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 June 30, 2004
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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
June 30, 2004: 42,600,149
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
The condensed financial statements and notes for the second quarter and first
six months of 2004 are presented below, with comparative figures from the 2003
financial statements.
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(In millions, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
---- ---- ---- ----
(unaudited) (unaudited)
Revenue:
Operating revenue $ 377.1 $ 314.2 $ 720.8 $ 587.2
---------- ---------- ----------- -----------
Costs and Expenses:
Costs of goods sold, services and rentals 295.5 252.2 562.1 476.3
Selling, general and administrative 30.9 30.1 62.0 59.9
Interest 3.2 2.4 6.4 5.0
---------- ---------- ----------- -----------
Total costs and expenses 329.6 284.7 630.5 541.2
---------- ---------- ----------- -----------
Income Before Taxes 47.5 29.5 90.3 46.0
Income taxes 18.3 10.8 34.3 16.9
---------- ---------- ----------- -----------
Income From Continuing Operations 29.2 18.7 56.0 29.1
Discontinued Operations (net of income taxes):
Properties 0.9 4.5 1.2 11.7
---------- ---------- ----------- -----------
Net Income $ 30.1 $ 23.2 $ 57.2 $ 40.8
========== ========== =========== ===========
Basic Earnings Per Share:
Continuing operations $ 0.69 $ 0.45 $ 1.32 $ 0.70
Discontinued operations 0.02 0.11 0.03 0.29
---------- ----------- ----------- -----------
Net income $ 0.71 $ 0.56 $ 1.35 $ 0.99
========== ========== =========== ===========
Diluted Earnings Per Share:
Continuing operations $ 0.68 $ 0.45 $ 1.30 $ 0.70
Discontinued operations 0.02 0.11 0.03 0.28
---------- ---------- ----------- -----------
Net income $ 0.70 $ 0.56 $ 1.33 $ 0.98
========== ========== =========== ===========
Dividends Per Share $ 0.225 $ 0.225 $ 0.450 $ 0.450
Average Number of Shares Outstanding 42.5 41.4 42.4 41.4
See Financial Notes
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
Industry Segment Data, Net Income
(In millions)
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
---- ---- ---- ----
(unaudited) (unaudited)
Revenue:
Ocean transportation $ 208.1 $ 199.3 $ 404.6 $ 385.4
Logistics services 93.5 57.4 167.6 108.4
Property Development and Management:
Leasing 20.4 20.6 41.2 39.7
Sales 28.3 26.4 68.4 43.1
Less amounts reported in discontinued
operations (1.5) (24.6) (1.9) (39.4)
Food Products 28.9 35.1 42.3 50.0
Intersegment revenue (0.6) -- (1.4) --
---------- ---------- ----------- -----------
Total revenue $ 377.1 $ 314.2 $ 720.8 $ 587.2
========== ========== =========== ===========
Operating Profit, Net Income:
Transportation:
Ocean transportation $ 31.4 $ 23.2 $ 50.0 $ 35.3
Logistics services 2.6 1.4 3.6 1.9
Property Development and Management:
Leasing 9.2 9.5 18.7 18.1
Sales 13.4 6.9 32.4 18.5
Less amounts reported in discontinued
operations (1.4) (7.3) (1.9) (18.8)
Food Products 0.3 2.3 2.9 4.2
---------- ---------- ----------- -----------
Total operating profit 55.5 36.0 105.7 59.2
Interest Expense (3.2) (2.4) (6.4) (5.0)
General Corporate Expenses (4.8) (4.1) (9.0) (8.2)
---------- ---------- ----------- -----------
Income From Continuing Operations Before
Income Taxes 47.5 29.5 90.3 46.0
Income Taxes (18.3) (10.8) (34.3) (16.9)
---------- ---------- ----------- -----------
Income From Continuing Operations 29.2 18.7 56.0 29.1
Discontinued Operations (net of income taxes):
Properties 0.9 4.5 1.2 11.7
---------- ---------- ----------- -----------
Net Income $ 30.1 $ 23.2 $ 57.2 $ 40.8
========== ========== =========== ===========
See Financial Notes
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In millions)
June 30, December 31,
2004 2003
---- ----
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 21 $ 6
Accounts and notes receivable, net 182 160
Capital Construction Fund 100 --
Inventories 29 16
Real estate held for sale 24 30
Deferred income taxes 13 15
Prepaid expenses and other assets 16 20
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Total current assets 385 247
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Investments 99 68
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Real Estate Developments 73 77
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Property, at cost 1,887 1,888
Less accumulated depreciation and amortization 843 809
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Property - net 1,044 1,079
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Capital Construction Fund 66 165
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Other Assets 119 124
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Total $ 1,786 $ 1,760
========= =========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable and current portion of long-term debt $ 115 $ 15
Accounts payable 95 95
Other 103 73
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Total current liabilities 313 183
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Long-term Liabilities:
Long-term debt 198 330
Deferred income taxes 344 356
Post-retirement benefit obligations 44 44
Other 37 36
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Total long-term liabilities 623 766
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Commitments and Contingencies
Shareholders' Equity:
Capital stock 35 35
Additional capital 126 112
Deferred compensation (2) --
Accumulated other comprehensive loss (6) (8)
Retained earnings 708 684
Cost of treasury stock (11) (12)
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Total shareholders' equity 850 811
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Total $ 1,786 $ 1,760
========= =========
See Financial Notes
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In millions)
Six Months Ended
June 30,
2004 2003
---- ----
(unaudited)
Cash Flows from Operating Activities $ 84 $ 61
--------- ---------
Cash Flows from Investing Activities:
Capital expenditures (24) (19)
Proceeds from disposal of property and other assets 20 5
Capital Construction Fund, net -- (2)
Investments, net (22) (2)
--------- ---------
Net cash used in investing activities (26) (18)
--------- ---------
Cash Flows from Financing Activities:
Proceeds from issuances of long-term debt 4 115
Payments of long-term debt (35) (128)
Proceeds from issuances of capital stock 9 3
Repurchase of capital stock (2) --
Dividends paid (19) (19)
--------- ---------
Net cash used in financing activities (43) (29)
--------- ---------
Net Increase in Cash and Cash Equivalents $ 15 $ 14
========= =========
Other Cash Flow Information:
Interest paid, net of amounts capitalized $ (7) $ (5)
Income taxes paid, net of refunds (30) (11)
Other Non-cash Information:
Depreciation expense 40 35
Tax-deferred property sales 1 34
Tax-deferred property purchases -- (11)
Debt assumed in real estate acquisition -- 15
Assets conveyed to joint venture -- 28
See Financial Notes
Financial Notes
(Unaudited)
(1) The Condensed Consolidated Balance Sheet as of June 30, 2004, the
Condensed Consolidated Statements of Income for the six months ended
June 30, 2004 and 2003, and the Condensed Consolidated Statements of
Cash Flows for the six months ended June 30, 2004 and 2003 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.
