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, 2004
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
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 7, 2005:
43,470,917
Aggregate market value of Common Stock held by non-affiliates at June 30, 2004:
$1,356,651,553
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 7, 2005 (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................................................3
(4) Logistics and Other Services.............................3
(5) Competition..............................................3
(6) Labor Relations..........................................5
(7) Rate Regulation..........................................5
B. Real Estate.......................................................6
(1) General..................................................6
(2) Planning and Zoning......................................6
(3) Residential Projects.....................................7
(4) Commercial Properties....................................8
C. Food Products....................................................11
(1) Production..............................................11
(2) Marketing of Sugar and Coffee...........................12
(3) Competition and Sugar Legislation.......................13
(4) Properties and Water....................................14
D. Employees and Labor Relations....................................14
E. Energy...........................................................15
F. Available Information............................................16
Item 3. Legal Proceedings................................................16
Item 4. Submission of Matters to a Vote of Security Holders..............17
Executive Officers of the Registrant..........................................17
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities................................18
Item 6. Selected Financial Data..............................................20
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...........43
Item 8. Financial Statements and Supplementary Data..........................45
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.................................................85
Item 9A. Controls and Procedures..............................................85
A. Disclosure Controls and Procedures..........................85
B. Internal Control over Financial Reporting...................85
Item 9B. Other Information....................................................85
PART III
Item 10. Directors and Executive Officers of the Registrant...................86
A. Directors...................................................86
B. Executive Officers..........................................86
C. Audit Committee Financial Experts...........................87
D. Code of Ethics..............................................87
Item 11. Executive Compensation...............................................87
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters..........................................87
Item 13. Certain Relationships and Related Transactions.......................87
Item 14. Principal Accountant Fees and Services...............................88
PART IV
Item 15. Exhibits, Financial Statement Schedules..............................89
A. Financial Statements........................................89
B. Financial Statement Schedules...............................89
C. Exhibits Required by Item 601 of Regulation S-K.............89
Signatures....................................................................97
Consent of Independent Registered Public Accounting Firm......................99
ALEXANDER & BALDWIN, INC.
FORM 10-K
Annual Report for the Fiscal Year
Ended December 31, 2004
PART I
ITEMS 1 & 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 two 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. Real Estate - 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, petroleum and
molasses hauling, general trucking services, mobile equipment
maintenance and repair services, and self-service storage 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, 2004,
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 2004, Matson carried approximately 169,600 containers
(compared with 162,400 in 2003) and 157,000 automobiles (compared with 145,200
in 2003) 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 2004, Matson carried approximately 17,200 containers (compared with 17,800 in
2003) and 4,580 automobiles (compared with 4,660 in 2003) in the Guam Service.
The alliance currently utilizes three Matson vessels and two APL vessels.
Matson's agreement with APL is scheduled to expire in February 2006. For
additional information about the APL alliance, see "Charter Agreements Related
to Guam Service" in Item 7 of Part II below.
In February 2005, Matson announced that it will replace its existing
Guam Service at the termination of the APL alliance with an integrated
Hawaii/Guam/China service beginning in February 2006. The service will employ
three existing Matson containerships along with two new containerships to be
purchased from Kvaerner Philadelphia Shipyard, Inc. ("Kvaerner") in a five-ship
string that carries cargo from the U.S. West Coast to Honolulu, then to Guam,
and eventually to China. In China, the vessels will be loaded with cargo
destined for the U.S. West Coast. The Guam service strategy involves
re-deploying into the Hawaii service three C-9 class vessels that currently
serve Guam at the termination of the APL alliance.
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 11 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 serve the neighbor islands of Hawaii, and one container barge equipped with
cranes in the Mid-Pacific service. The 17 Matson-owned vessels in the fleet
represent an investment of approximately $848 million expended over the past 34
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 has actively pursued a vessel renewal program. In 2002, Matson
contracted with Kvaerner for two new containerships for the Hawaii Service, each
at a project cost of approximately $107 million. The first ship was delivered in
the third quarter of 2003, and the second was delivered in the third quarter of
2004.
Ships owned by Matson are described on page 4.
As a complement to its fleet, Matson owns approximately 19,100
containers, 11,000 container chassis, 700 auto-frames and miscellaneous other
equipment. Capital expenditures incurred by Matson in 2004 for vessels,
equipment and systems totaled approximately $128 million.
Matson entered into agreements in February 2005 with Kvaerner to
purchase two containerships at a cost of $144.4 million each. The first ship is
expected to be delivered in June 2005, and the second ship is expected to be
delivered in May 2006. Also, in February 2005, Matson entered into a right of
first refusal agreement with Kvaerner, which provides that, after the second
containership is delivered to Matson, Matson has the right of first refusal to
purchase each of the next four containerships of similar design built by
Kvaerner that are deliverable before June 30, 2010. Matson may either exercise
its right of first refusal and purchase the ship at an eight percent discount
from a third party's proposed contract price, or decline to exercise its right
of first refusal and be paid by Kvaerner eight percent of such price.
Notwithstanding the above, if Matson and Kvaerner agree to a construction
contract for a vessel to be delivered before June 30, 2010, Matson shall receive
an eight percent discount.
(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 423,300 containers in 2004 (compared
with 419,600 in 2003). The facility can accommodate three vessels at one time.
Matson Terminals' lease with the State of Hawaii runs through September 2016. As
the result of an acquisition completed on January 31, 2005, Matson Terminals
also provides container stevedoring and other terminal services to Matson and
other vessel operators at ports on the island of Hawaii.
SSA Terminals, LLC ("SSAT"), a joint venture of Matson and SSA Marine,
Inc. ("SSA"), provides terminal and stevedoring services at U.S. Pacific Coast
terminal facilities in Long Beach, Oakland and Seattle.
Capital expenditures incurred by Matson Terminals in 2004 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.
(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 that 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 between 190 and 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.
Competition in the Hawaii Service is expected to increase in 2005 due
to entry into the Hawaii trade by the operator of a new dedicated automobile and
truck carrier, with a stated carrying capacity of 3,000 automobiles every two
weeks beginning in the second quarter of 2005. The operator announced that it
will target automobiles, buses, trucks and other large and oversize rolling
stock, and that it signed a multi-year contract with an automobile manufacturer
that is a current Matson customer, for which Matson moved approximately 20,000
westbound automobiles in 2004. Matson is well-positioned to compete with the new
entrant. Partially offsetting the loss of business to the new entrant, Matson
recently received a multi-year commitment from an automobile manufacturer that
previously was the customer of a different competitor. While the new entrant
into the Hawaii market is expected to have some adverse effect, its near-term
impact cannot be estimated, and the long-term impact will not be
MATSON NAVIGATION COMPANY, INC.
FLEET--2/1/05
-------------
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 29,517 4 -- 1,359 -- 300 2,592 -- --
MAUNAWILI........... 1153166 2004 -- 711' 9" 23.0 29,517 4 -- 1,359 -- 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............... 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............. --
MAUNAWILI........... --
Steam-Powered Ships
- -------------------
KAUAI............... 2,600
MAUI................ 2,600
MATSONIA............ 4,300
LURLINE............. 2,100
EWA (3)............. --
CHIEF GADAO (3)..... --
LIHUE .............. --
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.
known for some time. The total Hawaii-Mainland auto carriage market is
approximately 190,000 automobiles per year.
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 multiemployer 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 11, 2004, Matson increased its
rates in its Hawaii Service by $125 per westbound container, $60 per eastbound
container, and $25 per vehicle, both westbound and eastbound, and its terminal
handling charge by $25 per westbound container, $15 per eastbound container and
$5 per vehicle. Effective June 6, 2004, Matson increased its rates in its Guam
Service by $125 per container and $5 on items rated per weight or measure and
its West Coast terminal handling charge by $25 per container, $5 per vehicle and
$1 per revenue ton on items rated per weight or measure, both westbound and
eastbound. Due to sustained increases in fuel costs, Matson increased its fuel
surcharge in its Hawaii and Guam Services from 7.5 percent to 8.0 percent,
effective March 14, 2004; to 8.8 percent, effective June 21, 2004; and to 9.2
percent, effective October 18, 2004.
B. Real Estate
(1) General
As of December 31, 2004, A&B and its subsidiaries, including A & B
Properties, Inc., owned approximately 90,056 acres, consisting of approximately
89,817 acres in Hawaii and approximately 239 acres elsewhere, as follows:
Location No. of Acres
-------- ------------
Oahu ................................................ 38
Maui ................................................ 68,745
Kauai ............................................... 21,034
California .......................................... 91
Texas ............................................... 47
Washington .......................................... 13
Arizona ............................................. 35
Nevada .............................................. 21
Colorado ............................................ 17
Utah ................................................ 15
------
TOTAL ............................................. 90,056
======
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 2,311 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. Such acreage is not included in the table above.
Current Use No. of Acres
----------- ------------
Hawaii
Fully entitled Urban (defined below) ................ 699
Agricultural, pasture and miscellaneous ............. 59,839
Watershed land/conservation ......................... 29,279
U.S. Mainland
Fully entitled Urban ................................ 239
------
TOTAL ....................................... 90,056
======
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.
(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 ("SLUC") 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 acquired 270 acres of fully-zoned,
undeveloped residential and commercial land at the Wailea Resort on Maui,
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 January 2004, A&B commenced sales of 29 single-family homesites at
Wailea's Golf Vistas subdivision. Twenty-six lots were sold in 2004 and, as of
February 9, 2005, all 29 lots have closed escrow, at prices ranging from
$495,000 to $1.6 million, for an average price of $875,000.
In 2004, three bulk parcels were sold to third parties at an average
price of $559,000 per acre: MF-4 (10.5 acres), MF-15 (9.4 acres) and a 20
percent installment sale of MF-9 (30.2 acres). On January 7, 2005, a fourth
parcel sale closed at $535,000 per acre (MF-5, 8.4 acres). During 2004, A&B also
proceeded with a joint venture development on MF-8 (Kai Malu), as described more
fully below.
(b) Kai Malu at Wailea. In April 2004, A&B entered into a joint venture
with Armstrong Builders, Ltd. for development of the 25-acre MF-8 parcel at
Wailea. The project is planned to consist of 150 duplex units with an average
size of 1,800 square feet and an average price of over $1.0 million. In November
2004, the Planning Commission approved the issuance of a County Special
Management Area ("SMA") permit for the project and a preliminary public
condominium report was approved by the Hawaii Real Estate Commission for the
initial 34-unit phase, enabling marketing to commence in December 2004. As of
January 31, 2005, all of the 34 units in Phase I were sold under non-binding
contracts at an average price of $1.1 million. Final public condominium reports
for Phase I (34 units) and Phase II (54 units) were approved in February 2005,
enabling binding contracts to be secured.
(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)
remains pending before the Maui County Council's Land Use Committee. Council
action is expected in 2005.
(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 project
will consist of 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, approximately 165 acres,
is expected to be transferred to the venture in the first quarter of 2005. In
July 2003, the SLUC 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. In July 2004, the Kauai County Council gave final zoning and
visitor designation area approvals for the entire project. In August 2004, A&B
exercised its option to contribute to the joint venture up to 40 percent of the
project's future capital requirements. Design, engineering and construction
activity to date include: preparation of construction plans for onsite and
offsite infrastructure, preparation and submittal to government agencies of
subdivision maps for the initial phases of the project, development of potable
water wells, and permitting of a new electrical substation. Design work is
progressing on a sales center/model home complex, which will be constructed in
2005. For the initial phase of development, SMA approvals were secured and
permit applications were submitted for improvements. Marketing of the initial
phase is expected to commence in March 2005 and infrastructure construction is
scheduled to commence in mid-2005.
(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 and 105 units were sold in 2003. By the first
quarter of 2004, the remaining 11 units had been sold. The average price of all
116 units was $495,000.
(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 consists of
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 and, as of January 31, 2005, all 100 residential units were sold
under binding contracts, at an average price of $588,000 ($565 per square foot).
Construction commenced in December 2003 and is scheduled for completion in June
2005. The 13,500-square-foot commercial-zoned parcel along Kuhio Avenue and 31
parking stalls in the Lanikea parking structure were sold on January 14, 2005
for $3.75 million.
(g) Hokua. In July 2003, A&B entered into a joint venture with MK
Management LLC for the development of a 247-unit high-rise luxury condominium
project across from the Ala Moana Beach Park in Honolulu. The project will be 40
stories tall, with four floors of parking. 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 and, as of January 31, 2005, 242 of the
project's 247 units were sold under binding contracts, at an average price of
$1.1 million per unit ($594 per square foot). Construction commenced in December
2003 and is expected to be completed in December 2005.
(h) Kakaako Development. In August 2004, A&B acquired a 2.7-acre,
vacant, fee simple development site near downtown Honolulu, Oahu, for $14
million. A conceptual design for a 360-unit condominium project has been
developed, consisting of five floors of parking and 30 floors of residential
units. The average unit size will be approximately 1,100 square feet, and will
include one-, two- and three-bedroom floor plans. As required by the Hawaii
Community Development Authority (HCDA), 20 percent of the units have been
designated for sale to buyers earning no more than 140 percent of the Honolulu
median income. A preliminary public condominium report is expected by March
2005, at which time sales will commence. Construction is expected to commence in
early 2006.
(i) Mauna Lani. In April 2004, A&B entered into a joint venture with
Brookfield Homes Hawaii Inc. to acquire and develop a 30.5-acre residential
parcel in the Mauna Lani Resort on the island of Hawaii. In May 2004, the
property was acquired by the joint venture for $6.6 million. The conceptual plan
for the project consists of 137 single-family and duplex units. An SMA amendment
was submitted in October 2004 and was approved in November 2004. Site planning
was completed and submitted to the Mauna Lani Design Review Committee in January
2005. Product design, site planning, grading, drainage, utility and roadway
design work are being finalized. Groundbreaking is scheduled to commence in
mid-2005.
(j) 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. Five homes were sold in 2002, 36 homes were sold in 2003, and the
remaining three homes were sold in 2004. The average price of the 44 homes was
$395,000.
(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 5.1
million leasable 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 leasable 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 2004, unchanged from 2003. In 2004, A&B sold a
0.9-acre leased fee parcel in Kahului, Maui.
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 139,300
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 84,100
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
Several other commercial projects are being, or have been developed or
acquired, 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 January
2004, Hawaii's first Krispy Kreme store opened for business on a 0.9-acre ground
leased parcel. During 2004, an SMA permit was processed for a 6,500-square-foot
build-to-suit Acura dealership on 1.1 acres and a 4,500-square-foot
build-to-suit auto value center on 1.6 acres, and approval was obtained on
January 11, 2005.
(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 26.4 acres were sold, including 20.3
acres for the development of a 349,300-square-foot retail center, whose anchor
tenants are Borders Books & Music, Lowe's, OfficeMax and Old Navy. From 1999 to
2003, a total of 35.6 acres were sold, including a 12.8-acre parcel to Home
Depot, which completed a 135,000-square-foot store in May 2001, and a 14-acre
parcel to Wal-Mart, which completed a 142,000-square-foot store in October 2001.
During 2004, eight half-acre lots (5.9 acres) were sold at an average
price of $27 per square foot. As of January 31, 2005, the last three lots in
Maui Business Park (1.8 acres) were sold at an average price of $28 per square
foot.
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 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.) In February 2004, the SLUC approved the
reclassification of 138 acres to Urban. In April 2004, A&B filed a zoning change
application for the 179 acres and an SLUC application for the final Urban
approval for the 34 acres. An SLUC hearing on the 34 acres is scheduled in early
2005 and County hearings on the zoning application will commence after the SLUC
has granted final urban designation for the 34 acres.
(iii) 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
was subdivided into 61 lots, having an average size of 29,100 square feet.
During 2004, 22 lots were sold, at an average price of $28 per square foot. As
of December 31, 2004, a total of 54 lots (24 acres) were sold, at an average
price of $25 per square foot. In January 2005, three lots closed at an average
price of $32 per square foot, while four lots (2.2 acres) remain unsold.
(iv) 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. As of
January 31, 2005, leases were signed for about 52 percent of the space, and
letters of intent were signed for an additional 30 percent. In-line tenants
include Starbucks, Jamba Juice, T-Mobile, Baskin-Robbins, Fantastic Sam's,
Quizno's and various local retailers, restaurateurs and service providers.
Construction commenced in August 2004 and is projected to be completed in June
2005, at which time tenant improvements will commence. Opening is scheduled for
October 2005.
(v) 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. In October 2003, a final
public condominium report was issued for the project and sales commenced with
eight whole floors closing in 2003. In 2004, 17.5 floors were sold. The 25.5
floors have been sold at an average price of $1.1 million per floor. The
remaining 5.5 floors are in escrow, at an average sales price of $1.0 million
per floor.
(vi) Daiei Retail Parcel. On February 1, 2005, A&B acquired the fee
simple interest in a four-acre income-producing parcel located in central
Honolulu for $19.3 million. The property is fully leased to The Daiei (USA),
Inc. until 2018, which operates the 105,000-square-foot retail store on the
premises. The parcel is fully entitled for commercial and high-rise residential
use.
(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 Internal Revenue Code
Section 1031. The sale of Ontario Pacific Business Centre, a 246,100-square-foot
industrial property located in Ontario, California, was completed on January 12,
2005, and the sale of Northwest Business Center, an 87,000-square-foot
industrial/office building located in San Antonio, Texas, was completed on
January 26, 2005. Excluding these two properties, A&B's Mainland portfolio
currently includes approximately 3.4 million square feet of leasable area,
comprising eight retail centers, four office buildings and six industrial
properties, as follows:
Leasable Area
Property Location Type (sq. ft.)
- -------- -------- ---- --------------
Ontario Distribution Center............. Ontario, CA Industrial 898,400
Sparks Business Center.................. Sparks, NV Industrial 396,100
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
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
A&B's Mainland commercial properties achieved an average occupancy rate
of 95 percent in 2004 (compared with 93 percent in 2003). The increase was due
primarily to additions of fully-leased properties to the portfolio.
In 2002, A&B expanded its development activities to Valencia,
California, a fast growing region north of Los Angeles with favorable
demographics and strong economic growth. A&B will continue its search for
Mainland expansion opportunities in other growing markets. The following
development projects have been secured to date in Valencia:
(i) Westridge Executive Plaza. 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. Construction commenced in January 2003 and
was completed in January 2004. As of January 2005, the building was 95 percent
leased. Major tenants include Wells Fargo, Pardee Homes and Realty Executives.
(ii) Crossroads Plaza. In June 2004, A&B signed a joint venture agreement
with Intertex Hasley, LLC, to form Crossroads Plaza Development Partners, LLC,
for the development of a 62,000-square-foot mixed-use neighborhood retail center
on 6.5 acres of commercial-zoned land. The property was acquired in August for
$3.5 million. Site planning and design have been completed and pre-leasing has
commenced. Groundbreaking is expected to occur in mid-2005.
(iii) Rye Canyon. In October 2004, a joint venture between A&B and
Intertex Properties, LLC acquired, for $1.5 million, a 5.4-acre commercial-zoned
parcel for the development of an 85,000-square-foot office building. Site
planning and design are complete and design approvals are being sought.
Marketing and pre-leasing efforts commenced in February 2005. Groundbreaking is
expected to occur in mid-2005.
