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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

   x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2012

 

OR

 

   o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the transition period from              to             

 

Commission file number 001-34187

 

Matson, Inc.

(Exact name of registrant as specified in its charter)

 

Hawaii

 

99-0032630

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

1411 Sand Island Parkway

Honolulu, HI 96819

(Address of principal executive offices and zip code)

 

(808) 848-1211

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

Name of each exchange

Title of each class

 

on which registered

Common Stock, without par value

 

New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

Number of shares of Common Stock outstanding at February 26, 2013: 42,672,456

 

Aggregate market value of Common Stock held by non-affiliates at June 30, 2012:

$1,170,057,488

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  x  No   o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  o No  x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such 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 x    No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File  required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x    No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

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.

 

Large accelerated filer x

 

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 x

 

Documents Incorporated By Reference

 

The following document is incorporated by reference in Part III of the Annual Report on Form 10-K: Proxy statement for the annual meeting of shareholders of Matson, Inc. to be held April 25, 2013

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

PART I

 

 

 

 

Items 1 & 2

Business and Properties

1

 

 

 

A.

Business Description

2

 

(1)

Freight Services

2

 

(2)

Vessels

3

 

(3)

Terminals

5

 

(4)

Logistics and Other Services

5

 

(5)

Competition

5

 

(6)

Rate Regulation

7

 

 

 

 

B.

Employees and Labor Relations

7

 

 

 

C.

Energy

8

 

 

 

D.

Available Information

8

 

 

 

Item 1A.

Risk Factors

9

 

 

 

Item 1B.

Unresolved Staff Comments

15

 

 

 

Item 3.

Legal Proceedings

15

 

 

 

Item 4.

Mine Safety Disclosures

16

 

 

 

PART II

 

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

16

 

 

 

Item 6.

Selected Financial Data

18

 

 

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

 

 

 

 

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Page

 

 

 

Items 7A.

Quantitative and Qualitative Disclosures About Market Risk

33

 

 

 

Item 8.

Financial Statements and Supplementary Data

34

 

 

 

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

72

 

 

 

Item 9A.

Controls and Procedures

72

 

 

 

 

Conclusion Regarding Effectiveness of Disclosure Controls and Procedures

72

 

 

 

 

Internal Control over Financial Reporting

72

 

 

 

Item 9B.

Other Information

72

 

 

 

PART III

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

73

 

 

 

A.

Directors

73

 

 

 

B.

Executive Officers

73

 

 

 

C.

Corporate Governance

73

 

 

 

D.

Code of Ethics

73

 

 

 

Item 11.

Executive Compensation

73

 

 

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

73

 

 

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

73

 

 

 

Item 14.

Principal Accounting Fees and Services

73

 

 

 

PART IV

 

 

 

 

Item 15.

Exhibits and Financial Statement Schedules

74

 

 

 

A.

Financial Statements

74

 

 

 

B.

Financial Statement Schedules

74

 

 

 

C.

Exhibits Required by Item 601 of Regulation S-K

74

 

 

 

Signatures

79

 

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MATSON, INC.

 

FORM 10-K

 

Annual Report for the Fiscal Year

Ended December 31, 2012

 

PART I

 

ITEMS 1. AND 2.  BUSINESS AND PROPERTIES

 

“Matson” or the “Company” means Matson, Inc., a holding company incorporated in January 2012 in the State of Hawaii, together with its primary operating company, Matson Navigation Company, Inc. (“MatNav”), and all of its subsidiaries.  MatNav is a wholly-owned subsidiary of Matson, Inc.

 

Founded in 1882, Matson is a leading U.S. ocean freight carrier in the Pacific. Matson provides a vital lifeline to the island economies of Hawaii, Guam and Micronesia, and operates a premium, expedited service from China to Southern California. The Company’s fleet of 17 vessels includes containerships, combination container and roll-on/roll-off ships and custom-designed barges. Matson Logistics, Inc. (“Matson Logistics” or “Logistics”), a wholly-owned subsidiary of MatNav, was established in 1987 and extends the geographic reach of Matson’s transportation network throughout the continental U.S. and China. Matson Logistics’ integrated, asset-light logistics services include rail intermodal, highway brokerage and warehousing.

 

Ocean Transportation: The ocean transportation segment of Matson’s business, which is conducted through MatNav, is an asset-based business that generates revenue primarily through the carriage of containerized freight between various U.S. Pacific Coast, Hawaii, Guam, Micronesia, China and other Pacific island ports.

 

Also, the Company has a 35 percent ownership interest in SSA Terminals, LLC (“SSAT”) through a joint venture between Matson Ventures, Inc., a wholly-owned subsidiary of MatNav, and SSA Ventures, Inc. (“SSA”), a subsidiary of Carrix, Inc.  SSAT provides terminal and stevedoring services to various international carriers at six terminal facilities on the U.S. Pacific Coast and to MatNav at several of those facilities.  Matson records its share of income in the joint venture in operating expenses within the ocean transportation segment, due to the operations of the joint venture being an integral part of the Company’s business.

 

Logistics: The logistics segment of Matson’s business, which is conducted through Matson Logistics, is an asset-light based business that is a provider of domestic and international rail intermodal service (“Intermodal”), long-haul and regional highway brokerage, specialized hauling, flat-bed and project work, less-than-truckload services, expedited freight services, and warehousing and distribution services (collectively “Highway”).  Warehousing, packaging and distribution services are provided by Matson Logistics Warehousing, Inc. (“Matson Logistics Warehousing”), a wholly-owned subsidiary of Matson Logistics.

 

Separation Transaction: On December 1, 2011, Alexander & Baldwin, Inc., the former parent company of MatNav (the “Former Parent Company”), announced that its Board of Directors unanimously approved a plan to pursue the separation (the “Separation”) of the Former Parent Company to create two independent, publicly traded companies:

 

·                              Matson, a Hawaii-based ocean transportation company serving the U.S. Pacific Coast, Hawaii, Guam, Micronesia and China, and a logistics company; and

 

·                              Alexander & Baldwin, Inc. (“A&B”), a Hawaii-based land company with interests in real estate development, commercial real estate and agriculture.

 

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On February 13, 2012, the Former Parent Company entered into an Agreement and Plan of Merger to reorganize itself by forming a holding company incorporated in Hawaii, Alexander & Baldwin Holdings, Inc. (“Holdings”).  The holding company structure helped facilitate the Separation through the organization and segregation of the assets of the two businesses.  In addition, the holding company reorganization was intended to help preserve the Company’s status as a U.S. citizen under certain U.S. maritime and vessel documentation laws (popularly referred to as the Jones Act) by, amongst other things, limiting the percentage of outstanding shares of common stock in the holding company that may be owned or controlled in the aggregate by non-U.S. citizens to a maximum permitted percentage of 22%.

 

The Separation was completed on June 29, 2012.  In the Separation, the shareholders of Holdings received one share of common stock of A&B for every share of Holdings held of record as of June 18, 2012.  Immediately following the Separation, Alexander & Baldwin Holdings, Inc. changed its name to Matson, Inc.  For accounting purposes, Matson is the successor company to the Former Parent Company.

 

Prior to the completion of the Separation, the Company and A&B entered into a Separation and Distribution Agreement, a Tax Sharing Agreement and an Employee Matters Agreement, each dated June 8, 2012, that govern the post-Separation relationship.  In addition, the Company and A&B entered into a Transition Services Agreement, dated June 8, 2012, under which each company agreed to provide the other with various services on an interim, transitional basis, for up to 24 months.

 

Also in relation to the Separation, intercompany receivables, payables, loans and other accounts between A&B and Matson in existence immediately prior to the Separation, were satisfied and/or settled; and intercompany agreements and all other arrangements in effect immediately prior to the distribution were terminated or canceled, subject to certain exceptions.

 

Matson incurred total cash outflows of $166.2 million in relation to the Separation.  The total cash outflows were made up of three components: capital contribution, capitalized debt financing costs and Separation related expenses referred to as Separation costs in the Consolidated Statements of Income and Comprehensive Income.  The Separation related expenses of $8.6 million and capitalized debt financing costs of $1.9 million are reported under the cash flows provided by operating activities from continuing operations and cash flows used in financing activities from continuing operations, respectively, since these costs do not qualify as discontinued operations.

 

The breakdown of Separation cash outflows were as follows (in millions):

 

 

 

Separation Cash Outflows

 

Capital contribution to A&B

 

$

155.7

 

Separation costs

 

8.6

 

Capitalized debt financing costs

 

1.9

 

Total cash outflow related to the Separation

 

$

166.2

 

 

A.            BUSINESS DESCRIPTION

 

(1)           Freight Services

 

Matson’s Hawaii Service offers ocean freight services (lift-on/lift-off, roll-on/roll-off and conventional services) between the ports of Long Beach, Oakland, Seattle, and the major ports in Hawaii on the islands of Oahu, Kauai, Maui and Hawaii.  Matson is the principal carrier of ocean cargo between the U.S. Pacific Coast and Hawaii.  Principal westbound cargoes carried by Matson to Hawaii include dry containers of mixed commodities, refrigerated commodities, packaged foods, building materials, automobiles and household goods.  Principal eastbound cargoes carried by Matson from Hawaii include automobiles, household goods, dry containers of mixed commodities, food and beverages and livestock.  The majority of Matson’s Hawaii Service revenue is derived from the westbound carriage of containerized freight and automobiles.

 

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Matson’s China Service is part of an integrated Hawaii/Guam/China service.  This service employs five Matson containerships in a weekly service that carries cargo from the U.S. Pacific Coast to Honolulu, then to Guam.  The vessels continue to the ports of Xiamen, Ningbo and Shanghai in China, where they are loaded with cargo to be discharged in Long Beach.  These ships also carry cargo destined to and originating from the Guam and Micronesia Services.  For parts of 2011and 2010, Matson operated a second vessel string that employed five chartered containerships in a weekly service that carried cargo from the U.S. Pacific Coast directly to the ports of Hong Kong, Yantian and Shanghai in China, where they also loaded cargo to be discharged in Long Beach.  Operation of the second vessel string was terminated in the third quarter of 2011.

 

Matson’s Guam Service provides weekly container and conventional freight services between the U.S. Pacific Coast and Guam.  Additional freight destined to and from the Commonwealth of the Marianas Islands, the Republic of Palau and the island of Yap in the Federated States of Micronesia is transferred at Guam to and from connecting carriers for delivery to and from those locations.

 

Matson’s Micronesia Service offers container and conventional freight service between the U.S. Pacific Coast and the islands of Kwajalein, Ebeye and Majuro in the Republic of the Marshall Islands and the islands of Pohnpei, Chuuk and Kosrae in the Federated States of Micronesia.  Cargo destined for these islands is transshipped through Guam.  In the fourth quarter of 2012, this transshipment service was expanded from one ship to three ships, with Matson maintaining the charter of the one ship and developing a connecting carrier agreement with the owner of the other two vessels. This vessel expansion allowed Matson to maintain a bi-weekly service while expanding its geographic reach to include Japan and Korea.

 

In January 2013, Matson purchased the primary assets of the former Reef Shipping Company, a South Pacific ocean carrier based in Auckland, New Zealand.  Matson has named its new business “Matson South Pacific,” which will transport freight between New Zealand and other South Pacific Islands, such as Fiji, Samoa, American Samoa, Tonga and Cook Islands.

 

See “Rate Regulation” below for a discussion of Matson’s freight rates.

 

(2)           Vessels

 

The Matson-owned fleet consists of 17 vessels representing an investment of approximately $1.2 billion: ten containerships; three combination container/roll-on/roll-off ships; one roll-on/roll-off barge and two container barges equipped with cranes that serve the Neighbor Islands of Hawaii; and one container barge equipped with cranes that is available for charter.  The majority of vessels in the Matson fleet have been acquired with the assistance of withdrawals from a Capital Construction Fund (“CCF”) established under Section 607 of the Merchant Marine Act.

 

As a complement to its fleet, as of December 31, 2012, ocean transportation owned approximately 33,500 containers, 13,800 container chassis and generators, 900 auto-frames and miscellaneous other equipment. Capital expenditures incurred by ocean transportation in 2012 for vessels, equipment and systems totaled approximately $37.0 million.

 

Vessels owned by Matson as of December 31, 2012 are described below.

 

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MATSON NAVIGATION COMPANY, INC.

OWNED FLEET

 

 

 

 

 

 

 

 

 

 

 

 

 

Usable Cargo Capacity

 

 

 

 

 

 

 

 

 

Maximum

 

Maximum

 

Containers

 

Vehicles

 

Molasses

 

 

 

Official

 

Year

 

 

 

Speed

 

Deadweight

 

Reefer

 

 

 

 

 

 

 

 

 

Vessel Name

 

Number

 

Built

 

Length

 

(Knots)

 

(Long Tons)

 

Slots

 

TEUs(1)

 

Autos

 

Trailers

 

Short Tons

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diesel-Powered Ships

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MAUNALEI

 

1181627

 

2006

 

681’ 1”

 

22.1

 

33,771

 

328

 

1,992

 

 

 

 

MANULANI

 

1168529

 

2005

 

712’ 0”

 

23.0

 

29,517

 

284

 

2,378

 

 

 

 

MAUNAWILI

 

1153166

 

2004

 

711’ 9”

 

23.0

 

29,517

 

284

 

2,378

 

 

 

 

MANUKAI

 

1141163

 

2003

 

711’ 9”

 

23.0

 

29,517

 

284

 

2,378

 

 

 

 

R. J. PFEIFFER

 

979814

 

1992

 

713’ 6”

 

23.0

 

27,100

 

300

 

2,245

 

 

 

 

MOKIHANA

 

655397

 

1983

 

860’ 2”

 

23.0

 

29,484

 

354

 

1,994

 

1,323

 

38

 

 

MANOA

 

651627

 

1982

 

860’ 2”

 

23.0

 

30,187

 

408

 

2,824

 

 

 

3,000

 

MAHIMAHI

 

653424

 

1982

 

860’ 2”

 

23.0

 

30,167

 

408

 

2,824

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Steam-Powered Ships

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

KAUAI

 

621042

 

1980

 

720’ 5-1/2”

 

22.5

 

26,308

 

276

 

1,644

 

44

 

 

2,600

 

MAUI

 

591709

 

1978

 

720’ 5-1/2”

 

22.5

 

26,623

 

270

 

1,644

 

 

 

2,600

 

MATSONIA

 

553090

 

1973

 

760’ 0”

 

21.5

 

22,501

 

258

 

1,727

 

450

 

85

 

4,300

 

LURLINE

 

549900

 

1973

 

826’ 6”

 

21.5

 

22,213

 

246

 

1,646

 

761

 

55

 

2,100

 

LIHUE

 

530137

 

1971

 

787’ 8”

 

21.0

 

38,656

 

188

 

2,018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Barges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

WAIALEALE (2)

 

978516

 

1991

 

345’ 0”

 

 

5,621

 

36

 

 

230

 

45

 

 

MAUNA KEA (3)

 

933804

 

1988

 

372’ 0”

 

 

6,837

 

70

 

379

 

 

 

 

MAUNA LOA (3)

 

676973

 

1984

 

350’ 0”

 

 

4,658

 

78

 

335

 

 

 

2,100

 

HALEAKALA (3)

 

676972

 

1984

 

350’ 0”

 

 

4,658

 

78

 

335

 

 

 

2,100

 

 


(1)          “Twenty-foot Equivalent Units” (including trailers). TEU is a standard measure of cargo volume correlated to the volume of a standard 20-foot dry cargo container.

