Matson, Inc. - Quarter Report: 2014 June (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 June 30, 2014

 

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 June 30, 2014: 42,995,204

 

 

 

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						Six-Months Ended
		June 30						June 30
		2014			2013			2014			2013
Operating Revenue:
Ocean transportation		$	321.1		$	310.0		$	615.7		$	609.9
Logistics		115.3			106.6			213.2			201.4
Total operating revenue		436.4			416.6			828.9			811.3
Costs and Expenses:
Operating costs		366.9			344.9			714.7			687.7
Equity in (income) loss of terminal joint venture		(2.1		)	0.8			(2.3		)	0.6
Selling, general and administrative		35.9			34.4			70.9			67.8
Total costs and expenses		400.7			380.1			783.3			756.1
Operating Income		35.7			36.5			45.6			55.2
Interest expense		(4.5		)	(3.6		)	(8.6		)	(7.3		)
Income before income taxes		31.2			32.9			37.0			47.9
Income tax expense		(13.1		)	(12.8		)	(15.5		)	(18.7		)
Net Income		$	18.1		$	20.1		$	21.5		$	29.2
Other Comprehensive Income (Loss), Net of Income Taxes:
Net Income		$	18.1		$	20.1		$	21.5		$	29.2
Other Comprehensive Income (Loss):
Net loss and prior service cost		—			(0.8		)	—			(0.8		)
Amortization of prior service cost included in net periodic pension cost		(0.2		)	(0.4		)	(0.5		)	(0.7		)
Amortization of net loss included in net periodic pension cost		0.7			0.9			1.4			2.3
Foreign currency translation adjustment		—			(0.4		)	(0.1		)	(0.2		)
Total Other Comprehensive Income (Loss)		0.5			(0.7		)	0.8			0.6
Comprehensive Income		$	18.6		$	19.4		$	22.3		$	29.8
Basic Earnings Per Share:		$	0.42		$	0.47		$	0.50		$	0.68
Diluted Earnings Per Share:		$	0.42		$	0.47		$	0.50		$	0.68
Weighted Average Number of Shares Outstanding:
Basic		43.0			42.7			43.0			42.7
Diluted		43.2			43.0			43.2			43.0

 

See Notes to Condensed Consolidated Financial Statements.

 

1

 

MATSON, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(In millions) (Unaudited)

 

		June 30,			December 31,
		2014			2013
ASSETS
Current Assets:
Cash and cash equivalents		$	223.7		$	114.5
Accounts receivable, net		196.7			182.3
Deferred income taxes		9.0			9.1
Prepaid expenses and other assets		48.8			43.0
Total current assets		478.2			348.9
Investment in terminal joint venture		60.1			57.6
Property and equipment, net		721.4			735.4
Goodwill and intangible assets, net		30.8			31.2
Other long-term assets		74.1			75.2
Total assets		$	1,364.6		$	1,248.3
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Current portion of long-term debt		$	17.1		$	12.5
Accounts payable		127.6			124.0
Payroll and vacation benefits		17.3			16.9
Self-insured liabilities		20.8			15.1
Accrued and other liabilities		38.9			32.1
Total current liabilities		221.7			200.6
Long-term Liabilities:
Long-term debt		362.8			273.6
Deferred income taxes		330.1			326.1
Employee benefit plans		72.6			74.4
Self-insured claims and other liabilities		35.4			35.4
Total long-term liabilities		800.9			709.5
Commitments and Contingencies (Note 6)
Shareholders’ Equity:
Capital stock		32.1			32.1
Additional paid in capital		264.8			261.9
Accumulated other comprehensive loss		(22.7		)	(23.5		)
Retained earnings		67.8			67.7
Total shareholders’ equity		342.0			338.2
Total liabilities and shareholders’ equity		$	1,364.6		$	1,248.3

 

See Notes to Condensed Consolidated Financial Statements.