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 and related operations consist of: (1) a
sugar plantation on the island of Maui, operated by its Hawaiian Commercial &
Sugar Company ("HC&S") division, (2) a coffee farm on the island of Kauai,
operated by its Kauai Coffee Company, Inc. ("Kauai Coffee") subsidiary, (3) its
Kahului Trucking & Storage, Inc. ("KT&S") subsidiary, which provides sugar and
molasses hauling and storage, as well as petroleum hauling, mobile equipment
maintenance and repair services and self-service storage facilities on Maui and
(4) its Kauai Commercial Company, Incorporated subsidiary, which provides
services on Kauai similar to those provided by KT&S on Maui, as well as general
trucking services.
HC&S is Hawaii's largest producer of raw sugar, having produced
approximately 198,800 tons of raw sugar in 2004, or about 77 percent of the raw
sugar produced in Hawaii (compared with 205,700 tons, or about 79 percent in
2003). The decrease in production was due primarily to rainy weather early in
the year that affected planting, harvesting and milling operations; and to yield
losses attributable to a significant drought during the first year of crop
growth and the reappearance of leaf scald disease, which had been dormant for
years. Total Hawaii sugar production, in turn, amounted to approximately three
percent of total U.S. sugar production. HC&S harvested 16,890 acres of sugar
cane in 2004 (compared with 15,660 in 2003). More acres were harvested in 2004
to compensate for the yield losses noted above. Yields averaged 11.8 tons of
sugar per acre in 2004 (compared with 13.1 in 2003). The average cost per ton of
sugar produced at HC&S was $435 in 2004 (compared with $422 in 2003). The
increase in cost per ton was attributable to lower sugar production. As a
by-product of sugar production, HC&S also produced approximately 65,100 tons of
molasses in 2004 (compared with 72,500 in 2003).
In 2004, approximately 15,500 tons of sugar (compared with 12,100 in
2003) produced by HC&S were specialty food-grade raw sugars and sold under
HC&S's Maui Brand(R) trademark. A further expansion of the production facilities
for these sugars is planned for 2005.
During 2004, Kauai Coffee had approximately 3,200 acres of coffee trees
under cultivation. The harvest of the 2004 coffee crop yielded approximately 1.8
million pounds of green coffee (compared with 3.3 million in 2003). The lower
production was due primarily to accelerated natural drop (coffee falling off the
tree) from heavy rain and wind during harvests.
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.
(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 2004 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 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 grew until 2004. Preliminary
data indicates a 1.5-percent decrease in 2004. The use of non-caloric
(artificial) sweeteners accounts for a relatively small percentage of the
domestic sweetener market. The 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.
U.S. domestic raw sugar prices 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-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
JAN-04 20.54
FEB 20.59
MAR 20.86
APR 20.86
MAY 20.69
JUN 19.96
JUL 20.15
AUG 20.09
SEP 20.47
OCT 20.31
NOV 20.41
DEC 20.54
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. Coffee commodity prices have partially recovered from 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 about 900 acres leased from the
State of Hawaii, about 700 acres leased from the Department of Hawaiian Home
Lands and 1,300 acres under lease from private parties. Approximately 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. Also, all of Kauai
Coffee's fields 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
were then extended as revocable permits that were renewed 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 has renewed the existing permits on a holdover basis.
D. Employees and Labor Relations
As of December 31, 2004, A&B and its subsidiaries had approximately
2,056 regular full-time employees. About 995 regular full-time employees were
engaged in the food products segment, 942 were engaged in the transportation
segment, 46 were engaged in the real estate segment, and the balance was in
administration. Approximately 50 percent were covered by collective bargaining
agreements with unions.
At December 31, 2004, the active Matson fleet employed seagoing
personnel in 262 billets. Each billet corresponds to a position on a ship that
typically is filled by two or more employees because seagoing personnel rotate
between active sea duty and time ashore. 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. Matson's agreements with
the Seafarer's International Union and shore-based units of the Sailors Union of
the Pacific and the Marine Firemen's Union are expected to be renewed in
mid-2005 without service interruption.
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 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 and on
the island of Hawaii. Matson Terminals is a member of the Hawaii Stevedore
Industry Committee which, on behalf of its members, negotiates with the ILWU in
Hawaii.
During 2004, Matson renewed its collective bargaining agreement with
ILWU clerical workers at Long Beach through June 2007 without service
interruption.
During 2004, Matson contributed to multiemployer 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 multiemployer pension
plan 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, 2008, and the other general agreement will expire March 31,
2006. There are two collective bargaining agreements with Kauai Commercial
Company, Incorporated employees represented by the ILWU. The agreement covering
the production unit employees was renegotiated in 2004 and will expire April 30,
2007. The agreement covering the clerical employees is still being negotiated,
and they are currently working under an extended agreement. No interruption in
service is anticipated at this time. The collective bargaining agreement with
the ILWU for the production unit employees of Kauai Coffee was renegotiated and
expires January 31, 2007.
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 2004, Matson vessels purchased
approximately 1.87 million barrels of residual fuel oil (compared with 1.7
million barrels in 2003).
Residual fuel oil prices paid by Matson started in 2004 at $27.92 per
barrel and ended the year at $27.29. The low for the year was $26.21 per barrel
in January and the high was $42.31 in October. Sufficient fuel for Matson's
requirements is expected to be available in 2005.
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 coal, diesel,
fuel oil, and bio-diesel (recycled cooking oil) to produce power during factory
shutdown periods when bagasse is not being produced. In 2004, HC&S produced and
sold, respectively, approximately 209,000 MWH and 93,700 MWH of electric power
(compared with 211,500 MWH produced and 82,200 MWH sold in 2003). The increase
in power sold was due to heavy rain for the first half of 2004, which increased
hydroelectric power production and decreased irrigation pumping of well water.
In addition, HC&S limited irrigation pumping of well water during the second
half of 2004 to sell additional power. HC&S's oil use decreased to approximately
11,300 barrels in 2004, from approximately 17,900 barrels used in 2003. Coal use
for power generation approximated that of the prior year at 52,000 short tons.
In 2004, McBryde produced approximately 36,500 MWH of hydroelectric
power (compared with 30,100 MWH in 2003). Power sales in 2004 amounted to
approximately 30,500 MWH (compared with 21,200 MWH in 2003). The increase in
power production and sales was due primarily to heavy rainfall in 2004.
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 (the "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. The parties filed
reply briefs on June 17, 2002. The Board canceled the oral argument scheduled
for February 10, 2005 and placed the proceeding in abeyance until the Government
of Guam confirms that it is ready to proceed.
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 financial statements, and appropriate accruals for this matter
have been recorded.
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 (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 objected to the petition, asked the BLNR to conduct
administrative hearings on the matter and requested that the matter be
consolidated with the Company's currently pending application before the BLNR
for a long-term water license.
Since the filing of the petition, the Company has 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. An interim agreement was
entered into during the first quarter of 2004 between the parties to allow the
improvements to be completed, deferring the administrative hearing process. That
agreement, however, has since expired without renewal by the petitioners.
Nevertheless, the Company has continued to make improvements to the water
systems.
The administrative hearing process on the petition is continuing, and
the Company continues to object to the petition. The effect of this claim on the
Company's sugar-growing operations cannot currently be estimated. 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 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 both an
unrelated company and HC&S, to order the companies to leave all water of four
streams on the west side 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 it is currently diverting, it may have an 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 7, 2005, there were 3,792 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 220,300
shares a day in 2004, compared with 155,900 shares a day in 2003 and 150,600 in
2002.
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 2004 and 2003, were as follows:
Dividends Market Price
Paid High Low Close
---- ---- --- -----
2004
----
First Quarter $0.225 $35.14 $31.41 $32.96
Second Quarter 0.225 34.97 29.05 33.45
Third Quarter 0.225 34.24 30.15 33.94
Fourth Quarter 0.225 44.74 33.27 42.42
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
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 2004, dividend payments to shareholders totaled $38.3 million,
which was 38 percent of reported net income for the year. The following dividend
schedule for 2005 has been set, subject to final approval by the Board of
Directors:
Quarterly Dividend Declaration Date Record Date Payment Date
------------------ ---------------- ----------- ------------
First January 27 February 18 March 3
Second April 28 May 12 June 2
Third June 23 August 4 September 1
Fourth October 27 November 10 December 1
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.
During 2004, A&B repurchased 76,200 shares of its stock for an average
price of $29.95 per share. There were no shares of A&B common stock repurchased
by the Company during 2003 or 2002. A&B's Board of Directors has authorized A&B
to repurchase up to two million shares of its common stock.
Also during 2004, 58,804 shares were returned to the Company in
connection with the exercise of options to purchase shares of the Company's
stock. The fair value averaged $37.56 per share. Of these shares, 44,540 were
returned to the Company during the fourth quarter at an average value of $39.02
per share.
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, 2004, 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 1,723,276 $27.61 1,481,363*
approved by security holders
- ----------------------------------------------------------------------------------------------------------------------
Equity compensation plans
not approved by security
holders -- -- 198,342**
- ----------------------------------------------------------------------------------------------------------------------
Total 1,723,276 $27.61 1,679,705
- ----------------------------------------------------------------------------------------------------------------------
* Under the 1998 Plan, 173,187 shares may be issued either as restricted
stock grants or option grants.
** A&B has two compensation plans under which its stock is authorized for
issuance and 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 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 198,342 shares that were available for future issuance, 7,950
shares were available for future issuance under the Non-Employee
Director Stock Retainer Plan and 190,392 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):
2004 2003 2002 2001 2000
-------- -------- -------- -------- ----------
Revenue:
Transportation:
Ocean transportation $ 850.1 $ 776.3 $ 686.9 $ 682.3 $ 714.7
Logistics services 376.9 237.7 195.1 122.0 132.4
Real Estate:
Leasing 83.8 80.3 73.1 70.7 62.1
Sales 82.3 63.8 93.0 89.2 46.3
Less amounts reported in discontinued
operations1 (5.1) (42.5) (76.9) (14.8) (14.5)
Food Products 112.8 112.9 112.7 106.0 107.5
Reconciling items7 (6.5) -- -- -- --
---------- ---------- ---------- ---------- ----------
Total revenue $ 1,494.3 $ 1,228.5 $ 1,083.9 $ 1,055.4 $ 1,048.5
========== ========== ========== ========== ==========
Operating Profit:
Transportation:
Ocean transportation $ 108.3 $ 93.2 $ 42.4 $ 60.7 $ 94.0
Logistics services 8.9 4.3 3.1 1.6 (0.3)
Real Estate:
Leasing 38.8 37.0 32.9 34.1 30.1
Sales 34.6 23.9 19.4 17.9 24.2
Less amounts reported in discontinued
operations1 (3.3) (20.9) (21.2) (8.1) (7.8)
Food Products 4.8 5.1 13.8 5.7 7.5
---------- ---------- ---------- ---------- ----------
Total operating profit 192.1 142.6 90.4 111.9 147.7
Write-down of long-lived assets2 -- (7.7) -- (28.6) --
Gain on sale of investment3 -- -- -- 125.5 --
Dividends and other -- -- -- 2.1 3.0
Interest expense, net8 (12.7) (11.6) (11.6) (18.6) (24.3)
General corporate expenses (20.3) (15.2) (13.2) (13.2) (11.6)
---------- ---------- ---------- ---------- ----------
Income from continuing
operations before income taxes and
accounting changes 159.1 108.1 65.6 179.1 114.8
Income taxes (60.4) (39.8) (20.7) (64.4) (41.6)
---------- ---------- ---------- ---------- ----------
Income from continuing operations $ 98.7 $ 68.3 $ 44.9 $ 114.7 $ 73.2
========== ========== ========== ========== ==========
Identifiable Assets:
Transportation5 $ 953.4 $ 981.9 $ 880.1 $ 888.2 $ 911.1
Real Estate6 661.0 612.8 500.3 476.1 440.5
Food Products 152.8 154.4 163.4 153.3 197.1
Other 11.0 10.5 8.9 26.8 117.3
---------- ---------- ---------- ---------- ----------
Total assets $ 1,778.2 $ 1,759.6 $ 1,552.7 $ 1,544.4 $ 1,666.0
========== ========== ========== ========== ==========
Capital Expenditures:
Transportation5 $ 128.7 $ 133.4 $ 10.5 $ 59.7 $ 40.2
Real Estate4,6 10.9 107.7 83.7 72.0 44.8
Food Products 10.2 12.6 9.9 9.4 21.7
Other 1.4 1.7 0.9 0.3 0.2
---------- ---------- ---------- ---------- ----------
Total capital expenditures $ 151.2 $ 255.4 $ 105.0 $ 141.4 $ 106.9
========== ========== ========== ========== ==========
Depreciation and Amortization:
Transportation5 $ 58.0 $ 51.9 $ 51.0 $ 55.4 $ 54.6
Real Estate1, 6 12.3 11.3 9.1 7.8 6.0
Food Products 9.0 8.2 8.5 9.1 8.3
Other 0.4 0.3 0.4 0.5 0.5
---------- ---------- ---------- ---------- ----------
Total depreciation and
amortization $ 79.7 $ 71.7 $ 69.0 $ 72.8 $ 69.4
========== ========== ========== ========== ==========
2004 2003 2002 2001 2000
---------- ---------- --------- ---------- -------
Earnings per share:
From continuing operations before
accounting change:
Basic $ 2.32 $ 1.64 $ 1.09 $ 2.83 $ 1.79
Diluted $ 2.29 $ 1.63 $ 1.09 $ 2.82 $ 1.79
Net Income:
Basic $ 2.37 $ 1.95 $ 1.42 $ 2.73 $ 2.21
Diluted $ 2.33 $ 1.94 $ 1.41 $ 2.72 $ 2.21
Return on beginning equity 12.4% 11.2% 8.2% 15.9% 13.5%
Cash dividends per share $ 0.90 $ 0.90 $ 0.90 $ 0.90 $ 0.90
At Year End
Shareholders of record 3,792 3,959 4,107 4,252 4,438
Shares outstanding 43.3 42.2 41.3 40.5 40.4
Long-term debt - non-current 214 330 248 207 331
See Note 1 of Item 8 for information regarding changes in presentation for
certain revenues and expenses.
1 Prior year amounts restated for amounts treated as discontinued operations.
2 The 2003 and 2001 write-downs were for an "other than temporary" impairment in
the Company's investment in C&H.
3 In 2001, the Company sold its holdings in BancWest, realizing a gain of
approximately $125.5 million.
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.
6 Includes Leasing, Sales and Development activities.
7 Includes inter-segment revenue and interest income classified as revenue for
segment reporting purposes.
8 Includes Ocean Transportation interest expense of $5.7 million for 2004, $2.6
million for 2003, $2.4 million for 2002, $5.1 million for 2001 and $8.1
million for 2000.
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 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 new competitor
capacity 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 RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------
(dollars in millions, except per-share amounts) 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------
Operating Revenue $ 1,494 $ 1,229 $ 1,084
Operating Costs and Expenses $ 1,329 $ 1,113 $ 1,006
Other Income and (Expenses) $ (6) $ (8) $ (12)
Income Taxes $ 60 $ 40 $ 21
Net Income $ 101 $ 81 $ 58
Other Comprehensive Income (Loss) $ (1) $ 19 $ (27)
- ------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share $ 2.37 $ 1.95 $ 1.42
- ------------------------------------------------------------------------------------------------------------------
Operating Revenue for 2004 increased $265 million, or 22 percent,
compared with 2003. Logistics services contributed 52 percent to the increase
due to a late 2003 business acquisition and top-line business growth. Ocean
transportation contributed 26 percent of the increase due principally to
increased volumes and rate actions. Property sales contributed 20 percent.
Property leasing and food products revenue were comparable to 2003. The property
leasing and property sales revenue included in the Consolidated Statements of
Income are stated after subtracting discontinued operations.
Operating revenue for 2003 increased $145 million, or 13 percent,
compared with 2002. Ocean transportation contributed 61 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 30 percent
to the increase due to top-line business growth. Property leasing contributed 10
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 subtracting discontinued
operations.
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 2004 increased by $216 million, or 19
percent, compared with 2003. Costs of logistics services increased $130 million
due to business growth. Cost of transportation services increased by $67 million
due to higher terminal and vessel operating costs (both of which were due to
higher volume), a 2003 $17 million pension settlement gain, an accrual in 2003
for the settlement of a claim with the State of Hawaii and improved performance
of joint ventures. Costs of property sales and leasing services, after removing
discontinued operations, increased $26 million due to property sales and routine
operating and maintenance costs. Cost of agricultural goods and services
declined $3 million compared with 2003. Selling, General and Administrative
costs increased by $4 million due to consulting costs for Sarbanes-Oxley section
404 readiness, audit fees, increased accruals for incentive plans, and higher
non-qualified benefit plans expenses.
Operating Costs and Expenses for 2003 increased by $107 million, or 11
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 $7 million due to increased operating and maintenance
costs. 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.
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 equity in earnings of real
estate joint ventures, interest revenue and interest expense. Interest expense
of $13 million for 2004 was $1 million higher than in 2003 due principally to a
smaller mix of variable rate debt partially offset by lower debt balances. 2003
interest expense was substantially the same as the amount reported in 2002.
Income Taxes were higher for 2004 compared with 2003 due primarily to
higher pre-tax income and a higher effective tax rate of 38 percent versus 37
percent for 2003. Income taxes were higher for 2003 compared with 2002 due to
both higher pre-tax income and a higher tax rate. The 2002 effective tax rate
was 33 percent.
Other Comprehensive Income or Loss for 2004, 2003 and 2002 comprised
the minimum pension liability adjustments (Note 10 in Item 8 of the Company's
2004 Form 10-K) and the change in fair value of the treasury lock agreement
(Note 8 in Item 8 of the Company's 2004 Form 10-K).
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 2004 Form 10-K. The following information should be read in
relation to information contained in that Note.
Transportation Industry
Ocean Transportation; 2004 compared with 2003
- ---------------------------------------------
- --------------------------------------------------------------------------------
(dollars in millions) 2004 2003 Change
- --------------------------------------------------------------------------------
Revenue $ 850.1 $ 776.3 10%
Operating profit $ 108.3 $ 93.2 16%
- --------------------------------------------------------------------------------
Volume (units)
Hawaii containers 169,600 162,400 4%
Hawaii automobiles 157,000 145,200 8%
Guam containers 17,200 17,800 -3%
- --------------------------------------------------------------------------------
Transportation - Ocean Transportation revenue of $850.1 million for
2004 was 10 percent higher than the $776.3 million reported in 2003. Of this
increase, 38 percent was due to improved yields and rate actions, 38 percent was
due to higher container and automobile volume, 17 percent was to mitigate
increased fuel costs through a bunker fuel surcharge, and the remaining 7
percent was due to purchased transportation services, vessel charters and other
factors. To mitigate the effects of fluctuating fuel costs, Matson charges a
fuel surcharge.
For 2004, Hawaii Service container volume was 4 percent higher than in
2003 and automobile volume was 8 percent higher reflecting higher market growth
due, in part, to the improving Hawaii economy. Automobile volume increases also
reflect rental fleet replacements.
Operating profit of $108.3 million for 2004 was $15.1 million greater
than the $93.2 million reported for 2003 reflecting principally $42.7 million of
favorable revenue yields, cargo mix, higher cargo volume and vessel charters,
the non-recurrence of a 2003 expense of $4.7 million to settle an excise tax
issue with the State of Hawaii, $3.7 million of lower overhead costs and $2.6
million of higher returns from joint ventures. These favorable factors were
partially offset by $24.6 million of higher vessel operating costs due
principally to the addition, in second half of 2004, of two vessels in the
Hawaii Service to accommodate the higher volume and to ensure customer shipping
needs were met during recent Southern California terminal labor shortages and
$7.9 million for net benefit plan expenses (mostly due to the non-recurrence of
a 2003 pension settlement gain).
