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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 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)

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 September 30, 2019: 42,866,825

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

25

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

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

Nine Months Ended

September 30, 

September 30, 

(In millions, except per share amounts)

    

2019

    

2018

    

2019

    

2018

    

Operating Revenue:

Ocean Transportation

$

437.2

$

437.3

$

1,250.5

$

1,223.2

Logistics

 

134.9

 

152.1

 

411.9

 

434.7

Total Operating Revenue

 

572.1

 

589.4

 

1,662.4

 

1,657.9

Costs and Expenses:

Operating costs

 

(472.6)

 

(485.5)

 

(1,412.5)

 

(1,390.7)

Equity in income of Terminal Joint Venture

 

8.4

 

9.2

 

17.8

 

28.8

Selling, general and administrative

 

(52.7)

 

(54.5)

 

(164.0)

 

(162.7)

Total Costs and Expenses

 

(516.9)

 

(530.8)

 

(1,558.7)

 

(1,524.6)

Operating Income

 

55.2

 

58.6

 

103.7

 

133.3

Interest expense

 

(6.2)

 

(4.4)

 

(16.9)

 

(14.4)

Other income (expense), net

 

(0.5)

 

0.7

 

0.9

 

1.9

Income before Income Taxes

 

48.5

 

54.9

 

87.7

 

120.8

Income taxes

 

(12.3)

 

(13.3)

 

(20.6)

 

(32.4)

Net Income

$

36.2

$

41.6

$

67.1

$

88.4

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

Net Income

$

36.2

$

41.6

$

67.1

$

88.4

Other Comprehensive Income (Loss):

Amortization of prior service cost

 

(1.0)

 

(1.1)

 

(3.3)

 

(3.5)

Amortization of net loss

 

1.2

 

1.1

 

3.0

 

2.9

Other adjustments

 

(0.7)

 

0.1

 

(0.9)

 

Total Other Comprehensive (Loss) Income

 

(0.5)

 

0.1

 

(1.2)

 

(0.6)

Comprehensive Income

$

35.7

$

41.7

$

65.9

$

87.8

Basic Earnings Per Share

$

0.84

$

0.97

$

1.57

$

2.07

Diluted Earnings Per Share

$

0.84

$

0.97

$

1.55

$

2.06

Weighted Average Number of Shares Outstanding:

Basic

 

42.9

 

42.7

 

42.8

 

42.7

Diluted

 

43.3

 

43.1

 

43.2

 

43.0

See Notes to Condensed Consolidated Financial Statements.

1

Table of Contents

MATSON, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited)

September 30, 

December 31, 

(In millions)

    

2019

    

2018

    

ASSETS

Current Assets:

Cash and cash equivalents

$

23.6

$

19.6

Accounts receivable, net

 

223.9

 

223.7

Prepaid expenses and other assets

 

52.0

 

75.1

Total current assets

 

299.5

 

318.4

Long-term Assets:

Investment in Terminal Joint Venture

 

83.7

 

87.0

Property and equipment, net

 

1,485.5

 

1,366.6

Operating lease right of use assets

246.0

Goodwill

 

327.8

 

327.8

Intangible assets, net

205.7

214.0

Deferred dry-docking costs, net

56.0

67.1

Other long-term assets

 

49.6

 

49.5

Total long-term assets

2,454.3

2,112.0

Total Assets

$

2,753.8

$

2,430.4

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities:

Current portion of debt

$

48.4

$

42.1

Accounts payable

 

235.0

 

246.8

Operating lease liabilities

64.4

Accruals and other liabilities

 

89.9

 

81.9

Total current liabilities

 

437.7

 

370.8

Long-term Liabilities:

Long-term debt

 

834.6

 

814.3

Long-term operating lease liabilities

190.0

Deferred income taxes

 

335.9

 

312.7

Other long-term liabilities

157.9

177.3

Total long-term liabilities

 

1,518.4

 

1,304.3

Commitments and Contingencies (Note 2)

Shareholders’ Equity:

Common stock

 

32.2

 

32.0

Additional paid in capital

 

