Filed by Bowne Pure Compliance

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 21, 2008


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 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 þ		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

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 22, 2008, 30,002,097 shares of the Registrant’s common stock, par value $.01 per share, were outstanding.

PART I. FINANCIAL INFORMATION

1. Financial Statements

Horizon Lines, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except per share data)


	September 21,			December 23,
	2008			2007
	(unaudited)
Assets
Current assets
Cash	$	4,194		$	6,276
Accounts receivable, net of allowance of $8,325 and $6,191 at September 21, 2008 and December 23, 2007, respectively		169,674			140,820
Deferred tax asset		5,655			13,792
Prepaid vessel rent		4,749			4,361
Materials and supplies		33,232			31,576
Other current assets		11,039			10,446


Total current assets		228,543			207,271
Property and equipment, net		202,020			194,679
Goodwill		334,717			334,671
Intangible assets, net		134,418			152,031
Deferred tax asset		10,520			4,060
Other long-term assets		30,119			33,729


Total assets	$	940,337		$	926,441


Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$	27,269		$	40,225
Current portion of long-term debt		6,543			6,537
Accrued vessel rent		—			6,503
Other accrued liabilities		110,718			95,027


Total current liabilities		144,530			148,292
Long-term debt, net of current portion		603,062			572,469
Deferred rent		28,176			31,531
Other long-term liabilities		21,458			19,571


Total liabilities		797,226			771,863


Stockholders’ equity
Common stock, $.01 par value, 100,000 shares authorized, 33,774 shares issued and 29,974 shares outstanding as of September 21, 2008 and 50,000 shares authorized, 33,674 shares issued and 31,502 shares outstanding as of December 23, 2007		338			337
Treasury stock, 3,800 and 2,172 shares at cost as of September 21, 2008 and December 23, 2007, respectively		(78,538	)		(49,208	)
Additional paid in capital		168,423			163,760
Retained earnings		51,863			39,994
Accumulated other comprehensive income (loss)		1,025			(305	)


Total stockholders’ equity		143,111			154,578


Total liabilities and stockholders’ equity	$	940,337		$	926,441

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

Horizon Lines, Inc.

Unaudited Condensed Consolidated Statements of Income

(in thousands, except per share amounts)


	Quarters Ended						Nine Months Ended
	September 21,			September 23,			September 21,			September 23,
	2008			2007			2008			2007
Operating revenue	$	352,638		$	321,145		$	989,544		$	890,509
Operating expense:
Cost of services (excluding depreciation expense)		287,400			246,402			809,069			698,530
Depreciation and amortization		11,449			10,714			34,325			36,765
Amortization of vessel dry-docking		4,393			4,820			13,168			13,139
Selling, general and administrative		26,513			23,481			80,517			66,885
Miscellaneous expense, net		1,095			445			2,392			525


Total operating expense		330,850			285,862			939,471			815,844

Operating income		21,788			35,283			50,073			74,665
Other expense:
Interest expense, net		7,772			10,077			24,927			32,953
Loss on early extinguishment of debt		—			37,958			—			38,522
Other (income) expense, net		(4	)		25			(2	)		45


Income (loss) before income tax expense (benefit)		14,020			(12,777	)		25,148			3,145
Income tax expense (benefit)		1,492			(14,347	)		3,294			(15,038	)


Net income	$	12,528		$	1,570		$	21,854		$	18,183


Net income per share:
Basic	$	0.42		$	0.05		$	0.73		$	0.54
Diluted	$	0.42		$	0.05		$	0.72		$	0.53

Number of shares used in calculations:
Basic		29,970			33,131			30,060			33,460
Diluted		30,187			33,770			30,527			34,066

Dividends declared per common share	$	0.11		$	0.11		$	0.33		$	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 21,			September 23,
	2008			2007
Cash flows from operating activities:
Net income	$	21,854		$	18,183
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation		18,339			21,826
Amortization of other intangible assets		15,986			14,939
Amortization of vessel dry-docking		13,168			13,139
Amortization of deferred financing costs		2,022			2,296
Deferred income taxes		1,677			(20,023	)
Gain on equipment disposals		(7	)		(281	)
Stock-based compensation		3,532			2,401
Loss on early extinguishment of debt		—			38,522
Accretion of interest on 11% senior discount notes		—			6,062
Changes in operating assets and liabilities:
Accounts receivable		(28,521	)		(37,142	)
Materials and supplies		(1,655	)		(5,761	)
Other current assets		(593	)		(1,537	)
Accounts payable		(13,054	)		(6,727	)
Accrued liabilities		17,590			(8,650	)
Vessel rent		(9,657	)		(30,790	)
Vessel dry-docking payments		(9,291	)		(15,516	)
Other assets/liabilities		1,613			3,545


Net cash provided by (used in) operating activities		33,003			(5,514	)


Cash flows from investing activities:
Purchases of property and equipment		(26,351	)		(16,714	)
Purchase of business		(198	)		(32,082	)
Proceeds from the sale of property and equipment		350			3,078


Net cash used in investing activities		(26,199	)		(45,718	)


Cash flows from financing activities:
Payments on long-term debt		(4,902	)		(517,074	)
Borrowing under revolving credit facility		73,000			161,500
Payments on revolving credit facility		(37,500	)		(15,000	)
Issuance of convertible notes		—			330,000
Borrowing of term loan		—			125,000
Purchase of call spread options		—			(52,541	)
Sale of common stock warrants		—			11,958
Redemption premiums		—			(25,568	)
Dividends to stockholders		(9,985	)		(11,011	)
Purchase of treasury stock		(29,330	)		(28,560	)
Payments of financing costs		(139	)		(11,929	)
Payments on capital lease obligation		(81	)		(152	)
Common stock issued under employee stock purchase plan		38			8
Proceeds from exercise of stock options		13			84


Net cash used in financing activities		(8,886	)		(33,285	)


Net decrease in cash		(2,082	)		(84,517	)
Cash at beginning of period		6,276			93,949


Cash at end of period	$	4,194		$	9,432

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 Holdings, LLC (“Horizon Logistics”), a Delaware limited liability company and wholly-owned subsidiary, and Horizon Lines of Puerto Rico, Inc. (“HLPR”), a Delaware corporation and wholly-owned subsidiary. Horizon Lines operates as a Jones Act container shipping business with primary service to ports within the continental United States, Puerto Rico, Alaska, Hawaii, and Guam. Under the Jones Act, all vessels transporting cargo between U.S. ports must, subject to limited exceptions, be built in the U.S., registered under the U.S. flag, manned by predominantly U.S. crews, and owned and operated by U.S.-organized companies that are controlled and 75% owned by U.S. citizens. Horizon Lines also offers terminal services. Horizon Logistics manages the integrated logistics service offerings, including rail, trucking and distribution operations, in addition to Horizon Services Group, an organization offering transportation management systems and customized software solutions to shippers, carriers and other supply chain participants. HLPR operates as an agent for Horizon Lines 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.

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 23, 2007. 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 21, 2008 and the financial statements for the quarters and nine months ended September 21, 2008 and September 23, 2007 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 affect 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.

3. Acquisitions

On August 22, 2007, the Company completed the acquisition of Montebello Management, LLC (D/B/A Aero Logistics) (“Aero Logistics”), a full service third party logistics provider (3-PL), for approximately $27.5 million in cash. As of September 21, 2008, $0.5 million is being held in escrow pending achievement of 2008 earnings targets and has been excluded from the purchase price. Aero Logistics provides air, less than truckload (LTL) brokerage, warehousing and international expedited transport services. Aero Logistics’ results of operations have been included in the Company’s consolidated financial statements since the third quarter of 2007 and are included in the Horizon Logistics segment.

On June 26, 2007, the Company completed the purchase of Hawaii Stevedores, Inc. (“HSI”) for approximately $4.1 million in cash, net of cash acquired. HSI is a full service provider of stevedoring and marine terminal services in Hawaii. HSI’s results of operations have been included in the Company’s consolidated financial statements since the third quarter of 2007 and are included in the Horizon Lines segment.

The following table presents pro-forma financial information as though the acquisitions had occurred on December 25, 2006 (in thousands except per share amounts):


	Quarter Ended		Nine Months Ended
	September 23,		September 23,
	2007		2007

Operating revenue	$	325,950	$	917,743
Net income		1,555		18,186
Earnings per share (basic)		0.05		0.54
Earnings per share (diluted)		0.05		0.53

4. Income Taxes

During 2006, the Company elected the application of tonnage tax. The Company modified its trade routes between the U.S. west coast and Guam and Asia during the first quarter of 2007. As such, the Company’s shipping activities associated with these modified trade routes became qualified shipping activities, and thus the income from these vessels is excluded from gross income in determining the Company’s federal income tax liability. During the first quarter of 2007, the Company recorded a $2.5 million, or $0.08 per diluted share, tax benefit related to a revaluation of the deferred taxes associated with the activities now subject to tonnage tax as a result of the modified trade routes. In addition, during the third quarter of 2007, the Company recorded a $4.8 million, or $0.14 per diluted share, tax benefit related to a change in estimate resulting from refinements in the methodology for computing secondary activities and cost allocations for tonnage tax purposes. The benefit was recorded in connection with the filing of the 2006 income tax return in September 2007.

In August 2007, the Company purchased its outstanding 9% senior notes and 11% senior discount notes and terminated its prior senior credit facility. The associated transaction expenses were $38.0 million, consisting of purchase premiums and the write-off of unamortized deferred financing costs. These expenses were recorded as a loss on early extinguishment of debt and resulted in an income tax benefit of $14.2 million for the quarter and nine months ended September 23, 2007.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):


Balance at December 23, 2007	$	8,482
Additions based on tax positions related to the current year		1,555
Reductions for tax positions of prior years		(585	)

Balance at September 21, 2008	$	9,452

5. Stock-Based Compensation

The Company accounts for its stock-based compensation plans in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised) “Share-Based Payment” (“SFAS 123R”). Under SFAS 123R, all 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 and restricted shares granted under the Amended and Restated Equity Incentive Plan (the “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 typically cliff vest and become fully exercisable on the third anniversary of the grant date, provided the employee who was granted such option is continuously employed by the Company or its subsidiaries through such date, and provided any performance based criteria, if any, are met. In addition, recipients who retire from the Company after attaining age 59 ¹/2 are typically entitled to proportionate vesting. The following compensation costs are included within selling, general, and administrative expenses on the condensed consolidated statements of income (in thousands):


	Quarters Ended				Nine Months Ended
	September 21,		September 23,		September 21,		September 23,
	2008		2007		2008		2007

Stock options	$	387	$	483	$	1,231	$	1,184
Restricted stock		699		700		2,067		1,056
ESPP		69		48		234		161


Total	$	1,155	$	1,231	$	3,532	$	2,401

The Company recognized a deferred tax asset related to stock-based compensation of $0.3 million and $0.9 million during the quarter and nine months ended September 21, 2008, respectively, and $1.1 million and $1.9 million during the quarter and nine months ended September 23, 2007, respectively.

