Matson, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results for the three months ended March 31, 2013, compared with the three months ended March 31, 2012. Matson operates ocean transportation services in the Pacific and an asset-light logistics business. In January 2013, it entered the South Pacific trade through the acquisition of primary assets of Reef Shipping Limited.
Key financial metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Operating revenue | $394.7 million | $366.1 million | 7.8% |
| Operating income | $18.7 million | $6.1 million | 206.6% |
| Operating margin | 4.7% | 1.7% | Up 3.0 percentage points |
| Income from continuing operations | $9.1 million | $2.0 million | 355.0% |
| Net income | $9.1 million | $3.8 million | 139.5% |
| Diluted EPS | $0.21 | $0.09 | 133.3% |
| Operating cash flow | $35.0 million | $5.1 million | +$29.9 million |
- Ocean transportation revenue was $299.9 million, up 7.3%; operating income was $18.5 million versus $5.8 million, with a 6.2% margin versus 2.1%.
- Logistics revenue was $94.8 million, up 9.5%, but operating income declined to $0.2 million from $0.3 million; margin was 0.2% versus 0.3%.
- Cash and cash equivalents were $11.0 million at March 31, 2013, versus $19.9 million at December 31, 2012. Working capital was $29.6 million, down from $40.7 million.
- Total debt was $301.1 million, down from $319.1 million at year-end 2012. The $375.0 million revolving credit facility had $11.8 million utilized, including $5.0 million of borrowings and $6.8 million of letters of credit.
- Net cash used in investing activities was $14.9 million, including the $9.6 million Reef Shipping acquisition. Capital expenditures were $6.3 million.
- Net cash used in financing activities was $29.0 million, including $42.5 million of net debt payments, $6.5 million of dividends, and $21.0 million of new long-term debt proceeds.
Material changes versus the prior comparable period
- Revenue growth reflected higher Hawaii volume, new Micronesia/South Pacific volume, higher China freight rates, and increased logistics volume.
- Ocean transportation operating income improved substantially because of higher China freight rates, higher Hawaii volume, and improved vessel operating expenses. Matson operated a nine-ship fleet in the quarter versus ten ships in the prior-year period, when a vessel was in dry dock.
- Hawaii container volume increased 5.5%, Hawaii automobile volume increased 36.1%, China container volume increased 3.6%, and Micronesia/South Pacific container volume increased 60.0%. Guam container volume declined 4.9%.
- Q1 2012 included $2.5 million of separation costs; no separation costs were recorded in Q1 2013.
- Discontinued operations contributed $1.8 million in Q1 2012 and none in Q1 2013, reflecting the completed separation from Alexander & Baldwin and the termination of the CLX2 service.
- Operating cash flow improved primarily because of higher earnings, lower deferred dry-docking payments, and favorable working-capital changes.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects moderate full-year improvement in ocean transportation operating income. Hawaii growth is expected to be moderate; Guam is expected to show little or no full-year growth; and China rates are expected to experience modest erosion because of global vessel-capacity surplus.
- SSAT, the terminal joint venture, is expected to operate approximately at breakeven because of reduced lift volume following customer losses.
- Logistics operating margin is expected to be 1% to 2% of revenue in 2013, supported by anticipated volume growth and expense controls.
- 2013 capital expenditures are expected to be approximately $30 million, excluding vessel-replacement capital expenditures. Potential Capital Construction Fund deposits could be significant if a vessel-replacement plan is finalized.
- Management believes operating cash flow, cash balances, and available borrowings will be sufficient for the next twelve months, including working capital, capital expenditures, dividends, and potential acquisitions.
- Debt covenants were satisfied at March 31, 2013. Reported debt-to-consolidated-EBITDA was 1.60, consolidated EBITDA-to-interest expense was 13.97, and priority debt to consolidated tangible assets was 6.3%.
- Unrecorded commitments included $6.8 million of standby letters of credit, $20.5 million of performance and customs bonds, and $102.1 million of multiemployer pension withdrawal obligations. Management does not expect to withdraw from the pension plans or be required to advance funds under these commitments.
- The Department of Justice notified Matson on March 28, 2013, that the company was no longer under investigation regarding domestic water-carriage pricing and competitive practices.
- The filing cautions that interim results are not necessarily indicative of full-year results and identifies exposure to freight rates, volumes, fuel and operating costs, vessel capacity, interest rates, pension assumptions, environmental matters, and other legal and regulatory risks.
Investor verification checklist
- Verify sustainability of the Q1 ocean transportation margin improvement and the expected effect of China rate erosion.
- Monitor Hawaii, Guam, China, and South Pacific volume trends, including the contribution from the Reef Shipping acquisition.
- Reconcile debt repayments, liquidity usage, covenant compliance, and the company’s relatively low cash balance.
- Assess whether logistics margins reach management’s 1% to 2% 2013 target.
- Review potential vessel-replacement spending and Capital Construction Fund deposits, which are excluded from the stated capital-expenditure outlook.
- Consider the impact of pension obligations, environmental exposure, self-insurance commitments, and other contingencies.
- Note that the filing corrected a prior-period typographical error, changing Q1 2012 other comprehensive loss of $1.7 million to other comprehensive income of $1.7 million and reported comprehensive income to $5.5 million.