Matson, Inc. — FY2018 Form 10-K Summary
Business context and reporting period
Matson is a Hawaii-based provider of ocean transportation and logistics services. Its two reportable segments are Ocean Transportation and Logistics. The filing covers the fiscal year ended December 31, 2018; 2018 and 2017 each comprised 52 weeks, while 2016 comprised 53 weeks.
- Ocean Transportation: Jones Act and international services connecting Hawaii, Alaska, Guam, China, Japan, Micronesia and the South Pacific, plus terminal services and a 35% interest in SSA Terminals, LLC.
- Logistics: Transportation brokerage, freight forwarding, warehousing, distribution and supply-chain services, including the Span Alaska business.
- Matson had 2,007 employees at December 31, 2018, including 786 covered by collective bargaining agreements.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total operating revenue | $2,222.8 million | $2,046.9 million | +8.6% |
| Operating income | $163.8 million | $147.3 million | +11.2% |
| Operating margin | 7.4% | 7.2% | Expanded |
| Income before taxes | $147.7 million | $125.2 million | +18.0% |
| Net income | $109.0 million | $231.0 million | -52.8% |
| Diluted EPS | $2.53 | $5.35 | -52.7% |
| Operating cash flow | $305.0 million | $224.9 million | +35.6% |
| Total capital expenditures | $401.2 million | $307.0 million | +30.7% |
| Total debt | $856.4 million | $857.1 million | - $0.7 million |
- Ocean Transportation: Revenue was $1,641.3 million, up 4.4%; operating income was $131.1 million, up 3.7%; operating margin was 8.0%, unchanged. SSAT contributed $36.8 million, compared with $28.2 million in 2017.
- Logistics: Revenue was $581.5 million, up 22.4%; operating income was $32.7 million, up 56.5%; operating margin improved to 5.6% from 4.4%.
- 2018 net income was reduced by a $38.7 million tax expense. The comparison with 2017 was distorted by a $154.0 million non-cash tax benefit recorded in 2017 from the Tax Cuts and Jobs Act. Excluding that benefit, 2017 income tax expense was $48.2 million and the adjusted 2017 tax rate was 38.5%, versus 26.2% in 2018.
- Cash, cash equivalents and restricted cash totaled $24.5 million at year-end, including $19.6 million of cash and $4.9 million of restricted cash. Accounts receivable were $223.7 million.
- Working capital was negative $52.4 million, compared with negative $20.3 million in 2017.
- Shareholders’ equity increased to $755.3 million from $677.2 million. Dividends declared increased to $0.82 per share from $0.78 per share.
Material changes versus the prior comparable period
- Revenue and operating income increased, led by strong Logistics growth, higher Ocean Transportation rates and fuel surcharge revenue, and increased SSAT earnings.
- Ocean Transportation volumes were mixed: Hawaii containers declined 0.7%, Alaska containers increased 2.5%, China containers declined 6.7%, Guam containers declined 3.0%, and Other containers increased 39.3%.
- Logistics benefited primarily from higher transportation brokerage revenue and improved contributions from transportation brokerage and freight forwarding.
- Operating cash flow increased substantially, partly reflecting higher distributions from SSAT, which rose to $42.0 million from $17.5 million.
- Capital spending increased due to construction of four new Hawaii vessels, terminal investments and the Anchorage cross-dock facility. Capitalized vessel construction expenditures were $338.6 million in 2018.
- MV Daniel K. Inouye, the first new Aloha Class vessel, was delivered October 31, 2018 and entered service in November 2018.
- On November 26, 2018, Matson sold MV Maunalei for approximately $106.0 million and leased it back. Management expects the transaction to reduce annual operating income by approximately $7.2 million through $12.0 million of lease expense, partly offset by $4.8 million of lower depreciation and amortization.
- No material impairment charges were recorded for goodwill, intangible assets or long-lived assets.
- The company corrected an immaterial prior-period error related to a multi-employer pension withdrawal liability, including a $6.7 million liability and related adjustments.
Guidance, outlook, commentary and risks
- For 2019, management expects Ocean Transportation operating income to approximate 2018’s $131.1 million, after considering the full-year Maunalei sale-leaseback impact.
- Management expects 2019 Logistics operating income to approximate 2018’s $32.7 million and 2019 EBITDA to be approximately $286 million, broadly comparable with 2018 after adjusting for the sale-leaseback effect.
- Management expects 2019 net income to decline year over year, with approximately $130 million of depreciation and amortization, including approximately $31 million of dry-docking amortization, and approximately $24 million of interest expense.
- Expected 2019 capital spending includes approximately $120 million of other capital expenditures, $225 million of vessel construction expenditures and $12 million of dry-docking payments.
- Management expects Hawaii volumes to remain approximately level, modestly higher Alaska volumes, lower China contribution and modestly lower Guam volumes because of competition.
- Remaining vessel construction obligations were $250.6 million at year-end, including $188.9 million due in 2019 and $61.7 million due in 2020.
- The revolving credit facility provided $304.0 million of remaining availability at December 31, 2018 and matures June 29, 2022. The company was in compliance with its debt covenants.
- Key risks include fuel-price volatility and recovery through surcharges, IMO 2020 sulfur regulations, labor disruptions, weather and natural disasters, vessel construction delays, terminal modernization costs, competition, economic weakness, tariffs and trade-policy changes, cybersecurity incidents, environmental liabilities and potential changes to the Jones Act.
- Matson’s estimated multi-employer pension withdrawal obligations were $244.2 million, although no additional withdrawal liability was recorded for plans from which management does not intend to withdraw. Contractual obligations totaled $1.91 billion, including debt, vessel construction, leases, pension obligations and other commitments.
- The company adopted the new revenue standard in 2018 with a de minimis impact and expected to recognize approximately $252.9 million of right-of-use assets and $260.6 million of lease liabilities upon adoption of the new lease standard on January 1, 2019.
- Management and Deloitte & Touche LLP concluded that internal control over financial reporting was effective as of December 31, 2018. Deloitte issued an unqualified audit opinion.
Important facts for investors to verify
- Reconcile reported 2018 net income and EPS with the unusually large 2017 Tax Act benefit and assess normalized earnings comparisons.
- Verify the timing, cost and operating performance of the remaining three new Hawaii vessels and the associated $250.6 million of construction commitments.
- Assess whether planned 2019 capital expenditures and the negative working-capital position are adequately supported by operating cash flow and available borrowing capacity.
- Monitor the earnings effect of the MV Maunalei sale-leaseback and the company’s ability to replace older steamships as planned.
- Evaluate exposure to fuel prices, IMO 2020 compliance costs, scrubber installation, low-sulfur fuel availability and surcharge recovery.
- Review multi-employer pension exposure, including the disclosed $244.2 million estimated withdrawal obligation and the $95.2 million contractual obligation amount shown in the maturity table.
- Confirm the effect of lease accounting adoption on reported assets, liabilities, EBITDA presentation and debt-covenant calculations.
- Track competitive pressure in the China and Guam trades, labor-agreement renewals during 2019 and the status of terminal modernization projects.