matx_Current folio_10Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2016

 

OR

 

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

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

1411 Sand Island Parkway

Honolulu, HI

(Address of principal executive offices)

96819

(Zip Code)

 

(808) 848-1211

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address, and former

fiscal year, if changed since last report)

 

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

 

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  No

 

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

 

Large accelerated filer

Accelerated filer

 

 

Non-accelerated filer

Smaller reporting company

(Do not check if a smaller reporting company)

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  No

 

Number of shares of common stock outstanding as of June 30, 2016: 42,959,274

 

 

 

 


 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

MATSON, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income and Comprehensive Income

(In millions, except per-share amounts) (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2016

    

2015

    

2016

    

2015

    

Operating Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ocean Transportation

 

$

370.9

 

$

346.7

 

$

737.0

 

$

652.2

 

Logistics

 

 

96.8

 

 

100.9

 

 

184.9

 

 

193.6

 

Total Operating Revenue

 

 

467.7

 

 

447.6

 

 

921.9

 

 

845.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating costs

 

 

389.9

 

 

364.5

 

 

766.3

 

 

682.7

 

Equity in income of related party Terminal Joint Venture

 

 

(3.0)

 

 

(5.2)

 

 

(5.6)

 

 

(8.6)

 

Selling, general and administrative

 

 

44.7

 

 

54.6

 

 

90.5

 

 

93.1

 

Total Costs and Expenses

 

 

431.6

 

 

413.9

 

 

851.2

 

 

767.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

 

36.1

 

 

33.7

 

 

70.7

 

 

78.6

 

Interest expense

 

 

(6.5)

 

 

(4.6)

 

 

(11.4)

 

 

(8.9)

 

Income before Income Taxes

 

 

29.6

 

 

29.1

 

 

59.3

 

 

69.7

 

Income tax expense

 

 

(11.6)

 

 

(19.2)

 

 

(23.2)

 

 

(34.8)

 

Net Income

 

$

18.0

 

$

9.9

 

$

36.1

 

$

34.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income (Loss), Net of Income Taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

18.0

 

$

9.9

 

$

36.1

 

$

34.9

 

Other Comprehensive Income (Loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gain (loss) in prior service cost

 

 

 —

 

 

 —

 

 

0.7

 

 

(0.2)

 

Amortization of prior service cost included in net periodic pension cost

 

 

(0.2)

 

 

(0.2)

 

 

(0.6)

 

 

(0.6)

 

Amortization of net loss included in net periodic pension cost

 

 

1.0

 

 

0.9

 

 

2.1

 

 

2.3

 

Foreign currency translation adjustment

 

 

 —

 

 

0.6

 

 

(0.1)

 

 

0.7

 

Total Other Comprehensive Income

 

 

0.8

 

 

1.3

 

 

2.1

 

 

2.2

 

Comprehensive Income

 

$

18.8

 

$

11.2

 

$

38.2

 

$

37.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per-Share:

 

$

0.42

 

$

0.23

 

$

0.83

 

$

0.80

 

Diluted Earnings Per-Share:

 

$

0.42

 

$

0.23

 

$

0.83

 

$

0.79

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Number of Shares Outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

43.1

 

 

43.5

 

 

43.3

 

 

43.4

 

Diluted

 

 

43.4

 

 

44.0

 

 

43.7

 

 

43.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Dividends Per-Share

 

$

0.18

 

$

0.17

 

$

0.36

 

$

0.34

 

 

See Notes to Condensed Consolidated Financial Statements.

