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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
Commission file number 0-565
ALEXANDER & BALDWIN, INC.
(Exact name of registrant as specified in its charter)
Hawaii 99-0032630
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
822 Bishop Street
Post Office Box 3440, Honolulu, Hawaii 96801
(Address of principal executive offices and zip code)
808-525-6611
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
(Title of Class)
Number of shares of Common Stock outstanding at February 9, 2004:
42,307,828
Aggregate market value of Common Stock held by non-affiliates at June 30, 2003:
$1,019,843,484
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |X| No _____
Documents Incorporated By Reference
Portions of Registrant's Proxy Statement dated March 8, 2004 (Part III of
Form 10-K)
TABLE OF CONTENTS
PART I
Page
Items 1 & 2. Business and Properties............................................................ 1
A. Transportation..................................................................... 1
(1) Freight Services.......................................................... 1
(2) Vessels................................................................... 2
(3) Terminals................................................................. 2
(4) Logistics and Other Services.............................................. 4
(5) Competition............................................................... 4
(6) Labor Relations........................................................... 4
(7) Rate Regulation........................................................... 5
B. Property Development and Management................................................ 5
(1) General................................................................... 5
(2) Planning and Zoning....................................................... 6
(3) Residential Projects...................................................... 6
(4) Commercial Properties..................................................... 8
C. Food Products...................................................................... 11
(1) Production................................................................ 11
(2) Marketing of Sugar and Coffee............................................. 11
(3) Competition and Sugar Legislation......................................... 12
(4) Properties and Water...................................................... 13
D. Employees and Labor Relations...................................................... 13
E. Energy............................................................................. 14
F. Available Information.............................................................. 15
Item 3. Legal Proceedings.................................................................. 15
Item 4. Submission of Matters to a Vote of Security Holders................................ 16
Executive Officers of the Registrant................................................................. 16
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.............................................. 17
Item 6. Selected Financial Data............................................................ 19
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................. 21
Item 7A. Quantitative and Qualitative Disclosures About Market Risk......................... 40
Item 8. Financial Statements and Supplementary Data........................................ 42
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure............................................................... 81
Item 9A. Controls and Procedures............................................................ 81
A. Disclosure Controls and Procedures................................................. 81
B. Internal Control over Financial Reporting.......................................... 81
PART III
Item 10. Directors and Executive Officers of the Registrant................................. 82
A. Directors.......................................................................... 82
B. Executive Officers................................................................. 82
C. Audit Committee Financial Expert................................................... 83
D. Code of Ethics..................................................................... 83
Item 11. Executive Compensation............................................................. 83
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters........................................................ 83
Item 13. Certain Relationships and Related Transactions..................................... 83
Item 14. Principal Accountant Fees and Services............................................. 84
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................... 85
A. Financial Statements............................................................... 85
B. Financial Statement Schedules...................................................... 85
C. Exhibits Required by Item 601 of Regulation S-K.................................... 85
D. Reports on Form 8-K................................................................ 91
Signatures........................................................................................... 92
Independent Auditors' Consent........................................................................ 94
ALEXANDER & BALDWIN, INC.
FORM 10-K
Annual Report for the Fiscal Year
Ended December 31, 2003
PART I
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
Alexander & Baldwin, Inc. ("A&B") is a diversified corporation with
most of its operations centered in Hawaii. It was founded in 1870 and
incorporated in 1900. Ocean transportation operations, related shoreside
operations in Hawaii, and intermodal, truck brokerage and logistics services are
conducted by a wholly-owned subsidiary, Matson Navigation Company, Inc.
("Matson") and several Matson subsidiaries. Property development and food
products operations are conducted by A&B and certain other subsidiaries of A&B.
The business industries of A&B are as follows:
A. Transportation - carrying freight, primarily between various
ports on the U.S. Pacific Coast and major Hawaii ports and
Guam; chartering vessels to third parties; arranging
intermodal and motor carrier services and providing logistics
services in North America; and providing terminal, stevedoring
and container equipment maintenance services in Hawaii.
B. Property Development and Management - purchasing, developing,
selling, managing, leasing and investing in commercial
(including retail, office and industrial) and residential
properties, in Hawaii and on the U.S. mainland.
C. Food Products - growing sugar cane and coffee in Hawaii;
producing bulk raw sugar, specialty food-grade sugars,
molasses and green coffee; marketing and distributing roasted
coffee and green coffee; providing sugar and molasses hauling
in Hawaii; and generating and selling electricity.
For information about the revenue, operating profits and identifiable
assets of A&B's industry segments for the three years ended December 31, 2003,
see Note 14 ("Industry Segments") to A&B's financial statements in Item 8 of
Part II below.
DESCRIPTION OF BUSINESS AND PROPERTIES
A. Transportation
(1) Freight Services
Matson's Hawaii Service offers containership freight services between
the ports of Long Beach, Oakland, Seattle, and the major ports in Hawaii on the
islands of Oahu, Kauai, Maui and Hawaii. Roll-on/roll-off service is provided
between California and the major ports in Hawaii.
Matson is the principal carrier of ocean cargo between the U.S. Pacific
Coast and Hawaii. In 2003, Matson carried approximately 162,400 containers
(compared with 152,500 in 2002) and 145,200 automobiles (compared with 120,500
in 2002) between those destinations. Principal westbound cargoes carried by
Matson to Hawaii include dry containers of mixed commodities, refrigerated
commodities, building materials, automobiles and packaged foods. Principal
eastbound cargoes carried by Matson from Hawaii include automobiles, household
goods, refrigerated containers of fresh pineapple, canned pineapple and dry
containers of mixed commodities. The preponderance of Matson's Hawaii Service
revenue is derived from the westbound carriage of containerized freight and
automobiles.
Matson's Guam Service provides containership freight services between
the U.S. Pacific Coast and Guam and Micronesia. Matson's Guam Service is a
component of the Pacific Alliance Service, a strategic alliance established by
Matson and American President Lines, Ltd. ("APL") to provide freight services
between the U.S. Pacific Coast and Hawaii, Guam and several Far East ports. In
2003, Matson carried approximately 17,800 containers (compared with 16,300 in
2002) and 4,660 automobiles (compared with 3,760 in 2002) in the Guam Service.
The alliance currently utilizes three Matson vessels and two APL vessels.
Matson's Mid-Pacific Service offers container and conventional freight
services between the U.S. Pacific Coast and the ports of Kwajalein, Ebeye and
Majuro in the Republic of the Marshall Islands and Johnston Island, all via
Honolulu.
See "Rate Regulation" below for a discussion of Matson's freight rates.
(2) Vessels
Matson's fleet consists of ten containerships, three combination
container/trailerships, including a combination ship time-chartered from a third
party, one roll-on/roll-off barge, two container barges equipped with cranes
that service the neighbor islands of Hawaii, and one container barge equipped
with cranes in the Mid-Pacific service. The 16 Matson-owned vessels in its fleet
represent an investment of approximately $745 million expended over the past 33
years. The majority of vessels in the Matson fleet have been acquired with the
assistance of withdrawals from a Capital Construction Fund established under
Section 607 of the Merchant Marine Act, 1936, as amended.
Matson is actively pursuing a vessel renewal program because its fleet
is aging, with five vessels that will be more than 30 years old in 2004. In
2002, Matson contracted with Kvaerner Philadelphia Shipyard Inc. for two new
containerships for the Hawaii Service, each at a total project cost of
approximately $107 million. The first ship was delivered in the third quarter of
2003, and the second is scheduled for delivery in the third or fourth quarter of
2004.
Ships owned by Matson are described on the following page.
As a complement to its fleet, Matson owns approximately 19,600
containers, 10,700 container chassis, 500 auto-frames and miscellaneous other
equipment. Capital expenditures incurred by Matson in 2003 for vessels,
equipment and systems totaled approximately $132 million.
(3) Terminals
Matson Terminals, Inc. ("Matson Terminals"), a wholly-owned subsidiary
of Matson, provides container stevedoring, container equipment maintenance and
other terminal services for Matson and other ocean carriers at its 105-acre
marine terminal in Honolulu. Matson Terminals owns and operates seven cranes at
the terminal, which handled approximately 419,600 containers in 2003 (compared
with 378,600 in 2002) and can accommodate three vessels at one time. Matson
Terminals' lease with the State of Hawaii runs through September 2016. Matson
Terminals has completed a $32 million terminal improvement project at the
Honolulu terminal that included the conversion from a straddle carrier-based
container handling system to a wheeled chassis- and toppick-based system. The
conversion has resulted in improved productivity at the terminal, with marginal
improvements in stevedoring operations, increased storage density, and reduced
costs. In October 2003, Matson Terminals began operating a dedicated
roll-on/roll-off terminal facility in Honolulu that provides premium service to
automobile shippers and consignees.
SSA Terminals, LLC ("SSAT"), a joint venture of Matson and Stevedoring
Services of America ("SSA"), provides terminal and stevedoring services at U.S.
Pacific Coast terminal facilities in Long Beach, Oakland and Seattle.
MATSON NAVIGATION COMPANY, INC.
FLEET--2/1/04
-------------
Usable Cargo Capacity
-----------------------------------------------------
Containers Vehicles
Year Maximum Maximum ------------------------------------- --------------
Official Year Recon- Speed Deadweight Reefer
Vessel Name Number Built structed Length (Knots) (Long Tons) 20' 24' 40' 45' Slots TEUs (1) Autos Trailers
- ----------- -------- ----- -------- ---------- ------- ----------- --- --- ----- --- ------ -------- ----- --------
Diesel-Powered Ships
- --------------------
R.J. PFEIFFER....... 979814 1992 -- 713'6" 23.0 27,100 48 171 988 -- 300 2,229 -- --
MOKIHANA (2)........ 655397 1983 -- 860'2" 23.0 30,167 182 -- 1,340 -- 408 2,824 -- --
MAHIMAHI (2)........ 653424 1982 -- 860'2" 23.0 30,167 182 -- 1,340 -- 408 2,824 -- --
MANOA (2)........... 651627 1982 -- 860'2" 23.0 30,187 182 -- 1,340 -- 408 2,824 -- --
MANUKAI............. 1141163 2003 -- 711'9" 23.0 36,036 4 -- 1,294 -- 300 2,592 -- --
Steam-Powered Ships
- -------------------
KAUAI............... 621042 1980 1994 720'5 1/2" 22.5 26,308 -- 458 538 -- 300 1,626 44 --
MAUI................ 591709 1978 1993 720'5 1/2" 22.5 26,623 -- 458 538 -- 300 1,626 -- --
MATSONIA............ 553090 1973 1987 760'0" 21.5 22,501 16 128 771 -- 201 1,712 450 56
LURLINE............. 549900 1973 2003 826'6" 21.5 22,213 6 -- 865 38 246 1,821 910 55
EWA (3)............. 530140 1972 1978 787'8" 21.0 38,747 286 276 681 -- 228 1,979 -- --
CHIEF GADAO (3)..... 530138 1971 1978 787'8" 21.0 37,346 230 464 597 -- 274 1,981 -- --
LIHUE (3)........... 530137 1971 1978 787'8" 21.0 38,656 286 276 681 -- 188 1,979 -- --
Barges
- ------
WAIALEALE (4)....... 978516 1991 -- 345'0" -- 5,621 -- -- -- 35 -- 230 45
ISLANDER (5)........ 933804 1988 -- 372'0" -- 6,837 -- 276 24 70 380 -- --
MAUNA LOA (5)....... 676973 1984 -- 350'0" -- 4,658 -- 144 72 84 316 -- --
HALEAKALA (5)....... 676972 1984 -- 350'0" -- 4,658 -- 144 72 84 316 -- --
Molasses
----------
Vessel Name Short Tons
- ----------- ----------
Diesel-Powered Ships
- --------------------
R.J. PFEIFFER....... --
MOKIHANA (2)........ --
MAHIMAHI (2)........ --
MANOA (2)........... --
MANUKAI............. --
Steam-Powered Ships
- -------------------
KAUAI............... 2,600
MAUI................ 2,600
MATSONIA............ 4,300
LURLINE............. 2,100
EWA (3)............. --
CHIEF GADAO (3)..... --
LIHUE (3)........... --
Barges
- ------
WAIALEALE (4)....... --
ISLANDER (5)........ --
MAUNA LOA (5)....... 2,100
HALEAKALA (5)....... 2,100
- --------
(1) "Twenty-foot Equivalent Units" (including trailers). TEU is a standard
measure of cargo volume correlated to the volume of a standard 20-foot dry
cargo container.
