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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 March 31, 2020

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 March 31, 2020: 43,041,265

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

18

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

34

Item 3.

Defaults Upon Senior Securities

34

Item 4.

Mine Safety Disclosures

34

Item 5.

Other Information

34

Item 6.

Exhibits

35

Signatures

37

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)

    

2020

    

2019

    

Operating Revenue:

Ocean Transportation

$

400.9

$

397.9

Logistics

 

113.0

 

134.5

Total Operating Revenue

 

513.9

 

532.4

Costs and Expenses:

Operating costs

 

(448.3)

 

(467.1)

Income from SSAT

 

4.0

 

8.5

Selling, general and administrative

 

(56.6)

 

(56.3)

Total Costs and Expenses

 

(500.9)

 

(514.9)

Operating Income

 

13.0

 

17.5

Interest expense

 

(8.6)

 

(4.6)

Other income (expense), net

 

0.6

 

0.6

Income before Income Taxes

 

5.0

 

13.5

Income taxes

 

(1.2)

 

(1.0)

Net Income

$

3.8

$

12.5

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

Net Income

$

3.8

$

12.5

Other Comprehensive Income (Loss):

Amortization of prior service cost

 

(1.2)

 

(1.1)

Amortization of net loss

 

1.3

 

0.9

Other adjustments

 

(0.7)

 

Total Other Comprehensive (Loss) Income

 

(0.6)

 

(0.2)

Comprehensive Income

$

3.2

$

12.3

Basic Earnings Per Share

$

0.09

$

0.29

Diluted Earnings Per Share

$

0.09

$

0.29

Weighted Average Number of Shares Outstanding:

Basic

 

43.0

 

42.8

Diluted

 

43.3

 

43.1

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)

    

2020

    

2019

    

ASSETS

Current Assets:

Cash and cash equivalents

$

19.9

$

21.2

Accounts receivable, net of allowance for credit loss of $4.7 million and $4.3 million, respectively

 

218.8

 

205.9

Prepaid expenses and other assets

 

70.0

 

62.5

Total current assets

 

308.7

 

289.6

Long-term Assets:

Investment in SSAT

 

74.3

 

76.2

Property and equipment, net

 

1,589.6

 

1,598.1

Operating lease right of use assets

253.8

256.1

Goodwill

 

327.8

 

327.8

Intangible assets, net

200.2

202.9

Deferred dry-docking costs, net

52.2

56.9

Other long-term assets

 

29.3

 

37.8

Total long-term assets

2,527.2

2,555.8

Total Assets

$

2,835.9

$

2,845.4

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities:

Current portion of debt

$

53.4

$

48.4

Accounts payable and accruals

 

275.7

 

235.7

Operating lease liabilities

65.5

66.6

Other liabilities

 

76.3

 

86.0

Total current liabilities

 

470.9

 

436.7

Long-term Liabilities:

Long-term debt

 

871.5

 

910.0

Long-term operating lease liabilities

197.2

198.0

Deferred income taxes

 

340.2

 

337.6

Other long-term liabilities

155.9

157.4

Total long-term liabilities

 

1,564.8

 

1,603.0

Commitments and Contingencies

Shareholders’ Equity:

Common stock

 

32.3

 

32.2

Additional paid in capital

 

304.7

 

306.2

Accumulated other comprehensive loss, net

 

(37.5)

 

(36.9)

Retained earnings

 

500.7

 

504.2

Total shareholders’ equity

 

800.2

 

805.7

Total Liabilities and Shareholders’ Equity

$

2,835.9

$

2,845.4

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)

    

2020

    

2019

    

Cash Flows From Operating Activities:

Net income

$

3.8

$

12.5

Reconciling adjustments:

Depreciation and amortization

 

27.0

 

23.3

Amortization of operating lease right of use assets

17.4

16.7

Deferred income taxes

 

2.7

 

3.8

Share-based compensation expense

 

3.1

 

3.2

Income from SSAT

 

(4.0)

 

(8.5)

Distribution from SSAT

7.8

4.2

Other

(0.1)

(0.6)

Changes in assets and liabilities:

Accounts receivable, net

 

(12.9)

 

5.8

Deferred dry-docking payments

 

