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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[|X|] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
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 13, 2003:
41,390,388
Aggregate market value of Common Stock held by non-affiliates at June 30, 2002:
$1,003,571,857
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 10, 2003
(Part III of Form 10-K)
TABLE OF CONTENTS
PART I
Page
Items 1 & 2. Business and Properties............................................................ 1
A. Transportation..................................................................... 1
(1) Freight Services.......................................................... 1
(2) Vessels................................................................... 2
(3) Terminals................................................................. 2
(4) Intermodal and Other Services............................................. 4
(5) Competition............................................................... 4
(6) Labor Relations........................................................... 5
(7) Rate Regulation........................................................... 5
B. Property Development and Management................................................ 5
(1) General................................................................... 5
(2) Planning and Zoning....................................................... 6
(3) Residential Projects...................................................... 7
(4) Commercial Properties..................................................... 8
C. Food Products...................................................................... 10
(1) Production................................................................ 10
(2) Marketing of Sugar and Coffee............................................. 11
(3) Competition and Sugar Legislation......................................... 11
(4) Properties and Water...................................................... 12
D. Employees and Labor Relations...................................................... 13
E. Energy .......................................................................... 14
F. Available Information.............................................................. 14
Item 3. Legal Proceedings.................................................................. 15
Item 4. Submission of Matters to a Vote of Security Holders................................ 15
Executive Officers of the Registrant................................................................. 15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.............. 16
Item 6. Selected Financial Data............................................................ 18
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................. 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk......................... 33
Item 8. Financial Statements and Supplementary Data........................................ 34
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure............................................................... 69
PART III
Item 10. Directors and Executive Officers of the Registrant................................. 70
A. Directors.......................................................................... 70
B. Executive Officers................................................................. 70
Item 11. Executive Compensation............................................................. 71
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters........................................................ 71
Item 13. Certain Relationships and Related Transactions..................................... 71
Item 14. Controls and Procedures............................................................ 72
A. Evaluation of Disclosure Controls and Procedures................................... 72
B. Changes in Internal Controls....................................................... 72
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................... 73
A. Financial Statements............................................................... 73
B. Financial Statement Schedules...................................................... 73
C. Exhibits Required by Item 601 of Regulation S-K.................................... 73
D. Reports on Form 8-K................................................................ 79
Signatures ....................................................................................... 80
Certifications....................................................................................... 82
Independent Auditors' Consent........................................................................ 84
ALEXANDER & BALDWIN, INC.
FORM 10-K
Annual Report for the Fiscal Year
Ended December 31, 2002
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
Alexander & Baldwin, Inc. ("A&B") is a diversified corporation with
most of its operations centered in Hawaii. It was founded in 1870 and
incorporated in 1900. Ocean transportation operations and related shoreside
operations of A&B are conducted by a wholly-owned subsidiary, Matson Navigation
Company, Inc. ("Matson") and several Matson subsidiaries. Property development
and food products operations are conducted by A&B and certain other subsidiaries
of A&B.
The industry segments 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; providing terminal,
stevedoring and container equipment maintenance services in
Hawaii; arranging intermodal transportation in North America;
and providing third-party logistics services.
B. Property Development and Management - purchasing, developing,
selling, managing and leasing commercial (including retail,
office and industrial) and residential properties, in Hawaii
and on the U.S. mainland.
C. Food Products - growing sugar cane and coffee in Hawaii;
producing bulk raw sugar, specialty food-grade sugars,
molasses and green coffee; marketing and distributing roasted
coffee and green coffee; providing sugar and molasses hauling
and storage, general freight and petroleum hauling in Hawaii;
and generating and selling electricity.
For information about the revenue, operating profits and identifiable
assets of A&B's industry segments for the three years ended December 31, 2002,
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,
located on the islands of Oahu, Kauai, Maui and Hawaii. Roll-on/roll-off service
is provided between California and the major ports in Hawaii. Container cargo
also is received at and delivered to Portland, Oregon, and moved overland
between Portland and Seattle.
Matson is the principal carrier of ocean cargo between the U.S. Pacific
Coast and Hawaii. In 2002, Matson carried approximately 152,500 containers
(compared with 149,600 in 2001) and 120,500 motor vehicles (compared with
122,400 in 2001) between those destinations. Principal westbound cargoes carried
by Matson to Hawaii include refrigerated commodities, dry containers of mixed
commodities, packaged foods, motor vehicles and building materials. Principal
eastbound cargoes carried by Matson from Hawaii include motor vehicles,
household goods, canned pineapple, refrigerated containers of fresh 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 motor vehicles.
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
2002, Matson carried approximately 16,300 containers (compared with 17,300 in
2001) and 3,760 automobiles (compared with 2,750 in 2001) in the Guam Service.
The alliance currently utilizes five vessels (three Matson vessels and two APL
vessels) in a schedule which provides service from the U.S. Pacific Coast to
Guam and Micronesia, continuing through Far East ports and returning to
California.
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 cargo fleet consists of eleven containerships, two combination
container/trailerships, 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. These seventeen vessels
represent an investment of approximately $698,992,000 expended over the past 32
years. The majority of vessels in the Matson cargo fleet have been acquired with
the assistance of withdrawals from a Capital Construction Fund established under
Section 607 of the Merchant Marine Act, 1936, as amended. Matson is actively
pursuing a vessel renewal program because its fleet is aging, with six vessels
that will be between 30 and 33 years old in 2003.
In 2002, Matson's vessel renewal program resulted in an agreement to
purchase two new containerships for the Hawaii Service, each at a total project
cost of approximately $110 million. The ships, which are being built by Kvaerner
Philadelphia Shipyard, Inc., are expected to be delivered, respectively, in the
third quarter of 2003 and the second quarter of 2004.
Currently, three containerships are time-chartered to APL in connection
with the Pacific Alliance Service. Two container/trailerships previously
bareboat-chartered to Sea Star Line, LLC, which operates the vessels in the
Florida-Puerto Rico trade, and in which Matson has a minority investment
interest, were sold to Sea Star Line, LLC in January 2002. One containership
currently in reserve status is scheduled to be scrapped in 2003.
Matson's fleet units are described on the list on the following page.
As a complement to its fleet, Matson owns approximately 14,200
containers, 10,500 container chassis, 700 auto-frames and miscellaneous other
equipment. Capital expenditures incurred by Matson in 2002 for vessels,
equipment and systems totaled approximately $4,750,000.
(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
MATSON NAVIGATION COMPANY, INC.
FLEET--2/1/03
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' 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 0 1,340 408 2,824 -- --
MAHIMAHI (2)........ 653424 1982 860'2" 23.0 30,167 182 0 1,340 408 2,824 -- --
MANOA (2)........... 651627 1982 860'2" 23.0 30,187 182 0 1,340 408 2,824 -- --
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 1982 826'6" 21.5 22,213 6 162 713 292 1,626 220 81
EWA (3)............. 530140 1972 1978 787'8" 21.0 38,747 286 276 681 228 1,979 -- --
CHIEF GADAO......... 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 -- --
MANULANI............ 528400 1970 720'5 1/2" 22.5 27,109 26 160 659 221 1,536 -- --
MANUKAI (4)......... 524219 1970 720'5 1/2" 22.5 27,107 -- 537 416 251 1,476 -- --
Barges
- ---------------
WAIALEALE (5)....... 978516 1991 345'0" -- 5,621 -- -- -- 35 -- 230 45
ISLANDER (6)........ 933804 1988 372'0" -- 6,837 -- 276 24 70 380 -- --
MAUNA LOA (6)....... 676973 1984 350'0" -- 4,658 -- 144 72 84 316 -- --
HALEAKALA (6)....... 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)........... --
Steam-Powered Ships
- -------------------
KAUAI............... 2,600
MAUI................ 2,600
MATSONIA............ 4,300
LURLINE............. 2,100
EWA (3)............. --
CHIEF GADAO......... --
LIHUE............... --
MANULANI............ 5,300
MANUKAI (3)......... 5,300
Tugs and 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) Reserve Status. Scheduled to be scrapped in 2003.
(5) Roll-on/Roll-off Barge
(6) Container Barge
its 108-acre marine terminal in Honolulu. Matson Terminals owns and operates
seven cranes at the terminal, which handled approximately 378,600 containers in
2002 (compared with 383,500 in 2001) and can accommodate three vessels at one
time. Matson Terminals' lease with the State of Hawaii runs through September
2016. In 2001, Matson Terminals substantially completed a $32 million terminal
improvement project at the Honolulu terminal, which included the conversion from
a straddle carrier-based container handling system to a wheeled chassis- and
toppick-based system. Although the new system initially has not provided planned
improvements in productivity, the conversion is expected in the long run to
increase terminal storage density, improve productivity and reduce costs.
SSA Terminals, LLC ("SSAT"), a joint venture of Matson and Stevedoring
Services of America ("SSA"), provides terminal and stevedoring services at U.S.
Pacific Coast terminal facilities in Long Beach, Oakland and Seattle.
Capital expenditures incurred by Matson Terminals in 2002 for terminals
and equipment totaled approximately $5,350,000.
(4) Intermodal and Other Services
Matson Intermodal System, Inc. ("Matson Intermodal") is an intermodal
marketing company which arranges North American rail and motor carrier
transportation for shippers and carriers, in conjunction with ocean and other
surface transportation. Through volume purchases of rail and motor carrier
transportation services, augmented by such services as shipment tracing and
single-vendor invoicing, Matson Intermodal is able to reduce transportation
costs for customers. Matson Intermodal operates six customer service centers and
has 18 sales offices across the U.S. mainland. Capital expenditures incurred by
Matson Intermodal in 2002 totaled approximately $400,000.
