UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2003
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OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to _______________
Commission file number 0-565
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ALEXANDER & BALDWIN, INC.
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(Exact name of registrant as specified in its charter)
Hawaii 99-0032630
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P. O. Box 3440, Honolulu, Hawaii 9680l
822 Bishop Street, Honolulu, Hawaii 96813
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(Address of principal executive offices) (Zip Code)
(808) 525-6611
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|
Number of shares of common stock outstanding as of March 31, 2003: 41,390,988
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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The condensed financial statements and notes for the first quarter of 2003 and
2002 are presented below:
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(In millions, except per share amounts)
Three Months Ended
March 31,
2003 2002
---- ----
(unaudited)
Revenue:
Operating revenue $ 271.6 $ 232.8
Interest, dividends and other 1.8 2.2
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Total revenue 273.4 235.0
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Costs and Expenses:
Costs of goods sold, services and rentals 224.2 198.6
Selling, general and administrative 29.8 25.8
Interest 2.6 3.0
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Total costs and expenses 256.6 227.4
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Income Before Taxes 16.8 7.6
Income taxes 6.1 3.0
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Income From Continuing Operations 10.7 4.6
Discontinued Operations (net of income taxes):
Properties 6.9 5.2
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Net Income $ 17.6 $ 9.8
========= =========
Basic Earnings Per Share:
Continuing operations $ 0.26 $ 0.11
Discontinued operations 0.17 0.13
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Net income $ 0.43 $ 0.24
========== ==========
Diluted Earnings Per Share:
Continuing operations $ 0.26 $ 0.11
Discontinued operations 0.16 0.13
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Net income $ 0.42 $ 0.24
========== ==========
Dividends Per Share $ 0.225 $ 0.225
Average Number of Shares Outstanding 41.4 40.6
See notes to financial statements.
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
Industry Segment Data, Net Income
(In millions)
Three Months Ended
March 31,
2003 2002
---- ----
(unaudited)
Revenue:
Transportation:
Ocean transportation $ 186.1 $ 155.3
Intermodal services 51.0 40.3
Property Development and Management:
Leasing 19.1 17.8
Sales 16.7 37.3
Less amounts reported in discontinued operations (14.4) (32.3)
Food Products 14.9 16.6
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Total revenue $ 273.4 $ 235.0
========== ==========
Operating Profit, Net Income:
Transportation:
Ocean transportation $ 12.1 $ 2.4
Intermodal services 0.5 0.1
Property Development and Management:
Leasing 8.6 8.2
Sales 11.6 8.9
Less amounts reported in discontinued operations (11.2) (8.2)
Food Products 1.9 2.1
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Total operating profit 23.5 13.5
Interest Expense (2.6) (3.0)
General Corporate Expenses (4.1) (2.9)
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Income From Continuing Operations Before Income Taxes 16.8 7.6
Income Taxes (6.1) (3.0)
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Income From Continuing Operations 10.7 4.6
Discontinued Operations (net of income taxes):
Properties 6.9 5.2
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Net Income $ 17.6 $ 9.8
========== ==========
See notes to financial statements.
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In millions)
March 31, December 31,
2003 2002
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(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 1.2 $ 0.6
Accounts and notes receivable, net 153.0 155.5
Inventories 30.7 15.0
Real estate and other assets held for sale 44.3 33.4
Deferred income taxes 12.4 12.0
Prepaid expenses and other assets 16.9 17.2
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Total current assets 258.5 233.7
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Investments 55.4 32.9
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Real Estate Developments 21.9 42.0
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Property, at cost 1,798.0 1,764.1
Less accumulated depreciation and amortization 838.0 821.5
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Property - net 960.0 942.6
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Capital Construction Fund 209.7 208.4
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Other Assets 132.1 138.0
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Total $ 1,637.6 $ 1,597.6
============ ============
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable and current portion of long-term debt $ 9.6 $ 9.6
Accounts payable 82.3 80.9
Other 62.6 60.6
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Total current liabilities 154.5 151.1
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Long-term Liabilities:
Long-term debt 276.7 247.8
Deferred income taxes 340.9 337.8
Post-retirement benefit obligations 42.8 42.6
Other 95.5 94.6
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Total long-term liabilities 755.9 722.8
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Commitments and Contingencies
Shareholders' Equity:
Capital stock 33.9 33.8
Additional capital 88.8 84.8
Accumulated other comprehensive loss (34.5) (26.8)
Retained earnings 650.6 643.6
Cost of treasury stock (11.6) (11.7)
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Total shareholders' equity 727.2 723.7
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Total $ 1,637.6 $ 1,597.6
============ ============
See notes to financial statements.
