Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and related notes, and other financial information appearing elsewhere in this Quarterly Report on Form 10-Q.
FORWARD-LOOKING STATEMENTS
Except for historical information, the statements made in this Quarterly Report on Form 10-Q are forward-looking statements made pursuant to the safe-harbor provisions of the Private Security Litigation Reform Act of 1995. Such forward-looking statements may be contained in, among other things, SEC filings, such as reports on Forms 10-K, 10-Q and 8-K, the Annual Report to Shareholders, press releases made by the Company, the Company’s Internet Websites (including Websites of its subsidiaries), and oral statements made by officers of the Company.
This report, and other statements that the Company may make, may contain forward-looking statements with respect to the Company’s future financial or business performance, strategies or expectations. Forward-looking statements are typically identified by words or phrases such as “trend,” “potential,” “opportunity,” “pipeline,” “believe,” “comfortable,” “expect,” “anticipate,” “current,” “intention,” “estimate,” “position,” “assume,” “outlook,” “continue,” “remain,” “maintain,” “sustain,” “seek,” “achieve,” or similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “may” or similar expressions.
The Company cautions that forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time, including, but not limited to, the risk factors that are described in Part II, Item 1A, “Risk Factors” below. Forward-looking statements speak only as of the date they are made, and the Company assumes no duty to and does not undertake any obligation to update forward-looking statements. Actual results could differ materially from those anticipated in forward-looking statements and future results could differ materially from historical performance.
OVERVIEW
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a discussion of the Company’s financial condition, results of operations, liquidity and certain other factors that may affect its future results from the perspective of management. The discussion that follows is intended to provide information that will assist in understanding the changes in the Company’s financial statements from period to period, the primary factors that accounted for those changes, and how certain accounting principles, policies and estimates affect the Company’s financial statements. MD&A is provided as a supplement to the Condensed Consolidated Financial Statements and notes herein, and should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, the Company’s reports on Forms 10-Q and 8-K, and other publicly available information.
THIRD QUARTER 2020 DISCUSSION AND UPDATE ON BUSINESS CONDITIONS
Ocean Transportation: The Company’s container volume in the Hawaii service in the third quarter 2020 was 0.8 percent lower year-over-year primarily due to lower volume from the state’s COVID-19 mitigation efforts including restrictions on tourism and a second shelter-in-place order that took effect in August. The State of Hawaii recently eased visitor travel restrictions to the islands, but the levels of tourism are expected to remain low in the near-term and to have a meaningfully negative impact on Hawaii’s economy.
In China, the Company’s container volume in the third quarter 2020 was 124.7 percent higher year-over-year primarily due to volume from the CLX+ service in addition to higher volume on the CLX service as a result of increased capacity in the tradelane. Matson continued to realize a rate premium in the third quarter 2020 and achieved average freight rates that were higher than in the year ago period . The Company expects increased consumption of e-commerce and other commodities along with potential further disruption in air cargo markets to continue to provide opportunities for its CLX and CLX+ expedited ocean services.
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In Guam, the Company’s container volume in the third quarter 2020 was 2.1 percent higher primarily due to increased demand for home improvement and government cargo. In the near-term, we expect depressed tourism levels to have a negative impact on the Guam economy.
In Alaska, the Company’s container volume for the third quarter 2020 increased 1.5 percent year-over-year primarily due to higher southbound volume as a result of stronger seafood volume compared to the prior year, partially offset by modestly lower northbound volume. The Alaska economy continues to recover from the second quarter low, but residual negative economic effects from the COVID-19 pandemic coupled with a low oil price environment is expected to have a negative impact on Alaska’s economy in the near-term.
The contribution in the third quarter 2020 from the Company’s SSAT joint venture investment was $7.7 million, or $0.7 million lower than the third quarter 2019. The decrease was primarily due to lower lift volume.
Logistics: In the third quarter 2020, operating income for the Company’s Logistics segment was $11.9 million, or $0.6 million higher compared to the operating income achieved in the third quarter 2019. The increase was due primarily to improved performance in all of the business lines (i.e., transportation brokerage, freight forwarding, warehousing and distribution, and supply chain management and other services) driven by the continued reopening of the U.S. economy. In the near-term, we expect the elevated consumption of e-commerce and other high demand goods to benefit most of the business lines.
For the fourth quarter of 2020, the Company expects its businesses to continue to perform well and to generate strong financial results.