(2) Time-chartered to APL until February 2006.
(3) Reserve Status.
(4) Roll-on/Roll-off Barge.
(5) Container Barge.
Capital expenditures incurred by Matson Terminals in 2003 for terminals
and equipment totaled approximately $1 million.
(4) Logistics and Other Services
Matson Integrated Logistics, Inc. ("Matson Integrated Logistics"), a
wholly-owned subsidiary of Matson, arranges rail, highway, air, ocean and other
surface transportation and provides other third-party logistics services for
North American shippers. Through volume purchases of rail, motor carrier, air
and ocean transportation services, augmented by such services as shipment
tracing and single-vendor invoicing, Matson Integrated Logistics is able to
reduce transportation costs for its customers. Matson Integrated Logistics
operates eight regional operating centers and has 23 sales offices across the
U.S. mainland.
Matson Logistics Solutions, Inc. ("Matson Logistics"), a wholly-owned
subsidiary of Matson, provides third-party logistics services primarily for the
automotive industry in Hawaii, Alaska, Puerto Rico and Guam-Micronesia.
(5) Competition
Matson's Hawaii Service and Guam Service have one major containership
competitor that serves Long Beach, Oakland, Tacoma, Honolulu and Guam. Other
competitors in the Hawaii Service include two common carrier barge services,
unregulated proprietary and contract carriers of bulk cargoes, and air cargo
service providers. Although air freight competition is intense for
time-sensitive and perishable cargoes, inroads by such competition in terms of
cargo volume are limited by the amount of cargo space available in passenger
aircraft and by generally higher air freight rates.
Matson vessels are operated on schedules which make available to
shippers and consignees regular day-of-the-week sailings from the U.S. Pacific
Coast and day-of-the-week arrivals in Hawaii. Under its current schedule, Matson
operates 208 Hawaii round-trip voyages per year, double the westbound voyages of
its nearest competitor, and arranges additional voyages when cargo volumes
require additional capacity. This service is attractive to customers because
more frequent arrivals permit customers to reduce inventory costs. Matson also
competes by offering a more comprehensive service to customers, supported by the
scope of its equipment, its efficiency and experience in handling containerized
cargo, and competitive pricing.
The carriage of cargo between the U.S. Pacific Coast and Hawaii on
foreign-built or foreign-documented vessels is prohibited by Section 27 of the
Merchant Marine Act, 1920, commonly referred to as the Jones Act. However,
foreign-flag vessels carrying cargo to Hawaii from non-U.S. locations provide
indirect competition for Matson's Hawaii Service. Far East countries, Australia,
New Zealand and South Pacific islands have direct foreign-flag services to
Hawaii.
In response to coordinated efforts by various interests to convince
Congress to repeal the Jones Act, in 1995 Matson joined other businesses and
organizations to form the Maritime Cabotage Task Force, which supports the
retention of the Jones Act and other cabotage laws. Repeal of the Jones Act
would allow all foreign-flag vessel operators, which do not have to abide by
U.S. laws and regulations, to sail between U.S. ports in direct competition with
Matson and other U.S. operators which must comply with such laws and
regulations. The Task Force seeks to inform elected officials and the public
about the economic, national security, commercial, safety and environmental
benefits of the Jones Act and similar cabotage laws.
Matson Integrated Logistics competes for freight with a number of large
and small companies that provide surface transportation and third-party
logistics services.
(6) Labor Relations
The absence of strikes and the availability of labor through hiring
halls are important to the maintenance of profitable operations by Matson. Until
2002, when International Longshore and Warehouse Union ("ILWU") workers were
locked out for ten days on the U.S. Pacific Coast, Matson's operations had not
been disrupted significantly by labor disputes in over 30 years. See "Employees
and Labor Relations" below for a description of labor agreements to which Matson
and Matson Terminals are parties and information about certain unfunded
liabilities for multi-employer pension plans to which Matson and Matson
Terminals contribute.
(7) Rate Regulation
Matson is subject to the jurisdiction of the Surface Transportation
Board with respect to its domestic rates. A rate in the noncontiguous domestic
trade is presumed reasonable and will not be subject to investigation if the
aggregate of increases and decreases is not more than 7.5 percent above, or more
than 10 percent below, the rate in effect one year before the effective date of
the proposed rate, subject to increase or decrease by the percentage change in
the U.S. Producer Price Index. Effective January 12, 2003, Matson imposed a
terminal handling charge of $200 per container for westbound freight, $100 per
container for eastbound freight and $30 per automobile in its Hawaii Service. On
June 15, 2003, Matson instituted a $100 per container U.S. mainland terminal
handling charge for cargo moving to and from Guam. Matson increased its rates in
the Hawaii Service by $125 per westbound container and $60 per eastbound
container and increased its terminal handling charge by $25 per westbound
container and $15 per eastbound container, effective January 11, 2004. Matson
also increased its rates for moving automobiles by $25, both westbound and
eastbound, and its terminal handling charge for automobiles by $5. Matson's last
general rate increase was in April 2002. No general rate increase was
implemented in 2003. Due to dramatic increases in fuel prices attributed to the
increasing likelihood of war in Iraq, Matson increased its fuel surcharge from 6
percent to 7.5 percent effective March 3, 2003. Matson reduced the fuel
surcharge from 7.5 percent to 6.5 percent effective May 4, 2003, and increased
it from 6.5 percent to 7.5 percent effective September 15, 2003.
B. Property Development and Management
(1) General
A&B and its subsidiaries, including A & B Properties, Inc., own
approximately 90,240 acres, consisting of approximately 90,000 acres in Hawaii
and approximately 240 acres elsewhere, as follows:
Location No. of Acres
-------- ------------
Oahu ................................................ 46
Maui ................................................ 68,906
Kauai ............................................... 21,045
California .......................................... 91
Texas ............................................... 47
Washington .......................................... 13
Arizona ............................................. 35
Nevada .............................................. 21
Colorado ............................................ 17
Utah ................................................ 15
------
TOTAL ............................................. 90,236
======
As described more fully in the table below, the bulk of this acreage currently
is used for agricultural and related activities, and includes pasture land,
watershed land and conservation reserves. The balance is used or planned for
development or other urban uses. An additional 3,306 acres on Maui and Kauai are
leased from third parties and, in March 2003, title to 846 acres on Kauai was
transferred to a joint venture, consisting of A&B and DMB Associates, Inc., an
Arizona-based developer, for the development of a master planned resort
residential community.
Current Use No. of Acres
----------- ------------
Hawaii
Fully entitled Urban (defined below) ........... 656
Agricultural, pasture and miscellaneous ........ 60,051
Watershed land/conservation .................... 29,290
U.S. Mainland
Fully entitled Urban ........................... 239
------
TOTAL .................................. 90,236
======
A&B and its subsidiaries are actively involved in the entire spectrum
of real estate development and ownership, including planning, zoning, financing,
constructing, purchasing, managing and leasing, selling and exchanging, and
investing in real property.
On February 6 and 7, 2004, union workers at Honolulu's two largest
concrete manufacturers, which supply most of the concrete on Oahu, went on
strike, shutting down both manufacturing operations. This shutdown had the
immediate impact of delaying the pouring of the foundation for the Hokua
project, but is not expected to have a near-term impact on construction at the
Lanikea project. Both of these projects are described below. Any prolonged
strike will delay the completion of both projects, as well as have wide-spread
impact on construction generally on Oahu. Although labor negotiations between
union and management are ongoing, it is difficult at this time to predict the
likely duration of the strike.
(2) Planning and Zoning
The entitlement process for development of property in Hawaii is both
time-consuming and costly, involving numerous State and County regulatory
approvals. For example, conversion of an agriculturally-zoned parcel to
residential zoning usually requires the following three approvals:
o amendment of the County general plan to reflect the desired
residential use;
o approval by the State Land Use Commission to reclassify the
parcel from the Agricultural district to the Urban district; and
o County approval to rezone the property to the precise
residential use desired.
The entitlement process is complicated by the conditions, restrictions
and exactions that are placed on these approvals, including, among others, the
construction of infrastructure improvements, payment of impact fees,
restrictions on the permitted uses of the land, provision of affordable housing
and/or mandatory fee sale of portions of the project.
A&B actively works with regulatory agencies, commissions and
legislative bodies at various levels of government to obtain zoning
reclassification of land to its highest and best use. A&B designates a parcel as
"fully entitled" or "fully zoned" when the three land use approvals described
above have been obtained.
(3) Residential Projects
A&B is pursuing a number of residential projects in Hawaii, including:
(a) Wailea. In October 2003, A&B and an affiliate of GolfBC Group, a
Vancouver, Canada-based company, completed the acquisition of the Hawaii assets
of the Shinwa Golf Group. These assets include 270 acres of fully-zoned,
undeveloped residential and commercial land, and three golf courses at the
world-renowned Wailea Resort on Maui, and two golf courses and an undeveloped
hotel site at the Kauai Lagoons Resort. The total purchase price for the assets
was $131.5 million, with GolfBC acquiring the three golf courses and tennis
center at Wailea, and the two golf courses, hotel site and developable lands at
the Kauai Lagoons Resort for $64.4 million. A&B retained the 270 acres of
fully-zoned, undeveloped lands, planned for up to 1,600 homes, for $67.1
million. A&B was the original developer of the Wailea Resort, beginning in the
1970s and continuing until A&B sold the Resort to the Shinwa Golf Group in 1989.
