EXHIBIT 13
Contents
1 Financial Highlights
1 Review of Operations
3 Letter to Shareholders
8 Matson
12 ABHI
21 General Information
21 Board of Directors
21 Management, Organization
21 Common Stock
22 Dividends
22 Credit Ratings
22 Quarterly Results
23 Financial Report
42 Directors and Officers
44 Parent Company, Principal Subsidiaries and Affiliates
Inside Back Cover
Investor Information
Inside Front Cover (On the cover): Stand-out employees are featured throughout
the 1996 annual report. They represent, by example, all of their
compatriots--the loyal and hardworking members of the A&B family of companies.
(Clockwise, from upper right) Captain Norman A. Piianaia of Matson; Utility
Truck Driver-Semi, Lei G. Jarnesky of HC&S; Norbert M. Buelsing, Senior Vice
President, Property Management (left), and Lishan Z. Chong, Senior Financial
Analyst (right), of A&B Properties; and (left to right) S. Guy Isobe, Manager,
Customer Service Susan Hayman, Manager, Customer Service, Carey L. DeMers and
Raymond J. Parker, Supervisors, Telemarketing & Data Administration, of Matson.
FINANCIAL HIGHLIGHTS
1996 1995 Change
Revenue $ 1,232,568,000 $ 1,020,455,000 21%
Net Income $ 65,285,000 $ 55,755,000 17%
Per Share $ 1.44 $ 1.23 17%
Cash Dividends $ 39,860,000 $ 40,035,000 -0.4%
Per Share $ 0.88 $ 0.88 -
Average Shares Outstanding 45,303,000 45,492,000 -0.4%
Total Assets $ 1,800,622,000 $ 1,801,237,000 -
Shareholders' Equity $ 684,328,000 $ 649,678,000 5%
Per Share $15.09 $14.35 5%
Return on Beginning
Shareholders' Equity 10.0% 8.8% -
Current Ratio 1.4 to 1 1.4 to 1 -
Ratio: Debt and Capital Leases
to Total Capital 0.40 to 1 0.45 to 1 -
Employees 2,960 3,076 -4%
REVIEW OF OPERATIONS
[Graph showing the Company's operating profit by source 1986-1996.]
Alexander & Baldwin, Inc. is a diversified corporation with the majority of its
operations centered in Hawaii. Its principal business segments are:
Ocean Transportation
Property Development and Management
Food Products
Alexander & Baldwin, Inc. was founded in 1870 and incorporated in 1900. A&B's
common stock is traded on the NASDAQ Stock MarketSM under the symbol ALEX.
Headquartered at:
822 Bishop Street
Honolulu, Hawaii
The Company's mailing address is:
P. O. Box 3440
Honolulu, HI 96801-3440
Telephone: (808) 525-6611
Fax: (808) 525-6652
[Photo caption: Portraying A&B's three business segments and illustrating key
1996 business events (from top to bottom): the dramatic financial turnaround by
C&H sugar is represented by familiar products coming together, as C&H liquid
sugar is delivered to a Gatorade processing facility in the San Francisco Bay
area; Matson's new Guam service, inaugurated in February, is illustrated by the
S.S. Chief Gadao, departing from Apra Harbor in Guam for destinations in Korea
and Japan; and, last, exemplifying property value in the portfolio, the highly
successful Kmart in Kahului, Maui, which was built on a seven-acre parcel that
was first ground leased by A&B in 1993 and sold during 1996.]
[Photo caption: John C. Couch, Chairman of the Board, President and Chief
Executive Officer, Alexander & Baldwin, Inc.]
[Photo caption: A Matson container arrives on the job site of the new Hawaii
Convention Center scheduled to open in 1998. With the present lackluster
economy limiting the amount of construction activity, Matson has actively
pursued prime contractors and subcontractors for the major projects underway
and in the works, successfully being named project transportation company for
the Center and for the striking new 30-story First Hawaiian Center in downtown
Honolulu.]
Fellow Shareholders
Key decisions made in the past few years were the basis for the success we
enjoyed in 1996. Our achievements during the year were satisfying because much
of what we set out to do was accomplished in spite of some unusual challenges.
Measurable progress was made in several areas as we sought to reduce costs,
strengthen our competitive positions and open up new market opportunities.
Earnings improved significantly and we continued to build a foundation that
will help ensure future growth.
Economic events in 1996 unfolded about as we had expected--Hawaii's economy
improved little. A moderate upturn in the visitor industry was very nearly
offset by continued weakness in construction. Initiatives intended to improve
our earnings--independent of the near-term performance of the Hawaii economy--
led to record revenue for the Company and a more diversified earnings mix.
Unfortunately, unanticipated and largely uncontrollable cost increases in ocean
transportation had an adverse impact on margins in that business. In the face
of a weak economy in Hawaii, earnings growth for the Company resulted largely
from improvements in our food products business, but these were augmented by
solid results from our property development and management operations and by
the contribution from Matson Navigation Company, Inc.'s (Matson's) new Guam
service.
Noteworthy in 1996 were four accomplishments. Foremost was the impressive
turnaround at California and Hawaiian Sugar Company, Inc. (C&H)--our sugar
refining and marketing unit. C&H achieved a substantial improvement in its
operating results. The improvement resulted primarily from higher sales
revenue, due to increases both in sales volume and net selling prices, and from
significant cost savings resulting from the major restructuring of the business
early in the year.
Second was the favorable level of 1996 property sales. Given the
prevailing economic climate, it was a considerable achievement to realize $32
million in sales--while retaining satisfactory margins. An encouraging
component of that success was our new Maui Business Park, where the Company
enjoyed a strong start to its long-range plans to develop a total of 240 acres
near Kahului Airport for commercial and light industrial uses.
Third was the startup of Matson's new Guam service. The largest single
investment in the Company's history--$178 million for ships, hardware and
software--is generating an additional $70 million of revenue in a business we
already know well--ocean transportation. Because these revenues are derived
from markets outside Hawaii, they help diversify the Company's sources of
earnings. The potential for significant operating synergies with Matson's
Hawaii service also has begun to be realized.
Implementing the Guam service, however, has proven to be a greater
challenge than we anticipated due, in part, to the complexity of integrating it
into our already busy marine terminals on the West Coast and in Hawaii. Adding
enormously to that start-up challenge, but unrelated to it, has been resistance
by some West Coast longshore workers to a new master contract. Although
ratified in the fall by a majority of the union membership, certain local units
continue their strong opposition to some of the contract's provisions. The
result has been continuing disruptions by dissident groups at various West
Coast ports, which have affected operations and significantly increased
operating costs for all steamship companies calling at those ports during the
second half of 1996. While industry-wide efforts are focused on resolving the
problems as early as possible, at this writing, the disturbances continue to
impact Matson's operations adversely.
The fourth important accomplishment was the orderly phase-out of sugar
operations at our nearly century-old sugar plantation, McBryde Sugar Company,
Limited, on the island of Kauai. Because of chronically poor yields, the sugar
operations at that plantation had been a drain on profits for several years.
The last harvest was completed on schedule in September and produced 21,000
tons of sugar from 4,025 acres. At its peak in 1987, the plantation
encompassed 12,500 acres and produced 58,300 tons of sugar. Years of planning
and close cooperation with, as well as support from, the employees, their union
and the community greatly eased the burden of the difficult task of dis-
continuing this historic operation. While coffee, seed corn and other crops
already are being cultivated on some of the land, this watershed event marked
the end of an era for A&B on Kauai.
[Photo caption: A welcome for the first voyage. A traditional welcome
for the first Matson arrival in Guam on February 22, 1996. Guam Governor Carl
Gutierrez and Matson CEO C. Bradley Mulholland led the dignitaries on hand to
welcome the first arrival and to note the importance of ocean transport to
Guam's island community.]
[Photo caption: With the slopes of Haleakala seen in the background,
Maui Marketplace rapidly rises to meet Maui's consumer and visitor shopping
needs. Built on land leased or purchased from A&B, the 295,000 square-foot
retail center will open in May 1997. Activity at Maui Marketplace will
enhance the value of the balance of lots at Maui Business Park, 240-acre
development.]
Improved Financial Results
In 1996, A&B's net income was $65.3 million, a 17-percent increase from
1995's net income of $55.8 million. Earnings per share were $1.44, versus
$1.23 in 1995.
Incorporated in the 1995 figures were a $5.1 million after-tax charge for
the closure of the Kauai sugar operations, a $2.4 million charge to write-down
certain C&H assets, an $18.0 million gain on the sale of Matson Leasing
Company, Inc., and $5.3 million of income earned by Matson Leasing prior to its
sale in June 1995. In 1996, a portion ($2.9 million) of the charge for the
sugar plantation closure was reversed because actual costs were less than
expected. Excluding the Matson Leasing impacts, net income from continuing
operations more than doubled, to $65.3 million in 1996 from $32.4 million in
1995.
The annual dividend rate remained at $0.88 per share throughout 1996. The
nearly $40 million paid to shareholders in dividends during the year
represented about 61 percent of reported 1996 earnings.
Free cash flow (i.e., cash from operations, less cash used for investing)
was $91.4 million. Besides the dividend payments, this cash flow provided
funds to reduce debt by $59.9 million. The Company's debt to total capital
ratio was 40 percent at year-end 1996, compared with 45 percent a year earlier.
[Photo caption: Hawaii-grown sugar is unloaded at C&H's refinery in Crockett,
Calif. from the 37,000 ton Moku Pahu. The vessel is owned by HS&TC, a growers'
cooperative, and operated, under contract, by Matson.]
Matson Implements New Services
Recognizing that the prospects for an extended period of slow growth for
Hawaii were increasingly likely, Matson's strategic plans have two principal
goals. First is to find and pursue new business activities that will increase
the utilization of its valuable capital assets--its ships, container equipment
and marine terminals. Second is to reduce costs.
During 1996, the focus was on improved asset utilization. In February,
Matson and APL Limited (APL) inaugurated a joint service. In this service,
five vessels, in sequence, call weekly at Hawaii and Guam, carrying Matson
cargo, and then proceed to five ports in the Far East, loading cargo for APL
before returning to the West Coast.
Because Guam's economy has been relatively strong and customers have
responded well to Matson's entry into the market, Matson enjoyed good cargo
volume in the trade. APL also books westbound cargo destined for the Far East
on the ships, if space is available. With a strong export trade, especially in
the early part of 1996, this volume also was higher than Matson had
anticipated. Overall, revenue in the new Guam service has surpassed our
initial expectations.
In addition, Matson has been operating a vessel in a pioneering Pacific
Coast "shuttle" service (PCS) since mid-1994. Competing directly with
established rail and truck carriers, the volume in this north/south coastwise
trade has grown steadily but slowly. A significant step in the continued
development of this business occurred this past summer. In July, the Columbus
Line/Blue Star Line consortium, which serves New Zealand, Australia and the
U.S. West Coast, announced that it would cease multiple port calls by its own
vessels on the U.S. West Coast and, instead, would utilize Matson's PCS.
Insofar as Matson's Hawaii service is concerned, the results were
disappointing. The State's lackluster economic growth, the depressed
construction industry, reduced automobile shipments and strong competition led
to cargo declines. Also, Matson faced unanticipated and temporary cost
increases. In addition to the increased cargo handling costs resulting from
the labor disturbances already noted, the cost of fuel oil increased 32 percent
between the fall of 1995 and 1996, necessitating two rate actions to help
offset the higher fuel costs.
Solid Property Sales Activity--Commercial and Residential--in 1996
The lackluster Hawaii economy also continued to present a special challenge
to our property development and management business. With a large number and
variety of projects and properties available, A&B was able to take advantage of
several unusual sales opportunities in 1996 in spite of the general market
weakness.
Maui Business Park is the largest and most promising of our near-term
commercial developments. On a 20-acre parcel largely leased but, in part,
purchased from A&B in 1995, construction of a 295,000 square-foot retail center
is nearly complete. The new center features Eagle Hardware, Borders Books and
Music, Office Max and Sports Authority, among others. To date, 68 percent of
the 42-acre first phase of the project has been leased or sold. Revenue on the
four lots sold in 1996 averaged $30 per square foot, or $1.3 million per acre.
Interest in the project is expected to increase when the major stores in the
complex open later this year.
Among the Company's several residential projects, the most notable is Ku'au
Bayview, a 92-home project on Maui's North Shore near the famous Hookipa Park
windsurfing beach. A&B has been constructing homes on the developed lots there
only when firm purchase commitments are in hand. First available for sale in
April 1996, to date, 32 homes have been sold in the project and an additional
19 homes are in escrow.
A&B's diversified portfolio of commercial properties generates about $24
million per year in operating profit, split nearly evenly between Mainland and
Hawaii locations. The 2,170,000 square feet of Mainland property, located in a
number of Western states, is 97-percent occupied, reflecting predominantly
healthy economies in those markets. The Hawaii portion of the portfolio
(670,000 square feet) is about 86-percent occupied, indicative of a weaker
economy in Hawaii and the impact of large, new discount retailers.
[Photo caption: C&H is the leading brand of sugar in the West. Its distinc-
tive packaging is traditional in appearance, symbolizing for many Western
households the generations that have depended upon the quality of C&H
products.]
C&H Leads Food Products Improvement
Among all of A&B's operations, the Food Products segment made the most
dramatic improvement in 1996. The improvement in sugar refining and marketing,
by C&H, was especially gratifying.
Demand for C&H's refined cane sugar increased significantly during the
year, reflecting a smaller domestic beet sugar crop. At the same time, C&H's
financial results benefited from lower refining costs made possible by the
restructuring of C&H's refining operations last year, and by the start-up of a
new cogeneration plant that provides lower-cost process steam and electric
power to the refinery.
While the cost of raw cane sugar, C&H's primary raw material, remained
relatively high, improved productivity, reduced costs, higher sales volumes and
higher net selling prices all contributed to the turnaround in C&H's
performance. During the year, C&H refined and sold more sugar than it had in
any of the previous ten years and it supplied about seven percent of total U.S.
sugar consumption.
In response to reduced supplies of raw sugar on the island of Oahu and
increased competition from high fructose corn sweeteners in the Hawaii market,
C&H concluded that the long-term outlook for sugar refining in Hawaii was no
longer attractive. Accordingly, C&H closed its small refinery on Oahu at the
end of the year and centralized all sugar refining operations at its refinery
in Crockett, Calif.
During the first quarter of 1996, the Federal Agriculture Improvement and
Reform Act was passed and signed into law. Although this new agricultural
legislation, which governs all commodity programs, contains sugar program
provisions that still present problems for cane sugar refiners like C&H, its
enactment added some welcome stability to sweetener markets. The Company
remains active in communicating the industry's continuing concerns to Congress
and to the U.S. Department of Agriculture, the agency responsible for
administering the law.
Although the Company's sugar operations on Kauai were phased-out, sugar
production is increasing on Maui at A&B's 36,000-acre Hawaiian Commercial &
Sugar Company (HC&S). Total production at HC&S was 201,000 tons in 1996.
Sugar yields and overall production increased more than four percent,
reflecting changes in agronomic practices. The benefits of these changes are
expected to increase in subsequent years. Similarly, improvements at Island
Coffee Company, Inc. on Kauai resulted in a harvest of 2.4 million pounds of
green coffee, an increase of 37 percent compared with 1995 production. The
primary challenge facing this developmental coffee business is in marketing,
as we seek to develop new markets and channels of distribution for our
estate-grown specialty coffee.
Outlook for 1997, Beyond
The consensus of several recent economic forecasts is that the growth rate
for Hawaii's real gross state product will be about two percent in 1997. These
modest projections assume no significant detrimental effect of a weaker
Japanese yen on the number of visitors traveling to Hawaii from Japan.
Japanese visitors have fueled Hawaii's modest growth in tourism for the past
several years. About two million of the State's nearly seven million annual
visitors are from Japan. Another important factor in today's lackluster
Hawaii economy is the depressed construction industry. None of the forecasts
anticipates a construction industry recovery in 1997. Overall job creation in
the State, if any, is expected to be small.
Under this scenario, A&B's principal near-term focus is to realize the full
benefits of its earlier strategic initiatives, especially the integration of
the Guam service with Matson's other operations. With cargo volume and revenue
in this service meeting the established goals, Matson's primary focus will be
to improve productivity and lower costs. Also, satisfactory and timely
resolution of the current labor difficulties on the West Coast is critical if
Matson is to improve its overall performance in the near term.
While the Food Products segment remains exposed to normal commodity risks
and to occasional market distortions caused by flaws in the U.S. sugar program,
the improvements achieved by C&H give us optimism that the level of financial
results reached by this segment in 1996 can be sustained. Priorities will be
on new marketing initiatives and on continuing to improve the cost competitive-
ness of sugar refining and production. We also will continue to examine long-
term strategic options for these operations, recognizing that the sweetener
industry is consolidating and becoming more integrated worldwide.
In Properties, sales and leasing activity should grow slowly, but steadily.
Sales again will be challenged by adverse economic conditions, but it is
reasonable to anticipate some potential upside, based upon unplanned sales
opportunities that may present themselves, just as several did during 1996.
[Photo caption: For sale. Cozy. North Shore, Maui, Heaven. Sales began at
Ku'au Bayview, a 92-homesite project, in April 1996. A&B's first house/lot
project in this area of Maui in many years, sales of the first two phases have
been active, in spite of economic concerns in the State.]
Other Matters
With a modest 1997 capital budget, the prospects appear good for continuing
A&B's strong free cash flow. Although dividend increases are considered by the
Board from time to time, additional earnings momentum remains a prerequisite
for dividend increases.
