FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-565
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ALEXANDER & BALDWIN, INC.
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(Exact name of registrant as specified in its charter)
HAWAII 99-0032630
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P. O. BOX 3440, HONOLULU, HAWAII 96801
822 BISHOP STREET, HONOLULU, HAWAII 96813
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(Address of principal executive (Zip Code)
offices)
(808) 525-6611
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
Number of shares of common stock outstanding as of
June 30, 2002: 41,111,273
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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The condensed financial statements and notes for the second quarter and first
six months of 2002 are presented below, with comparative figures from the 2001
financial statements.
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
Condensed Statements of Income
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
(unaudited) (unaudited)
Revenue:
Operating revenue $277,194 $276,040 $508,825 $547,762
Interest, dividends and other 1,991 16,972 4,147 20,031
-------- -------- -------- --------
Total revenue 279,185 293,012 512,972 567,793
-------- -------- -------- --------
Costs and Expenses:
Costs of goods sold, services and rentals 229,433 223,713 425,661 432,658
Selling, general and administrative 27,618 24,504 53,427 49,448
Interest 3,060 4,870 6,017 10,649
-------- -------- -------- --------
Total costs and expenses 260,111 253,087 485,105 492,755
-------- -------- -------- --------
Income Before Taxes 19,074 39,925 27,867 75,038
Income taxes 6,550 15,290 10,029 27,759
-------- -------- -------- --------
Income From Continuing Operations 12,524 24,635 17,838 47,279
Discontinued Operations (net of income taxes):
Properties 673 367 5,166 603
Agriculture -- (488) -- (934)
-------- -------- -------- --------
Net Income $ 13,197 $ 24,514 $ 23,004 $ 46,948
======== ======== ======== ========
Basic Earnings Per Share:
From continuing operations $ 0.31 $ 0.60 $ 0.44 $ 1.17
Discontinued operations 0.01 -- 0.12 (0.01)
-------- -------- -------- --------
Net income $ 0.32 $ 0.60 $ 0.56 $ 1.16
======== ======== ======== ========
Diluted Earnings Per Share:
From continuing operations $ 0.31 $ 0.60 $ 0.44 $ 1.16
Discontinued operations 0.01 -- 0.12 (0.01)
-------- -------- -------- --------
Net income $ 0.32 $ 0.60 $ 0.56 $ 1.15
======== ======== ======== ========
Dividends Per Share $ 0.225 $ 0.225 $ 0.450 $ 0.450
Average Number of Shares Outstanding 41,033 40,568 40,829 40,538
See notes to financial statements.
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
Industry Segment Data, Net Income
(In thousands)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
(unaudited) (unaudited)
Revenue:
Ocean Transportation $ 233,074 $ 203,212 $ 415,818 $ 399,821
Property Development and Management:
Leasing 17,392 17,490 35,220 34,586
Sales 16,636 29,155 53,907 72,239
Less amounts reported in discontinued
operations (5,440) (1,109) (35,924) (2,159)
Food Products 27,523 28,076 43,951 46,261
Other -- 16,188 -- 17,045
--------- --------- --------- ---------
Total revenue $ 279,185 $ 293,012 $ 512,972 $ 567,793
========= ========= ========= =========
Operating Profit, Net Income:
Ocean Transportation $ 14,818 $ 18,713 $ 17,325 $ 36,168
Property Development and Management:
Leasing 7,616 8,679 15,858 17,419
Sales 2,974 3,551 11,852 15,767
Less amounts reported in discontinued
operations (1,051) (573) (8,075) (943)
Food Products 1,033 1,509 3,128 7,311
Other -- 16,107 -- 16,947
--------- --------- --------- ---------
Total operating profit 25,390 47,986 40,088 92,669
Interest Expense (3,060) (4,870) (6,017) (10,649)
Corporate Expenses (3,256) (3,191) (6,204) (6,982)
--------- --------- --------- ---------
Income From Continuing Operations Before
Taxes 19,074 39,925 27,867 75,038
Income Taxes (6,550) (15,290) (10,029) (27,759)
--------- --------- --------- ---------
Income From Continuing Operations 12,524 24,635 17,838 47,279
Discontinued Operations (net of income
taxes):
Properties 673 367 5,166 603
Agriculture -- (488) -- (934)
--------- --------- --------- ---------
Net Income $ 13,197 $ 24,514 $ 23,004 $ 46,948
========= ========= ========= =========
See notes to financial statements.
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
Condensed Balance Sheets
(In thousands)
June 30, December 31,
2002 2001
---- ----
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 8,828 $ 19,291
Accounts and notes receivable, net 142,341 130,491
Inventories 24,227 16,280
Real estate and other assets held for sale 11,941 35,584
Deferred income taxes 12,374 9,324
Prepaid expenses and other assets 10,852 13,044
Accrued deposits to Capital Construction Fund (4,000) (4,000)
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Total current assets 206,563 220,014
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Investments 35,033 33,021
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Real Estate Developments 51,545 47,840
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Property, at cost 1,832,006 1,816,679
Less accumulated depreciation and amortization 856,007 839,631
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Property - net 975,999 977,048
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Capital Construction Fund 175,335 158,737
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Other Assets 114,021 107,759
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Total $1,558,496 $1,544,419
========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable and current portion of long-term debt $ 27,600 $ 19,900
Accounts payable 71,262 78,911
Other 72,800 96,758
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Total current liabilities 171,662 195,569
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Long-term Liabilities:
Long-term debt 233,378 207,378
Deferred Income Taxes 344,094 338,709
Post-retirement benefit obligations 42,696 42,915
Other 46,667 49,181
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Total long-term liabilities 666,835 638,183
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Shareholders' Equity:
Capital stock 33,727 33,328
Additional capital 80,288 66,659
Retained earnings 617,768 622,615
Cost of treasury stock (11,784) (11,935)
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Total shareholders' equity 719,999 710,667
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Total $1,558,496 $1,544,419
========== ==========
See notes to financial statements.
