UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _______
Commission file number 0-565
ALEXANDER & BALDWIN, INC.
(Exact name of registrant as specified in its charter)
Hawaii 99-0032630
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
822 Bishop Street
Post Office Box 3440, Honolulu, Hawaii 96801
(Address of principal executive offices and zip code)
808-525-6611
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
(Title of Class)
Number of shares of Common Stock outstanding at February 7, 2005:
43,470,917
Aggregate market value of Common Stock held by non-affiliates at June 30, 2004:
$1,356,651,553
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |X| No _____
Documents Incorporated By Reference
Portions of Registrant's Proxy Statement dated March 7, 2005 (Part III of
Form 10-K)
TABLE OF CONTENTS
PART I
Page
Items 1 & 2. Business and Properties...........................................1
A. Transportation....................................................1
(1) Freight Services.........................................1
(2) Vessels..................................................2
(3) Terminals................................................3
(4) Logistics and Other Services.............................3
(5) Competition..............................................3
(6) Labor Relations..........................................5
(7) Rate Regulation..........................................5
B. Real Estate.......................................................6
(1) General..................................................6
(2) Planning and Zoning......................................6
(3) Residential Projects.....................................7
(4) Commercial Properties....................................8
C. Food Products....................................................11
(1) Production..............................................11
(2) Marketing of Sugar and Coffee...........................12
(3) Competition and Sugar Legislation.......................13
(4) Properties and Water....................................14
D. Employees and Labor Relations....................................14
E. Energy...........................................................15
F. Available Information............................................16
Item 3. Legal Proceedings................................................16
Item 4. Submission of Matters to a Vote of Security Holders..............17
Executive Officers of the Registrant..........................................17
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities................................18
Item 6. Selected Financial Data..............................................20
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...........43
Item 8. Financial Statements and Supplementary Data..........................45
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.................................................85
Item 9A. Controls and Procedures..............................................85
A. Disclosure Controls and Procedures..........................85
B. Internal Control over Financial Reporting...................85
Item 9B. Other Information....................................................85
PART III
Item 10. Directors and Executive Officers of the Registrant...................86
A. Directors...................................................86
B. Executive Officers..........................................86
C. Audit Committee Financial Experts...........................87
D. Code of Ethics..............................................87
Item 11. Executive Compensation...............................................87
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters..........................................87
Item 13. Certain Relationships and Related Transactions.......................87
Item 14. Principal Accountant Fees and Services...............................88
PART IV
Item 15. Exhibits, Financial Statement Schedules..............................89
A. Financial Statements........................................89
B. Financial Statement Schedules...............................89
C. Exhibits Required by Item 601 of Regulation S-K.............89
Signatures....................................................................97
Consent of Independent Registered Public Accounting Firm......................99
ALEXANDER & BALDWIN, INC.
FORM 10-K
Annual Report for the Fiscal Year
Ended December 31, 2004
PART I
ITEMS 1 & 2. BUSINESS AND PROPERTIES
Alexander & Baldwin, Inc. ("A&B") is a diversified corporation with
most of its operations centered in Hawaii. It was founded in 1870 and
incorporated in 1900. Ocean transportation operations, related shoreside
operations in Hawaii, and intermodal, truck brokerage and logistics services are
conducted by a wholly-owned subsidiary, Matson Navigation Company, Inc.
("Matson") and two Matson subsidiaries. Property development and food products
operations are conducted by A&B and certain other subsidiaries of A&B.
The business industries of A&B are as follows:
A. Transportation - carrying freight, primarily between various
ports on the U.S. Pacific Coast and major Hawaii ports and
Guam; chartering vessels to third parties; arranging
intermodal and motor carrier services and providing logistics
services in North America; and providing terminal, stevedoring
and container equipment maintenance services in Hawaii.
B. Real Estate - purchasing, developing, selling, managing,
leasing and investing in commercial (including retail, office
and industrial) and residential properties, in Hawaii and on
the U.S. mainland.
C. Food Products - growing sugar cane and coffee in Hawaii;
producing bulk raw sugar, specialty food-grade sugars,
molasses and green coffee; marketing and distributing roasted
coffee and green coffee; providing sugar, petroleum and
molasses hauling, general trucking services, mobile equipment
maintenance and repair services, and self-service storage in
Hawaii; and generating and selling electricity.
For information about the revenue, operating profits and identifiable
assets of A&B's industry segments for the three years ended December 31, 2004,
see Note 14 ("Industry Segments") to A&B's financial statements in Item 8 of
Part II below.
DESCRIPTION OF BUSINESS AND PROPERTIES
A. Transportation
(1) Freight Services
Matson's Hawaii Service offers containership freight services between
the ports of Long Beach, Oakland, Seattle, and the major ports in Hawaii on the
islands of Oahu, Kauai, Maui and Hawaii. Roll-on/roll-off service is provided
between California and the major ports in Hawaii.
Matson is the principal carrier of ocean cargo between the U.S. Pacific
Coast and Hawaii. In 2004, Matson carried approximately 169,600 containers
(compared with 162,400 in 2003) and 157,000 automobiles (compared with 145,200
in 2003) between those destinations. Principal westbound cargoes carried by
Matson to Hawaii include dry containers of mixed commodities, refrigerated
commodities, building materials, automobiles and packaged foods. Principal
eastbound cargoes carried by Matson from Hawaii include automobiles, household
goods, refrigerated containers of fresh pineapple, canned pineapple and dry
containers of mixed commodities. The preponderance of Matson's Hawaii Service
revenue is derived from the westbound carriage of containerized freight and
automobiles.
Matson's Guam Service provides containership freight services between
the U.S. Pacific Coast and Guam and Micronesia. Matson's Guam Service is a
component of the Pacific Alliance Service, a strategic alliance established by
Matson and American President Lines, Ltd. ("APL") to provide freight services
between the U.S. Pacific Coast and Hawaii, Guam and several Far East ports.
In 2004, Matson carried approximately 17,200 containers (compared with 17,800 in
2003) and 4,580 automobiles (compared with 4,660 in 2003) in the Guam Service.
The alliance currently utilizes three Matson vessels and two APL vessels.
Matson's agreement with APL is scheduled to expire in February 2006. For
additional information about the APL alliance, see "Charter Agreements Related
to Guam Service" in Item 7 of Part II below.
In February 2005, Matson announced that it will replace its existing
Guam Service at the termination of the APL alliance with an integrated
Hawaii/Guam/China service beginning in February 2006. The service will employ
three existing Matson containerships along with two new containerships to be
purchased from Kvaerner Philadelphia Shipyard, Inc. ("Kvaerner") in a five-ship
string that carries cargo from the U.S. West Coast to Honolulu, then to Guam,
and eventually to China. In China, the vessels will be loaded with cargo
destined for the U.S. West Coast. The Guam service strategy involves
re-deploying into the Hawaii service three C-9 class vessels that currently
serve Guam at the termination of the APL alliance.
Matson's Mid-Pacific Service offers container and conventional freight
services between the U.S. Pacific Coast and the ports of Kwajalein, Ebeye and
Majuro in the Republic of the Marshall Islands and Johnston Island, all via
Honolulu.
See "Rate Regulation" below for a discussion of Matson's freight rates.
(2) Vessels
Matson's fleet consists of 11 containerships, three combination
container/trailerships, including a combination ship time-chartered from a third
party, one roll-on/roll-off barge, two container barges equipped with cranes
that serve the neighbor islands of Hawaii, and one container barge equipped with
cranes in the Mid-Pacific service. The 17 Matson-owned vessels in the fleet
represent an investment of approximately $848 million expended over the past 34
years. The majority of vessels in the Matson fleet have been acquired with the
assistance of withdrawals from a Capital Construction Fund established under
Section 607 of the Merchant Marine Act, 1936, as amended.
Matson has actively pursued a vessel renewal program. In 2002, Matson
contracted with Kvaerner for two new containerships for the Hawaii Service, each
at a project cost of approximately $107 million. The first ship was delivered in
the third quarter of 2003, and the second was delivered in the third quarter of
2004.
Ships owned by Matson are described on page 4.
As a complement to its fleet, Matson owns approximately 19,100
containers, 11,000 container chassis, 700 auto-frames and miscellaneous other
equipment. Capital expenditures incurred by Matson in 2004 for vessels,
equipment and systems totaled approximately $128 million.
Matson entered into agreements in February 2005 with Kvaerner to
purchase two containerships at a cost of $144.4 million each. The first ship is
expected to be delivered in June 2005, and the second ship is expected to be
delivered in May 2006. Also, in February 2005, Matson entered into a right of
first refusal agreement with Kvaerner, which provides that, after the second
containership is delivered to Matson, Matson has the right of first refusal to
purchase each of the next four containerships of similar design built by
Kvaerner that are deliverable before June 30, 2010. Matson may either exercise
its right of first refusal and purchase the ship at an eight percent discount
from a third party's proposed contract price, or decline to exercise its right
of first refusal and be paid by Kvaerner eight percent of such price.
Notwithstanding the above, if Matson and Kvaerner agree to a construction
contract for a vessel to be delivered before June 30, 2010, Matson shall receive
an eight percent discount.
(3) Terminals
Matson Terminals, Inc. ("Matson Terminals"), a wholly-owned subsidiary
of Matson, provides container stevedoring, container equipment maintenance and
other terminal services for Matson and other ocean carriers at its 105-acre
marine terminal in Honolulu. Matson Terminals owns and operates seven cranes at
the terminal, which handled approximately 423,300 containers in 2004 (compared
with 419,600 in 2003). The facility can accommodate three vessels at one time.
Matson Terminals' lease with the State of Hawaii runs through September 2016. As
the result of an acquisition completed on January 31, 2005, Matson Terminals
also provides container stevedoring and other terminal services to Matson and
other vessel operators at ports on the island of Hawaii.
SSA Terminals, LLC ("SSAT"), a joint venture of Matson and SSA Marine,
Inc. ("SSA"), provides terminal and stevedoring services at U.S. Pacific Coast
terminal facilities in Long Beach, Oakland and Seattle.
Capital expenditures incurred by Matson Terminals in 2004 for terminals
and equipment totaled approximately $1 million.
(4) Logistics and Other Services
Matson Integrated Logistics, Inc. ("Matson Integrated Logistics"), a
wholly-owned subsidiary of Matson, arranges rail, highway, air, ocean and other
surface transportation and provides other third-party logistics services for
North American shippers. Through volume purchases of rail, motor carrier, air
and ocean transportation services, augmented by such services as shipment
tracing and single-vendor invoicing, Matson Integrated Logistics is able to
reduce transportation costs for its customers. Matson Integrated Logistics
operates eight regional operating centers and has 23 sales offices across the
U.S. mainland.
(5) Competition
Matson's Hawaii Service and Guam Service have one major containership
competitor that serves Long Beach, Oakland, Tacoma, Honolulu and Guam. Other
competitors in the Hawaii Service include two common carrier barge services,
unregulated proprietary and contract carriers of bulk cargoes, and air cargo
service providers. Although air freight competition is intense for
time-sensitive and perishable cargoes, inroads by such competition in terms of
cargo volume are limited by the amount of cargo space available in passenger
aircraft and by generally higher air freight rates.
