Table of Contents

 

 

 

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, 2015

 

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:

 

Title of each class

 

Name of each exchange
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 23, 2016:

43,444,091

 

Aggregate market value of Common Stock held by non-affiliates at June 30, 2015:

$1,812,878,266

 

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 to the extent described therein: Proxy statement for the annual meeting of shareholders of Matson, Inc. to be held April 28, 2016.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

 

 

 

Page

 

 

 

 

 

 

PART I

 

 

 

 

 

Items 1.

 

Business

1

 

 

 

 

 

A.

Business Description

1

 

 

(1) Operations

1

 

 

(2) Maritime Laws and the Jones Act

4

 

 

(3) Competition

4

 

 

(4) Customers and Rate Regulations

5

 

 

(5) Fuel Costs

6

 

 

(6) Seasonality

6

 

 

(7) Emissions

6

 

 

 

 

 

B.

Employees and Labor Relations

7

 

 

 

 

 

C.

Available Information

7

 

 

 

 

Item 1A.

 

Risk Factors

8

 

 

 

 

Item 1B.

 

Unresolved Staff Comments

15

 

 

 

 

Item 2.

 

Properties

15

 

 

 

 

Item 3.

 

Legal Proceedings

16

 

 

 

 

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

17

 

 

 

 

Item 6.

 

Selected Financial Data

19

 

 

 

 

Item 7.

 

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

20

 

 

 

 

Items 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

32

 

 

 

 

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

 

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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

 

 

80

 

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Table of Contents

 

MATSON, INC.

 

FORM 10-K

 

Annual Report for the Fiscal Year

Ended December 31, 2015

 

PART I

 

ITEM 1.  BUSINESS

 

Matson, Inc., a holding company incorporated in January 2012 in the State of Hawaii, and its subsidiaries (“Matson” or the “Company”), is a leading provider of ocean transportation and logistics services.  The Company consists of two segments, Ocean Transportation and Logistics.  For financial information by segment for the three years ended December 31, 2015, see Note 15 to the consolidated financial statements in Item 8 of Part II below.

 

Ocean Transportation:  Matson’s Ocean Transportation business is conducted through Matson Navigation Company, Inc. (“MatNav”), a wholly-owned subsidiary of Matson, Inc.  Founded in 1882, MatNav is an asset-based business that provides a vital lifeline of ocean freight transportation services to the domestic economies of Hawaii, Alaska, and Guam, and to other island economies in Micronesia and in the South Pacific.  MatNav also operates a premium, expedited service from China to Long Beach, California.  In addition, subsidiaries of MatNav provide container stevedoring, container equipment maintenance and other terminal services for MatNav and other ocean carriers on the Hawaii islands of Oahu, Hawaii, Maui and Kauai, and in the Alaska locations of Anchorage, Kodiak, Dutch Harbor and Akutan.

 

Matson 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 carriers at six terminal facilities on the U.S. West Coast, including to MatNav at three 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 SSAT’s operations.

 

Horizon Acquisition:  On May 29, 2015, Matson completed its acquisition of Horizon Lines, Inc. (“Horizon”).  As a result, Matson acquired Horizon’s Alaska operations and assumed all of Horizon’s non-Hawaii assets and liabilities (the “Horizon Acquisition”).  For additional information on the Horizon Acquisition, see Note 3 to the consolidated financial statements in Item 8 of Part II below.

 

Logistics:  Matson’s Logistics business is conducted through Matson Logistics, Inc. (“Matson Logistics” or “Logistics”), a wholly-owned subsidiary of MatNav.  Established in 1987, Matson Logistics is an asset-light business that provides multimodal transportation services, including domestic and international rail intermodal service (“Intermodal”); long-haul and regional highway brokerage, specialized hauling, flat-bed and project services, less-than-truckload services, and expedited freight services (collectively “Highway”); supply chain management, and warehousing and distribution services.

 

A.                                    BUSINESS DESCRIPTION

 

(1)                                 Operations

 

Ocean Transportation

 

Matson’s Services:  Matson’s Ocean Transportation segment provides the following ocean freight services:

 

Hawaii Service:  Matson’s Hawaii service provides 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 largest carrier of ocean cargo between the U.S. West Coast and Hawaii.

 

Westbound cargo carried by Matson to Hawaii includes dry containers of mixed commodities, refrigerated commodities, packaged foods, building materials, automobiles and household goods.  Matson’s eastbound cargo from Hawaii includes automobiles, household goods, dry containers of mixed commodities, 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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Alaska Service:  Matson’s Alaska service, which Matson acquired on May 29, 2015 as part of the Horizon Acquisition, provides ocean freight services (lift-on/lift-off and conventional services) between the port of Tacoma, Washington, and the ports of Anchorage, Kodiak, and Dutch Harbor in Alaska.  The Company also provides a barge service between Dutch Harbor and Akutan, and other transportation services to smaller locations in Alaska.

 

Matson’s northbound cargo to Alaska includes dry containers of mixed commodities, refrigerated commodities, packaged foods, household goods, and automobiles.  Matson’s southbound cargo from Alaska primarily consists of household goods, automobiles and seafood.

 

China Service:  Matson’s China service is part of an integrated Hawaii/Guam/China service.  This service carries cargo from Long Beach to Honolulu and 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 vessels also carry cargo destined to and originating from the Guam and Micronesia services.  China cargo consists mainly of garments, footwear, and other retail merchandise.

 

Guam Service:  Matson’s Guam service provides weekly container and conventional freight services carrying mainly general sustenance cargo between the U.S. West Coast and Guam.  Additionally, Matson provides freight services from Guam to the Commonwealth of the Northern Mariana Islands.

 

Micronesia Service:  Matson’s Micronesia service provides container and conventional freight services carrying mainly general sustenance cargo between the U.S. West Coast and the islands of Kwajalein, Ebeye and Majuro in the Republic of the Marshall Islands, the islands of Yap, Pohnpei, Chuuk and Kosrae in the Federated States of Micronesia, and the Republic of Palau.  Cargo destined for these locations is transshipped through Guam.

 

South Pacific Service:  Matson’s South Pacific service provides container and conventional freight services carrying general sustenance cargo between New Zealand and other South Pacific Islands including Fiji, Samoa, American Samoa, Tonga, the Cook Islands, Niue, Vanuatu, Nauru, and the Solomon Islands.

 

Matson’s Vessel Information:  Matson’s fleet includes 23 owned and three chartered vessels.  The Matson-owned fleet represents an initial investment of approximately $1.4 billion and consists of: 17 containerships; two combination container/roll-on/roll-off ships; one roll-on/roll-off barge; and three container barges equipped with cranes (see Critical Accounting Estimates in Item 7 of Part II below for additional information about vessel costs and net book values).  The majority of vessels in the Matson-owned fleet have been acquired with the assistance of withdrawals from a Capital Construction Fund (“CCF”) established under Section 607 of the Merchant Marine Act of 1936 (see Note 7 to the consolidated financial statements in Item 8 of Part II below for additional information about the CCF).

 

During the fourth quarter of 2013, MatNav and Philly Shipyard (formerly known as Aker Philadelphia Shipyard, Inc.) entered into definitive agreements pursuant to which Philly Shipyard will construct two new 3,600 twenty-foot equivalent unit (“TEU”) Aloha-class containerships with dual-fuel capable engines, which are expected to be delivered during the third quarter of 2018 and the first quarter of 2019 (the “Shipbuilding Agreements”), at a total cost of approximately $418.0 million.  Philly Shipyard’s obligations under the Shipbuilding Agreements are guaranteed by Aker Philadelphia Shipyard ASA, a publicly listed company on the OSLO Stock Exchange.

 

As a complement to its fleet, as of December 31, 2015, Matson owns approximately 37,400 containers and 12,200 chassis, which represents an initial investment of approximately $295 million, and miscellaneous other equipment.  Matson also leases approximately 13,700 containers and 11,100 chassis.

 

Matson’s U.S. flagged vessels must meet specified seaworthiness standards established by U.S. Coast Guard rules and classification society requirements.  These standards require that our ships undergo two dry-docking inspections within a five-year period.  The majority of Matson’s U.S. flagged vessels are enrolled in the U.S. Coast Guard’s Underwater Survey in Lieu of Dry-docking (“UWILD”) program.  The UWILD program allows eligible ships to meet their intermediate dry-docking requirement with a less costly underwater inspection.

 

Matson operates four non-U.S. flagged vessels (one owned; one under a bareboat charter arrangement; and two on time charter arrangements) in the Micronesia and South Pacific services.  Matson is responsible for ensuring that the owned and bareboat chartered vessels meet international standards for seaworthiness, which among other requirements generally mandate that Matson perform two dry-docking inspections every five years.  The dry-dockings of Matson’s time chartered vessels are the responsibility of the ships’ owners.

