Matson, Inc. — 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, Micronesia, the South Pacific and expedited China–Long Beach trade lanes; Logistics provides transportation brokerage, freight forwarding, warehousing and supply-chain services. The filing covers the three and six months ended June 30, 2017, compared with the corresponding 2016 periods.
Logistics results include Span Alaska, acquired August 4, 2016. The acquisition contributed $16.2 million of revenue and $4.9 million of operating income in the second quarter, and $28.8 million of revenue and $5.9 million of operating income for the six months ended June 30, 2017.
Key Financial Metrics
| Metric | Q2 2017 | Q2 2016 | Change | Six Months 2017 | Six Months 2016 |
|---|---|---|---|---|---|
| Total operating revenue | $512.5 million | $467.7 million | +9.6% | $986.9 million | $921.9 million |
| Operating income | $45.9 million | $36.1 million | +27.1% | $62.3 million | $70.7 million |
| Operating margin | 9.0% | 7.7% | +1.3 pts | 6.3% | 7.7% |
| Net income | $24.0 million | $18.0 million | +33.3% | $31.0 million | $36.1 million |
| Diluted EPS | $0.55 | $0.42 | +31.0% | $0.72 | $0.83 |
| Operating cash flow | Not separately provided | Not separately provided | — | $63.4 million | $78.8 million |
Q2 operating income margin was calculated from reported operating income and revenue. Segment operating margins were 9.9% for Ocean Transportation and 5.8% for Logistics in Q2 2017, compared with 9.1% and 2.3%, respectively, in Q2 2016.
- Ocean Transportation revenue was $392.7 million in Q2 and $762.7 million year to date; operating income was $39.0 million in Q2 and $53.5 million year to date.
- Logistics revenue was $119.8 million in Q2 and $224.2 million year to date; operating income was $6.9 million in Q2 and $8.8 million year to date.
- Cash and cash equivalents were $15.3 million at June 30, 2017, versus $13.9 million at December 31, 2016. Working capital was a $5.9 million surplus, compared with a $5.0 million deficiency at year-end.
- Total debt was $753.9 million, including $85.0 million drawn on the revolving credit facility, compared with $738.9 million at December 31, 2016. Remaining revolving-facility availability was $554.5 million.
- Net cash used in investing activities was $52.4 million, including $46.2 million of vessel construction expenditures and $37.1 million of other capital expenditures, partially offset by $43.4 million withdrawn from the Capital Construction Fund.
- Cash dividends were $0.19 per share in Q2; the board declared a $0.20 per-share dividend payable September 7, 2017.
Material Changes Versus the Prior Comparable Period
- Q2 revenue and profitability improved primarily from higher fuel-surcharge revenue, higher China freight rates and volume, favorable fuel-surcharge collection timing, improved SSAT joint-venture contribution and the inclusion of Span Alaska.
- Ocean Transportation Q2 revenue increased 5.9% and operating income increased 15.0%. China container volume rose 15.0%, while Hawaii, Alaska and Guam volumes declined.
- Ocean Transportation six-month operating income declined 20.0% despite 3.5% revenue growth, reflecting higher terminal handling costs, higher dry-docking amortization and weaker Hawaii and Guam volumes.
- Logistics Q2 revenue increased 23.8% and operating income increased 213.6%; six-month revenue increased 21.3% and operating income increased 131.6%, primarily because of Span Alaska.
- Six-month operating cash flow declined $15.4 million, mainly due to lower net income, increases in accounts receivable and prepaid assets, and higher dry-docking payments.
- Debt increased $15.0 million from year-end, while net borrowing under the revolving facility was $30.0 million for the first six months. Share repurchases were $1.3 million, versus $32.3 million in the prior-year period.
- SSAT contributed $6.9 million in Q2 and $11.8 million year to date, compared with $3.0 million and $5.6 million, respectively, in 2016.
Guidance, Outlook, Risks and Unusual Items
- Management expects full-year 2017 Ocean Transportation operating income to be below the $141.3 million achieved in 2016. Q3 Ocean Transportation operating income is expected to be moderately above the $42.7 million achieved in Q3 2016.
- Management expects 2017 Logistics operating income of approximately $20 million, compared with $11.9 million in 2016, and Q3 Logistics operating income approximately double the $3.5 million achieved in Q3 2016.
- Full-year guidance includes depreciation and amortization of approximately $150 million, EBITDA approximating 2016's $288.6 million, interest expense of approximately $25 million and an effective tax rate of approximately 39%.
- Expected 2017 capital spending includes approximately $50 million of maintenance capital, $242 million of vessel construction expenditures and $50 million of dry-docking payments.
- Remaining contractual commitments for four new Hawaii-service vessels totaled $761.1 million at June 30, 2017, including $198.5 million due in 2017 and $537.2 million due in 2018–2019.
- Hawaii container volumes are expected to be modestly lower for 2017; Alaska volumes are expected to remain modestly lower because of energy-sector contraction; Guam faces heightened competition; and China demand is expected to remain strong for the expedited service.
- A shipyard announced a letter of intent for up to four new containerships for the U.S. West Coast–Hawaii trade, potentially increasing competitive capacity. The agreement remained subject to negotiation and other conditions.
- The amended revolving credit facility, effective June 29, 2017, provides committed borrowing capacity of up to $650 million, with an uncommitted increase option of up to $250 million, and matures June 29, 2022. Key covenants include minimum interest coverage of 3.50 to 1.0 and maximum leverage generally of 3.25 to 1.0, with specified exceptions.
- Management reported no material changes to contractual obligations, contingencies or market-risk disclosures other than those described in the filing. Environmental and ordinary-course legal matters were not expected to materially affect results.
- The company was evaluating new revenue-recognition and lease accounting standards. It expected no significant impact from revenue recognition adoption and planned adoption through an opening retained-earnings adjustment in the first quarter of 2018.
Most Important Facts to Verify
- Whether vessel construction commitments of $761.1 million and planned 2017 capital expenditures can be funded while maintaining debt-covenant compliance.
- The sustainability of China volume and rate gains and the extent of competitive pressure in Hawaii and Guam.
- Whether the Span Alaska acquisition can deliver the projected approximately $20 million of 2017 Logistics operating income.
- The drivers of the six-month decline in Ocean Transportation operating income and operating cash flow.
- Actual 2017 EBITDA, tax rate, interest expense and segment results versus management guidance.
- Future SSAT contributions, fuel-surcharge timing and dry-docking costs, which materially affected quarter-to-quarter comparability.