In December 1996, the Board extended and expanded a previous authority to
repurchase shares. The new authorization permits the purchase of an additional
three million shares, representing about seven percent of the stock currently
outstanding. Under the previous repurchase authorization, A&B acquired nearly
1.3 million of its shares. Share repurchase provides an additional way to
benefit shareholders, while retaining the flexibility to meet other corporate
capital needs.
This year, Mr. Robert G. Reed III, who has served as a Director of A&B and
its subsidiaries for eleven years, will not stand for re-election. He has been
a highly capable and effective contributor to the Board's deliberations. His
advice and counsel have been greatly appreciated, and we wish him all the best
in his future endeavors.
The past few years have caused many changes in the Company. Often, these
changes involved difficult decisions, but they have been borne in good spirit
and with a "can do" attitude by the employees of A&B. Difficult times can
bring out the best in people. They also can mask or detract from strong
personal contributions to our businesses. This annual report features a few
employees from different units of the Company who have made significant contri-
butions to our performance in 1996. Of course, many others also deserve
recognition. All have helped us deal with the extraordinary challenges we have
faced, and their daily efforts continue to contribute to our progress. This
annual report is intended to honor them all and, on behalf of the shareholders,
I want to thank them all for their dedication and commitment.
I also would like to acknowledge the continued support and encouragement of
the shareholders and the Board of Directors.
John C. Couch
Chairman of the Board,
President and Chief Executive Officer
February 21, 1997
[Photo caption: C. Bradley Mulholland, President and Chief Executive Officer,
Matson Navigation Company, Inc.]
MATSON
Operations of the ocean transportation segment of A&B are conducted by
Matson Navigation Company, Inc. (Matson), a wholly owned subsidiary
headquartered in San Francisco. Matson is the principal carrier of
containerized cargo and automobiles between the U.S. Pacific Coast and Hawaii,
utilizing container ships and combination container/trailer ships in regularly
scheduled service between Hawaii and Los Angeles, Oakland and the U.S. Pacific
Northwest. This core Hawaii service includes the transshipment of cargo by
barges operating between Honolulu, on Oahu, and the islands of Hawaii, Maui and
Kauai. In February 1996, Matson began a new service to Guam as part of an
alliance with APL Limited (APL). The Guam service offers sailings from Oakland
to Honolulu and Guam, then on to ports in Korea and Japan, returning to Los
Angeles. Matson also operates a containership service that operates along the
West Coast, as well as a container-barge service between Honolulu and several
mid-Pacific islands. Matson subsidiaries offer stevedoring and terminal
services, intermodal transportation services and harbor tugboat services.
Matson's goal is to be customers' preferred provider of cargo
transportation services by offering high-value services characterized by
reliability, frequency, efficiency and ease-of-use.
OPERATING RESULTS
In 1996, ocean transportation operations provided 54 percent of both A&B's
revenue and its operating profit. For explanations of year-to-year changes in
results, please refer to Management's Discussion and Analysis on page 27.
1996 1995 1994
---- ---- ----
(in thousands)
Revenue $ 661,586 $ 593,807 $ 604,754
Operating Profit* $ 81,618 $ 87,769 $ 97,319
*Before interest expense, corporate expense and income taxes
HAWAII SERVICE CARGO
In contrast to its history of rapid, reliable economic growth since
Statehood in 1959, the Hawaii economy, since 1991, has had very modest, or no,
growth. This, and competitive factors, fundamentally have limited the poten-
tial growth of Hawaii service volume. Although Hawaii's visitor industry
experienced moderate growth during 1996, the statewide job count, especially
in the construction industry, continued a cyclical decline. These factors
nearly offset the benefit of the greater number of visitors. To help counter-
act these factors and to capitalize on its strengths in customer service,
Matson has focused its marketing efforts on serving as the designated project
carrier for large construction and other projects, and by tailoring its service
package to meet shippers' specific needs.
1996 1995 1994
---- ---- ----
Freight (Units) 152,100 157,200 173,300
Automobiles 83,100 107,100 116,800
In 1996, total Hawaii service containerized freight volume was about three
percent less than the 1995 level. Cargo volume in 1994 benefited from a 24-day
strie that shut down a principal competitor.
Total automobile shipments in 1996 were about 22-percent lower than in
1995, due to several factors. The number of cars shipped to and from Hawaii
for use in rental-car fleets was lower due to fewer purchase incentives offered
to rental car companies by the auto manufacturers. Shipments of privately
owned cars also declined, as a result of reduced transfers of military
personnel and competitive losses resulting from a competitor's eastbound
service, begun in mid-1995.
1996 PROGRESS
With its inaugural sailing on February 9, 1996, Matson's new Guam service
represented a significant new step for the Company. The new service comple-
ments Matson's core Hawaii service while, concurrently, providing access to new
markets, new sources of cargo and revenue growth, and better overall utiliza-
tion of capital assets.
Guam experienced continued high levels of visitor demand and an active
level of construction during 1996. More importantly, Guam shippers gave strong
support to Matson's new service. As a result, the volume of cargo carried
exceeded the start-up projections for the service. In addition, Matson was
able to increase revenue by selling available westbound capacity on its vessels
to APL and other carriers for their cargo moving to the Far East.
The new service permits Matson to maintain its frequency of four arrivals
per week and to increase its capacity on the competitive westbound service to
Hawaii. Concurrently, it reduces, by one fourth, the number and associated
costs of eastbound voyages from Hawaii to the U.S. mainland, a trade where
cargo demand is lower.
Considerable progress also was made during 1996 in Matson's Pacific Coast
service (PCS). Following the absence of coastwise shipping from the West Coast
for many years, Matson began this innovative service in July 1994. It competes
directly with traditional north/south rail and truck service. The PCS has
achieved a consistent record of on-time service, a factor that is vital in
attracting and retaining customers. The number of containers carried in the
"shuttle" service in 1996 rose by 46 percent from the 1995 level. The PCS
received a big boost from the mid-1996 announcement that the Columbus Line/Blue
Star Line consortium would halt its direct service to Seattle and Oakland from
Australia and New Zealand and, instead, use Matson's shuttle service from Los
Angeles. This step is a strong vote of confidence in the reliability of
Matson's service.
Matson continued to expand and improve the capabilities of its centralized
customer service center in Phoenix, Ariz., last year. The center handles
communications for all of Matson's services which, in 1996, amounted to over
1.1 million calls, an increase of 12 percent over 1995. The average speed of
answering calls was 5.4 seconds for all freight and 2.9 seconds for key
accounts. Further services are being added to the center to enhance Matson's
ability to serve its customers efficiently.
In 1996, Matson received a National Transportation Quality Award from
Logistics Management magazine for the fourth consecutive year. Matson also
received a 1996 Quest for Quality award from Distribution magazine, this for
the third consecutive year. This type of recognition is especially gratifying
because both awards are based on customer-survey responses.
Two important Matson subsidiaries continued to contribute to operations and
financial results during 1996. Matson's contract stevedoring subsidiary,
Matson Terminals, Inc., manages all of Matson's stevedoring operations and also
serves two international carriers, helping to spread the fixed costs of
terminals over greater volume. Matson Intermodal System, Inc. (MIS) arranges
economical intermodal transportation throughout the U.S. for Matson and many
other carriers. In 1997, MIS will celebrate its tenth anniversary. MIS also
manages inland equipment for Matson and door-to-pier transportation services
for many customers.
[Photo caption: Hawaii service freight units and auto carriage reflect
Hawaii's flat economic performance, cutbacks in purchase incentives for rental
car companies by auto manufacturers and competitive activity in the trade.]
FUEL COSTS, SHIPPING RATES
Matson annually consumes about 2.2 million barrels of fuel in its various
shipping services. By the fall of 1996, the average cost of a barrel of fuel
had risen 32-percent above the year-earlier cost. As a result of this fuel
cost escalation, Matson filed with the Surface Transportation Board a
1.1-percent fuel-related surcharge in its Hawaii service, effective
June 16, 1996. On December 8, 1996, Matson increased that surcharge to
1.75-percent. At the same time, Matson instituted a 1.75-percent fuel
surcharge in its rates to Guam.
On December 12, 1996, Matson filed with the Surface Transportation Board a
3.5-percent general rate increase that became effective on February 2, 1997, as
scheduled. The increase was intended to help offset higher operating costs and
to support ongoing investments in ships, container equipment, terminals and
shoreside operations. Barring unforeseen circumstances, Matson has no plans to
seek additional across-the-board increases during 1997. In the ten-year period
ending in 1996, Honolulu's consumer price index rose 50 percent and the U.S.
consumer price index rose 38 percent, while Matson's rates increased 32
percent.
[Photo caption: Aboard ship, the first officer stands watches at sea
and also is responsible for the cargo. Chief mate of the S.S. Chief Gadao,
Katherine A. Sweeney, uses hand-held radio equipment to convey cargo informa-
tion to terminal managers and cargo superintendents at the Sand Island terminal
in Honolulu.]
[Photo caption: Surrounded by straddle carriers, Gary J. Moniz, Manager,
Facilities & Maintenance (right), and Leonard E. Picanco, Senior
Supervisor, Facilities & Maintenance (left), examine a new suspension tube dust
shield. The new suspension system is made of stacked rubber doughnuts, which
is replacing a high-maintenance hydraulic system. Straddle carriers are highly
productive and maneuverable machines that lift and transport ocean containers
within the confines of marine terminals.]
1996 LONGSHORE CONTRACT
Following lengthy negotiations and a contentious ratification process, a
new contract with the International Longshoremen's and Warehousemen's Union
(ILWU) bargaining units on the West Coast was approved on October 3, 1996. In
addition, contracts with ILWU units in Hawaii were negotiated and implemented
in the fall of 1996.
Unfortunately, the West Coast contract has proven to be difficult to
implement in several ports. During contract negotiations in the third quarter
of 1996 and continuing in the fourth quarter of 1996 and the first quarter of
1997, after ratification, various forms of resistance to the terms of the
contract caused costly disruptions to the operations of virtually all marine
container terminals on the West Coast. Members of the employers' bargaining
group, the Pacific Maritime Association and the ILWU continue discussions and
other efforts to resolve the differences as this report goes to press.
ISSUES, PLANS TO ADDRESS THEM
Operating Costs, Uncertain Volume Growth: The Hawaii trade is highly
competitive and, since 1991, fundamental economic factors have limited the
growth in cargo demand. With competitive considerations prohibiting a
reduction in westbound voyages and sailing frequency, the most promising way
to increase operating margins is to reduce cargo handling and terminal costs.
The challenge is to accomplish these cost reductions without affecting customer
service. Controlling costs and improving margins will be Matson's primary
goal, and a significant challenge, in 1997.
Special Interest Groups and the Jones Act: In 1920, Congress passed the
latest version of legislation, commonly known as the Jones Act, that governs
how Matson, and other companies, serve the U.S. domestic shipping trades. The
present law is one of many similar laws that, since 1789, have reserved for
American citizens the exclusive right to offer shipping services between two
ports within the U.S. Similar laws reserve airline service, telecommunications
and public utility businesses for U.S. citizens.
During the 104th Congress, opponents of the Jones Act were unsuccessful in
having hearings held to consider bills to change its provisions. Matson has
been a major proponent of the broad-based Maritime Cabotage Task Force, a
consortium of more than 400 entities opposed to changing the present law.
Among other means, the Task Force uses its "web" page ("http://www.mctf.com")
to continue to educate the public on the economic, national security,
environmental and safety benefits of the Jones Act.
[Photo caption: The service may be highly automated, but we do sales the old
fashioned way, by listening to our customers first hand. Manager, Sales,
Pacific Northwest and 24-year Matson veteran, Ronald P. Barrett, discusses the
timely movement of lumber products to Hawaii with Mike McEvoy, Hawaii Sales
Agent, Matheus Lumber. Many construction materials are loaded to open, sturdy
containers called flat racks. These units allow for ease of loading and
discharge, and accommodate oversized cargo.]
OPERATING PROFIT OUTLOOK
In 1997, primarily due to continued low economic growth projected for the
state of Hawaii, Matson expects Hawaii service freight volume to be
approximately the same as that in 1996. The number of autos carried in that
trade likely will be slightly lower than in 1996. Cargo volume and revenue in
the Guam service likely will rise in 1997, both due to a full year of
operation, versus eleven months in 1996, and to sustained economic growth on
the island. Volume and revenue also are expected to continue to rise in the
Pacific Coast service. The key to reasonable growth in Matson's operating
profit and margins, however, is the amount of time needed to resolve success-
fully the present West Coast labor problems and, by so doing, to realize all
of the synergies of the combined Matson services.
[Photo caption: W. Allen Doane, President and Chief Operating Officer,
A&B-Hawaii, Inc. Mr. Doane was named Chief Executive Officer of ABHI,
effective January 1, 1997.]
ABHI
Operations of the property development and management, and the food
products segments of Alexander & Baldwin, Inc. (A&B) are conducted by A&B-
Hawaii, Inc. (ABHI), a wholly owned subsidiary headquartered in Honolulu.
ABHI's varied operations extend from the cultivation of sugar cane in the
fertile Central Valley of Maui to the refining and distribution of refined
sugar products throughout the western United States, and from the development
of master-planned residential communities and industrial-commercial properties
in Hawaii to the investment in and management of prime commercial, light-
industrial and retail properties on the U.S. mainland.
ABHI is responsible for the stewardship of some of A&B's most valuable
assets, its extensive land holdings in Hawaii. In all of its property-related
activities, both in Hawaii and elsewhere, A&B strives to be a responsible
steward of the land, employing its land holdings at their highest and best use,
consistent with community needs.
The extent and nature of the Company's land holdings dictate that, for the
foreseeable future, the highest and best use of the vast majority of its land
is for agriculture and conservation. At the present time, ABHI cultivates
sugar cane and coffee on about 40,000 acres of land. Because sugar cane
currently is the best crop for a large percentage of the cultivatable land,
A&B is committed to improving the efficiency and profitability of its sugar
operations.
ABHI's subsidiary, California and Hawaiian Sugar Company, Inc. (C&H), is
the largest producer of branded sugar in the U.S. C&H refines raw cane sugar
in the San Francisco Bay Area, and distributes refined industrial and grocery
sugar products throughout the western United States.
At year-end 1996, A&B owned approximately 93,160 acres of land, including
69,180 acres on Maui, 21,940 acres on Kauai, and 2,040 acres elsewhere. An
additional 3,200 acres on Maui and Kauai were leased from others. Approxi-
mately 91,800 acres of land owned by A&B are planted in sugar cane and coffee
or are employed in other agricultural, conservation or related uses.
Currently, about 1,360 acres are fully zoned for urban use. Of the land now
zoned for agriculture or non-urban use, about 2,800 acres are partially
entitled and an estimated 9,700 acres have foreseeable urban-use potential.
Hawaii
--------------------------
(In acres) Maui Kauai Total Mainland Total
- ---------- ---- ----- ----- -------- -----
Fully Entitled Urban 380 840 1,220 140 1,360
Agric./Pasture/Misc 52,900 8,100 61,000 1,900 62,900
Conservation 15,900 13,000 28,900 - 28,900
------ ------ ------ ----- ------
Total 69,180 21,940 91,120 2,040 93,160
====== ====== ====== ===== ======
Designated Urban 700 300 1,000 1,800 2,800
Urban Potential 6,200 3,500 9,700 - 9,700
PROPERTY DEVELOPMENT AND MANAGEMENT
SEGMENT DESCRIPTION
The property development and management activities of A&B are conducted by
ABHI and its subsidiary, A&B Properties, Inc. The large amount of land that
the Company owns and the location of that land provide A&B many opportunities
to serve residential, commercial and industrial markets, especially on the
islands of Maui and Kauai. Information of interest to shareholders about A&B's
property developments may be seen on A&B Properties' Internet home page
("http://www.abprop.com").
The following directional statements guide the activities of A&B
Properties:
. Initiate entitlements and related development activity on a market-
paced basis;
. Sustain a consistent flow of subdivision sales by pursuing a wide
spectrum of salable projects simultaneously;
. Provide new sources of recurring income and cash flow through
leasing;
. Develop and maintain a geographically diversified portfolio of
commercial, industrial and residential properties; and
. Redevelop existing properties in the Company's portfolio, when
appropriate, to ensure they are maintained at their highest and best
use.
OPERATING RESULTS
In 1996, property development and management operations provided six
percent of A&B's revenue and 26 percent of its operating profit. For
explanations of year-to-year changes in results, please refer to Management's
Discussion and Analysis on page 27.
1996 1995 1994
---- ---- ----
(in thousands)
Revenue:
Leasing $ 35,916 $ 34,073 $ 33,387
Sales 31,909 25,835 60,767
-------- -------- --------
Total $ 67,825 $ 59,908 $ 94,154
======== ======== ========
Operating Profit: *
Leasing $ 23,875 $ 23,063 $ 23,163
Sales 15,307 14,497 18,522
-------- -------- --------
Total $ 39,182 $ 37,560 $ 41,685
======== ======== ========
*Before interest expense, corporate expense and income taxes
1996 PROGRESS
Entitlements
Work to obtain entitlements for urban use in 1996 focused on: continued
participation in the update of the County of Maui's community plans; approval
of additional agricultural subdivisions on Maui, the 1,000-acre Kukui'ula
residential development on Kauai and the proposed master-planned 1,800-acre
residential community at Pilot Hill Ranch in California.
The Company continues to pursue a number of projects as part of the ten-
year update of Maui's community plans. Community plans in Hawaii generally are
the first step in the lengthy governmental land-approval process, creating a
"blueprint" for planned development activity over the next decade. A&B is
seeking various urban designations for portions of its undeveloped land within
four community plan regions on Maui where most of the Company's land holdings
are located. During 1996, the Makawao-Pukalani-Kula community plan was
approved. Two additional plans, for Kihei-Makena and Wailuku-Kahului, may be
approved in 1997.
