Washington, D.C. 20549
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
DESCRIPTION OF BUSINESS AND PROPERTIES
Business Segments
A. Real Estate Development and SalesB. Land Operations Segment
A&B is&B's Land Operations segment creates value through actively involved inmanaging and deploying the entire spectrumCompany's land and real estate-related assets to their highest and best use. Primary activities of real estate development and ownership, includingthe Land Operations segment include leasing agricultural land, planning, zoning, financing, constructing, purchasing, managing, and leasing, selling, and exchanging, and investing in real property.property; renewable energy; and diversified agribusiness.
(1) Landholdings
As of December 31, 2014,2017, A&B and its subsidiaries owned approximately 88,41786,315 acres, consisting of approximately 88,25186,234 acres in HawaiiHawai`i and approximately 16681 acres on the U.S. Mainland. Hawaii landholdings are primarily used for agriculture, pasture, watershed and conservation purposes. A portion is used for urban purposes or planned for development. The Mainland properties are primarily used or held for commercial purposes.as follows:
|
| | | | | | | | | | | | |
| Acres |
Location | Urban/Entitled* | | Agriculture | | Conservation | Total |
Maui | 593 |
| | 49,717 |
| | 15,870 |
| | 66,180 |
| |
Kauai | 117 |
| | 6,918 |
| | 13,325 |
| | 20,360 |
| |
Oahu | 181 |
| | 615 |
| | 640 |
| | 1,436 |
| |
Molokai | — |
| | 265 |
| | — |
| | 265 |
| |
Big Island | 10 |
| | — |
| | — |
| | 10 |
| |
TOTAL HAWAII | 901 |
| | 57,515 |
| | 29,835 |
| | 88,251 |
| |
TOTAL MAINLAND | 166 |
| | — |
| | — |
| | 166 |
| |
TOTAL LANDHOLDINGS | 1,067 |
| | 57,515 |
| | 29,835 |
| | 88,417 |
| |
| |
* | Land is designated "fully entitled urban" when all four land use approvals described in the "Planning and Zoning" section have been obtained. The total also includes 347 acres under commercial properties. |
|
| | | | | | | | | | | | | | | | | |
Type | Segment | Maui | Kauai | Oahu | Molokai | Hawai`i Island | Total Hawai`i Acres | Mainland | Total Acres |
Land under commercial properties/ urban ground leases | CRE | 96 |
| 19 |
| 184 |
| — |
| 15 |
| 314 |
| 81 |
| 395 |
|
Land in active development | | | | | | | | | |
Development for sale | Land Operations | 106 |
| — |
| 4 |
| — |
| — |
| 110 |
| — |
| 110 |
|
Development for hold | CRE | 9 |
| — |
| — |
| — |
| — |
| 9 |
| — |
| 9 |
|
Other | Land Operations | 81 |
| — |
| — |
| — |
| — |
| 81 |
| — |
| 81 |
|
Subtotal - Land in active development | | 196 |
| — |
| 4 |
| — |
| — |
| 200 |
| — |
| 200 |
|
Land used in other operations | Land Operations | 22 |
| 20 |
| — |
| — |
| — |
| 42 |
| — |
| 42 |
|
Urban land, not in active development/use | | | | | | | | | |
Developable, with full or partial infrastructure | Land Operations | 149 |
| 7 |
| — |
| — |
| — |
| 156 |
| — |
| 156 |
|
Developable, with limited or no infrastructure | Land Operations | 186 |
| 28 |
| — |
| — |
| — |
| 214 |
| — |
| 214 |
|
Other | Land Operations | 13 |
| 7 |
| — |
| — |
| — |
| 20 |
| — |
| 20 |
|
Subtotal - Urban land, not in active development | | 348 |
| 42 |
| — |
| — |
| — |
| 390 |
| — |
| 390 |
|
Agriculture-related | | | | | | | | | |
Agriculture | Land Operations | 47,769 |
| 6,358 |
| 75 |
| — |
| — |
| 54,202 |
| — |
| 54,202 |
|
In urban entitlement process | Land Operations | 357 |
| 260 |
| — |
| — |
| — |
| 617 |
| — |
| 617 |
|
Conservation & preservation | Land Operations | 15,845 |
| 13,309 |
| 509 |
| — |
| — |
| 29,663 |
| — |
| 29,663 |
|
Subtotal - Agriculture-related | | 63,971 |
| 19,927 |
| 584 |
| — |
| — |
| 84,482 |
| — |
| 84,482 |
|
Materials & Construction | M&C | 1 |
| — |
| 541 |
| 264 |
| — |
| 806 |
| — |
| 806 |
|
Total Landholdings | | 64,634 |
| 20,008 |
| 1,313 |
| 264 |
| 15 |
| 86,234 |
| 81 |
| 86,315 |
|
5
The table above does not include approximately 1,055 985acres under joint venture development that are shown below. below:
|
| | | | | | |
Joint Venture Projects | | Original Acres | | Acres at December 31, 2017 |
Kukui'ula (Kauai, HI) | | 1,010 |
| | 895 |
|
California joint ventures | | 75 |
| | 75 |
|
Ka Milo (Big Island, HI) | | 31 |
| | 8 |
|
Keala o Wailea (Maui, HI) | | 7 |
| | 7 |
|
The Collection (Oahu, HI) | | 3 |
| | — |
|
Total | | 1,126 |
| | 985 |
|
An additional 2,9001,068 acres on Maui, Kauai and Oahu are leased from third parties and are not included in any of the tables.
|
| | | | | | |
Project | | Original Acres | | Acres at December 31, 2014 |
Kukui’ula (HI) | | 1,000 |
| | 936 |
|
California joint ventures | | 97 |
| | 97 |
|
Ka Milo (HI) | | 31 |
| | 17 |
|
The Collection (HI) | | 3 |
| | 3 |
|
Waihonua (HI) | | 2 |
| | 2 |
|
TOTAL | | 1,133 |
| | 1,055 |
|
(2) Land Designation and Water:
On Maui, the Company owns over 47,000 acres of agricultural land. Nearly 32,000 acres of these working lands, formerly farmed in sugar, have been classified by the Company as core agricultural landholdings and are being transitioned to diversified agricultural uses. This transition is expected to occur over a multi-year period.
On Kauai, approximately 3,000 acres are cultivated in coffee by Massimo Zanetti Beverage USA, Inc. on land leased from A&B. Additional acreage is leased to third-party operators, with uses ranging from seed corn cultivation to pasture land and includes sites for renewable energy generating facilities.
The Hawai`i Legislature, in 2005, passed Important Agricultural Lands (“IAL”) legislation to fulfill the State's constitutional mandate to protect agricultural lands, promote diversified agriculture, increase the state’s agricultural self-sufficiency, and assure the long-term availability of agriculturally suitable lands. In 2008, the Legislature passed a package of incentives, which was necessary to trigger the IAL system of land designation. In 2009, A&B received approval from the State Land Use Commission for the designation of over 27,000 acres on Maui and over 3,700 acres on Kauai as IAL. These designations were the result of voluntary petitions filed by A&B.
A&B holds rights to an irrigation system in West Maui, which provided approximately 13 percent of the irrigation water used by HC&S during the last ten years of its operations. A&B also owns approximately 15,000 acres of watershed lands in East Maui, which supply a portion of the irrigation water used to irrigate the core agricultural lands owned by the Company in central Maui. A&B also held four water licenses to another 30,000 acres owned by the State of Hawai`i in East Maui which, during the last ten years of its operations, have supplied approximately 56 percent of the irrigation water used by HC&S. The last of these water license agreements expired in 1986, and all four agreements were then extended as revocable permits that were renewed annually. For information regarding legal proceedings involving A&B’s irrigation systems, see “Legal Proceedings” below.
Planning and ZoningZoning:
The entitlement process for development of property in HawaiiHawai`i is complex (involving numerous State and County regulatory approvals), lengthy (spanning multiple years) and costly involving numerous state(requiring significant expenditures for the preparation of studies and county regulatory approvals.applications for approval). For example, conversion of an agriculturally-zoned parcel to residential zoning usually requires the following approvals:
County amendment of the County Community/General Plan to reflect residentialintended use;
State Land Use Commission approval to reclassify the parcel from the Agricultural district to the Urban district;
County amendment of the County Community Plan to reflect residential use; and
County approval to rezone the property to the precise residentialland use desired.
The entitlement process is complicated by the conditions, restrictions and exactions that are placed on these approvals, including, among others, the requirementrequirements to construct infrastructure improvements, payment of impact fees, restrictions on the permitted uses of the land, requirementrequirements to provide affordable housing and required phased development of projects.
A&B actively works with regulatory agencies, commissions and legislative bodies at various levels of government to obtain zoning reclassification of land to its highest and best use for both investment and development. A&B designates a parcel as “fully entitled” or “fully zoned” when all of the above-mentioned land use approvals have been obtained.
(3)(2) DevelopmentDevelopment-for-sale Projects
The Company has an active development pipeline encompassing primary residential, resort residential and industrial lots for sale across the State of Hawai`i. The following is a summarysummary of the Company’s real estate development and investmentdevelopment-for-sale portfolio as of December 31, 2014:2017:
|
| | | | | | | | | | | | |
Project | Location | Product type | Acres at 12/31/14 | | Original planned units, saleable acres or gross leasable square feet | Estimated project cost (1) | A&B net investment as of 12/31/14 ($mil; including capitalized interest) | Estimated substantial completion of construction |
ACTIVE PLANNING, DEVELOPMENT AND SALES | | | | | | |
Wholly owned | | | | | | | | |
Haliimaile | Haliimaile, Maui | Primary residential | 55 |
| (2) | 175-200 lots | tbd |
| 1 |
| tbd |
Kahala Avenue Portfolio | Honolulu, Oahu | Residential | 9 |
| | 30 lots | 135 |
| 78 |
| n/a |
Kihei Residential | Kihei, Maui | Primary residential | 95 |
| | 600 units | tbd |
| 1 |
| tbd |
Maui Business Park II | Kahului, Maui | Light industrial lots | 143 |
| (3) | 136 acres | 81 |
| 52 |
| 2021 |
Mililani Mauka South | Mililani, Oahu | Retail/office developed for commercial portfolio | 1 |
| | 18,500 sf | 9 |
| 3 |
| 2015 |
The Ridge at Wailea (MF-19) | Wailea, Maui | Resort residential | 6 |
| | 9 lots | 9 |
| 8 |
| 2009 |
Wailea B-1 | Wailea, Maui | Commercial/retail | 11 |
| | 60,000 sf | tbd |
| 5 |
| tbd |
Wailea MF-7 | Wailea, Maui | Resort residential | 13 |
| | 75 units | 84 |
| 9 |
| 2018 |
Total | | | 333 |
| | | | | |
|
| | | | | | | | | | | | | | | |
| | | | | | | ($ in millions) |
Project | Location | Product Type | Est. Economic Interest | Planned Units or Saleable Acres | Units/ Acres Closed | Target Sales Price Range (PSF) | Est. Total Project Cost | A&B Projected Capital Commitment (JVs Only) | A&B Gross Investment (Life to Date) |
| | | (a) | | | | (b) | (c) | (d) |
Kahala Avenue Portfolio | Honolulu, Oahu | Residential | 100% | 17 acres | 13.3 acres | $150-$385 | $ | 135 |
| N/A |
| $ | 134 |
|
The Collection | Honolulu, Oahu | Primary residential | 90% +/-5% | 465 units | 460 units | $785 | $ | 285 |
| $ | 54 |
| $ | 54 |
|
Keala o Wailea (MF-11) | Wailea, Maui | Resort residential | 65% +/-5% | 70 units | 1 unit | $600-$1,000 | $ | 67 |
| $ | 9 |
| $ | 9 |
|
Kamalani (Increment 1) | Kihei, Maui | Primary residential | 100% | 170 units | 35 units | $400 | $ | 64 |
| N/A |
| $ | 39 |
|
Ka Milo at Mauna Lani | Kona, Hawai`i Island | Resort residential | 50% | 137 units | 99 units | $530-$800 | $ | 131 |
| $ | 17 |
| $ | 17 |
|
The Ridge at Wailea (MF-19) | Wailea, Maui | Resort residential | 100% | 5 acres | 1 acre | $60-$100 | $ | 10 |
| N/A |
| $ | 9 |
|
Maui Business Park (Phase II) | Kahului, Maui | Light industrial lots | 100% | 125 acres | 34 acres | $38-$60 | $ | 77 |
| N/A |
| $ | 59 |
|
Kukui'ula (e) | Poipu, Kauai | Resort residential | 85% +/- 5% | 640 acres | 115 acres | $40-$110 | $ | 854 |
| $ | 318 |
| $ | 313 |
|
| | | | | | | | | |
(a) Estimated economic interest represents the Company's estimated share of distributions after return of capital contributions based on current forecasts of sales activity. Actual results could differ materially from projected results due to the timing of expected sales, increases or decreases in estimated sales prices or costs and other factors. As a result, estimated economic interests are subject to change. Further, as it relates to certain of our joint venture projects, information disclosed herein is obtained from our joint venture partners, who maintain the books and records of the related ventures. |
(b) Includes land cost at book value, including capitalized interest, but excluding sales commissions and closing costs. |
(c) Includes land cost at contribution value and total expected A&B capital to be contributed. The estimate includes due diligence costs and capitalized interest, but excludes capital projected to be contributed by equity partners, third-party debt, and amounts expected to be funded from project cash flows and/or buyer deposits. |
(d) The book value of active development projects includes land stated at its acquisition value. In the case of development projects on A&B's historical landholdings, such as Kamalani and Maui Business Park, the value of land would be approximately $150 per acre. |
(e) In addition to the main Kukui'ula project included herein, with a book value of $303 million, the Company has investments in three other Kukui'ula-related joint ventures with a combined book value of $26 million. |
|
| | | | | | | | | | | | |
Project | Location | Product type | Acres at 12/31/14 | | Planned units, saleable acres or gross leasable square feet | Estimated project cost (1) | A&B net investment as of 12/31/14 ($mil; including capitalized interest) | Estimated substantial completion of construction |
| | | | | | |
ACTIVE PLANNING, DEVELOPMENT AND SALES | | | | | | |
Joint ventures | | | | | | | | |
Ka Milo at Mauna Lani | Kona, Hawaii | Resort residential | 17 |
| | 137 units | 120 |
| 11 |
| 2016 |
Keala 'O Wailea (MF-11) | Wailea, Maui | Resort residential | 7 |
| | 70 units | 60 |
| 9 |
| 2017 |
Kukui'ula | Poipu, Kauai | Resort residential | 936 |
| | Up to 1,500 units on 640 saleable acres | 805 |
| 277 |
| 2030 |
The Collection | Honolulu, Oahu | Primary residential/commercial | 3 |
| | 465 units (464 salable) | 275 |
| 46 |
| 2016 |
Waihonua at Kewalo | Honolulu, Oahu | Primary residential high-rise | 2 |
| | 341 units (340 salable) | 207 |
| 36 |
| 2014 |
Total | | | 965 |
| | | | | |
| | | | | | | | |
| |
(1) | Includes land cost at book value and capitalized interest, but excludes sales commissions and closing costs. |
| |
(2) | Eighteen of the 55 acres are designated for parks, open space, drainage and a waste water treatment plant. |
| |
(3) | Includes 18 acres of roadways and other infrastructure that are not saleable. |
|
| | | | | | |
Project | Location | Product type | Acres at 12/31/14 | A&B net investment as of 12/31/14 ($mil; including capitalized interest) |
| | | | |
FUTURE DEVELOPMENT | | | | |
Wholly owned | | | |
Aina 'O Kane | Kahului, Maui | Primary residential/commercial | 4 |
| 1 |
|
Brydeswood | Kalaheo, Kauai | Agricultural lots | 336 |
| 3 |
|
Kahului Town Center | Kahului, Maui | Primary residential/commercial | 19 |
| 2 |
|
Kai Olino | Port Allen, Kauai | Primary residential | 4 |
| 11 |
|
Wailea SF-8 | Kihei, Maui | Primary residential | 13 |
| 1 |
|
Wailea MF-6 | Wailea, Maui | Resort residential lots | 23 |
| 6 |
|
Wailea MF-10 | Wailea, Maui | Resort/commercial | 7 |
| 2 |
|
Wailea MF-16 | Wailea, Maui | Resort residential lots | 7 |
| 3 |
|
Wailea, other | Wailea, Maui | Various | 76 |
| 20 |
|
Total | | 489 |
| |
| | | | |
Joint ventures | | | | |
Bakersfield | Bakersfield, CA | Retail | 57 |
| 7 |
|
Palmdale Center | Palmdale, CA | Office/industrial | 18 |
| 5 |
|
Santa Barbara Ranch | Santa Barbara, CA | Primary residential lots | 22 |
| 6 |
|
Total | | | 97 |
| |
|
| | | | | | |
Project | Location | Product type | Acres at
12/31/14
| Planned units,
saleable acres or
gross leasable
square feet
|
| | | |
ENTITLEMENT | | | | |
Ele'ele Community Phase I | Ele'ele, Kauai | Primary residential | 260 |
| tbd |
Wai'ale | Kahului, Maui | Primary residential | 545 |
| up to 2,550 units |
Total | | | 805 |
| |
Kukui'ula:A&B’s majorlargest active projects include:
Maui:
(a)Maui Business Park II. Maui Business Park II (“MBP II”), 154 acres (136 acres salable; 124 acres remaining at December 31, 2014)development project is Kukui'ula, a fully amenitized luxury resort residential master planned community in Kahului zoned for light industrial, retail and office use, represents the second phase of the Company’s Maui Business Park project. Offsite and onsite construction is substantially complete and active marketing and sales have commenced. A 4-acre parcel was sold in 2012 for a Costco gas station. In 2013, a 24-acre parcel adjacent to Maui Business Park was sold for the development of Maui’s first Target-anchored center, which will open in March 2015 and is driving sales interest at MBP II. In 2014, a total of 7.2 acres were sold to the County of Maui, American Savings Bank, and Shelton Holdings (BMW) for $14.4 million. A 4-acre sale to Servco closed in January 2015 for $8.2 million.
(b)Wailea. In October 2003, A&B reacquired 270 acres of fully-zoned, undeveloped residential and commercial land at the Wailea Resort on Maui for $67.1 million. A&B was the original developer of the Wailea Resort, beginning in the 1970s and continuing until A&B sold the resort to the Shinwa Golf Group in 1989.
Since reacquisition, A&B has sold approximately 110 acres, and currently owns about 160 acres, which are planned for up to 700 units. A&B is in various stages of development or sale for various parcels within Wailea, which include the following projects:
At the 7.4-acre MF-11 (Keala ‘O Wailea) project, A&B has obtained final regulatory approval for a planned joint venture development of 70 multi-family units. Presales are expected to commence in 2015.
The 7.0-acre MF-19 parcel (Ridge at Wailea) was developed into nine residential lots. In 2014, one lot was sold and eight remain available for sale.
The 13.0-acre MF-7 parcel is fully designed and permitted for the development of a 75-unit multi-family project. The project has secured the required affordable housing credits and water meters. Timing of presales will depend on market conditions.
At the 11.0-acre B-1 parcel, A&B is evaluating bulk sale or development options.
Kauai:
(c)Kukui`ula.Poipu, Kauai. In April 2002, A&B entered into a joint venture with DMB Communities II (“DMBC”), an affiliate of DMB Associates, Inc. ("DMB"), an Arizona-based developer of master-planned communities, for the development of Kukui’ula, a 1,000-acre master planned resort residential community located in Poipu, Kauai, planned for up to 1,500 resort residential units. Total capital contributed byKukui'ula on acreage that consisted of historical A&B to the joint venture was approximately $274 million aslandholdings. As of December 31, 2014,2017, total capital contributed to the project was approximately $318 million, which included $30 million representing the value of land initially contributed. DMBCcontributed by the Company. As of December 31, 2017, DMB has contributed $189approximately $195 million.
Offsite infrastructure is complete for 500 to 800 units and all resort core amenities were completed and opened for business in 2011, including the Tom Weiskopf-designed championship golf course, an owners' clubhouse, pool and spa facilities, and a golf clubhouse. Increased vertical home construction activity at Kukui’ula continues to generate positive sales momentum, with 14 closings and eight additional sales under binding contracts in 2014. In the second half of 2014, the venture expanded its vertical construction program to add 54 homes over the next few years. The variousVarious vertical construction programs are being pursued at Kukui'ula in joint ventures with five third-party developers. In 2017, the joint venture recorded 15 sales of lots or homes.
Maui Business Park: Maui Business Park II (“MBP II”) represents the second phase of the Company's Maui Business Park project in Kahului, Maui. MBP II is zoned for light industrial, retail and office use. As of December 31, 2014,2017, approximately 91 saleable acres remain available.
Wailea: The Company's landholdings related to active, development-for-sale projects in Wailea, Maui, include the following projects:
At the Keala o Wailea (MF-11) project, A&B’s 70 multi-family unit joint venture development with Armstrong Builders, sitework construction commenced in December 2015. As of December 31, 2017, 66 units were under binding contracts and closings commenced in the fourth quarter of 2017.
At the Ridge at Wailea (MF-19) project, 4 acres remain available for sale.
Kamalani: A&B’s Kamalani project is a total630-unit residential project on 95 acres in Kihei, Maui. Preliminary subdivision approval was secured in April 2015. Grading and site-work on the 170-unit Increment 1 commenced in 2016. As of 112 residential lot sales hadDecember 31, 2017, 35 units were closed, and 9544 units were available for purchase.under binding contract.
Oahu:
(d)Kahala Avenue Portfolio. Portfolio:In The Kahala Avenue Portfolio, on Oahu, was acquired for $128 million in September and December 2013, A&B acquired a totalprimarily consisting of 30 properties for approximately $128 milliontotaling 17 acres in the prestigious Kahala neighborhood of East Honolulu. These properties were in various stages of disrepair and A&B immediately commenced clearing, landscape maintenance, and sales and marketing. Through December 31, 2014,2017, revenue from sales totaled $82.5 million ($38.4 million in 2014). Fourteen units are available, including six large oceanfront properties.
(e)The Collection. In 2012, A&B secured an option agreement with Kamehameha Schools for the development of a 3.3-acre city block near downtown Honolulu. The project includes a 396-unit high-rise condominium tower, 14 three-bedroom townhomes and a 54-unit mid-rise building. In August 2014, a joint venture was formed for the project development. The land was acquired from Kamehameha Schools and construction commenced in October 2014, with completion projected by year-end 2016.$146.6 million. As of March 2, 2015, 88 percent of the 450 units released for sale were presold under binding contracts.
(f)Waihonua at Kewalo. In 2010, A&B acquired a fully-entitled high-rise condominium development site near the Ala Moana Center in Honolulu. Sales and marketing commenced in December 2011 for a 340 saleable-unit project. In September 2012, the Company formed a joint venture for the development of the project. By July 2013, all 340 units were sold under binding contracts. Construction was completed in November 2014, and 12 units closed in December 2014. The remaining 328 units closed in January 2015.
B.Real Estate Leasing Segment
The Company’s improved commercial portfolio’s GLA summarized by geographic location and property type as of December 31, 2014 is as follows:
|
| | | | | | |
(square feet, in millions) | Hawaii | Mainland | Total |
Retail | 1.6 |
| 0.2 |
| 1.8 |
|
Industrial | 0.8 |
| 1.2 |
| 2.0 |
|
Office | 0.2 |
| 1.1 |
| 1.3 |
|
Total | 2.6 |
| 2.5 |
| 5.1 |
|
(a)Hawaii Commercial Properties
A&B’s Hawaii improved commercial2017, 13.3 acres were sold, and 3.7 acres remain available. The six available properties portfolio consists of retail, industrial and officeinclude three higher-value oceanfront properties comprisingrepresenting approximately 2.6 million127,000 square feet of GLA as of December 31, 2014. Mostor 78% of the commercial properties are locatedtotal square footage available for purchase.
(3) Renewable Energy
A&B has renewable hydroelectric and solar facilities on Oahuthe island of Kauai, operated by McBryde Resources, Inc. (“McBryde”), and Maui, with smaller holdingshas two financial investments in solar projects on Kauai and Oahu.
In 2017, McBryde produced 27,019 MWH of hydroelectric power (compared with 28,099 MWH in 2016) and 11,056 MWH of solar power from its Port Allen Solar Facility (compared with 10,700 MWH in 2016). To the extent it is not used in A&B-related operations, McBryde sells electricity to Kauai Island Utility Cooperative (“KIUC”). Power sales in 2017 amounted to 30,861 MWH (compared with 30,783 MWH in 2016).
In 2017, the Company generated a limited amount of Hawaii.hydroelectric power in connection with irrigation operations to support diversified agricultural activities on Maui. The average occupancy for the Hawaii portfoliopower was 94 percentused in 2014, comparedA&B-related operations. No power was sold to 93 percentMaui Electric Company in 2013. In January 2014, A&B sold the 185,700-square-foot Maui Mall, located in Kahului, Maui, the proceeds of which were applied, in a reverse 1031 exchange, to the acquisition of the Kailua Portfolio. The Kailua Portfolio was acquired in December 2013, and consisted of approximately 386,200 square feet of commercial space in the beachside community of Kailua, Oahu, and 51 acres ground leased to third parties that are improved with 760,000 square feet of commercial space, primarily located in Kailua and Kaneohe, Oahu. In addition to these 51 acres, A&B owns an additional 64 acres of urban and 2,900 acres of non-urban land on the neighbor islands that it ground leases to third parties. In 2014, the urban ground leases, which are typically the most secure source of rental income for A&B, generated 16 percent of2017, as the Company's total $77.3 millionpreviously-existing power purchase agreement was terminated in conjunction with the cessation of net operating income (NOI)*. In December 2014, A&B acquired Kaka'ako Commerce Center, a 204,400-square-foot, light-industrial complex in urban Honolulu. The purchase was initially funded by proceeds from several Maui land sales and cash. Proceeds from future Mainland portfolio sales are expected to be applied to the balance of the purchase price in a reverse 1031 exchange.
The Hawaii commercial properties owned as of year-end 2014 were as follows:
|
| | | | |
Property | Location | Type | Leasable Area
(sq. ft.)
|
| | | |
Pearl Highlands Center | Pearl City, Oahu | Retail | 415,400 |
|
Kailua-Retail (15 properties) | Kailua, Oahu | Retail | 316,200 |
|
Komohana Industrial Park | Kapolei, Oahu | Industrial | 238,300 |
|
Kaka'ako Commerce Center | Honolulu, Oahu | Industrial | 204,400 |
|
Waianae Mall | Waianae, Oahu | Retail | 170,300 |
|
Waipio Industrial | Waipahu, Oahu | Industrial | 158,400 |
|
Kaneohe Bay Shopping Center | Kaneohe, Oahu | Retail | 125,100 |
|
Waipio Shopping Center | Waipahu, Oahu | Retail | 113,800 |
|
P&L Building | Kahului, Maui | Industrial | 104,100 |
|
Lanihau Marketplace | Kailua-Kona, Hawaii | Retail | 88,300 |
|
Port Allen (4 buildings) | Port Allen, Kauai | Industrial/Retail | 87,400 |
|
The Shops at Kukui'ula | Poipu, Kauai | Retail | 78,900 |
|
Kailua-Industrial (6 properties) | Kailua, Oahu | Industrial | 68,800 |
|
Kunia Shopping Center | Waipahu, Oahu | Retail | 60,400 |
|
Kahului Office Building | Kahului, Maui | Office | 59,600 |
|
Lahaina Square | Lahaina, Maui | Retail | 50,200 |
|
Kahului Shopping Center | Kahului, Maui | Retail | 47,200 |
|
Napili Plaza | Napili, Maui | Retail | 45,100 |
|
Kahului Office Center | Kahului, Maui | Office | 33,400 |
|
Stangenwald Building | Honolulu, Oahu | Office | 27,100 |
|
Judd Building | Honolulu, Oahu | Office | 20,200 |
|
Gateway at Mililani Mauka | Mililani, Oahu | Retail | 18,900 |
|
Gateway at Mililani Mauka South | Mililani, Oahu | Office | 18,700 |
|
Maui Clinic Building | Kahului, Maui | Office | 16,600 |
|
Lono Center | Kahului, Maui | Office | 13,400 |
|
Total | | | 2,580,200 |
|
sugar operations at HC&S.
| |
* | Refer to page 47 for a discussion of management's use of a non-GAAP financial measure and the required reconciliation of non-GAAP measures to GAAP measures. |
(b)U.S. Mainland Commercial Properties
On the Mainland, A&B owns a portfolio of 13 commercial properties, acquired primarily by way of tax-deferred 1031 exchanges, consisting of retail, industrial and retail properties, comprising approximately 2.5 million square feet of leasable space as of December 31, 2014. A&B’s Mainland commercial properties’ occupancy rate was 93 percent compared to 95 percent in 2013.
A&B’s Mainland commercial properties owned as of year-end 2014 were as follows:
|
| | | | |
Property | Location | Type | Leasable Area
(sq. ft.)
|
Midstate Hayes | Visalia, CA | Industrial | 790,200 |
|
Sparks Business Center | Sparks, NV | Industrial | 396,100 |
|
1800 and 1820 Preston Park | Plano, TX | Office | 198,800 |
|
Ninigret Office Park | Salt Lake City, UT | Office | 185,500 |
|
San Pedro Plaza | San Antonio, TX | Office/Retail | 171,900 |
|
2868 Prospect Park | Sacramento, CA | Office | 162,900 |
|
Little Cottonwood Center | Sandy, UT | Retail | 141,500 |
|
Concorde Commerce Center | Phoenix, AZ | Office | 138,700 |
|
Deer Valley Financial Center | Phoenix, AZ | Office | 126,600 |
|
Union Bank | Everett, WA | Office | 84,000 |
|
Gateway Oaks | Sacramento, CA | Office | 58,700 |
|
Wilshire Shopping Center | Greeley, CO | Retail | 46,500 |
|
Royal MacArthur Center | Dallas, TX | Retail | 44,800 |
|
Total | | | 2,546,200 |
|
(c)Lease Expirations
The Company’s schedule of lease expirations for its Hawaii and U.S. Mainland commercial portfolio is as follows:
|
| | | | | | | | | | | | |
Year of expiration | Sq. ft. of expiring leases | Percentage of total leased GLA | Annual gross rent expiring(1) ($ in millions) | Percentage of total annual gross rent |
| | | | | | | | |
2015 | 713,192 |
| | 15.3 | % | | 10.5 |
| | 13.5 | % | |
2016 | 930,594 |
| | 19.9 | % | | 11.3 |
| | 14.5 | % | |
2017 | 815,409 |
| | 17.5 | % | | 13.6 |
| | 17.5 | % | |
2018 | 570,792 |
| | 12.2 | % | | 7.3 |
| | 9.4 | % | |
2019 | 450,061 |
| | 9.6 | % | | 10.7 |
| | 13.8 | % | |
2020 | 362,210 |
| | 7.8 | % | | 6.6 |
| | 8.5 | % | |
2021 | 224,285 |
| | 4.8 | % | | 4.6 |
| | 5.9 | % | |
2022 | 69,277 |
| | 1.5 | % | | 1.8 |
| | 2.3 | % | |
2023 | 128,251 |
| | 2.8 | % | | 2.1 |
| | 2.7 | % | |
2024 | 136,936 |
| | 2.9 | % | | 3.5 |
| | 4.5 | % | |
2025 | 15,775 |
| | 0.3 | % | | 0.7 |
| | 0.9 | % | |
Thereafter | 249,527 |
| | 5.4 | % | | 5.1 |
| | 6.5 | % | |
Total | 4,666,309 |
| | 100.0 | % | | 77.8 |
| | 100.0 | % | |
| |
(1) | Annual gross rent means the annualized base rent amounts of expiring leases and includes improved properties only and excludes 0.2 million square feet of month-to-month leases. |
The Company’s schedule of lease expirations for its ground leases is as follows:
|
| | | | | |
Year of expiration | Annual gross rent expiring ($ in millions) | | Percentage of total annual gross rent(1) |
Month-to-month | 0.8 |
| | 6.7 | % |
2015 | 0.8 |
| | 6.7 | % |
2016 | 0.8 |
| | 6.7 | % |
2017 | 0.2 |
| | 1.7 | % |
2018 | 0.3 |
| | 2.5 | % |
2019 | 0.3 |
| | 2.5 | % |
2020 | 0.8 |
| | 6.7 | % |
2021 | 0.7 |
| | 5.8 | % |
2022 | 0.3 |
| | 2.5 | % |
2023 | 0.5 |
| | 4.1 | % |
2024 | — |
| | — | % |
2025 | — |
| | — | % |
Thereafter | 6.5 |
| | 54.1 | % |
Total | 12.0 |
| | 100.0 | % |
| |
(1) | Annual gross rent means the annualized base rent amounts of expiring leases and includes improved properties only and excludes 0.2 million square feet of month-to-month leases. |
C. Materials and& Construction
(1) BusinessQuarries and Quarry Facilities
Major activitiesGrace owns 541 acres in Makakilo, Oahu, approximately 200 acres of which are used for its quarrying operations. Approximately 750,000 tons of rock were mined and processed by Grace in 2017. The operation of the quarry is governed by special and conditional use permits, which allow Grace to extract aggregate through 2032. Grace also owns approximately 264 acres on Molokai, which are licensed to a third-party operator for quarrying operations.
(2) Equipment
Grace owns approximately 525 pieces of on- and off-highway rolling stock, which consist of heavy duty trucks, passenger vehicles and various road paving, quarrying and operations equipment. Additionally, Grace owns approximately 560 pieces of non-rolling stock items used in its operations, such as generators, transit tankers, light towers, message boards and nuclear gauges. The Materials and& Construction segment include asphalt paving as prime contractorhas six rock crushing plants and subcontractor; importing and selling liquid asphalt; mining, processing and selling basalt aggregate; producing and selling asphaltic concrete; providing and selling various construction- and traffic-control-related products and manufacturing and selling precast concrete products. Segment activities are conducted through Grace and non-consolidated affiliates.
The market for Grace’s business can be generally divided into the public sector market and the private sector market. The public sector construction market includes spending by federal, state and county governments for road and highway paving, aggregate materials, and highway-related maintenance and management services. In general, public sector spending is less cyclical than private sector construction projects. Approximately 90 percent of Grace’s paving revenue in 2014 was directly or indirectly attributable to public sector contracts. The private sector construction market includes spending for non-residential and residential asphalt paving and material sales. Private sector spending is generally more cyclical than public sector spending and is primarily driven by economic conditions in Hawaii.
Aggregate: Aggregate production involves drilling and blasting rock from quarries, crushing the rock to appropriate sizes and screening materials after extraction to separate aggregate into two grades with more than 20 gradations with varying specifications. Basalt aggregate is used in the construction industry for residential and commercial developments, highways, roads,seven asphaltic concrete and ready-mix concrete products. Based on production in 2014, Grace was the largest producer of basalt aggregate in the state. Aggregate can also be imported into Hawaii from abroad to meet the state’s needs. Due to the high cost of handling and transporting aggregate, location is an important driver in determining a customer’s preferred source.
Asphaltic Concrete (hot mix asphalt): Grace imports liquid asphalt through its 70 percent-owned consolidated subsidiary, GLP Asphalt, LLC (GLP), for use in the manufacture of asphaltic concrete. Asphaltic concrete is produced by heating asphalt to a liquid consistency, drying the aggregate to remove moisture, and mixing the liquid asphalt with the aggregate in "hot mix plants." Asphaltic concrete consists of approximately 94 percent aggregate and 6 percent asphalt. Due to the high cost of transporting rock, Grace will generally utilize aggregate sources nearest to its hot mix plant and/or locate its hot mix plant next to the aggregate resource. Grace sources liquid asphalt through GLP, which purchases asphalt from Venezuela, Canada, and other foreign locations typically several times a year, depending on demand and the size of the available shipments. GLP is currently the only local distributor of liquid asphalt, and approximately 50 percent of GLP asphalt sales are to Grace and a non-consolidated affiliate. Liquid asphalt can also be procured in limited quantities by petroleum refineries on Oahu.
The segment has eight hot mix plants--threeplants (three on Oahu, one on Maui, one on Kauai, one on Hawaii island,the Island of Hawai`i, and twoone on Molokai. Approximately 20 percent of asphaltic concrete produced by Grace is sold to third parties and the remainder is used on construction jobs by Grace's asphalt paving division or a non-consolidated affiliate.Molokai).
(3) Backlog
Asphalt Paving: The asphalt paving market is predominately composed of paving projects contracted by federal, state and county agencies. The contracts are based on competitive sealed bids, with the bid awarded to a qualified contractor with the lowest bid. Approximately 90 percent of all asphalt paving work performed by Grace in 2014 was for federal, state and county governmental entities. The remainder of the work consists of private contracts, such as residential and commercial developments.
Grace’s primary paving competitors include Jas A. Glover, Ltd.; Roads and Highways, LLC (a division of Sterling Construction-NASDAQ: STRL); Road Builders Corp.; and Maui Master Builders, Inc.
Construction- and Traffic-Control-Related Products: Through various consolidated subsidiaries, Grace provides a range of construction-related products. Grace’s subsidiary, GP Roadway Solutions, Inc. (“GPRS”) operates as a subcontractor and prime contractor and provides guardrail, fencing and sign installation, and maintenance; rents and sells safety and traffic control equipment and supplies; provides traffic control services; provides road and parking lot striping, seal coating and crack sealing, and security services; and performs application of maintenance-related encapsulation product. Grace’s 51 percent-owned GP/RM Prestress, LLC (“GP/RM”) is a manufacturer and supplier in the prestressed and precast concrete industry. GP/RM fabricates architectural concrete products such as exterior columns, walls and spandrels in a variety of colors with varying finishes and features used in the construction of parking structures, buildings and high rises. GP/RM is also a major supplier of structural concrete products such as rectangular, hexagonal and octagonal columns; various types of beams, double tees, walls, spandrels, stairs, flat slabs, bridge girders, planks; and stadium bleachers used to support various types of structures. In addition, other construction materials and products are sold by non-consolidated affiliates.
As of December 31, 2014,2017, total backlog, which consists of signed contracts and awarded contracts not yet executed, including the backlog of Grace, GPRS, GP/RM and Maui Paving, LLC, a 50-percent-owned non-consolidatedunconsolidated affiliate, totaledwas approximately $219.4$202.1 million, compared to $218.1$242.9 million at December 31, 2013.2016. For purposes of calculating backlog, all of the entire estimated revenue attributable to Grace's consolidated subsidiaries and all of the entire backlog of Maui Paving, which was approximately $38.1$10.6 million and $33.6$15.0 million at December 31, 20142017 and 2013,2016, respectively, was included. Backlog represents the amount of revenue that Grace and Maui Paving expect to realize on contracts awarded primarily relatedor government contracts in which Grace Pacific has been confirmed to asphalt pavingbe the lowest bidder and formal communication of the award is deemed to a lesser extent, Grace’s consolidated revenue from its construction- and traffic-control-related products.be perfunctory.
The length of time that projects remain in backlog can span from a few days for a small volume of work to approximately 36 months for large paving contracts and contracts performed in phases. Backlog includes estimated revenue from the remaining portion of contracts not yet completed, as well as revenue from approved change orders.
(2) Assets
Quarries: Grace owns 541 acres in Makakilo, Oahu, approximately 200 acres of which are used for its quarrying operations. Approximately 800,000 tons of rock were mined and processed by Grace in 2014. The operation of the quarry is governed by special and conditional use permits, which allow Grace to extract aggregate through 2032. Grace also owns approximately 265 acres on Molokai, which are licensed to a third-party operator for quarrying operations.
Grace began the infrastructure work for new crushing plants, which are used to reduce large rocks down to salable grade aggregate, at the Makakilo quarry in April 2012. Primary and secondary crushing plants are used to reduce quarried rock to a 4” to 5” “surge” material. The surge is then processed at the finish plants, where the rock is further reduced and screened to exact product specifications. The erection of the new “A” grade finish plant began in January 2013, and was online at the end of September 2013. The existing “B” grade finish plant upgrade was completed in December 2014. The new primary and secondary crushing plants are expected to be completed in 2015. The new facilities are expected to increase the productivity and efficiency of the operations resulting in lower production costs. Through December 31, 2014, approximately $40.2 million has been incurred related to the quarry improvements ($33.8 million was incurred by Grace prior to its acquisition by A&B).
Equipment: Grace owns approximately 540 pieces of on- and off-highway rolling stock, which consists of heavy duty trucks, passenger vehicles and various road paving, quarrying and operations equipment. Additionally, Grace owns approximately 550 pieces of non-rolling stock items used in its operations, such as generators, transit tankers, light towers, message boards and nuclear gauges. The Materials and Construction segment has eight asphaltic concrete plants and six crushers.
D. Agribusiness
(1)Sugar Production
A&B has been engaged in the cultivation of sugar cane in Hawaii since 1870. A&B’s current Agribusiness and related operations consist of: (1) a sugar plantation on the island of Maui, operated by its Hawaiian Commercial & Sugar Company (“HC&S”) division, (2) renewable energy operations on the island of Kauai, operated by its McBryde Resources, Inc. (“McBryde”) subsidiary, (3) its Kahului Trucking & Storage, Inc. (“KT&S”) subsidiary, which provide several types of trucking services, including sugar and molasses hauling on Maui, mobile equipment maintenance and repair services on Maui, Kauai, and the Big Island, and self-service storage facilities on Maui and Kauai, and (4) Hawaiian Sugar & Transportation Cooperative (“HS&TC”), an agricultural cooperative that provides raw sugar marketing and transportation services solely to HC&S. HS&TC owns the MV Moku Pahu, a Jones Act-qualified integrated tug barge bulk dry carrier, which is used to transport raw sugar from Hawaii to the U.S. West Coast and coal from the U.S. West Coast to Hawaii.
HC&S is Hawaii’s only producer of raw sugar, producing approximately 162,100 tons of raw sugar in 2014 (compared with 191,500 tons in 2013). The primary reason for the decrease in production was wet weather during the harvesting season, which limited HC&S’s ability to harvest the planned acreage and efficiently process the harvested cane. HC&S harvested 14,200 acres of sugar cane in 2014 (compared with 15,400 acres in 2013). Yields averaged 11.4 tons of sugar per acre in 2014 (compared to 12.4 tons of sugar per acre in 2013). As a by-product of sugar production, HC&S also produced approximately 53,200 tons of molasses in 2014 (compared to 54,800 tons in 2013).
In 2014, approximately 10,400 tons of sugar (compared to 16,100 tons in 2013) were processed by HC&S into specialty food-grade sugars under HC&S’s Maui Brand® trademark or repackaged by distributors under their own labels.
(2)Marketing of Sugar
Approximately 94 percent of the sugar produced by HC&S in 2014 was bulk raw sugar purchased by C&H Sugar Company, Inc. (“C&H”), based in Crockett, California. C&H processes the raw cane sugar at its refinery at Crockett, California and markets the refined products primarily in the western and central United States. Pursuant to a supply contract with HS&TC, the raw sugar is sold to C&H at forward price contracts equal to the New York No. 16 Contract settlement price at the time of executed market trades, or mutually agreed upon pricing also based on current New York No. 16 Contract prices.
The remaining sugar produced by HC&S was specialty food-grade sugars, which are sold by HC&S to food and beverage producers and to retail stores under its Maui Brand® label, and to distributors that license our trademarks or repackage the sugars under their own labels. HC&S’s largest food-grade sugar customers are Cumberland Packing Corp., which repackages HC&S’s turbinado sugar for its “Sugar in the Raw” product line, and Sugar Foods Corporation, which licenses HC&S’s Maui Brand® label for exclusive use outside of Hawaii.
(3)Sugar Competition and Legislation
Hawaii has traditionally produced more sugar per acre than most other major producing areas of the world, but that advantage is offset by Hawaii’s high labor costs and the distance to the Mainland market. HC&S sells its bulk raw sugar in the U.S. domestic market based on the New York No. 16 Contract settlement prices.
The U.S. Congress historically has sought, through legislation, to assure a reliable domestic supply of sugar at stable and reasonable prices. The Agricultural Act of 2014 (the “Act”), also known as the 2014 Farm Bill, was signed by President Obama on February 7, 2014. The Act repeals certain programs, continues some programs with modifications, and authorizes several new programs administered by the U.S. Department of Agriculture (USDA). It replaces the Food Conservation and Energy Act of 2008, which expired on December 31, 2012 (“2008 Farm Bill”), but was extended one year during the national “fiscal cliff” negotiations. The Act continues the sugar program through 2018. It covers the U.S. sugar crop through the end of the 2018 USDA fiscal year, which ends on September 30, 2019. The two main elements of U.S. sugar policy are the tariff-rate quota (“TRQ”) import system and the price support loan program. The TRQ system limits imports from 40 countries by allowing a specific quota amount to enter the U.S.
The 2014 Farm Bill reauthorized the sugar price support loan program, which supports the U.S. price of sugar by providing for commodity-secured loans to producers. The 2014-crop national average loan rate is 18.75 cents per pound for raw cane sugar and 24.09 cents per pound for refined beet sugar, the same 2013. These national loan rates are adjusted regionally to reflect marketing and cost of transportation differentials. The 2014 adjusted crop loan rate in Hawaii is 17.45 cents per pound (18.75 cents per pound if stored on the Mainland). A&B does not currently participate in the sugar price support loan program.
In 2005, the U.S. approved a trade pact with Central America and the Dominican Republic, known as the Central America-Dominican Republic-United States Free Trade Agreement. In 2006, the first year of the agreement, additional sugar market access for participating countries amounted to about 1.2 percent of current U.S. sugar consumption (107,000 metric tons), which will grow to about 1.7 percent (151,000 metric tons) in its fifteenth year.
Implementation of the North American Free Trade Agreement (NAFTA) began in 1994. This agreement removed most barriers to trade and investment among the U.S., Canada and Mexico. Under NAFTA, all non-tariff barriers to agricultural trade between the U.S. and Mexico were eliminated. In addition, many tariffs were eliminated immediately or phased out. Starting in 2008, Mexico was permitted to ship an unlimited quantity of sugar duty-free to the U.S. each year. On December 19, 2014, the U.S. International Trade Commission (ITC) signed two agreements with Mexico that suspended the continued investigation of two anti-dumping and countervailing cases against Mexican sugar producers that had been brought by the American Sugar Coalition. A petition was subsequently filed by two sugar refiners challenging the propriety of the agreements. No decision on that petition has been rendered by ITC as of December 31, 2014.
U.S. raw sugar prices were relatively stable and flat for over thirty years but have been volatile over the last five years due to the full implementation of NAFTA in 2008, which unified the U.S. and Mexican sugar markets. In 2009, a tight NAFTA supply/demand outlook and a soaring world raw sugar market combined to push U.S. raw sugar prices to 29-year highs. Prices then steadily declined in 2012 and 2013 due to a NAFTA and world market surplus. The December 2014 ITC Mexican trade agreements provide a potential minimum reference price for Mexican sugar imported into the U.S.
A chronological chart of the average U.S. domestic raw sugar prices, based on the average daily New York No. 16 Contract settlement price for domestic raw sugar, is shown below (not adjusted for inflation):
(4)Land Designations and Water
The HC&S sugar plantation, the only remaining sugar plantation in Hawaii, consists of 43,300 acres, with approximately 36,000 acres under active sugar cane cultivation.
On Kauai, approximately 3,000 acres are cultivated in coffee by Massimo Zanetti Beverage USA, Inc., which leases the land from A&B. Additional acreage is cultivated in seed corn and used for pasture purposes.
The Hawaii Legislature, in 2005, passed Important Agricultural Lands (“IAL”) legislation to fulfill the state constitutional mandate to protect agricultural lands, promote diversified agriculture, increase the state’s agricultural self-sufficiency, and assure the long-term availability of agriculturally suitable lands. In 2008, the Legislature passed a package of incentives, which is necessary to trigger the IAL system of land designation. In 2009, A&B received approval from the State Land Use Commission for the designation of over 27,000 acres on Maui and over 3,700 acres on Kauai as IAL. These designations were the result of voluntary petitions filed by A&B.
It is crucial for HC&S to have access to reliable sources of water supply and efficient irrigation systems. HC&S conserves water by using “drip” irrigation systems that distribute water to the roots through small holes in plastic tubes. All but a small area of the cultivated cane land farmed by HC&S is drip irrigated.
A&B owns 16,000 acres of watershed lands in East Maui, which supply a portion of the irrigation water used by HC&S. A&B also held four water licenses to another 30,000 acres owned by the State of Hawaii in East Maui, which over the last ten years have supplied approximately 56 percent of the irrigation water used by HC&S. The last of these water license agreements expired in 1986, and all four agreements were then extended as revocable permits that were renewed annually. In 2001, a request was made to the State Board of Land and Natural Resources (the “BLNR”) to replace these revocable permits with a long-term water lease. Pending the conclusion by the BLNR of this contested case hearing on the request for the long-term lease, the BLNR has renewed the existing permits on a holdover basis. A&B also holds rights to an irrigation system in West Maui, which provided approximately 14 percent of the irrigation water used by HC&S over the last ten years. For information regarding legal proceedings involving A&B’s irrigation systems, see “Legal Proceedings” below.
(5)Energy
HC&S uses bagasse, the residual fiber of the sugar cane plant, as a fuel to generate steam for the production of most of the electrical power for sugar milling and irrigation pumping operations. In addition to bagasse, HC&S uses coal, diesel, fuel oil and recycled motor oil to generate power during factory shutdown periods when bagasse is not being produced or during periods when bagasse is not produced in sufficient quantities. HC&S also generates a limited amount of hydroelectric power. To the extent it is not used in A&B’s factory and farming operations, HC&S sells electricity. In 2014, HC&S produced and sold, respectively, approximately 181,300 megawatt hours (MWH) and 67,900 MWH of electric power (compared with 194,200 MWH produced and 58,900 MWH sold in 2013). The increase in power sold was due to lower field irrigation pumping requirements due to the wet weather, and increased hydroelectric generation. Hydroelectric generation increased to 18,800 MWH in 2014 (compared with 12,100 MWH in 2013). Coal used for power generation was 57,100 short tons, about 5,400 tons more than that used in 2013. More coal was required because of lower bagasse production from lower annual sugar production due to wet weather. Beginning on January 1, 2015, Maui Electric and HC&S mutually agreed to reduce the maximum amount of firm generation capacity to be supplied by HC&S during peak hours from 12 megawatts to 8 megawatts under its current power purchase agreement with HC&S. At current power rates, this change is expected to have a negative $2.5 million to $3.5 million impact on Agribusiness operating profit for 2015, which has been factored into the Agribusiness 2015 outlook. This power purchase agreement also is in the process of being amended. If an amendment is executed by the parties and approved by the Public Utilities Commission (PUC), the firm power provided by A&B may be significantly reduced or eliminated. The timing of PUC approval and the effective date of an amendment is not known at this time; HC&S will continue to operate under the current agreement until an amended agreement is executed and approved.
In 2014, McBryde produced approximately 27,900 MWH of hydroelectric power (compared with approximately 25,900 MWH in 2013) and approximately 11,700 MWH of solar power from its Port Allen Solar Facility (compared with approximately 12,500 MWH in 2013). To the extent it is not used in A&B-related operations, McBryde sells electricity to Kauai Island Utility Cooperative (“KIUC”). Power sales in 2014 amounted to approximately 32,800 MWH (compared with 31,200 MWH in 2013). The increase in power produced and sold was due to higher hydroelectric generation.
Employees and Labor Relations
As of December 31, 2014,2017, A&B and its subsidiaries had 1,502836 regular full-time employees, as compared to 808 regular full-time employees in the prior year. At the end of 2017, the Company's Materials & Construction segment employed 591 regular full-time employees. The Agribusiness segment employed 794 regular full-time employees, the Real Estate segment employed 55 regular full-time employees, the Materials and Construction segment employed 590 regular full-time employees, and the remaining full-time employees were employed in administration. Approximately 7053 percent of A&B's employees are covered by collective bargaining agreements with unions.