 

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Vessels owned and chartered by Matson as of December 31, 2015 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Usable Cargo Capacity

 

 

 

 

 

 

 

 

 

 

 

Maximum

 

Maximum

 

Containers

 

Vehicles

 

 

 

Owned/

 

Official

 

Year

 

 

 

Speed

 

Deadweight

 

Reefer

 

 

 

 

 

Name of Vessels (1)

 

Chartered

 

Number

 

Built

 

Length

 

(Knots)

 

(Long Tons)

 

Slots

 

TEUs (2)

 

Autos

 

Diesel-Powered - Owned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MAUNALEI

 

Owned

 

1181627

 

2006

 

681’ 1”

 

22

 

33,771

 

328

 

1,992

 

 

MANULANI

 

Owned

 

1168529

 

2005

 

712’ 0”

 

23

 

29,517

 

284

 

2,378

 

 

MAUNAWILI

 

Owned

 

1153166

 

2004

 

711’ 9”

 

23

 

29,517

 

326

 

2,378

 

 

MANUKAI

 

Owned

 

1141163

 

2003

 

711’ 9”

 

23

 

29,517

 

326

 

2,378

 

 

OLOMANA (3)

 

Owned

 

1559

 

1999

 

381’5”

 

14

 

5,364

 

68

 

521

 

 

R.J. PFEIFFER

 

Owned

 

979814

 

1992

 

713’ 6”

 

23

 

27,100

 

300

 

2,245

 

 

MATSON KODIAK (6)

 

Owned

 

910308

 

1987

 

710

 

20

 

37,473

 

280

 

1,668

 

 

HORIZON ANCHORAGE (6)

 

Owned

 

910306

 

1987

 

710

 

20

 

37,473

 

280

 

1,668

 

 

HORIZON TACOMA (6)

 

Owned

 

910307

 

1987

 

710

 

20

 

37,473

 

280

 

1,668

 

 

MOKIHANA

 

Owned

 

655397

 

1983

 

860’ 2”

 

23

 

29,484

 

354

 

1,994

 

1,323

 

MANOA

 

Owned

 

651627

 

1982

 

860’ 2”

 

23

 

30,187

 

408

 

2,824

 

 

MAHIMAHI

 

Owned

 

653424

 

1982

 

860’ 2”

 

23

 

30,167

 

408

 

2,824

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diesel-Powered - Chartered

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IMUA II (3)

 

Chartered

 

9184237

 

2005

 

388’ 6”

 

15

 

8,071

 

90

 

630

 

 

LILOA (3)

 

Chartered

 

4681

 

2003

 

358’ 11”

 

15

 

5,934

 

30

 

513

 

 

MANA (3)

 

Chartered

 

4958

 

1997

 

329’ 9”

 

13

 

4,508

 

60

 

384

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Steam-Powered

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

KAUAI

 

Owned

 

621042

 

1980

 

720’ 5”

 

22

 

26,308

 

276

 

1,644

 

44

 

MAUI

 

Owned

 

591709

 

1978

 

720’ 5”

 

22

 

26,623

 

252

 

1,644

 

 

MATSON PRODUCER (6)

 

Owned

 

552819

 

1974

 

720

 

22

 

38,858

 

170

 

1,680

 

 

MATSONIA

 

Owned

 

553090

 

1973

 

760’ 0”

 

21

 

22,501

 

258

 

1,727

 

450

 

HORIZON CONSUMER (6)

 

Owned

 

552818

 

1973

 

720

 

22

 

38,858

 

170

 

1,690

 

 

MATSON NAVIGATOR (6)

 

Owned

 

541868

 

1972

 

813

 

21

 

47,790

 

188

 

2,250

 

 

LIHUE

 

Owned

 

530137

 

1971

 

787’ 8”

 

21

 

38,656

 

188

 

2,018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Barges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

WAIALEALE (4)

 

Owned

 

978516

 

1991

 

345’ 0”

 

 

5,621

 

36

 

 

230

 

MAUNA KEA (5) 

 

Owned

 

933804

 

1988

 

372’ 0”

 

 

6,837

 

70

 

379

 

 

MAUNA LOA (5)

 

Owned

 

676973

 

1984

 

350’ 0”

 

 

4,658

 

78

 

335

 

 

HALEAKALA (5)

 

Owned

 

676972

 

1984

 

350’ 0”

 

 

4,658

 

78

 

335

 

 

 


(1) Excludes two inactive vessels to be recycled.

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

(3) Except for these four foreign-flagged vessels, all vessels are U.S. flagged and Jones Act qualified vessels.

(4) Roll-on/roll-off barge.

(5) Container barges equipped with cranes.

(6) Vessels acquired as part of the Horizon Acquisition on May 29, 2015.

 

Terminals

 

Matson provides container stevedoring, container equipment maintenance and other terminal services for MatNav and another ocean carrier at terminals located on the Hawaiian islands of Oahu, Hawaii, Maui and Kauai; and in the Alaska terminal locations of Anchorage, Kodiak, and Dutch Harbor.

 

In addition, SSAT provides terminal and stevedoring services to various carriers at six terminal facilities on the U.S. West Coast and to MatNav at three of those facilities, including Long Beach and Oakland, California, and Seattle, Washington.  Matson records its share of income in the joint venture in operating expenses within the Ocean Transportation segment due to the nature of SSAT’s operations.  Furthermore, APM Terminals provides terminal and stevedoring services to MatNav in Tacoma, Washington.

 

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Table of Contents

 

Logistics and Other Services

 

Matson Logistics is a transportation intermediary that provides intermodal rail services, highway, warehousing and distribution, and other third-party logistics services for North American customers and international ocean carrier customers, including MatNav.  Matson Logistics also provides freight forwarding, consolidation, customs brokerage, purchase order management and non-vessel operating common carrier services.  Matson Logistics Warehousing provides warehousing and distribution services in Northern and Southern California, and in Georgia.  Through Matson Logistics Warehousing, Matson Logistics provides its customers with a full suite of rail, highway, warehousing and distribution services.

 

Matson Logistics is able to reduce transportation costs for its customers 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 operates six customer service centers, including one in China (for supply chain services), and has sales offices throughout the United States.

 

(2)                                 Maritime Laws and the Jones Act

 

Maritime Laws:  All interstate and intrastate marine commerce within the U.S. falls under the Merchant Marine Act of 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, be manned predominantly by U.S. crews, and owned and operated by U.S.-organized companies that are controlled and 75 percent owned by U.S. citizens.  U.S. flagged vessels are generally required to be maintained at higher standards than foreign flagged vessels and are subject to rigorous supervision and inspections by, or on behalf of, the U.S. Coast Guard, which requires appropriate certifications and background checks of the crew members.  Under Section 27 of the Jones Act, the carriage of cargo between the U.S. West Coast, Hawaii and Alaska on foreign-built or foreign-documented vessels is prohibited.

 

During 2015, approximately 67 percent of Matson’s revenues generated by ocean transportation services, including Hawaii and Alaska, came from trades that were subject to the Jones Act.  Matson’s Hawaii and Alaska trade routes are included within the non-contiguous Jones Act market.  Hawaii, as an island economy, and Alaska due to its geographical location, are both dependent on ocean transportation.  The Jones Act ensures frequent, reliable, roundtrip service to these locations.  Matson’s vessels operating in these trade routes are fully Jones Act qualified.

 

Matson is a member of the American Maritime Partnership (“AMP”), which supports the retention of the Jones Act and similar cabotage laws.  The Jones Act has broad support from both houses of Congress.  Matson also believes that the ongoing war on terrorism has further solidified political support for U.S. flagged vessels because 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.  AMP 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.  Repeal of the Jones Act would allow foreign-flag vessel operators that do not have to abide by all U.S. laws and regulations to sail between U.S. ports in direct competition with Matson and other U.S. domestic operators that must comply with all such laws and regulations.

 

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.

 

Cabotage laws are not unique to the United States, and similar laws exist around the world in over 50 countries, including regions in which Matson provides ocean transportation services.  Any changes in such laws may have an impact on the services provided by Matson in those regions.

 

(3)                                 Competition

 

Hawaii Service:  Matson’s Hawaii service has one major containership competitor, Pasha Hawaii (“Pasha”), which operates container and roll-on/roll-off services between the ports of San Diego, Long Beach and Oakland, California, to Honolulu, Hawaii.  There also are two barge operators, Aloha Marine Lines and Sause Brothers, which offer barge service between the Pacific Northwest and Hawaii.

 

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 the 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 proprietary operators and contract carriers of bulk cargo.  Air freight competition for time-sensitive and perishable cargo exists; however, inroads by such competition in terms of cargo volume are limited by the amount of cargo space available in passenger aircrafts and by relatively high

air freight rates.

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Matson vessels are operated on schedules that provide shippers and consignees regular day-of-the-week sailings from the U.S. West Coast and day-of-the-week arrivals in Hawaii.  Matson generally offers an average of three to four 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 domestic liner ocean competitors’ combined sailings.  One of Matson’s westbound sailings each week continues on to Guam and China, so the number of eastbound sailings from Hawaii to the U.S. Mainland averages two to three per week.  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 container equipment, a dedicated neighbor islands barge network, its efficiency and experience in handling cargo of all types, and competitive pricing.

 

Alaska Service:  Matson’s Alaska service has one major competitor, Totem Ocean Trailer Express, Inc., which operates a roll-on/roll off service between Tacoma, Washington and Anchorage, Alaska.  There are also two barge operators, Alaska Marine Lines which mainly serves Seattle, Washington to the main ports of Anchorage and Dutch Harbor, and other locations in Alaska, and Samson Tug & Barge which mainly serves Seattle, Washington to many other locations in Alaska.  The barge operators have historically shipped lower value bulk commodities and construction materials that can accommodate a longer transit time.

 

Matson offers customers twice weekly scheduled services from Tacoma, Washington to Anchorage and Kodiak, Alaska and weekly service to Dutch Harbor, Alaska.  The Company also provides a weekly barge service between Dutch Harbor and Akutan.  Matson is the only Jones Act containership operator providing service to Kodiak and Dutch Harbor, which are the primary loading ports for southbound seafood volume.

 

China Service:  Major competitors to Matson’s China service include large international carriers such as Maersk, Hanjin, MSC, CMA CGM, Evergreen, China COSCO Shipping Corporation, APL, “K” Line, OOCL, Hyundai and NYK Line.

 

Matson competes by offering fast and reliable freight availability from the ports of Xiamen, Ningbo and Shanghai in China to Long Beach, California, providing fixed day arrivals and next-day cargo availability.  Matson’s service is further differentiated by offering a dedicated Long Beach marine terminal, an off-dock container yard providing fast truck turn times, one-stop intermodal connections, and providing state-of-the-art technology and world-class customer service.  Matson has offices in Hong Kong, Shenzhen, Xiamen, Ningbo and Shanghai, and has contracted with terminal operators in Xiamen, Ningbo and Shanghai.

 

Guam Service:  Matson’s Guam service competes with several foreign carriers that call at Guam with less frequent service, along with Waterman Steamship Corporation, a U.S. flagged carrier, which periodically calls at Guam.  At the beginning of 2016, American President Lines (APL) launched a U.S. flagged container feeder bi-weekly service connecting the U.S. West Coast to Guam and Saipan, via transshipments over Yokohama, Japan.

