UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2005
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_ OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________________ to _________________
Commission file number 0-565
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ALEXANDER & BALDWIN, INC.
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(Exact name of registrant as specified in its charter)
Hawaii 99-0032630
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P. O. Box 3440, Honolulu, Hawaii 9680l
822 Bishop Street, Honolulu, Hawaii 96813
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(Address of principal executive offices) (Zip Code)
(808) 525-6611
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address, and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|
Number of shares of common stock outstanding as of
June 30, 2005: 43,829,557
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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The unaudited, condensed financial statements and notes for the second quarter
and first six months of 2005 are presented below, with comparative figures from
the 2004 financial statements.
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(In millions, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
---- ---- ---- ----
Revenue:
Operating revenue $ 392.1 $ 374.4 $ 756.7 $ 715.6
---------- ---------- ----------- -----------
Costs and Expenses:
Costs of goods sold, services and rentals 308.6 295.5 586.3 561.6
Loss on investment 2.2 -- 2.2 --
Selling, general and administrative 33.4 30.9 65.5 62.0
---------- ---------- ----------- -----------
Operating costs and expenses 344.2 326.4 654.0 623.6
---------- ---------- ----------- -----------
Operating Income 47.9 48.0 102.7 92.0
Other Income and (Expense):
Equity in income of real estate affiliates 0.8 1.3 1.8 2.1
Interest income 1.2 1.1 2.1 1.8
Interest expense (3.0) (3.2) (5.8) (6.4)
---------- ---------- ----------- -----------
Income Before Taxes 46.9 47.2 100.8 89.5
Income taxes 17.8 18.2 38.3 34.0
---------- ---------- ----------- -----------
Income From Continuing Operations 29.1 29.0 62.5 55.5
Discontinued Operations (net of income taxes) 0.3 1.1 4.6 1.7
---------- ---------- ----------- -----------
Net Income $ 29.4 $ 30.1 $ 67.1 $ 57.2
========== ========== =========== ===========
Basic Earnings Per Share:
Continuing operations $ 0.67 $ 0.68 $ 1.44 $ 1.31
Discontinued operations -- 0.03 0.10 0.04
----------- ----------- ----------- -----------
Net income $ 0.67 $ 0.71 $ 1.54 $ 1.35
=========== =========== =========== ===========
Diluted Earnings Per Share:
Continuing operations $ 0.66 $ 0.67 $ 1.42 $ 1.29
Discontinued operations -- 0.03 0.10 0.04
----------- ----------- ----------- -----------
Net income $ 0.66 $ 0.70 $ 1.52 $ 1.33
=========== =========== =========== ===========
Dividends Per Share (1) $ 0.225 $ 0.225 $ 0.45 $ 0.45
Average Number of Shares Outstanding 43.6 42.5 43.5 42.4
Average Number of Dilutive Shares Outstanding 44.2 43.1 44.1 43.0
(1) Dividends per share for the second quarter and first half of 2005 do not
include the $0.225 third quarter dividend declared on June 23, 2005 and payable
on September 1, 2005. Dividends per share for the second quarter and first
half of 2004 do not include the $0.225 third quarter dividend declared on
June 24, 2004 and payable on September 2, 2004.
See Notes to Condensed Consolidated Financial Statements.
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
Industry Segment Data, Net Income
(In millions)
Three Months Ended Six Months Ended
June 30, June 30,
2005 2004 2005 2004
---- ---- ---- ----
Revenue:
Transportation:
Ocean transportation $ 221.0 $ 208.1 $ 427.2 $ 404.6
Logistics services 106.6 93.5 202.7 167.6
Real Estate:
Leasing 21.3 20.4 43.2 41.2
Sales 14.6 28.3 60.5 68.4
Less amounts reported in discontinued
operations (1.7) (3.1) (28.1) (5.3)
Food Products 32.2 28.9 54.6 42.3
Reconciling Items (1.9) (1.7) (3.4) (3.2)
---------- ---------- ----------- -----------
Total revenue $ 392.1 $ 374.4 $ 756.7 $ 715.6
========== ========== =========== ===========
Operating Profit, Net Income:
Transportation:
Ocean transportation $ 38.7 $ 31.4 $ 68.4 $ 50.0
Logistics services 3.6 2.6 6.6 3.6
Real Estate:
Leasing 10.5 9.2 21.2 18.7
Sales 4.8 13.4 21.3 32.4
Less amounts reported in discontinued
operations (0.6) (1.7) (7.5) (2.7)
Food Products 0.3 0.3 9.3 2.9
---------- ---------- ----------- -----------
Total operating profit 57.3 55.2 119.3 104.9
Loss on Investment (2.2) -- (2.2) --
Interest Expense (3.0) (3.2) (5.8) (6.4)
General Corporate Expenses (5.2) (4.8) (10.5) (9.0)
---------- ---------- ----------- -----------
Income From Continuing Operations Before
Income Taxes 46.9 47.2 100.8 89.5
Income Taxes (17.8) (18.2) (38.3) (34.0)
---------- ---------- ----------- -----------
Income From Continuing Operations 29.1 29.0 62.5 55.5
Discontinued Operations (net of income taxes) 0.3 1.1 4.6 1.7
---------- ---------- ----------- -----------
Net Income $ 29.4 $ 30.1 $ 67.1 $ 57.2
========== ========== =========== ===========
See Notes to Condensed Consolidated Financial Statements.
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In millions)
June 30, December 31,
2005 2004
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $ 69 $ 42
Accounts and notes receivable, net 167 181
Inventories 26 15
Real estate held for sale 65 35
Deferred income taxes 11 10
Prepaid expenses and other assets 20 20
Accrued deposits, net to Capital Construction Fund -- (15)
--------- ---------
Total current assets 358 288
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Investments 130 111
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Real Estate Developments 56 82
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Property, at cost 2,178 1,996
Less accumulated depreciation and amortization 897 863
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Property - net 1,281 1,133
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Capital Construction Fund 37 40
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Other Assets 127 124
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Total $ 1,989 $ 1,778
========= =========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable and current portion of long-term debt $ 32 $ 31
Accounts payable 114 115
Other 102 89
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Total current liabilities 248 235
--------- ---------
Long-term Liabilities:
Long-term debt 314 214
Deferred income taxes 388 339
Post-retirement benefit obligations 46 45
Other 38 41
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Total long-term liabilities 786 639
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Commitments and Contingencies
Shareholders' Equity:
Capital stock 35 35
Additional capital 169 150
Deferred compensation (7) (2)
Accumulated other comprehensive loss (9) (9)
Retained earnings 778 741
Cost of treasury stock (11) (11)
--------- ---------
Total shareholders' equity 955 904
--------- ---------
Total $ 1,989 $ 1,778
========= =========
See Notes to Condensed Consolidated Financial Statements.
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In millions)
Six Months Ended
June 30,
2005 2004
---- ----
Cash Flows from Operating Activities $ 129 $ 84
--------- ---------
Cash Flows from Investing Activities:
Capital expenditures (174) (24)
Proceeds from disposal of property and other assets 19 20
Deposits into Capital Construction Fund (158) (1)
Withdrawals from Capital Construction Fund 146 1
Investments, net (13) (22)
--------- ---------
Net cash used in investing activities (180) (26)
--------- ---------
Cash Flows from Financing Activities:
Proceeds from issuances of long-term debt 105 4
Payments of long-term debt (10) (35)
Payments of short-term debt, net (5) --
Proceeds from issuances of capital stock 8 9
Repurchase of capital stock -- (2)
Dividends paid (20) (19)
--------- ---------
Net cash provided by (used in) financing activities 78 (43)
--------- ---------
Net Increase in Cash and Cash Equivalents $ 27 $ 15
========= =========
Other Cash Flow Information:
Interest paid, net of amounts capitalized $ (7) $ (7)
Income taxes paid, net of refunds 22 (30)
Other Non-cash Information:
Depreciation expense 41 40
Tax-deferred property sales (28) --
Tax-deferred property purchases 28 --
Debt assumed in real estate acquisition 11 --
See Notes to Condensed Consolidated Financial Statements.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
(1) The Condensed Consolidated Financial Statements are unaudited. Because
of the nature of the Company's operations, the results for interim
periods are not necessarily indicative of results to be expected for
the year. In the opinion of management, all material adjustments
necessary for the fair presentation of interim period results have been
included in the interim financial statements.
