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Horizon Lines 10-K 2010 Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
HORIZON LINES, INC.
4064 Colony Road,
Suite 200, Charlotte, North Carolina 28211
(Address of principal executive offices)
(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 o No x
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 whether the registrant has submitted
electronically and posted on its corporate website, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for shorter period that the registrant was
required to submit and post such
files). Yes o 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 the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule
12b-2 of the
Exchange Act. (Check one):
(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 $51.0 million.
As of January 29, 2010, 30,401,673 shares of common
stock, par value $.01 per share, were outstanding.
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 June 1, 2010.
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: decreases in shipping volumes; legal or other
proceedings to which we are or may become subject, including the
Department of Justice antitrust investigation and related legal
proceedings; volatility in fuel prices; our substantial debt;
restrictive covenants under our debt agreements; our failure to
renew our commercial agreements with Maersk and resulting
potential alternative arrangements; 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 dry-docking costs
for our vessels; the loss of our key management personnel;
actions by our stockholders; 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); and adverse tax audits and other
tax matters.
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, even if
experience or future developments make it clear that projected
results expressed or implied in such statements will not be
realized, except as may be required by law.
See the section entitled “Risk Factors” 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.
Table of Contents
Part I.
Horizon Lines, Inc., a Delaware corporation, (the
“Company” and together with its subsidiaries,
“we”) operates as a holding company for Horizon Lines,
LLC (“Horizon Lines”), a Delaware limited liability
company and wholly-owned subsidiary, Horizon Logistics Holdings,
LLC (“Horizon Logistics”), a Delaware limited
liability company and wholly-owned subsidiary, Horizon Lines of
Puerto Rico, Inc. (“HLPR”), a Delaware corporation and
wholly-owned subsidiary, and Hawaii Stevedores, Inc., a Hawaii
corporation (“HSI”).
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,
CSX Corporation, the former parent of
Sea-Land
Domestic Shipping, LLC (“SLDS”), sold the
international marine container operations of
Sea-Land to
the A.P. Møller Maersk Group (“Maersk”) and SLDS
continued to be owned and operated by CSX Corporation as CSX
Lines, LLC. On February 27, 2003, Horizon Lines Holding
Corp. (“HLHC”) (which at the time was indirectly
majority-owned by Carlyle-Horizon Partners, L.P.) acquired from
CSX Corporation, 84.5% of CSX Lines, LLC, and 100% of CSX Lines
of Puerto Rico, Inc., which together with Horizon Logistics and
HSI 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. The Company was
formed as an acquisition vehicle to acquire, on July 7,
2004, the equity interest in HLHC. 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”). In 2005, the Company
completed its initial public offering. Subsequent to the initial
public offering, 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. 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.
The Company’s services can be classified into two principal
businesses, Horizon Lines and Horizon Logistics. Horizon Lines
operates as a Jones Act container shipping business with primary
service to ports within the continental United States, Puerto
Rico, Alaska, Hawaii, and Guam. Horizon Lines also offers
terminal services at certain ports. Horizon Logistics provides
integrated logistics service offerings, including rail,
trucking, warehousing, distribution, expedited logistics, and
non-vessel operating common carrier (“NVOCC”)
operations.
For financial information with respect to our business segments,
see Item 7, “Management’s Discussion and Analysis
of Financial Condition and Results of Operations —
Results of Operations,” and Note 6 to our Consolidated
Financial Statements. Item 7 and Note 6 contain
information about sales and profits for each segment, and
Note 6 contains information about each segment’s
assets.
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Horizon
Lines
We believe that we are the nation’s leading Jones Act
container shipping and integrated logistics company, accounting
for approximately 37% 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, the U.S. Virgin Islands and
Micronesia. We own or lease 20 vessels, 15 of which are
fully qualified Jones Act vessels, and approximately 18,500
cargo containers. We also provide comprehensive shipping and
sophisticated logistics services in our markets. We have 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 seven ports in the continental
U.S. and in the ports in Guam, Yantian and Xiamen, China
and Kaohsiung, Taiwan.
We ship a wide spectrum of consumer and industrial items used
every day 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 populations
in our markets, thereby providing us with a relatively stable
base of 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.
During 2009, approximately 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 50 countries. In general, all interstate and intrastate
marine commerce within the U.S. falls under the Jones Act,
which is a cabotage law. We believe the Jones Act enjoys broad
support from President Obama and 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.
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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 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 overcapacity 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 populations in our
markets, they provide us with a stable base of 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, where we
account for approximately 42% 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 37% share of total domestic marine container
shipments from the continental U.S. to these markets. This
percentage reflects 36% and 49% 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
2008, we introduced the ReeferPlus
®
GPS container tracking and shipment monitoring solution for
refrigerated ocean containers moving between the continental
U.S. and Puerto Rico. This innovative solution is designed
to improve the visibility and security of high-value perishable
cargo requiring cold chain logistics; a term used to describe
the maintenance of product temperature through the entire
transport chain from packing to delivery. Key capabilities of
ReeferPlus
®
GPS include GPS-enabled real-time container tracking; in-box
sensors reporting temperature, atmosphere and security updates
via the web; and remote monitoring and adjusting of reefer
conditions with one computer click. 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.
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Vessel
Fleet
Our management team adheres to an effective strategy for the
maintenance of our vessels. Early in our
52-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 dry-docking 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.
The table below lists our vessel fleet, which is the largest
containership fleet within the Jones Act markets, as of
December 20, 2009. Our vessel fleet consists of
20 vessels of varying classes and specifications, 15 of
which are fully Jones Act qualified. Of the 16 vessels that
are actively deployed, 11 are Jones Act qualified. Three Jones
Act qualified vessels are spare vessels available for seasonal
and dry-dock needs and to respond to potential new revenue
opportunities. A fourth spare Jones Act qualified vessel could
be available for deployment after undergoing dry-docking for
inspection and maintenance.
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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. The
charters for the Horizon Anchorage, Horizon Tacoma, and Horizon
Kodiak are due to expire in January 2015, for the Horizon Hunter
in 2018 and for the Horizon Hawk, Horizon Eagle, Horizon Falcon
and Horizon Tiger in 2019. 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 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.
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As summarized in the table below, our container fleet as of
December 20, 2009 consists of owned and leased containers
of different types and sizes. 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 various
Maersk entities that encompass terminal services, equipment
sharing, sales agency services, trucking services, cargo space
charters, and transportation services. These agreements, which
were most recently 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, Los Angeles, California, and Tacoma, Washington.
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 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 to Guam, and then from Guam to Yantian
and Xiamen, China, and Kaohsiung, Taiwan, with a return trip to
Los Angeles and Oakland, California. We utilize Maersk
containers to carry a portion of our cargo westbound to Hawaii
and Guam, where the contents of the containers are unloaded. We
ship the empty Maersk containers to the three ports in Asia.
When the vessels arrive in
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Asia, Maersk unloads the empty containers and replaces them with
loaded containers for the return trip to the U.S. west
coast. 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. We also use
Maersk equipment on our service to Hawaii from our
U.S. west coast ports, as well as from select
U.S. inland locations.
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”).
Any amounts deposited 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 earnings attributable to the operation of
its Jones Act qualified vessels into the CCF and makes
withdrawals of funds from the CCF to acquire
U.S.-built
and
U.S.-flagged
vessels. From
2003-2005,
Horizon Lines utilized CCF deposits totaling $50.4 million
to acquire six
U.S.-built
and
U.S.-flagged
vessels (Horizon Enterprise, Horizon Pacific, Horizon Hawaii,
Horizon Fairbanks, Horizon Navigator, and Horizon Trader).
Any amounts deposited in a 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 20, 2009 and December 21, 2008
include liabilities of approximately $14.2 million and
$12.9 million, respectively, for deferred taxes on deposits
in our CCF.
Horizon Logistics offers integrated logistics services through
relationships with affiliated and third-party truckers,
railroads, and worldwide ocean carriers. Horizon Logistics was
formed in 2007 from the merger of our existing logistics
operations and the acquisition of Aero Logistics, a
U.S. third-party logistics provider specializing in
expedited delivery and special projects. Horizon Logistics’
operations rely substantially on independent contractors to
fulfill the transportation services for most of its shipments.
Horizon Logistics service offerings are divided into the
following categories:
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Horizon Logistics operates a warehouse and cross-dock facility
in Compton, California to offer integrated inbound and export
logistics services to manufacturers and retailers. The
176,000 square-foot distribution center is located
10 miles from the Los Angeles/Long Beach ports with
connections to rail and road infrastructure within the Alameda
Corridor. Horizon Logistics is using the facility to offer an
integrated distribution solution, including a port drayage
service using Sea-Logix-owned and leased Clean Truck and
Transportation Worker Identification Credential
(“TWIC”) compliant fleet; air freight forwarding;
rapid transload for international import and export logistics;
intermodal transportation management; value-added distribution
services; and long-term storage as required by customers.
The worldwide transportation and logistics market is an integral
part of the global economy. According to Armstrong &
Associates, an independent research firm, gross revenue for
third-party logistics in the United States has grown from
approximately $34.0 billion in 1997 to approximately
$127.0 billion in 2008. The global logistics industry
consists of companies, large and small, that provide supply
chain management, freight forwarding, distribution, warehousing
and customs brokerage services. As business requirements for
efficient and cost-effective logistics services have increased,
so has the importance and complexity of effectively managing
freight transportation. Businesses increasingly strive to
minimize inventory levels, perform manufacturing and assembly
operations in the lowest cost locations, and distribute their
products in numerous global markets. As a result, companies are
increasingly looking to third-party logistics providers to help
them execute their supply chain strategies.
Competition within the freight forwarding, logistics and supply
chain management industry is intense, and is expected to remain
so. We compete with large international firms that have
worldwide capabilities to provide all of the services that we
offer. We also face competition from smaller regional and local
logistics providers, integrated transportation companies that
operate their own aircraft, cargo sales agents and brokers,
surface freight forwarders, ocean carriers, airlines,
associations of shippers organized to consolidate their
members’ shipments to obtain lower freight rates, and
internet-based freight exchanges. In addition, computer
information and consulting firms, which traditionally have
operated outside of the supply chain management industry, are
now expanding their scope of services to include supply chain
related activities as a means of serving the logistics needs of
their existing and potential customers.
We manage a sales and marketing team of 113 employees
strategically located in our various ports, as well as in five
regional offices across the continental U.S., including from our
headquarters in Charlotte, North Carolina and from Compton,
California. 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 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
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
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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 55% of our
transportation revenue in 2009 was derived from customers
shipping with us in more than one of our markets and
approximately 32% of our transportation revenue in 2009 was
derived from customers shipping with us in all three markets.
We generate most of our revenue through customer contracts with
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 many of 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
32 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. For 2009, our top ten largest
customers represented approximately 36% of transportation
revenue, with the largest customer accounting for approximately
9% of transportation revenue. During 2009, 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. These estimates 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 2009.
Our operations share corporate and administrative functions such
as finance, information technology, human resources, legal, 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 execute 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 booked with us. In addition, HITS supports a wide
variety of our logistics services including
less-than-truckload
(LTL), full truckload (FTL), NVOCC, air freight, expedited
ground and warehousing. In a typical transaction, our customers
go on-line to book a shipment or call, fax or
e-mail our
customer service department. Once applicable shipping
information is input into the booking system,
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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 between inland locations and ports on intermodal
bookings. We currently purchase rail services directly from the
railroads involved through confidential transportation service
contracts. 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 origin, 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.
Heightened awareness of maritime security needs, brought about
by the events of September 11, 2001 and numerous maritime
piracy 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, 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 has 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 standalone 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.
As of December 20, 2009, we had 1,895 employees, of
which approximately 1,277 were represented by seven labor unions.
We completed a non-union workforce reduction initiative during
the first quarter of 2009. The reduction in workforce impacted
approximately 80 non-union employees and resulted in a
$4.0 million restructuring charge. Of the
$4.0 million, $3.2 million, or $0.11 per fully diluted
share, was recorded during the fourth quarter of 2008 and the
remaining $0.8 million was recorded during the first
quarter
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of 2009. Of the $0.8 million recorded during the first
quarter of 2009, $0.7 million was included within the
Horizon Lines segment and the remaining $35 thousand was
included in the Horizon Logistics segment. In addition, during
the quarter ended June 21, 2009, we recorded an additional
$0.2 million of severance costs related to the elimination
of certain positions in connection with the loss of a major
customer and reorganization within the Horizon Logistics segment.
The table below sets forth the unions which represent our
employees, the number of employees represented by these unions
as of December 20, 2009 and the expiration dates of the
related collective bargaining agreements:
The table below provides a breakdown of headcount by
non-contiguous Jones Act market and function for our non-union
employees as of December 20, 2009.