 

Micronesia and the South Pacific Services:  Matson’s Micronesia and South Pacific services have competition from a variety of local and international carriers that provide freight services to the area.

 

Logistics:  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 freight brokers and intermodal marketing companies, and asset-invested market leaders such as JB Hunt.  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 freight services.

 

(4)                             Customers and Rate Regulations

 

Customers:  Matson serves customers in numerous industries and carries a wide variety of cargo, mitigating its dependence upon any single customer or single type of cargo.  In 2015, the Company’s 10 largest Ocean Transportation customers accounted for approximately 23 percent of the Company’s Ocean Transportation revenue, and the Company’s 10 largest Logistics customers accounted for approximately 23 percent of the Company’s Logistics revenue.  None of these customers accounted for more than 10 percent of the Company’s revenues in their respective operating segments.

 

Rate Regulations:  Matson is subject to the jurisdiction of the Surface Transportation Board with respect to its domestic ocean rates.  A rate in the non-contiguous 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

 

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effective date of the proposed rate, subject to increase or decrease by the percentage change in the U.S. Producer Price Index.  Matson generally provides a 30 day notice to customers of any increases in general rates and terminal handling charges, and passes along decreases as soon as possible.

 

Matson’s Ocean Transportation services engaged in U.S. foreign commerce are subject to the jurisdiction of the Federal Maritime Commission (“FMC”).  The FMC is an independent regulatory agency that is responsible for the regulation of ocean-borne international transportation of the U.S.  Conducting business in foreign shipping markets subjects the Company to certain risks (see Item 1A of Part I below for additional information about such risks).

 

(5)                             Fuel Costs

 

Matson purchases fuel oil, lubricants and gasoline for its operations; and also pays fuel surcharges to drayage providers and rail carriers.  The cost of fuel oil is by far Matson’s largest energy-related expense.

 

Matson applies a fuel surcharge rate to its Hawaii, Alaska, Guam, China, Micronesia and South Pacific customers.  Changes in the fuel surcharge levels are correlated to prevailing market rates for bunker fuel prices along with other fuel related cost factors.  In markets excluding China, Matson generally provides a 30-day notice to customers of increases in fuel surcharge rates.  In the China market, Matson adjusts the fuel surcharge quarterly.

 

(6)                             Seasonality

 

Matson’s Ocean Transportation services typically experience seasonality in volume, generally following a pattern of increasing volumes starting in the second quarter of each year, culminating in a peak season throughout the third quarter, with subsequent decline in demand during the fourth and first quarters.  This seasonality trend is amplified in the Alaska service primarily due to winter weather and the timing of southbound seafood trade.  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.  In addition, in the China trade, volume is driven primarily by U.S. consumer demand for goods during key retail selling seasons while freight rates are impacted mainly by macro supply and demand variables.

 

Matson’s Logistics services are not significantly impacted by seasonality factors.

 

(7)                             Emissions

 

Matson is focused on reducing transportation emissions, including carbon dioxide, nitrous oxide, particulate matter, and sulfur dioxide, through improvements in vessel fuel consumption and truck efficiency; and the development of more fuel-efficient transportation solutions.

 

The global sulfur emissions cap of 4.5 percent was reduced to 3.5 percent effective January 1, 2012, and is planned to be reduced to as low as 0.5 percent by 2020.  With respect to North America, the U.S Environmental Protection Agency (“EPA”) received approval from the International Maritime Organization, in coordination with Environment Canada, to designate all waters, with certain limited exceptions, within 200 nautical miles of U.S. and Canadian coast lines as designated emission control areas (“ECAs”).  Most of Matson’s vessels operate a portion of their voyages in ECAs while Matson’s Alaska vessels operate a substantial portion of their voyages in ECAs.  The North American ECA went into effect on August 1, 2012, limiting the sulfur emissions to 1.0 percent, with scheduled reductions in future years.  Maximum sulfur emissions permitted in designated ECA’s were reduced to 0.1 percent on January 1, 2015.

 

In 2014, Matson received a conditional waiver from the EPA ECA regulations for three diesel-powered vessels used in the Hawaii service that permits the continued use of 1.0 percent sulfur content fuel for a limited time, subject to the development of technologies that monitor main engine performance and promote full power operations on fuels with a sulfur content of less than 0.1 percent.

 

Effective in 2015, Horizon received a conditional waiver (subsequently transferred to Matson pursuant to the Horizon Acquisition) from the EPA ECA regulations for three diesel-powered vessels used in the Alaska service that permits the use of 2.0 percent sulfur content fuel on these vessels for a limited time, subject to the installation and testing of an exhaust gas cleaning system (known as ‘scrubbers’) on such vessels.  The conditional waiver includes a schedule by which such installation and testing is to be completed, with dates of installation ranging from the second half of 2015 to the end of 2016.  The estimated costs for the installation of scrubbers on all three vessels is approximately $27.7 million, of which approximately $10.1 million was incurred as of December 31, 2015 related to the installation on one vessel.  The Company expects the installation of the other two vessels to be completed later in 2016.  These capital expenditures are related to the Ocean Transportation segment.

 

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B.                                    EMPLOYEES AND LABOR RELATIONS

 

As of December 31, 2015, Matson and its subsidiaries had 1,663 employees, of which 650 employees were covered by collective bargaining agreements with shoreside and offshore unions.  These numbers do not include billets on vessels discussed below, or employees of SSAT or non-employees such as agents, temporary workers and contractors.

 

Matson and SSAT are members of the Pacific Maritime Association (“PMA”), which on behalf of its members negotiates collective bargaining agreements with the International Longshore and Warehouse Union (“ILWU”) on the U.S. Pacific Coast.  The PMA/ILWU collective bargaining agreements cover substantially all U.S. West Coast longshore labor.  Matson also has collective bargaining agreements with other shoreside unions that expire at various dates in the future.

 

Matson’s active fleet employed seagoing personnel in 325 billets at December 31, 2015.  Each billet corresponds to a position on a vessel 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 unions for both unlicensed crew members and licensed crew members.  Matson has collective bargaining agreements with these unions that expire at various dates in the future.

 

While Matson believes that it will be able to renegotiate collective bargaining agreements with its various unions as they expire without any significant impact on its operations; no assurance can be given that such agreements will be reached without slow-downs, strikes, lock-out or other disruptions that may adversely impact Matson’s operations.

 

Matson contributes to a number of multi-employer pension plans.  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.  Matson has no present intention of withdrawing from, and does not anticipate the termination of any of the multi-employer pension plans that it contributes to except for the ILA-PRSSA pension fund in Puerto Rico (see Notes 11 and 12 to the consolidated financial statements in Item 8 of Part II below for a discussion of withdrawal liabilities under certain multi-employer pension plans).

 

C.                                    AVAILABLE INFORMATION

 

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 Securities Exchange Act of 1934 as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the U.S. Securities and Exchange Commission (“SEC”).  The address of Matson’s Internet website is www.matson.com.  The contents of our website are not incorporated by reference into this Form 10-K.

 

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 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 address of the SEC’s Internet website is www.sec.gov.

 

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ITEM 1A.  RISK FACTORS

 

The Company’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 decrease in consumer confidence or market demand for the Company’s services and products in Hawaii and Alaska, the U.S. Mainland, Guam, Asia or the  South Pacific may adversely affect the Company’s financial position, results of operations, liquidity, or cash flows.

 

A weakening of domestic or global economies may adversely impact the level of freight volumes and freight rates.  Within the U.S., a weakening of economic drivers in Hawaii and Alaska, which include tourism, military spending, construction starts, personal income growth and employment, or the weakening of consumer confidence, market demand, the economy in the U.S. Mainland, or the effect of a change in the strength of the U.S. dollar against other foreign currencies, may further reduce the demand for goods to and from Asia, Hawaii and Alaska, 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.

 

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 new vessels 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.  The Company’s major competitor in the Hawaii market introduced a new vessel in 2015, and also acquired Horizon’s Hawaii service, which could adversely impact the Company’s Hawaii service.  In addition, at the beginning of 2016, American President Lines (APL) launched a U.S. flagged feeder containership bi-weekly service connecting the U.S. West Coast to Guam and Saipan via transshipments over Yokohama, Japan.  As a result of these and other competitor actions, the Company could experience some competition related volume losses.

 

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 could be adversely affected by any changes in the services provided, or changes to the costs of services provided by key vendors and agents.  Relationships with railroads and shipping companies and agents are important in the Company’s intermodal business.  The Company’s business also relies on its relationships with the military, freight forwarders, large retailers and consumer goods and automobile manufacturers, as well as other larger customers.  In 2015, the Company’s Ocean Transportation segment’s 10 largest customers accounted for approximately 23 percent of the business’ revenue.  In 2015, the Company’s Logistics segment’s 10 largest customers accounted for approximately 23 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.

 

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 increases in other expenses, for example: increased energy costs, and the costs of purchased outside 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 also may adversely affect its results of operations.

 

Work stoppages or other labor disruptions caused by unionized workers of the Company, other workers or their unions in related industries may adversely affect the Company’s operations.

 

As of December 31, 2015, Matson and its subsidiaries had 1,663 regular employees, of which 650 employees were covered by collective bargaining agreements with unions.  In addition, at December 31, 2015, the active Matson fleet employed seagoing

 

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personnel in 325 billets.  Each billet corresponds to a position on a vessel that typically is filled by two or more employees, because seagoing personnel rotate between active sea-duty and time ashore.  Such employees are also subject to collective bargaining agreements.  Furthermore, the Company relies on the services of third-parties including SSAT and its parent company, SSA, that employ persons covered by collective bargaining agreements.  For additional information on collective bargaining agreements with unions, see Item 1. B. Employees and Labor Relations of Part I above.

 

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 benefit increases or modify work practices.  Strikes and disruptions may occur as a result of the failure of Matson or other companies in its industry to negotiate collective bargaining agreements with such unions successfully.

