Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

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

 

For the fiscal year ended December 31, 2013

 

OR

 

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

 

For the transition period from                to         

 

Commission file number 001-34187

 

Matson, Inc.

(Exact name of registrant as specified in its charter)

 

Hawaii

 

99-0032630

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

1411 Sand Island Parkway

Honolulu, HI 96819

 (Address of principal executive offices and zip code)

 

(808) 848-1211

 (Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange
on which registered

Common Stock, without par value

 

New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

Number of shares of Common Stock outstanding at February 26, 2014:

42,935,493

 

Aggregate market value of Common Stock held by non-affiliates at June 30, 2013:

$1,054,012,599

 

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

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o  No x

 

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 x  No o

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

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

 

Large accelerated filer x

 

Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)

 

Smaller reporting company o

 

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

 

Documents Incorporated By Reference

 

The following document is incorporated by reference in Part III of the Annual Report on Form 10-K: Proxy statement for the annual meeting of shareholders of Matson, Inc. to be held April 24, 2014.

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

PART I

 

 

 

 

 

 

 

 

 

Page

 

 

 

 

 

Items 1.

 

Business

 

1

 

 

 

 

 

A.

 

Business Description

 

2

 

 

(1)

Ocean Transportation

 

2

 

 

(2)

Capital Construction Fund

 

4

 

 

(3)

Terminals

 

4

 

 

(4)

Logistics and Other Services

 

4

 

 

(5)

Competition

 

4

 

 

(6)

Rate Regulation

 

6

 

 

(7)

Seasonality

 

6

 

 

 

 

 

B.

 

Employees and Labor Relations

 

7

 

 

 

 

 

C.

 

Energy

 

7

 

 

 

 

 

D.

 

Available Information

 

8

 

 

 

 

 

Item 1A.

 

Risk Factors

 

8

 

 

 

 

 

Item 1B.

 

Unresolved Staff Comments

 

15

 

 

 

 

 

Item 2.

 

Properties

 

15

 

 

 

 

 

Item 3.

 

Legal Proceedings

 

15

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

16

 

PART II

 

Item 5.

 

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

 

17

 

 

 

 

 

Item 6.

 

Selected Financial Data

 

19

 

 

 

 

 

Item 7.

 

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

 

20

 

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Page

 

 

 

 

 

Items 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 

33

 

 

 

 

 

Item 8.

 

Financial Statements and Supplementary Data

 

35

 

 

 

 

 

Item 9.

 

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

 

74

 

 

 

 

 

Item 9A.

 

Controls and Procedures

 

74

 

 

 

 

 

 

 

Conclusion Regarding Effectiveness of Disclosure Controls and Procedures

 

74

 

 

 

 

 

 

 

Internal Control over Financial Reporting

 

74

 

 

 

 

 

Item 9B.

 

Other Information

 

74

 

 

 

 

 

PART III

 

Item 10.

 

Directors, Executive Officers and Corporate Governance

 

75

 

 

 

 

 

A.

 

Directors

 

75

 

 

 

 

 

B.

 

Executive Officers

 

75

 

 

 

 

 

C.

 

Corporate Governance

 

75

 

 

 

 

 

D.

 

Code of Ethics

 

75

 

 

 

 

 

Item 11.

 

Executive Compensation

 

75

 

 

 

 

 

Item 12.

 

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

 

75

 

 

 

 

 

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

 

76

 

 

 

 

 

Item 14.

 

Principal Accounting Fees and Services

 

76

 

PART IV

 

Item 15.

 

Exhibits and Financial Statement Schedules

 

76

 

 

 

 

 

A.

 

Financial Statements

 

76

 

 

 

 

 

B.

 

Financial Statement Schedules

 

76

 

 

 

 

 

C.

 

Exhibits Required by Item 601 of Regulation S-K

 

76

 

 

 

 

 

Signatures

 

82

 

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MATSON, INC.

 

FORM 10-K

 

Annual Report for the Fiscal Year

Ended December 31, 2013

 

PART I

 

ITEM 1.  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.

 

Ocean Transportation: Matson’s ocean transportation business is conducted through Matson Navigation Company, Inc. (“MatNav”), a wholly-owned subsidiary of Matson, Inc.  Founded in 1882, MatNav is an asset-based business that provides a vital lifeline of ocean freight transportation services to the island economies of Hawaii, Guam and Micronesia, and also operates a premium, expedited service from China to Long Beach, California.  In January 2013, Matson began providing ocean services to various islands in the South Pacific including New Zealand, Fiji, Samoa, American Samoa, Tonga and the Cook Islands, and later expanded service to include Australia to the Solomon Islands.  Matson’s fleet consists of 18 owned and three chartered vessels including containerships, combination container/roll-on/roll-off ships, and custom-designed barges.

 

Matson also provides container stevedoring, container equipment maintenance and other terminal services for MatNav and other ocean carriers through Matson Terminals, Inc. (“Matson Terminals”), a wholly-owned subsidiary of MatNav, on the islands of Oahu, Hawaii, Maui and Kauai.

 

Matson has a 35 percent ownership interest in SSA Terminals, LLC (“SSAT”) through a joint venture between Matson Ventures, Inc., a wholly-owned subsidiary of MatNav, and SSA Ventures, Inc. (“SSA”), a subsidiary of Carrix, Inc.  SSAT provides terminal and stevedoring services to various carriers at six terminal facilities on the United States of America (“U.S.”) Pacific Coast, including to MatNav at several of those facilities.  Matson records its share of income in the joint venture in operating expenses 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” or “Logistics”), a wholly-owned subsidiary of MatNav.  Established in 1987, Matson Logistics is an asset-light business that provides multimodal transportation, including domestic and international rail intermodal service (“Intermodal”); long-haul and regional highway brokerage, specialized hauling, flat-bed and project work, less-than-truckload services, expedited freight services (collectively “Highway”); and warehousing and distribution services.  The warehousing and distribution services are provided in the U.S. by Matson Logistics Warehousing, Inc. (“Matson Logistics Warehousing”), a wholly-owned subsidiary of Matson Logistics.

 

Separation Transaction:  On December 1, 2011, Alexander & Baldwin, Inc., the former parent company of MatNav (the “Former Parent Company”), announced that its Board of Directors unanimously approved a plan to pursue the separation (the “Separation”) of the Former Parent Company to create two independent, publicly traded companies:

 

·                        Matson, Inc.; and

 

·                        Alexander & Baldwin, Inc. (“A&B”), a Hawaii-based land company with interests in real estate development, commercial real estate and agriculture.

 

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As part of the Separation, a holding company, Alexander & Baldwin, Holdings, Inc. (“Holdings”) was formed to facilitate the organization and segregation of the assets of the two businesses.  The Separation was completed on June 29, 2012.  In the Separation, the shareholders of Holdings received one share of common stock of A&B for every share of Holdings held of record as of June 18, 2012.  Immediately following the Separation, Holdings changed its name to Matson, Inc.  For accounting purposes, Matson is the successor company to the Former Parent Company.

 

A.                                    BUSINESS DESCRIPTION

 

(1)                                 Ocean Transportation

 

Matson’s Hawaii service provides ocean freight services (lift-on/lift-off, roll-on/roll-off and conventional services) between the ports of Long Beach, Oakland, Seattle, and the major ports in Hawaii on the islands of Oahu, Kauai, Maui and Hawaii.  Matson is the principal carrier of ocean cargo between the U.S. Pacific Coast and Hawaii.  Westbound cargo carried by Matson to Hawaii includes dry containers of mixed commodities, refrigerated commodities, packaged foods, building materials, automobiles and household goods.  Matson’s eastbound cargo from Hawaii includes automobiles, household goods, dry containers of mixed commodities, food and beverages, and livestock.  The majority of Matson’s Hawaii service revenue is derived from the westbound carriage of containerized freight and automobiles.

 

Matson’s China service is part of an integrated Hawaii/Guam/China service.  This service employs five of Matson’s containerships in a weekly service that carries cargo from Long Beach to Honolulu and then to Guam.  The vessels continue to the ports of Xiamen, Ningbo and Shanghai in China, where they are loaded with cargo to be discharged in Long Beach.  These vessels also carry cargo destined to and originating from the Guam and Micronesia services.

 

Matson’s Guam service provides weekly container and conventional freight services between the U.S. Pacific Coast and Guam.  Additionally, Matson provides freight services from Guam to the Commonwealth of the Northern Mariana Islands.

 

Matson’s Micronesia service provides container and conventional freight services between the U.S. Pacific Coast and the islands of Kwajalein, Ebeye and Majuro in the Republic of the Marshall Islands, the islands of Yap, Pohnpei, Chuuk and Kosrae in the Federated States of Micronesia, and the Republic of Palau.  Cargo destined for these locations is transshipped through Guam.

 

In January 2013, Matson purchased the primary assets of the former Reef Shipping Limited, a South Pacific ocean freight carrier based in Auckland, New Zealand.  Matson named this new business “Matson South Pacific,” which currently transports freight between New Zealand, Australia and other South Pacific Islands such as Fiji, Samoa, American Samoa, Tonga, the Cook Islands, and the Solomon Islands.  Conducting business in foreign shipping markets subjects the Company to certain risks.

 

See “Risk Factors — The Company is subject to risks associated with conducting business in a foreign shipping market” in Item 1A.

 

Matson’s Vessel Information:

 

Matson’s fleet includes 18 owned and three chartered vessels.  The Matson-owned fleet represents an initial investment of approximately $1.3 billion and consists of: eleven containerships; three combination container/roll-on/roll-off ships; one roll-on/roll-off barge; and three container barges equipped with cranes.  The majority of vessels in the Matson-owned fleet have been acquired with the assistance of withdrawals from a Capital Construction Fund established under Section 607 of the Merchant Marine Act of 1936.

 

During the fourth quarter of 2013, MatNav and Aker Philadelphia Shipyard, Inc. (“APSI”) entered into definitive agreements pursuant to which APSI will construct two new 3,600 twenty-foot equivalent unit (“TEU”) Aloha-class container ships with dual-fuel capable engines, which are expected to be delivered during the third and fourth quarters of 2018 (the “Shipbuilding Agreements”), at a cost of approximately $418.0 million.  In addition, MatNav has an option to contract with APSI for the construction of up to three additional Aloha-class vessels for which a price and delivery date will be negotiated at the time the option is exercised.  APSI’s obligations under the Shipbuilding Agreements are guaranteed by Aker Philadelphia Shipyard ASA.

 

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As a complement to its fleet, as of December 31, 2013, Matson owns approximately 33,500 containers and 10,700 chassis, which represents an initial investment of approximately $290 million, and miscellaneous other equipment.  Matson also leases approximately 6,400 containers and 5,900 chassis.  Capital expenditures incurred by ocean transportation in 2013 for vessels, equipment and systems totaled approximately $33.8 million.

 

Matson’s U.S. flagged vessels must meet specified seaworthiness standards established by U.S. Coast Guard rules and Classification society requirements.  These standards require that our ships undergo two dry-docking inspections within a five-year period.  However, all of Matson’s U.S. flagged vessels are enrolled in the U.S. Coast Guard’s Underwater Survey in Lieu of Dry-docking (“UWILD”) program.  The UWILD program allows eligible ships to have their intermediate dry-docking requirement to be met with a far less costly underwater inspection.

 

Matson operates four non-U.S. flag vessels (one owned; one under a bareboat charter arrangement; and the remaining two on time charter) in the Pacific Islands.  Matson is responsible for ensuring that the owned and bareboat chartered ships meet international standards for seaworthiness, which among other requirements generally mandate that Matson perform two dry-docking inspections every five years.  The dry-dockings of Matson’s other chartered vessels are the responsibility of the ships’ owners.

 

Vessels owned and chartered by Matson as of December 31, 2013 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Usable Cargo Capacity

 

 

 

 

 

 

 

 

 

 

 

Maximum

 

Maximum

 

Containers

 

Vehicles

 

Molasses (5)

 

 

 

Owned/

 

Official

 

Year

 

 

 

Speed

 

Deadweight

 

Reefer

 

 

 

 

 

 

 

 

 

Vessel Name

 

Chartered

 

Number

 

Built

 

Length

 

(Knots)

 

(Long Tons)

 

Slots

 

TEUs(1)

 

Autos

 

Trailers

 

Short Tons

 

Diesel-Powered Ships

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MAUNALEI

 

Owned

 

1181627

 

2006

 

681’ 1”

 

22.1

 

33,771

 

328

 

1,992

 

 

 

 

MANULANI

 

Owned

 

1168529

 

2005

 

712’ 0”

 

23

 

29,517

 

284

 

2,378

 

 

 

 

MAUNAWILI

 

Owned

 

1153166

 

2004

 

711’ 9”

 

23

 

29,517

 

284

 

2,378

 

 

 

 

MANUKAI

 

Owned

 

1141163

 

2003

 

711’ 9”

 

23

 

29,517

 

326

 

2,378

 

 

 

 

OLOMANA (4)

 

Owned

 

1559

 

1999

 

381’0”

 

14

 

5,450

 

68

 

521

 

 

 

 

R.J. PFEIFFER

 

Owned

 

979814

 

1992

 

713’ 6”

 

23

 

27,100

 

300

 

2,245

 

 

 

 

MOKIHANA

 

Owned

 

655397

 

1983

 

860’ 2”

 

23

 

29,484

 

354

 

1,994

 

1,323

 

38

 

 

MANOA

 

Owned

 

651627

 

1982

 

860’ 2”

 

23

 

30,187

 

408

 

2,824

 

 

 

3,000

 

MAHIMAHI

 

Owned

 

653424

 

1982

 

860’ 2”

 

23

 

30,167

 

408

 

2,824

 

 

 

 

LILOA (4)

 

Chartered

 

4681

 

2002

 

360’ 0”

 

15

 

6,029

 

30

 

513

 

 

 

 

IMUA (4)

 

Chartered

 

9193812

 

1998

 

328’ 0”

 

14

 

6,288

 

50

 

360

 

 

 

 

MANA (4)

 

Chartered

 

4958

 

1997

 

330’ 0”

 

13

 

4,580

 

60

 

384

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Steam-Powered Ships

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

KAUAI

 

Owned

 

621042

 

1980

 

720’ 5-1/2”

 

22.5

 

26,308

 

276

 

1,644

 

44

 

 

2,600

 

MAUI

 

Owned

 

591709

 

1978

 

720’ 5-1/2”

 

22.5

 

26,623

 

252

 

1,644

 

 

 

2,600

 

MATSONIA

 

Owned

 

553090

 

1973

 

760’ 0”

 

21.5

 

22,501

 

258

 

1,727

 

450

 

85

 

4,300

 

LURLINE

 

Owned

 

549900

 

1973

 

826’ 6”

 

21.5

 

22,213

 

246

 

1,646

 

761

 

55

 

2,100

 

LIHUE

 

Owned

 

530137

 

1971

 

787’ 8”

 

21

 

38,656

 

188

 

2,018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Barges

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

WAIALEALE (2)

 

Owned

 

978516

 

1991

 

345’ 0”

 

 

5,621

 

36

 

 

230

 

45

 

 

MAUNA KEA (3) 

 

Owned

 

933804

 

1988

 

372’ 0”

 

 

6,837

 

70

 

379

 

 

 

 

MAUNA LOA (3)

 

Owned

 

676973

 

1984

 

350’ 0”

 

 

4,658

 

78

 

335

 

 

 

2,100

 

HALEAKALA (3)

 

Owned

 

676972

 

1984

 

350’ 0”

 

 

4,658

 

78

 

335

 

 

 

2,100

 

 


(1)          “Twenty-foot Equivalent Units” (including trailers).  TEU is a standard measure of cargo volume correlated to the volume of a standard 20-foot dry cargo container.