303.2

 

297.8

Accumulated other comprehensive loss, net

 

(35.7)

 

(34.5)

Retained earnings

 

498.0

 

460.0

Total shareholders’ equity

 

797.7

 

755.3

Total Liabilities and Shareholders’ Equity

$

2,753.8

$

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)

Nine Months Ended September 30, 

(In millions)

    

2019

    

2018

    

Cash Flows From Operating Activities:

Net income

$

67.1

$

88.4

Reconciling adjustments:

Depreciation and amortization

 

73.4

 

70.8

Non-cash operating lease expense

52.3

Deferred income taxes

 

21.9

 

26.5

Share-based compensation expense

 

8.7

 

8.2

Equity in income of Terminal Joint Venture

 

(17.8)

 

(28.8)

Distribution from Terminal Joint Venture

14.7

42.0

Other

(1.5)

(2.1)

Changes in assets and liabilities:

Accounts receivable, net

 

(0.2)

 

(46.1)

Deferred dry-docking payments

 

(17.9)

 

(10.5)

Deferred dry-docking amortization

 

25.9

 

27.5

Prepaid expenses and other assets

 

25.3

 

3.0

Accounts payable, accruals and other liabilities

 

(11.7)

 

24.8

Operating lease liabilities

(51.7)

Other long-term liabilities

 

(8.1)

 

(0.7)

Net cash provided by operating activities

 

180.4

 

203.0

Cash Flows From Investing Activities:

Capitalized vessel construction expenditures

(108.7)

(222.6)

Other capital expenditures

 

(62.7)

 

(44.7)

Proceeds from disposal of property and equipment

 

3.1

 

31.3

Cash deposits into Capital Construction Fund

 

(68.2)

 

(246.6)

Withdrawals from Capital Construction Fund

68.2

247.5

Other

3.7

Net cash used in investing activities

 

(168.3)

 

(231.4)

Cash Flows From Financing Activities:

Repayments of debt and capital leases

 

(28.4)

 

(17.0)

Proceeds from revolving credit facility

383.3

389.4

Repayments of revolving credit facility

 

(328.3)

 

(321.4)

Proceeds from issuance of capital stock

0.1

0.5

Dividends paid

(27.7)

 

(26.3)

Tax withholding related to net share settlements of restricted stock units

(3.3)

(4.5)

Net cash (used in) provided by financing activities

 

(4.3)

 

20.7

Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash

 

7.8

 

(7.7)

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

 

24.5

 

19.8

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

$

32.3

$

12.1

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

Cash and Cash Equivalents

$

23.6

$

12.1

Restricted Cash

8.7

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

$

32.3

$

12.1

Supplemental Cash Flow Information:

Interest paid, net of capitalized interest

$

16.8

$

14.5

Income tax (refunds) payments, net

$

(25.7)

$

4.6

Non-cash Information:

Capital expenditures included in accounts payable, accruals and other liabilities

$

9.8

$

0.4

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

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

Net income

 

 

 

 

 

 

36.2

 

36.2

Other comprehensive loss, net of tax

 

 

 

 

 

(0.5)

 

 

(0.5)

Share-based compensation

 

 

 

 

2.5

 

 

 

2.5

Shares issued, net of shares withheld for employee taxes

 

0.1

 

 

 

 

0.1

Dividends

 

 

 

 

 

 

(0.2)

 

(0.2)

Terminal Joint Venture's adoption of new lease accounting standard (see Note 2)

 

 

 

 

 

 

(5.6)

 

(5.6)

Balance at September 30, 2019

 

42.9

$

32.2

 

$

303.2

$

(35.7)

$

498.0

$

797.7

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 standard

 

 

 

 

(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

Net income

 

 

 

 

 

41.6

 

41.6

Other comprehensive income, net of tax

 

 

 

 

0.1

 

 

0.1

Share-based compensation

 

 

 

2.7

 

 

 

2.7

Shares issued, net of shares withheld for employee taxes

 

(0.2)

 

 

(0.2)

Balance at September 30, 2018

42.7

$

32.0

 

