Form 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

(Mark one)


þ		Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 19, 2010


o		Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number 001-32627

HORIZON LINES, INC.

(Exact name of registrant as specified in its charter)


Delaware		74-3123672
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)


4064 Colony Road, Suite 200, Charlotte, North Carolina		28211
(Address of principal executive offices)		(Zip Code)

(704) 973-7000
(Registrant’s telephone number, including area code)

NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)

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 issuer’s classes of common stock, as of the latest practicable date.

At October 20, 2010, 30,741,210 shares of the Registrant’s common stock, par value $.01 per share, were outstanding.

PART I. FINANCIAL INFORMATION

1. Financial Statements

Horizon Lines, Inc.

Unaudited Condensed Consolidated Balance Sheets

(in thousands, except per share data)


	September 19,			December 20,
	2010			2009
Assets
Current assets
Cash	$	4,419		$	6,419
Accounts receivable, net of allowance of $8,478 and $7,578 at September 19, 2010 and December 20, 2009, respectively		138,134			123,536
Prepaid vessel rent		7,132			4,580
Materials and supplies		28,129			30,254
Deferred tax asset		2,929			2,929
Other current assets		10,176			9,027


Total current assets		190,919			176,745
Property and equipment, net		186,026			193,438
Goodwill		317,068			317,068
Intangible assets, net		87,396			105,405
Other long-term assets		29,024			25,854


Total assets	$	810,433		$	818,510


Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	39,364		$	43,257
Current portion of long-term debt		18,750			18,750
Accrued vessel rent		—			4,339
Other accrued liabilities		110,827			110,473


Total current liabilities		168,941			176,819
Long-term debt, net of current portion		502,387			496,105
Deferred rent		19,230			22,585
Deferred tax liability		4,248			4,248
Other long-term liabilities		17,778			17,475


Total liabilities		712,584			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, 34,516 shares issued and 30,716 shares outstanding as of September 19, 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		194,544			196,900
Accumulated deficit		(17,722	)		(15,874	)
Accumulated other comprehensive loss		(780	)		(1,551	)


Total stockholders’ equity		97,849			101,278


Total liabilities and stockholders’ equity	$	810,433		$	818,510

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Horizon Lines, Inc.

Unaudited Condensed Consolidated Statements of Operations

(in thousands, except per share amounts)


	Quarters Ended					Nine Months Ended
	September 19,		September 20,			September 19,			September 20,
	2010		2009			2010			2009
Operating revenue	$	311,009	$	307,972		$	902,727		$	858,807
Operating expense:
Cost of services (excluding depreciation expense)		254,138		248,364			762,941			704,362
Depreciation and amortization		11,009		11,285			33,226			33,425
Amortization of vessel dry-docking		4,310		3,530			10,681			10,936
Selling, general and administrative		21,047		23,739			64,638			79,512
Impairment charge		1,799		1,208			1,799			1,867
Settlement of class action lawsuit		—		—			—			20,000
Restructuring charge		—		—			—			1,001
Miscellaneous expense, net		609		890			416			773


Total operating expense		292,912		289,016			873,701			851,876

Operating income		18,097		18,956			29,026			6,931
Other expense:
Interest expense, net		10,306		10,563			30,872			29,249
Loss on modification of debt		—		—			—			50
Other expense, net		11		1			18			11


Income (loss) before income tax expense (benefit)		7,780		8,392			(1,864	)		(22,379	)
Income tax expense (benefit)		33		(46	)		(17	)		10,219


Net income (loss)	$	7,747	$	8,438		$	(1,847	)	$	(32,598	)


Net income (loss) per share:
Basic	$	0.25	$	0.28		$	(0.06	)	$	(1.07	)
Diluted	$	0.25	$	0.27		$	(0.06	)	$	(1.07	)

Number of shares used in calculations:
Basic		30,865		30,430			30,660			30,431
Diluted		31,196		30,914			30,660			30,431

Dividends declared per common share	$	0.05	$	0.11		$	0.15		$	0.33

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Horizon Lines, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)


	Nine Months Ended
	September 19,			September 20,
	2010			2009
Cash flows from operating activities:
Net loss	$	(1,847	)	$	(32,598	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation		17,753			17,950
Amortization of other intangible assets		15,473			15,475
Amortization of vessel dry-docking		10,681			10,936
Amortization of deferred financing costs		2,535			2,081
Impairment charge		1,799			1,867
Restructuring charge		—			1,001
Loss on modification of debt		—			50
Deferred income taxes		—			10,312
Gain on equipment disposals		(27	)		(45	)
Gain on sale of interest in joint venture		(724	)		—
Stock-based compensation		1,890			2,464
Accretion of interest on 4.25% convertible notes		8,045			7,428
Changes in operating assets and liabilities:
Accounts receivable		(14,599	)		(2,551	)
Materials and supplies		2,090			(4,425	)
Other current assets		(1,149	)		(2,349	)
Accounts payable		(3,893	)		(7,050	)
Accrued liabilities		(1,595	)		10,466
Vessel rent		(9,657	)		(9,650	)
Vessel dry-docking payments		(15,761	)		(11,269	)
Other assets/liabilities		705			(664	)


Net cash provided by operating activities		11,719			9,429


Cash flows from investing activities:
Purchases of property and equipment		(8,773	)		(8,181	)
Proceeds from the sale of interest in joint venture		1,100			—
Proceeds from the sale of property and equipment		283			1,009


Net cash used in investing activities		(7,390	)		(7,172	)


Cash flows from financing activities:
Payments on long-term debt		(14,063	)		(4,913	)
Borrowing under revolving credit facility		87,800			64,000
Payments on revolving credit facility		(75,500	)		(49,000	)
Dividends to stockholders		(4,636	)		(10,041	)
Common stock issued under employee stock purchase plan		70			75
Payments of financing costs		—			(3,475	)


Net cash used in financing activities		(6,329	)		(3,354	)


Net decrease in cash		(2,000	)		(1,097	)
Cash at beginning of period		6,419			5,487


Cash at end of period	$	4,419		$	4,390

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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 Company’s 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 September 19, 2010 and the financial statements for the quarters and nine months ended September 19, 2010 and September 20, 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 2010, the Company implemented a new organizational structure. The 2010 reorganization included (1) the re-assignment of the Company’s inland logistics activities related to the container shipping operations, as these operations are no longer tightly integrated with the Company’s third-party logistics service offerings and (2) the re-alignment of responsibilities of certain members of the Company’s 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 third quarters and nine month periods of fiscal 2010 and 2009 have been presented to reflect one reportable segment, reflecting the Company’s consolidated results of operations.

