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 June 30, 2018

 

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 every Interactive Data File required to be submitted 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 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 ☐

 

 

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 June 30, 2018: 42,697,456

 

 

 

 


 

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

 

13

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

 

20

Item 4. 

Controls and Procedures

 

20

 

 

 

 

Part II—OTHER INFORMATION 

 

21

 

 

 

Item 1. 

Legal Proceedings

 

21

Item 1A. 

Risk Factors

 

21

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

 

21

Item 3. 

Defaults Upon Senior Securities

 

21

Item 4. 

Mine Safety Disclosures

 

21

Item 5. 

Other Information

 

21

Item 6. 

Exhibits

 

22

 

Signatures

 

23

 

 

 

 

 


 

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

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

(In millions, except per-share amounts)

    

2018

    

2017

    

2018

    

2017

    

Operating Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ocean Transportation

 

$

406.6

 

$

392.7

 

$

785.9

 

$

762.7

 

Logistics

 

 

150.5

 

 

119.8

 

 

282.6

 

 

224.2

 

Total Operating Revenue

 

 

557.1

 

 

512.5

 

 

1,068.5

 

 

986.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating costs

 

 

(465.9)

 

 

(422.4)

 

 

(905.2)

 

 

(834.2)

 

Equity in income of Terminal Joint Venture

 

 

9.1

 

 

6.9

 

 

19.6

 

 

11.8

 

Selling, general and administrative

 

 

(54.3)

 

 

(50.0)

 

 

(108.2)

 

 

(100.3)

 

Total Costs and Expenses

 

 

(511.1)

 

 

(465.5)

 

 

(993.8)

 

 

(922.7)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

 

46.0

 

 

47.0

 

 

74.7

 

 

64.2

 

Interest expense

 

 

(5.0)

 

 

(6.3)

 

 

(10.0)

 

 

(12.6)

 

Other income (expense), net

 

 

0.4

 

 

(1.1)

 

 

1.2

 

 

(1.9)

 

Income before Income Taxes

 

 

41.4

 

 

39.6

 

 

65.9

 

 

49.7

 

Income taxes

 

 

(8.8)

 

 

(15.6)

 

 

(19.1)

 

 

(18.7)

 

Net Income

 

$

32.6

 

$

24.0

 

$

46.8

 

$

31.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

32.6

 

$

24.0

 

$

46.8

 

$

31.0

 

Other Comprehensive Income (Loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gain in prior service cost

 

 

 —

 

 

0.1

 

 

 —

 

 

0.1

 

Amortization of prior service cost

 

 

(1.1)

 

 

(0.3)

 

 

(2.4)

 

 

(0.7)

 

Amortization of net loss

 

 

0.5

 

 

1.2

 

 

1.8

 

 

2.1

 

Other adjustments

 

 

(0.3)

 

 

 —

 

 

(0.1)

 

 

0.2

 

Total Other Comprehensive (Loss) Income

 

 

(0.9)

 

 

1.0

 

 

(0.7)

 

 

1.7

 

Comprehensive Income

 

$

31.7

 

$

25.0

 

$

46.1

 

$

32.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per-Share:

 

$

0.76

 

$

0.56

 

$

1.10

 

$

0.72

 

Diluted Earnings Per-Share:

 

$

0.76

 

$

0.55

 

$

1.09

 

$

0.72

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Number of Shares Outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

42.7

 

 

43.1

 

 

42.6

 

 

43.1

 

Diluted

 

 

43.0

 

 

43.3

 

 

42.9

 

 

43.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Dividends Per-Share

 

$

0.20

 

$

0.19

 

$

0.40

 

$

0.38

 

 

See Notes to Condensed Consolidated Financial Statements.

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Table of Contents

MATSON, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

(In millions)

    

2018

    

2017

    

ASSETS

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

12.8

 

$

19.8

 

Accounts receivable, net

 

 

221.7

 

 

194.6

 

Prepaid expenses and other assets

 

 

49.1

 

 

51.6

 

Total current assets

 

 

283.6

 

 

266.0

 

Long-term Assets:

 

 

 

 

 

 

 

Investment in Terminal Joint Venture

 

 

94.4

 

 

93.2

 

Property and equipment, net

 

 

1,307.1

 

 

1,165.7

 

Goodwill

 

 

323.7

 

 

323.7

 

Intangible assets, net

 

 

219.6

 

 

225.2

 

Deferred dry-docking costs, net

 

 

73.9

 

 

89.2

 