(3) Commitments and Contingencies: Commitments, excluding operating lease
commitments, that were in effect at June 30, 2004, included the
following (in millions):
Vessel purchase (a) $ 105
Guarantee of Hokua debt (b) $ 18
Guarantee of Sea Star debt (c) $ 11
Guarantee of HS&TC debt (d) $ 15
Standby letters of credit (e) $ 17
Bonds (f) $ 13
Benefit plan withdrawal obligations (g) $ 65
These amounts are not recorded on the Company's balance sheet and,
based on the Company's current knowledge and with the exception of item
(a), it is not expected that the Company or its subsidiaries will be
called upon to advance funds under these commitments.
(a) Matson Navigation Company, Inc. ("Matson") has an
agreement with Kvaerner Philadelphia Shipyard Inc., to
purchase a container ship ("Maunawili"). The Company
expects to take delivery of the ship during the third
quarter of 2004 for a total project cost of
approximately $105 million. The cost of the Maunawili is
expected to be funded with a combination of cash from
the Capital Construction Fund, the issuance of new debt,
and operations. No significant payment is required until
acceptance and delivery of the Maunawili. No obligation
is recorded on the financial statements because
conditions necessary to record either a liability or an
asset have not been met.
(b) At June 30, 2004, A&B Properties, Inc. ("Properties")
had guaranteed $2.5 million of the $12 million component
of a $130 million construction loan agreement that was
entered into by Hokua Development Group LLC ("Hokua"), a
limited liability company in which the Company is an
investor. The $12 million component was used by Hokua to
acquire the land that is being developed. This guarantee
terminates upon the initial funding of the balance of
the construction loan. This funding is expected to begin
toward the end of 2004. Properties would be called upon
to honor this guarantee in the event that the
construction loan is not funded.
Properties also has a limited guarantee equal to the
lesser of $15 million or 15.5 percent of the outstanding
balance of the construction loan that could be triggered
if the purchasers of condominium apartments become
entitled to rescind their purchase obligations. This
could occur if Hokua breaches covenants contained in its
sales contracts or violates the Interstate Land Sales
Practices Act, the Hawaii Condominium Act, the
Securities Act of 1933 or the Securities Exchange Act of
1934.
(c) Matson has guaranteed $11 million of the debt of Sea
Star Line, LLC ("Sea Star," a business in which Matson
holds a minority interest investment) 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 further reduced, over time by
scheduled repayments of the debt by Sea Star.
Subsequent to the 2004 second quarter-end, a member of
Sea Star has advised Matson that it intends to exercise
its option to purchase, during the third quarter of
2004, Matson's 19.5 percent interest in Sea Star for
an amount that approximates Matson's recorded investment
in Sea Star. As described above, Matson guarantees
$11 million of the Sea Star debt. When this option is
exercised, and subject to the lender's approval, Matson
will be relieved of its guarantee obligation.
(d) The Company guarantees up to $15 million of a $30
million revolving credit line of Hawaiian Sugar &
Transportation Cooperative's ("HS&TC," a raw sugar
marketing and transportation cooperative that the
Company uses to market and transport its sugar and of
which the Company is a member). 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 the lesser of 90 percent or $16
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 June 30, 2004,
the amount drawn was $8 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.
(e) The Company has arranged for standby letters of credit
totaling $17 million. This includes letters of credit,
totaling approximately $12 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 $3
million for workers' compensation claims incurred by
employees of C&H Sugar Company, Inc. ("C&H,"
an unconsolidated entity in which the Company has a
minority ownership equity interest), 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 agreement with C&H to provide this letter of credit
expired on December 24, 2003. C&H has advised the
Company that it is unable to provide a replacement
security deposit. Until C&H meets this contractual
obligation, the Company will not be released from this
letter of credit. The remaining letters of credit,
totaling $2 million, are for routine operating matters.
(f) Of the $13 million in bonds, $6 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, as part of real-estate
development, is completed. The Company has the financial
ability and intention to complete these improvements.
Also included in the total are $5 million of customs
bonds.
(g) The withdrawal liabilities for multi-employer pension
plans, in which Matson is a participant, aggregated
approximately $65 million as of the most recent
valuation dates. Management has no present intention of
withdrawing from and does not anticipate the termination
of any of the aforementioned plans.
Contingencies: As reported in Items 7 and 8 of the Company's 2003 Form
10-K, the State of Hawaii Department of Health ("DOH") has issued a
notice of violation of state and federal air pollution control
regulations and a $2 million proposed penalty, following the Company's
self reporting of this matter and taking corrective action to comply
with the regulations. The Company has contested this matter, but there
has been no change in the status since 2003 year-end. The Company
believes that the resolution of this matter will not have a material
effect on its financial statements and that appropriate accruals for
this matter have been recorded.
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.
(4) Accounting Method for Stock-Based Compensation and Diluted Earnings per
Share: 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 three and six months ended June 30, 2004 and
2003 would have been as follows (in millions, except per share
amounts):
Quarter Ended Six Months Ended
June 30 June 30
------- -------
2004 2003 2004 2003
Net Income:
As reported $ 30.1 $ 23.2 $ 57.2 $ 40.8
Stock-based compensation
expense determined under fair
value based method for all
awards, net of related tax effects (0.3) (0.3) (0.6) (0.6)
-------- -------- -------- --------
Pro forma $ 29.8 $ 22.9 $ 56.6 $ 40.2
======== ======== ======== ========
Net Income Per Share:
Basic, as reported $ 0.71 $ 0.56 $ 1.35 $ 0.99
Basic, pro forma $ 0.70 $ 0.55 $ 1.33 $ 0.97
Diluted, as reported $ 0.70 $ 0.56 $ 1.33 $ 0.98
Diluted, pro forma $ 0.69 $ 0.55 $ 1.32 $ 0.97
Effect on average shares outstanding
of assumed exercise of stock options
(in millions of shares):
Average number of shares
Outstanding 42.5 41.4 42.4 41.4
Effect of assumed exercise of
outstanding stock options 0.6 0.2 0.6 0.2
-------- -------- -------- --------
Average number of shares
outstanding after assumed exercise
of outstanding stock options 43.1 41.6 43.0 41.6
======== ======== ======== ======== `
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.
(5) 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 (i) the operations and cash flows of the
assets can be clearly distinguished from the remaining assets of the
Company, (ii) the cash flows that are specific to the assets sold have
been, or will be, eliminated from the ongoing operations of the
Company, (iii) the Company will not have a significant continuing
involvement in the operations of the assets sold, and (iv) 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.
