Matson(MATX) - 2020 Q1 - Quarterly Report

PART I—FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) Presents the company's unaudited condensed consolidated financial statements and detailed notes for the quarter ended March 31, 2020 Condensed Consolidated Statements of Income and Comprehensive Income Consolidated Statements of Income and Comprehensive Income (Three Months Ended March 31) | (In millions, except per share amounts) | 2020 | 2019 | Change (YoY) | % Change (YoY) | | :------------------------------------ | :--- | :--- | :----------- | :------------- | | Total Operating Revenue | $513.9 | $532.4 | $(18.5) | (3.5)% | | Total Costs and Expenses | $(500.9) | $(514.9) | $14.0 | (2.7)% | | Operating Income | $13.0 | $17.5 | $(4.5) | (25.7)% | | Income before Income Taxes | $5.0 | $13.5 | $(8.5) | (63.0)% | | Net Income | $3.8 | $12.5 | $(8.7) | (69.6)% | | Basic Earnings Per Share | $0.09 | $0.29 | $(0.20) | (69.0)% | | Diluted Earnings Per Share | $0.09 | $0.29 | $(0.20) | (69.0)% | Condensed Consolidated Balance Sheets Consolidated Balance Sheets (As of March 31, 2020 vs. December 31, 2019) | (In millions) | March 31, 2020 | December 31, 2019 | Change (QoQ) | | :------------ | :------------- | :---------------- | :----------- | | Total Assets | $2,835.9 | $2,845.4 | $(9.5) | | Total Liabilities | $2,035.7 | $2,039.7 | $(4.0) | | Total Shareholders' Equity | $800.2 | $805.7 | $(5.5) | Condensed Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows (Three Months Ended March 31) | (In millions) | 2020 | 2019 | Change (YoY) | | :------------ | :--- | :--- | :----------- | | Net cash provided by operating activities | $68.6 | $33.4 | $35.2 | | Net cash used in investing activities | $(20.7) | $(33.2) | $12.5 | | Net cash used in financing activities | $(50.6) | $(0.4) | $(50.2) | | Net Decrease in Cash, Cash Equivalents and Restricted Cash | $(2.7) | $(0.2) | $(2.5) | Condensed Consolidated Statements of Shareholders' Equity Changes in Shareholders' Equity (Three Months Ended March 31, 2020) | (In millions) | Balance at Dec 31, 2019 | Net Income | Other Comprehensive Loss | Share-based Compensation | Shares Issued (net) | Equity Interest in SSAT | Dividends | Balance at Mar 31, 2020 | | :------------ | :---------------------- | :--------- | :----------------------- | :----------------------- | :------------------ | :---------------------- | :-------- | :---------------------- | | Total | $805.7 | $3.8 | $(0.6) | $3.1 | $(4.5) | $2.2 | $(9.5) | $800.2 | Notes to the Condensed Consolidated Financial Statements 1. DESCRIPTION OF THE BUSINESS - Matson, Inc. operates in two segments: Ocean Transportation and Logistics[17][18][19] 2. SIGNIFICANT ACCOUNTING POLICIES - The financial statements are unaudited and reflect normal recurring adjustments, with the adoption of ASU 2016-13 for credit losses not having a material impact[20][21][22][23][24][25][26][27][28][29][30][31][32][33][34][35][36][37][38][39][40][41][42] SSAT Condensed Income Statement (Three Months Ended March 31) | (In millions) | 2020 | 2019 | | :------------ | :--- | :--- | | Operating revenue | $278.9 | $268.1 | | Operating costs and expenses | $(265.4) | $(244.2) | | Operating income | $13.5 | $23.9 | | Net Income | $13.0 | $22.5 | | Company Share of SSAT's Net Income | $4.0 | $8.5 | 3. REPORTABLE SEGMENTS - The Ocean Transportation segment's operating income includes $4.0 million in 2020 and $8.5 million in 2019 from the equity investment in SSAT[45][48] Reportable Segment Financial Information (Three Months Ended March 31) | (In millions) | 2020 | 2019 | Change (YoY) | % Change (YoY) | | :------------ | :--- | :--- | :----------- | :------------- | | Operating Revenue: | | | | | | Ocean Transportation | $400.9 | $397.9 | $3.0 | 0.8% | | Logistics | $113.0 | $134.5 | $(21.5) | (16.0)% | | Total Operating Revenue | $513.9 | $532.4 | $(18.5) | (3.5)% | | Operating Income: | | | | | | Ocean Transportation | $7.9 | $9.4 | $(1.5) | (16.0)% | | Logistics | $5.1 | $8.1 | $(3.0) | (37.0)% | | Total Operating Income | $13.0 | $17.5 | $(4.5) | (25.7)% | 4. PROPERTY AND EQUIPMENT - During Q1 2020, the newly constructed vessel Lurline was placed into service, transferring $308.2 million from 'Vessel construction in progress' to 'Vessels'[49] Property and Equipment, Net (As of March 31, 2020 vs. December 31, 2019) | (In millions) | March 31, 2020 | December 31, 2019 | Change | | :------------ | :------------- | :---------------- | :----- | | Vessels | $1,966.1 | $1,653.5 | $312.6 | | Vessel construction in progress | $185.4 | $488.9 | $(303.5) | | Total Property and Equipment, net | $1,589.6 | $1,598.1 | $(8.5) | 5. GOODWILL AND INTANGIBLES - Despite the COVID-19 pandemic's impact, the company concluded that no impairment triggering event for goodwill and intangible assets occurred during Q1 2020[50][53][54] Goodwill by Segment (As of March 31, 2020 and December 31, 2019) | (In millions) | Ocean Transportation | Logistics | Total | | :------------ | :------------------- | :-------- | :---- | | Goodwill | $222.6 | $105.2 | $327.8 | Intangible Assets, Net (As of March 31, 2020 vs. December 31, 2019) | (In millions) | March 31, 2020 | December 31, 2019 | | :------------ | :------------- | :---------------- | | Customer Relationships, net | $172.9 | $175.6 | | Trade name – Logistics | $27.3 | $27.3 | | Total Intangible Assets, net | $200.2 | $202.9 | 6. DEBT - On April 27, 2020, MatNav obtained $185.9 million in Title XI financing with a 1.22% cash interest rate, using proceeds to reduce outstanding debt[63][64][78] - On March 31, 2020, the company amended its credit facilities to increase permitted leverage ratios and adjust pricing grids, incurring $3.1 million in financing costs[66][67][68][71][72] - As of March 31, 2020, the company had $163.6 million of remaining borrowing availability and was in compliance with all debt covenants[69][74] Total Debt (As of March 31, 2020 vs. December 31, 2019) | (In millions) | March 31, 2020 | December 31, 2019 | Change | | :------------ | :------------- | :---------------- | :----- | | Private Placement Term Loans | $468.8 | $488.0 | $(19.2) | | Title XI Debt | $39.6 | $41.8 | $(2.2) | | Revolving credit facility | $357.0 | $379.1 | $(22.1) | | Total Debt | $924.9 | $958.4 | $(33.5) | | Less: Current portion | $(53.4) | $(48.4) | $(5.0) | | Total Long-term Debt | $871.5 | $910.0 | $(38.5) | Debt Maturities (As of March 31, 2020) | Year (in millions) | Total | | :----------------- | :---- | | 2020 | $37.0 | | 2021 | $54.2 | | 2022 | $416.9 | | 2023 | $59.9 | | 2024 | $55.8 | | Thereafter | $301.1 | | Total debt | $924.9 | 7. LEASES - On March 25, 2020, the company completed a sale and leaseback of equipment, generating $14.3 million in net proceeds and entering a five-year operating lease[85][88] Components of Lease Cost (Three Months Ended March 31) | (In millions) | 2020 | 2019 | | :------------ | :--- | :--- | | Operating lease cost | $20.0 | $16.7 | | Short-term lease cost | $0.1 | $2.4 | | Variable lease cost | $0.2 | $0.1 | | Total lease cost | $20.3 | $19.2 | 8. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Changes in Accumulated Other Comprehensive Income (Loss) (Three Months Ended March 31, 2020) | (In millions) | Pensions | Post-Retirement | Non-Qualified Plans | Other | Accumulated Other Comprehensive Income (Loss) | | :------------ | :------- | :-------------- | :------------------ | :---- | :-------------------------------------------- | | Balance at Dec 31, 2019 | $(51.9) | $16.3 | $(0.4) | $(0.9) | $(36.9) | | Amortization of prior service cost | $(0.5) | $(0.6) | $(0.1) | — | $(1.2) | | Amortization of net loss | $1.1 | $0.1 | $0.1 | — | $1.3 | | Foreign currency exchange | — | — | — | $(0.5) | $(0.5) | | Other adjustments | — | — | — | $(0.2) | $(0.2) | | Balance at Mar 31, 2020 | $(51.3) | $15.8 | $(0.4) | $(1.6) | $(37.5) | 9. FAIR VALUE OF FINANCIAL INSTRUMENTS - The company uses Level 1 inputs for cash and cash equivalents and Level 2 inputs for debt, with fair values approximating carrying values for most instruments[91][92] Fair Value of Financial Instruments (As of March 31, 2020) | (In millions) | Carrying Value | Total Fair Value | Level 1 (Fair Value) | Level 2 (Fair Value) | Level 3 (Fair Value) | | :------------ | :------------- | :--------------- | :------------------- | :------------------- | :------------------- | | Cash and cash