(2)          Roll-on/roll-off barge.

(3)          Container barges equipped with cranes.

(4)          Except for these four foreign-flagged vessels, all vessels are U.S. flagged and are Jones Act qualified.

(5)          Molasses operations were suspended during September 2013.

 

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(2)                             Capital Construction Fund

 

Matson is party to an agreement with the U.S. government that established a Capital Construction Fund (“CCF”) under provisions of the Merchant Marine Act of 1936, as amended.  The agreement has program objectives for the acquisition, construction, or reconstruction of vessels and for repayment of existing vessel indebtedness.  Deposits to the CCF are limited by certain applicable earnings.  Such deposits are tax deductions in the year made; however, they are taxable, with interest payable from the year of deposit, if withdrawn for general corporate purposes or other non-qualified purposes, or upon termination of the agreement.  Qualified withdrawals for investment in vessels and certain related equipment do not give rise to a current tax liability, but reduce the depreciable basis of the vessels or other assets for income tax purposes.

 

Amounts deposited into the CCF are a preference item for calculating federal alternative minimum taxable income.  Deposits not committed for qualified purposes within 25 years from the date of deposit will be treated as non-qualified withdrawals over the subsequent five years.

 

(3)                                 Terminals

 

Matson Terminals provides container stevedoring, container equipment maintenance and other terminal services for Matson and another ocean carrier at a 105-acre marine terminal in Honolulu.

 

The terminal facility, which can accommodate three vessels at one time, is leased through September 2016 from the State of Hawaii.  Matson Terminals owns and operates seven cranes at the terminal.  Matson Terminals also provides container stevedoring and other terminal services to Matson and other vessel operators on the islands of Hawaii, Maui and Kauai.  SSAT provides terminal and stevedoring services to various carriers at six terminal facilities on the U.S. Pacific Coast and to MatNav at several of those facilities.  Matson records its share of income in the joint venture in operating expenses within the ocean transportation segment due to the nature of SSAT’s operations.

 

(4)                                 Logistics and Other Services

 

Matson Logistics is a transportation intermediary that provides Intermodal rail services, Highway, warehousing and distribution, and other third-party logistics services for North American customers and international ocean carrier customers, including MatNav.  Through volume purchases of rail, motor carrier and ocean transportation services, augmented by such services as shipment tracking and tracing, and single-vendor invoicing, Matson Logistics is able to reduce transportation costs for its customers.  Matson Logistics operates six customer service centers, including one in China (for supply chain services), and has sales offices throughout the United States.

 

Matson Logistics also provides freight forwarding, consolidation, customs brokerage, purchase order management and Non Vessel Operating Common Carrier services.

 

Matson Logistics Warehousing principally provides warehousing and distribution services in Northern and Southern California, and Savannah, Georgia.  Through Matson Logistics Warehousing, Matson Logistics provides its customers with a full suite of rail, highway, warehousing and distribution services.

 

(5)                                 Competition

 

Maritime Laws: All interstate and intrastate marine commerce within the U.S. falls under the Merchant Marine Act of 1920 (commonly referred to as the Jones Act).

 

The Jones Act is a long-standing cornerstone of U.S. maritime policy.  Under the Jones Act, all vessels transporting cargo between covered U.S. ports must, subject to limited exceptions, be built in the U.S., registered under the U.S. flag, manned by predominantly U.S. crews, and owned and operated by U.S.-organized companies that are controlled and 75% owned by U.S. citizens.  U.S.-flagged vessels are generally required to be maintained at higher standards than foreign-flagged vessels and are subject to rigorous supervision and inspections by, or on behalf of, the U.S. Coast Guard, which requires appropriate certifications and background checks of the crew members.  Under Section 27 of the Jones Act, the carriage of cargo between the U.S. Pacific Coast and Hawaii on foreign-built or foreign-documented vessels is prohibited.

 

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During 2013, approximately 65% of Matson’s revenues generated by ocean transportation services came from trades that were subject to the Jones Act.  Matson’s trade route between the U.S. Pacific Coast and Hawaii is included within the non-contiguous Jones Act market.  As an island economy, Hawaii is highly dependent on ocean transportation.  The Jones Act ensures frequent, reliable, roundtrip service to keep store shelves stocked, reduces inventory costs and help move local products to market.  Matson’s vessels operating on this trade route are fully qualified Jones Act vessels.

 

Matson is a member of the American Maritime Partnership, which supports the retention of the Jones Act and similar cabotage laws.  Matson believes the Jones Act has broad support from President Obama and both major political parties in both houses of Congress.  Matson also believes that the ongoing war on terrorism has further solidified political support for U.S. flagged vessels because a vital and dedicated U.S. merchant marine is a cornerstone for a strong homeland defense, as well as a critical source of trained U.S. mariners for wartime support.  The American Maritime Partnership seeks to inform elected officials and the public about the economic, national security, commercial, safety and environmental benefits of the Jones Act and similar cabotage laws.  Repeal of the Jones Act would allow foreign-flag vessel operators, which do not have to abide by U.S. laws and regulations, to sail between U.S. ports in direct competition with Matson and other U.S. domestic operators, which must comply with such laws and regulations.

 

Other U.S. maritime laws require vessels operating between Guam, a U.S. territory, and U.S. ports to be U.S.-flagged and predominantly U.S.-crewed, but not U.S.-built.

 

Cabotage laws are not unique to the United States, and similar laws exist around the world in over 50 countries including regions in which Matson provides ocean transportation services.  Any changes in such laws may have an impact on the services provided by Matson in those regions.

 

Hawaii Service: Matson’s Hawaii service has one major containership competitor, Horizon Lines, Inc. (“Horizon”), which serves Long Beach and Oakland, California, Tacoma, Washington, and Honolulu, Hawaii.  The Hawaii service also has one additional liner competitor, Pasha Hawaii Transport Lines, LLC (“Pasha”) that operates a roll-on/roll-off ship, specializing in the carriage of automobiles, large pieces of rolling stock, such as trucks and buses, as well as a limited amount of household goods and containers.  Pasha is also expected to launch a new combination container/ roll-on/roll off vessel in mid-2014, which will increase competition to Matson’s Hawaii service.

 

Foreign-flag vessels carrying cargo to Hawaii from non-U.S. locations also provide competition for Matson’s Hawaii service.  Asia, Australia, New Zealand, and the South Pacific islands have direct foreign-flag services to Hawaii.  Mexico, South America and Europe have indirect foreign-flag services to Hawaii.  Other competitors in the Hawaii service include two common carrier barge services, unregulated proprietary and contract carriers of bulk cargoes.  Air freight competition for time-sensitive and perishable cargoes exists; however, inroads by such competition in terms of cargo volume are limited by the amount of cargo space available in passenger aircrafts and by relatively high air freight rates.  Over the years, additional barge competitors periodically have entered and left the U.S.-Hawaii trades, mostly from the Pacific Northwest.

 

Matson vessels are operated on schedules that provide shippers and consignees regular day-of-the-week sailings from the U.S. Pacific Coast and day-of-the-week arrivals in Hawaii.  Matson generally offers an average of three westbound sailings per week, though this amount may be adjusted according to seasonal demand and market conditions.  Matson provides over 150 westbound sailings per year, which is greater than its domestic ocean competitors’ sailings combined.  One westbound sailing each week continues on to Guam and China, so the number of eastbound sailings from Hawaii to the U.S. Mainland averages two per week.  This service is attractive to customers because more frequent arrivals permit customers to reduce inventory costs.  Matson also competes by offering a more comprehensive service to customers, supported by the scope of its container equipment, its efficiency and experience in handling cargoes of all types, and competitive pricing.

 

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China Service: Major competitors to Matson’s China service include large international carriers such as Maersk, COSCO, Evergreen, Hanjin, APL, China Shipping, Hyundai, MSC, OOCL, “K” Line and NYK Line.  Matson competes by offering fast and reliable freight availability from the ports of Xiamen, Ningbo and Shanghai in China to Long Beach, California using its newest and most fuel efficient ships, providing fixed day arrivals in Long Beach and next-day cargo availability.  Matson’s service is further differentiated by offering a dedicated Long Beach terminal providing fast truck turn times, an off-dock container yard, one-stop intermodal connections, and providing state-of-the-art technology and world-class customer service.  Matson has offices in Hong Kong, Xiamen, Ningbo and Shanghai, and has contracted with terminal operators in Xiamen, Ningbo and Shanghai.

 

Guam Service: Matson’s Guam service had one major competitor until November 2011 when Horizon ended its service to that area.  Several foreign carriers also serve Guam with less frequent service, along with Waterman Steamship Corporation, a U.S.-flagged carrier, which periodically calls at Guam.

 

Micronesia and the South Pacific Services: Matson’s Micronesia and South Pacific services have competition from a variety of local and international carries that provide freight services to the area.

 

Logistics: Matson Logistics competes with hundreds of local, regional, national and international companies that provide transportation and third-party logistics services.  The industry is highly fragmented and, therefore, competition varies by geography and areas of service.  Matson Logistics competes most directly with C.H. Robinson Worldwide, the Hub Group, and other large and smaller freight brokers and intermodal marketing companies, and asset-invested market leaders like JB Hunt.  Competition is differentiated by the depth, scale and scope of customer relationships; vendor relationships and rates; network capacity; and real-time visibility into the movement of customers’ goods and other technology solutions.  Additionally, while Matson Logistics primarily provides surface transportation brokerage, it also competes to a lesser degree with other forms of transportation for the movement of cargo, including air services.

 

(6)                             Rate Regulation

 

Matson is subject to the jurisdiction of the Surface Transportation Board with respect to its domestic rates.  A rate in the noncontiguous domestic trade is presumed reasonable and will not be subject to investigation if the aggregate of increases and decreases is not more than 7.5 percent above, or more than 10 percent below, the rate in effect one year before the effective date of the proposed rate, subject to increase or decrease by the percentage change in the U.S. Producer Price Index.

 

Matson raised rates in its Hawaii service, effective January 1, 2013 and again on January 5, 2014, by $175 per westbound container and $85 per eastbound container, and its terminal handling charges by $50 per westbound container and $25 per eastbound container.  Matson raised its rates in its Guam service, effective January 26, 2014, by $275 for both eastbound and westbound containers, and increased its U.S. Pacific Coast terminal handling charge by $75 for both east and westbound containers.  Matson did not implement a general rate increase in its Guam service in 2013, but did raise the Guam terminal handling charge effective January 20, 2013, by $50 for both westbound and eastbound containers.

 

With declining fuel-related costs, Matson lowered its fuel-related surcharge from 43.5 percent to 40.0 percent effective March 17, 2013, to 36.5 percent effective April 28, 2013 and to 34.5 percent on July 7, 2013, in its Hawaii service. Also effective March 17, 2013, Matson lowered the fuel-related surcharge in its Guam and Micronesia services from 40.0 percent to 36.5 percent.

 

Matson’s ocean transportation services that are engaged in U.S. foreign commerce are subject to the jurisdiction of the Federal Maritime Commission (“FMC”).  The FMC is an independent regulatory agency that is responsible for the regulation of ocean-borne international transportation of the U.S.

 

(7)                                 Seasonality

 

Matson’s ocean transportation services typically experience seasonality in volume, generally following a pattern of increasing volumes starting in the second quarter of each year, culminating in a peak season throughout the third quarter, with subsequent weakening of demand in the fourth and first quarters.  As a result, earnings tend to follow a similar pattern.  In addition, the China trade volume is driven primarily by U.S. consumer demand for goods during key retail selling seasons while freight rates are impacted mainly by macro supply and demand variables.  Matson’s Logistics services are not significantly impacted by seasonality factors.

 

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B.                                    Employees and Labor Relations

 

As of December 31, 2013, Matson and its subsidiaries had 1,036 employees, of which 272 employees were covered by collective bargaining agreements with unions.  Of these covered employees, 249 are subject to collective bargaining agreements that expire in 2014.  At December 31, 2013, the active Matson fleet employed seagoing personnel in 204 billets.  Each billet corresponds to a position on a ship that typically is filled by two or more employees because seagoing personnel rotate between active sea duty and time ashore.

 

Matson’s seagoing employees are represented by six unions, three representing unlicensed crew members and three representing licensed crew members.  Matson negotiates directly with these unions.  Matson’s unlicensed union contracts with the Seafarer’s International Union, the Sailors Union of the Pacific and the Marine Firemen’s Union were renewed in mid-2013 and extend through June 30, 2017.  Matson’s contracts with the American Radio Association were renewed in mid-2013 and extend through August 15, 2016.  Matson’s contracts with the Masters, Mates & Pilots will expire on June 15, 2023 for thirteen vessels and on August 15, 2023 for one managed vessel, and Matson’s contract with the Marine Engineers Beneficial Association will expire on August 15, 2018.

 

The absence of strikes and the availability of labor through hiring halls are important to the maintenance of profitable operations by Matson.  Over the past 40 years, Matson’s operations have been only been significantly disrupted by one labor dispute in 2002 when International Longshore and Warehouse Union (“ILWU”) workers were locked out for ten days on the U.S. Pacific Coast.

 

Matson, SSA and SSAT are members of the Pacific Maritime Association (“PMA”), which on behalf of its members, negotiates collective bargaining agreements with the ILWU on the U.S. Pacific Coast.  A six-year PMA/ILWU Master Contract, which covers all U.S. Pacific Coast longshore labor, was negotiated in 2008 and will expire on July 1, 2014.  Matson Terminals is a member of the Hawaii Stevedore Industry Committee, which negotiates with the ILWU in Hawaii on behalf of its members.  In 2008, Matson Terminals signed six-year agreements with each of the ILWU units, which will expire on June 30, 2014.  Matson’s collective bargaining agreements with the ILWU clerical workers in Honolulu and Oakland are effective through June 30, 2014.  Matson expects that new agreements will be reached without significant disruption to its operations.  Matson’s collective bargaining agreement with ILWU clerical workers in Long Beach is effective until June 30, 2016.