1


 

MATSON, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In millions) (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

    

2016

    

2015

    

ASSETS

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

19.2

 

$

25.5

 

Accounts receivable, net

 

 

206.4

 

 

214.3

 

Prepaid expenses and other assets

 

 

28.2

 

 

38.1

 

Total current assets

 

 

253.8

 

 

277.9

 

Long-term Assets:

 

 

 

 

 

 

 

Investment in related party Terminal Joint Venture

 

 

72.2

 

 

66.4

 

Property and equipment, net

 

 

873.3

 

 

860.3

 

Goodwill

 

 

245.1

 

 

241.6

 

Intangible assets, net

 

 

135.4

 

 

139.1

 

Deferred dry-docking costs

 

 

79.3

 

 

57.6

 

Other long-term assets

 

 

29.1

 

 

26.9

 

Total assets

 

$

1,688.2

 

$

1,669.8

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Current portion of debt

 

$

21.8

 

$

22.0

 

Accounts payable

 

 

178.3

 

 

164.9

 

Payroll and vacation benefits

 

 

22.3

 

 

23.1

 

Uninsured liabilities

 

 

21.9

 

 

27.1

 

Accrued and other liabilities

 

 

45.4

 

 

60.5

 

Total current liabilities

 

 

289.7

 

 

297.6

 

Long-term Liabilities:

 

 

 

 

 

 

 

Long-term debt

 

 

441.0

 

 

407.9

 

Deferred income taxes

 

 

317.5

 

 

310.5

 

Employee benefit plans

 

 

107.2

 

 

109.3

 

Uninsured and other liabilities

 

 

37.5

 

 

37.7

 

Multi-employer withdrawal liabilities

 

 

60.9

 

 

56.2

 

Total long-term liabilities

 

 

964.1

 

 

921.6

 

Commitments and Contingencies (Note 2)

 

 

 

 

 

 

 

Shareholders’ Equity:

 

 

 

 

 

 

 

Capital stock

 

 

32.2

 

 

32.6

 

Additional paid in capital

 

 

283.5

 

 

287.9

 

Accumulated other comprehensive loss

 

 

(44.8)

 

 

(46.9)

 

Retained earnings

 

 

163.5

 

 

177.0

 

Total shareholders’ equity

 

 

434.4

 

 

450.6

 

Total liabilities and shareholders’ equity

 

$

1,688.2

 

$

1,669.8

 

 

See Notes to Condensed Consolidated Financial Statements.

2


 

MATSON, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In millions) (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 

 

 

    

2016

    

2015

    

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

Net income

 

$

36.1

 

$

34.9

 

Reconciling adjustments:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

47.6

 

 

35.6

 

Deferred income taxes

 

 

7.4

 

 

20.7

 

Share-based compensation expense

 

 

6.2

 

 

7.6

 

Equity in income of related party Terminal Joint Venture

 

 

(5.6)

 

 

(8.6)

 

Distribution from Terminal Joint Venture

 

 

 —

 

 

3.5

 

Other

 

 

1.1

 

 

3.0

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

7.9

 

 

5.8

 

Deferred dry-docking payments

 

 

(28.5)

 

 

(12.3)

 

Deferred dry-docking amortization

 

 

17.2

 

 

11.1

 

Prepaid expenses and other assets

 

 

7.3

 

 

(12.6)

 

Accounts payable and accrued liabilities

 

 

11.2

 

 

(1.9)

 

Other liabilities

 

 

(29.1)

 

 

16.1

 

Net cash provided by operating activities

 

 

78.8

 

 

102.9

 

 

 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

Capital expenditures

 

 

(65.8)

 

 

(12.2)

 

Proceeds from disposal of property and equipment

 

 

1.7

 

 

1.6

 

Cash deposits into Capital Construction Fund

 

 

(12.5)

 

 

(2.2)

 

Withdrawals from Capital Construction Fund

 

 

12.5

 

 

2.2

 

Payments for Horizon’s common stock, net of cash acquired

 

 

 —

 

 

(28.7)

 

Net cash used in investing activities

 

 

(64.1)

 

 

(39.3)

 

 

 

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

Excess tax benefit from stock-based compensation

 

 

0.1

 

 

 —

 

Repayments of debt and capital leases

 

 

(11.1)

 

 

(33.4)

 

Proceeds from revolving credit facility

 

 

159.0

 

 

175.0

 

Repayments of revolving credit facility

 

 

(115.0)

 

 

 —

 

Payments of Horizon debt and redemption of warrants

 

 

 —

 

 

(467.5)

 

Proceeds from issuance of capital stock

 

 

0.4

 