Matson vessels are operated on schedules that make available to
shippers and consignees regular day-of-the-week sailings from the U.S. Pacific
Coast and day-of-the-week arrivals in Hawaii. Under its current schedule, Matson
operates between 190 and 208 Hawaii round-trip voyages per year, double the
westbound voyages of its nearest competitor, and arranges additional voyages
when cargo volumes require additional capacity. This service is attractive to
customers because more frequent arrivals permit customers to reduce inventory
costs. Matson also competes by offering a more comprehensive service to
customers, supported by the scope of its equipment, its efficiency and
experience in handling containerized cargo, and competitive pricing.
Competition in the Hawaii Service is expected to increase in 2005 due
to entry into the Hawaii trade by the operator of a new dedicated automobile and
truck carrier, with a stated carrying capacity of 3,000 automobiles every two
weeks beginning in the second quarter of 2005. The operator announced that it
will target automobiles, buses, trucks and other large and oversize rolling
stock, and that it signed a multi-year contract with an automobile manufacturer
that is a current Matson customer, for which Matson moved approximately 20,000
westbound automobiles in 2004. Matson is well-positioned to compete with the new
entrant. Partially offsetting the loss of business to the new entrant, Matson
recently received a multi-year commitment from an automobile manufacturer that
previously was the customer of a different competitor. While the new entrant
into the Hawaii market is expected to have some adverse effect, its near-term
impact cannot be estimated, and the long-term impact will not be
MATSON NAVIGATION COMPANY, INC.
FLEET--2/1/05
-------------
Usable Cargo Capacity
------------------------------------------------------
Containers Vehicles
Year Maximum Maximum -------------------------------------- --------------
Official Year Recon- Speed Deadweight Reefer
Vessel Name Number Built structed Length (Knots) (Long Tons) 20' 24' 40' 45' Slots TEUs (1) Autos Trailers
- ----------- -------- ----- -------- ---------- ------- ----------- --- --- ----- --- ------ -------- ----- --------
Diesel-Powered Ships
- --------------------
R.J. PFEIFFER....... 979814 1992 -- 713' 6" 23.0 27,100 48 171 988 -- 300 2,229 -- --
MOKIHANA (2)........ 655397 1983 -- 860' 2" 23.0 30,167 182 -- 1,340 -- 408 2,824 -- --
MAHIMAHI (2)........ 653424 1982 -- 860' 2" 23.0 30,167 182 -- 1,340 -- 408 2,824 -- --
MANOA (2)........... 651627 1982 -- 860' 2" 23.0 30,187 182 -- 1,340 -- 408 2,824 -- --
MANUKAI............. 1141163 2003 -- 711' 9" 23.0 29,517 4 -- 1,359 -- 300 2,592 -- --
MAUNAWILI........... 1153166 2004 -- 711' 9" 23.0 29,517 4 -- 1,359 -- 300 2,592 -- --
Steam-Powered Ships
- -------------------
KAUAI............... 621042 1980 1994 720' 5 1/2" 22.5 26,308 -- 458 538 -- 300 1,626 44 --
MAUI................ 591709 1978 1993 720' 5 1/2" 22.5 26,623 -- 458 538 -- 300 1,626 -- --
MATSONIA............ 553090 1973 1987 760' 0" 21.5 22,501 16 128 771 -- 201 1,712 450 56
LURLINE............. 549900 1973 2003 826' 6" 21.5 22,213 6 -- 865 38 246 1,821 910 55
EWA (3)............. 530140 1972 1978 787' 8" 21.0 38,747 286 276 681 -- 228 1,979 -- --
CHIEF GADAO (3)..... 530138 1971 1978 787' 8" 21.0 37,346 230 464 597 -- 274 1,981 -- --
LIHUE............... 530137 1971 1978 787' 8" 21.0 38,656 286 276 681 -- 188 1,979 -- --
Barges
- ------
WAIALEALE (4)....... 978516 1991 -- 345' 0" -- 5,621 -- -- -- -- 35 -- 230 45
ISLANDER (5)........ 933804 1988 -- 372' 0" -- 6,837 -- 276 24 -- 70 380 -- --
MAUNA LOA (5)....... 676973 1984 -- 350' 0" -- 4,658 -- 144 72 -- 84 316 -- --
HALEAKALA (5)....... 676972 1984 -- 350' 0" -- 4,658 -- 144 72 -- 84 316 -- --
Molasses
----------
Vessel Name Short Tons
- ----------- ----------
Diesel-Powered Ships
- --------------------
R.J. PFEIFFER....... --
MOKIHANA (2)........ --
MAHIMAHI (2)........ --
MANOA (2)........... --
MANUKAI............. --
MAUNAWILI........... --
Steam-Powered Ships
- -------------------
KAUAI............... 2,600
MAUI................ 2,600
MATSONIA............ 4,300
LURLINE............. 2,100
EWA (3)............. --
CHIEF GADAO (3)..... --
LIHUE .............. --
Barges
- ------
WAIALEALE (4)....... --
ISLANDER (5)........ --
MAUNA LOA (5)....... 2,100
HALEAKALA (5)....... 2,100
- --------
(1) "Twenty-foot Equivalent Units" (including trailers). TEU is a standard
measure of cargo volume correlated to the volume of a standard 20-foot dry
cargo container.
(2) Time-chartered to APL until February 2006.
(3) Reserve Status.
(4) Roll-on/Roll-off Barge.
(5) Container Barge.
known for some time. The total Hawaii-Mainland auto carriage market is
approximately 190,000 automobiles per year.
The carriage of cargo between the U.S. Pacific Coast and Hawaii on
foreign-built or foreign-documented vessels is prohibited by Section 27 of the
Merchant Marine Act, 1920, commonly referred to as the Jones Act. However,
foreign-flag vessels carrying cargo to Hawaii from non-U.S. locations provide
indirect competition for Matson's Hawaii Service. Far East countries, Australia,
New Zealand and South Pacific islands have direct foreign-flag services to
Hawaii.
In response to coordinated efforts by various interests to convince
Congress to repeal the Jones Act, in 1995 Matson joined other businesses and
organizations to form the Maritime Cabotage Task Force, which supports the
retention of the Jones Act and other cabotage laws. Repeal of the Jones Act
would allow all foreign-flag vessel operators, which do not have to abide by
U.S. laws and regulations, to sail between U.S. ports in direct competition with
Matson and other U.S. operators, which must comply with such laws and
regulations. The Task Force seeks to inform elected officials and the public
about the economic, national security, commercial, safety and environmental
benefits of the Jones Act and similar cabotage laws.
Matson Integrated Logistics competes for freight with a number of large
and small companies that provide surface transportation and third-party
logistics services.
(6) Labor Relations
The absence of strikes and the availability of labor through hiring
halls are important to the maintenance of profitable operations by Matson. Until
2002, when International Longshore and Warehouse Union ("ILWU") workers were
locked out for ten days on the U.S. Pacific Coast, Matson's operations had not
been disrupted significantly by labor disputes in over 30 years. See "Employees
and Labor Relations" below for a description of labor agreements to which Matson
and Matson Terminals are parties and information about certain unfunded
liabilities for multiemployer pension plans to which Matson and Matson Terminals
contribute.
(7) Rate Regulation
Matson is subject to the jurisdiction of the Surface Transportation
Board with respect to its domestic rates. A rate in the noncontiguous domestic
trade is presumed reasonable and will not be subject to investigation if the
aggregate of increases and decreases is not more than 7.5 percent above, or more
than 10 percent below, the rate in effect one year before the effective date of
the proposed rate, subject to increase or decrease by the percentage change in
the U.S. Producer Price Index. Effective January 11, 2004, Matson increased its
rates in its Hawaii Service by $125 per westbound container, $60 per eastbound
container, and $25 per vehicle, both westbound and eastbound, and its terminal
handling charge by $25 per westbound container, $15 per eastbound container and
$5 per vehicle. Effective June 6, 2004, Matson increased its rates in its Guam
Service by $125 per container and $5 on items rated per weight or measure and
its West Coast terminal handling charge by $25 per container, $5 per vehicle and
$1 per revenue ton on items rated per weight or measure, both westbound and
eastbound. Due to sustained increases in fuel costs, Matson increased its fuel
surcharge in its Hawaii and Guam Services from 7.5 percent to 8.0 percent,
effective March 14, 2004; to 8.8 percent, effective June 21, 2004; and to 9.2
percent, effective October 18, 2004.
B. Real Estate
(1) General
As of December 31, 2004, A&B and its subsidiaries, including A & B
Properties, Inc., owned approximately 90,056 acres, consisting of approximately
89,817 acres in Hawaii and approximately 239 acres elsewhere, as follows:
Location No. of Acres
-------- ------------
Oahu ................................................ 38
Maui ................................................ 68,745
Kauai ............................................... 21,034
California .......................................... 91
Texas ............................................... 47
Washington .......................................... 13
Arizona ............................................. 35
Nevada .............................................. 21
Colorado ............................................ 17
Utah ................................................ 15
------
TOTAL ............................................. 90,056
======
As described more fully in the table below, the bulk of this acreage
currently is used for agricultural and related activities, and includes pasture
land, watershed land and conservation reserves. The balance is used or planned
for development or other urban uses. An additional 2,311 acres on Maui and Kauai
are leased from third parties and, in March 2003, title to 846 acres on Kauai
was transferred to a joint venture, consisting of A&B and DMB Associates, Inc.,
an Arizona-based developer, for the development of a master-planned resort
residential community. Such acreage is not included in the table above.
Current Use No. of Acres
----------- ------------
Hawaii
Fully entitled Urban (defined below) ................ 699
Agricultural, pasture and miscellaneous ............. 59,839
Watershed land/conservation ......................... 29,279
U.S. Mainland
Fully entitled Urban ................................ 239
------
TOTAL ....................................... 90,056
======
A&B and its subsidiaries are actively involved in the entire spectrum
of real estate development and ownership, including planning, zoning, financing,
constructing, purchasing, managing and leasing, selling and exchanging, and
investing in real property.
(2) Planning and Zoning
The entitlement process for development of property in Hawaii is both
time-consuming and costly, involving numerous State and County regulatory
approvals. For example, conversion of an agriculturally-zoned parcel to
residential zoning usually requires the following three approvals:
o amendment of the County general plan to reflect the desired
residential use;
o approval by the State Land Use Commission ("SLUC") to reclassify the
parcel from the Agricultural district to the Urban district; and
o County approval to rezone the property to the precise residential use
desired.
The entitlement process is complicated by the conditions, restrictions
and exactions that are placed on these approvals, including, among others, the
construction of infrastructure improvements, payment of impact fees,
restrictions on the permitted uses of the land, provision of affordable housing
and/or mandatory fee sale of portions of the project.
