FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1999
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-565
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ALEXANDER & BALDWIN, INC.
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(Exact name of registrant as specified in its charter)
HAWAII 99-0032630
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P. O. BOX 3440, HONOLULU, HAWAII 96801
822 BISHOP STREET, HONOLULU, HAWAII 96813
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(Address of principal executive (Zip Code)
offices)
(808) 525-6611
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(Registrant's telephone number, including area code)
N/A
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(Former name, former address and former
fiscal year, if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
Number of shares of common stock outstanding as of
March 31, 1999: 43,317,456
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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The condensed financial statements and notes for the first quarter of 1999 are
presented below.
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF INCOME
(In thousands except per share amounts)
Three Months Ended
March 31
1999 1998
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(unaudited)
Revenue:
Net sales, revenue from services and rentals $191,018 $284,267
Interest, dividends and other 6,424 7,140
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Total revenue 197,442 291,407
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Costs and Expenses:
Costs of goods sold, services and rentals 144,649 237,208
Selling, general and administrative 23,125 26,081
Interest 4,527 6,080
Income taxes 9,303 8,264
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Total costs and expenses 181,604 277,633
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Income before cumulative effect of change in
accounting method 15,838 13,774
Cumulative effect of change in accounting method
for insurance-related assessments (net of income
taxes of $3,481) -- (5,801)
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Net Income $ 15,838 $ 7,973
======== ========
Basic and Diluted Earnings Per Share $ 0.36 $ 0.18
Dividends Per Share $ 0.225 $ 0.225
Average Number of Shares Outstanding 43,559 44,842
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
INDUSTRY SEGMENT DATA
(In thousands)
Three Months Ended
March 31
1999 1998
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(unaudited)
Revenue:
Ocean Transportation $169,195 $178,800
Property Development and Management:
Leasing 11,587 9,235
Sales 7,932 7,781
Food Products 8,002 94,874
Other 726 717
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Total Revenue $197,442 $291,407
======== ========
Operating Profit:
Ocean Transportation $ 18,265 $ 17,370
Property Development and Management:
Leasing 7,622 5,899
Sales 5,540 4,642
Food Products 1,471 2,998
Other 650 678
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Total Operating Profit $ 33,548 $ 31,587
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ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
CONDENSED BALANCE SHEETS
(In thousands)
MARCH 31 December 31
1999 1998
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(UNAUDITED)
ASSETS
Current Assets:
Cash and cash equivalents $ 17,484 $ 86,818
Accounts and notes receivable, net 119,244 129,808
Inventories 36,868 19,772
Real estate held for sale 15,468 8,535
Deferred income taxes 10,844 9,524
Prepaid expenses and other assets 10,137 9,407
Accrued deposits to Capital Construction Fund (10,000) (9,070)
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Total current assets 200,045 254,794
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Investments 146,085 159,068
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Real Estate Developments 50,623 57,690
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Property, at cost 1,793,957 1,787,424
Less accumulated depreciation and amortization 853,556 837,704
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Property - net 940,401 949,720
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Capital Construction Fund 145,068 143,303
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Other Assets 51,319 41,065
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Total $1,533,541 $1,605,640
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LIABILITIES AND
SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 37,339 $ 45,533
Short-term commercial paper borrowings -- 42,000
Accounts payable 41,364 37,781
Other 66,975 62,367
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Total current liabilities 145,678 187,681
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Long-term Liabilities:
Long-term debt 245,659 255,766
Post-retirement benefit obligations 62,065 61,929
Other 52,150 52,593
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Total long-term liabilities 359,874 370,288
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Deferred Income Taxes 350,471 353,029
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Shareholders' Equity:
Capital stock 35,527 36,098
Additional capital 52,918 51,946
Unrealized holding gains on securities 54,831 63,329
