UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _______
Commission file number 0-565
ALEXANDER & BALDWIN, INC.
(Exact name of registrant as specified in its charter)
Hawaii 99-0032630
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
822 Bishop Street
Post Office Box 3440, Honolulu, Hawaii 96801
(Address of principal executive offices and zip code)
808-525-6611
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, without par value
(Title of Class)
Number of shares of Common Stock outstanding at February 6, 2006:
44,182,469
Aggregate market value of Common Stock held by non-affiliates at June 30, 2005
$1,965,081,251
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes |X| No _____
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes _____ No |X|
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act.
(Check one): Large accelerated filer |X| Accelerated filer _____
Non-accelerated filer _____
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes _____ No |X|
Documents Incorporated By Reference
Portions of Registrant's Proxy Statement dated March 6, 2006 (Part III of
Form 10-K)
TABLE OF CONTENTS
PART I
Page
Items 1 & 2. Business and Properties................................. 1
A. Transportation.......................................... 1
(1) Freight Services............................... 1
(2) Vessels........................................ 2
(3) Terminals...................................... 3
(4) Logistics and Other Services................... 3
(5) Competition.................................... 3
(6) Labor Relations................................ 5
(7) Rate Regulation................................ 6
B. Real Estate............................................. 6
(1) General........................................ 6
(2) Planning and Zoning............................ 7
(3) Residential Projects........................... 7
(4) Commercial Properties.......................... 9
C. Food Products........................................... 12
(1) Production..................................... 12
(2) Marketing of Sugar and Coffee.................. 12
(3) Competition and Sugar Legislation.............. 13
(4) Properties and Water........................... 14
D. Employees and Labor Relations........................... 15
E. Energy.................................................. 15
F. Available Information................................... 16
Item 1A. Risk Factors............................................ 16
Item 1B. Unresolved Staff Comments............................... 21
Item 3. Legal Proceedings....................................... 21
Item 4. Submission of Matters to a Vote of Security Holders..... 22
Executive Officers of the Registrant.................................. 22
PART II
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of
Equity Securities....................................... 23
Item 6. Selected Financial Data................................. 25
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 27
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk............................................. 47
Item 8. Financial Statements and Supplementary Data............. 49
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure..................... 87
Item 9A. Controls and Procedures................................. 87
A. Disclosure Controls and Procedures...................... 87
B. Internal Control over Financial Reporting............... 87
Item 9B. Other Information....................................... 87
PART III
Item 10. Directors and Executive Officers of the Registrant...... 88
A. Directors............................................... 88
B. Executive Officers...................................... 88
C. Audit Committee Financial Experts....................... 89
D. Code of Ethics.......................................... 89
Item 11. Executive Compensation.................................. 89
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters.......... 89
Item 13. Certain Relationships and Related Transactions.......... 90
Item 14. Principal Accountant Fees and Services.................. 90
PART IV
Item 15. Exhibits and Financial Statement Schedules.............. 91
A. Financial Statements.................................... 91
B. Financial Statement Schedules........................... 91
C. Exhibits Required by Item 601 of Regulation S-K......... 91
Signatures............................................................ 101
Consent of Independent Registered Public Accounting Firm.............. 103
ALEXANDER & BALDWIN, INC.
FORM 10-K
Annual Report for the Fiscal Year
Ended December 31, 2005
PART I
ITEMS 1 & 2. BUSINESS AND PROPERTIES
Alexander & Baldwin, Inc. ("A&B") is a diversified corporation with
most of its operations centered in Hawaii. It was founded in 1870 and
incorporated in 1900. Ocean transportation operations, related shoreside
operations in Hawaii, and intermodal, truck brokerage and logistics services are
conducted by a wholly-owned subsidiary, Matson Navigation Company, Inc.
("Matson") and two Matson subsidiaries. Property development and food products
operations are conducted by A&B and certain other subsidiaries of A&B.
The business industries of A&B are as follows:
A. Transportation - carrying freight, primarily between various
ports on the U.S. Pacific Coast and major Hawaii ports and
Guam, and, commencing February 2006, between China and the
U.S. Pacific Coast; chartering vessels to third parties;
arranging intermodal and motor carrier services and providing
logistics services in North America; and providing terminal,
stevedoring and container equipment maintenance services in
Hawaii.
B. Real Estate - purchasing, developing, selling, managing,
leasing and investing in commercial (including retail, office
and industrial) and residential properties, in Hawaii and on
the U.S. mainland.
