Matson, Inc. 2018 Second-Quarter 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, Okinawa, Micronesia and the South Pacific, while Logistics provides brokerage, freight forwarding, warehousing and supply-chain services. The filing covers the quarter and six months ended June 30, 2018; MatNav’s corresponding operating period ended June 29, 2018. Results are unaudited and interim results may not be indicative of full-year performance.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Operating revenue | $557.1 million, up 8.7% | $1,068.5 million, up 8.3% |
| Operating income | $46.0 million, down 2.1% | $74.7 million, up 16.4% |
| Operating margin | Approximately 8.3%, versus 9.2% | Approximately 7.0%, versus 6.5% |
| Net income | $32.6 million, up 35.8% | $46.8 million, up 51.0% |
| Diluted EPS | $0.76, versus $0.55 | $1.09, versus $0.72 |
| Operating cash flow | Not separately provided | $119.1 million, versus $63.4 million |
- Ocean Transportation revenue increased 3.5% in the quarter and 3.0% year to date. Segment operating income was $36.5 million in the quarter and $61.0 million year to date.
- Logistics revenue increased 25.6% in the quarter and 26.0% year to date. Segment operating income increased to $9.5 million and $13.7 million, respectively.
- SSAT Terminal Joint Venture income contributed $9.1 million in the quarter and $19.6 million year to date, compared with $6.9 million and $11.8 million in the prior-year periods.
- Interest expense was $5.0 million in the quarter and $10.0 million year to date, down from $6.3 million and $12.6 million, partly because more interest was capitalized.
- Effective tax rate was 21.3% in the quarter and 29.0% year to date, compared with 39.4% and 37.6%. The reduction primarily reflected the Tax Cuts and Jobs Act, partly offset by a $3.1 million non-cash AMT refund sequestration adjustment year to date.
- Cash and cash equivalents were $12.8 million at June 30, 2018, compared with $19.8 million at December 31, 2017. Working capital deficiency was $31.9 million.
- Total debt was $932.5 million, including $295.0 million outstanding under the revolving credit facility. Revolver availability was $236.3 million, with maturity on June 29, 2022.
- Net property and equipment increased to $1,307.1 million from $1,165.7 million, primarily reflecting vessel construction. Vessel construction in progress was $543.4 million, related to four new Hawaii-service vessels.
- Six-month investing cash use was $180.4 million, including $166.8 million of vessel construction expenditures and $25.5 million of other capital expenditures. Financing cash flow was positive $54.3 million, driven primarily by net revolver borrowings.
- The quarterly dividend was $0.20 per share; the board declared a $0.21 per-share dividend payable September 6, 2018.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue grew $44.6 million, but operating income declined $1.0 million because operating costs increased faster than revenue. Ocean Transportation operating income declined $3.5 million, while Logistics operating income increased $2.5 million.
- Year-to-date operating income increased $10.5 million, supported by Logistics growth, lower vessel operating costs and higher SSAT earnings.
- Ocean Transportation quarterly container volumes were flat in Hawaii, down 0.6% in Alaska, down 5.9% in China and down 11.1% in Guam. China volume was affected by one fewer sailing; Guam reflected competitive losses.
- Year-to-date China and Guam container volumes declined 13.7% and 10.2%, respectively, while Alaska volume increased 4.5%.
- Operating cash flow increased $55.7 million, helped by higher net income, larger SSAT distributions, lower dry-docking payments and higher accounts payable and accruals.
- Debt increased $75.4 million from year-end, primarily due to a $90.0 million net increase in revolver borrowings used largely to fund new-vessel construction.
- The company adopted revenue standard ASU 2014-09 with an immaterial effect, early adopted ASU 2018-02 and reclassified $6.0 million from accumulated other comprehensive loss to retained earnings, and adopted ASU 2017-07 with presentation reclassifications but no effect on pretax income.
Guidance, Outlook, Risks and Unusual Items
- Management expects 2018 Ocean Transportation operating income to be modestly higher than 2017’s $126.4 million, but expects third-quarter Ocean Transportation operating income to be modestly lower than the prior-year $51.0 million.
- Management expects Hawaii volume approximately in line with 2017, China volume modestly lower with pricing approximately unchanged, lower Guam volume, and modestly higher Alaska volume.
- Logistics second-half operating income is expected to improve year over year by approximately the first-half increase; third-quarter operating income is expected to be moderately higher year over year.
- Full-year guidance includes approximately $132 million of depreciation and amortization, $296.0 million of 2017 EBITDA as the comparison point for expected modestly lower 2018 EBITDA, $22 million of interest expense, and a 28% effective tax rate for the balance of 2018.
- Expected 2018 expenditures are approximately $83 million for maintenance capital, $388 million for vessel construction and $17 million for dry-docking.
- Key risks include competitive losses in Guam, China and Alaska volume variability, fuel and terminal-handling costs, execution and funding of the four-vessel construction program, leverage and limited cash balances, environmental remediation exposure, pension and post-retirement obligations, tax-law interpretations, and normal-course litigation. Management reported no material changes to previously disclosed risk factors or contingencies.
- The company stated that it was materially compliant with environmental laws and that other legal matters were not expected to materially affect financial condition, results or cash flows.
Important Facts for Investors to Verify
- Verify the timing, cost, financing and delivery status of the four new Hawaii-service vessels and related capital commitments.
- Track revolver borrowings, remaining availability, debt maturities and liquidity given the working capital deficiency and low cash balance.
- Assess whether Logistics growth and SSAT contributions offset competitive pressure and volume declines in Guam and China.
- Reconcile the benefit of lower tax rates with the $3.1 million AMT-related non-cash adjustment and future Tax Act interpretations.
- Compare actual 2018 results with management’s guidance for Ocean Transportation, Logistics, EBITDA, tax rate and capital expenditures.
- Consider seasonality, including Alaska’s seafood cycle, and management’s warning that interim results may not represent full-year performance.