Matson, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Matson provides ocean transportation and logistics services through its Ocean Transportation and Logistics segments. Ocean Transportation serves Hawaii, Alaska, Guam, Micronesia, the South Pacific, and the China–Long Beach trade, and includes a 35% interest in SSAT. Logistics provides intermodal, highway brokerage, supply-chain, warehousing, and distribution services.
This unaudited report covers the three months ended March 31, 2016. MatNav and its subsidiaries use a March 25, 2016 period end. Results include the Alaska operations acquired from Horizon Lines on May 29, 2015; Horizon contributed $70.7 million of revenue and $4.2 million of pretax income in the quarter.
Financial Performance and Liquidity
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Operating revenue | $454.2 million | $398.2 million | 14.1% |
| Operating income | $34.6 million | $44.9 million | (22.9%) |
| Net income | $18.1 million | $25.0 million | (27.6%) |
| Diluted EPS | $0.41 | $0.57 | (28.1%) |
| Operating margin | 7.6% | 11.3% | Down 3.7 points |
| Net margin | 4.0% | 6.3% | Down 2.3 points |
Ocean Transportation revenue rose 19.8% to $366.1 million, primarily from the acquired Alaska service and higher Hawaii volume and yield. Segment operating income declined 24.8% to $33.0 million, reducing the segment margin to 9.0% from 14.4%. Logistics revenue fell 5.0% to $88.1 million, while operating income increased 60.0% to $1.6 million and its margin improved to 1.8% from 1.1%.
Net cash provided by operating activities was $19.8 million, compared with $46.3 million in the prior-year quarter. Capital expenditures were $30.6 million, dry-docking payments were $13.2 million, and cash deposits into the Capital Construction Fund were $12.5 million. Investing activities used $42.6 million. Financing activities provided $17.4 million, including $54.0 million of net revolving-credit borrowings and $20.8 million of share repurchases. Cash declined to $20.1 million from $25.5 million at December 31, 2015.
Total debt was $481.2 million at March 31, 2016, including $54.0 million drawn on the revolving credit facility, compared with $429.9 million at year-end. Revolving-credit availability was $335.0 million, with maturity in July 2020. Working capital deficiency improved to $2.3 million from $19.7 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased primarily because Q1 2016 included a full period of acquired Alaska operations; the acquisition was not reflected in Q1 2015 on the same basis.
- Ocean Transportation results were pressured by lower China freight rates and volume, higher depreciation and amortization, higher vessel operating expenses, acquisition-related overhead, and higher terminal-handling costs.
- China container volume decreased 18.1%, while Hawaii container volume increased 8.4%. Guam volume declined 3.5% following the launch of a competing U.S.-flagged service.
- SSAT contribution declined to $2.6 million from $3.4 million, reflecting lower lift volume and the absence of prior-year West Coast labor-disruption backlog benefits.
- Operating cash flow decreased $26.5 million, while capital expenditures increased $27.3 million year over year. The Company used additional revolver borrowings to help fund capital spending, share repurchases, and CCF deposits.
- The Company repurchased 518,600 shares for $20.8 million at an average price of $38.81 per share; 2,351,400 shares remained available under the repurchase program at March 31, 2016.
Guidance, Outlook, Risks, and Unusual Items
- Management expects full-year 2016 Hawaii container volume to be moderately above 2015, with most of the increase in the first half.
- Management expects challenging China trade conditions, historic-low market rates, chronic overcapacity, and China rates below its previous outlook.
- Alaska volume is expected to be modestly below the 67,300 containers carried by Horizon and Matson in 2015; Guam is expected to experience continued modest competitive volume losses.
- Full-year Ocean Transportation operating income is expected to be approximately 15% to 20% below the $187.8 million achieved in 2015. Second-quarter Ocean Transportation operating income is expected to approximate $31.4 million, the prior-year reported level.
- Logistics operating income is expected to modestly exceed the $8.5 million achieved in 2015. Expected 2016 interest expense is approximately $19.0 million, and the effective tax rate is approximately 39.0%.
- Expected 2016 spending includes approximately $65 million of maintenance capital expenditures, $67.2 million of new-vessel construction progress payments, and $60 million of dry-docking payments. Depreciation and amortization is expected to be approximately $133 million.
- Key risks include transpacific overcapacity and rate pressure, competitive losses in Guam and Alaska, economic conditions in served markets, vessel and dry-docking spending, environmental remediation exposure, pension and multi-employer withdrawal liabilities, and acquisition-related obligations.
- Management reported no material changes to previously disclosed legal proceedings, risk factors, market-risk exposures, contractual obligations, or critical accounting estimates. Pending legal matters are not expected to have a material effect based on management’s assessment.
- Horizon purchase-price and fair-value estimates remained preliminary and could be revised materially, particularly for property, intangible assets, debt, warrants, deferred taxes, and multi-employer withdrawal liabilities.
Important Facts for Investors to Verify
- Reconcile the year-over-year improvement in revenue with the decline in operating income, margins, and cash flow.
- Assess the sustainability of Hawaii volume gains and the impact of China rate declines and industry overcapacity.
- Monitor leverage, revolver usage, available liquidity, planned vessel construction payments, and dry-docking requirements.
- Review the final accounting for the Horizon acquisition and any changes to preliminary fair values or related liabilities.
- Evaluate whether the stated full-year Ocean Transportation and Logistics outlooks are achieved amid competitive and market-rate pressures.
- Confirm the effect of share repurchases and dividends on liquidity and shareholder returns.