(2) The 2005 estimated effective income tax rate of 38 percent is
substantially the same as the statutory rate.
(3) Commitments and Contingencies: Commitments and financial arrangements
that are not recorded on the Company's balance sheet at June 30, 2005,
other than operating lease obligations, included the following (in
millions):
Vessel purchases (a) $ 148
Guarantee of Hokua debt (b) $ 15
Guarantee of HS&TC debt (c) $ 7
Standby letters of credit (d) $ 19
Bonds (e) $ 14
Benefit plan withdrawal obligations (f) $ 65
These amounts are not recorded on the Company's balance sheet and, with
the exception of item (a), it is not expected that the Company or its
subsidiaries will be called upon to advance funds under these
commitments.
(a) In February 2005, Matson Navigation Company, Inc. ("Matson")
entered into an agreement with Kvaerner Philadelphia Shipyard Inc.
to purchase two containerships for $144.4 million each. The first
of these two ships, the MV Manulani, was delivered during the
second quarter of 2005, and the second ship, the MV Maunalei, is
expected to be delivered in the second quarter of 2006. The
purchase price for the MV Maunalei will also include approximately
$3.9 million of interest incurred by the shipyard during
construction, bringing the total purchase price to $148.3 million.
The purchase of the MV Maunalei is expected to be funded with the
Capital Construction Fund ("CCF"), operating cash flows and a new
revolving credit facility. Payment in full is required upon the
delivery of the containership. No obligation is recorded on the
financial statements for the MV Maunalei because conditions
necessary to record either a liability or an asset have not been
met. Information related to the use of the ships in the Guam trade
and in the recently announced China service is included in Part II
Item 8 of the Company's most recently filed Form 10-K. The
financing agreements for each of the two ships were described in
two 8-K's that were filed with the SEC during the second quarter
of 2005 and in Item 2 of this Form 10-Q.
(b) A&B Properties, Inc. ("Properties") has a limited loan guarantee
equal to the lesser of $15 million or 15.5 percent of the
outstanding balance of the construction loan for the Hokua
condominium project, in which Properties is an investor. The
guarantee could be triggered if the purchasers of condominium
apartments become entitled to rescind their purchase obligations.
This could occur if, for example, the seller breaches covenants
contained in its sales contracts or violates the Interstate Land
Sales Practices Act ("ILSPA"), the Hawaii Condominium Act, the
Securities Act of 1933 or the Securities Exchange Act of 1934.
The ILSPA requires that the building must be constructed and a
certificate of occupancy obtained, within two years following
execution of a binding sales contract with the buyer. For Hokua,
this is December 31, 2005 for most of the contracts. The Hokua
general contractor expects that a certificate of occupancy will be
obtained by December 31, 2005; however, any unanticipated delays
could result in the certificate not being obtained by that date.
The Company believes that even if the buyers are able to rescind
their contracts and are entitled to a refund, the affected units
could be sold for prices greater than the original selling prices,
since market prices in Honolulu have risen considerably during the
past 18 months.
(c) At June 30, 2005, the Company had guaranteed $15 million of a $30
million Hawaiian Sugar & Transportation Cooperative ("HS&TC")
revolving credit line. HS&TC is a raw sugar marketing and trans-
portation cooperative that is used to market and transport the
Company's raw sugar to C&H Sugar Company, Inc ("C&H"); the Company
is a member of HS&TC and is a minority owner of C&H. On July 29,
2005, this guarantee was restructured as a floating guarantee that
can range from the lower of the amount drawn by HS&TC under the
credit line to $21.5 million. The HS&TC credit line is used
primarily to fund purchases of raw sugar from the Hawaii growers
and is fully secured by all personal property of the cooperative
other than transportation assets. The amount that may be drawn by
HS&TC under the facility is limited to its inventory value plus
certain cash balances and accounts receivable. If the amounts
owed by C&H to HS&TC are outstanding for up to 10 days, the
amount of A&B's exposure under the guarantee is limited to the
lesser of $15 million or the actual amounts drawn. If HS&TC has
extended payment terms to C&H beyond the normal 10 days, then the
amount of the guarantee increases to the lesser of the amount drawn
on the credit line or $21.5 million. As of June 30, 2005, extended
credit terms had been provided to C&H, but the balance outstanding
on the credit line was $7 million, therefore the amount of A&B's
guarantee was $7 million at quarter-end. A copy of the new floating
guarantee agreement is included with this Form 10-Q as Exhibit
10.a.(xxxix).
(d) At June 30, 2005, the Company has arranged for standby
letters of credit totaling $19 million. This includes
letters of credit, totaling approximately $12 million,
which enable the Company to qualify as a self-insurer
for state and federal workers' compensation liabilities.
This balance includes approximately $4 million for
routine insurance-related operating matters, principally
in the real estate business.
Also included in the outstanding letters of credit, is
a $3 million letter of credit for workers' compensation
claims incurred by C&H employees prior to December 24,
1998. As disclosed in previous filings, C&H was a
wholly owned subsidiary of A&B until December 24, 1998,
at which date the Company sold a majority interest in
the business. The Company would only be called upon to
honor this letter of credit in the event of C&H's
insolvency or its failure to pay claims when due.
(e) Of the $14 million in bonds, $7 million relate to real
estate construction projects in Hawaii. These bonds are
required by either 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. Also included in the total
bond amount are $6 million of customs bonds. The
remaining $1 million of bonds are for
transportation-related matters.
(f) The withdrawal liabilities for multiemployer pension
plans, in which Matson is a participant, aggregated
approximately $65 million as of the most recent
valuation dates. Management has no present intention of
withdrawing from and does not anticipate termination of
any of the aforementioned plans.
Contingencies: During the first half of 2005, there were no substantive
changes to two environmental matters, the petition filed with the State
of Hawaii Board of Land and Natural Resources or the Citizen Complaint
and Petition for a Declaratory Order filed with the State of Hawaii
Commission on Water Resource Management. These items are described in
Part II, Items 7 and 8, of the Company's 2004 Form 10-K.
The Company and certain subsidiaries are parties to various legal
actions and are contingently liable in connection with claims and
contracts arising in the normal course of business, the outcome of
which, in the opinion of management after consultation with legal
counsel, will not have a material adverse effect on the Company's
financial position or results of operations.
(4) Accounting Method for Stock-Based Compensation and Diluted Earnings per
Share: As allowed by Statement of Financial Accounting Standards
("SFAS") No. 123R, "Accounting for Stock-Based Compensation, Revised"
and by SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure," the Company has elected to continue to
apply the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." Accordingly, no
compensation cost is recognized in the Company's net income for options
granted with exercise prices that are equal to the market values of the
underlying common stock on the dates of grant.
