matx_Current folio_10Q

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2017

 

OR

 

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

 

For the transition period from                     to                   

 

Commission file number 001-34187

 

Matson, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Hawaii

99-0032630

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

1411 Sand Island Parkway

Honolulu, HI

(Address of principal executive offices)

96819

(Zip Code)

 

(808) 848-1211

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address, and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

Large accelerated filer ☒

Accelerated filer ☐

 

 

Non-accelerated filer ☐

Smaller reporting company ☐

(Do not check if a smaller reporting company)

 

Emerging growth company ☐

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

 

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

 

Number of shares of common stock outstanding as of March 31, 2017: 43,116,250

 

 

 

 


 

Table of Contents

MATSON, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

 

 

 

 

 

 

 

 

 

 

  

Page

Part I—FINANCIAL INFORMATION 

 

1

 

 

 

 

Item 1. 

Financial Statements (Unaudited)

 

1

 

Condensed Consolidated Statements of Income and Comprehensive Income

 

1

 

Condensed Consolidated Balance Sheets

 

2

 

Condensed Consolidated Statements of Cash Flows

 

3

 

Notes to the Condensed Consolidated Financial Statements

 

4

Item 2. 

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

 

12

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

 

17

Item 4. 

Controls and Procedures

 

17

 

 

 

 

Part II—OTHER INFORMATION 

 

18

 

 

 

Item 1. 

Legal Proceedings

 

18

Item 1A. 

Risk Factors

 

18

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

 

18

Item 3. 

Defaults Upon Senior Securities

 

19

Item 4. 

Mine Safety Disclosures

 

19

Item 5. 

Other Information

 

19

Item 6. 

Exhibits

 

19

 

Signatures

 

20

 

 

 

 

 


 

Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

MATSON, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income and Comprehensive Income

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

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2017

    

2016

    

Operating Revenue:

 

 

 

 

 

 

 

Ocean Transportation

 

$

370.0

 

$

366.1

 

Logistics

 

 

104.4

 

 

88.1

 

Total Operating Revenue

 

 

474.4

 

 

454.2

 

 

 

 

 

 

 

 

 

Costs and Expenses:

 

 

 

 

 

 

 

Operating costs

 

 

(412.2)

 

 

(376.4)

 

Equity in income of related party Terminal Joint Venture

 

 

4.9

 

 

2.6

 

Selling, general and administrative

 

 

(50.7)

 

 

(45.8)

 

Total Costs and Expenses

 

 

(458.0)

 

 

(419.6)

 

 

 

 

 

 

 

 

 

Operating Income

 

 

16.4

 

 

34.6

 

Interest expense

 

 

(6.3)

 

 

(4.9)

 

Income before Income Taxes

 

 

10.1

 

 

29.7

 

Income tax expense

 

 

(3.1)

 

 

(11.6)

 

Net Income

 

$

7.0

 

$

18.1

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

Net Income

 

$

7.0

 

$

18.1

 

Other Comprehensive Income (Loss):

 

 

 

 

 

 

 

Net gain in prior service cost

 

 

 —

 

 

0.7

 

Amortization of prior service cost included in net periodic pension cost

 

 

(0.4)

 

 

(0.4)

 

Amortization of net loss included in net periodic pension cost

 

 

0.9

 

 

1.1

 

Other adjustments

 

 

0.2

 

 

(0.1)

 

Total Other Comprehensive Income

 

 

0.7

 

 

1.3

 

Comprehensive Income

 

$

7.7

 

$

19.4

 

 

 

 

 

 

 

 

 

Basic Earnings Per-Share:

 

$

0.16

 

$

0.42

 

Diluted Earnings Per-Share:

 

$

0.16

 

$

0.41

 

 

 

 

 

 

 

 

 

Weighted Average Number of Shares Outstanding:

 

 

 

 

 

 

 

Basic

 

 

43.0

 

 

43.4

 

Diluted

 

 

43.4

 

 

43.8

 

 

 

 

 

 

 

 

 

Cash Dividends Per-Share

 

$

0.19

 

$

0.18

 

 

See Notes to Condensed Consolidated Financial Statements.

