Matson, Inc. — Q1 2014 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 report covers the three months ended March 31, 2014, compared with the three months ended March 31, 2013.
Financial results and key metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Operating revenue | $392.5 million | $394.7 million | (0.6%) |
| Operating income | $9.9 million | $18.7 million | (47.1%) |
| Operating margin | 2.5% | 4.7% | Down 2.2 percentage points |
| Income before taxes | $5.8 million | $15.0 million | (61.3%) |
| Net income | $3.4 million | $9.1 million | (62.6%) |
| Net margin | 0.9% | 2.3% | Down 1.4 percentage points |
| Diluted EPS | $0.08 | $0.21 | (61.9%) |
| Operating cash flow | $30.1 million | $35.0 million | Down $4.9 million |
Ocean transportation revenue declined 1.8% to $294.6 million and operating income fell 49.2% to $9.4 million, reducing the segment margin to 3.2% from 6.2%. Logistics revenue increased 3.3% to $97.9 million, while operating income rose to $0.5 million from $0.2 million.
At March 31, 2014, cash and cash equivalents were $229.7 million, compared with $114.5 million at December 31, 2013. Working capital was $257.9 million, up from $148.3 million. Total debt was $383.6 million, compared with $286.1 million at year-end, including the January issuance of $100.0 million of 4.35% senior unsecured notes.
Investing cash outflow was $4.5 million, including $4.9 million of capital expenditures. Financing cash inflow was $89.6 million, primarily reflecting debt issuance. Dividends paid were $6.9 million, or $0.16 per share.
Material changes versus the prior comparable period
- Revenue was broadly stable, but operating expenses increased 1.8% to $382.6 million, materially compressing operating profit.
- Ocean transportation results were affected primarily by the timing of fuel surcharge collections, lower Hawaii container volume, lower China freight rates, and $1.0 million of legal expenses related to the Honolulu Harbor molasses release.
- Hawaii container volume declined 2.9%; China containers declined 3.5%; Guam containers increased 3.4%; and Micronesia/South Pacific containers increased 33.3%, reflecting a full quarter of operations.
- Logistics benefited from higher highway and international intermodal volume and improved warehouse operations, partly offset by severe weather affecting domestic intermodal activity.
- Interest expense increased 10.8% to $4.1 million due to higher borrowings. The reported effective tax rate was 41.4%, compared with 39.3%, reflecting uncertainties in income tax liabilities.
- Operating cash flow declined because of lower net income and increased deferred dry-docking payments.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected 2014 ocean transportation operating income to be near or slightly above 2013 levels of $104.3 million, excluding the $9.95 million litigation charge and any future impact from the molasses incident.
- Management expected logistics operating income to modestly exceed the 2013 level of $6.0 million.
- 2014 interest expense was expected to increase by approximately $3.5 million because of the January notes financing. The expected full-year effective tax rate was approximately 38.5%.
- Maintenance capital expenditures were expected to be approximately $40.0 million. Additional Capital Construction Fund deposits could be significant and defer a portion of current cash tax liabilities.
- Management anticipated modest Hawaii market growth, but expected new competitor containership capacity in the fourth quarter to pressure Hawaii container volume. China trade overcapacity was expected to continue through 2014.
- The September 2013 Honolulu Harbor molasses release remains subject to governmental investigations and potential response costs, natural resource damages, penalties, and other expenses. The company stated that these amounts could not yet be estimated and that the impact could be material.
- The company accrued a proposed $9.0 million settlement plus $0.95 million of plaintiff legal expenses in the False Claims Act litigation. Settlement remained contingent on U.S. government approval and court dismissal with prejudice.
- The company reported no material changes to contractual obligations, no off-balance-sheet arrangements, effective disclosure controls, and no material changes to internal control over financial reporting.
Most important facts for investors to verify
- Whether ocean transportation profitability recovers as projected and how new competitor capacity affects Hawaii volumes and pricing.
- The timing and magnitude of fuel surcharge collections and their effect on quarterly margins.
- Government actions, penalties, remediation costs, and natural resource damage claims related to the molasses release.
- Final approval and payment status of the $9.95 million False Claims Act settlement.
- Use of the additional debt proceeds, future interest expense, and the company’s ability to fund vessel construction, capital expenditures, pension contributions, and dividends.
- Whether additional Capital Construction Fund deposits materially affect cash taxes and liquidity.