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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
Commission file number 0-565
ALEXANDER & BALDWIN, INC.
(Exact name of registrant as specified in its charter)
Hawaii 99-0032630
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
822 Bishop Street
Post Office Box 3440, Honolulu, Hawaii 96801
(Address of principal executive offices and zip code)
808-525-6611
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
(Title of Class)
Number of shares of Common Stock outstanding at February 9, 2004:
42,307,828
Aggregate market value of Common Stock held by non-affiliates at June 30, 2003:
$1,019,843,484
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |X| No _____
Documents Incorporated By Reference
Portions of Registrant's Proxy Statement dated March 8, 2004 (Part III of
Form 10-K)
TABLE OF CONTENTS
PART I
Page
Items 1 & 2. Business and Properties............................................................ 1
A. Transportation..................................................................... 1
(1) Freight Services.......................................................... 1
(2) Vessels................................................................... 2
(3) Terminals................................................................. 2
(4) Logistics and Other Services.............................................. 4
(5) Competition............................................................... 4
(6) Labor Relations........................................................... 4
(7) Rate Regulation........................................................... 5
B. Property Development and Management................................................ 5
(1) General................................................................... 5
(2) Planning and Zoning....................................................... 6
(3) Residential Projects...................................................... 6
(4) Commercial Properties..................................................... 8
C. Food Products...................................................................... 11
(1) Production................................................................ 11
(2) Marketing of Sugar and Coffee............................................. 11
(3) Competition and Sugar Legislation......................................... 12
(4) Properties and Water...................................................... 13
D. Employees and Labor Relations...................................................... 13
E. Energy............................................................................. 14
F. Available Information.............................................................. 15
Item 3. Legal Proceedings.................................................................. 15
Item 4. Submission of Matters to a Vote of Security Holders................................ 16
Executive Officers of the Registrant................................................................. 16
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.............................................. 17
Item 6. Selected Financial Data............................................................ 19
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................. 21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk......................... 40
Item 8. Financial Statements and Supplementary Data........................................ 42
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure............................................................... 81
Item 9A. Controls and Procedures............................................................ 81
A. Disclosure Controls and Procedures................................................. 81
B. Internal Control over Financial Reporting.......................................... 81
PART III
Item 10. Directors and Executive Officers of the Registrant................................. 82
A. Directors.......................................................................... 82
B. Executive Officers................................................................. 82
C. Audit Committee Financial Expert................................................... 83
D. Code of Ethics..................................................................... 83
Item 11. Executive Compensation............................................................. 83
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters........................................................ 83
Item 13. Certain Relationships and Related Transactions..................................... 83
Item 14. Principal Accountant Fees and Services............................................. 84
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................... 85
A. Financial Statements............................................................... 85
B. Financial Statement Schedules...................................................... 85
C. Exhibits Required by Item 601 of Regulation S-K.................................... 85
D. Reports on Form 8-K................................................................ 91
Signatures........................................................................................... 92
Independent Auditors' Consent........................................................................ 94
ALEXANDER & BALDWIN, INC.
FORM 10-K
Annual Report for the Fiscal Year
Ended December 31, 2003
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
Alexander & Baldwin, Inc. ("A&B") is a diversified corporation with
most of its operations centered in Hawaii. It was founded in 1870 and
incorporated in 1900. Ocean transportation operations, related shoreside
operations in Hawaii, and intermodal, truck brokerage and logistics services are
conducted by a wholly-owned subsidiary, Matson Navigation Company, Inc.
("Matson") and several Matson subsidiaries. Property development and food
products operations are conducted by A&B and certain other subsidiaries of A&B.
The business industries of A&B are as follows:
A. Transportation - carrying freight, primarily between various
ports on the U.S. Pacific Coast and major Hawaii ports and
Guam; chartering vessels to third parties; arranging
intermodal and motor carrier services and providing logistics
services in North America; and providing terminal, stevedoring
and container equipment maintenance services in Hawaii.
B. Property Development and Management - purchasing, developing,
selling, managing, leasing and investing in commercial
(including retail, office and industrial) and residential
properties, in Hawaii and on the U.S. mainland.
C. Food Products - growing sugar cane and coffee in Hawaii;
producing bulk raw sugar, specialty food-grade sugars,
molasses and green coffee; marketing and distributing roasted
coffee and green coffee; providing sugar and molasses hauling
in Hawaii; and generating and selling electricity.
For information about the revenue, operating profits and identifiable
assets of A&B's industry segments for the three years ended December 31, 2003,
see Note 14 ("Industry Segments") to A&B's financial statements in Item 8 of
Part II below.
DESCRIPTION OF BUSINESS AND PROPERTIES
A. Transportation
(1) Freight Services
Matson's Hawaii Service offers containership freight services between
the ports of Long Beach, Oakland, Seattle, and the major ports in Hawaii on the
islands of Oahu, Kauai, Maui and Hawaii. Roll-on/roll-off service is provided
between California and the major ports in Hawaii.
Matson is the principal carrier of ocean cargo between the U.S. Pacific
Coast and Hawaii. In 2003, Matson carried approximately 162,400 containers
(compared with 152,500 in 2002) and 145,200 automobiles (compared with 120,500
in 2002) between those destinations. Principal westbound cargoes carried by
Matson to Hawaii include dry containers of mixed commodities, refrigerated
commodities, building materials, automobiles and packaged foods. Principal
eastbound cargoes carried by Matson from Hawaii include automobiles, household
goods, refrigerated containers of fresh pineapple, canned pineapple and dry
containers of mixed commodities. The preponderance of Matson's Hawaii Service
revenue is derived from the westbound carriage of containerized freight and
automobiles.
Matson's Guam Service provides containership freight services between
the U.S. Pacific Coast and Guam and Micronesia. Matson's Guam Service is a
component of the Pacific Alliance Service, a strategic alliance established by
Matson and American President Lines, Ltd. ("APL") to provide freight services
between the U.S. Pacific Coast and Hawaii, Guam and several Far East ports. In
2003, Matson carried approximately 17,800 containers (compared with 16,300 in
2002) and 4,660 automobiles (compared with 3,760 in 2002) in the Guam Service.
The alliance currently utilizes three Matson vessels and two APL vessels.
Matson's Mid-Pacific Service offers container and conventional freight
services between the U.S. Pacific Coast and the ports of Kwajalein, Ebeye and
Majuro in the Republic of the Marshall Islands and Johnston Island, all via
Honolulu.
See "Rate Regulation" below for a discussion of Matson's freight rates.
(2) Vessels
Matson's fleet consists of ten containerships, three combination
container/trailerships, including a combination ship time-chartered from a third
party, one roll-on/roll-off barge, two container barges equipped with cranes
that service the neighbor islands of Hawaii, and one container barge equipped
with cranes in the Mid-Pacific service. The 16 Matson-owned vessels in its fleet
represent an investment of approximately $745 million expended over the past 33
years. The majority of vessels in the Matson fleet have been acquired with the
assistance of withdrawals from a Capital Construction Fund established under
Section 607 of the Merchant Marine Act, 1936, as amended.
Matson is actively pursuing a vessel renewal program because its fleet
is aging, with five vessels that will be more than 30 years old in 2004. In
2002, Matson contracted with Kvaerner Philadelphia Shipyard Inc. for two new
containerships for the Hawaii Service, each at a total project cost of
approximately $107 million. The first ship was delivered in the third quarter of
2003, and the second is scheduled for delivery in the third or fourth quarter of
2004.
Ships owned by Matson are described on the following page.
As a complement to its fleet, Matson owns approximately 19,600
containers, 10,700 container chassis, 500 auto-frames and miscellaneous other
equipment. Capital expenditures incurred by Matson in 2003 for vessels,
equipment and systems totaled approximately $132 million.
(3) Terminals
Matson Terminals, Inc. ("Matson Terminals"), a wholly-owned subsidiary
of Matson, provides container stevedoring, container equipment maintenance and
other terminal services for Matson and other ocean carriers at its 105-acre
marine terminal in Honolulu. Matson Terminals owns and operates seven cranes at
the terminal, which handled approximately 419,600 containers in 2003 (compared
with 378,600 in 2002) and can accommodate three vessels at one time. Matson
Terminals' lease with the State of Hawaii runs through September 2016. Matson
Terminals has completed a $32 million terminal improvement project at the
Honolulu terminal that included the conversion from a straddle carrier-based
container handling system to a wheeled chassis- and toppick-based system. The
conversion has resulted in improved productivity at the terminal, with marginal
improvements in stevedoring operations, increased storage density, and reduced
costs. In October 2003, Matson Terminals began operating a dedicated
roll-on/roll-off terminal facility in Honolulu that provides premium service to
automobile shippers and consignees.
SSA Terminals, LLC ("SSAT"), a joint venture of Matson and Stevedoring
Services of America ("SSA"), provides terminal and stevedoring services at U.S.
Pacific Coast terminal facilities in Long Beach, Oakland and Seattle.
MATSON NAVIGATION COMPANY, INC.
FLEET--2/1/04
-------------
Usable Cargo Capacity
-----------------------------------------------------
Containers Vehicles
Year Maximum Maximum ------------------------------------- --------------
Official Year Recon- Speed Deadweight Reefer
Vessel Name Number Built structed Length (Knots) (Long Tons) 20' 24' 40' 45' Slots TEUs (1) Autos Trailers
- ----------- -------- ----- -------- ---------- ------- ----------- --- --- ----- --- ------ -------- ----- --------
Diesel-Powered Ships
- --------------------
R.J. PFEIFFER....... 979814 1992 -- 713'6" 23.0 27,100 48 171 988 -- 300 2,229 -- --
MOKIHANA (2)........ 655397 1983 -- 860'2" 23.0 30,167 182 -- 1,340 -- 408 2,824 -- --
MAHIMAHI (2)........ 653424 1982 -- 860'2" 23.0 30,167 182 -- 1,340 -- 408 2,824 -- --
MANOA (2)........... 651627 1982 -- 860'2" 23.0 30,187 182 -- 1,340 -- 408 2,824 -- --
MANUKAI............. 1141163 2003 -- 711'9" 23.0 36,036 4 -- 1,294 -- 300 2,592 -- --
Steam-Powered Ships
- -------------------
KAUAI............... 621042 1980 1994 720'5 1/2" 22.5 26,308 -- 458 538 -- 300 1,626 44 --
MAUI................ 591709 1978 1993 720'5 1/2" 22.5 26,623 -- 458 538 -- 300 1,626 -- --
MATSONIA............ 553090 1973 1987 760'0" 21.5 22,501 16 128 771 -- 201 1,712 450 56
LURLINE............. 549900 1973 2003 826'6" 21.5 22,213 6 -- 865 38 246 1,821 910 55
EWA (3)............. 530140 1972 1978 787'8" 21.0 38,747 286 276 681 -- 228 1,979 -- --
CHIEF GADAO (3)..... 530138 1971 1978 787'8" 21.0 37,346 230 464 597 -- 274 1,981 -- --
LIHUE (3)........... 530137 1971 1978 787'8" 21.0 38,656 286 276 681 -- 188 1,979 -- --
Barges
- ------
WAIALEALE (4)....... 978516 1991 -- 345'0" -- 5,621 -- -- -- 35 -- 230 45
ISLANDER (5)........ 933804 1988 -- 372'0" -- 6,837 -- 276 24 70 380 -- --
MAUNA LOA (5)....... 676973 1984 -- 350'0" -- 4,658 -- 144 72 84 316 -- --
HALEAKALA (5)....... 676972 1984 -- 350'0" -- 4,658 -- 144 72 84 316 -- --
Molasses
----------
Vessel Name Short Tons
- ----------- ----------
Diesel-Powered Ships
- --------------------
R.J. PFEIFFER....... --
MOKIHANA (2)........ --
MAHIMAHI (2)........ --
MANOA (2)........... --
MANUKAI............. --
Steam-Powered Ships
- -------------------
KAUAI............... 2,600
MAUI................ 2,600
MATSONIA............ 4,300
LURLINE............. 2,100
EWA (3)............. --
CHIEF GADAO (3)..... --
LIHUE (3)........... --
Barges
- ------
WAIALEALE (4)....... --
ISLANDER (5)........ --
MAUNA LOA (5)....... 2,100
HALEAKALA (5)....... 2,100
- --------
(1) "Twenty-foot Equivalent Units" (including trailers). TEU is a standard
measure of cargo volume correlated to the volume of a standard 20-foot dry
cargo container.
(2) Time-chartered to APL until February 2006.
(3) Reserve Status.
(4) Roll-on/Roll-off Barge.
(5) Container Barge.
Capital expenditures incurred by Matson Terminals in 2003 for terminals
and equipment totaled approximately $1 million.
(4) Logistics and Other Services
Matson Integrated Logistics, Inc. ("Matson Integrated Logistics"), a
wholly-owned subsidiary of Matson, arranges rail, highway, air, ocean and other
surface transportation and provides other third-party logistics services for
North American shippers. Through volume purchases of rail, motor carrier, air
and ocean transportation services, augmented by such services as shipment
tracing and single-vendor invoicing, Matson Integrated Logistics is able to
reduce transportation costs for its customers. Matson Integrated Logistics
operates eight regional operating centers and has 23 sales offices across the
U.S. mainland.
Matson Logistics Solutions, Inc. ("Matson Logistics"), a wholly-owned
subsidiary of Matson, provides third-party logistics services primarily for the
automotive industry in Hawaii, Alaska, Puerto Rico and Guam-Micronesia.
(5) Competition
Matson's Hawaii Service and Guam Service have one major containership
competitor that serves Long Beach, Oakland, Tacoma, Honolulu and Guam. Other
competitors in the Hawaii Service include two common carrier barge services,
unregulated proprietary and contract carriers of bulk cargoes, and air cargo
service providers. Although air freight competition is intense for
time-sensitive and perishable cargoes, inroads by such competition in terms of
cargo volume are limited by the amount of cargo space available in passenger
aircraft and by generally higher air freight rates.
Matson vessels are operated on schedules which make available to
shippers and consignees regular day-of-the-week sailings from the U.S. Pacific
Coast and day-of-the-week arrivals in Hawaii. Under its current schedule, Matson
operates 208 Hawaii round-trip voyages per year, double the westbound voyages of
its nearest competitor, and arranges additional voyages when cargo volumes
require additional capacity. This service is attractive to customers because
more frequent arrivals permit customers to reduce inventory costs. Matson also
competes by offering a more comprehensive service to customers, supported by the
scope of its equipment, its efficiency and experience in handling containerized
cargo, and competitive pricing.
The carriage of cargo between the U.S. Pacific Coast and Hawaii on
foreign-built or foreign-documented vessels is prohibited by Section 27 of the
Merchant Marine Act, 1920, commonly referred to as the Jones Act. However,
foreign-flag vessels carrying cargo to Hawaii from non-U.S. locations provide
indirect competition for Matson's Hawaii Service. Far East countries, Australia,
New Zealand and South Pacific islands have direct foreign-flag services to
Hawaii.
In response to coordinated efforts by various interests to convince
Congress to repeal the Jones Act, in 1995 Matson joined other businesses and
organizations to form the Maritime Cabotage Task Force, which supports the
retention of the Jones Act and other cabotage laws. Repeal of the Jones Act
would allow all foreign-flag vessel operators, which do not have to abide by
U.S. laws and regulations, to sail between U.S. ports in direct competition with
Matson and other U.S. operators which must comply with such laws and
regulations. The Task Force seeks to inform elected officials and the public
about the economic, national security, commercial, safety and environmental
benefits of the Jones Act and similar cabotage laws.
Matson Integrated Logistics competes for freight with a number of large
and small companies that provide surface transportation and third-party
logistics services.
(6) Labor Relations
The absence of strikes and the availability of labor through hiring
halls are important to the maintenance of profitable operations by Matson. Until
2002, when International Longshore and Warehouse Union ("ILWU") workers were
locked out for ten days on the U.S. Pacific Coast, Matson's operations had not
been disrupted significantly by labor disputes in over 30 years. See "Employees
and Labor Relations" below for a description of labor agreements to which Matson
and Matson Terminals are parties and information about certain unfunded
liabilities for multi-employer pension plans to which Matson and Matson
Terminals contribute.
(7) Rate Regulation
Matson is subject to the jurisdiction of the Surface Transportation
Board with respect to its domestic rates. A rate in the noncontiguous domestic
trade is presumed reasonable and will not be subject to investigation if the
aggregate of increases and decreases is not more than 7.5 percent above, or more
than 10 percent below, the rate in effect one year before the effective date of
the proposed rate, subject to increase or decrease by the percentage change in
the U.S. Producer Price Index. Effective January 12, 2003, Matson imposed a
terminal handling charge of $200 per container for westbound freight, $100 per
container for eastbound freight and $30 per automobile in its Hawaii Service. On
June 15, 2003, Matson instituted a $100 per container U.S. mainland terminal
handling charge for cargo moving to and from Guam. Matson increased its rates in
the Hawaii Service by $125 per westbound container and $60 per eastbound
container and increased its terminal handling charge by $25 per westbound
container and $15 per eastbound container, effective January 11, 2004. Matson
also increased its rates for moving automobiles by $25, both westbound and
eastbound, and its terminal handling charge for automobiles by $5. Matson's last
general rate increase was in April 2002. No general rate increase was
implemented in 2003. Due to dramatic increases in fuel prices attributed to the
increasing likelihood of war in Iraq, Matson increased its fuel surcharge from 6
percent to 7.5 percent effective March 3, 2003. Matson reduced the fuel
surcharge from 7.5 percent to 6.5 percent effective May 4, 2003, and increased
it from 6.5 percent to 7.5 percent effective September 15, 2003.
B. Property Development and Management
(1) General
A&B and its subsidiaries, including A & B Properties, Inc., own
approximately 90,240 acres, consisting of approximately 90,000 acres in Hawaii
and approximately 240 acres elsewhere, as follows:
Location No. of Acres
-------- ------------
Oahu ................................................ 46
Maui ................................................ 68,906
Kauai ............................................... 21,045
California .......................................... 91
Texas ............................................... 47
Washington .......................................... 13
Arizona ............................................. 35
Nevada .............................................. 21
Colorado ............................................ 17
Utah ................................................ 15
------
TOTAL ............................................. 90,236
======
As described more fully in the table below, the bulk of this acreage currently
is used for agricultural and related activities, and includes pasture land,
watershed land and conservation reserves. The balance is used or planned for
development or other urban uses. An additional 3,306 acres on Maui and Kauai are
leased from third parties and, in March 2003, title to 846 acres on Kauai was
transferred to a joint venture, consisting of A&B and DMB Associates, Inc., an
Arizona-based developer, for the development of a master planned resort
residential community.
Current Use No. of Acres
----------- ------------
Hawaii
Fully entitled Urban (defined below) ........... 656
Agricultural, pasture and miscellaneous ........ 60,051
Watershed land/conservation .................... 29,290
U.S. Mainland
Fully entitled Urban ........................... 239
------
TOTAL .................................. 90,236
======
A&B and its subsidiaries are actively involved in the entire spectrum
of real estate development and ownership, including planning, zoning, financing,
constructing, purchasing, managing and leasing, selling and exchanging, and
investing in real property.
On February 6 and 7, 2004, union workers at Honolulu's two largest
concrete manufacturers, which supply most of the concrete on Oahu, went on
strike, shutting down both manufacturing operations. This shutdown had the
immediate impact of delaying the pouring of the foundation for the Hokua
project, but is not expected to have a near-term impact on construction at the
Lanikea project. Both of these projects are described below. Any prolonged
strike will delay the completion of both projects, as well as have wide-spread
impact on construction generally on Oahu. Although labor negotiations between
union and management are ongoing, it is difficult at this time to predict the
likely duration of the strike.
(2) Planning and Zoning
The entitlement process for development of property in Hawaii is both
time-consuming and costly, involving numerous State and County regulatory
approvals. For example, conversion of an agriculturally-zoned parcel to
residential zoning usually requires the following three approvals:
o amendment of the County general plan to reflect the desired
residential use;
o approval by the State Land Use Commission to reclassify the
parcel from the Agricultural district to the Urban district; and
o County approval to rezone the property to the precise
residential use desired.
The entitlement process is complicated by the conditions, restrictions
and exactions that are placed on these approvals, including, among others, the
construction of infrastructure improvements, payment of impact fees,
restrictions on the permitted uses of the land, provision of affordable housing
and/or mandatory fee sale of portions of the project.
A&B actively works with regulatory agencies, commissions and
legislative bodies at various levels of government to obtain zoning
reclassification of land to its highest and best use. A&B designates a parcel as
"fully entitled" or "fully zoned" when the three land use approvals described
above have been obtained.
(3) Residential Projects
A&B is pursuing a number of residential projects in Hawaii, including:
(a) Wailea. In October 2003, A&B and an affiliate of GolfBC Group, a
Vancouver, Canada-based company, completed the acquisition of the Hawaii assets
of the Shinwa Golf Group. These assets include 270 acres of fully-zoned,
undeveloped residential and commercial land, and three golf courses at the
world-renowned Wailea Resort on Maui, and two golf courses and an undeveloped
hotel site at the Kauai Lagoons Resort. The total purchase price for the assets
was $131.5 million, with GolfBC acquiring the three golf courses and tennis
center at Wailea, and the two golf courses, hotel site and developable lands at
the Kauai Lagoons Resort for $64.4 million. A&B retained the 270 acres of
fully-zoned, undeveloped lands, planned for up to 1,600 homes, for $67.1
million. A&B was the original developer of the Wailea Resort, beginning in the
1970s and continuing until A&B sold the Resort to the Shinwa Golf Group in 1989.
In October 2003, A&B received State approval to commence marketing 29
single-family homesites at Wailea's Golf Vistas subdivision. Closings commenced
in January 2004. As of January 31, 2004, 13 lots have been sold and six lots are
in escrow, at prices ranging from $495,000 to $1.6 million, for an average price
of $835,000. Negotiations are progressing on the sale of various development
parcels to third parties, and A&B is proceeding with the evaluation of its own
development of certain parcels.
(b) The Summit at Kaanapali. In January 2000, A&B acquired 17 acres in
the Kaanapali Golf Estates project. This land was developed into 17
single-family homes and 36 homesites. As of December 31, 2003, all 17 homes and
34 homesites were sold (two homes and 20 homesites were sold in 2003). The two
remaining homesites closed in January 2004. The average price of the 17 homes
and 36 homesites was $1.1 million and $347,000, respectively.
(c) Haliimaile Subdivision. A&B's application to rezone 63 acres for
the development of a 150- to 200-lot subdivision in Haliimaile (Upcountry, Maui)
continues to be held by the Maui County Council's Land Use Committee. Council
action is expected in 2004.
(d) Kukui'Ula. Kukui'Ula is a 1,000-acre master planned resort
residential community located in Poipu, Kauai. In April 2002, an agreement was
signed with an affiliate of DMB Associates, Inc., an Arizona-based developer of
master planned communities, for the joint development of Kukui'Ula. The joint
venture's initial conceptual land use plan anticipates a reduction in overall
project density from 3,400 planned units to between 1,200 to 1,500 high-end
residential units. During 2003, A&B contributed to the venture title to 846
acres, a waste water treatment plant, and other improvements. The balance of the
land will be transferred to the venture upon securing further entitlements for
the property. In July 2003, the State Land Use Commission granted Urban
designation for the project's remaining acres, which will allow the entire
1,000-acre property to be developed as one integrated project. Applications were
filed in July 2003 to amend the Kauai County's zoning and visitor designation
areas for the project, and hearings were held in October and November 2003 and
January 2004. The Kauai County Planning Commission recommended approval of the
applications on January 27, 2004, and action is anticipated by the County
Council by the third quarter of 2004. The venture had no sales activity during
2003.
(e) Kai Lani. In September 2001, A&B entered into a joint venture with
Armstrong Kai Lani Corporation for the development of 116 townhouse units on an
11-acre parcel in the Ko 'Olina Resort on Oahu. Construction on the first
building began in July 2002. A total of 105 units were sold in 2003. As of
January 31, 2004, of the remaining 11 units, three units have been sold and
eight units are in escrow and are scheduled to close by March 2004. The average
price of the 116 units is $496,000.
(f) Lanikea at Waikiki. In November 2001, A&B acquired a 1.63-acre,
vacant, fee simple development site in Waikiki, Oahu, for approximately $3.6
million. The property, located at the entrance to Waikiki, is zoned for
high-rise residential use and limited commercial uses. The project has been
designed and permitted for 100 apartments, averaging 1,000 square feet in size,
except for the four penthouse units, which average 1,600 square feet. The
building will be 30 stories tall, with the first five floors devoted to parking.
Sales commenced in April 2003. As of January 31, 2004, 92 binding contracts have
been entered into, and an additional six units are in escrow. The average sales
price of the 98 contracts is $574,000. Construction commenced in December 2003
and is scheduled for completion in the second quarter of 2005.
(g) Hokua. In July 2003, A&B entered into a joint venture with the
MacNaughton/Kobayashi Group for the development of a 247-unit high-rise luxury
condominium project across from the Ala Moana Beach Park in Honolulu. The
project contains four floors of parking and 37 floors of residential units. The
first 32 residential floors include seven units each, with an average unit size
of 1,760 square feet. The next four floors have five units each, with an average
unit size of 2,500 square feet. The Penthouse floor contains three units,
averaging 4,330 square feet each. Sales commenced in December 2002. As of
January 31, 2004, 233 of the project's 247 units were under binding contracts,
at an average price of $1 million per unit. In November 2003, the joint venture
acquired title to the 3.7-acre property. Demolition of improvements commenced in
October 2003, and construction is expected to be completed in the fourth quarter
of 2005.
(h) HoloHolo Ku. In October 2001, A&B entered into a joint venture with
Kamuela Associates, LLC for the development of 44 detached single-family homes
under a Condominium Property Regime, on an 8.5-acre parcel in Kamuela on the
island of Hawaii. Construction began in December 2001, and was completed in
October 2003. As of January 31, 2004, 41 homes have been sold at an average
price of $387,000 (36 of the homes were sold in 2003), one is in escrow and two
are available for sale.
(4) Commercial Properties
An important source of property revenue is the lease rental income A&B
receives from its leased portfolio, currently consisting of approximately 5.4
million leaseable square feet of commercial building space, ground leases on 266
acres for commercial use, and leases on 10,719 acres for agricultural/pasture
use.
(a) Hawaii Commercial Properties
A&B's Hawaii commercial properties portfolio consists primarily of
seven retail centers, eight office buildings and three industrial properties,
comprising approximately 1.7 million square feet of leaseable space. Most of the
commercial properties are located on Maui and Oahu, with smaller holdings in the
area of Port Allen, on the island of Kauai. The average occupancy for the Hawaii
portfolio was 90 percent in 2003 (compared with 89 percent in 2002). The
increase was due primarily to higher occupancies in the office properties.
In March 2003, A&B sold the 83,800-square-foot Dairy Road Center
industrial property, located in Kahului, Maui. Other 2003 sales included four
leased fee properties in Kahului.
In August 2003, A&B acquired the Napili Plaza, a 45,200-square-foot
shopping center, located between the Kaanapali and Kapalua resorts on Maui, and
a 117,000-square-foot industrial warehouse, adjacent to HC&S's Puunene mill on
Maui. Proceeds from several tax-deferred exchanges under Section 1031 of the
Internal Revenue Code, as amended ("Code"), were used to acquire these
properties.
The primary Hawaii commercial properties are as follows:
Leasable Area
Property Location Type (sq. ft.)
- -------- -------- ---- -------------
Maui Mall............................... Kahului, Maui Retail 192,600
Mililani Shopping Center................ Mililani, Oahu Retail 180,300
Pacific Guardian Complex................ Honolulu, Oahu Office 138,400
Kaneohe Bay Shopping Center............. Kaneohe, Oahu Retail 124,500
P&L Warehouse........................... Kahului, Maui Industrial 104,100
Kahului Shopping Center................. Kahului, Maui Retail 99,600
Ocean View Center....................... Honolulu, Oahu Office 99,200
Hawaii Business Park.................... Pearl City, Oahu Industrial 85,200
Haseko Center........................... Honolulu, Oahu Office 84,200
One Main Plaza.......................... Wailuku, Maui Office 82,800
Wakea Business Center................... Kahului, Maui Industrial/Retail 61,500
Kahului Office Building................. Kahului, Maui Office 56,800
Napili Plaza............................ Napili, Maui Retail 45,200
Fairway Shops at Kaanapali.............. Kaanapali, Maui Retail 35,100
Kahului Office Center................... Kahului, Maui Office 31,300
Stangenwald Building.................... Honolulu, Oahu Office 27,100
Port Allen Marina Center ............... Port Allen, Kauai Retail 23,600
Judd Building........................... Honolulu, Oahu Office 20,200
A number of other commercial projects are being developed on Maui and
Oahu, including:
(i) Triangle Square. Previous construction at the 12-acre Triangle
Square commercial project in Kahului, Maui includes two retail buildings with a
combined leasable area of 42,600 square feet, a BMW car dealership and three
other improved commercial properties under long-term ground leases. In February
2003, a 0.9-acre ground lease was signed with the operator of the first Hawaii
Krispy Kreme store, and the 4,500-square-foot store opened for business in
January 2004. A lease was signed in August with an automobile dealer for a
6,500-square-foot build-to-suit Acura dealership on 1.1 acres. Approximately 1.6
acres remain available for lease.
(ii) Maui Business Park. Located in Kahului, Maui, the initial phase of
Maui Business Park, developed between 1995 and 2000, consists of approximately
69.4 saleable acres, subdivided into 41 lots, having an average size of 23,700
square feet, and three bulk parcels. The property is zoned for light
industrial/commercial uses.
From 1995 through 1998, a total of 20.3 acres was sold for the
development of a 349,300-square-foot retail center, whose anchor tenants are
Borders Books & Music, Lowe's, OfficeMax and Old Navy. In August 2000, a
12.8-acre parcel was sold to Home Depot, which completed a 135,000-square-foot
store in May 2001. In February 2001, a 14-acre parcel was sold to Wal-Mart,
which completed a 142,000-square-foot store in October 2001.
During 2003, five half-acre lots were sold at an average price of $26
per square foot. As of December 31, 2003, 62.8 acres have been sold (90 percent
of the project) at an average price of $24 per square foot. Of the remaining
eleven lots in the project (6.6 acres), as of January 31, 2004, two lots have
been sold, four lots are in escrow, two lots have signed letters of intent and
two lots are in negotiation, leaving one lot available for sale.
In May 2002, the Maui County Council approved the inclusion of
approximately 179 acres in the Wailuku-Kahului Community Plan for the future
expansion of Maui Business Park. In May 2003, A&B filed a petition with the
State Land Use Commission ("SLUC") to redesignate 138 acres from Agricultural to
Urban. (Seven acres are currently designated Urban, and an additional 34 acres
have already received tentative approval for designation as Urban.) SLUC
hearings were held in the fourth quarter of 2003 and, on February 5, 2004, the
SLUC approved the reclassification of 138 acres to Urban. A&B has commenced the
preparation of a zoning-change application to be filed with the County.
(iii) Kahului Airport Hotel. In March 2002, the Maui County Council
approved A&B's zoning and Community Plan amendment applications for a proposed
134-room hotel, to be developed on 3.4 acres near the Kahului Airport.
Construction plans were submitted to Maui County for review in December 2002.
However, due to higher-than-expected construction bids, obtained in April 2003,
construction of the hotel has been deferred.
