UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
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Number of shares of common stock outstanding as of June 30, 2019:
MATSON, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
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Condensed Consolidated Statements of Income and Comprehensive Income | 1 | ||
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5 | |||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 16 | ||
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26 |
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 | $ | | $ | | $ | | $ | | |||||
Logistics |
| |
| |
| |
| | |||||
Total Operating Revenue |
| |
| |
| |
| | |||||
Costs and Expenses: | |||||||||||||
Operating costs |
| ( |
| ( |
| ( |
| ( | |||||
Equity in income of Terminal Joint Venture |
| |
| |
| |
| | |||||
Selling, general and administrative |
| ( |
| ( |
| ( |
| ( | |||||
Total Costs and Expenses |
| ( |
| ( |
| ( |
| ( | |||||
Operating Income |
| |
| |
| |
| | |||||
Interest expense |
| ( |
| ( |
| ( |
| ( | |||||
Other income (expense), net |
| |
| |
| |
| | |||||
Income before Income Taxes |
| |
| |
| |
| | |||||
Income taxes |
| ( |
| ( |
| ( |
| ( | |||||
Net Income | $ | | $ | | $ | | $ | | |||||
Other Comprehensive Income (Loss), Net of Income Taxes: | |||||||||||||
Net Income | $ | | $ | | $ | | $ | | |||||
Other Comprehensive Income (Loss): | |||||||||||||
Amortization of prior service cost |
| ( |
| ( |
| ( |
| ( | |||||
Amortization of net loss |
| |
| |
| |
| | |||||
Other adjustments |
| ( |
| ( |
| ( |
| ( | |||||
Total Other Comprehensive Loss |
| ( |
| ( |
| ( |
| ( | |||||
Comprehensive Income | $ | | $ | | $ | | $ | | |||||
Basic Earnings Per Share | $ | | $ | | $ | | $ | | |||||
Diluted Earnings Per Share | $ | | $ | | $ | | $ | | |||||
Weighted Average Number of Shares Outstanding: | |||||||||||||
Basic |
| |
| |
| |
| | |||||
Diluted |
| |
| |
| |
| |
See Notes to Condensed Consolidated Financial Statements.
1
MATSON, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
June 30, | December 31, | ||||||
(In millions) |
| 2019 |
| 2018 |
| ||
ASSETS | |||||||
Current Assets: | |||||||
Cash and cash equivalents | $ | | $ | | |||
Accounts receivable, net |
| |
| | |||
Prepaid expenses and other assets |
| |
| | |||
Total current assets |
| |
| | |||
Long-term Assets: | |||||||
Investment in Terminal Joint Venture |
| |
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Property and equipment, net |
| |
| | |||
Operating lease right of use assets | | — | |||||
Goodwill |
| |
| | |||
Intangible assets, net | | | |||||
Deferred dry-docking costs, net | | | |||||
Other long-term assets |
| |
| | |||
Total long-term assets | | | |||||
Total Assets | $ | | $ | | |||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||
Current Liabilities: | |||||||
Current portion of debt | $ | | $ | | |||
Accounts payable |
| |
| | |||
Operating lease liabilities | | — | |||||
Accruals and other liabilities |
| |
| | |||
Total current liabilities |
| |
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Long-term Liabilities: | |||||||
Long-term debt |
| |
| | |||
Long-term operating lease liabilities | | — | |||||
Deferred income taxes |
| |
| | |||
Other long-term liabilities | | | |||||
Total long-term liabilities |
| |
| | |||
Commitments and Contingencies (Note 2) | |||||||
Shareholders’ Equity: | |||||||
Common stock |
| |
| | |||
Additional paid in capital |
| |
| | |||
Accumulated other comprehensive loss, net |
| ( |
| ( | |||
Retained earnings |
| |
| | |||
Total shareholders’ equity |
| |
| | |||
Total Liabilities and Shareholders’ Equity | $ | | $ | |
See Notes to Condensed Consolidated Financial Statements.