C. Food Products - growing sugar cane and coffee in Hawaii;
producing bulk raw sugar, specialty food-grade sugars,
molasses and green coffee; marketing and distributing roasted
coffee and green coffee; providing sugar, petroleum and
molasses hauling, general trucking services, mobile equipment
maintenance and repair services, and self-service storage in
Hawaii; and generating and selling electricity.
For information about the revenue, operating profits and identifiable
assets of A&B's industry segments for the three years ended December 31, 2005,
see Note 15 ("Industry Segments") to A&B's financial statements in Item 8 of
Part II below.
DESCRIPTION OF BUSINESS AND PROPERTIES
A. Transportation
(1) Freight Services
Matson's Hawaii Service offers containership freight services between
the ports of Long Beach, Oakland, Seattle, and the major ports in Hawaii on the
islands of Oahu, Kauai, Maui and Hawaii. Roll-on/roll-off service is provided
between California and the major ports in Hawaii.
Matson is the principal carrier of ocean cargo between the U.S. Pacific
Coast and Hawaii. In 2005, Matson carried approximately 175,800 containers
(compared with 169,600 in 2004) and 148,100 automobiles (compared with 157,000
in 2004) between those destinations. Principal westbound cargoes carried by
Matson to Hawaii include dry containers of mixed commodities, refrigerated
commodities, building materials, automobiles and packaged foods. Principal
eastbound cargoes carried by Matson from Hawaii include automobiles, household
goods, refrigerated containers of fresh pineapple, canned pineapple and dry
containers of mixed commodities. The preponderance of Matson's Hawaii Service
revenue is derived from the westbound carriage of containerized freight and
automobiles.
Matson's Guam Service provides containership freight services between
the U.S. Pacific Coast and Guam and Micronesia. Matson's Guam Service is a
component of the Pacific Alliance Service, a strategic alliance established by
Matson and American President Lines, Ltd. ("APL") to provide freight services
between the U.S. Pacific Coast and Hawaii, Guam and several Far East ports. In
2005, Matson carried approximately 16,600 containers (compared with 17,200 in
2004) and 4,500 automobiles (compared with 4,580 in 2004) in the Guam Service.
The alliance has utilized three Matson vessels and two APL vessels. Matson's
agreement with APL expired in February 2006.
As announced in February 2005, Matson has replaced its Guam Service at
the termination of the APL alliance with an integrated Hawaii/Guam/China service
beginning in February 2006. The service initially employs five existing Matson
containerships, one of which will be replaced with a new containership to be
purchased from Aker Philadelphia Shipyard, Inc. ("Aker") (formerly Kvaerner
Philadelphia Shipyard, Inc.), in a five-ship string that carries cargo from the
U.S. Pacific Coast to Honolulu, then to Guam. The vessels continue to China,
where they are loaded with cargo to be discharged in Long Beach. After a
transition period during the termination of the APL alliance, the Guam service
strategy involves re-deploying into the Hawaii service three C-9 class vessels
that currently serve Guam.
Matson's Mid-Pacific Service offers container and conventional freight
services between the U.S. Pacific Coast and the ports of Kwajalein, Ebeye and
Majuro in the Republic of the Marshall Islands and Johnston Island, all via
Honolulu.
See "Rate Regulation" below for a discussion of Matson's freight rates.
(2) Vessels
Matson's fleet consists of 12 containerships, three combination
container/trailerships, including a combination ship time-chartered from a third
party, one roll-on/roll-off barge, two container barges equipped with cranes
that serve the neighbor islands of Hawaii, and one container barge equipped with
cranes in the Mid-Pacific service. The 18 Matson-owned vessels in the fleet
represent an investment of approximately $1 billion expended over the past 35
years. The majority of vessels in the Matson fleet have been acquired with the
assistance of withdrawals from a Capital Construction Fund ("CCF") established
under Section 607 of the Merchant Marine Act, 1936, as amended.
Matson has actively pursued a vessel renewal program. In 2002, Matson
contracted with Aker for two new containerships for the Hawaii Service, each at
a project cost of approximately $107 million. The first ship was delivered in
the third quarter of 2003, and the second was delivered in the third quarter of
2004.
Matson entered into agreements in February 2005 with Aker to purchase
two additional new containerships at a contract price of $144.4 million each.
