Attached files
file | filename |
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EX-32.2 - EXHIBIT 32.2 - Horizon Lines, Inc. | c03727exv32w2.htm |
EX-31.2 - EXHIBIT 31.2 - Horizon Lines, Inc. | c03727exv31w2.htm |
EX-10.1 - EXHIBIT 10.1 - Horizon Lines, Inc. | c03727exv10w1.htm |
EX-32.1 - EXHIBIT 32.1 - Horizon Lines, Inc. | c03727exv32w1.htm |
EX-31.1 - EXHIBIT 31.1 - Horizon Lines, Inc. | c03727exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
(Mark one)
þ | Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 20, 2010
OR
o | Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number 001-32627
HORIZON LINES, INC.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
74-3123672 (I.R.S. Employer Identification No.) |
4064 Colony Road, Suite 200, Charlotte, North Carolina | 28211 | |
(Address of principal executive offices) | (Zip Code) |
(704) 973-7000
(Registrants telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)
(Registrants telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)
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 shorter 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 þ 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 whether the Registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See definition of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock,
as of the latest practicable date.
At July 21, 2010, 30,710,846 shares of the Registrants common stock, par value $.01 per
share, were outstanding.
HORIZON LINES, INC.
Form 10-Q Index
Form 10-Q Index
Page No. | ||||||||
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Exhibit 10.1 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
i
Table of Contents
PART I. FINANCIAL INFORMATION
1. Financial Statements
Horizon Lines, Inc.
Unaudited Condensed Consolidated Balance Sheets
(in thousands, except per share data)
June 20, | December 20, | |||||||
2010 | 2009 | |||||||
Assets |
||||||||
Current assets |
||||||||
Cash |
$ | 4,572 | $ | 6,419 | ||||
Accounts receivable, net of allowance of
$8,082 and $7,578 at June 20, 2010 and
December 20, 2009, respectively |
130,811 | 123,536 | ||||||
Prepaid vessel rent |
12,512 | 4,580 | ||||||
Materials and supplies |
27,991 | 30,254 | ||||||
Deferred tax asset |
2,929 | 2,929 | ||||||
Other current assets |
10,251 | 9,027 | ||||||
Total current assets |
189,066 | 176,745 | ||||||
Property and equipment, net |
190,020 | 193,438 | ||||||
Goodwill |
317,068 | 317,068 | ||||||
Intangible assets, net |
93,385 | 105,405 | ||||||
Other long-term assets |
30,655 | 25,854 | ||||||
Total assets |
$ | 820,194 | $ | 818,510 | ||||
Liabilities and Stockholders Equity |
||||||||
Current liabilities |
||||||||
Accounts payable |
$ | 40,981 | $ | 43,257 | ||||
Current portion of long-term debt |
18,750 | 18,750 | ||||||
Accrued vessel rent |
| 4,339 | ||||||
Other accrued liabilities |
105,319 | 110,473 | ||||||
Total current liabilities |
165,050 | 176,819 | ||||||
Long-term debt, net of current portion |
522,043 | 496,105 | ||||||
Deferred rent |
20,349 | 22,585 | ||||||
Deferred tax liability |
4,248 | 4,248 | ||||||
Other long-term liabilities |
17,212 | 17,475 | ||||||
Total liabilities |
728,902 | 717,232 | ||||||
Stockholders equity |
||||||||
Preferred stock, $.01 par value, 30,500 shares
authorized, no shares issued or outstanding |
| | ||||||
Common stock, $.01 par value, 100,000 shares
authorized, 34,470 shares issued and 30,670
shares outstanding as of June 20, 2010 and
34,091 shares issued and 30,291 shares
outstanding as of December 20, 2009 |
345 | 341 | ||||||
Treasury stock, 3,800 shares at cost |
(78,538 | ) | (78,538 | ) | ||||
Additional paid in capital |
195,802 | 196,900 | ||||||
Accumulated deficit |
(25,469 | ) | (15,874 | ) | ||||
Accumulated other comprehensive loss |
(848 | ) | (1,551 | ) | ||||
Total stockholders equity |
91,292 | 101,278 | ||||||
Total liabilities and stockholders equity |
$ | 820,194 | $ | 818,510 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
Table of Contents
Horizon Lines, Inc.
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
Quarters Ended | Six Months Ended | |||||||||||||||
June 20, | June 21, | June 20, | June 21, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Operating revenue |
$ | 305,585 | $ | 278,484 | $ | 591,718 | $ | 550,835 | ||||||||
Operating expense: |
||||||||||||||||
Cost of services (excluding depreciation expense) |
256,013 | 226,339 | 508,800 | 455,998 | ||||||||||||
Depreciation and amortization |
11,203 | 11,165 | 22,218 | 22,140 | ||||||||||||
Amortization of vessel dry-docking |
3,318 | 3,609 | 6,371 | 7,407 | ||||||||||||
Selling, general and administrative |
21,890 | 28,006 | 43,591 | 55,774 | ||||||||||||
Settlement of class action lawsuit |
| 20,000 | | 20,000 | ||||||||||||
Restructuring charge |
| 213 | | 1,001 | ||||||||||||
Impairment charge |
| 659 | | 659 | ||||||||||||
Miscellaneous income, net |
(753 | ) | (300 | ) | (190 | ) | (119 | ) | ||||||||
Total operating expense |
291,671 | 289,691 | 580,790 | 562,860 | ||||||||||||
Operating income (loss) |
13,914 | (11,207 | ) | 10,928 | (12,025 | ) | ||||||||||
Other expense: |
||||||||||||||||
Interest expense, net |
10,283 | 9,254 | 20,566 | 18,686 | ||||||||||||
Loss on modification of debt |
| 50 | | 50 | ||||||||||||
Other expense, net |
6 | 11 | 6 | 10 | ||||||||||||
Income (loss) before income tax (benefit) expense |
3,625 | (20,522 | ) | (9,644 | ) | (30,771 | ) | |||||||||
Income tax (benefit) expense |
(25 | ) | 10,561 | (50 | ) | 10,264 | ||||||||||
Net income (loss) |
$ | 3,650 | $ | (31,083 | ) | $ | (9,594 | ) | $ | (41,035 | ) | |||||
Net income (loss) per share: |
||||||||||||||||
Basic |
$ | 0.12 | $ | (1.02 | ) | $ | (0.31 | ) | $ | (1.35 | ) | |||||
Diluted |
$ | 0.12 | $ | (1.02 | ) | $ | (0.31 | ) | $ | (1.35 | ) | |||||
Number of shares used in calculations: |
||||||||||||||||
Basic |
30,595 | 30,438 | 30,558 | 30,431 | ||||||||||||
Diluted |
30,942 | 30,438 | 30,558 | 30,431 | ||||||||||||
Dividends declared per common share |
$ | 0.05 | $ | 0.11 | $ | 0.10 | $ | 0.22 | ||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Table of Contents
Horizon Lines, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
Six Months Ended | ||||||||
June 20, | June 21, | |||||||
2010 | 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (9,594 | ) | $ | (41,035 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation |
11,899 | 11,824 | ||||||
Amortization of other intangible assets |
10,319 | 10,316 | ||||||
Amortization of vessel dry-docking |
6,371 | 7,407 | ||||||
Amortization of deferred financing costs |
1,700 | 1,209 | ||||||
Impairment charge |
| 659 | ||||||
Restructuring charge |
| 1,001 | ||||||
Loss on modification of debt |
| 50 | ||||||
Deferred income taxes |
| 10,357 | ||||||
Gain on equipment disposals |
| (291 | ) | |||||
Gain on sale of interest in joint venture |
(724 | ) | | |||||
Stock-based compensation |
1,563 | 1,919 | ||||||
Accretion of interest on 4.25% convertible notes |
5,313 | 4,905 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(7,276 | ) | 663 | |||||
Materials and supplies |
2,263 | (3,070 | ) | |||||
Other current assets |
(1,224 | ) | 150 | |||||
Accounts payable |
(2,276 | ) | (3,106 | ) | ||||
Accrued liabilities |
(9,016 | ) | 12,780 | |||||
Vessel rent |
(14,115 | ) | (13,361 | ) | ||||
Vessel dry-docking payments |
(10,764 | ) | (8,593 | ) | ||||
Other assets/liabilities |
322 | (992 | ) | |||||
Net cash used in operating activities |
(15,239 | ) | (7,208 | ) | ||||
Cash flows from investing activities: |
||||||||
Purchases of property and equipment |
(5,577 | ) | (7,154 | ) | ||||
Proceeds from the sale of interest in joint venture |
1,100 | | ||||||
Proceeds from the sale of property and equipment |
234 | 853 | ||||||
Net cash used in investing activities |
(4,243 | ) | (6,301 | ) | ||||
Cash flows from financing activities: |
||||||||
Payments on long-term debt |
(9,375 | ) | (3,275 | ) | ||||
Borrowing under revolving credit facility |
75,500 | 45,000 | ||||||
Payments on revolving credit facility |
(45,500 | ) | (20,000 | ) | ||||
Dividends to stockholders |
(3,060 | ) | (6,694 | ) | ||||
Common stock issued under employee stock purchase plan |
70 | 75 | ||||||
Payments of financing costs |
| (3,406 | ) | |||||
Net cash provided by financing activities |
17,635 | 11,700 | ||||||
Net decrease in cash |
(1,847 | ) | (1,809 | ) | ||||
Cash at beginning of period |
6,419 | 5,487 | ||||||
Cash at end of period |
$ | 4,572 | $ | 3,678 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
Table of Contents
HORIZON LINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Organization
Horizon Lines, Inc. (the Company) operates as a holding company for Horizon Lines, LLC
(Horizon Lines), a Delaware limited liability company and wholly-owned subsidiary, Horizon
Logistics, 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. (HSI), a Hawaii corporation. Horizon Lines operates as
a container shipping business with primary service to ports within the continental United
States, Puerto Rico, Alaska, Hawaii, and Guam. Under the Jones Act, all vessels transporting
cargo between covered locations 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. Horizon Lines also
offers terminal services. Horizon Logistics provides integrated logistics service offerings,
including rail, trucking, warehousing, distribution, and non-vessel operating common carrier
(NVOCC) services. HLPR operates as an agent for Horizon Lines in Puerto Rico and also provides
terminal services in Puerto Rico.
2. Basis of Presentation
The condensed consolidated financial statements include the accounts of the Company and its
subsidiaries. All significant intercompany items have been eliminated in consolidation. Certain
prior period balances have been reclassified to conform to current period presentation.
The accompanying unaudited interim condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and
accordingly, certain financial information has been condensed and certain footnote disclosures
have been omitted. Such information and disclosures are normally included in financial
statements prepared in accordance with generally accepted accounting principles in the United
States (GAAP). These financial statements should be read in conjunction with the consolidated
financial statements and footnotes thereto included in the Companys Annual Report on Form 10-K
for the year ended December 20, 2009. The Company uses a 52 or 53 week (every sixth or seventh
year) fiscal year that ends on the Sunday before the last Friday in December.
The financial statements as of June 20, 2010 and the financial statements for the quarters
and six months ended June 20, 2010 and June 21, 2009 are unaudited; however, in the opinion of
management, such statements include all adjustments necessary for the fair presentation of the
financial information included herein, which are of a normal recurring nature. The preparation
of consolidated financial statements in conformity with GAAP requires management to make
estimates and assumptions and to use judgment that affects the amounts reported in the financial
statements and accompanying notes. Actual results may differ from those estimates. Results of
operations for interim periods are not necessarily indicative of results for the full year.
During the first and second quarters of 2010, the Company implemented a new organizational
structure. The 2010 reorganization included (1) the re-assignment of the Companys inland
logistics activities related to the container shipping operations, as these operations are no
longer tightly integrated with our third-party logistics service offerings and (2) the
re-alignment of responsibilities of certain members of the Companys management team.
The Company evaluated the impact of these and other changes on its segment reporting and
determined that the Company now has one reportable segment. As a result, the financial statement
information provided in this 10-Q for the second quarters and six month periods of fiscal 2010
and 2009 have been presented to reflect one reportable segment, reflecting the Companys
consolidated results of operations.
