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 June 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 June 30, 2019: 42,855,015
MATSON, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page
Part I—FINANCIAL INFORMATION
1
Item 1.
Financial Statements (Unaudited)
Condensed Consolidated Statements of Income and Comprehensive Income
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
Part II—OTHER INFORMATION
Legal Proceedings
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
25
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
Signatures
26
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended
Six Months Ended
June 30,
(In millions, except per share amounts)
2019
2018
Operating Revenue:
Ocean Transportation
$
415.4
406.6
813.3
785.9
Logistics
142.5
150.5
277.0
282.6
Total Operating Revenue
557.9
557.1
1,090.3
1,068.5
Costs and Expenses:
Operating costs
(472.8)
(465.9)
(939.9)
(905.2)
Equity in income of Terminal Joint Venture
0.9
9.1
9.4
19.6
Selling, general and administrative
(55.0)
(54.3)
(111.3)
(108.2)
Total Costs and Expenses
(526.9)
(511.1)
(1,041.8)
(993.8)
Operating Income
31.0
46.0
48.5
74.7
Interest expense
(6.1)
(5.0)
(10.7)
(10.0)
Other income (expense), net
0.8
0.4
1.4
1.2
Income before Income Taxes
25.7
41.4
39.2
65.9
Income taxes
(7.3)
(8.8)
(8.3)
(19.1)
Net Income
18.4
32.6
30.9
46.8
Other Comprehensive Income (Loss), Net of Income Taxes:
Other Comprehensive Income (Loss):
Amortization of prior service cost
(1.2)
(1.1)
(2.3)
(2.4)
Amortization of net loss
0.5
1.8
Other adjustments
(0.2)
(0.3)
(0.1)
Total Other Comprehensive Loss
(0.5)
(0.9)
(0.7)
Comprehensive Income
17.9
31.7
30.2
46.1
Basic Earnings Per Share
0.43
0.76
0.72
1.10
Diluted Earnings Per Share
1.09
Weighted Average Number of Shares Outstanding:
Basic
42.8
42.7
42.6
Diluted
43.2
43.0
42.9
See Notes to Condensed Consolidated Financial Statements.
December 31,
(In millions)
ASSETS
Current Assets:
Cash and cash equivalents
24.0
Accounts receivable, net
213.0
223.7
Prepaid expenses and other assets
52.6
75.1
Total current assets
289.6
318.4
Long-term Assets:
Investment in Terminal Joint Venture
86.7
87.0
Property and equipment, net
1,398.7
1,366.6
Operating lease right of use assets
238.5
—
Goodwill
327.8
Intangible assets, net
208.4
214.0
Deferred dry-docking costs, net
57.9
67.1
Other long-term assets
49.9
49.5
Total long-term assets
2,367.9
2,112.0
Total Assets
2,657.5
2,430.4
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Current portion of debt
53.6
42.1
Accounts payable
221.1
246.8
Operating lease liabilities
57.4
Accruals and other liabilities
93.3
81.9
Total current liabilities
425.4
370.8
Long-term Liabilities:
Long-term debt
791.0
814.3
Long-term operating lease liabilities
189.0
Deferred income taxes
323.9
312.7
Other long-term liabilities
163.0
177.3
Total long-term liabilities
1,466.9
1,304.3
Commitments and Contingencies (Note 2)
Shareholders’ Equity:
Common stock
32.1
32.0
Additional paid in capital
300.7
297.8
Accumulated other comprehensive loss, net
(35.2)
(34.5)
Retained earnings
467.6
460.0
Total shareholders’ equity
765.2
755.3
Total Liabilities and Shareholders’ Equity
Six Months Ended June 30,
Cash Flows From Operating Activities:
Net income
Reconciling adjustments:
Depreciation and amortization
47.5
47.6
Non-cash operating lease expense
33.5
9.9
14.6
Share-based compensation expense
6.2
5.5
(9.4)
(19.6)
Distribution from Terminal Joint Venture
9.5
17.5
Other
(1.6)
(0.6)
Changes in assets and liabilities:
10.8
(27.1)
Deferred dry-docking payments
(6.9)
(5.1)
Deferred dry-docking amortization
17.2
18.3
25.5
3.0
Accounts payable, accruals and other liabilities
(29.6)
(33.3)
(2.0)
Net cash provided by operating activities
108.2
119.1
Cash Flows From Investing Activities:
Capitalized vessel construction expenditures
(30.6)
(166.8)
Other capital expenditures
(38.4)
(25.5)
Proceeds from disposal of property and equipment
2.2
11.0
Cash deposits into Capital Construction Fund
(26.4)
(198.3)
Withdrawals from Capital Construction Fund
26.4
199.2
Net cash used in investing activities
(66.8)
(180.4)
Cash Flows From Financing Activities:
Repayments of debt and capital leases
(11.8)
(14.6)
Proceeds from revolving credit facility
212.8
268.9
Repayments of revolving credit facility
(212.8)
(178.9)
Proceeds from issuance of capital stock
Dividends paid
(18.2)
(17.3)
Tax withholding related to net share settlements of restricted stock units
(3.2)
(4.3)
Net cash (used in) provided by financing activities
(33.2)
54.3
Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash
8.2
(7.0)
Cash, Cash Equivalents and Restricted Cash, Beginning of the Period
24.5
19.8
Cash, Cash Equivalents and Restricted Cash, End of the Period
32.7
12.8
Reconciliation of Cash, Cash Equivalents and Restricted Cash, at End of the Period:
Cash and Cash Equivalents
Restricted Cash
8.7
Total Cash, Cash Equivalents and Restricted Cash, End of the Period
Supplemental Cash Flow Information:
Interest paid, net of capitalized interest
7.8
8.9
Income tax (refunds) payments, net
(26.2)
4.2
Non-cash Information:
Capital expenditures included in accounts payable, accruals and other liabilities
3.7
Accrued dividends
9.0
Accumulated
Common Stock
Additional
Stated
Paid In
Comprehensive
Retained
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)
4.4
12.5
Other comprehensive loss, net of tax
Share-based compensation
3.2
Shares issued, net of shares withheld for employee taxes
0.1
(3.1)
Dividends ($0.21 per share)
(9.1)
Balance at March 31, 2019
(34.7)
467.8
763.0
Dividends ($0.21 per share and $0.22 per share)
(18.6)
Balance at June 30, 2019
Balance at December 31, 2017
42.5
31.9
289.7
(24.9)
380.5
677.2
Reclassification resulting from adoption of new accounting pronouncement
(6.0)
6.0
14.2
Other comprehensive income, net of tax
0.2
2.7
(4.2)
Dividends ($0.20 per share)
(8.7)
Balance at March 31, 2018
288.1
(30.7)
392.0
681.4
2.8
0.3
Dividends ($0.20 per share and $0.21 per share)
(17.7)
Balance at June 30, 2018
291.2
(31.6)
406.9
698.5
NOTES TO THE CONDENSED CONSOLIDATED FINANICAL STATEMENTS
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.
