Matson, Inc. 2019 Q3 Form 10-Q Summary
Business Context and Reporting Period
Matson provides ocean transportation and logistics services. Its Ocean Transportation segment serves Hawaii, Alaska, Guam, China, Okinawa, Micronesia and the South Pacific, and includes a 35% interest in SSAT terminal operations. Its Logistics segment provides transportation brokerage, freight forwarding, warehousing and supply-chain services.
The filing covers the quarter and nine months ended September 30, 2019. MatNav’s operational period ended September 27, 2019. Financial statements are unaudited.
Financial Performance and Key Metrics
| Metric | Q3 2019 | Q3 2018 | Change |
|---|---|---|---|
| Operating revenue | $572.1 million | $589.4 million | Down 2.9% |
| Operating income | $55.2 million | $58.6 million | Down 5.8% |
| Operating margin | 9.6% | 9.9% | Down approximately 30 bps |
| Income before taxes | $48.5 million | $54.9 million | Down 11.7% |
| Net income | $36.2 million | $41.6 million | Down 13.0% |
| Diluted EPS | $0.84 | $0.97 | Down 13.4% |
| Operating cash flow | Not separately provided for Q3 | Not separately provided for Q3 |
| Metric | Nine Months 2019 | Nine Months 2018 | Change |
|---|---|---|---|
| Operating revenue | $1,662.4 million | $1,657.9 million | Up 0.3% |
| Operating income | $103.7 million | $133.3 million | Down 22.2% |
| Operating margin | 6.2% | 8.0% | Down approximately 180 bps |
| Net income | $67.1 million | $88.4 million | Down 24.1% |
| Diluted EPS | $1.55 | $2.06 | Down 24.8% |
| Operating cash flow | $180.4 million | $203.0 million | Down $22.6 million |
| Investing cash flow | $(168.3) million | $(231.4) million | Use declined $63.1 million |
| Financing cash flow | $(4.3) million | $20.7 million | Down $25.0 million |
Segment Results and Material Changes
- Ocean Transportation: Q3 revenue was essentially flat at $437.2 million, but operating income declined 9.9% to $43.9 million and margin fell to 10.0% from 11.1%. The decline reflected higher terminal handling and vessel operating costs, including MV Maunalei lease expense, and lower Hawaii volume.
- Ocean Transportation, nine months: Revenue increased 2.2% to $1,250.5 million, while operating income fell 33.5% to $73.0 million and margin declined to 5.8% from 9.0%. The SSAT contribution fell to $17.8 million from $28.8 million.
- Logistics: Q3 revenue declined 11.3% to $134.9 million, primarily due to lower transportation brokerage revenue, but operating income increased 14.1% to $11.3 million and margin improved to 8.4% from 6.5%. For nine months, revenue declined 5.2% while operating income increased 30.1% to $30.7 million.
- Volumes: Q3 Hawaii container volume declined 2.1%, China declined 3.4%, Guam declined 2.1%, and Alaska was flat. Hawaii automobile volume increased 12.9%. For nine months, Hawaii containers declined 2.2%, while Alaska, China, Guam and other container volumes increased modestly.
- Joint venture: SSAT’s Q3 contribution declined to $8.4 million from $9.2 million. Higher terminal operating costs and the absence of favorable prior-year items reduced the nine-month contribution.
- Capital assets: Property and equipment, net increased to $1,485.5 million from $1,366.6 million at December 31, 2018. MV Kaimana Hila entered service, with $211.8 million transferred from vessel construction in progress.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $23.6 million at September 30, 2019, compared with $19.6 million at year-end 2018. Including restricted cash, total cash, cash equivalents and restricted cash was $32.3 million, compared with $24.5 million at year-end.
- Total debt increased to $883.0 million from $856.4 million. Revolver borrowings increased to $290.0 million from $235.0 million, primarily to fund new-vessel construction, while fixed-rate debt declined by $28.4 million through scheduled repayments.
- Remaining revolver availability was $168.1 million; the facility matures June 29, 2022. Average revolver borrowing cost in Q3 was approximately 3.73%.
- Working capital deficiency increased to $138.2 million from $52.4 million, partly because ASC 842 added $64.4 million of current operating lease liabilities.
- Nine-month capital expenditures included $108.7 million for vessel construction and $62.7 million of other capital expenditures. Dividends paid were $27.7 million, and the quarterly dividend was $0.22 per share.
Guidance, Outlook, Risks and Unusual Items
- Management expected full-year 2019 Ocean Transportation operating income to be approximately 25% below 2018’s $131.1 million, after considering the $7.2 million full-year net operating expense impact of the MV Maunalei sale-leaseback.
- Management maintained its Logistics outlook for operating income growth of approximately 15% to 20% over 2018’s $32.7 million.
- Full-year expectations included approximately $135 million of depreciation and amortization, $25 million of interest expense, a 26.0% effective tax rate excluding the favorable $2.9 million discrete tax adjustment, approximately $270 million of EBITDA, and lower year-over-year net income.
- Expected 2019 capital spending was approximately $90 million for other capital expenditures, $215 million for vessel construction and $20 million for dry-docking.
- Matson adopted ASC 842 lease accounting on January 1, 2019, recognizing a $246.0 million operating lease right-of-use asset at September 30 and $254.4 million of operating lease liabilities. The adoption did not materially affect earnings, liquidity or debt covenants.
- A favorable $2.9 million non-cash tax adjustment in the first quarter reversed a prior-year AMT refund sequestration adjustment. Excluding discrete tax items, the nine-month effective tax rate was 26.8% versus 24.3% in 2018.
- Management identified slowing Hawaii economic and container-market growth, competitive Guam conditions, higher terminal and vessel costs, SSAT cost pressure, fuel and interest-rate exposure, environmental remediation risk and normal-course legal contingencies as relevant considerations. No material changes to previously disclosed risk factors or commitments were reported.
Important Facts for Investors to Verify
- Whether Ocean Transportation margins recover as vessel, terminal and lease costs normalize and whether the 2019 guidance is achieved.
- The sustainability of Logistics operating-income gains despite lower revenue, particularly in transportation brokerage and freight forwarding.
- Revolver utilization, available borrowing capacity and debt maturities relative to planned vessel construction and other capital spending.
- The effect of lower SSAT earnings and distributions on operating income and cash flow.
- Hawaii freight-market trends, China volume and rate performance, Guam competition and Alaska volume expectations.
- The treatment and future impact of ASC 842 lease liabilities, including the $50.9 million maximum residual-value guarantee associated with the vessel charter, which management did not consider probable of payment.