UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2004
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission file number 0-565
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ALEXANDER & BALDWIN, INC.
-------------------------
(Exact name of registrant as specified in its charter)
Hawaii 99-0032630
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P. O. Box 3440, Honolulu, Hawaii 9680l
822 Bishop Street, Honolulu, Hawaii 96813
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(Address of principal executive offices) (Zip Code)
(808) 525-6611
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address, and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|
Number of shares of common stock outstanding as of
September 30, 2004: 42,662,182
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
The condensed financial statements and notes for the third quarter and first
nine months of 2004 are presented below, with comparative figures from the 2003
financial statements. These financial statements are unaudited.
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(In millions, except per-share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
---- ---- ---- ----
Revenue:
Operating revenue $ 384.2 $ 316.3 $ 1,105.0 $ 903.5
------------ ------------ ----------- -----------
Costs and Expenses:
Costs of goods sold, services and rentals 310.1 253.4 872.2 729.6
Selling, general and administrative 31.3 26.6 93.3 86.5
Interest 3.1 3.1 9.5 8.1
------------ ------------ ----------- -----------
Total costs and expenses 344.5 283.1 975.0 824.2
------------ ------------ ----------- -----------
Income Before Taxes 39.7 33.2 130.0 79.3
Income taxes 15.1 11.7 49.4 28.6
------------ ------------ ----------- -----------
Income From Continuing Operations 24.6 21.5 80.6 50.7
Discontinued Operations (net of income taxes):
Properties 0.2 0.2 1.4 11.8
------------ ------------- ----------- -----------
Net Income $ 24.8 $ 21.7 $ 82.0 $ 62.5
============ ============ =========== ===========
Basic Earnings Per Share:
Continuing operations $ 0.58 $ 0.52 $ 1.90 $ 1.22
Discontinued operations -- -- 0.03 0.29
------------ ------------ ----------- -----------
Net income $ 0.58 $ 0.52 $ 1.93 $ 1.51
============ ============ =========== ===========
Diluted Earnings Per Share:
Continuing operations $ 0.58 $ 0.52 $ 1.88 $ 1.22
Discontinued operations -- -- 0.03 0.28
------------ ------------ ----------- -----------
Net income $ 0.58 $ 0.52 $ 1.91 $ 1.50
============ ============ =========== ===========
Dividends Per Share $ 0.225 $ 0.225 $ 0.675 $ 0.675
Average Number of Shares Outstanding 42.5 41.6 42.5 41.5
See Notes to Condensed Consolidated Financial Statements.
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
Industry Segment Data, Net Income
(In millions)
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
---- ---- ---- ----
Revenue:
Transportation:
Ocean transportation $ 215.0 $ 191.6 $ 619.6 $ 577.0
Logistics services 99.5 60.8 267.1 169.2
Property Development and Management:
Leasing 20.9 20.3 62.1 60.0
Sales 11.6 10.4 80.0 53.5
Less amounts reported in discontinued
operations (0.4) (0.4) (2.3) (39.8)
Food Products 38.3 33.6 80.6 83.6
Inter-segment Revenue (0.7) -- (2.1) --
------------ ------------ -------------- --------------
Total revenue $ 384.2 $ 316.3 $ 1,105.0 $ 903.5
============ ============ ============== ==============
Operating Profit, Net Income:
Transportation:
Ocean transportation $ 33.0 $ 25.1 $ 83.0 $ 60.4
Logistics services 2.2 1.4 5.8 3.3
Property Development and Management:
Leasing 10.1 9.1 28.8 27.2
Sales 2.5 2.6 34.9 21.1
Less amounts reported in discontinued
operations (0.3) (0.3) (2.2) (19.0)
Food Products 0.6 0.4 3.5 4.6
------------ ------------ -------------- --------------
Total operating profit 48.1 38.3 153.8 97.6
Interest Expense (3.1) (3.1) (9.5) (8.1)
General Corporate Expenses (5.3) (2.0) (14.3) (10.2)
------------ ------------ -------------- --------------
Income From Continuing Operations Before
Income Taxes 39.7 33.2 130.0 79.3
Income Taxes (15.1) (11.7) (49.4) (28.6)
------------ ------------ -------------- --------------
Income From Continuing Operations 24.6 21.5 80.6 50.7
Discontinued Operations (net of income taxes):
Properties 0.2 0.2 1.4 11.8
------------ ------------ -------------- --------------
Net Income $ 24.8 $ 21.7 $ 82.0 $ 62.5
============ ============ ============== ==============
See Notes to Condensed Consolidated Financial Statements.
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In millions)
September 30, December 31,
2004 2003
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $ 35 $ 6
Accounts and notes receivable, net 180 160
Inventories 19 16
Real estate held for sale 21 30
Deferred income taxes 13 15
Prepaid expenses and other assets 20 20
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Total current assets 288 247
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Investments 100 68
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Real Estate Developments 74 77
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Property, at cost 2,000 1,888
Less accumulated depreciation and amortization 850 809
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Property - net 1,150 1,079
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Capital Construction Fund 25 165
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Other Assets 123 124
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Total $ 1,760 $ 1,760
=========== =========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable and current portion of long-term debt $ 39 $ 15
Accounts payable 97 95
Other 103 73
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Total current liabilities 239 183
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Long-term Liabilities:
Long-term debt 230 330
Deferred income taxes 334 356
Post-retirement benefit obligations 45 44
Other 36 36
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Total long-term liabilities 645 766
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Commitments and Contingencies
Shareholders' Equity:
Capital stock 35 35
Additional capital 127 112
Accumulated other comprehensive loss and Deferred (9) (8)
compensation
Retained earnings 734 684
Cost of treasury stock (11) (12)
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Total shareholders' equity 876 811
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Total $ 1,760 $ 1,760
=========== =========
See Notes to Condensed Consolidated Financial Statements.