A&B actively works with regulatory agencies, commissions and
legislative bodies at various levels of government to obtain zoning
reclassification of land to its highest and best use. A&B designates a parcel as
"fully entitled" or "fully zoned" when the three land use approvals described
above have been obtained.
(3) Residential Projects
A&B is pursuing a number of residential projects in Hawaii, including:
(a) Wailea. In October 2003, A&B acquired 270 acres of fully-zoned,
undeveloped residential and commercial land at the Wailea Resort on Maui,
planned for up to 1,600 homes, for $67.1 million. A&B was the original developer
of the Wailea Resort, beginning in the 1970s and continuing until A&B sold the
Resort to the Shinwa Golf Group in 1989.
In January 2004, A&B commenced sales of 29 single-family homesites at
Wailea's Golf Vistas subdivision. Twenty-six lots were sold in 2004 and, as of
February 9, 2005, all 29 lots have closed escrow, at prices ranging from
$495,000 to $1.6 million, for an average price of $875,000.
In 2004, three bulk parcels were sold to third parties at an average
price of $559,000 per acre: MF-4 (10.5 acres), MF-15 (9.4 acres) and a 20
percent installment sale of MF-9 (30.2 acres). On January 7, 2005, a fourth
parcel sale closed at $535,000 per acre (MF-5, 8.4 acres). During 2004, A&B also
proceeded with a joint venture development on MF-8 (Kai Malu), as described more
fully below.
(b) Kai Malu at Wailea. In April 2004, A&B entered into a joint venture
with Armstrong Builders, Ltd. for development of the 25-acre MF-8 parcel at
Wailea. The project is planned to consist of 150 duplex units with an average
size of 1,800 square feet and an average price of over $1.0 million. In November
2004, the Planning Commission approved the issuance of a County Special
Management Area ("SMA") permit for the project and a preliminary public
condominium report was approved by the Hawaii Real Estate Commission for the
initial 34-unit phase, enabling marketing to commence in December 2004. As of
January 31, 2005, all of the 34 units in Phase I were sold under non-binding
contracts at an average price of $1.1 million. Final public condominium reports
for Phase I (34 units) and Phase II (54 units) were approved in February 2005,
enabling binding contracts to be secured.
(c) Haliimaile Subdivision. A&B's application to rezone 63 acres for
the development of a 150- to 200-lot subdivision in Haliimaile (Upcountry, Maui)
remains pending before the Maui County Council's Land Use Committee. Council
action is expected in 2005.
(d) Kukui`ula. Kukui`ula is a 1,000-acre master planned resort
residential community located in Poipu, Kauai. In April 2002, an agreement was
signed with an affiliate of DMB Associates, Inc., an Arizona-based developer of
master planned communities, for the joint development of Kukui`ula. The project
will consist of between 1,200 to 1,500 high-end residential units. During 2003,
A&B contributed to the venture title to 846 acres, a waste water treatment
plant, and other improvements. The balance of the land, approximately 165 acres,
is expected to be transferred to the venture in the first quarter of 2005. In
July 2003, the SLUC granted Urban designation for the project's remaining acres,
which will allow the entire 1,000-acre property to be developed as one
integrated project. In July 2004, the Kauai County Council gave final zoning and
visitor designation area approvals for the entire project. In August 2004, A&B
exercised its option to contribute to the joint venture up to 40 percent of the
project's future capital requirements. Design, engineering and construction
activity to date include: preparation of construction plans for onsite and
offsite infrastructure, preparation and submittal to government agencies of
subdivision maps for the initial phases of the project, development of potable
water wells, and permitting of a new electrical substation. Design work is
progressing on a sales center/model home complex, which will be constructed in
2005. For the initial phase of development, SMA approvals were secured and
permit applications were submitted for improvements. Marketing of the initial
phase is expected to commence in March 2005 and infrastructure construction is
scheduled to commence in mid-2005.
(e) Kai Lani. In September 2001, A&B entered into a joint venture with
Armstrong Kai Lani Corporation for the development of 116 townhouse units on an
11-acre parcel in the Ko 'Olina Resort on Oahu. Construction on the first
building began in July 2002 and 105 units were sold in 2003. By the first
quarter of 2004, the remaining 11 units had been sold. The average price of all
116 units was $495,000.
(f) Lanikea at Waikiki. In November 2001, A&B acquired a 1.63-acre,
vacant, fee simple development site in Waikiki, Oahu, for approximately $3.6
million. The property, located at the entrance to Waikiki, is zoned for
high-rise residential use and limited commercial uses. The project consists of
100 apartments, averaging 1,000 square feet in size, except for the four
penthouse units, which average 1,600 square feet. The building will be 30
stories tall, with the first five floors devoted to parking. Sales commenced in
April 2003 and, as of January 31, 2005, all 100 residential units were sold
under binding contracts, at an average price of $588,000 ($565 per square foot).
Construction commenced in December 2003 and is scheduled for completion in June
2005. The 13,500-square-foot commercial-zoned parcel along Kuhio Avenue and 31
parking stalls in the Lanikea parking structure were sold on January 14, 2005
for $3.75 million.
(g) Hokua. In July 2003, A&B entered into a joint venture with MK
Management LLC for the development of a 247-unit high-rise luxury condominium
project across from the Ala Moana Beach Park in Honolulu. The project will be 40
stories tall, with four floors of parking. The first 32 residential floors
include seven units each, with an average unit size of 1,760 square feet. The
next four floors have five units each, with an average unit size of 2,500 square
feet. The Penthouse floor contains three units, averaging 4,330 square feet
each. Sales commenced in December 2002 and, as of January 31, 2005, 242 of the
project's 247 units were sold under binding contracts, at an average price of
$1.1 million per unit ($594 per square foot). Construction commenced in December
2003 and is expected to be completed in December 2005.
(h) Kakaako Development. In August 2004, A&B acquired a 2.7-acre,
vacant, fee simple development site near downtown Honolulu, Oahu, for $14
million. A conceptual design for a 360-unit condominium project has been
developed, consisting of five floors of parking and 30 floors of residential
units. The average unit size will be approximately 1,100 square feet, and will
include one-, two- and three-bedroom floor plans. As required by the Hawaii
Community Development Authority (HCDA), 20 percent of the units have been
designated for sale to buyers earning no more than 140 percent of the Honolulu
median income. A preliminary public condominium report is expected by March
2005, at which time sales will commence. Construction is expected to commence in
early 2006.
(i) Mauna Lani. In April 2004, A&B entered into a joint venture with
Brookfield Homes Hawaii Inc. to acquire and develop a 30.5-acre residential
parcel in the Mauna Lani Resort on the island of Hawaii. In May 2004, the
property was acquired by the joint venture for $6.6 million. The conceptual plan
for the project consists of 137 single-family and duplex units. An SMA amendment
was submitted in October 2004 and was approved in November 2004. Site planning
was completed and submitted to the Mauna Lani Design Review Committee in January
2005. Product design, site planning, grading, drainage, utility and roadway
design work are being finalized. Groundbreaking is scheduled to commence in
mid-2005.
(j) HoloHolo Ku. In October 2001, A&B entered into a joint venture with
Kamuela Associates, LLC for the development of 44 detached single-family homes
under a Condominium Property Regime, on an 8.5-acre parcel in Kamuela on the
island of Hawaii. Construction began in December 2001, and was completed in
October 2003. Five homes were sold in 2002, 36 homes were sold in 2003, and the
remaining three homes were sold in 2004. The average price of the 44 homes was
$395,000.
(4) Commercial Properties
An important source of property revenue is the lease rental income A&B
receives from its leased portfolio, currently consisting of approximately 5.1
million leasable square feet of commercial building space, ground leases on 266
acres for commercial use, and leases on 10,719 acres for agricultural/pasture
use.
(a) Hawaii Commercial Properties
A&B's Hawaii commercial properties portfolio consists primarily of
seven retail centers, eight office buildings and three industrial properties,
comprising approximately 1.7 million square feet of leasable space. Most of the
commercial properties are located on Maui and Oahu, with smaller holdings in the
area of Port Allen, on the island of Kauai. The average occupancy for the Hawaii
portfolio was 90 percent in 2004, unchanged from 2003. In 2004, A&B sold a
0.9-acre leased fee parcel in Kahului, Maui.
The primary Hawaii commercial properties are as follows:
Leasable Area
Property Location Type (sq. ft.)
- -------- -------- ---- -------------
Maui Mall............................... Kahului, Maui Retail 192,600
Mililani Shopping Center................ Mililani, Oahu Retail 180,300
Pacific Guardian Complex................ Honolulu, Oahu Office 139,300
Kaneohe Bay Shopping Center............. Kaneohe, Oahu Retail 124,500
P&L Warehouse........................... Kahului, Maui Industrial 104,100
Kahului Shopping Center................. Kahului, Maui Retail 99,600
Ocean View Center....................... Honolulu, Oahu Office 99,200
Hawaii Business Park.................... Pearl City, Oahu Industrial 85,200
Haseko Center........................... Honolulu, Oahu Office 84,100
One Main Plaza.......................... Wailuku, Maui Office 82,800
Wakea Business Center................... Kahului, Maui Industrial/Retail 61,500
Kahului Office Building................. Kahului, Maui Office 56,800
Napili Plaza............................ Napili, Maui Retail 45,200
Fairway Shops at Kaanapali.............. Kaanapali, Maui Retail 35,100
Kahului Office Center................... Kahului, Maui Office 31,300
Stangenwald Building.................... Honolulu, Oahu Office 27,100
Port Allen Marina Center ............... Port Allen, Kauai Retail 23,600
Judd Building........................... Honolulu, Oahu Office 20,200
Several other commercial projects are being, or have been developed or
acquired, on Maui and Oahu, including:
(i) Triangle Square. Previous construction at the 12-acre Triangle
Square commercial project in Kahului, Maui includes two retail buildings with a
combined leasable area of 42,600 square feet, a BMW car dealership and three
other improved commercial properties under long-term ground leases. In January
2004, Hawaii's first Krispy Kreme store opened for business on a 0.9-acre ground
leased parcel. During 2004, an SMA permit was processed for a 6,500-square-foot
build-to-suit Acura dealership on 1.1 acres and a 4,500-square-foot
build-to-suit auto value center on 1.6 acres, and approval was obtained on
January 11, 2005.
(ii) Maui Business Park. Located in Kahului, Maui, the initial phase of
Maui Business Park, developed between 1995 and 2000, consists of approximately
69.4 saleable acres, subdivided into 41 lots, having an average size of 23,700
square feet, and three bulk parcels. The property is zoned for light
industrial/commercial uses.
From 1995 through 1998, a total of 26.4 acres were sold, including 20.3
acres for the development of a 349,300-square-foot retail center, whose anchor
tenants are Borders Books & Music, Lowe's, OfficeMax and Old Navy. From 1999 to
2003, a total of 35.6 acres were sold, including a 12.8-acre parcel to Home
Depot, which completed a 135,000-square-foot store in May 2001, and a 14-acre
parcel to Wal-Mart, which completed a 142,000-square-foot store in October 2001.