(iv) Mill Town Center. Located in Waipahu, Oahu (approximately 12 miles
from Honolulu), the Mill Town Center is a light-industrial subdivision
consisting of 27.5 saleable acres, developed between 1999 and 2002. The property
has been subdivided into 61 lots, having an average size of 29,100 square feet.
During 2003, seven lots were sold, at an average price of $27 per square foot.
As of December 31, 2003, a total of 32 lots (14 acres) have been sold, at an
average price of $24 per square foot. Of the remaining 29 lots (13.5 acres), as
of January 31, 2004, five lots have been sold, 18 lots are in escrow, letters of
intent have been executed for two lots and negotiations are ongoing for two
lots, leaving two lots (1 acre) remaining available for sale.
(v) Kunia Shopping Center. In November 2002, A&B acquired a 4.6-acre,
fee simple vacant parcel for $2.65 million. The parcel, which is zoned for
retail use, is located in Kunia, Central Oahu (near the Royal Kunia and Village
Park residential communities) and is planned to be developed as a
50,000-square-foot neighborhood retail center, plus three pad sites. Leasing
activities commenced in June 2003. Construction drawings were completed in
October 2003 and bids were received in December. Construction is projected to
commence in the second quarter of 2004 and be completed 12 months later.
(vi) Alakea Corporate Tower. In March 2003, A&B acquired a Class A
31-story office building in downtown Honolulu (since re-named Alakea Corporate
Tower), for $20 million. The building contains approximately 158,300 square feet
of office space, and was acquired with the intent of converting the building
into, and selling, fee simple office condominium units. The majority of planned
improvements to the building have been completed, including the renovation of
the lobby, conference room and four floors, the installation of landscaping and
a courtyard water feature and other common area repair and renovation work. The
building was submitted to a Condominium Property Regime and fifty-three
condominium units were created, some consisting of whole floors within the
building, and others consisting of two or three units per floor. List prices for
whole floors, which include eight assigned parking stalls per floor, range from
$1 million to $1.2 million. The Final Condominium Public Report was issued for
the project in October and sales commenced in the same month. In 2003, eight
whole floors were sold, at an average price of $1.1 million per floor. As of
January 31, 2004, one floor has been sold, another three and one-half floors are
in escrow and letters of intent have been signed for another four and one-half
floors.
(b) U.S. Mainland Commercial Properties
On the U.S. mainland, A&B owns a portfolio of commercial
properties, acquired primarily by way of tax-deferred exchanges under Code
Section 1031, comprising approximately 3.7 million square feet of leasable area.
The portfolio consists of eight retail centers, four office buildings and eight
industrial properties, as follows:
Leasable Area
Property Location Type (sq. ft.)
- -------- -------- ---- -------------
Ontario Distribution Center............. Ontario, CA Industrial 895,500
Sparks Business Center.................. Sparks, NV Industrial 396,100
Ontario-Pacific Business Centre......... Ontario, CA Industrial 246,100
Centennial Plaza........................ Salt Lake City, UT Industrial 244,000
Valley Freeway Corporate Park........... Kent, WA Industrial 229,100
Boardwalk Shopping Center............... Round Rock, TX Retail 184,600
San Pedro Plaza......................... San Antonio, TX Office 163,700
2868 Prospect Park...................... Sacramento, CA Office 161,700
Arbor Park Shopping Center.............. San Antonio, TX Retail 139,500
Mesa South Shopping Center.............. Phoenix, AZ Retail 133,600
San Jose Avenue Warehouse............... City of Industry, CA Industrial 126,000
Southbank II............................ Phoenix, AZ Office 120,800
Village at Indian Wells................. Indian Wells, CA Retail 104,600
2450 Venture Oaks....................... Sacramento, CA Office 99,000
Broadlands Marketplace.................. Broomfield, CO Retail 97,900
Northwest Business Center............... San Antonio, TX Industrial/Office 87,000
Carefree Marketplace.................... Carefree, AZ Retail 85,000
Marina Shores Shopping Center........... Long Beach, CA Retail 67,700
Vista Controls Building................. Valencia, CA Industrial/Office 51,100
Wilshire Center......................... Greeley, CO Retail 46,500
In June 2003, A&B sold the Airport Square property, a
170,800-square-foot shopping center located in Reno, Nevada.
In 2003, A&B acquired the 244,000-square-foot Centennial Plaza
industrial property in Salt Lake City, Utah (September), the 184,600-square-foot
Boardwalk Shopping Center in Round Rock, Texas (March), the 97,900-square-foot
Broadlands Marketplace in Broomfield, Colorado (October), and the
51,100-square-foot Vista Controls Building in Valencia, California (March). All
of these properties were acquired in Code Section 1031 exchanges.
A&B's Mainland commercial properties achieved an average occupancy rate
of 93 percent in 2003 (compared with 92 percent in 2002). The increase was due
primarily to additions of fully-leased properties to the portfolio.
In January 2003, A&B signed a joint venture agreement with Westridge
Executive Building, LLC, for the development of a 63,000-square-foot office
building in Valencia, California. Construction commenced in January and the
building shell was completed in November. The building is approximately 74
percent leased under binding leases, with an additional 15 percent of the
building under lease negotiations or executed letters of intent. Major tenants
include Wells Fargo, Pardee Homes and Realty Executives. Full lease-up is
anticipated in 2004.
C. Food Products
(1) Production
A&B has been engaged in activities relating to the production of cane
sugar and molasses in Hawaii since 1870, and production of coffee in Hawaii
since 1987. A&B's current food products operations consist of a sugar plantation
on the island of Maui, operated by its Hawaiian Commercial & Sugar Company
("HC&S") division, and a coffee farm on the island of Kauai, operated by its
Kauai Coffee Company, Inc. ("Kauai Coffee") subsidiary.
HC&S is Hawaii's largest producer of raw sugar, having produced
approximately 205,700 tons of raw sugar in 2003, or about 79 percent of the raw
sugar produced in Hawaii (compared with 215,900 tons or about 79 percent in
2002). The decrease in production was due primarily to an extended drought on
Maui, rainy weather late in the year, and arson to nearly 900 acres of cane.
Total Hawaii sugar production, in turn, amounted to approximately 5 percent of
total U.S. sugar production. HC&S harvested 15,660 acres of sugar cane in 2003
(compared with 16,557 in 2002). The decrease in acres harvested was due
primarily to weather-related slowdowns. Yields averaged 13.1 tons of sugar per
acre in 2003 (compared with 13 in 2002). The average cost per ton of sugar
produced at HC&S was $371 in 2003 (compared with $332 in 2002). The increase in
cost per ton was attributable to lower sugar production and higher operating
costs. As a by-product of sugar production, HC&S also produced approximately
72,500 tons of molasses in 2003 (compared with 74,300 in 2002).
In 2003, approximately 12,900 tons of sugar produced by HC&S were
specialty food-grade raw sugars and sold under HC&S's Maui Brand(R) trademark.
An expansion of the production facilities for these sugars was made in 2001 and
2002.
During 2003, Kauai Coffee had approximately 3,200 acres of coffee trees
under cultivation. The harvest of the 2003 coffee crop yielded approximately 3.3
million pounds of green coffee (compared with 2.8 million in 2002). The
increased production was due primarily to the inherent nature of coffee trees,
which typically produce higher yields bi-annually.
HC&S and McBryde Sugar Company, Limited ("McBryde"), a subsidiary of
A&B and the parent company of Kauai Coffee, produce electricity for internal use
and for sale to the local electric utility companies. HC&S's power is produced
by burning bagasse, by hydroelectric power generation and, when necessary, by
burning fossil fuels, whereas McBryde produces power solely by hydroelectric
generation. The price for the power sold by HC&S and McBryde is equal to the
utility companies' "avoided cost" of not producing such power themselves. In
addition, HC&S receives a capacity payment to provide a guaranteed power
generation capacity to the local utility. See "Energy" below for power
production and sales data.
Kahului Trucking & Storage, Inc., a subsidiary of A&B, provides sugar
and molasses hauling and storage, petroleum hauling, mobile equipment
maintenance and repair services and self-service storage facilities on Maui.
Kauai Commercial Company, Incorporated, another subsidiary of A&B, provides
similar services on Kauai, as well as general trucking services.
(2) Marketing of Sugar and Coffee
Substantially all of the bulk raw sugar produced in Hawaii is
purchased, refined and marketed by C&H Sugar Company, Inc. ("C&H"), of which A&B
owns approximately 36 percent of its common voting stock, 40 percent of its
junior preferred stock and 100 percent of its senior preferred stock. The
results of A&B's equity investment in C&H are reported in A&B's financial
statements as an investment in an affiliate. C&H processes the raw cane sugar at
its refinery at Crockett, California, and markets the refined products primarily
in the western and central United States. HC&S markets its specialty food-grade
raw sugars to food and beverage producers and to retail stores under its Maui
Brand(R) label, and to distributors that repackage the sugars under their own
labels. HC&S's largest food-grade raw sugar customers are Cumberland Packing
Corp. and Sugar Foods Corporation, which repackage HC&S's turbinado sugar for
their "Sugar in the Raw" products.
Hawaiian Sugar & Transportation Cooperative ("HS&TC"), a cooperative
consisting of two sugar cane growers in Hawaii (including HC&S), has a supply
contract with C&H, ending in December 2008. Pursuant to the supply contract, the
growers sell their raw sugar to C&H at a price equal to the New York No. 14
Contract settlement price, less a discount and less costs of sugar vessel
discharge and stevedoring. This price, after deducting the marketing, operating,
distribution, transportation and interest costs of HS&TC, reflects the gross
revenue to the Hawaii sugar growers, including HC&S. Notwithstanding the supply
contract, HC&S arranged directly with C&H for the forward pricing of a portion
of its 2003 harvest, as described in Item 7A ("Quantitative and Qualitative
Disclosures About Market Risk") of Part II below.
At Kauai Coffee, coffee marketing efforts are directed toward
developing a market for premium-priced, estate-grown Kauai green coffee. Most of
the coffee crop is being marketed on the U.S. mainland and in Asia as green
(unroasted) coffee. In addition to the sale of green coffee, Kauai Coffee
produces and sells roasted, packaged coffee in Hawaii under the Kauai Coffee(R)
trademark.
(3) Competition and Sugar Legislation
Hawaii sugar growers produce more sugar per acre than most other major
producing areas of the world, but that advantage is offset by Hawaii's high
labor costs and the distance to the U.S. mainland market. Hawaiian refined sugar
is marketed primarily west of Chicago. This is also the largest beet sugar
growing and processing area and, as a result, the only market area in the United
States that produces more sugar than it consumes. Sugar from sugar beets is the
greatest source of competition in the refined sugar market for the Hawaiian
sugar industry.
The overall U.S. caloric sweetener market continues to grow. The use of
non-caloric (artificial) sweeteners accounts for a relatively small percentage
of the domestic sweetener market. The anticipated increased use of high fructose
corn syrup and artificial sweeteners is not expected to affect sugar markets
significantly in the near future.
The U.S. Congress historically has sought, through legislation, to
assure a reliable domestic supply of sugar at stable and reasonable prices. The
current protective legislation is the Farm Security and Rural Investment Act of
2002 ("2002 Farm Bill"). The two main elements of U.S. sugar policy are the
tariff-rate quota ("TRQ") import system and the price support loan program. The
TRQ system limits imports by allowing only a quota amount to enter the U.S.
after payment of a relatively low tariff. A higher, over-quota tariff is imposed
for imported quantities above the quota amount.
The 2002 Farm Bill reauthorized the sugar price support loan program,
which supports the U.S. price of sugar by providing for commodity-secured loans
to producers. Unlike most other commodity programs, sugar loans are made to
processors and not directly to producers. HC&S is both a producer and a
processor. To qualify for loans, processors must agree to provide a part of the
loan payment to producers. Loans may be repaid either in cash or by forfeiture
without penalty. The 2002 Farm Bill eliminated the former loan forfeiture
penalty and marketing assessments, which increased the effective support level.
Under the 2002 Farm Bill, the government is required to administer the
loan program at no net cost by avoiding sugar loan forfeitures. This is
accomplished by reestablishing marketing allotments, which provides each
processor or producer a specific limit on sales for the year, above which
penalties would apply. It is also accomplished by adjusting fees and quotas for
imported sugar to maintain the domestic price at a level that discourages
producers from defaulting on loans. A loan rate (support price) of 18 cents per
pound for raw cane sugar is in effect for the 2003 through 2007 crops. The
supply agreement between HS&TC and C&H allows HS&TC to place sugar under loan
pursuant to the loan program, but prohibits forfeiting sugar under loan while
providing a "floor" price.
In 2003, U.S. domestic raw sugar prices declined and remain below
historical averages. The pricing situation continues to be challenging, even to
efficient producers like HC&S. A chronological chart of the average U.S.
domestic raw sugar prices, based on the average daily New York No. 14 Contract
settlement price for domestic raw sugar, is shown below:
[CHART]
JAN-00 17.70
FEB 17.05
MAR 18.46
APR 19.41
MAY 19.12
JUN 19.26
JUL 17.64
AUG 18.13
SEP 18.97
OCT 21.20
NOV 21.39
DEC 20.53
JAN-01 20.81
FEB 21.18
MAR 21.40
APR 21.51
MAY 21.19
JUN 21.04
JUL 20.64
AUG 21.01
SEP 20.87
OCT 20.85
NOV 21.19
DEC 21.35
JAN-02 21.03
FEB 20.63
MAR 19.92
APR 19.64
MAY 19.52
JUN 19.82
JUL 20.86
AUG 20.92
SEP 21.65
OCT 22.05
NOV 22.22
DEC 21.94
JAN-03 21.62
FEB 21.67
MAR 22.14
APR 21.87
MAY 21.80
JUN 21.55
JUL 21.32
AUG 21.29
SEP 21.34
OCT 20.97
NOV 20.90
DEC 20.38
Liberalized international trade agreements, such as the General
Agreement on Tariffs and Trade, or GATT, include provisions relating to
agriculture that can affect the U.S. sugar or sweetener industries materially.
Recent negotiations under the U.S.-Central America Free Trade Agreement, or
CAFTA, as well as other trade discussions, have resulted in lower U.S. sugar
prices.
Kauai Coffee competes with coffee growers located worldwide, including
in Hawaii. Due to an oversupply of coffee in the marketplace, coffee commodity
prices continue to be adversely affected and are near record lows.
(4) Properties and Water
The HC&S sugar plantation, the largest in Hawaii, consists of
approximately 43,300 acres of land, including 2,000 acres leased from the State
of Hawaii and 1,300 acres under lease from private parties. Over 37,000 acres
are under cultivation, and the balance either is used for contributory purposes,
such as roads and plant sites, or is not suitable for cultivation.
McBryde owns approximately 9,500 acres of land on Kauai, of which
approximately 2,400 acres are used for watershed and other conservation uses,
approximately 3,400 acres are used by Kauai Coffee and the remaining acreage is
leased to various agricultural enterprises for cultivation of a variety of crops
and for pasturage.
It is crucial for HC&S and Kauai Coffee to have access to reliable
sources of water supply and efficient irrigation systems. A&B's plantations
conserve water by using a "drip" irrigation system that distributes water to the
roots through small holes in plastic tubes. All but a small area of the
cultivated cane land farmed by HC&S is drip irrigated. All of Kauai Coffee's
fields also are drip irrigated.
A&B owns 16,000 acres of watershed lands on Maui that supply a portion
of the irrigation water used by HC&S. A&B also held four water licenses to
another 38,000 acres owned by the State of Hawaii on Maui, which over the years
has supplied approximately one-third of the irrigation water used by HC&S. The
last of these water license agreements expired in 1986, and all four agreements
have since been extended as revocable permits that are renewable annually. In
2001, a request was made to the State Board of Land and Natural Resources to
replace these revocable permits with a long-term water lease. Pending the
conclusion of a contested case hearing before the Board on the request for the
long-term lease, the Board renewed the existing permits.
D. Employees and Labor Relations
As of December 31, 2003, A&B and its subsidiaries had approximately
2,041 regular full-time employees. About 971 regular full-time employees were
engaged in the growing of sugar cane and coffee and the production of raw sugar
and green coffee; 897 were engaged in transportation; 46 were engaged in
property development and management and the balance was in administration and
miscellaneous operations. Approximately 55 percent were covered by collective
bargaining agreements with unions.
As of December 31, 2003, Matson and its subsidiaries also had
approximately 285 seagoing employees. Approximately 22 percent of Matson's
regular full-time employees and all of the seagoing employees were covered by
collective bargaining agreements.
Historically, collective bargaining with longshore and seagoing unions
has been complex and difficult. However, Matson and Matson Terminals consider
their relations with those unions, other unions and their non-union employees
generally to be satisfactory.
Matson's seagoing employees are represented by six unions, three
representing unlicensed crew members and three representing licensed crew
members. Matson negotiates directly with these unions. During 2003, Matson and
its licensed deck and engineering officers extended existing agreements for four
years through 2009 and entered into separate ten-year agreements covering
Matson's two new containerships. Matson and its radio officers extended their
existing agreement for four years through 2007 and entered into a separate
agreement through 2007 covering the two new ships. No agreements with offshore
personnel are scheduled to expire in 2004.
As described in "Transportation - Rate Regulation" above, SSAT, the
previously-described joint venture of Matson and SSA, provides stevedoring and
terminal services for Matson vessels calling at U.S. Pacific Coast ports.
Matson, SSA and SSAT are members of the Pacific Maritime Association ("PMA")
which, on behalf of its members, negotiates collective bargaining agreements
with the ILWU on the U.S. Pacific Coast. Matson Terminals provides stevedoring
and terminal services to Matson vessels calling at Honolulu. Matson Terminals is
a member of the Hawaii Stevedore Industry Committee ("SIC") which, on behalf of
its members, negotiates with the ILWU in Hawaii.
During 2003, Matson renewed its collective bargaining agreement with
ILWU clerical workers at Honolulu and Oakland for six-year terms through June
2008. In 2004, Matson expects to renew its agreement with ILWU clerical workers
at Long Beach without service interruption.
During 2003, Matson contributed to multi-employer pension plans for
vessel crews. If Matson were to withdraw from or significantly reduce its
obligation to contribute to one of the plans, Matson would review and evaluate
data, actuarial assumptions, calculations and other factors used in determining
its withdrawal liability, if any. In the event that any third parties materially
disagree with Matson's determination, Matson would pursue the various means
available to it under federal law for the adjustment or removal of its
withdrawal liability. Matson Terminals participates in a multi-employer pension
plans for its Hawaii ILWU non-clerical employees. For a discussion of withdrawal
liabilities under the Hawaii longshore and seagoing plans, see Note 10
("Employee Benefit Plans") to A&B's financial statements in Item 8 of Part II
below.
Bargaining unit employees of HC&S are covered by two collective
bargaining agreements with the ILWU. The agreements with the HC&S production
unit employees and clerical bargaining unit employees will expire January 31,
2008. One of the collective bargaining agreements covering the two ILWU
bargaining units at Kahului Trucking & Storage, Inc. was extended in 2003 and
will expire June 30, 2009, and the other general agreement will expire March 31,
2006. The two collective bargaining agreements with Kauai Commercial Company,
Incorporated employees represented by the ILWU were renegotiated in 2001 will
expire April 30, 2004. The collective bargaining agreement with the ILWU for the
production unit employees of Kauai Coffee expired January 31, 2004 and is
expected to be renewed without service interruption.
E. Energy
Matson and Matson Terminals purchase residual fuel oil, lubricants,
gasoline and diesel fuel for their operations. Residual fuel oil is by far
Matson's largest energy-related expense. In 2003, Matson vessels purchased
approximately 1.7 million barrels of residual fuel oil, the same as in 2002.
Residual fuel oil prices paid by Matson started in 2003 at $24.92 per
barrel and ended the year at $27.92. The low for the year was $17.59 per barrel
in May and the high was $36.54 in July. Sufficient fuel for Matson's
requirements is expected to be available in 2004.
As has been the practice with sugar plantations throughout Hawaii, HC&S
uses bagasse, the residual fiber of the sugar cane plant, as a fuel to generate
steam for the production of most of the electrical power for sugar milling and
irrigation pumping operations. In addition to bagasse, HC&S uses diesel fuel
oil, boiler fuel oil and coal to produce power during the factory shutdown
period when bagasse is not being produced. In 2003, HC&S produced and sold,
respectively, approximately 211,500 MWH and 82,200 MWH of electric power
(compared with 220,300 MWH produced and 87,400 MWH sold in 2002). The decrease
in power produced and sold was due to an extended drought, which reduced
hydroelectric power production and increased irrigation pumping of well water.
HC&S's oil use decreased to approximately 17,900 barrels in 2003, from
approximately 22,600 barrels used in 2002. However, coal use for power
generation increased to approximately 52,500 short tons in 2003, from 46,700
short tons in 2002. The increase in coal use was attributed to the
unavailability of bagasse supplies for the boilers caused by a delayed harvest
season and the smaller cane crop, and to the lack of hydroelectric power
resulting from the extended drought.
In 2003, McBryde produced approximately 30,100 MWH of hydroelectric
power (compared with 33,300 MWH in 2002). Power sales in 2003 amounted to
approximately 21,200 MWH (compared with 24,400 MWH in 2002). The decrease in
power production and sales was due primarily to reduced rainfall in 2003.
F. Available Information
A&B files reports with the Securities and Exchange Commission (the
"SEC"). The reports and other information filed include: Forms 10-K, 10-Q, 8-K
and other reports and information filed under the Securities Exchange Act of
1934 (the "Exchange Act").
The public may read and copy any materials A&B files with the SEC at
the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549.
The public may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet website that
contains reports, proxy and information statements, and other information
regarding A&B and other issuers that file electronically with the SEC. The
address of that website is www.sec.gov.
A&B makes available, free of charge on or through its Internet website,
A&B's annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable
after it electronically files such material with, or furnishes it to, the SEC.
The address of A&B's Internet website is www.alexanderbaldwin.com.
ITEM 3. LEGAL PROCEEDINGS
See "Business and Properties - Transportation - Rate Regulation" above
for a discussion of rate and other regulatory matters in which Matson is
routinely involved.
On September 14, 1998, Matson was served with a complaint filed by the
Government of Guam with the Surface Transportation Board, alleging that Sea-Land
Services, Inc., APL and Matson have charged unreasonable rates in the Guam trade
since January 1991. Matson did not begin its Guam Service until February 1996.
In 2002, APL was dismissed as a defendant based on the statute of limitations.
On April 23, 2002, the parties filed initial briefs addressing the appropriate
rate reasonableness methodology to be applied. There has been no material
activity in this proceeding since the parties filed reply briefs on June 17,
2002.
In August 2001, HC&S self-reported to the State of Hawaii Department of
Health (the "DOH") possible violations of state and federal air pollution
control regulations relating to a boiler at HC&S's Maui sugar mill. The boiler
was constructed in 1974 and HC&S thereafter operated the boiler in compliance
with the permits issued by the DOH. Because the boiler is fueled with less than
50 percent fossil fuels and is therefore a "biomass boiler" under state air
pollution control rules, the DOH initially concluded, and the DOH permits
reflected, that the boiler was not subject to the more stringent regulations
applicable to "fossil fuel-fired" boilers. In 2001, HC&S identified federal
regulatory guidance that provides that a boiler that burns any amount of fossil
fuel may be a "fossil fuel-fired boiler." HC&S then voluntarily reported the
possible compliance failures to the DOH. In September 2003, the DOH issued to
HC&S a Notice and Finding of Violation and proposed penalty of $1.98 million.
The amount of the penalty is being contested. In the opinion of management,
after consultation with counsel, this matter will not have a material adverse
effect on A&B's results of operations or financial position.
In January 2004, a petition was filed by the Native Hawaiian Legal
Corporation (the "NHLC"), on behalf of four individuals, requesting that the
State of Hawaii Board of Land and Natural Resources (the "BLNR") declare that
A&B and its subsidiaries (collectively, the "Company") have no current legal
authority to continue to divert water from streams in East Maui for use in the
Company's sugar growing operations, and to order the immediate full restoration
of these streams until a legal basis is established to permit the diversions of
the streams. The Company has objected to the petition, asked the BLNR to conduct
administrative hearings on the matter, and asked that the matter be consolidated
with the Company's currently pending application before the BLNR for a long-term
water license. If the Company is not permitted to divert stream waters for its
use, it would have a significant adverse effect on the Company's sugar
operations.
A&B and its subsidiaries are parties to, or may be contingently liable
in connection with, other legal actions arising in the normal conduct of their
businesses, the outcomes of which, in the opinion of management after
consultation with counsel, would not have a material adverse effect on A&B's
results of operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
For the information about executive officers of A&B required to be
included in this Part I, see section B ("Executive Officers") in Item 10 of Part
III below, which is incorporated herein by reference.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
A&B common stock is listed on The Nasdaq Stock Market and trades under
the symbol "ALEX." As of February 9, 2004, there were 3,944 shareholders of
record of A&B common stock. In addition, Cede & Co., which appears as a single
record holder, represents the holdings of thousands of beneficial owners of A&B
common stock.
A summary of daily stock transactions is listed in the Nasdaq National
Market Issues section of major newspapers. Trading volume averaged 155,900
shares a day in 2003, compared with 150,600 shares a day in 2002 and 135,600 in
2001.
The quarterly high and low sales prices and closing prices, as reported
by The Nasdaq Stock Market, and cash dividends paid per share of common stock,
for 2003 and 2002, were as follows:
Dividends Market Price
Paid High Low Close
---- ---- --- -----
2003
----
First Quarter $0.225 $26.90 $23.50 $24.86
Second Quarter 0.225 27.70 24.35 26.10
Third Quarter 0.225 30.03 25.76 28.36
Fourth Quarter 0.225 34.60 27.94 33.75
2002
----
First Quarter $0.225 $28.01 $23.98 $27.61
Second Quarter 0.225 29.25 24.74 25.80
Third Quarter 0.225 26.19 21.50 22.25
Fourth Quarter 0.225 26.50 20.50 25.79
Although A&B expects to continue paying quarterly cash dividends on its
common stock, the declaration and payment of dividends in the future are subject
to the discretion of the Board of Directors and will depend upon A&B's financial
condition, results of operations, cash requirements and other factors deemed
relevant by the Board of Directors. A&B strives to pay the highest possible
dividends commensurate with operating and capital needs. A&B has paid cash
dividends each quarter since 1903. The most recent increase in the quarterly
dividend rate was effective the first quarter of 1998, from 22 cents per share
to 22.5 cents. In 2003, dividend payments to shareholders totaled $37,409,000,
which was 46 percent of reported net income for the year. The following dividend
schedule for 2004 has been set, subject to final approval by the Board of
Directors:
Quarterly Dividend Declaration Date Record Date Payment Date
------------------ ---------------- ----------- ------------
First January 22 February 19 March 4
Second April 22 May 6 June 3
Third June 24 August 5 September 2
Fourth October 28 November 11 December 2
A&B common stock is included in the Dow Jones U.S. Transportation
Average, the Dow Jones U.S. 65 Stock Composite, the Dow Jones U.S. Industrial
Transportation Index, the Dow Jones Marine Transportation Index, the S&P MidCap
400, the Russell 2000 Index and the Russell 3000 Index.
There were no shares of A&B common stock repurchased by the Company
during 2003 or 2002. During 2001, A&B repurchased 105,000 shares of its stock
for an average price of $21.61 per share. A&B's Board of Directors has
authorized A&B to repurchase up to two million shares of its common stock.
A&B has a Shareholder Rights Plan, designed to protect the interests of
shareholders in the event an attempt is made to acquire the company. The rights
initially will trade with A&B's outstanding common stock and will not be
exercisable absent certain acquisitions or attempted acquisitions of specified
percentages of such stock. If exercisable, the rights generally entitle
shareholders (other than the acquiring party) to purchase additional shares of
A&B's stock or shares of an acquiring company's stock at prices below market
value.
Securities authorized for issuance under equity compensation plans as
of December 31, 2003, included:
- ----------------------------------------------------------------------------------------------------------------------
Number of securities
remaining available for
Number of securities to be Weighted-average exercise future issuance under
Plan Category issued upon exercise of price of outstanding equity compensation plans
outstanding options, options, warrants and (excluding securities
warrants and rights rights reflected in column (a))
(a) (b) (c)
- ----------------------------------------------------------------------------------------------------------------------
Equity compensation plans 2,476,000 $24.57 1,598,494
approved by security holders
- ----------------------------------------------------------------------------------------------------------------------
Equity compensation plans
not approved by security
holders -- -- 271,719*
- ----------------------------------------------------------------------------------------------------------------------
Total 2,476,000 $24.57 1,870,213
- ----------------------------------------------------------------------------------------------------------------------
* A&B has two compensation plans under which its stock is authorized for
issuance that were adopted without the approval of its security
holders. (1) Under A&B's Non-Employee Director Stock Retainer Plan,
each outside Director is issued a stock retainer of 300 A&B shares
after each year of service on A&B's Board of Directors. Those 300
shares vest immediately and are free and clear of any restrictions.
These shares are issued in January of the year following the year of
the Director's service to A&B. (2) Under A&B's Restricted Stock Bonus
Plan, the Compensation and Stock Option Committee identifies the
executive officers and other key employees who participate in one- and
three-year performance improvement incentive plans and formulates
performance goals to be achieved for the plan cycles. At the end of
each plan cycle, results are compared with goals, and awards are made
accordingly. Participants may elect to receive awards entirely in cash
or up to 50 percent in shares of A&B stock and the remainder in cash.
If a participant elects to receive a portion of the award in stock, an
additional 50 percent stock bonus may be awarded. In general, shares
issued under the Restricted Stock Bonus Plan may not be traded for
three years following the award date; special vesting provisions apply
for the death, termination or retirement of a participant.
Of the 271,719 shares that were available for future issuance, 7,950
shares were available for future issuance under the Non-Employee
Director Stock Retainer Plan and 263,769 shares were available for
issuance under the Restricted Stock Bonus Plan.