 

In addition, any slow-downs, strikes, lock-outs or other disruptions, including limits to availability of labor through trade union hiring halts could have an adverse impact on Matson’s or SSAT’s operations

 

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 and cranes, 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 and liability insurance policies, which 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.  The Company is currently in the process of renewing its terminal lease facilities at Anchorage, Alaska.

 

If we are not able to use our information technology and communications systems effectively, our ability to conduct business might be negatively impacted.

 

The Company is highly dependent on the proper functioning of our information technology systems to enable operations and compete effectively.  Our information technology systems rely on third-party service providers for access to the Internet, satellite-based communications systems, the electric grid, database storage facilities and telecommunications providers.  We have no control over the operations of these third-party service providers.  If our information technology and communications systems experience reliability issues, integration or compatibility concerns or if our third-party providers are unable to perform effectively or experience disruptions or failures, there could be an adverse impact on the availability and functioning of our information technology and communications systems, which could lead to business disruption or inefficiencies, reputational harm or loss of customers that could have an adverse effect on our business.

 

Our information technology systems may be exposed to cybersecurity risks and other disruptions that could impair the Company’s ability to operate and adversely affect its business.

 

The Company relies extensively on its information technology systems and third-party service providers, including for accounting, billing, disbursement, cargo booking and tracking, vessel scheduling and stowage, equipment tracking, customer service, banking, payroll and employee communication systems.  Despite our continuous efforts to make investments in our information technology systems, the implementation of security measures to protect our data and infrastructure against breaches and other cyber threats, and our use of internal processes and controls designed to protect the security and availability of our systems, our information technology and communication systems may be vulnerable to cybersecurity risks faced by other large companies in our industry.  Our systems may be susceptible to computer viruses, hacking, malware, denial of service attacks, cyber terrorism, circumvention of security systems, malfeasance, breaches due to employee error, natural disasters, telecommunications failure, or other catastrophic events at the Company’s facilities, aboard its vessels or at third-party locations.

 

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Any failure, breach or unauthorized access to the Company’s or third-party systems could result in the loss of confidential, sensitive or proprietary information, interruptions in its service or production or otherwise impact our ability to conduct business operations, and could result in potential reductions in revenue and profits, damage to its reputation or liability.

 

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 employees’ experience and knowledge of the Company’s business and customer relationships.  If key employees depart, the Company may incur significant costs to replace them.  Additionally, 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 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 a terminal joint venture, SSAT, 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 joint venture partner;

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

·                  The joint 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 may experience operating difficulties and financial losses, which may lead to asset write-downs or impairment charges that could negatively impact the operating results of the joint venture and the Company;

·                  The joint venture or venture partner could lose key personnel;

·                  The joint 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; and

·                  Actions of the joint venture may result in reputational harm to the Company.

 

In addition, the Company relies on the terminal joint venture, SSAT, and SSA for its stevedoring services on the U.S. West Coast.  The Company could be adversely affected by any changes in the services provided, or to the costs of such services provided by the Company’s terminal joint venture, SSAT, and SSA.

 

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

 

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

 

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

·                  Challenges in working with and maintaining good relationships with joint venture partners in our foreign operations;

·                  Difficulties in staffing and managing foreign operations;

·                  Our ability to be in compliance with 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;

·                  Not having continued access to existing port facilities;

·                  Competition with established and new carriers;

·                  Currency exchange rate fluctuations and our ability to manage these 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 its 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 reasonable rates 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 and terminal operations could be faced with a maritime accident, oil or other 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.

 

The Company’s Shipbuilding Agreements with Philly Shipyard are subject to risks.

 

On November 6, 2013, MatNav and Philly Shipyard (formerly known as Aker Philadelphia Shipyard, Inc.) entered into definitive agreements pursuant to which APSI will construct two new 3,600-TEU Aloha-class dual-fuel capable containerships, with expected delivery dates during the third quarter of 2018 and the first quarter of 2019.  Failure of either party to the shipbuilding agreements to fulfill its obligations under the agreements could have an adverse effect on the Company’s financial position 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 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.

 

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 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.

 

Higher than expected costs associated with the continuing integration of Horizon could adversely impact our results, financial position, liquidity or cash flow.

 

The Company expects to benefit from various cost saving initiatives as part of the integration process related to the Horizon Acquisition.  Integration cost savings expectations are in the areas of corporate office closures and headcount reductions, information technology expense reductions, as well as customer service and marketing expense reductions.  There can be no assurance that the Company will be able to achieve the expected integration cost savings or that the cost savings will be achieved within the planned 24-month post-closing period.  The lack of or delay in integration cost savings could have a materially adverse effect upon our business and results of operations.

 

The Horizon Acquisition may expose us to unknown liabilities.

 

We acquired Horizon subject to all of the liabilities and obligations of its non-Hawaii business, including any remaining liabilities and obligations associated with its Puerto Rico operations, which Horizon ceased during the first quarter of 2015.  Such liabilities include the estimated cost of the multi-employer withdrawal liability related to the ILA-PRSSA pension plan (See Note 3 and Note 12 to the consolidated financial statements in Item 8 of Part II below).  The disposition of these liabilities, and any other obligations that are unknown to the Company, including contingent liabilities, could have an adverse effect on the Company’s financial condition and results of operations.

 

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We may continue to be exposed to risks and liabilities related to Horizon’s former Hawaii business.

 

Pasha acquired Horizon’s former Hawaii business immediately before we acquired Horizon, and Pasha assumed substantially all liabilities and obligations related to Horizon’s Hawaii business and agreed to perform various covenants.  In some cases however, Horizon, as the original contracting party, may remain primarily responsible for such assumed Hawaii liabilities and obligations.  The Company may incur losses related to such assumed Hawaii liabilities and obligations.

 

We may be required to record a significant charge to earnings if recorded intangible assets associated with the Horizon Acquisition become impaired.

 

We recorded significant intangible assets related to goodwill and customer relationships arising from the Horizon Acquisition.  We are required to test goodwill for impairment annually, or 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.  Factors that could lead to an impairment of goodwill or intangible customer relationships include any significant adverse changes affecting the reporting unit’s financial condition, results of operations, and future cash flows.

 

We may be required to record future charges to earnings if goodwill associated with the Horizon Acquisition become impaired.  Any such charge would adversely impact our financial results.

 

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 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, taxes, depreciation and amortization, 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.

 

The Company’s effective income tax rate may vary.

 

Various internal and external factors may have favorable or unfavorable, material or immaterial effects on the Company’s effective income tax rate and, therefore, impact the Company’s net income and earnings per share.  These factors include, but are not limited to changes in tax rates; changes in tax laws, regulations, and rulings; changes in interpretations of existing tax laws, regulations and rulings; changes in the evaluation of the Company’s ability to realize deferred tax assets, and changes in uncertain tax positions; changes in accounting principles; changes in current pre-tax income as well as changes in forecasted pre-tax income; changes in the level of CCF deductions, non-deductible expenses, and expenses eligible for tax credits; changes in the mix of earnings among countries with varying tax rates; acquisitions and changes in the Company’s corporate structure.  These factors may result in periodic revisions to our effective income tax rate, which could affect the Company’s cash flow and results of operations.

 

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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 multi-employer 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.  There can be no assurance that the Company 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.

 

The Company may have exposure under its multi-employer pension and post-retirement plans in which it participates that extends beyond its funding obligation with respect to the Company’s employees.

 

The Company contributes to various multi-employer 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 (See Note 11 to the consolidated financial statements in Item 8 of Part II below).  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 of 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 multi-employer 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

 

Compliance with safety and environmental protection and other governmental requirements may adversely affect our operations.

 

The shipping industry in general, our business and the operation of our vessels and terminals in particular are affected by extensive and changing safety, environmental protection and other international, national, State and local governmental laws and regulations, including the following: laws pertaining to air emissions; wastewater discharges; the transportation, handling and disposal of solid and hazardous materials, oil and oil-related products, hazardous substances and wastes; the investigation and remediation of contamination; and health, safety and the protection of the environment and natural resources.  For example, our U.S. flagged vessels generally must be maintained “in class” and are subject to periodic inspections by ABS Quality Evaluation, Inc., or similar classification societies, and must be periodically inspected by, or on behalf of, the United States Coast Guard.  Federal environmental laws and certain State laws require us, as a vessel operator, to comply with numerous environmental regulations and to obtain certificates of financial responsibility and to adopt procedures for oil and hazardous substance spill prevention, response and clean up.

 

In complying with these laws, we have incurred expenses and may incur future expenses for vessel modifications and changes in operating procedures.  Changes in enforcement policies for existing requirements and additional laws and regulations adopted in the future could limit our ability to do business or further increase the cost of our doing business.  Our vessels’ operating certificates and licenses are renewed periodically during the required annual surveys of the vessels.  However, there can be no assurance that such certificates and licenses will be renewed, even though Matson maintains extensive programs and policies to ensure such renewal.  Also, in the future, we may have to alter existing equipment, add new equipment, or change operating procedures for our vessels to comply with changes in governmental regulations, safety or other equipment standards to meet our customers’ changing needs.  If any such costs are material, they could adversely affect our financial condition.

 

We are subject to regulation and liability under environmental laws that could result in substantial fines and penalties that may have a material adverse effect on our results of operations.

 

The U.S. Act to Prevent Pollution from vessels, which implements the International Maritime Pollution (MARPOL) treaty, and the Oil Pollution Action of 1990 (OPA-90), among many other laws, treaties and regulations, provides for severe civil and criminal penalties related to vessel-generated pollution for incidents in U.S. waters within three nautical miles and in some cases within the 200-mile

 

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exclusive economic zone.  The EPA requires vessels to obtain coverage under a general permit and to comply with inspection, monitoring, discharge, recordkeeping and reporting requirements.  Matson’s vessels operate within surplus emission control areas (SECAs) or emission control areas (ECAs).  If our vessels are not operated in accordance with these requirements, including record keeping and other reporting requirements, such violations could result in substantial fines or penalties that could have a material adverse effect on our results of operations and our business.

 

If we are unable to comply with changing EPA regulations regarding fuel and emissions, it may adversely impact our ongoing operations.