During the year, approvals on Maui also were sought for three agricultural
lot subdivisions. Construction plans have been submitted for Haiku Makai, a
28-lot project, and for Maunaolu, a 38-lot project.
On the island of Kauai, renewal of construction at the Company's Kukui'ula
residential development continues to await improvement in the local real estate
market. During the year, the Special Management Area permit for the project
was confirmed and preliminary subdivision plans for the first phase were
updated. A review of the development options was conducted and marketing
initiatives were taken to attract potential partners for future development of
the project.
Included in the County's new general plan was designation of "planned
community" for Pilot Hill Ranch, a large parcel owned by A&B and located in El
Dorado County, Calif., about 40 miles northeast of Sacramento. Subsequently,
A&B submitted to the County a Specific Plan for the project, the equivalent of
a zoning application. The general plan anticipates development of approxi-
mately 980 homes at Pilot Hill.
Development
The largest and most prominent development activity in 1996 was the
completion of construction of both the on- and off-site improvements for phase
1A (42 acres) of Maui Business Park, a light industrial-commercial project
located near Maui's primary airport and commercial harbor. Construction
proceeded during 1996 on Maui Marketplace, the 295,000 square-foot retail
center that anchors the project. The developer's plans call for Eagle Hardware
to open in March 1997 and for the center's grand opening to be in May. Borders
Books and Music, Office Max and Sports Authority are additional well-known
tenants. Other purchasers and lessees of parcels at Maui Business Park also
started construction of new facilities during the year.
Residential construction in 1996 included model and finished homes at Ku'au
Bayview, a 21-acre, 92-lot residential project located at Pa'ia on Maui's rural
North Shore. Site work also was substantially completed at Kauhikoa East, a
24-acre, nine-lot agricultural subdivision adjacent to a similar, but larger,
project nearby called Haiku Mauka, which sold out in early January 1997.
[Photo caption: Working with the buyers sells homes. Christine H. Camp, a
Project Manager with A&B Properties, can be analyzing real estate investment
plans one day, inspecting the job site the next, and greeting buyers the next.
A&B project managers are responsible for the ultimate success of assigned
projects, no matter what task needs doing.]
Sales Activity
Sales of Improved Industrial-Commercial Lots
At Maui Business Park, four lots were sold and three leased during 1996.
The purchases included sites for the first combination McDonald's/Chevron
facility in the State, a mortuary and a parcel delivery facility. Selling
prices averaged $30 per square foot, or $1.3 million per acre. The leases were
for a public storage facility. Through year-end 1996, a total of 13 lots have
been sold or leased in the project, including two additional lots for Maui
Marketplace. This represents 68 percent of its salable acreage. The opening
of Maui Marketplace in May is expected to stimulate increased interest in the
remainder of phase 1A and in subsequent phases of the project as well. In all,
Maui Business Park ultimately is planned to comprise about 240 acres.
Project Total Units Available In Sold/Leased Available In
1996 In 1996 1997
Maui Business Park 32 28 4/3 21
(Phase IA)
In 1996, A&B sold to Hawaii-based buyers two developed Maui sites with
long-term ground leases. The larger transaction was about seven acres, with a
highly successful Kmart store, for about $9.5 million. The other sale was a
1.5-acre commercial site for about $2.8 million. In both cases, the proceeds
have been, or are planned to be, reinvested in other income-producing
properties.
The Stangenwald Building, a six-story historic office building located in
downtown Honolulu, close to A&B's headquarters, was acquired as a replacement
property. The 28,000 square-foot property was purchased for about $2.8
million. The Kmart sale proceeds will be used to acquire other replacement
properties in Hawaii and on the U.S. mainland.
[Photo caption: Part of A&B's leased property portfolio, the 28,000
square-foot Apex Building in Kahului, Maui, added new tenants during 1996.
With its year-end 1996 occupancy level at 75 percent, the Apex Building
continues to attract tenants with connections to the visitor industry and
active outdoor sports, a growing niche market.]
[Photo caption: The new, 295,000 square-foot Maui Marketplace brings
new retailers to the island and anchors A&B's Maui Business Park. It also
illustrates the responsibilities that A&B entrusts to employees. Paul W.
Hallin, a Project Manager with A&B Properties (left), confers with Kirsten
Petersen of Kiewit Pacific Co., A&B Properties colleague, Talbot K. Shibley,
Construction Project Manager, and Mike Ishikawa of Sato & Associates, regarding
construction progress.]
Residential Sales
In April 1996, sales began with the opening of two model homes at Ku'au
Bayview. Strong response to the first, 35-home phase has led to release for
sales of the second phase. Prices for the 30 units sold during 1996 averaged
$229,000 for the 1,008 to 1,639 square-foot homes.
Project Total Salable Available In Sold In 1996 Available In
Units 1996 1997
Ku'au Bayview 92 92 30 62
Kahului Ikena 102 81 31 50
Haiku Mauka 39 10 9 1
Eleele Nani II 146 6 2 4
Marketing and sales of other residential projects continued in 1996. On
Maui, there were 31 sales at Kahului Ikena, a 102-unit condominium development
in central Kahului. In response to the sluggish real estate market, various
buyer-incentive programs were initiated, including a successful lease-to-own
package. Sales during 1996 averaged $134,000 per unit. Agricultural lot sales
continued at Haiku Mauka, a 39-lot development. Sales in 1996 averaged
$155,000 for each of the roughly two-acre lots. The last lot closed in January
1997. Nearby, site construction is nearly complete on a nine-lot, similar
development called Kauhikoa East.
[Photo caption: Hands-on, literally. When the task involves every inch of the
"territory," there is no better way to be in charge than to see things first-
hand. Leigh K. Fukutomi, Superintendent, Irrigation - Pa'ia, for HC&S, is
responsible for water flow to a large portion of HC&S' 36,000-acre thirsty
sugar crop.]
Leased Property Portfolio
Hawaii Portfolio
The Hawaii leased-property portfolio consists of about 670,000 square feet
of improved leasable space, and ground leases for about 270 acres for
commercial use and about 5,000 acres for agricultural uses. Hawaii's economic
circumstances and changes in retailing due to the entry of large discounters
made rates very competitive in 1996. Occupancy of the Company's improved
properties in Hawaii averaged 86 percent over the course of the year.
The newest building in this portfolio, 28,000 square-foot Apex Building in
Kahului, has become identified successfully with high-quality recreational
retailing, its target market niche. About 75-percent occupied at year-end
1996, its tenants include windsurfing, cycling and sailing shops, as well as a
tour operator serving overseas visitors. Several sites nearby, on a total of
about seven acres, are available in 1997 for ground leases or build-to-suit
development.
On Kauai, A&B Properties took on management of 1,200 acres formerly used
for sugar cultivation. Of these, a total of 700 acres were leased to others
for seed corn, papaya and other diversified crops. Another 227 acres have been
developed as an agricultural park. Most of the remaining land will be utilized
for pasture.
Mainland Portfolio
With relatively strong economic activity in many Western states, A&B's 2.17
million square-foot Mainland leased-property portfolio enjoyed high and very
stable occupancy levels, averaging 97 percent over the year.
During 1996, new leases were negotiated for the 246,000 square-foot office-
manufacturing site in Cupertino, Calif. formerly known as the DEC Building.
During 1996, Hewlett-Packard Co. occupied two of the site's three buildings
under a sublease and has agreed to a new three-year lease starting in August of
this year. A third building will continue to be leased by Digital Equipment
Corp.
ISSUES, PLANS TO ADDRESS THEM
. Hawaii Real Estate Demand: Although forecasts call for the State's economy
to strengthen modestly, real estate markets in the State remain depressed.
Downward pressure continues on lease rates. The introduction of value
retailing benefits A&B through sales and new lease income, but the new
competitors also jeopardize the future of many existing retailers who also,
in many cases, are A&B tenants. The Company's substantial land inventory
provides some flexibility to be responsive as opportunities develop, but the
present market circumstances call for great care and selectivity.
. Kauai Economy, Kukui'ula Development: With a small population, estimated at
about 50,000, and a historic dependence on agriculture and tourism, Kauai
still is struggling to restore growth to its economy following the 1992
hurricane. A&B will continue to defer further investment in its Kukui'ula
project until prospects for housing and commercial demand improve. During
1997, the County may begin to update the Kauai general plan. This process
could be sensitive, due to the present economic concerns.
OPERATING PROFIT OUTLOOK
Property leasing revenue and operating profit are expected to be slightly
higher in 1997 than in 1996. The leased property portfolio is expected to
improve its results, due to full-year higher occupancy rates for existing
properties and selectively higher rents.
Property sales are difficult to forecast, in part because they often are
opportunistic. For properties where the Company has formulated 1997 marketing
and sales plans, the projected revenue and operating profit likely will be
somewhat lower than that realized in 1996. Opportunistic sales, although not
included in this outlook, will be pursued.
The value added to the property portfolio by entitlements is not measured
in the financial statements. The lengthy and complex process of gaining
entitlements will continue in 1997 through participation in community plans and
via site-specific applications in Hawaii and on the Mainland.
[Photo caption: Thanks to the richness and quantity of its land, A&B is
committed to sugar growing in Hawaii. In fact, the HC&S plantation has added
740 acres of new sugar plantings in the past 3 years. Evangeline E. Casem
helps survey a former pineapple field, now leased by A&B for sugar cultivation,
layout of drip irrigation hardware and cane plantings.]
[Photo caption: One of the "unsung" jobs in sugar is also one of the
most important. Harvesting and cutting of "seed cane" provides the planting
stock for about 18,000 acres planted each year. With the proper care and
scheduling, seed cane production is balanced with planting needs. Here, Glenn
M. Wilbourn, General Superintendent, Land Preparation and Seed Operations
(center), reviews a seed cutter machine's maintenance record with Wilfred M.
Vasquez, Mechanic Journey Worker, and Danidean K. Poouahi, Maintenance
Mechanic-Learner.]
FOOD PRODUCTS
SEGMENT DESCRIPTION
ABHI's food products segment includes the sugar production operations of
Hawaiian Commercial & Sugar Company (HC&S) on Maui, the coffee production and
marketing activities of Island Coffee Company, Inc. (Island Coffee) on Kauai,
as well as the sugar refining and marketing operations of California and
Hawaiian Sugar Company, Inc. (C&H). ABHI is the largest sugar producer in
Hawaii, growing about 51 percent of the State's total crop in 1996. HC&S
produces raw sugar, molasses and salable electric power. Salable hydro power
also is produced by an ABHI subsidiary on Kauai. Island Coffee produces and
markets green coffee for sale in the U.S. and internationally, and roasted and
packaged Kauai Coffee for sale in Hawaii. Island Coffee is the largest coffee
grower in the U.S. C&H is the only sugarcane refiner in the western United
States, supplying to consumer and industrial markets about seven percent of the
refined sugar produced in the country.
On September 13, 1996, sugar production operations ended, in accordance
with the previously announced schedule, at McBryde Sugar Company, Limited on
Kauai. In spite of major efforts over the years, the plantation consistently
was unprofitable, primarily due to its small size and low sugar yields.
A&B remains committed, however, to healthy and efficient agricultural
operations in Hawaii as the best way of utilizing large tracts of the
Company's lands. The Company's three-part strategy regarding food products
operations is:
. While taking initiatives to reduce operating costs and increase efficiency,
provide for long-term operating success at C&H through investments in the
refinery and the C&H brand, pursue mutually-beneficial opportunities to form
alliances with other companies in the food products industry and support a
balanced federal farm program as it pertains to sugar;
. Increase production, increase yields and lower costs at HC&S; and
. Produce and market a Kauai coffee at Island Coffee.
OPERATING RESULTS
In 1996, food products operations provided 41 percent of A&B's revenue and
18 percent of its operating profit. For explanations of year-to-year changes
in results, please refer to Management's Discussion and Analysis on page 27.
1996 1995 1994
---- ---- ----
(in thousands)
Revenue $ 499,667 $ 363,944 $ 441,209
========= ========= =========
Operating Profit/(Loss):*
Before plantation $ 22,239 $ (19,697) $ (418)
closure
Plantation closure 4,624 (8,100) -
--------- --------- ---------
Total $ 26,863 $ (27,797) $ (418)
========= ========= =========
*Before interest expense, corporate expense and income taxes
[Photo caption: David G. Koncelik, President and Chief Executive Officer,
California and Hawaiian Sugar Company, Inc.]
1996 PROGRESS
C&H
The fundamentals of C&H's sugar refining business changed dramatically
between 1995 and 1996. The new legislation governing agriculture -- the
Federal Agriculture Improvement and Reform Act -- did not correct the problems
the old legislation created for the cane sugar industry. The new legislation
did, however, reduce the uncertainty and price volatility that had made the
previous year so difficult for all U.S. cane sugar refiners.
On the demand side, U.S. consumers continue to use more sweeteners.
Although the growth rate is low, normally between one and three percent
annually, the absolute amount of the increase is quite large, from 100,000 to
300,000 tons. In 1996, increased consumption and a reduced supply of beet
sugar increased market opportunities for cane sugar refiners. Increased demand
for refined cane sugar products led, in turn, to significantly higher sales
volume and moderate strengthening of both industrial and retail prices.
The magnitude of C&H's year-to-year increase in total sales volume, some 37
percent, was even greater than for the industry as a whole, because C&H's 1995
sales had been reduced significantly by a six-week strike. Demand was greater
for both industrial and commercial sugar products. Normally, industrial and
commercial sugar product sales each make up about half of C&H's sales volume.
C&H's raw (unrefined) sugar costs, which are based predominantly on the No.
14 (New York spot) price for domestic sugar, remained relatively high during
1996. These prices are affected by the new federal legislation, and fluctuate
continually in response to the way that the U.S. Department of Agriculture
administers the raw sugar import quota.
With relatively high fixed costs, higher sales and higher production are
very important to C&H. Total refinery output during 1996 was the highest it
had been since 1985.
C&H's profitability also benefited from a restructuring of the refinery at
year-end 1995. At that time, the refinery work force, bargaining and non-
bargaining employees alike, was reduced to three-quarters of its previous size.
Refinery operating costs also benefited from the May 1996 start up of
operations of a 240-megawatt cogeneration plant, built by a third party,
adjacent to C&H's Crockett, Calif. refinery. Using natural gas to produce
steam and electricity, the plant supplies process steam and electric power to
the C&H refinery, substantially reducing its energy costs. In addition,
because of this new energy supply, C&H was able to close down its own, far
older, power plant and avoid significant capital investments needed to fulfill
current required emissions and other standards.
At the end of 1996, a small, special-purpose refinery, located on leased
land in Aiea on Oahu, Hawaii, was shut down. A pretax charge of $2.3 million
was provided against 1996 earnings. Built to supply liquid sugar to beverage
and food producers in Hawaii, closure of Oahu sugar plantations made continued
operation of this plant impractical. Much of the operating equipment will be
moved to Crockett, where it will continue to be utilized to make liquid sugar
products.
[Photo caption: At C&H, Jon A. Wolthuis, Vice President - Refinery Operations,
does a big job. Along with Nazeer E. Doomun, Operations Manager, he looks over
the facilities of the Crockett sugar refinery, with a capacity exceeding
700,000 tons per year. With responsibility for attaining that production
level -- on time and within budget -- and managing the skills of more than
nearly 500 employees, every moment is active.]
Agribusiness
Sugar - With the cessation of sugar cultivation on Kauai, HC&S, on Maui, is
the focus of A&B's sugar cultivation. The largest sugar producer in Hawaii,
HC&S made progress during 1996 in implementing steps to improve its sugar
yields and add to the amount of acreage under cultivation. These steps will
continue in 1997 and beyond. Greater production benefits HC&S, due to the high
fixed cost component of plantation operations. C&H also benefits from greater
HC&S production, due to the high quality and lower delivered cost of Hawaii-
produced sugar, versus other sources of supply.
Labor negotiations are under way at HC&S with the sugar production and
clerical units of the International Longshoremen's and Warehousemen's Union.
In recent years, these contracts have been renewed for short periods due to the
uncertainty over farm legislation. The Company expects that new contracts will
be negotiated in the normal course of business.
Coffee - Total green coffee produced during the 1996 harvest by Island
Coffee, approximately 2.4 million pounds, was about 37-percent higher than that
of 1995. Sales and marketing efforts were increased in 1996. Along with the
task of selling the product, these efforts are aimed at strengthening awareness
in the marketplace of estate-grown Hawaii coffee as a specialty product,
meriting premium pricing. In 1997, quality of production and international
marketing initiatives also will be emphasized.
Power - Total power sales to the local electric utilities on Maui and
Kauai, respectively, were 108,000 megawatt hours, versus 118,000 in 1995.
Unusually low rainfall on Maui during the year necessitated greater use of
power for irrigation pumping and lessened the amount of power available for
sale on that island.
Agribusiness operating statistics for the past three years were:
1996 1995 1994
---- ---- ----
Raw sugar produced (tons) 221,000 222,000 223,000
Molasses produced (tons) 74,000 73,000 67,000
Electricity sold (megawatt hours) 108,000 118,000 122,000
Green coffee produced (pounds) 2,430,00 1,770,00 1,365,00
0 0 0
Cultivated acreage
Sugar 40,400 40,400 43,000
Coffee 4,000 4,000 4,000
[Photo caption: C&H-brand sugar products are known and familiar to U.S.
consumers, especially those in California and many areas west of Chicago.
The grocery shelf is the place most people see these products in this
packaging, but C&H sugar is a prominent ingredient in hundreds of other food
products sold in those stores as well. To meet the stringent needs of
industrial sugar buyers, C&H sells more than 50 different kinds of sugar.]
