Matson, Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2016; filed August 3, 2016. The financial statements are unaudited. MatNav’s fiscal period ended June 24, 2016. Matson provides ocean transportation and logistics services, with 22 owned vessels and a 35% interest in SSA Terminals, LLC.
Financial Performance and Position
| Metric | Three Months 2016 | Three Months 2015 | Six Months 2016 | Six Months 2015 |
|---|---|---|---|---|
| Operating revenue | $467.7 million | $447.6 million | $921.9 million | $845.8 million |
| Operating income | $36.1 million | $33.7 million | $70.7 million | $78.6 million |
| Net income | $18.0 million | $9.9 million | $36.1 million | $34.9 million |
| Diluted EPS | $0.42 | $0.23 | $0.83 | $0.79 |
| Operating margin | 7.7% | 7.5% | 7.7% | 9.3% |
- Revenue mix: Ocean Transportation revenue was $370.9 million in the second quarter and $737.0 million for the first six months. Logistics revenue was $96.8 million and $184.9 million, respectively.
- Segment profitability: Second-quarter Ocean Transportation operating income increased to $33.9 million from $31.4 million, while six-month operating income declined to $66.9 million from $75.3 million. Logistics operating income was $2.2 million in the quarter and $3.8 million year to date.
- Cash flow: Six-month operating cash flow was $78.8 million, compared with $102.9 million in the prior-year period. Investing cash use was $64.1 million, including $65.8 million of capital expenditures. Financing cash use was $21.0 million.
- Cash and working capital: Cash declined to $19.2 million from $25.5 million at December 31, 2015. Working capital was negative $35.9 million, compared with negative $19.7 million at year-end.
- Debt and liquidity: Total debt was $462.8 million, including $44.0 million drawn on the revolving credit facility, compared with $429.9 million at year-end. Revolver availability was $345.1 million, with maturity on July 30, 2020.
- Shareholder returns: The company paid a quarterly dividend of $0.18 per share and declared a $0.19 per-share dividend payable September 1, 2016. It repurchased 340,001 shares during the quarter for $11.9 million, or an average of $34.85 per share.
Material Changes Versus Prior Comparable Period
- Second-quarter revenue increased 4.5%, operating income increased 7.1%, and net income increased 81.8%, primarily reflecting lower tax expense and the absence of certain Horizon acquisition-related and Molasses Settlement costs.
- Six-month revenue increased 9.0%, but operating income fell 10.1% because costs grew faster than revenue. Net income increased 3.4%, mainly because the prior-year period included unfavorable tax effects related to the Horizon acquisition.
- Ocean Transportation benefited from a full period of Horizon’s Alaska operations and stronger Hawaii volumes, but was pressured by lower China freight rates and volumes, higher vessel and terminal costs, and lower SSAT joint-venture income.
- Logistics revenue declined 4.5% year to date, primarily because of lower fuel surcharge revenue, while operating income improved 15.2% through volume growth, warehouse improvements, and expense control.
- Operating cash flow declined $24.1 million year over year, while capital expenditures increased by $53.6 million. The company also used $32.3 million for share repurchases and increased net revolving-credit borrowings.
- Depreciation and amortization rose to $47.6 million in the first half from $35.6 million, partly reflecting the Horizon acquisition and higher dry-docking activity.
Guidance, Outlook, Risks, and Unusual Items
- Ocean Transportation outlook: Full-year 2016 operating income is expected to be approximately 15% to 20% below 2015’s $187.8 million; third-quarter operating income is expected to be approximately 25% below the 2015 third-quarter level of $68.9 million.
- Hawaii container volume is expected to be moderately higher for 2016, although second-half volume is expected to approximate the prior-year level. China volume and rates remain pressured by weak market conditions and overcapacity. Alaska volumes are expected to be modestly lower in the second half, and Guam is expected to experience competitive volume losses.
- Logistics operating income is expected to modestly exceed 2015’s $8.5 million. Full-year interest expense is expected to be approximately $23 million, and the effective tax rate approximately 39%.
- Expected 2016 cash spending includes approximately $85 million of capital expenditures, $67.2 million of new-vessel construction progress payments, and $60 million of dry-docking payments. Depreciation and amortization is expected to be approximately $133 million.
- Pending acquisition: Matson agreed to acquire Span Alaska for $197.6 million, subject to adjustments and customary closing conditions. Closing was expected in early August 2016 and was excluded from the 2016 outlook. The transaction was expected to be funded with revolver borrowings.
- Planned financing: Matson expected to issue $200 million of 15-year senior unsecured notes at a 3.14% interest rate, with proceeds used primarily to repay revolver borrowings and for general corporate purposes.
- Horizon accounting: Purchase accounting was finalized, including a $3.5 million goodwill increase and a final Puerto Rico multi-employer withdrawal liability of approximately $102.0 million payable over 98 quarterly installments plus a remainder payment. The liability had a fair value of $65.5 million at the acquisition date.
- Key risks include failure to close or integrate Span Alaska, use of significant revolver capacity if the planned notes financing is delayed, weak transpacific and Alaska freight markets, competitive losses, fuel and operating cost changes, environmental remediation exposure, pension obligations, and ordinary-course litigation.
- Management stated that pending legal matters and environmental exposures were not expected to have a material effect based on information then available. Disclosure controls were assessed as effective, with no material changes to internal control over financial reporting.
Investor Verification Checklist
- Verify the closing status, purchase accounting, financing, and integration performance of the Span Alaska acquisition.
- Monitor revolver borrowings, remaining availability, the issuance and terms of the planned $200 million notes, and covenant compliance.
- Assess whether China freight rates, Alaska volumes, Guam competition, and SSAT results are tracking management’s outlook.
- Reconcile capital spending, vessel construction payments, dry-docking expenditures, and expected depreciation and amortization with cash generation.
- Evaluate the sustainability of earnings growth after removing the favorable year-over-year tax comparison and acquisition-related cost effects.
- Review the Puerto Rico multi-employer withdrawal liability, pension funding requirements, environmental matters, and other contingencies.