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
The Company, from time to time, may make or may have made certain forward-looking statements, whether orally or in writing, such as, among others, forecasts or projections of the Company’s future performance or statements of management’s plans and objectives. These statements are considered “forward-looking” statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may be contained in, among other things, SEC filings such as Forms 10-K, 10-Q and 8-K, the Company’s Annual Report to Shareholders, the Company’s Sustainability Report, 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. Except for historical information contained in these written or oral communications, all other statements are forward-looking statements. These include, for example, all references to 2024 or future years, including such references included under “First Quarter 2024 Discussion and Outlook for 2024,” as well as statements generally identified through the inclusion of words such as “anticipate,” “believe,” “can,” “commit,” “estimate,” “expect,” “goal,” “intend,” “may,” “plan,” “target,” “seek,” “should,” and “will,” or similar statements or variations of such terms and other similar expressions. New risks or uncertainties may emerge from time to time, risks that the Company currently does not consider to be material could become material, and it is not possible for the Company to predict all such risks, nor can it assess the impact of all such risks on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results or outcomes, or the timing of results or outcomes, to differ materially from those contained in any forward-looking statements. Accordingly, forward-looking statements cannot be relied upon as a guarantee of future results or outcomes and involve a number of risks and uncertainties that could cause actual results or outcomes to differ materially from those projected in the statements, including but not limited to the factors that are described in Part I, Item 1A under the caption “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 . Except as required by law, the Company undertakes no obligation to revise or update publicly forward-looking statements or any factors that may affect actual results, whether as a result of new information, future events, circumstances occurring after the date of this report, or otherwise.
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 affected the Company’s Condensed Consolidated Financial Statements. The 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, 2023 , the Company’s reports on Forms 10-Q and 8-K, and other publicly available information.
FIRST QUARTER 2024 DISCUSSION AND OUTLOOK FOR 2024
Ocean Transportation: The Company’s container volume in the Hawaii service in the first quarter 2024 was 1.7 percent lower year-over-year. The decrease was primarily due to lower general demand . According to UHERO’s most recent forecast report, the Hawaii economy is projected to grow modestly supported by low unemployment and an increase in construction activity and jobs for large federal and state projects as well as home building on Oahu. Visitor arrivals are projected to increase modestly as the tourism industry continues to recover from the Maui wildfires last year in addition to the continued gradual return of international visitors. The Company expects volume in 2024 to approach the level achieved in 2023, reflecting modest economic growth in Hawaii and stable market share.
In China, the Company’s container volume in the first quarter 2024 decreased 4.0 percent year-over-year. The decrease was primarily due to a more traditional post-Lunar New Year period with a gradual recovery of volume after factories
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reopened and workers returned compared to a more accelerated increase in volume experienced post-Lunar New Year last year. The Company achieved higher freight rates in the first quarter 2024 as compared to the year ago period. Currently in the Transpacific marketplace, the Company continues to see steady U.S. consumer demand, which it expects to lead to improving demand for its CLX and MAX services in 2024 as compared to 2023 . The Company also expects average freight rates in 2024 to be higher than the levels achieved in 2023.
In Guam, the Company’s container volume in the first quarter 2024 was flat year-over-year. In the near-term, the Company expects continued improvement in the Guam economy with a low unemployment rate and a modest increase in tourism. For 2024, the Company expects volume to approximate the level achieved last year.
In Alaska, the Company’s container volume for the first quarter 2024 decreased 5.1 percent year-over-year primarily due to one less northbound sailing. In the near-term, the Company expects continued economic growth in Alaska supported by a low unemployment rate, jobs growth and lower levels of inflation. For 2024, the Company expects volume to approximate the level achieved last year.
The contribution in the first quarter 2024 from the Company’s SSAT joint venture investment was $0.4 million, or $2.2 million higher than the first quarter 2023. The increase was primarily due to higher lift volume. For 2024, the Company expects the contribution from SSAT to be higher than the levels achieved in 2023 due to an expected increase in lift volumes.
As a result of first quarter performance and the outlook trends noted above, the Company expects full year 2024 Ocean Transportation operating income to be higher than the $294.8 million achieved in 2023 and higher than the previous outlook. In the second quarter 2024, the Company expects Ocean Transportation operating income to be moderately higher than the level achieved in the second quarter 2023.