Environmental
Initiatives
We are committed to protecting the environment. We strive to
support our commitment to protect the environment with programs
that promote best practices in environmental stewardship. During
2008, we launched our Horizon Green initiative. Through our
Horizon Green initiative, we strive to better understand and
measure our impact on the environment, and to develop programs
that
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incorporate environmental stewardship and impact into our core
operations. Within the Horizon Green initiative, we are
addressing four key areas:
Marine
Environment
To protect the marine environment, we have established several
programs in addition to compliance with the MARPOL Convention
(International Convention for the Prevention of Pollution from
Ships) and ISM Code (International Safety Management Code)
created by the IMO. These programs include vessel management
controls and audits, ballast water management, waste stream
analyses, low sulfur diesel fuel usage and marine terminal
pollution mitigation plans.
Emissions
We strive to reduce transportation emissions, including carbon
dioxide, particulates, nitrous oxides and sulfur dioxide,
through improvements in vessel fuel consumption and truck
efficiency combined with the use of alternative fuels and more
efficient transportation alternatives, such as coastwise
shipping.
Sustainability
We believe in a long-term, sustainable approach to logistics
management which will benefit the Company, its associates,
customers, shareholders and the community. Examples include
reducing empty backhaul miles through logistics network
optimization, reduced fossil fuel consumption and using recycled
materials to build containers.
Carbon
Offsets
Freight shipping is one of the world’s leading sources of
carbon dioxide emissions that contribute to global climate
change. To address this challenge together with our customers,
Horizon Logistics has introduced a new carbon offset shipping
program, developed by our custom delivery and special handling
division. The carbon offset program offers customers a
carbon-neutral shipping solution through which retailers and
manufacturers can purchase environmental credits that fund
carbon offset programs, such as forestation and alternative
energy projects.
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 2009 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
100 F Street, NE, Washington, DC 20549. The public may
obtain information on the operation of the Public Reference Room
by calling
1-800-SEC-0330.
We are the
Subject of an Investigation by the Antitrust Division of the
Department of Justice Regarding Possible Antitrust Violations in
the Domestic Ocean Shipping Business. The Government
Investigation Could Result in a Material Criminal Penalty and
Could Have a Material Adverse Effect on Our
Business.
On April 17, 2008, we received a federal grand jury
subpoena and search warrant from the U.S. District Court
for the Middle District of Florida seeking information regarding
an investigation by the Antitrust Division of the Department of
Justice (“DOJ”) into possible antitrust violations in
the
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domestic ocean shipping business. Subsequently, the DOJ expanded
the timeframe covered by the subpoena. We are currently
providing documents to the DOJ in response to the subpoenas, and
we intend to continue to fully cooperate with the DOJ in its
investigation.
It is possible that we, our current or former directors,
officers or employees could be subject to criminal prosecution
and, if found guilty, imprisonment and substantial and material
fines and penalties. Three of our former employees have plead
guilty to a conspiracy to eliminate competition and raise prices
for moving freight between the continental U.S. and Puerto
Rico and were sentenced to varying prison terms. The effect of
an indictment being returned by the grand jury against us or our
directors or officers could, by itself, have a significant
impact on us and our business.
It is possible that the government investigation may lead to a
criminal conviction or settlement providing for the payment of
substantial fines by us. It is also possible that the outcome of
the investigation would damage our reputation and might impair
our ability to conduct our ocean shipping business in one or
more of the domestic trade lanes or with one or more of our
customers. Any conviction or potential settlement with the DOJ
could have a substantial and material effect on our financial
position, liquidity and cash flow.
Numerous
Purported Class Action Lawsuits Related to the Subject of
the Antitrust Investigations Have Been Filed Against Us and We
May Be Subject to Civil Liabilities.
Subsequent to the commencement of the DOJ investigation,
fifty-seven purported class action lawsuits were filed against
us and other domestic shipping carriers alleging price-fixing in
violation of the Sherman Act. The complaints seek treble
monetary damages, costs, attorneys’ fees, and an injunction
against the allegedly unlawful conduct. The federal cases have
been consolidated by the federal Panel on Multidistrict
Litigation in the District of Puerto Rico for the cases
including the Puerto Rico tradelane and the Western
District of Washington for the cases including the Hawaii and
Guam tradelanes. A federal class action lawsuit was filed in the
District of Alaska for the Alaska tradelane. A similar complaint
was filed in Duval County, Florida, against us and other
domestic shipping carriers by a customer alleging price-fixing
in violation of the Florida Antitrust Act and the Florida
Deceptive and Unlawful Trade Practices Act.
A related securities class action lawsuit was filed in the
District of Delaware against us and several of our current and
former employees, including our Chief Executive Officer. The
lawsuit alleges that the defendants made material
misrepresentations and omissions, including with respect to the
alleged price-fixing and violations of the Sherman Act, causing
the plaintiffs to pay inflated prices for our shares. The
securities litigation seeks unspecified monetary damages, among
other things.
Further, it is possible that there could be unfavorable outcomes
in the lawsuits that could result in the payment by us of
substantial monetary damages. We could also be required to make
payments for settlements in amounts that are not determinable.
For example, in connection with the Puerto Rico multidistrict
litigation (“MDL”), we have entered into a settlement
agreement, subject to count approval, and have agreed to pay
$20.0 million and to certain base-rate freezes. We have
paid $5.0 million into an escrow account pursuant to the
terms of the settlement agreement. The existence of these
proceedings could have a material adverse effect on our ability
to access the capital markets to raise additional funds to
refinance indebtedness or for other purposes. We cannot predict
or determine the timing or final outcomes of the investigation
or the lawsuits and are unable to estimate the amount or range
of loss that could result from unfavorable outcomes but, adverse
results in some or all of these legal proceedings could be
material to our results of operations, financial condition or
cash flows.
We have
Incurred Significant Costs in Connection with the
Antitrust-Related Proceedings and These Costs Will Continue to
Have a Material Adverse Effect on Our Financial Condition,
Liquidity and Cash Flow.
The legal costs associated with the investigation and the
lawsuits and the amount of time required to be spent by
management and the board of directors on these matters has had a
material adverse
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effect on our business, financial condition and results of
operations. In addition to expenses incurred for our defense in
these matters, under Delaware law and our bylaws, we may have an
additional obligation to indemnify our current and former
officers and directors in relation to those matters, and we have
advanced, and may continue to advance, legal fees and expenses
to certain other current and former employees. We have incurred
legal fees and costs for antitrust-related investigations and
legal proceedings of $12.2 million in fiscal year 2009 and
$10.7 million in fiscal year 2008. Our legal costs and fees
have had a material adverse effect on our financial condition,
liquidity and cash flow and will continue have a substantial
impact on our financial condition.
Our Ability to
Pay any Settlement in Connection with the Class Action
Lawsuits or the Government Investigation or Satisfy any Judgment
or Criminal Penalty May be Constrained by the Terms of Our Debt
Agreements.
Our ability to pay any settlement of either the class action
lawsuits or in connection with the government investigation is
limited by the terms of our credit agreement and the indenture
governing our convertible notes. Our credit agreement includes
financial covenants that limit our ability to pay a fine or
settlement. In addition, the events of default under both the
credit agreement and the indenture governing our convertible
notes may require an amendment in order to pay a substantial
fine or penalty. The lenders under our credit agreement or the
holders of our convertible notes may not agree to amend the
terms of the debt or they may require us to pay substantial fees
and incur unreasonable expenses in order to obtain an amendment.
For example, the pending settlement agreement entered into in
connection with the Puerto Rico MDL litigation required the
amendment of our credit agreement to permit the payments
required under the settlement agreement. To amend the credit
agreement, our lenders required us to pay a substantial consent
fee and the interest rate for borrowings under the credit
agreement was increased by 1.50% and the commitment fee was
increased. The fees and expenses incurred in connection with the
amendment of our credit agreement had a material adverse effect
on our financial condition. If we have to amend our credit
agreement or the indenture governing our convertible notes to
effect any other settlements or satisfy a judgment, we cannot
assure you that our lenders will permit such amendment, or that
such amendment will be available on terms that are acceptable to
us.
Our Ability to
Pay a Fine, Settlement or Judgment is Very Limited, and a
Substantial Fine, Settlement or Judgment Would Have a Material
Adverse Effect on Our Business, Operations and Financial
Condition.
Our ability to satisfy any fine or judgment or pay any
settlement is limited by our limited cash, limited borrowing
capacity, lack of unencumbered assets, limited cash flow and our
need to fund necessary capital expenditures, including vessel
maintenance and replacement of old vessels. We cannot assure you
that we would be able to borrow sufficient money or generate
sufficient cash flow to pay any fine, judgment or settlement in
connection with the antitrust-related matters. If we were
required to pay a substantial fine, it would have a material
adverse effect on our business plans, as well as our financial
condition and results of operations.
If We do not
Meet the New York Stock Exchange Continued Listing Requirements,
Our Common Stock May be Delisted, and We May be Required to
Repurchase or Refinance Our 4.25% Convertible Notes Due
2012.
In order to maintain our listing on the New York Stock Exchange
(“NYSE”), we must continue to meet the NYSE minimum
share price listing rule, the minimum market capitalization rule
and other continued listing criteria. If our common stock were
delisted, it could (i) reduce the liquidity and market
price of our common stock; (ii) negatively impact our
ability to raise equity financing and access the public capital
markets; and (iii) materially adversely impact our results
of operations and financial condition. In addition, if our
common stock is not listed on the NYSE or another national
exchange, holders of our 4.25% convertible notes due 2012 will
be entitled to require us to repurchase their
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convertible notes. Our senior secured credit facility provides
that the occurrence of this repurchase right constitutes a
default under such facility.
A further slowdown in economic conditions of our Jones Act and
Guam markets may adversely affect our business. 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. Consumer purchases or discretionary items
generally decline during periods where disposable income is
adversely affected or there is economic uncertainty, and, as a
result our customers may ship fewer containers or may ship
containers only at reduced rates. For example, shipping volume
in Hawaii was down approximately 10% and Puerto Rico and Alaska
volumes were down approximately 5% in 2009 as compared to 2008
as a result of poor economic conditions. The economic downturn
in our tradelanes has negatively affected our earnings. We
cannot predict the length of the current economic downturn or
whether further economic decline may occur. At this time, we are
also unable to determine the impact to our customers and
business, if any, of programs adopted by the U.S. or other
governments to stabilize and support the economy.
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, variability 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.
If the Jones Act was 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.
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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 there
can be no assurance that there will not be future efforts to
repeal all, or any portion of, the tonnage tax as it applies to
our shipping activities.
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 five ports located in the continental
U.S. (Elizabeth, New Jersey; Jacksonville, Florida;
Houston, Texas; Los Angeles, California; and Tacoma,
Washington). In general, these agreements, which were most
recently 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 20, 2009, we had 1,895 employees, of
which 1,277 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.
Our collective bargaining agreements are scheduled to expire as
follows: three in 2011, five in 2012, one in 2103 and one in
2014.
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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 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), the Clean Air Act and other federal environmental laws,
and certain state laws require us, as a vessel operator, to
comply with numerous environmental regulations and 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.
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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, 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.
The Coast Guard’s 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
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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 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.
Our protection and indemnity insurance (“P&I”) is
provided by a mutual P&I club which is a member of the
International Group of P&I clubs. As a mutual club, it
relies 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 international marine insurance clubs to
increase the cost of premiums, resulting not only in higher
premium costs, but also higher levels of deductibles and
self-insurance retentions.
Our coverage under the Longshore Act for U.S. Longshore and
Harbor Workers compensation is provided by Signal Mutual
Indemnity Association Ltd. Signal Mutual is a non-profit
organization whose members pool risks of a similar nature to
achieve long-term and stable insurance protection at cost.
Signal Mutual is now the largest provider of Longshore benefits
in the country. This program provides for first-dollar coverage
without a deductible.
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
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more of our vessels being removed from operation. We also cannot
be assured 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.
The reliability of our service may be adversely affected if our
spare vessels reserved for relief are not deployed efficiently
under extreme circumstances, which could damage our reputation
and harm our operating results. 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
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.
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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.
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 the three Jones
Act 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 recently 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
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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 22 years and the average
age of our Jones Act vessels is approximately 32 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 our
existing vessels with new vessels based on uncertainties related
to financing, timing and shipyard availability.
Our vessels are dry-docked periodically to comply with
regulatory requirements and to effect maintenance and repairs,
if necessary. The cost of such repairs at each dry-docking are
difficult to predict with certainty and can be substantial. Our
established processes have enabled us to make on average six
dry-dockings per year over the last five years with a minimal
impact on schedule. There are some years when we have more than
the average of six dry-dockings annually. In addition, our
vessels may have to be dry-docked in the event of accidents or
other unforeseen damage. Our insurance may not cover all of
these costs. Large unpredictable repair and dry-docking expenses
could significantly decrease our profits.
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, Michael T. Avara,
our Senior Vice President, Chief Financial Officer, 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
Form 10-K.
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.
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As of December 20, 2009, on a consolidated basis, we had
(i) $542.5 million of outstanding funded long-term
debt (exclusive of outstanding letters of credit with an
aggregate face amount of $11.1 million),
(ii) approximately $202.4 million of aggregate trade
payables, accrued liabilities and other balance sheet
liabilities (other than the long-term debt referred to above)
and (iii) a funded
debt-to-equity
ratio of approximately 5.4:1.0.