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Table of Contents
3. Long-Term Debt
Long-term debt consists of the following (in thousands):
June 20, | December 20, | |||||||
2010 | 2009 | |||||||
Senior credit facility |
||||||||
Term loan |
$ | 103,125 | $ | 112,500 | ||||
Revolving credit facility |
130,000 | 100,000 | ||||||
4.25% convertible senior notes |
307,668 | 302,355 | ||||||
Total long-term debt |
540,793 | 514,855 | ||||||
Less current portion |
(18,750 | ) | (18,750 | ) | ||||
Long-term debt, net of current portion |
$ | 522,043 | $ | 496,105 | ||||
Senior Credit Facility
On August 8, 2007, the Company entered into a credit agreement (the Senior Credit
Facility) secured by substantially all of the owned assets of the Company. 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 was intended to provide the Company the
flexibility necessary to effect the settlement of the Puerto Rico class action litigation and to
incur other antitrust related 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 clarify 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, the Company paid $3.5 million in financing costs
and recorded a loss on modification of debt of $0.1 million during the second quarter of 2009.
The Company made quarterly principal payments on the term loan of approximately $1.6
million from December 31, 2007 through September 30, 2009. Effective December 31, 2009,
quarterly payments increased 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. Final
maturity of the Senior Credit Facility could accelerate to February 15, 2012 unless the Notes
(as defined below) are refinanced, or arrangements for the refinance of the Notes have been
made, in each case on terms and conditions reasonably satisfactory to the Administrative Agent
of the Senior Credit Facility. The interest rate payable under the Senior Credit Facility varies
depending on the types of advances or loans the Company selects. Borrowings under the Senior
Credit Facility bear interest primarily at LIBOR-based rates plus a spread which ranges from
2.75% to 3.5% (LIBOR plus 3.25% as of June 20, 2010) depending on the Companys ratio of total
secured debt to EBITDA (as defined in the Senior Credit Facility). The Company also has the
option to borrow at Prime plus a spread which ranges from 1.75% to 2.5% (Prime plus 2.0% as of
June 20, 2010). The weighted average interest rate at June 20, 2010 was approximately 4.8%,
which includes the impact of the interest rate swap (as defined below). The Company also pays a
variable commitment fee on the unused portion of the commitment, ranging from 0.375% to 0.50%
(0.50% as of June 20, 2010).
The Senior Credit Facility contains customary covenants, including two financial covenants
with respect to the Companys leverage and interest coverage ratio and covenants that limit
distribution of dividends and stock repurchases. It also contains customary events of default,
subject to grace periods. The Company was in compliance with all such covenants as of June 20,
2010. As of June 20, 2010, total unused borrowing capacity under the revolving credit facility
was $83.7 million, after taking into account $130.0 million outstanding under the revolver and
$11.3 million utilized for outstanding letters of credit. Based on the Companys leverage ratio,
borrowing availability under the revolving credit facility was $63.5 million as of June 20,
2010.
5
Table of Contents
Derivative Instruments
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 Companys exposure is limited to the interest rate differential.
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, the Company
records the fair value of the swap as an asset or liability on its consolidated balance sheet,
and any unrealized gain or loss is included in accumulated other comprehensive loss. As of June
20, 2010, the Company recorded a liability of $3.9 million, of which $0.6 million is included in
other accrued liabilities and $3.3 million is included in other long-term liabilities in the
accompanying condensed consolidated balance sheet. The Company also recorded $0.2 million and
$0.5 million in other comprehensive income (loss) for the quarter and six months ended June 20,
2010, respectively. No hedge ineffectiveness was recorded during the quarter and six months
ended June 20, 2010. If the hedge was deemed ineffective, or extinguished by either
counterparty, any accumulated gains or losses remaining in other comprehensive loss would be
fully recorded in interest expense during the period.
4.25% Convertible Senior Notes
On August 8, 2007, the Company 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 the Companys 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 the
Company to repurchase the Notes for cash at any time before August 15, 2012 if certain
fundamental changes occur.
Each $1,000 of principal of the Notes will initially be convertible into 26.9339 shares of
the Companys common stock, which is the equivalent of $37.13 per share, subject to adjustment
upon the occurrence of specified events set forth under the terms of the Notes. Upon conversion,
the Company would pay the holder the cash value of the applicable number of shares of its common
stock, up to the principal amount of the note. Amounts in excess of the principal amount, if
any, may be paid in cash or in stock, at the Companys option. Holders may convert their Notes
into the Companys common stock as follows:
| Prior to May 15, 2012, if during any calendar quarter, and only during such calendar quarter, the last reported sale price of the Companys common stock for at least 20 trading days in a period of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter exceeds 120% of the applicable conversion price in effect on the last trading day of the immediately preceding calendar quarter; | ||
| During any five business day period prior to May 15, 2012, immediately after any five consecutive trading day period (the measurement period) in which the trading price per $1,000 principal amount of notes for each day of such measurement period was less than 98% of the product of the last reported sale price of the Companys common stock on such date and the conversion rate on such date; | ||
| If, at any time, a change in control occurs or if the Company is a party to a consolidation, merger, binding share exchange or transfer or lease of all or substantially all of its assets, pursuant to which the Companys common stock would be converted into cash, securities or other assets; or | ||
| At any time after May 15, 2012 through the fourth scheduled trading day immediately preceding August 15, 2012. |
Holders who convert their Notes in connection with a change in control may be entitled to a
make-whole premium in the form of an increase in the conversion rate. In addition, upon a change
in control, liquidation, dissolution or de-listing, the holders of the Notes may require the
Company to repurchase for cash all or any portion of their Notes for 100% of the principal
amount plus accrued and unpaid interest. As of June 20, 2010, none of the conditions allowing
holders of the Notes to convert or requiring the Company to repurchase the Notes had been met.
The Company may not redeem the Notes prior to maturity.
Concurrent with the issuance of the Notes, the Company entered into note hedge transactions
with certain financial institutions whereby if the Company is required to issue shares of its
common stock upon conversion of the Notes, the Company has the option to receive up to 8.9
million shares of its common stock when the price of the Companys common stock is between
$37.13 and $51.41 per share upon conversion, and the Company sold warrants to the same financial
institutions whereby the financial institutions have the option to receive up to 17.8 million
shares of the Companys common stock when the price of the Companys 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, $33.4 million net of
tax, and has been accounted for as an equity transaction. The Company received proceeds of $11.9
million related to the sale of the warrants, which has also been classified as equity.
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Table of Contents
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 Companys 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,
the Company will include the effect of the additional shares that may be issued if its common
stock price exceeds the conversion price, using the treasury stock method. The call options
purchased as part of the note hedge transactions are anti-dilutive and therefore will have no
impact on earnings per share.
Fair Value of Financial Instruments
The estimated fair values of the Companys debt as of June 20, 2010 and December 20, 2009
were $511.5 million and $478.0 million, respectively. The fair value of the Notes is based on
quoted market prices. The fair value of the other long-term debt approximates carrying value.
4. Income Taxes
During the second quarter of 2009, the Company determined that it was unclear as to the
timing of when it will generate sufficient taxable income to realize its deferred tax assets.
Accordingly, the Company recorded a valuation allowance against its deferred tax assets. The
valuation allowance is reviewed quarterly and will be maintained until sufficient positive
evidence exists to support the reversal of the valuation allowance. In addition, until such time
that the Company determines it is more likely than not that it will generate sufficient taxable
income to realize its deferred tax assets, income tax benefits associated with future period
losses will be fully reserved.
5. Stock-Based Compensation
Stock-based compensation costs are measured at the grant date, based on the estimated fair
value of the award, and are recognized as an expense in the income statement over the requisite
service period. Compensation costs related to stock options, restricted shares, and vested
shares granted under the Amended and Restated Equity Incentive Plan (the Plan), the 2009
Incentive Compensation Plan (the 2009 Plan), and purchases under the Employee Stock Purchase
Plan, as amended (ESPP) are recognized using the straight-line method, net of estimated
forfeitures. Stock options and restricted shares granted to employees under the Plan and the
2009 Plan typically cliff vest and become fully exercisable on the third anniversary of the
grant date, provided the employee who was granted such options/restricted shares is continuously
employed by the Company or its subsidiaries through such date, and provided performance based
criteria, if any, are met. In addition, recipients who retire from the Company and meet certain
age and length of service criteria are typically entitled to proportionate vesting.
The following compensation costs are included within selling, general, and administrative
expenses on the condensed consolidated statements of operations (in thousands):
Quarters Ended | Six Months Ended | |||||||||||||||
June 20, | June 21, | June 20, | June 21, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Stock options |
$ | 44 | $ | 290 | $ | 321 | $ | 671 | ||||||||
Restricted stock / vested shares |
874 | 689 | 1,157 | 1,248 | ||||||||||||
ESPP |
44 | | 85 | | ||||||||||||
Total |
$ | 962 | $ | 979 | $ | 1,563 | $ | 1,919 | ||||||||
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Stock Options
The Companys stock option plan provides for grants of stock options to key employees at
prices not less than the fair market value of the Companys common stock on the grant date. A
summary of stock option activity is presented below:
Weighted- | ||||||||||||||||
Weighted- | Average | Aggregate | ||||||||||||||
Average | Remaining | Intrinsic | ||||||||||||||
Number of | Exercise | Contractual | Value | |||||||||||||
Options | Options | Price | Term (years) | (000s) | ||||||||||||
Outstanding at December 20, 2009 |
1,515,190 | $ | 15.77 | |||||||||||||
Granted |
| |||||||||||||||
Exercised |
| |||||||||||||||
Forfeited |
(13,500 | ) | 16.51 | |||||||||||||
Expired |
(33,452 | ) | 10.90 | |||||||||||||
Outstanding at June 20, 2010 |
1,468,238 | $ | 15.80 | 6.10 | $ | | ||||||||||
Vested or expected to vest at June 20, 2010 |
1,464,038 | $ | 15.81 | 6.09 | $ | | ||||||||||
Exercisable at June 20, 2010 |
1,305,238 | $ | 15.99 | 5.88 | $ | | ||||||||||
As of June 20, 2010, there was $0.2 million in unrecognized compensation costs related to
stock options granted, which is expected to be recognized over a weighted average period of 0.9
years.
Restricted Stock
A summary of the status of the Companys restricted stock awards as of June 20, 2010 is
presented below:
Weighted- | ||||||||
Average | ||||||||
Fair Value | ||||||||
Number of | at Grant | |||||||
Restricted Shares | Shares | Date | ||||||
Nonvested at December 20, 2009 |
607,221 | $ | 10.21 | |||||
Granted |
406,763 | 4.78 | ||||||
Vested |
(197,290 | ) | 18.14 | |||||
Forfeited |
(42,989 | ) | 6.77 | |||||
Nonvested at June 20, 2010 |
773,705 | $ | 5.52 | |||||
As of June 20, 2010, there was $2.4 million of unrecognized compensation expense related to
all restricted stock awards, which is expected to be recognized over a weighted-average period
of 2.2 years.
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6. Net Income (Loss) per Common Share
Basic net income (loss) per share is computed by dividing net income (loss) by the weighted
daily average number of shares of common stock outstanding during the period. Diluted net income
(loss) per share is based upon the weighted daily average number of shares of common stock
outstanding for the period plus dilutive potential shares of common stock, including stock
options, using the treasury-stock method.
Net income (loss) per share is as follows (in thousands, except per share amounts):
Quarters Ended | Six Months Ended | |||||||||||||||
June 20, | June 21, | June 20, | June 21, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Numerator: |
||||||||||||||||
Net income (loss) |
$ | 3,650 | $ | (31,083 | ) | $ | (9,594 | ) | $ | (41,035 | ) | |||||
Denominator: |
||||||||||||||||
Denominator for basic loss per common share: |
||||||||||||||||
Weighted average shares outstanding |
30,595 | 30,438 | 30,558 | 30,431 | ||||||||||||
Effect of dilutive securities: |
||||||||||||||||
Stock-based compensation |
347 | | | | ||||||||||||
Denominator for diluted net loss per common share |
30,942 | 30,438 | 30,558 | 30,431 | ||||||||||||
Basic net income (loss) per common share |
$ | 0.12 | $ | (1.02 | ) | $ | (0.31 | ) | $ | (1.35 | ) | |||||
Diluted net income (loss) per common share |
$ | 0.12 | $ | (1.02 | ) | $ | (0.31 | ) | $ | (1.35 | ) | |||||
Certain of the Companys unvested stock-based awards contain non-forfeitable rights to
dividends. As a result, a total of 118,737 and 253,678 shares have been included in the
denominator for basic income (loss) per share for these participating securities during the
quarters ended June 20, 2010 and June 21, 2009, respectively, and 122,458 and 274,716 shares
have been included in the denominator for the six months ended June 20, 2010 and June 21, 2009,
respectively. In addition, a total of 442,695 shares have been excluded from the denominator for
diluted net loss per common share during the quarter ended June 21, 2009, and 204,087 and
234,771 shares have been excluded from the denominator during the six months ended June 20, 2010
and June 21, 2009, respectively, as the impact would be anti-dilutive.