During 2004, eight half-acre lots (5.9 acres) were sold at an average
price of $27 per square foot. As of January 31, 2005, the last three lots in
Maui Business Park (1.8 acres) were sold at an average price of $28 per square
foot.
In May 2002, the Maui County Council approved the inclusion of
approximately 179 acres in the Wailuku-Kahului Community Plan for the future
expansion of Maui Business Park. In May 2003, A&B filed a petition with the SLUC
to redesignate 138 acres from Agricultural to Urban. (Seven acres are currently
designated Urban, and an additional 34 acres have already received tentative
approval for designation as Urban.) In February 2004, the SLUC approved the
reclassification of 138 acres to Urban. In April 2004, A&B filed a zoning change
application for the 179 acres and an SLUC application for the final Urban
approval for the 34 acres. An SLUC hearing on the 34 acres is scheduled in early
2005 and County hearings on the zoning application will commence after the SLUC
has granted final urban designation for the 34 acres.
(iii) Mill Town Center. Located in Waipahu, Oahu (approximately 12 miles
from Honolulu), the Mill Town Center is a light-industrial subdivision
consisting of 27.5 saleable acres, developed between 1999 and 2002. The property
was subdivided into 61 lots, having an average size of 29,100 square feet.
During 2004, 22 lots were sold, at an average price of $28 per square foot. As
of December 31, 2004, a total of 54 lots (24 acres) were sold, at an average
price of $25 per square foot. In January 2005, three lots closed at an average
price of $32 per square foot, while four lots (2.2 acres) remain unsold.
(iv) Kunia Shopping Center. In November 2002, A&B acquired a 4.6-acre,
fee simple vacant parcel for $2.65 million. The parcel, which is zoned for
retail use, is located in Kunia, Central Oahu (near the Royal Kunia and Village
Park residential communities) and is planned to be developed as a
50,000-square-foot neighborhood retail center, plus three pad sites. As of
January 31, 2005, leases were signed for about 52 percent of the space, and
letters of intent were signed for an additional 30 percent. In-line tenants
include Starbucks, Jamba Juice, T-Mobile, Baskin-Robbins, Fantastic Sam's,
Quizno's and various local retailers, restaurateurs and service providers.
Construction commenced in August 2004 and is projected to be completed in June
2005, at which time tenant improvements will commence. Opening is scheduled for
October 2005.
(v) Alakea Corporate Tower. In March 2003, A&B acquired a Class A
31-story office building in downtown Honolulu (since re-named Alakea Corporate
Tower), for $20 million. The building contains approximately 158,300 square feet
of office space, and was acquired with the intent of converting the building
into, and selling, fee simple office condominium units. In October 2003, a final
public condominium report was issued for the project and sales commenced with
eight whole floors closing in 2003. In 2004, 17.5 floors were sold. The 25.5
floors have been sold at an average price of $1.1 million per floor. The
remaining 5.5 floors are in escrow, at an average sales price of $1.0 million
per floor.
(vi) Daiei Retail Parcel. On February 1, 2005, A&B acquired the fee
simple interest in a four-acre income-producing parcel located in central
Honolulu for $19.3 million. The property is fully leased to The Daiei (USA),
Inc. until 2018, which operates the 105,000-square-foot retail store on the
premises. The parcel is fully entitled for commercial and high-rise residential
use.
(b) U.S. Mainland Commercial Properties
On the U.S. mainland, A&B owns a portfolio of commercial properties,
acquired primarily by way of tax-deferred exchanges under Internal Revenue Code
Section 1031. The sale of Ontario Pacific Business Centre, a 246,100-square-foot
industrial property located in Ontario, California, was completed on January 12,
2005, and the sale of Northwest Business Center, an 87,000-square-foot
industrial/office building located in San Antonio, Texas, was completed on
January 26, 2005. Excluding these two properties, A&B's Mainland portfolio
currently includes approximately 3.4 million square feet of leasable area,
comprising eight retail centers, four office buildings and six industrial
properties, as follows:
Leasable Area
Property Location Type (sq. ft.)
- -------- -------- ---- --------------
Ontario Distribution Center............. Ontario, CA Industrial 898,400
Sparks Business Center.................. Sparks, NV Industrial 396,100
Centennial Plaza........................ Salt Lake City, UT Industrial 244,000
Valley Freeway Corporate Park........... Kent, WA Industrial 229,100
Boardwalk Shopping Center............... Round Rock, TX Retail 184,600
San Pedro Plaza......................... San Antonio, TX Office 163,700
2868 Prospect Park...................... Sacramento, CA Office 161,700
Arbor Park Shopping Center.............. San Antonio, TX Retail 139,500
Mesa South Shopping Center.............. Phoenix, AZ Retail 133,600
San Jose Avenue Warehouse............... City of Industry, CA Industrial 126,000
Southbank II............................ Phoenix, AZ Office 120,800
Village at Indian Wells................. Indian Wells, CA Retail 104,600
2450 Venture Oaks....................... Sacramento, CA Office 99,000
Broadlands Marketplace.................. Broomfield, CO Retail 97,900
Carefree Marketplace.................... Carefree, AZ Retail 85,000
Marina Shores Shopping Center........... Long Beach, CA Retail 67,700
Vista Controls Building................. Valencia, CA Industrial/Office 51,100
Wilshire Center......................... Greeley, CO Retail 46,500
A&B's Mainland commercial properties achieved an average occupancy rate
of 95 percent in 2004 (compared with 93 percent in 2003). The increase was due
primarily to additions of fully-leased properties to the portfolio.
In 2002, A&B expanded its development activities to Valencia,
California, a fast growing region north of Los Angeles with favorable
demographics and strong economic growth. A&B will continue its search for
Mainland expansion opportunities in other growing markets. The following
development projects have been secured to date in Valencia:
(i) Westridge Executive Plaza. In January 2003, A&B signed a joint
venture agreement with Westridge Executive Building, LLC, for the development of
a 63,000-square-foot office building. Construction commenced in January 2003 and
was completed in January 2004. As of January 2005, the building was 95 percent
leased. Major tenants include Wells Fargo, Pardee Homes and Realty Executives.
(ii) Crossroads Plaza. In June 2004, A&B signed a joint venture agreement
with Intertex Hasley, LLC, to form Crossroads Plaza Development Partners, LLC,
for the development of a 62,000-square-foot mixed-use neighborhood retail center
on 6.5 acres of commercial-zoned land. The property was acquired in August for
$3.5 million. Site planning and design have been completed and pre-leasing has
commenced. Groundbreaking is expected to occur in mid-2005.
(iii) Rye Canyon. In October 2004, a joint venture between A&B and
Intertex Properties, LLC acquired, for $1.5 million, a 5.4-acre commercial-zoned
parcel for the development of an 85,000-square-foot office building. Site
planning and design are complete and design approvals are being sought.
Marketing and pre-leasing efforts commenced in February 2005. Groundbreaking is
expected to occur in mid-2005.
C. Food Products
(1) Production
A&B has been engaged in activities relating to the production of cane
sugar and molasses in Hawaii since 1870, and production of coffee in Hawaii
since 1987. A&B's current food products and related operations consist of: (1) a
sugar plantation on the island of Maui, operated by its Hawaiian Commercial &
Sugar Company ("HC&S") division, (2) a coffee farm on the island of Kauai,
operated by its Kauai Coffee Company, Inc. ("Kauai Coffee") subsidiary, (3) its
Kahului Trucking & Storage, Inc. ("KT&S") subsidiary, which provides sugar and
molasses hauling and storage, as well as petroleum hauling, mobile equipment
maintenance and repair services and self-service storage facilities on Maui and
(4) its Kauai Commercial Company, Incorporated subsidiary, which provides
services on Kauai similar to those provided by KT&S on Maui, as well as general
trucking services.
HC&S is Hawaii's largest producer of raw sugar, having produced
approximately 198,800 tons of raw sugar in 2004, or about 77 percent of the raw
sugar produced in Hawaii (compared with 205,700 tons, or about 79 percent in
2003). The decrease in production was due primarily to rainy weather early in
the year that affected planting, harvesting and milling operations; and to yield
losses attributable to a significant drought during the first year of crop
growth and the reappearance of leaf scald disease, which had been dormant for
years. Total Hawaii sugar production, in turn, amounted to approximately three
percent of total U.S. sugar production. HC&S harvested 16,890 acres of sugar
cane in 2004 (compared with 15,660 in 2003). More acres were harvested in 2004
to compensate for the yield losses noted above. Yields averaged 11.8 tons of
sugar per acre in 2004 (compared with 13.1 in 2003). The average cost per ton of
sugar produced at HC&S was $435 in 2004 (compared with $422 in 2003). The
increase in cost per ton was attributable to lower sugar production. As a
by-product of sugar production, HC&S also produced approximately 65,100 tons of
molasses in 2004 (compared with 72,500 in 2003).
In 2004, approximately 15,500 tons of sugar (compared with 12,100 in
2003) produced by HC&S were specialty food-grade raw sugars and sold under
HC&S's Maui Brand(R) trademark. A further expansion of the production facilities
for these sugars is planned for 2005.
During 2004, Kauai Coffee had approximately 3,200 acres of coffee trees
under cultivation. The harvest of the 2004 coffee crop yielded approximately 1.8
million pounds of green coffee (compared with 3.3 million in 2003). The lower
production was due primarily to accelerated natural drop (coffee falling off the
tree) from heavy rain and wind during harvests.
HC&S and McBryde Sugar Company, Limited ("McBryde"), a subsidiary of
A&B and the parent company of Kauai Coffee, produce electricity for internal use
and for sale to the local electric utility companies. HC&S's power is produced
by burning bagasse, by hydroelectric power generation and, when necessary, by
burning fossil fuels, whereas McBryde produces power solely by hydroelectric
generation. The price for the power sold by HC&S and McBryde is equal to the
utility companies' "avoided cost" of not producing such power themselves. In
addition, HC&S receives a capacity payment to provide a guaranteed power
generation capacity to the local utility. See "Energy" below for power
production and sales data.
(2) Marketing of Sugar and Coffee
Substantially all of the bulk raw sugar produced in Hawaii is
purchased, refined and marketed by C&H Sugar Company, Inc. ("C&H"), of which A&B
owns approximately 36 percent of its common voting stock, 40 percent of its
junior preferred stock and 100 percent of its senior preferred stock. The
results of A&B's equity investment in C&H are reported in A&B's financial
statements as an investment in an affiliate. C&H processes the raw cane sugar at
its refinery at Crockett, California, and markets the refined products primarily
in the western and central United States. HC&S markets its specialty food-grade
raw sugars to food and beverage producers and to retail stores under its Maui
Brand(R) label, and to distributors that repackage the sugars under their own
labels. HC&S's largest food-grade raw sugar customers are Cumberland Packing
Corp. and Sugar Foods Corporation, which repackage HC&S's turbinado sugar for
their "Sugar in the Raw" products.