 

Most of Matson’s vessels operate a portion of their voyages in designated ECAs, while Matson’s Alaska vessels operate a substantial portion of their voyages in ECAs.  Beginning January 2012, the EPA issued new regulations regarding the sulfur content of fuel oils utilized by vessels operating in ECAs.  Beginning January 1, 2015, these emission regulations require the sulfur content of fuel oil utilized by vessels operating inside ECAs not to exceed 0.1 percent.  In 2014, Matson received a conditional waiver from the EPA ECA regulations for three diesel-powered vessels used in the Hawaii service that permits the continued use of 1percent sulfur fuel for a limited time, subject to our development of technologies that monitor main engine performance and promote full power operation on diesel fuels with a sulfur content of less than 0.1 percent.

 

Effective in 2015, Horizon received a conditional waiver (subsequently transferred to Matson pursuant to the Horizon Acquisition) from the EPA ECA regulations for three diesel-powered vessels used in the Alaska service that permits the continued use of these vessels burning higher sulfur content fuel for a limited time, subject to the installation and testing of an exhaust gas cleaning system (known as ‘scrubbers’) on such vessels.  The conditional waiver includes a schedule by which such installation and testing to be completed, with dates of installation ranging from the second half of 2015 to the end of 2016.

 

If we are not able to install the scrubbers by the applicable deadline, or we are otherwise unable to comply with our obligations under the conditional waiver, the conditional waiver may terminate.  Even if we are able to meet the requirements of the conditional waiver, there is no assurance that the scrubbers will be successful in reducing emissions and producing results that comply with the EPA ECA regulations.  In such situation, the Company would be required to operate these vessels utilizing low sulfur fuel, which could risk damaging the existing engines unless they are run at low speeds.  Lower speeds, however, could cause schedule delays or require us to operate additional vessels in Alaska and incur additional costs, which could have a material adverse effect on our business and results of operations.  Also, the operation of scrubbers involves the transportation of hazardous materials that in themselves create a risk.

 

The Company is subject to risks related to removal of the molasses tank farm and pier risers at Sand Island Terminal in Honolulu.

 

Pursuant to the Company’s settlement with the State of Hawaii to resolve all of the State’s claims arising from the discharge of molasses into the Honolulu Harbor in September 2013, the Company agreed to remove the molasses tank farm and pier risers at the Sand Island Terminal in Honolulu.  The Company hired an engineering consulting firm to develop plans to remove the items safely and developed a Spill Prevention and Response Plan.  Despite these precautions, molasses could be released into the environment during demolition activities.  This could lead to suspension of operations, third-party or governmental agency claims, disputes, legal or other proceedings, fines, penalties, natural resource damages, inquiries or investigations or other regulatory actions.  As a result, such event could have an adverse effect on the Company’s business.

 

The Company is subject to, and may in the future be subject to disputes, legal or other proceedings, and 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, and government inquiries or investigations, relating to antitrust matters, labor and employment matters, personal injury and property damage, environmental 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.

 

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Repeal, substantial amendment, or waiver of the Jones Act or its application would 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 were to enter the Hawaii or Alaska markets with lower operating costs by utilizing their ability to acquire and operate foreign-flag and foreign-built vessels, 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.

 

Non-compliance 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 Rivers and Harbors Act of 1899, 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.  Non-compliance 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 restrict emissions of greenhouse gasses such as a “cap and trade” system of allowances and credits, if enacted, may require costly vessel modifications, the use of higher-priced fuel and changes in operating practices that may not be recoverable through increased payments from customers.  Further changes to these laws and regulations could adversely affect the Company.

 

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 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 as 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.

 

ITEM 1B.  UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2.  PROPERTIES

 

Matson leases terminal facilities including office and storage space at the following locations:

 

Terminal Location

 

Acreage

 

Expiration Date

 

Honolulu, Hawaii

 

105

 

September 2018

 

West Oahu, Hawaii

 

7

 

June 2017

 

Tacoma, Washington

 

18

 

December 2015

 

Anchorage, Alaska

 

38

 

December 2015

 

Kodiak, Alaska

 

6

 

February 2020

 

Dutch Harbor, Alaska

 

18

 

December 2015

 

Polaris Point, Guam

 

30

 

June 2060

 

 

The Company is currently renewing leases that are past expiration date.  The Company’s other primary terminal facilities located at the Port of Seattle, Washington, and the Ports of Oakland and Long Beach, California, are leased by the Company’s terminal joint venture partner, SSAT.

 

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The Company’s other significant office locations, warehouses and storage facilities are as follows:

 

Office and Other Location

 

Description of Facility

 

Square Footage

 

U.S. Locations

 

 

 

 

 

Honolulu, Hawaii

 

Corporate headquarters

 

16,444

 

Irving, Texas

 

Office

 

51,989

 

Oakland, California

 

Office

 

48,162

 

Phoenix, Arizona

 

Office

 

27,986

 

Oakbrook Terrace, Illinois

 

Office

 

17,004

 

Concord, California

 

Office

 

7,974

 

Renton, Washington

 

Office

 

5,162

 

Atlanta, Georgia

 

Office

 

3,685

 

Akron, Ohio

 

Office

 

3,500

 

Tamuning, Guam

 

Office

 

3,500

 

Portland, Oregon

 

Office

 

3,203

 

Elizabeth, New Jersey

 

Office

 

1,844

 

Foreign Locations

 

 

 

 

 

Shanghai, China

 

Office

 

7,240

 

Auckland, New Zealand

 

Office

 

3,832

 

Hong Kong, China

 

Office

 

2,911

 

Ningbo, China

 

Office

 

2,103

 

Xiamen, China

 

Office

 

1,399

 

Shenzhen, China

 

Office

 

1,065

 

Warehouses and Storage Facility

 

 

 

 

 

Pooler, Georgia

 

Warehouse

 

710,844

 

Oakland, California

 

Warehouse

 

400,000

 

Pooler, Georgia

 

Warehouse

 

324,832

 

Rancho Dominguez, California

 

Warehouse

 

141,000

 

Oakland, California

 

Warehouse

 

132,000

 

Onehunga, New Zealand

 

Warehouse

 

17,577

 

Alameda, California

 

Storage facility

 

53,785

 

 

ITEM 3.  LEGAL PROCEEDINGS

 

The Company’s Ocean Transportation business has certain risks that could result in expenditures for environmental remediation.  The Company believes that based on all information available to it, the Company is currently in compliance, in all material respects, with applicable environmental laws and regulations.

 

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

 

ITEM 4.  MINE SAFETY DISCLOSURES

 

Not Applicable.

 

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PART II

 

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

 

General Information:  Matson’s common stock is traded on the New York Stock Exchange under the ticker symbol “MATX”.  As of February 23, 2016, there were 2,413 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.

 

Stockholder Return Performance Graph and Other Information:  The following information in this Item 5 shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933.

 

The cumulative total return listed below assumed an initial investment of $100 and reinvestment of dividends at each fiscal end and measures the performance of this investment as of the last trading day in the month of December for each of the five years ended December 31, 2015.  The graph is a historical representation of past performance only and is not necessarily indicative of future performance.

 


*          $100 invested on December 31, 2010 in stock or index, including reinvestment of dividends.

 

Trading volume averaged 240,996 shares a day in 2015, compared with 273,309 shares a day in 2014 and 228,479 shares a day in 2013.

 

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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 each fiscal quarter during 2015 and 2014, were as follows:

 

 

 

Dividends

 

Market Price

 

 

 

Paid

 

High

 

Low

 

Close

 

 

 

 

 

 

 

 

 

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First Quarter

 

$

0.17

 

$

42.55

 

$

32.41

 

$

42.16

 

Second Quarter

 

$

0.17

 

$

43.84

 

$

39.79

 

$

42.04

 

Third Quarter

 

$

0.18

 

$

43.80

 

$

35.03

 

$

38.49

 

Fourth Quarter

 

$

0.18

 

$

53.18

 

$

38.27

 

$

42.63

 

 

 

 

 

 

 

 

 

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First Quarter

 

$

0.16

 

$

26.88

 

$

22.50

 

$

24.69

 

Second Quarter

 

$

0.16

 

$

26.91

 

$

22.48

 

$

26.84

 

Third Quarter

 

$

0.17

 

$

29.54

 

$

25.02

 

$

25.03

 

Fourth Quarter

 

$

0.17

 

$

36.73

 

$

24.48

 

$

34.52

 

 

Dividends:  The Company declared and paid the following dividends during 2015:

 

 

 

Dividends

 

Shareholders of

 

Date

 

2015

 

Declared

 

Record Date

 

Paid

 

First Quarter

 

$

0.17

 

February 12, 2015

 

March 5, 2015

 

Second Quarter

 

$

0.17

 

May 7, 2015

 

June 4, 2015

 

Third Quarter

 

$

0.18

 

August 6, 2015

 

September 3, 2015

 

Fourth Quarter

 

$

0.18

 

November 5, 2015

 

December 3, 2015

 

 

Matson’s Board of Directors also declared a cash dividend of $0.18 per share for the first quarter 2016, payable on March 3, 2016 to shareholders of record on February 11, 2016.  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.

 

Share Repurchases:  The following is a summary of the stock repurchased during the three months ended December 31, 2015:

 

Period

 

Total Number of
Shares
Purchased

 

Average Price
Paid per Share

 

Total Number of
Shares Purchased
as Part of Publicly
Announced Plans or
Programs (1)

 

Maximum Number
of Shares that May
Be Purchased
Under the Plans or
Programs

 

October 1 — 31, 2015

 

 

 

 

 

November 1 — 30, 2015

 

18,000

 

$

51.77

 

18,000

 

2,982,000

 

December 1 — 31, 2015

 

112,000

 

$

44.76

 

112,000

 

2,870,000

 

Total

 

130,000

 

$

45.73

 

130,000

 

 

 

 


(1)       On November 4, 2015, the Company announced that Matson’s Board of Directors had approved a share repurchase program of up to 3.0 million shares of common stock through November 2, 2018. Shares will be repurchased in the open market from time to time, and may be made pursuant to a trading plan in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934.