Retained earnings 546,647 555,820
Cost of treasury stock (12,405) (12,551)
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Total shareholders' equity 677,518 694,642
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Total $1,533,541 $1,605,640
========== ==========
ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
March 31
1999 1998
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(unaudited)
<CAPTION:>
Cash Flows from Operating Activities $ 29,250 $ 17,104
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Cash Flows from Investing Activities:
Capital expenditures (13,412) (27,838)
Proceeds from disposal of property,
investments and other assets 2,198 2
Deposits into Capital Construction Fund (1,765) --
Withdrawals from Capital Construction Fund 930 --
Increase in investments, net (810) (468)
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Net cash used in investing activities (12,859) (28,304)
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Cash Flows from Financing Activities:
Proceeds from issuances of long-term debt 5,000 11,500
Payments of long-term debt (18,195) (10,079)
Proceeds (payments) on short-term commercial
paper borrowings, net (47,000) 11,000
Proceeds from issuances of capital stock 54 543
Repurchases of capital stock (15,792) (2,250)
Dividends paid (9,792) (10,092)
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Net cash provided by (used in) financing activities (85,725) 622
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Decrease in Cash and Cash
Equivalents $(69,334) $(10,578)
======== ========
Other Cash Flow Information:
Interest paid, net of amounts capitalized $ 4,446 $ 7,103
Income taxes paid, net of refunds 962 4,311
Other Non-Cash Information:
Accrued deposits to Capital Construction Fund, net 930 --
Depreciation 19,630 21,951
Tax-deferred property sales 5,768 4,279
Change in unrealized holding gains (8,498) (789)
FINANCIAL NOTES
(Unaudited)
(a) The condensed balance sheet as of March 31, 1999 and the condensed
statements of income and the condensed statements of cash flows for the
three months ended March 31, 1999 and 1998 are unaudited. Because of the
nature of the Company's operations, the results for interim periods are
not necessarily indicative of results to be expected for the year, but in
the opinion of management, all material adjustments necessary for the fair
presentation of interim period results have been included in the interim
financial statements.
(b) Estimated effective annual income tax rates differ from statutory rates,
primarily due to the dividends-received deduction and various tax credits.
(c) The Company's total non-owner changes in shareholders' equity consist of
net income plus unrealized holding gains on securities (comprehensive
income). On this basis, comprehensive income for the three months ended
March 31, 1999 and 1998 was $7.3 million and $7.2 million, respectively.
(d) Certain amounts have been reclassified to conform with the current year's
presentation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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FIRST QUARTER EVENTS:
OPERATING RESULTS: Net income for the first quarter of 1999 was $15,838,000,
or $0.36 per share. Income before the cumulative effect of an accounting
change for the comparable period of 1998 was $13,774,000, or $0.31 per share.
The accounting change resulted in a one-time, non-cash charge to 1998
first-quarter earnings of $5,801,000, or $0.13 per share. After reflecting
that charge, net income in the first quarter of 1998 was $7,973,000, or $0.18
per share.
Revenue in the first quarter of 1999 was $197,442,000, compared with revenue of
$291,407,000 in the first quarter of 1998. The sizeable decrease in revenue
resulted primarily from the sale in December 1998 of a majority interest in
A&B's sugar refining and marketing business.
FINANCIAL CONDITION AND LIQUIDITY
The Company's principal liquid resources, comprising cash and cash equivalents,
receivables, sugar and coffee inventories and unused lines of credit, less
accrued deposits to the Capital Construction Fund (CCF), totaled $363,608,000
at March 31, 1999, a decrease of $1,785,000 from December 31, 1998. This
decrease was due primarily to lower cash and receivables, substantially offset
by an increase in sugar and coffee inventories and in amounts available under
lines of credit. Cash decreased $69,334,000, primarily due to the proceeds
from the 1998 sale of the sugar refining business, which were used to repay
debt in 1999. The $10,564,000 decrease in receivables was due mostly to the
timing of the sugar-harvesting season and to lower revenue at Matson Navigation
Company, Inc. (Matson). Amounts available under lines of credit increased
$62,500,000, primarily due to an increase in credit facilities. Sugar and
coffee inventories increased $16,543,000, primarily due to the timing of the
sugar-harvesting season. Accrued deposits to the CCF increased $930,000.
Working capital was $54,367,000 at March 31, 1999, a decrease of $12,746,000
from the amount at the end of 1998. This was due primarily to decreases in
cash, short-term debt and receivables, partially offset by increases in sugar
and coffee inventories, real estate held for sale and accounts payable.