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 option activity under the Plan 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 23, 2007		1,599,008		$	15.93
Granted (a)		209,000			14.38
Exercised		(1,312	)		10.00
Forfeited		(168,954	)		15.39


Outstanding at September 21, 2008		1,637,742		$	15.79		7.80	$	898


Vested or expected to vest at September 21, 2008		1,603,230		$	15.66		7.78	$	898


Exercisable at September 21, 2008		33,250		$	10.00		7.02	$	52


(a)		On April 24, 2008, the Company granted 199,000 options to certain employees of the Company and its subsidiaries to purchase shares of its common stock at a price of $14.63 per share. The fair value of the options on the date of the grant was $4.05 per share. On July 21, 2008, the Company granted 10,000 options to certain employees of the Company and its subsidiaries to purchase shares of its common stock at a price of $9.38 per share. The fair value of the options on the date of the grant was $2.38 per share.

As of September 21, 2008, there was $2.9 million in unrecognized compensation costs related to options granted under the Plan, which is expected to be recognized over a weighted average period of 0.8 years.

Restricted Stock

A summary of the status of the Company’s restricted stock awards as of September 21, 2008 is presented below:


				Weighted-
				Average
				Fair Value
	Number of			at Grant
Restricted Shares	Shares			Date
Nonvested at December 23, 2007		307,559		$	27.54
Granted (a)		182,827			13.81
Vested		(17,440	)		34.42
Forfeited		(43,634	)		27.84


Nonvested at September 21, 2008		429,312		$	21.39


(a)		On June 3, 2008, the Company granted 4,502 shares of restricted stock each to all non-employee members on the Company’s Board of Directors. The grant date fair value of the restricted shares was $13.33 per share and the shares will vest in full on June 3, 2009. On May 7, 2008, the Company granted 5,757 shares of restricted stock to the lead independent director of the Company’s Board of Directors. The grant date fair value of the restricted shares was $10.35 per share and the shares will vest in full on June 2, 2009. On April 24, 2008, the Company granted a total of 118,300 shares of restricted stock to certain employees of the Company and its subsidiaries. The grant date fair value of the restricted shares was $14.63 per share. Of the 118,300 shares granted, 36,300 will vest in full on April 24, 2011. The remaining 82,000 restricted shares will vest in full on April 24, 2011 provided an earnings per share performance target for the Company’s fiscal year 2010 is met. If such target is not met, the restricted shares may vest in full on April 24^th during each of the years 2012 through 2014, provided an earnings per share performance target for the preceding fiscal year of the Company is met. If the restricted shares have not vested by April 24, 2014, the restricted shares will be forfeited. On July 21, 2008, the Company granted a total of 13,750 shares of restricted stock to certain employees of the Company and its subsidiaries. The grant date fair value of the restricted shares was $9.38 per share. Of the 13,750 shares granted, 3,750 will vest in full on July 21, 2011. The remaining 10,000 restricted shares will vest in full on July 21, 2011 provided an earnings per share performance target for the Company’s fiscal year 2010 is met. If such target is not met, the restricted shares may vest in full on July 21st during each of the years 2012 through 2014, provided an earnings per share performance target for the preceding fiscal year of the Company is met. If the restricted shares have not vested by July 21, 2014, the restricted shares will be forfeited.

As of September 21, 2008, there was $5.6 million of unrecognized compensation expense related to all restricted stock awards, which is expected to be recognized over a weighted-average period of 1.8 years.

6. Net Income per Common Share

In accordance with SFAS No. 128, “Earnings Per Share” (“SFAS 128”), 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.

Earnings per share are as follows (in thousands, except per share amounts):


	Quarters Ended				Nine Months Ended
	September 21,		September 23,		September 21,		September 23,
	2008		2007		2008		2007
Numerator:
Net income	$	12,528	$	1,570	$	21,854	$	18,183


Denominator:
Denominator for basic income per common share:
Weighted average shares outstanding		29,970		33,131		30,060		33,460

Effect of dilutive securities:
Stock-based compensation		217		639		467		606

Denominator for diluted net income per common share		30,187		33,770		30,527		34,066


Basic net income per common share	$	0.42	$	0.05	$	0.73	$	0.54


Diluted net income per common share	$	0.42	$	0.05	$	0.72	$	0.53

On November 19, 2007, the Company’s Board of Directors authorized the Company to commence a stock repurchase program to buy back up to $50.0 million of its common stock. The program allowed the Company to purchase shares through open market repurchases and privately negotiated transactions at a price of $26.00 per share or less until the program’s expiration on December 31, 2008. The Company completed its share repurchase program by acquiring a total of 2,800,200 shares at a total cost of $50.0 million, including the purchase of 1,627,500 shares at a total cost of $29.3 million during the quarter ended March 23, 2008. Repurchased shares have been accounted for as treasury stock.

On August 8, 2007, the Company utilized $28.6 million of the proceeds from issuance of the Notes (as defined in Note 12) to purchase 1,000,000 shares of its common stock in privately negotiated transactions.

7. Comprehensive Income

Comprehensive income is as follows (in thousands):


	Quarters Ended					Nine Months Ended
	September 21,			September 23,		September 21,		September 24,
	2008			2007		2008		2007

Net income	$	12,528		$	1,570	$	21,854	$	18,183
Change in fair value of interest rate swap		(1,113	)		—		1,260		—
Amortization of pension and post-retirement benefit transition obligation		39			25		70		75


Comprehensive income	$	11,454		$	1,595	$	23,184	$	18,258

8. Segment Reporting

Currently, the Company’s services can be classified into two principal businesses referred to as Horizon Lines and Horizon Logistics. Through Horizon Lines, the Company provides container shipping services and terminal services primarily in the non-contiguous domestic U.S. trades, owning or leasing vessels comprising a fleet of 21 U.S.-flag containerships and five port terminals linking the continental U.S. with Alaska, Hawaii, Guam, Micronesia, Asia and Puerto Rico. Horizon Logistics was created in September 2007 to manage the Company’s customized logistics solutions and Horizon Services Group and to focus on the growth and further development of the Company’s fully integrated logistics services. Although the Company provided certain ground transportation services prior to 2008, the primary focus of the Company was the core container shipping services and terminal services.

Prior to 2008, the Company did not maintain a separate business plan for Horizon Logistics. As such, the Company’s chief operating decision maker did not evaluate the performance of Horizon Logistics separately from that of Horizon Lines. During the first quarter of 2008, the Company began measuring the financial results for both Horizon Lines and Horizon Logistics separately. Therefore, in accordance with SFAS No. 131 “Disclosures about Segments of an Enterprise and Related Information”, the Company separately reports Horizon Lines and Horizon Logistics as segments.

Inter-segment revenues are presented at prices which approximate cost. The information below contains certain allocations of expenses that the Company deems reasonable and appropriate for the evaluation of results of operations. The Company does not allocate interest expense or income taxes to its segments. All inter-segment asset balances have been eliminated in consolidation. Certain segment information for the quarter and nine months ended September 23, 2007 has been reclassified to conform to the presentation for the quarter and nine months ended September 21, 2008. The following table presents information about the results of operations and the assets of the Company’s two reportable segments for the fiscal quarters and nine months ended September 21, 2008 and September 23, 2007 (in thousands):


	Quarters Ended						Nine Months Ended
	September 21,			September 23,			September 21,			September 23,
	2008			2007			2008			2007
Operating revenue:
Horizon Lines	$	342,693		$	317,430		$	963,646		$	883,752
Horizon Logistics		60,974			47,801			169,681			136,519

		403,667			365,231			1,133,327			1,020,271
Inter-segment revenue		(51,029	)		(44,086	)		(143,783	)		(129,762	)

Consolidated operating revenue	$	352,638		$	321,145		$	989,544		$	890,509


Depreciation and amortization:
Horizon Lines	$	15,035		$	15,007		$	45,237		$	44,549
Horizon Logistics		807			527			2,286			5,476

		15,842			15,534			47,523			50,025
Eliminations		—			—			(30	)		(121	)

Consolidated depreciation and amortization	$	15,842		$	15,534		$	47,493		$	49,904


Segment operating income (loss):
Horizon Lines	$	23,134		$	36,223		$	54,012		$	81,132
Horizon Logistics		(1,346	)		(940	)		(3,939	)		(6,467	)

Consolidated operating income		21,788			35,283			50,073			74,665


Unallocated interest expense, net		7,772			10,077			24,927			32,953
Loss on early extinguishment of debt		—			37,958			—			38,522
Unallocated other (income) expense, net		(4	)		25			(2	)		45

Consolidated income (loss) before income tax expense (benefit)	$	14,020		$	(12,777	)	$	25,148		$	3,145


Capital expenditures:
Horizon Lines	$	17,619		$	6,142		$	24,049		$	16,163
Horizon Logistics		1,270			195			2,302			551

Consolidated capital expenditures	$	18,889		$	6,337		$	26,351		$	16,714


	September 21,
	2008
Segment assets:
Horizon Lines	$	931,805
Horizon Logistics		41,421

		973,226
Eliminations		(32,889	)

Consolidated assets	$	940,337

9. Property and Equipment

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


	September 21,			December 23,
	2008			2007
Vessels and vessel improvements	$	148,214		$	141,776
Containers		24,176			24,522
Chassis		14,858			14,923
Cranes		26,862			25,179
Machinery and equipment		25,691			23,923
Facilities and land improvements		13,244			10,847
Software		32,233			30,214
Construction in progress		31,685			20,275


Total property and equipment		316,963			291,659
Accumulated depreciation		(114,943	)		(96,980	)


Property and equipment, net	$	202,020		$	194,679

The increase in construction in progress is primarily related to an $11.6 million down payment for new cranes in our Anchorage, Alaska terminal.

10. Intangible Assets

Intangible assets consist of the following (in thousands):


	September 21,			December 23,
	2008			2007
Customer contracts/relationships	$	145,079		$	144,824
Trademarks		63,800			63,800
Deferred financing costs		13,011			12,872
Non-compete agreements		262			262


Total intangibles with definite lives		222,152			221,758
Accumulated amortization		(87,734	)		(69,727	)


Net intangibles with definite lives		134,418			152,031
Goodwill		334,717			334,671


Intangible assets, net	$	469,135		$	486,702

11. Accrued Liabilities

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


	September 21,		December 23,
	2008		2007
Vessel operations	$	22,560	$	23,064
Fuel		20,975		14,885
Marine operations		12,515		9,682
Terminal operations		14,886		9,278
Payroll and employee benefits		13,875		12,574
Interest		3,605		6,986
Other liabilities		22,302		18,558


Total other accrued liabilities	$	110,718	$	95,027

12. Long-Term Debt

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


	September 21,			December 23,
	2008			2007
Senior credit facility
Term loan	$	120,313		$	125,000
Revolving credit facility		157,500			122,000
4.25% convertible senior notes		330,000			330,000
Other		1,792			2,006


Total long-term debt		609,605			579,006
Current portion		(6,543	)		(6,537	)


Long-term debt, net of current portion	$	603,062		$	572,469

Senior Credit Facility

On August 8, 2007, the Company entered into a credit agreement providing for a $250.0 million five year revolving credit facility and a $125.0 million term loan with various financial lenders (the “Senior Credit Facility”). The obligations are secured by substantially all of the owned assets of the Company. The terms of the Senior Credit Facility also provide for a $20.0 million swingline subfacility and a $50.0 million letter of credit subfacility.