ITEM 6. SELECTED FINANCIAL DATA
The following financial data should be read in conjunction with Item 8,
"Financial Statements and Supplementary Data," and Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
(dollars and shares in millions, except per-share amounts):
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
ANNUAL OPERATIONS
Total revenue1 $ 1,233 $ 1,088 $ 1,059 $ 1,052 $ 989
Dividends -- -- 4 3 3
Gain on sale of investment -- -- 126 -- --
Cost of goods sold and operating
expenses1 1,039 939 915 844 812
Depreciation and amortization1 73 70 74 70 72
Interest expense 12 12 19 24 18
Income taxes1 40 21 65 42 31
-------- -------- --------- --------- ---------
Income from continuing operations
before accounting changes 69 46 116 75 59
Discontinued operations - real estate2 12 12 4 4 4
Discontinued operations - agribusiness3 -- -- (9) -- --
Cumulative effect of change in
accounting methods4 -- -- -- 12 --
-------- -------- --------- --------- ---------
Net income $ 81 $ 58 $ 111 $ 91 $ 63
======== ======== ========= ========= =========
Comprehensive income $ 100 $ 31 $ 49 $ 103 $ 49
Earnings per share: From continuing operations before accounting change:
Basic $ 1.67 $ 1.12 $ 2.86 $ 1.82 $ 1.37
Diluted $ 1.66 $ 1.11 $ 2.85 $ 1.81 $ 1.37
Net Income:
Basic $ 1.95 $ 1.42 $ 2.73 $ 2.21 $ 1.45
Diluted $ 1.94 $ 1.41 $ 2.72 $ 2.21 $ 1.45
Return on beginning equity 11.2% 8.2% 15.9% 13.5% 9.0%
Cash dividends per share $ 0.90 $ 0.90 $ 0.90 $ 0.90 $ 0.90
Average number of shares outstanding 41.6 41.0 40.5 40.9 43.2
Effective income tax rate 37.0% 33.0% 36.0% 36.5% 34.5%
MARKET PRICE RANGE
High $ 34.60 $ 29.25 $ 29.61 $ 28.25 $ 27.13
Low 23.50 20.50 20.61 17.94 18.63
Close 33.75 25.79 26.70 26.25 22.81
AT YEAR END
Shareholders of record 3,959 4,107 4,252 4,438 4,761
Shares outstanding 42.2 41.3 40.5 40.4 42.5
Shareholders' equity $ 811 $ 724 $ 711 $ 694 $ 671
Per-share 19.22 17.54 17.54 17.19 15.78
Total assets 1,760 1,553 1,544 1,666 1,562
Working capital 64 83 24 56 60
Current ratio 1.3 to 1 1.5 to 1 1.1 to 1 1.4 to 1 1.4 to 1
Real estate developments - noncurrent $ 77 $ 42 $ 48 $ 63 $ 61
Investments - noncurrent 68 33 33 183 159
Capital Construction Fund 165 208 159 150 145
Long-term debt - noncurrent 330 248 207 331 278
Debt to debt plus capital 29.8% 26.2% 24.2% 34.2% 30.9%
1 Prior year amounts restated for amounts treated as discontinued
operations and to be consistent with the current year presentation.
2 Discontinued Operations - The sales of certain income-producing assets
are classified as discontinued operations if the operations and cash
flows can be distinguished from the remaining assets of the Company,
if cash flows for the assets 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. This is described
further in Note 3 of Item 8 of the Company's Form 10-K.
3 Discontinued Operations - Agribusiness includes the closing of
operations and abandonment of the Company's panelboard manufacturing
business in 2001. The loss included closure costs of $3 million and an
$11 million write-down of machinery and equipment associated with that
business.
4 The cumulative change in accounting in 2000 was for the change in
method of accounting for vessel drydocking costs from the accrual
method to the deferral method.
Amounts in Item 6 are rounded to millions, but per-share calculations and
percentages were calculated based on thousands. Accordingly, a
recalculation of some per-share amounts and percentages, if based on the
reported data, may be slightly different than the more accurate amounts
included herein.
ITEM 7. 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
consolidated financial statements and related notes thereto. Amounts in this
narrative are rounded to millions, but per-share calculations and percentages
were calculated based on thousands. Accordingly, a recalculation of some
per-share amounts and percentages, if based on the reported data, may be
slightly different than the more accurate amounts included herein.
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, principally in the
Company's transportation businesses;
4) legislative and regulatory environments at the federal, state and
local levels, including, among others, 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 and the ability to sell
raw sugar to C&H Sugar Company, Inc. ("C&H");
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) renewal or replacement of significant agreements including,
but not limited to, lease agreements and Matson's alliance and
charter agreement with American President Lines, Ltd. (see
"Charter Agreements" on page 33);
13) acts of nature, including but not limited to, drought, greater than
normal rainfall, hurricanes and typhoons;
14) acts of war and terrorism;
15) risks associated with current or future litigation; and
16) other risk factors described elsewhere in these communications and
from time to time in the Company's filings with the SEC.
CONSOLIDATED RESULTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------------------
(dollars in millions, except per-share amounts) 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------
Operating Revenue $ 1,233 $ 1,088 $ 1,059
Operating Costs & Expenses $ 1,112 $ 1,009 $ 989
Other Income and (Expenses) $ (12) $ (12) $ 111
Income Taxes $ 40 $ 21 $ 65
Net Income $ 81 $ 58 $ 111
Other Comprehensive Income (Loss) $ 19 $ (27) $ (62)
- ----------------------------------------------------------------------------------------------------------
Basic Earnings Per Share $ 1.95 $ 1.42 $ 2.73
- ----------------------------------------------------------------------------------------------------------
Operating Revenue for 2003 increased $145 million, or 13 percent,
compared with 2002. Ocean transportation contributed 62 percent of the increase
due principally to the addition of terminal handing charges, an increase in
cargo volume and other rate actions. Logistics services contributed 29 percent
to the increase due to top-line business growth. Property leasing contributed 9
percent due principally to purchases of new income-producing properties and
increased rents and occupancies. Property sales and food products revenue were
comparable to 2002. The property leasing and property sales revenue included in
the Consolidated Statements of Income are stated after discontinued operations.
Operating revenue for 2002 increased by $29 million or 3 percent
compared with 2001. Ocean transportation increased $5 million compared with 2001
due to rate actions and higher Hawaii Service container volumes. Revenue for
2002 was adversely affected by terrorist events of September 11, 2001 and by
West Coast port disruptions late in 2002. Logistics services revenue increased
$73 million due to top-line business growth. Property leasing increased $5
million due to increased rents partially offset by lower occupancies. Property
sales were $61 million lower than in 2001. This resulted from the 2001 adoption
of Statement of Financial Accounting Standard ("SFAS") No. 144 "Accounting for
the Impairment or Disposal of Long-Lived Assets." SFAS 144 required that
transactions that were initiated prior to the adoption of the standard should
not be treated as discontinued operations. Food products revenue increased by $7
million due to higher sugar production and modestly higher raw sugar prices.
Because the Company regularly develops and sells income producing real
estate, the revenue trends for these two segments are best understood before
subtracting discontinued operations. This analysis is provided in the Analysis
of Operating Revenue and Profit below.
Operating Costs and Expenses for 2003 increased by $103 million, or 10
percent, compared with 2002. Cost of transportation services increased by $26
million due to higher terminal and vessel operating costs (both of which were
due to higher volume), higher pension costs of $10 million and an accrual of $5
million in 2003 for the settlement of a claim with the State of Hawaii offset by
improved performance of joint ventures and by a pension settlement gain of $17
million that resulted from the formation of a new Hawaii Terminals Multiemployer
plan. Costs of logistics services increased $40 million due to business growth.
Costs of property sales and leasing services, after removing discontinued
operations, increased by $3 million due to increased operating and maintenance
costs, net of joint venture results. Cost of agricultural goods and services
increased by $9 million due to higher pension, personnel, maintenance and
insurance costs. Selling, General and Administrative costs increased by $17
million due to higher pension, health benefit, and business insurance costs.
Operating costs for 2003 also include an $8 million write-down of the carrying
value of C&H Sugar Company, Inc. ("C&H.")
Operating Costs and Expenses for 2002 increased by $20 million, or 2
percent compared with 2001. Cost of transportation services increased by $23
million due to higher freight costs associated with the late 2002 West Coast
port disruptions and higher pension costs partially offset by lower vessel
operating costs. Costs of logistics services increased $63 million due to
business growth. Costs of property sales and leasing services declined by $44
million due to the adoption of SFAS 144 that resulted in a different accounting
treatment for property sales initiated after adoption of the standard. Selling,
General and Administrative expenses increased $8 million in 2002 compared with
2001 because of higher pension, employee benefit and business insurance costs.
The comparison of operating costs and expenses also was affected by the 2001
write-downs of power generation equipment by $5 million, the Company's
investment in C&H by $29 million, and the panelboard manufacturing subsidiary on
Maui by $9 million.
Additional information about year-to-year fluctuations is included
under the caption Analysis of Operating Revenue and Profit.
Other Income and Expenses is composed of interest expense and gains on
sales of assets. Interest expense of $12 million for 2003 was the same as 2002.
Interest expense in 2001 was $19 million reflecting higher interest rates and
greater amounts drawn on credit facilities. 2001 also included a $126 million
gain on the sale of marketable securities. This gain was the result of the
Company divesting its holdings in BancWest Corporation and Bank of Hawaii
Corporation.
Income Taxes were higher for 2003 compared with 2002 due primarily to
higher pre-tax income and a higher effective tax rate of 37 percent versus 33
percent for the two years, respectively. The 2001 effective tax rate was 36
percent.
Other Comprehensive Income or Loss for 2003 and 2002 comprised the
minimum pension liability adjustments (Note 10 in Item 8 of the Company's 2003
Form 10-K) and the change in fair value of the treasury lock agreement (Note 8
in Item 8 of the Company's 2003 Form 10-K). The 2001 amount reflected the
reversal of previously unrealized gains from the sales of marketable equity
securities when those gains were realized.
ANALYSIS OF OPERATING REVENUE AND PROFIT
Detailed information related to the operations and financial
performance of the Company's Industry Segments is included in Note 14 in Item 8
of the Company's 2003 Form 10-K. The following information should be read in
relation to information contained in that Note.
Transportation Industry
Ocean Transportation; 2003 compared with 2002
- ---------------------------------------------
- --------------------------------------------------------------------
(dollars in millions) 2003 2002 Change
- --------------------------------------------------------------------
Revenue $ 776 $ 687 13%
Operating profit $ 93 $ 42 2.2x
- --------------------------------------------------------------------
Volume (units)
Hawaii containers 162,400 152,500 6%
Hawaii automobiles 145,200 120,500 20%
Guam containers 17,800 16,300 9%
- --------------------------------------------------------------------
Transportation - Ocean Transportation revenue of $776 million for 2003
was 13 percent higher than the $687 million reported in 2002. Of this increase,
57 percent was due to the terminal handling charges and other rate actions, and
43 percent was due to higher container and automobile volume. In January 2003,
to partially offset increasing terminal operation costs, 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.
For 2003, Hawaii Service container volume was 6 percent higher than in
2002 and automobile volume was 20 percent higher reflecting the recovery in
westbound container volumes that had declined in the months following September
11, 2001, a carryover of freight into 2003 following West Cost port disruptions
in the fourth quarter of 2002, and higher market growth due, in part, to the
improving Hawaii economy. During 2003 Matson accepted delivery of a new vessel,
the M.V. Manukai, and retired two older vessels.
Automobile volume increases also reflect principally increased
automobile dealer sales but also include rental fleet replacements, partly
offset by the acceleration of some 2003 automobile carriage into the third
quarter of 2002 in anticipation of the port disruptions. During the fourth
quarter, Matson chartered a roll-on/roll-off ("RORO") vessel, the Great Land,
to accommodate customer needs in a cost effective manner. In addition to moving
the Great Land's RORO operations to a Honolulu pier that is separate from
container operations, the vessel is making direct calls to Maui. Guam Service
container volume was 9 percent higher than 2002, reflecting recovery efforts
following Typhoon Pongsona.
Operating profit of $93 million for 2003 was $51 million greater than
the $42 million reported for 2002 reflecting principally $37 million of
favorable revenue yields and improved cargo volume, a $17 million pension
settlement gain that resulted from Matson joining the newly formed Hawaii
Terminals Multiemployer Plan, $13 million due to the absence of port disruptions
that reduced 2002 operating results, $22 million due to higher margins in the
Hawaii and Guam Service due to higher volume and improved terminal productivity
and $9 million of higher returns from joint ventures. These favorable factors
were partially offset by $17 million of higher vessel operating costs due
principally to the addition of an eighth vessel in the Hawaii Service to
accommodate the higher volume, $11 million for higher general and administrative
costs, principally related to increases in pension costs, $7 million of higher
west coast terminal costs and $4.7 million for the settlement of a claim with
the State of Hawaii (See Note 13 of Item 8 to the Company's Form 10-K). To
mitigate the effects of fluctuating fuel costs, Matson charges a fuel surcharge.
Ocean Transportation; 2002 compared with 2001
- ---------------------------------------------
- ---------------------------------------------------------------------------
(dollars in millions) 2002 2001 Change
- ---------------------------------------------------------------------------
Revenue $ 687 $ 682 1%
Operating profit $ 42 $ 61 -30%
- ---------------------------------------------------------------------------
Volume (units)
Hawaii containers 152,500 149,600 2%
Hawaii automobiles 120,500 122,400 -2%
Guam containers 16,300 17,300 -6%
- ---------------------------------------------------------------------------
Ocean Transportation revenue of $687 million for 2002 was 1 percent
higher than the $682 million reported in 2001. The higher revenue was due to
higher container volumes in the Hawaii Service, partially offset by lower Guam
Service container volume and lower Hawaii Service automobile volume.
For 2002 compared with 2001, Hawaii Service container volume was 2
percent higher, Hawaii Service automobile volume was 2 percent lower and Guam
Service container volume was 6 percent lower. The increased Hawaii Service
container volume was due, in part, to the lower than normal 2001 fourth quarter
cargo that was affected adversely by terrorist events of September 11, 2001.
Hawaii container and automobile volumes were affected adversely by U.S. Pacific
Coast labor disruptions experienced in the fourth quarter of 2002.
Operating profit of $42 million declined 30 percent from the $61
million reported for 2001 reflecting principally $13 million related to 2002
disruptions in U.S. Pacific Coast ports, $6 million of higher pension and
personnel costs, a 2001 gain of $3 million from the sale of two tugboats, $2
million of higher drydocking expenses, and the 2002 write-off of $1 million in
assets made obsolete by the replacement of two cranes at the Company's Sand
Island terminal. These unfavorable factors were offset partially by $3 million
for increased contract cargo carriage and $1 million of lower vessel costs due
principally to operating one fewer vessel in the Hawaii Service during most of
2002. Matson's share of the Sea Star Line, LLC and SSA Terminals, LLC joint
venture losses, included in operating profit, was $2 million less than its share
of losses recorded in 2001.
In January 2002, Matson reduced the number of vessels in the Hawaii
Service from eight to seven. An eighth vessel was returned to the regular Hawaii
Service in December 2002 to help alleviate the cargo backlogs that resulted from
the previously discussed port disruptions. In January 2002, Matson sold two
vessels to Sea Star Line, LLC for $17 million, which approximated the vessels'
carrying value.
In 2002, the labor agreement between the International Longshore and
Warehouse Union ("ILWU") and the Pacific Maritime Association ("PMA"), of which
Matson is a member, expired. Early in the fourth quarter of 2002, following
extensive negotiations and a shutdown of West Coast port operations, the U.S.
Court of Appeals for the Ninth Circuit issued an order requiring that the ports
be re-opened and longshore workers be ordered back to work for an 80-day cooling
off period. A new agreement between the ILWU and the PMA was ratified in January
2003. A separate six-year labor agreement with the ILWU Local 142 in Hawaii was
ratified in January 2003. The impact of the new ILWU agreements increased
terminal handling and benefit costs and was the primary reason for implementing
the previously noted terminal handling charge in January 2003.
On December 8, 2002, Typhoon Pongsona hit the island of Guam, causing
extensive property and economic damage to the island, but only minor damage to
Matson's office and equipment. Repairs were completed and normal operations
quickly resumed.
Logistics Services; 2003 compared with 2002
- -------------------------------------------
- ---------------------------------------------------------------------------
(dollars in millions) 2003 2002 Change
- ---------------------------------------------------------------------------
Revenue $ 238 $ 195 22%
Operating profit $ 4 $ 3 39%
- ---------------------------------------------------------------------------
Matson Integrated Logistics, Inc. (previously Matson Intermodal System,
Inc.) provides intermodal marketing and trucking brokerage services throughout
North America. Revenue was $238 million for 2003, compared with $195 million in
2002. Operating profit was $4 million for 2003, compared with $3 million
earned in 2002. The 2003 revenue growth was primarily the result of new
business.
In the fourth quarter of 2003, Matson Integrated Logistics acquired
certain assets, obligations and contracts of TransAmerica Transportation
Services, Inc. ("TTS," which is not affiliated with the Transamerica entity that
is a subsidiary of AEGON N.V.). TTS provides truck brokerage services to
companies located throughout the United States of America, Canada and Mexico by
contracting with over 100 regionally located transportation agencies and
carriers. Headquartered in Akron, Ohio, TTS provides comprehensive truckload,
less than truckload, and logistics services. The transaction added $12 million
of assets to the consolidated balance sheet at December 31, 2003, including
goodwill of approximately $1 million. No debt was assumed in connection with the
acquisition.
Logistics Services; 2002 compared with 2001
- -------------------------------------------
- ----------------------------------------------------------------------
(dollars in millions) 2002 2001 Change
- ----------------------------------------------------------------------
Revenue $ 195 $ 122 60%
Operating profit $ 3 $ 2 94%
- ----------------------------------------------------------------------
Matson Integrated Logistics revenue was $195 million for 2002, compared
with $122 million in 2001. Operating profit was $3 million for 2002, compared
with $2 million earned in 2001. The 2002 revenue growth was primarily the result
of new business.
The revenue for intermodal services includes the total amount billed to
customers for transportation services. The primary costs of the business include
purchased transportation for that cargo. As a result, the operating profit
margins for this business are consistently lower than other A&B businesses. The
primary operating profit and investment risk in the intermodal business is the
quality of receivables, which are monitored closely by management.
Property Development and Management
Leasing; 2003 compared with 2002
- --------------------------------
- --------------------------------------------------------------------
(dollars in millions) 2003 2002 Change
- --------------------------------------------------------------------
Revenue $ 80 $ 73 10%
Operating profit $ 37 $ 33 12%
- --------------------------------------------------------------------
Occupancy Rates:
Mainland 93% 92% 1%
Hawaii 90% 89% 1%
- --------------------------------------------------------------------
Revenue, before subtracting amounts treated as discontinued operations,
was $80 million for 2003, or 10 percent higher than the $73 million reported in
2002. Operating profit, also before subtracting discontinued operations, was $37
million for 2003, or 12 percent higher than the $33 million earned in 2002. The
higher operating profit was due primarily to the purchases of new
income-producing properties as well as higher rental rates and occupancies for
both the Mainland and Hawaii portfolios. These favorable factors were partially
offset by increased operating costs and additional expense to repair a siding
problem on a commercial building and other costs. Mainland occupancy increased,
due principally to tenancy increases in industrial properties as well as the
varying mix of properties in the portfolio due to sales and acquisitions. Hawaii
occupancy increased, due principally to gains in office leasing.
Leasing; 2002 compared with 2001
- --------------------------------
- -------------------------------------------------------------------
(dollars in millions) 2002 2001 Change
- -------------------------------------------------------------------
Revenue $ 73 $ 71 3%
Operating profit $ 33 $ 34 -4%
- -------------------------------------------------------------------
Occupancy Rates:
Mainland 92% 93% -1%
Hawaii 89% 90% -1%
- -------------------------------------------------------------------
Revenue, before subtracting amounts treated as discontinued operations,
was $73 million for 2002, or 3 percent higher than the $71 million reported in
2001. Operating profit, also before subtracting discontinued operations, was $33
million for 2002, or 4 percent lower than the $34 million earned in 2001. The
decrease in operating profit was due primarily to lower occupancies, increased
operating costs, and additional maintenance expense to repair a siding problem
on a commercial building. Mainland occupancy declined, due principally to
vacancies resulting from two tenant bankruptcies. Hawaii occupancy declined, due
primarily to an office vacancy that occurred in late 2001 and which was not
re-tenanted until July 2002.
As with any large real estate portfolio of commercial properties,
occupancy levels will vary between reporting periods based on known lease
expirations, unanticipated lease terminations, and properties sold and purchased
in the interim periods. The Company's portfolio includes leases covering a wide
range of space sizes and income, with no necessary correlation between lease
size and lease income. For example, a large lease covering 480,000 square feet
of industrial warehouse space in Ontario, California expired in December 2002.
Although this lease constituted approximately 10 percent of the total space in
the Company's portfolio, it represented only 2.5 percent of the portfolio's
annual leasing revenue. In early 2003 that property was leased to a new tenant.
Property Sales; 2003 compared with 2002 and 2001
- ------------------------------------------------
- ---------------------------------------------------------------------
(dollars in millions) 2003 2002 2001
- ---------------------------------------------------------------------
Revenue $ 64 $ 93 $ 89
Operating profit $ 24 $ 19 $ 18
- ---------------------------------------------------------------------
Before subtracting amounts treated as discontinued operations, property
sales revenue was $64 million and operating profit was $24 million in 2003.
Sales during 2003 included (1) a shopping center in Nevada for $24 million, (2)
six commercial properties on Maui (including a seven-acre property that had a
low carrying cost) for $15 million, (3) 23 residential properties for $9
million, (4) eight floors in the Alakea Corporate Tower for $9 million, (5)
seven industrial lots on Oahu for $3 million, (6) five industrial lots on Maui
for $3 million and (7) two land parcels on Maui for $1 million. Operating profit
also includes the Company's share of earnings in two real estate joint ventures
of $4 million that, combined, reflects the sales of 142 residential units in
2003.
Revenue of $93 million and operating profit of $19 million in 2002
resulted from the sales of (1) a seven-building distribution complex in Texas
for $27 million, (2) a shopping center and an industrial complex in California
for $27 million, (3) several small commercial properties, an 85-acre parcel in
Upcountry Maui, and nine business parcels on Oahu and Maui for $18 million, (4)
27 residential properties for $16 million and (5) a shopping center in Colorado
for $5 million. Operating profit also includes the Company's share of earnings
in two real estate joint ventures, reflecting the sales of five residential
units in 2002.
Revenue of $89 million and operating profit of $18 million in 2001
resulted from the sales of (1) 82 residential properties for $48 million, (2)
three commercial properties in Bainbridge, Washington for $16 million, (3) a
14-acre parcel at Maui Business Park to Wal-Mart for $14 million, (4) 11
business parcels on Oahu for $5 million, (4) a 68-acre parcel for highway
widening on Maui for $2 million, (5) two industrial lots on Maui for $1 million,
and (6) several parcels on Maui for $3 million.
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.
Discontinued Operations; Properties - The sales of certain
income-producing assets are classified as discontinued operations if the
operations and cash flows of the assets clearly can be distinguished from the
remaining assets of the Company, if cash flows for the assets 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. At the time a property is
classified as "discontinued," the previously recognized revenue and expenses for
the property are reclassified to discontinued operations so historically
reported information is updated to reflect discontinued operations at each
reporting interval.
The revenue, operating profit, and after-tax effects of these
transactions for 2003, 2002 and 2001 were as follows (in millions, except
per-share amounts):
- --------------------------------------------------------------------
2003 2002 2001
- --------------------------------------------------------------------
Sales Revenue $ 37 $ 65 --
Leasing Revenue $ 1 $ 8 $ 11
Sales Operating Profit $ 18 $ 14 --
Leasing Operating Profit $ 1 $ 5 $ 6
After-tax Earnings $ 12 $ 12 $ 4
Basic Earnings Per Share $ 0.28 $ 0.30 $ 0.10
- --------------------------------------------------------------------
2003: The sales of the Nevada commercial property and five of the
commercial properties on Maui met the criteria for classification as
discontinued operations.
2002: The sales of the previously noted California, Texas, and Colorado
commercial properties, four commercial properties on Maui, and the planned sale,
within the next 12 months, of a Nevada commercial property, met the criteria for
classification as discontinued operations.
2001: As permitted by SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," comparable property sales that were initiated
prior to the Company's adoption of this accounting standard on January 1, 2001,
were not reported as discontinued operations. During 2001, the Company sold
three properties in Washington State for an aggregate price of $16 million and a
$2 million after-tax gain. Since these transactions were initiated prior to the
adoption of SFAS No. 144, accounting treatment as discontinued operations was
not required.
Consistent with the Company's intention to reinvest the sales proceeds
into new investment property, the proceeds from the sales of property treated as
discontinued operations were deposited in escrow accounts for tax-deferred
reinvestment in accordance with Section 1031 of the Internal Revenue Code.
Food Products
Food Products; 2003 compared with 2002
- --------------------------------------
- -------------------------------------------------------------------------
(dollars in millions) 2003 2002 Change
- -------------------------------------------------------------------------
Revenue $ 113 $ 113 0%
Operating profit $ 5 $ 14 -63%
- -------------------------------------------------------------------------
Tons sugar sold 205,700 215,900 -5%
- -------------------------------------------------------------------------
Revenue of $113 million for 2003 was the same as revenue reported in
2002, but operating profit declined by 63 percent. Compared with 2002, the
10,200 fewer tons sugar sold was offset by higher raw sugar prices and an
increase in specialty sugar sales that improved revenue by $4 million and
increased power sales that added $1 million to revenue. Average revenue per ton
of sugar for 2003 was 4 percent higher than in 2002.
Operating profit declined due to higher 2003 costs, with those costs
being spread over 10,200 fewer tons of sugar. Operating costs were approximately
$6 million higher than 2002 due to $4 million higher pension and personnel
costs, $1 million of higher maintenance costs and $1 million higher insurance
costs. 2003 operating profit also was reduced for an accrual related to the
proposed penalty discussed under "Environmental Matters." Year-over-year results
were also affected by the 2002 sale of obsolete equipment at a gain of $1
million.
Annual and quarterly fluctuations in sales and operating profit are
normal for this business due to weather, and other seasonality factors that
impact production. Lower sugar production during 2003 was affected by adverse
weather conditions and a series of malicious fires that consumed nearly 900
acres of sugar cane. Cane fires disrupt normal harvesting practices and result
in lower yields per acre.
Coffee production of 3.3 million pounds for 2003 was approximately
500,000 pounds higher than the 2.8 million pounds produced in 2002. Coffee
prices continue to be affected adversely by world oversupply and near record
lows. Coffee operating profit for 2003 was approximately break-even.
Approximately 94 percent of the Company's sugar production was sold to
Hawaiian Sugar & Transportation Cooperative ("HS&TC") during each of 2003 and
2002 under a standard marketing contract. HS&TC sells its raw sugar to C&H at a
price equal to the New York No. 14 Contract settlement price, less a discount
and less costs for sugar vessel discharge and stevedoring. This price, after
deducting the marketing, operating, distribution, transportation and interest
costs of HS&TC, reflects the gross revenue to the Company.
Congress is expected to consider the U.S. - Central American Free Trade
Agreement ("CAFTA") during 2004. If CAFTA is approved, it would result in more
foreign sugar imports to the U.S. because world sugar prices reflect a "dump"
market through which foreign producers often sell surplus sugar that has been
subsidized for foreign governments at a loss. Currently the Central America
allotment quota is approximately 120,000 tons or about 10 per cent of the total
U.S. import quota. CAFTA would initially increase this quota, in 2005, to
210,000 tons. This would increase by 2 percent per year for 15 years. The
resulting increase in low priced imported sugar could have a significant adverse
effect on raw sugar sales prices and C&H refined sugar prices. The Company is a
minority owner of C&H.
Food Products; 2002 compared with 2001
- --------------------------------------
- ------------------------------------------------------------------------
(dollars in millions) 2002 2001 Change
- ------------------------------------------------------------------------
Revenue $ 113 $ 106 6%
Operating profit $ 14 $ 6 2.4x
- ------------------------------------------------------------------------
Tons sugar sold 215,900 191,500 13%
- ------------------------------------------------------------------------
Revenue of $113 million for 2002 was 6 percent higher than the $106
million reported in 2001. Operating profit for 2002 was $14 million, compared
with $6 million reported in 2001. This revenue and operating profit improvement
was due primarily to higher tons sold and modestly higher sugar prices.
Operating profit in 2002 also included a gain of $1 million for the sale of
obsolete equipment. Operating profit in 2001 included a charge of $5 million for
the write-off of power generation equipment that no longer was needed in the
business and a one-time $5 million distribution from HS&TC, the cooperative that
transports and markets Hawaii sugar.
Even with the wet harvesting conditions early in 2002, total year sugar
production was 13 percent higher than 2001 production. Sugar production and
costs in 2001 were affected adversely by drought conditions.
Coffee production of 2.8 million pounds for 2002 was approximately one
million pounds lower than the 3.8 million pounds produced in 2001. During 2002,
the Company recorded an expense of $250,000 to reduce the carrying cost of
inventory to the amount it expects to realize when it is sold.
In 2001, the Company ceased the operations of, and abandoned, its
panelboard manufacturing business operated by Hawaiian DuraGreen, Inc., a wholly
owned subsidiary of A&B (reported in 2001 discontinued operations). This is
discussed further in Note 3 of Item 8 of the Company's Form 10-K for the year
ended December 31, 2003.
ECONOMIC OUTLOOK
The economy of the State of Hawaii continues to perform well, and
growth forecasts are being raised. In spite of the fact that the State's large
visitor industry still has not fully recovered from the effects of the Iraq war
and SARS, its growth rate is improving. In addition, a strong residential real
estate market and associated construction activity continue to provide sound
underpinnings for employment.
Total visitor arrivals rose 0.3 percent in November compared with
October, with the comparable year-to-date figure being an increase of one
percent. Within the total, domestic arrivals were up 2 percent, led by U.S.
West, the largest domestic market, up 5.6 percent. Year-to-date, total domestic
arrivals are up 2.8 percent, with U.S. West up 2.3 percent. Domestic visitors
represent more than 71 percent of Hawaii's total visitors. The international
market continues to be relatively weaker, but improving, however, with total
November arrivals off just 3 percent, in the context of a 9.3 percent decline
year-to-date. Visitors from Japan were up 1.9 percent in November, the first
increase since March 2003, and a good improvement over the year-to-date decline
of 11.1 percent.
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. This is the case for nearly all residential markets on
all of Hawaii's islands, in spite of the fact that these separate and distinct
markets frequently behave differently.
Associated with this level of residential real estate, construction
activity remains high, although some recent measures are off earlier peaks. For
example, the contracting tax base, a proxy for the level of construction
activity, decreased by 2.8 percent in the third quarter. On the other hand,
private building authorizations rose 5.8 percent for the three counties
reporting and construction jobs statewide were up 4.9 percent.
Looking ahead, defense spending should be a large net contributor to
the Hawaii economy. Although a sizeable number of Hawaii-based troops are being
deployed now to Iraq and Afghanistan, with an associated decline in consumption,
a number of new, very large contracts have been awarded for facilities for new
Air Force and Army units, as well as long-term, multi-billion dollar contracts
to replace, rebuild and manage military housing on Oahu. Other initiatives, such
as basing an aircraft carrier at Pearl Harbor, are under consideration.
The State of Hawaii Department of Business, Economic Development and
Tourism recently raised its projection for Hawaii's real gross state product in
2003 to 2.9 percent, its third upward revision of the year. Its comparable
estimate for 2004 is now 2.8 percent, a full percentage point higher than its
projection three months ago. This type of improvement provides more growth
opportunities for increasing demand for shipping to Hawaii, as well as for all
aspects of real estate activity.
FINANCIAL CONDITION AND LIQUIDITY
Debt and Liquid Resources: Liquid resources of the Company, 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 $545 million at December 31, 2003, an increase of $41 million from
December 31, 2002. This net increase was due primarily to $30 million in higher
available balances on revolving credit and private placement shelf facilities,
$5 million of higher cash and cash equivalent balances and $4 million of
increased receivables.
Working Capital: Working capital was $64 million at December 31, 2003,
a decrease of $19 million from the balance at the end of 2002. The lower working
capital was due primarily to $19 million of higher accrued and other liabilities
and $14 million higher accounts payable balances partially offset by $5 million
of higher cash balances, and $4 million of higher receivables. The higher other
current liability balance was due primarily to reclassification of certain
employee benefits to current from non-current and deferred operating revenue.
The higher accounts payable balance was primarily due to the growth of the
Integrated Logistics business.
At December 31, 2003, the Company had receivables totaling $160
million, compared with $156 million a year earlier. These amounts were net of
allowances for doubtful accounts of $12 million and $11 million, respectively.
