Matson, Inc. — Form 10-Q Summary
Business context and reporting period
Matson provides ocean transportation and logistics services. Its Ocean Transportation segment serves Hawaii, Alaska, Guam, China, Micronesia, Okinawa and South Pacific markets and includes a 35% equity interest in SSAT terminal operations. Its Logistics segment provides transportation brokerage, freight forwarding, warehousing and supply-chain services. The filing covers the three months ended March 31, 2019; MatNav’s operating period ended March 29, 2019. Results for interim periods may not be indicative of full-year performance.
Financial performance and key metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total operating revenue | $532.4 million | $511.4 million | 4.1% |
| Ocean Transportation revenue | $397.9 million | $379.3 million | 4.9% |
| Logistics revenue | $134.5 million | $132.1 million | 1.8% |
| Operating income | $17.5 million | $28.7 million | (39.0%) |
| Net income | $12.5 million | $14.2 million | (12.0%) |
| Diluted EPS | $0.29 | $0.33 | (12.1%) |
| Operating cash flow | $33.4 million | $29.9 million | +$3.5 million |
- Consolidated operating margin was approximately 3.3%, compared with 5.6% in the prior-year quarter. Net margin was approximately 2.3%, compared with 2.8%.
- Ocean Transportation operating income fell to $9.4 million from $24.5 million, and its margin declined to 2.4% from 6.5%. The decline reflected higher vessel operating and terminal handling costs, weather-related impacts, MV Maunalei lease expense, lower Hawaii and Alaska volume, and a $2.0 million decrease in SSAT earnings.
- Logistics operating income increased to $8.1 million from $4.2 million, with margin improving to 6.0% from 3.2%, primarily from improved transportation brokerage and freight forwarding performance.
- Income taxes were $1.0 million, producing a 7.4% effective tax rate versus $10.3 million and 42.0% in Q1 2018. Q1 2019 included a favorable $2.9 million non-cash adjustment related to refundable alternative minimum tax credits; excluding discrete adjustments, the effective tax rate was 28.9% versus 28.6%.
- Cash used in investing activities was $33.2 million, including $20.9 million of vessel construction expenditures and $13.5 million of other capital expenditures. Financing cash flow was negative $0.4 million after debt repayments, net revolving-credit borrowings, dividends and share-tax withholding.
- Cash, cash equivalents and restricted cash ended at $24.3 million, including $15.4 million of unrestricted cash and $8.9 million of restricted cash.
- Total debt was $868.1 million at March 31, 2019, up from $856.4 million at December 31, 2018. Revolver borrowings increased to $255.0 million, and remaining revolver availability was $246.5 million. Working capital deficiency increased to $104.5 million from $52.4 million.
- Adoption of ASC 842 on January 1, 2019 added approximately $251.4 million of operating lease right-of-use assets and $259.1 million of operating lease liabilities at adoption, with a $4.4 million cumulative adjustment to retained earnings. Management stated that adoption did not significantly affect earnings, liquidity or debt covenants.
Material changes versus the prior comparable period
- Revenue increased $21.0 million, but operating expenses increased $32.2 million, more than offsetting the revenue growth.
- Ocean Transportation container volumes changed unevenly: Hawaii containers decreased 2.2%, Alaska containers decreased 5.7%, China containers increased 16.0%, Guam containers increased 4.1%, and other containers increased 12.9%.
- SSAT contribution declined to $8.5 million from $10.5 million, primarily because favorable one-time items recorded in the prior-year period did not recur.
- Operating cash flow improved despite lower net income, principally because of favorable accounts-receivable timing and collections. Investing outflows declined from $69.8 million to $33.2 million, largely because prior-year vessel construction and Capital Construction Fund activity was higher.
- Debt increased $11.7 million, primarily to fund vessel construction progress payments, while fixed-rate debt declined by $8.3 million due to scheduled repayments.
Guidance, outlook, risks and unusual items
- Management expects 2019 Ocean Transportation operating income to approximate the 2018 level of $131.1 million, after considering the full-year $7.2 million net operating expense impact associated with the MV Maunalei sale-and-leaseback. Second-quarter Ocean Transportation operating income is expected to be moderately lower year over year.
- Management expects 2019 Logistics operating income to be moderately above the 2018 level of $32.7 million; second-quarter Logistics operating income is expected to be modestly higher year over year.
- Full-year guidance includes approximately $130 million of depreciation and amortization, approximately $288 million of EBITDA, approximately $25 million of interest expense and an approximately 26.0% effective tax rate excluding the Q1 favorable tax adjustment.
- Expected 2019 capital spending includes approximately $120 million of other capital expenditures, $215 million of vessel construction expenditures and $12 million of dry-docking payments.
- Management expects Hawaii volume to approximate 2018 levels, China volume to approximate its exceptional 2018 level with freight rates approaching 2018 levels, modestly lower Guam volume, and modestly higher Alaska volume.
- Key risks include competitive and economic conditions in served markets, vessel operating costs, fuel and terminal costs, weather, construction and financing requirements for new vessels, environmental remediation exposure, lease obligations and pension-related costs. Management reported no material changes to previously disclosed risk factors, market risks, contractual obligations or contingencies.
- The company paid a $0.21-per-share dividend on March 7, 2019. The board declared another $0.21-per-share dividend payable June 6, 2019.
- Management stated that ordinary-course legal proceedings are not expected to have a material effect, and that the company was in material compliance with applicable environmental laws based on available information.
Important facts for investors to verify
- Whether Ocean Transportation margins recover as projected, particularly after the MV Maunalei lease expense and higher vessel and terminal costs.
- Whether 2019 volume and rate assumptions for Hawaii, China, Alaska and Guam are achieved.
- The sustainability of the Logistics segment’s sharp improvement in operating income.
- Progress payments, total funding requirements and delivery timing for the three vessels under construction.
- Revolver utilization, covenant compliance, debt maturities and liquidity after planned capital expenditures and dividends.
- The effect of the Q1 discrete tax benefit and whether the approximately 26.0% full-year tax-rate guidance is achieved.
- Potential obligations associated with operating leases, including the maximum residual-value guarantee of $50.9 million, or $47.7 million if the related charter is extended.