(2.6)

 

(3.2)

Deferred dry-docking amortization

 

6.1

 

8.1

Prepaid expenses and other assets

 

(0.2)

 

4.8

Accounts payable, accruals and other liabilities

 

38.9

 

(20.4)

Operating lease liabilities

(16.9)

(16.7)

Other long-term liabilities

 

(1.5)

 

0.4

Net cash provided by operating activities

 

68.6

 

33.4

Cash Flows From Investing Activities:

Capitalized vessel construction expenditures

(9.1)

(20.9)

Other capital expenditures

 

(26.1)

 

(13.5)

Proceeds from disposal of property and equipment

 

14.5

 

1.2

Cash deposits into Capital Construction Fund

 

(70.4)

 

(13.4)

Withdrawals from Capital Construction Fund

70.4

13.4

Net cash used in investing activities

 

(20.7)

 

(33.2)

Cash Flows From Financing Activities:

Repayments of debt

 

(11.4)

 

(8.2)

Proceeds from revolving credit facility

111.4

107.8

Repayments of revolving credit facility

 

(133.5)

 

(87.8)

Payment of financing costs

(3.1)

Dividends paid

(9.5)

 

(9.1)

Tax withholding related to net share settlements of restricted stock units

(4.5)

(3.1)

Net cash used in financing activities

 

(50.6)

 

(0.4)

Net Decrease in Cash, Cash Equivalents and Restricted Cash

 

(2.7)

 

(0.2)

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

 

28.4

 

24.5

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

$

25.7

$

24.3

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

Cash and Cash Equivalents

$

19.9

$

15.4

Restricted Cash

5.8

8.9

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

$

25.7

$

24.3

Supplemental Cash Flow Information:

Interest paid, net of capitalized interest

$

8.6

$

4.8

Income tax payments, net

$

(0.3)

$

(5.4)

Non-cash Information:

Capital expenditures included in accounts payable, accruals and other liabilities

$

3.5

$

5.5

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, 2019

 

42.9

$

32.2

 

$

306.2

$

(36.9)

$

504.2

$

805.7

Net income

 

 

 

 

 

 

3.8

 

3.8

Other comprehensive loss, net of tax

 

 

 

 

 

(0.6)

 

 

(0.6)

Share-based compensation

 

 

 

 

3.1

 

 

 

3.1

Shares issued, net of shares withheld for employee taxes

 

0.1

 

0.1

 

 

(4.6)

 

 

 

(4.5)

Equity interest in SSAT

2.2

2.2

Dividends ($0.22 per share)

 

 

 

 

 

 

(9.5)

 

(9.5)

Balance at March 31, 2020

 

43.0

$

32.3

 

$

304.7

$

(37.5)

$

500.7

$

800.2

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, 2018

 

42.7

$

32.0

 

$

297.8

$

(34.5)

$

460.0

$

755.3

Adoption of new lease accounting standard

 

 

 

 

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

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 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, a joint venture between Matson Ventures, Inc., a wholly-owned subsidiary of MatNav, and SSA Ventures, Inc., a subsidiary of Carrix, Inc. (“SSAT”). SSAT provides terminal and stevedoring services to various carriers at eight terminal facilities on the U.S. West Coast, including four facilities dedicated for MatNav’s use. Matson records its share of 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 logistics services to its customers including: (i) multimodal transportation brokerage of domestic and international rail intermodal services, 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, Inc. 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. The Company accounts for its investment in SSAT 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, 2019, filed with the Securities and Exchange Commission (“SEC”) on February 28, 2020.

Fiscal Period: The period end for Matson covered by this report is March 31, 2020. The period end for MatNav and its subsidiaries covered by this report occurred on the last Friday in March, or March 27, 2020, for the first quarter 2020.

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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, 2019.

Use of Estimates: The preparation of the interim condensed consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the amounts reported. Estimates and assumptions are used for, but not limited to: impairment of investments; impairment of long-lived assets, intangible assets and goodwill; capitalized interest; allowance for doubtful accounts; legal contingencies; uninsured risks and related liabilities; accrual estimates; pension and post-retirement estimates; multi-employer withdrawal liabilities; operating lease assets and liabilities; and income taxes. Future results could be materially affected if actual results differ from these estimates and assumptions.