Discontinued operations were as follows (in millions):
Quarter Ended Six Months Ended
June 30 June 30
------- -------
2004 2003 2004 2003
Discontinued Operations (net of tax)
Sales of Assets $ 0.7 $ 4.1 $ 1.0 $ 10.5
Leasing Operations 0.2 0.4 0.2 1.2
-------- -------- -------- --------
Total $ 0.9 $ 4.5 $ 1.2 $ 11.7
======== ======== ======== ========
(6) Other Comprehensive Income for the three and six months ended
June 30, 2004 and 2003 were as follows, (in millions):
Quarter Ended Six Months Ended
June 30 June 30
------- -------
2004 2003 2004 2003
Net Income $ 30.1 $ 23.2 $ 57.2 $ 40.8
Other Comprehensive Income (Loss):
Change in valuation of derivative 2.5 (3.0) 1.5 (3.5)
Company's share of investee's
minimum pension liability
adjustment -- -- -- (7.2)
-------- -------- -------- --------
Comprehensive Income $ 32.6 $ 20.2 $ 58.7 $ 30.1
======== ======== ======== ========
The change in valuation of derivative amount reflects the valuation of
an interest rate lock agreement related to the previously noted vessel
that Matson expects to take delivery of during 2004.
(7) Pension and Post-retirement Plans: The Company has defined benefit
pension plans that cover substantially all non-bargaining unit and
certain bargaining unit employees. The Company also has unfunded
non-qualified plans that provide benefits in excess of the amounts
permitted to be paid under the provisions of the tax law to
participants in qualified plans. The assumptions related to discount
rates, expected long-term rates of return on invested plan assets,
salary increases, age, mortality and health care cost trend rates,
along with other factors, are used in determining the assets,
liabilities and expenses associated with pension benefits. Management
reviews the assumptions annually with its independent actuaries, taking
into consideration existing and future economic conditions and the
Company's intentions with respect to these plans. Management believes
that its assumptions and estimates for 2004 are reasonable. Different
assumptions, however, could result in material changes to the assets,
obligations and costs associated with benefit plans.
The Components of Net Periodic Benefit Cost for the second quarters of
2004 and 2003 were as follows (in millions):
Pension Benefits Post-retirement Benefits
---------------- ------------------------
2004 2003 2004 2003
---- ---- ---- ----
Service Cost $ 1.6 $ 1.6 $ 0.2 $ 0.2
Interest Cost 4.0 4.8 0.8 0.7
Expected Return on Plan Assets (5.7) (5.5) -- --
Amortization of Prior Service Cost 0.1 1.1 -- --
Amortization of Net (Gain) Loss 0.5 1.6 0.1 0.1
-------- -------- -------- ---------
Net Periodic Benefit Cost $ 0.5 $ 3.6 $ 1.1 $ 1.0
======== ======== ======== =========
The Components of Net Periodic Benefit Cost for the first half of 2004
and 2003 were as follows (in millions):
Pension Benefits Post-retirement Benefits
---------------- ------------------------
2004 2003 2004 2003
---- ---- ---- ----
Service Cost $ 3.1 $ 3.2 $ 0.4 $ 0.3
Interest Cost 7.9 9.6 1.4 1.5
Expected Return on Plan Assets (11.4) (11.0) -- --
Amortization of Prior Service Cost 0.2 2.1 -- --
Amortization of Net (Gain) Loss 1.0 3.3 0.3 0.2
-------- -------- -------- ---------
Net Periodic Benefit Cost $ 0.8 $ 7.2 $ 2.1 $ 2.0
======== ======== ======== =========
As previously disclosed, the Company still expects to contribute
approximately $5 million to its pension plan in September 2004. Total
year 2004 pension expense is expected to be approximately $2 million.
(8) Significant Event: During the third quarter of 2004, Matson intends to
repay $100 million of commercial paper notes and to retire the
commercial paper program. Consistent with this intent, this amount has
been classified as current at quarter-end. Concurrently, Matson intends
to withdraw $100 million from the Capital Construction Fund and has,
consistent with this intent, reclassified $100 million of CCF as a
current asset at quarter-end. Matson also intends to terminate a $25
million short-term revolving credit facility that served as a liquidity
back-up line. No amounts are outstanding under this back-up line.
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, such as the possible entrance of a new
competitor 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) 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;
6) availability of water for irrigation and to support
real estate development;
7) performance of unconsolidated affiliates and ventures;
8) significant fluctuations in raw sugar prices and the
ability to sell raw sugar to C&H Sugar Company, Inc.
("C&H");
9) significant fluctuations in fuel prices;
10) 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) resolution of tax issues with the IRS or state tax
authorities;
13) performance of pension assets;
14) acts of nature, including but not limited to, drought,
greater than normal rainfall, hurricanes and typhoons;
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 REVENUE & NET INCOME
- ---------------------------------------------------------------------------------------------------------
Quarter Ended June 30
- ---------------------------------------------------------------------------------------------------------
(dollars in millions, except per-share) 2004 2003 Change
- ---------------------------------------------------------------------------------------------------------
Revenue $ 377.1 $ 314.2 20%
Net income $ 30.1 $ 23.2 30%
Consolidated revenue of $377.1 million for the second quarter of 2004 increased
$62.9 million, or 20 percent, compared with the second quarter of 2003. This
increase was due principally to $36.1 million growth in Matson Integrated
Logistics revenue, $8.8 million higher revenue for ocean transportation revenue,
$1.9 million higher revenue from real estate sales, $23.1 million of lower
amounts reported as discontinued operations (discontinued operations are a
reduction in reported operating revenue), partially offset by $6.2 million lower
revenue in food products. The reasons for the revenue growth are described below
in Analysis of Operating Revenue and Profit.
Costs of goods sold, services and rentals of $295.5 million for the second
quarter of 2004 increased $43.3 million, or 17 percent, compared with the second
quarter of 2003 due to higher purchased transportation services at the Matson
Integrated Logistics business and the sales of higher cost-basis real-estate in
2004, partially offset by lower cost of sugar sales due to lower production.
Additional information about operating expenses is contained in the Analysis of
Operating Revenue and Profit.
Selling, general and administrative costs were three percent higher than the
second quarter of 2003 due to higher consulting costs for Sarbanes-Oxley section
404 readiness, performance based incentive accruals, and salary increases,
partially offset by lower pension costs and lower administrative costs at
Matson. Higher interest expense reflects the cost of the new vessel financing.
Income taxes were higher than the second quarter of 2003 due to higher pre-tax
income and a higher effective tax rate.