equivalents | $19.9 | $19.9 | $19.9 | — | — | | Restricted cash | $5.8 | $5.8 | $5.8 | — | — | | Variable rate debt | $357.0 | $357.0 | — | $357.0 | — | | Fixed rate debt | $567.9 | $558.7 | — | $558.7 | — | 10. EARNINGS PER SHARE Earnings Per Share (Three Months Ended March 31) | (In millions, except per share amounts) | Net Income (2020) | Common Shares (2020) | Per Common Share Amount (2020) | Net Income (2019) | Common Shares (2019) | Per Common Share Amount (2019) | | :------------------------------------ | :---------------- | :------------------- | :----------------------------- | :---------------- | :------------------- | :----------------------------- | | Basic | $3.8 | 43.0 | $0.09 | $12.5 | 42.8 | $0.29 | | Diluted | $3.8 | 43.3 | $0.09 | $12.5 | 43.1 | $0.29 | 11. SHARE-BASED COMPENSATION - Total share-based compensation cost recognized was $3.1 million for Q1 2020, with $20.1 million of unrecognized cost remaining[97] 12. PENSION AND POST-RETIREMENT PLANS Net Periodic Benefit Cost (Benefit) (Three Months Ended March 31) | (In millions) | Pension Benefits (2020) | Pension Benefits (2019) | Post-retirement Benefits (2020) | Post-retirement Benefits (2019) | | :------------ | :---------------------- | :---------------------- | :------------------------------ | :------------------------------ | | Service cost | $1.2 | $1.1 | $0.1 | $0.1 | | Interest cost | $1.9 | $2.3 | $0.2 | $0.3 | | Expected return on plan assets | $(3.2) | $(3.1) | — | — | | Amortization of net loss | $1.5 | $0.9 | $0.2 | $0.2 | | Amortization of prior service credit | $(0.6) | $(0.6) | $(0.9) | $(0.9) | | Net periodic benefit cost (benefit) | $0.8 | $0.6 | $(0.4) | $(0.3) | ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Provides management's analysis of financial condition, operational results, and liquidity for Q1 2020, including COVID-19 impacts OVERVIEW - The MD&A provides management's discussion of financial condition, results of operations, liquidity, and other factors affecting future results[103] FIRST QUARTER 2020 DISCUSSION AND UPDATE ON BUSINESS CONDITIONS - Hawaii container volume increased 1.7% YoY due to increased demand for essential goods from COVID-19 shelter-in-place orders[104] - China container volume decreased 6.5% YoY due to an elongated post-Lunar New Year period and COVID-19 impacts[105] - Guam container volume decreased 3.9% YoY, primarily due to typhoon relief volume in the prior year[107] - Alaska container volume increased 11.0% YoY, driven by higher northbound volume for essential goods due to COVID-19[108] - SSAT joint venture contribution decreased by $4.5 million YoY to $4.0 million, mainly due to new lease accounting expenses[109] - Logistics operating income decreased by $3.0 million YoY to $5.1 million, due to lower transportation brokerage contributions[110] - Matson withdrew its full year 2020 outlook on April 6, 2020, due to increasing economic uncertainties from the COVID-19 pandemic[111] CONSOLIDATED RESULTS OF OPERATIONS - Interest expense increased by $4.0 million YoY due to lower capitalized interest from new vessel construction[113][114][115] Consolidated Results of Operations (Three Months Ended March 31) | (Dollars in millions, except per share amounts) | 2020 | 2019 | Change | % Change | | :-------------------------------------------- | :--- | :--- | :----- | :------- | | Operating revenue | $513.9 | $532.4 | $(18.5) | (3.5)% | | Operating income | $13.0 | $17.5 | $(4.5) | (25.7)% | | Net income | $3.8 | $12.5 | $(8.7) | (69.6)% | | Basic earnings per share | $0.09 | $0.29 | $(0.20) | (69.0)% | ANALYSIS OF OPERATING REVENUE AND INCOME BY SEGMENT - Ocean Transportation operating income decreased due to lower contributions from China and SSAT and higher depreciation[119] - Logistics revenue and operating income decreased primarily due to lower transportation brokerage and freight forwarding contributions[124] Ocean Transportation Operating Results (Three Months Ended March 31) | (Dollars in millions) | 2020 | 2019 | Change | % Change | | :-------------------- | :--- | :--- | :----- | :------- | | Ocean Transportation revenue | $400.9 | $397.9 | $3.0 | 0.8% | | Operating income | $7.9 | $9.4 | $(1.5) | (16.0)% | | Operating