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In millions)
Three Months Ended
March 31,
2003 2002
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(unaudited)
Cash Flows from (used in) Operating Activities $ 6.9 $ (38.3)
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Cash Flows from Investing Activities:
Capital expenditures (11.7) (8.2)
Proceeds from disposal of property and other assets 3.5 17.8
Capital Construction Fund, net (1.3) (13.0)
Other (3.2) (6.3)
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Net cash used in investing activities (12.7) (9.7)
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Cash Flows from Financing Activities:
Proceeds from issuances of long-term debt 83.2 33.0
Payments of long-term debt (68.9) -
Net proceeds of short-term debt - 11.5
Proceeds from issuances of capital stock 1.5 5.5
Dividends paid (9.3) (9.1)
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Net cash from (used in) financing activities 6.5 40.9
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Net Decrease in Cash and Cash Equivalents $ 0.7 $ (7.1)
=========== ===========
Other Cash Flow Information:
Interest paid, net of amounts capitalized $ (2.6) $ (2.7)
Income taxes paid, net of refunds (1.6) (36.7)
Other Non-cash Information:
Depreciation expense (17.7) (17.9)
Tax-deferred property sales 11.0 31.3
Tax-deferred property purchases (11.0) -
Debt assumed in real estate acquisition 14.6 -
Assets conveyed to joint venture 27.7 -
See notes to financial statements.
Financial Notes
(Unaudited)
(1) The Condensed Balance Sheet as of March 31, 2003, the Condensed
Statements of Income for the three months ended March 31, 2003 and
2002, and the Condensed Statements of Cash Flows for the three months
ended March 31, 2003 and 2002 are unaudited. Because of the nature of
the Company's operations, the results for interim periods are not
necessarily indicative of results to be expected for the year. In the
opinion of management, all material adjustments necessary for the fair
presentation of interim period results have been included in the
interim financial statements.
(2) The 2003 estimated effective income tax rate differs from the statutory
rate, due primarily to tax credits. The 2002 estimated effective annual
income tax rate differs from the statutory rate, due primarily to the
favorable settlement of prior years' federal and state tax audits and
tax credits.
(3) Accounting for and Classification of Discontinued Operations: As
required by Statement of Financial Accounting Standards (SFAS) No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," the
sales of certain income-producing assets are classified as discontinued
operations if the operations and cash flows of the assets can be
clearly distinguished from the remaining assets of the Company, if the
cash flows for the assets have been, or will be, eliminated from the
ongoing operations of the Company, if the Company will not have a
significant continuing involvement in the operations of the assets sold
and if the amount is considered material. Certain assets that are "held
for sale," based on the likelihood and intention of selling the
property within 12 months, are also treated as discontinued operations.
Depreciation on these assets is discontinued upon reclassification.
Sales of land, residential houses, and office condominium units are
generally considered inventory and are not included in discontinued
operations.
(4) Commitments, excluding operating lease commitments and appropriations
for capital expenditures, that were in effect at March 31, 2003,
included the following (in millions):
Vessel purchases (a) $ 214.0
Guarantee of Sea Star debt (b) $ 29.7
Guarantee of HS&TC debt (c) $ 15.0
Standby letters of credit (d) $ 19.8
Bonds (e) $ 13.8
Benefit plan withdrawal obligations (f) $ 10.7
These amounts are not recorded on the Company's balance sheet and,
based on the Company's current knowledge and with the exception of item
(a), it is not expected that the Company or its subsidiaries will be
called upon to advance funds under these commitments.
(a) During 2002, Matson entered into an agreement with Kvaerner
Philadelphia Shipyards, Inc., to purchase two container ships. The
total project cost for each ship is approximately $107 million. The
first ship is expected to be delivered in the third quarter of 2003 and
the second ship is expected to be delivered in the second quarter of
2004. No significant payments are required until the acceptance and
delivery of the ships. No obligation for these ships is recorded on the
financial statements because conditions necessary to record either a
liability or an asset have not been met. Matson is currently evaluating
ownership and operating alternatives for the ships.
(b) Matson has guaranteed $29.7 million of the debt of Sea Star and
would be required to perform under the guarantee should Sea Star be
unable to meet its obligations. It is expected that the guarantee will
be reduced, over time and by scheduled repayments of the debt by Sea
Star. Certain assets of Sea Star serve as collateral for these
borrowings and would reduce Matson's guarantee obligations. The Company
has not recorded any liability for its obligations under the guarantee
because it believes that the probability of making any payments is low.
(c) The Company guarantees up to $15 million of Hawaiian Sugar &
Transportation Cooperative's ("HS&TC") $30 million revolving credit
line. That credit line is used primarily to fund purchases of raw sugar
from the Hawaii growers and is fully secured by the inventory,
receivables and transportation assets of the cooperative. The amount
that may be drawn by HS&TC under the facility is limited to 95 percent
of its inventory value plus up to $15 million of HS&TC's receivables.
The Company's guarantee is limited to the lesser of $15 million or the
actual amounts drawn. Although the amount drawn by HS&TC on its credit
line varies, as of March 31, 2003, the amount drawn was $8.5 million.
The Company has not recorded any liability for its obligation under the
guarantee because it believes that the likelihood of making any payment
is not probable.
(d) The Company has arranged for standby letters of credit totaling
$19.8 million. This includes letters of credit, totaling approximately
$12.7 million that enable the Company to qualify as a self-insurer for
state and federal workers' compensation liabilities. The amount also
includes a letter of credit of $4.3 million for workers' compensation
claims incurred by California & Hawaiian Sugar Company, Inc. ("C&H," an
unconsolidated entity in which the Company has a minority ownership
equity interest) employees, under a now-closed self-insurance plan,
prior to December 24, 1998. The Company only would be called upon to
honor this letter of credit in the event of C&H's insolvency. The
obligation to provide this letter of credit expires on December 24,
2003. The remaining letters of credit are for insurance-related
matters, construction performance guarantees, and other routine
operating matters.
