matx_Current_Folio_10K

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

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

 

For the fiscal year ended December 31, 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

 

(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 21, 2017:

43,119,933

 

Aggregate market value of Common Stock held by non-affiliates at June 30, 2016:

$1,368,198,911

 

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

 

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 ☐  No ☒

 

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 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 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.  ☐

 

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 ☒

 

Accelerated filer ☐

 

 

 

Non-accelerated filer ☐

(Do not check if a smaller reporting company)

 

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

 

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 27, 2017.

 

 

 

 


 

Table of Contents

TABLE OF CONTENTS

 

 

 

 

 

 

 

Page

 

 

 

 

 

 

PART I

 

 

 

 

 

Item 1. 

 

Business

 

 

 

 

 

A. 

Company Overview

 

 

 

 

 

B. 

Business Description

 

 

(1)

 Ocean Transportation Segment

 

 

(2)

 Logistics Segment

 

 

 

 

 

C.

Employees and Labor Relations

10 

 

 

 

 

 

D.

Available Information

10 

 

 

 

 

Item 1A. 

 

Risk Factors

11 

 

 

 

 

Item 1B. 

 

Unresolved Staff Comments

18 

 

 

 

 

Item 2. 

 

Properties

19 

 

 

 

 

Item 3. 

 

Legal Proceedings

20 

 

 

 

 

Item 4. 

 

Mine Safety Disclosures

20 

 

 

 

 

 

 

PART II

 

 

 

 

 

Item 5. 

 

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

21 

 

 

 

 

Item 6. 

 

Selected Financial Data

22 

 

 

 

 

Item 7. 

 

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

24 

 

 

 

 

Item 7A. 

 

Quantitative and Qualitative Disclosures About Market Risk

37 

 

 

 

 

Item 8. 

 

Financial Statements and Supplementary Data

38 

 

 

 

 

Item 9. 

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

77 

 

 

 

 

Item 9A. 

 

Controls and Procedures

77 

 

 

 

 

 

 

Conclusion Regarding Effectiveness of Disclosure Controls and Procedures

77 

 

 

 

 

 

 

Internal Control over Financial Reporting

77 

 

 

 

 

Item 9B. 

 

Other Information

77 

 

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PART III

 

 

 

 

 

Item 10. 

 

Directors, Executive Officers and Corporate Governance

78 

 

 

 

 

 

A.

Directors

78 

 

 

 

 

 

B.

Executive Officers

78 

 

 

 

 

 

C.

Corporate Governance

78 

 

 

 

 

 

D.

Code of Ethics

78 

 

 

 

 

Item 11. 

 

Executive Compensation

78 

 

 

 

 

Item 12. 

 

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

78 

 

 

 

 

Item 13. 

 

Certain Relationships and Related Transactions, and Director Independence

78 

 

 

 

 

Item 14. 

 

Principal Accounting Fees and Services

78 

 

 

 

 

 

 

PART IV

 

 

 

 

 

Item 15. 

 

Exhibits and Financial Statement Schedules

79 

 

 

 

 

 

A.

Financial Statements

79 

 

 

 

 

 

B.

Financial Statement Schedules

79 

 

 

 

 

 

C.

Exhibits Required by Item 601 of Regulation S-K

79 

 

 

 

 

Signatures 

86 

 

 

 

 

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Table of Contents

MATSON, INC.

 

FORM 10-K

 

Annual Report for the Fiscal Year

Ended December 31, 2016

 

PART I

 

ITEM 1.  BUSINESS

 

A.

COMPANY OVERVIEW

 

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, 2016, 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 provides a vital lifeline of ocean freight transportation services to the domestic non-contiguous economies of Hawaii, Alaska and Guam, and to other island economies in Micronesia.  MatNav also operates a premium, expedited service from China to Long Beach, California, and provides services to various islands in the South Pacific.  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 and Dutch Harbor.  Matson’s fleet of 22 owned vessels and five chartered vessels includes containerships, combination container and roll-on/roll-off ships and custom-designed barges.

 

Matson 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. (“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 (“Terminal Joint Venture”).  Matson records its share of income in the joint venture in operating costs in the Consolidated Statements of Income and Comprehensive Income, and within the Ocean Transportation segment due to the nature of SSAT’s operations.

 

Logistics:  Matson’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 a variety of logistic services to its customers including: (i) multimodal transportation brokerage of domestic and international rail intermodal services, long-haul and regional highway trucking services, specialized hauling, flat-bed and project services, less-than-truckload services, and expedited freight services (collectively “Transportation Brokerage Services”); (ii) less-than-container load (“LCL”) consolidation and freight forwarding services (collectively “Freight Forwarding Services”); (iii) warehousing and distribution services; and (iv) supply chain management and other services.