Other long-term assets

 

 

79.3

 

 

84.5

 

Total long-term assets

 

 

2,098.0

 

 

1,981.5

 

Total Assets

 

$

2,381.6

 

$

2,247.5

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Current portion of debt

 

$

36.3

 

$

30.8

 

Accounts payable

 

 

193.5

 

 

175.1

 

Accruals and other liabilities

 

 

85.7

 

 

80.4

 

Total current liabilities

 

 

315.5

 

 

286.3

 

Long-term Liabilities:

 

 

 

 

 

 

 

Long-term debt

 

 

896.2

 

 

826.3

 

Deferred income taxes

 

 

299.8

 

 

285.2

 

Other long-term liabilities

 

 

170.6

 

 

171.5

 

Total long-term liabilities

 

 

1,366.6

 

 

1,283.0

 

Commitments and Contingencies (Note 2)

 

 

 

 

 

 

 

Shareholders’ Equity:

 

 

 

 

 

 

 

Common stock

 

 

32.0

 

 

31.9

 

Additional paid in capital

 

 

291.2

 

 

289.7

 

Accumulated other comprehensive loss, net

 

 

(31.6)

 

 

(24.9)

 

Retained earnings

 

 

407.9

 

 

381.5

 

Total shareholders’ equity

 

 

699.5

 

 

678.2

 

Total Liabilities and Shareholders’ Equity

 

$

2,381.6

 

$

2,247.5

 

 

See Notes to Condensed Consolidated Financial Statements.

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MATSON, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 

 

(In millions)

    

2018

    

2017

    

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

Net income

 

$

46.8

 

$

31.0

 

Reconciling adjustments:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

47.6

 

 

49.7

 

Deferred income taxes

 

 

14.6

 

 

11.0

 

Share-based compensation expense

 

 

5.5

 

 

4.9

 

Equity in income of Terminal Joint Venture

 

 

(19.6)

 

 

(11.8)

 

Distribution from Terminal Joint Venture

 

 

17.5

 

 

7.0

 

Other

 

 

(0.6)

 

 

1.1

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(27.1)

 

 

(9.0)

 

Deferred dry-docking payments

 

 

(5.1)

 

 

(33.0)

 

Deferred dry-docking amortization

 

 

18.3

 

 

25.6

 

Prepaid expenses and other assets

 

 

3.0

 

 

(1.1)

 

Accounts payable, accruals and other liabilities

 

 

18.4

 

 

(9.4)

 

Other long-term liabilities

 

 

(0.2)

 

 

(2.6)

 

Net cash provided by operating activities

 

 

119.1

 

 

63.4

 

 

 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

Capitalized vessel construction expenditures

 

 

(166.8)

 

 

(46.2)

 

Other capital expenditures

 

 

(25.5)

 

 

(37.1)

 

Proceeds from (payments for) disposal of property and equipment

 

 

11.0

 

 

(0.3)

 

Cash deposits into Capital Construction Fund

 

 

(198.3)

 

 

(12.2)

 

Withdrawals from Capital Construction Fund

 

 

199.2

 

 

43.4

 

Net cash used in investing activities

 

 

(180.4)

 

 

(52.4)

 

 

 

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

Repayments of debt and capital leases

 

 

(14.6)

 

 

(15.0)

 

Proceeds from revolving credit facility

 

 

268.9

 

 

155.0

 

Repayments of revolving credit facility

 

 

(178.9)

 

 

(125.0)

 

Proceeds from issuance of capital stock

 

 

0.5

 

 

0.4

 

Dividends paid

 

 

(17.3)

 

 

(16.5)

 

Repurchase of Matson common stock

 

 

 —

 

 

(1.3)

 

Tax withholding related to net share settlements of restricted stock units

 

 

(4.3)

 

 

(7.2)

 

Net cash provided by financing activities

 

 

54.3

 

 

(9.6)

 

 

 

 

 

 

 

 

 

Net (Decrease) Increase in Cash and Cash Equivalents

 

 

(7.0)

 

 

1.4

 

Cash and Cash Equivalents, Beginning of the Period

 

 

19.8

 

 

13.9

 

Cash and Cash Equivalents, End of the Period

 

$

12.8

 

$

15.3

 

 

 

 

 

 

 

 

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

 

Interest paid, net of capitalized interest

 

$

8.9

 

$

12.8

 

Income tax paid, net of income tax refunds

 

$

4.2

 

$

(0.3)

 

 

 

 

 

 

 

 

 

Non-cash Information:

 

 

 

 

 

 

 

Capital expenditures included in accounts payable, accruals and other liabilities

 

$

0.8

 

$

1.1

 

Accrued dividends

 

$

9.0

 

$

8.7

 

 

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 also provides services to Okinawa, Japan and various islands in the South Pacific.  In addition, subsidiaries of MatNav provide container stevedoring, refrigerated cargo services, inland transportation 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 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 four facilities which are used by MatNav (“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 (“LCL”) consolidation and freight forwarding services (collectively “Freight Forwarding Services”); (iii) warehousing and distribution services; and (iv) supply chain management, non-vessel operating common carrier freight forwarding and other services.

