Matson, Inc. — FY2016 Form 10-K 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 and the South Pacific and includes a 35% interest in SSAT, a terminal joint venture. Logistics provides transportation brokerage, freight forwarding, warehousing and supply-chain services.
The filing covers the fiscal year ended December 31, 2016. Fiscal 2016 included 53 weeks, compared with 52 weeks in 2015. The company acquired Span Alaska on August 4, 2016; 2016 results include approximately five months of its operations. The 2015 comparison includes Horizon operations from May 29, 2015.
Key financial metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Operating revenue | $1,941.6 million | $1,884.9 million | 3.0% |
| Operating income | $153.2 million | $196.3 million | (22.0%) |
| Operating margin | 7.9% | 10.4% | Down 2.5 points |
| Income before taxes | $129.1 million | $177.8 million | (27.4%) |
| Net income | $80.5 million | $103.0 million | (21.8%) |
| Diluted EPS | $1.85 | $2.34 | (20.9%) |
| Effective tax rate | 37.6% | 42.1% | Down 4.5 points |
| Operating cash flow | $157.8 million | $245.3 million | (35.7%) |
| Capital expenditures | $179.4 million | $67.8 million | Increase of $111.6 million |
Ocean Transportation revenue increased 2.9% to $1,541.1 million, while operating income declined 24.8% to $141.3 million and the segment margin fell to 9.2% from 12.5%. Logistics revenue increased 3.5% to $400.5 million, operating income rose 40.0% to $11.9 million, and the segment margin improved to 3.0% from 2.2%.
Fourth-quarter 2016 operating revenue was $519.3 million, operating income was $36.3 million and net income was $19.4 million. Diluted EPS was $0.44, compared with $0.60 in fourth-quarter 2015.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $13.9 million at December 31, 2016, down from $25.5 million.
- Working capital was negative $5.0 million, compared with negative $19.7 million at December 31, 2015.
- Total debt was $738.9 million, up from $429.9 million; long-term debt was $707.1 million.
- Debt consisted of $683.9 million of fixed-rate debt and $55.0 million of variable-rate debt.
- The revolving credit facility had $333.8 million of availability, with $55.0 million drawn and $11.2 million of letters of credit outstanding.
- Total shareholders’ equity increased to $471.5 million from $450.6 million.
- The company paid $32.2 million of dividends and repurchased $38.0 million of common stock in 2016. The quarterly dividend increased to $0.19 per share in the third and fourth quarters.
Material changes versus the prior comparable period
- Revenue increased, primarily from a full year of Horizon’s Alaska operations and the partial-year contribution from Span Alaska, but profitability declined because costs grew faster than revenue.
- Ocean Transportation results were pressured by lower China freight rates, higher Hawaii vessel operating costs, unfavorable fuel-surcharge timing, higher terminal handling costs and increased dry-docking amortization.
- Hawaii container volume increased 0.6% and automobile volume increased 7.4%. Alaska container volume increased 60.9%, principally reflecting the inclusion of a full year of operations. China container volume declined 1.8%, and Guam volume declined 2.7%.
- Logistics benefited from Span Alaska and higher intermodal volume, partly offset by lower intermodal yield and fuel-surcharge revenue.
- Operating cash flow declined primarily because of lower net income, higher dry-docking payments, no SSAT cash distribution in 2016 and changes in other liabilities.
- Investing cash outflows increased to $320.7 million, including $112.6 million for Span Alaska, $94.5 million for vessel construction and $84.9 million of capital expenditures.
- The company issued $275.0 million of long-term debt and increased revolving borrowings to fund the acquisition, capital spending, dry-docking and share repurchases.
Guidance, outlook, risks and unusual items
- Management expected 2017 Ocean Transportation operating income to be below the 2016 level. First-quarter 2017 Ocean Transportation operating income was expected to be approximately 50% below the $33.0 million earned in first-quarter 2016.
- For 2017, management expected Logistics operating income of approximately $20 million, EBITDA of approximately $288.6 million, interest expense of approximately $25 million and an effective tax rate of approximately 39%.
- Expected 2017 spending included approximately $50 million of maintenance capital, $210 million of vessel construction expenditures and $60 million of dry-docking payments.
- Matson has four new dual-fuel-capable vessels under construction, with expected deliveries from the third quarter of 2018 through the second quarter of 2020. Total estimated construction cost was approximately $925.3 million, with $803.9 million of remaining contractual construction obligations at year-end.
- Competitive pressure increased in Guam after a competitor expanded from bi-weekly to weekly service. Alaska volumes remained exposed to contraction in the energy-based economy, while China operations remained exposed to international container overcapacity and freight-rate pressure.
- Key risks include fuel-price volatility and imperfect fuel-surcharge recovery, labor disruptions, weather and natural disasters, cybersecurity and information-technology failures, environmental compliance, changes to the Jones Act, interest-rate and refinancing risk, and dependence on third-party transportation and terminal providers.
- The company had estimated multi-employer pension withdrawal obligations of $220.8 million, although it recorded $64.2 million related to the Horizon Puerto Rico mass-withdrawal liability and had no present intention to withdraw from its other plans.
- Matson accrued a $0.7 million settlement payable under a January 2017 Department of Justice Clean Water Act agreement relating to the 2013 Honolulu Harbor molasses release. The company did not admit liability.
- No goodwill, intangible-asset, long-lived-asset or SSAT investment impairment charges were recorded in 2016. Management reported effective disclosure controls and internal control over financial reporting; Span Alaska was excluded from the internal-control assessment because of its recent acquisition.
Important facts for investors to verify
- Whether Ocean Transportation margins recover despite competitive pressure, lower China rates and elevated vessel, dry-docking and terminal costs.
- Progress, total cost and delivery timing for the four-vessel fleet-renewal program, including the effect on debt, cash flow and future operating costs.
- Whether Span Alaska achieves the expected full-year contribution to Logistics operating income.
- Compliance with debt covenants, refinancing capacity and the effect of floating-rate borrowings on interest expense.
- The company’s ability to fund approximately $2.26 billion of disclosed contractual obligations, including debt, vessel construction, leases, pensions and other commitments.
- Potential changes in Jones Act, environmental, emissions and labor regulations, including the expiration or extension of conditional fuel-emissions waivers.
- Actual cash generation after capital expenditures, dry-docking payments, acquisitions, dividends and share repurchases.