(2)          Roll-on/Roll-off Barge.

(3)          Container Barge.

 

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(3)           Terminals

 

Matson Terminals, Inc. (“Matson Terminals”), a wholly-owned subsidiary of MatNav, provides container stevedoring, container equipment maintenance and other terminal services for Matson and other ocean carriers at its 105-acre marine terminal in Honolulu.  Matson Terminals owns and operates seven cranes at the terminal, which handled approximately 327,900 lifts in 2012 (compared with 355,900 lifts in 2011).  The number of lifts decreased primarily due to the dry-docking of two of the Neighbor Island barges in 2012.  The terminal can accommodate three vessels at one time.  Matson Terminals’ lease with the State of Hawaii runs through September 2016.  Matson Terminals also provides container stevedoring and other terminal services to Matson and other vessel operators on the islands of Hawaii, Maui and Kauai.

 

SSAT provides terminal and stevedoring services to various international carriers at six terminal facilities on the U.S. Pacific Coast and to MatNav at several of those facilities.  Matson records its share of income in the joint venture in operating expenses within the ocean transportation segment, due to the nature of the business.

 

(4)           Logistics and Other Services

 

Matson Logistics, Inc., a wholly-owned subsidiary of MatNav, is a transportation intermediary that provides rail, highway, warehousing and other third-party logistics services for North American customers and international ocean carrier customers, including Matson.  Through volume purchases of rail, motor carrier and ocean transportation services, augmented by such services as shipment tracking and tracing and single-vendor invoicing, Matson Logistics is able to reduce transportation costs for its customers.  Matson Logistics is headquartered in Concord, California, operates seven regional operating centers, including one in China, has sales offices in over 35 cities nationwide and operates through a network of agents throughout the U.S. Mainland.

 

Matson Logistics Warehousing principally provides warehousing and distribution services in Northern and Southern California and Savannah, Georgia.  Through Matson Logistics Warehousing, Matson Logistics provides its customers with a full suite of rail, highway, warehousing and distribution services.  In addition, Matson Logistics provides freight forwarding, consolidation, customs brokerage, purchase order management and Non Vessel Operating Common Carrier services through its supply chain segment.

 

(5)           Competition

 

Matson’s Hawaii Service has one major containership competitor, Horizon Lines, Inc., that serves Long Beach, Oakland, Tacoma and Honolulu.  The Hawaii Service also has one additional liner competitor, Pasha Hawaii Transport Lines, LLC that operates a roll-on/roll-off ship, specializing in the carriage of automobiles, large pieces of rolling stock, such as trucks and buses, as well as to a lesser extent household goods and containers.  Foreign-flag vessels carrying cargo to Hawaii from non-U.S. locations also provide competition for Matson’s Hawaii Service. Asia, Australia, New Zealand, and South Pacific islands have direct foreign-flag services to Hawaii.  Mexico, South America and Europe have indirect foreign-flag services to Hawaii.  Other competitors in the Hawaii Service include two common carrier barge services, unregulated proprietary and contract carriers of bulk cargoes, and air cargo service providers.  Air freight competition for time-sensitive and perishable cargoes exists; however, inroads by such competition in terms of cargo volume are limited by the amount of cargo space available in passenger aircraft and by generally higher air freight rates.  Over the years, additional barge competitors periodically have entered and left the U.S.-Hawaii trades, mostly from the Pacific Northwest.

 

Matson’s Guam Service had one major competitor, Horizon Lines, Inc., until November 2011 when Horizon Lines ended its service to that area.  Several foreign carriers also serve Guam with less frequent service, along with Waterman Steamship Corporation, a U.S.-flagged carrier, which periodically calls at Guam.

 

Matson vessels are operated on schedules that provide shippers and consignees regular day-of-the-week sailings from the U.S. Pacific Coast and day-of-the-week arrivals in Hawaii.  Matson generally offers an average of three westbound sailings per week, though this amount may be adjusted according to seasonal demand and market conditions.  Matson provides over 150 westbound sailings per year, which is greater than its entire domestic ocean competitors’ sailings combined.  One westbound sailing each week continues on to Guam and China, so the number

 

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of eastbound sailings from Hawaii to the U.S. Mainland averages two per week with the potential for additional sailings.  This service is attractive to customers because more frequent arrivals permit customers to reduce inventory costs.  Matson also competes by offering a more comprehensive service to customers, supported by the scope of its equipment, its efficiency and experience in handling cargoes of all types, and competitive pricing.

 

During 2012, approximately 65% of Matson’s revenues generated by ocean services came from trades that were subject to the Jones Act. The carriage of cargo between the U.S. Pacific Coast and Hawaii on foreign-built or foreign-documented vessels is prohibited by Section 27 of the Merchant Marine Act, 1920, commonly referred to as the Jones Act. The Jones Act is a long-standing cornerstone of U.S. maritime policy. Under the Jones Act, all vessels transporting cargo between covered U.S. ports must, subject to limited exceptions, be built in the U.S., registered under the U.S. flag, manned by predominantly U.S. crews, and owned and operated by U.S.-organized companies that are controlled and 75% owned by U.S. citizens. U.S.-flagged vessels are generally required to be maintained at higher standards than foreign-flagged vessels and are supervised by, as well as subject to rigorous inspections by, or on behalf of, the U.S. Coast Guard, which requires appropriate certifications and background checks of the crew members. Our trade route between Hawaii and the U.S. Pacific Coast represents the non-contiguous Jones Act market. Vessels operating on this trade route are required to be fully qualified Jones Act vessels. Other U.S. maritime laws require vessels operating between Guam, a U.S. territory, and U.S. ports to be U.S.-flagged and predominantly U.S.-crewed, but not U.S.-built.

 

Matson is a member of the American Maritime Partnership, which supports the retention of the Jones Act that regulates the transport of goods between U.S. ports. Cabotage laws, which reserve the right to ship cargo between domestic ports to domestic vessels, are not unique to the United States; similar laws are common around the world and exist in over 50 countries. In general, all interstate and intrastate marine commerce within the U.S. falls under the Jones Act, which is a cabotage law. As an island economy, Hawaii is highly dependent on ocean transportation. The Jones Act ensures frequent, reliable, roundtrip service to keep store shelves stocked, reduces inventory costs and helps move local products to market. The Company believes the Jones Act enjoys broad support from President Obama and both major political parties in both houses of Congress. The Company believes that the ongoing war on terrorism has further solidified political support for the Jones Act, as a vital and dedicated U.S. merchant marine is a cornerstone for a strong homeland defense, as well as a critical source of trained U.S. mariners for wartime support. Repeal of the Jones Act would allow foreign-flag vessel operators, which do not have to abide by U.S. laws and regulations, to sail between U.S. ports in direct competition with Matson and other U.S. operators, which must comply with such laws and regulations. The American Maritime Partnership seeks to inform elected officials and the public about the economic, national security, commercial, safety and environmental benefits of the Jones Act and similar cabotage laws.

 

Matson has operated its China Long Beach Express Service, CLX1, since February 2006.  Matson provides weekly containership service between the ports of Xiamen, Ningbo and Shanghai and the port of Long Beach.  En route to China, the ships stop at Honolulu, then Guam, carrying cargo destined to those areas.  From Honolulu, connecting service is provided to other ports in Hawaii.  From Guam, connecting service is provided to other Pacific islands.  The ships then continue from Guam to the ports of Xiamen, Ningbo and Shanghai, and return directly to Long Beach.  Matson operated a second China Long Beach Express Service, CLX2, between August 2010 and September 2011 when this service was terminated.  Major competitors in the China Service include large international carriers such as Maersk, COSCO, Evergreen, Hanjin, APL, China Shipping, Hyundai, MSC, OOCL, “K” Line and NYK Line.  Matson competes by offering fast and reliable freight availability from Shanghai to Long Beach, using its newest and most fuel efficient ships, providing fixed day arrivals in Long Beach and next-day cargo availability.  Matson’s service is further differentiated by offering a dedicated Long Beach terminal providing fast truck turn times, an off-dock container yard and one-stop intermodal connections, and providing state-of-the-art technology and world-class customer service.  Matson has offices in Hong Kong, Xiamen, Ningbo and Shanghai, and has contracted with terminal operators in Xiamen, Ningbo and Shanghai.

 

Matson Logistics competes with hundreds of local, regional, national and international companies that provide transportation and third-party logistics services. The industry is highly fragmented and, therefore, competition varies by geography and areas of service. Matson Logistics competes most directly with C.H. Robinson Worldwide, the Hub Group, and other large freight brokers and intermodal marketing companies. Competition is differentiated by the depth, scale and scope of customer relationships; vendor relationships and rates; network capacity; and real-time visibility into the movement of customers’ goods and other technology solutions. Additionally, while Matson Logistics primarily provides surface transportation brokerage, it also competes to a lesser degree with other forms of transportation for the movement of cargo, including air services.

 

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(6)          Rate Regulation

 

Matson is subject to the jurisdiction of the Surface Transportation Board with respect to its domestic rates.  A rate in the noncontiguous domestic trade is presumed reasonable and will not be subject to investigation if the aggregate of increases and decreases is not more than 7.5 percent above, or more than 10 percent below, the rate in effect one year before the effective date of the proposed rate, subject to increase or decrease by the percentage change in the U.S. Producer Price Index (“zone of reasonableness”).  Matson raised its rates in its Hawaii service, effective January 1, 2012 and again January 1, 2013, by $175 per westbound container and $85 per eastbound container and its terminal handling charges by $50 per westbound container and $25 per eastbound container.  Matson did not implement a general rate increase in its Guam Service in 2012 or 2013 but did raise the Guam terminal handling charge in both years. Rising fuel-related costs caused Matson to raise its fuel-related surcharge from 40.5 percent to 45.5 percent in its Hawaii service effective February 26, 2012.  Because of increasing container volume related to the recent exit of a key competitor, Matson did not increase its fuel-related surcharge for its Guam Service at that time, keeping it at 42.0 percent.  Declines in fuel costs caused Matson to reduce its fuel-related surcharge to 42.0 percent in its Hawaii service and 38.5 percent in its Guam service, effective June 17, 2012.  Declines in fuel costs continued, and Matson further reduced its fuel-related surcharge to 39.0 percent in its Hawaii service and to 35.5 percent in its Guam service, effective July 15, 2012.  After that, fuel prices and fuel-related costs began rising substantially, and Matson raised its fuel-related surcharge to 43.5 percent in its Hawaii service and 40.0 percent in its Guam service, effective October 7, 2012.  Matson’s China Service is subject to the jurisdiction of the Federal Maritime Commission (“FMC”).  No such zone of reasonableness applies under FMC regulation.

 

B.            Employees and Labor Relations

 

As of December 31, 2012, Matson and its subsidiaries had approximately 1,068 employees.  Approximately 23 percent were covered by collective bargaining agreements with unions, with less than one percent of Matson employees covered by bargaining agreements expiring in 2013.

 

At December 31, 2012, the active Matson fleet employed seagoing personnel in 203 billets.  Each billet corresponds to a position on a ship that typically is filled by two or more employees because seagoing personnel rotate between active sea duty and time ashore.

 

Matson’s seagoing employees are represented by six unions, three representing unlicensed crew members and three representing licensed crew members.  Matson negotiates directly with these unions.  Matson’s agreements with the Seafarer’s International Union, the Sailors Union of the Pacific and the Marine Firemen’s Union were renewed in mid-2008 through June 2013. Contracts that Matson has with the American Radio Association were renewed in mid-2009 through August 15, 2013.  Contracts that Matson has with the Masters, Mates & Pilots will expire on August 15, 2023 for thirteen vessels and on August 15, 2018 for one managed vessel, and Matson’s contract with the Marine Engineers Beneficial Association will expire on August 15, 2018.

 

The absence of strikes and the availability of labor through hiring halls are important to the maintenance of profitable operations by Matson.  In the last 40 years, only once in 2002 when International Longshore and Warehouse Union (“ILWU”) workers were locked out for ten days on the U.S. Pacific Coast has Matson’s operations been disrupted significantly by labor disputes.

 

SSAT, the previously-described joint venture of Matson and SSA, provides stevedoring and terminal services for Matson vessels calling at U.S. Pacific Coast ports.  Matson, SSA and SSAT are members of the Pacific Maritime Association (“PMA”) which, on behalf of its members, negotiates collective bargaining agreements with the ILWU on the U.S. Pacific Coast.  A six-year PMA/ILWU Master Contract, which covers all Pacific Coast longshore labor, was negotiated in 2008 and will expire on June 30, 2014.  Matson Terminals provides stevedoring and terminal services to Matson and other vessel operators calling at Honolulu and on the islands of Hawaii, Maui and Kauai.  Matson Terminals is a member of the Hawaii Stevedore Industry Committee, which negotiates with the ILWU in Hawaii on behalf of its members.  In 2008, Matson signed six-year agreements with each of the ILWU units, which will expire on June 30, 2014.

 

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During 2010, Matson maintained its collective bargaining agreements with ILWU clerical workers in Honolulu and Oakland, which are in effect through June 2014.  The bargaining agreement with ILWU clerical workers in Long Beach was renegotiated in 2010 for another three-year period.  Matson expects to renegotiate a new agreement before expiration on June 30, 2013.  The health & welfare and pension provisions were not renegotiated; however, the parties agreed to match the provisions that are negotiated between the ILWU clerical workers in Long Beach and the other employers.  These employers reached a new five-year agreement in December 2012 that was ratified by the ILWU clerical workers membership in February 2013, and will expire on June 30, 2017.

