Matson, Inc. 2019 Q2 Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2019; MatNav’s operational period ended June 28, 2019. Financial statements are unaudited. Matson provides Ocean Transportation and Logistics services, including Hawaii, Alaska, Guam, China, Micronesia, South Pacific and logistics markets.
Financial Performance and Position
| Metric | Three Months 2019 | Three Months 2018 | Six Months 2019 | Six Months 2018 |
|---|---|---|---|---|
| Operating revenue | $557.9 million | $557.1 million | $1,090.3 million | $1,068.5 million |
| Operating income | $31.0 million | $46.0 million | $48.5 million | $74.7 million |
| Operating margin | 5.6% | 8.3% | 4.4% | 7.0% |
| Net income | $18.4 million | $32.6 million | $30.9 million | $46.8 million |
| Diluted EPS | $0.43 | $0.76 | $0.72 | $1.09 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $108.2 million | $119.1 million |
- Second-quarter revenue increased 0.1%, but operating income declined 32.6%, net income declined 43.6%, and diluted EPS declined 43.4% year over year.
- Six-month revenue increased 2.0%, while operating income declined 35.1%, net income declined 34.0%, and diluted EPS declined 33.9%.
- Ocean Transportation revenue increased 2.2% in the quarter and 3.5% year to date, but operating income fell 46.0% and 52.3%, respectively. Margins declined to 4.7% from 9.0% in the quarter and to 3.6% from 7.8% year to date.
- Logistics revenue decreased 5.3% in the quarter and 2.0% year to date, while operating income increased 18.9% and 41.6%, respectively. Margins improved to 7.9% from 6.3% in the quarter and to 7.0% from 4.8% year to date.
- SSAT Terminal Joint Venture contribution declined to $0.9 million from $9.1 million in the quarter and to $9.4 million from $19.6 million year to date.
Cash Flow, Debt and Liquidity
- Six-month operating cash flow was $108.2 million, down from $119.1 million. Investing cash use was $66.8 million, compared with $180.4 million in 2018, primarily reflecting lower vessel construction spending.
- Capital expenditures included $30.6 million of vessel construction and $38.4 million of other capital expenditures during the first six months. The second new vessel, MV Kaimana Hila, entered service during the quarter after approximately $211.8 million was transferred from construction in progress.
- Cash, cash equivalents and restricted cash totaled $32.7 million at June 30, 2019, including $24.0 million of unrestricted cash and $8.7 million of restricted cash.
- Total debt was $844.6 million, down from $856.4 million at December 31, 2018. The revolving credit facility had $217.8 million of remaining availability and matures June 29, 2022.
- Working capital deficiency increased to $135.8 million from $52.4 million, partly because ASC 842 added $57.4 million of current operating lease liabilities.
- Operating lease liabilities totaled $246.4 million at present value, including $189.0 million long term. Management stated that ASC 842 did not significantly affect current earnings, liquidity or debt covenants.
- The company paid $18.2 million in dividends during the first six months. A $0.22-per-share dividend was declared for payment September 5, 2019.
Material Changes and Unusual Items
- Higher vessel operating costs, including the MV Maunalei lease expense, higher terminal handling costs, lower Hawaii volume and lower SSAT earnings reduced Ocean Transportation profitability.
- SSAT results were pressured by higher terminal operating costs, additional lease-accounting expense and the absence of favorable one-time items recorded in the prior-year period. Approximately $5.8 million of lease-related costs were expected to reverse and benefit SSAT results in the second half of 2019.
- The company adopted ASC 842 on January 1, 2019, recognizing approximately $251.4 million of right-of-use assets, $259.1 million of operating lease liabilities and a $4.4 million cumulative-effect increase to retained earnings.
- A $2.9 million non-cash tax benefit was recorded in the first six months of 2019 following IRS guidance that refundable AMT credits would not be subject to sequestration. The comparable 2018 period included a $3.1 million non-cash tax expense.
- Second-quarter volumes were mixed: Hawaii containers decreased 2.3%, Alaska containers increased 8.0%, China containers increased 2.5%, Guam was flat and other container volume increased 29.7%.
Outlook, Risks and Contingencies
- Management expected full-year 2019 Ocean Transportation operating income to be approximately 20% below 2018’s $131.1 million, after considering the full-year $7.2 million net operating expense impact of the MV Maunalei sale-leaseback.
- Management raised its Logistics outlook and expected 2019 operating income to increase approximately 10% to 15% over 2018’s $32.7 million.
- Expected 2019 EBITDA was approximately $270 million; net income was expected to decline year over year. Expected interest expense was approximately $25 million and the effective tax rate approximately 26.0%, excluding the $2.9 million first-quarter tax benefit.
- Expected 2019 depreciation and amortization was approximately $133 million, including $38 million of dry-docking amortization. The scrubber program increased full-year depreciation and amortization by an estimated $4.2 million.
- Expected 2019 capital spending included approximately $100 million of other capital expenditures, $215 million of vessel construction expenditures and $20 million of dry-docking payments.
- Key risks include weaker Hawaii freight demand, normalization of China volumes after elevated 2018 activity, competition in Guam, terminal operating costs, fuel and operating costs, vessel construction and dry-docking requirements, environmental remediation exposure, lease obligations, tax-law developments and general litigation.
- Management reported no material changes to previously disclosed risk factors, contractual obligations, contingencies or market-risk exposures. It stated that existing legal matters were not expected to materially affect financial condition, results or cash flows.
Investor Verification Points
- Verify the sustainability of Ocean Transportation margins and the extent to which SSAT cost pressures and lease-related items reverse in the second half of 2019.
- Track Hawaii freight volumes, China volume normalization and freight-rate trends against management’s full-year assumptions.
- Reconcile projected 2019 EBITDA, capital expenditures, vessel construction funding and debt reduction with subsequent filings.
- Assess liquidity using unrestricted cash, revolving-credit availability, scheduled debt maturities and the substantial operating lease commitments.
- Separate recurring operating performance from the $2.9 million tax benefit, prior-year tax adjustments, accelerated dry-docking amortization and other unusual items.