3. Long-Term Debt

Long-term debt consists of the following (in thousands):


	September 19,			December 20,
	2010			2009
Senior credit facility
Term loan	$	98,437		$	112,500
Revolving credit facility		112,300			100,000
4.25% convertible senior notes		310,400			302,355


Total long-term debt		521,137			514,855
Less current portion		(18,750	)		(18,750	)


Long-term debt, net of current portion	$	502,387		$	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 changes, 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 September 19, 2010) depending on the Company’s 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 2.25% as of September 19, 2010). The weighted average interest rate at September 19, 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 September 19, 2010).

The Senior Credit Facility contains customary covenants, including two financial covenants with respect to the Company’s leverage ratio 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 September 19, 2010. As of September 19, 2010, total unused borrowing capacity under the revolving credit facility was $101.4 million, after taking into account $112.3 million outstanding under the revolver and $11.3 million utilized for outstanding letters of credit. However, based on the Company’s leverage ratio, effective borrowing availability under the revolving credit facility was $81.4 million as of September 19, 2010.

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 Company’s 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 September 19, 2010, the Company recorded a liability of $3.9 million, of which $0.5 million is included in other accrued liabilities and $3.4 million is included in other long-term liabilities in the accompanying condensed consolidated balance sheet. The Company also recorded $35 thousand and $0.5 million in other comprehensive income (loss) for the quarter and nine months ended September 19, 2010, respectively. No hedge ineffectiveness was recorded during the quarter and nine months ended September 19, 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 Company’s 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 Company’s common stock, which is the equivalent of $37.13 per share, subject to adjustment upon the occurrence of specified events set forth under the terms of the Notes. Upon conversion, the Company would pay the holder the cash value of the applicable number of shares of its common stock, up to the principal amount of the note. Amounts in excess of the principal amount, if any, may be paid in cash or in stock, at the Company’s option. Holders may convert their Notes into the Company’s common stock as follows:

	•		Prior to May 15, 2012, if during any calendar quarter, and only during such calendar quarter, the last reported sale price of the Company’s common stock for at least 20 trading days in a period of 30 consecutive trading days ending on the last trading day of the preceding calendar quarter exceeds 120% of the applicable conversion price in effect on the last trading day of the immediately preceding calendar quarter;

	•		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 Company’s common stock on such date and the conversion rate on such date;

	•		If, at any time, a change in control occurs or if the Company is a party to a consolidation, merger, binding share exchange or transfer or lease of all or substantially all of its assets, pursuant to which the Company’s common stock would be converted into cash, securities or other assets; or

	•		At any time after May 15, 2012 through the fourth scheduled trading day immediately preceding August 15, 2012.

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 September 19, 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 Company’s common stock is between $37.13 and $51.41 per share upon conversion, and the Company sold warrants to the same financial institutions whereby the financial institutions have the option to receive up to 17.8 million shares of the Company’s common stock when the price of the Company’s common stock exceeds $51.41 per share upon conversion. The 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.

The Notes and the warrants sold in connection with the hedge transactions will have no impact on diluted earnings per share until the price of the Company’s common stock exceeds the conversion price (initially $37.13 per share) because the principal amount of the Notes will be settled in cash upon conversion. Prior to conversion of the Notes or exercise of the warrants, 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 Company’s debt as of September 19, 2010 and December 20, 2009 were $496.2 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				Nine Months Ended
	September 19,		September 20,		September 19,		September 20,
	2010		2009		2010		2009

Stock options	$	53	$	278	$	374	$	949
Restricted stock / vested shares		227		186		1,384		1,435
ESPP		47		80		132		80


Total	$	327	$	544	$	1,890	$	2,464

Stock Options

The Company’s stock option plan provides for grants of stock options to key employees at prices not less than the fair market value of the Company’s 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)		(000’s)
Outstanding at December 20, 2009		1,515,190		$	15.77
Granted		—
Exercised		—
Forfeited		(13,500	)		16.55
Expired		(63,977	)		13.65

Outstanding at September 19, 2010		1,437,713		$	15,78		5.90	$	—


Vested or expected to vest at September 19, 2010		1,434,773		$	15,79		5.90	$	—


Exercisable at September 19, 2010		1,274,713		$	15.97		5.68	$	—

As of September 19, 2010, there was $0.1 million in unrecognized compensation costs related to stock options granted, which is expected to be recognized over a weighted average period of 0.6 years.

Restricted Stock

A summary of the status of the Company’s restricted stock awards as of September 19, 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		(46,789	)		6.77


Nonvested at September 19, 2010		769,905		$	5.51

As of September 19, 2010, there was $1.6 million of unrecognized compensation expense related to all restricted stock awards, which is expected to be recognized over a weighted-average period of 1.9 years.

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				Nine Months Ended
	September 19,		September 20,		September 19,			September 20,
	2010		2009		2010			2009
Numerator:
Net income (loss)	$	7,747	$	8,438	$	(1,847	)	$	(32,598	)


Denominator:
Denominator for basic net income (loss) per common share:
Weighted average shares outstanding		30,865		30,430		30,660			30,431

Effect of dilutive securities:
Stock-based compensation		331		484		—			—

Denominator for diluted net income (loss) per common share		31,196		30,914		30,660			30,431

Basic net income (loss) per common share	$	0.25	$	0.28	$	(0.06	)	$	(1.07	)


Diluted net income (loss) per common share	$	0.25	$	0.27	$	(0.06	)	$	(1.07	)

Certain of the Company’s unvested stock-based awards contain non-forfeitable rights to dividends. As a result, a total of 158,747 and 205,368 shares have been included in the denominator for basic net income (loss) per share for these participating securities during the quarters ended September 19, 2010 and September 20, 2009, respectively, and 134,555 and 251,600 shares have been included in the denominator for the nine months ended September 19, 2010 and September 20, 2009, respectively. In addition, a total of 309,997 and 313,168 shares have been excluded from the denominator during the nine months ended September 19, 2010 and September 20, 2009, respectively, as the impact would be anti-dilutive.