 

2

 

MATSON, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(In millions) (Unaudited)

 

		Six-Months Ended
		June 30
		2014			2013
Cash Flows Provided by Operating Activities:
Net income		$	21.5		$	29.2
Reconciling adjustments:
Depreciation and amortization		35.2			35.0
Deferred income taxes		3.6			(10.1		)
Share-based compensation expense		3.7			2.8
Equity in (income) loss from terminal joint venture		(2.3		)	0.6
Other		(1.5		)	0.9
Changes in assets and liabilities:
Accounts receivable		(14.4		)	(4.8		)
Deferred dry-docking payments		(11.8		)	(6.0		)
Deferred dry-docking amortization		10.6			11.2
Prepaid expenses and other assets		(7.0		)	5.2
Accounts payable and accrued liabilities		7.0			17.3
Other liabilities		4.6			(1.8		)
Net cash provided by operating activities		49.2			79.5
Cash Flows Used in Investing Activities:
Capital expenditures		(20.2		)	(9.8		)
Proceeds from disposal of property and equipment		1.2			2.9
Deposits into Capital Construction Fund		(2.2		)	(2.2		)
Withdrawals from Capital Construction Fund		2.2			2.2
Payments for acquisitions		—			(9.6		)
Net cash used in investing activities		(19.0		)	(16.5		)
Cash Flows Used in Financing Activities:
Proceeds from issuance of debt		100.0			21.0
Repayments of debt		(6.2		)	(51.2		)
Proceeds from issuance of capital stock		0.8			0.8
Tax withholding related to net share settlements of restricted stock units		(1.7		)	(1.4		)
Dividends paid		(13.9		)	(13.0		)
Net cash provided by (used in) financing activities		79.0			(43.8		)
Net Increase in Cash and Cash Equivalents		109.2			19.2
Cash and cash equivalents, beginning of the period		114.5			19.9
Cash and cash equivalents, end of the period		$	223.7		$	39.1
Supplemental Cash Flow Information:
Interest paid		$	6.6		$	7.0
Income tax paid		$	12.7		$	8.9
Non-cash Information:
Capital expenditures included in accounts payable and accrued liabilities		$	2.1		$	2.7
Capital lease obligations		$	—		$	2.9
Accrued dividend		$	7.4		$	6.9

 

See Notes to Condensed Consolidated Financial Statements.

 

3

 

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.

 

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 is an asset-based business that provides a vital lifeline of ocean freight transportation services to the island economies of Hawaii, Guam, Micronesia, and various islands in the South Pacific. MatNav also operates a premium, expedited service from China to Long Beach, California.  In addition, a subsidiary of MatNav provides container stevedoring, container equipment maintenance and other terminal services for MatNav and other ocean carriers on the islands of Oahu, Hawaii, Maui and Kauai.

 

The Company 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. (the “Terminal Joint Venture”).  SSAT provides terminal and stevedoring services to various carriers at six terminal facilities on the Pacific Coast of the United States of America (“U.S.”), including to MatNav at several of those facilities.  Matson records its share of income (loss) in the joint venture in operating expenses within the ocean transportation segment due to the nature of SSAT’s operations.

 

Logistics:  The Company’s logistics business is conducted through Matson Logistics, Inc. (“Matson Logistics” or “Logistics”), a wholly-owned subsidiary of MatNav.  Established in 1987, Matson Logistics is an asset-light business that provides multimodal transportation services, including domestic and international rail intermodal service (“Intermodal”); long-haul and regional highway brokerage, specialized hauling, flat-bed and project services, less-than-truckload services, and expedited freight services (collectively “Highway”); and warehousing and distribution services.

 

2.             SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation:  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, and  do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete 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 filed on Form 10-K for the year ended December 31, 2013.

 

Fiscal Period:  The period end for Matson, Inc. is June 30. The period end for MatNav occurred on the last Friday in June, except for Matson Logistics Warehousing for which the period closed on June 30.

 

Significant Accounting Policies:  The Company’s significant accounting policies are described in Note 2 to the consolidated financial statements included in Item 8 of the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2013.

 

3.         DEBT

 

At June 30, 2014 and December 31, 2013, the Company’s debt consisted of the following (in millions):

 

		June 30,			December 31,
		2014			2013
Term Loans:
5.79%, payable through 2020		$	42.0		$	45.5
3.66%, payable through 2023		77.5			77.5
4.16%, payable through 2027		55.0			55.0
4.31%, payable through 2032		37.5			37.5
Title XI Bonds:
5.34%, payable through 2028		31.9			33.0
5.27%, payable through 2029		34.1			35.2
Term Notes:
4.35%, payable through 2044		100.0			—
Capital leases		1.9			2.4
Total debt		379.9			286.1
Less current portion		(17.1		)	(12.5		)
Total long-term debt		$	362.8		$	273.6

 

In January 2014, the Company issued $100 million of 30-year senior unsecured notes (the “Notes”).  The Notes have a weighted average life of 14.5 years and bear interest at a rate of 4.35%, payable semi-annually.  The proceeds are expected to be used for general corporate purposes.  The Notes will begin to mature in 2021, with annual principal payments of $5.0 million in 2021, $7.5 million in 2022 and 2023, $10.0 million from 2024 to 2027, and $8.0 million in 2028.  Starting in 2029, and in each year thereafter until 2044, annual principal payments will be $2.0 million.