 

Recent Acquisitions:

 

On August 4, 2016, Matson Logistics completed its acquisition of Span Intermediate, LLC (“Span Alaska”), a market leading provider of LCL consolidation and freight forwarding services to Alaska.  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 Acquisitions, see Note 3 to the Consolidated Financial Statements in Item 8 of Part II below.

 

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Our Mission and Vision:

 

Our mission is to move freight better than anyone.  Our vision is to create value for our shareholders by:

 

·

Being our customers’ first choice,

·

Leveraging our core strengths to drive growth and increase profitability,

·

Improving the communities in which we work and live,

·

Being an environmental leader in our industry, and

·

Being a great place to work.

 

B.

BUSINESS DESCRIPTION

 

(1)

OCEAN TRANSPORTATION SEGMENT

 

Ocean Freight Services:

 

Matson’s Ocean Transportation segment provides the following services:

 

Ocean 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 and Oakland, California, Seattle, Washington, 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 and beverages, retail merchandise, 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.

 

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 in Alaska, 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 and beverages, retail merchandise, household goods, and automobiles.  Matson’s southbound cargo from Alaska primarily consists of household goods, automobiles and seafood.

 

China Service:  Matson’s expedited China-Long Beach Express (“CLX”) service is part of an integrated Hawaii/Guam/ China service.  This service carries cargo from Long Beach, California to Honolulu, Hawaii, and then to Guam.  The vessels continue to the ports of Ningbo and Shanghai in China, where they are loaded with cargo to be discharged in Long Beach, California.  These vessels also carry cargo destined to and originating from the Guam and Micronesia services.    Commencing February 2017, Matson replaced its direct calling to Xiamen, China with a transshipment service to Shanghai, China.  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 weekly freight services to the Commonwealth of the Northern Mariana Islands with transshipment in Guam.

 

Japan Service:  On December 20, 2016, Matson announced the introduction of service to the Port of Naha in Okinawa, Japan as part of its expedited CLX service.  The new weekly service is expected to make its first call during the second quarter 2017. This service is expected to carry mainly general sustenance cargo supporting the U.S. military and commercial customer base.

 

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Table of Contents

Micronesia Service:  Matson’s Micronesia service provides conventional container 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 the South Pacific Islands, including Fiji, Samoa, American Samoa, Tonga, the Cook Islands, Niue, Vanuatu, Nauru, and the Solomon Islands.  In August 2016, Matson introduced its new South Pacific Express service that connects the U.S. West Coast to the ports in the South Pacific Islands.  Cargo is transshipped to Honolulu, Hawaii, with a monthly conventional container freight service connecting the U.S. West Coast and Hawaii service to our South Pacific network, including New Zealand.

 

Terminals:

 

Matson provides container stevedoring, container equipment maintenance and other terminal services (collectively “terminal services”) for MatNav 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.  Matson also provides terminal services for other ocean carriers at the Alaska terminal locations of Kodak and Dutch Harbor.

 

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 costs in the Consolidated Statements of Income and Comprehensive Income, and within the Ocean Transportation segment due to the nature of SSAT’s operations.

 

Matson utilizes the services of other third-party terminal operators at all of the other ports at which its vessels call.

 

Ship Management Services: 

 

Matson contracts with the U.S. Department of Transportation to provide ship management services.  During the first quarter of 2016, Matson signed an eight-year ship management contract to manage and maintain three Ready Reserve Force vessels on behalf of the U.S. Department of Transportation Maritime Administration.

 

Matson’s Vessel and Equipment Information:

 

Vessels:

 

Matson’s fleet includes 22 owned and five chartered vessels.  Matson’s owned vessels represent an investment of approximately $1.4 billion (see Critical Accounting Estimates in Item 7 of Part II below for additional information about vessel costs and net book values).  The majority of Matson’s owned vessels are U.S. flagged vessels, and 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).

 

Matson’s fleet consists of 21 U.S. flagged vessels operating in the Hawaii, Guam, China and Alaska services, and six non-U.S. flagged vessels operating in the Micronesia and South Pacific services. 