Bargaining unit employees of HC&S are covered by two collective bargaining agreements with the International Longshore and Warehouse Union ("ILWU"). The agreements with the HC&S production unit employees and clerical and technical employees bargaining units cover 593 workers. The production unit agreement was renegotiated in 2013 and expires on January 31, 2017. The clerical and technical employee agreement was renegotiated in 2014 and expires on January 31, 2017. Thirty-one19 bargaining unit employees at KT&S also are covered by twoa collective bargaining agreementsagreement with the ILWU. The bulk sugar employees’ agreement expired on June 30, 2014, and is currently extended until there is resolution of the West Coast and Hawaii stevedoring agreements. The agreement with all other KT&S employeesILWU that expires on March 31, 2015.2018. There are two collective bargaining agreements with 2318 A&B Fleet Services employees on the Big Island and Kauai, represented by the ILWU. Both agreements were renegotiated in 2014. Thethe Kauai and Big Island agreement expiresagreements expire on August 31, 2017, and the Kauai agreement expires on August 31, 2015.2020.
A collective bargaining agreement with the International Union of Operating Engineers AFL-CIO, Local Union 3 (“IUOE”) covers 192197 of Grace’s employees, who are primarily classified as heavy dutyheavy-duty equipment operators, paving construction site workers, quarry workers, truck drivers and mechanics. The Company has reached an agreement in principle with the IUOE, which contemplates a contractual expiration dateexpires on September 2, 2019.
Collective bargaining agreements with Laborers International Union of North America Local 368 (“Laborers”) cover 206201 Grace employees who engage in various types of work.employees. The traffic and rentals Laborers’ agreement expires on August 31, 2018; the precast/prestress concrete Laborers’ agreement expires on August 31, 2019; and the Laborers' agreement with fence, guardrail and sign installation workers expires on September 30, 2019;2019.
A collective bargaining agreement with the trafficHawai`i Regional Council of Carpenters, United Brotherhood of Carpenters and rentals Laborers’Joiners of America, and its Affiliated Local Unions and General Contractors Labor Association and the Building Industry Labor Association of Hawai`i (“Carpenters”) cover six Grace employees. The Carpenters agreement expires on August 31, 2015; and the precast/prestressed Laborers’ agreement expires on August 31, 2015.2019.
Available Information
A&B files reports with the Securities and Exchange Commission (the “SEC”). The reports and other information filed include: annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other reports and information filed under the Securities Exchange Act of 1934 (the “Exchange Act”).
The public may read and copy any materials A&B files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website at www.sec.gov, which contains reports, proxy and information statements, and other information regarding A&B and other issuers that file electronically with the SEC.
A&B makes available, free of charge on or through its Internet website, A&B’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the SEC. A&B’s website address is www.alexanderbaldwin.com.
ITEM 1A. RISK FACTORS
A&B’s business and its common stock are subject to a number of risks and uncertainties. You should carefully consider the risks and uncertainties described below, together with all of the other information in this Form 10-K and the Company’s filings with the U.S. Securities and Exchange Commission. Based on information currently known, A&B believes that the following information identifies the most significant risk factors affecting A&B’s business and its common stock. However, the risks and uncertainties faced by A&B are not limited to those described below, nor are they listed in order of significance. Additional risks and uncertainties not presently known to A&B or that it currently believes to be immaterial may also materially adversely affect A&B’s business, liquidity, financial condition, results of operation and cash flows. This Form 10-K also contains forward-looking statements that involve risks and uncertainties.
If any of the following events occur, A&B’s business, liquidity, financial condition, results of operations and cash flows could be materially adversely affected, and the trading price of A&B common stock could materially decline.
Risks RelatingRelated to A&B’s BusinessREIT Status
Note: All referencesQualification as a REIT involves highly technical and complex provisions of the Internal Revenue Code of 1986 (“Code”).
Qualification as a REIT involves the application of highly technical and complex Code provisions to “A&B”our operations, as well as various factual determinations concerning matters and "the Company"circumstances not entirely within our control.
There are only limited judicial and administrative interpretations of these provisions. Even a technical or inadvertent violation could jeopardize our REIT qualification.
If we fail to remain qualified as a REIT, we would be subject to U.S. federal income tax as a regular corporation and could face a substantial tax liability, which would reduce the amount of cash available for distribution to our shareholders.
We have determined that we operated in compliance with the REIT requirements commencing with the taxable year ended December 31, 2017. Our qualification and taxation as a REIT depends on our ability to meet, on a continuing basis, various requirements concerning, among other things, the sources of our income, the nature of our assets, the diversity of our share ownership and the amounts we distribute to our shareholders. Our ability to satisfy the asset tests depends upon our analysis of the characterization and fair market values of our assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals. Although we intend to operate in a manner consistent with the REIT requirements, we cannot assure you that we will remain so qualified.
If, in any taxable year, we fail to qualify as a REIT, we would be subject to U.S. federal and state income tax (including, for the 2017 taxable year, any applicable alternative minimum tax) on our taxable income at regular corporate rates, and we would not be allowed a deduction for distributions to shareholders in computing our taxable income. Any resulting corporate tax liability could be substantial and would reduce the amount of cash available for distribution to our shareholders, which, in turn, could have an adverse impact on the value of our common stock. In addition, unless we are entitled to relief under certain Code provisions, we also would be disqualified from re-electing REIT status for the four taxable years following the year in which we failed to qualify as a REIT. However, for taxable years that begin after December 31, 2017 and before January 1, 2026, shareholders that are individuals, trusts or estates are generally entitled to a deduction equal to 20% of the aggregate amount of ordinary income dividends received from a REIT, subject to certain limitations.
Our significant use of taxable REIT subsidiaries (“TRSs”) may cause us to fail to qualify as a REIT.
The net income of our TRSs is not required to be transferred to us, and such TRS income that is not transferred to us is generally not subject to our REIT distribution requirements. However, if the accumulation of cash or reinvestment of significant earnings in our TRSs causes the fair market value of our securities in those entities, taken together with other non-qualifying assets, to represent more than 25% of the fair market value of our total assets, or causes the fair market value of our TRS securities alone to exceed 25% (or, for 2018 and subsequent taxable years, 20%) of the fair market value of our total assets, in each case as determined for REIT asset testing purposes, we would, absent timely responsive action, fail to qualify as a REIT.
Complying with the REIT requirements may cause us to sell assets or forgo otherwise attractive investment opportunities.
To qualify as a REIT, we must continually satisfy various requirements concerning, among other things, the nature of our assets, the sources of our income and the amounts we distribute to our shareholders. For example, we must ensure that, at the end of each calendar quarter, at least 75% of the value of our total assets consists of some combination of “real estate assets” (as defined in the Code), cash, cash items and U.S. government securities. The remainder of our investments (other than government securities, qualified real estate assets and securities issued by a TRS) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our total assets (other than government securities, qualified real estate assets and securities issued by a TRS) can consist of the securities of any one issuer, and no more than 25% (or, for 2018 and subsequent taxable years, 20%) of the value of our total assets can be represented by securities of one or more TRSs. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to sell assets or forgo otherwise attractive investment opportunities. These actions could have the effect of reducing our income, amounts available for distribution to our shareholders and amounts available for making payments on our indebtedness.
We may be required to borrow funds, sell assets or raise equity to satisfy our REIT distribution requirements, which could adversely affect our ability to execute our business plan and grow.
We generally must distribute annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains, to qualify as a REIT. To the extent that we satisfy this distribution requirement and qualify as a REIT but distribute less than 100% of our REIT taxable income, including any net capital gains, we will be subject to tax at ordinary corporate tax rates on the retained portion. In addition, we will be subject
to a 4% nondeductible excise tax if the actual amount that we distribute to our shareholders in a calendar year is less than a minimum amount specified under U.S. federal tax laws. We intend to make distributions to our shareholders to comply with the REIT requirements of the Code.
From time to time, we may generate taxable income greater than our cash flow as a result of differences in timing between the recognition of taxable income and the actual receipt of cash or the effect of nondeductible capital expenditures, the creation of reserves or required debt or amortization payments. If we do not have other funds available in these situations, we could be required to borrow funds on unfavorable terms, sell assets at disadvantageous prices or distribute amounts that would otherwise be invested in future acquisitions to make distributions sufficient to enable us to pay out enough of our taxable income to satisfy the REIT distribution requirement and to avoid corporate income tax and the 4% excise tax in a particular year. These alternatives could increase our costs or reduce our equity or adversely impact our ability to raise short- and long- term debt. Furthermore, the REIT distribution requirements may increase the financing we need to fund capital expenditures and further growth and expansion initiatives. Thus, compliance with the REIT requirements may hinder our ability to grow, which could adversely affect the value of our common stock.
Whether we issue equity, at what price and the amount and other terms of any such issuances will depend on many factors, including alternative sources of capital, our then-existing leverage, our need for additional capital, market conditions and other factors beyond our control. If we raise additional funds through the issuance of equity securities or debt convertible into equity securities, the percentage of stock owned by our existing shareholders may be reduced. In addition, new equity securities or convertible debt securities could have rights, preferences and privileges senior to those of our current shareholders, which could substantially decrease the value of our securities owned by them. Depending on the share price we are able to obtain, we may have to sell a significant number of shares to raise the capital we deem necessary to execute our long-term strategy, and our shareholders may experience dilution in the value of their shares as a result.
Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.
The maximum U.S. federal income tax rate applicable to income from “qualified dividends” payable to U.S. shareholders that are individuals, trusts and estates is currently 20%. Dividends payable by REITs, however, generally are not eligible for the reduced rates applicable to qualified dividends. Although these rules do not adversely affect the taxation of REITs, the more favorable rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including our common stock. However, for taxable years that begin after December 31, 2017 and before January 1, 2026, shareholders that are individuals, trusts or estates are generally entitled to a deduction equal to 20% of the aggregate amount of ordinary income dividends received from a REIT, subject to certain limitations.
The REIT ownership limitations and transfer restrictions contained in our articles of incorporation may restrict or prevent you from engaging in certain transfers of our common stock, and could have unintended antitakeover effects.
For us to satisfy the REIT requirements, no more than 50% in value of all classes or series of our outstanding shares of stock may be owned, actually or constructively, by five or fewer individuals (as defined in the Code to include certain entities) at any time during the last half of each taxable year beginning with our 2018 taxable year. In addition, our capital stock must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months or during a proportionate part of a shorter taxable year beginning with our 2018 taxable year. Among other things, our articles of incorporation generally restrict shareholders from owning more than 9.8% of our outstanding shares. Under applicable constructive ownership rules, any shares of stock owned by certain affiliated owners generally would be added together for purposes of the stock ownership limits. These ownership limitations may prevent you from engaging in certain transfers of our common stock.
Furthermore, the ownership limitations and transfer restrictions contained in our articles of incorporation may delay, deter or prevent a transaction or a change in control that might involve a premium price for our stock or otherwise be in the best interests of our shareholders. As a result, the overall effect of the ownership limitations and transfer restrictions may be to render more difficult or discourage any attempt to acquire us, even if such acquisition may be favorable to the interests of our shareholders. This potential inability to obtain a premium could reduce the price of our common stock.
Our cash distributions are not guaranteed and may fluctuate.
A REIT generally is required to distribute at least 90% of its REIT taxable income to its shareholders (determined without regard to the dividends paid deduction and excluding any net capital gains). Generally, we expect to distribute all or substantially all of our REIT taxable income, including net capital gains, so as to not be subject to the income or excise tax
on undistributed REIT taxable income. Our board of directors, in its sole discretion, will determine on a quarterly basis the amount of cash to be distributed to our shareholders based on a number of factors including, but not limited to, our results of operations, cash flow and capital requirements, economic conditions, tax considerations, borrowing capacity and other factors, including debt covenant restrictions, that may impose limitations on cash payments and plans for future acquisitions and divestitures. Consequently, our distribution levels may fluctuate.
Certain of our business activities may be subject to corporate level income tax and other taxes, which would reduce our cash flows, and would cause potential deferred and contingent tax liabilities.
Our TRS assets and operations will continue to be subject to U.S. federal income taxes at regular corporate rates. We may also be subject to a variety of other taxes, including payroll taxes and state, local, and foreign income, property, transfer and other taxes on assets and operations. In addition, we could, in certain circumstances, be required to pay an excise or penalty tax, which could be significant in amount, in order to utilize one or more relief provisions under the Code to maintain qualification for taxation as a REIT. We also could incur a 100% excise tax on transactions with a TRS if they are not conducted on an arm’s length basis, or we also could be subject to tax in situations and on transactions not presently contemplated. Any of these taxes would decrease our earnings and our available cash.
If we dispose of an asset held at the REIT level during our first five years as a REIT, we also will be subject to a federal corporate level tax on the gain recognized from such sale, up to the amount of the built-in gain that existed on January 1, 2017, which is based on the fair market value of such asset in excess of our tax basis in such asset as of January 1, 2017. We currently do not expect to sell any asset if the sale would result in the imposition of a material tax liability. We cannot, however, assure you that we will not change our plans in this section refers to, and includes, each segment and line of business comprising A&B,regard.
In addition, the IRS and any referencestate or local tax authority may successfully assert liabilities against us for corporate income taxes for taxable years prior to the time we qualified as a REIT, in which case we will owe these taxes plus applicable interest and penalties, if any. Moreover, any increase in taxable income for these pre-REIT periods will likely result in an increase in pre-REIT accumulated earnings and profits, which could cause us to pay an additional taxable distribution to our shareholders after the relevant determination.
The tax imposed on REITs engaging in “prohibited transactions” may limit our ability to engage in transactions that would be treated as sales for federal income tax purposes.
A REIT’s net income from prohibited transactions is subject to a 100% penalty tax. The term “prohibited transaction” generally includes a sale or other disposition of property (including mortgage loans, but other than foreclosure property, as discussed below) that is held primarily for sale to customers in the ordinary course of our trade or business. We might be subject to this tax if we were to dispose of or securitize loans in a manner that was treated as a prohibited transaction for U.S. federal income tax purposes.
We intend to conduct our operations so that no asset that we own (or are treated as owning) will be treated as, or as having been, held for sale to customers, and that a sale of any such asset will not be treated as having been in the ordinary course of our business. As a result, we may choose not to engage in certain sales of loans at the REIT level, and may limit the structures we utilize for our securitization transactions, even though the sales or structures might otherwise be beneficial to us. In addition, whether property is held “primarily for sale to customers in the ordinary course of a trade or business” depends on the particular segmentfacts and circumstances. No assurance can be given that any property that we sell will not be treated as property held for sale to customers, or linethat we can comply with certain safe-harbor provisions of businessthe Internal Revenue Code that would prevent such treatment. The 100% prohibited transaction tax does not limitapply to gains from the foregoing.sale of property that is held through a TRS or other taxable corporation, although such income will be subject to tax in the hands of the corporation at regular corporate rates. We intend to structure our activities to prevent prohibited transaction characterization.
Changes to U.S. federal and state income tax laws could materially affect us and our stockholders.
The present U.S. federal income tax treatment of REITs may be modified, possibly with retroactive effect, by legislative, judicial or administrative action at any time, which could affect the U.S. federal income tax treatment of an investment in our common equity. The U.S. federal income tax rules dealing with REITs constantly are under review by persons involved in the legislative process, the IRS and the U.S. Treasury Department, which results in statutory changes as well as frequent revisions to regulations and interpretations. The recently enacted Tax Cuts and Jobs Act made substantial changes to the Code. Among those changes are a significant permanent reduction in the generally applicable corporate tax rate, changes in the taxation of individuals and other non-corporate taxpayers that generally but not universally reduce their taxes on a temporary basis subject to ‘‘sunset’’ provisions, the elimination or modification of various currently allowed deductions (including substantial limitations on the deductibility of interest and, in the case of individuals, the deduction for personal state
and local taxes), certain additional limitations on the deduction of net operating losses, and preferential rates of taxation on most ordinary REIT dividends and certain business income derived by non-corporate taxpayers in comparison to other ordinary income recognized by such taxpayers.
The effect of these, and the many other, changes made in the Tax Cuts and Jobs Act is highly uncertain, both in terms of their direct effect on the taxation of an investment in our common equity and their indirect effect on the value of our assets or market conditions generally. Furthermore, many of the provisions of the Tax Cuts and Jobs Act will require guidance through the issuance of Treasury regulations in order to assess their effect. There may be a substantial delay before such regulations are promulgated, increasing the uncertainty as to the ultimate effect of the statutory amendments on us. There may also be technical corrections legislation proposed with respect to the Tax Cuts and Jobs Act, the effect and timing of which cannot be predicted and may be adverse to us or our stockholders.
You are urged to consult with your tax advisor with respect to the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in our stock.
Changes to the Hawai`i tax code could result in increased state-level taxation of REITs doing business in Hawai`i or mandated state-level withholding of taxes on REIT dividends.
The Hawai`i State legislature has recently considered legislation that would eliminate the REIT dividends paid deduction for Hawai`i State income tax purposes for income generated in Hawai`i for a number of years or permanently. Such a repeal could result in double taxation of REIT income in Hawai`i under the Hawai`i tax code, reduce returns to shareholders and make our stock less attractive to investors, which could in turn lower the value of our stock. The Hawai`i State legislature also has considered mandating withholding of Hawai`i State income tax on dividends paid to out-of-state shareholders. Such shareholders may not be able to receive a credit of these taxes from their home state, thereby resulting in double taxation of such dividends. This could reduce returns to shareholders and make our stock less attractive to investors, which could in turn lower the value or our stock.
The ability of our board of directors to revoke our REIT qualification, without shareholder approval, may cause adverse consequences to our shareholders.
Our articles of incorporation provide that the board of directors may revoke or otherwise terminate our anticipated REIT election, without the approval of our shareholders, if it determines that it is no longer in our best interests to continue to qualify as a REIT. If we cease to be a REIT, we will not be allowed a deduction for dividends paid to shareholders in computing our taxable income, and we will be subject to U.S. federal income tax at regular corporate rates, which may have adverse consequences on our total return to our shareholders.
We have limited experience operating as a REIT, which may adversely affect our financial condition, results of operations, cash flow and ability to satisfy debt service obligations, as well as the per share trading price of our common stock.
We have begun operating in compliance with the REIT requirements for the taxable year ended December 31, 2017. Accordingly, our senior management team has limited experience operating a REIT, and we cannot assure you that our past operating experience will be sufficient to operate our company successfully as a REIT. Our limited experience operating as a REIT could, by adversely affecting our ability to remain qualified as a REIT or otherwise, adversely affect our financial condition, results of operations, cash flow and ability to satisfy debt service obligations, as well as the per share trading price of our common stock.
Our articles of incorporation contains restrictions on the ownership and transfer of our stock, though they may not be successful in preserving our qualification for taxation as a REIT.
For us to remain qualified for taxation as a REIT, no more than 50% of the value of outstanding shares of our stock may be owned, beneficially or constructively, by five or fewer individuals at any time during the last half of each taxable year other than the first year for which we elect to be taxed as a REIT. In addition, a person actually or constructively owning 10% or more of the vote or value of the shares of our capital stock could lead to a level of affiliation between the Company and one or more of its tenants that could cause our revenues from such affiliated tenants to not qualify as rents from real property. Subject to certain exceptions, our articles of incorporation prohibit any stockholder from owning beneficially or constructively more than (i) 9.8% in value of the outstanding shares of all classes or series of our capital stock or (ii) 9.8% in value or number, whichever is more restrictive, of the outstanding shares of any class or series of our capital stock.
We refer to these restrictions collectively as the “ownership limits” and we included them in our articles of incorporation to facilitate our compliance with REIT tax rules. The constructive ownership rules under the Code are complex and may cause the outstanding stock owned by a group of related individuals or entities to be deemed to be constructively owned by one individual or entity. As a result, the acquisition of less than 9.8% of our outstanding common stock (or the outstanding shares of any class or series of our stock) by an individual or entity could cause that individual or entity or another individual or entity to own constructively in excess of the relevant ownership limits. Any attempt to own or transfer shares of our common stock or of any of our other capital stock in violation of these restrictions may result in the shares being automatically transferred to a charitable trust or may be void. Even though our articles of incorporation contain the ownership limits, there can be no assurance that these provisions will be effective to prevent our qualification for taxation as a REIT from being jeopardized, including under the affiliated tenant rule. Furthermore, there can be no assurance that we will be able to enforce the ownership limits. If the restrictions in our articles of incorporation are not effective and as a result we fail to satisfy the REIT tax rules described above, then absent an applicable relief provision, we will fail to remain qualified for taxation as a REIT.
Risks Related to Our Business
Changes in economic conditions may result in a decrease in market demand for A&B’sour real estate assets in HawaiiHawai`i and the Mainland and its materialour materials and construction products.
Our business, including our assets and operations, is concentrated in Hawai`i. A weakening of economic drivers in Hawaii,Hawai`i, which include tourism, military and consumer spending, public and private construction starts and spending, personal income growth, and employment, or the weakening of consumer confidence, market demand, or economic conditions on the Mainland, may adversely affect the demand for or sale of HawaiiHawai`i real estate, the level of real estate leasing activity in HawaiiHawai`i and on the Mainland, and demand for the Company'sour materials and construction products. In addition, an increase in interest rates or other factors thatcould reduce the market value of our real estate holdings, as well as increase the cost of buyer financing that may reduce the demand for and market value of, A&B'sour real estate assets.
A&BWe may face new or increased competition.
There are numerous other developers, buyers, managers and owners of commercial and residential real estate and undeveloped land that compete or may compete with A&Bus for management and leasing revenues, land for development, properties for acquisition and disposition, and for tenants and purchasers forof properties. Intense competition could lead to increased vacancies, increased tenant incentives, decreased rents, sales prices or sales volume, or lack of development opportunities.
Our wholly owned subsidiary Grace Pacific LLC (“Grace” or “Grace Pacific”) competes in an industry that generally favors the lowest bid. An increase in competition,Increasing competitive market conditions, including out-of-state or new in-state contractors competing for a limited number of projects available, could leadadversely impact our results of operations through market share erosion due to lost bids, as well as lower pricing and thus lower prices and volume.margins realized on successful bids. Grace also mines aggregate and imports asphalt for sale. Grace'sGrace’s customers or its competitors could seek alternative sources of supply, such as importedsimilar to some of its competitors that are importing liquid asphalt.
A&BWe may face potential difficulties in obtaining operating and development capital.
The successful execution of A&B’sour strategy requires substantial amounts of operating and development capital. Sources of such capital could include banks, life insurance companies, public and private offerings of debt or equity, including rights offerings, sale of certain assets and joint venture partners. If A&B’sour credit profile deteriorates significantly, itsour access to the debt capital markets or itsour ability to renew itsour committed lines of credit may become restricted, the cost to borrow may increase, or A&Bwe may not be able to refinance debt at the same levels or on the same terms. Further, A&B relieswe rely on itsour ability to obtain and draw on a revolving credit facility to support itsour operations. Volatility in the credit and financial markets or deterioration in A&B’sour credit profile may prevent A&Bus from accessing funds. There is no assurance that any capital will be available on terms acceptable to A&Bus or at all to satisfy A&B’sour short or long-term cash needs.
A&BWe may raise additional capital in the future on terms that are more stringent to A&B,us, that could provide holders of new issuances rights, preferences and privileges that are senior to those of A&Bcurrently held by our common stock holders,stockholders, or that could result in dilution of common stock ownership.
To execute itsour business strategy, A&Bwe may require additional capital. If A&B incurswe incur additional debt or raisesraise equity, the terms of the debt or equity issued may give the holders rights, preferences and privileges senior to those of holders of A&Bour common stock, particularly in the event of liquidation. The terms of any new debt may also impose additional and more
stringent restrictions on A&B’sour operations than currently in place. If A&B issueswe issue additional common equity, either through public or private offerings or rights offerings, your percentage ownership in A&Bus would decline if you do not participate on a ratable basis.
Failure to comply with certain restrictive financial covenants contained in A&B’sour credit facilities could impose restrictions on A&B’sour business segments, capital availability or the ability to pursue other activities.
A&B’sOur credit facilities and term debt contain certain restrictive financial covenants. If A&B breacheswe breach any of the covenants and such breach is not cured in a timely manner or waived by the lenders, and results in default, A&B’sour access to credit may be limited or terminated and the lenders could declare any outstanding amounts immediately due and payable.
Increasing interest rates would increase A&B’sour overall interest expense.
Interest expense on A&B'sour floating-rate debt ($265.775.9 million atas of December 31, 2014)2017) would increase if interest rates rise. Additionally, the interest expense associated with fixed-rate debt could rise in future periods when the debt matures and is refinanced. Furthermore, the value of our commercial real estate portfolio and the market price of our stock could decline if market interest rates increase and investors seek alternative investments with higher distribution rates.
A&B’sOur significant operating agreements and leases could be replaced on less favorable terms or may not be replaced.
TheOur various businesses have significant operating agreements and leases of A&B in its various businessesthat expire at various points in the futurefuture. These agreements and leases may not be replacedrenewed or could be replaced on less favorable terms.
An increase in fuel prices may adversely affect A&B’sour operating environment and costs.
Fuel prices have a significant direct impact on the health of the HawaiiHawai`i economy. Increases in the price of fuel may result in higher transportation costs to HawaiiHawai`i and adversely affect visitor counts and the cost of goods shipped to Hawaii,Hawai`i, thereby affecting the strength of the HawaiiHawai`i economy and its consumers. Increases in fuel costs also can lead to other non-recoverable, direct expense increases to A&Bus through, for example, increased costs of energy and petroleum-based raw materials used in the production and transportation of sugar, the production of aggregate, and the manufacture, transportation, and placement of hot mix asphalt. Increases in energy costs for A&B’sour leased real estate portfolio are typically recovered from lessees, although A&B’sour share of energy costs increases as a result of lower occupancies, and higher operating cost reimbursements impact the ability to increase underlying rents. Rising fuel prices also may increase the cost of construction, including delivery costs to Hawaii,Hawai`i, and the cost of materials that are petroleum-based, thus affecting A&B’sour real estate development projects.projects and margins.
Noncompliance with, or changes to, federal, state or local law or regulations may adversely affect A&B’sour business.
A&B isWe are subject to federal, state and local laws and regulations, including government rate, regulations, land use, regulations, environmental regulations,and tax regulations and federal government administration of the U.S. sugar program.regulations. Noncompliance with, or changes to, the laws and regulations governing A&B’sour business could impose significant additional costs on A&Bus and adversely affect A&B’sour financial condition and results of operations. For example, the real estate segments are subject to numerous federal, state and local laws and regulations, which, if changed, or not complied with may adversely affect A&B’sour business. The CompanyWe frequently utilizes Section 1031utilize §1031 of the IRS Code to defer taxes when selling qualifying
real estate and reinvesting the proceeds in replacement properties. This often occurs when the Company sellswe sell bulk parcels of land in HawaiiHawai`i or commercial properties in HawaiiHawai`i or on the Mainland, all of which typically have a very low tax basis. A repeal of or adverse amendment to Section 1031,§1031 of the Code, which has often been considered by Congress, could impose significant additional costs on A&B. A&B isus. We are subject to Occupational Safety and Health Administration regulations, Environmental Protection Agency regulations, and state and county permits related to itsour operations. The Materials and& Construction segment is additionally subject to Mine Safety and Health Administration regulations. The AgribusinessLand Operations segment is subject to the federal government’s administration of the U.S. sugar program, such as the 2014 Farm Bill, the HawaiiHawai`i Public Utilities Commission’s regulation of agreements between A&Bus and Hawaii’sHawai`i’s utilities regarding the sale of electric power, and various county, state and federal environmental laws, regulations and permits governing farming operations and generation of electricity (including, for example, the use of pesticides and the burning of cane, bagasse and coal)pesticides).
Changes to, or A&B’sour violation of or inability to comply with any of the laws, regulations and permits mentioned above could increase A&B’s operating costs or ability to operate the affected line of business. Climate change legislation, such as limiting and reducing greenhouse gas emissions through a “cap and trade” system of allowances and credits, if enacted, may also increase A&B'sour operating costs or ability to operate the affected line of business.
Work stoppages or other labor disruptions by theour unionized employees or those of A&B or other companies in related industries may increase operating costs or adversely affect A&B'sour ability to conduct business.
As of December 31, 2014,2017, approximately 7053 percent of A&B's 1,502our regular full-time employees were covered by collective bargaining agreements with unions. A&BWe may be adversely affected by actions taken by our employees or those of A&B or other companies in related industries against efforts by management to control labor costs, restrain wage or benefits increases or
modify work practices. Strikes and disruptions may occur as a result of theour failure or that of A&B or other companies in itsour industry to negotiate collective bargaining agreements with such unions successfully. For example, in its Real Estate Developmentour Materials & Construction segment, a labor disruption resulting from a unionized workforce stoppage may significantly impede our production and Salesability to complete projects that are in process. Additionally, in our Land Operations segment, A&Bwe may be unable to complete construction of its projectsa development-for-sale project if building materials or labor are unavailable due to labor disruptions in the relevant trade groups.
The loss of or damage to key vendor and customer relationships may adversely affect A&B’simpact our ability to conduct business and itsadversely affect our profitability.
A&B’sOur business is dependent on itsour relationships with key vendors, customers and tenants. For example, in A&B’s Agribusiness segment, HC&S’s relationship with C&H Sugar Company, Inc., the primary buyer of HC&S’s raw sugar, is critical. The loss of or damage to any of these key relationships may adversely affect A&B’simpact our ability to conduct business and itsadversely affect our profitability.
Interruption, breaches or failure of A&B’sour information technology and communications systems could impair A&B’sour ability to operate, adversely affect itsour profitability and damage itsour reputation.
A&B is highlyWe are dependent on information technology systems. All information technology and communication systems are subject to reliability issues, integration and compatibility concerns and security-threateningcybersecurity-threatening intrusions. Further, A&Bwe may experience failures caused by the occurrence of a natural disaster or other unanticipated problems at A&B’sour facilities. Any failure, or security breaches, of A&B’sour systems could result in interruptions in itsour service or production, increased cost, lower profitability and damage to itsour reputation.
A&B isWe are susceptible to weather and natural disasters.
A&B’s real estate operationsOur Commercial Real Estate and Land Operations segments are vulnerable to natural disasters, such as hurricanes, earthquakes, tsunamis, floods, fires, tornadoes and unusually heavy or prolonged rain, which could cause personal injury and loss of life. In addition, natural disasters could damage itsour real estate holdings, and which could result in substantial repair or replacement costs to the extent not covered by insurance, a reduction in property values, or a loss of revenue, and could have an adverse effect on itsour ability to develop, lease and sell properties. The occurrence of natural disasters could also cause increases in property insurance rates and deductibles, which could reduce demand for, or increase the cost of owning or developing A&B’sour properties.
For the Agribusiness segment, drought,
Drought, greater than normal rainfall, hurricanes, low-wind conditions, earthquakes, tsunamis, floods, fires, other natural disasters, agricultural pestilence, or negligence or intentional malfeasance by individuals, may have an adverse effect onalso adversely impact the sugar planting, harvestingconditions of the land and production, electricity generationthereby harming the prospects for the Land Operations segment, including agribusiness-related activities, our renewable energy operations, and sales,our land infrastructure and the Agribusiness segment’s facilities, including dams and reservoirs.
For the Materials and& Construction segment, because nearly all of the segment'ssegment’s activities are completedperformed outdoors, its operations are substantially dependent on weather conditions. For example, periods of wet or other adverse weather conditions
could interrupt paving activities, resulting in delayed or loss of revenue, under-utilization of crews and equipment and less efficient rates of overhead recovery. Adverse weather conditions also restrict the demand for aggregate products, increase aggregate production costs and impede its ability to efficiently transport material.
A&B maintainsWe maintain casualty insurance under policies it believeswe believe to be adequate and appropriate. These policies are generally subject to large retentions and deductibles. Some types of losses, such as losses resulting from physical damage to dams, or crop damage, generally are not insured. In some cases A&B retainswe retain the entire risk of loss because it is not economically prudent to purchase insurance coverage or because of the perceived remoteness of the risk. Other risks are uninsured because insurance coverage may not be commercially available. Finally, A&B retainswe retain all risk of loss that exceeds the limits of itsour insurance.
Heightened security measures, war, actual or threatened terrorist attacks, efforts to combat terrorism and other acts of violence may adversely impact A&B’sour operations and profitability.
As our business is concentrated in Hawai`i, an attack on Hawai`i as a result of war or terrorism may severely or irreparably harm the Company, including our real estate holdings, our facilities and information technology systems, and personnel.
War, geopolitical instability, terrorist attacks and other acts of violence may also cause consumer confidence and spending to decrease, or may affect the ability or willingness of tourists to travel to Hawaii,Hawai`i, thereby adversely affecting Hawaii’s
Hawai`i’s economy and A&B. Additionally, futureus. Future terrorist attacks could also increase the volatility in the U.S. and worldwide financial markets.markets
Loss of A&B’sour key personnel could adversely affect itsour business.
A&B’sOur future success will depend, in significant part, upon the continued services of itsour key personnel, including itsour senior management and skilled employees. The loss of the services of key personnel could adversely affect itsour future operating results because of such employee’s experience, knowledge of itsour business and relationships. If key employees depart, A&Bwe may have to incur significant costs to replace them, and A&B’sour ability to execute itsour business model could be impaired if itwe cannot replace them in a timely manner. A&B doesWe do not maintain key person insurance on any of itsour personnel.
A&B isWe are subject to, and may in the future be subject to, disputes, legal or other proceedings, or government inquiries or investigations, that could have an adverse effect on A&B.us.
The nature of A&B’sour business exposes itus to the potential for disputes, legal or other proceedings, or government inquiries or investigations, relating to labor and employment matters, contractual disputes, personal injury and property damage, environmental matters, construction litigation, business practices, and other matters, as discussed in the other risk factors disclosed in this section. These disputes, individually or collectively, could harm A&B’sour business by distracting itsour management from the operation of itsour business. If these disputes develop into proceedings, these proceedings, individually or collectively, could involve or result in significant expenditures or losses by A&B. For more information, see Item 3 entitled “Legal Proceedings.”us. As a real estate developer, A&Bwe may face warranty and construction defect claims, as described below under “Risks RelatedRelating to A&B’s Real Estate Segments.Our Land Operations Segment.”
Changes in the value of pension assets, or a change in pension law or key assumptions, may result in increased expenses or plan contributions.
The amount of A&B’sour employee pension and postretirement benefit costs and obligations are calculated on assumptions used in the relevant actuarial calculations. Adverse changes in any of these assumptions due to economic or other factors, changes in discount rates, higher health care costs, or lower actual or expected returns on plan assets, may result in increased cost or required plan contributions. In addition, a change in federal law, including changes to the Employee Retirement Income Security Act and Pension Benefit Guaranty Corporation premiums, may adversely affect A&B’sour single-employer pension plans and plan funding. These factors, as well as a decline in the fair value of pension plan assets, may put upward pressure on the cost of providing pension and medical benefits and may increase future pension expense and required funding contributions. Although A&B haswe have actively sought to control increases in these costs, there can be no assurance that itwe will be successful in limiting future cost and expense increases.
Risks Relating to A&B’sOur Commercial Real Estate SegmentsSegment
A&B isWe are subject to risks associated with real estate construction and development.
A&B’s developmentOur redevelopment and development-for-hold projects are subject to risks relating to A&B’sour ability to complete itsour projects on time and on budget. Factors that may result in a development project exceeding budget or being prevented from completion include, but are not limited to:
anour inability of A&B or buyers to secure sufficient financing or insurance on favorable terms, or at all;
construction delays, defects, or cost overruns, which may increase project development costs;
an increase in commodity or construction costs, including labor costs;
the discovery of hazardous or toxic substances, or other environmental, culturally-sensitive, or related issues;
an inability to obtain, or a significant delay in obtaining, zoning, construction, occupancy and other required governmental permits and authorizations;
difficulty in complying with local, city, county and state rules and regulations regarding permitting, zoning, subdivision, utilities, water quality, as well as federal rules and regulations regarding air and water quality and protection of endangered species and their habitats;
insufficient infrastructure capacity or availability (e.g., water, sewer and roads) to serve the needs of our projects;
an inability to secure tenants necessary to support the project or maintain compliance with debt covenants;
failure to achieve or sustain anticipated occupancy levels;
condemnation of all or parts of development or operating properties, which could adversely affect the value or viability of such projects; and
instability in the financial industry could reduce the availability of financing.
Significant instability in the financial industry like that experienced during the financial crisis of 2008-2009, may result in, among other things, declining property values and increasing defaults on loans. This, in turn, could lead to increased regulations, tightened credit requirements, reduced liquidity and increased credit risk premiums for virtually all borrowers. Deterioration in the credit environment may also impact us in other ways, including the credit or solvency of vendors, tenants, or joint venture partners, the ability of partners to fund their financial obligations to joint ventures and our access to mortgage financing for our own properties.
We are subject to a number of factors that could cause leasing rental income to decline.
We own a portfolio of commercial income properties. Factors that may adversely affect the portfolio’s profitability include, but are not limited to:
a significant number of our tenants are unable to meet their obligations;
increases in non-recoverable operating and ownership costs;
we are unable to lease space at our properties when the space becomes available;
the rental rates upon a renewal or a new lease are significantly lower than prior rents or do not increase sufficiently to cover increases in operating and ownership costs;
the providing of lease concessions, such as free or discounted rents and tenant improvement allowances; and
the discovery of hazardous or toxic substances, or other environmental, culturally-sensitive, or related issues at the property.
The bankruptcy of key tenants may adversely affect our cash flows and profitability.
We may derive significant cash flows and earnings from certain key tenants. If one or more of these tenants declares bankruptcy or voluntarily vacates from the leased premise and we are unable to re-lease such space or to re-lease it on comparable or more favorable terms, we may be adversely impacted. Additionally, we may be further adversely impacted by an impairment or “write-down” of intangible assets, such as lease-in-place value, favorable lease asset, or a deferred asset related to straight-line lease rent, associated with a tenant bankruptcy or vacancy.
Our financial results are significantly influenced by the economic growth and strength of Hawai`i.
All of our redevelopment and development-for-hold activity is conducted in Hawai`i. Consequently, the growth and strength of Hawai`i’s economy has a significant impact on the demand for our real estate development projects. As a result, any adverse change to the growth or health of Hawai`i’s economy could have an adverse effect on our commercial real estate business.
The value of our development-for-hold projects and commercial properties is affected by a number of factors.
We have significant investments in various commercial real estate properties and development-for-hold projects. Weakness in the real estate sector, especially in Hawai`i, difficulty in obtaining or renewing project-level financing, and changes in our investment and redevelopment and development-for-hold strategy, among other factors, may affect the fair value of these real estate assets. If the undiscounted cash flows of our commercial properties or redevelopment or development-for-hold projects were to decline below the carrying value of those assets, we would be required to recognize an impairment loss if the fair value of those assets were below their carrying value.
Risks Relating to Our Land Operations Segment
We are subject to risks associated with real estate construction and development.
Our development-for-sale projects are subject to risks relating to our ability to complete our projects on time and on budget. Factors that may result in a development project exceeding budget or being prevented from completion include, but are not limited to:
our inability or that of buyers to secure sufficient financing or insurance on favorable terms, or at all;
construction delays, defects, or cost overruns, which may increase project development costs;
an increase in commodity or construction costs, including labor costs;
the discovery of hazardous or toxic substances, or other environmental, culturally-sensitive, or related issues;
an inability to obtain, or a significant delay in obtaining, zoning, construction, occupancy and other required governmental permits and authorizations;
difficulty in complying with local, city, county and state rules and regulations regarding permitting, zoning, subdivision, utilities, affordable housing and water quality, as well as federal rules and regulations regarding air and water quality and protection of endangered species and their habitats;
an inabilityinsufficient infrastructure capacity or availability (e.g., water, sewer and roads) to have access to sufficient and reliable sourcesserve the needs of water or to secure water service or meters for itsour projects;
an inability to secure tenants or buyers necessary to support the project or maintain compliance with debt covenants;
failure to achieve or sustain anticipated occupancy or sales levels;
buyer defaults, including defaults under executed or binding contracts;
condemnation of all or parts of development or operating properties, which could adversely affect the value or viability of such projects; and
an inability to sell A&B’sour constructed inventory.inventory; and
Instabilityinstability in the financial industry could reduce the availability of financing.
Significant instability in the financial industry like that experienced during the financial crisis of 2008-2009, may result in, among other things, declining property values and increasing defaults on loans. This, in turn, could lead to increased regulations, tightened credit requirements, reduced liquidity and increased credit risk premiums for virtually all borrowers. Fewer loan products and strict loan qualifications make it more difficult for borrowers to finance the purchase of units in A&B’sour projects. Additionally, more stringent requirements to obtain financing for buyers of commercial properties make it significantly more difficult for A&Bus to sell commercial properties and may negatively impact the sales prices and other terms of such sales. Deterioration in the credit environment may also impact A&Bus in other ways, including the credit or solvency of customers, vendors, tenants, or joint venture partners, the ability of partners to fund their financial obligations to joint ventures and A&B'sour access to mortgage financing for itsour own properties.
A&B is subject to a number of factors that could cause leasing rental income to decline.
A&B owns a portfolio of commercial income properties. Factors that may adversely affect the portfolio’s profitability include, but are not limited to:
a significant number of A&B’s tenants are unable to meet their obligations;
increases in non-recoverable operating and ownership costs;
A&B is unable to lease space at its properties when the space becomes available;
the rental rates upon a renewal or a new lease are significantly lower than prior rents or do not increase sufficiently to cover increases in operating and ownership costs;
the providing of lease concessions, such as free or discounted rents and tenant improvement allowances; and
the discovery of hazardous or toxic substances, or other environmental, culturally-sensitive, or related issues at the property.
The bankruptcy of key tenants may adversely affect A&B’s revenues and profitability.
A&B may derive significant revenues and earnings from certain key tenants. If one or more of these tenants declare bankruptcy or voluntarily vacates from the leased premise and A&B is unable to re-lease such space or to re-lease it on comparable or more favorable terms, A&B may be adversely impacted. Additionally, A&B may be further adversely impacted by an impairment or “write-down” of intangible assets, such as lease-in-place value or a deferred asset related to straight-line lease rent, associated with a tenant bankruptcy or vacancy.
Governmental entities have adopted or may adopt regulatory requirements that may restrict A&B’sour development activity.
A&B isWe are subject to extensive and complex laws and regulations that affect the land development process, including laws and regulations related to zoning and permitted land uses. Government entities have adopted or may approve regulations or laws that could negatively impact the availability of land and development opportunities within those areas. It is possible that increasingly stringent requirements will be imposed on developers in the future that could adversely affect A&B’sour ability to develop projects in the affected markets or could require that A&Bwe satisfy additional administrative and regulatory requirements, which could delay development progress or increase the development costs to A&B.us.
Real estate development projects are subject to warranty and construction defect claims in the ordinary course of business that can be significant.
As a developer, A&B isIn our development-for-sale projects, we are subject to warranty and construction defect claims arising in the ordinary course of business. The amounts payable under these claims, both in legal fees and remedying any construction defects, can be significant and could exceed the profits made from the project. As a consequence, A&Bwe may maintain liability insurance, obtain indemnities and certificates of insurance from contractors generally covering claims related to workmanship and materials, and create warranty and other reserves for projects based on historical experience and qualitative risks associated with the type of project built. Because of the uncertainties inherent in these matters, A&Bwe cannot provide any assurance that itsour insurance coverage, contractor arrangements and reserves will be adequate to address some or all of A&B’sour warranty and construction defect claims in the future. For example, contractual indemnities may be difficult to enforce, A&Bwe may be responsible for applicable self-insured retentions, and certain claims may not be covered by insurance or may exceed applicable coverage limits. Additionally, the coverage offered and the availability of liability insurance for construction defects could be limited or costly. Accordingly, A&Bwe cannot provide any assurance that such coverage will be adequate, available at an acceptable cost, or available at all.
A&B isWe are involved in joint ventures and is subject to risks associated with joint venture relationships.
A&B isWe are involved in joint venture relationships and may initiate future joint venture projects. A joint venture involves certain risks such as, among others:
A&Bwe may not have voting control over the joint venture;
A&Bwe may not be able to maintain good relationships with itsour venture partners;
the venture partner at any time may have economic or business interests that are inconsistent with A&B’sour economic or business interests;
the venture partner may fail to fund its share of capital for operations and development activities or to fulfill its other commitments, including providing accurate and timely accounting and financial information to A&B;us;
the joint venture or venture partner could lose key personnelpersonnel;
the venture partner could become insolvent, requiring A&Bus to assume all risks and capital requirements related to the joint venture project, and any resulting bankruptcy proceedings could have an adverse impact on the operation of the project or the joint venture; and
A&Bwe may be required to perform on guarantees it haswe have provided or agreesagree to provide in the future related to the completion of a joint venture'sventure’s construction and development of a project, joint venture indebtedness, or on indemnification of a third party serving as surety for a joint venture'sventure’s bonds for such completion.
A&B’sOur financial results are significantly influenced by the economic growth and strength of Hawaii.Hawai`i.
Virtually all of A&B’sour real estate development activity is conducted in Hawaii.Hawai`i. Consequently, the growth and strength of Hawaii’sHawai`i’s economy has a significant impact on the demand for A&B’sour real estate development projects. As a result, any adverse change to the growth or health of Hawaii’sHawai`i’s economy could have an adverse effect on A&B’sour real estate business.
The value of A&B’sour development projects and its commercial properties areis affected by a number of factors.
The Company hasWe have significant investments in various commercial real estate properties, development projects and joint venture investments. Weakness in the real estate sector, especially in Hawaii,Hawai`i, difficulty in obtaining or renewing project-level financing, and changes in A&B’sour investment and development strategy, among other factors, may affect the fair value of these real estate assets owned by A&Bus or by itsour joint ventures. If the fair value of A&B’sour joint venture development projects were to decline below the carrying value of those assets, and that decline was other-than-temporary, A&Bwe would be required to recognize an impairment loss. Additionally, if the undiscounted cash flows of its commercial properties orour development projects were to decline below the carrying value of those assets, A&Bwe would be required to recognize an impairment loss if the fair value of those assets were below their carrying value.
Our ability to use or lease agricultural lands for agricultural purposes may be limited by government regulation.
Given the large scale of our agricultural landholdings on Maui and Kauai, many of the third parties to whom we lease land for agricultural purposes may be characterized as large scale commercial agricultural operations. Legislation passed on Kauai placed restrictions on the ability of such operations to use land within specified distances of highways, schools, oceans, streams, residences, parks, care homes, hospitals and other similar uses, to grow crops other than ground cover. This legislation also put significant restrictions regarding, and public notification obligations concerning, pesticide use on such operations and limited their ability to use genetically modified organism (GMO) crops. On Maui, similar legislation passed by a voter initiative placed a moratorium on the ability to farm GMO crops. In November 2016, the Kauai and Maui legislation was invalidated by the courts. If additional legislative agricultural restrictions are passed, such as restrictions on the use of pesticides, our ability to use or lease lands for large scale agricultural purposes, and any rents that we can achieve for those lands, may be adversely affected.
The transition to a diversified agricultural model is subject to both the risks affecting the business generally and the inherent difficulties associated with implementing and executing the strategy.
Our ability to transition to a new diversified model and improve the operating results depends upon a number of factors, including:
the extent to which management has properly understood and is able to manage the dynamics and demands of the various farming operations comprising the diversified agricultural model, in which we may have limited or no prior experience;
the ability to secure applicable permits and/or licenses from governmental agencies that may be necessary for executing the strategy;
the ability to respond to any unanticipated changes in expected cash flows, liquidity, cash needs and cash expenditures with respect to the new diversified model, including our ability to obtain any additional financing or other liquidity enhancing transactions, if and when needed;
the ability to execute strategic initiatives in a cost-effective manner, including identifying business partners to explore potential opportunities; and
our ability to access adequate, affordable and uninterrupted sources of water (see the “The lack of water for agricultural irrigation could adversely affect the operations and profitability of the Land Operations segment” risk factor below).
Commercial agriculture is challenged in Hawaii, as in other U.S. jurisdictions, due to various factors, including high production costs, a shrinking farm labor base, and community opposition to conventional farming techniques, which include the use of legally approved chemical pesticides and fertilizers and the concentrated presence of livestock. These factors could impact our ability to successfully transition to diversified agriculture, and could similarly affect the success of leasehold tenant farmers on our agricultural lands.
There is no assurance that we will be able to effectively implement and execute a new diversified agricultural model, which could have an adverse impact on our results of operations.
The diversified agricultural model may not achieve the financial results expected.
We are currently evaluating several categories of replacement agricultural activities in the transition to the diversified model, including but not limited to energy crops, agroforestry, grass finished livestock operations, diversified food crops/agricultural park, and orchard crops. There is no assurance that our replacement agricultural activities will be economically feasible or improve the Land Operations segment’s operating results.
Agricultural land is illiquid and difficult to value.
Even if qualified farm lessees can be identified and engaged in leases, agricultural operations are high risk by nature and turnover can be expected. From a landlord’s perspective, agricultural leases produce only modest rents that could imply a valuation of the land that could materially understate other methods of appraising asset value.
Our power sales contracts could be replaced on less favorable terms or may not be replaced.
Our power sales contracts expire at various points in the future and may not be replaced or could be replaced on less favorable terms, which could adversely affect Land Operations profitability.
The market for power sales in Hawai`i is limited.
The power distribution systems in Hawai`i are small and island-specific; currently, there is no ability to move power generated on one island to any other island. In addition, Hawai`i law generally limits the ability of independent power producers, such as us, to sell their output to firms other than the respective utilities on each island, without themselves becoming utilities and subject to the State’s Public Utilities Commission (PUC) regulation. Further, any sales of electricity by us to the utilities on each island are subject to the approval of the PUC. Unlike some areas in the Mainland, Hawai`i’s independent power producers have no ability to use utility infrastructure to transfer power to other locations.
The lack of water for agricultural irrigation could adversely affect the operations and profitability of the Land Operations segment.
It is crucial for our land to have access to sufficient, reliable and affordable sources of water in order to conduct any agricultural activity. On Maui, there are regulatory and legal challenges to our ability to divert water from streams. In addition, access to water is subject to weather patterns that cannot reliably be predicted. If we are limited in our ability to divert stream waters for our use or there is insufficient rainfall on an extended basis, this would have a significant, adverse effect on the utility of the land and our ability to employ the land in active agricultural use.
Governmental entities have adopted or may adopt regulatory requirements related to our dams, reservoirs, and other water infrastructure that may adversely affect our operations.
We are subject to inspections and regulations that apply to certain of our dams, reservoirs, and other water infrastructure. Certain of these facilities have deficiencies noted by the State of Hawaii, which we are working with the regulators to resolve. It is possible that current or future requirements imposed on landowners and dam owners/operators may require that we satisfy additional administrative and regulatory requirements and thereby increase the holding costs to us and/or decrease the operational utility of the subject facilities.
Risks Relating to A&B’sOur Materials and& Construction Segment
A&B'sOur Materials and& Construction segment'ssegment’s revenue growth and profitability are dependent on factors outside of itsour control.
A&B'sOur Materials and& Construction segment'ssegment’s ability to grow its revenues and improve profitability areis dependent on factors outside of itsour control, which include, but are not limited to:
decreased government funding for infrastructure projects (see the "Economic“Economic downturns or reductions in government funding of infrastructure projects could reduce A&B'sour revenues and profits from itsour materials and construction businesses." ” risk factor below);
reduced spending by private sector customers resulting from poor economic conditions in Hawaii;Hawai`i;
an increased number of competitors;
less success in competitive bidding for contracts;
a decline in transportation and logistical costs, which may result in customers purchasing material from sources located outside of Hawai`i in a more cost-efficient manner;
limitations on access to necessary working capital and investment capital to sustain growth; and
inability to hire and retain essential personnel and to acquire equipment to support growth; and
inability to identify acquisition candidates and successfully acquire and integrate them into A&B's materials and construction businesses.growth.
Economic downturns or reductions in government funding of infrastructure projects could reduce A&B'sour revenues and profits from itsour materials and construction businesses.
