Matson, Inc. - Quarter Report: 2013 March (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2013

 

OR

 

o         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)

 

 

(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)

 

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 x    No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes x    No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o    No x

 

Number of shares of common stock outstanding as of March 31, 2013:      42,679,874

 

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

MATSON, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Income and Comprehensive Income

(In millions, except per-share amounts) (Unaudited)

 

		Three Months Ended March 31,
		2013			2012
Operating Revenue:
Ocean transportation		$	299.9		$	279.5
Logistic services		94.8			86.6
Total operating revenue		394.7			366.1
Costs and Expenses:
Operating costs		342.8			329.7
Equity in income of terminal joint venture		(0.2		)	(0.8		)
Selling, general and administrative		33.4			28.6
Separation costs		—			2.5
Operating costs and expenses		376.0			360.0
Operating Income		18.7			6.1
Interest expense		(3.7		)	(2.0		)
Income from Continuing Operations Before Income Taxes		15.0			4.1
Income tax expense		5.9			2.1
Income From Continuing Operations		9.1			2.0
Income From Discontinued Operations (net of income taxes)		—			1.8
Net Income		$	9.1		$	3.8
Other Comprehensive Income, Net of Tax:
Net Income		$	9.1		$	3.8
Defined benefit pension plans:
Net loss and prior service cost		—			—
Less: amortization of prior service cost included in net periodic pension cost		(0.3		)	0.1
Less: amortization of net loss included in net periodic pension cost		1.4			0.8
Foreign currency translation adjustment		0.2			—
Other Comprehensive income from Discontinued Operations		—			0.8
Other Comprehensive Income		1.3			1.7
Comprehensive Income		$	10.4		$	5.5
Basic Earnings Per Share:
Continuing operations		$	0.21		$	0.05
Discontinued operations		—			0.04
Net income		$	0.21		$	0.09
Diluted Earnings Per Share:
Continuing operations		$	0.21		$	0.05
Discontinued operations		—			0.04
Net income		$	0.21		$	0.09
Weighted Average Number of Shares Outstanding:
Basic		42.6			41.9
Diluted		43.0			42.3
Cash Dividends Per Share		$	0.15		$	0.315

 

See Notes to Condensed Consolidated Financial Statements.

 

1

 

MATSON, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In millions) (Unaudited)

 

		March 31,			December 31,
		2013			2012
ASSETS
Current Assets:
Cash and cash equivalents		$	11.0		$	19.9
Accounts and notes receivable, net		167.5			174.7
Inventories		5.0			4.3
Deferred income taxes		6.6			6.6
Prepaid expenses and other assets		25.3			28.6
Total current assets		215.4			234.1
Investment in terminal joint venture		59.7			59.6
Property, at cost		1,782.9			1,770.8
Less accumulated depreciation and amortization		(1,023.9		)	(1,008.3		)
Property — net		759.0			762.5
Other Assets		115.1			118.1
Total		$	1,149.2		$	1,174.3
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Notes payable and current portion of long-term debt		$	17.4		$	16.4
Accounts payable		121.4			125.8
Payroll and vacation benefits		15.5			16.0
Uninsured claims		13.0			11.2
Accrued and other liabilities		18.5			24.0
Total current liabilities		185.8			193.4
Long-term Liabilities:
Long-term debt		283.7			302.7
Deferred income taxes		249.1			251.9
Employee benefit plans		108.3			108.0
Uninsured claims and other liabilities		38.2			38.4
Total long-term liabilities		679.3			701.0
Commitments and Contingencies (Note 4)
Shareholders’ Equity:
Capital stock		32.0			31.9
Additional paid in capital		252.9			252.7
Accumulated other comprehensive loss		(44.2		)	(45.5		)
Retained earnings		43.4			40.8
Total shareholders’ equity		284.1			279.9
Total		$	1,149.2		$	1,174.3

 

See Notes to Condensed Consolidated Financial Statements.

