Matson, Inc. 2019 Form 10-K Summary
Business context and reporting period
Matson provides ocean transportation and logistics services through two segments: Ocean Transportation and Logistics. Ocean Transportation serves Hawaii, Alaska, Guam, China, Japan, Micronesia and the South Pacific and includes a 35% equity investment in SSA Terminals, LLC. Logistics provides transportation brokerage, freight forwarding, warehousing and supply-chain services.
The filing covers the fiscal year ended December 31, 2019. Fiscal 2019 and 2018 each included 52 weeks. Fourth-quarter 2019 results were also disclosed.
Key financial metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total operating revenue | $2,203.1 million | $2,222.8 million | Down 0.9% |
| Operating income | $129.1 million | $163.8 million | Down 21.2% |
| Net income | $82.7 million | $109.0 million | Down 24.1% |
| Diluted EPS | $1.91 | $2.53 | Down $0.62 |
| Operating margin | Approximately 5.9% | Approximately 7.4% | Down approximately 1.5 points |
| Net margin | Approximately 3.8% | Approximately 4.9% | Down approximately 1.1 points |
| Operating cash flow | $248.8 million | $305.0 million | Down $56.2 million |
| Capital expenditures | $310.3 million | $401.2 million | Down $90.9 million |
| Total debt | $958.4 million | $856.4 million | Up $102.0 million |
| Cash and restricted cash | $28.4 million | $24.5 million | Up $3.9 million |
Ocean Transportation revenue increased 1.5% to $1,666.6 million, but operating income fell 30.7% to $90.8 million and the segment margin declined to 5.4% from 8.0%. Logistics revenue declined 7.7% to $536.5 million, while operating income increased 17.1% to $38.3 million and the segment margin improved to 7.1% from 5.6%.
Ocean Transportation volumes were mixed: Hawaii containers declined 1.4%, Alaska containers increased 0.4%, China containers increased 3.9%, Guam containers declined 1.5%, and other container volume increased 3.7%. The SSAT joint venture contributed $20.8 million, down from $36.8 million.
Fourth-quarter 2019 operating revenue was $540.7 million, operating income was $25.4 million and net income was $15.6 million, compared with $564.9 million, $30.5 million and $20.6 million, respectively, in fourth-quarter 2018. Fourth-quarter diluted EPS was $0.36 versus $0.48.
Material changes versus the prior comparable period
- Consolidated revenue decreased modestly, but profitability declined substantially because Ocean Transportation costs rose faster than revenue.
- Ocean Transportation costs increased $65.6 million, primarily due to higher terminal handling costs, vessel operating costs, Maunalei lease expense and lower SSAT earnings.
- Logistics revenue declined mainly because of lower transportation brokerage revenue, but segment profitability improved because of stronger contributions from freight forwarding and transportation brokerage.
- Interest expense increased to $22.5 million from $18.7 million because of higher borrowings and lower capitalized interest.
- Cash flow from operations declined, while investing outflows remained high due to vessel construction, scrubber installations, terminal modernization and the Anchorage Service Center.
- Net borrowings under the revolving credit facility increased by $114.1 million. Revolver borrowings were $379.1 million at year-end, leaving $75.1 million of availability.
- Matson adopted ASC 842 lease accounting in 2019, recording operating lease right-of-use assets of $256.1 million and operating lease liabilities totaling $264.6 million at year-end. The adoption increased retained earnings by $4.4 million and did not materially affect current earnings, liquidity or debt covenants.
Liquidity, debt and commitments
Working capital deficiency increased to $147.1 million from $52.4 million, partly due to recognition of short-term operating lease liabilities and lower accounts receivable. Total debt consisted of $379.1 million of variable-rate revolver borrowings and $579.3 million of fixed-rate debt. The company was in compliance with its debt covenants at December 31, 2019.