Pro forma information regarding net income and earnings per share,
using the fair value method and reported below, has been estimated
using a Black-Scholes option-pricing model. This model was developed
for use in estimating the fair value of traded options which do not
have vesting requirements and which are fully transferable. The
Company's options have characteristics significantly different from
those of traded options. Had compensation cost for the stock options
been based on the estimated fair values at grant dates, the Company's
pro forma net income and net income per share for the three and six
months ended June 30, 2005 and 2004 would have been as follows (in
millions, except per share amounts):
Quarter Ended Six Months Ended
June 30, June 30,
-------- --------
2005 2004 2005 2004
Net Income:
As reported $ 29.4 $ 30.1 $ 67.1 $ 57.2
Stock-based compensation expense determined
under fair value based method for all awards,
net of related tax effects (0.4) (0.3) (0.8) (0.6)
-------- --------- --------- --------
Pro forma $ 29.0 $ 29.8 $ 66.3 $ 56.6
======== ========= ========= ========
Net Income Per Share:
Basic, as reported $ 0.67 $ 0.71 $ 1.54 $ 1.35
Basic, pro forma $ 0.66 $ 0.70 $ 1.52 $ 1.33
Diluted, as reported $ 0.66 $ 0.70 $ 1.52 $ 1.33
Diluted, pro forma $ 0.65 $ 0.69 $ 1.50 $ 1.32
Effect on average shares outstanding of assumed
exercise of stock options (in millions of shares):
Average number of shares outstanding 43.6 42.5 43.5 42.4
Effect of assumed exercise of outstanding stock
options 0.6 0.6 0.6 0.6
-------- --------- --------- --------
Average number of shares outstanding after
assumed exercise of outstanding stock options 44.2 43.1 44.1 43.0
======== ========= ========= ========
The pro forma effects are not necessarily representative of the pro
forma effects on future net income or earnings per share, because the
number of future shares that may be issued is not known; shares vest
over several years, and assumptions used to determine the fair value
can vary significantly. Additional information about stock-based
compensation is included in Notes 1 and 12 of Item 8 in the Company's
most recently filed Form 10-K and in Item 2 of this Form 10-Q.
(5) Accounting for and Classification of Discontinued Operations: As
required by Statement of Financial Accounting Standards ("SFAS") No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets,"
the sales of certain income-producing assets are classified as
discontinued operations if (i) the operations and cash flows of the
assets can be clearly distinguished from the remaining assets of the
Company, (ii) the cash flows that are specific to the assets sold have
been, or will be, eliminated from the ongoing operations of the
Company, (iii) the Company will not have a significant continuing
involvement in the operations of the assets sold, and (iv) the amount
is considered material. Certain assets that are "held for sale," based
on the likelihood and intention of selling the property within 12
months, are also treated as discontinued operations. Depreciation on
these assets is discontinued upon reclassification. Sales of land,
residential houses, and office condominium units are generally
considered inventory and are not included in discontinued operations.
Discontinued operations were as follows (in millions):
Quarter Ended Six Months Ended
June 30, June 30,
-------- --------
2005 2004 2005 2004
Discontinued Operations (net of tax)
Sales of Assets -- $ 0.9 $ 3.9 $ 1.0
Leasing Operations $ 0.3 0.2 0.7 0.7
------- -------- -------- --------
Total $ 0.3 $ 1.1 $ 4.6 $ 1.7
======== ======== ======== ========
(6) Other Comprehensive Income for the three and six months ended June 30,
2005 and 2004 was as follows (in millions):
Quarter Ended Six Months Ended
June 30, June 30,
-------- --------
2005 2004 2005 2004
Net Income $ 29.4 $ 30.1 $ 67.1 $ 57.2
Company's share of investee's
minimum pension liability
adjustment (0.4) -- (0.4) --
Change in valuation of derivative -- 2.5 0.1 1.5
-------- -------- -------- --------
Comprehensive Income $ 29.0 $ 32.6 $ 66.8 $ 58.7
======== ======== ======== ========
The change in valuation of derivative reflects the valuation of an
interest rate lock agreement related to a containership purchased by
Matson during 2004.
(7) Pension and Post-retirement Plans: The Company has defined benefit
pension plans that cover substantially all non-bargaining unit and
certain bargaining unit employees. The Company also has unfunded
non-qualified plans that provide benefits in excess of the amounts
permitted to be paid under the provisions of the tax law to
participants in qualified plans. The assumptions related to discount
rates, expected long-term rates of return on invested plan assets,
salary increases, age, mortality and health care cost trend rates,
along with other factors, are used in determining the assets,
liabilities and expenses associated with pension benefits. Management
reviews the assumptions annually with its independent actuaries, taking
into consideration existing and future economic conditions and the
Company's intentions with respect to these plans. Management believes
that its assumptions and estimates for 2005 are reasonable. Different
assumptions, however, could result in material changes to the assets,
obligations and costs associated with benefit plans.
The Components of Net Periodic Benefit Cost for the second quarter of
2005 and 2004 were as follows (in millions):
Pension Benefits Post-retirement Benefits
---------------- ------------------------
2005 2004 2005 2004
---- ---- ---- ----
Service Cost $ 1.6 $ 1.6 $ 0.2 $ 0.2
Interest Cost 4.0 4.0 0.8 0.8
Expected Return on Plan Assets (6.1) (5.7) -- --
Amortization of Prior Service Cost 0.1 0.1 -- --
Amortization of Net (Gain) Loss 0.4 0.5 0.3 0.1
-------- -------- -------- --------
Net Periodic Benefit Cost $ 0.0 $ 0.5 $ 1.3 $ 1.1
======== ======== ======== ========
The Components of Net Periodic Benefit Cost for the first half of 2005
and 2004 were as follows (in millions):
Pension Benefits Post-retirement Benefits
---------------- ------------------------
2005 2004 2005 2004
---- ---- ---- ----
Service Cost $ 3.0 $ 3.1 $ 0.5 $ 0.4
Interest Cost 8.0 7.9 1.6 1.4
Expected Return on Plan Assets (12.2) (11.4) -- --
Amortization of Prior Service Cost 0.2 0.2 -- --
Amortization of Net (Gain) Loss 0.8 1.0 0.6 0.3
-------- -------- -------- --------
Net Periodic Benefit Cost $ (0.2) $ 0.8 $ 2.7 $ 2.1
======== ======== ======== ========
The 2005 return on plan assets is expected to be nearly the same as the
sum of the service cost, interest cost and amortization components,
resulting in no material pension expense. No contributions to the
Company's pension plans are expected to be required during 2005.
The 2005 net periodic post-retirement and pension costs do not reflect
any amount associated with a subsidy relating to the Medicare
Prescription Drug Improvement and Modernization Act of 2003 because the
Company has not been able to conclude whether the benefit provided by
its plans are actuarially equivalent to Medicare Part D of the Act.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
The following analysis of the consolidated financial condition and results of
operations of Alexander & Baldwin, Inc. and its subsidiaries (collectively, the
"Company") should be read in conjunction with the condensed consolidated
financial statements and related notes thereto included in Item 1 of this Form
10-Q.
FORWARD-LOOKING STATEMENTS
The Company, from time to time, may make or may have made certain
forward-looking statements, whether orally or in writing, such as forecasts and
projections of the Company's future performance or statements of management's
plans and objectives. These statements are "forward-looking" statements as that
term is defined in the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements may be contained in, among other things, Securities
and Exchange Commission ("SEC") filings, such as the Forms 10-K, 10-Q and 8-K,
press releases made by the Company, the Company's Internet Web sites (including
Web sites of its subsidiaries), and oral statements made by the officers of the
Company. Except for historical information contained in these written or oral
communications, such communications contain forward-looking statements. These
forward-looking statements are not guarantees of future performance, and involve
a number of risks and uncertainties that could cause actual results to differ
materially from those projected in the statements, including, but not limited to
the following factors:
1) economic conditions in Hawaii and elsewhere;
2) market demand;
3) competitive factors, such as the entrance of new competitor
capacity in the Hawaii shipping trade, and pricing
pressures, principally in the Company's transportation
businesses;
4) renewal or replacement of significant operating and
financial agreements;
5) significant fluctuations in fuel prices;
6) legislative and regulatory environments at the federal,
state and local levels, including, among others, government
rate regulations, land use regulations, government
administration of the U.S. sugar program, and modifications
to or retention of cabotage laws;
7) availability of water for irrigation and to support real
estate development;
8) performance of unconsolidated affiliates and ventures;
9) significant fluctuations in raw sugar prices and the ability
to sell raw sugar to C&H Sugar Company, Inc. ("C&H");
10) raw sugar and coffee production that can be affected
adversely by weather, disease, irrigation, factory
reliability, labor availability, age of crop and other
factors;
11) vendor and labor relations in Hawaii, the U.S. Pacific
Coast, Guam and other locations where the Company has
operations;
12) risks associated with construction and development
activities, including, among others, construction costs,
construction defects, labor issues, ability to secure
insurance, and land use regulations;
13) performance of pension assets;
14) acts of nature, including but not limited to, drought,
greater than normal rainfall, hurricanes and typhoons;
15) resolution of tax issues with the IRS or state tax
authorities;
16) acts of war and terrorism;
17) risks associated with current or future litigation; and
18) other risk factors described elsewhere in these
communications and from time to time in the Company's
filings with the SEC.