The first ship, the MV Manulani, was delivered in May 2005, and the second ship,
the MV Maunalei, is now expected to be delivered in the third quarter of 2006.
The purchase price for the MV Maunalei will also include approximately $3.9
million of interest incurred by Aker during construction, bringing the total
purchase price to $148.3 million. The purchase of the MV Maunalei is expected to
be funded with the CCF, operating cash flows and a revolving credit facility
that was executed on June 28, 2005. No progress payments are required under the
contract; accordingly, payment in full is required upon delivery. No obligation
is recorded on the financial statements for the MV Maunalei because conditions
necessary to record either a liability or an asset have not been met. Also, in
February 2005, Matson entered into a right of first refusal agreement with Aker,
which provides that, after the MV Maunalei is delivered to Matson, Matson has
the right of first refusal to purchase each of the next four containerships of
similar design built by Aker that are deliverable before June 30, 2010. Matson
may either exercise its right of first refusal and purchase the ship at an 8
percent discount from a third party's proposed contract price, or decline to
exercise its right of first refusal and be paid by Aker 8 percent of such price.
Notwithstanding the above, if Matson and Aker agree to a construction contract
for a vessel to be delivered before June 30, 2010, Matson shall receive an 8
percent discount.
Ships owned by Matson are described on page 4.
As a complement to its fleet, Matson owns approximately 19,700
containers, 11,000 container chassis, 700 auto-frames and miscellaneous other
equipment. Capital expenditures incurred by Matson in 2005 for vessels,
equipment and systems totaled approximately $174 million.
In July 2005 Matson entered into agreements with the United States
Maritime Administration ("Marad") to manage three of Marad's ready reserve
vessels. Two of the vessels are roll-on/roll-off vessels currently on reduced
operating status and are based in Alameda, California. This contract is for four
years with two three-year extensions possible. The third vessel is a break bulk
vessel in full operating status with the U.S. Navy Military Sealift Command and
is based in the Marianas. This contract is for one year with two one-year
extensions possible. Matson will be responsible for keeping the ships in a
constant state of readiness and crewing the ships when an activation call goes
out.
(3) Terminals
Matson Terminals, Inc. ("Matson Terminals"), a wholly-owned subsidiary
of Matson, provides container stevedoring, container equipment maintenance and
other terminal services for Matson and other ocean carriers at its 105-acre
marine terminal in Honolulu. Matson Terminals owns and operates seven cranes at
the terminal, which handled approximately 417,500 containers in 2005 (compared
with 423,300 in 2004). The facility can accommodate three vessels at one time.
Matson Terminals' lease with the State of Hawaii runs through September 2016.
Matson Terminals also provides container stevedoring and other terminal services
to Matson and other vessel operators at ports on the island of Hawaii.
SSA Terminals, LLC ("SSAT"), a joint venture of Matson and SSA Marine,
Inc. ("SSA"), provides terminal and stevedoring services at U.S. Pacific Coast
terminal facilities to Matson and numerous international carriers, which include
Mediterranean Shipping Company ("MSC"), OOCL, NYK Line and China Shipping. SSAT
operates seven terminals: two in Seattle, three in Oakland/Richmond and two in
Long Beach, one of which is operated by SSA Terminals (Long Beach), LLC ("SSAT
(LB)"), a joint venture shared equally between SSAT and MSC. The volume for the
combined SSAT and SSAT (LB) operations during 2005 was 1.7 million lifts.
Capital expenditures incurred by Matson Terminals in 2005 for terminals
and equipment totaled approximately $743,000.
(4) Logistics and Other Services
Matson Integrated Logistics, Inc. ("Matson Integrated Logistics"), a
wholly-owned subsidiary of Matson, arranges rail, highway, air, ocean and other
surface transportation and provides other third-party logistics services for
North American shippers. Through volume purchases of rail, motor carrier, air
and ocean transportation services, augmented by such services as shipment
tracking and tracing and single-vendor invoicing, Matson Integrated Logistics is
able to reduce transportation costs for its customers. Matson Integrated
Logistics operates eight regional operating centers, has 28 sales offices, and
operates through a network of agents throughout the U.S. mainland. Matson
Integrated Logistics has expanded its business both through organic growth and
acquisitions, and its revenue in 2005 reflected the acquisition of a Texas-based
freight transportation management business at the end of 2004.