 

During 2013, Matson contributed to multiemployer pension plans for vessel crews.  If Matson were to withdraw from or significantly reduce its obligation to contribute to any one of the plans, Matson would review and evaluate data, actuarial assumptions, calculations and other factors used in determining its withdrawal liability, if any.  If any third parties materially disagree with Matson’s determination, Matson would pursue the various means available to it under federal law for the adjustment or removal of its withdrawal liability.  Matson also participates in a multiemployer pension plan for its office clerical workers in Long Beach.  Matson Terminals participates in two multiemployer pension plans for its Hawaii ILWU non-clerical employees.  See Note 10 to the consolidated financial statements in Item 8 of Part II below for a discussion of withdrawal liabilities under the Hawaii longshore and seagoing plans.

 

C.                                    Energy

 

Matson purchases residual fuel oil, lubricants, gasoline and diesel fuel for its operations, and also pays fuel surcharges to drayage providers and rail carriers.  Residual fuel oil is by far Matson’s largest energy-related expense.  In 2013, Matson used approximately 1.7 million barrels of residual fuel oil for its vessels, compared with 1.9 million barrels in 2012 at an average price per-barrel of $103 and $109 for the years ended December 31, 2013 and 2012, respectively.

 

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D.                                    Available Information

 

Matson makes available, free of charge on or through its Internet website, Matson’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the U.S. Securities and Exchange Commission (“SEC”).  The address of Matson’s Internet website is www.matson.com.

 

ITEM 1A.  RISK FACTORS

 

The Company’s business faces the risks set forth below, which may adversely affect our business, financial condition and operating results.  All forward-looking statements made by the Company or on the Company’s behalf are qualified by the risks described below.

 

Risks Relating To Operations

 

Changes in U.S., global, or regional economic conditions that result in a decrease in consumer confidence or market demand for the Company’s services and products in Hawaii, the U.S. Mainland, Guam, Asia or South Pacific may adversely affect the Company’s financial position, results of operations, liquidity, or cash flows.

 

A continuation or further weakening of the U.S., Guam, Asian, South Pacific or global economies may adversely impact the level of freight volumes and freight rates.  Within the U.S., a weakening of economic drivers in Hawaii, which include tourism, military spending, construction starts, personal income growth, and employment, or the further weakening of consumer confidence, market demand or the economy in the U.S. Mainland, may further reduce the demand for goods to and from Hawaii and Asia, travel to Hawaii and domestic transportation of goods, adversely affecting inland and ocean transportation volumes or rates.  We are unable to determine the full impact of sequestration on our carriage of military cargo, but we believe it continues to negatively impact us, and we could continue to be impacted by future cuts to federal programs, including Defense Department programs as a result of federal sequestration.  In addition, overcapacity in the global or transpacific ocean transportation markets or a change in the cost of goods or currency exchange rates may adversely affect freight volumes and rates in the Company’s China service.

 

The Company may face new or increased competition.

 

The Company may face new competition by established or start-up shipping operators that enter the Company’s markets.  The entry of a new competitor or the addition of ships or capacity by existing competition on any of the Company’s routes could result in a significant increase in available shipping capacity that could have an adverse effect on volumes and rates.

 

One current competitor, Pasha, announced that it intends to place a second ship into its Hawaii service in the second half of 2014.  We expect there to be a period of competitive disruption impacting rates and volumes following this market entry that would impact all carriers in the Hawaii trade, including Matson.

 

The loss of or damage to key vendor, agent and customer relationships may adversely affect the Company’s business.

 

The Company’s businesses are dependent on their relationships with key vendors, agents and customers, and derive a significant portion of their revenues from the Company’s largest customers.  The Company’s business relies on its relationships with the military, freight forwarders, large retailers and consumer goods and automobile manufacturers, as well as other larger customers.  Relationships with railroads and shipping companies and agents are important in the Company’s intermodal business.  For 2013, the Company’s ocean transportation business’ ten largest customers accounted for approximately 24 percent of the business’ revenue.  For 2013, the Company’s logistics business’ ten largest customers accounted for approximately 23 percent of the business’ revenue.  The loss of or damage to any of these key relationships may adversely affect the Company’s business and revenue.

 

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

 

Fuel is a significant operating expense for the Company’s ocean transportation business.  The price and supply of fuel are unpredictable and fluctuate based on events beyond the Company’s control.  Increases in the price of fuel may adversely affect the Company’s results of operations based on market and competitive conditions.  Increases in fuel costs also can lead to other expense increases, for example, increased costs of energy and purchased transportation services.  In the Company’s ocean transportation and logistics services segments, the Company is able to utilize fuel surcharges to partially recover increases in fuel expense, although increases in the fuel surcharge may adversely affect the Company’s competitive position and may not correspond exactly with the timing of increases in fuel expense.  Changes in the Company’s ability to collect fuel surcharges also may adversely affect its results of operations.

 

Work stoppages or other labor disruptions by the unionized employees of the Company or other companies in related industries may adversely affect the Company’s operations.

 

As of December 31, 2013, the Company had 1,036 regular full-time employees, of which 272 employees were covered by collective bargaining agreements with unions.  Of these covered employees, 249 are subject to collective bargaining agreements that expire in 2014, and include ILWU contracts on the U.S. Pacific Coast and in Hawaii.  In addition, the Company relies on the services of third-parties who employ persons covered by collective bargaining agreements, including SSAT.  The Company could be adversely affected by actions taken by employees of the Company or other companies in related industries against efforts by management to control labor costs, restrain wage or benefits increases or modify work practices.  Strikes and disruptions may occur as a result of the failure of the Company or other companies in its industry to negotiate collective bargaining agreements with such unions successfully.

 

The Company is susceptible to weather and natural disasters.

 

The Company’s operations are vulnerable to disruption as a result of weather and natural disasters such as bad weather at sea, hurricanes, typhoons, tsunamis, floods and earthquakes.  Such events will interfere with the Company’s ability to provide on-time scheduled service, resulting in increased expenses and potential loss of business associated with such events.  In addition, severe weather and natural disasters can result in interference with the Company’s terminal operations, and may cause serious damage to its vessels, loss or damage to containers, cargo and other equipment, and loss of life or physical injury to its employees, all of which could have an adverse effect on the Company’s business.

 

The Company maintains casualty and liability insurance policies.  These policies are generally subject to large retentions and deductibles.  Some types of losses, such as losses resulting from a port blockage, generally are not insured.  In some cases the Company retains the entire risk of loss because it is not economically prudent to purchase insurance coverage or because of the perceived remoteness of the risk.  Other risks are uninsured because insurance coverage may not be commercially available.  Finally, the Company retains all risk of loss that exceeds the limits of its insurance.

 

The Company’s significant operating agreements and leases could be replaced on less favorable terms or may not be replaced.

 

The significant operating agreements and leases of the Company in its various businesses expire at various points in the future and may not be replaced or could be replaced on less favorable terms, thereby adversely affecting the Company’s future financial position, results of operations and cash flows.

 

Interruption or failure of the Company’s information technology and communications systems could impair the Company’s ability to operate and adversely affect its business.

 

The Company is highly dependent on information technology systems.  These dependencies include accounting, billing, disbursement, cargo booking and tracking, vessel scheduling and stowage, equipment tracking, customer service, banking, payroll and employee communication systems.  All information technology and communication

 

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systems are subject to reliability issues, integration and compatibility concerns, and security-threatening intrusions.  The Company may experience failures caused by the occurrence of a natural disaster, computer hacking or viruses or other unanticipated problems at the Company’s facilities, aboard its vessels or at third-party locations.  Any failure of the Company’s or third-party systems could result in interruptions in its service or production, reductions in its revenue and profits, damage to its reputation or liability for the release of confidential information.

 

Loss of the Company’s key personnel could adversely affect its business.

 

The Company’s future success will depend, in significant part, upon the continued services of its key personnel, including its senior management and skilled employees.  The loss of the services of key personnel could adversely affect the Company’s future operating results because of such employees’ experience and knowledge of the Company’s business and customer relationships.  If key employees depart, the Company may have to incur significant costs to replace them, and the Company’s ability to execute its business model could be impaired if it cannot replace them in a timely manner.  The Company does not expect to maintain key person insurance on any of its key personnel.

 

The Company is involved in a joint venture and is subject to risks associated with joint venture relationships.

 

The Company is involved in the SSAT joint venture, and may initiate future joint venture projects.  A joint venture involves certain risks such as:

 

·                  The Company may not have voting control over the joint venture;

·                  The Company may not be able to maintain good relationships with its joint venture partner;

·                  The joint venture partner at any time may have economic or business interests that are inconsistent with the Company’s;

·                  The joint venture partner may fail to fund its share of capital for operations or to fulfill its other commitments, including providing accurate and timely accounting and financial information to the Company;

·                  The joint venture may experience operating difficulties and financial losses, which may lead to asset write-downs or impairment charges that could negatively impact the operating results of the joint venture and the Company;

·                  The joint venture or venture partner could lose key personnel; and

·                  The joint venture partner could become bankrupt requiring the Company to assume all risks and capital requirements related to the joint venture project, and the related bankruptcy proceedings could have an adverse impact on the operation of the partnership or joint venture.

 

In addition, the Company relies on the SSAT joint venture for its stevedoring services on the West Coast of the U.S. market.

 

The Company is subject to risks associated with conducting business in a foreign shipping market.

 

Matson’s China, Micronesia and South Pacific services are subject to risks associated with conducting business in a foreign shipping market, which include:

 

·                  Challenges associated with operating in foreign countries and doing business and developing relationships with foreign companies;

·                  Challenges in working with and maintaining good relationships with joint venture partners in our foreign operations;

·                  Difficulties in staffing and managing foreign operations;

·                  U.S. and foreign legal and regulatory restrictions, including compliance with the Foreign Corrupt Practices Act and foreign laws that prohibit corrupt payments to government officials;

·                  Global vessel overcapacity that may lead to decreases in volumes and shipping rates;

·                  Competition with established and new carriers;

 

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·                  Currency exchange rate fluctuations;

·                  Political and economic instability;

·                  Protectionist measures that may affect the Company’s operation of its wholly-owned foreign enterprise; and

·                  Challenges caused by cultural differences.

 

Any of these risks has the potential to adversely affect the Company’s operating results.

 

The Company’s logistics segment is dependent upon third parties for equipment, capacity and services essential to operate the Company’s logistics business, and if the Company fails to secure sufficient third party services, its business could be adversely affected.

 

The Company’s logistics segment is dependent upon rail, truck and ocean transportation services provided by independent third parties.  If the Company cannot secure sufficient transportation equipment, capacity or services from these third parties at reasonable rates to meet its customers’ needs and schedules, customers may seek to have their transportation and logistics needs met by other third parties on a temporary or permanent basis.  As a result, the Company’s business, consolidated results of operations and financial condition could be adversely affected.

 

The Company is subject to risks related to a marine accident or spill event.

 

The Company’s vessel and terminal operations could be faced with a maritime accident, oil or other spill, or other environmental mishap.  Such event may lead to personal injury, loss of life, damage of property, pollution and suspension of operations.  As a result, such event could have an adverse effect on the Company’s business.

 

Acquisitions may have an adverse effect on the Company’s business.

 

The Company’s growth strategy includes expansion through acquisitions.  Acquisitions may result in difficulties in assimilating acquired assets or companies, and may result in the diversion of the Company’s capital and its management attention from other business issues and opportunities.  The Company may not be able to integrate companies that it acquires successfully, including their personnel, financial systems, distribution, operations and general operating procedures.  The Company may also encounter challenges in achieving appropriate internal control over financial reporting in connection with the integration of an acquired company.  The Company may pay a premium for an acquisition, resulting in goodwill that may later be determined to be impaired, adversely affecting the Company’s financial condition and results of operations.

 

The Company’s Shipbuilding Agreements with Aker Philadelphia Shipyard, Inc. are subject to risks.

 

On November 6, 2013, MatNav and APSI entered into definitive agreements pursuant to which APSI will construct two new 3,600-TEU Aloha-class dual-fuel capable containerships, with expected delivery dates during the third and fourth quarters of 2018.  Failure of either party to the shipbuilding agreement to fulfill its obligations under the agreement could have an adverse effect on the Company’s financial position and results of operations.

 

Heightened security measures, war, actual or threatened terrorist attacks, efforts to combat terrorism and other acts of violence may adversely impact the Company’s operations and profitability.

 

War, terrorist attacks and other acts of violence may cause consumer confidence and spending to decrease, or may affect the ability or willingness of tourists to travel to Hawaii, thereby adversely affecting Hawaii’s economy and the Company.  Additionally, future terrorist attacks could increase volatility in the U.S. and worldwide financial markets.  Acts of war or terrorism may be directed at the Company’s shipping operations, or may cause the U.S. government to take control of Matson’s vessels for military operation.  Heightened security measures potentially slow the movement and increase the cost of freight through U.S. or foreign ports, across borders or on U.S. or foreign railroads or highways and could adversely affect the Company’s business and results of operations.

 

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The effects of the Company’s Separation from Alexander & Baldwin, Inc. may expose us or our shareholders to significant liabilities, or prevent us from undertaking certain desirable transactions during the two-year period following the Separation.

 

The Company and A&B entered into a number of agreements in connection with the Separation that set forth certain rights and obligations of the parties’ post-Separation, including a Separation and Distribution Agreement, a Tax Sharing Agreement, an Employee Matters Agreement and a Transition Services Agreement.  The Company possesses certain rights under those agreements, including indemnification rights from certain liabilities allocated to A&B.  The failure of A&B to perform its obligations under the Separation-related agreements could have an adverse effect on the Company’s financial condition, results of operations and cash flows.  In addition, the Company received a private letter ruling from the Internal Revenue Service (“IRS”), as well as an opinion from Skadden, Arps, Slate, Meagher & Flom LLP (which opinion relies on the effectiveness of the IRS ruling), substantially to the effect that, among other things, the Separation and the distribution of shares, taken together, will qualify as a reorganization under Section 368(a)(1)(D) of the Internal Revenue Code.  If there is a determination that the Separation and the distribution is taxable for U.S. federal income tax purposes, we, A&B, and their respective investors could become subject to significant tax and other liabilities and costs.  In addition, in order to preserve the tax free nature of the Separation, the parties have agreed not to issue equity securities representing 50 percent or more of their equity interests, acquire businesses or assets by issuing securities representing 50 percent or more of their equity interests or become parties to mergers or asset transfers that could jeopardize the tax-free status of the Separation, in each case, during the two-year period following the Separation.