 

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Table of Contents

Active vessels owned and chartered by Matson as of December 31, 2016 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)

 

TEUs (2)

 

Slots

 

Autos

 

Diesel-Powered - Owned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MAUNALEI

 

Owned

 

1181627

 

2006

 

681’ 1”

 

22.0

 

33,771

 

1,992

 

328

 

 

MANULANI

 

Owned

 

1168529

 

2005

 

711’ 11”

 

23.0

 

29,517

 

2,378

 

284

 

 

MAUNAWILI

 

Owned

 

1153166

 

2004

 

711’ 11”

 

23.0

 

29,517

 

2,378

 

326

 

 

MANUKAI

 

Owned

 

1141163

 

2003

 

711’ 11”

 

23.0

 

29,517

 

2,378

 

326

 

 

OLOMANA (3)

 

Owned

 

1559

 

1999

 

381’ 5”

 

14.0

 

5,364

 

521

 

68

 

 

R.J. PFEIFFER

 

Owned

 

979814

 

1992

 

713’ 6”

 

23.0

 

27,100

 

2,245

 

300

 

 

MATSON KODIAK

 

Owned

 

910308

 

1987

 

710’ 0”

 

20.0

 

37,473

 

1,668

 

280

 

 

MATSON ANCHORAGE

 

Owned

 

910306

 

1987

 

710’ 0”

 

20.0

 

37,473

 

1,668

 

280

 

 

MATSON TACOMA

 

Owned

 

910307

 

1987

 

710’ 0”

 

20.0

 

37,473

 

1,668

 

280

 

 

MOKIHANA

 

Owned

 

655397

 

1983

 

860’ 2”

 

23.0

 

29,484

 

1,994

 

354

 

1,323

 

MANOA

 

Owned

 

651627

 

1982

 

860’ 2”

 

23.0

 

30,187

 

2,824

 

408

 

 

MAHIMAHI

 

Owned

 

653424

 

1982

 

860’ 2”

 

23.0

 

30,167

 

2,824

 

408

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diesel-Powered - Chartered

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IMUA II (3)

 

Chartered

 

9184237

 

2005

 

388’ 6”

 

15.0

 

8,071

 

630

 

90

 

 

LILOA II (3)

 

Chartered

 

9184249

 

2004

 

388' 6"

 

15.0

 

8,071

 

630

 

90

 

 

MANA (3)

 

Chartered

 

4958

 

1997

 

329’ 9”

 

13.0

 

4,508

 

384

 

60

 

 

PAPA MAU (3)

 

Chartered

 

9266542

 

2003

 

441’ 0”

 

18.5

 

10,994

 

862

 

204

 

 

ISLANDER (3)

 

Chartered

 

9085596

 

1984

 

425' 8"

 

17.0

 

10,577

 

814

 

95

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Steam-Powered

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

KAUAI

 

Owned

 

621042

 

1980

 

720’ 5”

 

22.5

 

26,308

 

1,644

 

276

 

44

 

MAUI

 

Owned

 

591709

 

1978

 

720’ 5”

 

22.5

 

26,623

 

1,644

 

252

 

 

MATSON PRODUCER

 

Owned

 

552819

 

1974

 

720’ 0”

 

22.0

 

38,858

 

1,680

 

170

 

 

MATSONIA

 

Owned

 

553090

 

1973

 

760’ 0”

 

21.5

 

22,501

 

1,727

 

258

 

450

 

MATSON CONSUMER

 

Owned

 

552818

 

1973

 

720’ 0”

 

22.0

 

38,858

 

1,690

 

170

 

 

MATSON NAVIGATOR

 

Owned

 

541868

 

1972

 

813’ 0”

 

21.0

 

47,790

 

2,250

 

188

 

 

LIHUE

 

Owned

 

530137

 

1971

 

787’ 8”

 

21.0

 

38,656

 

2,018

 

188

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Barges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

WAIALEALE (4)

 

Owned

 

978516

 

1991

 

345’ 0”

 

 

5,621

 

 

36

 

230

 

MAUNA LOA (5)

 

Owned

 

676973

 

1984

 

350’ 0”

 

 

4,658

 

335

 

78

 

 

HALEAKALA (5)

 

Owned

 

676972

 

1984

 

350’ 0”

 

 

4,658

 

335

 

78

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(1)

Excludes two inactive vessels.

(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 six foreign-flagged vessels, all vessels are U.S. flagged and Jones Act qualified vessels.

(4)

Roll-on/roll-off barge.

(5)

Lift-on/lift-off barges equipped with cranes.