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In millions)
Nine Months Ended
September 30,
2004 2003
---- ----
Cash Flows from Operating Activities $ 124 $ 115
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Cash Flows from Investing Activities:
Capital expenditures (135) (130)
Proceeds from disposal of property and other assets 21 6
Capital Construction Fund, net 140 38
Deposit in escrow for property purchase -- (77)
Investments, net (22) (4)
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Net cash from (used in) investing activities 4 (167)
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Cash Flows from Financing Activities:
Proceeds from issuances of long-term debt 56 226
Payments of long-term debt (134) (133)
Proceeds from issuances of capital stock , net 8 11
Dividends paid (29) (28)
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Net cash from (used in) financing activities (99) 76
------- -------
Net Increase in Cash and Cash Equivalents $ 29 $ 24
======= =======
Other Cash Flow Information:
Interest paid, net of amounts capitalized $ (11) $ (8)
Income taxes paid, net of refunds (49) (23)
Other Non-cash Information:
Depreciation expense (59) (52)
Tax-deferred property sales 1 34
Tax-deferred property purchases -- (30)
Debt assumed in real estate acquisition -- 15
Assets conveyed to joint venture 5 28
See Notes to Condensed Consolidated Financial Statements.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) The Condensed Consolidated Financial Statements are unaudited. Because
of the nature of the Company's operations, the results for interim
periods are not necessarily indicative of results to be expected for
the year. In the opinion of management, all material adjustments
necessary for the fair presentation of interim period results have been
included in the interim financial statements.
(2) The 2004 estimated effective income tax rate is substantially the same
as the statutory rate. The 2003 estimated effective income tax rate
differs from the statutory rate due primarily to tax credits and life
insurance.
(3) Commitments and Contingencies: Commitments, excluding operating lease
commitments, that were in effect at September 30, 2004, included the
following (in millions):
Guarantee of Hokua debt (a) $ 18
Guarantee of HS&TC debt (b) $ 15
Standby letters of credit (c) $ 18
Bonds (d) $ 13
Benefit plan withdrawal obligations (e) $ 64
These amounts are not recorded on the Company's balance sheet and,
based on the Company's current knowledge and with the exception of item
(a), it is not expected that the Company or its subsidiaries will be
called upon to advance funds under these commitments.
(a) At September 30, 2004, A&B Properties, Inc.
("Properties") had guaranteed $2.5 million of the $12
million component of a $130 million construction loan
agreement that was entered into by Hokua Development
Group LLC ("Hokua"), a limited liability company in
which the Company is an investor. The $12 million
component was used by Hokua to acquire the land that is
being developed. This guarantee terminates upon the
initial funding of the balance of the construction loan.
This funding is expected to begin in early 2005.
Properties would be called upon to honor this guarantee
in the event that the construction loan is not funded.
Properties also has a limited guarantee equal to the
lesser of $15 million or 15.5 percent of the outstanding
balance of the construction loan 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.
(b) The Company guarantees up to $15 million of a $30
million revolving credit line of Hawaiian Sugar &
Transportation Cooperative ("HS&TC," a raw sugar
marketing and transportation cooperative that the
Company uses to market and transport its sugar and of
which the Company is a member). That credit line is
used primarily to fund purchases of raw sugar from the
Hawaii growers and is fully secured by the inventory,
receivables and transportation assets of the
cooperative. The amount that may be drawn by HS&TC
under the facility is limited to 95 percent of its
inventory value plus the lesser of 90 percent or $16
million of HS&TC's receivables. The Company's
guarantee is limited to the lesser of $15 million or
the actual amounts drawn. Although the amount drawn by
HS&TC on its credit line varies, as of September 30,
2004, the amount drawn was $22 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.
(c) The Company has arranged for standby letters of credit
totaling $18 million. Letters of credit include
approximately $12 million that enable the Company to
qualify as a self-insurer for state and federal workers'
compensation liabilities. The amount also includes a
letter of credit of $3 million for workers' compensation
claims incurred by employees of C&H Sugar Company, Inc.
("C&H," an unconsolidated entity in which the Company
has a minority ownership equity interest), under a
now-closed self-insurance plan, prior to December 24,
1998. The Company only would be called upon to honor
this letter of credit in the event of C&H's insolvency.
The 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 $3 million, are for routine operating matters.
(d) Of the $13 million in bonds, $6 million consists of
subdivision bonds related to real estate construction
projects in Hawaii. These bonds are required either by
the state or by county governments to ensure that
certain infrastructure work, as part of real-estate
development, is completed. The Company has the financial
ability and intention to complete these improvements.
Also included in the total are $5 million of customs
bonds.
(e) The withdrawal liabilities for multi-employer pension
plans, in which Matson is a participant, aggregated
approximately $64 million as of the most recent
valuation dates. Management has no present intention of
withdrawing from and does not anticipate the termination
of any of the aforementioned plans.
Contingencies: As reported in Items 7 and 8 of the Company's 2003 Form
10-K, the State of Hawaii Department of Health ("DOH") has issued a
notice of violation of state and federal air pollution control
regulations and a $2 million proposed penalty, following the Company's
self reporting of this matter and taking corrective action to comply
with the regulations. The Company has contested this matter, but there
has been no change in the status since 2003 year-end. The Company
believes that the resolution of this matter will not have a material
effect on its financial statements and that appropriate accruals for
this matter have been recorded.
As described in the Company's 2003 Form 10-K, a petition was filed in
January 2004, by the Native Hawaiian Legal Corporation, on behalf of
four individuals, requesting that the State of Hawaii Board of Land and
Natural Resources 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. The Company objected to the petition.
The Company has also been working to make improvements to the water
systems of the petitioner's four clients so as to improve the flow of
water to their taro patches. The interim agreement that was entered
into during the first quarter of 2004 between the parties to allow the
improvements to be completed, expired without renewal by the
petitioners. The Company is continuing to pursue its objections and
has, again, requested an administrative hearing on the petition. The
effect of this claim on the Company's sugar-growing operations cannot
currently be estimated.
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.
(4) Accounting Method for Stock-Based Compensation and Diluted Earnings per
Share: As allowed by Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," and by
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," the Company has elected to continue to apply the
provisions of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees." Accordingly, no compensation cost is
recognized in the Company's net income for options granted with
exercise prices that are equal to the market values of the underlying
common stock on the dates of grant.