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
Condensed Statements of Cash Flows
(In thousands)
Six Months Ended
June 30,
2002 2001
---- ----
(unaudited)
Cash Flows from (used in) Operating Activities $ (7,496) $ 76,929
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Cash Flows from Investing Activities:
Capital expenditures (26,340) (63,363)
Proceeds from disposal of property and other assets 18,379 --
Proceeds from sale of investments -- 16,217
Capital Construction Fund, net (16,598) 358
Other (6,300) 1,559
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Net cash used in investing activities (30,859) (45,229)
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Cash Flows from Financing Activities:
Proceeds from issuances of long-term debt 39,000 6,000
Payments of long-term debt (13,000) (25,000)
Net proceeds (payments) of short-term debt 7,700 (1,000)
Proceeds from issuances of capital stock 12,557 3,409
Dividends paid (18,365) (18,252)
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Net cash from (used in) financing activities 27,892 (34,843)
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Net Decrease in Cash and Cash Equivalents $ (10,463) $ (3,143)
========== ==========
Other Cash Flow Information:
Interest paid, net of amounts capitalized $ (6,195) $ (12,187)
Income taxes paid, net of refunds (40,963) (18,091)
Other Non-cash Information:
Accrued deposits to (withdrawals from) Capital
Construction Fund, net -- (2,520)
Depreciation expense 35,457 36,310
Tax-deferred property sales 39,474 30,843
Tax-deferred property purchases (38,584) (42,257)
Change in unrealized holding gains -- 6,301
See notes to financial statements.
Financial Notes
(Unaudited)
(a) The Condensed Balance Sheet as of June 30, 2002, the Condensed Statements
of Income for the three months and six months ended June 30, 2002 and
2001, and the Condensed Statements of Cash Flows for the six months ended
June 30, 2002 and 2001 are unaudited. Because of the nature of the
Company's operations, the results for interim periods are not necessarily
indicative of results to be expected for the year. In the opinion of
management, all material adjustments necessary for the fair presentation
of interim period results have been included in the interim financial
statements.
(b) The 2002 estimated effective annual income tax rate differs from the
statutory rate, due primarily to the favorable settlement of prior years'
federal and state tax audits. The 2001 estimated effective annual income
tax rate differs from the statutory rate, due primarily to the dividends-
received deduction, various tax credits and the charitable donation of
appreciated stock.
(c) Accounting for and Classification of Discontinued Operations: The Company
adopted Statement of Financial Accounting Standards (SFAS) No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," on
January 1, 2001. This standard requires the classification of the sales
of certain income-producing assets as discontinued operations if the
operations and cash flows of the assets can be clearly distinguished from
the remaining assets of the Company, if the cash flows for the assets have
been, or will be, eliminated from the ongoing operations of the Company,
if the Company will not have a significant continuing involvement in the
operations of the assets sold and if the amount is considered material.
Certain assets that are "held for sale," based on the likelihood and
intention of selling the property within 12 months, are also treated as
discontinued operations. Sales of land and residential houses are
generally considered inventory and are not included in discontinued
operations.
Revenue and operating profit in the Industry Segment Data for the
property development and management segment include operating results
and gains from properties sold and property classified as "held for sale,"
that are reported as discontinued operations, since this is how management
views and evaluates this business segment. These amounts are subtracted
in deriving total revenue and operating profit and are shown, net of tax,
under the caption "Discontinued Operations: Properties." The Company
intends to continue its practice of reinvesting the proceeds from the
sales of investment property into new income-earning property, using tax-
deferred exchanges.
(d) Commitments that are not included in the Company's Condensed Balance Sheet
at June 30, 2002 include a guarantee by Matson of $31,500,000 of debt of
an unconsolidated affiliate, a Company guarantee of up to $15,000,000 of
debt of a sugar marketing and transportation cooperative, performance
bonds totaling $6,640,000, and standby letters of credit totaling
$20,449,000. Based on the Company's current knowledge, it is not expected
that the Company or its subsidiaries will be called upon to advance funds
under these commitments. Additional discussion of these commitments is
contained in Item 2 of this Form 10-Q.
(e) As described in Note 13 to the 2001 financial statements included in Item
8 of the Company's 2001 Form 10-K, the State of Hawaii Department of
Taxation (State) had informed the Company that it believes a portion of
the Company's ocean transportation revenue is subject to the Public
Service Company tax. The Company strongly disagrees with the State's tax
position, but if the State were to prevail fully, the amount of the claim
could be material. Discussions with the State are continuing and the
Company believes that the ultimate resolution of this matter will not have
a material adverse effect on its results of operations or financial
position.
(f) Certain amounts have been reclassified to conform with the current year's
presentation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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The following analysis of the consolidated financial condition and results of
operations of Alexander & Baldwin, Inc. and its subsidiaries (collectively, the
"Company") should be read in conjunction with the condensed consolidated
financial statements and related notes thereto.
