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 September 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.
-------------------------
(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
---
(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 | |
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes | | No |X|
Number of shares of common stock outstanding as of 43,889,306
September 30, 2005:
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
The condensed financial statements and notes for the third quarter and first
nine months of 2005 are presented below, with comparative figures from the 2004
financial statements. These financial statements are unaudited.
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(In millions, except per-share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
---- ---- ---- ----
Revenue:
Operating revenue $ 451.8 $ 381.2 $ 1,208.5 $ 1,096.8
------------- ------------- ----------- -----------
Costs and Expenses:
Costs of goods sold, services and rentals 362.4 309.4 948.6 870.9
Loss on investment 0.1 -- 2.3 --
Selling, general and administrative 34.3 31.3 99.9 93.3
------------ ------------ ----------- -----------
Operating costs and expenses 396.8 340.7 1,050.8 964.2
------------ ------------ ----------- -----------
Operating Income 55.0 40.5 157.7 132.6
Other Income and (Expense):
Gain on insurance settlement 5.2 -- 5.2 --
Equity in income of real estate affiliates (0.8) 0.5 1.0 2.5
Interest income 1.2 1.1 3.3 2.9
Interest expense (4.1) (3.1) (9.9) (9.5)
------------ ------------ ----------- -----------
Income Before Taxes 56.5 39.0 157.3 128.5
Income taxes 21.4 14.8 59.7 48.8
------------ ------------ ----------- -----------
Income From Continuing Operations 35.1 24.2 97.6 79.7
Discontinued Operations (net of income taxes): 0.4 0.6 5.0 2.3
------------ ------------ ----------- -----------
Net Income $ 35.5 $ 24.8 $ 102.6 $ 82.0
============ ============ =========== ===========
Basic Earnings Per Share:
Continuing operations $ 0.80 $ 0.57 $ 2.24 $ 1.88
Discontinued operations 0.01 0.01 0.11 0.05
------------ ------------ ----------- -----------
Net income $ 0.81 $ 0.58 $ 2.35 $ 1.93
============ ============ =========== ===========
Diluted Earnings Per Share:
Continuing operations $ 0.80 $ 0.57 $ 2.22 $ 1.86
Discontinued operations 0.01 0.01 0.11 0.05
------------ ------------ ----------- -----------
Net income $ 0.81 $ 0.58 $ 2.33 $ 1.91
============ ============ =========== ===========
Dividends Per Share1 $ 0.225 $ 0.225 $ 0.675 $ 0.675
Average Number of Shares Outstanding 43.7 42.5 43.6 42.5
Average Number of Dilutive Shares Outstanding 44.2 43.0 44.0 43.0
1Dividends per share for the third quarter and first nine months include the $0.225 third quarter dividend declared on June 23,
2005 and payable on September 1, 2005. Dividends per share for the third quarter and first mine months of 2004 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 Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
---- ---- ---- ----
Revenue:
Transportation:
Ocean transportation $ 227.5 $ 215.0 $ 654.7 $ 619.6
Logistics services 108.5 99.5 311.2 267.1
Real Estate:
Leasing 23.3 20.9 66.6 62.1
Sales 61.7 11.6 122.2 80.0
Less amounts reported in discontinued
operations (1.7) (2.3) (29.8) (7.6)
Food Products 34.6 38.3 89.2 80.6
Reconciling Items (2.1) (1.8) (5.6) (5.0)
------------ ------------ -------------- --------------
Total revenue $ 451.8 $ 381.2 $ 1,208.5 $ 1,096.8
============ ============ ============== ==============
Operating Profit, Net Income:
Transportation:
Ocean transportation $ 36.8 $ 33.0 $ 105.2 $ 83.0
Logistics services 3.5 2.2 10.1 5.8
Real Estate:
Leasing 11.4 10.1 32.6 28.8
Sales 15.6 2.5 36.9 34.9
Less amounts reported in discontinued
operations (0.7) (1.0) (8.2) (3.7)
Food Products (0.1) 0.6 9.2 3.5
------------ ------------ -------------- --------------
Total operating profit 66.5 47.4 185.8 152.3
Loss on Investment (0.1) -- (2.3) --
Interest Expense (4.1) (3.1) (9.9) (9.5)
General Corporate Expenses (5.8) (5.3) (16.3) (14.3)
------------ ------------ -------------- --------------
Income From Continuing Operations Before
Income Taxes 56.5 39.0 157.3 128.5
Income Taxes (21.4) (14.8) (59.7) (48.8)
------------ ------------ -------------- --------------
Income From Continuing Operations 35.1 24.2 97.6 79.7
Discontinued Operations (net of income taxes): 0.4 0.6 5.0 2.3
------------ ------------ -------------- --------------
Net Income $ 35.5 $ 24.8 $ 102.6 $ 82.0
============ ============ ============== ==============
See Notes to Condensed Consolidated Financial Statements.
