UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission file number 0-565
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ALEXANDER & BALDWIN, INC.
-------------------------
(Exact name of registrant as specified in its charter)
Hawaii 99-0032630
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P. O. Box 3440, Honolulu, Hawaii 9680l
822 Bishop Street, Honolulu, Hawaii 96813
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(Address of principal executive offices) (Zip Code)
(808) 525-6611
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address, and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|
Number of shares of common stock outstanding as of
September 30, 2003: 41,815,093
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The condensed financial statements and notes for the third quarter and first
nine months of 2003 are presented below, with comparative figures from the 2002
financial statements.
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
Condensed Statements of Income
(In millions, except per-share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
(unaudited) (unaudited)
Revenue:
Operating revenue $ 315.1 $ 290.2 $ 900.0 $ 799.5
Interest and other 1.6 2.3 4.8 6.6
------------ ------------ ----------- -----------
Total revenue 316.7 292.5 904.8 806.1
------------ ------------ ----------- -----------
Costs and Expenses:
Costs of goods sold, services and rentals 253.5 238.3 730.1 667.0
Selling, general and administrative 26.6 26.1 86.5 79.5
Interest 3.1 3.0 8.1 9.0
------------ ------------ ----------- -----------
Total costs and expenses 283.2 267.4 824.7 755.5
------------ ------------ ----------- -----------
Income Before Taxes 33.5 25.1 80.1 50.6
Income taxes 11.8 9.0 28.9 18.1
------------ ------------ ----------- -----------
Income From Continuing Operations 21.7 16.1 51.2 32.5
Discontinued Operations (net of income taxes):
Properties -- 1.7 11.3 8.3
------------ ------------ ----------- -----------
Net Income $ 21.7 $ 17.8 $ 62.5 $ 40.8
============ ============ =========== ===========
Basic Earnings Per Share:
Continuing operations $ 0.52 $ 0.39 $ 1.23 $ 0.80
Discontinued operations -- 0.04 0.28 0.20
------------ ------------ ----------- -----------
Net income $ 0.52 $ 0.43 $ 1.51 $ 1.00
============ ============ =========== ===========
Diluted Earnings Per Share:
Continuing operations $ 0.52 $ 0.39 $ 1.23 $ 0.79
Discontinued operations -- 0.04 0.27 0.20
------------ ------------ ----------- -----------
Net income $ 0.52 $ 0.43 $ 1.50 $ 0.99
============ ============ =========== ===========
Dividends Per Share $ 0.225 $ 0.225 $ 0.675 $ 0.675
Average Number of Shares Outstanding 41.6 41.2 41.5 40.9
See Financial Notes
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
Industry Segment Data, Net Income
(In millions)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
(unaudited) (unaudited)
Revenue:
Transportation:
Ocean transportation $ 191.6 $ 181.2 $ 577.0 $ 512.2
Logistics services 60.8 53.8 169.2 142.7
Property Development and Management:
Leasing 20.3 18.8 60.0 54.0
Sales 10.4 7.3 53.5 61.2
Less amounts reported in discontinued
operations -- (3.6) (38.5) (43.2)
Food Products 33.6 35.0 83.6 79.2
------------ ------------- -------------- --------------
Total revenue $ 316.7 $ 292.5 $ 904.8 $ 806.1
============ ============= ============== ==============
Operating Profit, Net Income:
Transportation:
Ocean transportation $ 25.1 $ 16.9 $ 60.4 $ 33.2
Logistics services 1.4 1.4 3.3 2.4
Property Development and Management:
Leasing 9.1 8.6 27.2 24.5
Sales 2.6 2.4 21.1 14.2
Less amounts reported in discontinued
operations -- (2.8) (18.2) (13.2)
Food Products 0.4 4.9 4.6 8.0
------------ ------------- -------------- --------------
Total operating profit 38.6 31.4 98.4 69.1
Interest Expense (3.1) (3.0) (8.1) (9.0)
General Corporate Expenses (2.0) (3.3) (10.2) (9.5)
------------ ------------- -------------- --------------
Income From Continuing Operations Before
Income Taxes 33.5 25.1 80.1 50.6
Income Taxes (11.8) (9.0) (28.9) (18.1)
------------ ------------- -------------- --------------
Income From Continuing Operations 21.7 16.1 51.2 32.5
Discontinued Operations (net of income taxes):
Properties -- 1.7 11.3 8.3
------------ ------------- -------------- --------------
Net Income $ 21.7 $ 17.8 $ 62.5 $ 40.8
============ ============= ============== ==============
See Financial Notes
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
Condensed Balance Sheets
(In millions)
September 30, December 31,
2003 2002
---- ----
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 24.8 $ 0.6
Accounts and notes receivable, net 155.8 155.5
Inventories 17.7 15.0
Real estate and other assets held for sale 20.9 33.4
Deferred income taxes 11.6 12.0
Prepaid expenses and other assets 19.4 17.2
------------- ------------
Total current assets 250.2 233.7
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Investments 63.3 32.9
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Real Estate Developments 24.8 42.0
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Property, at cost 1,892.5 1,764.1
Less accumulated depreciation and amortization 830.4 821.5
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Property - net 1,062.1 942.6
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Capital Construction Fund 170.0 208.4
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Other Assets 204.3 138.0
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Total $ 1,774.7 $ 1,597.6
============= ============
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable and current portion of long-term debt $ 11.8 $ 9.6
Accounts payable 92.7 80.9
Other 76.7 60.6
------------- ------------
Total current liabilities 181.2 151.1
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Long-term Liabilities:
Long-term debt 365.6 247.8
Deferred income taxes 340.3 337.8
Post-retirement benefit obligations 43.3 42.6
Other 80.6 94.6
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Total long-term liabilities 829.8 722.8
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Commitments and Contingencies
Shareholders' Equity:
Capital stock 34.2 33.8
Additional capital 100.0 84.8
Accumulated other comprehensive loss (34.0) (26.8)
Retained earnings 675.1 643.6
Cost of treasury stock (11.6) (11.7)
------------- ------------
Total shareholders' equity 763.7 723.7
------------- ------------
Total $ 1,774.7 $ 1,597.6
============= ============
See Financial Notes
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
Condensed Statements of Cash Flows
(In millions)
Nine Months Ended
September 30,
2003 2002
---- ----
(unaudited)
Cash Flows from Operating Activities $ 115.1 $ 43.2
---------------- ----------------
Cash Flows from Investing Activities:
Capital expenditures (130.4) (33.0)
Proceeds from disposal of property and other assets 6.3 19.2
Capital Construction Fund, net 38.4 (52.1)
Deposit in escrow for property purchase (76.9) --
Other (4.8) (6.3)
---------------- ----------------
Net cash used in investing activities (167.4) (72.2)
----------------- ----------------
Cash Flows from Financing Activities:
Proceeds from issuances of long-term debt 225.9 73.0
Payments of long-term debt (132.7) (29.0)
Net payments of short-term debt - (12.4)
Proceeds from issuances of capital stock 11.3 14.7
Dividends paid (28.0) (27.6)
---------------- ----------------
Net cash from (used in) financing activities 76.5 18.7
---------------- ----------------
Net Increase (Decrease) in Cash and Cash Equivalents $ 24.2 $ (10.3)
================ ================
Other Cash Flow Information:
Interest paid, net of amounts capitalized $ (8.0) $ (8.9)
Income taxes paid, net of refunds (22.6) (43.9)
Other Non-cash Information:
Accrued deposit to Capital Construction Fund, net -- (4.0)
Depreciation expense (52.3) (52.9)
Tax-deferred property sales 33.9 40.3
Tax-deferred property purchases (29.9) (38.6)
Debt assumed in real estate acquisition 14.6 --
Assets conveyed to joint venture 27.7 --
See Financial Notes
Financial Notes
(Unaudited)
(1) The Condensed Balance Sheet as of September 30, 2003, the Condensed
Statements of Income for the nine months ended September 30, 2003 and
2002, and the Condensed Statements of Cash Flows for the nine months
ended September 30, 2003 and 2002 are unaudited. Because of the nature
of the Company's operations, the results for interim periods are not
necessarily indicative of results to be expected for the year. In the
opinion of management, all material adjustments necessary for the fair
presentation of interim period results have been included in the
interim financial statements.