CONSOLIDATED REVENUE & NET INCOME
Consolidated - Second quarter of 2005 compared with 2004
- -------------------------------------------------------------------------------------------
Quarter Ended June 30,
- -------------------------------------------------------------------------------------------
(dollars in millions) 2005 2004 Change
- -------------------------------------------------------------------------------------------
Revenue $ 392.1 $ 374.4 5%
Cost of goods sold, services and rentals $ 308.6 $ 295.5 4%
Selling, general and administrative $ 33.4 $ 30.9 8%
Loss on investment $ 2.2 -- --
Income taxes $ 17.8 $ 18.2 -2%
- -------------------------------------------------------------------------------------------
Net income $ 29.4 $ 30.1 -2%
- -------------------------------------------------------------------------------------------
Consolidated revenue of $392.1 million for the second quarter of 2005 increased
$17.7 million, or 5 percent, compared with the second quarter of 2004. This
increase was due principally to $13.1 million growth in Matson Integrated
Logistics revenue, $12.9 million higher revenue for ocean transportation, $3.3
million higher revenue in food products and $1.2 million higher revenue from
real estate leasing (excluding leasing revenue from assets classified as
discontinued operations), partially offset by $12.6 million in lower revenue
from real estate sales (excluding revenue from discontinued operations). The
reasons for the revenue growth are described below, by business segment, in the
Analysis of Operating Revenue and Profit.
Costs of goods sold, services and rentals of $308.6 million for the second
quarter of 2005 increased $13.1 million, or 4 percent, compared with the second
quarter of 2004 due to higher purchased transportation services of approximately
$10.8 million at the Matson Integrated Logistics business, $5.2 million higher
costs for ocean transportation, $3.1 million for higher cost of sugar sold due
to increased sales tonnage combined with the effect of higher operating costs,
partially offset by $5.3 million lower cost of property sales (excluding
property sales classified as discontinued operations).
Selling, general and administrative costs of $33.4 million for the second
quarter were $2.5 million, or 8 percent, higher than the second quarter of 2004
due to higher depreciation, amortization of leasehold improvements, professional
service fees, employee benefit costs and salaries and wages.
The $2.2 million loss on investment was the result of the planned sale of
Company's ownership interests in C&H Sugar Company.
Income taxes were slightly lower than the second quarter of 2004 due to lower
pre-tax income.
Consolidated - First half of 2005 compared with 2004
- ---------------------------------------------------------------------------------------------
Six Months Ended June 30,
- ---------------------------------------------------------------------------------------------
(dollars in millions) 2005 2004 Change
- ---------------------------------------------------------------------------------------------
Revenue $ 756.7 $ 715.6 6%
Cost of goods sold, services and rentals $ 586.3 $ 561.6 4%
Selling, general and administrative $ 65.5 $ 62.0 6%
Loss on investment $ 2.2 -- --
Income taxes $ 38.3 $ 34.0 13%
- ---------------------------------------------------------------------------------------------
Net income $ 67.1 $ 57.2 17%
- ---------------------------------------------------------------------------------------------
Consolidated revenue of $756.7 million for the first half of 2005 increased
$41.1 million, or 6 percent, compared with the first half of 2004. This increase
was due principally to $35.1 million growth in Matson Integrated Logistics
revenue, $22.6 million higher revenue for ocean transportation, $12.3 million
higher revenue in food products and $2.7 million higher revenue from real estate
leasing (excluding leasing revenue from assets classified as discontinued
operations), partially offset by $31.4 million in lower revenue from real estate
sales (excluding revenue from discontinued operations). The reasons for the
revenue growth are described below, by business segment, in the Analysis of
Operating Revenue and Profit.
Costs of goods sold, services and rentals of $586.3 million for the first half
of 2005 increased $24.7 million, or 4 percent, compared with the first half of
2004 due to higher purchased transportation services of approximately $29.7
million for the integrated logistics business, $9.6 million higher costs for
ocean transportation, and $6.1 million for higher cost of sugar sold due to
increased sales tonnage and higher operating costs, partially offset by $14.7
million lower cost of property sales (excluding property sales classified as
discontinued operations), and $7.5 million higher equity in earnings of SSA
Terminals, LLC ("SSAT," in which Matson is a minority owner).
Selling, general and administrative costs of $65.5 million for the first half of
2005 were $3.5 million, or 6 percent, higher than the first half of 2004 due to
the same factors cited for the second quarter increase.
The loss on investment was described previously in the second quarter
discussion.
Income taxes were higher than the first half of 2004 due to higher pre-tax
income. The 2005 income tax rate of 38 percent is expected to approximate the
Company's statutory rate.
Additional information about the revenue and profits of the Company are provided
in the Analysis of Operating Revenue and Profit shown below. Because the Company
operates in five different segments and three industries, the review of
operations, on a segment basis, provides an important perspective on the
financial results for the Company.
ANALYSIS OF OPERATING REVENUE AND PROFIT
TRANSPORTATION INDUSTRY
Ocean Transportation - Second quarter of 2005 compared with 2004
- ------------------------------------------------------------------------------
Quarter Ended June 30,
- ------------------------------------------------------------------------------
(dollars in millions) 2005 2004 Change
- ------------------------------------------------------------------------------
Revenue $ 221.0 $ 208.1 6%
Operating profit $ 38.7 $ 31.4 23%
- ------------------------------------------------------------------------------
Volume (Units)
Hawaii containers 44,300 40,400 10%
Automobiles 43,300 41,600 4%
Guam containers 4,200 4,300 -2%
- ------------------------------------------------------------------------------
Ocean Transportation revenue of $221 million for the second quarter of 2005 was
$12.9 million, or 6 percent, higher than the second quarter of 2004. Of this
increase, approximately $8.9 million was due to higher Hawaii container and
automobile volume, $4.8 million was due to increases in the fuel surcharge that
was, in turn, associated with higher fuel costs, and $2.8 million was due to
improved Hawaii service yields and cargo mix. These increases were partially
offset by $2.3 million of lower purchased transportation services, $1.1 million
of lower vessel charter revenue and $0.2 million of other factors. The fuel
surcharge provides a means to recover higher fuel costs, one of the largest
operating costs for the business. Total Hawaii container volume was 10 percent
higher than the second quarter of 2004. This reflects the continuing growth in
the Hawaii economy, particularly in construction and household goods movements,
and mainland bound agricultural products. Even with a new competitor offering
limited service in the Hawaii automobile carriage market, Matson's automobile
growth for the quarter was positive.
Operating profit of $38.7 million was $7.3 million, or 23 percent, better than
the second quarter of 2004. This was primarily the result of $3.9 million from
higher container and automobile volumes, $1.8 million in lower vessel operating
costs (excluding fuel), $1.5 million from favorable yields and mix in all
services and $1.3 million higher equity in earnings of SSAT. These increases in
operating profit were partially offset by $1.2 million of other costs,
principally higher terminal expenses and depreciation.
Ocean Transportation - First half of 2005 compared with 2004
- ---------------------------------------------------------------------------
Six Months Ended June 30,
- ---------------------------------------------------------------------------
(dollars in millions) 2005 2004 Change
- ---------------------------------------------------------------------------
Revenue $ 427.2 $ 404.6 6%
Operating profit $ 68.4 $ 50.0 37%
- ---------------------------------------------------------------------------
Volume (Units)
Hawaii containers 85,600 80,100 7%
Automobiles 78,900 77,900 1%
Guam containers 8,200 8,800 -7%
- ---------------------------------------------------------------------------
Ocean Transportation revenue of $427.2 million for the first half of 2005 was
$22.6 million, or 6 percent, higher than the first half of 2004. Of this
increase, approximately $16.7 million was due to higher Hawaii container and
automobile volume, $10.6 million was due to Hawaii service yields and cargo mix,
$8 million was due to increases in the fuel surcharge and $2 million was due to
government services. These increases were partially offset by $5.2 million of
lower vessel charter revenue, $4.7 million in lower purchased transportation,
$3.4 million from lower Guam and Mid-pacific service volumes and $1.4 million
from other factors. Total Hawaii container volume was 7 percent higher than the
first half of 2004.
