matx_Current folio_10Q

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2019

 

OR

 

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

 

For the transition period from                     to                   

 

Commission file number 001-34187

 

Matson, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Hawaii

99-0032630

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

1411 Sand Island Parkway

Honolulu, HI

(Address of principal executive offices)

96819

(Zip Code)

 

(808) 848-1211

(Registrant’s telephone number, including area code)

 

Not Applicable

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

 

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

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

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

 

 

 

Large accelerated filer ☒

Accelerated filer ☐

 

 

Non-accelerated filer ☐

Smaller reporting company ☐

 

 

 

Emerging growth company ☐

 

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

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

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

 

 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, without par value

MATX

New York Stock Exchange

Number of shares of common stock outstanding as of March 31, 2019: 42,826,363

 

 

 

 


 

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

 

Condensed Consolidated Statements of Shareholders’ Equity

 

4

 

Notes to the Condensed Consolidated Financial Statements

 

5

Item 2. 

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

 

15

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

 

21

Item 4. 

Controls and Procedures

 

21

 

 

 

 

Part II—OTHER INFORMATION 

 

21

 

 

 

Item 1. 

Legal Proceedings

 

21

Item 1A. 

Risk Factors

 

22

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

 

22

Item 3. 

Defaults Upon Senior Securities

 

22

Item 4. 

Mine Safety Disclosures

 

22

Item 5. 

Other Information

 

22

Item 6. 

Exhibits

 

22

 

Signatures

 

23

 

 

 

 

 


 

Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

MATSON, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income and Comprehensive Income

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

(In millions, except per share amounts)

    

2019

    

2018

    

Operating Revenue:

 

 

 

 

 

 

 

Ocean Transportation

 

$

397.9

 

$

379.3

 

Logistics

 

 

134.5

 

 

132.1

 

Total Operating Revenue

 

 

532.4

 

 

511.4

 

 

 

 

 

 

 

 

 

Costs and Expenses:

 

 

 

 

 

 

 

Operating costs

 

 

(467.1)

 

 

(439.3)

 

Equity in income of Terminal Joint Venture

 

 

8.5

 

 

10.5

 

Selling, general and administrative

 

 

(56.3)

 

 

(53.9)

 

Total Costs and Expenses

 

 

(514.9)

 

 

(482.7)

 

 

 

 

 

 

 

 

 

Operating Income

 

 

17.5

 

 

28.7

 

Interest expense

 

 

(4.6)

 

 

(5.0)

 

Other income (expense), net

 

 

0.6

 

 

0.8

 

Income before Income Taxes

 

 

13.5

 

 

24.5

 

Income taxes

 

 

(1.0)

 

 

(10.3)

 

Net Income

 

$

12.5

 

$

14.2

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

Net Income

 

$

12.5

 

$

14.2

 

Other Comprehensive Income (Loss):

 

 

 

 

 

 

 

Amortization of prior service cost

 

 

(1.1)

 

 

(1.3)

 

Amortization of net loss

 

 

0.9

 

 

1.3

 

Other adjustments

 

 

 —

 

 

0.2

 

Total Other Comprehensive Income (Loss)

 

 

(0.2)

 

 

0.2

 

Comprehensive Income

 

$

12.3

 

$

14.4

 

 

 

 

 

 

 

 

 

Basic Earnings Per Share:

 

$

0.29

 

$

0.33

 

Diluted Earnings Per Share:

 

$

0.29

 

$

0.33

 

 

 

 

 

 

 

 

 

Weighted Average Number of Shares Outstanding:

 

 

 

 

 

 

 

Basic

 

 

42.8

 

 

42.6

 

Diluted

 

 

43.1

 

 

42.9

 

 

See Notes to Condensed Consolidated Financial Statements.

