Matson, Inc. — 2014 Q2 Form 10-Q Summary
Business Context and Reporting Period
Matson provides ocean transportation and logistics services, including service to Hawaii, Guam, Micronesia, the South Pacific, and China-to-Long Beach expedited transportation. The filing covers the three and six months ended June 30, 2014, compared with the corresponding 2013 periods. Results are unaudited and interim results may not be indicative of full-year performance.
Financial Performance and Position
| Metric | Q2 2014 | Q2 2013 | Six Months 2014 | Six Months 2013 |
|---|---|---|---|---|
| Operating revenue | $436.4 million | $416.6 million | $828.9 million | $811.3 million |
| Operating income | $35.7 million | $36.5 million | $45.6 million | $55.2 million |
| Net income | $18.1 million | $20.1 million | $21.5 million | $29.2 million |
| Diluted EPS | $0.42 | $0.47 | $0.50 | $0.68 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $49.2 million | $79.5 million |
- Q2 revenue increased 4.8%, while operating income declined 2.2% and net income declined 10.0%. Six-month revenue increased 2.2%, but operating income declined 17.4% and net income declined 26.4%.
- Consolidated operating margin was approximately 8.2% in Q2 2014 versus 8.8% in Q2 2013, and approximately 5.5% for the first six months versus 6.8% in the prior-year period.
- Interest expense increased to $4.5 million in Q2 and $8.6 million for the six months, primarily from increased borrowings.
- Q2 income tax expense was $13.1 million, representing a 42.0% effective rate, compared with 38.9% in Q2 2013. The six-month effective rate was 41.9% versus 39.0%, due to certain non-recurring costs.
- Ocean transportation revenue increased 3.6% in Q2 and 1.0% for the six months. Ocean operating income declined 4.4% in Q2 and 20.1% for the six months; margins were 10.2% and 6.9%, respectively, versus 11.1% and 8.7% in the prior-year periods.
- Logistics revenue increased 8.2% in Q2 and 5.9% for the six months. Logistics operating income increased 31.8% in Q2 and 41.7% for the six months; margins improved to 2.5% and 1.6%, respectively.
- Cash and cash equivalents were $223.7 million at June 30, 2014, compared with $114.5 million at December 31, 2013. Working capital was $256.5 million versus $148.3 million.
- Total debt was $379.9 million at June 30, 2014, compared with $286.1 million at year-end 2013. Debt increased primarily because of the issuance of $100 million of 30-year senior unsecured notes in January 2014 at 4.35%.
- Six-month investing cash outflows were $19.0 million, including $20.2 million of capital expenditures. Financing cash inflows were $79.0 million, including net debt proceeds of approximately $93.8 million, offset by $13.9 million of dividends.
Material Changes Versus the Prior Comparable Period
- Revenue growth did not translate into profit growth because operating costs increased faster than revenue, particularly in ocean transportation.
- Ocean results were pressured by reserve-vessel deployment for dry-dock and relief activities, higher terminal handling expenses, timing of fuel-surcharge collections, and $2.2 million of molasses-related legal and other costs in the first six months.
- Ocean transportation benefited from higher freight yields, lower outside transportation costs, and improved SSAT terminal joint venture results. SSAT contributed $2.3 million for the six months versus a $0.6 million loss in 2013.
- Hawaii container volume declined 2.7% and automobile volume declined 7.4% for the six months. Micronesia/South Pacific container volume increased 31.3%, while China volume was essentially flat.
- Logistics performance improved due to higher highway volume, warehouse operating improvements, and a favorable litigation settlement, partly offset by lower intermodal yields.
- Operating cash flow declined $30.3 million year over year, primarily because of lower net income and increased accounts receivable, prepaid expenses, and other assets.
Guidance, Outlook, Risks, and Unusual Items
- Management expected second-half 2014 Hawaii volume to be flat to slightly higher than the prior-year period, with continued market growth but competitive losses in certain freight categories.
- Management expected China trade overcapacity to continue but anticipated stable volume and average freight rates, supported by high utilization and premium expedited service.
- Full-year 2014 ocean transportation operating income was expected to be near or slightly above the 2013 level of $104.3 million, excluding the $9.95 million litigation charge recorded in 2013. The outlook excluded future effects of the September 2013 molasses incident.
- Full-year logistics operating income was expected to modestly exceed the 2013 level of $6.0 million. Interest expense was expected to increase by approximately $3.5 million in 2014, and the full-year effective tax rate was expected to be approximately 40%.
- Maintenance capital expenditures were expected to be approximately $40 million for 2014. Additional Capital Construction Fund deposits could be significant and defer some current cash tax liabilities.
- Collective bargaining agreements covering Pacific Coast longshore labor expired July 1, 2014; certain Hawaii and office clerical agreements expired June 30, 2014. Employees continued working during negotiations, but a strike, slowdown, lockout, or unfavorable agreement could materially affect operations, financial position, results, or cash flow.
- The September 2013 Honolulu Harbor molasses release remains subject to governmental investigations and potential response costs, penalties, and natural-resource damages. No government lawsuits, cost assessments, penalties, or damages had been imposed as of the filing; future exposure could be material and could not be estimated.
- Matson paid $9.95 million in July 2014 to settle the False Claims Act litigation, and the case was dismissed with prejudice. The amount was accrued at June 30, 2014.
- The company reported effective disclosure controls and no material changes to internal control over financial reporting.
Most Important Facts for Investors to Verify
- Whether labor negotiations with the ILWU conclude without disruption or materially higher labor costs.
- The ultimate governmental costs, penalties, damages, and insurance recovery, if any, related to the molasses release.
- Whether ocean transportation margins recover as anticipated despite competitive pressure, trade-lane overcapacity, vessel costs, and volume declines in Hawaii.
- Actual 2014 capital expenditures, Capital Construction Fund deposits, vessel-construction commitments, and related liquidity effects.
- The effect of the new $100 million notes and other borrowings on interest expense, leverage, maturities, and debt-service capacity.
- Whether logistics operating improvements and highway growth offset lower intermodal yields and sustain the projected full-year improvement.