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,
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 20, 2009, we had approximately $113.9 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. Based on our
leverage ratio, borrowing availability under the revolving
credit facility was
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$98.4 million as of December 20, 2009. 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.
Our 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 the DOJ investigation and related lawsuits and 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 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:
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We may incur substantial indebtedness in the future. Our
incurrence of additional indebtedness would intensify the risks
described above.
The term loan and revolving credit portions of our senior credit
facility bear interest at variable rates. As of
December 20, 2009, we had outstanding a $112.5 million
term loan and $100.0 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 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 redemption. If such a
situation occurs, there is no guarantee that we will be able to
obtain the funds necessary to affect such 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.
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Stock markets in general and our common stock in particular have
experienced significant price and volume volatility over the
past year. The market price and trading volume of our common
stock may continue to be subject to significant fluctuations due
not only to general stock market conditions but also to
variability in the prevailing sentiment regarding our operations
or business prospects, as well as potential further decline of
our common stock due to margin calls on loans secured by pledges
of our common stock.
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 revenue 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.
Environmental
Regulation and Climate Change
All of our operations are subject to various federal, state and
local environmental laws and regulations implemented principally
by the Environmental Protection Agency (the “EPA”),
the United States Department of Transportation, the United
States Coast Guard and state environmental regulatory agencies.
These regulations govern the management of hazardous wastes,
discharge of pollutants into the air, surface and underground
waters, including rivers, harbors and the
200-mile
exclusive economic zone of the United States, and the disposal
of certain substances.
The operation of our vessels is also subject to regulation under
various international and federal laws, as interpreted and
implemented by the United States Coast Guard (the “Coast
Guard”) and port state authorities in our
non-U.S. ports
of call, as well as certain state and local laws. Additionally,
our vessels are required to meet construction and repair
standards established by the American Bureau of Shipping (ABS),
Det Norske Veritas (DNV), the IMO
and/or the
Coast Guard, and to meet operational, security and safety
standards and regulations presently established by the Coast
Guard. The Coast Guard further licenses our seagoing supervisory
personnel and certifies our seamen.
Our marine operations are further subject to regulation by
various federal agencies or the successors to those agencies,
including the Surface Transportation Board (the successor
federal agency to the Interstate Commerce Commission), the
United States Department of Transportation Maritime
Administration (“MARAD”), the Federal Maritime
Commission and the Coast Guard. These regulatory authorities
have broad powers over operational safety, tariff filings of
freight rates, service contracts, certain mergers, contraband,
environmental contamination, financial reporting and homeland,
port and vessel security.
Our common and contract motor carrier operations are regulated
by the United States Surface Transportation Board and various
state agencies. The Company’s drivers also must comply with
the safety and fitness regulations promulgated by the United
States Department of Transportation (“DOT”), including
certain regulations for drug and alcohol testing and hours of
service. The officers and unlicensed crew members employed
aboard our vessels must also comply with numerous safety and
fitness regulations promulgated by the Coast Guard, the DOT, and
the IMO, including certain regulations for drug testing and
hours of service.
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In 1990, the Oil Pollution Act of 1990 (“OPA”) was
enacted to establish an extensive regulatory and liability
regime designed to protect the environment from the damage
caused by oil spills. OPA is applicable to all owners and
operators whose vessels trade with the United States or its
territories or possessions, or whose vessels operate in the
navigable waters of the United States, which include the United
States territorial sea and the 200 nautical mile exclusive
economic zone around the United States. Additionally, under
OPA, vessel owners, operators and bareboat charterers are
“responsible parties” and are jointly, severally and
strictly liable (unless the spill results solely from the act or
omission of a third party, an act of God or an act of war) for
all containment and
clean-up
costs and other damages arising from discharges or threatened
discharges of oil from their vessels. “Damages” are
defined broadly under OPA to include:
Effective July 31, 2009, the OPA regulations were amended
to increase the liability limits for responsible parties for any
vessel other than a tank vessel to $1,000 per gross ton or
$854,400, whichever is greater. These limits of liability do not
apply if an incident was directly caused by violation of
applicable federal safety, construction or operating regulations
or by a responsible party’s gross negligence or willful
misconduct, or if the responsible party fails or refuses to
report the incident or to cooperate and assist in connection
with oil removal activities.
In 1980, the Comprehensive Environmental Response, Compensation
and Liability Act (“CERCLA”) was adopted and is
applicable to the discharge of hazardous substances (other than
oil) whether on land or at sea. CERCLA also imposes liability
similarly to OPA and provides for cleanup, removal and natural
resource damage. Liability per vessel under CERCLA is limited to
the greater of $300 per gross ton or $5 million, unless the
incident is caused by gross negligence, willful misconduct, or a
violation of certain regulations, in which case liability is
unlimited.
OPA requires owners and operators of vessels to establish and
maintain with the Coast Guard evidence of financial
responsibility sufficient to meet their potential liabilities
under the OPA. Effective July 1, 2009, the Coast Guard
regulations requiring evidence of financial responsibility were
amended to conform the OPA financial responsibility requirements
to the July 2009 increases in liability limits. Current Coast
Guard regulations require evidence of financial responsibility
in the amount of $1,000 per gross ton for non-tank vessels,
which includes the OPA limitation on liability of $700 per gross
ton and the CERCLA liability limit of $300 per gross ton.
Congress enacted the Delaware River Protection Act
(“DRPA”) to increase OPA liability limits to levels
that would reflect a proper apportionment between responsible
parties and the National Pollution Fund. Congress was also
concerned that inflation would further erode responsible party
liability and shift the economic risk of oil spills to the
public. The DRPA therefore also required that OPA limits of
liability be adjusted not less than every three years to reflect
significant increases in the CPI in order to preserve the
“polluter pays” principle embodied by OPA.
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Under the regulations, vessel owners and operators may evidence
their financial responsibility by showing proof of insurance,
surety bond, self-insurance or guaranty. Under OPA, an owner or
operator of a fleet of vessels is required only to demonstrate
evidence of financial responsibility in an amount sufficient to
cover the vessels in the fleet having the greatest maximum
liability under OPA.
The Coast Guard’s regulations concerning certificates of
financial responsibility provide, in accordance with OPA, that
claimants may bring suit directly against an insurer or
guarantor that furnishes certificates of financial
responsibility. In the event that such insurer or guarantor is
sued directly, it is prohibited from asserting any contractual
defense that it may have had against the responsible party and
is limited to asserting those defenses available to the
responsible party and the defense that the incident was caused
by the willful misconduct of the responsible party. Certain
organizations, which had typically provided certificates of
financial responsibility under pre-OPA laws, including the major
protection and indemnity organizations, have declined to furnish
evidence of insurance for vessel owners and operators if they
are subject to direct actions or are required to waive insurance
policy defenses.
OPA specifically permits individual states to impose their own
liability regimes with regard to oil pollution incidents
occurring within their boundaries, and some states have enacted
legislation providing for unlimited liability for oil spills. In
some cases, states, which have enacted such legislation, have
not yet issued implementing regulations defining vessels
owners’ responsibilities under these laws. We intend to
comply with all applicable state regulations in the ports where
our vessels call.
We maintain Certificates of Financial Responsibility as required
by the Coast Guard for our vessels.
Enacted in 1972, the United States Clean Water Act
(“CWA”) prohibits the discharge of oil or hazardous
substances in navigable waters and imposes strict liability in
the form of penalties for any unauthorized discharges. The CWA
also imposes substantial liability for the costs of removal,
remediation and damages and complements the remedies available
under OPA and CERCLA.
The EPA historically exempted the discharge of ballast water and
other substances incidental to the normal operation of vessels
in the United States ports from the CWA permitting requirements.
On March 31, 2005, however, a United States District Court
ruled that the EPA exceeded its authority in creating an
exemption for ballast water. On September 18, 2006, the
court issued an order invalidating the exemption in the
EPA’s regulations for all discharges incidental to the
normal operation of a vessel as of September 30, 2008, and
directing the EPA to develop a system for regulating all
discharges from vessels by that date. Under the court’s
ruling, owners and operators of vessels visiting
United States ports also would be required to comply with
the CWA permitting program to be developed by the EPA or face
penalties.
The EPA has issued regulations implementing a “Vessel
General Permit” (“VGP”) that codifies “best
management practices” for the control of twenty-eight
listed, specific discharges, including ballast water, that occur
normally in the operation of a vessel. We have obtained and are
now operating each of our ships in accordance with its VGP; the
VGP requirements have increased our record keeping requirements
but have not otherwise expect a material impact on our
operations.
Several states have specified significant, additional
requirements in connection with such state mandated CWA
certifications relating to the VGP rules and regulations.
Currently implemented state requirements have not significantly
increased our compliance efforts but we cannot predict what
additional state requirements may come into effect in the future
and, therefore, the future effect of the VGP regulations.
Various states have also enacted legislation restricting ballast
water discharges and the introduction of non-indigenous species
considered to be invasive. These and any similar restrictions
enacted in the future could increase the costs of operating in
the relevant waters.
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The United States National Invasive Species Act
(“NISA”) was enacted in 1996 in response to growing
reports of harmful organisms being released into United States
waters through ballast water taken on by vessels in foreign
ports. The Coast Guard adopted regulations under NISA in July
2004 that impose mandatory ballast water management practices
for all vessels equipped with ballast water tanks entering
United States waters. These requirements can be met by
performing mid-ocean ballast exchange, by retaining ballast
water on board the vessel, or by using environmentally sound
alternative ballast water management methods approved by the
Coast Guard. Mid-ocean ballast exchange is the primary method
for compliance with the Coast Guard regulations, since holding
ballast water can prevent vessels from performing cargo
operations upon arrival in the United States, and alternative
methods are still under development. Vessels that are unable to
conduct mid-ocean ballast exchange due to voyage or safety
concerns may discharge minimum amounts of ballast water,
provided that they comply with recordkeeping requirements and
document the reasons they could not follow the required ballast
water management requirements. In the August 28, 2009
Federal register, the Coast Guard proposed to amend their
regulations on ballast water management by establishing
standards for the allowable concentration of living organisms in
ship’s ballast water discharged in US waters. As proposed
it is a two tier standard; the initial limits match those set
internationally by IMO in the Ballast Water Convention. These
limits are proposed to come into force by January 1, 2012.
Technology is available that will enable ships to meet these
discharge standards. The second tier standard is more stringent
and cannot be met using existing treatment technology. This
second tier, as proposed, would come into effect on
January 1, 2017
The United States House of Representatives recently passed a
bill that amends NISA by prohibiting the discharge of ballast
water unless it has been treated with specified methods or
acceptable alternatives. Similar bills have been introduced in
the United States Senate, but it cannot be predicted which bill,
if any, will be enacted into law. In the absence of federal
standards, states have enacted legislation or regulations to
address invasive species through ballast water and hull cleaning
management and permitting requirements. For instance, the State
of California has recently enacted legislation extending its
ballast water management program to regulate the management of
“hull fouling” organisms attached to vessels and
adopted regulations limiting the number of organisms in ballast
water discharges. Additionally, a United States District Court
dismissed challenges to the State of Michigan’s ballast
water management legislation mandating the use of various
techniques for ballast water treatment; this decision was
affirmed by the United States Court of Appeals for the Sixth
Circuit on November 21, 2008. Other states may proceed with
the enactment of similar requirements that could increase the
costs of operating in state waters.
In 1970, the United States Clean Air Act (as amended by the
Clean Air Act Amendments of 1977 and 1990, the “CAA”)
was enacted and required the EPA to promulgate standards
applicable to emissions of volatile organic compounds and other
air contaminants. The CAA also requires states to draft State
Implementation Plans (“SIPs”), which are designed to
attain national health-based air quality standards in primarily
major metropolitan
and/or
industrial areas. Several SIPs regulate emissions resulting from
vessel loading and unloading operations by requiring the
installation of vapor control equipment. The EPA and some
states, however, have each proposed more stringent regulations
of air emissions from ocean-going vessels. For example, the
California Air Resources Board of the State of California (the
“CARB”) has petitioned the EPA to permit California
clean-fuel regulations applicable to all vessels sailing within
24 nautical miles of the California coastline whose itineraries
call for them to enter any California ports, terminal
facilities, or internal or estuarine waters. Although currently
under a court challenge, and pending an EPA decision on
CARB’s petition, these regulations are being enforced in
California.
The state of California is also implementing regulations that
will require vessels to either shut down the auxiliary engines
while in port in California and use electrical power supplied at
the dock or
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implement alternatives means to significantly reduce emissions
from the vessel’s electric power generating equipment while
it is in port. Generally, a vessel will run its auxiliary
engines while at port in order to power lighting, ventilation,
pumps, communication and other onboard equipment. The emissions
from running auxiliary engines while at port may be contributors
to particulate matter in the ambient air. The purpose of the
regulations is to reduce the emissions from a vessel while it is
in port. The cost of reducing vessel emissions while at port may
be substantial if we determine that we cannot use or the ports
will not permit us to use electrical power supplied at the dock.