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Table of Contents

MATSON, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In millions) (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

2017

    

2016

    

ASSETS

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

19.5

 

$

13.9

 

Accounts receivable, net

 

 

197.9

 

 

189.5

 

Prepaid expenses and other assets

 

 

70.1

 

 

70.8

 

Total current assets

 

 

287.5

 

 

274.2

 

Long-term Assets:

 

 

 

 

 

 

 

Investment in related party Terminal Joint Venture

 

 

87.3

 

 

82.4

 

Property and equipment, net

 

 

950.8

 

 

949.2

 

Goodwill

 

 

323.7

 

 

323.7

 

Intangible assets, net

 

 

233.7

 

 

236.6

 

Capital Construction Fund - cash on deposit

 

 

31.2

 

 

31.2

 

Deferred dry-docking costs

 

 

90.1

 

 

89.1

 

Other long-term assets

 

 

30.1

 

 

29.1

 

Total long-term assets

 

 

1,746.9

 

 

1,741.3

 

Total assets

 

$

2,034.4

 

$

2,015.5

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Current portion of debt

 

$

31.6

 

$

31.8

 

Accounts payable

 

 

153.5

 

 

170.5

 

Accruals and other liabilities

 

 

76.2

 

 

76.9

 

Total current liabilities

 

 

261.3

 

 

279.2

 

Long-term Liabilities:

 

 

 

 

 

 

 

Long-term debt

 

 

748.7

 

 

707.1

 

Deferred income taxes

 

 

352.2

 

 

348.8

 

Employee benefit plans

 

 

104.9

 

 

108.5

 

Uninsured claims and related liabilities

 

 

41.5

 

 

40.3

 

Multi-employer withdrawal liability

 

 

59.7

 

 

60.1

 

Total long-term liabilities

 

 

1,307.0

 

 

1,264.8

 

Commitments and Contingencies (Note 2)

 

 

 

 

 

 

 

Shareholders’ Equity:

 

 

 

 

 

 

 

Common stock

 

 

32.3

 

 

32.1

 

Additional paid in capital

 

 

285.2

 

 

289.8

 

Accumulated other comprehensive loss, net

 

 

(45.4)

 

 

(46.1)

 

Retained earnings

 

 

194.0

 

 

195.7

 

Total shareholders’ equity

 

 

466.1

 

 

471.5

 

Total liabilities and shareholders’ equity

 

$

2,034.4

 

$

2,015.5

 

 

See Notes to Condensed Consolidated Financial Statements.

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Table of Contents

MATSON, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In millions) (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2017

    

2016

    

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

Net income

 

$

7.0

 

$

18.1

 

Reconciling adjustments:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

24.6

 

 

23.8

 

Deferred income taxes

 

 

2.9

 

 

3.0

 

Share-based compensation expense

 

 

2.6

 

 

2.8

 

Equity in income of related party Terminal Joint Venture

 

 

(4.9)

 

 

(2.6)

 

Other

 

 

(2.6)

 

 

(1.6)

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(8.4)

 

 

2.6

 

Deferred dry-docking payments

 

 

(15.1)

 

 

(13.2)

 

Deferred dry-docking amortization

 

 

11.5

 

 

8.1

 

Prepaid expenses and other assets

 

 

(1.1)

 

 

7.7

 

Accounts payable, accruals and other liabilities

 

 

(13.3)

 

 

(29.3)

 

Other long-term liabilities

 

 

0.8

 

 

0.4

 

Net cash provided by operating activities

 

 

4.0

 

 

19.8

 

 

 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

Capital expenditures

 

 

(22.9)

 

 

(30.6)

 

Capitalized vessel construction expenditures

 

 

(1.3)

 

 

 —

 

Proceeds from disposal of property and equipment

 

 

 —

 

 

0.5

 

Cash deposits into Capital Construction Fund

 

 

 —

 