On December 31, 2007, the Company made its first quarterly principal payment on the term loan of approximately $1.6 million, which payments will continue through September 30, 2009, at which point quarterly payments increase to $4.7 million through September 30, 2011, at which point quarterly payments increase to $18.8 million until final maturity on August 8, 2012. The interest rate payable under the Senior Credit Facility varies depending on the types of advances or loans the Company selects. Borrowings under the Senior Credit Facility bear interest primarily at LIBOR-based rates plus a spread which ranges from 1.25% to 2.0% (LIBOR plus 1.50% as of September 21, 2008) 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 0.25% to 1.0% (Prime plus 0.50% as of September 21, 2008). However, none of the Company’s borrowings as of September 21, 2008 bear interest at Prime plus a spread. The weighted average interest rate at September 21, 2008 was approximately 4.5%, 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 0.25% to 0.40% (0.30% as of September 21, 2008). As of September 21, 2008, $85.6 million was available for borrowing under the revolving credit facility, after taking into account $157.5 million outstanding under the revolver and $6.9 million utilized for outstanding letters of credit.

The Senior Credit Facility contains customary affirmative and negative covenants and warranties, including two financial covenants with respect to the Company’s leverage and interest coverage ratio and limits the level of dividends and stock repurchases in addition to other restrictions. It also contains customary events of default, subject to grace periods. The Company was in compliance with all such covenants as of September 21, 2008.

Derivative Instruments

On March 31, 2008, the Company entered into an Interest Rate Swap Agreement (the “swap”) with Wachovia Bank, National Association (“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 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 income. As of September 21, 2008, the Company recorded an asset of $2.0 million, included in other long-term assets, in the accompanying consolidated balance sheet. The Company also recorded $(1.1) million (net of tax of $0.7 million) and $1.3 million (net of tax of $0.7 million) in other comprehensive (loss) income for the quarter and nine months ended September 21, 2008, respectively. No hedge ineffectiveness was recorded during the quarter and nine months ended September 21, 2008.

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, if 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;

	•		Prior to May 15, 2012, if during the five business day period 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 21, 2008, 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. In June 2008, the Company obtained approval from its shareholders to increase the number of authorized but unissued shares such that the number of shares available for issuance to the financial institutions increased from 4.6 million to 17.8 million. The separate note hedge and warrant transactions were structured to reduce the potential future share dilution associated with the conversion of Notes. The cost of the note hedge transactions to the Company was approximately $52.5 million, $33.4 million net of tax, and has been accounted for as an equity transaction in accordance with EITF No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock” (“EITF No. 00-19”).The Company received proceeds of $11.9 million related to the sale of the warrants, which has also been classified as equity because the warrants meet all of the equity classification criteria within EITF No. 00-19.

In accordance with SFAS 128, 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.

Other Debt

In conjunction with the acquisition of HSI, the Company assumed a $2.2 million note payable. The note is secured by the assets of HSI. The note bears interest at 5.26% per year and requires monthly payments of $32 thousand until maturity on February 24, 2014.

13. Fair Value Measurement

On December 24, 2007, the Company adopted SFAS 157, “Fair Value Measurements” (“SFAS 157”). This statement defines fair value, establishes a framework for using fair value to measure assets and liabilities, and expands disclosures about fair value measurements. SFAS 157 establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value 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

This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. 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 gain on the interest rate swap of $2.0 million is classified within level 2 of the fair value hierarchy of SFAS No. 157. No other assets or liabilities are measured at fair value under SFAS No. 157 as of September 21, 2008.

14. 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 recent performance of the investments in the financial markets, may result in higher contributions to these plans.

Pension Plans

The Company sponsors a defined benefit plan covering approximately 30 union employees as of September 21, 2008. 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 $0.1 million during each of the quarters ended September 21, 2008 and September 23, 2007 and $0.3 million during each of the nine months ended September 21, 2008 and September 23, 2007.

As part of the acquisition of HSI, the Company assumed net liabilities related to a pension plan covering approximately 50 salaried employees. The pension plan 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 $16 thousand and $49 thousand during the quarter and nine months ended September 21, 2008, respectively, and $18 thousand during the quarter and nine months ended September 23, 2007.

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 net periodic benefit costs related to the post-retirement benefits were $0.2 million and $0.1 million during the quarter ended September 21, 2008 and September 23, 2007, respectively, and $0.5 million and $0.4 million during the nine months ended September 21, 2008 and September 23, 2007, respectively.

As part of the acquisition of HSI, the Company assumed liabilities related to post-retirement medical, dental and life insurance benefits for eligible active and retired employees. Effective June 25, 2007, the 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 and $0.2 million during the quarter and nine months ended September 21, 2008, respectively, and $0.1 million during the quarter and nine months ended September 23, 2007.

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 moved, or a combination thereof. Expense for these plans is recognized as contributions are funded. The Company made contributions of $2.5 million and $7.2 million during the quarter and nine months ended September 21, 2008, respectively, and $2.4 million and $7.2 million during the quarter and nine months ended September 23, 2007, respectively. 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.

15. Commitments and Contingencies

Legal Proceedings

On April 17, 2008, the Company received a grand jury subpoena from the U.S. District Court for the Middle District of Florida seeking information regarding an investigation by the Antitrust Division of the Department of Justice (the “DOJ”) into possible antitrust violations in the domestic ocean shipping business. The Company is currently providing documents to the DOJ in response to the subpoena, and the Company intends to continue to fully cooperate with the DOJ in its investigation.

Subsequent to the commencement of the DOJ investigation, a number of purported class action lawsuits were filed against the Company and other domestic shipping carriers. Fifty-four cases have been filed in the following federal district courts: eight in the Southern District of Florida, five in the Middle District of Florida, eighteen in the District of Puerto Rico, eleven in the Northern District of California, two in the Central District of California, one in the District of Oregon, eight in the Western District of Washington and one in the District of Alaska. All of the foregoing district court cases that relate to ocean shipping services in the Puerto Rico tradelane were consolidated into a single mutlidisrict litigation (“MDL”) proceeding in the District of Puerto Rico. All of the foregoing district court cases that relate to ocean shipping services in the Hawaii and Guam tradelanes 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.

Each of the federal district court cases purports to be on behalf of a class of individuals and entities who purchased domestic ocean shipping services from the various domestic ocean carriers. The complaints allege price-fixing in violation of the Sherman Act and seek treble monetary damages, costs, attorneys’ fees, and an injunction against the allegedly unlawful conduct.

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.

Through September 21, 2008, the Company has incurred approximately $7.0 million in legal and professional fees associated with the DOJ investigation and the antitrust related litigation. In light of the early stages of the litigations, the fact-intensive nature of the issues involved and the inherent uncertainty of litigation, the Company is unable to predict the outcome of the suits or a reasonable range for any possible outcomes. The Company has not made a provision for any of these claims in the accompanying financial statements. It is possible that the outcome of these proceedings could have a material adverse effect on the Company’s financial condition, cash flows and results of operations. In addition, in connection with the DOJ investigation, it is possible that the Company could suffer criminal prosecution and be required to pay a substantial fine. The Company has not made a provision for any possible fines or penalties in the accompanying financial statements, and the Company can give no assurance that the final resolution of the DOJ investigation will not result in significant liability and will not have a material adverse effect on the Company’s financial condition, cash flows and results of operations.

On October 20, 2008, three former managers of the Company plead guilty to a conspiracy to eliminate competition and raise prices for moving freight between the Continental U.S. and Puerto Rico.

In the ordinary course of business, from time to time, the Company and its subsidiaries become involved in various legal proceedings which management believes will not have a material adverse effect on the Company’s financial position or results of operations. These relate primarily to claims for loss or damage to cargo, employees’ personal injury claims, and claims for loss or damage to the person or property of third parties. The Company and its subsidiaries generally maintain insurance, subject to customary deductibles or self-retention amounts, and/or reserves to cover these types of claims. The Company and its subsidiaries also, from time to time, become involved in routine employment-related disputes and disputes with parties with which they have contracts.

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 new non-Jones Act qualified container vessels. The bareboat charter for each new 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 all of the five new 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 new 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 new vessels at the end of the initial twelve-year period and SFL sells the new 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 new vessel. If the new 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.

Although the Company is not the primary beneficiary of the variable interest entities created in conjunction with the SFL transactions, the Company has an interest in the variable interest entities. Based on the Company’s analysis of the expected cash flows related to the variable interest entity, the Company believes only a remote likelihood exists that it would become the primary beneficiary of the variable interest entity and would be required to consolidate the variable interest entity. 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 balance sheet.

Standby Letters of Credit

The Company has standby letters of credit primarily related to its property and casualty insurance programs. On September 21, 2008 and December 23, 2007, amounts outstanding on these letters of credit totaled $6.9 million and $6.3 million, respectively.

16. Recent Accounting Pronouncements

In June 2008, the FASB issued Staff Position No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 concludes that unvested share-based payment awards that contain rights to receive non-forfeitable dividends or dividend equivalents (whether paid or unpaid) are participating securities, and thus, should be included in the two-class method of computing earnings per share (“EPS”). FSP EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008, and interim periods within those years. Retrospective application to all periods presented is required and early application is prohibited. The Company is in the process of determining the impact the adoption of FSP EITF 03-6-1 will have on its consolidated results of operations and financial position.