Logistics: In the first quarter 2024, operating income for the Company’s Logistics segment was $9.3 million, or $1.6 million lower compared to the level achieved in the first quarter 2023. The decrease was primarily due to continued market softness in transportation brokerage. For 2024, the Company expects challenging business conditions for transportation brokerage and expects operating income to be lower than the $48.0 million achieved in 2023. In the second quarter 2024, the Company expects operating income to be lower than the level achieved in the second quarter 2023.
Consolidated Operating Income: For full year 2024, the Company expects consolidated operating income to be modestly higher than the $342.8 million achieved in 2023 and expects comparable seasonality to the prior year. For the second quarter 2024, the Company expects consolidated operating income to be modestly higher than the $96.7 million achieved in the second quarter 2023.
Depreciation and Amortization: For the full year 2024, the Company expects depreciation and amortization expense to be approximately $180 million, inclusive of dry-docking amortization of approximately $27 million.
Interest Income: The Company expects interest income for the full year 2024 to be approximately $45 million. The increase in expected interest income from the prior outlook is due to the receipt on April 19, 2024 of $10.2 million in interest income earned on the federal tax refund related to the Company’s 2021 federal tax return.
Interest Expense: The Company expects interest expense for the full year 2024 to be approximately $8 million.
Other Income (Expense): The Company expects full year 2024 other income (expense) to be approximately $7 million in income, which is attributable to the amortization of certain components of net periodic benefit costs or gains related to the Company’s pension and post-retirement plans.
Income Taxes: In the first quarter 2024, the Company’s effective tax rate was 20.3 percent. For the full year 2024, the Company expects its effective tax rate to be approximately 22.0 percent.
Capital and Vessel Dry-docking Expenditures: For the first quarter 2024, the Company made capital expenditure payments excluding vessel construction expenditures of $54.2 million, capitalized vessel construction expenditures of $1.1 million, and dry-docking payments of $5.2 million. For the full year 2024, the Company expects to make other capital expenditure payments, including maintenance capital expenditures, of approximately $110 to $120 million, new
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vessel construction expenditures (including capitalized interest and owner’s items) of approximately $75 million, LNG installations and reengining on existing vessels of approximately $70 to $80 million, and dry-docking payments of approximately $35 million.
CONSOLIDATED RESULTS OF OPERATIONS
Consolidated Results – Three months ended March 31, 2024 compared with 2023:
Three Months Ended March 31,
(Dollars in millions, except per share amounts)
2024
2023
Change
Operating revenue
$
722.1
$
704.8
$
17.3
2.5
%
Operating costs and expenses
(685.2)
(666.1)
(19.1)
2.9
%
Operating income
36.9
38.7
(1.8)
(4.7)
%
Interest income
8.8
8.2
0.6
7.3
%
Interest expense
(2.2)
(4.5)
2.3
(51.1)
%
Other income (expense), net
1.8
1.8
—
0.0
%
Income before taxes
45.3
44.2
1.1
2.5
%
Income taxes
(9.2)
(10.2)
1.0
(9.8)
%
Net income
$
36.1
$
34.0
$
2.1
6.2
%
Basic earnings per share
$
1.05
$
0.94
$
0.11
11.7
%
Diluted earnings per share
$
1.04
$
0.94
$
0.10
10.6
%
Changes in operating revenue, and operating costs and expenses are further described below in the Analysis of Operating Revenue and Income by Segment.
The increase in interest income for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, was due to increased amounts of cash and CCF funds that are invested in interest bearing accounts, and higher interest rates during the period.
The decrease in interest expense for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, was due to lower outstanding debt during the period, and a higher offset of capitalized interest associated with new vessels 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.
Income tax expense was $9.2 million or 20.3 percent of income before taxes for the three months ended March 31, 2024, compared to $10.2 million or 23.1 percent of income before taxes for the three months ended March 31, 2023. The effective tax rate for the three months ended March 31, 2024 benefited from a 2.0 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, compared to a 0.8 percent FDII deduction for the three months ended March 31, 2023. The FDII deduction for the three months ended March 31, 2023 was lower primarily due to lower projected income generated from the Company’s China service. The effective tax rate for the three months ended March 31, 2024 also benefited from certain discrete tax adjustments that lowered the effective tax rate in the current period.