- ---------------------------------------------------------------------------------------------------------
Six Months Ended June 30
- ---------------------------------------------------------------------------------------------------------
(dollars in millions, except per-share) 2004 2003 Change
- ---------------------------------------------------------------------------------------------------------
Revenue $ 720.8 $ 587.2 23%
Net income $ 57.2 $ 40.8 40%
Consolidated revenue of $720.8 million for the first half of 2004 increased
$133.6 million, or 23 percent compared with the first half of 2003. This
increase was due principally to $59.2 million growth in Matson Integrated
Logistics revenue, $19.2 million higher revenue for ocean transportation
revenue, $25.3 million higher revenue from real estate sales, $37.5 million of
lower amounts reported as discontinued operations, offset by $7.7 million lower
revenue in food products. The reasons for the revenue growth are described
below in Analysis of Operating Revenue and Profit.
Costs of goods sold, services and rentals of $562.1 million for the first half
of 2004 increased $85.8 million, or 18 percent, compared with the first half of
2003 for the same reasons cited for the second quarter increase. Additional
information about operating expenses is contained in the Analysis of Operating
Revenue and Profit.
Selling, general and administrative costs of $62 million were $2.1 million, or
3.5 percent higher, than the first half of 2003 for the same reasons cited for
the second quarter increase. Higher interest expense reflects the cost of the
new vessel financing. Income taxes were higher than the first half of 2003 due
to higher pre-tax income and a higher effective tax rate.
Additional information about the revenue and profits of the Company are provided
in the segment discussion below. Because the Company operates in five different
segments, the review of segment operations provides an important perspective on
the financial results for the Company.
RESULTS OF SEGMENT OPERATIONS
Transportation - Ocean Transportation
- ----------------------------------------------------------------------------------------------------
Quarter Ended June 30
- ----------------------------------------------------------------------------------------------------
(dollars in millions) 2004 2003 Change
- ----------------------------------------------------------------------------------------------------
Revenue $ 208.1 $ 199.3 4%
Operating profit $ 31.4 $ 23.2 35%
- ----------------------------------------------------------------------------------------------------
Volume (Units)
Hawaii containers 40,400 39,900 1%
Hawaii automobiles 41,600 41,600 --
Guam containers 4,300 4,600 -7%
- ----------------------------------------------------------------------------------------------------
Ocean Transportation revenue of $208.1 million for the second quarter of 2004
was $8.8 million, or four percent, higher than the second quarter of 2003. Of
this increase, approximately $6.8 million was due to improved yields and cargo
mix, $1.9 million was due to increases in the bunker fuel surcharge and
$1.1 million was due to higher container volume, partially offset by $1 million
from a non-recurring charter in 2003. Container volume was one percent higher
than the second quarter of 2003 reflecting a return to normalized shipments of
consumer goods and modestly increasing growth in construction related products.
This was especially seen in the shipments of Hawaii-bound cargo, which showed
four percent higher growth than the second quarter of 2003.
Operating profit of $31.4 million was $8.2 million, or 35 percent, better than
the second quarter of 2003. This was primarily the result of $6.8 million from
favorable yields, $3.4 million for the non-recurrence of a 2003 excise tax
accrual, $0.7 million from higher container volume and $2.7 million of lower
administrative and employee benefit costs, partially offset by $2.3 million
higher vessel operating expenses and depreciation and $1 million of higher other
operating expenses. The remaining $2.1 million was comprised primarily of higher
cargo handling costs and gains on disposal of assets in 2003. The bunker fuel
surcharge did not contribute materially to operating profit since this is a
cost stabilization mechanism.
During the 2004 second quarter, Matson initiated a new roll-on-roll-off service
from the Big Island of Hawaii to the U.S. West Coast. This service is expected
to directly benefit customers in cattle and nursery businesses by reducing
transit times.
Effective June 6, 2004, Matson increased its Guam service rates by $125 per
container and $25 per vehicle to help defray terminal handling costs associated
with that service. Also effective on June 6th, Matson increased its West Coast
terminal handling charge by $25 per container and by $5 per automobile.
- ----------------------------------------------------------------------------------------------------
Six Months Ended June 30
- ----------------------------------------------------------------------------------------------------
(dollars in millions) 2004 2003 Change
- ----------------------------------------------------------------------------------------------------
Revenue $ 404.6 $ 385.4 5%
Operating profit $ 50.0 $ 35.3 42%
- ----------------------------------------------------------------------------------------------------
Volume (Units):
Hawaii containers 80,100 78,900 2%
Hawaii automobiles 77,900 79,100 -2%
Guam containers 8,800 9,000 -2%
- ----------------------------------------------------------------------------------------------------
Ocean Transportation revenue of $404.6 million for the first half of 2004 was
$19.2 million, or five percent, higher than the first half of 2003. Of this
increase, approximately $13 million was due to improved yields and cargo mix,
$3.8 million was due to increases in the bunker fuel surcharge and $3 million
was due to higher container volume. As with the second quarter, higher
container volume reflects a return to normalized shipments of consumer goods,
increasing growth in construction related products and a steadily improving
Hawaii economy. Hawaii-bound cargo showed four percent growth for the first
half of 2004 compared with the first half of 2003.
Operating profit of $50 million was $14.7 million, or 42 percent, better than
the first half of 2003. This was primarily the result of $13 million from
favorable yields, $3.4 million for the non-recurrence of a 2003 excise tax
accrual, $1.8 million from higher container volume, and $4.5 million of lower
administrative and employee benefit costs, partially offset by $5 million
higher vessel operating expenses and depreciation, $1.4 million of higher cargo
handling costs and $1.2 million of lower interest income.
For the second half of 2004, labor and operating costs are expected to increase
modestly.
Transportation - Logistics Services
- ----------------------------------------------------------------------------------------------------
Quarter Ended June 30
- ----------------------------------------------------------------------------------------------------
(dollars in millions) 2004 2003 Change
- ----------------------------------------------------------------------------------------------------
Revenue $ 93.5 $ 57.4 63%
Operating profit $ 2.6 $ 1.4 86%
- ----------------------------------------------------------------------------------------------------
Six Months Ended June 30
- ----------------------------------------------------------------------------------------------------
(dollars in millions) 2004 2003 Change
- ----------------------------------------------------------------------------------------------------
Revenue $ 167.6 $ 108.4 55%
Operating profit $ 3.6 $ 1.9 89%
- ----------------------------------------------------------------------------------------------------
Revenue and operating profit growth for the second quarter and first half of
2004 for the integrated logistics services business was mainly the result of
increased customer volume, in large part due to an acquisition in late 2003.
This acquisition is discussed in Items 7 and 8 of the Company's 2003 Form 10-K.
