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, business or environmental, social and governance 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,” “design,” “goal,” “plan,” 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, 2021. 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 Condensed Consolidated 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 Condensed Consolidated 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, 2021 , the Company’s reports on Forms 10-Q and 8-K, and other publicly available information.
FIRST QUARTER 2022 DISCUSSION AND UPDATE ON BUSINESS CONDITIONS
Ocean Transportation: The Company’s container volume in the Hawaii service in the first quarter 2022 was 0.6 percent lower year-over-year. The decrease was primarily due to lower eastbound volume . During the quarter, we continued to see elevated hospitality-related demand as a result of strong domestic tourist arrivals and modest improvement in international visitor traffic. In the near-term, we are cautiously optimistic on further economic recovery in Hawaii in 2022. The positive trends include further improvement in the unemployment rate and increasing tourism traffic, including meaningful international visitor traffic later in the year, but incremental waves of COVID-19 variants present the possibility of further economic slowdowns and the loss of federal stimulus coupled with inflation and higher interest rates may impact discretionary income.
In China, the Company’s container volume in the first quarter 2022 increased 13.4 percent year-over-year. The increase was a result of five more eastbound voyages than the prior year. Volume demand in the quarter was driven by e- commerce, garments and other goods. Matson continued to realize a significant rate premium over the Shanghai Containerized Freight Index in the first quarter 2022 and achieved average freight rates that were considerably higher
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than in the year ago period. Currently in the Transpacific tradelane, we are seeing supply chain challenges in China, primarily due to actions to mitigate the spread of COVID-19, as well as continued supply chain constraints and congestion on the U.S. West Coast, elevated consumption trends, and inventory restocking. Despite the near-term uncertainty presented by the supply chain challenges in China, we expect a combination of the current supply and demand factors to remain largely in place through at least the October peak season and continue to expect elevated demand for our China service for most of this year.
In Guam, the Company’s container volume in the first quarter 2022 increased 10.0 percent year-over-year primarily due to higher retail-related demand. In the near-term, we are cautiously optimistic on further economic growth in Guam as tourism traffic improves as the year progresses.
In Alaska, the Company’s container volume for the first quarter 2022 increased 20.2 percent year-over-year primarily due to (i) the increase in volume from the Alaska-Asia Express (“AAX”), (ii) higher northbound volume primarily due to higher retail-related demand and volume related to a competitor’s dry-docking and (iii) higher southbound volume primarily due to higher seafood volume. In the near-term, we expect improving economic trends in Alaska, but the recovery’s trajectory continues to remain uncertain.
The contribution in the first quarter 2022 from the Company’s SSAT joint venture investment was $34.0 million, or $24.8 million higher than the first quarter 2021. The increase was primarily driven by higher other terminal revenue.
Logistics: In the first quarter 2022, operating income for the Company’s Logistics segment was $16.4 million, or $10.3 million higher compared to the level achieved in the first quarter 2021. The increase was due primarily to higher contributions from all services as we continued to see elevated goods consumption, inventory restocking and favorable supply and demand fundamentals in our core markets.
CONSOLIDATED RESULTS OF OPERATIONS
Consolidated Results - Three months ended March 31, 2022 compared with 2021:
Three Months Ended March 31,
(Dollars in millions, except per share amounts)
2022
2021
Change
Operating revenue
$
1,165.5
$
711.8
$
453.7
63.7
%
Operating costs and expenses
(732.9)
(591.6)
(141.3)
23.9
%
Operating income
432.6
120.2
312.4
259.9
%
Interest expense
(4.8)
(7.3)
2.5
(34.2)
%
Other income (expense), net
2.0
1.4
0.6
42.9
%
Income before income taxes
429.8
114.3
315.5
276.0
%
Income taxes
(90.6)
(27.1)
(63.5)
234.3
%
Net income
$
339.2
$
87.2
$
252.0
289.0
%
Basic earnings per share
$
8.29
$
2.01
$
6.28
312.4
%
Diluted earnings per share
$
8.23
$
1.99
$
6.24
313.6
%
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, 2022, compared to the three months ended March 31, 2021, was due to lower outstanding debt during the period.