 

During 2012, Matson contributed to multiemployer pension plans for vessel crews.  If Matson were to withdraw from or significantly reduce its obligation to contribute to any one of the plans, Matson would review and evaluate data, actuarial assumptions, calculations and other factors used in determining its withdrawal liability, if any.  If any third parties materially disagree with Matson’s determination, Matson would pursue the various means available to it under federal law for the adjustment or removal of its withdrawal liability.  Also, Matson participates in a multiemployer pension plan for its office clerical workers in Long Beach.  Matson Terminals participates in two multiemployer pension plans for its Hawaii ILWU non-clerical employees.  For a discussion of withdrawal liabilities under the Hawaii longshore and seagoing plans, see Note 8 (“Employee Benefit Plans”) to Matson’s consolidated financial statements in Item 8 of Part II below.

 

C.            Energy

 

Matson purchases residual fuel oil, lubricants, gasoline and diesel fuel for its operations and also pays fuel surcharges to drayage providers and rail carriers.  Residual fuel oil is by far Matson’s largest energy-related expense.  In 2012, Matson used approximately 1.9 million barrels of residual fuel oil for its vessels, compared with 2.5 million barrels in 2011 (which included fuel for Matson’s CLX2 service that was discontinued in the third quarter of 2011) at an average price of $109.41 and $101.19 for the years ended December 31, 2012 and 2011, respectively.

 

D.            Available Information

 

Matson files reports with the Securities and Exchange Commission (the “SEC”).  The reports and other information filed include: annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other reports and information filed under the Securities Exchange Act of 1934 (the “Exchange Act”).

 

The public may read and copy any materials Matson files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549.  The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  The SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding Matson and other issuers that file electronically with the SEC.  The address of that website is www.sec.gov.

 

Matson makes available, free of charge on or through its Internet website, Matson’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the SEC.  The address of Matson’s Internet website is www.matson.com.

 

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ITEM 1A.  RISK FACTORS

 

Matson’s business faces the risks set forth below, which may adversely affect our business, financial condition and operating results.  All forward-looking statements made by the Company or on the Company’s behalf are qualified by the risks described below.

 

Risks Relating To Operations

 

Changes in U.S., global, or regional economic conditions that result in a further decrease in consumer confidence or market demand for the Company’s services and products in Hawaii, the U.S. Mainland, Guam, Asia or South Pacific may adversely affect the Company’s financial position, results of operations, liquidity, or cash flows.

 

A continuation or further weakening of the U.S., Guam, Asian, South Pacific or global economies may adversely impact the level of freight volumes and freight rates. Within the U.S., a further weakening of economic drivers in Hawaii, which include tourism, military spending, construction starts, personal income growth, and employment, or the further weakening of consumer confidence, market demand or the economy in the U.S. Mainland, may further reduce the demand for goods to and from Hawaii and Asia, travel to Hawaii and domestic transportation of goods, adversely affecting inland and ocean transportation volumes or rates.  In addition, overcapacity in the global or transpacific ocean transportation markets or a change in the cost of goods or currency exchange rates may adversely affect freight volumes and rates in the Company’s China service.

 

In addition, the Company could be impacted by the possible impact of cuts to federal programs, including Defense Department programs, as result of a federal sequestration scheduled to take place in March, 2013.  The Budget Control Act could impose an estimated $1.2 trillion in future federal spending cuts if budget deficit targets are not achieved. While Congress is discussing various options to prevent or defer sequestration, we cannot predict whether any such efforts will succeed. The impact of sequestration on our carriage of military cargo is unknown; however, it is possible that a funding delay could have a material adverse impact on our business, financial condition and results of operations.

 

The Company may face new or increased competition.

 

The Company may face new competition by established or start-up shipping operators that enter the Company’s markets.  The entry of a new competitor or the addition of ships or capacity by existing competition on any of the Company’s routes could result in a significant increase in available shipping capacity that could have an adverse effect on volumes and rates.

 

One current competitor, Pasha Hawaii Transport Lines, announced that it intends to place a second ship into its Hawaii service as early as 2014.  The extent of this market entry, in terms of sailing frequency, service reliability, slot availability, cargo configuration and service differentiation, is unknown.  However, there may be a period of competitive disruption impacting rates and volumes following this market entry that would impact all carriers in the Hawaii trade, including Matson.

 

The loss of or damage to key vendor, agent and customer relationships may adversely affect the Company’s business.

 

The Company’s businesses are dependent on their relationships with key vendors, agents and customers, and derive a significant portion of their revenues from the Company’s largest customers. The Company’s business relies on its relationships with the military, freight forwarders, large retailers and consumer goods and automobile manufacturers, as well as other larger customers. Relationships with railroads and shipping companies and agents are important in the Company’s intermodal business. For 2012, the Company’s ocean transportation business’ ten largest customers accounted for approximately 23 percent of the business’ revenue.  For 2012, the Company’s logistics business’ ten largest customers accounted for approximately 26 percent of the business’ revenue. The loss of or damage to any of these key relationships may adversely affect the Company’s business and revenue.

 

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An increase in fuel prices, or changes in the Company’s ability to collect fuel surcharges, may adversely affect the Company’s profits.

 

Fuel is a significant operating expense for the Company’s ocean transportation business.  The price and supply of fuel are unpredictable and fluctuate based on events beyond the Company’s control.  Increases in the price of fuel may adversely affect the Company’s results of operations based on market and competitive conditions. Increases in fuel costs also can lead to other expense increases, through, for example, increased costs of energy and purchased transportation services.  In the Company’s ocean transportation and logistics services segments, the Company is able to utilize fuel surcharges to partially recover increases in fuel expense, although increases in the fuel surcharge may adversely affect the Company’s competitive position and may not correspond exactly with the timing of increases in fuel expense. Changes in the Company’s ability to collect fuel surcharges may adversely affect its results of operations.

 

Work stoppages or other labor disruptions by the unionized employees of the Company or other companies in related industries may adversely affect the Company’s operations.

 

As of December 31, 2012, the Company had approximately 1,068 regular full-time employees, of which approximately 23 percent were covered by collective bargaining agreements with unions. The Company could be adversely affected by actions taken by employees of the Company or other companies in related industries against efforts by management to control labor costs, restrain wage or benefits increases or modify work practices. Strikes and disruptions may occur as a result of the failure of the Company or other companies in its industry to negotiate collective bargaining agreements with such unions successfully.

 

The Company is susceptible to weather and natural disasters.

 

The Company’s operations are vulnerable to disruption as a result of weather and natural disasters such as bad weather at sea, hurricanes, typhoons, tsunamis, floods and earthquakes. Such events will interfere with the Company’s ability to provide on-time scheduled service, resulting in increased expenses and potential loss of business associated with such events.  In addition, severe weather and natural disasters can result in interference with the Company’s terminal operations, and may cause serious damage to its vessels, loss or damage to containers, cargo and other equipment, and loss of life or physical injury to its employees, all of which could have an adverse effect on the Company’s business.

 

The Company maintains casualty insurance under policies it believes to be adequate and appropriate. These policies are generally subject to large retentions and deductibles. Some types of losses, such as losses resulting from a port blockage, generally are not insured. In some cases the Company retains the entire risk of loss because it is not economically prudent to purchase insurance coverage or because of the perceived remoteness of the risk. Other risks are uninsured because insurance coverage may not be commercially available. Finally, the Company retains all risk of loss that exceeds the limits of its insurance.

 

The Company’s significant operating agreements and leases could be replaced on less favorable terms or may not be replaced.

 

The significant operating agreements and leases of the Company in its various businesses expire at various points in the future and may not be replaced or could be replaced on less favorable terms, thereby adversely affecting the Company’s future financial position, results of operations and cash flows.

 

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Interruption or failure of the Company’s information technology and communications systems could impair the Company’s ability to operate and adversely affect its business.

 

The Company is highly dependent on information technology systems. These dependencies include accounting, billing, disbursement, cargo booking and tracking, vessel scheduling and stowage, equipment tracking, customer service, banking, payroll and employee communication systems. All information technology and communication systems are subject to reliability issues, integration and compatibility concerns, and security-threatening intrusions.  The Company may experience failures caused by the occurrence of a natural disaster, computer hacking or viruses or other unanticipated problems at the Company’s facilities. Any failure of the Company’s systems could result in interruptions in its service or production, reductions in its revenue and profits and damage to its reputation.

 

Loss of the Company’s key personnel could adversely affect its business.

 

The Company’s future success will depend, in significant part, upon the continued services of its key personnel, including its senior management and skilled employees. The loss of the services of key personnel could adversely affect the Company’s future operating results because of such employee’s experience and knowledge of the Company’s business and customer relationships. If key employees depart, the Company may have to incur significant costs to replace them, and the Company’s ability to execute its business model could be impaired if it cannot replace them in a timely manner. The Company does not expect to maintain key person insurance on any of its key personnel.

 

The Company is involved in a joint venture and is subject to risks associated with joint venture relationships.

 

The Company is involved in the SSAT joint venture, and may initiate future joint venture projects. A joint venture involves certain risks such as:

 

·      the Company may not have voting control over the joint venture;

·      the Company may not be able to maintain good relationships with its venture partners;

·      the venture partner at any time may have economic or business interests that are inconsistent with the Company’s;

·      the venture partner may fail to fund its share of capital for operations, or to fulfill its other commitments, including providing accurate and timely accounting and financial information to the Company;

·      the joint venture or venture partner could lose key personnel; and

·      the venture partner could become bankrupt, requiring the Company to assume all risks and capital requirements related to the joint venture project, and the related bankruptcy proceedings could have an adverse impact on the operation of the partnership or joint venture.

 

In addition, the Company relies on the SSAT joint venture for its stevedoring services on the West Coast of the U.S. market.

 

The Company is subject to risks associated with conducting business in a foreign shipping market.

 

Matson’s China, Micronesia and South Pacific services are subject to risks associated with conducting business in a foreign shipping market, which include:

 

·      challenges in operating in foreign countries and doing business and developing relationships with foreign companies;

·      difficulties in staffing and managing foreign operations;

·      U.S. and foreign legal and regulatory restrictions, including compliance with the Foreign Corrupt Practices Act and foreign laws that prohibit corrupt payments to government officials;

·      global vessel overcapacity that may lead to decreases in volumes and shipping rates;

·      competition with established and new carriers;

·      currency exchange rate fluctuations;

·      political and economic instability;

·      protectionist measures that may affect the Company’s operation of its wholly-owned foreign enterprise; and

·      challenges caused by cultural differences.

 

Any of these risks has the potential to adversely affect the Company’s operating results.

 

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The Company’s logistics segment is dependent upon third parties for equipment, capacity and services essential to operate the Company’s logistics business, and if the Company fails to secure sufficient third party services, its business could be adversely affected.

 

The Company’s logistics segment is dependent upon rail, truck and ocean transportation services provided by independent third parties. If the Company cannot secure sufficient transportation equipment, capacity or services from these third parties at a reasonable rate to meet its customers’ needs and schedules, customers may seek to have their transportation and logistics needs met by other third parties on a temporary or permanent basis. As a result, the Company’s business, consolidated results of operations and financial condition could be adversely affected.

 

The Company is subject to risks related to a marine accident or spill event.

 

The Company’s vessel operations could be faced with a maritime accident, oil spill, or other environmental mishap. Such event may lead to personal injury, loss of life, damage of property, pollution and suspension of operations. As a result, such event could have an adverse effect on the Company’s business.

 

Acquisitions may have an adverse effect on the Company’s business.

 

The Company’s growth strategy includes expansion through acquisitions.  Acquisitions may result in difficulties in assimilating acquired assets or companies, and may result in the diversion of the Company’s capital and its management’s attention from other business issues and opportunities. The Company may not be able to integrate companies that it acquires successfully, including their personnel, financial systems, distribution, operations and general operating procedures. The Company may also encounter challenges in achieving appropriate internal control over financial reporting in connection with the integration of an acquired company. The Company may pay a premium for an acquisition, resulting in goodwill that may later be determined to be impaired, adversely affecting the Company’s financial condition and results of operations.

 

Heightened security measures, war, actual or threatened terrorist attacks, efforts to combat terrorism and other acts of violence may adversely impact the Company’s operations and profitability.

 

War, terrorist attacks and other acts of violence may cause consumer confidence and spending to decrease, or may affect the ability or willingness of tourists to travel to Hawaii, thereby adversely affecting Hawaii’s economy and the Company.  Additionally, future terrorist attacks could increase the volatility in the U.S. and worldwide financial markets. Acts of war or terrorism may be directed at the Company’s shipping operations, or may cause the U.S. government to take control of Matson’s vessels for military operation.  Heightened security measures potentially slow the movement and increase the cost of freight through U.S. or foreign ports, across borders or on U.S. or foreign railroads or highways and could adversely affect the Company’s business and results of operations.

 

The Separation may expose us or our shareholders to significant liabilities, or prevent us from undertaking certain desirable transactions.

 

The Company and A&B entered into a number of agreements in connection with the Separation that set forth certain rights and obligations of the parties post-Separation, including a Separation and Distribution Agreement, a Tax Sharing Agreement, an Employee Matters Agreement and a Transition Services Agreement. The Company possesses certain rights under those agreements, including indemnification rights from certain liabilities allocated to A&B. The failure of A&B to perform its obligations under the Separation related agreements could have an adverse effect on the Company’s financial condition, results of operations and cash flows.  In addition, the Company received a private letter ruling from the Internal Revenue Service (“IRS”), as well as an opinion from Skadden, Arps, Slate, Meagher & Flom LLP (which opinion relies on the effectiveness of the IRS ruling), substantially to the effect that, among other things, the Separation and the distribution of shares, taken together, will qualify as a

 

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reorganization under Section 368(a)(1)(D) of the Internal Revenue Code. If there is a determination that the Separation and the distribution is taxable for U.S. federal income tax purposes, we, A&B, and their respective investors could become subject to significant tax and other liabilities and costs.  In addition, in order to preserve the tax free nature of the Separation, the parties have agreed not to issue equity securities representing 50 percent or more of their equity interests, acquire businesses or assets by issuing securities representing 50 percent or more of their equity interests or become parties to mergers or asset transfers that could jeopardize the tax-free status of the Separation.

 

Risks Relating to Financial Matters

 

A deterioration of the Company’s credit profile or disruptions of the credit markets could restrict its ability to access the debt capital markets or increase the cost of debt.