Pro forma information regarding net income and earnings per share,
using the fair value method and reported below, has been estimated
using a Black-Scholes option-pricing model. This model was developed
for use in estimating the fair value of traded options which do not
have vesting requirements and which are fully transferable. The
Company's options have characteristics significantly different from
those of traded options. Had compensation cost for the stock options
been based on the estimated fair values at grant dates, the Company's
pro forma net income and net income per share for the three and nine
months ended September 30, 2004 and 2003 would have been as follows (in
millions, except per share amounts):
Quarter Ended Nine Months Ended
September 30, September 30,
------------- -------------
2004 2003 2004 2003
---- ---- ---- ----
Net Income:
As reported $ 24.8 $ 21.7 $ 82.0 $ 62.5
Stock-based compensation
expense determined under
fair value based method
for all awards, net of
related tax effects (0.4) (0.3) (1.0) (0.9)
-------- -------- -------- --------
Pro forma $ 24.4 $ 21.4 $ 81.0 $ 61.6
======== ======== ======== ========
Net Income Per-share:
Basic, as reported $ 0.58 $ 0.52 $ 1.93 $ 1.51
Basic, pro forma $ 0.57 $ 0.51 $ 1.91 $ 1.48
Diluted, as reported $ 0.58 $ 0.52 $ 1.91 $ 1.50
Diluted, pro forma $ 0.57 $ 0.51 $ 1.89 $ 1.48
Effect on average shares outstanding of
assumed exercise of stock options
(in millions of shares):
Average number of shares outstanding 42.5 41.6 42.5 41.5
Effect of assumed exercise of
outstanding stock options 0.5 0.3 0.5 0.2
-------- -------- -------- --------
Average number of shares outstanding
after assumed exercise of outstanding
stock options 43.0 41.9 43.0 41.7
======== ======== ======== ========
The pro forma effects are not necessarily representative of the pro
forma effects on future net income or earnings per share, because the
number of future shares that may be issued is not known; shares vest
over several years, and assumptions used to determine the fair value
can vary significantly. Total shares considered antidilutive and that
were not included in the computation of diluted earnings per share were
312,000 and 866,000 at September 30, 2004 and 2003. Additional
information about stock-based compensation is included in Notes 1 and
12 of Item 8 in the Company's most recently filed Form 10-K.
(5) Accounting for and Classification of Discontinued Operations: As
required by Statement of Financial Accounting Standards ("SFAS") No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
the sales of certain income-producing assets are classified as
discontinued operations if (i) the operations and cash flows of the
assets can be clearly distinguished from the remaining assets of the
Company, (ii) the cash flows that are specific to the assets sold have
been, or will be, eliminated from the ongoing operations of the
Company, (iii) the Company will not have a significant continuing
involvement in the operations of the assets sold, and (iv) the amount
is considered material. Certain assets that are "held for sale," based
on the likelihood and intention of selling the property within 12
months, are also treated as discontinued operations. Depreciation on
these assets is discontinued upon reclassification. Sales of land,
residential houses, and office condominium units are generally
considered inventory and are not included in discontinued operations.
Discontinued operations were as follows (in millions):
Quarter Ended Nine Months Ended
September 30, September 30,
------------- -------------
2004 2003 2004 2003
---- ---- ---- ----
Discontinued Operations (net of tax)
Sales of Assets -- -- $ 1.0 $ 10.5
Leasing Operations $ 0.2 $ 0.2 0.4 1.3
-------- --------- -------- --------
Total $ 0.2 $ 0.2 $ 1.4 $ 11.8
======== ======== ======== ========
(6) Other Comprehensive Income for the three and nine months ended
September 30, 2004 and 2003 was as follows, (in millions):
Quarter Ended Nine Months Ended
September 30, September 30,
------------- -------------
2004 2003 2004 2003
---- ---- ---- ----
Net Income $ 24.8 $ 21.7 $ 82.0 $ 62.5
Other Comprehensive Income (Loss):
Change in valuation of derivative (0.6) 3.5 0.9 --
Company's share of investee's minimum
pension liability adjustment -- -- -- (7.2)
-------- -------- -------- --------
Comprehensive Income $ 24.2 $ 25.2 $ 82.9 $ 55.3
======== ======== ======== ========
The change in valuation of derivative amount reflects the funding of
Matson's two vessel purchases and the settlement of the interest rate
lock agreements.
C&H reported a $20.1 million minimum pension liability adjustment at
the end of 2002. The Company recorded its share of that adjustment
during the first quarter of 2003.
(7) Pension and Post-retirement Plans: 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 assumptions and estimates for 2004 are reasonable. Different
assumptions, however, could result in material changes to the assets,
obligations and costs associated with benefit plans.
The components of Net Periodic Benefit Cost for the third quarters of
2004 and 2003 were as follows (in millions):
Pension Benefits Post-retirement Benefits
---------------- ------------------------
2004 2003 2004 2003
---- ---- ---- ----
Service Cost $ 1.7 $ 1.6 $ 0.2 $ 0.2
Interest Cost 4.0 4.8 0.8 0.7
Expected Return on Plan Assets (5.7) (5.5) -- --
Amortization of Prior Service Cost 0.1 1.1 -- --
Amortization of Net (Gain) Loss 0.5 1.6 0.1 0.1
-------- -------- -------- ---------
Net Periodic Benefit Cost $ 0.6 $ 3.6 $ 1.1 $ 1.0
======== ======== ======== =========
The components of Net Periodic Benefit Cost for the first nine months
of 2004 and 2003 were as follows (in millions):
Pension Benefits Post-retirement Benefits
---------------- ------------------------
2004 2003 2004 2003
---- ---- ---- ----
Service Cost $ 4.7 $ 4.8 $ 0.5 $ 0.5
Interest Cost 11.9 14.4 2.2 2.2
Expected Return on Plan Assets (17.1) (16.5) -- --
Amortization of Prior Service Cost 0.4 3.2 -- --
Amortization of Net (Gain) Loss 1.5 4.9 0.4 0.3
-------- -------- -------- ---------
Net Periodic Benefit Cost $ 1.4 $ 10.8 $ 3.1 $ 3.0
======== ======== ======== =========
During the third quarter of 2004, the Company contributed approximately
$5 million to its pension plan. Total year 2004 pension expense is
expected to be approximately $2 million.
(8) Subsequent Events: On October 1, 2004, the Company renewed its
multi-bank revolving credit agreement. The agreement was extended for
three years and the amount available under the line was increased from
$185 million to $200 million. At September 30, 2004, the Company had no
amounts drawn on this facility.
On October 1, 2004, Properties repaid a $15 million term loan that had
been assumed in connection with a 2003 real estate purchase. The loan
had a maturity date of January 2005, but could be repaid without
penalty as early as October 1, 2004. The $15 million balance was
classified as a current liability at September 30, 2004.
On October 19, 2004, the Company renewed and extended for one year its
uncommitted overnight credit facility. The amount of the facility was
also increased from $70 million to $78.5 million
On October 19, 2004, two community-based organizations filed a Citizen
Complaint and a Petition for a Declaratory Order with the Commission on
Water Resource Management of the State of Hawaii ("Water Commission")
against Hawaiian Commercial & Sugar Company and an unrelated company,
to order the companies to leave all water of four streams on the west
side of the Island of Maui that is not being put to "actual, reasonable
and beneficial use" in the streams of origin. The complainants had
earlier filed, on June 25, 2004, with the Water Commission a petition
to increase the interim in-stream flow standards for those streams. The
Company objects to the petitions. If the Company is not permitted to
divert stream water for its use to the extent that is currently
diverting, it may have an adverse effect on the Company's sugar
operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ------------------------------------------------
The following analysis of the consolidated financial condition and results of
operations of Alexander & Baldwin, Inc. and its subsidiaries (collectively, the
"Company") should be read in conjunction with the condensed consolidated
financial statements and related notes thereto.