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:
Ocean Transportation (in millions) (1)
Ocean Transportation services
397.3
794.5
766.1
Terminal and other related services
4.8
5.0
11.5
11.2
Fuel sales
2.6
2.5
4.6
5.1
Vessel management and related services
3.5
Logistics (in millions) (1)
Transportation Brokerage and Freight Forwarding services
134.7
143.0
261.1
267.5
Warehouse and distribution services
5.3
10.6
8.8
Supply chain management and other services
3.3
6.3
6
The Company generally invoices its customers at the commencement of the voyage or the transportation service being provided, or as other services are being performed. Revenue is deferred when services are invoiced in advance to the customer. The Company’s receivables are classified as short-term as collection terms are for periods of less than one year. The Company expenses sales commissions and contract acquisition costs as incurred because the amounts are generally immaterial. These expenses are included in selling, general and administration expenses in the Condensed Consolidated Statements of Income and Comprehensive Income.
Capital Construction Fund: The Company’s Capital Construction Fund (“CCF”) is described in Note 7 to the Consolidated Financial Statements included in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. As of June 30, 2019 and December 31, 2018, $1.7 million and $1.0 million of eligible accounts receivable were assigned to the CCF, respectively. Due to the nature of the assignment of eligible accounts receivable into the CCF, such assigned amounts are classified as part of accounts receivable in the Condensed Consolidated Balance Sheets. Cash on deposit in the CCF is held in a money market account and classified as a long-term asset in the Company’s Condensed Consolidated Balance Sheets, as the Company intends to use qualified cash withdrawals to fund long-term investment in the construction of new vessels. During the three and six months ended June 30, 2019, the Company deposited $13.0 million and $26.4 million into the CCF respectively, and made qualifying cash withdrawals of $13.0 million and $26.4 million from the CCF respectively. The balance of cash on deposit at June 30, 2019 and December 31, 2018 was nominal.
Investment in Terminal Joint Venture: The Company’s investment in SSAT was $86.7 million and $87.0 million at June 30, 2019 and December 31, 2018, respectively. Condensed income statement information (unaudited) for the Terminal Joint Venture for the three and six months ended June 30, 2019 and 2018 consisted of the following:
Operating revenue
268.8
266.1
536.9
517.0
Operating costs and expenses
(265.0)
(240.4)
(509.2)
(460.1)
Operating income
3.8
27.7
56.9
Net Income (1)
24.3
26.8
55.0
Company Share of SSAT's Net Income (2)
Income Taxes: In connection with the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), the Company recorded a non-cash tax adjustment of $0.2 million that decreased income taxes for the three months ended June 30, 2018, and $3.1 million that increased income taxes for the six months ended June 30, 2018. These adjustments related to the application of an estimated 6.2 percent sequestration on alternative minimum tax (AMT) refunds due to the Company, and was based on guidance issued by the Internal Revenue Service (IRS) and emerging interpretations of the Tax Act during that period. On January 19, 2019, the IRS issued new guidance indicating that sequestration would not apply to refundable AMT credits. In accordance with this new guidance, the Company recorded a non-cash tax adjustment of $2.9 million that decreased income taxes for the six months ended June 30, 2019. No amount impacted income taxes during the three months ended June 30, 2019.
The Company continues to assess the impact of the Tax Act, related interpretations and other tax legislation, when issued, on the Company’s income tax estimates. These and other factors could materially affect the Company’s financial condition or its future operating results.
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 $0.21 per share was paid on June 6, 2019. On June 14, 2019, the Company’s Board of Directors declared a cash dividend of $0.22 per share payable on September 5, 2019.
New Accounting Pronouncements: Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”): In June 2016, the Financial Accounting Standards Board issued ASU 2016-13 which amends the current approach to estimate credit losses on certain financial assets, including trade and other receivables, available-for-sale securities and other financial instruments. ASU 2016-13 requires entities to establish a valuation allowance for the expected lifetime losses of certain financial instruments. Subsequent changes in the valuation allowance are recorded in current earnings and reversal of previous losses is permitted. The new standard is effective for interim and annual periods beginning on or after December 15, 2019, and early adoption is permitted. The Company is in the process of evaluating this new standard, but does not expect the adoption of ASU 2016-13 to have a significant impact on the Company’s Consolidated Financial Statements.
