Matson, Inc. annual report, FY2010

Filing Scope and Business Context

This source is Alexander & Baldwin, Inc.’s Form 10-K for the fiscal year ended December 31, 2010, not a standalone Matson, Inc. filing. Matson Navigation Company, Inc. is a wholly owned subsidiary and represents the principal transportation business. The filing covers fiscal 2010; fourth-quarter data is presented in the annual filing but is not a separate 10-K reporting period.

Businesses: Ocean Transportation, Logistics Services, Real Estate Leasing, Real Estate Sales, and Agribusiness.
Matson operates ocean freight services between the U.S. Pacific Coast, Hawaii, Guam, China, and other Pacific islands, plus terminal and logistics businesses.
The transportation segments included 53 weeks in fiscal 2010 versus 52 weeks in 2009.

Financial Performance and Key Metrics

Metric	2010	2009	Change
Total revenue	$1,646.2 million	$1,396.6 million	18%
Operating profit	$146.2 million	$62.5 million	134%
Income from continuing operations	$58.9 million	$9.0 million	Significant increase
Net income	$92.1 million	$44.2 million	108%
Diluted EPS	$2.22	$1.08	106%
Operating cash flow	$150 million	$115 million	30%
Total debt	$522 million	$471 million	11%
Long-term debt, non-current	$386 million	$406 million	Down $20 million
Total assets	$2,494.6 million	$2,379.6 million	5%

Operating margin, calculated from reported operating profit and total revenue, was approximately 8.9% in 2010 versus 4.5% in 2009. Income from continuing operations represented approximately 3.6% of revenue. Net income included $33.2 million of discontinued-operation earnings, or $0.80 per diluted share.

Segment Results

Ocean Transportation: Revenue was $1,045.0 million, up 18%; operating profit was $99.4 million, up 70%; margin improved to 9.5% from 6.6%. China container volume increased 56% to 72,700 units, while Hawaii container volume was broadly stable and Hawaii automobile volume declined 2%.
Logistics Services: Revenue increased 11% to $355.6 million, while operating profit increased 7% to $7.2 million. Margin declined slightly to 2.0% from 2.1% because of competitive pricing pressure.
Real Estate Leasing: Revenue decreased 9% to $94.4 million and operating profit decreased 18% to $35.3 million. Hawaii occupancy declined to 92% from 95%; mainland occupancy remained 85%.
Real Estate Sales: Revenue increased to $136.1 million from $125.6 million, and operating profit increased to $50.1 million from $39.1 million. Results were affected by the timing and mix of property sales and joint-venture income.
Agribusiness: Revenue increased 53% to $163.9 million. The segment generated $6.1 million of operating profit versus a $27.8 million loss in 2009, aided by higher sugar prices and production. A $4.9 million crop-disaster relief gain was included in 2010 results.

Cash Flow, Capital Spending, Debt and Liquidity

Operating cash flow was $150 million, compared with $115 million in 2009 and $275 million in 2008.
Investing cash outflow was $150 million, including $95 million of capital expenditures and $102 million of investment purchases, principally related to the Kukui’ula joint venture.
Reported capital expenditures were $243.1 million, including $69.4 million for ocean transportation and $164.7 million for real estate leasing. The cash-flow statement reflects $95 million of capital expenditures because certain real estate purchases were tax-deferred or classified as operating activities.
Financing cash outflow was $2 million. Debt increased by approximately $43 million during the year, and dividends paid were $52 million.
Cash and cash equivalents were $14 million at year-end, while cash, receivables, and sugar and coffee inventories totaled approximately $195 million.
Available borrowing capacity under credit and term facilities totaled approximately $358 million. The company stated that it was in compliance with all debt covenants.
Standard & Poor’s ratings for A&B and Matson were BBB+ with a negative outlook as of January 2011.
Debt maturities totaled $136 million in 2011, $40 million in 2012, $45 million in 2013, $54 million in 2014, $45 million in 2015, and $202 million thereafter.