In October 2003, A&B received State approval to commence marketing 29
single-family homesites at Wailea's Golf Vistas subdivision. Closings commenced
in January 2004. As of January 31, 2004, 13 lots have been sold and six lots are
in escrow, at prices ranging from $495,000 to $1.6 million, for an average price
of $835,000. Negotiations are progressing on the sale of various development
parcels to third parties, and A&B is proceeding with the evaluation of its own
development of certain parcels.
(b) The Summit at Kaanapali. In January 2000, A&B acquired 17 acres in
the Kaanapali Golf Estates project. This land was developed into 17
single-family homes and 36 homesites. As of December 31, 2003, all 17 homes and
34 homesites were sold (two homes and 20 homesites were sold in 2003). The two
remaining homesites closed in January 2004. The average price of the 17 homes
and 36 homesites was $1.1 million and $347,000, respectively.
(c) Haliimaile Subdivision. A&B's application to rezone 63 acres for
the development of a 150- to 200-lot subdivision in Haliimaile (Upcountry, Maui)
continues to be held by the Maui County Council's Land Use Committee. Council
action is expected in 2004.
(d) Kukui'Ula. Kukui'Ula is a 1,000-acre master planned resort
residential community located in Poipu, Kauai. In April 2002, an agreement was
signed with an affiliate of DMB Associates, Inc., an Arizona-based developer of
master planned communities, for the joint development of Kukui'Ula. The joint
venture's initial conceptual land use plan anticipates a reduction in overall
project density from 3,400 planned units to between 1,200 to 1,500 high-end
residential units. During 2003, A&B contributed to the venture title to 846
acres, a waste water treatment plant, and other improvements. The balance of the
land will be transferred to the venture upon securing further entitlements for
the property. In July 2003, the State Land Use Commission granted Urban
designation for the project's remaining acres, which will allow the entire
1,000-acre property to be developed as one integrated project. Applications were
filed in July 2003 to amend the Kauai County's zoning and visitor designation
areas for the project, and hearings were held in October and November 2003 and
January 2004. The Kauai County Planning Commission recommended approval of the
applications on January 27, 2004, and action is anticipated by the County
Council by the third quarter of 2004. The venture had no sales activity during
2003.
(e) Kai Lani. In September 2001, A&B entered into a joint venture with
Armstrong Kai Lani Corporation for the development of 116 townhouse units on an
11-acre parcel in the Ko 'Olina Resort on Oahu. Construction on the first
building began in July 2002. A total of 105 units were sold in 2003. As of
January 31, 2004, of the remaining 11 units, three units have been sold and
eight units are in escrow and are scheduled to close by March 2004. The average
price of the 116 units is $496,000.
(f) Lanikea at Waikiki. In November 2001, A&B acquired a 1.63-acre,
vacant, fee simple development site in Waikiki, Oahu, for approximately $3.6
million. The property, located at the entrance to Waikiki, is zoned for
high-rise residential use and limited commercial uses. The project has been
designed and permitted for 100 apartments, averaging 1,000 square feet in size,
except for the four penthouse units, which average 1,600 square feet. The
building will be 30 stories tall, with the first five floors devoted to parking.
Sales commenced in April 2003. As of January 31, 2004, 92 binding contracts have
been entered into, and an additional six units are in escrow. The average sales
price of the 98 contracts is $574,000. Construction commenced in December 2003
and is scheduled for completion in the second quarter of 2005.
(g) Hokua. In July 2003, A&B entered into a joint venture with the
MacNaughton/Kobayashi Group for the development of a 247-unit high-rise luxury
condominium project across from the Ala Moana Beach Park in Honolulu. The
project contains four floors of parking and 37 floors of residential units. The
first 32 residential floors include seven units each, with an average unit size
of 1,760 square feet. The next four floors have five units each, with an average
unit size of 2,500 square feet. The Penthouse floor contains three units,
averaging 4,330 square feet each. Sales commenced in December 2002. As of
January 31, 2004, 233 of the project's 247 units were under binding contracts,
at an average price of $1 million per unit. In November 2003, the joint venture
acquired title to the 3.7-acre property. Demolition of improvements commenced in
October 2003, and construction is expected to be completed in the fourth quarter
of 2005.
(h) HoloHolo Ku. In October 2001, A&B entered into a joint venture with
Kamuela Associates, LLC for the development of 44 detached single-family homes
under a Condominium Property Regime, on an 8.5-acre parcel in Kamuela on the
island of Hawaii. Construction began in December 2001, and was completed in
October 2003. As of January 31, 2004, 41 homes have been sold at an average
price of $387,000 (36 of the homes were sold in 2003), one is in escrow and two
are available for sale.
(4) Commercial Properties
An important source of property revenue is the lease rental income A&B
receives from its leased portfolio, currently consisting of approximately 5.4
million leaseable square feet of commercial building space, ground leases on 266
acres for commercial use, and leases on 10,719 acres for agricultural/pasture
use.
(a) Hawaii Commercial Properties
A&B's Hawaii commercial properties portfolio consists primarily of
seven retail centers, eight office buildings and three industrial properties,
comprising approximately 1.7 million square feet of leaseable space. Most of the
commercial properties are located on Maui and Oahu, with smaller holdings in the
area of Port Allen, on the island of Kauai. The average occupancy for the Hawaii
portfolio was 90 percent in 2003 (compared with 89 percent in 2002). The
increase was due primarily to higher occupancies in the office properties.
In March 2003, A&B sold the 83,800-square-foot Dairy Road Center
industrial property, located in Kahului, Maui. Other 2003 sales included four
leased fee properties in Kahului.
In August 2003, A&B acquired the Napili Plaza, a 45,200-square-foot
shopping center, located between the Kaanapali and Kapalua resorts on Maui, and
a 117,000-square-foot industrial warehouse, adjacent to HC&S's Puunene mill on
Maui. Proceeds from several tax-deferred exchanges under Section 1031 of the
Internal Revenue Code, as amended ("Code"), were used to acquire these
properties.
The primary Hawaii commercial properties are as follows:
Leasable Area
Property Location Type (sq. ft.)
- -------- -------- ---- -------------
Maui Mall............................... Kahului, Maui Retail 192,600
Mililani Shopping Center................ Mililani, Oahu Retail 180,300
Pacific Guardian Complex................ Honolulu, Oahu Office 138,400
Kaneohe Bay Shopping Center............. Kaneohe, Oahu Retail 124,500
P&L Warehouse........................... Kahului, Maui Industrial 104,100
Kahului Shopping Center................. Kahului, Maui Retail 99,600
Ocean View Center....................... Honolulu, Oahu Office 99,200
Hawaii Business Park.................... Pearl City, Oahu Industrial 85,200
Haseko Center........................... Honolulu, Oahu Office 84,200
One Main Plaza.......................... Wailuku, Maui Office 82,800
Wakea Business Center................... Kahului, Maui Industrial/Retail 61,500
Kahului Office Building................. Kahului, Maui Office 56,800
Napili Plaza............................ Napili, Maui Retail 45,200
Fairway Shops at Kaanapali.............. Kaanapali, Maui Retail 35,100
Kahului Office Center................... Kahului, Maui Office 31,300
Stangenwald Building.................... Honolulu, Oahu Office 27,100
Port Allen Marina Center ............... Port Allen, Kauai Retail 23,600
Judd Building........................... Honolulu, Oahu Office 20,200
A number of other commercial projects are being developed on Maui and
Oahu, including:
(i) Triangle Square. Previous construction at the 12-acre Triangle
Square commercial project in Kahului, Maui includes two retail buildings with a
combined leasable area of 42,600 square feet, a BMW car dealership and three
other improved commercial properties under long-term ground leases. In February
2003, a 0.9-acre ground lease was signed with the operator of the first Hawaii
Krispy Kreme store, and the 4,500-square-foot store opened for business in
January 2004. A lease was signed in August with an automobile dealer for a
6,500-square-foot build-to-suit Acura dealership on 1.1 acres. Approximately 1.6
acres remain available for lease.
(ii) Maui Business Park. Located in Kahului, Maui, the initial phase of
Maui Business Park, developed between 1995 and 2000, consists of approximately
69.4 saleable acres, subdivided into 41 lots, having an average size of 23,700
square feet, and three bulk parcels. The property is zoned for light
industrial/commercial uses.
From 1995 through 1998, a total of 20.3 acres was sold for the
development of a 349,300-square-foot retail center, whose anchor tenants are
Borders Books & Music, Lowe's, OfficeMax and Old Navy. In August 2000, a
12.8-acre parcel was sold to Home Depot, which completed a 135,000-square-foot
store in May 2001. In February 2001, a 14-acre parcel was sold to Wal-Mart,
which completed a 142,000-square-foot store in October 2001.
During 2003, five half-acre lots were sold at an average price of $26
per square foot. As of December 31, 2003, 62.8 acres have been sold (90 percent
of the project) at an average price of $24 per square foot. Of the remaining
eleven lots in the project (6.6 acres), as of January 31, 2004, two lots have
been sold, four lots are in escrow, two lots have signed letters of intent and
two lots are in negotiation, leaving one lot available for sale.
In May 2002, the Maui County Council approved the inclusion of
approximately 179 acres in the Wailuku-Kahului Community Plan for the future
expansion of Maui Business Park. In May 2003, A&B filed a petition with the
State Land Use Commission ("SLUC") to redesignate 138 acres from Agricultural to
Urban. (Seven acres are currently designated Urban, and an additional 34 acres
have already received tentative approval for designation as Urban.) SLUC
hearings were held in the fourth quarter of 2003 and, on February 5, 2004, the
SLUC approved the reclassification of 138 acres to Urban. A&B has commenced the
preparation of a zoning-change application to be filed with the County.
(iii) Kahului Airport Hotel. In March 2002, the Maui County Council
approved A&B's zoning and Community Plan amendment applications for a proposed
134-room hotel, to be developed on 3.4 acres near the Kahului Airport.
Construction plans were submitted to Maui County for review in December 2002.
However, due to higher-than-expected construction bids, obtained in April 2003,
construction of the hotel has been deferred.
(iv) Mill Town Center. Located in Waipahu, Oahu (approximately 12 miles
from Honolulu), the Mill Town Center is a light-industrial subdivision
consisting of 27.5 saleable acres, developed between 1999 and 2002. The property
has been subdivided into 61 lots, having an average size of 29,100 square feet.
During 2003, seven lots were sold, at an average price of $27 per square foot.
As of December 31, 2003, a total of 32 lots (14 acres) have been sold, at an
average price of $24 per square foot. Of the remaining 29 lots (13.5 acres), as
of January 31, 2004, five lots have been sold, 18 lots are in escrow, letters of
intent have been executed for two lots and negotiations are ongoing for two
lots, leaving two lots (1 acre) remaining available for sale.
(v) Kunia Shopping Center. In November 2002, A&B acquired a 4.6-acre,
fee simple vacant parcel for $2.65 million. The parcel, which is zoned for
retail use, is located in Kunia, Central Oahu (near the Royal Kunia and Village
Park residential communities) and is planned to be developed as a
50,000-square-foot neighborhood retail center, plus three pad sites. Leasing
activities commenced in June 2003. Construction drawings were completed in
October 2003 and bids were received in December. Construction is projected to
commence in the second quarter of 2004 and be completed 12 months later.