3. REPORTABLE SEGMENTS
Reportable segments are components of an enterprise that engage in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. The Company’s chief operating decision maker is its Chief Executive Officer.
The Company consists of two reportable segments, Ocean Transportation and Logistics, which are further described in Note 1. Reportable segments are measured based on operating income, exclusive of interest expense and income taxes. In arrangements where the customer purchases ocean transportation and logistics services, the revenues are allocated to each reportable segment based upon the contractual amounts for each type of service. The Company’s Terminal Joint Venture segment has been aggregated into the Company’s Ocean Transportation segment due to the operations of the Terminal Joint Venture being an integral part of the Company’s Ocean Transportation business.
The Company’s Ocean Transportation segment provides ocean transportation services to the Logistics segment, and the Logistics segment provides logistics services to the Ocean Transportation segment. Accordingly, inter-segment revenue of $25.3 million and $26.8 million for the three months ended June 30, 2019 and 2018, and $47.1 million and $45.1 million for the six months ended June 30, 2019 and 2018, respectively, have been eliminated from operating revenue in the table below.
8
Reportable segment results for the three and six months ended June 30, 2019 and 2018 consisted of the following:
Operating Income:
Ocean Transportation (1)
19.7
36.5
29.1
61.0
11.3
19.4
13.7
Total Operating Income
Interest expense, net
4. PROPERTY AND EQUIPMENT
Property and equipment at June 30, 2019 and December 31, 2018 consisted of the following:
Cost:
Vessels
1,629.6
1,489.2
Containers and equipment
516.5
513.6
Terminal facilities and other property
66.1
66.0
Vessel construction in progress
309.8
487.2
Other construction in progress
81.4
59.2
Total Property and Equipment
2,603.4
2,615.2
Less: Accumulated Depreciation
(1,204.7)
(1,248.6)
Total Property and Equipment, net
Vessel construction in progress relates to progress payments for the construction of two new vessels, capitalized owner’s items and capitalized interest. During the three months ended June 30, 2019, the construction of the second vessel, MV Kaimana Hila, was completed and the vessel was placed into service resulting in approximately $211.8 million, including $9.9 million of capitalized interest, transferred from the Vessel construction in progress category to the Vessels category within Property and Equipment. Capitalized interest included in Vessel construction in progress was $14.4 million and $16.3 million at June 30, 2019 and December 31, 2018, respectively.
9
5. GOODWILL AND INTANGIBLES
Goodwill by segment at June 30, 2019 and December 31, 2018 consisted of the following:
Ocean
Transportation
222.6
105.2
Intangible assets at June 30, 2019 and December 31, 2018 consisted of the following:
Customer Relationships:
140.6
90.1
230.7
Less: Accumulated Amortization
(49.6)
(44.0)
Total Customer Relationships, net
181.1
186.7
Trade name - Logistics
27.3
Total Intangible Assets, net
6. DEBT
At June 30, 2019 and December 31, 2018, the Company’s debt consisted of the following:
Private Placement Term Loans:
5.79 %, payable through 2020
7.0
10.5
3.66 %, payable through 2023
41.0
4.16 %, payable through 2027
44.5
3.37 %, payable through 2027
75.0
3.14 %, payable through 2031
194.0
200.0
4.31 %, payable through 2032
4.35 %, payable through 2044
100.0
3.92 %, payable through 2045
71.4
Title XI Bonds:
5.34 %, payable through 2028
20.9
22.0
5.27 %, payable through 2029
23.1
24.2
Revolving credit facility, maturity date of June 29, 2022
235.0
Capital leases
Total Debt
844.6
856.4
Less: Current portion
(53.6)
(42.1)
Total Long-term Debt
The Company’s debt is described in Note 8 to the Consolidated Financial Statements included in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. Borrowings under the revolving credit facility are classified as long-term debt in the Condensed Consolidated Balance Sheets, as principal payments are not required until the maturity date of June 29, 2022.
As of June 30, 2019, the Company had $217.8 million of remaining availability under the revolving credit facility. The average interest rate on borrowings under the revolving credit facility was approximately 3.93 percent during the three months ended June 30, 2019.
10
7. LEASES
New Lease Accounting Standard: The Company adopted the new lease accounting standard Leases ASC 842 on January 1, 2019, and made the following elections:
Upon adoption of ASC 842 on January 1, 2019, the Company recorded a right-of-use asset of approximately $251.4 million, a corresponding operating lease liability of $259.1 million. As part of the adoption, the Company recorded a net adjustment to retained earnings of $4.4 million. The adoption of ASC 842 did not have a significant impact on the Company’s current earnings, liquidity or existing debt covenant requirements. Significant assumptions and judgments made in applying the new lease accounting standard include determining the Company’s incremental borrowing rate and evaluating the probability of exercising lease options.
Description of Operating Leases: The Company has a variety of different types of operating leases, the specific terms and conditions of which vary from lease to lease. Certain operating lease agreements include terms such as: (i) renewal and early termination options; (ii) early buy-out and purchase options; and (iii) rent escalation clauses. The lease agreements also include provisions for the maintenance of the leased asset and payment of lease related costs. The Company reviews the specific terms and conditions of each lease and, as appropriate, notifies the lessor of any intent to exercise any option in accordance with the terms of the lease. In the normal course of business, the Company expects to be able to renew or replace most of its operating leases by other similar leases as they expire. Except for the residual value guarantee described below, the Company’s leases do not contain any other residual value guarantees.
