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 September 30, 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 Website, 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 September 30, 2017: 42,447,854

 

 

 

 


 

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

 

14

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

 

21

Item 4. 

Controls and Procedures

 

22

 

 

 

 

Part II—OTHER INFORMATION 

 

22

 

 

 

Item 1. 

Legal Proceedings

 

22

Item 1A. 

Risk Factors

 

22

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

 

23

Item 3. 

Defaults Upon Senior Securities

 

23

Item 4. 

Mine Safety Disclosures

 

23

Item 5. 

Other Information

 

23

Item 6. 

Exhibits

 

23

 

Signatures

 

24

 

 

 

 

 


 

Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

MATSON, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income and Comprehensive Income

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

(In millions, except per-share amounts)

    

2017

    

2016

    

2017

    

2016

    

Operating Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ocean Transportation

 

$

419.2

 

$

398.0

 

$

1,181.9

 

$

1,135.0

 

Logistics

 

 

124.7

 

 

102.4

 

 

348.9

 

 

287.3

 

Total Operating Revenue

 

 

543.9

 

 

500.4

 

 

1,530.8

 

 

1,422.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating costs

 

 

(436.1)

 

 

(410.9)

 

 

(1,271.2)

 

 

(1,177.2)

 

Equity in income of related party Terminal Joint Venture

 

 

7.5

 

 

3.6

 

 

19.3

 

 

9.2

 

Selling, general and administrative

 

 

(53.5)

 

 

(46.4)

 

 

(154.8)

 

 

(136.9)

 

Total Costs and Expenses

 

 

(482.1)

 

 

(453.7)

 

 

(1,406.7)

 

 

(1,304.9)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

 

61.8

 

 

46.7

 

 

124.1

 

 

117.4

 

Interest expense

 

 

(6.2)

 

 

(6.0)

 

 

(18.8)

 

 

(17.4)

 

Income before Income Taxes

 

 

55.6

 

 

40.7

 

 

105.3

 

 

100.0

 

Income tax expense

 

 

(21.5)

 

 

(15.4)

 

 

(40.2)

 

 

(38.6)

 

Net Income

 

$

34.1

 

$

25.3

 

$

65.1

 

$

61.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Comprehensive Income, Net of Income Taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

34.1

 

$

25.3

 

$

65.1

 

$

61.4

 

Other Comprehensive Income (Loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gain in prior service cost

 

 

0.7

 

 

23.4

 

 

0.8

 

 

24.1

 

Amortization of prior service cost included in net periodic pension cost

 

 

(2.2)

 

 

(0.6)

 

 

(2.9)

 

 

(1.2)

 

Amortization of net loss included in net periodic pension cost

 

 

1.0

 

 

0.9

 

 

3.1

 

 

3.0

 

Other adjustments

 

 

 —

 

 

0.6

 

 

0.2

 

 

0.5

 

Total Other Comprehensive Income (Loss)

 

 

(0.5)

 

 

24.3

 

 

1.2

 

 

26.4

 

Comprehensive Income

 

$

33.6

 

$

49.6

 

$

66.3

 

$

87.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per-Share:

 

$

0.79

 

$

0.59

 

$

1.51

 

$

1.42

 

Diluted Earnings Per-Share:

 

$

0.79

 

$

0.59

 

$

1.50

 

$

1.41

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Number of Shares Outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

42.9

 

 

42.8

 

 

43.0

 

 

43.1

 

Diluted

 

 

43.2

 

 

43.2

 

 

43.3

 

 

43.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Dividends Per-Share

 

$

0.20

 

$

0.19

 

$

0.58

 

$

0.55

 

 

See Notes to Condensed Consolidated Financial Statements.

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MATSON, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

(In millions)

    

2017

    

2016

    

ASSETS

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

24.7

 

$

13.9

 

Accounts receivable, net

 

 

213.9

 

 

189.5

 

Prepaid expenses and other assets

 

 

64.4

 

 

70.8

 

Total current assets

 

 

303.0

 

 

274.2

 

Long-term Assets:

 

 

 

 

 

 

 

Investment in related party Terminal Joint Venture

 

 

87.8

 

 

82.4

 

Property and equipment, net

 

 

1,099.2

 

 

949.2

 

Goodwill

 

 

323.7

 

 

323.7

 

Intangible assets, net

 

 

228.0

 

 

236.6

 

Capital Construction Fund - cash on deposit

 

 

 —

 

 

31.2

 

Deferred dry-docking costs, net

 

 

95.2

 

 

89.1

 

Other long-term assets

 

 

30.1

 

 

29.1

 

Total long-term assets

 

 

