EXHIBIT 13
Alexander & Baldwin, Inc. 1997 Annual Report Hawaii and Beyond
"Hawaii has always presented special challenges, as well as unique
opportunities, for those wishing to do business here. Over time, but especially
in today's increasingly dynamic global economy, the arena in which Hawaii
competes is becoming larger, and the standards it must meet are being raised
constantly by competitors we don't even know...
[Photo caption: On the cover: A&B's operations, in Hawaii and beyond, are
symbolized by the intense beauty of the Hawaiian Islands and the Pacific Ocean,
as seen from a NASA satellite. Hawaii's islands are unique, geographically
remote and remain at the center of A&B's increasingly diversified business
portfolio. Photo courtesy of NASA.]
[Photo caption: Facing page: Providing for a new type of visitor, the stunning
new Hawaii Convention Center is in "soft opening" status early in 1998. With
200,000 square feet of exhibit space, this state-of-the-art center leads the
renewal of Waikiki, the heart of Hawaii's visitor industry.]
Managing a diverse portfolio of outstanding properties on the Mainland, adding
new shipping routes in the Pacific, selling high-quality, branded sugar
products throughout the Western states and premium estate-grown coffee in Japan
and on the Mainland - A&B is stretching beyond its Hawaii roots for earnings
growth and diversity."
John C. Couch
Chairman of the Board,
President and Chief Executive Officer
Alexander & Baldwin, Inc.
[Photo caption: Selective real estate investment beyond Hawaii's shores is
illustrated by the Island Village Shopping Center, in Bainbridge Island, Wash.
With the Northwest economy growing steadily, this and other Company
investments in the area continue to increase in value.]
CORPORATE PROFILE
Contents
Corporate Profile 4
Financial Highlights 4
Letter to Shareholders 5
Review of Operations 10
Financial Report 21
Quarterly Results 41
General Information 41
Directors and Officers 42
Alexander & Baldwin, Inc. is a diversified corporation with most of its
operations centered on Hawaii. Its principal businesses are:
OCEAN TRANSPORTATION
Carrying freight, primarily between Pacific Coast ports, Hawaii ports and Guam
Conducting related shoreside operations
Arranging domestic intermodal transportation
PROPERTY DEVELOPMENT & MANAGEMENT
Developing real property, primarily in Hawaii
Selling residential and commercial property
Managing a portfolio of commercial properties
FOOD PRODUCTS
Growing sugar cane and producing raw sugar
Refining raw sugar, marketing and distributing refined sugar products
Growing, marketing and distributing coffee
Alexander & Baldwin was founded in 1870 and incorporated in 1900. A&B's
corporate headquarters are located in Honolulu, Hawaii. Its common stock is
traded on the NASDAQ Stock MarketSM under the symbol ALEX.
Financial Highlights
1997 1996 Change
Revenue $1,275,445,000 $1,239,810,000 3%
Net Income $ 81,387,000 $ 65,285,000 25%
Per Share $ 1.80 $ 1.44 25%
Cash Dividends $ 39,789,000 $ 39,860,000 -0.2%
Per Share $ 0.88 $ 0.88 -
Average Shares Outstanding 45,182,000 45,303,000 -0.3%
Total Assets $1,704,798,000 $1,796,115,000 -5%
Shareholders' Equity $ 719,588,000 $ 684,328,000 5%
Per Share $ 16.03 $ 15.09 6%
Return on Beginning
Shareholders' Equity 11.9% 10.0% -
Current Ratio 1.7 to 1 1.4 to 1 -
Debt/Debt + Equity 0.32 to 1 0.40 to 1 -
Employees 2,930 2,960 -1%
A&B OPERATING PROFIT BY SEGMENT (In thousands)
Reference: Industry Segment Information (pg. 24)
1992 $113,460
1993 $147,788
1994 $141,729
1995 $100,125
1996 $150,883
1997 $167,893
LETTER TO SHAREHOLDERS
SHARES OUTSTANDING
(At year-end, in thousands)
1992 46,333
1993 46,404
1994 45,691
1995 45,280
1996 45,339
1997 44,881
[Photo caption: John C. Couch, Chairman of the Board, President and Chief
Executive Officer, Alexander & Baldwin, Inc.]
A&B did well in 1997. We made significant progress in a number of areas,
although overall profitability levels still fell short of our goals. Total
sales grew to a record level. Net income was the highest in six years.
Shareholders' equity rose to a new high and total debt was reduced to the
lowest level in eight years. The Company paid out 49 percent of its earnings
in dividends, and continued the share repurchase program that has resulted in
the retirement of 2 million shares since it began four years ago.
The persistent weakness of the Hawaii economy-the primary market for our major
business segments-again proved to be a major obstacle to greater success.
Nevertheless, we continued to benefit from the strategy of building on the
strengths of our core businesses and expanding those businesses beyond Hawaii.
That increasing geographic diversification contributed significantly to the
success we did achieve.
There were few surprises in 1997. It was the seventh consecutive year in which
there was little or no growth in the Hawaii economy. That stagnation only
reinforced our commitment to continue seeking expansion opportunities beyond
the State. The strength of our core ocean transportation, real estate and food
products businesses has permitted us to edge out into other markets over the
past few years. By so doing, we have broadened our revenue base and enhanced
the Company's earnings potential. In 1997, nearly 60 percent of total revenue
was generated by business activities outside Hawaii. Those activities included
the operations of various A&B subsidiaries which provide Guam and Pacific Coast
shipping services, stevedoring and marine terminal services in U.S. West Coast
ports, and domestic intermodal transportation services. They also include the
Company's income property portfolio, and sugar refining and distribution
activities on the Mainland.
1997 Financial Results Good - Boosted by Insurance Settlement
NET INCOME
EARNINGS PER SHARE
1992 $0.41
1993 $1.45
1994 $1.62
1995 $1.23
1996 $1.44
1997 $1.80
TOTAL DEBT
(In thousands)
1990 $423,783
1991 $543,701
1992 $635,690
1993 $713,789
1994 $654,682
1995 $523,430
1996 $463,739
1997 $344,370
Even without a welcome financial boost from an insurance settlement, the
Company's earnings from continuing operations were the highest in six years.
The favorable settlement related to an insurance claim for damage to a marine
container terminal in Oakland, Calif., during the 1989 Loma Prieta earthquake.
Including reimbursed costs, interest and punitive damages, it added $20.0
million to 1997 pretax income.
Including the settlement, A&B's 1997 net income was $81.4 million, an increase
of $16.1 million, or 25 percent, from 1996's reported net income of $65.3
million. Earnings per share were $1.80 versus $1.44 in 1996.
Excluding the insurance settlement and three other beneficial, but unusual,
one-time factors, 1997 net income would be $68.3 million, which is an increase
of $9.5 million, or 16 percent, above the $58.8 million in comparable earnings
for 1996. Specifically, on an after-tax basis, the insurance settlement added
$12.5 million, or $0.28 per share in 1997. In 1996, a special charter payment
for certain vessels contributed $3.5 million, or $0.08 per share. Net income in
both 1997 and 1996 benefited from reversals of portions of a financial reserve
that was set up to cover the costs of closing a sugar plantation. (Actual
closing costs were less than expected.) These reserve reversals boosted 1997
income by $0.6 million, or $0.01 per share, and 1996 results by $2.9 million,
or $0.06 per share.
At the end of 1997, A&B's ratio of debt to total capital was 32 percent, versus
40 percent a year earlier. Cash and securities held at year-end exceeded $250
million. This improved capital structure and financial strength greatly
enhances the Company's capability to meet future investment needs.
In 1997, a net total debt repayment of $119.6 million was made. A&B's "free"
cash flow, i.e., cash flow from operations less cash used for investing, was
$133.4 million. That cash, plus $38.3 million from the Capital Construction
Fund, was used to reduce the debt, to pay out $39.8 million in dividends and to
repurchase $16.6 million in stock.
The annual dividend rate was $0.88 per share during 1997. Since the end of the
year, however, the Board raised it to $0.90 per share, or $0.225 a quarter,
effective the first quarter of 1998.
Business Segment Highlights
Foremost among the notable accomplishments of the year was the success of
Matson Navigation Company, Inc.'s (Matson's) trans-Pacific shipping alliance
with American President Lines, Ltd. (APL). The alliance completed its first
full year of operation in 1997 by exceeding forecast earnings. Started early in
1996, this alliance initially involved five ships serving the U.S. West Coast,
Hawaii, Guam and the Far East.
During 1997, there were discussions about how the alliance might be
restructured to provide better service and even better results. Agreement
subsequently was reached with APL on a new alliance structure, which will
improve Matson's competitive position in the Guam market and reduce its
operating costs. The new alliance, involving three Matson ships and three APL
ships, will serve ports in Mexico, the U.S. West Coast, Guam and the Far East.
The transition to the new fleet alignment began in January 1998.
Other Matson achievements included the continued strong growth of its inter-
modal (overland) transportation services subsidiary, Matson Intermodal System,
Inc., which increased revenue 29 percent to $96.7 million. Also, in Matson's
Pacific Coast service, the volume of loaded commercial containers carried
increased more than 50 percent. Operating between Los Angeles, Seattle and
Vancouver, B.C., this three-year-old service continues to gain additional
support from shippers seeking an alternative to rail and truck movement along
the West Coast.
Somewhat offsetting those successes were extraordinary difficulties which
continued to be encountered in West Coast ports because of labor shortages,
poor productivity due to lingering contract disputes, and congestion caused by
the Union Pacific Railroad Company's problems in Southern California. As a
result of all of these factors, cargo handling costs rose 10-15 percent above
normal levels. As the year drew to a close, industry and Company efforts to
resolve the problems began to produce better results. Improved performance is
expected in all ports during 1998.
To deal with similar issues more effectively over the long term, Matson is
planning the development of new, larger and more efficient marine terminals in
Los Angeles and Seattle, and is significantly restructuring its operations in
Oakland.
Another factor affecting Matson during the year, of course, was the lackluster
Hawaii economy, particularly the depressed construction industry, which
precluded any growth in cargo volume in Matson's core Hawaii service.
A&B-Hawaii, Inc.'s property development and management operations continued to
be strong and made a solid contribution in 1997. Again, the geographic
diversity of the Company's income properties (three million square feet under
lease in six Western states) proved beneficial. The robust Mainland economy
kept occupancy levels high, raised property values and produced some attractive
sales opportunities. An industrial property in Fremont, Calif., was sold in May
and a sale is pending on at least one other California property. All of these
sales proceeds were reinvested in other income properties to expand our
portfolio in Hawaii and on the Mainland. For example, the Company acquired a
regional shopping center in Indian Wells, Calif., early in the year in a tax-
deferred exchange under IRC Section 1031. And in Hawaii, where the soft office
market is producing excellent purchase opportunities, we acquired two small
office buildings at attractive prices. At the same time, the market for new
commercial space on Maui remained active but highly selective. Several
existing, as well as newly developed, commercial properties were sold by the
Company at favorable prices. Finally, residential property sales on Maui
proceeded at a good pace in spite of the weak economy.
During the year, we examined the possibility of establishing a real estate
investment trust, or REIT, for our income properties, but concluded that the
disadvantages outweighed the advantages at this time. The close relationship
(operational and financial) between the Company's development and leasing
activities, and the size, location and mix of our income properties, were all
factors we considered in reaching this conclusion. We intend to continue to
grow the Company's property development and leasing business in the years
ahead. To the extent a REIT structure remains an available and appropriate
option for the Company, it will be reexamined periodically.