7. Comprehensive Income (Loss)
Comprehensive income (loss) is as follows (in thousands):
Quarters Ended | Six Months Ended | |||||||||||||||
June 20, | June 21, | June 20, | June 21, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net income (loss) |
$ | 3,650 | $ | (31,083 | ) | $ | (9,594 | ) | $ | (41,035 | ) | |||||
Change in fair value of interest rate swap |
158 | 1,232 | 496 | 1,057 | ||||||||||||
Amortization of pension and
post-retirement benefit transition
obligation |
104 | 115 | 207 | 217 | ||||||||||||
Comprehensive income (loss) |
$ | 3,912 | $ | (29,736 | ) | $ | (8,891 | ) | $ | (39,761 | ) | |||||
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8. Property and Equipment
Property and equipment consists of the following (in thousands):
June 20, | December 20, | |||||||
2010 | 2009 | |||||||
Vessels and vessel improvements |
$ | 151,755 | $ | 148,823 | ||||
Containers |
28,232 | 24,035 | ||||||
Chassis |
14,616 | 14,599 | ||||||
Cranes |
37,156 | 36,965 | ||||||
Machinery and equipment |
29,048 | 28,637 | ||||||
Facilities and land improvements |
25,487 | 24,006 | ||||||
Software |
24,204 | 24,072 | ||||||
Construction in progress |
21,321 | 22,541 | ||||||
Total property and equipment |
331,819 | 323,678 | ||||||
Accumulated depreciation |
(141,799 | ) | (130,240 | ) | ||||
Property and equipment, net |
$ | 190,020 | $ | 193,438 | ||||
As of June 20, 2010, construction in progress includes $17.6 million of payments for three
new cranes. These cranes are expected to become operational in late 2011 and were initially
purchased for use in the Companys Anchorage, Alaska terminal. However, the Port of Anchorage
Intermodal Expansion Project is encountering delays that could continue until 2014 or beyond.
These cranes may be deployed in several of the Companys other terminal locations.
Alternatively, if the Company determines its current crane deployment is sufficient to meet
anticipated demand, it could actively market these new cranes for sale.
9. Intangible Assets
Intangible assets consist of the following (in thousands):
June 20, | December 20, | |||||||
2010 | 2009 | |||||||
Customer contracts/relationships |
$ | 142,475 | $ | 142,475 | ||||
Trademarks |
63,800 | 63,800 | ||||||
Deferred financing costs |
14,831 | 14,831 | ||||||
Non-compete agreements |
262 | 262 | ||||||
Total intangibles with definite lives |
221,368 | 221,368 | ||||||
Accumulated amortization |
(127,983 | ) | (115,963 | ) | ||||
Net intangibles with definite lives |
93,385 | 105,405 | ||||||
Goodwill |
317,068 | 317,068 | ||||||
Intangible assets, net |
$ | 410,453 | $ | 422,473 | ||||
10. Other Accrued Liabilities
Other accrued liabilities consist of the following (in thousands):
June 20, | December 20, | |||||||
2010 | 2009 | |||||||
Vessel operations |
$ | 19,146 | $ | 17,922 | ||||
Payroll and employee benefits |
13,553 | 17,035 | ||||||
Marine operations |
6,084 | 10,668 | ||||||
Terminal operations |
11,898 | 10,481 | ||||||
Fuel |
6,729 | 9,418 | ||||||
Interest |
7,188 | 7,298 | ||||||
Settlement of class action lawsuit |
15,000 | 15,000 | ||||||
Other liabilities |
25,721 | 22,651 | ||||||
Total other accrued liabilities |
$ | 105,319 | $ | 110,473 | ||||
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11. Fair Value Measurement
U.S. accounting standards establish a fair value hierarchy that prioritizes the inputs used
to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in
active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority
to unobservable inputs (Level 3 measurement). This hierarchy requires entities to maximize the
use of observable inputs and minimize the use of unobservable inputs when determining fair
value. The three levels of inputs used to measure fair value are as follows:
Level 1: | observable inputs such as quoted prices in active markets | |||
Level 2: | inputs other than the quoted prices in active markets that are observable either directly or indirectly | |||
Level 3: | unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions |
The Company measures the market value of its pension plan assets at the estimated market
value. The fair value of the pension plan assets is determined by using quoted market prices in
active markets.
On a recurring basis, the Company measures the interest rate swap at its estimated fair
value. The fair value of the swap is determined using the market standard methodology of netting
the discounted future fixed cash payments (or receipts) and the discounted expected variable
cash receipts (or payments). The variable cash receipts (or payments) are based on an
expectation of future interest rates (forward curves) derived from observable market interest
rate curves. The unrealized loss on the interest rate swap of $3.9 million is classified within
level 2 of the fair value hierarchy.
No other assets or liabilities are measured at fair value under the hierarchy as of June
20, 2010.
12. Pension and Post-retirement Benefit Plans
The Company provides pension and post-retirement benefit plans for certain of its union
workers. Each of the plans is described in more detail below. A decline in the value of assets
held by these plans, caused by negative performance of the investments in the financial markets,
and lower discount rates due to falling interest rates have resulted in higher contributions to
these plans.
Pension Plans
The Company sponsors a defined benefit plan covering approximately 30 union employees as of
June 20, 2010. The plan provides for retirement benefits based only upon years of service.
Employees whose terms and conditions of employment are subject to or covered by the collective
bargaining agreement between Horizon Lines and the International Longshore & Warehouse Union
Local 142 are eligible to participate once they have completed one year of service.
Contributions to the plan are based on the projected unit credit actuarial method and are
limited to the amounts that are currently deductible for income tax purposes. The Company
recorded net periodic benefit costs of $0.2 million during each of the quarters ended June 20,
2010 and June 21, 2009, and $0.3 million and $0.4 million during the six months ended June 20,
2010 and June 21, 2009, respectively.
The HSI pension plan covering approximately 50 salaried employees was frozen to new
entrants as of December 31, 2005. Contributions to the plan are based on the projected unit
credit actuarial method and are limited to the amounts that are currently deductible for income
tax purposes. The Company recorded net periodic benefit costs of $0.1 million during each of the
quarters ended June 20, 2010 and June 21, 2009, and $0.1 million during each of the six months
ended June 20, 2010 and June 21, 2009.
The Company expects to make contributions to the above mentioned pension plans totaling
$0.3 million during 2010.
Post-retirement Benefit Plans
In addition to providing pension benefits, the Company provides certain healthcare (both
medical and dental) and life insurance benefits for eligible retired members (post-retirement
benefits). For eligible employees hired on or before July 1, 1996, the healthcare plan provides
for post-retirement health coverage for an employee who, immediately preceding his/her
retirement date, was an active participant in the retirement plan and has attained age 55 as of
his/her retirement date. For eligible employees hired after July 1, 1996, the plan provides
post-retirement health coverage for an employee who, immediately preceding his/her retirement
date, was an active participant in the retirement plan and has attained a combination of age and
service totaling 75 years or more as of his/her retirement date. The Company recorded net
periodic benefit costs related to the post-retirement benefits of $0.1 million and $0.2 million
during the quarters ended June 20, 2010 and June 21, 2009, respectively, and $0.3 million and
$0.4 million during the six months ended June 20, 2010 and June 21, 2009, respectively.
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Effective June 25, 2007, the HSI plan provides for post-retirement medical, dental and life
insurance benefits for salaried employees who had attained age 55 and completed 20 years of
service as of December 31, 2005. Any salaried employee already receiving post-retirement medical
coverage as of June 25, 2007 will continue to be covered by the plan. For eligible union
employees hired on or before July 1, 1996, the healthcare plan provides for post-retirement
medical coverage for an employee who, immediately preceding his/her retirement date, was an
active participant in the retirement plan and has attained age 55 as of his/her retirement date.
For eligible union employees hired after July 1, 1996, the plan provides post-retirement health
coverage for an employee who, immediately preceding his/her retirement date, was an active
participant in the retirement plan and has attained age 55 and has a combination of age and
service totaling 75 years or more as of his/her retirement date. The Company recorded net
periodic benefit costs of $0.1 million during each of the quarters ended June 20, 2010 and June
21, 2009, and $0.2 million during each of the six months ended June 20, 2010 and June 21, 2009.
Other Plans
Under collective bargaining agreements, the Company participates in a number of
union-sponsored, multi-employer benefit plans. Payments to these plans are made as part of
aggregate assessments generally based on hours worked, tonnage of cargo moved, or a combination
thereof. Expense for these plans is recognized as contributions are funded. In addition to the
higher contributions the Company has made as a result of negative investment performance and
lower discount rates due to falling interest rates, the Company has also made higher payments
related to increased assessments as a result of lower container volumes and increased benefit
costs. If the Company exits these markets, it may be required to pay a potential withdrawal
liability if the plans are underfunded at the time of the withdrawal. Any adjustments would be
recorded when it is probable that a liability exists and it is determined that markets will be
exited.
13. Commitments and Contingencies
Legal Proceedings
On April 17, 2008, the Company 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. The Company is currently providing documents to the DOJ in
response to the subpoena. The Company is cooperating fully with the DOJ in its investigation.
The Company has 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 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 the Company,
among other things, continues its 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.
Subsequent to the commencement of the DOJ investigation, fifty-eight purported class action
lawsuits were filed against the Company and other domestic shipping carriers (the Class Action
Lawsuits). Each of the Class Action Lawsuits purports to be on behalf of a class of individuals
and entities who purchased domestic ocean shipping services from the various domestic ocean
carriers. These 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. The Class Action Lawsuits were filed in the following federal district courts: eight in
the Southern District of Florida, five in the Middle District of Florida, nineteen in the
District of Puerto Rico, twelve in the Northern District of California, three in the Central
District of California, one in the District of Oregon, eight in the Western District of
Washington, one in the District of Hawaii, and one in the District of Alaska.
Thirty-two of the Class Action Lawsuits relate to ocean shipping services in the Puerto
Rico tradelane and were consolidated into a single multidistrict litigation (MDL) proceeding
in the District of Puerto Rico. Twenty-five of the Class Action Lawsuits relate to ocean
shipping services in the Hawaii and Guam tradelanes and were consolidated into a MDL proceeding
in the Western District of Washington. One district court case remains in the District of
Alaska, relating to the Alaska tradelane.
On June 11, 2009, the Company entered into a settlement agreement with the named plaintiff
class representatives in the Puerto Rico MDL litigation. Under the settlement agreement, the
Company has agreed to pay $20.0 million and to certain base-rate freezes to resolve claims for
alleged antitrust violations in the Puerto Rico tradelane. The Company paid $5.0 million into an
escrow account and is required to pay an additional $5.0 million into the escrow account by
October 10, 2010 pursuant to the terms of the settlement agreement. The remaining $10.0 million
is required to be paid within five business days after final approval of the settlement
agreement by the district court.
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The base-rate freeze component of the settlement agreement provides that class members who
have contracts in the Puerto Rico trade with the Company as of the effective date of the
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 settlement agreement. All
class members would be eligible to share in the $20.0 million cash component, but only contract
customers of the Company would be eligible to elect the base-rate freeze in lieu of receiving
cash. The Company has 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. After several hearings, the district
court granted preliminary approval of the settlement agreement on July 12, 2010. The settlement
agreement is subject to final approval by the Court.
On March 20, 2009, the Company filed a motion to dismiss the claims in the Hawaii and Guam
MDL litigation. 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. After several extensions, the plaintiffs filed an amended consolidated class action
complaint on May 28, 2010. On July 12, 2010, the Company filed a motion to dismiss the
plaintiffs amended complaint. The Company intends to vigorously defend itself against these
purported class action lawsuits.
The Company and the plaintiffs have agreed to stay discovery in the Alaska litigation, and
the Company intends to vigorously defend itself against the purported class action lawsuit in
Alaska.
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 the Company
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. On October 27, 2008, the Company filed a motion to dismiss. The motion to dismiss is
pending.