Matson Logistics Solutions, Inc. ("Matson Logistics"), a wholly-owned
subsidiary of Matson, provides third-party logistics (3PL) services primarily in
Hawaii, Alaska, Puerto Rico and Guam-Micronesia. These services include
transportation management, air freight, supply chain audits and project cargo
logistics to Matson customers and others.
(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 or perishable cargoes, historic and projected inroads of such
competition in cargo volume are limited by the amount of cargo space available
in passenger aircraft and by generally higher air freight rates.
Matson vessels are operated on schedules which make available to
shippers and consignees regular day-of-the-week sailings from the U.S. Pacific
Coast and day-of-the-week arrivals in Hawaii. Under its current schedule, Matson
operates 208 Hawaii round-trip voyages per year, double the westbound voyages of
its nearest competitor, and arranges additional voyages when cargo volumes
require additional capacity. This service is attractive to customers because
more frequent arrivals permit customers to lower inventory costs. Matson also
competes by offering a more comprehensive service to customers, supported by its
scope of equipment and its efficiency and experience in the handling of
containerized cargoes and competitive pricing.
The carriage of cargo between the U.S. Pacific Coast and Hawaii on
foreign-built or foreign-documented vessels is prohibited by Section 27 of the
Merchant Marine Act, 1920, frequently referred to as the Jones Act. However,
foreign-flag vessels carrying cargo to Hawaii from foreign sources 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 Intermodal competes for freight with a number of large and small
companies engaged in intermodal transportation. Matson Logistics competes with
many larger providers of logistics services and with transportation companies
whose services include logistics.
(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, Matson's operations had not been disrupted significantly by labor disputes
in over 30 years. See "Employees and Labor Relations" below for descriptions of
the labor disruption in 2002, labor agreements to which Matson and Matson
Terminals are parties, and certain unfunded liabilities for multi-employer
pension plans to which Matson and Matson Terminals contribute.
(7) Rate Regulation
Matson is subject to the jurisdiction of the Surface Transportation
Board with respect to its domestic rates. A rate in the noncontiguous domestic
trade is presumed reasonable and will not be subject to investigation if the
aggregate of increases and decreases is not more than 7.5 percent above, or more
than 10 percent below, the rate in effect one year before the effective date of
the proposed rate, subject to increase or decrease by the percentage change in
the U.S. Producer Price Index. Matson filed a 2.75 percent across-the-board
increase in its Hawaii Service freight rates which became effective April 14,
2002, and a three percent across-the-board increase in its Guam Service freight
rates, which became effective October 3, 2002. Also in 2002, Matson increased
its fuel surcharge in its Hawaii Service and Guam Service from 3.25 percent to
4.75 percent, effective May 5, and from 4.75 percent to 6 percent, effective
October 20 in Hawaii and November 9 in Guam. Effective January 12, 2003, Matson
implemented, in its Hawaii Service, a terminal handling charge of $200 per
container for westbound freight, $100 per container for eastbound freight and
$30 per automobile. On February 14, 2003, due to dramatic increases in fuel
prices attributed to the increasing likelihood of war in Iraq, Matson announced
an increase in its fuel surcharge from 6 percent to 7.5 percent in the Hawaii
and Guam Services effective March 3, 2003.
B. Property Development and Management
(1) General
A&B and its subsidiaries, including A & B Properties, Inc., own
approximately 90,800 acres, consisting of approximately 90,600 acres in Hawaii
and approximately 200 acres elsewhere, as follows:
Location No. of Acres
-------- ------------
Oahu .................................................. 52
Maui .................................................. 68,649
Kauai ................................................. 21,881
California ............................................ 89
Texas ................................................. 26
Washington ............................................ 13
Arizona ............................................... 35
Nevada ................................................ 39
Colorado .............................................. 5
------
TOTAL ............................................... 90,789
======
As described more fully in the table below, the bulk of this acreage currently
is used for agricultural and related activities, and includes pasture land,
watershed land and conservation reserves. The balance is used or planned for
development or other urban uses. An additional 3,270 acres on Maui and Kauai are
leased from third parties.
Current Use No. of Acres
- ----------- ------------
Hawaii
Fully-entitled urban (defined below) 1,218
Agricultural, pasture and miscellaneous 60,073
Watershed land/conservation 29,291
U.S. Mainland
Fully-entitled urban 207
------
TOTAL 90,789
======
A&B and its subsidiaries are actively involved in the entire spectrum
of land development, including planning, zoning, financing, constructing,
purchasing, managing and leasing, and selling and exchanging 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 approvals:
- amendment of the County general plan to reflect the desired
residential use;
- approval by the State Land Use Commission to reclassify the
parcel from the "Agricultural" district to the "Urban" district;
- County approval to rezone the property to the precise residential
use desired; and,
- if the parcel is located in the Special Management Area ("SMA"), the
granting of an SMA permit by the County.
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 all necessary government land use
approvals have been obtained.
As described in more detail below, in 2002, work to obtain entitlements
for urban use focused on (i) obtaining Community Plan designations for various
A&B lands on Maui, and (ii) obtaining County entitlements for a proposed
single-family subdivision and proposed hotel on Maui. The Community Plans serve
to guide planning and development activity on Maui. A&B has obtained and
continues to seek various urban designations for its undeveloped lands within
the four Community Plans where most of its Maui lands are located.
(3) Residential Projects
A&B is pursuing a number of residential projects in Hawaii, including:
(a) Kukui`Ula. Kukui`Ula is a 1,045-acre master planned resort
residential community located in Poipu, Kauai. Approximately 837 acres are fully
entitled for up to 900 hotel and vacation ownership (timeshare) units, 3,000
residential units, a golf course and commercial uses. The balance of the project
is partially entitled and was planned for up to 750 residential units.
In April 2002, a joint venture 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 venture's initial
conceptual land use plan anticipates a reduction in overall project density from
the over 4,000 units originally entitled, to approximately 1,500 high-end
residential and hotel units. Applications to amend Kukui`Ula's land use
boundaries are expected to be filed by mid-2003. Title to approximately 850
acres is also expected to be transferred to the joint venture by mid-2003, with
the balance of the land to be transferred to the joint venture upon securing
further entitlements for the property.
All of the remaining lots at Koloa Estates, Kukui`Ula's first
residential project, were sold in 2002. The average sales price for this
project, which began in 1999, was approximately $150,000 per lot.
(b) The Summit at Kaanapali. In January 2000, A&B acquired 17 acres in
the Kaanapali Golf Estates project. This land is being developed into 53
single-family homes or house lots. Site work construction was completed in May
2001. Construction of the 17 homes in the project's first phase commenced June
2001 and was completed in May 2002. In June 2002, the sale of 19 vacant lots in
the project's next phase commenced. As of December 31, 2002, 15 homes and 14
lots were closed, at an average price of $1.1 million for the homes and $320,000
for the lots.
(c) 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 regime, on an 8.5-acre parcel in Kamuela on the island of
Hawaii. An additional 7.2-acre estate lot is available for sale. Construction
commenced November 2001. Five homes were sold in 2002 and 29 homes were in
escrow as of December 31, 2002. All 44 homes are either completed or in various
stages of completion.
(d) 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 commenced February
2002, and the first units are scheduled to close in February 2003. As of
December 31, 2002, 81 units were in escrow, including 76 under binding
contracts. Prices for the units sold to date range from $365,000 to $659,000,
with an average price of $440,000.
(e) Waikiki Condominium. On November 1, 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. Based on focus group
input from Waikiki brokers, design and permitting activities began in 2002 and
are expected to be completed in early 2003 with construction scheduled to
commence in the third quarter of 2003. Approximately 100 apartments, averaging
slightly under 1,100 square feet in size, are planned for the project.
(f) Haliimaile Subdivision. A&B continues to seek entitlements for a
subdivision consisting of between 150 and 200 lots on 67 acres in Haliimaile
(Upcountry, Maui). The project is before the County Council for final zoning
approval. In June 2002, the Council deferred future hearings on the project
until a suitable water source is found, due to water shortage conditions in the
Upcountry region. In 2002, a water study was commissioned to evaluate potential
Upcountry well sites to meet the potable water requirements, and the
subdivision's layout and lot sizes are being refined to meet anticipated market
demand. It is expected that water source and traffic issues will be resolved in
2003.
(4) Commercial Properties
An important source of property revenue is the lease rental income A&B
receives from over five million leasable square feet of commercial building
space, ground leases on 272 acres for commercial use, and leases on 11,540 acres
for agricultural/pasture use.
(a) Hawaii Commercial Properties
In Hawaii, most of the approximately 1.7 million square feet of the
improved, income-producing commercial properties owned by A&B are located on
Oahu and in the Kahului/Wailuku region of Maui, with smaller holdings in the
area of Port Allen, on the island of Kauai, including the recently completed
Port Allen Marina Center. A&B's Hawaii commercial properties portfolio consists
primarily of seven retail centers, eight office buildings and three industrial
properties. The average occupancy for the Hawaii portfolio was 89 percent in
2002 (compared with 90 percent in 2001). The decline was due primarily to lower
occupancies in the office properties.
The Mililani Shopping Center, comprising 180,300 square feet on Oahu,
was acquired by A&B in June 2002 and is presently 100 percent occupied. Proceeds
from several tax-deferred exchanges under Section 1031 of the Internal Revenue
Code, as amended ("Code"), were used to pay for a portion of the purchase price.
The primary Hawaii commercial properties are as follows:
Leasable Area
Property Location Type (sq. ft.)
