Matson, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Matson provides ocean transportation and logistics services through its Ocean Transportation and Logistics segments. Ocean Transportation serves Hawaii, Alaska, Guam, China, Micronesia, the South Pacific and other markets; Logistics provides transportation brokerage, freight forwarding, warehousing and supply-chain services. The unaudited quarter ended March 31, 2018 was filed May 2, 2018.
Financial Results and Key Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Operating revenue | $511.4 million | $474.4 million | 7.8% |
| Operating income | $28.7 million | $17.2 million | 66.9% |
| Operating margin | 5.6% | 3.6% | Up approximately 2.0 percentage points |
| Net income | $14.2 million | $7.0 million | 102.9% |
| Diluted EPS | $0.33 | $0.16 | 106.3% |
| Operating cash flow | $29.9 million | $4.0 million | Up $25.9 million |
- Ocean Transportation revenue was $379.3 million, up 2.5%, and operating income was $24.5 million, up 60.1%; segment margin increased to 6.5% from 4.1%.
- Logistics revenue was $132.1 million, up 26.5%, and operating income was $4.2 million, up 121.1%; segment margin increased to 3.2% from 1.8%.
- SSAT terminal joint venture income increased to $10.5 million from $4.9 million, with the increase nearly equally attributable to improved lift volume and one-time items.
- Cash and cash equivalents were $13.7 million at March 31, 2018, down from $19.8 million at December 31, 2017. Working capital was negative $6.8 million.
- Total debt was $903.6 million, including $254.0 million drawn under the revolving credit facility. Remaining revolver availability was $285.4 million, with maturity on June 29, 2022.
- Net cash used in investing activities was $69.8 million, including $57.7 million of vessel construction expenditures and $13.1 million of other capital expenditures.
- Net cash provided by financing activities was $33.8 million, including $49.0 million of net revolver borrowings and $8.7 million of dividends paid. The quarterly dividend was $0.20 per share.
Material Changes Versus the Prior Comparable Period
- Consolidated performance improved substantially, driven by higher Logistics activity, favorable fuel-surcharge timing, lower vessel operating costs, higher Alaska volume and stronger SSAT results.
- Hawaii container volume declined 1.9%, while automobile volume increased 21.7%. Alaska container volume increased 10.1%, China volume declined 22.2%, and Guam volume declined 9.3%.
- Revenue growth exceeded operating-cost growth, producing the improvement in operating margin and operating income.
- Operating cash flow improved partly because of a $7.0 million distribution from SSAT and lower deferred dry-docking payments. Investing cash outflows increased substantially because of vessel construction.
- Debt increased by $46.5 million from year-end, primarily reflecting additional revolver borrowings used to fund progress payments for four new Hawaii-service vessels.
- The company adopted the new revenue standard using the modified retrospective method; management determined the impact was immaterial. It also early adopted ASU 2018-02 and reclassified $6.0 million from accumulated other comprehensive loss to retained earnings.
Guidance, Outlook, Risks and Unusual Items
- Management expects 2018 Ocean Transportation operating income to be modestly higher than 2017’s $128.8 million and second-quarter Ocean Transportation operating income to approach the second-quarter 2017 level.
- Management expects 2018 Logistics operating income to be moderately higher than 2017’s $20.6 million and second-quarter Logistics operating income to be moderately higher year over year.
- Full-year guidance includes approximately $132 million of depreciation and amortization, $23 million of interest expense, and an effective tax rate of approximately 28% for the balance of 2018. Full-year EBITDA is expected to be lower than 2017’s $296.0 million.
- Expected 2018 capital requirements include approximately $68 million of maintenance capital expenditures, $388 million of vessel construction expenditures and $18 million of dry-docking payments.
- China volume is expected to be modestly lower in 2018, Guam volume lower amid heightened competition, Hawaii volume flat to modestly higher, and Alaska volume modestly higher.
- Q1 effective tax rate was 42.0%, including a $3.3 million non-cash adjustment related to estimated sequestration of alternative minimum tax refunds under the Tax Cuts and Jobs Act. Excluding this item, the rate would have been 28.6%.
- Vessel construction commitments totaled $562.5 million, including $345.3 million due in 2018 and $217.2 million due in 2019–2020; actual timing and amounts may change.
- Management reported environmental-remediation risks and ordinary-course legal contingencies but believes the company is materially compliant with environmental laws and that pending matters are not expected to materially affect results.
- The company stated that there were no material changes to its previously disclosed risk factors, market-risk position, contractual obligations other than the vessel commitments described, or internal controls.
Investor Verification Points
- Verify whether the improvement in Ocean Transportation operating income is sustainable after the favorable fuel-surcharge timing and SSAT one-time items.
- Monitor China and Guam volumes, competitive conditions, Hawaii demand and the normalization of Alaska volumes after competitor dry-docking effects.
- Assess funding needs and leverage as the company executes its approximately $562.5 million remaining vessel-construction commitments.
- Reconcile cash generation with the company’s large vessel, maintenance and dry-docking spending plans and limited cash balance.
- Confirm the ultimate tax impact of the Tax Cuts and Jobs Act, including the $3.3 million AMT-related adjustment and projected tax rate.
- Review the timing, cost and operational benefits of the four new Hawaii-service vessels.