 

2

 

MATSON, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Stockholders’ Equity

(In millions) (Unaudited)

 

										Accumulated
		Common Stock								Other
				Stated			Additional			Comprehensive			Retained
		Shares		Value			Capital			Income			Earnings			Total
Balance December 31, 2012		42.6		$	31.9		$	252.7		$	(45.5	)	$	40.8		$	279.9
Net Income		—		—			—			—			9.1			9.1
Other comprehensive income		—		—			—			1.3			—			1.3
Share-based compensation		—		—			1.3			—			—			1.3
Shares issued		0.1		0.1			(1.1		)	—			—			(1.0		)
Dividends		—		—			—			—			(6.5		)	(6.5		)
Balance March 31, 2013		42.7		$	32.0		$	252.9		$	(44.2	)	$	43.4		$	284.1

 

See Notes to Condensed Consolidated Financial Statements.

 

3

 

MATSON, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In millions) (Unaudited)

 

		Three Months Ended
		March 31,
		2013			2012
Cash Flows from Operating Activities from Continuing Operations
Income From Continuing Operations		$	9.1		$	2.0
Reconciling adjustments:
Depreciation and amortization		17.5			18.7
Deferred income taxes		(3.5		)	(0.6		)
Loss on disposal of property		(0.1		)	(0.1		)
Post-retirement expense		0.5			1.0
Share-based compensation expense		1.3			0.8
Equity in income of terminal joint venture		(0.2		)	(0.8		)
Changes in assets and liabilities:
Accounts receivable		7.3			4.9
Inventory		(0.7		)	—
Deferred dry-docking payments		(1.2		)	(11.0		)
Deferred dry-docking amortization		5.4			5.6
Prepaid expenses and other assets		4.9			(0.5		)
Accounts payable and accrued liabilities		(1.9		)	(5.4		)
Other liabilities		(3.4		)	(9.5		)
Net cash provided by operating activities from continuing operations		35.0			5.1
Cash Flows from Investing Activities from Continuing Operations:
Capital expenditures		(6.3		)	(8.5		)
Proceeds from disposal of property and other assets		1.0			0.3
Deposits into Capital Construction Fund		(2.2		)	(2.2		)
Withdrawals from Capital Construction Fund		2.2			2.2
Acquisitions and other		(9.6		)	—
Contribution from the Former Parent Company		—			12.5
Net cash (used in) provided by investing activities from continuing operations		(14.9		)	4.3
Cash Flows from Financing Activities from Continuing Operations:
Proceeds from issuance of long-term debt		21.0			7.0
Payments of long-term debt		(31.2		)	(2.2		)
Payments on line-of-credit agreements, net		(11.0		)	(3.0		)
Payment on capital leases		(0.3		)	—
(Payments) proceeds from issuance of capital stock		(1.0		)	12.8
Distribution to the Former Parent Company for proceeds from issuance of capital stock		—			(12.8		)
Dividends paid		(6.5		)	(13.3		)
Net cash used in financing activities from continuing operations		(29.0		)	(11.5		)
Cash Flows from Discontinued Operations:
Cash flows used in operating activities of discontinued operations		—			(25.1		)
Cash flows used in investing activities of discontinued operations		—			(10.9		)
Cash flows provided by financing activities of discontinued operations		—			35.1
Net cash flows used in discontinued operations		—			(0.9		)
Net Decrease in Cash and Cash Equivalents		(8.9		)	(3.0		)
Cash and cash equivalents, beginning of the period		19.9			21.5
Cash and cash equivalents, end of the period		$	11.0		$	18.5
Other Cash Flow Information:
Interest paid		$	2.1		$	2.3
Income taxes paid		$	—		$	—
Other Non-cash Information:
Capital expenditures included in accounts payable and accrued liabilities		$	2.0		$	3.6
Non-cash capital lease obligations		$	2.9		$	—

 

See Notes to Condensed Consolidated Financial Statements.

 

4

 

(1)                                 Description of Business “Matson” or the “Company” means Matson, Inc., a holding company incorporated in January 2012 in the State of Hawaii, together with its primary operating company, Matson Navigation Company, Inc. (“MatNav”), and all of its subsidiaries.  MatNav is a wholly-owned subsidiary of Matson, Inc.

 

Founded in 1882, Matson is a leading U.S. ocean freight carrier in the Pacific.  Matson provides a vital lifeline to the island economies of Hawaii, Guam and Micronesia, and operates a premium, expedited service from China to Southern California.  Also, effective January 2013, the Company began providing service to various islands in the South Pacific.  The Company’s fleet of 20 vessels, two of which are held for sale, includes containerships, combination container and roll-on/roll-off ships and custom-designed barges. Matson Logistics, Inc. (“Matson Logistics” or “Logistics”), a wholly-owned subsidiary of MatNav, was established in 1987 and extends the geographic reach of Matson’s transportation network throughout the continental U.S. and China. Matson Logistics’ integrated, asset-light logistics services include rail intermodal, highway brokerage and warehousing.