The Company’s sub-lease income was nominal to the Company’s Condensed Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2019. The Company did not have any finance leases during the six months ended June 30, 2019. Certain of the Company’s lease agreements include rental payments that may be adjusted in the future based on economic conditions and others include rental payments adjusted periodically for inflation. Variable lease expense is disclosed for the adjusted portion of such payments.
The lease type by underlying asset class and maximum terms of the Company’s operating leases are as follows:
Lease Type:
Life
Real estate and terminal leases
65 years
Vessel charter leases
10 years
Operations equipment and other leases
8 years
Incremental Borrowing Rate: As most of the Company’s operating leases do not provide an implicit rate, the Company uses an estimated incremental borrowing rate based on information available at the date of adoption and subsequent lease commencement dates in calculating the present value of its operating lease liabilities. The incremental borrowing rate is determined using the U.S. Treasury rate adjusted to account for the Company’s credit rating and the collateralized nature of operating leases.
11
Components of Lease Cost: Components of lease cost recorded in the Company’s Condensed Consolidated Statement of Income and Comprehensive Income for the three and six months ended June 30, 2019 consisted of the following:
Operating lease cost
16.8
Short-term lease cost
4.9
Variable lease cost
Total lease cost
38.6
Other Lease Information: Other information related to the Company’s operating leases for the three and six months ended June 30, 2019 is as follows:
(In millions, except lease term and discount rate)
Cash paid for amounts included in operating lease liabilities
16.6
33.3
Right of use assets obtained in the exchange for new operating lease liabilities
15.2
As of
June 30, 2019
Weighted-average remaining operating lease term
7.8 years
Weighted-average incremental borrowing rate
4.4%
Maturities of operating lease liabilities at June 30, 2019 are as follows:
Year (in millions)
34.0
2020
62.2
2021
46.7
2022
36.6
2023
32.3
Thereafter
85.8
Total lease payments
297.6
Less: Interest
(51.2)
Present value of operating lease liabilities
246.4
Less: Short-term portion
(57.4)
Future minimum payments under non-cancellable operating lease agreements at December 31, 2018 are as follows:
68.3
44.8
34.7
30.5
83.6
Total minimum lease payments
321.1
Residual Value Guarantee: On November 26, 2018, a wholly-owned subsidiary of the Company entered into a Bareboat Charter Agreement (the “Charter”). Charter lease payments are approximately $3.0 million per quarter and are included in the operating lease liabilities described above. The base term of the Charter is five years with a two year end-of-term renewal option. The Charter also includes a maximum residual value guarantee amount of $50.9 million after five years, or $47.7 million after the extended term. The residual value guarantee is excluded from operating lease liabilities described above as the Company determined that it is not probable that any portion of the residual value guarantee will be paid by the Company. The Charter and residual value guarantee are described in Note 9 to the Consolidated Financial
12
Statements included in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
8. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Changes in accumulated other comprehensive income (loss) by component, net of tax, for the six months ended June 30, 2019 consisted of the following:
Non-
Post-
Qualified
Pensions
Retirement
Plans
(55.8)
21.7
(0.4)
0.7
(55.5)
21.2
Amortization of net loss (gain)
(55.3)
20.6
Changes in accumulated other comprehensive income (loss) by component, net of tax, for the six months ended June 30, 2018 consisted of the following:
(40.6)
15.6
Reclassification adjustment related to the Tax Act (1)
(9.2)
3.4
(1.3)
1.3
(49.3)
0.6
(48.9)
18.1
9. FAIR VALUE MEASUREMENTS
The Company values its financial instruments based on the fair value hierarchy of valuation techniques for fair value measurements. Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date. Level 2 inputs include quoted prices for similar assets and liabilities in active markets and inputs other than quoted prices observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability. If the technique used to measure fair value includes inputs from multiple levels of the fair value hierarchy, the lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy.
The Company uses Level 1 inputs for the fair values of its cash, cash equivalents and restricted cash, and Level 2 inputs for its variable and fixed rate debt. The fair values of cash, cash equivalents and restricted cash, and variable rate debt approximate their carrying values due to the nature of the instruments. The fair value of the Company’s fixed rate debt is calculated based upon interest rates available for debt with terms and maturities similar to the Company’s existing debt arrangements.
13
The carrying value and fair value of the Company’s financial instruments as of June 30, 2019 and December 31, 2018 are as follows:
Quoted Prices in
Significant
Active Markets
Observable
Unobservable
Carrying Value
(Level 1)
Inputs (Level 2)
Inputs (Level 3)
Fair Value Measurements at June 30, 2019
Restricted cash
Variable rate debt
Fixed rate debt
609.6
608.0
December 31, 2018
Fair Value Measurements at December 31, 2018
621.4
584.5
10. EARNINGS PER SHARE
Basic earnings per share is determined by dividing net income by the weighted-average common shares outstanding during the period. The calculation of diluted earnings per share includes the dilutive effect of unexercised non-qualified stock options and non-vested restricted stock units. The denominator used to compute basic and diluted earnings per share for the three and six months ended June 30, 2019 and 2018, are as follows:
Three Months Ended June 30, 2019
Six Months Ended June 30, 2019
Weighted
Per
Average
Common
Net
Share
Income
Amount
Effect of Dilutive Securities
Three Months Ended June 30, 2018
Six Months Ended June 30, 2018
(0.01)
The computation of weighted-average common shares outstanding excludes a nominal amount of anti-dilutive non-qualified stock options for each period ended June 30, 2019 and 2018.
