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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒

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

For the quarterly period ended June 30, 2019

☐

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)

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

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 ☒

Number of shares of common stock outstanding as of June 30, 2019: 42,855,015

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	16
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	24
Item 4.	Controls and Procedures	24

Part II—OTHER INFORMATION		24

Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	24
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3.	Defaults Upon Senior Securities	25
Item 4.	Mine Safety Disclosures	25
Item 5.	Other Information	25
Item 6.	Exhibits	25
	Signatures	26

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MATSON, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income and Comprehensive Income

(Unaudited)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(In millions, except per share amounts)	2019		2018		2019		2018
Operating Revenue:
Ocean Transportation	$	415.4	$	406.6	$	813.3	$	785.9
Logistics		142.5		150.5		277.0		282.6
Total Operating Revenue		557.9		557.1		1,090.3		1,068.5

Costs and Expenses:
Operating costs		(472.8)		(465.9)		(939.9)		(905.2)
Equity in income of Terminal Joint Venture		0.9		9.1		9.4		19.6
Selling, general and administrative		(55.0)		(54.3)		(111.3)		(108.2)
Total Costs and Expenses		(526.9)		(511.1)		(1,041.8)		(993.8)

Operating Income		31.0		46.0		48.5		74.7
Interest expense		(6.1)		(5.0)		(10.7)		(10.0)
Other income (expense), net		0.8		0.4		1.4		1.2
Income before Income Taxes		25.7		41.4		39.2		65.9
Income taxes		(7.3)		(8.8)		(8.3)		(19.1)
Net Income	$	18.4	$	32.6	$	30.9	$	46.8

Other Comprehensive Income (Loss), Net of Income Taxes:
Net Income	$	18.4	$	32.6	$	30.9	$	46.8
Other Comprehensive Income (Loss):
Amortization of prior service cost		(1.2)		(1.1)		(2.3)		(2.4)
Amortization of net loss		0.9		0.5		1.8		1.8
Other adjustments		(0.2)		(0.3)		(0.2)		(0.1)
Total Other Comprehensive Loss		(0.5)		(0.9)		(0.7)		(0.7)
Comprehensive Income	$	17.9	$	31.7	$	30.2	$	46.1

Basic Earnings Per Share	$	0.43	$	0.76	$	0.72	$	1.10
Diluted Earnings Per Share	$	0.43	$	0.76	$	0.72	$	1.09

Weighted Average Number of Shares Outstanding:
Basic		42.8		42.7		42.8		42.6
Diluted		43.2		43.0		43.2		42.9

See Notes to Condensed Consolidated Financial Statements.

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MATSON, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)


	June 30,		December 31,
(In millions)	2019		2018
ASSETS
Current Assets:
Cash and cash equivalents	$	24.0	$	19.6
Accounts receivable, net		213.0		223.7
Prepaid expenses and other assets		52.6		75.1
Total current assets		289.6		318.4
Long-term Assets:
Investment in Terminal Joint Venture		86.7		87.0
Property and equipment, net		1,398.7		1,366.6
Operating lease right of use assets		238.5		—
Goodwill		327.8		327.8
Intangible assets, net		208.4		214.0
Deferred dry-docking costs, net		57.9		67.1
Other long-term assets		49.9		49.5
Total long-term assets		2,367.9		2,112.0
Total Assets	$	2,657.5	$	2,430.4

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Current portion of debt	$	53.6	$	42.1
Accounts payable		221.1		246.8
Operating lease liabilities		57.4		—
Accruals and other liabilities		93.3		81.9
Total current liabilities		425.4		370.8
Long-term Liabilities:
Long-term debt		791.0		814.3
Long-term operating lease liabilities		189.0		—
Deferred income taxes		323.9		312.7
Other long-term liabilities		163.0		177.3
Total long-term liabilities		1,466.9		1,304.3
Commitments and Contingencies (Note 2)
Shareholders’ Equity:
Common stock		32.1		32.0
Additional paid in capital		300.7		297.8
Accumulated other comprehensive loss, net		(35.2)		(34.5)
Retained earnings		467.6		460.0
Total shareholders’ equity		765.2		755.3
Total Liabilities and Shareholders’ Equity	$	2,657.5	$	2,430.4

See Notes to Condensed Consolidated Financial Statements.