 

4

 

4.         PENSION AND POST-RETIREMENT PLANS

 

The Company sponsors qualified defined-benefit pension and post retirement plans (collectively, the “Plans”). The following table provides the components of net periodic benefit cost for the Plans for the six-month periods ended June 30, 2014 and 2013 (in millions):

 

		Pension Benefits						Post-retirement Benefits
		June 30						June 30
		2014			2013			2014			2013
Service cost		$	1.7		$	1.4		$	0.5		$	0.5
Interest cost		4.7			4.3			1.3			1.1
Expected return on plan assets		(7.0		)	(5.9		)	—			—
Amortization of net loss		1.5			3.4			0.3			0.2
Amortization of prior service cost		(1.2		)	(1.1		)	—			—
Net periodic benefit cost		$	(0.3	)	$	2.1		$	2.1		$	1.8

 

In 2014, the Company expects to pay total cash contributions to its defined benefit pension plans of approximately $6.5 million, of which only $1.7 million has been contributed as of June 30, 2014.

 

5.         SHARE-BASED COMPENSATION

 

During the three and six-month periods ended June 30, 2014, the Company granted 26,227 and 349,993 time-based and performance-based shares to certain of its employees at a weighted-average grant date fair value of $24.82 and $23.59, respectively.  The number of performance shares awarded represents the maximum that can be earned, and will ultimately depend on the Company’s performance.

 

Total stock-based compensation cost recognized in the condensed consolidated financial statements of operations as a component of selling, general and administrative costs was $1.9 million and $1.5 million for the three-month periods ended June 30, 2014 and 2013, and $3.7 million and $2.8 million for the six-month periods ended June 30, 2014 and 2013, respectively.  Total unrecognized compensation cost related to unvested share-based compensation arrangements was $12.7 million at June 30, 2014, and is expected to be recognized over a weighted-average period of 2.0 years.  Total unrecognized compensation cost may be adjusted for any unearned performance shares or forfeited shares.

 

6.         CONTINGENCIES

 

Employee Matters: The Company and SSAT are members of the Pacific Maritime Association (“PMA”), which on behalf of its members, negotiates collective bargaining agreements with the International Longshore and Warehouse Union (“ILWU”) on the U.S. Pacific Coast.  The PMA/ILWU collective bargaining agreements, which cover substantially all U.S. Pacific Coast longshore labor, expired on July 1, 2014.    The Company also has collective bargaining agreements with ILWU longshore labor in Hawaii and ILWU office clerical workers in Honolulu and Oakland, each of which expired on June 30, 2014.  Although PMA’s and Matson’s collective bargaining agreements have expired, Matson and SSAT workers subject to these collective bargaining agreements are currently performing their work activities while contract negotiations continue.  Matson expects that new agreements will be reached without significant disruption to its or SSAT’s operations; however, no assurance can be given that a disruption will not occur, and if a significant disruption were to occur, this would have a material impact on the Company’s financial position, results of operations, or cash flows.

 

Environmental Matters:  Molasses was released into Honolulu Harbor from a pipeline system operated by a subsidiary of the Company in September 2013.  The Company is cooperating with federal and state agencies involved in responding to and investigating the incident.  On September 20, 2013, the Hawaii Department of Health (“DOH”) and other responding governmental agencies announced that they had officially transitioned their role from a response phase to a recovery and restoration phase.  The DOH also reported on September 20, 2013 that dissolved oxygen and pH levels in the harbor and nearby Keehi Lagoon had returned to normal target levels and that there was no longer discoloration of the water in those same areas attributable to the molasses release.  Keehi Lagoon was reopened to the public on September 21, 2013.