FORWARD-LOOKING STATEMENTS
The Company, from time to time, may make or may have made certain
forward-looking statements, whether orally or in writing, such as forecasts and
projections of the Company's future performance or statements of management's
plans and objectives. These statements are "forward-looking" statements as that
term is defined in the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements may be contained in, among other things, Securities
and Exchange Commission ("SEC") filings, such as the Forms 10-K, 10-Q and 8-K,
press releases made by the Company, the Company's Internet Web sites (including
Web sites of its subsidiaries), and oral statements made by the officers of the
Company. Except for historical information contained in these written or oral
communications, such communications contain forward-looking statements. These
forward-looking statements are not guarantees of future performance, and 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, such as the entrance of a new
competitor in the Hawaii shipping trade, and pricing
pressures, principally in the Company's transportation
businesses;
4) 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.;
5) significant fluctuations in fuel prices
6) 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;
7) availability of water for irrigation and to support real
estate development;
8) performance of unconsolidated affiliates and ventures;
9) significant fluctuations in raw sugar prices and the ability to
sell raw sugar to C&H Sugar Company, Inc. ("C&H");
10) vendor and labor relations in Hawaii, the U.S. Pacific Coast,
Guam and other locations where the Company has operations;
11) risks associated with construction and development
activities, including, among others, construction costs,
construction defects, labor issues, ability to secure
insurance, and land use regulations;
12) performance of pension assets;
13) acts of nature, including but not limited to, drought, greater
than normal rainfall, hurricanes and typhoons;
14) resolution of tax issues with the IRS or state tax authorities;
15) acts of war and terrorism;
16) risks associated with current or future litigation; and
17) other risk factors described elsewhere in these communications
and from time to time in the Company's filings with the SEC.
CONSOLIDATED REVENUE & NET INCOME
- --------------------------------------------------------------------------------
Quarter Ended September 30,
- --------------------------------------------------------------------------------
(dollars in millions) 2004 2003 Change
- --------------------------------------------------------------------------------
Revenue $ 384.2 $ 316.3 21%
Net income $ 24.8 $ 21.7 14%
Consolidated revenue of $384.2 million for the third quarter of 2004 increased
$67.9 million, or 21 percent, compared with the third quarter of 2003. This
increase was due principally to $38.7 million growth in Matson Integrated
Logistics revenue, $23.4 million higher revenue for ocean transportation
revenue, $4.7 million higher revenue in food products, and $1.2 million higher
revenue from real estate sales. The reasons for the revenue growth are described
below in Analysis of Operating Revenue and Profit.
Costs of goods sold, services and rentals of $310.1 million for the third
quarter of 2004 increased $56.7 million, or 22 percent, compared with the third
quarter of 2003 due to higher purchased transportation services of approximately
$35.8 million at the Matson Integrated Logistics business, higher cargo handling
costs at Matson associated with higher container volume and higher vessel costs
at Matson associated with an additional vessel during much of the 2004 third
quarter in the Long Beach to Hawaii trade due to a Southern California longshore
labor shortage. These higher costs were partially offset by lower pension and
employee benefit costs, a gain on the sale of Matson's investment in Sea
Star Line, LLC ("Sea Star") and the non-recurrence of accruals in 2003 for (1)
excise taxes at Matson, (2) a building maintenance expenditure at A&B
Properties, (3) unscheduled drydock repairs for a vessel, and (4) an emissions
fine at HC&S. Additional information about operating expenses is contained in
the Analysis of Operating Revenue and Profit.
Selling, general and administrative costs were 18 percent higher than the third
quarter of 2003 due to higher consulting costs for Sarbanes-Oxley section 404
readiness and fluctuations in incentive compensation plans and non-qualified
benefit plan expenses. These higher costs were partially offset by lower pension
costs and lower occupancy costs at Matson. Income taxes were higher than the
third quarter of 2003 due to higher pre-tax income and a higher effective tax
rate.
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Nine Months Ended September 30,
- --------------------------------------------------------------------------------
(dollars in millions) 2004 2003 Change
- --------------------------------------------------------------------------------
Revenue $ 1,105.0 $ 903.5 22%
Net income $ 82.0 $ 62.5 31%
Consolidated revenue of $1,105 million for the first nine months of 2004
increased $201.5 million, or 22 percent, compared with the first nine months of
2003. This increase was due principally to $97.9 million growth in Matson
Integrated Logistics revenue, $42.6 million higher ocean transportation revenue,
$37.5 million of lower amounts reported as discontinued operations, and $26.5
million higher revenue from real estate sales, partially offset by $3.0 million
lower revenue in food products. The reasons for the revenue growth are described
below in Analysis of Operating Revenue and Profit.
Costs of goods sold, services and rentals of $872.2 million for the first nine
months of 2004 increased $142.6 million, or 20 percent, compared with the first
nine months of 2003 due to higher purchased transportation services of
approximately $90.6 million at the Matson Integrated Logistics business, higher
cargo handling costs at Matson associated with higher container volume, the
sales of higher cost-basis real-estate in 2004, and higher vessel costs at
Matson associated with the additional vessel placed in service during the 2004
third quarter. These higher costs were partially offset by lower pension and
employee benefit costs, and the non-recurrence of the previously noted 2003
accruals. Additional information about operating expenses is contained in the
Analysis of Operating Revenue and Profit.
Selling, general and administrative costs of $93.3 million were $6.8 million, or
eight percent, higher than the first nine months of 2003 for the same reasons
cited for the third quarter increase. Higher interest expense reflects the cost
of financing portions of two new vessels. Income taxes were higher than the
first nine months of 2003 due to higher pre-tax income and a higher effective
tax rate.
Additional information about the revenue and profits of the Company are provided
in the segment discussion below. Because the Company operates in five different
segments, the review of segment operations provides an important perspective on
the financial results for the Company.
2004 FOURTH QUARTER OPERATING PROFIT OUTLOOK
Fourth quarter 2004 earnings are not expected to reach the level of 2003's
fourth quarter, due principally to the non-recurrence of a one-time $16.7
million gain in 2003 resulting from the conversion of a Matson pension plan to a
multi-employer plan. Excluding this item, Matson is expected to have a
respectable quarter, given the seasonally lower results typically achieved in
the fourth quarter. As noted in the 2004 second quarter Form 10-Q, A&B
Properties had, by mid-year, concluded almost all of its planned sales activity
for the year. Therefore few property sales are expected in the fourth quarter.