The year's results were decidedly more mixed for our food products business
segment. California and Hawaiian Sugar Company, Inc. (C&H), our West Coast
sugar refinery, had another good year, benefiting from favorable market condi-
tions and from its new, lower-cost structure. Unfortunately, market conditions
in 1998 do not now appear as promising as they were in 1996-97.
We continue to explore possible strategic alliances for C&H that would enhance
its long-term potential. In today's rapidly changing domestic sweetener market,
alliances with other firms in the industry offer growth opportunities not now
available to C&H alone.
C&H's 1997 success was almost completely offset by extremely disappointing
results at our 37,000-acre Maui sugar plantation. Problems with a new sugarcane
variety depressed yields per acre to the point that the plantation lost money
for the first time in many years. Total production was slightly below 200,000
tons, about eight-percent below target levels. Steps now being taken should
improve that situation in the next year or two, when total annual production
again should reach 210,000-220,000 tons.
[Photo caption: After harvest, sugar cane travels on a plantation road network
to HC&S' two mills in 65-ton haulers, like this one. Bulk raw sugar then is
shipped to C&H for refining into more familiar sugar products.]
The Company's other crop, coffee grown on Kauai, did much better. Kauai Coffee
Company, Inc. produced a record harvest exceeding four million pounds, up more
than 70 percent from the prior year. That total was nearly 60 percent of the
coffee grown in the State. Increased sales in Japan and increasing support from
Mainland roasters for this new estate-grown Hawaiian coffee bode well for its
future. A new visitors' center, now under construction at our 4,000-acre
plantation on Kauai, will enhance consumer-marketing efforts when it opens this
summer.
Hawaii's Economy
STATE OF HAWAII % CHANGE IN
REAL GROSS STATE PRODUCT
1985 4.8
1986 5.4
1987 3.6
1988 5.9
1989 4.8
1990 3.4
1991 -0.4
1992 0.9
1993 0.4
1994 0.0
1995 0.5
1996 0.9
1997 0.9
While the Company continues to grow beyond Hawaii, its core business operations
remain focused on the Islands. We, therefore, are concerned about the State's
lackluster economy and the prospects for its revitalization.
Largely propelled by external events, Hawaii's economy grew at the spectacular
rate of four percent per year, on an inflation-adjusted basis, for the 30 years
following statehood in 1959. For complex reasons, little or no growth has
occurred since then. The State remains a special place, but its extraordinary
economic success during those 30 years and its remoteness did not prepare it
well to compete effectively in today's more demanding and increasingly
interconnected global economy.
Although Hawaii remains remote, it no longer is isolated from economic events
around the world. The State's lack of competitiveness in a number of areas has
contributed to its economic stagnation. For example, Hawaii has the highest
cost of doing business of all 50 states and its state and local tax burden is
one of the heaviest in the country. Excessive regulation and duplication of
services by state and county governments are other concerns. Unfortunately,
it has taken seven years of dismal economic news for many in the community to
realize that "business as usual" has been leading the State nowhere.
Last fall, the Governor formed an Economic Revitalization Task Force of leaders
from a broad cross section of the community. Over several months, the Task
Force developed recommendations for consideration by the State Legislature this
winter. Bold initiatives, ranging from substantial tax cuts to more autonomy
for the University of Hawaii, were advanced and are now being debated in the
State House and Senate. The prospects for success of these initiatives remain
uncertain, but many now believe significant change is required and that it is
time to act. Hopefully, the vigorous debate now taking place will produce some
meaningful change. I have the privilege of serving on the Governor's Task Force
and continue to work with other A&B employees and community leaders to advocate
changes that will help serve as catalysts for renewed economic growth.
At this point, however, little, if any, growth is forecast for the State's
economy in 1998. Looking ahead, we do not yet know precisely what impact the
economic troubles in Asia will have on Hawaii, but clearly they will not be
favorable.
On the other hand, there are some positive developments to point to. To cite a
few, sales of existing homes were up last year; the new Hawaii Convention
Center will open formally in June 1998 with a backlog of more than 50 bookings;
plans are being developed for lengthening the airport runways on Maui and Kauai
(to permit more direct flights to and from the Mainland and abroad); domestic
airlines have announced additional flights to the Islands; several major
government and private construction projects have been announced; and
Continental Airlines has agreed to locate a new regional maintenance facility
in Honolulu. In addition, the strength of the Mainland economy should help
boost the number of westbound visitors to the Islands.
Acknowledgements
A&B's 127th year presented its share of challenges. In spite of the adversity
faced during the year, the Company grew and became stronger financially. It is
now better positioned than ever to deal with the challenges ahead and better
prepared to take advantage of opportunities as we continue to grow with and
beyond Hawaii.
As has been the case at other times in the past, the skill, dedication and hard
work of Company employees kept us moving forward. I am proud of their
accomplishments, and gratefully acknowledge their many contributions to our
continued success.
I also would like to thank the Board of Directors and shareholders for their
continued encouragement and support. Imua!*
/s/ John C. Couch
John C. Couch
Chairman of the Board,
President and Chief Executive Officer
February 20, 1998
* Imua is a Hawaiian word meaning to progress, to go forward.
[Photo caption: The M.V. Mokihana is one of the large, modern vessels
purchased by Matson in 1996 in connection with its strategic alliance with
American President Lines.]
REVIEW OF OPERATIONS
[Photo caption: Facing page: Residential living on Maui's North Shore is
exemplified by the 92-lot Ku'au Bayview development.]
[Photo caption: Condominium living in Maui. Kahului Ikena is a 102-unit A&B
development near Maui Community College and the commercial and government
centers of Maui.]
Alexander & Baldwin, Inc. (A&B) has two principal subsidiaries, A&B-Hawaii,
Inc. (ABHI) and Matson Navigation Company, Inc. (Matson). ABHI has operations
in property development and management, Hawaii agribusiness and food products.
Property Development And Management
In total, A&B owns about 93,000 acres of land. Value is added to these
landholdings through the process of gaining entitlements for urban use. About
1,320 of the 93,000 acres are fully zoned for urban use. The Company has
completed at least one step in the entitlement process for an additional 2,800
acres in Hawaii and on the Mainland, and has about 9,700 more acres with
foreseeable urban-use potential. Up-to-date information on specific projects is
available on A&B Properties' Internet home page, www.abprop.com.
Whether it is for watershed, cultivation of crops, lease or development, the
Company strives to put its land to the highest and best use, consistent with
community needs. Most of the acreage in Hawaii will be in agricultural use for
many years.
A&B'S LANDHOLDINGS, BY CATEGORY
Hawaii
----------------------------
(In acres) Maui Kauai Total Mainland Total
- ---------------------------------------------------------------------------
Fully Entitled Urban 360 810 1,170 150 1,320
Agric./Pasture/Misc. 52,800 8,100 60,900 1,900 62,800
Conservation 15,900 13,000 28,900 - 28,900
- ---------------------------------------------------------------------------
Total 69,060 21,910 90,970 2,050 93,020
Designated Urban 700 300 1,000 1,800 2,800
Urban Potential 6,200 3,500 9,700 - 9,700
Entitlements
The lengthy and complex process of gaining entitlements is the necessary first
step in developing land. In 1997, A&B requested that 650 acres at Maalaea be
designated as the site of a master-planned community in Maui County's 10-year
update of the community plan for the Kihei-Makena area. The project received
preliminary approval from the Maui County Council in December 1997, and final
Council action is expected in the first half of 1998. The Company also sought
to have included in the Wailuku-Kahului Community Plan 160 acres intended for
industrial/commercial use in Phases II through IV of Maui Business Park.
Urban designations are being pursued before the State Land Use Commission for
two proposed single-family residential subdivision projects on Maui: 200 units
on 45 acres at Haliimaile and 400 units on 110 acres at Spreckelsville.
Kukui'ula is a 1,000-acre long-term, master-planned residential project on
Kauai that has been idle because of soft market conditions. Plans for an
initial 32-unit subdivision were advanced in 1997 and construction may begin
in the second quarter of 1998.
Pilot Hill Ranch is an 1,800-acre planned community in El Dorado County,
Calif., about 40 miles northeast of Sacramento. During 1997, the Company
submitted a Specific Plan, the equivalent of a zoning application, and
consultants completed a draft Environmental Impact Report. Public hearings are
likely by mid-1998.
Development
Three new large-lot agricultural subdivisions on Maui made progress in 1997.
Kauhikoa Hill Ranch, a nine-lot project, was delayed temporarily by water-
source issues. By year-end, however, sales had commenced. Roads and utility
services are currently under construction at the 28-lot Haiku Makai project
and sales will begin shortly. The County of Maui is reviewing construction
plans for the 38-lot Maunaolu project, but development probably will not take
place until after 1998.
Sales
During 1997, the pace of new residential, and commercial, real estate sales in
Hawaii continued to be restrained by a weak economy. Prices softened due to
competitive conditions. On the Mainland, strong economic conditions created
active markets for high-quality commercial properties.
At A&B's Maui Business Park, a 300,000-square-foot retail center, Maui
Marketplace, held its grand opening in October 1997. During 1997, the developer
of Maui Marketplace purchased a portion of the land underlying the Marketplace
and has an option to complete the acquisition of the remaining land in
mid-1998. Three additional leased lots also were sold. The transactions in 1997
involved a total of about eight acres and generated more than $5 million in
gross margin. The 19 remaining lots in Phase I A of Maui Business Park, which
total about 11 acres, continue to be marketed actively. Ultimately, Maui
Business Park will encompass about 240 acres immediately adjacent to Maui's
principal airport.
As shown in the table below, 65 of the homes in the 92-lot Ku'au Bayview
single-family development were sold by year-end 1997. The sales in 1997
averaged $242,000 per unit. Also, since sales began in mid-1995, 69 of 102
units in the Kahului Ikena condominium project have been sold. The prices of
the 17 units sold in 1997 averaged $131,000 per unit.
RESIDENTIAL PROPERTIES
Total Available Sold/Leased Available Sold/Leased Available
Project Units in 1996 in 1996 in 1997 in 1997 in 1998
Ku'au Bayview 92 92 30 62 35 27
Kahului Ikena 102 81 31 50 17 33
Kauhikoa Hill Ranch 9 0 0 9 1 8
Ku'au Beach Estates 4 0 0 4 3 1
Property Management
Hawaii Portfolio The Hawaii commercial-property portfolio consists of 848,400
square feet of improved leasable space, plus 84 acres leased for commercial
uses and 11,730 acres leased for agricultural uses. During 1997, lease rates
continued to be very competitive, due to the sluggish Hawaii economy and
continuing pressure on local retailers caused by the recent market entry of
larger discounters. Occupancy of the commercial properties averaged 78 percent
in 1997, in part due to recently acquired properties with relatively high
present vacancies.
In March 1997, One Main Plaza, an 85,000-square-foot office building in
Wailuku, Maui, was purchased at below-replacement cost. Although its present
occupancy rate reflects Hawaii's soft economic conditions, the building's
quality, location and tenant mix give it good upside potential.
Mainland Portfolio A&B's portfolio of 12 properties in five Western states
consists of 2.21 million square feet of leasable space. Occupancies averaged 98
percent throughout 1997.
In May 1997, a 98,000-square-foot warehouse and office complex was sold. The
proceeds were reinvested, on a tax-deferred basis, in the Village at Indian
Wells, Calif., a retail center with 104,600 square feet of leasable space.
Other tax-deferred funds were invested in the 46,000-square-foot Wilshire
Shopping Center in Greeley, Colo., and in a two-story office building near the
A&B-owned Island Village Shopping Center in Bainbridge Island, Wash.