Allowance for Doubtful Accounts Receivable: Allowance for doubtful accounts receivable is established by management based on estimates of collectability. Estimates of collectability are principally based on an evaluation of the current financial condition of the customer and the potential risks to collection, the customers’ payment history, expected future credit losses and other factors which are regularly monitored by the Company.

Recognition of Revenues and Related Expenses: 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 for the periods presented:

March 31, 

Ocean Transportation (in millions) (1)

2020

    

2019

Ocean Transportation services

$

391.1

$

387.9

Terminal and other related services

5.8

6.7

Fuel sales

2.6

2.0

Vessel management and related services

1.4

1.3

Total

$

400.9

$

397.9

(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.

March 31, 

Logistics (in millions) (1)

2020

2019 (2)

Transportation Brokerage and Freight Forwarding services

$

102.1

$

123.3

Warehouse and distribution services

8.2

8.4

Supply chain management and other services

 

2.7

 

2.8

Total

$

113.0

$

134.5

(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.
(2)The Company has reclassified $3.1 million from transportation brokerage and freight forwarding services to warehouse and distribution services for the quarter ended March 31, 2019 to be consistent with its current period presentation. There was no change in total Logistics revenue for the quarter ended March 31, 2019.

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. Revenue and the related purchased third-party transportation costs are recognized over the duration of a delivery

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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 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 revenue, 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, 2019. As of March 31, 2020 and December 31, 2019, $1.7 million of eligible accounts receivable was assigned to the CCF. Due to the nature of the assignment of eligible accounts receivable into the CCF, such assigned amounts are classified as part of accounts receivable in the Condensed Consolidated Balance Sheets. 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, 2020 and 2019, the Company deposited $70.4 million and $13.4 million into the CCF, and made qualifying cash withdrawals of $70.4 million and $13.4 million from the CCF, respectively. The balance of cash on deposit at March 31, 2020 and December 31, 2019 was nominal.

Investment in SSAT: Condensed income statement information (unaudited) for SSAT for the three months ended March 31, 2020 and 2019 consisted of the following:

Three Months Ended

 

March 31, 

 

(In millions)

2020

    

2019

 

Operating revenue

$

278.9

$

268.1

Operating costs and expenses

(265.4)

(244.2)

Operating income

13.5

23.9

Net Income (1)

$

13.0

$

22.5

Company Share of SSAT's Net Income (2)

$

4.0

$

8.5

(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.

The Company’s investment in SSAT was $74.3 million and $76.2 million at March 31, 2020 and December 31, 2019, respectively. During the three months ended March 31, 2020, the Company recorded an increase of $2.2 million in its investment in SSAT and a corresponding increase in retained earnings related to the formation of a new subsidiary of SSAT, whose controlling interest is retained by SSAT.

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.

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Dividends: The Company’s first quarter 2020 cash dividend of $0.22 per share was paid on March 5, 2020. On April 23, 2020, the Company’s Board of Directors declared a cash dividend of $0.22 per share payable on June 4, 2020.

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.

The Company adopted ASU 2016-13 effective January 1, 2020 using the modified retrospective approach. Upon adoption, the Company included an evaluation of expected future credit losses as part of its estimate for determining the allowance for doubtful accounts. The impact of this change was not material to the Company’s allowance for doubtful accounts receivable in the Condensed Consolidated Financial Statements. The Company will continue to monitor the impact of the recent COVID-19 pandemic on expected future credit losses. The Company’s accounting policy related to allowance for doubtful accounts receivable is described above.

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 SSAT segment has been aggregated into the Company’s Ocean Transportation segment due to the operations of SSAT 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 $19.4 million and $21.8 million for the three months ended March 31, 2020 and 2019, respectively, have been eliminated from operating revenues in the table below. 