 

 

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. 

 

Due to the nature of the Company’s operations, 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. 

 

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, 2017, filed with the Securities and Exchange Commission (“SEC”) on February 23, 2018.

 

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Fiscal Period:  The period end for Matson covered by this report is June 30, 2018.  The period end for MatNav and its subsidiaries covered by this report occurred on the last Friday in June, or June 29, 2018, for the second quarter 2018.

 

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, 2017.

 

Recognition of Revenues and Expenses:    Revenue in the Company’s Condensed Consolidated Financial Statements is presented net of elimination of intercompany transactions.  The following is a description of the Company’s principal revenue generating activities by segment, and the Company’s revenue recognition policy for each activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

Ocean Transportation (in millions) (1)

 

2018

    

2017

 

2018

    

2017

 

Ocean transportation services

 

$

401.2

 

$

388.2

 

$

775.9

 

$

753.2

 

Terminal and other related services

 

 

0.5

 

 

0.8

 

 

1.3

 

 

1.6

 

Fuel sales

 

 

3.1

 

 

2.0

 

 

5.2

 

 

4.5

 

Ship management services

 

 

1.8

 

 

1.7

 

 

3.5

 

 

3.4

 

Total

 

$

406.6

 

$

392.7

 

$

785.9

 

$

762.7

 


(1)

Ocean Transportation revenue transactions are primarily denominated in U.S. dollars except for approximately 3 percent of Ocean Transportation revenues and fuel sales which are denominated in foreign currencies. 

 

§

Ocean Transportation services revenue is recognized ratably over the duration of a voyage based on the relative transit time completed in each reporting period.  Vessel operating costs and other ocean transportation operating costs, such as terminal operating overhead and general and administrative expenses, are charged to operating costs as incurred. 

§

Terminal and other related service revenues to third parties are recognized as the services are performed.

§

Fuel sales revenue is recognized when the Company has completed delivery of the product to the customer in accordance with the terms and conditions of the contract.

§

Ship management services revenue and related costs are recognized in proportion to the services completed.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

Logistics (in millions) (1)

 

2018

 

2017

 

2018

 

2017

 

Transportation brokerage and freight forwarding services

 

$

136.4

 

$

106.9

 

$

255.6

 

$

199.2

 

Warehouse and distribution services

 

 

7.8

 

 

7.3

 

 

15.2

 

 

14.5

 

Supply chain management and other services

 

 

6.3

 

 

5.6

 

 

11.8

 

 

10.5

 

Total

 

$

150.5

 

$

119.8

 

$

282.6

 

$

224.2

 


(1)

Logistics revenue transactions are primarily denominated in U.S. dollars except for approximately 3 percent of transportation brokerage and freight forwarding services revenue, and supply chain management and other services revenue categories are denominated in foreign currencies.

 

§

Logistics transportation brokerage and freight forwarding services revenue consists of amounts billed to customers for services provided.  The primary costs include third-party purchased transportation services, labor and equipment costs.  Revenue and the related purchased third-party transportation costs are recognized over the duration of a delivery based upon the relative transit time completed in each reporting period.  Labor and other operating costs are expensed as incurred.  The Company reports revenue on a gross basis as the Company serves as the principal in these transactions because it is responsible for fulfilling the contractual arrangements with the customer and has latitude in establishing prices.

§

Logistics warehousing and distribution services revenue consists of amounts billed to customers for storage, handling, and value-added packaging of customer merchandise.  Storage revenue is recognized in the month the service is provided to the customer.  Storage expenses are recognized as incurred.  Other warehousing and distribution services revenue and expense are recognized in proportion to the services performed. 

§

Supply chain management and other services revenue and related costs are recognized in proportion to the services performed.

 

The Company generally invoices its customers at the commencement of the voyage or the transportation service being provided, or as other services are being performed.  Revenue is deferred when services are paid in advance by the

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customer.  The Company’s receivables are classified as short-term as collection terms are for periods of less than one year. 

