Matson, Inc. 2015 Form 10-K Summary
Business context and reporting period
Matson is an ocean transportation and logistics company with Ocean Transportation and Logistics segments. Ocean Transportation serves Hawaii, Alaska, Guam, China, Micronesia and the South Pacific, and includes a 35% interest in SSA Terminals, LLC. Logistics provides intermodal, highway brokerage, warehousing and distribution services.
This annual report covers the fiscal year ended December 31, 2015. The fourth quarter was included in the annual results; the company did not file a quarterly report in this document. Matson completed its acquisition of Horizon Lines on May 29, 2015, acquiring Horizon’s Alaska operations and assuming non-Hawaii assets and liabilities.
Financial performance and key metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total operating revenue | $1,884.9 million | $1,714.2 million | 10.0% |
| Operating income | $196.3 million | $140.0 million | 40.2% |
| Operating margin | 10.4% | 8.2% | Expanded |
| Income before taxes | $177.8 million | $122.7 million | 44.9% |
| Net income | $103.0 million | $70.8 million | 45.5% |
| Diluted EPS | $2.34 | $1.63 | 43.6% |
| Operating cash flow | $245.3 million | $165.7 million | +$79.6 million |
- Ocean Transportation: Revenue was $1,498.0 million, up 17.2%; operating income was $187.8 million, up 43.2%; margin increased to 12.5% from 10.3%.
- Logistics: Revenue was $386.9 million, down 11.2%; operating income was $8.5 million, down 4.5%; margin improved to 2.2% from 2.0%.
- Fourth quarter: Revenue was $494.8 million, operating income was $45.9 million and net income was $26.6 million, compared with $443.5 million, $49.4 million and $27.8 million, respectively, in the fourth quarter of 2014.
- Volume: Hawaii container volume increased 8.1% to approximately 149,500 units. Alaska contributed approximately 39,100 containers from the acquisition date. China container volume declined 4.5%, while Guam and Micronesia/South Pacific volumes also declined.
Cash flow, liquidity, debt and capital structure
- Operating cash flow was $245.3 million. Investing cash flow was an outflow of $63.8 million, including $67.8 million of capital expenditures and $29.0 million paid for the Horizon acquisition, net of cash acquired.
- Financing cash flow was an outflow of $449.4 million, primarily reflecting $466.0 million for repayment of Horizon debt and warrant redemption, $30.8 million of dividends and $4.9 million of share repurchases.
- Cash and cash equivalents declined to $25.5 million from $293.4 million. Working capital was negative $19.7 million versus positive $296.0 million in 2014.
- Total debt was $429.9 million, including $407.9 million of non-current debt. All outstanding debt was fixed-rate at year-end, except for the undrawn revolving facility.
- The amended revolving credit facility had $389.0 million of availability at December 31, 2015, with $11.0 million used for letters of credit. The company was in compliance with its debt covenants.
- Contractual obligations totaled $1.382 billion, including $408.9 million of capital expenditure obligations, $429.9 million of debt principal, $129.9 million of operating leases and $72.8 million of estimated multi-employer withdrawal payments.
Material changes versus the prior comparable period
- The Horizon acquisition added Alaska operations, seven Jones Act-qualified containerships and related customer relationships. Horizon contributed $179.3 million of revenue and a $7.8 million pretax loss after May 29, 2015.
- The acquisition required total consideration of $495.4 million, including assumed and repaid debt and redeemed warrants. Matson recorded $214.2 million of goodwill and $140.0 million of customer-relationship intangible assets.
- One-time Horizon acquisition costs totaled approximately $19.0 million in 2015, and the company reported $12.4 million, $5.1 million and $1.5 million of such costs in the second, third and fourth quarters, respectively.
- SSAT contributed $16.5 million of equity income versus $6.6 million in 2014, benefiting from improved lift volume and the clearing of international cargo backlog.
- Capital expenditures increased to $67.8 million from $27.9 million, partly due to scrubber installation, new-vessel construction payments and vessel-related spending.
- Matson recorded a $2.1 million impairment charge for inactive vessels to be recycled. No goodwill or SSAT investment impairment was recorded.
- Matson adopted ASU 2015-16 and early adopted ASU 2015-17. The latter changed deferred tax presentation to non-current classification and did not involve retrospective adjustment.
Guidance, outlook, commentary and risks
- For 2016, management expected Hawaii container volume to be moderately higher, Alaska volume to be modestly lower than the combined 2015 level, and Ocean Transportation operating income to be modestly below $187.8 million.
- Management expected first-quarter 2016 operating income to be approximately 25% below the first-quarter 2015 level of $43.9 million.
- Logistics operating income was expected to modestly exceed the 2015 level, supported by volume growth and expense control. Expected 2016 interest expense was approximately $19.0 million and the effective tax rate approximately 39.0%.
- Management expected 2016 maintenance capital expenditures of approximately $65 million, vessel-construction progress payments of $67.2 million and dry-docking payments of approximately $60 million.
- Alaska scrubber installations were expected to be completed in 2016. Failure to meet waiver requirements could require the use of higher-cost low-sulfur fuel or additional vessels and could disrupt schedules.
- Key risks include economic weakness affecting freight volumes and rates, international vessel overcapacity, new competition in Hawaii, Guam and other trades, fuel-price volatility, labor disruptions, weather and natural disasters, cybersecurity incidents, environmental compliance, Jones Act changes, acquisition integration, impairment of Horizon-related goodwill and intangible assets, and pension or multi-employer withdrawal liabilities.
- The company’s estimated multi-employer withdrawal liability was $216.8 million in total, including a $60.3 million present-value liability associated with Horizon’s Puerto Rico pension-plan withdrawal. The final assessment was expected in 2016.
- The company accrued $7.4 million for removal of the Honolulu molasses tank farm and pier risers. Further environmental claims, regulatory actions or remediation costs remain possible.
- Management stated that disclosure controls and internal control over financial reporting were effective. However, Horizon was excluded from the internal-control assessment because it was acquired during 2015.
Most important facts for investors to verify
- Reconcile reported 2015 earnings and cash flow with the acquisition-related costs, molasses settlement costs and Horizon’s partial-year contribution.
- Review the final purchase-price allocation for Horizon, including goodwill, customer relationships, debt, deferred tax assets and multi-employer withdrawal liabilities.
- Assess liquidity after the cash decline to $25.5 million, negative working capital and the substantial 2016 capital, dry-docking and vessel-construction commitments.
- Verify the timing, cost and regulatory compliance of the three Alaska scrubber installations and the related conditional EPA waivers.
- Monitor competitive effects from Pasha’s Hawaii activities and APL’s new Guam service, as well as freight-rate pressure from global vessel overcapacity.
- Evaluate the sensitivity of results to fuel costs, fuel-surcharge recovery, labor negotiations, Jones Act policy, environmental liabilities and multi-employer pension obligations.
- Confirm whether the Horizon integration achieves management’s targeted earnings and cash-flow accretion by mid-2017 without additional restructuring or impairment charges.