 

(12.5)

 

Net cash used in investing activities

 

 

(24.2)

 

 

(42.6)

 

 

 

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

Repayments of debt and capital leases

 

 

(2.6)

 

 

(2.7)

 

Proceeds from revolving credit facility

 

 

100.0

 

 

97.0

 

Repayments of revolving credit facility

 

 

(56.0)

 

 

(43.0)

 

Proceeds from issuance of capital stock

 

 

0.4

 

 

0.8

 

Dividends paid

 

 

(8.3)

 

 

(7.9)

 

Repurchase of Matson common stock

 

 

(0.7)

 

 

(20.8)

 

Tax withholding related to net share settlements of restricted stock units

 

 

(7.1)

 

 

(6.1)

 

Other

 

 

0.1

 

 

0.1

 

Net cash provided by financing activities

 

 

25.8

 

 

17.4

 

 

 

 

 

 

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

 

 

5.6

 

 

(5.4)

 

Cash and Cash Equivalents, Beginning of the Period

 

 

13.9

 

 

25.5

 

Cash and Cash Equivalents, End of the Period

 

$

19.5

 

$

20.1

 

 

 

 

 

 

 

 

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

 

Interest paid, net of capitalized interest

 

$

6.5

 

$

4.2

 

Income tax paid (refund)

 

$

0.4

 

$

(0.1)

 

 

 

 

 

 

 

 

 

Non-cash Information:

 

 

 

 

 

 

 

Capital expenditures included in accounts payable, accruals and other liabilities

 

$

2.4

 

$

2.1

 

 

See Notes to Condensed Consolidated Financial Statements.

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Table of Contents

MATSON, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANICAL STATEMENTS

(Unaudited)

 

1.          DESCRIPTION OF THE BUSINESS

 

Matson, Inc., a holding company incorporated in January 2012 in the State of Hawaii, and its subsidiaries (“Matson” or the “Company”), is a leading provider of ocean transportation and logistics services.  The Company consists of two segments, Ocean Transportation and Logistics:

 

Ocean Transportation: Matson’s Ocean Transportation business is conducted through Matson Navigation Company, Inc. (“MatNav”), a wholly-owned subsidiary of Matson, Inc.  Founded in 1882, MatNav 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., 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 Terminal Joint Venture in operating costs in the Condensed Consolidated Statements of Income and Comprehensive Income, and within the Ocean Transportation segment due to the nature of SSAT’s operations.

 

Logistics: 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 service, 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 consolidation (“LCL”) and freight forwarding services (collectively “Freight Forwarding Services”); (iii) warehousing and distribution services; and (iv) supply chain management and other services.

 

Recent Acquisition:  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 (the “Span Alaska Acquisition”) (see Note 9, Business Combination for additional information on the recent acquisition).

 

2.          SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation: The Condensed Consolidated Financial Statements are unaudited, and include the accounts of Matson, Inc. and all wholly-owned subsidiaries, after elimination of significant intercompany amounts and transactions.  Significant investments in businesses, partnerships, and limited liability companies in which the Company does not have a controlling financial interest, but has the ability to exercise significant influence, are accounted for under the equity method.  A controlling financial interest is one in which the Company has a majority voting interest or one in which the Company is the primary beneficiary of a variable interest entity.  The Company accounts for its investment in the Terminal Joint Venture using the equity method of accounting.  The Condensed Consolidated Financial Statements include the accounts and activities of Span Alaska from the acquisition date on August 4, 2016 (see Note 9).

 

Due to the nature of the Company’s operations, including the acquisition of Span Alaska on August 4, 2016, the results for interim periods are not necessarily indicative of results to be expected for the year.  These Condensed Consolidated Financial Statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for fair presentation of the results of the interim periods, and do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete consolidated financial statements. 

 

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The Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission (“SEC”) on February 24, 2017.

 

Fiscal Period: The period end for Matson, Inc. is March 31, 2017.  The period end for MatNav and its subsidiaries covered occurred on the last Friday in March, or March 31, 2017, for the first quarter 2017.

