Filing Scope and Business Context
This Form 10-Q was filed by Alexander & Baldwin, Inc. (A&B), not Matson, Inc. Matson is described as a wholly owned subsidiary operating the Ocean Transportation and Logistics Services segments. The filing covers the three and nine months ended September 30, 2010, with unaudited interim financial statements. A&B operates in Transportation, Real Estate, and Agribusiness.
Financial Performance and Position
| Metric | Q3 2010 | Q3 2009 | 9M 2010 | 9M 2009 |
|---|---|---|---|---|
| Operating revenue | $444.3 million | $371.0 million | $1,185.6 million | $1,034.3 million |
| Operating income | $41.6 million | $14.5 million | $94.7 million | $26.7 million |
| Income from continuing operations | $24.8 million | $4.5 million | $50.5 million | $4.3 million |
| Net income | $25.7 million | $8.5 million | $71.9 million | $24.1 million |
| Diluted EPS | $0.62 | $0.21 | $1.74 | $0.59 |
- Operating margin was approximately 9.4% in Q3 and 8.0% for the first nine months, compared with approximately 3.9% and 2.6%, respectively, in the prior-year periods.
- Ocean Transportation revenue increased 14% in Q3 and 15% year to date; operating profit increased 67% and 96%, respectively. China container volumes rose 29% in Q3 and 34% year to date, supported by a second China service and stronger demand.
- Logistics Services revenue increased 12% in Q3 and 8% year to date, but operating profit declined 18% and 5%, respectively, due to competitive pricing, lower yields, capacity constraints, and higher warehouse costs.
- Real Estate Leasing revenue and operating profit declined year to date by 9% and 19%, respectively, reflecting lower rents and portfolio timing. Real Estate Sales operating profit increased 73% year to date, substantially aided by property sales and a $5.1 million mortgage settlement gain recognized through joint ventures.
- Agribusiness improved from a $13.8 million operating loss in Q3 2009 to $0.8 million of operating profit in Q3 2010, and from a $27.0 million loss to $1.5 million of profit for the first nine months. Higher sugar prices, volumes, yields, and production drove the improvement.
- Operating cash flow was $81 million for the first nine months, compared with $78 million in 2009. Investing cash use increased to $77 million from $8 million, primarily due to $78 million of increased investments and higher capital expenditures.
- Capital expenditures were $39 million, including $26 million for transportation assets, $8 million for real estate, and $5 million for agriculture. Financing cash use was $6 million versus $73 million in the prior-year period.
- Cash and cash equivalents were $14 million at September 30, 2010, compared with $16 million at December 31, 2009. Reported working capital was $72 million, up $62 million from year-end.
- Total debt was $500 million at September 30, 2010, versus $471 million at year-end; available borrowing capacity was approximately $373 million. Long-term debt fair value was $535 million against a $500 million carrying amount.
- The quarterly dividend remained $0.315 per share; the board declared the same amount for the fourth quarter, payable December 2, 2010.
Material Changes Versus the Prior Comparable Period
- Revenue increased 20% in Q3 and 15% year to date, while operating income increased nearly threefold in Q3 and more than tripled year to date.
- Net income benefited from stronger Ocean Transportation results, the Agribusiness recovery, improved real estate joint-venture earnings, and lower comparative costs. The prior-year period included a $6.0 million Matson workforce-reduction charge.
- Discontinued operations contributed $0.9 million in Q3 and $21.4 million year to date, compared with $4.0 million and $19.8 million, respectively, in 2009. These amounts primarily relate to real estate asset sales and leasing operations.
- HS&TC began being consolidated on December 1, 2009, affecting the comparability and timing of Agribusiness revenue recognition.
- Debt increased as the company funded real estate investments and development projects, while cash remained broadly stable because operating cash flow and financing activity offset investing needs.
Outlook, Risks, Contingencies, and Unusual Items
- Management expected Ocean Transportation results to decline from Q3 levels in Q4 because of seasonality, with typical sequential operating-profit declines of approximately 30%, and continuing startup losses from the new China service.
- Logistics Services full-year results were expected to be similar to 2009. Real Estate Leasing Q4 profit was expected to be below Q3, while additional improved-property and development sales were expected to be limited.
- Agribusiness was expected to achieve breakeven or modest profitability for 2010 based on production results and locked-in sugar prices.
- On October 8, 2010, A&B sold the Ontario Distribution Center for $43 million and intended to reinvest the proceeds in a Section 1031 exchange. On October 26, 2010, it acquired Little Cottonwood Center for $14.1 million, including assumption of a $6.4 million non-recourse loan.
- Water-rights proceedings in East and West Maui may reduce irrigation water and suppress future sugar yields; the company could not quantify the financial impact.
- Matson was subject to a U.S. Department of Justice investigation concerning water-carriage pricing and competitive practices, as well as a related antitrust class-action lawsuit. The outcome and financial impact were not predictable.
- Proposed EPA boiler-emission standards could affect Hawaiian Commercial & Sugar Company’s three boilers. Potential climate-change regulation could also increase energy, material, and vessel-modification costs.
- Off-balance-sheet commitments included $20 million of standby letters of credit, $19 million of performance and customs bonds, and $99 million of multiemployer pension-plan withdrawal obligations. Management did not expect these commitments to require funding.
- The company stated that operating cash flow, cash, and available borrowing capacity should fund the next year’s working capital, capital expenditures, dividends, and potential acquisitions or repurchases, subject to continued cash generation and credit availability.
Investor Verification Priorities
- Verify the issuer: the supplied filing is for Alexander & Baldwin, Inc., with Matson as a subsidiary, rather than a standalone Matson, Inc. filing.
- Assess how much earnings improvement is recurring versus attributable to the $5.1 million mortgage settlement gain, discontinued operations, property transactions, and unusual prior-year charges.
- Monitor Ocean Transportation’s China trade volumes, yields, startup costs, fourth-quarter seasonality, and the effect of higher terminal and vessel expenses.
- Review debt maturities, credit-facility availability, and liquidity relative to the $500 million debt balance and $14 million cash balance.
- Track Maui water-rights proceedings, EPA boiler regulations, DOJ and antitrust matters, and potential climate-related compliance costs.
- Evaluate real estate portfolio occupancy, lease renewals, Section 1031 reinvestment deadlines, and the episodic nature of property-sale earnings.