Matson, Inc. annual report, FY2011

Alexander & Baldwin, Inc. Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2011; filing dated February 28, 2012. The source filing is for Alexander & Baldwin, Inc. (A&B), the parent company of Matson before its planned separation, rather than for standalone Matson, Inc. Results are presented on a consolidated A&B basis. Fourth-quarter 2011 results are included where disclosed.

Business context

A&B operated five segments across Transportation, Real Estate, and Agribusiness. Transportation comprised Matson ocean transportation and logistics services.
Matson provided ocean freight services among the U.S. Pacific Coast, Hawaii, Guam, China, and other Pacific islands, and owned a 35% interest in SSAT terminal operations.
A&B announced a plan on December 1, 2011 to separate its land businesses from its transportation and logistics businesses. Completion was expected in the second half of 2012.
On February 13, 2012, A&B entered into a merger agreement to reorganize as a Hawaii holding company, including ownership restrictions intended to preserve Jones Act citizenship.

Financial performance and key metrics

Metric	2011	2010	Change
Total revenue	$1,722 million	$1,614 million	+7%
Operating income	$114 million	$126 million	-10%
Income from continuing operations	$55 million	$69 million	-20%
Net income	$34 million	$92 million	-63%
Diluted EPS	$0.81	$2.22	-64%
Operating cash flow	$86 million	$150 million	-43%
Total debt	$559 million	$522 million	+$37 million
Cash and cash equivalents	$22 million	$14 million	+$8 million

Operating margin declined to approximately 6.6% from 7.8% in 2010. Net income was materially affected by a $21 million after-tax loss from discontinued operations.
Ocean Transportation revenue increased 6% to $1,077.6 million, but operating profit fell 38% to $74.1 million. The segment margin declined to 6.9% from 11.7%.
Ocean revenue benefited from $73.2 million of higher fuel surcharge revenue and $9.6 million of net volume growth, but was hurt by $21.8 million of lower yields and cargo mix, especially in the China trade, plus higher terminal and operating costs.
Hawaii container volume increased 2% to approximately 140,000 units; Hawaii automobile volume declined 1% to approximately 81,000 units; CLX1 China container volume declined 2% to approximately 59,000 units.
Logistics Services revenue increased 9% to $386.4 million, while operating profit declined 31% to $5.0 million, reducing the margin to 1.3% from 2.0%.
Real Estate Leasing revenue increased 6% to $100.1 million and operating profit increased 11% to $39.3 million. Mainland occupancy improved to 92% from 85%, while Hawaii occupancy declined to 91% from 92%.
Real Estate Sales revenue declined to $66.2 million from $136.1 million, and operating profit declined to $15.5 million from $50.1 million. Results included a $6.4 million reduction in the carrying value of the Waiawa joint venture.
Agribusiness revenue declined 1% to $161.7 million, but operating profit increased to $22.2 million from $6.1 million. Sugar production rose 6% to approximately 182,800 tons, while sugar sold declined 8% to approximately 163,100 tons.
Capital expenditures were approximately $106.5 million, including $44.2 million for ocean transportation, $43.6 million for real estate leasing, and $10.5 million for agribusiness.
Quarterly Q4 revenue was $460.2 million, operating profit was $17.8 million, continuing-operations income was $3.7 million, and net income was $1.6 million, or $0.04 diluted EPS.

Liquidity, debt, and capital resources

Operating cash flow of $86 million was the primary liquidity source. Investing cash outflow was $71 million and financing cash outflow was $7 million.
At year-end, revolving credit facilities totaled $355 million, with $173 million outstanding, $19 million of letters of credit, and $163 million available.
An additional approximately $120 million remained available under a $400 million Prudential term facility, although the ability to draw additional amounts expired in April 2012.
Total unused borrowing capacity under revolving credit and term facilities was approximately $283 million. Management stated that the company was in compliance with all debt covenants.
Long-term debt was $507 million at year-end, compared with $386 million in 2010. Total contractual obligations were estimated at $847 million, including $559 million of debt, $110 million of estimated interest, and $91 million of operating leases.
The company expected 2012 minimum capital expenditures of approximately $70 million to $80 million and a total capital budget of approximately $210 million, including transportation growth capital, real estate development, lease portfolio acquisitions, and a planned Kauai solar project.
Annual cash dividends were $1.26 per share. No shares were repurchased in 2011, although the board authorized repurchases of up to two million shares beginning in 2012.

