Matson, Inc. Form 10-K Summary
Business context and reporting period
Matson provides ocean transportation and logistics services through two segments: Ocean Transportation and Logistics. Ocean Transportation serves Hawaii, Alaska, Guam, China, Japan, Micronesia and the South Pacific, while Logistics provides transportation brokerage, freight forwarding, warehousing and supply-chain services. This filing covers the fiscal year ended December 31, 2017, comprising 52 weeks; the comparable 2016 year comprised 53 weeks. Fourth-quarter 2017 results are included in the quarterly information.
Financial performance and key metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Operating revenue | $2,046.9 million | $1,941.6 million | 5.4% |
| Operating income | $149.4 million | $154.6 million | (3.4%) |
| Operating margin | 7.3% | 8.0% | Down 0.7 points |
| Income before taxes | $125.2 million | $130.5 million | (4.1%) |
| Net income | $232.0 million | $81.4 million | 185.0% |
| Diluted EPS | $5.37 | $1.87 | 187.2% |
| Operating cash flow | $224.9 million | $157.8 million | 42.5% |
| Total capital expenditures | $307.0 million | $179.4 million | 71.1% |
| Total debt | $857.1 million | $738.9 million | 16.0% |
- Ocean Transportation revenue increased 2.0% to $1,571.8 million, while operating income declined 9.7% to $128.8 million and margin declined to 8.2% from 9.3%.
- Logistics revenue increased 18.6% to $475.1 million, and operating income increased 73.1% to $20.6 million; margin improved to 4.3% from 3.0%. Results benefited from the full-year contribution of Span Alaska, acquired in August 2016.
- Ocean Transportation volumes were mixed: Hawaii containers declined 6.5%, Hawaii automobiles declined 10.9%, Alaska containers declined 1.5%, China containers increased 7.1%, and Guam containers declined 18.1%.
- SSAT terminal joint-venture income increased to $28.2 million from $15.8 million, primarily due to improved lift volume.
- Cash and cash equivalents were $19.8 million at year-end, with $294.7 million of available borrowing under the revolving credit facility. Working capital was negative $20.3 million.
- Net cash used in investing activities was $276.9 million, including $252.0 million of vessel construction expenditures. Net cash provided by financing activities was $57.9 million.
- Shareholders’ equity increased to $678.2 million from $494.9 million. The company declared $0.78 per share of dividends in 2017 and repurchased $19.3 million of common stock.
Material changes versus the prior comparable period
- Revenue growth was more than offset at the operating level by higher costs, including higher terminal handling costs, lower Hawaii and Guam volumes, and increased capital-related expenses.
- Reported net income was significantly higher because 2017 included a $155.0 million non-cash tax benefit from remeasurement of deferred tax assets and liabilities and other discrete effects of the Tax Cuts and Jobs Act. Excluding this benefit, 2017 income tax expense would have been $48.2 million and the effective tax rate approximately 38.5%.
- Debt increased by $118.2 million, primarily to fund construction of four new vessels and other capital and dry-docking expenditures.
- Capital spending increased substantially as the company progressed the construction of four vessels and continued terminal modernization.
- The company corrected an immaterial prior-period post-retirement benefit accounting error, increasing 2016 operating income by $1.4 million and retained earnings at December 31, 2016 by $0.9 million.
Fourth-quarter 2017, outlook and unusual items
- Fourth-quarter operating revenue was $516.1 million, operating income was $25.3 million, and net income was $166.9 million, including a $147.0 million tax benefit. Diluted EPS was $3.90.
- Fourth-quarter Ocean Transportation revenue was $389.9 million and operating income was $20.7 million. Logistics revenue was $126.2 million and operating income was $4.6 million.
- Management expected 2018 Ocean Transportation operating income to approximate 2017 levels, with flat-to-modest Hawaii volume growth, modestly lower China volume, continued competitive pressure in Guam, and Alaska volume approximately stable.
- Management expected 2018 Logistics operating income to increase modestly. Expected 2018 depreciation and amortization was approximately $135 million, EBITDA was expected to be below 2017’s $296.0 million, interest expense approximately $22 million, and the effective tax rate approximately 28%.
- Expected 2018 spending included approximately $68 million of maintenance capital expenditures, $436 million of vessel construction expenditures and $18 million of dry-docking payments.
- Four new dual-fuel-capable vessels, with combined contractual construction obligations of approximately $924.5 million, were expected to be delivered from the third quarter of 2018 through the second quarter of 2020. They are intended to replace aging steamships before January 2020 emissions requirements become effective.
Risks, contingencies and commitments
- Key risks include economic and freight-volume weakness, fuel-price volatility and imperfect fuel-surcharge recovery, increased competition, labor disruptions, weather and natural disasters, vessel accidents, cybersecurity failures, foreign-market risks and dependence on third-party transportation capacity.
- Approximately 72% of 2017 Ocean Transportation revenue came from Hawaii and Alaska trades subject to the Jones Act. Repeal, waiver or material amendment of the Jones Act could increase competition from foreign-built or foreign-flag vessels.
- Contractual obligations totaled approximately $2.13 billion, including $559.5 million of remaining vessel-construction obligations, $857.1 million of debt principal, $216.7 million of estimated debt interest, $227.6 million of operating leases and $92.6 million of undiscounted multi-employer pension withdrawal payments.
- The company estimated multi-employer pension withdrawal obligations of $261.5 million, although no withdrawal liability was recorded for plans from which it does not expect to withdraw. The recorded present value of the Horizon-related Puerto Rico withdrawal liability was $62.5 million.
- Debt agreements require, among other items, minimum interest coverage of 3.50 to 1.0 and maximum leverage of 3.25 to 1.0, with specified exceptions. The company reported compliance at December 31, 2017.
- Management stated that legal matters arising in the ordinary course and environmental matters were not expected to have a material effect, but environmental remediation, uninsured claims and regulatory changes could produce material costs.
Investor verification checklist
- Verify the sustainability of operating performance excluding the $155.0 million non-cash tax benefit.
- Assess whether Ocean Transportation margins recover as new vessels enter service and whether Guam competition and Hawaii construction-cycle weakness persist.
- Reconcile 2018 vessel-construction and terminal-modernization spending with operating cash flow, debt capacity and covenant headroom.
- Review vessel delivery schedules, contractual protections and potential cost or construction delays.
- Examine fuel prices, surcharge timing and the effect of emissions regulations on operating costs.
- Evaluate multi-employer pension exposure, labor-contract expirations and the company’s negative working capital position.
- Confirm subsequent adoption effects of new revenue-recognition and lease accounting standards, which were not expected to be material for revenue recognition but could affect balance-sheet presentation.