Business Context and Reporting Period
Matson, Inc. is an ocean transportation and logistics company serving Hawaii, Guam, Micronesia, the South Pacific, and the China–Long Beach trade. The company also provides terminal, stevedoring, intermodal, highway brokerage, warehousing, and distribution services. This unaudited Form 10-Q covers the three and nine months ended September 30, 2014, compared with the corresponding 2013 periods.
Key Financial Metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Operating revenue | $441.8 million | $415.0 million | $1,270.7 million | $1,226.3 million |
| Operating income | $45.0 million | $27.2 million | $90.6 million | $82.4 million |
| Operating margin | 10.2% | 6.6% | 7.1% | 6.7% |
| Net income | $21.5 million | $17.2 million | $43.0 million | $46.4 million |
| Net margin | 4.9% | 4.1% | 3.4% | 3.8% |
| Diluted EPS | $0.50 | $0.40 | $1.00 | $1.08 |
| Cash flow from operations | Not separately provided | Not separately provided | $96.1 million | $137.8 million |
Ocean transportation generated $329.5 million of third-quarter revenue and $42.6 million of operating income. Logistics generated $112.3 million of revenue and $2.4 million of operating income. The ocean transportation operating margin was 12.9% in the third quarter and 9.0% for the first nine months; logistics margins were 2.1% and 1.8%, respectively.
Cash and cash equivalents were $230.9 million at September 30, 2014, versus $114.5 million at December 31, 2013. Working capital increased to $259.9 million from $148.3 million. Total debt was $377.5 million, including $17.1 million of current debt, compared with $286.1 million at year-end 2013. The increase primarily reflects the January 2014 issuance of $100 million of 30-year senior unsecured notes bearing interest at 4.35%.
Capital expenditures were $25.6 million for the first nine months, compared with $19.7 million in 2013. The company also deposited $65.5 million into its Capital Construction Fund during the third quarter, consisting of $27.5 million in cash and $38.0 million of eligible receivables.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue increased 6.5%, operating income increased 65.4%, and net income increased 25.0% year over year.
- Third-quarter ocean transportation revenue increased 6.3%, driven by higher fuel surcharge revenue, Hawaii container growth, and higher freight yields. Ocean operating income increased 67.1% to $42.6 million.
- Hawaii container volume increased 3.8% in the third quarter, while Hawaii automobile volume declined 20.8% and China container volume declined 7.4%.
- SSAT terminal joint-venture income improved to $3.1 million in the third quarter from a $2.4 million loss, reflecting higher lift volume and improved productivity.
- Logistics revenue increased 7.1% in the third quarter, and logistics operating income increased 41.2%, aided by higher highway volume and warehouse improvements.
- For the first nine months, revenue increased 3.6% and operating income increased 10.0%, but net income declined 7.3% because of higher interest expense and a higher effective tax rate.
- Operating cash flow declined by $41.7 million year over year, primarily because of lower deferred-tax benefits, higher accounts receivable, and other working-capital changes.
- The third-quarter effective tax rate was 47.0%, compared with 27.1% in 2013, primarily because of a non-cash valuation allowance against deferred tax assets related to foreign operations and the release of tax liabilities in the prior-year quarter.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected fourth-quarter Hawaii container volume to be modestly above the fourth quarter of 2013, with continued market growth. A competitor was expected to add Hawaii capacity in early 2015.
- Management expected continued overcapacity in the China trade but anticipated high vessel utilization and higher average freight rates supported by Matson’s expedited service.
- Fourth-quarter ocean transportation operating income was expected to exceed the $26.0 million reported in the fourth quarter of 2013, excluding that period’s $9.95 million litigation charge. Logistics operating income was expected to be slightly above comparable 2013 levels.
- Full-year 2014 interest expense was expected to be approximately $17.3 million, the effective tax rate approximately 43%, and maintenance capital expenditures approximately $40.0 million.
- Pacific Maritime Association/ILWU agreements covering substantially all U.S. Pacific Coast longshore labor expired July 1, 2014; certain Hawaii and office-employee agreements expired June 30, 2014. Work slowdowns at Seattle and Tacoma had negatively affected SSAT productivity, although Matson’s operations had not been significantly impacted as of the filing.
- Matson recorded $2.1 million of third-quarter penalties, legal, and other costs related to the September 2013 Honolulu Harbor molasses release, bringing 2014 year-to-date costs to $4.2 million.
- Matson Terminals, Inc. agreed to plead guilty to two misdemeanor Rivers and Harbors Act violations and to pay a $1.0 million penalty, subject to court sentencing. Potential civil claims and possible government debarment remained unresolved, and the company could not estimate the ultimate costs or exposure.
- The company paid $9.95 million in 2014 to settle a False Claims Act matter; the case was dismissed with prejudice in July 2014.
- The board declared a quarterly dividend of $0.17 per share payable December 4, 2014.
Important Facts for Investors to Verify
- Whether Pacific Coast and Hawaii labor negotiations result in additional slowdowns, strikes, higher labor costs, or adverse work-practice changes.
- The final costs, penalties, civil claims, insurance recoveries, and potential debarment implications related to the Honolulu Harbor molasses release.
- Whether expected Hawaii market growth and higher freight yields offset China-trade overcapacity and declining automobile volumes.
- The sustainability of the improved SSAT contribution and logistics profitability.
- The effect of the higher debt balance and related interest expense on future earnings and cash flow.
- Whether the non-cash foreign deferred-tax valuation allowance or other tax items materially affect future effective tax rates.
- The use and tax benefits of the Capital Construction Fund, including the $65.5 million third-quarter deposit and assigned receivables.