(e) Of the $13.8 million in bonds, $5.9 million consists of subdivision
bonds related to real estate construction projects in Hawaii. These
bonds are required either by the state or by county governments to
ensure that certain infrastructure work required as part of real-estate
development is completed as required. The Company has the financial
ability and intention to complete these improvements. Also included in
the total are $5.3 million of customs bonds and $2.7 million of
non-real estate performance bonds.
(f) The withdrawal liabilities under a Hawaii longshore plan and
certain Mainland seagoing plans aggregated approximately $10.7 million
as of the most recent valuation date.
The State of Hawaii, Department of Taxation ("State") has informed the
Company that it believes a portion of the Company's ocean
transportation revenue is subject to the Public Service Company tax.
The Company strongly disagrees with the State's tax position. If the
State were to prevail fully, the amount of the claim could be material.
Management believes, after consultation with legal counsel, that the
ultimate disposition of this matter will not have a material adverse
effect on the Company's results of operations or financial position.
The Company and certain subsidiaries are parties to various legal
actions and are contingently liable in connection with claims and
contracts arising in the normal course of business, the outcome of
which, in the opinion of management after consultation with legal
counsel, will not have a material adverse effect on the Company's
financial position or results of operations.
(5) Accounting Method for Stock-based Compensation: As allowed by Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," and by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure," the Company has
elected to continue to apply the provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees."
Accordingly, no compensation cost is recognized in the Company's net
income for options granted with exercise prices that are equal to the
market values of the underlying common stock on the dates of grant.
Pro forma information regarding net income and earnings per share,
using the fair value method and reported below, has been estimated
using a Black-Scholes option-pricing model. This model was developed
for use in estimating the fair value of traded options which do not
have vesting requirements and which are fully transferable. The
Company's options have characteristics significantly different from
those of traded options.
Had compensation cost for the stock options been based on the estimated
fair values at grant dates, the Company's pro forma net income and net
income per share for the first quarters of 2003 and 2002 would have
been as follows (in millions, except per share amounts):
2003 2002
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Net Income:
As reported $ 17.6 $ 9.8
Stock-based compensation
expense determined under fair
value based method for all
awards, net of related tax effects (0.3) (0.4)
-------- ---------
Pro forma $ 17.3 $ 9.4
======== =========
Net Income Per Share:
Basic, as reported $ 0.43 $ 0.24
Basic, pro forma $ 0.42 $ 0.23
Diluted, as reported $ 0.42 $ 0.24
Diluted, pro forma $ 0.42 $ 0.23
The pro forma effects are not necessarily representative of the pro
forma effects on future net income or earnings per share, because the
number of future shares that may be issued is not known; shares vest
over several years, and assumptions used to determine the fair value
can vary significantly. Additional information about stock-based
compensation is included in Notes 1 and 12 of Item 8 in the Company's
most recently filed Form 10-K. No changes have been made to the
Company's stock option plans subsequent to that filing.
(6) Certain amounts have been reclassified to conform to the current year's
presentation. These amounts include the revenue and operating profit of
real estate assets designated as discontinued operations. Discontinued
operations included gain from sales of assets (after tax) of $6.4
million and $4.3 million for the first quarters of 2003 and 2002,
respectively.
(7) Other Comprehensive Income for the three months ended March 31, 2003
and 2002 were as follows, in millions:
2003 2002
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Net Income $ 17.6 $ 9.8
Other Comprehensive Income (Loss):
Change in valuation of derivative (0.5) --
Company's share of investee's minimum
pension liability adjustment (7.2) --
-------- ---------
Comprehensive Income $ 9.9 $ 9.8
======== =========
C&H reported a $20.1 million minimum pension liability adjustment and
the Company recorded its share of that adjustment.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ------------------------------------------------
The following analysis of the consolidated financial condition and results of
operations of Alexander & Baldwin, Inc. and its subsidiaries (collectively, the
"Company") should be read in conjunction with the condensed consolidated
financial statements and related notes thereto.
FORWARD-LOOKING STATEMENTS
The Company, from time to time, may make or may have made certain
forward-looking statements, whether orally or in writing, such as forecasts and
projections of the Company's future performance or statements of management's
plans and objectives. These statements are "forward-looking" statements as that
term is defined in the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements may be contained in, among other things, Securities
and Exchange Commission ("SEC") filings, such as the Forms 10-K, 10-Q and 8-K,
press releases made by the Company, the Company's Internet Web sites (including
Web sites of its subsidiaries), and oral statements made by the officers of the
Company. Except for historical information contained in these written or oral
communications, such communications contain forward-looking statements. These
forward-looking statements involve a number of risks and uncertainties that
could cause actual results to differ materially from those projected in the
statements, including, but not limited to the following factors:
1) economic conditions in Hawaii and elsewhere;
2) market demand;
3) competitive factors and pricing pressures in the Company's
primary markets;
4) legislative and regulatory environments at the federal,
state and local levels, such as government rate regulations,
land-use regulations, government administration of the U.S.