11. SHARE-BASED COMPENSATION
During the three and six months ended June 30, 2019, the Company granted approximately 21,000 and 359,000 in total of time-based restricted stock units and performance-based shares to certain of its employees at a weighted-average grant date fair value of $38.36 and $33.59, respectively.
Total share-based compensation cost recognized in the Condensed Consolidated Statements of Income and Comprehensive Income as a component of selling, general and administrative expenses was $3.0 million and $2.8 million for the three months ended June 30, 2019 and 2018, and $6.2 million and $5.5 million for the six months ended June 30, 2019 and 2018, respectively. Total unrecognized compensation cost related to unvested share-based compensation arrangements was $18.8 million at June 30, 2019, and is expected to be recognized over a weighted-
14
average period of approximately 2.0 years. Total unrecognized compensation cost may be adjusted for any unearned performance shares or forfeited shares.
12. PENSION AND POST-RETIREMENT PLANS
The Company’s pension and post-retirement plans are described in Note 11 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. Components of net periodic benefit cost for the Company’s qualified defined benefit pension and post-retirement plans for the three and six months ended June 30, 2019 and 2018 consisted of the following:
Pension Benefits
Post-retirement Benefits
Three Months Ended June 30,
Components of net periodic benefit cost (benefit):
Service cost
1.1
Interest cost
2.3
2.1
Expected return on plan assets
(3.4)
Amortization of prior service credit
(1.0)
Net periodic benefit cost (benefit)
4.3
(6.3)
(6.8)
2.4
(1.9)
(1.8)
******
15
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and related notes, and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q.
FORWARD-LOOKING STATEMENTS
Except for historical information, the statements made in this Quarterly Report on Form 10-Q are forward-looking statements made pursuant to the safe-harbor provisions of the Private Security Litigation Reform Act of 1995. Such forward-looking statements may be contained in, among other things, SEC filings, such as reports on Forms 10-K, 10-Q and 8-K, the Annual Report to Shareholders, press releases made by the Company, the Company’s Internet Websites (including Websites of its subsidiaries), and oral statements made by officers of the Company.
This report, and other statements that the Company may make, may contain forward-looking statements with respect to the Company’s future financial or business performance, strategies or expectations. Forward-looking statements are typically identified by words or phrases such as “trend,” “potential,” “opportunity,” “pipeline,” “believe,” “comfortable,” “expect,” “anticipate,” “current,” “intention,” “estimate,” “position,” “assume,” “outlook,” “continue,” “remain,” “maintain,” “sustain,” “seek,” “achieve,” or similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “may” or similar expressions.
The Company cautions that forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time, including, but not limited to, the risk factors that are described in Part I, Item 1A, “Risk Factors” of Matson’s Annual Report on Form 10-K for the year ended December 31, 2018. Forward-looking statements speak only as of the date they are made, and the Company assumes no duty to and does not undertake any obligation to update forward-looking statements. Actual results could differ materially from those anticipated in forward-looking statements and future results could differ materially from historical performance.
OVERVIEW
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a discussion of the Company’s financial condition, results of operations, liquidity and certain other factors that may affect its future results from the perspective of management. The discussion that follows is intended to provide information that will assist in understanding the changes in the Company’s financial statements from period to period, the primary factors that accounted for those changes, and how certain accounting principles, policies and estimates affect the Company’s financial statements. MD&A is provided as a supplement to the Condensed Consolidated Financial Statements and notes herein, and should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, the Company’s reports on Forms 10-Q and 8-K, and other publicly available information.
BUSINESS OUTLOOK
Ocean Transportation: The Company’s container volume in the Hawaii service in the second quarter 2019 was 2.3 percent lower year-over-year primarily due to negative container market growth. The GDP of the Hawaii economy continues to grow, albeit at a slowing pace; however, containerized freight market volume has not been keeping pace with GDP growth. The Company expects volume in 2019 to be lower than the level achieved in 2018, reflecting less containerized freight volume in Hawaii and stable market share.
In China, the Company’s container volume in the second quarter 2019 was 2.5 percent higher year-over-year. Matson continued to realize a sizeable rate premium in the second quarter 2019 and achieved average freight rates moderately higher than the second quarter 2018. For the second half of 2019, the Company expects volume to be lower than the prior year as volume normalizes to a traditional level of activity relative to the strong level achieved in the second half of 2018 resulting from the U.S.-China trade situation. For the full year 2019, the Company expects average freight rates to approach the levels achieved in 2018.
In Guam, the Company’s container volume in the second quarter 2019 was flat on a year-over-year basis. For 2019, the Company expects volume to approximate the level achieved last year and expects the highly competitive environment to remain.
In Alaska, the Company’s container volume for the second quarter 2019 was 8.0 percent higher year-over-year, primarily due to the timing of two additional northbound sailings. For 2019, the Company expects volume to be moderately higher than the level achieved in 2018 with higher northbound volume supported by improving economic conditions in Alaska and higher southbound seafood-related volume due to stronger seafood harvest levels than in 2018.
The contribution in the second quarter 2019 from the Company’s SSAT joint venture investment was $8.2 million lower than the second quarter 2018 primarily due to additional expense related to the early adoption of the new lease accounting standard in the quarter and higher terminal operating costs. Compared to our previous outlook, we expect approximately $5.8 million in lease-related costs to reverse and be a benefit to SSAT’s results in the second half of 2019. For 2019, the Company expects the contribution from SSAT to be lower primarily due to higher terminal operating costs, partially offset by higher lift volume.
