Matson, Inc. annual report, FY2022

Matson, Inc. 2022 Form 10-K Summary

Business context and reporting period

Matson provides ocean transportation and logistics services through two reportable segments: Ocean Transportation and Logistics. Ocean Transportation serves Hawaii, Alaska, Guam, China, Japan, Micronesia and the South Pacific, and includes Matson’s 35% equity investment in SSA Terminals, LLC. Logistics provides transportation brokerage, freight forwarding, warehousing and supply-chain services.

The filing covers the fiscal year ended December 31, 2022. Fiscal 2022 included 52 weeks versus 53 weeks in 2021. The filing also discusses fourth-quarter 2022 operating conditions.

Financial performance and key metrics

Metric	2022	2021	Change
Operating revenue	$4,343.0 million	$3,925.3 million	10.6%
Operating income	$1,353.6 million	$1,187.5 million	14.0%
Income before taxes	$1,352.3 million	$1,171.3 million	15.5%
Net income	$1,063.9 million	$927.4 million	14.7%
Diluted EPS	$27.07	$21.47	26.1%
Operating cash flow	$1,271.9 million	$984.1 million	29.2%
Capital expenditures	$209.3 million	$325.3 million	(35.7%)

Consolidated operating margin was approximately 31.2%, compared with approximately 30.3% in 2021. Ocean Transportation revenue increased 13.1% to $3,544.6 million, and operating income increased 12.6% to $1,281.2 million. Ocean Transportation’s operating margin was 36.1%, versus 36.3% in 2021. Logistics revenue increased 0.7% to $798.4 million, while operating income increased 45.4% to $72.4 million; its operating margin improved to 9.1% from 6.3%.

Ocean Transportation results benefited from higher China freight rates, higher fuel-related surcharge revenue, increased Alaska volume and a stronger SSAT contribution.
SSAT contributed $83.1 million of income in 2022, compared with $56.3 million in 2021.
Interest income was $8.2 million, reflecting cash and Capital Construction Fund deposits; interest expense declined to $18.0 million from $22.6 million.
The effective tax rate increased to 21.3% from 20.8%, partly because 2021 benefited from discrete tax adjustments.
Cash dividends declared increased to $1.22 per share from $1.06 per share.

Liquidity, debt and capital resources

Cash and cash equivalents were $249.8 million at December 31, 2022, compared with $282.4 million at year-end 2021. Cash, cash equivalents and restricted cash totaled $253.7 million.
The Capital Construction Fund held $518.2 million at year-end 2022, primarily for vessel construction. Matson deposited $582.8 million and withdrew $64.6 million from the fund during 2022.
Total debt declined to $517.5 million from $629.0 million. Debt maturities were $76.9 million in 2023, $39.7 million annually from 2024 through 2027, and $281.8 million thereafter.
The company had $642.1 million of unused revolving-credit capacity at December 31, 2022, under a facility maturing March 31, 2026; $7.9 million was used for letters of credit.
Working capital surplus increased to $178.0 million from $92.1 million.
Matson repurchased approximately 5.0 million shares for $397.0 million during 2022. Approximately 1.5 million shares remained available for repurchase at year-end.

Material changes versus the prior comparable period

Revenue and earnings increased despite lower China and Hawaii volumes, primarily because of higher China freight rates, fuel surcharges and Alaska volume.
Ocean Transportation volumes changed as follows: Hawaii containers decreased 5.8%, Hawaii automobiles decreased 11.4%, Alaska containers increased 8.6%, China containers decreased 11.7%, Guam containers decreased 3.7%, and other containers increased 11.4%.
Logistics revenue was broadly stable, but operating income improved materially because of stronger transportation brokerage and freight-forwarding contributions and lower operating expenses.
Operating cash flow increased by $287.8 million, while investing cash use increased by $405.9 million, mainly because of deposits into the Capital Construction Fund.
Debt declined by $111.5 million through scheduled repayments and prepayments, while share repurchases increased substantially from $198.3 million in 2021 to $397.0 million.
Matson’s equity investment in SSAT increased to $81.2 million from $58.7 million, although fourth-quarter SSAT contribution fell to $1.0 million, down $20.3 million year over year.

