matx_Current folio_10Q

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2016

 

OR

 

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

 

For the transition period from                     to                   

 

Commission file number 001-34187

 

Matson, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Hawaii

99-0032630

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

1411 Sand Island Parkway

Honolulu, HI

(Address of principal executive offices)

96819

(Zip Code)

 

(808) 848-1211

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address, and former

fiscal year, if changed since last report)

 

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

 

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

 

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

 

 

 

Large accelerated filer ☒

Accelerated filer ☐

 

 

Non-accelerated filer ☐

Smaller reporting company ☐

(Do not check if a smaller reporting company)

 

 

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

 

Number of shares of common stock outstanding as of September 30, 2016: 42,840,461

 

 

 

 


 

Table of Contents

MATSON, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

 

 

 

 

 

 

 

 

 

    

Page

Part I—FINANCIAL INFORMATION 

 

1

 

 

 

 

Item 1. 

Financial Statements (Unaudited)

 

1

 

Condensed Consolidated Statements of Income and Comprehensive Income

 

1

 

Condensed Consolidated Balance Sheets

 

2

 

Condensed Consolidated Statements of Cash Flows

 

3

 

Notes to Condensed Consolidated Financial Statements

 

4

Item 2. 

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

 

15

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

 

23

Item 4. 

Controls and Procedures

 

24

 

 

 

 

Part II—OTHER INFORMATION 

 

25

 

 

 

Item 1. 

Legal Proceedings

 

25

Item 1A. 

Risk Factors

 

25

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

 

25

Item 3. 

Defaults Upon Senior Securities

 

26

Item 4. 

Mine Safety Disclosures

 

26

Item 5. 

Other Information

 

26

Item 6. 

Exhibits

 

26

 

Signatures

 

27

 

 

 

 

 


 

Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

MATSON, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income and Comprehensive Income

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2016

    

2015

    

2016

    

2015

    

Operating Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Ocean Transportation

 

$

398.0

 

$

444.8

 

$

1,135.0

 

$

1,097.0

 

Logistics

 

 

102.4

 

 

99.5

 

 

287.3

 

 

293.1

 

Total Operating Revenue

 

 

500.4

 

 

544.3

 

 

1,422.3

 

 

1,390.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating costs

 

 

411.4

 

 

424.8

 

 

1,177.7

 

 

1,107.5

 

Equity in income of related party Terminal Joint Venture

 

 

(3.6)

 

 

(4.5)

 

 

(9.2)

 

 

(13.1)

 

Selling, general and administrative

 

 

46.4

 

 

52.2

 

 

136.9

 

 

145.3

 

Total Costs and Expenses

 

 

454.2

 

 

472.5

 

 

1,305.4

 

 

1,239.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

 

46.2

 

 

71.8

 

 

116.9

 

 

150.4

 

Interest expense

 

 

(6.0)

 

 

(4.7)

 

 

(17.4)

 

 

(13.6)

 

Income before Income Taxes

 

 

40.2

 

 

67.1

 

 

99.5

 

 

136.8

 

Income tax expense

 

 

(15.2)

 

 

(25.6)

 

 

(38.4)

 

 

(60.4)

 

Net Income

 

$

25.0

 

$

41.5

 

$

61.1

 

$

76.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

25.0

 

$

41.5

 

$

61.1

 

$

76.4

 

Other Comprehensive Income (Loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Net gain (loss) in prior service cost

 

 

 —

 

 

 —

 

 

0.7

 

 

(0.2)

 

Amortization of prior service cost included in net periodic pension cost

 

 

(0.3)

 

 

(0.4)

 

 

(0.9)

 

 

(1.0)

 

Amortization of net loss included in net periodic pension cost

 

 

0.9

 

 

1.1

 

 

3.0

 

 

3.4

 

Foreign currency translation and other adjustments

 

 

0.6

 

 

0.9

 

 

0.5

 

 

1.6

 

Total Other Comprehensive Income

 

 

1.2

 

 

1.6

 

 

3.3

 

 

3.8

 

Comprehensive Income

 

$

26.2

 

$

43.1

 

$

64.4

 

$

80.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per-Share:

 

$

0.58

 

$

0.95

 

$

1.42

 

$

1.76

 

Diluted Earnings Per-Share:

 

$

0.58

 

$

0.94

 

$

1.40

 

$

1.74

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Number of Shares Outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

42.8

 

 

43.5

 

 

43.1

 

 

43.5

 

Diluted

 

 

43.2

 

 

44.0

 

 

43.5

 

 

44.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Dividends Per-Share

 

$

0.19

 

$

0.18

 

$

0.55

 

$

0.52

 

 

See Notes to Condensed Consolidated Financial Statements.