 

Ocean Transportation:  The ocean transportation segment of Matson’s business, which is conducted through MatNav, is an asset-based business that generates revenue primarily through the carriage of containerized freight between various U.S. Pacific Coast, Hawaii, Guam, Micronesia, China and other Pacific island ports.

 

The Company also has a 35 percent ownership interest in SSA Terminals, LLC (“SSAT”) through a joint venture between Matson Ventures, Inc., a wholly-owned subsidiary of MatNav, and SSA Ventures, Inc. (“SSA”), a subsidiary of Carrix, Inc.  SSAT provides terminal and stevedoring services to various international carriers at six terminal facilities on the U.S. Pacific Coast and to MatNav at several of those facilities.  Matson records its share of income in the joint venture in operating expenses within the ocean transportation segment, due to the operations of the joint venture being an integral part of the Company’s business.

 

Logistics: The logistics segment of Matson’s business, which is conducted through Matson Logistics, is an asset-light business that is a provider of domestic and international rail intermodal service (“Intermodal”), long-haul and regional highway brokerage, specialized hauling, flat-bed and project work, less-than-truckload services, expedited freight services, and warehousing and distribution services (collectively “Highway”).  Warehousing, packaging and distribution services are provided by Matson Logistics Warehousing, Inc. (“Matson Logistics Warehousing”), a wholly-owned subsidiary of Matson Logistics.

 

Separation Transaction:  On December 1, 2011, Alexander & Baldwin, Inc., the former parent company of MatNav (the “Former Parent Company”), announced that its Board of Directors unanimously approved a plan to pursue the separation (the “Separation”) of the Former Parent Company to create two independent, publicly traded companies:

 

·                  Matson, a Hawaii-based ocean transportation company serving the U.S. Pacific Coast, Hawaii, Guam, Micronesia and China, and a logistics company; and

 

·                  Alexander & Baldwin, Inc. (“A&B”), a Hawaii-based land company with interests in real estate development, commercial real estate and agriculture.

 

5

 

On February 13, 2012, the Former Parent Company entered into an Agreement and Plan of Merger to reorganize itself by forming a holding company incorporated in Hawaii, Alexander & Baldwin Holdings, Inc. (“Holdings”).  The holding company structure helped facilitate the Separation through the organization and segregation of the assets of the two businesses.  In addition, the holding company reorganization was intended to help preserve the Company’s status as a U.S. citizen under certain U.S. maritime and vessel documentation laws (popularly referred to as the Jones Act) by, amongst other things, limiting the percentage of outstanding shares of common stock in the holding company that may be owned or controlled in the aggregate by non-U.S. citizens to a maximum permitted percentage of 22%.

 

The Separation was completed on June 29, 2012.  In the Separation, the shareholders of Holdings received one share of common stock of A&B for every share of Holdings held of record as of June 18, 2012.  Immediately following the Separation, Alexander & Baldwin Holdings, Inc. changed its name to Matson, Inc.  For accounting purposes, Matson is the successor company to the Former Parent Company.

 

Prior to the completion of the Separation, the Company and A&B entered into a Separation and Distribution Agreement, Tax Sharing Agreement and an Employee Matters Agreement, each dated June 8, 2012, that governs the post-Separation relationship.  In addition, the Company and A&B entered into a Transition Services Agreement, dated June 8, 2012, under which each company agreed to provide the other with various services on an interim, transitional basis, for up to 24 months.

 

Also in relation to the Separation, intercompany receivables, payables, loans and other accounts between A&B and Matson, in existence immediately prior to the Separation, were satisfied and/or settled; and intercompany agreements and all other arrangements in effect immediately prior to the distribution were terminated or canceled, subject to certain exceptions.