Material changes and unusual items

Matson terminated its second China service, CLX2, in the third quarter of 2011 because of sustained high fuel prices and volatile transpacific rates. CLX2 generated $92.7 million of 2011 revenue and a $56.6 million operating loss, reported in discontinued operations.
CLX2 exit activities produced approximately $12.5 million of expenses through year-end, with a $5.0 million liability remaining. Total cash and non-cash charges were expected to reach approximately $14.6 million by September 30, 2012.
A&B sold its coffee inventory and certain coffee-business assets for approximately $14 million in March 2011 and retained ownership of the related land, buildings, and power assets.
The company recorded a $6.4 million reduction in its Waiawa investment after the joint venture terminated its development plans.
Net pension liability increased to approximately $109 million from $70 million, while pension plan assets declined to $257 million from $285 million. The company expected approximately $21 million of pension contributions in 2012.
Discontinued operations contributed $23 million of after-tax income in 2010 but produced a $21 million after-tax loss in 2011, primarily because of CLX2.

Outlook, risks, and contingencies

Management assumed modest growth in the U.S. and Hawaii economies. Hawaii transportation was expected to remain stable, with potential support from tourism and Guam volume following Horizon Lines’ exit.
CLX1 vessels were expected to operate at full or near-full capacity, but transpacific freight rates were expected to remain depressed. Fuel prices, freight rates, capacity, and economic conditions remained major uncertainties.
Logistics was expected to achieve modest improvement through customer retention, intermodal growth, and highway and warehouse activity.
Real Estate Leasing was expected to show modest improvement, while Real Estate Sales remained opportunistic and difficult to forecast.
Agribusiness was expected to perform well based on projected sugar production and pricing locked in for more than half of the 2012 crop.
Material risks included fuel-price volatility, economic weakness, new transportation competition, loss or renegotiation of operating agreements, labor disruptions, environmental regulation, weather and natural disasters, real estate market weakness, financing constraints, joint-venture performance, pension obligations, and potential impairment charges.
Water rights and irrigation proceedings involving East and West Maui could reduce future sugar yields; the company could not predict the ultimate outcome or financial impact.
Matson continued to cooperate with a Department of Justice investigation into pricing and competitive practices in domestic trades. The company could not predict the outcome or financial impact.
An EEOC lawsuit involving alleged labor practices at a former coffee operation was pending after a second amended complaint; the company could not predict the outcome or financial impact.
EPA boiler-emission standards could require changes to HC&S operations, but the financial impact was unclear because the rules and compliance schedule remained subject to review.

Investor verification checklist

Verify whether the intended investment analysis is for pre-separation A&B or standalone Matson, since this filing includes real estate and agribusiness results that were later separated from transportation.
Reconcile continuing operations with discontinued operations, particularly the $56.6 million CLX2 operating loss and the $21 million after-tax discontinued-operations loss.
Assess whether fuel surcharges can continue to offset fuel costs without worsening competitive pressure or reducing freight volumes.
Review the $559 million debt balance, 2012 maturities, variable-rate exposure, covenant requirements, and the April 2012 expiration of additional Prudential borrowing capacity.
Monitor execution, financing, tax treatment, regulatory approvals, and Jones Act implications of the planned corporate separation.
Follow East and West Maui water proceedings, the DOJ investigation, the EEOC litigation, and potential EPA boiler-compliance costs.
Evaluate pension funding needs, multiemployer withdrawal exposure of approximately $87 million, and the projected $21 million of 2012 pension contributions.
Confirm the 2012 capital budget and whether planned growth, real estate, solar, and transportation investments can be funded from operating cash flow and available debt capacity.