(2) The 2003 estimated effective income tax rate differs from the statutory
rate, due primarily to tax credits and life insurance. The 2002
estimated effective annual income tax rate differs from the statutory
rate, due primarily to the favorable settlement of prior years' federal
and state tax audits and tax credits.
(3) Accounting for and Classification of Discontinued Operations: As
required by Statement of Financial Accounting Standards ("SFAS") No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
the sales of certain income-producing assets are classified as
discontinued operations if the operations and cash flows of the assets
can be clearly distinguished from the remaining assets of the Company,
if the cash flows that are specific to the assets sold have been, or
will be, eliminated from the ongoing operations of the Company, if the
Company will not have a significant continuing involvement in the
operations of the assets sold and if the amount is considered material.
Certain assets that are "held for sale," based on the likelihood and
intention of selling the property within 12 months, are also treated as
discontinued operations. Depreciation on these assets is discontinued
upon reclassification. Land, residential houses, and office condominium
units are generally considered inventory and the sales of these assets
are not included in discontinued operations.
(4) Commitments, excluding operating lease commitments, that were in
effect at September 30, 2003, included the following (in millions):
Vessel purchase (a) $ 107.0
Guarantee of Sea Star debt (b) $ 28.0
Guarantee of HS&TC debt (c) $ 15.0
Standby letters of credit (d) $ 18.6
Bonds (e) $ 13.7
Benefit plan withdrawal obligations (f) $ 29.1
These amounts are not recorded on the Company's balance sheet and,
based on the Company's current knowledge and with the exception of item
(a), it is not expected that the Company or its subsidiaries will be
called upon to advance funds under these commitments.
(a) During 2002, Matson Navigation Company, Inc. ("Matson")
entered into an agreement with Kvaerner Philadelphia
Shipyard Inc., to purchase two container ships. The
total project cost for each ship is approximately $107
million. The first ship was delivered in September 2003
and the second ship is expected to be delivered in the
third quarter of 2004. No payment for the second ship is
required until acceptance and delivery. The Company has
not recorded an obligation for the second ship because
conditions necessary to record either a liability or an
asset have not been met. The financing for the
acquisitions is discussed in Management's Discussion and
Analysis in this Form 10-Q.
(b) Matson has guaranteed $28.0 million of the debt of Sea
Star Line, LLC ("Sea Star," a business in which Matson
holds a minority interest investment) and would be
required to perform under the guarantee should Sea Star
be unable to meet its obligations. It is expected that
the guarantee will be reduced, over time by the required
assumption of a specified portion by the majority
partner in Sea Star, and by scheduled repayments of the
debt by Sea Star. The Company has not recorded any
liability for its obligations under the guarantee
because it believes that the probability of making any
payments is low.
(c) The Company guarantees up to $15 million of a $30
million revolving credit line of Hawaiian Sugar &
Transportation Cooperative ("HS&TC," a raw sugar
marketing and transportation cooperative that the
Company uses to market and transport its sugar and of
which the Company is a member). That credit line is used
primarily to fund purchases of raw sugar from the Hawaii
growers and is fully secured by the inventory,
receivables and transportation assets of the
cooperative. The amount that may be drawn by HS&TC
under the facility is limited to 95 percent of its
inventory value plus up to $15 million of HS&TC's
receivables. The Company's guarantee is limited to the
lesser of $15 million or the actual amounts drawn.
Although the amount drawn by HS&TC on its credit line
varies, as of September 30, 2003, the amount drawn was
$21 million. The Company has not recorded any liability
for its obligation under the guarantee because it
believes that the likelihood of making any payment is
not probable.
(d) The Company has arranged for standby letters of credit
totaling $18.6 million. This includes letters of credit,
totaling approximately $12.6 million that enable the
Company to qualify as a self-insurer for state and
federal workers' compensation liabilities. The amount
also includes a letter of credit of $3.2 million for
workers' compensation claims incurred by California &
Hawaiian Sugar Company, Inc. ("C&H," an unconsolidated
entity in which the Company has a minority ownership
equity interest) employees, under a now-closed
self-insurance plan, prior to December 24, 1998. The
Company only would be called upon to honor this letter
of credit in the event of C&H's insolvency. The
obligation to provide this letter of credit expires on
December 24, 2003. The remaining letters of credit are
for insurance-related matters, construction performance
guarantees, and other routine operating matters.
(e) Of the $13.7 million in bonds, $5.9 million consists of
subdivision bonds related to real estate construction
projects in Hawaii. These bonds are required either by
the state or by county governments to ensure that
certain infrastructure work, as part of real-estate
development, is completed. The Company has the financial
ability and intention to complete these improvements.
Also included in the total are $5.3 million of customs
bonds and $2.5 million of non-real estate performance
bonds.
(f) The withdrawal liabilities under a Hawaii longshore plan
and certain Mainland seagoing plans aggregated
approximately $29.1 million as of the most recent
valuation dates. Management has no present intention of
withdrawing from and does not anticipate the termination
of any of the aforementioned plans.
The State of Hawaii Department of Taxation ("State") has informed the
Company that it believes that a portion of the Company's past and
future ocean transportation revenue has been and is subject to the
Public Service Company tax and its successor, the General Excise tax.