FORWARD-LOOKING STATEMENTS
The Company, from time to time, may make or may have made certain forward-
looking statements, whether orally or in writing, such as forecasts and
projections of the Company's future performance or statements of management's
plans and objectives. These statements are "forward-looking" statements as
that term is defined in the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements may be contained in, among other things,
Securities and Exchange Commission (SEC) filings, such as the Forms 10-K,
10-Q and 8-K, press releases made by the Company, the Company's Internet
Web sites (including Web sites of its subsidiaries), and oral statements made
by the officers of the Company. Except for historical information contained
in these written or oral communications, such communications contain forward-
looking statements. These forward-looking statements involve a number of risks
and uncertainties that could cause actual results to differ materially from
those projected in the statements, including, but not limited to: (1) impact
of events of September 11, 2001; (2) economic conditions in Hawaii and
elsewhere; (3) market demand; (4) competitive factors and pricing pressures in
the Company's primary markets; (5) legislative and regulatory environments at
the federal, state and local levels, such as government rate regulations,
land-use regulations, government administration of the U.S. sugar program, and
modifications to or retention of cabotage laws; (6) dependence on third-party
suppliers; (7) fuel prices; (8) raw sugar prices; (9) labor relations;
(10) risks associated with current or future litigation and resolution of tax
issues with the IRS and state tax authorities; (11) the performance of
unconsolidated affiliates and ventures; and (12) other risk factors described
elsewhere in these communications and from time to time in the Company's
filings with the SEC.
SECOND QUARTER AND FIRST HALF EVENTS:
Operating Results: Net income for the second quarter of 2002 was $13,197,000,
or $0.32 per basic share. In the second quarter of 2001, income was
$24,514,000, or $0.60 per basic share. Revenue in the second quarter of 2002
was $279,185,000, compared with revenue of $293,012,000 in the second quarter
of 2001. Second quarter 2001 net income included a gain of $9,400,000 ($0.23
per basic share), due to the sale of the Company's investment in Pacific
Century Financial Corporation ("Pacific Century") (NYSE:BOH). Excluding this
gain on sale, net income decreased by $1,917,000, or 13 percent, compared with
the second quarter of 2001.
Net income for the first half of 2002 was $23,004,000, or $0.56 per basic
share, compared with $46,948,000, or $1.16 per basic share, for the first half
of 2001. Excluding the gain on the sale of the Pacific Century investment, net
income decreased by $14,544,000, or 39 percent, compared with the first half of
2001.
Interest expense for the first half and second quarter of 2002 was lower than
in the comparable periods last year, due to lower debt balances and lower
rates.
RESULTS OF SEGMENT OPERATIONS -
SECOND-QUARTER 2002 COMPARED WITH THE SECOND-QUARTER 2001
OCEAN TRANSPORTATION revenue of $223,074,000 for the second quarter of 2002
increased ten percent from the $203,212,000 reported in 2001. Operating profit
of $14,818,000 decreased 21 percent from the $18,713,000 reported in 2001. The
higher revenue was mainly due to new intermodal business and higher cargo
volume. These two factors, however, had little impact on the lower operating
profit, which was primarily a result of continuing productivity problems at the
Sand Island (Honolulu) terminal following the 2001 conversion of the
terminal's operations, partially offset by rate actions taken in 2002.
Second quarter operating results also included a $1.2 million charge for the
write-off of assets made obsolete by the replacement of two cranes at the
Company's Sand Island terminal. Second quarter 2002 Hawaii service container
volume was seven percent higher than in the second quarter of 2001. Most of
this increased volume was carried, however, under slot-charter agreements at
lower than normal margins. Automobile volume was eight percent lower for the
second quarter compared with a year earlier. A general rate increase of 2.75
percent became effective April 14, 2002. Additionally, effective May 5, 2002,
Matson increased its fuel surcharge from 3.25 percent to 4.75 percent, due to
increases in the prices of bunker fuel.
During the quarter, Matson entered into an agreement with Kvaerner Philadelphia
Shipyards, Inc. to purchase two container ships at a cost of approximately
$110 million each. The cost is expected to be funded with the Capital
Construction Fund and external borrowings. The first ship is expected to be
delivered in mid-2003, with the second ship in 2004. No significant payments
are required until the delivery of the first ship.
Matson's ownership interest in SSA Terminals, LLC (SSAT), a West Coast
stevedoring and terminal service provider, was reduced to 35 percent from 49.5
percent, as a result of an agreement to eliminate the majority owner's
preferred cash return.
The operating agreement for Sea Star Line, LLC (Sea Star), an ocean
transportation venture carrying cargo between Florida and Puerto Rico in which
Matson is a minority owner, was revised when Matson did not participate with
other owners in capital calls associated with acquisition of the assets of a
Puerto Rico competitor. As a result, Matson's future ownership interest in Sea
Star was reduced from 45 percent to approximately 20 percent and it is
anticipated that Matson's loan guarantees associated with Sea Star will,
over time, be reduced in accordance with a pre-determined schedule. At June
30, 2002, the amount of the loan guarantee was $31.5 million.
On May 13, 2002, the International Longshore and Warehouse Union (ILWU) and the
Pacific Maritime Association (of which Matson is a member) began negotiations
on the contract that governs longshore labor for U.S. Pacific Coast marine
terminals. The existing Pacific Coast Longshore Contract was scheduled to
expire on July 1, 2002. Since then, negotiations have continued and the
contract has been extended on a day-to-day basis. Along with wages and
benefits, the principal negotiating issues are the use of technology in marine
terminal operations and the modification of certain work rules.