sugar program, and modifications to or retention of cabotage
laws;
5) performance of pension assets;
6) labor relations in Hawaii, the U.S. Pacific Coast, Guam and
other locations where the Company has operations;
7) acts of nature, including but not limited to, drought, greater than
normal rainfall, hurricanes and typhoons;
8) acts of terrorism;
9) significant fluctuations in fuel prices;
10) significant fluctuations in raw sugar prices;
11) risks associated with current or future litigation;
12) resolution of tax issues with the IRS or state tax authorities;
13) performance of unconsolidated affiliates and ventures; and
14) other risk factors described elsewhere in these
communications and from time to time in the Company's
filings with the SEC.
FIRST QUARTER
Operating Results - First Quarters of 2003 and 2002
- -----------------------------------------------------------------------------
(dollars in millions, except per-share) 2003 2002 Change
- -----------------------------------------------------------------------------
Revenue $ 273.4 $ 235.0 16%
Net income $ 17.6 $ 9.8 80%
Basic earnings per share $ 0.43 $ 0.24 79%
- -----------------------------------------------------------------------------
The table above compares the Company's first quarter 2003 financial results to
first quarter 2002. The 16 percent increase in revenue and 80 percent
improvement in net income were due principally to higher cargo volumes (compared
with lower-than-normal 2002 cargo levels that followed events of September 11,
2001), the sale of a high-margin commercial property on Maui, and revenue growth
in the intermodal services business. Pension costs were approximately $3.4
million higher in the first quarter of 2003 than in the comparable 2002 period.
The Company's effective tax rate is 37 percent for the first quarter of 2003,
compared to 33 percent for all of 2002, reflecting favorable settlement of tax
audits in 2002.
RESULTS OF SEGMENT OPERATIONS -
FIRST QUARTER 2003 COMPARED WITH THE FIRST QUARTER 2002
Transportation - Ocean Transportation
- -----------------------------------------------------------------------------
(dollars in millions) 2003 2002 Change
- -----------------------------------------------------------------------------
Revenue $ 186.1 $ 155.3 20%
Operating profit $ 12.1 $ 2.4 5.0x
- -----------------------------------------------------------------------------
Improved revenue and operating profit for the first quarter of 2003 compared
with the first quarter of 2002 were due mainly to recovery of cargo volumes
following events of September 11, 2001, rate actions in 2002 and 2003(described
below), higher cargo volumes for the Guam trade as that Island community
rebuilds after Typhoon Pongsona, and productivity improvements at the Sand
Island terminal. These favorable factors were partially offset by increased
vessel operating costs following the re-introduction, in late 2002, of an eighth
vessel in the Hawaii Service, and higher pension costs. The additional vessel
was made necessary as freight volumes returned to levels that are more normal.
During the quarter, Matson completed the relocation of its Oakland and Long
Beach terminals to new, larger and more productive terminals.
- -----------------------------------------------------------------------------
(number of units) 2003 2002 Change
- -----------------------------------------------------------------------------
Hawaii container volume 39,000 35,700 9%
Automobile volume 37,500 24,500 53%
Guam container volume 4,400 3,900 13%
- -----------------------------------------------------------------------------
Container volume in the Hawaii Service and automobile volumes were 11 percent
and 53 percent, respectively, higher than in the first quarter of 2002,
reflecting the recovery in westbound container volumes that had declined in the
months following September 11, 2001. Automobile volume changes reflect
principally rental fleet replacements in Hawaii. The 13 percent improvement in
Guam service is due mainly to recovery efforts following Typhoon Pongsona.
Labor agreements with the International Longshore and Warehouse Union ("ILWU")
and the Pacific Maritime Association ("PMA") and between the ILWU Local 142 in
Hawaii and Matson were ratified in January 2003. Negotiations are currently in
progress for Matson's ILWU clerical bargaining units.
In January 2003, Matson implemented a terminal handling charge in its Hawaii
Service of $200 per container for westbound freight, $100 per container for
eastbound freight, and $30 per automobile. Due to increasing fuel costs, Matson
increased its fuel surcharge from 3.25 percent to 4.75 percent in May 2002 and
to six percent in October 2002 in Hawaii and in November 2002 in Guam. Effective
March 3, 2003, the surcharge was increased to 7.5 percent.
Transportation - Intermodal Services
- ------------------------------------------------------------------------------
(dollars in millions) 2003 2002 Change
- ------------------------------------------------------------------------------
Revenue $ 51.0 $ 40.3 27%
Operating profit $ 0.5 $ 0.1 5.0x
- ------------------------------------------------------------------------------
Revenue and operating profit growth for the Company's intermodal services
business was mainly the result of new business added during 2002. The revenue
for intermodal services includes the total amount billed to customers for
transportation services. The primary costs include purchased transportation for
that cargo. As a result, the operating profit margins for this business are
narrower than other A&B businesses. The primary operating profit and investment
risk for this business is the quality of receivables, which is monitored closely
by management.