RESULTS OF SEGMENT OPERATIONS -
FIRST QUARTER 1999 COMPARED WITH THE FIRST QUARTER 1998
OCEAN TRANSPORTATION revenue of $169,195,000 for the first quarter of 1999 was
five-percent less than the 1998 first-quarter revenue. However, operating
profit increased five percent, to $18,265,000, from $17,370,000 in the first
quarter of 1998. The improvement was due primarily to lower operating
expenses. Vessel operating expenses were reduced by a fleet schedule change
implemented in September 1998, lower fuel prices and the full impact of a
revised agreement with American President Lines, Ltd., which commenced in
February 1998. Matson's first-quarter 1999 Hawaii service container volume was
four-percent lower than in the 1998 first quarter, while Hawaii automobile
volume was 10-percent lower.
PROPERTY DEVELOPMENT AND MANAGEMENT - LEASING revenue of $11,587,000 for the
first quarter of 1999 was 25-percent higher than the first quarter 1998
revenue, and operating profit of $7,622,000 was 29 percent above that of the
first quarter of 1998. The increases primarily reflected a one-time buyout of
a long-term ground lease and the contribution of new properties added to the
portfolio after the 1998 first quarter. First quarter 1999 occupancy levels
for Mainland properties averaged 92 percent, versus 96 percent in the first
quarter of 1998. The decrease was due primarily to an increase in the number
of new, multi-tenant properties in the portfolio. Occupancy levels for Hawaii
properties averaged 72 percent in the first quarter of 1999, versus 65 percent
in the comparable period of 1998. That increase was due primarily to higher
tenancy in retail properties.
PROPERTY DEVELOPMENT AND MANAGEMENT - SALES revenue of $7,932,000 in the first
quarter of 1999 was virtually the same as the $7,781,000 recorded in the first
quarter of 1998. Sales in the first quarter of 1999 included three business
parcels and eight residential properties. Sales activity in the first quarter
of 1998 was nearly the same: three business parcels and nine residential
properties. However, operating profit from property sales in the first quarter
of 1999 was $5,540,000, versus $4,642,000 in the same period in 1998. The 19-
percent increase was due to higher margins in the mix of business parcels sold
in 1999's first quarter. Four of the 1999 sales and three of the 1998 sales
were completed on a tax-deferred basis.
The mix of property transactions 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
sales of undeveloped land and subdivision lots generally provide a greater
contribution margin than the sales 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, historical property sales and the
amount of real estate held for sale currently on the balance sheets do not
necessarily indicate future profitability trends for this segment. Because the
Company sells a significant amount of property on a tax-deferred basis, the
proceeds of which must be reinvested in similar property within time periods
specified by the Internal Revenue Code, property sales may not necessarily be
indicative of cash flows.
FOOD PRODUCTS revenue of $8,002,000 for the first quarter of 1999 was
significantly lower than the revenue reported for the comparable period of
1998. Operating profit also decreased from $2,998,000 in the first quarter of
1998 to $1,471,000 in the first quarter of 1999. Both reductions were
primarily the direct result of the partial sale of California and Hawaiian
Sugar Company, Inc. (C&H).
OTHER MATTERS
C&H RECAPITALIZATION AND PARTIAL SALE: On December 24, 1998, the Company
recapitalized and sold a majority of its equity in C&H. The recapitalization
and partial sale of C&H allows the Company to focus capital and management
attention better on its core businesses. At the same time, C&H, with its new
majority owner, is well positioned to pursue new opportunities to grow its
business. C&H is included in the consolidated results and in the Food Products
Segment of the Company up to the date of sale. Effective December 24, 1998,
the Company began accounting for its investment in C&H under the equity method.
TAX-DEFERRED REAL ESTATE EXCHANGES: In the first quarter of 1999, the Company
sold four parcels of land for $5,768,000. The proceeds from these sales are
reflected in the Statements of Cash Flows under the caption "Other Non-Cash
Information."
SHARE REPURCHASES: During the first quarter of 1999, the Company repurchased
764,000 shares of its common stock for an aggregate of about $15,792,000
(average of $20.67 per share). On March 1, 1999, the Board of Directors
authorized the repurchase of up to 2,000,000 additional shares of the Company's
stock.
