Business Context and Reporting Period
Matson, Inc. filed this Form 10-K for the fiscal year ended December 31, 2013. Matson provides ocean transportation and logistics services, with principal markets in Hawaii, Guam, Micronesia, China, the South Pacific and North America. Ocean transportation includes vessel operations, terminal services and a 35% interest in SSAT; Logistics provides intermodal, highway brokerage, warehousing and distribution services.
In January 2013, Matson acquired the primary assets of Reef Shipping Limited and began operating South Pacific services. The company had 18 owned and three chartered vessels at year-end. Approximately 65% of 2013 ocean transportation revenue came from Jones Act trades.
Financial Performance and Key Metrics
| ($ millions, except per-share amounts) | 2013 | 2012 | Change |
|---|---|---|---|
| Ocean transportation revenue | $1,229.4 | $1,189.8 | 3.3% |
| Logistics revenue | $407.8 | $370.2 | 10.2% |
| Total operating revenue | $1,637.2 | $1,560.0 | 4.9% |
| Operating income | $100.3 | $96.7 | 3.7% |
| Operating margin | 6.1% | 6.2% | Down modestly |
| Income from continuing operations | $53.7 | $52.0 | 3.3% |
| Net income | $53.7 | $45.9 | 17.0% |
| Diluted EPS | $1.25 | $1.08 | 15.7% |
| Operating cash flow | $195.7 | $94.0 | Increase of $101.7 |
| Capital expenditures | $35.2 | $38.1 | Down $2.9 |
| Total debt at year-end | $286.1 | $319.1 | Down $33.0 |
| Cash and cash equivalents | $114.5 | $19.9 | Increase of $94.6 |
Ocean transportation operating income declined to $94.3 million from $96.6 million, and its margin declined to 7.7% from 8.1%. Logistics operating income improved to $6.0 million from $0.1 million, with a 1.5% margin versus approximately zero in 2012. Net income benefited from the absence of the $6.1 million loss from discontinued operations recorded in 2012.
Year-end current assets were $348.9 million and current liabilities were $200.6 million. Cash, cash equivalents and receivables totaled $296.8 million. The company had a $375.0 million unsecured revolving credit facility, with $5.8 million used for letters of credit. Debt covenants were satisfied, including a debt-to-EBITDA ratio of 1.61, EBITDA-to-interest ratio of 12.28 and priority debt-to-tangible-assets ratio of 5.8%.
Quarterly fourth-quarter 2013 revenue was $410.9 million, operating income was $17.9 million, net income was $7.3 million and diluted EPS was $0.17, compared with fourth-quarter 2012 revenue of $398.3 million, operating income of $23.9 million, net income of $15.6 million and diluted EPS of $0.36.
Material Changes Versus the Prior Comparable Period
- Total revenue increased 4.9%, led by higher ocean transportation revenue and 10.2% growth in Logistics revenue.
- Ocean volumes increased in Hawaii containers by 0.9%, Hawaii automobiles by 3.4%, China containers by 2.2% and Micronesia/South Pacific containers by 128.6%, while Guam containers declined 1.6%.
- Ocean transportation operating income was reduced by a $9.95 million litigation charge, $3.0 million of molasses-release costs, South Pacific start-up and service-reconfiguration costs, higher general and administrative expenses and other unfavorable items.
- SSAT contributed a $2.0 million loss in 2013 versus $3.2 million of income in 2012, reflecting customer losses and Oakland expansion transition costs.
- Logistics improved substantially because of higher intermodal and highway volumes, cost reductions and the absence of the $3.9 million 2012 intangible-asset impairment and warehouse lease restructuring charge.
- Operating cash flow increased substantially, primarily because of deferred tax effects associated with increased Capital Construction Fund contributions, lower dry-docking cash outflows and working-capital changes.
- Total debt declined 10.3% year over year, while shareholders’ equity increased to $338.2 million from $279.9 million.
Guidance, Outlook, Risks and Unusual Items
Management expected 2014 Ocean Transportation operating income to be near or slightly above 2013’s $104.3 million excluding the litigation charge. Hawaii container volume was expected to increase modestly, Guam volume to remain relatively flat, China freight rates to experience modest erosion, and South Pacific results to improve as 2013 start-up costs were not expected to recur. Logistics operating income was expected to modestly exceed $6.0 million. Management projected a 2014 effective tax rate of approximately 38.5% and maintenance capital expenditures of approximately $40.0 million.
Management expected first-quarter 2014 operating income to be approximately one-half of the prior-year $18.5 million because of fuel-surcharge timing, lower Hawaii volume and lower China freight rates. Interest expense was expected to increase by approximately $3.5 million following the January 2014 issuance of $100 million of 4.35% senior unsecured notes.
Matson entered into agreements in November 2013 to construct two 3,600-TEU dual-fuel-capable vessels for approximately $418.0 million, with delivery expected in the third and fourth quarters of 2018. Contractual obligations included $409.6 million of remaining vessel-construction payments, including $92.0 million payable in 2015–2016.
A September 2013 molasses release into Honolulu Harbor resulted in $3.0 million of costs through year-end. Third-party claims had been resolved by February 28, 2014, but government agencies had not assessed response costs, natural-resource damages or penalties; future exposure could not be estimated and could be material.
Matson accrued $9.95 million for a proposed settlement of a False Claims Act lawsuit concerning military household-goods fuel surcharges. The settlement consisted of $9.0 million for claims and $0.95 million for plaintiff legal expenses and remained subject to government and court approval.
Principal risks include economic weakness in Hawaii and other markets, vessel overcapacity and new competition, fuel-price volatility and surcharge recovery, labor negotiations, weather and natural disasters, foreign-market exposure, SSAT performance, environmental liabilities, multiemployer pension withdrawal obligations, regulatory changes affecting the Jones Act, and compliance with debt covenants. The company reported $110.6 million of multiemployer pension withdrawal obligations, although management had no intention to withdraw from the plans.
Important Facts for Investors to Verify
- Whether the molasses incident results in material governmental penalties, remediation costs or natural-resource-damage claims.
- Whether the proposed $9.95 million litigation settlement receives required approvals and whether additional litigation exposure remains.
- Actual competitive effects of Pasha’s additional Hawaii vessel and resulting changes in volumes and freight rates.
- China trade freight rates, global vessel-capacity growth and utilization levels.
- Progress, cost performance and financing of the two-vessel, $418.0 million shipbuilding program.
- 2014 cash generation after increased interest expense, Capital Construction Fund contributions and vessel commitments.
- Renewal outcomes for collective bargaining agreements expiring in 2014, including Pacific Coast and Hawaii ILWU agreements.
- SSAT profitability and the sustainability of improved Oakland terminal volumes.
- Management’s reported effectiveness of disclosure controls and internal control over financial reporting, which received an unqualified auditor opinion.