The increase in receivables was mainly the result of higher cargo and growth of
the integrated logistics business in 2003. The Company's management believes
that the quality of these receivables is good and that its reserves are
adequate. The fluctuations in cash and the remaining current assets and current
liabilities resulted from normal operating activities.
Long-Term Debt and Credit Facilities: Long-term debt increased by $87
million during 2003. The additional borrowing reflected principally a $55
million Title XI bond issue, described below, that partially financed a vessel
purchase, $17 million used for the retirement of State of Hawaii Special
Facility Revenue Bonds, and $15 million of debt assumed by the Company as part
of a real estate purchase. Other fluctuations in Debt as noted on the
Consolidated Statement of Cash Flows related to other operating, working
capital, and capital expenditure needs.
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 9 years and bears an interest rate of 4.1 percent. The Company
subsequently replaced the remaining $15 million capacity with a new $75 million
private shelf agreement. This increased facility provides the Company with more
flexibility to finance capital projects and new 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 5.3 percent 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 the third
or fourth quarter 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 percent may be issued at a floating rate.
A&B also renewed, and extended for one year, its uncommitted $70
million credit line. Matson renewed, and extended for one year, its $40 million
revolving credit facility. Credit facilities are described in Note 8 in Item 8
of the Company's 2003 Form 10-K.
Capital Construction Fund: During 2003, the Company deposited $4
million into the CCF and withdrew approximately $46 million for the purchase of
a new vessel and $1 million for other qualified purposes.
Cash Flows: Cash Flows from Operating Activities were $136 million for
2003, compared with $56 million for 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.
Capital Expenditures: For 2003, capital expenditures, including
purchases of property using tax-deferred proceeds and additions to real estate
held for sale but excluding assumed debt, totaled $290 million. This was
comprised principally of $142 million for real estate acquisitions and property
development, $107 million for a new Matson vessel, $26 million for Matson's
container equipment and office relocation, and $13 million for agricultural
projects. Of the real estate related capital expenditures, $35 million was for
purchases and development of property intended to be sold as inventory and
included in Cash Flows from Operating Activities, $40 million utilized
tax-deferred proceeds and was not included in cash flows, and the remaining $67
million was recorded as Cash Flows from Investing Activities.
Real estate acquisitions during 2003 included the following:
Boardwalk Shopping Center: Purchased in March 2003 for $23 million, the
Boardwalk Shopping Center in Round Rock, Texas comprises 184,600 square
feet of retail space. In connection with the purchase, the Company
assumed a $15 million term loan that is secured by the property. The
term loan matures in January 2005, but may be repaid, without penalty,
as early as October 2004.
Alakea Corporate Tower: Purchased in March 2003 for $20 million, the
Alakea Corporate Tower is a 31-story Class "A" office building with
approximately 158,300 square feet of office space in Honolulu, Hawaii.
The Company has converted the building to fee simple office
condominiums and began selling units during the fourth quarter of 2003.
Vista Controls Building: Purchased in March 2003 for $5 million, the
Vista Controls Building is a 51,100-square-foot, two-story commercial
building in Valencia, California.
Napili Plaza: Purchased in August 2003 for $7 million, the Napili Plaza
is a 45,200-square-foot neighborhood retail center in West Maui.
Centennial Plaza: Purchased in September 2003 for $8 million, the
Centennial Plaza is a 244,000-square-foot, three-building industrial
complex in Salt Lake City, Utah.
Wailea: In October 2003, the Company and an affiliate of GolfBC Group
("GolfBC," a Vancouver, Canada-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 $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.
Broadlands Marketplace: In October 2003, the Company purchased, for
$11 million, the Broadlands Marketplace, a 97,900-square-foot,
neighborhood shopping center in Broomfield, Colorado, a suburb north
of Denver.
Tax-Deferred Real Estate Exchanges: Sales - During 2003, the Company
recorded, on a tax-deferred basis, real-estate sales proceeds of $37 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 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 $34 million is reported under the caption "Other Non-cash Information"
in the Condensed Statements of Cash Flows.
Purchases - During the 2003, the Company utilized $41 million of
tax-deferred funds to acquire new income-producing assets. As of December 31,
2003, all of the proceeds from tax-deferred sales had been reinvested.
INVESTMENTS, COMMITMENTS AND CONTINGENCIES
Investments: The Company has the following principal joint ventures,
each of which is accounted for following the equity method of accounting:
Kukui'Ula Development Company: The Kukui'Ula project on the island of
Kauai comprises 1,000 acres on the southern coast of Kauai, adjacent to the
Poipu resort. The project is planned for a resort, an 18-hole golf course,
residential and commercial use, and parks and open space. In 2002, A&B
Properties, Inc. ("Properties"), a subsidiary of A&B, accelerated development
plans for Kukui'Ula by entering into a joint venture with an affiliate of DMB
Associates, Inc. DMB is an Arizona-based developer of large master-planned
communities. During 2003, Properties contributed to the venture, title to 846
acres, a waste water treatment plant, and other improvements, totaling
approximately $28 million. The balance of the land will be transferred to the
venture upon securing further entitlements for the property. DMB will fund all
future development costs, subject to an option available to Properties, which
diminishes over time, to participate in a portion of that funding. In July 2003,
the State Land Use Commission granted urban designation for the project's
remaining acres, which will allow the entire 1,000-acre property to be developed
as one integrated project. The Kauai County Planning Commission recommended
approval of the applications on January 27, 2004, and action is anticipated by
the County Council by the third quarter of 2004. The venture had no sales
activity during 2003.
Hokua: During 2003, Properties entered into an operating agreement with
MK Management LLC, for the joint development of "Hokua at 1288 Ala Moana"
("Hokua"), a 40-story luxury residential condominium in Honolulu. Properties'
total investment in the venture is expected to be $40 million. Approximately $10
million was funded during 2003 and the remainder is expected to be funded during
2004. The joint venture has loan commitments totaling $130 million, of which
Properties guarantees approximately $18 million.
Kai Lani and HoloHolo Ku: Properties has a joint venture interest in
Kai Lani Company, LLC, a 116-unit townhouse condominium at Ko 'Olina Resort. It
also has a joint venture interest in HoloHolo Ku, a 44 single-family detached
condominium development in Waimea on the island of Hawaii. Notes receivable
totaling $7 million from these two investments were repaid during 2003.
Westridge LLC: Properties has a joint venture investment in an office
building that is being developed in Valencia, California. This building was
substantially completed in 2003.
SSA Terminals: Matson's ownership interest in SSA Terminals, LLC
("SSAT"), a West Coast stevedoring and terminal service provider, was reduced in
2002 to 35 percent from 49.5 percent, because of an agreement to eliminate the
majority owner's preferred cash return.
Sea Star Line, LLC: The operating agreement for Sea Star Line, LLC
("Sea Star"), an ocean transportation venture carrying cargo between Florida and
Puerto Rico, in which Matson is a minority owner, was revised in 2002 when
Matson chose not to participate with other owners in capital calls associated
with acquisition of the assets of a bankrupt Puerto Rico competitor. As a
result, Matson's ownership interest in Sea Star was reduced from 45 percent to
approximately 20 percent.
C&H Sugar Company: The Company owns approximately 36 percent of C&H
Sugar Company's ("C&H") common voting stock, 40 percent of its junior preferred
stock, and 100 percent of its senior preferred stock. Approximately 94 percent
of the Company's Maui sugar production is sold to C&H through an intermediary
raw sugar marketing and transportation cooperative, Hawaiian Sugar &
Transportation Cooperative. The carrying value of this investment was written
down by $8 million and $29 million in 2003 and 2001, respectively, because
expected cash flows are not expected to allow recovery of the carrying value of
the investment.
Notes 4 and 5 in Item 8 of the Company's 2003 Form 10-K provide
additional information about these investments.
Contractual Obligations: At December 31, 2003, the Company had the
following contractual obligations (in millions):
Payment due by period
-------------------------------------------------------
Less More
than 1 than 5
Contractual Obligations Total Year 1-3 Years 3-5 Years Years
----------------------- ----- ---- --------- --------- -----
Long-term debt obligations $ 345 $ 15 $ 90 $ 45 $ 195
Capital lease obligations -- -- -- -- --
Operating lease obligations 148 22 29 13 84
------- ------ ------- ------ ------
Total $ 493 $ 37 $ 119 $ 58 $ 279
======= ====== ======= ====== ======
Long-term debt obligations and lease obligations are described in Notes 8 and 9,
respectively, of Item 8 of the Company's 2003 Form 10-K.
Charter Agreements: Matson and American President Lines, Ltd. ("APL")
are parties to an eight-year Successor Alliance Slot Hire and Time Charter
Agreement dated January 28, 1998 ("Agreement"). This Agreement provides the
structure of an alliance through which Matson provides a weekly service to Guam.
Pursuant to this 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 Agreement generates annual revenue of approximately
$35 million for Matson.
In July 2003, 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. Dedicated shore-side facilities for automobiles were
opened in Oakland California and in Honolulu to accommodate cargo for this
vessel. Matson began using this vessel for the carriage of vehicles in its
Hawaii Service in October 2003.
Commitments: Commitments and financing arrangements, other than
operating lease commitments, in effect at the end of 2003 and 2002 included the
following (in millions):
Arrangement 2003 2002
----------- ---- ----
Appropriations for capital expenditures (a) $ 282 $ 104
Vessel purchases (b) $ 107 $ 214
Guarantee of Sea Star debt (c) $ 27 $ 30
Guarantee of HS&TC debt (d) $ 15 $ 15
Guarantee of Hokua debt (e) $ 18 --
Standby letters of credit (f) $ 20 $ 21
Bonds (g) $ 12 $ 14
Benefit plan withdrawal obligations (h) $ 50 $ 11
These amounts are not recorded on the Company's balance sheet and,
based on the Company's current knowledge and with the exception of items (a) and
(b), it is not expected that the Company or its subsidiaries will be called upon
to advance funds under these commitments. The value of guarantees that were
entered into or modified subsequent to December 31, 2002 are recorded as
obligations as required by Financial Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others."
(a) At December 31, 2003, the Company and its subsidiaries had an
unspent balance of total appropriations for capital expenditures
of approximately $282 million. These expenditures are primarily
for vessel maintenance, real estate developments held for
investment purposes, containers and operating equipment and
vessel modifications. There are, however, no contractual
obligations to spend the entire amount. For 2004, internal cash
flows and existing credit lines are expected to be sufficient to
finance working capital needs, dividends, capital expenditures,
and debt service.
(b) During 2002, 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 or fourth quarter
of 2004. The cost of the second ship is expected to be funded
with a combination of cash from the Capital Construction Fund,
the issuance of new debt, and operations. No significant payment
is required until the acceptance and delivery of each ship. No
obligation is recorded on the financial statements because
conditions necessary to record either a liability or an asset
have not yet been met.
(c) At December 31, 2003, Matson had guaranteed $27 million of the
debt of Sea Star 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 further reduced by
scheduled repayments of the debt by Sea Star. Certain assets of
Sea Star serve as collateral for these borrowings and would
reduce Matson's guarantee obligations. Matson has not recorded
any liability for its obligations under the guarantee because
it believes that the likelihood of making any payments is not
probable.
(d) The Company, in the fourth quarter of 2003, guaranteed up to
$15 million of HS&TC's $30 million revolving credit line.
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 December 31, 2003, the amount drawn was $10
million. The Company has not recorded a liability for its
obligation under the guarantee because it believes that the
likelihood of making any payment is not probable.
(e) Properties, in the fourth quarter of 2003, guaranteed $3
million of the $12 million component of a $130 million
construction loan agreement that was entered into by HDH, LLC,
a limited liability company that is owned by Hokua
Development Group LLC ("Hokua"), a limited liability company in
which the Company is an investor (see Note 5 of the Consolidated
Financial Statements included in Item 8). The $12 million
component was used by Hokua to acquire the land that is being
developed. The Company would be called upon to honor this
guarantee in the event that Hokua is unable to repay the
construction loan. Additionally, Properties has a limited
guarantee equal to the lesser of $15 million or 15.5 percent of
the outstanding loan balance that could be triggered if the
purchasers of condominium apartments become entitled to
rescind their purchase obligations. This could occur if Hokua
breaches covenants contained in its sales contracts or violates
the Interstate Land Sales Practices Act, the Hawaii Condominium
Act, the Securities Act of 1933 or the Securities Exchange Act
of 1934. The fair value of these guarantees was estimated at
$345,000 and is recorded as a non-current obligation of the
Company.
(f) The Company has arranged for standby letters of credit
totaling $20 million. This includes letters of credit, totaling
approximately $12 million, which 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 million for workers' compensation claims incurred by C&H
employees prior to December 24, 1998 (see Note 5 of the
Consolidated Financial Statements included in Item 8). The
letter of credit is for the benefit of the State of California
Department of Industrial Relations ("CDIR"). The Company only
would be called upon by the CDIR to honor this letter of credit
in the event of C&H's non-payment of workers' compensation
claims or insolvency. The agreement with C&H to provide this
letter of credit expired on December 24, 2003. C&H has advised
the Company that it is unable to provide a replacement security
deposit. Until C&H meets this contractual obligation, the
Company will not be released from this letter of credit. The
remaining letters of credit, totaling $5 million, are for
insurance-related matters, construction performance guarantees,
and other routine operating matters.
(g) Of the $12 million in bonds, $7 million consists of subdivision
bonds related to real estate construction projects in Hawaii.
These bonds are required by either state or county governments
to ensure that certain infrastructure work required as part of
real-estate development is completed as required. The Company
has the financial ability and intention to complete these
improvements. Also included in the total are $5 million of
customs bonds.
(h) Under special rules approved by the Pension Benefit Guaranty
Corporation ("PBGC") and adopted by the Pacific Coast longshore
plan in 1984, the Company could cease Pacific Coast cargo-
handling operations permanently and stop contributing to the
plan without any withdrawal liability, provided that the plan
meets certain funding obligations as defined in the plan. The
estimated withdrawal liabilities under the Hawaii longshore plan
and the seagoing plans aggregated approximately $50 million as
of the most recent valuation dates, based on estimates by plan
actuaries. In December 2003, Matson joined the Hawaii
Terminals Multiemployer plan. An estimate of that withdrawal
liability is included in the total withdrawal obligation.
Management has no present intention of withdrawing from and does
not anticipate termination of any of the aforementioned plans.
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. In addition, 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 ("DOH") possible violations of
state and federal air pollution control regulations at its Maui sugar mill, the
DOH issued a notice of violation and proposed penalty of approximately $2
million in September 2003. Although the Company operated in accordance with the
requirements of permits issued by the DOH 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 penalty is being contested. The
Company believes that the resolution of this matter will not have a material
effect on the Company's financial statements and that appropriate accruals for
this matter have been recorded.
Additionally, during the fourth quarter of 2003, the Company paid $1.6
million to settle a claim for payment of environmental remediation costs
incurred by the current owner of a sugar refinery site in Hawaii that previously
was owned by C&H and sold in 1994. In connection with this settlement, the
Company assumed responsibility to remediate certain parcels of the site. The
Company has accrued approximately $2 million for the estimated remediation cost.
Contingencies: 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.
In January 2004, a petition was filed by the Native Hawaiian Legal
Corporation, on behalf of four individuals, requesting that the State
of Hawaii Board of Land and Natural Resources ("BLNR") declare that the Company
has no current legal authority to continue to divert water from streams in East
Maui for use in its sugar growing operations, and to order the immediate full
restoration of these streams until a legal basis is established to permit the
diversions of the streams. The Company has objected to the petition, asked the
BLNR to conduct administrative hearings on the matter, and asked that the matter
be consolidated with the Company's currently pending application before the BLNR
for a long-term water license. If the Company is not permitted to divert stream
waters for its use, it would have a significant adverse effect on the Company's
sugar operations.
On February 6 and 7, 2004, union workers at Honolulu's two largest
concrete manufacturers, which supply most of the concrete on Oahu, went on
strike, shutting down both manufacturing operations. This shutdown had the
immediate impact of delaying the pouring of the foundation for the Hokua
project, but is not expected to have a near-term impact on construction at the
Lanikea project. Any prolonged strike will delay the completion of both
projects, as well as have wide-spread impact on construction generally on Oahu.
Although labor negotiations between union and management are ongoing, it is
difficult at this time to predict the likely duration of the strike.
CRITICAL ACCOUNTING POLICIES
The Company's accounting policies are more fully described in Note 1 of
the Consolidated Financial Statements included in Item 8. The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America, upon which the Management's Discussion and
Analysis is based, requires that management exercise judgment when making
estimates and assumptions about future events that affect the amounts reported
in the financial statements and accompanying notes. Future events and their
effects cannot be determined with absolute certainty and actual results will,
inevitably, differ from those estimates. These differences could be material.
The most significant accounting estimates inherent in the preparation
of A&B's financial statements are described below.
Asset Impairments: The Company's properties and investments are
reviewed for impairment if changing events or circumstances indicate that the
carrying amount of the assets may not be recoverable. This evaluation is based
on historical experience with similar assets and the assets' expected use in the
Company's business. The identification of impairment indicators of assets and
investments subsequent to acquisition and the estimates used in valuing these
amounts could result in different amounts recorded for property or investments
and, accordingly, the related depreciation and equity in earnings of
unconsolidated affiliates could be different.
Depreciation: Depreciation requires an estimate by management of the
useful life of each property item as well as an allocation of the costs
associated with a property to its various components. These assessments are
based on industry information as well as the Company's experience with similar
assets. If the Company changed its allocation of costs or changed the estimates
of useful lives of property, depreciation expense may be different.
Valuation of Purchased Leases and Contracts: Upon acquisition of real
estate, the Company assesses the fair value of acquired assets (including land,
buildings, tenant improvements and acquired above and below market leases and
the origination cost of acquired in-place leases in accordance with SFAS No.
141) and acquired obligations, and allocates the purchase price based on these
assessments. Different assessments could result in the carrying values of the
asset and the amortization charges being different.
Unconsolidated Affiliates: The Company accounts for its investments in
unconsolidated affiliates under the equity method when the Company's ownership
interest is more than 20 percent but less than 50 percent and the Company does
not exercise direct or indirect control over the investee. Factors that are
considered in determining whether or not the Company exercise control include
rights of partners regarding significant business decisions, including
dispositions and acquisitions of assets, board and management representation,
financing decision making, operating and capital budget approvals and
contractual rights of partners. To the extent that the Company is deemed to
control these entities, the entities would have to be consolidated. This would
affect the balance sheet, operations, and debt covenants.
Revenue Recognition and Collectibility: The Company has a wide range of
revenue types, including, for example, rental income, property sales, shipping
revenue, intermodal and logistics revenue and sales of raw sugar, molasses and
coffee. Before recognizing revenue, the Company assesses the underlying terms of
the transaction to ensure that recognition meets the requirements of relevant
accounting standards. Among these requirements is that the amount is
collectible. If assessments regarding collectibility are different, revenue and
assets could be different.
Voyage Revenue: The Company recognizes voyage revenue using the
percentage completion methods that is based on the relative transit times
between reporting periods. These transit times are very predictable, but if the
Company incorrectly estimates transit times due to unforeseen delays in transit,
revenue could be over or under stated.
Environmental Reserves: The estimated costs for environmental
remediation are recorded by the Company when the obligation is known and can be
estimated. If a range of probable loss is determined, the Company will record
the obligation at the low end of the range unless another amount in the range
better reflects the expected loss. These analyses are performed, depending on
the circumstances, by internal analysis or the use of third-party specialists.
The assumptions used in these analyses as well as the extent of the known
remediation can have an impact on the resulting valuation and that difference
could be material.
Pension and Post-retirement Estimates: The Company has defined benefit
pension plans that cover substantially all non-bargaining unit and certain
bargaining unit employees. The Company also has unfunded non-qualified plans
that provide benefits in excess of the amounts permitted to be paid under the
provisions of the tax law to participants in qualified plans. The assumptions
related to discount rates, expected long-term rates of return on invested plan
assets, salary increases, age, mortality and health care cost trend rates, along
with other factors, are used in determining the assets, liabilities and expenses
associated with pension benefits. Management reviews the assumptions annually
with its independent actuaries, taking into consideration existing and future
economic conditions and the Company's intentions with respect to these plans.
Management believes that its estimates for 2003, the more significant of which,
relating to its defined benefit pension plans are stated below, are reasonable.
Different assumptions, however, could result in material changes to the assets,
obligations and costs associated with benefit plans.
Pension income (expense) related to the Company's pension plans were
$(14) million, $1 million, and $13 million for 2003, 2002 and 2001,
respectively. The 2003 expense of $14 million does not include the settlement
gain of $17 million that resulted from the formation of the new Hawaii Terminals
Multiemployer plan. The Company expects that, in 2004, the qualified plan
expense will be approximately $2 million.
The valuation assumptions used for the Company's pension plans for each
of the three years were as follows:
Pension Benefits
----------------
2003 2002 2001
---- ---- ----
Discount rate 6.25% 6.50% 7.25%
Expected return on plan assets 8.50% 9.00% 9.00%
Rate of compensation increase 4.00% 4.25% 4.25%
The expected return on plan assets is based on the Company's historical
returns combined with long-term expectations, based on the mix of plan assets,
asset class returns, and long-term inflation assumptions, after consultation
with the firm used by the Company for actuarial calculations. One-, three-, and
five-year pension returns were 23.5 percent, -2.2 percent, and 1.4 percent,
respectively. Since 1989, the average return has been above 9 percent. These
returns have approximated or exceeded benchmark returns used by the Company to
evaluate performance of its fund managers. The Company's weighted-average asset
allocations at December 31, 2003 and 2002, and 2003 year-end target allocation,
by asset category, were as follows:
Target 2003 2002
------ ---- ----
Domestic equity securities 60% 60% 56%
International equity securities 10% 13% 11%
Debt securities 15% 16% 20%
Real Estate 15% 10% 11%
Other and cash 0% 1% 2%
---- ---- ----
Total 100% 100% 100%
==== ==== ====
The Company bases its determination of pension expense or income on
Statement of Financial Accounting Standards No. 87, which reduces year-to-year
volatility. Investment gains and losses are the difference between actual
returns on plan assets and expected returns. The cumulative investment gains or
losses are recognized over periods ranging from five to eighteen years. The
Company uses shorter amortization periods for certain plans because the benefits
offered under these plans are re-negotiated and updated more frequently than
those under the other benefit plans.
The discount rate used for benefit plan calculations is based on an
analysis, provided by the Company's actuary, of long-term bonds that receive one
of the two highest ratings given by a recognized rating agency, with durations
that approximate the benefit cash flows for the Company's employees and
retirees.
Lowering the expected long-term rate of return on the Company's
qualified plan assets from 9 percent to 8.5 percent would have reduced pre-tax
pension income for 2003 by approximately $1 million. Lowering the discount rate
assumption by one-half of one percentage point would have reduced pre-tax
pension income by approximately $2 million.
The value of qualified plan assets increased from $254 million at the
beginning of 2003 to $274 million at the end of the year. The 2003 net increase
was primarily the result of an actual return of $58 million, less the previously
noted $22 million transfer to the Hawaii Terminals Multiemployer Plan, and less
benefit payments of $16 million. At 2003 year end the projected benefit
obligation was $262 million. Plan funding was 105 percent at 2003 year-end
compared with 88 percent at 2002 year-end. The Company expects that its
qualified plans will require cash funding of approximately $5 million in 2004.
OTHER MATTERS
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
1 and Note 12 to the Consolidated Financial Statements included in Item 8.
Dependence on Information Technology Systems: The Company is highly
dependent on information technology systems to support its ability to conduct
business. These dependencies primarily include accounting, billing,
disbursement, cargo booking, vessel scheduling and stowage, banking, payroll and
employee communication systems. All of these systems are vulnerable to
reliability issues, integration and compatibility concerns, and
security-threatening intrusions. The Company has had no significant instances of
interruption to these systems.
Management believes that its information technology and systems are
adequate to meet the requirements of its business and operations. It continues
to make investments of capital for infrastructure, system development and
maintenance, system security and staffing and staff development. However, there
can be no assurances that future incidents, whether accidental or malicious,
could not affect adversely the function of the Company's information systems and
operations.
Management Changes: The following management changes occurred during
2003 and through February 9, 2004:
o James S. Andrasick accepted the permanent position of president
and chief executive officer of Matson, effective July 15, 2003.
Mr. Andrasick continued as chief financial officer and treasurer
of A&B through February 8, 2004. Mr. Andrasick is also an
executive vice president of A&B.
o Christopher J. Benjamin was promoted to vice president, corporate
development and planning of A&B effective April 24, 2003.
Mr. Benjamin was promoted to vice president and chief financial
officer of A&B effective February 9, 2004.
o Nelson N. S. Chun was named vice president and general counsel of
A&B effective November 26, 2003.
o Ronald J. Forest was promoted to senior vice president of Matson
effective April 24, 2003.
o David L. Hoppes was promoted to vice president, ocean services of
Matson effective August 1, 2003.
o John Hoxie, vice president of HC&S retired effective April 1,
2003.
o Frank Kiger was promoted to vice president, agricultural
operations of HC&S effective February 5, 2003.
o Michael J. Marks, vice president and general counsel of A&B,
retired effective September 1, 2003.
o C. Bradley Mulholland, vice chairman of Matson and executive vice
president of A&B, retired effective January 1, 2004.
o Paul E. Stevens resigned as executive vice president of Matson on
July 29, 2003.
o John W. Sullivan was promoted to vice president, vessel operations
of Matson effective August 1, 2003.
o Peter F. Weis was named vice president and chief information
officer of Matson on August 28, 2003.
o Thomas A. Wellman was promoted to vice president, treasurer and
controller effective February 9, 2004.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A&B, in the normal course of doing business, is exposed to the risks
associated with fluctuations in the market value of certain financial
instruments. A&B maintains a portfolio of investments, pension fund investments
and, through its Capital Construction Fund, an investment in mortgage-backed
securities. Details regarding these financial instruments are described in Notes
1, 4, 5, 7 and 10 to the consolidated financial statements in Item 8, "Financial
Statements and Supplementary Data."
A&B is exposed to changes in U.S. interest rates, primarily as a result
of its borrowing and investing activities used to maintain liquidity and to fund
business operations. In order to manage its exposure to changes in interest
rates, A&B utilizes a balanced mix of debt maturities, along with both
fixed-rate and variable-rate debt. The nature and amount of A&B's long-term and
short-term debt can be expected to fluctuate as a result of future business
requirements, market conditions, and other factors.
The Company periodically uses derivative financial instruments such as
interest rate and foreign currency hedging products to mitigate risks. The
Company's use of derivative instruments is limited to reducing its risk exposure
by utilizing interest rate or currency agreements that are accounted for as
hedges. The Company does not hold or issue derivative instruments for trading or
other speculative purposes nor does it use leveraged financial instruments.
Hedge accounting requires a high correlation between changes in fair value of
cash flows of the derivative instrument and the specific item being hedged, both
at inception and throughout the life of the hedge. The Company discontinues
hedge accounting prospectively when it is determined that a derivative is no
longer effective in offsetting changes in the fair value or cash flows of the
hedged item, the derivative expires or is sold, terminated or exercised, or the
derivative is discontinued as a hedge investment because it is unlikely that a
forecasted transaction will occur.
All derivatives are recognized in the consolidated balance sheets at
their fair value. On the date the derivative contract is entered into, the
Company designates the derivative as either a fair value or a cash flow hedge.
Changes in the fair value of a derivative that is highly effective as, and that
is designated and qualifies as, a fair value hedge, are recorded in current
period earnings along with the gain or loss on the hedged asset or liability.
Changes in the fair value of a derivative that is highly effective as, and that
is designated and qualifies as, a cash flow hedge, are recorded in Other
Comprehensive Income (Loss) and are reclassified to earnings in the period in
which earnings are affected by the underlying hedged item. The ineffective
portion of hedges is recognized in earnings in the current period.
At December 31, 2003 the Company had an interest rate lock agreement
that reduced the exposure to interest rate risk associated with future debt
issuances for the financing of a new vessel. This is described under the caption
"Interest Rate Hedging" in Note 8 of Item 8. A&B believes that, as of December
31, 2003, its exposure to market risk fluctuations for its financial instruments
is not material.
The following table summarizes A&B's debt obligations at December 31,
2003, presenting principal cash flows and related interest rates by the expected
fiscal year of repayment. Variable interest rates represent the weighted-average
rates of the portfolio at December 31, 2003. A&B estimates that the carrying
value of its debt is not materially different from its fair value.
Expected Fiscal Year of Repayment as of December 31, 2003
----------------------------------------------------------------------------------------
2004 2005 2006 2007 2008 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
(dollars in millions)
Fixed rate $ 15 $ 36 $ 22 $ 22 $ 23 $ 95 $ 213
Average interest rate 7.07% 7.49% 6.94% 6.95% 6.13% 5.23% --
Variable rate -- $ 132 -- -- -- -- $ 132
Average interest rate -- 1.30% -- -- -- -- --
A&B's sugar plantation, HC&S, has a contract to sell its raw sugar
production through 2008 to Hawaiian Sugar & Transportation Cooperative
("HS&TC"), an unconsolidated sugar and marketing cooperative, in which A&B has
an ownership interest. Under that contract, the price paid will fluctuate with
the New York No. 14 Contract settlement price for domestic raw sugar, less a
fixed discount. A&B also has an agreement with C&H Sugar Company, Inc, the
primary purchaser of sugar from HS&TC, which allows A&B to forward price, with
C&H, a portion of its raw sugar deliveries to HS&TC.
A&B has no direct material exposure to foreign currency risks, although
it is indirectly affected by changes in currency rates to the extent that this
affects tourism in Hawaii.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
Management's Responsibility for Financial Reporting 43
Independent Auditors' Report 44
Consolidated Statements of Income 45
Consolidated Statements of Cash Flows 46
Consolidated Balance Sheets 47
Consolidated Statements of Shareholders' Equity 48
Notes to Consolidated Financial Statements 49
1. Summary of Significant Accounting Policies 49
2. Acquisitions 55
3. Discontinued Operations 55
4. Impairment of Long-Lived Assets and Investments 56
5. Investments 56
6. Property 59
7. Capital Construction Fund 59
8. Notes Payable and Long-term Debt 60
9. Leases 62
10. Employee Benefit Plans 63
11. Income Taxes 67
12. Stock Options 68
13. Related Party Transactions, Commitments, Guarantees,
and Contingencies 70
14. Industry Segments 73
15. Quarterly Information (Unaudited) 75
16. Parent Company Condensed Financial Information 77
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The management of Alexander & Baldwin, Inc. has the responsibility for
preparing the accompanying consolidated financial statements and related notes
accurately and objectively. The statements have been prepared in accordance with
accounting principles generally accepted in the United States of America,
consistently applied, and necessarily include amounts based on judgments and
estimates made by management. Management also prepared the other information in
this annual report and is responsible for its accuracy and consistency with the
consolidated financial statements.
The Company maintains internal control systems, and related policies
and procedures, designed to provide reasonable assurance that assets are
safeguarded, that transactions are properly executed and recorded in accordance
with management's authorization, and that underlying accounting records may be
relied upon for the accurate preparation of the consolidated financial
statements and other financial information. The design, monitoring, and revision
of internal control systems involve, among other things, management's judgment
with respect to the relative cost and expected benefits of specific control
measures. The Company maintains an internal auditing function that evaluates and
formally reports on the adequacy and effectiveness of internal controls,
policies, and procedures.
