the Notes to the initial purchasers in reliance on the
exemption from registration provided by Section 4(2) of the
Securities Act. The initial purchasers then sold the Notes to
qualified institutional buyers pursuant to the exemption from
registration provided by Rule 144A under the Securities
Act. The Notes and the underlying common stock issuable upon
conversion of the Notes have not been registered under the
Securities Act and may not be offered or sold in the
U.S. absent registration or an applicable exemption from
registration requirements. The Company used
(i) $28.6 million of the proceeds to purchase
1,000,000 shares of the Company’s common stock in
privately negotiated transactions, (ii) $52.5 million
of the proceeds to acquire an option to receive the
Company’s common stock from the initial purchasers,
(iii) $10.6 million of the proceeds to pay the initial
purchasers’ discount and offering expenses and
(iv) the balance of the proceeds to purchase a portion of
the outstanding 9% senior notes and 11% senior
discount notes purchased in the Company’s tender offer.
On August 8, 2007, in conjunction with the offering of the
Notes, the Company also entered into warrant transactions
whereby the Company sold warrants to acquire, subject to
customary anti-dilution adjustments, approximately
4.6 million shares of the Company’s common stock at a
strike price of approximately $51.41 per share in reliance on
the exemption from registration provided by Section 4(2) of
the Securities Act. Neither the warrants nor the underlying
common stock issuable upon conversion of the warrants have been
registered under the Securities Act and may not be offered or
sold in the U.S. absent registration or an applicable
exemption from registration requirements. The Company received
aggregate proceeds of approximately $11.9 million from the
sale of the warrants.
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The following table provides information as of December 23,
2007 regarding shares of the Company’s common stock
issuable pursuant to its stock option plan:
The following table provides information about purchases made by
the Company of its common stock for each month included in the
fourth quarter of 2007:
ISSUER
PURCHASES OF EQUITY SECURITIES
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The below graph compares the cumulative total shareholder return
of the public common stock of Horizon Lines, Inc. to the
cumulative total returns of the Dow Jones U.S. Industrial
Transportation Index and the S&P 500 Index for the period
in which the Company’s stock has been publicly traded.
Cumulative total returns assume reinvestment of dividends.
Comparison of
Cumulative Total Return*
Notwithstanding anything to the contrary set forth in any of our
filings under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, that might
incorporate other filings with the Securities and Exchange
Commission, including this annual report on
Form 10-K,
in whole or in part, the Total Return Comparison Graph shall not
be deemed incorporated by reference into any such filings.
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The five year selected financial data below should be read in
conjunction with “Management’s Discussion and Analysis
of Financial Condition and Results of Operations,”
beginning on page 35 of this
Form 10-K,
and our consolidated financial statements and the related notes
appearing in Item 15 of this
Form 10-K.
All combined and consolidated financial data for the period (or
any portion thereof) from December 23, 2002 through
February 26, 2003 reflect the combined company CSX Lines,
LLC and its wholly owned subsidiaries, CSX Lines of Puerto Rico,
Inc., and the domestic liner business of SL Service, Inc.
(formerly known as
Sea-Land
Service, Inc.), all of which were stand-alone wholly owned
entities of CSX Corporation (“Predecessor B”). All
combined and consolidated financial data for the period (or any
portion thereof) from February 27, 2003 through
July 6, 2004 reflect Horizon Lines Holding on a
consolidated basis (“Predecessor A”). All consolidated
financial data for the periods (or any portion thereof) from
July 7, 2004 through December 23, 2007 reflect the
Company on a consolidated basis.
We have a 52- or 53-week fiscal year (every sixth or seventh
year) that ends on the Sunday before the last Friday in
December. The twelve months ended December 21, 2003, and
the years ended December 25, 2005, December 24, 2006
and December 23, 2007 each consisted of 52 weeks. The
twelve months ended December 26, 2004 consisted of
53 weeks.
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Selected Financial Data is as follows:
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The EBITDA amounts presented above contain certain charges that
our management team excludes when evaluating our operating
performance, for making day to day operating decisions and that
are excluded from EBITDA when determining the payment of
discretionary bonuses:
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The following discussion and analysis of our consolidated
financial condition and results of operations should be read in
conjunction with Selected Consolidated and Combined Financial
Data and our annual audited consolidated financial statements
and related notes thereto included elsewhere in this
Form 10-K.
The following discussion includes forward-looking statements
that involve certain risks and uncertainties. For additional
information regarding forward looking statements, see the Safe
Harbor Statement on page (i) of this
Form 10-K.
Operating revenue increased by $49.6 million or 4.3% for
the year ended December 23, 2007 from the year ended
December 24, 2006. This revenue growth is primarily
attributable to unit revenue improvements resulting from
favorable changes in cargo mix, general rate increases, revenue
related to acquisitions, increased bunker fuel and intermodal
fuel surcharges to help offset increases in fuel costs, as well
as increased slot charter revenue. This revenue increase is
offset partially by lower container volumes shipped.
Operating expenses increased by $50.4 million or 4.8% for
the year ended December 23, 2007 from the year ended
December 24, 2006. The increase in operating expenses is
primarily due to higher vessel operating costs due to the
deployment of the new vessels and an increase in the cost of
fuel, partially offset by a decrease in variable operating costs
due to lower volumes.
Operating revenue increased by $60.7 million or 5.5% for
the year ended December 24, 2006 from the year ended
December 25, 2005. This revenue growth is primarily
attributable to rate improvements resulting from favorable
changes in cargo mix, general rate increases, increased bunker
fuel and intermodal fuel surcharges to help offset increases in
fuel costs, and revenue increases from non-transportation and
other revenue services. This revenue increase is offset
partially by lower container volumes primarily attributable to
soft market conditions in Puerto Rico.
Operating expenses increased by $11.4 million or 1.1% for
the year ended December 24, 2006 from the year ended
December 25, 2005. The increase in operating expenses is
primarily due to increases in vessel fuel expense and rail and
truck transportation costs as a result of increases in fuel
prices, offset by a decrease in selling, general, and
administrative expenses and other variable operating expenses.
The decline in selling, general, and administrative expenses is
primarily due to lower stock-based compensation charges, the
elimination of the Castle Harlan management fee, and a decrease
in variable operating costs as a result of lower revenue
container volumes shipped.
We believe that we are the nation’s leading Jones Act
container shipping and integrated logistics company, accounting
for approximately 38% of total U.S. marine container
shipments from the continental U.S. to Alaska, Puerto Rico
and Hawaii, constituting the three non-contiguous Jones Act
markets, and to Guam and Micronesia. Under the Jones Act, all
vessels transporting cargo between
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U.S. ports must, subject to limited exceptions, be built in
the U.S., registered under the U.S. flag, manned by
predominantly U.S. crews, and owned and operated by
U.S.-organized
companies that are controlled and 75% owned by
U.S. citizens. We own or lease 21 vessels, 16 of which
are fully qualified Jones Act vessels, and approximately 22,000
cargo containers. We also provide comprehensive shipping and
logistics services in our markets. We have long-term access to
terminal facilities in each of our ports, operating our
terminals in Alaska, Hawaii, and Puerto Rico and contracting for
terminal services in the six ports in the continental
U.S. and in the ports in Guam, Hong Kong, Yantian and
Taiwan.
Our long operating history dates back to 1956, when
Sea-Land
pioneered the marine container shipping industry and established
our business. In 1958, we introduced container shipping to the
Puerto Rico market and in 1964 we pioneered container shipping
in Alaska with the first year-round scheduled vessel service. In
1987, we began providing container shipping services between the
U.S. west coast and Hawaii and Guam through our acquisition
from an existing carrier of all of its vessels and certain other
assets that were already serving that market. Today, as the only
Jones Act vessel operator with an integrated organization
serving Alaska, Puerto Rico, and Hawaii, we are uniquely
positioned to serve our customers that require shipping and
logistics services in more than one of these markets.
On February 27, 2003, Horizon Lines Holding (which at the
time was indirectly majority-owned by Carlyle-Horizon Partners,
L.P.) acquired from CSX Corporation (“CSX”), which was
the successor to
Sea-Land,
84.5% of CSX Lines, LLC (“Predecessor A”), and 100% of
CSX Lines of Puerto Rico, Inc. (“Predecessor Puerto Rico
Entity”), which together constitute our business today.
This transaction is referred to in this
Form 10-K
as the February 27, 2003 purchase transaction. CSX Lines,
LLC is now known as Horizon Lines, LLC and CSX Lines of Puerto
Rico, Inc. is now known as Horizon Lines of Puerto Rico, Inc.
Horizon Lines, Inc. (the “Company”; and together with
its subsidiaries, “We”) operates as a holding company
for Horizon Lines, LLC (“HL”), a Delaware limited
liability company and wholly-owned subsidiary, Horizon
Logistics, LLC (“Horizon Logistics”), a Delaware
limited liability company and wholly-owned subsidiary, and
Horizon Lines of Puerto Rico, Inc. (“HLPR”), a
Delaware corporation and wholly-owned subsidiary. The Company
was formed as an acquisition vehicle to acquire, on July 7,
2004, the equity interest in Horizon Lines Holding Corp., a
Delaware corporation (“HLHC” or “Horizon Lines
Holding”). The foregoing acquisition and related financing
and other transactions, referred to in this
Form 10-K
collectively as the “Acquisition-Related Transactions”
or “merger,” included a merger whereby Horizon Lines
Holding became a direct wholly-owned subsidiary of the Company.