Hawaiian Sugar & Transportation Cooperative ("HS&TC"), a cooperative
consisting of two sugar cane growers in Hawaii (including HC&S), has a supply
contract with C&H, ending in December 2008. Pursuant to the supply contract, the
growers sell their raw sugar to C&H at a price equal to the New York No. 14
Contract settlement price, less a discount and less costs of sugar vessel
discharge and stevedoring. This price, after deducting the marketing, operating,
distribution, transportation and interest costs of HS&TC, reflects the gross
revenue to the Hawaii sugar growers, including HC&S. Notwithstanding the supply
contract, HC&S arranged directly with C&H for the forward pricing of a portion
of its 2004 harvest, as described in Item 7A ("Quantitative and Qualitative
Disclosures About Market Risk") of Part II below.
At Kauai Coffee, coffee marketing efforts are directed toward
developing a market for premium-priced, estate-grown Kauai green coffee. Most of
the coffee crop is being marketed on the U.S. mainland and in Asia as green
(unroasted) coffee. In addition to the sale of green coffee, Kauai Coffee
produces and sells roasted, packaged coffee under the Kauai Coffee(R) trademark.
(3) Competition and Sugar Legislation
Hawaii sugar growers produce more sugar per acre than most other major
producing areas of the world, but that advantage is offset by Hawaii's high
labor costs and the distance to the U.S. mainland market. Hawaiian refined sugar
is marketed primarily west of Chicago. This is also the largest beet sugar
growing and processing area and, as a result, the only market area in the United
States that produces more sugar than it consumes. Sugar from sugar beets is the
greatest source of competition in the refined sugar market for the Hawaiian
sugar industry.
The overall U.S. caloric sweetener market grew until 2004. Preliminary
data indicates a 1.5-percent decrease in 2004. The use of non-caloric
(artificial) sweeteners accounts for a relatively small percentage of the
domestic sweetener market. The use of high fructose corn syrup and artificial
sweeteners is not expected to affect sugar markets significantly in the near
future.
The U.S. Congress historically has sought, through legislation, to
assure a reliable domestic supply of sugar at stable and reasonable prices. The
current protective legislation is the Farm Security and Rural Investment Act of
2002 ("2002 Farm Bill"). The two main elements of U.S. sugar policy are the
tariff-rate quota ("TRQ") import system and the price support loan program. The
TRQ system limits imports by allowing only a quota amount to enter the U.S.
after payment of a relatively low tariff. A higher, over-quota tariff is imposed
for imported quantities above the quota amount.
The 2002 Farm Bill reauthorized the sugar price support loan program,
which supports the U.S. price of sugar by providing for commodity-secured loans
to producers. Unlike most other commodity programs, sugar loans are made to
processors and not directly to producers. HC&S is both a producer and a
processor. To qualify for loans, processors must agree to provide a part of the
loan payment to producers. Loans may be repaid either in cash or by forfeiture
without penalty. The 2002 Farm Bill eliminated the former loan forfeiture
penalty and marketing assessments, which increased the effective support level.
Under the 2002 Farm Bill, the government is required to administer the
loan program at no net cost by avoiding sugar loan forfeitures. This is
accomplished by reestablishing marketing allotments, which provides each
processor or producer a specific limit on sales for the year, above which
penalties would apply. It is also accomplished by adjusting fees and quotas for
imported sugar to maintain the domestic price at a level that discourages
producers from defaulting on loans. A loan rate (support price) of 18 cents per
pound for raw cane sugar is in effect for the 2003 through 2007 crops. The
supply agreement between HS&TC and C&H allows HS&TC to place sugar under loan
pursuant to the loan program, but prohibits forfeiting sugar under loan while
providing a "floor" price.
U.S. domestic raw sugar prices remain below historical averages. The
pricing situation continues to be challenging, even to efficient producers like
HC&S. A chronological chart of the average U.S. domestic raw sugar prices, based
on the average daily New York No. 14 Contract settlement price for domestic raw
sugar, is shown below:
[CHART]
JAN-01 20.81
FEB 21.18
MAR 21.40
APR 21.51
MAY 21.19
JUN 21.04
JUL 20.64
AUG 21.01
SEP 20.87
OCT 20.85
NOV 21.19
DEC 21.35
JAN-02 21.03
FEB 20.63
MAR 19.92
APR 19.64
MAY 19.52
JUN 19.82
JUL 20.86
AUG 20.92
SEP 21.65
OCT 22.05
NOV 22.22
DEC 21.94
JAN-03 21.62
FEB 21.67
MAR 22.14
APR 21.87
MAY 21.80
JUN 21.55
JUL 21.32
AUG 21.29
SEP 21.34
OCT 20.97
NOV 20.90
DEC 20.38
JAN-04 20.54
FEB 20.59
MAR 20.86
APR 20.86
MAY 20.69
JUN 19.96
JUL 20.15
AUG 20.09
SEP 20.47
OCT 20.31
NOV 20.41
DEC 20.54
Liberalized international trade agreements, such as the General
Agreement on Tariffs and Trade, or GATT, include provisions relating to
agriculture that can affect the U.S. sugar or sweetener industries materially.
Recent negotiations under the U.S.-Central America Free Trade Agreement, or
CAFTA, as well as other trade discussions, have resulted in lower U.S. sugar
prices.
Kauai Coffee competes with coffee growers located worldwide, including
in Hawaii. Coffee commodity prices have partially recovered from near record
lows.
(4) Properties and Water
The HC&S sugar plantation, the largest in Hawaii, consists of
approximately 43,300 acres of land, including about 900 acres leased from the
State of Hawaii, about 700 acres leased from the Department of Hawaiian Home
Lands and 1,300 acres under lease from private parties. Approximately 37,000
acres are under cultivation, and the balance either is used for contributory
purposes, such as roads and plant sites, or is not suitable for cultivation.
McBryde owns approximately 9,500 acres of land on Kauai, of which
approximately 2,400 acres are used for watershed and other conservation uses,
approximately 3,400 acres are used by Kauai Coffee and the remaining acreage is
leased to various agricultural enterprises for cultivation of a variety of crops
and for pasturage.
It is crucial for HC&S and Kauai Coffee to have access to reliable
sources of water supply and efficient irrigation systems. A&B's plantations
conserve water by using a "drip" irrigation system that distributes water to the
roots through small holes in plastic tubes. All but a small area of the
cultivated cane land farmed by HC&S is drip irrigated. Also, all of Kauai
Coffee's fields are drip irrigated.
A&B owns 16,000 acres of watershed lands on Maui that supply a portion
of the irrigation water used by HC&S. A&B also held four water licenses to
another 38,000 acres owned by the State of Hawaii on Maui, which over the years
has supplied approximately one-third of the irrigation water used by HC&S. The
last of these water license agreements expired in 1986, and all four agreements
were then extended as revocable permits that were renewed annually. In 2001, a
request was made to the State Board of Land and Natural Resources to replace
these revocable permits with a long-term water lease. Pending the conclusion of
a contested case hearing before the Board on the request for the long-term
lease, the Board has renewed the existing permits on a holdover basis.
D. Employees and Labor Relations
As of December 31, 2004, A&B and its subsidiaries had approximately
2,056 regular full-time employees. About 995 regular full-time employees were
engaged in the food products segment, 942 were engaged in the transportation
segment, 46 were engaged in the real estate segment, and the balance was in
administration. Approximately 50 percent were covered by collective bargaining
agreements with unions.
At December 31, 2004, the active Matson fleet employed seagoing
personnel in 262 billets. Each billet corresponds to a position on a ship that
typically is filled by two or more employees because seagoing personnel rotate
between active sea duty and time ashore. Approximately 22 percent of Matson's
regular full-time employees and all of the seagoing employees were covered by
collective bargaining agreements.
Historically, collective bargaining with longshore and seagoing unions
has been complex and difficult. However, Matson and Matson Terminals consider
their relations with those unions, other unions and their non-union employees
generally to be satisfactory.
Matson's seagoing employees are represented by six unions, three
representing unlicensed crew members and three representing licensed crew
members. Matson negotiates directly with these unions. Matson's agreements with
the Seafarer's International Union and shore-based units of the Sailors Union of
the Pacific and the Marine Firemen's Union are expected to be renewed in
mid-2005 without service interruption.
SSAT, the previously-described joint venture of Matson and SSA,
provides stevedoring and terminal services for Matson vessels calling at U.S.
Pacific Coast ports. Matson, SSA and SSAT are members of the Pacific Maritime
Association which, on behalf of its members, negotiates collective bargaining
agreements with the ILWU on the U.S. Pacific Coast. Matson Terminals provides
stevedoring and terminal services to Matson vessels calling at Honolulu and on
the island of Hawaii. Matson Terminals is a member of the Hawaii Stevedore
Industry Committee which, on behalf of its members, negotiates with the ILWU in
Hawaii.
During 2004, Matson renewed its collective bargaining agreement with
ILWU clerical workers at Long Beach through June 2007 without service
interruption.
During 2004, Matson contributed to multiemployer pension plans for
vessel crews. If Matson were to withdraw from or significantly reduce its
obligation to contribute to one of the plans, Matson would review and evaluate
data, actuarial assumptions, calculations and other factors used in determining
its withdrawal liability, if any. In the event that any third parties materially
disagree with Matson's determination, Matson would pursue the various means
available to it under federal law for the adjustment or removal of its
withdrawal liability. Matson Terminals participates in a multiemployer pension
plan for its Hawaii ILWU non-clerical employees. For a discussion of withdrawal
liabilities under the Hawaii longshore and seagoing plans, see Note 10
("Employee Benefit Plans") to A&B's financial statements in Item 8 of Part II
below.
Bargaining unit employees of HC&S are covered by two collective
bargaining agreements with the ILWU. The agreements with the HC&S production
unit employees and clerical bargaining unit employees will expire January 31,
2008. One of the collective bargaining agreements covering the two ILWU
bargaining units at Kahului Trucking & Storage, Inc. was extended in 2003 and
will expire June 30, 2008, and the other general agreement will expire March 31,
2006. There are two collective bargaining agreements with Kauai Commercial
Company, Incorporated employees represented by the ILWU. The agreement covering
the production unit employees was renegotiated in 2004 and will expire April 30,
2007. The agreement covering the clerical employees is still being negotiated,
and they are currently working under an extended agreement. No interruption in
service is anticipated at this time. The collective bargaining agreement with
the ILWU for the production unit employees of Kauai Coffee was renegotiated and
expires January 31, 2007.
E. Energy
Matson and Matson Terminals purchase residual fuel oil, lubricants,
gasoline and diesel fuel for their operations. Residual fuel oil is by far
Matson's largest energy-related expense. In 2004, Matson vessels purchased
approximately 1.87 million barrels of residual fuel oil (compared with 1.7
million barrels in 2003).
Residual fuel oil prices paid by Matson started in 2004 at $27.92 per
barrel and ended the year at $27.29. The low for the year was $26.21 per barrel
in January and the high was $42.31 in October. Sufficient fuel for Matson's
requirements is expected to be available in 2005.