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ANALYSIS OF OPERATING REVENUE AND INCOME BY SEGMENT
Ocean Transportation Operating Results – Three months ended March 31, 2024 compared with 2023:
Three Months Ended March 31,
(Dollars in millions)
2024
2023
Change
Ocean Transportation revenue
$
579.0
$
551.0
$
28.0
5.1
%
Operating costs and expenses
(551.4)
(523.2)
(28.2)
5.4
%
Operating income
$
27.6
$
27.8
$
(0.2)
(0.7)
%
Operating income margin
4.8
%
5.0
%
Volume (Forty-foot equivalent units (FEU), except for automobiles) (1)
Hawaii containers
34,600
35,200
(600)
(1.7)
%
Hawaii automobiles
6,400
9,400
(3,000)
(31.9)
%
Alaska containers
18,800
19,800
(1,000)
(5.1)
%
China containers
28,900
30,100
(1,200)
(4.0)
%
Guam containers
4,900
4,900
—
—
%
Other containers (2)
3,600
4,100
(500)
(12.2)
%
(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 $28.0 million, or 5.1 percent, during the three months ended March 31, 2024, compared with the three months ended March 31, 2023. The increase was primarily due to higher freight rates in China and the domestic tradelanes, partially offset by lower volume in China, Hawaii, and Alaska, and lower fuel-related surcharge revenue.
On a year-over-year FEU basis, Hawaii container volume decreased 1.7 percent primarily due to lower general demand; Alaska volume decreased 5.1 percent primarily due to one less northbound sailing; China volume was 4.0 percent lower primarily due to a more traditional post-Lunar New Year period with a gradual recovery of volume after factories reopened and workers returned compared to a more accelerated increase in volume experienced post-Lunar New Year last year; Guam volume was flat; and Other containers volume decreased 12.2 percent.
Ocean Transportation operating income decreased $0.2 million, or 0.7 percent, during the three months ended March 31, 2024, compared with the three months ended March 31, 2023. The decrease was primarily due to higher vessel operating costs, including fuel-related expenses, and the timing of fuel-related surcharge collections, partially offset by higher freight rates in China.
The Company’s SSAT terminal joint venture investment contributed $0.4 million during the three months ended March 31, 2024, compared to a loss of $1.8 million during the three months ended March 31, 2023. The increase was primarily driven by higher lift volume.
Logistics Operating Results: Three months ended March 31, 2024 compared with 2023:
Three Months Ended March 31,
(Dollars in millions)
2024
2023
Change
Logistics revenue
$
143.1
$
153.8
$
(10.7)
(7.0)
%
Operating costs and expenses
(133.8)
(142.9)
9.1
(6.4)
%
Operating income
$
9.3
$
10.9
$
(1.6)
(14.7)
%
Operating income margin
6.5
%
7.1
%
Logistics revenue decreased $10.7 million, or 7.0 percent, during the three months ended March 31, 2024, compared with the three months ended March 31, 2023. The decrease was primarily due to lower revenue in transportation brokerage.
Logistics operating income decreased $1.6 million, or 14.7 percent, during the three months ended March 31, 2024, compared with the three months ended March 31, 2023. The decrease was primarily due to a lower contribution from transportation brokerage.
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LIQUIDITY AND CAPITAL RESOURCES
Sources of liquidity available to the Company as of March 31, 2024, compared to December 31, 2023 were as follows:
Cash and Cash Equivalents, Restricted Cash and Accounts Receivable: Cash and cash equivalents, restricted cash and accounts receivable as of March 31, 2024, compared to December 31, 2023 were as follows:
March 31,
December 31,
(In millions)
2024
2023
Change
Cash and cash equivalents
$
25.9
$
134.0
$
(108.1)
Restricted cash
$
2.3
$
2.3
$
—
Accounts receivable, net (1)
$
302.8
$
279.4
$
23.4
CCF - cash and cash equivalents, and investments account
$
606.8
$
599.4
$
7.4
(1) As of March 31, 2024 and December 31, 2023, $221.3 million and $218.1 million of eligible accounts receivable were assigned to the CCF, respectively.