The food products segment, excluding the possible federal sugar transportation
allowance noted in the Results of Operations -- Food Products discussion, is
currently expected to show modest improvement compared with the fourth quarter
of 2003. The Company anticipates that A&B's performance in 2004 will exceed its
internal target objectives for the year.
RESULTS OF SEGMENT OPERATIONS
Transportation - Ocean Transportation
- --------------------------------------------------------------------------------
Quarter Ended September 30,
- --------------------------------------------------------------------------------
(dollars in millions) 2004 2003 Change
- --------------------------------------------------------------------------------
Revenue $ 215.0 $ 191.6 12%
Operating profit $ 33.0 $ 25.1 31%
- --------------------------------------------------------------------------------
Volume (Units)
Hawaii containers 43,600 41,300 6%
Automobiles 32,400 29,900 8%
Guam containers 4,400 4,700 -6%
- --------------------------------------------------------------------------------
Ocean Transportation revenue of $215 million for the third quarter of 2004 was
$23.4 million, or 12 percent, higher than the third quarter of 2003. Of this
increase, approximately $9.3 million was due to higher container and auto
volume, $5.5 million was due to improved yields and cargo mix, $4.4 million was
due to increases in the bunker fuel surcharge, $2 million was due to higher
conventional cargo volume, and $2.1 million was from vessel charters. Total
Hawaii container volume was six percent higher than the third quarter of 2003.
This reflects the strong and continuing growth in the Hawaii economy and, in
particular, the growth in the construction sector.
Operating profit of $33 million was $7.9 million, or 31 percent, better than the
third quarter of 2003. This was primarily the result of $5.2 million from
favorable yields and mix, $3.2 million from higher container volume, $2.1
million of lower administrative and employee benefits costs, $1.6 million for
the non-recurrence of a 2003 excise tax accrual, a $1.2 million gain on the sale
of Matson's Sea Star investment, and $1 million for the non-recurrence of a 2003
unscheduled drydocking of a vessel, partially offset by $4.3 million higher
vessel operating expenses and depreciation and $2.1 million of higher cargo
handling costs and gains on disposal of assets in 2003.
The higher vessel cost resulted principally from the addition of one vessel in
the Long Beach to Hawaii service for much of the 2004 third quarter. A second
vessel was used in that service for several weeks toward the end of the third
quarter. These two additional vessels have enabled Matson to continue providing
on-time service to its customers while labor shortages in southern California
have delayed port operations.
During the third quarter, Matson took delivery of a new vessel, the MV
Maunawili, for a total project cost of approximately $105 million.
- --------------------------------------------------------------------------------
Nine Months Ended September 30,
- --------------------------------------------------------------------------------
(dollars in millions) 2004 2003 Change
- --------------------------------------------------------------------------------
Revenue $ 619.6 $ 577.0 7%
Operating profit $ 83.0 $ 60.4 37%
- --------------------------------------------------------------------------------
Volume (Units):
Hawaii containers 123,700 120,200 3%
Automobiles 110,300 109,000 1%
Guam containers 13,200 13,700 -4%
- --------------------------------------------------------------------------------
Ocean Transportation revenue of $619.6 million for the first nine months of 2004
was $42.6 million, or seven percent, higher than the first nine months of 2003.
Of this increase, approximately $18.5 million was due to improved yields and
cargo mix, $8.2 million was due to increases in the bunker fuel surcharge and
$11.5 million was due to higher container and auto volume and $6 million was due
to vessel charters. As with the third quarter, higher container volume reflects
a return to normalized shipments of consumer goods, increasing growth in
construction related products and a growing Hawaii economy. Total Hawaii cargo
was three percent higher than the first nine months of 2003.
Operating profit of $83 million was $22.6 million, or 37 percent, better than
the first nine months of 2003. This was primarily the result of $18.5 million
from favorable yields, $6.6 million of lower administrative and employee benefit
costs, $5 million for the non-recurrence of a 2003 excise tax accrual, $4.4
million from higher container volume, $2.3 million from vessel charters and a
$1.2 million gain on the sale of the Company's investment in Sea Star, partially
offset by $10.3 million higher vessel operating expenses and depreciation, and
$2.8 million of higher cargo handling and other operating costs.
Transportation - Logistics Services
- --------------------------------------------------------------------------------
Quarter Ended September 30,
- --------------------------------------------------------------------------------
(dollars in millions) 2004 2003 Change
- --------------------------------------------------------------------------------
Revenue $ 99.5 $ 60.8 64%
Operating profit $ 2.2 $ 1.4 57%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Nine Months Ended September 30,
- --------------------------------------------------------------------------------
(dollars in millions) 2004 2003 Change
- --------------------------------------------------------------------------------
Revenue $ 267.1 $ 169.2 58%
Operating profit $ 5.8 $ 3.3 76%
- --------------------------------------------------------------------------------
Revenue and operating profit growth for the third quarter and first nine months
of 2004 for the integrated logistics services business was mainly the result of
increased customer volume in all business lines (domestic, international and
highway). The increase in highway volume was, in large part, due to an
acquisition in late 2003. This acquisition is discussed in Items 7 and 8 of the
Company's 2003 Form 10-K.
The revenue for integrated logistics services includes the total amount billed
to customers for transportation services. The primary costs include purchased
transportation services. As a result, the operating profit margins for this
business are narrower than other A&B businesses. The primary operating profit
and investment risk for this business is the quality of receivables, which is
monitored closely.
Property Development and Management - Leasing
- --------------------------------------------------------------------------------
Quarter Ended September 30,
- --------------------------------------------------------------------------------
(dollars in millions) 2004 2003 Change
- --------------------------------------------------------------------------------
Revenue $ 20.9 $ 20.3 3%
Operating profit $ 10.1 $ 9.1 11%
- --------------------------------------------------------------------------------
Occupancy Rates:
Mainland 95% 96% -1%
Hawaii 90% 90% --
- --------------------------------------------------------------------------------
Property leasing revenue for the third quarter of 2004 was three percent higher
than the amounts reported for the third quarter of 2003. The slightly lower
occupancies for the mainland commercial leasing portfolio were due to a vacancy
of one large warehouse space. Higher operating profit was mainly due to a large
2003 repair expense for a Hawaii property, new properties that were acquired in
late 2003, and higher rents and royalties.