Also contributing was unit growth in all business lines--domestic,
international and highway.
The revenue for integrated logistics 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.
Property Development and Management - Leasing
- ----------------------------------------------------------------------------------------------------
Quarter Ended June 30
- ----------------------------------------------------------------------------------------------------
(dollars in millions) 2004 2003 Change
- ----------------------------------------------------------------------------------------------------
Revenue $ 20.4 $ 20.6 -1%
Operating profit $ 9.2 $ 9.5 -3%
- ----------------------------------------------------------------------------------------------------
Occupancy Rates:
Mainland 94% 96% -2%
Hawaii 90% 90% --
- ----------------------------------------------------------------------------------------------------
Property leasing revenue for the second quarter of 2004 was one percent less
than the amounts reported for the second quarter of 2003. Lower occupancies for
the mainland commercial leasing portfolio were nearly offset by higher
contributions from replacement property acquired after the 2003 second quarter.
Lower operating profit was mainly due to additional maintenance expense to
repair the siding on a commercial building.
- ----------------------------------------------------------------------------------------------------
Six Months Ended June 30
- ----------------------------------------------------------------------------------------------------
(dollars in millions) 2004 2003 Change
- ----------------------------------------------------------------------------------------------------
Revenue $ 41.2 $ 39.7 4%
Operating profit $ 18.7 $ 18.1 3%
- ----------------------------------------------------------------------------------------------------
Occupancy Rates:
Mainland 94% 92% 2%
Hawaii 90% 90% --
- ----------------------------------------------------------------------------------------------------
Property leasing revenue and operating profit growth for the first half of 2004
was the result of higher occupancies for the mainland commercial leasing
portfolio and higher contributions from replacement property acquired since the
2003 first quarter.
Property Development and Management - Sales
- ----------------------------------------------------------------------------------------------------
Quarter Ended June 30
- ----------------------------------------------------------------------------------------------------
(dollars in millions) 2004 2003 Change
- ----------------------------------------------------------------------------------------------------
Revenue $ 28.3 $ 26.4 7%
Operating profit $ 13.4 $ 6.9 94%
- ----------------------------------------------------------------------------------------------------
Sales during the second quarter of 2004 included 13 Maui and Oahu commercial
properties for $8.9 million, three residential development parcels for $13.8
million, one office condominium floor for $1 million, and five residential
properties for $4.3 million. Second quarter results also included $1.3 million
for the company's share of earnings in three real estate joint ventures.
By comparison, sales during the second quarter of 2003 included a commercial
property in Nevada for $23.5 million, and three residential properties for
$2.1 million. Operating profit for 2003 also included the Company's share of
earnings in two real estate joint ventures of $1 million.
- ----------------------------------------------------------------------------------------------------
Six Months Ended June 30
- ----------------------------------------------------------------------------------------------------
(dollars in millions) 2004 2003 Change
- ----------------------------------------------------------------------------------------------------
Revenue $ 68.4 $ 43.1 59%
Operating profit $ 32.4 $ 18.5 75%
- ----------------------------------------------------------------------------------------------------
Sales during the first half of 2004 included 30 Maui and Oahu commercial
properties for $21.1 million, three residential development parcels for $13.8
million, 8.5 office condominium floors for $9.8 million, and 28 residential
properties for $23.2 million. Operating profit for 2004 also included the
Company's share of earnings in three real estate joint ventures of $2.1 million.
By comparison, sales during the first half of 2003 included a commercial
property in Nevada for $23.5 million, ten commercial properties for $15.4
million, and eight residential properties for $3.7 million. Operating profit
for 2003 also included the Company's share of earnings in two real estate joint
ventures of $2.2 million.
Property sales for the second half of 2004 are not expected to continue at the
pace of the first half of the year. Although the Company continues to pursue
the sales of inventoried and income producing properties, a significant portion
of the sales expected to close during 2004 took place in the first half of
the year.
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. Additionally, the operating profit reported in each quarter does not
necessarily follow a percentage of sales trend because the cost basis of
property sold can differ significantly between transactions. The reporting of
property sales is also affected by the classification of certain property sales
as discontinued operations.
Property Development and Management - Discontinued Operations
- ------------------------------------------------------------------------------------------------------------------
Quarter Ended June 30 Six Months Ended June 30
- ------------------------------------------------------------------------------------------------------------------
(dollars in millions, before tax) 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------------
Sales revenue $ 1.1 $ 23.5 $ 1.1 $ 36.9
Leasing revenue $ 0.4 $ 1.1 $ 0.8 $ 2.5
Sales operating profit $ 1.1 $ 6.6 $ 1.5 $ 17.0
Leasing operating profit $ 0.3 $ 0.7 $ 0.4 $ 1.8
- ------------------------------------------------------------------------------------------------------------------
Discontinued operations for the second quarter and first half of 2004 included
the sale, for $1 million, of a Maui property and the operating results of an
Ontario, California commercial property that the Company intends to sell.
During the second quarter of 2003, the operating results and the proceeds from
the sale of a Reno, Nevada property was included in discontinued operations. In
addition to the property sales noted above, discontinued operations for the
first half of 2003 included the proceeds from the sales of five commercial
properties on Maui.
Because the Company regularly sells commercial properties, the amounts reported
as continuing and discontinued operations in prior quarters are restated each
time a property is designated as discontinued.
Food Products
- ----------------------------------------------------------------------------------------------------
Quarter Ended June 30
- ----------------------------------------------------------------------------------------------------
(dollars in millions) 2004 2003 Change
- ----------------------------------------------------------------------------------------------------
Revenue $ 28.9 $ 35.1 -18%
Operating profit $ 0.3 $ 2.3 -87%
- ----------------------------------------------------------------------------------------------------
Tons sugar produced 53,200 68,900 -23%
- ----------------------------------------------------------------------------------------------------
Six Months Ended June 30
- ----------------------------------------------------------------------------------------------------
(dollars in millions) 2004 2003 Change
- ----------------------------------------------------------------------------------------------------
Revenue $ 42.3 $ 50.0 -15%
Operating profit $ 2.9 $ 4.2 -31%
- ----------------------------------------------------------------------------------------------------
Tons sugar produced 64,900 87,600 -26%
- ----------------------------------------------------------------------------------------------------
Food products revenue and operating profit declined for both the second quarter
and first half of 2004 compared with 2003 due mainly to lower sugar production
and sales prices that were about seven percent below 2003. Lower sugar
production for 2004 was due to wet field conditions and unburnt, or poorly
burnt, cane that affected harvesting and processing conditions adversely.
Certain areas of the Maui sugar plantation had over 50 inches of rain over a
sustained period, so harvesting was impeded significantly for those areas.