Ocean Transportation; 2003 compared with 2002
- ---------------------------------------------
- --------------------------------------------------------------------------------
(dollars in millions) 2003 2002 Change
- --------------------------------------------------------------------------------
Revenue $ 776.3 $ 686.9 13%
Operating profit $ 93.2 $ 42.4 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 $776.3 million for
2003 was 13 percent higher than the $686.9 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.
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 Coast port disruptions
in the fourth quarter of 2002, and higher market growth due, in part, to the
improving Hawaii economy.
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. Guam Service container
volume was 9 percent higher than 2002, reflecting recovery efforts following
Typhoon Pongsona.
Operating profit of $93.2 million for 2003 was $50.8 million greater
than the $42.4 million reported for 2002 reflecting principally $37.2 million of
favorable revenue yields and improved cargo volume, a $16.7 million pension
settlement gain that resulted from Matson joining the Hawaii Terminals
Multiemployer Plan, $13.1 million due to the absence of port disruptions that
reduced 2002 operating results, $21.5 million due to higher margins in the
Hawaii and Guam Service due to higher volume and improved terminal productivity
and $8.3 million of higher returns from joint ventures. These favorable factors
were partially offset by $16.9 million of higher vessel operating costs due
principally to the addition of an eighth vessel in the Hawaii Service to
accommodate the higher volume, $11.1 million for higher general and
administrative costs, principally related to increases in pension costs, $7.2
million of higher west coast terminal costs and $4.7 million for the settlement
of a claim with the State of Hawaii.
Logistics Services; 2004 compared with 2003
- -------------------------------------------
- --------------------------------------------------------------------------------
(dollars in millions) 2004 2003 Change
- --------------------------------------------------------------------------------
Revenue $ 376.9 $ 237.7 59%
Operating profit $ 8.9 $ 4.3 2.1x
- --------------------------------------------------------------------------------
Matson Integrated Logistics, Inc. ("MIL") provides intermodal marketing
and truck brokerage services throughout North America. Revenue was $376.9
million for 2004, compared with $237.7 million in 2003. Operating profit was
$8.9 million for 2004, compared with $4.3 million earned in 2003. The 2004
revenue and operating profit growth were primarily the result of the late-2003
business acquisition noted below and new revenue due to continuing business
growth.
In December 2004, MIL acquired certain assets, obligations and
contracts of a Texas-based business that provides truck and rail brokerage
services. In December 2003, MIL acquired $12 million of assets and the operating
contracts of an Ohio-based business that provides truck brokerage services.
These two business acquisitions are described more fully in Note 2 of the
Consolidated Financial Statements included in Item 8.
Logistics Services; 2003 compared with 2002
- -------------------------------------------
- --------------------------------------------------------------------------------
(dollars in millions) 2003 2002 Change
- --------------------------------------------------------------------------------
Revenue $ 237.7 $ 195.1 22%
Operating profit $ 4.3 $ 3.1 39%
- --------------------------------------------------------------------------------
MIL revenue was $237.7 million for 2003, compared with $195.1 million
in 2002. Operating profit was $4.3 million for 2003, compared with $3.1 million
earned in 2002. The 2003 revenue and operating profit growth were 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 for 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.
Real Estate Industry
Leasing; 2004 compared with 2003
- --------------------------------
- ---------------------------------------------------------------------------------------------
(dollars in millions) 2004 2003 Change
- ---------------------------------------------------------------------------------------------
Revenue $ 83.8 $ 80.3 4%
Operating profit $ 38.8 $ 37.0 5%
- ---------------------------------------------------------------------------------------------
Occupancy Rates:
Mainland 95% 93% 2%
Hawaii 90% 90% --
- ---------------------------------------------------------------------------------------------
Leasable Space (million sq. ft.):
Mainland 3.7 3.7 --
Hawaii 1.7 1.7 --
- ---------------------------------------------------------------------------------------------
Revenue for 2004, before subtracting amounts treated as discontinued
operations, of $83.8 million was 4 percent higher than the $80.3 million
reported in 2003. Operating profit, also before subtracting discontinued
operations, was $38.8 million for 2004, or 5 percent higher than the $37 million
earned in 2003. The higher operating profit was due primarily to the full year
effect of the 2003 property purchases as well as higher rental rates and
improved mainland occupancies. Mainland occupancy increased, principally due to
tenancy increases in retail properties as well as the varying mix of properties
in the portfolio due to sales and acquisitions. Hawaii occupancy remained
unchanged from 2003. The composition of the leased portfolio remained relatively
stable during 2004.
Leasing; 2003 compared with 2002
- --------------------------------
- --------------------------------------------------------------------------------
(dollars in millions) 2003 2002 Change
- --------------------------------------------------------------------------------
Revenue $ 80.3 $ 73.1 10%
Operating profit $ 37.0 $ 32.9 12%
- --------------------------------------------------------------------------------
Occupancy Rates:
Mainland 93% 92% 1%
Hawaii 90% 89% 1%
- --------------------------------------------------------------------------------
Leasable Space (million sq. ft.):
Mainland 3.7 3.3 12%
Hawaii 1.7 1.6 6%
- --------------------------------------------------------------------------------
Revenue, before subtracting amounts treated as discontinued operations,
was $80.3 million for 2003, or 10 percent higher than the $73.1 million reported
in 2002. Operating profit, also before subtracting discontinued operations, was
$37 million for 2003, or 12 percent higher than the $32.9 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.
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.
Property Sales; 2004 compared with 2003 and 2002
- ------------------------------------------------
- --------------------------------------------------------------------------------
(dollars in millions) 2004 2003 2002
- --------------------------------------------------------------------------------
Revenue $ 82.3 $ 63.8 $ 93.0
Operating profit $ 34.6 $ 23.9 $ 19.4
- --------------------------------------------------------------------------------
Revenue, before subtracting amounts treated as discontinued operations,
from property sales was $82.3 million and operating profit was $34.6 million for
2004. Sales during 2004 primarily included (1) 33 Maui and Oahu commercial
properties for $24 million, (2) three residential development parcels on Maui
for $14 million, (3) 17 1/2 floors of an Oahu office condominium for $19 million
and, (4) 28 Maui residential properties for $23 million. Operating profit also
included the Company's share of earnings in its five real estate joint ventures,
including the sales of 14 residential units on Oahu and the island of Hawaii in
2004.
Revenue of $63.8 million and operating profit of $23.9 million in 2003
resulted from the sales of (1) a shopping center in Nevada for $24 million, (2)
six commercial properties on Maui for $15 million, (3) 23 Maui and Kauai
residential properties for $9 million, (4) eight office condominium floors on
Oahu 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 included the Company's share of earnings in two
real estate joint ventures of $4 million that, combined, reflect the sales of
142 residential units on Oahu and the island of Hawaii in 2003.
Revenue of $93 million and operating profit of $19.4 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 Maui and Kauai residential properties for $16 million and (5) a shopping
center in Colorado for $5 million. Operating profit also included the Company's
share of earnings in its two real estate joint ventures, reflecting the sales of
five residential units in 2002.
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 2004, 2003 and 2002 were as follows (in millions, except
per-share amounts):
- --------------------------------------------------------------------------------
2004 2003 2002
- --------------------------------------------------------------------------------
Sales Revenue $ 1.1 $ 36.9 $ 65.4
Leasing Revenue $ 4.0 $ 5.6 $ 11.5
Sales Operating Profit $ 1.5 $ 17.9 $ 14.6
Leasing Operating Profit $ 1.8 $ 3.0 $ 6.6
After-tax Earnings $ 2.0 $ 13.0 $ 13.3
Basic Earnings Per Share $ 0.05 $ 0.31 $ 0.33
- --------------------------------------------------------------------------------
2004: The sale of a Maui property was classified as a discontinued
operation. In addition, two office and one light industrial properties met the
criteria for classification as discontinued operations even though the Company
had not sold the properties by the end of 2004. One of the office properties and
the light industrial property were sold in January 2005 for $18 million and $6
million, respectively.
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.
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 Industry
Food Products; 2004 compared with 2003
- --------------------------------------
- --------------------------------------------------------------------------------
(dollars in millions) 2004 2003 Change
- --------------------------------------------------------------------------------
Revenue $ 112.8 $ 112.9 --
Operating profit $ 4.8 $ 5.1 -6%
- --------------------------------------------------------------------------------
Tons sugar sold 198,800 205,700 -3%
- --------------------------------------------------------------------------------
Revenue of $112.8 million and operating profit of $4.8 million for 2004
was about the same as the amounts reported in 2003. Higher power sales volume
and prices of $5.5 million, higher Maui Brand Sugar and Kauai Coffee roasted
coffee sales and lower operating costs were fully offset by $4 million of lower
raw sugar prices, $3 million of lower raw sugar production volume, an expense of
$1.6 million to reduce the carrying cost of coffee inventory to the amount it
expects to realize when inventories are sold, and lower molasses sales.
Compared with 2003, sugar production was 6,900 tons lower due to
adverse weather conditions and yield losses. The average revenue per ton of
sugar for 2004 was 5 percent lower than in 2003. Power sales of $15.3 million
were 56 percent higher than the full year 2003.
Coffee production of 1.8 million pounds for 2004 was 1.5 million pounds
lower than the 3.3 million pounds produced in 2003. This lower production was
principally due to heavy rain and wind on Kauai during the harvest season that
knocked coffee cherries off the trees and reduced the ability to harvest coffee.
The lower coffee harvest resulted in a lower-of-cost-or-market adjustment of
$1.6 million in the fourth quarter of 2004.
Approximately 92 percent of the Company's sugar production was sold to
Hawaiian Sugar & Transportation Cooperative ("HS&TC") during 2004 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. For 2003, approximately 94 percent of
total production was sold to HS&TC.
Food Products; 2003 compared with 2002
- --------------------------------------
- --------------------------------------------------------------------------------
(dollars in millions) 2003 2002 Change
- --------------------------------------------------------------------------------
Revenue $ 112.9 $ 112.7 --
Operating profit $ 5.1 $ 13.8 -63%
- --------------------------------------------------------------------------------
Tons sugar sold 205,700 215,900 -5%
- --------------------------------------------------------------------------------
Revenue of $112.9 million for 2003 approximated revenue reported in
2002, but operating profit declined by 63 percent. Compared with 2002, the
10,200 fewer tons of 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
$9 million higher than 2002 primarily 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.
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
operating profit for 2003 was approximately break-even.
SUBSEQUENT EVENTS
On February 24, 2005, Matson announced that it will replace its
existing Guam service with an integrated Hawaii/Guam/China service beginning in
February 2006 upon the termination of the APL alliance. The service will employ
three existing Matson containerships along with two new containerships to be
purchased from Kvaerner Philadelphia Shipyard, Inc. ("Kvaerner") in a five-ship
string that carries cargo from the U.S. West Coast to Honolulu, then to Guam,
and eventually to China. In China, the vessels will be loaded with cargo
destined for the U.S. West Coast. The Guam service strategy involves
re-deploying into the Hawaii service three C-9 class vessels that currently
serve Guam.
Also on February 24, 2005, Matson entered into agreements with Kvaerner
to purchase two containerships at a cost of $144.4 million each. The cost is
expected to be funded with the Capital Construction Fund, surplus cash, and
external borrowings. The first ship is expected to be delivered in June 2005,
with the second ship in May 2006. Payment in full is required upon the delivery
of each ship. Matson has the right to assign the agreements to a third party.
Matson expects that any such assignment would be made in conjunction with its
time chartering the use of such vessels.
In connection with the two purchase agreements Matson entered into a
right of first refusal agreement with Kvaerner, which provides that, after the
second containership is delivered to Matson, Matson has the right of first
refusal to purchase each of the next four containerships of similar design built
by Kvaerner that are deliverable before June 30, 2010. Matson may either
exercise its right of first refusal and purchase the ship at an eight percent
discount off of a third party's proposed contract price, or decline to exercise
its right of first refusal and be paid eight percent of such price.
Notwithstanding the above, if Matson and Kvaerner agree to a construction
contract for a vessel to be delivered before June 30, 2010, Matson shall receive
an eight percent discount.
ECONOMIC OUTLOOK AND INDUSTRY GROWTH OPPORTUNITIES
The economy in the State of Hawaii remains strong. At this point, the
two primary "drivers" of Hawaii's growth remain in good shape - the visitor
industry and strong real estate/construction.
Preliminary visitor industry figures for 2004 reflected record domestic
arrivals. Combined with an early stage recovery in international visitors, new
all-time records were set in 2004 in total visitor-days - a primary measure of
economic contribution - and in total visitor expenditures. Total hotel revenue
also reached an all-time record in 2004. All three of these measures bettered
their respective levels in 2000, the previous high point.
Construction enjoyed its fifth consecutive annual increase and the
forecast for 2005 reflects a sizeable 13.8 percent rise. The growth is based on
the combination of continuing strong private residential markets and the
replacement/refurbishment of military housing.
Hawaii's average unemployment rate was 3.4 percent for 2004, with the
December monthly rate at three percent, versus the national rate of 5.4 percent.
Forecasts indicate continued job growth in Hawaii in 2005.
Other measures of economic activity, such as retail sales of
automobiles and light trucks, remain at or near all-time highs. Although the
local inflation rate is likely to rise because of Hawaii's high exposure to
energy and housing costs, the rate of inflation is still expected to be
moderate. By all present indications, Hawaii will continue to enjoy moderate,
sustainable economic growth in the near future.
The Company believes that the economic growth in its core markets will
continue in the near term. While benefiting from this growth, A&B plans some
shifts in its strategies for A&B Properties and Matson. The Company's growth
strategies will be guided by two primary objectives: (1) sustaining profit
momentum at Matson in spite of external challenges and (2) continued success in
identifying and investing in profitable real estate.
The Company is targeting long-term annual earnings growth of
approximately 10 to 12 percent, although yearly growth rates will be influenced
by competitive factors, the transition to Matson's new Hawaii/Guam/China service
upon the expiration of the APL alliance, and the pace and timing of real estate
activity. In particular, 2006 will be impacted by the initiation of the new
Hawaii/Guam/China service and, as a result, earnings growth is not expected.
(See discussion of Hawaii/Guam/China service on page 37). Business growth will
be financed by both the Company's cash flow and by debt facilities. As of year
end, the Company's debt to debt-plus-equity ratio was 21 percent and it has
sufficient unused credit facilities in place to finance a significant portion of
its growth plans. The Company is also positioned well for obtaining additional
financing sources.
The composition of the Company's assets is currently about half in
transportation, about 40 percent in real estate and less than 10 percent in food
products. The Company's long-term strategic intent is to bring real estate and
transportation into balance via an active real estate investment program,
including land acquisitions, development of new and current projects and
maintenance of income-producing properties. Matson's purchase of two new
containerships in 2005 and 2006 will temporarily increase its share of total
capital. Other Matson spending over the next several years is expected to be
modest. Capital spending for the food products businesses is expected to be
modest as well.
Real Estate: A&B is targeting, subject to market demand, approximately
13 to 15 percent long-term earnings growth in its real estate businesses. This
is expected to be achieved through completion of existing projects, continued
strength in its income portfolio and maintaining a pipeline of new developments.
A number of opportunities are currently under consideration; some of these new
opportunities may be in new types of properties.
In recent years the Company has begun two significant projects, the
acquisition and ensuing development and sale of 270 acres of undeveloped land at
Wailea on Maui and the development of a 1,000-acre project at Kukui'ula on Kauai
in a partnership with an affiliate of DMB Associates, Inc. The Company is
looking for additional investments to complement these two longer-term projects.
A&B, however, will also continue pursuing projects with a 2-5 year return
horizon. Of the Wailea properties, the Company currently plans to sell about 60
acres in bulk sales and develop, either by itself or through joint ventures,
about 120 acres. The remaining acreage could be either developed or sold,
depending on market factors.
A facet of plans for continued growth of the real estate business will
be expanding the use of joint ventures. Joint ventures have benefited A&B by
dispersing risk among a greater number of projects and enable the Company to
partner with businesses that have complementary expertise, thereby creating
greater value than pursuing the same opportunities alone.
The Company also intends to increase monetization of non-essential
lands. These include lands that are not used for agriculture and that have
little or no foreseeable development potential.
Transportation: A&B is targeting long-term earnings growth at Matson of
approximately 8 to 10 percent, although this growth will be irregular as new
competition enters the Hawaii market and a new Hawaii/Guam/China service is
implemented following the expiration of Matson's alliance with American
President Lines, Ltd. in February 2006. As described on page 37, the transition
to the Hawaii/Guam/China service is expected to reduce earnings in 2006.
Long-term growth is expected as a result of the strong Hawaii economy, the
development of the eastbound China trade and continued growth in the logistics
business.
Competition in the Hawaii Service is expected to increase in 2005 due
to entry into the Hawaii trade by the operator of a new dedicated automobile and
truck carrier, with a stated carrying capacity of 3,000 automobiles every two
weeks beginning in the second quarter of 2005. The operator announced that it
will target automobiles, buses, trucks and other large and oversize rolling
stock, and that it signed a multi-year contract with an automobile manufacturer
that is a current Matson customer, for which Matson moved approximately 20,000
westbound automobiles in 2004. Matson is well-positioned to compete with the new
entrant. Partially offsetting the loss of business to the new entrant, Matson
recently received a multi-year commitment from an automobile manufacturer that
previously was the customer of a different competitor. While the new entrant
into the Hawaii market is expected to have some adverse effect, its near-term
impact cannot be estimated, and the long-term impact will not be known for some
time. The total Hawaii-Mainland auto carriage market is approximately 190,000
automobiles per year.
MIL is expected to continue growing through both the development of
existing business relationships and through acquisitions. The intermodal
business is fragmented and MIL expects to take advantage of synergistic
acquisitions.
Food Products: A&B, through its Hawaiian Commercial & Sugar ("HC&S")
operations on Maui produces approximately 77 percent of the state's sugar. HC&S'
strengths in this price-constrained business are its irrigation infrastructure,
innovative uses of technology, its workforce and a strong union relationship.
While agriculture remains the best and highest use for much of the Company's
land, it faces declining margins on the sale of commodity products. For that
reason, the business strategy for food products is to expand its Maui Brand
Sugar products, develop new sources of energy sales and develop new revenue
sources from sugar byproducts. In addition, because raw sugar production is
mostly a fixed cost operation, A&B continues to focus on higher production
volume and yields.
The U.S. Congress included a $7.2 million appropriation for the Hawaii
sugarcane producers in the Military Construction Appropriations Conference
Report as part of a broad disaster relief effort. The Company expects to benefit
by about $5.5 million during the first quarter of 2005 as a result of this
appropriation.
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 $633 million at December 31, 2004, an increase of $88 million from
December 31, 2003. This net increase was due primarily to $47 million in higher
available balances on revolving credit and private placement shelf facilities,
$36 million of higher cash and cash equivalent balances and $21 million of
increased receivables.
Working Capital: Working capital was $53 million at December 31, 2004,
a decrease of $11 million from the balance at the end of 2003. The lower working
capital was due primarily to $20 million higher accounts payable balances, $16
million increase in current portion of long-term debt and $15 million of accrued
deposits to the Capital Construction Fund, partially offset by an increase of
$36 million in cash and cash equivalents and $21 million of higher receivable
balances. The higher other current liability balance was due primarily to
nonqualified employee benefit plan reclassifications from non-current and
deferred operating revenue. The higher accounts payable balance was primarily
due to the growth of logistics services business.
At December 31, 2004, the Company had receivables totaling $181
million, compared with $160 million a year earlier. These amounts were net of
allowances for doubtful accounts of $14 million and $12 million, respectively.