Changes in the Company’s cash and cash equivalents, and restricted cash for the three months ended March 31, 2024, compared to the three months ended March 31, 2023 were as follows:
Three Months Ended March 31,
(In millions)
2024
2023
Change
Net cash provided by operating activities (1)
$
36.6
$
96.7
$
(60.1)
Net cash used in investing activities (2)
(59.0)
(153.5)
94.5
Net cash used in financing activities (3)
(85.7)
(104.5)
18.8
Net (decrease) increase in cash, cash equivalents and restricted cash
(108.1)
(161.3)
53.2
Cash and cash equivalents, and restricted cash, beginning of the period
136.3
253.7
(117.4)
Cash and cash equivalents, and restricted cash, end of the period
$
28.2
$
92.4
$
(64.2)
(1) Changes in net cash provided by operating activities:
Changes in net cash provided by operating activities for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, were due to the following:
(In millions)
Change
Net income
$
2.1
Non-cash depreciation and amortization
1.8
Deferred income taxes
3.7
Other non-cash related changes, net
(0.9)
Income and distribution from SSAT, net
11.8
Accounts receivable, net
(9.2)
Prepaid expenses and other assets
(43.3)
Accounts payable, accruals and other liabilities
(25.9)
Operating lease liabilities
4.8
Non-cash amortization of operating lease right of use assets
(5.7)
Deferred dry-docking payments
(2.8)
Non-cash deferred dry-docking amortization
0.6
Other long-term liabilities
2.9
Total
$
(60.1)
Net income was $36.1 million for the three months ended March 31, 2024, compared to $34.0 million for the three months ended March 31, 2023. Income from SSAT was $0.4 million for the three months ended March 31, 2024, compared to a loss of $1.8 million for the three months ended March 31, 2023. The increase in income from SSAT was due to higher lift volume during the three months ended March 31, 2024, compared to the same prior year period. The Company received $14.0 million of cash distributions from SSAT during the three months ended March 31, 2024, compared to no cash distributions received from SSAT during the three months ended March 31, 2023. Cash distributions from SSAT are dependent on the level of cash available for distribution after SSAT’s operational and capital needs. Changes in accounts receivable were primarily due to higher accounts receivable outstanding as of March 31, 2024, compared to the same prior year period, and also due to the timing of collections associated with those
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receivables. Changes in prepaid expenses and other assets were primarily due to a decrease in prepaid income taxes for the three months ended March 31, 2024, compared to the same prior year period. Changes in accounts payable, accruals and other liabilities were due to the timing of payments associated with those liabilities. Changes in operating lease liabilities were primarily due to new operating lease additions and renewals, offset by operating lease payments and terminations during the three months ended March 31, 2024, compared to the same prior year period. Deferred dry-docking payments for the three months ended March 31, 2024 were $5.2 million, compared to $2.4 million for the three months ended March 31, 2023. Changes in deferred dry-docking is primarily due to the timing of when the dry-docking of vessels occurs.
(2) Changes in net cash used in investing activities:
Changes in net cash used in investing activities for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, were due to the following:
(In millions)
Change
Cash deposits and interest into the CCF
$
99.5
Payment for intangible asset acquisition
12.4
Capitalized vessel construction expenditures
(0.7)
Capital expenditures (excluding vessel construction expenditures)
(18.7)
Proceeds from disposal of property and equipment, net, and other
2.0
Total
$
94.5
The Company received $6.0 million of interest and accretion in the CCF during the three months ended March 31, 2024, compared to $5.5 million of interest and $100.0 million of cash deposits in the CCF during the three months ended March 31, 2023. Cash and cash equivalents, and investments in the CCF are intended to fund milestone payments for the construction of three new Jones Act vessels. During the three months ended March 31, 2023, the Company paid $12.4 million related to an intangible asset acquisition. There were no acquisition related payments made during the three months ended March 31, 2024. Capitalized vessel construction expenditures (including capitalized interest) were $1.1 million for the three months ended March 31, 2024, compared to $0.4 million for the three months ended March 31, 2023. Capitalized vessel construction expenditures relate to milestone payments and capitalized interest for the construction of three new Jones Act vessels. Maintenance and other capital expenditures payments were $54.2 million for the three months ended March 31, 2024, compared to $35.5 million for the three months ended March 31, 2023. Maintenance and other capital expenditures primarily relate to vessel related expenditures, the acquisition of containers, chassis and other equipment, and expenditures on other capital related projects. The increase in maintenance and other capital expenditure for the three months ended March 31, 2024, compared to the same prior year period primarily related to the timing of when vessel maintenance activities are performed and when other capital related projects are incurred.