 

The Company did not repurchase any of its common stock in 2014 or 2013.

 

Securities Issued under Equity Compensation Plans:  See the subsection captioned “Equity Compensation Plan Information” in Matson’s 2016 Proxy Statement for information regarding securities authorized for issuance under the Company’s equity compensation plans, which subsection is incorporated herein by reference.

 

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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):

 

 

 

2015

 

2014

 

2013

 

2012

 

2011

 

Operating Revenue:

 

 

 

 

 

 

 

 

 

 

 

Ocean Transportation

 

$

1,498.0

 

$

1,278.4

 

$

1,229.4

 

$

1,189.8

 

$

1,076.2

 

Logistics

 

386.9

 

435.8

 

407.8

 

370.2

 

386.4

 

Total Operating Revenue

 

$

1,884.9

 

$

1,714.2

 

$

1,637.2

 

$

1,560.0

 

$

1,462.6

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income:

 

 

 

 

 

 

 

 

 

 

 

Ocean Transportation (1)

 

$

187.8

 

$

131.1

 

$

94.3

 

$

96.6

 

$

73.7

 

Logistics

 

8.5

 

8.9

 

6.0

 

0.1

 

4.9

 

Total Operating Income

 

196.3

 

140.0

 

100.3

 

96.7

 

78.6

 

Interest expense

 

(18.5

)

(17.3

)

(14.4

)

(11.7

)

(7.7

)

 

 

 

 

 

 

 

 

 

 

 

 

Income before Income Taxes

 

177.8

 

122.7

 

85.9

 

85.0

 

70.9

 

Income tax expense

 

(74.8

)

(51.9

)

(32.2

)

(33.0

)

(25.1

)

Net Income from Continuing Operations

 

103.0

 

70.8

 

53.7

 

52.0

 

45.8

 

Loss From Discontinued Operations (net of income taxes)

 

 

 

 

(6.1

)

(11.6

)

Net Income

 

$

103.0

 

$

70.8

 

$

53.7

 

$

45.9

 

$

34.2

 

 

 

 

 

 

 

 

 

 

 

 

 

Identifiable Assets:

 

 

 

 

 

 

 

 

 

 

 

Ocean Transportation (2)

 

$

1,601.0

 

$

1,313.9

 

$

1,168.6

 

$

1,097.2

 

$

1,083.9

 

Logistics

 

68.8

 

87.9

 

79.7

 

77.1

 

76.4

 

Other (3)

 

 

 

 

 

1,384.0

 

Total Assets

 

$

1,669.8

 

$

1,401.8

 

$

1,248.3

 

$

1,174.3

 

$

2,544.3

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital Expenditure from Continuing Operations (4):

 

 

 

 

 

 

 

 

 

 

 

Ocean Transportation

 

$

67.5

 

$

27.8

 

$

33.8

 

$

37.0

 

$

44.2

 

Logistics

 

0.3

 

0.1

 

1.4

 

1.1

 

3.0

 

Total Capital Expenditures

 

$

67.8

 

$

27.9

 

$

35.2

 

$

38.1

 

$

47.2

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and Amortization from Continuing Operations:

 

 

 

 

 

 

 

 

 

 

 

Ocean Transportation

 

$

81.4

 

$

66.6

 

$

66.4

 

$

69.1

 

$

68.4

 

Logistics

 

2.0

 

3.1

 

3.3

 

3.4

 

3.2

 

Total Depreciation and Amortization

 

$

83.4

 

$

69.7

 

$

69.7

 

$

72.5

 

$

71.6

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Share in Income from continuing operations:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

2.37

 

$

1.65

 

$

1.26

 

$

1.23

 

$

1.10

 

Diluted

 

$

2.34

 

$

1.63

 

$

1.25

 

$

1.22

 

$

1.09

 

Earnings Per Share in Net Income:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

2.37

 

$

1.65

 

$

1.26

 

$

1.09

 

$

0.82

 

Diluted

 

$

2.34

 

$

1.63

 

$

1.25

 

$

1.08

 

$

0.81

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends per share declared

 

$

0.70

 

$

0.66

 

$

0.62

 

$

0.93

 

$

1.26

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31:

 

 

 

 

 

 

 

 

 

 

 

Shareholders of record

 

2,406

 

2,509

 

2,607

 

2,729

 

2,923

 

Shares outstanding

 

43.5

 

43.2

 

42.8

 

42.6

 

41.7

 

Long-term debt — non-current

 

$

407.9

 

$

352.0

 

$

273.6

 

$

302.7

 

$

180.1

 

 


(1)             The Ocean Transportation segment includes $16.5 million, $6.6 million, $(2.0) million, $3.2 million and $8.6 million of equity in income/(loss) from the Company’s terminal joint venture, SSAT, for 2015, 2014, 2013, 2012 and 2011, respectively.

 

(2)             The Ocean Transportation segment includes $66.4 million, $64.4 million, $57.6 million, $59.6 million and $56.5 million, related to the Company’s terminal joint venture equity investment in SSAT as of December 31, 2015, 2014, 2013, 2012 and 2011, respectively.

 

(3)             Other identifiable assets related to discontinued operations from the Company’s former parent company and the Company’s second China Long Beach Express Service (“CLX2”) of $1.4 billion as of December 31, 2011.

 

(4)             Excludes expenditures related to Matson’s acquisitions, which are classified as payments for acquisitions in Cash Flows used in Investing Activities from Continuing Operations within the Consolidated Statements of Cash Flows.

 

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Table of Contents

 

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 Websites (including Websites 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 2016 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 consolidated 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 consolidated 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 consolidated financial statements in Item 8 of Part II below.  MD&A is presented in the following sections:

 

·                  Business Outlook

·                  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

·                  Critical Accounting Estimates

·                  Other Matters

 

BUSINESS OUTLOOK

 

The following is the Company’s fourth quarter 2015 discussion and 2016 Outlook:

 

In the fourth quarter 2015, the Hawaii trade experienced modest westbound market growth and, as expected, Matson achieved meaningful volume gains as it deployed additional vessels in response to a competitor’s service reconfiguration.  The Company believes that the Hawaii economy remains healthy and expects the continued progress of the construction cycle in urban Honolulu to generate modest volume growth.  As a result, for the full year 2016, the Company expects its Hawaii container volume to be moderately higher than 2015.

 

In the China trade, despite freight rates for other ocean carriers reaching historic lows, the Company achieved average freight rates that approximated the strong rates achieved in the fourth quarter 2014.  And, as expected, the Company’s China volume in the fourth quarter 2015 was moderately lower due to one fewer sailing, the absence of the extraordinarily high demand experienced in the fourth quarter 2014 during the U.S. West Coast labor disruptions, and market softness.  In 2016, international vessel overcapacity is expected to persist with vessel deliveries outpacing demand growth and putting continued pressure on international ocean carrier freight rates.  The Company expects its expedited service to continue to realize a sizable premium and maintain high vessel utilization in 2016, albeit at average freight rates that are significantly lower than 2015.

 

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In Guam, economic activity in the fourth quarter 2015 was stable and the Company achieved modest volume growth as the expected launch of a new competitor’s bi-weekly U.S. flagged containership service to Guam was delayed until early 2016.  For the full year 2016, the Company expects to experience competitive volume losses to this new service.

 

In Alaska, volume for the fourth quarter 2015 was approximately 14,200 containers.  In 2016, the Company expects Alaska volume to be modestly lower than the total 67,300 containers carried by Horizon and Matson in 2015.  The Company intends to operate a base deployment of three containerships in Alaska and expects to complete the installation of exhaust gas scrubbers on those ships in 2016.  The Company’s integration of the Alaska operations is progressing well and is expected to be substantially complete by the end of the third quarter 2016.  Selling, general and administrative expenses related to the Horizon Acquisition are not expected to materially exceed the incremental run-rate target of $15.0 million per year in 2016.  Further, the Company continues to expect to achieve its earnings and cash flow accretion targets for the Horizon Acquisition by mid-2017.

 

The Company’s terminal joint venture, SSAT, continued to benefit from improved lift volume during the fourth quarter.  For the full year 2016, the Company expects SSAT to contribute profits modestly lower than the $16.5 million contributed in 2015, primarily due to the absence of factors related to the clearing of international cargo backlog in the first half of 2015 that resulted from the U.S. West Coast labor disruptions.

 

For the full year 2016, the Company expects that Ocean Transportation operating income to be modestly lower than the $187.8 million achieved in 2015.  In the first quarter 2016, the Company expects operating income to be approximately 25 percent lower than the first quarter 2015 level of $43.9 million.

 

Logistics: Volume declines in Logistics’ businesses extended into the fourth quarter 2015 and the Company achieved an operating income margin of 2.5 percent.  The Company expects 2016 operating income to modestly exceed the 2015 level of $8.5 million, driven by volume growth and continued expense control.

 

Interest Expense: The Company expects its interest expense in 2016 to be approximately $19.0 million.

 

Income Tax Expense: The Company expects its effective tax rate for the full year 2016 to be approximately 39.0 percent.

 

Capital Spending and Vessel Dry-docking: For the full year 2015, the Company made maintenance capital expenditures of $46.9 million, scheduled contract payments for its two vessels under construction of  $20.9 million, and dry-docking payments of $25.7 million.

 

For the full year 2016, the Company expects to make maintenance capital expenditures of approximately $65 million, scheduled new vessel construction progress payments of $67.2 million, and dry-docking payments of approximately $60 million.  For the full year 2016, the Company expects depreciation and amortization to total approximately $133 million compared to $105.8 million in 2015, inclusive of dry-docking amortization of approximately $35 million expected in 2016 and $23.1 million in 2015.

 

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CONSOLIDATED RESULTS OF OPERATIONS

 

The following analysis of the financial condition and results of operations of Matson should be read in conjunction with the consolidated financial statements in Item 8 of Part II below.