Reportable segment financial information for the three months ended March 31, 2020 and 2019 are as follows:

Three Months Ended

March 31, 

(In millions)

    

2020

    

2019

    

Operating Revenue:

Ocean Transportation (1)

$

400.9

$

397.9

Logistics (2)

 

113.0

 

134.5

Total Operating Revenue

$

513.9

$

532.4

Operating Income:

Ocean Transportation (3)

$

7.9

$

9.4

Logistics

 

5.1

 

8.1

Total Operating Income

 

13.0

 

17.5

Interest expense, net

 

(8.6)

 

(4.6)

Other income (expense), net

 

0.6

 

0.6

Income before Income Taxes

 

5.0

 

13.5

Income taxes

 

(1.2)

 

(1.0)

Net Income

$

3.8

$

12.5

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(1)Ocean Transportation operating revenue excludes inter-segment revenue of $9.4 million and $11.4 million for the three months ended March 31, 2020 and 2019, respectively.
(2)Logistics operating revenue excludes inter-segment revenue of $10.0 million and $10.4 million for the three months ended March 31, 2020 and 2019, respectively.
(3)Ocean Transportation segment information includes $4.0 million and $8.5 million of equity in income from the Company’s equity investment in SSAT for the three months ended March 31, 2020 and 2019, respectively.

4.          PROPERTY AND EQUIPMENT

Property and equipment as of March 31, 2020 and December 31, 2019 consisted of the following:

March 31, 

December 31, 

(In millions)

    

2020

    

2019

Cost:

Vessels

$

1,966.1

$

1,653.5

Containers and equipment

528.8

544.5

Terminal facilities and other property

114.6

114.4

Vessel construction in progress

185.4

488.9

Other construction in progress

48.1

35.4

Total Property and Equipment

2,843.0

2,836.7

Less: Accumulated Depreciation

(1,253.4)

(1,238.6)

Total Property and Equipment, net

$

1,589.6

$

1,598.1

Vessel construction in progress relates to progress payments for the construction of new vessels, capitalized owner’s items and capitalized interest. During the three months ended March 31, 2020, the newly constructed vessel, Lurline was placed into service resulting in $308.2 million, including $16.5 million of capitalized interest, being 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 $7.4 million and $22.0 million at March 31, 2020 and December 31, 2019, respectively.

5.          GOODWILL AND INTANGIBLES

Goodwill by segment as of March 31, 2020 and December 31, 2019 consisted of the following:

Ocean

 

(In millions)

    

Transportation

    

Logistics

    

Total

 

Goodwill

$

222.6

$

105.2

$

327.8

Intangible assets as of March 31, 2020 and December 31, 2019 consisted of the following:

March 31, 

December 31, 

(In millions)

    

2020

    

2019

Customer Relationships:

Ocean Transportation

$

140.6

$

140.6

Logistics

90.1

90.1

Total

230.7

230.7

Less: Accumulated Amortization

(57.8)

(55.1)

Total Customer Relationships, net

172.9

175.6

Trade name – Logistics

27.3

27.3

Total Intangible Assets, net

$

200.2

$

202.9

The Company evaluates its goodwill and intangible assets for possible impairment in the fourth quarter, or whenever events or changes in circumstances indicate that it is more likely than not that the fair value is less than its carrying amount. The Company has reporting units within the Ocean Transportation and Logistics reportable segments. The Company considered the deterioration in general economic and market conditions due to the COVID-19 pandemic and its impact on the performance of each of the Company’s reporting units. Based on the Company’s assessment of its market capitalization, future forecasts and the amount of excess of fair value over the carrying value of the reporting

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units in the 2019 annual impairment tests, the Company concluded that an impairment triggering event did not occur during the quarter ended March 31, 2020.

The Company will monitor events and changes in circumstances that could negatively impact the key assumptions used in determining the fair value, including the amount and timing of estimated future cash flows generated by the reporting units, long-term growth and discount rates, comparable company market valuations, and industry and economic trends. It is possible that future changes in such circumstances, including a more prolonged and/or severe COVID-19 pandemic, or future changes in the assumptions and estimates used in assessing the fair value of the reporting unit, could require the Company to record a non-cash impairment charge.