 

Deterioration in the Company’s credit profile may ultimately have an adverse effect on the Company’s ability to access the private or public debt markets and also may increase its borrowing costs.  If the Company’s credit profile deteriorates significantly, its access to the debt capital markets or its ability to renew its committed lines of credit may become restricted, or the Company may not be able to refinance debt at the same levels or on the same terms. Because the Company relies on its ability to draw on its revolving credit facilities to support its operations, when required, any volatility in the credit and financial markets that prevents the Company from accessing funds (for example, a lender that does not fulfill its lending obligation) could have an adverse effect on the Company’s financial condition and cash flows. Additionally, the Company’s credit agreements generally include an increase in borrowing rates if the Company’s credit profile deteriorates. Furthermore, the Company incurs interest under its revolving credit facilities based on floating rates. Floating rate debt creates higher debt service requirements if market interest rates increase, which would adversely affect the Company’s cash flow and results of operations.

 

Failure to comply with certain restrictive financial covenants contained in the Company’s credit facilities could preclude the payment of dividends, impose restrictions on the Company’s business segments, capital resources or other activities or otherwise adversely affect the Company.

 

The Company’s credit facilities contain certain restrictive financial covenants, the most restrictive of which include the maintenance of minimum shareholders’ equity levels, a maximum ratio of debt to earnings before interest, depreciation, amortization, and taxes, and the maintenance of no more than a maximum amount of priority debt as a percentage of consolidated tangible assets. If the Company does not maintain the required covenants, and that breach of covenants is not cured timely or waived by the lenders, resulting in default, the Company’s access to credit may be limited or terminated, dividends may be suspended, and the lenders could declare any outstanding amounts due and payable. The Company’s continued ability to borrow under its credit facilities is subject to compliance with these financial and other non-financial covenants.

 

Changes in the value of pension assets, or a change in pension law or key assumptions, may adversely affect the Company’s financial performance.

 

The amount of the Company’s employee pension and post-retirement benefit costs and obligations are calculated on assumptions used in the relevant actuarial calculations. Adverse changes in any of these assumptions due to economic or other factors, changes in discount rates, higher health care costs, or lower actual or expected returns on plan assets, may adversely affect the Company’s operating results, cash flows, and financial condition. In addition, a change in federal law, including changes to the Employee Retirement Income Security Act or Pension Benefit Guaranty Corporation premiums, may adversely affect the Company’s single-employer and multiemployer pension plans and plan funding.  These factors, as well as a decline in the fair value of pension plan assets, may put upward pressure on the cost of providing pension and medical benefits and may increase future pension expense and required funding contributions. Although the Company has frozen the pension plan and actively sought to control increases in these costs, there can be no assurance that it will be successful in limiting future cost and expense increases, and continued upward pressure in costs and expenses could further reduce the profitability of the Company’s businesses.

 

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The Company may have exposure under its multiemployer pension and postretirement plans in which it participates that extends beyond its funding obligation with respect to the Company’s employees.

 

The Company contributes to various multiemployer pension plans. In the event of a partial or complete withdrawal by the Company from any plan that is underfunded, the Company would be liable for a proportionate share of such plan’s unfunded vested benefits. Based on the limited information available from plan administrators, which the Company cannot independently validate, the Company believes that its portion of the contingent liability in the case of a full withdrawal or termination may be material to its financial position and results of operations. If any other contributing employer withdraws from any plan that is underfunded, and such employer (or any member in its controlled group) cannot satisfy its obligations under the plan at the time of withdrawal, then the Company, along with the other remaining contributing employers, would be liable for its proportionate share of such plan’s unfunded vested benefits. In addition, if a multiemployer plan fails to satisfy the minimum funding requirements, the Internal Revenue Service will impose certain penalties and taxes.

 

Risks Relating to Legal and Legislative Matters

 

The Company is subject to, and may in the future be subject to, disputes, legal or other proceedings, or government inquiries or investigations, that could have an adverse effect on the Company.

 

The nature of the Company’s business exposes it to the potential for disputes, legal or other proceedings, or government inquiries or investigations, relating to antitrust matters, labor and employment matters, personal injury and property damage, environmental matters, and other matters, as discussed in the other risk factors disclosed in this section or in other Company filings with the SEC. For example, Matson is a common carrier, whose tariffs, rates, rules and practices in dealing with its customers are governed by extensive and complex foreign, federal, state and local regulations, which may be the subject of disputes or administrative or judicial proceedings.  If these disputes develop into proceedings, these proceedings, individually or collectively, could involve or result in significant expenditures or losses by the Company, or result in significant changes to Matson’s tariffs, rates, rules and practices in dealing with its customers, all of which could have an adverse effect on the Company’s future operating results, including profitability, cash flows, and financial condition.  For a description of significant legal proceedings involving the Company, see “Legal Proceedings” below.

 

Repeal, substantial amendment, or waiver of the Jones Act or its application could have an adverse effect on the Company’s business.

 

If the Jones Act was to be repealed, substantially amended, or waived and, as a consequence, competitors with lower operating costs by utilizing their ability to acquire and operate foreign-flag and foreign-built vessels were to enter the Hawaii market, the Company’s business would be adversely affected. In addition, the Company’s advantage as a U.S.-citizen operator of Jones Act vessels could be eroded by periodic efforts and attempts by foreign interests to circumvent certain aspects of the Jones Act. If maritime cabotage services were included in the General Agreement on Trade in Services, the North American Free Trade Agreement or other international trade agreements, or if the restrictions contained in the Jones Act were otherwise altered, the shipping of cargo between covered U.S. ports could be opened to foreign-flag or foreign-built vessels.

 

Noncompliance with, or changes to, federal, state or local law or regulations, including passage of climate change legislation or regulation, may adversely affect the Company’s business.

 

The Company is subject to federal, state and local laws and regulations, including cabotage laws, government rate regulations, and environmental regulations including those relating to air quality initiatives at port locations, including, but not limited to, the Oil Pollution Act of 1990, the Comprehensive Environmental Response Compensation & Liability Act of 1980, the Clean Water Act, the Invasive Species Act and the Clean Air Act. Continued compliance with these laws and regulations may result in additional costs and changes in operating procedures that may adversely affect the Company’s business. Noncompliance with, or changes to, the laws and regulations governing the Company’s business could impose significant additional costs on the Company and adversely affect the Company’s financial condition and results of operations. In addition, changes in environmental laws impacting the business, including passage of climate change legislation or other regulatory initiatives that

 

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restrict emissions of greenhouse gasses, may require costly vessel modifications, the use of higher-priced fuel and changes in operating practices that may not all be able to be recovered through increased payments from customers.  Further changes to these laws and regulations could adversely affect the Company. Climate change legislation, such as limiting and reducing greenhouse gas emissions through a “cap and trade” system of allowances and credits, if enacted, may have an adverse effect on the Company’s business.

 

Risks Related to Capital Structure

 

The Company’s business could be adversely affected if the Company were determined not to be a U.S. citizen under the Jones Act.

 

Certain provisions of the Company’s articles of incorporation protect the Company’s ability to maintain its status as a U.S. citizen under the Jones Act. Although the Company believes it currently is a U.S. citizen under the Jones Act, if non-U.S. citizens were able to defeat such articles of incorporation restrictions and own in the aggregate more than 25 percent of the Company’s common stock, the Company would no longer be considered a U.S. citizen under the Jones Act. Such an event could result in the Company’s ineligibility to engage in coastwise trade and the imposition of substantial penalties against it, including seizure or forfeiture of its vessels, which could have an adverse effect on the Company’s financial condition and results of operation.

 

The Company has a shareholder rights plan, or poison pill, which could affect the price of its common stock and make it more difficult for a potential acquirer to purchase a large portion of our securities, to initiate a tender offer or a proxy contest, or to acquire the Company.

 

On June 8, 2012, the Company’s board of directors adopted a shareholder rights plan, commonly known as a “poison pill.” The poison pill may discourage, delay, or prevent a third party from acquiring a large portion of our securities, initiating a tender offer or proxy contest, or acquiring us through an acquisition, merger, or similar transaction. Such an acquirer could be prevented from consummating one of these transactions even if the Company’s shareholders might receive a premium for their shares over then-current market prices.

 

ITEM 1B.  UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 3.  LEGAL PROCEEDINGS

 

See “Business and Properties — Business Description - Rate Regulation” above for a discussion of rate and other regulatory matters in which Matson is routinely involved.

 

On April 21, 2008, MatNav was served with a grand jury subpoena from the U.S. District Court for the Middle District of Florida for documents and information relating to water carriage in connection with the Department of Justice’s investigation into the pricing and other competitive practices of carriers operating in the domestic trades.  Matson understands that while the investigation originally was focused primarily on the Puerto Rico trade, it also includes pricing and other competitive practices in connection with all domestic trades, including the Alaska, Hawaii and Guam trades.  Matson does not operate vessels in the Puerto Rico and Alaska trades.  It does operate vessels in the Hawaii and Guam trades.  Matson has cooperated, and will continue to cooperate, fully with the Department of Justice.  If the Department of Justice believes that any violations have occurred on the part of Matson, it could seek civil or criminal sanctions, including monetary fines.  The Company is unable to predict, at this time, the outcome or financial impact, if any, of this investigation.

 

Matson and its subsidiaries are parties to, or may be contingently liable in connection with, other legal actions arising in the normal conduct of their businesses, the outcomes of which, in the opinion of management after consultation with counsel, would not have a material adverse effect on Matson’s results of operations or financial position.

 

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ITEM 4.  MINE SAFETY DISCLOSURES

 

Not Applicable.

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Concurrently with the Separation, the Company changed its trading symbol to MATX.  Common stock, prior to the completion of the Separation, had traded on the New York Stock Exchange under the ticker symbol “ALEX”.  Following the completion of the Separation, Matson’s common stock has traded on the New York Stock Exchange under the symbol “MATX.” As of February 26, 2013, there were 2,710 shareholders of record of Matson common stock. In addition, Cede & Co., which appears as a single record holder, represents the holdings of thousands of beneficial owners of Matson common stock.

 

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

Among Matson, Inc., the S&P 500 Index, and the Dow Jones US Industrial Transportation TSM Index

 

GRAPHIC

 

*$100 invested on 12/31/07 in stock or index, including reinvestment of dividends.

Fiscal year ending December 31.

 

Copyright© 2013 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.

Copyright© 2013 Dow Jones & Co. All rights reserved.

 

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Trading volume averaged 245,085 shares a day in 2012 compared with 254,081 shares a day in 2011 and 201,147 shares a day in 2010.

 

The quarterly intra-day high and low sales prices and end of quarter closing prices, as reported by the New York Stock Exchange, and cash dividends paid per share of common stock, for 2012 and 2011, were as follows:

 

 

 

 

Dividends

 

Market Price

 

 

 

Paid

 

High

 

Low

 

Close

 

2012

 

 

 

 

 

 

 

 

 

First Quarter

 

$

0.315

 

$

49.49

 

$

40.64

 

$

48.45

 

Second Quarter

 

$

0.315

 

$

53.71

 

$

47.22

 

$

53.25

 

Third Quarter

 

$

0.150

 

$

30.30

 

$

19.96

 

$

20.91

 

Fourth Quarter

 

$

0.150

 

$

25.23

 

$

20.00

 

$

24.72

 

 

 

 

 

 

 

 

 

 

 

2011

 

 

 

 

 

 

 

 

 

First Quarter

 

$

0.315

 

$

46.00

 

$

39.18

 

$

45.65

 

Second Quarter

 

$

0.315

 

$

55.50

 

$

44.50

 

$

48.16

 

Third Quarter

 

$

0.315

 

$

51.66

 

$

36.48

 

$

36.53

 

Fourth Quarter

 

$

0.315

 

$

45.53

 

$

33.09

 

$

40.82

 

 

On June 29, 2012, the Company completed the Separation, which included the distribution of all shares of A&B to the Company’s shareholders.  In the table above, market prices include the value of A&B through June 29, 2012. Although Matson expects to continue paying quarterly cash dividends on its common stock, the declaration and payment of dividends are subject to the discretion of the Board of Directors and will depend upon Matson’s financial condition, results of operations, cash requirements and other factors deemed relevant by the Board of Directors.

 

The Company did not repurchase any of its common stock in 2012, 2011 or 2010.