As has been the practice with sugar plantations throughout Hawaii, HC&S
uses bagasse, the residual fiber of the sugar cane plant, as a fuel to generate
steam for the production of most of the electrical power for sugar milling and
irrigation pumping operations. In addition to bagasse, HC&S uses coal, diesel,
fuel oil, and bio-diesel (recycled cooking oil) to produce power during factory
shutdown periods when bagasse is not being produced. In 2004, HC&S produced and
sold, respectively, approximately 209,000 MWH and 93,700 MWH of electric power
(compared with 211,500 MWH produced and 82,200 MWH sold in 2003). The increase
in power sold was due to heavy rain for the first half of 2004, which increased
hydroelectric power production and decreased irrigation pumping of well water.
In addition, HC&S limited irrigation pumping of well water during the second
half of 2004 to sell additional power. HC&S's oil use decreased to approximately
11,300 barrels in 2004, from approximately 17,900 barrels used in 2003. Coal use
for power generation approximated that of the prior year at 52,000 short tons.
In 2004, McBryde produced approximately 36,500 MWH of hydroelectric
power (compared with 30,100 MWH in 2003). Power sales in 2004 amounted to
approximately 30,500 MWH (compared with 21,200 MWH in 2003). The increase in
power production and sales was due primarily to heavy rainfall in 2004.
F. Available Information
A&B files reports with the Securities and Exchange Commission (the
"SEC"). The reports and other information filed include: Forms 10-K, 10-Q, 8-K
and other reports and information filed under the Securities Exchange Act of
1934 (the "Exchange Act").
The public may read and copy any materials A&B files with the SEC at
the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549.
The public may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet website that
contains reports, proxy and information statements, and other information
regarding A&B and other issuers that file electronically with the SEC. The
address of that website is www.sec.gov.
A&B makes available, free of charge on or through its Internet website,
A&B's annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable
after it electronically files such material with, or furnishes it to, the SEC.
The address of A&B's Internet website is www.alexanderbaldwin.com.
ITEM 3. LEGAL PROCEEDINGS
See "Business and Properties - Transportation - Rate Regulation" above
for a discussion of rate and other regulatory matters in which Matson is
routinely involved.
On September 14, 1998, Matson was served with a complaint filed by the
Government of Guam with the Surface Transportation Board (the "Board"), alleging
that Sea-Land Services, Inc., APL and Matson have charged unreasonable rates in
the Guam trade since January 1991. Matson did not begin its Guam Service until
February 1996. In 2002, APL was dismissed as a defendant based on the statute of
limitations. On April 23, 2002, the parties filed initial briefs addressing the
appropriate rate reasonableness methodology to be applied. The parties filed
reply briefs on June 17, 2002. The Board canceled the oral argument scheduled
for February 10, 2005 and placed the proceeding in abeyance until the Government
of Guam confirms that it is ready to proceed.
In August 2001, HC&S self-reported to the State of Hawaii Department of
Health (the "DOH") possible violations of state and federal air pollution
control regulations relating to a boiler at HC&S's Maui sugar mill. The boiler
was constructed in 1974 and HC&S thereafter operated the boiler in compliance
with the permits issued by the DOH. Because the boiler is fueled with less than
50 percent fossil fuels and is therefore a "biomass boiler" under state air
pollution control rules, the DOH initially concluded, and the DOH permits
reflected, that the boiler was not subject to the more stringent regulations
applicable to "fossil fuel-fired" boilers. In 2001, HC&S identified federal
regulatory guidance that provides that a boiler that burns any amount of fossil
fuel may be a "fossil fuel-fired boiler." HC&S then voluntarily reported the
possible compliance failures to the DOH. In September 2003, the DOH issued to
HC&S a Notice and Finding of Violation and proposed penalty of $1.98 million.
The amount of the penalty is being contested. In the opinion of management,
after consultation with counsel, this matter will not have a material adverse
effect on A&B's financial statements, and appropriate accruals for this matter
have been recorded.
In January 2004, a petition was filed by the Native Hawaiian Legal
Corporation, on behalf of four individuals, requesting that the State of Hawaii
Board of Land and Natural Resources (the "BLNR") declare that A&B and its
subsidiaries (collectively, the "Company") have no current legal authority to
continue to divert water from streams in East Maui for use in the Company's
sugar growing operations, and to order the immediate full restoration of these
streams until a legal basis is established to permit the diversions of the
streams. The Company objected to the petition, asked the BLNR to conduct
administrative hearings on the matter and requested that the matter be
consolidated with the Company's currently pending application before the BLNR
for a long-term water license.
Since the filing of the petition, the Company has been working to make
improvements to the water systems of the petitioner's four clients so as to
improve the flow of water to their taro patches. An interim agreement was
entered into during the first quarter of 2004 between the parties to allow the
improvements to be completed, deferring the administrative hearing process. That
agreement, however, has since expired without renewal by the petitioners.
Nevertheless, the Company has continued to make improvements to the water
systems.
The administrative hearing process on the petition is continuing, and
the Company continues to object to the petition. The effect of this claim on the
Company's sugar-growing operations cannot currently be estimated. If the Company
is not permitted to divert stream waters for its use, it would have a
significant adverse effect on the Company's sugar operations.
On October 19, 2004, two community-based organizations filed a Citizen
Complaint and a Petition for a Declaratory Order with the Commission on Water
Resource Management of the State of Hawaii ("Water Commission") against both an
unrelated company and HC&S, to order the companies to leave all water of four
streams on the west side of Maui that is not being put to "actual, reasonable
and beneficial use" in the streams of origin. The complainants had earlier
filed, on June 25, 2004, with the Water Commission a petition to increase the
interim in-stream flow standards for those streams. The Company objects to the
petitions. If the Company is not permitted to divert stream water for its use to
the extent that it is currently diverting, it may have an adverse effect on the
Company's sugar operations.
A&B and its subsidiaries are parties to, or may be contingently liable
in connection with, other legal actions arising in the normal conduct of their
businesses, the outcomes of which, in the opinion of management after
consultation with counsel, would not have a material adverse effect on A&B's
results of operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
For the information about executive officers of A&B required to be
included in this Part I, see section B ("Executive Officers") in Item 10 of Part
III below, which is incorporated herein by reference.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
A&B common stock is listed on The Nasdaq Stock Market and trades under
the symbol "ALEX." As of February 7, 2005, there were 3,792 shareholders of
record of A&B common stock. In addition, Cede & Co., which appears as a single
record holder, represents the holdings of thousands of beneficial owners of A&B
common stock.
A summary of daily stock transactions is listed in the Nasdaq National
Market Issues section of major newspapers. Trading volume averaged 220,300
shares a day in 2004, compared with 155,900 shares a day in 2003 and 150,600 in
2002.
The quarterly high and low sales prices and closing prices, as reported
by The Nasdaq Stock Market, and cash dividends paid per share of common stock,
for 2004 and 2003, were as follows:
Dividends Market Price
Paid High Low Close
---- ---- --- -----
2004
----
First Quarter $0.225 $35.14 $31.41 $32.96
Second Quarter 0.225 34.97 29.05 33.45
Third Quarter 0.225 34.24 30.15 33.94
Fourth Quarter 0.225 44.74 33.27 42.42
2003
----
First Quarter $0.225 $26.90 $23.50 $24.86
Second Quarter 0.225 27.70 24.35 26.10
Third Quarter 0.225 30.03 25.76 28.36
Fourth Quarter 0.225 34.60 27.94 33.75
Although A&B expects to continue paying quarterly cash dividends on its
common stock, the declaration and payment of dividends in the future are subject
to the discretion of the Board of Directors and will depend upon A&B's financial
condition, results of operations, cash requirements and other factors deemed
relevant by the Board of Directors. A&B strives to pay the highest possible
dividends commensurate with operating and capital needs. A&B has paid cash
dividends each quarter since 1903. The most recent increase in the quarterly
dividend rate was effective the first quarter of 1998, from 22 cents per share
to 22.5 cents. In 2004, dividend payments to shareholders totaled $38.3 million,
which was 38 percent of reported net income for the year. The following dividend
schedule for 2005 has been set, subject to final approval by the Board of
Directors:
Quarterly Dividend Declaration Date Record Date Payment Date
------------------ ---------------- ----------- ------------
First January 27 February 18 March 3
Second April 28 May 12 June 2
Third June 23 August 4 September 1
Fourth October 27 November 10 December 1
A&B common stock is included in the Dow Jones U.S. Transportation
Average, the Dow Jones U.S. 65 Stock Composite, the Dow Jones U.S. Industrial
Transportation Index, the Dow Jones Marine Transportation Index, the S&P MidCap
400, the Russell 2000 Index and the Russell 3000 Index.
During 2004, A&B repurchased 76,200 shares of its stock for an average
price of $29.95 per share. There were no shares of A&B common stock repurchased
by the Company during 2003 or 2002. A&B's Board of Directors has authorized A&B
to repurchase up to two million shares of its common stock.
Also during 2004, 58,804 shares were returned to the Company in
connection with the exercise of options to purchase shares of the Company's
stock. The fair value averaged $37.56 per share. Of these shares, 44,540 were
returned to the Company during the fourth quarter at an average value of $39.02
per share.
A&B has a Shareholder Rights Plan, designed to protect the interests of
shareholders in the event an attempt is made to acquire the company. The rights
initially will trade with A&B's outstanding common stock and will not be
exercisable absent certain acquisitions or attempted acquisitions of specified
percentages of such stock. If exercisable, the rights generally entitle
shareholders (other than the acquiring party) to purchase additional shares of
A&B's stock or shares of an acquiring company's stock at prices below market
value.
Securities authorized for issuance under equity compensation plans as
of December 31, 2004, included:
- ----------------------------------------------------------------------------------------------------------------------
Number of securities
remaining available for
Number of securities to be Weighted-average exercise future issuance under
Plan Category issued upon exercise of price of outstanding equity compensation plans
outstanding options, options, warrants and (excluding securities
warrants and rights rights reflected in column (a))
(a) (b) (c)
- ----------------------------------------------------------------------------------------------------------------------
Equity compensation plans 1,723,276 $27.61 1,481,363*
approved by security holders
- ----------------------------------------------------------------------------------------------------------------------
Equity compensation plans
not approved by security
holders -- -- 198,342**
- ----------------------------------------------------------------------------------------------------------------------
Total 1,723,276 $27.61 1,679,705
- ----------------------------------------------------------------------------------------------------------------------
* Under the 1998 Plan, 173,187 shares may be issued either as restricted
stock grants or option grants.
** A&B has two compensation plans under which its stock is authorized for
issuance and that were adopted without the approval of its security
holders. (1) Under A&B's Non-Employee Director Stock Retainer Plan,
each outside Director is issued a stock retainer of 300 A&B shares
after each year of service on A&B's Board of Directors. Those 300
shares vest immediately and are free and clear of any restrictions.