- --------------------------------------------------------------------------------
Nine Months Ended September 30,
- --------------------------------------------------------------------------------
(dollars in millions) 2004 2003 Change
- ------------------------------------------- -------------------- ---------------
Revenue $ 62.1 $ 60.0 4%
Operating profit $ 28.8 $ 27.2 6%
- ------------------------------------------- -------------------- ---------------
Occupancy Rates:
Mainland 94% 93% 1%
Hawaii 90% 90% --
- ------------------------------------------ -------------------- ----------------
Property leasing revenue and operating profit growth for the first nine months
of 2004 was the result of higher occupancies for the mainland commercial leasing
portfolio, higher contributions from replacement properties, the previously
noted 2003 repair expenditure, and higher rents and royalties.
Property Development and Management - Sales
- --------------------------------------------------------------------------------
Quarter Ended September 30,
- --------------------------------------------------------------------------------
(dollars in millions) 2004 2003 Change
- --------------------------------------------------------------------------------
Revenue $ 11.6 $ 10.4 12%
Operating profit $ 2.5 $ 2.6 -4%
- --------------------------------------------------------------------------------
Sales during the third quarter of 2004 included principally seven office
condominium units for $7.6 million and three Maui and Oahu commercial properties
for $2.8 million.
By comparison, sales during the third quarter of 2003 were comprised principally
of the sales of 15 residential properties for $5.6 million and six Oahu
properties for $3 million.
In addition to property sales, operating profit also included the Company's
share of earnings in real estate joint ventures.
- --------------------------------------------------------------------------------
Nine Months September 30,
- --------------------------------------------------------------------------------
(dollars in millions) 2004 2003 Change
- --------------------------------------------------------------------------------
Revenue $ 80.0 $ 53.5 50%
Operating profit $ 34.9 $ 21.1 65%
- --------------------------------------------------------------------------------
Sales during the first nine months of 2004 included 33 Maui and Oahu commercial
properties for $24 million, three residential development parcels for $13.8
million, 15 1/2 office condominium floors for $17.4 million and 28 residential
properties for $23.2 million.
By comparison, sales during the first nine months of 2003 included a shopping
center in Nevada for $23.5 million, 16 commercial properties for $18.3 million,
and 23 residential properties for $9.2 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. Additionally, the operating profit reported in each quarter does not
necessarily follow a percentage of sales trend because the cost basis of
property sold can differ significantly between transactions. The reporting of
property sales is also affected by the classification of certain property sales
as discontinued operations.
Property Development and Management - Discontinued Operations
- ------------------------------------------------------------------------------------------------------
Quarter Ended September 30, Nine Months Ended September 30,
- ------------------------------------------------------------------------------------------------------
(dollars in millions, before tax) 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------
Sales revenue -- -- $ 1.1 $ 36.9
Leasing revenue $ 0.4 $ 0.4 $ 1.2 $ 2.9
Sales operating profit -- -- $ 1.5 $ 17.0
Leasing operating profit $ 0.3 $ 0.3 $ 0.7 $ 2.0
- ------------------------------------------------------------------------------------------------------
There were no sales of property during the third quarter of 2004 or 2003 that
resulted in discontinued operations. Leasing revenue and operating profit for
the two quarters included one commercial property in California that the Company
intends to sell.
Discontinued operations for the first nine months of 2004 included the sale, for
$1 million, of a Maui property and the leasing income from the above mentioned
commercial property in California. Sales in 2003 included the sales of a Nevada
property and five commercial properties on Maui.
Because the Company regularly sells commercial properties, the amounts reported
as continuing and discontinued operations in prior quarters are restated each
time a property is designated as discontinued.
Food Products
- --------------------------------------------------------------------------------
Quarter Ended September 30,
- --------------------------------------------------------------------------------
(dollars in millions) 2004 2003 Change
- --------------------------------------------------------------------------------
Revenue $ 38.3 $ 33.6 14%
Operating profit $ 0.6 $ 0.4 50%
- --------------------------------------------------------------------------------
Tons sugar produced 77,500 68,600 13%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Nine Months Ended September 30,
- --------------------------------------------------------------------------------
(dollars in millions) 2004 2003 Change
- --------------------------------------------------------------------------------
Revenue $ 80.6 $ 83.6 -4%
Operating profit $ 3.5 $ 4.6 -24%
- --------------------------------------------------------------------------------
Tons sugar produced 142,400 156,200 -9%
- --------------------------------------------------------------------------------
Food products revenue increased for the third quarter of 2004 compared with 2003
due mainly to higher sugar production and power sales partially offset by lower
sugar prices. Revenue for the first nine months of 2004 declined compared with
2003 due to lower sugar production and continuing low raw-sugar sales prices.
Sugar prices were approximately seven percent lower than 2003. Sugar production
for 2004 was affected adversely earlier in the year by wet field conditions and
poorly burnt cane. Production in the third quarter improved 13 percent over the
comparable quarter last year. Power sales of $4.1 million and $10.7 million for
the 2004 quarter and nine months, respectively, were approximately 95 percent
and 56 percent higher than the comparable periods of 2003.
Compared with the 2003 third quarter, sugar margins were $3.5 million lower.
This was more than offset by power margins that were $2 million higher than 2003
and improved margins on Maui Brand Sugar sales, Kauai Coffee sales and the
Company's two trucking operations and the non-recurrence of a 2003 accrual for
an emissions fine that, combined, comprised the remaining $1.7 million quarter
over quarter improvement.
Compared with the first nine months of 2003, sugar and molasses margins were
$7.6 million lower. This was partially offset by power margins that were $3.8
million higher than 2003 and improved margins on Maui Brand Sugar sales, Kauai
Coffee sales, and for the Company's two trucking operations and the
non-recurrence of the 2003 emissions fine that, combined, comprised the
remaining $2.7 million year-over-year variance.
HS&TC, the raw sugar marketing and transportation cooperative that the Company
uses to market and transport its sugar and of which the Company is a member,
may receive a federal sugar transportation assistance payment during the fourth
quarter of 2004 or the first quarter of 2005. If this assistance is received,
HC&S operating profit may benefit by $5 to $6 million.
Quarterly fluctuations in sales and operating profit are normal for this
business due to commodity sugar prices, weather, production and other
seasonality factors. The Company's sugar business uses a standard cost system
for determining cost of sales. As total-year production and cost estimates
change, the standard cost per ton is adjusted to reflect those changes. During
each quarter the cost of crop is adjusted to reflect total-year production
estimates.