Contractual obligations totaled approximately $1.797 billion, including $958.4 million of debt, $314.3 million of operating lease obligations, $147.2 million of qualified pension obligations, $91.1 million of multi-employer withdrawal obligations, $64.8 million of vessel construction commitments and $175.9 million of estimated debt interest.
Matson’s estimated multi-employer pension withdrawal exposure was $266.7 million, although no liability was recorded for plans from which the company does not intend to withdraw. Recorded multi-employer withdrawal liabilities totaled approximately $65.6 million, including current and long-term amounts.
Guidance, outlook and unusual items
- Management expected 2020 net income to be approximately flat year over year, with consolidated operating income of approximately $143 million and EBITDA of approximately $280 million.
- The 2020 outlook included an estimated $15 million negative COVID-19 impact, primarily affecting Ocean Transportation, China-related activity and SSAT volumes.
- First-quarter 2020 Ocean Transportation operating income was expected to be approximately breakeven versus $9.4 million in first-quarter 2019; the full-year segment outlook was above the 2019 level.
- Management expected 2020 Logistics operating income to be below the 2019 level of $38.3 million.
- Expected 2020 depreciation and amortization was approximately $135 million, interest expense approximately $33 million and effective tax rate approximately 26%.
- Expected 2020 capital spending included approximately $110 million of other capital expenditures, $75 million of vessel construction expenditures and $15 million of dry-docking payments.
- IMO 2020 sulfur regulations became effective January 1, 2020. Matson planned additional scrubber installations and expected higher compliant-fuel costs, with uncertainty over fuel availability, maintenance costs and surcharge recovery.
- The new Lurline vessel entered active service in January 2020, and Matsonia was expected to be delivered in the fourth quarter of 2020. The Sand Island terminal’s first modernization phase, estimated at approximately $60 million, was expected to be completed in 2020.
- The filing identified COVID-19 as a material subsequent risk, including possible effects on China manufacturing, freight volumes, tourism, port operations, dry-dockings and scrubber installations.
- No impairment charges were recorded for goodwill, intangible assets or long-lived assets in 2019. Goodwill totaled $327.8 million, including $78.6 million associated with the Span Alaska reporting unit, which was identified as a critical audit matter.
Principal risks and contingencies
- Potential repeal, amendment or waiver of the Jones Act could increase competition from lower-cost foreign-flag or foreign-built vessels; approximately 72% of Ocean Transportation revenue was derived from Hawaii and Alaska trades subject to the Jones Act.
- Exposure includes fuel-price volatility, IMO 2020 compliance, labor disruptions, weather and natural disasters, vessel accidents, environmental liabilities, cybersecurity incidents and dependence on third-party transportation and terminal providers.
- Floating-rate debt creates interest-rate exposure; a 100-basis-point increase was estimated to reduce 2019 results by approximately $3.8 million, assuming year-end variable-rate debt remained outstanding.
- Operating agreements, terminal leases, vessel leases and labor contracts may be renewed on less favorable terms or may not be renewed.
- Management stated that ordinary-course legal matters and environmental matters were not expected to have a material effect, but the company retains uninsured risks and has substantial pension, lease and contractual obligations.
- Deloitte & Touche LLP issued unqualified opinions on the financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal control over financial reporting were effective.
Investor verification checklist
- Verify the sustainability of the 2020 outlook, particularly the assumed $15 million COVID-19 impact and the expectation of flat net income.
- Monitor Ocean Transportation margins, SSAT earnings, Hawaii and China volumes, freight rates and fuel-surcharge recovery.
- Reconcile debt maturities, revolver availability, covenant headroom and the large 2022 debt maturity concentration.
- Assess whether vessel construction, scrubber installation, terminal modernization and dry-docking spending remain within budget.
- Evaluate the potential cash impact of multi-employer pension withdrawal exposure, recorded withdrawal liabilities and other benefit obligations.
- Review IMO 2020 fuel costs, scrubber performance and the availability of compliant fuel.
- Track goodwill sensitivity for the Span Alaska reporting unit and the effect of economic conditions in Alaska on impairment risk.