(vi) Alakea Corporate Tower. In March 2003, A&B acquired a Class A
31-story office building in downtown Honolulu (since re-named Alakea Corporate
Tower), for $20 million. The building contains approximately 158,300 square feet
of office space, and was acquired with the intent of converting the building
into, and selling, fee simple office condominium units. The majority of planned
improvements to the building have been completed, including the renovation of
the lobby, conference room and four floors, the installation of landscaping and
a courtyard water feature and other common area repair and renovation work. The
building was submitted to a Condominium Property Regime and fifty-three
condominium units were created, some consisting of whole floors within the
building, and others consisting of two or three units per floor. List prices for
whole floors, which include eight assigned parking stalls per floor, range from
$1 million to $1.2 million. The Final Condominium Public Report was issued for
the project in October and sales commenced in the same month. In 2003, eight
whole floors were sold, at an average price of $1.1 million per floor. As of
January 31, 2004, one floor has been sold, another three and one-half floors are
in escrow and letters of intent have been signed for another four and one-half
floors.
(b) U.S. Mainland Commercial Properties
On the U.S. mainland, A&B owns a portfolio of commercial
properties, acquired primarily by way of tax-deferred exchanges under Code
Section 1031, comprising approximately 3.7 million square feet of leasable area.
The portfolio consists of eight retail centers, four office buildings and eight
industrial properties, as follows:
Leasable Area
Property Location Type (sq. ft.)
- -------- -------- ---- -------------
Ontario Distribution Center............. Ontario, CA Industrial 895,500
Sparks Business Center.................. Sparks, NV Industrial 396,100
Ontario-Pacific Business Centre......... Ontario, CA Industrial 246,100
Centennial Plaza........................ Salt Lake City, UT Industrial 244,000
Valley Freeway Corporate Park........... Kent, WA Industrial 229,100
Boardwalk Shopping Center............... Round Rock, TX Retail 184,600
San Pedro Plaza......................... San Antonio, TX Office 163,700
2868 Prospect Park...................... Sacramento, CA Office 161,700
Arbor Park Shopping Center.............. San Antonio, TX Retail 139,500
Mesa South Shopping Center.............. Phoenix, AZ Retail 133,600
San Jose Avenue Warehouse............... City of Industry, CA Industrial 126,000
Southbank II............................ Phoenix, AZ Office 120,800
Village at Indian Wells................. Indian Wells, CA Retail 104,600
2450 Venture Oaks....................... Sacramento, CA Office 99,000
Broadlands Marketplace.................. Broomfield, CO Retail 97,900
Northwest Business Center............... San Antonio, TX Industrial/Office 87,000
Carefree Marketplace.................... Carefree, AZ Retail 85,000
Marina Shores Shopping Center........... Long Beach, CA Retail 67,700
Vista Controls Building................. Valencia, CA Industrial/Office 51,100
Wilshire Center......................... Greeley, CO Retail 46,500
In June 2003, A&B sold the Airport Square property, a
170,800-square-foot shopping center located in Reno, Nevada.
In 2003, A&B acquired the 244,000-square-foot Centennial Plaza
industrial property in Salt Lake City, Utah (September), the 184,600-square-foot
Boardwalk Shopping Center in Round Rock, Texas (March), the 97,900-square-foot
Broadlands Marketplace in Broomfield, Colorado (October), and the
51,100-square-foot Vista Controls Building in Valencia, California (March). All
of these properties were acquired in Code Section 1031 exchanges.
A&B's Mainland commercial properties achieved an average occupancy rate
of 93 percent in 2003 (compared with 92 percent in 2002). The increase was due
primarily to additions of fully-leased properties to the portfolio.
In January 2003, A&B signed a joint venture agreement with Westridge
Executive Building, LLC, for the development of a 63,000-square-foot office
building in Valencia, California. Construction commenced in January and the
building shell was completed in November. The building is approximately 74
percent leased under binding leases, with an additional 15 percent of the
building under lease negotiations or executed letters of intent. Major tenants
include Wells Fargo, Pardee Homes and Realty Executives. Full lease-up is
anticipated in 2004.
C. Food Products
(1) Production
A&B has been engaged in activities relating to the production of cane
sugar and molasses in Hawaii since 1870, and production of coffee in Hawaii
since 1987. A&B's current food products operations consist of a sugar plantation
on the island of Maui, operated by its Hawaiian Commercial & Sugar Company
("HC&S") division, and a coffee farm on the island of Kauai, operated by its
Kauai Coffee Company, Inc. ("Kauai Coffee") subsidiary.
HC&S is Hawaii's largest producer of raw sugar, having produced
approximately 205,700 tons of raw sugar in 2003, or about 79 percent of the raw
sugar produced in Hawaii (compared with 215,900 tons or about 79 percent in
2002). The decrease in production was due primarily to an extended drought on
Maui, rainy weather late in the year, and arson to nearly 900 acres of cane.
Total Hawaii sugar production, in turn, amounted to approximately 5 percent of
total U.S. sugar production. HC&S harvested 15,660 acres of sugar cane in 2003
(compared with 16,557 in 2002). The decrease in acres harvested was due
primarily to weather-related slowdowns. Yields averaged 13.1 tons of sugar per
acre in 2003 (compared with 13 in 2002). The average cost per ton of sugar
produced at HC&S was $371 in 2003 (compared with $332 in 2002). The increase in
cost per ton was attributable to lower sugar production and higher operating
costs. As a by-product of sugar production, HC&S also produced approximately
72,500 tons of molasses in 2003 (compared with 74,300 in 2002).
In 2003, approximately 12,900 tons of sugar produced by HC&S were
specialty food-grade raw sugars and sold under HC&S's Maui Brand(R) trademark.
An expansion of the production facilities for these sugars was made in 2001 and
2002.
During 2003, Kauai Coffee had approximately 3,200 acres of coffee trees
under cultivation. The harvest of the 2003 coffee crop yielded approximately 3.3
million pounds of green coffee (compared with 2.8 million in 2002). The
increased production was due primarily to the inherent nature of coffee trees,
which typically produce higher yields bi-annually.
HC&S and McBryde Sugar Company, Limited ("McBryde"), a subsidiary of
A&B and the parent company of Kauai Coffee, produce electricity for internal use
and for sale to the local electric utility companies. HC&S's power is produced
by burning bagasse, by hydroelectric power generation and, when necessary, by
burning fossil fuels, whereas McBryde produces power solely by hydroelectric
generation. The price for the power sold by HC&S and McBryde is equal to the
utility companies' "avoided cost" of not producing such power themselves. In
addition, HC&S receives a capacity payment to provide a guaranteed power
generation capacity to the local utility. See "Energy" below for power
production and sales data.
Kahului Trucking & Storage, Inc., a subsidiary of A&B, provides sugar
and molasses hauling and storage, petroleum hauling, mobile equipment
maintenance and repair services and self-service storage facilities on Maui.
Kauai Commercial Company, Incorporated, another subsidiary of A&B, provides
similar services on Kauai, as well as general trucking services.
(2) Marketing of Sugar and Coffee
Substantially all of the bulk raw sugar produced in Hawaii is
purchased, refined and marketed by C&H Sugar Company, Inc. ("C&H"), of which A&B
owns approximately 36 percent of its common voting stock, 40 percent of its
junior preferred stock and 100 percent of its senior preferred stock. The
results of A&B's equity investment in C&H are reported in A&B's financial
statements as an investment in an affiliate. C&H processes the raw cane sugar at
its refinery at Crockett, California, and markets the refined products primarily
in the western and central United States. HC&S markets its specialty food-grade
raw sugars to food and beverage producers and to retail stores under its Maui
Brand(R) label, and to distributors that repackage the sugars under their own
labels. HC&S's largest food-grade raw sugar customers are Cumberland Packing
Corp. and Sugar Foods Corporation, which repackage HC&S's turbinado sugar for
their "Sugar in the Raw" products.
Hawaiian Sugar & Transportation Cooperative ("HS&TC"), a cooperative
consisting of two sugar cane growers in Hawaii (including HC&S), has a supply
contract with C&H, ending in December 2008. Pursuant to the supply contract, the
growers sell their raw sugar to C&H at a price equal to the New York No. 14
Contract settlement price, less a discount and less costs of sugar vessel
discharge and stevedoring. This price, after deducting the marketing, operating,
distribution, transportation and interest costs of HS&TC, reflects the gross
revenue to the Hawaii sugar growers, including HC&S. Notwithstanding the supply
contract, HC&S arranged directly with C&H for the forward pricing of a portion
of its 2003 harvest, as described in Item 7A ("Quantitative and Qualitative
Disclosures About Market Risk") of Part II below.
At Kauai Coffee, coffee marketing efforts are directed toward
developing a market for premium-priced, estate-grown Kauai green coffee. Most of
the coffee crop is being marketed on the U.S. mainland and in Asia as green
(unroasted) coffee. In addition to the sale of green coffee, Kauai Coffee
produces and sells roasted, packaged coffee in Hawaii under the Kauai Coffee(R)
trademark.
(3) Competition and Sugar Legislation
Hawaii sugar growers produce more sugar per acre than most other major
producing areas of the world, but that advantage is offset by Hawaii's high
labor costs and the distance to the U.S. mainland market. Hawaiian refined sugar
is marketed primarily west of Chicago. This is also the largest beet sugar
growing and processing area and, as a result, the only market area in the United
States that produces more sugar than it consumes. Sugar from sugar beets is the
greatest source of competition in the refined sugar market for the Hawaiian
sugar industry.
The overall U.S. caloric sweetener market continues to grow. The use of
non-caloric (artificial) sweeteners accounts for a relatively small percentage
of the domestic sweetener market. The anticipated increased use of high fructose
corn syrup and artificial sweeteners is not expected to affect sugar markets
significantly in the near future.
The U.S. Congress historically has sought, through legislation, to
assure a reliable domestic supply of sugar at stable and reasonable prices. The
current protective legislation is the Farm Security and Rural Investment Act of
2002 ("2002 Farm Bill"). The two main elements of U.S. sugar policy are the
tariff-rate quota ("TRQ") import system and the price support loan program. The
TRQ system limits imports by allowing only a quota amount to enter the U.S.
after payment of a relatively low tariff. A higher, over-quota tariff is imposed
for imported quantities above the quota amount.
The 2002 Farm Bill reauthorized the sugar price support loan program,
which supports the U.S. price of sugar by providing for commodity-secured loans
to producers. Unlike most other commodity programs, sugar loans are made to
processors and not directly to producers. HC&S is both a producer and a
processor. To qualify for loans, processors must agree to provide a part of the
loan payment to producers. Loans may be repaid either in cash or by forfeiture
without penalty. The 2002 Farm Bill eliminated the former loan forfeiture
penalty and marketing assessments, which increased the effective support level.