1


 

Table of Contents

MATSON, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In millions) (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

    

2016

    

2015

    

ASSETS

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

16.4

 

$

25.5

 

Accounts receivable, net

 

 

225.6

 

 

214.3

 

Prepaid expenses and other assets

 

 

68.4

 

 

38.1

 

Total current assets

 

 

310.4

 

 

277.9

 

Long-term Assets:

 

 

 

 

 

 

 

Investment in related party Terminal Joint Venture

 

 

75.8

 

 

66.4

 

Property and equipment, net

 

 

908.1

 

 

860.3

 

Goodwill

 

 

324.1

 

 

241.6

 

Intangible assets, net

 

 

239.1

 

 

139.1

 

Capital Construction Fund - cash on deposit

 

 

110.9

 

 

 —

 

Deferred dry-docking costs

 

 

76.6

 

 

57.6

 

Other long-term assets

 

 

28.1

 

 

26.9

 

Total assets

 

$

2,073.1

 

$

1,669.8

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Current portion of debt

 

$

26.3

 

$

22.0

 

Accounts payable

 

 

180.7

 

 

164.9

 

Payroll and vacation liabilities

 

 

23.9

 

 

23.1

 

Uninsured liabilities

 

 

20.0

 

 

27.1

 

Accrued and other liabilities

 

 

39.3

 

 

60.5

 

Total current liabilities

 

 

290.2

 

 

297.6

 

Long-term Liabilities:

 

 

 

 

 

 

 

Long-term debt

 

 

786.1

 

 

407.9

 

Deferred income taxes

 

 

335.2

 

 

310.5

 

Employee benefit plans

 

 

103.4

 

 

109.3

 

Uninsured and other liabilities

 

 

38.5

 

 

37.7

 

Multi-employer withdrawal liabilities

 

 

60.5

 

 

56.2

 

Total long-term liabilities

 

 

1,323.7

 

 

921.6

 

Commitments and Contingencies (Note 2)

 

 

 

 

 

 

 

Shareholders’ Equity:

 

 

 

 

 

 

 

Capital stock

 

 

32.1

 

 

32.6

 

Additional paid in capital

 

 

286.0

 

 

287.9

 

Accumulated other comprehensive loss

 

 

(43.6)

 

 

(46.9)

 

Retained earnings

 

 

184.7

 

 

177.0

 

Total shareholders’ equity

 

 

459.2

 

 

450.6

 

Total liabilities and shareholders’ equity

 

$

2,073.1

 

$

1,669.8

 

 

See Notes to Condensed Consolidated Financial Statements.

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Table of Contents

MATSON, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In millions) (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 

 

 

    

2016

    

2015

    

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

Net income

 

$

61.1

 

$

76.4

 

Reconciling adjustments:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

71.8

 

 

59.1

 

Deferred income taxes

 

 

24.7

 

 

31.9

 

Share-based compensation expense

 

 

9.2

 

 

9.6

 

Equity in income of related party Terminal Joint Venture

 

 

(9.2)

 

 

(13.1)

 

Distribution from Terminal Joint Venture

 

 

 —

 

 

8.8

 

Other

 

 

2.4

 

 

1.4

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(0.1)

 

 

(11.6)

 

Deferred dry-docking payments

 

 

(43.7)

 

 

(14.0)

 

Deferred dry-docking amortization

 

 

27.8

 

 

16.8

 

Prepaid expenses and other assets

 

 

(34.6)

 

 

(15.2)

 

Accounts payable and accrued liabilities

 

 

10.7

 

 

(2.1)

 

Other liabilities

 

 

(32.6)

 

 

11.0

 

Net cash provided by operating activities

 