Quarterly fluctuations in sales and operating profit are normal for this
business due to commodity sugar prices, weather, production and other
seasonality factors.
The Company's sugar business uses a standard cost system for determining cost of
sales. As total-year production and cost estimates change, the standard cost per
ton is adjusted to reflect those changes. During the second quarter of 2004 the
cost of crop was increased by three percent to reflect lower total-year
production estimates.
Operating profit for both the second quarter and first half of 2004 compared
with 2003 benefited from higher electrical power sales with both volume and
price increases that were 21 percent over 2003. In addition, stronger food-grade
sugar and roasted coffee sales helped the second quarter and first half results.
The benefit of these factors was more than offset by lower production and sales
prices for raw sugar.
As discussed in the first quarter Form 10-Q, the full-year 2004 operating profit
for Food Products is expected to be less than the amounts reported last year due
to lower raw sugar production and continuing low sugar prices. 2004 production
could drop from between five to seven percent below the 206,000 tons produced in
2003. Combined with lower sugar prices, and in spite of cost reduction efforts
that have been initiated, this will significantly erode the first half
operating profit.
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
$636 million at June 30, 2004, an increase of $91 million from December 31,
2003. The increase was due primarily to $41 million of higher balances available
under variable rate debt facilities, $22 million of higher receivable balances,
$15 million of higher cash balances, and $14 million of higher sugar and coffee
inventory balances. Inventory balances were the result of normal business
seasonality. Cash balances were higher than 2003 year-end due to receivable
collections, business growth, timing of capital expenditures, and lower
short-term debt balances that could be paid down prior to quarter-end.
Balance Sheet: Working capital was $72 million at June 30, 2004, an increase of
$8 million from the balance carried at the end of 2003. The higher working
capital was due primarily to higher accounts receivable, cash and inventory
balances partially offset by higher taxes payable, other accrued current
liabilities and lower balances in real estate held for sale. Real estate held
for sale declined during the first half mainly due to the sales of office
condominium units.
Long-term Debt, including commercial paper and other amounts classified as
current, totaled $313 million at June 30, 2004 compared with a balance of $345
million at December 31, 2003. This $32 million decrease was due principally to
normal debt repayments. The weighted average interest rate for the Company's
outstanding borrowings at June 30, 2004 was approximately 4%.
A $50 million private shelf agreement, under which Matson had already borrowed
$15 million, expired in June 2004. Matson amended the agreement to $65 million,
$15 million of which was outstanding, and extended the agreement for three
years.
As noted previously, Matson expects to take delivery of a new vessel, the MV
Maunawili in the third quarter of 2004. Matson currently intends to finance the
MV Maunawili with $55 million of U.S. government Guaranteed Ship Financing
Bonds, more commonly known as Title XI bonds. Approximately $46 million is
expected to be funded through the Company's Capital Construction Fund and the
remaining $4 million will be funded through operating cash flows.
During the third quarter of 2004, Matson intends to repay $100 million of
commercial paper notes and to retire the commercial paper program. Consistent
with this intent, this amount has been classified as current at quarter-end.
Concurrently, Matson intends to withdraw $100 million from the Capital
Construction Fund and has, consistent with this intent, reclassified $100
million of CCF as a current asset at quarter-end. Matson also intends to
terminate a $25 million short-term revolving credit facility that served as a
liquidity back-up line. No amounts are outstanding under this back-up line.
Cash Flows and Capital Expenditures: Cash Flows from Operating Activities was
$84 million for the first half of 2004, compared with Cash Flows from Operating
Activities of $61 million for the first half of 2003. The higher cash flow was
due to better operating results, the sales of real estate classified as Real
Estate Held for Sale and fluctuations in other working capital balances. During
the first half of 2004, the Company invested approximately $20 million into the
Hokua joint venture, in which the Company has a 50 percent voting interest.
For the first half of 2004, capital expenditures totaled $24 million compared
with $19 million for the first half of 2003. These expenditures were primarily
for normal operations and did not include re-investment of proceeds from tax-
deferred sales into new income producing property.
Tax-Deferred Real Estate Exchanges: Sales - During the first half of 2004, the
Company recorded, on a tax-deferred basis, the sale of one property for $1
million. During the first quarter of 2004, a $4 million property sale had been
completed and reported as a tax-deferred transaction; however, during the second
quarter the Company was unable to complete the purchase of the identified
replacement property and the amount was included in cash flows from investing
activities during the second quarter. During the first half of 2003, the Company
recorded, on a tax-deferred basis, $37 million of sales. The proceeds from
tax-deferred sales are held in escrow, but are available for reinvestment in
replacement property.
Purchases - No property was purchased during the first half of 2004 using the
proceeds from tax-deferred sales. During the first half of 2003, the company
utilized $15 million of tax-deferred funds to acquire new income-producing
property.
Commitments, Contingencies and Environmental Matters: A description of
commitments and contingencies in effect at the end of the second quarter is
described in Note (3) to the financial statements of Item 1.
OTHER MATTERS
Charter Agreement: Matson and American President Lines, Ltd. ("APL") are parties
to a Successor Alliance Slot Hire and Time Charter Agreement ("APL Agreement")
that expires in February 2006. The APL Agreement provides the structure of an
alliance through which Matson provides a weekly service to Guam. Pursuant to the
APL Agreement, Matson time charters three C-9 class vessels to APL and APL
reserves a designated number of container slots on each C-9 vessel as well as
two additional APL vessels for Matson's exclusive use. Matson's annual time
charter revenues arising from the APL Agreement are approximately $35 million,
and Matson generates substantial additional revenues from its Guam trade. Taken
together, such revenues contribute a significant portion of the Ocean
Transportation segment's total operating profit. Based on discussions with APL
in late June 2004, Matson currently believes that the APL Agreement will not be
renewed in its present form after February 2006, and any new or revised
agreement with APL, if a new or revised agreement is entered into with APL,
would be on terms substantially less favorable to Matson. Regardless of whether
an agreement is entered into with APL, Matson will continue serving the Guam
market after February 2006, and Matson intends to pursue operating changes in
that market and its Hawaii service in order to optimize service and
profitability. For example, regardless of whether there is an agreement with APL
after February 2006, it is Matson's present intention to redeploy the three C-9
vessels in its Hawaii service, replacing smaller, less cost-efficient vessels.
Although it is too early to estimate with certainty the financial implications
of alternative service arrangements being explored by Matson, any such
alternative is not expected to substitute fully for the operating profit
contribution of the current APL alliance arrangement. Due substantially to the
termination of the charter arrangement with APL described above, Matson
currently estimates that an annual operating profit reduction of $10 to $20
million, and possibly higher during the transition period following the
agreement's expiration, can be expected. With over 18 months remaining before
the APL Agreement's expiration, Matson is focused on developing an optimal
successor service to the current APL Guam arrangement.