Material Changes Versus the Prior Comparable Period

Results improved materially from 2009, which was affected by weak freight demand, lower China yields, depressed sugar results, and real estate market weakness.
Ocean Transportation benefited from higher China volumes and yields, fuel-surcharge revenue, and improved terminal activity. The second China string, CLX2, began in August 2010 but generated approximately $19.3 million of start-up losses, principally in the fourth quarter.
Agribusiness returned to profitability as sugar production rose 35% to 171,800 tons and average sugar revenue increased to $575 per ton from $352.
Real Estate Leasing weakened because of lower mainland rents, lower Hawaii occupancy, property-sale timing, and the period between dispositions and reinvestment.
Real estate investments in affiliates increased to $329 million from $242 million, principally due to additional investment in joint ventures.
Property, net, increased to $1.65 billion from $1.54 billion, while total debt increased to $522 million from $471 million.
The company recorded a $1.9 million impairment related to its Santa Barbara Ranch joint venture investment and a $2.1 million gain related to the purchase of the Ka Milo project’s construction loan at a discount.

Guidance, Outlook, Risks and Unusual Items

Management expected improved financial performance in 2011, with earnings weighted toward the third and fourth quarters because of anticipated real estate sales and the expected transition of CLX2 from start-up losses to modest profitability. The outlook assumed a slow U.S. recovery, modest Hawaii growth, continued visitor-industry improvement, higher employment, and moderate construction recovery.

Ocean Transportation: China trade was expected to drive improvement; Hawaii volumes were expected to increase moderately, and Guam volumes were expected to improve later in 2011.
Logistics: modest improvement was expected from continued international intermodal and warehousing growth.
Real Estate Leasing: management expected modest improvement overall, despite possible softening in Hawaii occupancy and rents and higher depreciation from acquisitions.
Real Estate Sales: modest improvement was expected, with land sales anticipated later in 2011; timing remained difficult to predict.
Agribusiness: profitability was expected to continue, supported by sugar prices locked in for approximately three-quarters of the expected crop and higher production.
The 2011 capital budget was approximately $250 million, including approximately $100 million for Ocean Transportation and $63 million for ongoing real estate development and maintenance. Approximately $45 million related to possible replacement of two inter-island barges under evaluation.
Material risks include fuel-price volatility, freight-rate and volume pressure, China-service start-up execution, competition, labor disruptions, credit-market access, debt covenant compliance, real estate occupancy and financing, sugar and coffee prices, water availability, weather, environmental regulation, and joint-venture performance.
East and West Maui water proceedings could reduce future sugar yields; management could not predict the financial impact.
Matson was cooperating with a Department of Justice investigation concerning pricing and competitive practices in domestic trades. The company could not predict the outcome or financial impact.
An antitrust class action was dismissed with prejudice in November 2010, but plaintiffs appealed to the Ninth Circuit in December 2010.
In February 2011, EPA boiler-emission standards became applicable to Hawaiian Commercial & Sugar Company’s boilers; compliance was required by early 2014, but the financial impact was not yet determinable.
The company entered into an agreement to lease land and sell certain coffee-business assets to Massimo Zanetti Beverage USA for approximately $15 million, subject to contingencies and expected to close in the first quarter of 2011.

Most Important Facts for an Investor to Verify

Confirm that the intended security is A&B’s common stock and that this filing is not a standalone Matson filing.
Reconcile consolidated results with Matson’s contribution, including the $19.3 million CLX2 start-up loss and the effects of the additional fiscal week.
Assess whether China freight volumes, rates, and CLX2 profitability met management’s 2011 expectations.
Review debt maturities, revolving-facility renewals, covenant headroom, and the BBB+ negative credit outlook.
Evaluate the sustainability of earnings excluding discontinued operations, crop-disaster relief, property-sale gains, and other unusual items.
Monitor Maui water litigation and permits, EPA boiler requirements, labor negotiations, multiemployer pension withdrawal exposure of approximately $99 million, and pending legal proceedings.
Review the timing and funding requirements of the approximately $250 million 2011 capital budget and possible barge replacements.
Verify the effect of real estate occupancy, rents, joint-venture funding, impairments, and tax-deferred exchange activity on future cash flow.