The Hawaii labor agreement with the ILWU Local 142 also was scheduled to expire
on July 1, 2002, and subsequently was being extended on a day-to-day basis.
Although discussions about local issues are continuing, this contract is not
expected to be renewed until after the West Coast negotiations are completed.
The Company is not currently experiencing any work slowdowns or stoppages as a
result of these ongoing West Coast and Hawaii labor negotiations.
PROPERTY DEVELOPMENT AND MANAGEMENT - LEASING operating profit, before removing
amounts treated as discontinued operations, was $7,616,000 for the second
quarter of 2002, or 12 percent lower than in the second quarter of 2001. This
decrease was the result of lower occupancies for both the Mainland and Hawaii
properties and the write-off of approximately $200,000 of pursuit costs for an
acquisition that did not occur. Second quarter 2002 occupancy levels for
Mainland properties averaged 91 percent, versus 93 percent in the second
quarter of 2001. Occupancy levels for Hawaii properties averaged 87 percent in
the second quarter of 2002, versus 90 percent a year earlier. Mainland
occupancy declined, principally due to a lease expiration for a large
industrial tenant and vacancies resulting from two tenant bankruptcies. The
decrease in Hawaii occupancy was due primarily to the loss of a significant
office tenant in late 2001. This space subsequently was re-leased in the
second quarter of 2002.
In the second quarter of 2002, two shopping centers were acquired, one in Long
Beach, California and one in Mililani, Hawaii.
PROPERTY DEVELOPMENT AND MANAGEMENT - SALES revenue and operating profit
(before subtracting amounts treated as discontinued operations) of $16,636,000
and $2,974,000, respectively, for the second quarter of 2002 were primarily the
result of selling a Colorado shopping center, seven residential properties,
four business parcels and an 85-acre parcel on Maui, partially offset by the
write-off of approximately $400,000 of pursuit costs for an acquisition that
did not occur. Sales revenue of $29,155,000 and operating profit of $3,551,000
for the second quarter of 2001 were the result of the sale of 46 residential
properties, four business parcels and a four-acre parcel on Maui. This
variability in sales and operating profit is an inherent characteristic of
property sales activity.
The Company has accelerated development plans for its Kukui'Ula project on the
island of Kauai and has entered into a joint venture with an affiliate of DMB
Associates. The venture will have responsibility for planning, development and
sales of the project. The Company will contribute the land and existing
improvements to the venture, and DMB will fund all future development costs,
subject to an option available to the Company, that diminishes over time, to
participate in a portion of that funding. The Kukui'Ula project comprises
1,045 acres on the southern coast of Kauai, adjacent to the Poipu resort.
The project consists of 837 acres fully entitled for a resort, an 18-hole golf
course, residential and commercial use, and parks and open space. The
remaining 208 acres are partially entitled.
The Company has two other joint ventures to develop smaller projects in Hawaii.
One project is Kai Lani, a 116-unit townhouse condominium project at Ko'Olina,
a resort community on the island of Oahu. The other is HoloHolo Ku, consisting
of 44 single-family condominium ranch homes bordering Parker Ranch pastures in
Waimea on the island of Hawaii. The Company accounts for these two joint
ventures and the Kukui'Ula joint venture following the equity method of
accounting.
DISCONTINUED OPERATIONS: PROPERTIES - During the second quarter, the sale of a
small shopping center in Colorado met the criteria for classification as a
discontinued operation. The after-tax gain on the sale and the earnings of
this property totaled $673,000, or $0.01 per share, for the second quarter of
2002. These are classified, therefore, under the caption "Discontinued
Operations: Properties." The revenue and operating profit generated from this
property, as well as from the qualifying properties sold in the first quarter
of 2002, were removed from continuing operations in prior years. The after-
tax operating profit during the second quarter of 2001 that was reclassified
as discontinued operations following the sale of this property, as well as
sales of property in the first quarter of 2002, totaled $367,000. Consistent
with the Company's intention to reinvest the sales proceeds into new investment
property, the proceeds from this sale were put in escrow accounts for tax-
deferred reinvestment in accordance with Section 1031 of the Internal Revenue
Code. For the current quarter, no unsold assets were classified as held for
sale.
FOOD PRODUCTS revenue of $27,523,000 for the second quarter of 2002 was
$553,000 lower than the $28,076,000 of revenue reported in the second quarter
of 2001. Operating profit of $1,033,000 for the second quarter of 2002
compared with $1,509,000 for the second quarter of 2001. The decrease in
operating profit was due primarily to lower domestic raw sugar prices, and
lower sugar and molasses production, partially offset by reduced losses from
A&B's 36 percent minority investment in C&H Sugar Company, Inc. (C&H).
As of June 30, 2002, the Company had forward-priced 42 percent of its expected
total-year sugar production at approximately $21/cwt. Domestic sugar prices
for 2002 are expected to be slightly lower than for 2001. During the first
half of 2002, wet harvesting conditions on Maui have affected sugar production
and costs adversely. Sugar production and costs in 2001 were affected
adversely by drought conditions. Even with the wet harvesting conditions,
however, the 2002 total-year sugar production is expected to improve modestly,
compared with the 191,512 tons produced during 2001.
Coffee prices are not expected to improve during 2002, due to continued world
oversupply of lower quality commercial grades, particularly from Brazil.
OTHER operating profit for the second quarter of 2001 included a $15,100,000
pre-tax gain, due to the sale of the Company's investment in Pacific Century.