 

87.5

 

 

159.0

 

 

 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

Capital expenditures

 

 

(67.3)

 

 

(30.3)

 

Capitalized vessel construction expenditures

 

 

(39.2)

 

 

 —

 

Proceeds from disposal of property and equipment

 

 

2.2

 

 

4.7

 

Cash deposits into Capital Construction Fund

 

 

(123.4)

 

 

(77.9)

 

Withdrawals from Capital Construction Fund

 

 

12.5

 

 

93.7

 

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

 

 

(112.8)

 

 

 —

 

Payments for Horizon’s common stock, net of cash acquired, and other acquisitions

 

 

 —

 

 

(29.0)

 

Net cash used in investing activities

 

 

(328.0)

 

 

(38.8)

 

 

 

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

Repayments of debt and capital leases

 

 

(13.7)

 

 

(13.4)

 

Proceeds from revolving credit facility

 

 

1,275.0

 

 

557.0

 

Repayments of revolving credit facility

 

 

(1,080.0)

 

 

(439.0)

 

Payments of financing costs

 

 

 —

 

 

(0.9)

 

Proceeds from issuance of debt

 

 

200.0

 

 

 —

 

Repayments of Span Alaska debt

 

 

(81.9)

 

 

 —

 

Repayments of Horizon debt and redemption of warrants

 

 

 —

 

 

(467.5)

 

Proceeds from issuance of capital stock

 

 

0.6

 

 

1.4

 

Tax withholding related to net share settlements of restricted stock units

 

 

(6.8)

 

 

(2.9)

 

Dividends paid

 

 

(24.0)

 

 

(22.8)

 

Payments for shares repurchased

 

 

(37.8)

 

 

 —

 

Net cash provided by (used in) financing activities

 

 

231.4

 

 

(388.1)

 

 

 

 

 

 

 

 

 

Net Decrease in Cash and Cash Equivalents

 

 

(9.1)

 

 

(267.9)

 

Cash and cash equivalents, beginning of the period

 

 

25.5

 

 

293.4

 

Cash and cash equivalents, end of the period

 

$

16.4

 

$

25.5

 

 

 

 

 

 

 

 

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

 

Interest paid, net of capitalized interest

 

$

15.7

 

$

13.2

 

Income tax paid

 

$

16.2

 

$

34.2

 

 

 

 

 

 

 

 

 

Non-cash Information:

 

 

 

 

 

 

 

Capital expenditures included in accounts payable and accrued liabilities

 

$

12.6

 

$

6.1

 

Capital lease obligations

 

$

 —

 

$

1.7

 

 

See Notes to Condensed Consolidated Financial Statements.

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Table of Contents

MATSON, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANICAL STATEMENTS

(Unaudited)

 

1.          DESCRIPTION OF THE BUSINESS

 

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

 

Ocean Transportation: Matson’s Ocean Transportation business is conducted through Matson Navigation Company, Inc. (“MatNav”), a wholly-owned subsidiary of Matson, Inc.  Founded in 1882, MatNav is an asset-based business that provides a vital lifeline of ocean freight transportation services to the domestic offshore economies of Hawaii, Alaska, and Guam, and to other island economies including Micronesia and various islands in the South Pacific.  MatNav also operates a premium, expedited service from China to Long Beach, California.  In addition, subsidiaries of MatNav provide container stevedoring, container equipment maintenance and other terminal services for MatNav and other ocean carriers on the Hawaiian islands of Oahu, Hawaii, Maui and Kauai, and in the Alaska locations of Anchorage, Kodiak, Dutch Harbor and Akutan.  The Company's fleet of 22 owned vessels includes containerships, combination container and roll-on/roll-off ships and custom-designed barges.

 

The Company has a 35 percent ownership interest in SSA Terminals, LLC (“SSAT”), a joint venture between Matson Ventures, Inc., a wholly-owned subsidiary of MatNav, and SSA Ventures, Inc., a subsidiary of Carrix, Inc.  SSAT provides terminal and stevedoring services to various carriers at six terminal facilities on the West Coast of the United States of America (“U.S.”), including to MatNav at several of those facilities.  Matson records its share of income or loss in the joint venture in operating costs in the Condensed Consolidated Statements of Income and Comprehensive Income, and within the Ocean Transportation segment due to the nature of SSAT’s operations.