The Company's consolidated financial statements have been audited by
Deloitte & Touche LLP, independent auditors, who have expressed their opinion
with respect to the fairness, in all material aspects, of the presentation of
financial position, results of operations and cash flows under accounting
principles generally accepted in the United States of America. Management has
made available to Deloitte & Touche LLP all of the Company's financial records
and related data. Furthermore, management believes that all representations made
to Deloitte & Touche LLP during its audit were valid and appropriate.
The Board of Directors, through its Audit Committee (composed of
non-employee directors), oversees management's responsibilities in the
preparation of the consolidated financial statements. The Audit Committee
appoints the independent auditors, subject to shareholder ratification. The
Audit Committee meets regularly with the external and internal auditors to
evaluate the effectiveness of their work in discharging their respective
responsibilities and to assure their independent and free access to the
Committee.
/s/ Allen Doane
Allen Doane
President and Chief Executive Officer
/s/ J. S. Andrasick
James S. Andrasick
Executive Vice President, Chief Financial Officer and Treasurer
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS OF ALEXANDER & BALDWIN, INC.:
We have audited the accompanying consolidated balance sheets of
Alexander & Baldwin, Inc. and subsidiaries as of December 31, 2003 and 2002, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Alexander & Baldwin, Inc.
and subsidiaries at December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2003 in conformity with accounting principles generally accepted in
the United States of America.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Honolulu, Hawaii
February 6, 2004
ALEXANDER & BALDWIN, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per-share amounts)
Year Ended December 31, 2003 2002 2001
---- ---- ----
Operating Revenue:
Ocean transportation $ 776 $ 687 $ 682
Logistics services 238 195 122
Property leasing 79 65 60
Property sales 27 28 89
Food products 113 113 106
-------- --------- ---------
Total revenue 1,233 1,088 1,059
-------- --------- ---------
Operating Costs and Expenses:
Cost of transportation services 601 575 552
Cost of logistics services 215 175 112
Cost of property sales and leasing services 56 53 97
Cost of agricultural goods and services 108 99 100
Selling, general and administrative 124 107 99
Impairment loss for operating investment 8 -- 29
-------- --------- ---------
Total operating costs and expenses 1,112 1,009 989
-------- --------- ---------
Operating Income 121 79 70
Other Income and (Expense)
Gain on sale of investments -- -- 126
Dividends -- -- 4
Interest expense (12) (12) (19)
-------- --------- ---------
Income From Continuing Operations Before Income Taxes 109 67 181
Income taxes 40 21 65
-------- --------- ---------
Income From Continuing Operations 69 46 116
Income from discontinued operations, net of income
taxes (see Notes 2 and 3) 12 12 (5)
-------- --------- ---------
Net Income 81 58 111
Other Comprehensive Income (Loss):
Minimum pension liability adjustment (net of taxes of
$(13) and $16) 20 (25) --
Change in valuation of derivatives (net of taxes) (1) (2) --
Unrealized holding gains (losses) and reclassification of
realized gains on securities (net of income taxes of
$36) -- -- (62)
-------- --------- ---------
Comprehensive Income $ 100 $ 31 $ 49
======== ========= =========
Basic Earnings per Share of Common Stock:
Continuing operations $ 1.67 $ 1.12 $ 2.86
Discontinued operations 0.28 0.30 (0.13)
-------- --------- ---------
Net income $ 1.95 $ 1.42 $ 2.73
======== ========= =========
Diluted Earnings per Share of Common Stock:
Continuing operations $ 1.66 $ 1.11 $ 2.85
Discontinued operations 0.28 0.30 (0.13)
-------- --------- ---------
Net income $ 1.94 $ 1.41 $ 2.72
======== ========= =========
Average Common Shares Outstanding 41.6 41.0 40.5
See notes to consolidated financial statements.
ALEXANDER & BALDWIN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Year Ended December 31, 2003 2002 2001
---- ---- ----
Cash Flows from Operations:
Net income $ 81 $ 58 $ 111
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 73 71 75
Deferred income taxes 3 13 (8)
Gains on disposal of assets (18) (20) (143)
Equity in (income) loss of affiliates (9) 5 13
Write-down of long-lived assets and investments 8 -- 45
Changes in assets and liabilities:
Accounts and notes receivable 3 (23) 2
Inventories (1) 1 1
Prepaid expenses and other assets 3 (9) 13
Deferred drydocking costs 1 (11) (5)
Pension and post-retirement assets and obligations (1) (2) (21)
Accounts and income taxes payable 7 (24) 62
Other liabilities 6 (7) (2)
Real Estate Developments Held for Sale:
Real estate inventory sales 15 13 40
Expenditures for new real estate inventory (35) (9) (32)
------- ------- ------
Net cash provided by operations 136 56 151
------- ------- ------
Cash Flows from Investing Activities:
Capital expenditures for property and developments (214) (45) (99)
Receipts from disposal of income producing
property, investments and other assets 8 21 142
Deposits into Capital Construction Fund (4) (58) (12)
Withdrawals from Capital Construction Fund 47 5 4
Payments for purchases of investments (17) (6) (2)
Proceeds from sale and maturity of investments 6 -- --
------- ------- ------
Net cash provided by (used in) investing
activities (174) (83) 33
------- ------- ------
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt 293 73 6
Payments of long-term debt (233) (31) (137)
Proceeds (payments) from short-term
borrowings - net -- (12) (3)
Repurchases of capital stock -- -- (2)
Proceeds from issuance of capital stock 20 16 5
Dividends paid (37) (37) (37)
------- ------- ---------
Net cash provided by (used in) financing
activities 43 9 (168)
------- ------- ------
Cash and Cash Equivalents:
Net increase (decrease) for the year 5 (18) 16
Balance, beginning of year 1 19 3
------- ------- ------
Balance, end of year $ 6 $ 1 $ 19
======= ======= ======
Other Cash Flow Information:
Interest paid, net of amounts capitalized $ (11) $ (12) $ (20)
Income taxes paid, net of refunds (45) (52) (21)
Non-cash Activities:
Tax-deferred property sales 34 68 30
Tax-deferred property purchases (41) (60) (42)
See notes to consolidated financial statements.
ALEXANDER & BALDWIN, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except per-share amount)
December 31
2003 2002
---- ----
ASSETS
Current Assets
Cash and cash equivalents $ 6 $ 1
Accounts and notes receivable, less allowances of $12 and $11 million 160 156
Sugar and coffee inventories 5 5
Materials and supplies inventories 11 10
Real estate and other assets held for sale 30 33
Deferred income taxes 15 12
Prepaid expenses and other assets 20 17
--------- ---------
Total current assets 247 234
Investments 68 33
Real Estate Developments 77 42
Property - net 1,079 943
Capital Construction Fund 165 208
Pension Assets 62 28
Other Assets - net 62 65
--------- ---------
Total $ 1,760 $ 1,553
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable and current portion of long-term debt $ 15 $ 10
Accounts payable 95 81
Payrolls and vacation due 20 20
Uninsured claims 10 13
Income taxes payable 1 4
Post-retirement benefit obligations-- current portion 3 3
Accrued and other liabilities 39 20
--------- ---------
Total current liabilities 183 151
--------- ---------
Long-term Liabilities
Long-term debt 330 248
Deferred income taxes 356 338
Post-retirement benefit obligations 44 43
Uninsured claims and other liabilities 36 49
--------- ---------
Total long-term liabilities 766 678
--------- ---------
Commitments and Contingencies
Shareholders' Equity
Capital stock - common stock without par value; authorized, 150 million
shares ($0.75 stated value per share); outstanding,
42.2 million shares in 2003 and 41.3 million shares in 2002 35 34
Additional capital 112 85
Accumulated other comprehensive loss (8) (27)
Retained earnings 684 644
Cost of treasury stock (12) (12)
--------- ---------
Total shareholders' equity 811 724
--------- ---------
Total $ 1,760 $ 1,553
========= =========
See notes to consolidated financial statements.
ALEXANDER & BALDWIN, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 2003
(In millions, except per-share amounts)
Capital Stock Accumulated
--------------------------------------------- Other
Issued In Treasury Compre-
---------------------- ----------------- hensive
Stated Additional Income Retained
Shares Value Shares Cost Capital (Loss) Earnings
------ ----- ------ ---- ------- ------ --------
Balance, December 31, 2000 44.3 $ 33 4.0 $ (12) $ 58 $ 62 $ 553
Shares repurchased (0.1) -- -- -- -- -- (2)
Stock options exercised - net 0.2 -- -- -- 7 -- (2)
Issued-- incentive plans -- -- (0.1) -- 2 -- --
Unrealized holding gain -- -- -- -- -- 16 --
Reversal of holding gains1 -- -- -- -- -- (78) --
Net income -- -- -- -- -- -- 111
Cash dividends -- -- -- -- -- -- (37)
------ ----- ------ -------- ------ ------- -------
Balance, December 31, 2001 44.4 33 3.9 (12) 67 -- 623
Stock options exercised - net 0.7 1 -- -- 17 -- --
Issued-- incentive plans -- -- -- -- 1 -- --
Minimum Pension Liability -- -- -- -- -- (25) --
Valuation of Derivative -- -- -- -- -- (2) --
Net income -- -- -- -- -- -- 58
Cash dividends -- -- -- -- -- -- (37)
------ ----- ------ -------- ------ ------- -------
Balance, December 31, 2002 45.1 34 3.9 (12) 85 (27) 644
Stock options exercised - net 0.9 1 -- -- 26 -- (4)
Issued-- incentive plans -- -- (0.1) -- 1 -- --
Minimum Pension Liability -- -- -- -- -- 20 --
Valuation of Derivative -- -- -- -- -- (1) --
Net income -- -- -- -- -- -- 81
Cash dividends -- -- -- -- -- -- (37)
------ ----- ------ -------- ------ ------- -------
Balance, December 31, 2003 46.0 $ 35 3.8 $ (12) $ 112 $ (8) $ 684
====== ===== ====== ======== ====== ======= =======
1 See Note 5 for discussion of marketable equity securities sold during 2001.
See notes to consolidated financial statements.
ALEXANDER & BALDWIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business: Founded in 1870, Alexander & Baldwin, Inc.
("A&B") is incorporated under the laws of the State of Hawaii. A&B operates
primarily in three industries: transportation, real estate and food
products. These industries are described below:
Transportation - carrying freight, primarily between various ports on
the U.S. Pacific Coast and major Hawaii ports and Guam; chartering
vessels to third parties; arranging intermodal and motor carrier
services and providing logistics services in North America; and
providing terminal, stevedoring and container equipment maintenance
services in Hawaii.
Property Development and Management - purchasing, developing, selling,
managing, leasing and investing in commercial (including retail, office
and industrial) and residential properties, in Hawaii and on the U.S.
mainland.
Food Products - growing sugar cane and coffee in Hawaii; producing bulk
raw sugar, specialty food-grade sugars, molasses and green coffee;
marketing and distributing roasted coffee and green coffee; providing
sugar and molasses hauling in Hawaii; and generating and selling
electricity.
Principles of Consolidation: The consolidated financial statements
include the accounts of Alexander & Baldwin, Inc. and all wholly owned
subsidiaries ("Company"), after elimination of significant intercompany amounts.
Significant investments in businesses, partnerships, and limited liability
companies in which the Company does not have control are accounted for under the
equity method. Generally, these are investments in businesses in which the
Company's ownership is between 20 percent and 50 percent.
Segment Information: The Company has five segments operating in three
industries: Transportation, Property Development and Management, and Food
Products. The Transportation industry is comprised of ocean transportation and
logistics services segments. The Property Development and Management industry is
comprised of property leasing and property development and sales segments. The
Company reports segment information in the same way that management assesses
segment performance. Additional information regarding these segments is found in
Note 14.
Cash and Cash Equivalents: Cash equivalents are composed of highly
liquid investments with an original maturity of three months or less and which
have no significant risk of change in value.
Allowances for Doubtful Accounts: Allowances for doubtful accounts are
established by management based on estimates of collectibility. The changes in
allowances for doubtful accounts, included on the Balance Sheets as an offset to
"Accounts and notes receivable," for the three years ended December 31, 2003
were as follows (in millions):
Balance at Write-offs Balance at
Beginning of year Expense and Other End of Year
----------------- ------- --------- -----------
2001 $ 6 $ 3 $ (2) $ 7
2002 $ 7 $ 5 $ (1) $ 11
2003 $ 11 $ 5 $ (4) $ 12
Inventories: Raw sugar and coffee inventories are stated at the lower
of cost (first-in, first-out basis) or market value. Other inventories, composed
principally of materials and supplies, are stated at the lower of cost
(principally average cost) or market value.
Drydocking: Under U.S. Coast Guard Rules, administered through the
American Bureau of Shipping's alternative compliance program, all vessels must
meet specified seaworthiness standards to remain in service carrying cargo
between U.S. marine terminals. Vessels must undergo regular inspection,
monitoring and maintenance, referred to as "drydocking" to maintain the required
operating certificates. These drydocks occur on scheduled intervals ranging from
two to five years, depending on the vessel age. Because the drydocks enable the
vessel to continue operating in compliance with U.S. Coast Guard requirements,
the costs of these scheduled drydocks are deferred and amortized until the next
regularly scheduled drydock period. Deferred amounts are included on the
Consolidated Balance Sheets in other current and non-current assets. Amortized
amounts are charged to operating expenses in the Consolidated Statements of
Income. Changes in deferred drydocking costs are included in the Consolidated
Statements of Cash Flows in Cash Flows from Operations.
Property: Property is stated at cost, net of accumulated depreciation
and amortization. Expenditures for major renewals and betterments are
capitalized. Replacements, maintenance, and repairs that do not improve or
extend asset lives are charged to expense as incurred. Gains or losses from
property disposals are included in the determination of net income. Costs of
developing coffee orchards are capitalized during the development period and
depreciated over the estimated productive lives of approximately 20 years. Upon
acquiring real estate, the Company allocates the purchase price to land,
buildings, in-place leases and above and below market leases based on relative
fair value.
Capitalized Interest: Interest costs incurred in connection with
significant expenditures for real estate developments or the construction of
assets are capitalized. Interest expense is shown net of capitalized interest on
the Statements of Income, because the amounts are not significant.
Construction Expenditures: Expenditures for real estate developments
are capitalized during construction and are classified as Real Estate
Developments on the Consolidated Balance Sheets. When construction is complete,
the costs are reclassified as either Real Estate Held for Sale or Property,
based upon the Company's intent to sell the completed asset or to hold it as an
investment. Cash flows related to real estate developments are classified as
either operating or investing activities, based upon the Company's intention to
sell the property or to retain ownership of the property as an investment
following completion of construction.
Depreciation: Depreciation is computed using the straight-line method.
Estimated useful lives of property are as follows:
Classification Range of Life (in years)
-------------- ------------------------
Buildings 10 to 40
Vessels 10 to 40
Marine containers 2 to 25
Terminal facilities 3 to 35
Machinery and equipment 3 to 35
Utility systems and other 5 to 50
Coffee Orchards 20
Fair Value of Financial Instruments: The fair values of cash and cash
equivalents, receivables and short-term and long-term borrowings approximate
their carrying values.
Real Estate Assets: Real estate is carried at the lower of cost or fair
value. Fair values generally are determined using the expected market value for
the property, less sales costs. For residential units and lots held for sale,
market value is determined by reference to the sales of similar property, market
studies, tax assessments, and cash flows. For commercial property, market value
is determined using recent comparable sales, tax assessments, and cash flows. A
large portion of the Company's real estate is undeveloped land located in the
State of Hawaii on the islands of Maui and Kauai. This land has a cost basis
that averages approximately $150 per acre, a value much lower than fair value.
Impairments of Long-Lived Assets: Long-lived assets are reviewed for
possible impairment when events or circumstances indicate that the carrying
value may not be recoverable. In such evaluation, the estimated future
undiscounted cash flows generated by the asset are compared with the amount
recorded for the asset to determine if a write-down may be required. If this
review determines that the recorded value will not be recovered, the amount
recorded for the asset is reduced to estimated fair value (see Note 4).
Voyage Revenue Recognition: Voyage revenue is recognized ratably over
the duration of a voyage based on the relative transit time in each reporting
period; commonly referred to as the "percentage of completion" method. Voyage
expenses are recognized as incurred. Probable losses on voyages are provided for
at the time such losses can be estimated. Freight rates are provided in tariffs
filed with the Surface Transportation Board of the U.S. Department of
Transportation. Prior to the 2003 third quarter, voyage revenue and variable
costs and expenses associated with voyages were included in income at the time
each voyage leg commenced. This change in accounting method did not have a
material effect on the Company's consolidated results of operations or financial
position.
Real Estate Sales Revenue Recognition: Sales are recorded when the
risks and benefits of ownership have passed to the buyers (generally on closing
dates), adequate down payments have been received, and collection of remaining
balances is reasonably assured.
Real Estate Leasing Revenue Recognition: Revenue for leases with
significant rent escalations that occur during the term of the lease is
recognized on a straight-line basis. The effect of other leases not recognized
on a straight-line basis is not material. Income arising from tenant rents that
are contingent upon the sales of the tenant exceeding a defined threshold are
recognized in accordance with Staff Accounting Bulletin 101, which states that
this income is to be recognized only after the contingency has been removed
(i.e. sales thresholds have been achieved).
Sugar and Coffee Revenue Recognition: Revenue from bulk raw sugar sales
is recorded when delivered to the cooperative of Hawaiian producers, based on
the estimated net return to producers in accordance with contractual agreements.
Revenue from coffee is recorded when the title to the product and risk of loss
passes to third parties (generally this occurs when the product is shipped or
delivered to customers) and when collection is reasonably assured.
Non-voyage Ocean Transportation Costs: Depreciation, charter hire,
terminal operating overhead, and general and administrative expenses are charged
to expense as incurred.
Agricultural Costs: Costs of growing and harvesting sugar cane are
charged to the cost of production in the year incurred and to cost of sales as
raw sugar is delivered to the cooperative of Hawaiian producers, as permitted by
Statement of Position No. 85-3, "Accounting by Agricultural Producers and
Agricultural Cooperatives." Costs of growing coffee are charged to inventory in
the year incurred and to cost of sales as coffee is sold.
Discontinued Operations: The sales of certain income-producing assets
are classified as discontinued operations, as required by Statement of Financial
Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," if the operations and cash flows of the assets
clearly can be distinguished from the remaining assets of the Company, if cash
flows for the assets 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. Upon reclassification, depreciation of the assets is
stopped. Sales of land and residential houses are generally considered inventory
and are not included in discontinued operations.
Employee Benefit Plans: Certain ocean transportation subsidiaries are
members of the Pacific Maritime Association ("PMA") and the Hawaii Stevedoring
Industry Committee, which negotiate multi-employer pension plans covering
certain shoreside bargaining unit personnel. The subsidiaries directly negotiate
multi-employer pension plans covering other bargaining unit personnel. Pension
costs are accrued in accordance with contribution rates established by the PMA,
the parties to a plan or the trustees of a plan. Several trusteed,
noncontributory, single-employer defined benefit plans and defined contribution
plans cover substantially all other employees.
Accounting Method for Stock-Based Compensation and Calculation of Basic
and Diluted Earnings per Share of Common Stock: As allowed by 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. The
following assumptions were used in determining the pro forma amounts:
2003 2002 2001
---- ---- ----
Stock volatility 24.4% 23.4% 25.2%
Expected term from grant date (in years) 5.2 5.5 6.2
Risk-free interest rate 3.3% 2.8% 4.5%
Forfeiture discount 4.9% 2.9% 2.6%
Dividend yield 2.7% 3.4% 3.3%
Based upon the above assumptions, the computed annual weighted average
fair values of employee stock options granted during 2003, 2002, and 2001 were
$5.21, $4.44, and $6.22, respectively, per option.
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 in each of the three years ended December 31, 2003, would have been as
follows (in millions, except per share amounts):
2003 2002 2001
---- ---- ----
Net Income:
As reported $ 81 $ 58 $ 111
Stock-based compensation
expense determined under fair
value based method for all
awards, net of related tax effects (1) (1) (2)
------ ------ -------
Pro forma $ 80 $ 57 $ 109
====== ====== =======
Net Income Per Share:
Basic, as reported $ 1.95 $ 1.42 $ 2.73
Basic, pro forma $ 1.93 $ 1.38 $ 2.69
Diluted, as reported $ 1.94 $ 1.41 $ 2.72
Diluted, pro forma $ 1.91 $ 1.38 $ 2.67
Effect on average shares outstanding
of assumed exercise of stock options
(in millions of shares):
Average number of shares
outstanding 41.6 41.0 40.5
Effect of assumed exercise of
outstanding stock options 0.3 0.2 0.2
------ ------ -------
Average number of shares
outstanding after assumed
exercise of stock options 41.9 41.2 40.7
====== ====== =======
Basic Earnings per Share is determined by dividing Net Income by the
weighted-average common shares outstanding during the year. The calculation of
Diluted Earnings per Share includes the dilutive effect of unexercised options
to purchase the Company's stock. Total shares considered antidilutive and that
were not included in the computation of diluted earnings per share were 508,000,
1,682,000, and 1,932,000 for 2003, 2002, and 2001, respectively.
The pro forma disclosures of net income and earnings per share are not
likely to be representative of the pro forma effects on future net income or
earnings per share, because the number of future shares which 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 Note 12.
Income Taxes: The Company estimates its current tax due. Deferred tax
assets and liabilities are established for temporary differences between the way
certain income and expense items are reported for financial reporting and tax
purposes. Deferred tax assets and liabilities are adjusted to the extent
necessary to reflect tax rates in effect when the temporary differences reverse.
A valuation allowance is established for deferred tax assets for which
realization is uncertain. Adjustments may be required by a change in assessment
of the Company's current and deferred tax assets and liabilities, changes in tax
laws, and changes due to audit adjustments by federal and state tax authorities.
To the extent adjustments are required in any given period, the adjustments
would be included as part of the tax provision in the statement of operations
and/or balance sheet.
Derivative Financial Instruments: The Company periodically uses
derivative financial instruments such as interest rate and foreign currency
hedging products to mitigate risks. The Company's use of derivative instruments
is limited to reducing its risk exposure by utilizing interest rate or currency
agreements that are accounted for as hedges. The Company does not hold or issue
derivative instruments for trading or other speculative purposes nor does it use
leveraged financial instruments. Hedge accounting requires a high correlation
between changes in fair value of cash flows of the derivative instrument and the
specific item being hedged, both at inception and throughout the life of the
hedge. The Company discontinues hedge accounting prospectively when it is
determined that a derivative is no longer effective in offsetting changes in the
fair value or cash flows of the hedged item, the derivative expires or is sold,
terminated or exercised, or the derivative is discontinued as a hedge investment
because it is unlikely that a forecasted transaction will occur.
All derivatives are recognized in the consolidated balance sheets at
their fair value. On the date the derivative contract is entered into, the
Company designates the derivative as either a fair value or a cash flow hedge.
Changes in the fair value of a derivative that is highly effective as, and that
is designated and qualifies as, a fair value hedge, are recorded in current
period earnings along with the gain or loss on the hedged asset or liability.
Changes in the fair value of a derivative that is highly effective as, and that
is designated and qualifies as, a cash flow hedge, are recorded in Other
Comprehensive Income (Loss) and are reclassified to earnings in the period in
which earnings are affected by the underlying hedged item. The ineffective
portion of hedges is recognized in earnings in the current period.
Comprehensive Income: Comprehensive Income includes all changes in
Stockholders' Equity, except those resulting from capital stock transactions.
Prior to 2002, the only difference between Net Income and Comprehensive Income
was the unrealized holding gains on securities available for sale (see Note 5).
For 2003 and 2002, Other Comprehensive Income (Loss) includes the minimum
pension liability adjustments (see Note 10) and gains or losses on certain
derivative instruments used to hedge interest rate risk (see Note 8).
Comprehensive Income is not used in the calculation of Earnings per Share.
Environmental Costs: Environmental expenditures are recorded as a
liability and charged to operating expense when the obligation is probable and
the remediation cost is estimable. Certain costs, however, are capitalized in
Property when the obligation is recorded, if the cost (1) extends the life,
increases the capacity or improves the safety and efficiency of property owned
by the Company, (2) mitigates or prevents environmental contamination that has
yet to occur and that otherwise may result from future operations or activities,
or (3) is incurred or discovered in preparing for sale property that is
classified as "held for sale." The amounts of capitalized environmental costs
were not material at December 31, 2003 or 2002.
Use of 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. Future actual amounts could differ from those estimates.
Impact of Newly Issued and Proposed Accounting Standards: The Company
adopted SFAS No. 143, "Accounting for Asset Retirement Obligations," on January
1, 2003. This statement addresses accounting and reporting for obligations and
costs that will occur when long-term assets are retired. Among other things, the
statement requires that the present value of the liability associated with
future asset retirements be recorded on the balance sheet when an obligation has
been incurred and when it can be measured. The amortization of the capitalized
cost and increases in the present value of the obligation which result from the
passage of time, are recorded as charges to earnings. The financial effect of
this standard was not material to the Company's consolidated financial
statements.
The Company adopted SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities," which addresses accounting for restructuring and
similar costs initiated after December 31, 2002. SFAS No. 146 supersedes
previous accounting guidance, principally Emerging Issues Task Force Issue No.
94-3. The standard requires that the liability for costs associated with an exit
or disposal activity be recognized when the liability is incurred. Under Issue
94-3, a liability for an exit cost was recognized at the date of the Company's
commitment to an exit plan. SFAS No. 146 also establishes that the liability
initially should be measured and recorded at fair value. Accordingly, this
standard affects the timing of recognizing future restructuring costs, as well
as the amounts recognized.
In December 2002, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure; an Amendment of FASB Statement No. 123." SFAS No. 148 permits
companies that choose to apply the provisions of SFAS No. 123 to use several
methods of transition to the accounting provisions of SFAS No. 123. Those
transition methods include adopting the provisions only for new stock option
grants, adopting the provisions for unvested options and for new stock option
grants, and adopting SFAS No. 123 retroactive to the earliest period presented
in the financial statements. SFAS No. 123 allows companies to treat the cost of
stock options as expense during the periods in which the stock option awards
vest. Information regarding the Company's stock options, including the
disclosures required by SFAS No. 123 and SFAS No. 148, is contained in Notes 1
and 12.
In April 2003, the FASB issued 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 December 2003, the FASB amended SFAS No. 132 "Employers' Disclosures
about Pensions and Other Postretirement Benefits." The portions of this
amendment that apply to the Company's 2003 financial statement disclosures
include additional disclosures related to market values of plan assets, a
discussion of investment strategies and target allocations percentages,
additional discussion of how the estimated rate of return assumption was
developed, information about the accumulated benefit obligations, the
measurement date, an estimate of the expected contributions for the next fiscal
year and significant changes to previously disclosed expected contributions.
These disclosures are included in Note 10. The portions of the amendment that
will apply to the Company's 2004 financial statement disclosures include a table
of expected benefit payments for five years and, in total, for the subsequent
five-year period. Additionally, the Company is required to disclose components
of the net benefit cost in quarterly financial statements beginning with the
first quarter of 2004.
The Company adopted Financial Interpretation No. ("FIN") 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" for guarantees issued or modified
after December 31, 2002. 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. The Interpretation
also modified the disclosure requirements about a guarantor's obligations under
agreements. The financial effect of adopting FIN 45 did not affect the
consolidated financial statements materially.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities." FIN 46 defines variable interest entities and addresses
consolidation of such entities by the primary beneficiary of the entity. This
Interpretation, as it relates to variable interest entities, has subsequently
been deferred to the first interim period ending after March 15, 2004. The
Company is currently assessing the impacts of the Interpretation, but currently
does not believe it will have a material effect on the consolidated financial
statements.
Reclassifications and Rounding: Certain amounts in the 2002 and 2001
consolidated financial statements have been reclassified to conform to the 2003
presentation. This includes the revenue and costs of real estate assets
designated as discontinued operations in subsequent periods. This is further
discussed in Note 3. Amounts in the Consolidated Financial Statements and Notes
are rounded to millions, but per-share calculations and percentages were
calculated based on un-rounded amounts. Accordingly, a recalculation of some
per-share amounts and percentages, if based on the reported data, may be
slightly different than the more accurate amounts included herein.
2. ACQUISITIONS
In December 2003, Matson Integrated Logistics, Inc., a subsidiary of
Matson Navigation Company, Inc., acquired certain assets, obligations and
contracts of TransAmerica Transportation Services ("TTS," which is not
affiliated with the Transamerica entity that is a subsidiary of AEGON N.V.) TTS
provides truck brokerage services to companies located throughout the U.S.,
Canada and Mexico by contracting with over 100 regionally located transportation
agencies and carriers. Headquartered in Akron, Ohio, TTS provides comprehensive
truckload, less than truckload, and logistics services. The transaction added
$12 million of assets to the consolidated balance sheet at December 31, 2003,
including goodwill of approximately $1 million. No debt was assumed in
connection with the acquisition.
3. DISCONTINUED OPERATIONS
Real-estate: During 2003, the sales of a Nevada commercial property and
five commercial properties on Maui met the criteria for classification as
discontinued operations.
During 2002, the sales of a shopping center and an industrial complex
in California, a seven-building distribution complex in Texas, a shopping center
in Colorado, four commercial properties on Maui and the planned sale, within the
next 12 months, of a Nevada commercial property, met the criteria for
classification as discontinued operations.
The revenue, operating profit, and after-tax effects of these
transactions for the three years ended December 31, 2003 were as follows (in
millions, except per share amounts):
2003 2002 2001
---- ---- ----
Sales Revenue $ 37 $ 65 --
Leasing Revenue $ 1 $ 8 $ 11
Sales Operating Profit $ 18 $ 14 --
Leasing Operating Profit $ 1 $ 5 $ 6
After-tax Earnings $ 12 $ 12 $ 4
Basic Earnings Per Share $ 0.28 $ 0.30 $ 0.10
The revenue and operating profit generated from these properties in
prior years were reclassified from continuing operations to discontinued
operations for consistency with the current treatment. Consistent with the
Company's intention to reinvest the sales proceeds into new investment property,
the proceeds from the sales of property treated as discontinued operations were
deposited in escrow accounts for tax-deferred reinvestment in accordance with
Section 1031 of the Internal Revenue Code.
Agribusiness: In 2001, the Company ceased the operations of and
abandoned its panelboard manufacturing business operated by Hawaiian DuraGreen,
Inc., a wholly owned subsidiary ("DuraGreen"). Following a year of production
issues, poor operating results and weaknesses in the panelboard market,
management determined that the Company's investment in the business would not be
recovered and profitability could not be achieved. The 2001 loss from
Discontinued Operations includes operating losses and closure costs of $3
million and an $11 million write-down of the production machinery and equipment
assets to their estimated salvage value, net of a total income tax benefit of
approximately $5 million ($0.13 per share).
Income Taxes: The income tax expense (benefit) relating to discontinued
operations was $7 million in 2003, $7 million in 2002 and ($3) million in 2001.
4. IMPAIRMENT OF LONG-LIVED ASSETS AND INVESTMENTS
The Company recorded impairment losses of $8 million and $29 million on
its investment in C&H Sugar Company, Inc. ("C&H") in 2003 and 2001,
respectively. During 2001, the Company also wrote off $5 million of power
generation equipment that no longer was needed in the business.