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In millions)
September 30, December 31,
2005 2004
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $ 90 $ 42
Accounts and notes receivable, net 169 181
Inventories 20 15
Real estate held for sale 27 35
Deferred income taxes 15 10
Prepaid expenses and other assets 23 20
Accrued deposits, net to Capital Construction Fund -- (15)
--------- ---------
Total current assets 344 288
--------- ---------
Investments 140 111
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Real Estate Developments 49 82
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Property, at cost 2,216 1,996
Less accumulated depreciation and amortization 914 863
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Property - net 1,302 1,133
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Capital Construction Fund 64 40
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Other Assets 130 124
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Total $ 2,029 $ 1,778
========= =========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable and current portion of long-term debt $ 31 $ 31
Accounts payable 117 115
Other 94 89
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Total current liabilities 242 235
--------- ---------
Long-term Liabilities:
Long-term debt 302 214
Deferred income taxes 404 339
Post-retirement benefit obligations 47 45
Other 40 41
--------- ---------
Total long-term liabilities 793 639
--------- ---------
Commitments and Contingencies
Shareholders' Equity:
Capital stock 36 35
Additional capital 171 150
Deferred compensation (6) (2)
Accumulated other comprehensive loss (9) (9)
Retained earnings 813 741
Cost of treasury stock (11) (11)
--------- ---------
Total shareholders' equity 994 904
--------- ---------
Total $ 2,029 $ 1,778
========= =========
See Notes to Condensed Consolidated Financial Statements.
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In millions)
Nine Months Ended
September 30,
2005 2004
---- ----
Cash Flows from Operating Activities $ 232 $ 124
--------- ---------
Cash Flows from Investing Activities:
Capital expenditures (209) (135)
Proceeds from disposal of property and other assets 25 21
Deposits into Capital Construction Fund (188) (2)
Withdrawals from Capital Construction Fund 150 142
Investments, net (19) (22)
--------- ---------
Net cash used in investing activities (241) 4
--------- ---------
Cash Flows from Financing Activities:
Proceeds from issuances of long-term debt 105 56
Payments of long-term debt (21) (134)
Payments of short-term debt, net (7) --
Proceeds from issuances of capital stock 10 8
Dividends paid (30) (29)
--------- ---------
Net cash provided by (used in) financing activities 57 (99)
--------- ---------
Net Increase in Cash and Cash Equivalents $ 48 $ 29
========= =========
Other Cash Flow Information:
Interest paid, net of amounts capitalized $ (12) $ (11)
Income taxes paid, net of refunds 13 (49)
Other Non-cash Information:
Depreciation expense (62) (59)
Tax-deferred property sales 30 1
Tax-deferred property purchases (28) --
Debt assumed in real estate acquisition 11 --
Assets conveyed to joint venture -- 5
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 September 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) $ -
Standby letters of credit (d) $ 19
Bonds (e) $ 13
Benefit plan withdrawal obligations (f) $ 70
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 now expected to be delivered in the
third quarter of 2006; in previous filings, the Company
had stated that it expected delivery of the MV Maunalei
during 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 revolving
credit facility that was executed on June 28, 2005.
No progress payments are required under the contract;
accordingly, payment in full is required upon the
delivery. 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. The purchase agreement gives
Matson the right to assign the purchase contract to
third parties and the Company is actively pursuing a
time-charter option.
(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 since the initial
contracts were executed.
(c) The Company has guaranteed up to $21.5 million of a
$30 million Hawaiian Sugar & Transportation Cooperative
("HS&TC") revolving credit line. HS&TC is a raw
sugar marketing and transportation 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. This guarantee 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 September 30, 2005, no amounts were outstanding
on the facility.
(d) At September 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 insurance-related matters,
principally in the Company's real estate business.
Also included in the outstanding letters of credit is a
$3 million letter of credit that serves as a security
deposit for self-insured workers' compensation claims
incurred by C&H employees prior to the December 24,
1998 sale of a majority interest in the business. The
Company's remaining interests in C&H were sold in
August 2005 to American Sugar Refining, Inc. ("ASR").
As part of the sales agreement, ASR agreed to indemnify
the Company for any draws against the letter of credit
and to provide a substitute letter of credit by
November 8, 2005.
(e) Of the $13 million in bonds, $6.5 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 $0.5 million of bonds
are for transportation-related matters.
(f) The withdrawal liabilities for multiemployer pension
plans, in which Matson is a participant, aggregated
approximately $70 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.
The Company and certain subsidiaries are parties to various legal
actions and are contingently liable in connection with claims and
contracts arising in the normal course of business, the outcome of
which, in the opinion of management after consultation with legal
counsel, will not have a material adverse effect on the Company's
financial position or results of operations.
(4) Accounting Method for Stock-Based Compensation and Diluted Earnings per
Share: As allowed by Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation" and by SFAS
No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," the Company has elected to continue to apply the
provisions of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees." Accordingly, no compensation cost is
recognized in the Company's net income for options granted with
exercise prices that are equal to the market values of the underlying
common stock on the dates of grant.
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.