The Company strongly disagrees with the State's overall position. If
the State were to prevail fully, the amount of the claim could be
material. A liability for this matter has been established in the
accompanying balance sheets and, after consultation with legal counsel,
management believes that the ultimate disposition of this matter will
not have a material adverse effect on the Company's operations or
financial condition.
The Company and certain subsidiaries are parties to various legal
actions and are contingently liable in connection with claims and
contracts arising in the normal course of business, the outcome of
which, in the opinion of management after consultation with legal
counsel, will not have a material adverse effect on the Company's
financial position or results of operations.
(5) Accounting Method for Stock-based Compensation: As allowed by Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," and by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," the Company has
elected to continue to apply the provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, no compensation cost is recognized in the Company's net
income for options granted with exercise prices that are equal to the
market values of the underlying common stock on the dates of grant.
Pro forma information regarding net income and earnings per share,
using the fair value method and reported below, has been estimated
using a Black-Scholes option-pricing model. This model was developed
for use in estimating the fair value of traded options which do not
have vesting requirements and which are fully transferable. The
Company's options have characteristics significantly different from
those of traded options.
Had compensation cost for the stock options been based on the estimated
fair values at grant dates, the Company's pro forma net income and net
income per share for the quarter and nine months ended September 30,
2003 and 2002 would have been as follows (in millions, except per share
amounts):
Quarter Ended Nine Months Ended
September 30 September 30
------------ ------------
2003 2002 2003 2002
Net Income:
As reported $ 21.7 $ 17.8 $ 62.5 $ 40.8
Stock-based compensation
expense determined under fair
value based method for all
awards, net of related tax effects (0.3) (0.3) (0.9) (1.1)
-------- -------- -------- --------
Pro forma $ 21.4 $ 17.5 $ 61.6 $ 39.7
======== ======== ======== ========
Net Income Per-share:
Basic, as reported $ 0.52 $ 0.43 $ 1.51 $ 1.00
Basic, pro forma $ 0.51 $ 0.42 $ 1.48 $ 0.97
Diluted, as reported $ 0.52 $ 0.43 $ 1.50 $ 0.99
Diluted, pro forma $ 0.51 $ 0.42 $ 1.48 $ 0.96
Effect on average shares outstanding
of assumed exercise of stock options (in
millions of shares):
Average number of shares outstanding 41.6 41.2 41.5 40.9
Effect of assumed exercise of outstanding
stock options 0.3 0.1 0.2 0.3
---- ---- ---- ---
Average number of shares outstanding after
assumed exercise of outstanding stock options 41.9 41.3 41.7 41.2
==== ==== ==== ====
The pro forma effects are not necessarily representative of the pro
forma effects on future net income or earnings per share, because the
number of future shares that may be issued is not known; shares vest
over several years, and assumptions used to determine the fair value
can vary significantly. Additional information about stock-based
compensation is included in Notes 1 and 12 of Item 8 in the Company's
most recently filed Form 10-K. No changes have been made to the
Company's stock option plans subsequent to that filing.
(6) Certain amounts have been reclassified to conform to the current year's
presentation. These amounts include the revenue and operating profit of
real estate assets designated as discontinued operations. Discontinued
operations were as follows:
Quarter Ended Nine Months Ended
September 30 September 30
------------ ------------
2003 2002 2003 2002
Discontinued Operations (net of tax)
Sales of Assets -- $ 1.0 $ 10.5 $ 5.9
Leasing Operations -- 0.7 0.8 2.4
-------- -------- -------- --------
Total -- $ 1.7 $ 11.3 $ 8.3
======== ======== ======== ========
(7) Other Comprehensive Income for the quarter and nine months ended
September 30, 2003 and 2002 was as follows, (in millions):
Quarter Ended Nine Months Ended
September 30 September 30
------------ ------------
2003 2002 2003 2002
Net Income $ 21.7 $ 17.8 $ 62.5 $ 40.8
Other Comprehensive Income (Loss):
Change in valuation of derivative 3.5 -- -- --
Company's share of investee's
minimum pension liability adjustment -- -- (7.2) --
-------- -------- -------- --------
Comprehensive Income $ 25.2 $ 17.8 $ 55.3 $ 40.8
======== ======== ======== ========
The change in valuation of derivative amount reflects the funding of
the first of two vessel purchases and the settlement of one interest
rate lock agreement. A second agreement is expected to remain in place
until delivery and funding of the second vessel in 2004.
C&H reported a $20.1 million minimum pension liability adjustment and
the Company recorded its share of that adjustment during the first
quarter of 2003.
(8) Subsequent Events: On October 1, 2003, A&B and an affiliate of GolfBC
Group ("GolfBC," a Vancouver-based company unrelated to A&B) acquired
certain real estate assets from various subsidiaries of the Shinwa Golf
Group ("Shinwa"). A&B purchased 270 acres of residential and commercial
zoned property at the Wailea Resort for approximately $67 million.
GolfBC purchased three golf courses and a tennis center at the Wailea
Resort and two golf courses and other lands at the Kauai Lagoons
Resort. At September 30, 2003, since the transaction was funded prior
to quarter-end, A&B had included an investment for its purchase on the
Condensed Balance Sheet in Non-current Assets - Other. This amount,
including amounts to be funded from escrow, is also included in the
Condensed Statement of Cash Flows as Cash Flows from Investing
Activities. Upon closing in October, the amounts were transferred to
Real Estate Developments and Real Estate Held for Sale on the Balance
Sheet and to Capital Expenditures on the Statement of Cash Flows.
On October 15, 2003, the Company purchased, for approximately $11
million, the Broadlands Shopping Center, a 95,250 square-foot, Safeway
anchored neighborhood shopping center located in Broomfield, Colorado,
a suburb north of Denver. The acquisition of this shopping center
completes the tax-deferred property exchange that was initiated with
the June 2003 sale of the Airport Square shopping center, located in
Reno, Nevada.
(9) Change in Accounting: In September 2003, the Company changed its method
of accounting for vessel voyage revenue from the commencement of voyage
to recognizing revenue based on the percentage of relative transit time
in each reporting period. Recording voyage expenses was changed from
commencement of voyage to when the related voyage costs are incurred.
This did not have a material effect on the third quarter results.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ------------------------------------------------
The following analysis of the consolidated financial condition and results of
operations of Alexander & Baldwin, Inc. and its subsidiaries (collectively, the
"Company") should be read in conjunction with the condensed consolidated
financial statements and related notes thereto.