Alternatively, the ports may pass the cost of supplying
electrical power at the port to us, and we may incur additional
costs in connection with modifying our vessels to use electrical
power supplied at the dock.
International Law, the MARPOL (International Convention for the
Prevention of Pollution from Ships, 1973, as modified by the
Protocol of 1978 relating thereto) Convention, may, in the
future, require the use of low sulfur fuels worldwide in both
auxiliary and main propulsion diesel engines on ships. By
July 1, 2010, the MARPOL Amendments are expected to require
all diesel engines on ships built between 1990 and 2000 to meet
a Nitrous Oxide (NOx) standard of
17.0g-NOx/kW-hr.
On January 1, 2011 the NOx standard will be lowered to 14.4
g-NOx/kW-hr and on January 1, 2016 it will be further
lowered to 3.4 g-NOx/kW-hr, for vessels operating in a
designated Emission Control Area (ECA).
In addition, the current global sulfur cap of 4.5% Sulfur will
be reduced to 3.5% Sulfur in 2010 and further reduced to as low
as 0.5% sulfur as early as 2020, and no later than 2025,
depending upon recommendations made in connection with a MARPOL
fuel availability study scheduled for 2018. Under these MARPOL
Amendments, the current 1.5% maximum sulfur omission permitted
in designated Emission Control Areas (ECAs) will be reduced to
1.0% sulfur on July 1, 2010, and then further reduced to
0.1% sulfur on January 1, 2015. These sulfur limitations
will be applied to all subsequently approved ECAs under the
MARPOL Amendments. The EPA has received preliminary approval of
the IMO, in coordination with Environment Canada, to designate
all waters within 200 nautical miles of the U.S and
Canadian coasts as ECA’s. Under EPA regulations the North
American ECA could go into force as early as 2012 limiting the
sulfur content in fuel that is burned as described above.
Beginning in 2016, NOx after-treatment requirements become
applicable in this ECA as well.
The Resource
Conservation and Recovery Act
Our operations occasionally generate and require the
transportation, treatment and disposal of both hazardous and
non-hazardous solid wastes that are subject to the requirements
of the United States Resource Conservation and Recovery Act
or comparable state, local or foreign requirements. In addition,
from time to time we arrange for the disposal of hazardous waste
or hazardous substances at offsite disposal facilities. If such
materials are improperly disposed of by third parties, we may
still be held liable for cleanup costs under applicable laws.
Endangered
Species Regulation
The Endangered Species Act, federal conservation regulations and
comparable state laws protect species threatened with possible
extinction. Protection of endangered species may include
restrictions on the speed of vessels in certain ocean waters and
may require us to change the routes of our vessels during
particular periods. For example, in an effort to prevent the
collision of vessels with the North Atlantic right whale,
federal regulations restrict the speed of vessels to ten knots
or less in certain areas along the Atlantic Coast of the
U.S. The reduced speed of our vessels and special routing
along the Atlantic Coast of our vessels is expected to result in
the use of additional fuel, which will affect our results of
operations.
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Greenhouse Gas
Regulation
In February 2005, the Kyoto Protocol to the United Nations
Framework Convention on Climate Change (the “Kyoto
Protocol”) was enacted. Pursuant to the Kyoto Protocol,
adopting countries are required to implement national programs
to reduce emissions of certain gases, generally referred to as
greenhouse gases, which are suspected of contributing to global
warming. In October 2007, the California Attorney General and a
coalition of environmental groups petitioned the EPA to regulate
greenhouse gas emissions from ocean-going vessels under the CAA.
Any passage of climate control legislation or other regulatory
initiatives in the United States that restrict emissions of
greenhouse gases could entail financial impacts on our
operations that cannot be predicted with certainty at this time.
The issue is being heavily debated within various international
regulatory bodies, such as the IMO, as well and climate control
measures that effect shipping could also be implemented on an
international basis potentially affecting our vessel operations.
Vessel
Security Regulations
Since September 11, 2001, there have been a variety of
initiatives intended to enhance vessel security within the
United States. On November 25, 2002, the Maritime
Transportation Security Act of 2002 (the “MTSA”) came
into effect. To implement certain portions of the MTSA, in July
2003, the Coast Guard issued regulations requiring the
implementation of certain security requirements aboard vessels
operating in waters subject to the jurisdiction of the United
States. Similarly, in December 2002, amendments to the
International Convention for the Safety of Life at Sea
(“SOLAS”) created a new chapter of the convention
dealing specifically with maritime security. The new chapter
came into effect in July 2004 and imposes various detailed
security obligations on vessels and port authorities, most of
which are contained in the newly created International Ship and
Port Facilities Security Code (the “ISPS Code”). Among
the various requirements are:
The Coast Guard regulations, intended to align with
international maritime security standards, exempt
non-United
States vessels from MTSA vessel security measures provided such
vessels have on board a valid International Ship Security
Certificate that attests to the vessel’s compliance with
SOLAS security requirements and the ISPS Code as ratified by the
ship’s flag state. Vessels native to the United States,
however, are not exempted from the security measures addressed
by the MTSA, SOLAS and the ISPS Code. We have implemented the
various security measures addressed by the MTSA, SOLAS and the
ISPS Code.
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 20, 2009:
On April 17, 2008, we received a grand jury subpoena and
search warrant from the U.S. District Court for the Middle
District of Florida seeking information regarding an
investigation by the Antitrust Division of the Department of
Justice (the “DOJ”) into possible antitrust violations
in the domestic ocean shipping business. Subsequently, the DOJ
expanded the timeframe covered by the subpoena. We are currently
providing documents to the DOJ in response to the subpoena. We
intend to cooperate fully with the DOJ in its investigation.
We have entered into a conditional amnesty agreement with the
DOJ under its Corporate Leniency Policy. The amnesty agreement
pertains to a single contract relating to ocean shipping
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services provided to the United States Department of Defense.
The DOJ has agreed to not bring any criminal prosecution with
respect to that government contract as long as we, among other
things, continue our full cooperation in the investigation. The
amnesty does not bar a claim for damages that may be sought by
the DOJ under any applicable federal law or regulation.
On October 9, 2009, we received a Request for Information
and Production of Documents from the Puerto Rico Office of
Monopolistic Affairs. The request relates to an investigation
into possible price fixing and unfair competition in the Puerto
Rico domestic ocean shipping business. We are currently
providing documents in response to this request, and we intend
to cooperate fully in this investigation.
Subsequent to the commencement of the DOJ investigation, a
number of purported class action lawsuits were filed against us
and other domestic shipping carriers. Fifty-seven cases have
been filed in the following federal district courts: eight in
the Southern District of Florida, six in the Middle District of
Florida, twenty in the District of Puerto Rico, eleven in the
Northern District of California, two in the Central District of
California, one in the District of Oregon, eight in the Western
District of Washington, and one in the District of Alaska.
Nineteen of the foregoing district court cases that related to
ocean shipping services in the Puerto Rico tradelane were
consolidated into a single multidistrict litigation
(“MDL”) proceeding in the District of Puerto Rico. All
of the foregoing district court cases that related to ocean
shipping services in the Hawaii and Guam tradelanes were
consolidated into MDL proceedings in the Western District of
Washington. One district court case remains in the District of
Alaska, relating to the Alaska tradelane.
Each of the federal district court cases purports to be on
behalf of a class of individuals and entities who directly, or
indirectly in one case, purchased domestic ocean shipping
services from the various domestic ocean carriers. The
complaints allege price-fixing in violation of the Sherman Act
and seek treble monetary damages, costs, attorneys’ fees,
and an injunction against the allegedly unlawful conduct.
On June 11, 2009, we entered into a settlement agreement
with the plaintiffs in the Puerto Rico MDL litigation. Under the
settlement agreement, which is subject to Court approval, we
have agreed to pay $20.0 million and to certain base-rate
freezes to resolve claims for alleged antitrust violations in
the Puerto Rico tradelane. We paid $5.0 million into an
escrow account pursuant to the terms of the settlement agreement
and will be required to pay $5.0 million within
90 days after preliminary approval of the settlement
agreement by the district court and $10.0 million within
five business days after final approval of the settlement
agreement by the district court.
The base-rate freeze component of the settlement agreement
provides that class members who have contracts in the Puerto
Rico trade with us as of the effective date of the final
settlement agreement would have the option, in lieu of receiving
cash, to have their “base rates” frozen for a period
of two years. The base-rate freeze would run for two years from
the expiration of the contract in effect on the effective date
of the final settlement agreement. All class members would be
eligible to share in the $20.0 million cash component, but
only contract customers of ours would be eligible to elect the
base-rate freeze in lieu of receiving cash. We have the right to
terminate the settlement agreement under certain circumstances.
On July 8, 2009, the plaintiffs filed a motion for
preliminary approval of the settlement agreement in the Puerto
Rico MDL litigation. Several hearings on the motion for
preliminary approval of the settlement agreement have been held
where the Court has heard the objections of certain non-settling
defendants. We are awaiting the Court’s decision.
On March 20, 2009, we filed a motion to dismiss the claims
in the Hawaii and Guam MDL litigation. The plaintiffs filed a
response to our motion to dismiss on April 20, 2009, and we
filed a reply on May 8, 2009. On August 18, 2009, the
District Court for the Western District of Washington entered an
order dismissing, without prejudice, the Hawaii and Guam MDL
litigation. In dismissing the complaint, however, the plaintiffs
were granted thirty days to amend their complaint, and we and
the plaintiffs agreed to extend the time to file an amended
complaint to November 16, 2009. Subsequently, the Court
granted the plaintiffs until May 10, 2010 to file an
amended complaint. We and the plaintiffs have agreed to stay
discovery in the Alaska litigation. We intend to vigorously
defend against these purported class action lawsuits.
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In addition, on July 9, 2008, a complaint was filed by
Caribbean Shipping Services, Inc. in the Circuit Court,
4th Judicial Circuit in and for Duval County, Florida,
against us and other domestic shipping carriers alleging
price-fixing in violation of the Florida Antitrust Act and the
Florida Deceptive and Unlawful Trade Practices Act. The
complaint seeks treble damages, injunctive relief, costs and
attorneys’ fees. The case is not brought as a class action.
This case is pending discovery.
Through December 20, 2009, we have incurred approximately
$22.9 million in legal and professional fees associated
with the DOJ investigation and the antitrust related litigation.
In addition, we have paid $5.0 million into an escrow
account pursuant to the terms of the Puerto Rico MDL settlement
agreement. Further, a reserve of $15.0 million related to
the expected future payments pursuant to the terms of the
settlement of the Puerto Rico MDL litigation has been included
in other accrued liabilities on our consolidated balance sheet.
We are unable to predict the outcome of the Hawaii and Guam MDL
litigation, the Alaska
class-action
litigation and the Florida Circuit Court litigation. We have not
made a provision for any of these claims in the accompanying
financial statements. It is possible that the outcome of these
proceedings could have a material adverse effect on our
financial condition, cash flows and results of operations.
In addition, in connection with the DOJ investigation, it is
possible that we could suffer criminal prosecution and be
required to pay a substantial fine. We have not made a provision
for any possible fines or penalties in the accompanying
financial statements, and we can give no assurance that the
final resolution of the DOJ investigation will not result in
significant liability and will not have a material adverse
effect on our financial condition, cash flows and results of
operations.
On December 31, 2008, a securities class action lawsuit was
filed by the City of Roseville Employees’ Retirement System
in the United States District Court for the District of
Delaware, naming us and six current and former employees,
including our Chief Executive Officer, as defendants. We filed a
motion to dismiss and the Court granted the motion to dismiss on
November 13, 2009; however, the plaintiffs were granted
eleven days to file an amended complaint. We and the plaintiffs
agreed to extend the time to file the amended complaint, and the
plaintiffs filed their amended complaint on December 23,
2009. The amended complaint added two of our current and former
employees as defendants.
The amended complaint purports to be on behalf of purchasers of
our common stock. The complaint alleges, among other things,
that we made material misstatements and omissions in connection
with alleged price-fixing in our shipping business in Puerto
Rico in violation of antitrust laws. We are preparing a response
to the amended complaint. We are unable to predict the outcome
of this lawsuit; however, we believe that we have appropriate
disclosure practices and intend to vigorously defend against the
lawsuits.
On May 13, 2009, we were served with a complaint filed by a
shareholder in Delaware Chancery Court seeking production of
certain books and records pursuant to Section 220 of the
Delaware General Corporation law. We have reached an agreement
on the scope of the required document production and produced
the required documents. Subsequently, the suit was dismissed.
In the ordinary course of business, from time to time, we become
involved in various legal proceedings. 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. We generally maintain insurance,
subject to customary deductibles or self-retention amounts,
and/or
reserves to cover these types of claims. We also, from time to
time, become involved in routine employment-related disputes and
disputes with parties with which we have contractual relations.
There were no matters submitted to a vote of security holders
through the solicitation of proxies or otherwise during the
fourth quarter of fiscal 2009.
