Matson, Inc. 2012 Form 10-K Summary
Business context and reporting period
Matson filed its annual report for the fiscal year ended December 31, 2012, including fourth-quarter information. The company operates two segments: asset-based Ocean Transportation serving Hawaii, Guam, Micronesia, China and other Pacific markets, and asset-light Logistics services, including rail intermodal, highway brokerage and warehousing.
The June 29, 2012 separation from Alexander & Baldwin created Matson as an independent public company. Prior-period results were restated for discontinued operations related to A&B and the terminated CLX2 China service.
Financial performance and key metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Total operating revenue | $1,560.0 million | $1,462.6 million | 6.7% |
| Ocean Transportation revenue | $1,189.8 million | $1,076.2 million | 10.6% |
| Logistics revenue | $370.2 million | $386.4 million | (4.2)% |
| Operating income | $96.7 million | $78.6 million | 23.0% |
| Operating margin | 6.2% | 5.4% | Improved |
| Income from continuing operations | $52.0 million | $45.8 million | 13.5% |
| Net income | $45.9 million | $34.2 million | 34.2% |
| Diluted EPS | $1.08 | $0.81 | 33.3% |
| Operating cash flow from continuing operations | $94.0 million | $104.1 million | Declined |
| Capital expenditures | $38.1 million | $47.2 million | Declined |
| Total debt at year-end | $319.1 million | $197.5 million | Increased |
Ocean Transportation operating income rose to $96.6 million from $73.7 million, with the segment margin increasing to 8.1% from 6.8%. Logistics operating income fell to $0.1 million from $4.9 million, producing an approximately zero margin versus 1.3% in 2011. SSAT joint-venture earnings declined to $3.2 million from $8.6 million.
Fourth-quarter 2012 revenue was $398.3 million, operating income was $23.9 million, income from continuing operations was $15.7 million and net income was $15.6 million. Fourth-quarter diluted EPS was $0.37, compared with $0.04 in the fourth quarter of 2011.
Year-end liquidity included $19.9 million of cash and cash equivalents and $174.7 million of receivables. The company had a new $375.0 million five-year revolving credit facility, of which $30.8 million was used at year-end, including $24.0 million of borrowings and $6.8 million of letters of credit. Debt covenant compliance was reported, with debt-to-consolidated EBITDA of 1.79 and consolidated EBITDA-to-interest expense of 15.25.
Material changes versus the prior comparable period
- Ocean Transportation benefited from a 67.8% increase in Guam container volume after a major competitor exited the trade in late 2011, higher China freight rates and higher fuel surcharges.
- Hawaii container volume decreased 2.0% and automobile volume decreased 2.7% because of market weakness, competitive pressures, direct foreign sourcing and rental-fleet replacement timing.
- Logistics revenue declined because of lower international intermodal and highway volumes, including the loss of a major ocean-carrier customer and certain truckload customers.
- Logistics recorded a $2.1 million intangible-asset impairment and additional restructuring-related costs; total identified charges were approximately $3.9 million.
- The company incurred $8.6 million of separation costs and total separation-related cash outflows of $166.2 million, including a $155.7 million capital contribution to A&B.
- Debt increased primarily because Matson issued $170.0 million of fixed-rate debt and borrowed to fund the separation contribution.
- Cash dividends decreased to $0.93 per share from $1.26 per share, reflecting the post-separation dividend policy.
Guidance, outlook, risks and unusual items
- Management expected modest improvement in Ocean Transportation operating income in 2013, supported by lower outside transportation costs and a lighter dry-dock schedule.
- Hawaii volumes were expected to gain modestly, but management identified potential competitive disruption from Pasha Hawaii’s planned second vessel, potentially as early as 2014.
- China freight rates were expected to erode modestly because additional vessel capacity was expected to exceed demand.
- Guam volumes were expected to remain relatively flat, while SSAT was expected to operate around breakeven after customer losses.
- Logistics management targeted 2013 operating margins of 1% to 2% and operating income similar to 2011, dependent on warehouse improvements, cost controls and economic conditions.
- 2013 capital expenditures were expected at $40 million to $50 million, excluding vessel replacement expenditures; first-quarter expenditures were expected at $10 million to $15 million.
- Management may make significant Capital Construction Fund deposits if it finalizes a vessel replacement plan involving two new vessels over three to five years.
- Key risks include fuel-price volatility, economic weakness, freight-rate and vessel-capacity pressure, labor disruptions, adverse weather, environmental events, regulatory changes affecting the Jones Act, pension and multiemployer-plan obligations, credit-market access, customer concentration and foreign-market risks.
- The Department of Justice investigation into domestic water-carriage pricing and competitive practices remained unresolved; the company could not predict its outcome or financial impact.
- Multiemployer pension withdrawal liabilities were estimated at $102.1 million, although management had no present intention to withdraw from the plans.
- In January 2013, Matson completed its acquisition of primary assets formerly owned by Reef Shipping for $9.6 million, funded with revolving-credit borrowings and cash.
Most important facts for investors to verify
- Whether Guam’s volume benefit persists and whether new competition enters the Guam or Hawaii trades.
- Whether China freight-rate declines and global vessel overcapacity reduce Ocean Transportation earnings.
- Progress in restoring Logistics profitability to the stated 1% to 2% margin target.
- Fuel prices, surcharge recovery and the effect of dry-docking and labor costs on cash flow.
- Debt repayment requirements, revolving-facility availability and continued compliance with financial covenants.
- Potential exposure from the Department of Justice investigation, multiemployer pension plans and separation-related tax obligations.
- Capital requirements and financing implications of the potential vessel replacement program.