FORWARD-LOOKING STATEMENTS
The Company, from time to time, may make or may have made certain
forward-looking statements, whether orally or in writing, such as forecasts and
projections of the Company's future performance or statements of management's
plans and objectives. These statements are "forward-looking" statements as that
term is defined in the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements may be contained in, among other things, Securities
and Exchange Commission ("SEC") filings, such as the Forms 10-K, 10-Q and 8-K,
press releases made by the Company, the Company's Internet Web sites (including
Web sites of its subsidiaries), and oral statements made by the officers of the
Company. Except for historical information contained in these written or oral
communications, such communications contain forward-looking statements. These
forward-looking statements involve a number of risks and uncertainties that
could cause actual results to differ materially from those projected in the
statements, including, but not limited to, the following factors:
1) economic conditions in Hawaii and elsewhere;
2) market demand;
3) competitive factors and pricing pressures in the Company's
primary markets;
4) legislative and regulatory environments at the federal, state and local
levels, such as government rate regulations, land-use regulations,
government administration of the U.S. sugar program, and modifications
to or retention of cabotage laws;
5) performance of pension assets;
6) availability of water for irrigation and to support real-estate
development;
7) performance of unconsolidated affiliates and ventures;
8) significant fluctuations in raw sugar prices;
9) significant fluctuations in fuel prices;
10) resolution of tax issues with the IRS or state tax authorities;
11) labor relations in Hawaii, the U.S. Pacific Coast, Guam and other
locations where the Company has operations;
12) acts of nature, including but not limited to, drought, greater than
normal rainfall, hurricanes and typhoons;
13) acts of terrorism;
14) risks associated with current or future litigation; and
15) other risk factors described elsewhere in these communications and from
time to time in the Company's filings with the SEC.
CONSOLIDATED REVENUE & NET INCOME
- ---------------------------------------------------------------------------------------------------------
Quarter Ended September 30
- ---------------------------------------------------------------------------------------------------------
(dollars in millions, except per-share) 2003 2002 Change
- ---------------------------------------------------------------------------------------------------------
Revenue $ 316.7 $ 292.5 8%
Net income $ 21.7 $ 17.8 22%
Basic earnings per share $ 0.52 $ 0.43 21%
- ---------------------------------------------------------------------------------------------------------
For the third quarter of 2003, revenue was $316.7 million, eight percent higher
than 2002. Net income of $21.7 million for the third quarter of 2003 was 22
percent higher than 2002. Both revenue and net income benefited from higher
Matson cargo rates, revenue yields and volumes compared with lower than normal
2002 cargo levels that followed events of September 11, 2001, continued
improvements in ship terminal productivity, the mix of real estate sales,
increased leasing results due to both higher occupancies and the timing and
amount of commercial property transactions. These benefits were partially offset
by higher vessel operating, pension and labor costs. Revenue also benefited from
growth in the logistics business.
- ---------------------------------------------------------------------------------------------------------
Nine Months Ended September 30
- ---------------------------------------------------------------------------------------------------------
(dollars in millions, except per-share) 2003 2002 Change
- ---------------------------------------------------------------------------------------------------------
Revenue $ 904.8 $ 806.1 12%
Net income $ 62.5 $ 40.8 53%
Basic earnings per share $ 1.51 $ 1.00 51%
- ---------------------------------------------------------------------------------------------------------
For the first nine months of 2003, revenue was $904.8 million, 12 percent higher
than 2002. Net income of $62.5 million for the first nine months of 2003 was 53
percent higher than 2002. Both of these increases were due to the same factors
noted for the third quarter comparison.
The Company's effective tax rate is 36.5 percent for the first nine months of
2003, compared to 33 percent for all of 2002, reflecting primarily favorable
settlements of tax audits and realization of certain tax incentives in 2002.
RESULTS OF SEGMENT OPERATIONS
Transportation - Ocean Transportation
- --------------------------------------------------------------------------------
Quarter Ended September 30
- --------------------------------------------------------------------------------
(dollars in millions) 2003 2002 Change
- --------------------------------------------------------------------------------
Revenue $ 191.6 $ 181.2 6%
Operating profit $ 25.1 $ 16.9 49%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Volume (Units)
Hawaii containers 41,300 39,900 4%
Automobiles 29,900 32,400 -8%
Guam containers 4,700 4,300 9%
- --------------------------------------------------------------------------------
Improved revenue and operating profit for the third quarter of 2003 compared
with the third quarter of 2002 were the result of rate actions in 2002 and 2003
(described below), a greater mix of higher-margin freight, and improved results
from the operations of joint ventures. These favorable factors were partially
offset by increased vessel operating costs, higher pension and labor costs and
lower automobile carriage. The third quarter, absent unusual transactions, is
historically the strongest quarter of the year for Ocean Transportation.
Container volume in the Hawaii Service was four percent higher than 2002
reflecting market growth due, in part, to the improving Hawaii economy. The
eight percent lower automobile volume for the third quarter of 2003 reflects
principally the earlier than normal rental fleet replacements and dealer
shipments, in 2002, as West Coast port disruptions escalated. The Guam service
improvement was due mainly to continued recovery efforts following Typhoon
Pongsona.
- --------------------------------------------------------------------------------
Nine Months Ended September 30
- --------------------------------------------------------------------------------
(dollars in millions) 2003 2002 Change
- --------------------------------------------------------------------------------
Revenue $ 577.0 $ 512.2 13%
Operating profit $ 60.4 $ 33.2 82%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Volume (Units):
Hawaii containers 120,200 115,700 4%
Automobiles 109,000 92,500 18%
Guam containers 13,700 12,200 12%
- --------------------------------------------------------------------------------
Improved revenue and operating profit for the first nine months of 2003 compared
with the first nine months of 2002 were due mainly to the same factors noted for
the third quarter, higher container volume and productivity improvements at the
Sand Island container terminal.
Container volume in the Hawaii Service and automobile volumes were four percent
and 18 percent, respectively, higher than in the first nine months of 2002,
reflecting the recovery in westbound container volumes that had declined in the
months following September 11, 2001 and a carryover of freight into 2003
following West Coast port disruptions in the fourth quarter of 2002. Automobile
volume changes also reflect increased rental fleet replacements in Hawaii in
2003, partially offset by the acceleration of some 2002 automobile carriage into
the third quarter of that year. As with the third quarter, the 12 percent
improvement in Guam service was due mainly to recovery efforts following Typhoon
Pongsona.
In January 2003, Matson implemented a terminal handling charge in its Hawaii
Service of $200 per container for westbound freight, $100 per container for
eastbound freight, and $30 per automobile. To mitigate the effects of
fluctuating fuel costs, Matson charges a fuel surcharge. The changes in the
Hawaii surcharge during 2002 and 2003 were:
- --------------------------------------------------
Month of Change From To
- --------------------------------------------------
- --------------------------------------------------
May 2002 3.25% 4.75%
October 2002 4.75% 6.00%
March 2003 6.00% 7.50%
May 2003 7.50% 6.50%
September 2003 6.50% 7.50%
- --------------------------------------------------
During the third quarter of 2003, Matson took delivery of a new vessel, the M.V.