In May 2008, the FASB issued Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments that may be Settled in Cash Upon Conversion” (“FSP APB 14-1”). FSP APB 14-1 requires that the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) be separately accounted for in a manner that reflects an issuer’s nonconvertible debt borrowing rate. As a result, the liability component would be recorded at a discount reflecting its below market coupon interest rate, and the liability component would subsequently be accreted to its par value over its expected life, with the rate of interest that reflects the market rate at issuance being reflected in the results of operations. This change in methodology will affect the calculations of net income and earnings per share, but will not increase the Company’s cash interest payments. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Retrospective application to all periods presented is required and early adoption is prohibited. The Notes (as defined in Note 12) are within the scope of FSP APB 14-1. As such, the Company has assessed the impact of adopting FSP APB 14-1 and expects to adjust its reported amounts for the quarter and nine months ended September 21, 2008 and September 23, 2007, and the fiscal year ended December 23, 2007 as follows (in thousands except per share amounts):


	Quarter Ended September 21, 2008							Nine Months Ended September 21, 2008
	As					As		As					As
	Reported		Adjustments			Adjusted		Reported		Adjustments			Adjusted

Interest expense, net	$	7,772	$	2,244		$	10,016	$	24,927	$	6,601		$	31,528
Income tax expense		1,492		(844	)		648		3,294		(2,482	)		812
Net income		12,528		(1,400	)		11,128		21,854		(4,119	)		17,735

Net income per share
Basic		0.42		(0.05	)		0.37		0.73		(0.14	)		0.59
Diluted		0.42		(0.05	)		0.37		0.72		(0.13	)		0.59


	Quarter Ended September 23, 2007									Nine Months Ended September 23, 2007
	As						As			As						As
	Reported			Adjustments			Adjusted			Reported			Adjustments			Adjusted

Interest expense, net	$	10,077		$	1,092		$	11,169		$	32,953		$	1,092		$	34,045
Income tax benefit		(14,347	)		(411	)		(14,758	)		(15,038	)		(411	)		(15,449	)
Net income		1,570			(681	)		889			18,183			(681	)		17,502

Net income per share
Basic		0.05			(0.02	)		0.03			0.54			(0.02	)		0.52
Diluted		0.05			(0.02	)		0.03			0.53			(0.02	)		0.51


	Year Ended December 23, 2007
	As						As
	Reported			Adjustments			Adjusted

Interest expense, net	$	41,672		$	3,204		$	44,876
Income tax benefit		(13,983	)		(1,205	)		(15,188	)
Net income		28,859			(1,999	)		26,860

Net income per share
Basic		0.87			(0.06	)		0.81
Diluted		0.85			(0.06	)		0.79

In addition, the Company will record the following estimated amounts as additional non-cash interest expense upon the adoption of FSP APB 14-1 (in thousands):


Fiscal Year
2008	$	8,901
2009		10,011
2010		11,060
2011		11,765
2012		4,821

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of non-governmental entities that are presented in conformity with generally accepted accounting principles (the GAAP hierarchy). Statement 162 will become effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” The adoption of SFAS 162 is not expected to have any impact on the Company’s consolidated results of operations and financial position.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 requires companies with derivative instruments to disclose information that should enable financial statement users to understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under FASB Statement No. 133 “Accounting for Derivative Instruments and Hedging Activities” and how derivative instruments and related hedged items affect a company’s financial position, financial performance and cash flows. SFAS 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008. As this statement relates only to disclosure requirements, the Company does not expect it to have an impact on its results of operations or financial position.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This standard is effective for fiscal years beginning after December 15, 2008 and early adoption is prohibited.

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations” (“SFAS 141R”). SFAS 141R replaces SFAS 141 and establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non controlling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. This standard is effective for fiscal years beginning after December 15, 2008 and early adoption is prohibited.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement of certain financial assets and liabilities under an instrument-by-instrument election. Subsequent measurements for the financial assets and liabilities an entity elects to measure at fair value will be recognized in the results of operations. SFAS 159 also establishes additional disclosure requirements. This standard is effective for fiscal years beginning after November 15, 2007. Effective for fiscal year 2008, the Company has adopted the provisions of SFAS 159. The adoption did not have a financial impact on the Company’s results of operations and financial position.

In September 2006, the Financial Accounting Standards Board (the “FASB”) issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under generally accepted accounting principles. As a result of SFAS 157 there is now a common definition of fair value to be used throughout GAAP. The FASB believes that the new standard will make the measurement of fair value more consistent and comparable and improve disclosures about those measures. The provisions of SFAS 157 were to be effective for fiscal years beginning after November 15, 2007. On February 6, 2008, the FASB agreed to defer the effective date of SFAS 157 for one year for certain nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). Effective for fiscal 2008, the Company has adopted SFAS 157 except as it applies to those nonfinancial assets and nonfinancial liabilities. The adoption did not have a financial impact on the Company’s results of operations and financial position.

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

General economic uncertainty fueled by deteriorating credit markets, increased prices for petroleum products, and lagging consumer confidence as a result of volatile financial markets are all negatively impacting our financial performance. Although we deliver basic food, clothing and shelter to customers and consumers, many markets, including our own, are experiencing an increased number of business closures, sharp declines in housing starts and tourism, and a general slowdown in consumer spending.

Container volumes during the quarter and nine months ended September 21, 2008 were impacted by deteriorating market conditions in Puerto Rico and Hawaii. During the quarter ended September 21, 2008, container volumes were also negatively impacted by three hurricanes in the Caribbean. In addition, lower volumes and a reduction in seafood quotas affected terminal services revenue. Operating revenue grew as a result of higher fuel surcharges to help offset increases in fuel costs, unit revenue improvements resulting from general rate increases and cargo mix changes, improved space charter revenue, and revenue related to acquisitions.

Operating expenses during the quarter and nine months ended September 21, 2008 were impacted by rising fuel prices. The increase in operating expense during the nine months ended September 21, 2008 is primarily attributable to higher vessel operating costs due to the deployment of five new vessels during 2007, an increase in the cost of fuel, and an increase in selling, general and administrative expenses due to the Department of Justice antitrust investigation and related legal proceedings and higher compensation costs. These increases in operating expenses are partially offset by our cost control initiatives in the areas of fuel consumption, port terminal operations, and equipment management.


	Quarters Ended						Nine Months Ended
	September 21,			September 23,			September 21,			September 23,
	2008			2007			2008			2007
	($ in thousands)
Operating revenue	$	352,638		$	321,145		$	989,544		$	890,509
Operating expense		330,850			285,862			939,471			815,844


Operating income	$	21,788		$	35,283		$	50,073		$	74,665


Operating ratio		93.8	%		89.0	%		94.9	%		91.6	%
Revenue containers (units)		71,748			74,759			209,112			214,574

We believe that in addition to GAAP based financial information, earnings before net interest expense, income taxes, depreciation, and amortization (“EBITDA”) is a meaningful disclosure for the following reasons: (i) EBITDA is a component 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 the Company to maintain certain interest expense coverage and leverage ratios, which contain EBITDA as a component, and our management team uses EBITDA to monitor compliance with such covenants, (iii) EBITDA is a component of the measure used by our management team to make day-to-day operating decisions, (iv) EBITDA is a component 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 the Company of certain targets, which contain EBITDA as a component. We acknowledge that there are limitations when using EBITDA. EBITDA is not a recognized term under GAAP and does 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 is 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 tax payments and debt service requirements. Because all companies do not use identical calculations, this presentation of EBITDA may not be comparable to other similarly titled measures of other companies. A reconciliation of net income to EBITDA is included below:


	Quarters Ended					Nine Months Ended
	September 21,		September 23,			September 21,		September 23,
	2008		2007			2008		2007
	(in thousands)
Net income	$	12,528	$	1,570		$	21,854	$	18,183
Interest expense, net		7,772		10,077			24,927		32,953
Income tax expense (benefit)		1,492		(14,347	)		3,294		(15,038	)
Depreciation and amortization		15,842		15,534			47,493		49,904


EBITDA	$	37,634	$	12,834		$	97,568	$	86,002

Recent Developments

During the third quarter, an agreement was reached on a new six-year contract covering the Company’s union employees represented by the International Longshore & Warehouse Union. In addition, it is anticipated that the contract covering the Company’s union employees represented by the International Longshoreman’s Association for the East and Gulf coast will commence during December 2008. This contract is set to expire in October 2010.

General

The Company has two principal businesses referred to as Horizon Lines, LLC (“Horizon Lines”) and Horizon Logistics Holdings, LLC (“Horizon Logistics”). Through Horizon Lines, we believe that we are the nation’s leading Jones Act container shipping and integrated logistics company, accounting for approximately 37% of total U.S. marine container shipments from the continental U.S. to Alaska, Puerto Rico and Hawaii, constituting the three non-contiguous Jones Act markets, and to Guam and Micronesia. Under the Jones Act, all vessels transporting cargo between U.S. ports must, subject to limited exceptions, be built in the U.S., registered under the U.S. flag, manned by predominantly U.S. crews, and owned and operated by U.S.-organized companies that are controlled and 75% owned by U.S. citizens. We own or lease 21 vessels, 16 of which are fully qualified Jones Act vessels, and approximately 22,000 cargo containers. We have access to terminal facilities in each of our ports, operating our terminals in Alaska, Hawaii, and Puerto Rico and contracting for terminal services in the five ports in the continental U.S. and in the ports in Guam, Hong Kong, Yantian and Taiwan.

The Company, through its wholly owned subsidiary, Horizon Logistics, also offers inland transportation for its customers through its own trucking operations on the U.S. west coast and Alaska, and its integrated logistics services including relationships with third-party truckers, railroads and barge operators in its markets. In addition, Horizon Services Group offers transportation management systems and customized software solutions to shippers, carriers and other supply chain participants.

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.

Critical Accounting Policies

The preparation of our financial statements in conformity with GAAP 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 constantly 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 21, 2008. The critical accounting policies can be found in the Company’s Annual Report on Form 10-K for the fiscal year ended December 23, 2007 as filed with the 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. At times, there is a timing disparity between volatility in our fuel costs and related adjustments to our fuel surcharges (or the incorporation of adjusted fuel surcharges into our base transportation rates) that may result in lower recovery of our fuel costs during sharp hikes in the price of fuel and improvements in recovery of our fuel costs when fuel prices level off or decline.

Over 85% of our revenues are generated from our shipping and logistics services in markets where the marine trade is subject to the Jones Act or other U.S. maritime laws. The balance of our revenue is derived from (i) vessel loading and unloading services that we provide for vessel operators at our terminals, (ii) agency services that we provide for third-party shippers lacking administrative presences in our markets, (iii) vessel space charter income from third-parties in trade lanes not subject to the Jones Act, (iv) management of vessels owned by third-parties, (v) warehousing services for third-parties, and (vi) other non-transportation services.

As used in this Form 10-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 marine operating costs, inland transportation costs, vessel operating costs, land costs and rolling stock rent. Our marine operating costs consist of stevedoring, port charges, wharfage and various other costs to secure vessels at the port and to load and unload containers to and from vessels. Our inland transportation costs consist primarily of the costs to move containers to and from the port via rail, truck or barge. Our vessel operating costs consist primarily of 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 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 21, 2008 Compared with the Quarter Ended September 23, 2007

Horizon Lines Segment

Horizon Lines provides container shipping services and terminal services primarily in the U.S. domestic Jones Act trades, operating a fleet of 21 U.S.-flag containerships and six port terminals linking the continental U.S. with Alaska, Hawaii, Guam, Micronesia, Asia and Puerto Rico. The amounts presented below exclude all intercompany transactions.


