Business Context and Reporting Period
This unaudited Form 10-Q covers Alexander & Baldwin, Inc. for the three months ended March 31, 2012. Matson, Inc. operated as a wholly owned transportation subsidiary within A&B; the filing is not a standalone Matson filing. A&B operated Ocean Transportation, Logistics Services, Real Estate, and Agribusiness businesses.
The company was pursuing a separation into two publicly traded companies: a land company retaining the Alexander & Baldwin name and a transportation and logistics company operating under the Matson name. Completion was expected in the third quarter of 2012. A February 2012 holding-company reorganization was intended to facilitate the separation and preserve Jones Act eligibility.
Financial Results and Key Metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Operating revenue | $405.0 million | $373.3 million | 8% |
| Operating income | $12.2 million | $14.9 million | (18%) |
| Income from continuing operations | $2.8 million | $9.1 million | (69%) |
| Net income | $3.8 million | $5.2 million | (27%) |
| Diluted EPS | $0.09 | $0.12 | (25%) |
| Operating margin | 3.0% | 4.0% | Down approximately 100 basis points |
| Cash flow from operating activities | $(20) million | $(11) million | Greater use of cash |
- Ocean Transportation revenue increased 17% to $279.7 million and operating profit increased 50% to $8.1 million, with a 2.9% margin versus 2.3%. Higher fuel surcharges, Guam volume, and China trade performance were partly offset by lower Hawaii volumes and higher dry-docking and terminal costs.
- Logistics Services revenue fell 5% to $86.6 million and operating profit fell 80% to $0.3 million. Intermodal and highway volumes declined, reflecting the CLX2 shutdown, loss of a major ocean carrier customer, and loss of certain truckload customers.
- Real Estate Sales revenue declined 51% to $11.5 million and operating profit declined 93% to $0.9 million. The prior-year period benefited from property sales and a joint-venture investment gain.
- Real Estate Leasing revenue was $25.6 million and operating profit was $10.7 million, with a 41.7% margin. Mainland and Hawaii occupancy was 93% and 91%, respectively.
- Agribusiness revenue declined 13% to $14.0 million, while operating profit increased 35% to $3.5 million. Sugar production fell 72% to 1,900 tons because the harvest started later, but margins improved due to higher power and lease revenue and lower expenses.
- Discontinued operations generated $1.0 million after tax versus a $3.9 million loss in Q1 2011. The 2012 result included $2.4 million from real estate sales, partly offset by $1.4 million of CLX2 operating and shutdown losses.
Financial Position, Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $19 million at March 31, 2012, down from $22 million at December 31, 2011.
- Total debt was $596 million, compared with $559 million at year-end 2011. Current debt and notes payable were $55 million, and long-term debt was $541 million. The fair value of long-term debt was $564 million.
- Available capacity under revolving credit and term facilities was $245 million. Management stated that operating funds, cash, and available borrowings were expected to cover working capital, capital expenditures, dividends, and potential acquisitions and repurchases for the year.
- Working capital improved to $13 million from a $3 million deficit, primarily because of a $23 million increase in sugar inventories.
- Investing activities used $19 million, including $13 million of capital expenditures. Financing activities provided $36 million, including $51 million of debt issuance, $15 million of debt payments and financing costs, and $13 million of dividends paid.
- The quarterly dividend remained $0.315 per share. A second-quarter dividend of $0.315 per share was scheduled for June 4, 2012.
- Operating cash flow was negative primarily because of higher working capital, increased sugar inventory, corporate expenses, and pension contributions. Planned 2012 pension contributions were approximately $21 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth was concentrated in Ocean Transportation, particularly from $26.9 million of higher fuel surcharges and improved Guam and China activity.
- Overall operating costs increased 10%, exceeding the 8% revenue increase. Transportation costs rose approximately $35.1 million.
- Operating income declined despite higher revenue because of increased transportation costs, separation expenses, weaker logistics results, and lower real estate sales and joint-venture earnings.
- Other income and expense deteriorated to a $7.6 million net expense from a $0.5 million net expense, primarily because Q1 2011 included a gain from the Bridgeport joint venture and Q1 2012 included joint-venture losses.
- The company recorded $3.3 million of pre-tax separation costs in Q1 2012. Full-year separation-related professional fees and one-time costs were estimated at $20 million to $22 million before tax.
- CLX2 termination liabilities were $3.0 million at March 31, 2012. Total cash and non-cash CLX2 termination charges were expected to reach approximately $15.5 million by September 30, 2012.
Guidance, Outlook, Risks and Unusual Items
- Management expected modest growth in the U.S. and Hawaii economies, supported by strong visitor activity in Hawaii.
- Ocean Transportation Hawaii container volume was expected to be moderately lower in Q2 2012. Transpacific rates were expected to improve modestly, while Guam performance was expected to remain improved until a new competitor entered the market.
- Logistics Services full-year performance was expected to be flat to modestly better, subject to Mainland economic conditions, competition, cargo mix, capacity, and carrier reliability.
- Real Estate Leasing was expected to show modest full-year improvement, while Q2 commercial property sales were expected to be minimal. Real estate sales remain episodic and difficult to forecast.
- Agribusiness was expected to perform well based on forecast sugar production and pricing locked in for most of the 2012 crop.
- Key risks included fuel prices, freight rates, economic conditions, competitive changes, the separation process, and the ability to maintain borrowing capacity and cash generation.
- Contingencies included water-rights proceedings affecting Maui sugar operations, a Department of Justice investigation into domestic water-carriage pricing and competitive practices, potential Boiler MACT compliance costs, an EEOC lawsuit, and potential climate-change regulation. The filing states that the financial impact of these matters could not be predicted.
- Off-balance-sheet commitments included $19 million of standby letters of credit, $50 million of performance and customs bonds, and $87 million of multiemployer pension withdrawal obligations. Management did not expect the company to be required to advance funds under these commitments.
- The filing states that interim results are not necessarily indicative of full-year performance and that the financial statements should be read with the 2011 Form 10-K.
Important Facts for Investors to Verify
- Confirm the status, timing, approvals, costs, and final structure of the planned separation into A&B and Matson entities.
- Monitor Ocean Transportation fuel surcharges, Hawaii and Guam volumes, Transpacific rates, dry-docking costs, and competitive entry into Guam.
- Assess whether Logistics Services can recover from the CLX2 shutdown, customer losses, and lower highway and intermodal volumes.
- Reconcile negative operating cash flow with higher debt, planned pension contributions, dividends, and separation expenditures.
- Track CLX2 exit costs and the settlement of the remaining $3.0 million liability.
- Evaluate the potential operational and financial effects of Maui water-rights proceedings, environmental regulations, the Department of Justice investigation, and the EEOC litigation.