Operating profit of $68.4 million was $18.4 million, or 37 percent, better than
the first half of 2004. This was primarily the result of $10.6 million from
favorable yields and mix in all services, $7.5 million higher equity in earnings
of SSAT, $2.5 million from higher container and automobile volumes, $1.8 million
in lower vessel operating costs (excluding fuel) and $1.6 million from lower
vessel operating overhead expenses. These increases in operating profit were
partially offset by $3 million from lower vessel charters and $2.6 million of
increased depreciation expense and other factors.
Logistics Services - Second quarter of 2005 compared with 2004
- -------------------------------------------------------------------------------
Quarter Ended June 30,
- -------------------------------------------------------------------------------
(dollars in millions) 2005 2004 Change
- -------------------------------------------------------------------------------
Revenue $ 106.6 $ 93.5 14%
Operating profit $ 3.6 $ 2.6 38%
- -------------------------------------------------------------------------------
Integrated logistics revenue increased by 14 percent for the second quarter of
2005 compared with the second quarter of 2004. This growth was the result of
improvements in mix of business and rates and a 26 percent increase in highway
volume, partially offset by a 5 percent lower volume in each of the domestic and
international intermodal services. A portion of the highway volume increase was
the result of a business acquired in late 2004 and normal fluctuations among
categories of movements.
Integrated logistics operating profit increased by 38 percent, or $1 million,
for the second quarter of 2005 compared with the second quarter of 2004. The
increased operating profit was the result of higher yields and mix of business
in all three service categories partially offset by higher personnel costs and
other overhead. Although there were modest operating margin increases that
resulted from increased highway volume, these increases were partially offset by
the lower margins on domestic and international intermodal volumes.
The revenue for integrated logistics services includes the total amount billed
to customers for transportation services. The primary costs include purchased
transportation services. As a result, the operating profit margins for this
business are narrower than other A&B businesses. The primary operating profit
and investment risk for this business is the quality of receivables, which is
monitored closely.
Logistics Services - First half of 2005 compared with 2004
- -------------------------------------------------------------------------------
Six Months Ended June 30,
- -------------------------------------------------------------------------------
(dollars in millions) 2005 2004 Change
- -------------------------------------------------------------------------------
Revenue $ 202.7 $ 167.6 21%
Operating profit $ 6.6 $ 3.6 83%
- -------------------------------------------------------------------------------
Integrated logistics revenue increased by 21 percent for the first half of 2005
compared with the first half of 2004. This growth was the result of improvements
in mix of business, rates and a 28 percent increase in highway volume. As with
the second quarter, the increase in highway volume was principally due to the
late 2004 business acquisition and organic growth.
Integrated logistics operating profit increased by 83 percent, or $3 million,
for the first half of 2005 compared with the first half of 2004. The operating
profit improvement was the result of higher yields in all three service
categories and overall increased volumes partially offset by higher personnel
costs and other overhead.
REAL ESTATE INDUSTRY
Property leasing and sales revenue and operating profit are analyzed before
subtracting amounts related to discontinued operations. This is consistent with
how the Company's management evaluates and makes decisions for the Company's
real estate businesses. A discussion of discontinued operations for the real
estate business is included separately.
Leasing- Second quarter of 2005 compared with 2004
- --------------------------------------------------------------------------------
Quarter Ended June 30,
- --------------------------------------------------------------------------------
(dollars in millions) 2005 2004 Change
- --------------------------------------------------------------------------------
Revenue $ 21.3 $ 20.4 4%
Operating profit $ 10.5 $ 9.2 14%
- --------------------------------------------------------------------------------
Occupancy Rates:
Mainland 95% 94% 1%
Hawaii 92% 90% 2%
- --------------------------------------------------------------------------------
Leasable Space (million sq. ft.):
Mainland 3.5 3.7 -5%
Hawaii 1.7 1.7 --
- --------------------------------------------------------------------------------
Property leasing revenue and operating profit for the second quarter of 2005
were 4 percent and 14 percent higher, respectively, than the amounts reported
for the second quarter of 2004. These increases were due principally to $1.1
million of revenue and $0.9 million of contribution margin from property
acquisitions subsequent to the second quarter of 2004. Although not a large
factor in the quarter-over-quarter variance, the higher occupancy rate for the
mainland commercial leasing portfolio was due primarily to a 2004 vacancy at one
large warehouse property. Quarter-over-quarter operating profit was also
affected by a $500,000 charge in 2004 for siding repairs for an office building
in Honolulu.
Leasing- First half of 2005 compared with 2004
- ----------------------------------------------------------------------------
Six Months Ended June 30,
- ----------------------------------------------------------------------------
(dollars in millions) 2005 2004 Change
- ----------------------------------------------------------------------------
Revenue $ 43.2 $ 41.2 5%
Operating profit $ 21.2 $ 18.7 13%
- ----------------------------------------------------------------------------
Occupancy Rates:
Mainland 95% 94% 1%
Hawaii 91% 90% 1%
- ----------------------------------------------------------------------------
Property leasing revenue and operating profit for the first half of 2005 were 5
percent and 13 percent higher, respectively, than the amounts reported for the
first half of 2004. These increases were due principally to $1.7 million of
revenue and $1.5 million of contribution margin from property acquisitions
subsequent to the second quarter of 2004. Operating profit comparisons were also
affected by the previously noted 2004 siding repair costs. The higher occupancy
rate for the Mainland commercial leasing portfolio was due primarily to a 2004
vacancy at one large warehouse property.
Property Sales - Second quarter and first half of 2005 compared with 2004
- -----------------------------------------------------------------------------
Quarter Ended June 30,
- -----------------------------------------------------------------------------
(dollars in millions) 2005 2004 Change
- -----------------------------------------------------------------------------
Revenue $ 14.6 $ 28.3 -48%
Operating profit $ 4.8 $ 13.4 -64%
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Six Months Ended June 30,
- -----------------------------------------------------------------------------
(dollars in millions) 2005 2004 Change
- -----------------------------------------------------------------------------
Revenue $ 60.5 $ 68.4 -12%
Operating profit $ 21.3 $ 32.4 -34%
- -----------------------------------------------------------------------------
The reduction in second quarter and first half revenue and operating results was
due to fewer property sales in 2005 compared with 2004 and the timing of those
sales. The composition of these sales is described below.
Second quarter 2005 revenue was principally from the final 80-percent
installment payment of $14.1 million for a 30-acre development parcel at Wailea.
In addition to the profit contribution from that sale, 2005 second quarter
operating profit included $0.8 million for the Company's share of earnings in
four real estate joint ventures.
2005 first half property sales also included first quarter sales revenue
comprising a warehouse/distribution complex in Ontario, California for $17.8
million, seven Maui and Oahu commercial properties for $7.6 million, a
residential development parcel and three residential properties for $7.5
million, a service center/warehouse complex comprised of three buildings in San
Antonio, Texas for $6.3 million, and 5.5 office condominium floors for $5.5
million. In addition to the profit contribution from these sales, 2005 first
quarter operating profit benefited by about $1 million for the Company's share
of earnings in four real estate joint ventures.
Second quarter 2004 property sales revenue comprised three residential
development parcels for $13.8 million, 13 Maui and Oahu commercial properties
for $8.9 million, five residential properties for $4.3 million, and one office
condominium floor for $1 million. In addition to the profit contribution from
these sales, 2004 second quarter operating profit included $1.3 million for the
Company's share of earnings in three real estate joint ventures.