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.
Income tax expense was $90.6 million or 21.1 percent of income before income taxes for the three months ended March 31, 2022, compared to $27.1 million or 23.7 percent of income before income taxes for the three months ended March 31, 2021. The effective tax rate for the three months ended March 31, 2022 benefited from a 2.6 percent deduction related to foreign-derived intangible income (“FDII”) under Section 250 of the Internal Revenue Code that lowered the effective tax rate for the current period. The Company benefits from a FDII deduction as it relates to a U.S. corporation that generates income from services provided to or from foreign countries.
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ANALYSIS OF OPERATING REVENUE AND INCOME BY SEGMENT
Ocean Transportation Operating Results - Three months ended March 31, 2022 compared with 2021:
Three Months Ended March 31,
(Dollars in millions)
2022
2021
Change
Ocean Transportation revenue
$
943.9
$
560.5
$
383.4
68.4
%
Operating costs and expenses
(527.7)
(446.4)
(81.3)
18.2
%
Operating income
$
416.2
$
114.1
$
302.1
264.8
%
Operating income margin
44.1
%
20.4
%
Volume (Forty-foot equivalent units (FEU), except for automobiles) (1)
Hawaii containers
35,500
35,700
(200)
(0.6)
%
Hawaii automobiles
8,600
10,700
(2,100)
(19.6)
%
Alaska containers
20,800
17,300
3,500
20.2
%
China containers
46,600
41,100
5,500
13.4
%
Guam containers
5,500
5,000
500
10.0
%
Other containers (2)
5,300
4,000
1,300
32.5
%
(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.
Ocean Transportation revenue increased $383.4 million, or 68.4 percent, during the three months ended March 31, 2022, compared with the three months ended March 31, 2021. The increase was primarily due to higher revenue in China, higher fuel-related surcharge revenue, and higher revenue in Alaska. The higher revenue in China was primarily due to considerably higher average freight rates and higher volume. The higher revenue in Alaska was primarily the result of higher volume.
On a year-over-year FEU basis, Hawaii container volume decreased 0.6 percent primarily due to lower eastbound volume; Alaska volume increased 20.2 percent primarily due to (i) the increase in volume from AAX, (ii) higher northbound volume primarily due to higher retail-related demand and volume related to a competitor’s dry-docking, and (iii) higher southbound volume primarily due to higher seafood volume; China volume was 13.4 percent higher as a result of five more eastbound voyages than the prior year; Guam volume was 10.0 percent higher primarily due to higher retail-related demand; and Other containers volume increased 32.5 percent primarily due to the addition of China-Auckland Express volume in the South Pacific.
Ocean Transportation operating income increased $302.1 million during the three months ended March 31, 2022, compared with the three months ended March 31, 2021. The increase was primarily due to considerably higher average freight rates and higher volume in China and a higher contribution from SSAT, partially offset by higher operating costs and expenses primarily due to the CCX and CLX+ services and the timing of fuel-related surcharge recovery.
The Company’s SSAT terminal joint venture investment contributed $34.0 million during the three months ended March 31, 2022, compared to a contribution of $9.2 million during the three months ended March 31, 2021. The increase was primarily driven by higher other terminal revenue.
Logistics Operating Results: Three months ended March 31, 2022, compared with 2021:
Three Months Ended March 31,
(Dollars in millions)
2022
2021
Change
Logistics revenue
$
221.6
$
151.3
$
70.3
46.5
%
Operating costs and expenses
(205.2)
(145.2)
(60.0)
41.3
%
Operating income
$
16.4
$
6.1
$
10.3
168.9
%
Operating income margin
7.4
%
4.0
%
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Logistics revenue increased $70.3 million, or 46.5 percent, during the three months ended March 31, 2022, compared with the three months ended March 31, 2021. The increase was primarily due to higher transportation brokerage and supply chain management revenue.
Logistics operating income increased $10.3 million, or 168.9 percent, for the three months ended March 31, 2022, compared with the three months ended March 31, 2021. The increase was primarily due to higher contributions from all services.