[Photo caption: Facing page: Sugar - A&B's roots are deep in Hawaii. Here's
how sugarcane products begin. Green, lush and inherently sweet, cane grows on
37,000 acres at HC&S on Maui. A mechanical cutter for harvesting "seed" cane
is in the field.]
[Photo caption: A more familiar form of sugar - cubes of refined sugar -
represents A&B's refining and marketing subsidiary, C&H, in Crockett, Calif.
With the only cane refinery in the Western states, C&H is the leading branded
sugar in the West.]
[Photo caption: Estate-grown, Kauai Coffee is A&B's newest crop. Marketing and
sales efforts aim eastward and westward beyond Hawaii - with customers in Japan
and on the U.S. mainland.]
Property Management & Development Outlook
Property Leasing operating profit likely will change little in 1998, due to
continuing soft economic conditions in Hawaii. In Property Sales, residential
and commercial developments are expected to continue to sell steadily, but
slowly, in 1998. In the Mainland's present active commercial market, purchase
offers for Company-owned properties will be considered on a case-by-case basis.
Such offers present opportunities to create value and add to income, as is the
case with the pending sale of a 246,000-square-foot office/research complex in
Cupertino, Calif.
Agribusiness And Food Products
[Photo caption: Facing page: Big, fast, on schedule. A Matson C-9 vessel, M.V.
Manoa, inbound under the Golden Gate. Carrying a vast portion of Hawaii's
day-to-day consumer needs, Hawaii service vessels make "just-in-time" inventory
practical on islands 2,000 miles or more from major production centers.]
Raw Sugar Production
Hawaiian Commercial & Sugar Company (HC&S) on Maui is the largest producer of
raw cane sugar in Hawaii, with 55 percent of the State crop in 1997. During the
year, however, sugar production at HC&S was reduced by cultivation and
processing problems associated with a new variety of sugar cane. The experience
gained in 1997 and a reexamination of agricultural practices have led to
appropriate changes that should result in much-improved yields in the next few
years. To ensure that HC&S remains competitive with other sweetener producers,
the Company also is continuing its efforts to reduce costs in all aspects of
plantation operations.
AGRIBUSINESS STATISTICS
1997 1996 1995
---- ---- ----
Raw sugar produced (tons)
HC&S 198,000 201,000 198,000
McBryde - 20,000 24,000
--------- --------- ---------
Total 198,000 221,000 222,000
========= ========= =========
Green coffee produced (pounds) 4,300,000 2,430,000 1,770,000
Cultivated acreage
Sugar 36,700 40,400 40,400
Coffee 3,800 4,000 4,000
Coffee
Kauai Coffee Company, Inc., the largest grower of coffee in the United States,
produced more than four million pounds in 1997. Production was more than 70
percent higher than the previous record crop in 1996. The Company achieved
added success in 1997 in marketing this high-quality, estate-grown coffee to
customers both in the United States and in Japan. Although Kauai Coffee does
not yet contribute to operating profit, its results are improving steadily.
Power, Trucking
The Company's hydroelectric plants on Maui and Kauai, as well as its sugar
mills on Maui, continue to generate surplus electricity, which is sold to the
local public utilities. During 1997, 109,000 megawatt-hours were sold,
approximately the same volume as in 1996. The Company also has small trucking
operations on both Maui and Kauai that support the agricultural operations and
serve independent customers in each community.
Sugar Refining and Marketing
California and Hawaiian Sugar Company, Inc. (C&H) is the only sugarcane refiner
in the western United States and produces about eight percent of the national
supply of refined sugar. Through most of 1997, margins in the cane sugar
refining industry benefited from relatively lower supplies of beet sugar.
Although administration of the U.S. sugar import quotas kept raw cane sugar
prices high on an absolute basis, prices were somewhat lower than in 1996.
Operations at C&H also continued to benefit from lower costs, due to its
restructuring two years ago and selected capital investments.
In the fourth quarter of 1997, refined sugar prices began to weaken in response
to forecasts of greater sugar beet production in 1998, higher inventories of
refined sugar, a lower consumption growth rate and new cane refining capacity
that is anticipated to start up in Florida early in 1998. The U.S. Department
of Agriculture also has set lower levels of raw sugar imports, which will
increase the cost of the raw sugar purchased by C&H. Capping the change in
outlook were strategic realignments and consolidations, which increased concen-
tration in the industry by reducing the number of domestic sweetener suppliers.
Given all these factors, it is unlikely that C&H can sustain in 1998 the level
of performance that it attained during 1996 and 1997. Additionally, the two
principal labor contracts at C&H expire May 31, 1998. While negotiations are
expected to prove difficult, management is optimistic that a new contract can
be ratified without a work stoppage.
Food Products Outlook
During 1998-99, production results at HC&S should improve and cost-reduction
efforts should contribute to better results. The coffee operations are expected
to edge closer to profitability as a result of greater production, higher
quality and increased market awareness. Sugar refining results are likely to be
lower, but are expected to remain positive.
Matson has operations in ocean shipping, marine container terminals and
domestic intermodal transportation.
[Photo caption: Matson has built upon the assets of its core Hawaii service
also to serve shipping customers in mid-Pacific Islands, in Asia and on the
Pacific Coast.]
HAWAII SERVICE
FREIGHT (UNITS)
1992 177,900
1993 171,600
1994 173,300
1995 157,200
1996 152,100
1997 149,700
HAWAII SERVICE
AUTOMOBILES
1992 110,600
1993 109,400
1994 116,600
1995 107,100
1996 83,100
1997 78,600
Ocean Shipping And Intermodal Transportation
Hawaii Service
The core business of Matson Navigation Company, Inc. (Matson) is its Hawaii
service. Matson is the leading carrier of containerized cargo and automobiles
between the U.S. Pacific Coast and the Islands. During 1997, continuing slow
economic growth and declines in construction activity in Hawaii slightly
reduced the cargo carried. Longshore productivity problems, which had affected
costs in 1996 and early 1997, were being resolved. Other labor issues, however,
delayed a return to normal productivity and adversely affected shipping
schedules and costs. These issues were: a strike by harbor pilots in Los
Angeles, the Union Pacific Railroad's problems and a shortage of longshore
workers in Southern California. In addition, a shipboard fire forced Matson to
take a vessel out of service temporarily, which also disrupted schedules and
raised costs.
HAWAII CARGO VOLUME
1997 1996 1995
---- ---- ----
Freight (units) 149,700 152,100 157,200
Automobiles 78,600 83,100 107,100
In December 1997, Matson announced that it would defer an across-the-board
increase in Hawaii service rates, in recognition of the weak economic
conditions in Hawaii. Also, an existing fuel surcharge was reduced from 1.75
percent to 1.5 percent, effective January 15, 1998.
Guam Service
1997 was the first full year of Matson's service to Guam under the Company's
alliance with American President Lines, Ltd. (APL). Customers' acceptance of
the service continued to be good, and although Guam's economic growth
moderated, cargo volume was higher than in 1996.
On December 17, 1997, Typhoon Paka hit Guam with exceptionally high winds.
Although the damage to homes and other structures was extensive, shipping
services resumed shortly after the storm passed.
Matson and APL renegotiated the terms of their alliance late in 1997 and
implemented new vessel schedules (reflected in the map on the facing page) in
January 1998. The new alliance agreement is expected to produce substantial
benefits for both Matson and APL and will result in better service for Guam
customers.
The new alliance also will contribute to lower cargo-handling costs, higher
terminal productivity and improved vessel schedule reliability.
[Photo caption: Matson's "hub" is the Sand Island Terminal in Honolulu, one of
the world's busiest container terminals. Sand Island is the destination for
Oahu-bound cargo, the transshipment point for Neighbor Island and mid-Pacific
cargo, and the point of departure for Hawaii's products.]
[Photo caption: At Matson's bustling Seattle container terminal, cargo moves
both to Hawaii and on the Pacific Coast shuttle. This innovative coastwise
service is changing decades-old transportation patterns and challenging the
dominance of trucks and rails for time-sensitive cargo.]
Pacific Coast Service
Matson's West Coast shuttle service enjoyed steady growth in the volume of full
commercial containers carried during 1997. This increase was partially offset
by a reduction in the volume of empty containers carried for repositioning.
Rates are higher, however, for full containers. Also, the same labor issues in
Southern California that affected the Hawaii service negatively affected costs.
In August 1997, a new relationship with Canadian National Railway was
announced. This will increase the volume of southbound cargo. Profitability in
the Pacific Coast service continues to improve.
Mid-Pacific Service
Matson's container-barge service to Johnston Island, Kwajalein, Majuro and
Ebeye enjoyed higher volume in 1997 than in 1996. A high level of construction
activity in the first half of the year contributed to the increase. Following
extended negotiations with the U.S. Department of Defense, rates for military
cargo to Kwajalein were reduced in July 1997.
Matson Intermodal System, Inc. (MIS)
Continued growth in volume helped MIS to modestly increase its 1997
contribution to operating profit. During its 10 years in business, MIS has
benefited from the continuing trend among companies in many industries to
outsource transportation management. Annual MIS revenue is nearing $100
million.
Early in 1998, Matson created a new subsidiary, Matson Logistics Solutions,
Inc., to respond to customers' needs for more comprehensive transportation
services.
Matson Terminals, Inc. (MTI)
MTI is the stevedore for Matson and outside customers at Matson-operated
container terminals. During 1997, longshore productivity continued to be a
problem for all terminals on the West Coast. Late in the year, transportation
congestion in Southern California due to problems in the rail industry, plus
shortages of longshore labor in Southern California ports, added to costs just
as productivity trends began to improve. Increased registration of new long-
shore workers and industry training programs were leading to improvements by
early 1998. In Matson's terminals, productivity should continue to improve, due
in part to planned changes in container-handling techniques at its Oakland,
Calif., terminal. The reconfiguration of the Guam service also will reduce
congestion in Matson's terminals by transferring much of the West Coast cargo
handling for that service to APL's terminals.
Ocean Transportation Outlook
1998 results are expected to benefit modestly from higher Hawaii and coastwise
freight, improved cargo-handling productivity, the restructured operating
alliance with APL and greater intermodal volume. These improvements, however,
will not be sufficient to offset the effect of the 1997 insurance settlement
(which contributed $20.0 million to operating profit), reductions in other
cargo categories and expected higher costs. During 1998, an important project
for Matson will be to continue to develop plans for the orderly renewal of its
fleet. Based on the current fleet age and expected service needs, the Company
may begin replacing its fleet within the next five years.
FINANCIAL REPORT
21 Independent Auditors' Report
22 Eleven-Year Summary of Selected Financial Data
24 Industry Segment Information
25 Management's Discussion and Analysis
28 Statements of Income
29 Statements of Cash Flows
30 Balance Sheets
32 Statements of Shareholders' Equity
33 Notes to Financial Statements
41 Quarterly Results
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, 1997 and 1996, and the related
statements of income, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1997 (pages 24 and 28 to 40).