(3) Changes in net cash used in financing activities:
Changes in net cash used in financing activities for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, were due to the following:
(In millions)
Change
Repurchase of Matson common stock
$
(7.3)
Repayments of fixed interest debt
30.7
Withholding tax related to net share settlements of restricted stock units
(4.8)
Dividends paid
0.2
Total
$
18.8
During the three months ended March 31, 2024, the Company paid $47.3 million to repurchase Matson common stock, compared to $40.0 million during the three months ended March 31, 2023. During the three months ended March 31, 2024, the Company paid $10.1 million in scheduled fixed debt payments, compared to $26.4 million of prepaid Title XI debt and $14.4 million in scheduled fixed debt payments during the three months ended March 31, 2023. During the three months ended March 31, 2024, the Company paid $17.2 million in withholding taxes related to vested restricted stock units, compared to $12.4 million during the three months ended March 31, 2023. 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, 2024, the Company paid $11.1 million in dividends, compared to $11.3 million during the three months ended March 31, 2023. The decrease in dividend payments was due to the
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reduction in common stock outstanding, offset by an increase in dividends declared per share of common stock by the Company.
Capital Construction Fund: The Company’s CCF is described in Note 7 of Part I, Item 1 above. CCF cash and cash equivalents, investments and assigned accounts receivables as of March 31, 2024 and December 31, 2023 is as follows:
March 31,
December 31,
(In millions)
2024
2023
Capital Construction Fund:
Cash and cash equivalents, and investments account
$
606.8
$
599.4
Assigned accounts receivables
$
221.3
$
218.1
The Company intends to use withdrawals from the CCF cash and cash equivalents, and investments account to fund qualified milestone progress payments for the construction of three new Jones Act vessels.
Debt: The Company’s debt is described in Note 8 of Part I, Item 1 above. The Company utilizes a mix of fixed and variable debt for liquidity and to fund the Company’s operations. Total Debt as of March 31, 2024 and December 31, 2023 is as follows:
March 31,
December 31,
(In millions)
2024
2023
Change
Fixed interest debt
$
430.5
$
440.6
$
(10.1)
Total Debt
$
430.5
$
440.6
$
(10.1)
Total Debt decreased by $10.1 million during the three months ended March 31, 2024, compared to December 31, 2023, primarily due to scheduled repayments of private placement term loans.
As of March 31, 2024, the Company had $644.2 million of remaining borrowing availability under the revolving credit facility, with a maturity date of March 31, 2026.
Working Capital: The Company had a working capital deficit of $18.5 million and a working capital surplus of $40.0 million at March 31, 2024 and December 31, 2023, 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 decrease in the Company’s working capital at March 31, 2024, compared to December 31, 2023 is primarily due to the decrease in cash provided by operating activities and higher capital expenditure during the three months ended March 31, 2024.
Capital Expenditures: During the three months ended March 31, 2024, there were no material changes to the Company’s expected capital expenditures for the years ending December 31, 2024, 2025 and 2026 that are described in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 .
The following represents the estimated timing of future milestone payments under the vessel construction agreements as of March 31, 2024, as described in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 :
Paid
Future Milestone Payments
Vessel Construction Obligations
(in millions)
As of
March 31, 2024
Remainder
of 2024
2025
2026
2027
2028
Thereafter
Total
Three Aloha Class Containerships
$
99.9
$
71.0
$
367.1
$
323.0
$
132.0
$
6.0
$
—
$
999.0
The Company intends to use the CCF cash and cash equivalents, and investments account to fund future milestone progress payments.
Repurchase of Shares: During the three months ended March 31, 2024, the Company repurchased approximately 0.4 million shares for a total cost of $48.9 million. The maximum number of remaining shares that may be purchased under the Company’s share repurchase program was approximately 2.0 million shares at March 31, 2024.
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Other Material Cash Requirements: There were no other material changes during the quarter ended March 31, 2024 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, 2023 .
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, 2023 .
OTHER MATTERS
The Company’s first quarter 2023 cash dividend of $0.32 per share was paid on March 7, 2024. On April 25, 2024, the Company’s Board of Directors declared a cash dividend of $0.32 per share payable on June 6, 2024 to shareholders of record on May 9, 2024.
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 its Annual Report on Form 10-K for the year ended December 31, 2023 .
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