- -------- -------- ---- ---------
Maui Mall Kahului, Maui Retail 192,600
Mililani Shopping Center Mililani, Oahu Retail 180,300
Pacific Guardian Complex Honolulu, Oahu Office 138,400
Kaneohe Bay Shopping Center Kaneohe, Oahu Retail 124,500
P&L Warehouse Kahului, Maui Industrial 104,100
Kahului Shopping Center Kahului, Maui Retail 99,600
Ocean View Center Honolulu, Oahu Office 99,200
Hawaii Business Park Pearl City, Oahu Industrial 85,200
Haseko Center Honolulu, Oahu Office 84,200
One Main Plaza Wailuku, Maui Office 82,800
Wakea Business Center Kahului, Maui Industrial/Retail 61,500
Kahului Office Building Kahului, Maui Office 56,800
Fairway Shops at Kaanapali Kaanapali, Maui Retail 35,100
Kahului Office Center Kahului, Maui Office 31,300
Stangenwald Building Honolulu, Oahu Office 27,100
Port Allen Marina Center Port Allen, Kauai Retail 23,600
Judd Building Honolulu, Oahu Office 20,200
A number of other commercial projects are being developed on Maui and
Oahu, including:
(i) Triangle Square. Previous construction at Triangle Square 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. Agreements have been negotiated with a
second car dealership and Krispy Kreme to develop portions of the available 4.5
acres at this development.
(ii) Maui Business Park. Located in Kahului, Maui, the initial phase of
Maui Business Park consists of Phase IA (37.4 saleable acres), completed in
1995, and Phase IB (32.0 saleable acres), completed in 2000.
Phase IA includes the 349,300 square-foot Maui Marketplace retail
center, which is owned by a third party and occupies 20.3 acres of the
subdivision. The remaining area of Phase IA consists of 30 lots with an average
size of 22,900 square feet, of which seven lots were sold in 2002. As of
December 31, 2002, seven lots (4.0 saleable acres) remained available for sale
or lease.
In Phase IB, Home Depot completed construction of a 135,000 square-foot
store in May 2001. In February 2001, Wal-Mart purchased a 14.0-acre parcel in
the subdivision and completed construction of a 142,000 square-foot store in
October 2001. The remaining area consists of ten lots with an average size of
18,800 square feet. As of December 31, 2002, eight lots (3.8 saleable acres)
remained available for sale or lease.
In May 2002, the Maui County Council approved the inclusion of
approximately 175 acres in the Wailuku-Kahului Community Plan for the future
expansion of Maui Business Park. Future entitlement efforts include seeking
State "Urban" designation and County "Light Industrial" zoning for the property.
(iii) Kahului Airport Hotel. In March 2002, the County Council approved
A&B's zoning and Community Plan amendment applications for the proposed 134-room
Courtyard by Marriott hotel, to be developed on 3.4 acres near the Kahului
Airport. The project's SMA permit was subsequently obtained in April 2002.
Design of the hotel commenced May 2002 and construction plans were submitted to
the County for review in December 2002. Preliminary design and preparation of an
SMA permit are underway for the project's affordable housing requirement,
consisting of 34 townhouse units on A&B-owned land in Kahului.
(iv) Mill Town Center. Located in Waipahu, Oahu (approximately 12 miles
from Honolulu), the Mill Town Center is a light-industrial subdivision
consisting of 27.5 saleable acres being developed in two phases. Phase IA (10.2
saleable acres), completed in 1999, consists of 23 fee simple industrial lots.
In 2002, three lots were sold to commercial and industrial businesses and, as of
December 31, 2002, five lots (2.2 saleable acres) remained available for sale or
lease.
Phase IB (17.3 acres) was subdivided into 32 lots and IB's sitework was
completed in November 2002. As of December 31, 2002, 31 lots (14.3 saleable
acres) remained available for sale or lease in Phase IB.
(b) U.S. Mainland Commercial Properties
On the U.S. mainland, A&B owns a portfolio of commercial properties,
acquired primarily by way of tax-deferred exchanges under Code Section 1031,
comprising approximately 3.3 million square feet of leasable area. The portfolio
consists of seven retail centers, four office buildings and six industrial
properties, as follows:
Leasable Area
Property Location Type (sq. ft.)
- -------- -------- ---- ---------
Ontario Distribution Center........... Ontario, CA Industrial 895,500
Sparks Business Center................ Sparks, NV Industrial 396,100
Ontario-Pacific Business Centre....... Ontario, CA Industrial 246,100
Valley Freeway Corporate Park......... Kent, WA Industrial 229,100
Airport Square........................ Reno, NV Retail 170,800
San Pedro Plaza....................... San Antonio, TX Office 163,700
2868 Prospect Park.................... Sacramento, CA Office 161,700
Arbor Park............................ San Antonio, TX Retail 139,500
Mesa South 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
Northwest Business Center............. San Antonio, TX Office/Industrial 87,000
Carefree Marketplace.................. Carefree, AZ Retail 85,000
Marina Shores......................... Long Beach, CA Retail 67,700
Wilshire Center....................... Greeley, CO Retail 46,500
In February 2002, A&B sold the Great Southwest Industrial property,
located in Dallas, Texas. This seven-building portfolio contained 842,900 square
feet of leasable area. Other 2002 sales include the 43,300 square-foot Market
Square Shopping Center, located in Greeley, Colorado (May), the 133,600
square-foot Moulton Plaza Shopping Center, located in Laguna Hills, California
(December), and the 147,300 square-foot Day Creek industrial facility, located
in Ontario, California (December).
In 2002, A&B acquired the 67,700 square-foot Marina Shores Shopping
Center in Long Beach, California (May) and the 396,100 square-foot Sparks
Business Center in Sparks, Nevada, in the Reno metropolitan area (December).
Both of these properties were acquired in Code Section 1031 exchanges.
A&B's Mainland commercial properties achieved an average occupancy rate
of 92 percent in 2002 (compared with 93 percent in 2001). The decrease was due
primarily to two tenant bankruptcies which resulted in an increase in available
space in the Ontario Distribution Center and the Mesa South Shopping Center.
C. Food Products
(1) Production
A&B has been engaged in activities relating to the production of cane
sugar and molasses in Hawaii since 1870, and production of coffee in Hawaii
since 1987. A&B's current food products operations consist of a sugar plantation
on the island of Maui, operated by its Hawaiian Commercial & Sugar Company
("HC&S") division, and a coffee farm on the island of Kauai, operated by its
Kauai Coffee Company, Inc. ("Kauai Coffee") subsidiary.
HC&S is Hawaii's largest producer of raw sugar, having produced
approximately 215,900 tons of raw sugar in 2002, or about 79 percent of the raw
sugar produced in Hawaii (compared with 191,500 tons or about 70 percent in
2001). The increase in production was due primarily to an extended harvesting
season, combined with improved factory efficiency. Total Hawaii sugar
production, in turn, amounted to approximately four percent of total United
States sugar production. HC&S harvested 16,557 acres of sugar cane in 2002
(compared with 15,101 in 2001). The increase in acres harvested was due
primarily to a later-than-expected factory startup in 2001. Yields averaged 13.0
tons of sugar per acre in 2002 (compared with 12.7 in 2001). The average cost
per ton of sugar produced at HC&S was $332 in 2002 (compared with $371 in 2001).
The decrease in cost per ton was attributable to higher sugar production,
partially offset by higher operating costs. As a by-product of sugar production,
HC&S also produced approximately 74,300 tons of molasses in 2002 (compared with
71,200 in 2001).
In 2002, approximately 11,000 tons of the raw sugar produced by HC&S
were produced as specialty food-grade raw sugars and sold under HC&S's Maui
Brand(R) trademark. A $2.4 million expansion of the production facilities for
these sugars was completed in February 2001 and an additional $3.6 million
expansion is underway.
During 2002, Kauai Coffee had approximately 3,400 acres of coffee trees
under cultivation. The harvest of the 2002 coffee crop yielded approximately 2.8
million pounds of green coffee (compared with 3.8 million in 2001). The
decreased production was due primarily to the inherent nature of coffee trees,
which typically produce higher yields bi-annually, magnified by a high natural
drop of the coffee to the ground.
HC&S and McBryde Sugar Company, Limited ("McBryde"), a subsidiary of
A&B and the parent company of Kauai Coffee, produce electricity for internal use
and for sale to the local electric utility companies. HC&S's power is produced
by burning bagasse, by hydroelectric power generation and, when necessary, by
burning fossil fuels, whereas McBryde produces power solely by hydroelectric
generation. The price for the power sold by HC&S and McBryde is equal to the
utility companies' "avoided cost" of not producing such power themselves. In
addition, HC&S receives a capacity payment to provide a guaranteed power
generation capacity to the local utility. See "Energy" below for power
production and sales data.
Kahului Trucking & Storage, Inc., a subsidiary of A&B, provides sugar
and molasses hauling and storage, petroleum hauling, mobile equipment
maintenance and repair services and self-service storage facilities on Maui.
Kauai Commercial Company, Incorporated, another subsidiary of A&B, provides
similar services on Kauai, as well as general trucking services.
(2) Marketing of Sugar and Coffee
Substantially all of the raw sugar produced in Hawaii is purchased,
refined and marketed by C&H Sugar Company, Inc. ("C&H"), of which A&B owns a 36
percent common stock interest. 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 the two remaining sugar cane growers in Hawaii (including HC&S),
has a ten-year supply contract with C&H, ending in June 2003. 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. HS&TC
has agreed in principle to a revised supply agreement with C&H through the 2008
crop. Notwithstanding the supply contract, HC&S arranged directly with C&H for
the forward pricing of a portion of its 2002 harvest, as described in Item 7A
("Quantitative and Qualitative Disclosures About Market Risk") of Part II below.