 

Logistics: The Company’s logistics business is conducted through Matson Logistics, Inc. (“Matson Logistics”), a wholly-owned subsidiary of MatNav.  Established in 1987, Matson Logistics is an asset-light business that provides multimodal transportation services, including domestic and international rail intermodal service (“Intermodal”); long-haul and regional highway brokerage, specialized hauling, flat-bed and project services, less-than-truckload services, and expedited freight services (collectively "Highway"); less-than-container load consolidation and freight forwarding services (collectively “Freight Forwarding”); supply chain management; and warehousing and distribution services.

 

On August 4, 2016, Matson Logistics completed the purchase of 100 percent of the membership interests of Span Intermediate, LLC (“Span Alaska”), a Freight Forwarding business (see Note 3, Business Combinations).

 

2.          GENERAL AND SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation: The Condensed Consolidated Financial Statements are unaudited.  The consolidated financial statements include the accounts of Matson, Inc. and all wholly-owned subsidiaries, after elimination of significant intercompany revenues, and costs and expenses.  Significant investments in businesses, partnerships, and limited liability companies in which the Company does not have a controlling financial interest, but has the ability to exercise significant influence, are accounted for under the equity method.  A controlling financial interest is one in which the Company has a majority voting interest or one in which the Company is the primary beneficiary of a variable interest entity.

 

Due to the nature of the Company’s operations and the Company’s acquisition of Horizon Lines, Inc. (“Horizon”) on May 29, 2015, and Span Alaska on August 4, 2016, the results for interim periods are not necessarily indicative of results to be expected for the year.  These Condensed Consolidated Financial Statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for fair presentation of the results of the interim periods, and do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. 

 

The Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2015, filed with the Securities and Exchange Commission (“SEC”) on February 26, 2016.

 

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Table of Contents

The Condensed Consolidated Statements of Income and Comprehensive Income include the operations of Horizon from May 29, 2015, and Span Alaska from August 4, 2016.

 

Fiscal Period: The period end for Matson, Inc. covered by this report is September 30, 2016.  The period end for MatNav and its subsidiaries covered by this report occurred on the last Friday in September, or September 23, 2016.

 

Significant Accounting Policies: The Company’s significant accounting policies are described in Note 2 to the Consolidated Financial Statements included in Item 8 of the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2015.

 

Property and Equipment: Property and equipment was $908.1 million and $860.3 million at September 30, 2016 and December 31, 2015, and is recorded net of accumulated depreciation of $1,183.8 million and $1,128.6 million, respectively.  Property and equipment includes vessel construction expenditures of $67.3 million and $29.2 million, and capitalized interest of $1.9 million and $0.8 million at September 30, 2016 and December 31, 2015, respectively.

 

Goodwill: Changes in the Company’s goodwill for the three and nine months ended September 30, 2016 and 2015 consist of the following (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

 

Ocean

 

 

 

 

 

 

    

Transportation

    

Logistics

    

Total

 

Balance at December 31, 2015

 

$

215.0

 

$

26.6

 

$

241.6

 

Additions

 

 

 —

 

 

 —

 

 

 —

 

Balance at March 31, 2016

 

 

215.0

 

 

26.6

 

 

241.6

 

Additions

 

 

3.5

 

 

 —

 

 

3.5

 

Balance at June 30, 2016

 

 

218.5

 

 

26.6

 

 

245.1

 

Additions

 

 

 —

 

 

79.0

 

 

79.0

 

Balance at September 30, 2016

 

$

218.5

 

$

105.6

 

$

324.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

 

Ocean

 

 

 

 

 

 

    

Transportation

    

Logistics

    

Total

 

Balance at December 31, 2014

 

$

0.8

 

$

26.6

 

$

27.4

 

Additions

 

 

 —

 

 

 —

 

 

 —

 

Balance at March 31, 2015

 

 

0.8

 

 

26.6

 

 

27.4

 

Additions

 

 

219.7

 

 

 —

 

 

219.7

 

Balance at June 30, 2015

 

 

220.5

 

 

26.6

 

 

247.1

 

Additions

 

 

1.2

 

 

 —

 

 

1.2

 

Balance at September 30, 2015

 

$

221.7

 

$

26.6

 

$

248.3

 

 

Additions to Ocean Transportation goodwill for the three and nine months ended September 30, 2016 and 2015, relate to the Horizon acquisition, and additions to Logistics goodwill for the three and nine months ended September 30, 2016, relate to the Span Alaska acquisition (see Note 3, Business Combinations).