The segment'ssegment’s products are used in public infrastructure projects, which include the construction, maintenance and improvement of highways, streets, roads, airport runways and similar projects. A&B'sOur materials and construction businesses, including itsour aggregates business, are highly dependent on the amount and timing of infrastructure work funded by various governmental entities, which, in turn, depends on the overall condition of the economy, the need for new or replacement infrastructure, the priorities placed on various projects funded by governmental entities and federal, state or local government spending levels. For example, the City and County of Honolulu administration increased road and highway spending from $100 million in 2012-2013 to $120 million in 2013-2014 and $132 million in 2014-2015, A&BWe cannot be assured of the existence, amount and timing of appropriations for spending on these and other future projects, including state and federal spending on roads and highways. Spending on infrastructure could decline for numerous reasons, including decreased revenues received by state and local governments for spending on such projects (including federal funding), and other competing priorities for available state, local and federal funds. State spending on highway and other projects can be adversely affected by decreases or delays in, or uncertainties regarding, federal highway funding. The segment is reliant upon contracts with the City and County of Honolulu, the State of HawaiiHawai`i and the Federal Government for a significant portion of its revenues.
If revenues and profits are impacted by economic downturns or reductions in government funding, the segment’s long-lived assets and goodwill may become impaired.
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A&BWe may face community opposition to the operation or expansion of quarries or other facilities.
Quarries and other segment facilities require special and conditional use permits to operate. Permitting and licensing applications and proceedings and regulatory enforcement proceedings are all matters open to public scrutiny and comment. In addition, the Makakilo quarry is adjacent to residential areas and heavy equipment and explosives are used in the mining process. As a result, from time to time, A&B'sour Materials and& Construction segment operations may be subject to community opposition and adverse publicity that may have a negative effect on operations and delay or limit any future expansion or development of segment operations.
A&B'sOur materials and construction businesses operate only in Hawaii,Hawai`i, and adverse changes to the economy and business environment in HawaiiHawai`i could adversely affect operations and profitability.
Because of itsour operations are concentrated in a specific geographic location, A&B'sour materials and construction businesses are susceptible to fluctuations in operations and profitability caused by changes in economic or other conditions in Hawaii.Hawai`i.
Significant contracts may be canceled or A&Bwe may be disqualified from bidding for new contracts.
Governmental entities typically have the right to cancel their contracts with A&B'sour construction businesses at any time with payment generally only for the work already completed plus a negotiated compensatory overhead recovery amount. In addition, A&B'sour construction businesses could be prohibited from bidding on certain governmental contracts if it failswe fail to maintain qualifications required by those entities, such as maintaining an acceptable safety record.
If A&B'sour materials and construction businesses are unable to accurately estimate the overall risks, requirements or costs when bidding on or negotiating a contract that it iswe are ultimately awarded, the segment may achieve a lower than anticipated profit or incur a loss on the contract.
The majority of the Materials and& Construction segment'ssegment’s revenues are derived from “quantity pricing” (fixed unit price) contracts. Approximately 1019 percent of 20142017 segment revenues and backlog are derived from “lump sum” (fixed total price) contracts. Quantity pricing contracts require the provision of line-item materials at a fixed unit price based on approved quantities irrespective of actual per unit costs. Lump sum contracts require that the total amount of work be performed for a single price irrespective of actual quantities or actual costs. Expected profits on contracts are realized only if costs are accurately estimated and then successfully controlled. If cost estimates for a contract are inaccurate, or if the contract is not performed within cost estimates, then cost overruns may result in losses or cause the contract not to be as profitable as expected.
If A&B'sour materials and construction businesses are unable to attract and retain key personnel and skilled labor, or encounter labor difficulties, the ability to bid for and successfully complete contracts may be negatively impacted.
The ability to attract and retain reliable, qualified personnel is a significant factor that enables A&B'sour materials and construction businesses to successfully bid for and profitably complete itstheir work. This includes members of management, project managers, estimators, supervisors, and foremen. The segment'ssegment’s future success also will also depend on its ability to hire, train and retain, or to attract, when needed, highly skilled management personnel. If competition for these employees is intense, it could be difficult to hire and retain the personnel necessary to support operations. If A&B doeswe do not succeed in retaining itsour current employees and attracting, developing and retaining new highly skilled employees, segment operations and future earnings may be negatively impacted.
A majority of segment personnel are unionized. Any work stoppage or other labor dispute involving unionized workforce, or inability to renew contracts with the unions, could have an adverse effect on operations.
A&B'sOur construction and construction-related businesses may fail to meet schedule or performance requirements of itsour paving contracts.
Asphalt paving contracts have penalties for late completion. In most instances, projects must be completed within an allotted number of business or calendar days from the time the notice to proceed is received, subject to allowances for additional days due to weather delays or additional work requested by the customer. If A&B'sour construction businesses subsequently fail to complete the project as scheduled, A&Bwe may be responsible for contractually agreed-upon liquidated damages, an amount assessed per day beyond the contractually allotted days, at the discretion of the customer. Under these circumstances, the total project cost could exceed original estimates and could result in a loss of profit or a loss on the project. Additionally, A&B'sour construction businesses enter into lump sum and quantity pricing contracts where profits can be adversely
affected by a number of factors beyond itsour control, which can cause actual costs to materially exceed the costs estimated at the time of itsour original bid.
Timing of the award and performance of new contracts could have an adverse effect on Materials and& Construction segment operating results and cash flow.
It is generally very difficult to predict whether and when bids for new projects will be offered for tender, as these projects frequently involve a lengthy and complex design and bidding process, which is affected by a number of factors, such as market conditions, funding arrangements and governmental approvals. Because of these factors, segment results of operations and cash flows may fluctuate from quarter to quarter and year to year, and the fluctuation may be substantial.
The uncertainty of the timing of contract awards after a winning bid is submitted may also present difficulties in matching the size of equipment fleet and work crews with contract needs. In some cases, A&B'sour materials and construction businesses may maintain and bear the cost of more equipment than is currently required, in anticipation of future needs for existing contracts or expected future contracts.
In addition, the timing of the revenues, earnings and cash flows from contracts can be delayed by a number of factors, including delays in receiving material and equipment from suppliers and services from subcontractors and changes in the scope of work to be performed.
Dependence on a limited number of customers could adversely affect A&B'sour materials and construction businesses and results of operations.
Due to the size and nature of the segment'ssegment’s construction contracts, one or a few customers have in the past and may in the future represent a substantial portion of consolidated segment revenues and gross profits in any one year or over a period of several consecutive years. For example, in 2014,2017, approximately 8186 percent of Grace'sGrace’s construction related revenue was generated from projects administered by the federal government, State of HawaiiHawai`i, or the various counties in HawaiiHawai`i where Grace served as general contractor or subcontractor. Similarly, segment backlog frequently reflects multiple contracts for certain customers; therefore, one customer may comprise a significant percentage of backlog at a certain point in time. For example, the State of HawaiiHawai`i comprised approximately 3056 percentof Grace’s construction backlog at December 31, 2014.2017. The loss of business from any such customer, or a default or delay in payment on a significant scale by a customer, could have an adverse effect on A&B'sour materials and construction businesses or results of operations.
A&B'sOur materials and construction businesses are likely to become capital-intensiverequire more capital over the longer term.
The property and machinery needed to produce aggregate products and perform asphaltic concrete paving contracts are expensive. Although capital needs over the next five years are expected to be relatively modest, over the longer term, A&B'sour materials and construction businesses may require increasing annual capital expenditures. The segment'ssegment’s ability to generate sufficient cash flow to fund these expenditures depends on future performance, which will be subject to general economic conditions, industry cycles and financial, business, and other factors affecting operations, many of which are beyond A&B'sour control. If the segment is unable to generate sufficient cash to operate its business, it may be required, among other things, to further reduce or delay planned capital or operating expenditures.
An inability to obtain bonding could limit the aggregate dollar amount of contracts that A&B'sour materials and construction businesses are able to pursue.
As is customary in the construction industry, A&Bwe may be required to provide surety bonds to itsour customers to secure itsour performance under construction contracts. A&B'sOur ability to obtain surety bonds primarily depends upon itsour capitalization, working capital, past performance, management expertise and reputation and certain external factors, including the overall capacity of the surety market. Surety companies consider such factors in relationship to the amount of backlog and their underwriting standards, which may change from time to time. Events that adversely affect the insurance and bonding markets generally may result in bonding becoming more difficult to obtain in the future, or being available only at a significantly greater cost. The inability to obtain adequate bonding would limit the amount that A&B'sour construction businesses are to able bid on new contracts and could have an adverse effect on the segment'ssegment’s future revenues and business prospects.
A&B'sOur Materials and& Construction segment operations are subject to hazards that may cause personal injury or property damage, thereby subjecting A&Bus to liabilities and possible losses, which may not be covered by insurance.
Segment employees are subject to the usual hazards associated with performing construction activities on road construction sites, plants and quarries. Operating hazards can cause personal injury and loss of life, damage to or destruction of property, plant and equipment and environmental damage. A&B maintainsWe maintain general liability and excess liability insurance,
workers’ compensation insurance, auto insurance and other types of insurance, all in amounts consistent with A&B’sour materials and construction businesses'businesses’ risk of loss and industry practice, but this insurance may not be adequate to cover all losses or liabilities may be incurred in operations.
Insurance liabilities are difficult to assess and quantify due to unknown factors, including the severity of an injury, the determination of liability in proportion to other parties, the number of incidents not reported and the effectiveness of the segment'ssegment’s safety program. If insurance claims or costs were above itsour estimates, A&B'sour materials and construction businesses might be required to use working capital to satisfy these claims, which could impact itstheir ability to maintain or expand itstheir operations.
Environmental and other regulatory matters could adversely affect A&B'sour materials and construction businesses'businesses’ ability to conduct its business and could require significant expenditures.
Segment operations are subject to various environmental laws and regulations relating to the management, disposal and remediation of hazardous substances, climate change and the emission and discharge of pollutants into the air and water. A&B'sOur materials and construction businesses could be held liable for such contamination created not only from their own activities but also from the historical activities of others on properties that the segment acquires or leases. Segment operations are also subject to laws and regulations relating to workplace safety and worker health, which, among other
things, regulate employee exposure to hazardous substances. Violations of such laws and regulations could subject A&Bus to substantial fines and penalties, cleanup costs, third-party property damage or personal injury claims. In addition, these laws and regulations have become, and enforcement practices and compliance standards are becoming, increasingly stringent. Moreover, A&Bwe cannot predict the nature, scope or effect of legislation or regulatory requirements that could be imposed, or how existing or future laws or regulations will be administered or interpreted, with respect to products or activities to which they have not been previously applied. Compliance with more stringent laws or regulations, as well as more vigorous enforcement policies of the regulatory agencies, could require substantial expenditures for, among other things, equipment not currently possessed, or the acquisition or modification of permits applicable to segment activities.
Short supplies and highvolatility in the costs of fuel, energy and raw materials may adversely affect A&B'sour materials and construction businesses.
A&B'sOur materials and construction businesses require a continued supply of diesel fuel, electricity and other energy sources for production and transportation. The financial results of these businesses have at times been affected by the high costs of these energy sources. Significant increases in costs or reduced availability of these energy sources have and may in the future reduce financial results. Moreover, fluctuations in the supply and costs of these energy sources can make planning business operations more difficult. A&B doesWe do not hedge itsour fuel price risk, but instead focusesfocus on volume-related price reductions, fuel efficiency, alternative fuel sources, consumption and the natural hedge created by the ability to increase aggregates prices.
Similarly, segment operations also require a continued supply of liquid asphalt, which serves as a key raw material in the production of asphaltic concrete. AsphaltLiquid asphalt is subject to potential supply constraints and significant price fluctuations, which are generally correlated to the price of crude oil, though not as closely as diesel or gasoline, and are beyond the control of A&B'sour materials and construction business.
Risks Relating to A&B’s Agribusiness Segment
The lack Accordingly, significant increases in the price of water for agricultural irrigation could adversely affect Agribusiness operations and profitability.
It is crucial for the Agribusiness segment to have access to reliable sources of water for the irrigation of sugar cane. As further described in “Legal Proceedings,” there are regulatory and legal challenges to the segment’s ability to divert water from streams in Maui. In addition, access to water is subject to weather patterns that cannot be reliably predicted. If the segment is limited in its ability to divert stream waters for its use or there is insufficient rainfall on an extended basis, it wouldcrude oil will have an adverse effectimpact on sugar operations, including possible cessation of operations.
Low raw sugar prices adversely affect the profitability of A&B's sugar business.
The operations and profitabilityfinancial results of the AgribusinessMaterials & Construction segment are substantially affected by market factors, particularly the domestic prices for raw cane sugar. These market factors are influenced by a varietydue to higher costs of forces, including pricesproduction of competing crops and suppliers, weather conditions and United States farm and trade policies. If low sugar prices result in sustained losses for the Agribusiness segment, then depending on the size and duration of those losses, A&B may be required to cease sugar operations. Cessation of sugar operations without other active farming would result inasphaltic concrete. Conversely, significant annual carrying and maintenance costs for the plantation, such as maintaining the water delivery infrastructure, higher property taxes and
maintenance of the lands. Additionally, there would be significant one-time expenses related to a cessation of operations, such as employee severance costs and asset write-downs.
Wet weather during the harvesting season may significantly affect sugar production and yields.
Wet weather during the harvesting season creates muddy field conditions, which reduces the efficiency of harvesting operations and lowers the amount of cane that can be harvested from the fields in a given period of time. Additionally, wet weather also increases the amount of mud and other debris that must be removeddeclines in the processingprice of the cane into sugar, which results in decreased yields.
A&B is subject to risks associated with raw sugar production.
A&B's production of raw sugar is subject to numerous risks that could adversely affect the volumeoil had, and quality of sugar produced. Any of these risks has the potential to adversely affect sugar operations, including possible cessation of operations. These risks include, but are not limited to:
equipment accidents or failures in the factory or the power plant, particularly where equipment is old and difficult to repair or replace;
government restrictions on farming practices, including cane burning and pesticide use;
loss of A&B's major customer;
weather and natural disasters, such as excessive rain, which impacts the efficiency of harvesting operations, and vog, which leads to inefficient and costly no-burn cane harvesting;
increases in costs, including, but not limited to fuel, fertilizer, herbicide and drip tubing;
labor, including labor availability (see risk factor above regarding labor disruptions) and loss of qualified personnel;
lack of demand for sugar production;
failure to comply with food quality and safety requirements;
disease;
uncontrolled fires, including arson; and
weed control.
A&B’s ability to use or lease agricultural lands for agricultural purposes may be limited by government regulation.
Given the large scale of its agricultural landholdings on Maui and Kauai, many of the third parties to whom A&B leases land for agricultural purposes may be characterized as large scale commercial agricultural operations. Recent legislation passed on Kauai places restrictions on the ability of such operations to use land within specified distances of highways, schools, oceans, streams, residences, parks, care homes, hospitals and other similar uses, to grow crops other than ground cover. This legislation also puts significant restrictions regarding, and public notification obligations concerning, pesticide use on such operations and limits their ability to use genetically modified organism (GMO) crops. On Maui, similar legislation passed by a voter initiative places a moratorium on the ability to farm GMO crops. The Kauai and Maui legislation is in the process of being challenged in the courts and, if such legislation is upheld by the courts, or additional legislative agricultural restrictions are passed, such as restrictions on the use of pesticides, the ability of A&B to use or lease its lands for large scale agricultural purposes, and any rents that it can achieve for those lands, may be adversely affected by this and similar legislation.
A&B’s power sales contracts could be replaced on less favorable terms or may not be replaced.
A&B’s power sales contracts expire at various points in the future, may have an adverse impact on our material and may not be replaced or could be replaced on less favorable terms, which could adversely affect Agribusiness profitability.
The market for power sales in Hawaii is limited.
The power distribution systems in Hawaii are small and island-specific; currently, there is no ability to move power generated on one island to any other island. In addition, Hawaii law limits the ability of independent power producers, such as A&B, to sell their output to firms other than the respective utilities on each island, without themselves becoming utilities and subject to the State’s Public Utilities Commission (PUC) regulation. Further, anyconstruction sales of electricity by A&B to the utilities on each island are subject to the approval of the PUC. Unlike some areas in the Mainland, Hawaii’s independent power producers have no ability to use utility infrastructure to transfer power to other locations.
A&B has limited options for carriage of sugar to domestic markets.
In order to directly ship bulk or partially processed food-grade sugar from Maui to markets on the U.S. West Coast, or any alternate U.S. domestic port, A&B must utilize vessels that are subject to the restrictions delineated in Section 27 of the Merchant Marine Act, 1920, commonly referred to as the Jones Act. A&B currently owns a bulk sugar transportation vessel, the MV Moku Pahu, and therefore, A&B is also subject to the restrictions of the Jones Act. Under the Jones Act, all vessels transporting cargo between covered U.S. ports must, subject to limited exceptions, be built in the U.S., registered under the U.S. flag, manned by predominantly U.S. crews, and owned and operated by U.S.-organized companies that are controlled and 75 percent owned by U.S. citizens. U.S.-flagged vessels are generally required to be maintained at higher standards than foreign-flagged vessels and are supervised by, as well as subject to rigorous inspections by, or on behalf of, the U.S. Coast Guard, which requires appropriate certifications and background checks of the crew members. Because of these restrictions, A&B would have limited options for carriage of sugar to domestic markets if the MV Moku Pahu no longer qualified under the Jones Act or were taken out of serviceliquid asphalt concrete, due to its age.
A&B has limited options and strict time constraints for carriagelower costs of molassesimporting asphalt to domestic markets.
Due to a molasses spill at Honolulu Harbor in September 2013, all of the molasses produced by A&B must now be shipped out of Kahului Harbor. A&B currently has the ability to store approximately 20 percent of annual molasses production before having to cease harvest and milling operations,Hawai`i, which cessation wouldmay result in significant additional operating costs. The frequency and timingcustomers sourcing liquid asphalt from competition located outside of vessel arrivals to ship molasses off island are therefore important to A&B's ability to continue its sugar operations without interruption, and there is no assurance that such interruptions will not occur. Additionally, if domestic Jones Act shipping capacity is not available in the market when required, A&B may be forced to sell its molasses to foreign buyers, which would result in lower profitability.Hawai`i.
A&B has aging infrastructure in its sugar factory, irrigation and power facilities.
A&B maintains critical spares for primary factory equipment in the event of a breakdown or failure. However, due to the extensive age and complexity of the mill, factory and power plant, it is possible that damage to equipment may not be repaired in a timely manner or at an acceptable cost, which may adversely affect sugar operations, including possible cessation of operations.A&B also operates renewable energy facilities, some of which are located on conservation-zoned land, which is subject to restrictions on activities conducted on the land. It therefore may not be feasible to expediently repair damage to such facilities should it occur. A&B has property, boiler and machinery, and business interruption insurance for most of such events; however, it is possible that A&B’s insurance coverage may not cover all risk of loss.
Risks Relating to the Separation
If the Separation were to fail to qualify as tax-free for U.S. federal income tax purposes, then A&B, Matson and the shareholders who received their shares of A&B common stock in the Separation could be subject to significant tax liability or tax indemnity obligations.
Matson received a private letter ruling from the IRS (which we refer to as the IRS Ruling) that, for U.S. federal income tax purposes, (i) certain transactions to be effected in connection with the Separation qualify as a reorganization under Sections 355 and/or 368 of the Internal Revenue Code of 1986, as amended (which we refer to as the Code), or as a complete liquidation under Section 332(a) of the Code and (ii) the Separation qualifies as a transaction under Section 355 of the Code. In addition to obtaining the IRS Ruling, Matson received a tax opinion (which we refer to as the Tax Opinion) from the law firm of Skadden, Arps, Slate, Meagher & Flom LLP (which Tax Opinion relies on the effectiveness of the IRS Ruling) substantially to the effect that, for U.S. federal income tax purposes, the Separation and certain related transactions qualify as a reorganization under Section 368 of the Code. The IRS Ruling and Tax Opinion rely on certain facts and assumptions, and certain representations from A&B and Matson regarding the past and future conduct of their respective businesses and other matters. Notwithstanding the IRS Ruling and Tax Opinion, the IRS could determine on audit that the Separation and related transactions should be treated as a taxable transaction if it determines that any of these facts, assumptions, representations or
undertakings are not correct or have been violated, or that the Separation and related transactions should be taxable for other reasons, including as a result of a significant change in stock or asset ownership after the Separation or if the IRS were to disagree with the conclusions in the Tax Opinion that are not covered by the IRS Ruling. If the Separation and related transactions ultimately were determined to be taxable, the distribution of A&B stock in the Separation could be treated as taxable for U.S. federal income tax purposes to the shareholders who received their shares of A&B common stock in the Separation, and such shareholders could incur significant U.S. federal income tax liabilities. In addition, Matson would recognize a gain in an amount equal to the excess of the fair market value of the shares of A&B common stock distributed to Matson's shareholders on the Separation date over Matson tax basis in such shares.
In addition, under the terms of the Tax Sharing Agreement that A&B entered into with Matson, A&B also generally is responsible for any taxes imposed on Matson that arise from the failure of the Separation and certain related transactions to qualify as tax-free for U.S. federal income tax purposes within the meaning of Sections 355 and 368 of the Code, to the extent such failure to qualify is attributable to actions, events or transactions relating to A&B’s stock, assets or business, or a breach of the relevant representations or covenants made by A&B and its subsidiaries in the Tax Sharing Agreement, the materials submitted to the IRS in connection with the request for the IRS Ruling or the representation letter provided to counsel in connection with the Tax Opinion. The amounts of any such taxes could be significant.
A&B is subject to continuing contingent liabilities of Matson following the Separation.
After the Separation, there are several significant areas where the liabilities of Matson may become A&B’s obligations. For example, under the Code and the related rules and regulations, each corporation that was a member of the Matson consolidated tax reporting group during any taxable period or portion of any taxable period ending on or before the effective time of the Separation is severally liable for the U.S. federal income tax liability of the entire Matson consolidated tax reporting group for such taxable period. In connection with the Separation and related transactions, A&B entered into a Tax Sharing Agreement with Matson that allocates the responsibility for prior period taxes of the Matson consolidated tax reporting group between A&B and Matson. If Matson were unable to pay any prior period taxes for which it is responsible, however, A&B could be required to pay the entire amount of such taxes, and such amounts could be significant. Other provisions of U.S. federal, state, local, or foreign law may establish similar liability for other matters, including laws governing tax-qualified pension plans as well as other contingent liabilities.
A court could require that we assume responsibility for obligations allocated to Matson under the Separation and Distribution Agreement.
Under the Separation and Distribution Agreement entered into with Matson, A&B and Matson are each responsible for the debts, liabilities and other obligations related to the businesses that each company owns and operates following the consummation of the Separation. A court, however, could disregard the allocation agreed to between the parties in the Separation and Distribution Agreement and require that A&B assume responsibility for obligations allocated to Matson, particularly if Matson were to refuse or were unable to pay or perform the allocated obligations.
Potential indemnification liabilities to Matson pursuant to the Separation and Distribution Agreement could adversely affect the Company.
Among other things, the Separation and Distribution Agreement provides for indemnification obligations designed to make A&B financially responsible for substantially all liabilities that may exist relating to its business activities, whether incurred prior to or after the Separation. If A&B is required to indemnify Matson under the circumstances set forth in the Separation and Distribution Agreement, A&B may be subject to substantial liabilities.
In connection with the Separation, Matson is required to indemnify A&B for certain liabilities. However, there can be no assurance that the indemnity will be sufficient to insure A&B against the full amount of such liabilities, or that Matson's ability to satisfy its indemnification obligation will not be impaired in the future.
Pursuant to the Separation and Distribution Agreement, Matson is required to indemnify A&B for substantially all liabilities that may exist relating to Matson’s business activities, whether incurred prior to or after the Separation. However, third parties could seek to hold A&B responsible for any of the liabilities that Matson agrees to retain, and there can be no assurance that the indemnity from Matson will be sufficient to protect A&B against the full amount of such liabilities, or that Matson will be able to fully satisfy its indemnification obligations. Moreover, even if A&B ultimately succeeds in recovering from Matson any amounts for which A&B is held liable, A&B may be temporarily required to bear these losses.
The Separation may expose A&B to potential liabilities arising out of state and federal fraudulent conveyance laws.
The Separation is subject to review under various state and federal fraudulent conveyance laws. Fraudulent conveyance laws generally provide that an entity engages in a constructive fraudulent conveyance when (i) the entity transfers assets and does not receive fair consideration or reasonably equivalent value in return and (ii) the entity (a) is insolvent at the time of the transfer or is rendered insolvent by the transfer, (b) has unreasonably small capital with which to carry on its business or (c) intends to incur or believes it will incur debts beyond its ability to repay its debts as they mature. An unpaid creditor or an entity acting on behalf of a creditor (including without limitation a trustee or debtor-in-possession in a bankruptcy by A&B or Matson or any of its respective subsidiaries) may bring a lawsuit alleging that the Separation or any of the related transactions constituted a constructive fraudulent conveyance. If a court accepts these allegations, it could impose a number of remedies, including without limitation, requiring A&B shareholders to return to Matson some or all of the shares of A&B common stock distributed in the distribution.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 3. LEGAL PROCEEDINGS
A&B owns 16,000 acres of watershed lands in East Maui that supply a significant portion of the irrigation water used by Hawaiian Commercial & Sugar Company (“HC&S”), a division of A&B that produces raw sugar.Maui. A&B also held four water licenses to another 30,000 acres owned by the State of HawaiiHawai`i in East Maui which, over the last 10 years, have supplied approximately 56 percent of the irrigation water used by HC&S.Maui. The last of these water license agreements expired in 1986, and all four agreements were then extended as revocable permits that were renewed annually. In 2001, a request was made to the State Board of Land and Natural Resources (the “BLNR”"BLNR") to replace these revocable permits with a long-term water lease. Pending the conclusion by the BLNR of this contested case hearing on the request for the long-term lease, the BLNR has renewedkept the existing permits on a holdover basis. IfThree parties filed a lawsuit on April 10, 2015 (the "4/10/15 Lawsuit") alleging that the CompanyBLNR has been renewing the revocable permits annually rather than keeping them in holdover status. The lawsuit asks the court to void the revocable permits and to declare that the renewals were illegally issued without preparation of an environmental assessment ("EA"). In December 2015, the BLNR decided to reaffirm its prior decisions to keep the permits in holdover status. This decision by the BLNR is being challenged by the three parties. In January 2016, the court ruled in the 4/10/15 Lawsuit that the renewals were not permittedsubject to utilize sufficient quantitiesthe EA requirement, but that the BLNR lacked legal authority to keep the revocable permits in holdover status beyond one year. The court has allowed the parties to make an immediate appeal of stream waters fromthis ruling. In May 2016, the Hawai`i State landsLegislature passed House Bill 2501, which specified that the BLNR has the legal authority to issue holdover revocable permits for the disposition of water rights for a period not to exceed three years. The governor signed this bill into law as Act 126 in East Maui, it could have a material adverse effect onJune 2016. Pursuant to Act 126, the Company’s sugar-growing operations.annual authorization of the existing holdover permits was sought and granted by the BLNR in December 2016 and November 2017.
In addition, on May 24, 2001, petitions were filed by a third party, requesting that the Commission on Water Resource Management of the State of Hawaii (“Hawai`i ("Water Commission”Commission") establish interim instream flow standards (“IIFS”("IIFS") in 27 East Maui streams that feed the Company’sCompany's irrigation system. On September 25, 2008, theThe Water Commission took action on eight of the petitions, resulting in some quantity of water being returned to the streams rather than being utilized for irrigation purposes. In May 2010, the Water Commissioninitially took action on the remaining 19 streams resultingpetitions in additional water being returned to2008 and 2010, but the streams. A petition requestingpetitioners requested a contested case hearing to challenge the Water Commission’sCommission's decisions was filed with the Commission by the opposing third party. On October 18, 2010, theon certain petitions. The Water Commission denied the petitioner’s request for a contested case hearing. On November 17, 2010,hearing request, but the petitioner filed an appeal ofpetitioners successfully appealed the Water Commission’s denial to the Hawaii Intermediate Court of Appeals. On August 31, 2011, the HawaiiHawai`i Intermediate Court of Appeals, dismissedwhich ordered the petitioner’s appeal. On November 29, 2011, the petitioner appealed the Hawaii Intermediate Court of Appeals’ dismissal to the Hawaii Supreme Court. On January 11, 2012, the Hawaii Supreme Court vacated the Hawaii Intermediate Court of Appeals’ dismissal of the petitioner’s appeal and remanded the appeal back to the Intermediate Court of Appeals. On November 30, 2012, the Intermediate Court of Appeals remanded the case back to the Water Commission, ordering the Commission to grant the petitioner’s request for a contested case hearing. On July 17, 2013, therequest. The Commission then authorized the appointment of a hearings officer for the contested case hearing. On August 20, 2014, the Commissionhearing and expanded the scope of the contested case
hearing to encompass all 27 petitions for amendment of the IIFS for East Maui streams includingin 23 hydrologic units. The evidentiary phase of the eight petitions that the Commission previously acted upon in 2008. Hearingshearing before the Commission-appointed hearings officer are scheduledwas completed on April 2, 2015. On January 15, 2016, the Commission-appointed hearings officer issued his recommended decision on the petitions. The recommended decision would restore water to beginstreams in 11 of the 23 hydrologic units. In March 2015,2016, the hearings officer ordered a reopening of the contested case proceedings in light of the Company’s January 2016 announcement to cease sugar operations at HC&S by the end of the year and noto transition to a new diversified agricultural model on the former sugar lands. In April 2016, the Company announced its commitment to fully and permanently restore the priority taro streams identified by the petitioners. Re-opened evidentiary hearings occurred in the first quarter of 2017 and a decision is expected until late 2015.pending. In August 2017, the hearings officer in the reopened evidentiary hearing issued his proposed decision. The Commission heard arguments on the proposed decision in October 2017.
Water loss that may result
HC&S also used water from four streams in Central Maui ("Na Wai Eha") to irrigate its agricultural lands in Central Maui. Beginning in 2004, the Water Commission’s future decisions will impose challenges to the Company’s sugar growing operations. Water loss will result in a combination of future suppression of sugar yields and negative financial impacts on the Company that will only be quantifiable over time. Accordingly, the Company is unable to predict, at this time, the total impact of the water proceedings.
On June 25, 2004, two organizations filed a petition with the Water Commission began proceedings to establish IIFS for four streams in West Maui to increase the amountNa Wai Eha streams. Before the IIFS proceedings were concluded, the Water Commission designated Na Wai Eha as a surface water management area, meaning that all uses of water to be returned tofrom these streams. The West Maui irrigation system provided approximately 14 percent ofstreams required water use permits issued by the irrigation water used by HC&S overWater Commission. Following contested case proceedings, the last 10 years. The Water Commission issued aestablished IIFS in 2010, but that decision in June 2010, which requiredwas appealed, and the return of water in two of the four streams. In July 2010, the two organizations appealed the Water Commission’s decision to the Hawaii Intermediate Court of Appeals. On June 23, 2011, the case was transferred to the Hawaii Supreme Court. On August 15, 2012, the HawaiiHawai`i Supreme Court overturned the Water Commission's decision and remanded the case to the Water Commission for further considerationproceedings. The parties to the IIFS contested case settled the case in connection with2014. Thereafter, proceedings for the establishment of the
IIFS. On April 4, 2014, the parties entered into an out-of-court settlement on the amountissuance of water use permits commenced with over 100 applicants, including HC&S, vying for permits. While the water use permit proceedings were ongoing, A&B announced the cessation of sugar cane cultivation at the end of 2016. This announcement triggered a re-opening and reconsideration of the 2014 IIFS decision. Contested case proceedings were held to be returnedsimultaneously reconsider the IIFS, determine appurtenant water rights, and consider applications for water use permits. Based on those proceedings, the Hearing Officer issued his recommendation to the four streams, and the Water Commission approvedon November 1, 2017. The Commission has not yet issued its decision.
If the settlement on April 17, 2014.
In January 2013, the Environmental Protection Agency (“EPA”) finalized nationwide standards for controlling hazardous air pollutant emissions from industrial, commercial, institutional boilers and process heaters (the “Boiler MACT” rule), which apply to HC&S’s three boilers at the Puunene Sugar Mill. Compliance with the Boiler MACT rule is required by January 2016.
The Company anticipates that the Puunene Mill boilers will be able to meet the new emissions limits without significant modifications and that compliance costs will be less than $2 million, based on currently available information. The Company is currently developing strategies for achieving compliance withnot permitted to use sufficient quantities of stream waters, it would have a material adverse effect on the new regulations, including identifying required upgrades to boilerCompany’s pursuit of a diversified agribusiness model in subsequent years and air pollution control instrumentation and developing the complex compliance monitoring approaches necessary to accommodate the facility’s multi-fuel operations. There remains significant uncertainty as to the final requirementsvalue of the Boiler MACT rule, pending an EPA response to various petitions for reconsideration and ongoing litigation. Any resulting changes to the Boiler MACT rule could adversely impact the Company’s compliance schedule or cost of compliance.
On June 24, 2014, the Hawaii State Department of Health (“DOH”) Clean Air Branch issued a Notice and Finding of Violation and Order (“NFVO”) to HC&S alleging various violations relating to the operation of HC&S’s three boilers at its sugar mill. The DOH reviewed a 5-year period (2009-2013) and alleged violations relating primarily to periods of excess visible emissions and operation of the wet scrubbers installed to control particulate matter emissions from the boiler stacks. All incidents were self-reported by HC&S to the DOH prior to the DOH’s review, and there is no indication that these deviations resulted in any violation of health-based air quality standards. The NFVO includes an administrative penalty of $1.3 million, which HC&S has contested. The Company is unable to predict, at this time, the outcome or financial impact of the NFVO but does not believe that the financial impact of the NFVO will be material to its financial condition, cash flows, or results of operations.agricultural lands.
A&B is a party to, or may be contingently liable in connection with, other legal actions arising in the normal conduct of its businesses, the outcomes of which, in the opinion of management after consultation with counsel, would not have a material effect on A&B’s consolidated financial statements as a whole.
ITEM 4. MINE SAFETY DISCLOSURES
The information concerning mine safety violations or other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulations S-K (17 CFR 229.104) is included in Exhibit 95 to this Annual Report on Form 10-K.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Prior to June 29, 2012, A&B’s businesses included Matson Navigation Company, a wholly owned subsidiary, that provided ocean transportation, truck brokerage and intermodal services. As part of a strategic initiative designed to allow A&B to independently execute its strategies and to best enhance and maximize its earnings, growth prospects and shareholder value, A&B made a decision to separate the transportation businesses from the Hawaii real estate and agriculture businesses. In preparation for the Separation, A&B modified its legal-entity structure and became a wholly owned subsidiary of a newly created entity, Alexander & Baldwin Holdings, Inc. On June 29, 2012, Holdings distributed to its shareholders all of the shares of A&B stock. Holders of Holdings common stock continued to own the transportation businesses, but also received one share of A&B common stock for each share of Holdings common stock held at the close of business on June 18, 2012, the record date. Following the Separation, Holdings changed its name to Matson, Inc. On July 2, 2012, A&B began regular trading on the New York Stock Exchange under the ticker symbol “ALEX” as an independent, public company.
As of February 14, 2015,15, 2018, there were 2,555 2,244shareholders of record of A&B common stock. In addition, Cede & Co., which appears as a single record holder, represents the holdings of thousands of beneficial owners of A&B common stock.
The following performance graph compares the monthly dollar change in the cumulative shareholder return on the Company’s common stock since the Separation:stock:
Trading volume averaged 203,642213,042 shares a day in 2014, 192,9772017, 178,858 shares a day in 20132016, and 221,420172,542 shares a day in 2012. 2015.
The quarterly intra-day high and low sales prices and end of quarter closing prices, following Separation, as reported by the New York Stock Exchange, were as follows:
| | | Dividends Paid Per Share | | Market Price | Dividends Paid Per Share | | Market Price |
| | | High | | Low | | Close | | | High | | Low | | Close |
2013 | | | | | | | | |
2016 | | | | | | | | |
First Quarter | $ | — |
| | $ | 36.86 |
| | $ | 28.82 |
| | $ | 35.75 |
| $ | 0.06 |
| | $ | 37.83 |
| | $ | 28.82 |
| | $ | 36.68 |
|
Second Quarter | $ | — |
| | $ | 40.95 |
| | $ | 32.55 |
| | $ | 39.75 |
| $ | 0.06 |
| | $ | 39.36 |
| | $ | 32.94 |
| | $ | 36.14 |
|
Third Quarter | $ | — |
| | $ | 46.23 |
| | $ | 34.32 |
| | $ | 36.02 |
| $ | 0.06 |
| | $ | 42.80 |
| | $ | 35.12 |
| | $ | 38.42 |
|
Fourth Quarter | $ | 0.04 |
| | $ | 41.97 |
| | $ | 35.71 |
| | $ | 41.73 |
| $ | 0.07 |
| | $ | 46.43 |
| | $ | 36.98 |
| | $ | 44.87 |
|
| | | | | | | | | | | | | | |
2014 | | | | | | | | |
2017 | | | | | | | | |
First Quarter | $ | 0.04 |
| | $ | 45.16 |
| | $ | 36.98 |
| | $ | 42.56 |
| $ | 0.07 |
| | $ | 46.27 |
| | $ | 40.78 |
| | $ | 44.52 |
|
Second Quarter | $ | 0.04 |
| | $ | 43.19 |
| | $ | 36.61 |
| | $ | 41.45 |
| $ | 0.07 |
| | $ | 46.87 |
| | $ | 39.53 |
| | $ | 41.38 |
|
Third Quarter | $ | 0.04 |
| | $ | 42.38 |
| | $ | 35.96 |
| | $ | 35.97 |
| $ | 0.07 |
| | $ | 46.67 |
| | $ | 40.58 |
| | $ | 46.33 |
|
Fourth Quarter | $ | 0.05 |
| | $ | 40.99 |
| | $ | 33.98 |
| | $ | 39.26 |
| $ | 15.92 |
| | $ | 46.96 |
| | $ | 27.50 |
| | $ | 27.74 |
|
A&B commenced a quarterly dividend of $0.04 per share inDuring the fourth quarter of 2013, and increased2017, the dividend rate by $0.01 per share per quarterCompany declared a distribution to its shareholders in the fourth quarteraggregate amount of 2014. Although A&B$783 million (approximately $15.92 per share) ("Special Distribution"), which represented the Company's previously undistributed non-REIT earnings and profits accumulated prior to January 1, 2017, the Company's REIT taxable income for the 2017 taxable year, and a substantial portion of the Company's estimated REIT taxable income for the 2018 taxable year. The Company completed the payment of the Special Distribution on January 23, 2018 through an aggregate of $156.6 million in cash and the issuance of 22,587,299 shares of the Company's common stock.
The Company has completed a conversion process to qualify as a REIT commencing with the taxable year ended December 31, 2017. As a REIT the Company is generally required to distribute at least 90% of its REIT taxable income to its shareholders (determined without regard to the dividends paid deduction and excluding any net capital gains). Generally, the Company expects to continue paying quarterly cash dividends on its common stock,distribute all or substantially all of the declaration and payment of dividends in the future areREIT taxable income, including net capital gains, so as to not be subject to the discretion of theincome or excise tax on undistributed REIT taxable income. The Company's Board of Directors, andin its sole discretion, will depend upondetermine on a quarterly basis the amount of cash to be distributed to the Company's shareholders based on a number of factors including, but not limited to, A&B's financial condition, results of operations, cash flow and capital requirements, economic conditions, tax considerations, borrowing capacity and other factors, deemed relevant by the Board of Directors.including debt covenant restrictions, that may impose limitations on cash payments and plans for future acquisitions and divestitures.
A&B common stock is included in the Dow Jones U.S. Real Estate Index, the Russell 2000 Index, the Russell 3000 Index, the Dow Jones U.S. Composite Average and the S&P MidCap 400.400 Diversified REITs Sub Industry Index.
OnIn October 29, 2013,2017, A&B's&B’s Board of Directors authorized A&B to repurchase up to two$150 million shares of its common stock beginning on January 1, 2014.November 8, 2017 through December 31, 2019. The authorization expiressupersedes a previous authorization that was originally set to expire on December 31, 2017. No shares were repurchased in 2017, 2016, or 2015 and replaced an authorization that expired on December 31, 2013. A&B did not repurchase any of its common stock in 2014, 2013 or 2012.under such plan.
Securities authorized for issuance under equity compensation plans as of December 31, 2014,2017, included:
| | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | Number of securities to be issued upon exercise of outstanding options, warrants and rights | Weighted-average exercise price of outstanding options, warrants and rights | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
| (a) | (b) | (c) | (a) 1 | (b) 1 | (c) 2 |
Equity compensation plans approved by security holders | 1,124,576 | $18.84 | 1,376,473* | 630,500 | $12.58 | 1,064,838 |
Equity compensation plans not approved by security holders | — | |
Total | 1,124,576 | $18.84 | 1,376,473 | 630,500 | $12.58 | 1,064,838 |
| |
* | Under the 2013 Incentive Compensation Plan, 1,376,473 shares may be issued either as restricted stock grants, restricted stock unit grants, or stock option grants. |
1 Number of securities reflects the antidilutive adjustments to outstanding stock option awards, including the number of stock options and the weighted average price for such awards, as a result of the Company's Special Distribution that was declared on November 16, 2018 and settled on January 23, 2018 in connection with its conversion to a REIT.
2 Under the 2012 Incentive Compensation Plan, 1,064,838 shares may be issued either as restricted stock grants, restricted stock unit grants, or stock option grants.
The following are the Company's recent purchases of equity securities and use of proceeds for the fourth quarter of fiscal year 2017.
|
| | | | |
Issuer Purchases of Equity Securities |
Period | Total Number of Shares Purchased1 | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
October 1-31, 2017 | 1,672 | $45.24 | — | — |
November 1-30, 2017 | — | $— | — | — |
December 1-31, 2017 | 256,928 | $28.72 | — | — |
1 Represents shares accepted in satisfaction of tax withholding obligations arising upon option exercises.
ITEM 6. SELECTED FINANCIAL DATA
The following should be read in conjunction with Item 8, “Financial Statements and Supplementary Data,” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (dollars and shares in millions, except shareholders of recordItem 8, “Financial Statements and per-share amounts):Supplementary Data.”
|
| | | | | | | | | | | | | | | | | | | |
| 2014 | | 2013 | | 2012 | | 2011 | | 2010 |
Revenue: |
|
| |
|
| |
|
| |
|
| |
|
|
Real Estate: |
|
| |
|
| |
|
| |
|
| |
|
|
Leasing | $ | 125.6 |
| | $ | 110.4 |
| | $ | 100.6 |
| | $ | 99.7 |
| | $ | 93.8 |
|
Development and Sales | 150.0 |
| | 423.0 |
| | 32.2 |
| | 59.8 |
| | 131.0 |
|
Less amounts reported in discontinued operations1 | (70.4 | ) | | (369.2 | ) | | (45.3 | ) | | (81.9 | ) | | (154.0 | ) |
Materials and Construction2 | 234.3 |
| | 54.9 |
| | — |
| | — |
| | — |
|
Agribusiness3 | 120.5 |
| | 146.1 |
| | 182.3 |
| | 157.5 |
| | 165.6 |
|
Reconciling items4 | — |
| | — |
| | (8.3 | ) | | — |
| | — |
|
Total revenue | $ | 560.0 |
| | $ | 365.2 |
| | $ | 261.5 |
| | $ | 235.1 |
| | $ | 236.4 |
|
|
|
| |
|
| |
|
| |
|
| |
|
|
Operating Profit (Loss): |
|
| |
|
| |
|
| |
|
| |
|
|
Real Estate: |
|
| |
|
| |
|
| |
|
| |
|
|
Leasing | $ | 47.5 |
| | $ | 43.4 |
| | $ | 41.6 |
| | $ | 39.3 |
| | $ | 35.3 |
|
Development and Sales5 | 85.7 |
| | 44.4 |
| | (4.4 | ) | | 15.5 |
| | 50.1 |
|
Less amounts reported in discontinued operations1 | (56.2 | ) | | (36.7 | ) | | (21.1 | ) | | (38.8 | ) | | (64.6 | ) |
Materials and Construction2 | 25.9 |
| | 2.9 |
| | — |
| | — |
| | — |
|
Agribusiness3 | (11.8 | ) | | 10.7 |
| | 20.8 |
| | 22.2 |
| | 6.1 |
|
Total operating profit | 91.1 |
| | 64.7 |
| | 36.9 |
| | 38.2 |
| | 26.9 |
|
Interest expense | (29.0 | ) | | (19.1 | ) | | (14.9 | ) | | (17.1 | ) | | (17.3 | ) |
General corporate expenses | (18.6 | ) | | (17.4 | ) | | (15.1 | ) | | (19.9 | ) | | (22.7 | ) |
Reduction in KRS II carrying value, net6 | (14.7 | ) | | — |
| | — |
| | — |
| | — |
|
Acquisition/Separation costs | — |
| | (4.6 | ) | | (6.8 | ) | | — |
| | — |
|
Income (loss) from continuing operations before income taxes | 28.8 |
| | 23.6 |
| | 0.1 |
| | 1.2 |
| | (13.1 | ) |
Income tax expense (benefit)7 | (1.4 | ) | | 11.1 |
| | (5.9 | ) | | 2.8 |
| | (5.0 | ) |
Income (loss) from continuing operations | 30.2 |
| | 12.5 |
| | 6.0 |
| | (1.6 | ) | | (8.1 | ) |
Income from discontinued operations | 34.3 |
| | 22.3 |
| | 12.8 |
| | 23.3 |
| | 41.2 |
|
Net income | 64.5 |
| | 34.8 |
| | 18.8 |
| | 21.7 |
| | 33.1 |
|
Income attributable to non-controlling interest | (3.1 | ) | | (0.5 | ) | | — |
| | — |
| | — |
|
Net income attributable to A&B | $ | 61.4 |
| | $ | 34.3 |
| | $ | 18.8 |
| | $ | 21.7 |
| | $ | 33.1 |
|
| | | | | | | | | |
Identifiable Assets: | | | | | | | | | |
Real Estate: | | | | | | | | | |
Leasing | $ | 1,121.6 |
| | $ | 1,113.4 |
| | $ | 771.3 |
| | $ | 772.0 |
| | $ | 761.3 |
|
Development and Sales8 | $ | 634.3 |
| | $ | 640.9 |
| | $ | 504.8 |
| | $ | 451.5 |
| | $ | 420.3 |
|
Agribusiness | $ | 162.8 |
| | $ | 160.0 |
| | $ | 149.9 |
| | $ | 157.8 |
| | $ | 153.3 |
|
Materials and Construction | $ | 385.9 |
| | $ | 358.7 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Other | $ | 25.3 |
| | $ | 10.6 |
| | $ | 11.3 |
| | $ | 5.3 |
| | $ | 6.6 |
|
Total assets | $ | 2,329.9 |
| | $ | 2,283.6 |
| | $ | 1,437.3 |
| | $ | 1,386.6 |
| | $ | 1,341.5 |
|
|
| | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
(In millions, except per share amounts) | 2017 | | 2016 | | 2015 | | 2014 | | 20131 |
Consolidated statements of operations data2: | | | | | | | | | |
Operating Revenue: | | | | | | | | | |
Commercial Real Estate | $ | 136.9 |
| | $ | 134.7 |
| | $ | 133.6 |
| | $ | 125.3 |
| | $ | 78.5 |
|
Land Operations | 84.5 |
| | 61.9 |
| | 120.2 |
| | 96.7 |
| | 104.7 |
|
Materials & Construction | 204.1 |
| | 190.9 |
| | 219.0 |
| | 234.3 |
| | 54.9 |
|
Total Operating Revenue | 425.5 |
| | 387.5 |
| | 472.8 |
| | 456.3 |
| | 238.1 |
|
Operating Costs and Expenses: | | | | | | | | | |
Cost of Commercial Real Estate | 75.5 |
| | 79.0 |
| | 80.4 |
| | 78.0 |
| | 46.6 |
|
Cost of Land Operations | 60.4 |
| | 35.0 |
| | 71.1 |
| | 57.4 |
| | 69.4 |
|
Cost of Materials & Construction | 166.1 |
| | 154.5 |
| | 175.7 |
| | 191.3 |
| | 47.6 |
|
Selling, general and administrative | 66.4 |
| | 52.0 |
| | 51.6 |
| | 52.9 |
| | 41.2 |
|
REIT evaluation/conversion costs3 | 15.2 |
| | 9.5 |
| | — |
| | — |
| | — |
|
Impairment of real estate assets4 | 22.4 |
| | 11.7 |
| | — |
| | — |
| | — |
|
Acquisition/ separation costs5 | — |
| | — |
| | — |
| | — |
| | 4.6 |
|
Total operating costs and expenses | 406.0 |
| | 341.7 |
| | 378.8 |
| | 379.6 |
| | 209.4 |
|
Operating Income | 19.5 |
| | 45.8 |
| | 94.0 |
| | 76.7 |
| | 28.7 |
|
Income related to joint ventures6 | 7.2 |
| | 19.2 |
| | 36.8 |
| | 1.8 |
| | (2.3 | ) |
Reductions in solar investments, net7 | (2.6 | ) | | (9.8 | ) | | (2.6 | ) | | (14.7 | ) | | — |
|
Interest and other income, net | 2.1 |
| | (1.7 | ) | | (2.5 | ) | | 6.1 |
| | 2.7 |
|
Interest expense, net | (25.6 | ) | | (26.3 | ) | | (26.8 | ) | | (29.0 | ) | | (19.1 | ) |
Gain on insurance proceeds | — |
| | — |
| | — |
| | — |
| | 2.4 |
|
Income from continuing operations before income taxes and net gain (loss) on sale of improved properties | 0.6 |
| | 27.2 |
| | 98.9 |
| | 40.9 |
| | 12.4 |
|
Income tax benefit (expense)7 | 218.2 |
| | 0.5 |
| | (37.0 | ) | | (4.1 | ) | | (7.0 | ) |
Income from continuing operations before net gain (loss) on sale of improved properties | 218.8 |
| | 27.7 |
| | 61.9 |
| | 36.8 |
| | 5.4 |
|
Net gain (loss) on sale of improved properties, net of income taxes8 | 9.3 |
| | 5.0 |
| | (1.1 | ) | | — |
| | — |
|
Income from continuing operations | 228.1 |
| | 32.7 |
| | 60.8 |
| | 36.8 |
| | 5.4 |
|
Income (loss) from discontinued operations, net of tax | 2.4 |
| | (41.1 | ) | | (29.7 | ) | | 27.7 |
| | 29.4 |
|
Net income (loss) | 230.5 |
| | (8.4 | ) | | 31.1 |
| | 64.5 |
| | 34.8 |
|
Income attributable to noncontrolling interest | (2.2 | ) | | (1.8 | ) | | (1.5 | ) | | (3.1 | ) | | (0.5 | ) |
Net income (loss) attributable to A&B | $ | 228.3 |
| | $ | (10.2 | ) | | $ | 29.6 |
| | $ | 61.4 |
| | $ | 34.3 |
|
| | | | | | | | | |
Capital expenditures9,10,11 | $ | 42.5 |
| | $ | 119.6 |
| | $ | 44.7 |
| | $ | 75.1 |
| | $ | 505.3 |
|
| | | | | | | | | |
Depreciation and amortization11 | $ | 41.4 |
| | $ | 119.5 |
| | $ | 55.7 |
| | $ | 55.0 |
| | $ | 41.7 |
|
| | | | | | | | | |
Earnings (loss) available to A&B shareholders per share:
| | | | | | | | | |
Basic: | | | | | | | | | |
Continuing operations available to A&B Shareholders | $ | 4.63 |
| | $ | 0.66 |
| | $ | 1.15 |
| | $ | 0.69 |
| | $ | 0.11 |
|
Discontinued operations available to A&B Shareholders | 0.05 |
| | (0.84 | ) | | (0.61 | ) | | 0.57 |
| | 0.66 |
|
Basic earnings per share available to A&B Shareholders | $ | 4.68 |
| | $ | (0.18 | ) | | $ | 0.54 |
| | $ | 1.26 |
| | $ | 0.77 |
|
Diluted: | | | | | | | | | |
Continuing operations available to A&B Shareholders | $ | 4.30 |
| | $ | 0.65 |
| | $ | 1.14 |
| | $ | 0.68 |
| | $ | 0.11 |
|
SELECTED FINANCIAL DATA (CONTINUED)
|
| | | | | | | | | | | | | | | | | | | |
| 2014 |
| 2013 |
| 2012 |
| 2011 |
| 2010 |
Capital Expenditures: |
|
|
|
|
|
|
|
|
|
Real Estate: |
|
|
|
|
|
|
|
|
|
Leasing9 | $ | 51.8 |
|
| $ | 488.5 |
| | $ | 23.1 |
| | $ | 43.6 |
| | $ | 164.7 |
|
Development and Sales10 | — |
|
| 0.1 |
| | — |
| | 5.2 |
| | 0.1 |
|
Agribusiness11 | 10.8 |
|
| 11.8 |
| | 31.7 |
| | 10.5 |
| | 6.8 |
|
Materials and Construction2 | 10.7 |
|
| 4.8 |
| | — |
| | — |
| | — |
|
Other | 1.8 |
|
| 0.1 |
| | — |
| | — |
| | 0.3 |
|
Total capital expenditures | $ | 75.1 |
|
| $ | 505.3 |
|
| $ | 54.8 |
|
| $ | 59.3 |
|
| $ | 171.9 |
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization: |
|
|
|
|
|
|
|
|
|
Real Estate: |
|
|
|
|
|
|
|
|
|
Leasing1 | $ | 26.9 |
|
| $ | 24.3 |
| | $ | 22.0 |
| | $ | 21.6 |
| | $ | 20.3 |
|
Development and Sales | 0.2 |
|
| 0.2 |
| | 0.2 |
| | 0.2 |
| | 0.2 |
|
Agribusiness | 11.5 |
|
| 11.7 |
| | 11.6 |
| | 11.9 |
| | 12.7 |
|
Materials and Construction2 | 15.2 |
|
| 4.4 |
| | — |
| | — |
| | — |
|
Other | 1.2 |
|
| 1.1 |
| | 1.3 |
| | 1.1 |
| | 2.0 |
|
Total depreciation and amortization | $ | 55.0 |
|
| $ | 41.7 |
|
| $ | 35.1 |
|
| $ | 34.8 |
|
| $ | 35.2 |
|
| | | | | | | | | |
Earnings (loss) per share12: | | | | | | | | | |
Basic: | | | | | | | | | |
Continuing operations attributable to A&B | $ | 0.56 |
|
| $ | 0.27 |
| | $ | 0.14 |
|
| $ | (0.04 | ) |
| $ | (0.19 | ) |
Discontinued operations attributable to A&B | $ | 0.70 |
|
| $ | 0.50 |
| | $ | 0.30 |
|
| $ | 0.55 |
|
| $ | 0.97 |
|
Basic earnings per share attributable to A&B | $ | 1.26 |
| | $ | 0.77 |
| | $ | 0.44 |
| | $ | 0.51 |
| | $ | 0.78 |
|
Diluted: | | | | | | | | | |
Continuing operations attributable to A&B | $ | 0.55 |
| | $ | 0.26 |
| | $ | 0.14 |
| | $ | (0.04 | ) | | $ | (0.19 | ) |
Discontinued operations attributable to A&B | $ | 0.70 |
| | $ | 0.50 |
| | $ | 0.30 |
| | $ | 0.55 |
| | $ | 0.97 |
|
Diluted earnings per share attributable to A&B | $ | 1.25 |
| | $ | 0.76 |
| | $ | 0.44 |
| | $ | 0.51 |
| | $ | 0.78 |
|
| | | | | | | | | |
Cash dividends declared per common share | $ | 0.17 |
| | $ | 0.04 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| | | | | | | | | |
Balance sheet data (in millions): | | | | | | | | | |
Investment in real estate and joint ventures | $ | 1,639.9 |
| | $ | 1,606.8 |
| | $ | 1,203.4 |
| | $ | 1,165.0 |
| | $ | 1,123.8 |
|
Total assets | $ | 2,329.9 |
| | $ | 2,283.6 |
| | $ | 1,437.3 |
| | $ | 1,386.6 |
| | $ | 1,341.5 |
|
Total liabilities | $ | 1,115.1 |
| | $ | 1,114.9 |
| | $ | 526.4 |
| | $ | 662.6 |
| | $ | 652.9 |
|
Long-term debt – non-current | $ | 631.5 |
| | $ | 605.5 |
| | $ | 220.0 |
| | $ | 327.2 |
| | $ | 249.6 |
|
Total equity (includes non-controlling interest) | $ | 1,214.8 |
| | $ | 1,168.7 |
| | $ | 910.9 |
| | $ | 724.0 |
| | $ | 688.6 |
|
|
| | | | | | | | | | | | | | | | | | | |
Discontinued operations available to A&B Shareholders | 0.04 |
| | (0.83 | ) | | (0.60 | ) | | 0.57 |
| | 0.65 |
|
Diluted earnings per share available to A&B Shareholders | $ | 4.34 |
| | $ | (0.18 | ) | | $ | 0.54 |
| | $ | 1.25 |
| | $ | 0.76 |
|
| | | | | | | | | |
Cash dividends declared per common share | $ | 4.48 |
| | $ | 0.25 |
| | $ | 0.21 |
| | $ | 0.17 |
| | $ | 0.04 |
|
| | | | | | | | | |
| As of December 31, |
(In millions) | 2017 | | 2016 | | 2015 | | 2014 | | 20131 |
Consolidated balance sheet data: | | | | | | | | | |
Investment in real estate and joint ventures | $ | 1,557.5 |
| | $ | 1,573.9 |
| | $ | 1,564.6 |
| | $ | 1,639.9 |
| | $ | 1,606.8 |
|
Total assets12 | $ | 2,231.2 |
| | $ | 2,156.3 |
| | $ | 2,242.3 |
| | $ | 2,321.1 |
| | $ | 2,274.7 |
|
Total liabilities12 | $ | 1,572.1 |
| | $ | 932.3 |
| | $ | 1,003.6 |
| | $ | 1,107.3 |
| | $ | 1,108.2 |
|
Redeemable noncontrolling interest | $ | 8.0 |
| | $ | 10.8 |
| | $ | 11.6 |
| | $ | — |
| | $ | — |
|
Total equity (includes noncontrolling interest) | $ | 651.1 |
| | $ | 1,213.2 |
| | $ | 1,227.1 |
| | $ | 1,213.8 |
| | $ | 1,166.5 |
|
Long-term debt – non-current12 | $ | 585.2 |
| | $ | 472.7 |
| | $ | 496.6 |
| | $ | 632.0 |
| | $ | 606.6 |
|
| |
1 | Amounts recast to reflect discontinued operations. |
| |
2
| 2013 includes the results, capital expenditures, and depreciation and amortization of Grace from the acquisition date of October 1, 2013 through December 31, 2013. |
| |
32
| Includes a $4.9 million gain in 2010 relatedAmounts recast to an agriculture disaster relief payment for drought experienced in prior years.reflect the adoption of Financial Accounting Standards Board Accounting Standards Update No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. |