On October 9, 2009, the Company 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. The Company has provided documents in response to this request and
intends to cooperate fully in this investigation.
On October 19, 2009, a purported class action lawsuit was filed against the Company, other
domestic shipping carriers and certain individuals in the United States District Court for the
District of Puerto Rico. The complaint purports to be on behalf of a class of individuals
(indirect purchasers) who allege to have paid inflated prices for retail goods imported to
Puerto Rico as a result of alleged price-fixing of the defendants in violation of the Sherman
Act and various provisions of Puerto Rico law. The purported plaintiffs are seeking treble
monetary damages, costs and attorneys fees. On April 9, 2010, the Company filed a motion to
dismiss. The motion to dismiss is pending, and the Company intends to vigorously defend itself
against this lawsuit.
Through June 20, 2010, the Company has incurred approximately $24.9 million in legal and
professional fees associated with the DOJ investigation and the antitrust related litigation. In
addition, the Company has 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 the Companys consolidated balance
sheet. The Company is unable to predict the outcome of the Hawaii and Guam MDL litigation, the
Alaska class-action litigation, the indirect purchaser litigation in the District of Puerto
Rico, and the Florida Circuit Court litigation. The Company has not made any 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 the Companys financial condition,
cash flows and results of operations.
In addition, in connection with the DOJ investigation, it is possible that the Company
could suffer criminal prosecution and be required to pay a substantial fine. The Company is
unable to predict the outcome of the DOJ investigation. The Company has not made a provision for
any possible fines or penalties in the accompanying financial statements, and the Company 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 the Companys 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 the Company and six current and former employees, including the Companys Chief Executive
Officer, as defendants. The complaint purported to be on behalf of purchasers of the Companys
common stock. The complaint alleged, among other things, that the Company made material
misstatements and omissions in connection with alleged price-fixing in the Companys shipping
business in Puerto Rico in violation of antitrust laws. The Company filed a motion to dismiss,
and the Court granted the motion to dismiss on November 13, 2009 with leave to file an amended
complaint. The plaintiff filed an amended complaint on December 23, 2009, and the Company filed
a motion to dismiss the amended complaint on February 12, 2010. The Companys motion to dismiss
the amended complaint was granted with prejudice on May 18, 2010. On June 15, 2010, the
plaintiff appealed the Courts decision to dismiss the amended complaint.
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On March 9, 2010, the Companys Board of Directors and certain current and former officers
of the Company were named as defendants in a shareholder derivative lawsuit filed in the
Superior Court of Mecklenburg County, North Carolina. The derivative suit was filed by a
shareholder named Patrick Smith purportedly on behalf of Horizon Lines, Inc. claiming that the
Directors and current and former officers named in the complaint breached their fiduciary duties
and damaged the Company by allegedly causing the Company to engage in an antitrust conspiracy in
the ocean shipping trade routes between the continental United States and Alaska, Hawaii, Guam
and Puerto Rico. The relief being sought by the plaintiff includes monetary damages, fees and
expenses associated with the action, including attorneys fees, and appropriate equitable
relief. The defendants filed a motion to dismiss on May 27, 2010. The Company intends to
vigorously defend itself against this lawsuit. However, the Company is unable to predict the
outcome of this lawsuit.
In the ordinary course of business, from time to time, the Company and its subsidiaries
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. The Company and its subsidiaries generally maintain insurance,
subject to customary deductibles or self-retention amounts, and/or reserves to cover these types
of claims. The Company and its subsidiaries also, from time to time, become involved in routine
employment-related disputes and disputes with parties with which they have contractual
relations.
SFL Agreements
In April 2006, the Company completed a series of agreements with Ship Finance International
Limited and certain of its subsidiaries (SFL) to charter five non-Jones Act qualified
container vessels. The bareboat charter for each vessel is a hell or high water charter, and
the obligation of the Company to pay charter hire thereunder for the vessel is absolute and
unconditional. The aggregate annual charter hire for the five vessels is approximately $32.0
million. Under the charters, the Company is responsible for crewing, insuring, maintaining, and
repairing each vessel and for all other operating costs with respect to each vessel. The term of
each of the bareboat charters is twelve years from the date of delivery of the related vessel,
with a three year renewal option exercisable by the Company. In addition, the Company has the
option to purchase all of the vessels following the five, eight, twelve, and, if applicable,
fifteen year anniversaries of the date of delivery at pre-agreed purchase prices. If the Company
elects to purchase all of the vessels after the five or eight year anniversary date, it will
have the right to assume the outstanding debt related to each purchased vessel, and the amount
of the debt so assumed will be credited against the purchase price paid for the vessels. If the
Company elects not to purchase the vessels at the end of the initial twelve-year period and SFL
sells the vessels for less than a specified amount, the Company is responsible for paying the
amount of such shortfall, which shall not exceed $3.8 million per vessel. If the vessels are to
be sold by SFL to an affiliated party for less than a different specified amount, the Company
has the right to purchase the new vessels for that different specified amount.
The Company has an interest in the variable interest entities (VIE) created in
conjunction with the SFL transactions. However, based on a qualitative assessment as of June 20,
2010, the Company has determined it is not the primary beneficiary of the VIEs. The Companys
power to direct activities that most significantly impact the VIEs economic performance is
limited to the maintenance and repair of the vessels. The Companys maintenance and repair
activities are performed primarily to conform to the requirements of the U.S. Coast Guard and to
maintain the vessels on-time departure and arrival schedules. The Companys obligation to absorb
losses related to the residual guarantee or receive benefits related to the pre-agreed purchase
price at the end of the twelve-year period are not considered to be significant to the cash
flows of the VIE.
Certain contractual obligations and off-balance sheet obligations arising from this
transaction include the annual operating lease obligations and the residual guarantee. The
Company is accounting for the leases as operating leases. The residual guarantee is recorded at
its fair value of approximately $0.2 million as a liability on the Companys balance sheet.
Standby Letters of Credit
The Company has standby letters of credit primarily related to its property and casualty
insurance programs. On June 20, 2010 and December 20, 2009, amounts outstanding on these letters
of credit totaled $11.3 million and $11.1 million, respectively.
14. Recent Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (FASB) issued an amendment to
the accounting for fair value measurements and disclosures. This amendment details additional
disclosures on fair value measurements, requires a gross presentation of activities within a
Level 3 rollforward, and adds a new requirement to disclose transfers in and out of Level 1 and
Level 2 measurements. The new disclosures are required of all entities that are required to
provide disclosures about recurring and nonrecurring fair value measurements. This amendment is
effective in the first interim or reporting period beginning after December 15, 2009, with an
exception for the gross presentation of Level 3 rollforward information, which is required for
annual reporting periods beginning after December 15, 2010, and for interim reporting periods
within those years. The adoption of the provisions of this amendment required in the first
interim period after December 15, 2009 did not have a material impact on the Companys financial
statement disclosures. In addition, the adoption of the provisions of this amendment required
for periods
beginning after December 15, 2010 is not expected to have a material impact on the
Companys financial statement disclosures.
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In June 2009, the FASB issued authoritative guidance that amends the evaluation criteria to
identify the primary beneficiary of a variable interest entity and requires ongoing assessment
of whether an enterprise is the primary beneficiary of the variable interest entity. The
determination of whether a reporting entity is required to consolidate another entity is based
on, among other things, the other entitys purpose and design and the reporting entitys ability
to direct the activities that most significantly impact the other entitys economic performance.
The Company adopted the provisions of the authoritative guidance during the quarter ended March
21, 2010. There was no impact on the Companys consolidated results of operations and financial
position, other than the modification of certain disclosures related to the Companys
involvement in variable interest entities.
In June 2009, the FASB issued an amendment to the accounting and disclosure requirements
for transfers of financial assets. The amendment modifies the derecognition guidance and
eliminates the exemption from consolidation for qualifying special-purpose entities. The Company
adopted the provisions of the authoritative guidance during the quarter ended March 21, 2010 and
there was no impact on the Companys consolidated results of operations and financial position.
In May 2009, and subsequently amended in February 2010, the FASB issued authoritative
guidance for subsequent events, which 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. The Company adopted the authoritative
guidance during the quarter ended September 20, 2009, and there was no impact on the Companys
consolidated results of operations and financial position.
15. Subsequent Events
On July 12, 2010, the District Court of Puerto Rico granted preliminary approval of the
settlement agreement related to the Puerto Rico MDL litigation. Per the terms of the agreement,
the Company is required to pay an additional $5.0 million into the escrow account by October 10,
2010.
The Company has evaluated subsequent events and transactions for potential recognition or
disclosure through such time these statements were filed with the Securities and Exchange
Commission, and has determined there were no other items deemed to be reportable.
15
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2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our consolidated financial condition and results
of operations should be read in conjunction with the financial statements of the Company and
notes thereto included elsewhere in this quarterly report. In this quarterly report, unless the
context otherwise requires, references to we, us, and our mean the Company, together with
its subsidiaries, on a consolidated basis.
Executive Overview
The challenging macroeconomic environment continues to negatively impact our results of
operations. Although the trends are improving and some reports indicate that the economy is
stabilizing and beginning to rebound, the recovery has been slow and uneven. Our markets
continue to experience weak business conditions due to ongoing softness in consumer spending,
tourism, and commercial construction. In light of the risks posed by the current macroeconomic
environment, we have continued a series of successful cost management efforts.
Container volumes during the quarter ended June 20, 2010 increased slightly over the
quarter ended June 21, 2009. Operating revenue for the quarter ended June 20, 2010 increased as
a result of higher fuel surcharges, the expansion of our logistics service offerings, and
improved container volumes, which was partially offset by a reduction in revenue related to the
expiration of contracts with the government for the management of its vessels. Operating revenue
during the six months ended June 20, 2010 increased as a result of higher fuel surcharges and
the expansion of our logistics service offerings, which was partially offset by a reduction in
revenue related to the expiration of certain contracts with the government and lower container
volumes.
The increase in operating expense during the quarter and six months ended June 20, 2010 is
primarily due to higher fuel prices, higher vessel operating expenses as a result of an increase
in dry-dockings, and additional expenses due to three vessel incidents during the first quarter
of 2010 as a result of unusually harsh winter weather conditions and mechanical issues. The
increase was partially offset by a decrease in selling, general and administrative expenses,
largely due to a decline in legal and professional expenses associated with the Department of
Justice antitrust investigation and related legal proceedings and a decline in the performance
incentive plan expense, lower terminal rates, our cost control efforts, and the sale of our
interest in a joint venture. In addition, operating expense for the quarter and six months ended
June 21, 2009 includes a $20 million charge for the potential settlement of the Puerto Rico MDL
litigation.
Quarters Ended | Six Months Ended | |||||||||||||||
June 20, | June 21, | June 20, | June 21, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
($ in thousands) | ||||||||||||||||
Operating revenue |
$ | 305,585 | $ | 278,484 | $ | 591,718 | $ | 550,835 | ||||||||
Operating expense |
291,671 | 289,691 | 580,790 | 562,860 | ||||||||||||
Operating income (loss) |
$ | 13,914 | $ | (11,207 | ) | $ | 10,928 | $ | (12,025 | ) | ||||||
Operating ratio |
95.4 | % | 104.0 | % | 98.2 | % | 102.2 | % | ||||||||
Revenue containers (units) |
64,596 | 64,176 | 124,884 | 125,653 | ||||||||||||
Average unit revenue |
$ | 3,934 | $ | 3,686 | $ | 3,944 | $ | 3,713 |
We believe that in addition to GAAP based financial information, EBITDA and Adjusted EBITDA
are meaningful disclosures for the following reasons: (i) EBITDA and Adjusted EBITDA are
components of the measure used by our board of directors and management team to evaluate our
operating performance, (ii) the senior credit facility contains covenants that require us to
maintain certain interest expense coverage and leverage ratios, which contain EBITDA and
Adjusted EBITDA as components, and restrict certain cash payments if certain ratios are not met,
subject to certain exclusions, and our management team uses EBITDA and Adjusted EBITDA to
monitor compliance with such covenants, (iii) EBITDA and Adjusted EBITDA are components of the
measure used by our management team to make day-to-day operating decisions, (iv) EBITDA and
Adjusted EBITDA are components of the measure used by our management to facilitate internal
comparisons to competitors results and the marine container shipping and logistics industry in
general and (v) the payment of discretionary bonuses to certain members of our management is
contingent upon, among other things, the satisfaction by us of certain targets, which contain
EBITDA and Adjusted EBITDA as components. We acknowledge that there are limitations when using
EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA 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. Additionally, EBITDA and
Adjusted EBITDA are not intended to be a measure of free cash flow for managements
discretionary use, as it does not consider
certain cash requirements such as debt service requirements, capital expenditures, and
dry-docking payments. Because all companies do not use identical calculations, this presentation
of EBITDA and Adjusted EBITDA may not be comparable to other similarly titled measures of other
companies. The EBITDA amounts presented below contain certain charges that our management team
excludes when evaluating our operating performance, for making day-to-day operating decisions
and that have historically been excluded from EBITDA to arrive at Adjusted EBITDA when
determining the payment of discretionary bonuses.