(5) Competition
Matson's Hawaii Service and Guam Service have one major containership
competitor that serves Long Beach, Oakland, Tacoma, Honolulu and Guam. In March
2005, one additional liner competitor entered the Hawaii trade focusing on the
carriage of automobiles and large pieces of rolling stock such as trucks and
busses. The new entrant has one specialized ship for the carriage of such cargo
and provides service every two weeks between San Diego and certain Hawaiian
islands. The new carrier had some adverse impact on Matson in 2005, but Matson
was able to replace a substantial portion of the cargoes that shifted to the new
carrier. Matson has also secured multi-
MATSON NAVIGATION COMPANY, INC.
FLEET - 2/22/06
---------------
Usable Cargo Capacity
------------------------------------------------------
Containers Vehicles
Year Maximum Maximum -------------------------------------- --------------
Official Year Recon- Speed Deadweight Reefer
Vessel Name Number Built structed Length (Knots) (Long Tons) 20' 24' 40' 45' Slots TEUs (1) Autos Trailers
----------- -------- ----- -------- ---------- ------- ----------- --- --- ----- --- ------ -------- ----- --------
Diesel-Powered Ships (2)
------------------------
R.J. PFEIFFER....... 979814 1992 -- 713' 6" 23.0 27,100 48 171 988 -- 300 2,229 -- --
MOKIHANA............ 655397 1983 -- 860' 2" 23.0 30,167 182 -- 1,340 -- 408 2,824 -- --
MANULANI............ 1168529 2005 -- 712' 23.0 29,517 4 -- 1,294 -- 300 2,592 -- --
MAHIMAHI............ 653424 1982 -- 860' 2" 23.0 30,167 182 -- 1,340 -- 408 2,824 -- --
MANOA............... 651627 1982 -- 860' 2" 23.0 30,187 182 -- 1,340 -- 408 2,824 -- --
MANUKAI............. 1141163 2003 -- 711' 9" 23.0 29,517 4 -- 1,359 -- 300 2,592 -- --
MAUNAWILI........... 1153166 2004 -- 711' 9" 23.0 29,517 4 -- 1,359 -- 300 2,592 -- --
Steam-Powered Ships
-------------------
KAUAI............... 621042 1980 1994 720' 5 1/2" 22.5 26,308 -- 210 779 -- 300 1,626 44 --
MAUI................ 591709 1978 1993 720' 5 1/2" 22.5 26,623 -- 458 538 -- 300 1,626 -- --
MATSONIA............ 553090 1973 1987 760' 0" 21.5 22,501 50 94 771 -- 201 1,712 450 56
LURLINE............. 549900 1973 2003 826' 6" 21.5 22,213 6 -- 865 38 246 1,821 910 55
EWA (3)............. 530140 1972 1978 787' 8" 21.0 38,747 286 276 681 -- 228 1,979 -- --
CHIEF GADAO (3)..... 530138 1971 1978 787' 8" 21.0 37,346 230 464 597 -- 274 1,981 -- --
LIHUE............... 530137 1971 1978 787' 8" 21.0 38,656 286 276 681 -- 188 1,979 -- --
Barges
------
WAIALEALE (4)....... 978516 1991 -- 345' 0" -- 5,621 -- -- -- -- 35 -- 230 45
ISLANDER (5)........ 933804 1988 -- 372' 0" -- 6,837 -- 276 24 -- 70 380 -- --
MAUNA LOA (5)....... 676973 1984 -- 350' 0" -- 4,658 -- 144 72 -- 84 316 -- --
HALEAKALA (5)....... 676972 1984 -- 350' 0" -- 4,658 -- 144 72 -- 84 316 -- --
Molasses
----------
Vessel Name Short Tons
----------- ----------
Diesel-Powered Ships (2)
--------------------
R.J. PFEIFFER....... --
MOKIHANA............ --
MANULANI............ --
MAHIMAHI............ --
MANOA............... --
MANUKAI............. --
MAUNAWILI........... --
Steam-Powered Ships
-------------------
KAUAI............... 2,600
MAUI................ 2,600
MATSONIA............ 4,300
LURLINE............. 2,100
EWA (3)............. --
CHIEF GADAO (3)..... --
LIHUE .............. --
Barges
------
WAIALEALE (4)....... --
ISLANDER (5)........ --
MAUNA LOA (5)....... 2,100
HALEAKALA (5)....... 2,100
--------
(1) "Twenty-foot Equivalent Units" (including trailers). TEU is a standard
measure of cargo volume correlated to the volume of a standard 20-foot dry
cargo container.