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 nine
months ended September 30, 2005 and 2004 would have been as follows (in
millions, except per share amounts):
1
Quarter Ended Nine Months Ended
September 30, September 30,
------------- -------------
2005 2004 2005 2004
---- ---- ---- ----
Net Income:
As reported $ 35.5 $ 24.8 $ 102.6 $ 82.0
Stock-based compensation expense determined
under fair value based method for all awards,
net of related tax effects (0.4) (0.4) (1.2) (1.0)
-------- --------- --------- --------
Pro forma $ 35.1 $ 24.4 $ 101.4 $ 81.0
======== ========= ========= ========
Net Income Per-share:
Basic, as reported $ 0.81 $ 0.58 $ 2.35 $ 1.93
Basic, pro forma $ 0.80 $ 0.57 $ 2.32 $ 1.91
Diluted, as reported $ 0.81 $ 0.58 $ 2.33 $ 1.91
Diluted, pro forma $ 0.80 $ 0.57 $ 2.30 $ 1.89
Effect on average shares outstanding of assumed
exercise of stock options (in millions of shares):
Average number of shares outstanding 43.7 42.5 43.6 42.5
Effect of assumed exercise of outstanding stock
options 0.5 0.5 0.4 0.5
-------- --------- --------- --------
Average number of shares outstanding after
assumed exercise of outstanding stock options 44.2 43.0 44.0 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 Nine Months Ended
September 30, September 30,
------------- -------------
2005 2004 2005 2004
---- ---- ---- ----
Discontinued Operations (net of tax)
Sales of Assets -- -- $ 3.9 $ 1.4
Leasing Operations $ 0.4 $ 0.6 1.1 0.9
-------- ------- -------- --------
Total $ 0.4 $ 0.6 $ 5.0 $ 2.3
======== ======== ======== ========
(6) Other Comprehensive Income for the three and nine months ended
September 30, 2005 and 2004 was as follows (in millions):
Quarter Ended Nine Months Ended
September 30, September 30,
------------- -------------
2005 2004 2005 2004
---- ---- ---- ----
Net Income $ 35.5 $ 24.8 $ 102.6 $ 82.0
Company's share of investee's
minimum pension liability
adjustment -- -- (0.4) --
Change in valuation of derivative -- (0.6) 0.1 0.9
---------- --------- --------- ---------
Comprehensive Income $ 35.5 $ 24.2 $ 102.3 $ 82.9
========== ========= ========= =========
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 third quarters of
2005 and 2004 were as follows (in millions):
Pension Benefits Post-retirement Benefits
---------------- ------------------------
2005 2004 2005 2004
---- ---- ---- ----
Service Cost $ 1.6 $ 1.7 $ 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 $ -- $ 0.6 $ 1.3 $ 1.1
======== ======== ======== ========
The Components of Net Periodic Benefit Cost for the first nine months
of 2005 and 2004 were as follows (in millions):
Pension Benefits Post-retirement Benefits
---------------- ------------------------
2005 2004 2005 2004
---- ---- ---- ----
Service Cost $ 4.8 $ 4.7 $ 0.7 $ 0.5
Interest Cost 12.0 11.9 2.4 2.2
Expected Return on Plan Assets (18.3) (17.1) -- --
Amortization of Prior Service Cost 0.3 0.4 -- --
Amortization of Net (Gain) Loss 1.2 1.5 0.9 0.4
-------- -------- -------- --------
Net Periodic Benefit Cost $ -- $ 1.4 $ 4.0 $ 3.1
======== ======== ======== ========
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. Although
the Company has determined that the plans are actuarially equivalent to
Medicare Part D of the Act, the amount cannot be determined until the
retiree Medicare elections are known. However, if no retirees elect
Medicare Part D, the Company has estimated that the annual pre-tax
benefit will be about $500,000. Since some retirees are likely to elect
Medicare Part D coverage, the benefit to the Company may be lower.
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;
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 and federal legislation and
rules that could affect single-employer and multi-employer
pension plans and plan funding, including changes to the
Employee Retirement Income Security Act and Pension
Benefit Guarantee Corporation premiums;
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 - Third quarter of 2005 compared with 2004
- --------------------------------------------------------------------------------------------
Quarter Ended September 30,
- --------------------------------------------------------------------------------------------
(dollars in millions) 2005 2004 Change
- --------------------------------------------------------------------------------------------
Revenue $ 451.8 $ 381.2 19%
Cost of goods sold, services and rentals $ 362.4 $ 309.4 17%
Selling, general and administrative $ 34.3 $ 31.3 10%
Loss on investment $ 0.1 -- --
Gain on insurance settlement $ 5.2 -- --
Income taxes $ 21.4 $ 14.8 45%
- --------------------------------------------------------------------------------------------
Net income $ 35.5 $ 24.8 43%
- --------------------------------------------------------------------------------------------
Consolidated revenue of $451.8 million for the third quarter of 2005 increased
$70.6 million, or 19 percent, compared with the third quarter of 2004. This
increase was due principally to $50.1 million in higher revenue from real estate
sales, $12.5 million higher revenue for ocean transportation, $9 million growth
in Matson Integrated Logistics revenue, and $3 million higher revenue from real
estate leasing (excluding leasing revenue from assets classified as discontinued
operations), partially offset by $3.7 million lower revenue in food products.
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 $362.4 million for the third
quarter of 2005 increased $53 million, or 17 percent, compared with the third
quarter of 2004 due to $40.6 million higher cost of property sales (excluding
property sales classified as discontinued operations), $8.6 million higher costs
for ocean transportation, and $7.2 million of higher purchased transportation
services at Matson Integrated Logistics business, partially offset by $4
million of lower cost of sugar sold.
Selling, general and administrative costs of $34.3 million for the third quarter
were $3 million, or 10 percent, higher than the third quarter of 2004 due to
higher depreciation, amortization of leasehold improvements, professional
service fees, employee benefit costs, salaries and wages and charitable
contributions, partially offset by lower Sarbanes-Oxley Act internal
compliance costs.
During the third quarter, the Company recorded a $5.2 million gain from an
insurance settlement following a fire earlier in the year at the Kahului
Shopping Center on Maui. This gain is included in proceeds from disposal
of property in the Cash Flows from Investing Activities on the Condensed
Consolidated Statement of Cash Flows. In addition, the Company received $0.6
million related to business interruption insurance and has included this benefit
in operating revenue and in Cash Flows from Operating Activities. The Company
intends to re-develop and sell portions of the property.
Income taxes were higher than in the third quarter of 2004 due to higher pre-tax
income. The Company's effective tax rate was the same for both quarters.
Consolidated - First nine months of 2005 compared with 2004
- ----------------------------------------------------------------------------------------------
Nine Months Ended September 30,
- ----------------------------------------------------------------------------------------------
(dollars in millions) 2005 2004 Change
- ----------------------------------------------------------------------------------------------
Revenue $ 1,208.5 $ 1,096.8 10%
Cost of goods sold, services and rentals $ 948.6 $ 870.9 9%
Selling, general and administrative $ 99.9 $ 93.3 7%
Loss on investment $ 2.3 -- --
Gain on insurance settlement $ 5.2 -- --
Income taxes $ 59.7 $ 48.8 22%
- ----------------------------------------------------------------------------------------------
Net income $ 102.6 $ 82.0 25%
- ----------------------------------------------------------------------------------------------
Consolidated revenue of $1,208.5 million for the first nine months of 2005
increased $111.7 million, or 10 percent, compared with the first nine months of
2004. This increase was due principally to $44.1 million growth in Matson
Integrated Logistics revenue, $35.1 million higher revenue for ocean
transportation, $18.8 million in higher revenue from real estate sales
(excluding revenue from discontinued operations), $8.6 million higher revenue in
food products and $5.8 million higher revenue from real estate leasing
(excluding leasing revenue from assets classified as 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 $948.6 million for the first nine
months of 2005 increased $77.7 million, or 9 percent, compared with the first
nine months of 2004 due to higher purchased transportation services of
approximately $36.9 million for the Matson Integrated Logistics business, $25.5
million higher cost of property sales (excluding property sales classified as
discontinued operations), $19.3 million higher costs for ocean transportation,
and $2.7 million for higher cost of sugar sold, partially offset by $10.2
million higher equity in earnings of SSA Terminals, LLC ("SSAT," in which
Matson is a minority owner).
Selling, general and administrative costs of $99.9 million for the first nine
months of 2005 were $6.6 million, or 7 percent, higher than the first nine
months of 2004 due to the same factors cited for the third quarter increase.
The $2.3 million loss on investment was the result of the sale of Company's
ownership interests in C&H Sugar Company.
The $5.2 million gain was described in the consolidated third quarter
comparison.
Income taxes were higher than the first nine months of 2004 due to higher
pre-tax income. The 2005 income tax rate of 38 percent for both periods
approximates 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 - Third quarter of 2005 compared with 2004
- -------------------------------------------------------------------------
Quarter Ended September 30,
- -------------------------------------------------------------------------
(dollars in millions) 2005 2004 Change
- -------------------------------------------------------------------------
Revenue $ 227.5 $ 215.0 6%
Operating profit $ 36.8 $ 33.0 12%
- -------------------------------------------------------------------------
Volume (Units)
Hawaii containers 45,200 43,600 4%
Automobiles 32,000 32,400 -1%
Guam containers 4,300 4,400 -2%
- -------------------------------------------------------------------------
Ocean Transportation revenue of $227.5 million for the third quarter of 2005 was
$12.5 million, or 6 percent, higher than the third quarter of 2004. Of this
increase, approximately $5.3 million was due to higher Hawaii container,
automobile and conventional volume, $4.9 million was due to increases in the
fuel surcharge that, in turn, offset higher fuel costs, $1.2 million was due to
yields, and $1 million was due to charter and other revenue. 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 4 percent higher than
the third quarter of 2004. This reflects the continuing growth in the Hawaii
economy. Matson's automobile volume for the quarter was nearly flat with last
year.
Ocean Transportation's profit margin was 16 percent for the third quarter of
2005 compared with 15 percent for the comparable 2004 quarter. Operating profit
of $36.8 million was $3.8 million, or 12 percent, better than the third quarter
of 2004. This was primarily the result of $2.7 million higher equity in earnings
of SSAT, $1.6 million from favorable yields and mix in all services, $1.5
million from lower vessel operating costs, and $0.4 million from higher
container, automobile and conventional volumes. Sea Star Line, LLC contributed
$1.4 million to last year's third quarter operating profit; Matson's minority
interest in that investment was sold in August 2004. Operating profit from
vessel charters and other business was $1 million lower than 2004.
Ocean Transportation - First nine months of 2005 compared with 2004
- ----------------------------------------------------------------------
Nine Months Ended September 30,
- ----------------------------------------------------------------------
(dollars in millions) 2005 2004 Change
- ----------------------------------------------------------------------
Revenue $ 654.7 $ 619.6 6%
Operating profit $ 105.2 $ 83.0 27%
- ----------------------------------------------------------------------
Volume (Units)
Hawaii containers 130,800 123,700 6%
Automobiles 110,900 110,300 1%
Guam containers 12,500 13,200 -5%
- ----------------------------------------------------------------------
Ocean Transportation revenue of $654.7 million for the first nine months of 2005
was $35.1 million, or 6 percent, higher than the first nine months of 2004. Of
this increase, approximately $23.8 million was due to higher Hawaii container,
automobile and conventional volume, $13.1 million was due to increases in the
fuel surcharge, and $8.9 million was due to yields and cargo mix in all
services. Charter and other revenue was $10.7 million lower than 2004. Total
Hawaii container volume was 6 percent higher than the first nine months of 2004.
Automobile volume was slightly higher than the first nine months of 2004.
Ocean Transportation's profit margin was 16 percent for the first nine months of
2005 compared with 13 percent for the first nine months of 2004. Operating
profit of $105.2 million was $22.2 million, or 27 percent, better than the first
nine months of 2004. This was primarily the result of $14.6 million from higher
container, automobile and conventional volume, $10.2 million higher equity in
earnings of SSAT, $8.6 million from favorable yields and mix in all services,
and $2.6 million from lower vessel operating costs. Operating profit from vessel
charters and other business was $5.9 million lower than 2004 and outside
transportation costs were $5.8 million higher. Sea Star Line, LLC contributed
$2.1 million to last year's operating profit; Matson's minority interest in that
investment was sold in August 2004. Overall, the new competitor in the Hawaii
trade had a smaller than expected impact on the year-over-year results of the
ocean transportation segment.
Logistics Services - Third quarter of 2005 compared with 2004
- -----------------------------------------------------------------------------
Quarter Ended September 30,
- -----------------------------------------------------------------------------
(dollars in millions) 2005 2004 Change
- -----------------------------------------------------------------------------
Revenue $ 108.5 $ 99.5 9%
Operating profit $ 3.5 $ 2.2 59%
- -----------------------------------------------------------------------------
Integrated logistics revenue increased by 9 percent for the third quarter of
2005 compared with the third quarter of 2004. This growth was the result of
continued improvements in mix of business and rates and an 18 percent increase
in highway volume, partially offset by an 8 percent decrease in domestic
intermodal volume and an 11 percent decrease in international intermodal volume.
Market shifts were a contributing factor to increased highway and lower domestic
intermodal volumes. A portion of the highway volume increase was also the result
of a business acquired in late 2004.
Integrated logistics operating profit increased by 59 percent, or $1.3 million,
for the third quarter of 2005 compared with the third quarter of 2004 as a
result of higher yields and mix of business in all three service categories
partially offset by higher personnel costs and other overhead.
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 nine months of 2005 compared with 2004
- -------------------------------------------------------------------------------
Nine Months Ended September 30,
- -------------------------------------------------------------------------------
(dollars in millions) 2005 2004 Change
- -------------------------------------------------------------------------------
Revenue $ 311.2 $ 267.1 17%
Operating profit $ 10.1 $ 5.8 74%
- -------------------------------------------------------------------------------
Integrated logistics revenue increased by 17 percent for the first nine months
of 2005 compared with the first nine months of 2004. This growth was the result
of improvements in mix of business, rates and a 24 percent increase in highway
volume, partially offset by a three percent decline in domestic and
international intermodal volumes. As with the third quarter, the increase in
highway volume was principally due to market shifts, the late 2004 business
acquisition and organic growth.
Integrated logistics operating profit increased by 74 percent, or $4.3 million,
for the first nine months of 2005 compared with the first nine months of 2004.
The operating profit improvement was the result of higher yields 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 - Third quarter of 2005 compared with 2004
- --------------------------------------------------------------------------------
Quarter Ended September 30,
- --------------------------------------------------------------------------------
(dollars in millions) 2005 2004 Change
- --------------------------------------------------------------------------------
Revenue $ 23.3 $ 20.9 11%
Operating profit $ 11.4 $ 10.1 13%
- --------------------------------------------------------------------------------
Occupancy Rates:
Mainland 94% 95% -1%
Hawaii 93% 90% 3%
- --------------------------------------------------------------------------------
Leasable Space (million sq. ft.):
Mainland 3.5 3.7 -5%
Hawaii 1.7 1.7 --
- --------------------------------------------------------------------------------
Property leasing revenue and operating profit for the third quarter of 2005 were
11 percent and 13 percent higher, respectively, than the amounts reported for
the third quarter of 2004.
Comparing 2005 third quarter results with the prior year, property acquisitions
and a new commercial property developed by the Company contributed $2.3 million
of revenue and $1.4 million of operating profit and property sales reduced
revenue by $0.6 million and operating profit by $0.3 million. The business
interruption settlement related to a fire earlier this year at the Company's
Kahului Shopping Center on Maui contributed $0.6 million to the quarter's
revenue and operating profit. Lease rates and occupancies were the primary
remaining factor to the quarter-over-quarter change.
Leasing - First nine months of 2005 compared with 2004
- -------------------------------------------------------------------------
Nine Months Ended September 30,
- -------------------------------------------------------------------------
(dollars in millions) 2005 2004 Change
- -------------------------------------------------------------------------
Revenue $ 66.6 $ 62.1 7%
Operating profit $ 32.6 $ 28.8 13%
- -------------------------------------------------------------------------
Occupancy Rates:
Mainland 95% 94% 1%
Hawaii 92% 90% 2%
- -------------------------------------------------------------------------
Property leasing revenue and operating profit for the first nine months of 2005
were 7 percent and 13 percent higher, respectively, than the amounts reported
for the first nine months of 2004.
Comparing the first nine months of 2005 with the same period of 2004, property
acquisitions contributed $3.9 million of revenue and $2.9 million of operating
profit and property sales reduced revenue by $1.6 million and operating profit
by $0.8 million. The absence of a one-time 2004 siding repair cost for a
building in Honolulu benefited the year-over-year operating profit comparison by
approximately $0.7 million. As with the third quarter, the business interruption
settlement of $0.6 million, higher rental rates and improved occupancies
benefited the year-over-year comparison.
Property Sales - Third quarter and first nine months of 2005 compared with 2004
- --------------------------------------------------------------------------------
Quarter Ended September 30,
- --------------------------------------------------------------------------------
(dollars in millions) 2005 2004 Change
- --------------------------------------------------------------------------------
Revenue $ 61.7 $ 11.6 5.3x
Operating profit $ 15.6 $ 2.5 6.2x
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Nine Months Ended September 30,
- --------------------------------------------------------------------------------
(dollars in millions) 2005 2004 Change
- --------------------------------------------------------------------------------
Revenue $ 122.2 $ 80.0 53%
Operating profit $ 36.9 $ 34.9 6%
- --------------------------------------------------------------------------------
The higher third quarter and nine months revenue and operating results were due
to the mix and timing of property sales in 2005 compared with 2004. The
composition of these sales is described below. Operating profit also includes
marketing expenses incurred by the Company for its development projects and
the Company's share of joint venture marketing expenses that cannot be
capitalized as part of real estate developments.
2005 Property Sales:
Third quarter 2005 property sales comprised principally all 100 units
at the Company's Lanikea residential high-rise project in Waikiki for
$59 million and a Maui property for $2.5 million. A gain of $5.2
million was recognized in operating profit during the third quarter for
a partial property damage insurance settlement related to the Kahului
Shopping Center fire, as previously described. The Company
intends to redevelop and sell portions of the property. Operating
Profit also included a loss of $0.8 million for the Company's share of
earnings in joint ventures.
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 joint ventures.
First quarter 2005 property sales comprised 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 joint ventures.
2004 Property Sales:
Third quarter 2004 property sales comprised seven office condominium
units for $7.6 million and three Maui and Oahu commercial properties
for $2.8 million.
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
joint ventures.
First quarter 2004 property 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 joint ventures.
Effect of Property Sales Mix on Operating Results: 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 for much 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 third quarter and
first nine months of 2005 and 2004 were as follows:
- ----------------------------------------------------------------------------------------------------------
Quarter Ended September 30, Nine Months Ended September 30,
- ----------------------------------------------------------------------------------------------------------
(dollars in millions, before tax) 2005 2004 2005 2004
- ----------------------------------------------------------------------------------------------------------
Sales revenue -- -- $ 24.6 $ 1.1
Leasing revenue $ 1.7 $ 2.3 $ 5.2 $ 6.5
Sales operating profit -- -- $ 6.3 $ 1.5
Leasing operating profit $ 0.7 $ 1.0 $ 1.9 $ 2.2
- ----------------------------------------------------------------------------------------------------------
2005 discontinued operations included 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. Additionally, the revenue and expenses
of an office building in Wailuku, Maui and two office buildings in Honolulu have
been classified as discontinued operations because of the Company's plans to
sell these properties. The two Honolulu properties were sold on October 25,
2005.
2004 discontinued operations included the sale of a Maui property.
The leasing revenue and operating profit noted above includes the results for
properties that were sold through September 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 - Third quarter of 2005 compared with 2004
- -------------------------------------------------------------------------------
Quarter Ended September 30,
- -------------------------------------------------------------------------------
(dollars in millions) 2005 2004 Change
- -------------------------------------------------------------------------------
Revenue $ 34.6 $ 38.3 -10%
Operating profit $ (0.1) $ 0.6 NA
- -------------------------------------------------------------------------------
Tons sugar produced 62,500 77,500 -19%
- -------------------------------------------------------------------------------
Food products revenue decreased 10 percent for the third quarter of 2005
compared with 2004 due mainly to $5.1 million for lower sugar sales volume and
$0.5 million for lower sugar prices partially offset by $0.8 million for higher
power sales prices and $0.7 million in higher molasses sales.
Operating profit was $0.7 million lower than the third quarter of 2004 due to
$1.6 million lower margins on sugar sales resulting from higher operating costs
and lower sales price and a $1 million charge to reduce the carrying value of
coffee inventories to fair market value, partially offset by the higher power
and molasses sales.
Food Products - First nine months of 2005 compared with 2004
- --------------------------------------------------------------------------------
Nine Months Ended September 30,
- --------------------------------------------------------------------------------
(dollars in millions) 2005 2004 Change
- --------------------------------------------------------------------------------
Revenue $ 89.2 $ 80.6 11%
Operating profit $ 9.2 $ 3.5 2.6x
- --------------------------------------------------------------------------------
Tons sugar produced 140,300 142,400 -1%
- --------------------------------------------------------------------------------
Food products revenue increased 11 percent for the first nine months of 2005
compared with 2004 due mainly to $5.5 million received as part of an
agricultural disaster relief program, $3 million for higher power sales, $1
million of higher trucking and royalty revenue, and $0.9 million of higher
molasses sales, partially offset by $2 million of lower sugar and coffee sales.
Operating profit was $5.7 million better than the first nine months of 2004 due
mainly to the $5.5 disaster relief payment, $3 million of higher power sales,
$0.8 million of royalty and trucking profit improvements and $0.9 million of
higher molasses sales, partially offset by $3.9 million of lower sugar sales and
a $1 million charge to reduce the carrying value of coffee inventories to fair
market value.
FOURTH QUARTER 2005 METRICS
Ocean transportation cargo volumes and yields are expected to remain good but,
as with prior years, cargo volumes may be seasonally lower than the second and
third quarters. The fourth quarter will be affected by a 12-week quarter
compared with 13 weeks in the fourth quarter of 2004. Because the Company
evaluates and adjusts its fuel surcharge at the beginning of each quarter,
rising fuel costs could affect fourth quarter results. Matson is also beginning
to incur start-up costs as it prepares for a February 2006 commencement of the
China service.
Logistics services are expected to continue benefiting from margin growth and
higher highway volume, offset somewhat by lower international and domestic
intermodal volume. Market shifts from domestic intermodal transportation to
highway transportation are expected to have a continuing near-term effect
on the business.
Real-estate management leasing is expected to have continuing high occupancies
and stable rates through the remainder of the year.
Property sales for the fourth quarter will benefit from the previously noted
sales of two Honolulu office buildings in October. The sales of residential
units in the Hokua luxury-high-rise in Honolulu, in which the Company has an
equity investment, are expected to close during the first quarter of 2006.
Food products sugar production for the year is expected to be about 193,000 tons
with the fourth quarter results at about break-even.
This section contains forward-looking statements, which involve a number of
risks and uncertainties, as described above in the "Forward-Looking Statements"
section, that could cause actual results to differ materially from those
projected.
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
$642 million at September 30, 2005, an increase of $9 million from December 31,
2004. The increase was due primarily to $48 million higher cash balances, $15
million lower accrued deposits to the CCF, the repayment of $7 million on
short-term credit lines and $4 million of higher sugar and coffee inventories,
partially offset by the elimination of a $50 million private shelf facility and
receivable balances that were $12 million lower than at the end of 2004. These
fluctuations are due to normal operating activities.
Balance Sheet: Working capital was $102 million at September 30, 2005, an
increase of $49 million from the balance carried at the end of 2004. The
increase in working capital was due primarily to $48 million higher cash
balances, $15 million lower accrued net deposits to the CCF and $14 million
lower accrued liabilities. These working capital improvements were partially
offset by $12 million lower receivable balances and $13 million of higher income
taxes payable.
Cash and cash equivalents totaled $90 million at the end of the third quarter
compared with $42 million at the beginning of the year. This balance results
from continuing strong operating cash flows, including the recent sales of 100
units in the Company's Lanikea development for $59 million, and no outstanding
debt balances that could be repaid without penalty.
Long-term Debt, including the current portion, totaled $333 million at September
30, 2005 compared with a balance of $245 million at December 31, 2004. This $88
million increase was due mainly to $105 million of financing for the purchase of
the MV Manulani and the assumption of $11 million of debt in connection with a
June 2005 real estate purchase, partially offset by $21 million of term debt
repayments and $7 million of short-term debt repayments.
Matson renewed and extended its $30 million revolving credit agreement with
Wells Fargo Bank National Association. This facility extends to September 30,
2009, including a one-year term option and carries interest at LIBOR plus 47.5
basis points. This facility was described in a Form 8-K filed on October 6,
2005.
On October 31, 2005, the Company extended its committed short-term $78.5 million
working capital credit facility with First Hawaiian Bank for one year, until
January 1, 2007. The amount available under this facility is reduced by amounts
borrowed against First Hawaiian Bank's $53.5 million share of the Company's $200
million revolving credit facility. A copy of the amendment to the agreement is
included in Exhibit 10.a.(xx) of this Form 10-Q.
The Company's net deferred tax obligation was $389 million at September 30, 2005
compared with $329 million at December 31, 2004. This $60 million increase was
due principally to $188 million in deposits to the CCF, partially offset by book
depreciation in excess of tax depreciation, tax-deferred property transactions
and other transactions for which the tax and book accounting differs.
Cash Flows and Capital Expenditures: Cash Flows from Operating Activities
totaled $232 million for the first nine months of 2005, compared with $124
million for the first nine months of 2004. This increase was the result of
increased deferred taxes, lower receivable balances, higher operating results,
an increase in cash from the sales of residential properties, and increased
depreciation expense.
Capital expenditures for the first nine months of 2005 totaled $209 million
compared with $135 million for the first nine months of 2004. The 2005
expenditures included $144 million for the purchase of the MV Manulani, $18
million for other transportation-related assets, $37 million for real estate
related acquisitions, development and property improvements, and $8 million of
routine asset replacements for agricultural operations. The amounts reported in
Capital Expenditures on the Statement of Cash Flows exclude $28 million of
tax-deferred purchases since the Company did not actually take control of the
cash during the exchange period. Capital expenditures for the first nine months
of 2004 were for a new ship and shipping containers, real estate acquisitions
and development and other capital replacements.
Tax-Deferred Real Estate Exchanges: Sales - There were five sales and one
condemnation of property during the first nine months of 2005, totaling $30
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 three parcels in Maui. The proceeds from these sales were
immediately available for reinvestment in replacement property. During the first
nine months of 2004, the Company had recorded $1 million of sales on a
tax-deferred basis but these funds were not subsequently reinvested.
Purchases - During the nine months of 2005, the Company purchased, using the
proceeds from tax-deferred sales, the fee simple interest in a leased property
in Honolulu, a two-story office building in Phoenix, Arizona and the Lanihau
shopping center in Kailua-Kona, Hawaii. 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. The Lanihau shopping center was purchased as a reverse
tax-deferred exchange that will re-deploy the funds from other property sales
that closed on October 25, 2005. There were no purchases of property during the
first nine months 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 September 30, 2005,
all proceeds from tax-deferred sales had been reinvested. The funds related to
1031 transactions are not included in the Statement of Cash Flows but are
included as non-cash information below the Statement.
For "reverse 1031" transactions, the Company purchases a property in
anticipation of receiving funds in a future property sale. Funds used for
reverse 1031 purchases are included as capital expenditures on the Statement of
Cash Flows and the related sales of property, for which the proceeds are linked,
are included as property sales in the Statement.
Commitments, Contingencies and Environmental Matters: A description of
commitments and contingencies at September 30, 2005 is described in Note 3 to
the financial statements of Item 1.
OTHER MATTERS
China Service: On October 24 and 25, 2005, respectively, Matson commemorated
the opening of new offices in Shanghai and Ningbo and announced the appointment
of Shanghai United International Ocean Shipping Agency Ltd. as port agent in
Shanghai and China Marine Shipping Agency Ningbo Co. Ltd. as port agent in
Ningbo. The new China to Long Beach service is expected to commence in
February 2006.
Investments: The Company's joint ventures are described in Item 8 of the
Company's most recently filed Form 10-K and its first and second quarter Forms
10-Q.
In September 2005, the Hawaii Community Development Authority ("HCDA") awarded
to the Company a right to negotiate a letter of intent and complete development
plans for a 36.5-acre Kaka'ako Waterfront project that spans a half-mile of
shoreline in Central Honolulu. The Company has four months to complete
negotiations with HCDA for the letter of intent and two additional months to
execute a definitive agreement. If these deadlines are not met, then HCDA may
award the negotiation rights to another developer. Total development costs are
preliminarily estimated at $650-$700 million. Development plans are expected to
be completed over a two-year period, after which, the phased construction would
begin.
In August 2005, the Company sold its minority interest in C&H Sugar Company,
Inc. to American Sugar Refining, Inc. A loss of $2.3 million was recorded to
write off the remaining balance of the C&H investment and for transaction costs.
$2.2 million of this loss was recorded in the second quarter. Only a nominal
amount was paid to the equity owners. This transaction was described in a Form
8-K filed on August 10, 2005.
Dividends and Stock Ownership Guidelines: The Company's third quarter dividend
to shareholders was paid on September 1, 2005 to shareholders of record on
August 4, 2005. Through September 30, 2005, the Company had paid $30 million in
dividends, or approximately 29 percent of its first nine-month net income. On
October 28, 2005, the Company's Board of Directors declared a fourth quarter
dividend of 22-1/2 cents per share payable on December 1, 2005 to shareholders
of record as of November 10, 2005.
Earlier this year, the A&B Board of Directors approved share ownership
guidelines for non-employee Directors. At present, all Directors own A&B stock,
and it is expected that each Director will meet the guidelines within the
specified five-year period. Stock ownership guidelines also are in place for
senior executives of the Company.
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 and in its second quarter
Form 10-Q.
Critical Accounting Estimates: 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: Information about the impacts of newly
issued accounting standards are discussed in the Company's first and second
quarter Forms 10-Q and in Item 8 of the Company's most recently filed Form 10-K.
Economic Conditions:
Current measures of Hawaii's economic performance continue to reflect broad,
moderate growth. With substantial energy cost increases in place, however, and
the potential for additional interest rate hikes, local forecasters are watchful
for signs that these factors may begin to affect the local economy. To date none
are apparent.
Although the pace of visitor growth moderated during the second quarter, when
total visitor arrivals grew 2.2 percent on a year-over-year basis, monthly
comparisons have improved since, with July up 7.1 percent and August up 7.7
percent to a new all-time record. Year-to-date through August, five million
visitors have come to Hawaii, also a record.
Statewide hotel occupancies remain above 85 percent and they are among the
highest in the nation. Room rates were up about 10 percent in August and are
second in level only to New York City.
Job growth continues, with a 2.8 percent rise in the second quarter and gains in
the important visitor and construction sectors. Hawaii's unemployment rate was
2.6 percent in August, the lowest in the U.S.
Housing prices continue to escalate, although moderation in the pace of
appreciation is expected. By island, the median prices in September for single
family home re-sales were: Oahu $615,000, up 29.5 percent versus September 2004;
Maui $690,000, up 15.8 percent; Kauai $780,000, up 40.2 percent and a new record
high; Big Island $427,500, up 43 percent.
Among other positive measures, the State of Hawaii recently forecast a surplus
of $632.6 million for fiscal year 2006-07. Consideration is being given both to
wage increases for state workers and tax relief.
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. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
- --------------------------------------------------------------------
Issuer Purchases of Equity Securities
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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
- -----------------------------------------------------------------------------------------------------------------
Jul 1 - 31, 2005 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------
Aug 1 - 31, 2005 -- -- -- --
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Sep 1 - 30, 2005 -- -- -- --
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ITEM 5. OTHER INFORMATION
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On October 31, 2005, the Company extended its committed short-term
$78.5 million working capital credit facility with First Hawaiian Bank
for one year, until January 1, 2007. The amount available under this
facility is reduced by amounts borrowed against First Hawaiian Bank's
$53.5 million share of the Company's $200 million revolving credit
facility. A copy of the amendment to the agreement is included in
Exhibit 10.a.(xx) of this Form 10-Q.
ITEM 6. EXHIBITS
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10.a.(xx) Fourteenth Amendment dated October 31, 2005 to the Revolving
Credit Agreement between Alexander & Baldwin, Inc. and First Hawaiian
Bank, dated December 30, 1993.
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 hereunto duly authorized.
ALEXANDER & BALDWIN, INC.
-------------------------
(Registrant)
Date: November 1, 2005 /s/ Christopher J. Benjamin
-------------------------------
Christopher J. Benjamin
Senior Vice President and
Chief Financial Officer
Date: November 1, 2005 /s/ Thomas A. Wellman
-------------------------------
Thomas A. Wellman
Vice President, Controller and Treasurer
EXHIBIT INDEX
10.a.(xx) Fourteenth Amendment dated October 31, 2005 to the
Revolving Credit Agreement between Alexander & Baldwin, Inc. and First
Hawaiian Bank, dated December 30, 1993.
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.