Business Context and Reporting Period
Company: Alexander & Baldwin, Inc. (A&B) (Note: The user request metadata listed "Matson, Inc.", but the filing text identifies the registrant as Alexander & Baldwin, Inc., with Matson Navigation Company as a wholly-owned subsidiary).
Reporting Period: Fiscal year ended December 31, 1998.
Business Overview: A&B is a diversified corporation headquartered in Hawaii with three primary industry segments: Ocean Transportation (via Matson), Property Development and Management, and Food Products (sugar and coffee). The company operates primarily in Hawaii and the U.S. Mainland.
Key Financial Metrics
Revenue and Profit (Parent Company Condensed Statements):
- Total Revenue: $24,666,000 (1998) vs. $22,294,000 (1997).
- Net Income: $25,142,000 (1998) vs. $81,387,000 (1997).
- Comprehensive Income: $33,327,000 (1998) vs. $88,326,000 (1997).
- Equity in Net Income of Subsidiaries: $22,405,000 (1998) vs. $77,272,000 (1997).
Cash Flow (Parent Company):
- Operating Cash Flow: $9,664,000 (1998) vs. $25,495,000 (1997).
- Investing Cash Flow: Net inflow of $38,563,000 (1998), driven by $40,000,000 in dividends received from subsidiaries.
- Financing Cash Flow: Net outflow of $46,406,000 (1998), primarily due to $40,323,000 in dividends paid and $20,838,000 in stock repurchases.
- Cash and Equivalents: $885,000 (Dec 31, 1998) vs. negative $936,000 (Dec 31, 1997).
Debt and Liquidity:
- Long-term Liabilities (Parent): $7,649,000 (1998), consisting principally of deferred compensation and executive benefit plans.
- Debt Obligations (Consolidated): Total debt of approximately $343.3 million ($123.0 million fixed-rate, $220.3 million variable-rate).
- Liquidity: The filing states the company maintains a balanced mix of debt maturities and does not hedge interest rate exposure.
Segment Operational Metrics:
- Ocean Transportation: Carried 143,431 containers (Hawaii Service) and 18,418 containers (Guam Service) in 1998, down from 1997 levels. Capital expenditures totaled $51.1 million.
- Food Products: HC&S produced 216,188 tons of raw sugar (up from 198,037 tons in 1997). Cost per ton decreased to $373.89 from $446.92.
- Property: Hawaii commercial/industrial occupancy averaged 68% (down from 78% in 1997). U.S. Mainland occupancy averaged 91% (down from 98% in 1997).
Material Changes vs. Prior Period
- Significant Decline in Net Income: Net income dropped by approximately 69% year-over-year, largely due to a decrease in "Equity in Net Income of Subsidiaries" from $77.3 million to $22.4 million.
- Partial Sale of C&H: On December 24, 1998, A&B completed the recapitalization and partial sale of approximately 60% of the equity interest in California and Hawaiian Sugar Company, Inc. (C&H). Future results for C&H will be reported as an investment in an affiliate rather than consolidated.
- Property Write-downs: A&B wrote off $20,216,000 in previously incurred development costs for the Kukui'Ula residential project on Kauai due to weak economic conditions and a revised development strategy.
- Occupancy Rates: Occupancy rates declined in both Hawaii (68% vs. 78%) and U.S. Mainland (91% vs. 98%) commercial/industrial portfolios due to new supply and economic conditions.
- Freight Volume: Container volumes decreased across all major services (Hawaii, Guam, and Pacific Coast) compared to 1997.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook:
- Property Strategy: The Kukui'Ula project strategy has shifted from a master-planned community to incremental residential subdivisions and expedited resort development to match market absorption.
- Real Estate Market: Management anticipates continued challenges in the Maui retail market in 1999 due to new supply. However, Mainland properties in San Antonio, Sacramento, and Phoenix are expected to benefit from population and business growth.
- Sugar Refining: C&H profit margins declined in 1998 due to price competition from beet sugar. Results are expected to be better in the third and fourth quarters due to seasonality.
Risks and Contingencies:
- Regulatory/Legal: Matson is defending against a Surface Transportation Board complaint alleging unreasonable rates in the Guam trade. A&B is also subject to Jones Act regulations; repeal would introduce foreign-flag competition.
- Labor Relations: Approximately 55% of employees are covered by collective bargaining agreements. While relations are generally satisfactory, historical disruptions at Pacific Coast ports have occurred.
- Energy Costs: Matson's largest energy expense is residual fuel oil, which fluctuates significantly (ranging from $55.00 to $101.50 per metric ton in 1998).
- Water Rights: Food products operations rely heavily on water licenses and permits, some of which are renewable annually or pending long-term license issuance.
Unusual Items:
- Asset Sale: Sale of Ridgeview Court (Cupertino, CA) for $51.5 million in June 1998, with proceeds reinvested via tax-deferred exchanges.
- Dividend Activity: Significant cash outflow for dividends paid ($40.3 million) and stock repurchases ($20.8 million) in 1998.
Investor Verification Checklist
- C&H Transaction Impact: Verify the specific financial impact of the 60% sale of C&H on future consolidated revenue and the accounting treatment of the remaining 36% interest.
- Kukui'Ula Project Viability: Assess the revised development strategy for Kukui'Ula and the likelihood of recovering the $20.2 million write-down through future sales.
- Occupancy Trends: Monitor occupancy rates and rental rates for Hawaii commercial properties, particularly in Maui, given the reported decline and new supply.
- Debt Maturity Profile: Review the $343 million debt portfolio, specifically the $220 million in variable-rate debt, to assess interest rate risk exposure.
- Regulatory Status: Track the outcome of the Surface Transportation Board complaint regarding Guam trade rates and any legislative changes to the Jones Act.