6.          DEBT

At March 31, 2020 and December 31, 2019, the Company’s debt consisted of the following:

March 31, 

December 31, 

(In millions)

    

2020

    

2019

    

Private Placement Term Loans:

5.79 %, payable through 2020

$

3.5

$

3.5

3.66 %, payable through 2023

 

31.9

 

31.9

4.16 %, payable through 2027

 

39.3

 

39.3

3.37 %, payable through 2027

75.0

75.0

3.14 %, payable through 2031

178.8

188.0

4.31 %, payable through 2032

 

30.3

 

30.3

4.35 %, payable through 2044

100.0

100.0

3.92 %, payable through 2045

69.5

69.5

Title XI Debt:

5.34 %, payable through 2028

 

18.7

 

19.8

5.27 %, payable through 2029

 

20.9

 

22.0

Revolving credit facility, maturity date of June 29, 2022

 

357.0

 

379.1

Total Debt

 

924.9

 

958.4

Less: Current portion

 

(53.4)

 

(48.4)

Total Long-term Debt

$

871.5

$

910.0

The following is a description of the Company’s debt:

Private Placement Term Loans: The 5.79 percent notes payable through 2020 are amortized by semi-annual principal payments of $3.5 million plus interest.

During the second quarter of 2012, the Company issued $170.0 million of unsecured notes, which funded in three tranches, $77.5 million at an interest rate of 3.66 percent, $55.0 million at an interest rate of 4.16 percent, and $37.5 million at an interest rate of 4.31 percent (the “2012 Notes”). Principal and interest are payable semi-annually. The 2012 Notes began to amortize in 2015 with aggregate semi-annual payments of $4.6 million which continued through 2016, followed by $8.4 million in 2017 through mid-year 2023, $3.8 million through mid-year 2027, and $1.2 million thereafter.

In January 2014, the Company issued $100.0 million of 30-year senior unsecured notes at an interest rate of 4.35 percent, payable semi-annually (the “2014 Notes”). The 2014 Notes will begin to amortize in 2021, with annual principal payments of $5.0 million in 2021, $7.5 million in 2022 and 2023, $10.0 million from 2024 to 2027, and $8.0 million in 2028. Starting in 2029, and in each year thereafter until 2044, annual principal payments will be $2.0 million.

In July 2015, the Company issued $75.0 million of 30-year senior unsecured notes at an interest rate of 3.92 percent, payable semi-annually (the “2015 Notes”). The 2015 Notes began to amortize in 2017, with annual principal payments of approximately $1.8 million through 2019. During the years 2020 to 2026, the annual principal payments will range between approximately $1.3 million and $8.0 million. Starting in 2027, and in each year thereafter, the annual principal payments will be approximately $1.5 million.

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In September 2016, the Company issued $200.0 million of 15-year senior unsecured notes (the “Series D Notes”) at an interest rate of 3.14 percent, payable semi-annually. The Series D Notes began to amortize in 2019, with semi-annual principal payments of $6.0 million. During the years 2020 through 2023, semi-annual principal payments will be $9.2 million. Starting in 2024, and in each year thereafter through maturity in 2031, the semi-annual principal payments will be $7.15 million.

In December 2016, the Company issued $75 million of 11-year senior unsecured notes at an interest rate of 3.37 percent, payable semi-annually (the “Series A Notes”). The Series A Notes will begin to amortize in 2021, with principal payments of $5.8 million in 2021 and $11.5 million per year, paid semi-annually, from 2022 through 2027.

Existing and 2020 Title XI Bonds: In September 2003, MatNav issued $55.0 million in U.S. Government guaranteed ship financing bonds (Title XI) to finance the delivery of Manukai (the “Existing Title XI Bonds”). The bonds have a final maturity in September 2028 with a coupon rate of 5.34 percent. The bonds are amortized by semi-annual payments of $1.1 million plus interest. In August 2004, MatNav issued $55.0 million of U.S. Government guaranteed ship financing bonds (Title XI) to finance the delivery of Maunawili. The bonds have a final maturity in July 2029 with a coupon rate of 5.27 percent. The bonds are amortized by semi-annual payments of $1.1 million plus interest.