 

The Company expenses sales commissions and contract acquisition costs as incurred because the amounts are generally immaterial.  These expenses are included in selling, general and administration expenses in the Condensed Consolidated Statements of Income and Comprehensive Income. 

 

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, 2017.  As of June 30, 2018 and December 31, 2017, the following amounts related to the Company’s CCF:

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

(In millions)

    

2018

    

2017

 

Capital Construction Fund:

 

 

 

 

 

 

 

Cash on deposit

 

$

 —

 

$

0.9

 

Assigned accounts receivables

 

$

124.7

 

$

134.8

 

 

Cash on deposit in the CCF is 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 six months ended June 30, 2018 and 2017, the Company deposited $198.3 million and $12.2 million into the CCF, respectively, and made qualifying cash withdrawals of $199.2 million and $43.4 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.

 

Investment in Terminal Joint Venture:  The Company’s investment in the Terminal Joint Venture was $94.4 million and $93.2 million at June 30, 2018 and December 31, 2017, respectively.  Condensed income statement information (unaudited) for the Terminal Joint Venture for the three and six months ended June 30, 2018 and 2017 consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

Condensed Statements of Operating Income and Net Income (unaudited) (in millions)

 

2018

    

2017

 

2018

    

2017

 

Operating revenue

 

$

266.1

 

$

214.1

 

$

517.0

 

$

410.8

 

Operating costs and expenses

 

 

(240.4)

 

 

(194.0)

 

 

(460.1)

 

 

(378.0)

 

Operating income

 

 

25.7

 

 

20.1

 

 

56.9

 

 

32.8

 

Net Income (1)

 

 

24.3

 

 

19.5

 

 

55.0

 

 

33.8

 

Company Share of Net Income

 

$

9.1

 

$

6.9

 

$

19.6

 

$

11.8

 


(1)

Includes earnings from equity method investments held by the Terminal Joint Venture less earnings allocated to non-controlling interests. 

 

Income Taxes:    In connection with the Tax Cuts and Jobs Act that was signed into law on December 22, 2017 (the “Tax Act”), the Company recorded a non-cash tax adjustment that decreased income tax expense by $0.2 million for the three months ended June 30, 2018, and increased income tax expense by $3.1 million for the six months ended June 30, 2018.  These adjustments were due to the application of an estimated 6.2 percent sequestration on alternative minimum tax (AMT) refunds for the years 2018 to 2021, and were based on new guidance issued by the Internal Revenue Service and emerging interpretations of the Tax Act. 

 

The Company continues to assess the impact of the Tax Act and any related interpretations, when issued, on the Company’s income tax estimates.  These and other factors could materially affect the Company’s financial condition or its future operating results.

 

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

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consultation with counsel, would not have a material effect on the Company’s financial condition, results of operations, or cash flows.

 

New Accounting Pronouncements:    Revenues from Contracts with Customers (Topic 606) (“ASU 2014-09”): The Company adopted ASU 2014-09 during the three months ended March 31, 2018 using the modified retrospective method.  This method allowed the Company to recognize the cumulative effect of initially applying ASU 2014-09 as an adjustment to retained earnings as of December 31, 2017.  Prior to adopting ASU 2014-09, the Company performed a review of its revenue contracts and evaluated the Company’s current accounting policies and procedures for recognizing revenues in the Company’s Consolidated Financial Statements, and compared these to the new requirements of ASU 2014-09.  In addition, the Company identified the performance obligations and consideration applicable under each contract.    

 

Based upon this evaluation, the Company determined that the impact of adopting ASU 2014-09 was immaterial because the analysis of the Company’s contracts under ASU 2014-09 supports the recognition of revenue over time as the service is performed, which is consistent with the Company’s current revenue recognition accounting policy.  The majority of the Company’s contracts require the Company to provide ocean and logistics transportation services to its customers.  Such services are provided by the Company over a period of time, generally, when cargo is being delivered from source to destination point, or as the service is being performed.  Therefore, performance obligations are completed in a short period of time due to the nature of the services provided by the Company.  Under the new standard, revenues from the majority of the Company’s contracts will continue to be recognized over time as the customer simultaneously receives and consumes the benefit of these services as described in ASU 2014-09.  In addition, the identification of performance obligations and related consideration under the new standard is not materially different from our current accounting treatment.