income margin | 2.0% | 2.4% | | | | Volume (FEU): | | | | | | Hawaii containers | 35,500 | 34,900 | 600 | 1.7% | | Alaska containers | 18,200 | 16,400 | 1,800 | 11.0% | | China containers | 12,900 | 13,800 | (900) | (6.5)% | | Guam containers | 4,900 | 5,100 | (200) | (3.9)% | | Other containers | 4,100 | 3,500 | 600 | 17.1% | Logistics Operating Results (Three Months Ended March 31) | (Dollars in millions) | 2020 | 2019 | Change | % Change | | :-------------------- | :--- | :--- | :----- | :------- | | Logistics revenue | $113.0 | $134.5 | $(21.5) | (16.0)% | | Operating income | $5.1 | $8.1 | $(3.0) | (37.0)% | | Operating income margin | 4.5% | 6.0% | | | LIQUIDITY AND CAPITAL RESOURCES - Net cash provided by operating activities increased by $35.2 million YoY to $68.6 million[126][127] - Net cash used in investing activities decreased by $12.5 million YoY to $20.7 million, due to lower vessel construction expenditures[126][128] - Net cash used in financing activities increased significantly by $50.2 million YoY to $50.6 million, due to decreased net borrowings[126][130] - Total debt decreased by $33.5 million to $924.9 million, while the working capital deficiency increased to $162.2 million[131][133] Sources of Liquidity (As of March 31, 2020 vs. December 31, 2019) | (In millions) | March 31, 2020 | December 31, 2019 | Change | | :------------ | :------------- | :---------------- | :----- | | Cash and cash equivalents | $19.9 | $21.2 | $(1.3) | | Restricted cash | $5.8 | $7.2 | $(1.4) | | Accounts receivable, net | $218.8 | $205.9 | $12.9 | CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET ARRANGEMENTS - There were no material changes to contractual obligations, commitments, contingencies, and off-balance sheet arrangements during the quarter[134] CRITICAL ACCOUNTING ESTIMATES - No changes to critical accounting estimates were reported during the quarter[136] OTHER MATTERS - The company paid a cash dividend of $0.22 per share on March 5, 2020, and declared another payable on June 4, 2020[137] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK States that there have been no material changes to the company's market risk position since the previous annual report - No material changes to the company's market risk position were reported from the information provided in the Annual Report on Form 10-K[138] ITEM 4. CONTROLS AND PROCEDURES Confirms the effectiveness of disclosure controls and reports no material changes in internal control over financial reporting - The company's management concluded that disclosure controls and procedures were effective as of March 31, 2020[139] - There were no changes in internal control over financial reporting that materially affected, or are reasonably likely to materially affect, controls[140] PART II—OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Confirms material compliance with environmental laws and that other legal actions are not expected to have a material effect - The company believes it is in material compliance with applicable environmental laws and regulations[142] - Other legal actions are not expected to have a material effect on the company's financial condition, results of operations, or cash flows[143] ITEM 1A. RISK FACTORS Outlines key risks affecting the business, including those related to the Jones Act, operations, finance, and legal compliance Risks Related to the Jones Act - Repeal or substantial amendment of the Jones Act would adversely affect the company by allowing lower-cost competitors into its markets[145][146] - Loss of U.S. citizen status under the Jones Act could lead to ineligibility for coastwise trade and substantial penalties[148] Risks Related To Operations - The COVID-19 pandemic could continue to materially impact operations through reduced container volume, lower demand, and service disruptions[149] - Changes in U.S., global, or regional economic conditions can decrease demand for services and products, impacting freight volumes and rates[152] - New or increased competition could significantly increase available shipping capacity and adversely affect volumes and rates[153] - Dependence on key customer relationships means loss or