Matson, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Matson provides ocean transportation and logistics services through two segments: Ocean Transportation, serving Hawaii, Alaska, Guam, Micronesia, the South Pacific and China-to-Long Beach routes; and Logistics, providing multimodal transportation, freight forwarding, warehousing and related services. The filing covers the quarter and nine months ended September 30, 2016. Results include Horizon’s Alaska operations from May 29, 2015, and Span Alaska from August 4, 2016. Interim results are not necessarily indicative of full-year performance.
Financial Performance and Key Metrics
| Metric | Q3 2016 | Q3 2015 | Change |
|---|
| Operating revenue | $500.4 million | $544.3 million | (8.1%) |
| Operating income | $46.2 million | $71.8 million | (35.7%) |
| Operating margin | 9.2% | 13.2% | Down 4.0 points |
| Net income | $25.0 million | $41.5 million | (39.8%) |
| Diluted EPS | $0.58 | $0.94 | (38.3%) |
| Interest expense | $6.0 million | $4.7 million | 27.7% increase |
| Metric | Nine Months 2016 | Nine Months 2015 | Change |
|---|
| Operating revenue | $1,422.3 million | $1,390.1 million | 2.3% |
| Operating income | $116.9 million | $150.4 million | (22.3%) |
| Operating margin | 8.2% | 10.8% | Down 2.6 points |
| Net income | $61.1 million | $76.4 million | (20.0%) |
| Diluted EPS | $1.40 | $1.74 | (19.5%) |
- Q3 Ocean Transportation revenue declined 10.5% to $398.0 million and operating income declined 38.0% to $42.7 million; margin fell to 10.7% from 15.5%.
- Q3 Logistics revenue increased 2.9% to $102.4 million and operating income increased 20.7% to $3.5 million; margin improved to 3.4% from 2.9%.
- Nine-month Ocean Transportation revenue rose 3.5% to $1,135.0 million, but operating income fell 24.0% to $109.6 million; margin declined to 9.7% from 13.1%.
- Nine-month Logistics revenue declined 2.0% to $287.3 million, while operating income increased 17.7% to $7.3 million; margin improved to 2.5% from 2.1%.
- Net cash provided by operating activities was $87.5 million, down from $159.0 million. Investing cash outflow was $328.0 million, driven by capital spending, vessel construction, Capital Construction Fund deposits and the Span Alaska acquisition.
- Cash and cash equivalents were $16.4 million at September 30, 2016, compared with $25.5 million at December 31, 2015. Working capital was $20.2 million, compared with a $19.7 million deficiency at year-end 2015.
- Total debt was $812.4 million, including $195.0 million outstanding under the revolving credit facility, compared with $429.9 million at December 31, 2015. Revolver availability was $193.8 million.
- Shareholders’ equity was $459.2 million. The company paid $24.0 million in dividends and repurchased $37.8 million of shares during the first nine months.
Material Changes Versus the Prior Comparable Period
- Ocean Transportation performance weakened substantially in Q3 because of lower China freight rates, lower fuel surcharge revenue and reduced Hawaii, Alaska and Guam volumes. Prior-year comparisons also benefited from competitor service disruptions and West Coast labor-related cargo backlogs.
- Q3 volumes declined 8.0% in Hawaii containers, 10.7% in Alaska containers, 3.0% in China containers and 4.6% in Guam containers. Micronesia and South Pacific volume increased 12.5%.
- The company acquired Span Alaska for total consideration of $199.1 million, including repayment of $81.9 million of Span Alaska debt. The acquisition added $8.5 million of Q3 revenue and approximately $1.3 million of operating income, and generated $79.0 million of preliminary goodwill.
- The company issued $200.0 million of 15-year senior unsecured Series D Notes at 3.14% and increased revolver borrowings to fund capital requirements, the acquisition, share repurchases and Capital Construction Fund deposits.
- Capital Construction Fund deposits totaled $123.4 million during the first nine months, including $110.8 million during Q3. The company also made $39.2 million of capitalized vessel construction payments.
- Interest expense increased because of higher borrowings and non-cash interest accretion related to the Puerto Rico multi-employer liability.
Guidance, Outlook, Risks and Unusual Items
- Management expected Q4 2016 Ocean Transportation operating income to be approximately 15% below Q4 2015’s $43.6 million, reflecting weaker Hawaii, Guam and Alaska volumes and lower SSAT contribution.
- Management expected full-year 2016 Logistics operating income of approximately $11 million, interest expense of approximately $24 million and an effective tax rate of approximately 39%.
- Expected 2016 spending included approximately $90 million of capital expenditures, $96 million of capitalized vessel construction expenditures and $57 million of dry-docking payments. Depreciation and amortization was expected to be approximately $136 million.
- Matson entered into a $511 million contract for two new Hawaii combination container and roll-on/roll-off vessels, scheduled for delivery in late 2019 and mid-2020. Reported vessel construction commitments totaled $485.5 million as of September 30.
- Industry and operating risks include chronic overcapacity in international container shipping, weaker China rates, energy-related weakness in Alaska, lower seafood harvests, competitive losses in Guam, fuel surcharge changes, vessel and terminal operating costs, and economic conditions in served markets.
- The Department of Justice stated it was prepared to file a Clean Water Act civil penalty action related to the 2013 Honolulu Harbor molasses release, while indicating willingness to discuss resolution. Matson believes it has defenses; the filing does not provide a clear potential loss amount.
- On October 27, 2016, Matson expected to issue $75 million of 11-year senior unsecured notes at an expected fixed rate of 3.37%, subject to definitive documentation and closing conditions, primarily to repay revolver borrowings.
- Management reported compliance with debt covenants at September 30, 2016. The principal debt covenants include maximum debt-to-consolidated-EBITDA of 3.25 to 1.00 and minimum consolidated-EBITDA-to-interest expense of 3.50 to 1.00.
Most Important Facts for Investors to Verify
- Whether weaker Ocean Transportation volumes and China freight rates persist beyond Q4 2016, particularly in Hawaii, Alaska and Guam.
- The final purchase-price accounting, fair values and operating contribution of Span Alaska; reported amounts were preliminary.
- Liquidity after the $511 million vessel contract, Capital Construction Fund activity, planned capital expenditures and additional debt issuance.
- Debt leverage, revolver availability and continued compliance with financial covenants as vessel construction and other investments proceed.
- The potential financial impact and resolution of the Department of Justice’s threatened Clean Water Act civil penalty action.
- Whether SSAT earnings remain below the prior-year level and whether logistics margin improvement offsets pressure in Ocean Transportation.