 

Hawaii Fleet Renewal Program:    

 

Matson has 11 vessels actively deployed in its Hawaii service including three steamships.  Including these three steamships, the Company has a total of seven steamships, all of which are near the end of their useful life.  Beginning January 1, 2020, these steamships will no longer comply with established U.S. and international emission regulations without substantial modifications.  In order to renew its Hawaii fleet and prepare for the phase-out of its steamships, Matson ordered four new vessels as follows:

 

·

During the fourth quarter of 2013, MatNav and Philly Shipyard, Inc. (“Philly Shipyard”) entered into definitive agreements pursuant to which Philly Shipyard will construct two new Aloha Class containerships with dual-fuel capable engines (the “Philly Shipbuilding Agreements”). 

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Table of Contents

·

During the third quarter of 2016, MatNav and General Dynamics NASSCO (“NASSCO”) entered into a definitive agreement pursuant to which NASSCO will construct two new Kanaloa Class combination container and roll-on/roll-off (“Con-Ro”) vessels with dual-fuel capable engines (the “NASSCO Shipbuilding Agreements”).

 

Certain specifications of the new vessels on order are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Usable Cargo Capacity

 

 

 

 

 

 

 

 

 

 

 

 

Maximum

 

Maximum

 

Containers

 

Vehicles

 

  

Official

  

Expected

  

 

  

Type of

  

 

  

Speed

  

Deadweight

  

    

  

Reefer

  

    

Name of Vessels

 

Number

 

Delivery Date

 

Class

 

Vessel

 

Length

 

(Knots)

 

(Long Tons)

 

TEUs

 

Slots

 

Autos

Dual-fuel Capable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Daniel K. Inouye

 

1274136

 

Q3 2018

 

Aloha Class

 

Containership

 

854’ 0”

 

23.5

 

50,794

 

3,220

 

408

 

Kaimana Hila

 

1274135

 

Q1 2019

 

Aloha Class

 

Containership

 

854’ 0”

 

23.5

 

53,747

 

3,220

 

408

 

Lurline

 

1274143

 

Q4 2019

 

Kanaloa Class

 

Con-Ro

 

869’ 5”

 

23.0

 

50,981

 

2,750

 

432

 

500

Matsonia

 

1274123

 

Q2 2020

 

Kanaloa Class

 

Con-Ro

 

869’ 5”

 

23.0

 

50,981

 

2,750

 

432

 

500

 

Expected annual construction progress payments based on signed agreements and change orders, excluding owners’ items and capitalized interest, for both the Aloha Class and Kanaloa Class vessels are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in millions)

    

2016 and Prior

    

2017

    

2018

    

2019

    

2020

    

Total

Two Aloha Class Containerships

 

$

95.9

 

$

159.1

 

$

138.1

 

$

20.3

 

$

0.9

 

$

414.3

Two Kanaloa Class Con-Ro Vessels

 

 

25.6

 

 

41.7

 

 

246.1

 

 

174.3

 

 

23.3

 

 

511.0

Total

 

$

121.5

 

$

200.8

 

$

384.2

 

$

194.6

 

$

24.2

 

$

925.3

 

Upon delivery, the two new Aloha Class containerships are expected to replace the three active steamships currently deployed in the Company’s Hawaii service.  By the end of 2019, Matson expects to have retired all of its seven active steamships as they will no longer comply with new environmental regulations without substantial modifications that are effective as of January 1, 2020.

 

When complete, these new Aloha Class containerships and Kanaloa Class Con-Ro vessels are expected to have among the lowest operating cost per TEU of any vessel in the U.S. domestic trades.  The cost efficiencies are expected to be driven by our ability to return to an optimal nine vessel Hawaii fleet deployment and by significantly lower operating costs including fuel consumption, maintenance and repair, and dry-docking costs.

 

Equipment

 

As a complement to its fleet of vessels, Matson has a variety of equipment including cranes, containers, chassis and other equipment, which represents an investment in excess of $0.5 billion as of December 31, 2016.  Matson also leases containers, chassis and other equipment under various operating lease agreements.

 

Additional information of Matson’s fleet equipment is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

Approx. %

 

Approx. %

 

Fleet Equipment

    

Total (1)

    

Owned (1)

    

Leased (1)

    

Chassis

 

23,000

 

54

%  

46

%

Dry Containers

 

34,600

 

82

%  

18

%

Refrigerated Containers

 

8,900

 

47

%  

53

%

Specialty Equipment (2)

 

5,300

 

87

%  

13

%

Motor Generators

 

1,800

 

100

%  

 —

%


(1)

Amounts represent approximations of equipment totals and percentage allocations.