1,864.0

 

 

1,741.3

 

Total assets

 

$

2,167.0

 

$

2,015.5

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Current portion of debt

 

$

29.2

 

$

31.8

 

Accounts payable

 

 

172.9

 

 

170.5

 

Accruals and other liabilities

 

 

82.4

 

 

75.3

 

Total current liabilities

 

 

284.5

 

 

277.6

 

Long-term Liabilities:

 

 

 

 

 

 

 

Long-term debt

 

 

810.1

 

 

707.1

 

Deferred income taxes

 

 

386.2

 

 

363.8

 

Employee benefit plans

 

 

66.5

 

 

71.7

 

Uninsured claims and related liabilities

 

 

42.3

 

 

40.3

 

Multi-employer withdrawal liability

 

 

58.8

 

 

60.1

 

Total long-term liabilities

 

 

1,363.9

 

 

1,243.0

 

Commitments and Contingencies (Note 2)

 

 

 

 

 

 

 

Shareholders’ Equity:

 

 

 

 

 

 

 

Common stock

 

 

31.8

 

 

32.1

 

Additional paid in capital

 

 

285.8

 

 

289.8

 

Accumulated other comprehensive loss, net

 

 

(22.4)

 

 

(23.6)

 

Retained earnings

 

 

223.4

 

 

196.6

 

Total shareholders’ equity

 

 

518.6

 

 

494.9

 

Total liabilities and shareholders’ equity

 

$

2,167.0

 

$

2,015.5

 

 

See Notes to Condensed Consolidated Financial Statements.

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MATSON, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

(In millions)

    

2017

    

2016

    

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

Net income

 

$

65.1

 

$

61.4

 

Reconciling adjustments:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

74.3

 

 

71.8

 

Deferred income taxes

 

 

22.3

 

 

24.7

 

Share-based compensation expense

 

 

7.8

 

 

9.2

 

Equity in income of related party Terminal Joint Venture

 

 

(19.3)

 

 

(9.2)

 

Cash distribution received from Terminal Joint Venture

 

 

14.0

 

 

 —

 

Other

 

 

2.1

 

 

2.1

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(24.3)

 

 

(4.8)

 

Deferred dry-docking payments

 

 

(45.1)

 

 

(43.7)

 

Deferred dry-docking amortization

 

 

35.7

 

 

27.8

 

Prepaid expenses and other assets

 

 

4.3

 

 

(27.1)

 

Accounts payable, accruals and other liabilities

 

 

14.5

 

 

(27.2)

 

Other long-term liabilities

 

 

(4.4)

 

 

2.5

 

Net cash provided by operating activities

 

 

147.0

 

 

87.5

 

 

 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

Vessel construction expenditures

 

 

(172.2)

 

 

(39.2)

 

Other capital expenditures

 

 

(43.3)

 

 

(67.3)

 

Proceeds from (payments for) disposal of property and equipment

 

 

(0.3)

 

 

2.2

 

Cash deposits into Capital Construction Fund

 

 

(64.6)

 

 

(123.4)

 

Cash withdrawals from Capital Construction Fund

 

 

95.8

 

 

12.5

 

Payments for membership interests in Span Alaska, net of cash acquired

 

 

 —

 

 

(112.8)

 

Net cash used in investing activities

 

 

(184.6)

 

 

(328.0)

 

 

 

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

Proceeds from issuance of debt

 

 

 —

 

 

200.0

 

Repayments of debt and capital leases

 

 

(19.5)

 

 

(13.7)

 

Proceeds from revolving credit facility

 

 

341.0

 

 

1,275.0

 

Repayments of revolving credit facility

 

 

(221.0)

 

 

(1,080.0)

 

Payment of financing costs

 

 

(1.7)

 

 

 —

 

Proceeds from issuance of capital stock

 

 

0.4

 

 

0.6

 

Dividends paid

 

 

(25.2)

 

 

(24.0)

 

Repurchase of Matson common stock

 

 

(18.4)

 

 

(37.8)

 

Payments of Span Alaska debt

 

 

 —

 

 

(81.9)

 

Tax withholding related to net share settlements of restricted stock units

 

 

(7.2)

 

 

(6.8)

 

Net cash used in financing activities

 

 

48.4

 

 

231.4

 

 

 

 

 

 

 

 

 

Net Increase (Decrease) in Cash and Cash Equivalents

 

 

10.8

 

 

(9.1)

 

Cash and Cash Equivalents, Beginning of the Period

 

 

13.9

 

 

25.5

 

Cash and Cash Equivalents, End of the Period

 

$

24.7

 

$

16.4

 

 

 

 

 

 

 

 

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

 

Interest paid, net of capitalized interest

 

$

20.5

 

$

15.7

 

Income tax paid (refund)

 

$

(0.1)

 

$

16.2

 

 

 

 

 

 

 

 

 

Non-cash Information:

 

 

 

 

 

 

 

Capital expenditures included in accounts payable, accruals and other liabilities

 

$

1.5

 

$

12.6

 

 

See Notes to Condensed Consolidated Financial Statements.