The Company was formed in connection with the
Acquisition-Related Transactions, and has no independent
operations. Consequently, the accompanying consolidated
financial statements include the consolidated accounts of the
Company as of December 23, 2007, December 24, 2006 and
December 25, 2005 and for the years ended December 23,
2007, December 24, 2006 and December 25, 2005.
Certain prior period balances have been reclassified to conform
with the current period presentation.
Fiscal
Year
We have a 52- or 53-week (every sixth or seventh year) fiscal
year that ends on the Sunday before the last Friday in December.
The fiscal years ended December 23, 2007, December 24,
2006 and December 25, 2005 each consisted of 52 weeks.
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The preparation of our financial statements in conformity with
accounting principles generally accepted in the United States of
America requires us to make estimates and assumptions in the
reported amounts of revenues and expenses during the reporting
period and in reporting the amounts of assets and liabilities,
and disclosures of contingent assets and liabilities at the date
of our financial statements. Since many of these estimates and
assumptions are based on future events which cannot be
determined with certainty, the actual results could differ from
these estimates.
We believe that the application of our critical accounting
policies, and the estimates and assumptions inherent in those
policies, are reasonable. These accounting policies and
estimates are constantly re-evaluated and adjustments are made
when facts or circumstances dictate a change. Historically, we
have found the application of accounting policies to be
appropriate and actual results have not differed materially from
those determined using necessary estimates.
We account for transportation revenue based upon method two
under Emerging Issues Task Force
No. 91-9
“Revenue and Expense Recognition for Freight Services in
Process.” Under this method we record transportation
revenue for the cargo when shipped and an expense accrual for
the corresponding costs to complete delivery when the cargo
first sails from its point of origin. We believe that this
method of revenue recognition does not result in a material
difference in reported net income on an annual or quarterly
basis as compared to recording transportation revenue between
accounting periods based upon the relative transit time within
each respective period with expenses recognized as incurred.
We recognize revenue and related costs of sales for our
terminal, logistics and other services upon completion of
services.
The Company maintains an allowance for doubtful accounts based
upon the expected collectibility of accounts receivable. The
Company monitors its collection risk on an ongoing basis through
the use of credit reporting agencies. The Company does not
require collateral from its trade customers.
In addition, the Company maintains an allowance for revenue
adjustments consisting of amounts reserved for billing rate
changes that are not captured upon load initiation. These
adjustments generally arise: (1) when the sales department
contemporaneously grants small rate changes (“spot
quotes”) to customers that differ from the standard rates
in the system; (2) when freight requires dimensionalization
or is reweighed resulting in a different required rate;
(3) when billing errors occur; and (4) when data entry
errors occur. When appropriate, permanent rate changes are
initiated and reflected in the system. These revenue adjustments
are recorded as a reduction to revenue.
We purchase insurance coverage for a portion of our exposure
related to certain employee injuries (workers’ compensation
and compensation under the Longshore and Harbor Workers’
Compensation Act), vehicular and vessel collision, accidents and
personal injury and cargo claims. Most insurance arrangements
include a level of self-insurance (self-retention or deductible)
applicable to each claim or vessel voyage, but provide an
umbrella policy to limit our exposure to catastrophic claim
costs. The amounts of self-insurance coverage change from time
to time. Our current insurance coverage specifies that the
self-insured limit on claims ranges from $0 to $1,000,000. Our
safety and claims personnel work directly with representatives
from our insurance companies to continually update the
anticipated residual exposure for each claim. In establishing
accruals and reserves for claims and insurance expenses, we
evaluate and monitor each claim individually, and we use factors
such as historical experience, known trends and third-party
estimates to determine the appropriate
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reserves for potential liability. Changes in the perceived
severity of previously reported claims, significant changes in
medical costs and legislative changes affecting the
administration of our plans could significantly impact the
determination of appropriate reserves.
Under Statement of Financial Accounting Standards
(“SFAS”) No. 142 “Goodwill and Other
Intangible Assets,” goodwill and other intangible assets
with indefinite lives are not amortized but are subject to
annual undiscounted cash flow impairment tests. If there is an
apparent impairment, a new fair value of the reporting unit
would be determined. If the new fair value is less than the
carrying amount, an impairment loss would be recognized.
The majority of the customer contracts and trademarks on the
balance sheet as of December 23, 2007 were valued on
July 7, 2004, as part of the Acquisition-Related
Transactions, using the income appraisal methodology. The income
appraisal methodology includes a determination of the present
value of future monetary benefits to be derived from the
anticipated income, or ownership, of the subject asset. The
value of our customer contracts includes the value expected to
be realized from existing contracts as well as from expected
renewals of such contracts and is calculated using unweighted
and weighted total undiscounted cash flows as part of the income
appraisal methodology. The value of our trademarks and service
marks is based on various factors including the strength of the
trade or service name in terms of recognition and generation of
pricing premiums and enhanced margins. We amortize customer
contracts and trademarks and service marks on a straight-line
method over the estimated useful life of four to fifteen years.
We evaluate these assets annually for potential impairment in
accordance with SFAS No. 142.
Under U.S. Coast Guard Rules, administered through the
American Bureau of Shipping’s alternative compliance
program, all vessels must meet specified seaworthiness standards
to remain in service carrying cargo between U.S. marine
terminals. Vessels must undergo regular inspection, monitoring
and maintenance, referred to as drydocking, to maintain the
required operating certificates. These drydockings generally
occur every two and a half years, or twice every five years.
Because drydockings enable the vessel to continue operating in
compliance with U.S. Coast Guard requirements, the costs of
these scheduled drydockings are customarily deferred and
amortized over a
30-month
period beginning with the accounting period following the
vessel’s release from drydock.
We also take advantage of vessel drydockings to perform normal
repair and maintenance procedures on our vessels. These routine
vessel maintenance and repair procedures are expensed as
incurred. In addition, we will occasionally, during a vessel
drydocking, replace vessel machinery or equipment and perform
procedures that materially enhance capabilities of a vessel. In
these circumstances, the expenditures are capitalized and
depreciated over the estimated useful lives.
Deferred tax assets represent expenses recognized for financial
reporting purposes that may result in tax deductions in the
future and deferred tax liabilities represent expense recognized
for tax purposes that may result in financial reporting expenses
in the future. Certain judgments, assumptions and estimates may
affect the carrying value of the valuation allowance and income
tax expense in the consolidated financial statements. We record
an income tax valuation allowance when the realization of
certain deferred tax assets, net operating losses and capital
loss carryforwards is not likely. In conjunction with the
election of tonnage tax, we revalued our deferred taxes to
accurately reflect the rates at which we expect such items to
reverse in future periods.
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We account for uncertain tax positions in accordance with
Financial Accounting Standards Board (the “FASB”)
Interpretation No. 48 (“FIN 48”),
“Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109”. The
application of income tax law is inherently complex. As such, we
are required to make many assumptions and judgments regarding
our income tax positions and the likelihood whether such tax
positions would be sustained if challenged. Interpretations and
guidance surrounding income tax laws and regulations change over
time. As such, changes in our assumptions and judgments can
materially affect amounts recognized in the consolidated
financial statements.
In conjunction with the initial public offering, we early
adopted SFAS No. 123R (“SFAS 123R”),
“Share-Based Payment”, using the modified prospective
approach as of September 30, 2005. SFAS 123R covers a
wide range of share-based compensation arrangements including
stock options, restricted share plans, and employee stock
purchase plans.
In applying SFAS 123R, the value of each equity-based award
is estimated on the date of grant using the Black-Scholes
option-pricing model. The Black-Scholes model takes into account
volatility in the price of our stock, the risk-free interest
rate, the estimated life of the equity-based award, the closing
market price of our stock and the exercise price. Due to the
relatively short period of time since our stock became publicly
traded, we base our estimates of stock price volatility on the
average of (i) our historical stock price over the period
in which it has been publicly traded and (ii) historical
volatility of similar entities commensurate with the expected
term of the equity-based award; however, this estimate is
neither predictive nor indicative of the future performance of
our stock. The estimates utilized in the Black-Scholes
calculation involve inherent uncertainties and the application
of management judgment. In addition, we are required to estimate
the expected forfeiture rate and only recognize expense for
those options expected to vest.
We capitalize property and equipment as permitted or required by
applicable accounting standards, including replacements and
improvements when costs incurred for those purposes extend the
useful life of the asset. We charge maintenance and repairs to
expense as incurred. Depreciation on capital assets is computed
using the straight-line method and ranges from 3 to
40 years. Our management makes assumptions regarding future
conditions in determining estimated useful lives and potential
salvage values. These assumptions impact the amount of
depreciation expense recognized in the period and any gain or
loss once the asset is disposed.