 

Securities authorized for issuance under equity compensation plans as of December 31, 2012, included:

 

 

 

Number of securities to be
issued upon exercise of
outstanding options, warrants
and rights

 

Weighted-average exercise
price of outstanding options,
warrants and rights

 

Number of securities
remaining available for
future issuance under equity
compensation plans
(excluding securities
reflected in column (a))

 

Plan Category

 

(a)

 

(b)

 

(c)

 

 

 

 

 

 

 

 

 

Equity compensation plans approved by security holders

 

1,353,391

 

$

21.15

 

6,197,202

 

Equity compensation plans not approved by security holders

 

 

 

 

Total

 

1,353,391

 

$

21.15

 

6,197,202

 

 

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ITEM 6. SELECTED FINANCIAL DATA

 

The following  should be read in conjunction with Item 8, “Financial Statements and Supplementary Data,” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (dollars and shares in millions, except shareholders of record and per-share amounts):

 

 

 

2012

 

2011(1)

 

2010(1)

 

2009(1)

 

2008(1)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

Ocean transportation

 

$

1,189.8

 

$

1,076.2

 

$

1,015.0

 

$

888.2

 

$

1,022.8

 

Logistics

 

370.2

 

386.4

 

355.6

 

320.9

 

436.0

 

Total operating revenue

 

$

1,560.0

 

$

1,462.6

 

$

1,370.6

 

$

1,209.1

 

$

1,458.8

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income:

 

 

 

 

 

 

 

 

 

 

 

Ocean transportation(2)

 

$

96.6

 

$

73.7

 

$

118.3

 

$

57.8

 

$

105.6

 

Logistics

 

0.1

 

4.9

 

7.1

 

6.7

 

18.5

 

Operating Income

 

96.7

 

78.6

 

125.4

 

64.5

 

124.1

 

Interest expense

 

(11.7

)

(7.7

)

(8.2

)

(9.0

)

(11.6

)

Income from Continuing Operations Before Income Taxes

 

85.0

 

70.9

 

117.2

 

55.5

 

112.5

 

Income tax expense

 

33.0

 

25.1

 

46.7

 

22.5

 

42.5

 

Income From Continuing Operations

 

52.0

 

45.8

 

70.5

 

33.0

 

70.0

 

Income (Loss) From Discontinued Operations (net of income taxes)

 

(6.1

)

(11.6

)

21.6

 

11.2

 

62.4

 

Net Income

 

$

45.9

 

$

34.2

 

$

92.1

 

$

44.2

 

$

132.4

 

 

 

 

 

 

 

 

 

 

 

 

 

Identifiable Assets:

 

 

 

 

 

 

 

 

 

 

 

Ocean transportation(3)

 

$

1,097.2

 

$

1,083.9

 

$

1,084.7

 

$

1,095.2

 

$

1,153.9

 

Logistics(4)

 

77.1

 

76.4

 

73.8

 

72.4

 

74.2

 

Other(5)

 

 

1,384.0

 

1,336.1

 

1,212.0

 

1,122.1

 

Total assets

 

$

1,174.3

 

$

2,544.3

 

$

2,494.6

 

$

2,379.6

 

$

2,350.2

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital Expenditures for Continuing Operations:

 

 

 

 

 

 

 

 

 

 

 

Ocean transportation

 

$

37.0

 

$

44.2

 

$

69.4

 

$

12.7

 

$

35.5

 

Logistics(6)

 

1.1

 

3.0

 

1.8

 

0.6

 

2.4

 

Total capital expenditures

 

$

38.1

 

$

47.2

 

$

71.2

 

$

13.3

 

$

37.9

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and Amortization from Continuing Operations:

 

 

 

 

 

 

 

 

 

 

 

Ocean transportation

 

$

69.1

 

$

68.4

 

$

67.6

 

$

67.1

 

$

66.1

 

Logistics

 

3.4

 

3.2

 

3.2

 

3.5

 

2.3

 

Total depreciation and amortization

 

$

72.5

 

$

71.6

 

$

70.8

 

$

70.6

 

$

68.4

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

From continuing operations:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

1.23

 

1.10

 

1.71

 

0.80

 

1.70

 

Diluted

 

1.22

 

1.09

 

1.70

 

0.80

 

1.69

 

Net income:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

1.09

 

0.82

 

2.23

 

1.08

 

3.21

 

Diluted

 

1.08

 

0.81

 

2.22

 

1.08

 

3.19

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average equity

 

6.5

%

3.2

%

8.6

%

4.1

%

12.0

%

Cash dividends per share

 

0.93

 

1.26

 

1.26

 

1.26

 

1.235

 

 

 

 

 

 

 

 

 

 

 

 

 

At Year End

 

 

 

 

 

 

 

 

 

 

 

Shareholders of record

 

2,729

 

2,923

 

3,079

 

3,197

 

3,269

 

Shares outstanding

 

42.6

 

41.7

 

41.3

 

41.0

 

41.0

 

Long-term debt – non-current

 

302.7

 

180.1

 

136.6

 

148.1

 

162.7

 

 

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(1)              Prior year amounts restated for amounts treated as discontinued operations.

 

(2)              The ocean transportation segment includes approximately $3.2 million, $8.6 million, $12.8 million, $6.2 million, and $5.2 million of equity in earnings from its investment in SSAT for 2012, 2011, 2010, 2009 and 2008, respectively.

 

(3)              The ocean transportation segment includes approximately $59.6 million, $56.5 million, $52.9 million, $47.2 million, and $44.6 million, related to its investment in SSAT as of December 31, 2012, 2011, 2010, 2009, and 2008, respectively.

 

(4)     Includes goodwill of $27.0 million as of December 31, 2012, 2011 and 2010.

 

(5)              Includes assets related to discontinued operations from A&B and CLX2 of $1.4 billion, $1.3 billion, $1.2 billion and $1.1 billion as of December 31, 2011, 2010, 2009 and 2008, respectively.

 

(6)              Excludes expenditures related to Matson Logistics’ acquisitions, which are classified as acquisition of businesses in Cash Flows from Investing Activities within the Consolidated Statements of Cash Flows.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

FORWARD-LOOKING STATEMENTS AND RISK FACTORS

 

The Company, from time to time, may make or may have made certain forward-looking statements, whether orally or in writing, such as forecasts and projections of the Company’s future performance or statements of management’s plans and objectives. These statements are “forward-looking” statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may be contained in, among other things, SEC filings, such as the Forms 10-K, 10-Q and 8-K, the Annual Report to Shareholders, press releases made by the Company, the Company’s Internet Web sites (including Web sites of its subsidiaries), and oral statements made by the officers of the Company. Except for historical information contained in these written or oral communications, such communications contain forward-looking statements. These include, for example, all references to 2013 or future years. New risk factors emerge from time to time and it is not possible for the Company to predict all such risk factors, nor can it assess the impact of all such risk factors on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Accordingly, forward-looking statements cannot be relied upon as a guarantee of future results and involve a number of risks and uncertainties that could cause actual results to differ materially from those projected in the statements, including, but not limited to the factors that are described in Part I, Item 1A under the caption of “Risk Factors” of this Form 10-K, which section is incorporated herein by reference. The Company is not required, and undertakes no obligation, to revise or update forward-looking statements or any factors that may affect actual results, whether as a result of new information, future events, or circumstances occurring after the date of this report.

 

OVERVIEW

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a discussion of the Company’s financial condition, results of operations, liquidity and certain other factors that may affect its future results from the perspective of management. The discussion that follows is intended to provide information that will assist in understanding the changes in the Company’s financial statements from year to year, the primary factors that accounted for those changes, and how certain accounting principles, policies and estimates affect the Company’s financial statements. MD&A is provided as a supplement to, and should be read in conjunction with, the consolidated financial statements and the accompanying notes to the financial statements. MD&A is presented in the following sections:

 

·                  Business Overview

·                  Critical Accounting Estimates

·                  Consolidated Results of Operations

·                  Analysis of Operating Revenue and Income by Segment

·                  Liquidity and Capital Resources

·                  Contractual Obligations, Commitments, Contingencies and Off-Balance-Sheet Arrangements

·                  Business Outlook

·                  Other Matters

 

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BUSINESS OVERVIEW

 

Founded in 1882, Matson is a leading U.S. ocean freight carrier in the Pacific. Matson provides a vital lifeline to the island economies of Hawaii, Guam and Micronesia, and operates a premium, expedited service from China to Southern California. The Company’s fleet of 17 vessels includes containerships, combination container and roll-on/roll-off ships and custom-designed barges. Matson Logistics, Inc., a wholly-owned subsidiary of MatNav, was established in 1987 and extends the geographic reach of Matson’s transportation network throughout the continental U.S. and China.  Logistics’ integrated, asset-light logistics services include rail intermodal, highway brokerage and warehousing.

 

Ocean Transportation: The ocean transportation segment of Matson’s business, which is conducted through MatNav, is an asset-based business that generates revenue primarily through the carriage of containerized freight between various U.S. Pacific Coast, Hawaii, Guam, Micronesia, China and other Pacific island ports.

 

Also, the Company has a 35 percent ownership interest in SSA Terminals, LLC through a joint venture between Matson Ventures, Inc., a wholly-owned subsidiary of MatNav, and SSA Ventures, Inc., a subsidiary of Carrix, Inc.  SSAT provides terminal and stevedoring services to various international carriers at six terminal facilities on the U.S. Pacific Coast and to MatNav at several of those facilities.  Matson records its share of income in the joint venture in operating expenses within the ocean transportation segment, due to the operations of the joint venture being an integral part of the Company’s business.

 

Logistics: The logistics segment of Matson’s business, which is conducted through Logistics, is an asset-light based business that is a provider of domestic and international rail intermodal service, long-haul and regional highway brokerage, specialized hauling, flat-bed and project work, less-than-truckload services, expedited freight services, and warehousing and distribution services.  Warehousing, packaging and distribution services are provided by Matson Logistics Warehousing, Inc., a wholly-owned subsidiary of Logistics.

 

Separation Transaction: The Separation was completed on June 29, 2012.  In the Separation, the shareholders of Holdings received one share of common stock of A&B for every share of Holdings held of record as of June 18, 2012.  Immediately following the Separation, Alexander & Baldwin Holdings, Inc. changed its name to Matson, Inc.  For accounting purposes, Matson is the successor company to the Former Parent Company.

 

CRITICAL ACCOUNTING ESTIMATES

 

The Company’s significant accounting policies are described in Note 1 to the Consolidated Financial Statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, upon which the MD&A is based, requires that management exercise judgment when making estimates and assumptions about future events that may affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with certainty and actual results will, inevitably, differ from those critical accounting estimates. These differences could be material.

 

The Company considers an accounting estimate to be critical if: (i)(a) the accounting estimate requires the Company to make assumptions that are difficult or subjective about matters that were highly uncertain at the time that the accounting estimate was made, (b) changes in the estimate are reasonably likely to occur in periods after the period in which the estimate was made, or (c) use of different estimates by the Company could have been used, and (ii) changes in those assumptions or estimates would have had a material impact on the financial condition or results of operations of the Company. The critical accounting estimates inherent in the preparation of the Company’s financial statements are described below.

 

Impairment of Long-Lived Assets and Finite-Lived Intangible Assets:  The Company’s long-lived assets, including finite-lived intangible assets, are reviewed for possible impairment annually and whenever events or circumstances indicate that the carrying value may not be recoverable.  In such an evaluation, the estimated future undiscounted cash flows generated by the asset are compared with the amount recorded for the asset to determine if its carrying value is not recoverable. If this review determines that the recorded value will not be recovered, the

 

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amount recorded for the asset is reduced to estimated fair value. The Company has evaluated certain long-lived assets, including intangible assets, for impairment.  During 2012 the Company determined that it had an impairment related to intangible assets at Logistics.  The Company recorded impairment expense of $2.1 million for 2012, which is included in operating expense on the Consolidated Statement of Income and Comprehensive Income.  No impairment charges were recorded in 2011, and 2010. These asset impairment analyses are highly subjective because they require management to make assumptions and apply considerable judgments to, among others, estimates of the timing and amount of future cash flows, expected useful lives of the assets, uncertainty about future events, including changes in economic conditions, changes in operating performance, changes in the use of the assets, and ongoing costs of maintenance and improvements of the assets, and thus, the accounting estimates may change from period to period. If management uses different assumptions or if different conditions occur in future periods, the Company’s financial condition or its future operating results could be materially impacted.

 

Impairment of Investments: The Company’s investment in its terminal joint venture is reviewed for impairment annually and whenever there is evidence that fair value may be below carrying cost. An investment is written down to fair value if fair value is below carrying cost and the impairment is other-than-temporary. In evaluating the fair value of an investment and whether any identified impairment is other-than-temporary, significant estimates and considerable judgments are involved.  These estimates and judgments are based, in part, on the Company’s current and future evaluation of economic conditions in general, as well as a joint venture’s current and future plans. Additionally, these impairment calculations are highly subjective because they also require management to make assumptions and apply judgments to estimates regarding the timing and amount of future cash flows, probabilities related to various cash flow scenarios, and appropriate discount rates based on the perceived risks, among others. In evaluating whether an impairment is other-than-temporary, the Company considers all available information, including the length of time and extent of the impairment, the financial condition and near-term prospects of the affiliate, the Company’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value, and projected industry and economic trends, among others. Changes in these and other assumptions could affect the projected operational results and fair value of the unconsolidated joint venture, and accordingly, may require valuation adjustments to the Company’s investment that may materially impact the Company’s financial condition or its future operating results. For example, if current market conditions deteriorate significantly or a joint venture’s plans change materially, impairment charges may be required in future periods, and those charges could be material.  The Company has evaluated its investment in SSAT for impairment and no impairment charges were recorded in 2012, 2011 and 2010 as a result of this process.

 

Impairment of Vessels: The Company operates an integrated network of vessels, containers, and terminal equipment; therefore, in evaluating impairment, the Company groups its assets at the ocean transportation entity level, which represents the lowest level for which identifiable cash flows are available. The Company’s vessels and equipment are reviewed for possible impairment annually and whenever events or circumstances, such as recurring operating losses, indicate that their carrying values may not be recoverable. In evaluating impairment, the estimated future undiscounted cash flows generated by the asset group are compared with the amount recorded for the asset group to determine if its carrying value is not recoverable. If this review determines that the recorded value will not be recovered, the amount recorded for the asset group is reduced to estimated fair value. These asset impairment loss analyses are highly subjective because they require management to make assumptions and apply considerable judgments to, among other things, estimates of the timing and amount of future cash flows, expected useful lives of the assets, uncertainty about future events, including changes in economic conditions, changes in operating performance, changes in the use of the assets, and ongoing costs of maintenance and improvements of the assets, and thus, the accounting estimates may change from period to period. If management uses different assumptions or if different conditions occur in future periods, the Company’s financial condition or its future operating results could be materially impacted.  The Company has not recorded any impairment related to its vessels for the years ended December 31, 2012, 2011 and 2010, respectively.

 

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Additional information about the Company’s vessels as of December 31, 2012 is as follows:

 

 

 

 

 

Gross Book Value

 

Net Book Value

 

 

 

Purchase

 

as of

 

as of

 

 

 

Date

 

December 31, 2012

 

December 31, 2012

 

MAUNALEI

 

September 2006

 

$

158.1

 

$

125.1

 

MANULANI

 

June 2005

 

152.1

 

114.3

 

MAUNAWILI

 

September 2004

 

103.8

 

76.2

 

MANUKAI

 

September 2003

 

106.0

 

74.5

 

R.J. PFEIFFER

 

August 1992

 

161.6

 

58.1

 

MOKIHANA

 

January 1996

 

100.5

 

36.2

 

MANOA

 

January 1996

 

64.8

 

18.8

 

KAUAI

 

September 1980

 

91.6

 

18.4

 

MAHIMAHI

 

January 1996

 

62.3

 

18.2

 

MAUI

 

June 1978

 

77.8

 

11.8

 

WAIALEALE

 

November 1991

 

11.0

 

3.5

 

HALEAKALA

 

December 1984

 

15.3

 

3.4

 

LURLINE

 

August 1998

 

17.9

 

2.5

 

MATSONIA

 

October 1987

 

95.6

 

2.4

 

MAUNA KEA

 

August 1988

 

10.2

 

2.2

 

MAUNA LOA

 

December 1984

 

12.7

 

2.2

 

LIHUE

 

January 1996

 

7.8

 

1.9

 

Total vessels

 

 

 

$

1,249.1

 

$

569.7

 

 

Legal Contingencies: The Company’s results of operations could be affected by significant litigation adverse to the Company, including, but not limited to, liability claims, antitrust claims, and claims related to coastwise trading matters. The Company records accruals for legal matters when the information available indicates that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Management makes adjustments to these accruals to reflect the impact and status of negotiations, settlements, rulings, advice of counsel and other information and events that may pertain to a particular matter. Predicting the outcome of claims and lawsuits and estimating related costs and exposure involves substantial uncertainties that could cause actual costs to vary materially from those estimates. In making determinations of likely outcomes of litigation matters, the Company considers many factors. These factors include, but are not limited to, the nature of specific claims including unasserted claims, the Company’s experience with similar types of claims, the jurisdiction in which the matter is filed, input from outside legal counsel, the likelihood of resolving the matter through alternative dispute resolution mechanisms and the matter’s current status. A detailed discussion of significant litigation matters is contained in Note 11 to the Consolidated Financial Statements.