 

Acquisition:  In January 2013, Matson purchased the primary assets, consisting of vessels and containers, of the former Reef Shipping Limited, a South Pacific ocean carrier based in Auckland, New Zealand.  The Company acquired the assets to enter into the South Pacific shipping trade.  The Company paid a total of $9.6 million for the primary assets, financed by borrowings from the Company’s revolving credit facilities and cash on hand.  Matson South Pacific transports freight between New Zealand and other South Pacific Islands, such as Fiji, Samoa, American Samoa, Tonga and the Cook Islands.  The acquisition is not expected to have a material impact on the Company’s 2013 financial results

 

Other:  Subsequent to the issuance of the March 31, 2012 interim condensed consolidated financial statements, the Company identified a typographical error in the Condensed Consolidated Statements of Income and Comprehensive Income and has adjusted previously reported Other Comprehensive Loss of $1.7 million to Other Comprehensive Income of $1.7 million and corrected the mathematical total of such Comprehensive Income from $2.1 million previously reported to $5.5 million for the three months ended March 31, 2012. 

 

(2)                                 The Condensed Consolidated Financial Statements are unaudited. 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; they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements.

 

6

 

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 filed on Form 10-K for the year ended December 31, 2012.

 

The period end for Matson, Inc. is March 31. The period end for MatNav occurred on the last Friday in March, except for Matson Logistics Warehousing whose period closed on March 31.

 

Amounts in the consolidated financial statements and notes are rounded to millions, but percentages were determined based on amounts before rounding. Accordingly, a recalculation of some percentages, if based on the reported data, may be slightly different.

 

(3)                                 Accounting for and Classification of Discontinued Operations: As required by the Financial Accounting Standards Board (“FASB”) ASC Subtopic 205-20, Discontinued Operations, the termination of certain income-producing assets are classified as discontinued operations if (i) the operations and cash flows of the component have been, or will be, eliminated from the ongoing operations of the Company as a result of the disposal transaction, and (ii) the Company will not have any significant continuing involvement in the operations of the component after the disposal transaction.  Discontinued operations include the results for the business lines that were terminated through March 31, 2013.  Operating results included in the Consolidated Statements of Income and Comprehensive Income, Statement of Cash Flows and the segment results (Note 12) for the three months ended March 31, 2012, have been restated to reflect the termination of segments that were classified as discontinued operations.

 

The Separation was completed on June 29, 2012.  In the Separation, the shareholders of Holdings received one share of common stock of A&B for every share of Holdings held of record as of June 18, 2012.  Immediately following the Separation, Alexander & Baldwin Holdings, Inc. changed its name to Matson, Inc.  Refer to Note 1 for further description of the Separation Transaction.

 

In the third quarter of 2011, the Company terminated its second China Long Beach Express Service (“CLX2”), due to the longer-term outlook for sustained high fuel prices and increasingly volatile Transpacific rates.  As of the termination date, the Company had established and approved plans to (i) return to the lessors or sub-charter the five vessels used in the service (ii) off-hire or dispose of certain excess container equipment and (iii) terminate office contracts and employees. These plans were substantially completed as of September 30, 2011; however, the off-hiring of excess leased containers continued through 2012 and into 2013, and two of the five ships were offered for sub-charter until they were returned to the lessors in July 2012.  The remaining three ships were returned to the lessors as of September 30, 2011 pursuant to the terms of the one-year charter contracts.  The Company does not expect to incur any additional material losses from the discontinued operations of CLX2 and as of March 31, 2013, had no future liability. Income (losses) from discontinued operations consisted of the following (in millions):

 

7

 

		Three Months Ended
		March 31,
		2013			2012
Discontinued operations, net of tax:
Income from A&B		$	—		$	41.1
Expenses from A&B		—			(38.2		)
Tax benefit from A&B		—			0.3
Income from A&B		—			3.2
Expenses from CLX2		—			(2.2		)
Tax benefit from CLX2		—			0.8
Income from discontinued operations, net of tax		$	—		$	1.8

 

(4)                                 Commitments, Guarantees and Contingencies:  Commitments and financial arrangements at March 31, 2013, included the following (in millions):

 

Standby letters of credit (a)		$	6.8
Performance and customs bonds (b)		$	20.5
Benefit plan withdrawal obligations (c)		$	102.1

 

These amounts are not recorded on the Company’s Condensed Consolidated Balance Sheet and it is not expected that the Company or its subsidiaries will be called upon to advance funds under these commitments.