	Quarters Ended
	September 21,			September 23,
	2008			2007			Change			% Change
	($ in thousands)
Operating revenue	$	342,002		$	317,430		$	24,572			7.7	%
Operating expense:
Vessel		121,466			93,914			27,552			29.3	%
Marine		53,856			53,213			643			1.2	%
Inland		54,756			50,548			4,208			8.3	%
Land		37,961			34,231			3,730			10.9	%
Rolling stock rent		10,446			11,738			(1,292	)		(11.0	)%


Cost of services		278,485			243,644			34,841			14.3	%
Depreciation and amortization		10,642			10,187			455			4.5	%
Amortization of vessel dry-docking		4,393			4,820			(427	)		(8.9	)%
Selling, general and administrative		24,247			22,125			2,122			9.6	%
Miscellaneous expense, net		1,101			431			670			155.5	%


Total operating expense		318,868			281,207			37,661			13.4	%


Operating income	$	23,134		$	36,223		$	(13,089	)		(36.1	)%


Operating ratio		93.2	%		88.6	%					4.6	%
Revenue containers (units)		71,748			74,759			(3,011	)		(4.0	)%

Operating Revenue. Horizon Lines operating revenue increased $24.6 million, or 7.7%, and accounted for approximately 97.0% of consolidated operating revenue. This revenue increase can be attributed to the following factors (in thousands):


Bunker and intermodal fuel surcharges included in rates	$	23,099
General rate increases		8,334
Increase in non-transportation services		4,235
Revenue container volume decrease		(11,096	)


Total operating revenue increase	$	24,572

The revenue container volume declines are primarily due to deteriorating market conditions in Puerto Rico and Hawaii and are partially offset by general rate increases. Bunker and intermodal fuel surcharges, which are included in our transportation revenue, accounted for approximately 18.2% of total revenue in the quarter ended September 21, 2008 and approximately 12.3% of total revenue in the quarter ended September 23, 2007. We increased our bunker and intermodal fuel surcharges several times throughout 2007 and in the first nine months of 2008 as a result of fluctuations in the cost of fuel for our vessels, in addition to fuel fluctuations passed on to us by our truck, rail, and barge service providers. Fuel surcharges are evaluated regularly as the price of fuel fluctuates, and we may at times incorporate these surcharges into our base transportation rates that we charge. The increase in non-transportation revenue is primarily due to higher space charter revenue resulting from an increase in fuel surcharges, offset by a decrease in terminal services.

Cost of Services. The $34.8 million increase in cost of services is primarily due to an increase in fuel costs as a result of an increase in fuel prices, which is partially offset by reduced expenses associated with lower container volumes and reduced expenses associated with our cost control efforts.

Vessel expense, which is not primarily driven by revenue container volume, increased $27.6 million for the quarter ended September 21, 2008 compared to the quarter ended September 23, 2007. This increase is primarily attributable to an increase in fuel prices. The $27.6 million increase in fuel costs is comprised of $29.8 million increase due to fuel prices offset by $2.2 million decrease due to lower fuel consumption and fewer vessel operating days. The decrease in vessel operating days is due to utilizing our seasonal vessel in Alaska during the quarter ended September 23, 2007, a modification to our Puerto Rico and Houston service and one additional dry-docking during the quarter ended September 23, 2007.

Marine expense is comprised of the costs incurred to bring vessels into and out of port, and to load and unload containers. The types of costs included in marine expense are stevedoring and associated benefits, pilotage fees, tug fees, government fees, wharfage fees, dockage fees, and line handler fees. Marine expense increased to $53.9 million for the quarter ended September 21, 2008 from $53.2 million during the quarter ended September 23, 2007 due to increased stevedoring costs as a result of contractual rate increases.

Inland expense increased to $54.8 million for the quarter ended September 21, 2008 compared to $50.5 million during the quarter ended September 23, 2007. The $4.3 million increase in inland expense is due to $5.3 million in higher fuel costs, partially offset by lower container volumes.

Land expense is comprised of the costs included within the terminal for the handling, maintenance, and storage of containers, including yard operations, gate operations, maintenance, warehouse, and terminal overhead.


	Quarters Ended
	September 21,		September 23,
	2008		2007		% Change
	(in thousands)
Land expense:
Maintenance	$	13,695	$	12,633		8.4	%
Terminal overhead		14,509		13,128		10.5	%
Yard and gate		7,621		6,325		20.5	%
Warehouse		2,136		2,145		0.4	%


Total land expense	$	37,961	$	34,231		10.9	%

Non-vessel related maintenance expenses increased primarily due to $1.2 million of additional fuel expenses, offset by a decrease in overall repair expenses. The decrease in overall repair expenses is associated with lower volumes and our cost control efforts. Terminal overhead increased primarily due to higher utilities costs, increased facility rent as a result of the relocation of our Long Beach, CA offices, and increases in labor costs. Yard and gate expense is comprised of the costs associated with moving cargo into and out of the terminal facility and the costs associated with the storage of equipment and revenue loads in the terminal facility. Yard and gate expenses increased primarily due to rate increases in the monitoring of refrigerated containers.

Depreciation and Amortization. Depreciation and amortization was $10.6 million during the quarter ended September 21, 2008 compared to $10.2 million for the quarter ended September 23, 2007. The increase is due to a reduction in the estimated remaining useful lives of certain assets.


	Quarters Ended
	September 21,		September 23,
	2008		2007		% Change
	(in thousands)
Depreciation and amortization:
Depreciation—owned vessels	$	2,346	$	2,273		3.2	%
Depreciation and amortization—other		3,218		2,836		13.5	%
Amortization of intangible assets		5,078		5,078		0.0	%


Total depreciation and amortization	$	10,642	$	10,187		4.5	%


Amortization of vessel dry-docking	$	4,393	$	4,820		(8.9	)%

Amortization of Vessel Dry-docking. Amortization of vessel dry-docking was $4.4 million during the quarter ended September 21, 2008 compared to $4.8 million for the quarter ended September 23, 2007. Amortization of vessel dry-docking fluctuates based on the timing of dry-dockings, the number of dry-dockings that occur during a given period, and the amount of expenditures incurred during the dry-dockings. Dry-dockings generally occur every two and a half years and historically we have dry-docked approximately six vessels per year.

Selling, General and Administrative. Selling, general and administrative costs increased to $24.2 million for the quarter ended September 21, 2008 compared to $22.1 million for the quarter ended September 23, 2007, an increase of $2.1 million or 9.6%. This increase is comprised of $4.6 million of expenses related to the Department of Justice antitrust investigation and related legal proceedings, offset by a decrease of approximately $0.7 million in the accrual related to the Company’s performance incentive plan, $1.1 million of consultant fees related to our process re-engineering initiative, and $0.7 million of legal fees unrelated to the Department of Justice antitrust investigation.

Miscellaneous Expense (Income), Net. Miscellaneous expense, net increased $0.7 million during the quarter ended September 21, 2008 compared to the quarter ended September 23, 2007 primarily as a result of lower bad debt expense during 2007.

Horizon Logistics Segment

Horizon Logistics manages integrated logistics service offerings, including rail, trucking and distribution operations, in addition to Horizon Services Group, an organization offering transportation management systems and customized software solutions to shippers, carriers and other supply chain participants. The amounts presented below exclude all intercompany transactions.


	Quarters Ended
	September 21,			September 23,
	2008			2007			Change			% Change
	(in thousands)
Operating revenue	$	10,636		$	3,715		$	6,921			186.3	%
Operating expense:
Inland		8,046			2,147			5,899			274.8	%
Land		781			596			185			31.0	%
Rolling stock rent		88			15			73			486.7	%


Cost of services		8,915			2,758			6,157			223.2	%
Depreciation and amortization		807			527			280			53.1	%
Selling, general and administrative		2,266			1,357			909			67.0	%
Miscellaneous (income) expense, net		(6	)		13			(19	)		(146.2	)%


Total operating expense		11,982			4,655			7,327			157.4	%


Operating loss	$	(1,346	)	$	(940	)	$	(406	)		(43.2	)%

Operating Revenue. Horizon Logistics operating revenue accounted for approximately 3.0% of consolidated operating revenue. Approximately $6.5 million of the $6.9 million increase during the quarter ended September 21, 2008 is due to the acquisition of Aero Logistics.

Cost of Services. Cost of services increased to $8.9 million for the quarter ended September 21, 2008 compared to $2.8 million for the quarter ended September 23, 2007, an increase of $6.2 million. The increase in cost of services is primarily due to increased inland expenses as a result of the acquisition of Aero Logistics.

Depreciation and Amortization. Depreciation and amortization was $0.8 million during the quarter ended September 21, 2008 compared to $0.5 million for the quarter ended September 23, 2007. The increase in amortization of intangible assets is due to the amortization of the intangible assets recorded in conjunction with the acquisition of Aero Logistics.


	Quarters Ended
	September 21,		September 23,
	2008		2007		% Change
	(in thousands)
Depreciation and amortization:
Depreciation and amortization—other	$	563	$	447		26.0	%
Amortization of intangible assets		244		80		205.0	%


Total depreciation and amortization	$	807	$	527		53.1	%

Selling, General and Administrative. Selling, general and administrative costs increased to $2.3 million for the quarter ended September 21, 2008 compared to $1.4 million for the quarter ended September 23, 2007, an increase of $0.9 million. This increase is due to the ramp up of activities and personnel within the logistics segment, including the acquisition of Aero Logistics.

Unallocated Expenses

Interest Expense, Net. Interest expense, net decreased to $7.8 million for the quarter ended September 21, 2008 compared to $10.1 million for the quarter ended September 23, 2007, a decrease of $2.3 million or 22.8%. This decrease is a result of the August 2007 refinancing and the related lower interest rates payable on the outstanding debt.

Loss on Early Extinguishment of Debt. Loss on early extinguishment of debt was $38.0 million for the quarter ended September 23, 2007. This loss on extinguishment of debt is due to the write off of net deferred financing costs and premiums paid in connection with the tender offer for the 9% senior notes and 11% senior discount notes and the extinguishment of the prior senior credit facility.

Income Tax Expense (Benefit). The Company’s effective tax rate for the quarters ended September 21, 2008 and September 23, 2007 was 10.6% and (112.3)%, respectively. During 2006, the Company elected the application of tonnage tax. During the third quarter of 2007, the Company recorded a $4.8 million, or $0.14 per diluted share, tax benefit related to a change in estimate resulting from refinements in the methodology for computing secondary activities and cost allocations for tonnage tax purposes. The benefit was recorded in connection with the filing of the 2006 income tax return in September 2007. Excluding the loss on extinguishment and the refinements in methodology of applying tonnage tax, the Company’s effective tax rate was 17.8% for the quarter ended September 23, 2007. The Company’s effective tax rate is impacted by the Company’s income from qualifying shipping activities as well as the income from the Company’s non-qualifying shipping activities and will fluctuate based on the ratio of income from qualifying and non-qualifying activities.