In addition, as of December 31, 2002, approximately 33 percent of the expected
2003 harvest has been forward priced.
At Kauai Coffee, coffee marketing efforts are directed toward
developing a market for premium-priced, estate-grown Kauai green coffee. Most of
the coffee crop is being marketed on the U.S. mainland and in Asia as green
(unroasted) coffee. In addition to the sale of green coffee, Kauai Coffee
produces and sells roasted, packaged coffee in Hawaii under the Kauai Coffee(R)
trademark.
(3) Competition and Sugar Legislation
Hawaii sugar growers produce more sugar per acre than most other major
producing areas of the world, but that advantage is offset by Hawaii's high
labor costs and the distance to the U.S. mainland market. Hawaiian refined sugar
is marketed primarily west of Chicago. This is also the largest beet sugar
growing and processing area and, as a result, the only market area in the United
States that produces more sugar than it consumes. Sugar from sugar beets is the
greatest source of competition in the refined sugar market for the Hawaiian
sugar industry.
The overall U.S. caloric sweetener market continues to grow. The use of
non-caloric (artificial) sweeteners accounts for a relatively small percentage
of the domestic sweetener market. The anticipated increased use of high fructose
corn syrup and artificial sweeteners is not expected to affect sugar markets
significantly in the near future.
The U.S. Congress historically has sought, through legislation, to
assure a reliable domestic supply of sugar at stable and reasonable prices. The
current protective legislation is the Farm Security and Rural Investment Act of
2002 ("2002 Farm Bill"). The two main elements of U.S. sugar policy are the
tariff-rate quota ("TRQ") import system and the price support loan program. The
TRQ system limits imports by allowing only a quota amount to enter the U.S.
after payment of a relatively low tariff. A higher, over-quota tariff is imposed
for imported quantities above the quota amount.
The 2002 Farm Bill reauthorized the sugar price support loan program,
which supports the U.S. price of sugar by providing for commodity-secured loans
to producers. Unlike most other commodity programs, sugar loans are made to
processors and not directly to producers. HC&S is both a producer and a
processor. To qualify for loans, processors must agree to provide a part of the
loan payment to producers. Loans may be repaid either in cash or by forfeiture
without penalty. The 2002 Farm Bill eliminated the former loan forfeiture
penalty and marketing assessments, which increased the effective support level.
Under the 2002 Farm Bill, the government is required to administer the
loan program at no net cost by avoiding sugar loan forfeitures. This is
accomplished by reestablishing marketing allotments, which provides each
processor or producer a specific limit on sales for the year, above which
penalties would apply. It is also accomplished by adjusting fees and quotas for
imported sugar to maintain the domestic price at a level that discourages
producers from defaulting on loans. A loan rate (support price) of 18 cents per
pound for raw cane sugar is in effect for the 2003 through 2007 crops. The
pending revised supply agreement between HS&TC and C&H is expected to limit
HC&S's ability to place sugar under loan pursuant to the loan program, while
providing a "floor" price.
In 2002, U.S. domestic raw sugar prices averaged 20.85 cents per pound,
above the 20-year lows experienced in 2000, but still 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 Contract No. 14 settlement price for
domestic raw sugar, is shown below:
[CHART]
JAN-99 22.41
FEB 22.34
MAR 22.55
APR 22.58
MAY 22.65
JUN 22.63
JUL 22.61
AUG 21.31
SEP 20.10
OCT 20.51
NOV 17.45
DEC 17.67
JAN-00 17.70
FEB 17.05
MAR 18.46
APR 19.41
MAY 19.12
JUN 19.26
JUL 17.64
AUG 18.13
SEP 18.97
OCT 21.20
NOV 21.39
DEC 20.53
JAN-01 20.81
FEB 21.18
MAR 21.40
APR 21.51
MAY 21.19
JUN 21.04
JUL 20.64
AUG 21.01
SEP 20.87
OCT 20.85
NOV 21.19
DEC 21.35
JAN-02 21.03
FEB 20.63
MAR 19.92
APR 19.64
MAY 19.52
JUN 19.82
JUL 20.86
AUG 20.92
SEP 21.65
OCT 22.05
NOV 22.22
DEC 21.94
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.
Kauai Coffee competes with coffee growers located worldwide, including
in Hawaii. Due to an oversupply of coffee in the marketplace, coffee commodity
prices continue to be adversely affected and are near record lows.
(4) Properties and Water
The HC&S sugar plantation, the largest in Hawaii, consists of
approximately 43,300 acres of land, including 2,000 acres leased from the State
of Hawaii and 1,300 acres under lease from private parties. Over 37,000 acres
are under cultivation, and the balance either is used for contributory purposes,
such as roads and plant sites, or is not suitable for cultivation.
McBryde owns approximately 9,500 acres of land on Kauai, of which
approximately 2,400 acres are used for watershed and other conservation uses,
approximately 3,400 acres are used by Kauai Coffee and the remaining acreage is
leased to various agricultural enterprises for cultivation of a variety of crops
and for pasturage.
It is crucial for HC&S and Kauai Coffee to have access to reliable
sources of water supply and efficient irrigation systems. A&B's plantations
conserve water by using a "drip" irrigation system that distributes water to the
roots through small holes in plastic tubes. All but a small test area of the
cultivated cane land farmed by HC&S is drip irrigated. All of Kauai Coffee's
fields also are drip irrigated.
A&B owns 16,000 acres of watershed lands on Maui that supply a portion
of the irrigation water used by HC&S. A&B also held four water licenses to
38,000 acres owned by the State of Hawaii, which over the years supplied
approximately one-third of the irrigation water used by HC&S. The last of these
water license agreements expired in 1986, and all four agreements have since
been extended as revocable permits that are renewable annually. In 2001, a
request was made to the State Board of Land and Natural Resources to replace
these revocable permits with a long-term water lease. Pending a contested case
hearing before the Board on the request for the long-term lease, the Board
renewed the existing permits.
D. Employees and Labor Relations
As of December 31, 2002, A&B and its subsidiaries had approximately
2,025 regular full-time employees. About 940 regular full-time employees were
engaged in the growing of sugar cane and coffee and the production of raw sugar
and green coffee; 898 were engaged in transportation; 44 were engaged in
property development and management and the balance was in administration and
miscellaneous operations. Approximately 55 percent were covered by collective
bargaining agreements with unions.
As of December 31, 2002, Matson and its subsidiaries also had
approximately 318 seagoing employees. Approximately 22 percent of Matson's
regular full-time employees and all of the seagoing employees were covered by
collective bargaining agreements.
Historically, collective bargaining with longshore and seagoing unions
has been complex and difficult. However, Matson and Matson Terminals consider
their relations with those unions, other unions and their non-union employees
generally to be satisfactory.
Matson's seagoing employees are represented by six unions, three
representing unlicensed crew members and three representing licensed crew
members. Matson negotiates directly with these unions. In 2002, collective
bargaining agreements with the three unions representing unlicensed crew members
were renewed without service interruption, each for three-year terms ending June
30, 2005. The collective bargaining agreement with radio officers on Matson
vessels will expire December 31, 2003.
As described in "Transportation - Rate Regulation" above, SSAT, the
previously-described joint venture of Matson and SSA, provides stevedoring and
terminal services for Matson vessels calling at U.S. Pacific Coast ports.
Matson, SSA and SSAT are members of the Pacific Maritime Association ("PMA")
which, on behalf of its members, negotiates collective bargaining agreements
with the International Longshore and Warehouse Union ("ILWU") on the U.S.
Pacific Coast. Matson Terminals provides stevedoring and terminal services to
Matson vessels calling at Honolulu. Matson Terminals is a member of the Hawaii
Stevedore Industry Committee ("SIC") which, on behalf of its members, negotiates
with the ILWU in Hawaii.
In response to widespread work slowdowns at U.S. Pacific Coast
terminals in connection with contract negotiations with the ILWU that had begun
in May 2002, the PMA initiated a lockout at the end of September 2002 that
continued for ten days until the U.S. District Court in San Francisco issued a
temporary restraining order under the Taft-Hartley Act. On the U.S. Pacific
Coast, agreement on the terms of a six-year contract was reached in December
2002. Following that agreement, the SIC and the ILWU in Hawaii also reached
agreement on the terms of a six-year contract.
During 2001, Matson renewed its collective bargaining agreement with
ILWU clerical workers at Los Angeles for a three-year term and expects in 2003
to renew its agreement with ILWU clerical workers at Oakland without service
interruption.
During 2002, Matson contributed to multi-employer pension plans for
vessel crews. If Matson were to withdraw from or significantly reduce its
obligation to contribute to one of the plans, Matson would review and evaluate
data, actuarial assumptions, calculations and other factors used in determining
its withdrawal liability, if any. In the event that any third parties materially
disagree with Matson's determination, Matson would pursue the various means
available to it under federal law for the adjustment or removal of its
withdrawal liability. Matson Terminals participates in a multi-employer pension
plan for its Hawaii longshore 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 were extended in 2001 and
expired January 31, 2003. One of the collective bargaining agreements covering
the two ILWU bargaining units at Kahului Trucking & Storage, Inc. expired June
30, 2002, and is expected to be renewed without service interruption. The two
collective bargaining agreements with Kauai Commercial Company, Incorporated
employees represented by the ILWU were renegotiated in 2001 and will expire
April 30, 2004. The collective bargaining agreement with the ILWU for the
production unit employees of Kauai Coffee was renegotiated in 2001 and will
expire January 31, 2004.