Under the 2002 Farm Bill, the government is required to administer the
loan program at no net cost by avoiding sugar loan forfeitures. This is
accomplished by reestablishing marketing allotments, which provides each
processor or producer a specific limit on sales for the year, above which
penalties would apply. It is also accomplished by adjusting fees and quotas for
imported sugar to maintain the domestic price at a level that discourages
producers from defaulting on loans. A loan rate (support price) of 18 cents per
pound for raw cane sugar is in effect for the 2003 through 2007 crops. The
supply agreement between HS&TC and C&H allows HS&TC to place sugar under loan
pursuant to the loan program, but prohibits forfeiting sugar under loan while
providing a "floor" price.
In 2003, U.S. domestic raw sugar prices declined and remain below
historical averages. The pricing situation continues to be challenging, even to
efficient producers like HC&S. A chronological chart of the average U.S.
domestic raw sugar prices, based on the average daily New York No. 14 Contract
settlement price for domestic raw sugar, is shown below:
[CHART]
JAN-00 17.70
FEB 17.05
MAR 18.46
APR 19.41
MAY 19.12
JUN 19.26
JUL 17.64
AUG 18.13
SEP 18.97
OCT 21.20
NOV 21.39
DEC 20.53
JAN-01 20.81
FEB 21.18
MAR 21.40
APR 21.51
MAY 21.19
JUN 21.04
JUL 20.64
AUG 21.01
SEP 20.87
OCT 20.85
NOV 21.19
DEC 21.35
JAN-02 21.03
FEB 20.63
MAR 19.92
APR 19.64
MAY 19.52
JUN 19.82
JUL 20.86
AUG 20.92
SEP 21.65
OCT 22.05
NOV 22.22
DEC 21.94
JAN-03 21.62
FEB 21.67
MAR 22.14
APR 21.87
MAY 21.80
JUN 21.55
JUL 21.32
AUG 21.29
SEP 21.34
OCT 20.97
NOV 20.90
DEC 20.38
Liberalized international trade agreements, such as the General
Agreement on Tariffs and Trade, or GATT, include provisions relating to
agriculture that can affect the U.S. sugar or sweetener industries materially.
Recent negotiations under the U.S.-Central America Free Trade Agreement, or
CAFTA, as well as other trade discussions, have resulted in lower U.S. sugar
prices.
Kauai Coffee competes with coffee growers located worldwide, including
in Hawaii. Due to an oversupply of coffee in the marketplace, coffee commodity
prices continue to be adversely affected and are near record lows.
(4) Properties and Water
The HC&S sugar plantation, the largest in Hawaii, consists of
approximately 43,300 acres of land, including 2,000 acres leased from the State
of Hawaii and 1,300 acres under lease from private parties. Over 37,000 acres
are under cultivation, and the balance either is used for contributory purposes,
such as roads and plant sites, or is not suitable for cultivation.
McBryde owns approximately 9,500 acres of land on Kauai, of which
approximately 2,400 acres are used for watershed and other conservation uses,
approximately 3,400 acres are used by Kauai Coffee and the remaining acreage is
leased to various agricultural enterprises for cultivation of a variety of crops
and for pasturage.
It is crucial for HC&S and Kauai Coffee to have access to reliable
sources of water supply and efficient irrigation systems. A&B's plantations
conserve water by using a "drip" irrigation system that distributes water to the
roots through small holes in plastic tubes. All but a small area of the
cultivated cane land farmed by HC&S is drip irrigated. All of Kauai Coffee's
fields also are drip irrigated.
A&B owns 16,000 acres of watershed lands on Maui that supply a portion
of the irrigation water used by HC&S. A&B also held four water licenses to
another 38,000 acres owned by the State of Hawaii on Maui, which over the years
has supplied approximately one-third of the irrigation water used by HC&S. The
last of these water license agreements expired in 1986, and all four agreements
have since been extended as revocable permits that are renewable annually. In
2001, a request was made to the State Board of Land and Natural Resources to
replace these revocable permits with a long-term water lease. Pending the
conclusion of a contested case hearing before the Board on the request for the
long-term lease, the Board renewed the existing permits.
D. Employees and Labor Relations
As of December 31, 2003, A&B and its subsidiaries had approximately
2,041 regular full-time employees. About 971 regular full-time employees were
engaged in the growing of sugar cane and coffee and the production of raw sugar
and green coffee; 897 were engaged in transportation; 46 were engaged in
property development and management and the balance was in administration and
miscellaneous operations. Approximately 55 percent were covered by collective
bargaining agreements with unions.
As of December 31, 2003, Matson and its subsidiaries also had
approximately 285 seagoing employees. Approximately 22 percent of Matson's
regular full-time employees and all of the seagoing employees were covered by
collective bargaining agreements.
Historically, collective bargaining with longshore and seagoing unions
has been complex and difficult. However, Matson and Matson Terminals consider
their relations with those unions, other unions and their non-union employees
generally to be satisfactory.
Matson's seagoing employees are represented by six unions, three
representing unlicensed crew members and three representing licensed crew
members. Matson negotiates directly with these unions. During 2003, Matson and
its licensed deck and engineering officers extended existing agreements for four
years through 2009 and entered into separate ten-year agreements covering
Matson's two new containerships. Matson and its radio officers extended their
existing agreement for four years through 2007 and entered into a separate
agreement through 2007 covering the two new ships. No agreements with offshore
personnel are scheduled to expire in 2004.
As described in "Transportation - Rate Regulation" above, SSAT, the
previously-described joint venture of Matson and SSA, provides stevedoring and
terminal services for Matson vessels calling at U.S. Pacific Coast ports.
Matson, SSA and SSAT are members of the Pacific Maritime Association ("PMA")
which, on behalf of its members, negotiates collective bargaining agreements
with the ILWU on the U.S. Pacific Coast. Matson Terminals provides stevedoring
and terminal services to Matson vessels calling at Honolulu. Matson Terminals is
a member of the Hawaii Stevedore Industry Committee ("SIC") which, on behalf of
its members, negotiates with the ILWU in Hawaii.
During 2003, Matson renewed its collective bargaining agreement with
ILWU clerical workers at Honolulu and Oakland for six-year terms through June
2008. In 2004, Matson expects to renew its agreement with ILWU clerical workers
at Long Beach without service interruption.
During 2003, Matson contributed to multi-employer pension plans for
vessel crews. If Matson were to withdraw from or significantly reduce its
obligation to contribute to one of the plans, Matson would review and evaluate
data, actuarial assumptions, calculations and other factors used in determining
its withdrawal liability, if any. In the event that any third parties materially
disagree with Matson's determination, Matson would pursue the various means
available to it under federal law for the adjustment or removal of its
withdrawal liability. Matson Terminals participates in a multi-employer pension
plans for its Hawaii ILWU non-clerical employees. For a discussion of withdrawal
liabilities under the Hawaii longshore and seagoing plans, see Note 10
("Employee Benefit Plans") to A&B's financial statements in Item 8 of Part II
below.
Bargaining unit employees of HC&S are covered by two collective
bargaining agreements with the ILWU. The agreements with the HC&S production
unit employees and clerical bargaining unit employees will expire January 31,
2008. One of the collective bargaining agreements covering the two ILWU
bargaining units at Kahului Trucking & Storage, Inc. was extended in 2003 and
will expire June 30, 2009, and the other general agreement will expire March 31,
2006. The two collective bargaining agreements with Kauai Commercial Company,
Incorporated employees represented by the ILWU were renegotiated in 2001 will
expire April 30, 2004. The collective bargaining agreement with the ILWU for the
production unit employees of Kauai Coffee expired January 31, 2004 and is
expected to be renewed without service interruption.
E. Energy
Matson and Matson Terminals purchase residual fuel oil, lubricants,
gasoline and diesel fuel for their operations. Residual fuel oil is by far
Matson's largest energy-related expense. In 2003, Matson vessels purchased
approximately 1.7 million barrels of residual fuel oil, the same as in 2002.
Residual fuel oil prices paid by Matson started in 2003 at $24.92 per
barrel and ended the year at $27.92. The low for the year was $17.59 per barrel
in May and the high was $36.54 in July. Sufficient fuel for Matson's
requirements is expected to be available in 2004.
As has been the practice with sugar plantations throughout Hawaii, HC&S
uses bagasse, the residual fiber of the sugar cane plant, as a fuel to generate
steam for the production of most of the electrical power for sugar milling and
irrigation pumping operations. In addition to bagasse, HC&S uses diesel fuel
oil, boiler fuel oil and coal to produce power during the factory shutdown
period when bagasse is not being produced. In 2003, HC&S produced and sold,
respectively, approximately 211,500 MWH and 82,200 MWH of electric power
(compared with 220,300 MWH produced and 87,400 MWH sold in 2002). The decrease
in power produced and sold was due to an extended drought, which reduced
hydroelectric power production and increased irrigation pumping of well water.
HC&S's oil use decreased to approximately 17,900 barrels in 2003, from
approximately 22,600 barrels used in 2002. However, coal use for power
generation increased to approximately 52,500 short tons in 2003, from 46,700
short tons in 2002. The increase in coal use was attributed to the
unavailability of bagasse supplies for the boilers caused by a delayed harvest
season and the smaller cane crop, and to the lack of hydroelectric power
resulting from the extended drought.
In 2003, McBryde produced approximately 30,100 MWH of hydroelectric
power (compared with 33,300 MWH in 2002). Power sales in 2003 amounted to
approximately 21,200 MWH (compared with 24,400 MWH in 2002). The decrease in
power production and sales was due primarily to reduced rainfall in 2003.
F. Available Information
A&B files reports with the Securities and Exchange Commission (the
"SEC"). The reports and other information filed include: Forms 10-K, 10-Q, 8-K
and other reports and information filed under the Securities Exchange Act of
1934 (the "Exchange Act").
The public may read and copy any materials A&B files with the SEC at
the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549.
The public may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet website that
contains reports, proxy and information statements, and other information
regarding A&B and other issuers that file electronically with the SEC. The
address of that website is www.sec.gov.
A&B makes available, free of charge on or through its Internet website,
A&B's annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable
after it electronically files such material with, or furnishes it to, the SEC.
The address of A&B's Internet website is www.alexanderbaldwin.com.
ITEM 3. LEGAL PROCEEDINGS
See "Business and Properties - Transportation - Rate Regulation" above
for a discussion of rate and other regulatory matters in which Matson is
routinely involved.
On September 14, 1998, Matson was served with a complaint filed by the
Government of Guam with the Surface Transportation Board, alleging that Sea-Land
Services, Inc., APL and Matson have charged unreasonable rates in the Guam trade
since January 1991. Matson did not begin its Guam Service until February 1996.
In 2002, APL was dismissed as a defendant based on the statute of limitations.
On April 23, 2002, the parties filed initial briefs addressing the appropriate
rate reasonableness methodology to be applied. There has been no material
activity in this proceeding since the parties filed reply briefs on June 17,
2002.