 

(a)                     Includes approximately $5.6 million in letters of credit which are required for the Company’s self-insured workers’ compensation programs and its other insurance programs, and approximately $1.2 million in letters of credit used to support various credit enhancement needs.

 

(b)                     Consists of approximately $19.3 million in U.S. Customs bonds, and approximately $1.2 million related to transportation and other matters.

 

(c)                      Represents the withdrawal liabilities as of the most recent valuation dates for multiemployer pension plans, in which Matson is a participant. Management has no present intention of withdrawing from, and does not anticipate the termination of, any of the aforementioned plans.

 

Environmental Matters:  As with most transportation companies of its size, the Company’s shipping 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 in compliance, in all material respects, with applicable environmental laws and regulations.

 

Other Contingencies:  On April 21, 2008, Matson was served with a grand jury subpoena from the U.S. District Court for the Middle District of Florida for documents and information relating to water carriage in connection with the Department of Justice’s investigation into the pricing and other competitive practices of carriers operating in the domestic trades.  Matson understands that while the investigation originally was focused on the Puerto Rico trade, it also includes pricing and other competitive practices in all domestic trades, including the Alaska, Hawaii and Guam trades.  Matson does not operate vessels in the Puerto Rico and Alaska trades.  It does operate vessels in the Hawaii and Guam trades.  Matson cooperated fully with the Department of Justice.  On March 28, 2013, the Department of Justice notified Matson that the Company is no longer under investigation.

 

8

 

Matson and its subsidiaries are parties to, or may be contingently liable in connection with, other legal actions arising in the normal conduct of their businesses, the outcomes of which, in the opinion of management after consultation with counsel, would not have a material effect on Matson’s consolidated financial statements.

 

(5)                                   Earnings Per Share (“EPS”): The number of shares used to compute basic and diluted earnings per share is as follows (in millions, except per share data):

 

		Three Months Ended March 31, 2013								Three Months Ended March 31, 2012
					Weighted		Per						Weighted		Per
					Average		Common						Average		Common
		Net			Common		Share			Net			Common		Share
		Income			Shares		Amount			Income			Shares		Amount
Basic:
Income from continuing operations		$	9.1		42.6		$	0.21		$	2.0		41.9		$	0.05
Income from discontinued operations		—			42.6		—			1.8			41.9		0.04
		9.1					$	0.21		3.8					$	0.09
Effect of Dilutive Securities					0.4								0.4
Diluted:
Income from continuing operations		9.1			43.0		0.21			2.0			42.3		0.05
Income from discontinued operations		—			43.0		—			1.8			42.3		0.04
		$	9.1				$	0.21		$	3.8				$	0.09

 

Basic earnings per share is computed based on the weighted-average number of common shares outstanding during the period.  Diluted earnings per share is computed based on the weighted-average-number of common shares outstanding adjusted by the number of additional shares, if any, that would have been outstanding had the potentially dilutive common shares been issued.  Potentially dilutive shares of common stock include non-qualified stock options and restricted stock units.

 

The computation of weighted average dilutive shares outstanding excluded non-qualified stock options to purchase 0.2 million and 0.6 million shares of common stock during the three months ended March 31, 2013 and 2012, respectively.  These options were excluded because the options’ exercise prices were greater than the average market price of the Company’s common stock for the periods presented and, therefore, the effect would be anti-dilutive.

 

9

 

(6)                                 Share-Based Compensation:  During the three months ended March 31, 2013, the Company granted no non-qualified stock options to purchase shares of the Company’s common stock.

 

Activity in the Company’s stock option plans for the three months ended March 31, 2013, was as follows (in thousands, except weighted average exercise price and weighted average contractual life):

 

										Weighted			Weighted
						1998				Average			Average		Aggregate
		2007		1998		Director		Total		Exercise			Contractual		Intrinsic
		Plan		Plan		Plan		Shares		Price			Life		Value
Outstanding, January 1, 2013		954		253		146		1,353		$	21.15
Granted		—		—		—		—		$	0.00
Exercised		(25	)	—		—		(25	)	$	16.40
Forfeited and expired		(3	)	—		—		(3	)	$	18.96
Outstanding, March 31, 2013		926		253		146		1,325		$	21.24		5.3		$	4,355
Exercisable, March 31, 2013		722		253		146		1,121		$	21.11		4.8		$	3,883