These shares are issued in January of the year following the year of
the Director's service to A&B. (2) Under A&B's Restricted Stock Bonus
Plan, the Compensation Committee identifies the executive officers and
other key employees who participate in one- and three-year performance
improvement incentive plans and formulates performance goals to be
achieved for the plan cycles. At the end of each plan cycle, results
are compared with goals, and awards are made accordingly. Participants
may elect to receive awards entirely in cash or up to 50 percent in
shares of A&B stock and the remainder in cash. If a participant elects
to receive a portion of the award in stock, an additional 50 percent
stock bonus may be awarded. In general, shares issued under the
Restricted Stock Bonus Plan may not be traded for three years following
the award date; special vesting provisions apply for the death,
termination or retirement of a participant.
Of the 198,342 shares that were available for future issuance, 7,950
shares were available for future issuance under the Non-Employee
Director Stock Retainer Plan and 190,392 shares were available for
issuance under the Restricted Stock Bonus Plan.
ITEM 6. SELECTED FINANCIAL DATA
The following financial data should be read in conjunction with Item 8,
"Financial Statements and Supplementary Data," and Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
(dollars and shares in millions, except per-share amounts):
2004 2003 2002 2001 2000
-------- -------- -------- -------- ----------
Revenue:
Transportation:
Ocean transportation $ 850.1 $ 776.3 $ 686.9 $ 682.3 $ 714.7
Logistics services 376.9 237.7 195.1 122.0 132.4
Real Estate:
Leasing 83.8 80.3 73.1 70.7 62.1
Sales 82.3 63.8 93.0 89.2 46.3
Less amounts reported in discontinued
operations1 (5.1) (42.5) (76.9) (14.8) (14.5)
Food Products 112.8 112.9 112.7 106.0 107.5
Reconciling items7 (6.5) -- -- -- --
---------- ---------- ---------- ---------- ----------
Total revenue $ 1,494.3 $ 1,228.5 $ 1,083.9 $ 1,055.4 $ 1,048.5
========== ========== ========== ========== ==========
Operating Profit:
Transportation:
Ocean transportation $ 108.3 $ 93.2 $ 42.4 $ 60.7 $ 94.0
Logistics services 8.9 4.3 3.1 1.6 (0.3)
Real Estate:
Leasing 38.8 37.0 32.9 34.1 30.1
Sales 34.6 23.9 19.4 17.9 24.2
Less amounts reported in discontinued
operations1 (3.3) (20.9) (21.2) (8.1) (7.8)
Food Products 4.8 5.1 13.8 5.7 7.5
---------- ---------- ---------- ---------- ----------
Total operating profit 192.1 142.6 90.4 111.9 147.7
Write-down of long-lived assets2 -- (7.7) -- (28.6) --
Gain on sale of investment3 -- -- -- 125.5 --
Dividends and other -- -- -- 2.1 3.0
Interest expense, net8 (12.7) (11.6) (11.6) (18.6) (24.3)
General corporate expenses (20.3) (15.2) (13.2) (13.2) (11.6)
---------- ---------- ---------- ---------- ----------
Income from continuing
operations before income taxes and
accounting changes 159.1 108.1 65.6 179.1 114.8
Income taxes (60.4) (39.8) (20.7) (64.4) (41.6)
---------- ---------- ---------- ---------- ----------
Income from continuing operations $ 98.7 $ 68.3 $ 44.9 $ 114.7 $ 73.2
========== ========== ========== ========== ==========
Identifiable Assets:
Transportation5 $ 953.4 $ 981.9 $ 880.1 $ 888.2 $ 911.1
Real Estate6 661.0 612.8 500.3 476.1 440.5
Food Products 152.8 154.4 163.4 153.3 197.1
Other 11.0 10.5 8.9 26.8 117.3
---------- ---------- ---------- ---------- ----------
Total assets $ 1,778.2 $ 1,759.6 $ 1,552.7 $ 1,544.4 $ 1,666.0
========== ========== ========== ========== ==========
Capital Expenditures:
Transportation5 $ 128.7 $ 133.4 $ 10.5 $ 59.7 $ 40.2
Real Estate4,6 10.9 107.7 83.7 72.0 44.8
Food Products 10.2 12.6 9.9 9.4 21.7
Other 1.4 1.7 0.9 0.3 0.2
---------- ---------- ---------- ---------- ----------
Total capital expenditures $ 151.2 $ 255.4 $ 105.0 $ 141.4 $ 106.9
========== ========== ========== ========== ==========
Depreciation and Amortization:
Transportation5 $ 58.0 $ 51.9 $ 51.0 $ 55.4 $ 54.6
Real Estate1, 6 12.3 11.3 9.1 7.8 6.0
Food Products 9.0 8.2 8.5 9.1 8.3
Other 0.4 0.3 0.4 0.5 0.5
---------- ---------- ---------- ---------- ----------
Total depreciation and
amortization $ 79.7 $ 71.7 $ 69.0 $ 72.8 $ 69.4
========== ========== ========== ========== ==========
2004 2003 2002 2001 2000
---------- ---------- --------- ---------- -------
Earnings per share:
From continuing operations before
accounting change:
Basic $ 2.32 $ 1.64 $ 1.09 $ 2.83 $ 1.79
Diluted $ 2.29 $ 1.63 $ 1.09 $ 2.82 $ 1.79
Net Income:
Basic $ 2.37 $ 1.95 $ 1.42 $ 2.73 $ 2.21
Diluted $ 2.33 $ 1.94 $ 1.41 $ 2.72 $ 2.21
Return on beginning equity 12.4% 11.2% 8.2% 15.9% 13.5%
Cash dividends per share $ 0.90 $ 0.90 $ 0.90 $ 0.90 $ 0.90
At Year End
Shareholders of record 3,792 3,959 4,107 4,252 4,438
Shares outstanding 43.3 42.2 41.3 40.5 40.4
Long-term debt - non-current 214 330 248 207 331
See Note 1 of Item 8 for information regarding changes in presentation for
certain revenues and expenses.
1 Prior year amounts restated for amounts treated as discontinued operations.
2 The 2003 and 2001 write-downs were for an "other than temporary" impairment in
the Company's investment in C&H.
3 In 2001, the Company sold its holdings in BancWest, realizing a gain of
approximately $125.5 million.
4 Includes tax-deferred property purchases that are considered non-cash
transactions in the Consolidated Statements of Cash Flows; excludes
capital expenditures for real estate developments held for sale.
5 Includes both Ocean Transportation and Integrated Logistics.
6 Includes Leasing, Sales and Development activities.
7 Includes inter-segment revenue and interest income classified as revenue for
segment reporting purposes.
8 Includes Ocean Transportation interest expense of $5.7 million for 2004, $2.6
million for 2003, $2.4 million for 2002, $5.1 million for 2001 and $8.1
million for 2000.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following analysis of the consolidated financial condition and
results of operations of Alexander & Baldwin, Inc. and its subsidiaries
(collectively, the "Company") should be read in conjunction with the
consolidated financial statements and related notes thereto. Amounts in this
narrative are rounded to millions, but per-share calculations and percentages
were calculated based on thousands. Accordingly, a recalculation of some
per-share amounts and percentages, if based on the reported data, may be
slightly different than the more accurate amounts included herein.
FORWARD-LOOKING STATEMENTS
The Company, from time to time, may make or may have made certain
forward-looking statements, whether orally or in writing, such as forecasts and
projections of the Company's future performance or statements of management's
plans and objectives. These statements are "forward-looking" statements as that
term is defined in the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements may be contained in, among other things, Securities
and Exchange Commission ("SEC") filings, such as the Forms 10-K, 10-Q and 8-K,
press releases made by the Company, the Company's Internet Web sites (including
Web sites of its subsidiaries), and oral statements made by the officers of the
Company. Except for historical information contained in these written or oral
communications, such communications contain forward-looking statements. These
forward-looking statements are not guarantees of future performance, and involve
a number of risks and uncertainties that could cause actual results to differ
materially from those projected in the statements, including, but not limited to
the following factors:
1) economic conditions in Hawaii and elsewhere;
2) market demand;
3) competitive factors, such as the entrance of new competitor
capacity in the Hawaii shipping trade, and pricing pressures,
principally in the Company's transportation businesses;
4) renewal or replacement of significant agreements including,
but not limited to, lease agreements and Matson's alliance
and charter agreement with American President Lines, Ltd.;
5) significant fluctuations in fuel prices;
6) legislative and regulatory environments at the federal, state and
local levels, including, among others, government rate
regulations, land use regulations, government administration of
the U.S. sugar program, and modifications to or retention of
cabotage laws;
7) availability of water for irrigation and to support real estate
development;
8) performance of unconsolidated affiliates and ventures;
9) significant fluctuations in raw sugar prices and the ability to
sell raw sugar to C&H Sugar Company, Inc. ("C&H");
10) vendor and labor relations in Hawaii, the U.S. Pacific Coast,
Guam and other locations where the Company has operations;
11) risks associated with construction and development activities,
including, among others, construction costs, construction defects,
labor issues, ability to secure insurance, and land use
regulations;
12) performance of pension assets;
13) acts of nature, including but not limited to, drought, greater
than normal rainfall, hurricanes and typhoons;
14) resolution of tax issues with the IRS or state tax authorities;
15) acts of war and terrorism;
16) risks associated with current or future litigation; and
17) other risk factors described elsewhere in these communications and
from time to time in the Company's filings with the SEC.
CONSOLIDATED RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------------------------------------------
(dollars in millions, except per-share amounts) 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------
Operating Revenue $ 1,494 $ 1,229 $ 1,084
Operating Costs and Expenses $ 1,329 $ 1,113 $ 1,006
Other Income and (Expenses) $ (6) $ (8) $ (12)
Income Taxes $ 60 $ 40 $ 21
Net Income $ 101 $ 81 $ 58
Other Comprehensive Income (Loss) $ (1) $ 19 $ (27)
- ------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share $ 2.37 $ 1.95 $ 1.42
- ------------------------------------------------------------------------------------------------------------------
Operating Revenue for 2004 increased $265 million, or 22 percent,
compared with 2003. Logistics services contributed 52 percent to the increase
due to a late 2003 business acquisition and top-line business growth. Ocean
transportation contributed 26 percent of the increase due principally to
increased volumes and rate actions. Property sales contributed 20 percent.
Property leasing and food products revenue were comparable to 2003. The property
leasing and property sales revenue included in the Consolidated Statements of
Income are stated after subtracting discontinued operations.
Operating revenue for 2003 increased $145 million, or 13 percent,
compared with 2002. Ocean transportation contributed 61 percent of the increase
due principally to the addition of terminal handing charges, an increase in
cargo volume and other rate actions. Logistics services contributed 30 percent
to the increase due to top-line business growth. Property leasing contributed 10
percent due principally to purchases of new income-producing properties and
increased rents and occupancies. Property sales and food products revenue were
comparable to 2002. The property leasing and property sales revenue included in
the Consolidated Statements of Income are stated after subtracting discontinued
operations.