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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 29,
2010, there were approximately 2,656 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 28, 2010, our Board of Directors declared a
quarterly cash dividend of $0.05 per share for our common stock,
which is payable on March 15, 2010 to holders of record at
the close of business on March 1, 2010. We have regularly
paid quarterly dividends as set forth in the table above. We
currently expect that cash dividends comparable to the most
recent declaration will continue to be paid in the future
although we have no commitment to do so and can provide no
assurance this will occur.
During the fourth quarter of 2009, there were no purchases of
shares of the Company’s common stock, by or on behalf of
the Company or any “affiliated purchaser” as defined
by
Rule 10b-18(a)(3)
of the Securities Exchange Act of 1934.
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 1, 2010, and is
incorporated herein by reference.
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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,” included
in this
Form 10-K,
and our consolidated financial statements and the related notes
appearing in Item 15 of this
Form 10-K.
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. Each of the years presented below consisted of
52 weeks.
Selected Financial Data is as follows (in thousands, except per
share data):
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38
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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.
The ongoing challenging economic conditions continued to
negatively impact our results of operations during 2009.
Although we experienced some moderation in volumes towards the
end of 2009, our markets were impacted by weakness in consumer
spending, tourism, and commercial construction. Throughout 2009,
we remained focused on cost containment with the goal of
prudently managing our business.
Operating revenue decreased as a result of lower container
volumes along with lower fuel surcharges, slightly offset by
unit revenue improvements resulting from general rate increases
and cargo mix upgrades. General rate increases are typically
implemented in order to mitigate contractual expense increases.
Terminal services revenue declined as a result of lower exports.
The decrease in operating expense during the year ended
December 20, 2009 is primarily due to lower fuel prices,
lower container volumes, and a decrease in selling, general and
administrative expenses, largely due to the reduction in
workforce and lower stock-based compensation expense. Operating
expense for the year ended December 20, 2009 includes a
$20 million accrual for the potential settlement of the
Puerto Rico MDL litigation.
We believe that we are the nation’s leading Jones Act
container shipping and integrated logistics company, accounting
for approximately 37% 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 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 20 vessels, 15 of which
are fully qualified Jones Act vessels, and approximately 18,500
cargo containers. We also provide comprehensive shipping and
logistics services in our markets, including rail, trucking,
warehousing, distribution and non-vessel operating common
carrier (“NVOCC”) operations. 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 seven ports in the continental
U.S. and in the ports in Guam, Yantian and Xiamen, China
and Kaohsiung, Taiwan.
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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.
Horizon Lines, Inc., a Delaware corporation, (the
“Company” and together with its subsidiaries,
“we”) operates as a holding company for Horizon Lines,
LLC (“Horizon Lines”), a Delaware limited liability
company and wholly-owned subsidiary, Horizon Logistics Holdings,
LLC (“Horizon Logistics”), a Delaware limited
liability company and wholly-owned subsidiary, Horizon Lines of
Puerto Rico, Inc. (“HLPR”), a Delaware corporation and
wholly-owned subsidiary, and Hawaii Stevedores, Inc., a Hawaii
corporation (“HSI”).
In December 1999, CSX Corporation, the former parent of
Sea-Land
Domestic Shipping, LLC (“SLDS”), sold the
international marine container operations of
Sea-Land to
the A.P. Møller Maersk Group (“Maersk”) and SLDS
continued to be owned and operated by CSX Corporation as CSX
Lines, LLC. On February 27, 2003, Horizon Lines Holding
Corp. (“HLHC”) (which at the time was indirectly
majority-owned by Carlyle-Horizon Partners, L.P.) acquired from
CSX Corporation, 84.5% of CSX Lines, LLC, and 100% of CSX Lines
of Puerto Rico, Inc., which together with Horizon Logistics and
HSI 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. The Company was
formed as an acquisition vehicle to acquire, on July 7,
2004, the equity interest in HLHC. 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”). In 2005, the Company
completed its initial public offering. Subsequent to the initial
public offering, 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.
The accompanying consolidated financial statements include the
consolidated accounts of the Company as of December 20,
2009, December 21, 2008 and December 23, 2007 and for
the fiscal years ended December 20, 2009, December 21,
2008 and December 23, 2007. Certain prior period balances
have been reclassified to conform to current period
presentation. In addition, as noted below, certain prior period
balances have been adjusted to conform to recent accounting
pronouncements.
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 20, 2009, December 21,
2008 and December 23, 2007 each consisted of 52 weeks.
We prepare our financial statements in conformity with
accounting principles generally accepted in the United States of
America. The preparation of our financial statements 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
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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 periodically 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 believe the following accounting principles are critical
because they involve significant judgments, assumptions, and
estimates used in the preparation of our financial statements.
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
and other services upon completion of services.
We recognize revenue from logistics operations as service is
rendered. Gross revenue consists of the total dollar value of
services purchased by shippers. Revenue and the associated costs
for the following services are recognized upon proof of delivery
of freight: truck brokerage, rail brokerage, expedited
international air, expedited domestic ground services, and
drayage. Horizon Logistics also offers warehousing/long-term
storage for which revenue is recognized based upon warehouse
space occupied during the reporting period.
We maintain an allowance for doubtful accounts based upon the
expected collectability of accounts receivable reflective of our
historical collection experience. In circumstances in which we
are aware of a specific customer’s inability to meet its
financial obligation (for example, bankruptcy filings, accounts
turned over for collection or litigation), we record a specific
reserve for the bad debts against amounts due. For all other
customers, we recognize reserves for these bad debts based on
the length of time the receivables are past due and other
customer specific factors including, type of service provided,
geographic location and industry. We monitor our collection risk
on an ongoing basis through the use of credit reporting
agencies. Accounts are written off after all means of
collection, including legal action, have been exhausted. We do
not require collateral from our trade customers.
In addition, we maintain 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.
Casualty and
Property Insurance Reserves
We purchase insurance coverage for our exposures related to
employee injuries (state worker’s compensation and
compensation under the Longshore and Harbor workers’
compensation Act), vessel collisions and allisions, property
loss and damage, third party liability, and cargo loss and
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damage. Most insurance policies include a deductible applicable
to each incident or vessel voyage and deductibles can change
from year to year as policies are renewed or replaced. Our
current insurance program includes deductibles ranging from $0
to $2,000,000. In most cases, our claims personnel work directly
with our insurers’ claims professionals or our third-party
claim administrators to continually update the anticipated
residual exposure for each claim. In this process, we evaluate
and monitor each claim individually, and use resources such as
historical experience, known trends, and third-party estimates
to determine the appropriate 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.
Goodwill is reviewed annually, or when events or circumstances
dictate, more frequently. The impairment review for goodwill
consists of a two- step process of first determining the fair
value of the reporting unit and comparing it to the carrying
value of the net assets allocated to the reporting unit. If the
fair value of the reporting unit exceeds the carrying value, no
further analysis or write-down of goodwill is required. If the
fair value of the reporting unit is less than the carrying value
of the net assets, the implied fair value of the reporting unit
is allocated to all the underlying assets and liabilities,
including both recognized and unrecognized tangible and
intangible assets, based on their fair value. If necessary,
goodwill is then written down to its implied fair value. The
indefinite-life intangible asset impairment review consists of a
comparison of the fair value of the indefinite-life intangible
asset with its carrying amount. If the carrying amount exceeds
its fair value, an impairment loss is recognized in an amount
equal to that excess. If the fair value exceeds its carrying
amount, the indefinite-life intangible asset is not considered
impaired.
The fair value of a reporting unit is based on quoted market
prices, if available. Quoted market prices are often not
available for individual reporting units. Accordingly, we base
the fair value of a reporting unit on an expected present value
technique. The expected present value technique for a reporting
unit consists of estimating expected future cash flows
discounted using a rate commensurate with the business risk. The
estimation of fair value utilizing discounted expected future
cash flows includes numerous uncertainties which require our
significant judgment when making assumptions of expected
revenue, operating costs, marketing, selling and administrative
expenses, as well as assumptions regarding the overall shipping
and logistics industries, competition, and general economic and
business conditions, among other factors.
The majority of the customer contracts and trademarks on the
balance sheet as of December 20, 2009 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.
Long-lived assets are reviewed annually, or more frequently if
events or changes in circumstances indicate that the carrying
amount of these assets may not be fully recoverable. The
assessment of possible impairment is based on our ability to
recover the carrying value of our asset based on our estimate of
its undiscounted future cash flows. If these estimated future
cash flows are less than the carrying value of the asset, an
impairment charge would be recognized for the difference between
the asset’s estimated fair value and its carrying value.
The determination of fair value is based on quoted market prices
in active markets, if available. Such quoted market prices are
often not available for our identifiable intangible assets.
Accordingly,
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we base fair value on projected future cash flows discounted at
a rate determined by management to be commensurate with the
business risk. The estimation of fair value utilizing discounted
forecasted cash flows includes numerous uncertainties which
require our significant judgment when making assumptions of
revenues, operating costs, marketing, selling and administrative
expenses, as well as assumptions regarding the overall shipping
and logistics industries, competition, and general economic and
business conditions, among other factors.
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 dry-docking, to maintain the
required operating certificates. These dry-dockings generally
occur every two and a half years, or twice every five years. The
costs of these scheduled dry-dockings are customarily deferred
and amortized over a
30-month
period beginning with the accounting period following the
vessel’s release from dry-dock because dry-dockings enable
the vessel to continue operating in compliance with
U.S. Coast Guard requirements.
We also take advantage of vessel dry-dockings 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
dry-docking, 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.
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.
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.
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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 June 2009, the Financial Accounting Standards Board
(“FASB”) issued SFAS No. 168, “The FASB
Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles”
(“SFAS 168”). SFAS 168 establishes the FASB
Accounting Standards Codification (“Codification”) as
the single source of authoritative GAAP to be applied by
nongovernmental entities, except for the rules and interpretive
releases of the SEC under authority of federal securities laws,
which are sources of authoritative GAAP for SEC registrants. All
guidance contained in the Codification carries an equal level of
authority. The Codification does not change GAAP. Instead, it
takes the thousands of individual pronouncements that currently
comprise GAAP and reorganizes them into approximately 90
accounting Topics, and displays all Topics using a consistent
structure. Contents in each Topic are further organized first by
Subtopic, then Section and finally Paragraph. The Paragraph
level is the only level that contains substantive content.
Citing particular content in the Codification involves
specifying the unique numeric path to the content through the
Topic, Subtopic, Section and Paragraph structure. FASB suggests
that all citations begin with “FASB ASC,” where ASC
stands for Accounting Standards Codification. SFAS 168, now
included within FASB ASC 105 is effective for interim and annual
periods ending after September 15, 2009. The adoption of
FASB ASC 105 did not have an impact on our consolidated results
of operations and financial position, but changes the
referencing system for accounting standards.
In June 2009, the FASB issued SFAS No. 167,
“Amendments to FASB Interpretation No. 46(R)”
(“SFAS 167”), now included within FASB ASC 810.
FASB ASC 810 amends the evaluation criteria to identify the
primary beneficiary of a variable interest entity and requires
ongoing reassessment of whether an enterprise is the primary
beneficiary of the variable interest entity. FASB ASC 810 is
effective for fiscal years beginning after November 15,
2009, and interim periods within those years. We are in the
process of determining the impact the adoption of FASB ASC 810
will have on our results of operations and financial position.
In June 2009, the FASB issued SFAS No. 166,
“Accounting for Transfers of Financial Assets, an Amendment
of FASB Statement No. 140”
(“SFAS 166”), now included within FASB ASC 860.
FASB ASC 860 amends the derecognition guidance in FASB Statement
No. 140 and eliminates the exemption from consolidation for
qualifying special-purpose entities. FASB ASC 860 is effective
for fiscal years beginning after November 15, 2009, and
interim periods within those years. We are in the process of
determining the impact the adoption of FASB ASC 860 will have on
our results of operations and financial position
In May 2009, the FASB issued SFAS No. 165,
“Subsequent Events” (“SFAS 165”), now
referred to as FASB ASC 855 “Subsequent Events”
(“FASB ASC 855”). FASB ASC 855 establishes general
standards of accounting for and disclosure of events that occur
after the balance sheet date, but before the financial
statements are issued or are available to be issued. FASB ASC
855 requires the disclosure of the date through which an entity
has evaluated subsequent events and the basis for that
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date. This disclosure is intended to alert all users of
financial statements that an entity has not evaluated subsequent
events after that date in the set of financial statements being
presented. FASB ASC 855 is effective on a prospective basis for
interim or annual periods ending after June 15, 2009. The
adoption of FASB ASC 855 did not have an impact on our
consolidated results of operations and financial position.
In May 2008, the FASB issued Staff Position No. APB
14-1,
“Accounting for Convertible Debt Instruments that may be
Settled in Cash Upon Conversion”, now included within FASB
ASC 470 “Debt with Conversion and Other Options”
(“FASB ASC 470’’). FASB ASC
470-20
requires that the liability and equity components of convertible
debt instruments that may be settled in cash upon conversion
(including partial cash settlement) be separately accounted for
in a manner that reflects an issuer’s nonconvertible 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 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. This change in methodology affects the
calculations of net income and earnings per share, but does not
increase our cash interest payments. FASB ASC
470-20 is
effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods
within those fiscal years. Retrospective application to all
periods presented is required and early adoption is prohibited.
