Matson, Inc. — Form 10-Q Summary
Business context and reporting period
Matson provides ocean transportation and logistics services, primarily serving Hawaii, Alaska, Guam, China, Micronesia, the South Pacific and related markets. The filing covers the unaudited quarter and nine months ended September 30, 2018; MatNav’s operating period ended September 28, 2018. The report contains two segments: Ocean Transportation and Logistics.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Operating revenue | $589.4 million | $543.9 million | $1,657.9 million | $1,530.8 million |
| Operating income | $58.6 million | $58.3 million | $133.3 million | $122.5 million |
| Net income | $41.6 million | $34.1 million | $88.4 million | $65.1 million |
| Diluted EPS | $0.97 | $0.79 | $2.06 | $1.50 |
| Operating margin | 9.9% | 10.7% | 8.0% | 8.0% |
- Q3 revenue increased 8.4%, while operating income increased 0.5% and net income increased 22.0%. Nine-month revenue increased 8.3%, operating income increased 8.8% and net income increased 35.8%.
- Q3 Ocean Transportation revenue rose 4.3% to $437.3 million, but segment operating income declined 4.5% to $48.7 million and margin fell to 11.1% from 12.2%. Nine-month segment operating income increased 3.2% to $109.7 million, with a 9.0% margin.
- Q3 Logistics revenue increased 22.0% to $152.1 million and operating income increased 35.6% to $9.9 million. Nine-month revenue rose 24.6% to $434.7 million and operating income rose 45.7% to $23.6 million; margin improved to 5.4% from 4.6%.
- SSAT terminal joint venture income increased to $9.2 million in Q3 and $28.8 million for nine months, compared with $7.5 million and $19.3 million, respectively.
- Operating cash flow for nine months was $203.0 million, up from $147.0 million. Investing cash use was $231.4 million, including $222.6 million of vessel construction expenditures and $44.7 million of other capital expenditures.
- Cash and equivalents were $12.1 million at September 30, 2018, compared with $19.8 million at December 31, 2017. Working capital was negative $24.6 million.
- Total debt increased to $908.1 million from $857.1 million at year-end, primarily because revolving-credit borrowings increased to $273.0 million. Revolver availability was $243.2 million, with maturity on June 29, 2022.
Material changes versus comparable periods
- Ocean Transportation revenue benefited from higher fuel surcharge revenue and China freight rates, but Q3 operating income was pressured by unfavorable fuel-surcharge timing and higher terminal handling costs.
- Q3 container volumes declined 1.1% in Hawaii, 2.0% in Alaska and 3.3% in China; Guam was flat. Other volumes increased 36.4%, partly reflecting the Okinawa service.
- For the first nine months, China volume declined 9.9% and Guam volume declined 7.1%, while Other volume increased 43.0% and Alaska volume increased 2.1%.
- Logistics growth was driven primarily by higher transportation brokerage revenue and improved contributions from transportation brokerage and freight forwarding.
- The lower effective tax rate materially supported earnings: 24.2% in Q3 2018 versus 38.7% in Q3 2017, and 26.8% for nine months versus 38.2%. The 2018 nine-month rate includes a $3.1 million non-cash tax expense related to estimated AMT refund sequestration.
- 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-only reclassifications.
Guidance, outlook, risks and unusual items
- Management expects full-year 2018 Ocean Transportation operating income to be modestly above 2017’s $126.4 million and Logistics operating income to approximate $30 million.
- Full-year EBITDA is expected to be modestly above $296.0 million; depreciation and amortization is expected to be approximately $132 million, including approximately $36 million of dry-docking amortization.
- Expected full-year interest expense is approximately $19 million. Fourth-quarter effective tax rate guidance is approximately 26.0%.
- Expected 2018 capital spending includes approximately $77 million of maintenance capital, $350 million of vessel construction expenditures and $19 million of dry-docking payments.
- The company is constructing four Hawaii-service vessels. The first Aloha Class vessel was delivered October 31, 2018; the second is expected in the first quarter of 2019, with the two Kanaloa Class vessels expected at the end of 2019 and in the fourth quarter of 2020.
- Remaining contractual obligations for vessel construction and operating leases totaled $634.4 million, including $562.5 million for vessel construction. Timing and amounts may change materially.
- Key risks include competitive pressure in Guam, weaker-than-expected Alaska seafood volumes, fuel and terminal-cost volatility, environmental remediation exposure, and potential shipbuilding delays, specification failures, subcontractor issues or shipyard insolvency.
- Management reported no material changes to other contractual obligations, market risks or legal contingencies. Disclosure controls were effective, and no material internal-control changes were identified.
- The quarterly dividend was $0.21 per share; the board declared another $0.21 per share dividend payable December 6, 2018. No common-stock repurchases occurred during the quarter.
Important facts for investors to verify
- Whether vessel construction remains on schedule and within the remaining $562.5 million construction obligation.
- Whether the higher Logistics growth and improved margins are sustainable.
- Whether Ocean Transportation margins recover despite competitive pressure, volume declines and fuel-surcharge timing.
- The effect of increased revolving-credit borrowings and the company’s low cash balance on liquidity during the vessel investment program.
- Future tax-rate effects from the Tax Cuts and Jobs Act, AMT refund treatment and related IRS interpretations.
- Actual 2018 results relative to the company’s Ocean Transportation, Logistics, EBITDA, tax, interest and capital-expenditure guidance.