Business Context and Reporting Period
This unaudited Form 10-Q covers Alexander & Baldwin, Inc. for the quarter and six months ended June 30, 2011. The filing identifies Alexander & Baldwin, Inc., rather than Matson, Inc., as the registrant; Matson is its wholly owned transportation subsidiary. A&B operates in Transportation, Real Estate, and Agribusiness through five segments: Ocean Transportation, Logistics Services, Real Estate Leasing, Real Estate Sales, and Agribusiness.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Operating revenue | $488.2 million, up 23% | $893.2 million, up 21% |
| Operating income | $25.5 million, down 38% | $27.9 million, down 46% |
| Operating margin | 5.2%, versus 10.4% | 3.1%, versus 7.0% |
| Income from continuing operations | $13.2 million, down 41% | $14.2 million, down 43% |
| Net income | $18.7 million, down 35% | $23.9 million, down 48% |
| Diluted EPS | $0.44, versus $0.70 | $0.57, versus $1.12 |
| Discontinued operations, net of tax | $5.5 million | $9.7 million |
- Segment performance: Second-quarter revenue and operating profit were $314.2 million and $9.4 million for Ocean Transportation; $103.1 million and $2.1 million for Logistics Services; $25.2 million and $10.4 million for Real Estate Leasing; $30.7 million and $10.6 million for Real Estate Sales; and $44.7 million and $8.5 million for Agribusiness.
- Ocean Transportation pressure: Revenue increased 22% in the quarter and 20% year to date, but operating profit declined 75% in the quarter and 96% year to date. The Ocean Transportation margin fell to 3.0% in the quarter and 0.3% for the first half, primarily because of higher fuel, vessel charter, equipment, terminal, and administrative costs associated with CLX2, together with lower yields.
- Cash flow: Six-month operating cash flow was $17 million, compared with $39 million in 2010. Investing cash use was $32 million, including $35 million of capital expenditures. Financing cash flow was $16 million, including $178 million of debt issuance, $147 million of debt repayment and deferred financing costs, and $27 million of dividends.
- Liquidity: Cash and cash equivalents were $15 million at June 30, 2011, versus $14 million at year-end 2010. Additional sources of liquidity, including cash, receivables, and sugar inventory, totaled $231 million. Available capacity under revolving credit and term facilities was $311 million.
- Debt and capital structure: Total debt was $556 million at June 30, 2011, versus $522 million at December 31, 2010. Current debt was $46 million and long-term debt was $510 million. Shareholders’ equity was $1.133 billion, compared with $1.136 billion at year-end.
- Dividends: The quarterly dividend was $0.315 per share; $0.630 per share was paid during the first six months.
Material Changes Versus the Prior Comparable Period
- Revenue growth was broad-based, led by Ocean Transportation, Logistics Services, and Agribusiness. Higher transportation volumes and fuel surcharges increased revenue, but cost inflation substantially reduced operating income.
- Ocean Transportation’s results deteriorated sharply because CLX2 generated pre-tax operating losses of $18 million in the second quarter and $30 million year to date. Higher fuel prices, charter costs, and competitive pricing pressure outweighed volume gains.
- Logistics Services revenue increased 16% in the quarter and 17% year to date, while operating profit increased 40% and 6%, respectively.
- Real Estate Leasing benefited from higher Mainland occupancy and portfolio activity. Second-quarter operating profit increased 22% and first-half operating profit increased 19%.
- Real Estate Sales were episodic: second-quarter revenue increased 40%, but first-half revenue declined 34% because of the timing and mix of property sales. First-half results included a gain from the sale of an investment interest.
- Agribusiness operating profit increased to $8.5 million in the quarter and $11.1 million year to date, primarily due to higher sugar prices and volume, improved molasses and power margins, and lower specialty sugar production costs.
- Discontinued-operations income declined from $21.1 million to $9.7 million for the first six months, reflecting differences in the timing and mix of property dispositions.
- The March 2011 sale of coffee inventory and related operating assets generated approximately $14 million of proceeds with no material gain or loss; A&B retained ownership of certain underlying land and infrastructure but ceased operating the coffee plantation.
Outlook, Risks, Contingencies, and Unusual Items
- CLX2 termination: Matson decided to discontinue its second China-Long Beach Express service effective August 21, 2011. The company expects after-tax losses of approximately $20 million to $25 million, predominantly in the third quarter, including charter and ship repositioning costs, container obligations, operating losses, and other exit costs.
- Ocean Transportation outlook: Excluding CLX2, second-half operating profit was expected to be lower than the prior year because of high fuel prices, volatile Transpacific freight rates, competitive pressure, weaker Guam volumes, and lower expected CLX1 performance.
- Other segment outlook: Logistics performance was expected to be broadly flat in the second half. Real Estate Leasing was expected to improve modestly, subject to softer Hawaii occupancy and rents. Real estate sales remained difficult to forecast because of their episodic nature. Agribusiness was expected to remain strong, although later-quarter profits were expected to be below the unusually strong second-quarter level.
- Refinancing: On August 5, 2011, A&B and Matson entered into linked five-year unsecured revolving facilities totaling $355 million, expiring in August 2016. The facilities include financial and other restrictive covenants, including limits on A&B’s Debt/EBITDA ratio.
- Legal and regulatory matters: The filing discusses unresolved East and West Maui water proceedings, a Department of Justice investigation into domestic water-carriage pricing practices, antitrust litigation, EPA boiler-emissions requirements, potential climate-related regulation, and an EEOC lawsuit that named A&B in July 2011. The company could not predict the outcomes or financial impacts of these matters.
- Other commitments: At June 30, 2011, standby letters of credit totaled $19 million, performance and customs bonds totaled $31 million, and multiemployer pension withdrawal obligations totaled $99 million. Management did not expect the company to be required to advance funds under these commitments.
- Accounting change: The company expects to adopt ASU 2011-05 on January 1, 2012. The change will affect presentation of comprehensive income but not net income, comprehensive income, or EPS.
Important Facts for Investors to Verify
- Confirm the intended issuer: the supplied filing is for Alexander & Baldwin, Inc., with Matson as a subsidiary, not a standalone Matson, Inc. Form 10-Q.
- Verify the timing, classification, and cash impact of the expected $20 million to $25 million after-tax CLX2 exit loss.
- Monitor fuel prices, Transpacific freight rates, CLX1 results, Guam volumes, and whether Ocean Transportation margins recover after CLX2 is discontinued.
- Review debt maturities, availability under the $355 million Senior Credit Facility, and compliance with Debt/EBITDA and other covenants.
- Assess operating cash generation relative to capital expenditures, dividends, and debt service, particularly given the decline in first-half operating cash flow to $17 million.
- Track developments in Maui water rights, the DOJ investigation, antitrust litigation, EEOC claims, EPA boiler standards, and other contingencies for potential financial effects.
- Consider the volatility of real estate sales and the reduction in discontinued-operations income when evaluating recurring earnings.