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.
ECONOMIC CONDITIONS: The outlook for 1999 is for continued weak economic
growth for the state of Hawaii. Most published estimates are for about a 1.5%
rise in real gross state product. Modest growth in visitor arrivals, totaling
about one percent, is the anticipated net result of continued growth in the
number of arrivals from the U.S. mainland and of no growth, at best, in
eastbound arrivals. Private-sector construction activity continues to be a
drag on the economy, with construction industry employment still down and
new-construction authorizations remaining at or near a low point. Personal
income and price levels are modest positives, with continued low growth
expected in the former and declines in the latter. The total number of jobs is
not expected to grow, however, on a year-to-year basis, until the year 2000.
YEAR 2000
State of Year 2000 Readiness
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In 1995, the Company and its subsidiaries (collectively, the "Company")
commenced an evaluation of their computer systems and applications to prepare
for the year 2000 ("Y2K"). Following this evaluation, implementation plans for
all business segments were prepared and currently are being executed. The Y2K
initiative is proceeding with the direction of the Board of Directors, which
receives regular progress reports.
The Company's Y2K readiness project addresses risks in the following three
primary areas:
1. the Company's information systems, including hardware and software;
2. the Company's embedded systems, including computers and software that
control machinery, telephone systems, and environmental systems; and
3. third parties with whom the Company does business.
The approach to making the information and embedded systems Y2K ready consists
of five phases: awareness, assessment, remediation, testing and installation.
The awareness phase consists of investigating the nature of the Y2K problem and
educating the Company about the risk. The assessment phase consists of taking
an inventory of the Company's computers and software, and determining which are
Y2K ready and which require remediation or replacement. The remediation phase
consists of fixing or replacing computer software and hardware identified as
not 2K ready during the assessment phase. The testing phase involves testing
whether the software and hardware will work properly before, on and after
December 31, 1999. The installation phase involves placing the Y2K-ready
components into production.
Company information systems: Company personnel and outside consultants have
assessed the Y2K readiness of the Company's information systems. Certain
information systems that were not Y2K ready and which had a significant impact
on the Company's operations were identified as mission critical. The awareness
and assessment phases are complete. The remediation and testing of those
mission critical information systems also are complete. The installation of
those mission critical systems, and of all other information systems affected
by the Y2K problem, is expected to be complete by August 31, 1999.
Company embedded systems: Company personnel were assisted by outside
consultants in assessing the embedded systems in our factories, buildings,
ships, shoreside facilities, heavy equipment, etc. The embedded systems with
Y2K problems were evaluated in terms of their impact on operations and safety.
The remediation, testing and installation of all mission critical embedded
systems are complete. A few non-critical embedded systems with minor
operational impact and no impact on safety will be replaced before the end of
1999.
Third parties: In 1998, the Company identified and prioritized the third party
vendors, customers and associates that could impact Company operations. Those
third parties were contacted to assess their Y2K readiness. Additionally,
Company employees conducted in-depth assessments, including face-to-face
meetings, with third parties having the potential to affect materially the
Company. Follow-up contacts will be made during the third quarter of 1999,
which is when most third parties have advised the Company that they will be
substantially complete with their Y2K projects.
Costs
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The implementation plans, which consist of upgrading, modifying, or replacing
various systems, are expected to cost approximately $6,000,000 to $8,000,000,
including a contingency of $2,000,000. At the end of April 1999, the Company
had expended approximately $4,100,000 for this work, of which $3,400,000 was
expended in 1998. A total of $1,200,000 is budgeted for 1999, most of which
will have been utilized in the first half of 1999. Y2K costs for 1998
represented about eighteen percent of the Company's total information techno-
logy budget. The 1999 costs are expected to be about seven percent of the
budget. The internal and external costs of the Y2K work are being expensed as
incurred, unless a computer system is being replaced for operating reasons as
well as Y2K compliance, in which case the costs are being capitalized. Cash
generated from operations is funding all of the Y2K costs; however, the Company
has ample resources from unused credit facilities, if needed. No major
internal systems projects have been delayed as a result of the Y2K work.