Nine Months Ended September 21, 2008 Compared with the Nine Months Ended September 23, 2007

Horizon Lines Segment


	Nine Months Ended
	September 21,			September 23,
	2008			2007			Change			% Change
	($ in thousands)
Operating revenue	$	962,059		$	883,752		$	78,307			8.9	%
Operating expense:
Vessel		334,842			269,793			65,049			24.1	%
Marine		153,996			147,206			6,790			4.6	%
Inland		154,935			145,762			9,173			6.3	%
Land		110,281			97,330			12,951			13.3	%
Rolling stock rent		33,285			33,748			(463	)		(1.4	)%


Cost of services		787,339			693,839			93,500			13.5	%
Depreciation and amortization		32,069			31,410			659			2.1	%
Amortization of vessel dry-docking		13,168			13,139			29			0.2	%
Selling, general and administrative		73,134			63,803			9,331			14.6	%
Miscellaneous expense, net		2,337			429			1,908			444.8	%


Total operating expense		908,047			802,620			105,427			13.1	%


Operating income	$	54,012		$	81,132		$	(27,120	)		(33.4	)%


Operating ratio		94.4	%		90.8	%					3.6	%
Revenue containers (units)		209,112			214,574			(5,462	)		(2.5	)%

Operating Revenue. Horizon Lines operating revenue increased $78.3 million, or 8.9%, and accounted for approximately 97.2% of consolidated operating revenue. This revenue increase can be attributed to the following factors (in thousands):


Bunker and intermodal fuel surcharges included in rates	$	56,011
General rate increases		22,137
Increase in non-transportation services		11,955
Revenue related to acquisition of HSI		8,026
Revenue container volume decrease		(19,822	)


Total operating revenue increase	$	78,307

The revenue container volume declines are primarily due to continued overall soft market conditions in Puerto Rico and Hawaii, partially offset by general rate increases. Bunker and intermodal fuel surcharges, which are included in our transportation revenue, accounted for approximately 16.7% of total revenue in the nine months ended September 21, 2008 and approximately 11.8% of total revenue in the nine months ended September 23, 2007. We increased our bunker and intermodal fuel surcharges several times throughout 2007 and in the nine months of 2008 as a result of fluctuations in the cost of fuel for our vessels, in addition to fuel fluctuations passed on to us by our truck, rail, and barge service providers. Fuel surcharges are evaluated regularly as the price of fuel fluctuates, and we may at times incorporate these surcharges into our base transportation rates that we charge. The increase in non-transportation revenue is primarily due to higher space charter revenue resulting from an increase in fuel surcharges and the extension of the scope of services provided in connection with our expanded service between the U.S. west coast and Guam and Asia, partially offset by a decrease due to vessel charter revenue during 2007 and lower terminal services revenue. Prior to deploying one of the new vessels into the expanded service, we chartered this vessel to a third party.

Cost of Services. The $93.5 million increase in cost of services is primarily due to an increase in fuel costs as a result of an increase in fuel prices and the deployment of the new vessels and expanded services between the U.S. west coast and Hawaii during 2007, which is partially offset by reduced expenses associated with lower container volumes and reduced expenses associated with our cost control efforts.

Vessel expense, which is not primarily driven by revenue container volume, increased $65.0 million for the nine months ended September 21, 2008 compared to the nine months ended September 23, 2007. This increase can be attributed to the following factors (in thousands):


Vessel fuel costs increase	$	59,236
Vessel lease expense increase		8,197
Labor and other vessel operating decrease		(2,384	)


Total vessel expense increase	$	65,049

The $59.2 million increase in fuel costs is comprised of $69.0 million increase in fuel prices offset by a $9.8 million decrease due to lower fuel consumption despite an increase in vessel operating days. The decrease in labor and other vessel operating expense is due to additional operating expenses associated with five dry-dockings and $3.6 million related to certain one time expenses associated with the activation of the new vessels during the nine months ended September 23, 2007. We continue to incur labor expenses associated with the vessel in dry-dock while also incurring expenses associated with the spare vessels deployed to serve as dry-dock relief. The reductions were partially offset by higher vessel lay up costs during the nine months ended September 21, 2008.

Marine expense is comprised of the costs incurred to bring vessels into and out of port, and to load and unload containers. The types of costs included in marine expense are stevedoring and associated benefits, pilotage fees, tug fees, government fees, wharfage fees, dockage fees, and line handler fees. Marine expense increased to $154.0 million for the nine months ended September 21, 2008 from $147.2 million during the nine months ended September 23, 2007 due to increased stevedoring costs related to services provided to third parties as a result of the acquisition of HSI, partially offset by lower container volumes.

Inland expense increased to $154.9 million for the nine months ended September 21, 2008 compared to $145.8 million during the nine months ended September 23, 2007. The increase in inland expense is due to $11.7 million in higher fuel costs, offset slightly by lower container volumes.


	Nine Months Ended
	September 21,		September 23,
	2008		2007		% Change
	(in thousands)
Land expense:
Maintenance	$	39,806	$	37,015		7.5	%
Terminal overhead		43,186		37,312		15.7	%
Yard and gate		21,097		17,527		20.4	%
Warehouse		6,192		5,476		13.1	%


Total land expense	$	110,281	$	97,330		13.3	%

Non-vessel related maintenance expenses increased primarily due to $2.6 million of additional fuel expenses. In addition, $1.0 million of maintenance expenses incurred by HSI was offset by a decrease in overall repair expenses. The decrease in overall repair expenses is associated with lower volumes and our cost control efforts. Terminal overhead increased primarily due to the acquisition of HSI, a severance charge for several union employees who elected early retirement, and labor and other inflationary increases. Yard and gate expense is comprised of the costs associated with moving cargo into and out of the terminal facility and the costs associated with the storage of equipment and revenue loads in the terminal facility. Yard and gate expenses increased primarily due to rate increases in the monitoring of refrigerated containers.

Depreciation and Amortization. Depreciation and amortization was $32.1 million during the nine months ended September 21, 2008 compared to $31.4 million for the nine months ended September 23, 2007. The decrease in depreciation-owned vessels is due to certain vessel assets becoming fully depreciated and no longer subject to depreciation expense. The increase in depreciation and amortization-other is primarily due the timing of the purchase and sale of our containers. The increase in amortization of intangible assets is due to the amortization of the intangible assets recorded in conjunction with the acquisition of HSI.


	Nine Months Ended
	September 21,		September 23,
	2008		2007		% Change
	(in thousands)
Depreciation and amortization:
Depreciation—owned vessels	$	7,397	$	7,724		(4.2	)%
Depreciation and amortization—other		9,438		8,827		6.9	%
Amortization of intangible assets		15,234		14,859		2.5	%


Total depreciation and amortization	$	32,069	$	31,410		2.1	%


Amortization of vessel dry-docking	$	13,168	$	13,139		0.2	%

Amortization of Vessel Dry-docking. Amortization of vessel dry-docking during the nine months ended September 21, 2008 was flat compared to the nine months ended September 23, 2007. Amortization of vessel dry-docking fluctuates based on the timing of dry-dockings, the number of dry-dockings that occur during a given period, and the amount of expenditures incurred during the dry-dockings. Dry-dockings generally occur every two and a half years and historically we have dry-docked approximately six vessels per year.

Selling, General and Administrative. Selling, general and administrative costs increased to $73.1 million for the nine months ended September 21, 2008 compared to $63.8 million for the nine months ended September 23, 2007, an increase of $9.3 million or 14.6%. This increase is comprised of $7.0 million of expenses related to the Department of Justice antitrust investigation and related legal proceedings, an increase of approximately $1.5 million in the accrual related to the Company’s performance incentive plan, and an increase of approximately $1.3 million of compensation expense related to stock option and restricted stock grants.

Miscellaneous Expense, Net. Miscellaneous expense, net increased $1.9 million during the nine months ended September 21, 2008 compared to the nine months ended September 23, 2007 primarily as a result of a lower gain on the sale of assets during 2008 and lower bad debt expense during 2007.

Horizon Logistics Segment


	Nine Months Ended
	September 21,			September 23,
	2008			2007			Change			% Change
	(in thousands)
Operating revenue	$	27,485		$	6,757		$	20,728			306.8	%
Operating expense:
Inland		19,389			3,114			16,275			522.6	%
Land		2,044			1,562			482			30.9	%
Rolling stock rent		299			15			284			1,893.3	%


Cost of services		21,732			4,691			17,041			363.3	%
Depreciation and amortization		2,256			5,355			(3,099	)		(57.9	)%
Selling, general and administrative		7,382			3,082			4,300			139.5	%
Miscellaneous expense, net		54			96			(42	)		(43.8	)%


Total operating expenses		31,424			13,224			18,200			137.6	%


Operating loss	$	(3,939	)	$	(6,467	)	$	2,528			39.1	%

Operating Revenue. Horizon Logistics operating revenue accounted for approximately 2.8% of consolidated operating revenue. Approximately $18.5 million of the $20.7 million increase during the nine months ended September 21, 2008 is due to the acquisition of Aero Logistics.

Cost of Services. Cost of services increased to $21.7 million for the nine months ended September 21, 2008 compared to $4.7 million for the nine months ended September 23, 2007, an increase of $17.0 million. The increase in cost of services is primarily due to increased inland expenses as a result of the acquisition of Aero Logistics.

Depreciation and Amortization. Depreciation and amortization was $2.3 million during the nine months ended September 21, 2008 compared to $5.4 million for the nine months ended September 23, 2007. The decrease is due to certain capitalized software assets becoming fully depreciated and no longer subject to depreciation expense. The increase in amortization of intangible assets is due to the amortization of the intangible assets recorded in conjunction with the acquisition of Aero Logistics.


	Nine Months Ended
	September 21,		September 23,
	2008		2007		% Change
	(in thousands)
Depreciation and amortization:
Depreciation and amortization—other	$	1,504	$	5,275		(71.5	)%
Amortization of intangible assets		752		80		840.0	%


Total depreciation and amortization	$	2,256	$	5,355		(57.9	)%

Selling, General and Administrative. Selling, general and administrative costs increased to $7.4 million for the nine months ended September 21, 2008 compared to $3.1 million for the nine months ended September 23, 2007, an increase of $4.3 million. This increase is due to the ramp up of activities and personnel within the logistics segment, including the acquisition of Aero Logistics.

Unallocated Expenses

Interest Expense, Net. Interest expense, net decreased to $24.9 million for the nine months ended September 21, 2008 compared to $33.0 million for the nine months ended September 23, 2007, a decrease of $8.1 million or 24.5%. This decrease is a result of the August 2007 refinancing and the related lower interest rates payable on the outstanding debt.

Loss on Early Extinguishment of Debt. Loss on early extinguishment of debt was $38.5 million for the nine months ended September 23, 2007. This loss on extinguishment of debt is due to the write off of net deferred financing costs and premiums paid in connection with the tender offer for the 9% senior notes and 11% senior discount notes and the extinguishment of the prior senior credit facility.