We evaluate each of our long-lived assets for impairment using
undiscounted future cash flows relating to those assets whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. When undiscounted
future cash flows are not expected to be sufficient to recover
the carrying amount of an asset, the asset is written down to
its fair value.
In September 2006, the FASB issued SFAS No. 157,
“Fair Value Measurements” (“SFAS 157”).
SFAS 157 addresses how companies should measure fair value
when they are required to use a fair value measure for
recognition or disclosure purposes under generally accepted
accounting principles. As a result of SFAS 157 there is now
a common definition of fair value to be used throughout GAAP.
The FASB believes that the new standard will make the
measurement of fair value more consistent and comparable and
improve disclosures about those measures. The provisions of
SFAS 157 were to be effective for fiscal years beginning
after November 15, 2007. On December 14, 2007, the
FASB issued proposed FSP
FAS 157-b
which would delay the effective date of SFAS 157 for all
nonfinancial assets and nonfinancial liabilities, except those
that are recognized or disclosed at fair value in the
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financial statements on a recurring basis (at least annually).
This proposed FSP partially defers the effective date of
Statement 157 to fiscal years beginning after November 15,
2008, and interim periods within those fiscal years for items
within the scope of this FSP. Effective for fiscal 2008, the
Company will adopt SFAS 157 except as it applies to those
nonfinancial assets and nonfinancial liabilities as noted in
proposed FSP
FAS 157-b.
The Company is in the process pf determining the financial
impact the partial adoption of SFAS 157 will have on its
results of operations and financial position.
The FASB has published for comment a clarification on the
accounting for convertible debt instruments that may be settled
in cash (including partial cash settlement) upon conversion,
such as the convertible notes we issued in August 2007
(“FSP APB
14-a”).
The proposed FSP would require the issuer to separately account
for the liability and equity components of the instrument in a
manner that reflects the issuer’s non-convertible debt
borrowing rate. As a result, the liability component would be
recorded at a discount reflecting its below market coupon
interest rate, and the liability component would subsequently be
accreted to its par value over its expected life, with the rate
of interest that reflects the market rate at issuance being
reflected in the results of operations. The proposed change in
methodology will affect the calculations of net income and
earnings per share. The proposed effective date of FSP APB
14-a was
originally for fiscal years beginning after December 15,
2007 and did not permit early application. In November 2007, the
FASB announced it expects to begin its redeliberations of the
guidance in the proposed FSP beginning in January 2008.
Therefore, it is expected that final guidance will not be issued
until at least the first quarter of 2008 and it is unlikely the
proposed effective date for fiscal years beginning after
December 15, 2007 will be retained. The proposed transition
guidance requires retrospective application to all periods
presented and does not grandfather existing instruments. The
Company is in the process of determining the impact of this
proposed FSP.
In February 2007, the FASB issued SFAS No. 159,
“The Fair Value Option for Financial Assets and Financial
Liabilities-including an amendment of FASB Statement
No. 115” (“SFAS 159”). SFAS 159
allows an entity the irrevocable option to elect fair value for
the initial and subsequent measurement of certain financial
assets and liabilities under an
instrument-by-instrument
election. Subsequent measurements for the financial assets and
liabilities an entity elects to fair value will be recognized in
the results of operations. SFAS 159 also establishes
additional disclosure requirements. This standard is effective
for fiscal years beginning after November 15, 2007. The
Company is in the process of determining the financial impact
the adoption of SFAS 159 will have on its results of
operations and financial position.
In December 2007, the FASB issued SFAS No. 141R,
“Business Combinations” (“SFAS 141R”).
SFAS 141R replaces SFAS 141 and establishes principles
and requirements for how an acquirer recognizes and measures in
its financial statements the identifiable assets acquired, the
liabilities assumed, any non controlling interest in the
acquiree and the goodwill acquired. SFAS 141R also
establishes disclosure requirements which will enable users to
evaluate the nature and financial effects of the business
combination. This standard is effective for fiscal years
beginning after December 15, 2008.
In December 2007, the FASB issued SFAS No. 160,
“Noncontrolling Interests in Consolidated Financial
Statements” (“SFAS 160”). SFAS 160
establishes accounting and reporting standards for ownership
interests in subsidiaries held by parties other than the parent,
the amount of consolidated net income attributable to the parent
and to the noncontrolling interest, changes in a parent’s
ownership interest and the valuation of retained noncontrolling
equity investments when a subsidiary is deconsolidated.
SFAS 160 also establishes reporting requirements that
provide sufficient disclosures that clearly identify and
distinguish between the interests of the parent and the
interests of the noncontrolling owners. This standard is
effective for fiscal years beginning after December 15,
2008.
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On February 1, 2008, the Company filed a shelf registration on
Form S-3.
The registration statement, which became effective upon filing
with the U.S. Securities and Exchange Commission,
registered for resale the $330.0 million aggregate
principal amount of 4.25% convertible senior notes due 2012 and
the shares issuable upon conversion of the notes that were part
of a private placement completed on August 8, 2007. The
notes pay interest semiannually at a rate of 4.25% per annum.
The notes are convertible under certain circumstances into cash
up to the principal amount of the notes, and shares of the
Company’s common stock or cash (at the option of the
Company) for any conversion value in excess of the principal
amount at an initial conversion rate of 26.9339 shares of
the Company’s common stock per $1,000 principal amount of
notes. This represents an initial conversion price of
approximately $37.13 per share. Concurrent with the issuance of
the notes, the Company entered into separate note hedge and
warrant transactions which were structured to reduce the
potential future share dilution associated with the conversion
of notes. The cost of the note hedge transactions was
approximately $52.5 million, $33.4 million net of tax
benefits, and the Company received proceeds of
$11.9 million related to the sale of the warrants.
The issuance of the convertible senior notes was part of a
series of transactions by which the Company refinanced its
capital structure. On August 8, 2007, the Company entered
into a credit agreement providing for a $250.0 million five
year revolving credit facility and a $125.0 million term
loan with various financial lenders (the “Senior Credit
Facility”). The Senior Credit Facility obligations are
secured by substantially all of the Company’s assets. The
terms of the Senior Credit Facility also provide for a
$20.0 million swingline subfacility and a
$50.0 million letter of credit subfacility.
On July 17, 2007, the Company launched a cash tender offer
for any and all of its outstanding 9% senior notes and
11% senior discount notes. On August 13, 2007, the
Company completed the cash tender offer with 100% of the
outstanding principal amount of the notes validly tendered. The
Company used proceeds from the sale of the convertible notes and
borrowings under the Senior Credit Facility to fund the cash
tender offer for the 9% senior notes and the
11% senior discount notes.
On November 19, 2007, the Company’s Board of Directors
authorized the Company to commence a stock repurchase program to
buy back up to $50.0 million worth of its common stock. The
program allowed the Company to purchase shares through open
market repurchases and privately negotiated transactions at a
price of $26.00 per share or less until the program’s
expiration on December 31, 2008. The Company acquired
1,172,700 shares at a total cost of $20.6 million
under this program during the fourth quarter of 2007. The
Company completed its share repurchase program in the first
quarter of 2008, acquiring an additional 1,627,500 shares
at a total cost of $29.4 million. Although the Company does
not currently intend to repurchase additional shares, the
Company will continue to evaluate market conditions and may,
subject to approval by the Company’s Board of Directors,
repurchase additional shares of its common stock in the future.
On August 22, 2007, the Company completed the acquisition
of Montebello Management, LLC (D/B/A Aero Logistics) (“Aero
Logistics”), a full service third party logistics provider,
for approximately $27.3 million in cash. As of
December 23, 2007, $0.5 million is held in escrow
pending achievement of 2008 earnings targets and has been
excluded from the purchase price. In addition, subsequent to
December 23, 2007, the Company completed its assessment of
the working capital received and released $0.4 million
originally placed into escrow and paid an additional
$0.2 million. The additional $0.2 million increased
the total purchase to $27.5 million. Aero Logistics designs
and manages custom freight shipping and special handling
programs for customers in service-sensitive industries including
high-tech, healthcare, energy, mining, retail and apparel. Aero
Logistics offers an array of multi-modal transportation services
and fully integrated logistics solutions to satisfy the unique
needs of its customers. Aero Logistics also operates a fleet of
approximately 90 GPS-equipped trailers under the direction of
their Aero Transportation division, which provides expedited
less-than-truckload (LTL) and full truckload (FTL) service
throughout North America.
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On June 26, 2007, the Company completed the purchase of
Hawaii Stevedores, Inc. (“HSI”) for approximately
$4.1 million in cash, net of cash acquired. HSI, which
operates as a subsidiary of the Company, is a full service
provider of stevedoring and marine terminal services in Hawaii
and has operations in all of the commercial ports on Oahu and
the Island of Hawaii.
In 2007, a draft of a Technical Corrections Act proposed
redefining the Puerto Rico trade such that it would not qualify
for application of the tonnage tax. However, the Technical
Corrections Act, as passed, did not include any language that
will adversely affect our utilization of the tonnage tax regime.