 

Risks Relating to Financial Matters

 

A deterioration of the Company’s credit profile or disruptions of the credit markets could restrict its ability to access the debt capital markets or increase the cost of debt.

 

Deterioration in the Company’s credit profile may have an adverse effect on the Company’s ability to access the private or public debt markets and also may increase its borrowing costs.  If the Company’s credit profile deteriorates significantly, its access to the debt capital markets or its ability to renew its committed lines of credit may become restricted, or the Company may not be able to refinance debt at the same levels or on the same terms. Because the Company relies on its ability to draw on its revolving credit facilities to support its operations, when required, any volatility in the credit and financial markets that prevents the Company from accessing funds (for example, a lender that does not fulfill its lending obligation) could have an adverse effect on the Company’s financial condition and cash flows.  Additionally, the Company’s credit agreements generally include an increase in borrowing rates if the Company’s credit profile deteriorates.  Furthermore, the Company incurs interest under its revolving credit facilities based on floating rates.  Floating rate debt creates higher debt service requirements if market interest rates increase, which would adversely affect the Company’s cash flow and results of operations.

 

Failure to comply with certain restrictive financial covenants contained in the Company’s credit facilities could preclude the payment of dividends, impose restrictions on the Company’s business segments, capital resources or other activities or otherwise adversely affect the Company.

 

The Company’s credit facilities contain certain restrictive financial covenants, the most restrictive of which include the maintenance of minimum shareholders’ equity levels, a maximum ratio of debt to earnings before interest, taxes, depreciation and amortization, and the maintenance of no more than a maximum amount of priority debt as a percentage of consolidated tangible assets.  If the Company does not maintain the required covenants, and that breach of covenants is not cured timely or waived by the lenders, resulting in default, the Company’s access to credit may be limited or terminated, dividends may be suspended, and the lenders could declare any outstanding amounts due and payable.  The Company’s continued ability to borrow under its credit facilities is subject to compliance with these financial and other non-financial covenants.

 

The Company’s effective income tax rate may vary.

 

Various internal and external factors may have favorable or unfavorable, material or immaterial effects on the Company’s effective income tax rate and, therefore, the Company’s net income and earnings per share.  These factors include, but are not limited to changes in tax rates; changes in tax laws, regulations, and rulings; changes in

 

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interpretations of existing tax laws, regulations and rulings; changes in the Company’s evaluation of collectability of deferred tax assets and uncertain tax positions; changes in accounting principles; changes in current pre-tax income as well as changes in forecasted pre-tax income; changes in the level of CCF deductions, non-deductible expenses, and expenses eligible for tax credits; changes in the mix of earnings among countries with varying tax rates; acquisitions and changes in the Company’s corporate structure.  These factors may result in periodic revisions to our effective income tax rate, which could affect the Company’s cash flow and results of operations.

 

Changes in the value of pension assets, or a change in pension law or key assumptions, may adversely affect the Company’s financial performance.

 

The amount of the Company’s employee pension and post-retirement benefit costs and obligations are calculated on assumptions used in the relevant actuarial calculations.  Adverse changes in any of these assumptions due to economic or other factors, changes in discount rates, higher health care costs, or lower actual or expected returns on plan assets, may adversely affect the Company’s operating results, cash flows, and financial condition.  In addition, a change in federal law, including changes to the Employee Retirement Income Security Act or Pension Benefit Guaranty Corporation premiums, may adversely affect the Company’s single-employer and multiemployer pension plans and plan funding.  These factors, as well as a decline in the fair value of pension plan assets, may put upward pressure on the cost of providing pension and medical benefits and may increase future pension expense and required funding contributions.  There can be no assurance that it will be successful in limiting future cost and expense increases, and continued upward pressure in costs and expenses could further reduce the profitability of the Company’s businesses.

 

The Company may have exposure under its multiemployer pension and post-retirement plans in which it participates that extends beyond its funding obligation with respect to the Company’s employees.

 

The Company contributes to various multiemployer pension plans.  In the event of a partial or complete withdrawal by the Company from any plan that is underfunded, the Company would be liable for a proportionate share of such plan’s unfunded vested benefits.  Based on the limited information available from plan administrators, which the Company cannot independently validate, the Company believes that its portion of the contingent liability in the case of a full withdrawal or termination may be material to its financial position and results of operations.  If any other contributing employer withdraws from any plan that is underfunded, and such employer (or any member in its controlled group) cannot satisfy its obligations under the plan at the time of withdrawal, then the Company, along with the other remaining contributing employers, would be liable for its proportionate share of such plan’s unfunded vested benefits.  In addition, if a multiemployer plan fails to satisfy the minimum funding requirements, the IRS will impose certain penalties and taxes.

 

Risks Relating to Legal and Legislative Matters

 

The impact of the molasses release in September 2013 may have an adverse effect on the Company’s financial position, results of operations, or cash flows.

 

The Company could be faced with regulatory compliance obligations, third party or governmental agency claims, disputes, legal or other proceedings, fines, penalties, natural resource damages, inquiries or investigations or other regulatory actions, including debarment, in connection with the release of molasses into Honolulu Harbor in September 2013.  The Company cannot currently estimate the potential impact of any such events, but such events could involve or result in significant expenditures or losses by the Company, or result in significant changes to Matson’s tariffs, rates, rules and practices in dealing with its customers, all of which could have an adverse effect on the Company’s financial position, results of operations, or cash flows.  See “Legal Proceedings” below.

 

The Company is subject to, and may in the future be subject to, disputes, legal or other proceedings, or government inquiries or investigations, that could have an adverse effect on the Company.

 

The nature of the Company’s business exposes it to the potential for disputes, legal or other proceedings, or government inquiries or investigations, relating to antitrust matters, labor and employment matters, personal injury and property damage, environmental and other matters, as discussed in the other risk factors disclosed in this section or in other Company filings with the SEC.  For example, Matson is a common carrier, whose tariffs, rates, rules and

 

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practices in dealing with its customers are governed by extensive and complex foreign, federal, state and local regulations, which may be the subject of disputes or administrative or judicial proceedings.  If these disputes develop into proceedings, these proceedings, individually or collectively, could involve or result in significant expenditures or losses by the Company, or result in significant changes to Matson’s tariffs, rates, rules and practices in dealing with its customers, all of which could have an adverse effect on the Company’s future operating results, including profitability, cash flows, and financial condition.  For a description of significant legal proceedings involving the Company, see “Legal Proceedings” below.

 

Repeal, substantial amendment, or waiver of the Jones Act or its application could have an adverse effect on the Company’s business.

 

If the Jones Act was to be repealed, substantially amended, or waived and, as a consequence, competitors were to enter the Hawaii market with lower operating costs by utilizing their ability to acquire and operate foreign-flag and foreign-built vessels, the Company’s business would be adversely affected.  In addition, the Company’s advantage as a U.S.-citizen operator of Jones Act vessels could be eroded by periodic efforts and attempts by foreign interests to circumvent certain aspects of the Jones Act.  If maritime cabotage services were included in the General Agreement on Trade in Services, the North American Free Trade Agreement or other international trade agreements, or if the restrictions contained in the Jones Act were otherwise altered, the shipping of cargo between covered U.S. ports could be opened to foreign-flag or foreign-built vessels.

 

Noncompliance with, or changes to, federal, state or local law or regulations, including passage of climate change legislation or regulation, may adversely affect the Company’s business.

 

The Company is subject to federal, state and local laws and regulations, including cabotage laws, government rate regulations, and environmental regulations including those relating to air quality initiatives at port locations, including, but not limited to, the Oil Pollution Act of 1990, the Comprehensive Environmental Response Compensation & Liability Act of 1980, the Rivers and Harbors Act of 1899, the Clean Water Act, the Invasive Species Act and the Clean Air Act.  Continued compliance with these laws and regulations may result in additional costs and changes in operating procedures that may adversely affect the Company’s business.  Noncompliance with, or changes to, the laws and regulations governing the Company’s business could impose significant additional costs on the Company and adversely affect the Company’s financial condition and results of operations.  In addition, changes in environmental laws impacting the business, including passage of climate change legislation or other regulatory initiatives that restrict emissions of greenhouse gasses, may require costly vessel modifications, the use of higher-priced fuel and changes in operating practices that may not be recoverable through increased payments from customers.  Further changes to these laws and regulations could adversely affect the Company.  Climate change legislation, such as limiting and reducing greenhouse gas emissions through a “cap and trade” system of allowances and credits, if enacted, may have an adverse effect on the Company’s business.

 

Risks Related to Capital Structure

 

The Company’s business could be adversely affected if the Company were determined not to be a U.S. citizen under the Jones Act.

 

Certain provisions of the Company’s articles of incorporation protect the Company’s ability to maintain its status as a U.S. citizen under the Jones Act.  Although the Company believes it currently is a U.S. citizen under the Jones Act, if non-U.S. citizens were able to defeat such articles of incorporation restrictions and own in the aggregate more than 25 percent of the Company’s common stock, the Company would no longer be considered a U.S. citizen under the Jones Act.  Such an event could result in the Company’s ineligibility to engage in coastwise trade and the imposition of substantial penalties against it, including seizure or forfeiture of its vessels, which could have an adverse effect on the Company’s financial condition and results of operation.

 

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ITEM 1B.  UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2.  PROPERTIES

 

The Company leases a 105-acre marine terminal at Honolulu, Hawaii.  The Company’s other primary terminal facilities located at the Port of Seattle, Washington, and the Ports of Oakland and Long Beach, California, are leased by the Company’s joint venture partner, SSA Terminals, LLC.  The Company leases seven acres at West Oahu, Hawaii, and thirty acres at Polaris Point, Guam that are used as container depots.  The following is a summary of the Company’s other significant facilities:

 

Location

 

Description of Facility

 

Square Footage

Honolulu, Hawaii

 

Corporate headquarters

 

16,444

Oakland, California

 

Office

 

47,580

Phoenix, Arizona

 

Office

 

22,808

Oakbrook Terrace, Illinois

 

Office

 

17,004

Concord, California

 

Office

 

7,974

Auckland, New Zealand

 

Office

 

7,481

Shanghai, China

 

Office

 

7,240

Pooler, Georgia

 

Warehouse facility

 

710,844

Oakland, California

 

Warehouse facility

 

400,000

Black Creek, Georgia

 

Warehouse facility

 

367,265

Pooler, Georgia

 

Warehouse facility

 

324,832

Hayward, California

 

Warehouse facility

 

214,000

Rancho Dominguez, California

 

Warehouse facility

 

141,000

Oakland, California

 

Warehouse facility

 

132,000

Alameda, California

 

Storage facility

 

47,500

 

For additional information about the Company’s properties, refer to “Business” in Item 1 of Part 1 above.

 

ITEM 3.  LEGAL PROCEEDINGS

 

See “Business — Business Description - Rate Regulation” above for a discussion of rate and other regulatory matters in which Matson is routinely involved.

 

Molasses was released into Honolulu Harbor from a pipeline system operated by a subsidiary of the Company in early September 2013.  The Company is cooperating with federal and state agencies involved in responding to and investigating the release.  On September 20, 2013, the Hawaii Department of Health (“DOH”) and other responding governmental agencies announced that they had officially transitioned their role from a response phase to a recovery and restoration phase.  The DOH also reported on September 20, 2013 that dissolved oxygen and pH levels in the harbor and nearby Keehi Lagoon had returned to normal target levels and that there was no longer discoloration of the water in those same areas attributable to the molasses release.  Keehi Lagoon was reopened to the public on September 21, 2013.

 

On October 10, 2013, the Company was served with a federal grand jury subpoena seeking documents in connection with a criminal investigation into the release of molasses into Honolulu Harbor.  In addition, the Company has received written requests for information regarding the release from the following governmental agencies: (i) the DOH; (ii) the State of Hawaii Office of Hawaiian Affairs; and (iii) the United States Environmental Protection Agency (Region IX).

 

As of December 31, 2013, the Company has incurred $3.0 million in response costs, legal expenses, and third party claims related to the release of molasses.

 

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As of February 28, 2014, the Company has resolved all third-party claims that have been received. However, government agencies have not: (i) initiated any legal proceedings; (ii) presented the Company with an accounting of their response costs; (iii) provided an assessment of natural resource damages; or (iv) imposed any penalties in connection with the release of molasses.  Therefore, the Company is not able to estimate the future costs, penalties, damages or expenses that it may incur related to the incident.  As a result, at this time no assurance can be given that the impact of the incident on the Company’s financial position, results of operations or cash flows will not be material.

 

In addition to the molasses release discussed above, the Company’s shipping business has certain other risks that could result in expenditures for environmental remediation.  The Company believes that based on all information available to it, the Company is currently in compliance, in all material respects, with applicable environmental laws and regulations.

 

On June 10, 2013, Matson was served with a complaint filed in the United States District Court for the Central District of California by an individual plaintiff as relator on behalf of the United States asserting claims against Matson and certain other ocean carriers and freight forwarders for violations of the False Claims Act.  The case is entitled United States of America, ex rel. Mario Rizzo v. Horizon Lines, LLC et al.  The qui tam complaint alleges that Matson and the other defendants submitted or created records supporting false claims for payment of fuel surcharges assessed on the shipment of military household goods for the Department of Defense.  The federal government has declined to intervene in this qui tam suit.  The individual plaintiff in the suit seeks damages and penalties on behalf of the federal government, and may be entitled to a portion of any recovery or settlement resulting from the suit.  The plaintiff filed a Second Amended Complaint on August 23, 2013.  Matson filed a motion to dismiss the complaint on September 16, 2013.  On October 31, 2013, the court denied Matson’s motion.  Discovery has commenced and a jury trial is scheduled to begin on October 7, 2014.  On February 14, 2014, Matson and the plaintiff engaged in non-binding mediation.  On February 23, 2014, Matson’s Board of Directors approved a settlement of $9.0 million in full settlement of all claims, and $0.95 million for plaintiff’s legal expenses.  The settlement is contingent upon approval of the United States government, and the dismissal of the case with prejudice by the District Court.

 

Matson and its subsidiaries are parties to, or may be contingently liable in connection with other legal actions arising in the normal conduct of their businesses, the outcomes of which, in the opinion of management after consultation with counsel, would not have a material effect on Matson’s financial position, results of operations or cash flows.

 

ITEM 4.  MINE SAFETY DISCLOSURES

 

Not Applicable.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Matson’s common stock is traded on the New York Stock Exchange under the ticker symbol “MATX”.  Prior to the completion of the Separation, common stock had traded on the New York Stock Exchange under the ticker symbol “ALEX”.  As of February 26, 2014, there were 2,609 shareholders of record of Matson common stock.  In addition, Cede & Co., which appears as a single record holder, represents the holdings of thousands of beneficial owners of Matson common stock.