1


 

Table of Contents

MATSON, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

(In millions)

    

2019

    

2018

    

ASSETS

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

15.4

 

$

19.6

 

Accounts receivable, net

 

 

217.9

 

 

223.7

 

Prepaid expenses and other assets

 

 

73.3

 

 

75.1

 

Total current assets

 

 

306.6

 

 

318.4

 

Long-term Assets:

 

 

 

 

 

 

 

Investment in Terminal Joint Venture

 

 

91.3

 

 

87.0

 

Property and equipment, net

 

 

1,386.2

 

 

1,366.6

 

Operating lease right of use assets

 

 

243.3

 

 

 —

 

Goodwill

 

 

327.8

 

 

327.8

 

Intangible assets, net

 

 

211.2

 

 

214.0

 

Deferred dry-docking costs, net

 

 

60.2

 

 

67.1

 

Other long-term assets

 

 

50.2

 

 

49.5

 

Total long-term assets

 

 

2,370.2

 

 

2,112.0

 

Total Assets

 

$

2,676.8

 

$

2,430.4

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Current portion of debt

 

$

45.2

 

$

42.1

 

Accounts payable

 

 

232.4

 

 

246.8

 

Operating lease liabilities

 

 

54.3

 

 

 —

 

Accruals and other liabilities

 

 

79.2

 

 

81.9

 

Total current liabilities

 

 

411.1

 

 

370.8

 

Long-term Liabilities:

 

 

 

 

 

 

 

Long-term debt

 

 

822.9

 

 

814.3

 

Long-term operating lease liabilities

 

 

196.7

 

 

 —

 

Deferred income taxes

 

 

317.9

 

 

312.7

 

Other long-term liabilities

 

 

165.2

 

 

177.3

 

Total long-term liabilities

 

 

1,502.7

 

 

1,304.3

 

Commitments and Contingencies (Note 2)

 

 

 

 

 

 

 

Shareholders’ Equity:

 

 

 

 

 

 

 

Common stock

 

 

32.1

 

 

32.0

 

Additional paid in capital

 

 

297.8

 

 

297.8

 

Accumulated other comprehensive loss, net

 

 

(34.7)

 

 

(34.5)

 

Retained earnings

 

 

467.8

 

 

460.0

 

Total shareholders’ equity

 

 

763.0

 

 

755.3

 

Total Liabilities and Shareholders’ Equity

 

$

2,676.8

 

$

2,430.4

 

 

See Notes to Condensed Consolidated Financial Statements.

2


 

Table of Contents

MATSON, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

(In millions)

    

2019

    

2018

    

Cash Flows From Operating Activities:

 

 

 

 

 

 

 

Net income

 

$

12.5

 

$

14.2

 

Reconciling adjustments:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

23.3

 

 

23.6

 

Non-cash operating lease expense

 

 

16.7

 

 

 —

 

Deferred income taxes

 

 

3.8

 

 

6.4

 

Share-based compensation expense

 

 

3.2

 

 

2.7

 

Equity in income of Terminal Joint Venture

 

 

(8.5)

 

 

(10.5)

 

Distribution from Terminal Joint Venture

 

 

4.2

 

 

7.0

 

Other

 

 

(0.6)

 

 

(0.6)

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable, net

 

 

5.8

 

 

(14.5)

 

Deferred dry-docking payments

 

 

(3.2)

 

 

(4.6)

 

Deferred dry-docking amortization

 

 

8.1

 

 

9.2

 

Prepaid expenses and other assets

 

 

4.8

 

 

8.2

 

Accounts payable, accruals and other liabilities

 

 

(20.4)

 

 

(11.0)

 

Operating lease liabilities

 

 

(16.7)

 

 

 —

 

Other long-term liabilities

 

 

0.4

 

 

(0.2)

 

Net cash provided by operating activities

 

 

33.4

 

 

29.9

 

 

 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

 

 

Capitalized vessel construction expenditures

 

 

(20.9)

 

 

(57.7)

 

Other capital expenditures

 

 

(13.5)

 

 

(13.1)

 

Proceeds from disposal of property and equipment

 

 

1.2

 

 

1.0

 

Cash deposits into Capital Construction Fund

 

 

(13.4)

 

 

(53.5)

 

Withdrawals from Capital Construction Fund

 

 

13.4

 

 

53.5

 

Net cash used in investing activities

 

 

(33.2)

 

 

(69.8)

 

 

 

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

 

 

Repayments of debt and capital leases

 