Income Tax Expense (Benefit). The Company’s effective tax rate for the nine months ended September 21, 2008 and September 23, 2007 was 13.1% and (478.2)%, respectively. During 2006, the Company elected the application of tonnage tax. The Company modified its trade routes between the U.S. west coast and Guam and Asia during the first quarter of 2007. As such, the Company’s shipping activities associated with these modified trade routes became qualified shipping activities, and thus the income from these vessels is excluded from gross income in determining federal income tax liability. During the nine months ended September 23, 2007, the Company recorded a $7.3 million tax benefit related to a revaluation of the deferred taxes associated with the activities now subject to tonnage tax as a result of the modified trade routes and related to a change in estimate resulting in refinements in the methodology for computing secondary activities and cost allocations for tonnage tax purposes. Excluding the loss on extinguishment and the related tax benefits, the benefit associated with the revaluation of deferred taxes related to activities qualifying for the application of tonnage tax and the benefits related to the refinements in methodology of applying tonnage tax, the Company’s effective tax rate was 15.5% for the nine months ended September 23, 2007. The Company’s effective tax rate is impacted by the Company’s income from qualifying shipping activities as well as the income from the Company’s non-qualifying shipping activities and will fluctuate based on the ratio of income from qualifying and non-qualifying activities.

Liquidity and Capital Resources

Our principal sources of funds have been (i) earnings generated from operations and (ii) borrowings under debt arrangements. Our principal uses of funds have been (i) capital expenditures on our container fleet, our terminal operating equipment, improvements to our owned and leased vessel fleet, and our information technology systems, (ii) vessel dry-docking expenditures, (iii) working capital consumption, (iv) principal and interest payments on our existing indebtedness, (v) dividend payments to our common stockholders, (vi) acquisitions, (vii) share repurchases, (viii) premiums associated with a debt tender offer and (ix) purchases of equity instruments in conjunction with the Notes. Cash totaled $4.2 million at September 21, 2008. As of September 21, 2008, $85.6 million was available for borrowing under the revolving credit facility, after taking into account $157.5 million outstanding under the revolver and $6.9 million utilized for outstanding letters of credit.

Operating Activities

Net cash provided by operating activities was $33.0 million for the nine months ended September 21, 2008 compared to net cash used in operating activities of $5.5 million for the nine months ended September 23, 2007, an increase of $38.5 million. The increase in cash provided by operating activities is primarily due to the following (in thousands):


Decrease in vessel payments in excess of accrual	$	21,133
Increase in accounts payable and accrued liabilities, net		7,757
Decrease in performance incentive plan payments in excess of accrual		12,156
Decrease in accounts receivable		8,621
Other increases in working capital, net		9,617
Earnings adjusted for non-cash charges		(20,767	)

	$	38,517

Investing Activities

Net cash used in investing activities was $26.2 million for the nine months ended September 21, 2008 compared to $45.7 million for the nine months ended September 23, 2007. The reduction is primarily related to a $31.9 million decrease in the purchases of businesses, partially offset by a $2.7 million decrease in proceeds from the sale of equipment increase and a $9.6 million increase in capital expenditures, which includes an $11.6 million down payment for new cranes in our Anchorage, Alaska terminal.

Financing Activities

Net cash used in financing activities during the nine months ended September 21, 2008 was $8.9 million compared to $33.3 million for the nine months ended September 23, 2007. The net cash used in financing activities during the nine months ended September 21, 2008 included $35.5 million, net of repayments, borrowed under the Senior Credit Facility. During the nine months ended September 23 2007, the Company refinanced its debt structure. The Company used the proceeds provided by the Senior Credit Facility (as defined below) and the Notes (as defined below) to (i) repay $192.8 million of borrowings outstanding under the prior senior credit facility (ii) purchase the outstanding principal and pay associated premiums of the 9% senior notes and 11% senior discount notes purchased in the Company’s tender offer, and (iii) purchase 1,000,000 shares of the Company’s common stock. Concurrent with the issuance of the Notes, the Company entered into hedge transactions whereby, under certain circumstances, the Company has the option to receive shares of its common stock, and the Company sold warrants whereby certain financial institutions have the option to receive shares of the Company’s common stock. The cost of the note hedge transactions to the Company was approximately $52.5 million and the Company received proceeds of $11.9 million related to the sale of the warrants. The net cash used in financing activities during the nine months ended September 23, 2007 also includes a $25.0 million prepayment under the Prior Senior Credit Facility and $4.5 million in long-term debt payments related to the outstanding indebtedness secured by mortgages on the Horizon Enterprise and the Horizon Pacific.

On November 19, 2007, the Company’s Board of Directors authorized the Company to commence a stock repurchase program to buy back up to $50.0 million of its common stock. The program allowed the Company to purchase shares through open market repurchases and privately negotiated transactions at a price of $26.00 per share or less until the program’s expiration on December 31, 2008. The Company completed its share repurchase program by acquiring a total of 2,800,200 shares at a total cost of $50.0 million, including the purchase of 1,627,500 shares at a total cost of $29.3 million during the quarter ended March 23, 2008. Although the Company does not currently intend to repurchase additional shares, the Company will continue to evaluate market conditions and may, subject to approval by the Company’s Board of Directors, repurchase additional shares of its common stock in the future.

Outlook

Horizon Lines is experiencing the overall economic downturn in the U.S. and in other countries. The significant declines in tourism and construction, as well as business closures, are negatively impacting container volumes, particularly in Puerto Rico and Hawaii. In addition, we have faced extremely volatile fuel prices and lower terminal services revenue. The price of fuel, a significant expense for our operations, has increased 50% this year. The price and supply of fuel is unpredictable and fluctuates based on events outside our control. The significant volatility and rapid increase in fuel prices negatively impacts our performance because adjustments in our fuel surcharges lag changes in actual fuel prices paid and we are unable to fully recover all of the incremental costs. We expect slight revenue container volume growth in Alaska but expect revenue volume declines in Puerto Rico and in Hawaii. As a result, we expect overall revenue container volume declines of approximately 3.1% and approximately 2.0% revenue growth in 2008 due to more favorable cargo mix and general rate increases. Horizon Logistics is in the early stages of its existence and is experiencing a much slower ramp up in third party logistics business than expected due to the overall slowdown in the economy. We will continue our process improvement initiatives and cost constraint efforts in both our liner and logistics divisions. As a result of these factors, we expect 2008 earnings per share of $0.68-$0.96, excluding any costs related to the Department of Justice antitrust investigation and related legal proceedings and a $0.8 million severance charge for several union employees who elected early retirement. We estimate that we may incur approximately $10.0 million in legal expenses related to the Department of Justice antitrust investigation and related legal proceedings in 2008. Including the $10.0 million in expected legal expenses and the $0.8 million severance charge, we expect earnings per share of $0.38-$0.66.

We are closely monitoring the potential impact of the current financial and liquidity crisis on our financial obligations and access to capital. We entered into an interest rate swap that effectively fixes the interest rate on approximately $120.3 million of our senior credit facility, leaving only $157.5 million of our total indebtedness of $609.6 million subject to changes in interest rates. We currently have approximately $86 million available under our senior credit facility and believe this availability combined with cash flows generated from operations will be sufficient to service our normal business operations over the next twelve months. We are not able to predict the outcome of the legal proceedings surrounding the Department of Justice antitrust investigation and have excluded any potential impact from our cash flow projections.

The ultimate extent of the U.S. economic slowdown and its impact on our business is unknown. However, we believe that 2009 container volumes will decline. As such, we are focusing on maximizing revenue opportunities and constraining costs and cash expenditures throughout our business.

Capital Requirements

Our current and future capital needs relate primarily to debt service, maintenance and improvement of our vessel fleet, and providing for other necessary equipment acquisitions, including terminal cranes in Anchorage, Alaska and Guam. Cash to be used for investing activities, including purchases of property and equipment for the next twelve months is expected to total approximately $18.0-$22.0 million. Such capital expenditures will include continued redevelopment of our San Juan, Puerto Rico terminal, vessel regulatory and maintenance initiatives and other terminal infrastructure and equipment. In addition, expenditures for vessel dry-docking payments are estimated at $20.0 million for the next twelve months.

Eight of our vessels, the Horizon Anchorage, Horizon Tacoma, Horizon Kodiak, Horizon Hunter, Horizon Hawk, Horizon Eagle, Horizon Falcon and Horizon Tiger are leased or chartered. The charters for the Horizon Anchorage, Horizon Tacoma, and Horizon Kodiak are due to expire in January 2015, for the Horizon Hunter in 2018, and for the Horizon Hawk, Horizon Eagle, Horizon Falcon and Horizon Tiger in 2019. 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 December 31, 2007, the Company made its first quarterly principal payment on the term loan of approximately $1.6 million, which payments will continue through September 30, 2009, at which point quarterly payments increase to $4.7 million through September 30, 2011, at which point quarterly payments increase to $18.8 million until final maturity on August 8, 2012. As of September 21, 2008, $277.8 million was outstanding under the Senior Credit Facility, which included a $120.3 million term loan and borrowings of $157.5 million under the revolving credit facility. The interest rate payable under the Senior Credit Facility varies depending on the types of advances or loans the Company selects. Borrowings under the Senior Credit Facility bear interest primarily at LIBOR-based rates plus a spread which ranges from 1.25% to 2.0% (LIBOR plus 1.50% as of September 21, 2008) 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 0.25% to 1.0% (Prime plus 0.50% as of September 21, 2008). However, none of the Company’s borrowings as of September 21, 2008 bear interest at Prime plus a spread. The weighted average interest rate at September 21, 2008 was approximately 4.5%, 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 0.25% to 0.40% (0.30% as of September 21, 2008).

Derivative Instruments

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 income. As of September 21, 2008, the Company recorded an asset of $2.0 million, included in other long-term assets, in the accompanying consolidated balance sheet. The Company also recorded $(1.1) million (net of tax of $0.7 million) and $1.3 million (net of tax of $0.7 million) in other comprehensive income (loss) for the quarter and nine months ended September 21, 2008, respectively. No hedge ineffectiveness was recorded during the quarter and nine months ended September 21, 2008.

4.25% Convertible Senior Notes

	•		Prior to May 15, 2012, if during any calendar quarter, and only during such calendar quarter, if 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;

	•		Prior to May 15, 2012, if during the five business day period 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.

Interest Rate Risk

Our primary interest rate exposure relates to the Senior Credit Facility. As of September 21, 2008, the Company had outstanding a $120.3 million term loan and $157.5 million under the revolving credit facility, which bear interest at variable rates.