3 Costs related to the Company's in-depth evaluation of and conversion to a REIT.
| |
4 | RepresentsDuring the saleyear ended December 31, 2017, the Company recorded impairments of a 286-acre agricultural parcel in 2012$22.4 million related to three mainland commercial properties classified as “Gain onheld for sale as of agricultural parcel”December 31, 2017. During the year ended December 31, 2016, A&B recorded non-cash impairment charges of $11.7 million related to certain non-active, long-term development projects in the Consolidated Statements of Income, but reflected as revenue for segment reporting purposes.its Land Operations segment. |
5 Acquisition/separation costs relate to the acquisition of Grace Pacific LLC on October 1, 2013.
| |
56
| The Real Estate Development and Sales segment includes approximately $2.0 million, $4.2 million, $(8.3) million, $(7.9) million, and $2.0 million in equity in earnings (losses) from its various real estateIncome (loss) related to joint ventures for 2014, 2013, 2012, 2011, and 2010, respectively. Included in operating profit areinclude non-cash impairment and equity losses ofas follows: (1) $5.1 million in 2016 related to certain joint venture development projects in the Land Operations segment and a surplus parcel held by an unconsolidated joint venture in the Materials & Construction segment, (2) $0.3 million related to the sale of Crossroads in 2014, and (3) $6.3 million in 2013 related to the consolidation of The Shops at Kukui'ula in 2013, $9.8 million related to the Bakersfield joint venture and Santa Barbara real estate project in 2012, and $6.4 million related to the Waiawa real estate joint venture in 2011.Kukui`ula. |
7 Represents non-cash reductions in the carrying value of A&B’s KRS II and Waihonu joint venture solar investments. Tax benefits associated with joint venture solar investments are included in Income tax benefit (expense).
358 Amounts in 2017 represent the sales of one office building in Maui, Hawai`i in January 2017 and one industrial property in California in November 2017. Amounts in 2016 represent the sales of two California properties and one Utah office property in June 2016. Amounts in 2015 represent the sales of one Colorado retail property in March 2015, one Texas office building in May 2015, and one Washington office building in December 2015.
| |
69 Represents gross capital additions to and acquisitions in or for the commercial real estate portfolio, including gross tax-deferred property purchases, but excluding the assumption of debt, that are reflected as non-cash transactions in the Consolidated Statements of Cash Flows.
| Represents a non-cash reduction in the carrying value of a $23.8 million tax equity investment in a 12-megawatt solar farm on Kauai (KRS II) that was made in July 2014. Tax benefits associated with the KRS II investment are accompanied by non-cash reductions of the investment's carrying value. Tax benefits associated with the investment are included in the Income tax expense (benefit) line item in the Consolidated Statements of Income.
|
| |
7
| The Company has revised income taxes for misstatements as further detailed in Note 1 to the consolidated financial statements. The Company has corrected these misstatements and revised balances are reflected in the Selected Financial Data table. The correction of these errors was immaterial to the consolidated financial statements taken as a whole and had no impact on pre-tax income or cash flows from operating, investing or financing activities. For the year ended December 31, 2014, income taxes were overstated due to a $1.6 million out-of-period income tax adjustment recorded in the first quarter of 2014 that was related to 2013. For the year ended December 31, 2013, income tax expense was understated and net income attributable to A&B was overstated by $2.6 million, which includes the previously mentioned $1.6 million out-of-period adjustment. For the year ended December 31, 2012, income tax expense was understated and net income attributable to A&B was overstated by $1.7 million. Total equity as of January 1, 2012 was overstated by $1.8 million. |
| |
8
| The Real Estate Development and Sales segment includes approximately $383.8 million, $335.0 million, $319.7 million, $290.1 million and $274.8 million related to its investment in various real estate joint ventures as of December 31, 2014, 2013, 2012, 2011 and 2010, respectively. |
| |
9
| Represents gross capital additions to the leasing portfolio, including gross tax-deferred property purchases, but excluding the assumption of debt, that are reflected as non-cash transactions in the Consolidated Statements of Cash Flows. |
| |
10 | Excludes expenditures for real estate developments held for sale, which are classified as Cash Flows from Operating Activities within the Consolidated Statements of Cash Flows, and excludes investment in joint ventures classified as Cash Flows from Investing Activities. Operating cash flows for expenditures related to real estate developments were $20.8 million, $15.3 million, $7.2 million, $41.7 million, and $150.6 million $37.2 million, $13.8 millionfor 2017, 2016, 2015, 2014 and $21.6 million for 2014, 2013, 2012, 2011 and 2010, respectively. Investments in real estate joint ventures were $16.4 million, $20.8 million, $25.8 million, $28.7 million, and $22.2 million $17.4 million, $27.9 millionin 2017, 2016, 2015, 2014 and $100.5 million in 2014, 2013, 2012, 2011 and 2010, respectively. |
| |
1111 Includes amounts from discontinued operations. | Includes $21.8 million of capital in 2012 related to the Company’s Port Allen solar project before tax credits. |
| |
12 | The computationAmounts recast to reflect the adoption of basic and diluted earnings per common share for all periods prior to Separation is calculated using 42.4 million,Financial Accounting Standards Update No. 2015-03, Interest- Imputation of Interest (Subtopic 835-30), Simplifying the numberPresentation of shares of A&B common stock outstanding on July 2, 2012, which was the first day of trading following the June 29, 2012 distribution of A&B common stock to Holdings shareholders, as if those shares were outstanding for those periods. For all periods prior to Separation, there were no dilutive shares because no actual A&B shares or share-based awards were outstanding prior to the Separation.Debt Issuance Costs. |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
We have made or incorporated by reference forward-looking statementsStatements in this Form 10-K that are based on our management's beliefsnot historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve a number of risks and assumptions and on information currently availableuncertainties that could cause actual results to our management. Forward-lookingdiffer materially from those contemplated by the relevant forward-looking statements. These forward-looking statements include, the information concerning ourbut are not limited to, statements regarding possible or assumed future results of operations, business strategies, financing plans, competitive position, potential growth opportunities potential operating performance improvements,and competitive positions. Such forward-looking statements speak only as of the effectsdate the statements were made and are not guarantees of competitionfuture performance. Forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the effectstiming of future legislation or regulations. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words "believe," "expect," "plan," "intend," "anticipate," "estimate," "predict," "potential," "continue," "may," "might," "should," "could" or the negative of these terms or similar expressions.
Forward-looking statements involve risks, uncertainties and assumptions. Actual results maycertain events to differ materially from those expressed in theseor implied by the forward-looking statements. You shouldThese factors include, but are not put undue reliance on any forward-looking statementslimited to, prevailing market conditions and other factors related to the Company's REIT status and the Company business generally discussed in the Company's most recent Form 10-K, Form 10-Q and other filings with the Securities and Exchange Commission. The information in this Form 10-K.10-K should be evaluated in light of these important risk factors. We do not haveundertake any intention or obligation to update the Company's forward-looking statements after we file this Form 10-K.statements.
The risk factors discussed in "Risk Factors" could cause our results to differ materially from those expressed in forward-looking statements. There may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our financial position, results of operations or cash flows. Any such risks could cause our results to differ materially from those expressed in forward-looking statements.
INTRODUCTION
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“("MD&A”&A") is a supplement to the accompanying consolidated financial statements and provides additional information about A&B’s business, recent developments, financial condition, liquidity and capital resources, cash flows, results of operations and how certain accounting principles, policies and estimates affect A&B’s financial statements. MD&A is organized as follows:
Basis of Presentation: This section provides a discussion of the basis on which A&B’s consolidated financial statements were prepared, including A&B’s historical results of operations.
Business Overview: This section provides a general description of A&B’s business, as well as recent developments that A&B believes are important in understanding its results of operations and financial condition or in understanding anticipated future trends.
Critical Accounting Estimates:This section identifies and summarizes those accounting policies that significantly impact A&B’s reported results of operations and financial condition and require significant judgment or estimates on the part of management in their application.
ConsolidatedResults of Operations: This section provides an analysis of A&B’s consolidated results of operations for the three years ended December 31, 2014, 20132017, 2016, and 2012.2015.
Analysis of Operating Revenue and Profit by Segment: This section provides an analysis of A&B’s results of operations by business segment.
Liquidity and Capital Resources: This section provides a discussion of A&B’s financial condition and an analysis of A&B’s cash flows for thethree years ended December 31, 2014, 20132017, 2016, and 2012,2015, as well as a discussion of A&B’s ability to fund its future commitments and ongoing operating activities through internal and external sources of capital.
Contractual Obligations, Commitments, Contingencies and Off-Balance-Sheet Arrangements: This section provides a discussion of A&B’s contractual obligations and other commitments and contingencies that existed at December 31, 2014.2017.
Quantitative and Qualitative Disclosures about Market Risk: This section discusses how A&B monitors and manages exposure to potential gains and losses associated with changes in interest rates.
Outlook:Rounding: This section providesAmounts in the MD&A are rounded to the nearest tenth of a discussionmillion. Accordingly, a recalculation of management’s general outlook about its marketstotals and A&B’s competitive position.percentages, if based on the reported data, and may be slightly different.
Basis of Presentation
Prior to June 29, 2012, A&B’s businesses included Matson Navigation Company, a wholly owned subsidiary, that provided ocean transportation, truck brokerage and intermodal services. As part of a strategic initiative designed to allow A&B to independently execute its strategies and to best enhance and maximize its earnings, growth prospects and shareholder value, A&B made a decision to separate the transportation businesses from the Hawaii real estate and agriculture businesses. In preparation for the Separation, A&B modified its legal-entity structure and became a wholly owned subsidiary of Holdings. On June 29, 2012, Holdings distributed to its shareholders all of the shares of A&B stock. Holders of Holdings common stock continued to own the transportation businesses, but also received one share of A&B common stock for each share of Holdings common stock held at the close of business on June 18, 2012, the record date. Following the Separation, Holdings changed its name to Matson, Inc. On July 2, 2012, A&B began regular trading on the New York Stock Exchange under the ticker symbol “ALEX” as an independent, public company.36
The financial statements and related financial information pertaining to the periods preceding the Separation have been presented on a combined basis and reflect the financial position, results of operations and cash flows of the real estate and agriculture businesses and corporate functions of Alexander & Baldwin, Inc., all of which were under common ownership and common management prior to the Separation. The financial statements and related financial information pertaining to the period subsequent to the Separation have been presented on a consolidated basis. The financial statements for periods prior to the Separation included herein may not necessarily reflect A&B’s results of operations, financial position and cash flows in the future or what its results of operations, financial position and cash flows would have been had A&B been a stand-alone company during the periods presented.
Business Overview
BUSINESS OVERVIEW
A&B, whose history dates back to 1870, is headquartered in Honolulu and operates four segments, principally in Hawaii:through three reportable segments: Commercial Real Estate Development and Sales; Real Estate Leasing; Agribusiness;Estate; Land Operations; and Materials and& Construction.
The Company has completed a conversion process to comply with the requirements to be treated as a REIT commencing with the taxable year ended December 31, 2017 (the “REIT Conversion”).
Commercial Real Estate Leasing
The Commercial Real Estate Leasing segment owns, operates and manages retail, industrial, and office properties in HawaiiHawai`i and on the Mainland.mainland. The Commercial Real Estate Leasing segment also leases urban land in HawaiiHawai`i to third-party lessees.
Real Estate Development and SalesLand Operations
The Real Estate Development and SalesLand Operations segment generates its revenues throughactively manages the investment in and development and sale ofCompany's land and commercialreal estate-related assets and residential propertiesdeploys these assets to their highest and best use. Primary activities of the Land Operations segment include planning, zoning, financing, constructing, purchasing, managing, selling, and investing in Hawaiireal property; renewable energy; and through the sale of properties in the Company's Leasing portfolio.
Agribusiness
The Agribusiness segment produces bulk raw sugar, specialty food grade sugars and molasses; markets and distributes specialty food-grade sugars; provides general trucking services, equipment maintenance and repair services; leases agricultural land to third parties; and generates and sells electricity to the extent not used in A&B’s Agribusiness operations.diversified agribusiness activities.
Materials and& Construction
The Materials and& Construction segment performs asphalt paving as prime contractor and subcontractor; imports and sells liquid asphalt; mines, processes and sells basalt aggregate; produces and sells asphaltic and ready-mix concrete; provides and sells various construction- and traffic-control-related products and manufactures and sells precast concrete products.
Critical Accounting Estimates
CRITICAL ACCOUNTING ESTIMATES
A&B’s significant accounting policies are described in Note 2 to the Consolidated Financial Statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States, of America, upon which the MD&A is based, requires that management exercise judgment when making estimates and assumptions about future events that may affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with certainty and actual results will, inevitably, differ from those critical accounting estimates. These differences could be material.
A&B considers an accounting estimate to be critical if: (i)(a) the accounting estimate requires A&B to make assumptions that are difficult or subjective about matters that were highly uncertain at the time that the accounting estimate was made, (b) changes in the estimate are reasonably likely to occur in periods subsequent to the period in which the estimate was made, or (c) use of different estimates by A&B could have been used, and (ii) changes in those assumptions or estimates would have had a material impact on the financial condition or results of operations of A&B. The critical accounting estimates inherent in the preparation of A&B’s financial statements are described below.
Principles of Consolidation
The consolidated financial statements include the accounts of Alexander & Baldwin, Inc. and all wholly owned and controlled subsidiaries, after elimination of significant intercompany amounts. Significant investments in businesses, partnerships and limited liability companies in which the Company does not have a controlling financial interest, but has the ability to exercise significant influence, are accounted for under the equity method. A controlling financial interest is one in which the Company has a majority voting interest or one in which the Company is the primary beneficiary of a variable interest entity. In determining whether the Company is the primary beneficiary of a variable interest entity in which it has an interest, the Company is required to make significant judgments with respect to various factors including, but not limited to, the Company’s ability to direct the activities that most significantly impact the entity’s economic performance, the rights and ability of other investors to participate in decisions affecting the economic performance of the entity, and kick-out rights, among others. Activities that significantly affect the economic performance of the entities in which the Company has an interest include, but are not limited to, establishing and modifying detailed business, development, marketing and sales plans, approving and modifying the project budget, approving design changes and associated overruns, if any, and approving project financing, among others. The Company has not consolidated any variable interest entity in which the Company does not also have voting control because it has determined that it is not the primary beneficiary since decisions to direct the activities that most significantly impact the entity’s performance are shared by the joint venture partners.
Impairment of Long-Lived Assets and Finite-Lived Intangible Assets
A&B’s long-lived assets, including finite-lived intangible assets, are reviewed for possible impairment when events or circumstances indicate that the carrying value may not be recoverable. In such an evaluation, the estimated future undiscounted cash flows generated by the asset are compared with the amount recorded for the asset to determine if its carrying value is not recoverable. If this review determines that the recorded value will not be recovered, the amount recorded for the asset is reduced to estimated fair value. These asset impairment analyses are highly subjective because they require management to make assumptions and apply considerable judgments to, among others, estimates of the timing and amount of future cash flows, expected useful lives of the assets, uncertainty about future events, including changes in economic conditions, changes
in operating performance, changes in the use of the assets, and ongoing costs of maintenance and improvements of the assets and, thus, the accounting estimates may change from period to period. If management uses different assumptions or if different conditions occur in future periods, A&B’s financial condition or its future operating results could be materially impacted. A&B has evaluated certain long-lived assets, including intangible assets, for impairment.
During the secondfourth quarter of 2012, A&B2017, in connection with the Company's strategic decision to dispose of certain of its Mainland commercial properties and increase focus on its Hawai`i commercial portfolio, the Company classified several of its Mainland properties as held for sale. In connection with this determination, the Company recorded $22.4 million of impairments of real estate for three properties, as the expected sales proceeds, less costs to sell, were less than the carrying values of those assets.
During the fourth quarter of 2016, as a result of a change in its strategy for development activities, the Company recorded non-cash impairment chargecharges of $5.1$11.7 million related to certain non-active, long-term development projects. The impairment loss recorded reduced the carrying amounts to the estimated fair value, reflecting the change to the Company’s development-for-sale strategy to de-risk its Santa Barbaraportfolio by not pursuing certain long-term projects that were not in active development and instead focus on projects with a shorter-term lifespan, generally 3 to 5 years.
The impairment charges are presented within Impairment of real estate landholdings in California. The impairment of the Santa Barbara landholdings are classified within Operating costs and expensesassets in the Consolidated Statementsaccompanying consolidated statements of Income. Nooperations. There were no material long-lived asset impairment charges were recorded in 2014 or 2013.2015.
Impairment of Investments
A&B’s investments in unconsolidated affiliates are reviewed for impairment whenever there is evidence that fair value may be below carrying cost. An investment is written down to fair value if fair value is below carrying cost and the impairment is believed to be other-than-temporary. In evaluating the fair value of an investment and whether any identified impairment is other-than-temporary, significant estimates and considerable judgments are involved. These estimates and judgments are based, in part, on A&B’s current and future evaluation of economic conditions in general, as well as a joint venture’s current and future plans. Additionally, these impairment calculations are highly subjective because they also require management to make assumptions and apply judgments to estimates regarding the timing and amount of future cash flows and take into account various factors, including sales prices, development costs, market conditions, and absorption rates, probabilities related to various cash flow scenarios, and appropriate discount rates based on the perceived risks, among others. In evaluating whether an impairment is other-than-temporary, A&B considers all available information, including the length of time and extent of the impairment, the financial condition and near-term prospects of the affiliate, A&B’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value, and projected industry and economic trends, among others. Changes in these and other assumptions could affect the projected operational results and fair value of the unconsolidated affiliates, and accordingly, may require valuation adjustments to A&B’s investments that may materially impact A&B’s financial condition or its future operating results. For example, if current market conditions deteriorate significantly or a joint venture’s plans change materially, impairment charges may be required in future periods, and those charges could be material.
In July 2014, theThe Company investedmade investments of $23.8 million in a2014 and $15.4 million in 2016 in tax equity investmentinvestments related to the construction and operation of (1) a 12-megawatt solar farm on Kauai.Kauai and (2) two photovoltaic facilities with a combined capacity of 6.5 megawatts on Oahu, respectively. The Company recovers its investmentinvestments primarily through tax credits and tax benefits, which are recorded in the Income tax expense (benefit) line item in the Consolidated Statementsconsolidated statements of Income.operations. As these tax benefits were received and recognized, the Company recorded non-cash reductions of the investment'sinvestments' carrying value. For the yearyears ended December 31, 2014,2017 and 2016, the Company recorded a net, non-cash reductionreductions of the investment'sinvestments' carrying value which totaled $14.7 million.of
In September 2013, the Company entered into an Amended$2.6 million and Restated Limited Liability Company Agreement of Kukui'ula Village ("Agreement") with DMB Kukui'ula Village LLC ("DMB"). Under the Agreement, the Company assumed financial and operational control of Kukui'ula Village LLC ("Village") and consolidated the assets and liabilities of Village at fair value, resulting in a $6.3$9.8 million, write down of its investment in the joint venture. In 2012, A&B recorded an impairment loss and equity losses totaling $4.7 million related to its joint venture investment in Bakersfield (CA) for a commercial development. The recognition of the impairment loss reduced the carrying amount of the investment to its estimated fair value and reflected the change in the Company’s development strategy to focus on development projects in Hawaii, and therefore, its related decision not to proceed with the development of California real estate assets in the near term. The impairment loss and equity losses of the Company’s investments are classified as Impairment and equity losses related to joint ventures in the Consolidated Statements of Income.respectively.
Weakness in particular real estate markets, difficulty in obtaining or renewing project-level financing or development approvals, and changes in A&B’s development strategy, among other factors, may affect the value or feasibility of certain development projects owned by A&B or by its joint ventures and could lead to additional impairment charges in the future.
Goodwill
The Company reviews goodwill for impairment at the reporting unit level annually and whenever events or changes in circumstances indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. The goodwill impairment tests involves a two-step process. Step one of the goodwill impairment test estimates the fair value of a reporting unit using various methodologies, including discounted cash flows and market multiples. The discounted cash flow approach relies on a number of assumptions, including future macroeconomic conditions, market factors specific to the reporting unit, the amount and timing of estimated future cash flows to be generated by the business over an extended period of time, long-term growth rates for the business, and a discount rate that considers the risks related to the amount and timing of the cash flows, among others. Although the assumptions used by the Company in its discounted cash flow model are based on
the best available market information and are consistent with the assumptions the Company used to generate its internal strategic plans and forecasts, significant judgment is required to estimate the amount and timing of future cash flows and the risk of achieving those cash flows. Under the market multiple methodology, the estimate of fair value may beis based on market multiples of EBITDA (earnings before interest, taxes, depreciation and amortization) or revenues. When using market multiples of EBITDA or revenues, the Company must make judgments about the comparability of those multiples in closed and proposed transactions. Accordingly, changes in assumptionstransactions and estimates, including, but not limited to, changes driven by external factors, such as industry and economic trends, and those driven by internal factors, such as changes in business strategy and its internal forecasts, could have a material effect on the reporting unit's business, financial condition and resultscomparability of operations.multiples for guideline
companies. Additionally, the foregoing assumptions could be adversely impacted by any of the risks discussed in "Risk Factors."
If the results of the Company's step one test indicateindicates that a reporting unit's estimated fair value is less than its carrying value, a step two analysisan impairment charge is performed. Inrecognized for the step two analysis,amount by which the estimatedcarrying amount exceeds the reporting unit's fair value, not to exceed the total amount of the reporting unit isgoodwill allocated to all of the assets and liabilities of thethat reporting unit as if the reporting unit had been acquired in a business combination. The implied value of goodwill is compared to the carrying value of goodwill. If the implied value of the goodwill exceeds the carrying value of goodwill, then goodwill is not considered to be impaired, and impaired if the implied value of goodwill is less than the carrying value of goodwill.unit.
At December 31, 2014,2017, the Company's goodwill totaled $102.3 million, primarily related to the 2013 acquisition of Grace Pacific. Of the total goodwill, $93.6 millionrelates to three reporting units in the Materials and& Construction segment. The valuation of each reporting unit assumes that each is an unrelated business to be sold separately and independently from the other reporting units. As of the date of the last impairment test in the fourth quarter of 2014,2017, the weighted average percentage (using reporting units’ carrying value) by which the fair values of the reporting units exceeded their carrying values was estimated to be between 9 and 10approximately 11 percent. The Company's fair value estimate for reporting units include a number of assumptions, including increased levels of road infrastructure spending by governmental and private entities, expectations about the Company's share of governmental contracts, and material input and labor costs, among others. If actual revenues are lower (for example, due to a lower level of government or private contracts bid or won by the reporting units), or costs are higher than anticipated and cannot be recovered as part of the price of the work performed, as well as other factors that result in adverse changes in the key assumptions used in the fair value estimates mentioned above, the fair value of the Company's reporting units could be negatively impacted.
Legal Contingencies
A&B’s results of operations could be affected by significant litigation adverse to A&B, including, but not limited to, liability claims and construction defect claims. A&B records accruals for legal matters when the information available indicates that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Management makes adjustments to these accruals to reflect the impact and status of negotiations, settlements, rulings, advice of counsel and other information and events that may pertain to a particular matter. Predicting the outcome of claims and lawsuits and estimating related costs and exposure involves substantial uncertainties that could cause actual costs to vary materially from those estimates. In making determinations of likely outcomes of litigation matters, A&B considers many factors. These factors include, but are not limited to, the nature of specific claims, including unasserted claims, A&B’s experience with similar types of claims, the jurisdiction in which the matter is filed, input from outside legal counsel, the likelihood of resolving the matter through alternative dispute resolution mechanisms and the matter’s current status. A detailed discussion of significant litigation matters is contained in Note 15 to the Consolidated Financial Statements.
Revenue Recognition for Certain Long-Term Real Estate Developments
As discussed in Note 2 to the Consolidated Financial Statements, revenues from real estate sales are generally recognized when sales are closed and title, risks and rewards pass to the buyer. For certain real estate sales, A&B and its joint venture partners account for revenues on long-term real estate development projects that have continuing post-closing involvement, such as Kukui’ula,Kukui'ula, using the percentage-of-completion method. Following this method, the amount of revenue recognized is based on the percentage of development costs that have been incurred through the reporting period in relation to total expected development cost associated with the subject property. Accordingly, if material changes to total expected development costs or revenues occur, A&B’s financial condition or its future operating results could be materially impacted.
Construction Contracts and Related Products
Revenues from asphalt paving contracts are generally recognized using the percentage-of-completion method with progress toward completion measured on the basis of units (tons, cubic yards, square yards, square feet or other units of measure) of work completed as of a specific date to an estimate of the total units of work to be delivered under each contract. The Company uses this method as management considers units of work completed to be the best available measure of progress on paving contracts. Contracts in progress are reviewed regularly, and revenues and earnings may be adjusted based on revisions to assumption and estimates, including, but not limited to, revisions to job performance, job conditions, changes to the scope of work, estimated contract costs, progress toward completion, changes in internal and external factors or conditions and final contract settlement. Contract costs include all direct material, labor, equipment utilization, hired truckers, traffic control, bonds and subcontract costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, field office rentals, utilities, certain repair costs and other expenses attributable to the contracts. Selling, general and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. The life cycle for contracts generally ranges from several months to three years in duration.
Pension and Post-Retirement Estimates
The estimation of A&B’s pension and post-retirement expenses and liabilities requires that A&B make various assumptions. These assumptions include the following factors:
Discount rates
Expected long-term rate of return on pension plan assets
Health care cost trend rates
Salary growth
Inflation
Retirement rates
Mortality rates
Expected contributions
Actual results that differ from the assumptions made with respect to the above factors could materially affect A&B’s financial condition or its future operating results. The effects of changing assumptions are included in unamortized net gains and losses, which directly affect accumulated other comprehensive income. Additionally, these unamortized gains and losses are amortized and reclassified to income (loss) over future periods.
The 2014 net periodic costs for qualified pension and post-retirement plans were determined using a discount rate of 4.90 percent. The benefit obligations for qualified pension and post-retirement plans, as of December 31, 2014, were determined using a discount rate of 4.00 percent and 4.10 percent, respectively. For A&B’s non-qualified benefit plans, the 2014 net periodic cost was determined using a discount rate of 3.50 percent and the December 31, 2014 obligation was determined using a discount rate of 3.10 percent. The discount rate used for determining the year-end benefit plan obligation was generally calculated using a weighting of expected benefit payments and rates associated with high-quality U.S. corporate bonds for each year of expected payment to derive a single estimated rate at which the benefits could be effectively settled at December 31, 2014.
In late 2013, the Company changed its pension plan investment and management approach to a liability driven investment strategy, which seeks to increase the correlation of the pension plan assets and liabilities to reduce the volatility of the plan's funded status, and over time, improve the funded status of the plan. The adoption of this strategy has resulted in an asset allocation that is weighted more toward fixed income investments, which reduces investment volatility, but also reduces investment returns over time. In connection with the adoption of a liability driven investment strategy, the Company appointed an investment adviser in 2014 that directs investments and selects investment options, based on guidelines established by the Investment Committee. The expected return on plan assets assumption of 7.10 percent is principally based on the long-term outlook for various asset class returns, asset mix, the historical performance of the plan assets under the liability driven investment strategy and a comparison of the estimated long-term return calculated to the distribution of assumptions adopted by other plans. Since adopting the liability driven investment strategy in late 2013, returns on plan assets has been 8.21 percent. For the year ended December 31, 2014, plan asset returns were 8.12 percent.
As of December 31, 2014, A&B’s post-retirement obligations were measured using an initial 7.3 percent health care cost trend rate in 2015, decreasing to 7.0 percent in 2016, and further decreasing 0.2 percent each year through 2028, with an ultimate rate of 4.5 percent in 2028.
Lowering the expected long-term rate of return on A&B’s qualified plan assets by one-half of one percent would have increased pre-tax pension expense for 2014 by approximately $0.8 million. Lowering the discount rate assumption by one-half of one percentage point would have increased pre-tax pension expense by approximately $0.7 million. Additional information about A&B’s benefit plans is included in Note 12 to the Consolidated Financial Statements.
As of December 31, 2014, the market value of A&B’s defined benefit plan assets totaled approximately $160.8 million, compared with $153.4 million as of December 31, 2013. The recorded net pension liability was approximately $43.6 million as of December 31, 2014 and approximately $22.0 million as of December 31, 2013. A&B expects to make contributions totaling $2.1 million to certain of its defined benefit pension plans in 2015. A&B’s contributions to its pension plans were approximately $5.7 million in 2014 and $0.1 million in 2013.
Income Taxes
A&B makes certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments are applied in the calculation of tax credits, tax benefits and deductions, and in the calculation of certain deferred tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. Significant changes to these estimates may result in an increase or decrease to A&B’s tax provision in a subsequent period.
In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertain tax positions taken or expected to be taken with respect to the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with management’s expectations could materially affect A&B’s financial condition or its future operating results.
Recent Accounting Pronouncements
See Note 2 to the Consolidated Financial Statements for a full description of the impact of recently issued accounting standards, which is incorporated herein by reference, including the expected dates of adoption and estimated effects on A&B’s results of operations and financial condition.
CONSOLIDATED RESULTS OF OPERATIONS
The following analysis of the consolidated financial condition and results of operations of Alexander & Baldwin, Inc. and its subsidiaries (collectively, the “Company”) should be read in conjunction with the consolidated financial statements and related notes thereto. Amounts in this narrative are rounded to millions, but per-share calculations and percentages were calculated based on thousands. Accordingly, a recalculation of some per-share amounts and percentages, if based on the reported data, may be slightly different than the more accurate amounts included herein. The financial information included in the following table and narrative reflects the presentation of the HC&S sugar operations as discontinued operations for all periods presented.
|
| | | | | | | | | | | | | | | |
(dollars in millions, except per-share amounts) | 2014 | | Chg. | | 2013 | | Chg. | | 2012 |
Operating Revenue | $ | 560.0 |
| | 53% | | $ | 365.2 |
| | 40% | | $ | 261.5 |
|
Operating Costs and Expenses | 495.4 |
| | 52% | | 325.3 |
| | 37% | | 237.5 |
|
Operating Income | 64.6 |
| | 62% | | 39.9 |
| | 66% | | 24.0 |
|
Other Income and (Expense) | (35.8 | ) | | 120% | | (16.3 | ) | | (32)% | | (23.9 | ) |
Income Taxes Expense (Benefit) | (1.4 | ) | | NM | | 11.1 |
| | NM | | (5.9 | ) |
Income From Continuing Operations | 30.2 |
| | 142% | | 12.5 |
| | 108% | | 6.0 |
|
Discontinued Operations (net of taxes) | 34.3 |
| | 54% | | 22.3 |
| | 74% | | 12.8 |
|
Net Income | 64.5 |
| | 85% | | 34.8 |
| | 85% | | 18.8 |
|
Income attributable to non-controlling interest | (3.1 | ) | | 6X | | (0.5 | ) | | —% | | — |
|
Net income attributable to A&B | $ | 61.4 |
| | 79% | | $ | 34.3 |
| | 82% | | $ | 18.8 |
|
| | | | | | | | | |
Basic Earnings Per Share | $ | 1.26 |
| | 64% | | $ | 0.77 |
| | 75% | | $ | 0.44 |
|
Diluted Earnings Per Share | $ | 1.25 |
| | 64% | | $ | 0.76 |
| | 73% | | $ | 0.44 |
|
|
| | | | | | | | | | | | | | | |
(dollars in millions, except per share amounts) | 2017 | | Change | | 2016 | | Change | | 2015 |
Operating revenue | $ | 425.5 |
| | 9.8% | | $ | 387.5 |
| | (18.0)% | | $ | 472.8 |
|
Operating costs and expenses | 406.0 |
| | 18.8% | | 341.7 |
| | (9.8)% | | 378.8 |
|
Operating income | 19.5 |
| | (57.4)% | | 45.8 |
| | (51.3)% | | 94.0 |
|
Other income (expense), net | (18.9 | ) | | (1.6)% | | (18.6 | ) | | NM | | 4.9 |
|
Income tax benefit (expense) | 218.2 |
| | 436X | | 0.5 |
| | NM | | (37.0 | ) |
Net gain (loss) on the sale of improved property, net of income taxes | 9.3 |
| | 86.0% | | 5.0 |
| | NM | | (1.1 | ) |
Income from continuing operations | 228.1 |
| | 7X | | 32.7 |
| | (46.2)% | | 60.8 |
|
Discontinued operations (net of income taxes) | 2.4 |
| | NM | | (41.1 | ) | | (38.4)% | | (29.7 | ) |
Net income (loss) | 230.5 |
| | NM | | (8.4 | ) | | NM | | 31.1 |
|
Income attributable to noncontrolling interest | (2.2 | ) | | (22.2)% | | (1.8 | ) | | (20.0)% | | (1.5 | ) |
Net income (loss) attributable to A&B | $ | 228.3 |
| | NM | | $ | (10.2 | ) | | NM | | $ | 29.6 |
|
| | |
| |
| |
| | |
Basic earnings (loss) per share - continuing operations | $ | 4.63 |
| | 7X | | $ | 0.66 |
| | (42.8)% | | $ | 1.15 |
|
Basic earnings (loss) per share - discontinued operations | 0.05 |
| | NM | | (0.84 | ) | | (37.7)% | | (0.61 | ) |
Net income (loss) available to A&B shareholders | $ | 4.68 |
| | NM | | $ | (0.18 | ) | | NM | | $ | 0.54 |
|
| | |
| | | |
| | |
Diluted earnings (loss) per share - continuing operations | $ | 4.30 |
| | 7X | | $ | 0.65 |
| | (43.0)% | | $ | 1.14 |
|
Diluted earnings (loss) per share - discontinued operations | 0.04 |
| | NM | | (0.83 | ) | | (38.3)% | | (0.60 | ) |
Net income (loss) available to A&B shareholders | $ | 4.34 |
| | NM | | $ | (0.18 | ) | | NM | | $ | 0.54 |
|
On November 16, 2017 the Company announced that its Board of Directors declared a special distribution on its shares of common stock in an aggregate amount of $783 million, or approximately $15.92 per share (the "Special Distribution"), payable in cash and shares of the Company's stock. The Special Distribution represents the Company's previously undistributed non-REIT earnings and profits ("E&P") accumulated prior to January 1, 2017, which were required to be distributed in connection with the Company's conversion to a REIT for the 2017 taxable year, the Company's REIT taxable income for the 2017 taxable year and a substantial portion of the Company's estimated REIT taxable income for the 2018 taxable year. The Special Distribution was paid on January 23, 2018. Shareholders had an opportunity to elect to receive the Special Distribution in the form of cash or additional shares of common stock, subject to a limit of $156.6 million of cash. As the deadline for the common shareholders' election was January 12, 2018, subsequent to December 31, 2017, the total Special Distribution of $783 million was included in the computation of the Company's diluted earnings (loss) per share.
422017 vs. 2016
Operating revenue for 2017 increased 9.8%, or $38.0 million, to $425.5 million, primarily due to higher revenue from the Land Operations and Materials & Construction segments. The reasons for business and segment-specific year-to-year fluctuations in revenue are further described below in the Analysis of Operating Revenue and Profit by Segment.
Operating costs and expenses for 2017 increased 18.8%, or $64.3 million, to $406.0 million, primarily due to increases in operating expenses incurred by the Land Operations and Materials & Construction segments, as well as impairment charges recorded during the fourth quarter of 2017 related to certain, mainland commercial properties. The reasons for the operating cost and expense changes are described below, by business segment, in the Analysis of Operating Revenue and Profit by Segment. Operating costs and expenses for 2017 and 2016 also included costs of $15.2 million and $9.5 million, respectively, related to the Company's REIT conversion.
2014Other income (expense), net was a net expense of $18.9 million in 2017 compared to a net expense of $18.6 million in 2016. The change from the prior year was primarily due to an increase of $3.5 million in interest income, a $1.6 million decrease in pension and post retirement other expense and a $7.2 million decrease in the adjustment to reduce the carrying amount of tax equity solar investments. These increases were offset by $12.0 million, lower income from joint ventures.
Income tax benefit (expense) was a benefit of $218.2 million in 2017, primarily reflected the reversal of approximately $223.0 million of net deferred liabilities in connection with the Company's conversion to a REIT, partially offset by approximately $3.0 million due to the impact of the enactment of the Tax Cuts and Jobs Act of 2017. Income tax benefit of $0.5 million for 2016 reflected a lower effective income tax rate for the year ended December 31, 2016, primarily driven by the non-refundable federal tax credit related to the Company’s Waihonu tax equity solar investment.
Net gain (loss) on sale of improved property, net of income taxes increased 86.0%, or $4.3 million, to $9.3 million due to the aggregate gain realized on the sales of two commercial properties during 2017, as compared to the net gain of $5.0 million on commercial property sales during 2016. Additionally, following our conversion to a REIT, sales of improved properties are no longer subject to taxation.
Income attributable to noncontrolling interest increased $0.4 million in 2017 compared to 2016. The noncontrolling interest represents third-party noncontrolling interests in two entities consolidated by Grace and in which Grace owns a 70 percent and 51 percent share.
2016 vs. 20132015
Operating Revenuerevenue for 2014 increased 53 percent,2016 decreased 18.0%, or $194.8$85.3 million, to $560.0$387.5 million, primarily due to a $179.4 million increase inlower revenue from the Land Operations and Materials and& Construction revenue. Grace was acquired on October 1, 2013, and accordingly, 2014 included a full year of revenuessegments, offset by increased revenue from Grace, compared to one quarter of revenues in 2013. In addition,the Commercial Real Estate Leasing revenue increased $46.4 million in 2014 (excluding revenue from discontinued operations), primarily due to expansion of the portfolio though acquisitions made in 2013. These increases were partially offset by a $25.6 million reduction in Agribusiness revenue primarily due to lower sugar prices in the first half 2014 compared to 2013.segment. The reasons for business- and segment-specific year-to-year fluctuations in revenue are further described below in the Analysis of Operating Revenue and Profit by Segment.
Because of the recurring nature of property sales, the Company views changes in Real Estate DevelopmentOperating costs and Sales and Real Estate Leasing revenues on a year-over-year basis before the reclassification of revenueexpenses for 2016 decreased 9.8%, or $37.1 million, to discontinued operations to be more meaningful in assessing segment performance. Additionally,$341.7 million, primarily due to lower operating expenses incurred by the timing of sales for development propertiesLand Operations and the mix of properties sold, management believes performance is more appropriately assessed over a multi-year period. Year-over-year comparisons of revenue are also not complete without the consideration of results from the Company’s investment in its real estate joint ventures, which are not included in consolidated operating revenue, but are included in segment operating profit. The Analysis of Operating Revenue and Profit by Segment that follows provides additional information on changes in Real Estate Development and Sales revenue and operating profit before reclassifications to discontinued operations.
Operating Costs and Expenses for 2014 increased 52 percent, or $170.1 million, to $495.4 million. Operating costs increased $143.7 million due to a full year of operating costs and expenses for Grace in 2014, compared to one quarter of Grace operating costs and expenses in 2013. Additionally, operating costs increased $29.9 million due to higher Real Estate Leasing segment costs, including increased depreciation expense related to 2013 acquisitions, and increased operating costs due to the expansion of the portfolio in 2013.Materials & Construction segments. The reasons for the operating cost and expense changes in business- and segment-specific year-to-year fluctuations in operating costs, which affect segment operating profit, are more fully described below, by business segment, in the Analysis of Operating Revenue and Profit by Segment. Operating costs and expenses for 2016 also included costs of $9.5 million related to the Company's evaluation of a potential REIT conversion.
Other Income and Expense: Other income (expense), net was $(35.8)an expense of $18.6 million in 20142016 compared with $(16.3)income of $4.9 million in 2013.2015. The change in other income (expense) from the prior year was principallyprimarily due to $17.6 million lower income from joint ventures, and a $14.7$7.2 million reductionincrease in the adjustment to reduce the carrying valueamount of a $23.8 million tax equity investmentsolar investments, offset by a $1.0 million increase in a 12-megawatt solar farm on Kauai that was made in July 2014. Tax benefits associated with the KRS II investment are accompanied by non-cash reductions of the investment's carrying value. Tax benefits associated with the investment are included in the interest income.
Income taxes benefit (expense) was a slight benefit in 2016 compared to expense in 2015, due to lower earnings in 2016 as compared to 2015. Income taxes also reflected a lower effective income tax expense (benefit)rate for the year ended December 31, 2016 primarily driven by the non-refundable federal tax credit related to the Company’s solar investment.
Net gain (loss) on sale of improved property, net of income taxes line item in the Consolidated Statements of Income. Interest expense increased by $9.9was$5.0 million due to higher average debt levels as a result of acquisitions made in 2013.
Income Taxes and the effective rate were lower in 2014 compared with 2013 due principally to tax benefits associated with the Company's investment in KRS II and Agribusiness losses from continuing operations in 2014commercial property sales during 2016, as compared to income in 2013 but was partially offset by higher income from continuing operations from Grace due to a full yearthe net loss of results in 2014 versus one quarter of results in 2013.$1.1 million on commercial property sales during 2015.
Income attributable to non-controllingnoncontrolling interest increased $2.6$0.3 million in 20142016 compared to 2013 due to the full year impact resulting from the acquisition of Grace on October 1, 2013.2015. The non-controllingnoncontrolling interest represents third-party minoritynoncontrolling interests in two entities thatconsolidated by Grace consolidates and in which Grace owns a 70 percent share and 51 percent share.
Operating Revenue for 2013 increased 40 percent, or $103.7 million, to $365.2 million. Real Estate Development and Sales segment revenue (excluding revenue from discontinued operations) increased $70.4 million, primarily due to the sale of an undeveloped industrial parcel adjacent to Maui Business Park II and sales of residential lots on Oahu. Additionally, operating revenue increased $54.9 million due to the acquisition of Grace on October 1, 2013. Real Estate Leasing revenue increased $14.6 million in 2013 (excluding revenue from discontinued operations), primarily due to acquisitions. These increases were partially offset by a $36.2 million reduction in Agribusiness revenue primarily due to lower prices on sugar sold and one less voyage compared to 2012. The reasons for business- and segment-specific year-to-year fluctuations in revenue are further described below in the Analysis of Operating Revenue and Profit by Segment.
Because of the recurring nature of property sales, the Company views changes in Real Estate Development and Sales and Real Estate Leasing revenues on a year-over-year basis before the reclassification of revenue to discontinued operations to be more meaningful in assessing segment performance. Additionally, due to the timing of sales for development properties and the mix of properties sold, management believes performance is more appropriately assessed over a multi-year period. Year-over-year comparisons of revenue are also not complete without the consideration of results from the Company’s investment in
43
its real estate joint ventures, which are not included in consolidated operating revenue, but are included in segment operating profit. The Analysis of Operating Revenue and Profit by Segment that follows, provides additional information on changes in Real Estate Development and Sales revenue and operating profit before reclassifications to discontinued operations.
Operating Costs and Expenses for 2013 increased 37 percent, or $87.8 million, to $325.3 million. Operating costs increased $47.6 million due to the acquisition of Grace on October 1, 2013. Additionally, operating costs increased $41.5 million due to higher Real Estate Development and Sales segment costs. The reasons for changes in business- and segment-specific year-to-year fluctuations in operating costs, which affect segment operating profit, are more fully described below in the Analysis of Operating Revenue and Profit by Segment.
Other Income and Expense: Other income (expense) was $(16.3) million in 2013 compared with $(23.9) million in 2012. The change in other income (expense) was principally due to $8.7 million in higher joint venture operating income, $2.4 million of gains from insurance proceeds, and $2.6 million in higher interest and other income. These increases were partially offset by $4.2 million in higher interest expense and $1.9 million of higher impairment charges in 2013.
Income Taxes and the effective rate were higher in 2013 compared with 2012 due principally to higher income from continuing operations, non-deductible expenses incurred by the Company related to the acquisition of Grace, which occurred in the fourth quarter of 2013, and solar credits received in 2012 associated with the Company's Port Allen solar project.
ANALYSIS OF OPERATING REVENUE AND PROFIT BY SEGMENT
Additional detailed information related to the operations and financial performance of the Company’s Operating Segments is included in Part II Item 6 and Note 1719 to the Consolidated Financial Statements.Statements (Part II, Item 8). The following information should be read in relation to the information contained in those sections.therein.