 

Self-Insured Liabilities: The Company is self-insured for certain losses including, but not limited to, employee health, workers’ compensation, general liability, real and personal property. Where feasible, the Company obtains third-party excess insurance coverage to limit its exposure to these claims. When estimating its self-insured liabilities, the Company considers a number of factors, including historical claims experience, demographic factors, current trends, and analyses provided by independent third-parties. Periodically, management reviews its assumptions and the analyses provided by independent third-parties to determine the adequacy of the Company’s self-insured liabilities. The Company’s self-insured liabilities contain uncertainties because management is required to apply judgment and make long-term assumptions to estimate the ultimate cost to settle reported claims and claims incurred, but not reported, as of the balance sheet date. If management uses different assumptions or if different conditions occur in future periods, the Company’s financial condition or its future operating results could be materially impacted.

 

Goodwill: The Company reviews goodwill for impairment annually and whenever events or changes in circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. In estimating the fair value of a reporting unit, the Company uses a combination of a discounted cash flow model and fair value based on market multiples of earnings before interest, taxes, depreciation and amortization (“EBITDA”). The discounted cash flow approach requires the Company to use a number of assumptions, including market factors specific to the business, the amount and timing of estimated future cash flows to be generated by the business over an extended period of time, long-term growth rates for the business, and a discount rate that considers the risks related to the amount and timing of the cash flows. Although the assumptions used by the Company in its discounted cash flow model are consistent with the assumptions the Company used to generate its internal strategic plans and forecasts, significant judgment is required to estimate the amount and timing of future cash flows from the reporting unit and the risk of achieving those cash flows. When using market multiples of EBITDA, the Company must make judgments about the comparability of those multiples in closed and proposed transactions. Accordingly,

 

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Table of Contents

 

changes in assumptions and estimates, including, but not limited to, changes driven by external factors, such as industry and economic trends, and those driven by internal factors, such as changes in the Company’s business strategy and its internal forecasts, could have a material effect on the Company’s business, financial condition and results of operations.  The Company has not recorded any impairment related to its goodwill for the years ended December 31, 2012, 2011 and 2010, respectively.

 

Pension and Post-Retirement Estimates:  The estimation of the Company’s pension and post-retirement benefit expenses and liabilities requires that the Company make various assumptions. These assumptions include the following factors:

 

·                  Discount rates

·                  Expected long-term rate of return on pension plan assets

·                  Salary growth

·                  Health care cost trend rates

·                  Inflation

·                  Retirement rates

·                  Mortality rates

·                  Expected contributions

 

Actual results that differ from the assumptions made with respect to the above factors could materially affect the Company’s financial condition or its future operating results. The effects of changing assumptions are included in unamortized net gains and losses, which directly affect accumulated other comprehensive income. Additionally, these unamortized gains and losses are amortized and reclassified to income (loss) over future periods.

 

The 2012 net periodic costs for qualified pension and post-retirement plans were determined using discount rates of 4.8 percent and 4.9 percent, respectively. The benefit obligations for qualified pension and post-retirement benefit plans, as of December 31, 2012, were determined using discount rates of 4.2 percent and 4.3 percent, respectively. For the Company’s non-qualified pension plans, the 2012 net periodic cost was determined using a discount rate of 3.9 percent and the December 31, 2012 obligation was determined using a discount rate of 2.4 percent. The discount rate used for determining the year-end benefit obligation was generally calculated using a weighting of expected benefit payments and rates associated with high-quality U.S. corporate bonds for each year of expected payment to derive a single estimated rate at which the benefits could be effectively settled at December 31, 2012.

 

The expected return on plan assets of 8.3 percent was based on historical trends combined with long-term expectations, the mix of plan assets, asset class returns, and long-term inflation assumptions. One-, three-, and five-year pension returns (losses) were 15.2 percent, 8.4 percent, and (0.1) percent, respectively. The Company’s long-term rate of return (since inception in 1989) was 8.3 percent.

 

As of December 31, 2012, the Company’s post-retirement obligations were measured using an initial 8.0 percent health care cost trend rate, decreasing by 0.5 percent annually until the ultimate rate of 4.5 percent is reached in 2020.

 

Lowering the expected long-term rate of return on the Company’s qualified pension plan assets by one-half of one percent would have increased pre-tax pension expense for 2012 by approximately $0.6 million. Lowering the discount rate assumption by one-half of one percentage point would have increased pre-tax pension expense for the qualified pension plans by approximately $0.8 million. Additional information about the Company’s benefit plans is included in Note 8 to the Consolidated Financial Statements.

 

As of December 31, 2012, the market value of the Company’s qualified defined benefit pension plan assets totaled approximately $149.2 million, compared with $126.0 million as of December 31, 2011. The recorded net pension liability was approximately $60.9 million as of December 31, 2012 and approximately $66.6 million as of December 31, 2011. The Company expects to make contributions totaling $3.5 million to its qualified defined benefit pension plans in 2013. The Company’s contributions to these qualified pension plans were approximately $13.3 million in 2012, $4.4 million in 2011 and $5.9 million in 2010.

 

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Table of Contents

 

Income Taxes: The Company makes certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments are applied in the calculation of tax credits, tax benefits and deductions, and in the calculation of certain deferred tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. Significant changes to these estimates may result in an increase or decrease to the Company’s tax provision in a subsequent period.

 

In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertain tax positions taken or expected to be taken with respect to the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with management’s expectations could materially affect the Company’s financial condition or its future operating results.

 

Accounting Standards Updates: Accounting standards updates effective after December 31, 2012, are not expected to have a material effect on the Company’s consolidated financial position or results of operations.

 

CONSOLIDATED RESULTS OF OPERATIONS

 

The following analysis of the consolidated financial condition and results of operations of Matson, Inc. and its subsidiaries (collectively, the “Company”) should be read in conjunction with the consolidated financial statements and related notes thereto.

 

2012 vs. 2011

 

 

 

Years Ended December 31,

 

(dollars in millions, except per share amounts)

 

2012

 

2011

 

Change

 

 

 

 

 

 

 

 

 

Operating revenue

 

$

1,560.0

 

$

1,462.6

 

6.7

%

Operating costs and expenses

 

(1,463.3

)

(1,384.0

)

5.7

%

Operating income

 

96.7

 

78.6

 

23.0

%

Interest expense

 

(11.7

)

(7.7

)

51.9

%

Income from continuing operations before income taxes

 

85.0

 

70.9

 

19.9

%

Income tax expense

 

33.0

 

25.1

 

31.5

%

Income from continuing operations

 

52.0

 

45.8

 

13.5

%

Loss from discontinued operations (net of income taxes)

 

(6.1

)

(11.6

)

 

 

Net income

 

$

45.9

 

$

34.2

 

34.2

%

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

1.09

 

$

0.82

 

32.9

%

Diluted earnings per share

 

$

1.08

 

$

0.81

 

33.3

%

 

Consolidated Operating Revenue for the year ended December 31, 2012 increased $97.4 million, or 6.7 percent, compared to the year ended December 31, 2011.  This increase was principally due to $113.6 million in higher revenue for ocean transportation, partially offset by $16.2 million in lower revenue from logistics.  The reasons for the operating revenue changes are described below, by business segment, in the Analysis of Operating Revenue and Income by Segment.

 

Operating Costs and Expenses for the year ended December 31, 2012 increased $79.3 million, or 5.7 percent, compared to the year ended December 31, 2011.  The increase was due to a $90.7 million increase in costs for the ocean transportation segment, which is inclusive of $8.6 million in Separation costs, offset by a reduction of cost in logistics of $11.4 million.  The reasons for the operating expense changes are described below, by business segment, in the Analysis of Operating Revenue and Income by Segment.

 

Income Tax Expense during the year ended December 31, 2012 was 38.8 percent of income from continuing operations before income tax as compared to 35.4 percent in 2011 and increased by $7.9 million compared with the year ended December 31, 2011 due principally to certain non-recurring and non-deductible Separation related transaction costs and the re-measurement of uncertain tax positions in 2012 as required as part of the Separation tax accounting treatment.

 

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Table of Contents

 

The fourth quarter 2012 tax rate was less than the tax rates for each of the preceding quarters in 2012 for the following two reasons.  First, the Company recorded a tax provision benefit in the fourth quarter 2012 for re-valuation of deferred state tax liabilities caused by a reduction in the Company’s California income apportionment factors under the state’s single-sales factor apportionment requirement, which became mandatory as a result of new legislation in the fourth quarter 2012.  Second, the Company recorded a tax provision benefit in the fourth quarter 2012 for a reduction of certain unrecognized tax benefit reserves caused by lapses in the statute of limitations for certain periods and jurisdictions in the fourth quarter 2012.

 

Loss from Discontinued Operations during the year ended December 31, 2012 decreased $5.5 million.  Due to the Separation on June 29, 2012, Matson has restated the operations for the six and twelve months ended June 30, 2012 and December 31, 2011, respectively, from A&B as discontinued operations.  The loss from discontinued operations, net of tax, decreased primarily due to the reduction in losses related to the shutdown of CLX2 offset by the increase in net loss recorded by A&B and the recognition of additional tax expense related to the Separation.  The change from net income to a net loss for A&B was due to an increase in consolidated operating costs and expenses, impairments of properties and a real estate joint venture recognized in the second quarter of 2012, and other expenses, which more than offset increases in A&B’s consolidated operating revenue and a decrease in taxes.

 

2011 vs. 2010

 

 

 

Years Ended December 31,

 

(dollars in millions, except per share amounts)

 

2011

 

2010

 

Change

 

Operating revenue

 

$

1,462.6

 

$

1,370.6

 

6.7

%

Operating costs and expenses

 

(1,384.0

)

(1,245.2

)

11.1

%

Operating income

 

78.6

 

125.4

 

(37.3

)%

Interest expense

 

(7.7

)

(8.2

)

(6.1

)%

Income from continuing operations before income taxes

 

70.9

 

117.2

 

(39.5

)%

Income tax expense

 

25.1

 

46.7

 

(46.3

)%

Income from continuing operations

 

45.8

 

70.5

 

(35.0

)%

(Loss) income from discontinued operations (net of income taxes)

 

(11.6

)

21.6

 

 

 

Net income

 

$

34.2

 

$

92.1

 

(62.9

)%

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.82

 

$

2.23

 

(63.2

)%

Diluted earnings per share

 

$

0.81

 

$

2.22

 

(63.5

)%

 

Consolidated Operating Revenue for 2011 increased 6.7 percent, or $92.0 million, to $1,462.6 million. This increase was due to $61.2 million in higher ocean transportation revenue and $30.8 million in greater revenue from Logistics.  The reasons for the operating revenue changes are described below, by business segment, in the Analysis of Operating Revenue and Income by Segment.

 

Operating Costs and Expenses for 2011 increased by 11.1 percent, or $138.8 million, to $1,384.0 million. Ocean transportation costs increased $105.8 million and logistics costs increased by $33.0 million.  The reasons for the operating expense changes are described below, by business segment, in the Analysis of Operating Revenue and Income by Segment.

 

Income Taxes were lower in 2011 compared with 2010 on an absolute basis due principally to lower income. The effective tax rate in 2011 was 35.4 percent which was a decrease from 39.8 percent in 2010, due principally to deductible expenses in both periods that had a greater impact on the 2011 effective rate because of the lower income relative to 2010.

 

Discontinued Operations were lower in 2011 compared with 2010 due to the loss associated with the shutdown of CLX2.  The loss related to CLX2 was partially offset by the change from a net loss to net income by A&B, which was reclassified to discontinued operations as a result of the Separation.

 

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Table of Contents

 

ANALYSIS OF OPERATING REVENUE AND INCOME BY SEGMENT

 

Additional detailed information related to the operations and financial performance of the Company’s Reportable Segments is included in Part II Item 6 and Note 13 to the Consolidated Financial Statements. The following information should be read in relation to the information contained in those sections.

 

Ocean Transportation; 2012 compared with 2011

 

 

 

Years Ended December 31,

 

(dollars in millions)

 

2012

 

2011

 

Change

 

Revenue

 

$

1,189.8

 

$

1,076.2

 

10.6

%

Operating income(1)

 

$

96.6

 

$

73.7

 

31.1

%

Operating income margin

 

8.1

%

6.8

%

 

 

 

 

 

 

 

 

 

 

Volume (Units)(2)

 

 

 

 

 

 

 

Hawaii containers

 

137,200

 

140,000

 

(2.0

)%

Hawaii automobiles

 

78,800

 

81,000

 

(2.7

)%

China containers

 

60,000

 

59,000

 

1.7

%

Guam containers

 

25,500

 

15,200

 

67.8

%

 


(1) The Company incurred additional costs related to the shutdown of CLX2 that did not meet the criteria to be classified as discontinued operations of approximately $0.5 million and $7.1 million and therefore reduced operating income for the year ended December 31, 2012 and 2011, respectively.

 

(2) Approximate container volumes included for the period are based on the voyage departure date, but revenue and operating income are adjusted to reflect the percentage of revenue and operating income earned during the reporting period for voyages that straddle the beginning or end of each reporting period.

 

Ocean transportation revenue increased $113.6 million, or 10.6 percent, in the year ended December 31, 2012 compared with the year ended December 31, 2011.  The increase was due principally to significantly higher volume in the Guam trade that resulted from the exit of a major competitor in that trade in late 2011, an increase in China freight rates and increased fuel surcharges resulting from higher fuel prices, partially offset by reduced volumes in the Hawaii trade.