Our convertible notes payable are within the scope of FASB ASC
470-20. We
have adopted the provisions of FASB ASC
470-20, and
as such, have adjusted the reported amounts in our Statements of
Operations for the years ended December 21, 2008 and
December 23, 2007 and our Balance Sheet as of
December 21, 2008 and December 23, 2007 as follows (in
thousands except per share amounts):
In June 2008, the FASB issued Staff Position
No. EITF 03-6-1,
“Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities”, now
included within FASB ASC 260 “Earnings Per Share”
(“FASB ASC 260”). FASB ASC
260-10-45
concludes that unvested share-based payment awards that contain
rights to receive non-forfeitable dividends or dividend
equivalents (whether paid or unpaid) are participating
securities, and thus, should be included in the two-class method
of computing earnings per share (“EPS”). FASB ASC
260-10-45 is
effective
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for fiscal years beginning after December 15, 2008, and
interim periods within those years. Retrospective application to
all periods presented is required and early application is
prohibited. We have adopted the provisions of FASB ASC
260-10-45
and as such, have adjusted the reported amounts of basic and
diluted shares outstanding for the years ended December 21,
2008 and December 23, 2007 as follows (in thousands):
In March 2008, the FASB issued SFAS No. 161,
“Disclosures about Derivative Instruments and Hedging
Activities”, now included within FASB ASC 815. FASB ASC 815
requires companies with derivative instruments to disclose
information that should enable financial statement users to
understand how and why a company uses derivative instruments,
how derivative instruments and related hedged items are
accounted for under FASB ASC 815 and how derivative instruments
and related hedged items affect a company’s financial
position, financial performance and cash flows. FASB ASC 815 is
effective for financial statements issued for fiscal years
beginning after November 15, 2008. As this statement
relates only to disclosure requirements, the adoption did not
have an impact on our results of operations or financial
position.
In December 2007, the FASB issued SFAS No. 160,
“Noncontrolling Interests in Consolidated Financial
Statements”, now included within FASB ASC 810
“Consolidation” (“FASB ASC 810”). FASB ASC
810 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. FASB ASC
810 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. The adoption did not have an impact on
our results of operations or financial position.
In December 2007, the FASB issued SFAS No. 141R,
“Business Combinations”, now included within FASB ASC
805 “Business Combinations” (“FASB ASC
805”). FASB ASC 805 establishes principles and requirements
for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities
assumed, any noncontrolling interest in the acquiree and the
goodwill acquired. FASB ASC 805 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 and early adoption is prohibited. The adoption did not have
an impact on our results of operations or financial position.
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”, now included within FASB ASC 825
“Financial Instruments” (“FASB ASC 825”).
FASB ASC 825 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 measure at fair value will be
recognized in the results of operations. FASB ASC 825 also
establishes additional disclosure requirements. This standard is
effective for fiscal years beginning after November 15,
2007. Effective for fiscal year 2008, we have adopted the
provisions of FASB ASC 825. The adoption did not have an impact
on our results of operations and financial position.
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In September 2006, the FASB issued SFAS No. 157,
“Fair Value Measurements”, now referred to as FASB ASC
820. FASB ASC 820 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 FASB ASC 820 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 FASB
ASC 820 were to be effective for fiscal years beginning after
November 15, 2007. On February 6, 2008, the FASB
agreed to defer the effective date for one year for certain
nonfinancial assets and nonfinancial liabilities, except those
that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). Effective
for fiscal 2008, we have adopted FASB ASC 820 except as it
applies to those nonfinancial assets and nonfinancial
liabilities. The adoption did not have an impact on our results
of operations and financial position.
We publish tariffs with rates rules and practices for all three
of our Jones Act trade routes. These tariffs 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. We also publish
tariffs for transportation of international cargo which are
subject to regulation by the Federal Maritime Commission
(“FMC”).
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, improved margins, and increased earnings and
cash flows.
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
primarily 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. There is occasionally 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 variances in our fuel recovery.
During 2009, over 85% of our revenue was 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 cost of services consist primarily of vessel operating
costs, marine operating costs, inland transportation costs, land
costs and rolling stock rent. Our vessel operating costs consist
primarily of vessel fuel costs, crew payroll costs and benefits,
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 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 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 20, 2009 Compared to Year Ended December 21,
2008
Horizon Lines
Segment
Horizon Lines provides container shipping services and terminal
services primarily in the U.S. domestic Jones Act trades,
operating a fleet of 20
U.S.-flag
containerships and five port terminals linking the continental
U.S. with Alaska, Hawaii, Guam, Micronesia, Asia and Puerto
Rico. The amounts presented below exclude all intercompany
transactions.
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Operating Revenue. Operating revenue decreased
$147.0 million, or 11.6%, and accounted for approximately
96.7% of consolidated operating revenue. This revenue decrease
can be attributed to the following factors (in thousands):
The revenue container volume declines are primarily due to soft
market conditions in all of our tradelanes and are partially
offset by general rate increases. General rate increases are
implemented to mitigate rising contractual costs. Bunker and
intermodal fuel surcharges, which are included in our
transportation revenue, accounted for approximately
11.5% of total revenue in the year ended December 20,
2009 and approximately 16.4% of total revenue in the year ended
December 21, 2008. We adjust our bunker and intermodal fuel
surcharges as a result of changes in the cost of bunker fuel for
our vessels, in addition to diesel fuel fluctuations passed on
to us by our truck, rail, and barge service providers. Fuel
surcharges are evaluated regularly as the price of fuel
fluctuates, and we may at times incorporate these surcharges
into our base transportation rates that we charge. The decrease
in non-transportation revenue is primarily due to lower space
charter revenue resulting from a decline in fuel surcharges, a
reduction in terminal services and the expiration of certain
government contracts.
Cost of Services. The $125.5 million
reduction in cost of services is primarily due to lower fuel
costs as a result of a decrease in fuel prices and a decline in
inland costs as a result of lower container volumes and reduced
expenses associated with our cost control efforts.
Vessel expense, which is not primarily driven by revenue
container volume, decreased $84.3 million for the year
ended December 20, 2009. This decrease can be attributed to
the following factors (in thousands):
The $81.0 million reduction in fuel costs is comprised of a
$73.2 million decrease due to fuel prices and a
$7.8 million decline due to lower daily consumption as a
result of lower active vessel operating days, changes in vessel
deployment, and our focus on both departure and arrival schedule
integrity lowering overall consumption. The decline in labor and
other vessel operating expense is due to a decrease in the
expense accrual for voyages in progress at the end of the year
and the recovery of certain employer-paid payroll taxes,
partially offset by more operating days in 2009 due to 3 more
dry-dockings as compared to 2008. We continue to incur labor
expenses associated with the vessels in dry-dock, while at the
same time incurring expenses associated with the spare vessel
deployed to serve as dry-dock relief.
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 associated benefits, pilotage fees, tug fees, government
fees, wharfage fees, dockage fees, and line handler fees. Marine
expense of $210.3 million for the year ended
December 20, 2009 increased $4.4 million as compared
to the year ended December 21, 2008 as the increases in
multi-employer plan benefit assessments for our west coast union
employees and contractual rate increases were partially offset
by a decrease in marine expense related to lower container
volumes.
Inland expense decreased to $177.4 million for the year
ended December 20, 2009 compared to $205.9 million
during the year ended December 21, 2008. The
$28.5 million decrease in inland expense is primarily due
to lower fuel costs, lower container volumes, and our cost
control efforts.
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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.
Non-vessel related maintenance expenses decreased primarily due
to lower fuel costs. Terminal overhead decreased primarily due
to lower utilities expense, a decline in compensation costs as a
result of the reduction in workforce, and a decrease in
severance charges related to certain union employees who elected
early retirement. 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 increased primarily as a result of $0.2 million
due to a one-time stevedoring revenue opportunity, a
$0.2 million write down of certain prepaid capital
expenditures related to our San Juan, Puerto Rico port
redevelopment project as a result of the bankruptcy filing of
the general contractor, and $0.2 million of rate increases
in the monitoring of refrigerated containers.
Rolling stock expense decreased $7.0 million or 15.9%
during the year ended December 20, 2009 as compared to the
year ended December 21, 2008. This decrease is primarily
due to the off-hire of certain leased container units and
increased efficiencies in association with our cost control
efforts.
Depreciation and Amortization. Depreciation
and amortization was $44.3 million during the year ended
December 20, 2009 compared to $44.5 million for the
year ended December 21, 2008. The decrease in
depreciation-owned vessels is due to certain vessel assets
becoming fully depreciated and no longer subject to depreciation
expense.
Amortization of Vessel
Dry-docking. Amortization of vessel dry-docking
was $13.7 million during the year ended December 20,
2009 compared to $17.2 million for the year ended
December 21, 2008. Amortization of vessel dry-docking
fluctuates based on the timing of dry-dockings, the number of
dry-dockings that occur during a given period, and the amount of
expenditures incurred during the dry-dockings. Dry-dockings
generally occur every two and a half years and historically we
have dry-docked approximately six vessels per year.
Selling, General and Administrative. Selling,
general and administrative costs decreased to $93.4 million
for the year ended December 20, 2009 compared to
$100.2 million for the year ended
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December 21, 2008, a decline of $6.8 million or 6.7%.
This decrease is comprised of a $4.3 million reduction in
consultant fees incurred during 2008 related to our process
re-engineering initiative, $5.6 million related to the
reduction in workforce, and $0.6 million decline in
stock-based compensation expense, partially offset by
$1.5 million of higher expenses related to the antitrust
investigation and related legal proceedings, $3.0 million
related to our performance incentive plan, and $1.0 million
increase in legal fees unrelated to the antitrust investigation.
Settlement of Class Action Lawsuit. On
June 11, 2009, we entered into a settlement agreement with
the plaintiffs in the Puerto Rico MDL litigation. Under the
settlement agreement, which has not yet been approved by the
Court, we have agreed to pay $20.0 million and to certain
base-rate freezes, to resolve claims for alleged antitrust
violations in the Puerto Rico tradelane.
Impairment Charge. Impairment of assets of
$1.9 million during the year ended December 20, 2009
related to a write-down of the carrying value of our spare
vessels. Impairment of assets during the year ended
December 21, 2008 included $3.3 million and
$2.7 million related to our spare vessels and certain owned
and leased equipment, respectively.
Restructuring Charge. Restructuring costs of
$0.8 million during the year ended December 20, 2009
included $0.7 million and $0.1 million related to
severance costs and other costs associated with our workforce
reduction initiative, respectively. The $0.7 million of
severance costs included $0.5 million related to the
acceleration of certain stock-based compensation awards.
Restructuring costs during the year ended December 21, 2008
included $3.0 million and $0.1 million related to
severance costs and contract termination and legal costs,
respectively.
Miscellaneous Expense, Net. Miscellaneous
expense, net decreased $1.8 million during the years ended
December 20, 2009 compared to the year ended
December 21, 2008 primarily as a result of lower bad debt
expense during 2009 due to a decrease in revenue.
Horizon Logistics
Segment
Horizon Logistics manages integrated logistics service
offerings, including rail, trucking and distribution operations.
The amounts presented below exclude all intercompany
transactions.
Operating Revenue. Horizon Logistics operating
revenue accounted for approximately 3.3% of consolidated
operating revenue. Revenue increased to $37.7 million
during the year ended
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December 20, 2009 compared to $36.4 million during the
year ended December 21, 2008. This increase is primarily
due to the NVOCC and brokerage operations expansion, partially
offset by a decline in the demand for our expedited logistics
service offering.
Cost of Services. Cost of services increased
to $36.5 million for the year ended
December 20, 2009 compared to $30.8 million for
the year ended December 21, 2008, an increase of
$5.7 million. The increase in cost of services is primarily
due to the expansion of lower margin service offerings.
Depreciation and Amortization. Depreciation
and amortization was $0.6 million during the year ended
December 20, 2009 compared to $1.1 million for the
year ended December 21, 2008. The decrease in amortization
is due to the impairment of the customer relationship intangible
asset during the fourth quarter of 2008.
Selling, General and Administrative. Selling,
general and administrative costs increased to $8.8 million
for the year ended December 20, 2009 compared to
$8.0 million for the year ended December 21, 2008, an
increase of $0.8 million. This increase is primarily due to
increased personnel costs, including $0.4 million related
to our performance incentive plan and $0.5 million related
to headcount additions in 2009.
Impairment of Assets. Impairment of assets
during the year ended December 21, 2008 included
$17.7 million and $1.7 million related to goodwill and
customer contracts acquired, respectively.
Interest Expense, Net. Interest expense, net
of $39.7 million for the year ended
December 20, 2009 was lower compared to
$41.4 million during the year ended December 21, 2008.
The decrease in interest expense due to the lower outstanding
balance on the revolving line of credit and lower LIBOR base
rates was partially offset by the higher credit spread
percentage rate resulting from the June 2009 amendment to our
Senior Credit Facility.