 

5

 

On October 10, 2013, the Company was served with a federal grand jury subpoena seeking documents in connection with a criminal investigation into the release of molasses into Honolulu Harbor.  In addition, in April 2014, the Company received two subpoenas from the Hawaii Attorney General and written requests for information regarding the release from the following governmental agencies: (i) the DOH; (ii) the State of Hawaii Office of Hawaiian Affairs; and (iii) the United States Environmental Protection Agency (Region IX). The Company continues to respond to governmental requests for information, and is engaging in dialogue with governmental agencies in order to reasonably resolve these matters.

 

As of July 31, 2014, the Company has resolved all material third-party claims that have been received.  However, government agencies have not: (i) initiated any lawsuits; (ii) presented the Company with an accounting of their response costs; (iii) provided an assessment of natural resource damages; or (iv) imposed any penalties in connection with the release of molasses.  Therefore, the Company is not able to estimate the future costs, penalties, damages or expenses that it may incur related to the incident.  As a result, at this time no assurance can be given that the impact of the incident on the Company’s financial position, results of operations, or cash flows will not be material.

 

In addition to the molasses release discussed above, the Company’s shipping business has certain other 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 Legal Matters:  On June 10, 2013, the Company was served with a complaint filed in the United States District Court for the Central District of California by an individual plaintiff as relator on behalf of the United States asserting claims against the Company and certain other ocean carriers and freight forwarders for violations of the False Claims Act.  The case is entitled United States of America, ex rel. Mario Rizzo v. Horizon Lines, LLC et al. The qui tam complaint alleges that Matson and the other defendants submitted or created records supporting false claims for payment of fuel surcharges assessed on the shipment of military household goods for the Department of Defense.  The federal government has declined to intervene in this qui tam suit.  The individual plaintiff in the suit seeks damages and penalties on behalf of the federal government, and may be entitled to a portion of any recovery or settlement resulting from the suit.  The plaintiff filed a Second Amended Complaint on August 23, 2013.  The Company filed a motion to dismiss the complaint on September 16, 2013.  On October 31, 2013, the court denied the Company’s motion.  Discovery commenced and a jury trial was scheduled to begin on October 7, 2014.  On February 14, 2014, Matson and the plaintiff engaged in non-binding mediation.  On February 23, 2014, Matson’s Board of Directors approved a settlement of $9.0 million in full settlement of all claims, and $0.95 million for plaintiff’s legal expenses.  On July 17, 2014, the settlement was approved by the United States Government, and the Company paid the settlement amount. On July 22, 2014, the case was dismissed with prejudice by the District Court.  The amount of the settlement was included in accrued and other liabilities in the consolidated balance sheets at June 30, 2014 and December 31, 2013.

 

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.

 

6

 

7.         EARNINGS PER SHARE (“EPS”)

 

The number of shares used to compute basic and diluted earnings per share for the three and six-month periods ended June 30, 2014 and 2013, is as follows (in millions, except per share data):

 

		Three-Months Ended June 30, 2014								Three-Months Ended June 30, 2013
					Weighted		Per						Weighted		Per
					Average		Common						Average		Common
		Net			Common		Share			Net			Common		Share
		Income			Shares		Amount			Income			Shares		Amount
Basic:		$	18.1		43.0		$	0.42		$	20.1		42.7		$	0.47
Effect of dilutive restricted stock units and stock options					0.2		—						0.3		—
Diluted:		$	18.1		43.2		$	0.42		$	20.1		43.0		$	0.47

 

		Six-Months Ended June 30, 2014								Six-Months Ended June 30, 2013
					Weighted		Per						Weighted		Per
					Average		Common						Average		Common
		Net			Common		Share			Net			Common		Share
		Income			Shares		Amount			Income			Shares		Amount
Basic:		$	21.5		43.0		$	0.50		$	29.2		42.7		$	0.68
Effect of dilutive restricted stock units and stock options					0.2		—						0.3		—
Diluted:		$	21.5		43.2		$	0.50		$	29.2		43.0		$	0.68

 

Basic earnings per share (“EPS”) are 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 computation of weighted average dilutive shares outstanding excludes non-qualified stock options to purchase shares of common stock 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.