CONSOLIDATED RESULTS OF OPERATIONS
Consolidated Results - Three months ended September 30, 2020, compared with 2019:
Three Months Ended September 30,
(Dollars in millions, except per share amounts)
2020
2019
Change
Operating revenue
$
645.2
$
572.1
$
73.1
12.8
%
Operating costs and expenses
(546.8)
(516.9)
(29.9)
5.8
%
Operating income
98.4
55.2
43.2
78.3
%
Interest expense
(5.7)
(6.2)
0.5
(8.1)
%
Other income (expense), net
2.4
(0.5)
2.9
(580.0)
%
Income before income taxes
95.1
48.5
46.6
96.1
%
Income taxes
(24.2)
(12.3)
(11.9)
96.7
%
Net income
$
70.9
$
36.2
$
34.7
95.9
%
Basic earnings per share
$
1.65
$
0.84
$
0.81
96.4
%
Diluted earnings per share
$
1.63
$
0.84
$
0.79
94.0
%
Changes in operating revenue, and operating costs and expenses are further described below in the Analysis of Operating Revenue and Income by Segment.
The decrease in interest expense for the three months ended September 30, 2020, compared to the three months ended September 30, 2019, was due to lower outstanding debt during the period, offset by a lower amount of capitalized interest associated with the new vessel construction.
Other income (expense) relates to the amortization of certain components of net periodic benefit costs or gains related to the Company’s pension and post-retirement plans, and interest received from income tax refunds. The increase in Other income (expense) was due to favorable adjustments related to the Company’s pension and post-retirement plan liabilities during the three months ended September 30, 2020.
Income tax expense was $24.2 million or 25.4 percent of income before income taxes for the three months ended September 30, 2020, compared to $12.3 million or 25.4 percent of income before income taxes for the three months ended September 30, 2019.
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Consolidated Results - Nine months ended September 30, 2020, compared with 2019:
Nine Months Ended September 30,
(Dollars in millions, except per share amounts)
2020
2019
Change
Operating revenue
$
1,683.2
$
1,662.4
$
20.8
1.3
%
Operating costs and expenses
(1,520.6)
(1,558.7)
38.1
(2.4)
%
Operating income
162.6
103.7
58.9
56.8
%
Interest expense
(22.5)
(16.9)
(5.6)
33.1
%
Other income (expense), net
4.5
0.9
3.6
400.0
%
Income before income taxes
144.6
87.7
56.9
64.9
%
Income taxes
(37.1)
(20.6)
(16.5)
80.1
%
Net income
$
107.5
$
67.1
$
40.4
60.2
%
Basic earnings per share
$
2.50
$
1.57
$
0.93
59.2
%
Diluted earnings per share
$
2.48
$
1.55
$
0.93
60.0
%
Changes in operating revenue, and operating costs and expenses are further described below in the Analysis of Operating Revenue and Income by Segment.
The increase in interest expense for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, was due to a lower amount of capitalized interest associated with the new vessel construction.
Other income (expense) relates to the amortization of certain components of net periodic benefit costs or gains related to the Company’s pension and post-retirement plans, and interest income received from income tax refunds. The increase in Other income (expense) was due to favorable adjustments related to the Company’s pension and post-retirement plan liabilities and higher interest received from income tax refunds during the nine months ended September 30, 2020.
Income tax expense was $37.1 million or 25.7 percent of income before income taxes for the nine months ended September 30, 2020, compared to $20.6 million or 23.5 percent of income before income taxes for the nine months ended September 30, 2019. In connection with the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), the Company recorded a non-cash tax adjustment of $2.9 million that decreased income taxes for the nine months ended September 30, 2019. Excluding the impact of this non-cash tax adjustment, the adjusted effective tax rate would have been 26.8 percent for the nine months ended September 30, 2019. The adjusted effective tax rate for the nine months ended September 30, 2019 is higher than the effective tax rate for the nine months ended September 30, 2020 due to discrete tax adjustments recorded during that period.
ANALYSIS OF OPERATING REVENUE AND INCOME BY SEGMENT
Ocean Transportation Operating Results - Three months ended September 30, 2020, compared with 2019:
Three Months Ended September 30,
(Dollars in millions)
2020
2019
Change
Ocean Transportation revenue
$
498.3
$
437.2
$
61.1
14.0
%
Operating costs and expenses
(411.8)
(393.3)
(18.5)
4.7
%
Operating income
$
86.5
$
43.9
$
42.6
97.0
%
Operating income margin
17.4
%
10.0
%
Volume (Forty-foot equivalent units (FEU), except for automobiles) (1)
Hawaii containers
36,400
36,700
(300)
(0.8)
%
Hawaii automobiles
12,900
15,700
(2,800)
(17.8)
%
Alaska containers
19,700
19,400
300
1.5
%
China containers
38,200
17,000
21,200
124.7
%
Guam containers
4,800
4,700
100
2.1
%
Other containers (2)
4,600
4,400
200
4.5
%
(1) Approximate volumes included for the period are based on the voyage departure date, but revenue and operating income are adjusted to reflect the percentage of revenue and operating income earned during the reporting period for voyages in transit at the end of each reporting period.