Manukai, constructed at a project cost of approximately $107 million.
Transportation - Logistics Services
- --------------------------------------------------------------------------------
Quarter Ended September 30
- --------------------------------------------------------------------------------
(dollars in millions) 2003 2002 Change
- --------------------------------------------------------------------------------
Revenue $ 60.8 $ 53.8 13%
Operating profit $ 1.4 $ 1.4 --
- --------------------------------------------------------------------------------
Revenue growth in the third quarter of 2003 for the Company's logistics services
business was mainly the result of increased customer volume, especially in
international and highway activity.
- --------------------------------------------------------------------------------
Nine Months Ended September 30
- --------------------------------------------------------------------------------
(dollars in millions) 2003 2002 Change
- --------------------------------------------------------------------------------
Revenue $ 169.2 $ 142.7 19%
Operating profit $ 3.3 $ 2.4 38%
- --------------------------------------------------------------------------------
As with the third quarter, revenue and operating profit growth during the first
nine months of 2003 was due mainly to the increased customer volume.
The revenue for logistics services includes the total amount billed to customers
for transportation services. The primary costs include purchased transportation
for that cargo. As a result, the operating profit margins for this business are
narrower than other A&B businesses. The primary operating profit and investment
risk for this business is the quality of receivables, which is monitored
closely.
This component of the Transportation segment was previously referred to as
"Intermodal Services." Matson Intermodal Services, Inc. has been renamed
Matson Integrated Logistics, Inc. to better reflect its business interests.
Property Development and Management - Leasing (before removing amounts
classified as discontinued operations)
- --------------------------------------------------------------------------------
Quarter Ended September 30
- --------------------------------------------------------------------------------
(dollars in millions) 2003 2002 Change
- --------------------------------------------------------------------------------
Revenue $ 20.3 $ 18.8 8%
Operating profit $ 9.1 $ 8.6 6%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Occupancy Rates:
Mainland 96% 92% 4%
Hawaii 90% 90% --
- --------------------------------------------------------------------------------
Revenue and operating profit growth for the third quarter of 2003 was the result
of higher occupancies for the Mainland commercial leasing portfolio and the
purchases of income-producing property in the fourth quarter of 2002 and in
2003.
- --------------------------------------------------------------------------------
Nine Months Ended September 30
- --------------------------------------------------------------------------------
(dollars in millions) 2003 2002 Change
- --------------------------------------------------------------------------------
Revenue $ 60.0 $ 54.0 11%
Operating profit $ 27.2 $ 24.5 11%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Occupancy Rates:
Mainland 93% 91% 2%
Hawaii 90% 88% 2%
- --------------------------------------------------------------------------------
Revenue and operating profit growth for the first nine months of 2003, before
removing amounts treated as discontinued operations, was also the result of
higher occupancies for both the Mainland and Hawaii portfolios and the purchases
of new income-producing property.
Property Development and Management - Sales (before removing amounts
classified as discontinued operations)
- --------------------------------------------------------------------------------
Quarter Ended September 30
- --------------------------------------------------------------------------------
(dollars in millions) 2003 2002 Change
- --------------------------------------------------------------------------------
Revenue $ 10.4 $ 7.3 42%
Operating profit $ 2.6 $ 2.4 8%
- --------------------------------------------------------------------------------
Sales during the third quarter of 2003 included the sales of 15 residential
properties, six industrial lots on Oahu, and 31 joint venture residential units.
Sales during the third quarter of 2002 included three business parcel sales and
12 residential properties.
- --------------------------------------------------------------------------------
Nine Months Ended September 30
- --------------------------------------------------------------------------------
(dollars in millions) 2003 2002 Change
- --------------------------------------------------------------------------------
Revenue $ 53.5 $ 61.2 -13%
Operating profit $ 21.1 $ 14.2 49%
- --------------------------------------------------------------------------------
Sales during the first nine months of 2003 included a shopping center in Nevada,
eight commercial properties on Maui (including a seven-acre property that had a
low carrying cost), seven industrial lots on Oahu, and 23 residential
properties. Results also reflect the Company's share of earnings in two
residential real estate joint ventures that, combined, sold 96 residential units
in 2003. The largest property sales transactions that were expected for 2003
have been closed, but the Company will continue to have sales of lower-margin
real estate inventory through the fourth quarter.
Sales during the first nine months of 2002 included the sales of a
seven-building distribution complex in Texas, an 85-acre parcel in Upcountry
Maui, seven commercial properties, five industrial lots, 23 residential
properties, and a shopping center in Colorado.
The mix of property sales in any year or quarter can be diverse. Sales can
include developed residential real estate, commercial properties, developable
subdivision lots, undeveloped land, and property sold under threat of
condemnation. The sale of undeveloped land and vacant parcels in Hawaii
generally provides a greater contribution to earnings than does the sale of
developed and commercial property, due to the low historical-cost basis of the
Company's Hawaii land. Consequently, property sales revenue trends, cash flows
from the sales of real estate and the amount of real estate held for sale on the
balance sheets do not necessarily indicate future profitability trends for this
segment. The reporting of property sales is also affected by the classification
of certain property sales as discontinued operations.
Property Development and Management - Discontinued Operations
- ---------------------------------------------------------------------------------------------------------------------------
Quarter Ended September 30 Nine Months Ended September 30
- ---------------------------------------------------------------------------------------------------------------------------
(dollars in millions, before tax) 2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------------------------------
Sales revenue -- $ 1.8 $ 36.9 $ 37.1
Leasing revenue -- $ 1.8 $ 1.6 $ 6.1
Sales operating profit -- $ 1.6 $ 17.0 $ 9.4
Leasing operating profit -- $ 1.2 $ 1.2 $ 3.8
- ---------------------------------------------------------------------------------------------------------------------------
There were no sales of property during the third quarter of 2003 that resulted
in discontinued operations. During the third quarter of 2002, discontinued
property sales included the proceeds from two commercial properties on Maui.
Total year 2003 discontinued operations included the proceeds from the sales of
Airport Square in Nevada, five commercial properties on Maui (including the
Dairy Road Center), and for 2002, the sales of a mainland distribution complex
in Texas, the Market Square Shopping Center in Colorado, and three commercial
properties on Maui.
Because the Company regularly sells commercial properties, the amounts reported
as continuing and discontinued operations in prior quarters are restated each
time a property is designated as discontinued. At September 30, 2003 the Company
had not designated any income earning property as "available for sale."