 

(8.2)

 

 

(2.5)

 

Proceeds from revolving credit facility

 

 

107.8

 

 

117.4

 

Repayments of revolving credit facility

 

 

(87.8)

 

 

(68.4)

 

Proceeds from issuance of capital stock

 

 

 —

 

 

0.2

 

Dividends paid

 

 

(9.1)

 

 

(8.7)

 

Tax withholding related to net share settlements of restricted stock units

 

 

(3.1)

 

 

(4.2)

 

Net cash (used in) provided by financing activities

 

 

(0.4)

 

 

33.8

 

 

 

 

 

 

 

 

 

Net Decrease in Cash, Cash Equivalents and Restricted Cash

 

 

(0.2)

 

 

(6.1)

 

Cash, Cash Equivalents and Restricted Cash, Beginning of the Period

 

 

24.5

 

 

19.8

 

Cash, Cash Equivalents and Restricted Cash, End of the Period

 

$

24.3

 

$

13.7

 

 

 

 

 

 

 

 

 

Reconciliation of Cash, Cash Equivalents, and Restricted Cash, at End of the Period:

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

$

15.4

 

$

13.7

 

Restricted Cash

 

 

8.9

 

 

 —

 

Total Cash, Cash Equivalents and Restricted Cash, End of the Period

 

$

24.3

 

$

13.7

 

 

 

 

 

 

 

 

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

 

Interest paid, net of capitalized interest

 

$

4.8

 

$

5.3

 

Income tax paid, net of income tax refunds

 

$

(5.4)

 

$

0.2

 

 

 

 

 

 

 

 

 

Non-cash Information:

 

 

 

 

 

 

 

Capital expenditures included in accounts payable, accruals and other liabilities

 

$

5.5

 

$

0.7

 

 

See Notes to Condensed Consolidated Financial Statements.

3


 

Table of Contents

MATSON, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Shareholders’ Equity

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

Common Stock

 

Additional

 

Other

 

 

 

 

 

 

 

 

 

 

Stated

 

Paid In

 

Comprehensive

 

Retained

 

 

 

(In millions, except per share amounts)

    

Shares

    

Value

    

Capital

    

Income (Loss)

    

Earnings

    

Total

Balance at December 31, 2018

 

42.7

 

$

32.0

 

$

297.8

 

$

(34.5)

 

$

460.0

 

$

755.3

Adjustment related to the adoption of new lease accounting standard (see Note 7)

 

 

 

 

 

 

 

 

 

4.4

 

 

4.4

Net income

 

 

 

 

 

 

 

 

 

12.5

 

 

12.5

Other comprehensive loss, net of tax

 

 

 

 

 

 

 

(0.2)

 

 

 —

 

 

(0.2)

Share-based compensation

 

 

 

 

 

3.2

 

 

 

 

 

 

3.2

Shares issued, net of shares withheld for employee taxes

 

0.1

 

 

0.1

 

 

(3.2)

 

 

 

 

 

 

(3.1)

Dividends ($0.21 per share)

 

 

 

 

 

 

 

 

 

(9.1)

 

 

(9.1)

Balance at March 31, 2019

 

42.8

 

$

32.1

 

$

297.8

 

$

(34.7)

 

$

467.8

 

$

763.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

Common Stock

 

Additional

 

Other

 

 

 

 

 

 

 

 

 

 

Stated

 

Paid In

 

Comprehensive

 

Retained

 

 

 

(In millions, except per share amounts)

    

Shares

    

Value

    

Capital

    

Income (Loss)

    

Earnings

    

Total

Balance at December 31, 2017

 

42.5

 

$

31.9

 

$

289.7

 

$

(24.9)

 

$

380.5

 

$

677.2

Reclassification resulting from adoption of new accounting pronouncement

 

 

 

 

 

 

 

(6.0)

 

 

6.0

 

 

 —

Net income

 

 

 

 

 

 

 

 

 

14.2

 

 

14.2

Other comprehensive income, net of tax

 

 

 

 

 

 

 

0.2

 

 

 

 

0.2

Share-based compensation

 

 

 

 

 

2.7

 

 

 

 

 

 

2.7

Shares issued, net of shares withheld for employee taxes

 

0.2

 

 

0.1

 

 

(4.3)

 

 

 

 

 

 

(4.2)

Dividends ($0.20 per share)

 

 

 

 

 

 

 

 

 

(8.7)

 

 

(8.7)

Balance at March 31, 2018

 

42.7

 

$

32.0

 

$

288.1

 

$

(30.7)

 

$

392.0

 

$

681.4

 

 

See Notes to Condensed Consolidated Financial Statements.