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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 Okinawa, Japan and 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 seven terminal facilities on the U.S. West Coast, including to MatNav at four 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 13, 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 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 13).

 

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 covered by this report is September 30, 2017.  The period end for MatNav and its subsidiaries covered by this report occurred on the last Friday in September, or September 29, 2017, for the third quarter 2017.

 

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

 

Immaterial Correction of an Error in Previously Issued Financial Statements:  Subsequent to the filing of the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2017, the Company identified an error related to its post-retirement benefit plan liabilities.  The Company did not account for the transfer of certain participants belonging to three stevedore union groups in Hawaii, out of the Company’s post-retirement benefit plan and into a multi-employer Stevedore Industry Committee Welfare Benefit Plan (“SIC Plan”), that was approved by the Board of the SIC Plan in August 2016 (the “Transfer”).  The SIC Plan assumed the existing unfunded obligation related to the transferred participants who continue to receive substantially the same post-retirement benefits that they previously received under the Company’s post-retirement benefit plan.  The Company determined that the Transfer should have been accounted for in August 2016 when the Transfer was approved by the SIC Board as a negative plan amendment in accordance with Accounting Standards Codification (“ASC”) 715-60, Defined Benefit Plans – Other Postretirements since the Company retains significant risks related to the obligation for the transferred participants’ benefits, and will continue to participate in the funding of the transferred benefit obligation through ongoing and increased contributions to the SIC Plan. 

 

Accordingly, the Company corrected this error by recording a decrease of $36.8 million in employee benefit plan liabilities and $1.6 million in accruals and other liabilities, with a corresponding net gain in prior service costs of $22.5 million in accumulated other comprehensive loss (gain), net of $15.0 million of deferred income taxes, and a $0.9 million increase in retained earnings as of December 31, 2016.  The net gain in prior service costs included in accumulated other comprehensive loss will be amortized over a period of approximately 10 years.  The correction for the amortization of the net gain in prior service costs resulted in an increase in Ocean Transportation segment operating income of $0.5 million, and income tax expense of $0.2 million in the Company’s Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2016.  The Company believes the correction of this error is immaterial to previously issued Consolidated Financial Statements for prior periods.  The misstatement had no impact on the Company’s Condensed Consolidated Statements of Cash Flows.

 

Reclassifications: Certain amounts included within cash flows from operating activities of the Condensed Consolidated Statement of Cash Flow for the nine months ended September 30, 2016, have been reclassified to conform to the current period presentation.  There was no change in net cash provided by operating activities for the nine months ended September 30, 2016.

 

New Accounting Pronouncements: 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”).  ASU 2014-09 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.  ASU 2014-09 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 2014-09 on its Consolidated Financial Statements.  The Company is currently reviewing customer contracts in each of its operating segments for all revenue generating services provided by the Company, and is assessing the impact of applying ASU 2014-09, and comparing this to the Company’s historical revenue recognition practices.  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 2014-09.  While the Company continues to assess all potential impacts of adopting ASU 2014-09, based upon information available to date, the Company does not expect the adoption of ASU 2014-09 to have a significant impact on either the timing or recognition of Ocean Transportation and Logistics revenues.  The Company is also evaluating its accounting

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disclosures related to revenue recognition.  The Company plans to adopt the requirements of the new standard by recording the impact of adoption as an adjustment to retained earnings at the beginning of the first quarter of 2018.

 

Leases: In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which requires lessees to record most leases on their balance sheets but recognize the expenses on their statements of income 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.  ASU 2016-02 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 the impact of adopting ASU 2016-02.

 

Net Periodic Pension Cost and Benefit Cost:  In March 2017, the FASB issued ASU 2017-07.  “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Benefit Cost (“ASU 2017-07”).  ASU 2017-07 requires employees that sponsor defined benefit pension and other post-retirement plans to present the service cost component of net benefit cost in the same income statement line item as other employee compensation costs arising from services rendered, and that only the service cost component will be eligible for capitalization.  The other components of the net periodic benefit cost must be presented separately from the line item that includes the service cost component and outside of the income from operations subtotal.  ASU 2017-07 is effective for interim and annual periods beginning after December 15, 2017.  The Company does not expect the adoption of ASU 2017-07 to have a significant impact on the Company’s Consolidated Financial Statements.