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, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Honolulu, Hawaii
January 22, 1998
Eleven-Year Summary of Selected Financial Data
(Dollars and shares in thousands, except per-share amounts)
Alexander & Baldwin Inc. and Subsidiaries
1997 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ---------- ----------
Annual Operations:
Net sales and other operating revenue $1,275,445 $1,239,810 $1,033,593 $1,144,033 $ 923,804 $ 703,948
Deduct:
Cost of goods sold and operating expenses 1,119,297 1,101,696 948,210 1,019,700 794,880 583,593
Interest expense 28,936 34,081 33,429 27,702 28,802 23,881
Hurricane loss - - - - - 24,803
Income taxes 45,825 38,748 19,535 32,652 41,386 19,044
---------- ---------- ---------- ---------- ---------- ----------
Income from continuing operations 81,387 65,285 32,419 63,979 58,736 52,627
Income (loss) from discontinued operations - - 23,336 10,629 8,253 7,878
Cumulative effect of change
in accounting principle - - - - - (41,551)
---------- ---------- ---------- ---------- ---------- ----------
Net income $ 81,387 $ 65,285 $ 55,755 $ 74,608 $ 66,989 $ 18,954
========== ========== ========== ========== ========== ==========
Comprehensive income $ 88,326 $ 73,660 $ 66,512 $ 70,031 - -
========== ========== ========== ========== ========== ==========
Basic and Diluted Earnings per Share:
Income from continuing operations $1.80 $1.44 $0.72 $1.39 $1.27 $1.14
Income (loss) from discontinued operations - - 0.51 0.23 0.18 0.17
Cumulative effect of change
in accounting principle - - - - - (0.90)
---------- ---------- ---------- ---------- ---------- ----------
Net income $1.80 $1.44 $1.23 $1.62 $1.45 $0.41
========== ========== ========== ========== ========== ==========
Return on beginning equity 11.9% 10.0% 8.8% 12.7% 12.0% 3.3%
Cash dividends per share $ 0.88 $ 0.88 $ 0.88 $ 0.88 $ 0.88 $ 0.88
Average number of shares outstanding 45,182 45,303 45,492 46,059 46,338 46,294
Gross profit percentage 20.6% 20.0% 20.2% 21.2% 24.9% 29.1%
Effective income tax rate 36.0% 37.3% 37.6% 33.8% 41.3% 26.6%
Market price range per share:
High $ 29.375 $ 29.250 $ 25.500 $ 28.250 $ 28.000 $ 30.500
Low 24.375 22.500 20.500 21.250 22.500 21.500
Close 27.313 25.000 23.000 22.250 26.750 24.750
At Year End:
Shareholders of record 5,481 5,881 6,357 6,729 7,056 7,507
Shares outstanding 44,881 45,339 45,280 45,691 46,404 46,333
Shareholders' equity $ 719,588 $ 684,328 $ 649,678 $ 632,614 $ 587,006 $ 559,099
Per-share 16.03 15.09 14.35 13.85 12.65 12.07
Total assets 1,704,798 1,796,115 1,801,237 1,925,775 1,904,742 1,676,635
Working capital 114,806 95,579 84,399 58,392 64,884 40,013
Cash and cash equivalents 21,623 23,824 32,150 8,987 32,295 20,827
Property-net 1,036,515 1,061,190 973,514 975,672 1,032,983 888,621
Real estate developments-noncurrent 68,056 70,144 56,104 66,371 54,919 50,977
Long-term debt-noncurrent 290,885 345,618 380,389 519,605 576,390 549,960
Capital lease obligations-noncurrent 2,000 12,039 24,186 35,274 44,495 59,816
Current ratio 1.7 to 1 1.4 to 1 1.4 to 1 1.3 to 1 1.3 to 1 1.4 to 1
Capital stock price/earnings
ratio at December 31 15.2 to 1 17.4 to 1 18.7 to 1 13.7 to 1 18.5 to 1 60.4 to 1
All share and per-share amounts reflect the 2-for-1 stock split in 1988.
Eleven-Year Summary of Selected Financial Data, Continued
(Dollars and shares in thousands, except per-share amounts)
Alexander & Baldwin Inc. and Subsidiaries
1991 1990 1989 1988 1987
---------- ---------- ---------- ---------- ----------
Annual Operations:
Net sales and other operating revenue $ 715,984 $ 747,550 $ 845,936 $ 701,908 $ 655,276
Deduct:
Cost of goods sold and operating expenses 565,105 552,236 512,499 495,234 470,928
Interest expense 24,575 29,602 26,965 27,406 21,104
Hurricane loss - - - - -
Income taxes 42,359 58,820 107,461 61,535 62,167
---------- ---------- ---------- ---------- ----------
Income from continuing operations 83,945 106,892 199,011 117,733 101,077
Income (loss) from discontinued operations 4,861 1,075 (310) - -
Cumulative effect of change
in accounting principle - - - - -
---------- ---------- ---------- ---------- ----------
Net income $ 88,806 $ 107,967 $ 198,701 $ 117,733 $ 101,077
========== ========== ========== ========== ==========
Comprehensive income - - - - -
========== ========== ========== ========== ==========
Basic and Diluted Earnings per Share:
Income from continuing operations $1.82 $2.32 $4.30 $2.35 $1.93
Income (loss) from discontinued operations 0.10 0.02 (0.01) - -
Cumulative effect of change
in accounting principle - - - - -
---------- ---------- ---------- ---------- ----------
Net income $1.92 $2.34 $4.29 $2.35 $1.93
========== ========== ========== ========== ==========
Return on beginning equity 16.7% 23.5% 45.2% 31.7% 21.4%
Cash dividends per share $ 0.88 $ 0.86 $ 0.80 $ 0.77 $ 0.68
Average number of shares outstanding 46,213 46,133 46,326 50,079 52,444
Gross profit percentage 31.9% 36.0% 48.5% 38.8% 37.2%
Effective income tax rate 33.5% 35.5% 35.1% 34.3% 38.1%
Market price range per share:
High $ 29.500 $ 38.000 $ 39.500 $ 36.750 $ 32.000
Low 21.000 19.000 31.250 20.875 16.000
Close 28.250 22.250 37.500 31.500 21.625
At Year End:
Shareholders of record 7,749 7,860 7,650 7,201 6,859
Shares outstanding 46,229 46,201 46,096 50,099 50,347
Shareholders' equity $ 578,669 $ 530,298 $ 459,712 $ 439,729 $ 371,007
Per-share 12.52 11.48 9.97 8.78 7.37
Total assets 1,547,648 1,364,165 1,141,671 1,070,483 981,737
Working capital 23,195 55,340 33,906 35,974 42,262
Cash and cash equivalents 18,675 47,351 23,389 22,794 26,695
Property-net 882,513 799,942 691,194 548,066 520,124
Real estate developments-noncurrent 36,362 14,156 - - -
Long-term debt-noncurrent 452,279 315,851 196,954 174,715 172,014
Capital lease obligations-noncurrent 69,717 86,392 95,241 100,306 106,935
Current ratio 1.2 to 1 1.5 to 1 1.4 to 1 1.4 to 1 1.5 to 1
Capital stock price/earnings
ratio at December 31 14.7 to 1 9.5 to 1 8.7 to 1 13.4 to 1 11.2 to 1
All share and per-share amounts reflect the 2-for-1 stock split in 1988.
INDUSTRY SEGMENT INFORMATION
(In thousands)
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------
REVENUE:
Ocean transportation $ 712,654 $ 661,586 $ 593,807 $ 604,754 $ 551,687
Property development and management:
Leasing 37,148 35,916 34,073 33,387 32,606
Sales 35,916 31,909 25,835 60,767 32,559
Food products 486,912 506,909 377,082 441,209 304,007
Other 2,815 3,490 2,796 3,916 2,945
- -----------------------------------------------------------------------------------------------------------
Total revenue $1,275,445 $1,239,810 $1,033,593 $1,144,033 $ 923,804
===========================================================================================================
OPERATING PROFIT:
Ocean transportation $ 100,350* $ 81,618 $ 87,769 $ 97,319 $ 91,194
Property development and management:
Leasing 24,559 23,875 23,063 23,163 22,975
Sales 13,262 15,307 14,497 18,522 18,570
Food products 27,083 26,863 (27,797) (418) 12,692
Other 2,639 3,220 2,593 3,143 2,357
- -----------------------------------------------------------------------------------------------------------
Total operating profit 167,893 150,883 100,125 141,729 147,788
Interest expense, net (28,936) (34,081) (33,429) (27,702) (28,802)
General corporate expenses (11,745) (12,769) (14,742) (17,396) (18,864)
- -----------------------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes $ 127,212 $ 104,033 $ 51,954 $ 96,631 $ 100,122
===========================================================================================================
IDENTIFIABLE ASSETS:
Ocean transportation $ 930,636 $1,005,741 $ 997,230 $ 853,933 $ 882,335
Property development and management 317,622 312,829 297,927 271,073 268,581
Food products 382,109 386,986 413,675 399,717 418,724
Other 74,431 90,559 92,405 87,362 39,094
- -----------------------------------------------------------------------------------------------------------
Assets of continuing operations 1,704,798 1,796,115 1,801,237 1,612,085 1,608,734
Discontinued operations - container leasing - - - 313,690 296,008
- -----------------------------------------------------------------------------------------------------------
Total assets $1,704,798 $1,796,115 $1,801,237 $1,925,775 $1,904,742
===========================================================================================================
CAPITAL EXPENDITURES:
Ocean transportation $ 20,828 $ 171,110 $ 46,872 $ 29,676 $ 53,745
Property development and management 8,620 4,141 8,613 14,376 34,772
Food products 18,806 12,058 13,650 18,665 26,637
DEPRECIATION AND AMORTIZATION:
Ocean transportation $ 62,192 $ 62,055 $ 57,619 $ 55,663 $ 55,738
Property development and management 6,281 6,214 5,561 5,246 4,860
Food products 19,538 20,144 20,390 21,340 15,974
*Includes $20 million from the settlement of a lawsuit that
involved insurance claims for earthquake damage to port facilities in 1989.
MANAGEMENT'S DISCUSSION AND ANALYSIS
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS
CONSOLIDATED EARNINGS AND REVENUE
Net income in 1997 was $81,387,000, or $1.80 per share. This was a 25-percent
improvement compared with net income of $65,285,000 in 1996, or $1.44 per
share. Net income in 1997 included $12,478,000, or $0.28 per share, resulting
from the favorable settlement of protracted litigation related to an insurance
claim. Net income in 1996 included a one-time vessel charter hire that
contributed $3,545,000, or $0.08 per share. Income in both 1997 and 1996
benefited from partial reversals of a financial reserve that was set up to
cover the costs of closing a sugar plantation: 1997 income included $600,000,
or $0.01 per share, and 1996 income included $2,900,000, or $0.06 per share.
Excluding these factors, 1997 income was $68,309,000, an increase of
$9,469,000, or 16 percent, from $58,840,000 in 1996. Revenue in 1997 was
$1,275,445,000, compared with revenue of $1,239,810,000 in 1996, primarily
reflecting slightly higher ocean transportation revenue and property sales.
1997 COMPARED WITH 1996
OCEAN TRANSPORTATION revenue of $712,654,000 increased eight percent and
operating profit of $100,350,000 increased 23 percent in 1997 compared with
1996. Excluding the insurance settlement, however, which contributed
$19,965,000, pre-tax, to operating profit in 1997, and the one-time vessel
charter hire, which contributed $5,634,000, pretax, to operating profit in
1996, operating profit for the ocean transportation segment rose six percent.
Hawaii's continuing slow economic growth and decline in construction caused
reduced cargo volumes for the Hawaii service. Compared with 1996, total Hawaii
container volume was down two percent and total automobile volume was down five
percent in 1997. In an effort to support Hawaii's economic revitalization,
Matson announced that it would defer an increase in Hawaii service rates and
would reduce an existing fuel surcharge from 1.75 percent to 1.5 percent, in
January 1998.