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Table of Contents

MATSON, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANICAL STATEMENTS

(Unaudited)

 

1.          DESCRIPTION OF THE BUSINESS

 

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

 

Ocean Transportation:  Matson’s Ocean Transportation business is conducted through Matson Navigation Company, Inc. (“MatNav”), a wholly-owned subsidiary of Matson, Inc.  Founded in 1882, MatNav provides a vital lifeline of ocean freight transportation services to the domestic non-contiguous economies of Hawaii, Alaska, and Guam, and to other island economies in Micronesia.  MatNav also operates a premium, expedited service from China to Long Beach, California, and also provides services to Okinawa, Japan and various islands in the South Pacific.  In addition, subsidiaries of MatNav provide container stevedoring, refrigerated cargo services, inland transportation and other terminal services for MatNav and other ocean carriers on the Hawaiian Islands of Oahu, Hawaii, Maui and Kauai, and in the Alaska locations of Anchorage, Kodiak and Dutch Harbor.

 

Matson has a 35 percent ownership interest in SSA Terminals, LLC (“SSAT”), a joint venture between Matson Ventures, Inc., a wholly-owned subsidiary of MatNav, and SSA Ventures, Inc., a subsidiary of Carrix, Inc.  SSAT provides terminal and stevedoring services to various carriers at eight terminal facilities on the U.S. West Coast, including four facilities which are used by MatNav (“Terminal Joint Venture”).  Matson records its share of net income from SSAT in costs and expenses in the Condensed Consolidated Statements of Income and Comprehensive Income, and within the Ocean Transportation segment due to the nature of SSAT’s operations.

 

Logistics:  Matson’s Logistics business is conducted through Matson Logistics, Inc. (“Matson Logistics”), a wholly-owned subsidiary of MatNav.  Established in 1987, Matson Logistics is an asset-light business that provides a variety of logistic services to its customers including: (i) multimodal transportation brokerage of domestic and international rail intermodal service, long-haul and regional highway trucking services, specialized hauling, flat-bed and project services, less-than-truckload services, and expedited freight services (collectively “Transportation Brokerage” services); (ii) less-than-container load (“LCL”) consolidation and freight forwarding services (collectively “Freight Forwarding” services); (iii) warehousing and distribution services; and (iv) supply chain management, non-vessel operating common carrier (NVOCC) freight forwarding and other services.

 

 

2.          SIGNIFICANT ACCOUNTING POLICIES

 

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

 

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

 

The Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission (“SEC”) on March 4, 2019.

 

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Table of Contents

Fiscal Period:  The period end for Matson covered by this report is March 31, 2019.  The period end for MatNav and its subsidiaries covered by this report occurred on the last Friday in March, or March 29, 2019, for the first quarter 2019.

 

Significant Accounting Policies:  The Company’s significant accounting policies are described in Note 2 to the Consolidated Financial Statements included in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

 

The Company adopted Accounting Standards Codification (“ASC”) 842, Leases (“ASC 842”) on January 1, 2019.  ASC 842 requires lessees to record leases on their balance sheets but recognize the expenses in their income statements in a manner similar to current practice.  ASC 842 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.  Refer to Note 7 for additional information on the Company’s adoption of ASC 842 and other lease related disclosures.

 

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

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

Ocean Transportation (in millions) (1)

 

2019

    

2018

 

Ocean Transportation services

 

$

387.9

 

$

368.8

 

Terminal and other related services

 

 

6.7

 

 

6.2

 

Fuel sales

 

 

2.0

 

 

2.6

 

Vessel management and related services

 

 

1.3

 

 

1.7

 

Total

 

$

397.9

 

$

379.3

 


(1)

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

 

§

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

§

Terminal and other related services revenue is recognized as the services are performed.  Related costs are recognized as incurred.