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A reconciliation of net income (loss) to EBITDA and Adjusted EBITDA is included below (in
thousands):
Quarters Ended | Six Months Ended | |||||||||||||||
June 20, | June 21, | June 20, | June 21, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(in thousands) | ||||||||||||||||
Net income (loss) |
$ | 3,650 | $ | (31,083 | ) | $ | (9,594 | ) | $ | (41,035 | ) | |||||
Interest expense, net |
10,283 | 9,254 | 20,566 | 18,686 | ||||||||||||
Income tax (benefit) expense |
(25 | ) | 10,561 | (50 | ) | 10,264 | ||||||||||
Depreciation and amortization |
14,521 | 14,774 | 28,589 | 29,547 | ||||||||||||
EBITDA |
28,429 | 3,506 | 39,511 | 17,462 | ||||||||||||
Department of Justice antitrust
investigation costs |
1,030 | 4,062 | 1,988 | 8,486 | ||||||||||||
Union severance charge |
97 | | 360 | | ||||||||||||
Settlement of class action lawsuit |
| 20,000 | | 20,000 | ||||||||||||
Restructuring charge |
| 213 | | 1,001 | ||||||||||||
Impairment charge |
| 659 | | 659 | ||||||||||||
Loss on modification of debt |
| 50 | | 50 | ||||||||||||
Adjusted EBITDA |
$ | 29,556 | $ | 28,490 | $ | 41,859 | $ | 47,658 | ||||||||
In addition to EBITDA and Adjusted EBITDA, we use various other non-GAAP measures such as
adjusted net income (loss) and adjusted net income (loss) per share. As with EBITDA and Adjusted
EBITDA, the measures below are not recognized terms under GAAP and do not purport to be an
alternative to net income (loss) 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.
The tables below present a reconciliation of net income (loss) to adjusted net income
(loss) and net income (loss) per share to adjusted net income (loss) per share (in thousands,
except per share amounts):
Quarters Ended | Six Months Ended | |||||||||||||||
June 20, | June 21, | June 20, | June 21, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net income (loss) |
$ | 3,650 | $ | (31,083 | ) | $ | (9,594 | ) | $ | (41,035 | ) | |||||
Adjustments: |
||||||||||||||||
Department of Justice
antitrust investigation
costs |
1,030 | 4,062 | 1,988 | 8,486 | ||||||||||||
Union severance charge |
97 | | 360 | | ||||||||||||
Settlement of class action
lawsuit |
| 20,000 | | 20,000 | ||||||||||||
Restructuring charge |
| 213 | | 1,001 | ||||||||||||
Impairment charge |
| 659 | | 659 | ||||||||||||
Loss on modification of debt |
| 50 | | 50 | ||||||||||||
Tax valuation allowance |
| 10,561 | | 10,561 | ||||||||||||
Tax impact of adjustments |
(7 | ) | (339 | ) | (5 | ) | (302 | ) | ||||||||
Total adjustments |
1,120 | 35,206 | 2,343 | 40,455 | ||||||||||||
Adjusted net income (loss) |
$ | 4,770 | $ | 4,123 | $ | (7,251 | ) | $ | (580 | ) | ||||||
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Quarters Ended | Six Months Ended | |||||||||||||||
June 20, | June 21, | June 20, | June 21, | |||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net income (loss) per share |
$ | 0.12 | $ | (1.02 | ) | $ | (0.31 | ) | $ | (1.35 | ) | |||||
Adjustments: |
||||||||||||||||
Department of Justice
antitrust investigation
costs |
0.03 | 0.14 | 0.06 | 0.29 | ||||||||||||
Union severance charge |
| | 0.01 | | ||||||||||||
Settlement of class action
lawsuit |
| 0.65 | | 0.66 | ||||||||||||
Restructuring charge |
| 0.01 | | 0.03 | ||||||||||||
Impairment charge |
| 0.02 | | 0.02 | ||||||||||||
Tax valuation allowance |
| 0.34 | | 0.34 | ||||||||||||
Tax impact of adjustments |
0.00 | (0.01 | ) | 0.00 | (0.01 | ) | ||||||||||
Total adjustments |
0.03 | 1.15 | 0.07 | 1.33 | ||||||||||||
Adjusted net income (loss) per share |
$ | 0.15 | $ | 0.13 | $ | (0.24 | ) | $ | (0.02 | ) | ||||||
General
We believe that we are the nations 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 covered locations 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 19,000
cargo containers. We also provide comprehensive shipping and logistics offerings 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.
Recent Developments
On February 26, 2010, we announced plans to commence in December 2010 our own weekly
trans-Pacific liner service between Asia and the U.S. West Coast. The new service will utilize
our five 2,824 twenty-foot-equivalent-unit (TEU) capacity, 23-knot, U.S. flag Hunter-class
containerships that currently call on Guam and continue on to China and Taiwan as part of a
space charter agreement with Maersk Line. We have selected Shanghai and Ningbo, China as our
ports of call. In preparation for these plans, we and Maersk Line have mutually agreed not to
renew the current Asia space charter agreement when it expires on December 10, 2010.
On June 8, 2010, we entered into an agreement with APM Terminals North America (APMT) for
a new six-year U.S. terminal services agreement. The prior terminal services agreement with APMT
was scheduled to expire in December 2010.
During the first quarter of 2010, the Company implemented a new organizational structure.
The 2010 reorganization included (1) the re-assignment of the Companys inland logistics
activities related to the container shipping operations, as these operations are no longer
tightly integrated with our third-party logistics service offerings and (2) the re-alignment of
the responsibilities of certain members of the Companys management team.
We evaluated the impact of these and other changes on our segment reporting and determined
that we now have one reportable segment. As a result, the financial statement information
provided in this 10-Q for the second quarters and six months of fiscal 2010 and 2009 have been
presented to reflect one reportable segment, reflecting our consolidated results of operations.
History
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 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. In addition to these domestic markets, we have been serving the
international market with vessels operating between the U.S. West Coast and Asia since the
inception of our space charter agreements with Maersk Line in December 1999.
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Critical Accounting Policies
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 based upon 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 reevaluated 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.
There have been no material changes to the Companys critical accounting policies during the six
months ended June 20, 2010. The critical accounting policies can be found in the Companys
Annual Report on Form 10-K for the fiscal year ended December 20, 2009 as filed with the
Securities and Exchange Commission (SEC).
Seasonality
Our container volumes are subject to seasonal trends common in the transportation industry.
Financial results in the first quarter are normally lower due to reduced loads during the winter
months. Volumes typically build to a peak in the third quarter and early fourth quarter, which
generally results in higher revenues and improved margins.
Results of Operations
Operating Revenue Overview
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.
Over 85% of our revenue is 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) warehousing services for
third-parties, and (v) other non-transportation services.
As used in this Form 10-Q, the term revenue containers refers to containers that are
transported for a charge, as opposed to empty containers.
Cost of Services Overview
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 and other transportation costs. 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.
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Quarter Ended June 20, 2010 Compared with the Quarter Ended June 21, 2009
Quarters Ended | ||||||||||||||||
June 20, | June 21, | |||||||||||||||
2010 | 2009 | Change | % Change | |||||||||||||
($ in thousands) | ||||||||||||||||
Operating revenue |
$ | 305,585 | $ | 278,484 | $ | 27,101 | 9.7 | % | ||||||||
Operating expense: |
||||||||||||||||
Vessel |
98,451 | 82,501 | 15,950 | 19.3 | % | |||||||||||
Marine |
53,782 | 49,285 | 4,497 | 9.1 | % | |||||||||||
Inland |
56,990 | 49,233 | 7,757 | 15.8 | % | |||||||||||
Land |
36,679 | 35,388 | 1,291 | 3.6 | % | |||||||||||
Rolling stock rent |
10,111 | 9,932 | 179 | 1.8 | % | |||||||||||
Cost of services |
256,013 | 226,339 | 29,674 | 13.1 | % | |||||||||||
Depreciation and amortization |
11,203 | 11,165 | 38 | 0.3 | % | |||||||||||
Amortization of vessel dry-docking |
3,318 | 3,609 | (291 | ) | (8.1) | % | ||||||||||
Selling, general and administrative |
21,890 | 28,006 | (6,116 | ) | (21.8) | % | ||||||||||
Settlement of class action lawsuit |
| 20,000 | (20,000 | ) | (100.0) | % | ||||||||||
Restructuring charge |
| 213 | (213 | ) | (100.0) | % | ||||||||||
Impairment charge |
| 659 | (659 | ) | (100.0) | % | ||||||||||
Miscellaneous income, net |
(753 | ) | (300 | ) | (453 | ) | 151.0 | % | ||||||||
Total operating expense |
291,671 | 289,691 | 1,980 | 0.7 | % | |||||||||||
Operating income (loss) |
$ | 13,914 | $ | (11,207 | ) | $ | 25,121 | 224.2 | % | |||||||
Operating ratio |
95.4 | % | 104.0 | % | (8.6) | % | ||||||||||
Revenue containers (units) |
64,596 | 64,176 | 420 | 0.7 | % | |||||||||||
Average unit revenue |
$ | 3,934 | $ | 3,686 | $ | 248 | 6.7 | % |
Operating Revenue. Our operating revenue increased $27.1 million, or 9.7% during the
quarter ended June 20, 2010 as compared to the quarter ended June 21, 2009. This revenue
increase can be attributed to the following factors (in thousands):
Bunker and intermodal fuel surcharges increase |
$ | 18,535 | ||
Third-party logistics increase |
6,903 | |||
Other revenue increase |
7,670 | |||
Revenue container volume increase |
1,383 | |||
Expiration of government vessel management contract |
(6,324 | ) | ||
Revenue container rate decrease |
(1,066 | ) | ||
Total operating revenue increase |
$ | 27,101 | ||
The increase in revenue container volume is primarily due to the stabilization and mild
improvement in our tradelanes. Bunker and intermodal fuel surcharges, which are included in our
transportation revenue, accounted for approximately 14.3% of total revenue in the quarter ended
June 20, 2010 and approximately 9.1% of total revenue in the quarter ended June 21, 2009. We
adjust our bunker and intermodal fuel surcharges as a result of fluctuations 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 increase in other revenue is primarily due to higher
space charter revenue resulting from an increase in fuel surcharges.
Cost of Services. The $29.7 million increase in cost of services is primarily due to higher
fuel costs as a result of an increase in fuel prices and an increase in inland transportation
costs as a result of the increase in third-party logistics revenue, partially offset by a
decrease in variable costs as a result of the expiration of certain contracts with the
government for the management of its vessels.
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Vessel expense, which is not primarily driven by revenue container volume, increased $16.0
million for the quarter ended June 20, 2010 compared to the quarter ended June 21, 2009. This
increase can be attributed to the following factors (in thousands):
Vessel fuel costs increase |
$ | 21,310 | ||
Labor and other vessel operating expense increase |
2,035 | |||
Government vessel management contract expense decrease |
(6,995 | ) | ||
Vessel space charter expense decrease |
(400 | ) | ||
Total vessel expense increase |
$ | 15,950 | ||
The $21.3 million increase in fuel costs is comprised of a $19.9 million increase due to
fuel prices and a $1.4 million increase in consumption due to additional vessel operating days.
The increase in labor and other vessel operating expense is due to additional operating expense
associated with an increase in the number of dry-dockings during 2010. We continue to incur
labor expenses with the vessel in dry-dock while continuing to incur expenses associated with
the spare vessel deployed 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. The $4.5 million increase in marine expense during quarter ended June 20,
2010 is primarily due to multi-employer plan benefit assessments for our west coast union
employees, an increase in repairs and maintenance of our cranes, and contractual rate increases,
partially offset by lower terminal rates.