 

7

 

8.         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 equivalents and Level 2 inputs for its long-term debt.  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 of 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 June 30, 2014 and December 31, 2013 are as follows (in millions):

 

		Carrying Value at June 30, 2014			Fair Value Measurements at June 30, 2014
(in millions)		Total			Total			Quoted Prices in Active Markets (Level 1)			Significant Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Cash & cash equivalents		$	223.7		$	223.7		$	223.7		$	—		$	—
Accounts and notes receivable		196.7			196.7			—			196.7			—
Fixed rate debt		379.9			398.8			—			398.8			—

 

		Carrying Value at December 31, 2013			Fair Value Measurements at December 31, 2013
(in millions)		Total			Total			Quoted Prices in Active Markets (Level 1)			Significant Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Cash & cash equivalents		$	114.5		$	114.5		$	114.5		$	—		$	—
Accounts and notes receivable		182.3			182.3			—			182.3			—
Fixed rate debt		286.1			292.7			—			292.7			—

 

8

 

9.         REPORTABLE SEGMENTS

 

The Company consists of two 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.

 

Segment results for the three and six-month periods ended June 30, 2014 and 2013 were as follows (in millions):

 

		Three-Months Ended						Six-Months Ended
		June 30						June 30
		2014			2013			2014			2013
Revenue:
Ocean transportation		$	321.1		$	310.0		$	615.7		$	609.9
Logistics		115.3			106.6			213.2			201.4
Total revenue		$	436.4		$	416.6		$	828.9		$	811.3
Operating Income:
Ocean transportation		$	32.8		$	34.3		$	42.2		$	52.8
Logistics		2.9			2.2			3.4			2.4
Total operating income		35.7			36.5			45.6			55.2
Interest expense, net		(4.5		)	(3.6		)	(8.6		)	(7.3		)
Income before income taxes		31.2			32.9			37.0			47.9
Income taxes		(13.1		)	(12.8		)	(15.5		)	(18.7		)
Net income		$	18.1		$	20.1		$	21.5		$	29.2

 

9

 

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 the 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 the Forms 10-K, 10-Q and 8-K, the Annual Report to Shareholders, press releases made by the Company, the Company’s Internet Web sites (including Web sites of its subsidiaries), and oral statements made by the 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,” 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 for the year ended December 31, 2013, filed with the Securities Exchange Commission on February 28, 2014.  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.

 

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 filed on Form 10-K for the year ended December 31, 2013, and the Company’s reports filed on Forms 10-Q and 8-K, and other publicly available information.

 

BUSINESS OUTLOOK

 

Ocean Transportation: In the second quarter 2014, market growth returned to the Hawaii trade; however, the Company experienced modest competitive losses in eastbound backhaul freight and Pacific Northwest originated commodity freight. For the second half 2014, the Company expects growth in the Hawaii trade to continue, with its Hawaii volume expected to be flat to slightly up compared to the second half of 2013.  A competitor is expected to launch new containership capacity into the Hawaii trade late in 2014 and therefore is not expected to have any material impact on the Company’s volume for the remainder of the year.  In the China trade, overcapacity is expected to continue, with vessel deliveries outpacing demand growth.  However, the Company expects to maintain its volume and average freight rates with high vessel utilization levels, as its expedited service continues to realize a premium to market rates. In Guam, muted growth is expected and the Company envisions its volume to be modestly better than 2013, assuming no new competitors enter the market.

 

In the second half 2014, the Company expects ocean transportation operating income to significantly increase from the level achieved in the second half of 2013, which was $51.4 million (exclusive of a $9.95 million litigation charge).  For the full year 2014, ocean transportation operating income is expected to be near or slightly above the level achieved in 2013, which was $104.3 million (exclusive of the $9.95 million litigation charge).  This outlook excludes any future impact from the September 2013 molasses incident.

 

Logistics: In the second half of 2014, the Company expects operating income to be near or slightly higher than comparable 2013 levels, and therefore expects operating income to modestly exceed the full year 2013 level of $6.0 million. The Company expects continuing improvement in volume growth, expense control and warehouse operations.

 

Interest Expense: The Company expects its interest expense in 2014 to increase over the 2013 amount by approximately $3.5 million due primarily to the Notes financing transaction that closed on January 28, 2014.

 

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Income Tax Expense: The Company expects the full year 2014 effective tax rate to be approximately 40 percent.

 

Other: The Company expects maintenance capital expenditures for 2014 to be approximately $40.0 million. Additionally, while the Company does not have any scheduled contract payments in 2014 related to its two vessels under construction, it does expect to make additional contributions to its Capital Construction Fund (“CCF”). These deposits could be significant and will have the effect of deferring a portion of the Company’s current cash tax liabilities.