 

Significant Accounting Policies: The Company’s significant accounting policies are described in Note 2 to the Consolidated Financial Statements included in Item 8 of the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2016.

 

Property and Equipment: Property and equipment at March 31, 2017 and December 31, 2016 includes the following:

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

(In millions)

    

2017

    

2016

 

Cost:

 

 

 

 

 

 

 

Vessels

 

$

1,420.6

 

$

1,416.1

 

Containers and equipment

 

 

537.8

 

 

536.9

 

Terminal facilities and other property

 

 

57.1

 

 

43.2

 

Vessel construction in progress

 

 

125.8

 

 

124.5

 

Other construction in progress

 

 

32.1

 

 

31.2

 

Total Property and Equipment

 

 

2,173.4

 

 

2,151.9

 

Less: Accumulated Deprecation

 

 

(1,222.6)

 

 

(1,202.7)

 

Total Property and Equipment, net

 

$

950.8

 

$

949.2

 

 

Vessel construction in progress includes capitalized interest of $4.1 million and $2.9 million at March 31, 2017 and December 31, 2016, respectively.

 

Goodwill: Changes in goodwill for the three months ended March 31, 2017 and 2016 consist of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

 

Ocean

 

 

 

 

 

(In millions)

    

Transportation

    

Logistics

    

Total

 

Balance at December 31, 2016

 

$

218.5

 

$

105.2

 

$

323.7

 

Additions

 

 

 —

 

 

 —

 

 

 —

 

Balance at March 31, 2017

 

$

218.5

 

$

105.2

 

$

323.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

 

Ocean

 

 

 

 

 

 

    

Transportation

    

Logistics

    

Total

 

Balance at December 31, 2015

 

$

215.0

 

$

26.6

 

$

241.6

 

Additions

 

 

 —

 

 

 —

 

 

 —

 

Balance at March 31, 2016

 

$

215.0

 

$

26.6

 

$

241.6

 

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Intangible Assets, Net: Intangible assets at March 31, 2017 and December 31, 2016 include the following: 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

(In millions)

    

2017

    

2016

 

Customer Relationships:

 

 

 

 

 

 

 

Ocean Transportation

 

$

140.6

 

$

140.6

 

Logistics

 

 

90.1

 

 

90.1

 

Total

 

 

230.7

 

 

230.7

 

Less: Accumulated Amortization

 

 

(24.3)

 

 

(21.4)

 

Total Customer Relationships, net

 

 

206.4

 

 

209.3

 

Trade name - Logistics

 

 

27.3

 

 

27.3

 

Total Intangible Assets, net

 

$

233.7

 

$

236.6

 

 

Capital Construction Fund: The Company’s Capital Construction Fund (“CCF”) is described in Note 7 to the Consolidated Financial Statements included in Item 8 of the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2016.  As of March 31, 2017 and December 31, 2016, the following amounts related to the Company’s CCF:

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

(In millions)

    

2017

    

2016

 

Capital Construction Fund:

 

 

 

 

 

 

 

Cash on deposit

 

$

31.2

 

$

31.2

 

Assigned accounts receivables

 

$

174.8

 

$

174.7

 

 

Amount on deposit in the CCF are held in a money market account and classified as long-term assets in the Company’s Condensed Consolidated Balance Sheets, as the Company intends to use qualified cash withdrawals to fund long-term investment in the construction of new vessels.  There were no deposits or qualifying cash withdrawals made from the CCF during the three months ended March 31, 2017.  During the three months ended March 31, 2016, the Company deposited $12.5 million into the CCF, and there were no qualifying cash withdrawals.  Eligible accounts receivable that are assigned into the CCF are classified as part of accounts receivable, net in the Condensed Consolidated Financial Statements due to the nature of the assignment.

