Matson, Inc. Form 10-Q Summary
Business Context and Reporting Period
Matson filed an unaudited quarterly report for the three and nine months ended September 30, 2012. Matson provides ocean transportation among the U.S. Pacific Coast, Hawaii, Guam, Micronesia, China and other Pacific island ports, plus asset-light logistics services in the continental United States. Its fleet consisted of 17 vessels, and it held a 35% interest in SSA Terminals, LLC.
The June 29, 2012 separation from Alexander & Baldwin, Inc. was completed during the reporting period. Matson is the accounting successor to the former parent, and A&B operations were presented as discontinued operations. Prior-period amounts were reclassified where necessary.
Financial Performance and Key Metrics
| Metric | Q3 2012 | Q3 2011 | First nine months 2012 | First nine months 2011 |
|---|---|---|---|---|
| Total operating revenue | $401.4 million | $380.6 million | $1,161.7 million | $1,087.7 million |
| Operating income | $34.2 million | $30.9 million | $72.8 million | $66.8 million |
| Income from continuing operations | $19.0 million | $18.4 million | $36.3 million | $39.1 million |
| Net income | $19.1 million | $8.7 million | $30.3 million | $32.6 million |
| Diluted EPS | $0.45 | $0.21 | $0.71 | $0.77 |
| Operating margin | 8.5% | 8.1% | 6.3% | 6.1% |
Q3 revenue increased 5.5%, operating income increased 10.7%, and net income increased 119.5%. The nine-month revenue increase was 6.8%, while operating income increased 9.0%; however, continuing-operations income declined 7.2% and net income declined 7.1%, primarily because of higher interest and tax expense and separation-related items.
- Ocean transportation: Q3 revenue increased 9.1% to $307.1 million and operating income increased 13.8% to $32.9 million. The segment margin was 10.7%, compared with 10.3% in the prior-year quarter. Nine-month revenue increased 11.6% to $886.1 million and operating income increased 14.2% to $69.9 million, with a 7.9% margin versus 7.7%.
- Logistics: Q3 revenue declined 4.9% to $94.3 million and operating income declined 35.0% to $1.3 million, with a 1.4% margin versus 2.0%. Nine-month revenue declined 6.1% to $275.6 million and operating income declined 48.2% to $2.9 million, with a 1.1% margin versus 1.9%.
- Cash flow: Operating cash flow from continuing operations was $66.5 million for the first nine months, compared with $71.3 million in 2011. Capital expenditures were $30.8 million versus $39.5 million. Ending cash was $11.5 million, compared with $16.7 million at September 30, 2011.
- Liquidity: Working capital was $16.6 million at September 30, 2012, compared with a $3.7 million deficit at year-end 2011. Cash and receivables totaled $177.9 million.
- Debt: Total debt was $328.6 million, compared with $197.6 million at December 31, 2011. Long-term debt carrying value was $328.6 million and fair value was $350.5 million. The company had a new $375.0 million five-year revolving credit facility, of which $37.0 million was used, including $30.0 million of borrowings and $7.0 million of letters of credit.
- Dividends: Cash dividends paid during the first nine months totaled $33.1 million. A fourth-quarter dividend of $0.15 per share was declared on October 25, 2012.
Material Changes Versus the Prior Comparable Period
- Ocean transportation benefited from higher China freight rates and volume, increased Guam volume after a major competitor exited that trade in November 2011, and additional China sailings. Hawaii container volume declined 2.8% for the first nine months, while China container volume increased 6.5% and Guam container volume increased 88.1%.
- Ocean transportation costs increased because of dry-docking, higher vessel and terminal expenses, and increased outside transportation costs. The SSAT joint venture contribution declined to $0.7 million in Q3 and $3.1 million for the first nine months, from $2.8 million and $6.8 million, respectively.
- Logistics results weakened because of lower intermodal and highway volumes, the shutdown of the CLX2 China service, and the loss of a major ocean carrier customer.
- The separation generated total expected cash outflows of $166.2 million, comprising a $155.7 million capital distribution to A&B, $8.6 million of separation costs, and $1.9 million of capitalized debt financing costs. Q3 separation costs were $0.3 million.
- Interest expense increased 110.5% in Q3 and 38.6% for the first nine months because of the higher debt balance. The nine-month effective tax burden was 44.1%, affected by non-deductible separation costs and remeasurement of uncertain tax positions.
- Discontinued operations produced $0.1 million of income in Q3 2012 versus a $9.7 million loss in Q3 2011. For the first nine months, discontinued operations produced a $6.0 million loss versus a $6.5 million loss in 2011.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected fourth-quarter 2012 ocean transportation operating income to be significantly above the $13.0 million achieved in fourth-quarter 2011, despite normal seasonal volume declines, based on China freight rates and continued Guam strength.
- Management expected Hawaii volumes to remain approximately flat for the remainder of 2012, with only modest gains in 2013. China demand and rates were expected to weaken in the fourth quarter and first quarter because of the traditional slack season.
- Logistics fourth-quarter operating income was expected to be breakeven, dependent on warehouse improvement, expense control, economic conditions, customer mix and competitive conditions.
- Fourth-quarter capital expenditures were expected to be approximately $10 million to $15 million. Management believed operating cash flow, cash balances and available borrowings would fund working capital, capital expenditures, dividends and potential acquisitions for the next twelve months.
- Key risks include Hawaii economic and construction activity, fuel prices, China and Transpacific freight-rate volatility, competitive capacity, vessel dry-docking, seasonality, customer concentration, and the possibility of a new competitor entering the Guam trade.
- Commitments included $7.0 million of standby letters of credit, $14.2 million of performance and customs bonds, and $91.3 million of multiemployer pension withdrawal obligations. Management did not expect to be required to fund these commitments under current circumstances.
- The Department of Justice continued an investigation into pricing and competitive practices in domestic water carriage, including Hawaii and Guam. Matson denied wrongdoing and could not estimate any potential loss.
- CLX2 shutdown liabilities were substantially settled by July 31, 2012, and the company reported no future liability as of September 30, 2012. Management did not expect additional material CLX2 losses.
- Debt covenants were satisfied at September 30, 2012. Reported ratios were 1.99 times debt to consolidated EBITDA, 16.71 times consolidated EBITDA to interest expense, and 6.5% priority debt to consolidated tangible assets.
Important Facts an Investor Should Verify
- Whether Guam volume and pricing remain sustainable if a new competitor enters the trade.
- Whether China freight rates and capacity discipline hold through the expected seasonal slowdown.
- Whether Hawaii volumes recover from competitive pressure, direct foreign sourcing and weak construction activity.
- Whether Logistics can return to profitability after customer losses and the CLX2 shutdown.
- The effect of higher debt and interest expense on future earnings, cash flow and covenant headroom.
- The final cash cost and tax consequences of the A&B separation, including the remaining approximately $0.7 million expected distribution.
- The potential financial and reputational impact of the Department of Justice investigation and other environmental or legal contingencies.