2004 first half property sales also included first quarter sales comprised of 23
residential properties for $18.9 million, 17 Maui and Oahu commercial inventory
properties for $12.2 million, and 7.5 office condominium floors for $8.8
million. In addition to the profit contribution from these sales, 2004 first
quarter operating profit included $0.8 million for the Company's share of
earnings in two real estate joint ventures.
The mix of property sales in any year or quarter can be diverse. Sales can
include developed residential real estate, commercial properties, developable
subdivision lots, undeveloped land, and property sold under threat of
condemnation. The sale of undeveloped land and vacant parcels in Hawaii
generally provides a greater contribution to earnings than does the sale of
developed and commercial property, due to the low historical-cost basis of the
Company's Hawaii land. Consequently, property sales revenue trends, cash flows
from the sales of real estate and the amount of real estate held for sale on the
balance sheets do not necessarily indicate future profitability trends for this
segment. Additionally, the operating profit reported in each quarter does not
necessarily follow a percentage of sales trends because the cost basis of
property sold can differ significantly between transactions. The reporting of
property sales is also affected by the classification of certain property sales
as discontinued operations.
Real Estate Discontinued Operations - 2005 compared with 2004
The sales of certain income-producing assets are classified as discontinued
operations if the operations and cash flows of the assets clearly can be
distinguished from the remaining assets of the Company, if 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. At the time a property is classified as "discontinued," the
previously recognized revenue and expenses for the property are reclassified to
discontinued operations so historically reported information is updated to
reflect discontinued operations at each reporting interval.
The revenue and operating profit on these transactions for the second quarter
and first half of 2005 and 2004 were as follows:
- ---------------------------------------------------------------------------------------------------------
Quarter Ended June 30, Six Months Ended June 30,
- ---------------------------------------------------------------------------------------------------------
(dollars in millions, before tax) 2005 2004 2005 2004
- ---------------------------------------------------------------------------------------------------------
Sales revenue -- $ 1.1 $ 24.6 $ 1.1
Leasing revenue $ 1.7 $ 2.0 $ 3.5 $ 4.2
Sales operating profit -- $ 1.1 $ 6.3 $ 1.5
Leasing operating profit $ 0.6 $ 0.6 $ 1.2 $ 1.2
- ---------------------------------------------------------------------------------------------------------
2005: The sales of one warehouse/distribution complex in Ontario, California,
for $17.8 million, one service center/warehouse complex, consisting of three
buildings in San Antonio, Texas, for $6.3 million, and the fee interest in a
parcel in Maui were included in discontinued operations. Additionally, the
revenue and expenses of an office building in Wailuku, Maui and two office
buildings in downtown Honolulu have been classified as discontinued operations
because of the Company's plans to sell these properties.
2004: The sale of a Maui property was included in discontinued operations
during the first half of 2004.
The leasing revenue and operating profit noted above includes the results for
properties that were sold through June 30, 2005 and the operating results of the
three office buildings, noted above, that the Company intends to sell within the
next 12 months.
FOOD PRODUCTS INDUSTRY
Food Products - Second quarter of 2005 compared with 2004
- ---------------------------------------------------------------------------
Quarter Ended June 30,
- ---------------------------------------------------------------------------
(dollars in millions) 2005 2004 Change
- ---------------------------------------------------------------------------
Revenue $ 32.2 $ 28.9 11%
Operating profit $ 0.3 $ 0.3 --
- ---------------------------------------------------------------------------
Tons sugar produced 58,400 53,200 10%
- ---------------------------------------------------------------------------
Food products revenue increased 11 percent for the second quarter of 2005
compared with 2004 due mainly to $1.9 million for higher sugar sales, $0.8
million for higher power sales prices and $0.5 million in higher Maui Brand
sugar sales. Sugar sales benefited from 10 percent higher production and
slightly higher sugar prices.
Operating profit was unchanged from the second quarter of 2004 with higher
operating costs, principally personnel and fuel fully offsetting the higher
revenue.
Food Products - First half of 2005 compared with 2004
- ----------------------------------------------------------------------------
Six Months Ended June 30,
- ----------------------------------------------------------------------------
(dollars in millions) 2005 2004 Change
- ----------------------------------------------------------------------------
Revenue $ 54.6 $ 42.3 29%
Operating profit $ 9.3 $ 2.9 3.2x
- ----------------------------------------------------------------------------
Tons sugar produced 77,900 64,900 20%
- ----------------------------------------------------------------------------
Food products revenue increased 29 percent for the first half of 2005 compared
with 2004 due mainly to $5.5 million received as part of an agricultural
disaster relief program, $4.2 million for higher sugar sales and $2.2 million
for higher power sales. Sugar sales benefited from 20 percent higher production
during the first half of 2005 compared with the first half of 2004.
Operating profit was $6.4 million better than the first half of 2004 due mainly
to the disaster relief payment and power sales. These benefits were partially
offset by higher operating costs and the effects of a higher cost per ton from
lower forecasted production. Cost-per-ton is based on total-year forecasted
production and operating costs.
OUTLOOK FOR 2005
For ocean transportation, the cargo demand outlook remains good for the balance
of the year. The previously announced general rate increases and periodic fuel
surcharge adjustments continue to help offset increases in operating costs.
Increased competition in the automobile carriage market will continue to be a
factor for the year. Due to strong automobile and container volume, Matson added
a ninth vessel to the Hawaii service in late July, 2005.
For logistics services, operating profit is expected to remain strong for the
second half of the year due to the full year effect of a late-2004 acquisition
and demand for highway transportation.
Property sales are expected to be higher than 2004. Residential sales revenue
for the Company's Waikiki high-rise, totaling about $59 million, will benefit
the third quarter results. The Company's property leasing business is expected
to continue producing stable growth.
Sugar production for 2005 is expected to be about 3 percent lower than the
198,800 tons produced in 2004. This lower estimate is due to the Company's
decision to increase the age of the 2006 and 2007 crops by harvesting fewer
acres in 2005, resulting in a more optimal yield in future years.
FINANCIAL CONDITION, LIQUIDITY, FINANCING ARRANGEMENTS AND CASH FLOWS
Liquid Resources: The Company's principal liquid resources, comprising cash and
cash equivalents, receivables, sugar and coffee inventories and unused lines of
credit, less accrued deposits to the Capital Construction Fund ("CCF"), totaled
$625 million at June 30, 2005, a decrease of $8 million from December 31, 2004.
The decrease was due primarily to the elimination of a $50 million private shelf
facility and $14 million of lower receivable balances mostly offset by $27
million of higher cash balances, $15 million of lower accrued deposits to the
CCF, $11 million of higher sugar and coffee inventory balances and increased
available balances on revolving credit facilities. Inventory balances were the
result of normal business seasonality. Cash balances were higher than 2004
year-end due to receivable collections, business growth, timing of capital
expenditures, and the absence of debt balances that could be repaid.
Balance Sheet: Working capital was $110 million at June 30, 2005, an increase of
$57 million from the balance carried at the end of 2004. The increase in working
capital was due primarily to higher balances of real estate held for sale,
higher cash balances, lower accrued deposits to the CCF, and higher inventory
balances. These factors were partially offset by lower balances of accounts
receivable and higher balances for accrued liabilities. Cash and cash
equivalents totaled $69 million at the end of the second quarter compared with
$42 million at the beginning of the year. This balance results from lower
receivable balances, continuing strong operating cash flows, and low debt
balances that can be repaid without penalty.
Long-term Debt, including current portion, totaled $346 million at June 30, 2005
compared with a balance of $245 million at December 31, 2004. This $101 million
increase was due mainly to $105 million of financing for the purchase of the MV
Manulani. In May 2005, Matson entered into an Amended and Restated Note
Agreement with Prudential Insurance Company of America and Pruco Life Insurance
Company ("Prudential Agreement") for $120 million. The Prudential Agreement,
which is secured by a first mortgage on the MV Manulani, supersedes a $65
million private shelf facility against which $15 million had been drawn,
resulting in $105 million of additional debt and a $50 million reduction in
liquid resources (described above). Of this financing, the previously drawn $15
million bears interest at 4.31 percent and has annual maturities of $2 million
in each of 2005, 2006 and 2007 and $3 million in each of 2008, 2009 and 2010,
and matures on August 19, 2010. The new borrowing of $105 million bears interest
at 4.79 percent and is payable in 30 equal semi-annual installments of $3.5
million commencing on November 19, 2005, with a final maturity of May 19, 2020.