During the first half of 2007, the Company modified its trade
route between the U.S. west coast and Asia and Guam
commencing with the deployment of newly acquired vessels. This
deployment enabled the Company to redeploy Jones Act qualified
active vessels to other Jones Act routes and to commence a new
U.S. west coast to Hawaii trade route with two of the
vessels previously deployed in the Guam trade route.
We publish tariffs with fixed rates for all three of our Jones
Act trade routes. These rates are subject to regulation by the
Surface Transportation Board (“STB”). However, in the
case of our Puerto Rico and Alaska trade routes, we primarily
ship containers on the basis of confidential negotiated
transportation service contracts that are not subject to rate
regulation by the STB.
Our container volumes are subject to seasonal trends common in
the transportation industry. Financial results in the first
quarter are normally lower due to reduced loads during the
winter months. Volumes typically build to a peak in the third
quarter and early fourth quarter, which generally results in
higher revenues and improved margins.
We derive our revenue primarily from providing comprehensive
shipping and logistics services to and from the continental
U.S. and Alaska, Puerto Rico, Hawaii and Guam. We charge
our customers on a per load basis and price our services based
on the length of inland and ocean cargo transportation hauls,
type of cargo and other requirements, such as shipment timing
and type of container. In addition, we assess fuel surcharges on
a basis consistent with industry practice and at times may
incorporate these surcharges into our basic transportation
rates. At times, there is a timing disparity between volatility
in our fuel costs and related adjustments to our fuel surcharges
(or the incorporation of adjusted fuel surcharges into our base
transportation rates) that may result in insufficient recovery
of our fuel costs during sharp hikes in the price of fuel and
recoveries in excess of our fuel costs when fuel prices level
off or decline.
During 2007, over 85% of our revenues were generated from our
shipping and logistics services in markets where the marine
trade is subject to the Jones Act or other U.S. maritime
laws. The balance of our revenue is derived from (i) vessel
loading and unloading services that we provide for vessel
operators at our terminals, (ii) agency services that we
provide for third-party shippers lacking administrative
presences in our markets, (iii) vessel space charter income
from third-parties in trade lanes not subject to the Jones Act,
(iv) management of vessels owned by third-parties,
(v) warehousing services for third-parties, and
(vi) other non-transportation services.
As used in this
Form 10-K,
the term “revenue containers” refers to containers
that are transported for a charge, as opposed to empty
containers.
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Our operating expenses consist primarily of marine operating
costs, inland transportation costs, vessel operating costs, land
costs and rolling stock rent. Our marine operating costs consist
of stevedoring, port charges, wharfage and various other costs
to secure vessels at the port and to load and unload containers
to and from vessels. Our inland transportation costs consist
primarily of the costs to move containers to and from the port
via rail, truck or barge. Our vessel operating costs consist
primarily of crew payroll costs and benefits, vessel fuel costs,
vessel maintenance costs, space charter costs, vessel insurance
costs and vessel rent. We view our vessel fuel costs as subject
to potential fluctuation as a result of changes in unit prices
in the fuel market. Our land costs consist primarily of
maintenance, yard and gate operations, warehousing operations
and terminal overhead in the terminals in which we operate.
Rolling stock rent consists primarily of rent for street
tractors, yard equipment, chassis, gensets and various dry and
refrigerated containers.
Year Ended
December 23, 2007 Compared to Year Ended December 24,
2006
Operating Revenue. Operating revenue increased
to $1,206.5 million for the year ended December 23,
2007 from $1,156.9 million for the year ended
December 24, 2006, an increase of $49.6 million, or
4.3%. This revenue increase can be attributed to the following
factors (in thousands):
The decreased revenue due to revenue container volume declines
is primarily due to overall soft market conditions in Puerto
Rico and decelerating growth in Hawaii. This revenue container
volume
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decrease is offset by higher margin cargo mix in addition to
general rate increases. Bunker and intermodal fuel surcharges,
which are included in our transportation revenue, accounted for
approximately 12% of total revenue in both of the years ended
December 23, 2007 and December 24, 2006. We increased
our bunker and intermodal fuel surcharges several times
throughout 2006 and 2007 as a result of fluctuations in the cost
of fuel for our vessels, in addition to fuel fluctuations passed
on to us by our truck, rail, and barge carriers. Fuel surcharges
are evaluated regularly as the price of fuel fluctuates, and we
may at times incorporate these surcharges into the base
transportation rates that we charge. The increase in
non-transportation revenue is primarily due to higher space
charter revenue resulting from the extension of the scope of
services provided in connection with our expanded service
between the U.S. west coast and Guam and Asia, partially
offset by lower terminal services revenue.
Operating Expense. Operating expense increased
to $954.0 million for the year ended December 23, 2007
from $896.3 million for the year ended December 24,
2006, an increase of $57.7 million or 6.4%. The increase in
operating expense is primarily due to higher vessel operating
costs related to the deployment of the new vessels and expanded
services between the U.S. west coast and Hawaii, which is
partially offset by reduced expenses associated with lower
container volumes and reduced expenses associated with cost
control efforts.
Vessel expense, which is not primarily driven by revenue
container volume, increased to $368.7 million for the year
ended December 23, 2007 from $319.6 million for the
year ended December 24, 2006, an increase of
$49.1 million or 15.4%. This increase can be attributed to
the following factors (in thousands):
The $7.9 million increase in fuel expense is comprised of
an increase of $13.7 million due to a 9.8% increase in fuel
prices, offset by a decrease of $5.3 million due to lower
fuel consumption and a decrease of $0.5 million due to a
loss on fuel hedge in 2006. The increase in vessel operating
expenses is primarily due to additional active vessels during
2007 as a result of the expansion of services between the
U.S. west coast and Guam and Asia and the U.S. west
coast and Hawaii as well as more dry-dockings during 2007 versus
2006. In addition, the Company incurred certain one time,
non-recurring expenses associated with the activation of the new
vessels of approximately $3.5 million during the year ended
December 23, 2007.
Marine expense is comprised of the costs incurred to bring
vessels into and out of port, and to load and unload containers.
The types of costs included in marine expense are stevedoring
and benefits, pilotage fees, tug fees, government fees, wharfage
fees, dockage fees, and line handler fees. Marine expense
increased to $198.9 million for the year ended
December 23, 2007 from $192.2 million for the year
ended December 24, 2006, an increase of $6.7 million
or 3.5%. This increase in marine expenses can be attributed to
additional stevedoring costs related to services provided to
third parties as a result of the acquisition of HSI, which is
offset by decreased expenses due to lower revenue container
volumes.
Inland expense increased to $206.0 million for the year
ended December 23, 2007 from $202.0 million for the
year ended December 24, 2006, an increase of
$4.0 million or 2.0%. The increase in inland expense is due
to higher inland expenses as a result of the acquisition of Aero
Logistics, offset by lower container volumes.
Land expense is comprised of the costs included within the
terminal for the handling, maintenance and storage of
containers, including yard operations, gate operations,
maintenance, warehouse and terminal overhead.
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Non-vessel related maintenance expenses decreased primarily due
to a decline in overall volumes and lower maintenance expenses
due to newer equipment and process improvement initiatives. Yard
and gate expense is comprised of the costs associated with
moving cargo into and out of the terminal facility and the costs
associated with the storage of equipment and revenue loads in
the terminal facility. Yard and gate expenses decreased
primarily due to lower revenue container volumes.
Depreciation and Amortization. Depreciation
and amortization costs decreased to $47.9 million for the
year ended December 23, 2007 from $50.2 million for
the year ended December 24, 2006, a decrease of
$2.4 million or 4.7%.
The decrease in depreciation — owned vessels is due to
certain vessels becoming fully depreciated and no longer subject
to depreciation expense. The decrease in depreciation and
amortization — other is primarily due to the timing of
the purchase and sale of our containers and certain capitalized
software assets becoming fully depreciated and no longer subject
to depreciation expense. The increase in amortization of
intangible assets is due to the amortization of the intangible
assets recorded in conjunction with the acquisitions of H.S.I
and Aero Logistics.
Amortization of Vessel
Drydocking. Amortization of vessel drydocking
increased to $17.5 million for the year ended
December 23, 2007 compared to $14.7 million for the
year ended December 24, 2006, an increase of
$2.8 million or 19.4%. The increase is primarily due to the
timing of drydockings and drydocking costs.
Selling, General and Administrative. Selling,
general and administrative costs decreased to $91.0 million
for the year ended December 23, 2007 from
$98.3 million for the year ended December 24, 2006, a
decrease of $7.3 million or 7.4%. This decrease is
comprised of a $10.9 million decrease in the management
bonus accrual and $2.0 million decrease of fees incurred in
connection with the Company’s 2006 secondary offerings,
offset by an increase of approximately $0.7 million of
professional fees related to our process re-engineering
initiative, $2.0 million increase in salaries and related
expenses and $2.8 million of compensation expense related
to stock option and restricted stock grants.