 

CONSOLIDATED RESULTS OF OPERATIONS

 

Consolidated Results: Three-month Periods ended June 30, 2014 compared with 2013:

 

		Three-Months Ended June 30
(dollars in millions, except per share amounts)		2014			2013			Change
Operating revenue		$	436.4		$	416.6		4.8	%
Operating costs and expenses		400.7			380.1			5.4	%
Operating income		35.7			36.5			(2.2	)%
Interest expense		(4.5		)	(3.6		)	25.0	%
Income before income taxes		31.2			32.9			(5.2	)%
Income tax expense		(13.1		)	(12.8		)	2.3	%
Net income		$	18.1		$	20.1		(10.0	)%
Basic earnings per share		$	0.42		$	0.47		(10.6	)%
Diluted earnings per share		$	0.42		$	0.47		(10.6	)%

 

Consolidated operating revenue for the second quarter 2014 increased $19.8 million, or 4.8 percent, compared to 2013.  This increase was due to $11.1 million and $8.7 million in higher revenue from ocean transportation and logistics services, respectively.

 

Operating costs and expenses for the second quarter 2014 increased $20.6 million, or 5.4 percent, compared to 2013.  The increase was due to a $12.6 million and $8.0 million increase in operating costs from ocean transportation and logistics segment, respectively.  Changes in operating revenue and expense are described below in the Analysis of Operating Revenue and Income by Segment, as part of the discussion of trends in operating revenues and operating.

 

Interest expense increased $0.9 million to $4.5 million for the second quarter of 2014 compared to $3.6 million in 2013. The increase was due to increased borrowings in the second quarter 2014 compared to 2013.

 

Income tax expense was $13.1 million or 42.0% of net income before income taxes for the second quarter of 2014, compared to $12.8 million or 38.9% of net income before income taxes in 2013.  The increase in the income tax rate was due to certain non-recurring costs in the second quarter 2014.

 

Consolidated Results: Six-month Periods ended June 30, 2014 compared with 2013:

 

		Six-Months Ended June 30
(dollars in millions, except per share amounts)		2014			2013			Change
Operating revenue		$	828.9		$	811.3		2.2	%
Operating costs and expenses		783.3			756.1			3.6	%
Operating income		45.6			55.2			(17.4	)%
Interest expense		(8.6		)	(7.3		)	17.8	%
Income before income taxes		37.0			47.9			(22.8	)%
Income tax expense		(15.5		)	(18.7		)	(17.1	)%
Net income		$	21.5		$	29.2		(26.4	)%
Basic earnings per share		$	0.50		$	0.68		(26.5	)%
Diluted earnings per share		$	0.50		$	0.68		(26.5	)%

 

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Consolidated operating revenue for the six-month period ended June 30, 2014 increased $17.6 million, or 2.2 percent, compared to 2013.  This increase was due to $5.8 million and $11.8 million in higher revenue from ocean transportation and logistics services, respectively.

 

Operating costs and expenses for the six-month period ended June 30, 2014 increased $27.2 million, or 3.6 percent, compared to 2013.  The increase was due to a $16.4 million and $10.8 million increase in operating costs from ocean transportation and logistics segment, respectively.  Changes in operating revenue and expense are described below in the Analysis of Operating Revenue and Income by Segment, as part of the discussion of trends in operating revenues and operating.

 

Interest expense increased $1.3 million to $8.6 million for the six-month period ended June 30, 2014 compared to $7.3 million in 2013. The increase was due to increased borrowings in the six-month period ended June 30, 2014 compared to 2013.

 

Income tax expense was $15.5 million or 41.9% of net income before income taxes for the six-month period ended June 30, 2014, compared to $18.7 million or 39.0% of net income for 2013.  The increase in the income tax rate was due to certain non-recurring costs that increased the tax rate in the six-month period ended 2014.