 

Accumulated Other Comprehensive Loss:  Changes in accumulated other comprehensive loss by component, net of tax, for the three months ended March 31, 2017 and 2016 are as follows (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

Non-

 

 

 

Other

 

 

 

 

 

Post

 

Qualified

 

 

 

Comprehensive

 

(In millions)

    

Pensions

    

Retirement

    

Plans

    

Other

 

Income (Loss)

 

Balance at December 31, 2016

 

$

(41.4)

 

$

(4.4)

 

$

(0.4)

 

$

0.1

 

$

(46.1)

 

Amortization of prior service cost

 

 

(0.4)

 

 

 —

 

 

 —

 

 

 —

 

 

(0.4)

 

Amortization of net loss

 

 

0.8

 

 

0.1

 

 

 —

 

 

 —

 

 

0.9

 

Other adjustments

 

 

 —

 

 

 —

 

 

 —

 

 

0.2

 

 

0.2

 

Balance at March 31, 2017

 

$

(41.0)

 

$

(4.3)

 

$

(0.4)

 

$

0.3

 

$

(45.4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

Non-

 

 

 

Other

 

 

 

 

 

Post

 

Qualified

 

 

 

Comprehensive

 

(In millions)

    

Pensions

    

Retirement

    

Plans

    

Other

 

Income (Loss)

 

Balance at December 31, 2015

 

$

(41.7)

 

$

(4.7)

 

$

(0.2)

 

$

(0.3)

 

$

(46.9)

 

Net gain in prior service costs

 

 

 —

 

 

0.7

 

 

 —

 

 

 —

 

 

0.7

 

Amortization of prior service cost

 

 

(0.4)

 

 

 —

 

 

 —

 

 

 —

 

 

(0.4)

 

Amortization of net loss

 

 

0.8

 

 

0.2

 

 

0.1

 

 

 —

 

 

1.1

 

Other adjustments

 

 

 —

 

 

 —

 

 

 —

 

 

(0.1)

 

 

(0.1)

 

Balance at March 31, 2016

 

 

(41.3)

 

 

(3.8)

 

 

(0.1)

 

$

(0.4)

 

 

(45.6)

 

 

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

 

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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.

 

Reclassifications:  Amounts in changes in assets and liabilities within operating activities of the cash flow for the three months ended March 31, 2016, have been reclassified to conform to the current period presentation.

 

New Accounting Pronouncements: Share-Based Awards:  The Company adopted Accounting Standards Update (“ASU”) 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”) during the first quarter of 2017.  ASU 2016-09 simplified several aspects of the accounting for share-based payment award transactions, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows.  The adoption of ASU 2016-09 did not have a material impact on the Company’s Condensed Consolidated Financial Statements for the three months ended March 31, 2017, and the cumulative effect adjustments to beginning retained earnings and other components of shareholders’ equity as of the date of adoption were immaterial.

 

Revenue from Contracts with Customers:  In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”).  The guidance establishes principles regarding the nature, timing, and uncertainty of revenue from contracts with customers.  It removes inconsistencies in existing revenue requirements, provides a more robust framework for addressing revenue issues and improves comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets.  The guidance will be effective for interim and annual reporting periods beginning after December 15, 2017.

 

The Company is in the process of evaluating the impact of adopting ASU 2014-19 on its Consolidated Financial Statements.  The Company is currently reviewing customer contracts in each of its operating segments for all services provided, assessing the impact of applying ASU 2014-19, and comparing this to the Company’s historical revenue recognition criteria.  Based upon the preliminary review of customer contracts, the Company believes that the Company’s revenue recognition policies are consistent with the requirements of ASU 2014-19.  While the Company continues to assess all potential impacts of adopting ASU 2014-19, based upon information available to date, the Company does not expect the adoption of ASU 2014-19 to have a significant impact either on the timing or recognition of Ocean Transportation and Logistics revenues.

 

Leases:  In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which requires lessees to record most leases in their balance sheets but recognize the expenses on their income statements in a manner similar to current practice.  ASU 2016-02 states that a lessee would recognize a lease liability for the obligation to make lease payments, and a right-of-use asset for the underlying leased asset for the period of the lease term.  The guidance will be effective for interim and annual periods beginning after December 15, 2018 and early adoption is permitted.  The Company is in the process of evaluating this guidance.

