Matson, Inc. 2015 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Matson provides ocean transportation and logistics services. Ocean Transportation serves Hawaii, Guam, Micronesia, the South Pacific, and an expedited China-to-Long Beach service; Logistics provides intermodal, highway brokerage, warehousing, and distribution services. This unaudited filing covers the three months ended March 31, 2015, compared with the three months ended March 31, 2014.
Financial Performance and Liquidity
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total operating revenue | $398.2 million | $392.5 million | 1.5% |
| Operating income | $44.9 million | $9.9 million | 353.5% |
| Operating margin | 11.3% | 2.5% | Up 8.8 percentage points |
| Income before taxes | $40.6 million | $5.8 million | 600.0% |
| Net income | $25.0 million | $3.4 million | 635.3% |
| Diluted EPS | $0.57 | $0.08 | 612.5% |
| Operating cash flow | $46.3 million | $30.1 million | Up $16.2 million |
- Ocean Transportation revenue increased 3.7% to $305.5 million, while operating income rose to $43.9 million from $9.4 million. The segment margin improved to 14.4% from 3.2%.
- Logistics revenue declined 5.3% to $92.7 million, but operating income doubled to $1.0 million; the margin improved to 1.1% from 0.5%.
- Cash and cash equivalents were $325.8 million at March 31, 2015, up from $293.4 million at December 31, 2014. Accounts receivable were $201.8 million, producing $527.6 million of cash and accounts receivable liquidity.
- Working capital was $331.2 million, compared with $296.0 million at year-end 2014. Capital Construction Fund deposits were $27.5 million.
- Total debt was $371.2 million, down from $373.6 million at December 31, 2014, consisting of $21.6 million current debt and $349.6 million long-term debt. Fixed-rate debt had a carrying value of $371.2 million and estimated fair value of $397.3 million.
- Capital expenditures were $3.3 million. Dividends paid were $7.5 million, and the quarterly dividend was increased to $0.17 per share from $0.16 in the prior-year quarter.
Material Changes Versus the Prior Comparable Period
- The substantial improvement in operating income primarily reflected higher China freight rates, timing of fuel-surcharge collections, improved Hawaii and Guam container yields, lower operating costs, and stronger results from the SSAT terminal joint venture.
- SSAT contributed $3.4 million of income, compared with $0.2 million in the prior-year quarter, partly due to increased lift volume.
- Ocean Transportation volume was mixed: Hawaii containers increased 0.3%, China containers increased 5.1%, Guam containers decreased 5.0%, Micronesia/South Pacific containers decreased 18.8%, and Hawaii automobiles decreased 31.5%.
- Logistics revenue was pressured by lower international intermodal volume associated with West Coast port congestion and lower fuel-surcharge revenue. Warehouse and yield improvements supported the increase in segment profit.
- Interest expense increased to $4.3 million from $4.1 million. The effective tax rate declined to 38.4% from 41.4%, primarily because of prior-year tax-liability uncertainties, partly offset by nondeductible acquisition-related charges in 2015.
- Operating cash flow increased despite higher accounts receivable, supported by higher net income, increased accounts payable and accrued liabilities, and lower deferred dry-docking payments.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Matson expected to close its acquisition of Horizon Lines’ Alaska operations by the end of the second quarter of 2015, subject to the Pasha Hawaii transaction and other customary conditions. The approximately $456 million transaction was expected to be funded with cash on hand and revolving-credit borrowings. The 2015 outlook excluded the transaction’s future effects.
- For 2015, management expected Ocean Transportation operating income to be moderately higher than 2014 and Logistics operating income to exceed 2014’s $8.9 million, driven by volume growth, expense control, and warehouse improvements.
- Management expected higher competition and additional containership capacity in Hawaii, continued strong demand and premium rates for the expedited China service, and modest SSAT profit despite West Coast port congestion.
- Expected 2015 interest expense was slightly below 2014’s $17.3 million, with an effective tax rate of approximately 38.5%. Maintenance capital expenditures were expected to be approximately $40.0 million, plus $33.4 million of scheduled payments for two vessels under construction.
- The company pleaded guilty in January 2015 to two misdemeanor violations related to the September 2013 Honolulu Harbor molasses release and paid $1.0 million in fines and restitution. Potential civil claims and related costs remain unresolved and cannot be estimated; management stated that the ultimate impact could be material.
- Collective bargaining agreements covering West Coast longshore labor had expired, although a tentative five-year PMA/ILWU agreement had been announced. Hawaii and Oakland agreements were also expired or operating under extensions. Failure to reach or ratify agreements could result in slowdowns, strikes, lockouts, or other disruptions.
- The filing states that there were no material changes to contractual obligations, market-risk information, critical accounting estimates, or previously disclosed risk factors. The company reported no off-balance-sheet arrangements.
Important Facts Investors Should Verify
- Whether the Horizon acquisition and related Pasha transaction closed on schedule, the final purchase price and financing, and the resulting effect on leverage and earnings.
- Whether the strong China pricing and fuel-surcharge timing benefits persisted beyond the first quarter.
- The status and financial exposure of unresolved civil, environmental, or governmental claims related to the molasses release.
- Ratification and implementation of the PMA/ILWU agreement and the status of Matson’s Hawaii and Oakland labor negotiations.
- Actual 2015 capital expenditures, vessel-construction payments, Capital Construction Fund contributions, and free cash flow relative to management’s expectations.