 

ANALYSIS OF OPERATING REVENUE AND INCOME BY SEGMENT

 

Ocean Transportation Operating Results:  Three-month Periods ended June 30, 2014 compared with 2013:

 

		Three-Months Ended June 30
(dollars in millions)		2014			2013			Change
Ocean transportation revenue		$	321.1		$	310.0		3.6	%
Operating costs and expenses		288.3			275.7			4.6	%
Operating income		$	32.8		$	34.3		(4.4	)%
Operating income margin		10.2		%	11.1		%
Volume (Units) (1)
Hawaii containers		34,800			35,700			(2.5	)%
Hawaii automobiles		19,600			23,200			(15.5	)%
China containers		15,700			15,400			1.9	%
Guam containers		6,200			6,100			1.6	%
Micronesia/South Pacific Containers		3,100			2,400			29.2	%

(1)         Approximate container volumes included for the period are based on the voyage departure date, but revenue and operating income are adjusted to reflect the percentage of revenue and operating income earned during the reporting period for voyages that straddle the beginning or end of each reporting period.

 

Ocean transportation revenue increased $11.1 million or 3.6 percent during the second quarter 2014 compared with 2013. The increase was due primarily to higher freight yields across all major trade lanes and higher fuel surcharge revenue; partially offset by lower Hawaii container and automobile volume.

 

For the second quarter 2014 compared with 2013, Hawaii container volume decreased 2.5 percent due primarily to lower eastbound freight; China volume increased modestly reflecting continued high utilization and demand for Matson’s premium expedited service; Guam volume increased modestly due to timing of shipments; and Micronesia/South Pacific volume increased 29.2 percent due to reconfiguration of the South Pacific service.  Hawaii automobile volume decreased 15.5 percent primarily due to certain customer losses.

 

Ocean transportation operating income decreased $1.5 million, or 4.4 percent, during the second quarter 2014 compared with 2013. The decrease can be attributed primarily to increased vessel operating expenses associated with reserve vessel deployment for dry-dock and other relief activities, and increased terminal handling expenses.  In addition, the Company incurred $1.2 million in legal and other expenses related to the molasses released into Honolulu Harbor in September 2013.  Partially offsetting these decreases to operating income were higher freight yields across all major trade lanes and lower outside transportation costs.

 

The Company’s SSAT terminal joint venture investment contributed $2.1 million during the second quarter 2014, compared to a $0.8 million loss in 2013.  The increase was primarily attributable to increased lift volume and the timing of wharfage payments.

 

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Ocean Transportation Operating Results:  Six-month Periods ended June 30, 2014 compared with 2013:

 

		Six-Months Ended June 30
(dollars in millions)		2014			2013			Change
Ocean transportation revenue		$	615.7		$	609.9		1.0	%
Operating costs and expenses		573.5			557.1			2.9	%
Operating income		$	42.2		$	52.8		(20.1	)%
Operating income margin		6.9		%	8.7		%
Volume (Units) (1)
Hawaii containers		68,100			70,000			(2.7	)%
Hawaii automobiles		42,800			46,200			(7.4	)%
China containers		29,400			29,600			(0.7	)%
Guam containers		12,200			11,900			2.5	%
Micronesia/South Pacific Containers		6,300			4,800			31.3	%

 

(1)         Approximate container volumes included for the period are based on the voyage departure date, but revenue and operating income are adjusted to reflect the percentage of revenue and operating income earned during the reporting period for voyages that straddle the beginning or end of each reporting period.

 

Ocean transportation revenue increased $5.8 million, or 1.0 percent, during the six-month period ended June 30, 2014 compared to 2013. The increase was due primarily to higher freight yields across all major trade lanes and increased volume in the South Pacific; partially offset by lower fuel surcharge revenue and lower Hawaii container and automobile volume.

 

During the six-month period ended June 30, 2014, Hawaii container volume decreased 2.7 percent primarily to lower eastbound freight; China volume was effectively flat; Guam volume increased modestly due to timing of shipments; and Micronesia/South Pacific volume increased 31.3 percent reflecting a full six-months of operations and service reconfiguration in the South Pacific.  Hawaii automobile volume decreased 7.4 percent primarily due to certain customer losses.

 

Ocean transportation operating income decreased $10.6 million, or 20.1 percent, during the six-month period ended June 30, 2014 compared with 2013. The decrease can be attributed primarily to the timing of fuel surcharge collections in the first quarter 2014 and increased vessel operating associated with reserve vessel deployment for dry-dock and other relief activities in the second quarter 2014, and increased terminal handling expenses. In addition, the Company incurred $2.2 million in legal and other expenses related to the molasses released into Honolulu Harbor in September 2013.  Partially offsetting these decreases to operating income were higher freight yields across all major trade lanes and lower outside transportation costs.