 

3.          REPORTABLE SEGMENTS

 

Reportable segments are components of an enterprise that engage in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available.  The Company's chief operating decision maker is its Chief Executive Officer.

 

The Company consists of two reportable segments, Ocean Transportation and Logistics, which are further described in Note 1.  Reportable segments are measured based on operating income, exclusive of interest expense and income taxes. In arrangements where the customer purchases ocean transportation and logistics services, the revenues are allocated to each reportable segment based upon the contractual amounts for each type of service.  The Company’s Terminal Joint Venture segment has been aggregated into the Company’s Ocean Transportation segment due to the operations of the Terminal Joint Venture been an integral part of the Company’s Ocean Transportation business.

 

The Company’s Ocean Transportation segment provides ocean transportation services to the Logistics segment.  Accordingly, inter-segment revenue of $8.7 million and $1.7 million for the three months ended March 31, 2017 and March 31, 2016, respectively, have been eliminated from the Logistics segment in the table below. 

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Reportable segment results for the three months ended March 31, 2017 and 2016 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

(In millions)

    

2017

    

2016

    

Operating Revenue:

 

 

 

 

 

 

 

Ocean Transportation

 

$

370.0

 

$

366.1

 

Logistics (1)

 

 

104.4

 

 

88.1

 

Total Operating Revenue

 

$

474.4

 

$

454.2

 

Operating Income:

 

 

 

 

 

 

 

Ocean Transportation

 

$

14.5

 

$

33.0

 

Logistics (1)

 

 

1.9

 

 

1.6

 

Total Operating Income

 

 

16.4

 

 

34.6

 

Interest expense, net

 

 

(6.3)

 

 

(4.9)

 

Income before Income Taxes

 

 

10.1

 

 

29.7

 

Income taxes

 

 

(3.1)

 

 

(11.6)

 

Net Income

 

$

7.0

 

$

18.1

 


(1)

Logistics operating results include Span Alaska operating results from the date of acquisition on August 4, 2016.

 

 

 

4.          DEBT

 

At March 31, 2017 and December 31, 2016, the Company’s debt consisted of the followings:

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

(In millions)

    

2017

    

2016

    

Term Loans:

 

 

 

 

 

 

 

5.79 %, payable through 2020

 

$

24.5

 

$

24.5

 

3.66 %, payable through 2023

 

 

59.3

 

 

59.3

 

4.16 %, payable through 2027

 

 

55.0

 

 

55.0

 

3.37 %, payable through 2027

 

 

75.0

 

 

75.0

 

3.14 %, payable through 2031

 

 

200.0

 

 

200.0

 

4.31 %, payable through 2032

 

 

37.5

 

 

37.5

 

4.35 %, payable through 2044

 

 

100.0

 

 

100.0

 

3.92 %, payable through 2045

 

 

75.0

 

 

75.0

 

Title XI Bonds:

 

 

 

 

 

 

 

5.34 %, payable through 2028

 

 

25.3

 

 

26.4

 

5.27 %, payable through 2029

 

 

27.5

 

 

28.6

 

Revolving credit facility

 

 

99.0

 

 

55.0

 

Capital leases

 

 

2.2

 

 

2.6

 

Total Debt

 

 

780.3

 

 

738.9

 

Less: Current portion

 

 

(31.6)

 

 

(31.8)

 

Total Long-term Debt

 

$

748.7

 

$

707.1

 

 

The Company’s debt is described in Note 8 to the Consolidated Financial Statements included in Item 8 of the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2016. 

 

Revolving Credit Facility: Borrowings under the revolving credit facility are classified as long-term debt in the Condensed Consolidated Balance Sheet, as principal payments are not required until maturity date of July 30, 2020.  As of March 31, 2017, the Company had $290.4 million of remaining availability under the revolving credit facility.  The interest rate on borrowings under the revolving credit facility approximated 2.19 percent during the three months ended March 31, 2017.

