Matson, Inc. — Fiscal 2014 Form 10-K Summary
Business context and reporting period
Matson provides ocean transportation and logistics services through two segments: Ocean Transportation and Logistics. Ocean Transportation serves Hawaii, Guam, Micronesia, the South Pacific and provides expedited China-to-Long Beach service; Logistics provides intermodal, highway brokerage, warehousing and distribution services. The filing covers the fiscal year ended December 31, 2014, with quarterly information for fourth-quarter 2014.
Matson operated 18 owned and three chartered vessels and held a 35% interest in SSAT, a West Coast terminal joint venture. Approximately 63% of Ocean Transportation revenue came from Jones Act trades in 2014.
Key financial metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Operating revenue | $1,714.2 million | $1,637.2 million | +4.7% |
| Ocean Transportation revenue | $1,278.4 million | $1,229.4 million | +4.0% |
| Logistics revenue | $435.8 million | $407.8 million | +6.9% |
| Operating income | $140.0 million | $100.3 million | +39.6% |
| Operating margin | 8.2% | 6.1% | +210 basis points |
| Net income | $70.8 million | $53.7 million | +31.8% |
| Diluted EPS | $1.63 | $1.25 | +30.4% |
| Operating cash flow | $165.7 million | $195.7 million | -15.3% |
| Capital expenditures | $27.9 million | $35.2 million | -20.7% |
| Total debt | $373.6 million | $286.1 million | +30.6% |
Net margin was approximately 4.1%, compared with 3.3% in 2013. Cash and cash equivalents were $293.4 million at year-end, versus $114.5 million in 2013. Cash, cash equivalents and receivables totaled $491.0 million. The $375.0 million revolving credit facility had $6.0 million utilized, entirely for letters of credit.
Debt increased primarily because Matson issued $100.0 million of 4.35% senior unsecured notes in January 2014. The company was in compliance with its debt covenants, including a debt-to-EBITDA ratio of 1.77 and EBITDA-to-interest ratio of 12.21, against limits of 3.25 and 3.50, respectively.
Fourth-quarter 2014
| Metric | Q4 2014 | Q4 2013 | Change |
|---|---|---|---|
| Operating revenue | $443.5 million | $410.9 million | +7.9% |
| Operating income | $49.4 million | $17.9 million | +176.0% |
| Net income | $27.8 million | $7.3 million | +280.8% |
| Diluted EPS | $0.63 | $0.17 | +270.6% |
Q4 Ocean Transportation operating income was $46.3 million, compared with $16.0 million in the prior-year quarter. Logistics operating income was $3.1 million, compared with $1.9 million. The 2013 quarter was affected by a $9.95 million litigation charge; Q4 2014 benefited from higher China freight rates, fuel-surcharge timing and improved operating performance.
Material changes versus the prior comparable period
- Ocean Transportation operating income increased 39.0% to $131.1 million, and its margin improved to 10.3% from 7.7%.
- Ocean Transportation revenue growth reflected higher freight yields, increased fuel-surcharge revenue and South Pacific growth, partly offset by a 13.4% decline in Hawaii automobile volume.
- Hawaii container volume was essentially flat; China container volume increased 1.1%; Guam volume increased 2.1%; and Micronesia/South Pacific volume increased 15.6%.
- Logistics operating income increased to $8.9 million from $6.0 million, while its margin improved to 2.0% from 1.5%, driven by highway volume, yields, warehouse improvements and a favorable litigation settlement.
- SSAT contributed $6.6 million of income in 2014 versus a $2.0 million loss in 2013.
- Operating cash flow declined despite higher earnings, principally because of changes in deferred taxes, lower CCF-related effects and higher receivables. Matson made net Capital Construction Fund contributions of $65.5 million in 2014.
- Other comprehensive loss was $29.8 million, primarily reflecting pension and post-retirement items; accumulated other comprehensive loss increased to $53.3 million from $23.5 million.
Guidance, outlook, risks and unusual items
Management expected 2015 Ocean Transportation operating income to be modestly higher than 2014 and first-quarter 2015 operating income to approach Q4 2014 levels. Hawaii container volume was expected to approximate 2014 levels because of additional competitor capacity, while China demand and premium freight rates were expected to remain strong. Logistics operating income was expected to exceed $8.9 million, and 2015 interest expense was expected to decline slightly from $17.3 million. Management projected a 2015 effective tax rate of approximately 38.5%.
Planned 2015 maintenance capital expenditures were approximately $40.0 million, plus $33.4 million of scheduled payments for the two vessels under construction. The company expected additional CCF contributions that could exceed the $65.5 million net contribution made in 2014.
Matson agreed to acquire Horizon Lines’ Alaska operations and assume its non-Hawaii assets and liabilities. The transaction value was approximately $456.0 million before transaction costs and was expected to be funded with cash and revolver borrowings. Management estimated approximately $25.0 million of one-time closing costs and $20.0 million to $25.0 million of restructuring and integration costs. Closing depended on the Pasha Hawaii transaction, regulatory clearance and other conditions; Horizon stockholders approved the transaction on February 25, 2015.
Matson incurred $4.6 million in 2014 for legal fees, penalties and other expenses related to the September 2013 Honolulu Harbor molasses release. A $1.0 million liability was accrued for the criminal resolution, but potential civil claims and other future costs could not be estimated and could be material.
- Key operating risks include economic weakness, lower freight volumes or rates, global vessel overcapacity, new Hawaii competition, fuel-price volatility and inability to recover fuel costs through surcharges.
- Labor agreements covering West Coast longshore workers had expired, although a tentative five-year agreement was announced in February 2015. Hawaii and Oakland agreements were operating under extensions, creating potential strike, slowdown or lockout risk.
- The Honolulu terminal lease expires in September 2016 and was under renewal discussions.
- Material contingencies include $94.8 million of estimated multiemployer pension withdrawal obligations, $20.6 million of bonds and $6.0 million of standby letters of credit; these amounts were not recorded as balance-sheet liabilities under the disclosed circumstances.
- The company remains exposed to environmental incidents, natural disasters, cybersecurity events, pension assumptions, regulatory changes affecting the Jones Act and risks associated with the Horizon acquisition.
Investor verification checklist
- Verify the final closing, financing, integration costs and operating performance of the Horizon acquisition.
- Assess whether Hawaii competition and lower automobile volumes affect freight yields and Ocean Transportation margins.
- Review China freight rates, vessel utilization and the effect of global container overcapacity.
- Monitor resolution and financial exposure from the Honolulu Harbor molasses release, including potential civil claims.
- Reconcile liquidity after CCF contributions, vessel-construction payments, capital expenditures and Horizon funding.
- Review labor-contract ratifications and any resulting wage, service or disruption costs.
- Evaluate pension funding status, the $94.8 million withdrawal exposure and the effect of lower discount rates or other actuarial changes.
- Confirm that debt covenants remain satisfied after any acquisition-related borrowing; management reported effective disclosure controls and no material weakness as of December 31, 2014.