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 2002, Matson vessels purchased
approximately 1.7 million barrels of residual fuel oil (compared with 1.8
million in 2001).
Residual fuel oil prices paid by Matson started in 2002 at $15.30 per
barrel and ended the year at $22.87. The low for the year was $15.30 per barrel
in January and the high was $29.50 in October. Sufficient fuel for Matson's
requirements is expected to be available in 2003.
As has been the practice with sugar plantations throughout Hawaii, HC&S
uses bagasse, the residual fiber of the sugar cane plant, as a fuel to generate
steam for the production of most of the electrical power for sugar milling and
irrigation pumping operations. In addition to bagasse, HC&S uses diesel fuel
oil, boiler fuel oil and coal to produce power during the factory shutdown
period when bagasse is not being produced. In 2002, HC&S produced and sold,
respectively, approximately 220,300 MWH and 87,400 MWH of electric power
(compared with 203,650 MWH produced and 61,100 MWH sold in 2001). The increase
in power produced and sold was due to HC&S's extended harvest season and
abundant spring rainfall that reduced irrigation pumping requirements. HC&S's
oil use decreased to approximately 21,000 barrels in 2002, from 69,000 barrels
used in 2001. Coal use for power generation also decreased, to approximately
46,700 short tons in 2002, from 62,400 short tons in 2001. The decrease in oil
and coal use was attributed to the extended harvest season and the larger cane
crop, which improved the availability of bagasse supplies for the boilers.
In 2002, McBryde produced approximately 33,300 MWH of hydroelectric
power (compared with 30,600 MWH in 2001). Power sales in 2002 amounted to
approximately 24,400 MWH (compared with 21,200 MWH in 2001). The increase in
power production and sales was due primarily to abundant spring rainfall in 2002
that alleviated the drought conditions experienced in 2001.
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 site is http://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 http://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 ("STB"), alleging that
Sea-Land Services, Inc. ("Sea-Land"), 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.
In August 2001, HC&S self-reported to the State of Hawaii Department of
Health ("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 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, 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 DOH. On January 8, 2003, DOH orally informed HC&S that
DOH will issue to HC&S a Notice of Violation resulting in monetary sanctions for
failing to comply with Hawaii and federal air pollution control regulations with
respect to the boiler. In the opinion of management, after consultation with
counsel, this matter will not have a material adverse effect on A&B's results of
operations or financial position.
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 of the Registrant")
in Item 10 of Part III below, which is incorporated herein by reference.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
A&B common stock is listed on The Nasdaq Stock Market and trades under
the symbol "ALEX." As of February 13, 2003, there were 4,082 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 150,600
shares a day in 2002, compared with 135,600 in 2001 and 98,900 in 2000.
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 2002 and 2001, were as follows:
Market Price
Dividends ------------------------------------
Paid High Low Close
---- ---- --- -----
2002
- ----
First Quarter $0.225 $28.010 $23.980 $27.610
Second Quarter 0.225 29.250 24.735 25.800
Third Quarter 0.225 26.190 21.500 22.250
Fourth Quarter 0.225 26.500 20.500 25.790
2001
- ----
First Quarter $0.225 $29.609 $21.063 $21.375
Second Quarter 0.225 25.840 20.610 25.750
Third Quarter 0.225 26.430 21.120 23.410
Fourth Quarter 0.225 27.920 21.600 26.700
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 22.0 cents per share
to 22.5 cents. In 2002, dividend payments to shareholders totaled $36,889,000,
which was 63 percent of reported net income for the year. The following dividend
schedule for 2003 has been set, subject to final approval by the Board of
Directors:
Quarterly Dividend Declaration Date Record Date Payment Date
- ------------------ ---------------- ----------- ------------
First January 23 February 13 March 6
Second April 24 May 8 June 5
Third June 26 August 7 September 4
Fourth October 23 November 6 December 4
A&B common stock is included in the Dow Jones Transportation Index, the
Dow Jones Composite Index, the Dow Jones Marine Transportation Index, and the
Russell 2000 Index.
The number of shares of A&B common stock repurchased by A&B during each
of the three years ended December 31, 2002, was as follows:
Shares Average Price
Year Purchased (per share)
---- --------- ------------
2002 -- --
2001 105,000 $21.61
2000 2,378,195 $20.29
A&B's Board of Directors has authorized A&B to repurchase up to 2
million shares of its common stock.
The Company 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 the Company'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 the Company'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, 2002, 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 3,171,000 $24.84 1,991,000
approved by security holders
- ------------------------------ ----------------------------- ---------------------------- ----------------------------
Equity compensation plans
not approved by security
holders -- -- 332,780*
- ------------------------------ ----------------------------- ---------------------------- ----------------------------
Total 3,171,000 $24.84 2,323,780
- ------------------------------ ----------------------------- ---------------------------- ----------------------------
* A&B has two compensation plans under which its stock is authorized for
issuance that were adopted without the approval of its security
holders. (1) Under A&B's Non-Employee Director Stock Retainer Plan,
each outside Director is issued a stock retainer of 300 A&B shares
after each year of service on A&B's Board of Directors. Those 300
shares vest immediately and are free and clear of any restrictions.
These shares are issued in January of the year following the year of
the Director's service to A&B. (2) Under A&B's Restricted Stock Bonus
Plan, the Compensation and Stock Option Committee identifies the
executive officers and other key employees who participate in one- and
three-year performance improvement incentive plans and formulates
performance goals to be achieved for the plan cycles. At the end of
each plan cycle, results are compared with goals, and awards are made
accordingly. Participants may elect to receive awards entirely in cash
or up to 50 percent in shares of A&B stock and the remainder in cash.
If a participant elects to receive a portion of the award in stock, an
additional 50 percent stock bonus may be awarded. Shares issued under
the Restricted Stock Bonus Plan may not be traded for three years
following the award date.
Of the 332,780 shares that were available for future issuance, 12,725
shares were available for future issuance under the Non-Employee
Director Stock Retainer Plan and 320,055 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 thousands, except per-share amounts):
2002 2001 2000 1999 1998
------------ ------------ ------------ ----------- ------------
ANNUAL OPERATIONS
Total revenue1 $ 1,088,885 $ 1,189,152 $ 1,056,179 $ 992,891 $ 1,334,989
Cost of goods sold and operating
expenses1 939,084 915,142 844,505 812,627 1,173,030
Depreciation and amortization 69,889 73,593 70,224 71,943 86,574
Interest expense 11,680 18,658 24,252 17,774 24,799
Income taxes 21,734 65,377 42,350 31,114 22,610
------------ ------------ ------------ ----------- ------------
Income from continuing operations
before accounting changes 46,498 116,382 74,848 59,433 27,976
Discontinued operations - real estate 11,658 3,431 3,476 3,146 2,967
Discontinued operations - agribusiness -- (9,185) -- -- --
Cumulative effect of change in
accounting methods -- -- 12,250 -- (5,801)
------------ ------------ ------------ ----------- ------------
Net income $ 58,156 $ 110,628 $ 90,574 $ 62,579 $ 25,142
============ ============ ============ =========== ============
Comprehensive income $ 31,341 $ 48,691 $ 103,050 $ 48,711 $ 33,327
Earnings per share:
From continuing operations before
accounting change:
Basic $ 1.13 $ 2.87 $ 1.83 $ 1.38 $ 0.63
Diluted $ 1.13 $ 2.86 $ 1.83 $ 1.37 $ 0.62
Net Income:
Basic $ 1.42 $ 2.73 $ 2.21 $ 1.45 $ 0.56
Diluted $ 1.41 $ 2.72 $ 2.21 $ 1.45 $ 0.56
Return on beginning equity 8.2% 15.9% 13.5% 9.0% 3.5%
Cash dividends per share $ 0.90 $ 0.90 $ 0.90 $ 0.90 $ 0.90
Average number of shares outstanding 41,008 40,535 40,898 43,206 44,760
Effective income tax rate 33.0% 36.0% 36.5% 34.5% 45.4%
MARKET PRICE RANGE PER SHARE
High $ 29.250 $ 29.609 $ 28.250 $ 27.125 $ 31.125
Low 20.500 20.610 17.938 18.625 18.813
Close 25.790 26.700 26.250 22.813 23.250
AT YEAR END
Shareholders of record 4,107 4,252 4,438 4,761 5,125
Shares outstanding 41,268 40,529 40,353 42,526 44,028
Shareholders' equity $ 723,648 $ 710,667 $ 693,651 $ 670,963 $ 694,642
Per-share 17.54 17.54 17.19 15.78 15.78
Total assets 1,597,569 1,544,419 1,666,012 1,561,460 1,605,640
Working capital 82,584 24,445 55,861 59,805 67,113
Current ratio 1.5 to 1 1.1 to 1 1.4 to 1 1.4 to 1 1.4 to 1
Real estate developments - noncurrent $ 42,050 $ 47,840 $ 62,628 $ 60,810 $ 57,690
Investments - noncurrent 32,923 33,021 183,141 158,726 159,068
Capital Construction Fund 208,400 158,737 150,405 145,391 143,303
Long-term debt - noncurrent 247,789 207,378 330,766 277,570 255,766
Debt to debt plus capital 26.2% 24.2% 34.2% 30.9% 33.1%
1 Prior year amounts restated for amounts treated as discontinued operations.
`
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.