ISSUES, PLANS TO ADDRESS THEM
. National Sugar Policy, Practices - A primary goal of U.S. sugar policy is to
insulate U.S. consumers and producers from the price volatility of the world
market. Other goals include: to establish and maintain market prices that
allow efficient domestic producers to survive and to ensure ample supplies of
reasonably priced sugar products to U.S. consumers, all at no cost to the
taxpayer. About half of the sugar consumed in the U.S. is domestically grown
beet sugar. The other half is cane sugar, some of which is domestically
grown and the rest imported. The principal means of influencing sugar prices
is by varying the amount of raw cane sugar imported into the U.S. This
mechanism, however, has lost most of its influence on final product pricing
because the production of domestic beet sugar in the U.S. has risen, and
varied dramatically, in recent years. Restricted quotas and, therefore,
tight supplies of raw cane sugar raise the cost of production for cane
refiners, even when sugar beets and refined beet sugar products are in
oversupply. As a result, sugarcane refiners across the country have been
unprofitable in some periods, with 1995 a prominent near-term example.
In 1996, raw sugar prices remained artificially high but were considerably
more stable than in 1995. Cane refiners continue to face the risk that the
availability and price of a large part of the supply of their primary raw
material, raw cane sugar, is subject to government control. C&H, along with
the other members of the U.S. Cane Refiners Association and members of the
Sweetener Users Association, is continuing to make the U.S. Department of
Agriculture aware of the industry's need for a reliable supply of imported
raw cane sugar at reasonable prices and the need for further program reforms.
. HC&S Production, Costs - In a commodity business, like raw sugar production,
it is of paramount importance to achieve and maintain a competitive cost
structure. HC&S has established ambitious, but achievable, goals with regard
to lowering its costs. For the most part, these goals can be met if
production increases and costs are tightly controlled. Initiatives include
adoption of new cane varieties, careful monitoring and use of soil nutrients,
optimization of water application and selective expansion of acreage.
. Successful Coffee Marketing of Kauai - The best way to overcome the
relatively high cost of producing coffee in Hawaii is to attain and maintain
high quality production that supports premium pricing, compared with
commodity grade coffees. The objective is to gain market acceptance for
Kauai coffee as a high-value, premium product. As a new speciality coffee in
a growing, but highly competitive market, this task presents some formidable
challenges, and may take some time to achieve.
OPERATING PROFIT OUTLOOK
The financial results of the food products segment enjoyed a dramatic
recovery between 1995 and 1996. Although considerable uncertainty remains over
sugar prices and the supply of competitive sweeteners, the prospects appear
good for a modest increase in segment revenue and for operating profit that
maintains the level attained in 1996. This segment does, however, generally
have a higher level of earnings variability than do A&B's other units.
GENERAL INFORMATION
BOARD OF DIRECTORS
Members of the current Board of Directors, including one advisory
director, beneficially own approximately seven percent of A&B shares.
At the Annual Meeting of Shareholders on April 25, 1996, shareholders
elected a total of 10 directors, all of whom were nominated by the Board. Re-
elected were Michael J. Chun, John C. Couch, Leo E. Denlea, Jr., Walter A.
Dods, Jr., Charles G. King, Carson R. McKissick, C. Bradley Mulholland,
Robert G. Reed III, Maryanna G. Shaw and Charles M. Stockholm.
Alexander C. Waterhouse serves as an advisory director at the pleasure of the
Board. R. J. Pfeiffer, Chairman of the Board from 1980 to 1995 and a director
from 1978 to 1995, continues to hold the honorary position of Chairman
Emeritus.
MANAGEMENT, ORGANIZATION
W. Allen Doane, president and chief operating officer of ABHI, was
appointed chief executive officer of ABHI, effective January 1, 1997.
Glenn R. Rogers, vice president, chief financial officer and treasurer of
A&B, was appointed a senior vice president, chief financial officer and
treasurer of ABHI, effective January 25, 1996.
Judith A. Williams, vice president of ABHI, was appointed a vice president
of A&B, effective August 22, 1996.
Thomas A. Wellman, controller of ABHI, was appointed a vice president of
ABHI and controller of A&B, effective January 25, 1996.
John F. Gasher, director, human resources development for A&B, was
appointed a vice president of ABHI, effective January 1, 1997.
Richard F. Cameron, senior vice president of ABHI, retired, effective
December 31, 1996.
COMMON STOCK
A&B common shares trade under the symbol ALEX on The NASDAQ Stock
MarketSM. A summary of daily stock transactions is listed in the NASDAQ
National Market Issues section of major newspapers. Trading volume averaged
67,425 shares a day in 1996, compared with 86,022 shares a day in 1995 and
85,594 in 1994. Currently, 14 firms make a market in ALEX.
High and low sales prices per share, by quarter, for 1996 and 1995 were:
Quarter 1996 1995
------- ---- ----
First................. $24-1/4 -- 22-1/2 $24-1/4 -- 20-1/2
Second................ 29-1/4 -- 23-3/4 25-1/2 -- 21-3/4
Third................. 26-1/4 -- 23-1/4 25-1/2 -- 22-1/4
Fourth................ 28-1/2 -- 23 24-1/4 -- 22-1/2
DIVIDENDS
A&B strives to pay the highest possible dividends commensurate with
operating and capital needs. The Company has paid cash dividends in every
quarter since 1903. The quarterly dividend rate last was increased in the
second quarter of 1990, from 20 cents a share to 22 cents. In 1996, total
dividend payments to shareholders were $39.9 million, 61 percent of reported
earnings for the year.
The following dividend schedule for 1997 has been set, subject to final
approval by the A&B Board of Directors:
Quarterly Dividend Declaration Date Record Date Payment Date
- ------------------ ---------------- ----------- ------------
First............. January 23 February 14 March 6
Second............ April 24 May 8 June 5
Third............. June 26 August 7 September 4
Fourth............ October 23 November 6 December 4
CREDIT RATINGS
As discussed in Note 7 to the financial statements, Matson had outstanding
commercial paper notes at December 31, 1996 of $149.6 million. The Matson
notes are rated A-1/P-1/D-1 by Standard & Poor's, Moody's, and Duff & Phelps,
respectively. Standard & Poor's rates Matson's senior debt as A-.
C&H had outstanding commercial paper notes of $76 million at December 31,
1996. The C&H notes are rated A-2/P-2 by Standard & Poor's and Moody's,
respectively.
QUARTERLY RESULTS (UNAUDITED)
Segment results by quarter for 1996 and 1995 are listed below (in
thousands, except per share amounts).
1996 1995
----------------------------------------- -----------------------------------------
4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
-------- -------- -------- -------- -------- -------- -------- --------
Revenue:
Ocean Transportation $167,462 $168,701 $173,201 $152,222 $148,595 $150,507 $149,663 $145,042
Property Development & Management
Leasing 9,025 8,918 9,085 8,888 8,805 8,746 8,441 8,081
Sales 9,324 15,299 5,125 2,161 16,437 2,403 2,874 4,121
Food Products 145,201 139,518 119,908 95,040 83,613 83,946 108,588 87,797
Other 759 1,393 673 665 730 684 701 681
-------- -------- -------- -------- -------- -------- -------- --------
Total Revenue $331,771 $333,829 $307,992 $258,976 $258,180 $246,286 $270,267 $245,722
======== ======== ======== ======== ======== ======== ======== ========
Operating Profit:
Ocean Transportation $ 16,711 $ 20,646 $ 26,648 $ 17,613 $ 23,220 $ 26,592 $ 20,855 $ 17,102
Property Development & Management
Leasing 5,658 6,032 6,243 5,942 5,827 6,033 5,729 5,474
Sales 3,407 8,673 2,995 232 10,949 328 1,524 1,696
Food Products 13,207 11,848 2,696 (888) (8,217) (4,350) (11,388) (3,842)
Other 623 1,356 628 613 684 640 656 613
-------- -------- -------- -------- -------- -------- -------- --------
Total Operating Profit 39,606 48,555 39,210 23,512 32,463 29,243 17,376 21,043
Interest Expense 8,426 8,469 8,376 8,810 8,753 9,513 7,711 7,452
General Corporate Expense 3,563 2,970 2,858 3,378 2,690 3,462 4,224 4,366
-------- -------- -------- -------- -------- -------- -------- --------
Income Before Income Taxes 27,617 37,116 27,976 11,324 21,020 16,268 5,441 9,225
Income Taxes 10,418 13,991 10,206 4,133 8,440 5,923 1,901 3,271
-------- -------- -------- -------- -------- -------- -------- --------
Income from Continuing Operations 17,199 23,125 17,770 7,191 12,580 10,345 3,540 5,954
Income from MLC operations -- -- -- -- -- -- 2,730 2,606
Gain on sale of MLC -- -- -- -- 794 -- 17,206 --
-------- -------- -------- -------- -------- -------- -------- --------
Net Income $ 17,199 $ 23,125 $ 17,770 $ 7,191 $ 13,374 $ 10,345 $ 23,476 $ 8,560
======== ======== ======== ======== ======== ======== ======== ========
Earnings Per Share $0.38 $0.51 $0.39 $0.16 $0.30 $0.23 $0.51 $0.19
======== ======== ======== ======== ======== ======== ======== ========
FINANCIAL REPORT
23 Independent Auditors' Report
24 Eleven-Year Summary of Selected Financial Data
26 Industry Segment Information
27 Management's Discussion and Analysis
30 Statements of Income
31 Statements of Cash Flows
32 Balance Sheets
34 Statements of Shareholders' Equity
35 Notes to Financial Statements
INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS OF ALEXANDER & BALDWIN, INC.:
We have audited the accompanying balance sheets of Alexander & Baldwin, Inc.
and its subsidiaries as of December 31, 1996 and 1995, and the related
statements of income, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996 (pages 26 and 30 to 41).
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Alexander & Baldwin, Inc. and its
subsidiaries at December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Honolulu, Hawaii
January 23, 1997
(except for Note 13, as to which the date is February 13, 1997)
Eleven-Year Summary of Selected Financial Data
(Dollars and shares in thousands, except per-share amounts)
Alexander & Baldwin Inc. and Subsidiaries
1996 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ---------- ----------
Annual Operations:
Net sales and other operating revenue $1,232,568 $1,020,455 $1,144,033 $ 923,804 $ 703,948 $ 715,984
Deduct:
Cost of goods sold and operating expenses 1,094,454 935,072 1,019,700 794,880 583,593 565,105
Interest expense 34,081 33,429 27,702 28,802 23,881 24,575
Hurricane loss - - - - 24,803 -
Income taxes 38,748 19,535 32,652 41,386 19,044 42,359
---------- ---------- ---------- ---------- ---------- ----------
Income from continuing operations 65,285 32,419 63,979 58,736 52,627 83,945
Income (loss) from discontinued operations - 23,336 10,629 8,253 7,878 4,861
Cumulative effect of change
in accounting principle - - - - (41,551) -
---------- ---------- ---------- ---------- ---------- ----------
Net income $ 65,285 $ 55,755 $ 74,608 $ 66,989 $ 18,954 $ 88,806
========== ========== ========== ========== ========== ==========
Earnings per share:
Income from continuing operations $1.44 $0.72 $1.39 $1.27 $1.14 $1.82
Income (loss) from discontinued operations - 0.51 0.23 0.18 0.17 0.10
Cumulative effect of change
in accounting principle - - - - (0.90) -
---------- ---------- ---------- ---------- ---------- ----------
Net income $1.44 $1.23 $1.62 $1.45 $0.41 $1.92
========== ========== ========== ========== ========== ==========
Return on beginning equity 10.0% 8.8% 12.7% 12.0% 3.3% 16.7%
Cash dividends per share $ 0.88 $ 0.88 $ 0.88 $ 0.88 $ 0.88 $ 0.88
Average number of shares outstanding 45,303 45,492 46,059 46,338 46,294 46,213
Gross profit percentage 20.0% 20.2% 21.2% 24.9% 29.1% 31.9%
Effective income tax rate 37.3% 37.6% 33.8% 41.3% 26.6% 33.5%
Market price range per share:
High $ 29.250 $ 25.500 $ 28.250 $ 28.000 $ 30.500 $ 29.500
Low 22.500 20.500 21.250 22.500 21.500 21.000
Close 25.000 23.000 22.250 26.750 24.750 28.250
At Year End:
Shareholders of record 5,881 6,357 6,729 7,056 7,507 7,749
Shares outstanding 45,339 45,280 45,691 46,404 46,333 46,229
Shareholders' equity $ 684,328 $ 649,678 $ 632,614 $ 587,006 $ 559,099 $ 578,669
Per share 15.09 14.35 13.85 12.65 12.07 12.52
Total assets 1,800,622 1,801,237 1,925,775 1,904,742 1,676,635 1,547,648
Working capital 101,431 84,399 58,392 64,884 40,013 23,195
Cash and cash equivalents 23,824 32,150 8,987 32,295 20,827 18,675
Property-net 1,063,056 973,514 975,672 1,032,983 888,621 882,513
Real estate developments-noncurrent 70,144 56,104 66,371 54,919 50,977 36,362
Long-term debt-noncurrent 345,618 380,389 519,605 576,390 549,960 452,279
Capital lease obligations-noncurrent 12,039 24,186 35,274 44,495 59,816 69,717
Current ratio 1.4 to 1 1.4 to 1 1.3 to 1 1.3 to 1 1.4 to 1 1.2 to 1
Capital stock price/earnings
ratio at December 31 17.4 to 1 18.7 to 1 13.7 to 1 18.5 to 1 60.4 to 1 14.7 to 1
All share and per-share amounts reflect the stock splits of 2-for-1 in 1988 and 3-for-2 in 1986.
Eleven-Year Summary of Selected Financial Data, Continued
(Dollars and shares in thousands, except per-share amounts)
Alexander & Baldwin Inc. and Subsidiaries
1990 1989 1988 1987 1986
---------- ---------- ---------- ---------- ----------
Annual Operations:
Net sales and other operating revenue $ 747,550 $ 845,936 $ 701,908 $ 655,276 $ 536,668
Deduct:
Cost of goods sold and operating expenses 552,236 512,499 495,234 470,928 409,563
Interest expense 29,602 26,965 27,406 21,104 16,042
Hurricane loss - - - - -
Income taxes 58,820 107,461 61,535 62,167 575
---------- ---------- ---------- ---------- ----------
Income from continuing operations 106,892 199,011 117,733 101,077 110,488
Income (loss) from discontinued operations 1,075 (310) - - -
Cumulative effect of change
in accounting principle - - - - -
---------- ---------- ---------- ---------- ----------
Net income $ 107,967 $ 198,701 $ 117,733 $ 101,077 $ 110,488
========== ========== ========== ========== ==========
Earnings per share:
Income from continuing operations $2.32 $4.30 $2.35 $1.93 $1.97
Income (loss) from discontinued operations 0.02 (0.01) - - -
Cumulative effect of change
in accounting principle - - - - -
---------- ---------- ---------- ---------- ----------
Net income $2.34 $4.29 $2.35 $1.93 $1.97
========== ========== ========== ========== ==========
Return on beginning equity 23.5% 45.2% 31.7% 21.4% 27.9%
Cash dividends per share $ 0.86 $ 0.80 $ 0.77 $ 0.68 $ 0.66
Average number of shares outstanding 46,133 46,326 50,079 52,444 55,990
Gross profit percentage 36.0% 48.5% 38.8% 37.2% 35.2%
Effective income tax rate 35.5% 35.1% 34.3% 38.1% 0.5%
Market price range per share:
High $ 38.000 $ 39.500 $ 36.750 $ 32.000 $ 24.500
Low 19.000 31.250 20.875 16.000 14.000
Close 22.250 37.500 31.500 21.625 22.500
At Year End:
Shareholders of record 7,860 7,650 7,201 6,859 6,749
Shares outstanding 46,201 46,096 50,099 50,347 56,095
Shareholders' equity $ 530,298 $ 459,712 $ 439,729 $ 371,007 $ 473,283
Per share 11.48 9.97 8.78 7.37 8.44
Total assets 1,364,165 1,141,671 1,070,483 981,737 934,032
Working capital 55,340 33,906 35,974 42,262 67,533
Cash and cash equivalents 47,351 23,389 22,794 26,695 34,507
Property-net 799,942 691,194 548,066 520,124 489,076
Real estate developments-noncurrent 14,156 - - - -
Long-term debt-noncurrent 315,851 196,954 174,715 172,014 94,512
Capital lease obligations-noncurrent 86,392 95,241 100,306 106,935 90,818
Current ratio 1.5 to 1 1.4 to 1 1.4 to 1 1.5 to 1 1.9 to 1
Capital stock price/earnings
ratio at December 31 9.5 to 1 8.7 to 1 13.4 to 1 11.2 to 1 11.4 to 1
All share and per-share amounts reflect the stock splits of 2-for-1 in 1988 and 3-for-2 in 1986.
