Matson, Inc. 2022 Q3 Form 10-Q Summary
Business context and reporting period
Matson provides ocean transportation and logistics services through two reportable segments: Ocean Transportation and Logistics. Ocean Transportation serves Hawaii, Alaska, Guam, Micronesia, China, Japan and the South Pacific and includes Matson’s 35% equity investment in SSAT. The Logistics segment provides transportation brokerage, freight forwarding, warehousing and supply-chain services.
The filing covers the three and nine months ended September 30, 2022, compared with the respective periods in 2021. Interim results are unaudited and may not be indicative of full-year results.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Operating revenue | $1,114.8 million | $1,071.6 million | $3,541.4 million | $2,658.3 million |
| Operating income | $335.3 million | $377.9 million | $1,261.0 million | $712.0 million |
| Income before taxes | $334.1 million | $374.6 million | $1,254.3 million | $698.8 million |
| Net income | $266.0 million | $283.2 million | $985.9 million | $532.9 million |
| Diluted EPS | $6.89 | $6.53 | $24.65 | $12.19 |
| Cash flow from operations | Not separately provided | Not separately provided | $1,102.5 million | $583.3 million |
- Q3 revenue increased 4.0%, while operating income declined 11.3% and net income declined 6.1%. Reduced average shares outstanding supported a 5.5% increase in diluted EPS.
- Nine-month revenue increased 33.2%, operating income increased 77.1%, and net income increased 85.0%. Diluted EPS increased 102.2%.
- Q3 Ocean Transportation revenue increased 6.4% to $918.5 million, but operating income decreased 12.9% to $315.2 million. The segment margin declined to 34.3% from 41.9%.
- Nine-month Ocean Transportation revenue increased 38.2% to $2,911.6 million, operating income increased 77.5% to $1,201.4 million, and the operating margin increased to 41.3% from 32.1%.
- Q3 Logistics revenue decreased 5.7% to $196.3 million, while operating income increased 25.6% to $20.1 million and the margin increased to 10.2% from 7.7%.
- Nine-month Logistics revenue increased 14.2% to $629.8 million, operating income increased 70.3% to $59.6 million, and the margin increased to 9.5% from 6.3%.
- SSAT contributed $23.4 million in Q3 and $82.1 million for the nine-month period, compared with $13.0 million and $35.0 million, respectively, in the prior-year periods.
Liquidity, cash flow, debt and capital allocation
- At September 30, 2022, cash and cash equivalents were $242.8 million, restricted cash was $3.9 million, and accounts receivable were $328.5 million.
- Cash, cash equivalents and restricted cash totaled $246.7 million at September 30, 2022, compared with $287.7 million at December 31, 2021.
- Working capital surplus increased to $274.6 million from $92.1 million, primarily due to higher operating cash generation and federal income tax receivables.
- Total debt declined to $531.8 million from $629.0 million at year-end 2021. There were no borrowings under the revolving credit facility, which had $642.2 million of remaining availability, net of letters of credit, at September 30, 2022.
- Operating cash flow was $1,102.5 million for the first nine months. Investing cash flow was negative $692.9 million, including $579.7 million deposited into the Capital Construction Fund and $125.3 million of vessel and other capital expenditures.
- Financing cash flow was negative $450.6 million, including $296.9 million of share repurchases, $97.2 million of debt repayments and $36.9 million of dividends.
- The Company repurchased approximately 3.5 million shares for $294.7 million during the first nine months. Approximately 3.0 million shares remained available under the repurchase program at September 30, 2022.
- The Capital Construction Fund held $565.0 million at September 30, 2022. The balance is classified as a long-term asset and is intended to fund qualified vessel construction expenditures.
Material changes versus the prior comparable period
- Q3 results reflected normalization in pandemic-related demand: Hawaii container volume declined 7.1%, China volume declined 15.1%, and Guam volume declined 1.8%; Alaska volume increased 10.6%.
- China freight rates remained above the Shanghai Containerized Freight Index but were below earlier pandemic highs. Lower China volume, higher CLX+ operating costs and higher fuel-related expenses reduced Q3 Ocean Transportation profitability.
- The temporary CCX service ended in early September 2022, approximately six weeks earlier than expected, because expedited-service demand declined and Southern California port congestion eased.
- Nine-month results benefited from substantially higher China freight rates and volume, higher fuel-related surcharge revenue, stronger Alaska volume and increased SSAT income.
- Total debt decreased by $97.2 million, including a $50.4 million prepayment of private-placement term loans and scheduled repayments.
- The Company recorded a $232.9 million income-tax receivable at September 30, 2022, primarily related to a federal refund associated with the Capital Construction Fund deduction.
Guidance, outlook, risks and unusual items
- Management expects the next two quarters to be challenging in the Transpacific trade lane as retailer inventories adjust and ocean carriers reduce capacity. For the remainder of 2022 and into Q1 2023, Matson expects lower year-over-year freight demand and lower CLX and CLX+ rates, while still expecting a significant premium to the Shanghai Containerized Freight Index.
- Management expects near-term economic growth in Hawaii and Guam to benefit from tourism recovery, and Alaska to benefit from energy-related activity and elevated oil prices. Inflation, higher interest rates, reduced discretionary income and the end of pandemic-era stimulus create uncertainty.
- On November 1, 2022, MatNav signed agreements for three LNG-ready, 3,600-TEU Aloha Class Jones Act containerships. The program is expected to cost approximately $1.0 billion, with deliveries anticipated in Q4 2026, Q2 2027 and Q4 2027. The first $50 million milestone payment was funded from the Capital Construction Fund.
- Remaining vessel construction payments are expected to be funded through the Capital Construction Fund, cash, operating cash flow, revolving-credit availability and additional debt financing. The filing identifies approximately $999 million of total milestone payments, including $121 million in 2023–2024 and $658 million in 2025–2026.
- CARB issued a Notice of Violation concerning alleged shore-power compliance violations by chartered vessels at the Port of Long Beach. Potential penalties for 2020–2022 could exceed $1 million in aggregate but are not expected to be material.
- Key risks include weaker economic conditions, lower transpacific demand and rates, fuel-price volatility, competition, labor disruptions following expiration of Pacific Maritime Association/ILWU agreements, environmental and climate regulation, vessel construction delays, Jones Act changes, cybersecurity incidents and access to debt markets.
- The Inflation Reduction Act introduces a 1% excise tax on share repurchases after December 31, 2022 and a potential 15% corporate alternative minimum tax. The Company was evaluating the law and related guidance.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2022, with no material changes to internal control over financial reporting during the quarter.
Investor verification checklist
- Verify the sustainability of China freight-rate premiums and the expected timing and magnitude of the transpacific volume and rate decline.
- Assess whether CLX and CLX+ cost structure, chartered-vessel commitments and fuel expenses could pressure Ocean Transportation margins.
- Review the funding plan, construction milestones, delivery risks and final economics of the approximately $1.0 billion Aloha Class vessel program.
- Monitor use of the $565.0 million Capital Construction Fund, the related tax benefits and potential future cash-tax effects.
- Track debt maturities, revolving-credit availability, covenant compliance and the impact of higher interest rates on future financing.
- Evaluate the effect of share repurchases, the remaining authorization and the post-2022 excise tax on capital allocation.
- Follow CARB settlement discussions, shore-power compliance and other environmental liabilities.
- Monitor labor negotiations, Jones Act developments, fuel prices, geopolitical conditions, tourism trends and macroeconomic conditions in Hawaii, Alaska and Guam.