7. Comprehensive Income (Loss)

Comprehensive income (loss) is as follows (in thousands):


	Quarters Ended						Nine Months Ended
	September 19,			September 20,			September 19,			September 20,
	2010			2009			2010			2009
Net income (loss)	$	7,747		$	8,438		$	(1,847	)	$	(32,598	)
Change in fair value of interest rate swap		(35	)		(427	)		461			630
Amortization of pension and post-retirement benefit transition obligation		104			115			310			332


Comprehensive income (loss)	$	7,816		$	8,126		$	(1,076	)	$	(31,636	)

8. Property and Equipment

Property and equipment consists of the following (in thousands):


	September 19,			December 20,
	2010			2009
Vessels and vessel improvements	$	152,036		$	148,823
Containers		28,165			24,035
Chassis		14,661			14,599
Cranes		37,177			36,965
Machinery and equipment		29,148			28,637
Facilities and land improvements		25,421			24,006
Software		24,415			24,072
Construction in progress		22,556			22,541


Total property and equipment		333,579			323,678
Accumulated depreciation		(147,553	)		(130,240	)


Property and equipment, net	$	186,026		$	193,438

As of September 19, 2010, construction in progress includes $18.0 million of payments for three new cranes. These cranes were initially purchased for use in the Company’s Anchorage, Alaska terminal and were expected to be installed and become fully operational in late 2011. However, the Port of Anchorage Intermodal Expansion Project is encountering delays that could continue until 2014 or beyond. As such, the Company is currently evaluating its options for these cranes, which may include marketing them for sale or deploying them in several of the Company’s other terminal locations.

9. Intangible Assets

Intangible assets consist of the following (in thousands):


	September 19,			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		(133,972	)		(115,963	)

Net intangibles with definite lives		87,396			105,405
Goodwill		317,068			317,068


Intangible assets, net	$	404,464		$	422,473

10. Other Accrued Liabilities

Other accrued liabilities consist of the following (in thousands):


	September 19,		December 20,
	2010		2009
Vessel operations	$	16,466	$	17,922
Payroll and employee benefits		15,223		17,035
Marine operations		9,982		10,668
Terminal operations		11,569		10,481
Fuel		10,985		9,418
Interest		3,050		7,298
Settlement of class action lawsuit		15,000		15,000
Other liabilities		28,552		22,651


Total other accrued liabilities	$	110,827	$	110,473

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 September 19, 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 September 19, 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 September 19, 2010 and September 20, 2009, and $0.5 million and $0.6 million during the nine months ended September 19, 2010 and September 20, 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 September 19, 2010 and September 20, 2009, and $0.2 million during each of the nine months ended September 19, 2010 and September 20, 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 September 19, 2010 and September 20, 2009, respectively, and $0.4 million and $0.6 million during the nine months ended September 19, 2010 and September 20, 2009, respectively.

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 September 19, 2010 and September 20, 2009, and $0.3 million during each of the nine months ended September 19, 2010 and September 20, 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 United States 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. The Company has provided documents to the DOJ in response to the subpoena and continues to cooperate with the DOJ in its investigation.

In addition, 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.

The Company has periodically met with the DOJ Staff but is unable to predict the outcome of the DOJ’s investigation. In connection with the investigation, it is possible that the Company will be charged with a criminal violation and be required to pay a substantial fine, either pursuant to an agreement with the DOJ or a court proceeding. The Company has not made a provision in the accompanying financial statements for any possible fines or penalties resulting from the DOJ investigation. In addition, the Company has not made any provision for any civil damages resulting from the amnesty matter in the accompanying financial statements. 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 Company’s financial condition, cash flows and results of operations.

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 provide a base-rate freeze as described below to resolve claims for alleged antitrust violations in the Puerto Rico tradelane. On July 8, 2009, the plaintiffs filed a motion for preliminary approval of the settlement in the Puerto Rico MDL litigation. After several hearings, the Court granted preliminary approval of the settlement on July 12, 2010. The settlement is subject to final approval by the Court. Through October 8, 2010, the Company has paid $10.0 million into an escrow account and is required to pay the remaining $10.0 million within five business days after final approval of the settlement agreement by the District Court. On September 15, 2010, notices of the Puerto Rico settlement were mailed to class members, who have sixty days to respond. The Court has set November 18, 2010 for a hearing to decide whether the settlement should be finally approved. Some class members may elect to opt-out of the settlement in the response to the class notice they have received. The class members that opt-out of the settlement may bring separate claims against the Company.

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 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. 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 March 20, 2009, the Company filed a motion to dismiss the claims in the Hawaii and Guam MDL litigation. On August 18, 2009, the United States 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 motion to dismiss is pending. The Company intends to vigorously defend itself against these purported class action lawsuits.

The Company and the plaintiffs have agreed to stay 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 September 27, 2010, Pan American Grain Co. Inc. (“Pan American Grain”) filed a complaint in the United States District Court for the District of Puerto Rico against the Company, other domestic shipping carriers and certain individuals. The complaint alleges price-fixing in violation of the Sherman Act and the Puerto Rico Antitrust Law and seeks treble monetary damages, costs and attorneys’ fees.

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 plaintiffs are seeking treble monetary damages, costs and attorneys’ fees. On April 9, 2010, the Company filed a motion to dismiss. The District Court has dismissed all counts in the complaint except those under Puerto Rico antitrust laws. The District Court has certified to the Puerto Rico Supreme Court the question of whether the Puerto Rico antitrust statue applies to interstate commerce. The Company intends to vigorously defend against this lawsuit.