C&H: As described in Note 5, the Company holds common and preferred
stock holdings in C&H. As a result of operating losses and declining cash flows
at C&H, combined with adverse market changes, the Company concluded in 2003 and,
previously, in 2001, that C&H's estimated future earnings and cash flows would
not allow recovery of the carrying value of the investments. This loss in value
was considered an "other than temporary" impairment condition; accordingly, the
carrying values of the investments were written down by $8 million and $29
million during the fourth quarters of 2003 and 2001, respectively. The 2001 loss
includes a write-down of the common stock and junior preferred stock values to
zero, and a write-down of the senior preferred stock to approximately $12
million. The amount of the 2001 write-down was based on the valuation of the
common, and junior and senior preferred stocks, as conducted by an independent
valuation firm. Accepted valuation practices were utilized in determining these
investments' fair values, including the market and income approaches, discounted
cash flow method, and market yield analysis. The valuation considered the
Company's minority position, the illiquidity of these types of investments in
the public market, the ability of future cash flows to fund future debt and
preferred obligations, and sugar industry conditions. The 2003 write-down was
based on the Company's estimate of probability-weighted discounted cash flows
available to pay the dividends on the senior preferred stock. The estimate of
cash flows was based on information the Company had as a minority shareholder.
The Company has no current plans to divest or sell its investments in C&H. These
impairment charges were recorded as a separate line item in Operating Costs and
Expenses in the Consolidated Statements of Income.
Power Equipment: In 2001, the Company included a charge of $5 million
in "Cost of agricultural goods and services" on the Consolidated Statement of
Income, for power generation equipment that was removed from service. This
equipment no longer was needed in the Company's cane sugar refining operations
on the island of Maui, due to changes in factory and power generation processes.
5. INVESTMENTS
At December 31, 2003 and 2002, investments consisted principally of
equity in affiliated companies, limited liability companies, and limited
partnership interests. These investments are summarized, by industries, as
follows (in millions):
2003 2002
---- ----
Equity in Affiliated Companies:
Real Estate $ 41 $ 2
Transportation 23 19
Food Products 3 11
Other 1 1
------- ------
Total Investments $ 68 $ 33
======= ======
The Company's equity in income (loss) of unconsolidated affiliates for
the three years ended December 31, 2003, included in operating expenses and
operating profit, was as follows (in millions):
2003 2002 2001
---- ---- ----
Equity in Earnings (Losses) of
Unconsolidated Affiliates:
Real Estate $ 4 -- --
Transportation 4 $ (5) $ (7)
Food Products -- -- (2)
------ ------ ------
Total $ 8 $ (5) $ (9)
====== ====== ======
Real Estate: In 2002, A&B Properties, Inc. ("Properties"), a subsidiary
of A&B, accelerated development plans for its Kukui'Ula project on the island of
Kauai by entering into a joint venture with an affiliate of DMB Associates, Inc.
DMB is a Scottsdale, Arizona-based developer of large master-planned
communities. During 2003, Properties contributed to the venture, title to 846
acres, a waste water treatment plant, and other improvements, totaling
approximately $28 million. The balance of the land will be transferred to the
venture upon securing further entitlements for the property. DMB will fund all
future development costs, subject to an option available to Properties, which
diminishes over time, to participate in a portion of that funding. The Kukui'Ula
project comprises 1,000 acres on the southern coast of Kauai, adjacent to the
Poipu resort. The project is planned for a resort, an 18-hole golf course,
residential and commercial use, and parks and open space. In July 2003, the
State Land Use Commission granted urban designation for the project's remaining
acres, which will allow the entire 1,000-acre property to be developed as one
integrated project. Properties is a member with a 50 percent voting interest,
for major decisions, and accounts for the investment using the equity method of
accounting. The venture had no sales activity during 2003.
During 2003, Properties entered into an operating agreement with MK
Management LLC, for the joint development of "Hokua at 1288 Ala Moana,"
a 40-story luxury residential condominium in Honolulu. Properties'
total investment in the venture is expected to be $40 million. Approximately $10
million was funded during 2003 and the remainder is expected to be funded during
2004. The joint venture has loan commitments totaling $130 million, of which
Properties guarantees approximately $18 million. Properties is a member with a
50 percent voting interest, for major decisions, and accounts for the investment
using the equity method of accounting.
Properties has a 50 percent voting interest, for major decisions, in
Kai Lani Company, LLC, a 116-unit townhouse condominium at Ko 'Olina Resort. It
also has a 50 percent voting interest, for major decisions, in HoloHolo Ku, a 44
single-family detached condominium development in Waimea on the island of
Hawaii. Notes receivable totaling $7 million from these two investments were
repaid during 2003. Properties also has a 50 percent voting interest, for major
decisions, in an office building that is being developed in Valencia,
California. This building was substantially completed in 2003. Properties
accounts for these three investments using the equity method of accounting.
Transportation: Matson, a wholly owned subsidiary of the Company, has a
minority interest investment in a limited liability company ("LLC") with
Saltchuk Resources, Inc. and International Shipping Agency, Inc., named Sea Star
Line, LLC ("Sea Star"), which operates an ocean transportation service between
Florida and Puerto Rico. The operating agreement for Sea Star was revised during
2002 when Matson chose not to participate with the other owners in capital calls
associated with the acquisition of the assets of a bankrupt competitor. As a
result, Matson's ownership interest in Sea Star was reduced from 45 percent to
approximately 20 percent during 2002. At December 31, 2003 Matson had guaranteed
obligations of $27 million of this unconsolidated affiliate. This guarantee
obligation is expected to be reduced to $12 million during the first quarter of
2004 and it is expected that the guarantee will be further reduced by scheduled
repayments of debt by Sea Star. Through 2001, Matson chartered two vessels to
Sea Star. In January 2002, these two vessels were sold to Sea Star for an
aggregate sales price of $17 million, which was the approximate carrying value
of the vessels when they were sold. This investment represents a minority
interest and is accounted for under the equity method of accounting.
Matson is part owner of an LLC with Stevedoring Services of America,
named SSA Terminals, LLC ("SSAT"), which provides stevedoring and terminal
services at five terminals in three West Coast ports to the Company and other
shipping lines. Matson's ownership interest in SSAT was reduced from 49.5
percent to 35 percent during 2002 because of an agreement to eliminate the
majority owner's preferred cash return. This investment represents a minority
interest and is accounted for under the equity method of accounting. The "Cost
of transportation services" included approximately $110 million, $96 million,
and $90 million for 2003, 2002, and 2001, respectively, paid to this
unconsolidated affiliate for terminal services.
Food Products: The Company owns an equity interest in C&H, comprising
approximately 36 percent of the common stock, 40 percent of the junior preferred
stock and all of the senior preferred stock of C&H. Dividends on the senior and
junior preferred stocks are cumulative. Through December 2003, dividends on the
senior preferred stock were payable either in cash or by issuance of additional
shares of senior preferred stock. C&H has not issued additional shares of senior
preferred stock to the Company but has accrued the dividends. C&H must redeem
from the Company, at one thousand dollars per share, the outstanding senior
preferred stock in December 2009 and the outstanding junior preferred stock in
December 2010. The Company accounts for its investment in C&H under the equity
method. Because the Company believes there is significant uncertainty regarding
realization of the cumulative dividend amounts, it has established a valuation
reserve approximately equal to the cumulative dividend amounts. Additionally, as
described in Note 4, the Company recorded, in 2003 and 2001, impairment losses
related to this investment that resulted from an "other than temporary" declines
in value. As described in Note 13, the Company has an obligation to provide a
security deposit for self-insurance workers' compensation claims incurred by C&H
employees prior to December 24, 1998. The agreement with C&H to provide this
security deposit, which is in the form of a letter of credit for $3 million,
expired in December 2003, at which time C&H was obligated to post a replacement
security deposit. C&H advised the Company in December 2003 that it would not be
in a position to provide a replacement security deposit. Because the State of
California Department of Industrial Relations, which is the named beneficiary,
could draw on the Company's letter of credit if the Company initiated a
termination of the letter of credit without C&H providing a replacement security
deposit, the Company has left the $3 million letter of credit in place.
Other: Other investments are principally investments in limited
partnerships that are recorded at the lower of cost or fair value. The values of
these investments are assessed annually.
Marketable Equity Securities: In May 2001, BNP Paribas SA, France's
largest bank, announced that, subject to regulatory, shareholder and other
approvals, it would purchase the remaining 55 percent of BancWest Corporation
("BancWest") which it did not already own for $35 per share. This offer was 40
percent higher than the market price of BancWest's stock at the time of the
offer. When the offer was made, the Company owned 3,385,788 shares of BancWest.
The transaction closed during the fourth quarter of 2001. As a result of the
sale, the Company received cash of $119 million, recorded a pre-tax gain of $110
million, and recognized an after-tax gain of approximately $68 million ($1.69
per basic share).
During 2001, the Company also divested its holdings in Bank of Hawaii
Corporation (previously known as Pacific Century Financial Corporation). This
was completed through the donation of 360,000 shares to the Company's charitable
foundation and the sales of 749,000 shares of the stock. The fair value of the
donated stock was approximately $8 million and the historical cost basis was
approximately $500,000. The net expense related to this contribution was
$500,000 and is included in "Selling, general and administrative expenses" in
the 2001 consolidated financial statements. The Company received $16 million for
the sales of the shares, recognized a pre-tax gain of $15 million, and recorded
an after-tax gain of $9 million ($0.23 per basic share).
Net unrealized holding gains, net of tax, for 2001 were $16 million.
Cumulative holding gains, net of tax, of $78 million were reversed and charged
to Other Comprehensive Income during 2001, due to the sales of the securities
previously noted.
See Note 7 for a discussion of fair values of investments in the
Capital Construction Fund.
6. PROPERTY
Property on the Consolidated Balance Sheets includes the following (in
millions):
2003 2002
---- ----
Vessels $ 745 $ 699
Machinery and equipment 489 481
Buildings 355 313
Land 135 113
Water, power and sewer systems 93 93
Other property improvements 71 65
--------- ---------
Total 1,888 1,764
Less accumulated depreciation and amortization 809 821
--------- ---------
Property - net $ 1,079 $ 943
========= =========
7. CAPITAL CONSTRUCTION FUND
Matson is party to an agreement with the United States government that
established a Capital Construction Fund ("CCF") under provisions of the Merchant
Marine Act, 1936, as amended. The agreement has program objectives for the
acquisition, construction, or reconstruction of vessels and for repayment of
existing vessel indebtedness. Deposits to the CCF are limited by certain
applicable earnings. Such deposits are tax deductions in the year made; however,
they are taxable, with interest payable from the year of deposit, if withdrawn
for general corporate purposes or other non-qualified purposes, or upon
termination of the agreement. Qualified withdrawals for investment in vessels
and certain related equipment do not give rise to a current tax liability, but
reduce the depreciable bases of the vessels or other assets for income tax
purposes.
Amounts deposited into the CCF are a preference item for calculating
federal alternative minimum taxable income. Deposits not committed for qualified
purposes within 25 years from the date of deposit will be treated as
non-qualified withdrawals over the subsequent five years. As of December 31,
2003, the oldest CCF deposits date from 1995. Management believes that all
amounts on deposit in the CCF at the end of 2003 will be used or committed for
qualified purposes prior to the expiration of the applicable 25-year periods.
Under the terms of the CCF agreement, Matson may designate certain
qualified earnings as "accrued deposits" or may designate, as obligations of the
CCF, qualified withdrawals to reimburse qualified expenditures initially made
with operating funds. Such accrued deposits to and withdrawals from the CCF are
reflected on the Consolidated Balance Sheets either as obligations of the
Company's current assets or as receivables from the CCF.
The Company has classified its investments in the CCF as
"held-to-maturity" and, accordingly, has not reflected temporary unrealized
market gains and losses on the Consolidated Balance Sheets or Consolidated
Statements of Income. The long-term nature of the CCF program supports the
Company's intention to hold these investments to maturity.
At December 31, 2003 and 2002, the balances on deposit in the CCF are
summarized as follows (in millions):
2003 2002
---------------------------------------- --------------------------------------
Amortized Fair Unrealized Amortized Fair Unrealized
Cost Value Gain Cost Value Gain
--------- ------- ---------- --------- ----- ----------
Mortgage-backed securities $ 4 $ 5 $ 1 $ 17 $ 19 $ 1
Cash and cash equivalents 161 161 -- 191 191 --
------ ------- ------ ------- ------ -------
Total $ 165 $ 166 $ 1 $ 208 $ 210 $ 1
====== ======= ======= ======= ====== =======
Fair value of the mortgage-backed securities was determined by an
outside investment management company, based on experience trading identical or
substantially similar securities. No central exchange exists for these
securities; they are traded over-the-counter. The Company earned $1 million in
2003, $2 million in 2002, and $2 million in 2001 on its investments in
mortgage-backed securities. The fair values of other CCF investments are based
on quoted market prices. These other investments mature no later than January
21, 2005. One security classified as "held-to-maturity" was sold during 2003 for
approximately the carrying value, one security was sold during 2002 for a loss
of $375,000 and one security was sold during 2001 for a loss of $43,000. The
securities no longer met authorized credit requirements
8. NOTES PAYABLE AND LONG-TERM DEBT
At December 31, 2003 and 2002, long-term debt consisted of the
following (in millions):
2003 2002
---- ----
Commercial paper, 2003 high 2.20%, low 1.79% $ 100 $ 100
Bank variable rate loans, due after 2003,
2003 high 2.05%, low 1.03% 32 55
Term loans:
5.34%, payable through 2028 55 --
4.10%, payable through 2012 35 --
7.38%, payable through 2007 30 38
7.42%, payable through 2010 20 20
7.43%, payable through 2007 15 15
7.55%, payable through 2009 15 15
4.31%, payable through 2010 15 --
8.33%, payable in 2005 15 --
7.57%, payable through 2009 13 15
------- -------
Total 345 258
Less current portion 15 10
------- -------
Long-term debt $ 330 $ 248
======= =======
Long-term Debt Maturities: At December 31, 2003, maturities and planned
prepayments of all long-term debt during the next five years are $15 million in
2004, $68 million in 2005, $22 million in each of 2006 and 2007 and $23 million
in 2008.
Commercial Paper: At December 31, 2003, $100 million of commercial
paper notes was outstanding under a commercial paper program that was used by
Matson to finance the construction of a vessel in 1991. Maturities ranged from
13 to 51 days. The commercial paper program is rated A-1 P-1 as of year-end.
As described below, the Company has committed long-term revolving
credit facilities totaling $275 million, of which $250 million was available at
December 31, 2003 and could be used to refinance its commercial paper notes if
the Company were not successful in replacing the notes as they become due. These
revolving credit facilities expire after December 31, 2004 and are not
cancelable or callable prior to expiration, except for violation of provisions
for which compliance is objectively determinable or measurable. No violations in
these financial agreements existed at December 31, 2003 and no available
information indicates that a violation has occurred thereafter but prior to the
issuance of this Form 10-K. The borrowings outstanding under the commercial
paper program are classified as long-term because the Company has the ability to
refinance the notes on a non-current basis using these revolving credit
facilities; however, it is the Company's intention to repay the commercial paper
notes with qualified withdrawals from the Capital Construction Fund that is also
classified as non-current. The Company also has an un-drawn $25 million
short-term revolving credit facility that serves as a commercial paper liquidity
back-up line.
Revolving Credit Facilities: The Company has a revolving credit and
term loan agreement with six commercial banks, whereby it may borrow up to $185
million under revolving loans through November 2004, at market rates of
interest. Any revolving loan outstanding on that date may be converted into a
term loan that would be payable in four equal quarterly installments. The
agreement contains certain restrictive covenants, the most significant of which
requires the maintenance of an interest coverage ratio of 2:1 and total debt to
earnings before interest, depreciation, amortization, and taxes of 3:1. At
December 31, 2003 and 2002, $25 million and $22.5 million, respectively, were
outstanding under this agreement. These amounts were classified as non-current
because the Company has the intent and ability to refinance the facility beyond
2004. The amount is included in the five-year maturity schedule for 2005.
The Company has an uncommitted $70 million short-term revolving credit
agreement with a commercial bank. The agreement extends through November 2004,
but may be canceled by the bank or the Company at any time. The amount which the
Company may draw under the facility is reduced by the amount drawn against the
bank under the previously referenced $185 million multi-bank facility, in which
it is a participant, and by letters of credit issued under the $70 million
uncommitted facility. At December 31, 2003 and 2002, $7 million and $3 million,
respectively, were outstanding under this agreement. These amounts were
classified as non-current because the Company has the intent and ability to
refinance the balances through its $185 million facility. Under the borrowing
formula for this facility, the Company could have borrowed an additional $55
million at December 31, 2003. For sensitivity purposes, if the $185 million
facility had been drawn fully, the amount that could have been drawn under the
borrowing formula at 2003 year-end would have been $17 million.
Matson has two revolving credit agreements totaling $90 million with
commercial banks. The first facility is a $50 million two-year revolving credit
agreement that expires in December 2004. No amounts were outstanding on this
facility at December 31, 2003 or 2002. Outstanding letters of credit that were
issued against the facility reduced the available credit by $5 million. The
second facility is a 21-month $40 million revolving credit agreement that
expires in September 2005. At December 31, 2003, no amounts were outstanding on
this facility. At December 31, 2002, $30 million was outstanding on this
facility. Both of these facilities have one-year term options.
Matson also has a $25 million one-year revolving credit agreement with
a commercial bank, expiring in November 2004, which serves as a commercial paper
liquidity back-up line. No amounts were outstanding under this agreement at
December 31, 2003 or 2002.
Title XI Bonds: In September 2003, Matson partially financed the
delivery of a new vessel with $55 million of 5.3 percent fixed-rate, 25-year
term, U.S. government Guaranteed Ship Financing Bonds, more commonly known as
Title XI bonds. These bonds are payable in semiannual payments of $1.1 million
beginning in March 2004.
Private Shelf Agreements: The Company has a private shelf agreement for
$75 million that expires in November 2006. No amount had been drawn on this
facility at December 31, 2003. This facility replaced a $50 million facility
that would have expired in April 2004. During 2003, the Company borrowed $35
million on this $50 million facility. Additionally, Matson has a $50 million
private shelf offering that expires in June 2004 against which $15 million was
drawn during 2003.
Interest Rate Hedging: The Company entered into interest rate lock
agreements to minimize exposure to interest rate risk associated with future
debt issuances for new vessel financing. Under an interest rate lock agreement,
the Company agrees to pay or receive an amount equal to the difference between
the net present value of the cash flows for a notional principal amount of
indebtedness based on the existing yield of a U.S. treasury bond at the date
when the agreement is established and the date when the agreement is settled.
To hedge the interest rate risk associated with obtaining financing for
the one new undelivered vessel discussed in Note 13, the Company entered into
one such interest rate lock agreement with a notional amount of $55 million in
November 2002. The lock settles in 2004, corresponding to the planned issuance
of the associated debt. The interest rate lock agreement is reflected at fair
value in the Company's consolidated financial statements and the related gain or
loss on the agreement is deferred in shareholders' equity as a component of
Accumulated Other Comprehensive Loss. Upon issuance of the debt, the deferred
gain or loss will be amortized as an adjustment to interest expense over the
same period that the related interest costs on the new debt are recognized in
income. A second interest rate lock agreement with a notional amount of $55
million was settled in August 2003 with the delivery of a new vessel.
At 2003 year end, the fair value of the lock agreement settling in
2004, of $4 million has been recorded in current accrued liabilities and other
long-term liabilities. Fair value is determined as the amount that the interest
rate lock can be settled for with a third party. The $2 million cumulative
unrealized loss, net of taxes of $1 million, is included in Accumulated Other
Comprehensive Loss at December 31, 2003.
9. LEASES
The Company as Lessee: Principal operating leases include land, office
and terminal facilities, containers and equipment, leased for periods that
expire between 2004 and 2052. Management expects that, in the normal course of
business, most operating leases will be renewed or replaced by other similar
leases.
Rental expense under operating leases totaled $29 million, $22 million
and $20 million for the years ended December 31, 2003, 2002, and 2001,
respectively. Rental expense for operating leases that provide for future
escalations are accounted for on a straight-line basis.
Future minimum payments under operating leases as of December 31, 2003
were as follows (in millions):
Operating
Leases
------
2004 $ 22
2005 19
2006 10
2007 8
2008 5
Thereafter 84
-------
Total minimum lease payments $ 148
=======
In September 2003, Matson retired, for $17 million, 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.
The Company as Lessor: The Company leases land, buildings, land
improvements, and three vessels under operating leases. The historical cost of
and accumulated depreciation on leased property at December 31, 2003 and 2002
were as follows (in millions):
2003 2002
---- ----
Leased property $ 659 $ 616
Less accumulated amortization 133 116
------- -------
Property under operating leases--net $ 526 $ 500
======= =======
Total rental income under these operating leases for the three years
ended December 31, 2003 was as follows (in millions):
2003 2002 2001
---- ---- ----
Minimum rentals $ 107 $ 105 $ 105
Contingent rentals (based on sales volume) 2 2 3
------- ------- ------
Total $ 109 $ 107 $ 108
======= ======= ======
Future minimum rentals on non-cancelable leases at December 31, 2003
were as follows (in millions):
Operating
Leases
------
2004 $ 100
2005 93
2006 41
2007 30
2008 21
Thereafter 97
-------
Total $ 382
=======
10. EMPLOYEE BENEFIT PLANS
The Company has funded single-employer defined benefit pension plans
that cover substantially all non-bargaining unit employees. In addition, the
Company has plans that provide certain retiree health care and life insurance
benefits to substantially all salaried and to certain hourly employees.
Employees are generally eligible for such benefits upon retirement and
completion of a specified number of years of credited service. The Company does
not pre-fund these benefits and has the right to modify or terminate certain of
these plans in the future. Certain groups of retirees pay a portion of the
benefit costs.
The measurement date for the Company's benefit plans is January 1st of
each year unless there are mid-year bargaining unit negotiations that result in
a new plan valuation. For 2003, all valuations were conducted on January 1st.
The Company's weighted-average asset allocations at December 31, 2003
and 2002, and 2003 year-end target allocation, by asset category, were as
follows:
Target 2003 2002
------ ---- ----
Domestic equity securities 60% 60% 56%
International equity securities 10% 13% 11%
Debt securities 15% 16% 20%
Real Estate 15% 10% 11%
Other and cash 0% 1% 2%
---- ---- ----
Total 100% 100% 100%
==== ==== ====
The Company has an Investment Committee that meets regularly with
investment advisors to establish investment policies, direct investments and
select investment options. The Investment Committee is also responsible for
appointing trustees and investment managers. The Company's investment policy
permits investments in marketable securities, such as domestic and foreign
stocks, domestic and foreign bonds, venture capital, real estate investments,
and cash equivalents. Equity investments in the defined benefit plan assets do
not include any direct holdings of the Company's stock but may include such
holdings to the extent that the stock is included as part of certain mutual fund
holdings.
The assets of the defined benefit pension plans consist principally of
listed stocks and bonds. Contributions are determined annually for each plan by
the Company's pension administrative committee, based upon the actuarially
determined minimum required contribution under the Employee Retirement Income
Security Act of 1974 ("ERISA"), as amended, and the maximum deductible
contribution allowed for tax purposes. For the plans covering employees who are
members of collective bargaining units, the benefit formulas are determined
according to the collective bargaining agreements, either using career average
pay as the base or a flat dollar amount per year of service. The benefit
formulas for the remaining defined benefit plans are based on final average pay.
The Company expects to contribute approximately $5 million to its defined
benefit pension plans in 2004.
The status of the funded defined benefit pension plan, the unfunded
accumulated post-retirement benefit plans, the accumulated benefit obligation,
and assumptions used to determine benefit information at December 31, 2003,
2002, and 2001, is shown below (dollars in millions):
Pension Benefits Other Post-retirement Benefits
--------------------------------- -------------------------------
2003 2002 2001 2003 2002 2001
---- ---- ---- ---- ---- ----
Change in Benefit Obligation
Benefit obligation at beginning of year
beginning of year $ 289 $ 257 $ 235 $ 47 $ 41 $ 38
Service cost 6 5 5 1 1 --
Interest cost 19 18 18 3 3 3
Plan participants'
contributions -- -- -- 2 1 1
Actuarial (gain) loss 7 24 13 1 5 2
Benefits paid (16) (15) (14) (5) (4) (3)
Amendments 17 -- -- -- -- --
Settlements (60) -- -- -- -- --
-------- ------- -------- ------- ------- --------
Benefit obligation at
end of year 262 289 257 49 47 41
-------- ------- -------- ------- ------- --------
Change in Plan Assets
Fair value of plan assets at
beginning of year 254 315 364
Actual return on plan assets 58 (46) (35)
Benefits paid (16) (15) (14)
Settlements (22) -- --
-------- ------- --------
Fair value of plan assets
at end of year 274 254 315
-------- ------- --------
Prepaid (Accrued) Benefit Cost
Funded status - Plan assets greater
than benefit obligation 12 (35) 58 (49) (47) (41)
Unrecognized net actuarial
(gain) loss 52 92 (5) 2 1 (4)
Unrecognized prior
service cost 3 8 10 -- -- --
Intangible asset 1 8 -- -- -- --
Minimum pension liability (6) (45) -- -- -- --
-------- ------- -------- ------- ------- --------
Prepaid (Accrued) benefit cost $ 62 $ 28 $ 63 $ (47) $ (46) $ (45)
======== ======= ======== ======= ======= ========
Accumulated Benefit
Obligation $ 234 $ 260 $ 231
======== ======= ========
Weighted Average Assumptions:
Discount rate 6.25% 6.50% 7.25% 6.25% 6.50% 7.25%
Expected return on plan assets 8.50% 9.00% 9.00%
Rate of compensation increase 4.00% 4.25% 4.25% 4.00% 4.25% 4.25%
Initial health care cost trend rate 8.50% 9.00% 10.00%
Ultimate rate 5.00% 5.00% 5.00%
Year ultimate rate is reached 2008 2006 2006
The expected return on plan assets is based on the Company's
historical returns combined with long-term expectations, based on the mix of
plan assets, asset class returns, and long-term inflation assumptions, after
consultation with the firm used by the Company for actuarial calculations. One,
three, and five-year pension returns were 23.5 percent, -2.2 percent, and 1.4
percent, respectively. Since 1989, the average return has been above 9 percent.
The actual returns have approximated or exceeded benchmark returns used by the
Company to evaluate performance of its fund managers.
The information for pension plans with an accumulated benefit
obligation in excess of plan assets at December 31, 2003 and 2002 is shown below
(in millions):
2003 2002
---- ----
Projected benefit obligation $ 56 $ 217
Accumulated benefit obligation $ 49 $ 193
Fair value of plan assets $ 47 $ 166
Components of the net periodic benefit cost for the defined benefit
pension plans and the post-retirement health care and life insurance benefit
plans during 2003, 2002, and 2001, are shown below (in millions):
Pension Benefits Other Post-retirement Benefits
----------------------------------- ---------------------------------
2003 2002 2001 2003 2002 2001
---- ---- ---- ---- ---- ----
Components of Net Periodic
Benefit Cost/(Income)
Service cost $ 6 $ 5 $ 5 $ 1 $ 1 $ 1
Interest cost 19 18 17 3 3 3
Expected return on plan
assets (22) (27) (32) -- -- --
Recognition of net gain 7 -- (5) -- (2) (3)
Amortization of prior
service cost 5 3 2 -- -- --
Recognition of settlement
(gain)/loss (17) -- -- -- -- --
------ ------- ------- ------- ------- -------
Net periodic benefit
cost/(income) $ (2) $ (1) $ (13) $ 4 $ 2 $ 1
====== ======= ======= ======= ======= =======
Unrecognized gains and losses of the post-retirement benefit plans are
amortized over five years. Although current health costs are increasing, the
Company attempts to mitigate these increases by maintaining caps on certain of
its benefit plans, using lower cost health care plan options where possible,
requiring that certain groups of employees pay a portion of their benefit costs,
self-insuring for certain insurance plans, encouraging wellness programs for
employees, and implementing measures to mitigate future benefit cost increases.
If the assumed health care cost trend rate were increased or decreased
by one percentage point, the accumulated post-retirement benefit obligation, as
of December 31, 2003, 2002 and 2001, and the net periodic post-retirement
benefit cost for 2003, 2002 and 2001, would have increased or decreased as
follows (in millions):
Other Post-retirement Benefits
One Percentage Point
----------------------------------------------------------------------------
Increase Decrease
------------------------------- --------------------------------
2003 2002 2001 2003 2002 2001
---- ---- ---- ---- ---- ----
Effect on total of service and
interest cost components $ -- $ -- $ -- $ -- $ -- $ --
Effect on post-retirement
benefit obligation $ 5 $ 4 $ 4 $ (4) $ (4) $ (3)
The Company has non-qualified supplemental pension plans covering
certain employees and retirees, which provide for incremental pension payments
from the Company's general funds, so that total pension benefits would be
substantially equal to amounts that would have been payable from the Company's
qualified pension plans if it were not for limitations imposed by income tax
regulations. The obligation, included with other non-current liabilities,
relating to these unfunded plans, totaled $13 million and $16 million at
December 31, 2003 and 2002, respectively. These amounts include the additional
minimum pension liability described below. The expense associated with the
non-qualified plans was $7 million, $3 million, and $3 million for 2003, 2002
and 2001, respectively. The 2003 expense included settlement and special
termination losses totaling $3 million.
The Company has recorded minimum pension liabilities for its qualified
and nonqualified plans as required by SFAS No. 87 representing the excess of
unfunded accumulated benefit obligations over previously recorded pension cost
liabilities. The change in the unfunded accumulated benefit obligations was
attributed primarily to fluctuations in the values of pension assets combined
with a reduction in the discount rate assumption. The components for 2002 and
2003 were as follows (in millions):
Other Non-current Other Non-current
Asset (unrecognized Liabilities (additional Accumulated Other
prior service cost) 1 minimum liability)1 Deferred Tax Asset Comprehensive Loss
------------------- -------------------- ------------------ ------------------
December 31, 2001 -- -- -- --
Change $ 8 $ (49) $ 16 $ 25
----- -------- ------ -----
December 31, 2002 8 (49) 16 25
Change (7) 40 (13) (20)
----- ------- ------ -----
December 31, 2003 $ 1 $ (9) $ 3 $ 5
===== ======= ====== =====
1The year-end balance is included in the total pension asset on the balance
sheet.
In December 2003, Matson Terminals, Inc., a subsidiary of Matson, and
two other Hawaii marine terminal operators formed the Hawaii Terminals
Multiemployer Plan. The termination of two of the Company's defined benefit
plans and the transfer of the obligations for terminated plan's benefit
obligations to the new multiemployer plan resulted in a settlement gain of $17
million. Approximately $22 million of assets were transferred to the
multiemployer plan in December in connection with this matter.
Total contributions to the multi-employer pension plans covering
personnel in shoreside and seagoing bargaining units were $6 million in 2003, $4
million in 2002, and $4 million in 2001.
Union collective bargaining agreements provide that total employer
contributions during the terms of the agreements must be sufficient to meet the
normal costs and amortization payments required to be funded during those
periods. Contributions are generally based on union labor paid or cargo volume.
A portion of such contributions is for unfunded accrued actuarial liabilities of
the plans being funded over periods of 25 to 40 years, which began between 1967
and 1976.
The multi-employer plans are subject to the plan termination insurance
provisions of ERISA and are paying premiums to the Pension Benefit Guaranty
Corporation ("PBGC"). The statutes provide that an employer who withdraws from,
or significantly reduces its contribution obligation to, a multi-employer plan
generally will be required to continue funding its proportional share of the
plan's unfunded vested benefits.