45
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Miscellaneous Expense, Net. Miscellaneous
expense decreased to $1.0 million for the year ended
December 23, 2007 from $1.4 million for the year ended
December 24, 2006, a decrease of $0.4 million or
31.2%. This decrease is primarily a result of lower bad debt
expense during 2007.
Interest Expense, Net. Interest expense, net
decreased to $41.7 million for the year ended
December 23, 2007 from $48.6 million for the year
ended December 24, 2006, a decrease of $6.9 million or
14.1%. This decrease is a result of the August 2007 refinancing
and the related lower interest rates payable on the outstanding
debt.
Loss on Early Extinguishment of Debt. Loss on
early extinguishment of debt was $38.5 million for the year
ended December 23, 2007 compared to $0.6 million
during the year ended December 24, 2006. The 2007 loss on
extinguishment is due to the write off of net deferred financing
costs and premiums paid in connection with the tender offer for
the 9% senior notes and the 11% senior discount notes.
The 2006 loss on extinguishment is due to the write off of
deferred finance fees associated with the $25.0 million
voluntary prepayment of our term loan.
Income Tax Benefit. Income tax benefit was
$14.0 million in 2007 and $25.3 million in 2006, which
represent effective tax rates of (94.0%) and (53.9%),
respectively. During 2006, the Company elected the application
of tonnage tax. The Company modified its trade routes between
the U.S. west coast and Guam and Asia during 2007. As such,
the Company’s shipping activities associated with these
modified trade routes became qualified shipping activities, and
thus the income from these vessels is excluded from gross income
in determining federal income tax liability. During 2007, the
Company recorded a $7.7 million tax benefit related to the
revaluation of deferred taxes related to the qualified shipping
income expected to be generated by the new vessels and related
to a change in estimate resulting from refinements in the
methodology for computing secondary activities and cost
allocations for tonnage tax purposes. This benefit was recorded
in connection with the filing of the 2006 income tax return in
September 2007. Excluding the loss on extinguishment and the
related tax benefits, the benefit associated with the
revaluation of deferred taxes related to activities qualifying
for the application of tonnage tax and the benefits related to
the refinements in methodology of applying tonnage tax, the
Company’s effective tax rate was 14.1% for the year ended
December 23, 2007. The Company’s 2006 election was
made in connection with the filing of the Company’s 2005
federal corporate income tax return and the Company accounted
for this election as a change in the tax status of its
qualifying shipping activities. Excluding the 2005 reduction in
income tax expense and revaluation of the deferred taxes related
to qualifying activities, the Company’s effective tax rate
for the year ended December 24, 2006 was 9.5%. The
Company’s effective tax rate is impacted by the
Company’s income from shipping activities as well as the
income from the Company’s non qualifying shipping
activities and will fluctuate based on the ratio of income from
qualifying and non-qualifying activities.
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Year Ended
December 24, 2006 Compared to Year Ended December 25,
2005
Operating Revenue. Operating revenue increased
to $1,156.9 million for the year ended December 24,
2006 from $1,096.2 million for the year ended
December 25, 2005, an increase of $60.7 million, or
5.5%. This revenue increase can be attributed to the following
factors (in thousands):
The decreased revenue due to revenue container volume declines
for the year ended December 24, 2006 is primarily due to
overall soft market conditions in Puerto Rico as well as a
strategic shift away from lower margin automobile cargo to more
refrigerated cargo and other higher margin freight. The
temporary government shutdown in Puerto Rico and uncertainty
surrounding tax reform contributed to the continued soft market
conditions. This revenue container volume decrease is offset by
higher margin cargo mix in addition to general rate increases.
Bunker and intermodal fuel surcharges, which are included in our
transportation revenue, accounted for approximately 12% of total
revenue in the year ended December 24, 2006 and
approximately 8% of total revenue in the year ended
December 25, 2005. We increased our bunker and intermodal
fuel surcharges several times throughout 2005 and 2006, as a
result of significant increases in the cost of fuel for our
vessels and as a result of fuel increases passed on to us by our
truck, rail, and barge carriers. Fuel surcharges are evaluated
regularly as the price of fuel fluctuates, and we may at times
incorporate these surcharges into the base transportation rates
that we charge. The growth in other non-transportation services
is primarily due to increases in terminal services provided to
third parties, offset slightly by a decrease in equipment rental
income.
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Operating Expense. Operating expense increased
to $896.3 million for the year ended December 24, 2006
from $867.3 million for the year ended December 25,
2005, an increase of $29.0 million or 3.3%. The increase in
operating expense primarily reflects the effect of rising fuel
prices, and an increase in rolling stock rent, offset by lower
expenses associated with lower container volumes. Vessel
expense, which is not primarily driven by revenue container
volume, increased to $319.6 million for the year ended
December 24, 2006 from $300.3 million for the year
ended December 25, 2005, an increase of $19.3 million
or 6.4%. This $19.3 million increase can be attributed to
the following factors (in thousands):
The $27.1 million increase in fuel expense is comprised of
an increase of $32.1 million due to a 27.7% increase in
fuel prices, offset by a decrease of $5.0 million due to
lower fuel consumption. The decrease in vessel lease expense is
due to the purchase of the Horizon Enterprise and the Horizon
Pacific in September 2005, offset by lease expense incurred
during 2006 for the Horizon Hunter. The decrease in vessel labor
and other operating expenses is primarily due to operating one
less vessel in Puerto Rico during most of 2006.
Marine expense is comprised of the costs incurred to bring
vessels into and out of port, and to load and unload containers.
The types of costs included in marine expense are stevedoring
and benefits, pilotage fees, tug fees, government fees, wharfage
fees, dockage fees, and line handler fees. Marine expense
decreased to $192.2 million for the year ended
December 24, 2006 from $195.3 million for the year
ended December 25, 2005, a decrease of $3.0 million or
1.6%. This decrease in marine expenses can be attributed to a
3.7% decrease in total revenue container volume period over
period, offset by contractual labor increases.
Inland expense increased to $202.0 million for the year
ended December 24, 2006 from $190.2 million for the
year ended December 25, 2005, an increase of
$11.8 million or 6.2%. Approximately $7.6 million of
this increase is due to higher fuel costs, as rail, truck, and
barge carriers have substantially increased their fuel
surcharges period over period. The remaining increase is due to
rate increases offset by lower volumes.
Land expense is comprised of the costs included within the
terminal for the handling, maintenance and storage of
containers, including yard operations, gate operations,
maintenance, warehouse and terminal overhead. Land expense was
flat for the year ended December 24, 2006 compared to the
year ended December 25, 2005.
Non-vessel related maintenance expenses decreased primarily due
to lower maintenance expenses associated with the new
refrigerated container equipment added to our fleet during 2005
and other new container equipment added to our fleet in 2006.
This decrease is partially offset by an
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increase of $1.6 million in fuel costs. Terminal overhead
increased primarily due to higher utility expenses, labor
related expenses and higher insurance costs. Yard and gate
expense is comprised of the costs associated with moving cargo
into and out of the terminal facility and the costs associated
with the storage of equipment and revenue loads in the terminal
facility. Yard and gate expenses decreased primarily due to
decreased revenue container volumes, offset slightly by a
$0.3 million increase in fuel costs.
Depreciation and Amortization. Depreciation
and amortization costs decreased to $50.2 million for the
year ended December 24, 2006 from $51.1 million for
the year ended December 25, 2005, a decrease of
$0.9 million or 1.8%.
Depreciation of owned vessels increased by $1.6 million due
to the acquisition of the rights and beneficial interests of the
sole owner participant in two separate trusts, the assets of
which consist primarily of the Horizon Enterprise and the
Horizon Pacific in the third quarter of fiscal year 2005. The
$2.5 million decrease in depreciation and
amortization-other is primarily due to a decrease in
depreciation of leasehold improvements and containers. The
decrease in leasehold improvements is due to the write-off of
certain leasehold improvements made prior to the acquisition of
the rights and beneficial interests in the aforementioned trusts
in September 2005.
Amortization of Vessel
Drydocking. Amortization of vessel drydocking
decreased to $14.7 million for the year ended
December 24, 2006 compared to $15.8 million for the
year ended December 25, 2005, a decrease of
$1.1 million or 7.1%. The decrease is primarily related to
an increased number of drydockings in 2004 and 2005 and to lower
overall costs on recent drydockings.
Selling, General and Administrative. Selling,
general and administrative costs decreased to $98.3 million
for the year ended December 24, 2006 from
$114.6 million for the year ended December 25, 2005, a
decrease of $16.4 million or 14.3%. This decrease is
comprised of an $18.0 million decrease in stock-based
compensation expense, and $9.7 million in management fees.
The management fee expenses related to the previous management
services and related fee provisions of a management agreement
with Castle Harlan. Such management agreement was terminated in
conjunction with the Company’s initial public offering in
September 2005. These decreases are offset by a
$4.8 million increase in professional fees,
$4.8 million increase in salaries and related expenses, and
$1.8 million increase in other expenses. The professional
fees increase is primarily due to consulting related
professional fees, and an increase in audit and legal fees. In
addition, expenses associated with the secondary offerings and
shelf registration totaling $2.0 million are relatively
flat with other transaction related costs of $2.2 million
during 2005.