 

Income Statement – Reporting Comprehensive Income (Topic 220) (“ASU 2018-02”):  ASU 2018-02 allows a reclassification from accumulated other comprehensive income (loss) to retained earnings for the remeasurement tax effects resulting from the Tax Act.  The Company elected to adopt early ASU 2018-02 during the three months ended March 31, 2018, and recorded a reclassification adjustment of $6.0 million between accumulated other comprehensive income (loss) and retained earnings (see Note 7).

 

Compensation – Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Benefit Cost (“ASU 2017-07”):  ASU 2017-07 requires employers that sponsor defined benefit pension and 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.  

 

The Company adopted ASU 2017-07 during the three months ended March 31, 2018.  To conform prior period amounts to current period presentation as required by ASU 2017-07, the Company recorded retrospective adjustments and reclassified $1.1 million and $1.9 million of expenses from operating costs to other income (expense) in the Condensed Consolidated Statement of Income and Comprehensive Income for the three and six months ended June 30, 2017, respectively.  There was no change to income before income taxes for all periods presented as a result of adopting ASU 2017-07. 

 

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

 

 

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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, and the Logistics segment provides logistics services to the Ocean Transportation segment.  Accordingly, inter-segment revenue of $26.8 million and $21.7 million for the three months ended June 30, 2018 and 2017, and $45.1 million and $38.6 million for the six months ended June 30, 2018 and 2017, respectively, have been eliminated from operating revenue in the table below. 

 

Reportable segment results for the three and six months ended June 30, 2018 and 2017 consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

(In millions)

    

2018

    

2017

    

2018

    

2017

    

Operating Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ocean Transportation

 

$

406.6

 

$

392.7

 

$

785.9

 

$

762.7

 

Logistics

 

 

150.5

 

 

119.8

 

 

282.6

 

 

224.2

 

Total Operating Revenue

 

$

557.1

 

$

512.5

 

$

1,068.5

 

$

986.9

 

Operating Income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ocean Transportation (1)

 

$

36.5

 

$

40.0

 

$

61.0

 

$

55.3

 

Logistics

 

 

9.5

 

 

7.0

 

 

13.7

 

 

8.9

 

Total Operating Income

 

 

46.0

 

 

47.0

 

 

74.7

 

 

64.2

 

Interest expense, net

 

 

(5.0)

 

 

(6.3)

 

 

(10.0)

 

 

(12.6)

 

Other income (expense), net

 

 

0.4

 

 

(1.1)

 

 

1.2

 

 

(1.9)

 

Income before Income Taxes

 

 

41.4

 

 

39.6

 

 

65.9

 

 

49.7

 

Income taxes

 

 

(8.8)

 

 

(15.6)

 

 

(19.1)

 

 

(18.7)

 

Net Income

 

$

32.6

 

$

24.0

 

$

46.8

 

$

31.0

 


(1)

Ocean Transportation segment information includes $9.1 million and $6.9 million of equity in income from the Terminal Joint Venture for the three months ended June 30, 2018 and 2017, and $19.6 million and $11.8 million for the six months ended June 30, 2018 and 2017, respectively.

 

 

4.          PROPERTY AND EQUIPMENT

 

Property and equipment at June 30, 2018 and December 31, 2017 consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

(In millions)

    

2018

    

2017

 

Cost:

 

 

 

 

 

 

 

Vessels

 

$

1,442.1

 

$

1,433.6

 

Containers and equipment

 

 

530.2

 

 

543.0

 

Terminal facilities and other property

 

 

65.9

 

 

64.8

 

Vessel construction in progress

 

 

543.4

 

 

376.6

 

Other construction in progress

 

 

35.8

 

 

26.2

 

Total Property and Equipment

 

 

2,617.4

 

 

2,444.2

 

Less: Accumulated Depreciation

 

 

(1,310.3)

 

 

(1,278.5)

 

Total Property and Equipment, net

 

$

1,307.1

 

$

1,165.7

 

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Vessel construction in progress relates to progress payments for the construction of four new vessels to be used within the Hawaii service, capitalized owners’ items and capitalized interest.  Capitalized interest included in vessel construction in progress was $18.6 million and $10.4 million at June 30, 2018 and December 31, 2017, respectively.