Property Development and Management - Leasing
- ------------------------------------------------------------------------------
(dollars in millions) 2003 2002 Change
- ------------------------------------------------------------------------------
Revenue $ 19.1 $ 17.8 7%
Operating profit $ 8.6 $ 8.2 5%
- ------------------------------------------------------------------------------
Revenue and operating profit growth, before removing amounts treated as
discontinued operations, was the result of higher occupancies for Hawaii
properties, and the purchases of income-producing property during 2002,
partially offset by lower occupancy rates for mainland properties and the sales
of certain income-producing property subsequent to the 2002 first quarter. The
lower mainland property occupancy was mainly due to a large vacancy that
occurred at the end of 2002, but which subsequently was leased in March.
- ------------------------------------------------------------------------------
Occupancy Rates 2003 2002 Change
- ------------------------------------------------------------------------------
Mainland 87% 91% -4%
Hawaii 89% 87% 2%
- ------------------------------------------------------------------------------
Property Development and Management - Sales
- ------------------------------------------------------------------------------
(dollars in millions) 2003 2002 Change
- ------------------------------------------------------------------------------
Revenue $ 16.7 $ 37.3 -55%
Operating profit $ 11.6 $ 8.9 30%
- ------------------------------------------------------------------------------
2003 first quarter sales included the sales of five commercial properties
(including a seven-acre property on Maui that had a low carrying cost), three
lots at Maui Business Park and residential resort homes and home lots on Maui.
2002 first quarter results included the sales of a seven-building distribution
complex in Texas, smaller commercial properties, one lot at Maui Business Park
and residential resort homes and home lots on Maui.
The variability in sales and operating profit is an inherent characteristic of
property sales activity.
Property Development and Management - Discontinued Operations
- -------------------------------------------------------------------------------
(dollars in millions) 2003 2002
- -------------------------------------------------------------------------------
Sales Revenue $ 13.4 $ 29.9
Leasing Revenue $ 1.0 $ 2.4
Sales Operating Profit $ 10.4 $ 6.8
Leasing Operating Profit $ 0.8 $ 1.4
- -------------------------------------------------------------------------------
During the first quarter of 2003, the proceeds from the sales of five commercial
properties on Maui, and for 2002, the proceeds from the sales of a mainland
distribution complex and a land parcel subject to a ground lease were classified
as discontinued.
Because the Company regularly purchases and sells commercial properties, the
amounts reported as discontinued operations in prior quarters are restated each
time a property is designated as discontinued. As a result, 2002 first quarter
discontinued operations have been restated to include the leasing revenue and
operating profit from 12 properties that were, subsequent to March 31, 2002,
designated as discontinued.
Food Products
- ---------------------------------------------------------------
(dollars in millions) 2003 2002 Change
- ---------------------------------------------------------------
Revenue $ 14.9 $ 16.6 -10%
Operating profit $ 1.9 $ 2.1 -10%
- ---------------------------------------------------------------
Revenue and operating profit declines for the first quarter of 2003, compared
with 2002, were due mainly to lower raw sugar sales, due to lower production,
and higher operating costs, partially offset by higher sugar prices.
- -------------------------------------------------------------
2003 2002 Change
- -------------------------------------------------------------
Tons sugar produced 18,700 25,700 -27%
- -------------------------------------------------------------
A later-than-normal startup of the Puunene factory, following an off-season
maintenance process, and wet harvesting conditions were the primary factors in
the lower sugar production.
Through March 31, 2003, the Company had forward priced 92,900 tons of sugar, or
approximately 48 percent of its expected 2003 sales, at an average price of
$22.11/cwt. For comparison, the average raw sugar prices for 2002 and 2001 were
$21.57/cwt and $21.12/cwt, respectively.
The collective bargaining agreements between the Company's Maui sugar plantation
and the ILWU Local 142 expired at the end of January 2003 and two new five-year
agreements have subsequently been ratified.
FINANCIAL CONDITION, LIQUIDITY, FINANCING ARRANGEMENTS AND CASH FLOWS
Liquid Resources: The Company's principal liquid resources, comprising cash and
cash equivalents, receivables, sugar and coffee inventories and unused lines of
credit, less accrued deposits to the Capital Construction Fund ("CCF"), totaled
$501 million at March 31, 2003, a decrease of $4 million from December 31, 2002.
This net decrease was due primarily to $17 million drawn on variable rate debt
facilities and $3 million of lower receivable balances, partially offset by $15
million in higher sugar inventories.
Balance Sheet: Working capital was $104.0 million at March 31, 2003, an increase
of $21.4 million from the balance carried at the end of 2002. The higher working
capital was due primarily to higher sugar inventories and real estate held for
sale.
During the first quarter of 2003, the Company contributed 852 acres of land and
improvements with a carrying cost of $27.7 million to the Kukui'Ula joint
venture. This transfer reduced Real Estate Developments and increased
Investments. No gain or loss was recorded on the transfer.
Long-term Debt, including amounts classified as current, totaled $286.3 million
compared with a balance of $257.4 million at December 31, 2002. This increase
was due mainly to operating cash requirements and $14.6 million of debt assumed
by the Company, as part of a real estate purchase. The assumed debt is secured
by the property, bears an interest rate of 8.33 percent, has interest-only
payments, and matures in January 2005. The Company can repay this loan in
October 2004 without penalty. The weighted average interest rate for the
Company's outstanding borrowings at March 31, 2003 was approximately 4%.