The $7.8 million increase in inland expense is primarily due to the increase in our inland
service offerings and higher fuel costs.
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.
Quarters Ended | ||||||||||||
June 20, | June 21, | |||||||||||
2010 | 2009 | % Change | ||||||||||
(in thousands) | ||||||||||||
Land expense: |
||||||||||||
Maintenance |
$ | 12,877 | $ | 12,217 | 5.4 | % | ||||||
Terminal overhead |
14,624 | 14,330 | 2.1 | % | ||||||||
Yard and gate |
6,913 | 6,869 | 0.6 | % | ||||||||
Warehouse |
2,265 | 1,972 | 14.9 | % | ||||||||
Total land expense |
$ | 36,679 | $ | 35,388 | 3.6 | % | ||||||
Non-vessel related maintenance expenses increased primarily due to higher fuel costs.
Terminal overhead increased primarily due to higher utilities expenses. Warehouse expense
increased primarily as a result of higher labor costs.
Rolling stock expense increased $0.2 million during the quarter ended June 20, 2010 as
compared to the quarter ended June 21, 2009. This increase is due to higher costs related to our
existing equipment sharing arrangements.
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Depreciation and Amortization. Depreciation and amortization of $11.2 million during the
quarter ended June 20, 2010 was flat as compared to the quarter ended June 21, 2009.
Quarters Ended | ||||||||||||
June 20, | June 21, | |||||||||||
2010 | 2009 | % Change | ||||||||||
(in thousands) | ||||||||||||
Depreciation and amortization: |
||||||||||||
Depreciationowned vessels |
$ | 2,331 | $ | 2,227 | 4.7 | % | ||||||
Depreciation and amortizationother |
3,713 | 3,781 | (1.8) | % | ||||||||
Amortization of intangible assets |
5,159 | 5,157 | 0.0 | % | ||||||||
Total depreciation and amortization |
$ | 11,203 | $ | 11,165 | 0.3 | % | ||||||
Amortization of vessel dry-docking |
$ | 3,318 | $ | 3,609 | (8.1) | % | ||||||
Amortization of Vessel Dry-docking. Amortization of vessel dry-docking was $3.3 million
during the quarter ended June 20, 2010 compared to $3.6 million for the quarter ended June 21,
2009. 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
$21.9 million for the quarter ended June 20, 2010 compared to $28.0 million for the quarter
ended June 21, 2009, a decrease of $6.1 million or 21.8%. This decrease is primarily comprised
of a $3.0 million decline in legal and professional fees expenses associated with the Department
of Justice antitrust investigation and related legal proceedings, $2.1 million decrease in the
accrual related to our performance incentive plan, and $0.5 million in savings related to our
cost control efforts, including travel and entertainment, meetings and seminars, the elimination
of certain perquisites for our executive officers, and advertising.
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 is subject to final 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.
Impairment Charge. Impairment charge of $0.7 million during the quarter ended June 21, 2009
included an additional write-down related to our spare vessels.
Miscellaneous Income, Net. Miscellaneous income, net increased $0.5 million during the
quarter ended June 20, 2010 compared to the quarter ended June 21, 2009 primarily as a result of
the sale of our interest in a joint venture, partially offset by a decrease in the gain on sale
of property and equipment and an increase in bad debt expense.
Interest Expense, Net. Interest expense, net increased to $10.3 million for the quarter
ended June 20, 2010 compared to $9.3 million for the quarter ended June 21, 2009, an increase of
$1.0 million or 11.1%. This increase is a result of a higher interest rates payable on the
outstanding debt as a result of the June 2009 amendment to our Senior Credit Facility.
Income Tax (Benefit) Expense. The effective tax rate for the quarters ended June 20, 2010
and June 21, 2009 was (0.7)% and (51.5)%, respectively. During the second quarter of 2009, we
determined that it was unclear as to the timing of when we will generate sufficient taxable
income to realize our deferred tax assets. Accordingly, we recorded a valuation allowance
against our deferred tax assets. Although we have recorded a valuation allowance against our
deferred tax assets, it does not affect our ability to utilize our deferred tax assets to offset
future taxable income. Until such time that we determine it is more likely than not that we will
generate sufficient taxable income to realize our deferred tax assets, income tax benefits
associated with future period losses will be fully reserved. As a result, the Company does not
expect to record a current or deferred federal tax benefit or expense and only minimal state tax
provisions during those periods.
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Six Months Ended June 20, 2010 Compared with the Six Months Ended June 21, 2009
Six Months Ended | ||||||||||||||||
June 20, | June 21, | |||||||||||||||
2010 | 2009 | Change | % Change | |||||||||||||
($ in thousands) | ||||||||||||||||
Operating revenue |
$ | 591,718 | $ | 550,835 | $ | 40,883 | 7.4 | % | ||||||||
Operating expense: |
||||||||||||||||
Vessel |
200,883 | 167,313 | 33,570 | 20.1 | % | |||||||||||
Marine |
106,010 | 98,704 | 7,306 | 7.4 | % | |||||||||||
Inland |
108,428 | 98,922 | 9,506 | 9.6 | % | |||||||||||
Land |
73,490 | 71,982 | 1,508 | 2.1 | % | |||||||||||
Rolling stock rent |
19,989 | 19,077 | 912 | 4.8 | % | |||||||||||
Cost of services |
508,800 | 455,998 | 52,802 | 11.6 | % | |||||||||||
Depreciation and amortization |
22,218 | 22,140 | 78 | 0.4 | % | |||||||||||
Amortization of vessel dry-docking |
6,371 | 7,407 | (1,036 | ) | (14.0) | % | ||||||||||
Selling, general and administrative |
43,591 | 55,774 | (12,183 | ) | (21.8) | % | ||||||||||
Settlement of class action lawsuit |
| 20,000 | (20,000 | ) | (100.0) | % | ||||||||||
Restructuring charge |
| 1,001 | (1,001 | ) | (100.0) | % | ||||||||||
Impairment charge |
| 659 | (659 | ) | (100.0) | % | ||||||||||
Miscellaneous income, net |
(190 | ) | (119 | ) | (71 | ) | 60.0 | % | ||||||||
Total operating expense |
580,790 | 562,860 | 17,930 | 3.2 | % | |||||||||||
Operating income (loss) |
$ | 10,928 | $ | (12,025 | ) | $ | 22,953 | 190.9 | % | |||||||
Operating ratio |
98.2 | % | 102.2 | % | (4.0) | % | ||||||||||
Revenue containers (units) |
124,884 | 125,653 | (769 | ) | (0.6) | % | ||||||||||
Average unit revenue |
$ | 3,944 | $ | 3,713 | $ | 231 | 6.2 | % |
Operating Revenue. Our operating revenue increased $40.9 million, or 7.4% during the six
months ended June 20, 2010 as compared to the six months ended June 21, 2009. This revenue
increase can be attributed to the following factors (in thousands):
Bunker and intermodal fuel surcharges increase |
$ | 33,345 | ||
Other revenue increase |
14,403 | |||
Third-party logistics increase |
11,010 | |||
Expiration of government vessel management contract |
(12,698 | ) | ||
Revenue container volume decrease |
(2,547 | ) | ||
Revenue container rate decrease |
(2,630 | ) | ||
Total operating revenue increase |
$ | 40,883 | ||
The revenue container volume decline is primarily due to ongoing challenges in all of our
tradelanes. Bunker and intermodal fuel surcharges, which are included in our transportation
revenue, accounted for approximately 14.2% of total revenue in the six months ended June 20,
2010 and approximately 9.2% of total revenue in the six months ended June 21, 2009. We adjust
our bunker and intermodal fuel surcharges as a result of fluctuations 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 increase in other revenue is primarily due higher space charter revenue
resulting from an increase in fuel surcharges.
Cost of Services. The $52.8 million increase in cost of services is primarily due to higher
fuel costs as a result of an increase in fuel prices and an increase in inland transportation
costs as a result of the increase in third-party logistics revenue, partially offset by a
decrease in variable costs as a result of the expiration of certain contracts with the
government for the management of its vessels and lower container volumes.
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Vessel expense, which is not primarily driven by revenue container volume, increased $33.6
million for the six months ended June 20, 2010 compared to the six months ended June 21, 2009.
This increase can be attributed to the following factors (in thousands):
Vessel fuel costs increase |
$ | 43,747 | ||
Labor and other vessel operating expense increase |
3,426 | |||
Vessel space charter expense increase |
197 | |||
Government vessel management contract expense decrease |
(13,800 | ) | ||
Total vessel expense increase |
$ | 33,570 | ||
The $43.7 million increase in fuel costs is comprised of a $41.7 million increase due to
fuel prices and a $2.0 million increase in consumption due to additional vessel operating days.
The increase in labor and other vessel operating expense is due additional operating expense
associated with an increase in the number of dry-dockings during 2010. We continue to incur
labor expenses with the vessel in dry-dock while continuing to incur expenses associated with
the spare vessel deployed 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. The $7.3 million increase in marine expense during the six months ended
June 20, 2010 was primarily due to multi-employer plan benefit assessments for our west coast
union employees, an increase in cargo claims due to weather-related vessel incidents, and
contractual rate increases, partially offset by lower container volumes and lower terminal
rates.
The $9.5 million increase in inland expense is primarily due to the increase in our inland
service offerings and higher fuel costs.
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.
Six Months Ended | ||||||||||||
June 20, | June 21, | |||||||||||
2010 | 2009 | % Change | ||||||||||
(in thousands) | ||||||||||||
Land expense: |
||||||||||||
Maintenance |
$ | 25,947 | $ | 24,536 | 5.8 | % | ||||||
Terminal overhead |
28,725 | 29,206 | (1.6) | % | ||||||||
Yard and gate |
14,473 | 14,451 | 0.2 | % | ||||||||
Warehouse |
4,345 | 3,789 | 14.7 | % | ||||||||
Total land expense |
$ | 73,490 | $ | 71,982 | 2.1 | % | ||||||
Non-vessel related maintenance expenses increased primarily due to higher fuel costs.
Terminal overhead decreased primarily due to lower compensation costs as a result of the
reduction in workforce and reduced expenses related to the relocation of our Long Beach,
California offices incurred during the first quarter of 2009. Warehouse expense increased
primarily as a result of higher labor costs.
Rolling stock expense increased $0.9 million or 4.8% during the six months ended June 20,
2010 as compared to the six months ended June 21, 2009. This increase is due to higher costs
related to our existing equipment sharing arrangements.
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Depreciation and Amortization. Depreciation and amortization of $22.2 million during the
six months ended June 20, 2010 was flat as compared to the six months ended June 21, 2009.
Six Months Ended | ||||||||||||
June 20, | June 21, | |||||||||||
2010 | 2009 | % Change | ||||||||||
(in thousands) | ||||||||||||
Depreciation and amortization: |
||||||||||||
Depreciationowned vessels |
$ | 4,666 | $ | 4,432 | 5.3 | % | ||||||
Depreciation and amortizationother |
7,233 | 7,392 | (2.2) | % | ||||||||
Amortization of intangible assets |
10,319 | 10,316 | 0.0 | % | ||||||||
Total depreciation and amortization |
$ | 22,218 | $ | 22,140 | 0.4 | % | ||||||
Amortization of vessel dry-docking |
$ | 6,371 | $ | 7,407 | (14.0) | % | ||||||
Amortization of Vessel Dry-docking. Amortization of vessel dry-docking was $6.4 million
during the six months ended June 20, 2010 compared to $7.4 million for the six months ended June
21, 2009. 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
$43.6 million for the six months ended June 20, 2010 compared to $55.8 million for the six
months ended June 21, 2009, a decrease of $12.2 million or 21.8%. This decrease is primarily
comprised of a $6.5 million decline in legal and professional fees expenses associated with the
Department of Justice antitrust investigation and related legal proceedings, $3.1 million
decrease in the accrual related to our performance incentive plan, $0.4 million decrease in
stock-based compensation expense, and $1.1 million in savings related to our cost control
efforts, including travel and entertainment, meetings and seminars, charitable contributions,
the elimination of certain perquisites for our executive officers, and advertising.
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 is subject to final 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.
Impairment Charge. Impairment charge of $0.7 million during the six months ended June 21,
2009 included an additional write-down related to our spare vessels.