Commercial Real Estate
2017 vs. 2016
|
| | | | | | | | | |
(dollars in millions) | 2017 | | 2016 | | Change |
Commercial Real Estate operating revenue | $ | 136.9 |
| | $ | 134.7 |
| | 1.6% |
Commercial Real Estate operating costs and expenses | (75.5 | ) | | (79.0 | ) | | 4.4% |
Selling, general and administrative | (6.8 | ) | | (2.5 | ) | | (172.0)% |
Intersegment operating revenue, net1 | 2.5 |
| | 2.0 |
| | 25.0% |
Impairment of real estate assets | (22.4 | ) | | — |
| | NM |
Other income/(expense), net | (0.3 | ) | | (0.4 | ) | | 25.0% |
Commercial Real Estate operating profit | $ | 34.4 |
| | $ | 54.8 |
| | (37.2)% |
Operating profit margin | 25.1% | | 40.7% |
| |
Cash Net Operating Income ("Cash NOI")2 | | | | |
|
Hawai`i | $ | 74.0 |
| | $ | 69.8 |
| | 6.0% |
Mainland | 10.9 |
| | 13.2 |
| | (17.6)% |
Total | $ | 84.8 |
| | $ | 83.0 |
| | 2.2% |
Same-Store Cash Net Operating Income ("Same-Store Cash NOI")2 | | | | | |
Hawai`i | $ | 67.4 |
| | $ | 64.4 |
| | 4.5% |
Mainland | 8.3 |
| | 7.7 |
| | 6.8% |
Total | $ | 75.6 |
| | $ | 72.2 |
| | 4.8% |
Gross Leasable Area ("GLA") (million sq. ft.) - Improved (at year end) | | | | | |
Hawai`i | 3.0 |
| | 2.9 |
| | |
Mainland | 1.0 |
| | 1.8 |
| | |
Total improved | 4.0 |
| | 4.7 |
| | |
Hawai`i ground leases (acres at year end) | 117 |
| | 106 |
| | |
1 Intersegment operating revenue for Commercial Real Estate Leasingis primarily from our Materials & Construction segment and is eliminated in our consolidated results of operations.
2 Refer to page 45 or a discussion of management's use of a non-GAAP financial measure and the required reconciliation of non-GAAP measures to GAAP measures.
Commercial Real Estate Developmentoperating revenue for 2017 was 1.6% percent higher than 2016, primarily attributable to the increases in Hawai`i same-store rents. "Same-store" refers to properties that were owned and Salesoperated for the entirety of the prior calendar year. The same-store pool excludes properties under development or redevelopment and also excludes properties acquired or sold during the comparable reporting periods, including stabilized properties. New developments and redevelopments are moved into the same-store pool upon one full calendar year of stabilized operation, which is typically upon attainment of market occupancy.
Operating profit was 37.2% lower in 2017, compared with 2016, principally due to aggregate impairment charges of $22.4 million related to certain of its U.S. Mainland properties that were classified as held for sale as of December 31, 2017.
The Company's commercial portfolio's occupancy and same-store occupancy percentage summarized by geographic location and property type as of December 31, 2017 and 2016 was as follows:
|
| | | | | | | | | | | |
Occupancy |
| | | | | | | | | | | |
| As of December 31, 2017 | | As of December 31, 2016 | | Percentage Point Change |
| Hawai`i | Mainland | Total | | Hawai`i | Mainland | Total | | Hawai`i | Mainland | Total |
Retail | 93.1% | 96.9% | 93.4% | | 92.8% | 96.1% | 93.1% | | 0.3 | 0.8 | 0.3 |
Industrial | 95.1% | 100.0% | 96.5% | | 96.6% | 89.4% | 92.5% | | (1.5) | 10.6 | 4.0 |
Office | 89.1% | 88.0% | 88.3% | | 84.7% | 90.5% | 88.7% | | 4.4 | (2.5) | (0.4) |
Total | 93.5% | 94.1% | 93.6% | | 93.4% | 90.4% | 92.2% | | 0.1 | 3.7 | 1.4 |
|
| | | | | | | | | | | |
Same-Store Occupancy |
| | | | | | |
| As of December 31, 2017 | | As of December 31, 2016 | | Percentage Point Change |
| Hawai`i | Mainland | Total | | Hawai`i | Mainland | Total | | Hawai`i | Mainland | Total |
Retail | 92.9% | 96.9% | 93.3% | | 92.5% | 96.1% | 92.9% | | 0.4 | 0.8 | 0.4 |
Industrial | 95.3% | 100.0% | 96.7% | | 96.6% | 100.0% | 97.7% | | (1.3) | — | (1.0) |
Office | 86.5% | 88.0% | 87.6% | | 87.7% | 90.5% | 89.8% | | (1.2) | (2.5) | (2.2) |
Total | 93.3% | 94.1% | 93.5% | | 93.6% | 95.1% | 94.0% | | (0.3) | (1.0) | (0.5) |
In 2017, the Company signed or renewed 211 leases or 909,422 square feet, at an average spread of 13.9%, and the change in average annual rental income on renewals, including tenant concessions, if any, as compared to the prior rental income was approximately 13.6%. Total tenant improvement costs and leasing commissions were $14.3 million in 2017 and $6.6 million in 2016.
GLA was 4.0 million square feet at December 31, 2017, compared to 4.7 million square feet as of December 31, 2016 as a result of the following activity:
|
| | | | | | | | | | | | |
Dispositions | | Acquisitions |
Date | | Property | | GLA | | Date | | Property | | GLA |
11/17 | | Midstate 99 Distribution Center | | 790,200 |
| | 6/17 | | Honokohau Industrial | | 73,200 |
|
1/17 | | The Maui Clinic Building | | 16,600 |
| | | | | | |
| | Total dispositions | | 806,800 |
| | | | Total improved acquisitions | | 73,200 |
|
2016 vs. 2015
|
| | | | | | | | | |
(dollars in millions) | 2016 | | 2015 | | Change |
Commercial Real Estate operating revenue | $ | 134.7 |
| | $ | 133.6 |
| | 0.8% |
Commercial Real Estate operating costs and expenses | (79.0 | ) | | (80.4 | ) | | 1.7% |
Selling, general and administrative | (2.5 | ) | | (1.4 | ) | | (78.6)% |
Intersegment operating revenue, net1 | 2.0 |
| | 1.8 |
| | 11.1% |
Other income (expense), net | (0.4 | ) | | (0.4 | ) | | —% |
Commercial Real Estate operating profit | $ | 54.8 |
| | $ | 53.2 |
| | 3.0% |
Operating profit margin | 40.7% | | 39.8% | |
|
Cash NOI2 | | | | | |
Hawai`i | $ | 69.8 |
| | $ | 62.6 |
| | 11.5% |
Mainland | 13.2 |
| | 16.7 |
| | (21.0)% |
Total | $ | 83.0 |
| | $ | 79.3 |
| | 4.7% |
GLA - Improved (at year end) | | | | | |
Hawai`i | 2.9 |
| | 2.7 |
| | |
Mainland | 1.8 |
| | 2.2 |
| | |
Total improved | 4.7 |
| | 4.9 |
| | |
Hawai`i ground leases (acres at year end) | 106 |
| | 106 |
| | |
1 Intersegment operating revenue for Commercial Real Estate is primarily from our Materials & Construction segment and is eliminated in our consolidated results of operations.
2 Refer to page 45 for a discussion of management's use of a non-GAAP financial measure and the required reconciliation of non-GAAP measures to GAAP measures.
Commercial Real Estate operating revenue for 2016 was 0.8 percent higher than 2015, principally due to the revenue impact from the acquisitions of Manoa Marketplace (January 2016) and Aikahi Shopping Center leasehold improvements (May 2015), as well as improved performance from Hawai`i properties, partially offset by the disposition of three Mainland properties in 2015 and three Mainland properties in 2016.
Operating profit was 3.0 percent higher in 2016, compared with 2015, principally due to improved performance from Hawai`i properties and the favorable impact from the previously mentioned Hawai`i acquisitions, partially offset by the Mainland dispositions and higher selling, general and administrative expenses due to approximately $1.3 million of transaction costs primarily related to the acquisition of Manoa Marketplace in 2016.
GLA was 4.7 million square feet at December 31, 2016, compared to 4.9 million square feet as of December 31, 2015 as a result of the following activity: |
| | | | | | | | | | | | |
Dispositions | | Acquisitions |
Date | | Property | | GLA | | Date | | Property | | GLA |
6/16 | | Ninigret Office Park | | 185,500 |
| | 12/16 | | 2927 East Manoa Road (Ground Lease) | | N/A |
|
6/16 | | Gateway Oaks | | 59,700 |
| | 1/16 | | Manoa Marketplace | | 139,300 |
|
6/16 | | Prospect Park | | 163,300 |
| | | | | | |
| | Total dispositions | | 408,500 |
| | | | Total improved acquisitions | | 139,300 |
|
Use of Non-GAAP Financial Measures
The Company uses non-GAAP measures when evaluating operating performance because management believes that they provide additional insight into the Company’s and segments' core operating results, and/or the underlying business trends affecting performance on a consistent and comparable basis from period to period. These measures generally are provided to investors as an additional means of evaluating the performance of ongoing core operations.
Cash Net Operating Income ("Cash NOI") is a non-GAAP measure used by the Company in evaluating the CRE segment’s operating performance as it is an indicator of the return on property investment, and provides a method of comparing performance of operations, on an unlevered basis, over time. Cash NOI should be not be viewed as a substitute for, or superior to, financial measures calculated in accordance with GAAP.
Cash NOI is calculated as total property revenues less direct property-related operating expenses. Cash NOI excludes straight-line rent adjustments, amortization of favorable/unfavorable leases, amortization of tenant incentives, general and administrative expenses, impairments of real estate, and depreciation and amortization (including amortization of maintenance capital, tenant improvements and leasing commissions).
The Company’s methods of calculating non-GAAP measures may differ from methods employed by other companies and thus may not be comparable to such other companies.
A reconciliation of Commercial Real Estate operating profit are analyzed before subtracting amounts related to discontinued operations. ThisCommercial Real Estate Cash NOI is consistent with how the Company’s management evaluates performance and makes decisions regarding capital allocation for the Company’s real estate businesses. A discussion of discontinued operations for the real estate business is included separately.as follows (in millions):
Effect of Property Sales Mix on Operating Results: |
| | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 |
Commercial Real Estate Operating Profit | | $ | 34.4 |
| | $ | 54.8 |
| | $ | 53.2 |
|
Plus: Depreciation and amortization | | 26.0 |
| | 28.4 |
| | 28.9 |
|
Less: Straight-line lease adjustments | | (1.6 | ) | | (2.1 | ) | | (2.3 | ) |
Plus: Lease incentive amortization | | — |
| | 0.1 |
| | 0.1 |
|
Less: Favorable/(unfavorable) lease amortization | | (2.9 | ) | | (3.3 | ) | | (3.6 | ) |
Less: Termination income | | (1.7 | ) | | (0.1 | ) | | (0.7 | ) |
Plus: Other (income)/expense, net | | 0.3 |
| | 0.4 |
| | (0.5 | ) |
Plus: Impairment of real estate assets | | 22.4 |
| | — |
| | — |
|
Plus: Selling, general, administrative and other expenses | | 7.9 |
| | 4.8 |
| | 4.2 |
|
Commercial Real Estate Cash NOI | | $ | 84.8 |
| | $ | 83.0 |
| | $ | 79.3 |
|
Land Operations
2017vs. 2016 vs. 2015
Direct year-over-year comparison of the Real Estate Development and SalesLand Operations segment results may not provide a consistent, measurable indicator of future performance because results from period to period are significantly affected by the mix and timing of property sales. Operating results, by virtue of each project’s asset class, geography and timing are inherently variable. Earnings from joint venture investments are not included in segment revenue, but are included in operating profit. The mix of real estate sales in any year or quarter can be diverse and 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 HawaiiHawai`i generally provides higher margins than does the sale of developed and commercial property, due to the low historical-costhistorical cost basis of the Company’s Hawaii land.land owned in Hawai`i. Consequently, Real Estate Development and SalesLand Operations revenue trends, cash flows from the sales of real estate, and the amount of real estate held for sale on the Company's balance sheetssheet 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.
Commercial Portfolio Acquisitions and Dispositions
In January 2014, the Company sold the 185,700 square-foot Maui Mall. Sales proceeds were utilized to complete the December 2013 acquisition of the Kailua Portfolio, which consisted of 21 improved properties, 51 acres of urban ground leases improved by third parties with 760,000 square feet of GLA, and vacant land located in Kailua, Hawaii and other Oahu locations.45
In December 2014, the Company acquired the Kaka'ako Commerce Center, a 204,400 square-foot industrial center in urban Honolulu.
44
Real Estate Leasing; 2014 compared with 2013
|
| | | | | | | | | | |
(dollars in millions) | 2014 | | 2013 | | Change |
Real Estate Leasing segment revenue | $ | 125.6 |
| | $ | 110.4 |
| | 14 | % |
Real Estate Leasing operating costs and expenses | 76.0 |
| | 64.4 |
| | 18 | % |
Selling, general and administrative expenses | 1.7 |
| | 2.3 |
| | (26 | )% |
Other segment expense | 0.4 |
| | 0.3 |
| | 33 | % |
Segment operating profit | $ | 47.5 |
| | $ | 43.4 |
| | 9 | % |
Operating profit margin | 37.8 | % | | 39.3 | % | | |
Net Operating Income* | $ | 77.3 |
| | $ | 68.8 |
| | 12 | % |
Leasable Area (million sq. ft.) - Improved (at year end) | | | | | |
Hawaii - improved | 2.6 |
| | 2.6 |
| | |
Mainland - improved | 2.5 |
| | 2.5 |
| | |
Total improved | 5.1 |
| | 5.1 |
| | |
Hawaii urban ground leases (acres at year end) | 115 |
| | 116 |
| | |
|
| | | | | | | | | | | |
(in millions) | 2017 | | 2016 | | 2015 |
Development sales revenue | $ | 35.0 |
| | $ | 12.5 |
| | $ | 75.0 |
|
Unimproved/other property sales revenue | 25.6 |
| | 28.7 |
| | 26.3 |
|
Other operating revenues1 | 23.9 |
| | 20.7 |
| | 18.9 |
|
Total Land Operations operating revenue | 84.5 |
| | 61.9 |
| | 120.2 |
|
Operating expenses | (73.9 | ) | | (46.3 | ) | | (83.8 | ) |
Impairment of real estate assets | — |
| | (11.7 | ) | | — |
|
Earnings from joint ventures | 3.3 |
| | 15.1 |
| | 30.2 |
|
Reductions in solar investments, net | (2.6 | ) | | (9.8 | ) | | (2.6 | ) |
Interest and other income | 2.9 |
| | (2.2 | ) | | (2.3 | ) |
Total Land Operations operating profit | $ | 14.2 |
| | $ | 7.0 |
| | $ | 61.7 |
|
Land Operations operating profit margin | 16.8% | | 11.3% | | 51.3% |
| |
*1 | ReferOther operating revenues includes revenue related to page 47trucking, renewable energy and diversified agriculture. In December 2016, the Company completed its final sugar harvest and ceased its sugar operations. The results of sugar operations have been presented within discontinued operations for a discussion of management's use of a non-GAAP financial measure and the required reconciliation of non-GAAP measures to GAAP measures.all periods presented. |
Real Estate Leasing2017: Land Operations revenue for 2014 was 14 percent higher than 2013, principally due to$84.5 million and included sales of one Kahala Avenue parcel, 35 units on Maui, a 293-acre parcel in Haiku, Maui, a 273-acre parcel on the revenue impact resulting from the acquisitionsisland of Waianae Mall (January 2013), Napili Plaza (May 2013), Pearl Highlands Center (September 2013), The ShopsKauai, six lots at Kukui'ula (September 2013),Maui Business Park, a 146-acre parcel in Kihei, Maui, a three-acre parcel in Wailea, Maui, and the Kailua Portfolio (December 2013), partially offset by the sale ofa 0.8-acre vacant, urban parcel on Maui, Mall (January 2014)along with trucking service and the disposition of ten Mainland properties in 2013 described in the acquisitions and dispositions table for 2013.power sales revenues.
Operating profit was 9 percent higher$14.2 million and included earnings from the Company's real estate development-related joint ventures and investments. The segment results also included a $2.6 million non-cash reduction in 2014, compared with 2013,the carrying value of the Company's Solar Investment and $2.9 million of interest and other income primarily related to notes receivable on a third-party development-for-sale project that was repaid during the fourth quarter of 2017.
2016: Land Operations revenue was $61.9 million, principally duerelated to the favorable impact from previously mentioned Hawaii acquisitionssales of three vacant parcels of $27.7 million on Maui, two residential lots on Oahu of $6.9 million, The Collection developer fee of $4.4 million, 0.5 acres at Maui Business Park II of $1.0 million, trucking service revenue, and Mainland dispositions, and improved performance from several Mainland properties. Depreciation expense was 11 percent higher year-over-year, as proceeds from commercial propertypower sales under 1031 exchange transactions are reinvested in commercial properties at a higher relative book basis than the property sold.revenue.
The Company's commercial portfolio's weighted average occupancy summarized by geographic location and property typeOperating profit for the year ended December 31, 2014 was as follows:
|
| | | |
Weighted average occupancy - percent | Hawaii | Mainland | Total |
Retail | 93% | 90% | 93% |
Industrial | 99% | 99% | 99% |
Office | 82% | 88% | 87% |
Total portfolio | 94% | 93% | 94% |
Same store occupancy in 2014 was 93 percent, compared to 92 percent in 2013, due primarily to higher Mainland occupancies at two office properties and one industrial property.
In 2014, approximately 9.6 percent of leases, measured as a percentage of expiring annual gross rent to total annual gross rent, were scheduled to expire. As of December 31, 2014, approximately 51 percent of the expiring leases had been renewed, and the change in average annual rental income on renewals, including tenant concessions, if any, as compared to the prior rental income was 13 percent. Total tenant improvement costs and leasing commissions were $6.9 million in 2014.
Leasable space was 5.1 million square feet at year-end 2014 and included the following activity:
|
| | | | | | | | | | |
Dispositions | | Acquisitions |
Date | | Property | | Leasable sq. ft | | Date | | Property | | Leasable sq. ft |
1-14 | | Maui Mall | | 185,700 | | 12-14 | | Kaka'ako Commerce Center | | 204,400 |
| | Total Dispositions | | 185,700 | | | | Total Acquisitions | | 204,400 |
Real Estate Leasing; 2013 compared with 2012
|
| | | | | | | | | | |
(dollars in millions) | 2013 | | 2012 | | Change |
Real Estate Leasing segment revenue | $ | 110.4 |
| | $ | 100.6 |
| | 10 | % |
Real Estate Leasing operating costs and expenses | 64.4 |
| | 57.2 |
| | 13 | % |
Selling, general and administrative expenses | 2.3 |
| | 1.7 |
| | 35 | % |
Other segment expense | 0.3 |
| | 0.1 |
| | 3X |
|
Segment operating profit | $ | 43.4 |
| | $ | 41.6 |
| | 4 | % |
Operating profit margin | 39.3 | % | | 41.4 | % | | |
Net Operating Income* | $ | 68.8 |
| | $ | 63.1 |
| | 9 | % |
Leasable Area (million sq. ft.) - Improved (at year end) | | | | | |
|
Hawaii - improved | 2.6 |
| | 1.4 |
| |
|
|
Mainland - improved | 2.5 |
| | 6.5 |
| | |
|
Total improved | 5.1 |
| | 7.9 |
| | |
Hawaii urban ground leases (acres at year end) | 116 |
| | 65 |
| | |
| |
* | Refer to page 47 for a discussion of management's use of a non-GAAP financial measure and the required reconciliation of non-GAAP measures to GAAP measures. |
Real Estate Leasing revenue for 2013 was 10 percent higher than the amount reported for 2012. The increase was principally due to the revenue impact resulting from the acquisitions of Waianae Mall (January 2013), Napili Plaza (May 2013), Pearl Highlands Center (September 2013), The Shops at Kukui'ula and the Kailua Portfolio (December 2013), partially offset by the dispositions of ten Mainland properties described in the table below summarizing acquisitions and dispositions.
Operating profit was 4 percent higher in 2013, compared with 2012, principally due to the favorable impact from previously mentioned Hawaii acquisitions and Mainland dispositions. Depreciation expense was 12 percent higher year-over-year, as proceeds from commercial property sales under 1031 exchange transactions are reinvested in commercial properties at a higher relative book basis than the property sold.
Leasable space decreased to 5.1 million at year-end 2013, from 7.9 million square feet in 2012, principally due to the following activity:
|
| | | | | | | | | | |
Dispositions | | Acquisitions |
Date | | Property | | Leasable sq. ft | | Date | | Property | | Leasable sq. ft |
1-13 | | Northpoint Industrial | | 119,400 | | 1-13 | | Waianae Mall | | 170,300 |
9-13 | | Centennial Plaza | | 244,000 | | 5-13 | | Napili Plaza | | 45,100 |
9-13 | | Issaquah Office Center | | 146,900 | | 9-13 | | Pearl Highlands Center | | 415,400 |
10-13 | | Republic Distribution Center | | 312,500 | | 9-13 | | The Shops at Kukui’ula | | 78,900 |
12-13 | | Activity Distribution Center | | 252,300 | | 12-13 | | Kailua Portfolio | | 386,200 |
12-13 | | Heritage Business Park | | 1,316,400 | | | | Kailua Ground Leases* | | 51 acres |
12-13 | | Savannah Logistics Park | | 1,035,700 | | | | | | |
12-13 | | Broadlands Marketplace | | 103,900 | | | | | | |
12-13 | | Meadows on the Parkway | | 216,400 | | | | | | |
12-13 | | Rancho Temecula Town Center | | 165,500 | | | | Total Improved Acquisitions | | 1,095,900 |
| | Total Dispositions | | 3,913,000 | | | | Total Ground Lease Acquisitions | | 51 acres |
* Land acquired and ground leased to tenants includes 760,000 square feet of tenant-improved commercial space.
Use of Non-GAAP Financial Measures
The Company presents net operating income (“NOI”), which is a non-GAAP measure derived from Real Estate Leasing revenues (determined in accordance with GAAP, including discontinued operations, less straight-line rental adjustments) minus property operating expenses (determined in accordance with GAAP). NOI does not have any standardized meaning prescribed by GAAP, and therefore, may differ from definitions of NOI used by other companies. The Company provides this information as an additional means of evaluating ongoing core operations. NOI should not be considered as an alternative to net income (determined in accordance with GAAP) as an indicator of the Company's financial performance, or as an alternative to cash flow from operating activities as a measure of the Company's liquidity. NOI is commonly used as a measure of operating performance because it is an indicator of the return on property investment, and provides a method of comparing property performance over time. NOI excludes general and administrative expenses, straight-line rental adjustments, interest income, interest expense, depreciation and amortization, and gains on sales of interests in real estate. The Company believes that the Real Estate Leasing segment's operating profit after discontinued operations is the most directly comparable GAAP measurement to NOI. A reconciliation of Real Estate Leasing operating profit to Real Estate Leasing segment NOI is as follows:
Reconciliation of Real Estate Leasing Operating Profit to NOI
(In Millions, Unaudited)
|
| | | | | | | | | | | |
| 2014 | | 2013 | | 2012 |
Real Estate Leasing segment operating profit before discontinued operations | $ | 47.5 |
| | $ | 43.4 |
| | $ | 41.6 |
|
Less amounts reported in discontinued operations (pre-tax) | (0.3 | ) | | (14.6 | ) | | (17.1 | ) |
Real Estate Leasing segment operating profit after subtracting discontinued operations | 47.2 |
| | 28.8 |
| | 24.5 |
|
| | | | | |
Depreciation and amortization | 28.0 |
| | 24.8 |
| | 22.2 |
|
Straight-line lease adjustments | (2.7 | ) | | (2.9 | ) | | (3.6 | ) |
General and administrative expenses | 4.5 |
| | 3.5 |
| | 2.9 |
|
Discontinued operations | 0.3 |
| | 14.6 |
| | 17.1 |
|
Real Estate Leasing segment NOI | $ | 77.3 |
| | $ | 68.8 |
| | $ | 63.1 |
|
Real Estate Development and Sales; 2014 compared with 2013 and 2012
|
| | | | | | | | | | | |
(dollars in millions) | 2014 | | 2013 | | 2012 |
Improved property sales revenue | $ | 64.1 |
| | $ | 331.6 |
| | $ | 5.0 |
|
Development sales revenue | 56.6 |
| | 41.8 |
| | 8.7 |
|
Unimproved/other property sales revenue | 29.3 |
| | 49.6 |
| | 18.5 |
|
Total Real Estate Development and Sales segment revenue | 150.0 |
| | 423.0 |
| | 32.2 |
|
Cost of Real Estate Development and Sales | (55.2 | ) | | (362.3 | ) | | (11.0 | ) |
Operating expenses | (16.7 | ) | | (16.0 | ) | | (11.4 | ) |
Write down of The Shops at Kukui'ula joint venture investment | — |
| | (6.3 | ) | | — |
|
Write down of Santa Barbara | — |
| | — |
| | (5.1 | ) |
Impairment of Bakersfield | — |
| | — |
| | (4.7 | ) |
Earnings (loss) from joint ventures | 2.0 |
| | 4.3 |
| | (4.4 | ) |
Other income | 5.6 |
| | 1.7 |
| | — |
|
Total Real Estate Development and Sales operating profit (loss) | $ | 85.7 |
| | $ | 44.4 |
| | $ | (4.4 | ) |
Real Estate Development and Sales operating profit margin | 57.1 | % | | 10.5 | % | | NM |
|
2014: Revenue from Real Estate Development and Sales, before subtracting amounts presented as discontinued operations, was $150.0 million, principally related to the sale of Maui Mall, seven residential lots on Oahu, 7.2 acres at Maui Business Park II, a 6.4-acre parcel at Wailea resort on Maui, 11 parcels on Maui, and the deferred recognition of $6.0 million of proceeds from three retail Mainland properties. Operating income included returns from the Company’s investment in the 205-unit One Ala Moana condominium on Oahu. Operating profit also2016 included joint venture residential sales of 451 residential units at The Collection, 14 units at Kukui’ulaKukui'ula on Kauai 15 residentialand 10 units at Ka Milo on the Island of Hawaii, two units at Kai Malu on Maui and 12 residential units at the Waihonua condominium on Oahu.Hawai`i. The margin on these sales was partially offset by joint venture expenses. During the fourth quarter of 2016, as a result of a change in its strategy for development activities, the Company recorded non-cash impairment charges of $11.7 million related to certain non-active, long-term development projects. The impairment loss recorded reduced the carrying amounts to the estimated fair value, reflecting the change to the Company’s development-for-sale strategy to de-risk its portfolio by not pursuing certain long-term projects that were not in active development and instead focus on projects with a shorter-term investment period, generally 3 to 5 years. Operating profit includes the reduction of the Company's solar energy investments of $9.8 million in 2016.
20132015: Revenue from Real Estate Development and Sales, before subtracting amounts presented as discontinued operations,Land Operations segment revenue was $423.0$120.2 million, principally related to the gain on the salesales of 10 Mainland improved properties, ninefive residential lots on Oahu, a 24-acre bulk parcel adjacent to18.4 acres at Maui Business Park II, two non-core10 parcels on Maui, landthree Kauai parcels, and a small commercial lot on Oahu. parcel in Santa Barbara, California.
Operating profit also included joint venture residential sales of 10329 Waihonua condominium units on Oahu, 22 units at Kukui’ulaKukui'ula on Kauai, 13 residential12 units at Ka Milo on the Island of HawaiiHawai`i, and seven unitsthe one remaining unit at Kai Malu on Maui. The margin on thethese sales described above was partially offset by a $6.3 million impairment charge injoint venture expenses. Operating profit includes the third quarter of 2013, related to taking control of The Shops at Kukui’ula and the consolidationreduction of the joint venture, as well as due diligence costs related to acquisition activities and joint venture expenses.Company's solar energy investments of $2.6 million in 2015.
Discontinued Operations
2017vs. 2016 vs. 2015
2012: Revenue from Real Estate Development and Sales, before subtracting amounts presented as discontinued operations, was $32.2 million, principally related to the gain on the sale of 286 acres of agricultural-zoned land on Maui, a 4.1-acre parcel at Maui Business Park II, Firestone Boulevard Building, two leased fee parcels on Maui, three residential units on Oahu and several non-core land parcels on Maui. Operating profit also included joint venture sales of a parcel and seven residential units at Kukui’ula, eight residential units at Ka Milo and two units at Kai Malu. The margin on the sales described above was partially offset by $9.8 million of impairment charges in the second quarter of 2012, related to the Company’s Santa Barbara and Bakersfield development projects in California, resulting from the Company’s change in its development strategy to focus on development projects in Hawaii, as well as joint venture expenses.
Discontinued Operations;The revenue, operating profit,income (loss), and after-tax effects of discontinued operations for 2014, 20132017, 2016, and 20122015 were as follows (in millions, except per-share amounts)millions):
|
| | | | | | | | | | | |
| 2014 | | 2013 | | 2012 |
Proceeds from the sale of income-producing properties (Real Estate Development and Sales Segment) | $ | 70.1 |
| | $ | 337.6 |
| | $ | 8.9 |
|
Real Estate Leasing revenue (Real Estate Leasing Segment) | 0.3 |
| | 31.6 |
| | 36.4 |
|
| | | | | |
Gain on sale of income-producing properties | $ | 55.9 |
| | $ | 22.1 |
| | $ | 4.0 |
|
Real Estate Leasing operating profit | 0.3 |
| | 14.6 |
| | 17.1 |
|
Total operating profit before taxes | 56.2 |
| | 36.7 |
| | 21.1 |
|
Income tax expense | 21.9 |
| | 14.4 |
| | 8.3 |
|
Income from discontinued operations | $ | 34.3 |
| | $ | 22.3 |
| | $ | 12.8 |
|
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Sugar operations revenue | $ | 22.9 |
| | $ | 98.4 |
| | $ | 97.7 |
|
Cost of sugar operations | 22.5 |
| | 87.5 |
| | 124.6 |
|
Operating income (loss) from sugar operations | 0.4 |
| | 10.9 |
| | (26.9 | ) |
Sugar operations cessation costs | (2.7 | ) | | (77.6 | ) | | (22.6 | ) |
Gain on asset dispositions | 6.0 |
| | — |
| | — |
|
Income (loss) from discontinued operations before income taxes | 3.7 |
| | (66.7 | ) | | (49.5 | ) |
Income tax (expense) benefit | (1.3 | ) | | 25.6 |
| | 19.8 |
|
Income (loss) from discontinued operations | $ | 2.4 |
| | $ | (41.1 | ) | | $ | (29.7 | ) |
48
20142017:: The revenues and expenses Income from discontinued operations of $2.4 million for 2017 reflected gains realized on asset dispositions during the year, as well as the results of operations related to the sale of Maui Mall, a retail propertyfinal sugar voyage that was completed in Hawaii, were classified as discontinued operations.
2013: The revenuesJanuary 2017 and expensesother exit related costs related to the salescessation of Northpoint Industrial,the sugar operations. See Note 18, "Cessation of Sugar Operations" for further discussion regarding the cessation and the related costs associated with such exit and disposal activities.
2016:Loss from discontinued operations increased by $11.4 million from the prior year primarily due to an industrial propertyincrease in California; Centennial Plaza, an industrial property in Utah; Issaquah Office Center, an office building in Washington; Republic Distribution Center, an industrial property in Texas; Activity Distribution Center, an industrial building in California; Heritage Business Park, an industrial property in Texas; Savannah Logistics Center, an industrial warehouse in Georgia; Broadlands Marketplace, a retail property in Colorado; Meadows on the Parkway, a retail center in Colorado; and Rancho Temecula, a retail center in California were classified as discontinued operations. Additionally, the revenues and expensessugar cessation charges of $77.6 million recognized during 2016 related to Maui Mall,the cessation of the HC&S sugar operation, offset by improved results of operations related to the final harvest. The cessation charges included asset write-offs and accelerated depreciation, employee severance benefits and related costs, and property removal, restoration and other exit-related costs. See Note 18, "Cessation of Sugar Operations" for further discussion regarding the cessation and the related costs associated with such exit and disposal activities. The improved results of sugar operations were primarily due to lower overall production costs and higher sugar margins.
2015:Loss from discontinued operations during 2015 reflected the results of the Company's HC&S sugar operations. During 2015, the HC&S sugar operations incurred an operating loss of $26.9 million primarily due to low raw sugar margin as a retailresult of low production and low power margin due to low pricing and volume. The cessation charges of $22.6 million recognized during 2015 consist of employee severance benefits and related costs, as well as asset write-offs for certain fixed assets. There were no commercial property on Maui sold on January 6, 2014,sales in 2015 that were classified as discontinued operations pursuant to Financial Accounting Standards Board Accounting Standards Update 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.
Materials & Construction
2017 vs. 2016
|
| | | | | | | | | |
(dollars in millions) | 2017 | | 2016 | | Change |
Materials & Construction operating revenue | $ | 204.1 |
| | $ | 190.9 |
| | 6.9% |
Operating profit | $ | 22.0 |
| | $ | 23.3 |
| | (5.6)% |
Operating profit margin | 10.8% | | 12.2% | | |
Depreciation and amortization | $ | 12.2 |
| | $ | 11.7 |
| | 4.3% |
Aggregate tons delivered (tons in thousands) | 691.6 |
| | 696.1 |
| | (0.6)% |
Asphalt tons delivered (tons in thousands) | 553.8 |
| | 444.9 |
| | 24.5% |
Backlog1,2 at period end | $ | 202.1 |
| | $ | 242.9 |
| | (16.8)% |
1 Backlog represents the total of (1) the amount of revenue that Grace Pacific and Maui Paving, LLC, a 50-percent-owned unconsolidated affiliate, expect to realize on contracts awarded and (2) government contracts in which Grace Pacific has been confirmed to be the lowest bidder and formal communication of the award is perfunctory ($17.2 million as of December 31, 2013.2017). Backlog primarily consists of asphalt paving and, to a lesser extent, Grace Pacific’s consolidated revenue from its Prestress and construction-and traffic control-related products. Backlog includes estimated revenue from the remaining portion of contracts not yet completed, as well as revenue from approved change orders. The length of time that projects remain in backlog can span from a few days for a small volume of work to 36 months for large paving contracts and contracts performed in phases. Maui Paving's backlog at December 31, 2017 and 2016 was $10.6 million and $15.0 million, respectively.
2012:2 The revenue and expenses related to the sales of the Firestone Boulevard Building and Northpoint Industrial, two industrial properties in California, and two leased fee properties in Maui were classified as discontinued operations. Northpoint Industrial was sold in January 2013, but was classified as held for sale, asAs of December 31, 2012, in2017 and 2016, the consolidated balance sheets. Additionally, the revenues, expensesbacklog included contractual revenue with related parties of $1.0 million and operating profit from Northpoint were classified as discontinued operations for all periods presented.$1.3 million, respectively.
Materials and Construction
Materials and Construction (2013 includes Grace results only from its October 1, 2013 acquisition)
|
| | | | | | |
(dollars in millions) | 2014 | 2013 |
Revenue | $ | 234.3 |
| $ | 54.9 |
|
Operating profit | $ | 25.9 |
| $ | 2.9 |
|
Operating profit margin | 11.1 | % | 5.3 | % |
Depreciation and amortization | $ | 15.2 |
| $ | 4.4 |
|
Aggregate produced (tons in thousands) | 793.7 |
| 193.1 |
|
Aggregate used and sold (tons in thousands) | 711.4 |
| 112.3 |
|
Asphaltic concrete placed (tons in thousands) | 470.5 |
| 114.5 |
|
Backlog | $ | 219.4 |
| $ | 218.1 |
|
On October 1, 2013, the Company completed the acquisition of Grace. Segment results for 2013 reflect Grace's results from the date of acquisition to December 31, 2013, and are, therefore, not comparable to full year results for 2014.
Materials and& Construction revenue was $234.3$204.1 million in 2014, and was2017, compared to $190.9 million in 2016. Revenue increased 6.9 percent primarily attributabledue to Grace's paving activitieshigher overall net material and construction material sales.volumes. Backlog at the end of December 31, 20142017 was $219.4$202.1 million, compared to $218.1$242.9 million as of December 31, 2013.2016. Backlog includes all ofreasonably expected to be filled within the backlog of Maui Paving, a 50 percent-owned non-consolidated affiliate.next fiscal year is $127.1 million.
Operating profit was $25.9$22.0 million for 2014,2017, compared to $23.3 million for 2016, primarily due to lower paving margins as a result of competitive market pressures, as well as lower earnings from a materials joint venture. Earnings from joint venture investments are not included in segment revenue but are included in operating profit.
2016 vs. 2015
|
| | | | | | | | | |
(dollars in millions) | 2016 | | 2015 | | Change |
Materials & Construction operating revenue | $ | 190.9 |
| | $ | 219.0 |
| | (12.8)% |
Operating profit | $ | 23.3 |
| | $ | 30.9 |
| | (24.6)% |
Operating profit margin | 12.2% | | 14.1% | |
|
Depreciation and amortization | $ | 11.7 |
| | $ | 11.6 |
| | 0.9% |
Aggregate tons delivered (tons in thousands) | 696.1 |
| | 840.2 |
| | (17.2)% |
Asphalt tons delivered (tons in thousands) | 444.9 |
| | 466.7 |
| | (4.7)% |
Backlog at period end | $ | 242.9 |
| | $ | 226.5 |
| | 7.2% |
Materials & Construction revenue was $190.9 million in 2016, compared to $219.0 million in 2015. Revenue declined 12.8 percent primarily due to a reduction in the price of asphalt sold due to the decline in oil prices and lower material and construction volumes and unit prices. During 2016, Materials & Construction experienced 232.5 crew days that were rained out, as compared to 175.5 days during 2015, which negatively impacted paving volume. Unit prices for paving decreased due to competitive pressures. Backlog at the end of December 31, 2016 was $242.9 million, compared to $226.5 million as of December 31, 2015.
Operating profit was $23.3 million for 2016, compared to $30.9 million for 2015. The decrease was primarily related to decreased paving, quarrying, and material sales, and reflected approximately $4.0 million of negative non-cash depreciation and amortization chargesas well as lower earnings from purchase price accounting adjustments to tangible and intangible assets recorded at fair value in the acquisition of Grace.
Agribusiness
Agribusiness; 2014 compared with 2013
|
| | | | | | | | | | |
(dollars in millions) | 2014 | | 2013 | | Change |
Revenue | $ | 120.5 |
| | $ | 146.1 |
| | (18 | )% |
Operating profit (loss) | $ | (11.8 | ) | | $ | 10.7 |
| | NM |
|
Operating profit margin | NM |
| | 7.3 | % | | |
Tons sugar produced | 162,100 |
| | 191,500 |
| | (15 | )% |
Tons sugar sold (raw and specialty sugar) | 154,300 |
| | 159,600 |
| | (3 | )% |
Agribusiness revenue decreased $25.6 million, or 18 percent, in 2014 compared with 2013. The decrease was primarily due to $22.1 million in lower raw sugar sales revenue due principally to lower prices, $5.0 million in lower vessel
charter revenue due to no outside charters in 2014, and $2.6 million lower specialty sugar sales from lower volume,a materials joint venture, partially offset by $2.0 million in higher powerasphalt sales volume and price, and $1.5 million in higher molasses sales volume.
Operating profit decreased $22.5 million in 2014 compared with 2013. The decrease was primarily due to $25.3 million in lower raw sugar marginmargins, due to lower pricing and production during the year,material cost. Operating profit for 2016 was also impacted by a $2.6 million accrual for environmental costs related to the management of a former quarry site and a net loss of $1.0 million related to the sales of vacant land parcels by an unconsolidated affiliate. Earnings from joint venture investments are not included in lower othersegment revenue but are included in operating income, which included insurance proceeds collections in 2013 that did not occur in 2014 and no outside charters, partially offset by $2.3 million higher power revenue primarily due to a higher volume of deliveries.profit.
Sugar production in 2014 was 15 percent lower than 2013 due principally to a lower number of acres harvested as a result of inclement weather during the harvesting season. Tons of sugar sold was three percent lower in 2014 than in 2013, due principally to lower volume of specialty sugar sold.
Agribusiness; 2013 compared with 2012
|
| | | | | | | | | |
(dollars in millions) | 2013 | | 2012 | | Change |
Revenue | $ | 146.1 |
| | 182.3 |
| | (20 | )% |
Operating profit | $ | 10.7 |
| | 20.8 |
| | (49 | )% |
Operating profit margin | 7.3 | % | | 11.4 | % | | |
Tons sugar produced | 191,500 |
| | 178,300 |
| | 7 | % |
Tons sugar sold (raw and specialty sugar) | 159,600 |
| | 198,200 |
| | (19 | )% |
Agribusiness revenue decreased $36.2 million, or 20 percent, in 2013 compared with 2012. The decrease was primarily due to $29.9 million in lower raw sugar sales revenue due principally to lower prices and one less raw sugar delivery in the year as compared to 2012, $3.6 million in lower molasses revenue from lower volume and prices, $3.2 million in lower specialty sugar sales from lower volume and pricing, and $2.4 million in lower trucking revenue due to terminated operations on Kauai, partially offset by $4.4 million in higher vessel charter revenue from the completion of an outside charter.
Operating profit decreased $10.1 million in 2013 compared with 2012. The decrease was primarily due to $9.0 million in lower raw sugar margin due to lower pricing during the year, $1.7 million in lower other operating income, which included lower outside leases, and $1.1 million in lower molasses margin from lower net prices due to changes in transportation logistics during the year, partially offset by $1.5 million higher vessel charter margin from the completion of an outside charter.
Sugar production in 2013 was 7 percent higher than 2012 due principally to higher yields. Tons of sugar sold was 19 percent lower in 2013 than in 2012, due principally to four sugar shipments completed in 2013 as compared to five completed sugar shipments in 2012.
LIQUIDITY AND CAPITAL RESOURCES
Overview:A&B’s&B's primary liquidity needs have historically been to support working capital requirements and fund capital expenditures, commercial real estate acquisitions and real estate developments. A&B’s principal sources of liquidity have been cash flows provided by operating activities, available cash and cash equivalent balances, and borrowing capacity under its various credit facilities.
A&B’s operating income is generated by its subsidiaries. There are no material restrictions on the ability of A&B’s wholly owned subsidiaries to pay dividends or make other distributions to A&B. A&B regularly evaluates investment opportunities, including development projects, commercial real estate acquisitions, joint venture investments, share repurchases, business acquisitions and other strategic transactions to increase shareholder value. A&B cannot predict whether or when it may enter into acquisitions or joint venturesmake investments or what impact any such transactions could have on A&B’s results of operations, cash flows or financial condition. A&B’s cash flows from operations, borrowing availability and overall liquidity are subject to certain risks and uncertainties, including those described in the section entitled “Risk Factors”"Risk Factors" beginning on page 17.13.
On December 1, 2014, ABP Pearl Highlands LLC, a wholly owned subsidiary of A&B, refinanced a $58.1 million mortgage loan that bore interest at 5.89 percent, required monthly payments of principal and interest of approximately $0.4 million, and had a final balloon payment of $56.2 million due on September 15, 2016. The new loan (Refinanced Loan) was increased to $92.0 million and bears interest at 4.15 percent. The Refinanced Loan matures in December 2024 and requires monthly principal and interest payments of approximately $0.4 million. A final principal payment of approximately $73.0 million is due on December 8, 2024. The Refinanced Loan is secured by the Pearl Highlands Center, located in Pearl City, Oahu, under a Mortgage and Security Agreement between ABP Pearl Highlands LLC and The Northwestern Mutual Life Insurance Company.
Cash Flows:Cash flows provided by (used in) operating activities continue to beused in operations for the Company’s most significant source of liquidity. Netyear ended December 31, 2017 was $1.3 million while cash flows from (used in)operations for the years ended December 31, 2016 and 2015 were $111.2 million, and $129.1 million, respectively. Cash flows from operating activities which includeincludes expenditures related to real estate development inventory expenditures, totaled $39.1developments held for sale. The decrease in cash flows from operating activities is primarily attributed to cash outlays for working capital purposes, including a discretionary pension contribution and employee severance payments related to the cessation of HC&S sugar operations. These outflows are offset by non-cash impairment charges of $22.4 million for 2014, $(38.3) million for 2013 and $10.9 million for 2012. Cash flows for 2014 were higher than 2013 primarily due to lowercertain commercial real estate development inventory sales expenditures, which decreased by $108.9 million, principally due toassets included in the purchase of 30 Kahala residential properties on Oahu in 2013, and higher net income in 2014. These increases were partially offset by lower real estate development sales proceeds and an increase in working capital, principally related to inventories.2017 operations.
Net cash flowsCash used in investing activities were $28.0was $3.9 million and $33.2 million for 2014, $211.7the years ended December 31, 2017 and 2016, respectively, while cash provided by investing activities was $18.4 million for 2013 and $50.1 million for 2012. The netthe year ended December 31, 2015. During the year ended December 31, 2017, cash used in investing activities in 2014 included $60.2 million for capital expenditures, including $24.2 million related to a portion of the acquisition price of Kaka'ako Commerce Center expected to be funded with reverse 1031 proceeds, $12.7 millioncash outlays related to capital improvements to commercial properties, $10.7 million for Materials and Construction segment-related capital expenditures and investments in unconsolidated affiliates, which were $42.5 million and $41.9 million, respectively. Proceeds received from the balancedisposal of properties and other assets were $47.2 million, primarily related to routine replacementsthe sales of Midstate 99 Distribution Center for agricultural operations. Capital expenditures$33.4 million in November and The Maui Clinic Building for $3.4 million in January. Other investing cash flow activity during 2017 included $33.3 million of proceeds from joint ventures and other investments, primarily related to 1031 commercial property acquisitions totaled $14.9 million and was related to the acquisitionrepayment of Kaka'ako Commerce Center. Other cash flows used in investing activities included a $23.8 million tax equity solar investment, $30.6 million of real estate investments and $20.5 million fornotes receivable on a minority interest in a materials joint venture. These cash flows were partially offset by $9.5 million in proceeds, principally from deferred proceeds associated with the sale of three Mainland retail propertiesthird-party development-for-sale project in the fourth quarter of 2013, $85.6 million in proceeds related to the reverse 1031 sale of Maui Mall, and $36.2 million in cash proceeds related to real estate activities, including $20.0 million from A&B's preferred investment in the One Ala Moana condominium project, $8.9 million from Kukui'ula joint venture investments related to sales of residential units, and $5.0 million from the sale of the Crossroads investment.
Net cash flows used in investing activities in 2013 included $32.5 million for capital expenditures, and was composed of $12.3 million related to capital improvements to commercial properties, $4.9 million for Materials and Construction segment-related capital expenditures and the balance primarily related to routine replacements for agricultural operations. Capital expenditures related to 1031 commercial property acquisitions totaled $472.8 million and was related to the acquisitions of the Kailua Portfolio, Pearl Highlands Center, Waianae Mall and Napili Plaza. Other cash flows used in investing activities included $19.4 million for the One Ala Moana condominium investment and $20.0 million principally related to investments in A&B's Kukui'ula joint venture projects. These cash flows were partially offset by $330.8 million in proceeds from 1031 commercial property dispositions and $5.1 million in cash proceeds received primarily from real estate-related investments.quarter.
Net cash flows used in investing activities for capital expenditures were as follows:
| | | | December 31, | |
(dollars in millions) | | 2014 | | 2013 | | Change | |
Commercial real estate property improvements | | $ | 32.6 |
| | $ | 7.7 |
| | 4X |
| |
(in millions) | | 2017 | | 2016 | | Change |
Commercial real estate property acquisitions/improvements | | $ | 26.7 |
| | $ | 95.0 |
| | (71.9)% |
Tenant improvements | | 4.3 |
| | 8.0 |
| | (46 | )% | 6.1 |
| | 3.8 |
| | 60.5% |
Quarrying and paving | | 10.7 |
| | 4.9 |
| | 118 | % | 6.3 |
| | 9.3 |
| | (32.3)% |
Agribusiness and other | | 12.6 |
| | 11.9 |
| | 6 | % | 3.4 |
| | 8.0 |
| | (57.5)% |
Total capital expenditures* | | $ | 60.2 |
| | $ | 32.5 |
| | 85 | % | |
Total capital expenditures1 | | $ | 42.5 |
| | $ | 116.1 |
| | (63.4)% |
| |
* | Capital expenditures for real estate developments to be held and sold as real estate development inventory are classified in the Consolidated Statements of Cash Flows as operating activities. |
1 Excludes capital expenditures for real estate developments to be held and sold as real estate development inventory, which are classified in the consolidated statement of cash flows as operating activities and are excluded from the table above.
In 2015,2018, A&B expects that its required minimum capital expenditures for growth and maintenance capital will be approximately $30$60-$65 million a year. A&B’s total capital budget for 2015, which is primarily related to growth capital, is currently plannedthe Commercial Real Estate portfolio and $8-$12 million for approximately $205Materials & Construction. An additional $40-$45 million and includes spendinghas been projected for new, but currently unidentified, investment opportunities as well as expenditures for real estate developments and currently unidentified 1031 lease portfolio acquisitions. Approximately $50 million of the total projected capital budget relates to ongoing real estate development, including The Collection, Maui Business Park II, Kukui’ula and other investments. Additionally, $125 million of the 2015 capital budget relate to currently unidentified real estate and other investment opportunities. Of the remaining projected capital expenditures, approximately $11 million relates to lease portfolio maintenance capital and the balance principally relates to maintenance capital for Grace and the Agribusiness segment.Land Operations. Should investment opportunities in excess of the amounts budgeted arise, A&B believes it has adequate sources of liquidity to fund these investments.
NetNet cash flows provided by (used in) financing activities totaled $(11.6)was $96.1 million $252.2 million and $28.6 million in 2014, 2013 and 2012, respectively. The decrease in cash flows from financing activities in 2014 was principally due to 2013
borrowings related to the Company's acquisition activities in 2013, which included the Kahala Avenue portfolio and a portion of the purchase price for the Kailua Portfolio, as well as a full year of dividend payments in 2014ended December 31, 2017 as compared to one quarternet cash used in financing activities for the years December 31, 2016 and 2015 of dividends in 2013.$84.7 million and $131.6 million, respectively. The increase in cash flows fromused in financing activities in 20132017 as compared to 2016 was principally due to borrowings related tohigher amounts borrowed under the Company's acquisition activities,revolving senior credit facility during 2017, offset by repayment amounts made on the Company's long term debt.
On November 16, 2017, in connection with its conversion to a REIT, the Company declared the Special Distribution of $783 million (approximately $15.92 per share), which includedrepresented the Kahala Avenue portfolioCompany's previously undistributed non-REIT earnings and profits accumulated prior to January 1, 2017, the Company's REIT taxable income for the 2017 taxable year, and a substantial portion of the purchase priceCompany's estimated REIT taxable income for the Kailua2018 taxable year. The Company completed the
payment of the Special Distribution on January 23, 2018 through an aggregate of $156.6 million in cash and the issuance of 22,587,299 shares of the Company's common stock.
On February 23, 2018, the Company acquired a portfolio of commercial properties in Hawai`i (the "Portfolio") for a total consideration of $254.1 million, including assumed debt of $62.0 million. The Portfolio expectedconsists of three grocery-anchored shopping centers: (1) Laulani Village Shopping Center located in Ewa Beach, Oahu, (2) Hokulei Village Shopping Center located in Lihue, Kauai, and (3) Pu`unene Shopping Center located in Kahului, Maui.
The acquisition of the Portfolio was funded through proceeds from the sale of U.S. Mainland commercial properties via tax-deferred §1031 exchanges, the assumption of a $62.0 million promissory note (“Promissory Note”), and borrowings under the Company’s revolving senior credit facility at the time of closing.
The Promissory Note bears interest at 3.93 percent and requires monthly interest payments of approximately $0.2 million until May 2020 and principal and interest payments of approximately $0.3 million thereafter. The Promissory Note matures on May 1, 2024 and is secured by the Laulani Village Shopping Center.
On February 26, 2018,the Company entered into an agreement with Wells Fargo Bank, National Association and a syndicate of other financial institutions that provides for a $50 million term loan facility (“Wells Fargo Term Facility”). The Company also drew $50 million under the Wells Fargo Term Facility on February 26, 2018 and used such term loan proceeds to be funded with reverse 1031 proceeds.repay amounts that were borrowed under the Company’s Revolving Credit Facility to fund the acquisition of the Portfolio. Borrowings under the Wells Fargo Term Facility bear interest at a stated rate, as defined, plus a margin that is determined based on a pricing grid using the ratio of debt to total assets ratio, as defined.
The Company believes that funds generated from results of operations, available cash and cash equivalents, and available borrowings under credit facilities will be sufficient to finance the Company’s business requirements for the next fiscal year, including working capital, capital expenditures, and potential acquisitions and stock repurchases. There can be no assurance, however, that the Company will continue to generate cash flows at or above current levels or that it will be able to maintain its ability to borrow under its available credit facilities.