 

Consolidated Results: 2015 compared with 2014:

 

 

 

Years Ended December 31,

 

(dollars in millions, except per share amounts)

 

2015

 

2014

 

Change

 

Operating revenue

 

$

1,884.9

 

$

1,714.2

 

10.0

%

Operating costs and expenses

 

(1,688.6

)

(1,574.2

)

7.3

%

Operating income

 

196.3

 

140.0

 

40.2

%

Interest expense

 

(18.5

)

(17.3

)

6.9

%

Income before income taxes

 

177.8

 

122.7

 

44.9

%

Income tax expense

 

(74.8

)

(51.9

)

44.1

%

Net income

 

$

103.0

 

$

70.8

 

45.5

%

Basic earnings per share

 

$

2.37

 

$

1.65

 

43.6

%

Diluted earnings per share

 

$

2.34

 

$

1.63

 

43.6

%

 

Consolidated Operating Revenue for the year ended December 31, 2015 increased $170.7 million, or 10.0 percent, compared to the prior year.  This increase was due to an increase of $219.6 million for Ocean Transportation, partially offset by a decrease of $48.9 million for Logistics.

 

Operating Costs and Expenses for the year ended December 31, 2015 increased $114.4 million, or 7.3 percent, compared to the prior year.  The increase was due to an increase of $162.9 million for Ocean Transportation, partially offset by a decrease of $48.5 million for Logistics.

 

Operating Income during the year ended December 31, 2015 increased $56.3 million, or 40.2 percent, compared to the prior year.  The increase was due to an increase of $56.7 million for Ocean Transportation, partially offset by a decrease of $0.4 million for Logistics.

 

The reasons for changes in operating revenue, operating costs and expenses, and operating income 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, 2015 was $74.8 million, or 42.1 percent, of income before income taxes, as compared to $51.9 million, or 42.3 percent of income before income taxes, in the prior year.

 

Net Income during the year ended December 31, 2015 increased $32.2 million, or 45.5 percent, compared to the prior year.

 

Consolidated Results: 2014 compared with 2013:

 

 

 

Years Ended December 31,

 

(dollars in millions, except per share amounts)

 

2014

 

2013

 

Change

 

Operating revenue

 

$

1,714.2

 

$

1,637.2

 

4.7

%

Operating costs and expenses

 

(1,574.2

)

(1,536.9

)

2.4

%

Operating income

 

140.0

 

100.3

 

39.6

%

Interest expense

 

(17.3

)

(14.4

)

20.1

%

Income from continuing operations before income taxes

 

122.7

 

85.9

 

42.8

%

Income tax expense

 

(51.9

)

(32.2

)

61.2

%

Net income

 

$

70.8

 

$

53.7

 

31.8

%

Basic earnings per share

 

$

1.65

 

$

1.26

 

31.0

%

Diluted earnings per share

 

$

1.63

 

$

1.25

 

30.4

%

 

Consolidated Operating Revenue for the year ended December 31, 2014 increased $77.0 million, or 4.7 percent, compared to the prior year.  This increase was due to $49.0 million and $28.0 million higher revenues for Ocean Transportation and Logistics, respectively.

 

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Table of Contents

 

Operating Costs and Expenses for the year ended December 31, 2014 increased $37.3 million, or 2.4 percent, compared to the prior year.  The increase was due to increases of $12.2 million and $25.1 million in costs for Ocean Transportation and Logistics, respectively.

 

Operating Income during the year ended December 31, 2014 increased $39.7 million, or 39.6 percent, compared to the prior year.  The increase was due to increases of $36.8 million and $2.9 million for Ocean Transportation and Logistics, respectively.

 

The reasons for changes in operating revenue, operating costs and expenses, and operating income 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, 2014 was $51.9 million, or 42.3 percent of income before income taxes, as compared to $32.2 million, or 37.5 percent of income before income taxes, in the prior year.  The increase in income tax rate was principally due to a non-cash valuation allowance recorded against deferred tax assets related to foreign operations, and non-deductible charges related to the Horizon Acquisition, partially offset by the release of uncertain tax positions.

 

Net Income during the year ended December 31, 2014 increased $17.1 million, or 31.8 percent, compared to the prior year.

 

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 15 to the consolidated financial statements in Item 8 of Part II below.  The following information should be read in relation to the information contained in those sections.

 

Ocean Transportation: 2015 compared with 2014:

 

 

 

Years Ended December 31,

 

(dollars in millions)

 

2015

 

2014

 

Change

 

Ocean Transportation revenue

 

$

1,498.0

 

$

1,278.4

 

17.2

%

Operating costs and expenses

 

(1,310.2

)

(1,147.3

)

14.2

%

Operating income

 

$

187.8

 

$

131.1

 

43.2

%

Operating income margin

 

12.5

%

10.3

%

 

 

 

 

 

 

 

 

 

 

Volume (Units) (1)

 

 

 

 

 

 

 

Hawaii containers

 

149,500

 

138,300

 

8.1

%

Hawaii automobiles

 

70,000

 

70,600

 

(0.8

)%

Alaska containers (2)

 

39,100

 

 

 

China containers

 

59,200

 

62,000

 

(4.5

)%

Guam containers

 

24,200

 

24,600

 

(1.6

)%

Micronesia/South Pacific Containers

 

14,000

 

14,800

 

(5.4

)%

 


(1)             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.

 

(2)             Alaska container volume represents operations from the date of Horizon Acquisition on May 29, 2015.

 

Ocean Transportation revenue increased $219.6 million, or 17.2 percent, during the year ended December 31, 2015 compared with the year ended December 31, 2014.  This increase was primarily due to the inclusion of revenue from the Company’s acquired Alaska operations, higher container volume and yield in Hawaii, and higher freight rates in the Company’s China service, partially offset by lower fuel surcharge revenue and lower volume in the South Pacific and China.

 

Alaska volume included in the Company results reflects operations from May 29, 2015.  On a year over year basis, Hawaii container volume increased by 8.1 percent primarily due to volume gains resulting from a competitor’s service reconfiguration, and modest market growth; China volume was 4.5 percent lower due to one fewer sailing, the absence of the extraordinarily high demand experienced in the fourth quarter 2014 during the U.S. West Coast labor disruptions, and market softness in the fourth quarter 2015; Guam volume declined by 1.6 percent due to the timing of select shipments; and Hawaii automobile volume was essentially flat.

 

Ocean Transportation operating income increased $56.7 million during the year ended December 31, 2015 compared with the year ended December 31, 2014.  The increase was primarily due to higher freight rates in China, container volume and yield improvements in Hawaii, the inclusion of operating results for the Alaska trade, and improved results at SSAT.  Partially offsetting these favorable operating income items were additional selling, general and administrative expenses primarily due to the Horizon Acquisition, higher vessel operating expenses related to the deployment of additional vessels in the Hawaii trade, higher terminal handling expenses, lower China container volume, and costs related to the Company’s settlement with the State of Hawaii (the “Molasses Settlement”).

 

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Table of Contents

 

The Company’s SSAT terminal joint venture investment contributed $16.5 million during the year ended December 31, 2015, compared to a $6.6 million contribution in the year ended December 31, 2014.  The increase was primarily attributable to the clearing of international carrier cargo backlog and improved lift volume.

 

Ocean Transportation: 2014 compared with 2013:

 

 

 

Years Ended December 31,

 

(dollars in millions)

 

2014

 

2013

 

Change

 

Ocean Transportation revenue

 

$

1,278.4

 

$

1,229.4

 

4.0

%

Operating costs and expenses

 

(1,147.3

)

(1,135.1

)

1.1

%

Operating income

 

$

131.1

 

$

94.3

 

39.0

%

Operating income margin

 

10.3

%

7.7

%

 

 

 

 

 

 

 

 

 

 

Volume (Units) (1)

 

 

 

 

 

 

 

Hawaii containers

 

138,300

 

138,500

 

(0.1

)%

Hawaii automobiles

 

70,600

 

81,500

 

(13.4

)%

China containers

 

62,000

 

61,300

 

1.1

%

Guam containers

 

24,600

 

24,100

 

2.1

%

Micronesia/South Pacific Containers

 

14,800

 

12,800

 

15.6

%

 


(1)             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 $49.0 million, or 4.0 percent during the year ended December 31, 2014 compared to the prior year.  This increase was due partially to higher freight yields across major trade lanes, higher fuel surcharge revenue, and increased volume in the South Pacific, partially offset by lower automobile volume.

 

During the year ended December 31, 2014, container volumes in Hawaii and China were relatively flat; Guam volume increased modestly due to timing of shipments; and Micronesia/South Pacific volume increased 15.6 percent reflecting a full year of operations and service reconfiguration in the South Pacific.  Hawaii automobile volume decreased 13.4 percent partially due to certain customer losses.

 

Ocean Transportation operating income increased $36.8 million, or 39.0 percent during the year ended December 31, 2014.  The increase was partially due to higher freight yields across major trade lanes, the timing of fuel surcharge collections, lower outside transportation costs, and improved results at the Company’s terminal joint venture, SSAT, partially offset by higher terminal handling expenses and higher general and administrative expenses some of which were attributable to the Company’s then-pending Horizon Acquisition.  In addition, the fourth quarter 2013 was negatively impacted by a $9.95 million litigation charge.  In 2014, the Company incurred $4.6 million in penalties, legal and other expenses related to the molasses released into Honolulu Harbor in September 2013 compared to $3.0 million in 2013.

 

The Company’s terminal joint venture, SSAT, contributed $6.6 million during the year ended December 31, 2014, compared to a $2.0 million loss in 2013.  The increase was partially attributable to increased lift volume and the absence of transition costs related to the Oakland terminal expansion in 2013.

 

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Table of Contents

 

Logistics: 2015 compared with 2014:

 

 

 

Years Ended December 31,

 

(dollars in millions)

 

2015

 

2014

 

Change

 

Intermodal revenue

 

$

209.0

 

$

243.5

 

(14.2

)%

Highway revenue

 

177.9

 

192.3

 

(7.5

)%

Total Logistics Revenue

 

386.9

 

435.8

 

(11.2

)%

Operating costs and expenses

 

(378.4

)

(426.9

)

(11.4

)%

Operating income

 

$

8.5

 

$

8.9

 

(4.5

)%

Operating income margin

 

2.2

%

2.0

%

 

 

 

Logistics revenue decreased $48.9 million, or 11.2 percent, during the year ended December 31, 2015 compared to the year ended December 31, 2014.  This decrease was primarily the result of lower intermodal and highway volume and lower fuel surcharge revenue, partially offset by favorable changes in business mix and increased warehouse revenue.