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MATSON, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Six Months Ended June 30,
(In millions)	2019		2018
Cash Flows From Operating Activities:
Net income	$	30.9	$	46.8
Reconciling adjustments:
Depreciation and amortization		47.5		47.6
Non-cash operating lease expense		33.5		—
Deferred income taxes		9.9		14.6
Share-based compensation expense		6.2		5.5
Equity in income of Terminal Joint Venture		(9.4)		(19.6)
Distribution from Terminal Joint Venture		9.5		17.5
Other		(1.6)		(0.6)
Changes in assets and liabilities:
Accounts receivable, net		10.8		(27.1)
Deferred dry-docking payments		(6.9)		(5.1)
Deferred dry-docking amortization		17.2		18.3
Prepaid expenses and other assets		25.5		3.0
Accounts payable, accruals and other liabilities		(29.6)		18.4
Operating lease liabilities		(33.3)		—
Other long-term liabilities		(2.0)		(0.2)
Net cash provided by operating activities		108.2		119.1

Cash Flows From Investing Activities:
Capitalized vessel construction expenditures		(30.6)		(166.8)
Other capital expenditures		(38.4)		(25.5)
Proceeds from disposal of property and equipment		2.2		11.0
Cash deposits into Capital Construction Fund		(26.4)		(198.3)
Withdrawals from Capital Construction Fund		26.4		199.2
Net cash used in investing activities		(66.8)		(180.4)

Cash Flows From Financing Activities:
Repayments of debt and capital leases		(11.8)		(14.6)
Proceeds from revolving credit facility		212.8		268.9
Repayments of revolving credit facility		(212.8)		(178.9)
Proceeds from issuance of capital stock		—		0.5
Dividends paid		(18.2)		(17.3)
Tax withholding related to net share settlements of restricted stock units		(3.2)		(4.3)
Net cash (used in) provided by financing activities		(33.2)		54.3

Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash		8.2		(7.0)
Cash, Cash Equivalents and Restricted Cash, Beginning of the Period		24.5		19.8
Cash, Cash Equivalents and Restricted Cash, End of the Period	$	32.7	$	12.8

Reconciliation of Cash, Cash Equivalents and Restricted Cash, at End of the Period:
Cash and Cash Equivalents	$	24.0	$	12.8
Restricted Cash		8.7		—
Total Cash, Cash Equivalents and Restricted Cash, End of the Period	$	32.7	$	12.8

Supplemental Cash Flow Information:
Interest paid, net of capitalized interest	$	7.8	$	8.9
Income tax (refunds) payments, net	$	(26.2)	$	4.2

Non-cash Information:
Capital expenditures included in accounts payable, accruals and other liabilities	$	3.7	$	0.8
Accrued dividends	$	9.4	$	9.0

See Notes to Condensed Consolidated Financial Statements.

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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
Net income	—		—		—		—		18.4		18.4
Other comprehensive loss, net of tax	—		—		—		(0.5)		—		(0.5)
Share-based compensation	—		—		3.0		—		—		3.0
Shares issued, net of shares withheld for employee taxes	0.1		—		(0.1)		—		—		(0.1)
Dividends ($0.21 per share and $0.22 per share)	—		—		—		—		(18.6)		(18.6)
Balance at June 30, 2019	42.9	$	32.1	$	300.7	$	(35.2)	$	467.6	$	765.2


						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
Net income	—		—		—		—		32.6		32.6
Other comprehensive loss, net of tax	—		—		—		(0.9)		—		(0.9)
Share-based compensation	—		—		2.8		—		—		2.8
Shares issued, net of shares withheld for employee taxes	—		—		0.3		—		—		0.3
Dividends ($0.20 per share and $0.21 per share)	—		—		—		—		(17.7)		(17.7)
Balance at June 30, 2018	42.7	$	32.0	$	291.2	$	(31.6)	$	406.9	$	698.5

See Notes to Condensed Consolidated Financial Statements.

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MATSON, INC. AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANICAL STATEMENTS

(Unaudited)

1. DESCRIPTION OF THE BUSINESS

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

Ocean Transportation: Matson’s Ocean Transportation business is conducted through Matson Navigation Company, Inc. (“MatNav”), a wholly-owned subsidiary of Matson, Inc. Founded in 1882, MatNav provides a vital lifeline of ocean freight transportation services to the domestic non-contiguous economies of Hawaii, Alaska, and Guam, and to other island economies in Micronesia. MatNav also operates a premium, expedited service from China to Long Beach, California, and 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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Fiscal Period: The period end for Matson covered by this report is June 30, 2019. The period end for MatNav and its subsidiaries covered by this report occurred on the last Friday in June, or June 28, 2019, for the second 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.

Leases: 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				Six Months Ended
	June 30,				June 30,
Ocean Transportation (in millions) (1)	2019		2018		2019		2018
Ocean Transportation services	$	406.6	$	397.3	$	794.5	$	766.1
Terminal and other related services		4.8		5.0		11.5		11.2
Fuel sales		2.6		2.5		4.6		5.1
Vessel management and related services		1.4		1.8		2.7		3.5
Total	$	415.4	$	406.6	$	813.3	$	785.9

(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				Six Months Ended
	June 30,				June 30,
Logistics (in millions) (1)	2019		2018		2019		2018
Transportation Brokerage and Freight Forwarding services	$	134.7	$	143.0	$	261.1	$	267.5
Warehouse and distribution services		5.3		4.2		10.6		8.8
Supply chain management and other services		2.5		3.3		5.3		6.3
Total	$	142.5	$	150.5	$	277.0	$	282.6

(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.