RESULTS OF SEGMENT OPERATIONS -
FIRST SIX MONTHS 2002 COMPARED WITH THE FIRST SIX MONTHS OF 2001
OCEAN TRANSPORTATION revenue of $415,818,000 for the first half of 2002 was
four percent higher than the $399,821,000 reported in the first half of 2001.
Operating profit of $17,325,000 for the first half of 2002 declined 52 percent
from $36,168,000 in the first half of 2001. The higher revenue was due to the
same factors cited in the second quarter comparisons. The decline in operating
profit resulted primarily from productivity issues at the Sand Island
(Honolulu) terminal, favorable one-time revenue and insurance reserve
adjustments in 2001, barge drydockings in Hawaii early in 2002 which increased
third-party service costs, lower pension credits and the assets write-off
previously noted in the second quarter comparisons partially offset by
previously noted rate actions. First half 2002 Hawaii service container volume
was two percent higher than in the first half of 2001. Automobile volume was
15 percent lower for the first six months of 2002, compared with the first half
of 2001.
In January 2002, Matson sold two vessels to Sea Star for $17,000,000, which
approximated the vessels' carrying value.
PROPERTY DEVELOPMENT AND MANAGEMENT - LEASING revenue (before subtracting
amounts treated as discontinued operations) was $35,220,000 for the first half
of 2002, or two percent higher than the $34,586,000 reported for the first half
of 2001. Operating profit, also before subtracting discontinued operations,
was $15,858,000 for the first half of 2002, or nine percent lower than the
$17,419,000 reported for the first half of 2001. This decrease in operating
profit was due to lower occupancies overall in both Mainland and Hawaii
properties, partially offset by the timing of sales and acquisitions of
properties in 2002 as compared with 2001. 2002 occupancy levels for Mainland
properties averaged 91 percent, versus 93 percent in the first half of 2001.
Average occupancy levels for Hawaii properties were 87 percent, versus 90
percent in the comparable period of 2001. The fluctuations in occupancy rates
were due to the same factors cited for the second quarter.
PROPERTY DEVELOPMENT AND MANAGEMENT - SALES (before subtracting amounts treated
as discontinued operations) revenue of $53,907,000 and operating profit of
$11,852,000 in the first half of 2002 were primarily the result of the sales
of a seven-building distribution complex in Texas, a number of smaller Hawaii
commercial properties, 11 residential homes, a small shopping center in
Colorado and an 85-acre parcel in upcountry Maui. Sales revenue of $72,239,000
and operating profit of $15,767,000 in the first half of 2001 included the sale
of an industrial lot to Wal-Mart, three commercial properties in Washington
state, a four-acre parcel on Maui, 68 residential properties and four business
parcels. The lower revenue and operating profit for 2002 compared with 2001
were the result of a lower number of property sales in 2002. This variability
in sales and operating profit is an inherent characteristic of property sales
activity.
DISCONTINUED OPERATIONS: PROPERTIES - During the first half of 2002, the sales
of a seven-building distribution complex in Texas, a land parcel subject to a
ground lease, and the small Colorado shopping center noted previously met the
criteria for classification as discontinued operations. The after-tax gain on
the sales and the earnings of these properties, totaling $5,166,000, or $0.12
per share, for the first half of 2002, are classified, therefore, under the
caption "Discontinued Operations: Properties." The revenue and operating
profit generated from these properties in prior years were removed from
continuing operations. The after-tax operating profit during the first half of
2001 that was reclassified as discontinued operations following the sale of the
properties in 2002 totaled $603,000. Consistent with the Company's intention
to reinvest the sales proceeds into new investment property, the proceeds from
these sales were put in escrow accounts for tax-deferred reinvestment in
accordance with Section 1031 of the Internal Revenue Code.
As permitted by SFAS No. 144, comparable property sales that were initiated
prior to the Company's adoption of this accounting standard on January 1, 2001
have not been reported as discontinued operations. The 2001 first half
includes the sales of three properties in Washington state for an aggregate
price of $15.6 million and a $2.1 million after-tax gain, all of which were
initiated prior to the adoption of the new standard.
FOOD PRODUCTS revenue of $43,951,000 in the first half of 2002 compared with
$46,261,000 in revenue for the comparable period of 2001. Operating profit for
the first half of 2002 was $3,128,000 compared with $7,311,000 for the first
half of 2001. Both of these decreases were due primarily to a first quarter
2001 one-time $5,000,000 (pre-tax) distribution from HS&TC, the sugar marketing
and transportation cooperative that handles the Hawaii sugar growers'
production.
In 2001, the Company ceased the operations of and abandoned its panelboard
manufacturing business operated by Hawaiian DuraGreen, Inc., a wholly owned
subsidiary of the Company (reported in 2001 discontinued operations). This is
discussed further in Item 8 of the Company's Form 10-K for the year ended
December 31, 2001.
OTHER operating profit for the first half of 2001 included the previously noted
gain from the sale of the Company's investment in Pacific Century.
FINANCIAL CONDITION AND LIQUIDITY, FINANCING ARRANGEMENTS
AND WORKING CAPITAL
Liquid Resources: The Company's principal liquid resources, comprising cash
and cash equivalents, receivables, sugar and coffee inventories and unused
lines of credit, less accrued deposits to the Capital Construction Fund,
totaled $499,348,000 at June 30, 2002, a decrease of $28,508,000 from December
31, 2001. This net decrease was due primarily to $33,000,000 in higher drawn
balances on variable rate facilities (including both short and long-term
facilities) following the payment of federal income taxes related to the
December 2001 bank stock sales, and lower cash balances, partially offset by
higher receivables of $11,900,000 and agricultural inventories that were
$7,700,000 higher than at year-end 2001, due to seasonality of production
cycles.
