Matson, Inc. — Q1 2021 Form 10-Q Summary
Business Context and Reporting Period
Matson provides ocean transportation and logistics services through two reportable segments. Ocean Transportation serves Hawaii, Alaska, Guam, China, Micronesia, the South Pacific and other markets, and includes the company’s 35% equity investment in SSA Terminals, LLC (SSAT). Logistics provides transportation brokerage, freight forwarding, warehousing, distribution and supply-chain services.
The filing covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020. The financial statements are unaudited. MatNav’s reporting period ended March 26, 2021.
Financial Performance and Key Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total operating revenue | $711.8 million | $513.9 million | +38.5% |
| Ocean Transportation revenue | $560.5 million | $400.9 million | +39.8% |
| Logistics revenue | $151.3 million | $113.0 million | +33.9% |
| Operating income | $120.2 million | $13.0 million | +824.6% |
| Operating margin | 16.9% | 2.5% | +14.4 percentage points |
| Net income | $87.2 million | $3.8 million | +$83.4 million |
| Diluted EPS | $1.99 | $0.09 | +$1.90 |
| Net cash from operating activities | $122.9 million | $68.6 million | +$54.3 million |
Ocean Transportation operating income was $114.1 million, up from $7.9 million, with a 20.4% margin versus 2.0%. Logistics operating income was $6.1 million, up from $5.1 million, while its margin declined to 4.0% from 4.5% because costs increased faster than revenue.
SSAT contributed $9.2 million of equity income, compared with $4.0 million in the prior-year quarter. SSAT’s higher contribution reflected increased terminal lift volume.
Income before taxes was $114.3 million and income tax expense was $27.1 million, producing a 23.7% effective tax rate. The filing notes that the prior-year effective tax rate benefited from discrete adjustments related to stock compensation and foreign taxes.
Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $11.8 million at March 31, 2021, versus $14.4 million at December 31, 2020. Including restricted cash, total cash was $17.1 million.
- Operating cash flow of $122.9 million was partly offset by $37.1 million of investing cash outflows and $88.4 million of financing cash outflows, resulting in a $2.6 million decrease in cash, cash equivalents and restricted cash.
- Capital expenditures were $38.5 million, compared with $26.1 million in Q1 2020. There were no capitalized vessel-construction expenditures in Q1 2021, reflecting completion of the fleet-renewal program in 2020.
- Total debt declined to $698.9 million from $760.1 million at December 31, 2020. Revolver borrowings declined to $25.0 million from $71.8 million, and fixed-rate debt declined by $14.4 million through scheduled repayments.
- Remaining borrowing availability under the revolving credit facility was $616.9 million, with $8.1 million used for letters of credit. The facility matures March 31, 2026.
- Working capital was negative $205.2 million, broadly unchanged from negative $205.6 million at year-end. The company manages working capital partly through its revolving credit facility.
- The company paid a quarterly dividend of $0.23 per share and declared another $0.23 per-share dividend payable June 3, 2021.
Material Changes Versus the Prior Comparable Period
- China container volume increased 218.6%, primarily from the CLX+ service and increased CLX capacity. Management reported significantly higher average freight rates and a significant rate premium.
- Hawaii container volume increased 0.6%, while Hawaii automobile volume declined 19.5%. Alaska container volume declined 4.9%, although management estimated normalized Alaska volume increased approximately 2.5% after considering one fewer sailing and the prior-year competitor dry-docking effect.
- Guam container volume increased 2.0%; other container volume declined 2.4%.
- Ocean Transportation’s results benefited from stronger China contributions, higher SSAT income and higher rates, partially offset by lower Alaska contributions and higher depreciation.
- Logistics revenue rose 33.9%, primarily from transportation brokerage, while operating income increased 19.6% due to stronger transportation brokerage and supply-chain management contributions.
- Interest expense decreased 15.1% because of lower outstanding debt, partly offset by lower capitalized interest.
- Operating lease cost increased to $27.5 million from $20.3 million.
- Total shareholders’ equity increased to $1.029 billion from $961.2 million, primarily reflecting Q1 net income, partially offset by dividends and share-tax withholding.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide a clear quantitative earnings or revenue guidance range. Management expects California port congestion to persist through Q2 2021 and into the traditional peak season. It expects favorable Transpacific demand, including elevated consumption and e-commerce activity, and significant demand for the expedited CLX and CLX+ services through the peak season into late October.
Management expects Hawaii tourism and economic conditions to improve as travel restrictions ease and vaccinations increase, but the recovery remains uncertain. Guam tourism remains depressed, and Alaska’s economy is expected to recover slowly while the pandemic continues and unemployment remains elevated.
- COVID-19 effects remain a material operating risk, particularly for tourism-dependent Hawaii and Guam and for the broader economic recovery.
- Supply-chain congestion, capacity constraints, freight-rate conditions and demand normalization could materially affect Ocean Transportation results.
- Goodwill and intangible assets were not impaired in Q1 2021. However, a prolonged or more severe pandemic, weaker cash flows, changes in discount rates or market valuations, or adverse industry conditions could result in a future non-cash impairment charge.
- On March 31, 2021, Matson amended its revolving credit agreement and private placement note agreements. The amendments generally reduced the maximum consolidated leverage ratio to 3.50-to-1.0, with a one-time increase to 4.0-to-1.0 for a material acquisition, and removed or relaxed certain restrictions.
- The company paid approximately $2.2 million of fees for the credit agreement amendment and approximately $0.8 million for private placement note amendments.
- Management reported no material changes to legal proceedings, contractual obligations, market-risk disclosures or risk factors from the 2020 Form 10-K. Environmental remediation and ordinary-course legal matters remain potential contingencies, but management does not expect them to be material.
- Following quarter-end, Matson implemented the financial modules of a new ERP system. Management expects the system to strengthen controls but noted inherent implementation risks and will continue monitoring internal controls during 2021.
Most Important Facts for Investors to Verify
- Whether elevated China freight rates, CLX/CLX+ demand and port-congestion benefits persist beyond the 2021 peak season.
- The sustainability of the Q1 Ocean Transportation margin of 20.4% versus 2.0% in the prior-year quarter.
- Whether Hawaii and Guam tourism recover as expected and whether Alaska volumes normalize.
- Compliance with the amended 3.50-to-1.0 consolidated leverage covenant and the company’s future use of its $616.9 million revolver availability.
- Future capital expenditures, vessel investments, dry-docking requirements and debt maturities, including $44.8 million due during the remainder of 2021 and $65.0 million in 2022.
- Potential goodwill or intangible-asset impairment if pandemic, market or operating assumptions deteriorate.
- Post-implementation performance of the new ERP financial modules and related internal-control assessments.