The increase in receivables was mainly the result of increased business
activity, particularly strong cargo volumes in the transportation businesses
late in the year. The Company's management believes that the quality of these
receivables is good and that its reserves are adequate. Cash balances were
higher due to strong cash flows during the second half of the year combined with
the timing of redeployment opportunities and low debt balances that could be
repaid at year-end. At the end of 2004, the Company accrued $15 million as a
planned deposit to its Capital Construction Fund. This accrual represents a
claim against current assets and demonstrates the Company's intention to deposit
these funds into the CCF, thereby enabling the Company to deduct the accrued
deposit in calculating its 2004 tax payments. The fluctuations in other working
capital accounts resulted from normal operating activities.
Long-Term Debt and Credit Facilities: Long-term debt, including current
portion of long-term debt and current notes payable, was $245 million at the end
of 2004 compared with $345 million at the end of 2003. This $100 million decline
was the net result of retiring Matson's $100 million commercial paper program,
the early retirement, without penalty, of a $15 million term-loan that had been
assumed in connection with a 2003 real estate purchase, scheduled term debt
repayments totaling $12 million and variable rate debt repayments of $131
million, partially offset by the addition of a new $55 million Title XI bond
issue, described below, that partially financed the purchase of a new vessel,
the MV Maunawili. The weighted average interest rate for the Company's
outstanding borrowings at December 31, 2004 was approximately 5.7 percent.
A $50 million private shelf agreement, under which Matson had already
borrowed $15 million, expired in June 2004. In July, Matson renewed the
agreement to $65 million, $15 million of which was outstanding, and extended the
agreement to July 2007.
In August 2004, 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, a withdrawal from the Company's Capital Construction Fund ("CCF"), and
operating funds.
In August 2004, Matson repaid and retired its $100 million commercial
paper program. The repayment was accomplished by a withdrawal of $100 million
from the CCF. Matson also terminated a $25 million short-term revolving credit
facility that served as a liquidity back-up line for the commercial paper notes.
Also during 2004: (1) A&B increased its multibank revolving credit
facility from $185 million to $200 million and extended the facility to January
2008; (2) A&B increased its uncommitted $70 million credit line to $78.5 million
and extended the line to January 2006; (3) Matson renewed and extended a $50
million credit facility to December 2006; and (4) Matson reduced a $40 million
revolving credit facility to $30 million.
Credit facilities are described in Note 8 in Item 8 of the Company's
2004 Form 10-K.
Capital Construction Fund: During 2004, the Company deposited $2
million into the CCF and withdrew approximately $142 million. At December 31,
2004, it was the Company's intention to deposit an additional $15 million into
the CCF. This amount was accrued as a claim against current assets. During 2004,
$100 million was withdrawn from the CCF in connection with the retirement of
Matson's commercial paper program and $42 million was withdrawn for the purchase
of the MV Maunawili.
Cash Flows: Cash Flows from Operating Activities were $173 million for
2004, compared with $136 million for 2003. The higher operating cash flow was
due to better operating results, the increased sales of real estate inventory,
higher depreciation and fluctuations in other working capital balances.
Capital Expenditures: For 2004, capital expenditures, including
purchases of property using tax-deferred proceeds and additions to real estate
held for sale but excluding assumed debt, totaled $181 million. This was
comprised principally of $41 million for real estate acquisitions and property
development, $105 million for vessels, $17 million for Matson's container and
operating equipment, and $10 million for agricultural projects. Of the
real-estate related capital expenditures, $14 million was for purchase of land
on which the Company intends to build a high rise residential building.
Consistent with the intended purpose for the land, the acquisition amount was
included in Cash Flows from Operating Activities.
Tax-Deferred Real Estate Transactions: During 2004, the Company had no
material tax-deferred real estate purchases or sales. During 2003, the Company
recorded, on a tax-deferred basis, real-estate sales proceeds of $37 million and
utilized $41 million of 2003 and 2002 sales proceeds to acquire new
income-producing assets. As of December 31, 2004, $3 million was available for
reinvestment on a tax-deferred basis.
INVESTMENTS
The Company has the following principal investments, each of which is
accounted for following the equity method of accounting:
A) Crossroads Plaza: In June 2004, the Company signed a joint
venture agreement with Intertex Hasley, LLC, for the
development of a 62,000-square-foot mixed-use neighborhood
retail center on 6.5 acres of commercial land in Valencia,
California, called Crossroads Plaza Development Partners, LLC
("Crossroads Plaza"). The property was acquired in August 2004
for $3.5 million. Site planning and design have been completed
and pre-leasing has commenced. Groundbreaking is expected in
mid-2005. The Company has a 50 percent voting interest in the
Crossroads Plaza.
B) Hokua: In July 2003, the Company 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. The Company's total
investment in the venture is expected to be $40 million.
Approximately $36 million has been funded through December
2004. The joint venture has loan commitments totaling $130
million, of which the Company guarantees a maximum of $15
million. The Company has a 50 percent voting interest in
Hokua.
C) HoloHolo Ku: In October 2001, the Company 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. Five homes were sold in 2002, 36 homes were
sold in 2003, and the remaining three homes were sold in 2004.
The average price of the 44 homes was $395,000. The Company
has a 50 percent voting interest in HoloHolo Ku.
D) Kai Lani: In September 2001, the Company 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 and 105 units were sold in 2003. By the
first quarter of 2004, the remaining 11 units had been sold.
The average price of all 116 units was $495,000. The Company
has a 50 percent voting interest in Kai Lani.
E) Kai Malu at Wailea: In April 2004, the Company entered into a
joint venture with Armstrong Builders, Ltd. for development
of the 25-acre MF-8 parcel at Wailea on Maui. The project is
planned to consist of 150 duplex units with an average size of
1,800 square feet and an average price of over $1 million.
In November 2004, the Planning Commission approved the
issuance of a County Special Management Area ("SMA") permit
for the project and a preliminary public condominium report
was approved by the Hawaii Real Estate Commission for the
initial 34-unit phase, enabling marketing to commence in
December 2004. As of January 31, 2005, all of the 34 units in
Phase I were sold under non-binding contracts at an average
price of $1.1 million. Final public condominium reports for
Phase I (34 units) and Phase II (54 units) were approved in
February 2005, enabling binding contracts to be secured. The
Company has a 50 percent voting interest in Kai Malu at
Wailea.
F) 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
project will consist of between 1,200 to 1,500 high-end
residential units. During 2003, the Company contributed to
the venture title to 846 acres, a waste water treatment plant,
and other improvements totaling approximately $28 million in
value. The balance of the land, approximately 165 acres, is
expected to be transferred to the venture in the first quarter
of 2005. In July 2003, the State Land Use Commission ("SLUC")
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. In July 2004, the Kauai
County Council gave final zoning and visitor designation area
approvals for the entire project. In August 2004, the Company
exercised its option to contribute to the joint venture up to
40 percent of the project's future capital requirements. The
additional investment is expected to range from $50 million to
$75 million and occur over the next three to four years.
Design, engineering and construction activity to date include:
preparation of construction plans for onsite and offsite
infrastructure, preparation and submittal to government
agencies of subdivision maps for the initial phases of the
project, development of potable water wells, and permitting
of a new electrical substation. Design work is progressing on
a sales center/model home complex, which will be constructed
in 2005. For the initial phase of development, SMA approvals
were secured and permit applications were submitted for
improvements. Marketing of the initial phase is expected to
commence in March 2005 and infrastructure construction is
scheduled to commence in mid-2005. The total project cost,
excluding vertical home construction, is projected to be
approximately $725 million, although the maximum cash outlay
will be much lower due to phasing of the project. With its
additional equity investment, the Company will likely receive
between 50 percent and 60 percent of the venture's returns.
The Company has a 50 percent voting interest, for significant
decisions of Kukui`ula.
G) Mauna Lani: In April 2004, the Company entered into a joint
venture with Brookfield Homes Hawaii Inc. ("Brookfield") to
acquire and develop a 30.5-acre residential parcel in the
Mauna Lani Resort on the island of Hawaii. In May 2004, the
property was acquired by the joint venture for $6.6 million.
The conceptual plan for the project consists of 137
single-family and duplex units. An SMA amendment was
submitted in October 2004 and was approved in November 2004.
Site planning was completed and submitted to the Mauna Lani
Design Review Committee in January 2005. Product design, site
planning, grading, drainage, utility and roadway design work
are being finalized. Groundbreaking is scheduled to commence
in mid-2005. The Company has a 50 percent voting interest in
the venture.
H) Rye Canyon: In October 2004, the Company acquired 5.4 acres of
commercial-zoned land in Valencia, California for $1.5 million
for the development, with a joint venture partner, of an
85,000-square-foot office building. Design and site planning
are complete and design approvals are being sought. Marketing
and pre-leasing efforts commenced in February 2005.
Groundbreaking is expected to commence in mid-2005. As of
December 31, 2004, the joint venture agreement had not been
signed.
I) Westridge LLC: In January 2003, the Company signed a joint
venture agreement with Westridge Executive Building, LLC, for
the development of a 63,000-square-foot office building. The
Company has a 50 percent voting interest in Westridge LLC.
Construction was completed in 2004 and the property was 91
percent leased at the end of 2004.
J) SSA Terminals: Matson is part owner, with SSA Marine Inc., of
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 is 35 percent.
K) Sea Star Line: In August 2004, Matson sold its investment in
Sea Star Line, LLC for approximately $7 million and recognized
a gain of approximately $1 million. Concurrent with the sale,
Matson was relieved of its $11 million guarantee obligation of
Sea Star's debt.
L) C&H: The Company owns approximately 36 percent of C&H's common
voting stock, 40 percent of its junior preferred stock, and
100 percent of its senior preferred stock. Approximately 92
percent of the Company's Maui sugar production is sold to C&H
through an intermediary raw sugar marketing and transportation
cooperative, HS&TC. The carrying value of this investment is
currently $3.8 million. In 2004, C&H's board of directors
approved the hiring of an advisor to assist in selling the
business. The expected proceeds from the possible sale of C&H
are expected to recover the carrying value of the investment.
The Company has evaluated investments in the aforementioned
unconsolidated affiliates 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 its investments following the consolidation provisions of
Accounting Research Bulletin No. 51 "Consolidated Financial Statements," as
amended.
Notes 4 and 5 in Item 8 of the Company's 2004 Form 10-K provide
additional information about the Company's investments.
CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET
ARRANGEMENTS
Contractual Obligations: At December 31, 2004, 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 $ 245 $ 31 $ 48 $ 50 $ 116
Purchase obligations 31 31 -- -- --
Post-retirement obligations 33 3 6 6 18
Non-qualified benefit obligations 26 4 5 3 14
Capital lease obligations -- -- -- -- --
Operating lease obligations 129 19 18 10 82
------- ------ ------- ------ ------
Total $ 464 $ 88 $ 77 $ 69 $ 230
======= ====== ======= ====== ======
Long-term debt obligations and lease obligations are described in Notes
8 and 9, respectively, of Item 8 of the Company's 2004 Form 10-K.
Off Balance Sheet Arrangements: Commitments and financing arrangements
that are not recorded on the Company's balance sheet at December 31, 2004, other
than operating lease obligations that are shown above, in effect at the end of
2004 and 2003 included the following (in millions):
Arrangement 2004
----------- ----
Capital appropriations (a) $ 158
Guarantee of HS&TC debt (b) $ 15
Guarantee of Hokua debt (c) $ 15
Standby letters of credit (d) $ 18
Bonds (e) $ 14
Benefit plan withdrawal obligations (f) $ 65
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 December 31, 2004, the Company and its subsidiaries had an
unspent balance of total appropriations for capital expenditures
of approximately $158 million. These expenditures are primarily
for vessel maintenance, real estate investments, real estate
developments, containers and operating equipment and vessel
modifications. There are, however, no contractual obligations
to spend the entire amount. For 2005, internal cash flows and
existing credit lines are expected to be sufficient to finance
working capital needs, dividends, capital expenditures, and debt
service.
(b) The Company guarantees up to $15 million of HS&TC's $30 million
revolving credit line. This agreement expires in April 2006,
but is currently expected to be renewed. The HS&TC 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 current
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,
2004, the amount drawn was $15 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 remote.
(c) A&B Properties, Inc. ("Properties") 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, for example, 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 outstanding balance of the
venture's construction loan at December 31, 2004 was $12
million.
(d) The Company has arranged for standby letters of credit totaling
$18 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. 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 but has been extended until December 31,
2005. The remaining letters of credit, totaling $3 million, are
for routine insurance-related operating matters, principally in
the real estate businesses.
(e) Of the $14 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 $6 million of
customs bonds. The remaining $1 million of bonds are for
transportation-related matters.
(f) The withdrawal liabilities for multiemployer pension plans, in
which Matson is a participant, aggregated approximately $65
million as of the most recent valuation dates. Management has no
present intention of withdrawing from and does not anticipate
termination of any of the aforementioned plans.
Certain of the businesses in which the Company holds non-controlling
investments have long-term debt obligations. Other than obligations described
above, those investee obligations do not have recourse to the Company and the
Company's "at-risk" amounts are limited to its investment. These investments are
described above and in Notes 5 and 13 in Item 8 of the Company's 2004 Form 10-K.
Charter Agreements Related to Guam Service: 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. The APL Agreement will not be renewed after February 2006.
Matson will replace the existing Guam service with an integrated
Hawaii/Guam/China service beginning in February 2006. The service will employ
three existing Matson containerships along with two new containerships to be
purchased from the Kvaerner Philadelphia Shipyard in a five-ship string that
carries cargo to Honolulu from the U.S. West Coast, continues to Guam and then
on to China. In China, the vessels will be loaded with eastbound cargo destined
for the U.S. West Coast. This service will be unique among trans-Pacific
services because it will combine a secure and growing base of westbound freight
to Hawaii and Guam with eastbound freight from the robust Asia market. This
strategy also involves re-deploying into the Hawaii service three C-9 class
vessels that currently serve Guam. The Hawaii service will benefit from this
change due to fuel economies, increased cargo capacity and a deferral of
expenditures for vessel replacement.
The new Hawaii/Guam/China service will bring many operational benefits
as described above, and is expected, in the long term, to present greater
earnings potential than the present Guam service. The new service will, however,
require a large capital investment, currently estimated at about $365 million.
This includes $289 million for the new vessels, $26 million for other vessel
related costs and $50 million to acquire additional containers and to make
terminal improvements. Matson also will face a start-up period in the
trans-Pacific eastbound trade as it makes the operational transition to a new
fleet deployment, establishes a marketing organization and builds customer
relationships. As with any new service, the duration and economics of the
start-up period are difficult to estimate and depend on factors both within and
outside the control of Matson including eastbound rate levels and growth in
China-US trade. The anticipated reduction in operating profit in 2006 resulting
from this operational transition is expected to be in the range of $20-25
million. This earnings gap would be expected to narrow significantly in
subsequent years, with the earnings of the new service eventually exceeding the
current Guam service. These figures do not reflect the impact of general market
growth trends and cost reduction, business growth, and yield management
initiatives separate from the Guam service, all of which would be expected to
enhance earnings. Additionally, in 2006, the Company will incur interest expense
in the range of approximately $12 million as a result of these capital
expenditures.
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 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 relating to a boiler 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 consolidated financial statements and that appropriate accruals for
this matter have been recorded.
Additionally, in late 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 sold by the Company
in 1994. In connection with this settlement, the Company assumed responsibility
to remediate certain parcels of the site. The Company has accrued approximately
$2.3 million for the estimated remediation cost.
Other Contingencies: 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 objected to the petition,
asked the BLNR to conduct administrative hearings on the matter and requested
that the matter be consolidated with the Company's currently pending application
before the BLNR for a long-term water license.
Since the filing of the petition, the Company has 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. An interim agreement was
entered into during the first quarter of 2004 between the parties to allow the
improvements to be completed, deferring the administrative hearing process. That
agreement, however, has since expired without renewal by the petitioners.
Nevertheless, the Company has continued to make improvements to the water
systems.
The administrative hearing process on the petition is continuing, and
the Company continues to object to the petition. The effect of this claim on the
Company's sugar-growing operations cannot currently be estimated. 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-growing operations.
In October 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 both an
unrelated company and HC&S, 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, in June 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 it is currently diverting, it may have an adverse effect
on the Company's sugar-growing operations.
The Company and certain subsidiaries are parties to various other legal
actions and are contingently liable in connection with other 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.
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 could 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 exercises 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 method 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. 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 2004, 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 qualified pension
plans were $(2) million, $2 million, and $1 million for 2004, 2003, and 2002,
respectively. The Company expects that, in 2005, the qualified plan expense will
not be significant.
The valuation assumptions used for the Company's pension plans for each
of the three years were as follows:
Pension Benefits
--------------------------
2004 2003 2002
---- ---- ----
Discount rate 6.00% 6.25% 6.50%
Expected return on plan assets 8.50% 8.50% 9.00%
Rate of compensation increase 4.00% 4.00% 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 third-party firms used by the Company for pension management and actuarial
valuations. One-, three-, and five-year pension returns were 11.5 percent, 5.1
percent, and 0.5 percent, respectively. Since 1989, the average return has been
approximately 10 percent. These returns have approximated benchmark returns used
by the Company to evaluate performance of its fund managers. The Company's
weighted-average asset allocations at December 31, 2004 and 2003, and 2004
year-end target allocation, by asset category, were as follows:
Target 2004 2003
------ ---- ----
Domestic equity securities 60% 61% 60%
International equity securities 10% 15% 13%
Debt securities 15% 14% 16%
Real Estate 15% 10% 10%
Other and cash -- -- 1%
---- ---- ----
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 four to 16 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 determining the year-end benefit plan
obligation was calculated by the Company's actuary using a weighting of expected
benefit payments and rates associated with high-quality corporate bonds for each
year of expected payment to derive an estimated rate at which the benefits could
be effectively settled at December 31, 2004, rounded to the nearest quarter
percent.
Lowering the expected long-term rate of return on the Company's
qualified plan assets from 8.5 percent to 8.0 percent would have reduced pre-tax
pension income for 2004 by approximately $1 million. Lowering the discount rate
assumption by one-half of one percentage point would have increased pre-tax
pension expense by approximately $2 million.
The value of qualified plan assets increased from $274 million at the
beginning of 2004 to $295 million at the end of the year. The 2004 net increase
was primarily the result of an actual return of $30 million, plus $4.7 million
of Company contributions to the pension plan, and less benefit payments of $14
million. At 2004 year end the projected benefit obligation was $274 million.
Plan funding was 108 percent at 2004 year-end compared with 105 percent at 2003
year-end. The Company does not expect to make any cash funding into its
qualified plans during 2005.