Capital Expenditures: For the first quarter of 2003, capital expenditures,
including purchases of property using tax-deferred proceeds and additions to
real estate held for sale but excluding assumed debt, totaled $42.7
million. Of this amount, $36.5 million was for real estate acquisitions and
property development, $3.7 million was for agricultural projects, $1.6 million
was at Matson, and $0.9 million was for renovations to the Company's historic
headquarters building in Honolulu. Of the $42.7 million, $20 million was
included in Cash Flows from Operating Activities, $11.0 million utilized
tax-deferred proceeds and was not included in cash flows, and the remaining
$11.7 million was recorded as Cash Flows from Investing Activities.
Real estate acquisitions during the first quarter included the following:
Boardwalk Shopping Center: Purchased in March 2003 for $23.1 million,
the Boardwalk Shopping Center in Austin, Texas comprises 184,600 square
feet of retail space. The shopping center is 100 percent occupied with
a mix of 29 national and local businesses.
1100 Alakea Street: Purchased in March 2003 for $20 million, 1100
Alakea Street is a 31-story Class "A" office building with
approximately 170,000 square feet of leasable area on 26,000
square-feet of fee simple property in Honolulu, Hawaii. The building is
approximately 35 percent occupied. The Company intends to convert the
building to fee-simple condominiums.
Vista Controls Building: Purchased in March 2003 for $4.8 million, the
Vista Controls Building is a 51,000 square foot, fully leased,
two-story commercial building in Valencia, California.
Cash Flows: Cash Flows from Operating Activities were $6.9 million for the first
three months of 2003, compared with Cash Flows used in Operating Activities of
$38.3 million for the first three months of 2002. The higher cash flow was due
principally to the timing of payments for income taxes in the 2002 first
quarter, higher net income, the timing of sales and expenditures for real estate
development projects that are classified as Real Estate Held for Sale, and
fluctuations in other working capital balances.
Tax-Deferred Real Estate Exchanges: During the first three months of 2003, the
Company recorded, on a tax-deferred basis, real-estate sales of $14.4 million.
The proceeds from these sales were immediately available for reinvestment in
replacement property on a tax-deferred basis. The proceeds from tax-deferred
sales are held in escrow pending future use to purchase new real estate assets.
Of the total sales proceeds, $3.4 million related to three "reverse 1031"
transactions. That amount was included in the Statement of Cash Flows as both
Capital expenditures for property and developments and as "Receipts from
disposal of property." The remaining $11 million is reported under the caption
"Other Non-cash Information" in the Condensed Statements of Cash Flows. During
the first quarter of 2003, the company utilized $13.6 million of tax-deferred
funds to acquire new income-producing real estate.
Commitments and Contingencies: A description of other financing arrangements in
effect at the end of the first quarter is described in Note (4) to the financial
statements of Item 1.
Environmental Matters: As with most industrial and land development companies of
its size, the Company's shipping, real estate, and agricultural businesses have
certain risks that could result in expenditures for environmental remediation.
The Company believes that it is in compliance, in all material respects, with
applicable environmental laws and regulations, and works proactively to identify
potential environmental concerns. In addition, the Company has emergency
response and crisis management programs. The Company has received a claim for
payment of environmental remediation costs associated with a sugar refinery
site, sold in 1994, that previously was owned by California and Hawaiian Sugar
Company. Additionally, the Company has self-reported to the State of Hawaii
Department of Health, possible violations of state and federal air pollution
control regulations at its Maui sugar mill. Although operating in accordance
with the requirements of permits issued to the Company, the permits' operating
conditions may not have reflected the federal standards fully. The Company
believes that the resolution of the two matters noted above will not have a
material effect on the Company's financial statements. There have been no
substantive changes in these two matters since 2002 year-end.
OTHER MATTERS
Significant Accounting Policies: The Company's significant accounting policies
are described in Note 1 of the 2002 consolidated financial statements included
in Item 8 of the Company's Form 10-K for the year ended December 31, 2002. There
have been no changes to the policies since that filing.
Significant Estimates: The preparation of the condensed consolidated financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported.
The more significant of these include:
1) assumptions underlying the calculation of pension,
post-retirement, and non-qualified benefit obligations and
costs,
2) assumptions underlying the carrying value of investments,
3) the estimation of allowances for doubtful accounts,
4) the estimation of liabilities for self-insurance programs,
5) the calculation and classification of tax obligations and
provisions prior to completion of tax returns and completion
of taxing authority audits,
6) the application of cost accounting methods for sugar,
molasses and coffee inventory and cost of sales,
7) depreciable lives and salvage values for fixed assets,
8) liabilities for environmental assessments and remedial
efforts,
9) estimates of joint venture earnings or losses prior to the
issuance of final annual joint venture financial
statements,
10) accruals for obligations incurred but not yet billed to the
Company, and
11) recoverability of claims from losses under insurance coverage.