Other Financing Arrangements: Other financing arrangements at the end of the
second quarter included (1) a guarantee by Matson of $31,500,000 of debt of
Sea Star, an unconsolidated affiliate, (2) a Company guarantee of up to
$15,000,000 of debt of Hawaiian Sugar & Transportation Cooperative (HS&TC), a
sugar marketing and transportation cooperative, under its $30 million revolving
credit agreement, (3) performance bonds totaling $6,640,000, and (4) standby
letters of credit totaling $20,449,000. These amounts are not recorded on the
Company's balance sheet and, based on the Company's current knowledge, it is
not expected that the Company or its subsidiaries will be called upon to
advance funds under these commitments.
It is expected that the Sea Star debt guarantee will be reduced, over time,
following the previously noted change that reduced Matson's ownership interest
in that venture.
The performance bonds primarily are related to real estate construction
projects in Hawaii. These bonds are required either by the state or county
governments to ensure that certain infrastructure work required as part of
real-estate development is completed as required. The Company has the
financial ability and intention to complete these improvements.
HS&TC's $30 million credit line is used primarily to fund purchases of raw
sugar from the Hawaii growers and is fully secured by the inventory,
receivables and transportation assets of the cooperative. The amount drawn
by HS&TC under the facility is limited to 95% of its inventory value plus up to
$15 million of its receivables. The Company's guarantee is limited to the
lesser of $15,000,000 or the actual amounts drawn. Although the amount drawn
by HS&TC on its credit line varies, as of June 30, 2002, the amount drawn was
$15,750,000.
The standby letters of credit include one letter of credit for $4,339,000 for
workers' compensation claims incurred by C&H employees, under a now-closed self
insurance plan, prior to December 25, 1998. The Company only would be called
upon to honor this letter of credit in the event of C&H's insolvency.
Working Capital: Working capital was $34,901,000 at June 30, 2002, an increase
of $10,456,000 from the amount at the end of 2001. The higher working capital
was due primarily to paying the federal income taxes (which were unusually high
due to the gain realized from the December 2001 sale of the Company's BancWest
Corporation holdings), higher trade receivables, higher agricultural products
inventory, and lower trade payables, partially offset by lower cash balances
and lower inventory of real estate available for sale due to sales of property.
Cash Flows: Cash Flows used in Operating Activities were $7,496,000 for the
first half of 2002 compared with Cash Flows from Operating Activities of
$76,929,000 for the first half of 2001. This decline of $84.4 million was due
principally to the timing of payments for taxes ($38.4 million that, in large
part, resulted from the December 2001 sale of the Company's stock in BancWest
Corporation), changes in accounts and notes receivable ($20.8 million), and
the timing of sales and expenditures for real estate development projects
that are classified as a current asset as Real Estate Held for Sale
($14.4 million).
OTHER MATTERS
Significant Accounting Policies: The Company's significant accounting policies
are described in Note 1 of the 2001 consolidated financial statements included
in Item 8 of the Company's Form 10-K for the year ended December 31, 2001.
There have been no changes to the policies since that filing.
Significant Estimates: The preparation of the condensed consolidated financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported.
The more significant of these include (1) assumptions underlying the
calculation of pension, post-retirement, and non-qualified benefit obligations
and costs, (2) assumptions underlying the carrying value of investments, (3)
the estimation of allowances for doubtful accounts, (4) the estimation of
liabilities for self insurance programs, (5) the calculation and classification
of tax obligations and provisions prior to completion of tax returns and
completion of taxing authority audits, (6) the application of cost accounting
methods for sugar, molasses and coffee inventory and cost of sales, (7)
depreciable lives and salvage values for fixed assets, (8) liabilities for
environmental assessments and remedial efforts, (9) estimates of joint venture
earnings or losses prior to the issuance of final annual joint venture
financial statements, (10) accruals for obligations incurred but not yet billed
to the Company, (11) recoverability of claims from losses under insurance
coverage, and (12) value of securities held in the Capital Construction Fund
and in the Company's pension plans. The Company believes that the methods it
uses to determine these estimated amounts are in compliance with generally
accepted accounting principles consistently applied.
Charter Agreement: Matson and American President Lines, Ltd. (APL), are
parties to the Successor Alliance Slot Hire and Time Charter Agreement dated
January 28, 1998 (Agreement). This Agreement provides the structure of an
alliance through which Matson provides a weekly service to Guam. Pursuant to
this eight-year Agreement, Matson time charters three C-9 class vessels to APL
and APL reserves a designated number of container slots on each vessel for
Matson's exclusive use. This Agreement generates revenue of approximately
$2.9 million per month for Matson.
Tax-Deferred Real Estate Exchanges: During the first half of 2002, the Company
recorded, on a tax-deferred basis, real-estate sales of $39,474,000. The
proceeds from these sales were immediately available for reinvestment in
replacement property on a tax-deferred basis. The funds from these sales were
held in escrow, pending future use to purchase new real estate assets. These
amounts are not included in "Cash Flows from Operating Activities" and "Capital
Expenditures," but are reported under the caption "Other Non-cash Information"
in the Condensed Statements of Cash Flows. There were two purchases during the
first half of 2002 that utilized $38,584,000 of these escrowed funds.
