Matson, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Matson provides ocean transportation and logistics services. Ocean transportation serves Hawaii, Alaska, Guam, Micronesia, the South Pacific, and an expedited China–Long Beach service; logistics provides intermodal, highway brokerage, warehousing, and related services.
This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2015. MatNav and its subsidiaries used a September 25, 2015 period end. The results include the first full quarter of Alaska operations following the May 29, 2015 acquisition of Horizon Lines’ Alaska operations and other non-Hawaii assets and liabilities.
Financial Performance and Key Metrics
| Metric | Q3 2015 | Q3 2014 | Change |
|---|---|---|---|
| Operating revenue | $544.3 million | $441.8 million | 23.2% |
| Operating income | $71.8 million | $45.0 million | 59.6% |
| Operating margin | 13.2% | 10.2% | Up approximately 3.0 pts |
| Net income | $41.5 million | $21.5 million | 93.0% |
| Diluted EPS | $0.94 | $0.50 | 88.0% |
| Net margin | 7.6% | 4.9% | Up approximately 2.7 pts |
| Metric | Nine months 2015 | Nine months 2014 | Change |
|---|---|---|---|
| Operating revenue | $1,390.1 million | $1,270.7 million | 9.4% |
| Operating income | $150.4 million | $90.6 million | 66.0% |
| Operating margin | 10.8% | 7.1% | Up approximately 3.7 pts |
| Net income | $76.4 million | $43.0 million | 77.7% |
| Diluted EPS | $1.74 | $1.00 | 74.0% |
- Ocean transportation: Q3 revenue was $444.8 million, up 35.0%; operating income was $68.9 million, up 61.7%; and operating margin increased to 15.5% from 12.9%. Nine-month revenue was $1,097.0 million and operating income was $144.2 million.
- Logistics: Q3 revenue declined 11.4% to $99.5 million, but operating income increased 20.8% to $2.9 million, with margin improving to 2.9% from 2.1%. Nine-month revenue declined 10.0% to $293.1 million, while operating income increased 6.9% to $6.2 million.
- Cash flow: Nine-month operating cash flow was $159.0 million, compared with $96.1 million in 2014. Capital expenditures were $30.3 million, and cash used in investing activities was $38.8 million.
- Liquidity: Cash and cash equivalents were $25.5 million at September 30, 2015, compared with $293.4 million at December 31, 2014. Working capital was $50.2 million, compared with $296.0 million at year-end.
- Debt: Total debt was $481.5 million, compared with $373.6 million at December 31, 2014. Revolver borrowings were $118.0 million, with $271.5 million of availability at quarter-end. On October 1, 2015, Matson issued $75.0 million of 30-year senior unsecured notes and used the proceeds to reduce revolver borrowings.
- Dividends: The Q3 dividend was $0.18 per share. The board declared an additional $0.18 per-share dividend for Q4 2015.
Material Changes Versus the Prior Comparable Period
- The Horizon acquisition added Alaska revenue and operating income and materially expanded assets, liabilities, goodwill, and intangible assets. Horizon contributed $90.0 million of Q3 revenue and $14.5 million of Q3 income before taxes.
- Ocean transportation benefited from higher Hawaii volumes, higher China freight rates, the Alaska operations, and improved SSAT terminal joint venture results. Hawaii container volume increased 14.8% in Q3; China volume increased 5.3%.
- Logistics revenue declined because of lower intermodal and highway volume and lower fuel surcharge revenue, although warehouse performance and per-unit margins improved.
- Q3 selling, general and administrative expense included approximately $10.0 million of acquisition-related costs above the targeted incremental run-rate.
- Interest expense increased modestly to $4.7 million in Q3 and $13.6 million for the nine months, primarily because of higher borrowings.
- The Q3 effective tax rate was 38.2%, compared with 47.0% in 2014, partly because the prior-year period included a non-cash valuation allowance. The nine-month 2015 tax rate was 44.2%, including a $4.8 million non-cash deferred-tax adjustment and acquisition-related tax effects.
- Nine-month financing cash flow was negative $388.1 million, primarily reflecting $467.5 million paid for Horizon debt and redeemed warrants, partially offset by revolver borrowings.
Guidance, Outlook, Risks, and Unusual Items
- Management expects Alaska integration to be completed within two years of closing. Incremental annual run-rate SG&A is expected to be approximately $15.0 million; excess acquisition-related SG&A was expected to be approximately $7.5 million in Q4 2015.
- Excluding the excess Q4 acquisition-related SG&A, ocean transportation operating income was expected to approximate the $46.3 million achieved in Q4 2014. Logistics full-year 2015 operating income was expected to approximate the 2014 level of $8.9 million.
- Management expected Q4 interest expense of approximately $5.0 million and an effective tax rate of approximately 40%. Q4 maintenance capital expenditures were expected to be approximately $30 million, with $20.9 million of scheduled contract payments for two vessels under construction.
- Hawaii volume trends were expected to remain favorable, while China volume was expected to be moderately lower because of one fewer sailing, the absence of 2014 West Coast labor-disruption demand, and market softness.
- Alaska economic activity was expected to remain muted because of low energy prices. A competitor’s planned Guam service was expected to cause some volume losses after launch.
- The acquisition’s preliminary purchase price allocation remains subject to revision. It includes $220.9 million of goodwill, $140.0 million of customer-relationship intangibles, and $60.6 million of multi-employer withdrawal liabilities, with estimated future undiscounted payments of $73.9 million over approximately 18 years.
- The company recorded $11.4 million of costs related to the Molasses Settlement during the first nine months. Environmental remediation risks and ordinary-course legal matters were disclosed, but management did not expect them to have a material effect.
- Management reported no material changes to previously disclosed risk factors, contractual obligations, market risk, or internal controls. Forward-looking results remain subject to economic conditions, competition, fuel and freight trends, integration execution, labor issues, and other risks described in prior filings.
Important Facts for Investors to Verify
- Progress and final accounting for the Horizon acquisition, including the preliminary goodwill, intangible asset, deferred-tax, and pension-liability estimates.
- Whether Alaska integration costs decline toward the approximately $15.0 million annual incremental SG&A run-rate.
- Cash availability, revolver balances, covenant capacity, and the effect of the October 1, 2015 note issuance on debt costs and liquidity.
- Sustainability of Hawaii volume gains, China freight-rate premiums, and SSAT joint venture contributions.
- Competitive effects from the planned Guam service and economic weakness in Alaska.
- Future cash requirements for vessel construction, capital expenditures, multi-employer pension liabilities, dividends, and other acquisition-related obligations.