 

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.

 

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.

 

 

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 being 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 $12.6 million and $6.7 million for the three months ended September 30, 2017 and 2016, respectively, and $32.0 million and $10.3 million for the nine months ended September 30, 2017 and 2016, respectively, have been eliminated from Logistics segment operating revenue in the table below. 

 

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Reportable segment results for the three and nine months ended September 30, 2017 and 2016 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

(In millions)

    

2017

    

2016

    

2017

    

2016

    

Operating Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ocean Transportation

 

$

419.2

 

$

398.0

 

$

1,181.9

 

$

1,135.0

 

Logistics (1)

 

 

124.7

 

 

102.4

 

 

348.9

 

 

287.3

 

Total Operating Revenue

 

$

543.9

 

$

500.4

 

$

1,530.8

 

$

1,422.3

 

Operating Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ocean Transportation

 

$

54.6

 

$

43.2

 

$

108.1

 

$

110.1

 

Logistics (1)

 

 

7.2

 

 

3.5

 

 

16.0

 

 

7.3

 

Total Operating Income

 

 

61.8

 

 

46.7

 

 

124.1

 

 

117.4

 

Interest expense, net

 

 

(6.2)

 

 

(6.0)

 

 

(18.8)

 

 

(17.4)

 

Income before Income Taxes

 

 

55.6

 

 

40.7

 

 

105.3

 

 

100.0

 

Income taxes

 

 

(21.5)

 

 

(15.4)

 

 

(40.2)

 

 

(38.6)

 

Net Income

 

$

34.1

 

$

25.3

 

$

65.1

 

$

61.4

 


(1)

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

 

 

4.          PROPERTY AND EQUIPMENT

 

Property and equipment at September 30, 2017 and December 31, 2016 consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

(In millions)

    

2017

    

2016

 

Cost:

 

 

 

 

 

 

 

Vessels

 

$

1,430.8

 

$

1,416.1

 

Containers and equipment

 

 

543.2

 

 

536.9

 

Terminal facilities and other property

 

 

58.9

 

 

43.2

 

Vessel construction in progress

 

 

296.7

 

 

124.5

 

Other construction in progress

 

 

26.9

 

 

31.2

 

Total Property and Equipment

 

 

2,356.5

 

 

2,151.9

 

Less: Accumulated Deprecation

 

 

(1,257.3)

 

 

(1,202.7)

 

Total Property and Equipment, net

 

$

1,099.2

 

$

949.2

 

 

Vessel construction in progress relates to progress payments paid for the construction of four new vessels to be used within the Hawaii service, and includes capitalized interest of $7.4 million and $2.9 million at September 30, 2017 and December 31, 2016, respectively.

 

 

5.          GOODWILL AND INTANGIBLES

 

Changes in goodwill for the three and nine months ended September 30, 2017 and 2016 consisted 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

 

Additions

 

 

 —

 

 

 —

 

 

 —

 

Balance at June 30, 2017

 

 

218.5

 

 

105.2

 

 

323.7

 

Additions

 

 

 —

 

 

 —

 

 

 —

 

Balance at September 30, 2017

 

$

218.5

 

$

105.2

 

$

323.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Goodwill

 

 

 

Ocean

 

 

 

 

 

 

    

Transportation

    

Logistics

    

Total

 

Balance at December 31, 2015

 

$

215.0

 

$

26.6

 

$

241.6

 

Additions

 

 

 —

 

 

 —

 

 

 —

 

Balance at March 31, 2016

 

 

215.0

 

 

26.6

 

 

241.6

 

Additions

 

 

3.5

 

 

 —

 

 

3.5

 

Balance at June 30, 2016

 

 

218.5

 

 

26.6

 

 

245.1

 

Additions

 

 

 —

 

 

79.0

 

 

79.0

 

Balance at September 30, 2016

 

$

218.5

 

$

105.6

 

$

324.1

 

 

Intangible assets at September 30, 2017 and December 31, 2016 consisted of the following: 

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

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

 

 

(30.0)

 

 

(21.4)

 

Total Customer Relationships, net

 

 

200.7

 

 

209.3

 

Trade name - Logistics

 

 

27.3

 

 

27.3

 

Total Intangible Assets, net

 

$

228.0

 

$

236.6

 

 

 

 

6.          CAPITAL CONSTRUCTION FUND

 

The Company’s Capital Construction Fund (“CCF”) is described in Note 7 to the Consolidated Financial Statements included in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.  As of September 30, 2017 and December 31, 2016, the following amounts related to the Company’s CCF:

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

(In millions)

    

2017

    

2016

 

Capital Construction Fund:

 

 

 

 

 

 

 

Cash on deposit

 

$

 —

 

$

31.2

 

Assigned accounts receivables

 

$

175.9

 

$

174.7

 

 

Cash 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.  During the three and nine months ended September 30, 2017, the Company deposited $52.4 million and $64.6 million into the CCF, and made qualifying cash withdrawals of $52.4 million and $95.8 million from the CCF, respectively.  Eligible accounts receivable that are assigned into the CCF are classified as part of accounts receivable in the Condensed Consolidated Financial Statements due to the nature of the assignment. 