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◾

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 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 to 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 June 30, 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 and six months ended June 30, 2019, the Company deposited $13.0 million and $26.4 million into the CCF respectively, and made qualifying cash withdrawals of $13.0 million and $26.4 million from the CCF respectively. The balance of cash on deposit at June 30, 2019 and December 31, 2018 was nominal.

Investment in Terminal Joint Venture: The Company’s investment in SSAT was $86.7 million and $87.0 million at June 30, 2019 and December 31, 2018, respectively. Condensed income statement information (unaudited) for the Terminal Joint Venture for the three and six months ended June 30, 2019 and 2018 consisted of the following:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(In millions)	2019		2018		2019		2018
Operating revenue	$	268.8	$	266.1	$	536.9	$	517.0
Operating costs and expenses		(265.0)		(240.4)		(509.2)		(460.1)
Operating income		3.8		25.7		27.7		56.9
Net Income (1)	$	4.2	$	24.3	$	26.8	$	55.0
Company Share of SSAT's Net Income (2)	$	0.9	$	9.1	$	9.4	$	19.6

(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 $0.2 million that decreased income taxes for the three months ended June 30, 2018, and $3.1 million that increased income taxes for the six months ended June 30, 2018. These adjustments 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 for the six months ended June 30, 2019. No amount impacted income taxes during the three months ended June 30, 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.

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

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

Dividends: The Company’s second quarter 2019 cash dividend of $0.21 per share was paid on June 6, 2019. On June 14, 2019, the Company’s Board of Directors declared a cash dividend of $0.22 per share payable on September 5, 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 $25.3 million and $26.8 million for the three months ended June 30, 2019 and 2018, and $47.1 million and $45.1 million for the six months ended June 30, 2019 and 2018, respectively, have been eliminated from operating revenue in the table below.

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Reportable segment results for the three and six months ended June 30, 2019 and 2018 consisted of the following:


	Three Months Ended				Six Months Ended
	June 30,				June 30,
(In millions)	2019		2018		2019		2018
Operating Revenue:
Ocean Transportation	$	415.4	$	406.6	$	813.3	$	785.9
Logistics		142.5		150.5		277.0		282.6
Total Operating Revenue	$	557.9	$	557.1	$	1,090.3	$	1,068.5
Operating Income:
Ocean Transportation (1)	$	19.7	$	36.5	$	29.1	$	61.0
Logistics		11.3		9.5		19.4		13.7
Total Operating Income		31.0		46.0		48.5		74.7
Interest expense, net		(6.1)		(5.0)		(10.7)		(10.0)
Other income (expense), net		0.8		0.4		1.4		1.2
Income before Income Taxes		25.7		41.4		39.2		65.9
Income taxes		(7.3)		(8.8)		(8.3)		(19.1)
Net Income	$	18.4	$	32.6	$	30.9	$	46.8

(1)	Ocean Transportation segment information includes $0.9 million and $9.1 million of equity in income from the Company’s investment in SSAT for the three months ended June 30, 2019 and 2018, and $9.4 million and $19.6 million for the six months ended June 30, 2019 and 2018, respectively.

4. PROPERTY AND EQUIPMENT

Property and equipment at June 30, 2019 and December 31, 2018 consisted of the following:


	June 30,		December 31,
(In millions)	2019		2018
Cost:
Vessels	$	1,629.6	$	1,489.2
Containers and equipment		516.5		513.6
Terminal facilities and other property		66.1		66.0
Vessel construction in progress		309.8		487.2
Other construction in progress		81.4		59.2
Total Property and Equipment		2,603.4		2,615.2
Less: Accumulated Depreciation		(1,204.7)		(1,248.6)
Total Property and Equipment, net	$	1,398.7	$	1,366.6

Vessel construction in progress relates to progress payments for the construction of two new vessels, capitalized owner’s items and capitalized interest. During the three months ended June 30, 2019, the construction of the second vessel, MV Kaimana Hila, was completed and the vessel was placed into service resulting in approximately $211.8 million, including $9.9 million of capitalized interest, transferred from the Vessel construction in progress category to the Vessels category within Property and Equipment. Capitalized interest included in Vessel construction in progress was $14.4 million and $16.3 million at June 30, 2019 and December 31, 2018, respectively.

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5. GOODWILL AND INTANGIBLES

Goodwill by segment at June 30, 2019 and December 31, 2018 consisted of the following:


		Ocean