§

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

§

Vessel management and related services revenue is recognized in proportion to the services completed.  Related costs are recognized as incurred.

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

Logistics (in millions) (1)

 

2019

 

2018

 

Transportation Brokerage and Freight Forwarding services

 

$

126.4

 

$

124.5

 

Warehouse and distribution services

 

 

5.3

 

 

4.6

 

Supply chain management and other services

 

 

2.8

 

 

3.0

 

Total

 

$

134.5

 

$

132.1

 


(1)

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

 

§

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

§

Warehousing and distribution services revenue consist of amounts billed to customers for storage, handling, and value-added packaging of customer merchandise.  Storage revenue is recognized in the month the service is

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provided to the customer.  Storage related costs are recognized as incurred.  Other warehousing and distribution services revenue and related costs are recognized in proportion to the services performed. 

§

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

 

The Company generally invoices its customers at the commencement of the voyage or the transportation service being provided, or as other services are being performed.  Revenue is deferred when services are invoiced in advance by the customer.  The Company’s receivables are classified as short-term as collection terms are for periods of less than one year.  The Company expenses sales commissions and contract acquisition costs as incurred because the amounts are generally immaterial.  These expenses are included in selling, general and administration expenses in the Condensed Consolidated Statements of Income and Comprehensive Income. 

 

Capital Construction Fund:    The Company’s Capital Construction Fund (“CCF”) is described in Note 7 to the Consolidated Financial Statements included in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.  As of March 31, 2019 and December 31, 2018, $1.7 million and $1.0 million of eligible accounts receivable were assigned to the CCF, respectively.  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.  Cash on deposit in the CCF is held in a money market account and classified as a long-term asset 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 March 31, 2019, the Company deposited $13.4 million into the CCF, and made qualifying cash withdrawals of $13.4 million from the CCF.  The balance of cash on deposit at March 31, 2019 and December 31, 2018 was nominal.

 

Investment in Terminal Joint Venture:  The Company’s investment in SSAT was $91.3 million and $87.0 million at March 31, 2019 and December 31, 2018, respectively.  Condensed income statement information (unaudited) for the Terminal Joint Venture for the three months ended March 31, 2019 and 2018 consisted of the following:

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

(In millions)

 

2019

    

2018

 

Operating revenue

 

$

268.1

 

$

250.9

 

Operating costs and expenses

 

 

(244.2)

 

 

(219.7)

 

Operating income

 

 

23.9

 

 

31.2

 

Net Income (1)

 

$

22.5

 

$

30.7

 

Company Share of SSAT's Net Income (2)

 

$

8.5

 

$

10.5

 


(1)

Includes earnings from equity method investments held by SSAT less earnings allocated to non-controlling interests.

(2)

The Company records its share of net income from SSAT in costs and expenses in the Condensed Consolidated Statement of Income and Comprehensive Income due to the nature of SSAT’s operations.

 

Income Taxes:    In connection with the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), the Company recorded a non-cash tax adjustment of $3.3 million that increased income taxes and decreased income tax receivables for the three months ended March 31, 2018.  This adjustment related to the application of an estimated 6.2 percent sequestration on alternative minimum tax (AMT) refunds due to the Company, and was based on guidance issued by the Internal Revenue Service (IRS) and emerging interpretations of the Tax Act during that period.  On January 19, 2019, the IRS issued new guidance indicating that sequestration would not apply to refundable AMT credits.  In accordance with this new guidance, the Company recorded a non-cash tax adjustment of $2.9 million that decreased income taxes and increased income tax receivables for the three months ended March 31, 2019. 

 

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

 

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

 

Other Matters:  The Company and its subsidiaries are parties to, or may be contingently liable in connection with other legal actions arising in the normal course of their businesses, the outcomes of which, in the opinion of management after

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

 

Dividends:  The Company’s first quarter 2019 cash dividend of $0.21 per share was paid on March 7, 2019.  On April 25, 2019, the Company’s Board of Directors declared a cash dividend of $0.21 per share payable on June 6, 2019.

