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, China, Okinawa, and South Pacific markets and includes a 35% 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, 2017. MatNav’s operating period ended September 29, 2017. The company had 42.4 million common shares outstanding at September 30, 2017. Results include Span Alaska from its August 4, 2016 acquisition date.
Financial Metrics
| Metric | Q3 2017 | Q3 2016 | Change |
|---|---|---|---|
| Operating revenue | $543.9 million | $500.4 million | +8.7% |
| Operating income | $61.8 million | $46.7 million | +32.3% |
| Operating margin | 11.4% | 9.3% | +210 bps |
| Net income | $34.1 million | $25.3 million | +34.8% |
| Diluted EPS | $0.79 | $0.59 | +33.9% |
| Interest expense | $6.2 million | $6.0 million | +3.3% |
| Effective tax rate | 38.7% | 37.8% | +90 bps |
| Metric | Nine Months 2017 | Nine Months 2016 | Change |
|---|---|---|---|
| Operating revenue | $1,530.8 million | $1,422.3 million | +7.6% |
| Operating income | $124.1 million | $117.4 million | +5.7% |
| Operating margin | 8.1% | 8.3% | Down approximately 15 bps |
| Net income | $65.1 million | $61.4 million | +6.0% |
| Diluted EPS | $1.50 | $1.41 | +6.4% |
Q3 Ocean Transportation revenue increased 5.3% to $419.2 million and operating income increased 26.4% to $54.6 million, producing a 13.0% margin versus 10.9%. Logistics revenue increased 21.8% to $124.7 million and operating income increased 105.7% to $7.2 million, producing a 5.8% margin versus 3.4%. The Logistics improvement primarily reflected the inclusion of Span Alaska.
For the nine months, Ocean Transportation revenue rose 4.1% to $1,181.9 million, but operating income declined 1.8% to $108.1 million and margin declined to 9.1% from 9.7%. Logistics revenue rose 21.4% to $348.9 million, while operating income rose 119.2% to $16.0 million and margin increased to 4.6% from 2.5%.
Cash Flow, Liquidity, Debt, and Capital Spending
- Operating cash flow for the first nine months was $147.0 million, compared with $87.5 million in 2016.
- Investing cash outflow was $184.6 million, including $172.2 million of vessel construction expenditures and $43.3 million of other capital expenditures.
- Cash and cash equivalents increased to $24.7 million from $13.9 million at December 31, 2016.
- Working capital was positive at $18.5 million, compared with a $3.4 million deficiency at year-end 2016.
- Total debt was $839.3 million, including $175.0 million outstanding under the revolving credit facility, versus $738.9 million at December 31, 2016. Long-term debt was $810.1 million.
- Remaining revolving-credit availability was $464.5 million at September 30, 2017; the facility matures June 29, 2022.
- The company paid $25.2 million in dividends and repurchased $18.4 million of common stock during the first nine months.
- Capital construction fund cash on deposit declined to zero from $31.2 million at year-end, reflecting withdrawals used principally for new-vessel construction.
Material Changes Versus the Prior Comparable Period
- Q3 profitability improved substantially despite lower Hawaii and Guam volumes, supported by higher freight rates, China growth, favorable fuel-surcharge timing, stronger Alaska volumes, and increased SSAT income.
- Q3 Hawaii container volume declined 6.4% and Guam volume declined 22.6%; China volume increased 11.7% and Alaska volume increased 8.2%.
- For the first nine months, Ocean Transportation operating income declined because of lower Hawaii and Guam volumes and higher terminal-handling costs, partly offset by China performance, pricing, fuel-surcharge timing, and higher SSAT contributions.
- SSAT income increased to $7.5 million in Q3 and $19.3 million for the nine months, compared with $3.6 million and $9.2 million, respectively.
- The company recorded an immaterial correction related to post-retirement benefit plan liabilities. The correction reduced employee benefit liabilities by $36.8 million and accruals by $1.6 million, increased accumulated other comprehensive income by $22.5 million net of tax, and increased retained earnings by $0.9 million at December 31, 2016.
- The company repurchased 680,700 shares during Q3 at an average price of $25.04, leaving 1,151,288 shares available under the repurchase authorization.
Guidance, Outlook, Risks, and Unusual Items
- Management expects full-year 2017 Ocean Transportation operating income to be below the $142.7 million achieved in 2016.
- Full-year Logistics operating income is expected to be approximately $20 million, compared with $11.9 million in 2016, primarily because Span Alaska will be included for a full year.
- Expected 2017 EBITDA is modestly above the $290.0 million achieved in 2016. Expected depreciation and amortization is approximately $145 million, including approximately $46 million of dry-docking amortization.
- Expected 2017 interest expense is approximately $24 million and the effective tax rate is approximately 39%.
- Expected 2017 maintenance capital expenditures are approximately $50 million, vessel construction expenditures approximately $250 million, and dry-docking payments approximately $50 million.
- Management expects continued strong demand for the expedited China service but continued overcapacity in international container shipping. Hawaii construction-related volumes are weakening, Guam faces heightened competition, and Alaska’s energy-sector contraction may pressure northbound volumes.
- A potential future Hawaii competitor, TOTE, announced plans for a new service using four containerships with planned deliveries in 2020 and 2021. The filing notes uncertainty regarding whether the service will launch on the announced terms.
- The company states that environmental remediation risks and ordinary-course legal proceedings are not expected to have a material financial effect. No material changes to contractual obligations, market risk, or critical accounting estimates were reported.
- The company expects to adopt the new revenue-recognition standard through a retained-earnings adjustment at the beginning of 2018 and does not currently expect a significant impact. It is evaluating the future leases standard and expects no significant impact from the pension-cost presentation standard.
- The Board declared a $0.20-per-share dividend payable December 7, 2017.
Most Important Facts for Investors to Verify
- Whether Hawaii and Guam volume declines persist and whether new or expanded competitors affect rates, utilization, or market share.
- Progress, timing, and total cost of the four new Hawaii vessels and the related capital-construction funding and debt requirements.
- Whether Logistics can achieve approximately $20 million of 2017 operating income and sustain the improvement after the Span Alaska acquisition contribution normalizes.
- Compliance with debt covenants, the utilization and cost of the revolving credit facility, and the company’s ability to fund capital expenditures while maintaining dividends and repurchases.
- Actual full-year EBITDA, Ocean Transportation operating income, tax rate, interest expense, capital spending, and dry-docking expenditures relative to management’s guidance.
- Potential obligations associated with post-retirement benefits, multi-employer plans, environmental matters, and other contingencies.