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
2004 and through February, 2005:
o Christopher J. Benjamin was promoted to vice president and chief
financial officer of A&B effective February 9, 2004.
o John F. Gasher, A&B vice president, retired effective January 1,
2005.
o Yolanda V. Gonzalez joined Matson Navigation Company as vice
president, human resources effective June 14, 2004.
o Paul W. Hallin was promoted to senior vice president, development of
A&B Properties, Inc. effective January 1, 2004.
o David I. Haverly was promoted to vice president, asset management at
A&B Properties, Inc. effective January 1, 2005.
o Merle A. K. Kelai, Matson vice president, retired effective
February 1, 2005.
o Charles W. Loomis was promoted to associate general counsel of A&B
effective February 9, 2004. Mr. Loomis is also a vice president of
A&B Properties, Inc.
o Diane M. Shigeta was promoted to vice president of A&B Properties,
Inc. effective July 1, 2004.
o Richard B. Stack, Jr. was promoted to vice president, development at
A&B Properties, Inc. effective January 1, 2005.
o Thomas A. Wellman was promoted to vice president, treasurer and
controller effective February 9, 2004. Mr. Wellman is also
vice president, treasurer and controller of A&B Properties, Inc.
o Michael G. Wright was promoted to senior vice president,
acquisitions and investments of A&B Properties, Inc. effective
January 1, 2004.
o Ruthann S. Yamanaka joined A&B as vice president, human resources
effective September 1, 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, 2004 the Company's interest rate lock agreement that
reduced the exposure to interest rate risk associated with future debt issuances
for the financing of a new vessel, had been settled. This is described under the
caption "Interest Rate Hedging" in Note 8 of Item 8. A&B believes that, as of
December 31, 2004, 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,
2004, 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, 2004. 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, 2004
---------------------------------------------------------------------------------------
2005 2006 2007 2008 2009 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
(dollars in millions)
Fixed rate $ 23.9 $ 23.9 $ 23.9 $ 24.9 $ 24.9 $ 116.7 $ 238.2
Average interest rate 6.77% 6.78% 6.80% 6.06% 6.06% 5.07%
Variable rate $ 7.0 -- -- -- -- -- $ 7.0
Average interest rate 2.83% -- -- -- -- --
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. That agreement has a
provision that permits, under certain circumstances, the sales of sugar at a
floor price.
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
ffects tourism in Hawaii.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
Management's Reports............................................. 46
Reports of Independent Registered Public Accounting Firm......... 47
Consolidated Statements of Income................................ 49
Consolidated Statements of Cash Flows............................ 50
Consolidated Balance Sheets...................................... 51
Consolidated Statements of Shareholders' Equity.................. 52
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies....................... 53
2. Subsequent Events and Acquisitions............................... 59
3. Discontinued Operations.......................................... 60
4. Impairment of Long-Lived Assets and Investments.................. 61
5. Investments in Affiliates........................................ 61
6. Property ........................................................ 64
7 Capital Construction Fund........................................ 64
8. Notes Payable and Long-term Debt................................. 65
9. Leases........................................................... 67
10. Employee Benefit Plans........................................... 68
11. Income Taxes..................................................... 72
12. Stock Options and Restricted Stock............................... 73
13. Commitments, Guarantees, Contingencies and Related Party
Transactions................................................... 75
14. Industry Segments................................................ 77
15. Quarterly Information (Unaudited)................................ 79
16. Parent Company Condensed Financial Information................... 81
MANAGEMENT'S REPORTS
MANAGEMENT'S RESPONSIBILITY ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Management of Alexander & Baldwin, Inc. has the responsibility for
establishing and maintaining adequate internal control over financial reporting.
Internal control over financial reporting is defined in Rule 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934, as amended, as a process
designed by, or under the supervision of, the company's principal executive and
principal financial officers and effected by the company's board of directors,
management and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with accounting principles generally
accepted in the United States of America and includes those policies and
procedures that:
o Pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of
assets of the company;
o Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with accounting principles generally accepted in the United States of
America, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors
of the company; and
o Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the company's assets
that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
only provides reasonable assurance with respect to financial statement
presentation and preparation. Projections of any evaluation of effectiveness to
future periods are subject to the risks that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Management assessed the effectiveness of the Company's internal control over
financial reporting as of December 31, 2004. In making this assessment,
Management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework. Based on its assessments, Management believes that, as of December
31, 2004, the Company's internal control over financial reporting is effective.
The Company's independent registered public accounting firm, Deloitte & Touche
LLP ("Deloitte"), has issued an audit report on Management's assessment of the
Company's internal control over financial reporting. That report appears on page
48 of this Form 10-K.
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
Management is also responsible 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's consolidated financial statements have been audited by Deloitte
and its report appears on page 47 of this Form 10-K. Management has made
available to Deloitte all of the Company's financial records and related data.
Furthermore, Management believes that all representations made to Deloitte
during its audit were valid and appropriate.
The Board of Directors, through its Audit Committee (composed solely of
independent 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/ W. Allen Doane /s/ Christopher J. Benjamin
- ------------------ ---------------------------
W. Allen Doane Christopher J. Benjamin
President and Chief Executive Officer Vice President and Chief Financial
Officer Officer
February 24, 2005 February 24, 2005
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Alexander & Baldwin, Inc.
Honolulu, Hawaii
We have audited the accompanying consolidated balance sheets of Alexander &
Baldwin, Inc. and subsidiaries (the "Company") as of December 31, 2004 and 2003,
and the related consolidated statements of income, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 2004.
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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit 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, 2004 and 2003, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2004, in conformity with accounting principles generally accepted in the
United States of America.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004, based on the
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated February 24, 2005 expressed an unqualified opinion on management's
assessment of the effectiveness of the Company's internal control over financial
reporting and an unqualified opinion on the effectiveness of the Company's
internal control over financial reporting.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Honolulu, Hawaii
February 24, 2005
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Alexander & Baldwin, Inc.
Honolulu, Hawaii
We have audited management's assessment, included in the accompanying
Management's Reports - Management's Responsibility on Internal Control over
Financial Reporting, that Alexander & Baldwin, Inc. and subsidiaries (the
"Company") maintained effective internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Company's management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on management's assessment and an opinion on the
effectiveness of the Company's internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed by,
or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of December 31, 2004, is fairly
stated, in all material respects, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2004, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements as of and for the year ended December 31, 2004 of the Company and our
report dated February 24, 2005 expressed an unqualified opinion on those
financial statements.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Honolulu, Hawaii
February 24, 2005
ALEXANDER & BALDWIN, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per-share amounts)
Year Ended December 31, 2004 2003 2002
- ----------------------- ---- ---- ----
Operating Revenue:
Ocean transportation $ 846 $ 776 $ 687
Logistics services 377 238 195
Property leasing 79 75 61
Property sales 81 27 28
Food products 111 113 113
-------- -------- ---------
Total revenue 1,494 1,229 1,084
-------- -------- ---------
Operating Costs and Expenses:
Cost of transportation services 668 601 575
Cost of logistics services 345 215 175
Cost of property sales and leasing services 83 57 50
Cost of agricultural goods and services 105 108 99
Selling, general and administrative 128 124 107
Impairment loss for operating investment -- 8 --
-------- -------- ---------
Total operating costs and expenses 1,329 1,113 1,006
-------- -------- ---------
Operating Income 165 116 78
Other Income and (Expense)
Equity in income (loss) of real estate affiliates 3 4 --
Interest income 4 -- --
Interest expense (13) (12) (12)
-------- -------- ---------
Income From Continuing Operations Before Income Taxes 159 108 66
Income taxes 60 40 21
-------- -------- ---------
Income From Continuing Operations 99 68 45
Income from discontinued operations, net of income
taxes (see Notes 2 and 3) 2 13 13
-------- -------- ---------
Net Income 101 81 58
Other Comprehensive Income (Loss):
Minimum pension liability adjustment (net of taxes of $1,
$(13) and $16) (2) 20 (25)
Change in cash flow hedge (net of taxes) 1 (1) (2)
-------- -------- ---------
Comprehensive Income $ 100 $ 100 $ 31
======== ======== =========
Basic Earnings per Share of Common Stock:
Continuing operations $ 2.32 $ 1.64 $ 1.09
Discontinued operations 0.05 0.31 0.33
-------- -------- ---------
Net income $ 2.37 $ 1.95 $ 1.42
======== ======== =========
Diluted Earnings per Share of Common Stock:
Continuing operations $ 2.29 $ 1.63 $ 1.09
Discontinued operations 0.04 0.31 0.32
-------- -------- ---------
Net income $ 2.33 $ 1.94 $ 1.41
======== ======== =========
Average Common Shares Outstanding 42.6 41.6 41.0
See notes to consolidated financial statements.
ALEXANDER & BALDWIN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Year Ended December 31, 2004 2003 2002
---- ---- ----
Cash Flows from Operations:
Net income $ 101 $ 81 $ 58
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 80 73 71
Deferred income taxes (11) (6) 10
Gains on disposal of assets (12) (18) (20)
Equity in (income) loss of affiliates (9) (9) 5
Write-down of long-lived assets and investments -- 8 --
Changes in assets and liabilities:
Accounts and notes receivable (21) 3 (23)
Inventories 1 (1) 1
Prepaid expenses and other assets (14) 3 (9)
Deferred drydocking costs 9 1 (11)
Pension and post-retirement assets and obligations 3 (1) (2)
Accounts and income taxes payable 26 16 (21)
Other liabilities 20 6 (7)
Real Estate Developments Held for Sale:
Real estate inventory sales 30 15 13
Expenditures for new real estate inventory (30) (35) (9)
------- ------- -------
Net cash provided by operations 173 136 56
------- ------- -------
Cash Flows from Investing Activities:
Capital expenditures for property and developments (151) (214) (45)
Receipts from disposal of income-producing
property, investments and other assets 22 8 21
Deposits into Capital Construction Fund (2) (4) (58)
Withdrawals from Capital Construction Fund 142 47 5
Payments for purchases of investments (39) (17) (6)
Proceeds from sale and maturity of investments 7 6 --
------- ------- -------
Net cash provided by (used in) investing activities (21) (174) (83)
------- ------- -------
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt 56 293 73
Payments of long-term debt (158) (233) (31)
Proceeds (payments) from short-term
borrowings - net -- -- (12)
Repurchases of capital stock (2) -- --
Proceeds from issuance of capital stock 26 20 16
Dividends paid (38) (37) (37)
------- ------- -------
Net cash provided by (used in) financing activities (116) 43 9
------- ------- -------
Cash and Cash Equivalents:
Net increase (decrease) for the year 36 5 (18)
Balance, beginning of year 6 1 19
------- ------- -------
Balance, end of year $ 42 $ 6 $ 1
======= ======= =======
Other Cash Flow Information:
Interest paid, net of amounts capitalized $ (14) $ (11) $ (12)
Income taxes paid, net of refunds (61) (45) (52)
Non-cash Activities:
Tax-deferred property sales -- 34 68
Tax-deferred property purchases -- (41) (60)
See notes to consolidated financial statements.
ALEXANDER & BALDWIN, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except per-share amount)
December 31
2004 2003
---- ----
ASSETS
Current Assets
Cash and cash equivalents $ 42 $ 6
Accounts and notes receivable, less allowances of $14 and $12 million 181 160
Sugar and coffee inventories 4 5
Materials and supplies inventories 11 11
Real estate held for sale 35 30
Deferred income taxes 10 15
Prepaid expenses and other assets 20 20
Accrued deposits, net to Capital Construction Fund (15) --
--------- ---------
Total current assets 288 247
Investments in Affiliates 111 68
Real Estate Developments 82 77
Property - net 1,133 1,079
Capital Construction Fund 40 165
Pension Assets 65 62
Other Assets - net 59 62
--------- ---------
Total $ 1,778 $ 1,760
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable and current portion of long-term debt $ 31 $ 15
Accounts payable 115 95
Payrolls and vacation due 19 20
Uninsured claims 16 10
Income taxes payable 6 1
Post-retirement benefit obligations -- current portion 3 3
Accrued and other liabilities 45 39
--------- ---------
Total current liabilities 235 183
--------- ---------
Long-term Liabilities
Long-term debt 214 330
Deferred income taxes 339 356
Post-retirement benefit obligations 45 44
Uninsured claims and other liabilities 41 36
--------- ---------
Total long-term liabilities 639 766
--------- ---------
Commitments and Contingencies
Shareholders' Equity
Capital stock - common stock without par value; authorized, 150 million
shares ($0.75 stated value per share); outstanding,
43.3 million shares in 2004 and 42.2 million shares in 2003 35 35
Additional capital 150 112
Accumulated other comprehensive loss (9) (8)
Deferred compensation (2) --
Retained earnings 741 684
Cost of treasury stock (11) (12)
--------- ---------
Total shareholders' equity 904 811
--------- ---------
Total $ 1,778 $ 1,760
========= =========
See notes to consolidated financial statements.
ALEXANDER & BALDWIN, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 2004
(In millions, except per-share amounts)
Capital Stock Accumulated
------------------------------------- Other
Issued In Treasury Compre-
------------------ --------------- hensive Deferred
Stated Additional Income Compen- Retained
Shares Value Shares Cost Capital (Loss) sation Earnings
------ ----- ------ ---- ------- ------ -------- --------
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) -- --
Cash flow hedge -- -- -- -- -- (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 -- --
Cash flow hedge -- -- -- -- -- (1) -- --
Net income -- -- -- -- -- -- -- 81
Cash dividends -- -- -- -- -- -- -- (37)
----- ----- ---- ----- ----- ---- ----- ------
Balance, December 31, 2003 46.0 35 3.8 (12) 112 (8) -- 684
Shares repurchased (0.1) 0 -- -- -- -- -- (2)
Stock options exercised - net 1.0 0 -- -- 34 -- -- (4)
Issued - incentive plans 0.1 0 (0.1) 1 4 -- $ (2) --
Minimum pension liability -- -- -- -- -- (2) -- --
Cash flow hedge -- -- -- -- -- 1 -- --
Net income -- -- -- -- -- -- -- 101
Cash dividends -- -- -- -- -- -- -- (38)
----- ----- ---- ----- ----- ---- ----- ------
Balance, December 31, 2004 47.0 $ 35 3.7 $ (11) $ 150 $ (9) $ (2) $ 741
===== ===== ==== ===== ===== ==== ===== ======
Note: Certain amounts shown as '0' due to rounding.
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.
Real Estate - 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, petroleum and molasses hauling, general trucking services,
mobile equipment maintenance and repair services, and self-service
storage 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 ("the 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, Real Estate, and Food Products. The Transportation
industry is comprised of ocean transportation and logistics services segments.
The Real Estate industry is comprised of leasing and property sales segments.
The Company reports segment information in the same way that management assesses
segment performance. For purposes of certain segment disclosures, such as
identifiable assets, the Company's development activities are included with the
property sales segment. 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, 2004
were as follows (in millions):
Balance at Write-offs Balance at
Beginning of year Expense and Other End of Year
----------------- ------- --------- -----------
2002 $ 7 $ 5 $ (1) $ 11
2003 $ 11 $ 5 $ (4) $ 12
2004 $ 12 $ 6 $ (4) $ 14
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.
Real Estate Development: 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 of
about $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).
Goodwill and Intangible Assets: Goodwill and intangibles are recorded
on the Balance Sheets as other non-current assets. The Company is required to
conduct an annual review of goodwill and intangible assets for potential
impairment. Goodwill impairment testing requires a comparison between the
carrying value and fair value of a reportable goodwill asset. If the carrying
value exceeds the fair value, goodwill is considered impaired. The amount of the
impairment loss is measured as the difference between the carrying value and the
implied fair value of the goodwill, which is determined using estimated
discounted cash flows. Impairment testing for non-amortizable intangible assets
requires a comparison between fair value and carrying value of the intangible
asset. If the carrying value exceeds fair value the intangible asset is
considered impaired and is reduced to fair value. In 2004, the Company did not
record a charge to earnings for an impairment of goodwill or other intangible
assets as a result of its annual review.
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.
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: Rental revenue is recognized
on a straight-line basis over the terms of the related leases, including periods
for which no rent is due (typically referred to as "rent holidays".) Differences
between revenue recognized and amounts due under respective lease agreements are
recorded as increases or decreases, as applicable, to deferred rent receivable.
Also included in rental revenue are certain tenant reimbursements and percentage
rents determined in accordance with the terms of the leases. 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 multiemployer pension plans covering certain
shoreside bargaining unit personnel. The subsidiaries directly negotiate
multiemployer 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:
2004 2003 2002
---- ---- ----
Stock volatility 22.8% 24.4% 23.4%
Expected term from grant date (in years) 5.8 5.2 5.5
Risk-free interest rate 3.6% 3.3% 2.8%
Forfeiture discount 6.4% 4.9% 2.9%
Dividend yield 2.1% 2.7% 3.4%
Based upon the above assumptions, the computed annual weighted average
fair values of employee stock options granted during 2004, 2003, and 2002 were
$7.44, $5.21, and $4.44 , 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, 2004, would have been as
follows (in millions, except per share amounts):
2004 2003 2002
---- ---- ----
Net Income:
As reported $ 101 $ 81 $ 58
Stock-based compensation
expense determined under fair
value based method for all
awards, net of related tax effects (2) (1) (1)
------- ------- ------
Pro forma $ 99 $ 80 $ 57
======= ======= ======
Net Income Per Share:
Basic, as reported $ 2.37 $ 1.95 $ 1.42
Basic, pro forma $ 2.33 $ 1.93 $ 1.38
Diluted, as reported $ 2.33 $ 1.94 $ 1.41
Diluted, pro forma $ 2.30 $ 1.91 $ 1.38
Effect on average shares outstanding
of assumed exercise of stock options
(in millions of shares):
Average number of shares
outstanding 42.6 41.6 41.0
Effect of assumed exercise of
outstanding stock options 0.6 0.3 0.2
------- ------- ------
Average number of shares
outstanding after assumed
exercise of stock options 43.2 41.9 41.2
======= ======= ======
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 for 2003 and
2002 were 508,000 and 1,682,000, respectively. The shares for 2004 were not
significant.
The pro forma disclosures of net income and earnings per share are not
necessarily 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. The provision
is based upon revenues and expenses in the accompanying Consolidated Statements
of Income. Significant judgment is required in determining the Company's tax
liabilities in the multiple jurisdictions in which the Company operates.
Income taxes are accounted for in accordance with SFAS 109, "Accounting
for Income Taxes." Deferred income taxes are provided for the tax effect of
temporary differences between the tax basis of assets and liabilities and their
reported amounts in the financial statements. Deferred income tax liabilities
and assets are adjusted to the extent necessary to reflect tax rates expected to
be in effect when the temporary differences reverse. Adjustments may be required
by a change in assessment of our deferred tax assets and liabilities, changes in
tax regulations, 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 within the tax provision in the statement of
operations and/or balance sheet.
The Company has not recorded a valuation allowance. A valuation
allowance would be established if, based on the weight of available evidence,
management believes that it is more likely than not that some portion or all of
a recorded deferred tax asset would not be realized in future periods.
The Company's income tax provision is based on calculations and
assumptions that are subject to examination by different tax authorities. The
Company establishes accruals for certain tax contingencies and interest when,
despite the Company's belief that its tax return provisions are fully supported,
the Company believes certain positions are likely to be challenged and that the
Company's positions may not be fully sustained. The tax contingency accruals are
adjusted in light of changing facts and circumstances, such as the progress of
tax audits, case law, and the expiration of statutes of limitations. If events
occur and the payment of these amounts proves to be unnecessary, the reversal of
the liabilities would result in tax benefits being recognized in the period when
the Company determines the liabilities are no longer necessary. If the Company's
estimate of tax liabilities proves to be less than the ultimate assessment, a
further charge to expense would result.
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.
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, 2004 or 2003.
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
has adopted the amended Statement of Financial Accounting Standards ("SFAS") No.
132 "Employers' Disclosures about Pensions and Other Postretirement Benefits."
Certain portions of this amendment that were adopted in the Company's 2003
financial statement disclosures included 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. The portions of the amendment that were adopted with the
Company's 2004 financial statement disclosures included a table of expected
benefit payments for five years and, in total, for the subsequent five-year
period. Additionally, as required by the Standard, the Company is disclosing in
quarterly financial statements, the components of the net benefit cost.