Food Products
- --------------------------------------------------------------------------------
Quarter Ended September 30
- --------------------------------------------------------------------------------
(dollars in millions) 2003 2002 Change
- --------------------------------------------------------------------------------
Revenue $ 33.6 $ 35.0 -4%
Operating profit $ 0.4 $ 4.9 -92%
- --------------------------------------------------------------------------------
Tons sugar produced 68,600 72,900 -6%
- --------------------------------------------------------------------------------
Revenue and operating profit declined for the third quarter of 2003 compared
with 2002 due mainly to lower raw sugar production, higher pension, labor and
insurance costs, factory maintenance expenses, lower power revenue, and an
accrual for the proposed penalty discussed below under "Environmental Matters."
These factors were partially offset by higher estimated full-year sugar prices.
Quarterly fluctuations in sales and operating profit are normal for this
business due to weather, production and other seasonality factors.
Lower sugar production during the third quarter was affected by a series of
malicious fires that consumed over 800 acres of sugar cane. This was a five-fold
increase in acres consumed by malicious fires compared with each of the prior
two years. Cane fires disrupt normal harvesting practices and result in lower
yields per acre. A police task force has been formed to investigate this issue.
- --------------------------------------------------------------------------------
Nine Months Ended September 30
- --------------------------------------------------------------------------------
(dollars in millions) 2003 2002 Change
- --------------------------------------------------------------------------------
Revenue $ 83.6 $ 79.2 6%
Operating profit $ 4.6 $ 8.0 -43%
- --------------------------------------------------------------------------------
Tons sugar produced 156,200 154,800 1%
- --------------------------------------------------------------------------------
Revenue increased due to higher production and raw sugar prices. Operating
profit declined for first nine months of 2003 due to the same factors noted for
the third quarter of the year.
Through September 30, 2003, approximately 80 percent of the Company's expected
2003 commodity sugar crop had been priced. An additional seven percent of the
2003 crop is food grade and is sold at prices higher than the commodity prices.
Average revenue per ton of sugar for 2003 is expected to be approximately 4.5
percent higher than in 2002.
The outlook for the Food Products segment for the full year remains lower than
the unusually good results for 2002 due mainly to lower production and higher
pension costs. Sugar production for 2003 is expected to be moderately lower than
the 215,900 tons produced in 2002.
FINANCIAL CONDITION, LIQUIDITY, FINANCING ARRANGEMENTS AND CASH FLOWS
Liquid Resources: The Company's principal liquid resources, comprising cash and
cash equivalents, receivables, sugar and coffee inventories and unused lines of
credit, less accrued deposits to the Capital Construction Fund ("CCF"), totaled
$468.5 million at September 30, 2003, a decrease of $36 million from December
31, 2002. The net decrease was due primarily to $62 million of lower balances
available under variable rate debt facilities partially offset by $24 million of
higher cash balances. The remaining difference was due mainly to seasonal
inventory fluctuations.
Balance Sheet: Working capital was $69.0 million at September 30, 2003, a
decrease of $13.6 million from the balance carried at the end of 2002. The lower
working capital was due primarily to higher trade accounts payable and income
tax balances, partially offset by increased cash balances and raw sugar
inventories. These fluctuations are mostly due to business cyclicality.
During the first quarter of 2003, the Company conveyed 852 acres of land and
improvements with a carrying cost of $27.7 million to the Kukui'Ula joint
venture. This transfer reduced Real Estate Developments and increased
Investments. No gain or loss was recorded on the transfer.
Long-term Debt, including amounts classified as current, totaled $377.4 million
at September 30, 2003 compared with a balance of $257.4 million at December 31,
2002. This $120 million increase includes $67 million of borrowing to purchase
assets at the Wailea Resort (described below), $55 million of new Title XI bonds
(described below), $14.6 million of debt assumed by the Company (as part of the
purchase price for a real estate transaction), offset by cash generated from
operations. The weighted average interest rate for the Company's outstanding
borrowings at September 30, 2003 was approximately 4%.
In July 2003, the Company borrowed $35 million on an existing $50 million
private shelf agreement for the purpose of restructuring some of its debt to
take advantage of lower long-term interest rates. The $35 million loan is for 10
years and bears an interest rate of 4.10%. The Company intends to increase the
remaining $15 million available under the private shelf agreement to $75 million
during the fourth quarter of 2003. This increased facility will provide the
Company with more flexibility to finance medium-term real estate projects and
investments.
In September 2003, Matson borrowed $15 million on its $50 million private shelf
agreement and used the proceeds to retire higher-rate Special Facility Revenue
Bonds that had been issued by the State of Hawaii Department of Transportation
and for which Matson was obligated to pay terminal facility rent equal to the
principal and interest on the bonds.
As noted previously, Matson took delivery of a new vessel in September 2003.
This vessel, with a total project cost of approximately $107 million was
partially financed with $55 million of 5.337% fixed-rate, 25 year term, U.S.
government Guaranteed Ship Financing Bonds, more commonly known as Title XI
bonds. The remaining project cost was financed with the Capital Construction
Fund and operating cash flows. No decision has been made about the form of
financing for the new vessel that will be delivered to Matson during 2004.
Matson has, however, received from the Maritime Administration, a commitment to
guarantee bonds for up to $75 million for the purchase of that vessel, of which
35% may be issued at a floating rate.
Cash Flows and Capital Expenditures: Cash Flows from Operating Activities were
$115.1 million for the first nine months of 2003, compared with Cash Flows from
Operating Activities of $43.2 million for the first nine months of 2002. The
higher cash flow was due to better operating results, the timing of sales and
expenditures for real estate development projects that are classified as Real
Estate Held for Sale and fluctuations in other working capital balances,
including the timing of payments for income taxes in 2002 resulting from a sale
of securities in late 2001.
For the first nine months of 2003, capital expenditures, including purchases of
property using tax-deferred proceeds and additions to real estate held for sale
but excluding assumed debt, totaled $183.7 million. This was comprised
principally of $61.0 million for real estate acquisitions and property
development, $114.7 million for Matson's new vessel, container equipment and
office relocation, and $6.5 million for agricultural projects. Of the $183.7
million, $23.4 million was included in Cash Flows from Operating Activities,
$29.9 million utilized tax-deferred proceeds and was not included in cash flows,
and the remaining $130.4 million was recorded as Cash Flows from Investing
Activities.
Real estate acquisitions during the first nine months of 2003 included the
following:
Boardwalk Shopping Center: Purchased in March 2003 for $23.1 million,
the Boardwalk Shopping Center in Austin, Texas comprises 184,600 square
feet of retail space.
Alakea Corporate Tower: Purchased in March 2003 for $20 million, the
Alakea Corporate Tower is a 31-story Class "A" office building with
approximately 170,000 square feet of leasable area on 26,000 square
feet of fee simple property in Honolulu, Hawaii. The Company has
converted the building to fee-simple office condominiums and will begin
selling units during the fourth quarter of 2003.