Restructuring Charge. Restructuring costs of $1.0 million included $0.9 million related to
severance costs and $0.1 million related to other costs associated with our workforce reduction
initiative. The $0.9 million of severance costs included $0.5 million related to the
acceleration of certain stock-based compensation awards.
Miscellaneous Income, Net. Miscellaneous income, net increased $0.1 million during the six
months ended June 20, 2010 compared to the six months ended June 21, 2009. This increase is
primarily as a result of the sale of our interest in a joint venture, partially offset by an
increase in bad debt expense and lower gains on the sale of property and equipment.
Interest Expense, Net. Interest expense, net increased to $20.6 million for the six months
ended June 20, 2010 compared to $18.7 million for the six months ended June 21, 2009, an
increase of $1.9 million or 10.2%. This increase is a result of a higher interest rates payable
on the outstanding debt as a result of the June 2009 amendment to our Senior Credit Facility.
Income Tax (Benefit) Expense. The effective tax rate for the six months ended June 20, 2010
and June 21, 2009 was 0.5% and (33.4)%, 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 a result, the Company does not
expect to record a current or deferred federal tax benefit or expense and only minimal state tax
provisions during those periods.
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Liquidity and Capital Resources
Principal sources of funds have been (i) earnings before non-cash charges and (ii)
borrowings under debt arrangements. Principal uses of funds have been (i) capital expenditures
on our container fleet, terminal operating equipment, owned and leased vessel fleet, and
information technology systems, (ii) vessel dry-docking expenditures, (iii) working capital
consumption, (iv) principal and interest payments on indebtedness, and (v) dividend payments.
Cash totaled $4.6 million at June 20, 2010.
The Senior Credit Facility contains customary covenants, including two financial covenants
with respect to our leverage and interest coverage ratio and covenants that limit our
distribution of dividends and stock repurchases. It also contains customary events of default,
subject to grace periods. We were in compliance with all such covenants as of June 20, 2010. As
of June 20, 2010, total unused borrowing capacity under the revolving credit facility was $83.7
million, after taking into account $130.0 million outstanding under the revolver and $11.3
million utilized for outstanding letters of credit. Based on our leverage ratio, borrowing
availability under the revolving credit facility was $63.5 million as of June 20, 2010.
Operating Activities
Net cash used in operating activities was $15.2 million for the six months ended June 20,
2010 compared to $7.2 million for the six months ended June 21, 2009, an increase of $8.0
million. The increase in cash used in operating activities is primarily due to the following (in
thousands):
Increase in accounts receivable |
$ | (7,939 | ) | |
Decrease in accrual for settlement of class action lawsuit |
(20,000 | ) | ||
Other changes in working capital, net |
(5,949 | ) | ||
Increase in payments related to dry-dockings |
(2,171 | ) | ||
Earnings adjusted for non-cash charges |
18,235 | |||
Decrease in payments related to restructuring and early termination of leased assets |
3,807 | |||
Decrease in payments related to Department of Justice antitrust investigation and
related legal proceedings |
5,986 | |||
$ | (8,031 | ) | ||
Investing Activities
Net cash used in investing activities was $4.2 million for the six months ended June 20,
2010 compared to $6.3 million for the six months ended June 21, 2009. The $2.1 million reduction
is related to a $1.6 million decrease in capital spending and proceeds of $1.1 million received
from the sale of our interest in a joint venture, partially offset by a $0.6 million reduction
in the proceeds from the sale of assets.
Financing Activities
Net cash provided by financing activities during the six months ended June 20, 2010 was
$17.6 million compared to $11.7 million for the six months ended June 21, 2009. The net cash
provided by financing activities during the six months ended June 20, 2010 included $20.6
million, net of repayments, borrowed under the Senior Credit Facility as compared to $21.7
million during the six months ended June 21, 2009. Dividend payments to stockholders during the
six months ended June 20, 2010 were $3.1 million compared to $6.7 million during the six months
ended June 21, 2009. In addition, during the six months ended June 21, 2009, we paid $3.4
million in financing costs related to fees associated with the amendment to the Senior Credit
Facility.
Capital Requirements and Commitments
Our current and future capital needs relate primarily to debt service, our vessel fleet,
and other necessary equipment acquisitions, including the equipment needed for the launch of our
international service at the end of 2010. Cash to be used for investing activities, including
purchases of property and equipment for the next twelve months is expected to total
approximately $18.0-$21.0 million. Such capital expenditures will include terminal
infrastructure and equipment, continued redevelopment of our San Juan, Puerto Rico terminal, and
vessel regulatory and maintenance initiatives. In addition, expenditures for vessel dry-docking
payments are estimated to be $17.0-$19.0 million for the next twelve months.
On June 11, 2009, we entered into a settlement agreement with the plaintiffs in the Puerto
Rico MDL litigation. Under the settlement agreement, 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 have paid $5.0 million into an escrow account and are required to pay an
additional $5.0 million into the escrow account by October 10, 2010 pursuant to the terms of the
settlement agreement. The remaining $10.0 million is required to be paid 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 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 settlement agreement. All class members
would be eligible to share in the $20.0
million cash component, but only our contract customers 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.
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Table of Contents
Eight of our vessels, the Horizon Anchorage, Horizon Tacoma, Horizon Kodiak, Horizon
Hunter, Horizon Hawk, Horizon Eagle, Horizon Falcon and Horizon Tiger are leased, or chartered,
under charters that are due to expire in January 2015 for the Horizon Anchorage, Horizon Tacoma
and Horizon Kodiak, in 2018 for the Horizon Hunter and in 2019 for the Horizon Hawk, Horizon
Eagle, Horizon Falcon and Horizon Tiger. The charters for these vessels permit us to purchase
the applicable vessel at the expiration of the charter period for a fair market value specified
in the relevant charter that is determined through a pre-agreed appraisal procedure. The fair
market values of these vessels at the expiration of their charters cannot be predicted with any
certainty.
Long-Term Debt
Senior Credit Facility
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 was intended to provide us the flexibility
necessary to effect the settlement of the Puerto Rico class action litigation and to incur other
antitrust related 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 clarify 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 during the second quarter of 2009.
We made quarterly principal payments on the term loan of approximately $1.6 million from
December 31, 2007 through September 30, 2009. Effective December 31, 2009, quarterly payments
increased 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. Final maturity of the Senior
Credit Facility could accelerate to February 15, 2012 unless the Notes (as defined below) are
refinanced, or arrangements for the refinance of the Notes have been made, in each case on terms
and conditions reasonably satisfactory to the Administrative Agent of the Senior Credit
Facility. The interest rate payable under the Senior Credit Facility varies depending on the
types of advances or loans the Company selects. Borrowings under the Senior Credit Facility bear
interest primarily at LIBOR-based rates plus a spread which ranges from 2.75% to 3.5% (LIBOR
plus 3.25% as of June 20, 2010) 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 2.0% as of June 20, 2010). The weighted average
interest rate at June 20, 2010 was approximately 4.8%, 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 June 20, 2010).
The Senior Credit Facility contains customary covenants, including two financial covenants
with respect to our leverage and interest coverage ratio and covenants that limit distribution
of dividends and stock repurchases. It also contains customary events of default, subject to
grace periods. We were in compliance with all such covenants as of June 20, 2010. As of June 20,
2010, total unused borrowing capacity under the revolving credit facility was $83.7 million,
after taking into account $130.0 million outstanding under the revolver and $11.3 million
utilized for outstanding letters of credit. Based on our leverage ratio, borrowing availability
under the revolving credit facility was $63.5 million as of June 20, 2010.
Derivative Instruments
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.
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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. As of June 20, 2010, we
recorded a liability of $3.9 million, of which $0.6 million is included in other accrued
liabilities and $3.3 million is included in other long-term liabilities, in the accompanying
consolidated balance sheet. We also recorded $0.2 million and $0.5 million in other
comprehensive income (loss) for the quarter and six months ended June 20, 2010, respectively. No
hedge ineffectiveness was recorded during the quarter and six months ended June 20, 2010. If the
hedge was deemed ineffective, or extinguished by either counterparty, any accumulated gains or
losses remaining in other comprehensive loss would be fully recorded in interest expense during
the period.
4.25% Convertible Senior Notes
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:
| Prior to May 15, 2012, if during any calendar quarter, and only during such calendar quarter, the last reported sale price of our common stock for at least 20 trading days in a period of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter exceeds 120% of the applicable conversion price in effect on the last trading day of the immediately preceding calendar quarter; | ||
| During any five business day period prior to May 15, 2012, immediately after any five consecutive trading day period (the measurement period) in which the trading price per $1,000 principal amount of notes for each day of such measurement period was less than 98% of the product of the last reported sale price of our common stock on such date and the conversion rate on such date; | ||
| If, at any time, a change in control occurs or if we are a party to a consolidation, merger, binding share exchange or transfer or lease of all or substantially all of its assets, pursuant to which the Companys common stock would be converted into cash, securities or other assets; or | ||
| At any time after May 15, 2012 through the fourth scheduled trading day immediately preceding August 15, 2012. |
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 June 20, 2010, 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, $33.4 million net of tax, and has been accounted for as an equity
transaction. 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 Companys 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.
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Goodwill
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 June 20, 2010, the carrying value of our
goodwill was $317.1 million. Earnings estimated to be generated are expected to support the
carrying value of goodwill.
Outlook
Our outlook for the remainder of 2010 remains consistent with earlier projections in that
we continue to expect our 2010 financial results to be in the range of 2009 results. We are
experiencing some economic stabilization and recovery, evidenced in part by the ongoing modest
volume firming trend. However, we also face continuing high fuel prices and ongoing rate
pressure in Puerto Rico where capacity has been added in what remains essentially a stagnant
business environment. We will closely monitor cash flows and expect to maintain adequate
liquidity to remain in compliance with all financial covenants.
Interest Rate Risk
Our primary interest rate exposure relates to the Senior Credit Facility. As of June 20,
2010, we had outstanding a $103.1 million term loan and $130.0 million under the revolving
credit facility, which bear interest at variable rates.
On March 31, 2008, we entered into an Interest Rate Swap Agreement (the swap) on our term
loan with 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 the Company against the risk of
rising interest rates by effectively fixing the base interest rate payable related to our term
loan. Interest rate differentials paid or received under the swap are recognized as adjustments
to interest expense. We do 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,
our exposure is limited to the interest rate differential.
Each quarter point change in interest rates would result in a $0.3 million change in annual
interest expense on the revolving credit facility.
Recent Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (FASB) issued an amendment to
the accounting for fair value measurements and disclosures. This amendment details additional
disclosures on fair value measurements, requires a gross presentation of activities within a
Level 3 rollforward, and adds a new requirement to disclose transfers in and out of Level 1 and
Level 2 measurements. The new disclosures are required of all entities that are required to
provide disclosures about recurring and nonrecurring fair value measurements. This amendment is
effective in the first interim or reporting period beginning after December 15, 2009, with an
exception for the gross presentation of Level 3 rollforward information, which is required for
annual reporting periods beginning after December 15, 2010, and for interim reporting periods
within those years. The adoption of the provisions of this amendment required in the first
interim period after December 15, 2009 did not have a material impact on our financial statement
disclosures. In addition, the adoption of the provisions of this amendment required for periods
beginning after December 15, 2010 is not expected to have a material impact on our financial
statement disclosures
In June 2009, the FASB issued authoritative guidance that amends the evaluation criteria to
identify the primary beneficiary of a variable interest entity and requires ongoing assessment
of whether an enterprise is the primary beneficiary of the variable interest entity. The
determination of whether a reporting entity is required to consolidate another entity is based
on, among other things, the other entitys purpose and design and the reporting entitys ability
to direct the activities that most significantly impact the other entitys economic performance.
We adopted the provisions of the authoritative guidance during the quarter ended March 21, 2010.
There was no impact on our consolidated results of operations and financial position, other than
the modification of certain disclosures related to our involvement in variable interest
entities.
In June 2009, the FASB issued an amendment to the accounting and disclosure requirements
for transfers of financial assets. The amendment modifies the derecognition guidance and
eliminates the exemption from consolidation for qualifying special-purpose entities. We adopted
the provisions of the authoritative guidance during the quarter ended March 21, 2010 and there
was no impact on our consolidated results of operations and financial position.
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In May 2009, and subsequently amended in February 2010, the FASB issued authoritative
guidance for subsequent events, which 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. We adopted the authoritative guidance
during the quarter ended September 20, 2009, and there was no impact on our consolidated results
of operations and financial position.