In December 2004, the FASB issued revised SFAS No. 123 "Share-Based
Payment." SFAS No. 123 (revised) requires companies to measure the cost of
employee services received in exchange for an award of equity instruments based
on the fair value of the award on the grant-date. This cost is then recognized
over the period during which an employee is required to provide service in
exchange for the award. Adoption is required for interim and annual reporting
periods that begin after June 15, 2005. The Company intends to adopt the new
requirements during the third quarter of 2005. The after-tax annual effect of
adopting this standard would have been approximately $2 million for 2004. The
future impact, however, will be dependent upon the number of options to purchase
shares of the Company's stock that are issued each year.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an
amendment of ARB No. 43, Chapter 4." This standard clarifies the accounting for
abnormal amounts of idle facility expense, freight, handling costs and spoilage,
requiring that, under some circumstances, these costs should be treated as
period charges. This standard is effective for reporting periods beginning after
June 15, 2005. The adoption of this standard is not expected to have an effect
on the consolidated financial statements.
In December 2004, the FASB issued SFAS No. 152, "Accounting for Real
Estate Time-Sharing Transactions." This standard clarifies the accounting for
complex real estate time-sharing transactions. The standard is effective for
fiscal years beginning after June 15, 2005. The Company does not believe that it
has any transactions that would be affected by this new standard.
In December 2004, the FASB issued FASB No. 153, "Exchanges of
Nonmonetary Assets - an amendment of APB Opinion No. 29." This standard
addresses the accounting for reciprocal transfers of non-monetary assets and is
effective for reporting periods beginning after June 15, 2005. Although the
Company is reviewing its potential application, the adoption of the standard is
not expected to have an effect on its consolidated financial statements.
During the first quarter of 2004, the Company adopted Financial
Interpretation No ("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. The adoption of FIN 46 had no
effect on the Company's consolidated financial statements.
Reclassifications and Rounding: Certain amounts in the 2003 and 2002
consolidated financial statements have been reclassified to conform to the 2004
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. SUBSEQUENT EVENTS AND ACQUISITIONS
Subsequent Events: On February 24, 2005, Matson announced that it will
replace its existing Guam service with an integrated Hawaii/Guam/China service
beginning in February 2006. The service will employ three existing Matson
containerships along with two new containerships to be purchased from Kvaerner
Philadelphia Shipyard, Inc. ("Kvaerner") in a five-ship string that carries
cargo from the U.S. West Coast to Honolulu, then to Guam, and eventually to
China. In China, the vessels will be loaded with cargo destined for the U.S.
West Coast. The Guam service strategy involves re-deploying into the Hawaii
service three C-9 class vessels that currently serve Guam.
On February 24, 2005 Matson entered into agreements with Kvaerner to
purchase two containerships at a cost of $144.4 million each. The cost is
expected to be funded with the Capital Construction Fund, surplus cash, and
external borrowings. The first ship is expected to be delivered in June 2005,
with the second ship in May 2006. Payment in full is required upon the delivery
of each ship. Matson has the right to assign the agreements to a third party.
Matson expects that any such assignment would be made in conjunction with its
time chartering the use of such vessels.
In connection with the two purchase agreements Matson entered into a
right of first refusal agreement with Kvaerner, which provides that, after the
second containership is delivered to Matson, Matson has the right of first
refusal to purchase each of the next four containerships of similar design built
by Kvaerner that are delivered before June 30, 2010. Matson may either purchase
the ship at an eight percent discount off of a third party's proposed contract
price, or be paid eight percent of such price. Notwithstanding the above, if
Matson and Kvaerner agree to a construction contract for a vessel to be
delivered before June 30, 2010, Matson shall receive an eight percent discount.
Acquisitions: In December 2004, Matson Integrated Logistics, Inc.
("MIL"), a subsidiary of Matson Navigation Company, Inc., acquired certain
assets, obligations and contracts of Aquitaine Assets LLC, ("AQ") for
approximately $3 million plus a percentage of annual earnings over five years.
Headquartered in Houston, Texas, AQ provides comprehensive highway, intermodal
and logistics services. The purchase agreement contains an earn-out provision
based on the EBITDA generated by the acquired assets though 2009. This
transaction added $3 million of intangible assets to the consolidated balance
sheet at December 31, 2004. No debt was assumed in connection with the
acquisition.
In December 2003, MIL 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.)
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. During 2004, goodwill was increased by an additional
$1 million due to an earn-out provision. No debt was assumed in connection with
the acquisition.
3. DISCONTINUED OPERATIONS
During 2004, the sale of a Maui property was classified as a
discontinued operation. In addition, two office and one light industrial
properties met the criteria for classification as discontinued operations even
though the Company had not sold the property by the end of 2004. Two of these
properties were sold in January 2005.
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, 2004, were as follows (in
millions, except per share amounts):
2004 2003 2002
---- ---- ----
Sales Revenue $ 1 $ 37 $ 65
Leasing Revenue 4 6 11
Sales Operating Profit 2 18 15
Leasing Operating Profit 2 3 7
After-tax Earnings 2 13 13
Basic Earnings Per Share 0.05 0.31 0.33
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.
Income Taxes: The income tax expense (benefit) relating to discontinued
operations was $2 million in 2004 and $8 million in 2003 and $9 million in 2002.
4. IMPAIRMENT OF LONG-LIVED ASSETS AND INVESTMENTS
As described in Note 5, the Company holds common and preferred stock
holdings in C&H Sugar Company Inc. ("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 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 during the
fourth quarter of 2003. The write-down was based on information the Company had
as a minority shareholder and included an estimate of probability-weighted
discounted cash flows available at C&H to pay the dividends on the Company's
senior preferred stock. The impairment charge was recorded as a separate line
item in Operating Costs and Expenses in the Consolidated Statements of Income.
5. INVESTMENTS IN AFFILIATES
At December 31, 2004 and 2003, 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):
2004 2003
---- ----
Equity in Affiliated Companies:
Real Estate $ 84 $ 41
Transportation 23 23
Food Products 3 3
Other 1 1
------- -------
Total Investments $ 111 $ 68
======= =======
Real Estate: The Company uses the equity method of accounting for each
of its real estate investments described below:
A) Crossroads Plaza: In June 2004, the Company signed a joint
venture agreement with Intertex Hasley, LLC, for the
development of a 62,000-square-foot mixed-use neighborhood
retail center on 6.5 acres of commercial land in Valencia,
California, called Crossroads Plaza Development Partners, LLC
("Crossroads Plaza"). The property was acquired in August 2004
for $3.5 million. Site planning and design have been completed
and pre-leasing has commenced. Groundbreaking is expected in
mid-2005. The Company has a 50 percent voting interest in the
Crossroads Plaza.
B) Hokua: In July 2003, the Company 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. The Company's total
investment in the venture is expected to be $40 million.
Approximately $36 million has been funded through December
2004. The joint venture has loan commitments totaling $130
million, of which the Company guarantees a maximum of $15
million. The Company has a 50 percent voting interest in
Hokua.
C) HoloHolo Ku: In October 2001, the Company 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. Five homes were sold in 2002, 36 homes were
sold in 2003, and the remaining three homes were sold in 2004.
The average price of the 44 homes was $395,000. The Company
has a 50 percent voting interest in HoloHolo Ku.
D) Kai Lani: In September 2001, the Company 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 and 105 units were sold in 2003. By the
first quarter of 2004, the remaining 11 units had been sold.
The average price of all 116 units was $495,000. The Company
has a 50 percent voting interest in Kai Lani.
E) Kai Malu at Wailea: In April 2004, the Company entered into a
joint venture with Armstrong Builders, Ltd. for development
of the 25-acre MF-8 parcel at Wailea on Maui. The project is
planned to consist of 150 duplex units with an average size
of 1,800 square feet and an average price of over $1 million.
In November 2004, the Planning Commission approved the
issuance of a County Special Management Area ("SMA") permit
for the project and a preliminary public condominium report
was approved by the Hawaii Real Estate Commission for the
initial 34-unit phase, enabling marketing to commence in
December 2004. As of January 31, 2005, all of the 34 units in
Phase I were sold under non-binding contracts at an average
price of $1.1 million. Final public condominium reports for
Phase I (34 units) and Phase II (54 units) were approved in
February 2005, enabling binding contracts to be secured. The
Company has a 50 percent voting interest in Kai Malu at
Wailea.
F) 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
project will consist of between 1,200 to 1,500 high-end
residential units. During 2003, the Company contributed to
the venture title to 846 acres, a waste water treatment plant,
and other improvements totaling approximately $28 million in
value. The balance of the land, approximately 165 acres, is
expected to be transferred to the venture in the first quarter
of 2005. In July 2003, the State Land Use Commission ("SLUC")
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. In July 2004, the Kauai
County Council gave final zoning and visitor designation area
approvals for the entire project. In August 2004, the
Company exercised its option to contribute to the joint
venture up to 40 percent of the project's future capital
requirements. The additional investment is expected to range
from $50 million to $75 million and occur over the next three
to four years. Design, engineering and construction activity
to date include: preparation of construction plans for onsite
and offsite infrastructure, preparation and submittal to
government agencies of subdivision maps for the initial
phases of the project, development of potable water wells, and
permitting of a new electrical substation. Design work is
progressing on a sales center/model home complex, which will
be constructed in 2005. For the initial phase of development,
SMA approvals were secured and permit applications were
submitted for improvements. Marketing of the initial phase is
expected to commence in March 2005 and infrastructure
construction is scheduled to commence in mid-2005. The total
project cost, excluding vertical home construction, is
projected to be approximately $725 million, although the
maximum cash outlay will be much lower due to phasing of the
project. With its additional equity investment, the Company
will likely receive between 50 percent and 60 percent of the
venture's returns. The Company has a 50 percent voting
interest, for significant decisions of Kukui`ula.
G) Mauna Lani: In April 2004, the Company entered into a joint
venture with Brookfield Homes Hawaii Inc. ("Brookfield") to
acquire and develop a 30.5-acre residential parcel in the
Mauna Lani Resort on the island of Hawaii. In May 2004, the
property was acquired by the joint venture for $6.6 million.
The conceptual plan for the project consists of 137
single-family and duplex units. An SMA amendment was
submitted in October 2004 and was approved in November 2004.
Site planning was completed and submitted to the Mauna Lani
Design Review Committee in January 2005. Product design, site
planning, grading, drainage, utility and roadway design work
are being finalized. Groundbreaking is scheduled to commence
in mid-2005. The Company has a 50 percent voting interest in
the venture.
H) Rye Canyon: In October 2004, the Company acquired 5.4 acres of
commercial-zoned land in Valencia, California for $1.5 million
for the development, with a joint venture partner, of an
85,000-square-foot office building. Design and site planning
are complete and design approvals are being sought. Marketing
and pre-leasing efforts commenced in February 2005.
Groundbreaking is expected to commence in mid-2005. As of
December 31, 2004, the joint venture agreement had not been
signed.
I) Westridge LLC: In January 2003, the Company signed a joint
venture agreement with Westridge Executive Building, LLC, for
the development of a 63,000-square-foot office building. The
Company has a 50 percent voting interest in Westridge LLC.
Construction was completed in 2004 and the property was 91
percent leased at the end of 2004.
The equity in earnings (losses) of unconsolidated real estate
affiliates is reported separately in the Consolidated Statements of Income under
"Other Income and (Expense)."
Transportation: Matson, a wholly owned subsidiary of the Company, is
part owner of an LLC with SSA Marine Inc., 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 35 percent
minority interest is accounted for under the equity method of accounting. The
"Cost of transportation services" included approximately $135 million, $110
million, and $96 million for 2004, 2003, and 2002, respectively, paid to this
unconsolidated affiliate for terminal services.
In August 2004, Matson sold its 19.5 percent investment in Sea Star
Line, LLC ("Sea Star") to another owner of Sea Star for approximately $7 million
and recognized a gain of approximately $1 million. Concurrent with the sale,
Matson was relieved of its $11 million guarantee obligation of Sea Star's debt.
In January 2002, two vessels that had previously been chartered to Sea Star were
sold to the venture for an aggregate sales price of $17 million, which was the
approximate carrying value of the vessels when they were sold.
The Company's equity in earnings or (loss) of unconsolidated
transportation affiliates of $6 million, $4 million and $(5) million for 2004,
2003, and 2002, respectively, was included on the consolidated income statements
with costs of transportation services because the affiliates are integrally
related to the Company's ocean transportation operations since SSAT provides all
terminal services to Matson for the U. S. West Coast and Sea Star was formed, in
part, to charter vessels from the Company.
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. In 2003, the
Company recorded an impairment loss related to this investment that resulted
from an "other than temporary" decline 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. In 2004, C&H's board of directors approved the hiring of an advisor to
assist in selling the business. The expected proceeds from the possible sale of
C&H are expected to recover the carrying value of the investment. The Company's
equity in earnings (loss) of C&H was included on the Consolidated Statements of
Income with "costs of agricultural goods and services" because the affiliate is
integrally related to the Company's food products operations as the customer for
approximately 92 percent of the Company's sugar production. The equity in losses
of C&H was not material.
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.
6. PROPERTY
Property on the Consolidated Balance Sheets includes the following (in
millions):
2004 2003
--------- ---------
Vessels $ 848 $ 745
Machinery and equipment 504 489
Buildings 337 355
Land 138 135
Water, power and sewer systems 99 93
Other property improvements 70 71
--------- ---------
Total 1,996 1,888
Less accumulated depreciation and amortization 863 809
--------- ---------
Property - net $ 1,133 $ 1,079
========= =========
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,
2004, the oldest CCF deposits date from 2001. Management believes that all
amounts on deposit in the CCF at the end of 2004 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. At December 31, 2004,
the Company has accrued a $15 million deposit to 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, 2004 and 2003, the balances on deposit in the CCF are
summarized as follows (in millions):
2004 2003
-------------------------------------- ---------------------------------------
Amortized Fair Unrealized Amortized Fair Unrealized
Cost Value Gain Cost Value Gain
Mortgage-backed securities $ 3 $ 3 $ -- $ 4 $ 5 $ 1
Cash and cash equivalents 22 22 -- 161 161 --
Accrued deposits, net 15 15 -- -- -- --
----- ----- ------ ----- ----- -----
Total $ 40 $ 40 $ -- $ 165 $ 166 $ 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 $0.3 million in
2004, $1 million in 2003, and $2 million in 2002, on its investments in
mortgage-backed securities. The fair values of other CCF investments are based
on quoted market prices. These other investments matured on or before February
10, 2005. No securities classified as "held-to-maturity" were sold during 2004;
one such security was sold during 2003 for approximately the carrying value, and
one such security was sold during 2002 for a loss of $375,000. Those two
securities were sold because they no longer met the Company's authorized credit
requirements. The reduction in the CCF from 2003 to 2004 was due to qualified
withdrawals.
8. NOTES PAYABLE AND LONG-TERM DEBT
At December 31, 2004 and 2003, notes payable and long-term debt
consisted of the following (in millions):
2004 2003
---- ----
Commercial Paper, repaid in 2004 -- $ 100
Revolving Credit loans, due after 2004,
2004 high 3.05%, low 1.65% $ 7 32
Title XI Bonds:
5.27%, payable through 2029 55 --
5.34%, payable through 2028 53 55
Term Loans:
4.10%, payable through 2012 35 35
7.41%, payable through 2007 22 30
7.42%, payable through 2010 17 20
4.31%, payable through 2010 15 15
7.43%, payable through 2007 15 15
7.55%, payable through 2009 15 15
7.57%, payable through 2009 11 13
8.33%, repaid in 2004 -- 15
------- -------
Total 245 345
Less current portion 31 15
------- -------
Long-term debt $ 214 $ 330
======= =======
Company Credit Rating: In January 2005, Standard & Poor's issued an A-
corporate credit rating for A&B. Matson's credit rating of A- was reaffirmed in
September 2004, following the retirement of the Company's commercial paper
program.
Long-term Debt Maturities: At December 31, 2004, maturities of all
long-term debt during the next five years are $31 million in 2005, $24 million
in each of 2006 and 2007, $25 million in each of 2008 and 2009.
Commercial Paper: In August 2004, the Company 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.
Revolving Credit Facilities: During 2004, the Company increased its
revolving credit and term loan agreement with six commercial banks to $200
million from $185 million. The term of the facility was also extended to January
2008. 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,
2004 no amounts were drawn on the facility. At December 31, 2003, $25 million
was outstanding under this agreement. The amounts drawn on this facility are
classified as non-current because the Company has the intent and ability to
refinance the facility beyond twelve months.
The Company has an uncommitted short-term revolving credit agreement
with a commercial bank that was increased from $70 million in 2003 to $78.5
million in 2004. The agreement extends to January 2006, 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 $200 million multi-bank facility, in which it is a
participant, and by letters of credit issued under the $78.5 million uncommitted
facility. The outstanding balance under this credit facility was $7 million at
each of December 31, 2004 and 2003. These amounts are classified as current
because the Company uses the line for working capital purposes. Under the
borrowing formula for this facility, the Company could have borrowed an
additional $70 million at December 31, 2004. For sensitivity purposes, if the
$200 million facility had been drawn fully, the amount that could have been
drawn under the borrowing formula at 2004 year-end would have been $16 million.
Matson has two revolving credit agreements totaling $80 million with
commercial banks. The first facility is a $50 million two-year revolving credit
agreement that expires in December 2006. Outstanding letters of credit that were
issued against the facility reduced the available credit by $2 million. The
second facility is a $30 million revolving credit agreement that expires in
September 2005. Both of these facilities have one-year term options. No amounts
were outstanding on either facility at December 31, 2004 or 2003.
The unused borrowing capacity under all variable rate credit facilities
as of December 31, 2004 totaled $294 million.
Title XI Bonds: In August 2004, Matson partially financed the delivery
of the MV Maunawili with $55 million of 5.27 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 2005. In September 2003, Matson partially financed the delivery of the
MV Manukai with $55 million of 5.34 percent fixed-rate, 25-year term, Title XI
bonds. These bonds are payable in semiannual payments of $1.1 million.
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, 2004. Additionally, Matson has a $65 million private
shelf offering that expires in July 2007 against which $15 million was drawn
during 2003.
Interest Rate Hedging: To hedge the interest rate risk associated with
obtaining financing for two vessels, the Company entered into two interest rate
lock agreements with settlements corresponding to the 2003 and 2004 vessel
delivery schedules. 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.
The interest rate lock agreements were reflected at fair value in the
Company's 2003 and 2002 consolidated financial statements and the related gain
or loss on the agreement was deferred in shareholders' equity as a component of
Accumulated Other Comprehensive Loss. The first interest rate lock agreement
with a notional amount of $55 million was settled in August 2003, concurrent
with the delivery of the MV Manukai. The second agreement, also with a notional
amount of $55 million, was settled in August 2004, concurrent with the delivery
of the MV Maunawili. The deferred gains or losses associated with the settlement
are being amortized as an adjustment to interest expense over the 25-year term
of the underlying debt. These amounts are not material to consolidated interest
expense.