 

COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN*

Among Matson, Inc., the S&P 500 Index, the S&P Midcap 400 Index,

the Dow Jones US Industrial Transportation TSM Index,

and the S&P Transportation Select Industry Index

 

GRAPHIC

 

*$100 invested on 12/31/08 in stock or index, including reinvestment of dividends.

 

In the prior year annual report, the Comparison of Five-Year Cumulative Total Return graph compared the five-year total shareholder return of Matson’s stock to the S&P 500 and the Dow Jones U.S. Industrial Transportation TSM indices.  In this annual report, Matson has changed the comparative indices to include the S&P MidCap 400 Index and the S&P Transportation Select Industry Index.  These indices are viewed by management to be better indicators to be used as comparison of the Company’s stock performance.  The Company appeals to a broader base of investor capital than transportation investors given its Jones Act status, and given the size of the companies included on the S&P 500, the Company believes that there are more comparable companies listed on the S&P MidCap 400 Index.  The long-term stability and reliability of the Company’s Jones Act market position makes it comparable to a broader set of companies in more stable businesses.  The S&P Transportation Select Industry Index includes a broader set of companies with greater similarities to Matson (in size and business mix) as compared to the Dow Jones U.S. Industrial Transportation TSM Index and therefore is a better benchmark.

 

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Trading volume averaged 228,479 shares a day in 2013 compared with 245,085 shares a day in 2012 and 254,081 shares a day in 2011.

 

The quarterly intra-day high and low sales prices and end of quarter closing prices, as reported by the New York Stock Exchange, and cash dividends paid per share of common stock, for each fiscal quarter during 2013 and 2012, were as follows:

 

 

 

Dividends

 

Market Price

 

 

 

Paid

 

High

 

Low

 

Close

 

2013

 

 

 

 

 

 

 

 

 

First Quarter

 

$

0.150

 

$

27.69

 

$

23.92

 

$

24.60

 

Second Quarter

 

$

0.150

 

$

26.44

 

$

21.51

 

$

25.00

 

Third Quarter

 

$

0.160

 

$

29.47

 

$

25.00

 

$

26.23

 

Fourth Quarter

 

$

0.160

 

$

27.85

 

$

23.46

 

$

26.11

 

 

 

 

 

 

 

 

 

 

 

2012

 

 

 

 

 

 

 

 

 

First Quarter

 

$

0.315

 

$

49.49

 

$

40.64

 

$

48.45

 

Second Quarter

 

$

0.315

 

$

53.71

 

$

47.22

 

$

53.25

 

Third Quarter

 

$

0.150

 

$

30.30

 

$

19.96

 

$

20.91

 

Fourth Quarter

 

$

0.150

 

$

25.23

 

$

20.00

 

$

24.72

 

 

 

 

 

 

 

 

 

 

 

 

On June 29, 2012, the Company completed the Separation, which included the distribution of all shares of A&B to the Company’s shareholders.  In the table above, market prices include the value of A&B through June 29, 2012. Although Matson expects to continue paying quarterly cash dividends on its common stock, the declaration and payment of dividends are subject to the discretion of the Board of Directors and will depend upon Matson’s financial condition, results of operations, cash requirements and other factors deemed relevant by the Board of Directors.

 

The Company did not repurchase any of its common stock in 2013, 2012 or 2011.

 

See Item 12 of Part III of this report for information regarding securities authorized for issuance under the Company’s equity compensation plans.

 

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ITEM 6. SELECTED FINANCIAL DATA

 

The following  should be read in conjunction with Item 8, “Financial Statements and Supplementary Data,” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (dollars and shares in millions, except shareholders of record and per-share amounts):

 

 

 

2013

 

2012

 

2011

 

2010

 

2009

 

Operating Revenue:

 

 

 

 

 

 

 

 

 

 

 

Ocean transportation

 

$

1,229.4

 

$

1,189.8

 

$

1,076.2

 

$

1,015.0

 

$

888.2

 

Logistics

 

407.8

 

370.2

 

386.4

 

355.6

 

320.9

 

Total operating revenue

 

$

1,637.2

 

$

1,560.0

 

$

1,462.6

 

$

1,370.6

 

$

1,209.1

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income:

 

 

 

 

 

 

 

 

 

 

 

Ocean transportation(1)

 

$

94.3

 

$

96.6

 

$

73.7

 

$

118.3

 

$

57.8

 

Logistics

 

6.0

 

0.1

 

4.9

 

7.1

 

6.7

 

Operating Income

 

100.3

 

96.7

 

78.6

 

125.4

 

64.5

 

Interest expense

 

(14.4

)

(11.7

)

(7.7

)

(8.2

)

(9.0

)

Income from Continuing Operations Before Income Taxes

 

85.9

 

85.0

 

70.9

 

117.2

 

55.5

 

Income tax expense

 

(32.2

)

(33.0

)

(25.1

)

(46.7

)

(22.5

)

Income From Continuing Operations

 

53.7

 

52.0

 

45.8

 

70.5

 

33.0

 

(Loss) Income From Discontinued Operations (net of income taxes)

 

 

(6.1

)

(11.6

)

21.6

 

11.2

 

Net Income

 

$

53.7

 

$

45.9

 

$

34.2

 

$

92.1

 

$

44.2

 

 

 

 

 

 

 

 

 

 

 

 

 

Identifiable Assets:

 

 

 

 

 

 

 

 

 

 

 

Ocean transportation(2)

 

$

1,168.6

 

$

1,097.2

 

$

1,083.9

 

$

1,084.7

 

$

1,095.2

 

Logistics

 

79.7

 

77.1

 

76.4

 

73.8

 

72.4

 

Other(3)

 

 

 

1,384.0

 

1,336.1

 

1,212.0

 

Total assets

 

$

1,248.3

 

$

1,174.3

 

$

2,544.3

 

$

2,494.6

 

$

2,379.6

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital Expenditure from Continuing Operations(4):

 

 

 

 

 

 

 

 

 

 

 

Ocean transportation

 

$

33.8

 

$

37.0

 

$

44.2

 

$

69.4

 

$

12.7

 

Logistics

 

1.4

 

1.1

 

3.0

 

1.8

 

0.6

 

Total capital expenditures

 

$

35.2

 

$

38.1

 

$

47.2

 

$

71.2

 

$

13.3

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and Amortization from Continuing Operations:

 

 

 

 

 

 

 

 

 

 

 

Ocean transportation

 

$

66.4

 

$

69.1

 

$

68.4

 

$

67.6

 

$

67.1

 

Logistics

 

3.3

 

3.4

 

3.2

 

3.2

 

3.5

 

Total depreciation and amortization

 

$

69.7

 

$

72.5

 

$

71.6

 

$

70.8

 

$

70.6

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Share in Income from continuing operations:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.26

 

$

1.23

 

$

1.10

 

$

1.71

 

$

0.80

 

Diluted

 

$

1.25

 

$

1.22

 

$

1.09

 

$

1.70

 

$

0.80

 

Earnings Per Share in Net Income:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.26

 

$

1.09

 

$

0.82

 

$

2.23

 

$

1.08

 

Diluted

 

$

1.25

 

$

1.08

 

$

0.81

 

$

2.22

 

$

1.08

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends per share declared

 

$

0.62

 

$

0.93

 

$

1.26

 

$

1.26

 

$

1.26

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31:

 

 

 

 

 

 

 

 

 

 

 

Shareholders of record

 

2,607

 

2,729

 

2,923

 

3,079

 

3,197

 

Shares outstanding

 

42.8

 

42.6

 

41.7

 

41.3

 

41.0

 

Long-term debt — non-current

 

$

273.6

 

$

302.7

 

$

180.1

 

$

136.6

 

$

148.1

 

 


(1)    The ocean transportation segment includes $(2.0) million, $3.2 million, $8.6 million, $12.8 million, and $6.2 million of equity in (loss) income from its Terminal Joint Venture investment in SSAT for 2013, 2012, 2011, 2010, and 2009, respectively.

 

(2)    The ocean transportation segment includes $57.6 million, $59.6 million, $56.5 million, $52.9 million, and $47.2 million related to its investment in SSAT as of December 31, 2013, 2012, 2011, 2010, and 2009, respectively.

 

(3)    Other identifiable assets related to discontinued operations from A&B and the Company’s second China Long Beach Express Service (“CLX2”) of $1.4 billion, $1.3 billion, and $1.2 billion as of December 31, 2011, 2010, and 2009, respectively.

 

(4) Excludes expenditures related to Matson’s acquisitions, which are classified as payments for acquisitions in Cash Flows used in Investing Activities from Continuing Operations within the Consolidated Statements of Cash Flows.

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

FORWARD-LOOKING STATEMENTS AND RISK FACTORS

 

The Company, from time to time, may make or may have made certain forward-looking statements, whether orally or in writing, such as forecasts and projections of the Company’s future performance or statements of management’s plans and objectives.  These statements are “forward-looking” statements as that term is defined in the Private Securities Litigation Reform Act of 1995.  Such forward-looking statements may be contained in, among other things, SEC filings, such as the Forms 10-K, 10-Q and 8-K, the Annual Report to Shareholders, press releases made by the Company, the Company’s Internet Web sites (including Web sites of its subsidiaries), and oral statements made by the officers of the Company.  Except for historical information contained in these written or oral communications, such communications contain forward-looking statements.  These include, for example, all references to 2014 or future years.  New risk factors emerge from time to time and it is not possible for the Company to predict all such risk factors, nor can it assess the impact of all such risk factors on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.  Accordingly, forward-looking statements cannot be relied upon as a guarantee of future results and involve a number of risks and uncertainties that could cause actual results to differ materially from those projected in the statements, including, but not limited to the factors that are described in Part I, Item 1A under the caption of “Risk Factors” of this Form 10-K, which section is incorporated herein by reference.  The Company is not required, and undertakes no obligation, to revise or update forward-looking statements or any factors that may affect actual results, whether as a result of new information, future events, or circumstances occurring after the date of this report.

 

OVERVIEW

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a discussion of the Company’s financial condition, results of operations, liquidity and certain other factors that may affect its future results from the perspective of management.  The discussion that follows is intended to provide information that will assist in understanding the changes in the Company’s consolidated financial statements from year to year, the primary factors that accounted for those changes, and how certain accounting principles, policies and estimates affect the Company’s consolidated financial statements.  MD&A is provided as a supplement to, and should be read in conjunction with, the consolidated financial statements and the accompanying notes to the consolidated financial statements in Item 8 of Part II below.  MD&A is presented in the following sections:

 

·                  Business Outlook

·                  Consolidated Results of Operations

·                  Analysis of Operating Revenue and Income by Segment

·                  Liquidity and Capital Resources

·                  Contractual Obligations, Commitments, Contingencies and Off-Balance Sheet Arrangements

·                  Critical Accounting Estimates

·                  Other Matters

 

BUSINESS OUTLOOK

 

The Business Outlook provides the Company’s views on current conditions and trends in the various markets it serves, recent Company performance and its near-term prospects.  The following information updates the quarterly filings made by the Company throughout 2013.  All forward-looking statements made herein are qualified by the inherent risks of the Company’s operations and the markets it serves, as more fully described in the Risk Factors set out in Item 1A.

 

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The Company serves multiple domestic and international transportation markets and its operations are therefore impacted by regional, national and international economic conditions.  Given its large operational presence in Hawaii, the Company’s volumes in the Hawaii trade are highly dependent on the future results of the overall Hawaii economy, competitive activity related to capacity and pricing, and to specific economic sub-categories including construction.  In addition, the timing of fuel surcharge collections can lead to fluctuations in quarterly operating income performance on a comparable year over year basis, but does not typically lead to a material annual year over year fluctuation in operating income performance.

 

In the China trade, volume is driven primarily by U.S. consumer demand for manufactured goods around key retail selling seasons while freight rates are impacted mainly by macro supply-demand balances.  As a result, this trade has historically experienced significant volatility and seasonality in freight rates.  Currently, there is a global surplus of container vessel capacity, and a recent market survey conducted by Alphaliner estimates that a record 1.65 million TEUs of new vessel capacity will be delivered in 2014.  While excess vessel capacity may be mitigated through vessel scrapping, deferral of new vessel deliveries, vessel lay-ups and slow steaming, transpacific freight rates depend primarily upon rational carrier management of industry capacity.

 

In the Guam trade, the competitive environment has historically impacted financial results, and to a lesser degree, overall market volume.  Currently, the Company is the sole carrier of containerized freight from the West Coast of the U.S. to Guam following the departure of its major competitor from the trade lane in mid-November of 2011.

 

All trade lanes typically experience seasonality in volume and generally follow a pattern of increasing volumes starting in the second quarter of each year culminating in a peak season throughout the third quarter, with subsequent weakening of demand thereafter in the fourth and first quarters.  As a result, earnings tend to follow a similar pattern, offset by periodic vessel dry-docking and other episodic cost factors, which can lead to earnings variability.

 

Ocean Transportation: Following year over year volume growth in the first half of 2013, Hawaii container volume contracted in the third and fourth quarters.  Despite the lull in container volume that has continued into early 2014, the Company believes that the Hawaii economy is in a multi-year recovery and is anticipating modest market growth in the trade in 2014.  Containership capacity is projected to increase in the second half of 2014 as a competitor is expected to launch an additional, new vessel into the trade.  Overall, the Company anticipates a slight year over year increase in its Hawaii container volume for 2014.

 

In the China trade, freight rates eroded in the fourth quarter 2013, a reflection of the ongoing vessel overcapacity in the market and the international carriers’ inability to sustain general rate increases.  In 2014, overcapacity is expected to continue, with vessel deliveries outpacing demand growth, leading to modest freight rate erosion.  However, the Company expects its ships will remain at high utilization levels, and its service will continue to realize a premium to market rates for its expedited service in 2014.

 

In Guam, the Company’s container volume contracted in the fourth quarter due to general market conditions.  Muted growth is expected in Guam for 2014 and therefore the Company expects its volume to be relatively flat compared to 2013, assuming no new competitors enter the market.

 

The Company plans to maintain its core nine-ship fleet deployment throughout 2014 for the trade lanes referenced above.

 

Additionally, in 2013 the Company incurred start-up costs and service reconfiguration expenses in the South Pacific trade.  The Company expects performance improvement in the trade as these costs are not expected to recur in 2014.

 

The Company’s terminal operations joint venture, SSAT, had year over year improvement in operating results during the fourth quarter, primarily due to new customer activity and improved lift volume at its expanded Oakland terminal. The Company expects modest profit at SSAT for 2014.