Despite the decline in Guam's economic growth rate, Matson's Guam service,
which completed its first full year in 1997, continued to contribute
significantly to Matson's results. Matson and APL renegotiated the terms of
their alliance in late 997. A new vessel schedule will be implemented in early
1998 and will benefit both carriers and their customers by reducing transit
times. Although longshore labor disruptions continued into 1997, the
relatively poor terminal productivity and increased cargo handling costs
improved somewhat. After adjusting for volume effects, overall terminal labor
costs increased by 6 percent in 1997, after 15-percent increase in 1996.
PROPERTY DEVELOPMENT AND MANAGEMENT - LEASING revenue and operating profit rose
three percent compared with 1996. The leased-property portfolio benefited from
continuing high occupancy levels for Mainland properties. Occupancy rates in
1997 averaged 98 percent for the Mainland portfolio, versus 97 percent in 1996.
Occupancy levels for the Company's Hawaii-leased real estate portfolio averaged
78 percent in 1997, versus 86 percent in the previous year. That decrease was
due primarily to properties acquired in early 1997 that have relatively low
occupancy rates and to the weak Hawaii economy.
PROPERTY DEVELOPMENT AND MANAGEMENT - SALES revenue of $35,916,000 for 1997 was
13-percent higher than in 1996; however, operating profit decreased 13-percent
for 1997 compared with 1996. Sales in 1997 included four leased parcels in
Maui Business Park, an undeveloped 24-acre residential parcel, several
developed and undeveloped business parcels, an industrial warehouse in
California and 59 residential properties. 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. Six of the 1997
and four of the 1996 sales were completed on a tax-deferred basis.
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 $486,912,000 in 1997 was four-percent lower than the
prior year's revenue of $506,909,000. Operating profit of $27,083,000 in 1997,
however, was one-percent higher than the operating profit of $26,863,000 for
the prior year. Improved sugar refining margins were offset substantially by
the effects of lower sugar yields at the Company's Maui plantation. Operating
results also were impacted by the previously noted partial reversals of the
reserve established in 1995 for a plantation closure.
During most of 1997, margins in the cane sugar refining industry continued to
benefit from relatively low supplies of beet sugar. However, toward the end of
1997, the prospects of a larger sugar beet crop and decreasing beet sugar
prices began to tighten margins throughout the industry. This factor, combined
with other competitive pressures and continuing low cane sugar import quotas,
will make it difficult for the refining business to sustain 1997-level
earnings into 1998. The Company's coffee-growing and marketing operations had
losses for both 1997 and 1996, although results are improving, due to higher
production volume (4,300,000 pounds of green beans in 1997 versus 2,400,000
pounds in 1996), improved quality and a stronger marketing effort.
During 1997, the Company addressed concerns about the decline in sugar
production at its Maui sugar plantation. The decline was due primarily to
excessive rainfall early in the year and to disappointing sugar yields from a
new plant variety. Changes in cultivation and ripening processes are expected
to improve future yields. Cost-reduction efforts also have been implemented
throughout the plantation operations.
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 obscured the
synergies of the newly combined shipping services and other cost reduction
initiatives. Operating results for 1996 also benefited from the previously
noted one-time vessel charter payment.
PROPERTY DEVELOPMENT AND MANAGEMENT - LEASING revenue rose five percent and
operating profit rose four percent compared with 1995. These 1996 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 in 1996, the same
rate as for 1995. Occupancy levels for the Company's Hawaii leased real estate
portfolio averaged 86 percent in 1996, versus 90 percent in 1995, reflecting
the weak real estate market in Hawaii and the increased presence of large
discount retailers in the market. Both of these factors 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-acre 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. Four of the 1996 sales were
completed on a tax-deferred basis. No tax-deferred sales were completed in
1995.
FOOD PRODUCTS revenue of $506,909,000 for 1996 was 34-percent greater than the
1995 revenue of $377,082,000. Operating profit was $26,863,000 for 1996,
compared with a loss of $27,797,000 for 1995. Operating profit in 1996
included $4,600,000, pre-tax, for the partial reversal of an $8,100,000,
pre-tax, charge for the closure of sugar-growing operations on Kauai recorded
in 1995. Operating profit for 1995 had been affected adversely by a refinery
workers' strike, the $8,100,000, pre-tax, charge, a $3,800,000, pre-tax, write-
down of an operating asset, high raw sugar costs and low refined sugar prices.
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 $509,176,000 at December 31, 1997, an increase of $709,000 from
December 31, 1996. Amounts available under lines of credit increased
$25,500,000, due primarily to lower commercial paper balances outstanding at
year-end. Accounts receivable increased $8,406,000, due principally to higher
receivables at Matson. Sugar and coffee inventories decreased $22,652,000, due
principally to the timing of raw sugar purchases. Accrued deposits to the CCF
decreased by $8,344,000. Cash and cash equivalents decreased by $2,201,000,
due primarily to debt repayments.
Working capital of $114,806,000 at December 31, 1997 was $19,227,000 higher
than the amount at the end of 1996. This increase was due primarily to a
decrease in short-term debt, partially offset by lower inventories.
Net cash provided by operations, before capital expenditures for real estate
developments held for sale, was $187,505,000 and $149,801,000 for 1997 and
1996, respectively. Net operating cash flows were used principally for capital
expenditures, payments of debt, deposits into the CCF, repurchases of capital
stock and dividends. Withdrawals from the CCF were used to repay debt.
In 1997, capital expenditures were $48,496,000, compared with $187,721,000 in
1996. Ocean transportation capital additions in 1997 of $20,828,000 were
primarily for the acquisition of container and terminal equipment. Property
development and management capital additions in 1997 of $8,620,000 were for
real-estate developments held for investment purposes and for improvements to
leased properties. Food products capital additions in 1997 of $18,806,000 were
primarily for sugar refinery modifications and for power generation,
harvesting, and factory equipment for the Company's sugar- and coffee-growing
operations.
Capital expenditures approved, but not yet spent, were $84,222,000 at December
31, 1997. These expenditures are primarily for Year 2000 remediation,
container equipment, real-estate developments held for investment purposes,
improvements to leased properties, and irrigation, factory and power generation
equipment for the Company's sugar-growing operations. For 1998, internal cash
flows and short-term borrowing facilities are expected to be sufficient to
finance working capital needs, dividends, capital expenditures and debt
service.
OTHER MATTERS
NEW ACCOUNTING STANDARDS: The Company adopted two new accounting standards in
1997: Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings Per
Share" and SFAS No. 130 "Reporting Comprehensive Income." In accordance with
SFAS 128, the Company renamed its Primary Earnings per Share (EPS) to Basic EPS
and disclosed its Diluted EPS. Due to the immaterial impact of the Company's
stock options, Basic and Diluted EPS are the same amount. In accordance with
SFAS 130, the Company added the measure of comprehensive income, consisting of
net income plus unrealized holding gains on securities, to its Statements of
Income. Comprehensive income, however, is not used in the calculation of EPS.
See also Note 1 to the Company's Financial Statements.
INSURANCE LITIGATION: In February 1997, Matson received $33,650,000 in
settlement of litigation involving a contested insurance claim for earthquake
damage to port facilities in 1989. After recovering repair and litigation
costs of approximately $13,650,000, the Company recorded $9,700,000 of interest
revenue and $10,300,000 of other revenue. The after-tax impact of the
settlement on 1997 net income was $12,478,000, or $0.28 per share.
LEGISLATION: In September 1997, the Secretary of Agriculture established,
under the Federal Agriculture Improvement and Reform Act and in accordance with
the Harmonized Tariff Schedule, the aggregate quantity of sugars and syrups
that can be imported into the United States. The maximum import quantity for
fiscal year 1998 was set at 1,800,000 metric tons raw value (mtrv) with an
initial release of 1,200,000 mtrv and the remaining 600,000 mtrv to be released
in 200,000 mtrv increments in January, March, and May if, in those months, the
stocks-to-use ratio, as published in the World Agricultural Supply and Demand
Estimate (WASDE), is not greater than 15.5 percent. In January 1998, the WASDE
stocks-to-use ratio was 15.7 percent. As a result, the first 1998 increment
was cancelled and the maximum import quantity for fiscal year 1998 is now
1,600,000 mtrv.
TAX-DEFERRED REAL ESTATE EXCHANGES: In 1997, the Company sold five parcels of
land for $16,689,000. Proceeds of $11,000,000 were reinvested in 1997 and the
remaining proceeds are expected to be reinvested in 1998, both on a tax-
deferred basis. Also, in 1997, the Company received $699,000 from a sale of
land under threat of condemnation. Proceeds of this condemnation are also
expected to be reinvested on a tax-deferred basis. Proceeds of $4,000,000 from
prior condemnation sales were reinvested in 1997 on a tax-deferred basis. The
proceeds from these sales and condemnation are reflected in the Condensed
Statements of Cash Flows under the caption "Non-cash Activities."
SHARE REPURCHASES: In 1997, the Company repurchased 624,050 shares of its
common stock, for an aggregate of $16,585,000 ($26.58 per share, average).
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.
YEAR 2000: Beginning in 1996, the Company initiated an evaluation of its
computer systems and applications to prepare for the Year 2000. Following this
evaluation, implementation plans for all business segments were prepared and
are currently being executed. Areas which have the greatest risk of impacting
operations are being corrected first; however, all work related to primary
systems and applications is expected to be completed substantially by the end
of 1998. Many of the primary systems are already Year 2000 compliant. The
plans consist of upgrading, modifying or replacing various systems for
approximately $6,000,000 to $8,000,000. The costs incurred in connection with
the Year 2000 compliance are being treated as an operating expense unless a
system is being replaced for operating reasons as well as Year 2000 compliance,
in which case costs are being capitalized. The Company believes that its
systems and applications necessary to operate and manage its businesses will be
replaced, modified or upgraded in advance of the Year 2000 and that the related
costs will not have a material impact on the operations, cash flows, financial
condition or segment results of future periods.
OUTLOOK: Information about the Company's outlook for 1998 and its plans to
address issues affecting primary business units are included in the Letter to
Shareholders on pages 5 through 9 and in the business unit discussions included
on pages 10 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 Forms 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, such as
government rate regulations, land-use regulations, government administration of
the U.S. sugar program, and retention of cabotage laws; (5) dependence on raw
sugar suppliers and other third-party suppliers; (6) fuel prices; (7) labor
relations; and (8) 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 control systems, and related policies and
procedures designed to provide reasonable assurance that assets are safe-
guarded, 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 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 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 21).
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, 1997 1996 1995
- ---------------------------------------------------------------------------------
REVENUE:
Transportation and terminal services $ 566,705 $ 547,427 $ 511,673
Food products 471,967 495,149 363,751
Rentals and other services 159,153 143,392 100,423
Property development and other 35,519 31,424 25,334
Interest 23,131 15,085 19,571
Gain on sale of property and other 16,119 4,577 10,158
Dividends 2,851 2,756 2,683
- ---------------------------------------------------------------------------------
Total revenue 1,275,445 1,239,810 1,033,593
- ---------------------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of services 585,739 550,745 473,757
Cost of goods sold 425,979 437,976 361,492
Selling, general and administrative 107,579 112,975 112,961
Interest 28,936 34,565 37,365
Interest capitalized - (484) (3,936)
- ---------------------------------------------------------------------------------
Total costs and expenses 1,148,233 1,135,777 981,639
- ---------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES 127,212 104,033 51,954
INCOME TAXES 45,825 38,748 19,535
- ---------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 81,387 65,285 32,419
DISCONTINUED OPERATIONS:
Income From Operations of Matson Leasing
Company, Inc. (Net of income taxes of
$3,228) - - 5,336
Gain on Sale of Matson Leasing Company,
Inc. (Net of income taxes of $8,954) - - 18,000
- ---------------------------------------------------------------------------------
NET INCOME 81,387 65,285 55,755
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Unrealized holding gains on securities
(Net of income taxes of $3,977 in 1997,
$3,961 in 1996 and $6,391 in 1995) 6,939 8,375 10,757
- ---------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 88,326 $ 73,660 $ 66,512
=================================================================================
BASIC AND DILUTED EARNINGS PER SHARE OF
COMMON STOCK:
Continuing Operations $ 1.80 $ 1.44 $ 0.72
Discontinued Operations - - 0.51
- ---------------------------------------------------------------------------------
Net Income $ 1.80 $ 1.44 $ 1.23
=================================================================================
AVERAGE COMMON SHARES OUTSTANDING 45,182 45,303 45,492
See notes to financial statements.
