Matson, Inc. — Form 10-Q Summary
Business context and reporting period
Matson provides ocean transportation and logistics services, primarily serving Hawaii, Alaska, Guam, Micronesia, the South Pacific, and a premium China–Long Beach service. The filing covers the quarter and six months ended June 30, 2015; MatNav’s reporting period ended June 26, 2015. Results are unaudited.
On May 29, 2015, Matson completed the acquisition of Horizon Lines’ Alaska operations and related non-Hawaii assets and liabilities. The reported results include Alaska operations from May 29 through June 30, 2015.
Financial metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Operating revenue | $447.6 million | $436.4 million | $845.8 million | $828.9 million |
| Operating income | $33.7 million | $35.7 million | $78.6 million | $45.6 million |
| Operating margin | 7.5% | 8.2% | 9.3% | 5.5% |
| Net income | $9.9 million | $18.1 million | $34.9 million | $21.5 million |
| Diluted EPS | $0.23 | $0.42 | $0.79 | $0.50 |
| Operating cash flow | Not separately provided | Not separately provided | $102.9 million | $49.2 million |
- Ocean Transportation revenue increased 8.0% in Q2 and 5.9% year to date; segment operating income was $31.4 million in Q2 and $75.3 million year to date.
- Logistics revenue declined 12.5% in Q2 and 9.2% year to date; segment operating income was $2.3 million in Q2 and $3.3 million year to date.
- Q2 income before taxes was $29.1 million, and the effective tax rate was 66.0%, compared with 42.0% in the prior-year quarter. The rate included a $4.8 million non-cash deferred tax asset write-off, reducing Q2 EPS by $0.11.
- Cash and cash equivalents were $15.8 million at June 30, 2015, compared with $293.4 million at December 31, 2014. Working capital declined to $16.2 million from $296.0 million.
- Total debt was $516.6 million, including $152.5 million outstanding under the revolving credit facility, versus $373.6 million at December 31, 2014. Revolver availability was $215.9 million.
- Six-month capital expenditures were $12.2 million. Dividends paid were $14.9 million, and the declared quarterly dividend increased to $0.18 per share.
Material changes versus the prior comparable period
- Q2 revenue increased 2.6%, but operating income decreased 5.6% and net income decreased 45.3%. The principal factors were acquisition-related costs, the molasses settlement costs, higher terminal expenses, and the higher tax rate.
- Six-month revenue increased 2.0%, while operating income increased 72.4% and net income increased 62.3%, primarily reflecting improved ocean transportation results, higher China freight rates, yield improvements, timing of fuel surcharge collections, and the initial Alaska contribution.
- Ocean Transportation Q2 margin declined to 9.1% from 10.2%; six-month margin improved to 11.5% from 6.9%.
- Logistics operating income was broadly flat year to date despite lower revenue, aided by cost reductions and warehouse improvements.
- Acquisition-related balance sheet changes included $219.7 million of goodwill, $140.0 million of customer-relationship intangibles, $58.5 million of multi-employer withdrawal liabilities, and significantly higher debt.
Guidance, outlook, risks, and unusual items
- Management expects to complete Alaska integration within two years. Incremental recurring SG&A is expected to be approximately $15.0 million annually, while excess acquisition-related SG&A was $13.5 million in Q2 and is expected to be approximately $25 million in the second half of 2015.
- For the second half of 2015, management expects ocean transportation operating income to moderately exceed the $88.9 million achieved in the second half of 2014, excluding excess acquisition-related SG&A and the molasses settlement impact. Full-year ocean transportation operating income is expected to be substantially higher than 2014 on the same basis.
- Management expects logistics operating income for 2015 to approximate the 2014 level of $8.9 million, second-half interest expense of approximately $10.0 million, and a second-half effective tax rate of approximately 40.0%.
- Second-half planned spending includes approximately $35.0 million of maintenance capital expenditures and $33.0 million of scheduled payments for two vessels under construction. Additional CCF contributions are expected to exceed the $65.5 million net contribution made in 2014.
- The July 29, 2015 Hawaii molasses-release settlement required $5.9 million in cash and removal of the tank farm and pier risers, estimated to cost $5.5 million to $9.5 million. Q2 results included approximately $11.4 million of related costs.
- Horizon’s estimated multi-employer withdrawal liability is $73.9 million of undiscounted future payments, including approximately $55.4 million after 2020. Acquisition fair values remain subject to revision and could change significantly.
- Key risks include failure to realize integration savings, unknown Horizon liabilities, weaker Alaska demand, fuel and emissions compliance costs, and the need to install scrubbers on certain Alaska vessels under a temporary EPA exemption.
- After quarter-end, Matson announced a planned $75.0 million issuance of 30-year senior unsecured notes and amended its revolving facility, increasing capacity from $375 million to $400 million and extending maturity to July 2020. These transactions were subject to customary closing conditions.
Facts investors should verify
- Whether Alaska integration savings are achieved within the expected two-year period and whether excess acquisition-related SG&A declines toward the $15.0 million annual run rate.
- The final purchase-accounting values for Horizon, particularly goodwill, customer intangibles, deferred taxes, debt, and multi-employer withdrawal liabilities.
- Actual cash costs and completion timing for the molasses remediation and tank-farm removal.
- Liquidity after acquisition-related borrowing, planned capital spending, CCF contributions, vessel payments, and the expected note issuance.
- Alaska volumes, freight rates, fuel costs, and compliance-related capital expenditures for vessel scrubbers.
- The extent to which the elevated Q2 tax rate was non-recurring and whether the expected approximately 40.0% second-half tax rate is achieved.