Composition of Property Sales: The mix of property sales in any year or
quarter can be diverse. Sales can include developed residential real estate,
commercial properties, developable subdivision lots, undeveloped land and
property sold under threat of condemnation. The sale of undeveloped land and
vacant parcels in Hawaii generally provides a greater contribution to earnings
than does the sale of developed and commercial property, due to the low
historical-cost basis of the Company's Hawaii land. Consequently, property
sales revenue trends, cash flows from the sales of real estate and the amount
of real estate held for sale on the balance sheets do not necessarily indicate
future profitability trends for this segment. The reporting of property sales
is also affected by the classification of certain property sales as
discontinued operations.
Accounting for and Classification of Discontinued Operations: The Company
adopted Statement of Financial Accounting Standards (SFAS) No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets," on January 1, 2001. This
standard requires the classification of the sales of certain income-producing
assets as discontinued operations if the operations and cash flows of the
assets can be clearly distinguished from the remaining assets of the Company,
if the cash flows for the assets have been, or will be, eliminated from the
ongoing operations of the Company, if the Company will not have a significant
continuing involvement in the operations of the assets sold and if the amount
is considered material. Certain assets that are "held for sale," based on the
likelihood and intention of selling the property within 12 months, are also
treated as discontinued operations. Sales of land and residential houses are
generally considered inventory and are not included in discontinued operations.
Revenue and operating profit in the Industry Segment Data for the property
development and management segment include operating results and gains from
properties sold and property classified as "held for sale," that are reported
as discontinued operations, since this is how management views and evaluates
this business segment. These amounts are subtracted in deriving total revenue
and operating profit and are shown, net of tax, under the caption "Discontinued
Operations: Properties." The Company intends to continue its practice of
reinvesting the proceeds from the sales of investment property into new
income-earning property using tax-deferred exchanges.
New Accounting Standards: SFAS No. 142, "Goodwill and Other Intangible Assets"
became effective and was adopted by the Company on January 1, 2002. This
statement addresses how intangible assets, including goodwill, should be
accounted for in the consolidated financial statements. The adoption of the
standard had no material effect on the Company's financial statements.
SFAS No. 143, "Accounting for Asset Retirement Obligations" becomes effective
in January 2003. This statement addresses accounting and reporting for
obligations and costs which will occur when long-term assets are retired.
Among other things, the statement requires that the present value of the
liability associated with future asset retirements be recorded on the balance
sheet when an obligation has been incurred and when it can be measured. The
amortization of the capitalized cost and increases in the present value of the
obligation which result from the passage of time, are recorded as charges to
earnings. The possible financial impacts of this standard, when it is adopted
by the Company in January 2003, are not yet known, but are being assessed.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 4 addressed how gains and losses from extinguishment
of debt should be reported. SFAS No. 64 made certain exceptions to SFAS No. 4
for sinking fund payments. SFAS No. 44 established accounting requirements for
the transition effects of the Motor Carrier Act of 1980. These three standards
were entirely rescinded. SFAS No. 145 also made technical corrections to 17
APB Opinions, FASB Statements, FASB Interpretations and FASB Technical
Bulletins. None of these changes will significantly affect the Company's
accounting or reporting practices.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses accounting for restructuring
and similar costs. SFAS No. 146 supersedes previous accounting guidance,
principally Emerging Issues Task Force Issue No. 94-3. The Company will adopt
the provisions of the new standard for restructuring activities initiated after
December 31, 2002. The standard requires that the liability for costs
associated with an exit or disposal activity be recognized when the liability
is incurred. Under Issue 94-3, a liability for an exit cost was recognized at
the date of the Company's commitment to an exit plan. SFAS No. 146 also
establishes that the liability initially should be measured and recorded at
fair value. Accordingly, this may affect the timing of recognizing future
restructuring costs as well as the amounts recognized.
Additional information about the impacts of newly issued accounting standards
is discussed in Item 8 of the Company's Form 10-K for the year ended December
31, 2001.
Pensions: As noted in Item 8 of the Company's 2001 Form 10-K, the Company has
realized earnings benefits from pension returns and the excess of pension
assets over pension obligations. For 2001, the total year benefit was
approximately $12.7 million. For 2002, the Company expects that the full year
benefit will be approximately $1.4 million.
Environmental Matters: As with most industrial and land-development companies
of its size, the Company's operations have certain risks, which could result in
expenditures for environmental remediation. The Company believes that it is in
compliance, in all material respects, with applicable environmental laws and
regulations, and works proactively to identify potential environmental
concerns. The Company has received a claim for reimbursement of environmental
remediation costs associated with a sugar refinery site previously owned by
California and Hawaiian Sugar Company that was sold in 1994. The resolution of
this claim is not expected to have a material effect on the Company's financial
results. Management believes that appropriate liabilities have been accrued
for environmental matters.
Economic Conditions: Recent statistical reports on Hawaii's economy have been,
for the most part, moderately favorable. Visitor-days in the month of June, an
important measure of economic contribution, rose above prior-year figures for
only the second time since the events of 9/11; unemployment, which rose 0.3
percent in June to 4.5 percent, remained well (150 basis points) below the
national rate of 6.0 percent; Hawaii's leading economic indicator (LEI), last
reported in late May, rose sharply, only its second increase since July 2000.
Visitors from Japan also have enjoyed greater purchasing power with the recent
strengthening of the yen versus the U.S. dollar. In addition, total aircraft
seats scheduled to be offered this summer to Hawaii actually would be slightly
(0.8 percent) higher than last summer's capacity, with a 12.2 percent increase
in the very important U.S. West area, the strongest source of the recovery in
domestic travel to Hawaii.