(2)

Specialty equipment includes auto frames, flat racks, insulated containers, open top, platforms, flat bed trailers and tanks.

 

Operating Costs:

 

Major components of ocean transportation operating costs are as follows:

 

Direct Cargo Expense includes terminal handling costs, purchased outside transportation and other related costs. 

 

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Vessel Operating Expense includes crew wages and related costs, fuel consumption, pilot, tugs and line related costs, vessel charter expenses, and other vessel related expenses.  Matson purchases fuel oil, lubricants and gasoline for its operations; and also pays fuel surcharges to other third party transportation providers.

 

Operating Overhead includes equipment repair costs, equipment operating lease and repositioning expenses, vessel repair and maintenance costs, dry-docking amortization, insurance, port engineers and other maintenance costs, and other vessel and shoreside related overhead.

 

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 vessels 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 vessels to meet their intermediate dry-docking requirement with a less costly underwater inspection.

 

Matson is responsible for ensuring that its non-U.S flagged 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 vessel owners.

 

Competition:

 

The following is a summary of major competitors in Matson’s Ocean Transportation service:

 

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 Long Beach, Oakland and San Diego, 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 alternatives for companies shipping 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.

 

Matson vessels are operated on schedules that provide shippers and consignees fixed day-of-the-week sailings from the U.S. West Coast as well as fixed day-of-the-week arrivals in Hawaii.  Matson offers four westbound sailings per week, though this amount may be adjusted according to seasonal demand and market conditions.  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 is three per week.  This service is attractive to customers because more frequent sailings permit customers to reduce inventory costs.  Matson also competes by offering a more comprehensive service to customers, including:  service to and from the three largest U.S. West Coast ports; the most efficient terminal network on the U.S. West Coast; a dedicated neighbor islands barge network; an award winning customer service team; and its efficiency and experience in handling cargo of all types.

 

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 Western Alaska and other locations.  The barge operators have historically shipped lower value commodities that can accommodate a longer transit time, as well as construction materials and other cargo that are not conducive to movement in containers. 

 

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 in Alaska. Matson is the only Jones Act containership operator providing service to Kodiak and Dutch Harbor in Alaska, which are the primary loading ports for southbound seafood.

 

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

 

Matson competes by offering fast and reliable freight availability from the ports of 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 Ningbo and Shanghai.

 

Guam Service:  Matson’s Guam service has one major competitor, American President Lines (“APL”), a subsidiary of CMA CGM, which operates a weekly U.S. flagged container feeder service connecting the U.S. West Coast to Guam and Saipan, via transshipments over Yokohama, Japan and Busan, South Korea.  There are also several foreign carriers that call at Guam from foreign origins along with the Waterman Steamship Corporation, a U.S. flagged carrier, which periodically calls at Guam. 

 

Japan Service: Matson’s Japan service will compete primarily with APL, which operates a weekly U.S. flagged containership service from the U.S. West Coast to the Port of Naha, Okinawa, 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.

 

Customer Concentration: 

 

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 2016, the Company’s 10 largest Ocean Transportation customers accounted for approximately 24 percent of the Company’s Ocean Transportation revenue.  None of these customers accounted for more than 10 percent of Ocean Transportation’s operating revenues.

 

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.

 

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 2016, approximately 57 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

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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 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.

 

Rate Regulations and Fuel Related Surcharge:    

 

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 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).

 

Matson applies a fuel surcharge rate to its ocean transportation customers.  Changes in the fuel surcharge levels are correlated to prevailing market rates for bunker fuel prices along with other fuel related cost factors. 

 

Emission Regulations: 

 

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 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.  This waiver expires at the end of 2017 but does include a provision for extension

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for an additional two years.  The Company is currently developing solutions to comply with the EPA ECA regulations for these three vessels.

 

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.  Matson completed the installation of scrubbers in each of the three diesel-powered vessels as of December 31, 2016, which are now operating within the EPA ECA regulations.

 

(1)

LOGISTICS SEGMENT

 

Logistics Services:    

 

Matson’s Logistics segment provides the following services:

 

Transportation Brokerage Services:  Matson Logistics’ transportation brokerage services provide intermodal rail, highway, and other third-party logistics services for North American customers and international ocean carrier customers, including MatNav.  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 five customer service centers and has sales offices throughout the United States.

 

Freight Forwarding Services:  Matson Logistics provides LCL consolidation and freight forwarding services primarily to the Alaska market through its wholly owned subsidiary, Span Alaska.  Span Alaska’s business aggregates LCL freight at its main terminal in Auburn, Washington for consolidation and shipment to a network of terminals in Alaska.  Span Alaska also provides trucking services to its Auburn terminal and from its Alaska based terminals to final customer destinations in Alaska.