Miscellaneous Expense, Net. Miscellaneous
expense increased to $1.4 million for the year ended
December 24, 2006 from $0.6 million for the year ended
December 25, 2005, an increase of $0.8 million or
123.3%. This increase is primarily a result of recognized losses
on the retirement of equipment during 2006 and an increase in
bad debt expense.
Interest Expense, Net. Interest expense, net
decreased to $48.6 million for the year ended
December 24, 2006 from $51.4 million for the year
ended December 25, 2005, a decrease of
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$2.8 million or 5.4%. This decrease is comprised of a
$7.1 million decrease attributable to the redemption of
$53.0 million of the principal amount of the 9% senior
notes and $56.0 million principal amount of the
11% senior discount notes utilizing proceeds from the
Company’s initial public offering in September 2005 and a
$1.1 million increase in interest income related to higher
cash balances and higher interest rates earned on the
Company’s cash balances during 2006 compared to 2005. The
decrease is offset by a $4.4 million increase in interest
expense under our senior credit facility due to a 195 basis
point increase in interest rates during 2006 as compared to 2005
and a $0.4 million increase in interest expense related to
the notes issued by the owner trustees for the purchase of the
Horizon Enterprise and the Horizon Pacific.
Loss on Early Extinguishment of Debt. Loss on
early extinguishment of debt was $0.6 million for the year
ended December 24, 2006 compared to $13.2 million
during the year ended December 25, 2005, a decrease of
12.6 million or 95.5%. The 2006 loss on extinguishment is
due to the write off of deferred finance fees associated with
the $25.0 million voluntary prepayment of our term loan.
The 2005 loss on extinguishment is primarily due to redemption
premiums and the write-off of deferred financing costs
associated with the early retirement of a portion of our
9% senior notes and 11% senior discount notes that
occurred during 2005.
Income Tax (Benefit) Expense. Income tax
(benefit) expense was ($25.3) million in 2006 and
$0.4 million in 2005, which represent effective tax rates
of (53.9%) and (2.4%), respectively. During 2006, after
evaluating the merits and requirements of the tonnage tax, the
Company elected the application of the tonnage tax instead of
the federal corporate income tax on income from its qualifying
shipping activities. This 2006 election of the tonnage tax was
made in connection with the filing of the Company’s 2005
federal corporate income tax return and will also apply to all
subsequent federal income tax returns unless the Company revokes
this alternative tonnage tax treatment. The Company does not
intend to revoke its election of the tonnage tax in the
foreseeable future. The Company is accounting for this election
as a change in the tax status of its qualifying shipping
activities. The impact of this tonnage tax election resulted in
a decrease in income tax expense of approximately
$43.5 million during the year ended December 24, 2006.
Approximately $11.0 million and $18.8 million relate
to the 2005 reduction in income tax expense and revaluation of
the deferred taxes related to the application of tonnage tax to
qualifying activities, respectively. Excluding the 2005
reduction in income tax expense and revaluation of the deferred
taxes related to qualifying activities, the Company’s
effective tax rate for the year ended December 24, 2006
would be 9.5%. Retroactively applying the tonnage tax to the
year ended December 25, 2005 would result in a 2005
effective tax rate of (59.1%). The differences between the
federal and state statutory tax rates and the overall effective
tax rate for the year ended December 25, 2005 is related
primarily to permanent differences resulting from stock-based
compensation.
Our principal sources of funds have been (i) earnings
before non-cash charges, (ii) borrowings under debt
arrangements and (iii) equity capitalization. Our principal
uses of funds have been (i) capital expenditures on our
container fleet, our terminal operating equipment, improvements
to our owned and leased vessel fleet, and our information
technology systems, (ii) vessel drydocking expenditures,
(iii) the purchase of vessels upon expiration of operating
leases, (iv) working capital consumption,
(v) principal and interest payments on our existing
indebtedness, (vi) dividend payments to our common
stockholders, (vii) acquisitions, (viii) share
repurchases, (ix) premiums associated with the tender
offer, and (x) purchases of equity instruments in
conjunction with the Notes. Cash totaled $6.3 million at
December 23, 2007. As of December 23, 2007,
$121.7 million was available for borrowing under the
$250.0 million revolving credit facility, after taking into
account $6.3 million utilized for outstanding letters of
credit.
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Net cash provided by operating activities decreased by
$60.7 million to $54.8 million for the year ended
December 23, 2007 from $115.5 million for the year
ended December 24, 2006. Net earnings adjusted for
depreciation, amortization, deferred income taxes, accretion and
other non-cash operating activities, which includes non-cash
stock-based compensation expense, resulted in cash flow
generation of $131.6 million for the year ended
December 23, 2007 compared to $125.5 million for the
year ended December 24, 2006, an increase of
$6.1 million. The reduction in cash provided by operating
activities is primarily related to a $24.0 million increase
in vessel rent payments in excess of accruals,
$10.5 million of bonus payments in excess of accruals, a
$12.7 million increase in accounts receivable as a result
of a slight increase in the number of days sales outstanding, a
$7.4 million increase in materials and supplies as a result
of increased fuel prices and two additional active vessels
during 2007 and a $4.6 million increase in vessel
drydocking payments as a result of nine drydockings during 2007
versus five during 2006.
Net cash provided by operating activities increased by
$39.1 million to $115.5 million for the year ended
December 24, 2006 from $76.4 million for the year
ended December 25, 2005. Net earnings adjusted for
depreciation, amortization, deferred income taxes, accretion and
other non-cash operating activities, which includes non-cash
stock-based compensation expense, resulted in cash flow
generation of $125.5 million for the year ended
December 24, 2006 compared to $94.3 million for the
year ended December 25, 2005, an increase of
$31.2 million. The 2006 other assets/liabilities working
capital use includes $4.2 million of various costs
associated with our contractual obligations with Ship Finance
Limited. Accounts payable and accrued liabilities working
capital changes are primarily due to timing of interest payments
and various other operating expenses.
Net cash used in investing activities was $59.4 million for
the year ended December 23, 2007 compared to
$19.3 million for the year ended December 24, 2006.
The $40.1 million increase is due to the acquisition of HSI
and Aero Logistics and a $10.1 million increase in capital
expenditures, primarily related to the raising of our Honolulu,
Hawaii cranes and other capital expenditures in connection with
our fleet enhancement initiative and our San Juan, Puerto
Rico terminal redevelopment project, offset by a
$1.2 million increase in proceeds from the sale of
equipment.
Net cash used in investing activities was $19.3 million for
the year ended December 24, 2006 compared to
$38.8 million for the year ended December 25, 2005.
Approximately $25.2 million of the capital expenditures in
the year ended December 25, 2005 is comprised of the
acquisition of the rights and beneficial interests of the sole
owner participant in two separate trusts, the assets of which
consist primarily of the Horizon Enterprise and the Horizon
Pacific and the charters related thereto under which HL operates
such vessels. Excluding this expenditure, capital expenditures
increased approximately $5.3 million in 2006 as compared to
2005. Capital expenditures in 2006 primarily relate to the
acquisition of containers, expenditures related to the new fleet
enhancement initiative, and capital expenditures relating to the
redevelopment of the San Juan, Puerto Rico terminal.
Net cash used in financing activities during the year ended
December 23, 2007 was $83.1 million compared to
$43.7 million for the year ended December 24, 2006.
The Company used the proceeds provided by the New Credit
Facility (as defined below) and the Notes (as defined below) to
(i) repay $192.8 million of borrowings outstanding
under the Prior Senior Credit Facility (as defined below),
(ii) purchase the outstanding principal and pay associated
premiums of the 9% senior notes and 11% senior
discount notes purchased in the Company’s tender offer, and
(iii) purchase 1,000,000 shares of the Company’s
common stock. Concurrent with the issuance of the Notes, the
Company entered into note hedge transactions whereby the Company
has the option to purchase shares of the Company’s common
stock and the Company sold warrants to purchase the
Company’s
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common stock. The cost of the note hedge transactions to the
Company was approximately $52.5 million and the Company
received proceeds of $11.9 million related to the sale of
the warrants. The net cash used in financing activities during
the year ended December 23, 2007 also includes a
$25.0 million prepayment under the senior credit facility
and $4.5 million in long-term debt payments related to the
outstanding indebtedness secured by mortgages on the Horizon
Enterprise and the Horizon Pacific. The net cash used for
financing activities during 2006 includes a $25.0 million
prepayment under the senior credit facility, the payment of
$1.2 million in financing costs related to fees associated
with amendments to HL and HLHC’s senior credit facility,
and a $1.3 million open market purchase of HLFHC’s
11% senior discount notes.
Net cash used in financing activities during the year ended
December 24, 2006 was $43.7 million compared to
$52.9 million for the year ended December 25, 2005.