(2) Includes containers from services in various islands in Micronesia and the South Pacific, and Okinawa, Japan.
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Ocean Transportation revenue increased $61.1 million during the three months ended September 30, 2020, compared with the three months ended September 30, 2019. The increase was primarily due to higher freight revenue in the China service, including revenue associated with the CLX+, partially offset by lower fuel-related surcharge revenue and lower revenue in the Hawaii service.
On a year-over-year FEU basis, Hawaii container volume decreased 0.8 percent primarily due to lower volume from the state’s COVID-19 mitigation efforts including restrictions on tourism and a second shelter-in-place order that took effect in August; Alaska volume increased 1.5 percent primarily due to higher southbound volume as a result of stronger seafood volume compared to the prior year, partially offset by modestly lower northbound volume; China volume was 124.7 percent higher primarily due to volume from the CLX+ service in addition to higher volume on the CLX service as a result of Matson’s increased capacity in the tradelane; Guam volume was 2.1 percent higher primarily due to increased demand for home improvement and government cargo; and Other containers volume increased 4.5 percent.
Ocean Transportation operating income increased $42.6 million, or 97.0 percent, during the three months ended September 30, 2020, compared with the three months ended September 30, 2019. The increase was primarily due to a higher contribution from the China service, including the contribution from the CLX+, lower vessel operating costs, including the impact of one less vessel operating in the Hawaii service, and the timing of fuel-related surcharge collections, partially offset by a lower contribution from the Hawaii service and higher general and administrative expenses.
The Company’s SSAT terminal joint venture investment contributed $7.7 million during the three months ended September 30, 2020, compared to a contribution of $8.4 million during the three months ended September 30, 2019. The decrease was primarily due to lower lift volume.
Ocean Transportation Operating Results - Nine months ended September 30, 2020, compared with 2019:
Nine Months Ended September 30,
(Dollars in millions)
2020
2019
Change
Ocean Transportation revenue
$
1,310.0
$
1,250.5
$
59.5
4.8
%
Operating costs and expenses
(1,173.3)
(1,177.5)
4.2
(0.4)
%
Operating income
$
136.7
$
73.0
$
63.7
87.3
%
Operating income margin
10.4
%
5.8
%
Volume (Forty-foot equivalent units (FEU), except for automobiles) (1)
Hawaii containers
108,100
109,300
(1,200)
(1.1)
%
Hawaii automobiles
34,400
49,400
(15,000)
(30.4)
%
Alaska containers
55,000
54,600
400
0.7
%
China containers
78,500
47,100
31,400
66.7
%
Guam containers
13,900
14,600
(700)
(4.8)
%
Other containers (2)
12,600
12,700
(100)
(0.8)
%
(1) Approximate volumes included for the period are based on the voyage departure date, but revenue and operating income are adjusted to reflect the percentage of revenue and operating income earned during the reporting period for voyages in transit at the end of each reporting period.
(2) Includes containers from services in various islands in Micronesia and the South Pacific, and Okinawa, Japan.
Ocean Transportation revenue increased $59.5 million, or 4.8 percent, during the nine months ended September 30, 2020, compared with the nine months ended September 30, 2019. The increase was primarily due to higher freight revenue in the China service, including revenue associated with the CLX+, partially offset by lower revenue in the Hawaii service and lower fuel-related surcharge revenue.
On a year-over-year FEU basis, Hawaii container volume decreased 1.1 percent primarily due to lower volume as a result of the state’s COVID-19 mitigation efforts including restrictions on tourism, partially offset by volume associated with the dry-docking of one of Pasha’s vessels; Alaska volume increased by 0.7 percent primarily due to higher northbound volume, including volume associated with the dry-docking of a competitor’s vessel, partially offset by modestly lower southbound volume; China volume was 66.7 percent higher primarily due to volume from the CLX+ service; Guam volume was 4.8 percent lower primarily due to lower demand for retail-related goods resulting from the COVID-19 pandemic and its related effects; and Other container volume decreased 0.8 percent.
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Ocean Transportation operating income increased $63.7 million, or 87.3 percent, during the nine months ended September 30, 2020, compared with the nine months ended September 30, 2019. The increase was primarily due to a higher contribution from the China service, including the contribution from the CLX+, and lower vessel operating costs, including the impact of one less vessel operating in the Hawaii service, partially offset by a lower contribution from the Hawaii service.