The Company believes that the methods it uses to determine estimates complies
with generally accepted accounting principles consistently applied.
Investments: The Company's joint ventures are described in Item 8 of its most
recently filed Form 10-K. During the first quarter of 2003, the Company
conveyed, to Kukui'Ula Development Company LLC, 852 acres of land and existing
improvements, totaling approximately $27.7 million. In January 2003, the Company
entered into a new joint venture agreement with Westridge Executive Building LLC
to develop a 64,300 square foot Class "A" suburban office building in Valencia
California. The building is expected to be completed in December 2003 at an
estimated cost of $12.3 million. The accrual of preferred stock dividends of
C&H, subsequent to the write down of the investments in 2001, has been deferred
until the investee has sufficient cash flow available to make dividend payments.
Charter Agreement: Matson and American President Lines, Ltd. ("APL") are parties
to the Successor Alliance Slot Hire and Time Charter Agreement dated January 28,
1998 ("Agreement"). This Agreement provides the structure of an alliance through
which Matson provides a weekly service to Guam. Pursuant to this eight-year
Agreement, Matson time charters three C-9 class vessels to APL and APL reserves
a designated number of container slots on each vessel for Matson's exclusive
use. This Agreement generates revenue of approximately $2.9 million per month
for Matson.
Composition of Property Sales: The mix of property sales in any year or quarter
can be diverse. Sales can include developed residential real estate, commercial
properties, developable subdivision lots, undeveloped land, and property sold
under threat of condemnation. The sale of undeveloped land and vacant parcels in
Hawaii generally provides a greater contribution to earnings than does the sale
of developed and commercial property, due to the low historical-cost basis of
the Company's Hawaii land. Consequently, property sales revenue trends, cash
flows from the sales of real estate and the amount of real estate held for sale
on the balance sheets do not necessarily indicate future profitability trends
for this segment. The reporting of property sales is also affected by the
classification of certain property sales as discontinued operations.
New and Proposed Accounting Standards: SFAS No. 143, "Accounting for Asset
Retirement Obligations," became effective in January 2003. This statement
addresses accounting and reporting for obligations and costs that will occur
when long-term assets are retired. Among other things, the statement requires
that the present value of the liability associated with future asset retirements
be recorded on the balance sheet when an obligation has been incurred and when
it can be measured. The amortization of the capitalized cost and increases in
the present value of the obligation which result from the passage of time, are
recorded as charges to earnings. The adoption of SFAS No. 143 in 2003 had no
material effect on the Company's condensed consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses accounting for restructuring
and similar costs. SFAS No. 146 supersedes previous accounting guidance,
principally Emerging Issues Task Force Issue No. 94-3. The Company will adopt
the provisions of the new standard for restructuring activities initiated after
December 31, 2002. The standard requires that the liability for costs associated
with an exit or disposal activity be recognized when the liability is incurred.
Under Issue 94-3, a liability for an exit cost was recognized at the date of the
Company's commitment to an exit plan. SFAS No. 146 also establishes that the
liability initially should be measured and recorded at fair value. Accordingly,
this standard may affect the timing of recognizing future restructuring costs,
as well as the amounts recognized. The adoption of SFAS No. 146 had no material
effect on the Company's condensed consolidated financial statements.
In November 2002, the FASB issued Interpretation No. ("FIN") 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." This Interpretation specifies that a
guarantor is required to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing the guarantee. This
applies to guarantees issued or modified after December 31, 2002. The
Interpretation also revises the disclosure requirements about a guarantor's
obligations under agreements, which are effective for the 2002 consolidated
financial statements. The adoption of FIN 45 had no effect on the Company's 2003
first quarter condensed consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities." The Interpretation defines variable interest
entities and addresses consolidation of such entities by the primary beneficiary
of the entity. The Interpretation is effective for interests in variable
interest entities created after January 31, 2003. For interests in variable
interest entities created before February 1, 2003, the Interpretation shall
apply to the first interim or annual reporting period beginning after June 15,
2003.
Additional information about the impacts of newly issued accounting standards is
discussed in Item 8 of the Company's Form 10-K for the year ended December 31,
2002.
Pensions: For 2002, the total year benefit was approximately $1.4 million. For
2003, due to market driven lower pension assets and the application of a lower
discount rate for the calculation of pension obligations, the Company expects
that the full year expense will be approximately $14 million. Additional
information regarding pensions is included in Item 8 of the Company's 2002 Form
10-K.
Stock Options: Information regarding the accounting for and pro forma effect of
options to purchase shares of the Company's stock is included in Note (5) to the
financial statement included in Item 1.
Economic Conditions: The economy of Hawaii continued to perform relatively well
in 2003, in spite of a sharp short-term decline in the international portion of
its largest industry, tourism, due to the conflict in Iraq, and concern over the
direction and pace of the U.S. economy. In spite of a 30-40 percent fall-off in
daily international arrivals during the active conflict in Iraq, leading local
economists point to job growth in the state (especially in government,
education, health and construction), low unemployment (Hawaii's unemployment
rate in February was 3%, versus a national rate of 6.4%), personal income growth
(4.7% in the most recent data available) and the continuing strong performance
of interest rate-sensitive sectors, especially construction and home sales. It
is unusual, however, for the state to enjoy sustained growth when the visitor
industry, as a whole, is not strong.
