Matson, Inc. Form 10-Q Summary
Business Context and Reporting Period
Matson is a U.S. Pacific ocean freight carrier serving Hawaii, Guam, Micronesia, China, and the South Pacific, with an asset-light logistics segment covering intermodal, highway brokerage, warehousing, and distribution. The filing covers the unaudited quarter and nine months ended September 30, 2013, compared with the corresponding 2012 periods.
Ocean transportation includes an 18-vessel fleet and a 35% interest in SSA Terminals, LLC. Matson began South Pacific service in January 2013 after acquiring the primary assets of Reef Shipping Limited.
Financial Performance and Key Metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Operating revenue | $415.0 million | $401.4 million | $1,226.3 million | $1,161.7 million |
| Operating income | $27.2 million | $34.2 million | $82.4 million | $72.8 million |
| Operating margin | 6.6% | 8.5% | 6.7% | 6.3% |
| Income from continuing operations | $17.2 million | $19.0 million | $46.4 million | $36.3 million |
| Net income | $17.2 million | $19.1 million | $46.4 million | $30.3 million |
| Diluted EPS | $0.40 | $0.45 | $1.08 | $0.71 |
- Ocean transportation revenue increased 1.0% in the quarter and 3.8% for the nine months. Segment operating income declined 22.5% in the quarter to $25.5 million but increased 12.0% for the nine months to $78.3 million.
- Logistics revenue increased 11.2% in the quarter and 11.1% for the nine months. Operating income increased to $1.7 million from $1.3 million in the quarter and to $4.1 million from $2.9 million for the nine months.
- Third-quarter consolidated operating income declined because operating costs increased 5.6%, faster than revenue growth of 3.4%. Nine-month operating income increased 13.2%.
- Interest expense was $3.6 million in the quarter and $10.9 million for the nine months. The nine-month increase reflected the post-Separation debt structure.
- Effective tax rates were 27.1% in the quarter and 35.1% for the nine months. The quarter benefited from release of a $2.2 million Separation-related tax allocation liability.
- Cash flow from continuing operations was $137.8 million for the nine months, compared with $68.3 million in 2012. The increase was substantially influenced by deferred taxes associated with a $111.8 million Capital Construction Fund deposit.
- Capital expenditures were $19.7 million versus $30.8 million in the prior-year period. Financing activities used $50.9 million, including $41.9 million of long-term debt repayment, $11.0 million of net line-of-credit repayments, and $19.9 million of dividends.
- Cash and cash equivalents increased to $81.8 million from $19.9 million at December 31, 2012. Working capital increased to $122.8 million from $40.7 million.
- Total debt was $289.9 million at September 30, 2013, down from $319.1 million at year-end 2012. The $375.0 million revolving facility had $5.8 million utilized, all for letters of credit. The company reported compliance with debt covenants, including a 1.59 debt-to-EBITDA ratio and 12.43 EBITDA-to-interest ratio.
Material Changes Versus the Prior Comparable Period
- Quarterly net income decreased 9.9% and diluted EPS decreased 11.1%, despite revenue growth, primarily because of higher operating costs and unfavorable ocean transportation items.
- Nine-month net income increased 53.1% and diluted EPS increased 52.1%, benefiting from improved continuing operations and the absence of 2012 discontinued-operation losses and Separation-related costs.
- Ocean transportation third-quarter results included a $3.8 million adverse arbitration decision concerning previously co-owned Guam terminal assets, $1.3 million of molasses-release-related costs, and a $2.4 million loss from the SSAT joint venture versus $0.7 million of income in the prior year.
- Third-quarter ocean volumes declined in Hawaii containers by 3.1%, Hawaii automobiles by 24.3%, China containers by 5.3%, and Guam containers by 3.2%; Micronesia/South Pacific containers increased 113.3%, partly reflecting the new South Pacific operation.
- The company reported immaterial corrections to previously presented 2012 cash-flow classifications and comprehensive-income amounts.
Guidance, Outlook, Risks, and Unusual Items
- Management expected fourth-quarter Hawaii volume to be modestly below the prior-year level, little or no Guam growth, and modest China rate erosion due to continued carrier overcapacity.
- Additional SSAT Oakland transition costs were expected to produce a modest joint-venture loss in the fourth quarter. Ocean transportation operating income for the balance of 2013 was expected to be near or slightly below fourth-quarter 2012 levels.
- Logistics operating margin was expected to be 1% to 2% of revenue in the fourth quarter. 2013 capital expenditures were expected to be approximately $25 million, excluding vessel replacement capital expenditures. The fourth-quarter effective tax rate was expected to be approximately 38.5%.
- A molasses release from a company-operated Honolulu Harbor pipeline occurred in September 2013. The company had incurred $1.3 million in response, legal, and third-party costs, received a federal grand jury subpoena and agency information requests, and could not estimate future penalties, damages, remediation costs, or other expenses. The filing states that the impact could be material.
- A False Claims Act qui tam lawsuit alleges improper fuel-surcharge claims relating to military household goods. The government declined to intervene; Matson’s motion to dismiss was denied after the reporting date, and the company could not estimate a possible loss.
- On November 5, 2013, Matson agreed to issue $100 million of 30-year senior unsecured notes at 4.35%, subject to customary closing conditions, for expected issuance in January 2014.
- On November 6, 2013, Matson agreed to acquire two 3,600-TEU Aloha-class containerships for $418.0 million, with expected delivery in the third and fourth quarters of 2018. Payments are scheduled primarily for 2017 and 2018 and are expected to be funded through cash, operations, available revolver capacity, and potential future financings.
- Management stated that operating cash flow, cash balances, and available borrowings should be sufficient for the next twelve months, including working capital, capital expenditures, dividends, and potential acquisitions.
Most Important Facts to Verify
- Reconcile the strong nine-month cash flow with the $111.8 million Capital Construction Fund deposit and related deferred-tax effects.
- Monitor the financial and legal exposure from the Honolulu Harbor molasses release, including governmental claims, remediation obligations, and potential penalties.
- Assess whether SSAT Oakland transition costs and terminal-volume losses continue to pressure ocean transportation earnings.
- Evaluate funding capacity and leverage implications of the planned $418.0 million vessel program and the proposed $100 million notes.
- Verify the sustainability of Hawaii and China volumes, freight rates, fuel surcharges, and the company’s projected fourth-quarter operating income.
- Review the False Claims Act litigation and any subsequent estimate, reserve, settlement, or adverse ruling.