Unrelated to the Guam service, Matson intends to further moderate the estimated
reduction in operating profit in the Guam service described above through a
combination of cost reductions, organic growth, acquisitions, and yield
management initiatives.
Investments: The Company's joint ventures are described in Item 8 of its most
recently filed Form 10-K. The Company has evaluated investments in
unconsolidated affiliates relative to Financial Interpretation ("FIN") Number 46
"Consolidation of Variable Interest Entities," as revised, and has determined
that the investments in these affiliates are either not subject to or do not
meet the consolidation requirements of FIN No. 46. Accordingly, the Company
accounts for these investments using the equity method of accounting and the
consolidation provisions of Accounting Research Bulletin No. 51 "Consolidated
Financial Statements," as amended.
During the second quarter of 2004, the Company and Brookfield Homes Corporation
(NYSE:BHS, "Brookfield") formed MLR Golf Partners LLC ("MLR"), a limited
liability corporation in which the Company and Brookfield are equal partners.
During the second quarter, the Company contributed $3 million to MLR and MLR
purchased a 30.5 acre parcel at the Mauna Lani Resort on the island of Hawaii.
MLR plans to build residential units on the site.
Port Security: New security regulations for U.S. ports became effective,
pursuant to the Maritime Transportation Security Act (MSTA), on July 1, 2004.
These regulations require that vessels and port facilities provide security
enhancements to better control access to terminals and ports. Matson's terminal
facility at its Honolulu Sand Island port and the U.S. west coast terminals that
are operated by Stevedore Services of America Terminals (in which Matson is a
minority partner) are compliant with the new regulations.
Significant Accounting Policies: The Company's significant accounting policies
are described in Note 1 of the consolidated financial statements included in
Item 8 of the Company's Form 10-K for the year ended December 31, 2003 and in
the Financial Notes included in Item 1 of this Form 10-Q.
Critical Accounting Policies Estimates: The Company's accounting policies are
described in Note 1 of the Consolidated Financial Statements included in Item 8
of the Company's most recently filed Form 10-K. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America, upon which the Management's Discussion and Analysis is
based, requires that management exercise judgment when making estimates and
assumptions about future events that affect the amounts reported in the
financial statements and accompanying notes. Future events and their effects
cannot be determined with absolute certainty and actual results will,
inevitably, differ from those estimates. These differences could be material.
The most significant accounting estimates inherent in the preparation of A&B's
financial statements were described in Item 7 of the Company's 2003 Form 10-K.
New and Proposed Accounting Standards: Information about the impacts of newly
issued accounting standards are discussed in Item 2 of the Company's Form 10-Q
for the quarter ended March 31, 2004 and in Item 8 of the Company's Form 10-K
for the year ended December 31, 2003.
Economic Conditions: In spite of high oil and petroleum product prices and the
first upwards step in U.S. interest rates, Hawaii's economy continues to grow
strongly. If anything, the sustained strength in Hawaii's housing markets and
construction has spread now to other sectors. Moreover, some concerns about the
State's most important external "drivers," especially the pace and duration of a
U.S. recovery and Japan's progress, have been removed, or at least lessened
substantially, since last quarter.
Visitors from the U.S. mainland continue to travel to Hawaii in moderately
larger numbers. In the past few months, Japanese visitor statistics also have
improved markedly on a year-over-year basis, reflecting the anniversary of SARS
fears and the Iraq conflict. Even with this welcome improvement, Japanese
visitor totals still remain well below 2000 levels.
Although some locally based Army units have deployed overseas, new basings here
of a Stryker brigade and C-17 aircraft will provide a stimulus both through
advance construction and the arrival of troops and dependents. In addition, no
matter what happens to interest rates and private sector housing activity, there
will be substantial stimulus to construction associated with military housing
renovation projects just getting started.
Combining these factors, the outlook is good for continued job growth, low
unemployment (already under four percent) and real personal income growth. The
only downside apparent is an inevitable, but moderate, rise in inflationary
pressures from the high energy and housing costs.
Management Changes: Effective on June 14, 2004, Yolanda V. Gonzalez joined
Matson Navigation Company as vice president, human resources at Oakland
headquarters.
Effective July 1, 2004, Diane M. Shigeta was promoted to vice president of A&B
Properties, Inc.
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, 2003. There
has been no material change in the quantitative and qualitative disclosure about
market risk since December 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
- --------------------------------
(a) Disclosure Controls and Procedures. The Company's management, with the
participation of the Company's Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of the Company's
disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) as of the end of the period covered by
this report. Based on such evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that, as of the end
of such period, the Company's disclosure controls and procedures are
effective in recording, processing, summarizing and reporting, on a
timely basis, information required to be disclosed by the Company in
the reports that it files or submits under the Exchange Act.
(b) Internal Control Over Financial Reporting. There have not been any
changes in the Company's internal control over financial reporting
as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fiscal quarter to which this report relates
that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF
- -----------------------------------------------------------------------
EQUITY SECURITIES
-----------------
Issuer Purchases of Equity Securities
- -------------------------------------------------------------------------------------------------------------------------------
Total Number of Maximum Number
Shares Purchased as of Shares that
Part of Publicly May Yet Be Purchased
Total Number of Average Price Announced Plans Under the Plans
Period Shares Purchased Paid per Share or Programs or Programs
- -------------------------------------------------------------------------------------------------------------------------------
April 1 - 30, 2004 2,118 (1) $34.97 -- --
- -------------------------------------------------------------------------------------------------------------------------------
May 1 - 31, 2004 76,200 $29.95 76,200 (2) 1,923,800 (2)
- -------------------------------------------------------------------------------------------------------------------------------
June 1 - 30, 2004 5,364 (1) $32.75 -- --
- -------------------------------------------------------------------------------------------------------------------------------
(1) Represents shares accepted in satisfaction of the exercise price of stock
options and tax withholding obligations upon option exercises.
(2) As previously announced on December 16, 2002, the A&B Board of Directors
authorized the repurchase of up to 2,000,000 shares of common stock under
the Alexander & Baldwin, Inc. Share Repurchase Program. The Program expires
on December 31, 2004.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits
--------
10.a.(xxiv) First Amendment to the Private Shelf Agreement
between Matson Navigation Company, Inc. and Prudential
Insurance Company of America, dated as of June 29, 2001.
10.b.1.(xvi) Amendment No. 3 to the Alexander & Baldwin,
Inc. 1998 Non-Employee Director Stock Option Plan, dated
June 23, 2004.