 

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7.          DEBT

 

At September 30, 2017 and December 31, 2016, the Company’s debt consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

(In millions)

    

2017

    

2016

    

Term Loans:

 

 

 

 

 

 

 

5.79 %, payable through 2020

 

$

21.0

 

$

24.5

 

3.66 %, payable through 2023

 

 

54.7

 

 

59.3

 

4.16 %, payable through 2027

 

 

52.4

 

 

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

 

 

36.3

 

 

37.5

 

4.35 %, payable through 2044

 

 

100.0

 

 

100.0

 

3.92 %, payable through 2045

 

 

73.2

 

 

75.0

 

Title XI Bonds:

 

 

 

 

 

 

 

5.34 %, payable through 2028

 

 

24.2

 

 

26.4

 

5.27 %, payable through 2029

 

 

26.4

 

 

28.6

 

Revolving credit facility

 

 

175.0

 

 

55.0

 

Capital leases

 

 

1.1

 

 

2.6

 

Total Debt

 

 

839.3

 

 

738.9

 

Less: Current portion

 

 

(29.2)

 

 

(31.8)

 

Total Long-term Debt

 

$

810.1

 

$

707.1

 

 

The Company’s debt is described in Note 8 to the Consolidated Financial Statements included in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, and in Part I, Financial Information of the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2017, except as described below. 

 

Classification of Borrowings: Borrowings under the revolving credit facility is classified as long-term debt in the Condensed Consolidated Balance Sheets, as principal payments are not required until the maturity date of June 29, 2022. 

 

As of September 30, 2017, the Company had $464.5 million of remaining availability under the revolving credit facility.  The interest rate on borrowings under the revolving credit facility approximated 2.69 percent during the three months ended September 30, 2017.

 

 

8.          ACCUMULATED OTHER COMPREHENSIVE LOSS

 

Changes in accumulated other comprehensive loss by component, net of tax, for the nine months ended September 30, 2017 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

Non-

 

 

 

Other

 

 

 

 

 

Post

 

Qualified

 

 

 

Comprehensive

 

(In millions)

    

Pensions

    

Retirement

    

Plans

    

Other

 

Income (Loss)

 

Balance at December 31, 2016

 

$

(41.4)

 

$

18.1

 

$

(0.4)

 

$

0.1

 

$

(23.6)

 

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)

 

 

18.2

 

 

(0.4)

 

 

0.3

 

 

(22.9)

 

Net gain in prior service costs

 

 

 —

 

 

 —

 

 

 —

 

 

0.1

 

 

0.1

 

Amortization of prior service cost

 

 

(0.3)

 

 

 —

 

 

 —

 

 

 —

 

 

(0.3)

 

Amortization of net loss

 

 

0.8

 

 

0.3

 

 

0.1

 

 

 —

 

 

1.2

 

Balance at June 30, 2017

 

 

(40.5)

 

 

18.5

 

 

(0.3)

 

 

0.4

 

 

(21.9)

 

Net gain in prior service costs

 

 

 —

 

 

0.7

 

 

 —

 

 

 —

 

 

0.7

 

Amortization of prior service cost

 

 

(0.4)

 

 

(1.7)

 

 

(0.1)

 

 

 —

 

 

(2.2)

 

Amortization of net loss

 

 

0.8

 

 

0.2

 

 

 —

 

 

 —

 

 

1.0

 

Balance at September 30, 2017

 

$

(40.1)

 

$

17.7

 

$

(0.4)

 

$

0.4

 

$

(22.4)

 

 

The balance for post-retirement at December 31, 2016 has been corrected for the adjustment described in Note 2, Immaterial Correction of an Error in Previously Issued Financial Statements.  

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Changes in accumulated other comprehensive loss by component, net of tax, for the nine months ended September 30, 2016 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

Non-

 

 

 

Other

 

 

 

 

 

Post

 

Qualified

 

 

 

Comprehensive

 

(In millions)

    

Pensions

    

Retirement

    

Plans

    

Other