Risks
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Company information and embedded systems: The Company believes that the Y2K
risks associated with the failure of its information and embedded systems will
be low, due to its Y2K readiness preparations. However, despite the prepara-
tions being taken by the Company to ensure that its information and embedded
systems are Y2K ready, there may be risks due to unforeseen circumstances.
Third parties: Failure of third parties may affect materially the Company's
operations; however, the seriousness of this risk depends on the nature and
duration of the failure. The most serious impact on the Company's operations
from third parties would result if basic services, such as telecommunications,
electric power, and other basic infrastructure services, were disrupted. Some
public disclosure about readiness preparation among third-party suppliers is
now available; however, the Company is unable to estimate the likelihood of
significant third-party disruptions. The only risk largely under the Company's
control is preparing its internal operations for the Y2K.
As such, the most reasonably likely worst case scenario could result from
third-party failures, such as temporary short-term disruptions in customer
services and product deliveries, temporary billing and collection delays, and
temporary delays in payrolls and vendor payments. If the most reasonably
likely worst case scenario occurred, it could have a material adverse impact
on the Company's results of operations, liquidity and financial condition.
Details of the Company's plans for dealing with potential problems will be
included in its contingency plans.
Contingency Plans
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The Company's approach to Y2K contingency planning is to complement disaster
plans that already are in effect for the Company. The disaster plans provide
operating procedures for unanticipated outages of electricity, communications
or other essential services, such as those disruptions which might occur due
to a hurricane or tsunami. The Y2K contingency plans will address Y2K-specific
issues that are not covered in the existing disaster plans.
The contingency plans will detail procedures and strategies for each business
unit for dealing with potential problems before, on and after December 31,
1999. These preparations include ensuring that adequate levels of essential
fuel, materials and supplies are available, and completing certain critical
administrative procedures before the end of 1999.
Y2K contingency plans will be completed by June 30, 1999. They will be
reviewed and refined through the end of 1999, as appropriate.
Summary
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Although there can be no absolute assurance that the Company will be successful
in identifying and avoiding all possible problems, the Company continues to
identify and address potential negative consequences which may result from not
being Y2K ready. In particular, there can be no assurance that the Company will
not be affected adversely by the failure of a vendor, customer, or other third
party to address the Y2K issue adequately. However, in the context of the
uncertainties inherent in dealing with the Y2K issue, the Company believes,
based on available information, that the impact of the Y2K issue and its
associated costs will not have a material impact on the results of operations,
liquidity and financial condition. This disclosure is a Year 2000 Readiness
Disclosure, pursuant to the Year 2000 Information and Readiness Disclosure Act.
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 environments at the federal, state and local levels, such as
government rate regulations, land-use regulations, government administration of
the U.S. sugar program, and modifications to or retention of cabotage laws; (5)
dependence on third-party suppliers; (6) fuel prices; (7) labor relations; (8)
the ability to locate and correct or replace, on a timely basis, all relevant
computer codes prior to the year 2000; and (9) other risk factors described
elsewhere in these communications and from time to time in the Company's
filings with the SEC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
Information concerning market risk is incorporated herein by reference to
Item 7A of the Company's Form 10-K for the fiscal year ended December 31, 1998.
There has been no material change in the quantitative and qualitative
disclosure about market risk since December 31, 1998.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(a) Exhibits
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10. Material contracts.
10.b.1.(xxxvii) Agreement between Alexander & Baldwin, Inc.
and Miles B. King, dated February 24, 1999.
11. Statement re computation of per share earnings.
27. Financial Data Schedule.
(b) Reports on Form 8-K
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No reports on Form 8-K were filed during the quarter.
SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of l934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALEXANDER & BALDWIN, INC.
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(Registrant)
Date: May 14, 1999 /s/ Glenn R. Rogers
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Glenn R. Rogers
Executive Vice President and
Chief Financial Officer
Date: May 14, 1999 /s/ Thomas A. Wellman
-------------------------
Thomas A. Wellman
Controller
EXHIBIT INDEX
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10. Material contracts.
10.b.1.(xxxvii) Agreement between Alexander & Baldwin, Inc. and Miles B.
King, dated as of February 24, 1999.
11. Statement re computation of per share earnings.
27. Financial Data Schedule.