 

Container and automobile volume decreased in the Hawaii trade in the year ended December 31, 2012 compared with the year ended December 31, 2011: Hawaii container volume decreased 2.0 percent due to market weakness, competitive pressures, and a modest market contraction resulting from direct foreign sourcing of cargo; Hawaii automobile volume decreased 2.7 percent due primarily to the timing of automobile rental fleet replacement. Container volume in the China and Guam trades increased during the year ended December 31, 2012 as compared to the year ended December 31, 2011: China container volume increased 1.7 percent due to increased demand and a shift in direct foreign sourcing of cargo destined to Hawaii; Guam volume was substantially higher, increasing 67.8 percent in the year due to gains related to the departure of a major competitor from the trade in mid-November 2011.

 

Ocean transportation operating income increased $22.9 million, or 31.1 percent, in the year ended December 31, 2012 compared with the year ended December 31, 2011. The increase in operating income was principally due to higher volume in the Guam trade and increased freight rates and volume in the China trade, partially offset by decreased volume in Hawaii, increased costs related to vessel and barge dry-docking and higher outside transportation costs. The Company also incurred higher terminal handling costs due primarily to increased wharfage and container handling rates, higher general and administrative expenses, including Separation costs, and higher vessel expenses.

 

The Company’s SSAT joint venture contributed $3.2 million to operating income during the year ended December 31, 2012 compared with $8.6 million during the year ended December 31, 2011. The decline was primarily due to the loss of volume from several major customers.

 

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Table of Contents

 

Ocean Transportation; 2011 compared with 2010

 

 

 

Years Ended December 31,

 

(dollars in millions)

 

2011

 

2010

 

Change

 

Revenue

 

$

1,076.2

 

$

1,015.0

 

6.0

%

Operating income(1)

 

$

73.7

 

$

118.3

 

(37.7

)%

Operating income margin

 

6.8

%

11.7

%

 

 

 

 

 

 

 

 

 

 

Volume (Units)(2)

 

 

 

 

 

 

 

Hawaii containers

 

140,000

 

136,700

 

2.4

%

Hawaii automobiles

 

81,000

 

81,800

 

(1.0

)%

China containers

 

59,000

 

60,000

 

(1.7

)%

Guam containers

 

15,200

 

15,200

 

 

 


(1) The Company incurred additional costs related to the shutdown of CLX2 that did not meet the criteria to be classified as discontinued operations of approximately $7.1 million and therefore reduced operating income for the year ended December 31, 2011.

 

(2) Approximate container volumes included for the period are based on the voyage departure date, but revenue and operating income are adjusted to reflect the percentage of revenue and operating income earned during the reporting period for voyages that straddle the beginning or end of each reporting period.

 

Ocean Transportation revenue increased $61.2 million, or 6.0 percent, in 2011 compared to 2010. This increase was principally due to higher fuel surcharges due to increased fuel prices, as well as net volume growth principally in Hawaii. These increases were partially offset by lower yields and cargo mix primarily in the China trade.

 

Total Hawaii container volume increased 2.4 percent in 2011 compared with 2010, due to a new connecting carrier agreement with a large international carrier that commenced at the end of 2010 and other customer gains, partially offset by one less week in 2011 compared to 2010. Matson’s Hawaii automobile volume for 2011 was 1.0 percent lower than 2010, due principally to the timing of automobile rental fleet replacement activity. China container volume decreased 1.7 percent in 2011, compared with 2010, principally due to increased competition from excess capacity in the trade. Guam container volumes were flat as weaker market conditions were offset by fourth quarter gains related to the departure of a competitor from the trade in mid-November 2011.

 

Operating income (which includes $7.1 million of CLX2 shutdown expenses) decreased $44.6 million, or 37.7 percent, in 2011 compared to 2010. The decrease in operating income was principally due to lower yields and cargo mix primarily related to the China trade. Additionally, terminal handling costs increased primarily due to higher rates, and outside transportation costs increased due to higher volume. Operations overhead costs increased due to additional equipment repositioning costs and higher vessel operating expenses due to the increased contractual labor costs and generally higher costs, partially offset by lower equipment lease expenses. The lower yields and increases in costs were partially offset by higher overall cargo volume.

 

The Company’s SSAT joint venture contributed $8.6 million to operating income during the year ended December 31, 2011 compared with $12.8 million reported for the year ended December 31, 2010. The decline is primarily due to the loss of volume.

 

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Table of Contents

 

Logistics; 2012 compared with 2011

 

 

 

Years Ended December 31,

 

(dollars in millions)

 

2012

 

2011

 

Change

 

Intermodal revenue

 

$

229.1

 

$

234.5

 

(2.3

)%

Highway revenue

 

141.1

 

151.9

 

(7.1

)%

Total Revenue

 

$

370.2

 

$

386.4

 

(4.2

)%

Operating income

 

$

0.1

 

$

4.9

 

(98.0

)%

Operating income margin

 

0.0

%

1.3

%

 

 

 

Logistics revenue for the year ended December 31, 2012, decreased $16.2 million, or 4.2 percent, compared with the year ended December 31, 2011.  This decrease was primarily due to lower international intermodal and highway volumes. Intermodal volume declined primarily due to the shutdown of CLX2 and the loss of a major ocean carrier customer, partially offset by an increase in domestic volumes. Highway volume decreased due to the loss of certain full truckload customers.

 

Logistics operating income for the year ended December 31, 2012 decreased $4.8 million compared with the year ended December 31, 2011.  The reduction in operating income was due to the impairment charge of an intangible asset and restructuring of a lease at its Northern California warehousing operation totaling $3.9 million and lower volume in international intermodal and highway, partially offset by lower general and administrative expenses.

 

Logistics; 2011 compared with 2010

 

 

 

Years Ended December 31,

 

(dollars in millions)

 

2011

 

2010

 

Change

 

Intermodal revenue

 

$

234.5

 

$

204.1

 

14.9

%

Highway revenue

 

151.9

 

151.5

 

0.3

%

Total Revenue

 

$

386.4

 

$

355.6

 

8.7

%

Operating income

 

$

4.9

 

$

7.1

 

(31.0

)%

Operating income margin

 

1.3

%

2.0

%

 

 

 

Logistics revenue increased $30.8 million, or 8.7 percent, in 2011 compared with 2010. This increase was principally due to higher Intermodal volume which increased 6.6 percent, driven primarily by increased inland activity to support Ocean Transportation’s China business.

 

Logistics operating income decreased $2.2 million, or 31.0 percent, in 2011 compared with 2010. Operating income decreased despite the increased Intermodal volume cited above, due primarily to lower warehousing results, but was also due to a large military contract move that occurred in the first quarter of 2010.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Overview: Additional sources of liquidity for the Company, consisting of cash and cash equivalents, and receivables totaled $194.6 million at December 31, 2012, an increase of $17.1 million from December 31, 2011. The increase was due primarily to a $10.1 million increase in cash and cash equivalents and an increase in accounts receivable of $7.0 million.

 

Cash Flows:  Cash flows provided by operating activities continue to be the Company’s most significant source of liquidity. Net cash flows provided by operating activities from continuing operations totaled $94.0 million for 2012, $104.1 million for 2011, and $160.4 million for 2010. The decrease in 2012 over 2011 was due principally to decreases in accounts payable and accrued liabilities, as well as higher cash outflows related to the dry-dockings of vessels during the year, which were partially offset by the increase in other liabilities.  The decrease in 2011 over 2010 was due principally to lower Matson earnings and higher cash outflows related to the dry-dockings of vessels during the year, which was partially offset by the reduction in accounts payable.

 

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Table of Contents

 

Net cash flows used in investing activities were $6.3 million for 2012, $4.6 million for 2011, and $28.1 million for 2010.  The increase in cash flows used in investing activities was due principally to the reduction in contribution from the Former Parent Company, partially offset by the reduction of capital expenditures.  Contribution from the Former Parent Company of $25.0 million, $40.3 million and $43.0 million for the years ended December 31, 2012, 2011, and 2010 respectively, represent dividends paid by the Former Parent Company to its shareholders prior to the Separation offset by distributions to the Former Parent Company for the issuance of capital stock and stock based compensation, which are reflected in the Consolidated Financial Statements due to Matson being the successor company of the Former Parent Company for accounting purposes.  Capital expenditures for the year ended December 31, 2012 totaled $38.1 million compared with $47.2 million and $71.2 million for the years ended December 31, 2011 and 2010, respectively. The 2012 expenditures included $37.0 million for the purchase of ocean transportation-related assets and $1.1 million related to the purchase of logistics-related assets. Capital expenditures for the year ended December 31, 2011, totaled $47.2 million and included $44.2 million for the purchase of ocean transportation-related assets and $3.0 million related to the purchase of logistics-related assets.  Capital expenditures for the year ended December 31, 2010, totaled $71.2 million and included $69.4 million for the purchase of ocean transportation-related assets and $1.8 million related to the purchase of logistics-related assets.

 

Net cash flows used in financing activities for 2012 totaled $74.5 million, compared with $70.2 million and $119.0 million used in 2011 and 2010, respectively. Cash flows used in financing activities were higher in 2012, primarily due to the contribution of $155.7 million to A&B upon Separation.  The contribution was partially offset by borrowings of $197.0 million during the year ended December 31, 2012, which were primarily used to fund the contribution to A&B.  Also there was a reduction in the payment of dividends to the Company’s shareholders of $39.5 million, of which $26.7 million was paid to the Former Parent Company’s shareholders in the first and second quarter, which have been included in the Consolidated Financial Statements due to Matson being the successor company of the Former Parent Company for accounting purposes.  In conjunction with the Separation, the Company has lowered its quarterly dividend, resulting in lower cash payouts during 2012 as compared to 2011 and 2010.  Also during 2012, the Company saw increased stock option exercises due to the stock price trading at a higher price than the previous two years.

 

Other Sources of Liquidity:  The Company entered into a new $375.0 million, five-year unsecured revolving credit facility with a syndicate of banks during the second quarter of 2012 in order to provide additional sources of liquidity for working capital requirements or investment opportunities on a short-term as well as longer-term basis.  As of December 31, 2012, the used portion of the Company’s revolving credit facility was $30.8 million, of which $24.0 million was from cash borrowings and $6.8 million was from letters of credit.

 

During the second quarter of 2012, Matson executed new unsecured, fixed rate, amortizing long-term debt of $170.0 million which was funded in three tranches, $77.5 million at an interest rate of 3.66% maturing in 2023, $55.0 million at an interest rate of 4.16% maturing in 2027, and $37.5 million at an interest rate of 4.31% maturing in 2032.  The overall weighted average coupon of the three tranches of debt is 3.97% and the overall weighted average duration of the three tranches of debt is 9.3 years.  The cash received from the issuance of three tranches of debt was partially utilized for the contribution of cash from Matson to A&B.  Additionally, the Company negotiated the release of the MV Manulani as security for existing long-term debt of $56.0 million as part of the Company’s debt restructuring completed during the second quarter of 2012 to facilitate the Separation.  This obligation was also moved from MatNav to Matson.  Following the above mentioned debt financing transactions, all of Matson’s outstanding debt was unsecured, however it is guaranteed by Matson’s significant subsidiaries, except for $72.6 million, as of December 31, 2012, of secured MatNav debt.

 

Total debt was $319.1 million as of December 31, 2012, compared with $197.5 million at the end of 2011.

 

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Table of Contents

 

Principal negative covenants as defined in Matson’s five-year revolving credit facility (“Credit Agreement”) and long term fixed rate debt include, but are not limited to:

 

a)                                                  The ratio of debt to consolidated EBITDA cannot exceed 3.25 to 1.00 for each fiscal four quarter period;

 

b)                                                  the ratio of consolidated EBITDA to interest expense as of the end of any fiscal four quarter period cannot be less than 3.50 to 1.00; and

 

c)                                                   The principal amount of priority debt at any time cannot exceed 20% of consolidated tangible assets; and the principal amount of priority debt that is not Title XI priority debt at any time cannot exceed 10% of consolidated tangible assets.  Priority debt, as further defined in the Credit Agreement, is all debt secured by a lien on the Company’s assets or subsidiary debt.

 

The Company was in compliance with these covenants as of December 31, 2012, with a debt to consolidated EBITDA ratio of 1.79, consolidated EBITDA to interest expense ratio of 15.25, and priority debt to consolidated tangible assets ratio of 6.3%.

 

CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET ARRANGEMENTS

 

Contractual Obligations:    At December 31, 2012, the Company had the following estimated contractual obligations (in millions):

 

 

 

 

 

 

 

Payment due by period

 

 

 

 

 

Contractual Obligations

 

 

 

2013

 

2014-2015

 

2016-2017

 

Thereafter

 

Total

 

Long-term debt obligations (including current portion)

 

(a)

 

$

16.4

 

$

50.9

 

$

48.7

 

$

203.1

 

$

319.1

 

Estimated interest on debt

 

(b)

 

13.6

 

25.1

 

20.9

 

43.9

 

103.5

 

Purchase obligations

 

(c)

 

17.7

 

 

 

 

17.7

 

Post-retirement obligations

 

(d)

 

2.2

 

4.7

 

4.9

 

13.0

 

24.8

 

Non-qualified benefit obligations

 

(e)

 

0.8

 

3.9

 

1.0

 

1.6

 

7.3

 

Operating lease obligations

 

(f)

 

18.3

 

29.5

 

15.5

 

5.3

 

68.6

 

Total

 

 

 

$

69.0

 

$

114.1

 

$

91.0

 

$

266.9

 

$

541.0

 

 


(a)                     Long-term debt obligations (including current portion) include principal repayments of short-term and long-term debt for the respective period(s) described (see Note 6 to the Consolidated Financial Statements for principal repayments for each of the next five years). Short-term debt includes amounts borrowed under revolving credit facilities and have been reflected as payments due in 2013.

 

(b)                     Estimated cash paid for interest on debt is determined based on (1) the stated interest rate for fixed debt and (2) the rate in effect on December 31, 2012 for variable rate debt. Because the Company’s variable rate date may be rolled over, actual interest may be greater or less than the amounts indicated.

 

(c)                      Purchase obligations include only non-cancellable contractual obligations for the purchases of goods and services. Arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be purchased, a pricing structure and approximate timing of the transaction. Any amounts reflected on the consolidated balance sheet as accounts payable and accrued liabilities are excluded from the table above.