2
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 | $ | | $ | | |||
Reconciling adjustments: | |||||||
Depreciation and amortization |
| |
| | |||
Non-cash operating lease expense | | — | |||||
Deferred income taxes |
| |
| | |||
Share-based compensation expense |
| |
| | |||
Equity in income of Terminal Joint Venture |
| ( |
| ( | |||
Distribution from Terminal Joint Venture | | | |||||
Other | ( | ( | |||||
Changes in assets and liabilities: | |||||||
Accounts receivable, net |
| |
| ( | |||
Deferred dry-docking payments |
| ( |
| ( | |||
Deferred dry-docking amortization |
| |
| | |||
Prepaid expenses and other assets |
| |
| | |||
Accounts payable, accruals and other liabilities |
| ( |
| | |||
Operating lease liabilities | ( | — | |||||
Other long-term liabilities |
| ( |
| ( | |||
Net cash provided by operating activities |
| |
| | |||
Cash Flows From Investing Activities: | |||||||
Capitalized vessel construction expenditures | ( | ( | |||||
Other capital expenditures |
| ( |
| ( | |||
Proceeds from disposal of property and equipment |
| |
| | |||
Cash deposits into Capital Construction Fund |
| ( |
| ( | |||
Withdrawals from Capital Construction Fund | | | |||||
Net cash used in investing activities |
| ( |
| ( | |||
Cash Flows From Financing Activities: | |||||||
Repayments of debt and capital leases |
| ( |
| ( | |||
Proceeds from revolving credit facility | | | |||||
Repayments of revolving credit facility |
| ( |
| ( | |||
Proceeds from issuance of capital stock | — | | |||||
Dividends paid | ( |
| ( | ||||
Tax withholding related to net share settlements of restricted stock units | ( | ( | |||||
Net cash (used in) provided by financing activities |
| ( |
| | |||
Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash |
| |
| ( | |||
Cash, Cash Equivalents and Restricted Cash, Beginning of the Period |
| |
| | |||
Cash, Cash Equivalents and Restricted Cash, End of the Period | $ | | $ | | |||
Reconciliation of Cash, Cash Equivalents and Restricted Cash, at End of the Period: | |||||||
Cash and Cash Equivalents | $ | | $ | | |||
Restricted Cash | | — | |||||
Total Cash, Cash Equivalents and Restricted Cash, End of the Period | $ | | $ | | |||
Supplemental Cash Flow Information: | |||||||
Interest paid, net of capitalized interest | $ | | $ | | |||
Income tax (refunds) payments, net | $ | ( | $ | | |||
Non-cash Information: | |||||||
Capital expenditures included in accounts payable, accruals and other liabilities | $ | | $ | | |||
Accrued dividends | $ | | $ | |
See Notes to Condensed Consolidated Financial Statements.
3
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 |
| | $ | |
| $ | | $ | ( | $ | | $ | | ||||
Adjustment related to the adoption of new lease accounting standard (see Note 7) | — |
| — |
|
| — |
| — | | | |||||||
Net income |
| — |
| — |
|
| — |
| — |
| |
| | ||||
Other comprehensive loss, net of tax |
| — |
| — |
|
| — |
| ( |
| — |
| ( | ||||
Share-based compensation |
| — |
| — |
|
| |
| — |
| — |
| | ||||
Shares issued, net of shares withheld for employee taxes |
| |
| |
|
| ( |
| — |
| — |
| ( | ||||
Dividends ($ |
| — |
| — |
|
| — |
| — |
| ( |
| ( | ||||
Balance at March 31, 2019 |
| | $ | |
| $ | | $ | ( | $ | | $ | | ||||
Net income |
| — |
| — |
|
| — |
| — |
| |
| | ||||
Other comprehensive loss, net of tax | — |
| — |
|
| — |
| ( |
| — |
| ( | |||||
Share-based compensation |
| — |
| — |
|
| |
| — |
| — |
| | ||||
Shares issued, net of shares withheld for employee taxes |
| |
| — |
|
| ( |
| — |
| — |
| ( | ||||
Dividends ($ |
| — |
| — |
|
| — |
| — |
| ( |
| ( | ||||
Balance at June 30, 2019 |
| | $ | |
| $ | | $ | ( | $ | | $ | |
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 |
| | $ | |
| $ | | $ | ( | $ | | $ | | ||||
Reclassification resulting from adoption of new accounting pronouncement | — |