STATEMENTS OF CASH FLOWS (In thousands)
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
Year Ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------------------
CASH FLOWS FROM OPERATIONS:
Income from continuing operations $ 81,387 $ 65,285 $ 32,419
Adjustments to reconcile net income to
net cash provided by operations:
Depreciation 88,558 88,951 85,127
Plantation closure (reversal) (990) (4,624) 8,100
Loss (gain) on disposal of property,
investments and other assets (872) (1,686) 226
Changes in assets and liabilities:
Accounts and notes receivable (5,532) (5,225) (32,889)
Inventories 24,276 (16,616) 2,640
Prepaid expenses and other assets 1,973 103 6,153
Accounts and income taxes payable (672) 7,062 14,580
Deferred income taxes payable 13,168 10,420 42,965
Other liabilities (13,791) 6,131 (8,771)
Capital expenditures for real estate
developments held for sale (5,636) (16,799) (19,734)
Discontinued leasing operations - - (59,160)
- ----------------------------------------------------------------------------------
Net cash provided by operations 181,869 133,002 71,656
- ----------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property (45,598) (185,142) (63,908)
Capital expenditures for real estate
developments held for investment (2,898) (2,579) (5,581)
Receipts from disposal of income
producing property, investments
and other assets 728 10,897 362,501
Deposits into Capital Construction Fund (11,656) (11,481) (136,484)
Withdrawals from Capital Construction Fund 50,000 145,500 999
Reduction (increase) in investments - net (822) 1,184 (1,518)
Discontinued leasing operations:
Capital expenditures - - (30,061)
Other - - 900
- ----------------------------------------------------------------------------------
Net cash provided by (used in) investing
activities (10,246) (41,621) 126,848
- ----------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 34,500 43,000 40,000
Payments of long-term liabilities (109,082) (81,888) (189,764)
Proceeds (payments) of short-term commercial
paper borrowings - net (45,000) (21,000) 25,000
Repurchases of capital stock (16,585) (1,250) (11,580)
Proceeds from issuance of capital stock 2,132 1,291 468
Dividends paid (39,789) (39,860) (40,035)
- ----------------------------------------------------------------------------------
Net cash used in financing activities (173,824) (99,707) (175,911)
- ----------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS:
Net increase (decrease) for the year (2,201) (8,326) 22,593
Balance, beginning of year 23,824 32,150 9,557
- ----------------------------------------------------------------------------------
Balance, end of year $ 21,623 $ 23,824 $ 32,150
==================================================================================
OTHER CASH FLOW INFORMATION:
Interest paid, net of amounts capitalized $ 30,956 $ 36,472 $ 41,277
Income taxes paid, net of refunds 29,775 26,360 53,014
NON-CASH ACTIVITIES.Tax-deferred property sales 17,388 12,325 -
See notes to financial statements.
BALANCE SHEETS
(In thousands, except per-share amounts)
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
December 31, 1997 1996
- ---------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 21,623 $ 23,824
Accounts and notes receivable:
Trade, less allowances of $18,005 and $10,294 152,098 134,552
Other 24,067 33,207
Inventories:
Sugar and coffee 38,888 61,540
Materials and supplies 30,321 35,330
Real estate held for sale 12,563 17,383
Deferred income taxes 9,404 17,708
Prepaid expenses and other assets 9,977 12,114
Accrued deposits to Capital Construction Fund (10,000) (1,656)
- ---------------------------------------------------------------------------------
Total current assets 288,941 334,002
- ---------------------------------------------------------------------------------
INVESTMENTS 102,813 91,602
- ---------------------------------------------------------------------------------
REAL ESTATE DEVELOPMENTS 68,056 70,144
- ---------------------------------------------------------------------------------
PROPERTY:
Land 66,161 61,869
Buildings 218,116 204,588
Vessels 815,805 811,774
Machinery and equipment 697,095 676,830
Water, power and sewer systems 83,334 78,726
Other property improvements 94,512 88,529
- ---------------------------------------------------------------------------------
Total 1,975,023 1,922,316
Less accumulated depreciation and amortization 938,508 861,126
- ---------------------------------------------------------------------------------
Property.net 1,036,515 1,061,190
- ---------------------------------------------------------------------------------
CAPITAL CONSTRUCTION FUND 148,610 178,616
- ---------------------------------------------------------------------------------
PENSION ASSETS 1,192 -
- ---------------------------------------------------------------------------------
OTHER ASSETS.NET 58,671 60,561
- ---------------------------------------------------------------------------------
Total $1,704,798 $1,796,115
=================================================================================
See notes to financial statements.
December 31, 1997 1996
- ---------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 24,453 $ 31,966
Current portion of capital lease obligations 10,032 12,116
Short-term commercial paper borrowings 17,000 62,000
Accounts payable 46,835 50,496
Payrolls and vacation pay 20,561 21,996
Uninsured claims 15,265 16,129
Post-retirement benefit obligations.current portion 5,164 5,710
Taxes other than income 4,551 5,445
Accrued interest payable 2,158 3,313
Accrued and other liabilities 28,116 29,252
- ---------------------------------------------------------------------------------
Total current liabilities 174,135 238,423
- ---------------------------------------------------------------------------------
LONG-TERM LIABILITIES:
Long-term debt 290,885 345,618
Capital lease obligations 2,000 12,039
Post-retirement benefit obligations 112,125 116,047
Uninsured claims 9,249 7,902
Pension obligations - 3,651
Other 37,062 37,194
- ---------------------------------------------------------------------------------
Total long-term liabilities 451,321 522,451
- ---------------------------------------------------------------------------------
DEFERRED INCOME TAXES 359,754 350,913
- ---------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Capital stock.common stock without par value;
authorized, 150,000 shares ($.75 stated value
per share); outstanding, 44,881 shares in 1997
and 45,339 shares in 1996 36,769 37,150
Additional capital 49,437 43,377
Unrealized holding gains on securities 55,144 48,205
Retained earnings 591,135 568,969
Cost of treasury stock (12,897) (13,373)
- ---------------------------------------------------------------------------------
Total shareholders' equity 719,588 684,328
- ---------------------------------------------------------------------------------
Total $1,704,798 $1,796,115
=================================================================================
STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except per-share amounts)
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
Three Years Ended December 31, 1997
- --------------------------------------------------------------------------------------------------------------------
Capital Stock
------------------------------------------
Issued In Treasury
--------------------- ------------------
Unrealized
Additional Holding Retained
Shares Stated Value Shares Cost Capital Gains Earnings
- --------------------------------------------------------------------------------------------------------------------
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 plans 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 plans 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
CHANGES IN 1997:
Shares repurchased and retired (624) (468) (16,117)
Stock options exercised 234 175 5,098
Acquired in payment of options (123) (92) (3,315)
Issued--incentive plans 6 4 (49) 476 962
Unrealized holding gains on
securities 6,939
Net income 81,387
Cash dividends -- $.88 per share (39,789)
- --------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 49,026 $ 36,769 4,145 $(12,897) $ 49,437 $ 55,144 $591,135
====================================================================================================================
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.
COMPREHENSIVE INCOME: The Statements of Income include a new measure called
Comprehensive Income. This is intended to report a measure of all changes in
Shareholders' Equity that result from either recognized transactions or other
economic events, excluding capital stock transactions, which impact
Shareholders' Equity. For the Company, the only difference between Net Income
and Comprehensive Income is the unrealized holding gains on securities
available for sale. Comprehensive Income is not used in the calculation of
Earnings per Share.
BASIC AND DILUTED EARNINGS PER SHARE OF COMMON STOCK: Basic Earnings per Share
is determined by dividing Net Income by the weighted-average common shares
outstanding during the year. The impact on earnings per share of the Company's
stock options is immaterial, consequently, Diluted Earnings per Share is the
same amount as Basic Earnings per Share.
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.
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 contract hedges are recorded in inventory and subsequently charged to
cost of sales when the related inventory is sold. 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 1996 and 1995 financial statements
have been reclassified to conform with the 1997 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 approximately $362 million in
cash, and realized an after-tax gain of $18 million. Sales and gross profit of
the discontinued operation were $35,251,000 and $14,762,000, respectively, in
1995.
3. INVESTMENTS
At December 31, 1997 and 1996, 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, 1997 and
1996 were as follows (in thousands):
1997 1996
- ---------------------------------------------------------------------
Market value $ 96,597 $85,796
Less historical cost 9,851 9,966
- ---------------------------------------------------------------------
Unrealized holding gains 86,746 75,830
Less deferred income taxes 31,602 27,625
- ---------------------------------------------------------------------
Net unrealized holding gains $ 55,144 $48,205
=====================================================================
The investments in limited partnership interests and purchase-money mortgages
are recorded at cost, which approximated market values, of $6,216,000 and
$5,806,000 at December 31, 1997 and 1996, 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 1994. Management believes that all amounts on
deposit in the CCF at the end of 1997 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, 1997 and 1996, the balances on deposit in the CCF are
summarized in Table 1.
TABLE 1 (In thousands)
- ---------------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------
Amortized Fair Unrealized Amortized Fair Unrealized
Cost Value Gain (Loss) Cost Value Gain (Loss)
- ---------------------------------------------------------------------------------------------------------
Mortgage-backed securities $ 69,451 $ 68,738 $ (713) $ 84,642 $ 80,871 $(3,771)
Cash and cash equivalents 69,159 69,159 - 92,318 92,318 -
Accrued deposits 10,000 10,000 - 1,656 1,656 -
- -------------------------------------------------------------------------------------------------------
Total $148,610 $147,897 $ (713) $178,616 $174,845 $(3,771)
=======================================================================================================
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 1997, 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 2005 through 2028. The MBS have a weighted average life of approximately
5.6 years. The Company earned $5,897,000 in 1997, $6,838,000 in 1996 and
$7,655,000 in 1995 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 1998.
During 1997 and 1996, 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 $5,828,000 in 1997, $5,552,000 in
1996 and $5,903,000 in 1995. 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
paid or cargo volume. 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 Pacific Coast
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 $2,896,000 for the year
ended December 31, 1997, based on estimates by plan actuaries. Management has
no present intention of withdrawing from and does not anticipate termination of
any of the aforementioned plans.