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 Company’s Chief Executive Officer, as defendants. The complaint purported to be on behalf of purchasers of the Company’s common stock. The complaint alleged, among other things, that the Company made material misstatements and omissions in connection with alleged price-fixing in the Company’s 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 Company’s motion to dismiss the amended complaint was granted with prejudice on May 18, 2010. On June 15, 2010, the plaintiff appealed the Court’s decision to dismiss the amended complaint.

On March 9, 2010, the Company’s 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 defendants’ motion to dismiss was granted on October 21, 2010 and the plaintiff’s complaint was dismissed with prejudice. The plaintiff has the right to file an appeal with the Court of Appeals of North Carolina.

Through September 19, 2010, the Company has incurred approximately $26.4 million in legal and professional fees associated with the DOJ investigation, the antitrust related litigation, and other related legal proceedings. In addition, through September 19, 2010, 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 Company’s consolidated balance sheet as of September 19, 2010. On October 8, 2010, the Company paid an additional $5.0 million payment pursuant to the terms of the Puerto Rico MDL settlement agreement. 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, the Florida Circuit Court litigation, the Pan American Grain complaint, and the shareholder derivative lawsuit. 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 Company’s financial condition, cash flows and results of operations.

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 September 19, 2010, the Company has determined it is not the primary beneficiary of the VIEs. The Company’s power to direct activities that most significantly impact the VIEs’ economic performance is limited to the maintenance and repair of the vessels. The Company’s 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 Company’s 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 Company’s consolidated balance sheet.

Standby Letters of Credit

The Company has standby letters of credit primarily related to its property and casualty insurance programs. On September 19, 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 Company’s 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 Company’s 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 entity’s purpose and design and the reporting entity’s ability to direct the activities that most significantly impact the other entity’s economic performance. The Company adopted the provisions of the authoritative guidance during the quarter ended March 21, 2010. There was no impact on the Company’s consolidated results of operations and financial position, other than the modification of certain disclosures related to the Company’s 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 Company’s 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 Company’s consolidated results of operations and financial position.

15. Subsequent Events

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.

2. Management’s 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 economic recovery has continued at a slow and uneven pace, including a slowdown in economic activity during the 3^rd quarter of 2010. Persistent high unemployment and uncertainty in the economy have affected consumers and impacted their spending. As a result of the still uncertain macroeconomic environment, we remain focused on a series of successful cost management efforts as well as initiatives to selectively grow revenue.

Container volumes during the quarter and nine months ended September 19, 2010 decreased over the quarter and nine months ended September 20, 2009. We are also experiencing ongoing competitive pricing pressures in our Puerto Rico tradelane due in part to capacity that was added to the depressed market. Operating revenue for the quarter and nine months ended September 19, 2010 increased as a result of higher fuel surcharges, improved third party terminal services, 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, the loss of revenue under a transportation services agreement, and lower container volumes.

The increase in operating expense during the quarter ended September 19, 2010 is primarily due to higher fuel prices, additional inland expenses related to the expansion of our logistics service offerings, and incremental vessel operating expenses as a result of an increase in dry-dockings. 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 as well as a decline in the performance incentive plan expense, lower terminal rates, and our cost control efforts. Operating expense during the nine months ended September 19, 2010 was impacted by the factors above and also by 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, partially offset by a gain realized as a result of the sale of our interest in a joint venture. In addition, operating expense for the nine months ended September 20, 2009 includes a $20 million charge for the potential settlement of the Puerto Rico MDL litigation.


	Quarters Ended						Nine Months Ended
	September 19,			September 20,			September 19,			September 20,
	2010			2009			2010			2009
	($ in thousands)
Operating revenue	$	311,009		$	307,972		$	902,727		$	858,807
Operating expense		292,912			289,016			873,701			851,876

Operating income	$	18,097		$	18,956		$	29,026		$	6,931


Operating ratio		94.2	%		93.8	%		96.8	%		99.2	%
Revenue containers (units)		65,726			67,649			190,610			193,305
Average unit revenue	$	3,921		$	3,818		$	3,936		$	3,750

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 management’s 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.

A reconciliation of net income (loss) to EBITDA and Adjusted EBITDA is included below (in thousands):


	Quarters Ended					Nine Months Ended
	September 19,		September 20,			September 19,			September 20,
	2010		2009			2010			2009
Net income (loss)	$	7,747	$	8,438		$	(1,847	)	$	(32,598	)
Interest expense, net		10,306		10,563			30,872			29,249
Income tax expense (benefit)		33		(46	)		(17	)		10,219
Depreciation and amortization		15,319		14,815			43,907			44,361


EBITDA		33,405		33,770			72,915			51,231

Department of Justice antitrust investigation costs		1,475		1,959			3,463			10,445
Impairment charge		1,799		1,208			1,799			1,867
Union severance charge		107		—			468			—
Settlement of class action lawsuit		—		—			—			20,000
Restructuring charge		—		—			—			1,001
Loss on modification of debt		—		—			—			50


Adjusted EBITDA	$	36,786	$	36,937		$	78,645		$	84,594

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 and net income (loss) per share to adjusted net income per share (in thousands, except per share amounts):


	Quarters Ended						Nine Months Ended
	September 19,			September 20,			September 19,			September 20,
	2010			2009			2010			2009
Net income (loss)	$	7,747		$	8,438		$	(1,847	)	$	(32,598	)
Adjustments:
Department of Justice antitrust investigation costs		1,475			1,959			3,463			10,445
Impairment charge		1,799			1,208			1,799			1,867
Union severance charge		107			—			468			—
Settlement of class action lawsuit		—			—			—			20,000
Restructuring charge		—			—			—			1,001
Loss on modification of debt		—			—			—			50
Tax valuation allowance		—			—			—			10,561
Tax impact of adjustments		(168	)		(219	)		(174	)		(520	)


Total adjustments		3,213			2,948			5,556			43,404


Adjusted net income	$	10,960		$	11,386		$	3,709		$	10,806


	Quarters Ended				Nine Months Ended
	September 19,		September 20,		September 19,			September 20,
	2010		2009		2010			2009
Net income (loss) per diluted share	$	0.25	$	0.27	$	(0.06	)	$	(1.07	)
Adjustments:
Department of Justice antitrust investigation costs		0.05		0.06		0.11			0.34
Impairment charge		0.05		0.04		0.05			0.06
Union severance charge		—		—		0.02			—
Settlement of class action lawsuit		—		—		—			0.66
Restructuring charge		—		—		—			0.03
Tax valuation allowance		—		—		—			0.35
Tax impact of adjustments		—		—		—			(0.02	)