FORWARD-LOOKING STATEMENTS
The Company, from time to time, may make or may have made certain
forward-looking statements, whether orally or in writing, such as forecasts and
projections of the Company's future performance or statements of management's
plans and objectives. These statements are "forward-looking" statements as that
term is defined in the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements may be contained in, among other things, Securities
and Exchange Commission ("SEC") filings, such as the Forms 10-K, 10-Q and 8-K,
press releases made by the Company, the Company's Internet Web sites (including
Web sites of its subsidiaries), and oral statements made by the officers of the
Company. Except for historical information contained in these written or oral
communications, such communications contain forward-looking statements. These
forward-looking statements involve a number of risks and uncertainties that
could cause actual results to differ materially from those projected in the
statements, including, but not limited to: (1) the timing and outcome of current
Hawaii labor negotiations; (2) labor relations in Hawaii, the U.S. Pacific
Coast, Guam and other locations where the Company has operations; (3) impact on
the Company of acts of terrorism; (4) economic conditions in Hawaii and
elsewhere; (5) market demand; (6) competitive factors and pricing pressures in
the Company's primary markets; (7) legislative and regulatory environments at
the federal, state and local levels, such as government rate regulations,
land-use regulations, government administration of the U.S. sugar program, and
modifications to or retention of cabotage laws; (8) acts of nature, including
but not limited to, drought, greater than normal rainfall and hurricanes; (9)
fuel prices; (10) raw sugar prices; (11) risks associated with current or future
litigation and resolution of tax issues with the IRS and state tax authorities;
(12) the performance of unconsolidated affiliates and ventures; and (13) 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
Consolidated Earnings and Revenue: Net income in 2002 was $58,156,000,
or $1.42 per basic share, versus $110,628,000, or $2.73 per basic share, in
2001, and $90,574,000, or $2.21 per basic share, in 2000. Revenue in 2002 was
$1,088,885,000, compared with revenue of $1,189,152,000 in 2001 and
$1,056,179,000 in 2000.
Accounting Changes and Significant Unusual Transactions
2002: There were no significant accounting changes or significant
unusual transactions in 2002.
2001: Results for 2001 include the sales of the Company's marketable
equity securities. The sales of these securities resulted in cash receipts of
approximately $134,722,000, pre-tax gains of approximately $125,478,000 and
after-tax gains of about $77,788,000 ($1.92 per basic share). The Company also
donated appreciated stock with an approximate fair value of $7,500,000 to its
charitable foundation. These sales are described more fully in Note 5 to the
consolidated financial statements included in Item 8.
The Company reduced the carrying value of its equity investments in C&H
Sugar Company, Inc. ("C&H") by $28,600,000. This resulted in an after-tax charge
of $17,732,000 ($0.44 per basic share). In addition, the Company wrote off
$4,823,000 of power generation equipment, resulting in a $3,087,000 after-tax
charge to earnings ($0.08 per basic share). These impairments are discussed more
fully in Note 4 to the consolidated financial statements included in Item 8.
The Company ceased the operations of and abandoned its panelboard
manufacturing subsidiary on Maui. This discontinued operation resulted in a
$9,185,000 after-tax charge to earnings ($0.23 per basic share). This is
described in Note 3 to the consolidated financial statements included in Item 8.
2000: The Company made two changes in accounting methods (see Note 2 to
the consolidated financial statements). The first change was for vessel
drydocking costs at its subsidiary, Matson Navigation Company, Inc. ("Matson").
Previously, the estimated costs for future drydocking of vessels were accrued in
advance of the drydocking. Subsequent payments were charged against the accrued
liability. Under the new method, drydocking expenditures that benefit future
periods are capitalized and depreciated. This change increased 2000 net income
by $12,250,000 (net of income tax expense of $7,668,000), or $0.29 per basic
share. The second change was for the presentation of certain costs recorded in
the ocean transportation and property leasing segments, which previously were
recorded as an offset to revenue. This change did not affect net income.
RESULTS OF INDUSTRY SEGMENT OPERATIONS
Detailed information related to the operations and financial
performance of the Company's Industry Segments is included in Note 14 of Item 8
"Financial Statements and Supplementary Data." The following information should
be read in relation to information contained in that Note.
2002 Compared with 2001
Transportation - Ocean Transportation revenue of $686,927,000 for 2002
was one percent higher than the $682,272,000 reported in 2001. The higher
revenue was due mainly to rate actions and a recovery, in 2002, of cargo volumes
that had declined immediately following the terrorist events of September 11,
2001, partially offset by revenue losses from U.S. Pacific Coast labor
disruptions experienced in the fourth quarter of 2002.
Operating profit of $42,430,000 declined 30 percent from the
$60,704,000 reported for 2001. The decline in operating profit resulted
primarily from (1) lost revenue and increased costs caused by fourth quarter
2002 disruptions in U.S. Pacific Coast ports, (2) higher pension and health plan
expense, (3) lower productivity at Matson's Sand Island terminal, (4) the 2001
gain from the sale of two tugboats, (5) barge drydockings in Hawaii early in
2002 that increased third-party service costs, and (6) the 2002 write-off of
assets made obsolete by the replacement of two cranes at the Company's Sand
Island terminal. These unfavorable factors were offset partially by operating
one fewer vessel in the Hawaii Service during most of 2002 and increased
contract cargo carriage. Matson's share of the Sea Star Line, LLC and SSA
Terminals, LLC joint venture losses, included in operating profit, was less than
its share of losses recorded in 2001.
For 2002 compared with 2001, Hawaii Service container volume was two
percent higher, Hawaii Service automobile volume was two percent lower and Guam
Service container volume was six percent lower. The increased Hawaii Service
container volume was due, in part, to the lower than normal 2001 fourth quarter
cargo that was affected adversely by terrorist events of September 11, 2001.
2002 2001
---- ----
Hawaii Service container volume 152,500 149,600
Hawaii Service automobile volume 120,500 122,400
Guam Service container volume 16,300 17,300
In January 2002, Matson reduced the number of vessels in the Hawaii
Service from eight to seven. An eighth vessel was returned to the regular Hawaii
Service in December 2002 to help alleviate the cargo backlogs that resulted from
the previously discussed port disruptions. In January 2002, Matson sold two
vessels to Sea Star Line, LLC for $17,000,000, which approximated the vessels'
carrying value.
Due to higher fuel costs, Matson increased its fuel surcharge from 3.25
percent to 4.75 percent in May 2002 and to six percent in October 2002 in Hawaii
and in November 2002 in Guam. Effective March 3 2002, the surcharge was
increased to 7.5 percent. In January 2003, Matson implemented a terminal
handling charge in its Hawaii Service of $200 per container for westbound
freight, $100 per container for eastbound freight, and $30 per automobile. The
charge is intended to recover a portion of the increased costs associated with
the movement of cargo through terminal facilities on the Pacific Coast and in
Hawaii.
In May 2002, the International Longshore and Warehouse Union ("ILWU")
and the Pacific Maritime Association ("PMA"), of which Matson is a member, began
negotiations on the contract that governs longshore labor for the U.S. Pacific
Coast marine terminals. The contract was extended from July 1 through September
2, after which the ILWU declined further extensions. On September 29, the PMA
ordered terminal operators and shippers to close 29 Pacific Coast ports; Matson
operates ships through four of these ports. On October 8, following efforts by
federal mediators to resolve the deadlock, President George W. Bush, invoking
provisions of the Taft-Hartley Act, requested that the San Francisco Federal
Court issue an order requiring that the ports be re-opened and longshore workers
be ordered back to work for an 80-day cooling off period. The Federal Court
approved the order, and the ports were re-opened on October 8. In December, the
ILWU and the PMA reached agreement on the terms of a new contract. The agreement
was ratified by the ILWU members in January 2003. The estimated impact of the
port disruptions on 2002 operating profit was approximately $13.6 million. The
separate Hawaii labor agreement with the ILWU Local 142 was scheduled to expire
on July 1, 2002, but was extended. A new six-year contract was ratified in
January 2003. The impact of the new ILWU agreements will result in increased
terminal handling costs for Matson, especially in the later years of the
contract.
On December 8, 2002, Typhoon Pongsona hit the Island of Guam, causing
extensive property and economic damage to the Island, but only minor damage to
Matson's office and equipment. Port operations subsequently have been restored,
supporting the Island community as it rebuilds.
Transportation - Intermodal Services provides intermodal marketing and
trucking brokerage services throughout North America. Revenue was $195,114,000
for 2002, compared with $121,960,000 in 2001. Operating profit was $3,068,000
for 2002, compared with $1,560,000 earned in 2001. The 2002 revenue growth was
primarily the result of new business. The revenue for intermodal services
includes the total amount billed to customers for transportation services. The
primary costs of the business include purchased transportation for that cargo.
As a result, the operating profit margins for this business are consistently
lower than other A&B businesses. The primary operating profit and investment
risk in the intermodal business is the quality of receivables, which are
monitored closely by management.
Property Development and Management - Leasing revenue, before
subtracting amounts treated as discontinued operations, was $73,087,000 for
2002, or three percent higher than the $70,685,000 reported in 2001. Operating
profit, also before subtracting discontinued operations, was $32,905,000 for
2002, or four percent lower than the $34,139,000 earned in 2001. The decrease in
operating profit was due primarily to lower occupancies, increased operating
costs, and additional maintenance expense to repair a siding problem on a
commercial building. In 2002, occupancy levels for Mainland properties averaged
92 percent, versus 93 percent in 2001. Mainland occupancy declined, due
principally to vacancies resulting from two tenant bankruptcies. In 2002,
occupancy levels for Hawaii properties averaged 89 percent, versus 90 percent in
2001. Hawaii occupancy declined, due primarily to an office vacancy that
occurred in late 2001 and which was not re-tenanted until July 2002.