Industry Segment Information
(In thousands)
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Revenue:
Ocean transportation $ 661,586 $ 593,807 $ 604,754 $ 551,687 $ 537,669
Property development and management:
Leasing 35,916 34,073 33,387 32,606 30,386
Sales 31,909 25,835 60,767 32,559 27,529
Food products 499,667 363,944 441,209 304,007 104,053
Other 3,490 2,796 3,916 2,945 4,311
---------- ---------- ---------- ---------- ----------
Total revenue $1,232,568 $1,020,455 $1,144,033 $ 923,804 $ 703,948
========== ========== ========== ========== ==========
Operating Profit:
Ocean transportation $ 81,618 $ 87,769 $ 97,319 $ 91,194 $ 97,195
Property development and management:
Leasing 23,875 23,063 23,163 22,975 21,357
Sales 15,307 14,497 18,522 18,570 16,820
Food products 26,863 (27,797) (418) 12,692 (26,175)
Other 3,220 2,593 3,143 2,357 4,263
---------- ---------- ---------- ---------- ----------
Total operating profit 150,883 100,125 141,729 147,788 113,460
Interest expense, net (34,081) (33,429) (27,702) (28,802) (23,881)
General corporate expenses (12,769) (14,742) (17,396) (18,864) (17,908)
---------- ---------- ---------- ---------- ----------
Income from continuing operations
before income taxes $ 104,033 51,954 $ 96,631 $ 100,122 $ 71,671
========== ========== ========== ========== ==========
Identifiable Assets:
Ocean transportation $1,005,741 $ 997,230 $ 853,933 $ 882,335 $ 958,669
Property development and management 312,829 297,927 271,073 268,581 258,653
Food products 391,493 413,675 399,717 418,724 135,071
Other 90,559 92,405 87,362 39,094 38,437
---------- ---------- ---------- ---------- ----------
Assets of continuing operations 1,800,622 1,801,237 1,612,085 1,608,734 1,390,830
Discontinued operations - container
leasing - - 313,690 296,008 285,805
---------- ---------- ---------- ---------- ----------
Total assets $1,800,622 $1,801,237 $1,925,775 $1,904,742 $1,676,635
========== ========== ========== ========== ==========
Capital Expenditures:
Ocean transportation $ 171,110 $ 46,872 $ 29,676 $ 53,745 $ 64,333
Property development and management 4,141 8,613 14,376 34,772 30,013
Food products 12,058 13,650 18,665 26,637 8,589
Depreciation and Amortization:
Ocean transportation $ 62,055 $ 57,619 $ 55,663 $ 55,738 $ 52,829
Property development and management 6,214 5,561 5,246 4,860 4,523
Food products 20,144 20,390 21,340 15,974 10,665
MANAGEMENT'S DISCUSSION AND ANALYSIS
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
CONSOLIDATED EARNINGS AND REVENUE
Net income for 1996 was $65,285,000, or $1.44 per share. This was a 17-percent
improvement compared with 1995 net income of $55,755,000, or $1.23 per share.
1996 results included a $2,900,000, or $0.06 per share, partial reversal of a
1995 charge for the phasing-out of the Company's unprofitable sugar-growing
operations on the island of Kauai, which was substantially completed in 1996.
Results for 1995 included an $18,000,000, or $0.40 per share, gain from the
sale of Matson Leasing Company, Inc.'s (Matson Leasing) net assets and
$5,336,000, or $0.11 per share, from its partial-year operations. These
factors were partially offset in 1995 by the charge of $5,050,000, or $0.11 per
share, for phasing-out sugar growing at the Company's Kauai plantation and a
$2,384,000, or $0.05 per share, write-down of a California and Hawaiian Sugar
Company, Inc. (C&H) operating asset. Revenue for 1996 was $1,232,568,000
compared with $1,020,455,000 for 1995, reflecting increases in all of the
Company's business segments.
1996 COMPARED WITH 1995
OCEAN TRANSPORTATION revenue increased 11 percent, reflecting primarily the
start-up of the Guam service, but operating profit declined seven percent in
1996, compared with 1995. Operating and overhead costs increased in 1996, due
primarily to the implementation of the Guam service and to disruptive labor
actions during the third and fourth quarters related to the West Coast
longshore contract. Operating profit also was affected adversely by higher
fuel prices and higher fuel consumption. Together, these factors have obscured
the potential synergies of the newly combined shipping services and other cost
reduction initiatives, such as the consolidation of customer service opera-
tions. During 1996, charter hire revenue of $6,609,000 was received, compared
with $4,330,000 for 1995. This increase, however, was more than offset by a
reduction in interest income of $6,290,000 for 1996 compared with 1995.
Hawaii's slow economic growth and increased competition have resulted in
reduced cargo volumes for the Hawaii service. The mid-1995 introduction, by a
competitor, of a Hawaii to Los Angeles service also contributed to cargo
declines. Compared with 1995, total Hawaii container volume was down three
percent and total automobile volume was down 22 percent in 1996.
The Guam service, which began in February 1996, made a solid contribution to
Matson's revenue in its start-up phase. There was relatively strong demand for
ocean shipping arising from Guam's tourism and construction industries. Also,
increased westbound bookings by Matson's alliance partner, APL Limited, of
cargo destined for the Far East has helped the Company diversify its economic
risk in this new trade. Demand in the Pacific Coast service continued to grow
in 1996, which resulted in a positive contribution to overhead. In July,
the Columbus Line and Blue Star Line consortium reconfigured its service from
Australia and New Zealand to cease multiple port calls on the Pacific Coast
and, instead, began to utilize the Company's Pacific Coast service.
PROPERTY DEVELOPMENT AND MANAGEMENT - LEASING revenue rose five percent and
operating profit rose four percent compared with 1995. These increases were
due to full-year contributions from properties added to the leased portfolio in
the second half of 1995. Occupancy levels for the Company's Mainland leased
real estate portfolio averaged 97 percent, the same rate as for 1995.
Occupancy levels for the Company's Hawaii leased real estate portfolio averaged
86 percent, versus 90 percent in the previous year, reflecting the continued
weak real estate market in Hawaii and the impact of large discount retailers.
Both of these factors have limited the absorption of new and vacant space.
PROPERTY DEVELOPMENT AND MANAGEMENT - SALES revenue of $31,909,000 for 1996 was
24-percent higher than in 1995; however, operating profit increased only six
percent for 1996 compared with 1995. Significant sales in 1996 included two
leased parcels, a 66-acre unimproved parcel to a Maui utility, four lots in the
Company's Maui Business Park and 73 residential properties. Sales in 1995
included a 5.5-0acre parcel at Maui Business Park, three individual lots in
Maui Business Park, eight developed industrial lots, a 38-acre agricultural-
subdivision parcel and 47 residential properties. Three of the 1996 sales were
completed on a tax-deferred basis. No tax-deferred sales were completed in
1995.
The mix of property sales in any year can be diverse. Sales can include
property sold under threat of condemnation, developed residential real estate,
commercial properties, developable subdivision lots and undeveloped land. The
sale of undeveloped land and subdivision lots generally provides a greater
contribution margin than does the sale of developed and commercial property,
due to the low historical-cost basis of the Company's Hawaii land, which
averages approximately $150 per acre. Consequently, property sales revenue
trends and the amount of real estate held for sale on the balance sheets do not
necessarily indicate future profitability for this segment.
FOOD PRODUCTS revenue of $499,667,000 for 1996 was 37-percent greater than the
prior year's revenue of $363,944,000. Operating profit was $26,863,000 for
1996, compared with a loss of $27,797,000 for 1995. Operating profit for 1995
had been affected adversely by a refinery workers' strike, an $8,100,000 (pre-
tax) reserve for the closure of sugar-growing operations on Kauai, a $3,800,000
(pre-tax) write-down of an operating asset, high raw sugar costs and low
refined sugar prices.
For 1996, increased domestic sugar consumption and a better balance of sugar
supply contributed to greater demand for cane sugar products and to higher
refined sugar prices. An increase in the sugar import quota helped to
stabilize raw sugar costs at historically high levels, but below the Company's
1995 costs. Operating profit in 1996 included $4,600,000 (pre-tax) for the
partial reversal of the $8,100,000 (pre-tax) charge recorded in 1995. This
portion of the original reserve was not required for closing the Kauai sugar-
growing operation, due to better-than-expected results from the final sugar
cane harvest, better-than-expected pension gains and the disposition of assets.
Adding to the improved 1996 results for the Company's sugar operations were
lower costs resulting from the December 1995 restructuring of the Crockett,
Calif. sugar refinery and the 1996 completion of a third-party-owned cogenera-
tion plant which supplies process steam and electricity to that refinery.
The Company's coffee growing and marketing operations had losses for both 1996
and 1995.
During 1996, the Company continued to address concerns about the recent decline
in yields at its Maui sugar plantation. The decline, caused in part, by water
and fertilizer deficiencies, is being addressed, but yield improvements have
not yet been fully realized because the crop cycle spans two years from
planting to harvest.
1995 COMPARED WITH 1994
OCEAN TRANSPORTATION revenue declined by two percent and operating profit
declined by ten percent in 1995 compared with 1994. These declines were due
primarily to decreases in Hawaii container volume and automobile carriage, due
to weaknesses in certain sectors of Hawaii's economy, most notably construction
and the sales of automobiles and durable goods. Also, the 1994 results
benefited from a labor strike against a competitor and the 1995 results were
adversely impacted when that competitor commenced, in mid-1995, a new eastbound
service. Operating profit for 1995, however, benefited from higher shipping
rates and increased interest income.
PROPERTY DEVELOPMENT AND MANAGEMENT - LEASING revenue and operating profit were
approximately the same for 1995 and 1994. Occupancy rates for the Company's
U.S. mainland properties averaged 97 percent for both years, but occupancy
levels for Hawaii properties declined slightly from 92 percent in 1994 to 90
percent in 1995.
PROPERTY DEVELOPMENT AND MANAGEMENT - SALES revenue of $25,835,000 for 1995 was
57-percent lower than in 1994, but operating profit declined only 22 percent
during the same period. This decline was due mainly to better margins for the
sales of property in 1995 than in 1994. The 1995 sales were previously
described. Sales in 1994 included a Mainland shopping center, five developed
industrial lots, two undeveloped acres near Kahului harbor, Maui, and 40
residential properties.
FOOD PRODUCTS revenue decreased 18 percent in 1995 compared with 1994, due
primarily to lower refined sugar sales resulting from a 1995 labor strike at
C&H. The segment's operating loss for the year was $27,797,000, compared with
a loss of $418,000 in 1994. The 1995 loss was due primarily to the C&H strike,
the write-down of an operating asset, high raw sugar costs, depressed refined
sugar prices, a 1995 charge for phasing-out the Company's sugar-growing
operations on Kauai, and lower sugar yields at the Company's Maui sugar
plantation.
FINANCIAL CONDITION AND LIQUIDITY
The Company's principal liquid resources, which consist of cash and cash
equivalents, trade receivables, sugar and coffee inventories and unused lines
of credit, less accrued deposits to the Capital Construction Fund (CCF),
totaled $512,974,000 at December 31, 1996, an increase of $87,527,000 from
December 31, 1995. Amounts available under lines of credit increased
$74,000,000, due primarily to a new $50,000,000 shelf facility, of which
$15,000,000 was drawn in 1996, and increased capacity under a $100,000,000
backup credit facility, due to lower commercial paper balances outstanding at
year-end. Sugar and coffee inventories increased $10,255,000, due principally
to the timing of raw sugar purchases. Accounts receivable increased
$7,021,000, due principally to the initiation of Matson's new Guam service,
partially offset by reductions in amounts advanced to Hawaii sugar growers.
Cash and cash equivalents decreased by $8,326,000, due primarily to the timing
of capital and operating expenditures.
Net cash provided by operations, before capital expenditures for real estate
developments held for sale and discontinued operations (in 1995), were
$149,801,000 and $150,550,000 for 1996 and 1995, respectively. Net operating
cash flows were used principally for capital expenditures, payments of debt,
deposits into the CCF and dividends. Withdrawals from the CCF were used to
purchase additional vessels in December 1995 and January 1996. Cash flows for
1996 and 1995 benefited further from the sale of Matson Leasing's net assets,
the proceeds of which were used principally to retire debt, to pay tax
obligations and to fund capital needs.
In 1996, capital expenditures were $187,721,000, compared with $69,489,000 in
1995. Ocean transportation capital additions in 1996 of $171,110,000 were
primarily for the acquisition of five container vessels, and container and
chassis equipment. Property development and management capital additions in
1996 of $4,141,000 were for real-estate developments held for investment
purposes and for improvements to leased properties. Food products capital
additions in 1996 of $12,058,000 were primarily for sugar refinery modifi-
cations and for power generation equipment, harvesting, and factory equipment
for the Company's sugar- and coffee-growing operations.
Capital expenditures approved, but not yet spent, were $46,688,000 at December
31, 1996. For 1997, internal cash flows are expected to be sufficient to
finance working capital needs, dividends, capital expenditures and debt
service. However, the Company maintains several borrowing facilities which
could be utilized for operating, capital or other cash requirements.
OTHER
INSURANCE LITIGATION: Matson received a favorable cash settlement of
approximately $33.7 million on February 13, 1997 for a contested insurance
claim in connection with repairing port facilities damaged by a 1989 earth-
quake. This settlement will result in pre-tax income of approximately $21
million in the first quarter of 1997.
PROFIT IMPROVEMENT INITIATIVES: Contributing to 1996 results were the
late-1995 staff reductions at the Company's headquarters and in its Hawaii-
based businesses, the freezing of executive salaries for 1996, the elimination
of Company-owned executive automobiles and the sale of the corporate airplane.
The Company is continuing to seek ways to reduce costs and improve operating
and administrative efficiencies.
LEGISLATION: In April 1996, the President of the United States signed the
Federal Agricultural Improvement and Reform Act. Along with provisions
affecting many crops for the next seven years, the new law made changes to the
raw sugar price-support mechanisms. These changes included eliminating market
allocation mechanisms, lowering the sugar price support level by providing for
government recourse loans when imports of raw sugar are below a defined
threshold and establishing a minimum level of raw sugar imports. In September
1996, the U.S. Secretary of Agriculture announced that, beginning in 1997, the
minimum level of raw sugar imports would be administered under a revised
formula. Under this new method, an initial import quota of 1,700,000 tons was
established. This tonnage will increase or decrease by specified amounts, at
scheduled intervals, based upon changes in sugar supply, demand and
inventories. The U.S. Department of Agriculture will monitor this program and
may, at its discretion, alter the sugar import quota. These changes resulted
in a reduction of raw sugar costs during 1996 compared with 1995. Refined
sugar prices, however, were not directly impacted by these changes.
TAX-DEFERRED EXCHANGES: In 1996, the Company sold two parcels of land on Maui
for $12,325,000. The proceeds from these sales are reflected in the Statements
of Cash Flows under the caption "Non-Cash Activities." Proceeds of $2,800,000
were reinvested in 1996 on a tax-deferred basis, and the remaining proceeds are
expected to be reinvested in 1997 on a tax-deferred basis. Also, in 1996, the
Company received $1,850,000 from a sale of land under threat of condemnation.
These proceeds will be reinvested on a tax-deferred basis.
SHARE REPURCHASES: During 1996, the Company repurchased 50,000 shares of its
common stock for $1,250,000. Since approval of a 2,000,000-share repurchase
program in 1993, the Company has purchased a total of 1,283,934 shares for
$30,546,000. In December 1996, the Board of Directors authorized the
repurchase of up to 3,000,000 additional shares.
ENVIRONMENTAL MATTERS: As with most industrial and land-development companies
of its size, the Company's operations have certain risks which could result in
expenditures for environmental remediation. The Company believes that it is in
compliance, in all material respects, with applicable environmental laws and
regulations, and works proactively to identify potential environmental
concerns. Management believes that appropriate liabilities have been accrued
for environmental matters.
OUTLOOK: Information about the Company's outlook for 1997 and its plans to
address issues affecting each primary business unit is included in the Letter
to Shareholders on pages 3 through 7 and in the business unit discussions
included on pages 8 through 20 of the Annual Report to Shareholders, which
sections are incorporated herein by reference.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
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. Such forward-looking statements may be contained in,
among other things, Securities and Exchange Commission (SEC) filings such as
the Form 10-K, press releases made by the Company and oral statements made by
the officers of the Company. Except for historical information contained in
these written or oral communications, such communications contain forward-
looking statements. These forward-looking statements involve a number of risks
and uncertainties that could cause actual results to differ materially from
those projected in the statements, including, but not limited to:
(1) economic conditions in Hawaii and elsewhere; (2) market demand;
(3) competitive factors and pricing pressures in the Company's primary markets;
(4) legislative and regulatory environment at the federal, state and local
levels; (5) dependence on raw sugar suppliers and other third-party suppliers;
(6) fuel prices; and (7) other risk factors described elsewhere in these
communications and from time to time in the Company's filings with the SEC.
MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS
Management has prepared and is responsible for the Company's consolidated
financial statements and related notes. They have been prepared in accordance
with generally accepted accounting principles and necessarily include amounts
based on judgments and estimates made by management. All financial information
in this Annual Report is consistent with these financial statements.
The Company maintains internal accounting control systems, and related policies
and procedures designed to provide reasonable assurance that assets are
safeguarded, that transactions are properly executed and recorded in accordance
with management's authorization, and that underlying accounting records may be
relied upon for the accurate preparation of financial statements and other
financial information. The design, monitoring and revision of internal
accounting control systems involve, among other things, management's judgment
with respect to the relative cost and expected benefits of specific control
measures. The Company maintains an internal auditing function that evaluates
and formally reports on the adequacy and effectiveness of internal accounting
controls, policies and procedures.
The Company's financial statements have been audited by independent auditors
who have expressed their opinion with respect to the fairness, in all material
aspects, of the presentation of financial position, results of operations and
cash flows under generally accepted accounting principles (see Independent
Auditors' Report on page 23).
The Board of Directors, through its Audit Committee (composed of non-employee
directors), oversees management's responsibilities in the preparation of the
financial statements and nominates the independent auditors, subject to
shareholder election. The Audit Committee meets regularly with the external
and internal auditors to evaluate the effectiveness of their work in
discharging their respective responsibilities and to assure their independent
and free access to the Committee.