Vista Controls Building: Purchased in March 2003 for $4.8 million, the
Vista Controls Building is a 51,000 square foot, fully leased,
two-story commercial building in Valencia, California.
Napili Plaza: Purchased in August 2003 for $7.1 million, the Napili
Plaza is a 45,200 square foot neighborhood retail center in West Maui.
Centennial Plaza: Purchased in September 2003 for $7.9 million, the
Centennial Plaza is a 244,000 square foot, 3-building complex on 14.6
fee-simple acres at the Centennial Industrial Park in Salt Lake City,
Utah.
On October 1, 2003, A&B and an affiliate of GolfBC Group ("GolfBC," a
Vancouver-based company unrelated to A&B) acquired certain real estate assets
from various subsidiaries of the Shinwa Golf Group ("Shinwa"). A&B purchased 270
acres of residential and commercial zoned property at the Wailea Resort for
approximately $67 million. GolfBC purchased three golf courses and a tennis
center at the Wailea Resort and two golf courses and other lands at the Kauai
Lagoons Resort. At September 30, 2003, since the transaction was funded prior to
quarter-end, A&B had included an investment for its purchase on the Condensed
Balance Sheet in Non-current Assets - Other. This amount, including amounts to
be funded from escrow, is also included in the Condensed Statement of Cash Flows
as Cash Flows from Investing Activities. Upon closing in October, the amounts
were transferred to Real Estate Developments and Real Estate Held for Sale on
the Balance Sheet and to Capital Expenditures on the Statement of Cash Flows.
On October 15, 2003, the Company purchased, for approximately $11 million, the
Broadlands Shopping Center, a 95,250 square-foot, Safeway anchored neighborhood
shopping center located in Broomfield, Colorado, a suburb north of Denver. The
acquisition of this shopping center completes the tax-deferred property exchange
that was initiated with the June 2003 sale of the Airport Square shopping
center, located in Reno, Nevada.
Tax-Deferred Real Estate Exchanges: Sales - During the first nine months of
2003, the Company recorded, on a tax-deferred basis, real-estate sales proceeds
of $37.3 million. The proceeds from these sales were immediately available for
reinvestment in replacement property. The proceeds from tax-deferred sales are
held in escrow pending future use to purchase new real estate assets. Of the
total sales proceeds, $3.4 million was included in the Statement of Cash Flows
as both Capital expenditures for property and developments and as "Receipts from
disposal of property" because the Company purchased replacement "like-kind"
property prior to the related tax-deferred sale (referred to as a "reverse
exchange"). The remaining $33.9 million is reported under the caption "Other
Non-cash Information" in the Condensed Statements of Cash Flows.
Purchases - During the first nine months of 2003, the Company utilized $29.9
million of tax-deferred funds to acquire new income-producing assets. As of
September 30, 2003, $11.3 million of proceeds from tax-deferred sales had not
been reinvested. Most of these funds were subsequently utilized for the purchase
of the previously noted Broadlands shopping center on October 15, 2003.
Commitments and Contingencies: A description of other financing arrangements in
effect at the end of the third quarter is described in Note (4) to the financial
statements of Item 1.
Environmental Matters: As with most industrial and land development companies of
its size, the Company's shipping, real estate, and agricultural businesses have
certain risks that could result in expenditures for environmental remediation.
The Company believes that it is in compliance, in all material respects, with
applicable environmental laws and regulations, and works proactively to identify
potential environmental concerns. The Company has emergency response and crisis
management programs.
After Hawaiian Commercial & Sugar Company ("HC&S") self-reported, in 2001, to
the State of Hawaii Department of Health ("State") possible violations of state
and federal air pollution control regulations at its Maui sugar mill, the State
issued a notice of violation and proposed penalty of $1.97 million in September
2003. Although the Company operated in accordance with the requirements of
permits issued by the State in 1974, the permit conditions may not have
reflected the federal standards fully. Upon identifying and self-reporting the
matter in late 2001, the Company immediately took corrective action to comply
with the regulations. The amount of the fine is being contested.
Additionally, the Company has received a claim for payment of environmental
remediation costs associated with a sugar refinery site, sold in 1994, that
previously was owned by C&H. No substantive changes to this matter occurred
during the quarter, but expects to resolve the matter by 2003 year-end.
The Company believes that the resolution of the two matters noted above will not
have a material effect on the Company's financial statements and that
appropriate accruals for these obligations have been recorded.
OTHER MATTERS
Significant Accounting Policies: The Company's significant accounting policies
are described in Note 1 of the consolidated financial statements included in
Management's Discussion and Analysis and in Item 8 of the Company's Form 10-K
for the year ended December 31, 2002 and in Note 9 of the Financial Notes
included in Item 1 of this Form 10-Q.
Significant Estimates: The preparation of the condensed consolidated financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported.
The more significant of these include:
1) assumptions underlying the calculation of pension,
post-retirement, and non-qualified benefit obligations and costs,
2) assumptions underlying the carrying value of investments,
3) the estimation of allowances for doubtful accounts,
4) the estimation of liabilities for self-insurance programs,
5) the calculation and classification of tax obligations and
provisions prior to completion of tax returns and completion of
taxing authority audits,
6) the application of cost accounting methods for sugar, molasses
and coffee inventory and cost of sales,
7) depreciable lives and salvage values for fixed assets,
8) liabilities for environmental assessments and remedial efforts,
9) estimates of joint venture earnings or losses prior to the
issuance of final annual joint venture financial statements,
10) accruals for obligations incurred but not yet billed to the
Company, and
11) recoverability of claims from losses under insurance coverage.
The Company believes that the methods it uses to determine estimates comply with
generally accepted accounting principles consistently applied.
Investments: The Company's joint ventures are described in Item 8 of its most
recently filed Form 10-K and Item 2 of its most recently filed Form 10-Q.
The operating agreement of Hokua Development Group LLC, the developer of Hokua
at 1288 Ala Moana ("Hokua," a 40-story luxury residential condominium in
Honolulu) was signed in July 2003. A&B's total investment in the venture is
expected to be $40 million and will be funded over approximately 18 months.
Ground-breaking for this project is expected to occur during the fourth quarter
of 2003. Hokua is a limited liability company, in which a wholly owned
subsidiary of A&B is a member.
The accrual of preferred stock dividends of C&H (net of losses), subsequent to
the write down of the investments in 2001, has been deferred until the investee
has sufficient cash flow available to make dividend payments.