As with any large real estate portfolio of commercial properties,
occupancy levels will vary between reporting periods based on known lease
expirations, unanticipated lease terminations, and properties sold and purchased
in the interim periods. The Company's portfolio includes leases covering a wide
range of space sizes and income, with no necessary correlation between lease
size and lease income. For example, a large lease covering 480,000 square feet
of industrial warehouse space in Ontario, California expired in December 2002.
Although this lease constitutes approximately ten percent of the total space in
the Company's portfolio, it represents only 2.5 percent of the portfolio's
annual leasing revenue. As in the case of all space that is vacant or
anticipated to be vacant, this industrial space is being actively marketed and a
new tenant has leased approximately 21 percent of the space and has an option to
lease 26 percent of the remaining space.
Property Development and Management - Sales, before subtracting amounts
treated as discontinued operations, had revenue of $92,965,000 and operating
profit of $19,418,000 in 2002. This was primarily the result of sales of a
shopping center and an industrial complex in California, a seven-building
distribution complex in Texas, a shopping center in Colorado, several small
Hawaii commercial properties, 27 residential properties, an 85-acre parcel in
Upcountry Maui and nine business parcels on Oahu and Maui. Revenue of
$89,156,000 and operating profit of $17,926,000 in 2001 resulted from the sales
of a 14-acre parcel at Maui Business Park to Wal-Mart, three commercial
properties in Bainbridge, Washington, a four-acre parcel on Maui, 82 residential
properties and a 68-acre parcel for highway widening on Maui.
Discontinued Operations: Properties - During 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. The revenue, operating profit, and after-tax effects of
these transactions for 2002 and 2001 were as follows (in thousands, except per
share amounts):
2002 2001
---------- ---------
Sales Revenue $ 65,434 --
Leasing Revenue $ 6,501 $ 9,913
Sales Operating Profit $ 14,559 --
Leasing Operating Profit $ 4,006 $ 5,446
After-tax Earnings $ 11,658 $ 3,431
Basic Earnings Per Share $ 0.29 $ 0.09
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.
As permitted by Statement of Financial Accounting Standards ("SFAS")
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
comparable property sales that were initiated prior to the Company's adoption of
this accounting standard on January 1, 2001, were not reported as discontinued
operations. During 2001, the Company sold three properties in Washington State
for an aggregate price of $15.6 million and a $2.1 million after-tax gain. Since
these transactions were initiated prior to the adoption of SFAS No. 144,
accounting treatment as discontinued operations was not required.
Food Products revenue of $112,727,000 for 2002 was six percent higher
than the $105,976,000 reported in 2001. Operating profit for 2002 was
$13,841,000, compared with $5,660,000 reported in 2001. This operating profit
improvement was due primarily to higher production and modestly higher sugar
prices and the sale, for $1.2 million, of obsolete equipment in 2002. Operating
profit in 2001 included a charge of $4.8 million for the write-off of power
generation equipment that no longer was needed in the business and a one-time
$5,000,000 (pre-tax) distribution from Hawaiian Sugar & Transportation
Cooperative ("HS&TC"), the cooperative that transports and markets Hawaii sugar.
Even with the wet harvesting conditions early in 2002, total year sugar
production was 215,900 tons, or 13 percent higher than the 191,500 tons produced
during 2001. Sugar production and costs in 2001 were affected adversely by
drought conditions. Although the 2002 harvest season was extended several weeks,
the Company expects to begin the 2003 harvest as scheduled in February. For
2003, production is expected to be comparable with 2002; however, weather
conditions, which can change quickly and unexpectedly, could affect production
and yields significantly.
Approximately 95 percent of the Company's sugar production was sold to
HS&TC during 2002 under a standard marketing contract. HS&TC sells, under a
supply agreement that expires in June 2003, 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. HS&TC has agreed in principle
to a revised agreement with C&H through the 2008 crop. HS&TC's operations
include chartering its integrated tug and barge unit under short-term
transportation arrangements. In recent years, these have included charters to
North Korea and Indonesia. To the extent that HS&TC is not able to continue
these charters in 2003, due to political unrest or trade restrictions, the net
sales price to the Company may be lower.
For 2002, the actual raw sugar prices averaged $21.57/cwt, compared
with $21.12/cwt for 2001. The New York No. 14 Contract settlement price, which
is the benchmark for most of the Company's raw sugar sales, averaged $20.85/cwt
for 2002, and $21.09/cwt for 2001. As of December 31, 2002, the Company had
forward priced approximately 33 percent of its expected 2003 sugar production at
approximately $22.00/cwt.
The collective bargaining agreement between the Company's Maui sugar
plantation and the ILWU Local 142 expired at the end of January 2003. A
tentative agreement has subsequently been reached, but has not yet been
ratified.
Coffee production of 2.8 million pounds for 2002 was approximately one
million pounds lower than the 3.8 million pounds produced in 2001. During 2002,
the Company recorded an expense of $250,000 to reduce the carrying cost of
inventory to the amount it expects to realize when it is sold. Coffee prices
continue to be affected adversely by world oversupply and near record lows.
Operating profit for the food products segment also includes the
Company's share of equity in earnings or losses in C&H, a sugar refinery to
which HS&TC sells substantially all of its raw sugar and that is partially owned
by the Company. During 2002, the Company recorded no equity in earnings or
losses of C&H since C&H had estimated break-even operations. During 2001, the
Company recorded $1.6 million for its share of C&H losses. The closure of a
competing refinery in Sugarland Texas could have a stabilizing influence on
C&H's business (see Notes 5 and 13 of Item 8).
In 2001, the Company ceased the operations of, and abandoned, its
panelboard manufacturing business operated by Hawaiian DuraGreen, Inc., a wholly
owned subsidiary of A&B (reported in 2001 discontinued operations). This is
discussed further in Note 3 of Item 8 of the Company's Form 10-K for the year
ended December 31, 2001.
Other operating profit for 2001 included the revenue and gain from the
sale of the Company's marketable equity securities. The sales are described in
Note 5 of Item 8.
2001 Compared with 2000
Transportation - Ocean Transportation revenue of $682,272,000 was
$32,391,000, or five percent, lower than the $714,663,000 reported for 2000.
Operating profit of $60,704,000 was $33,321,000, or 35 percent, lower than the
$94,025,000 reported during the prior year. The revenue and operating profit
declines were directly attributable to cargo volumes and terminal productivity
issues.
For 2001 compared with 2000, Hawaii Service container volume was one
percent lower, Hawaii Service automobile volume was seven percent lower and Guam
Service container volume was five percent lower.
2001 2000
---- ----
Hawaii Service container volume 149,600 151,500
Hawaii Service automobile volume 122,400 132,200
Guam Service container volume 17,300 18,200
The lower cargo and automobile volumes were primarily the result of the
weakened Hawaii economy following the September 11, 2001 terrorist attacks on
the United States of America. These attacks had a significant adverse effect on
air travel. This reduced Hawaii tourism and, in turn, significantly reduced the
fourth quarter carriage of commercial cargo and automobiles to Hawaii.
In addition, transition problems related to a terminal improvement
project at Matson's Honolulu terminal reduced productivity during the fourth
quarter. Lower results from Matson's investments in a shipping operation in
Puerto Rico and from a stevedoring joint venture also adversely affected the
total-year results.
A 3.5 percent increase in Hawaii Service rates announced in 2000 took
effect in February 2001. Total fuel costs decreased by $7,609,000 in 2001 versus
2000, resulting in a decrease in the fuel surcharge from 4.25 percent to 3.25
percent.
Transportation - Intermodal Services revenue was $121,960,000 in 2001
compared with $132,403,000 in 2000. Operating profit was $1,560,000 for 2001
compared with a loss of $293,000 for 2000. The decline in revenue in 2001 was
due principally to the commerce related effects of the September 11 terrorist
attacks.
Property Development and Management - Leasing revenue, before
subtracting amounts treated as discontinued operations, of $70,685,000 was 14
percent higher than 2000 revenue of $62,105,000. Operating profit, also before
subtracting discontinued operations, of $34,139,000 was 13 percent higher than
2000 operating profit of $30,120,000. These increases were due primarily to
additions to the leased property portfolio, higher occupancy levels in the
Hawaii portfolio, and increased royalty revenue. Occupancy levels for the
Mainland portfolio averaged 93 percent in 2001, versus 96 percent in 2000. The
Company owned four million square feet of leasable improved property on the
Mainland at year-end 2001, the same as at year-end 2000. Occupancy levels for
the Hawaii properties averaged 90 percent in 2001, versus 86 percent in 2000.
The Company owned 1.5 million square feet of leasable improved property in
Hawaii at year-end 2001, compared with 1.2 million square feet at year-end 2000.
Property Development and Management - Sales revenue, before subtracting
amounts treated as discontinued operations, was $89,156,000 for 2001 compared
with $46,322,000 of revenue a year earlier. Operating profit, also before
subtracting discontinued operations, was $17,926,000 for 2001 compared with
operating profit of $24,228,000 for 2000. Sales in 2001 included a 14-acre
parcel at Maui Business Park to Wal-Mart, three commercial properties in
Bainbridge, Washington, a four-acre parcel on Maui, 82 residential properties
and a 68-acre parcel for highway widening on Maui. Sales in 2000 included a
ground lease under a Costco store, a 13-acre parcel at Maui Business Park, 16
business parcels, and 28 residential properties.