FINANCIAL CONDITION, LIQUIDITY, FINANCING ARRANGEMENTS AND CASH FLOWS
Liquid Resources: The Company's principal liquid resources, comprising cash and
cash equivalents, receivables, sugar and coffee inventories and unused lines of
credit, less accrued deposits to the Capital Construction Fund ("CCF"), totaled
$623 million at September 30, 2004, an increase of $78 million from December 31,
2003. The increase was due primarily to $29 million of higher cash balances, $26
million of higher balances available under variable rate debt facilities, $20
million of higher receivable balances, and $3 million of higher sugar and coffee
inventory balances. Inventory balances were the result of normal business
seasonality. Cash balances were higher than 2003 year-end due to receivable
collections, business growth, timing of capital expenditures, and lower
short-term debt balances that could be paid down prior to quarter-end.
Balance Sheet: Working capital was $49 million at September 30, 2004, a decrease
of $15 million from the balance carried at the end of 2003. The lower working
capital was due primarily to higher taxes payable, an increase in current
portion of notes payable, and lower balances in real estate held for sale,
partially offset by higher cash and accounts receivable balances. Real Estate
Held for Sale declined during the first nine months due mainly to the sales of
office condominium units.
Long-term Debt, including current portion of long-term debt, totaled $269
million at September 30, 2004 compared with a balance of $345 million at
December 31, 2003. This $76 million decrease was due principally to the
retirement of the Company's commercial paper program in August 2004 and normal
debt repayments partially offset by additional borrowing in connection with the
purchase and delivery of a new ship in the third quarter of 2004. The weighted
average interest rate for the Company's outstanding borrowings at September 30,
2004 was approximately 5.8%.
During the third quarter, Matson took delivery of a new vessel, the MV
Maunawili. The total project cost of the vessel was financed with $55 million of
U.S. government Guaranteed Ship Financing Bonds, more commonly known as Title XI
bonds, $46 million from the Company's Capital Construction Fund, and $4 million
of operating funds.
During the third quarter of 2004, Matson repaid and retired its $100 million
commercial paper program. The repayment was accomplished by a withdrawal of $100
million from the Capital Construction Fund. Matson also terminated a $25 million
short-term revolving credit facility that served as a liquidity back-up line for
the commercial paper notes.
Cash Flows and Capital Expenditures: Cash Flows from Operating Activities were
$124 million for the first nine months of 2004, compared with Cash Flows from
Operating Activities of $115 million for the first nine months of 2003. The
higher cash flow was due to better operating results, increased depreciation,
the sales of real estate classified as Real Estate Held for Sale, higher income
taxes payable, higher trade payables, and fluctuations in other working capital
balances. During the first nine months of 2004, the Company invested
approximately $23 million into the Hokua joint venture, in which the Company has
a 50 percent voting interest.
For the first nine months of 2004, capital expenditures totaled $135 million
compared with $130 million for the first nine months of 2003. These expenditures
were primarily for the purchase of a new ship, shipping containers, a 2.7-acre
parcel in Honolulu on which the Company intends to develop a high-rise
residential condominium building, ongoing real estate development, information
systems, and normal capital replacements. These amounts do not include the
re-investment of proceeds from tax-deferred sales into new income-producing
property since tax-deferred transactions are not included on the Statement of
Consolidated Cash Flows.
Tax-Deferred Real Estate Exchanges: Sales - During the first nine months of
2004, the Company recorded, on a tax-deferred basis, the sales of two properties
for $1 million. During the first nine months of 2003, the Company recorded, on a
tax-deferred basis, $34 million of sales. The proceeds from tax-deferred sales
are held in escrow, but are available for reinvestment in replacement property.
Purchases - No property was purchased during the first nine months of 2004.
During the first nine months of 2003, the Company utilized $30 million of
tax-deferred funds to acquire new income-producing property.
Commitments, Contingencies and Environmental Matters: A description of
commitments and contingencies in effect at the end of the third quarter is
described in Note (3) to the financial statements of Item 1.
OTHER MATTERS
Charter Agreement: Matson and American President Lines, Ltd. ("APL") are parties
to a Successor Alliance Slot Hire and Time Charter Agreement ("APL Agreement")
that expires in February 2006. The APL Agreement provides the structure of an
alliance through which Matson provides a weekly service to Guam. Pursuant to the
APL Agreement, Matson time charters three C-9 class vessels to APL and APL
reserves a designated number of container slots on each C-9 vessel as well as
two additional APL vessels for Matson's exclusive use. Matson's annual time
charter revenues arising from the APL Agreement are approximately $35 million,
and Matson generates substantial additional revenues from its Guam trade. Taken
together, such revenues contribute a significant portion of the Ocean
Transportation segment's total operating profit. Based on discussions with APL
in late June 2004, Matson currently believes that the APL Agreement will not be
renewed in its present form after February 2006, and any new or revised
agreement with APL, if a new or revised agreement is entered into with APL,
would be on terms substantially less favorable to Matson. Regardless of whether
an agreement is entered into with APL, Matson will continue serving the Guam
market after February 2006, and Matson intends to pursue operating changes in
that market and its Hawaii service in order to optimize service and
profitability. For example, regardless of whether there is an agreement with APL
after February 2006, it is Matson's present intention to redeploy the three C-9
vessels in its Hawaii service, replacing smaller, less cost-efficient vessels.
Although it is too early to estimate with certainty the financial implications
of alternative service arrangements being explored by Matson, any such
alternative is not expected to substitute fully for the operating profit
contribution of the current APL alliance arrangement. Due substantially to the
termination of the charter arrangement with APL described above, Matson
currently estimates that an annual operating profit reduction of $10 to $20
million, and possibly higher during the transition period following the
agreement's expiration, can be expected. With over a year remaining before the
APL Agreement's expiration, Matson is focused on developing an optimal successor
service to the current APL Guam arrangement.
Unrelated to the Guam service, Matson intends to further moderate the estimated
reduction in operating profit in the Guam service described above through a
combination of cost reductions, organic growth, acquisitions, and yield
management initiatives.
Investments: The Company's joint ventures are described in Item 2 of the
Company's two most recently filed Form 10-Q's and in Item 8 of its most recently
filed Form 10-K.
In August 2004, the Company exercised an option to increase its equity
investment in the Kukui'ula resort property. The additional investment is
expected to range from $50 million to $75 million and occur over the next three
to four years. Additionally, the 1,000 acre master-planned residential resort
community was successfully re-entitled in July. The total project cost for the
resort is projected to be approximately $725 million, which does not include
the vertical construction costs for homes. With its additional equity
investment, the Company will likely receive between fifty and sixty percent
of the venture's returns.