Charter Agreements: Matson and American President Lines, Ltd. ("APL") are
parties to the Successor Alliance Slot Hire and Time Charter Agreement dated
January 28, 1998 ("APL Agreement"). This APL Agreement provides the structure of
an alliance through which Matson provides a weekly service to Guam. Pursuant to
this eight-year APL Agreement, Matson time charters three C-9 class vessels to
APL and APL reserves a designated number of container slots on each vessel for
Matson's exclusive use. This APL Agreement generates revenue of approximately
$2.9 million per month for Matson.
In July, Matson entered into a time charter agreement with Totem Ocean Trailer
Express, Inc. for a roll-on/roll-off vessel. The agreement has a two-year
initial term with three one-year renewal options at an average annual expense of
$12 million. To accommodate the operations of this new vessel, Matson is
negotiating terms for the use of an additional terminal facility in Honolulu.
Matson began using this vessel for the carriage of vehicles in its Hawaii
service in October 2003.
New and Proposed Accounting Standards: In April 2003, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." SFAS No. 149, effective, in most regards, for contracts
entered into or modified after June 30, 2003, provides clarifying guidance to
SFAS No. 133 and establishes additional accounting and reporting standards for
derivative instruments, hedging activities, and derivatives embedded in other
contracts. Adoption of SFAS No. 149 had no effect on the Company's consolidated
financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equities." SFAS No.
150, effective for financial instruments entered into or modified after May 31,
2003, and for interim periods beginning after June 15, 2003, requires that
certain instruments that were previously classified as equity should be
classified as a liability. These include instruments for which redemption is
mandatory, that have an obligation to repurchase the issuer's equity shares, and
unconditional obligation that must or may be settled by issuing a variable
number of the issuer's equity shares, provided that certain characteristics are
present. The Company does not have any instruments that would be reclassified,
under SFAS No. 150, from equity to liability.
In November 2002, the FASB issued Interpretation No. ("FIN") 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." This Interpretation specifies that a
guarantor is required to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing the guarantee. This
applies to guarantees issued or modified after December 31, 2002. The
Interpretation also revises the disclosure requirements about a guarantor's
obligations under agreements, which are effective for the 2002 consolidated
financial statements. The adoption of FIN 45 had no material effect on the
Company's 2003 nine-month condensed consolidated financial statements.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities." The Interpretation defines variable interest entities and addresses
consolidation of such entities by the primary beneficiary of the entity. The
Interpretation is effective for interests in variable interest entities created
after January 31, 2003. The Company has made no investments in Variable Interest
Entities subsequent to February 1, 2003. In October 2003, the FASB deferred the
effective date for investments in such entities that existed at January 31,
2003, until first interim or annual reporting period after December 15, 2003.
The Company is currently evaluating investments that existed on that date to
determine if any such investments are in Variable Interest Entities.
Additional information about the impacts of newly issued accounting standards is
discussed in Item 8 of the Company's Form 10-K for the year ended December 31,
2002, and in Item 2 of the Company's two most recently filed Forms 10-Q.
Pensions: For 2002, the total year pre-tax pension benefit of approximately $1.4
million was recorded in the Company's income statement. For 2003, due to market
driven lower pension assets and the application of a lower discount rate for the
calculation of pension obligations, the Company expects that the full-year
pre-tax expense will be approximately $14 million. The Company will not be
required to make any cash contributions to its pension plans during 2003 but
expects to contribute approximately $4 million to the pension plans in 2004.
Additional information regarding pensions is included in Item 8 of the Company's
2002 Form 10-K.
Stock Options: Information regarding the accounting for and pro forma effect of
options to purchase shares of the Company's stock is included in Note (5) to the
financial statement included in Item 1.
Economic Conditions: Hawaii's economy continues to grow at a faster pace than
many Mainland states. This growth derives primarily from increasing numbers of
visitors from the Western U.S., as well as from a strong residential real estate
market and associated home construction.
For the year-to-date period through August, total visitor days were up 4.7
percent, with a 6.5 percent increase in the U.S. West, Hawaii's largest market;
an 11 percent increase in visitor days in the U.S. East, the second largest
market. These increases were offset, in part, by a 15.3 percent decrease in
visitors from Japan, the third largest visitor market. Hotels reported an 83.1
percent occupancy rate statewide in the same month, the best August since 1991.
Residential housing markets remain very strong, with a steady progression of
record or near-record sales of both existing and new homes and condominium
properties. Some concerns are being raised about the low inventory of existing
homes for sale and potential spot labor shortages affecting the pace of new home
construction.
Construction activity in Hawaii continues at high levels. In the second quarter
of 2003, employment in the industry was up 7.6 percent on a year-over-year basis
and up 2.8 percent from the first quarter of 2003. The contracting tax base in
construction, a proxy for construction activity, rose 11 percent between the
second quarter of 2002 and that of 2003. Contracts were awarded during the
quarter for the "privatization" of a substantial amount of military housing on
Oahu. These will lead to replacement of much of the older inventory of homes on
military bases as soon as the contractors begin work. This is expected to add
jobs to this sector and, through construction spending, contribute to the
economy.
The State of Hawaii's Department of Business, Economic Development and Tourism
recently raised its projection for real gross state product in 2003 to 2.6
percent, its second upward revision of the year. Its comparable estimate for
2005 is 1.8 percent.
Management Changes: Nelson N.S. Chun was named vice president and general
counsel of A&B. Mr. Chun is expected to join A&B in November 2003.
Peter F. Weis was named vice president and chief information officer of Matson
on August 28, 2003.
Michael J. Marks, vice president and general counsel of A&B, retired on
September 1, 2003.
Robert J. Pfeiffer, chairman emeritus of A&B and Matson, passed away on
September 26, 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
Information concerning market risk is incorporated herein by reference to Item
7A of the Company's Form 10-K for the fiscal year ended December 31, 2002. There
has been no material change in the quantitative and qualitative disclosure about
market risk since December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
- --------------------------------
(a) Disclosure Controls and Procedures. The Company's management, with
the participation of the Company's Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of the Company's
disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) as of the end of the period covered by
this report. Based on such evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that, as of the
end of such period, the Company's disclosure controls and procedures
are effective in recording, processing, summarizing and reporting, on
a timely basis, information required to be disclosed by the Company
in the reports that it files or submits under the Exchange Act.
(b) Internal Control Over Financial Reporting. There have not been any
changes in the Company's internal control over financial reporting
(as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fiscal quarter to which this report relates
that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
No reports on Form 8-K were filed during the quarter.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALEXANDER & BALDWIN, INC.
-------------------------
(Registrant)
Date: October 31, 2003 /S/ James S. Andrasick
-----------------------------------
James S. Andrasick
Executive Vice President, Chief
Financial Officer and Treasurer
Date: October 31, 2003 /S/ Thomas A. Wellman
-----------------------------------
Thomas A. Wellman
Controller
EXHIBIT INDEX
31.1 Certification of Chief Executive Officer, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.