LIQUIDITY AND CAPITAL RESOURCES
Sources of liquidity available to the Company as of March 31, 2022, compared to December 31, 2021 were as follows:
Cash, Cash Equivalents, Restricted Cash and Accounts Receivable: Cash and cash equivalents, restricted cash and accounts receivable as of March 31, 2022, compared to December 31, 2021 were as follows:
March 31,
December 31,
(In millions)
2022
2021
Change
Cash and cash equivalents
$
392.8
$
282.4
$
110.4
Restricted cash
$
5.3
$
5.3
$
—
Accounts receivable, net (1)
$
371.4
$
343.7
$
27.7
(1) As of March 31, 2022 and December 31, 2021, $9.8 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, 2022, compared to the three months ended March 31, 2021 were as follows:
Three Months Ended March 31,
(In millions)
2022
2021
Change
Net cash provided by operating activities (1)
$
273.9
$
122.9
$
151.0
Net cash used in investing activities (2)
(46.4)
(37.1)
(9.3)
Net cash used in by financing activities (3)
(117.1)
(88.4)
(28.7)
Net increase (decrease) in cash, cash equivalents and restricted cash
110.4
(2.6)
113.0
Cash, cash equivalents and restricted cash, beginning of the period
287.7
19.7
268.0
Cash, cash equivalents and restricted cash, end of the period
$
398.1
$
17.1
$
381.0
(1) Changes in net cash provided by operating activities:
Changes in net cash provided by operating activities for the three months ended March 31, 2022, compared to the three months ended March 31, 2021, were due to the following:
(In millions)
Change
Net income
$
252.0
Non-cash depreciation and amortization
1.1
Non-cash deferred income taxes
0.1
Other non-cash related changes, net
0.8
Income and distributions from SSAT, net
(35.3)
Accounts receivable, net
(20.0)
Prepaid expenses and other assets
(26.7)
Accounts payable, accruals and other liabilities
(21.8)
Operating lease liabilities
(12.9)
Non-cash amortization of operating lease right of use assets
12.3
Deferred dry-docking payments
0.9
Non-cash deferred dry-docking amortization
0.1
Other long-term liabilities
0.4
Total
$
151.0
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Net income was $339.2 million for the three months ended March 31, 2022, compared to $87.2 million for the three months ended March 31, 2021, as described above. Income from SSAT was $34.0 million for the three months ended March 31, 2022, compared to $9.2 million for the three months ended March 31, 2021. The increase in income from SSAT was due to higher operating profits generated by SSAT during the three months ended March 31, 2022 as compared to the same prior year period. There were no cash distributions from SSAT during the three months ended March 31, 2022, compared to $10.5 million for the three months ended March 31, 2021. Cash distributions from SSAT are dependent on the level of cash available for distribution after operational and future capital needs of SSAT, and the timing of when such dividends are declared and paid. Changes in accounts receivable were primarily due to increased levels of revenues, and the timing of collections associated with those receivables. Changes in prepaid expenses and other assets were primarily due to increased prepaid fuel and other operating related costs, and the timing and amount of prepaid income taxes for the three months ended March 31, 2022 as compared to the same prior year period. Changes in accounts payable, accruals and other liabilities were primarily due to increased levels of operating costs and the timing of payments associated with those liabilities. Changes in operating lease liabilities were primarily due to new operating lease additions and renewals, partially offset by operating lease terminations during the three months ended March 31, 2022, compared to the same prior year period. Deferred dry-docking payments for the three months ended March 31, 2022 were $8.6 million, compared to $9.5 million for the three months ended March 31, 2021. The decrease in deferred dry-docking payments was due to less dry-dock related activity during the three months ended March 31, 2022 as compared to the same prior year period.