Other Sources of Liquidity: Additional sources of liquidity for the Company consisted of cash and cash equivalents, trade and income tax receivables, contracts retention, and quarry and sugar inventories, that totaled approximately $116.6totaling $174.1 million at December 31, 2014,2017, an increase of $12.6$73.7 million from December 31, 2013.2016. This net increase wasis primarily due primarily to $6.5aggregate borrowings of $100 million and $6.0 million in higher sugar and quarry inventories, respectively, partially offset by a $3.4 million decrease in trade receivables.under the Company's new term facilities during the fourth quarter of 2017.
The Company also has revolving credit and term facilities that provide additional sources of liquidity for working capital requirements or investment opportunities on a short-term as well as longer-term basis. Total debt was $706.0On September 15, 2017, the Company entered into a Second Amended and Restated Credit Agreement ("A&B Revolver") with Bank of America N.A., as administrative agent, First Hawaiian Bank, and other lenders party thereto, which amended and restated its existing $350 million atcommitted revolving credit facility ("Revolving Credit Facility"). The A&B Revolver increased the endtotal revolving commitments to $450 million, extended the term of 2014 compared with $710.7 million at the endRevolving Credit Facility to September 15, 2022, amended certain covenants, and reduced the interest rates and fees charged under the Revolving Credit Facility. Additionally, all other terms of 2013. As ofthe Revolving Credit Facility remain substantially unchanged. At December 31, 2014, available borrowings under these facilities, which are more fully described below, totaled $205.52017, $66.0 million was outstanding, $11.8 million in letters of credit had been issued against the facility, and includes $16.3$372.2 million of capacity that may only be used for asphalt purchases.remained available.
TheIn December 2015, the Company hasentered into a replenishing 3-yearthree-year unsecured note purchase and private shelf agreement (the "Prudential Agreement") with Prudential Investment Management, Inc. and its affiliates (collectively, “Prudential”"Prudential") under whichthat enabled the Company mayto issue notes in an aggregate amount up to $300$450 million, less the sum of all principal amounts then outstanding on any notes issued by the Company or any of its subsidiaries to Prudential and the amounts of any notes that are committed under the note purchase agreement.Prudential Agreement. The ability to draw additional amountsPrudential Agreement, as amended, expires in December 2018 and contains certain restrictive covenants that are substantially the same as the covenants contained in the A&B Revolver, as amended. Borrowings under the shelf facility expires in June 2015. At December 31, 2014, approximately $7.5 million was available under the facility.
The Company has a revolving senior credit facility that provides for an aggregate $350 million, 5-year unsecured commitment (A&B Senior Credit Facility), with an uncommitted $100 million increase option. The facility expires in June 2017. The A&B Senior Credit Facility also provides for a $100 million sub-limit for the issuance of standby and commercial letters of credit and an $80 million sub-limit for swing line loans. Amounts drawn under the facilities bear interest at London Interbank Offered Rate (“LIBOR”) plus a margin based on a ratiorates that are determined at the time of debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) pricing grid. At December 31, 2014, $156.1 million was outstanding, $12.2 million in letters of credit had been issued against the facilities, and $181.7 million was undrawn.borrowing.
A&B’s ability to access its credit facilities is subject to its compliance with the terms and conditions of the credit facilities, including financial covenants. The financial covenants under current agreements require A&B to maintain certain financial covenants,metrics, such as the maintenance of minimum shareholders’ equity levels, minimum EBITDA to fixed charges ratio, maximum debt to total assets ratio, minimum unencumbered income-producing asset value to unencumbered debt ratio and limitations on priority debt. At December 31, 2014,As a result of the Special Distribution, that was declared on November 16, 2017 and settled on January 23, 2018, the Company received waivers related to the impact of the Special Distribution on the minimum
shareholder’s equity computation for its A&B was in compliance with all such covenants. While there can be no assurance that A&B will remain in compliance with its covenants, A&B expects that it will remain in compliance. Credit facilities areRevolver and unsecured term loan agreements. The Company's debt is more fully described in Note 98 to the Consolidated Financial Statements.
Balance Sheet:The Company hadhas a working capital deficitsdeficit of $7.1$652.0 million and $48.4 million atas of December 31, 20142017, which is a decrease of $625.2 million, from a $26.8 million deficit as of December 31, 2016. The change in the working capital is due to the increase in dividend payable related to the special distribution of $783.0 million comprised of $156.6 million in cash and 2013, respectively.$626.4 million in shares, both paid in January 2018. The increase in working capital is principallyliabilities was offset by an increase in cash on hand due to a $60 million bridge loan, related to the acquisition of the Kailua Portfolio, that was classified as a current liability in 2013 and repaid in January 2014. Additionally, working capital increased due to a $13.8 million and $5.4 millionfourth quarter term borrowings, an increase in inventories and costs and estimated earnings in excess of billings on uncompleted contracts, respectively, partially offset by a $13.4 million reduction in real estate held for sale from 2013due to the Company's strategic decision to put certain of its Mainland commercial properties up for sale, recognition of previously deferred revenue related to the salelast sugar harvest shipment (which was shipped as of Maui Mall.
Property-Net increased by $28.0 million, principally due to the acquisition of Kaka'ako Commerce Center, partially offsetDecember 31, 2016 but not recognized until receipt by the salecustomer in January 2017), payment of Maui Mall. The proceedssubstantially all HC&S cessation related liabilities during 2017, and an increase in the Company's income tax receivable from the Maui Mall sale were reinvested under a reverse 1031 transaction into the 2013 acquisition of the Kailua Portfolio.
Investments in Affiliates increased $77.2 million, primarily due2016 to investments in The Collection condominium project and the Kukui'ula vertical construction program.2017.
Tax-Deferred Real Estate Exchanges:
Sales: During 2014,2017, sales and condemnation proceeds that qualified for potential tax-deferral treatment under Internal Revenue Code Sections 1031 and 1033 totaled approximately $81.7$34.1 million from the sale of office properties in California and Maui Mall and non-corea land parcel on Maui. During 2013,2016, sales and condemnation proceeds that qualified for potential tax-deferral treatment under Internal Revenue Code Sections 1031§1031 and 1033§1033 totaled approximately $378.6$77.4 millionand were generated primarily from the sales of Northpoint Industrial, Centennial Plaza, Issaquah Office Center, Republic Distribution Center, Activity Distribution Center, Heritage Business Park, Savannah Logistics Park, Broadlands Marketplace, Meadows on the Parkway, Rancho Temecula Town Center, a 24-acre bulk parceltwo California properties and 209 acres of non-core land on Maui.one Utah office property in June 2016.
Purchases: During 2014,2017, the Company utilized $14.9$10.1 million from tax-deferred sales to acquire the Kaka'ako Commerce Center under a forward 1031 exchange transaction. The Company expects the majority of the balance of the purchase price will be returned to the Company with proceeds from reverse 1031 transactions. During 2013, the Company utilized $472.8 million from tax-deferred sales to acquire the Kailua Portfolio under a forward and reverse 1031 exchange transaction, Pearl Highlands CenterHonokohau Industrial Park under a reverse 1031 transaction,exchange transaction. During 2016, the Company acquired both the leasehold and Napili Plaza underleased fee interests of Manoa Marketplace, a forward 1031 transaction.
retail center on Oahu for $82.4 million. The proceeds from 1031the sales of the three Mainland properties that were completed during the second quarter have been applied to the Manoa Marketplace acquisition under a reverse §1031 transaction that qualifies for tax-deferral treatment under Internal Revenue Code §1031. Additionally, $8.2 million of §1033 condemnation proceeds received during the fourth quarter were applied to the Manoa Marketplace acquisition. Also during 2016, the Company acquired the leased fee interest in 2929 East Manoa Road for $2.8 million using $1.2 million of proceeds from the Mainland property sales under a §1031 transaction and expects to fund the remainder from sales proceeds in 2017.
Proceeds from §1031 tax-deferred sales are held in escrow pending future use to purchase new real estate assets. The proceeds from 1033§1033 condemnations are held by the Company until the funds are redeployed. As of December 31, 2014,2017, there were no proceedsapproximately $34.1 million from tax-deferred sales or condemnations that had not been reinvested.
CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET ARRANGEMENTS
Contractual Obligations: At December 31, 2014,2017, the Company had the following estimated contractual obligations (in millions):
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| | Payment due by period | |
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| | | | Payment due by period |
Contractual Obligations |
| Total | | 2015 | | 2016-2017 | | 2018-2019 | | Thereafter | | Total | | 2018 | | 2019-2020 | | 2021-2022 | | Thereafter |
Long-term debt obligations | (a) | $ | 705.6 |
| | $ | 74.5 |
| | $ | 290.0 |
| | $ | 66.7 |
| | $ | 274.4 |
| (a) | $ | 631.8 |
| | $ | 41.8 |
| | $ | 80.9 |
| | $ | 166.8 |
| | $ | 342.3 |
|
Estimated interest on debt | (b) | 155.1 |
| | 29.6 |
| | 48.3 |
| | 30.0 |
| | 47.2 |
| (b) | 150.3 |
| | 24.2 |
| | 42.2 |
| | 34.3 |
| | 49.6 |
|
Purchase obligations | (c) | 15.3 |
| | 15.3 |
| | — |
| | — |
| | — |
| (c) | 40.6 |
| | 40.6 |
| | — |
| | — |
| | — |
|
Pension benefits | | | 126.2 |
| | 12.6 |
| | 25.3 |
| | 25.5 |
| | 62.8 |
|
Post-retirement obligations | (d) | 7.6 |
| | 0.9 |
| | 1.7 |
| | 1.6 |
| | 3.4 |
| (d) | 7.8 |
| | 0.9 |
| | 1.8 |
| | 1.6 |
| | 3.5 |
|
Non-qualified benefit obligations | (e) | 6.2 |
| | 0.7 |
| | 3.7 |
| | 1.1 |
| | 0.7 |
| (e) | 4.2 |
| | 0.7 |
| | 1.4 |
| | — |
| | 2.1 |
|
Operating lease obligations | (f) | 45.1 |
| | 5.6 |
| | 10.8 |
| | 8.6 |
| | 20.1 |
| (f) | 42.4 |
| | 5.5 |
| | 10.2 |
| | 8.8 |
| | 17.9 |
|
Total |
| $ | 934.9 |
| | $ | 126.6 |
| | $ | 354.5 |
| | $ | 108.0 |
| | $ | 345.8 |
| | $ | 1,003.3 |
| | $ | 126.3 |
| | $ | 161.8 |
| | $ | 237.0 |
| | $ | 478.2 |
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(a) | Long-term debt obligations (including current portion, but excluding debt premium or discount) include principal repayments of short-term and long-term debt for the respective period(s) described (see Note 98 to the Consolidated Financial Statements for principal repayments for each of the next five years). Short-termLong-term debt includes amounts borrowed under revolving credit facilities, andwhich have been reflected as payments due in 2015.2022. This amount does not include the debt issuance cost. |
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(b) | Estimated cash paid for interest on debt is determined based on (1) the stated interest rate for fixed debt and (2) the rate in effect on December 31, 20142017 for variable rate debt. Because the Company’s variable rate debt may be rolled over, actual interest may be greater or less than the amounts indicated. Estimated interest on debt also includes swap payments on the Company's interest rate swaps. |
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(c) | Purchase obligations include only non-cancelable contractual obligations for the purchases of goods and services. Arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be purchased, a pricing structure and approximate timing of the transaction. Any amounts reflected on the consolidated balance sheet as accounts payable and accrued liabilities are excluded from the table above. |
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(d) | Post-retirement obligations include expected payments to medical service providers in connection with providing benefits to the Company’s employees and retirees. The $3.4$3.5 million noted in the column labeled “Thereafter” comprises estimated benefit payments for 20202023 through 2024.2027. Post-retirement obligations are described further in Note 1211 to the Consolidated Financial Statements. The obligation for pensions reflected on the Company’s consolidated balance sheet is excluded from the table above because the Company is unable to reliably estimate the timing and amount of contributions. |
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(e) | Non-qualified benefit obligations include estimated payments to executives and directors under the Company’s three non-qualified plans. The $0.7$2.1 million noted in the column labeled “Thereafter” comprises estimated benefit payments for 2023 through 2027. Additional information about the Company’s non-qualified plans is included in Note 11 to the Consolidated Financial Statements. |
payments for 2020 through 2024. Additional information about the Company’s non-qualified plans is included in Note 12 to the Consolidated Financial Statements.
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(f) | Operating lease obligations primarily include principally land, office space and equipment under non-cancelable, long-term lease arrangements that do not transfer the rights and risks of ownership to A&B. These amounts are further described in Note 109 to the Consolidated Financial Statements. |
A&B has not provided a detailed estimate of the timing and amount of payments related to uncertain tax position liabilities due to the uncertainty of when the related tax settlements are due. Additionally, upon Separation, the Company’s unrecognized tax benefits were reflected on Matson, Inc.’s (“Matson”) financial statements because Matson is considered the successor parent to the affiliated tax group. In connection with the Separation, the Company entered into a tax indemnification agreement with Matson and established a liability of $1 million representing the fair value of the indemnity to Matson in the event the Company’s pre-separation unrecognized tax benefits are not realized. The remaining liability as of December 31, 2014 was $0.2 million.
Other Commitments and Contingencies: A description of other commitments, contingencies and off-balance sheet arrangements, and incorporated herein by reference, is described in Note 1514 to the Consolidated Financial Statements of Item 8 in this Form 10-K.
OUTLOOK
All of the forward-looking statements made herein are qualified by the inherent risks of the Company’s operations and the markets it serves, as more fully described on pages 17 to 30 of this Form 10-K, and other filings with the SEC.
There are two primary sources of periodic economic forecasts and data for the State of Hawaii: The University of Hawaii Economic Research Organization (UHERO) and the state’s Department of Business, Economic Development and Tourism (DBEDT). Much of the economic information includedincorporated herein has been derived from economic reports available on UHERO’s and DBEDT’s websites that provide more complete information about the status of, and forecast for, the Hawaii economy. Information below on Oahu residential re-sales is published by the Honolulu Board of Realtors and Title Guaranty of Hawaii, Incorporated. Information below on the Oahu commercial real estate market is provided by Colliers International (Hawaii). Bankruptcy filing information cited below is published by the U.S. Bankruptcy Court District of Hawaii. Information below on foreclosures is from published reports. Debit and credit card same store sales activity is provided by First Hawaiian Bank.reference.
The Company’s overall outlook assumes steady growth for the U.S. and Hawaii economies. The Hawaii economy is projected to produce real growth of 3.1 percent in 2015, after growing 2.7 percent in 2014, and is expected to continue to grow at a moderate pace for the next several years.
The primary driver of growth is tourism, which set an all-time record for visitor expenditures and arrivals for a third consecutive year in 2014, and is expected to continue to grow at a modest rate for the next several years.
Construction continues its upward trend. The value of statewide construction permits through December 2014 was up by 21.9 percent over the same period in 2013, led by an increase in commercial/industrial construction and renovation/addition permits.
The median resale prices for homes and condominiums on Oahu reached record highs in 2014. The median resale price for a home on Oahu was $675,000, up 3.8 percent compared to 2013, and the median resale price of an Oahu condominium was up 5.4 percent at $350,000. In January, median prices for Oahu condominiums reached a record high of $381,500. For December 2014, days on market were low at 23 days for homes and 22 days for condos. Residential re-sales on Maui and Kauai have improved, while the Big Island remains flat.
Oahu retail vacancy remained low at 4.1 percent, while asking rents increased 8.7 percent to $3.64 in the fourth quarter of 2014, compared to last year. Fourth quarter industrial vacancy was 2.1 percent, compared to 2.7 percent in last year's fourth quarter. Industrial asking rents increased 11.1 percent in the fourth quarter of 2014, compared to last year. Office vacancy increased 1.0 percentage point in the fourth quarter of 2014, compared to the fourth quarter of 2013; however, asking rents improved 5.8 percent over the same comparative period.
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Property Type | Vacancy Rate for the Quarter Ended
December 31, 2014 | Average Asking Rent Per Square Foot Per Month (NNN) for the Quarter Ended December 31, 2014 |
Retail | 4.1% | $3.64 |
Industrial | 2.1% | $1.10 |
Office | 13.2% | $1.64 |
The state continues to see positive trends in other economic indicators. Unemployment in December of 2014 was 4.0 percent, down from 4.7 percent in December of 2013, and well below the national unemployment rate of 5.6 percent. Bankruptcy filings in 2014 were down by 18 percent compared to 2013. Foreclosures were down 40 percent in 2014 compared to last year. Debit and credit card same store sales activity increased 6.2 percent for the year over the comparable period of 2013.
Growth in Hawaii's economy is providing a positive operating environment for the Company's businesses. Real estate sales activity and interest at the Company's development projects improved in 2014, and management continues to see increased sales activity and interest as the Company heads into 2015. While the volume and timing of real estate sales are always difficult to predict with any accuracy, assuming sales occur as currently forecast, the Company is projecting material year-over-year improved performance from its “core” real estate development sales (exclusive of non-commercial property sales, such as the 2014 sale of Maui Mall).
Real Estate Leasing NOI was up 12.4 percent* in 2014 due to the portfolio expansion in 2013. The rate of NOI growth moderated significantly in the fourth quarter, however, due to the timing of 2013 acquisitions, which occurred primarily in the last four months of the year. For 2015, management expects NOI growth of approximately 6 percent to 8 percent due to expectations for improving portfolio occupancy and retail rent growth.
Agribusiness operating profit is dependent upon a variety of factors, including prices in effect at the time sugar is priced; total sugar production, which is affected by weather and the availability of water among other factors; the volume, price and timing of molasses sales; the volume and prices at which the Company sells power to the local electric utilities; and variability in other sources of income. With myriad financial variables affecting Agribusiness profitability, future earnings are difficult to predict.
Although a combination of improved production and sugar prices allowed the Company to achieve solid operating profit in Agribusiness from 2010 to 2013 of $59.8 million, the segment incurred an $11.8 million operating loss in 2014 due primarily to low sugar prices and extremely wet weather conditions that led to a significant reduction in sugar production. Prospects for this segment in 2015 have improved modestly, as pricing has increased compared to last year. Through December 31, 2014, the Company has priced 26 percent of the 2015 crop at prices higher than 2014. If the Company is able to maintain these pricing levels for the remainder of the crop and achieve its full-year production targets, and also considering the Company's expectation for other factors noted above, the segment would generate a lower level of losses than incurred in 2014. However, for the reasons previously described, it is difficult to forecast future results at this time. The Company continues to seek ways to address the inherent volatility of Agribusiness earnings.
At the end of December 2014, the Materials and Construction segment had a consolidated backlog of $219.4 million. The City and County of Honolulu's paving budget has increased from $100 million in 2012-2013, to $120 million for the 2013-2014 and to $132 million for 2014-2015. Segment performance in 2015 will be largely dictated by the percentage of the backlog Grace can complete, the amount of City bids issued, won and completed, and, to a lesser degree, by prevailing weather conditions. The Company will update its outlook for the Materials and Construction segment as the year progresses.
| |
* | Refer to page 47 for a discussion of management's use of a non-GAAP financial measure and the required reconciliation of non-GAAP measures to GAAP measures. |
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A&B is exposed to changes in interest rates, primarily as a result of its borrowing and investing activities used to maintain liquidity and to fund business operations. In order to manage its exposure to changes in interest rates, A&B utilizes a balanced mix of debt maturities, along with both fixed-rate and variable-rate debt. The nature and amount of A&B’s long-term and short-term debt can be expected to fluctuate as a result of future business requirements, market conditions, and other factors.
A&B’s fixed rate debt, excluding debt premium or discount, consists of $439.9$555.9 million in principal term notes. A&B’s variable rate debt consists of $169.8$66.5 million under its revolving credit facilities and $95.9$9.4 millionunder term loans. Other than in default, A&B does not have an obligation, nor the option in some cases, to prepay its fixed-rate debt prior to maturity and, as a result, interest rate fluctuations and the resulting changes in fair value would not have an impact on A&B’s financial condition or results of operations unless A&B was required to refinance such debt. For A&B’s variable rate debt, a one percent increase in interest rates would have a $2.5$0.8 million impact on A&B's results of operations for 2014,2017, assuming the December 31, 20142017 balance of the variable rate debt was outstanding throughout 2014.2017.
The following table summarizes A&B’s debt obligations at December 31, 2014,2017, presenting principal cash flows and related interest rates by the expected fiscal year of repayment.
| |
| Expected Fiscal Year of Repayment as of December 31, 2014 (dollars in millions) | Expected Fiscal Year of Repayment as of December 31, 2017 (dollars in millions) |
|
| |
| |
| |
| |
| |
| |
| | Fair Value at | | | | | | | | | | | | | | | Fair Value at |
|
| |
| |
| |
| |
| |
| |
| | December 31, | | | | | | | | | | | | | | | December 31, |
| 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | Thereafter | | Total | | 2014 | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | Thereafter | | Total | | 2017 |
Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed rate | $ | 43.7 |
| | $31.8 | | $ | 39.0 |
| | $ | 32.0 |
| | $ | 31.2 |
| | $ | 262.2 |
| | $439.9 | | $ | 464.9 |
| $ | 41.3 |
| | $ | 41.2 |
| | $ | 39.7 |
| | $ | 51.0 |
| | $ | 40.4 |
| | $ | 342.3 |
| | $ | 555.9 |
| | $ | 491.3 |
|
Average interest rate | 5.02 | % | | 5.00 | % | | 4.97 | % | | 4.89 | % | | 4.80 | % | | 4.60 | % | | 4.74 | % | |
| 4.60% | | 4.54% | | 4.47% | | 4.46% | | 4.42% | | 4.26% | | 4.36% | | |
Variable rate | $ | 30.9 |
| | $ | 62.6 |
| | $156.6 | | $ | 1.7 |
| | $ | 1.8 |
| | $ | 12.1 |
| | $265.7 | | $ | 264.7 |
| $ | 0.5 |
| | $ | — |
| | $ | — |
| | $ | 9.4 |
| | $ | 66.0 |
| | $ | — |
| | $ | 75.9 |
| | $ | 151.0 |
|
Average interest rate* | 2.43 | % | | 2.41 | % | | 2.16 | % | | 1.83 | % | | 1.89 | % | | 2.03 | % | | 2.11 | % | |
| 3.27% | | 3.24% | | 3.21% | | 3.16% | | 3.00% | | 3.02% | | 3.09% | | |
| |
* | Estimated interest rates on variable debt are determined based on the rate in effect on December 31, 2014. Actual interest rates may be greater or less than the amounts indicated when variable rate debt is rolled over. |
*Estimated interest rates on variable debt are determined based on the rate in effect on December 31, 2017. Actual interest rates may be greater or less than the amounts indicated when variable rate debt is rolled over.
From time to time, the Company may invest its excess cash in short-term money market funds that purchase government securities or corporate debt securities. At December 31, 2014,2017, the Company had a negligible amount invested in money market funds.funds was immaterial. These money market funds maintain a weighted average maturity of less than 90 days, and accordingly, a one percent change in interest rates is not expected to have a material impact on the fair value of these investments or on interest income.
A&B has no material exposure to foreign currency risks, although it is indirectly affected by changes in currency rates to the extent that changes in rates affect tourism in Hawaii.risks.
56
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
| | | | | Page | | | Page |
| | | | |
Report of Independent Registered Public Accounting Firm | Report of Independent Registered Public Accounting Firm | | Report of Independent Registered Public Accounting Firm | |
Consolidated Statements of Income | | |
Consolidated Statements of Comprehensive Income | | |
Consolidated Statements of Operations | | Consolidated Statements of Operations | |
Consolidated Statements of Comprehensive Income (Loss) | | Consolidated Statements of Comprehensive Income (Loss) | |
Consolidated Balance Sheets | Consolidated Balance Sheets | | Consolidated Balance Sheets | |
Consolidated Statements of Cash Flows | Consolidated Statements of Cash Flows | | Consolidated Statements of Cash Flows | |
Consolidated Statements of Equity | Consolidated Statements of Equity | | Consolidated Statements of Equity | |
Notes to Consolidated Financial Statements | Notes to Consolidated Financial Statements | | Notes to Consolidated Financial Statements | |
| 1. | Background and Basis of Presentation | | 1. | Background and Basis of Presentation | |
| 2. | Significant Accounting Policies | | 2. | Significant Accounting Policies | |
| 3. | Acquisitions | | 3. | Related Party Transactions | |
| 4. | Related Party Transactions | | 4. | Discontinued Operations | |
| 5. | Discontinued Operations | | 5. | Investments in Affiliates | |
| 6. | Investments in Affiliates | | 6. | Uncompleted Contracts | |
| 7. | Uncompleted Contracts | | 7. | Property | |
| 8. | Property | | 8. | Notes Payable and Long-Term Debt | |
| 9. | Notes Payable and Long-Term Debt | | 9. | Leases – The Company as Lessee | |
| 10. | Leases – The Company as Lessee | | 10 | Leases – The Company as Lessor | |
| 11 | Leases – The Company as Lessor | | 11. | Employee Benefit Plans | |
| 12. | Employee Benefit Plans | | 12. | Income Taxes | |
| 13. | Income Taxes | | 13. | Share-Based Awards | |
| 14. | Share-Based Awards | | 14. | Commitments and Contingencies | |
| 15. | Commitments and Contingencies | | 15. | Derivative Instruments | |
| 16. | Derivative Instruments | | 16. | Earnings Per Share ("EPS") | |
| 17. | Segment Results | | 17. | Redeemable Noncontrolling Interest | |
| | 18. | Cessation of Sugar Operations | |
| | 19. | Segment Results | |
| | 20. | Subsequent Events | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors and Shareholders of
Alexander & Baldwin, Inc.
Honolulu, Hawaii
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Alexander & Baldwin, Inc. and subsidiaries (the “Company”) as of December 31, 20142017 and 2013, and2016, the related consolidated statements of income,operations, comprehensive income (loss), equity, and cash flows, for each of the three years in the period ended December 31, 2014. These consolidated financial statements are2017, and the responsibility ofrelated notes (collectively referred to as the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States)“financial statements”). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidatedthe financial statements present fairly, in all material respects, the financial position of Alexander & Baldwin, Inc. and subsidiariesthe Company as of December 31, 20142017 and 2013,2016, and the results of theirits operations and theirits cash flows for each of the three years in the period ended December 31, 2014,2017, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2014,2017, based on the criteria established in Internal Control-IntegratedControl - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 9, 2015,1, 2018, expressed an adverseunqualified opinion on the Company’s internal control over financial reporting becausereporting.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material weakness.misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Honolulu, Hawaii
March 9, 20151, 2018
We have served as the Company’s auditor since 1950.
ALEXANDER & BALDWIN, INC.
CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS
(In millions, except per-shareper share amounts) |
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Operating Revenue: | | | | | | |
Commercial Real Estate | | $ | 136.9 |
| | $ | 134.7 |
| | $ | 133.6 |
|
Land Operations | | 84.5 |
| | 61.9 |
| | 120.2 |
|
Materials & Construction | | 204.1 |
| | 190.9 |
| | 219.0 |
|
Total operating revenue | | 425.5 |
| | 387.5 |
| | 472.8 |
|
Operating Costs and Expenses: | | | | | | |
Cost of Commercial Real Estate | | 75.5 |
| | 79.0 |
| | 80.4 |
|
Cost of Land Operations | | 60.4 |
| | 35.0 |
| | 71.1 |
|
Cost of Materials & Construction | | 166.1 |
| | 154.5 |
| | 175.7 |
|
Selling, general and administrative | | 66.4 |
| | 52.0 |
| | 51.6 |
|
REIT evaluation/conversion costs | | 15.2 |
| | 9.5 |
| | — |
|
Impairment of real estate assets | | 22.4 |
| | 11.7 |
| | — |
|
Total operating costs and expenses | | 406.0 |
| | 341.7 |
| | 378.8 |
|
Operating Income | | 19.5 |
| | 45.8 |
| | 94.0 |
|
Income related to joint ventures | | 7.2 |
| | 19.2 |
| | 36.8 |
|
Reductions in solar investments, net (Note 5, 12, 14) | | (2.6 | ) | | (9.8 | ) | | (2.6 | ) |
Interest and other income (expense), net | | 2.1 |
| | (1.7 | ) | | (2.5 | ) |
Interest expense | | (25.6 | ) | | (26.3 | ) | | (26.8 | ) |
Income from Continuing Operations Before Income Taxes and Net Gain (Loss) on Sale of Improved Properties | | 0.6 |
| | 27.2 |
| | 98.9 |
|
Income tax benefit (expense) | | 218.2 |
| | 0.5 |
| | (37.0 | ) |
Income from Continuing Operations Before Net Gain (Loss) on Sale of Improved Properties | | 218.8 |
|
| 27.7 |
|
| 61.9 |
|
Net gain (loss) on the sale of improved properties, net of income taxes | | 9.3 |
| | 5.0 |
| | (1.1 | ) |
Income from Continuing Operations | | 228.1 |
| | 32.7 |
| | 60.8 |
|
Income (loss) from discontinued operations, net of income taxes (Note 4) | | 2.4 |
| | (41.1 | ) | | (29.7 | ) |
Net Income (Loss) | | 230.5 |
| | (8.4 | ) | | 31.1 |
|
Income attributable to noncontrolling interest | | (2.2 | ) | | (1.8 | ) | | (1.5 | ) |
Net Income (Loss) Attributable to A&B Shareholders | | $ | 228.3 |
| | $ | (10.2 | ) | | $ | 29.6 |
|
| | | | | | |
Basic Earnings (Loss) Per Share of Common Stock: | | | | | | |
Continuing operations available to A&B shareholders | | $ | 4.63 |
| | $ | 0.66 |
| | $ | 1.15 |
|
Discontinued operations available to A&B shareholders | | 0.05 |
| | (0.84 | ) | | (0.61 | ) |
Net income (loss) available to A&B shareholders | | $ | 4.68 |
| | $ | (0.18 | ) | | $ | 0.54 |
|
Diluted Earnings (Loss) Per Share of Common Stock: | |
| | | | |
Continuing operations available to A&B shareholders | | $ | 4.30 |
| | $ | 0.65 |
| | $ | 1.14 |
|
Discontinued operations available to A&B shareholders | | 0.04 |
| | (0.83 | ) | | (0.60 | ) |
Net income (loss) available to A&B shareholders | | $ | 4.34 |
| | $ | (0.18 | ) | | $ | 0.54 |
|
| |
| | | | |
Weighted-Average Number of Shares Outstanding: | |
| | | | |
Basic | | 49.2 |
| | 49.0 |
| | 48.9 |
|
Diluted | | 53.0 |
| | 49.4 |
| | 49.3 |
|
| |
|
| | | | |
Amounts Available to A&B Shareholders (Note 16): | |
|
| | | | |
Continuing operations available to A&B shareholders, net of income taxes | | $ | 227.7 |
| | $ | 32.2 |
| | $ | 56.2 |
|
Discontinued operations available to A&B shareholders, net of income taxes | | 2.4 |
| | (41.1 | ) | | (29.7 | ) |
Net income (loss) available to A&B shareholders | | $ | 230.1 |
| | $ | (8.9 | ) | | $ | 26.5 |
|
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2014 | | 2013 | | 2012 |
Operating Revenue: | | | | | |
Real estate leasing | $ | 125.2 |
| | $ | 78.8 |
| | $ | 64.2 |
|
Real estate development and sales | 80.0 |
| | 85.4 |
| | 15.0 |
|
Materials and construction | 234.3 |
| | 54.9 |
| | — |
|
Agribusiness | 120.5 |
| | 146.1 |
| | 182.3 |
|
Total operating revenue | 560.0 |
| | 365.2 |
| | 261.5 |
|
Operating Costs and Expenses: |
| |
| |
|
Cost of real estate leasing | 78.3 |
| | 48.4 |
| | 38.4 |
|
Cost of real estate sales | 41.0 |
| | 46.7 |
| | 5.2 |
|
Cost of materials and construction contracts | 191.3 |
| | 47.6 |
| | — |
|
Cost of agribusiness goods and services | 131.9 |
| | 136.8 |
| | 161.0 |
|
Selling, general and administrative | 52.9 |
| | 41.2 |
| | 37.7 |
|
Gain on sale of agricultural parcel | — |
| | — |
| | (7.3 | ) |
Gain on charitable donation of appreciated land | — |
| | — |
| | (9.4 | ) |
Impairment of real estate assets (Santa Barbara) | — |
| | — |
| | 5.1 |
|
Separation/acquisition costs | — |
| | 4.6 |
| | 6.8 |
|
Total operating costs and expenses | 495.4 |
| | 325.3 |
| | 237.5 |
|
Operating Income | 64.6 |
| | 39.9 |
| | 24.0 |
|
Other Income and (Expense): |
| |
| |
|
Income (loss) related to joint ventures | 2.1 |
| | 4.3 |
| | (4.4 | ) |
Gain on insurance proceeds | — |
| | 2.4 |
| | — |
|
Impairment and equity losses related to joint ventures | (0.3 | ) | | (6.6 | ) | | (4.7 | ) |
Reduction in KRS II carrying value, net (Note 6, 13)
| (14.7 | ) | | — |
| | — |
|
Interest income and other | 6.1 |
| | 2.7 |
| | 0.1 |
|
Interest expense | (29.0 | ) | | (19.1 | ) | | (14.9 | ) |
Income From Continuing Operations Before Income Taxes | 28.8 |
| | 23.6 |
| | 0.1 |
|
Income tax expense (benefit) | (1.4 | ) | | 11.1 |
| | (5.9 | ) |
Income From Continuing Operations | 30.2 |
| | 12.5 |
| | 6.0 |
|
Income from discontinued operations, net of income taxes (Note 5) | 34.3 |
| | 22.3 |
| | 12.8 |
|
Net Income | 64.5 |
| | 34.8 |
| | 18.8 |
|
Income attributable to non-controlling interest | (3.1 | ) | | (0.5 | ) | | — |
|
Net Income Attributable to A&B | $ | 61.4 |
| | $ | 34.3 |
| | $ | 18.8 |
|
| | |
| | |
Basic Earnings per Share of Common Stock: | | | | | |
Continuing operations attributable to A&B shareholders | $ | 0.56 |
| | $ | 0.27 |
| | $ | 0.14 |
|
Discontinued operations attributable to A&B shareholders | 0.70 |
| | 0.50 |
| | 0.30 |
|
Net income attributable to A&B shareholders | $ | 1.26 |
| | $ | 0.77 |
| | $ | 0.44 |
|
Diluted Earnings per Share of Common Stock: |
| |
| |
|
Continuing operations attributable to A&B shareholders | $ | 0.55 |
| | $ | 0.26 |
| | $ | 0.14 |
|
Discontinued operations attributable to A&B shareholders | 0.70 |
| | 0.50 |
| | 0.30 |
|
Net income attributable to A&B shareholders | $ | 1.25 |
| | $ | 0.76 |
| | $ | 0.44 |
|
| | | | | |
Weighted Average Number of Shares Outstanding: | | | | | |
Basic | 48.7 |
| | 44.4 |
| | 42.6 |
|
Diluted | 49.3 |
| | 45.1 |
| | 42.9 |
|
| | | | | |
Amounts Attributable to A&B Shareholders: | | | | | |
Income from continuing operations, net of tax | $ | 27.1 |
| | $ | 12.0 |
| | $ | 6.0 |
|
Discontinued operations, net of tax | 34.3 |
| | 22.3 |
| | 12.8 |
|
Net income | $ | 61.4 |
| | $ | 34.3 |
| | $ | 18.8 |
|
See Notes to Consolidated Financial Statements.
See notes to consolidated financial statements.
ALEXANDER & BALDWIN, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2014 | | 2013 | | 2012 |
Net Income | $ | 64.5 |
| | $ | 34.8 |
| | $ | 18.8 |
|
Other Comprehensive Income (Loss), Net of Tax: | | | | | |
Defined benefit pension plans: | | | | | |
Net gain (loss) / prior service credit (cost) | (26.7 | ) | | 22.4 |
| | (6.0 | ) |
Amortization of net loss included in net periodic pension cost | 4.5 |
| | 7.7 |
| | 8.0 |
|
Amortization of prior service credit included in net periodic pension cost | (1.3 | ) | | (1.3 | ) | | (1.3 | ) |
Income taxes related to other comprehensive income | 9.2 |
| | (11.7 | ) | | (0.3 | ) |
Other Comprehensive Income (Loss) | (14.3 | ) | | 17.1 |
| | 0.4 |
|
Comprehensive Income | 50.2 |
| | 51.9 |
| | 19.2 |
|
Comprehensive income attributable to non-controlling interest | (3.1 | ) | | (0.5 | ) | | — |
|
Comprehensive income attributable to A&B | $ | 47.1 |
| | $ | 51.4 |
| | $ | 19.2 |
|
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2017 | | 2016 | | 2015 |
Net Income (Loss) | | $ | 230.5 |
| | $ | (8.4 | ) | | $ | 31.1 |
|
Other Comprehensive Income (Loss), net of tax: | | | | | | |
Unrealized interest rate hedging gain (loss) | | (0.4 | ) | | 2.6 |
| | — |
|
Reclassification adjustment for interest expense included in net income or loss | | 0.5 |
| | 0.4 |
| | — |
|
Defined benefit pension plans: | | | | | | |
Actuarial loss | | (3.2 | ) | | (4.6 | ) | | (7.1 | ) |
Amortization of net loss included in net periodic pension cost | | 5.7 |
| | 7.5 |
| | 7.3 |
|
Amortization of prior service credit included in net periodic pension cost | | (1.1 | ) | | (0.9 | ) | | (1.3 | ) |
Curtailment | | — |
| | (1.5 | ) | | — |
|
Prior service cost | | — |
| | — |
| | (0.4 | ) |
Income taxes related to other comprehensive income | | (0.6 | ) | | (1.4 | ) | | 0.6 |
|
Other comprehensive income (loss), net of tax | | 0.9 |
| | 2.1 |
| | (0.9 | ) |
Comprehensive Income (Loss) | | 231.4 |
| | (6.3 | ) | | 30.2 |
|
Comprehensive income attributable to noncontrolling interest | | (2.2 | ) | | (1.8 | ) | | (1.5 | ) |
Comprehensive Income (Loss) Attributable to A&B Shareholders | | $ | 229.2 |
| | $ | (8.1 | ) | | $ | 28.7 |
|
See Notes to Consolidated Financial Statements.
See notes to consolidated financial statements.57
ALEXANDER & BALDWIN, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except per-share amount)
| | | December 31, | December 31, |
| 2014 | | 2013 | 2017 | | 2016 |
ASSETS | | | | | | |
Current Assets | | | | |
Current Assets: | | | | |
Cash and cash equivalents | $ | 2.8 |
| | $ | 3.3 |
| $ | 68.9 |
| | $ | 2.2 |
|
Accounts receivable, less allowances of $1.7 for 2014 and $1.3 for 2013 | 33.1 |
| | 36.5 |
| |
Accounts receivable, net | | 34.1 |
| | 32.1 |
|
Contracts retention | 9.1 |
| | 9.3 |
| 13.2 |
| | 13.1 |
|
Costs and estimated earnings in excess of billings on uncompleted contracts | 15.9 |
| | 10.5 |
| 20.2 |
| | 16.4 |
|
Inventories | 81.9 |
| | 68.1 |
| 31.9 |
| | 43.3 |
|
Real estate held for sale | 2.5 |
| | 15.9 |
| 67.4 |
| | 1.0 |
|
Deferred income taxes | 8.3 |
| | 7.8 |
| |
Income tax receivable | 6.7 |
| | 1.4 |
| 27.7 |
| | 10.6 |
|
Prepaid expenses and other assets | 15.6 |
| | 17.0 |
| 11.4 |
| | 19.6 |
|
Total current assets | 175.9 |
| | 169.8 |
| 274.8 |
| | 138.3 |
|
Investments in Affiliates | 418.6 |
| | 341.4 |
| 401.7 |
| | 390.8 |
|
Real Estate Developments | 224.0 |
| | 249.1 |
| 151.0 |
| | 179.5 |
|
Property - Net | 1,301.7 |
| | 1,273.7 |
| |
Intangible Assets - Net | 63.9 |
| | 74.1 |
| |
Property – Net | | 1,147.5 |
| | 1,231.6 |
|
Intangible Assets – Net | | 46.9 |
| | 53.8 |
|
Deferred Tax Asset | | 16.5 |
| | — |
|
Goodwill | 102.3 |
| | 99.6 |
| 102.3 |
| | 102.3 |
|
Restricted Cash | | 34.3 |
| | 10.1 |
|
Other Assets | 43.5 |
| | 75.9 |
| 56.2 |
| | 49.9 |
|
Total assets | $ | 2,329.9 |
| | $ | 2,283.6 |
| $ | 2,231.2 |
| | $ | 2,156.3 |
|
| | | | |
LIABILITIES AND EQUITY | | | | | | |
Current Liabilities | | | | |
Current Liabilities: | | | | |
Notes payable and current portion of long-term debt | $ | 74.5 |
| | $ | 105.2 |
| $ | 46.0 |
| | $ | 42.4 |
|
Accounts payable | 37.6 |
| | 32.6 |
| 43.3 |
| | 35.2 |
|
Billings in excess of costs and estimated earnings on uncompleted contracts | 3.6 |
| | 4.4 |
| 5.7 |
| | 3.5 |
|
Accrued interest | 5.7 |
| | 5.9 |
| 6.5 |
| | 6.3 |
|
Deferred revenue | 16.5 |
| | 17.8 |
| 0.9 |
| | 17.6 |
|
Indemnity holdback related to Grace acquisition | 9.3 |
| | 18.8 |
| 9.3 |
| | 9.3 |
|
HC&S cessation-related liabilities | | 4.6 |
| | 19.1 |
|
Accrued dividends | | 783.0 |
| | — |
|
Accrued and other liabilities | 35.8 |
| | 33.5 |
| 27.5 |
| | 31.7 |
|
Total current liabilities | 183.0 |
| | 218.2 |
| 926.8 |
| | 165.1 |
|
Long-term Liabilities | | | | |
Long-term Liabilities: | | | | |
Long-term debt | 631.5 |
| | 605.5 |
| 585.2 |
| | 472.7 |
|
Deferred income taxes | 194.0 |
| | 193.2 |
| — |
| | 182.0 |
|
Accrued pension and post-retirement benefits | 54.8 |
| | 37.3 |
| 19.9 |
| | 64.8 |
|
Other non-current liabilities | 51.8 |
| | 60.7 |
| 40.2 |
| | 47.7 |
|
Total long-term liabilities | 932.1 |
| | 896.7 |
| 645.3 |
| | 767.2 |
|
Commitments and Contingencies (Note 15) |
|
| |
|
| |
Equity |
|
| |
|
| |
Common stock - no par value; authorized, 150 million shares; outstanding, 48.8 million and 48.6 million shares at December 31, 2014 and 2013, respectively | 1,147.3 |
| | 1,140.5 |
| |
Total liabilities | | 1,572.1 |
| | 932.3 |
|
Commitments and Contingencies (Note 14) | |
| |
|
Redeemable Noncontrolling Interest (Note 17) | | 8.0 |
| | 10.8 |
|
Equity: | | | | |
Common stock - no par value; authorized, 150 million shares; outstanding, 49.3 million and 49.0 million shares at December 31, 2017 and December 31, 2016, respectively | | 1,161.7 |
| | 1,157.3 |
|
Accumulated other comprehensive loss | (44.4 | ) | | (30.1 | ) | (42.3 | ) | | (43.2 | ) |
Retained earnings | 101.0 |
| | 49.4 |
| |
(Distributions in excess of accumulated earnings) Retained earnings | | (473.0 | ) | | 95.2 |
|
Total A&B shareholders' equity | 1,203.9 |
| | 1,159.8 |
| 646.4 |
| | 1,209.3 |
|
Non-controlling interest | 10.9 |
| | 8.9 |
| |
Noncontrolling interest | | 4.7 |
| | 3.9 |
|
Total equity | 1,214.8 |
| | 1,168.7 |
| 651.1 |
| | 1,213.2 |
|
Total liabilities and equity | $ | 2,329.9 |
| | $ | 2,283.6 |
| $ | 2,231.2 |
| | $ | 2,156.3 |
|
See Notes to Consolidated Financial Statements.
See notes to consolidated financial statements.
ALEXANDER & BALDWIN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2014 | | 2013 | | 2012 |
Cash Flows from Operating Activities: |
|
| |
|
| |
|
|
Net income | $ | 64.5 |
| | $ | 34.8 |
| | $ | 18.8 |
|
Adjustments to reconcile net income to net cash provided by (used in) operations: |
|
| |
|
| |
|
|
Depreciation and amortization | 55.0 |
| | 41.7 |
| | 35.1 |
|
Deferred income taxes | 8.8 |
| | (0.6 | ) | | (4.6 | ) |
Gains on asset transactions, net of impairment losses | (82.2 | ) | | (52.8 | ) | | (14.8 | ) |
Share-based expense | 4.9 |
| | 4.2 |
| | 5.4 |
|
Equity in (income) loss of affiliates, net of distributions | 0.1 |
| | (2.9 | ) | | 8.4 |
|
Changes in operating assets and liabilities: |
|
| |
|
| |
|
|
Trade, contracts retention, and other receivables | 1.6 |
| | 3.3 |
| | 0.1 |
|
Costs and estimated earnings in excess of billings on uncompleted contracts - net | (6.4 | ) | | (1.9 | ) | | — |
|
Inventories | (13.5 | ) | | (2.7 | ) | | 12.8 |
|
Prepaid expenses and other assets | 5.0 |
| | (0.4 | ) | | (10.0 | ) |
Accrued pension and post-retirement benefits | (2.3 | ) | | 5.2 |
| | 4.2 |
|
Accounts payable, contracts retention, and income taxes | (2.3 | ) | | (4.9 | ) | | (1.5 | ) |
Accrued and other liabilities | (6.0 | ) | | 7.6 |
| | (14.2 | ) |
Real estate inventory sales (real estate developments held for sale) | 53.6 |
| | 81.7 |
| | 8.4 |
|
Expenditures for real estate inventory (real estate developments held for sale) | (41.7 | ) | | (150.6 | ) | | (37.2 | ) |
Net cash provided by (used in) operations | 39.1 |
| | (38.3 | ) | | 10.9 |
|
Cash Flows from Investing Activities: |
|
| |
|
| |
|
|
Capital expenditures for property, plant and equipment | (60.2 | ) | | (32.5 | ) | | (45.4 | ) |
Capital expenditures related to 1031 commercial property transactions | (14.9 | ) | | (472.8 | ) | | (9.4 | ) |
Proceeds from investment tax credits and grants related to Port Allen Solar Farm | 4.5 |
| | 2.4 |
| | 7.5 |
|
Proceeds from disposal of property and other assets | 9.5 |
| | 1.2 |
| | 2.2 |
|
Proceeds from disposals related to 1031 commercial property transactions | 85.6 |
| | 330.8 |
| | 18.8 |
|
Payments for purchases of investments in affiliates and preferred investment | (75.1 | ) | | (43.4 | ) | | (17.5 | ) |
Proceeds from investments in affiliates and preferred investment | 36.2 |
| | 5.1 |
| | 2.9 |
|
Change in restricted cash associated with 1031 transactions | 0.6 |
| | 3.2 |
| | (9.2 | ) |
Acquisition of business, net of cash (including Grace indemnity holdback) | (14.2 | ) | | (5.7 | ) | | — |
|
Net cash used in investing activities | (28.0 | ) | | (211.7 | ) | | (50.1 | ) |
Cash Flows from Financing Activities: |
|
| |
|
| |
|
|
Proceeds from issuance of long-term debt | 283.0 |
| | 585.0 |
| | 134.0 |
|
Payments of long-term debt and deferred financing costs | (224.2 | ) | | (380.3 | ) | | (257.2 | ) |
Proceeds from (payments on) line-of-credit agreement, net | (62.3 | ) | | 51.6 |
| | (6.0 | ) |
Distributions to Alexander & Baldwin Holdings, Inc.(a) | — |
| | — |
| | (26.7 | ) |
Contributions from Alexander & Baldwin Holdings, Inc.(a) | — |
| | — |
| | 172.7 |
|
Distribution to non-controlling interests | (0.2 | ) | | (1.1 | ) | | — |
|
Dividends paid | (8.3 | ) | | (2.0 | ) | | — |
|
Proceeds from issuance (repurchase) of capital stock and other, net | 0.4 |
| | (1.0 | ) | | 11.8 |
|
Net cash provided by (used in) financing activities | (11.6 | ) | | 252.2 |
| | 28.6 |
|
Cash and Cash Equivalents: |
|
| |
|
| |
|
|
Net increase (decrease) for the year | (0.5 | ) | | 2.2 |
| | (10.6 | ) |
Balance, beginning of year | 3.3 |
| | 1.1 |
| | 11.7 |
|
Balance, end of year | $ | 2.8 |
| | $ | 3.3 |
| | $ | 1.1 |
|
Other Cash Flow Information: |
|
| |
|
| |
|
|
Interest paid, net of amounts capitalized | $ | (29.8 | ) | | $ | (19.1 | ) | | $ | (14.9 | ) |
Income taxes paid | $ | (14.2 | ) | | $ | (12.0 | ) | | $ | (2.0 | ) |
Non-cash Activities: |
|
| |
|
| |
|
|
Contribution of land and development assets to The Collection joint venture | $ | 33.8 |
| | $ | — |
| | $ | — |
|
Real estate exchanged for note receivable | $ | 3.6 |
| | $ | — |
| | $ | — |
|
Acquisition of Grace (issuance of equity and indemnity holdback) | $ | — |
| | $ | 219.8 |
| | $ | — |
|
Mortgage debt assumed at fair value in real estate acquisitions | $ | — |
| | $ | 142.2 |
| | $ | — |
|
Property (net) acquired in connection with the consolidation of The Shops at Kukui'ula | $ | — |
| | $ | 39.0 |
| | $ | — |
|
Capital expenditures included in accounts payable and accrued expenses | $ | 5.7 |
| | $ | 6.6 |
| | $ | 12.2 |
|
Contribution of land and development assets to Waihonua joint venture | $ | — |
| | $ | — |
| | $ | 24.2 |
|
Conversion of net investment of A&B Holdings into common stock | $ | — |
| | $ | — |
| | $ | 926.3 |
|
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Cash Flows from Operating Activities: | | | | | |
Net income (loss) | $ | 230.5 |
| | $ | (8.4 | ) | | $ | 31.1 |
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operations: | | | | | |
Depreciation and amortization | 41.4 |
| | 119.5 |
| | 55.7 |
|
Deferred income taxes | (199.0 | ) | | (20.1 | ) | | 16.9 |
|
Gains on asset transactions, net of asset write-downs | (12.7 | ) | | (11.6 | ) | | (35.8 | ) |
Share-based compensation expense | 4.4 |
| | 4.1 |
| | 4.7 |
|
Investments in affiliates, net of distributions | 5.5 |
| | 1.4 |
| | (3.7 | ) |
Changes in operating assets and liabilities: | | | | | |
Trade, contracts retention, and other receivables | (0.9 | ) | | 4.3 |
| | (3.1 | ) |
Costs and estimated earnings in excess of billings on uncompleted contracts - net | (1.5 | ) | | 0.7 |
| | (1.4 | ) |
Inventories | 11.4 |
| | 12.7 |
| | 25.9 |
|
Prepaid expenses, income tax receivable and other assets | (23.0 | ) | | (0.1 | ) | | (12.5 | ) |
Accrued pension and post-retirement benefits | (47.4 | ) | | 6.3 |
| | 3.6 |
|
Accounts payable and contracts retention | 3.3 |
| | (0.4 | ) | | 0.1 |
|
Accrued and other liabilities | (40.1 | ) | | 10.7 |
| | (18.2 | ) |
Real estate inventory sales (real estate developments held for sale) | 47.6 |
| | 7.4 |
| | 73.0 |
|
Expenditures for real estate inventory (real estate developments held for sale) | (20.8 | ) | | (15.3 | ) | | (7.2 | ) |
Net cash (used in) provided by operations | (1.3 | ) | | 111.2 |
| | 129.1 |
|
| | | | | |
Cash Flows from Investing Activities: | | | | | |
Capital expenditures for property, plant and equipment | (42.5 | ) | | (116.1 | ) | | (44.7 | ) |
Proceeds from disposal of property and other assets | 47.2 |
| | 88.8 |
| | 48.1 |
|
Payments for purchases of investments in affiliates and other investments | (41.9 | ) | | (47.2 | ) | | (29.4 | ) |
Proceeds from investments in affiliates and other investments | 33.3 |
| | 41.3 |
| | 44.4 |
|
Net cash (used in) provided by investing activities | (3.9 | ) | | (33.2 | ) | | 18.4 |
|
| | | | | |
Cash Flows from Financing Activities: | | | | | |
Proceeds from issuance of long-term debt | 292.5 |
| | 272.0 |
| | 132.0 |
|
Payments of long-term debt and deferred financing costs | (181.0 | ) | | (334.3 | ) | | (248.1 | ) |
Borrowings (payments) on line-of-credit agreement, net | 2.6 |
|
| (9.9 | ) | | (3.0 | ) |
Distribution to noncontrolling interests | (0.5 | ) | | (1.4 | ) | | (1.1 | ) |
Dividends paid | (10.3 | ) | | (12.3 | ) | | (10.3 | ) |
Proceeds from issuance (repurchase) of capital stock and other, net | (7.2 | ) | | 1.2 |
| | (1.1 | ) |
Net cash provided by (used in) financing activities | 96.1 |
| | (84.7 | ) | | (131.6 | ) |
| | | | | |
Cash, Cash Equivalents and Restricted Cash: | | | | | |
Net increase (decrease) in cash, cash equivalents, and restricted cash | 90.9 |
| | (6.7 | ) | | 15.9 |
|
Balance, beginning of period | 12.3 |
| | 19.0 |
| | 3.1 |
|
Balance, end of period | $ | 103.2 |
| | $ | 12.3 |
| | $ | 19.0 |
|
| |
(a) | Refer to Note 4, “Related Party Transactions.” |
See notes to consolidated financial statements.