In August 2001, HC&S self-reported to the State of Hawaii Department of
Health (the "DOH") possible violations of state and federal air pollution
control regulations relating to a boiler at HC&S's Maui sugar mill. The boiler
was constructed in 1974 and HC&S thereafter operated the boiler in compliance
with the permits issued by the DOH. Because the boiler is fueled with less than
50 percent fossil fuels and is therefore a "biomass boiler" under state air
pollution control rules, the DOH initially concluded, and the DOH permits
reflected, that the boiler was not subject to the more stringent regulations
applicable to "fossil fuel-fired" boilers. In 2001, HC&S identified federal
regulatory guidance that provides that a boiler that burns any amount of fossil
fuel may be a "fossil fuel-fired boiler." HC&S then voluntarily reported the
possible compliance failures to the DOH. In September 2003, the DOH issued to
HC&S a Notice and Finding of Violation and proposed penalty of $1.98 million.
The amount of the penalty is being contested. In the opinion of management,
after consultation with counsel, this matter will not have a material adverse
effect on A&B's results of operations or financial position.
In January 2004, a petition was filed by the Native Hawaiian Legal
Corporation (the "NHLC"), on behalf of four individuals, requesting that the
State of Hawaii Board of Land and Natural Resources (the "BLNR") declare that
A&B and its subsidiaries (collectively, the "Company") have no current legal
authority to continue to divert water from streams in East Maui for use in the
Company's sugar growing operations, and to order the immediate full restoration
of these streams until a legal basis is established to permit the diversions of
the streams. The Company has objected to the petition, asked the BLNR to conduct
administrative hearings on the matter, and asked that the matter be consolidated
with the Company's currently pending application before the BLNR for a long-term
water license. If the Company is not permitted to divert stream waters for its
use, it would have a significant adverse effect on the Company's sugar
operations.
A&B and its subsidiaries are parties to, or may be contingently liable
in connection with, other legal actions arising in the normal conduct of their
businesses, the outcomes of which, in the opinion of management after
consultation with counsel, would not have a material adverse effect on A&B's
results of operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
For the information about executive officers of A&B required to be
included in this Part I, see section B ("Executive Officers") in Item 10 of Part
III below, which is incorporated herein by reference.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
A&B common stock is listed on The Nasdaq Stock Market and trades under
the symbol "ALEX." As of February 9, 2004, there were 3,944 shareholders of
record of A&B common stock. In addition, Cede & Co., which appears as a single
record holder, represents the holdings of thousands of beneficial owners of A&B
common stock.
A summary of daily stock transactions is listed in the Nasdaq National
Market Issues section of major newspapers. Trading volume averaged 155,900
shares a day in 2003, compared with 150,600 shares a day in 2002 and 135,600 in
2001.
The quarterly high and low sales prices and closing prices, as reported
by The Nasdaq Stock Market, and cash dividends paid per share of common stock,
for 2003 and 2002, were as follows:
Dividends Market Price
Paid High Low Close
---- ---- --- -----
2003
----
First Quarter $0.225 $26.90 $23.50 $24.86
Second Quarter 0.225 27.70 24.35 26.10
Third Quarter 0.225 30.03 25.76 28.36
Fourth Quarter 0.225 34.60 27.94 33.75
2002
----
First Quarter $0.225 $28.01 $23.98 $27.61
Second Quarter 0.225 29.25 24.74 25.80
Third Quarter 0.225 26.19 21.50 22.25
Fourth Quarter 0.225 26.50 20.50 25.79
Although A&B expects to continue paying quarterly cash dividends on its
common stock, the declaration and payment of dividends in the future are subject
to the discretion of the Board of Directors and will depend upon A&B's financial
condition, results of operations, cash requirements and other factors deemed
relevant by the Board of Directors. A&B strives to pay the highest possible
dividends commensurate with operating and capital needs. A&B has paid cash
dividends each quarter since 1903. The most recent increase in the quarterly
dividend rate was effective the first quarter of 1998, from 22 cents per share
to 22.5 cents. In 2003, dividend payments to shareholders totaled $37,409,000,
which was 46 percent of reported net income for the year. The following dividend
schedule for 2004 has been set, subject to final approval by the Board of
Directors:
Quarterly Dividend Declaration Date Record Date Payment Date
------------------ ---------------- ----------- ------------
First January 22 February 19 March 4
Second April 22 May 6 June 3
Third June 24 August 5 September 2
Fourth October 28 November 11 December 2
A&B common stock is included in the Dow Jones U.S. Transportation
Average, the Dow Jones U.S. 65 Stock Composite, the Dow Jones U.S. Industrial
Transportation Index, the Dow Jones Marine Transportation Index, the S&P MidCap
400, the Russell 2000 Index and the Russell 3000 Index.
There were no shares of A&B common stock repurchased by the Company
during 2003 or 2002. During 2001, A&B repurchased 105,000 shares of its stock
for an average price of $21.61 per share. A&B's Board of Directors has
authorized A&B to repurchase up to two million shares of its common stock.
A&B has a Shareholder Rights Plan, designed to protect the interests of
shareholders in the event an attempt is made to acquire the company. The rights
initially will trade with A&B's outstanding common stock and will not be
exercisable absent certain acquisitions or attempted acquisitions of specified
percentages of such stock. If exercisable, the rights generally entitle
shareholders (other than the acquiring party) to purchase additional shares of
A&B's stock or shares of an acquiring company's stock at prices below market
value.
Securities authorized for issuance under equity compensation plans as
of December 31, 2003, included:
- ----------------------------------------------------------------------------------------------------------------------
Number of securities
remaining available for
Number of securities to be Weighted-average exercise future issuance under
Plan Category issued upon exercise of price of outstanding equity compensation plans
outstanding options, options, warrants and (excluding securities
warrants and rights rights reflected in column (a))
(a) (b) (c)
- ----------------------------------------------------------------------------------------------------------------------
Equity compensation plans 2,476,000 $24.57 1,598,494
approved by security holders
- ----------------------------------------------------------------------------------------------------------------------
Equity compensation plans
not approved by security
holders -- -- 271,719*
- ----------------------------------------------------------------------------------------------------------------------
Total 2,476,000 $24.57 1,870,213
- ----------------------------------------------------------------------------------------------------------------------
* A&B has two compensation plans under which its stock is authorized for
issuance that were adopted without the approval of its security
holders. (1) Under A&B's Non-Employee Director Stock Retainer Plan,
each outside Director is issued a stock retainer of 300 A&B shares
after each year of service on A&B's Board of Directors. Those 300
shares vest immediately and are free and clear of any restrictions.
These shares are issued in January of the year following the year of
the Director's service to A&B. (2) Under A&B's Restricted Stock Bonus
Plan, the Compensation and Stock Option Committee identifies the
executive officers and other key employees who participate in one- and
three-year performance improvement incentive plans and formulates
performance goals to be achieved for the plan cycles. At the end of
each plan cycle, results are compared with goals, and awards are made
accordingly. Participants may elect to receive awards entirely in cash
or up to 50 percent in shares of A&B stock and the remainder in cash.
If a participant elects to receive a portion of the award in stock, an
additional 50 percent stock bonus may be awarded. In general, shares
issued under the Restricted Stock Bonus Plan may not be traded for
three years following the award date; special vesting provisions apply
for the death, termination or retirement of a participant.
Of the 271,719 shares that were available for future issuance, 7,950
shares were available for future issuance under the Non-Employee
Director Stock Retainer Plan and 263,769 shares were available for
issuance under the Restricted Stock Bonus Plan.
ITEM 6. SELECTED FINANCIAL DATA
The following financial data should be read in conjunction with Item 8,
"Financial Statements and Supplementary Data," and Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
(dollars and shares in millions, except per-share amounts):
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
ANNUAL OPERATIONS
Total revenue1 $ 1,233 $ 1,088 $ 1,059 $ 1,052 $ 989
Dividends -- -- 4 3 3
Gain on sale of investment -- -- 126 -- --
Cost of goods sold and operating
expenses1 1,039 939 915 844 812
Depreciation and amortization1 73 70 74 70 72
Interest expense 12 12 19 24 18
Income taxes1 40 21 65 42 31
-------- -------- --------- --------- ---------
Income from continuing operations
before accounting changes 69 46 116 75 59
Discontinued operations - real estate2 12 12 4 4 4
Discontinued operations - agribusiness3 -- -- (9) -- --
Cumulative effect of change in
accounting methods4 -- -- -- 12 --
-------- -------- --------- --------- ---------
Net income $ 81 $ 58 $ 111 $ 91 $ 63
======== ======== ========= ========= =========
Comprehensive income $ 100 $ 31 $ 49 $ 103 $ 49
Earnings per share: From continuing operations before accounting change:
Basic $ 1.67 $ 1.12 $ 2.86 $ 1.82 $ 1.37
Diluted $ 1.66 $ 1.11 $ 2.85 $ 1.81 $ 1.37
Net Income:
Basic $ 1.95 $ 1.42 $ 2.73 $ 2.21 $ 1.45
Diluted $ 1.94 $ 1.41 $ 2.72 $ 2.21 $ 1.45
Return on beginning equity 11.2% 8.2% 15.9% 13.5% 9.0%
Cash dividends per share $ 0.90 $ 0.90 $ 0.90 $ 0.90 $ 0.90
Average number of shares outstanding 41.6 41.0 40.5 40.9 43.2
Effective income tax rate 37.0% 33.0% 36.0% 36.5% 34.5%
MARKET PRICE RANGE
High $ 34.60 $ 29.25 $ 29.61 $ 28.25 $ 27.13
Low 23.50 20.50 20.61 17.94 18.63
Close 33.75 25.79 26.70 26.25 22.81
AT YEAR END
Shareholders of record 3,959 4,107 4,252 4,438 4,761
Shares outstanding 42.2 41.3 40.5 40.4 42.5
Shareholders' equity $ 811 $ 724 $ 711 $ 694 $ 671
Per-share 19.22 17.54 17.54 17.19 15.78
Total assets 1,760 1,553 1,544 1,666 1,562
Working capital 64 83 24 56 60
Current ratio 1.3 to 1 1.5 to 1 1.1 to 1 1.4 to 1 1.4 to 1
Real estate developments - noncurrent $ 77 $ 42 $ 48 $ 63 $ 61
Investments - noncurrent 68 33 33 183 159
Capital Construction Fund 165 208 159 150 145
Long-term debt - noncurrent 330 248 207 331 278
Debt to debt plus capital 29.8% 26.2% 24.2% 34.2% 30.9%
1 Prior year amounts restated for amounts treated as discontinued
operations and to be consistent with the current year presentation.
2 Discontinued Operations - The sales of certain income-producing assets
are classified as discontinued operations if the operations and cash
flows can be distinguished from the remaining assets of the Company,
if cash flows for the assets have been, or will be, eliminated from
the ongoing operations of the Company, if the Company will not have a
significant continuing involvement in the operations of the assets
sold and if the amount is considered material. This is described
further in Note 3 of Item 8 of the Company's Form 10-K.