The Company’s SSAT terminal joint venture investment contributed $15.4 million during the nine months ended September 30, 2020, compared to a contribution of $17.8 million during the nine months ended September 30, 2019. The decrease was largely attributable to lower lift volume.
Logistics Operating Results: Three months ended September 30, 2020, compared with 2019:
Three Months Ended September 30,
(Dollars in millions)
2020
2019
Change
Logistics revenue
$
146.9
$
134.9
$
12.0
8.9
%
Operating costs and expenses
(135.0)
(123.6)
(11.4)
9.2
%
Operating income
$
11.9
$
11.3
$
0.6
5.3
%
Operating income margin
8.1
%
8.4
%
Logistics revenue increased $12.0 million, or 8.9 percent, during the three months ended September 30, 2020, compared with the three months ended September 30, 2019. The increase was primarily due to higher transportation brokerage revenue.
Logistics operating income increased $0.6 million, or 5.3 percent, for the three months ended September 30, 2020, compared with the three months ended September 30, 2019. The increase was due primarily to a higher contribution from transportation brokerage.
Logistics Operating Results: Nine months ended September 30, 2020, compared with 2019:
Nine Months Ended September 30,
(Dollars in millions)
2020
2019
Change
Logistics revenue
$
373.2
$
411.9
$
(38.7)
(9.4)
%
Operating costs and expenses
(347.3)
(381.2)
33.9
(8.9)
%
Operating income
$
25.9
$
30.7
$
(4.8)
(15.6)
%
Operating income margin
6.9
%
7.5
%
Logistics revenue decreased $38.7 million, or 9.4 percent, during the nine months ended September 30, 2020, compared with the nine months ended September 30, 2019. The decrease was primarily due to lower transportation brokerage and freight forwarding revenue.
Logistics operating income decreased $4.8 million, or 15.6 percent, for the nine months ended September 30, 2020, compared with the nine months ended September 30, 2019. The decrease was due primarily to lower contributions from transportation brokerage and freight forwarding.
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LIQUIDITY AND CAPITAL RESOURCES
Sources of Liquidity: Sources of liquidity available to the Company as of September 30, 2020, compared to December 31, 2019 were as follows:
September 30,
December 31,
(In millions)
2020
2019
Change
Cash and cash equivalents
$
12.7
$
21.2
$
(8.5)
Restricted cash
$
3.0
$
7.2
$
(4.2)
Accounts receivable, net (1)
$
234.3
$
205.9
$
28.4
(1) As of September 30, 2020 and December 31, 2019, $1.7 million and $1.7 million, respectively, of eligible accounts receivable were assigned to the CCF (see Note 2 of the Condensed Consolidated Financial Statements).
Cash, Cash Equivalents and Restricted Cash: Significant changes in the Company’s cash, cash equivalents and restricted cash for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019 are as follows:
Nine Months Ended September 30,
(In millions)
2020
2019
Change
Net cash provided by operating activities (1)
$
270.8
$
180.4
$
90.4
Net cash used in investing activities (2)
(95.6)
(168.3)
72.7
Net cash used in financing activities (3)
(187.9)
(4.3)
(183.6)
Net (decrease) increase in cash, cash equivalents and restricted cash
(12.7)
7.8
(20.5)
Cash, cash equivalents and restricted cash, beginning of the period
28.4
24.5
3.9
Cash, cash equivalents and restricted cash, end of the period
$
15.7
$
32.3
$
(16.6)
(1) Change in net cash provided by operating activities:
Changes in net cash provided by operating activities for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, were due to the following:
(In millions)
Change
Net income from operations
$
40.4
Non-cash deferred income taxes
11.6
Amortization of operating lease right of use assets
0.8
Other non-cash related changes, net
16.4
Income and distributions from SSAT, net
25.6
Operating lease liabilities
(2.0)
Deferred dry-docking payments
6.8
Accounts receivable, net
(28.7)
Prepaid expenses and other assets
(5.7)
Accounts payable, accruals and other liabilities
35.7
Deferred dry-docking amortization
(8.1)
Other long-term liabilities
(2.4)
Total
$
90.4
Changes in accounts receivable were primarily due to the timing of collections associated with those receivables. Changes in accounts payable, accruals and other liabilities were primarily due to the timing of payments associated with those liabilities.
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(2) Change in net cash used in investing activities:
Changes in net cash used in investing activities for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, were due to the following:
(In millions)
Change
Capitalized vessel construction expenditures
$
50.9
Cash deposits into CCF
(28.9)
Withdrawals from CCF
28.9
Other capital expenditures
9.2
Proceeds from disposal of property and equipment, net
12.6
Total
$
72.7
Capitalized vessel construction expenditures (including capitalized interest) were $57.8 million for the nine months ended September 30, 2020, compared to $108.7 million for the nine months ended September 30, 2019. Capitalized vessel construction expenditures relate to progress payments for the construction of new vessels, capitalized interest and owner’s items. Changes in cash deposits into CCF and withdrawals from CCF primarily relate to the timing of when deposits are made into the CCF, and when the subsequent withdrawals are made out of the CCF for the purposes of vessel construction progress payments. Other capital expenditures payments were $53.5 million for the nine months ended September 30, 2020, compared to $62.7 million for the nine months ended September 30, 2019. The decrease in other capital expenditures is primarily due to the timing of certain capital project activities incurred during 2020 as compared to 2019. The increase in proceeds from disposal of property and equipment is primarily due to the sale and leaseback of chassis and container equipment for net proceeds of $14.3 million during the nine months ended September 30, 2020. There were no sale and leaseback transactions during the nine months ended September 30, 2019.
(3) Change in net cash used in financing activities:
Changes in net cash used in financing activities for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, were due to the following:
(In millions)
Change
Proceeds received from issuance of fixed interest debt
$
325.5
Repayments of fixed interest debt
(175.8)
Borrowings under revolving credit facility, net
(311.1)
Payment of financing costs
(18.5)
Dividends paid
(1.4)
Change in other payments, net
(2.3)
Total
$
(183.6)
During the nine months ended September 30, 2020, the Company received $325.5 million of proceeds from two new Title XI debt issuances, and paid $204.2 million in scheduled fixed debt payments and redeemed debt at par of $169.5 million, compared to $28.4 million in scheduled fixed debt payments during the nine months ended September 30, 2019 . During the nine months ended September 30, 2020, the Company decreased net borrowings under the revolving credit facility by $256.1 million, compared to $55.0 million increase during the nine months ended September 30, 2019. During the nine months ended September 30, 2020, the Company paid $18.5 million in financing costs related to the amendment of its revolving credit facility, private placement term loans and Title XI debt. No financing costs were paid during the nine months ended September 30, 2019. During the nine months ended September 30, 2020, the Company paid $29.1 million in dividends, compared to $27.7 million during the nine months ended September 30, 2019 . The increase in dividend payments resulted from an increase in dividends declared per share of common stock by the Company.
Debt: Total Debt as of September 30, 2020 and December 31, 2019 is as follows:
September 30,
December 31,
(In millions)
2020
2019
Change
Revolving credit facility
$
123.0
$
379.1
$
(256.1)
Fixed interest debt
700.6
579.3
121.3
Total Debt
$
823.6
$
958.4
$
(134.8)
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Total Debt decreased by $134.8 million during the nine months ended September 30, 2020. The decrease in the Company’s outstanding revolving credit borrowings was primarily due to the increase in net cash provided by operating activities, proceeds from issuance of new fixed interest debt and lower capital expenditure. The increase in fixed interest debt was due to the issuance of new Title XI debt partially offset by the repayment of private placement term loans during the nine months ended September 30, 2020.
As of September 30, 2020, the Company had $518.9 million of remaining borrowing availability under the revolving credit facility, with a maturity date of June 29, 2022. The Company’s debt is described in Note 6 of Part I, Item 1 above.
Working Capital: The Company had a working capital deficiency of $164.0 million and $147.1 million at September 30, 2020 and December 31, 2019, respectively. The increase in working capital deficiency at September 30, 2020 is partially due to the timing of billings and collections associated with accounts receivable and other assets, and the timing of payments associated with accounts payable, accruals and other liabilities.
CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET ARRANGEMENTS
Except as described below, there were no material changes during this quarter to the Company’s contractual obligations, commitments, contingencies and off-balance sheet arrangements that are described in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 , which is incorporated herein by reference.
The Company’s debt is described in Note 6 to the Condensed Consolidated Financial Statements included in the Company’s Quarterly Report on Form 10-Q for the three months ended March 31, 2020 and in the Company’s Quarterly Report on Form 10-Q for the three months ended June 30, 2020.
CRITICAL ACCOUNTING ESTIMATES
There have been no changes during this quarter to the Company’s critical accounting estimates as discussed in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
OTHER MATTERS
The Company’s third quarter 2020 cash dividend of $0.23 per share was paid on September 3, 2020. On October 29, 2020, the Company’s Board of Directors declared a cash dividend of $0.23 per share payable on December 3, 2020.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes to the Company’s market risk position from the information provided under Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the year ended December 31, 2019.
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