9. LEASES
The Company as Lessee: Principal operating leases include land, office
and terminal facilities, containers and equipment, leased for periods that
expire between 2005 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, $29 million
and $22 million for the years ended December 31, 2004, 2003, and 2002,
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, 2004 were as follows (in millions):
Operating
Leases
------
2005 $ 19
2006 10
2007 8
2008 5
2009 5
Thereafter 82
-------
Total minimum lease payments $ 129
=======
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, 2004 and 2003
were as follows (in millions):
2004 2003
---------- -------
Leased property $ 668 $ 659
Less accumulated amortization 153 133
------- -------
Property under operating leases--net $ 515 $ 526
======= =======
Total rental income under these operating leases for the three years
ended December 31, 2004 was as follows (in millions):
2004 2003 2002
-------- ------- ------
Minimum rentals $ 109 $ 107 $ 105
Contingent rentals (based on sales volume) 2 2 2
------- ------- -------
Total $ 111 $ 109 $ 107
======= ======= =======
Future minimum rentals on non-cancelable leases at December 31, 2004
were as follows (in millions):
Operating
Leases
------
2005 $ 104
2006 51
2007 37
2008 27
2009 21
Thereafter 105
-------
Total $ 345
=======
10. EMPLOYEE BENEFIT PLANS
The Company has funded single-employer defined benefit pension plans
that cover substantially all non-bargaining unit employees and certain
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. For 2004, mid-year bargaining unit negotiations were reflected in the
net periodic benefit cost.
The Company's weighted-average asset allocations at December 31, 2004
and 2003, and 2004 year-end target allocation, by asset category, were as
follows:
Target 2004 2003
------ ---- ----
Domestic equity securities 60% 61% 60%
International equity securities 10% 15% 13%
Debt securities 15% 14% 16%
Real estate 15% 10% 10%
Other and cash -- -- 1%
---- ---- ----
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 contributed approximately $5 million to its defined benefit pension
plans in 2004. No contributions are expected to be required in 2005.
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, 2004,
2003, and 2002, is shown below (dollars in millions):
Pension Benefits Other Post-retirement Benefits
--------------------------------- -------------------------------
2004 2003 2002 2004 2003 2002
---- ---- ---- ---- ---- ----
Change in Benefit Obligation
Benefit obligation at
beginning of year $ 262 $ 289 $ 257 $ 49 $ 47 $ 41
Service cost 6 6 5 1 1 1
Interest cost 16 19 18 3 3 3
Plan participants'
contributions -- -- -- 2 2 1
Actuarial (gain) loss 4 7 24 4 1 5
Benefits paid (14) (16) (15) (5) (5) (4)
Amendments -- 17 -- -- -- --
Settlements -- (60) -- -- -- --
-------- -------- ------- ------- ------- -------
Benefit obligation at
end of year 274 262 289 54 49 47
-------- -------- ------- ------- ------- -------
Change in Plan Assets
Fair value of plan assets at
beginning of year 274 254 315
Actual return on plan assets 30 58 (46)
Employer contribution 5 -- --
Benefits paid (14) (16) (15)
Settlements -- (22) --
-------- -------- -------
Fair value of plan assets
at end of year 295 274 254
-------- -------- -------
Prepaid (Accrued) Benefit Cost
Funded status - Plan assets greater
than benefit obligation 21 12 (35) (54) (49) (47)
Unrecognized net actuarial
(gain) loss 46 52 92 6 2 1
Unrecognized prior
service cost 2 3 8 -- -- --
Intangible asset -- 1 8 -- -- --
Minimum pension liability (4) (6) (45) -- -- --
-------- -------- ------- ------- ------- -------
Prepaid (Accrued) benefit cost $ 65 $ 62 $ 28 $ (48) $ (47) $ (46)
======== ======== ======= ======= ======= =======
Accumulated Benefit Obligation $ 248 $ 234 $ 260
======== ======== =======
Weighted Average Assumptions:
Discount rate 6.00% 6.25% 6.50% 6.00% 6.25% 6.50%
Expected return on plan assets 8.50% 8.50% 9.00%
Rate of compensation increase 4.00% 4.00% 4.25% 4.00% 4.00% 4.25%
Initial health care cost trend rate 9.00% 8.50% 9.00%
Ultimate rate 5.00% 5.00% 5.00%
Year ultimate rate is reached 2009 2008 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 11.5 percent, 5.1 percent, and 0.5
percent, respectively. Since 1989, the average return has been approximately 10
percent. The actual returns have approximated the benchmark returns used by the
Company to evaluate performance of its fund managers.
The information for qualified pension plans with an accumulated benefit
obligation in excess of plan assets at December 31, 2004 and 2003 is shown below
(in millions):
2004 2003
---- ----
Projected benefit obligation $ 53 $ 56
Accumulated benefit obligation $ 47 $ 49
Fair value of plan assets $ 45 $ 47
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 2004, 2003, and 2002, are shown below (in millions):
Pension Benefits Other Post-retirement Benefits
--------------------------------- ---------------------------------
2004 2003 2002 2004 2003 2002
---- ---- ---- ---- ---- ----
Components of Net Periodic
Benefit Cost/(Income)
Service cost $ 6 $ 6 $ 5 $ 1 $ 1 $ 1
Interest cost 16 19 18 3 3 3
Expected return on plan
assets (23) (22) (27) -- -- --
Recognition of net (gain) loss 2 7 -- -- -- (2)
Amortization of prior
service cost 1 5 3 -- -- --
Recognition of settlement
(gain)/loss -- (17) -- -- -- --
------ ------ ------- ------- ------- -------
Net periodic benefit
cost/(income) $ 2 $ (2) $ (1) $ 4 $ 4 $ 2
====== ====== ======= ======= ======= =======
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, 2004, 2003 and 2002, and the net periodic post-retirement
benefit cost for 2004, 2003 and 2002, would have increased or decreased as
follows (in millions):
Other Post-retirement Benefits
One Percentage Point
-----------------------------------------------------------------------------
Increase Decrease
-------------------------------- ---------------------------------
2004 2003 2002 2004 2003 2002
---- ---- ---- ---- ---- ----
Effect on total of service and
interest cost components $ -- $ -- $ -- $ -- $ -- $ --
Effect on post-retirement
benefit obligation $ 6 $ 5 $ 4 $ (5) $ (4) $ (4)
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 $19 million and $13 million at
December 31, 2004 and 2003, respectively. These amounts include the additional
minimum pension liability described below. A five percent discount rate was used
to determine the 2004 obligation. The expense associated with the non-qualified
plans was $3 million, $7 million, and $3 million for 2004, 2003 and 2002,
respectively. The 2003 expense included settlement and special termination
losses totaling $3 million. The 2004 expense included settlement losses totaling
$600,000.
Estimated future benefit payments are as follows (in millions):
Pension Non-qualified Post-retirement
Year Benefits Plan Benefits Benefits
---- -------- ------------- --------
2005 $ 15 $ 4 $ 3
2006 15 1 3
2007 16 4 3
2008 16 1 3
2009 16 2 3
2010-2014 91 14 18
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 2003 and
2004 were as follows (in millions):
Other Non-current
Other Non-current Liabilities
Asset (unrecognized (additional Accumulated Other
prior service cost)1 minimum liability1 Deferred Tax Asset Comprehensive Loss
-------------------- ------------------ ------------------ ------------------
December 31, 2002 $ 8 $ (49) $ 16 $ 25
Change (7) 40 (13) (20)
----- ----- ----- -----
December 31, 2003 1 (9) 3 5
Change (1) (3) 2 2
----- ----- ----- -----
December 31, 2004 $ -- $ (12) $ 5 $ 7
===== ===== ===== =====
1 The year-end balance is included in the total pension asset on the balance
sheet.
Matson participates in 13 multiemployer plans and has an estimated
withdrawal obligation with respect to four of these plans that totals $65
million. Management has no present intention of withdrawing from and does not
anticipate termination of any of these plans. Total contributions to the
multiemployer pension plans covering personnel in shoreside and seagoing
bargaining units were $6 million in 2004, $6 million in 2003, and $4 million in
2002.
In December 2003, Matson Terminals, Inc., a subsidiary of Matson, and
two other Hawaii marine terminal operators formed the Hawaii Terminals
Multiemployer Plan. The transfer of two of the Company's defined benefit plans'
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 2003 in connection with this matter.
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 multiemployer 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 multiemployer 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. Accordingly, no withdrawal obligation for this plan is included in
the total estimated withdrawal obligation.
11. INCOME TAXES
The income tax expense on income from continuing operations for the
three years ended December 31, 2004 consisted of the following (in millions):
2004 2003 2002
---- ---- ----
Current:
Federal $ 65 $ 43 $ 14
State 6 3 (3)
------- ------- ------
Current 71 46 11
Deferred (11) (6) 10
------- ------- ------
Income tax expense $ 60 $ 40 $ 21
======= ======= ======
Income tax expense for the three years ended December 31, 2004 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, 2004 for the following reasons (in millions):
2004 2003 2002
---- ---- ----
Computed federal income tax expense $ 56 $ 38 $ 23
State income taxes 2 3 (2)
Prior years' tax settlement -- -- (1)
Other--net 2 (1) 1
-------- -------- -------
Income tax expense $ 60 $ 40 $ 21
======== ======== =======
State taxes include credits for capital goods excise tax, enterprise
zone, investments in qualified high-tech businesses 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, 2004 and 2003 were as
follows (in millions):
2004 2003
---- ----
Property basis and equipment basis differences $ 223 $ 177
Tax-deferred gains on real estate transactions 118 121
Capital Construction Fund 15 61
Benefit plans (5) (6)
Insurance reserves (11) (10)
Joint ventures and other investments (7) (3)
Other--net (4) 1
------- -------
Total $ 329 $ 341
======= =======
Examinations of the Company's federal and California income tax returns
have been completed through 1999. Examinations of the Company's Hawaii income
tax returns have been completed through 1998. The Internal Revenue Service may
audit the Company's federal income tax returns for years subsequent to 2000.
Additionally, the Company is routinely involved in state and local income tax
audits. Although the outcome of tax audits is always uncertain, the Company
believes that adequate amounts of tax have been provided for adjustments that
may be expected to result for these years.
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 33.6 percent, excluding this item.
In 2003, the Company received non-taxable death benefit proceeds of
approximately $1.4 million resulting in a one-time reduction of income tax
expense. The Company's 2003 effective tax rate on continuing operations would
have been 37.3 percent, excluding this item.
For each of 2004, 2003 and 2002, the Company received approximately $1
million of Hawaii tax credits, net of federal tax, from investments in qualified
high-tech businesses. In 2004, 2003, and 2002, income tax benefits attributable
to employee stock option transactions of $6 million, $2 million and $1 million,
respectively, were not included in the tax provision, but were allocated
directly to stockholders' equity.
12. STOCK OPTIONS AND RESTRICTED STOCK
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 Committee of the A&B Board of Directors 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.
Restricted Stock: 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. During
2004, 66,100 shares were issued at a value of $33.51 per share. These shares
vest ratably over five years. Compensation expense is being recognized in
earnings during the vesting period. All 66,100 shares were outstanding at
December 31, 2004.
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 8,000 shares of the Company's common
stock at the fair market value of the shares on the date of grant. 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, 2004, 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, 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
Granted 351 -- 64 -- 415 $ 33.47
Exercised (759) (363) (6) (28) (1,156) $ 24.78
Canceled (11) (1) -- -- (12) $ 24.02
----- ----- --- ---- ------
December 31, 2004 1,418 95 151 59 1,723 $ 27.61
===== ===== === ==== ======
Exercisable 671 95 64 59 889 $ 25.50
----- ----- --- ---- ------
As of December 31, 2004, the Company had reserved 1,182,363 and 299,000
shares of its common stock for the issuance of options under the 1998 Plan and
1998 Directors' Plan, respectively. Additional information about stock options
outstanding as of 2004 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 12/31/2004 Years Price 12/31/2004 Options
----- ---------- ----- ----- ---------- -------
$20.01 - 23.00 250 4.3 $ 21.35 -- --
$23.01 - 26.00 62 2.8 24.05 250 $ 21.35
$26.01 - 29.00 972 6.6 26.88 62 24.05
$29.01 - 32.00 28 5.4 30.47 561 27.39
$32.01 - 35.00 410 9.0 33.47 16 29.85
$35.01 - 45.45 1 6.2 42.51 -- --
----- ---
$ 0.00 - 45.45 1,723 6.7 $ 27.61 889 $ 25.50
===== ===
13. COMMITMENTS, GUARANTEES, CONTINGENCIES AND 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, 2004 included the following (in millions):
Arrangement 2004
----------- ----
Capital appropriations (a) $ 158
Guarantee of HS&TC debt (b) $ 15
Guarantee of Hokua debt (c) $ 15
Standby letters of credit (d) $ 18
Bonds (e) $ 14
Benefit plan withdrawal obligations (f) $ 65
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 December 31, 2004, the Company and its subsidiaries had an
unspent balance of total appropriations for capital expenditures
of approximately $158 million. These expenditures are primarily
for vessel maintenance, real estate investments, real estate
developments, containers and operating equipment and vessel
modifications. There are, however, no contractual obligations to
spend the entire amount. For 2005, internal cash flows and
existing credit lines are expected to be sufficient to finance
working capital needs, dividends, capital expenditures, and debt
service.
(b) The Company guarantees up to $15 million of HS&TC's $30 million
revolving credit line. This agreement expires in April 2006,
but is currently expected to be renewed. The HS&TC 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 current
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,
2004, the amount drawn was $15 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 remote.
(c) A&B Properties, Inc. ("Properties") 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, for example, 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 outstanding balance of the
venture's construction loan at December 31, 2004 was $12
million.
(d) The Company has arranged for standby letters of credit totaling
$18 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 but has been
extended until December 31, 2005. The remaining letters of
credit, totaling $3 million, are for routine insurance-related
operating matters, principally in the real estate businesses.
(e) Of the $14 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 $6 million of
customs bonds. The remaining $1 million of bonds are for
transportation-related matters.
(f) The withdrawal liabilities for multiemployer pension plans, in
which Matson is a participant, aggregated approximately $65
million as of the most recent valuation dates. Management has no
present intention of withdrawing from and does not anticipate
termination of any of the aforementioned plans.
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.
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 objected to the petition, asked the BLNR
to conduct administrative hearings on the matter and requested that the matter
be consolidated with the Company's currently pending application before the BLNR
for a long-term water license.
Since the filing of the petition, the Company has 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. An interim agreement was
entered into during the first quarter of 2004 between the parties to allow the
improvements to be completed, deferring the administrative hearing process. That
agreement, however, has since expired without renewal by the petitioners.
Nevertheless, the Company has continued to make improvements to the water
systems.
The administrative hearing process on the petition is continuing, and
the Company continues to object to the petition. The effect of this claim on the
Company's sugar-growing operations cannot currently be estimated. 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-growing operations.
In October 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 both an
unrelated company and Hawaiian Commercial & Sugar 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, in June 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 it is currently
diverting, it may have an adverse effect on the Company's sugar-growing
operations.
The Company and certain subsidiaries are parties to various other legal
actions and are contingently liable in connection with other 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.
Related Party Transactions: Note 5 includes additional information
about transactions with unconsolidated affiliates, which affiliates are also
related parties, due to the Company's minority interest investments.
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. The price that the Hawaii
sugar growers receive for the sale of raw sugar is C&H contract price, reduced
for the operating, transportation and interest costs incurred by HS&TC, net of
revenue generated by HS&TC for charter voyages. Revenue from raw sugar sold to
HS&TC was $63 million, $71 million and $72 million during 2004, 2003 and 2002,
respectively. At December 31, 2004 and 2003, the Company had amounts receivable
from HS&TC of $10 million and $9 million, respectively.
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 Real Estate industry 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,
petroleum and molasses hauling, general trucking services, mobile equipment
maintenance and repair services, and self-service storage in Hawaii; and
generates and sells, to the extent not used in the Company's operations,
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 three years ended December
31, 2004 is summarized below (in millions):
For the Year 2004 2003 2002
---- ---- ----
Revenue:
Transportation:
Ocean transportation $ 850.1 $ 776.3 $ 686.9
Logistics services 376.9 237.7 195.1
Real Estate:
Leasing 83.8 80.3 73.1
Sales 82.3 63.8 93.0
Less amounts reported in discontinued
operations1 (5.1) (42.5) (76.9)
Food Products 112.8 112.9 112.7
Reconciling items 2 (6.5) -- --
---------- --------- ----------
Total revenue $ 1,494.3 $ 1,228.5 $ 1,083.9
========== ========== ==========
Operating Profit:
Transportation:
Ocean transportation $ 108.3 $ 93.2 $ 42.4
Logistics services 8.9 4.3 3.1
Real Estate:
Leasing 38.8 37.0 32.9
Sales 34.6 23.9 19.4
Less amounts reported in discontinued
operations1 (3.3) (20.9) (21.2)
Food Products 4.8 5.1 13.8
---------- ---------- ----------
Total operating profit 192.1 142.6 90.4
Write-down of long-lived assets3 -- (7.7) --
Interest expense, net4 (12.7) (11.6) (11.6)
General corporate expenses (20.3) (15.2) (13.2)
---------- ---------- ----------
Income from continuing
operations before income taxes
and accounting changes $ 159.1 $ 108.1 $ 65.6
========== ========== ==========
Identifiable Assets:
Transportation6 $ 953.4 $ 981.9 $ 880.1
Real Estate7 661.0 612.8 500.3
Food Products 152.8 154.4 163.4
Other 11.0 10.5 8.9
---------- ---------- ----------
Total assets $ 1,778.2 $ 1,759.6 $ 1,552.7
========== ========== ==========
Capital Expenditures:
Transportation6 $ 128.7 $ 133.4 $ 10.5
Real Estate5,7 10.9 107.7 83.7
Food Products 10.2 12.6 9.9
Other 1.4 1.7 0.9
---------- ---------- ----------
Total capital expenditures $ 151.2 $ 255.4 $ 105.0
========== ========== ==========
Depreciation and Amortization:
Transportation6 $ 58.0 $ 51.9 $ 51.0
Real Estate1, 7 12.3 11.3 9.1
Food Products 9.0 8.2 8.5
Other 0.4 0.3 0.4
---------- ---------- ----------
Total depreciation and
amortization $ 79.7 $ 71.7 $ 69.0
========== ========== ==========
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 Includes inter-segment revenue and interest income classified as revenue for
segment reporting purposes.
3 The 2003 write-down was for an "other than temporary" impairment in the
Company's investment in C&H.
4 Includes Ocean Transportation interest expense of $5.7 million for 2004,
$2.6 million for 2003, and $2.4 million for 2002.
5 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.
6 Includes both Ocean Transportation and Integrated Logistics because the
amounts for Integrated Logistics are not material.
7 Includes Leasing, Sales and Development activities because of a shared asset
base.
15. QUARTERLY INFORMATION (Unaudited)
Segment results by quarter for 2004 are listed below (in millions,
except per-share amounts):
2004
------------------------------------------------------------
Q1 Q2 Q3 Q4
----------- ---------- ----------- ----------
Revenue:
Transportation:
Ocean transportation $ 196.5 $ 208.1 $ 215.0 $ 230.5
Logistics services 74.1 93.5 99.5 109.8
Real Estate:
Leasing 20.8 20.4 20.9 21.7
Sales 40.1 28.3 11.6 2.3
Less amounts reported in discontinued
operations 1 (1.0) (2.1) (1.0) (1.0)
Food Products 13.4 28.9 38.3 32.2
Reconciling items 2 (1.5) (1.7) (1.8) (1.5)
----------- ---------- ----------- ----------
Total revenue $ 342.4 $ 375.4 $ 382.5 $ 394.0
=========== ========== =========== ==========
Operating Profit (Loss):
Transportation:
Ocean transportation $ 18.6 $ 31.4 $ 33.0 $ 25.3
Logistics services 1.0 2.6 2.2 3.1
Real Estate:
Leasing 9.5 9.2 10.1 10.0
Sales 19.0 13.4 2.5 (0.3)
Less amounts reported in discontinued
operations1 (0.7) (1.5) (0.5) (0.6)
Food Products 2.6 0.3 0.6 1.3
----------- ---------- ----------- ----------
Total operating profit 50.0 55.4 47.9 38.8
Interest Expense (3.3) (3.2) (3.1) (3.1)
General Corporate Expenses (4.1) (4.8) (5.3) (6.1)
----------- ---------- ----------- ----------
Income From Continuing Operations
before Income Taxes 42.6 47.4 39.5 29.6
Income taxes (16.0) (18.2) (15.0) (11.2)
----------- ---------- ----------- ----------
Income From Continuing Operations 26.6 29.2 24.5 18.4
Discontinued Operations1 0.5 0.9 0.3 0.3
----------- ---------- ----------- ----------
Net Income $ 27.1 $ 30.1 $ 24.8 $ 18.7
=========== ========== =========== ==========
Earnings Per Share:
Basic $ 0.64 $ 0.71 $ 0.58 $ 0.44
Diluted $ 0.63 $ 0.70 $ 0.58 $ 0.42
1 See Note 3 for discussion of discontinued operations.
2 Includes inter-segment revenue and interest income classified as revenue for
segment reporting purposes.