 

(d)                     Post-retirement obligations include expected payments to medical service providers in connection with providing benefits to the Company’s employees and retirees. The $13.0 million noted in the column labeled “Thereafter” comprises estimated benefit payments for 2018 through 2022. Post-retirement obligations are described further in Note 8 to the Consolidated Financial Statements. The obligation for pensions reflected on the Company’s consolidated balance sheet is excluded from the table above because the Company is unable to reliably estimate the timing and amount of contributions.

 

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(e)                      Non-qualified benefit obligations include estimated payments to executives and directors under the Company’s four non-qualified plans. The $1.6 million noted in the column labeled “Thereafter” comprises estimated benefit payments for 2018 through 2022. Additional information about the Company’s non-qualified plans is included in Note 8 to the Consolidated Financial Statements.

 

(f)                       Operating lease obligations include principally land, office and terminal facilities, containers and equipment under non-cancelable, long-term lease arrangements that do not transfer the rights and risks of ownership to the Company. These amounts are further described in Note 7 to the Consolidated Financial Statements.

 

The Company has not provided a detailed estimate of the timing and amount of payments related to uncertain tax position liabilities due to the uncertainty of when the related tax settlements are due. At December 31, 2012, the Company’s uncertain tax position liabilities totaled approximately $7.0 million.

 

Other Commitments and Contingencies:  A description of other commitments, contingencies, and off-balance sheet arrangements, is described in Note 11 to the Consolidated Financial Statements of Item 8 in this Form 10-K and incorporated herein by reference.

 

BUSINESS OUTLOOK

 

The Business Outlook provides the Company’s views on current conditions and trends in the various markets it serves, recent Company performance and its near-term prospects. The following information updates the Company’s quarterly filings made by the Former Parent Company and the Company throughout 2012. All forward-looking statements made herein are qualified by the inherent risks of the Company’s operations and the markets it serves, as more fully described in Item 1.A of this filing.

 

The Company serves multiple domestic and international transportation markets and its operations are therefore impacted by regional, national and international economic conditions. Given its large operational presence in Hawaii, the Company’s volumes in the Hawaii trade are highly dependent on the future results of the overall Hawaii economy, competitive activity related to capacity and pricing, and to specific economic sub-categories including construction.

 

In the China trade, volume is driven primarily by U.S. consumer demand for manufactured goods around key retail selling seasons while freight rates are impacted mainly by macro supply-demand balances. As a result, this trade has historically experienced significant volatility and seasonality in freight rates. Currently, there is a global surplus of container vessel capacity and a recent market survey conducted by Alphaliner estimates that a record 1.75 million TEUs of new vessel capacity will be delivered in 2013.  While excess vessel capacity has recently been mitigated through vessel lay-ups and slow steaming, resulting in higher than expected freight rates, sustaining current Transpacific rates depends primarily upon rational carrier management of industry capacity.

 

In the Guam trade, the competitive environment has historically impacted financial results, and to a lesser degree, overall market volume. Currently, the Company is the sole carrier of containerized freight from the West Coast of the U.S. to Guam following the departure of its major competitor from the trade lane in mid-November of 2011.

 

All trade lanes typically experience seasonality in volume and generally follow a pattern of increasing volumes starting in the second quarter of each year culminating in a peak season throughout the third quarter, with subsequent weakening of demand thereafter in the fourth and first quarters. As a result, earnings tend to follow a similar pattern, offset by periodic vessel dry-docking and other episodic cost factors, which can lead to earnings variability.

 

Ocean Transportation: Ocean Transportation’s performance is significantly influenced by freight volumes, freight rates, operating costs, and other factors, which continue to be highly dependent on general economic conditions, the future results of the overall Hawaii economy, and also specific economic sub-categories such as construction activity in Hawaii, fuel prices, Transpacific freight rates, the competitive environments in Hawaii, Guam and China, and other factors that cannot be predicted with certainty.

 

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Ocean Transportation: In the fourth quarter and throughout 2012, Hawaii container and auto volume was adversely impacted by subdued construction activity, competitive rate pressures, a modest market contraction resulting from direct foreign sourcing of cargo and the timing of automobile rental fleet replacements. However, there have been encouraging indications that the Hawaii economy is reviving, evidenced by strong fourth quarter 2012 consumer spending and a marginal uptick in construction activity late in the year. Therefore, modest volume gains are expected in the Hawaii trade in 2013.

 

Further, and as noted above, Hawaii volume can be significantly impacted by competitive activity related to pricing and capacity. Pasha Hawaii Transport, currently operating a single ro-ro vessel in the Hawaii trade lane, has announced that it intends to complete the construction of a second ship (a combination roll-on/roll-off container ship, “ro-con”) for its Hawaii service as early as 2014. The extent of this market entry, in terms of sailing frequency, service reliability, slot availability, cargo configuration and service differentiation, is unknown. However, there may be a period of competitive disruption following this market entry that could potentially negatively impact the volume for all carriers in the Hawaii trade, including Matson. Any adverse impact may be offset, to some degree, by general market growth in 2013 and beyond.

 

In the China trade, freight rates in the fourth quarter of 2012 continued to be higher than year earlier periods, reflecting an improved general rate environment. However, additional capacity is expected to enter this market in 2013 that will outstrip demand. While continued carrier restraint is expected to some degree, average annual freight rates are expected to erode modestly for Matson. Further, the Company expects to run its ships at less than full capacity during the traditional slack season but return to historical high utilization levels for the balance of 2013.

 

During the fourth quarter and throughout 2012, the Company benefitted significantly from strong volume in its Guam trade, which resulted from the departure of a major competitor the prior year. The timing and probability of a new competitor entering this market is unknown; however, overall market volume growth and economic growth in Guam during 2012 was muted.   Slow, if any, overall growth in Guam is expected to continue in 2013; and therefore, Matson’s volumes in 2013 are expected to be relatively flat compared to 2012 levels.

 

Results for SSAT, the Company’s terminal operations joint venture, were negatively affected throughout 2012 by significantly reduced lift volume due to customer losses. This customer attrition is expected to negatively impact results throughout 2013 and it is therefore expected that SSAT will operate at a breakeven level.

 

In addition to the trade lane outlook, the Company expects to benefit from operating a nine-ship fleet for most of 2013 and lower outside transportation costs, both of which result from a lighter drydock schedule. Overall, operating income in the Ocean Transportation segment is therefore expected to improve modestly from 2012 levels.

 

Logistics: In the fourth quarter and throughout 2012, volume and pricing in Logistics’ intermodal and highway businesses were mixed. In the fourth quarter, the segment incurred significant one-time, non-cash losses associated with its Northern California warehousing operation, which resulted from consolidating warehouse space and recognizing the impairment of an intangible asset. As a result, Logistics performance was below long-term expectations. In response, the Company has taken cost-cutting measures to lower Logistics’ general and corporate overhead and initiated the roll-out of a domestic 53-foot container pilot program to improve profitability. Warehouse operations are expected to improve as a result of the consolidation. Therefore, Logistics is expected to improve its operating income margins to 1-2 percent of revenues in 2013 and overall operating income is expected to return to a level similar to 2011.

 

This performance will be dependent upon continuing improvement at Logistics’ Northern California warehouse operations, continued oversight of expenses, improvement in the U.S. Mainland economy, as well as competitive dynamics, cargo mix, available capacity in the market, reliability of the underlying carriers and other factors that cannot be predicted with certainty.

 

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The Company’s overall outlook assumes modest growth for the U.S. and Hawaii economies.  There are two primary sources of periodic economic forecasts and data for the State of Hawaii: The University of Hawaii Economic Research Organization (UHERO) and the State’s Department of Business, Economic Development and Tourism (DBEDT). Economic information included herein has been derived from economic reports available on UHERO’s and DBEDT’s websites that provide more complete information about the status of and forecast for the Hawaii economy.

 

Other:  The Company expects capital expenditures for the first quarter of 2013 to be approximately $10-15 million and capital expenditures for the year to be $40-$50 million, excluding vessel replacement expenditures.

 

The Company may elect to make deposits to the Capital Construction Fund in 2013 if it is able to finalize the next phase of its vessel replacement plan that calls for two new vessels in the next three to five years. These deposits could be significant, and the amounts deposited will be determined based on a number of factors, including Company cash requirements. Any deposits made in 2013 will have the effect of reducing the Company’s current cash tax liabilities.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Matson is exposed to changes in interest rates, primarily as a result of its borrowing and investing activities used to maintain liquidity and to fund business operations. In order to manage its exposure to changes in interest rates, Matson utilizes a balanced mix of both fixed-rate and variable-rate debt. The nature and amount of Matson’s long-term and short-term debt can be expected to fluctuate as a result of future business requirements, market conditions and other factors.

 

The Company’s fixed rate debt consists of $295.1 million in principal term notes. The Company’s variable rate debt consists of $24.0 million under its revolving credit facilities. Other than in default, the Company does not have an obligation to prepay its fixed-rate debt prior to maturity and, as a result, interest rate fluctuations and the resulting changes in fair value would not have an impact on the Company’s financial condition or results of operations unless the Company was required to refinance such debt. For the Company’s variable rate debt, a one percent increase in interest rates would not have a material impact on the Company’s results of operations.

 

The following table summarizes Matson’s debt obligations at December 31, 2012, presenting principal cash flows and related interest rates by the expected fiscal year of repayment.

 

 

 

Expected Fiscal Year of Repayment as of December 31, 2012 (dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value at

 

 

 

2013

 

2014

 

2015

 

2016

 

2017

 

Thereafter

 

Total

 

December 31, 2012

 

Fixed rate

 

$

11.4

 

$

11.4

 

$

20.5

 

$

20.5

 

$

28.2

 

$

203.1

 

$

295.1

 

$

316.8

 

Average interest rate

 

4.6

%

4.5

%

4.5

%

4.5

%

4.5

%

4.5

%

4.6

%

 

 

Variable rate

 

$

5.0

 

$

19.0

 

$

 

$

 

$

 

$

 

$

24.0

 

$

24.0

 

Average interest rate*

 

1.7

%

1.7

%

 

 

 

 

1.7

%

 

 

 


* Estimated interest rates on variable debt are determined based on the rate in effect on December 31, 2012. Actual interest rates may be greater or less than the amounts indicated when variable rate debt is rolled over.

 

From time to time, the Company may invest its excess cash in short-term money market funds that purchase government securities or corporate debt securities. At December 31, 2012, the Company did not have any investments in money market funds. These money market funds maintain a weighted average maturity of less than 90 days, and accordingly, a one percent change in interest rates is not expected to have a material impact on the fair value of these investments or on interest income. Through its Capital Construction Fund, the Company may, from time to time, invest in mortgage-backed securities. At December 31, 2012 and 2011, these investments were not material.

 

Matson has no material exposure to foreign currency risks, although it is indirectly affected by changes in currency rates to the extent that changes in rates affect tourism in Hawaii. Transactions related to its China Service are primarily denominated in U.S. dollars, and therefore, a one percent change in the renminbi exchange rate would not have a material effect on the Company’s results of operations.  In 2013, transactions related to its new South Pacific Service are expected to be primarily denominated in New Zealand dollars, however a one percent change in the New Zealand dollar exchange is not expected to have a material effect on the Company’s results of operations.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

 

 

 

Page

 

 

 

 

Management’s Annual Report on Internal Control Over Financial Reporting

35

 

 

Report of Independent Registered Public Accounting Firm

36

 

 

Consolidated Statements of Income and Comprehensive Income

37

 

 

Consolidated Balance Sheets

38

 

 

Consolidated Statements of Cash Flows

39

 

 

Consolidated Statements of Shareholders’ Equity

40

 

 

Notes to Consolidated Financial Statements

41

 

 

 

1.

Summary of Significant Accounting Policies

41

 

 

 

 

 

2.

Discontinued Operations

49

 

 

 

 

 

3.

Investment in Terminal Joint Venture

50

 

 

 

 

 

4.

Property

51

 

 

 

 

 

5.

Capital Construction Fund

52

 

 

 

 

 

6.

Notes Payable and Long-Term Debt

52

 

 

 

 

 

7.

Leases

54

 

 

 

 

 

8.

Employee Benefit Plans

54

 

 

 

 

 

9.

Income Taxes

62

 

 

 

 

 

10.

Share-Based Awards

64

 

 

 

 

 

11.

Commitments, Guarantees and Contingencies

67

 

 

 

 

 

12.

Related Party

68

 

 

 

 

 

13.

Reportable Segments

69

 

 

 

 

 

14.

Quarterly Information (Unaudited)

71

 

 

 

 

 

15.

Subsequent Events

72

 

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MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

 

The management of Matson, Inc. has the responsibility for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that:

 

·                  Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the company;

·                  Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

·                  Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting only provides reasonable assurance with respect to financial statement presentation and preparation. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2012. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on its assessment, management believes that, as of December 31, 2012, the Company’s internal control over financial reporting is effective. The Company’s independent registered public accounting firm, Deloitte & Touche LLP, has issued an audit report on the Company’s internal control over financial reporting.

 

/s/ Matthew J. Cox

 

/s/ Joel M. Wine

Matthew J. Cox

 

Joel M. Wine

President and Chief Executive Officer

 

Senior Vice President and Chief Financial Officer

February 28, 2013

 

February 28, 2013

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Shareholders of

Matson, Inc.

Honolulu, Hawaii

 

We have audited the accompanying consolidated balance sheets of Matson, Inc. and subsidiaries (the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of income and comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2012.  We also have audited the Company’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

As disclosed in Notes 1 and 2 to the consolidated financial statements, Alexander & Baldwin Inc., separated from the Company during the year ended December 31, 2012.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Matson, Inc. and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

 

/s/ Deloitte & Touche LLP

 

Honolulu, Hawaii

February 28, 2013

 

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MATSON, INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(In millions, except per-share amounts)

 

 

 

Years Ended December 31,

 

 

 

2012

 

2011

 

2010

 

Operating Revenue:

 

 

 

 

 

 

 

Ocean transportation

 

$

1,189.8

 

$

1,076.2

 

$

1,015.0

 

Logistics

 

370.2

 

386.4

 

355.6

 

Total operating revenue

 

1,560.0

 

1,462.6

 

1,370.6

 

 

 

 

 

 

 

 

 

Costs and Expenses:

 

 

 

 

 

 

 

Operating costs

 

1,338.1

 

1,280.1

 

1,144.7

 

Equity in income of terminal joint venture

 

(3.2

)

(8.6

)

(12.8

)

Selling, general and administrative

 

119.8

 

112.5

 

113.3

 

Separation costs

 

8.6

 

 

 

Operating costs and expenses

 

1,463.3

 

1,384.0

 

1,245.2