 

 

5.          GOODWILL AND INTANGIBLES

 

Goodwill by segment at both June 30, 2018 and December 31, 2017 consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ocean

 

 

 

 

 

 

 

(In millions)

    

Transportation

    

Logistics

    

Total

 

Goodwill

 

$

218.5

 

$

105.2

 

$

323.7

 

 

Intangible assets at June 30, 2018 and December 31, 2017 consisted of the following: 

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

(In millions)

    

2018

    

2017

 

Customer Relationships:

 

 

 

 

 

 

 

Ocean Transportation

 

$

140.6

 

$

140.6

 

Logistics

 

 

90.1

 

 

90.1

 

Total

 

 

230.7

 

 

230.7

 

Less: Accumulated Amortization

 

 

(38.4)

 

 

(32.8)

 

Total Customer Relationships, net

 

 

192.3

 

 

197.9

 

Trade name - Logistics

 

 

27.3

 

 

27.3

 

Total Intangible Assets, net

 

$

219.6

 

$

225.2

 

 

 

6.          DEBT

 

Debt at June 30, 2018 and December 31, 2017 consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

(In millions)

    

2018

    

2017

    

Private Placement Term Loans:

 

 

 

 

 

 

 

5.79 %, payable through 2020

 

$

14.0

 

$

17.5

 

3.66 %, payable through 2023

 

 

45.6

 

 

50.1

 

4.16 %, payable through 2027

 

 

47.1

 

 

49.8

 

3.37 %, payable through 2027

 

 

75.0

 

 

75.0

 

3.14 %, payable through 2031

 

 

200.0

 

 

200.0

 

4.31 %, payable through 2032

 

 

33.9

 

 

35.1

 

4.35 %, payable through 2044

 

 

100.0

 

 

100.0

 

3.92 %, payable through 2045

 

 

73.2

 

 

73.2

 

Title XI Bonds:

 

 

 

 

 

 

 

5.34 %, payable through 2028

 

 

23.1

 

 

24.2

 

5.27 %, payable through 2029

 

 

25.3

 

 

26.4

 

Revolving credit facility

 

 

295.0

 

 

205.0

 

Capital leases

 

 

0.3

 

 

0.8

 

Total Debt

 

 

932.5

 

 

857.1

 

Less: Current portion

 

 

(36.3)

 

 

(30.8)

 

Total Long-term Debt

 

$

896.2

 

$

826.3

 

 

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, 2017.  Borrowings under the revolving credit facility are 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. 

 

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As of June 30, 2018, the Company had $236.3 million of remaining availability under the revolving credit facility.  The interest rate on borrowings under the revolving credit facility approximated 3.33 percent during the three months ended June 30, 2018.

 

 

7.          ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

Changes in accumulated other comprehensive income (loss) by component, net of tax, for the six months ended June 30, 2018 consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

Non-

 

 

 

Other

 

 

 

 

 

Post

 

Qualified

 

 

 

Comprehensive

 

(In millions)

    

Pensions

    

Retirement

    

Plans

    

Other

 

Income (Loss)

 

Balance at December 31, 2017

 

$

(40.6)

 

$

15.6

 

$

(0.3)

 

$

0.4

 

$

(24.9)

 

Amortization of prior service cost

 

 

(0.4)

 

 

(0.9)

 

 

 —

 

 

 —

 

 

(1.3)

 

Amortization of net loss

 

 

0.9

 

 

0.3

 

 

0.1

 

 

 —

 

 

1.3

 

Remeasurement adjustment related to the Tax Act (1)

 

 

(9.2)

 

 

3.4

 

 

(0.2)

 

 

 —

 

 

(6.0)

 

Other adjustments

 

 

 —

 

 

 —

 

 

 —

 

 

0.2

 

 

0.2

 

Balance at March 31, 2018

 

 

(49.3)

 

 

18.4

 

 

(0.4)

 

 

0.6

 

 

(30.7)

 

Amortization of prior service cost

 

 

(0.5)

 

 

(0.5)

 

 

(0.1)

 

 

 —

 

 

(1.1)

 

Amortization of net loss

 

 

0.9

 

 

0.2

 

 

0.1

 

 

(0.7)

 

 

0.5

 

Other adjustments

 

 

 —

 

 

 —

 

 

 —

 

 

(0.3)

 

 

(0.3)

 

Balance at June 30, 2018

 

$

(48.9)

 

$

18.1

 

$

(0.4)

 

$

(0.4)

 

$

(31.6)

 


(1)

Reclassification from accumulated other comprehensive income (loss) to retained earnings for the remeasurement tax effects resulting from the Tax Act in accordance with ASU 2018-02.

 

Changes in accumulated other comprehensive income (loss) by component, net of tax, for the six months ended June 30, 2017 consisted of the following: