Matson, Inc. Form 10-Q Summary
Reporting period: Quarterly and six-month periods ended June 30, 2012. The financial statements are unaudited. Matson completed its separation from Alexander & Baldwin, Inc. on June 29, 2012 and became the successor company for accounting purposes.
Business Context
Matson operates two segments: Ocean Transportation, serving Hawaii, Guam, Micronesia, China and other Pacific markets with a fleet of 17 vessels; and asset-light Logistics Services, including intermodal, highway brokerage, warehousing and distribution. Matson also owns 35% of SSA Terminals, LLC.
Financial Performance and Position
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Operating revenue | $394.2 million, up 4.5% | $760.3 million, up 7.5% |
| Ocean Transportation revenue | $299.5 million, up 9.2% | $579.0 million, up 12.9% |
| Logistics Services revenue | $94.7 million, down 8.1% | $181.3 million, down 6.7% |
| Operating income | $32.5 million, up 11.3% | $38.6 million, up 7.5% |
| Operating margin | 8.2%, versus 7.7% | 5.1%, approximately unchanged |
| Income from continuing operations | $15.3 million, down 13.6% | $17.3 million, down 16.4% |
| Net income | $7.8 million, down 58.3% | $11.2 million, down 53.1% |
| Diluted EPS | $0.18, versus $0.44 | $0.26, versus $0.57 |
| Operating cash flow from continuing operations | Not separately provided | $20.7 million, versus $26.1 million |
Ocean Transportation operating profit was $31.2 million in the second quarter and $37.0 million for the first half, with margins of 10.4% and 6.4%, respectively. Logistics operating profit was $1.3 million in the second quarter and $1.6 million for the first half, with margins of 1.4% and 0.9%, respectively.
Net income was reduced by discontinued-operation losses of $7.5 million in the second quarter and $6.1 million for the first half. Continuing-operations tax rates were approximately 50.0% for the quarter and 50.1% for the first half, reflecting non-deductible separation costs and the remeasurement of uncertain tax positions.
Liquidity, Debt and Capital Resources
- Cash and cash equivalents were $35.5 million at June 30, 2012, versus $9.8 million at December 31, 2011.
- Cash, cash equivalents and receivables totaled $206.1 million, up $28.6 million from year-end.
- Working capital was $29.1 million, compared with a $3.7 million working-capital deficit at year-end.
- Total debt was $372.8 million, versus approximately $197.6 million at year-end. Long-term debt had a carrying value of $372.8 million and a fair value of $380.3 million.
- Matson issued $170.0 million of unsecured fixed-rate debt in three tranches bearing rates from 3.66% to 4.31%, with maturities from 2023 through 2032.
- The company entered into a $375 million, five-year unsecured revolving credit facility; available capacity was $296 million at June 30.
- Capital expenditures were $17.5 million for the first half, compared with $27.9 million in the prior-year period. The company paid $26.7 million in dividends during the first half.
- Management stated that operating cash flow, cash balances and available borrowings should be sufficient for the next twelve months, including working capital, capital expenditures, dividends and potential acquisitions.
Material Changes Versus the Prior Comparable Period
- Ocean Transportation revenue and profit increased, primarily due to higher Guam volumes after a major competitor exited the trade, higher China freight rates and fuel surcharges. These gains were partly offset by weaker Hawaii volumes and higher operating costs.
- Hawaii container volume declined 4.8% in the quarter and 4.6% year to date; Hawaii automobile volume declined 11.8% and 9.1%, respectively.
- Guam container volume increased 79.4% in the quarter and 86.6% year to date. China container volume increased 2.0% and 4.0%, respectively.
- Logistics revenue and profit declined because of lower intermodal and highway volumes, the CLX2 shutdown, loss of a major international ocean-carrier customer and weaker Northern California warehouse performance.
- Separation costs of $5.8 million were recorded in the second quarter and $8.3 million for the first half. Total expected separation-related cash outflows were $165.9 million, including a $155.7 million distribution to A&B, $8.3 million of separation costs and $1.9 million of capitalized debt-financing costs.
- Discontinued operations include A&B and the CLX2 service. A&B results included property and real-estate joint-venture impairments in 2012, while CLX2 generated lower shutdown losses than in 2011.
Guidance, Outlook and Risks
- Management assumed modest growth in the U.S. and Hawaii economies. Hawaii volumes were expected to remain flat to modestly lower for the remainder of 2012 because construction activity had not fully recovered.
- Transpacific vessels were expected to operate at full or near-full capacity, with second-quarter freight rates continuing through the mid-October peak season before a modest seasonal decline. Global container capacity remained above demand, creating rate risk.
- Higher Guam volumes were expected to continue until a replacement competitor entered the market, but timing was uncertain.
- Ocean Transportation operating profit for the remainder of 2012 was expected to be modestly better than the second half of 2011, excluding $7.1 million of CLX2-related expenses recorded outside discontinued operations in the second half of 2011. Third-quarter results were expected to be affected by vessel and barge drydockings.
- Logistics operating profit for the second half was expected to be flat to modestly lower, subject to warehouse improvements, economic conditions, competitive dynamics, cargo mix and carrier capacity.
- The expected effective tax rate was approximately 38.5% for the third and fourth quarters. Further separation costs or discontinued-operation losses were expected to be immaterial.
- Material risks include fuel prices, freight rates, economic and construction conditions, competitive changes in Guam and Hawaii, excess international vessel capacity, drydocking costs, environmental regulation, pension obligations and the transition from the former parent.
- A Department of Justice investigation into pricing and competitive practices in domestic trades remained outstanding. Matson denied wrongdoing and could not estimate any potential loss.
- Off-balance-sheet commitments included $7 million of standby letters of credit, $14 million of performance and customs bonds and $87 million of multiemployer pension-plan withdrawal obligations. Management did not expect the company to be called upon to fund these commitments.
Key Facts for Investor Verification
- Confirm the post-separation balance sheet, debt structure, covenant compliance and actual remaining separation cash outflows, including the expected $4.3 million settlement payment.
- Assess whether Guam volume gains and China freight rates offset weaker Hawaii demand and potential new competition.
- Monitor the sustainability of Logistics Services profitability following the CLX2 shutdown and customer losses.
- Reconcile reported net income and EPS to continuing operations, discontinued operations, separation costs and related tax effects.
- Evaluate cash conversion, capital expenditures, dividend funding and availability under the revolving credit facility.
- Track the Department of Justice investigation, environmental matters, pension obligations and other contingencies for changes in expected exposure.