On April 27, 2020, MatNav entered into (i) a consolidated agreement (the “Consolidated Agreement”) among MatNav, the United States of America, represented by the Maritime Administrator of the Maritime Administration (“MARAD”) and, with respect to certain provisions, the Company and (ii) a Note Purchase Agreement (the “Note Purchase Agreement”) among MatNav, MARAD, and the Federal Financing Bank (the “FFB”). Pursuant to the Consolidated Agreement, the Note Purchase Agreement and certain related agreements (collectively, the “2020 Title XI Debt Agreements”), MatNav obtained Title XI financing in the amount of $185.9 million (the “2020 Title XI Bonds” and, collectively with the Existing Title XI Bonds, the “Title XI Bonds”). A fee of approximately $8.7 million was paid to MARAD out of the proceeds at closing. The net proceeds of approximately $177 million were used to reduce outstanding debt.

The 2020 Title XI Bonds mature on October 15, 2043 and have a cash interest rate of 1.22 percent, payable semi-annually in arrears on April 15 and October 15, commencing on October 15, 2020, together with a principal payment of approximately $4.0 million. MatNav may prepay any amounts outstanding under the Consolidated Agreement subject to a potential prepayment premium or other adjustment, in accordance with the 2020 Title XI Debt Agreements. Once amounts under the 2020 Title XI Bonds are repaid, they may not be reborrowed. Mandatory prepayments are required under certain limited circumstances, including specified casualty events with respect to the vessel Daniel K. Inouye (the “Vessel”).

Revolving Credit Facility: On June 29, 2017 (the “Closing Date”), the Company entered into an amended and restated credit agreement that provides the Company with additional sources of liquidity for working capital, capital expenditures and investment opportunities, and amends and restates the Company’s previously amended and restated credit agreement (the “Credit Agreement” or the “revolving credit facility”). The Credit Agreement expires on June 29, 2022, and provides for committed aggregate borrowing of up to $650 million, with an uncommitted option to increase the aggregate borrowing by up to $250 million. The aggregate borrowing within the Credit Agreement includes a $100 million sublimit for the issuance of standby and commercial letters of credit, and a $50 million sublimit for swing line loans. The Company may prepay any amounts outstanding under the Credit Agreement without premium or penalty. All obligations of the Company under the Credit Agreement are guaranteed by Matson’s principal operating subsidiary MatNav and by certain other subsidiaries.

On March 31, 2020 the Company entered into a First Amendment to Amended and Restated Credit Agreement (the “Credit Agreement Amendment”) to the Credit Agreement. The Credit Agreement Amendment provides for amendments to certain covenants and other terms, including increasing the permitted consolidated leverage ratio from March 31, 2020 to December 30, 2021, amending the pricing grid to provide for pricing ranging from, at the Company’s election, LIBOR plus a margin between 1.75 percent and 3.50 percent or a base rate plus a margin between 0.75 percent and 2.50 percent depending on the Company’s consolidated net leverage ratio; providing for additional limitations on stock redemptions and repurchases, sale leaseback transactions and asset sales during the period from March 31, 2020 through December 30, 2021; and providing for additional limitations on incurrence of priority debt through December 21, 2027. In addition, the Credit Agreement Amendment adds a “most favored lender” provision for the benefit of the lenders with respect to the Company’s Private Loan Facilities.

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Pursuant to the Credit Agreement Amendment, commencing March 31, 2020, borrowings under the Credit Agreement bear interest at either LIBOR plus a margin of between 1.75 percent and 3.50 percent or the base rate plus a margin of between 0.75 percent and 2.50 percent. Letters of credit are subject to fees based on the Company’s consolidated net leverage ratio at a rate of between 1.75 percent and 3.50 percent, and the Company also pays a commitment fee of between 0.25 percent and 0.55 percent depending on the Company’s consolidated net leverage ratio.

As of March 31, 2020, the Company had $163.6 million of remaining borrowing availability under the revolving credit facility. The Company used $7.7 million of the sublimit for letters of credit outstanding as of March 31, 2020. Based on the Company’s consolidated net leverage ratio, which stipulates borrowing margins, the interest rate applicable to revolving credit facility was approximately 3.50 percent at March 31, 2020.

Amendments to Existing Private Placement Term Loan Facilities and New Shelf Facilities (“Private Debt Agreements”): On June 29, 2017, the Company and the holders of the Company’s term loans entered into amendments (collectively, the “2017 Amendments”) to each of Company’s Private Debt Agreements, previously issued prior to the Closing Date. The 2017 Amendments provide for amendments to certain covenants and other terms, including (at the Company’s option under certain circumstances) adjustments to the required consolidated leverage ratio, and, in connection with the exercise of such option, the payment of additional interest for certain pre-defined periods.