 

The Company’s SSAT terminal joint venture investment contributed $2.3 million during the six-month period ended June 30, 2014, compared to a $0.6 million loss in 2013. The increase was primarily attributable to increased lift volume and the timing of wharfage payments.

 

Logistics Operating Results:  Three-month Periods ended June 30, 2014 compared with 2013:

 

		Three-Months Ended June 30
(dollars in millions)		2014			2013			Change
Intermodal revenue		$	67.2		$	65.4		2.8	%
Highway revenue		48.1			41.2			16.7	%
Total Logistics Revenue		115.3			106.6			8.2	%
Operating costs and expenses		112.4			104.4			7.7	%
Operating income		$	2.9		$	2.2		31.8	%
Operating income margin		2.5		%	2.1		%

 

Logistics revenue increased $8.7 million, or 8.2 percent, during the second quarter 2014 compared to 2013. This increase was primarily due to higher highway volume.

 

Logistics operating income increased by $0.7 million during the second quarter 2014 compared to 2013. The increase was primarily due to a favorable litigation settlement, warehouse operating improvements, and increased highway volume, partially offset by lower intermodal yield.

 

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Logistics Operating Results:  Six-month Periods ended June 30, 2014 compared with 2013:

 

		Six-Months Ended June 30
(dollars in millions)		2014			2013			Change
Intermodal revenue		$	121.8		$	122.2		(0.3	)%
Highway revenue		91.4			79.2			15.4	%
Total Logistics Revenue		213.2			201.4			5.9	%
Operating costs and expenses		209.8			199.0			5.4	%
Operating income		$	3.4		$	2.4		41.7	%
Operating income margin		1.6		%	1.2		%

 

Logistics revenue increased $11.8 million, or 5.9 percent, during the six-month period ended June 30, 2014 compared to 2013. This increase was primarily the result of higher highway and international intermodal volume; partially offset by lower domestic intermodal volume.

 

Logistics operating income increased by $1.0 million during the six-month period ended June 30, 2014 compared to 2013. The increase was primarily due to a favorable litigation settlement, warehouse operating improvements and increased highway volume, partially offset by lower intermodal yield.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Overview:

 

Cash flows provided by operating activities are generally the Company’s primary source of liquidity.  Additional sources of liquidity were provided by available cash and cash equivalent balances as well as borrowings on available credit facilities.

 

Cash Flows:

 

Cash flows provided by operating activities were $49.2 million for the six-month period ended June 30, 2014, compared with $79.5 million for 2013.  The decrease in cash flows provided by operating activities was primarily due to an increase in accounts receivable, and prepaid and other assets, a decrease in net income, and accounts payable and accrued liabilities; offset by the benefit from the change in deferred income taxes, and an increase in other liabilities.

 

Cash flows used in investing activities were $19.0 million for the six-month period ended June 30, 2014, compared with $16.5 million for 2013.  The increase in cash flows used in investing activities was primarily due increased capital expenditures, offset by payments for acquisitions of $9.6 million in 2013.  Capital expenditures were $20.2 million for the six-month period ended June 30, 2014, compared to $9.8 million for 2013, and primarily related to the ocean transportation segment.

 

Cash flows provided by financing activities were $79.0 million for the six-month period ended June 30, 2014, compared to cash flows used in financing activities of $43.8 million for 2013.  The change was primarily due to increased proceeds from issuance of long-term debt net of repayments of $93.8 million during the six-month period ended June 30, 2014, offset by higher debt repayments during 2013.

 

Other Sources of Liquidity:

 

Additional sources of liquidity totaled $420.4 million at June 30, 2014, consisting of cash and cash equivalents, and accounts receivables, an increase of $123.6 million compared to December 31, 2013.  The increase was due primarily to a $109.2 million and $14.4 million increase in cash and cash equivalents, and accounts receivable, respectively. The Company had working capital of $256.5 million at June 30, 2014, compared to $148.3 million at December 31, 2013.

 

Total debt was $379.9 million as of June 30, 2014, compared with $286.1 million at December 31, 2013. The increase in debt is primarily due to the issuance of $100 million of 30-year senior unsecured notes during the first quarter of 2014, offset by repayments of debt.

 

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