Matson, Inc. 2020 Q1 Form 10-Q Summary
Business context and reporting period
Matson provides ocean transportation and logistics services, primarily serving Hawaii, Alaska, Guam, China, Micronesia, Japan and the South Pacific. Reported segments are Ocean Transportation and Logistics; the 35%-owned SSAT terminal joint venture is included in Ocean Transportation. The filing covers the three months ended March 31, 2020; MatNav’s corresponding period ended March 27, 2020. Results were materially affected by the emerging COVID-19 pandemic.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Operating revenue | $513.9 million | $532.4 million | Down 3.5% |
| Operating income | $13.0 million | $17.5 million | Down 25.7% |
| Operating margin | 2.5% | 3.3% | Down 0.8 percentage points |
| Net income | $3.8 million | $12.5 million | Down 69.6% |
| Diluted EPS | $0.09 | $0.29 | Down $0.20 |
| Net cash from operations | $68.6 million | $33.4 million | Up $35.2 million |
- Ocean Transportation revenue increased 0.8% to $400.9 million, while operating income declined 16.0% to $7.9 million; the segment margin decreased to 2.0% from 2.4%.
- Logistics revenue declined 16.0% to $113.0 million, and operating income declined 37.0% to $5.1 million; the segment margin decreased to 4.5% from 6.0%.
- Interest expense increased to $8.6 million from $4.6 million, primarily because less vessel-construction interest was capitalized.
- Cash and cash equivalents were $19.9 million at March 31, 2020, compared with $21.2 million at December 31, 2019. Cash, cash equivalents and restricted cash totaled $25.7 million.
- Total debt was $924.9 million, down from $958.4 million at year-end 2019. Debt included $357.0 million outstanding under the revolving credit facility, with $163.6 million of remaining borrowing availability and $7.7 million of letters of credit outstanding.
- Working capital deficiency increased to $162.2 million from $147.1 million at December 31, 2019.
- Shareholders’ equity was $800.2 million, compared with $805.7 million at year-end 2019. The company paid a quarterly dividend of $0.22 per share and declared the same amount for payment June 4, 2020.
Material changes versus the prior comparable period
- Revenue decreased $18.5 million, primarily because Logistics revenue fell $21.5 million; Ocean Transportation revenue increased $3.0 million.
- Profitability deteriorated as operating income fell $4.5 million and net income fell $8.7 million. The decline reflected weaker Logistics results, lower SSAT earnings, lower China contribution and higher depreciation.
- SSAT contribution declined to $4.0 million from $8.5 million, primarily due to additional lease-accounting expense and lower lift volume from canceled transpacific sailings.
- Operating cash flow increased to $68.6 million, supported in part by favorable timing of accounts payable, accruals and other liabilities; accounts receivable used $12.9 million of cash.
- Capital expenditures were $35.2 million, consisting of $9.1 million of vessel-construction expenditures and $26.1 million of other capital expenditures. The company also received $14.3 million from a sale-and-leaseback of chassis and container equipment.
- The newly constructed vessel Lurline entered service, and $308.2 million was transferred from vessel construction in progress to vessels.
- The company adopted the expected-credit-loss standard effective January 1, 2020; the initial impact on the allowance for doubtful accounts was not material.
Guidance, outlook, commentary and risks
- Matson withdrew its full-year 2020 outlook on April 6, 2020 because of increasing economic uncertainty related to COVID-19.
- COVID-19 increased Hawaii and Alaska demand for home food and essential goods, but sharply reduced tourism and is expected to adversely affect Hawaii, Guam and Alaska economies. China volumes declined because of extended post-Lunar New Year shutdowns and supply-chain disruptions.
- Q1 container volumes changed as follows: Hawaii containers up 1.7%, Alaska containers up 11.0%, China containers down 6.5%, Guam containers down 3.9%, and Hawaii automobiles down 21.8%.
- On March 31, 2020, Matson amended its revolving credit agreement and private debt agreements. The amendments increased permitted leverage thresholds through December 2021, added restrictions on repurchases, asset sales and priority debt, and increased potential pricing and fee obligations.
- On April 27, 2020, MatNav obtained $185.9 million of Title XI financing at a 1.22% cash interest rate. After an approximately $8.7 million fee, approximately $177 million of net proceeds were used to reduce outstanding debt. This financing occurred after the quarter-end balance sheet date.
- The company was in compliance with applicable debt covenants at March 31, 2020. Principal risks include prolonged COVID-19 effects, reduced tourism and freight demand, customer financial distress, restricted credit access, leverage-covenant compliance, fuel-price and IMO 2020 compliance costs, labor disruptions, weather and vessel risks, environmental regulation, Jones Act eligibility, and potential goodwill or intangible-asset impairment.
- Management determined that COVID-19 had not triggered a goodwill or intangible impairment as of March 31, 2020, but warned that a more prolonged or severe pandemic could require a non-cash impairment charge.
- The company expects delivery of the second Kanaloa Class vessel, Matsonia, in the fourth quarter of 2020, subject to shipbuilding and supply-chain risks.
Investor verification points
- Verify the pace and duration of COVID-19 effects on tourism, freight volumes, rates and Logistics demand in subsequent filings.
- Monitor liquidity after the April 2020 Title XI refinancing, including debt reduction, borrowing availability, interest costs and covenant headroom.
- Assess whether the working capital deficiency and reliance on the revolving facility remain manageable.
- Track SSAT earnings, transpacific volumes and the sustainability of Ocean Transportation margins.
- Review delivery, financing and operating performance of Matsonia and the utilization of Lurline.
- Evaluate potential impairment of goodwill and intangible assets if market capitalization, forecasts or economic conditions deteriorate.