On March 31, 2020, the Company and the holders of notes party thereto entered into amendments (collectively, the “2020 Amendments”) to each of the Company’s Private Loan Facilities. The 2020 Amendments modify certain covenants and other terms, including increasing the permitted consolidated leverage ratio from March 31, 2020 to December 30, 2021; providing for additional quarterly interest enhancement payments based on the Company’s consolidated leverage ratio from the quarter ended March 31, 2020 through the quarters ending December 31, 2021; providing for an additional 25 basis points of interest on the Notes commencing on January 1, 2022 (subject to termination of such incremental interest upon the Company meeting a consolidated leverage ratio of less than 3:00 to 1:00 for two consecutive fiscal quarters); providing for additional fee payments to be made for the quarters ending June 30, 2021 and September 30, 2021; providing for prepayment at par at the option of the holders with proceeds of certain Title XI debt and dispositions of capital assets; providing for additional limitations on stock redemptions and repurchases, sale leaseback transactions and asset sales during the period from March 31, 2020 through and including December 30, 2021; and providing for additional limitations on incurrence of priority debt through December 21, 2027. In addition, the 2020 Amendments add a “most favored lender” provision for the benefit of the noteholders with respect to the other Private Loan Facilities and the Credit Agreement.

Financing Costs: The Company paid approximately $2.0 million and $0.8 million related to the Credit Agreement Amendment and the 2020 Amendments, respectively. These amounts have been included in other assets in the Condensed Consolidated Balance Sheet as of March 31, 2020.

Debt Covenants in the Private Placement Term Loans and the Revolving Credit Facility: The Credit Agreement and Private Loan Facilities (collectively, the “Private Debt Agreements”) contain affirmative, negative and financial covenants customary for financings of this type, including, among other things, limitations on certain other indebtedness, loans and investments, liens, mergers, asset sales, and transactions with affiliates as defined within the Private Debt Agreements. The Private Debt Agreements also contain customary events of default, including cross defaults to other material indebtedness, including the Title XI debt. A brief description of the principal covenants contained in the Private Debt Agreements includes, but is not limited to the following (as defined within the Private Debt Agreements):

Minimum Consolidated Interest Coverage Ratio as of the end of any fiscal quarter is not permitted to be less than 3.50 to 1.0;
Maximum Consolidated Leverage Ratio as of the end of any fiscal quarter is not permitted to exceed the ratios specified in the Private Debt Agreements for the applicable quarter; and
No Priority Debt may be incurred other than: (i) an aggregate of $331,000,000 principal amount of Title XI Priority Debt and (ii) Priority Debt incurred by Foreign Subsidiaries in an aggregate principal amount not to exceed $20,000,000.

Principal covenants generally will restrict the incurrence of liens except for permitted liens, which include, without limitation, liens securing Title XI debt up to certain thresholds, as defined within the Private Debt Agreements. The Company was in compliance with these covenants as of March 31, 2020.

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Debt Covenants in Existing Title XI Bonds and 2020 Title XI Debt Agreements: The Existing Title XI Bonds contain customary representations and warranties as well as affirmative and negative covenants, defaults and other provisions typical for MARAD-guaranteed financings of this type, with definitions and limitations as defined within the Existing Title XI Bonds. These covenants include, among other things, minimum working capital and net worth requirements, limitations on certain other indebtedness, loans and investments, liens, mergers, asset sales, sale and leaseback transactions, and transactions with affiliates as defined within the Existing Title XI Bonds. Certain of the covenants in the Existing Title XI Bonds are applicable only upon and during the continuance of either (i) an event of default or (ii) the failure of MatNav to meet certain financial requirements.