Under special rules approved by the PBGC and adopted by the Pacific
Coast longshore plan in 1984, Matson could cease Pacific Coast cargo-handling
operations permanently and stop contributing to the plan without any withdrawal
liability, provided that the plan meets certain funding obligations as defined
in the plan. The estimated withdrawal liabilities under the Hawaii longshore
plan and the seagoing plans aggregated approximately $50 million, based on
estimates by plan actuaries at the most recent valuation dates. This amount
includes an estimate of the withdrawal obligation of $19 million for the
previously noted Hawaii Terminals Multiemployer Plan. Management has no present
intention of withdrawing from and does not anticipate termination of any of the
aforementioned plans.
11. INCOME TAXES
The income tax expense on income from continuing operations for the
three years ended December 31, 2003 consisted of the following (in millions):
2003 2002 2001
---- ---- ----
Current:
Federal $ 43 $ 14 $ 64
State 3 (3) 8
------- ------ -------
Current 46 11 72
Deferred (6) 10 (7)
------- ------ -------
Income tax expense $ 40 $ 21 $ 65
======= ====== =======
Income tax expense for the three years ended December 31, 2003 differs
from amounts computed by applying the statutory federal rate to income from
continuing operations before income taxes, for the three years ended December
31, 2003 for the following reasons (in millions):
2003 2002 2001
---- ---- ----
Computed federal income tax expense $ 38 $ 23 $ 64
State income taxes 3 (2) 5
Dividend exclusion -- -- (1)
Prior years' tax settlement -- (1) --
Low income housing credits -- -- (1)
Fair market value over cost of donations -- -- (2)
Other--net (1) 1 --
-------- ------- -------
Income tax expense $ 40 $ 21 $ 65
======== ======= =======
State taxes include credits for low-income housing, capital goods
excise tax, residential construction and research activities, net of related
federal taxes.
The tax effects of temporary differences that give rise to significant
portions of the net deferred tax liability at December 31, 2003 and 2002 were as
follows (in millions):
2003 2002
---- ----
Property basis and depreciation $ 177 $ 165
Tax-deferred gains on real estate transactions 121 112
Capital Construction Fund 61 76
Benefit plans (1) (13)
Insurance reserves (10) (8)
Other--net (7) (6)
------- -------
Total $ 341 $ 326
======= =======
Examinations of the Company's federal income tax returns have been
completed through 1999. The State of Hawaii Department of Taxation is currently
auditing the Company's state tax returns for 1999-2001. Management believes that
the outcome of the current audit will not have a material effect on the
Company's financial position or results of operations
In 2002, the Internal Revenue Service completed its audit of the
Company's 1998 and 1999 tax returns and the State of California completed its
audit of the Company's 1996-1999 California income tax returns. This resulted in
a one-time reduction of income tax expense of $1 million, due to the reversal of
previously accrued income tax liabilities. The Company's 2002 effective tax rate
on continuing operations would have been 33.8 percent, excluding this item.
For each of 2003 and 2002, the Company received approximately $1
million of Hawaii tax credits, net of federal tax, from two investments it made
in a qualified high-tech business. The 2003 and 2002 benefit is reflected as a
reduction in Income Taxes Payable.
In 2003, 2002 and 2001, income tax benefits attributable to employee
stock option transactions of $2 million, $1 million and $1 million,
respectively, were not included in the tax provision, but were allocated
directly to stockholders' equity.
12. STOCK OPTIONS
Employee Stock Option Plans: The Company has two stock option plans
under which key employees are granted options to purchase shares of the
Company's common stock.
Adopted in 1998, the Company's 1998 Stock Option/Stock Incentive Plan
("1998 Plan") provides for the issuance of non-qualified stock options to
employees of the Company. Under the 1998 Plan, option prices may not be less
than the fair market value of the Company's common stock on the dates of grant
and the options become exercisable over periods determined, at the dates of
grant, by the Compensation and Stock Option Committee of the A&B Board of
Directors ("Compensation Committee") that administers the plan. Generally
options vest ratably over three years and expire ten years from the date of
grant. Payments for options exercised may be made in cash or in shares of the
Company's stock. If an option to purchase shares is exercised within five years
of the date of grant and if payment is made in shares of the Company's stock,
the option holder may receive, under a reload feature, a new stock option grant
for such number of shares as is equal to the number surrendered, with an option
price not less than the greater of the fair market value of the Company's stock
on the date of exercise or one and one-half times the original option price.
Adopted in 1989, the Company's 1989 Stock Option/Stock Incentive Plan
("1989 Plan") is substantially the same as the 1998 Plan, except that each
option is generally exercisable in full one year after the date granted. The
1989 Plan terminated in January 1999, but options granted through 1998 remain
exercisable.
The 1998 and 1989 Plans also permit the issuance of shares of the
Company's common stock as a reward for past service rendered to the Company or
one of its subsidiaries or as an incentive for future service with such
entities. The recipients' interest in such shares may be vested fully upon
issuance or may vest in one or more installments, upon such terms and conditions
as are determined by the committee that administers the plans. No shares were
issued during 2002 or 2003. At December 31, 2003, approximately 7,000 shares had
been awarded but had not yet vested.
Director Stock Option Plans: The Company has two Directors' stock
option plans. Under the 1998 Non-Employee Director Stock Option Plan ("1998
Directors' Plan"), each non-employee Director of the Company, elected at an
Annual Meeting of Shareholders, is automatically granted, on the date of each
such Annual Meeting, an option to purchase 3,000 shares of the Company's common
stock at the fair market value of the shares on the date of grant. Under an
amendment to the 1998 Directors' Plan that is being proposed at the 2004 Annual
Meeting of Shareholders, the number of options to purchase shares would be
increased to a greater number of shares. Each option to purchase shares
generally becomes exercisable ratably over three years following the date
granted.
The 1989 Non-Employee Directors Stock Option Plan ("1989 Directors'
Plan") is substantially the same as the 1998 Directors' Plan, except that each
option generally becomes exercisable in-full one year after the date granted.
This plan terminated in January 1999, but options granted through termination
remain exercisable.
Changes in shares and the weighted average exercise prices for the
three years ended December 31, 2003, were as follows (shares in thousands):
Employee Plans Directors' Plans
---------------------- ------------------------- Weighted
1998 1989 Average
1998 1989 Directors' Directors' Total Exercise
Plan Plan Plan Plan Shares Price
---- ---- ---- ---- ------ -----
December 31, 2000 1,086 2,407 48 168 3,709 $ 24.52
Granted 590 -- 24 -- 614 $ 27.23
Exercised (35) (244) -- -- (279) $ 23.53
Canceled (14) (21) -- (21) (56) $ 25.81
-------- -------- ------ ------ ---------
December 31, 2001 1,627 2,142 72 147 3,988 $ 24.99
Granted 431 -- 24 -- 455 $ 26.56
Exercised (263) (410) -- (21) (694) $ 23.65
Canceled (56) (522) -- -- (578) $ 28.67
-------- -------- ------ ------ ---------
December 31, 2002 1,739 1,210 96 126 3,171 $ 24.84
Granted 426 -- 24 -- 450 $ 26.16
Exercised (274) (690) (24) (27) (1,015) $ 24.48
Canceled (54) (61) (3) (12) (130) $ 24.61
-------- -------- ------ ------ ---------
December 31, 2003 1,837 459 93 87 2,476 $ 25.23
======== ======== ====== ====== =========
Exercisable 999 459 48 87 1,593 $ 24.57
-------- -------- ------ ------ ---------
As of December 31, 2003, the Company had reserved 1,860,213 and 10,000
shares of its common stock for the issuance of options under the 1998 Plan and
1998 Directors' Plan, respectively. Under the previously noted amendment to the
1998 Directors' Plan that is being proposed at the Company's 2004 Annual Meeting
of Shareholders, 350,000 additional shares would be added to the 1998 Directors'
Plan share reserve. Additional information about stock options outstanding as of
2003 year-end is summarized below (shares in thousands):
Weighted Weighted
Shares Average Weighted Shares Average
Range of Outstanding Remaining Average Exercisable Price of
Exercise as of Contractual Exercise as of Exercisable
Price 12/31/2003 Years Price 12/31/2003 Options
- ------------------ ---------- ------------- ------------ ---------- -------
$ 0.00 - 20.00 7 7.3 $ 0.00 -- --
$20.01 - 22.00 619 4.7 $21.28 619 $21.28
$22.01 - 24.00 191 3.3 $23.21 179 $23.22
$24.01 - 26.00 57 2.3 $24.88 56 $24.87
$26.01 - 28.00 1,086 6.7 $26.50 400 $26.94
$28.01 - 30.00 502 6.0 $28.36 336 $28.39
$30.01 - 32.00 10 8.2 $31.59 -- --
$32.01 - 34.88 4 2.5 $32.56 3 $32.63
----- -----
$ 0.00 - 34.88 2,476 5.7 $25.23 1,593 $24.57
===== =====
13. RELATED PARTY TRANSACTIONS, COMMITMENTS, GUARANTEES, AND CONTINGENCIES
Commitments, excluding the operating and capital lease commitments that
are described in Note 9, that were in effect at December 31, 2003 and 2002
included the following (in millions):
Arrangement 2003 2002
----------- ---- ----
Appropriations for capital expenditures (a) $ 282 $ 104
Vessel purchases (b) $ 107 $ 214
Guarantee of Sea Star debt (c) $ 27 $ 30
Guarantee of HS&TC debt (d) $ 15 $ 15
Guarantee of Hokua debt (e) $ 18 --
Standby letters of credit (f) $ 20 $ 21
Bonds (g) $ 12 $ 14
Benefit plan withdrawal obligations (h) $ 50 $ 11
These amounts are not recorded on the Company's balance sheet and,
based on the Company's current knowledge and with the exception of items (a) and
(b), it is not expected that the Company or its subsidiaries will be called upon
to advance funds under these commitments. The value of guarantees that were
entered into or modified subsequent to December 31, 2002 are recorded as
obligations as required by Financial Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others."
(a) At December 31, 2003, the Company and its subsidiaries had an
unspent balance of total appropriations for capital expenditures
of approximately $282 million. These expenditures are primarily
for vessel maintenance, real estate developments held for
investment purposes, containers and operating equipment and
vessel modifications. There are, however, no contractual
obligations to spend the entire amount. For 2004, internal cash
flows and existing credit lines are expected to be sufficient to
finance working capital needs, dividends, capital expenditures,
and debt service.
(b) During 2002, 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 or fourth
quarter of 2004. The cost of the second ship is expected to
be funded with a combination of cash from the Capital
Construction Fund, the issuance of new debt, and operations.
No significant payment is required until the acceptance and
delivery of each ship. No obligation is recorded on the
financial statements because conditions necessary to
record either a liability or an asset have not yet been met.
(c) At December 31, 2003, Matson had guaranteed $27 million of the
debt of Sea Star 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 further reduced by
scheduled repayments of the debt by Sea Star. Certain assets of
Sea Star serve as collateral for these borrowings and would
reduce Matson's guarantee obligations. Matson has not recorded
any liability for its obligations under the guarantee because
it believes that the likelihood of making any payments is not
probable.
(d) The Company, in the fourth quarter of 2003, guaranteed up to
$15 million of HS&TC's $30 million revolving credit line.
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 December 31, 2003, the amount drawn
was $10 million. The Company has not recorded a liability for
its obligation under the guarantee because it believes that the
likelihood of making any payment is not probable.
(e) Properties, in the fourth quarter of 2003, guaranteed $3 million
of the $12 million component of a $130 million construction loan
agreement that was entered into by HDH, LLC, a limited liability
company that is owned by Hokua Development Group LLC ("Hokua"),
a limited liability company in which the Company is an investor
(see Note 5). The $12 million component was used by Hokua to
acquire the land that is being developed. The Company would be
called upon to honor this guarantee in the event that Hokua is
unable to repay the construction loan. Additionally, the
Company has a limited guarantee equal to the lesser of $15
million or 15.5 percent of the outstanding loan balance that
could be triggered if the purchasers of condominium apartments
become entitled to rescind their purchase obligations. This
could occur if Hokua breaches covenants contained in its sales
contracts or violates the Interstate Land Sales Practices Act,
the Hawaii Condominium Act, the Securities Act of 1933 or the
Securities Exchange Act of 1934. The fair value of these
guarantees was estimated at $345,000 and is recorded as a
non-current obligation of the Company.
(f) The Company has arranged for standby letters of credit totaling
$20 million. This includes letters of credit, totaling
approximately $12 million, which 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 million for workers' compensation claims incurred by C&H
employees prior to December 24, 1998 (see Note 5). The
letter of credit is for the benefit of the State of
California Department of Industrial Relations ("CDIR"). The
Company only would be called upon by the CDIR to honor this
letter of credit in the event of C&H's non-payment of workers'
compensation claims or insolvency. The agreement with C&H to
provide this letter of credit expired on December 24, 2003.
C&H has advised the Company that it is unable to provide a
replacement security deposit. Until C&H meets this contractual
obligation, the Company will not be released from this letter of
credit. The remaining letters of credit, totaling $5 million,
are for insurance-related matters, construction performance
guarantees, and other routine operating matters.
(g) Of the $12 million in bonds, $7 million consists of subdivision
bonds related to real estate construction projects in Hawaii.
These bonds are required by either state or county governments
to ensure that certain infrastructure work required as part of
real-estate development is completed as required. The Company
has the financial ability and intention to complete these
improvements. Also included in the total are $5 million of
customs bonds.
(h) Under special rules approved by the Pension Benefit Guaranty
Corporation ("PBGC") and adopted by the Pacific Coast longshore
plan in 1984, the Company could cease Pacific Coast
cargo-handling operations permanently and stop contributing to
the plan without any withdrawal liability, provided that the
plan meets certain funding obligations as defined in the plan.
The estimated withdrawal liabilities under the Hawaii longshore
plan and the seagoing plans aggregated approximately $50 million
as of the most recent valuation dates, based on estimates by
plan actuaries. In December 2003, Matson joined the Hawaii
Terminals Multiemployer plan. An estimate of that withdrawal
liability is included in the total withdrawal obligation.
Management has no present intention of withdrawing from and does
not anticipate termination of any of the aforementioned plans.
C&H is a party to a sugar supply contract with Hawaiian Sugar &
Transportation Cooperative ("HS&TC"), a raw sugar marketing and transportation
cooperative that the Company uses to market and transport its sugar to C&H.
Under the terms of this contract, which expires with the 2008 crop, C&H (an
unconsolidated entity in which the Company has a minority ownership equity
interest - see Notes 4 and 5) is obligated to purchase, and HS&TC is obligated
to sell, all of the raw sugar delivered to HS&TC by the Hawaii sugar growers, at
prices determined by the quoted domestic sugar market. Revenue from raw sugar
sold to HS&TC was $71 million, $72 million and $70 million during 2003, 2002
and 2001, respectively.
In January 2004, Matson settled its claim with the State of Hawaii
Department of Taxation regarding the applicability of the Public Service Company
tax and its successor, the General Excise tax, to a portion of its ocean
transportation revenue, for approximately $4.7 million. This amount was accrued
as a cost of transportation services on the Consolidated Statement of Income
during 2003.
Note 5 contains additional information about transactions with
unconsolidated affiliates, which affiliates are also related parties, due to the
Company's minority interest investments.
In January 2004, a petition was filed by the Native Hawaiian Legal
Corporation, on behalf of four individuals, requesting that the State
of Hawaii Board of Land and Natural Resources ("BLNR") declare that the Company
has no current legal authority to continue to divert water from streams in East
Maui for use in its sugar growing operations, and to order the immediate full
restoration of these streams until a legal basis is established to permit the
diversions of the streams. The Company has objected to the petition, asked the
BLNR to conduct administrative hearings on the matter, and asked that the matter
be consolidated with the Company's currently pending application before the BLNR
for a long-term water license. If the Company is not permitted to divert stream
waters for its use, it would have a significant adverse effect on the Company's
sugar operations.
On February 6 and 7, 2004, union workers at Honolulu's two largest
concrete manufacturers, which supply most of the concrete on Oahu, went on
strike, shutting down both manufacturing operations. This shutdown had the
immediate impact of delaying the pouring of the foundation for the Hokua
project, but is not expected to have a near-term impact on construction at the
Lanikea project. Any prolonged strike will delay the completion of both
projects, as well as have wide-spread impact on construction generally on Oahu.
Although labor negotiations between union and management are ongoing, it is
difficult at this time to predict the likely duration of the strike.
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.
14. INDUSTRY SEGMENTS
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker, or decision-making group, in deciding how to allocate
resources and in assessing performance. The Company's chief operating
decision-making group is made up of the president and lead executives of the
Company and each of the Company's segments. The lead executive for each
operating segment manages the profitability, cash flows, and assets of his or
her respective segment's various product or service lines and businesses. The
operating segments are managed separately, because each operating segment
represents a strategic business unit that offers different products or services
and serves different markets. The Company has five segments that operate in
three industries: Transportation, Real Estate and Food Products.
The Transportation industry is comprised of two segments. Ocean
Transportation carries freight between various U.S. West Coast, major Hawaii
ports, Guam and other Pacific ports; holds investments in ocean transportation
entities that are considered integral to its operations and terminal service
businesses (see Note 5); and provides terminal, stevedoring and container
equipment management services in Hawaii. Logistics Services (formerly Intermodal
Systems) provides intermodal and motor carrier services and provides logistics
services in North America.
The Property Development and Management industry also is comprised of
two segments operating in Hawaii and on the U.S. mainland. Property Leasing
owns, operates, and manages commercial properties. Property Development and
Sales develops and sells commercial and residential properties.
The Food Products segment grows sugar cane and coffee in Hawaii;
produces bulk raw sugar, specialty food-grade sugars, molasses and green coffee;
markets and distributes roasted coffee and green coffee; provides sugar and
molasses hauling in Hawaii; and generates and sells electricity.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies. Reportable segments
are measured based on operating profit, exclusive of non-operating or unusual
transactions, interest expense, general corporate expenses, and income taxes.
Industry segment information for each of the five years ended December
31, 2003 is summarized below (in millions):
For the Year 2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Revenue:
Transportation:
Ocean transportation $ 776 $ 687 $ 682 $ 715 $ 662
Logistics services 238 195 122 132 119
Property development and management:
Leasing 80 73 71 62 54
Sales 64 93 89 46 48
Less amounts reported in discontinued
Operations1 (38) (73) (11) (11) (10)
Food products 113 113 106 108 116
-------- -------- -------- ------- --------
Total revenue $ 1,233 $ 1,088 $ 1,059 $ 1,052 $ 989
======== ======== ======== ======= ========
Operating Profit:
Transportation:
Ocean transportation $ 93 $ 42 $ 61 $ 94 $ 89
Logistics services 4 3 2 -- (5)
Property development and management:
Leasing 37 33 34 30 28
Sales 24 19 18 24 17
Less amounts reported in discontinued
Operations1 (19) (19) (6) (6) (6)
Food products 5 14 6 8 11
-------- -------- -------- ------- --------
Total operating profit 144 92 115 150 134
Write-down of long-lived assets2 (8) -- (29) -- (15)
Gain on Sale of Investment3 -- -- 126 -- --
Dividends and Other -- -- 1 2 3
Interest expense, net (12) (12) (19) (24) (18)
General corporate expenses (15) (13) (13) (12) (14)
-------- -------- -------- ------- --------
Income from continuing
operations before income taxes and
accounting changes $ 109 $ 67 $ 181 $ 116 $ 90
======== ======== ======== ======= ========
Identifiable Assets:
Transportation5 $ 982 $ 880 $ 888 $ 911 $ 895
Property development and management6 613 500 476 441 385
Food products 154 163 153 197 173
Other 11 10 27 117 109
-------- -------- -------- ------- --------
Total assets $ 1,760 $ 1,553 $ 1,544 $ 1,666 $ 1,562
======== ======== ======== ======= ========
Capital Expenditures:
Transportation5 $ 133 $ 10 $ 60 $ 40 $ 19
Property development and management4,6 107 84 72 45 67
Food products 13 10 9 22 17
Other 2 1 -- -- --
-------- -------- -------- ------- --------
Total capital expenditures $ 255 $ 105 $ 141 $ 107 $ 103
======== ======== ======== ======= ========
Depreciation and Amortization:
Transportation5 $ 52 $ 51 $ 55 $ 55 $ 56
Property development and management1, 6 12 10 9 7 5
Food products 9 9 9 8 10
Other -- -- 1 -- 1
-------- -------- -------- ------- --------
Total depreciation and
amortization $ 73 $ 70 $ 74 $ 70 $ 72
======== ======== ======== ======= ========
See Note 1 for information regarding changes in presentation for certain
revenues and expenses.
1 Prior year amounts restated for amounts treated as discontinued operations.
See Notes 1 and 3 for additional information.
2 See Note 4 for discussion of the write-down of long-lived assets and
investments in 2003 and 2001. The 1999 charge was for an impairment loss,
recorded under SFAS No. 121 for the Company's coffee business.
3 See Note 5 for a discussion of the gain on sale of marketable equity
securities that occurred in 2001.
4 Includes tax-deferred property purchases that are considered non-cash
transactions in the Consolidated Statements of Cash Flows; excludes capital
expenditures for real estate developments held for sale.
5 Includes both Ocean Transportation and Integrated Logistics because the
amounts for Integrated Logistics are not material.
6 Includes both Leasing and Development businesses because of a shared asset
base.
15. QUARTERLY INFORMATION (Unaudited)
Segment results by quarter for 2003 are listed below (in millions,
except per-share amounts):
2003
-----------------------------------------------------
Q1 Q2 Q3 Q4
--------- -------- --------- --------
Revenue:
Transportation:
Ocean transportation $ 186 $ 199 $ 192 $ 199
Logistics services 51 57 61 69
Property development and management:
Leasing 19 21 20 20
Sales 16 27 10 11
Less amounts reported in discontinued
operations (14) (24) -- --
Food products 15 35 34 29
--------- -------- --------- --------
Total revenue $ 273 $ 315 $ 317 $ 328
========= ======== ========= ========
Operating Profit (Loss):
Transportation:
Ocean transportation $ 12 $ 23 $ 25 $ 33
Logistics services 1 1 1 1
Property development and management:
Leasing 9 10 9 9
Sales 11 7 4 2
Less amounts reported in discontinued
operations (11) (7) -- (1)
Food products 2 2 -- 1
--------- -------- --------- --------
Total operating profit 24 36 39 45
Write-down of long-lived assets1 -- -- -- (8)
Interest Expense (3) (2) (3) (4)
General Corporate Expenses (4) (4) (2) (5)
--------- -------- --------- --------
Income From Continuing Operations
before Income Taxes 17 30 34 28
Income taxes (6) (11) (12) (11)
--------- -------- --------- --------
Income From Continuing Operations 11 19 22 17
Discontinued Operations2 7 4 -- 1
--------- -------- --------- --------
Net Income $ 18 $ 23 $ 22 $ 18
========= ======== ========= ========
Earnings Per Share:
Basic $ 0.43 $ 0.56 $ 0.52 $ 0.44
Diluted $ 0.42 $ 0.56 $ 0.52 $ 0.44
1 See Note 4 for discussion of the write-down of long-lived assets and
investments in 2003.
2 See Note 3 for discussion of discontinued operations.
Significant events for the Fourth Quarter of 2003 include the $17
million settlement gain due to Matson's joining the Hawaii Terminals
Multiemployer Plan and the $8 million impairment loss related to the Company's
investment in C&H.
Segment results by quarter for 2002 are listed below (in millions,
except per-share amounts):
2002
-----------------------------------------------------
Q1 Q2 Q3 Q4
--------- -------- --------- --------
Revenue:
Transportation:
Ocean transportation $ 155 $ 176 $ 181 $ 175
Logistics services 40 48 54 53
Property development and management:
Leasing 18 17 19 19
Sales 37 17 7 32
Less amounts reported in discontinued
operations (32) (7) (3) (31)
Food products 17 28 35 33
--------- -------- --------- --------
Total revenue $ 235 $ 279 $ 293 $ 281
========= ======== ========= ========
Operating Profit (Loss):
Transportation:
Ocean transportation $ 2 $ 14 $ 17 $ 9
Logistics services -- 1 1 1
Property development and management:
Leasing 9 7 9 8
Sales 9 3 2 5
Less amounts reported in discontinued
operations (8) (2) (3) (6)
Food products 2 1 5 6
--------- -------- --------- --------
Total operating profit 14 24 31 23
Interest Expense (3) (3) (3) (3)
General Corporate Expenses (3) (3) (3) (4)
--------- -------- --------- --------
Income From Continuing Operations
before Income Taxes 8 18 25 16
Income taxes (3) (6) (9) (3)
--------- -------- --------- --------
Income From Continuing Operations 5 12 16 13
Discontinued Operations1 5 1 2 4
--------- -------- --------- --------
Net Income $ 10 $ 13 $ 18 $ 17
========= ======== ========= ========
Earnings Per Share:
Basic $ 0.24 $ 0.32 $ 0.43 $ 0.43
Diluted $ 0.24 $ 0.32 $ 0.43 $ 0.42
1 See Note 3 for discussion of discontinued operations.
16. PARENT COMPANY CONDENSED FINANCIAL INFORMATION
Set forth below are the unconsolidated condensed financial statements
of Alexander & Baldwin, Inc. ("Parent Company"). The significant accounting
policies used in preparing these financial statements are substantially the same
as those used in the preparation of the consolidated financial statements as
described in Note 1, except that, for purposes of the tables presented in this
footnote, subsidiaries are carried under the equity method.
The following table presents the Parent Company's condensed Balance
Sheets as of December 31, 2003 and 2002 (in millions):
2003 2002
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $ -- $ --
Accounts and notes receivable, net 11 15
Prepaid expenses and other 15 12
-------- ---------
Total current assets 26 27
-------- ---------
Investments:
Subsidiaries consolidated, at equity 584 547
Other -- 1
-------- ---------
Total investments 584 548
-------- ---------
Property, at Cost 378 365
Less accumulated depreciation and amortization 176 166
-------- ---------
Property -- net 202 199
-------- ---------
Due from Subsidiaries 239 158
-------- ---------
Other Assets 29 30
-------- ---------
Total $ 1,080 $ 962
======== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 13 $ 10
Accounts payable 6 6
Income taxes payable 8 11
Other 16 14
-------- ---------
Total current liabilities 43 41
-------- ---------
Long-term Debt 147 118
-------- ---------
Other Long-term Liabilities 17 18
-------- ---------
Deferred Income Taxes 62 61
-------- ---------
Commitments and Contingencies
Shareholders' Equity:
Capital stock 35 34
Additional capital 112 85
Accumulated other comprehensive loss (8) (27)
Retained earnings 684 644
Cost of treasury stock (12) (12)
-------- ---------
Total shareholders' equity 811 724
-------- ---------
Total $ 1,080 $ 962
======== =========
The following table presents the Parent Company's condensed Statements
of Income for the years ended December 31, 2003, 2002 and 2001 (in millions):
2003 2002 2001
---- ---- ----
Revenue:
Food products $ 90 $ 91 $ 84
Property leasing 21 19 14
Property sales 2 4 15
Interest, dividends and other 13 15 132
--------- --------- ---------
Total revenue 126 129 245
--------- --------- ---------
Costs and Expenses:
Cost of agricultural goods and services 87 81 78
Cost of property sales and leasing services 10 11 15
Selling, general and administrative 16 13 13
Interest and other 13 13 21
Income taxes -- 1 42
--------- --------- ---------
Total costs and expenses 126 119 169
--------- --------- ---------
Income (Loss) from Continuing Operations -- 10 76
Discontinued Operations, net of income taxes -- 2 1
--------- --------- ---------
Income Before Equity in Income
of Subsidiaries Consolidated -- 12 77
Equity in Income from Continuing Operations of
Subsidiaries Consolidated 81 36 40
Equity in Income (Loss) from Discontinued
Operations of Subsidiaries Consolidated -- 10 (6)
--------- --------- ---------
Net Income 81 58 111
Other Comprehensive Income (Loss), net of income taxes 19 (27) (62)
--------- --------- ---------
Comprehensive Income $ 100 $ 31 $ 49
========= ========= =========
The following table presents the Parent Company's condensed Statements
of Cash Flows for the years ended December 31, 2003, 2002 and 2001 (in
millions):
2003 2002 2001
---- ---- ----
Cash Flows from Operations $ 19 $ (35) $ 6
------- ------- -------
Cash Flows from Investing Activities:
Capital expenditures (14) (11) (23)
Proceeds from disposal of property and investments 2 1 138
Dividends received from subsidiaries 40 40 40
Increase in investments -- -- --
------- ------- -------
Net cash provided by investing activities 28 30 155
------- ------- -------
Cash Flows from Financing Activities:
Increase (decrease) in intercompany payable (62) (3) 12
Proceeds from (repayments of) long-term debt, net 32 13 (123)
Proceeds from issuance of capital stock 20 16 5
Repurchases of capital stock -- -- (2)
Dividends paid (37) (37) (37)
------- ------- -------
Net cash used in financing activities (47) (11) (145)
------- ------- -------
Cash and Cash Equivalents:
Net increase (decrease) for the year -- (16) 16
Balance, beginning of year -- 16 --
------- ------- -------
Balance, end of year $ -- $ -- $ 16
======= ======= =======
Other Cash Flow Information:
Interest paid, net of amounts capitalized $ (9) $ (9) $ (14)
Income taxes paid (45) (52) (21)
Other Non-cash Information:
Depreciation expense (11) (12) (12)
Tax-deferred property sales -- 27 12
Tax-deferred property purchases -- (27) (12)
General Information: The Parent Company is headquartered in Honolulu,
Hawaii and is engaged in the operations that are described in Note 14, "Industry
Segments." Additional information related to the Parent Company is described in
the foregoing notes to the consolidated financial statements.
Long-term Debt: At December 31, 2003 and 2002, long-term debt consisted
of the following (in millions):
2003 2002
---- ----
Bank variable rate loans, due after 2003, 2003 high 2%, low 1.6% $ 32 $ 25
Term loans:
4.10%, payable through 2012 35 --
7.38%, payable through 2007 30 38
7.42%, payable through 2010 20 20
7.43%, payable through 2007 15 15
7.55%, payable through 2009 15 15
7.57%, payable through 2009 13 15
------- -------
Total 160 128
Less current portion 13 10
------- -------
Long-term debt $ 147 $ 118
======= =======
The Company has a revolving credit and term loan agreement with six
commercial banks, whereby it may borrow up to $185 million under revolving loans
through November 2004, at market rates of interest. Any revolving loan
outstanding on that date may be converted into a term loan that would be payable
in four equal quarterly installments. The agreement contains certain restrictive
covenants, the most significant of which requires the maintenance of an interest
coverage ratio of 2:1 and total debt to earnings before interest, depreciation,
amortization, and taxes of 3:1. At December 31, 2003 and 2002, $25 million and
$23 million, respectively, were outstanding under this agreement. The amount is
included in the five-year maturity schedule for 2005.