Forward Looking Statements
This Form 10-Q 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.
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; competitive
nature of trans-Pacific ocean transportation market between Asia and the U.S. West Coast;
cyclical nature of international shipping industry and resulting volatile changes in freight
rates; international regulatory and currency environment; 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-Q (including the exhibits hereto) might not occur. We
undertake no obligation, and specifically decline any obligation, to publicly update or revise
any forward-looking statements, whether as a result of new information, future events or
otherwise.
See the section entitled Risk Factors in our Form 10-K for the fiscal year ended December
20, 2009 as filed with the SEC, and this form 10-Q for the quarterly period ended June 20, 2010,
for a more complete discussion of these risks and uncertainties and for other risks and
uncertainties. Those factors and the other risk factors described therein 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.
3. Quantitative and Qualitative Disclosures About Market Risk
We maintain a policy for managing risk related to exposure to variability in interest
rates, fuel prices, and other relevant market rates and prices. Our policy includes entering
into derivative instruments in order to mitigate our risks.
Exposure relating to our Senior Credit Facility and our exposure to bunker fuel price
increases are discussed in our Form 10-K for the year ended December 20, 2009. There have been
no material changes to these market risks since December 20, 2009.
There have been no material changes in the quantitative and qualitative disclosures about
market risk since December 20, 2009. Information concerning market risk is incorporated by
reference to Part II, Item 7A Quantitative and Qualitative Disclosures about Market Risk of
our Form 10-K for the fiscal year ended December 20, 2009.
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4. Controls and Procedures
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures designed to ensure information
required to be disclosed in Company reports filed under the Securities Exchange Act of 1934, as
amended (the Exchange Act), is recorded, processed, summarized, and reported within the time
periods specified in the Securities and Exchange Commissions rules and forms. Disclosure
controls and procedures are designed to provide reasonable assurance that information required
to be disclosed in Company reports filed under the Exchange Act is accumulated and communicated
to management, including the Companys Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.
Internal Control over Financial Reporting
The Companys management, with the participation of the Companys Chief Executive Officer
and Chief Financial Officer, has evaluated the effectiveness of the Companys internal control
over financial reporting as of June 20, 2010 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 the Companys internal control over financial reporting is effective as of June
20, 2010.
Changes in Internal Control
There were no changes in the Companys internal control over financial reporting during the
Companys fiscal quarter ending June 20, 2010 that have materially affected, or are reasonably
likely to materially affect, the Companys internal control over financial reporting.
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PART II. OTHER INFORMATION
1. Legal Proceedings
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 are cooperating 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
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.
Subsequent to the commencement of the DOJ investigation, fifty-eight purported class action
lawsuits were filed against us and other domestic shipping carriers (the Class Action
Lawsuits). Each of the Class Action Lawsuits purports to be on behalf of a class of individuals
and entities who purchased domestic ocean shipping services from the various domestic ocean
carriers. These 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. The Class Action Lawsuits were filed in the following federal district courts: eight in
the Southern District of Florida, five in the Middle District of Florida, nineteen in the
District of Puerto Rico, twelve in the Northern District of California, three in the Central
District of California, one in the District of Oregon, eight in the Western District of
Washington, one in the District of Hawaii, and one in the District of Alaska.
Thirty-two of the Class Action Lawsuits relate to ocean shipping services in the Puerto
Rico tradelane and were consolidated into a single multidistrict litigation (MDL) proceeding
in the District of Puerto Rico. Twenty-five of the Class Action Lawsuits relate to ocean
shipping services in the Hawaii and Guam tradelanes and were consolidated into a MDL proceeding
in the Western District of Washington. One district court case remains in the District of
Alaska, relating to the Alaska tradelane.
On June 11, 2009, we entered into a settlement agreement with the named plaintiff class
representatives in the Puerto Rico MDL litigation. Under the settlement agreement, 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
and are required to pay an additional $5.0 million into the escrow account by October 10, 2010
pursuant to the terms of the settlement agreement. The remaining $10.0 million is required to be
paid 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 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 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. After several hearings, the district court granted preliminary approval of
the settlement agreement on July 12, 2010. The settlement agreement is subject to final approval
by the Court.
On March 20, 2009, we filed a motion to dismiss the claims in the Hawaii and Guam MDL
litigation. 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. After several extensions, the plaintiffs filed an amended consolidated class action
complaint on May 28, 2010. On July 12, 2010, we filed a motion to dismiss the plaintiffs
amended complaint. We intend to vigorously defend against these purported class action lawsuits.
We and the plaintiffs have agreed to stay discovery in the Alaska litigation, and we intend
to vigorously defend against the purported class action lawsuit in Alaska.
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. On October 27, 2008, we filed a motion to dismiss. The motion to
dismiss is pending.
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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 have provided documents in response to this request and intend to cooperate fully
in this investigation.
On October 19, 2009, a purported class action lawsuit was filed against us, other domestic
shipping carriers and certain individuals in the United States District Court for the District
of Puerto Rico. The complaint purports to be on behalf of a class of individuals (indirect
purchasers) who allege to have paid inflated prices for retail goods imported to Puerto Rico as
a result of alleged price-fixing of the defendants in violation of the Sherman Act and various
provisions of Puerto Rico law. The purported plaintiffs are seeking treble monetary damages,
costs and attorneys fees. On April 9, 2010, we filed a motion to dismiss. The motion to dismiss
is pending, and we intend to vigorously defend against this lawsuit.
Through June 20, 2010, we have incurred approximately $24.9 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,
the indirect purchaser litigation in the District of Puerto Rico, and the Florida Circuit Court
litigation. We have not made any 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 are unable to predict the
outcome of the DOJ investigation. 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 the Company and six current and former employees, including our Chief Executive Officer,
as defendants. The complaint purported to be on behalf of purchasers of our common stock. The
complaint alleged, 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 filed a motion to dismiss, and the Court granted the motion to dismiss on
November 13, 2009 with leave to file an amended complaint. The plaintiff filed an amended
complaint on December 23, 2009, and we filed a motion to dismiss the amended complaint on
February 12, 2010. Our motion to dismiss the amended complaint was granted with prejudice on
May 18, 2010. On June 15, 2010, the plaintiff appealed the Courts decision to dismiss the
amended complaint.
On March 9, 2010, our Board of Directors and certain current and former officers were named
as defendants in a shareholder derivative lawsuit filed in the Superior Court of Mecklenburg
County, North Carolina. The derivative suit was filed by a shareholder named Patrick Smith
purportedly on behalf of Horizon Lines, Inc. claiming that the Directors and current and former
officers named in the complaint breached their fiduciary duties and damaged the Company by
allegedly causing us to engage in an antitrust conspiracy in the ocean shipping trade routes
between the continental United States and Alaska, Hawaii, Guam and Puerto Rico. The relief being
sought by the plaintiff includes monetary damages, fees and expenses associated with the action,
including attorneys fees, and appropriate equitable relief. The defendants filed a motion to
dismiss on May 27, 2010. We intend to vigorously defend against this lawsuit. However, we are
unable to predict the outcome of this lawsuit.
In the ordinary course of business, from time to time, we and our subsidiaries 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 and our subsidiaries generally maintain insurance, subject to
customary deductibles or self-retention amounts, and/or reserves to cover these types of claims.
We and our subsidiaries also, from time to time, become involved in routine employment-related
disputes and disputes with parties with which they have contractual relations.
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1A. Risk Factors
The following risk factors relate to our trans-Pacific liner service between Asia and the
West Coast of the United States. We have named our service the Five Star Express and
anticipate a launch date in December 2010. Except as described below, there have been no
material changes from our risk factors as previously reported in our Annual Report on Form 10-K
for the fiscal year ended December 20, 2009, filed with the SEC.
The Trans-Pacific Ocean Transportation Market Between Asia and the West Coast of the United
States is Highly Competitive, and We May Not be Able to Compete Successfully With Established
Companies That Have Greater Resources or Other New Entrants.
We plan to employ our five 2,824 TEU capacity Hunter-class containerships in a highly
competitive market that is capital intensive and highly fragmented. As a new entrant we will
face operational risks associated with establishing and executing our service offering. These
operational risks include, but are not limited to, identifying and retaining qualified staff,
agents, vendors, and representatives; obtaining sufficient equipment resources; establishing
brand recognition; navigating language and cultural differences; and complying with new or
unfamiliar regulatory regimes.
Competition arises primarily from other vessel owners or operators, some of whom have
substantially greater resources than we do and have well established reputations and substantial
experience in the international marketplace. In addition to these established companies, we
could face competition from new entrants into the market. Some owners and operators of vessels
in the international market may be receiving direct or indirect support from or be operated by
sovereign governments. Competition for the international transportation of containers by sea is
intense and depends on price, location, size, speed, age, service, condition and the
acceptability of the vessel and its operators. Competitors with greater resources and larger
fleets operate in the container shipping industry in the trans-Pacific service between Asia and
the West Coast of the Unites States. These service providers may be able to offer lower rates
than we can offer, and they may be prepared and able to sustain significant losses in order to
maintain market share.
The Cyclical Nature of the International Shipping Industry May Lead to Volatile Changes in
Freight Rates Which May Adversely Affect Our Operating Results and Financial Condition.
Profitability in our planned trans-Pacific liner service will be dependent upon our cost
structure and the freight rates we are able to charge. The supply of and demand for shipping
capacity strongly influences freight rates. The international shipping industry has recently
experienced a period where shipping capacity exceeded demand. Such dislocation between supply
and demand has resulted in a highly volatile rate environment. Future demand will continue to
be affected by, among other things, world and regional economic and political conditions
(including developments in international trade and fluctuations in industrial and agricultural
production). The size of the existing fleet in a particular market, the number of new vessel
deliveries, the scrapping of older vessels and the number of vessels out of active service
(i.e., laid-up, drydocked, awaiting repairs or otherwise not available for hire), determines the
supply of shipping capacity, which is measured by the amount of suitable tonnage available to
carry cargo.
Factors influencing the supply of and demand for international shipping capacity are
outside of our control, and we cannot predict the nature, timing and degree of changes in
industry conditions. The cyclical nature of the international shipping industry may continue to
drive volatility in freight rates and, in turn, reduce our revenues earnings, and cash flows.
Our Trans-Pacific Service Faces a Regulatory and Currency Environment That Does Not Exist in Our
Domestic Tradelanes and is Specific to Operating as an Ocean Common Carrier in the International
Marketplace.
A company that holds itself out to the general public to provide ocean transportation
services for cargo between the United States and China is subject to various licensing and
regulatory regimes in both countries. The Federal Maritime Commission in the United States and
the Ministry of Transportation of P.R.C. in the Peoples Republic of China are two of the
principal, but not sole, regulatory authorities.
Compliance with various regulatory regimes, both foreign and domestic, could increase our
costs or result in loss of revenue or both. Fluctuations in foreign currency exchange could
have similar impacts. Law and regulations impacting international trade and sovereign monetary
policy are subject to political conditions and periodic change. Such changes may require us to
modify our business plans or strategies and force us to incur greater costs or suffer lost
opportunities.
2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
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3. Defaults Upon Senior Securities
None.
4. Reserved
5. Other Information
None.
6. Exhibits
10.1 | *+ | Amendment No. 3 to Stevedoring and Terminal Services Agreement among Horizon Lines, LLC and APM
Terminals North America, Inc. dated June 8, 2010. |
||
31.1 | * | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
||
31.2 | * | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
||
32.1 | * | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. |
||
32.2 | * | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Filed herewith. | |
+ | Portions of this document were omitted and filed separately pursuant to a request for confidential treatment in accordance with Rule 24b-2 of the Securities Act. |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: July 23, 2010
HORIZON LINES, INC. |
||||
By: | /s/ MICHAEL T. AVARA | |||
Michael T. Avara | ||||
Senior Vice President & Chief Financial Officer (Principal Financial Officer & Authorized Signatory) |
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EXHIBIT INDEX
Exhibit | |||
No. | Description | ||
10.1 | *+ | Amendment No. 3 to Stevedoring and Terminal Services Agreement among Horizon Lines, LLC and APM
Terminals North America, Inc. dated June 8, 2010. |
|
31.1 | * | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
31.2 | * | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
32.1 | * | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
32.2 | * | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Filed herewith. | |
+ | Portions of this document were omitted and filed separately pursuant to a request for confidential treatment in accordance with Rule 24b-2 of the Securities Act. |