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2017 | | 2016 | | 2015 |
Other Cash Flow Information: | | | | | |
Interest paid, net of capitalized interest | $ | (24.9 | ) | | $ | (26.2 | ) | | $ | (27.3 | ) |
Income taxes paid | $ | (4.0 | ) | | $ | — |
| | $ | (6.4 | ) |
| | | | | |
Noncash Investing and Financing Activities: | | | | | |
Contribution of land and development assets to joint ventures | $ | — |
| | $ | — |
| | $ | 9.6 |
|
Real estate exchanged for note receivable | $ | 2.5 |
| | $ | — |
| | $ | 1.9 |
|
Declared distribution from investment in affiliate | $ | — |
| | $ | 8.0 |
| | $ | — |
|
Declared distribution to noncontrolling interest | $ | — |
| | $ | 0.9 |
| | $ | 0.4 |
|
Asset retirement obligations | $ | — |
| | $ | 5.4 |
| | $ | 6.0 |
|
Uncollected proceeds from disposal of equipment | $ | 1.9 |
| | $ | — |
| | $ | — |
|
Capital expenditures included in accounts payable and accrued expenses | $ | 4.5 |
| | $ | 1.3 |
| | $ | 8.0 |
|
Dividends declared | $ | 783.0 |
| | $ | — |
| | $ | — |
|
See Notes to Consolidated Financial Statements.
ALEXANDER & BALDWIN, INC.
CONSOLIDATED STATEMENTS OF EQUITY
For the three years ended December 31, 2014
(In millions, except per-share amounts)millions)
| | | | | | | | | Accumulated | | | | | | Total Equity | | |
| | Common | | | Other | | | | | | |
|
|
|
| (Distributions | |
| | | | |
| | Stock | | Net | Compre- | | | Non- | | | |
| Accumulated | in Excess of | |
| | | | Redeem- |
| | | | Stated | | Invest- | hensive | Retained | | Controlling | | | | Common | Other | Accumulated | |
| | | | able |
| | Shares | | Value | | ment | | Loss | | Earnings | | interest | | Total | | Stock | Compre- | Earnings) | | Non- | | | | Non- |
Balance, January 1, 2012 | | — |
| | $ | — |
| | $ | 771.6 |
| | $ | (47.6 | ) | | $ | — |
| | $ | — |
| | $ | 724.0 |
| |
| | |
|
| Stated | hensive | Retained | | Controlling | | | | Controlling |
| | | Shares |
| Value | | Loss | | Earnings | | Interest | | Total | | Interest |
Balance, January 1, 2015 | | | 48.8 |
| | $ | 1,147.3 |
| | $ | (44.4 | ) | | $ | 101.0 |
| | $ | 10.9 |
| | $ | 1,214.8 |
| | $ | — |
|
Net income | | | | | | (1.6 | ) | | | | 20.4 |
| | | | 18.8 |
| | | | | | | | 29.6 |
| | 1.1 |
| | 30.7 |
| | 0.4 |
|
Other comprehensive income, net of tax | | | | | | | | 0.4 |
| | | | | | 0.4 |
| | | | | | (0.9 | ) | | | | | | (0.9 | ) | | |
Contribution from Alexander & Baldwin Holdings, Inc., net | | | | | | 154.5 |
| | | | | | | | 154.5 |
| |
Conversion of net investment of Alexander & Baldwin Holdings, Inc. into common stock | | 42.4 |
| | 924.5 |
| | (924.5 | ) | | | | | | | | — |
| |
Share-based compensation | | | | 2.1 |
| | | | | | | | | | 2.1 |
| |
Shares issued, net | | 0.5 |
| | 10.2 |
| | | | | | (0.3 | ) | | | | 9.9 |
| |
Excess tax benefit from share-based awards | | | | 1.2 |
| | | | | | | | | | 1.2 |
| |
Balance, December 31, 2012 | | 42.9 |
| | 938.0 |
| | — |
| | (47.2 | ) | | 20.1 |
| | — |
| | 910.9 |
| |
Net income | | | | | | | | | | 34.3 |
| | 0.5 |
| | 34.8 |
| |
Other comprehensive income, net of tax | | | | | | | | 17.1 |
| | | | | | 17.1 |
| |
Dividends paid on common stock ($0.04 per share) | | | | | | | | | | (2.0 | ) | | | | (2.0 | ) | |
Distributions to non-controlling interest | | | | | | | | | | | | (0.7 | ) | | (0.7 | ) | |
Share-based compensation | | | | 4.2 |
| | | | | | | | | | 4.2 |
| |
Grace acquisition | | 5.4 |
| | 196.3 |
| | | | | | | | 9.1 |
| | 205.4 |
| |
Shares issued or repurchased, net | | 0.3 |
| | 0.4 |
| | | | | | (3.0 | ) | | | | (2.6 | ) | |
Excess tax benefit from share-based awards | | | | 1.6 |
| | | | | | | | | | 1.6 |
| |
Balance, December 31, 2013 | | 48.6 |
| | 1,140.5 |
| | — |
| | (30.1 | ) | | 49.4 |
| | 8.9 |
| | 1,168.7 |
| |
Net income | | | | | | | | | | 61.4 |
| | 3.1 |
| | 64.5 |
| |
Other comprehensive income, net of tax | | | | | | | | (14.3 | ) | | | | | | (14.3 | ) | |
Dividends paid on common stock ($0.17 per share) | | | | | | | | | | (8.3 | ) | | | | (8.3 | ) | |
Distributions to non-controlling interest | | | | | | | | | | | | (1.1 | ) | | (1.1 | ) | |
Dividends on common stock ($0.21 per share) | | | | | | | | | (10.3 | ) | | | | (10.3 | ) | | |
Reclassification of redeemable noncontrolling interest (Note 17) | | | | | | | | | | | (8.5 | ) | | (8.5 | ) | | 8.5 |
|
Distributions to noncontrolling interest | | | | | | | | | | | | | — |
| | (0.4 | ) |
Adjustments to redemption value of redeemable noncontrolling interest (Note 17) | | | | | | | | | (3.1 | ) | | | | (3.1 | ) | | 3.1 |
|
Share-based compensation | | | | 4.9 |
| | | | | | | | | | 4.9 |
| | | | 4.7 |
| | | | | | | | 4.7 |
| | |
Shares issued or repurchased, net | | 0.2 |
| | 0.6 |
| | | | | | (1.5 | ) | | | | (0.9 | ) | | 0.1 |
| | (0.9 | ) | | | | | | | | (0.9 | ) | | |
Excess tax benefit from share-based awards | | | | 1.3 |
| | | | | | | | | | 1.3 |
| | | | 0.6 |
| | | | | | | | 0.6 |
| | |
Balance, December 31, 2014 | | 48.8 |
| | $ | 1,147.3 |
| | $ | — |
| | $ | (44.4 | ) | | $ | 101.0 |
| | $ | 10.9 |
| | $ | 1,214.8 |
| |
Balance, December 31, 2015 | | | 48.9 |
| | 1,151.7 |
| | (45.3 | ) | | 117.2 |
| | 3.5 |
| | 1,227.1 |
| | 11.6 |
|
Net income (loss) | | | | | | | | | (10.2 | ) | | 0.4 |
| | (9.8 | ) | | 1.4 |
|
Other comprehensive income, net of tax | | | | | | | 2.1 |
| | | | | | 2.1 |
| | |
Dividends on common stock ($0.25 per share) | | | | | | | | | (12.3 | ) | | | | (12.3 | ) | | |
Distributions to noncontrolling interest | | | | | | | | | | | | | — |
| | (0.9 | ) |
Adjustments to redemption value of redeemable noncontrolling interest (Note 17) | | | | | | | | | 1.3 |
| | | | 1.3 |
| | (1.3 | ) |
Share-based compensation | | | | | 4.1 |
| | | | | | | | 4.1 |
| | |
Shares issued or repurchased, net | | | 0.1 |
| | 1.5 |
| | | | (0.8 | ) | | | | 0.7 |
| | |
Balance, December 31, 2016 | | | 49.0 |
| | 1,157.3 |
| | (43.2 | ) | | 95.2 |
| | 3.9 |
| | 1,213.2 |
| | 10.8 |
|
Net income | | |
|
| |
|
| |
|
| | 228.3 |
| | 1.0 |
| | 229.3 |
| | 1.2 |
|
Other comprehensive income, net of tax | | |
|
| |
|
| | 0.9 |
| |
|
| |
| | 0.9 |
| |
|
|
Dividends on common stock ($16.13 per share) | | |
|
| |
|
| |
|
| | (793.3 | ) | |
| | (793.3 | ) | |
|
|
Distributions to noncontrolling interest | | |
|
| |
|
| |
|
| |
|
| | (0.2 | ) | | (0.2 | ) | | (0.3 | ) |
Adjustments to redemption value of redeemable noncontrolling interest (Note 17) | | |
|
| |
|
| |
|
| | 3.7 |
| |
|
| | 3.7 |
| | (3.7 | ) |
Share-based compensation | | |
|
| | 4.4 |
| |
|
| |
|
| |
|
| | 4.4 |
| |
|
|
Shares issued or repurchased, net | | | 0.3 |
| | — |
| |
|
| | (6.9 | ) | |
| | (6.9 | ) | |
|
|
Balance, December 31, 2017 | | | 49.3 |
| | $ | 1,161.7 |
| | $ | (42.3 | ) | | $ | (473.0 | ) | | $ | 4.7 |
| | $ | 651.1 |
| | $ | 8.0 |
|
See Notes to Consolidated Financial Statements.
See notes to consolidated financial statements.
Alexander & Baldwin, Inc.
Notes to Consolidated Financial Statements
1. BACKGROUND AND BASIS OF PRESENTATION
| |
1. | BACKGROUND AND BASIS OF PRESENTATION |
Description of BusinessBusiness: : Prior to June 29, 2012, A&B’s businesses included Matson Navigation Company Inc., a wholly owned subsidiary that provided ocean transportation, truck brokerage and intermodal services. As part of a strategic initiative designed to allow A&B to independently execute its strategies and to best enhance and maximize its growth prospects and shareholder value, A&B made a decision to separate the transportation businesses from the Hawaii real estate and agriculture businesses. In preparation for the separation, A&B modified its legal-entity structure and became a wholly owned subsidiary of a newly created entity, Alexander & Baldwin Holdings, Inc. ("Holdings"). On June 29, 2012, Holdings distributed to its shareholders all of the common stock of A&B stock in a tax-free distribution (the “Separation”). Holders of Holdings common stock continued to own the transportation businesses, but also received one share of A&B common stock for each share of Holdings common stock held at the close of business on June 18, 2012, the record date. Following the Separation, Holdings changed its name to Matson, Inc. On July 2, 2012, A&B began regular trading on the New York Stock Exchange under the ticker symbol “ALEX” as an independent, public company.
The financial statements and related financial information pertaining to the period preceding the Separation have been presented on a combined basis and reflect the financial position, results of operations and cash flows of the real estate and agriculture businesses and corporate functions of Alexander & Baldwin, Inc., all of which were under common ownership and common management prior to ("A&B" or the Separation. The financial statements and related financial information pertaining to the period subsequent to the Separation have been presented on a consolidated basis. The financial statements for periods prior to the Separation included herein may not necessarily reflect what A&B’s results of operations, financial position and cash flows would have been had A&B been a stand-alone company during the periods presented.
A&B"Company") is headquartered in Honolulu and operates four segments, principally in Hawaii:three segments: Commercial Real Estate Development and Sales; Real Estate Leasing; Agribusiness;Estate; Land Operations; and Materials & Construction.
Commercial Real Estate: includes leasing, property management, redevelopment and Construction.development-for-hold activities. Significant assets include improved commercial real estate and urban ground leases. Income from this segment is principally generated by leasing and operating real estate assets.
Real Estate DevelopmentLand Operations: includes planning, zoning, financing, constructing, purchasing, managing, selling, and Sales: The Real Estate Developmentinvesting in real property; leasing agricultural land; renewable energy; and Sales segment generates its revenues through the investmentdiversified agribusiness. Primary assets include landholdings, renewable energy assets (investments in hydroelectric and solar facilities and power purchase agreements) and development projects. Income from this segment is principally generated by renewable energy operations, agricultural leases, select farming operations, development sales and sale of landfees, and commercial and residential properties in Hawaii.parcel sales.
Real Estate Leasing: The Real Estate Leasing segment owns, operates and manages retail, office and industrial properties in Hawaii and on the Mainland. The Real Estate Leasing segment also leases urban land in Hawaii to third-party lessees.
Agribusiness: The Agribusiness segment produces bulk raw sugar, specialty food grade sugars and molasses; produces and sells specialty food-grade sugars; provides general trucking services, equipment maintenance and repair services; leases agricultural land to third parties; and generates and sells electricity to the extent not used in A&B’s Agribusiness operations.
Materials and& Construction: The Materials and Construction segment, which includes the results of Grace from October 1, 2013, the date of acquisition, performs asphalt paving as prime contractor and subcontractor; imports and sells liquid asphalt; mines, processes and sells basalt aggregate; produces and sells asphaltic and ready-mix concrete; provides and sells various construction- and traffic-control-related productsproducts; and manufactures and sells precast concrete products. Assets include two grade A (prime) rock quarries, an asphalt storage terminal, paving hot mix plants and quarry and paving equipment. Income is generated principally by materials supply and paving construction.
Reclassifications:The Company reclassified certain 2012has completed a conversion process to comply with the requirements to be treated as a real estate investment trust (“REIT”) commencing with the taxable year amountsended December 31, 2017. In connection with our conversion to a REIT, the Company undertook the following actions:
On November 8, 2017, the Company completed a holding company merger ("Holding Company Merger") in order to facilitate the Consolidated StatementsCompany's ongoing REIT compliance. Pursuant to the Holding Company Merger, the then-existing Alexander & Baldwin, Inc. ("A&B Predecessor"), Alexander & Baldwin REIT Holdings, Inc., a Hawai`i corporation and a direct, wholly owned subsidiary of Cash Flows to improveA&B Predecessor (“A&B REIT Holdings”), and A&B REIT Merger Corporation, a Hawai`i corporation and a direct, wholly owned subsidiary of A&B REIT Holdings (“Merger Sub”) completed a merger through which Merger Sub was merged with and into A&B Predecessor, with A&B Predecessor continuing as the transparency of its cash flows. The Company's 1031 activities in the consolidated statement of cash flows for 2012 were previously presented as non-cash activities, but those activities are now reflected as additional items within cash flows from investing activities. Net cash provided by (used in) operations, net cash provided by (used in) investing activitiessurviving corporation and net cash provided by (used in) financing activities did not changebeing renamed "Alexander & Baldwin Investments, LLC." Additionally, as a result of the Holding Company Merger, A&B REIT Holdings replaced A&B Predecessor as the Hawai`i-based, publicly held corporation through which the Company’s operations are conducted, and all shares of common stock, including the reserve of common stock issuable under the outstanding awards and equity incentive compensation plans, of A&B Predecessor were converted into shares of A&B REIT Holdings common stock on a one-for-one basis; promptly following the merger A&B REIT Holdings was renamed “Alexander & Baldwin, Inc.” In these Notes to the Financial Statements, unless the context requires otherwise, references to A&B or the Company refer to Alexander & Baldwin, Inc. prior to the consummation of the Holding Company Merger (subsequently renamed Alexander & Baldwin Investments, LLC) and to A&B REIT Holdings following consummation of the Holding Company Merger (subsequently renamed Alexander & Baldwin, Inc.).
On November 16, 2017 (the "Declaration Date"), the Company declared a distribution to its shareholders in the aggregate amount of $783 million (approximately $15.92 per share) (the "Special Distribution"), which represented the Company's previously undistributed non-REIT earnings and profits accumulated prior to January 1, 2017, the Company's REIT taxable income for the 2017 taxable year, and a substantial portion of the Company's estimated REIT taxable income for the 2018 taxable year. The Company completed the payment of the Special Distribution on January 23, 2018 ("the Distribution Date") through an aggregate of $156.6 million in cash and the issuance of 22,587,299 shares of the Company's common stock.
Reclassifications: Prior year financial statement amounts are reclassified as necessary to conform to the current year presentation related to the application of Rule 3-15 of Regulation S-X and the adoption of certain new accounting standards discussed below. There was no impact on net income or (accumulated deficit) / retained earnings as a result of the reclassifications. See Note 2 "Significant Accounting Policies" for additional information.
Revisions of prior period financial statements: In the course of preparing the Company’s financial statements for the year ended December 31, 2014, the Company identified misstatements in certain deferred tax accounts related to prior periods. For the year ended December 31, 2013, income tax expense was understated and net income and comprehensive income attributable to A&B was overstated by $2.6 million, which includes a $1.6 million out-of-period 2013 adjustment to income taxes previously recorded in the first quarter of 2014. The balance sheet impact of the misstatement resulted in an overstatement of non-current deferred taxes and income tax receivable by approximately $0.6 million and $2.0 million, respectively. For the year ended December 31, 2012, income tax expense was understated and net income and comprehensive income attributable to A&B was overstated by $1.7 million. The balance sheet impact of the misstatement resulted in an overstatement of non-current deferred and current deferred taxes by approximately $1.5 million and $0.2 million, respectively. Net investment within the consolidated statement of equity as of January 1, 2012 was overstated by $1.8 million. Accordingly, the Company has corrected the misstatements for the years ended December 31, 2013 and 2012 in the accompanying financial statements. The Company assessed the materiality of these misstatements quantitatively and qualitatively and has concluded that the correction of these errors are immaterial to the consolidated financial statements taken as a whole. The impact of the misstatements had no impact on pre-tax income or cash flows from operating, investing or financing activities.
Rounding:Amounts in the consolidated financial statements and notes thereto are rounded to the nearest tenth of a million, but per-share calculations were determined based on amounts before rounding.million. Accordingly, a recalculation of some per-share amounts and percentages, if based on the reported data, may be slightly different.result in differences.
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2. | SIGNIFICANT ACCOUNTING POLICIES |
Principles of Consolidation: The consolidated financial statements include the accounts of Alexander & Baldwin, Inc. and all wholly owned and controlled subsidiaries, after elimination of significant intercompany amounts. Significant investments in businesses, partnerships and limited liability companies in which the Company does not have a controlling financial interest, but has the ability to exercise significant influence, are accounted for under the equity method. A controlling financial interest is one in which the Company has a majority voting interest or one in which the Company is the primary beneficiary of a variable interest entity. In determining whether the Company is the primary beneficiary of a variable interest entity in which it has an interest, the Company is required to make significant judgments with respect to various factors including, but not limited to, the Company’s ability to direct the activities that most significantly impact the entity’s economic performance, the rights and ability of other investors to participate in decisions affecting the economic performance of the entity, and kick-out rights, among others. Activities that significantly affect the economic performance of the entities in which the Company has an interest include, but are not limited to, establishing and modifying detailed business, development, marketing and sales plans, approving and modifying the project budget, approving design changes and associated overruns, if any, and approving project financing, among others. The Company has not consolidated any variable interest entity in which the Company does not also have voting control because it has determined that it is not the primary beneficiary since decisions to direct the activities that most significantly impact the entity’s performance are shared by the joint venture partners.
The consolidated financial statements include the results of GP/RM, a supplier in the precast concrete industry, and GLP Asphalt, LLC ("GLP"), an importer and distributor of liquid asphalt, which are owned 51 percent and 70 percent, respectively. These entities are consolidated because the Company holds a controlling financial interest through its majority ownership of the voting interests of the entities. The remaining interest in these entities is reported as non-controllingnoncontrolling interest in the consolidated financial statements. Profits, losses and cash distributions are allocated in accordance with the respective operating agreements.
Use of Estimates: The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported. Estimates and assumptions are used for, but not limited to: (i) asset impairments, including intangible assets and goodwill, (ii) legallitigation and environmental contingencies, (iii) revenue recognition for long-term real estate developments and construction contracts, (iv) pension and postretirement estimates, and (v) income taxes. Future results could be materially affected if actual results differ from these estimates and assumptions.
Customer Concentration: Grace derives a significant portion of Materials and& Construction revenues from a limited customer base. For the yearyears ended December 31, 20142017, 2016, and 2015, revenue of approximately $37.5$67.7 million, $52.0 million, and $79.6$38.1 million, of revenuerespectively, was generated directly and indirectly from projects administered by the City and County of HonoluluHonolulu. For the years ended December 31, 2017, 2016, and 2015, revenue of approximately $60.2 million, $50.1 million, and $80.8 million, respectively, was generated directly and indirectly from the State of Hawaii, respectively,Hawai`i, where Grace served as general contractor or subcontractor. The revenues derived from the City and County of Honolulu and the State of Hawaii for the period from the date of acquisition of October 1, 2013 through December 31, 2013 were $14.3 million and $8.9 million, respectively. Hawaiian Commercial & Sugar Company, a consolidated subsidiary included in the Agribusiness segment, derived approximately $65.5 million, $87.6 million, and $117.5 million of revenue from C&H Sugar Company for the years ended December 31, 2014, 2013, and 2012, respectively.
Cash and Cash Equivalents: Cash equivalents consist of highly liquid investments with a maturity of three months or less at the date of purchase. The Company carries these investments at cost, which approximates fair value. Outstanding checks in excess of funds on deposit totaled $3.0 million at December 31, 2014 and are reflected as current liabilities in the consolidated balance sheets. There were no outstanding checks in excess of funds on deposit as of December 31, 2013.
Fair Value of Financial Instruments: The fair values of cash and cash equivalents, receivables and short-term borrowings approximate their carrying values due to the short-term nature of the instruments. The carrying amount and fair value of the Company’s debt at December 31, 2014 was $706.0 million2017 and $729.6 million, respectively, and $710.7 million and $723.2 million at December 31, 2013, respectively. The fair value of debt is calculated by discounting the future cash flows of the debt at rates based on instruments with similar risk, terms and maturities as compared to the Company’s existing debt arrangements (level 2).2016.
Allowance for Doubtful Accounts: Allowances for doubtful accounts are established by management based on estimates of collectability. Estimates of collectability are principally based on an evaluation of the current financial condition of the Company’s customers and their payment history, which are regularly monitored by the Company. The changes in the allowance for doubtful accounts, included on the consolidated balance sheets as an offset to “Accounts receivable,” for the three years ended December 31, 20142017, 2016, and 2015 were as follows (in millions):
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| Balance at Beginning of year | | Provision for bad debt | | Write-offs and Other | | Balance at End of Year |
2014 | $1.3 | | $0.8 | | $(0.4) | | $1.7 |
2013 | $1.6 | | $0.1 | | $(0.4) | | $1.3 |
2012 | $1.7 | | $0.2 | | $(0.3) | | $1.6 |
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| Balance at Beginning of Year | | Provision for Bad Debt | | Write-offs and Other | | Balance at End of Year |
2017 | $1.0 | | $1.0 | | $(0.6) | | $1.4 |
2016 | $1.7 | | $0.8 | | $(1.5) | | $1.0 |
2015 | $1.7 | | $0.4 | | $(0.4) | | $1.7 |
Operating Cycle: The Company uses the duration of the construction contracts that range from one year to three years as its operating cycle for purposes of classifying assets and liabilities related to contracts. Accounts receivable and contracts retention collectible after one year related to the Materials and& Construction segment are included in current assets in the consolidated balance sheets and amounted to $6.0$8.0 million and $5.7$8.2 million as of December 31, 20142017 and December 31, 2013,2016, respectively. Accounts and contracts payable related to the Materials and& Construction segment payable after one year are included in current liabilities in the consolidated balance sheets and amounted to $0.4 million and $0.6 million as of both December 31, 20142017 and December 31, 2013.2016, respectively.
Inventories: Sugar inventories arewere stated at the lower of cost (first-in, first-out basis) or market value. Materials and& supplies and Materials and& Construction segment inventory are stated at the lower of cost (principally average cost, first-in, first-out basis) or market value.
Inventories at December 31, 20142017 and 20132016 were as follows (in millions):
| | | 2014 | | 2013 | 2017 | | 2016 |
Sugar inventories | $ | 23.3 |
| | $ | 16.8 |
| $ | — |
| | $ | 17.5 |
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Asphalt | 21.3 |
| | 17.9 |
| 12.2 |
| | 7.4 |
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Processed rock, portland cement, and sand | 15.7 |
| | 12.9 |
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Processed rock, Portland cement, and sand | | 13.5 |
| | 12.6 |
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Work in progress | 2.8 |
| | 2.7 |
| 2.8 |
| | 3.0 |
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Retail merchandise | 1.5 |
| | 1.8 |
| 1.7 |
| | 1.7 |
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Parts, materials and supplies inventories | 17.3 |
| | 16.0 |
| 1.7 |
| | 1.1 |
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Total | $ | 81.9 |
| | $ | 68.1 |
| $ | 31.9 |
| | $ | 43.3 |
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Property: Property is stated at cost, net of accumulated depreciation and amortization. Expenditures for major renewals and betterments are capitalized. Replacements, maintenance, and repairs that do not improve or extend asset lives are charged to expense as incurred. Upon acquiring commercial real estate that is deemed a business, the Company records land, buildings, leases above and below market, and other intangible assets based on their fair values. Costs related to due diligence are expensed as incurred.
Depreciation: Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets or the units-of-production method for quarry production-related assets. Estimated useful lives of property are as follows:
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Classification | Range of Life (in years) |
BuildingsBuilding and improvements | 10 to 40 |
Leasehold improvements | 5 to 10 (lesser of useful life or lease term) |
Water, power and sewer systems | 5 to 50 |
Rock crushing and asphalt plants | 25 to 35 |
Machinery and equipment | 2 to 35 |
Other property improvements | 3 to 35 |
Real Estate Developments: Expenditures for real estate developments are capitalized during construction and are classified as real estate developments on the consolidated balance sheets. When construction is substantially complete, the costs are reclassified as either Real Estate Held for Sale or Property, based upon the Company’s intent to either sell the completed asset or to hold it as an investment property, respectively. Cash flows related to real estate developments are classified as either operating or investing activities, based upon the Company’s intention to sell the property or to retain ownership of the property as an investment following completion of construction.
For development projects, capitalized costs are allocated using the direct method for expenditures that are specifically associated with the unit being sold and the relative-sales-value method for expenditures that benefit the entire project. Capitalized development costs typically include costs related to land acquisition, grading, roads, water and sewage systems, landscaping, capitalized interest, and project amenities. Direct overhead costs incurred after the development project is substantially complete, such as utilities, maintenance and real estate taxes, are charged to selling, general and administrative expense as incurred. All indirect overhead costs are charged to selling, general and administrative costs as incurred.
Capitalized Interest: Interest costs incurred in connection with significant expenditures for real estate developments, the construction of assets, or investments in real estate joint ventures are capitalized during the period in which activities
necessary to get the asset ready for its intended use are in progress. Capitalization of interest is discontinued when the asset is substantially complete and ready for its intended use. Capitalization of interest on investments in real estate joint ventures is recorded until the underlying investee commences its principal operations, which is typically when the investee has other-than-ancillary revenue generation. Total interest cost incurred was $31.0$26.4 million, $20.8$28.3 million, and $16.8$29.1 million in 2014, 20132017, 2016 and 2012,2015, respectively. Capitalized interest in 2014, 20132017, 2016 and 20122015 was $1.9$0.9 million, $1.8$2.0 million, and $2.0$2.3 million, respectively, and was principally related to the Company's investment in Waihonua andThe Collection, the Company’s Maui Business Park II, project.and Kamalani projects.
Real Estate Assets Held for Sale: The Company separately classifies assets held for sale in its consolidated financial statements. As of December 31, 2017, the Company has Hawai`i real estate developments and certain U.S. Mainland commercial properties that were classified as held for sale with a total net asset value of $67.4 million. Real estate investments to be disposed of are reported at the lower of carrying amounts or estimated fair value, less costs to sell. During the fourth quarter of 2017, the Company recorded aggregate impairment charges of $22.4 million related to certain U.S. Mainland commercial properties assets. The following table summarizes the assets held for sale and liabilities related to the assets held for sale as of December 31, 2017:
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Real Estate Developments | $ | 21.1 |
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Property – Net | 64.8 |
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Other Assets | 3.9 |
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Total assets | 89.8 |
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Impairment of real estate assets | (22.4 | ) |
Real estate held for sale | $ | 67.4 |
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Impairment of Long-Lived Assets and Finite-Lived Intangible Assets: Long-lived assets, including finite-lived intangible assets, are reviewed for possible impairment when events or circumstances indicate that the carrying value may not be recoverable. In such an evaluation, the estimated future undiscounted cash flows generated by the asset are compared with the amount recorded for the asset to determine if its carrying value is not recoverable. If this review determines that the recorded value will not be recovered, the amount recorded for the asset is reduced to estimated fair value. These asset impairment analyses are highly subjective because they require management to make assumptions and apply considerable judgments to, among others, estimates of the timing and amount of future cash flows, expected useful lives of the assets, uncertainty about future events, including changes in economic conditions, changes in operating performance, changes in the use of the assets and ongoing costs of maintenance and improvements of the assets, and thus, the accounting estimates may change from period to period. If management uses different assumptions or if different conditions occur in future periods, A&B’s financial condition or its future operating results could be materially impacted.
During the secondfourth quarter of 2012,2017, the Company recorded a non-cashaggregate impairment chargecharges of $5.1$22.4 million related to certain of its Santa BarbaraU.S. Mainland commercial properties that were classified as held for sale as of December 31, 2017.
During the fourth quarter of 2016, as a result of a change in its strategy for development activities, the Company recorded non-cash impairment charges of $11.7 million related to certain non-active, long-term development projects. The impairment loss recorded reduced the carrying amounts to the estimated fair value, reflecting the change to the Company’s development-for-sale strategy to de-risk its portfolio by not pursuing certain long-term projects that were not in active development and instead focus on projects with a short-term lifespan, generally 3 to 5 years.
The impairment charges are presented within Impairment of real estate landholdings in California. The impairment of the Santa Barbara landholdings are classified within Operating costs and expensesassets in the Consolidated Statementsaccompanying consolidated statements of Income. Nooperations. There were no material long-lived asset impairment charges were recorded in 2014 or 2013.2015.
Impairment of Investments: The Company's investments in unconsolidated affiliates are reviewed for impairment whenever there is evidence that fair value may be below carrying cost. An investment is written down to fair value if fair value is below carrying cost and the impairment is believed to be other-than-temporary. In evaluating the fair value of an investment and whether any identified impairment is other-than-temporary, significant estimates and considerable judgments are involved. These estimates and judgments are based, in part, on the Company’s current and future evaluation of economic conditions in general, as well as a joint venture’s current and future plans. Additionally, these impairment calculations are highly subjective because they also require management to make assumptions and apply judgments to estimates regarding the timing and amount
of future cash flows that may consider various factors, including sales prices, development costs, market conditions and absorption rates, probabilities related to various cash flow scenarios, and appropriate discount rates based on the perceived risks, among others. In evaluating whether an impairment is other-than-temporary, the Company considers all available
information, including the length of time and extent of the impairment, the financial condition and near-term prospects of the affiliate, the Company’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value, and projected industry and economic trends, among others. Changes in these and other assumptions could affect the projected operational results and fair value of the unconsolidated affiliates, and accordingly, may require valuation adjustments to the Company’s investments that may materially impact the Company’s financial condition or its future operating results. For example, if current market conditions deteriorate significantly or a joint venture’s plans change materially, impairment charges may be required in future periods, and those charges could be material.
In July 2014, the Company invested $23.8 million in KIUC Renewable Solutions Two LLC (KRS II), an entity that owns and operates a 12-megawatt solar farm in Koloa, Kauai. The investment return from the Company's investment in KRS II is principally composed of federal and state tax benefits. As tax benefits are realized over the life of the investment, the Company recognizes a non-cash reduction to the carrying amount of its investment in KRS II. For the year ended December 31, 2014, the Company recorded a net non-cash reduction of $14.7 million in Other income (expense) in the Consolidated Statements of Income. The Company expects that future reductions to its investment in KRS II will be recognized as tax benefits are realized.
In 2013, the Company entered into an Amended and Restated Limited Liability Company Agreement of Kukui'ula Village (Agreement) with DMB Kukui'ula Village LLC (DMB). Under the Agreement, the Company assumed financial and operational control of Kukui'ula Village LLC (Village) and consolidated the assets and liabilities of Village at fair value, resulting in a $6.3 million write down of its investment in the joint venture.
In 2012, the Company recorded an impairment loss and equity losses totaling $4.7 million related to its joint venture investment in Bakersfield (CA) for a commercial development. The recognition of the impairment loss reduced the carrying amount of the investment to its estimated fair value and reflected the change in the Company’s development strategy to focus on development projects in Hawaii, and therefore, its related decision not to proceed with the development of California real estate assets in the near term. The impairment loss and equity losses of the Company’s investments are classified as Impairment and equity losses related to joint ventures in the Consolidated Statements of Income.
Weakness in particular real estate markets, difficulty in obtaining or renewing project-level financing or development approvals, and changes in the Company’s development strategy, among other factors, may affect the value or feasibility of certain development projects owned by the Company or by its joint ventures and could lead to additional impairment charges in the future.
Fair Value Measurements: The fair values of cash and cash equivalents, receivables and short-term borrowings approximate their carrying values due to the short-term nature of the instruments. The carrying amount and fair value of the Company’s debt at December 31, 2017 was $631.2 million and $642.3 million, respectively, and $515.1 million and $529.3 million at December 31, 2016, respectively. The fair value of debt is calculated by discounting the future cash flows of the debt at rates based on instruments with similar risk, terms and maturities as compared to the Company’s existing debt arrangements (level 2).
FASB ASC Topic 820, Fair Value Measurements and Disclosures (ASC 820), as amended, establishes a fair value hierarchy, which requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The hierarchy places the highest priority on unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurements) and assigns the lowest priority to unobservable inputs (Level 3 measurements). The three levels of inputs within the hierarchy are defined as follows:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect the Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
If the technique used to measure fair value includes inputs from multiple levels of the fair value hierarchy, the lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy.
The Company's U.S. Mainland commercial properties as well as the Company's non-active long-term development projects that were impaired during each of the years ended December 31, 2017 and 2016, respectively, represent assets measured at fair value on a nonrecurring basis subsequent to their initial recognition. The Company estimated the fair values of these long-lived assets based on the Company’s own judgments about the assumptions that market participants would use in pricing the real estate assets and available, observable market data. The Company classified these fair value measurements as Level 3 inputs. After the impairment charges recorded, the aggregate carrying value of the impaired U.S. Mainland commercial properties was $46.3 million, and the aggregate carrying value of the non-active, long-term development projects were not material.
Intangible Assets: IntangiblesIntangible assets are recorded on the consolidated balance sheets as other non-current assets and are related to the acquisition of commercial properties and the acquisition of Grace on October 1, 2013.properties. Intangible assets acquired in 20142017 and 20132016 were as follows:
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| | | | | | | | | | | | |
| 2014 | | 2013 |
| Amount | | Weighted Average Life (Years) | | Amount | | Weighted Average Life (Years) |
Amortized intangible assets: | | | | | | | |
In-place/favorable leases | $ | 2.1 |
| | 1.8 |
| | $ | 51.3 |
| | 7.2 |
Permitted quarry rights | — |
| | — |
| | 18.0 |
| | 19.0 |
Contract backlog | — |
| | — |
| | 2.6 |
| | 2.2 |
Trade name/customer relationships | — |
| | — |
| | 3.1 |
| | 8.0 |
Total | $ | 2.1 |
| | 1.8 |
| | $ | 75.0 |
| | 9.9 |
|
| | | | | | | | | | | |
| 2017 | | 2016 |
| Amount | | Weighted Average Life (Years) | | Amount | | Weighted Average Life (Years) |
In-place/favorable leases | $ | 0.3 |
| | 1.6 | | $ | 8.5 |
| | 7.0 |
Intangible assets for the years ended December 31, 2017 and 2016 included the following (in millions):
| | | 2014 | | 2013 | 2017 | | 2016 |
| Cost | | Accumulated Amortization | | Cost | | Accumulated Amortization | |
Amortized intangible assets: | | | | | | | | |
In-place leases | $ | 61.6 |
| | $ | (25.8 | ) | | $ | 59.6 |
| | $ | (18.6 | ) | $ | 70.2 |
| | $ | 69.9 |
|
Favorable leases | 16.6 |
| | (7.8 | ) | | 16.6 |
| | (6.1 | ) | 17.9 |
| | 17.9 |
|
Permitted quarry rights | 18.0 |
| | (0.7 | ) | | 18.0 |
| | (0.1 | ) | 18.0 |
| | 18.0 |
|
Contract backlog | 2.6 |
| | (2.5 | ) | | 2.6 |
| | (1.0 | ) | 2.6 |
| | 2.6 |
|
Trade name/customer relationships | 2.2 |
| | (0.3 | ) | | 3.1 |
| | — |
| 2.2 |
| | 2.2 |
|
Accumulated amortization | | (64.0 | ) | | (56.8 | ) |
Total assets | $ | 101.0 |
| | $ | (37.1 | ) | | $ | 99.9 |
| | $ | (25.8 | ) | $ | 46.9 |
| | $ | 53.8 |
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Aggregate intangible asset amortization was $11.2$6.0 million, $9.3$9.2 million, and $3.3$10.5 million for 2014, 20132017, 2016 and 2012,2015, respectively. Estimated amortization expenses related to intangiblesintangible assets over the next five years are as follows (in millions):
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| |
| Estimated Amortization |
2015 | $9.0 |
2016 | $6.7 |
2017 | $5.6 |
2018 | $4.8 |
2019 | $4.3 |
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| | | |
| Estimated Amortization |
2018 | $ | 5.4 |
|
2019 | $ | 4.5 |
|
2020 | $ | 3.6 |
|
2021 | $ | 3.1 |
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2022 | $ | 2.9 |
|
Goodwill: The Company recorded a total of $93.6 million of goodwill in connection with the acquisition of Grace, which occurred on October 1, 2013. Additionally, the Company recorded $9.3 million of goodwill in connection with the consolidation of The Shops at Kukui'ula. The Grace and The Shops at Kukui'ula goodwill is not expected to be deductible for tax purposes. In 2014, the Company finalized its valuation of Grace and, as a result, recorded an additional $3.3 million of goodwill, primarily related to the fair value of liabilities associated with the maintenance and management of former quarry sites. The Company reviews goodwill for impairment at the reporting unit level annually and whenever events or changes in circumstances indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. The goodwill impairment test estimates the fair value of a reporting unit using various methodologies, including discounted cash flows and market multiples. The discounted cash flow approach relies on a number of assumptions, including future macroeconomic conditions, market factors specific to the reporting unit, the amount and timing of estimated future cash flows to be generated by the business over an extended period of time, long-term growth rates for the business, and a discount rate that considers the risks related to the amount and timing of the cash flows, among others. Under the market multiple methodology, the estimate of fair value is based on market multiples of EBITDA (earnings before interest, taxes, depreciation and amortization) or revenues. When using market multiples of EBITDA or revenues, the Company must make judgments about the comparability of those multiples in closed and proposed transactions and comparability of multiples for guideline companies.
If the results of the Company's test indicates that a reporting unit's estimated fair value is less than its carrying value, an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to that reporting unit.
The changes in the carrying amount of goodwill allocated to the Company's reportable segments for the years ended December 31, 20142017 and 20132016 were as follows (in millions):
|
| | | | | | | | | | | |
| Materials & Construction | | Real Estate Leasing | | Total |
Balance, January 1, 2013 | $ | — |
| | $ | — |
| | $ | — |
|
Goodwill acquired during the year | 90.3 |
| | 9.3 |
| | 99.6 |
|
Balance, December 31, 2013 | 90.3 |
| | 9.3 |
| | 99.6 |
|
Goodwill increase during the year | 3.3 |
| | — |
| | 3.3 |
|
Goodwill allocated to sale of Maui Mall | — |
| | (0.6 | ) | | (0.6 | ) |
Balance, December 31, 2014 | $ | 93.6 |
| | $ | 8.7 |
| | $ | 102.3 |
|
|
| | | | | | | | | | | |
| Materials & Construction | | Commercial Real Estate | | Total |
Balance, January 1, 2016 | $ | 93.6 |
| | $ | 8.7 |
| | $ | 102.3 |
|
Changes to goodwill | — |
| | — |
| | — |
|
Balance, December 31, 2016 | 93.6 |
| | 8.7 |
| | 102.3 |
|
Changes to goodwill | — |
| | — |
| | — |
|
Balance, December 31, 2017 | $ | 93.6 |
| | $ | 8.7 |
| | $ | 102.3 |
|
Revenue Recognition: The Company has a wide variety of revenue sources, including sales of real estate, sales, commercial property rentals, material sales, paving construction, and the sales of raw sugar and molasses. Before recognizing revenue, the Company assesses the underlying terms of the transaction to ensure that recognition meets the requirements of relevant accounting standards. In general, the Company recognizes revenue when persuasive evidence of an arrangement exists, delivery of the service or product has occurred, the sales price is fixed or determinable, and collectability is reasonably assured.
Sales of Real Estate Sales Revenue Recognition: Real Estate Development and Sales of real estate revenue representsinvolve proceeds from the sale of a variety of real estate development inventory. Real estate development inventory may include industrial lots, residential lots, agricultural lots, condominium units, single-family homes and multi-family homes. Sales are recorded when the risks and rewards of ownership have passed to the buyers (generally on closing dates), adequate initial and continuing investments have been
received, and collection of remaining balances, if any, is reasonably assured. For certain development projects that have continuing post-closing involvement and for which total revenue and capital costs are reasonably estimable, the Company uses the percentage-of-completion method for revenue recognition. Under this method, the amount of revenue recognized is based on development costs that have been incurred through the reporting period as a percentage of total expected development cost associated with the development project. This generally results in a stabilized gross margin percentage, but requires significant judgment and estimates.
Commercial Real Estate Leasing Revenue Recognition: Commercial Real Estate Leasing revenue is recognized on a straight-line basis over the terms of the related leases, including periods for which no rent is due (typically referred to as “rent holidays”). Differences between revenues recognized and amounts due under respective lease agreements are recorded as increases or decreases, as applicable, to deferred rent receivable. Also included in rental revenue are certain tenant reimbursements and percentage rents determined in accordance with the terms of the leases. Income arising from tenant rents that are contingent upon the sales of the tenant exceeding a defined threshold are recognized only after the contingency has been resolved (e.g.(i.e., sales thresholds have been achieved).
Construction Contracts and Related Products Revenue Recognition: Grace generates revenue primarily from material sales and paving contracts. The recognition of revenue is based on the underlying terms of the transaction.
Materials - Materials:Revenues from material sales, which include basalt aggregate, liquid asphalt and hot mix asphalt, are recognized when title to the product and risk of loss passes to third parties (generally this occurs when the product is picked up by customers or their agents) and when collection is reasonably assured.
Construction - Construction:A majority of paving contracts areis performed for HawaiiHawai`i state, federal, and county governments. Unit price contracts, which comprise a significant portion of Grace's paving contracts, require Grace to provide line-item deliverables at fixed unit prices based on approved quantities irrespective of Grace’s actual per unit costs. Earnings on unit price contracts are recognized as quantities are delivered and accepted by the customer.delivered. Lump sum contracts require that the total amount of work be performed for a single price irrespective of actual quantities or Grace’s actual costs. Earnings on fixed-price paving contracts are generally recognized using the percentage-of-completion method with progress toward completion measured on the basis of units (tons, cubic yards, square yards, square feet or other units of measure)unit cost of work completed as of a specific date to an estimate of the total unitsunit cost of work to be delivered under each contract. Grace uses this method as its management considers units of work completedthis to be the best available measure of progress on contracts. Contracts in progress are reviewed regularly, and sales and earnings may be adjusted based on revisions to assumption and estimates, including, but not limited to, revisions to job performance, job site conditions, changes to the scope of work, estimated contract costs, progress toward completion, changes in internal and external factors or conditions and final contract settlement. Selling, general and administrative costs are charged to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses become evident.
Sugar and Molasses Revenue Recognition: Revenue from sugar sales is recorded when title to the product and risk of loss passes to third parties (generally this occurs when the product is shipped or delivered to customers) and when collection is reasonably assured.
Agricultural Costs: Costs of growing and harvesting sugar cane are charged to the cost of inventory in the year incurred and to cost of sales as sugar is sold.
Discontinued Operations: In 2014,On December 31, 2015, due to continuing and significant operating losses stemming from low sugar prices and poor production levels, the Company early adopteddetermined it would cease sugar operations at its Hawaiian Commercial & Sugar Company (“HC&S”) division on Maui upon completion of its final harvest in 2016. HC&S completed its harvest in December 2016, and the provisions of Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”Company ceased its sugar operations (the "Cessation"), which changes. As a result, the Company concluded that its sugar operations met the requirements for reporting discontinued operations under Subtopic 205-20. For periods prior to the adoption of ASU 2014-08, the sales of certain income-producing assets were classifiedbe reported as discontinued operations if the operations and cash flows of the assets clearly could be distinguished from the remaining assets of the Company, if cash flows for the assets had been, or would have been, eliminated from the ongoing operations of the Company, if the Company would not have had a significant continuing involvement in the operations of the assets sold, and if the amount was considered material. Certain assets that are “held-for-sale,” based on the likelihood and intention of selling the property within 12 months, were also treated as discontinued operations. Sales of land not under lease and residential houses and lots were generally considered inventory and were not included in discontinued operations.all periods presented. See Note 4, "Discontinued Operations" for additional detail.
Employee Benefit Plans: The Company provides a wide range of benefits to existing employees and retired employees, including single-employer defined benefit plans, postretirement, defined contribution plans, post-employment and health care benefits. The Company records amounts relating to these plans based on various actuarial assumptions, including
discount rates, assumed rates of return, compensation increases, turnover rates and health care cost trend rates. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current economic conditions and trends. The Company believes that the assumptions utilized in recording obligations under the Company’s plans,
which are presented in Note 12,11, “Employee Benefit Plans,” are reasonable based on its experience and on advice from its independent actuaries; however, differences in actual experience or changes in the assumptions may materially affect the Company’s financial position or results of operations.
Share-Based Compensation: The Company records compensation expense for all share-based payment awards made to employees and directors. The Company’s various equity plans are more fully described in Note 14.13, "Share-Based Awards."
Redeemable Non-controlling Interest: Non-controlling interests in subsidiaries that are redeemable for cash or other assets outside of the Company’s control are classified as mezzanine equity, outside of equity and liabilities, and are adjusted to fair value on each balance sheet date. The resulting changes in fair value of the estimated redemption amount, increases or decreases, are recorded with corresponding adjustments against retained earnings or, in the absence of retained earnings, common stock.
Earnings Per Share (“EPS”): The following table provides a reconciliation of income from continuing operations to income from continuing operations attributable to A&B (in millions):
|
| | | | | | | | | | | |
| 2014 | | 2013 | | 2012 |
Income from continuing operations | $ | 30.2 |
| | $ | 12.5 |
| | $ | 6.0 |
|
Non-controlling interest | (3.1 | ) | | (0.5 | ) | | — |
|
Income from continuing operations attributable to A&B | $ | 27.1 |
| | $ | 12.0 |
| | $ | 6.0 |
|
The computation of basic and diluted earnings per common share for all periods prior to Separation is calculated using the number of shares of A&B common stock outstanding on July 2, 2012, the first day of trading following the June 29, 2012 distribution of A&B common stock to Holdings shareholders, as if those shares were outstanding for those periods. For all periods prior to Separation, there were no dilutive shares because no actual A&B shares or share-based awards were outstanding prior to the Separation.
The number of shares used to compute basicBasic and diluted earnings per share are computed and disclosed in accordance with FASB Accounting Standards Codification Topic 260, Earnings Per Share. The Company utilizes the two-class method to compute earnings available to common shareholders. Under the two-class method, earnings are adjusted by accretion amounts to redeemable noncontrolling interests recorded at redemption value. The adjustments represent in-substance dividend distributions to the noncontrolling interest holder as the holder has a contractual right to receive a specified amount upon redemption. As a result, earnings are adjusted to reflect this in-substance distribution that is different from other common shareholders. In addition, the Company allocates net earnings to each class of common stock and participating security as follows (in millions):
|
| | | | | | | | |
| 2014 | | 2013 | | 2012 |
Denominator for basic EPS - weighted average shares outstanding | 48.7 |
| | 44.4 |
| | 42.6 |
|
Effect of dilutive securities: | | | | | |
Outstanding stock options and restricted stock units | 0.6 |
| | 0.7 |
| | 0.3 |
|
Denominator for diluted EPS - weighted average shares outstanding | 49.3 |
| | 45.1 |
| | 42.9 |
|
if all of the net earnings for the period had been distributed. The Company's participating securities consist of time-based restricted unit awards that contain a non-forfeitable right to receive dividends and, therefore, are considered to participate in earnings with common shareholders. Basic earnings per common share excludes dilution and is computed based oncalculated by dividing net earnings allocated to common shares by the weighted-average number of common shares outstanding duringfor the period. Diluted earnings per common share is computed based oncalculated by dividing net earnings allocable to common shares by the weighted-average number of common shares outstanding for the period, as adjusted byfor the numberpotential dilutive effect of additional shares, if any, that would have been outstanding hadnon-participating share-based awards. Additionally, as the potentially dilutivedeadline for the common shares been issued. Potentially dilutive shares of common stock include non-qualified stock options and restricted stock units.
During the years endedshareholders' election was January 12, 2018, subsequent to December 31, 2014, 2013 and 2012, there were no anti-dilutive securities outstanding.
On January 26, 2015,2017, the Company granted to employees, 67,087 sharestotal Special Distribution of time-based restricted stock units, and 42,459 shares of performance share units. The time-based restricted stock units vest ratably over three years and 50 percent$783 million (approximately $15.92 per share) was included in the computation of the performance share units cliff vest over 2 years and 50 percent cliff vest over 3 years, provided that the minimum level of the 2-year and 3-year performance objectives, respectively, is achieved.Company's diluted earnings (loss) per share.