Segment results by quarter for 2003 are listed below (in millions,
except per-share amounts):
2003
------------------------------------------------------------
Q1 Q2 Q3 Q4
----------- ---------- ----------- ----------
Revenue:
Transportation:
Ocean transportation $ 186.1 $ 199.3 $ 191.6 $ 199.3
Logistics services 51.0 57.4 60.8 68.5
Real Estate:
Leasing 19.1 20.6 20.3 20.3
Sales 16.7 26.4 10.4 10.3
Less amounts reported in discontinued
operations (15.4) (25.1) (1.0) (1.0)
Food Products 14.9 35.1 33.6 29.3
----------- ---------- ----------- ----------
Total revenue $ 272.4 $ 313.7 $ 315.7 $ 326.7
=========== ========== =========== ==========
Operating Profit (Loss):
Transportation:
Ocean transportation $ 12.1 $ 23.2 $ 25.1 $ 32.8
Logistics services 0.5 1.4 1.4 1.0
Real Estate:
Leasing 8.6 9.5 9.1 9.8
Sales 11.6 6.9 2.6 2.8
Less amounts reported in discontinued
operations (11.6) (7.5) (0.5) (1.3)
Food Products 1.9 2.3 0.4 0.5
----------- ---------- ----------- ----------
Total operating profit 23.1 35.8 38.1 45.6
Write-down of long-lived assets1 -- -- -- (7.7)
Interest Expense (2.6) (2.4) (3.1) (3.5)
General Corporate Expenses (4.1) (4.1) (2.0) (5.0)
----------- ---------- ----------- ----------
Income From Continuing Operations
before Income Taxes 16.4 29.3 33.0 29.4
Income taxes (6.0) (10.8) (11.6) (11.4)
----------- ---------- ----------- ----------
Income From Continuing Operations 10.4 18.5 21.4 18.0
Discontinued Operations2 7.2 4.7 0.3 0.8
----------- ---------- ----------- ----------
Net Income $ 17.6 $ 23.2 $ 21.7 $ 18.8
=========== ========== =========== ==========
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.
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, 2004 and 2003 (in millions):
2004 2003
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $ 1 --
Accounts and notes receivable, net 13 $ 11
Real estate held for sale 6 --
Prepaid expenses and other 11 15
-------- --------
Total current assets 31 26
-------- --------
Investments:
Subsidiaries consolidated, at equity 829 584
-------- --------
Property, at Cost 378 378
Less accumulated depreciation and amortization 182 176
-------- --------
Property -- net 196 202
-------- --------
Due from Subsidiaries 45 239
-------- --------
Other Assets 29 29
-------- --------
Total $ 1,130 $ 1,080
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 24 $ 13
Accounts payable 5 6
Income taxes payable 7 8
Other 18 16
-------- --------
Total current liabilities 54 43
-------- --------
Long-term Debt 98 147
-------- --------
Other Long-term Liabilities 22 17
-------- --------
Deferred Income Taxes 52 62
-------- --------
Commitments and Contingencies
Shareholders' Equity:
Capital stock 35 35
Additional capital 150 112
Accumulated other comprehensive loss (9) (8)
Deferred compensation (2) --
Retained earnings 741 684
Cost of treasury stock (11) (12)
-------- --------
Total shareholders' equity 904 811
-------- --------
Total $ 1,130 $ 1,080
======== ========
The following table presents the Parent Company's condensed Statements
of Income for the years ended December 31, 2004, 2003 and 2002 (in millions):
2004 2003 2002
---------- ---------- --------
Revenue:
Food products $ 86 $ 90 $ 91
Property leasing 21 19 18
Property sales 5 2 4
Interest and other 5 13 15
--------- --------- ---------
Total revenue 117 124 128
--------- --------- ---------
Costs and Expenses:
Cost of agricultural goods and services 86 87 81
Cost of property sales and leasing services 9 8 10
Selling, general and administrative 20 16 13
Interest and other 10 13 13
Income taxes (11) -- 1
--------- --------- ---------
Total costs and expenses 114 124 118
--------- --------- ---------
Income from Continuing Operations 3 -- 10
Discontinued Operations, net of income taxes -- -- 2
--------- --------- ---------
Income Before Equity in Income
of Subsidiaries Consolidated 3 -- 12
Equity in Income from Continuing Operations of
Subsidiaries Consolidated 96 68 35
Equity in Income from Discontinued
Operations of Subsidiaries Consolidated 2 13 11
--------- --------- ---------
Net Income 101 81 58
Other Comprehensive Income (Loss), net of income taxes (1) 19 (27)
--------- --------- ---------
Comprehensive Income $ 100 $ 100 $ 31
========= ========= =========
The following table presents the Parent Company's condensed Statements
of Cash Flows for the years ended December 31, 2004, 2003 and 2002 (in
millions):
2004 2003 2002
-------- -------- -------
Cash Flows from Operations $ 34 $ 19 $ (35)
------ ------- -------
Cash Flows from Investing Activities:
Capital expenditures (12) (14) (11)
Proceeds from disposal of property and investments 6 2 1
Dividends received from subsidiaries 40 40 40
------ ------- -------
Net cash provided by investing activities 34 28 30
------ ------- -------
Cash Flows from Financing Activities:
Decrease in intercompany payable (15) (62) (3)
Proceeds from (repayments of) long-term debt, net (38) 32 13
Proceeds from issuance of capital stock 26 20 16
Repurchases of capital stock (2) -- --
Dividends paid (38) (37) (37)
------ ------- -------
Net cash used in financing activities (67) (47) (11)
------ ------- -------
Cash and Cash Equivalents:
Net increase (decrease) for the year 1 -- (16)
Balance, beginning of year -- -- 16
------ ------- -------
Balance, end of year $ 1 $ -- $ --
====== ======= =======
Other Cash Flow Information:
Interest paid, net of amounts capitalized $ (9) $ (9) $ (9)
Income taxes paid (61) (45) (52)
Other Non-cash Information:
Depreciation expense (12) (11) (12)
Tax-deferred property sales -- -- 27
Tax-deferred property purchases -- -- (27)
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, 2004 and 2003, long-term debt
consisted of the following (in millions):
2004 2003
-------- --------
Revolving credit loans, due after 2004, 2004 high 3.05%, low 1.65% $ 7 $ 32
Term Loans:
4.10%, payable through 2012 35 35
7.38%, payable through 2007 22 30
7.42%, payable through 2010 17 20
7.43%, payable through 2007 15 15
7.55%, payable through 2009 15 15
7.57%, payable through 2009 11 13
------- -------
Total 122 160
Less current portion 24 13
------- -------
Long-term debt $ 98 $ 147
======= =======
During 2004, the Company increased its revolving credit and term loan
agreement with six commercial banks to $200 million from $185 million. The term
of the facility was also extended to January 2008. 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, 2004 no amounts were drawn on
the facility. At December 31, 2003, $25 million was outstanding under this
agreement. The amounts drawn on this facility are classified as non-current
because the Company has the intent and ability to refinance the facility beyond
twelve months.
The Company has an uncommitted short-term revolving credit agreement
with a commercial bank that was increased from $70 million in 2003 to $78.5
million in 2004. The agreement extends to January 2006, 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 $200 million multi-bank facility, in which it is a
participant, and by letters of credit issued under the $78.5 million uncommitted
facility. The outstanding balance under this credit facility was $7 million at
each of December 31, 2004 and 2003. These amounts are classified as current
because the Company uses the line for working capital purposes. Under the
borrowing formula for this facility, the Company could have borrowed an
additional $70 million at December 31, 2004. For sensitivity purposes, if the
$200 million facility had been drawn fully, the amount that could have been
drawn under the borrowing formula at 2004 year-end would have been $16 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,
2004.
At December 31, 2004, maturities and planned prepayments of all
long-term debt during the next five years are $24 million in 2005 and $17
million annually for 2006 through 2008.
Other Long-term Liabilities: Other Long-term Liabilities at December
31, 2004 and 2003 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.
B. Internal Control over Financial Reporting
(a) See page 46 for management's annual report on internal control over
financial reporting.
(b) See page 48 for attestation report of the independent registered
public accounting firm.
(c) 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.
ITEM 9B. OTHER INFORMATION
Not applicable.
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 7, 2005 ("A&B's
2005 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, 2005, 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 2005 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 2005 Proxy Statement, which subsection is incorporated
herein by reference.
James S. Andrasick (61)
President and Chief Executive Officer of Matson, 7/02-present;
Executive Vice President of A&B, 4/02-4/04; Chief Financial Officer and
Treasurer of A&B, 6/00-2/04; 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 (41)
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.
Meredith J. Ching (48)
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 (52)
Vice President and General Counsel of A&B, 11/03-present; Partner,
Cades Schutte LLP, 10/83-11/03.
Matthew J. Cox (43)
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.
W. Allen Doane (57)
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.
G. Stephen Holaday (60)
Plantation General Manager, Hawaiian Commercial & Sugar Company,
1/97-present; Vice President of A&B, 12/99-4/04; 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 (59)
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 (51)
Chief Executive Officer and Vice Chairman of A & B Properties, Inc.,
12/99-present; Vice President (Properties Group) of A&B, 2/99-4/04; Executive
Vice President of ABHI, 2/99-12/99; first joined A&B or a subsidiary in 1992.
Alyson J. Nakamura (39)
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 (46)
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.
Ruthann S. Yamanaka (51)
Vice President (Human Resources) of A&B, 9/04-present; Senior Vice
President of Hawaiian Airlines, Inc., 3/98-8/04.
C. Audit Committee Financial Experts
For information about the Audit Committee Financial Experts, see the
section captioned "Audit Committee Report" in A&B's 2005 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 2005 Proxy Statement, which subsection is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
See the section captioned "Executive Compensation" in A&B's 2005 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 2005 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 2005 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 2005 Proxy Statement, which section is incorporated herein by
reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
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 through
February 24, 2005).
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 ChaseMellon 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. (i) 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).
(ii) First Amendment to Third Amended and Restated Revolving Credit and
Term Loan Agreement, effective as of February 4, 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
(Exhibit 4.b.(ii) to A&B's Form 10-Q for the quarter ended March 31,
2004).
(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 (Exhibit 4.b.(iii) to A&B's Form 10-Q for the quarter ended
September 30, 2004).
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 (Exhibit 10.a.(xviii) to A&B's Form 10-K
for the year ended December 31, 2003).
(xix) Thirteenth Amendment dated October 19, 2004 to the Revolving
Credit Agreement between Alexander & Baldwin, Inc. and First Hawaiian
Bank, dated December 30, 1993 (Exhibit 10.a.(xvix) to A&B's Form 10-Q
for the quarter ended September 30, 2004).
(xx) 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).
(xxi) 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).
(xxii) 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).
(xxiii) 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).
(xxiv) 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).
(xxv) First Amendment dated July 12, 2004 to the Private Shelf
Agreement between Matson Navigation Company, Inc. and Prudential
Insurance Company of America, dated as of June 29, 2001 (Exhibit
10.a.(xxiv) to A&B's Form 10-Q for the quarter ended June 30, 2004).
(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 (Exhibit 10.a.(xxvi) to A&B's
Form 10-Q for the quarter ended September 30, 2004).
(xxvii) Credit Agreement between Matson Navigation Company, Inc. and
Bank of America, N.A., dated October 25, 2002.
(xxviii) First Loan Modification Agreement dated December 15, 2004 to
the Credit Agreement between Matson Navigation Company, Inc. and Bank
of America. N.A., dated October 25, 2002.
(xxix) Loan Agreement between Matson Navigation Company, Inc. and Wells
Fargo Bank, National Association, dated as of October 3, 2003.
(xxx) First Amendment to Loan Agreement and Second Modification to
Promissory Note between Matson Navigation Company, Inc. and Wells
Fargo Bank, National Association, dated as of September 30, 2004.
(xxxi) Private Shelf Agreement between Alexander & Baldwin, Inc. and
Prudential Investment Management, Inc., dated as of November 25, 2003
(Exhibit 10.a.(xxiv) to A&B's Form 10-K for the year ended December
31, 2003).
(xxxii) 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. (Exhibit 10.a.(xxv) to A&B's Form 10-K for
the year ended December 31, 2003).
(xxxiii) 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).
(xxxiv) 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).
(xxxv) 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).
(xxxvi) 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).
(xxxvii) 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).
(xxxviii) 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).
(xxxix) Shipbuilding Contract (Hull 003) between Kvaerner Philadelphia
Shipyard Inc. and Matson Navigation Company, Inc., dated February 14,
2005.
(xl) Amendment No. 1 dated February 18, 2005, to Shipbuilding Contract
(Hull 003) between Kvaerner Philadelphia Shipyard Inc. and Matson
Navigation Company, Inc., dated February 14, 2005.
(xli) Shipbuilding Contract (Hull BN460) between Kvaerner Philadelphia
Shipyard Inc. and Matson Navigation Company, Inc., dated February 14,
2005.
(xlii) Amendment No. 1 dated February 18, 2005, to Shipbuilding
Contract (Hull BN460) between Kvaerner Philadelphia Shipyard Inc. and
Matson Navigation Company, Inc., dated February 14, 2005.
(xliii) Right of First Refusal Agreement between Kvaerner Philadelphia
Shipyard Inc. and Matson Navigation Company, Inc., dated February 14,
2005.
*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) 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).
________________________________
*All exhibits listed under 10.b.1. are management contracts or compensatory
plans or arrangements.
(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 (Exhibit 10.b.1.(xiii) to A&B's Form
10-Q for the quarter ended September 30, 2004).
(xiv) 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).
(xv) 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).
(xvi) Amendment No. 2 to the Alexander & Baldwin, Inc. 1998
Non-Employee Director Stock Option Plan, dated February 26, 2004
(Exhibit 10.b.1.(xiv) to A&B's Form 10-Q for the quarter ended March
31, 2004).
(xvii) Amendment No. 3 to the Alexander & Baldwin, Inc. 1998
Non-Employee Director Stock Option Plan, dated June 23, 2004 (Exhibit
10.b.1.(xvi) to A&B's Form 10-Q for the quarter ended June 30, 2004).
(xviii) 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).
(xix) 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).
(xx) Settlement Agreement and General Release of Claims among C.
Bradley Mulholland, Matson Navigation Company, Inc. and Alexander &
Baldwin, Inc. dated December 31, 2003 (Exhibit 10.b.1.(xvi) to A&B's
Form 10-K for the year ended December 31, 2003).
(xxi) 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).
(xxii) 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).
(xxiii) 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).
(xxiv) 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).
(xxv) 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).
(xxvi) 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).
(xxvii) 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).
(xxviii) 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).
(xxix) 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).
(xxx) Amendment No. 7 to the A&B Excess Benefits Plan, dated October
22, 2003 (Exhibit 10.b.1.(xxvii) to A&B's Form 10-K for the year ended
December 31, 2003).
(xxxi) 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).
(xxxii) 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).
(xxxiii) 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).
(xxxiv) 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).
(xxxv) 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).
(xxxvi) 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).
(xxxvii) Amendment No. 1 to the A&B Retirement Plan for Outside
Directors, dated July 1, 1998 (Exhibit 10.b.1.(xlii) to A&B's Form 10-Q
for the quarter ended September 30, 1998).
(xxxviii) 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).
(xxxix) Amendment No. 3 to the A&B Retirement Plan for Outside
Directors, dated December 9, 2004.
(xl) Amendment No. 4 to the A&B Retirement Plan for Outside Directors,
dated February 24, 2005 (A&B's Form 8-K, filed on February 28, 2005).
(xli) 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). Schedule to Form of Severance Agreement entered into with
certain executive officers, as amended and restated effective August
23, 2004 (Exhibit 10.b.1.(xxxix) to A&B's Form 10-Q for the quarter
ended June 30, 2004).
(xlii) 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).
(xliii) 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).
(xliv) Amendment No. 2 to the Alexander & Baldwin, Inc. One-Year
Performance Improvement Incentive Plan, dated February 25, 2004
(Exhibit 10.b.1.(xxxix) to A&B's Form 10-Q for the quarter ended March
31, 2004).
(xlv) 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).
(xlvi) 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).
(xlvii) 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).
(xlviii) 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).
(xlix) 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).
(l) 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).
(li) 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).
(lii) 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).
(liii) Amendment No. 3 to the Alexander & Baldwin, Inc. Restricted
Stock Bonus Plan, dated December 8, 2004.
21. Subsidiaries.
21. Alexander & Baldwin, Inc. Subsidiaries as of February 18, 2005.
23. Consent of Deloitte & Touche LLP dated March 7, 2005 (included as the
last page of A&B's Form 10-K for the year ended December 31, 2004).
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.
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 7, 2005 By /s/ W. Allen Doane
----------------------------
W. 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/ W. Allen Doane President and Chief March 7, 2005
- ------------------------------- Executive Officer and
W. Allen Doane Director
/s/ Christopher J. Benjamin Vice President and March 7, 2005
- ------------------------------- Chief Financial Officer
Christopher J. Benjamin
/s/ Thomas A. Wellman Vice President, March 7, 2005
- ------------------------------- Controller and
Thomas A. Wellman Treasurer
/s/ Charles M. Stockholm Chairman of the Board March 7, 2005
- ------------------------------- and Director
Charles M. Stockholm
/s/ Michael J. Chun Director March 7, 2005
- -------------------------------
Michael J. Chun
/s/ Walter A. Dods, Jr. Director March 7, 2005
- -------------------------------
Walter A. Dods, Jr.
/s/ Charles G. King Director March 7, 2005
- -------------------------------
Charles G. King
/s/ Constance H. Lau Director March 7, 2005
- --------------------------------
Constance H. Lau
/s/ Carson R. McKissick Director March 7, 2005
- -------------------------------
Carson R. McKissick
/s/ Maryanna G. Shaw Director March 7, 2005
- -------------------------------
Maryanna G. Shaw
/s/ Jeffrey N. Watanabe Director March 7, 2005
- -------------------------------
Jeffrey N. Watanabe
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statements
33-31922, 33-31923, 33-54825, and 333-69197 on Form S-8 of our reports dated
February 24, 2005, relating to the financial statements of Alexander & Baldwin,
Inc. and subsidiaries and management's report on the effectiveness of internal
control over financial reporting, appearing in this Annual Report on Form 10-K
of Alexander & Baldwin, Inc. and subsidiaries for the year ended December 31,
2004.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Honolulu, Hawaii
March 7, 2005