 

Warehousing and Distribution Services:  Matson Logistics provides warehousing and distribution services in Northern and Southern California, and in Georgia.  Matson Logistics operates two warehouses in Georgia, two in Northern California, and one in Southern California.

 

Supply Chain Management and Other Services:  Matson Logistics’ supply chain management provides customers with a variety of logistics services including purchase order management, non-vessel operating common carrier freight forwarding services and customs brokerage.

 

Operating Costs:

 

Logistics operating costs primarily include the costs of outside transportation, leased warehouse and other facilities operating costs, customer service costs, and other operating overhead.

 

Competition:

 

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’ transportation brokerage services 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 J.B. 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.

 

Matson Logistics’ freight forwarding services competes most directly with a variety of freight forwarding companies that operate within Alaska including Carlile, Lynden, American Fast Freight and Alaska Traffic Company.

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Customer Concentration:

 

Matson Logistics serves customers in numerous industries and geographical locations.  In 2016, the Company’s 10 largest logistics customers accounted for approximately 22 percent of the Company’s Logistics revenue.  None of these customers accounted for more than 10 percent of Matson Logistics’ operating revenues.

 

Seasonality:

 

Matson’s Logistics services are generally not significantly impacted by seasonality factors, except for its freight forwarding service to Alaska which are affected by the winter weather, the cyclical nature of the oil, construction and fishing industries, and the seasonal nature of the tourism industry.

 

C.

EMPLOYEES AND LABOR RELATIONS

 

Employees:

 

As of December 31, 2016, Matson and its subsidiaries had 1,925 employees, of which 712 employees were covered by collective bargaining agreements with shoreside and offshore unions.  These numbers do not include billets on vessels discussed below, employees of SSAT, or other non-employees, such as agents, temporary workers and contractors.

 

Matson’s active fleet employed seagoing personnel in 355 billets at December 31, 2016.  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 ship management services also employed personnel in 28 billets at December 31, 2016.

 

Bargaining Agreements:

 

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 unions that expire at various dates in the future.

 

Matson’s seagoing employees are represented by unions for both unlicensed and licensed crew members. 

Matson also 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.

 

Multi-employer Pension Plans:

 

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 which Horizon withdrew from (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).

 

D.

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

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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.

 

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, regional economic conditions or governmental policies 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, a change in the cost of goods or currency exchange rates, imposition of tariffs, or a change in international trade policies 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.  In 2016, the Company’s major competitor in the Guam service upgraded its U.S. flagged feeder containership from a bi-weekly service to a weekly service connecting the U.S. West Coast to Guam and Saipan via transshipments over Yokohama, Japan and Busan, South Korea.  As a result of these and other competitor actions, the Company could experience some reduction in profitability.

 

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 2016, the Company’s Ocean Transportation segment’s 10 largest customers accounted for approximately 24 percent of the business’ revenue.  In 2016, the Company’s Logistics segment’s 10 largest customers accounted for approximately 22 percent of the business’ revenue.  The loss of or damage to any of these key relationships may adversely affect the Company’s business and revenue.

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

 

Fuel is a significant operating expense for the Company’s Ocean Transportation business.  The price and supply of fuel are unpredictable and fluctuate based on events beyond the Company’s control.  Increases in the price of fuel may adversely affect the Company’s results of operations.  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, 2016, Matson and its subsidiaries had 1,925 regular employees, of which 712 employees were covered by collective bargaining agreements with unions.  In addition, at December 31, 2016, the active Matson fleet employed seagoing personnel in 355 billets, and vessel management services employed personnel in 28 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 that employ persons covered by collective bargaining agreements.  For additional information on collective bargaining agreements with unions, see Item 1. C. 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. 

 

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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 cloud services 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 and system-wide data security program, 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 such as 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.

 

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

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·

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 business associates 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 including the imposition of tariffs 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.

 

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 and NASSCO are subject to risks.

 

On November 6, 2013, MatNav and Philly Shipyard entered into definitive agreements pursuant to which Philly Shipyard 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.  On August 25, 2016, MatNav and NASSCO entered into definitive agreements pursuant to which NASSCO will construct two new 3,500-TEU Kanaloa Class dual-fuel capable container and roll-on/roll-off vessels, with expected delivery dates at the end of 2019 and mid-2020.  Failure of any 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.

 

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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.