 

Intangible Assets, Net: Intangible assets were $239.1 million and $139.1 million at September 30, 2016 and December 31, 2015, and were recorded net of accumulated amortization of $18.5 million and $12.3 million, respectively. 

 

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Capital Construction Fund: The Company’s Capital Construction Fund (“CCF”) is described in Note 7 to the Consolidated Financial Statements included in Item 8 of the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2015.  As of September 30, 2016 and December 31, 2015, the Company had $110.9 million and nominal amounts on deposit in the CCF, respectively.  These amounts are held in a money market account and classified as long-term assets in the Company’s Condensed Consolidated Balance Sheets, as the Company intends to use qualified cash withdrawals to fund long-term investment in the construction of new vessels.

 

During the three months ended September 30, 2016, the Company made cash deposits of $110.8 million into the CCF.  During the nine months ended September 30, 2016, the Company made cash deposits of $123.4 million into the CCF.  Additionally, $12.5 million of qualified cash withdrawal was made from the CCF during the nine months ended September 30, 2016.  On October 21, 2016, the Company withdrew $32.5 million from the CCF and paid a scheduled progress payment associated with the construction of the new vessels.

 

As of September 30, 2016 and December 31, 2015, $165.1 million and $176.6 million, respectively, of eligible accounts receivable were assigned to the CCF.  Due to the nature of the assignment of eligible accounts receivable into the CCF, such assigned amounts are classified as part of accounts receivable in the Condensed Consolidated Balance Sheets.

 

Accumulated Other Comprehensive Loss: Changes in accumulated other comprehensive loss by component, net of tax, for the three and nine months ended September 30, 2016 and 2015 are as follows (in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

Non-

 

Foreign

 

 

 

Other

 

 

 

 

 

Post

 

Qualified

 

Currency

 

Interest

 

Comprehensive

 

 

    

Pensions

    

Retirement

    

Plans

    

Transaction

    

Hedge

    

Income (Loss)

 

Balance at December 31, 2015

 

$

(41.7)

 

$

(4.7)

 

$

(0.9)

 

$

1.0

 

$

(0.6)

 

$

(46.9)

 

Net gain in prior service costs

 

 

 —

 

 

0.7

 

 

 —

 

 

 —

 

 

 —

 

 

0.7

 

Amortization of prior service cost

 

 

(0.4)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(0.4)

 

Amortization of net loss

 

 

0.8

 

 

0.2

 

 

0.1

 

 

 —

 

 

 —

 

 

1.1

 

Foreign currency translation adjustment

 

 

 —

 

 

 —

 

 

 —

 

 

(0.1)

 

 

 —

 

 

(0.1)

 

Balance at March 31, 2016

 

 

(41.3)

 

 

(3.8)

 

 

(0.8)

 

 

0.9

 

 

(0.6)

 

 

(45.6)

 

Amortization of prior service cost

 

 

(0.3)

 

 

 —

 

 

0.1

 

 

 —

 

 

 —

 

 

(0.2)

 

Amortization of net loss

 

 

0.8

 

 

0.2

 

 

 —

 

 

 —

 

 

 —

 

 

1.0

 

Balance at June 30, 2016

 

 

(40.8)

 

 

(3.6)

 

 

(0.7)

 

 

0.9

 

 

(0.6)

 

 

(44.8)

 

Amortization of prior service cost

 

 

(0.3)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(0.3)

 

Amortization of net loss

 

 

0.8

 

 

0.2

 

 

(0.1)

 

 

 —

 

 

 —

 

 

0.9

 

Foreign currency translation adjustment

 

 

 —

 

 

 —

 

 

 —

 

 

0.6

 

 

 —

 