| — |
|
| — |
| ( |
| |
| — | |||||
Net income |
| — |
| — |
|
| — |
| — |
| |
| | ||||
Other comprehensive income, net of tax |
| — |
| — |
|
| — |
| |
| — |
| | ||||
Share-based compensation |
| — |
| — |
|
| |
| — |
| — |
| | ||||
Shares issued, net of shares withheld for employee taxes |
| |
| |
|
| ( |
| — |
| — |
| ( | ||||
Dividends ($ |
| — |
| — |
|
| — |
| — |
| ( |
| ( | ||||
Balance at March 31, 2018 |
| | $ | |
| $ | | $ | ( | $ | | $ | | ||||
Net income |
| — |
| — |
|
| — |
| — |
| |
| | ||||
Other comprehensive loss, net of tax | — |
| — |
|
| — |
| ( |
| — |
| ( | |||||
Share-based compensation |
| — |
| — |
|
| |
| — |
| — |
| | ||||
Shares issued, net of shares withheld for employee taxes |
| — |
| — |
|
| |
| — |
| — |
| | ||||
Dividends ($ |
| — |
| — |
|
| — |
| — |
| ( |
| ( | ||||
Balance at June 30, 2018 |
| | $ | |
| $ | | $ | ( | $ | | $ | |
See Notes to Condensed Consolidated Financial Statements.
4
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
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
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.
5
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 | $ | | $ | | $ | | $ | | |||||
Terminal and other related services | | | | | |||||||||
Fuel sales | | | | | |||||||||
Vessel management and related services | | | | | |||||||||
Total | $ | | $ | | $ | | $ | |
(1) | Ocean Transportation revenue transactions are primarily denominated in U.S. dollars except for less than |
◾ | 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 | $ | | $ | | $ | | $ | | |||||
Warehouse and distribution services | | | | | |||||||||
Supply chain management and other services |
| |
| |
| |
| | |||||
Total | $ | | $ | | $ | | $ | |
(1) | Logistics revenue transactions are primarily denominated in U.S. dollars except for less than |
◾ | 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. |
6
◾ | 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, $
Investment in Terminal Joint Venture: The Company’s investment in SSAT was $
Three Months Ended |
| Six Months Ended |
| ||||||||||
June 30, |
| June 30, |
| ||||||||||
(In millions) | 2019 |
| 2018 |
| 2019 |
| 2018 |
| |||||
Operating revenue | $ | | $ | | $ | | $ | | |||||
Operating costs and expenses | ( | ( | ( | ( | |||||||||
Operating income | | | | | |||||||||
Net Income (1) | $ | | $ | | $ | | $ | | |||||
Company Share of SSAT's Net Income (2) | $ | | $ | | $ | | $ | |
(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 $
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.
7
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 $
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
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 $
8
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 | $ | | $ | | $ | | $ | | |||||
Logistics |
| |
| |
| |
| | |||||
Total Operating Revenue | $ | | $ | | $ | | $ | | |||||
Operating Income: | |||||||||||||
Ocean Transportation (1) | $ | | $ | | $ | | $ | | |||||
Logistics |
| |
| |
| |
| | |||||
Total Operating Income |
| |
| |
| |
| | |||||
Interest expense, net |
| ( |
| ( |
| ( |
| ( | |||||
Other income (expense), net |
| |
| |
| |
| | |||||
Income before Income Taxes |
| |
| |
| |
| | |||||
Income taxes |
| ( |
| ( |
| ( |
| ( | |||||
Net Income | $ | | $ | | $ | | $ | |
(1) | Ocean Transportation segment information includes $ |
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 | $ | | $ | | |||
Containers and equipment | | | |||||
Terminal facilities and other property | | | |||||
Vessel construction in progress | | | |||||
Other construction in progress | | | |||||
Total Property and Equipment | | | |||||
Less: Accumulated Depreciation | ( | ( | |||||
Total Property and Equipment, net | $ | | $ | |
Vessel construction in progress relates to progress payments for the construction of
9