3 Discontinued Operations - Agribusiness includes the closing of
operations and abandonment of the Company's panelboard manufacturing
business in 2001. The loss included closure costs of $3 million and an
$11 million write-down of machinery and equipment associated with that
business.
4 The cumulative change in accounting in 2000 was for the change in
method of accounting for vessel drydocking costs from the accrual
method to the deferral method.
Amounts in Item 6 are rounded to millions, but per-share calculations and
percentages were calculated based on thousands. Accordingly, a
recalculation of some per-share amounts and percentages, if based on the
reported data, may be slightly different than the more accurate amounts
included herein.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following analysis of the consolidated financial condition and
results of operations of Alexander & Baldwin, Inc. and its subsidiaries
(collectively, the "Company") should be read in conjunction with the
consolidated financial statements and related notes thereto. Amounts in this
narrative are rounded to millions, but per-share calculations and percentages
were calculated based on thousands. Accordingly, a recalculation of some
per-share amounts and percentages, if based on the reported data, may be
slightly different than the more accurate amounts included herein.
FORWARD-LOOKING STATEMENTS
The Company, from time to time, may make or may have made certain
forward-looking statements, whether orally or in writing, such as forecasts and
projections of the Company's future performance or statements of management's
plans and objectives. These statements are "forward-looking" statements as that
term is defined in the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements may be contained in, among other things, Securities
and Exchange Commission ("SEC") filings, such as the Forms 10-K, 10-Q and 8-K,
press releases made by the Company, the Company's Internet Web sites (including
Web sites of its subsidiaries), and oral statements made by the officers of the
Company. Except for historical information contained in these written or oral
communications, such communications contain forward-looking statements. These
forward-looking statements involve a number of risks and uncertainties that
could cause actual results to differ materially from those projected in the
statements, including, but not limited to, the following factors:
1) economic conditions in Hawaii and elsewhere;
2) market demand;
3) competitive factors and pricing pressures, principally in the
Company's transportation businesses;
4) legislative and regulatory environments at the federal, state and
local levels, including, among others, government rate regulations,
land-use regulations, government administration of the U.S. sugar
program, and modifications to or retention of cabotage laws;
5) performance of pension assets;
6) availability of water for irrigation and to support real-estate
development;
7) performance of unconsolidated affiliates and ventures;
8) significant fluctuations in raw sugar prices and the ability to sell
raw sugar to C&H Sugar Company, Inc. ("C&H");
9) significant fluctuations in fuel prices;
10) resolution of tax issues with the IRS or state tax authorities;
11) labor relations in Hawaii, the U.S. Pacific Coast, Guam and
other locations where the Company has operations;
12) renewal or replacement of significant agreements including,
but not limited to, lease agreements and Matson's alliance and
charter agreement with American President Lines, Ltd. (see
"Charter Agreements" on page 33);
13) acts of nature, including but not limited to, drought, greater than
normal rainfall, hurricanes and typhoons;
14) acts of war and terrorism;
15) risks associated with current or future litigation; and
16) other risk factors described elsewhere in these communications and
from time to time in the Company's filings with the SEC.
CONSOLIDATED RESULTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------------------
(dollars in millions, except per-share amounts) 2003 2002 2001
- ----------------------------------------------------------------------------------------------------------
Operating Revenue $ 1,233 $ 1,088 $ 1,059
Operating Costs & Expenses $ 1,112 $ 1,009 $ 989
Other Income and (Expenses) $ (12) $ (12) $ 111
Income Taxes $ 40 $ 21 $ 65
Net Income $ 81 $ 58 $ 111
Other Comprehensive Income (Loss) $ 19 $ (27) $ (62)
- ----------------------------------------------------------------------------------------------------------
Basic Earnings Per Share $ 1.95 $ 1.42 $ 2.73
- ----------------------------------------------------------------------------------------------------------
Operating Revenue for 2003 increased $145 million, or 13 percent,
compared with 2002. Ocean transportation contributed 62 percent of the increase
due principally to the addition of terminal handing charges, an increase in
cargo volume and other rate actions. Logistics services contributed 29 percent
to the increase due to top-line business growth. Property leasing contributed 9
percent due principally to purchases of new income-producing properties and
increased rents and occupancies. Property sales and food products revenue were
comparable to 2002. The property leasing and property sales revenue included in
the Consolidated Statements of Income are stated after discontinued operations.
Operating revenue for 2002 increased by $29 million or 3 percent
compared with 2001. Ocean transportation increased $5 million compared with 2001
due to rate actions and higher Hawaii Service container volumes. Revenue for
2002 was adversely affected by terrorist events of September 11, 2001 and by
West Coast port disruptions late in 2002. Logistics services revenue increased
$73 million due to top-line business growth. Property leasing increased $5
million due to increased rents partially offset by lower occupancies. Property
sales were $61 million lower than in 2001. This resulted from the 2001 adoption
of Statement of Financial Accounting Standard ("SFAS") No. 144 "Accounting for
the Impairment or Disposal of Long-Lived Assets." SFAS 144 required that
transactions that were initiated prior to the adoption of the standard should
not be treated as discontinued operations. Food products revenue increased by $7
million due to higher sugar production and modestly higher raw sugar prices.
Because the Company regularly develops and sells income producing real
estate, the revenue trends for these two segments are best understood before
subtracting discontinued operations. This analysis is provided in the Analysis
of Operating Revenue and Profit below.
Operating Costs and Expenses for 2003 increased by $103 million, or 10
percent, compared with 2002. Cost of transportation services increased by $26
million due to higher terminal and vessel operating costs (both of which were
due to higher volume), higher pension costs of $10 million and an accrual of $5
million in 2003 for the settlement of a claim with the State of Hawaii offset by
improved performance of joint ventures and by a pension settlement gain of $17
million that resulted from the formation of a new Hawaii Terminals Multiemployer
plan. Costs of logistics services increased $40 million due to business growth.
Costs of property sales and leasing services, after removing discontinued
operations, increased by $3 million due to increased operating and maintenance
costs, net of joint venture results. Cost of agricultural goods and services
increased by $9 million due to higher pension, personnel, maintenance and
insurance costs. Selling, General and Administrative costs increased by $17
million due to higher pension, health benefit, and business insurance costs.
Operating costs for 2003 also include an $8 million write-down of the carrying
value of C&H Sugar Company, Inc. ("C&H.")
Operating Costs and Expenses for 2002 increased by $20 million, or 2
percent compared with 2001. Cost of transportation services increased by $23
million due to higher freight costs associated with the late 2002 West Coast
port disruptions and higher pension costs partially offset by lower vessel
operating costs. Costs of logistics services increased $63 million due to
business growth. Costs of property sales and leasing services declined by $44
million due to the adoption of SFAS 144 that resulted in a different accounting
treatment for property sales initiated after adoption of the standard. Selling,
General and Administrative expenses increased $8 million in 2002 compared with
2001 because of higher pension, employee benefit and business insurance costs.
The comparison of operating costs and expenses also was affected by the 2001
write-downs of power generation equipment by $5 million, the Company's
investment in C&H by $29 million, and the panelboard manufacturing subsidiary on
Maui by $9 million.
Additional information about year-to-year fluctuations is included
under the caption Analysis of Operating Revenue and Profit.
Other Income and Expenses is composed of interest expense and gains on
sales of assets. Interest expense of $12 million for 2003 was the same as 2002.
Interest expense in 2001 was $19 million reflecting higher interest rates and
greater amounts drawn on credit facilities. 2001 also included a $126 million
gain on the sale of marketable securities. This gain was the result of the
Company divesting its holdings in BancWest Corporation and Bank of Hawaii
Corporation.
Income Taxes were higher for 2003 compared with 2002 due primarily to
higher pre-tax income and a higher effective tax rate of 37 percent versus 33
percent for the two years, respectively. The 2001 effective tax rate was 36
percent.
Other Comprehensive Income or Loss for 2003 and 2002 comprised the
minimum pension liability adjustments (Note 10 in Item 8 of the Company's 2003
Form 10-K) and the change in fair value of the treasury lock agreement (Note 8
in Item 8 of the Company's 2003 Form 10-K). The 2001 amount reflected the
reversal of previously unrealized gains from the sales of marketable equity
securities when those gains were realized.
ANALYSIS OF OPERATING REVENUE AND PROFIT
Detailed information related to the operations and financial
performance of the Company's Industry Segments is included in Note 14 in Item 8
of the Company's 2003 Form 10-K. The following information should be read in
relation to information contained in that Note.
Transportation Industry
Ocean Transportation; 2003 compared with 2002
- ---------------------------------------------
- --------------------------------------------------------------------
(dollars in millions) 2003 2002 Change
- --------------------------------------------------------------------
Revenue $ 776 $ 687 13%
Operating profit $ 93 $ 42 2.2x
- --------------------------------------------------------------------
Volume (units)
Hawaii containers 162,400 152,500 6%
Hawaii automobiles 145,200 120,500 20%
Guam containers 17,800 16,300 9%
- --------------------------------------------------------------------
Transportation - Ocean Transportation revenue of $776 million for 2003
was 13 percent higher than the $687 million reported in 2002. Of this increase,
57 percent was due to the terminal handling charges and other rate actions, and
43 percent was due to higher container and automobile volume. In January 2003,
to partially offset increasing terminal operation costs, Matson implemented a
terminal handling charge in its Hawaii Service of $200 per container for
westbound freight, $100 per container for eastbound freight, and $30 per
automobile.
For 2003, Hawaii Service container volume was 6 percent higher than in
2002 and automobile volume was 20 percent higher reflecting the recovery in
westbound container volumes that had declined in the months following September
11, 2001, a carryover of freight into 2003 following West Cost port disruptions
in the fourth quarter of 2002, and higher market growth due, in part, to the
improving Hawaii economy. During 2003 Matson accepted delivery of a new vessel,
the M.V. Manukai, and retired two older vessels.
Automobile volume increases also reflect principally increased
automobile dealer sales but also include rental fleet replacements, partly
offset by the acceleration of some 2003 automobile carriage into the third
quarter of 2002 in anticipation of the port disruptions. During the fourth
quarter, Matson chartered a roll-on/roll-off ("RORO") vessel, the Great Land,
to accommodate customer needs in a cost effective manner. In addition to moving
the Great Land's RORO operations to a Honolulu pier that is separate from
container operations, the vessel is making direct calls to Maui. Guam Service
container volume was 9 percent higher than 2002, reflecting recovery efforts
following Typhoon Pongsona.
Operating profit of $93 million for 2003 was $51 million greater than
the $42 million reported for 2002 reflecting principally $37 million of
favorable revenue yields and improved cargo volume, a $17 million pension
settlement gain that resulted from Matson joining the newly formed Hawaii
Terminals Multiemployer Plan, $13 million due to the absence of port disruptions
that reduced 2002 operating results, $22 million due to higher margins in the
Hawaii and Guam Service due to higher volume and improved terminal productivity
and $9 million of higher returns from joint ventures. These favorable factors
were partially offset by $17 million of higher vessel operating costs due
principally to the addition of an eighth vessel in the Hawaii Service to
accommodate the higher volume, $11 million for higher general and administrative
costs, principally related to increases in pension costs, $7 million of higher
west coast terminal costs and $4.7 million for the settlement of a claim with
the State of Hawaii (See Note 13 of Item 8 to the Company's Form 10-K). To
mitigate the effects of fluctuating fuel costs, Matson charges a fuel surcharge.