Discontinued Operations: Properties - As previously discussed, certain
property sold during 2002 or intended to be sold within one year were
reclassified to discontinued operations. The revenue, operating profit, and
after-tax effects of these transactions for 2001 and 2000 were as follows (in
thousands, except per share amounts):
2001 2000
---- ----
Leasing Revenue $ 9,913 $ 10,010
Leasing Operating Profit $ 5,446 $ 5,517
After-tax Earnings $ 3,431 $ 3,476
Basic Earnings Per Share $ 0.09 $ 0.09
Food Products revenue of $105,976,000 in 2001 compared with revenue of
$107,510,000 in 2000. Operating profit of $5,660,000 in 2001 was 25 percent
lower than the $7,522,000 earned in 2000. The benefits of higher domestic raw
sugar and molasses prices throughout 2001, a one-time $5,000,000 distribution
from HS&TC, and improved sales of natural sugars under the Maui Brand(R) label
were more than offset by a write-off of power generation equipment that no
longer was needed in the business, lower raw sugar production and power sales,
and lower results from the Company's minority investment in C&H. The previously
discussed impairment loss related to the Company's investment in C&H was not
included in segment operating profit.
HC&S produced 191,500 tons of raw sugar during 2001, compared with
210,300 tons a year earlier. This lower production was the result of harvesting
nearly 13 percent fewer acres in 2001, compared with 2000, combined with
extended drought conditions. Drought conditions on Maui lessened in late 2001
compared with 2000 and early 2001. Average raw sugar sales prices for 2001 were
$21.12/cwt, compared with $19.10/cwt for 2000.
As previously noted, in 2001, the Company ceased the operations of and
abandoned its panelboard manufacturing business operated by Hawaiian DuraGreen,
Inc.
Other operating profit of $127,635,000 for 2001 was due primarily to
the sales of marketable equity securities during 2001. This is described more
fully in Note 5 of the consolidated financial statements included in Item 8.
ECONOMIC OUTLOOK
In early 2003, Hawaii's economy continued to grow modestly. That growth
was drawing on a continuing recovery in the visitor industry as well as strength
in construction and home sales.
Projections for Hawaii's growth have to be viewed, however, in the
context of a still-uncertain U.S. economy and weakness in Japan's economy. In
addition, the situations with Iraq and North Korea present real risks to
Hawaii's economy. These conflicts could have direct and immediate effects on
Hawaii's tourism, but the ramifications are difficult to forecast. For example,
although tourism declined sharply during the 1991 conflict with Iraq, it
recovered relatively quickly.
Nonetheless, the late-January release of the State of Hawaii's index of
leading economic indicators was higher for the ninth consecutive month. Six of
its ten measures were positive. This index is designed to signal changes in
Hawaii's economic environment five to ten months in advance.
The prominent visitor industry is enjoying an early surge in 2003,
following positive performance in the important winter months. The 30th annual
Honolulu Marathon, for example, held in December 2002, had 17,300 participants
from Japan, up from 9,200 the prior year, an 88 percent rise. On a sustained
basis, however, travelers from the "U.S. West" have been the key to the visitor
industry's improvement.
The sales of existing homes and condominium properties on Oahu and all
of Hawaii's neighbor islands continue to be strong, with the number of
transactions, median prices and the total dollar sales volume all rising. This
demand, in turn, is being reflected in continuing strength in construction and
private construction authorizations. Total third quarter private authorizations
were up 18 percent from a year ago, with the residential portion up 35 percent.
Barring disruptions from any of the external factors mentioned above,
moderately positive trends, especially in the visitor industry and in real
estate, may provide more favorable circumstances for A&B's businesses than has
been the case since early 2001.
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 $504,494,000 at December 31, 2002, a decrease of $23,362,000 from
December 31, 2001. This net decrease was due primarily to $34,000,000 in lower
available balances on variable rate facilities (including both short- and
long-term facilities) following the payment of federal income taxes related to
the December 2001 bank stock sales and deposits into the CCF during 2002, and
lower cash balances, partially offset by higher receivables of $25,000,000.
Long-term debt increased $40,411,000 since the end of 2001, reflecting
a combination of operating, working capital, and capital expenditure needs. A&B
renewed, and extended for one year, its uncommitted $70 million credit line.
Matson renewed, and extended for two years, its $50,000,000 and $40,000,000
revolving credit facilities. These latter two facilities also have one-year term
options.
Working Capital: Working capital was $82,584,000 at December 31, 2002,
an increase of $58,139,000 from the balance at the end of 2001. The higher
working capital was due primarily to the payment of federal income taxes in
early 2002 (which were unusually high at December 31, 2001, due to the gain
realized from the December 2001 sale of the Company's BancWest Corporation
holdings), higher real estate inventory held for sale (due principally to
classification of a commercial property as held for sale), higher trade
receivables (due principally to increased intermodal and ocean freight revenue
and to a real-estate note receivable reclassified from non-current to current),
and a reduction in the current portion of long-term debt, partially offset by
lower cash balances and the sale, in January 2002, of two vessels that had been
included in current assets.
At December 31, 2002, the Company had receivables totaling
$155,544,000, compared with $130,491,000 a year earlier. These amounts were net
of allowances for doubtful accounts of $10,988,000 and $7,252,000, respectively.
The increase in receivables was mainly the result of higher cargo and intermodal
business during the fourth quarter of 2002 and the reclassification of
approximately $5 million of real estate receivable balances to current. The
Company's management believes that the quality of these receivables is good and
that its reserves are adequate.
Capital Construction Fund: During 2002, the Company deposited
$58,163,000 into the CCF and withdrew, for qualified purposes, approximately
$4,500,000. The additional deposits reflect contributions from the sale of two
vessels in early 2002 and amounts that may be used for the purchase of new
vessels in 2003 and 2004.
Property and Capital Additions: Property, at cost, before accumulated
depreciation and amortization (see Note 6), declined by $52,615,000 since
December 31, 2001. This reflects primarily the sales of $71,415,000 of
commercial real estate, the write-off of fully depreciated capitalized software
and hardware of approximately $33,600,000, the disposal of substantially
depreciated straddle carriers, cranes, and other equipment totaling
approximately $32,000,000, the reclassification to current assets of $15,600,000
for a commercial property expected to be sold within the next year, and the
sales of approximately $5 million of other fixed assets. These reductions in
property were partially offset by current year capital expenditures of
approximately $44,613,000 and the purchases of new commercial real estate
property of approximately $60,375,000, using the proceeds from real property
sold on a tax-deferred basis. This latter item is described more fully under the
caption "Tax-Deferred Real Estate Exchanges."
Capital additions comprise capital expenditures for property and
capital expenditures for real property, including the re-deployment of non-cash
tax-deferred funds to purchase property that are noted under "Non-cash
Activities" on the Statements of Cash Flows, but exclude capital expenditures
for real-estate developments held for sale, since this latter item is treated as
inventory on the Balance Sheets. Capital additions during 2002 were
$104,988,000, compared with $141,440,000 in 2001. Ocean transportation capital
additions in 2002 of $10,451,000 were primarily for terminal improvements and
vessel modifications. Property development and management capital additions in
2002 of $83,656,000 included $60,375,000 for the re-deployment of tax-deferred
sales proceeds into similar income producing assets and $23,281,000 for the
development of real estate, for improvements to leased properties, and for the
purchase of developed commercial property. Food products capital additions in
2002 of $9,943,000 were primarily for routine factory modifications and
replacements.
Cash Flows: Cash Flows from Operating Activities were $55,654,000 for
2002, compared with Cash Flows from Operating Activities of $150,968,000
for 2001. This decline of $95,314,000 was due principally to the timing of
payments for income taxes that, in large part, resulted from the December 2001
sale of the Company's stock in BancWest Corporation, changes in accounts and
notes receivable, and the timing of sales and expenditures for real estate
development projects that are classified as a current asset as Real Estate Held
for Sale.
INVESTMENTS, COMMITMENTS AND CONTINGENCIES
Contractual Obligations and Commitments: At December 31, 2002 and 2001,
the Company had the following contractual obligations (in thousands):
2002 2001 Note
-------- -------- ----
Long-term debt $247,789 $207,378 8
Operating lease obligations $155,514 $146,521 9
Sand Island revenue bonds $ 10,974 $ 10,431 9
The payment schedules associated with the December 31, 2002 obligations
are included in the referenced Notes 8 and 9 of the consolidated financial
statements in Item 8
Investments: The Company has the following principal joint ventures,
each of which is accounted for following the equity method of accounting:
Kukui'Ula Development Company: During 2002, the Company accelerated
development plans for its Kukui'Ula project on the island of Kauai by entering
into a joint venture with an affiliate of DMB Associates, Inc. It is anticipated
that the Company will contribute to the venture, land, and existing
improvements, totaling approximately $28 million. DMB will fund all future
development costs, subject to an option available to the Company, which
diminishes over time, to participate in a portion of that funding. The Kukui'Ula
project comprises 1,045 acres on the southern coast of Kauai, adjacent to the
Poipu resort. The project consists of 837 fully entitled acres planned for a
resort, an 18-hole golf course, residential and commercial use, and parks and
open space. The remaining 208 acres are partially entitled.
Kai Lani and HoloHolo Ku: The Company has a minority interest in Kai
Lani, a limited liability company that is building 116 townhouse condominium
units at Ko' Olina, a resort community on the island of Oahu. It also has a
minority interest in HoloHolo Ku, a limited liability company that is building
44 single-family condominium homes in Waimea on the island of Hawaii. The
Company has notes receivable totaling $6.6 million from these two investments.
SSA Terminals: Matson's ownership interest in SSA Terminals, LLC
("SSAT"), a West Coast stevedoring and terminal service provider, was reduced to
35 percent from 49.5 percent, because of an agreement to eliminate the majority
owner's preferred cash return.
Sea Star Line, LLC: The operating agreem