Matson, Inc. 2020 Q3 Form 10-Q Summary
Business Context and Reporting Period
Matson provides ocean transportation and logistics services through two reportable segments: Ocean Transportation and Logistics. Ocean Transportation serves Hawaii, Alaska, Guam, China, Micronesia, Japan and the South Pacific and includes Matson’s 35% equity interest in SSA Terminals, LLC. Logistics provides transportation brokerage, freight forwarding, warehousing and supply-chain services.
This unaudited filing covers the quarter and nine months ended September 30, 2020, compared with the corresponding 2019 periods. MatNav’s reporting period ended September 25, 2020. Results reflect significant COVID-19-related economic and tourism disruptions.
Financial Performance and Key Metrics
| Metric | Q3 2020 | Q3 2019 | Change |
|---|---|---|---|
| Total operating revenue | $645.2 million | $572.1 million | +12.8% |
| Operating income | $98.4 million | $55.2 million | +78.3% |
| Net income | $70.9 million | $36.2 million | +95.9% |
| Diluted EPS | $1.63 | $0.84 | +94.0% |
| Operating margin | 15.2% | 9.6% | +5.6 percentage points |
| Net margin | 11.0% | 6.3% | +4.7 percentage points |
| Metric | Nine Months 2020 | Nine Months 2019 | Change |
|---|---|---|---|
| Total operating revenue | $1,683.2 million | $1,662.4 million | +1.3% |
| Operating income | $162.6 million | $103.7 million | +56.8% |
| Net income | $107.5 million | $67.1 million | +60.2% |
| Diluted EPS | $2.48 | $1.55 | +60.0% |
| Operating margin | 9.7% | 6.2% | +3.5 percentage points |
| Net margin | 6.4% | 4.0% | +2.4 percentage points |
Q3 Ocean Transportation revenue increased 14.0% to $498.3 million, while segment operating income nearly doubled to $86.5 million and margin expanded to 17.4% from 10.0%. Logistics revenue increased 8.9% to $146.9 million, but operating income rose only 5.3% to $11.9 million and margin declined to 8.1% from 8.4%.
For the first nine months, Ocean Transportation revenue increased 4.8% to $1,310.0 million and operating income increased 87.3% to $136.7 million. Logistics revenue declined 9.4% to $373.2 million and operating income declined 15.6% to $25.9 million.
Net cash provided by operating activities was $270.8 million for the first nine months, compared with $180.4 million in 2019. Investing cash use was $95.6 million versus $168.3 million, while financing cash use was $187.9 million versus $4.3 million. Ending cash, cash equivalents and restricted cash declined to $15.7 million from $32.3 million.
At September 30, 2020, cash and cash equivalents were $12.7 million, restricted cash was $3.0 million and accounts receivable were $234.3 million. Working capital was negative $164.0 million, compared with negative $147.1 million at December 31, 2019.
Total debt was $823.6 million, down from $958.4 million at year-end 2019. Current debt was $53.4 million and long-term debt, net of deferred loan fees, was $754.5 million. The company reported $518.9 million of remaining revolving-credit availability, subject to applicable covenants, with the facility maturing June 29, 2022.
Material Changes Versus the Prior Comparable Period
- Growth was led by the China service, including the CLX+ expedited service and higher CLX capacity. China container volume increased 124.7% in Q3 and 66.7% year to date.
- Hawaii container volume declined 0.8% in Q3 and 1.1% year to date, while Hawaii automobile volume declined 17.8% in Q3 and 30.4% year to date, reflecting reduced tourism and COVID-19 mitigation measures.
- Alaska container volume increased 1.5% in Q3 and 0.7% year to date. Guam volume increased 2.1% in Q3 but declined 4.8% year to date.
- Ocean Transportation profitability benefited from the stronger China service, CLX+, lower vessel operating costs and the impact of one fewer vessel operating in Hawaii. Fuel-related surcharge timing also benefited Q3 results.
- SSAT contributed $7.7 million in Q3 and $15.4 million year to date, down from $8.4 million and $17.8 million, respectively, primarily because of lower lift volume.
- Logistics improved in Q3 as the U.S. economy reopened and e-commerce and high-demand goods supported business lines; however, year-to-date results remained below 2019 due to earlier weakness in transportation brokerage and freight forwarding.
- The newly constructed Lurline entered service during the first nine months, with $308.2 million transferred from vessel construction in progress to vessels.
- The company issued $325.5 million of new Title XI debt, repaid $204.2 million of debt and reduced revolving-credit borrowings by $256.1 million. It also paid $18.5 million of financing costs.
- The company adopted the expected-credit-loss standard effective January 1, 2020; the adoption impact was not material. No goodwill impairment-triggering event was identified during Q3.
Guidance, Outlook, Risks and Unusual Items
Management expected the businesses to continue performing well and generate strong financial results in the fourth quarter of 2020. Management identified continued e-commerce consumption, high-demand goods and possible air-cargo disruption as opportunities for CLX and CLX+. No specific quantitative earnings or revenue guidance was provided.
COVID-19 remained the principal near-term uncertainty. Lower tourism was expected to continue affecting Hawaii, Guam and Alaska, while customer financial difficulties, supply-chain disruptions, employee availability, port operations and vessel maintenance could adversely affect results. The ultimate duration and severity of the pandemic could not be reasonably estimated.
Other material risks include competition and excess shipping capacity, fuel prices and recovery of fuel surcharges, IMO 2020 compliant-fuel costs, labor disruptions, weather and natural disasters, vessel accidents and dry-docking costs, cybersecurity and information-technology failures, environmental regulation, Jones Act compliance, access to credit and compliance with debt covenants.
The company expected the second Kanaloa Class vessel, Matsonia, to be delivered in the fourth quarter of 2020. It is investing approximately $60 million in the first phase of Sand Island terminal modernization. Future goodwill or intangible-asset impairment charges remain possible if COVID-19 or other conditions reduce estimated reporting-unit cash flows or valuations.
The board declared a quarterly dividend of $0.23 per share payable December 3, 2020. Management stated that no material changes occurred during the quarter to contractual obligations, contingencies, market-risk exposure or critical accounting estimates. Legal matters arising in the ordinary course were not expected to have a material effect, and management stated that the company was materially compliant with environmental laws.
Investor Verification Checklist
- Verify the sustainability of China-service and CLX+ volumes, pricing premiums, charter costs and profitability as pandemic-related demand normalizes.
- Monitor Hawaii, Guam and Alaska tourism, economic conditions, freight volumes and automobile demand.
- Review available revolver capacity, debt maturities, covenant compliance and refinancing requirements, particularly the June 2022 revolver maturity.
- Assess liquidity in light of low cash balances, negative working capital, capital expenditures, vessel commitments and dividend payments.
- Track delivery, commissioning and operating performance of Matsonia and the costs and timing of terminal modernization.
- Evaluate exposure to fuel prices, IMO 2020 compliance costs, fuel-surcharge recovery and vessel scrubber projects.
- Review potential goodwill, intangible-asset, pension, environmental and multi-employer pension liabilities.
- Confirm management’s Q4 2020 outlook against actual segment volumes, margins and cash generation.