$

293.7

$

(31.5)

$

448.5

$

742.7

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 September 30, 2019. The period end for MatNav and its subsidiaries covered by this report occurred on the last Friday in September, or September 27, 2019, for the third 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 pre-adoption 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

 

Nine Months Ended

 

September 30, 

 

September 30, 

 

Ocean Transportation (in millions) (1)

2019

    

2018

 

2019

    

2018

 

Ocean Transportation services

$

424.1

$

424.2

$

1,218.6

$

1,190.3

Terminal and other related services

8.3

8.0

19.8

19.2

Fuel sales

3.3

3.4

7.9

8.5

Vessel management and related services

1.5

1.7

4.2

5.2

Total

$

437.2

$

437.3

$

1,250.5

$

1,223.2

(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

 

Nine Months Ended

September 30, 

 

September 30, 

Logistics (in millions) (1)

2019

2018

2019

2018

Transportation Brokerage and Freight Forwarding services

$

127.4

$

144.2

$

388.5

$

411.7

Warehouse and distribution services

4.6

4.5

15.2

13.3

Supply chain management and other services

 

2.9

 

3.4

 

8.2

 

9.7

Total

$

134.9

$

152.1

$

411.9

$

434.7

(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

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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 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 administrative 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 September 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 nine months ended September 30, 2019, the Company deposited $41.8 million and $68.2 million into the CCF, respectively, and made qualifying cash withdrawals of $41.8 million and $68.2 million from the CCF, respectively. The balance of cash on deposit at September 30, 2019 and December 31, 2018 was nominal.

Investment in Terminal Joint Venture: Condensed income statement information (unaudited) for the Terminal Joint Venture for the three and nine months ended September 30, 2019 and 2018 consisted of the following:

Three Months Ended

 

Nine Months Ended

 

September 30, 

 

September 30, 

 

(In millions)

2019

    

2018

 

2019

    

2018

 

Operating revenue

$

288.7

$

289.4

$

825.6

$

806.5

Operating costs and expenses

(262.6)

(259.5)

(771.8)

(719.7)

Operating income

26.1

29.9

53.8

86.8

Net Income (1)

$

23.3

$

27.7

$

50.1

$

82.7

Company Share of SSAT's Net Income (2)

$

8.4

$

9.2

$

17.8

$

28.8

(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.

The Company recorded a net adjustment of $5.6 million that reduced its Investment in Terminal Joint Venture with a corresponding reduction in retained earnings in the Condensed Consolidated Balance Sheets at September 30, 2019. This resulted from the adoption of ASC 842 by SSAT. The Company’s investment in SSAT was $83.7 million and $87.0 million at September 30, 2019 and December 31, 2018, respectively.

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 $3.1 million that increased income taxes for the nine months ended September 30, 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 for the nine months ended September 30, 2019. No amounts related to the Tax Act impacted income taxes during the three months ended September 30, 2019 and 2018.

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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 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 third quarter 2019 cash dividend of $0.22 per share was paid on September 5, 2019. On October 25, 2019, the Company’s Board of Directors declared a cash dividend of $0.22 per share payable on December 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 in certain transactions. Accordingly, inter-segment revenue of $28.2 million and $27.6 million for the three months ended September 30, 2019 and 2018, and $75.3 million and $72.7 million for the nine months ended September 30, 2019 and 2018, respectively, have been eliminated from operating revenues in the table below. 

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Reportable segment financial information for the three and nine months ended September 30, 2019 and 2018 are as follows:

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

(In millions)

    

2019

    

2018

    

2019

    

2018

    

Operating Revenue:

Ocean Transportation (1)

$

437.2

$

437.3

$

1,250.5

$

1,223.2

Logistics (2)

 

134.9

 

152.1

 

411.9

 

434.7

Total Operating Revenue

$

572.1

$

589.4

$

1,662.4

$

1,657.9

Operating Income:

Ocean Transportation (3)

$

43.9

$

48.7

$

73.0

$

109.7

Logistics

 

11.3

 

9.9

 

30.7