 

0.6

 

Balance at September 30, 2016

 

$

(40.3)

 

$

(3.4)

 

$

(0.8)

 

$

1.5

 

$

(0.6)

 

$

(43.6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

Non-

 

Foreign

 

 

 

Other

 

 

 

 

 

Post

 

Qualified

 

Currency

 

Interest

 

Comprehensive

 

 

    

Pensions

    

Retirement

    

Plans

    

Transaction

    

Hedge

    

Income (Loss)

 

Balance at December 31, 2014

 

$

(45.0)

 

$

(7.2)

 

$

(0.7)

 

$

0.3

 

$

(0.7)

 

$

(53.3)

 

Net loss in prior service costs

 

 

(0.2)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(0.2)

 

Amortization of prior service cost

 

 

(0.4)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(0.4)

 

Amortization of net loss

 

 

1.0

 

 

0.4

 

 

 —

 

 

 —

 

 

 —

 

 

1.4

 

Foreign currency translation adjustment

 

 

 —

 

 

 —

 

 

 —

 

 

0.1

 

 

 —

 

 

0.1

 

Balance at March 31, 2015

 

 

(44.6)

 

 

(6.8)

 

 

(0.7)

 

 

0.4

 

 

(0.7)

 

 

(52.4)

 

Amortization of prior service cost

 

 

(0.2)

 

 

0.1

 

 

(0.1)

 

 

 —

 

 

 —

 

 

(0.2)

 

Amortization of net loss

 

 

0.9

 

 

0.2

 

 

(0.2)

 

 

 —

 

 

 —

 

 

0.9

 

Foreign currency translation adjustment

 

 

 —

 

 

 —

 

 

 —

 

 

0.6

 

 

 —

 

 

0.6

 

Balance at June 30, 2015

 

 

(43.9)

 

 

(6.5)

 

 

(1.0)

 

 

1.0

 

 

(0.7)

 

 

(51.1)

 

Amortization of prior service cost

 

 

(0.4)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(0.4)

 

Amortization of net loss

 

 

1.0

 

 

0.1

 

 

 —

 

 

 —

 

 

 —

 

 

1.1

 

Foreign currency translation adjustment

 

 

 —

 

 

 —

 

 

 —

 

 

0.8

 

 

 —

 

 

0.8

 

Other

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

0.1

 

 

0.1

 

Balance at September 30, 2015

 

$

(43.3)

 

$

(6.4)

 

$

(1.0)

 

$

1.8

 

$

(0.6)

 

$

(49.5)

 

 

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

 

The Company previously resolved all federal criminal claims, and all criminal, civil and administrative claims that the State of Hawaii may have had arising from the molasses release.  On October 13, 2016, the United States Department of Justice delivered a letter to Company counsel stating that it is prepared to file a civil penalty action under the Clean Water Act but would be willing to discuss a potential resolution of those claims prior to filing an action.  The Company believes it has defenses against those claims.

 

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

 

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

 

Subsequent Event: On October 27, 2016, the Company entered into a private placement commitment letter under which it expects to issue $75 million of 11-year senior unsecured notes (the “11-year Notes”) within 90 days, subject to entering into definitive documentation and satisfying other customary closing conditions.  The 11-year Notes are expected to have a weighted average life of approximately 8 years, a fixed interest rate of 3.37 percent, and financial and other covenants that are substantially the same as the covenants in the Company’s existing outstanding senior unsecured notes.  Proceeds of the 11-year Notes are expected to be used to pay down the Company’s revolving credit facility and for general corporate purposes.

 

New Accounting Pronouncements: Leases: In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which requires lessees to record most leases on their balance sheets but recognize the expenses on their income statements in a manner similar to current practice.  ASU 2016-02 states that a lessee would recognize a lease liability for the obligation to make lease payments, and a right-of-use asset for the underlying leased asset for the period of the lease term.  The new standard is effective for interim and annual periods beginning after December 15, 2018 and early adoption is permitted.  The Company is in the process of evaluating this guidance.

 

Share-Based Awards: In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.”  The amendments are effective for public companies for annual periods beginning after December 15, 2016, and interim periods within those annual periods.  Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows.  Early adoption is permitted.  The Company is in the process of evaluating this guidance.