/s/ John C. Couch
- ------------------------
John C. Couch
Chairman of the Board, President
and Chief Executive Officer
STATEMENTS OF INCOME
(In thousands, except per-share amounts)
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
Year Ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------
REVENUE:
Transportation and terminal services ... $ 547,427 $ 511,673 $ 473,450
Food products .......................... 487,907 350,613 427,524
Rentals and other services ............. 143,392 100,423 161,764
Property development and other ......... 31,424 25,334 59,412
Interest ............................... 15,085 19,571 11,618
Gain on sale of property and other ..... 4,577 10,158 7,474
Dividends .............................. 2,756 2,683 2,791
--------- --------- ---------
Total revenue ........................ 1,232,568 1,020,455 1,144,033
--------- --------- ---------
COSTS AND EXPENSES:
Cost of services ....................... 550,745 473,757 478,761
Cost of goods sold ..................... 430,376 348,354 422,444
Selling, general and administrative .... 113,333 112,961 118,495
Interest ............................... 34,565 37,365 31,427
Interest capitalized ................... (484) (3,936) (3,725)
--------- --------- ---------
Total costs and expenses ............. 1,128,535 968,501 1,047,402
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES ........................... 104,033 51,954 96,631
INCOME TAXES.............................. 38,748 19,535 32,652
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS......... 65,285 32,419 63,979
DISCONTINUED OPERATIONS:
Income From Operations of Matson Leasing
Company, Inc. (Net of income taxes of
$3,228 in 1995 and $5,975 in 1994).... - 5,336 10,629
Gain on Sale of Matson Leasing Company,
Inc. (Net of income taxes of $8,954).. - 18,000 -
--------- --------- ---------
NET INCOME................................ $ 65,285 $ 55,755 $ 74,608
========= ========= =========
EARNINGS PER SHARE OF COMMON STOCK:
Continuing Operations .................. $ 1.44 $ 0.72 $ 1.39
Discontinued Operations ................ - 0.51 0.23
--------- --------- ---------
Net Income ............................. $ 1.44 $ 1.23 $ 1.62
========= ========= =========
AVERAGE COMMON SHARES OUTSTANDING......... 45,303 45,492 46,059
See notes to financial statements.
STATEMENTS OF CASH FLOWS (In thousands)
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
Year Ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATIONS:
Income from continuing operations.................................................. $ 65,285 $ 32,419 $ 63,979
Adjustments to reconcile net income to net cash provided by operations:
Depreciation..................................................................... 88,951 85,127 84,037
Plantation closure (reversal).................................................... (4,624) 8,100 -
Loss (gain) on disposal of property, investments and other assets................ (1,686) 226 (5,700)
Changes in assets and liabilities:
Accounts and notes receivable.................................................... (5,225) (32,889) 1,245
Inventories...................................................................... (16,616) 2,640 1,111
Prepaid expenses and other assets................................................ 103 6,153 26,328
Accounts and income taxes payable................................................ 7,062 14,580 (7,859)
Deferred income taxes payable.................................................... 10,420 42,965 1,412
Other liabilities................................................................ 6,131 (8,771) (15,677)
Capital expenditures for real estate developments held for sale.................... (16,799) (19,734) (6,817)
Discontinued leasing operations.................................................... - (59,160) 44,702
--------- --------- ---------
Net cash provided by operations................................................ 133,002 71,656 186,761
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property.................................................. (185,142) (63,908) (48,791)
Capital expenditures for real estate developments held for investment.............. (2,579) (5,581) (12,643)
Receipts from disposal of income producing property, investments and other assets.. 10,897 362,501 1,447
Deposits into Capital Construction Fund............................................ (11,481) (136,484) (8,900)
Withdrawals from Capital Construction Fund......................................... 145,500 999 9,383
Reduction (increase) in investments - net.......................................... 1,184 (1,518) (32)
Discontinued leasing operations:
Capital expenditures............................................................. - (30,061) (33,932)
Other............................................................................ - 900 1,045
--------- --------- ---------
Net cash provided by (used in) investing activities............................ (41,621) 126,848 (92,423)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt........................................... 43,000 40,000 31,000
Payments of long-term liabilities.................................................. (81,888) (189,764 (84,314)
Proceeds (payments) of short-term commercial paper borrowings - net ............... (21,000) 25,000 (6,000)
Repurchases of capital stock....................................................... (1,250) (11,580) (17,717)
Proceeds from issuance of capital stock............................................ 1,291 468 122
Dividends paid..................................................................... (39,860) (40,035) (40,563)
--------- --------- ---------
Net cash used in financing activities.......................................... (99,707) (175,911) (117,472)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................................ (8,326) 22,593 (23,134)
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR:
Continuing operations.............................................................. 32,150 8,987 32,295
Discontinued leasing operations.................................................... - 570 396
--------- --------- ---------
TOTAL CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR................................ 32,150 9,557 32,691
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR:
Continuing operations.............................................................. 23,824 32,150 8,987
Discontinued leasing operations.................................................... - - 570
--------- --------- ---------
TOTAL CASH AND CASH EQUIVALENTS AT END OF YEAR...................................... $ 23,824 $ 32,150 $ 9,557
========= ========= =========
OTHER CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized.......................................... $ 36,472 $ 41,277 $ 44,064
Income taxes paid, net of refunds.................................................. 26,360 53,014 18,391
NON-CASH ACTIVITIES/Tax-deferred property sales..................................... 12,325 - 22,200
See notes to financial statements.
BALANCE SHEETS
(In thousands, except per-share amounts)
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
December 31, 1996 1995
- ------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents .......................... $ 23,824 $ 32,150
Accounts and notes receivable:
Trade, less allowances of $5,787 and $5,479 ...... 139,059 110,697
Other ............................................ 33,207 54,548
Inventories:
Sugar and coffee ................................. 61,540 51,285
Materials and supplies ........................... 41,182 34,821
Real estate held for sale .......................... 17,383 23,550
Deferred income taxes .............................. 17,708 11,439
Prepaid expenses and other assets .................. 12,114 13,413
Accrued deposits to Capital Construction Fund ...... (1,656) (6,233)
---------- ----------
Total current assets ........................... 344,361 325,670
---------- ----------
INVESTMENTS........................................... 91,602 82,246
---------- ----------
REAL ESTATE DEVELOPMENTS.............................. 70,144 56,104
---------- ----------
PROPERTY:
Land .............................................. 61,869 60,101
Buildings .......................................... 204,588 202,769
Vessels ............................................ 816,516 657,238
Machinery and equipment ............................ 676,830 660,499
Water, power and sewer systems ..................... 78,726 82,208
Other property improvements ........................ 88,529 91,091
---------- ----------
Total .......................................... 1,927,058 1,753,906
Less accumulated depreciation and amortization ..... 864,002 780,392
---------- ----------
Property-net ................................... 1,063,056 973,514
---------- ----------
CAPITAL CONSTRUCTION FUND............................. 178,616 317,212
---------- ----------
OTHER ASSETS-NET...................................... 52,843 46,491
---------- ----------
Total .......................................... $1,800,622 $1,801,237
========== ==========
See notes to financial statements.
December 31, 1996 1995
- -------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt .................. $ 31,966 $ 24,794
Current portion of capital lease obligations ....... 12,116 11,061
Short-term commercial paper borrowings ............. 62,000 83,000
Accounts payable ................................... 50,496 49,394
Payrolls and vacation pay .......................... 21,996 19,891
Uninsured claims ................................... 16,129 13,076
Post-retirement benefit obligations/current portion. 5,710 5,118
Taxes other than income ............................ 5,445 6,099
Promotional programs ............................... 4,507 1,099
Accrued interest payable ........................... 3,313 4,478
Accrued and other liabilities ...................... 29,252 23,261
---------- ----------
Total current liabilities ...................... 242,930 241,271
---------- ----------
LONG-TERM LIABILITIES:
Long-term debt ..................................... 345,618 380,389
Capital lease obligations .......................... 12,039 24,186
Post-retirement benefit obligations ................ 116,047 118,472
Uninsured claims ................................... 7,902 11,182
Pension obligations ................................ 3,651 13,345
Other .............................................. 37,194 32,335
---------- ----------
Total long-term liabilities .................... 522,451 579,909
---------- ----------
DEFERRED INCOME TAXES................................. 350,913 330,379
---------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Capital stock/common stock without par value;
authorized, 150,000 shares ($.75 stated value
per share); outstanding, 45,339 shares in
1996 and 45,280 shares in 1995 ................... 37,150 37,133
Additional capital ................................. 43,377 40,138
Unrealized holding gains on securities ............. 48,205 39,830
Retained earnings .................................. 568,969 546,394
Cost of treasury stock ............................. (13,373) (13,817)
---------- ----------
Total shareholders' equity ..................... 684,328 649,678
---------- ----------
Total .......................................... $1,800,622 $1,801,237
========== ==========
STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except per-share amounts)
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
Three Years Ended December 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------
Capital Stock
---------------------------------------
Issued In Treasury
--------------------- ---------------
Unrealized
Additional Holding Retained
Shares Stated Value Shares Cost Capital Gains Earnings
------ ------------ ------ ---- ---------- ---------- --------
BALANCE, DECEMBER 31, 1993................. 50,704 $38,028 4,300 $(14,724) $38,510 $525,192
CHANGES IN 1994:
Shares repurchased and retired ........ (723) (542) (17,175)
Stock options exercised ............... 12 9 352
Acquired in payment of options ........ (6) (5) (152)
Issued--incentive plan ................ 4 3
Unrealized holding gains on
securities ......................... $29,073
Net income ............................ 74,608
Cash dividends -- $.88 per share ...... (40,563)
------ ------- ----- -------- ------- ------- --------
BALANCE, DECEMBER 31, 1994................. 49,991 37,493 4,300 (14,724) 38,862 29,073 541,910
CHANGES IN 1995:
Shares repurchased and retired ........ (511) (383) (11,196)
Stock options exercised ............... 24 18 669
Acquired in payment of options ........ (2) (1) (40)
Issued--incentive plan ................ 8 6 (70) 907 607
Unrealized holding gains on
securities ......................... 10,757
Net income ............................ 55,755
Cash dividends -- $.88 per share ...... (40,035)
------ ------- ----- -------- ------- ------- --------
BALANCE, DECEMBER 31, 1995................. 49,510 37,133 4,230 (13,817) 40,138 39,830 546,394
CHANGES IN 1996:
Shares repurchased and retired ........ (50) (38) (1,213)
Stock options exercised ............... 125 94 2,690
Acquired in payment of options ........ (59) (44) (1,637)
Issued--incentive plan ................ 7 5 (36) 444 549
Unrealized holding gains on
securities ......................... 8,375
Net income ............................ 65,285
Cash dividends -- $.88 per share ...... (39,860)
------ ------- ----- -------- ------- ------- --------
BALANCE, DECEMBER 31, 1996 ................ 49,533 $37,150 4,194 $(13,373) $43,377 $48,205 $568,969
====== ======= ===== ======== ======= ======= ========
See notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION: The consolidated financial statements include the
accounts of Alexander & Baldwin, Inc. and all subsidiaries, after elimination
of significant intercompany amounts.
OCEAN TRANSPORTATION: Voyage revenue and variable costs and expenses are
included in income at the time each voyage leg commences. This method of
accounting does not differ materially from other acceptable accounting
methods.
Vessel depreciation, charter hire, terminal operating overhead, and general and
administrative expenses are charged to expense as incurred. Expected costs of
regularly-scheduled dry docking of vessels and planned major vessel repairs
performed during dry docking are accrued.
PROPERTY DEVELOPMENT AND MANAGEMENT: Sales are recorded when the risks and
benefits of ownership have passed to the buyers (generally at closing dates),
adequate down payments have been received and collection of remaining balances
is reasonably assured.
Expenditures for real estate developments are capitalized during construction
and are classified as Real Estate Developments on the balance sheet. When
construction is complete, the costs are reclassified either as Property or as
Real Estate Held For Sale, based upon the Company's intent to sell the
completed asset or to hold it as an investment. Cash flows related to real
estate developments are classified as operating or investing activities, based
upon the Company's intention either to sell the property or to retain ownership
of the property as an investment following completion of construction.
FOOD PRODUCTS: Revenue is recorded when refined sugar products and coffee are
sold to third parties.
Costs of growing sugar cane are charged to the cost of production in the year
incurred and to cost of sales as refined products are sold. The cost of raw
cane sugar purchased from third parties is recorded as inventory at the
purchase price.
Costs of developing coffee are capitalized during the development period and
depreciated over the estimated productive lives of the orchards. Costs of
growing coffee are charged to inventory in the year incurred and to cost of
sales as coffee is sold.
CASH AND CASH EQUIVALENTS: The Company considers highly liquid investments
purchased with original maturities of three months or less, which have no
significant risk of change in value, to be cash equivalents.
INVENTORIES: Sugar inventory, consisting of raw and refined sugar products,
and coffee inventory, are stated at the lower of cost (first-in, first-out
basis) or market. Other inventories, composed principally of materials and
supplies, are stated at the lower of cost (principally average cost) or market.
PROPERTY: Property is stated at cost. Major renewals and betterments are
capitalized. Replacements, maintenance and repairs which do not improve or
extend asset lives are charged to expense as incurred. Assets held under
capital leases are included with property owned. Gains or losses from property
disposals are included in income.
CAPITALIZED INTEREST: Interest costs incurred in connection with significant
expenditures for real estate developments or the construction of assets are
capitalized.
DEPRECIATION: Depreciation is computed using the straight-line method.
Depreciation expense includes amortization of assets under capital leases and
vessel spare parts.
Estimated useful lives of property are as follows:
Buildings........................................... 10 to 50 years
Vessels............................................. 10 to 40 years
Marine containers................................... 15 years
Machinery and equipment............................. 3 to 35 years
Utility systems and other depreciable property...... 5 to 60 years
OTHER NON-CURRENT ASSETS: Other non-current assets consist principally of
sugar supply contracts and intangible assets. These assets are being amortized
using the straight-line method over periods not exceeding 30 years.
PENSION PLANS: Certain ocean transportation subsidiaries are members of the
Pacific Maritime Association (PMA), the Maritime Service Committee or the
Hawaii Stevedore Committee, which negotiate multi-employer pension plans
covering certain seagoing and shoreside bargaining unit personnel. The
subsidiaries negotiate multi-employer pension plans covering other bargaining-
unit personnel. Pension costs are accrued in accordance with contribution
rates established by the PMA, the parties to a plan or the trustees of a plan.
Several trusteed, noncontributory, single-employer defined benefit plans cover
substantially all other employees.
INCOME TAXES: Income tax expense is based on revenue and expenses in the
statements of income. Deferred income tax liabilities and assets are computed
at current tax rates for temporary differences between the financial statement
and income tax bases of assets and liabilities.
FAIR VALUES: The carrying values of current assets (other than inventories,
real estate held for sale, deferred income taxes and prepaid and other assets)
and of debt instruments are reasonable estimates of their fair values. Real
estate is carried at the lower of cost or fair value. Fair values are
generally determined using the expected market value for the property, less
sales costs. For residential units and lots held for sale, fair value is
determined by reference to the sales of similar property, market studies,
tax assessments and discounted cash flows. For commercial property, fair value
is determined using recent comparable sales, tax assessments and cash flow
analysis. A large portion of the Company's real estate is undeveloped land
located in Hawaii. This land has a cost basis which averages approximately
$150 per acre, a value which is much lower than fair value.
FUTURES CONTRACTS: Realized and unrealized gains and losses on commodity
futures contracts are deferred and recorded in inventory. These amounts are
not significant.
ENVIRONMENTAL COSTS: Environmental expenditures that relate to current
operations are expensed or capitalized as appropriate. Expenditures that
relate to an existing condition caused by past operations or events, and which
do not contribute to current or future revenue generation, are charged to
expense. Liabilities are recorded when environmental assessments or remedial
efforts are probable and the costs can be reasonably estimated.
USE OF ESTIMATES: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenue and expenses during the
reporting periods. Future actual amounts could differ from those estimates.
RECLASSIFICATIONS: Certain amounts in the 1995 and 1994 financial statements
have been reclassified to conform with the 1996 presentation.
RESTATEMENTS: The financial statements for all periods presented have been
restated to reflect the sale of certain net assets of the Company's container
leasing segment, as described in Note 2.
2. DISCONTINUED OPERATIONS
In June 1995, the Company sold the net assets of its container leasing
subsidiary, Matson Leasing Company, Inc., for $361.7 million in cash, and
realized an after-tax gain of $18 million. Specifically excluded from the sale
were long-term debt and U. S. tax obligations of the business.
Summary operating results of discontinued operations, excluding the above gain,
were as follows:
1995 1994
---- ----
(In thousands)
Net sales .................................... $35,251 $ 63,060
======= ========
Gross profit .................................. $14,762 $ 24,499
======= ========
Earnings before income taxes .................. $ 8,564 $ 16,604
Income taxes .................................. 3,228 5,975
------- --------
Net earnings from discontinued operations...... $ 5,336 $ 10,629
======== ========
3. INVESTMENTS
At December 31, 1996 and 1995, investments principally consisted of marketable
equity securities, limited partnership interests and purchase-money mortgages.
The marketable equity securities are classified as "available for sale" and are
stated at quoted market values. The unrealized holding gains on these
securities, net of deferred income taxes, have been recorded as a separate
component of shareholders' equity.
The components of the net unrealized holding gains at December 31, 1996 and
1995 were as follows:
1996 1995
---- ----
(In thousands)
Market value.............................. $85,796 $73,460
Less historical cost ..................... 9,966 9,966
------- -------
Unrealized holding gains ................. 75,830 63,494
Less deferred income taxes ............... 27,625 23,664
------- -------
Net unrealized holding gains ............. $48,205 $39,830
======= =======
The investments in limited partnership interests and purchase money mortgages
are recorded at cost, which approximated market values, of $5,806,000 and
$8,786,000 at December 31, 1996 and 1995, respectively. The purchase money
mortgages are intended to be held to maturity. The value of the underlying
investments of the limited partnership interests are assessed annually and are
approximately equal to the original cost.