Ocean Transportation; 2002 compared with 2001
- ---------------------------------------------
- ---------------------------------------------------------------------------
(dollars in millions) 2002 2001 Change
- ---------------------------------------------------------------------------
Revenue $ 687 $ 682 1%
Operating profit $ 42 $ 61 -30%
- ---------------------------------------------------------------------------
Volume (units)
Hawaii containers 152,500 149,600 2%
Hawaii automobiles 120,500 122,400 -2%
Guam containers 16,300 17,300 -6%
- ---------------------------------------------------------------------------
Ocean Transportation revenue of $687 million for 2002 was 1 percent
higher than the $682 million reported in 2001. The higher revenue was due to
higher container volumes in the Hawaii Service, partially offset by lower Guam
Service container volume and lower Hawaii Service automobile volume.
For 2002 compared with 2001, Hawaii Service container volume was 2
percent higher, Hawaii Service automobile volume was 2 percent lower and Guam
Service container volume was 6 percent lower. The increased Hawaii Service
container volume was due, in part, to the lower than normal 2001 fourth quarter
cargo that was affected adversely by terrorist events of September 11, 2001.
Hawaii container and automobile volumes were affected adversely by U.S. Pacific
Coast labor disruptions experienced in the fourth quarter of 2002.
Operating profit of $42 million declined 30 percent from the $61
million reported for 2001 reflecting principally $13 million related to 2002
disruptions in U.S. Pacific Coast ports, $6 million of higher pension and
personnel costs, a 2001 gain of $3 million from the sale of two tugboats, $2
million of higher drydocking expenses, and the 2002 write-off of $1 million in
assets made obsolete by the replacement of two cranes at the Company's Sand
Island terminal. These unfavorable factors were offset partially by $3 million
for increased contract cargo carriage and $1 million of lower vessel costs due
principally to operating one fewer vessel in the Hawaii Service during most of
2002. Matson's share of the Sea Star Line, LLC and SSA Terminals, LLC joint
venture losses, included in operating profit, was $2 million less than its share
of losses recorded in 2001.
In January 2002, Matson reduced the number of vessels in the Hawaii
Service from eight to seven. An eighth vessel was returned to the regular Hawaii
Service in December 2002 to help alleviate the cargo backlogs that resulted from
the previously discussed port disruptions. In January 2002, Matson sold two
vessels to Sea Star Line, LLC for $17 million, which approximated the vessels'
carrying value.
In 2002, the labor agreement between the International Longshore and
Warehouse Union ("ILWU") and the Pacific Maritime Association ("PMA"), of which
Matson is a member, expired. Early in the fourth quarter of 2002, following
extensive negotiations and a shutdown of West Coast port operations, the U.S.
Court of Appeals for the Ninth Circuit issued an order requiring that the ports
be re-opened and longshore workers be ordered back to work for an 80-day cooling
off period. A new agreement between the ILWU and the PMA was ratified in January
2003. A separate six-year labor agreement with the ILWU Local 142 in Hawaii was
ratified in January 2003. The impact of the new ILWU agreements increased
terminal handling and benefit costs and was the primary reason for implementing
the previously noted terminal handling charge in January 2003.
On December 8, 2002, Typhoon Pongsona hit the island of Guam, causing
extensive property and economic damage to the island, but only minor damage to
Matson's office and equipment. Repairs were completed and normal operations
quickly resumed.
Logistics Services; 2003 compared with 2002
- -------------------------------------------
- ---------------------------------------------------------------------------
(dollars in millions) 2003 2002 Change
- ---------------------------------------------------------------------------
Revenue $ 238 $ 195 22%
Operating profit $ 4 $ 3 39%
- ---------------------------------------------------------------------------
Matson Integrated Logistics, Inc. (previously Matson Intermodal System,
Inc.) provides intermodal marketing and trucking brokerage services throughout
North America. Revenue was $238 million for 2003, compared with $195 million in
2002. Operating profit was $4 million for 2003, compared with $3 million
earned in 2002. The 2003 revenue growth was primarily the result of new
business.
In the fourth quarter of 2003, Matson Integrated Logistics acquired
certain assets, obligations and contracts of TransAmerica Transportation
Services, Inc. ("TTS," which is not affiliated with the Transamerica entity that
is a subsidiary of AEGON N.V.). TTS provides truck brokerage services to
companies located throughout the United States of America, Canada and Mexico by
contracting with over 100 regionally located transportation agencies and
carriers. Headquartered in Akron, Ohio, TTS provides comprehensive truckload,
less than truckload, and logistics services. The transaction added $12 million
of assets to the consolidated balance sheet at December 31, 2003, including
goodwill of approximately $1 million. No debt was assumed in connection with the
acquisition.
Logistics Services; 2002 compared with 2001
- -------------------------------------------
- ----------------------------------------------------------------------
(dollars in millions) 2002 2001 Change
- ----------------------------------------------------------------------
Revenue $ 195 $ 122 60%
Operating profit $ 3 $ 2 94%
- ----------------------------------------------------------------------
Matson Integrated Logistics revenue was $195 million for 2002, compared
with $122 million in 2001. Operating profit was $3 million for 2002, compared
with $2 million earned in 2001. The 2002 revenue growth was primarily the result
of new business.
The revenue for intermodal services includes the total amount billed to
customers for transportation services. The primary costs of the business include
purchased transportation for that cargo. As a result, the operating profit
margins for this business are consistently lower than other A&B businesses. The
primary operating profit and investment risk in the intermodal business is the
quality of receivables, which are monitored closely by management.
Property Development and Management
Leasing; 2003 compared with 2002
- --------------------------------
- --------------------------------------------------------------------
(dollars in millions) 2003 2002 Change
- --------------------------------------------------------------------
Revenue $ 80 $ 73 10%
Operating profit $ 37 $ 33 12%
- --------------------------------------------------------------------
Occupancy Rates:
Mainland 93% 92% 1%
Hawaii 90% 89% 1%
- --------------------------------------------------------------------
Revenue, before subtracting amounts treated as discontinued operations,
was $80 million for 2003, or 10 percent higher than the $73 million reported in
2002. Operating profit, also before subtracting discontinued operations, was $37
million for 2003, or 12 percent higher than the $33 million earned in 2002. The
higher operating profit was due primarily to the purchases of new
income-producing properties as well as higher rental rates and occupancies for
both the Mainland and Hawaii portfolios. These favorable factors were partially
offset by increased operating costs and additional expense to repair a siding
problem on a commercial building and other costs. Mainland occupancy increased,
due principally to tenancy increases in industrial properties as well as the
varying mix of properties in the portfolio due to sales and acquisitions. Hawaii
occupancy increased, due principally to gains in office leasing.
Leasing; 2002 compared with 2001
- --------------------------------
- -------------------------------------------------------------------
(dollars in millions) 2002 2001 Change
- -------------------------------------------------------------------
Revenue $ 73 $ 71 3%
Operating profit $ 33 $ 34 -4%
- -------------------------------------------------------------------
Occupancy Rates:
Mainland 92% 93% -1%
Hawaii 89% 90% -1%
- -------------------------------------------------------------------
Revenue, before subtracting amounts treated as discontinued operations,
was $73 million for 2002, or 3 percent higher than the $71 million reported in
2001. Operating profit, also before subtracting discontinued operations, was $33
million for 2002, or 4 percent lower than the $34 million earned in 2001. The
decrease in operating profit was due primarily to lower occupancies, increased
operating costs, and additional maintenance expense to repair a siding problem
on a commercial building. Mainland occupancy declined, due principally to
vacancies resulting from two tenant bankruptcies. Hawaii occupancy declined, due
primarily to an office vacancy that occurred in late 2001 and which was not
re-tenanted until July 2002.
As with any large real estate portfolio of commercial properties,
occupancy levels will vary between reporting periods based on known lease
expirations, unanticipated lease terminations, and properties sold and purchased
in the interim periods. The Company's portfolio includes leases covering a wide
range of space sizes and income, with no necessary correlation between lease
size and lease income. For example, a large lease covering 480,000 square feet
of industrial warehouse space in Ontario, California expired in December 2002.
Although this lease constituted approximately 10 percent of the total space in
the Company's portfolio, it represented only 2.5 percent of the portfolio's
annual leasing revenue. In early 2003 that property was leased to a new tenant.
Property Sales; 2003 compared with 2002 and 2001
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(dollars in millions) 2003 2002 2001
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Revenue $ 64 $ 93 $ 89
Operating profit $ 24 $ 19 $ 18
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Before subtracting amounts treated as discontinued operations, property
sales revenue was $64 million and operating profit was $24 million in 2003.
Sales during 2003 included (1) a shopping center in Nevada for $24 million, (2)
six commercial properties on Maui (including a seven-acre property that had a
low carrying cost) for $15 million, (3) 23 residential properties for $9
million, (4) eight floors in the Alakea Corporate Tower for $9 million, (5)
seven industrial lots on Oahu for $3 million, (6) five industrial lots on Maui
for $3 million and (7) two land parcels on Maui for $1 million. Operating profit
also includes the Company's share of earnings in two real estate joint ventures
of $4 million that, combined, reflects the sales of 142 residential units in
2003.
Revenue of $93 million and operating profit of $19 million in 2002
resulted from the sales of (1) a seven-building distribution complex in Texas
for $27 million, (2) a shopping center and an industrial complex in California
for $27 million, (3) several small commercial properties, an 85-acre parcel in
Upcountry Maui, and nine business parcels on Oahu and Maui for $18 million, (4)
27 residential properties for $16 million and (5) a shopping center in Colorado
for $5 million. Operating profit also includes the Company's share of earnings
in two real estate joint ventures, reflecting the sales of five residential
units in 2002.
Revenue of $89 million and operating profit of $18 million in 2001
resulted from the sales of (1) 82 residential properties for $48 million, (2)
three commercial properties in Bainbridge, Washington for $16 million, (3) a
14-acre parcel at Maui Business Park to Wal-Mart for $14 million, (4) 11
business parcels on Oahu for $5 million, (4) a 68-acre parcel for highway
widening on Maui for $2 million, (5) two industrial lots on Maui for $1 million,
and (6) several parcels on Maui for $3 million.
The mix of property sales in any year or quarter can be diverse. Sales
can include developed residential real estate, commercial properties,
developable subdivision lots, undeveloped land, and property sold under threat
of condemnation. The sale of undeveloped land and vacant parcels in Hawaii
generally provides a greater contribution to earnings than does the sale of
developed and commercial property, due to the low historical cost basis of the
Company's Hawaii land. Consequently, property sales reve