In August 2004, A&B Properties, Inc. and Intertex General Contractors, Inc.
formed Crossroads Plaza Development Partners LLC ("Crossroads Plaza").
Crossroads Plaza intends to develop a Class "A" 62,000 square-foot retail and
office center on a 6.5-acre parcel in Valencia California, which the venture
purchased during the third quarter. Construction of the complex, for an
estimated $11 million, is expected to begin in early 2005.
In August 2004, Matson sold its investment in Sea Star for approximately $7
million and recognized a gain of approximately $1.2 million. Concurrent with the
sale, Matson's $11 million guarantee obligation of Sea Star's debt was
discontinued.
The Company has evaluated investments in unconsolidated affiliates, including
reconsideration events for such investments, relative to Financial
Interpretation ("FIN") Number 46 "Consolidation of Variable Interest Entities,"
as revised, and has determined that the investments in these affiliates are
either not subject to or do not meet the consolidation requirements of FIN No.
46. Accordingly, the Company accounts for these investments using the equity
method of accounting and the consolidation provisions of Accounting Research
Bulletin No. 51 "Consolidated Financial Statements," as amended.
Significant Accounting Policies: The Company's significant accounting policies
are described in Note 1 of the consolidated financial statements included in
Item 8 of the Company's Form 10-K for the year ended December 31, 2003 and in
the Financial Notes included in Item 1 of this Form 10-Q.
Critical Accounting Policies Estimates: The Company's accounting policies are
described in Note 1 of the Consolidated Financial Statements included in Item 8
of the Company's most recently filed Form 10-K. 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 were described in Item 7 of the Company's 2003 Form 10-K.
New and Proposed Accounting Standards: On October 13, 2004, the Financial
Accounting Standards Board ("FASB") deferred the application date of the
proposed standard on Share-Based Payment to June 14, 2005. The proposed standard
now requires that the cost of awards that are granted, modified or settled in
interim or annual periods beginning after June 15, 2005 should be charged to the
income statement. This standard, as proposed, would not affect A&B until the
third quarter of 2005. The effect of this standard cannot be estimated prior to
the effective date.
Additional information about the impacts of newly issued accounting standards
are discussed in Item 2 of the Company's Form 10-Q for the quarters ended March
31, 2004 and June 30, 2004 and in Item 8 of the Company's Form 10-K for the year
ended December 31, 2003.
Economic Conditions: With support from external economies, especially the U.S.
Mainland and Japan, Hawaii's expansion continues. As the growth cycle has
matured, its sources of strength have broadened. Job growth continues and the
unemployment rate remains the lowest among all of the states. Visitor strength
from a variety of U.S. markets has been joined by improving levels of visitors
from Japan. Sustained construction activity is highly likely in spite of hikes
in short interest rates because of unfulfilled housing demand, which continues
strong in spite of interest rate increases. Adding to that are several programs
to renovate or replace the majority of military housing on Oahu, which also
represents rate-insensitive construction activity.
With higher energy and housing prices, understandably, the local inflation rate
has increased. Forecasts anticipate that inflation will be about 3.5 percent for
the next few years. In addition, some concerns are arising about the
availability materials and cost of skilled labor in the construction trades.
Overall, however, this cyclical growth appears to be sustained, baring external
events, because of the breadth of its sources and its moderate pace.
Management Changes: Effective September 1, 2004, Ruthann S. Yamanaka joined A&B
as vice president, human resources.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
Information concerning market risk is incorporated herein by reference to Item
7A of the Company's Form 10-K for the fiscal year ended December 31, 2003. There
has been no material change in the quantitative and qualitative disclosure about
market risk since December 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
- --------------------------------
(a) Disclosure Controls and Procedures. The Company's management, with
the participation of the Company's Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of the Company's
disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) as of the end of the period covered
by this report. Based on such evaluation, the Company's Chief
Executive Officer and Chief Financial Officer have concluded that,
as of the end of such period, the Company's disclosure controls and
procedures are effective in recording, processing, summarizing and
reporting, on a timely basis, information required to be disclosed by
the Company in the reports that it files or submits under the
Exchange Act.
(b) Internal Control Over Financial Reporting. There have not been any
changes in the Company's internal control over financial reporting
(as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fiscal quarter to which this report relates
that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits
--------
4.b.(iii) Second Amendment to Third Amended and Restated Revolving
Credit and Term Loan Agreement, effective as of October 1, 2004,
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.
10.a.(xix) Thirteenth Amendment dated October 19, 2004 to the
Revolving Credit Agreement between Alexander & Baldwin, Inc. and
First Hawaiian Bank, dated December 30, 1993.
10.a.(xxvi) Security Agreement between Matson Navigation
Company, Inc. and the United States of America, with respect
to $55 million of Title XI ship financing bonds, dated July 29, 2004.
10.b.1.(xiii) Forms of Non-Qualified Stock Option Agreement and
Restricted Stock Issuance Agreement pursuant to the Alexander &
Baldwin, Inc. 1998 Stock Option/Stock Incentive Plan.
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.
(b) Reports on Form 8-K
-------------------
A&B filed a Current Report on Form 8-K dated August 31, 2004
pursuant to Item 1.02 relating to the terminations by Matson
Navigation Company, Inc. of its commercial paper program and a
$25 million revolving credit facility.
A&B furnished a Current Report on Form 8-K dated October 28,
2004 pursuant to Item 2.02 that attached a press release
announcing A&B's financial results for the quarter ended
September 30, 2004.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALEXANDER & BALDWIN, INC.
-------------------------------------
(Registrant)
Date: November 1, 2004 /s/ Christopher J. Benjamin
--------------------------------------
Christopher J. Benjamin
Vice President and Chief Financial Officer
Date: November 1, 2004 /s/ Thomas A. Wellman
---------------------------------------
Thomas A. Wellman
Vice President, Controller and Treasurer
EXHIBIT INDEX
4.b.(iii) Second Amendment to Third Amended and Restated Revolving
Credit and Term Loan Agreement, effective as of October 1, 2004, 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.
10.a.(xix) Thirteenth Amendment dated October 19, 2004 to the Revolving
Credit Agreement between Alexander & Baldwin, Inc. and First Hawaiian Bank,
dated December 30, 1993.
10.a.(xxvi) Security Agreement between Matson Navigation Company, Inc.
and the United States of America, with respect to $55 million of Title XI ship
financing bonds, dated July 29, 2004.
10.b.1.(xiii) Forms of Non-Qualified Stock Option Agreement and
Restricted Stock Issuance Agreement pursuant to the Alexander & Baldwin, Inc.
1998 Stock Option/Stock Incentive Plan.
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.