Interest-sensitive measures, such as residential home sales, also continue to
be strong. The dollar volume of single-family and condominium sales on Oahu was
up 20 percent in the first half of 2002 versus the first half of 2001. For the
same period, single-family transactions rose 11 percent and the median price
was up 11 percent, to $320,000. Condominium sales rose 16 percent, with the
median price of $144,000 up eight percent.
All of these reports, however, pre-dated the "melt-down" that took place in the
U.S. equity market in mid-July 2002. It is unclear, therefore, what effect the
resulting decrease in household wealth might have in the coming months on
consumers' willingness to travel to Hawaii or to purchase real estate.
As noted in previous filings, the outlook for A&B's businesses reflects, in
large measure, the outlook for the economy of Hawaii. In particular, Matson's
cargo demand, especially for freight and for autos involved in the visitor
rental-car trade, benefits from growth in visitor traffic and the resulting
greater overall activity within Hawaii's business community. Similarly,
leasing of A&B's commercial properties and residential sales also benefit from
overall economic growth. Although we remain hopeful that the effects of the
decline in financial markets will be modest and short-lived, the outlook now
is less positive and more uncertain than earlier this year. Assuming that
visitor trends do improve as the year progresses, A&B's core operations also
should improve.
Management Changes: On July 1, 2002, the following management changes
occurred at Matson:
- W. Allen Doane, president and chief executive of Alexander & Baldwin,
Inc. and, previously, vice chairman of the board of Matson, was
appointed chairman.
- C. Bradley Mulholland, previously president and chief executive officer
of Matson, was appointed vice chairman of its board, reporting to W.
Allen Doane.
- James S. Andrasick, executive vice president and chief financial officer
of A&B, was appointed to additional duties as president and chief
executive officer of Matson, on an interim basis, also reporting to
W. Allen Doane.
- Raymond L. Smith, chief operating officer of Matson, left the company.
- Paul E. Stevens, previously senior vice president (ocean services) of
Matson, was promoted to executive vice president.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
Information concerning market risk is incorporated herein by reference to
Item 7A of the Company's Form 10-K for the fiscal year ended December 31, 2001.
There has been no material change in the quantitative and qualitative
disclosure about market risk since December 31, 2001.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
At the Annual Meeting of Shareholders of the Company held on April 25,
2002, the Company's shareholders voted in favor of: (i) the election of ten
directors to the Company's Board of Directors, (ii) the approval of an
amendment to the 1998 Stock Option/Stock Incentive Plan, and (iii) the election
of Deloitte & Touche LLP as the Company's independent auditors. The number of
votes for, against or withheld, as well as the number of abstentions and
broker non-votes, as to each matter voted upon at the Annual Meeting of
Shareholders, were as follows:
(i) Election of Directors For Withheld
--- --------
Michael J. Chun 37,529,239 192,577
Leo E. Denlea, Jr. 37,541,962 179,584
W. Allen Doane 34,173,201 3,548,615
Walter A. Dods, Jr. 36,984,579 737,237
Charles G. King 37,353,444 368,372
Carson R. McKissick 37,076,170 645,646
C. Bradley Mulholland 34,202,466 3,519,350
Lynn M. Sedway 37,231,239 490,577
Maryanna G. Shaw 37,228,357 493,459
Charles M. Stockholm 37,245,183 476,633
(ii) Proposal to Approve an For Against Abstain
--- ------- -------
Amendment to the 1998
Stock Option/Stock 32,776,766 3,513,883 1,431,167
Incentive Plan
(iii) Election of Auditors For Against Abstain
--- ------- -------
33,755,221 1,710,548 2,256,047
There were no broker non-votes at the Annual Meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits
--------
10. Material contracts.
10.a.(xxvii) Vessel Construction Contract between Matson
Navigation Company, Inc. and Kvaerner Philadelphia Shipyard
Inc., dated May 29, 2002.
10.a.(xxviii) Vessel Purchase and Sale Agreement between Matson
Navigation Company, Inc. and Kvaerner Shipholding, Inc., dated
May 29, 2002.
11. Statement re Computation of Per Share Earnings.
99. Certification of Chief Executive Officer and Chief Financial
Officer.
(b) Reports on Form 8-K
-------------------
A report on Form 8-K, dated May 29, 2002, was filed on May 29, 2002
to report, under Item 5 thereof, a definitive agreement entered into
by Matson Navigation Company, Inc. ("Matson"), a wholly-owned
subsidiary of Alexander & Baldwin, Inc., for the construction
of two new containerships for Matson.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of l934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALEXANDER & BALDWIN, INC.
-------------------------------
(Registrant)
Date: August 13, 2002 /s/ James S. Andrasick
-------------------------------
James S. Andrasick
Executive Vice President, Chief
Financial Officer and Treasurer
Date: August 13, 2002 /s/ Thomas A. Wellman
-------------------------
Thomas A. Wellman
Controller
EXHIBIT INDEX
-------------
10. Material contracts.
10.a.(xxvii) Vessel Construction Contract between Matson Navigation
Company, Inc. and Kvaerner Philadelphia Shipyard Inc., dated May 29, 2002.
10.a.(xxviii) Vessel Purchase and Sale Agreement between Matson
Navigation Company, Inc. and Kvaerner Shipholding, Inc., dated May 29,
2002.
11. Statement re Computation of Per Share Earnings.
99. Certification of Chief Executive Officer and Chief Financial Officer.