Income Tax Expense. The effective tax rate for
the years ended December 20, 2009 and December 21,
2008 was (49.6)% and 81.9%, respectively. During the second
quarter of 2009, we determined that it was unclear as to the
timing of when we will generate sufficient taxable income to
realize our deferred tax assets. Accordingly, we recorded a
valuation allowance against our deferred tax assets. Although we
have recorded a valuation allowance against our deferred tax
assets, it does not affect our ability to utilize our deferred
tax assets to offset future taxable income. Until such time that
we determine it is more likely than not that we will generate
sufficient taxable income to realize our deferred tax assets,
income tax benefits associated with future period losses will be
fully reserved. As such, the Company’s federal and state
tax rates are expected to effectively be 0% and 1%-2%,
respectively, during those periods.
During 2006, we elected the application of tonnage tax. Prior to
recording a valuation allowance against our deferred tax assets,
the effective tax rate was impacted by our income from
qualifying shipping activities as well as the income from our
non-qualifying shipping activities and will fluctuate based on
the ratio of income from qualifying and non-qualifying
activities and the relative size of our consolidated income
(loss) before income taxes.
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Year Ended
December 21, 2008 Compared to Year Ended December 23,
2007
Horizon Lines
Segment
Operating Revenue. Operating revenue increased
$76.9 million, or 6.5%, and accounted for approximately
97.2% of consolidated operating revenue. This revenue increase
can be attributed to the following factors (in thousands):
The revenue container volume decline is primarily due to
deteriorating market conditions in Puerto Rico and Hawaii and is
partially offset by general rate increases. Bunker and
intermodal fuel surcharges, which are included in our
transportation revenue, accounted for approximately 16.4% of
total revenue in the year ended December 21, 2008 and
approximately 12.1% of total revenue in the year ended
December 23, 2007. We adjusted our bunker and intermodal
fuel surcharges several times throughout 2008 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 service providers. Fuel surcharges are evaluated
regularly as the price of fuel fluctuates, and we may at times
incorporate these surcharges into our base transportation rates
that we charge. The increase in non-transportation revenue is
primarily due to higher space charter revenue resulting from an
increase in fuel surcharges, offset by a decrease in terminal
services.
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Cost of Services. The $101.0 million
increase in cost of services is primarily due to an increase in
fuel costs as a result of an increase in fuel prices, which is
partially offset by reduced expenses associated with lower
container volumes and reduced expenses associated with our cost
control efforts.
Vessel expense, which is not primarily driven by revenue
container volume, increased $70.8 million for the year
ended December 21, 2008. This increase can be attributed to
the following factors (in thousands):
The $64.2 million increase in fuel costs is comprised of
$75.3 million increase in fuel prices offset by an
$11.1 million decrease due to lower fuel consumption,
despite an increase in vessel operating days. The decrease in
labor and other vessel operating expense is due to lower
operating expenses associated with less dry-dockings in 2008 and
$3.5 million related to certain one-time expenses
associated with the activation of the new vessels during the
year ended December 23, 2007. We continue to incur labor
expenses associated with vessels that are in dry-dock, while
also incurring expenses associated with the spare vessels
deployed to serve as dry-dock relief. The reductions were
partially offset by higher vessel lay up costs of
$1.2 million during the year ended December 21, 2008
and a supplementary premium call related to our protection and
indemnity insurance policy totaling $1.3 million for the
year ended December 21, 2008.
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 $205.9 million for the year ended
December 21, 2008 from $198.9 million for the year
ended December 23, 2007. The increase in marine expenses
can be attributed to increased stevedoring costs related to
contractual rate increases and services provided to third
parties as a result of the acquisition of HSI, partially offset
by lower container volumes.
Inland expense increased to $205.9 million for the year
ended December 21, 2008 from $197.6 million for the
year ended December 23, 2007, an increase of
$8.3 million or 4.2%. The increase in inland expense is due
to $12.8 million in higher fuel costs and contractual rates
increases, offset slightly 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.
Non-vessel related maintenance expenses increased primarily due
to $3.1 million of additional fuel expenses. In addition,
$0.7 million of maintenance expenses incurred by HSI was
offset by a decrease in overall repair expenses. The decrease in
overall repair expenses is associated with lower
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volumes and our cost control efforts. Terminal overhead
increased primarily due to the acquisition of HSI, an increase
in rent expense as a result of the move to our warehouse to
Compton, California, a severance charge for several union
employees who elected early retirement, and labor and other
inflationary increases. 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 increased primarily due to rate increases in the
monitoring of refrigerated containers.
Depreciation and Amortization. Depreciation
and amortization was $44.5 million during the year ended
December 21, 2008 compared to $41.7 million for the
year ended December 23, 2007. The increase in depreciation
and amortization-other is primarily due the timing of the
purchase and sale of our containers. The increase in
amortization of intangible assets is due to the amortization of
the intangible assets recorded in conjunction with the
acquisition of HSI.
Amortization of Vessel
Dry-docking. Amortization of vessel dry-docking
during the year ended December 21, 2008 was flat compared
to the year ended December 23, 2007. Amortization of vessel
dry-docking fluctuates based on the timing of dry-dockings, the
number of dry-dockings that occur during a given period, and the
amount of expenditures incurred during the dry-dockings.
Dry-dockings generally occur every two and a half years and
historically we have dry-docked approximately six vessels per
year on average.
Selling, General and Administrative. Selling,
general and administrative costs increased to
$100.2 million for the year ended December 21, 2008
compared to $85.6 million for the year ended
December 23, 2007, an increase of $14.6 million or
17.0%. This increase is comprised of $10.7 million of
expenses related to the Department of Justice antitrust
investigation and related legal proceedings and an increase of
approximately $2.0 million in the accrual related to a
discretionary performance-based payout.
Impairment of Assets. Impairment of assets
included $3.3 million and $2.7 million related to our
spare vessels and certain owned and leased equipment,
respectively.
Restructuring Costs. Restructuring costs
included $3.0 million and $0.1 million related to
severance costs and contract termination and legal costs,
respectively.
Miscellaneous Expense, Net. Miscellaneous
expense, net increased $2.0 million during the year ended
December 21, 2008 compared to the year ended
December 23, 2007 primarily as a result of an increase in
bad debt expense due to higher revenue and lower gain on the
sale of assets during 2008.
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Horizon Logistics
Segment
Horizon Logistics manages integrated logistics service
offerings, including rail, trucking and distribution operations.
The amounts presented below exclude all intercompany
transactions.
Operating Revenue. Horizon Logistics operating
revenue accounted for approximately 2.8% of consolidated
operating revenue. Approximately $18.9 million of the
$20.8 million increase during the year ended
December 21, 2008 is due to the acquisition of Aero
Logistics.
Cost of Services. Cost of services increased
to $30.8 million for the year ended
December 21, 2008 compared to $11.1 million for
the year ended December 23, 2007, an increase of
$19.7 million. The increase in cost of services is
primarily due to increased inland expenses as a result of the
acquisition of Aero Logistics.
Depreciation and Amortization. Depreciation
and amortization was $1.1 million during the year ended
December 21, 2008 compared to $6.2 million for the
year ended December 23, 2007. The decrease in
depreciation-other is due to 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 acquisition of Aero Logistics.
Selling, General and Administrative. Selling,
general and administrative costs increased to $8.0 million
for the year ended December 21, 2008 compared to
$5.3 million for the year ended December 23, 2007, an
increase of $2.7 million. This increase is due to the ramp
up of activities and personnel within the logistics segment,
including the acquisition of Aero Logistics.
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Impairment of Assets. Impairment of assets
included $17.7 million and $1.7 million related to
goodwill and customer contracts acquired, respectively.
Interest Expense, Net. Interest expense, net
decreased to $41.4 million for the year ended
December 21, 2008 from $44.9 million for the year
ended December 23, 2007, a decrease of $3.5 million or
7.7%. 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. The loss on extinguishment of debt
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 11% senior discount notes and the
extinguishment of the prior senior credit facility.
Income Tax Benefit. The effective tax rate for
the years ended December 21, 2008 and December 23,
2007 was 81.9% and (129.8)%, respectively. During 2006, we
elected the application of tonnage tax. We modified our trade
routes between the U.S. west coast and Guam and Asia during
the first quarter of 2007. As such, our 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, we recorded a $7.3 million tax
benefit related to a revaluation of the deferred taxes
associated with the activities now subject to tonnage tax as a
result of the modified trade routes and related to a change in
estimate resulting in refinements in our methodology for
computing secondary activities and cost allocations for tonnage
tax purposes. The effective tax rate is impacted by our income
from qualifying shipping activities as well as the income from
our non-qualifying shipping activities and will fluctuate based
on the ratio of income from qualifying and non-qualifying
activities and the relative size of our consolidated income
(loss) before income taxes.
Our principal sources of funds have been (i) earnings
before non-cash charges and (ii) borrowings under debt
arrangements. 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 dry-docking expenditures, (iii) working
capital consumption, (iv) principal and interest payments
on our existing indebtedness, (v) dividend payments to our
common stockholders, (vi) acquisitions, (vii) share
repurchases, (viii) premiums associated with the tender
offer, and (ix) purchases of equity instruments in
conjunction with the Notes. Cash totaled $6.4 million at
December 20, 2009. As of December 20, 2009, total
unused borrowing capacity under the revolving credit facility
was $113.9 million, after taking into account
$100.0 million outstanding under the revolver and
$11.1 million utilized for outstanding letters of credit.
Based on our leverage ratio, borrowing availability under the
revolving credit facility was $98.4 million as of
December 20, 2009.
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Net cash provided by operating activities was $57.5 million
for the year ended December 20, 2009 compared to
$89.4 million for the year ended December 21, 2008, a
decrease of $31.9 million. The decrease in cash provided by
operating activities is primarily due to the following (in
thousands):
Net cash provided by operating activities increased by
$34.6 million to $89.4 million for the year ended
December 21, 2008 from $54.8 million for the year
ended December 23, 2007. 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 $92.3 million for the year ended
December 21, 2008 compared to $131.6 million for the
year ended December 23, 2007, a decrease of
$39.3 million. The reduction in cash provided by operating
activities is primarily related to a $21.1 million decrease
in vessel rent payments in excess of accruals, a decrease of
$10.5 million in performance incentive payments in excess
of accruals, an $18.5 million decrease in accounts
receivable, and a $15.0 million decrease in materials and
supplies.
Net cash used in investing activities was $11.8 million for
the year ended December 20, 2009 compared to
$38.8 million for the year ended December 21, 2008.
The reduction is primarily related to a $26.1 million
decrease in capital spending. Capital expenditures during the
years ended December 20, 2009 and December 21, 2008
include $2.5 million and $14.1 million, respectively,
of progress payments for three new cranes in our Anchorage,
Alaska terminal.
Net cash used in investing activities was $38.8 million for
the year ended December 21, 2008 compared to
$59.4 million for the year ended December 23, 2007.
The reduction is primarily related to a $31.1 million
decrease in the purchases of businesses, partially offset by a
$2.8 million decrease in proceeds from the sale of
equipment increase and a $7.7 million increase in capital
expenditures, which includes $14.1 million of progress
payments for three new cranes in our Anchorage, Alaska terminal.
Net cash used in financing activities during the year ended
December 20, 2009 was $44.8 million compared to
$51.3 million for the year ended December 21, 2008.
The net cash used in financing activities during the year ended
December 20, 2009 included $28.0 million of net debt
repayments and $13.4 million of dividends to stockholders.
In addition, during the year ended December 20, 2009, we
paid $3.5 million in financing costs related to fees
associated with the amendment to the Senior Credit Facility.
Net cash used in financing activities during the year ended
December 21, 2008 was $51.3 million compared to
$83.1 million for the year ended December 23, 2007.
The net cash used in financing activities during the year ended
December 21, 2008 included $8.5 million of net
repayments made on the Senior Credit Facility,
$13.3 million of dividends to stockholders and
$29.3 million to complete the stock repurchase program.
During the year December 23 2007, we refinanced our debt
structure. We
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used the proceeds provided by the Senior 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 (ii) purchase the
outstanding principal and pay associated premiums of the
9% senior notes and 11% senior discount notes
purchased in our tender offer, and (iii) purchase
1,000,000 shares of our common stock. Concurrent with the
issuance of the Notes, we entered into hedge transactions
whereby, under certain circumstances, we have the option to
receive shares of our common stock, and we sold warrants whereby
certain financial institutions have the option to receive shares
of our common stock. Our cost of the note hedge transactions was
approximately $52.5 million and we 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 Prior Senior Credit Facility,
$14.7 million of dividends to stockholders,
$20.7 million of treasury stock purchased under the stock
repurchase program, 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.
On November 19, 2007, our Board of Directors authorized the
Company to commence a stock repurchase program to buy back up to
$50.0 million worth of our common stock. The program
allowed us 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. We acquired 1,172,700 shares at a
total cost of $20.7 million under this program during the
fourth quarter of 2007. We completed our share repurchase
program in the first quarter of 2008, acquiring an additional
1,627,500 shares at a total cost of $29.3 million.