 

The following table summarizes non-vested restricted stock unit activity through March 31, 2013, (in thousands, except weighted average grant-date fair value amounts):

 

		2007
		Plan		Weighted
		Restricted		Average
		Stock		Grant-Date
		Units		Fair Value
Outstanding, January 1, 2013		356		$	17.97
Granted		340		$	26.96
Vested		(133	)	$	17.74
Canceled		—		$	0.00
Outstanding, March 31, 2013		563		$	23.46

 

Restricted stock unit awards vest over three years.  A portion of the awards vest based on a service period, and are expensed over the three-year vesting period.  Prior to 2013, the Company also granted performance-based awards that vest over a three-year vesting period, provided that the Company met certain performance targets in the first year of the grant.  During the first quarter of 2013 the Company granted new performance-based awards tied to the Company’s average annual return on invested capital (which the Company refers to as “average ROIC”), as measured over the three-year period beginning January 1, 2013 and ending December 31, 2015.  Performance Share awards for the senior leadership team will also be modified based on total shareholder return performance (which the Company refers to as the “TSR modifier”) measured over the same three-year period.  The relative TSR is based on the Company’s total shareholder return over the three-year measurement period relative to the shareholder return over the same period for the companies comprising the S&P Transportation Select Industry Index and S&P MidCap 400 Index (with each index weighted 50%).  The service-vesting provisions of each award require the award recipient to remain in continuous service with the Company until the end of the three-year measurement period in order to vest in any shares that become issuable on the basis of the performance-vesting criteria.

 

10

 

A summary of compensation cost related to share-based payments, exclusive of A&B related compensation prior to the Separation, is as follows (in millions):

 

		Three Months Ended
		March 31,
		2013			2012
Share-based expense (net of estimated forfeitures):
Stock options		$	0.1		$	0.2
Non-vested stock/Restricted stock units		1.2			0.6
Total share-based expense		1.3			0.8
Total recognized tax benefit		(0.5		)	(0.3		)
Share-based expense (net of tax)		$	0.8		$	0.5

 

(7)                                 Pension and Post-retirement Plans:  The Company has defined benefit and defined contribution pension plans that cover substantially all non-bargaining unit and certain bargaining unit employees.  The Company also has unfunded non-qualified plans that provide benefits in excess of the amounts permitted to be paid under the provisions of the tax law to participants in qualified plans.  The assumptions related to discount rates, expected long-term rates of return on invested plan assets, salary increases, age, mortality and health care cost trend rates, along with other factors, are used in determining the assets, liabilities and expenses associated with pension benefits.  Management reviews the assumptions annually with its independent actuaries, taking into consideration existing and future economic conditions and the Company’s intentions with respect to these plans.  Management believes that its assumptions and estimates for 2013 are reasonable. Different assumptions, however, could result in material changes to the assets, obligations and costs associated with benefit plans.

 

The components of net periodic benefit cost recorded for the first three months of 2013 and 2012 were as follows (in millions):

 

		Pension Benefits						Post-retirement Benefits
		2013			2012			2013			2012
Service cost		$	0.7		$	1.4		$	0.3		$	0.3
Interest cost		2.1			2.9			0.5			0.8
Expected return on plan assets		(2.7		)	(2.7		)	—			—
Amortization of net loss		2.0			0.9			0.2			0.5
Amortization of prior service cost		(0.6		)	—			—			—
Net periodic benefit cost		$	1.5		$	2.5		$	1.0		$	1.6

 

In 2013, the Company expects cash contributions to its defined pension plans to total approximately $3.5 million, all of which has yet to be contributed as of March 31, 2013.

 

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(8)                                 Fair Value Measurements: The Company values its financial instruments based on the fair value hierarchy of valuation techniques described in the FASB’s accounting standard 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.  The Company uses Level 1 inputs for the fair values of its cash equivalents.  The Company uses Level 2 inputs for its long term debt.  These inputs include interest rates for similar financial instruments.  The fair values of cash and cash equivalents, receivables and short-term borrowings approximate their carrying values due to the short-term nature of the instruments.  The fair value the Company’s debt is calculated based upon interest rates available for debt with terms and maturities similar to the Company’s existing debt arrangements.