Total adjustments		0.10		0.10		0.18			1.42


Adjusted net income per diluted share	$	0.35	$	0.37	$	0.12		$	0.35

General

We believe that we are the nation’s leading Jones Act container shipping and integrated logistics company, accounting for approximately 37% of total U.S. marine container shipments from the continental U.S. to Alaska, Puerto Rico and Hawaii, constituting the three non-contiguous Jones Act markets, and to Guam and Micronesia. Under the Jones Act, all vessels transporting cargo between 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 20,400 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 Guam. We also have access, under a space charter agreement with Maersk Line, to the ports in Yantian and Xiamen, China and Kaohsiung, Taiwan.

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 2010, the Company implemented a new organizational structure. The 2010 reorganization included (1) the re-assignment of the Company’s 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 Company’s 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 third quarters and nine 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.

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 Company’s critical accounting policies during the nine months ended September 19, 2010. The critical accounting policies can be found in the Company’s 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.

Quarter Ended September 19, 2010 Compared with the Quarter Ended September 20, 2009


	Quarters Ended
	September 19,			September 20,
	2010			2009			Change			% Change
	($ in thousands)
Operating revenue	$	311,009		$	307,972		$	3,037			1.0	%
Operating expense:
Vessel		95,717			95,008			709			0.7	%
Marine		52,125			55,126			(3,001	)		(5.4	)%
Inland		57,565			52,074			5,491			10.5	%
Land		38,678			36,631			2,047			5.6	%
Rolling stock rent		10,053			9,525			528			5.5	%


Cost of services		254,138			248,364			5,774			2.3	%
Depreciation and amortization		11,009			11,285			(276	)		(2.4	)%
Amortization of vessel dry-docking		4,310			3,530			780			22.1	%
Selling, general and administrative		21,047			23,739			(2,692	)		(11.3	)%
Impairment charge		1,799			1,208			591			48.9	%
Miscellaneous expense, net		609			890			(281	)		(31.6	)%


Total operating expense		292,912			289,016			3,896			1.3	%


Operating income	$	18,097		$	18,956		$	(859	)		(4.5	)%


Operating ratio		94.2	%		93.8	%					0.4	%
Revenue containers (units)		65,726			67,649			(1,923	)		(2.8	)%
Average unit revenue	$	3,921		$	3,818		$	103			2.7	%

Operating Revenue. Our operating revenue increased $3.0 million, or 1.0% during the quarter ended September 19, 2010 as compared to the quarter ended September 20, 2009. This revenue increase can be attributed to the following factors (in thousands):


Third-party logistics increase	$	6,930
Bunker and intermodal fuel surcharges increase		4,920
Other revenue increase		2,284
Revenue container rate increase		1,718
Revenue container volume decrease		(6,243	)
Expiration of government vessel management contract		(6,572	)


Total operating revenue increase	$	3,037

The decrease in revenue container volume is primarily due to continued soft market conditions in our Puerto Rico and Hawaii tradelanes. Bunker and intermodal fuel surcharges, which are included in our transportation revenue, accounted for approximately 14.0% of total revenue in the quarter ended September 19, 2010 and approximately 12.5% of total revenue in the quarter ended September 20, 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 third party terminal services, partially offset by the loss of revenue under a transportation services agreement.

Cost of Services. The $5.8 million increase in cost of services is primarily due to higher fuel costs as a result of higher in fuel prices and additional 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.

Vessel expense, which is not primarily driven by revenue container volume, increased $0.7 million for the quarter ended September 19, 2010 compared to the quarter ended September 20, 2009. This increase can be attributed to the following factors (in thousands):


Vessel fuel costs increase	$	6,698
Labor and other vessel operating expense increase		1,817
Vessel space charter expense increase		94
Government vessel management contract expense decrease		(7,900	)


Total vessel expense increase	$	709

The $6.7 million increase in fuel costs is comprised of a $5.4 million increase due to fuel prices and a $1.3 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 a higher number of dry-dockings during 2010. We continue to incur labor expenses with the vessel in dry-dock, while also incurring 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 $3.0 million decrease in marine expense during quarter ended September 19, 2010 is primarily due to lower terminal rates and volumes, partially offset by an increase in repairs and maintenance of our cranes and contractual rate increases.

The $5.5 million increase in inland expense is primarily due to the expansion of 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
	September 19,		September 20,
	2010		2009		% Change
	(in thousands)
Land expense:
Maintenance	$	14,041	$	12,852		9.3	%
Terminal overhead		14,758		14,256		3.5	%
Yard and gate		7,745		7,514		3.1	%
Warehouse		2,134		2,009		6.2	%


Total land expense	$	38,678	$	36,631		5.6	%

Non-vessel related maintenance expenses increased primarily due to higher fuel costs and additional repair and maintenance activities. Terminal overhead increased primarily due to higher utilities expenses.

Rolling stock expense increased $0.5 million during the quarter ended September 19, 2010 as compared to the quarter ended September 20, 2009. This increase is due to an increase in the quantity of leased containers and chassis.

Depreciation and Amortization. Depreciation and amortization was $11.0 million during the quarter ended September 19, 2010 as compared to $11.3 during the quarter ended September 20, 2009. The decrease in depreciation and amortization-other is primarily due to certain capitalized software assets becoming fully depreciated and no longer subject to depreciation expense.