Because the Company regularly develops and sells income-producing real
estate, the revenue trends for these two segments are best understood before
subtracting discontinued operations. This analysis is provided in the Analysis
of Operating Revenue and Profit below.
Operating Costs and Expenses for 2004 increased by $216 million, or 19
percent, compared with 2003. Costs of logistics services increased $130 million
due to business growth. Cost of transportation services increased by $67 million
due to higher terminal and vessel operating costs (both of which were due to
higher volume), a 2003 $17 million pension settlement gain, an accrual in 2003
for the settlement of a claim with the State of Hawaii and improved performance
of joint ventures. Costs of property sales and leasing services, after removing
discontinued operations, increased $26 million due to property sales and routine
operating and maintenance costs. Cost of agricultural goods and services
declined $3 million compared with 2003. Selling, General and Administrative
costs increased by $4 million due to consulting costs for Sarbanes-Oxley section
404 readiness, audit fees, increased accruals for incentive plans, and higher
non-qualified benefit plans expenses.
Operating Costs and Expenses for 2003 increased by $107 million, or 11
percent, compared with 2002. Cost of transportation services increased by $26
million due to higher terminal and vessel operating costs (both of which were
due to higher volume), higher pension costs of $10 million and an accrual of $5
million in 2003 for the settlement of a claim with the State of Hawaii offset by
improved performance of joint ventures and by a pension settlement gain of $17
million that resulted from the formation of a new Hawaii Terminals Multiemployer
Plan. Costs of logistics services increased $40 million due to business growth.
Costs of property sales and leasing services, after removing discontinued
operations, increased by $7 million due to increased operating and maintenance
costs. Cost of agricultural goods and services increased by $9 million due to
higher pension, personnel, maintenance and insurance costs. Selling, General and
Administrative costs increased by $17 million due to higher pension, health
benefit, and business insurance costs. Operating costs for 2003 also include an
$8 million write-down of the carrying value of C&H.
Additional information about year-to-year fluctuations is included
under the caption Analysis of Operating Revenue and Profit.
Other Income and Expenses is composed of equity in earnings of real
estate joint ventures, interest revenue and interest expense. Interest expense
of $13 million for 2004 was $1 million higher than in 2003 due principally to a
smaller mix of variable rate debt partially offset by lower debt balances. 2003
interest expense was substantially the same as the amount reported in 2002.
Income Taxes were higher for 2004 compared with 2003 due primarily to
higher pre-tax income and a higher effective tax rate of 38 percent versus 37
percent for 2003. Income taxes were higher for 2003 compared with 2002 due to
both higher pre-tax income and a higher tax rate. The 2002 effective tax rate
was 33 percent.
Other Comprehensive Income or Loss for 2004, 2003 and 2002 comprised
the minimum pension liability adjustments (Note 10 in Item 8 of the Company's
2004 Form 10-K) and the change in fair value of the treasury lock agreement
(Note 8 in Item 8 of the Company's 2004 Form 10-K).
ANALYSIS OF OPERATING REVENUE AND PROFIT
Detailed information related to the operations and financial
performance of the Company's Industry Segments is included in Note 14 in Item 8
of the Company's 2004 Form 10-K. The following information should be read in
relation to information contained in that Note.
Transportation Industry
Ocean Transportation; 2004 compared with 2003
- ---------------------------------------------
- --------------------------------------------------------------------------------
(dollars in millions) 2004 2003 Change
- --------------------------------------------------------------------------------
Revenue $ 850.1 $ 776.3 10%
Operating profit $ 108.3 $ 93.2 16%
- --------------------------------------------------------------------------------
Volume (units)
Hawaii containers 169,600 162,400 4%
Hawaii automobiles 157,000 145,200 8%
Guam containers 17,200 17,800 -3%
- --------------------------------------------------------------------------------
Transportation - Ocean Transportation revenue of $850.1 million for
2004 was 10 percent higher than the $776.3 million reported in 2003. Of this
increase, 38 percent was due to improved yields and rate actions, 38 percent was
due to higher container and automobile volume, 17 percent was to mitigate
increased fuel costs through a bunker fuel surcharge, and the remaining 7
percent was due to purchased transportation services, vessel charters and other
factors. To mitigate the effects of fluctuating fuel costs, Matson charges a
fuel surcharge.
For 2004, Hawaii Service container volume was 4 percent higher than in
2003 and automobile volume was 8 percent higher reflecting higher market growth
due, in part, to the improving Hawaii economy. Automobile volume increases also
reflect rental fleet replacements.
Operating profit of $108.3 million for 2004 was $15.1 million greater
than the $93.2 million reported for 2003 reflecting principally $42.7 million of
favorable revenue yields, cargo mix, higher cargo volume and vessel charters,
the non-recurrence of a 2003 expense of $4.7 million to settle an excise tax
issue with the State of Hawaii, $3.7 million of lower overhead costs and $2.6
million of higher returns from joint ventures. These favorable factors were
partially offset by $24.6 million of higher vessel operating costs due
principally to the addition, in second half of 2004, of two vessels in the
Hawaii Service to accommodate the higher volume and to ensure customer shipping
needs were met during recent Southern California terminal labor shortages and
$7.9 million for net benefit plan expenses (mostly due to the non-recurrence of
a 2003 pension settlement gain).
Ocean Transportation; 2003 compared with 2002
- ---------------------------------------------
- --------------------------------------------------------------------------------
(dollars in millions) 2003 2002 Change
- --------------------------------------------------------------------------------
Revenue $ 776.3 $ 686.9 13%
Operating profit $ 93.2 $ 42.4 2.2x
- --------------------------------------------------------------------------------
Volume (units)
Hawaii containers 162,400 152,500 6%
Hawaii automobiles 145,200 120,500 20%
Guam containers 17,800 16,300 9%
- --------------------------------------------------------------------------------
Transportation - Ocean Transportation revenue of $776.3 million for
2003 was 13 percent higher than the $686.9 million reported in 2002. Of this
increase, 57 percent was due to the terminal handling charges and other rate
actions, and 43 percent was due to higher container and automobile volume. In
January 2003, to partially offset increasing terminal operation costs, Matson
implemented a terminal handling charge.
For 2003, Hawaii Service container volume was 6 percent higher than in
2002 and automobile volume was 20 percent higher reflecting the recovery in
westbound container volumes that had declined in the months following September
11, 2001, a carryover of freight into 2003 following West Coast port disruptions
in the fourth quarter of 2002, and higher market growth due, in part, to the
improving Hawaii economy.
Automobile volume increases also reflect principally increased
automobile dealer sales but also include rental fleet replacements, partly
offset by the acceleration of some 2003 automobile carriage into the third
quarter of 2002 in anticipation of the port disruptions. Guam Service container
volume was 9 percent higher than 2002, reflecting recovery efforts following
Typhoon Pongsona.
Operating profit of $93.2 million for 2003 was $50.8 million greater
than the $42.4 million reported for 2002 reflecting principally $37.2 million of
favorable revenue yields and improved cargo volume, a $16.7 million pension
settlement gain that resulted from Matson joining the Hawaii Terminals
Multiemployer Plan, $13.1 million due to the absence of port disruptions that
reduced 2002 operating results, $21.5 million due to higher margins in the
Hawaii and Guam Service due to higher volume and improved terminal productivity
and $8.3 million of higher returns from joint ventures. These favorable factors
were partially offset by $16.9 million of higher vessel operating costs due
principally to the addition of an eighth vessel in the Hawaii Service to
accommodate the higher volume, $11.1 million for higher general and
administrative costs, principally related to increases in pension costs, $7.2
million of higher west coast terminal costs and $4.7 million for the settlement
of a claim with the State of Hawaii.
Logistics Services; 2004 compared with 2003
- -------------------------------------------
- --------------------------------------------------------------------------------
(dollars in millions) 2004 2003 Change
- --------------------------------------------------------------------------------
Revenue $ 376.9 $ 237.7 59%
Operating profit $ 8.9 $ 4.3 2.1x
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Matson Integrated Logistics, Inc. ("MIL") provides intermodal marketing
and truck brokerage services throughout North America. Revenue was $376.9
million for 2004, compared with $237.7 million in 2003. Operating profit was
$8.9 million for 2004, compared with $4.3 million earned in 2003. The 2004
revenue and operating profit growth were primarily the result of the late-2003
business acquisition noted below and new revenue due to continuing business
growth.
In December 2004, MIL acquired certain assets, obligations and
contracts of a Texas-based business that provides truck and rail brokerage
services. In December 2003, MIL acquired $12 million of assets and the operating
contracts of an Ohio-based business that provides truck brokerage services.
These two business acquisitions are described more fully in Note 2 of the
Consolidated Financial Statements included in Item 8.
Logistics Services; 2003 compared with 2002
- -------------------------------------------
- --------------------------------------------------------------------------------
(dollars in millions) 2003 2002 Change
- --------------------------------------------------------------------------------
Revenue $ 237.7 $ 195.1 22%
Operating profit $ 4.3 $ 3.1 39%
- --------------------------------------------------------------------------------
MIL revenue was $237.7 million for 2003, compared with $195.1 million
in 2002. Operating profit was $4.3 million for 2003, compared with $3.1 million
earned in 2002. The 2003 revenue and operating profit growth were primarily the
result of new business.
The revenue for intermodal services includes the total amount billed to
customers for transportation services. The primary costs of the business include
purchased transportation for that cargo. As a result, the operating profit
margins for this business are consistently lower than for other A&B businesses.
The primary operating profit and investment risk in the intermodal business is
the quality of receivables, which are monitored closely by management.
Real Estate Industry
Leasing; 2004 compared with 2003
- --------------------------------
- ---------------------------------------------------------------------------------------------
(dollars in millions) 2004 2003 Change
- ---------------------------------------------------------------------------------------------
Revenue $ 83.8 $ 80.3 4%
Operating profit $ 38.8 $ 37.0 5%
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Occupancy Rates:
Mainland 95% 93% 2%
Hawaii 90% 90% --
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Leasable Space (million sq. ft.):
Mainland 3.7 3.7 --
Hawaii 1.7 1.7 --
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Revenue for 2004, before subtracting amounts treated as discontinued
operations, of $83.8 million was 4 percent higher than the $80.3 million
reported in 2003. Operating profit, also before subtracting discontinued
operations, was $38.8 million for 2004, or 5 percent higher than the $37 million
earned in 2003. The higher operating profit was due primarily to the full year
effect of the 2003 property purchases as well as higher rental rates and
improved mainland occupancies. Mainland occupancy increased, principally due to
tenancy increases in retail properties as well as the varying mix of properties
in the portfolio due to sales and acquisitions. Hawaii occupancy remained
unchanged from 2003. The composition of the leased portfolio remained relatively
stable during 2004.
Leasing; 2003 compared with 2002
- --------------------------------
- --------------------------------------------------------------------------------
(dollars in millions) 2003 2002 Change
- --------------------------------------------------------------------------------
Revenue $ 80.3 $ 73.1 10%
Operating profit $ 37.0