Matson, Inc. — 2017 First-Quarter 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, Micronesia, the South Pacific and China, while Logistics provides transportation brokerage, freight forwarding, warehousing and supply-chain services. The unaudited filing covers the three months ended March 31, 2017, compared with the same period in 2016.
Results include Span Alaska, acquired August 4, 2016, from the acquisition date. Matson operates 22 owned vessels and five chartered vessels and owns 35% of the SSAT terminal joint venture.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Operating revenue | $474.4 million | $454.2 million | 4.4% |
| Operating income | $16.4 million | $34.6 million | (52.6%) |
| Operating margin | 3.5% | 7.6% | Down 4.1 percentage points |
| Income before taxes | $10.1 million | $29.7 million | (66.0%) |
| Net income | $7.0 million | $18.1 million | (61.3%) |
| Diluted EPS | $0.16 | $0.41 | (61.0%) |
| Operating cash flow | $4.0 million | $19.8 million | (79.8%) |
- Ocean Transportation revenue increased 1.1% to $370.0 million, but operating income fell 56.1% to $14.5 million and margin declined to 3.9% from 9.0%.
- Logistics revenue rose 18.5% to $104.4 million, primarily from Span Alaska and higher fuel-surcharge revenue. Operating income increased 18.8% to $1.9 million; margin remained 1.8%.
- The SSAT terminal joint venture contributed $4.9 million, compared with $2.6 million in the prior-year quarter.
- Cash and cash equivalents were $19.5 million at March 31, 2017, versus $13.9 million at December 31, 2016. Working capital was $26.2 million, compared with a $5.0 million deficiency at year-end.
- Total debt was $780.3 million, including $99.0 million drawn on the revolving credit facility, compared with total debt of $738.9 million at December 31, 2016. Revolver availability was $290.4 million and maturity was July 30, 2020.
- Investing cash outflows were $24.2 million, including $22.9 million of maintenance capital expenditures, $1.3 million of vessel construction expenditures and $15.1 million of dry-docking payments. Financing cash inflows were $25.8 million.
- Matson paid a quarterly dividend of $0.19 per share and repurchased 21,900 shares for $0.7 million during the quarter.
Material changes versus the prior comparable period
- Revenue growth did not translate into earnings growth because operating costs and expenses increased 9.2%, substantially faster than revenue.
- Ocean Transportation results were pressured by unfavorable timing of fuel-surcharge collections, lower Hawaii and Alaska container volume, deployment of an additional Hawaii vessel, and higher dry-docking amortization.
- China container volume increased 23.4% because of stronger expedited-service demand and an additional sailing. Hawaii, Alaska and Guam container volumes declined 5.5%, 4.2% and 6.9%, respectively.
- Logistics benefited from a full quarter of Span Alaska operations, but transportation brokerage margins were pressured by excess capacity and more competitive pricing.
- Operating cash flow declined due to lower net income, higher accounts receivable, timing of prepaid payments and increased dry-docking payments. Investing cash use improved partly because the company made no Capital Construction Fund deposit, versus a $12.5 million deposit in Q1 2016.
- Interest expense increased to $6.3 million from $4.9 million because of higher revolver and long-term borrowings. The effective tax rate decreased to 30.7% from 39.1%, primarily due to share-based compensation tax effects related to the adoption of ASU 2016-09.
Guidance, outlook, risks and unusual items
- Management expects 2017 Ocean Transportation operating income to be below the $141.3 million achieved in 2016 and expects second-quarter Ocean Transportation operating income to approximate $33.9 million.
- For 2017, Hawaii container volume is expected to approximate 2016 levels; China demand is expected to remain strong; Guam volume is expected to be lower; and Alaska volume is expected to be modestly lower due to continued energy-sector weakness.
- Full-year Logistics operating income is expected to be approximately $20 million, compared with $11.9 million in 2016, primarily from a full year of Span Alaska results. Second-quarter Logistics operating income is expected to be approximately double the $2.2 million reported in Q2 2016.
- Management expects 2017 EBITDA to approximate $288.6 million, depreciation and amortization to be approximately $150 million, interest expense to be approximately $25 million and the effective tax rate to be approximately 39%.
- Expected 2017 expenditures include approximately $50 million of maintenance capital, $210 million of capitalized vessel construction expenditures and $60 million of dry-docking payments.
- The principal newly identified risk concerns shipbuilding agreements with Philly Shipyard and NASSCO for four dual-fuel-capable vessels scheduled for delivery from the third quarter of 2018 through mid-2020. Delivery delays, failure to meet specifications, subcontractor issues or counterparty failure could adversely affect results.
- Management reported no material changes to contractual obligations, contingencies, market risk or critical accounting estimates. Environmental remediation and ordinary-course legal matters were not expected to be material.
- The company adopted ASU 2016-09 without a material financial statement impact. It was evaluating revenue-recognition and lease standards and did not expect the revenue standard to materially affect revenue timing or recognition based on its preliminary assessment.
Most important facts for investors to verify
- Whether Ocean Transportation margins recover from the Q1 decline and whether fuel-surcharge timing, vessel deployment and dry-docking costs normalize.
- Whether China volume and pricing remain strong while Hawaii, Alaska and Guam volumes face competitive or economic pressure.
- Span Alaska’s contribution to Logistics earnings and whether brokerage-margin compression persists.
- Funding needs and covenant capacity associated with the planned vessel construction program, including the $290.4 million of revolver availability and $780.3 million of total debt.
- Actual 2017 operating cash flow relative to substantial planned capital, construction and dry-docking expenditures.
- Execution, timing and cost risks under the Philly Shipyard and NASSCO vessel contracts.