Additionally, the Company assumed $11.4 million of secured debt in connection
with the June 2005 purchase of a two-story office building in Phoenix,
Arizona. This assumed debt bears interest at 6.2 percent and matures on October
1, 2013. The additional debt that resulted from these two facilities was
partially offset by normal debt repayments. The weighted average interest rate
for the Company's outstanding borrowings at June 30, 2005 was approximately 5
percent.
The Company also executed a $105 million secured reducing revolving credit
financing agreement related to the planned purchase, during the second quarter
of 2006, of a new containership, the MV Maunalei. This facility provides for a
10-year commitment beginning with the June 2005 execution of the agreement, but
funding will not occur until the containership is delivered in 2006. The maximum
amount that can be drawn on the facility declines in eight annual commitment
reductions of $10.5 million each, commencing on the second anniversary of the
closing date. The interest rate for the facility is 0.375 percent over the
London Interbank Offered Rate "(LIBOR") for the first five years. For the second
five years, the rate is 0.450 percent over LIBOR.
The Company's net deferred tax obligation was $377 million at June 30, 2005
compared with $329 million at December 31, 2004. This $48 million increase was
due principally to $158 million in deposits to the CCF and, to a lesser extent,
$28 million of tax-deferred property sales.
Cash Flows and Capital Expenditures: Cash Flows from Operating Activities
totaled $129 million for the first half of 2005, compared with $84 million for
the first half of 2004. This increase was the result of better operating
results, lower receivable balances and an increase in deferred tax obligations.
Capital expenditures for the first half of 2005 totaled $174 million compared
with $24 million for the first half of 2004. With the exception of the 2005
purchase of the MV Manulani for $144 million, these expenditures were primarily
for routine asset replacements. The amounts reported in Capital Expenditures on
the Statement of Cash Flows exclude $28 million of tax-deferred purchases since
the Company does not actually take control of the cash during the exchange
period. Matson took delivery of the MV Manulani in May 2005 for $144.4 million.
This vessel was purchased using funds from a new term-debt facility, withdrawals
from the CCF and operating cash flows.
On July 6, 2005, the Company announced the development of a 42-story 352-unit
residential condominium building, Keola La'i, on a 2.7-acre parcel close to the
financial district of Honolulu. The Company does not expect to expend any
significant amounts on this development until construction begins in early 2006.
The first 85 residential units were released for sale in July. The Company
currently intends to finance the construction of this project with cash
generated by other real estate projects, current credit facilities and, if
needed, new credit facilities.
Tax-Deferred Real Estate Exchanges: Sales - There were four sales and one
condemnation of property during the first half of 2005, totaling $28 million,
which qualified for potential tax-deferral treatment under the Internal Revenue
Code Sections 1031 and 1033. The sales included a warehouse/distribution complex
in Ontario, California, one service center/warehouse complex, consisting of
three buildings in San Antonio, Texas, one commercial parcel in Waikiki and the
fee interest in two parcels in Maui. The proceeds from these sales were
immediately available for reinvestment in replacement property. During the first
half of 2004, the Company did not record any sales on a tax-deferred basis.
Purchases - During the first half of 2005, the Company purchased, using the
proceeds from tax-deferred sales, the fee simple interest in a leased property
in Honolulu and a two-story office building in Phoenix, Arizona. Of the $22.3
million purchase price for the Phoenix building, the Company assumed $11.4
million of debt and used $10.9 million of tax-deferred proceeds, of which $8.2
million was from 1031 tax-deferred exchanges and $2.7 million was from earlier
1033 land condemnations. There were no purchases of property during the first
half of 2004 that utilized proceeds from tax-deferred sales.
The proceeds from 1031 tax-deferred sales are held in escrow pending future use
to purchase new real estate assets. The proceeds from 1033 condemnations are
held by the Company until the funds are redeployed. As of June 30, 2005, all
proceeds from tax-deferred sales had been reinvested.
Commitments, Contingencies and Environmental Matters: A description of
commitments and contingencies at June 30, 2005 is described in Note 3 to the
financial statements of Item 1.
OTHER MATTERS
Investments: The Company's joint ventures are described in Item 8 of the
Company's most recently filed Form 10-K and Form 10-Q.
Centre Pointe Marketplace: In April 2005, the Company entered into a joint
venture agreement with Intertex Properties for the potential development of a
100,000 square-foot shopping center on a 10.2-acre parcel at the Centre Pointe
Business Park in Valencia, California. This is the Company's fourth joint
venture with Intertex and its fifth investment in Valencia.
Dividends: On June 23, 2005, the Company's Board of Directors announced a
third-quarter 2005 dividend of 22.5 cents per share, payable on September 1,
2005 to shareholders of record on August 4, 2005. Accordingly the Company
accrued $10 million of dividends payable as of June 30, 2005. Through June 30,
2005, the Company had paid $20 million in dividends, or approximately 30 percent
of its first-half earnings.
Significant Accounting Policies: The Company's significant accounting policies
are described in Note 1 of the consolidated financial statements included in
Item 8 of the Company's most recently filed Form 10-K.
The Company's revenue and expense recognition policies for its Integrated
Logistics business are summarized as follows:
Logistics services revenue and cost recognition: The revenue for
logistics services includes the total amount billed to customers for
transportation services. The primary costs include purchased
transportation services. Revenue and the related purchased
transportation costs are recognized based on relative transit time,
commonly referred to as the "percentage of completion" method. Further,
the Company reports revenue on a gross basis in accordance with the
criteria in EITF 99-19, "Reporting Revenue Gross as a Principal versus
Net as an Agent."
Critical Accounting Policies and Estimates: The Company's accounting policies
are described in Note 1 of the Consolidated Financial Statements included in
Item 8 of the Company's most recently filed Form 10-K. The preparation of
financial statements in conformity with accounting principles generally accepted
in the United States of America, upon which the Management's Discussion and
Analysis is based, requires that Management exercise judgment when making
estimates and assumptions about future events that affect the amounts reported
in the financial statements and accompanying notes. Future events and their
effects cannot be determined with absolute certainty and actual results will,
inevitably, differ from those estimates. These differences could be material.
The most significant accounting estimates inherent in the preparation of A&B's
financial statements were described in Item 7 of the Company's 2004 Form 10-K.
New and Proposed Accounting Standards: In March 2005, the Financial Accounting
Standards Board ("FASB") issued Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations--an interpretation of FASB Statement
No. 143." Under the provisions of Interpretation No. 47, when a business has an
unconditional obligation to retire an asset, it must recognize a liability for
the fair value of the retirement obligation in the financial statements, if such
obligation can be estimated. The interpretation has no effect on the Company
since it is already following its provisions.
In April 2005, the Securities and Exchange Commission ("SEC") deferred the
application date of Statement of Financial Accounting Standards No. 123 (revised
2004), "Share-Based Payment." The standard requires that the cost of awards that
are granted, modified or settled should be charged to compensation expense in
the Statement of Income. As permitted by the SEC's deferred application of the
standard, the Company plans to adopt this standard on January 1, 2006. Note 4 in
Item 1 describes the pro forma effect of SFAS 123R for the second quarter and
first half of 2005.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections." SFAS 154 replaces APB Opinion No. 20, "Accounting Changes," and
SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements." The
Statement, effective for years beginning after December 15, 2005, requires
retrospective application to prior periods' financial statements of changes in
accounting principles, unless it is impractical to determine the cumulative or
period-specific effects of the changes. The retrospective application results in
the consistent presentation of information for all prior periods that are
presented in a financial report. SFAS 154 also redefines a restatement as the
"revising of previously issued financial statements to reflect the correction of
an error." The standard will affect A&B's financial reporting for 2006 and
future periods, to the extent of future accounting changes and, if any, future
error corrections.
Additional information about the impacts of newly issued accounting standards
are discussed in Item 8 of the Company's most recently filed Form 10-K.
Economic Conditions: Initially, the present cycle of growth for Hawaii's economy
began in the late 90s with an increase in the number of visitors from the U.S.
West and demand for second homes from those offshore buyers--based primarily on
"boomer" demographics. Now, well into that cycle, the number of factors
contributing to growth has, if anything, grown, resulting in an outlook for
sustained, moderate growth.
International tourism continues to rebound, helped by the strength of the yen
and Hawaii's own marketing initiatives. Air carriers have responded to growing
demand by adding flights, especially direct flights to the Neighbor Islands.
Military spending is increasing, both in traditional terms, e.g., units taking
advantage of Hawaii's "forward" strategic location, new units employing
different technologies (Stryker brigade, associated new aircraft), and in
federal initiatives to "privatize" the substantial stock of aged on-base
housing. Local housing demand also is up, propelled by rising values, continued
supply constraints and interest rates that remain low by historical standards.
Virtually every economic measure in the state now reflects growth--the labor
force, jobs, the unemployment rate, construction commitments, visitor
expenditures and arrivals, hotel occupancies and rates, personal income and tax
revenues.
Even when things are going this well, there are issues to monitor--such as
higher housing prices versus affordability, a very low unemployment rate versus
labor supply and cost, and practical limits on basic infrastructure.
Nonetheless, in contrast with Hawaii's Japanese "bubble" expansion of the late
80s, because of the relatively long and moderate nature of the present growth,
there appears to be sufficient time and awareness to allow the State and its
counties to plan for and to address these constraints before they impede what
is, by most measures, one of Hawaii's most attractive periods of expansion.
Management Changes: The following management changes were made effective
July 1, 2005:
o Ronald P. Barrett was promoted to vice president of Matson.
o Christopher J. Benjamin was promoted to senior vice president of A&B.
Mr. Benjamin is also A&B's chief financial officer.
o Nelson N. S. Chun was promoted to senior vice president and chief legal
officer of A&B.
o Matthew J. Cox was promoted to executive vice president and chief operating
officer of Matson.
o John E. Dennen was promoted to vice president of Matson. Mr. Dennen is also
Matson's controller.
o Branton B. Dreyfus was promoted to vice president of Matson.
o Dale B. Hendler was promoted to vice president at Matson.
o G. Stephen Holaday was named president of A&B's agribusiness group of
companies.
o David L. Hoppes was promoted to senior vice president of Matson.
o Stanley M. Kuriyama was promoted to chief executive officer and
president of A&B's newly formed Land Group. Mr. Kuriyama remains vice
chairman and chief executive officer of A&B Properties, Inc. The new
Land Group encompasses all real estate assets of the Company, including
its agribusiness companies.
o Paul A. Londynsky was promoted to vice president of Matson.
o Gary Y. Nakamatsu was promoted to vice president of Matson.
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, 2004. There
has been no material change in the quantitative and qualitative disclosure about
market risk since December 31, 2004.
ITEM 4. CONTROLS AND PROCEDURES
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(a) Disclosure Controls and Procedures. The Company's management, with
the participation of the Company's Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of the Company's
disclosure controls and procedures (as such term is defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) as of the end of the period covered by
this report. Based on such evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that, as of the
end of such period, the Company's disclosure controls and procedures
are effective in recording, processing, summarizing and reporting, on
a timely basis, information required to be disclosed by the Company
in the reports that it files or submits under the Exchange Act.
(b) Internal Control Over Financial Reporting. There have not been any
changes in the Company's internal control over financial reporting
(as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fiscal quarter to which this report relates
that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
- ------------------------------------------------------------------------------
SECURITIES
- ----------
Issuer Purchases of Equity Securities
Total Number of Maximum Number
Shares Purchased as of Shares that
Part of Publicly May Yet Be Purchased
Total Number of Average Price Announced Plans Under the Plans
Period Shares Purchased Paid per Share or Programs or Programs
------ ---------------- -------------- ------------------- --------------------
Apr 1 - 30, 2005 1,000 (1) $40.30 -- --
May 1 - 31, 2005 -- -- -- --
Jun 1 - 30, 2005 -- -- -- --
(1) Represents shares accepted in satisfaction of the exercise price of stock
options or tax withholding obligations upon option exercises.
ITEM 5. OTHER INFORMATION
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(a) On June 8, 2005, A&B purchased the Deer Valley Financial
Center, a two-story office building in Phoenix, Arizona, for $22.3
million. As part of the purchase, the Company assumed $11.4
million of debt. The original principal amount of $11.6 million
was borrowed on November 1, 2003 by the property's former owners.
The debt bears interest at 6.2 percent, has monthly payments of
$71,200, matures on October 1, 2013 and is secured by a first
mortgage on the property. The promissory note and other agreements
related to this assumption of debt are included in this Form 10-Q
as exhibits 10.a.(xxxvi), 10.a.(xxxvii), and 10.a.(xxxviii).
ITEM 6. EXHIBITS
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10.a.(xxxvi) Promissory Note, dated September 18, 2003, by Deer
Valley Financial Center, LLC, Huntington Company, L.L.C., Geneva
Company, L.L.C., and Metzger Deer Valley, LLC in favor of PNC
Bank, National Association.
10.a.(xxxvii) Consent and Assumption Agreement With Release and
Modification of Loan Documents, dated June 6, 2005, among Deer
Valley Financial Center, LLC, Huntington Company, L.L.C., Geneva
Company, L.L.C., Metzger Deer Valley, LLC, R. Craig Hannay, A&B
Deer Valley LLC, ABP Deer Valley LLC, WDCI Deer Valley LLC,
Alexander & Baldwin, Inc., and Midland Loan Services, Inc.
10.a.(xxxviii) Borrower's Certificate, dated June 6, 2005, by
A&B Deer Valley LLC, ABP Deer Valley LLC, and WDCI Deer Valley LLC
in favor of Wells Fargo Bank N.A.
10.a.(xxxix) Floating Continuing Guarantee, dated July 29, 2005
among Alexander & Baldwin, Inc., American AgCredit, PCA and
other financial institutions.
31.1 Certification of Chief Executive Officer, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALEXANDER & BALDWIN, INC.
(Registrant)
Date: August 1, 2005 /s/ Christopher J. Benjamin
------------------------------
Christopher J. Benjamin
Senior Vice President and
Chief Financial Officer
Date: August 1, 2005 /s/ Thomas A. Wellman
-------------------------------
Thomas A. Wellman
Vice President, Controller and
Treasurer
EXHIBIT INDEX
10.a.(xxxvi) Promissory Note, dated September 18, 2003, by Deer
Valley Financial Center, LLC, Huntington Company, L.L.C., Geneva
Company, L.L.C., and Metzger Deer Valley, LLC in favor of PNC
Bank, National Association.
10.a.(xxxvii) Consent and Assumption Agreement With Release and
Modification of Loan Documents, dated June 6, 2005, among Deer
Valley Financial Center, LLC, Huntington Company, L.L.C., Geneva
Company, L.L.C., Metzger Deer Valley, LLC, R. Craig Hannay, A&B
Deer Valley LLC, ABP Deer Valley LLC, WDCI Deer Valley LLC,
Alexander & Baldwin, Inc., and Midland Loan Services, Inc.
10.a.(xxxviii) Borrower's Certificate, dated June 6, 2005, by
A&B Deer Valley LLC, ABP Deer Valley LLC, and WDCI Deer Valley
LLC in favor of Wells Fargo Bank N.A.
10.a.(xxxix) Floating Continuing Guarantee, dated July 29, 2005
among Alexander & Baldwin, Inc., American AgCredit, PCA and
other financial institutions.
31.1 Certification of Chief Executive Officer, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.