 

2.5

 

Tax withholding related to net share settlements of restricted stock units

 

 

(6.3)

 

 

(2.9)

 

Dividends paid

 

 

(15.8)

 

 

(14.9)

 

Payments for shares repurchased

 

 

(32.3)

 

 

 —

 

Net cash used in financing activities

 

 

(21.0)

 

 

(341.2)

 

 

 

 

 

 

 

 

 

Net Decrease in Cash and Cash Equivalents

 

 

(6.3)

 

 

(277.6)

 

Cash and cash equivalents, beginning of the period

 

 

25.5

 

 

293.4

 

Cash and cash equivalents, end of the period

 

$

19.2

 

$

15.8

 

 

 

 

 

 

 

 

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

 

Interest paid

 

$

11.6

 

$

8.6

 

Income tax paid

 

$

5.4

 

$

27.0

 

 

 

 

 

 

 

 

 

Non-cash Information:

 

 

 

 

 

 

 

Capital expenditures included in accounts payable and accrued liabilities

 

$

4.9

 

$

2.9

 

Accrued dividend

 

$

8.2

 

$

7.9

 

 

See Notes to Condensed Consolidated Financial Statements.

3


 

1.          DESCRIPTION OF THE 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:

 

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 offshore economies of Hawaii, Alaska, and Guam, and to other island economies including Micronesia and various islands 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 Hawaiian islands of Oahu, Hawaii, Maui and Kauai, and in the Alaska locations of Anchorage, Kodiak, Dutch Harbor and Akutan.  The Company's fleet of 22 owned vessels includes containerships, combination container and roll-on/roll-off ships and custom-designed barges.

 

The Company has a 35 percent ownership interest in SSA Terminals, LLC (“SSAT”), a joint venture between Matson Ventures, Inc., a wholly-owned subsidiary of MatNav, and SSA Ventures, Inc., a subsidiary of Carrix, Inc.  SSAT provides terminal and stevedoring services to various carriers at six terminal facilities on the West Coast of the United States of America (“U.S.”), including to MatNav at several of those facilities.  Matson records its share of income or loss in the joint venture in operating costs in the Condensed Consolidated Statements of Income and Comprehensive Income, and within the Ocean Transportation segment due to the nature of SSAT’s operations.

 

Logistics: The Company’s logistics business is conducted through Matson Logistics, Inc. (“Matson 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.

 

2.          GENERAL AND SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation: The Condensed Consolidated Financial Statements are unaudited.  Due to the nature of the Company’s operations and the Company’s acquisition of Horizon Lines, Inc. (“Horizon”) on May 29, 2015, the results for interim periods are not necessarily indicative of results to be expected for the year.  These Condensed Consolidated Financial Statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for fair presentation of the results of the interim periods, and do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.  The Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2015, filed with the Securities and Exchange Commission (“SEC”) on February 26, 2016.

 

The Condensed Consolidated Statements of Income and Comprehensive Income include the operations of Horizon from May 29, 2015.

 

Fiscal Period: The period end for Matson, Inc. covered by this report is June 30, 2016.  The period end for MatNav and its subsidiaries covered by this report occurred on the last Friday in June, or June 24, 2016.

 

Significant Accounting Policies: The Company’s significant accounting policies are described in Note 2 to the Consolidated Financial Statements included in Item 8 of the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2015.

 

Property and Equipment: Property and equipment is stated at cost, net of accumulated depreciation of $1,165.6 million and $1,128.6 million at June 30, 2016 and December 31, 2015, respectively.