On March 31, 2008, the Company entered into an interest rate swap with Wachovia in the notional amount of $121.9 million. 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. 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 fixed rate of interest of 3.02%, and Wachovia has agreed to pay a floating interest rate equal to the three-month LIBOR rate. The purpose of entering into this swap is to protect the Company against the risk of rising interest rates related to its term loan. Interest rate differentials paid or received under the swap are recognized as adjustments to interest expense. The Company does not hold or issue interest rate swap agreements for trading purposes. In the event that the counter-party fails to meet the terms of the interest rate swap agreement, the Company’s exposure is limited to the interest rate differential.

Each quarter point change in interest rates would result in a $0.4 million change in annual interest expense on the revolving credit facility.

Ratio of Earnings to Fixed Charges

Our ratio of earnings to fixed charges for the quarter and nine months ended September 21, 2008 is as follows (in thousands):


	Quarter Ended			Nine Months Ended
	September 21, 2008			September 21, 2008
Pretax income	$	14,020		$	25,148
Interest expense		7,826			25,085
Rentals		8,795			26,486


Total fixed charges	$	16,621		$	51,571


Pretax earnings plus fixed charges	$	30,641		$	76,719


Ratio of earnings to fixed charges		1.84	x		1.49	x

For the purposes of calculating the ratio of earnings to fixed charges, earnings represent income before income taxes plus fixed charges. Fixed charges consists of interest expense, including amortization of net discount or premium, and financing costs and the portion of operating rental expense (33%) that management believes is representative of the interest component of rent expense.

Recent Accounting Pronouncements

In May 2008, the FASB issued Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments that may be Settled in Cash Upon Conversion” (“FSP APB 14-1”). FSP APB 14-1 requires that the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) be separately accounted for in a manner that reflects an issuer’s nonconvertible debt borrowing rate. As a result, the liability component would be recorded at a discount reflecting its below market coupon interest rate, and the liability component would subsequently be accreted to its par value over its expected life, with the rate of interest that reflects the market rate at issuance being reflected in the results of operations. This change in methodology will affect the calculations of net income and earnings per share, but will not increase the Company’s cash interest payments. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Retrospective application to all periods presented is required and early adoption is prohibited. The Notes (as defined above) are within the scope of FSP APB 14-1. As such, the Company has assessed the impact of adopting FSP APB 14-1 and expects to adjust its reported amounts for the quarter and nine months ended September 21, 2008 and September 23, 2007, and the fiscal year ended December 23, 2007 as follows (in thousands except per share amounts):


	Quarter Ended September 21, 2008							Nine Months Ended September 21, 2008
	As					As		As					As
	Reported		Adjustments			Adjusted		Reported		Adjustments			Adjusted

Interest expense, net	$	7,772	$	2,244		$	10,016	$	24,927	$	6,601		$	31,528
Income tax expense		1,492		(844	)		648		3,294		(2,482	)		812
Net income		12,528		(1,400	)		11,128		21,854		(4,119	)		17,735

Net income per share
Basic		0.42		(0.05	)		0.37		0.73		(0.14	)		0.59
Diluted		0.42		(0.05	)		0.37		0.72		(0.13	)		0.59


	Quarter Ended September 23, 2007									Nine Months Ended September 23, 2007
	As						As			As						As
	Reported			Adjustments			Adjusted			Reported			Adjustments			Adjusted

Interest expense, net	$	10,077		$	1,092		$	11,169		$	32,953		$	1,092		$	34,045
Income tax benefit		(14,347	)		(411	)		(14,758	)		(15,038	)		(411	)		(15,449	)
Net income		1,570			(681	)		889			18,183			(681	)		17,502

Net income per share
Basic		0.05			(0.02	)		0.03			0.54			(0.02	)		0.52
Diluted		0.05			(0.02	)		0.03			0.53			(0.02	)		0.51


	Year Ended December 23, 2007
	As						As
	Reported			Adjustments			Adjusted

Interest expense, net	$	41,672		$	3,204		$	44,876
Income tax benefit		(13,983	)		(1,205	)		(15,188	)
Net income		28,859			(1,999	)		26,860

Net income per share
Basic		0.87			(0.06	)		0.81
Diluted		0.85			(0.06	)		0.79

In addition, the Company will record the following estimated amounts as additional non-cash interest expense upon the adoption of FSP APB 14-1 (in thousands):


Fiscal Year
2008	$	8,901
2009		10,011
2010		11,060
2011		11,765
2012		4,821

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: changes in tax laws or in their interpretation or application (including the repeal of the application of the tonnage tax to our trade in any one of our applicable shipping routes); rising fuel prices; our substantial debt; restrictive covenants under our debt agreements; decreases in shipping volumes; our failure to renew our commercial agreements with Maersk; labor interruptions or strikes; job related claims, liability under multi-employer pension plans; compliance with safety and environmental protection and other governmental requirements; new statutory and regulatory directives in the United States addressing homeland security concerns; the successful start-up of any Jones-Act competitor; increased inspection procedures and tighter import and export controls; restrictions on foreign ownership of our vessels; repeal or substantial amendment of the coastwise laws of the United States, also known as the Jones Act; escalation of insurance costs, catastrophic losses and other liabilities; the arrest of our vessels by maritime claimants; severe weather and natural disasters; our inability to exercise our purchase options for our chartered vessels; the aging of our vessels; unexpected substantial dry-docking costs for our vessels; the loss of our key management personnel; actions by our stockholders; adverse tax audits and other tax matters; and legal or other proceedings to which we are or may become subject, including the Department of Justice antitrust investigation and related legal proceedings.

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 23, 2007 as filed with the SEC and in this Form 10-Q for the quarter ended September 21, 2008 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 23, 2007. There have been no material changes to these market risks since December 23, 2007.

There have been no material changes in the quantitative and qualitative disclosures about market risk since December 23, 2007. Information concerning market risk is incorporated by reference to Part II, Item 7A “Quantitative and Qualitative Disclosures about Market Risk” of the Company’s Form 10-K for the fiscal year ended December 23, 2007.

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 21, 2008 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 21, 2008.

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 21, 2008 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

Through September 21, 2008, the Company has incurred approximately $7.0 million in legal and professional fees associated with the DOJ investigation and the antitrust related litigation. In light of the early stages of the litigations, the fact-intensive nature of the issues involved and the inherent uncertainty of litigation, the Company is unable to predict the outcome of the suits or a reasonable range for any possible outcomes. The Company has not made a provision for any of these claims in the accompanying financial statements. It is possible that the outcome of these proceedings could have a material adverse effect on the Company’s financial condition, cash flows and results of operations. In addition, in connection with the DOJ investigation, it is possible that the Company could suffer criminal prosecution and be required to pay a substantial fine. The Company has not made a provision for any possible fines in the accompanying financial statements, and the Company can give no assurance that the final resolution of the DOJ investigation will not result in significant liability and will not have a material adverse effect on the Company’s financial condition, cash flows and results of operations.

On October 20, 2008, three former managers of the Company plead guilty to a conspiracy to eliminate competition and raise prices for moving freight between the Continental U.S. and Puerto Rico.

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 contracts.

1A. Risk Factors

Except as disclosed below, there have been no material changes from our risk factors as previously reported in our Annual Report to the SEC on Form 10-K for the fiscal year ended December 23, 2007.

The Company has received a subpoena from the Antitrust Division of the Department of Justice regarding possible antitrust violations in the domestic ocean shipping business, and numerous purported class action lawsuits have been filed against the Company. The government investigation and the related antitrust lawsuits could have a material effect on our business.

On April 17, 2008, the Company received a federal grand jury subpoena from the U.S. District Court for the Middle District of Florida seeking information regarding an investigation by the Antitrust Division of the DOJ into possible antritrust violations in the domestic ocean shipping business. The subpoena requires the Company to furnish records and other information with respect to the Company’s ocean shipping business to the DOJ. The Company intends to continue to fully cooperate with the DOJ in its investigation.

Subsequent to the commencement of the DOJ investigation, a number of purported class action lawsuits were filed against the Company and other domestic shipping carriers. Fifty-four cases have been filed in the following federal district courts: eight in the Southern District of Florida, five in the Middle District of Florida, eighteen in the District of Puerto Rico, eleven in the Northern District of California, two in the Central District of California, one in the District of Oregon, eight in the Western District of Washington and one in the District of Alaska. Each of the federal district court cases purports to be on behalf of a class of individuals and entities who purchased domestic ocean shipping services from the various domestic ocean carriers. The complaints allege price-fixing in violation of the Sherman Act and seek treble monetary damages, costs, attorneys’ fees, and an injunction against the allegedly unlawful conduct. In addition, on July 9, 2008, a complaint was filed in the Circuit Court, 4th Judicial Circuit in and for Duval County, Florida, against the Company and other domestic shipping carriers by a customer alleging price fixing in violation of the Florida Antitrust Act and the Florida Deceptive and Unlawful Trade Practices Act. The complaint seeks treble damages, injunctive relief, costs and attorneys’ fees. The case is not brought as a class action.

It is possible that the government investigation may lead to a criminal conviction or settlement providing for the payment of fines. It is also possible that the outcome of the investigation would damage the reputation of the Company and might impair the ability of the Company to conduct its ocean shipping business in one or more of the domestic trade lanes or with one or more of its customers. Further, it is possible that there could be unfavorable outcomes in the class action lawsuits or other proceedings. Management is unable to estimate the amount or range of loss that could result from unfavorable outcomes but, adverse results in legal proceedings could be material to the Company’s results of operations, financial condition or cash flows.

2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

3. Defaults Upon Senior Securities

None.

4. Submission of Matters to a Vote of Security-Holders

None.

5. Other Information

None.

6. Exhibits


10.1		Form of Indemnification Agreement (filed as Exhibit 10.1 to the Company’s report on Form 8-K filed July 18, 2008).

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		3

1. Financial Statements		3

Unaudited Condensed Consolidated Balance Sheets		3

Unaudited Condensed Consolidated Statements of Income		4

Unaudited Condensed Consolidated Statements of Cash Flows		5

Notes to Unaudited Condensed Consolidated Financial Statements		6

2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		20

3. Quantitative and Qualitative Disclosures About Market Risk		37

4. Controls and Procedures		37

Part II. Other Information		38

1. Legal Proceedings		38

1A. Risk Factors		38

2. Unregistered Sales of Equity Securities and Use of Proceeds		39

3. Defaults Upon Senior Securities		39

4. Submission of Matters to a Vote of Security Holders		39

5. Other Information		39

6. Exhibits		39

Signature		40

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
10.1		Form of Indemnification Agreement (filed as Exhibit 10.1 to the Company’s report on Form 8-K filed July 18, 2008).

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.

1.		I have reviewed this report on Form 10-Q of Horizon Lines, Inc.;

2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

	a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	c)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

	a)		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


/s/ CHARLES G. RAYMOND
Charles G. Raymond
President and Chief Executive Officer
(Principal Executive Officer)


/s/ MICHAEL T. AVARA
Michael T. Avara
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)

(1)		The Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934; and

(2)		The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.