The net cash used for financing activities during 2006 includes
a $25.0 million prepayment under the senior credit
facility, $14.8 million in dividends to common
stockholders, the payment of $1.2 million in financing
costs related to fees associated with amendments to HL and
HLHC’s senior credit facility, and a $1.3 million open
market purchase of HLFHC’s 11% senior discount notes.
On November 19, 2007, the Company’s Board of Directors
authorized the Company to commence a stock repurchase program to
buy back up to $50.0 million worth of its common stock. The
program allowed the Company to purchase shares through open
market repurchases and privately negotiated transactions at a
price of $26.00 per share or less until the program’s
expiration on December 31, 2008. The Company acquired
1,172,700 shares at a total cost of $20.6 million
under this program during the fourth quarter of 2007. The
Company completed its share repurchase program in the first
quarter of 2008, acquiring an additional 1,627,500 shares
at a total cost of $29.4 million. Although the Company does
not currently intend to repurchase additional shares, the
Company will continue to evaluate market conditions and may,
subject to approval by the Company’s Board of Directors,
repurchase additional shares of its common stock in the future.
The Company expects to fund future share repurchases with
either, or a combination of, existing cash on hand or borrowings
under its revolving credit facility.
Our outlook for 2008 reflects stable market conditions in
Hawaii, flat economic conditions in Puerto Rico, and continued
economic growth in Alaska. We expect approximately 1.5% in
revenue container volume growth in 2008 and approximately 2.5%
revenue growth due to more favorable cargo mix and general rate
increases. Our Horizon Logistics division will continue to
provide integrated logistics services, including rail, trucking,
and distribution services to Horizon Lines and will pursue
additional third party logistics business. Since Horizon
Logistics is in the infancy stages of its existence, we do not
expect the third party business to be significant in 2008. We
will continue our process initiatives improvements and cost
constraint efforts in both our liner and logistics divisions.
Fuel is a significant expense for our operations. The price of
fuel is unpredictable and fluctuates based on events outside our
control. Continued volatility in fuel prices could impact our
profitability because adjustments in our fuel surcharges lag
changes in actual fuel cost. As a result of the expected organic
growth, continued growth from our 2007 acquisitions, and
decreases in interest expense due to our 2007 refinancing, we
expect our earnings to increase to $2.01-$2.26 per diluted share
in 2008, based upon current economic conditions.
Capital
Requirements and Liquidity
Based upon our current level of operations and certain
anticipated improvements, we believe that cash flow from
operations and available cash, together with borrowings
available under the senior credit facility, will be adequate to
meet our future liquidity needs throughout 2008. During 2008, we
expect to spend approximately $20.6 million and
$15.8 million on capital expenditures and drydocking
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expenditures, respectively. Such capital expenditures include
continued redevelopment of our San Juan Puerto Rico
terminal, vessel regulatory and life extension initiatives, and
other terminal infrastructure and equipment. We expect to
generate cash flows after capital expenditures and drydocking
expenses but before debt repayments, share repurchases, and
dividends of between $115.0 million and $125.0 million
in 2008. We intend to utilize these cash flows to complete our
share repurchase program, to pay dividends, and to make debt
repayments. However, if attractive acquisition opportunities
arise that we believe are consistent with our strategic plans,
certain of our cash flows could be utilized to fund
acquisitions. Due to the seasonality within our business, we
will utilize borrowings under the senior credit facility in the
first half of 2008 but plan to repay such borrowings in the
second half of the year.
Contractual obligations as of December 23, 2007 are as
follows (in thousands):
The Company is not a party to any off-balance sheet arrangements
that have, or are reasonably likely to have, a current or future
effect on the Company’s financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures
or capital resources that is material to investors.
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On August 8, 2007, the Company entered into a credit
agreement providing for a $250.0 million five year
revolving credit facility and a $125.0 million term loan
with various financial lenders (the “Senior Credit
Facility”). The obligations of the Company are secured by
substantially all of the assets of the Company. The terms of the
Senior Credit Facility also provide for a $20.0 million
swingline subfacility and a $50.0 million letter of credit
subfacility. In addition to proceeds from the term loan, the
Company borrowed and used $133.5 million under the
revolving credit facility to repay borrowings outstanding under
the Prior Senior Credit Facility (as defined below) and to
purchase a portion of the outstanding 9% senior notes and
11% senior discount notes purchased in the Company’s
tender offer. Future borrowings under the Senior Credit Facility
are expected to be used for permitted acquisitions, share
repurchases and general corporate purposes, including working
capital.
Beginning on December 31, 2007, principal payments of
approximately $1.6 million are due quarterly on the term
loan through September 30, 2009, at which point quarterly
payments increase to $4.7 million through
September 30, 2011, at which point quarterly payments
increase to $18.8 million until final maturity on
August 8, 2012. As of December 23, 2007,
$247.0 million was outstanding under the Senior Credit
Facility, which included a $125.0 million term loan and
borrowings of $122.0 million under the revolving credit
facility. The interest rate payable under the Senior Credit
Facility varies depending on the types of advances or loans the
Company selects. Borrowings under the Senior Credit Facility
bear interest primarily at LIBOR-based rates plus a spread which
ranges from 1.25% to 2.0% (LIBOR plus 1.50% as of the date
hereof) depending on the Company’s ratio of total secured
debt to EBITDA (as defined in the Senior Credit Facility). The
weighted average interest rate at December 23, 2007 was
approximately 6.5%. The Company also pays a variable commitment
fee on the unused portion of the commitment, ranging from 0.25%
to 0.40% (0.30% as of December 23, 2007).
The Senior Credit Facility contains customary affirmative and
negative covenants and warranties, including two financial
covenants with respect to the Company’s leverage and
interest coverage ratio and limits the level of dividends and
stock repurchases in addition to other restrictions. It also
contains customary events of default, subject to grace periods,
as appropriate. The Company was in compliance with all such
covenants as of December 23, 2007.
On August 1, 2007, the Company entered into a purchase
agreement relating to the sale by the Company of
$300.0 million aggregate principal amount of its
4.25% Convertible Senior Notes due 2012 (the
“Notes”) for resale to qualified institutional buyers
as defined in Rule 144A under the Securities Act of 1933,
as amended. Under the terms of the purchase agreement, the
Company also granted the initial purchasers an option to
purchase up to $30.0 million aggregate principal amount of
the Notes to cover over-allotments. The initial purchasers
subsequently exercised the over-allotment option in full, and,
at closing on August 8, 2007, the initial purchasers
acquired $330.0 million aggregate principal amount of the
Notes. The net proceeds from the offering, after deducting the
initial purchasers’ discount and offering expenses, were
approximately $320.5 million. The Company used
(i) $28.6 million of the net proceeds to purchase
1,000,000 shares of the Company’s common stock in
privately negotiated transactions, (ii) $52.5 million
of the net proceeds to acquire an option to receive the
Company’s common stock from the initial purchasers, and
(iii) the balance of the net proceeds to purchase a portion
of the outstanding 9% senior notes and 11% senior
discount notes purchased in the Company’s tender offer.
The Notes are general unsecured obligations of the Company and
rank equally in right of payment with all of the Company’s
other existing and future obligations that are unsecured and
unsubordinated. The Notes bear interest at the rate of 4.25%,
and the Company will pay interest on the Notes on February 15
and August 15 of each year, beginning on February 15, 2008.
The Notes
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will mature on August 15, 2012, unless earlier converted,
redeemed or repurchased in accordance with their terms prior to
August 15, 2012. Holders of the Notes may require the
Company to repurchase the Notes for cash at any time before
August 15, 2012 if certain fundamental changes occur.
Each $1,000 of principal of the Notes will initially be
convertible into 26.9339 shares of the Company’s
common stock, which is the equivalent of $37.13 per share,
subject to adjustment upon the occurrence of specified events
set forth under the terms of the Notes. Upon conversion, the
Company would pay the holder the cash value of the applicable
number of shares of its common stock, up to the principal amount
of the note. Amounts in excess of the principal amount, if any,
may be paid in cash or in stock, at the Company’s option.
Holders may convert their Notes into the Company’s common
stock as follows:
Holders who convert their Notes in connection with a change in
control may be entitled to a make-whole premium in the form of
an increase in the conversion rate. In addition, upon a change
in control, liquidation, dissolution or de-listing, the holders
of the Notes may require the Company to repurchase for cash all
or any portion of their Notes for 100% of the principal amount
plus accrued and unpaid interest. As of December 23, 2007,
none of the conditions allowing holders of the Notes to convert
or requiring the Company to repurchase the Notes had been met.
The Company may not redeem the Notes prior to maturity.
As required by the terms of a registration rights agreement
relating to the Notes, the Company filed a shelf registration
statement with the SEC with respect to the Notes and the shares
issuable upon conversion of the Notes on February 1, 2008.
As discussed in Note 2 to the Notes to the Consolidated
Financial Statements, the FASB has published for comment a
clarification on the accounting for convertible debt instruments
that may be settled in cash (including partial cash settlement)
upon conversion, such as the convertible notes we issued in
August 2007 (“FSP APB
14-a”).