	Quarters Ended
	September 19,		September 20,
	2010		2009		% Change
	(in thousands)
Depreciation and amortization:
Depreciation—owned vessels	$	2,351	$	2,343		0.4	%
Depreciation and amortization—other		3,502		3,783		(7.4	)%
Amortization of intangible assets		5,156		5,159		0.0	%


Total depreciation and amortization	$	11,009	$	11,285		(2.4	)%


Amortization of vessel dry-docking	$	4,310	$	3,530		22.1	%

Amortization of Vessel Dry-docking. Amortization of vessel dry-docking was $4.3 million during the quarter ended September 19, 2010 compared to $3.5 million for the quarter ended September 20, 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 $21.0 million for the quarter ended September 19, 2010 compared to $23.7 million for the quarter ended September 20, 2009, a decrease of $2.7 million or 11.3%. This decrease is primarily comprised of a $1.5 million decrease in the accrual related to our performance incentive plan, $0.5 million decline in legal and professional fees expenses associated with the Department of Justice antitrust investigation and related legal proceedings, and $0.5 million in savings related to our cost control efforts, including professional fees, the elimination of certain perquisites for our executive officers, and advertising.

Impairment Charge. Impairment charge of $1.8 million during the quarter ended September 19, 2010 related to certain leased equipment not expected to be deployed during the foreseeable future. The impairment charge of $1.2 million during the quarter ended September 20, 2009 included an additional write-down related to our spare vessels.

Miscellaneous Expense, Net. Miscellaneous expense, net decreased $0.3 million during the quarter ended September 19, 2010 compared to the quarter ended September 20, 2009 primarily as a result of a decline in the loss on sale of property and equipment.

Interest Expense, Net. Interest expense, net decreased to $10.3 million for the quarter ended September 19, 2010 compared to $10.6 million for the quarter ended September 20, 2009, a decrease of $0.3 million or 2.8%. This decrease is primarily a result of a reduction in the amount of debt outstanding under the Senior Credit Facility.

Income Tax Expense (Benefit). The effective tax rate for the quarters ended September 19, 2010 and September 20, 2009 was 0.4% and (0.5)%, 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.

Nine Months Ended September 19, 2010 Compared with the Nine Months Ended September 20, 2009


	Nine Months Ended
	September 19,			September 20,
	2010			2009			Change			% Change
	($ in thousands)
Operating revenue	$	902,727		$	858,807		$	43,920			5.1	%
Operating expense:
Vessel		296,601			262,321			34,280			13.1	%
Marine		158,135			153,831			4,304			2.8	%
Inland		165,993			150,995			14,998			9.9	%
Land		112,168			108,613			3,555			3.3	%
Rolling stock rent		30,044			28,602			1,442			5.0	%


Cost of services		762,941			704,362			58,579			8.3	%
Depreciation and amortization		33,226			33,425			(199	)		(0.6	)%
Amortization of vessel dry-docking		10,681			10,936			(255	)		(2.3	)%
Selling, general and administrative		64,638			79,512			(14,874	)		(18.7	)%
Impairment charge		1,799			1,867			(68	)		(3.6	)%
Settlement of class action lawsuit		—			20,000			(20,000	)		(100.0	)%
Restructuring charge		—			1,001			(1,001	)		(100.0	)%
Miscellaneous expense, net		416			773			(357	)		(46.2	)%


Total operating expense		873,701			851,876			21,825			2.6	%


Operating income	$	29,026		$	6,931		$	22,095			318.8	%


Operating ratio		96.8	%		99.2	%					(2.4	)%
Revenue containers (units)		190,610			193,305			(2,695	)		(1.4	)%
Average unit revenue	$	3,936		$	3,750		$	186			5.0	%

Operating Revenue. Our operating revenue increased $43.9 million, or 5.1% during the nine months ended September 19, 2010 as compared to the nine months ended September 20, 2009. This revenue increase can be attributed to the following factors (in thousands):


Bunker and intermodal fuel surcharges increase	$	38,266
Third-party logistics increase		17,954
Other revenue increase		15,201
Revenue container rate increase		632
Expiration of government vessel management contract		(19,270	)
Revenue container volume decrease		(8,863	)


Total operating revenue increase	$	43,920

The revenue container volume decline is primarily due to ongoing challenges in our Puerto Rico and Hawaii tradelanes. Bunker and intermodal fuel surcharges, which are included in our transportation revenue, accounted for approximately 14.1% of total revenue in the nine months ended September 19, 2010 and approximately 10.4% of total revenue in the nine months ended September 20, 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 and third party terminal services, partially offset by the loss of revenue under a transportation services agreement.

Cost of Services. The $58.6 million increase in cost of services is primarily due to higher fuel costs as a result of higher fuel prices and additional 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.

Vessel expense, which is not primarily driven by revenue container volume, increased $34.3 million for the nine months ended September 19, 2010 compared to the nine months ended September 20, 2009. This increase can be attributed to the following factors (in thousands):


Vessel fuel costs increase	$	50,445
Labor and other vessel operating expense increase		4,654
Vessel space charter expense increase		292
Government vessel management contract expense decrease		(21,111	)


Total vessel expense increase	$	34,280

The $50.4 million increase in fuel costs is comprised of a $48.0 million increase due to fuel prices and a $2.4 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 a higher number of dry-dockings during 2010. We continue to incur labor expenses with the vessel in dry-dock, while also incurring 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 $4.3 million increase in marine expense during the nine months ended September 19, 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, an increase in repairs and maintenance of our cranes, and contractual rate increases, partially offset by lower container volumes and lower terminal rates.

The $15.0 million increase in inland expense is primarily due to the expansion of our inland service offerings and higher fuel costs.


	Nine Months Ended
	September 19,		September 20,
	2010		2009		% Change
	(in thousands)
Land expense:
Maintenance	$	39,988	$	37,389		7.0	%
Terminal overhead		43,483		43,461		0.1	%
Yard and gate		22,217		21,965		1.1	%
Warehouse		6,480		5,798		11.8	%


Total land expense	$	112,168	$	108,613		3.3	%

Non-vessel related maintenance expenses increased primarily due to higher fuel costs. Warehouse expense increased primarily as a result of higher labor costs and due to an increase in the volume of certain revenue generating warehouse activities.

Rolling stock expense increased $1.4 million or 5.0% during the nine months ended September 19, 2010 as compared to the nine months ended September 20, 2009. This increase is due to higher costs related to our existing equipment sharing arrangements and an increase in the quantity of leased containers and chassis.