 

In addition to its Ocean Transportation service lines, Matson incurred response costs, legal expenses and third party claims of $1.7 million and $3.0 million in the fourth quarter and second half of 2013, respectively, in connection with the molasses incident at Honolulu Harbor that occurred in September 2013.  At this stage in the proceedings, the Company is not able to estimate the future costs, penalties, damages or expenses that it may incur related to the incident.

 

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The Company accrued $9.95 million for a proposed litigation settlement in the case entitled United States of America, ex rel. Mario Rizzo v. Horizon Lines, LLC et al. (the “Litigation Charge”).  The full settlement of all of plaintiff’s claims was reached at a non-binding mediation and was approved by the Company’s Board of Directors on February 23, 2014.  The settlement is contingent upon approval of the United States government, and the dismissal of the case with prejudice by the District Court.

 

The Company’s outlook for 2014 excludes any future impact of the molasses incident and is being provided relative to the prior year’s operating income excluding the Litigation Charge.  For the full year 2014, Ocean Transportation operating income is expected to be near or slightly above levels achieved in 2013, which was $104.3 million, excluding the Litigation Charge.  Operating income for the first quarter of 2014 is expected to be approximately one half the prior year’s level of $18.5 million due to the timing of fuel surcharge collections, lower Hawaii volume, and lower China freight rates.

 

Logistics: Volume growth in Logistics’ intermodal and highway businesses extended into the fourth quarter 2013, and combined with continued cost cutting measures, operating income margin improved to 1.9 percent of revenues.  The Company expects 2014 operating income to modestly exceed the 2013 levels of $6.0 million, driven by continued volume growth, expense control and improvements in warehouse operations.

 

Interest Expense: The Company expects its interest expense in 2014 to increase over the 2013 amount by approximately $3.5 million due primarily to the Notes financing transaction that closed on January 28, 2014.

 

Income Tax Expense: Net income and earnings per share in the fourth quarter 2013 were adversely impacted by an effective tax rate of 49.3 percent as compared to 21.9 percent in the fourth quarter 2012. The rate for the fourth quarter 2013 was higher primarily due to the impact of the Litigation Charge, and a change in timing of CCF deposits that led to a corresponding increase in tax expense.  The rate for fourth quarter 2012 was unusually low primarily due to a favorable, non-recurring change to state tax law that required the Company re-value its deferred tax liabilities. The Company expects its 2014 effective tax rate to be approximately 38.5% percent.

 

Other: The Company expects maintenance capital expenditures for 2014 to be approximately $40.0 million.  Additionally, while the Company does not have any scheduled contract payments in 2014 relating to its two vessels under construction, it does expect to make additional contributions to its CCF.

 

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Table of Contents

 

CONSOLIDATED RESULTS OF OPERATIONS

 

The following analysis of the financial condition and results of operations of Matson should be read in conjunction with the consolidated financial statements in Item 8 of Part II below.

 

Consolidated Results: 2013 compared with 2012

 

 

 

Years Ended December 31,

 

(dollars in millions, except per share amounts)

 

2013

 

2012

 

Change

 

Operating revenue

 

$

1,637.2

 

$

1,560.0

 

4.9

%

Operating costs and expenses

 

(1,536.9

)

(1,463.3

)

5.0

%

Operating income

 

100.3

 

96.7

 

3.7

%

Interest expense

 

(14.4

)

(11.7

)

23.1

%

Income from continuing operations before income taxes

 

85.9

 

85.0

 

1.1

%

Income tax expense

 

(32.2

)

(33.0

)

-2.4

%

Income from continuing operations

 

53.7

 

52.0

 

3.3

%

Loss from discontinued operations (net of income taxes)

 

 

(6.1

)

 

 

Net income

 

$

53.7

 

$

45.9

 

17.0

%

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

1.26

 

$

1.09

 

15.6

%

Diluted earnings per share

 

$

1.25

 

$

1.08

 

15.7

%

 

Consolidated Operating Revenue for the year ended December 31, 2013 increased $77.2 million, or 4.9 percent, compared to the prior year.  This increase was due to $39.6 million and $37.6 million higher revenues for ocean transportation and logistics, respectively.  The reasons for the operating revenue changes are described below, by business segment, in the Analysis of Operating Revenue and Income by Segment.

 

Operating Costs and Expenses for the year ended December 31, 2013 increased $73.6 million, or 5.0 percent, compared to the prior year.  The increase was due to increases of $41.9 million and $31.7 million in costs for ocean transportation and logistics, respectively.  The reasons for the operating expense changes are described below, by business segment, in the Analysis of Operating Revenue and Income by Segment.

 

Income Tax Expense during the year ended December 31, 2013 was $32.2 million, or 37.5 percent of income from continuing operations before income tax as compared to $33.0 million, or 38.8 percent, in the prior year.  The change in tax rate percent is due principally to a tax benefit in 2013 from the re-measurement of uncertain tax positions and a non-recurring tax increase in the prior year from non-deductible charges related to the Separation.

 

Loss from Discontinued Operations was $6.1 million for the year ended December 31, 2012 related to the Separation and the shutdown of the Company’s second China Long Beach Express service (“CLX2”) operations.  There were no discontinued operations during 2013.

 

Consolidated Results: 2012 compared with 2011

 

 

 

Years Ended December 31,

 

(dollars in millions, except per share amounts)

 

2012

 

2011

 

Change

 

Operating revenue

 

$

1,560.0

 

$

1,462.6

 

6.7

%

Operating costs and expenses

 

(1,463.3

)

(1,384.0

)

5.7

%

Operating income

 

96.7

 

78.6

 

23.0

%

Interest expense

 

(11.7

)

(7.7

)

51.9

%

Income from continuing operations before income taxes

 

85.0

 

70.9

 

19.9

%

Income tax expense

 

(33.0

)

(25.1

)

31.5

%

Income from continuing operations

 

52.0

 

45.8

 

13.5

%

Loss from discontinued operations (net of income taxes)

 

(6.1

)

(11.6

)

 

 

Net income

 

$

45.9

 

$

34.2

 

34.2

%

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

1.09

 

$

0.82

 

32.9

%

Diluted earnings per share

 

$

1.08

 

$

0.81

 

33.3

%

 

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Table of Contents

 

Consolidated Operating Revenue for the year ended December 31, 2012 increased $97.4 million, or 6.7 percent, compared to the prior year.  This increase was due to $113.6 million in higher revenue for ocean transportation, partially offset by $16.2 million in lower revenue from logistics.  The reasons for the operating revenue changes are described below, by business segment, in the Analysis of Operating Revenue and Income by Segment.

 

Operating Costs and Expenses for the year ended December 31, 2012 increased $79.3 million, or 5.7 percent, compared to the prior year.  The increase was due to a $90.7 million increase in costs for the ocean transportation segment, which is inclusive of $8.6 million in Separation costs, partially offset by a reduction of cost in logistics of $11.4 million.  The reasons for the operating expense changes are described below, by business segment, in the Analysis of Operating Revenue and Income by Segment.

 

Income Tax Expense during the year ended December 31, 2012 was $33.0 million, or 38.8 percent of income from continuing operations before income tax as compared to $25.1 million, or 35.4 percent, in 2011.  The change in the tax rate percentage is due principally to certain non-recurring and non-deductible Separation related transaction costs and the re-measurement of uncertain tax positions in 2012 as required as part of the Separation tax accounting treatment.

 

Loss from Discontinued Operations during the year ended December 31, 2012 decreased $5.5 million compared to prior year.  Due to the completion of the Separation on June 29, 2012, Matson has restated the operations for the six and twelve months ended June 30, 2012 and December 31, 2011, respectively, as discontinued operations from A&B.  The loss from discontinued operations, net of tax, decreased primarily due to the reduction in losses related to the shutdown of CLX2 offset by the increase in the net loss related to A&B and the recognition of additional tax expense related to the Separation.

 

ANALYSIS OF OPERATING REVENUE AND INCOME BY SEGMENT

 

Additional detailed information related to the operations and financial performance of the Company’s Reportable Segments is included in Part II Item 6 and Note 15 to the consolidated financial statements in Item 8 of Part II below.  The following information should be read in relation to the information contained in those sections.

 

Ocean Transportation: 2013 compared with 2012

 

 

 

Years Ended December 31,

 

(dollars in millions)

 

2013

 

2012

 

Change

 

Ocean transportation revenue

 

$

1,229.4

 

$

1,189.8

 

3.3

%

Operating costs and expenses

 

1,135.1

 

1,093.2

 

3.8

%

Operating income

 

$

94.3

 

$

96.6

 

-2.4

%

Operating income margin

 

7.7

%

8.1

%

 

 

Volume (Units) (1)

 

 

 

 

 

 

 

Hawaii containers

 

138,500

 

137,200

 

0.9

%

Hawaii automobiles

 

81,500

 

78,800

 

3.4

%

China containers

 

61,300

 

60,000

 

2.2

%

Guam containers (2)

 

24,100

 

24,500

 

(1.6

)%

Micronesia/South Pacific Containers (2)

 

12,800

 

5,600

 

128.6

%

 


(1)         Approximate container volumes included for the period are based on the voyage departure date, but revenue and operating income are adjusted to reflect the percentage of revenue and operating income earned during the reporting period for voyages that straddle the beginning or end of each reporting period.

 

(2)         In January 2013, the Company purchased the assets of Reef Shipping Limited.  Accordingly, given new route configurations in the South Pacific service, the Company reclassified 2012 volume related to Yap and Palau from the Guam containers total to the Micronesia/South Pacific containers total.

 

Ocean Transportation revenue increased $39.6 million, or 3.3 percent, during the year ended December 31, 2013 compared to the prior year.  The increase was primarily due to new volume associated with the Company’s Micronesia/South Pacific service and improved freight rates and favorable cargo mix changes in Hawaii, partially offset by lower fuel surcharges resulting from lower fuel prices.

 

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Table of Contents

 

During the year ended December 31, 2013, Hawaii container and automobile volume increased 0.9 percent and 3.4 percent, respectively, due to modest market growth; China volume was 2.2 percent higher primarily the result of an additional sailing in 2013; Guam volume was slightly lower due to general market conditions; and Micronesia/South Pacific volume increased due to the acquisition of the assets of Reef Shipping Limited, a South Pacific ocean freight carrier based in Auckland, New Zealand, early in the year.

 

Ocean Transportation operating income decreased $2.3 million, or 2.4 percent, during the year ended December 31, 2013.  The decrease in operating income was principally due to the Litigation Charge of $9.95 million, start-up costs and service reconfiguration expenses in the South Pacific trade, higher general and administrative expenses, and other non-recurring unfavorable items.  In addition, the Company incurred $3.0 million in response costs, legal expenses and third party claims related to the molasses released into Honolulu Harbor. The decrease in operating income was partially offset by freight rate and cargo mix improvements in Hawaii, lower vessel expenses from the full year deployment of a nine-ship fleet, lower outside transportation costs due to barge dry-dockings in the prior year, and the absence of Separation costs.

 

Losses attributable to the Company’s SSAT Terminal Joint Venture investment were $2.0 million during the year ended December 31, 2013, compared to an income contribution of $3.2 million in the prior year.  The loss reflected past customer losses that resulted in lower lift volume and higher than expected transition costs related to the expansion of its terminal operations in Oakland, partially offset by new customers and volumes at the expanded Oakland terminal in the fourth quarter 2013.

 

Ocean Transportation: 2012 compared with 2011

 

 

 

Years Ended December 31,

 

(dollars in millions)

 

2012

 

2011

 

Change

 

Ocean transportation revenue

 

$

1,189.8

 

$

1,076.2

 

10.6

%

Operating costs and expenses

 

1,093.2

 

1,002.5

 

9.0

%

Operating income (1)

 

$

96.6

 

$

73.7

 

31.1

%

Operating income margin

 

8.1

%

6.8

%

 

 

Volume (Units) (2)

 

 

 

 

 

 

 

Hawaii containers

 

137,200

 

140,000

 

(2.0

)%

Hawaii automobiles

 

78,800

 

81,000

 

(2.7

)%

China containers

 

60,000

 

59,000

 

1.7

%

Guam containers (3)

 

24,500

 

13,800

 

77.5

%

Micronesia Containers (3)

 

5,600

 

5,500

 

1.8

%

 


(1)         The Company incurred additional costs related to the shutdown of CLX2 that did not meet the criteria to be classified as discontinued operations of $7.1 million and therefore reduced operating income for the year ended December 31, 2011.

 

(2)         Approximate container volumes included for the period are based on the voyage departure date, but revenue and operating income are adjusted to reflect the percentage of revenue and operating income earned during the reporting period for voyages that straddle the beginning or end of each reporting period.

 

(3)         In January 2013, the Company purchased the assets of Reef Shipping Limited.  Accordingly, given new route configurations in the South Pacific service, the Company reclassified 2012 and 2011 volume related to Yap and Palau from the Guam containers total to the Micronesia containers total.

 

Ocean transportation revenue increased $113.6 million, or 10.6 percent, in the year ended December 31, 2012 compared with the prior year.  The increase was due principally to significantly higher volume in the Guam service that resulted from the exit of a major competitor in that trade in late 2011, an increase in China freight rates and increased fuel surcharges resulting from higher fuel prices, partially offset by reduced volumes in the Hawaii service.

 

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Table of Contents

 

Container and automobile volume decreased in the Hawaii service in the year ended December 31, 2012 compared with the prior year: Hawaii container volume decreased 2.0 percent due to market weakness, competitive pressures, and a modest market contraction resulting from direct foreign sourcing of cargo; Hawaii automobile volume decreased 2.7 percent due primarily to the timing of automobile rental fleet replacement.  Container volume in the China and Guam services increased during the year ended December 31, 2012 as compared to the year ended December 31, 2011: China container volume increased 1.7 percent due to increased demand and a shift in direct foreign sourcing of cargo destined to Hawaii; Guam volume was substantially higher, increasing 77.5 percent in the year due to gains related to the departure of a major competitor from the trade in mid-November 2011.

 

Ocean transportation operating income increased $22.9 million, or 31.1 percent, in the year ended December 31, 2012 compared with the prior year.  The increase in operating income was principally due to higher volume in the Guam service and increased freight rates and volume in the China service, partially offset by decreased volume in the Hawaii service, increased costs related to vessel and barge dry-docking, and higher outside transportation costs.  The Company also incurred higher terminal handling costs due primarily to increased wharfage and container handling rates, higher general and administrative expenses, including Separation costs, and higher vessel expenses.

 

The Company’s SSAT joint venture contributed $3.2 million to operating income during the year ended December 31, 2012 compared with $8.6 million contributed in the prior year.  The decline was primarily due to the loss of volume from several major customers.