The proposed FSP would require the issuer to separately account
for the liability and equity components of the instrument in a
manner that reflects the issuer’s non-convertible debt
borrowing rate. As a result, the liability component would be
recorded at a discount reflecting its below market coupon
interest rate, and the liability component would subsequently be
accreted to its par value over its expected life, with the rate
of interest that reflects the market rate at issuance being
reflected on the income statement. The proposed change in
methodology will affect the calculations of net income and
earnings per share. The proposed effective date of FSP APB
14-a is for
fiscal years beginning after December 15, 2007 and does not
permit early application. In November 2007, the FASB announced
it is expected to begin its redeliberations of the
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guidance in the proposed FSP beginning in January 2008.
Therefore, it is expected that final guidance will not be issued
until at least the first quarter of 2008 and it is unlikely the
proposed effective date for fiscal years beginning after
December 15, 2007 will be retained. The proposed transition
guidance requires retrospective application to all periods
presented and does not grandfather existing instruments. The
Company is in the process of determining the impact of this
proposed FSP.
Concurrent with the issuance of the Notes, the Company entered
into note hedge transactions with certain financial institutions
whereby if the Company is required to issue shares of its common
stock upon conversion of the Notes, the Company has the option
to receive up to 8.9 million shares of the Company’s
common stock when the price of the Company’s common stock
is between $37.13 and $51.41 per share upon conversion, and the
Company sold warrants to the same financial institutions whereby
the financial institutions have the option to receive up to
4.6 million shares of the Company’s common stock when
the price of the Company’s common stock exceeds $51.41 per
share upon conversion. The Company will seek approval from its
shareholders to increase the number of authorized but unissued
shares such that the number of shares available for issuance to
the financial institutions increases from 4.6 million to
17.8 million. The separate note hedge and warrant
transactions were structured to reduce the potential future
share dilution associated with the conversion of Notes. The cost
of the note hedge transactions to the Company was approximately
$52.5 million, $33.4 million net of tax, and has been
accounted for as an equity transaction in accordance with EITF
No. 00-19,
“Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company’s Own Stock”
(EITF
No. 00-19).The
Company received proceeds of $11.9 million related to the
sale of the warrants, which has also been classified as equity
because they meet all of the equity classification criteria
within EITF
No. 00-19.
In accordance with SFAS 128, the Notes will have no impact
on diluted earnings per share until the price of the
Company’s common stock exceeds the conversion price
(initially $37.13 per share) because the principal amount of the
Notes will be settled in cash upon conversion. Prior to
conversion, the Company will include the effect of the
additional shares that may be issued if its common stock price
exceeds the conversion price, using the treasury stock method.
Also, in accordance with SFAS 128, the warrants sold in
connection with the hedge transactions will have no impact on
earnings per share until the Company’s share price exceeds
$37.13. Prior to exercise, the Company will include the effect
of additional shares that may be issued using the treasury stock
method. The call options purchased as part of the note hedge
transactions are anti-dilutive and therefore will have no impact
on earnings per share.
In conjunction with the acquisition of HSI, the Company assumed
a $2.2 million note payable. The note is secured by the
assets of HSI. The note bears interest at 5.26% per year and
requires monthly payments of $32 thousand until maturity on
February 24, 2014.
Our primary interest rate exposure relates to the senior credit
facility. As of December 23, 2007, the Company had
outstanding a $125.0 million term loan and
$122.0 million under the revolving credit facility, which
bear interest at variable rates. Each quarter point change in
interest rates would result in a $0.3 million change in
annual interest expense on each of the term loan and the
revolving credit facility.
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We maintain a policy for managing risk related to exposure to
variability in interest rates, fuel prices and other relevant
market rates and prices which includes entering into derivative
instruments in order to mitigate our risks.
Our exposure to market risk for changes in interest rates is
limited to our senior credit facility and one of our operating
leases. The interest rate for our senior credit facility is
currently indexed to LIBOR of one, two, three, or six months as
selected by us, or the Alternate Base Rate as defined in the
senior credit facility. One of our operating leases is currently
indexed to LIBOR of one month.
In addition, we utilize derivative instruments tied to various
indexes to hedge a portion of our quarterly exposure to bunker
fuel price increases. These instruments consist of fixed price
swap agreements. We do not use derivative instruments for
trading purposes. Credit risk related to the derivative
financial instruments is considered minimal and is managed by
requiring high credit standards for its counterparties.
Changes in fair value of derivative financial instruments are
recorded as adjustments to the assets or liabilities being
hedged in the statement of operations or in accumulated other
comprehensive income (loss), depending on whether the derivative
is designated and qualifies for hedge accounting, the type of
hedge transaction represented and the effectiveness of the
hedge. As of December 23, 2007, we do not have any hedges
in place.
The table below provides information about our debt obligations
indexed to LIBOR. The principal cash flows are in thousands.
See index in Item 15 of this annual report on
Form 10-K.
Quarterly information (unaudited) is presented in a Note to the
consolidated financial statements.
None.
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The Company maintains disclosure controls and procedures
designed to ensure information required to be disclosed in
Company reports filed under the Securities Exchange Act of 1934,
as amended (“the Exchange Act”), is recorded,
processed, summarized, and reported within the time periods
specified in the Securities and Exchange Commission’s rules
and forms. Disclosure controls and procedures are designed to
provide reasonable assurance that information required to be
disclosed in Company reports filed under the Exchange Act is
accumulated and communicated to management, including the
Company’s Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding
required disclosure.
The Company’s management, with the participation of the
Company’s Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Company’s
disclosure controls and procedures pursuant to
Rule 13a-15(b)
of the Exchange Act as of December 23, 2007. Based on that
evaluation, the Company’s Chief Executive Officer and Chief
Financial Officer have concluded that the Company’s
disclosure controls and procedures are effective as of
December 23, 2007.
The Company’s management is responsible for establishing
and maintaining adequate internal control over financial
reporting as defined in
Rules 13a-15(f)
under the Securities Exchange Act of 1934. Pursuant to the rules
and regulations of the Securities and Exchange Commission,
internal control over financial reporting is a process designed
by, or under the supervision of, the Company’s principal
executive and principal financial officers, and effected by the
Company’s board of directors, management and other
personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
accounting principles generally accepted in the United States.
Due to inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Further,
because of changes in conditions, effectiveness of internal
control over financial reporting may vary over time.
The Company’s management, with the participation of the
Company’s Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Company’s
internal control over financial reporting as of
December 23, 2007 based on the control criteria established
in a report entitled Internal Control — Integrated
Framework, issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). Based on such evaluation
management has concluded that our internal control over
financial reporting is effective as of December 23, 2007.
Ernst and Young LLP, the Company’s independent registered
public accounting firm, has issued an attestation report on the
effectiveness of the Company’s internal controls over
financial reporting, which is on page F-2 of this Annual
Report on
Form 10-K.
There were no changes in the Company’s internal control
over financial reporting during the Company’s fiscal
quarter ending December 23, 2007, that have materially
affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
None.
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The information required by this item as to the Company’s
executive officers, directors, director nominees, audit
committee financial expert, audit committee, and procedures for
stockholders to recommend director nominees will be included in
the Company’s proxy statement to be filed for the Annual
Meeting of Stockholders to be held on June 3, 2008, and is
incorporated by reference herein. The information required by
this item as to compliance by the Company’s directors,
executive officers and certain beneficial owners of the
Company’s Common Stock with Section 16(a) of the
Securities Exchange Act of 1934 also will be included in said
proxy statement and also is incorporated herein by reference.
The Company has adopted a Code of Business Conduct and Ethics
that governs the actions of all Company employees, including
officers. The Code of Business Conduct and Ethics is posted
within the Investor Relations section of the Company’s
internet website at www.horizonlines.com. The Company will
provide a copy of the Code of Business Conduct and Ethics to any
stockholder upon request. Any amendments to
and/or any
waiver from a provision of any of the Code of Business Conduct
and Ethics granted to any director, executive officer or any
senior financial officer, must be approved by the Board of
Directors and will be disclosed on the Company’s internet
website as soon as reasonably practical following the amendment
or waiver. The information contained on or connected to the
Company’s internet website is not incorporated by reference
into this
Form 10-K
and should not be considered part of this or any other report
that the Company files with or furnishes to the Securities and
Exchange Commission.
The information required by this item will be included in the
Company’s proxy statement to be filed for the Annual
Meeting of Stockholders to be held on June 3, 2008, and is
incorporated herein by reference.
The information required by this item will be included in the
Company’s proxy statement to be filed for the Annual
Meeting of Stockholders to be held on June 3, 2008, and is
incorporated herein by reference.
The information required by this item will be included in the
Company’s proxy statement to be filed for the Annual
Meeting of Stockholders to be held on June 3, 2008, and is
incorporated herein by reference.
The information required by this item will be included in the
Company’s proxy statement to be filed for the Annual
Meeting of Stockholders to be held on June 3, 2008, and is
incorporated herein by reference.
(a)(1) Financial Statements:
Horizon Lines,
Inc.
Index to Consolidated Financial Statements
(a)(2) Exhibits:
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