A Case Analysis of Horizon Lines Inc. from the Prospective of Financial Decision Management
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I. A summary of the company’s situation
The Horizon Lines, Inc. encountered financial difficulties in the following areas:
The company faced penalties from the legal system due to price fixing, namely market manipulation; a hefty fine of $45 million was imposed.
The Jones Act, namely a government regulation designed out of good will to protect the American maritime industry but unintentionally pushed up the cost of maintenance, labor and building of ships, resulted in a loss of its competitive edge to Horizon’s foreign competitors.
The myopic partnership strategy, i.e. the Maersk Partnership did not foresee the possible shifts/pitfalls in the future. These pitfalls included the increasing price of fuel by as much as 40% and unforeseen overcapacity, which resulted a steep dip in the freight price by as much as 35%.
The optimistic outlook in 2007 led the company to refinance its debts, however, the ensuing litigation and settlement fees put it in a possible default position, the long-term debt stood at $516,323,000 in 2010(exhibit 5). Even if the company can meet its debt obligations, the lawsuits and settlements fettered its cash flow; in 2010 the company started with $6,419,000 but ended with only $2,751,000(exhibit 3). In terms of contractual obligations, when its 4.25% convertible senior notes matured in 2012, Horizon was faced with a total obligation of $638,802,000(exhibit 6).
Attempts to salvage the floundering company included reduction of the labor force and a sellout of some of its operations; however, these were not realized, due to labor protection laws and unfavorable market environment.