 

The carrying value and fair value of the Company’s financial instruments as of March 31, 2013 and December 31, 2012 are as follows (in millions):

 

					Fair Value Measurements at
					March 31, 2013
		Carrying Value at						Quoted Prices in			Significant			Significant
		March 31, 2013						Active Markets			Observable Inputs			Unobservable Inputs
(in millions)		Total			Total			(Level 1)			(Level 2)			(Level 3)
Cash & cash equivalents		$	11.0		$	11.0		$	11.0		$	—		$	—
Accounts and notes receivable		167.5			167.5			—			167.5			—
Variable rate debt		5.0			5.0			—			5.0			—
Fixed rate debt		292.9			314.3			—			314.3			—

 

					Fair Value Measurements at
					December 31, 2012
		Carrying Value at						Quoted Prices in			Significant			Significant
		December 31, 2012						Active Markets			Observable Inputs			Unobservable Inputs
(in millions)		Total			Total			(Level 1)			(Level 2)			(Level 3)
Cash & cash equivalents		$	19.9		$	19.9		$	19.9		$	—		$	—
Accounts and notes receivable		174.7			174.7			—			174.7			—
Variable rate debt		24.0			24.0			—			24.0			—
Fixed rate debt		295.1			316.8			—			316.8			—

 

(9)                                 Related Party Transactions:  Effective upon the completion of the Separation, Matson ceased to be a related party of the Former Parent Company.  Prior to the Separation, transactions with Former Parent Company were considered related party transactions, as discussed below.

 

Historically, the Company provided vessel management services to A&B for its bulk sugar vessel, the MV Moku Pahu, the income of which is included in ocean transportation.  Additionally, the Company expensed operating costs related to a lease for industrial warehouse space in Savannah, Georgia, that is leased from A&B.  The Company also recognized the cost for equipment and repair services to the vessel and other various services provided by A&B in operating costs.

 

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The amounts of these related party transactions are as follows (in millions):

 

		Three Months Ended March 31,
		2013			2012
Vessel management services income		$	—		$	0.9
Lease expense to affiliate		—			(1.1		)
Equipment and repair services expense and other		—			(0.5		)
Related party expense, net		$	—		$	(0.7	)

 

Distributions to A&B for the proceeds from the issuance of capital stock of $12.8 million for the three months ended March 31, 2012, have been included in the Condensed Consolidated Financial Statements due to Matson being the successor company of the Former Parent Company for accounting purposes.  There have been no contributions in 2013.  Distributions from A&B of $12.5 million for the three months ended March 31, 2012 represent dividends paid by the Former Parent Company to its shareholders prior to the Separation and are reflected in the Condensed Consolidated Financial Statements due to Matson being the successor company of the Former Parent Company for accounting purposes.  There have been no distributions from A&B during 2013.

 

(10)                          Income Taxes:  In connection with the Separation, the Company entered into a Tax Sharing Agreement with A&B that governs the respective rights, responsibilities and obligations of the companies after the Separation with respect to tax liabilities and benefits, tax attributes, tax contests and other tax sharing regarding U.S. Federal, state, local and foreign income taxes, other tax matters and related tax returns.  A&B has liability to Matson with respect to Matson’s consolidated or combined federal, state, local and foreign income tax liability for the taxes that are attributed to A&B’s businesses and relative contribution to state and other taxable income of the Matson consolidated or combined group relating to the taxable periods in which A&B was a part of that group.  The Tax Sharing Agreement specifies the portion, if any, of this tax liability for which Matson and A&B will bear responsibility, and Matson and A&B agreed to indemnify each other against any amounts for which they are not responsible.

 

The Company makes certain estimates and judgments in determining income tax expense for financial statement purposes.  These estimates and judgments are applied in the calculation of tax credits, tax benefits and deductions, and in the calculation of certain deferred tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes.  Deferred tax assets and deferred tax liabilities are adjusted to the extent necessary to reflect tax rates expected to be in effect when the temporary differences reverse.  Adjustments to deferred tax assets and deferred tax liabilities may be required due to changes in tax laws and audit adjustments by tax authorities.  To the extent adjustments are required in any given period, the adjustments would be included within the tax provision in the Condensed Consolidated Statements of Income and Comprehensive Income or Balance Sheets.