Depreciation and Amortization. Depreciation and amortization of $33.2 million during the nine months ended September 19, 2010 was flat as compared to the nine months ended September 20, 2009.


	Nine Months Ended
	September 19,		September 20,
	2010		2009		% Change
	(in thousands)
Depreciation and amortization:
Depreciation—owned vessels	$	7,017	$	6,775		3.6	%
Depreciation and amortization—other		10,734		11,175		(3.9	)%
Amortization of intangible assets		15,475		15,475		0.0	%


Total depreciation and amortization	$	33,226	$	33,425		(0.6	)%


Amortization of vessel dry-docking	$	10,681	$	10,936		(2.3	)%

Amortization of Vessel Dry-docking. Amortization of vessel dry-docking was $10.7 million during the nine months ended September 19, 2010 compared to $10.9 million for the nine months ended September 20, 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 $64.6 million for the nine months ended September 19, 2010 compared to $79.5 million for the nine months ended September 20, 2009, a decrease of $14.9 million or 18.7%. This decrease is primarily comprised of a $7.0 million decline in legal and professional fees expenses associated with the Department of Justice antitrust investigation and related legal proceedings, $4.3 million decrease in the accrual related to our performance incentive plan, $0.6 million decrease in stock-based compensation expense, and $1.7 million in savings related to our cost control efforts, including professional fees, 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 $1.8 million during the nine months ended September 19, 2010 related to certain leased equipment not expected to be deployed during the foreseeable future. The impairment charge of $1.9 million during the nine months ended September 20, 2009 included an additional write-down related to our spare vessels.

Restructuring Charge. Restructuring costs of $1.0 million during the nine months ended September 20, 2009 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 Expense, Net. Miscellaneous expense, net decreased $0.4 million during the nine months ended September 19, 2010 compared to the nine months ended September 20, 2009. This decrease is primarily a result of the sale of our interest in a joint venture, partially offset by an increase in bad debt expense.

Interest Expense, Net. Interest expense, net increased to $30.9 million for the nine months ended September 19, 2010 compared to $29.2 million for the nine months ended September 20, 2009, an increase of $1.7 million or 5.8%. This increase is a result of 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 nine months ended September 19, 2010 and September 20, 2009 was 0.9% and (45.7)%, 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.

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 $4.4 million at September 19, 2010.

The Senior Credit Facility contains customary covenants, including two financial covenants with respect to our leverage ratio 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 September 19, 2010. As of September 19, 2010, total unused borrowing capacity under the revolving credit facility was $101.4 million, after taking into account $112.3 million outstanding under the revolver and $11.3 million utilized for outstanding letters of credit. However, based on our leverage ratio, effective borrowing availability under the revolving credit facility was $81.4 million as of September 19, 2010.

Operating Activities

Net cash provided by operating activities was $11.7 million for the nine months ended September 19, 2010 compared to $9.4 million for the nine months ended September 20, 2009, an increase of $2.3 million. The increase in cash provided by operating activities is primarily due to the following (in thousands):


Earnings adjusted for non-cash charges	$	18,639
Decrease in payments related to Department of Justice antitrust investigation and related legal proceedings		7,363
Decrease in payments related to restructuring and early termination of leased assets		4,578
Other changes in working capital, net		3,250
Increase in payments related to dry-dockings		(4,492	)
Increase in accounts receivable		(12,048	)
Decrease in accrual for settlement of class action lawsuit		(15,000	)


	$	2,290

Investing Activities

Net cash used in investing activities was $7.4 million for the nine months ended September 19, 2010 compared to $7.2 million for the nine months ended September 20, 2009. The increase is related to a $0.6 million increase in capital spending and a $0.7 million reduction in the proceeds from the sale of assets, partially offset by proceeds of $1.1 million received from the sale of our interest in a joint venture.

Financing Activities

Net cash used in financing activities during the nine months ended September 19, 2010 was $6.3 million compared to $3.4 million for the nine months ended September 20, 2009. The net cash used in financing activities during the nine months ended September 19, 2010 included $1.8 million, net of borrowings, paid under the Senior Credit Facility as compared to $10.1 million, net of payments, borrowed under the Senior Credit Facility during the nine months ended September 20, 2009. Dividend payments to stockholders during the nine months ended September 19, 2010 were $4.6 million compared to $10.0 million during the nine months ended September 20, 2009. In addition, during the nine months ended September 20, 2009, we paid $3.5 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. We expect we will need to acquire up to 12,500 additional containers in conjunction with the launch of our international service. Cash lease payments during 2011 are expected to total $11.2 million related to these additional containers. Cash to be used for investing activities, including purchases of property and equipment for the next twelve months is expected to total approximately $20.0-$22.0 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 $16.0-18.0 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 provide a base-rate freeze, to resolve claims for alleged antitrust violations in the Puerto Rico tradelane. Through October 8, 2010, we have paid $10.0 million into an escrow account and 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. On September 15, 2010, notices of the Puerto Rico settlement were mailed to class members, who have sixty days to respond. The Court has set November 18, 2010 for a hearing to decide whether the settlement should be finally approved.

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 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. 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.

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 changes, 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 September 19, 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 2.25% as of September 19, 2010). The weighted average interest rate at September 19, 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 September 19, 2010).

The Senior Credit Facility contains customary covenants, including two financial covenants with respect to our leverage ratio 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 September 19, 2010. As of September 19, 2010, total unused borrowing capacity under the revolving credit facility was $101.4 million, after taking into account $112.3 million outstanding under the revolver and $11.3 million utilized for outstanding letters of credit. However, based on our leverage ratio, effective borrowing availability under the revolving credit facility was $81.4 million as of September 19, 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.

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 September 19, 2010, we recorded a liability of $3.9 million, of which $0.5 million is included in other accrued liabilities and $3.4 million is included in other long-term liabilities, in the accompanying consolidated balance sheet. We also recorded $35 thousand and $0.5 million in other comprehensive income (loss) for the quarter and nine months ended September 19, 2010, respectively. No hedge ineffectiveness was recorded during the quarter and nine months ended September 19, 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 Company’s common stock would be converted into cash, securities or other assets; or

	•		At any time after May 15, 2012 through the fourth scheduled trading day immediately preceding August 15, 2012.