damage to these relationships could adversely affect business and revenue[154][155] - Reliance on key vendors and third-parties for equipment and capacity means failure to secure these could lead to customer loss[156][157] - Increases in fuel prices or limited availability of compliant fuels could adversely affect profits and operations[158][159] - Work stoppages or labor disruptions by unionized workers could adversely affect operations[160][161][162] - Vulnerability to weather, natural disasters, and other operating risks can disrupt service and increase expenses[163][164][165][166] - Significant operating agreements and leases may be replaced on less favorable terms or not renewed, impacting financial performance[168] - Unexpected dry-docking or repair costs for vessels can be substantial and adversely affect results of operations[169] - Dependence on information technology means reliability issues or cybersecurity risks could negatively impact operations[170][171][172][173][174] - Loss of key personnel could adversely affect future operating results and incur significant replacement costs[175] - Risks associated with joint ventures like SSAT include lack of voting control and inconsistent partner interests[176][177][178] - Conducting business in foreign markets exposes the company to challenges with foreign operations and political or economic instability[179][183] - Maritime accidents or spill events could lead to personal injury, property damage, pollution, and suspension of operations[180] - The shipbuilding agreement with NASSCO is subject to risks like delivery delays or failure to meet specifications[181] - Modernization projects for terminals face risks of regulatory delays, construction delays, or cost overruns[182][184] - Heightened security measures, war, or terrorist attacks could decrease consumer confidence and increase costs[185] - Acquisitions carry risks of integration difficulties, unknown liabilities, and potential goodwill impairment[186][187][188][189] Risks Related to Financial Matters - Deterioration of the company's credit profile or disruptions in credit markets could restrict access to capital and increase borrowing costs[190][191][192] - Failure to comply with restrictive financial covenants could lead to dividend suspension or acceleration of debt repayment[193] - The effective income tax rate may vary due to changes in tax laws, pre-tax income, and earnings mix[194] - Changes in pension asset values or key actuarial assumptions could increase pension costs and funding requirements[195] - Exposure under multi-employer pension plans could result in liability for a proportionate share of unfunded vested benefits[197] Risks Related to Legal and Legislative Matters - Compliance with extensive and changing safety and environmental regulations may increase operating costs or lead to fines[198][199][200][201] - The company is subject to disputes, legal proceedings, and government inquiries that could result in significant expenditures or losses[202] - Non-compliance with or changes to laws and regulations could impose significant additional costs or impact operating practices[203] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Reports no unregistered sales of equity securities or use of proceeds during the period - None[204] ITEM 3. DEFAULTS UPON SENIOR SECURITIES Indicates no defaults upon senior securities during the reporting period - None[205] ITEM 4. MINE SAFETY DISCLOSURES States that there are no mine safety disclosures to report - None[206] ITEM 5. OTHER INFORMATION Reports that there is no other information to disclose - None[207] ITEM 6. EXHIBITS Lists all exhibits filed with the Form 10-Q, including credit agreement amendments, certifications, and XBRL documents - Key exhibits include amendments to the Amended and Restated Credit Agreement, the agreement for Title XI financing, and certifications from the CEO and CFO[208][209][210][211] SIGNATURES Contains the signatures of authorized officers certifying the report on May 5, 2020 - The report was signed on May 5, 2020, by Joel M. Wine, Senior Vice President and Chief Financial Officer, and Kevin L. Stuck, Vice President and Controller[213][214]