 

4


 

Goodwill: Changes in the Company’s goodwill for the three and six months ended June 30, 2016 and 2015 consist of the following (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

 

Ocean

 

 

 

 

 

 

    

Transportation

    

Logistics

    

Total

 

Balance at December 31, 2015

 

$

215.0

 

$

26.6

 

$

241.6

 

Additions

 

 

 —

 

 

 —

 

 

 —

 

Balance at March 31, 2016

 

 

215.0

 

 

26.6

 

 

241.6

 

Additions

 

 

3.5

 

 

 —

 

 

3.5

 

Balance at June 30, 2016

 

$

218.5

 

$

26.6

 

$

245.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

 

Ocean

 

 

 

 

 

 

    

Transportation

    

Logistics

    

Total

 

Balance at December 31, 2014

 

$

0.8

 

$

26.6

 

$

27.4

 

Additions

 

 

 —

 

 

 —

 

 

 —

 

Balance at March 31, 2015

 

 

0.8

 

 

26.6

 

 

27.4

 

Additions

 

 

214.2

 

 

 —

 

 

214.2

 

Balance at June 30, 2015

 

$

215.0

 

$

26.6

 

$

241.6

 

 

Ocean Transportation goodwill additions for the three and six months ended June 30, 2016 and 2015 are related to the Horizon Acquisition (see Note 3, Business Combinations).

 

Intangible Assets, Net: Intangible assets are recorded net of accumulated amortization of $16.0 million and $12.3 million at June 30, 2016 and December 31, 2015, respectively. 

 

Capital Construction Fund: The Company’s Capital Construction Fund (“CCF”) is described in Note 7 to the Consolidated Financial Statements included in Item 8 of the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2015.  As of June 30, 2016 and December 31, 2015, the Company had nominal amounts on deposit in the CCF.  These amounts are held in a money market account and classified as long-term assets in the Company’s Condensed Consolidated Balance Sheets, as the Company intends to use qualified cash withdrawals to fund the vessel construction costs.  During the three months ended June 30, 2016, the Company did not make any cash deposits into the CCF.  During the six months ended June 30, 2016, the Company made cash deposits of $12.5 million into the CCF.  Additionally, $12.5 million of qualified cash withdrawals were made from the CCF during the three and six months ended June 30, 2016.

 

As of June 30, 2016 and December 31, 2015, $164.8 million and $176.6 million, respectively, of eligible accounts receivable were assigned to the CCF.  Due to the nature of the assignment of eligible accounts receivable into the CCF, such assigned amounts are classified as part of accounts receivable in the Condensed Consolidated Balance Sheets. 

 

Contingencies: 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.

 

5


 

Accumulated Other Comprehensive Loss: Changes in accumulated other comprehensive loss by component, net of tax, for the three and six months ended June 30, 2016 and 2015 are as follows (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

Non-

 

Foreign

 

 

 

Other

 

 

 

 

 

Post

 

Qualified

 

Currency

 

Interest

 

Comprehensive

 

 

    

Pensions

    

Retirement

    

Plans

    

Transaction

    

Hedge

    

Income (Loss)

 

Balance at December 31, 2015

 

$

(41.7)

 

$

(4.7)

 

$

(0.9)

 

$

1.0

 

$

(0.6)

 

$

(46.9)

 

Net gain in prior service costs

 

 

 —

 

 

0.7

 

 

 —

 

 

 —

 

 

 —

 

 

0.7

 

Amortization of prior service cost

 

 

(0.4)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(0.4)

 

Amortization of net loss

 

 

0.8

 

 

0.2

 

 

0.1

 

 

 —

 

 

 —

 

 

1.1

 

Foreign currency translation adjustment

 

 

 —

 

 

 —

 

 

 —

 

 

(0.1)

 

 

 —

 

 

(0.1)

 

Balance at March 31, 2016

 

 

(41.3)

 

 

(3.8)

 

 

(0.8)

 

 

0.9

 

 

(0.6)

 

 

(45.6)

 

Amortization of prior service cost

 

 

(0.3)

 

 

 —

 

 

0.1

 

 

 —

 

 

 —

 

 

(0.2)

 

Amortization of net loss

 

 

0.8

 

 

0.2

 

 

 —

 

 

 —

 

 

 —

 

 

1.0

 

Balance at June 30, 2016

 

$

(40.8)

 

$

(3.6)

 

$

(0.7)

 

$

0.9

 

$

(0.6)

 

$

(44.8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

Non-

 

Foreign

 

 

 

Other

 

 

 

 

 

Post

 

Qualified

 

Currency

 