Fourth-quarter 2022 conditions, outlook and unusual items

Fourth-quarter Hawaii container volume declined 13.0% year over year because of lower retail and hospitality demand, elevated comparison-period volumes and one fewer week.
China container volume declined 47.2%, reflecting weaker CLX and CLX+ demand, discontinuation of the CCX service and one fewer week. Management expected below-normal China demand and lower rates in the first half of 2023, with improved trade dynamics potentially emerging in the second half absent a U.S. hard landing.
Management expected to continue earning a significant freight-rate premium to the Shanghai Containerized Freight Index because of the speed and reliability of its China services.
Fourth-quarter Guam and Alaska container volumes declined 14.0% and 7.7%, respectively. Management cited economic support from tourism, employment and, in Alaska, energy activity, but also noted inflation, higher interest rates and the withdrawal of pandemic-era stimulus.
Matson is constructing three LNG-ready Aloha Class vessels at an expected total cost of approximately $1.0 billion, with deliveries currently expected in the fourth quarter of 2026, second quarter of 2027 and fourth quarter of 2027. Remaining vessel construction obligations were $949.0 million at year-end.
Expected total capital expenditures are $195 million to $210 million in 2023, $205 million to $220 million in 2024 and $440 million to $450 million in 2025. These estimates include vessel construction, LNG installations, reengining and maintenance capital.
Matson began LNG installation work on Daniel K. Inouye, expects work on Kaimana Hila to begin in the second quarter of 2024 and plans to reengine Manukai beginning in the second quarter of 2023.
The company targets a 40% reduction in Scope 1 emissions from its owned fleet by 2030, using 2016 as the baseline, and net-zero Scope 1 emissions by 2050. The filing cautions that LNG availability, cost, technology, construction delays and regulatory requirements could prevent or delay these goals.
Matson disclosed a California Air Resources Board notice of violation concerning shore-power and emissions requirements for certain chartered vessels. Potential penalties for 2020 through 2022 could exceed $1 million in aggregate but are not expected to be material.
The Pacific Maritime Association/International Longshore and Warehouse Union agreement covering substantially all U.S. West Coast longshore labor expired July 1, 2022 and remained under negotiation at filing. Slowdowns, strikes, lockouts or other disruptions could affect operations.
Management reported no material impairment of long-lived assets, goodwill or indefinite-lived intangible assets in 2022. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting.

Principal risks and contingencies

Normalization of post-pandemic demand, weaker consumer spending, inventory reductions, inflation, recession risk and higher interest rates may reduce freight volumes and rates, particularly in the China trade.
Fuel-price volatility and potential inability to recover fuel costs through surcharges could pressure margins.
Changes to, repeal of or waivers under the Jones Act could increase competition in Hawaii and Alaska and threaten Matson’s U.S. citizen and Jones Act-qualified operating status.
Labor negotiations, vessel dry-dockings, charter renewals, port infrastructure constraints, weather events, natural disasters, maritime accidents and geopolitical disruptions could impair service reliability and increase costs.
The company is exposed to cybersecurity, information-technology and third-party service-provider failures.
Multi-employer pension withdrawal obligations were estimated at $170.1 million, while the recorded present value of the assumed Horizon-related withdrawal liability was $52.7 million.
Insurance policies contain significant retentions and deductibles, and certain risks are uninsured or may exceed policy limits.
Remaining operating lease liabilities had a present value of $406.1 million, including $143.6 million classified as current.
Vessel construction, vendor and other contractual obligations were material, including $949.0 million of remaining vessel construction obligations and $99.3 million of vendor and other obligations.

Investor verification checklist

Verify whether China volumes and freight rates recover in the second half of 2023 and whether the expected rate premium to SCFI persists.
Track SSAT earnings, lift volumes, terminal revenue and the impact of labor negotiations on West Coast operations.
Reconcile future vessel construction, LNG-conversion and terminal-modernization spending with operating cash flow, the Capital Construction Fund and available debt capacity.
Review compliance with debt covenants, scheduled maturities and the effect of the transition from LIBOR to SOFR.
Monitor execution, cost and delivery risk for the three Aloha Class vessels and LNG projects.
Assess exposure to fuel prices, chartered-vessel commitments, environmental penalties, pension obligations and uninsured maritime or cyber losses.
Confirm the status and financial resolution of the CARB notice of violation and the PMA/ILWU collective bargaining negotiations.