The 2020 Title XI Debt Agreements contain customary representations and warranties as well as affirmative and negative covenants, defaults and other provisions typical for MARAD-guaranteed financings of this type, with definitions, limitations and financial tests all as negotiated between MatNav and MARAD. As part of the 2020 Title XI Debt Agreements, certain covenants contained in the Existing Title XI Bonds were eliminated. The covenants in the 2020 Title XI Debt Agreements include, among other things, limitations on certain other indebtedness, loans and investments, liens, mergers, asset sales, sale-leasebacks, and transactions with affiliates as defined within the 2020 Title XI Debt Agreements. Certain of the covenants in the 2020 Title XI Debt Agreements are applicable only upon and during the continuance of either (i) an event of default or (ii) the failure of either the Company or MatNav to meet certain supplemental financial tests.

The supplemental financial tests applicable to MatNav include maintenance of a working capital minimum of $1, and maintenance of a long term debt to net worth ratio of greater than or equal to 2.0 to 1.0; and
The supplemental financial tests applicable to the Company include maintenance of a net worth greater than or equal to 90% of the net worth of the Company as set forth in the most recent audited financial statements prior to closing of the issuance of the 2020 Title XI Bonds and compliance with the leverage ratio set forth in the Company’s Credit Agreement.

Debt Security and Guarantees: All of the debt of the Company and MatNav, including related guarantees, as of March 31, 2020 was unsecured, except for the Title XI debt.

Under the 2020 Title XI Debt Agreements, MARAD has guaranteed certain obligations of MatNav to the FFB. MatNav has agreed to reimburse MARAD for any payments it makes under the MARAD guaranty, and MatNav’s obligations to MARAD with respect to the 2020 Title XI Bonds are secured by a mortgage on the Vessel and certain related assets (the “Collateral”), as well as the Existing Vessels (as defined below). In addition, MatNav’s obligations to MARAD with respect to the 2020 Title XI Bonds are guaranteed by the Company under an Affiliate Guaranty (the “Guaranty”).

The 2020 Title XI Debt Agreements also provide that the two vessels securing MatNav’s Existing Title XI Bonds – Manukai and Maunawili (the “Existing Vessels”) – also secure the 2020 Title XI Bonds until the Existing Title XI Bonds are retired in 2028 and 2029, respectively, subject to certain exceptions.

Debt Maturities: At March 31, 2020, debt maturities during the next five years and thereafter are as follows:

Year (in millions)

    

Total

 

2020

$

37.0

2021

 

54.2

2022

 

416.9

2023

 

59.9

2024

 

55.8

Thereafter

 

301.1

Total debt

$

924.9

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7.          LEASES

Description of Operating Leases: The Company has 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 with 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 Statements of Income and Comprehensive Income for the three months ended March 31, 2020 and 2019. The Company did not have any finance leases during the three months ended March 31, 2020 and 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 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, 2020 and 2019 consisted of the following:

Three Months Ended

March 31, 

(In millions)

    

2020

2019

Operating lease cost

$

20.0

$

16.7

Short-term lease cost

 

0.1

 

2.4

Variable lease cost

 

0.2

 

0.1

Total lease cost

$

20.3

$

19.2

Sale and Leaseback of Equipment: On March 25, 2020, the Company entered into an agreement for the sale and leaseback of multiple tranches of chassis and container equipment. The net proceeds from the sales were $14.3 million, and the gain on the disposal of the equipment was not material to the Company’s Condensed Consolidated Financial Statements. The Company subsequently leased back the equipment under a five-year operating lease agreement that includes purchase options exercisable at fair market value. The Company has included the right of use asset and related lease liabilities in other lease information below. There were no sale and leaseback transactions during the three months ended March 31, 2019.

Other Lease Information: Other information related to the Company’s operating leases for the three months ended March 31, 2020 and 2019 consisted of the following:

Three Months Ended

March 31, 

(In millions)

    

2020

2019

Cash paid for amounts included in operating lease liabilities

$

20.5

$

16.7

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

$

16.1

$

5.8

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March 31, 2020

    

December 31, 2019

Weighted average remaining operating lease term

7.4 years

7.5 years

Weighted average incremental borrowing rate

4.1%

4.2%

Maturities of operating lease liabilities at March 31, 2020 are as follows:

    

As of

Year (in millions)

    

March 31, 2020

2020

$

58.7

2021

 

58.4

2022

 

46.7

2023

 

41.2

2024

 

26.2

Thereafter

 

79.8

Total lease payments