The net pension benefit and components for 1997, 1996 and 1995, of single-
employer defined benefit pension plans, which cover substantially all other
employees, were as follows (in thousands):
1997 1996 1995
- ---------------------------------------------------------------------------
Service cost--benefits earned
during the year $ 6,692 $ 6,326 $ 6,210
Interest cost on projected benefit
obligations 23,807 23,295 21,785
Actual return on plan assets (84,027) (47,980) (78,713)
Net amortization and deferral 48,272 14,599 50,298
Curtailments and terminations 412 (779) (1,761)
- ---------------------------------------------------------------------------
Net pension benefit $ (4,844) $ (4,539) $ (2,181)
===========================================================================
The funded status of the single-employer plans at December 31, 1997 and 1996
was as follows (in thousands):
1997 1996
- ---------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested benefits $ 310,593 $ 284,755
Non-vested benefits 9,395 8,415
- ---------------------------------------------------------------------------
Accumulated benefit obligations 319,988 293,170
Additional amounts related to projected
compensation levels 34,895 32,925
- ---------------------------------------------------------------------------
Projected benefit obligations 354,883 326,095
Plan assets at fair value 443,248 380,909
- ---------------------------------------------------------------------------
Excess of plan assets over
projected benefit obligations (88,365) (54,814)
Prior service costs to be recognized in future
years (5,707) (3,518)
Unrecognized actuarial net gain 91,011 59,119
Unrecognized net asset at
January 1, 1987 (being amortized over
periods of 4 to 15 years) 1,869 2,864
- ---------------------------------------------------------------------------
Accrued pension liability (asset) $ (1,192) $ 3,651
===========================================================================
At December 31, 1997 and 1996, the projected benefit obligations were
determined using a discount rate of 7.25 percent and 7.5 percent, respectively,
and assumed increases in future compensation levels of 4.25 percent and 4.5
percent, respectively. The expected long-term rate of return on assets was
9 percent for 1997 and 1996. The assets of the plans consist principally of
listed stocks and bonds. Gains and losses are amortized using the minimum
method allowed by Statement of Financial Accounting Standards (SFAS) No. 87.
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 obligation, included with other non-current liabilities, relating to these
unfunded plans, totaled $10,654,000 and $9,844,000 at December 31, 1997 and
1996, 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 1997, 1996 and 1995 included the following (in thousands):
1997 1996 1995
- ---------------------------------------------------------------------
Service cost $ 1,310 $ 1,351 $ 1,512
Interest cost 6,250 6,605 7,031
Net amortization (6,683) (2,016) (1,524)
Curtailment gain - (2,476) (2,045)
- ---------------------------------------------------------------------
Post-retirement benefit cost $ 877 $ 3,464 $ 4,974
=====================================================================
The unfunded accumulated post-retirement benefit obligations at December 31,
1997 and 1996 are summarized below (in thousands):
1997 1996
- ----------------------------------------------------------------------
Retirees $ 52,668 $ 54,951
Fully-eligible active plan participants 12,120 10,865
Other active plan participants 26,324 27,780
Unrecognized prior service cost 3,824 3,643
Unrecognized net gain 22,353 24,518
- ----------------------------------------------------------------------
Accumulated post-retirement benefit
obligations 117,289 121,757
Current obligation 5,164 5,710
- ----------------------------------------------------------------------
Non-current obligation $112,125 $116,047
======================================================================
At December 31, 1997 and 1996, the weighted average discount rates used in
determining the accumulated post-retirement benefit obligations were 7.25
percent and 7.5 percent, respectively, and the assumed health care cost trend
rate used in measuring the accumulated post-retirement benefit obligations was
10 percent through 2001, decreasing to 5 percent thereafter. For 1997, gains
and losses are being amortized over five years. For 1996 and previous years,
gains and losses were amortized using the minimum method allowed by SFAS No.
106. This change did not significantly affect financial results for 1997. If
the assumed health care cost trend rate were increased by one percentage point,
the accumulated post-retirement benefit obligation as of December 31, 1997 and
1996 would have increased by approximately $11,113,000 and $11,105,000,
respectively, and the net periodic post-retirement benefit cost for 1997 and
1996 would have increased by approximately $1,172,000 and $1,208,000,
respectively.
7. LONG-TERM DEBT, CREDIT AGREEMENTS
At December 31, 1997 and 1996, long-term debt consisted of the following (in
thousands):
1997 1996
- -------------------------------------------------------------------
Commercial paper, 1997 high 6.70%, low 5.15% $130,852 $225,632
Bank variable rate loans (1997 high 6.325%,
low 5.570%) due after 1997 41,500 22,000
Term loans:
7.18%, payable through 2007 67,500 75,000
8%, payable through 2000 27,500 37,500
9.05%, payable through 1999 14,815 21,285
9.8%, payable through 2004 14,583 16,667
9%, payable through 1999 10,588 15,882
7.43%, payable through 2007 15,000 15,000
7.65%, payable through 2001 10,000 10,000
11.78%, repaid in 1997 - 618
- -------------------------------------------------------------------
Total 332,338 439,584
Less current portion 24,453 31,966
Commercial paper classified as current 17,000 62,000
- -------------------------------------------------------------------
Long-term debt $290,885 $345,618
===================================================================
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, 1999, 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,
1997 and 1996, $25,000,000 and $15,000,000, 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, 1998, but may be canceled by the bank at any time. At
December 31, 1997 and 1996, $11,500,000 and $7,000,000, 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 September 8, 2000.
At December 31,1997, $5,000,000 was outstanding under this agreement. No
amount was outstanding at December 31, 1996.
A subsidiary has a $50,000,000 one-year revolving credit agreement with a two-
year term option. 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, 1997 and 1996, there were no amounts outstanding under
this agreement.
A subsidiary has an uncommitted $15,000,000 revolving credit agreement with a
commercial bank. The Agreement extends to November 28, 2000. At December 31,
1997 and 1996, 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, 1997 and 1996, $15,000,000 had been borrowed.
COMMERCIAL PAPER: At December 31, 1997, 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, 1997,
$99,852,000 of commercial paper notes was outstanding under this program.
Maturities ranged from 3 to 34 days. The borrowings outstanding under this
program are classified as long-term, because the subsidiary intends to continue
the program 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, 1997,
$31,000,000 of commercial paper notes was outstanding under this program.
Maturities ranged from 22 to 26 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, 1997, $17,000,000 was classified as current. The commercial paper
is supported by a $100,000,000 backup revolving credit facility with five
commercial banks. Both the commercial paper program and the backup facility
are guaranteed by the subsidiary's parent and by the Company.
LONG-TERM DEBT MATURITIES: At December 31, 1997, maturities and planned
prepayments of all long-term debt during the next five years totaled
$24,453,000 for 1998, $32,616,000 for 1999, $19,583,000 for 2000, $17,083,000
for 2001 and $9,583,000 for 2002.
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
1998; 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 1998 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 $45,560,000, $45,559,000 and
$46,680,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
Contingent rents and income from sublease rents were not significant.
Assets recorded under capital lease obligations and included in property at
December 31, 1997 and 1996 were as follows (in thousands):
1997 1996
- -------------------------------------------------------------------------
Vessel $55,253 $55,253
Machinery and equipment 42,039 42,468
- -------------------------------------------------------------------------
Total 97,292 97,721
Less accumulated amortization 95,866 90,462
- -------------------------------------------------------------------------
Property under capital leases--net $ 1,426 $ 7,259
=========================================================================
Future minimum payments under all leases and the present value of minimum
capital lease payments as of December 31, 1997 were as follows (in thousands):
Capital Operating
Leases Leases
- --------------------------------------------------------------------------
1998 $ 11,081 $ 27,539
1999 609 17,321
2000 578 14,448
2001 547 12,412
2002 516 11,705
Thereafter - 90,191
- --------------------------------------------------------------------------
Total minimum lease payments 13,331 $173,616
Less amount representing interest 1,299 ========
- ---------------------------------------------------------------
Present value of future minimum payments 12,032
Less current portion 10,032
- ---------------------------------------------------------------
Long-term obligations at December 31, 1997 $ 2,000
===============================================================
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 $8,257,000 and $7,713,000 at December 31, 1997 and 1996,
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, 1997 and 1996 were
as follows (in thousands):
1997 1996
- --------------------------------------------------------------------------
Leased property $267,569 $246,802
Less accumulated amortization 47,253 42,722
- --------------------------------------------------------------------------
Property under operating leases--net $220,316 $204,080
==========================================================================
Total rental income under these operating leases for the three years ended
December 31, 1997 was as follows (in thousands):
1997 1996 1995
- ---------------------------------------------------------------------------
Minimum rentals $ 35,535 $ 34,556 $ 28,164
Contingent rentals (based on sales volume) 1,048 1,232 880
- ---------------------------------------------------------------------------
Total $ 36,583 $ 35,788 $ 29,044
===========================================================================
Contingent rentals are based on sales volume.
Future minimum rental income on non-cancelable leases at December 31, 1997 was
as follows (in thousands):
Operating
Leases
- -------------------------------------------------------
1998 $ 23,057
1999 19,960
2000 16,288
2001 13,738
2002 11,525
Thereafter 130,618
- ------------------------------------------------------
Total $ 215,186
======================================================
9. INCOME TAXES
The income tax expense for the three years ended December 31, 1997 consisted of
the following (in thousands):
1997 1996 1995
- ---------------------------------------------------------------------------
Current:
Federal $ 30,181 $ 23,549 $(23,833)
State 2,476 4,779 403
- ---------------------------------------------------------------------------
Total 32,657 28,328 (23,430)
Deferred 13,168 10,420 42,965
- ---------------------------------------------------------------------------
Income tax expense $ 45,825 $ 38,748 $ 19,535
===========================================================================
Total income tax expense for the three years ended December 31, 1997 differs
from amounts computed by applying the statutory Federal rate to pre-tax income,
for the following reasons (in thousands):
1997 1996 1995
- ---------------------------------------------------------------------------
Computed income tax expense $ 44,525 $ 36,412 $ 18,184
State tax on income, less applicable
Federal tax 3,732 2,605 326
Low-income housing credits (1,214) (1,219) (1,224)
Fair market value over cost of donations (1,306) (11) -
Other-net 88 961 2,249
- ---------------------------------------------------------------------------
Income tax expense $ 45,825 $ 38,748 $ 19,535
===========================================================================
The tax effects of temporary differences that give rise to significant portions
of the net deferred tax liability at December 31, 1997 and 1996 were as follows
(in thousands):
1997 1996
- --------------------------------------------------------------------------
Accelerated depreciation $178,570 $171,815
Capital Construction Fund 104,408 111,064
Tax-deferred gains on real estate transactions 77,784 73,890
Unrealized holding gains on securities 31,602 27,625
Post-retirement benefits (48,014) (49,398)
Insurance reserves (6,907) (6,791)
Alternative minimum tax benefit - (3,905)
Other-net 12,907 8,905
- --------------------------------------------------------------------------
Total $350,350 $333,205
==========================================================================
The Internal Revenue Service (IRS) has completed its audits of the Company's
tax returns through 1991. No settlement had a material effect on the Company's
financial position or results of operations. The IRS has commenced an audit
of the Company's tax returns for 1992 through 1995. Management believes that
the resolution of the current audit 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 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 1997, new options to
purchase 565,212 shares were granted under the 1989 Plan. This included reload
options to purchase 57,132 shares.
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 1997 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 1997, new options to purchase 21,000 shares were granted, options to
purchase 15,000 shares were exercised and options to purchase 9,000 shares were
canceled. At December 31, 1997, options to purchase 183,000 shares were
outstanding under the plan.
The Company applies Accounting Principles Board Opinion No. 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 and the
Directors' stock option plan had been determined consistent with SFAS No. 123,
"Accounting for Stock-Based Compensation," the after-tax cost for grants made
in 1997, 1996 and 1995 would have been approximately $1,800,000, $900,000 and
$1,300,000, respectively. Earnings per share for 1997, 1996 and 1995 would
have declined by $0.04, $0.02 and $0.03, respectively.
