Matson, Inc. Form 10-Q Summary
Business context and reporting period
Matson is a U.S. Pacific ocean freight carrier serving Hawaii, Guam, Micronesia, China and South Pacific markets, with an asset-light logistics business serving the continental U.S. and China. The company operates 18 vessels and owns a 35% interest in SSAT, a terminal and stevedoring joint venture. The filing covers the unaudited quarter and six months ended June 30, 2013, compared primarily with the corresponding 2012 periods.
Matson acquired the primary assets of Reef Shipping Limited in January 2013, expanding its South Pacific service. The 2012 comparative results were restated for discontinued operations following the June 2012 separation from Alexander & Baldwin.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total operating revenue | $416.6 million, up 5.7% | $811.3 million, up 6.7% |
| Operating income | $36.5 million, up 12.3% | $55.2 million, up 43.0% |
| Operating margin | 8.8%, versus 8.2% | 6.8%, versus 5.1% |
| Income from continuing operations | $20.1 million, up 31.4% | $29.2 million, up 68.8% |
| Net income | $20.1 million, versus $7.8 million | $29.2 million, versus $11.2 million |
| Diluted EPS | $0.47, versus $0.18 | $0.68, versus $0.26 |
Ocean transportation revenue was $310.0 million in the quarter and $609.9 million year to date; operating income was $34.3 million and $52.8 million, producing margins of 11.1% and 8.7%, respectively. Logistics revenue was $106.6 million in the quarter and $201.4 million year to date; operating income was $2.2 million and $2.4 million, producing margins of 2.1% and 1.2%.
Six-month operating cash flow from continuing operations was $79.5 million, compared with $28.5 million in 2012. Investing activities used $16.5 million, including $9.8 million of capital expenditures and $9.6 million for acquisitions and other items. Financing activities used $43.8 million, including $39.7 million of long-term debt payments, $11.0 million of net line-of-credit repayments and $13.0 million of dividends paid.
Cash and cash equivalents were $39.1 million at June 30, 2013, compared with $19.9 million at December 31, 2012. Working capital was $47.6 million, compared with $40.7 million at year-end. Total debt was $292.4 million, down from $319.1 million. The company had a $375.0 million unsecured revolving credit facility, of which $6.8 million was used for letters of credit. Fixed-rate debt principal was $289.4 million, and no variable-rate borrowings were outstanding.
Material changes versus the prior comparable period
- Revenue increased in both segments, led by higher Hawaii, China and Micronesia/South Pacific volumes and stronger logistics intermodal and highway activity.
- Ocean transportation operating income increased substantially in the first half, benefiting from lower vessel operating expenses, higher Hawaii volume, a lighter dry-docking schedule and the absence of 2012 separation costs.
- Logistics operating income improved despite continued low margins, supported by higher intermodal volume, cost controls and favorable receivables collections.
- 2012 included $5.8 million of separation costs in the second quarter and $8.3 million in the first half. These costs did not recur in 2013.
- Net income comparisons benefited from the absence of 2012 losses from discontinued operations: $7.5 million in the second quarter and $6.1 million for the first half.
- Interest expense increased to $3.6 million in the quarter and $7.3 million year to date, reflecting the post-separation debt structure.
- The SSAT joint venture reported losses of $0.8 million in the quarter and $0.6 million year to date, versus income of $1.6 million and $2.4 million, respectively, in the prior-year periods.
- The company restated certain 2012 cash flow classifications related to CLX2 and stock-based compensation; management determined the restatements were not material.
Guidance, outlook, risks and unusual items
- Management expected moderate full-year improvement in ocean transportation operating income. Second-half performance was expected to be flat to modestly better than 2012.
- Hawaii volume was expected to show moderate growth; Guam growth was expected to be minimal. China freight-rate pressure was expected to continue because of excess vessel capacity.
- SSAT was expected to operate around breakeven for the year because of reduced lift volume from prior customer losses.
- Logistics performance was expected to significantly improve in the second half. Full-year logistics operating margin was expected to be 1% to 2% of revenue.
- 2013 capital expenditures were expected to be approximately $20 million to $25 million, excluding possible vessel-replacement spending. Potential Capital Construction Fund deposits could be significant and defer cash taxes without changing the tax rate.
- Management stated that operating cash flow, cash balances and available borrowing capacity should be sufficient for the next 12 months, including working capital, capital expenditures, dividends and potential acquisitions.
- The company was in compliance with its debt covenants at June 30, including a debt-to-consolidated-EBITDA ratio of 1.56, EBITDA-to-interest ratio of 12.43 and priority-debt-to-consolidated-tangible-assets ratio of 6.2%.
- Matson was named in a False Claims Act qui tam lawsuit concerning fuel surcharges on military household-goods shipments. The federal government declined to intervene; Matson believes the case is without merit and could not estimate a potential loss.
- Off-balance-sheet commitments included $6.8 million of standby letters of credit, $20.4 million of performance and customs bonds, and $102.1 million of multiemployer pension withdrawal obligations. Management did not expect the company to be called upon to advance funds under these commitments.
- The company expected approximately $3.5 million of 2013 cash contributions to defined pension plans, none of which had been contributed as of June 30.
Important facts for investors to verify
- Whether China freight-rate erosion and weak SSAT lift volumes offset expected Hawaii and South Pacific volume growth.
- The sustainability of improved operating cash flow, particularly the contribution from higher accounts payable and accrued liabilities and lower dry-docking payments.
- Execution of the South Pacific acquisition and the expected improvement in logistics margins.
- Actual 2013 capital expenditures, any vessel-replacement investments and related Capital Construction Fund deposits.
- Debt repayment progress, covenant compliance and liquidity after dividends, acquisitions and capital spending.
- Developments in the False Claims Act litigation and any change in the company’s ability to estimate potential exposure.
- Whether the unusually favorable comparison from the absence of 2012 separation costs and discontinued-operation losses distorts year-over-year earnings growth.