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 September 19, 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 Company’s common stock exceeds the conversion price (initially $37.13 per share) because the principal amount of the Notes will be settled in cash upon conversion. Prior to conversion of the Notes or exercise of the warrants, we will include the effect of the additional shares that may be issued if our common stock price exceeds the conversion price, using the treasury stock method. The call options purchased as part of the note hedge transactions are anti-dilutive and therefore will have no impact on earnings per share.

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 September 19, 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

We are somewhat guarded about our outlook for the remainder of 2010 based on the third quarter slowdown. Container volume improvement remains dependent on the depth and breadth of the economic recovery in our markets and its impact on consumer sentiment. We currently expect our full-year 2010 adjusted EBITDA results to fall short of 2009 results, but remain above the levels that would jeopardize our debt covenants. We are currently evaluating the options to refinance our long-term debt and currently expect this process to be completed during the first half of 2011. We remain optimistic about prospects for our new trans-Pacific Five Star Express liner service between China and the U.S. West Coast, which launches on December 13, 2010.

Interest Rate Risk

Our primary interest rate exposure relates to the Senior Credit Facility. As of September 19, 2010, we had outstanding a $98.4 million term loan and $112.3 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 entity’s purpose and design and the reporting entity’s ability to direct the activities that most significantly impact the other entity’s 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.

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 and in our Form 10-Q for the quarterly period ended June 20, 2010 as filed with the SEC, 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.

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 Commission’s rules and forms. Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in Company reports filed under the Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Internal Control over Financial Reporting

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s internal control over financial reporting as of September 19, 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 Company’s internal control over financial reporting is effective as of September 19, 2010.

Changes in Internal Control

There were no changes in the Company’s internal control over financial reporting during the Company’s fiscal quarter ending September 19, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

1. Legal Proceedings

On April 17, 2008, we received a grand jury subpoena and search warrant from the United States 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. We have provided documents to the DOJ in response to the subpoena and continue to cooperate with the DOJ in its investigation.

In addition, 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.

We have periodically met with the DOJ Staff but are unable to predict the outcome of the DOJ’s investigation. In connection with the investigation, it is possible that we will be charged with a criminal violation and be required to pay a substantial fine, either pursuant to an agreement with the DOJ or a court proceeding. We have not made a provision in the accompanying financial statements for any possible fines or penalties resulting from the DOJ investigation. In addition, we have not made any provision for any civil damages resulting from the amnesty matter in the accompanying financial statements. 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 our financial condition, cash flows and results of operations.

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.

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 provide a base-rate freeze as described below to resolve claims for alleged antitrust violations in the Puerto Rico tradelane. On July 8, 2009, the plaintiffs filed a motion for preliminary approval of the settlement in the Puerto Rico MDL litigation. After several hearings, the Court granted preliminary approval of the settlement on July 12, 2010. The settlement is subject to final approval by the Court. Through October 8, 2010, we have paid $10.0 million into an escrow account and are required to pay the remaining $10.0 million within five business days after final approval of the settlement agreement by the District Court. On September 15, 2010, notices of the Puerto Rico settlement were mailed to class members, who have sixty days to respond. The Court has set November 18, 2010 for a hearing to decide whether the settlement should be finally approved. Some class members may elect to opt-out of the settlement in the response to the class notice they have received. The class members that opt-out of the settlement may bring separate claims against us.

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 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. 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 March 20, 2009, we filed a motion to dismiss the claims in the Hawaii and Guam MDL litigation. On August 18, 2009, the United States 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. The motion to dismiss is pending. We intend to vigorously defend against these purported class action lawsuits.

We and the plaintiffs have agreed to stay 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.

On September 27, 2010, Pan American Grain Co. Inc. (“Pan American Grain”) filed a complaint in the United States District Court for the District of Puerto Rico against us, other domestic shipping carriers and certain individuals. The complaint alleges price-fixing in violation of the Sherman Act and the Puerto Rico Antitrust Law and seeks treble monetary damages, costs and attorneys’ fees.

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 District Court has dismissed all counts in the complaint except those under Puerto Rico antitrust laws. The District Court has certified to the Puerto Rico Supreme Court the question of whether the Puerto Rico antitrust statue applies to interstate commerce. We intend to vigorously defend against this lawsuit.

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 Court’s 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. The defendants’ motion to dismiss was granted on October 21, 2010 and the plaintiff’s complaint was dismissed with prejudice. The plaintiff has the right to file an appeal with the Court of Appeals of North Carolina.

Through September 19, 2010, we have incurred approximately $26.4 million in legal and professional fees associated with the DOJ investigation, the antitrust related litigation, and other related legal proceedings. In addition, through September 19, 2010, 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 as of September 19, 2010. On October 8, 2010, we paid an additional $5.0 million payment pursuant to the terms of the Puerto Rico MDL settlement agreement. 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, the Florida Circuit Court litigation, the Pan American Grain complaint, and the shareholder derivative lawsuit. 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 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.

1A. Risk Factors

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 and our Quarterly Report on Form 10-Q for the period ended June 20, 2010, as filed with the SEC.

2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

3. Defaults Upon Senior Securities

None.

4. Reserved

5. Other Information

None.

6. Exhibits


31.1*		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


*		Filed herewith.


	Page No.

Part I. Financial Information		1

1. Financial Statements		1

Unaudited Condensed Consolidated Balance Sheets		1

Unaudited Condensed Consolidated Statements of Operations		2

Unaudited Condensed Consolidated Statements of Cash Flows		3

Notes to Unaudited Condensed Consolidated Financial Statements		4

2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		16

3. Quantitative and Qualitative Disclosures About Market Risk		31

4. Controls and Procedures		31

Part II. Other Information		32

1. Legal Proceedings		32

1A. Risk Factors		34

2. Unregistered Sales of Equity Securities and Use of Proceeds		34

3. Defaults Upon Senior Securities		34

4. Reserved		34

5. Other Information		34

6. Exhibits		34

Signature		35

Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2


	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
No.		Description
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.