 

New Accounting Pronouncements:    

Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”):  In June 2016, the Financial Accounting Standards Board issued ASU 2016‑13 which amends the current approach to estimate credit losses on certain financial assets, including trade and other receivables, available-for-sale securities and other financial instruments.  ASU 2016‑13 requires entities to establish a valuation allowance for the expected lifetime losses of certain financial instruments.  Subsequent changes in the valuation allowance are recorded in current earnings and reversal of previous losses is permitted.  The new standard is effective for interim and annual periods beginning on or after December 15, 2019, and early adoption is permitted.  The Company is in the process of evaluating this new standard, but does not expect the adoption of ASU 2016‑13 to have a significant impact on the Company’s Consolidated Financial Statements.

 

 

3.          REPORTABLE SEGMENTS

 

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

 

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

 

The Company’s Ocean Transportation segment provides ocean transportation services to the Logistics segment, and the Logistics segment provides logistics services to the Ocean Transportation segment.  Accordingly, inter-segment revenue of $21.8 million and $18.3 million for the three months ended March 31, 2019 and 2018, respectively, have been eliminated from operating revenue in the table below. 

 

Reportable segment results for the three months ended March 31, 2019 and 2018 consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

(In millions)

    

2019

    

2018

    

Operating Revenue:

 

 

 

 

 

 

 

Ocean Transportation

 

$

397.9

 

$

379.3

 

Logistics

 

 

134.5

 

 

132.1

 

Total Operating Revenue

 

$

532.4

 

$

511.4

 

Operating Income:

 

 

 

 

 

 

 

Ocean Transportation (1)

 

$

9.4

 

$

24.5

 

Logistics

 

 

8.1

 

 

4.2

 

Total Operating Income

 

 

17.5

 

 

28.7

 

Interest expense, net

 

 

(4.6)

 

 

(5.0)

 

Other income (expense), net

 

 

0.6

 

 

0.8

 

Income before Income Taxes

 

 

13.5

 

 

24.5

 

Income taxes

 

 

(1.0)

 

 

(10.3)

 

Net Income

 

$

12.5

 

$

14.2

 


(1)

Ocean Transportation segment information includes $8.5 million and $10.5 million of equity in income from the Company’s equity investment in SSAT for the three months ended March 31, 2019 and 2018, respectively.

 

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4.          PROPERTY AND EQUIPMENT

 

Property and equipment at March 31, 2019 and December 31, 2018 consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

(In millions)

    

2019

    

2018

 

Cost:

 

 

 

 

 

 

 

Vessels

 

$

1,490.1

 

$

1,489.2

 

Containers and equipment

 

 

514.7

 

 

513.6

 

Terminal facilities and other property

 

 

66.0

 

 

66.0

 

Vessel construction in progress

 

 

512.6

 

 

487.2

 

Other construction in progress

 

 

70.0

 

 

59.2

 

Total Property and Equipment

 

 

2,653.4

 

 

2,615.2

 

Less: Accumulated Depreciation

 

 

(1,267.2)

 

 

(1,248.6)

 

Total Property and Equipment, net

 

$

1,386.2

 

$

1,366.6

 

 

Vessel construction in progress relates to progress payments for the construction of three new vessels, capitalized owner’s items and capitalized interest.  Capitalized interest included in vessel construction in progress was $21.0 million and $16.3 million at March 31, 2019 and December 31, 2018, respectively.