As a result of the first half performance and the outlook trends noted above, the Company expects full year 2019 Ocean Transportation operating income to be approximately 20 percent lower than the $131.1 million achieved in 2018 after taking into account a full year net operating expense impact of $7.2 million associated with the sale and leaseback of MV Maunalei. In the third quarter 2019, the Company expects Ocean Transportation operating income to be moderately lower than the level achieved in the third quarter 2018.
Logistics: In the second quarter 2019, operating income for the Company’s Logistics segment was $1.8 million higher compared to the operating income achieved in the second quarter 2018 due to higher contributions across all of the service lines. For 2019, the Company is raising its outlook and expects Logistics operating income to be approximately 10-15 percent higher than the level achieved in 2018 of $32.7 million. In the third quarter 2019, the Company expects operating income to approximate the level achieved in the third quarter 2018.
Depreciation and Amortization: For the full year 2019, the Company expects depreciation and amortization expense to be approximately $133 million, inclusive of dry-docking amortization of approximately $38 million. As a result of the previously announced scrubber program on six vessels, dry-dock amortization was accelerated on two vessels in the second quarter, which increased depreciation and amortization in the quarter by $1.4 million and is expected to increase depreciation and amortization for the full year 2019 by approximately $4.2 million.
EBITDA: The Company expects net income in 2019 to decline year-over-year and expects EBITDA in 2019 to be approximately $270 million.
Other Income (Expense): The Company expects full year 2019 other income (expense) to be approximately $2.7 million in income, which is attributable to other component costs related to the Company’s pension and post-retirement plans.
Interest Expense: The Company expects interest expense for the full year 2019 to be approximately $25 million.
Income Taxes: In the second quarter 2019, the Company’s effective tax rate was 28.4 percent. For the full year 2019, the Company expects its effective tax rate to be approximately 26.0 percent, which excludes a positive non-cash adjustment of $2.9 million in the first quarter of 2019 related to the reversal of an expense adjustment in 2018 arising from the enactment of the Tax Cuts and Jobs Act of 2017.
Capital and Vessel Dry-docking Expenditures: For the second quarter 2019, the Company made other capital expenditure payments of $24.9 million, capitalized vessel construction expenditures of $9.7 million, and dry-docking payments of $3.7 million. For the full year 2019, the Company expects to make other capital expenditure payments, including maintenance capital expenditures, of approximately $100 million, vessel construction expenditures (including capitalized interest and owner’s items) of approximately $215 million, and dry-docking payments of approximately $20 million.
17
CONSOLIDATED RESULTS OF OPERATIONS
Consolidated Results: Three months ended June 30, 2019, compared with 2018:
(Dollars in millions, except per share amounts)
Change
%
(15.8)
3.1
(15.0)
(32.6)
Income before income taxes
(15.7)
(37.9)
1.5
(17.0)
(14.2)
(43.6)
Basic earnings per share
(0.33)
(43.4)
Diluted earnings per share
Changes in operating revenue, and operating costs and expenses are further described below in the Analysis of Operating Revenue and Income by Segment.
The increase in interest expense for the three months ended June 30, 2019, compared to the three months ended June 30, 2018, was due to a lower amount of capitalized interest associated with the new vessel construction.
Other income (expense) relates to the amortization of certain components of net periodic benefit costs or gains related to the Company’s pension and post-retirement plans.
Income tax expense was $7.3 million or 28.4 percent of income before income taxes for the three months ended June 30, 2019, compared to $8.8 million or 21.3 percent of income before income taxes for the three months ended June 30, 2018. The effective tax rate for the three months ended June 30, 2018 benefited from certain discrete tax adjustments that lowered the effective tax rate for that period. Excluding the impact of these discrete tax adjustments, the adjusted effective tax rate would be 26.1 percent for the three months ended June 30, 2018. The effective tax rate for the three months ended June 30, 2019 was impacted by higher foreign taxes paid during the period.
Consolidated Results: Six months ended June 30, 2019, compared with 2018:
21.8
2.0
(48.0)
(35.1)
16.7
(26.7)
(40.5)
(56.5)
(15.9)
(34.0)
(0.38)
(0.37)
(33.9)
The increase in interest expense for the six months ended June 30, 2019, compared to the six months ended June 30, 2018, was due to higher interest rates on borrowings under the revolving credit facility and a lower amount of capitalized interest associated with the new vessel construction.
18
Income tax expense was $8.3 million or 21.2 percent of income before income taxes for the six months ended June 30, 2019, compared to $19.1 million or 29.0 percent of income before income taxes for the six months ended June 30, 2018. In connection with the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”), the Company recorded a non-cash tax adjustment of $3.1 million that increased the effective tax rate for the six months ended June 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 for the years 2018 to 2021, and was based on guidance issued by the Internal Revenue Service (IRS) and emerging interpretations of the Tax Act during that period. On January 19, 2019, the IRS issued new guidance indicating that sequestration would not apply to refundable AMT credits. In accordance with this new guidance, the Company recorded a non-cash tax adjustment of $2.9 million that decreased income taxes for the six months ended June 30, 2019. The effective tax rate for the six months ended June 30, 2018 benefited from certain tax adjustments that lowered the effective tax rate.
Excluding the impact of these discrete tax adjustments, the adjusted effective tax rate would be 28.6 percent for the six months ended June 30, 2019, compared to 26.3 percent for the six months ended June 30, 2018. The effective tax rate for the six months ended June 30, 2019 was also impacted by higher foreign taxes paid during the period.