 

3.          BUSINESS COMBINATION

 

Span Alaska Acquisition:  On August 4, 2016 (the “Effective Date”), Matson Logistics completed the purchase of 100 percent of the membership interests of Span Alaska pursuant to the terms of the Membership Interest Purchase Agreement, dated July 18, 2016.  At the Effective Date, Span Alaska became a wholly-owned subsidiary of Matson Logistics.  Span Alaska is an asset-light logistics company providing freight forwarding services primarily to the Alaska market.  Span Alaska consolidates freight in Auburn, Washington, for shipment to Alaska and distribution through a network of terminals in Anchorage, Fairbanks, Wasilla, Kenai, Juneau and Kodiak.  Span Alaska’s operations are recorded within the Logistics segment of the Company.

 

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Total consideration paid by the Company on the Effective Date for the membership interests in Span Alaska including the repayment of Span Alaska’s debt and accrued interest, is as follows:

 

 

 

 

 

 

(in millions)

    

Total Consideration

 

Membership interests in Span Alaska

 

$

117.2

 

Span Alaska’s debt (including accrued interest)

 

 

81.9

 

Total

 

$

199.1

 

 

The Span Alaska acquisition was accounted for as a business combination in accordance with ASC 805.  The assets acquired and liabilities assumed in the Span Alaska acquisition were recorded based on fair value estimates as of the Effective Date, with the remaining unallocated purchase price recorded as goodwill.  Such fair value estimates require significant judgement, and include estimates used in the valuation of property and equipment, and intangible assets.  The Company’s fair value estimates are subject to revision pending the Company’s final fair value analysis and purchase price calculations.  Final estimates of fair value may be significantly different from those reflected in the Company’s Condensed Consolidated Financial Statements as of September 30, 2016. 

 

The following table summarizes the preliminary fair values assigned to Span Alaska’s assets acquired and liabilities assumed at the Effective Date:

 

 

 

 

 

 

Purchase Price Allocation (in millions)

    

Total

 

Cash and cash equivalents

 

$

4.4

 

Accounts receivable

 

 

11.1

 

Other current and long-term assets

 

 

1.0

 

Property and equipment

 

 

8.1

 

Intangibles – Customer relationships

 

 

79.0

 

Intangibles – Trade name

 

 

27.3

 

Accounts payable

 

 

(3.3)

 

Accruals and other current liabilities

 

 

(6.3)

 

Capital lease obligations

 

 

(1.2)

 

Span Alaska’s debt

 

 

(81.9)

 

Total identifiable assets less liabilities

 

 

38.2

 

Total consideration for membership interests in Span Alaska

 

 

(117.2)

 

Goodwill

 

$

79.0

 

 

Property and equipment: Property and equipment of $8.1 million includes the fair value of terminal and transportation equipment (trucks, forklifts, trailers, containers and other warehouse equipment), leasehold improvements and other office equipment.

 

Intangibles - The customer relationships and trade name intangible assets were recorded using preliminary information obtained from valuation specialists engaged by the Company to assist management with estimating the fair value of these intangible assets.

 

Customer relationships: Intangibles of $79.0 million related to customer relationships which are being amortized over 20 years.  In determining the amortization period, the Company considered the historical trends of Span Alaska’s customers and related attrition rates.  The Company also considered potential future attrition risks, existing competition, the costs associated with establishing a Freight Forwarding business including the need to develop a broad base of customer relationships over a period of time.  Furthermore, the Company considered existing relationships with ocean transportation service providers in Alaska, and the potential impact on competition.  As a result, the Company believes that Span Alaska’s customers are considered less vulnerable to attrition.

 

Trade name: Intangibles of $27.3 million related to the Span Alaska trade name, which was determined to have an indefinite life.  Span Alaska has operated for a period in excess of 38 years, and its trade name is widely known in Alaska for high quality and reliable Freight Forwarding services.  The Span Alaska operations will continue to be operated under the Span Alaska trade name, independent of Matson’s ocean transportation operation in Alaska.

 

Span Alaska’s debt: The Company repaid all of Span Alaska’s debt including accrued interest of $81.9 million, as of the Effective Date.