 

 

5.          GOODWILL AND INTANGIBLES

 

Goodwill by segment at March 31, 2019 and December 31, 2018 consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ocean

 

 

 

 

 

 

 

(In millions)

    

Transportation

    

Logistics

    

Total

 

Goodwill

 

$

222.6

 

$

105.2

 

$

327.8

 

 

Intangible assets at March 31, 2019 and December 31, 2018 consisted of the following: 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

(In millions)

    

2019

    

2018

 

Customer Relationships:

 

 

 

 

 

 

 

Ocean Transportation

 

$

140.6

 

$

140.6

 

Logistics

 

 

90.1

 

 

90.1

 

Total

 

 

230.7

 

 

230.7

 

Less: Accumulated Amortization

 

 

(46.8)

 

 

(44.0)

 

Total Customer Relationships, net

 

 

183.9

 

 

186.7

 

Trade name - Logistics

 

 

27.3

 

 

27.3

 

Total Intangible Assets, net

 

$

211.2

 

$

214.0

 

 

 

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6.          DEBT

 

At March 31, 2019 and December 31, 2018, the Company’s debt consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

(In millions)

    

2019

    

2018

    

Private Placement Term Loans:

 

 

 

 

 

 

 

5.79 %, payable through 2020

 

$

10.5

 

$

10.5

 

3.66 %, payable through 2023

 

 

41.0

 

 

41.0

 

4.16 %, payable through 2027

 

 

44.5

 

 

44.5

 

3.37 %, payable through 2027

 

 

75.0

 

 

75.0

 

3.14 %, payable through 2031

 

 

194.0

 

 

200.0

 

4.31 %, payable through 2032

 

 

32.7

 

 

32.7

 

4.35 %, payable through 2044

 

 

100.0

 

 

100.0

 

3.92 %, payable through 2045

 

 

71.4

 

 

71.4

 

Title XI Bonds:

 

 

 

 

 

 

 

5.34 %, payable through 2028

 

 

20.9

 

 

22.0

 

5.27 %, payable through 2029

 

 

23.1

 

 

24.2

 

Revolving credit facility, maturity date of June 29, 2022

 

 

255.0

 

 

235.0

 

Capital leases

 

 

 —

 

 

0.1

 

Total Debt

 

 

868.1

 

 

856.4

 

Less: Current portion

 

 

(45.2)

 

 

(42.1)

 

Total Long-term Debt

 

$

822.9

 

$

814.3

 

 

The Company’s debt is described in Note 8 to the Consolidated Financial Statements included in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.  Borrowings under the revolving credit facility are classified as long-term debt in the Condensed Consolidated Balance Sheets, as principal payments are not required until the maturity date of June 29, 2022. 

 

As of March 31, 2019, the Company had $246.5 million of remaining availability under the revolving credit facility.  The interest rate on borrowings under the revolving credit facility approximated 3.97 percent during the three months ended March 31, 2019.

 

 

7.          LEASES

 

Adoption of ASC 842:  The Company adopted ASC 842 on January 1, 2019 and made the following elections:

 

§

Applied the transition requirements that resulted in a cumulative-effect adjustment of $4.4 million recorded to retained earnings at January 1, 2019, due to the elimination of deferred gains from the Company’s sale and leaseback transactions recorded in the Consolidated Balance Sheet as of December 31, 2018;

§

Elected to apply the package of practical expedient permitted under the transition guidance which allows, among other things, the historical lease classification and initial direct costs to be carried forward;

§

Elected the short-term lease exception which allows the Company to exclude leases with an initial term of one year or less from recognition on the Condensed Consolidated Balance Sheets;

§

Elected to separate non-lease components by underlying asset class for real estate and terminal leases and operations equipment leases; and

§

Elected to use a portfolio approach in applying discount rates to leases based upon the lease terms in the following categories: (i) one to five years; (ii) six to ten years; (iii) eleven to fifteen years; and (iv) sixteen years and greater, regardless of the type of underlying asset class.

 

Upon adoption, the Company recorded a right-of-use asset of approximately $251.4 million, a corresponding operating lease liability of $259.1 million, and de-recognized deferred rent of $7.7 million.  The adoption of ASC 842 did not have a significant impact on the Company’s current earnings, liquidity or existing debt covenant requirements.  Significant assumptions and judgments made in applying the new lease accounting standard include determining the Company’s incremental borrowing rate and evaluating the probability of exercising lease options.