 

Logistics: 2013 compared with 2012

 

 

 

Years Ended December 31,

 

(dollars in millions)

 

2013

 

2012

 

Change

 

Intermodal revenue

 

$

244.2

 

$

229.1

 

6.6

%

Highway revenue

 

163.6

 

141.1

 

15.9

%

Total Logistics Revenue

 

407.8

 

370.2

 

10.2

%

Operating income

 

$

6.0

 

$

0.1

 

 

 

Operating income margin

 

1.5

%

0.0

%

 

 

 

Logistics revenue for the year ended December 31, 2013, increased $37.6 million, or 10.2 percent, compared to the prior year.  This increase was the result of higher intermodal and highway volume.

 

Logistics operating income for the year ended December 31, 2013, increased by $5.9 million compared to the prior year.  The increase was primarily due to the absence of a $3.9 million charge taken in 2012 related to intangible asset impairment and a warehouse lease restructuring charge.  In addition, Logistics operating income in 2013 benefited from lower general and administrative expenses and higher intermodal volume than in 2012.

 

Logistics: 2012 compared with 2011

 

 

 

Years Ended December 31,

 

(dollars in millions)

 

2012

 

2011

 

Change

 

Intermodal revenue

 

$

229.1

 

$

234.5

 

(2.3

)%

Highway revenue

 

141.1

 

151.9

 

(7.1

)%

Total Logistics Revenue

 

370.2

 

386.4

 

(4.2

)%

Operating income

 

$

0.1

 

$

4.9

 

 

 

Operating income margin

 

0.0

%

1.3

%

 

 

 

Logistics revenue for the year ended December 31, 2012, decreased $16.2 million, or 4.2 percent, compared with the prior year.  This decrease was primarily due to lower international intermodal and highway volumes.  Intermodal volume declined primarily due to the shutdown of CLX2 and the loss of a major ocean carrier customer, partially offset by an increase in domestic volumes.  Highway volume decreased due to the loss of certain full truckload customers.

 

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Table of Contents

 

Logistics operating income for the year ended December 31, 2012, decreased $4.8 million compared with the prior year.  The reduction in operating income was due to the impairment charge of an intangible asset, restructuring of a lease at its Northern California warehousing operation totaling $3.9 million and lower volume in international intermodal and highway, partially offset by lower general and administrative expenses.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Overview:

 

Additional sources of liquidity for the Company, consisting of cash and cash equivalents, and receivables totaled $296.8 million at December 31, 2013, an increase of $102.2 million from December 31, 2012.  The increase was due to a $94.6 million increase in cash and cash equivalents, and an increase in accounts receivable of $7.6 million.

 

Cash Flows:

 

Net cash flows provided by operating activities from continuing operations continue to be the Company’s most significant source of liquidity, and were $195.7 million in 2013, compared with $94.0 million and $104.1 million provided in 2012 and 2011, respectively.  The increase in 2013 over 2012 was due principally to changes in deferred income taxes of $66.3 million as a result of increased contributions to the Capital Construction Fund, and lower cash outflows related to the dry-docking of vessels during 2013, and accounts payable and accrued liabilities.  The decrease in 2012 over 2011 was due principally to decreases in accounts payable and accrued liabilities, as well as higher cash outflows related to the dry-dockings of vessels during 2012, which were partially offset by the increase in other liabilities.

 

Net cash flows used in investing activities from continuing operations were $40.0 million for 2013, compared with $6.3 million and $4.6 million used in 2012 and 2011, respectively.  The increase in 2013 over 2012 was due principally to the reduction in contribution from the Former Parent Company, and payment for acquisitions, partially offset by a reduction of capital expenditures.  No contributions were received from the Former Parent Company during 2013 as compared to $25.0 million and $40.3 million in 2012 and 2011, respectively.  These contributions represent dividends paid by the Former Parent Company to its shareholders prior to the Separation offset by distributions to the Former Parent Company for the issuance of capital stock and stock based compensation, which are reflected in the Consolidated Financial Statements due to Matson being the successor company of the Former Parent Company for accounting purposes.

 

Capital expenditures were $35.2 million for 2013, compared with $38.1 million and $47.2 million for 2012 and 2011, respectively.  The 2013 capital expenditures included $33.8 million for the purchase of ocean transportation-related assets and $1.4 million related to the purchase of logistics-related assets.  Capital expenditures for the year ended December 31, 2012 included $37.0 million for the purchase of ocean transportation-related assets and $1.1 million related to the purchase of logistics-related assets.  Capital expenditures for the year ended December 31, 2011 included $44.2 million for the purchase of ocean transportation-related assets and $3.0 million related to the purchase of logistics-related assets.

 

During the fourth quarter of 2013, the Company entered into agreements with a shipyard for the construction of two new 3,600 twenty-foot equivalent units (TEU) Aloha-class container ships at a cost of $418.0 million.  The container ships are expected to be delivered during 2018.  The Company made an initial payment of $8.4 million to the shipyard during 2013, which is included in 2013 ocean transportation related capital expenditure above.  Additional payments totaling $92.0 million are payable in 2015 and 2016, with the remaining balance payable in 2017 and 2018, and will be funded by cash and other available sources of liquidity as described below.

 

Net cash flows used in financing activities from continuing operations were $61.1 million for 2013, compared with $74.5 million and $70.2 million used in 2012 and 2011, respectively.  The decrease in 2013 was due principally to reductions in payments of long-term debt and dividends, and the net change in proceeds from the issuance of long-term debt less contributions and other distributions to A&B as part of the Separation, offset by the increase in payments of line credit agreements, and a reduction in proceeds from the issuance of capital stock.  Net cash flows used in financing activities from continuing operations were higher in 2012 compared to prior year, primarily due to

 

27



Table of Contents

 

the contribution of $155.7 million to A&B upon Separation, offset by an increase from net borrowings of $88.3 million during 2012, which were primarily used to fund the contribution.  Also there was an increase in proceeds from the issuance of capital stock of $15.1 million, and a reduction in the payment of dividends to the Company’s shareholders and distributions to the Former Parent Company of $49.4 million, of which $26.7 million was paid to the Former Parent Company’s shareholders in the first and second quarter of 2012, which have been included in the Consolidated Financial Statements due to Matson being the successor company of the Former Parent Company for accounting purposes.  Subsequent to the Separation, the Company lowered its quarterly dividend, resulting in lower cash payouts during 2012 as compared to 2011.  Also during 2012, the Company saw increased stock option exercises.

 

Other Sources of Liquidity:

 

Term Debt: During the second quarter of 2012, Matson executed new unsecured, fixed rate, amortizing long-term debt of $170.0 million, which was funded in three tranches, $77.5 million at an interest rate of 3.66% maturing in 2023, $55.0 million at an interest rate of 4.16% maturing in 2027, and $37.5 million at an interest rate of 4.31% maturing in 2032.  Interest is payable semi-annually.  The weighted average coupon and average life of the three tranches of debt are 3.97% and 9.2 years, respectively.  The notes will begin to amortize in 2015, with aggregate semi-annual payments of $4.6 million through 2016, $8.4 million in 2017 through mid-year 2023, $3.8 million through mid-year 2027, and $1.2 million thereafter.  The cash received from the issuance of the three tranches of debt was partially utilized for the contribution of cash to A&B during the Separation.

 

In May 2005, the Company partially financed the delivery of the MV Manulani by issuing $105.0 million of Series B Notes with a coupon of 4.79% and 15-year final maturity.  The notes amortize by semi-annual principal payments of $3.5 million plus interest.  The Company negotiated the release of the MV Manulani as security for the remaining long-term debt of $56.0 million as part of the Company’s debt restructuring completed during the Separation, resulting in an increase in the interest rate to 5.79%.

 

In January 2014, Matson issued $100 million of 30-year senior unsecured notes (the “Notes”).  The Notes have a weighted average life of 14.5 years and bear interest at a rate of 4.35%, payable semi-annually.  The proceeds are expected to be used for general corporate purposes.  The Notes will begin to amortize in 2021, with annual principal payments of $5.0 million in 2021, $7.5 million in 2022 and 2023, $10.0 million from 2024 to 2027, and $8.0 million in 2028.  Starting in 2029, and in each year thereafter until 2044, annual principal payments will be $2.0 million.

 

Revolving Credit Facility: During the second quarter of 2012, the Company entered into a $375.0 million, five-year unsecured revolving credit facility with a syndicate of banks to provide the Company with additional sources of liquidity for working capital requirements and investment opportunities.  As of December 31, 2013, the used portion of the Company’s revolving credit facility was $5.8 million, all of which was from letters of credit.

 

Title XI Bonds:  In September 2003, the Company issued $55.0 million in U.S. Government guaranteed ship finance bonds (Title XI) to partially finance the delivery of the MV Manukai.  The secured bonds have a final maturity in September 2028 with a coupon of 5.34%.  The bonds are amortized by fifty semi-annual payments of $1.1 million plus interest.  In August 2004, the Company issued $55.0 million of U.S. Government guaranteed ship finance bonds (Title XI) to partially finance the delivery of the MV Maunawili.  The secured bonds have a final maturity in July 2029, with a coupon of 5.27%.  The bonds are amortized by fifty semi-annual payments of $1.1 million plus interest.

 

Capital Leases:  As of December 31, 2013, Matson had obligations under its capital leases of $2.4 million consisting of specialized and standard containers used in the Company’s South Pacific service.  Capital leases have been classified as current and long-term debt in the Company’s Consolidated Balance Sheet.

 

Total debt was $286.1 million as of December 31, 2013, compared with $319.1 million as of December 31, 2012.  All of the Company’s outstanding debt was unsecured, except for $68.2 million as of December 31, 2013, which is guaranteed by the Company’s significant subsidiaries.

 

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Table of Contents

 

Principal financial covenants as defined in Matson’s five-year revolving credit facility (“Credit Agreement”) and long term fixed rate debt include, but are not limited to:

 

·                  The ratio of debt to consolidated earnings before interest, tax, depreciation and amortization (“EBITDA”) cannot exceed 3.25 to 1.00 for each fiscal four quarter period;

·                  The ratio of consolidated EBITDA to interest expense as of the end of any fiscal four quarter period cannot be less than 3.50 to 1.00; and

·                  The principal amount of priority debt at any time cannot exceed 20% of consolidated tangible assets; and the principal amount of priority debt that is not Title XI priority debt at any time cannot exceed 10% of consolidated tangible assets.  Priority debt, as further defined in the Credit Agreement, is all debt secured by a lien on the Company’s assets or subsidiary debt.

 

The Company was in compliance with these covenants as of December 31, 2013, with a debt to consolidated EBITDA ratio of 1.61, consolidated EBITDA to interest expense ratio of 12.28, and priority debt to consolidated tangible assets ratio of 5.8%.

 

CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET ARRANGEMENTS

 

Contractual Obligations:

 

At December 31, 2013, the Company had the following estimated contractual obligations (in millions):

 

 

 

Payment due by period

 

Contractual Obligations

 

2014

 

2015-2016

 

2017-2018

 

Thereafter

 

Total

 

Construction of new vessels (1)

 

$

 

$

92.0

 

$

317.6

 

$

 

$

409.6

 

Long-term debt obligations (including current portion) (2)

 

12.5

 

42.3

 

56.4

 

174.9

 

286.1

 

Estimated interest on debt (3)

 

12.8

 

23.2

 

18.9

 

36.1

 

91.0

 

Purchase obligations (4)

 

12.0

 

 

 

 

12.0

 

Post-retirement obligations (5)

 

2.4

 

5.2

 

5.4

 

15.0

 

28.0

 

Non-qualified benefit obligations (6)

 

2.6

 

2.3

 

1.1

 

2.5

 

8.5

 

Operating lease obligations (7)

 

22.0

 

30.0

 

10.8

 

7.1

 

69.9

 

Total

 

$

64.3

 

$

195.0

 

$

410.2

 

$

235.6

 

$

905.1

 

 


(1)                     Payment for the construction of new vessels is based upon the shipbuilding agreements with APSI and the expected delivery times of the vessels in 2018.

 

(2)                     Long-term debt obligations (including current portion) include principal repayments of outstanding short-term and long-term debt for the respective periods, and capital leases.  The table does not include the obligations related to the new $100 million of 30-year senior unsecured notes issued in January 2014.  The Notes will begin to amortize in 2021.

 

(3)                     Estimated cash paid for interest on debt is determined based on the stated interest rate for fixed debt.  This does not include the obligations related to the new $100 million of 30-year senior unsecured notes issued in January 2014.  Interest on this debt is paid semi-annually with $2.1 million paid in 2014, $4.4 million paid in years 2015 through 2018, and $43.6 million paid thereafter.

 

(4)                     Purchase obligations include only non-cancellable contractual obligations for the purchases of goods and services.  Arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be purchased, a pricing structure and approximate timing of the transaction.  Any amounts reflected on the consolidated balance sheet as accounts payable and accrued liabilities are excluded from the table above.

 

(5)                     Post-retirement obligations include expected payments to medical service providers in connection with providing benefits to the Company’s employees and retirees.  The $15.0 million noted in the column labeled “Thereafter” comprises estimated benefit payments for 2019 through 2023.  Post-retirement obligations are described further in Note 10 to the consolidated financial statements.  The obligation for pensions reflected on the Company’s consolidated balance sheet is excluded from the table above because the Company is unable to reliably estimate the timing and amount of contributions.

 

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(6)                     Non-qualified benefit obligations include estimated payments to executives and directors under the Company’s four non-qualified plans.  The $2.5 million noted in the column labeled “Thereafter” comprises estimated benefit payments for 2019 through 2023.  Additional information about the Company’s non-qualified plans is included in Note 10 to the consolidated financial statements in Item 8 of Part II below.

 

(7)                     Operating lease obligations include principally land, office and terminal facilities, containers and equipment under non-cancelable, long-term lease arrangements that do not transfer the rights and risks of ownership to the Company.  These amounts are further described in Note 9 to the consolidated financial statements in Item 8 of Part II below.

 

Estimated timing and amount of payments related to uncertain tax position liabilities of $7.2 million as of December 31, 2013, is excluded from the table due to the uncertainty of such timing and payments, if any.

 

Commitments, Contingencies and Off-Balance Sheet Arrangements:

 

A description of commitments and contingencies is described in Note 13 to the consolidated financial statements in Item 8 of Part II below, and is incorporated herein by reference.  The Company does not have any off-balance sheet arrangements.