 

The Span Alaska and Horizon Acquisitions 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.  Similarly, we acquired Span Alaska subject to all of its liabilities and obligations.  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.

 

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 Span Alaska and Horizon Acquisitions became impaired.

 

We recorded significant intangible assets related to goodwill and customer relationships arising from the Horizon and Span Alaska acquisitions.  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.

 

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

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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 a maximum ratio of debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”), a minimum ratio of EBITDA to interest expense, the maintenance of no more than a maximum amount of priority debt as a percentage of consolidated tangible assets, and the maintenance of minimum shareholders’ equity.  If the Company does not maintain these and other required covenants, and a breach of such covenants is not cured timely or waived by the lenders resulting in a 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.

 

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

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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.

 

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 1.0 percent 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.  The conditional waiver is scheduled to expire on December 31, 2017, but contains the possibility of a two-year extension provision.  If Matson were unable to obtain such extension, Matson would operate these vessels on 0.1 percent sulfur fuel at lower speeds in the designated ECAs. This could cause certain vessels to not maintain schedule which could adversely affect our business and ongoing operations. 

 

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 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 sulfur 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.

 

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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.

 

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.

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ITEM 2.  PROPERTIES

 

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

 

 

 

 

 

Terminal Location

    

Acreage

    

Honolulu, Hawaii

 

105

 

West Oahu, Hawaii

 

7

 

Tacoma, Washington

 

18

 

Anchorage, Alaska

 

38

 

Kodiak, Alaska

 

6

 

Dutch Harbor, Alaska

 

18

 

Polaris Point, Guam

 

30

 

 

The Company is currently renewing its West Oahu, Hawaii terminal lease which expires in June 2017.  The Company also expects to be able to renew all other terminal leases as they expire, which are up for renewal in periods beyond 2017.  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, SSAT.

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

 

 

 

 

 

 

 

Significant Offices, Warehouses and Storage Facilities

    

Description of Facility

    

Square Footage

 

U.S. Office Locations:

 

 

 

 

 

Honolulu, Hawaii

 

Corporate headquarters

 

16,444

 

Oakland, California

 

Office

 

48,162

 

Phoenix, Arizona

 

Office

 

27,986

 

Oakbrook Terrace, Illinois

 

Office

 

17,004

 

Concord, California

 

Office

 

7,974

 

Renton, Washington

 

Office

 

3,770

 

Atlanta, Georgia

 

Office

 

3,685

 

Akron, Ohio

 

Office

 

3,500

 

Tamuning, Guam

 

Office

 

3,500

 

Portland, Oregon

 

Office

 

3,203

 

Foreign Office Locations:

 

 

 

 

 

Shanghai, China

 

Office

 

7,240

 

Auckland, New Zealand

 

Office

 

3,832

 

Ningbo, China

 

Office

 

2,103

 

Hong Kong, China

 

Office

 

1,535

 

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

 

Piti, Guam

 

Warehouse

 

62,478

 

Auburn, Washington

 

Warehouse

 

51,250

 

Anchorage, Alaska

 

Warehouse

 

23,680

 

Anchorage, Alaska

 

Warehouse

 

13,954

 

Fairbanks, Alaska

 

Warehouse

 

6,000

 

Soldotna, Alaska

 

Warehouse

 

5,400

 

Kodiak, Alaska

 

Warehouse

 

4,000

 

Auburn, Washington

 

Warehouse

 

2,500

 

Wasilla, Alaska

 

Warehouse

 

2,000

 

Alameda, California

 

Storage facility

 

53,785

 

 

 

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ITEM 3.  LEGAL PROCEEDINGS

 

Environmental Matters: In September 2013, molasses was released into Honolulu Harbor from a pipeline system operated by a subsidiary of the Company.  The Company cooperated with federal and state agencies involved in responding to and investigating the incident.  The Hawaii Department of Health reported on September 20, 2013 that dissolved oxygen and pH levels in the harbor and nearby Keehi Lagoon had returned to normal target levels and that there was no longer discoloration of the water in those same areas attributable to the molasses release.  Keehi Lagoon was reopened to the public on September 21, 2013.

 

The Company previously resolved all federal criminal claims, and all criminal, civil and administrative claims that the State of Hawaii may have had arising from the molasses release.  On October 13, 2016, the United States Department of Justice delivered a letter to Company counsel stating that it was prepared to file a civil penalty action under the Clean Water Act but would be willing to discuss a potential resolution of those claims prior to filing an action.  On January 19, 2017, Matson Terminals entered into a Settlement Agreement to resolve the Department of Justice’s alleged civil claims under the Clean Water Act.  Pursuant to the terms of the Settlement Agreement, which was filed in the United States District Court, District of Hawaii, the Company will pay $0.7 million to resolve all civil liability for these claims.  The Company did not admit any liability as part of this settlement. 