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Goodwill: The Company recorded goodwill of $79.0 million from the Span Acquisition, which represents the excess of the fair value of consideration paid by the Company over the fair value of the underlying identifiable assets acquired and liabilities assumed.   In accordance with Accounting Standards Codification (ASC) 805, Business Combination (“ASC 805”), goodwill will not be amortized, but instead will be tested for impairment at least annually, or whenever events or circumstances have occurred that may indicate a possible impairment. 

 

Goodwill arises as a result of several factors: (i) The Span Alaska acquisition significantly expands Matson’s Logistics’ platform and Matson’s long-term commitment into the Alaska market; (ii) Span Alaska is a leading freight forwarding business and continues to be led by an experienced management team and assembled workforce with knowledge of the Alaska industry and of its customers; and (iii) the additional growth potential of Span Alaska. 

 

The Company's Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2016 include operating revenue of $8.5 million (after elimination of intercompany revenue), and operating income of $1.3 million, respectively, from Span Alaska’s operations.  One-time acquisition related costs of approximately $2.9 million incurred as a result of the Span Alaska acquisition, is included in selling, general and administrative costs in the Consolidated Statements of Income and Comprehensive Income.  

 

Horizon Acquisition: On May 29, 2015, Matson completed its acquisition of Horizon whereby MatNav acquired Horizon’s Alaska operations and assumed all of Horizon’s non-Hawaii assets and liabilities (the “Horizon Acquisition”).  Immediately before the completion of the Horizon Acquisition, Horizon sold certain of its subsidiaries to the Pasha Group (the “Pasha Transaction”) that: (i) conducted Horizon’s Hawaii operations (including owning the assets used to conduct such Hawaii operations and being responsible for the liabilities related thereto), and (ii) employed the Horizon employees who conducted its Hawaii operations.  Horizon also completed the termination of its Puerto Rico operations during the first quarter of 2015.  The Alaska operations are recorded within the Ocean Transportation segment of the Company.

 

Total consideration for the Horizon Acquisition was $495.4 million based on the fair value of common shares of $29.4 million, warrants of $37.1 million, and Horizon’s debt including accrued interest and breakage fees of $428.9 million.  Immediately following the close of the Horizon Acquisition, the Company repaid the assumed debt and redeemed all of Horizon’s outstanding warrants.

 

The Horizon Acquisition was accounted for as a business combination in accordance with ASC 805.  Assets acquired and liabilities assumed were recorded at estimated fair value at May 29, 2015, with the remaining unallocated purchase price of $217.7 million recorded as goodwill.  As of June 30, 2016, the purchase price accounting for the Horizon Acquisition was considered final. 

 

The Company's Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2016 include operating revenue of $74.0 million and $208.2 million, and operating income of $11.3 million and $21.6 million, respectively, from Horizon’s operations.  One-time acquisition related costs incurred post December 31, 2015 were not material.  

 

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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

 

(Unaudited)

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

September 30, 

 

 

September 30, 

 

(in millions, except per-share amount)

    

2016

    

2015

    

2016

    

2015

    

Pro Forma Combined:

    

 

 

    

 

 

    

 

 

    

 

 

    

Operating revenue

 

$

507.0

 

$

559.1

 

$

1,457.5

 

$

1,569.5

 

Net income

 

$

28.2

 

$

38.3

 

$

67.7

 

$

68.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings Per-Share:

 

$

0.66

 

$

0.88

 

$

1.57

 

$

1.58

 

Diluted Earnings Per-Share:

 

$

0.66

 

$

0.87

 

$

1.56

 

$

1.57

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-Average Number of Shares Outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

  Basic

 

 

42.8

 

 

43.5

 

 

43.1

 

 

43.5

 

  Diluted

 

 

43.2

 

 

44.0

 

 

43.5

 

 

44.0

 

 

 

4.          DEBT

 

At September 30, 2016 and December 31, 2015, the Company’s debt consisted of the following (in millions):

 

 

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

 

    

2016

    

2015

    

Term Loans:

 

 

 

 

 

 

 

5.79 %, payable through 2020

 

$

28.0

 

$

31.5

 

3.66 %, payable through 2023