Filing Context and Reporting Period
This Form 10-Q covers the quarter and six months ended June 30, 2010, and was filed by Alexander & Baldwin, Inc. (A&B), not Matson, Inc. Matson is described as A&B’s wholly owned ocean transportation and logistics subsidiary. The financial statements are unaudited.
A&B operates through Transportation, Real Estate, and Agribusiness, including Matson’s Ocean Transportation and Logistics Services segments.
Key Financial Metrics
| Metric | Q2 2010 | Q2 2009 | Six Months 2010 | Six Months 2009 |
|---|---|---|---|---|
| Operating revenue | $398.9 million | $351.0 million | $743.6 million | $665.8 million |
| Operating income | $42.4 million | $15.0 million | $54.5 million | $13.9 million |
| Operating margin | 10.6% | 4.3% | 7.3% | 2.1% |
| Income from continuing operations | $22.9 million | $5.0 million | $26.4 million | $0.8 million |
| Discontinued operations, net of tax | $6.0 million | $7.6 million | $19.8 million | $14.8 million |
| Net income | $28.9 million | $12.6 million | $46.2 million | $15.6 million |
| Diluted EPS | $0.70 | $0.31 | $1.12 | $0.38 |
- Second-quarter revenue increased 14%; operating income increased 2.8 times; and net income increased 2.3 times.
- First-half revenue increased 12%; operating income increased 3.9 times; and net income increased 3.0 times.
- Cash flow from operations was $39 million for the first half of 2010, compared with $46 million in the prior-year period.
- Cash and cash equivalents were $36 million at June 30, 2010, versus $16 million at December 31, 2009.
- Total debt was approximately $526 million at June 30, 2010, versus $471 million at year-end 2009. Available capacity under credit facilities was $357 million.
- Working capital was $19 million at June 30, 2010. Management stated that operating cash flow, cash balances, and available borrowings were expected to fund the next year’s requirements, subject to continued cash generation and credit availability.
- Capital expenditures were $24 million in the first half of 2010, compared with $19 million in the prior-year period. Dividends paid were $26 million, or $0.63 per share.
Material Changes Versus the Prior Comparable Period
- Ocean Transportation: Q2 revenue rose 18% to $257.2 million and operating profit rose 75% to $37.0 million. Higher fuel surcharges, improved yields and cargo mix, stronger China and Guam volumes, lower vessel expenses, and increased SSAT earnings drove the improvement. The operating margin increased to 14.4% from 9.7%.
- Q2 China container volume increased 35%, while Hawaii container volume declined 2% and Hawaii automobile volume declined 22%. First-half China container volume increased 36%.
- Logistics Services: Q2 revenue increased 10% to $88.6 million, but operating profit declined 17% to $1.5 million because of lower warehousing volume and weaker intermodal yields. First-half operating profit was approximately flat at $3.4 million.
- Real Estate Leasing: Q2 revenue declined 10% to $23.2 million and operating profit declined 23% to $8.5 million, primarily because of lower mainland rents and the timing of property sales and acquisitions.
- Real Estate Sales: First-half revenue increased 77% to $82.3 million and operating profit increased 93% to $29.4 million, aided by episodic property sales, including Mililani Shopping Center and Valley Freeway Corporate Park. Management cautioned that sales activity would moderate from first-half levels.
- Agribusiness: Q2 operating profit improved to $1.8 million from a $11.3 million loss, and first-half operating profit improved to $0.7 million from a $13.2 million loss. Improved sugar margins, higher production, better growing conditions, and higher sugar prices were key factors.
- Discontinued operations contributed $19.8 million in the first half of 2010, up from $14.8 million, meaning reported net income benefited materially from asset sales and related discontinued activities.
Outlook, Risks, Contingencies, and Unusual Items
- Matson expected China trade rates and volumes to remain strong through 2010 and into 2011, subject to normal seasonality and potential declines in freight rates or volumes.
- A second weekly China service was scheduled to begin in early October 2010 using five time-chartered ships. Containers and equipment were expected to cost $50 million to $60 million. Start-up losses were expected to reduce 2010 Ocean Transportation operating profit by $10 million to $15 million, principally in the fourth quarter.
- Management expected full-year Logistics Services results to be similar to 2009 and Ocean Transportation performance for the balance of 2010 to be similar to the second quarter before the new-service start-up losses.
- A&B expected Agribusiness could approach break-even in 2010, but noted that only approximately 40% of the expected crop had been harvested at quarter-end and full-year results remained uncertain.
- Water Commission decisions affecting East and West Maui reduced access to irrigation water. Management stated that near-term production was not immediately threatened, but future sugar yields could be suppressed; the financial impact could not be quantified.
- Matson was subject to a U.S. Department of Justice investigation concerning pricing and competitive practices in domestic trades. The filing states that the outcome and potential financial impact could not be predicted.
- A consolidated antitrust class action against A&B, Matson, and another carrier remained pending. Plaintiffs filed an amended complaint on May 28, 2010; the company stated that it would vigorously defend the case.
- Potential climate-change legislation could increase energy costs, material prices, and vessel or equipment modification costs, but the impact was not estimable.
- At June 30, 2010, commitments included $10 million of standby letters of credit, $19 million of performance and customs bonds, and $89 million of multiemployer pension withdrawal obligations. Management did not expect the company to be required to advance funds under these commitments.
- Subsequent events included the July 2010 acquisition of the Komohana Industrial Park for $38 million of Section 1031 proceeds and the launch announcement for the additional China service.
Investor Verification Items
- Verify that the intended filing is A&B’s 2010 Form 10-Q rather than a standalone Matson, Inc. filing.
- Separate recurring operating performance from discontinued-operation income and episodic real estate gains.
- Assess the sustainability of China trade pricing and volumes after the planned service expansion and the expected $10 million to $15 million start-up loss.
- Review debt maturities, covenants, interest rates, and the availability of the stated $357 million in credit capacity.
- Monitor Maui water proceedings and their potential long-term effect on sugar production and land use.
- Review the DOJ investigation and antitrust litigation for potential fines, damages, settlements, or restrictions.
- Reconcile the cash-flow decline with higher earnings and the increased investment in real estate joint ventures, development projects, and investments.