(2) Changes in net cash used in investing activities:
Changes in net cash used in investing activities for the three months ended March 31, 2022, compared to the three months ended March 31, 2021, were due to the following:
(In millions)
Change
Cash deposits into CCF
$
(10.7)
Withdrawals from CCF
10.7
Capitalized vessel construction expenditures
(9.4)
Other capital expenditures
1.1
Proceeds from disposal of property and equipment, net
(1.0)
Total
$
(9.3)
Capitalized vessel construction expenditures (including capitalized interest) were $9.4 million for the three months ended March 31, 2022 and related to the construction of a new flat-deck barge. There were no capitalized vessel construction expenditures during the three months ended March 31, 2021. Other capital expenditures payments were $37.4 million for the three months ended March 31, 2022, compared to $38.5 million for the three months ended March 31, 2021. Other capital expenditures primarily relates to the acquisition of containers, chassis and other equipment; vessel related expenditures; and expenditures on other capital related projects.
(3) Changes in net cash used in financing activities:
Changes in net cash used in financing activities for the three months ended March 31, 2022, compared to the three months ended March 31, 2021, were due to the following:
(In millions)
Change
Repurchase of Matson common stock
$
(70.4)
Repayments and borrowings under revolving credit facility, net
46.8
Withholding tax related to net share settlements of restricted stock units
(5.3)
Payment of financing costs
3.0
Dividends paid
(2.8)
Total
$
(28.7)
During the three months ended March 31, 2022, the Company paid $70.4 million for the repurchase of Matson common stock. There was no stock repurchase activity during the same prior year period. During the three months ended March 31, 2022, the Company paid $14.4 million in scheduled fixed debt payments, compared to $14.4 million in scheduled fixed debt payments during the three months ended March 31, 2021. During the three months ended March 31, 2021, the Company decreased net borrowings under the revolving credit facility by $46.8 million. There were no borrowing under the revolving credit facility during the three months ended March 31, 2022. During the three months ended March 31, 2021, the Company paid $3.0 million in financing costs. No financing costs were paid during
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the three months ended March 31, 2022. During the three months ended March 31, 2022, the Company paid $19.4 million in payroll taxes related to vested restricted stock units, compared to $14.1 million for the three months ended March 31, 2021. The increase in withholding tax was primarily due to the increase of the Company’s stock price as of the vesting date of the restricted stock units. During the three months ended March 31, 2022, the Company paid $12.9 million in dividends, compared to $10.1 million during the three months ended March 31, 2021. 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 March 31, 2022 and December 31, 2021 is as follows:
March 31,
December 31,
(In millions)
2022
2021
Change
Fixed interest debt
614.7
629.0
(14.3)
Total Debt
$
614.7
$
629.0
$
(14.3)
Total Debt decreased by $14.3 million during the three months ended March 31, 2022. 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, 2022.
As of March 31, 2022, the Company had $642.0 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 surplus of $264.6 million and $92.1 million at March 31, 2022 and December 31, 2021, respectively. Working capital is primarily impacted by the amount of net cash provided by operating activities, the amount of capital expenditures, the timing of collections associated with accounts receivable, prepaid expenses and other assets, and by the amount and timing of payments associated with accounts payable, accruals, income taxes and other liabilities. The increase in working capital surplus at March 31, 2022 is primarily due to the increase in cash generated from operating activities during the three months ended March 31, 2022, compared to the three months ended December 31, 2021.
Capital Expenditures: There were no material changes during the quarter ended March 31, 2022 to the Company’s expected capital expenditures for the years ending December 31, 2022 and 2023 that are described in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 .
Repurchase of Shares: During the quarter ended March 31, 2022, the Company repurchased approximately 0.7 million shares for a total cost of $68.6 million. The maximum number of shares that may be purchased under the Company’s stock repurchase program was approximately 2.8 million shares at March 31, 2022.
Other Material Cash Requirements: Except as described above, there were no other material changes during the quarter ended March 31, 2022 to the Company’s other cash requirements that are described in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 .
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no changes during this quarter to the Company’s critical accounting policies and estimates as discussed in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
OTHER MATTERS
The Company’s first quarter 2022 cash dividend of $0.30 per share was paid on March 3, 2022. On April 28, 2022, the Company’s Board of Directors declared a cash dividend of $0.30 per share payable on June 2, 2022 to shareholders of record on May 12, 2022.
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, 2021.
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