The Company has an uncommitted $70 million short-term revolving credit
agreement with a commercial bank. The agreement extends through November 2004,
but may be canceled by the bank or the Company at any time. The amount which the
Company may draw under the facility is reduced by the amount drawn against the
bank under the previously referenced $185 million multi-bank facility, in which
it is a participant, and by letters of credit issued under the $70 million
uncommitted facility. At December 31, 2003 and 2001, $7 million and $3 million,
respectively, were outstanding under this agreement. These amounts were
classified as non-current because the Company has the intent and ability to
refinance the balances through its $185 million facility. Under the borrowing
formula for this facility, the Company could have borrowed an additional $55
million at December 31, 2003. For sensitivity purposes, if the $185 million
facility had been drawn fully, the amount that could have been drawn under the
borrowing formula at 2003 year-end would have been $17 million.
The Company has a private shelf agreement for $75 million that expires
in November 2006. No amount had been drawn on this facility at December 31,
2003. This facility replaced a $50 million facility that would have expired in
April 2004 and against which the Company borrowed $35 million in 2003.
At December 31, 2003, maturities and planned prepayments of all
long-term debt during the next five years are $13 million in 2004, $50 million
in 2005, $18 million 2006 and $17 million in each of 2007 and 2008.
Other Long-term Liabilities: Other Long-term Liabilities at December
31, 2003 and 2002 consisted principally of deferred compensation, executive
benefit plans, additional minimum pension liability, and self-insurance
liabilities.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. 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 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 controls over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the Company's fiscal fourth quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A. Directors
For information about the directors of A&B, see the section captioned
"Election of Directors" in A&B's proxy statement dated March 8, 2004 ("A&B's
2004 Proxy Statement"), which section is incorporated herein by reference.
B. Executive Officers
The name of each executive officer of A&B (in alphabetical order), age
(in parentheses) as of March 31, 2004, and present and prior positions with A&B
and business experience for the past five years are given below.
Generally, the term of office of executive officers is at the pleasure
of the Board of Directors. For a discussion of compliance with Section 16(a) of
the Securities Exchange Act of 1934 by A&B's directors and executive officers,
see the subsection captioned "Section 16(a) Beneficial Ownership Reporting
Compliance" in A&B's 2004 Proxy Statement, which subsection is incorporated
herein by reference. For a discussion of severance agreements between A&B and
certain of A&B's executive officers, see the subsection captioned "Severance
Agreements" in A&B's 2004 Proxy Statement, which subsection is incorporated
herein by reference.
James S. Andrasick (60)
Executive Vice President of A&B, 4/02-present; Chief Financial Officer
and Treasurer of A&B, 6/00-2/04; President and Chief Executive Officer of
Matson, 7/02-present; Senior Vice President of A&B, 6/00-4/02; President and
Chief Operating Officer, C. Brewer and Company, Limited, 9/92-3/00.
Christopher J. Benjamin (40)
Vice President and Chief Financial Officer of A&B, 2/04-present; Vice
President (Corporate Development & Planning) of A&B, 4/03-2/04; Director
(Corporate Development & Planning) of A&B, 8/01-4/03; Vice President,
ChannelPoint, Inc., 10/99-6/01; Vice President, AmMed International, LLC,
4/98-10/99.
Meredith J. Ching (47)
Vice President (Government & Community Relations) of A&B,
10/92-present; Vice President (Government & Community Relations) of A&B-Hawaii,
Inc. ("ABHI"), 10/92-12/99; first joined A&B or a subsidiary in 1982.
Nelson N. S. Chun (51)
Vice President and General Counsel of A&B, 11/03-present; Partner,
Cades Schutte LLP, 10/83-11/03.
Matthew J. Cox (42)
Senior Vice President and Chief Financial Officer of Matson,
6/01-present; Controller of Matson, 6/01-1/03; Executive Vice President and
Chief Financial Officer, Distribution Dynamics, Inc., 8/99-6/01; Vice
President, American President Lines, Ltd., 12/86-7/99.
Allen Doane (56)
President and Chief Executive Officer of A&B, and Director of A&B and
Matson, 10/98-present; Chairman of Matson, 7/02-1/04; Vice Chairman of Matson,
12/98-7/02, 1/04-present; Executive Vice President of A&B, 8/98-10/98; Director
of ABHI, 4/97-12/99; Chief Executive Officer of ABHI, 1/97-12/99; President of
ABHI, 4/95-12/99; first joined A&B or a subsidiary in 1991.
John F. Gasher (70)
Vice President (Human Resources) of A&B, 12/99-present; Vice President
(Human Resources Development) of ABHI, 1/97-12/99; first joined A&B or a
subsidiary in 1960.
G. Stephen Holaday (59)
Vice President of A&B, 12/99-present; Senior Vice President of ABHI,
4/89-12/99; Vice President and Controller of A&B, 4/93-1/96; first joined A&B or
a subsidiary in 1983.
John B. Kelley (58)
Vice President (Investor Relations) of A&B, 8/01-present; Vice
President (Corporate Planning & Investor Relations) of A&B, 10/99-8/01; Vice
President (Investor Relations) of A&B, 1/95-10/99; Vice President of ABHI,
9/89-12/99; first joined A&B or a subsidiary in 1979.
Stanley M. Kuriyama (50)
Vice President (Properties Group) of A&B, 2/99-present; Chief Executive
Officer and Vice Chairman of A & B Properties, Inc., 12/99-present; Executive
Vice President of ABHI, 2/99-12/99; first joined A&B or a subsidiary in 1992.
Alyson J. Nakamura (38)
Secretary of A&B, 2/99-present; Assistant Secretary of A&B, 6/94-1/99;
Secretary of ABHI, 6/94-12/99; first joined A&B or a subsidiary in 1994.
Thomas A. Wellman (45)
Vice President of A&B, 2/04-present; Controller of A&B, 1/96-present;
Assistant Treasurer of A&B, 1/96-12/99, 6/00-2/04; Treasurer of A&B, 1/00-5/00,
2/04-present; Vice President of ABHI, 1/96-12/99; Controller of ABHI,
11/91-12/99; first joined A&B or a subsidiary in 1989.
C. Audit Committee Financial Expert
For information about the Audit Committee Financial Expert, see the
section captioned "Audit Committee Report" in A&B's 2004 Proxy Statement, which
section is incorporated herein by reference.
D. Code of Ethics
For information about A&B's Code of Ethics, see the subsection
captioned "Code of Ethics" in A&B's 2004 Proxy Statement, which subsection is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
See the section captioned "Executive Compensation" in A&B's 2004 Proxy
Statement, which section is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
See the section captioned "Security Ownership of Certain Shareholders"
and the subsection titled "Security Ownership of Directors and Executive
Officers" in A&B's 2004 Proxy Statement, which section and subsection are
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the subsection captioned "Certain Relationships and Transactions"
in A&B's 2004 Proxy Statement, which subsection is incorporated herein by
reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information concerning principal accountant fees and services appears
in the section captioned "Ratification of Appointment of Independent Auditors"
in A&B's 2004 Proxy Statement, which section is incorporated herein by
reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A. Financial Statements
The financial statements are set forth in Item 8 of Part II above.
B. Financial Statement Schedules
All schedules are omitted because of the absence of the conditions
under which they are required or because the information called for is included
in the financial statements or notes thereto.
C. Exhibits Required by Item 601 of Regulation S-K
Exhibits not filed herewith are incorporated by reference to the
exhibit number and previous filing shown in parentheses. All previous exhibits
were filed with the Securities and Exchange Commission in Washington, D.C.
Exhibits filed pursuant to the Securities Exchange Act of 1934 were filed under
file number 0-565. Shareholders may obtain copies of exhibits for a copying and
handling charge of $0.15 per page by writing to Alyson J. Nakamura, Secretary,
Alexander & Baldwin, Inc., P. O. Box 3440, Honolulu, Hawaii 96801.
3. Articles of incorporation and bylaws.
3.a. Restated Articles of Association of Alexander & Baldwin, Inc., as
restated effective May 5, 1986, together with Amendments dated April
28, 1988 and April 26, 1990 (Exhibits 3.a.(iii) and (iv) to A&B's Form
10-Q for the quarter ended March 31, 1990).
3.b. Revised Bylaws of Alexander & Baldwin, Inc. (as Amended Effective
February 22, 2001) (Exhibit 3.b.(i) to A&B's Form 10-K for the year
ended December 31, 2000).
4. Instruments defining rights of security holders, including indentures.
4.a. Equity.
4.a. Rights Agreement, dated as of June 25, 1998 between Alexander &
Baldwin, Inc. and Chase Mellon Shareholder Services, L.L.C. and
Press Release of Alexander & Baldwin, Inc. (Exhibits 4 and 99
to A&B's Form 8-K dated June 25, 1998).
4.b. Debt.
4.b. Third Amended and Restated Revolving Credit and Term Loan
Agreement, dated November 19, 2001, among Alexander & Baldwin,
Inc. and First Hawaiian Bank, Bank of America, N.A., Bank of
Hawaii, The Bank of New York, Wells Fargo Bank, National
Association, American Savings Bank, F.S.B., and First Hawaiian
Bank, as Agent (Exhibit 4.b. to A&B's Form 10-K for the year
ended December 31, 2001).
10. Material contracts.
10.a. (i) Issuing and Paying Agent Agreement between Matson Navigation
Company, Inc. and U.S. Bank National Association, as
successor-in-interest to Security Pacific National Trust (New York),
with respect to Matson Navigation Company, Inc.'s $150 million
commercial paper program dated September 18, 1992 (Exhibit
10.b.1.(xxviii) to A&B's Form 10-Q for the quarter ended September 30,
1992).
(ii) Note Agreement among Alexander & Baldwin, Inc., A&B-Hawaii, Inc.
and The Prudential Insurance Company of America, dated as of June 4,
1993 (Exhibit 10.a.(xiii) to A&B's Form 8-K dated June 4, 1993).
(iii) Amendment dated as of May 20, 1994 to the Note Agreement among
Alexander & Baldwin, Inc., A&B-Hawaii, Inc. and The Prudential
Insurance Company of America, dated as of June 4, 1993 (Exhibit
10.a.(xviv) to A&B's Form 10-Q for the quarter ended June 30, 1994).
(iv) Amendment dated as of June 30, 1995 to the Note Agreement, among
Alexander & Baldwin, Inc., A&B-Hawaii, Inc. and The Prudential
Insurance Company of America, dated as of June 4, 1993 (Exhibit
10.a.(xxvii) to A&B's Form 10-Q for the quarter ended June 30, 1995).
(v) Amendment dated as of November 29, 1995 to the Note Agreement among
Alexander & Baldwin, Inc., A&B-Hawaii, Inc. and The Prudential
Insurance Company of America, dated as of June 4, 1993 (Exhibit
10.a.(xvii) to A&B's Form 10-K for the year ended December 31, 1995).
(vi) Revolving Credit Agreement between Alexander & Baldwin, Inc.,
A&B-Hawaii, Inc., and First Hawaiian Bank, dated December 30, 1993
(Exhibit 10.a.(xx) to A&B's Form 10-Q for the quarter ended September
30, 1994).
(vii) Amendment dated August 31, 1994 to the Revolving Credit Agreement
between Alexander & Baldwin, Inc., A&B-Hawaii, Inc., and First Hawaiian
Bank dated December 30, 1993 (Exhibit 10.a.(xxi) to A&B's Form 10-Q for
the quarter ended September 30, 1994).
(viii) Second Amendment dated March 29, 1995 to the Revolving Credit
Agreement between Alexander & Baldwin, Inc., A&B-Hawaii, Inc., and
First Hawaiian Bank, dated December 30, 1993 (Exhibit 10.a.(xxiii) to
A&B's Form 10-Q for the quarter ended March 31, 1995).
(ix) Third Amendment dated November 30, 1995 to the Revolving Credit
Agreement between Alexander & Baldwin, Inc., A&B-Hawaii, Inc., and
First Hawaiian Bank, dated December 30, 1993 (Exhibit 10.a.(xvii) to
A&B's Form 10-K for the year ended December 31, 1996).
(x) Fourth Amendment dated November 25, 1996 to the Revolving Credit
Agreement between Alexander & Baldwin, Inc., A&B-Hawaii, Inc., and
First Hawaiian Bank, dated December 30, 1993 (Exhibit 10.a.(xviii) to
A&B's Form 10-K for the year ended December 31, 1996).
(xi) Fifth Amendment dated November 28, 1997 to the Revolving Credit
Agreement between Alexander & Baldwin, Inc., A&B-Hawaii, Inc., and
First Hawaiian Bank, dated December 30, 1993 (Exhibit 10.a.(xix) to
A&B's Form 10-K for the year ended December 31, 1997).
(xii) Sixth Amendment dated November 30, 1998 to the Revolving Credit
Agreement between Alexander & Baldwin, Inc., A&B-Hawaii, Inc., and
First Hawaiian Bank, dated December 30, 1993 (Exhibit 10.a.(xiv) to
A&B's Form 10-K for the year ended December 31, 1998).
(xiii) Seventh Amendment dated November 23, 1999 to the Revolving
Credit Agreement between Alexander & Baldwin, Inc., A&B-Hawaii, Inc.,
and First Hawaiian Bank, dated December 30, 1993 (Exhibit 10.a.(xv) to
A&B's Form 10-K for the year ended December 31, 1999).
(xiv) Eighth Amendment dated May 3, 2000 to the Revolving Credit
Agreement ("Agreement") between Alexander & Baldwin, Inc. and First
Hawaiian Bank, dated December 30, 1993 (A&B-Hawaii, Inc., an original
party to the Agreement, was merged into Alexander & Baldwin, Inc.
effective December 31, 1999) (Exhibit 10.a.(xxvii) to A&B's Form 10-Q
for the quarter ended June 30, 2000).
(xv) Ninth Amendment dated November 16, 2000 to the Revolving Credit
Agreement between Alexander & Baldwin, Inc. and First Hawaiian Bank,
dated December 30, 1993 (Exhibit 10.a.(xvii) to A&B's Form 10-K for the
year ended December 31, 2000).
(xvi) Tenth Amendment dated November 30, 2001 to the Revolving Credit
Agreement between Alexander & Baldwin, Inc. and First Hawaiian Bank,
dated December 30, 1993 (Exhibit 10.a.(xviii) to A&B's Form 10-K for
the year ended December 31, 2001).
(xvii) Eleventh Amendment dated November 21, 2002 to the Revolving
Credit Agreement between Alexander & Baldwin, Inc. and First Hawaiian
Bank, dated December 30, 1993 (Exhibit 10.a.(xix) to A&B's Form 10-K
for the year ended December 31, 2002).
(xviii) Twelfth Amendment dated November 12, 2003 to the Revolving
Credit Agreement between Alexander & Baldwin, Inc. and First Hawaiian
Bank, dated December 30, 1993.
(xix) Private Shelf Agreement between Alexander & Baldwin, Inc.,
A&B-Hawaii, Inc., and Prudential Insurance Company of America, dated as
of August 2, 1996 (Exhibit 10.a.(xxxiii) to A&B's Form 10-Q for the
quarter ended September 30, 1996).
(xx) First Amendment, dated as of February 5, 1999, to the Private
Shelf Agreement between Alexander & Baldwin, Inc., A&B-Hawaii, Inc.,
and Prudential Insurance Company of America, dated as of August 2, 1996
(Exhibit 10.a.(xxii) to A&B's Form 10-K for the year ended December 31,
1998).
(xxi) Private Shelf Agreement between Alexander & Baldwin, Inc. and
Prudential Insurance Company of America, dated as of April 25, 2001
(Exhibit 10.a.(xlvii) to A&B's Form 10-Q for the quarter ended June 30,
2001).
(xxii) Amendment, dated as of April 25, 2001, to the Note Agreement
among Alexander & Baldwin, Inc., A&B-Hawaii, Inc. and The Prudential
Insurance Company of America, dated as of June 4, 1993, and the Private
Shelf Agreement between Alexander & Baldwin, Inc., A&B-Hawaii, Inc.,
and Prudential Insurance Company of America, dated as of August 2, 1996
(Exhibit 10.a.(xlviii) to A&B's Form 10-Q for the quarter ended June
30, 2001).
(xxiii) Private Shelf Agreement between Matson Navigation Company, Inc.
and Prudential Insurance Company of America, dated as of June 29, 2001
(Exhibit 10.a.(xlix) to A&B's Form 10-Q for the quarter ended June 30,
2001).
(xxiv) Private Shelf Agreement between Alexander & Baldwin, Inc. and
Prudential Investment Management, Inc., dated as of November 25, 2003.
(xxv) Letter Amendment dated as of November 25, 2003 to the Private
Shelf Agreement between Alexander & Baldwin, Inc., A&B-Hawaii, Inc.,
and Prudential Insurance Company of America, dated as of August 2,
1996, and the Private Shelf Agreement between Alexander & Baldwin, Inc.
and Prudential Insurance Company of America, dated as of April 25,
2001, among The Prudential Insurance Company of America, Pruco Life
Insurance Company, Pruco Life Insurance Company of New Jersey and
Alexander & Baldwin, Inc.
(xxvi) Amended and Restated Asset Purchase Agreement, dated as of
December 24, 1998, by and among California and Hawaiian Sugar Company,
Inc., A&B-Hawaii, Inc., McBryde Sugar Company, Limited and Sugar
Acquisition Corporation (without exhibits or schedules) (Exhibit
10.a.1.(xxxvi) to A&B's Form 8-K dated December 24, 1998).
(xxvii) Amended and Restated Stock Sale Agreement, dated as of December
24, 1998, by and between California and Hawaiian Sugar Company, Inc.
and Citicorp Venture Capital, Ltd. (without exhibits) (Exhibit
10.a.1.(xxxvii) to A&B's Form 8-K dated December 24, 1998).
(xxviii) Pro forma financial information relative to the Amended and
Restated Asset Purchase Agreement, dated as of December 24, 1998, by
and among California and Hawaiian Sugar Company, Inc., A&B-Hawaii,
Inc., McBryde Sugar Company, Limited and Sugar Acquisition Corporation,
and the Amended and Restated Stock Sale Agreement, dated as of December
24, 1998, by and between California and Hawaiian Sugar Company, Inc.
and Citicorp Venture Capital, Ltd. (Exhibit 10.a.1.(xxxviii) to A&B's
Form 8-K dated December 24, 1998).
(xxix) Vessel Construction Contract between Matson Navigation Company,
Inc. and Kvaerner Philadelphia Shipyard Inc., dated May 29, 2002
(Exhibit 10.a.(xxvii) to A&B's Form 10-Q for the quarter ended June 30,
2002).
(xxx) Vessel Purchase and Sale Agreement between Matson Navigation
Company, Inc. and Kvaerner Shipholding, Inc., dated May 29, 2002
(Exhibit 10.a.(xxviii) to A&B's Form 10-Q for the quarter ended June
30, 2002).
(xxxi) Waiver of Cancellation Provisions Vessel Construction Contracts
among Matson Navigation Company, Inc., Kvaerner Philadelphia Shipyard
Inc. and Kvaerner Shipholding Inc., dated December 30, 2002 (Exhibit
10.a.(xxx) to A&B's Form 10-K for the year ended December 31, 2002).
*10.b.1. (i) Alexander & Baldwin, Inc. 1989 Stock Option/Stock Incentive
Plan (Exhibit 10.c.1.(ix) to A&B's Form 10-K for the year ended
December 31, 1988).
(ii) Amendment No. 1 to the Alexander & Baldwin, Inc. 1989 Stock
Option/Stock Incentive Plan (Exhibit 10.b.1.(xxvi) to A&B's Form 10-Q
for the quarter ended June 30, 1992).
(iii) Amendment No. 2 to the Alexander & Baldwin, Inc. 1989 Stock
Option/Stock Incentive Plan (Exhibit 10.b.1.(iv) to A&B's Form 10-Q for
the quarter ended March 31, 1994).
(iv) Amendment No. 3 to the Alexander & Baldwin, Inc. 1989 Stock
Option/Stock Incentive Plan (Exhibit 10.b.1.(ix) to A&B's Form 10-K for
the year ended December 31, 1994).
(v) Amendment No. 4 to the Alexander & Baldwin, Inc. 1989 Stock
Option/Stock Incentive Plan (Exhibit 10.b.1.(v) to A&B's Form 10-K for
the year ended December 31, 2000).
(vi) Alexander & Baldwin, Inc. 1989 Non-Employee Director Stock Option
Plan (Exhibit 10.c.1.(x) to A&B's Form 10-K for the year ended December
31, 1988).
(vii) Amendment No. 1 to the Alexander & Baldwin, Inc. 1989
Non-Employee Director Stock Option Plan (Exhibit 10.b.1.(xxiv) to A&B's
Form 10-K for the year ended December 31, 1991).
(viii) Amendment No. 2 to the Alexander & Baldwin, Inc. 1989
Non-Employee Director Stock Option Plan (Exhibit 10.b.1.(xxvii) to
A&B's Form 10-Q for the quarter ended June 30, 1992).
(ix) Amendment No. 3 to the Alexander & Baldwin, Inc. 1989 Non-Employee
Director Stock Option Plan (Exhibit 10.b.1.(ix) to A&B's Form 10-K for
the year ended December 31, 2000).
(x) Alexander & Baldwin, Inc. 1998 Stock Option/Stock Incentive Plan
(Exhibit 10.b.1.(xxxii) to A&B's Form 10-Q for the quarter ended March
31, 1998).
(xi) Amendment No. 1 to the Alexander & Baldwin, Inc. 1998 Stock
Option/Stock Incentive Plan (Exhibit 10.b.1.(xi) to A&B's Form 10-K for
the year ended December 31, 2000).
(xii) Alexander & Baldwin, Inc. 1998 Non-Employee Director Stock Option
Plan (Exhibit 10.b.1.(xxxiii) to A&B's Form 10-Q for the quarter ended
March 31, 1998).
________________________________
*All exhibits listed under 10.b.1. are management contracts or compensatory
plans or arrangements.
(xiii) Amendment No. 1 to the Alexander & Baldwin, Inc. 1998
Non-Employee Director Stock Option Plan (Exhibit 10.b.1.(xiii) to A&B's
Form 10-K for the year ended December 31, 2000).
(xiv) Alexander & Baldwin, Inc. Non-Employee Director Stock Retainer
Plan, dated June 25, 1998 (Exhibit 10.b.1.(xxxiv) to A&B's Form 10-Q
for the quarter ended June 30, 1998).
(xv) Amendment No. 1 to Alexander & Baldwin, Inc. Non-Employee Director
Stock Retainer Plan, effective December 9, 1999 (Exhibit 10.b.1.(xi) to
A&B's Form 10-K for the year ended December 31, 1999).
(xvi) Settlement Agreement and General Release of Claims among C.
Bradley Mulholland, Matson Navigation Company, Inc. and Alexander &
Baldwin, Inc. dated December 31, 2003.
(xvii) A&B Deferred Compensation Plan for Outside Directors (Exhibit
10.c.1.(xviii) to A&B's Form 10-K for the year ended December 31,
1985).
(xviii) Amendment No. 1 to A&B Deferred Compensation Plan for Outside
Directors, effective October 27, 1988 (Exhibit 10.c.1.(xxix) to A&B's
Form 10-Q for the quarter ended September 30, 1988).
(xix) A&B Life Insurance Plan for Outside Directors (Exhibit
10.c.1.(xix) to A&B's Form 10-K for the year ended December 31, 1985).
(xx) A&B Excess Benefits Plan, Amended and Restated effective February
1, 1995 (Exhibit 10.b.1.(xx) to A&B's Form 10-K for the year ended
December 31, 1994).
(xxi) Amendment No. 1 to the A&B Excess Benefits Plan, dated June 26,
1997 (Exhibit 10.b.1.(xxxi) to A&B's Form 10-Q for the quarter ended
June 30, 1997).
(xxii) Amendment No. 2 to the A&B Excess Benefits Plan, dated December
10, 1997 (Exhibit 10.b.1.(xx) to A&B's Form 10-K for the year ended
December 31, 1997).
(xxiii) Amendment No. 3 to the A&B Excess Benefits Plan, dated April
23, 1998 (Exhibit 10.b.1.(xxxv) to A&B's Form 10-Q for the quarter
ended June 30, 1998).
(xxiv) Amendment No. 4 to the A&B Excess Benefits Plan, dated June 25,
1998 (Exhibit 10.b.1.(xxxvi) to A&B's Form 10-Q for the quarter ended
June 30, 1998).
(xxv) Amendment No. 5 to the A&B Excess Benefits Plan, dated December
9, 1998 (Exhibit 10.b.1.(xxii) to A&B's Form 10-K for the year ended
December 31, 1998).
(xxvi) Amendment No. 6 to the A&B Excess Benefits Plan, dated October
25, 2000 (Exhibit 10.b.1.(xxviii) to A&B's Form 10-K for the year ended
December 31, 2000).
(xxvii) Amendment No. 7 to the A&B Excess Benefits Plan, dated October
22, 2003.
(xxviii) Restatement of the A&B Executive Survivor/Retirement Benefit
Plan, effective February 1, 1995 (Exhibit 10.b.1.(xxii) to A&B's Form
10-K for the year ended December 31, 1994).
(xxix) Amendment No. 1 to the A&B Executive Survivor/Retirement Benefit
Plan, dated October 25, 2000 (Exhibit 10.b.1.(xxx) to A&B's Form 10-K
for the year ended December 31, 2000).
(xxx) Restatement of the A&B 1985 Supplemental Executive Retirement
Plan, effective February 1, 1995 (Exhibit 10.b.1.(xxiv) to A&B's Form
10-K for the year ended December 31, 1994).
(xxxi) Amendment No. 1 to the A&B 1985 Supplemental Executive
Retirement Plan, dated August 27, 1998 (Exhibit 10.b.1.(xliii) to A&B's
Form 10-Q for the quarter ended September 30, 1998).
(xxxii) Amendment No. 2 to the A&B 1985 Supplemental Executive
Retirement Plan, dated October 25, 2000 (Exhibit 10.b.1.(xxxiii) to
A&B's Form 10-K for the year ended December 31, 2000).
(xxxiii) Restatement of the A&B Retirement Plan for Outside Directors,
effective February 1, 1995 (Exhibit 10.b.1.(xxvi) to A&B's Form 10-K
for the year ended December 31, 1994).
(xxxiv) Amendment No. 1 to the A&B Retirement Plan for Outside
Directors, dated August 27, 1998 (Exhibit 10.b.1.(xlii) to A&B's Form
10-Q for the quarter ended September 30, 1998).
(xxxv) Amendment No. 2 to the A&B Retirement Plan for Outside
Directors, dated October 25, 2000 (Exhibit 10.b.1.(xxxvi) to A&B's Form
10-K for the year ended December 31, 2000).
(xxxvi) Form of Severance Agreement entered into with certain executive
officers, as amended and restated effective August 24, 2000 (Exhibit
10.b.1.(xli) to A&B's Form 10-Q for the quarter ended September 30,
2000).
(xxxvii) Alexander & Baldwin, Inc. One-Year Performance Improvement
Incentive Plan, as restated effective October 22, 1992 (Exhibit
10.b.1.(xxi) to A&B's Form 10-K for the year ended December 31, 1992).
(xxxviii) Amendment No. 1 to the Alexander & Baldwin, Inc. One-Year
Performance Improvement Incentive Plan, dated December 13, 2001
(Exhibit 10.b.1.(xxxvii) to A&B's Form 10-K for the year ended December
31, 2001).
(xxxix) Alexander & Baldwin, Inc. Three-Year Performance Improvement
Incentive Plan, as restated effective October 22, 1992 (Exhibit
10.b.1.(xxii) to A&B's Form 10-K for the year ended December 31, 1992).
(xl) Alexander & Baldwin, Inc. Deferred Compensation Plan effective
August 25, 1994 (Exhibit 10.b.1.(xxv) to A&B's Form 10-Q for the
quarter ended September 30, 1994).
(xli) Amendment No. 1 to the Alexander & Baldwin, Inc. Deferred
Compensation Plan, effective July 1, 1997 (Exhibit 10.b.1.(xxxii) to
A&B's Form 10-Q for the quarter ended June 30, 1997).
(xlii) Amendment No. 2 to the Alexander & Baldwin, Inc. Deferred
Compensation Plan, dated June 25, 1998 (Exhibit 10.b.1.(xxxvii) to
A&B's Form 10-Q for the quarter ended June 30, 1998).
(xliii) Amendment No. 3 to the Alexander & Baldwin, Inc. Deferred
Compensation Plan, dated October 25, 2000 (Exhibit 10.b.1.(xliii) to
A&B's Form 10-K for the year ended December 31, 2000).
(xliv) Alexander & Baldwin, Inc. Restricted Stock Bonus Plan, as
restated effective April 28, 1988 (Exhibit 10.c.1.(xi) to A&B's Form
10-Q for the quarter ended June 30, 1988).
(xlv) Amendment No. 1 to the Alexander & Baldwin, Inc. Restricted Stock
Bonus Plan, effective December 11, 1997 (Exhibit 10.b.1.(ii) to A&B's
Form 10-K for the year ended December 31, 1997).
(xlvi) Amendment No. 2 to the Alexander & Baldwin, Inc. Restricted
Stock Bonus Plan, dated June 25, 1998 (Exhibit 10.b.1.(xxxviii) to
A&B's Form 10-Q for the quarter ended June 30, 1998).
(xlvii) Amendment No. 2 to the Alexander & Baldwin, Inc. 1998 Stock
Option/Stock Incentive Plan (Exhibit 10.b.1.(xlvi) to A&B's Form 10-Q
for the quarter ended March 31, 2002).
21. Subsidiaries.
21. Alexander & Baldwin, Inc. Subsidiaries as of February 19, 2004.
23. Consent of Deloitte & Touche LLP dated March 8, 2004 (included as the
last page of A&B's Form 10-K for the year ended December 31, 2003).
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.
D. Reports on Form 8-K
During the quarter ended December 31, 2003, A&B furnished a Current
Report on Form 8-K dated October 23, 2003 pursuant to Item 12 that attached a
press release announcing A&B's financial results for the quarter ended September
30, 2003.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 8, 2004 By /s/ Allen Doane
------------------------------------------
Allen Doane, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Allen Doane President and Chief March 8, 2004
- ------------------------------- Executive Officer and
Allen Doane Director
/s/ Christopher J. Benjamin Vice President and March 8, 2004
- ------------------------------- Chief Financial Officer
Christopher J. Benjamin
/s/ Thomas A. Wellman Vice President, March 8, 2004
- ------------------------------- Controller and
Thomas A. Wellman Treasurer
/s/ Charles M. Stockholm Chairman of the Board March 8, 2004
- ------------------------------- and Director
Charles M. Stockholm
/s/ Michael J. Chun Director March 8, 2004
- -------------------------------
Michael J. Chun
/s/ Leo E. Denlea, Jr. Director March 8, 2004
- -------------------------------
Leo E. Denlea, Jr.
/s/ Walter A. Dods, Jr. Director March 8, 2004
- -------------------------------
Walter A. Dods, Jr.
/s/ Charles G. King Director March 8, 2004
- -------------------------------
Charles G. King
/s/ Carson R. McKissick Director March 8, 2004
- -------------------------------
Carson R. McKissick
/s/ Maryanna G. Shaw Director March 8, 2004
- -------------------------------
Maryanna G. Shaw
/s/ Jeffrey N. Watanabe Director March 8, 2004
- -------------------------------
Jeffrey N. Watanabe
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements
33-31922, 33-31923, 33-54825, and 333-69197 of Alexander & Baldwin, Inc. and
subsidiaries on Form S-8 of our report dated February 6, 2004, appearing in this
Annual Report on Form 10-K of Alexander & Baldwin, Inc. and subsidiaries for the
year ended December 31, 2003.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Honolulu, Hawaii
March 8, 2004