Interest

 

Comprehensive

 

 

    

Pensions

    

Retirement

    

Plans

    

Transaction

    

Hedge

    

Income (Loss)

 

Balance at December 31, 2014

 

$

(45.0)

 

$

(7.2)

 

$

(0.7)

 

$

0.3

 

$

(0.7)

 

$

(53.3)

 

Net loss in prior service costs

 

 

(0.2)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(0.2)

 

Amortization of prior service cost

 

 

(0.4)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(0.4)

 

Amortization of net loss

 

 

1.0

 

 

0.4

 

 

 —

 

 

 —

 

 

 —

 

 

1.4

 

Foreign currency translation adjustment

 

 

 —

 

 

 —

 

 

 —

 

 

0.1

 

 

 —

 

 

0.1

 

Balance at March 31, 2015

 

 

(44.6)

 

 

(6.8)

 

 

(0.7)

 

 

0.4

 

 

(0.7)

 

 

(52.4)

 

Amortization of prior service cost

 

 

(0.2)

 

 

0.1

 

 

(0.1)

 

 

 —

 

 

 —

 

 

(0.2)

 

Amortization of net loss

 

 

0.9

 

 

0.2

 

 

(0.2)

 

 

 —

 

 

 —

 

 

0.9

 

Foreign currency translation adjustment

 

 

 —

 

 

 —

 

 

 —

 

 

0.6

 

 

 —

 

 

0.6

 

Balance at June 30, 2015

 

$

(43.9)

 

$

(6.5)

 

$

(1.0)

 

$

1.0

 

$

(0.7)

 

$

(51.1)

 

 

New Accounting Pronouncements: Leases: In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which requires lessees to record most leases on their balance sheets but recognize the expenses on their income statements in a manner similar to current practice.  ASU 2016-02 states that a lessee would recognize a lease liability for the obligation to make lease payments, and a right-of-use asset for the underlying leased asset for the period of the lease term.  The new standard is effective for interim and annual periods beginning after December 15, 2018 and early adoption is permitted.  The Company is in the process of evaluating this guidance.

 

Share-Based Awards: In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.”  The amendments are effective for public companies for annual periods beginning after December 15, 2016, and interim periods within those annual periods.  Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows.  Early adoption is permitted.  The Company is in the process of evaluating this guidance.

6


 

3.          BUSINESS COMBINATION

 

Horizon Acquisition: On May 29, 2015 (the “Effective Date”), Matson completed its acquisition of Horizon whereby MatNav acquired Horizon’s Alaska operations and assumed all of Horizon’s non-Hawaii assets and liabilities (the “Horizon Acquisition”).  Immediately before the completion of the Horizon Acquisition, Horizon sold certain of its subsidiaries to the Pasha Group (the “Pasha Transaction”) that: (i) conducted Horizon’s Hawaii operations (including owning the assets used to conduct such Hawaii operations and being responsible for the liabilities related thereto), and (ii) employed the Horizon employees who conducted its Hawaii operations.  Horizon also completed the termination of its Puerto Rico operations during the first quarter of 2015.  The Alaska operations are recorded within the Ocean Transportation segment of the Company.

 

On the Effective Date, a subsidiary of the Company merged with Horizon and as a result, the Company acquired 100 percent of Horizon’s outstanding shares and warrants for a cash price of $0.72 per-share.  As a result of the Horizon Acquisition, the Company thereby acquired Horizon’s assets and thereby assumed its liabilities including Horizon’s debt (net of proceeds from the Pasha Transaction).  Immediately following the Horizon Acquisition, the Company repaid the assumed debt which included accrued interest and breakage fees, and redeemed all of Horizon’s outstanding warrants.  Total consideration including debt paid and warrants redeemed by the Company is as follows:

 

 

 

 

 

 

(in millions)

    

Total Consideration

 

Common shares

 

$

29.4

 

Warrants

 

 

37.1

 

Horizon’s debt (including accrued interest and breakage fees)

 

 

428.9

 

Total

 

$

495.4

 

 