ANALYSIS OF OPERATING REVENUE AND INCOME BY SEGMENT
Ocean Transportation Operating Results: Three months ended June 30, 2019, compared with 2018:
(Dollars in millions)
Ocean Transportation revenue
(395.7)
(370.1)
(25.6)
6.9
(16.8)
(46.0)
Operating income margin
4.7
Volume (Forty-foot equivalent units (FEU), except for automobiles) (1)
Hawaii containers
37,700
38,600
(900)
Hawaii automobiles
16,700
16,000
700
Alaska containers
18,800
17,400
1,400
8.0
China containers
16,300
15,900
400
Guam containers
4,800
Other containers (2)
3,700
1,100
29.7
Ocean Transportation revenue increased $8.8 million, or 2.2 percent, during the three months ended June 30, 2019, compared with the three months ended June 30, 2018. The increase was primarily due to higher freight revenue in Alaska, higher fuel surcharge revenue and higher average rates in China, partially offset by lower container volume in Hawaii.
On a year-over-year FEU basis, Hawaii container volume decreased 2.3 percent primarily due to negative container market growth; Alaska volume increased by 8.0 percent primarily due to the timing of two additional northbound sailings; China volume was 2.5 percent higher; Guam volume was flat; and Other container volume increased 29.7 percent primarily due to the South Pacific and Okinawa services.
Ocean Transportation operating income decreased $16.8 million, or 46.0 percent, during the three months ended June 30, 2019, compared with the three months ended June 30, 2018. The decrease was primarily due to higher vessel operating costs (including MV Maunalei lease expense), a lower contribution from SSAT, higher terminal handling costs and lower volume in Hawaii, partially offset by a higher contribution from the Alaska service and higher average rates in China.
The Company’s SSAT terminal joint venture investment contributed $0.9 million during the three months ended June 30, 2019, compared to a contribution of $9.1 million during the three months ended June 30, 2018. The decrease
19
was primarily due to additional expense related to the early adoption of the new lease accounting standard in the quarter and higher terminal operating costs.
Ocean Transportation Operating Results: Six months ended June 30, 2019, compared with 2018:
27.4
(784.2)
(724.9)
(59.3)
(31.9)
(52.3)
3.6
72,600
74,300
(1,700)
33,700
32,800
900
35,200
34,800
30,100
27,800
2,300
8.3
9,900
9,700
200
8,300
6,800
1,500
22.1
Ocean Transportation revenue increased $27.4 million, or 3.5 percent, during the six months ended June 30, 2019, compared with the six months ended June 30, 2018. The increase was primarily due to higher fuel surcharge revenue, higher freight revenue in China and higher freight revenue in Alaska, partially offset by lower container volume in Hawaii.
On a year-over-year FEU basis, Hawaii container volume decreased 2.3 percent primarily due to negative container market growth and weather-related impacts in the first quarter of 2019; Alaska volume increased by 1.1 percent primarily due to the timing of one additional northbound sailing, partially offset by lower northbound volume related to the dry-docking of a competitor’s vessel in the year ago period; China volume was 8.3 percent higher primarily due to stronger volume post Lunar New Year; Guam volume was 2.1 percent higher primarily due to typhoon relief-related volume; and Other container volume increased 22.1 percent primarily due to the Okinawa service.
Ocean Transportation operating income decreased $31.9 million, or 52.3 percent, during the six months ended June 30, 2019, compared with the six months ended June 30, 2018. The decrease was primarily due to higher vessel operating costs (including MV Maunalei lease expense), higher terminal handling costs, a lower contribution from SSAT and lower volume in Hawaii, partially offset by a higher contribution from the China service.
The Company’s SSAT terminal joint venture investment contributed $9.4 million during the six months ended June 30, 2019, compared to a contribution of $19.6 million during the six months ended June 30, 2018. The decrease was primarily due to higher terminal operating costs, additional expense related to the early adoption of the new lease accounting standard, and the absence of favorable one-time items in the year ago six months period.
20
Logistics Operating Results: Three months ended June 30, 2019, compared with 2018:
Logistics revenue
(8.0)
(5.3)
(131.2)
(141.0)
9.8
18.9
7.9
Logistics revenue decreased $8.0 million, or 5.3 percent, during the three months ended June 30, 2019, compared with the three months ended June 30, 2018. The decrease was primarily due to lower transportation brokerage revenue, partially offset by higher freight forwarding revenue.
Logistics operating income increased $1.8 million, or 18.9 percent, for the three months ended June 30, 2019, compared with the three months ended June 30, 2018. The increase was due primarily to higher contributions from freight forwarding and transportation brokerage.
Logistics Operating Results: Six months ended June 30, 2019, compared with 2018:
(5.6)
(257.6)
(268.9)
5.7
41.6
Logistics revenue decreased $5.6 million, or 2.0 percent, during the six months ended June 30, 2019, compared with the six months ended June 30, 2018. The decrease was primarily due to lower transportation brokerage revenue, partially offset by higher freight forwarding revenue.
Logistics operating income increased $5.7 million, or 41.6 percent, for the six months ended June 30, 2019, compared with the six months ended June 30, 2018. The increase was due primarily to higher contributions from transportation brokerage and freight forwarding.
LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity: Sources of liquidity available to the Company at June 30, 2019, compared to December 31, 2018 were as follows:
Accounts receivable, net (1)
21
Cash, Cash Equivalents and Restricted Cash: Significant changes in the Company’s cash, cash equivalents and restricted cash for the six months ended June 30, 2019, compared to the six months ended June 30, 2018 are as follows:
Net cash provided by operating activities (1)
(10.9)
Net cash used in investing activities (2)
113.6
Net cash (used in) provided by financing activities (3)
(87.5)
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
19.9
(1) Change in net cash provided by operating activities:
Changes in net cash provided by operating activities for the six months ended June 30, 2019, compared to the six months ended June 30, 2018, were due to the following:
Net income from operations
Non-cash deferred income taxes
(4.7)
Equity in income from Terminal Joint Venture
10.2
Distributions from Terminal Joint Venture
37.9
22.5
The change in equity income and distributions from Terminal Joint Venture results from a decrease in the Company’s share of income from the Terminal Joint Venture to $9.4 million during the six months ended June 30, 2019, compared to $19.6 million for the six months ended June 30, 2018, while distributions from the Terminal Joint Venture decreased to $9.5 million for the six months ended June 30, 2019, compared to $17.5 million for the six months ended June 30, 2018. Changes in accounts receivable were primarily due to the timing of billings and collections associated with those receivables. The increase in prepaid expenses and other assets primarily related to an income tax refund received during the six months ended June 30, 2019, and the timing of prepayments and other assets. Changes in accounts payable, accruals and other liabilities were primarily due to the timing of payments associated with those liabilities.
(2) Change in net cash used in investing activities:
Changes in net cash used in investing activities for the six months ended June 30, 2019, compared to the six months ended June 30, 2018, were due to the following:
136.2
Cash deposits into CCF
171.9
Withdrawals from CCF
(172.8)
(12.9)
Proceeds from disposal of property and equipment, net
22
Vessel construction expenditures (including capitalized interest) were $30.6 million for the six months ended June 30, 2019, compared to $166.8 million for the six months ended June 30, 2018. Vessel construction expenditures relate to progress payments for the construction of new vessels for the Hawaii service, capitalized interest and owner’s items. Changes in cash deposits into CCF, and withdrawals from CCF primarily relate to the timing of when deposits are made into the CCF, and when the subsequent withdrawals are made out of the CCF for the purposes of vessel construction progress payments. Other capital expenditures payments were $38.4 million for the six months ended June 30, 2019, compared to $25.5 million for the six months ended June 30, 2018. The increase in other capital expenditures is primarily due to the timing of certain capital project activities incurred during 2019 as compared to 2018. The decrease in proceeds from disposal of property and equipment is primarily due to sale and leaseback of chassis equipment previously owned by the Company during the six months ended June 30, 2018. There were no sale and leaseback activities during the six months ended June 30, 2019.
(3) Change in net cash (used in) provided by financing activities:
Changes in net cash (used in) provided by financing activities for the six months ended June 30, 2019, compared to the six months ended June 30, 2018, were due to the following:
Repayments of fixed interest debt and capital leases
Borrowings under revolving credit facility, net
(90.0)
Change in other payments, net
During the six months ended June 30, 2019, the Company paid $11.8 million in scheduled fixed debt and capital lease payments compared to $14.6 million during the six months ended June 30, 2018. During the six months ended June 30, 2018, the Company increased net borrowings under the revolving credit facility by $90.0 million, while there was no change in net borrowing during the six months ended June 30, 2019. Borrowings from the Company’s revolving credit facility were primarily used to fund progress payments related to the construction of new vessels. During the six months ended June 30, 2019, the Company paid $18.2 million in dividends, compared to $17.3 million during the six months ended June 30, 2018. The increase in dividend payments resulted from an increase in dividends declared per share of common stock by the Company.
Debt: Total debt as of June 30, 2019 and December 31, 2018 is as follows:
Revolving credit facility
Fixed interest debt
Total debt decreased by $11.8 million during the six months ended June 30, 2019. The reduction in fixed interest debt was due to scheduled debt payments made during the six months ended June 30, 2019.
As of June 30, 2019, the Company had $217.8 million of availability under the revolving credit facility, with a maturity date of June 29, 2022. The Company’s debt is described in Note 8 to the Consolidated Financial Statements included in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, which is incorporated herein by reference.
Working Capital: The Company had a working capital deficiency of $135.8 million and $52.4 million at June 30, 2019 and December 31, 2018, respectively. The increase in working capital deficiency at June 30, 2019 is partially due to the recording of operating lease liabilities of $57.4 million as of June 30, 3019 in accordance with the adoption of the new lease accounting standard ASC 842. Changes in working capital is also impacted by the timing of billings and collections associated with accounts receivable and other assets, and the timing of payments associated with accounts payable, accruals and other liabilities.
23
CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET ARRANGEMENTS
There were no material changes during this quarter to the Company’s contractual obligations, commitments, contingencies and off-balance sheet arrangements that are described in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, which is incorporated herein by reference.
CRITICAL ACCOUNTING ESTIMATES
There have been no changes during this quarter to the Company’s critical accounting estimates as discussed in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
OTHER MATTERS
The Company’s second quarter 2019 cash dividend of $0.21 per share was paid on June 6, 2019. On June 14, 2019, the Company’s Board of Directors declared a cash dividend of $0.22 per share payable on September 5, 2019.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to the Company’s market risk position from the information provided under Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the year ended December 31, 2018.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures.
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2019, the Company’s disclosure controls and procedures are effective.
Changes in Internal Control Over Financial Reporting.
There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended June 30, 2019, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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.
ITEM 1A. RISK FACTORS
There were no material changes to the Company’s risk factors that are described in Part I, Item 1A, “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934.
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934.
32
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
101.INS
XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
XBRL Taxonomy Extension Schema Document
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MATSON, INC.
(Registrant)
Date: August 8, 2019
/s/ Joel M. Wine
Joel M. Wine
Senior Vice President and
Chief Financial Officer
/s/ Kevin L. Stuck
Kevin L. Stuck
Vice President and Controller
(principal accounting officer)