 

In addition to the molasses release discussed above, the Company’s ocean transportation business has certain other 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.

 

Other Matters: 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 21, 2017, there were 2,357 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, 2016.  The graph is a historical representation of past performance only and is not necessarily indicative of future performance.

 

Picture 2

 

 


*$100 invested on December 31, 2011 in stock or index, including reinvestment of dividends.

 

Trading volume averaged 279,852 shares a day in 2016, compared with 240,996 shares a day in 2015 and 273,309 shares a day in 2014.

 

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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 for each fiscal quarter during 2016 and 2015, were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends

 

Market Price

 

2016

    

Paid

    

High

    

Low

    

Close

 

First Quarter

 

$

0.18

 

$

43.24

 

$

34.55

 

$

40.17

 

Second Quarter

 

$

0.18

 

$

39.96

 

$

30.54

 

$

32.29

 

Third Quarter

 

$

0.19

 

$

43.00

 

$

32.08

 

$

39.88

 

Fourth Quarter

 

$

0.19

 

$

42.00

 

$

28.79

 

$

35.39

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

Dividends:  Dividends declared and paid per share of common stock by the Company for each fiscal quarter during 2016, were as follows:

 

 

 

 

 

 

 

 

 

 

 

    

Dividends

    

Shareholders of

    

 

 

2016

 

Declared

 

Record Date

 

Date Paid

 

First Quarter

 

$

0.18

 

February 11, 2016

 

 

March 3, 2016

 

Second Quarter

 

$

0.18

 

May 12, 2016

 

 

June 2, 2016

 

Third Quarter

 

$

0.19

 

August 4, 2016

 

 

September 1, 2016

 

Fourth Quarter

 

$

0.19

 

November 10, 2016

 

 

December 1, 2016

 

 

Matson’s Board of Directors also declared a cash dividend of $0.19 per share for the first quarter 2017, payable on March 2, 2017 to shareholders of record on February 9, 2017.  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 Matson common stock repurchased by the Company during the three months ended December 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

 

    

Total Number of

    

Maximum Number

 

 

 

 

 

 

 

 

Shares Purchased

 

of Shares that May

 

 

 

Total Number of

 

 

 

 

as Part of Publicly

 

Be Purchased

 

 

 

Shares

 

Average Price

 

Announced Plans or

 

Under the Plans or

 

Period

 

Purchased

 

Paid Per-Share

 

Programs (1)

 

Programs

 

October 1 — 31, 2016

1,100

 

$

39.63

 

1,100

 

1,872,988

 

November 1 — 30, 2016

600

 

 

39.71

 

600

 

1,872,388

 

December 1 — 31, 2016

3,000

 

 

35.90

 

3,000

 

1,869,388

 

Total

 

4,700

 

$

37.26

 

4,700

 

 

 


(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.

 

Securities Issued under Equity Compensation Plans:  See the subsection captioned “Equity Compensation Plan Information” in Matson’s 2017 Proxy Statement for information regarding securities authorized for issuance under the Company’s equity compensation plans, which subsection is incorporated herein by reference.

 

ITEM 6.  SELECTED FINANCIAL DATA

 

The comparative selected financial data of the Company is presented for the five years in the period ended December 31, 2016.  The information  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). 

 

22


 

Table of Contents

Fiscal year ended December 31, 2016 includes 53 weeks, while all other fiscal years include 52 weeks:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

2016

    

2015

    

2014

    

2013

    

2012

 

Operating Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ocean Transportation (1)

 

$

1,541.1

 

$

1,498.0

 

$

1,278.4

 

$

1,229.4

 

$

1,189.8

 

Logistics (2)

 

 

400.5

 

 

386.9

 

 

435.8

 

 

407.8

 

 

370.2

 

Total Operating Revenue

 

$

1,941.6

 

$

1,884.9

 

$

1,714.2

 

$

1,637.2

 

$

1,560.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating and Net Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ocean Transportation (1)(3)

 

$

141.3

 

$

187.8

 

$

131.1

 

$

94.3

 

$

96.6

 

Logistics (2)

 

 

11.9

 

 

8.5

 

 

8.9

 

 

6.0

 

 

0.1

 

Total Operating Income

 

 

153.2

 

 

196.3