As of June 30, 2016, the Company has finalized the purchase accounting for the Horizon Acquisition.  Horizon’s assets and liabilities acquired pursuant to the Horizon Acquisition were recorded based on the fair value estimates as of the Effective Date, with the remaining unallocated purchase price recorded as goodwill.  The following table summarizes the fair values assigned to Horizon’s assets acquired and liabilities assumed as a result of the Horizon Acquisition as of June 30, 2016:

 

 

 

 

 

 

Purchase Price Allocation (in millions)

    

Total

 

Cash and cash equivalents

 

$

0.8

 

Accounts receivable

 

 

31.7

 

Other current assets

 

 

7.2

 

Deferred tax assets, net

 

 

46.3

 

Property and equipment

 

 

170.4

 

Intangibles – Customer relationships

 

 

140.0

 

Other long-term assets

 

 

4.1

 

Accounts payable

 

 

(22.8)

 

Accruals and other current liabilities

 

 

(31.4)

 

Multi-employer withdrawal liability

 

 

(65.5)

 

Capital lease obligations

 

 

(1.6)

 

Horizon’s debt and warrants

 

 

(467.5)

 

Total identifiable assets less liabilities

 

 

(188.3)

 

Total cash paid for common shares

 

 

(29.4)

 

Goodwill

 

$

217.7

 

 

The amounts above include $2.0 million of purchase price adjustments recorded to the preliminary purchase price allocation initially reported in the Company’s interim Condensed Consolidated Financial Statements for the three and six months ended June 30, 2015.  Purchase price adjustments relate primarily to the receipt of additional information regarding the fair value of certain assets acquired and liabilities assumed.  These adjustments include a $4.9 million adjustment to increase the Puerto Rico multi-employer withdrawal liability, offset by a $0.7 million adjustment to increase deferred tax assets and a $0.7 million adjustment to decrease accruals and other current liabilities, in the three and six months ended June 30, 2016, and a corresponding increase in goodwill of $3.5 million as a result of the Company receiving the final calculation of the required payments from the Trustees of the Puerto Rico Pension Fund on May 27, 2016. 

 

7


 

The final Puerto Rico multi-employer withdrawal liability was determined to be approximately $102.0 million, payable in 98 quarterly installments of $1,036,647, and a remainder payment.  Based upon the Company’s incremental borrowing rate of 3.87 percent, the Company determined the final fair value of the multi-employer withdrawal payments to be $65.5 million at May 29, 2015 compared to the preliminary allocation of $60.6 million.  The Company also recorded a $1.1 million adjustment to increase interest expense in the Consolidated Statements of Income and Comprehensive Income, with a corresponding increase to multi-employer withdrawal liability in the three and six months ended June 30, 2016, as a result of these purchase accounting changes and the accretion of the fair value of the multi-employer withdrawal liability.

 

The Company's Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2016 include revenue of $63.5 million and $134.2 million, and operating income of $3.4 million and $10.4 million, respectively, from Horizon’s operations.  One-time acquisition related costs incurred post December 31, 2015 were not material. 

 

Pro Forma Financial Information (Unaudited): The following unaudited pro forma financial information presents the combined operating results of the Company, and those of Horizon excluding its Hawaii operations, as if the Horizon Acquisition had been completed at the beginning of each period presented below.  The unaudited pro forma financial information includes the accounting effects of the business combination, including the amortization of intangible assets, depreciation of property and equipment, and interest expense.  The unaudited pro forma financial information is presented for informational purposes only and is not indicative of the result of operations that would have been achieved if the Horizon Acquisition had taken place at the beginning of the periods presented, nor should it be taken as an indication of our future consolidated results of operations.