 

CRITICAL ACCOUNTING ESTIMATES

 

The Company’s significant accounting policies are described in Note 2 to the consolidated financial statements. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, upon which the MD&A is based, requires that management exercise judgment when making estimates and assumptions about future events that may affect the amounts reported in the consolidated financial statements and accompanying notes.  Future events and their effects cannot be determined with certainty and actual results will, inevitably, differ from those critical accounting estimates.  These differences could be material.

 

The Company considers an accounting estimate to be critical if: (i)(a) the accounting estimate requires the Company to make assumptions that are difficult or subjective about matters that were highly uncertain at the time that the accounting estimate was made, (b) changes in the estimate are reasonably likely to occur in periods after the period in which the estimate was made, or (c) use of different estimates by the Company could have been used, and (ii) changes in those assumptions or estimates would have had a material impact on the financial condition or results of operations of the Company.  The critical accounting estimates inherent in the preparation of the Company’s consolidated financial statements are described below.  Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors.

 

Impairment of Investments: The Company’s investment in its Terminal Joint Venture is reviewed for impairment annually and whenever there is evidence that fair value may be below carrying cost.  An investment is written down to fair value if fair value is below carrying cost and the impairment is other-than-temporary.  In evaluating the fair value of an investment and whether any identified impairment is other-than-temporary, significant estimates and considerable judgments are involved.  These estimates and judgments are based, in part, on the Company’s current and future evaluation of economic conditions in general, as well as the Terminal Joint Venture’s current and future plans.  These fair value calculations are highly subjective because they require management to make assumptions and apply judgments to estimates regarding the timing and amount of future cash flows, probabilities related to various cash flow scenarios, and appropriate discount rates based on the perceived risks, among others.  In evaluating whether an impairment is other-than-temporary, the Company considers all available information, including the length of time and extent of the impairment, the financial condition and near-term prospects of the Terminal Joint Venture, the Company’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value, and projected industry and economic trends, among others.  Changes in these and other assumptions could affect the projected operational results and fair value of the Terminal Joint Venture, and accordingly, may require valuation adjustments to the Company’s investment that may materially impact the Company’s financial condition or its future operating results.

 

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The Company has evaluated its investment in its Terminal Joint Venture for impairment and no impairment charges were recorded for the years ended December 31, 2013, 2012, and 2011.

 

Impairment of Vessels and Equipment: The Company operates an integrated network of vessels, containers, and terminal equipment; therefore, in evaluating impairment, the Company groups its assets at the ocean transportation entity level, which represents the lowest level for which identifiable cash flows are available.  The Company’s vessels and equipment are reviewed for possible impairment annually and whenever events or circumstances, such as recurring operating losses, indicate that their carrying values may not be recoverable.  In evaluating impairment, the estimated future undiscounted cash flows generated by the asset group are compared with the amount recorded for the asset group to determine if its carrying value is not recoverable.  If this review determines that the recorded value will not be recovered, the amount recorded for the asset group is reduced to estimated fair value.  These asset impairment analyses are highly subjective because they require management to make assumptions and apply considerable judgments to, among other things, estimates of the timing and amount of future cash flows, expected useful lives of the assets, uncertainty about future events, including changes in economic conditions, changes in operating performance, changes in the use of the assets, and ongoing costs of maintenance and improvements of the assets, and thus, the accounting estimates may change from period to period.  If management uses different assumptions or if different conditions occur in future periods, the Company’s financial condition or its future operating results could be materially impacted.

 

The Company has evaluated its vessels and equipment for impairment and no impairment charges were recorded for the years ended December 31, 2013, 2012, and 2011.

 

Additional information about Matson’s vessels as of December 31, 2013 is as follows:

 

 

 

Purchase
Date

 

Cost

 

Net Book
Value

 

MAUNALEI

 

September 2006

 

$

158.1

 

$

120.0

 

MANULANI

 

June 2005

 

152.1

 

109.3

 

MAUNAWILI

 

September 2004

 

103.8

 

72.8

 

MANUKAI

 

September 2003

 

107.3

 

72.3

 

R.J. PFEIFFER

 

August 1992

 

162.4

 

53.0

 

MOKIHANA

 

January 1996

 

100.7

 

32.8

 

MAHIMAHI

 

January 1996

 

64.5

 

18.6

 

MANOA

 

January 1996

 

64.9

 

17.1

 

KAUAI

 

September 1980

 

91.5

 

16.2

 

MAUI

 

June 1978

 

80.2

 

12.3

 

WAIALEALE

 

November 1991

 

11.4

 

3.5

 

OLOMANA

 

January 2013

 

3.6

 

3.2

 

LURLINE

 

August 1998

 

17.9

 

2.2

 

MATSONIA

 

October 1987

 

95.6

 

2.2

 

MAUNA KEA

 

August 1988

 

10.2

 

1.8

 

HALEAKALA

 

December 1984

 

15.3

 

1.8

 

LIHUE

 

January 1996

 

7.8

 

1.7

 

MAUNA LOA

 

December 1984

 

12.9

 

1.3

 

Total

 

 

 

$

1,260.2

 

$

542.1

 

 

Impairment of Long-Lived Assets and Finite-Lived Intangible Assets:  The Company’s long-lived assets, including finite-lived intangible assets, are reviewed for possible impairment annually and whenever events or circumstances indicate that the carrying value may not be recoverable.  In such an evaluation, the estimated future undiscounted cash flows generated by the asset are compared with the amount recorded for the asset to determine if its carrying value is not recoverable.  If this review determines that the recorded value will not be recovered, the amount recorded for the asset is reduced to estimated fair value.  These asset impairment analyses are highly subjective because they require management to make assumptions and apply considerable judgments to, among others, estimates of the timing and amount of future cash flows, expected useful lives of the assets, uncertainty about future events, including changes in economic conditions, changes in operating performance, changes in the use of the assets, and ongoing costs of maintenance and improvements of the assets, and thus, the accounting estimates may change from period to period.  If management uses different assumptions or if different conditions occur in future periods, the Company’s financial condition or its future operating results could be materially impacted.

 

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The Company has evaluated certain long-lived assets, including finite-lived intangible assets, for impairment and no impairment charges were recorded for the years ended December 31, 2013 and 2011.  During 2012 the Company determined that it had an impairment related to intangible assets at Logistics.  The Company recorded impairment expense of $2.1 million for the year ended December 31, 2012, which is included in operating expense on the Consolidated Statements of Income and Comprehensive Income.

 

Impairment of Goodwill: The Company reviews goodwill for impairment annually in the fourth quarter, and whenever events or changes in circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount.  In estimating the fair value of a reporting unit, the Company uses a combination of a discounted cash flow model and fair value based on market multiples of earnings before interest, taxes, depreciation and amortization (“EBITDA”).  The discounted cash flow approach requires the Company to use a number of assumptions, including market factors specific to the business, the amount and timing of estimated future cash flows to be generated by the business over an extended period of time, long-term growth rates for the business, and a discount rate that considers the risks related to the amount and timing of the cash flows.  Although the assumptions used by the Company in its discounted cash flow model are consistent with the assumptions the Company uses to generate its internal strategic plans and forecasts, significant judgment is required to estimate the amount and timing of future cash flows from the reporting unit and the risk of achieving those cash flows.  When using market multiples of EBITDA, the Company must make judgments about the comparability of those multiples in closed and proposed transactions.  Accordingly, changes in assumptions and estimates, including, but not limited to, changes driven by external factors, such as industry and economic trends, and those driven by internal factors, such as changes in the Company’s business strategy and its internal forecasts, could have a material effect on the Company’s financial condition or its future operating results.

 

The Company has evaluated its goodwill for impairment and no impairment charges were recorded for the years ended December 31, 2013, 2012 and 2011, respectively.

 

Legal Contingencies: The Company’s results of operations could be affected by significant litigation adverse to the Company, including, but not limited to, liability claims, antitrust claims, claims related to coastwise trading matters, lawsuits involving private plaintiffs or government agencies, and environment related matters.  The Company records accruals for legal matters when the information available indicates that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated.  Management makes adjustments to these accruals to reflect the impact and status of negotiations, settlements, rulings, advice of outside legal counsel and other information and events that may pertain to a particular matter.  Predicting the outcome of claims and lawsuits and estimating related costs and exposure involves substantial uncertainties that could cause actual costs to vary materially from those estimates.  In making determinations of likely outcomes of litigation matters, the Company considers many factors.  These factors include, but are not limited to, the nature of specific claims including unasserted claims, the Company’s experience with similar types of claims, the jurisdiction in which the matter is filed, input from outside legal counsel, the likelihood of resolving the matter through alternative dispute resolution mechanisms and the matter’s current status.

 

A detailed discussion of significant litigation matters is contained in Note 13 to the consolidated financial statements included in
Item 8 of Part II below.

 

Self-Insured Liabilities: The Company is self-insured for certain losses including, but not limited to, employee health, workers’ compensation, general liability, real and personal property.  Where feasible, the Company obtains third-party excess insurance coverage to limit its exposure to these claims.  When estimating its self-insured liabilities, the Company considers a number of factors, including historical claims experience, demographic factors, current trends, and analyses provided by independent third-parties.  Periodically, management reviews its assumptions and the analyses provided by independent third-parties to determine the adequacy of the Company’s self-insured liabilities.  The Company’s self-insured liabilities contain uncertainties because management is required to apply judgment and make long-term assumptions to estimate the ultimate cost to settle reported claims and claims incurred, but not reported, as of the balance sheet date.  If management uses different assumptions or if different conditions occur in future periods, the Company’s financial condition or its future operating results could be materially impacted.

 

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Pension and Post-Retirement Estimates:  The estimation of the Company’s pension and post-retirement benefit expenses and liabilities requires that the Company make various assumptions.  These assumptions include factors such as discount rates, expected long-term rate of return on pension plan assets, salary growth, health care cost trend rates, inflation, retirement rates, mortality rates and expected contributions.  Actual results that differ from the assumptions made could materially affect the Company’s financial condition or its future operating results.  The effects of changing assumptions are included in unamortized net gains and losses, which directly affect accumulated other comprehensive income.  Additionally, these unamortized gains and losses are amortized and reclassified to income (loss) over future periods.  Additional information about the Company’s benefit plans is included in Note 10 to the consolidated financial statements in Item 8 of Part II below.

 

Income Taxes: The Company makes certain estimates and judgments in determining income tax expense for consolidated financial statement purposes.  These estimates and judgments are applied in the calculation of tax credits, tax benefits and deductions, and in the calculation of certain deferred tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and consolidated financial statement purposes.  In addition, judgment is required in determining if, based on the weight of available evidence, management believes that it is more likely than not that some portion or all of a recorded deferred tax asset would not be realized in future periods.  Significant changes to these estimates may result in an increase or decrease to the Company’s tax provision in a subsequent period.  In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertain tax positions taken or expected to be taken with respect to the application of complex tax laws.  Resolution of these uncertainties in a manner inconsistent with management’s expectations could materially affect the Company’s financial condition or its future operating results.

 

OTHER MATTERS

 

Accounting Standards Updates: Accounting standards updates effective after December 31, 2013, are not expected to have a material effect on the Company’s financial position or results of operations.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Matson is exposed to changes in interest rates, primarily as a result of its borrowing and investing activities used to maintain liquidity and to fund business operations.  In order to manage its exposure to changes in interest rates, Matson utilizes a balanced mix of both fixed-rate and variable-rate debt.  The nature and amount of Matson’s long-term and short-term debt can be expected to fluctuate as a result of future business requirements, market conditions and other factors.

 

Matson’s fixed-rate debt was $286.1 million as of December 31, 2013.  Currently, Matson does not have any variable rate debt outstanding under its revolving credit facilities.  Other than in default, the Company does not have an obligation to prepay its fixed-rate debt prior to maturity and, as a result, interest rate fluctuations and the resulting changes in fair value would not have an impact on the Company’s financial condition or results of operations unless the Company was required to refinance such debt.

 

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The following table summarizes Matson’s debt obligations at December 31, 2013, presenting principal cash flows and related interest rates by the expected fiscal year of repayment.

 

 

 

Expected Fiscal Year of Repayment as of December 31, 2013 (dollars in millions)

 

 

 

2014

 

2015

 

2016

 

2017

 

2018

 

Thereafter

 

Total

 

Fixed rate (1)

 

$

12.5

 

$

21.7

 

$

20.6

 

$

28.2

 

$

28.2

 

$

174.9

 

$

286.1

 

Average interest rate

 

4.6

%

4.6

%

4.6

%

4.6

%

4.7

%

4.9

%

4.8

%

Variable rate

 

 

 

 

 

 

 

 

Average interest rate (2)

 

$

 

$

 

$

 

$

 

$

 

$

 

$

 

 


(1)                                 The table does not include the obligations related to the $100 million 30-year senior unsecured notes issued in January 2014.  The notes bear interest at a rate of 4.35% and begin to amortize in 2021.

(2)                                 Estimated interest rates on variable debt are determined based on the rate in effect on December 31, 2013.  Actual interest rates may be greater or less than the amounts indicated when variable rate debt is rolled over.

 

From time to time, Matson may invest its excess cash in short-term money market funds that purchase government securities or corporate debt securities.  At December 31, 2013, the Company did not have any such investments. These money market funds maintain a weighted average maturity of less than 90 days, and accordingly, a one percent change in interest rates is not expected to have a material impact on the fair value of these investments or on interest income.  Through its Capital Construction Fund, the Company may, from time to time, invest in mortgage-backed securities.  At December 31, 2013, the Company did not have any such investments.

 

Matson has no material exposure to foreign currency risks, although it is indirectly affected by changes in currency rates to the extent that changes in rates affect tourism in Hawaii.  Transactions related to its China service are primarily denominated in U.S. dollars, and therefore, a one percent change in the Chinese Yuan exchange rate would not have a material effect on the Company’s results of operations.  Transactions related to Matson’s new South Pacific service acquired in January 2013 are primarily denominated in New Zealand dollars.  However a one percent change in the New Zealand dollar exchange rate is not expected to have a material effect on the Company’s results of operations.

 

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ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

 

 

Page

 

 

 

Management’s Annual Report on Internal Control Over Financial Reporting

36

 

 

Report of Independent Registered Public Accounting Firm

37

 

 

Consolidated Statements of Income and Comprehensive Income

38

 

 

Consolidated Balance Sheets

39

 

 

Consolidated Statements of Cash Flows

40

 

 

Consolidated Statements of Shareholders’ Equity

41

 

 

Notes to Consolidated Financial Statements

42

 

 

1.

Description of the Business

42

 

 

 

2.

Significant Accounting Policies

43

 

 

 

3.

Discontinued Operations

49

 

 

 

4.

Investment in Terminal Joint Venture

50

 

 

 

5.

 Property and Equipment

51

 

 

 

6.

Goodwill and Intangible Assets

52

 

 

 

7.

Capital Construction Fund