 

Logistics operating income decreased $0.4 million during the year ended December 31, 2015 compared to the year ended December 31, 2014.  The decrease was primarily due to lower intermodal and highway volume, partially offset by warehouse operating improvements and improved yield.

 

Logistics: 2014 compared with 2013:

 

 

 

Years Ended December 31,

 

(dollars in millions)

 

2014

 

2013

 

Change

 

Intermodal revenue

 

$

243.5

 

$

244.2

 

(0.3

)%

Highway revenue

 

192.3

 

163.6

 

17.5

%

Total Logistics Revenue

 

435.8

 

407.8

 

6.9

%

Operating costs and expenses

 

(426.9

)

(401.8

)

6.2

%

Operating income

 

$

8.9

 

$

6.0

 

48.3

%

Operating income margin

 

2.0

%

1.5

%

 

 

 

Logistics revenue increased $28.0 million, or 6.9 percent, during the year ended December 31, 2014 compared to 2013.  This increase was partially due to higher highway and international intermodal volume, partially offset by lower domestic intermodal volume.

 

Logistics operating income increased $2.9 million during the year ended December 31, 2014 compared to 2013.  The increase was partially due to increased highway yield and volume, warehouse operating improvements, and a favorable litigation settlement, partially offset by lower intermodal yield.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company’s primary source of liquidity is cash flows generated by the Company’s operations.  Changes in the cash and cash equivalents are as follows:

 

 

 

As of December 31,

 

 

 

 

 

 

 

 

 

Change

 

Cash Flow Information (in millions)

 

2015

 

2014

 

2013

 

2015-2014

 

2014-2013

 

Net cash provided by operating activities

 

$

245.3

 

$

165.7

 

$

195.7

 

$

79.6

 

$

(30.0

)

Net cash used in investing activities

 

(63.8

)

(50.5

)

(40.0

)

(13.3

)

(10.5

)

Net cash (used in) provided by financing activities

 

(449.4

)

63.7

 

(61.1

)

(513.1

)

124.8

 

Net (decrease) increase in cash and cash equivalents

 

(267.9

)

178.9

 

94.6

 

(446.8

)

84.3

 

Cash and cash equivalents, beginning of the period

 

293.4

 

114.5

 

19.9

 

178.9

 

94.6

 

Cash and cash equivalents, end of the period

 

$

25.5

 

$

293.4

 

$

114.5

 

$

(267.9

)

$

178.9

 

 

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Table of Contents

 

Net cash provided by operating activities:

 

 

 

Change

 

(dollars in millions)

 

2015 to 2014

 

2014 to 2013

 

Increase in net income from operations

 

$

32.2

 

$

17.1

 

Increase (decrease) from adjustments for non-cash related charges, net

 

69.9

 

(72.2

)

Distributions from related party Terminal Joint Venture

 

14.0

 

 

Change in accounts receivable

 

28.8

 

(7.7

)

Change in prepaid expenses and other assets

 

(30.5

)

29.1

 

Change in accounts payable and accrued liabilities

 

(22.9

)

11.3

 

Increase in deferred dry-docking payments

 

(11.6

)

(0.1

)

Change in other liabilities

 

(0.3

)

(7.5

)

Total

 

$

79.6

 

$

(30.0

)

 

Changes in accounts receivable, prepaid expenses and other assets, and accounts payable and accrued liabilities in 2015 compared to 2014 are partially due to the impact of the Horizon Acquisition and Alaska service activities, and also related to the timing of collections and payments.  Increase in deferred dry-docking payments in 2015 compared to 2014 was partially due to the dry docking of additional vessels acquired as part of the Horizon Acquisition.

 

Net decrease in income from operations in 2014 compared to 2013 resulted from non-cash adjustments related charges is partially due to a decrease in deferred income taxes of $54.8 million as a result of decreased cash contributions into the CCF (see Note 7 to the consolidated financial statements in Item 8 of Part II below for additional information on the CCF).  Changes in account receivables in 2014 compared to 2013 are as a result of increased operating revenues in 2014.  Prepaid expenses and other assets decreased due to lower prepaid fuel and a reduction in income tax receivable.

 

Net cash used in investing activities:

 

 

 

Change

 

(dollars in millions)

 

2015 to 2014

 

2014 to 2013

 

(Increase) decrease in capital expenditures

 

$

(39.9

)

$

7.3

 

Increase in cash deposits into CCF

 

(46.0

)

(27.5

)

Increase in cash withdrawals from CCF

 

101.0

 

 

Payments for Horizon Acquisition and other acquisitions

 

(29.0

)

9.3

 

Increase in proceeds from disposal of property and equipment

 

0.6

 

0.4

 

Total

 

$

(13.3

)

$

(10.5

)

 

Capital expenditures increased from $27.9 million in 2014 to $67.8 million in 2015.  The increase was partially due to the installation of new scrubbers on one vessel acquired as part of the Horizon Acquisition, progress payments related to the construction of two new vessels, and increased capital expenditures on other vessels.  In 2015, the Company increased its cash deposits into the CCF due to expected future qualified withdrawals to be made from the CCF as a result of the Horizon Acquisition and new vessel progress payments.  The increase in cash withdrawals from the CCF related to vessels acquired as part of the Horizon Acquisition that were processed through the CCF for income tax purposes as qualifying withdrawals (see Note 7 to the consolidated financial statements in Item 8 of Part II below for additional information on the CCF).  In 2015, the Company paid $29.0 million in cash, net of cash received to acquire the common stock of Horizon (see Note 3 to the consolidated financial statements in Item 8 of Part II below).

 

Capital expenditures decreased from $35.2 million in 2013 to $27.9 million in 2014.  The decrease was primarily due to the timing of vessel related capital expenditures.  There were no acquisition related payments in 2014, as compared to payments of $9.3 million paid in 2013.

 

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Table of Contents

 

Net cash used in financing activities:

 

 

 

Change

 

(dollars in millions)

 

2015 to 2014

 

2014 to 2013

 

Payments of Horizon debt and redemption of warrants

 

$

(466.0

)

$

 

(Decrease) increase in proceeds received from issuance of debt

 

(25.0

)

79.0

 

(Increase) decrease in repayments of debt and capital leases

 

(9.5

)

34.1

 

Change in borrowings under revolving credit facility, net

 

 

11.0

 

Stock repurchase payments

 

(4.9

)

 

(Decrease) increase in proceeds received from issuance of capital stock

 

(3.6

)

4.1

 

Increase in other payments, net

 

(4.1

)

(3.4

)

Total

 

$

(513.1

)

$

124.8

 

 

In 2015, the Company repaid all of Horizon’s outstanding debt and redeemed the warrants related to the Horizon Acquisition (see Note 3 to the consolidated financial statements in Item 8 of Part II below).  In 2015, the Company received $75.0 million of proceeds from the issuance of notes, compared to $100.0 million received in 2014.  Repayment of debt and capital leases increased in 2015 as a result of increased borrowings and the timing of debt repayments.  In 2015, the Company paid $4.9 million in share repurchases.  There was no share repurchases in 2014 or 2013.

 

Net cash provided by financing activities increased from $(61.1) million in 2013 to $63.7 million in 2014 partially due to the issuance of $100 million of 30-year senior unsecured notes in 2014 compared to $21.0 million in 2013, and the reduction of debt and capital lease repayments in 2014 compared to 2013.  The change in borrowings under the revolver credit facility was partially due to reduced repayments of credit facility borrowings.

 

Other Sources of Liquidity:

 

Cash flows provided by operating activities are the Company’s primary source of liquidity.  Additional sources of liquidity available to the Company at December 31, 2015 and 2014 are as follows:

 

 

 

As of December 31,

 

Sources of Liquidity (in millions)

 

2015

 

2014

 

Change

 

Cash and cash equivalents (1)

 

$

25.5

 

$

293.4

 

$

(267.9

)

Accounts receivable, net (2)

 

214.3

 

197.6

 

16.7

 

Capital Construction Fund deposits (3)

 

 

27.5

 

(27.5

)

 


(1)             The decrease in cash and cash equivalents was due partially due to the Horizon Acquisition related payments of $495.4 million (see Note 3 to the consolidated financial statements in Item 8 of Part II below for additional information related to the Horizon Acquisition), partially offset by net proceeds from debt of $75.0 million.

 

(2)             The increase in accounts receivable was partially due to account receivables related to the Alaska service that was acquired in 2015 as part of the Horizon Acquisition, and increased revenue during 2015.

 

(3)             The decrease in cash on deposit in the CCF deposits relates to progress payments made for the Jones Act vessels acquired as part of the Horizon Acquisition (see Note 7 to the consolidated financial statements in Item 8 of Part II below for additional information on the CCF).

 

The Company had working capital of $(19.7) million at December 31, 2015, compared to $296.0 million at December 31, 2014.  As of December 31, 2015, the Company had $389.0 million of availability under the revolving credit facility (see Note 8 to the consolidated financial statements in Item 8 of Part II below for additional information about debt).

 

27



Table of Contents

 

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

 

Contractual Obligations:

 

At December 31, 2015, the Company had the following estimated contractual obligations (in millions):

 

 

 

 

 

Payment Due By Period

 

 

 

 

 

Contractual Obligations

 

2016

 

2017 - 2018

 

2019 - 2020

 

Thereafter

 

Total

 

Capital expenditure obligations (1)

 

$

87.9

 

$

313.5

 

$

7.5

 

$

 

$

408.9

 

Total debt obligations (2)

 

22.0

 

61.6

 

60.0

 

286.3

 

429.9

 

Estimated interest on debt (3)

 

18.4

 

33.4

 

27.9

 

81.3

 

161.0

 

Purchase obligations (4)

 

12.1