Matson, Inc. 10-Q Summary
Business Context and Reporting Period
Matson, Inc. provides ocean transportation and logistics services through two reportable segments: Ocean Transportation and Logistics. Ocean Transportation serves Hawaii, Alaska, Guam, Micronesia, China, Okinawa, 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.
This unaudited Form 10-Q covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods. MatNav’s reporting period ended July 1, 2022.
Financial Performance and Key Metrics
| Metric | Q2 2022 | Q2 2021 | Change |
|---|---|---|---|
| Total operating revenue | $1,261.1 million | $874.9 million | +44.1% |
| Operating income | $493.1 million | $213.9 million | +130.5% |
| Operating margin | 39.1% | 24.4% | +14.7 percentage points |
| Net income | $380.7 million | $162.5 million | +134.3% |
| Net margin | 30.2% | 18.6% | +11.6 percentage points |
| Diluted EPS | $9.49 | $3.71 | +155.8% |
| Interest expense | $4.5 million | $5.5 million | Down 18.2% |
| Metric | Six Months 2022 | Six Months 2021 | Change |
|---|---|---|---|
| Total operating revenue | $2,426.6 million | $1,586.7 million | +52.9% |
| Operating income | $925.7 million | $334.1 million | +177.1% |
| Operating margin | 38.1% | 21.1% | +17.0 percentage points |
| Net income | $719.9 million | $249.7 million | +188.3% |
| Net margin | 29.7% | 15.7% | +14.0 percentage points |
| Diluted EPS | $17.69 | $5.70 | +210.4% |
Ocean Transportation revenue increased 53.6% in Q2 and 60.3% year to date, while segment operating income increased 133.8% and 181.2%, respectively. Ocean Transportation operating margins were 44.8% in Q2 and 44.5% year to date, compared with 29.4% and 25.3% in the prior-year periods.
Logistics revenue increased 10.4% in Q2 and 26.3% year to date. Logistics operating income increased 79.1% in Q2 and 107.9% year to date, with margins of 10.9% and 9.1%, respectively, versus 6.7% and 5.5% in the prior-year periods.
SSAT contributed $24.7 million in Q2 and $58.7 million year to date, compared with $12.8 million and $22.0 million, respectively, in 2021. The improvement was primarily driven by higher other terminal revenue.
Cash Flow, Liquidity and Capital Structure
- Six-month operating cash flow was $691.1 million, compared with $238.8 million in 2021.
- Investing cash flow used $79.0 million, including $11.4 million of vessel construction expenditures and $68.4 million of other capital expenditures.
- Financing cash flow used $285.5 million, including $208.5 million for share repurchases, $32.5 million of debt repayments and $25.0 million of dividends.
- Cash, cash equivalents and restricted cash increased to $614.3 million at June 30, 2022, from $287.7 million at December 31, 2021. Cash and cash equivalents were $609.0 million.
- Working capital surplus increased to $480.6 million from $92.1 million at year-end 2021.
- Total debt was $596.6 million, down from $629.0 million at December 31, 2021. There were no borrowings under the revolving credit facility, which had $642.0 million of remaining availability and matures March 31, 2026.
- Operating lease liabilities totaled $466.6 million on a present-value basis, including $152.4 million current and $314.2 million long term.
- The company repurchased approximately 2.3 million shares for $206.7 million during the first six months. Approximately 1.2 million shares remained available under the repurchase program at June 30, 2022.
Material Changes Versus the Prior Comparable Period
- China container volume increased 11.7% in Q2 and 12.5% year to date, supported by additional eastbound voyages, higher demand and substantially higher average freight rates.
- Alaska container volume increased 12.2% in Q2 and 15.9% year to date, while Hawaii container volume declined 1.5% and 1.1%, respectively, primarily because of lower retail-related demand.
- Guam container volume declined 7.0% in Q2 but increased 0.9% year to date.
- Ocean Transportation results benefited from higher China freight rates and volume, fuel-related surcharge revenue and stronger SSAT results, partially offset by higher fuel expenses and higher costs associated with CLX+ and CCX services.
- Revenue growth substantially exceeded expense growth, resulting in significant operating-margin expansion.
- Income taxes increased with earnings, but effective tax rates declined to 22.4% in Q2 and 21.8% year to date, partly due to the foreign-derived intangible income deduction.
- The weighted average diluted share count declined to 40.1 million in Q2 and 40.7 million year to date, from 43.8 million in both comparable 2021 periods, primarily reflecting share repurchases.
Guidance, Outlook, Risks and Unusual Items
Management expected solid demand in the China service, with vessels operating at or near capacity and maintaining a significant premium to market freight rates. However, management observed that Transpacific freight rates had declined from earlier-year highs and likely peaked for the time being. The company expected an orderly market for the remainder of 2022 and planned to operate the CCX service through the October peak season.
Management expected continued recovery in Hawaii, Guam and Alaska from the pandemic, supported by tourism and, in Alaska, energy-related activity. It also highlighted uncertainty from weakening U.S. and global economic conditions, high inflation, higher interest rates, reduced household discretionary income and the expiration of pandemic-era stimulus.
Potential risks include freight-rate normalization, demand changes, fuel costs, supply-chain disruption, economic weakness, tourism trends and execution costs for expanded services. The company stated that there were no material changes to the risk factors in its 2021 Form 10-K.
California’s Air Resources Board issued a Notice of Violation related to shore-power requirements for chartered vessels at the Port of Long Beach in 2020. Potential penalties for 2020 through 2022 could exceed $1 million in aggregate, but management did not expect them to be material to financial condition, results of operations or cash flows.
No goodwill impairment triggering event was identified during the quarter, although future changes in market conditions, forecasts, discount rates or industry trends could require a non-cash impairment charge. The board declared a $0.31 per-share dividend payable September 1, 2022.
Facts Investors Should Verify
- Whether China freight rates and premiums remain durable as Transpacific market rates normalize.
- The sustainability of exceptionally high Ocean Transportation margins and the effect of fuel costs, surcharges and CLX+/CCX operating costs.
- Volume trends in Hawaii and Guam, including exposure to inflation, interest rates and lower discretionary spending.
- Remaining capital requirements for vessel construction, fleet renewal, containers and other equipment.
- Future share repurchase activity, dividend payments and the impact of reduced share count on EPS.
- Resolution and potential cost of the CARB environmental matter and compliance with shore-power requirements.
- SSAT distributions and earnings contribution, which depend on SSAT’s cash availability and future capital needs.