 

5.          FAIR VALUE MEASUREMENTS

 

The Company values its financial instruments based on the fair value hierarchy of valuation techniques for fair value measurements.  Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date.  Level 2 inputs include quoted prices for similar assets and liabilities in active markets and inputs

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other than quoted prices observable for the asset or liability.  Level 3 inputs are unobservable inputs for the asset or liability.  If the technique used to measure fair value includes inputs from multiple levels of the fair value hierarchy, the lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy.

 

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

 

The carrying value and fair value of the Company’s financial instruments as of March 31, 2017 and December 31, 2016 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Quoted Prices in

 

Significant

 

Significant

 

 

 

Total

 

 

 

Active Markets

 

Observable 

 

Unobservable 

 

 

 

    Carrying Value    

 

Total

 

(Level 1)

    

Inputs (Level 2)

 

Inputs (Level 3)

 

(In millions)

 

March 31, 2017

 

Fair Value Measurements at March 31, 2017

 

Cash and cash equivalents

    

$

19.5

    

$

19.5

    

$

19.5

    

$

 —

    

$

 —

 

Accounts receivable, net

 

 

197.9

 

 

197.9

 

 

 —

 

 

197.9

 

 

 —

 

CCF - cash on deposit

 

 

31.2

 

 

31.2

 

 

 —

 

 

31.2

 

 

 —

 

Variable rate debt

 

 

99.0

 

 

99.0

 

 

 —

 

 

99.0

 

 

 —

 

Fixed rate debt

 

 

681.3

 

 

674.9

 

 

 —

 

 

674.9

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In millions)

 

December 31, 2016

 

Fair Value Measurements at December 31, 2016

 

Cash and cash equivalents

    

$

13.9

    

$

13.9

    

$

13.9

    

$

 —

    

$

 —

 

Accounts receivable, net

 

 

189.5

 

 

189.5

 

 

 —

 

 

189.5

 

 

 —

 

CCF - cash on deposit

 

 

31.2

 

 

31.2

 

 

 —

 

 

31.2

 

 

 —

 

Variable rate debt

 

 

55.0

 

 

55.0

 

 

 —

 

 

55.0

 

 

 —

 

Fixed rate debt

 

 

683.9

 

 

685.2

 

 

 —

 

 

685.2

 

 

 —

 

 

 

 

 

 

6.          EARNINGS PER-SHARE

 

The number of shares used to compute basic and diluted earnings per-share for the three months ended March 31, 2017 and 2016, is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2017

 

Three Months Ended March 31, 2016

 

 

    

 

 

   

Weighted-

   

Per

   

 

 

   

Weighted-

   

Per

   

 

 

 

 

 

Average

 

Common

 

 

 

 

Average

 

Common

 

 

 

Net

 

Common

 

Share

 

Net

 

Common

 

Share

 

(In millions, except share amounts)

 

Income

 

Shares

 

Amount

 

Income

 

Shares

 

Amount

 

Basic:

 

$

7.0

 

43.0

 

$

0.16

 

$

18.1

 

43.4

 

$

0.42

 

Effect of Dilutive Securities:

 

 

 

 

0.4

 

 

 —

 

 

 

 

0.4

 

 

(0.01)

 

Diluted:

 

$

7.0

 

43.4

 

$

0.16

 

$

18.1

 

43.8

 

$

0.41

 

 

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

 

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

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7.          SHARE-BASED COMPENSATION

 

During the three months ended March 31, 2017, the Company granted approximately 256,700 in total of time-based restricted stock units and performance-based shares to certain of its employees at a weighted-average grant date fair value of $36.92. 

 

Total share-based compensation cost recognized in the Condensed Consolidated Statements of Income and Comprehensive Income as a component of selling, general and administrative expenses was $2.6 million and $2.8 million for the three months ended March 31, 2017 and 2016, respectively.  Total unrecognized compensation cost related to unvested share-based compensation arrangements was $16.3 million at March 31, 2017, and is expected to be recognized over a weighted-average period of 1.8 years.  Total unrecognized compensation cost may be adjusted for any unearned performance shares or forfeited shares.