 

(11)                          Debt:  The Company entered into a $375.0 million, five-year unsecured revolving credit facility with a syndicate of banks during the second quarter of 2012 in order to provide additional sources of liquidity for working capital requirements or investment opportunities on a short-term as well as longer-term basis.  As of March 31, 2013, the used portion of the Company’s revolving credit facility was $11.8 million, of which $5.0 million was from cash borrowings and $6.8 million was from letters of credit.

 

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During the second quarter of 2012, Matson issued $170.0 million in unsecured, fixed rate, amortizing long-term debt.  The debt was funded in three tranches; $77.5 million at an interest rate of 3.66% maturing in 2023, $55.0 million at an interest rate of 4.16% maturing in 2027, and $37.5 million at an interest rate of 4.31% maturing in 2032.  The weighted average coupon and duration of the three tranches of debt are 3.97% and 9.3 years, respectively.  The cash received from issuance was partially utilized to fund a contribution of cash from Matson to A&B under the terms of the Separation.  Additionally, the Company negotiated the release of the MV Manulani as security for existing long-term debt of $56.0 million as part of the Company’s debt restructuring completed during the second quarter of 2012 to facilitate the Separation.  This obligation was also moved from MatNav to Matson.  Following the above mentioned debt financing transactions, all of Matson’s outstanding debt was unsecured, except for $70.4 million as of March 31, 2013.  However, the debt is guaranteed by Matson’s significant subsidiaries.

 

Capital Leases:  In March 2013, Matson South Pacific entered into a new capital lease for specialized containers.  The initial amount of the lease was $2.9 million which has been included in property on the Condensed Consolidated Balance Sheet.  Also, in conjunction with the purchase of the assets of Reef Shipping Limited, the Company acquired capital leases for standard containers, which are also included in property on the Condensed Consolidated Balance Sheet.  As of March 31, 2013, the capital leases acquired were $0.3 million.  As of March 31, 2013, capital leases amounted to $3.2 million, of which $1.0 million has been classified as current within the notes payable and current portion on long-term debt.

 

Total debt was $301.1 million, as of March 31, 2013, compared with $319.1 million at the end of 2012.

 

Principal negative covenants as defined in Matson’s five-year revolving credit facility (the “Credit Agreement”) and long-term fixed rate debt include, but are not limited to:

 

a)                       The ratio of debt to consolidated EBITDA cannot exceed 3.25 to 1.00 for each fiscal four quarter period;

 

b)                       the ratio of consolidated EBITDA to interest expense as of the end of any fiscal four quarter period cannot be less than 3.50 to 1.00; and

 

c)                        The principal amount of priority debt at any time cannot exceed 20% of consolidated tangible assets; and the principal amount of priority debt that is not Title XI priority debt at any time cannot exceed 10% of consolidated tangible assets.  Priority debt, as further defined in the Credit Agreement, is all debt secured by a lien on the Company’s assets or subsidiary debt.

 

The Company was in compliance with these covenants as of March 31, 2013.

 

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(12)                          Segment results for the three months ended March 31, 2013 and 2012 were as follows (in millions):

 

		Three Months Ended
		March 31,
		2013			2012
Revenue:
Ocean transportation		$	299.9		$	279.5
Logistics services		94.8			86.6
Total revenue		$	394.7		$	366.1
Operating Income, Net Income:
Ocean transportation		18.5			$	5.8
Logistics services		0.2			0.3
Total operating income		18.7			6.1
Interest Expense		(3.7		)	(2.0		)
Income From Continuing Operations Before Income Taxes		15.0			4.1
Income Tax Expense		5.9			2.1
Income From Continuing Operations		9.1			2.0
Income From Discontinued Operations (net of income taxes)		—			1.8
Net Income		$	9.1		$	3.8

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following analysis of the consolidated financial condition and results of operations of Matson should be read in conjunction with the Condensed Consolidated Financial Statements and related notes thereto included in Item 1 of this Form 10-Q.

 

FORWARD-LOOKING STATEMENTS

 

This report, and other statements that the Company may make, may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act, 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,” and 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 factors that are described in Part I, Item 1A under the caption of “Risk Factors” of Matson’s Annual Report on Form 10-K filed with the Securities Exchange Commission on March 1, 2013.  Forward-looking statements speak only as of the date they are made, and the Company assumes no duty to and does not undertake 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.

 

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