Income Taxes: The Company was included in the consolidated tax return of Matson, Inc. (formerly Alexander & Baldwin Holdings, Inc.) for results occurring prior to June 30, 2012. Subsequent to June 30, 2012, the Company reported as a separate taxpayer. The current and deferred income tax expense recorded prior to June 30, 2012 in the consolidated financial statements has been determined by applying the provisions of ASC 740 as if the Company were a separate taxpayer.
The Company makes certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments are applied in the calculation of tax credits, tax benefits and deductions, and in the calculation of certain deferred tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes. Deferred tax assets and deferred tax liabilities are adjusted to the extent necessary to reflect tax rates expected to be in effect when the temporary differences reverse. Adjustments may be required to deferred tax assets and deferred tax liabilities due to changes in tax laws and audit adjustments by tax authorities. To the extent adjustments are required in any given period, the adjustments would be included within the tax provision in the Consolidated
Statementsaccompanying consolidated statements of Income or Balance Sheets.operations. The Company records a liability for uncertain tax positions not deemed to meet the more-likely-than-not threshold. The Company did not have material uncertain tax positions as of December 31, 20142017 and 2013.2016.
The Company has not recorded a valuation allowance for its deferred tax assets. A valuation allowance would be established if, based on the weight of available evidence, management believes that it is more likely than not that some portion or allthe benefit from its state nonrefundable energy tax credit carryforward will not be realized. Consequently, the Company has recorded a valuation allowance of a recorded$6.9 million on the deferred tax asset would notrelating to this credit carryforward. If our assumptions change and the Company determines that it will be realizedable to realize the credit, the tax benefits relating to any reversal of the valuation allowance on the deferred tax assets will be recognized as a reduction in future periods.income tax expense.
The investment return from the Company's investmentCompany accounts for tax credits related to its investments in KRS II is principally composed of federal and state tax benefits, including tax credits. These tax credits are accounted forWaihonu using the flow-through method, which reduces the provision for income taxes in the year the tax credits first become available. The total KRS II net tax credit benefits that the Company recognized for book purposes in 2014 was approximately $13.7 million.
Comprehensive Income:Income (Loss): Comprehensive income (loss) includes all changes in equity, except those resulting from transactions with shareholders. Accumulated othershareholders and net income (loss). Other comprehensive lossincome (loss) principally includes amortization of deferred pension and postretirement costs. The components of accumulated other comprehensive loss, net of taxes, were as follows for the years ended December 31, 2017 and 2016 (in millions):
| | | 2014 | | 2013 | | 2012 | 2017 | | 2016 |
Unrealized components of benefit plans: | | | | | | | | |
Pension plans | $ | (43.9 | ) | | $ | (29.3 | ) | | $ | (48.6 | ) | $ | (43.1 | ) | | $ | (43.8 | ) |
Post-retirement plans | (0.5 | ) | | (1.1 | ) | | 1.4 |
| (1.0 | ) | | (0.6 | ) |
Non-qualified benefit plans | — |
| | 0.3 |
| | — |
| (0.1 | ) | | (0.6 | ) |
Interest rate swap | | 1.9 |
| | 1.8 |
|
Accumulated other comprehensive loss | $ | (44.4 | ) | | $ | (30.1 | ) | | $ | (47.2 | ) | $ | (42.3 | ) | | $ | (43.2 | ) |
Accumulated Other Comprehensive Income:The changes in accumulated other comprehensive income for pension and postretirement plansloss by component for the yearyears ended December 31, 20142017, 2016 and 2015 were as follows (in millions, net of tax):
|
| | | | | | | |
| December 31, |
| 2014 | | 2013 |
Beginning balance | $ | (30.1 | ) | | $ | (47.2 | ) |
Amounts reclassified from accumulated other comprehensive income, net of tax | (14.3 | ) | | 17.1 |
|
Ending balance | $ | (44.4 | ) | | $ | (30.1 | ) |
|
| | | | | | | | | | | |
| Employee Benefit Plans | | Interest Rate Swap | | Total |
Balance, January 1, 2015 | $ | (44.4 | ) | | $ | — |
| | $ | (44.4 | ) |
Other comprehensive loss before reclassifications, net of taxes of $2.9 for employee benefit plans | (4.6 | ) | | — |
| | (4.6 | ) |
Amounts reclassified from accumulated other comprehensive loss, net of taxes of $2.3 for employee benefit plans | 3.7 |
| | — |
| | 3.7 |
|
Balance, December 31, 2015 | $ | (45.3 | ) | | $ | — |
| | $ | (45.3 | ) |
Other comprehensive loss before reclassifications, net of taxes of $2.1 and $1.0 for employee benefit plans and interest rate swap, respectively | (3.4 | ) | | 1.6 |
| | (1.8 | ) |
Amounts reclassified from accumulated other comprehensive loss, net of taxes of $2.3 and $0.2 for employee benefit plans and interest rate swap, respectively | 3.7 |
| | 0.2 |
| | 3.9 |
|
Balance, December 31, 2016 | $ | (45.0 | ) | | $ | 1.8 |
| | $ | (43.2 | ) |
Other comprehensive loss before reclassifications, net of taxes of $1.2 and $0.2 for employee benefit plans and interest rate swap, respectively | (2.0 | ) | | (0.2 | ) | | (2.2 | ) |
Amounts reclassified from accumulated other comprehensive loss, net of taxes of $1.8 and $0.2 for employee benefit plans and interest rate swap, respectively | 2.8 |
| | 0.3 |
| | 3.1 |
|
Balance, December 31, 2017 | $ | (44.2 | ) | | $ | 1.9 |
| | $ | (42.3 | ) |
The reclassifications of other comprehensive incomeloss components out of accumulated other comprehensive incomeloss for 2014the years ended December 31, 2017, 2016 and 2015 were as follows (in millions):
| | | | | | | | | 2017 | | 2016 | | 2015 |
Details about Accumulated Other Comprehensive Income Components | 2014 | | 2013 | | 2012 | | |
Actuarial gain (loss)* | $ | (26.7 | ) | | $ | 22.4 |
| | $ | (6.0 | ) | | |
Unrealized hedging gain (loss) | | $ | (0.4 | ) | | $ | 2.6 |
| | $ | — |
|
Reclassification adjustment for interest expense included in net income or loss | | 0.5 |
| | 0.4 |
| | — |
|
Actuarial loss* | | (3.2 | ) | | (4.6 | ) | | (7.1 | ) |
Amortization of defined benefit pension items reclassified to net periodic pension cost: | | | | | | | | | | | |
Prior service cost | | — |
| | — |
| | (0.4 | ) |
Net loss* | 4.5 |
| | 7.7 |
| | 8.0 |
| | 5.7 |
| | 7.5 |
| | 7.3 |
|
Prior service credit* | (1.3 | ) | | (1.3 | ) | | (1.3 | ) | | (1.1 | ) | | (0.9 | ) | | (1.3 | ) |
Curtailment | | — |
| | (1.5 | ) | | — |
|
Total before income tax | (23.5 | ) | | 28.8 |
| | 0.7 |
| | 1.5 |
| | 3.5 |
| | (1.5 | ) |
Income taxes | 9.2 |
| | (11.7 | ) | | (0.3 | ) | | (0.6 | ) | | (1.4 | ) | | 0.6 |
|
Other comprehensive income (loss) net of tax | $ | (14.3 | ) | | $ | 17.1 |
| | $ | 0.4 |
| | |
Other comprehensive income (loss), net of tax | | $ | 0.9 |
| | $ | 2.1 |
| | $ | (0.9 | ) |
* These accumulated other comprehensive loss components are included in the computation of net periodic pension cost (see Note 11 for additional details).
| |
* | These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 12 for additional details). |
Environmental Costs: Environmental exposures are recorded as a liability and charged to operations when an environmental liability has been incurred and can be reasonably estimated. If the aggregate amount of the liability and the amount and timing of cash payments for the liability are fixed or reliably determinable, the environmental liability is discounted. An environmental liability has been incurred when both of the following conditions have been met: (i) litigation has commenced or a claim or an assessment has been asserted, or, based on available information, commencement of litigation or assertion of a claim or an assessment is probable, and (ii) based on available information, it is probable that the outcome of such litigation, claim, or assessment will be unfavorable. If a range of probable loss is determined, the Company will record the obligation at the low end of the range unless another amount in the range better reflects the expected loss. Certain costs, however, are capitalized in Property when the obligation is recorded, if the cost (1) extends the life, increases the capacity or improves the safety and efficiency of property owned by the Company, (2) mitigates or prevents environmental contamination that has yet to occur and that otherwise may result from future operations or activities, or (3) is incurred or discovered in preparing for sale property that is classified as “held-for-sale.” The amounts of capitalized environmental costs were not material at December 31, 2014 or 2013.
Self-Insured Liabilities: The Company is self-insured for certain losses that include, but are not limited to, employee health, workers’ compensation, general liability, real and personal property, and real estate construction warranty and defect claims. When feasible, the Company obtains third-party insurance coverage to limit its exposure to these claims. When estimating its self-insured liabilities, the Company considers a number of factors, including historical claims experience, demographic factors, and valuations provided by independent third-parties.
ImpactInterest and other income (expense), net is comprised primarily of Recently Issuedinterest income and other components of net periodic benefit costs related to pension and postretirement benefits. The components of Interest and other income (expense), net on the Consolidated Statement of Operations for the years ended December 31, 2017, 2016 and 2015 are as follows:
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Interest income | $ | 5.3 |
| | $ | 1.8 |
| | $ | 0.8 |
|
Pension and postretirement benefit expense | (2.6 | ) | | (4.2 | ) | | (3.7 | ) |
Other income (expense) | (0.6 | ) | | 0.7 |
| | 0.4 |
|
Interest and other income (expense), net | $ | 2.1 |
| | $ | (1.7 | ) | | $ | (2.5 | ) |
New Accounting Standards:Pronouncements:
In AprilMay 2014, the FASBFinancial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (ASU 2014-08). This update changes the requirements for reporting discontinued operations under Subtopic 205-20. A disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when either (i) the component of an entity or group of components of an entity meets the criteria to be classified as held for sale, (ii) the component of an entity or group of components of an entity is disposed of by sale, or (iii) the component of an entity or group of components of an entity is disposed of other than by sale. The amendments in ASU 2014-08 improve the definition of discontinued operations by limiting discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity’s operations and financial results. The amendments in the update require additional disclosures about discontinued operations and disclosures related to the disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation. The amendments in ASU 2014-08 are to be applied to all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. The Company has early adopted the provisions under ASU 2014-08.
In May 2014, the FASB issued Accounting Standards Update (ASU)No. 2014-09, Revenue from Contracts with Customers (Topic 606), as a new Topic,(“ASU 2014-09”) which provides guidance for revenue recognition. ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets. ASU 2014-09 will supersede the revenue recognition requirements in FASB Accounting Standards Codification (ASC) Topic 606. The new605, Revenue Recognition, and most industry-specific guidance. Under ASU 2014-09, revenue recognition standardis recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 provides a five-step analysis of transactions to determine when and how revenue is recognized.recognized including (i) identify the contract(s) with a customer, (ii) identify the performance obligations in the contract(s), (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract(s), and (v) recognize revenue when, or as, the entity satisfies a performance obligation. In addition, ASU 2014-09 requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, deferring the effective date of this standard. As a result, ASU 2014-09 and related amendments will be effective for the Company for its fiscal year beginning January 1, 2018, including interim periods within that fiscal year. Early adoption is permitted, but not before August 1, 2017, the original effective date of ASU 2014-09.
In March, April, May, and December 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal Versus Agent Consideration (Reporting Revenue Gross Versus Net), ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, and ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, respectively (collectively, the “Amendments”). The core principle isAmendments serve to clarify certain aspects of and have the same effective date as ASU 2014-09.
The Company has completed its evaluation of the impact of adopting ASU No. 2014-09 and has identified the major revenue streams. Based on the evaluation, the Company does not anticipate a significant impact on the financial statements, controls structure around the implementation, or notes in the consolidated financial statements. Upon adoption at January 1, 2018, the Company will recognize an insignificant cumulative effect amount using the modified retrospective approach.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 requires the identification of arrangements that revenue should be accounted for as leases by lessees. In general, lease arrangements exceeding a twelve month term must now be recognized as assets and liabilities on the balance sheet of the lessee. Under ASU 2016-02, a right-of-use asset and lease obligation will be recorded for all leases, whether operating or financing, while the income statement will reflect lease expense for operating leases and amortization/interest expense for financing leases. The balance sheet amount recorded for existing leases at the date of adoption of ASU 2016-02 must be calculated using the applicable incremental borrowing rate at the date of adoption. In addition, ASU 2016-02 requires the use of the modified retrospective
method, which will require adjustment to depictall comparative periods presented in the transferconsolidated financial statements. ASU 2016-02 is effective for financial statements issued for fiscal years beginning after December 15, 2018. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements and footnote disclosures.
In August 2016, the FASB issued ASU No. 2016-15, Statement of promised goodsCash Flows (Topic 230) ("ASU 2016-15"). ASU 2016-15 is an update that addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice of cash receipts and cash payments presentation and classification in the statement of cash flows. ASU 2016-15 is effective for financial statements issued for fiscal years beginning after December 15, 2017. The Company elected to early adopt ASU 2016-15 in the fourth quarter of fiscal year 2017. The adoption of this standard did not have a material impact on the Company’s financial position or servicesresults of operation.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash ("ASU 2016-18"). ASU 2016-18 will require entities to customersshow the changes on the total cash, cash equivalents, restricted cash and restricted cash equivalents in an amount that reflects the considerationstatement of cash flows. As a result, entities will no longer present transfers between these items on the statement of cash flows. The guidance will be applied retrospectively and is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The Company elected to early adopt this guidance in the fourth quarter of fiscal year 2017, pursuant to which the Company applied the cash flow presentation requirements retrospectively to all periods presented.
The impact of adopting the above guidance for the years ended December 31, 2016 and 2015 was as follows:
|
| | | | | | | | | | | | | | | | | | | |
| 2016 | | 2015 |
| Previously Reported | Impact of Adoption | Current Presentation | | Previously Reported | Impact of Adoption | Current Presentation |
Cash Flows from Operating Activities | $ | 111.2 |
| $ | — |
| $ | 111.2 |
| | $ | 129.1 |
| $ | — |
| $ | 129.1 |
|
Cash Flows from Investing Activities | $ | (25.6 | ) | $ | (7.6 | ) | $ | (33.2 | ) | | $ | 1.0 |
| $ | 17.4 |
| $ | 18.4 |
|
Cash Flows from Financing Activities | $ | (84.7 | ) | $ | — |
| $ | (84.7 | ) | | $ | (131.6 | ) | $ | — |
| $ | (131.6 | ) |
| | | | | | | |
Cash, Cash Equivalents and Restricted Cash | | | | | | | |
Net increase in cash and cash equivalents and restricted cash | $ | 0.9 |
| $ | (7.6 | ) | $ | (6.7 | ) | | $ | (1.5 | ) | $ | 17.4 |
| $ | 15.9 |
|
Balance, beginning of period | 1.3 |
| 17.7 |
| 19.0 |
| | 2.8 |
| 0.3 |
| 3.1 |
|
Balance, end of period | $ | 2.2 |
| $ | 10.1 |
| $ | 12.3 |
| | $ | 1.3 |
| $ | 17.7 |
| $ | 19.0 |
|
The reconciliation of Cash, Cash Equivalents and Restricted Cash as of December 31, 2017, 2016 and 2015 was:
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Cash and Cash Equivalents | $ | 68.9 |
| | $ | 2.2 |
| | $ | 1.3 |
|
Restricted Cash | 34.3 |
| | 10.1 |
| | 17.7 |
|
Cash, Cash Equivalents and Restricted Cash | $ | 103.2 |
| | $ | 12.3 |
| | $ | 19.0 |
|
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350):Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). The guidance simplifies the accounting for goodwill impairment for all entities by eliminating the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of today’s goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (i.e., measure the charge based on today’s Step 1). The standard does not change the guidance on completing Step 1 of the goodwill impairment test. An entity expectswill still be able to perform today’s optional qualitative goodwill impairment assessment before determining whether to proceed to Step 1. The Company elected to early adopt this guidance in the fourth quarter of fiscal year 2017. The adoption of this standard did not have any impact on the Company’s financial position or results of operations.
In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business ("ASU 2017-01"). ASU 2017-01 provides guidance regarding the definition of a business with the objective of providing guidance to assist entities with
evaluating whether transactions should be entitled in exchangeaccounted for those goodsas acquisitions (or disposals) of assets or services. Thisbusinesses. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, including interim periods within those years. ASU 2017-01 should be applied prospectively and early adoption is permitted. The new guidance will result in many real estate transactions being classified as an asset acquisition and transaction costs being capitalized. The Company elected to early adopt FASB ASU No. 2017-01 in the second quarter of fiscal year 2017. The adoption of this standard did not have a material impact on the Company’s financial position or results of operations.
In March 2017, the FASB issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost ("ASU 2017-07"). ASU 2017-07 provides that entities will present the service cost component of net periodic benefit cost in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period. Only the service cost component will be eligible for capitalization in assets. In addition, entities will present the other components of net periodic benefit cost separately from the line item(s) that includes the service cost and outside of any subtotal of operating income, if one is presented. These components will not be eligible for capitalization in assets. ASU 2017-07 is effective for fiscal years or interim periods beginning after December 15, 2017 and early adoption is permitted. The Company elected to early adopt this guidance in the fourth quarter of fiscal year 2017, and has recorded the other components of net periodic benefit costs within other expense, which is classified in Interest and other income (expense), net in the accompanying consolidated statements of operations. The service cost component of net periodic benefit cost is classified in Selling, general and administrative in the consolidated statements of operations. The Company applied the presentation requirement of ASU 2017-07 retrospectively to all periods presented. The impact of adopting the above guidance was as follows:
Accordingly, the Company also reclassified prior period amounts for the other components of net periodic benefit costs totaling $4.2 million and $3.7 million for the years ended December 31, 2016, and 2015, respectively, from Selling, general and administrative to Interest and other income, net.
The impact of adopting the above guidance for the years ended December��31, 2016 and 2015 were as follows:
|
| | | | | | | | | | | | | | | | | | | |
| 2016 | | 2015 |
| Previously Reported | Impact of Adoption | Current Presentation | | Previously Reported | Impact of Adoption | Current Presentation |
Selling, general and administrative | $ | 56.2 |
| $ | (4.2 | ) | $ | 52.0 |
| | $ | 55.3 |
| $ | (3.7 | ) | $ | 51.6 |
|
Interest and other income, net | $ | 2.5 |
| $ | (4.2 | ) | $ | (1.7 | ) | | $ | 1.2 |
| $ | (3.7 | ) | $ | (2.5 | ) |
In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”). The guidance clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Entities will apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. The guidance also clarifies that a modification to an award could be significant and therefore require disclosure, even if modification accounting is not required. Therefore, an entity will have to make all of the disclosures about modifications that are required today, in addition to disclosing that compensation expense hasn’t changed, if that’s the case. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 20162017. Early adoption is permitted, including in any interim period for which financial statements have not yet been issued or made available for issuance. The guidance will be applied prospectively to awards modified on or after the adoption date. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements and shallfootnote disclosures.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The guidance amends the hedge accounting model in ASC 815 to enable entities to better portray the economics of their risk management activities in the financial statements and enhance the transparency and understandability of hedge results. The amendments expand an entity’s ability to hedge nonfinancial and financial risk components and reduce complexity in fair value hedges of interest rate risk. This ASU eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be appliedpresented in the same income statement line as the hedged item. This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted in any interim period or fiscal year before the effective date. For cash flow and net investment hedges existing at the date of adoption, entities will apply the new guidance using a modified retrospective approach (i.e., with a cumulative effect adjustment recorded to the opening balance of retained earnings as of the initial application date). The guidance provides transition relief to make it easier for entities to apply certain amendments to existing hedges (including fair value hedges) where the hedge documentation needs to
be modified. The presentation and disclosure requirements apply prospectively. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements and footnote disclosures.
In February 2018, the FASB issued ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220). The guidance permits entities to reclassify tax effects stranded in accumulated other comprehensive income as a result of tax reform to retained earnings, giving entities the option to reclassify these amounts rather than require reclassification. The FASB also gave entities the option to apply the guidance retrospectively or in the period of adoption. When adopted, the standard requires all entities to make new disclosures, regardless of whether they elect to reclassify stranded amounts. Entities are required to disclose whether or not they elected to reclassify the tax effects related to the Tax Cuts and Jobs Act of 2017 as well as their policy for releasing income tax effects from accumulated OCI. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Entities are able to early adopt the guidance in any interim or annual period for which financial statements have not yet been issued and apply it either (1) in the period of adoption or (2) retrospectively to each period presented or as a cumulative-effect adjustment asin which the income tax effects of the dateTax Cuts and Jobs Act of adoption.2017 related to items in accumulated OCI are recognized. The Company is currently evaluatingassessing the potential impact ofthat adopting this new accounting standard.standard will have on its consolidated financial statements and footnote disclosures.
3. ACQUISITIONS
The Company applies the provisions of the Financial Accounting Standards Board's Accounting Standards Codification Topic 805, Business Combinations (ASC 805) to acquisitions. Under ASC 805, assets acquired and liabilities assumed are recorded at fair value. The excess of the purchase price over the net fair value of assets acquired and liabilities assumed is recorded as goodwill. The fair values of assets acquired and liabilities assumed are determined through the market, income or cost approaches, and the valuation approach is generally based on the specific characteristics of the asset or liability. Under the market approach, value is estimated using information from transactions in which other participants in the market have paid for reasonably similar assets that have been sold within a reasonable period from the valuation date. Adjustments are made to compensate for differences between reasonably similar assets and the item being valued. Under the income approach, the future cash flows expected to be received over the life of the asset, taking into account a variety of factors, such as long-term growth rates and the amount and timing of cash flows, are discounted to present value using a rate of return that accounts for the time value of money and investment risk factors. Under the cost approach, the Company estimates the cost to replace the asset with a new asset taking into consideration a variety of factors such as age, physical condition, functional obsolescence and economic obsolescence. The fair value of liabilities assumed is calculated as the net present value of estimated payments using prevailing market interest rates for liabilities with similar credit risk and terms.
Grace Acquisition
On October 1, 2013, the Company consummated its acquisition of 100 percent of the shares of Grace, a Hawaii-based materials and infrastructure construction company. Pursuant to an Agreement and Plan of Merger (Merger Agreement), by and among A&B, A&B II, LLC (Merger Sub), a Hawaii limited liability company and a wholly owned subsidiary of A&B, Grace Pacific Corporation, a Hawaii corporation (now Grace Pacific LLC, a Hawaii limited liability company and a wholly owned subsidiary of Grace Holdings), Grace Holdings and David C. Hulihee, in his capacity as the shareholders' representative, dated June 6, 2013, Grace Holdings merged with and into Merger Sub, with Merger Sub remaining as the surviving company and a wholly owned subsidiary of A&B (Merger). The results of Grace’s operations subsequent to the acquisition date are included in the Consolidated Statements of Income.
The Company views the acquisition of Grace as an attractive long-term investment, with favorable return metrics and diversification benefits that will augment A&B's ability to further pursue its core real estate strategies over time. Grace will extend and enhance A&B's community building capabilities to encompass infrastructure work, for which a steady and growing need exists in Hawaii. Grace will also allow A&B to further benefit from Hawaii's improving economy and real estate markets and also materially strengthens and diversifies A&B's financial profile and flexibility.
The total merger consideration paid to Grace equity holders was approximately $231.6 million, consisting of 5.4 million shares of A&B common stock, valued at $196.3 million, based on the fair value of the Company’s stock price on October 1, 2013, and approximately $35.3 million in cash. Additionally, approximately $67.6 million of net debt was assumed by A&B in the Merger. Pursuant to the Merger Agreement, the aggregate number of shares of A&B common stock issued in the Merger was determined by dividing $199.75 million, which was 85 percent of the total merger consideration prior to any post-closing adjustments, by $36.7859, which was the volume weighted average of the trading prices of A&B common stock on the New York Stock Exchange for the 20 consecutive trading days ending on the third trading day prior to the closing of the Merger. Of the $35.3 million cash portion of the acquisition price, as of December 31, 2014, approximately $9.3 million (Holdback Amount) remains withheld pro rata from Grace shareholders and retained by A&B to secure any final adjustments to the merger consideration and certain indemnification obligations of Grace shareholders pursuant to the Merger Agreement. These funds will be released by A&B in accordance with the terms set forth in the Merger Agreement. In addition, an amount of cash equal to $1 million of the merger consideration otherwise deliverable to Grace shareholders has been delivered to the shareholders' representative to cover the costs and expenses incurred by him in performing his duties as provided in the Merger Agreement. Any amounts not used, or retained for future use, by the shareholders' representative will be paid to Grace shareholders upon the release of any and all remaining portions of the Holdback Amount.
The allocation of purchase price to assets acquired and liabilities assumed is as follows (in millions):
|
| | | | | | | | | |
| Preliminary Valuation October 1, 2013 | Modifications | Final Valuation |
Cash consideration | $ | 35.3 |
| $ | — |
| $ | 35.3 |
|
Common stock issued as consideration | 196.3 |
| — |
| 196.3 |
|
Fair value of consideration transferred | 231.6 |
| — |
| 231.6 |
|
| | | |
Fair value of assets acquired and liabilities assumed | | |
Assets acquired: | | | |
Cash and cash equivalents | 5.7 |
| — |
| 5.7 |
|
Accounts receivable | 37.1 |
| — |
| 37.1 |
|
Contracts retention | 9.6 |
| — |
| 9.6 |
|
Costs and estimated earnings in excess of billings on uncompleted contracts | 11.7 |
| — |
| 11.7 |
|
Inventories | 42.0 |
| — |
| 42.0 |
|
Property, plant and equipment | 148.6 |
| — |
| 148.6 |
|
Mineral rights | 18.0 |
| — |
| 18.0 |
|
Intangible assets | 5.8 |
| (1.0 | ) | 4.8 |
|
All other, net | 10.4 |
| 0.9 |
| 11.3 |
|
Total assets acquired | 288.9 |
| (0.1 | ) | 288.8 |
|
| | | |
Liabilities assumed: | | | |
Accounts payable and accrued liabilities | 26.3 |
| — |
| 26.3 |
|
Billings in excess of cost and estimated earnings on uncompleted contracts | 7.5 |
| 0.6 |
| 8.1 |
|
Deferred tax liability, long-term | 27.1 |
| (0.6 | ) | 26.5 |
|
Long-term debt, including current portion | 72.7 |
| (0.2 | ) | 72.5 |
|
All other, net | 4.9 |
| 3.4 |
| 8.3 |
|
Total liabilities assumed | 138.5 |
| 3.2 |
| 141.7 |
|
| | | |
Non-controlling interest | 9.1 |
| — |
| 9.1 |
|
Excess of purchase price over net assets acquired | $ | 90.3 |
| $ | 3.3 |
| $ | 93.6 |
|
Goodwill is calculated as the excess of the purchase price over the fair value of the net assets recognized. The goodwill recorded as part of the acquisition primarily reflects the value of the know-how, operating processes and employee base of Grace, and other intangible assets that do not qualify for separate recognition. During 2014, based on new information, the Company recorded an adjustment to the preliminary valuation, resulting in a net increase to goodwill of $3.3 million. The adjustment did not have a significant impact on the Company's consolidated statements of operations, balance sheet, or cash flows for all periods presented, and therefore, was not retrospectively adjusted in the financial statements. The adjustment to goodwill was primarily due to adjustments to the fair value of liabilities related to the maintenance and management of former quarry sites.
The Company incurred $4.6 million of acquisition costs and other related fees (all of which were incurred in 2013), which were recorded in selling, general and administrative costs.
From October 1, 2013 through December 31, 2013, Grace contributed operating revenues of $54.9 million and net earnings of $1.7 million (including earnings attributed to non-controlling interest of $0.5 million), which included deductions of $0.1 million and $1.7 million for operating revenue and net earnings, respectively, related to purchase price allocation adjustments. The unaudited pro forma combined historical results (using audited Grace results for its fiscal years ended September 30, 2013 and 2012), as if Grace had been acquired at the beginning of 2012 are as follows (in millions):
|
| | | | | | | |
| Year Ended December 31, |
| 2013 | | 2012 |
Operating revenue | $ | 539.1 |
| | $ | 454.1 |
|
Income from continuing operations, after tax | $ | 31.7 |
| | $ | 14.8 |
|
The 2013 pro forma results excludes $6.9 million of pre-tax transaction-related costs incurred by A&B and Grace and includes amortization of the definite lived intangible assets and depreciation based on estimated fair value and useful lives. The pro forma results are for informational purposes only and are not necessarily indicative of what actually would have occurred if the acquisition had been completed as of the beginning of 2012, nor are the pro forma results necessarily indicative of future consolidated results.
Kailua Portfolio Acquisition
On December 20, 2013, the Company consummated the purchase of a portfolio of commercial and other properties in Hawaii for $360.7 million, plus assumed debt of $12.0 million, from Castle Family LLC, Castle 1974 LLC, Castle Residuary LLC, Castle Kaopa LLC, and Harold K. L. Castle Foundation (collectively “KR”). The portfolio encompasses 43 grocery- and drug store-anchored shopping centers, light industrial properties and 51 acres ground leased to third-parties and improved with 760,000 square feet of retail and other commercial space, primarily located in the Windward Oahu town of Kailua. The portfolio also includes approximately 585 acres of mostly preservation-zoned land on Oahu. The purchase of the portfolio was funded with approximately $270 million of 1031 and 1033 proceeds from the sales of commercial properties and other non-income generating assets, a $60 million bridge loan, the assumption of $12.0 million in mortgage debt principal, and borrowings under the Company's line of credit for the balance. The portion of the purchase price not initially funded with 1031 and 1033 proceeds was ultimately funded with tax-deferred proceeds from the sale of Maui Mall in January 2014. The acquisition of the portfolio is expected to improve the long-term growth prospects of the Company’s commercial portfolio.
The allocation of purchase price to assets acquired and liabilities assumed is as follows (in millions):
|
| | | |
Fair value of assets acquired and liabilities assumed |
Assets acquired: | |
Property, plant and equipment | $ | 367.7 |
|
Intangible assets | 30.4 |
|
Total assets acquired | 398.1 |
|
| |
Liabilities assumed: | |
Intangible liabilities | 26.0 |
|
Liabilities assumed | 11.4 |
|
Total liabilities assumed | 37.4 |
|
| |
Net assets acquired | $ | 360.7 |
|
The Company incurred $1.1 million of acquisition costs and other related fees in 2013, which were recorded in selling, general and administrative costs.
From the date of acquisition on December 20, 2013 through December 31, 2013, the portfolio contributed net revenues of $0.8 million and net earnings of $0.4 million. The unaudited pro forma combined historical results, as if the portfolio had been acquired at the beginning of 2012 are as follows (in millions):
|
| | | | | | | |
| Year Ended December 31, |
| 2013 | | 2012 |
Operating revenue | $ | 391.0 |
| | $ | 285.5 |
|
Income from continuing operations, after tax | $ | 23.3 |
| | $ | 14.2 |
|
The pro forma results include transaction costs, amortization of in-place and above/below leases and depreciation increase based on estimated fair value and useful lives. The pro forma results are not necessarily indicative of what actually would have occurred if the acquisition had been completed as of the beginning of 2012, nor are they necessarily indicative of future consolidated results.
Other Acquisitions
In 2013, A&B completed various acquisitions that included Waianae Mall (January 2013), Napili Plaza (May 2013), Pearl Highlands Center (September 2013) and The Shops at Kukui’ula (September 2013). The acquisitions were funded with $111.1 million of 1031 proceeds, the assumption of $130.9 million of debt and $0.8 million of cash.
The allocation of purchase price to assets acquired and liabilities assumed is as follows (in millions):
|
| | | |
Fair value of assets acquired and liabilities assumed |
Assets acquired: | |
Property, plant and equipment | $ | 224.2 |
|
Intangible assets | 20.9 |
|
Goodwill | 9.3 |
|
Total assets acquired | 254.4 |
|
| |
Liabilities assumed: | |
Intangible liabilities | 8.3 |
|
Liabilities assumed | 134.2 |
|
Total liabilities assumed | 142.5 |
|
| |
Net assets acquired | $ | 111.9 |
|
The Company incurred $2.1 million of acquisition costs and other related fees, which were recorded in selling, general and administrative costs in 2013.
From the acquisition dates through December 31, 2013, the acquired assets contributed net revenues of $12.4 million and net earnings after tax of $2.1 million. The unaudited pro forma combined historical results have been omitted because after making every reasonable effort, the properties' complete historical information is impracticable to obtain.
| |
4.3. | RELATED PARTY TRANSACTIONS |
Prior to Separation, Holdings (and its subsidiaries) was considered an affiliate of A&B and engaged in certain related party relationships with the Company, as more fully discussed below. Following the Separation, Holdings was no longer considered an affiliate of A&B.
Services and Lease Agreements. Historically, Holdings provided vessel management services to the Company for its bulk sugar vessel, the MV Moku Pahu, the cost of which was included in the cost of Agribusiness products and services. Additionally, the Company recognized lease income in Real Estate Leasing revenue for an industrial warehouse space in Savannah, Georgia, that was leased to Holdings. The Company also recognized Agribusiness operating revenue for equipment and repair services provided to Holdings, and was reimbursed at cost for various other services provided to Holdings.
|
| | | | | | | | | | | | |
| | 2014 | | 2013 | | 2012 |
Vessel management services expenses | | $ | — |
| | $ | — |
| | $ | (2.0 | ) |
Lease income from affiliate | | — |
| | — |
| | 2.1 |
|
Equipment and repair services income and other | | — |
| | — |
| | 1.4 |
|
Related party revenue, net | | $ | — |
| | $ | — |
| | $ | 1.5 |
|
Contributions. Holdings, a prior affiliate, made contributions to the Company, net of distributions from the Company, totaling $154.5 million for the year ended December 31, 2012. Distributions to Holdings represent dividends paid by the Company to shareholders of Holdings and contributions from Holdings consist of dividends and capital contributions received from a subsidiary of Holdings.
Construction Contracts and Material Sales. The Company entered into contracts in the ordinary course of business, as a supplier, with affiliates that are also members in entities in which the Company also is also a member. Revenues earned from transactions with affiliates totaled approximately $23.9$21.1 million, $12.0 million, and $7.9$23.0 million for the yearyears ended December 31, 20142017, 2016, and the period from October 1, 2013 to December 31, 2013,2015, respectively. Receivables from these affiliates were $3.0$2.9 million and $3.3 million atas of December 31, 20142017 and 2013, respectively.immaterial as of December 31, 2016. Amounts due to these affiliates were not material atimmaterial as of December 31, 20142017 and 2013. Grace also enters2016.
Commercial Real Estate. The Company entered into contracts in the ordinary course of business, as a subcontractor, supplier, and customerlessor of property, with variousunconsolidated affiliates in which the Company has an interest, as well as with certain entities that are owned by a management employee who is also a stockholder and director.director of the Company. Revenues earned byfrom these transactions were $5.2 million for the years ended December 31, 2017, $6.1 million for the year ended December 31, 2016, and immaterial for the year ended December 31, 2015. Receivables from these affiliates were immaterial as of December 31, 2017 and 2016.
Land Operations. During the year ended December 31, 2017, the Company receivablesrecorded developer fee revenues of approximately $2.4 million related to management and purchasesadministrative services provided to certain unconsolidated investments in affiliates. Developer fee revenues recorded for the years ended 2016 and 2015 were $4.6 million and $2.9 million, respectively. Receivables from these affiliates were immaterial as of December 31, 2017 and 2016.
Consulting Agreement. In January 2016, the Company entered into a one-year consulting agreement with a former executive of its Grace subsidiary (who retired in December 2015) to provide services related entityto the operation of Grace, including assisting in leadership transition, operating performance and government and community affairs. The agreement was for 2014$200,000 for the 2016 calendar year and 2013 were not material.terminated on December 31, 2016.
| |
5.4. | DISCONTINUED OPERATIONS |
In December 2016, the Company completed its final sugar harvest and ceased its sugar operations.
The Company regularly evaluates and may sell selected properties from its portfolio when it believes the valuehistorical results of an asset hasoperations have been maximized and the full fair market value for the asset can be realized.
During 2014, the sale of Maui Mall, a retail property in Hawaii, was classifiedpresented as discontinued operations.
During 2013, the sales of four industrial properties, three retail properties and two office buildings were classified as discontinued operations. Additionally, Maui Mall, a retail property on Maui, was sold in January 2014, but was classified as held for sale, as of December 31, 2013,operations in the consolidated balance sheets. The revenues, expensesfinancial statements and operating profit from Maui Mall were classified as discontinued operations for all periods presented.
During 2012, the sales of the Firestone Boulevard Building and Northpoint Industrial, two industrial properties in California, and two leased fee properties in Maui were classified as discontinued operations. Northpoint Industrial was sold in January 2013, but was classified as held for sale, as of December 31, 2012, in the consolidated balance sheets. The revenues, expenses and operating profit from Northpoint were classified as discontinued operations for all periods presented.
The results of operations from these properties in prior periods were reclassified from continuing operations to discontinued operations to conform to the current period’s accounting presentation. Consistent with the Company’s intention to reinvest the sales proceeds into new investment property, the proceeds from the sales of property treated as discontinued operations were deposited in escrow accounts for tax-deferred reinvestment in accordance with Section 1031 of the Internal Revenue Code.have been recast.
The revenue, operating profit,income (loss), gain on asset dispositions, income tax expense(expense) benefit and after-tax effects of these transactions for 2014, 2013the years ended December 31, 2017, 2016, and 20122015 were as follows (in millions):
|
| | | | | | | | | | | |
| 2014 | | 2013 | | 2012 |
Proceeds from the sale of income-producing properties | $ | 70.1 |
| | $ | 337.6 |
| | $ | 8.9 |
|
Real Estate Leasing revenue | $ | 0.3 |
| | $ | 31.6 |
| | $ | 36.4 |
|
| | | | | |
Gain on sale of income-producing properties, net | $ | 55.9 |
| | $ | 22.1 |
| | $ | 4.0 |
|
Real Estate Leasing operating profit | 0.3 |
| | 14.6 |
| | 17.1 |
|
Total operating profit before taxes | 56.2 |
| | 36.7 |
| | 21.1 |
|
Income tax expense | 21.9 |
| | 14.4 |
| | 8.3 |
|
Income from discontinued operations | $ | 34.3 |
| | $ | 22.3 |
| | $ | 12.8 |
|
Basic Earnings Per Share | $ | 0.70 |
| | $ | 0.50 |
| | $ | 0.30 |
|
Diluted Earnings Per Share | $ | 0.70 |
| | $ | 0.50 |
| | $ | 0.30 |
|
|
| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Sugar operations revenue | $ | 22.9 |
| | $ | 98.4 |
| | $ | 97.7 |
|
Cost of sugar operations | 22.5 |
| | 87.5 |
| | 124.6 |
|
Operating income (loss) from sugar operations | 0.4 |
| | 10.9 |
| | (26.9 | ) |
Sugar operations cessation costs | (2.7 | ) | | (77.6 | ) | | (22.6 | ) |
Gain on asset dispositions | 6.0 |
| | — |
| | — |
|
Income (loss) from discontinued operations before income taxes | 3.7 |
| | (66.7 | ) | | (49.5 | ) |
Income tax (expense) benefit | (1.3 | ) | | 25.6 |
| | 19.8 |
|
Income (loss) from discontinued operations | $ | 2.4 |
| | $ | (41.1 | ) | | $ | (29.7 | ) |
| | | | | |
Basic earnings (loss) per share | $ | 0.05 |
| | $ | (0.84 | ) | | $ | (0.61 | ) |
Diluted earnings (loss) per share | $ | 0.04 |
| | $ | (0.83 | ) | | $ | (0.60 | ) |
There was no depreciation and amortization related to discontinued operations for the year ended December 31, 2017. Depreciation and amortization related to discontinued operations was $70.9 million and $12.4 million for the years ended December 31, 2016, and 2015, respectively.
| |
6.5. | INVESTMENTS IN AFFILIATES |
At December 31, 2014 and 2013,The Company's investments consistedin affiliates consist principally of equity investments in limited liability companies. Thecompanies in which the Company has the ability to exercise significant influence over the operating and financial policies of these investments and, accordingly,investments. Accordingly, the Company accounts for its investments using the equity method of accounting. The amountCompany’s investments in affiliates totaled$401.7 million and $390.8 million as of December 31, 2017 and 2016, respectively. The amounts of the Company’s investment at December 31, 20142017 and December 31, 2016 that representsrepresent undistributed earnings of investments in affiliates waswere approximately $1.9 million.$8.2 million and $15.5 million, respectively. Dividends and distributions from unconsolidated affiliates totaled $17.9$10.4 million in 2014, $6.62017, $71.6 million in 20132016 and $2.9$72.2 million for 2012. The Company’s investments in affiliates totaled $418.6 million and $341.4 million as of December 31, 2014 and 2013, respectively.2015.
Operating results include the Company’sCompany's proportionate share of net income from its equity method investments. A summary of combined financial information forrelated to the Company’sCompany's equity method investments at December 31 is as follows (in millions):
| | | 2014 | | 2013 | 2017 | | 2016 |
Current assets | $ | 52.7 |
| | $ | 43.5 |
| $ | 153.1 |
| | $ | 154.3 |
|
Non-current assets | 935.6 |
| | 673.2 |
| 754.9 |
| | 727.8 |
|
Total assets | $ | 988.3 |
| | $ | 716.7 |
| $ | 908.0 |
| | $ | 882.1 |
|
| | | | | | |
Current liabilities | $ | 53.0 |
| | $ | 44.2 |
| $ | 52.5 |
| | $ | 65.8 |
|
Non-current liabilities | 245.9 |
| | 107.9 |
| 192.8 |
| | 175.0 |
|
Total liabilities | $ | 298.9 |
| | $ | 152.1 |
| $ | 245.3 |
| | $ | 240.8 |
|
In 2002, the Company entered into a joint venture with DMB Communities II, an affiliate of DMB Associates, Inc., an Arizona-based developer of master-planned communities (“DMB”), for the development of Kukui’ula,Kukui'ula, a master planned resort residential community located in Poipu, Kauai, planned for up to 1,500 high-end residential units. The carrying value of the
Company's investment in Kukui'ula, which includes capital contributed by A&B to the joint venture and the value of land initially contributed, net of joint venture earnings and losses, was $267.8$302.6 million as of December 31, 2014.2017 and $290.7 million as of December 31, 2016. The total capital contributed
In 2010, A&B acquired fully-entitled land near the Ala Moana Center in Honolulu for the development of Waihonua ("Waihonua"), a 340-saleable unit residential high-rise condominium. In 2012, the Company formed a joint venture and contributed the land, pre-development assets and cash. The Company also secured capital partners that provided the remainder of the $65.0 million in total equity required for the project and the joint venture secured construction financing. In connection with the project, the Company provided a limited guaranty to the construction lender in the amount of the lesser of $20$20.0 million or the outstanding loan balance. The Company's exposure to loss iswas limited to its equity investment and the outstanding balance on the loan, up to $20$20.0 million. Construction was completed in November 2014, and 12 units closed in December 2014. The remaining 328 units closed in January 2015 and the construction loan was paid off. The Company's investment at December 31, 2014 and 2013 was $35.6 million and $33.4 million, respectively. The Company does not have a controlling financial interest in the joint venture, but exercises significant influence over the operating and financial policies of the venture, and therefore, accountsaccounted for its investment under the equity method. Construction of Waihonua was completed in November 2014, and 12 units closed in December 2014. The remaining 328 units closed in January 2015 and the construction loan was paid off, extinguishing the guarantee. The Company had no carrying value related to its investment in Waihonua at December 31, 2017 and 2016, respectively. For the year ended December 31, 2015, the Company determined that its Waihonua joint venture met the conditions of a significant subsidiary under Rule 1-02(w) of Regulation S-X and, therefore, pursuant to Rule 3-09 of Regulation S-X, has attached separate financial statements to this Annual Report on Form 10-K as Exhibit 99.1.
In October 2014, the Company contributed land, pre-paid development assets and cash to The Collection LLC, a joint venture formed to develop a 464-unit high-rise residential condominium project on Oahu, consisting of a 396-unit396-saleable unit high-rise condominium tower, 14 three-bedroom townhomes, and a 54-unit mid-rise building. In addition to the Company's initial contribution, the Company also secured equity partners that will contributecontributed an additional $16.8 million in cash. The Company's total agreed upon contribution, which includes the land and pre-paid development assets already contributed, iswas $50.3 million. In connection with the project, the Company provided a limited guaranty to the construction lender for the project at the lesser of $30$30.0 million or the outstanding loan balance. The Company's exposure to loss is limited to its total equity investment and the outstanding balance on the loan, up to $30$30.0 million. The fair value of the Company's guaranty was not material. The Company's investment at December 31, 20142017 and 2016 was $45.9 million.$18.5 million and $15.3 million, respectively. The Company accounts for its investment under the equity method. As of December 31, 2017, all 396 tower units and 54 loft
The Company also has investments in various other joint ventures that operate or develop real estate and joint ventures that engage in materials and construction-related activities and renewable energy. The Company does not have a controlling financial interest, but has the ability to exercise significant influence over the operating and financial policies of these joint ventures and, accordingly, accounts for its investments in these ventures using the equity method of accounting.
Property on the consolidated balance sheets includes the following (in millions):
The accumulated benefit obligation for the Company’s qualified pension plans was $203.2$204.5 million and $173.6$197.0 million as of December 31, 20142017 and 2013,2016, respectively. Amounts recognized on the consolidated balance sheets and in accumulated other comprehensive loss at December 31, 20142017 and 20132016 were as follows (in millions):
The estimated prior service credit for the defined benefit pension plans that will be amortized from accumulated other comprehensive loss into net periodic benefit cost in 20152018 is $0.8$0.5 million. The estimated net loss that will be recognized in net periodic pension cost for the defined benefit pension plans in 20152018 is $6.7$3.8 million. The estimated net loss for the other defined benefit post-retirement plans that will be amortized from accumulated other comprehensive loss into net periodic pension cost in 20152018 is $0.2$0.3 million. The estimated prior service cost for the other defined benefit post-retirement plans that will be amortized from accumulated other comprehensive loss into net periodic pension cost in 20152018 is negligible.
Unrecognized gains and losses of the post-retirement benefit plans are amortized over five5 years. Although current health costs are expected to increase, the Company attempts to mitigate these increases by maintaining caps on certain of its benefit plans, using lower cost health care plan options where possible, requiring that certain groups of employees pay a portion of their benefit costs, self-insuring for certain insurance plans, encouraging wellness programs for employees, and implementing measures to mitigate future benefit cost increases.
Components of the net periodic benefit cost and other amounts recognized in other comprehensive lossincome (loss) for the defined benefit pension plans and the post-retirement health care and life insurance benefit plans during 2014, 2013,2017, 2016, and 2012,2015, are shown below (in millions):
If the assumed health care cost trend rate were increased or decreased by one percentage point, the accumulated post-retirement benefit obligation, as of December 31, 2014, 20132017, 2016 and 20122015 and the net periodic post-retirement benefit cost for 2014, 20132017, 2016 and 2012,2015 would have increased or decreased as follows (in millions):
certified by the plan's actuary. Among other factors, plans that are less than 65 percent funded are "red zone" plans in need of reorganization; plans between 65 percent and 80 percent funded or that have an accumulated funding deficiency or are expected to have a deficiency in any of the next six years are "yellow zone" plans; plans that meet both of the "yellow zone" criteria are "orange zone" plans; and if the plan is funded more than 80 percent, it is a "green zone" plan. The "FIP/RP Status Pending/Implemented" column indicates plans for which a financial improvement plan (FIP) or a rehabilitation plan (RP) is either pending or has been implemented. The last column lists the expiration dates of the collective-bargaining agreements to which the plans are subject.
The 2012 Plan consists of four separate incentive compensation programs: (i) the discretionary grant program, (ii) the stock issuance program, (iii) the incentive bonus program and (iv) the automatic grant program for the non-employee members of the Company’s Board of Directors. Share-based compensation is generally awarded under three of the four programs, as more fully described below.
A summary of compensation cost related to share-based payments is as follows (in millions):
In July 2014, the Company invested $23.8 million in a tax equity investment related to the construction and operation of a 12-megawatt solar farm on Kauai. The Company recovers its investment primarily through tax credits and tax benefits. In connection with this investment, the Company provided a contingent $6$6.0 million guaranty of KRS II project debt. The other
equity partner and managing member of KRS II, project sponsor and customer for the output of the facility, Kauai Island Utility Cooperative, is the primary guarantor of the project debt.
In addition, on May 24, 2001, petitions were filed by a third party, requesting that the Commission on Water Resource Management of the State of Hawaii (“Hawai`i ("Water Commission”Commission") establish interim instream flow standards (“IIFS”("IIFS") in 27 East Maui streams that feed the Company’sCompany's irrigation system. On September 25, 2008, theThe Water Commission took action on eight of the petitions, resulting in some quantity of water being returned to the streams rather than being utilized for irrigation purposes. In May 2010, the Water Commissioninitially took action on the remaining 19 streams resultingpetitions in additional water being returned to2008 and 2010, but the streams. A petition requestingpetitioners requested a contested case hearing to challenge the Water Commission’sCommission's decisions was filed with the Commission by the opposing third party. On October 18, 2010, theon certain petitions. The Water Commission denied the petitioner’s request for a contested case hearing. On November 17, 2010,hearing request, but the petitioner filed an appeal ofpetitioners successfully appealed the Water Commission’s denial to the Hawaii Intermediate Court of Appeals. On August 31, 2011, theHawai`i Intermediate Court of Appeals, dismissedwhich ordered the petitioner’s appeal. On November 29, 2011, the petitioner appealed the Intermediate Court of Appeals’ dismissal to the Hawaii Supreme Court. On January 11, 2012, the Hawaii Supreme Court vacated the Intermediate Court of Appeals’ dismissal of the petitioner’s appeal and remanded the appeal back to the Intermediate Court of Appeals. On November 30, 2012, the Intermediate Court of Appeals remanded the case back to the Water Commission, ordering the Commission to grant the petitioner’s request for a contested case hearing. On July 17, 2013, therequest. The Commission then authorized the appointment of a hearings officer for the contested case hearing. On August 20, 2014, the Commissionhearing and expanded the scope of the contested case hearing to encompass all 27 petitions for amendment of the IIFS for East Maui streams includingin 23 hydrologic units. The evidentiary phase of the eight petitions thathearing before the Commission previously acted upon in 2008. Hearings before a Commission-appointed hearings officer are scheduledwas completed on April 2, 2015. On January 15, 2016, the Commission-appointed hearings officer issued his recommended decision on the petitions. The recommended decision would restore water to commencestreams in 11 of the 23 hydrologic units. In March 2015,2016, the hearings officer ordered a reopening of the contested case proceedings in light of the Company’s January 2016 announcement to cease sugar operations at HC&S by the end of the year and noto transition to a new diversified agricultural model on the former sugar lands. In April 2016, the Company announced its commitment to fully and permanently restore the priority taro streams identified by the petitioners. Re-opened evidentiary hearings occurred in the first quarter of 2017 and a decision is expected until late 2015.pending. In August 2017, the hearings officer in the reopened evidentiary hearing issued his proposed decision. The Commission heard arguments on the proposed decision in October 2017.
17. SEGMENT RESULTSREDEEMABLE NONCONTROLLING INTEREST
Operating segments are components of an enterprise that engage in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. The Company’s chief operating decision maker is its Chief Executive Officer. The Chief Executive Officer regularly reviews the results of fourCompany operates three segments: Commercial Real Estate (formerly Leasing); Land Operations (formerly Real Estate Development and Sales and Agribusiness); and Materials & Construction.
The accounting policies of the operating segments are described in the summary of significant accounting policies. Reportable segments are measured based on operating profit, exclusive of interest expense, general corporate expenses and income taxes. Revenues related to transactions between reportable segments have been eliminated. Transactions between reportable segments are accounted for on the same basis as transactions with unrelated third parties.