See Note 4 for a discussion of market values of investments in the Capital
Construction Fund.
4. CAPITAL CONSTRUCTION FUND
A subsidiary is party to an agreement with the United States Government which
established a Capital Construction Fund (CCF) under provisions of the Merchant
Marine Act, 1936, as amended. The agreement has program objectives for the
acquisition, construction or reconstruction of vessels and for repayment of
existing vessel indebtedness. Deposits to the CCF are limited by certain
applicable earnings. Such deposits are Federal income tax deductions in the
year made; however, they are taxable, with interest payable from the year of
deposit, if withdrawn for general corporate purposes or other non-qualified
purposes, or upon termination of the agreement. Qualified withdrawals for
investment in vessels having adequate tax bases do not give rise to a current
tax liability, but reduce the depreciable bases of the vessels or other assets
for income tax purposes. Amounts deposited into the CCF are a preference item
for calculating Federal alternative minimum taxable income. Deposits not
committed for qualified purposes within 25 years from the date of deposit, will
be treated as non-qualified withdrawals over the subsequent five years. As of
year-end, the oldest CCF deposits date from 1991. Management believes that all
amounts on deposit in the CCF at the end of 1996 will be used or committed for
qualified purposes prior to the expiration of the applicable 25-year periods.
Under the terms of the CCF agreement, the subsidiary may designate certain
qualified earnings as `accrued deposits'' or may designate, as obligations of
the CCF, qualified withdrawals to reimburse qualified expenditures initially
made with operating funds. Such accrued deposits to and withdrawals from the
CCF are reflected on the balance sheet either as obligations of the Company's
current assets or as receivables from the CCF.
The Company has classified its investments in the CCF as "held-to-maturity"
and, accordingly, has not reflected temporary unrealized market gains and
losses on the balance sheets or statements of income. The long-term nature of
the CCF program supports the Company's intention to hold these investments to
maturity.
At December 31, 1996 and 1995, the balances on deposit in the CCF are
summarized in Table 1.
TABLE 1 (In thousands)
1996 1995
--------------------------------- ---------------------------------
Amortized Fair Unrealized Amortized Fair Unrealized
Cost Value Gain (Loss) Cost Value Gain (Loss)
--------- ----- ----------- --------- ----- -----------
Mortgage-backed securities..... $ 84,642 $ 80,871 $(3,771) $ 95,156 $ 91,132 $(4,024)
Cash and cash equivalents...... 92,318 92,318 - 215,823 215,856 33
Accrued deposits............... 1,656 1,656 - 6,233 6,233 -
-------- -------- ------- -------- -------- -------
Total.......................... $178,616 $174,845 $(3,771) $317,212 $313,221 $(3,991)
======== ======== ======== ======== ======== =======
Fair value of the mortgage-backed securities ("MBS") was determined by an
outside investment management company, based on the experience of trading
identical or substantially similar securities. No central exchange exists for
these securities; they are traded over-the-counter.
At the end of 1996, the fair value of the Company's investments in MBS is less
than amortized cost due to interest rate sensitivity inherent in the fair
value determination of such securities. While an unrealized market loss
exists, the Company intends to hold these investments to maturity, which ranges
from 1997 through 2024. The MBS have a weighted average life of approximately
six years. The Company earned $6,838,000 in 1996, $7,655,000 in 1995 and
$8,292,000 in 1994 on its investments in MBS.
Fair values of the remaining CCF investments were based on quoted market
prices, if available. If a quoted market price was not available, fair value
was estimated using quoted market prices of similar securities and investments.
These remaining investments mature in 1997.
During 1996 and 1995, there were no sales of securities classified as "held-to-
maturity" included in the CCF.
5. EMPLOYEE BENEFIT PLANS
Total contributions to the multi-employer pension plans covering personnel in
shoreside and seagoing bargaining units were $5,552,000 in 1996, $5,903,000 in
1995 and $8,216,000 in 1994. Union collective bargaining agreements provide
that total employer contributions during the terms of the agreements must be
sufficient to meet the normal costs and amortization payments required to be
funded during those periods. Contributions are generally based on union labor
used or cargo handled or carried. A portion of such contributions is for
unfunded accrued actuarial liabilities of the plans being funded over periods
of 25 to 40 years, which began between 1967 and 1976.
The multi-employer plans are subject to the plan termination insurance
provisions of the Employee Retirement Income Security Act of 1974, as amended,
and are paying premiums to the Pension Benefit Guarantee Corporation (PBGC).
The statutes provide that an employer which withdraws from or significantly
reduces its contribution obligation to a multi-employer plan generally will be
required to continue funding its proportional share of the plan's unfunded
vested benefits.
Under special rules approved by the PBGC and adopted by the longshore plan in
1984, the Company could cease Pacific Coast cargo-handling operations
permanently and stop contributing to the plan without any withdrawal liability,
provided that the plan meets certain funding obligations as defined in the
plan. The estimated withdrawal liabilities under the Hawaii longshore plan and
the seagoing plans aggregated approximately $6,400,000 for various plan years
ending in 1996 and 1995. Management has no present intention of withdrawing
from and does not anticipate termination of any of the aforementioned plans.
The net pension cost (benefit) and components for 1996, 1995 and 1994, of
single-employer defined benefit pension plans, which cover substantially all
other employees, were as follows:
1996 1995 1994
---- ---- ----
(In thousands)
Service cost--benefits earned
during the year ....................... $ 6,326 $ 6,210 $ 7,317
Interest cost on projected benefit
obligation ............................ 23,295 21,785 20,542
Actual return on plan assets.............. (47,980) (78,713) 3,719
Net amortization and deferral............. 14,599 50,298 (29,062)
Curtailments and terminations ............ (779) (1,761) 1,300
------- -------- --------
Net pension cost (benefit) ............... $ (4,539) $ (2,181) $ 3,816
======== ======== ========
The funded status of the single-employer plans at December 31, 1996 and 1995
was as follows:
1996 1995
---- ----
(In thousands)
Actuarial present value of benefit obligation:
Vested benefits ......................... $ 284,755 $ 241,422
Non-vested benefits ..................... 8,415 9,881
--------- ---------
Accumulated benefit obligation .......... 293,170 251,303
Additional amounts related to projected
compensation levels................... 32,925 34,276
--------- ---------
Projected benefit obligation ............ 326,095 285,579
Plan assets at fair value................... 380,909 348,208
--------- ---------
Excess of plan assets over
projected benefit obligation............. (54,814) (62,629)
Prior service costs to be recognized in
future years ............................ (3,518) (3,739)
Unrecognized actuarial net gain............. 59,119 75,759
Unrecognized net asset at
January 1, 1987 (being amortized over
periods of 4 to 15 years) ............... 2,864 3,954
--------- ---------
Accrued pension liability................... $ 3,651 $ 13,345
========= =========
At December 31, 1996 and 1995, the projected benefit obligation was determined
using a discount rate of 7.5% and 8%, respectively, and assumed increases in
future compensation levels of 4.5% and 5%, respectively. The expected long-
term rate of return on assets was 9% for 1996 and 1995. The assets of the
plans consist principally of listed stocks and bonds.
Contributions are determined annually for each plan by the Company's pension
administrative committee, based upon the actuarially determined minimum
required contribution under ERISA and the maximum deductible contribution
allowed for tax purposes. For the plans covering employees who are members of
collective bargaining units, the benefit formulas are determined according to
the collective bargaining agreements, either using career average pay as the
base or a flat dollar amount per year of service. The benefit formulas for the
remaining defined benefit plans are based on final average pay.
The Company has non-qualified supplemental pension plans covering certain
employees and retirees, which provide for incremental pension payments from the
Company's general funds so that total pension benefits would be substantially
equal to amounts that would have been payable from the Company's qualified
pension plans if it were not for limitations imposed by income tax regulations.
The projected benefit obligation, included with other non-current liabilities,
relating to these unfunded plans, totaled $9,844,000 and $8,680,000 at December
31, 1996 and 1995, respectively.
6. POST-RETIREMENT BENEFIT PLANS
The Company has plans that provide certain retiree health care and life
insurance benefits to substantially all salaried and to certain hourly
employees. Employees are generally eligible for such benefits upon retirement
and completion of a specified number of years of credited service. The Company
does not pre-fund these benefits and has the right to modify or terminate
certain of these plans in the future. Certain groups of retirees pay a portion
of the benefit costs.
The net periodic cost for post-retirement health care and life insurance
benefits during 1996, 1995 and 1994 included the following:
1996 1995 1994
---- ---- ----
(In thousands)
Service cost........................... $ 1,351 $ 1,512 $ 2,149
Interest cost.......................... 6,605 7,031 7,825
Net amortization....................... (2,016) (1,524) (216)
Curtailment gain....................... (2,476) (2,045) -
-------- ------- --------
Post-retirement benefit cost........... $ 3,464 $ 4,974 $ 9,758
======== ======= ========
The unfunded accumulated post-retirement benefit obligation at December 31,
1996 and 1995 is summarized below:
1996 1995
---- ----
(In thousands)
Accumulated post-retirement benefit obligation:
Retirees .................................. $ 54,951 $ 56,606
Fully-eligible active plan participants ... 10,865 9,073
Other active plan participants ............ 27,780 25,373
Unrecognized prior service cost ........... 3,643 5,676
Unrecognized net gain ..................... 24,518 26,862
-------- --------
Total ................................... 121,757 123,590
Current obligation........................... 5,710 5,118
-------- --------
Non-current obligation....................... $116,047 $118,472
======== ========
At December 31, 1996 and 1995, the weighted average discount rates used in
determining the accumulated post-retirement benefit obligations were 7.5% and
8%, respectively, and the assumed health care cost trend rate used in measuring
the accumulated post-retirement benefit obligation was 10% through 2001,
decreasing to 5% thereafter. If the assumed health care cost trend rate were
increased by one percentage point, the accumulated post-retirement benefit
obligation as of December 31, 1996 and 1995 would have increased by
approximately $11,105,000 and $10,405,000, respectively, and the net periodic
post-retirement benefit cost for 1996 and 1995 would have increased by
approximately $1,208,000 and $1,190,000, respectively.
7. LONG-TERM DEBT, CREDIT AGREEMENTS
At December 31, 1996 and 1995, long-term debt consisted of the following:
1996 1995
---- ----
(In thousands)
Commercial paper, 5.33%-5.70%............. $ 225,632 $ 246,437
Bank variable rate loans (1996 high 6.38%,
low 5.50%) due after 1996 ............. 22,000 40,000
Term loans:
7.19%, payable through 2007 ............ 75,000 75,000
8%, payable through 2000 . ............. 37,500 47,500
9.05%, payable through 1999 ............ 21,285 27,201
9.8%, payable through 2004 ............. 16,667 18,750
9%, payable through 1999 .. ............ 15,882 21,176
7.43%, payable through 2007 ............ 15,000 -
7.65%, payable through 2001 ............ 10,000 10,000
11.78%, payable through 1997 ........... 618 1,269
Limited partnership subscription notes,
no interest, repaid in 1996 ............ - 850
--------- ---------
Total .................................. 439,584 488,183
Less current portion ................... 31,966 24,794
Commercial paper classified as current . 62,000 83,000
--------- ---------
Long-term debt ......................... $ 345,618 $ 380,389
========= =========
VARIABLE RATE LOANS: The Company and a subsidiary have a revolving credit and
term loan agreement with five commercial banks, whereby they may borrow up to
$155,000,000, under revolving loans to November 30, 1998, at varying rates of
interest. Any revolving loan outstanding on that date may be converted into a
term loan, which would be payable in 16 equal quarterly installments. The
agreement contains certain restrictive covenants, the most significant of which
requires the maintenance of an interest coverage ratio of 2:1. At December 31,
1996 and 1995, $15,000,000 and $10,000,000, respectively, were outstanding
under this agreement.
The Company and a subsidiary have an uncommitted $45,000,000 short-term
revolving credit agreement with a commercial bank. The agreement extends to
November 30, 1997, but may be canceled by the bank at any time. At
December 31, 1996 and 1995, $7,000,000 and $17,000,000, respectively, were
outstanding under this agreement.
The Company and a subsidiary have an uncommitted $25,000,000 revolving credit
agreement with a commercial bank. The agreement extends to July 18, 1997. At
December 31, 1996, there were no amounts outstanding under this agreement. At
December 31, 1995, $13,000,000 was outstanding.
During 1995, a subsidiary entered into a $50,000,000 one-year Revolving Credit
Agreement to replace two previous credit facilities. Up to $25,000,000 of this
agreement serves as a commercial paper liquidity back-up line, with the balance
available for general corporate funds. At December 31, 1996 and 1995, there
were no amounts outstanding under this agreement.
TERM LOAN: The Company and a subsidiary have a shelf facility under which they
may borrow up to $50,000,000 in $5,000,000 term loan increments. At December
31, 1996, $15,000,000 had been borrowed.
COMMERCIAL PAPER: At December 31, 1996, there were two commercial paper
programs. The first program was used by a subsidiary to finance the
construction of a vessel, which was delivered in 1992. At December 31, 1996,
$149,632,000 of commercial paper notes was outstanding under this program.
Maturities ranged from 6 to 66 days. The borrowings outstanding under this
program are classified as long-term, because the subsidiary intends to continue
the program indefinitely and eventually to repay the borrowings with qualified
withdrawals from the Capital Construction Fund.
The second commercial paper program is used by a subsidiary to fund the
purchases of sugar inventory from Hawaii sugar growers and to provide working
capital for sugar refining and marketing operations. At December 31, 1996,
$76,000,000 of commercial paper notes was outstanding under this program.
Maturities ranged from 7 to 51 days. The interest cost and certain fees on the
borrowings relating to sugar inventory advances to growers are reimbursed by
the growers. Of the total commercial paper borrowing outstanding at
December 31, 1996, $62,000,000 was classified as current. The commercial paper
is supported by a $100,000,000 backup revolving credit facility with six
commercial banks. Both the commercial paper program and the backup facility
are guaranteed by the subsidiary's parent and by the Company.
In 1995, the Company repaid the outstanding commercial paper notes of a third
program which had been used to finance container purchases of the discontinued
container leasing business.
LONG-TERM DEBT MATURITIES: At December 31, 1996, maturities and planned
prepayments of all long-term debt during the next five years totaled
$31,966,000 for 1997, $24,453,000 for 1998, $32,616,000 for 1999, $19,583,000
for 2000 and $17,083,000 for 2001.
8. LEASES
THE COMPANY AS LESSEE: Various subsidiaries of the Company lease a vessel and
certain land, buildings and equipment under both capital and operating leases.
Capital leases include one vessel leased for a term of 25 years ending in 1998;
containers, machinery and equipment for terms of 5 to 12 years expiring through
1997; and a wastewater treatment facility in California, the title to which
will revert to a subsidiary in 2002. Principal operating leases cover office
and terminal facilities for periods which expire between 1997 and 2026.
Management expects that in the normal course of business, most operating leases
will be renewed or replaced by other similar leases.
Rental expense under operating leases totaled $50,869,000, $46,680,000 and
$48,169,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Contingent rents and income from sublease rents were not significant.
Assets recorded under capital lease obligations and included in property at
December 31, 1996 and 1995 were as follows:
1996 1995
---- ----
(In thousands)
Vessel ............................................. $ 55,253 $55,253
Machinery and equipment............................. 42,468 42,688
-------- -------
Total............................................ 97,721 97,941
Less accumulated amortization....................... 90,462 84,813
-------- -------
Property under capital leases--net ................. $ 7,259 $13,128
======== =======
Future minimum payments under all leases and the present value of minimum
capital lease payments as of December 31, 1996 were as follows:
Capital Operating
Leases Leases
------ ------
(In thousands)
1997................................................ $ 14,603 $25,186
1998................................................ 11,089 24,252
1999................................................ 609 16,203
2000................................................ 578 13,394
2001................................................ 547 12,206
Thereafter.......................................... 516 101,866
-------- -------
Total minimum lease payments........................ 27,942 $193,107
========
Less amount representing interest................... 3,787
--------
Present value of future minimum payments............ 24,155
Less current portion................................ 12,116
--------
Long-term obligations at December 31, 1996.......... $ 12,039
========
A subsidiary is obligated to pay terminal facility rent equal to the principal
and interest on Special Facility Revenue Bonds issued by the Department of
Transportation of the State of Hawaii. Interest on the bonds is payable semi-
annually and principal, in the amount of $16,500,000, is due in 2013. An
accrued liability of $7,713,000 and $7,170,000 at December 31, 1996 and 1995,
respectively, included in other long-term liabilities, provides for a pro-rata
portion of the principal due on these bonds.