 

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Description of Operating Leases:  The Company has a variety of different types of operating leases, the specific terms and conditions of which vary from lease to lease.  Certain operating lease agreements include terms such as: (i) renewal and early termination options; (ii) early buy-out and purchase options; and (iii) rent escalation clauses.  The lease agreements also include provisions for the maintenance of the leased asset and payment of lease related costs.  The Company reviews the specific terms and conditions of each lease and, as appropriate, notifies the lessor of any intent to exercise any option in accordance with the terms of the lease.  In the normal course of business, the Company expects to be able to renew or replace most of its operating leases by other similar leases as they expire.  Except for the residual value guarantee described below, the Company’s leases do not contain any other residual value guarantees. 

 

The Company’s sub-lease income was nominal to the Company’s Condensed Consolidated Financial Statements for the three months ended March 31, 2019.  The Company did not have any finance leases during the three month period ended March 31, 2019.  Certain of the Company’s lease agreements include rental payments that may be adjusted in the future based on economic conditions and others include rental payments adjusted periodically for inflation.  Variable lease expense is disclosed for the adjusted portion of such payments.

 

The lease type by underlying asset class and maximum terms of the Company’s operating leases are as follows:

 

 

 

 

Lease Type:

    

Life 

Real estate and terminal leases

 

65 years

Vessel charter leases

 

10 years

Operations equipment and other leases

 

8 years

 

Incremental Borrowing Rate:  As most of the Company’s operating leases do not provide an implicit rate, the Company uses an estimated incremental borrowing rate based on information available at the date of adoption and subsequent lease commencement dates in calculating the present value of its operating lease liabilities.  The incremental borrowing rate is determined using the U.S. Treasury rate adjusted to account for the Company’s credit rating and the collateralized nature of operating leases.

 

Components of Lease Cost:  Components of lease cost recorded in the Company’s Condensed Consolidated Statement of Income and Comprehensive Income for the three months ended March 31, 2019 consisted of the following: 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

(In millions)

    

2019

Operating lease cost

 

$

16.7

Short-term lease cost

 

 

2.4

Variable lease cost

 

 

0.1

Total lease cost

 

$

19.2

 

Other Lease Information:  Other information related to the Company’s operating leases for the three months ended March 31, 2019 is as follows:

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 

(In millions, except lease term and discount rate)

    

2019

Cash paid for amounts included in operating lease liabilities

 

$

16.7

Right of use assets obtained in the exchange for new operating lease liabilities

 

$

5.8

Weighted-average remaining operating lease term

 

 

7.9 years

Weighted-average incremental borrowing rate

 

 

4.5%

 

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Maturities of operating lease liabilities at March 31, 2019 are as follows:

 

 

 

 

 

 

As of

Year (in millions)

    

March 31, 2019

2019

 

$

48.6

2020

 

 

59.8

2021

 

 

45.6

2022

 

 

35.6

2023

 

 

31.4

Thereafter

 

 

83.2

Total lease payments

 

 

304.2

Less: Interest

 

 

(53.2)

Present value of operating lease liabilities

 

 

251.0

Less: Short-term portion

 

 

(54.3)

Long-term operating lease liabilities

 

$

196.7

 

Future minimum payments under operating lease agreements at December 31, 2018 are as follows:

 

 

 

 

 

Year (in millions)

 

Total

2019

 

$

68.3

2020

 

 

59.2

2021

 

 

44.8

2022

 

 

34.7

2023

 

 

30.5

Thereafter

 

 

83.6

Total minimum lease payments

 

$

321.1

 

Residual Value Guarantee:  On November 26, 2018, a wholly-owned subsidiary of the Company entered into a Bareboat Charter Agreement (the “Charter”).  Charter lease payments are approximately $3.0 million per quarter and are included in the operating lease liabilities described above.  The base term of the Charter is a five year period with a two year end-of-term renewal option.  The Charter also includes a maximum residual value guarantee amount of $50.9 million after five years, or $47.7 million after the extended term.  The residual value guarantee is excluded from operating lease liabilities described above as the Company determined that it is not probable that any portion of the residual value guarantee will be paid by the Company.  The Charter and residual value guarantee are described in Note 9 to the Consolidated Financial Statements included in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

 

 

 

 

8.          ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

 

Changes in accumulated other comprehensive income (loss) by component, net of tax, for the three months ended March 31, 2019 consisted of the following: