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 I, Item 1A, “Risk Factors” of Matson’s Annual Report on Form 10-K for the year ended December 31, 2020. 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, 2020 , the Company’s reports on Forms 10-Q and 8-K, and other publicly available information.
FIRST QUARTER 2021 DISCUSSION AND UPDATE ON BUSINESS CONDITIONS
Ocean Transportation: The Company’s container volume in the Hawaii service in the first quarter 2021 was 0.6 percent higher year-over-year primarily due to higher demand for sustenance and home improvement goods, partially offset by one less westbound sailing and lower tourism activity as a result of the pandemic. The low tourism levels during the COVID-19 pandemic have had a meaningfully negative impact on Hawaii’s economy. With eased visitor travel restrictions and increased vaccinations on the mainland, tourism to the Hawaiian islands has recently picked up and is expected to accelerate into the summer as vaccinations become more widespread. The recovery in tourism is expected to lead to gradually improving economic conditions in the state, but the economic recovery trajectory continues to remain uncertain.
In China, the Company’s container volume in the first quarter 2021 increased 218.6 percent year-over-year primarily due to volume from the CLX+ service in addition to higher volume on the CLX service as a result of our increased capacity in the tradelane. Matson continued to realize a significant rate premium in the first quarter 2021 and achieved average freight rates that were considerably higher than in the year ago period . At present, significant supply chain congestion continues, particularly at the California ports, and these conditions will most likely persist through the second quarter
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2021 and into the traditional peak season. We also expect demand in the Transpacific tradelane to remain favorable as elevated consumption trends, including heightened e-commerce activity, are expected to continue beyond the second quarter. Accordingly, we expect significant demand for our expedited CLX and CLX+ services to remain throughout the peak season into late October.
In Guam, the Company’s container volume in the first quarter 2021 increased 2.0 percent year-over-year primarily due to higher demand for sustenance and home improvement goods, partially offset by lower tourism activity as a result of the pandemic. 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 first quarter 2021 decreased 4.9 percent year-over-year as a result of lower northbound volume primarily due to one less sailing this year and volume related to a competitor’s dry-docking in the year ago period and lower southbound volume, partially offset by volume from the Alaska-to-Asia Express service. Normalizing for the one less sailing this year and volume related to a competitor’s dry-docking in the year ago period, Alaska volume increased approximately 2.5 percent. In the near-term, we expect the Alaska economy to slowly recover, but remain challenged until the pandemic subsides and the unemployment rate improves.
The contribution in the first quarter 2021 from the Company’s SSAT joint venture investment was $9.2 million, or $5.2 million higher than the first quarter 2020. The increase was driven by higher lift volume.
Logistics: In the first quarter 2021, operating income for the Company’s Logistics segment was $6.1 million, or $1.0 million higher compared to the operating income achieved in the first quarter 2020. The increase was due primarily to higher contributions from transportation brokerage and supply chain management as a result of elevated goods consumption and inventory restocking in addition to tight supply and demand fundamentals in our core markets.
CONSOLIDATED RESULTS OF OPERATIONS
Consolidated Results - Three months ended March 31, 2021, compared with 2020:
Three Months Ended March 31,
(Dollars in millions, except per share amounts)
2021
2020
Change
Operating revenue
$
711.8
$
513.9
$
197.9
38.5
%
Operating costs and expenses
(591.6)
(500.9)
(90.7)
18.1
%
Operating income
120.2
13.0
107.2
824.6
%
Interest expense
(7.3)
(8.6)
1.3
(15.1)
%
Other income (expense), net
1.4
0.6
0.8
133.3
%
Income before income taxes
114.3
5.0
109.3
2,186.0
%
Income taxes
(27.1)
(1.2)
(25.9)
2,158.3
%
Net income
$
87.2
$
3.8
$
83.4
2,194.7
%
Basic earnings per share
$
2.01
$
0.09
$
1.92
2,133.3
%
Diluted earnings per share
$
1.99
$
0.09
$
1.90
2,111.1
%
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 March 31, 2021, compared to the three months ended March 31, 2020, was due to lower outstanding debt during the period, offset by a lower amount of capitalized interest associated with the new vessel construction in 2020.
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 March 31, 2021.
Income tax expense was $27.1 million or 23.7 percent of income before income taxes for the three months ended March 31, 2021, compared to $1.2 million or 24.0 percent of income before income taxes for the three months ended March 31, 2020. The effective tax rate for the three months ended March 31, 2021 was lower than the effective tax rate
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for the three months ended March 31, 2020 as it benefitted from discrete adjustments related to stock compensation and foreign taxes that lowered the effective tax rate for that period.
ANALYSIS OF OPERATING REVENUE AND INCOME BY SEGMENT
Ocean Transportation Operating Results - Three months ended March 31, 2021, compared with 2020:
Three Months Ended March 31,
(Dollars in millions)
2021
2020
Change
Ocean Transportation revenue
$
560.5
$
400.9
$
159.6
39.8
%
Operating costs and expenses
(446.4)
(393.0)
(53.4)
13.6
%
Operating income
$
114.1
$
7.9
$
106.2
1,344.3
%
Operating income margin
20.4
%
2.0
%
Volume (Forty-foot equivalent units (FEU), except for automobiles) (1)
Hawaii containers
35,700
35,500
200
0.6
%
Hawaii automobiles
10,700
13,300
(2,600)
(19.5)
%
Alaska containers
17,300
18,200
(900)
(4.9)
%
China containers
41,100
12,900
28,200
218.6
%
Guam containers
5,000
4,900
100
2.0
%
Other containers (2)
4,000
4,100
(100)
(2.4)
%
(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 $159.6 million during the three months ended March 31, 2021, compared with the three months ended March 31, 2020. The increase was primarily due to higher freight revenue in the China service, including revenue associated with the CLX+ service, partially offset by lower fuel-related surcharge revenue and lower service revenue in Alaska.
On a year-over-year FEU basis, Hawaii container volume increased 0.6 percent primarily due to higher demand for sustenance and home improvement goods, partially offset by one less westbound sailing and lower tourism activity as a result of the pandemic; Alaska volume decreased 4.9 percent due to lower northbound volume primarily due to one less sailing this year and volume related to a competitor’s dry-docking in the year ago period and lower southbound volume, partially offset by volume from the Alaska-to-Asia Express service; China volume was 218.6 percent higher primarily due to volume from the CLX+ service in addition to higher volume on the CLX service as a result of our increased capacity in the tradelane; Guam volume was 2.0 percent higher primarily due to higher demand for sustenance and home improvement goods, partially offset by lower tourism activity as a result of the pandemic; and Other containers volume decreased 2.4 percent.
Ocean Transportation operating income increased $106.2 million during the three months ended March 31, 2021, compared with the three months ended March 31, 2020. The increase was primarily due to a higher contribution from China, including the contribution from the CLX+ service, and a higher contribution from SSAT, partially offset by a lower contribution from the Alaska service and higher depreciation.
The Company’s SSAT terminal joint venture investment contributed $9.2 million during the three months ended March 31, 2021, compared to a contribution of $4.0 million during the three months ended March 31, 2020. The increase was driven by higher lift volume.
Logistics Operating Results: Three months ended March 31, 2021, compared with 2020:
Three Months Ended March 31,
(Dollars in millions)
2021
2020
Change
Logistics revenue
$
151.3
$
113.0
$
38.3
33.9
%
Operating costs and expenses
(145.2)
(107.9)
(37.3)
34.6
%
Operating income
$
6.1
$
5.1
$
1.0
19.6
%
Operating income margin
4.0
%
4.5
%
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Logistics revenue increased $38.3 million, or 33.9 percent, during the three months ended March 31, 2021, compared with the three months ended March 31, 2020. The increase was primarily due to higher transportation brokerage revenue.
Logistics operating income increased $1.0 million, or 19.6 percent, for the three months ended March 31, 2021, compared with the three months ended March 31, 2020. The increase was primarily due to higher contributions from transportation brokerage and supply chain management.
LIQUIDITY AND CAPITAL RESOURCES
Sources of liquidity available to the Company as of March 31, 2021, compared to December 31, 2020 were as follows:
Cash, Cash Equivalents, Restricted Cash and Accounts Receivable: Cash and cash equivalents, restricted cash and accounts receivable for the three months ended March 31, 2021, compared to December 31, 2020 were as follows:
March 31,
December 31,
(In millions)
2021
2020
Change
Cash and cash equivalents
$
11.8
$
14.4
$
(2.6)
Restricted cash
$
5.3
$
5.3
$
—
Accounts receivable, net (1)
$
261.1
$
253.4
$
7.7
(1) As of March 31, 2021 and December 31, 2020, $1.7 million of eligible accounts receivable were assigned to the CCF.
Changes in the Company’s cash, cash equivalents and restricted cash for the three months ended March 31, 2021, compared to the three months ended March 31, 2020 were as follows:
Three Months Ended March 31,
(In millions)
2021
2020
Change
Net cash provided by operating activities (1)
$
122.9
$
68.6
$
54.3
Net cash used in investing activities (2)
(37.1)
(20.7)
(16.4)
Net cash used in financing activities (3)
(88.4)
(50.6)
(37.8)
Net decrease in cash, cash equivalents and restricted cash
(2.6)
(2.7)
0.1
Cash, cash equivalents and restricted cash, beginning of the period
19.7
28.4
(8.7)
Cash, cash equivalents and restricted cash, end of the period
$
17.1
$
25.7
$
(8.6)
(1) Change in net cash provided by operating activities:
Changes in net cash provided by operating activities for the three months ended March 31, 2021, compared to the three months ended March 31, 2020, were due to the following:
(In millions)
Change
Net income from operations
$
83.4
Non-cash deferred income taxes
3.8
Amortization of operating lease right of use assets
6.5
Other non-cash related changes, net
8.2
Income and distributions from SSAT, net
(2.5)
Operating lease liabilities
(5.6)
Deferred dry-docking payments
(6.9)
Accounts receivable, net
5.2
Prepaid expenses and other assets
(4.6)
Accounts payable, accruals and other liabilities
(33.3)
Deferred dry-docking amortization
0.5
Other long-term liabilities
(0.4)
Total
$
54.3
Deferred dry-docking payments for the three months ended March 31, 2021 were $9.5 million, compared to $2.6 million for the three months ended March 31, 2020. The increase in deferred dry-docking payments was due to the timing of
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when vessels are in dry-dock during each period. Changes in accounts receivable were primarily due to increased levels of revenues, and the timing of collections associated with those receivables. Changes in accounts payable, accruals and other liabilities were primarily due to accrued income taxes for the three months ended March 31, 2021 which will be paid during the subsequent quarter. There were no accrued income taxes during the quarter ended March 31, 2020. In addition, the change is also related to the increased level of operating costs and expenses, and the timing of payments associated with those liabilities.
(2) Change in net cash used in investing activities:
Changes in net cash used in investing activities for the three months ended March 31, 2021, compared to the three months ended March 31, 2020, were due to the following:
(In millions)
Change
Capitalized vessel construction expenditures
$
9.1
Cash deposits into CCF
70.4
Withdrawals from CCF
(70.4)
Other capital expenditures
(12.4)
Proceeds from disposal of property and equipment, net
(13.1)
Total
$
(16.4)
Capitalized vessel construction expenditures (including capitalized interest) were $9.1 million for the three months ended March 31, 2020. There were no capitalized vessel construction expenditures during the quarter ended March 31, 2021. Capitalized vessel construction expenditures relate to progress payments for the construction of new vessels, capitalized interest and owner’s items. The reduction is primarily due to the completion of the Company’s fleet renewal program in 2020. 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 $38.5 million for the three months ended March 31, 2021, compared to $26.1 million for the three months ended March 31, 2020. The increase in other capital expenditures is primarily due to the timing of certain capital project activities incurred during 2021 as compared to 2020. The decrease 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 three months ended March 31, 2020. There were no sale and leaseback transactions during the three months ended March 31, 2021.
(3) Change in net cash used in financing activities:
Changes in net cash used in financing activities for the three months ended March 31, 2021, compared to the three months ended March 31, 2020, were due to the following:
(In millions)
Change
Repayments of fixed interest debt
$
(3.0)
Repayments and borrowings under revolving credit facility, net
(24.7)
Payment of financing costs
0.1
Dividends paid
(0.6)
Tax withholding related to net share settlements of restricted stock units
(9.6)
Total
$
(37.8)
During the three months ended March 31, 2021, the Company paid $14.4 million in scheduled fixed debt payments, compared to $11.4 million during the three months ended March 31, 2020 . During the three months ended March 31, 2021, the Company decreased net borrowings under the revolving credit facility by $46.8 million, compared to $22.1 million decrease during the three months ended March 31, 2020. During the three months ended March 31, 2021, the Company paid $3.0 million in financing costs, compared to $3.1 million paid during the three months ended March 31, 2020, related to amendments of its revolving credit facility, private placement term loans and Title XI debt. During the three months ended March 31, 2021, the Company paid $10.1 million in dividends, compared to $9.5 million during the three months ended March 31, 2020 . The increase in dividend payments resulted from an increase in dividends declared per share of common stock by the Company. During the three months ended March 31, 2021, the Company paid $14.1 million in taxes related to vested restricted stock units, compared to $4.5 million for the three months ended March 31, 2020. The increase in taxes is primarily due to the increase of the Company’s stock price as of the vesting date of the restricted stock units.
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Debt: Total Debt as of March 31, 2021 and December 31, 2020 is as follows:
March 31,
December 31,
(In millions)
2021
2020
Change
Revolving credit facility
$
25.0
$
71.8
$
(46.8)
Fixed interest debt
673.9
688.3
(14.4)
Total Debt
$
698.9
$
760.1
$
(61.2)
Total Debt decreased by $61.2 million during the three months ended March 31, 2021. The decrease in the Company’s outstanding revolving credit borrowings was primarily due to the increase in net cash provided by operating activities. The decrease in fixed interest debt was due to the scheduled repayments of private placement term loans and Title XI debt during the three months ended March 31, 2021.
As of March 31, 2021, the Company had $616.9 million of remaining borrowing availability under the revolving credit facility, with a maturity date of March 31, 2026. The Company’s debt is described in Note 6 of Part I, Item 1 above.
Working Capital: The Company had a working capital deficit of $205.2 million and $205.6 million at March 31, 2021 and December 31, 2020, respectively. The Company manages its working capital needs through the use of borrowings on its revolving credit facility which can be received on short notice. The increase in working capital deficit at March 31, 2021 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
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, 2020 , which is incorporated herein by reference , except as described in Note 6 of Part I, Item 1 above.
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, 2020.
OTHER MATTERS
The Company’s first quarter 2021 cash dividend of $0.23 per share was paid on March 4, 2021. On April 22, 2021, the Company’s Board of Directors declared a cash dividend of $0.23 per share payable on June 3, 2021.
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, 2020.
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