THE COMPANY AS LESSOR: Various Company subsidiaries lease land, buildings and
land improvements under operating leases. The historical cost of and
accumulated depreciation on leased property at December 31, 1996 and 1995 were
as follows:
1996 1995
---- ----
(In thousands)
Leased property..................................... $246,802 $246,609
Less accumulated amortization....................... 42,722 37,555
-------- --------
Property under operating leases--net................ $204,080 $209,054
======== ========
Total rental income under these operating leases for the three years ended
December 31, 1996 was as follows:
1996 1995 1994
---- ---- ----
(In thousands)
Minimum rentals............................. $34,556 $28,164 $31,792
Contingent rentals (based on sales volume).. 1,232 880 1,515
------- ------- -------
Total.................................. $35,788 $29,044 $33,307
======= ======= =======
Future minimum rental income on non-cancelable leases at December 31, 1996 was
as follows:
Operating
Leases
------------
(In thousands)
1997...................................... $ 28,860
1998...................................... 20,903
1999...................................... 17,059
2000...................................... 13,353
2001 ..................................... 10,898
Thereafter................................ 114,939
---------
Total .................................. $ 206,012
=========
9. INCOME TAXES
The income tax expense for the three years ended December 31, 1996 consisted of
the following:
1996 1995 1994
---- ---- ----
(In thousands)
Current:
Federal................................ $23,549 $(23,833) $29,796
State.................................. 4,779 403 1,444
------- -------- -------
Total ............................... 28,328 (23,430) 31,240
Deferred.................................. 10,420 42,965 1,412
------- -------- -------
Income tax expense ....................... $38,748 $ 19,535 $32,652
======= ======== =======
Total income tax expense for the three years ended December 31, 1996 differs
from amounts computed by applying the statutory Federal rate to pre-tax income,
for the following reasons:
1996 1995 1994
---- ---- ----
(In thousands)
Computed income tax expense............... $36,412 $18,184 $33,821
Increase (decrease) resulting from:
State tax on income, less applicable
Federal tax.......................... 2,605 326 1,332
Low-income housing credits............. (1,219) (1,224) (1,219)
Fair market value over cost of
donations............................ (11) - (2,138)
Other-net.............................. 961 2,249 856
------- ------- -------
Income tax expense ................. $38,748 $19,535 $32,652
======= ======= =======
The tax effects of temporary differences that give rise to significant portions
of the net deferred tax liability at December 31, 1996 and 1995 were as
follows:
1996 1995
---- ----
(In thousands)
Capital Construction Fund........................... $159,304 $166,649
Accelerated depreciation............................ 123,575 130,456
Tax-deferred gains on real estate transactions...... 73,890 69,585
Unrealized holding gains on securities.............. 27,625 23,664
Post-retirement benefits............................ (49,398) (47,813)
Insurance reserves.................................. (6,791) (6,766)
Alternative minimum tax benefits.................... (3,905) (14,264)
Other-net........................................... 8,905 (2,571)
-------- --------
Total............................................ $333,205 $318,940
======== ========
The Internal Revenue Service (IRS) has completed its audits of the Company's
tax returns through 1991 and, with one exception, has settled all substantive
issues raised during the audits. No settlement had a material effect on the
Company's financial position or results of operations. The Company is
contesting the remaining issue, which relates to the classification of cross
border lease transactions. The IRS has commenced an audit of the Company's
tax returns for 1992 through 1995. Management believes that the ultimate
resolution of the outstanding audit issue and other matters which may result
from the current audits will not have a material effect on the Company's
financial position or results of operations.
10. CAPITAL STOCK AND STOCK OPTIONS
The Company has a stock option plan ("1989 Plan") under which key employees may
be granted stock purchase options and stock appreciation rights. A second
stock option plan for key employees terminated in 1993, but shares previously
granted under the plan are still exercisable. Under the 1989 Plan, option
prices may not be less than the fair market value of a share of the Company's
common stock on the dates of grant, and each option generally becomes
exercisable in-full one year after the date granted. Payment for options
exercised, to the extent not reduced by the application or surrender of stock
appreciation rights, may be made in cash or in shares of the Company's stock.
If payment is made in shares of the Company's stock, the option holder may
receive, under a reload feature of the 1989 Plan, a new stock option grant for
the number of shares equal to that surrendered, with an option price not less
than the fair market value of the Company's stock on the date of exercise.
During 1996, 471,264 new options were granted under the 1989 Plan, including
40,489 reload options.
The 1989 Plan also permits issuance of shares of the Company's common stock as
a reward for past service rendered to the Company or one of its subsidiaries or
as an incentive for future service with such entities. The recipients'
interest in such shares may be fully vested upon issuance or may vest in one or
more installments, upon such terms and conditions as are determined by the
committee which administers the plan. The number of incentive shares issued
during 1996 or outstanding at the end of the year was not material.
The Company also has a Directors' stock option plan, under which each non-
employee Director of the Company, elected at an Annual Meeting of Shareholders,
is automatically granted, on the date of each such Annual Meeting, an option to
purchase 3,000 shares of the Company's common stock at the average fair market
value of the shares for the five consecutive trading days prior to the grant
date. Each option becomes exercisable six months after the date granted.
During 1996, 24,000 new options were granted and no options were canceled or
exercised. At December 31, 1996, 186,000 options were outstanding under the
plan.
The Company applies Accounting Principles Board Opinion Number 25, "Accounting
for Stock Issued to Employees," and related Interpretations in accounting for
its stock-based compensation plans. Accordingly, no compensation cost is
recognized in the Company's income statement for stock option plans at the time
grants are awarded. If the compensation costs for the 1989 Plan had been
determined consistent with Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," the after-tax cost for grants made
in 1996 and 1995 would have been approximately $900,000 and $1.3 million,
respectively. Earnings per share for 1996 and 1995 would have declined by
$0.02 and $0.03, respectively. The potential impact of the Director's stock
option plan was immaterial.
Changes in shares under all option plans, for the three years ended
December 31, 1996, were as follows:
Price Range
Shares Per Share
------ ---------
1994: Granted............................. 475,200 $24.700-27.000
Exercised........................... (12,300) 17.375-24.750
Canceled............................ (55,996) 24.250-36.250
--------
Outstanding, December 31............ 2,444,032 17.375-37.875
1995: Granted............................. 551,800 21.750-22.500
Exercised........................... (23,550) 17.375-24.750
Canceled............................ (385,531) 24.250-36.250
--------
Outstanding, December 31............ 2,586,751 17.375-37.875
1996: Granted............................. 495,264 21.750-32.625
Exercised........................... (125,188) 17.375-24.750
Canceled............................ (15,800) 24.250-36.250
---------
Outstanding, December 31
(2,510,252 exercisable) .......... 2,941,027 $17.375-37.875
=========
Options outstanding at December 31, 1996 include 48,916 shares that carry stock
appreciation rights which expire in January 1997. The outstanding options do
not have a material dilutive effect in the calculation of earnings per share of
common stock.
The Company has a Shareholder Rights Plan, designed to protect the interests of
shareholders in the event an attempt is made to acquire the Company. The
rights initially will trade with the Company's outstanding common stock and
will not be exercisable absent certain acquisitions or attempted acquisitions
of specified percentages of such stock. If exercisable, the rights generally
entitle shareholders to purchase additional shares of the Company's stock or
shares of an acquiring company's stock at prices below market value.
11. RELATED PARTY TRANSACTIONS, COMMITMENTS AND CONTINGENCIES
At December 31, 1996, the Company and its subsidiaries had an unspent balance
of total appropriations for capital expenditures of approximately $46,688,000.
However, there is no contractual obligation to spend this entire amount.
The Company has arranged for standby letters of credit of approximately
$20,689,000, necessary to qualify as a self-insurer for state and federal
workers' compensation liabilities. The Company also has other letters of
credit outstanding for normal operating matters which total approximately
$4,701,000.
A subsidiary is a party, acting as the steam host, to a Steam Purchase
Agreement with a developer which constructed and operates a cogeneration
facility contiguous to the subsidiary's California refinery. The agreement
provides that, during the 30-year period of the agreement, the subsidiary will
receive steam necessary for refinery operations at a reduced price, compared to
the market price of fuel which previously had to be purchased to generate its
steam requirements.
A subsidiary is party to a long-term sugar supply contract with Hawaiian
Sugar & Transportation Cooperative (HSTC), a raw sugar marketing and
transportation cooperative owned by the Company and by the other Hawaii sugar
growers. Under the terms of this contract, the subsidiary is obligated to
purchase, and HSTC is obligated to sell, all of the raw sugar delivered to HSTC
by the Hawaii sugar growers, at prices determined by the quoted domestic sugar
market. The subsidiary made purchases of raw sugar totaling $190,196,000 and
$158,284,000 under the contract during 1996 and 1995, respectively. The
contract also requires that the subsidiary provide cash advances to HSTC prior
to the physical receipt of the sugar at its refinery (see Note 7). Such
advances are determined by the estimated raw sugar market prices. Amounts due
to HSTC are credited against outstanding advances to HSTC upon delivery of raw
sugar to the subsidiary's refinery.
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.
12. INDUSTRY SEGMENTS
Industry segment information for 1996, 1995 and 1994, on page 26, is
incorporated herein by reference. Segments are:
Ocean transportation -- carrying freight between various U.S. and Canadian West
Coast, Hawaii and other Pacific ports, and providing terminal services.
Property development and management -- developing, managing and selling
residential, commercial and industrial properties.
Food products -- growing, processing and marketing sugar, molasses and coffee,
and generating and selling electricity.
As discussed in Note 2, the net assets of the container leasing segment were
sold in 1995.
13. SUBSEQUENT EVENT
On February 13, 1997, a subsidiary received $33,650,000 in settlement of a
lawsuit that involved insurance claims over damage to the subsidiary's port
facilities resulting from the October 1989 Loma Prieta earthquake. After
satisfying terminal repair costs and litigation expenses of approximately
$12,600,000, the Company, through its subsidiaries, will record approximately
$21,000,000 of pre-tax income in the first quarter of 1996. After taxes, this
will add about $13,000,000, or $0.29 per share, to net income during that
period.
DIRECTORS AND OFFICERS
Alexander & Baldwin, Inc.
Directors
MICHAEL J. CHUN (53)*
President, The Kamehameha Schools
(educational institution)
JOHN C. COUCH (57)
Chairman of the Board, President and Chief Executive Officer,
Alexander & Baldwin, Inc.
Chairman of the Board and
Chief Executive Officer
A&B-Hawaii, Inc.
Chairman of the Board,
Matson Navigation Company, Inc.
LEO E. DENLEA, JR. (65)*
Chairman of the Board, President
and Chief Executive Officer,
Farmers Group, Inc. (insurance)
WALTER A. DODS, JR. (55)*
Chairman of the Board and
Chief Executive Officer,
First Hawaiian, Inc.
Chairman of the Board and
Chief Executive Officer,
First Hawaiian Bank (banking)
CHARLES G. KING (51)**
President, King Auto Center
(automobile dealership)
CARSON R. McKISSICK (64)*
Managing Director,
The Corporate Development Company (financial advisory services)
C. BRADLEY MULHOLLAND (55)
President and Chief Executive Officer, Matson Navigation Company, Inc.
ROBERT G. REED III (69)**
Independent business consultant
MARYANNA G. SHAW (58)*
Private investor
CHARLES M. STOCKHOLM (64)**
Managing Director,
Trust Company of the West
(investment management services)
R. J. PFEIFFER (77)
Chairman Emeritus of the Board,
Alexander & Baldwin, Inc.
Chairman Emeritus of the Board,
A&B-Hawaii, Inc.
Chairman Emeritus of the Board,
Matson Navigation Company, Inc.
Advisory Director
ALEXANDER C. WATERHOUSE (85)
Vice Chairman,
Waterhouse Properties, Inc.
(private investments)
* Audit Committee Members
** Compensation and Stock Option Committee Members
All positions as of December 31, 1996
All ages as of March 31, 1997
Alexander & Baldwin, Inc.
Officers
JOHN C. COUCH (57)
Chairman of the Board, President and Chief Executive Officer
MEREDITH J. CHING (40)
Vice President (Government & Community Relations)
JOHN B. KELLEY (51)
Vice President (Investor Relations)
MILES B. KING (49)
Vice President and Chief Administrative Officer
MICHAEL J. MARKS (58)
Vice President, General Counsel and Secretary
GLENN R. ROGERS (53)
Vice President, Chief Financial Officer and Treasurer
ROBERT K. SASAKI (56)
Vice President (Properties)
JUDITH A. WILLIAMS (53)
Vice President (Corporate Planning & Development)
THOMAS A. WELLMAN (38)
Controller
A&B-Hawaii, Inc.
Officers
JOHN C. COUCH (57)
Chairman of the Board and Chief Executive Officer
W. ALLEN DOANE (49)
President and Chief Operating Officer
RICHARD F. CAMERON (64)
Senior Vice President (Agribusiness)
G. STEPHEN HOLADAY (52)
Senior Vice President (Asst. Plantation Manager)
MILES B. KING (49)
Senior Vice President (Industrial Relations)
DAVID G. KONCELIK (55)
Senior Vice President (President and Chief Executive Officer,
California and Hawaiian Sugar Company, Inc.)
MICHAEL J. MARKS (58)
Senior Vice President and General Counsel
GLENN R. ROGERS (53)
Senior Vice President, Chief Financial Officer and Treasurer
ROBERT K. SASAKI (56)
Senior Vice President (Properties)
NORBERT M. BUELSING (46)
Vice President (Property Management)
MEREDITH J. CHING (40)
Vice President (Government & Community Relations)
KEITH A. GOTO (53)
Vice President (Labor Relations)
JOHN B. KELLEY (51)
Vice President
STANLEY M. KURIYAMA (43)
Vice President (Land Planning & Entitlements)
THOMAS A. WELLMAN (38)
Vice President and Controller
JUDITH A. WILLIAMS (53)
Vice President (Corporate Planning & Development)
ALYSON J. NAKAMURA (31)
Secretary
Matson Navigation Company, Inc.
Officers
JOHN C. COUCH (57)
Chairman of the Board
C. BRADLEY MULHOLLAND (55)
President and Chief Executive Officer
RAYMOND J. DONOHUE (60)
Senior Vice President and Chief Financial Officer
MILES B. KING (49)
Senior Vice President (Human Resources)
GARY J. NORTH (52)
Senior Vice President (Operations)
(President and Chief Operating Officer, Matson Terminals, Inc.)
KEVIN C. O'ROURKE (50)
Senior Vice President and General Counsel
PAUL E. STEVENS (44)
Senior Vice President (Marketing)
RICHARD S. BLISS (58)
Vice President
(Area Manager, Hawaii)
ROBERT L. DAWDY (52)
Vice President (West Coast Operations)
BRANTON B. DREYFUS (43)
Vice President
(Area Manager, Southern California)
JOHN C. GOSLING (60)
Vice President (Engineering)
PHILIP M. GRILL (49)
Vice President (Government Relations)
DALE B. HENDLER (43)
Vice President (Information Services)
MERLE A. K. KELAI (65)
Vice President (Community Relations and Government Affairs)
RONALD H. ROTHMAN (55)
Vice President (Industrial Relations)
MICHAEL J. MARKS (58)
Secretary
TIMOTHY H. REID (50)
Treasurer
JOSEPH A. PALAZZOLO (48)
Controller
[Photo caption: Board of Directors (from left to right): John C. Couch, Leo
E. Denlea, Jr., C. Bradley Mulholland, Michael J. Chun, Maryanna G. Shaw,
Alexander G. Waterhouse, Charles M. Stockholm (back), R. J. Pfeiffer (front),
Carson R. McKissick, Charles G. King, Walter A. Dods, Jr., Robert G. Reed III.
Behind the directors are photos of A&B's founders, Samuel T. Alexander (center
left) and Henry P. Baldwin (center right), and their first partners, Wallace M.
Alexander (far left) and Joseph P. Cooke (far right). Wallace M. Alexander and
Joseph P. Cooke also were the son and nephew, respectively, of Samuel T.
Alexander.]
PARENT COMPANY, PRINCIPAL SUBSIDIARIES AND AFFILIATES1
ALEXANDER & BALDWIN, INC. Honolulu, Hawaii
A&B-HAWAII, INC. (Honolulu, Hawaii)
Division: Hawaiian Commercial & Sugar Company Puunene, Maui
Subsidiaries:
A&B Development Company (California) San Francisco
A&B Properties, Inc. Honolulu
California and Hawaiian Sugar Company, Inc. Crockett, California
East Maui Irrigation Company, Limited Puunene, Maui
McBryde Sugar Company, Limited Eleele, Kauai
Subsidiary: Island Coffee Company, Inc. Eleele, Kauai
Kahului Trucking & Storage, Inc. Kahului, Maui
Kauai Commercial Company, Incorporated Puhi, Kauai
MATSON NAVIGATION COMPANY, INC. (San Francisco, California)
Subsidiaries:
Matson Intermodal System, Inc. San Francisco
Matson Services Company, Inc. San Francisco
Matson Terminals, Inc. San Francisco
HAWAIIAN SUGAR & TRANSPORTATION COOPERATIVE2 (Crockett, California)
1 Wholly owned unless otherwise indicated
2 A cooperative owned with other Hawaii sugar companies
INVESTOR INFORMATION
ANNUAL MEETING
The Annual Meeting of Shareholders will be held in the Plaza Meeting Room on
the ground floor of Amfac Center, 745 Fort Street, Honolulu, Hawaii at 10 a.m.
on Thursday, April 24, 1997.
INVESTOR INFORMATION
Shareholders having questions about A&B are encouraged to write to John C.
Couch, Chairman of the Board, President and Chief Executive Officer; or Michael
J. Marks, Vice President, General Counsel and Secretary.
Inquiries from professional investors may be directed to John B. Kelley, Vice
President, Investor Relations. Phone (808) 525-8422 E-mail: jbkell@aloha.net
FORM 10-K
Shareholders may obtain a copy of the Company's Annual Report on Form 10-K, as
filed with the Securities and Exchange Commission, without charge, by writing
to Michael J. Marks, Vice President, General Counsel and Secretary, Alexander &
Baldwin, Inc., P.O. Box 3440, Honolulu, HI 96801-3440.
TRANSFER AGENT & REGISTRAR
CHASE MELLON SHAREHOLDER SERVICES
San Francisco, California and New York, New York
For questions regarding stock certificates or dividends, representatives of the
Transfer Agent may be reached at 1-800-356-2017 between 8 a.m. and 8 pm.,
Eastern Time.
AUDITORS
DELOITTE & TOUCHE LLP
Honolulu, Hawaii