10.b.1.(xxxix) Schedule to Form of Severance Agreement entered
into with certain executive officers, as amended and restated
effective August 24, 2000.
31.1 Certification of Chief Executive Officer, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K
-------------------
A&B furnished a Current Report on Form 8-K dated July 27, 2004
pursuant to Item 12 that attached a press release announcing
A&B's financial results for the quarter ended June 30, 2004.
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: July 27, 2004 /s/ Christopher J. Benjamin
------------------------------------------
Christopher J. Benjamin
Vice President and Chief Financial Officer
Date: July 27, 2004 /s/ Thomas A. Wellman
------------------------------------------
Thomas A. Wellman
Vice President and Controller
EXHIBIT INDEX
10.a.(xxiv) First Amendment to the Private Shelf Agreement between
Matson Navigation Company, Inc. and Prudential Insurance Company of America,
dated as of June 29, 2001.
10.b.1.(xvi) Amendment No. 3 to the Alexander & Baldwin, Inc. 1998
Non-Employee Director Stock Option Plan, dated June 23, 2004.
10.b.1.(xxxix) Schedule to Form of Severance Agreement entered into
with certain executive officers, as amended and restated effective August 24,
2000.
31.1 Certification of Chief Executive Officer, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
SCHEDULE TO FORM OF SEVERANCE AGREEMENT(1)
------------------------------------------
The Company has entered into Severance Agreements with the
following executive officers(2):
Executive Officer Date Agreement Executed
----------------- -----------------------
James S. Andrasick September 1, 2000
Christopher J. Benjamin May 1, 2004
Matthew J. Cox May 1, 2002
W. Allen Doane September 1, 2000
G. Stephen Holaday September 1, 2000
Stanley M. Kuriyama September 1, 2000
- -------------------------
(1) Form of Severance Agreement was filed as Exhibit 10.b.1.(xli) to A&B's Form
10-Q for the quarter ended September 30, 2000.
(2) This is a listing of those executive officers with severance agreements; it
is not a complete list of the executive officers of Alexander &
Baldwin, Inc.
MATSON NAVIGATION COMPANY, INC.
555 12th Street
Oakland, California 94607
Re: First Amendment to Private Shelf Agreement
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Ladies and Gentlemen:
Reference is made to the Private Shelf Agreement (the "Agreement")
dated as of June 29, 2001 between MATSON NAVIGATION COMPANY, INC., on the one
hand, and THE PRUDENTIAL INSURANCE COMPANY OF AMERICA and each Prudential
Affiliate (as defined in the Agreement) which has or may become bound by certain
provisions of the Agreement, on the other hand.
Pursuant to the request of the Company and paragraph 11C of the
Agreement, the undersigned and the Company hereby agree that the Agreement shall
be amended as follows:
1. Paragraph 1 is amended by deleting the reference therein to
"$50,000,000" and substituting therefore a reference to
"$65,000,000."
2. Paragraph 2B(2) is amended by deleting the existing text of
clause (i) thereof in its entirety and substituting therefore
a reference to "July 12, 2007."
3. Clause (ii) of paragraph 3A is amended by adding the following
phrase immediately after the word "Agreement" appearing in the
second line of text thereof: ", the first amendment to this
Agreement."
4. The defined term "Prudential" appearing in paragraph 10B (and
on the first page of the Agreement) is amended and restated in
its entirety as follows:
"Prudential" shall mean Prudential Investment Management, Inc.
The Company and the undersigned hereby acknowledge and agree that the
current Available Facility Amount (as such term is defined in the Agreement) is
$50,000,000.
The foregoing amendments to the Agreement shall be effective upon
Prudential's receipt of (i) an original counterpart of this letter agreement as
executed on behalf of the Company and (ii) a wire transfer of immediately
available funds in the amount of $50,000 in payment of Prudential's structuring
fee. Both such conditions must be satisfied on or before July 30, 2004.
Sincerely,
THE PRUDENTIAL INSURANCE COMPANY OF AMERICA
By /s/ Stephen J. DeMartini
Its Vice President
PRUCO LIFE INSURANCE COMPANY
By /s/ Stephen J. DeMartini
Its Vice President
PRUDENTIAL INVESTMENT MANAGEMENT, INC.
By /s/ Stephen J. DeMartini
Its Vice President
Accepted and agreed:
MATSON NAVIGATION COMPANY, INC.
By /s/ Matthew J. Cox
Its Senior Vice President
EXHIBIT 31.1
CERTIFICATIONS
I, 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 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed under our
supervision, 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 report is being
prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal control over financial reporting.
By /s/ Allen Doane
-----------------------------------
Allen Doane, President and
Chief Executive Officer
Date: July 27, 2004
EXHIBIT 31.2
CERTIFICATIONS
I, Christopher J. Benjamin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Alexander &
Baldwin, Inc.;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4. The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or
caused such disclosure controls and procedures to be designed under our
supervision, 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 report is being
prepared;
(b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in the case
of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting;
and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in
the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal control over financial reporting.
By /s/ Christopher J. Benjamin
-------------------------------------
Christopher J. Benjamin, Vice President
and Chief Financial Officer
Date: July 27, 2004
EXHIBIT 32
Certification of Chief Executive Officer and
Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of Alexander & Baldwin,
Inc. (the "Company") for the quarterly period ending June 30, 2004, as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
Allen Doane, as Chief Executive Officer of the Company, and Christopher J.
Benjamin, 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.
/s/ Allen Doane
- -----------------------------------
Name: Allen Doane
Title: Chief Executive Officer
Date: July 27, 2004
/s/ Christopher J. Benjamin
- -----------------------------------
Name: Christopher J. Benjamin
Title: Chief Financial Officer
Date: July 27, 2004
ALEXANDER & BALDWIN, INC.
1998 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
AMENDMENT NO. 3
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The Alexander & Baldwin, Inc. 1998 Non-Employee Director Stock Option
Plan (the "Plan") is hereby amended, effective as of June 23, 2004, in the
following respect:
1. Section I ("AMENDMENT OF THE PLAN") of Article Three of the Plan is
hereby amended in its entirety to read as follows:
"The Plan may be amended at any time by the Board, subject to
shareholder approval for any material amendments to the Plan or as
required under applicable law or regulation."
2. Except as modified by this Amendment No. 3, all the terms and
provisions of the Plan (as previously amended) shall continue in full force and
effect.
IN WITNESS WHEREOF, Alexander & Baldwin, Inc. has caused this Amendment
No. 3 to be executed on its behalf by its duly-authorized officers on this 23rd
day of June, 2004.
ALEXANDER & BALDWIN, INC.
By /s/ John F. Gasher
Its Vice President
By /s/ Alyson J. Nakamura
Its Secretary