Changes in shares under all option plans, for the three years ended
December 31, 1997, were as follows:
Price Range
Shares Per Share
- -----------------------------------------------------------------------
1994: 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 2,941,027 17.375-37.875
1997: GRANTED 586,212 25.100-34.875
EXERCISED (263,351) 17.375-24.750
CANCELED (57,850) 24.750-37.875
- -----------------------------------------------------------------------
OUTSTANDING, DECEMBER 31
(2,600,337 EXERCISABLE) 3,206,038 $21.750-37.875
=======================================================================
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. If not
renewed, the Plan will expire in 1998.
11. RELATED PARTY TRANSACTIONS, COMMITMENTS AND CONTINGENCIES
At December 31, 1997, the Company and its subsidiaries had an unspent balance
of total appropriations for capital expenditures of approximately $84,222,000.
However, there is no contractual obligation to spend this entire amount.
The Company has arranged for standby letters of credit of approximately
$19,930,000 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
$3,958,000.
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 $126,629,000 and
$190,188,000 under the contract during 1997 and 1996, 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 1997, 1996 and 1995, on page 24, 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.
Quarterly Results
(Unaudited)
Segment results by quarter for 1997 and 1996 are listed below (in thousands,
except per-share amounts):
1997 1996
----------------------------------------- -----------------------------------------
4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr. 4th Qtr. 3rd Qtr. 2nd Qtr. 1st Qtr.
----------------------------------------- -----------------------------------------
Revenue:
Ocean Transportation $177,423 $179,106 $175,005 $181,120 $167,462 $168,701 $173,201 $152,222
Property Development
& Management:
Leasing 9,103 9,320 9,609 9,116 9,025 8,918 9,085 8,888
Sales 13,245 4,080 14,480 4,111 9,324 15,299 5,125 2,161
Food Products 134,777 132,816 118,131 101,188 146,235 140,970 121,337 98,367
Other 711 684 703 717 759 1,393 673 665
- ---------------------------------------------------------------------------- -----------------------------------------
Total Revenue $335,259 $326,006 $317,928 $296,252 $332,805 $335,281 $309,421 $262,303
============================================================================ =========================================
Operating Profit:
Ocean Transportation $ 19,088 $ 24,405 $ 22,807 $ 34,050 $ 16,711 $ 20,646 $ 26,648 $ 17,613
Property Development
& Management:
Leasing 5,787 6,105 6,433 6,234 5,658 6,032 6,243 5,942
Sales 7,345 1,257 3,080 1,580 3,407 8,673 2,995 232
Food Products 5,913 11,778 6,949 2,443 13,207 11,848 2,696 (888)
Other 653 652 671 663 623 1,356 628 613
- ---------------------------------------------------------------------------- -----------------------------------------
Total Operating Profit 38,786 44,197 39,940 44,970 39,606 48,555 39,210 23,512
- ---------------------------------------------------------------------------- -----------------------------------------
Interest Expense 6,421 6,770 7,803 7,942 8,426 8,469 8,376 8,810
General Corporate Expenses 2,925 2,865 2,891 3,064 3,563 2,970 2,858 3,378
- ---------------------------------------------------------------------------- -----------------------------------------
Income Before Income Taxes 29,440 34,562 29,246 33,964 27,617 37,116 27,976 11,324
Income Taxes 9,429 12,690 10,967 12,739 10,418 13,991 10,206 4,133
- ---------------------------------------------------------------------------- -----------------------------------------
Net Income $ 20,011 $ 21,872 $ 18,279 $ 21,225 $ 17,199 $ 23,125 $ 17,770 $ 7,191
============================================================================ =========================================
Basic and Diluted
Earnings per Share $ 0.45 $ 0.48 $ 0.40 $ 0.47 $ 0.38 $ 0.51 $ 0.39 $ 0.16
============================================================================ =========================================
Certain amounts have been reclassified to conform with the current presentation.
GENERAL INFORMATION
Board of Directors
Members of the Board of Directors, including one advisory director, beneficially
own approximately seven percent of A&B shares.
At the Annual Meeting of Shareholders on April 24, 1997, shareholders elected a
total of nine 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, Maryanna G. Shaw
and Charles M. Stockholm. Alexander C. Waterhouse continues to serve 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
Glenn R. Rogers, vice president, chief financial officer and treasurer of A&B,
was appointed executive vice president, chief financial officer and treasurer of
A&B, effective July 1, 1997.
Ronald H. Rothman, vice president, industrial relations of Matson, will retire,
effective May, 1, 1998. Ronald J. Forest was appointed vice president, labor
relations of Matson, effective December 11, 1997.
Credit Ratings
As discussed in Note 7 to the financial statements, Matson had outstanding
commercial paper notes at December 31, 1997 of $100 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 $31 million at December 31, 1997.
The C&H notes are rated A-2/P-2 by Standard & Poor's and Moody's, respectively.
DIRECTORS AND OFFICERS
ALEXANDER & BALDWIN, INC.
Directors
MICHAEL J. CHUN (54)*
President, The Kamehameha Schools
(educational institution)
JOHN C. COUCH (58)
Chairman of the Board, President and
Chief Executive Officer,
Alexander & Baldwin, Inc.
Chairman of the Board,
A&B-Hawaii, Inc.
Chairman of the Board,
Matson Navigation Company, Inc.
LEO E. DENLEA, JR. (66)**
Retired Chairman of the Board, President
and Chief Executive Officer,
Farmers Group, Inc. (insurance)
WALTER A. DODS, JR. (56)*
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 (52)**
President, King Auto Center
(automobile dealership)
CARSON R. McKISSICK (65)*
Managing Director,
The Corporate Development Company
(financial advisory services)
C. BRADLEY MULHOLLAND (56)
President and Chief Executive Officer,
Matson Navigation Company, Inc.
MARYANNA G. SHAW (59)*
Private investor
CHARLES M. STOCKHOLM (65)**
Managing Director,
Trust Company of the West
(investment management services)
R. J. PFEIFFER (78)
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 (86)
Vice Chairman, Waterhouse Properties, Inc.
(private investments)
* Audit Committee Members
** Compensation and Stock Option
Committee Members
ALEXANDER & BALDWIN, INC.
Officers
JOHN C. COUCH (58)
Chairman of the Board, President and
Chief Executive Officer
GLENN R. ROGERS (54)
Executive Vice President, Chief Financial
Officer and Treasurer
MEREDITH J. CHING (41)
Vice President (Government &
Community Relations)
JOHN B. KELLEY (52)
Vice President (Investor Relations)
MILES B. KING (50)
Vice President and Chief Administrative Officer
MICHAEL J. MARKS (59)
Vice President, General Counsel and Secretary
ROBERT K. SASAKI (57)
Vice President (Properties)
JUDITH A. WILLIAMS (54)
Vice President
(Corporate Planning & Development)
THOMAS A. WELLMAN (39)
Controller
A&B-HAWAII, INC.
Officers
JOHN C. COUCH (58)
Chairman of the Board
W. ALLEN DOANE (50)
President and Chief Executive Officer
G. STEPHEN HOLADAY (53)
Senior Vice President
(Plantation General Manager, HC&S)
MILES B. KING (50)
Senior Vice President (Human Resources)
DAVID G. KONCELIK (56)
Senior Vice President (President and Chief
Executive Officer, California and Hawaiian Sugar Company, Inc.)
MICHAEL J. MARKS (59)
Senior Vice President and General Counsel
GLENN R. ROGERS (54)
Senior Vice President,
Chief Financial Officer and Treasurer
ROBERT K. SASAKI (57)
Senior Vice President (Properties)
NORBERT M. BUELSING (47)
Vice President (Property Management)
MEREDITH J. CHING (41)
Vice President (Government &
Community Relations)
JOHN F. GASHER (64)
Vice President (Human Resources Development)
KEITH A. GOTO (54)
Vice President (Labor Relations)
JOHN B. KELLEY (52)
Vice President
STANLEY M. KURIYAMA (44)
Vice President
(Land Planning & Entitlements)
THOMAS A. WELLMAN (39)
Vice President and Controller
JUDITH A. WILLIAMS (54)
Vice President
(Corporate Planning & Development)
ALYSON J. NAKAMURA (32)
Secretary
MATSON NAVIGATION COMPANY, INC.
Officers
JOHN C. COUCH (58)
Chairman of the Board
C. BRADLEY MULHOLLAND (56)
President and Chief Executive Officer
RAYMOND J. DONOHUE (61)
Senior Vice President and
Chief Financial Officer
MILES B. KING (50)
Senior Vice President (Human Resources)
GARY J. NORTH (53)
Senior Vice President (Operations)
(President and Chief Operating Officer, Matson Terminals, Inc.)
KEVIN C. O'ROURKE (51)
Senior Vice President and General Counsel
PAUL E. STEVENS (45)
Senior Vice President (Marketing)
RICHARD S. BLISS (59)
Vice President (Area Manager, Hawaii)
ROBERT L. DAWDY (53)
Vice President (West Coast Operations)
BRANTON B. DREYFUS (44)
Vice President
(Area Manager, Southern California)
JOHN C. GOSLING (61)
Vice President (Engineering)
PHILIP M. GRILL (50)
Vice President (Government Relations)
DALE B. HENDLER (44)
Vice President (Information Services)
MERLE A. K. KELAI (66)
Vice President (Community Relations and
Government Affairs)
RONALD J. FOREST (42)
Vice President (Labor Relations)
MICHAEL J. MARKS (59)
Secretary
TIMOTHY H. REID (51)
Treasurer
JOSEPH A. PALAZZOLO (49)
Controller
All positions as of December 31, 1997
All ages as of March 31, 1998
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 23, 1998.
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: invrel@alexanderbaldwin.com
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.
Tansfer Agent & Registrar
CHASEMELLON
SHAREHOLDER SERVICES
San Francisco, California and
Ridgefield Park, New Jersey
For questions regarding stock certificates, dividends or other transfer-related
matters, representatives of the Transfer Agent may be reached at 1-800-356-2017
between 8 a.m. and 8 p.m., Eastern Time. Correspondence may be sent to:
P.O. Box 3315, So. Hackensack NJ 07606.
Auditors
DELOITTE & TOUCHE LLP
Honolulu, Hawaii
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 68,734 shares a day
in 1997, compared with 67,425 shares a day in 1996 and 86,022 in 1995.
Currently, 14 firms make a market in ALEX.
High and low sales prices per share, by quarter, for 1997 and 1996 were:
Quarter 1997 1996
- -----------------------------------------------------
First $ 29-3/8 - 24-1/2 $ 24-1/4 - 22-1/2
Second 27-3/4 - 24-3/8 29-1/4 - 23-3/4
Third 28-1/8 - 25-3/8 26-1/4 - 23-1/4
Fourth 28-1/4 - 26 28-1/2 - 23
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. An increase in the quarterly dividend rate from 22 cents a share to 22.5
cents will be effective in the first quarter of 1998. In 1997, total dividend
payments to shareholders were $39.8 million, 49 percent of reported earnings for
the year.
The following dividend schedule for 1998 has been set, subject to final approval
by the A&B Board of Directors:
Quarterly Declaration Record Payment
Dividend Date Date Date
- ------------------------------------------------
First Jan. 22 Feb. 13 March 5
Second April 23 May 7 June 4
Third June 25 Aug. 6 Sept. 3
Fourth Oct. 22 Nov. 5 Dec. 3
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:
Kauai 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
Alexander & Baldwin, Inc.
822 Bishop Street
Honolulu, Hawaii 96813-3924
P. O. Box 3440
Honolulu, HI 96801-3440
Telephone: 808-525-6611
Fax: 808-525-6652
Website: www.alexanderbaldwin.com