Capital
Requirements and Liquidity
Continued uncertainty in the credit markets has made financing
terms for borrowers less attractive and in certain cases has
resulted in the unavailability of certain types of debt
financing. Although these factors may make it difficult or
expensive for us to access credit markets, we have access to
credit. We believe we have sufficient liquidity to meet our
current needs and are closely managing our cash flows, including
capital spending, based on current and anticipated volume
levels. We will defer or limit capital additions where
economically feasible. Based upon our current level of
operations, 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 liquidity
needs throughout 2010. During 2010, we expect to spend
approximately $20.0 million and $25.0 million on
capital expenditures and dry-docking expenditures, respectively.
Such capital expenditures will include terminal infrastructure
and equipment, continued redevelopment of our San Juan,
Puerto Rico terminal, and vessel regulatory, modification, and
maintenance initiatives. We intend to utilize our cash flows for
working capital needs, to make debt repayments, to fund the
potential settlement of the Puerto Rico MDL, and to pay
dividends. Our term loan payments increase from
$6.3 million in 2009 to $18.8 million in 2010.
Although, we currently expect that cash dividends will continue
to be paid in the future, we have no commitment to do so and can
provide no assurance this will occur. Due to the seasonality
within our business, we will utilize borrowings under the senior
credit facility in the first half of 2010, but plan to repay
such borrowings in the second half of the year.
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Contractual obligations as of December 20, 2009 are as
follows (in thousands):
We are not a party to any off-balance sheet arrangements that
have, or are reasonably likely to have, a current or future
effect on our financial condition, revenues or expenses, results
of operations, liquidity, capital expenditures or capital
resources that is material to investors.
On August 8, 2007, we entered into a credit agreement (the
“Senior Credit Facility”) secured by substantially all
our owned assets. On June 11, 2009, the Senior Credit
Facility was amended resulting in a reduction in the size of the
revolving credit facility from $250.0 million to
$225.0 million. 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.
The amendment to the Senior Credit Facility is intended to
provide us the flexibility that we need to effect the settlement
of the Puerto Rico class action litigation and to incur other
antitrust related
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litigation expenses. The amendment revises the definition of
Consolidated EBITDA by allowing for certain charges, including
(i) the Puerto Rico settlement and (ii) litigation
expenses related to antitrust litigation matters in an amount
not to exceed $25 million in the aggregate and
$15 million over a
12-month
period, to be added back to the calculation of Consolidated
EBITDA. In addition, the Senior Credit Facility was amended to
(i) increase the spread over LIBOR and Prime based rates by
150 bps, (ii) increase the range of fees on the unused
portion of the commitment, (iii) eliminate the
$150 million incremental facility, (iv) modify the
definition of Consolidated EBITDA to eliminate the term
“non-recurring charges”, and (v) incorporate
other structural enhancements, including a step-down in the
secured leverage ratio and further limitations on the ability to
make certain restricted payments. As a result of the amendment
to the Senior Credit Facility, we paid $3.5 million in
financing costs and recorded a loss on modification of debt of
$0.1 million.
We have made quarterly principal payments on the term loan of
approximately $1.6 million since December 31, 2007.
Effective December 31, 2009, quarterly payments will
increase to $4.7 million through September 30, 2011,
at which point quarterly payments will increase to
$18.8 million until final maturity on August 8, 2012.
The interest rate payable under the Senior Credit Facility
varies depending on the types of advances or loans we select.
Borrowings under the Senior Credit Facility bear interest
primarily at LIBOR-based rates plus a spread which ranges from
2.75% to 3.5% (LIBOR plus 3.25% as of December 20,
2009) depending on our ratio of total secured debt to
EBITDA (as defined in the Senior Credit Facility). We also have
the option to borrow at Prime plus a spread which ranges from
1.75% to 2.5% (Prime plus 2.25% as of December 20, 2009).
The weighted average interest rate at December 20, 2009 was
approximately 5.1%, which includes the impact of the interest
rate swap (as defined below). We also pay a variable commitment
fee on the unused portion of the commitment, ranging from 0.375%
to 0.50% (0.50% as of December 20, 2009).
The Senior Credit Facility contains customary affirmative and
negative covenants and warranties, including two financial
covenants with respect to our 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. We were in
compliance with all such covenants as of December 20, 2009
and expect to be in compliance during 2010.
On March 31, 2008, we entered into an Interest Rate Swap
Agreement (the “swap”) with Wachovia Bank, National
Association, a current subsidiary of Wells Fargo &
Co., (“Wachovia”) in the notional amount of
$121.9 million. The swap expires on August 8, 2012.
Under the swap, the Company and Wachovia have agreed to exchange
interest payments on the notional amount on the last business
day of each calendar quarter. We have agreed to pay a 3.02%
fixed interest rate, and Wachovia has agreed to pay a floating
interest rate equal to the three-month LIBOR rate. The critical
terms of the swap agreement and the term loan are the same,
including the notional amounts, interest rate reset dates,
maturity dates and underlying market indices. The purpose of
entering into this swap is to protect us against the risk of
rising interest rates by effectively fixing the base interest
rate payable related to our term loan.
The swap has been designated as a cash flow hedge of the
variability of the cash flows due to changes in LIBOR and has
been deemed to be highly effective. Accordingly, we record the
fair value of the swap as an asset or liability on our
consolidated balance sheet, and any unrealized gain or loss is
included in accumulated other comprehensive (loss) income. As of
December 20, 2009, we recorded a liability of
$4.5 million, of which $0.7 million is included in
other accrued liabilities and $3.8 million is included in
other long-term liabilities, in the accompanying consolidated
balance sheet. We also recorded $0.2 million and
$3.9 million in other comprehensive income (loss) for the
years ended December 20, 2009 and December 21, 2008,
respectively. No hedge ineffectiveness was recorded during the
years ended December 20, 2009 and December 21, 2008.
If the hedge was deemed ineffective, or extinguished by either
counterparty, any accumulated gains or losses remaining in other
comprehensive income would be fully recorded in interest expense
during the period.
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On August 8, 2007, we issued $330.0 million aggregate
principal amount of 4.25% Convertible Senior Notes due 2012
(the “Notes”). The Notes are general unsecured
obligations of the Company and rank equally in right of payment
with all of our other existing and future obligations that are
unsecured and unsubordinated. The Notes bear interest at the
rate of 4.25% per annum, which is payable in cash semi-annually
on February 15 and August 15 of each year. The Notes 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 us 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 our 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, we would pay the holder the
cash value of the applicable number of shares of our 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 our option. Holders may convert their Notes into our
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 us 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 20, 2009, none
of the conditions allowing holders of the Notes to convert or
requiring us to repurchase the Notes had been met. We may not
redeem the Notes prior to maturity.
Concurrent with the issuance of the Notes, we entered into note
hedge transactions with certain financial institutions whereby
if we are required to issue shares of our common stock upon
conversion of the Notes, we have the option to receive up to
8.9 million shares of our common stock when the price of
our common stock is between $37.13 and $51.41 per share upon
conversion, and we sold warrants to the same financial
institutions whereby the financial institutions have the option
to receive up to 17.8 million shares of our common stock
when the price of our common stock exceeds $51.41 per share upon
conversion. 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 which has been accounted for as an equity
transaction. We recorded a $19.1 million income tax benefit
related to the cost of the hedge transaction that was
subsequently fully reserved as part of recording a full
valuation allowance against
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our deferred tax assets. We received proceeds of
$11.9 million related to the sale of the warrants, which
has also been classified as equity.
The Notes and the warrants sold in connection with the hedge
transactions 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 of the Notes or exercise of the
warrants, we will include the effect of the additional shares
that may be issued if our common stock price exceeds the
conversion price, 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.
We review our goodwill, intangible assets and long-lived assets
for impairment whenever events or changes in circumstances
indicate that the carrying amounts of these assets may not be
recoverable, and also review goodwill annually.
As of December 20, 2009, the carrying value of goodwill
related to our Horizon Lines and Horizon Logistics segments was
$314.2 million and $2.9 million, respectively.
Earnings estimated to be generated related to our Horizon Lines
segment are expected to support the carrying value of its
goodwill. Our Horizon Logistics business is currently facing the
challenges of building and expanding a business during difficult
economic times. If these overall economic conditions worsen or
continue for an extended period of time, we may be required to
record an additional impairment charge against the carrying
value of the goodwill related to our Horizon Logistics segment.
Performance
Metrics
In addition to EBITDA and Adjusted EBITDA, we use various other
non-GAAP measures such as adjusted net income, and adjusted net
income per share. We believe that in addition to GAAP based
financial information, the non-GAAP amounts presented below are
meaningful disclosures for the following reasons: (i) each
are components of the measure used by our board of directors and
management team to evaluate our operating performance,
(ii) each are components of the measure used by our
management team to make
day-to-day
operating decisions, (iii) each are components of the
measures used by our management to facilitate internal
comparisons to competitors’ results and the marine
container shipping and logistics industry in general,
(iv) results excluding certain costs and expenses provide
useful information for the understanding of the ongoing
operations with the impact of significant special items, and
(v) the payment of discretionary bonuses to certain members
of our management is contingent upon, among other things, the
satisfaction by Horizon Lines of certain targets, which contain
the non-GAAP measures as components. We acknowledge that there
are limitations when using non-GAAP measures. The measures below
are not recognized terms under GAAP and do not purport to be an
alternative to net income as a measure of operating performance
or to cash flows from operating activities as a measure of
liquidity. Similar to the amounts presented for EBITDA and
Adjusted EBITDA, because all companies do not use identical
calculations, the amounts below may not be comparable to other
similarly titled measures of other companies.
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The tables below present a reconciliation of net loss to
adjusted net income and net loss per share to adjusted net
income per share (in thousands, except per share amounts):
We expect conditions in the markets where we operate to remain
challenging in 2010. Some of our market economies are beginning
to exhibit possible signs of modest recovery, which could be
further fueled by the federal economic stimulus program. While
we see the potential for volume stabilization and slight rate
improvement given this scenario, we also expect ongoing fuel
price volatility and increased contractual labor costs and
benefits assessments through 2010. Based on these expectations,
we will continue to aggressively manage costs, maintain
liquidity, and closely manage cash flow. We also anticipate some
ongoing antitrust-related legal fees as we continue to cooperate
with the DOJ in its ongoing investigation. And like last year,
we expect that first-half comparisons will be more difficult
than in the second half, due to higher fuel prices, flat
container rates and increased dry-dock costs. We see the
potential for volumes to begin strengthening in line with
seasonal and economic firming trends in the second half of the
year. Lastly, we are continuing to review our Maersk agreements
in anticipation of their scheduled expiration in
December 2010. Key among these agreements are arrangements
in which we pay Maersk for terminal services at ports in
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the continental United States, and those whereby Maersk pays
Horizon Lines for space on our vessels that run between Asia and
the U.S. West Coast.
Our primary interest rate exposure relates to the Senior Credit
Facility. As of December 20, 2009, we had outstanding a
$112.5 million term loan and $100.0 million under the
revolving credit facility, which bear interest at variable rates.
On March 31, 2008, the Company entered into an Interest
Rate Swap Agreement (the “swap”) with Wachovia Bank,
National Association, a current subsidiary of Wells
Fargo & Co., (“Wachovia”) in the notional
amount of $121.9 million. The swap expires on
August 8, 2012. Under the swap, the Company and Wachovia
have agreed to exchange interest payments on the notional amount
on the last business day of each calendar quarter. The Company
has agreed to pay a 3.02% fixed interest rate, and Wachovia has
agreed to pay a floating interest rate equal to the three-month
LIBOR rate. The critical terms of the swap agreement and the
term loan are the same, including the notional amounts, interest
rate reset dates, maturity dates and underlying market indices.
The purpose of entering into this swap is to protect the Company
against the risk of rising interest rates by effectively fixing
the base interest rate payable related to its term loan.
Interest rate differentials paid or received under the swap are
recognized as adjustments to interest expense. The Company does
not hold or issue interest rate swap agreements for trading
purposes. In the event that the counter-party fails to meet the
terms of the interest rate swap agreement, the Company’s
exposure is limited to the interest rate differential.
Each quarter point change in interest rates or spread would
result in a $0.3 million change in annual interest expense
on the revolving credit facility.
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, at times 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.
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The table below provides information about our funded 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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We maintain 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 our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure.
Our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, has evaluated the
effectiveness of our disclosure controls and procedures pursuant
to
Rule 13a-15(b)
of the Exchange Act as of December 20, 2009. Based on that
evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and
procedures are effective as of December 20, 2009.
Our 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, our principal executive and
principal financial officers, and effected by our 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.
Our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, has evaluated the
effectiveness of our internal control over financial reporting
as of December 20, 2009 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 20, 2009.
Ernst and Young LLP, our 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 our internal control over financial
reporting during our fiscal quarter ending December 20,
2009, that have materially affected, or are reasonably likely to
materially affect, our 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 1, 2010, 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 and directors. 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 1, 2010, 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 1, 2010, 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 1, 2010, 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 1, 2010, 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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