 

 

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

(Unaudited)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

(in millions, except per-share amount)

    

2015

    

2015

    

Pro Forma Combined:

    

 

 

    

 

 

    

Operating revenue

 

$

507.2

 

$

980.6

 

Net income

 

$

7.6

 

$

25.1

 

 

 

 

 

 

 

 

 

Basic Earnings Per-Share:

 

$

0.17

 

$

0.58

 

Diluted Earnings Per-Share:

 

$

0.17

 

$

0.57

 

 

 

 

 

 

 

 

 

Weighted-Average Number of Shares Outstanding:

 

 

 

 

 

 

 

  Basic

 

 

43.5

 

 

43.4

 

  Diluted

 

 

44.0

 

 

43.9

 

 

 

8


 

4.          DEBT

 

At June 30, 2016 and December 31, 2015, the Company’s debt consisted of the following (in millions):

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

    

2016

    

2015

    

Term Loans:

 

 

 

 

 

 

 

5.79 %, payable through 2020

 

$

28.0

 

$

31.5

 

3.66 %, payable through 2023

 

 

63.8

 

 

68.4

 

4.16 %, payable through 2027

 

 

55.0

 

 

55.0

 

4.31 %, payable through 2032

 

 

37.5

 

 

37.5

 

4.35 %, payable through 2044

 

 

100.0

 

 

100.0

 

3.92 %, payable through 2045

 

 

75.0

 

 

75.0

 

Title XI Bonds:

 

 

 

 

 

 

 

5.34 %, payable through 2028

 

 

27.5

 

 

28.6

 

5.27 %, payable through 2029

 

 

29.7

 

 

30.8

 

Revolving credit facility

 

 

44.0

 

 

 —

 

Capital leases

 

 

2.3

 

 

3.1

 

Total Debt

 

 

462.8

 

 

429.9

 

Less current portion

 

 

(21.8)

 

 

(22.0)

 

Total Long-term Debt

 

$

441.0

 

$

407.9

 

 

The Company’s debt is described in Note 8 to the Consolidated Financial Statements included in Item 8 of the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2015.

 

Revolving Credit Facility: Borrowings under the revolving credit facility are classified as long-term debt in the Condensed Consolidated Balance Sheet, as principal payments are not required until maturity date of July 30, 2020.  As of June 30, 2016, the Company had $345.1 million of availability under the revolving credit facility.  The interest rate on borrowings under the revolving credit facility approximated 1.84 percent during the three months ended June 30, 2016.

 

5.          PENSION AND OTHER POST-RETIREMENT PLANS

 

The Company sponsors qualified defined benefit pension and other post-retirement plans (collectively, the “Plans”).  The following table provides the components of net periodic benefit cost (benefit) for the Plans for the six months ended June 30, 2016 and 2015 (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension Benefits

 

Other Post-retirement Benefits

 

 

 

June 30, 

 

June 30, 

 

Components of Net Periodic Benefit Cost:

    

2016

    

2015

    

2016

    

2015

 

Service cost

 

$

2.0

 

$

1.7

 

$

0.8

 

$

0.8

 

Interest cost

 

 

4.8

 

 

4.8

 

 

1.4

 

 

1.3

 

Expected return on plan assets

 

 

(6.7)

 

 

(6.9)

 

 

 —

 

 

 —

 

Amortization of net loss

 

 

2.6

 

 

3.2

 

 

0.6

 

 

1.2

 

Amortization of prior service cost

 

 

(1.1)

 

 

(1.2)

 

 

 —

 

 

 —

 

Net periodic benefit cost

 

$

1.6

 

$

1.6

 

$

2.8

 

$

3.3

 

 

During the six months ended June 30, 2016, the Company contributed $3.1 million to its defined benefit pension plans, out of total expected contributions of $7.5 million for 2016.

9


 

6.          SHARE-BASED COMPENSATION

 

During the three months ended June 30, 2016, the Company granted approximately 19,700 of time-based shares to certain of its employees at a $38.11 weighted-average grant date fair value. 

 

Total stock-based compensation cost recognized in the Condensed Consolidated Statements of Income and Comprehensive Income as a component of selling, general and administrative expenses was $3.4 million and $4.8 million for the three months ended June 30, 2016 and 2015, respectively, and $6.2 million and $7.6 million for the six months ended June 30, 2016 and 2015, respectively.  Total unrecognized compensation cost related to unvested share-based compensation arrangements was $15.7 million at June 30, 2016, and is expected to be recognized over a weighted-average period of 2.1 years.  Total unrecognized compensation cost may be adjusted for any unearned performance shares or forfeited shares.