The primary concern, then, is how long Hawaii can continue to perform well if
the U.S. economy does not pick up, especially now that the Iraq conflict has
diminished in intensity. Within the total visitor count, travelers from the U.S.
West are especially important because they have been the largest source of
growth recently. Visitors from this area also return frequently and are
predominant among the offshore buyers of property in Hawaii.
Given reasonable performance of the U.S. and international economies, and
assuming no external "event risks," Hawaii may have moderate growth beyond 2004.
Subsequent Events: On April 23 2003, the Company announced that its wholly owned
subsidiary, A&B Properties, had signed a letter of intent with MK Management,
LLC, formed by The MacNaughton Group and The Kobayashi Group, for the
development of "Hokua at 1288 Ala Moana," a 40-story luxury residential
condominium in Honolulu. Of the approximate $210 million development cost, A&B
will provide equity and mezzanine debt of $40 million.
On April 23, 2003, Matson announced that it intends to reduce its fuel surcharge
from 7.5 percent to 6.5 percent, in its Hawaii and Guam services,
effective May 4, 2003.
Management Changes: Frank Kiger was promoted to Vice President, Agricultural
Operations of A&B's Hawaiian Commercial & Sugar Company (a division of A&B)
effective February 5, 2003. He replaced John Hoxie, who retired.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
Information concerning market risk is incorporated herein by reference to Item
7A of the Company's Form 10-K for the fiscal year ended December 31, 2002. There
has been no material change in the quantitative and qualitative disclosure about
market risk since December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
- --------------------------------
(a) Evaluation of Disclosure Controls and Procedures. The Company's
Chief Executive Officer and Chief Financial Officer have evaluated
the effectiveness of the Company's disclosure controls and
procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c)
under the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"). Based on such evalua-
tion, such officers have concluded that, as of the Evaluation
Date, the Company's disclosure controls and procedures are
effective in alerting them on a timely basis to material information
relating to the Company (including its consolidated subsidiaries)
required to be included in the Company's reports filed or submitted
under the Exchange Act.
(b) Changes in Internal Controls. Since the Evaluation Date, there have
not been any significant changes in the Company's internal controls
or in other factors that could significantly affect such controls.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits
--------
11. Statement re Computation of Per Share Earnings.
99. Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the quarter.
A Form 8-K was filed on April 23, 2003 in connection with the
Company's 2003 first quarter earnings release.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALEXANDER & BALDWIN, INC.
-------------------------
(Registrant)
Date: April 25, 2003 /s/ James S. Andrasick
------------------------------------
James S. Andrasick
Executive Vice President, Chief
Financial Officer and Treasurer
Date: April 25, 2003 /s/ Thomas A. Wellman
------------------------------------
Thomas A. Wellman
Controller
CERTIFICATIONS
I, W. Allen Doane, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Alexander &
Baldwin, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
By /s/ W. Allen Doane
---------------------------------
W. Allen Doane, President and
Chief Executive Officer
Date: April 25, 2003
CERTIFICATIONS
I, James S. Andrasick, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Alexander &
Baldwin, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
By /s/ James S. Andrasick
---------------------------------
James S. Andrasick, Executive Vice President,
Chief Financial Officer and Treasurer
Date: April 25, 2003
EXHIBIT INDEX
11. Statement re Computation of Per Share Earnings.
99. Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
EXHIBIT 99
Certification of Chief Executive Officer and
Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of Alexander & Baldwin,
Inc. (the "Company") for the quarterly period ending March 31, 2003, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
W. Allen Doane, as Chief Executive Officer of the Company, and James S.
Andrasick, as Chief Financial Officer of the Company, each hereby certifies,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
A signed original of this written statement required by Section 906 has been
provided to Alexander & Baldwin, Inc. and will be retained by Alexander &
Baldwin, Inc. and furnished to the Securities and Exchange Commission or its
staff upon request.
/s/ W. Allen Doane
- ---------------------------------
Name: W. Allen Doane
Title: Chief Executive Officer
Date: April 25, 2003
/s/ James S. Andrasick
- ---------------------------------
Name: James S. Andrasick
Title: Chief Financial Officer
Date: April 25, 2003
This certification accompanies the Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.
EXHIBIT 11
ALEXANDER & BALDWIN, INC.
COMPUTATION OF EARNINGS PER SHARE
(In millions, except per share amounts)
Three Months Ended
March 31,
2003 2002
---- ----
Basic Earnings Per Share
- ------------------------
Net income $ 17.6 $ 9.8
====== ======
Average number of shares outstanding 41.4 40.6
====== ======
Basic earnings per share $ 0.43 $ 0.24
====== ======
Diluted Earnings Per Share
- --------------------------
Net income $ 17.6 $ 9.8
====== ======
Average number of shares outstanding 41.4 40.6
Effect of assumed exercise of outstanding
stock options 0.1 0.3
------ ------
Average number of shares outstanding
after assumed exercise of
outstanding stock options 41.5 40.9
====== ======
Diluted earnings per share $ 0.42 $ 0.24
====== ======