 

8.          PENSION AND OTHER POST-RETIREMENT PLANS

 

The Company sponsors qualified defined benefit pension and other post-retirement plans (collectively, the “Plans”).  The following table provides the components of net periodic benefit cost (benefit) for the Plans for the three months ended March 31, 2017 and 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension Benefits

 

Other Post-retirement Benefits

 

 

 

March 31, 

 

March 31, 

 

(In millions)

    

2017

    

2016

    

2017

    

2016

 

Components of Net Periodic Benefit Cost (Benefit):

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

1.0

 

$

1.0

 

$

0.4

 

$

0.4

 

Interest cost

 

 

2.4

 

 

2.4

 

 

0.7

 

 

0.7

 

Expected return on plan assets

 

 

(3.4)

 

 

(3.3)

 

 

 —

 

 

 —

 

Amortization of net loss

 

 

1.2

 

 

1.3

 

 

0.3

 

 

0.3

 

Amortization of prior service cost

 

 

(0.6)

 

 

(0.6)

 

 

 —

 

 

 —

 

Net periodic benefit cost

 

$

0.6

 

$

0.8

 

$

1.4

 

$

1.4

 

 

During the three months ended March 31, 2017, the Company contributed $3.0 million to its defined benefit pension plans.  No further contributions are expected for 2017.

 

9.          BUSINESS COMBINATION

 

Span Alaska Acquisition:  On August 4, 2016 (the “Effective Date”), Matson Logistics completed the purchase of 100 percent of the membership interests of Span Alaska pursuant to the terms of the Membership Interest Purchase Agreement.  At the Effective Date, Span Alaska became a wholly-owned subsidiary of Matson Logistics.  Span Alaska is an asset-light logistics company providing freight forwarding services primarily to the Alaska market.  Span Alaska consolidates freight in Auburn, Washington, for shipment to Alaska and distribution through a network of terminals in Anchorage, Fairbanks, Wasilla, Kenai, Juneau and Kodiak.  Span Alaska’s operations are recorded within the Logistics segment of the Company.

 

Total consideration for the Span Alaska Acquisition was $198.9 million based on the fair value of membership interests of $117.0 million, and Span Alaska’s debt and accrued interest of $81.9 million.  Immediately following the close of the Span Alaska Acquisition, the Company paid the assumed debt.

 

The Span Alaska Acquisition was accounted for as a business combination in accordance with Accounting Standards Codification (ASC) 805, “Business Combination” (“ASC 805”).  The assets acquired and liabilities assumed in the Span Alaska Acquisition were recorded based on fair value estimates as of the Effective Date, with the remaining unallocated purchase price of $78.6 million recorded as goodwill.  As of December 31, 2016, the purchase price accounting for the Span Alaska Acquisition was considered final. 

 

The Company's Condensed Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2017 include operating revenue of $9.0 million (after elimination of intercompany revenue of $6.1 million), and operating income of $1.0 million, from Span Alaska’s operations.  One-time acquisition related costs incurred post December 31, 2016 were not material.  

 

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Pro Forma Financial Information (Unaudited): The following unaudited pro forma financial information presents the combined operating results of the Company and Span Alaska, as if the Span Alaska Acquisition had been completed at the beginning of each period presented below.  The unaudited pro forma financial information includes the accounting effects of the business combination, including the amortization of intangible assets, depreciation of property and equipment, and interest expense.  Unaudited pro forma operating revenue is presented after elimination of intercompany revenue. 

 

The unaudited pro forma financial information is presented for informational purposes only and is not indicative of the result of operations that would have been achieved if the Span Alaska Acquisition had taken place at the beginning of the periods presented, nor should it be taken as an indication of our future consolidated results of operations.

 

 

 

 

 

 

 

 

 

 

 

(Unaudited)