 

7.          EARNINGS PER-SHARE

 

The number of shares used to compute basic and diluted earnings per-share for the three and six months ended June 30, 2016 and 2015, is as follows (in millions, except per-share amounts):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2016

 

Six Months Ended June 30, 2016

 

 

    

 

 

    

Weighted-

    

Per

    

 

 

    

Weighted-

    

Per

    

 

 

 

 

 

Average

 

Common

 

 

 

 

Average

 

Common

 

 

 

Net

 

Common

 

Share

 

Net

 

Common

 

Share

 

 

 

Income

 

Shares

 

Amount

 

Income

 

Shares

 

Amount

 

Basic:

 

$

18.0

 

43.1

 

$

0.42

 

$

36.1

 

43.3

 

$

0.83

 

Effect of Dilutive Securities:

 

 

 

 

0.3

 

 

 —

 

 

 

 

0.4

 

 

 —

 

Diluted:

 

$

18.0

 

43.4

 

$

0.42

 

$

36.1

 

43.7

 

$

0.83

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2015

 

Six Months Ended June 30, 2015

 

 

    

 

 

    

Weighted-

    

Per

    

 

 

    

Weighted-

    

Per

 

 

 

 

 

 

Average

 

Common

 

 

 

 

Average

 

Common

 

 

 

Net

 

Common

 

Share

 

Net

 

Common

 

Share

 

 

 

Income

 

Shares

 

Amount

 

Income

 

Shares

 

Amount

 

Basic:

 

$

9.9

 

43.5

 

$

0.23

 

$

34.9

 

43.4

 

$

0.80

 

Effect of Dilutive Securities:

 

 

 

 

0.5

 

 

 —

 

 

 

 

0.5

 

 

(0.01)

 

Diluted:

 

$

9.9

 

44.0

 

$

0.23

 

$

34.9

 

43.9

 

$

0.79

 

 

Basic earnings per-share is determined by dividing net income by the weighted-average common shares outstanding during the period.  The calculation of diluted earnings per-share includes the dilutive effect of unexercised non-qualified stock options and non-vested restricted stock units.

 

The computation of weighted-average dilutive shares outstanding excludes certain non-qualified stock options to purchase shares of common stock where the options’ exercise prices were greater than the average market price of the Company’s common stock for the periods presented and, therefore, the effect would be anti-dilutive.  The number of such shares excluded was nominal.

 

8.          FAIR VALUE MEASUREMENTS

 

The Company values its financial instruments based on the fair value hierarchy of valuation techniques for fair value measurements.  Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date.  Level 2 inputs include quoted prices for similar assets and liabilities in active markets and inputs other than quoted prices observable for the asset or liability.  Level 3 inputs are unobservable inputs for the asset or liability.  If the technique used to measure fair value includes inputs from multiple levels of the fair value hierarchy, the lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy.

 

10


 

The Company uses Level 1 inputs for the fair values of its cash equivalents, and Level 2 inputs for its accounts receivable, variable rate debt and fixed rate debt.  The fair values of cash and cash equivalents, accounts receivable and variable rate debt approximate their carrying values due to the nature of the instruments.  The fair value of the Company’s fixed rate debt is calculated based upon interest rates available for debt with terms and maturities similar to the Company’s existing debt arrangements.

 

The carrying value and fair value of the Company’s financial instruments as of June 30, 2016 and December 31, 2015 are as follows (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices in

 

Significant

 

Significant

 

 

 

Total

 

 

 

Active Markets

 

Observable 

 

Unobservable 

 

 

 

    Carrying Value    

 

Total

 

(Level 1)

    

Inputs (Level 2)

 

Inputs (Level 3)

 

 

 

June 30, 2016

 

Fair Value Measurements at June 30, 2016

 

Cash and cash equivalents

    

$

19.2

    

$

19.2

    

$

19.2

    

$

 —

    

$

 —

 

Accounts receivable, net

 

 

206.4

 

 

206.4