(2) MAUNALEI is scheduled to be delivered in the third quarter of 2006.
(3) Scheduled to be scrapped in 2006.
(4) Roll-on/Roll-off Barge.
(5) Container Barge.
year commitments from several major automobile manufacturers ensuring its strong
competitive position into the near future. The total Hawaii-Mainland auto
carriage market is approximately 190,000 automobiles per year.
Other competitors in the Hawaii Service include two common carrier
barge services, unregulated proprietary and contract carriers of bulk cargoes,
and air cargo service providers. Although air freight competition is intense for
time-sensitive and perishable cargoes, inroads by such competition in terms of
cargo volume are limited by the amount of cargo space available in passenger
aircraft and by generally higher air freight rates.
Matson vessels are operated on schedules that make available to
shippers and consignees regular day-of-the-week sailings from the U.S. Pacific
Coast and day-of-the-week arrivals in Hawaii. Under its current schedule, Matson
operates between 213 and 228 Hawaii westbound voyages per year, double the
westbound voyages of its nearest competitor, and arranges additional voyages
when cargo volumes require additional capacity. With the commencement of the
China Service, the number of eastbound voyages will drop by one voyage each week
to 161 to 176 for each year. This service is attractive to customers because
more frequent arrivals permit customers to reduce inventory costs. Matson also
competes by offering a more comprehensive service to customers, supported by the
scope of its equipment, its efficiency and experience in handling containerized
cargo, and competitive pricing.
The carriage of cargo between the U.S. Pacific Coast and Hawaii on
foreign-built or foreign-documented vessels is prohibited by Section 27 of the
Merchant Marine Act, 1920, commonly referred to as the Jones Act. However,
foreign-flag vessels carrying cargo to Hawaii from non-U.S. locations provide
indirect competition for Matson's Hawaii Service. Far East countries, Australia,
New Zealand and South Pacific islands have direct foreign-flag services to
Hawaii.
In response to coordinated efforts by various interests to convince
Congress to repeal the Jones Act, in 1995 Matson joined other businesses and
organizations to form the Maritime Cabotage Task Force, which supports the
retention of the Jones Act and other cabotage laws, which regulate the transport
of goods between U.S. ports. Repeal of the Jones Act would allow all
foreign-flag vessel operators, which do not have to abide by U.S. laws and
regulations, to sail between U.S. ports in direct competition with Matson and
other U.S. operators, which must comply with such laws and regulations. The Task
Force seeks to inform elected officials and the public about the economic,
national security, commercial, safety and environmental benefits of the Jones
Act and similar cabotage laws.
Simultaneous with the phase-out of the APL Alliance, Matson commenced
its China Long Beach Express Service on February 1, 2006. Matson provides weekly
containership service between the ports of Shanghai and Ningbo and the port of
Long Beach. Enroute to China, the ships carry cargo to the ports of Honolulu and
Guam. Each ship continues to the ports of Ningbo and Shanghai and returns
directly to Long Beach. Major competitors in the China Service include
well-known international carriers such as Maersk, Cosco, Evergreen, Hanjin, APL,
China Shipping, Hyundai, NYK Line and Yang Ming. Matson intends to compete by
offering the fastest freight availability from Shanghai to Long Beach, providing
fixed Sunday arrivals in Long Beach and next-day cargo availability, offering a
dedicated Long Beach terminal providing fast truck turn times, an off-dock
container yard and one-stop intermodal connections, using its newest and most
fuel efficient U.S. flag ships and providing state-of-the-art technology and
world-class customer service. Matson opened offices in Shanghai and Ningbo in
October 2005, and has hired agents and has contracted with terminals in both
locations.
Matson Integrated Logistics competes for freight with a number of large
and small companies that provide surface transportation and third-party
logistics services.
(6) Labor Relations
The absence of strikes and the availability of labor through hiring
halls are important to the maintenance of profitable operations by Matson. Until
2002, when International Longshore and Warehouse Union ("ILWU") workers were
locked out for ten days on the U.S. Pacific Coast, Matson's operations had not
been disrupted significantly by labor disputes in over 30 years. See "Employees
and Labor Relations" below for a description of labor agreements to which Matson
and Matson Terminals are parties and information about certain unfunded
liabilities for multiemployer pension plans to which Matson and Matson Terminals
contribute.
(7) Rate Regulation
Matson is subject to the jurisdiction of the Surface Transportation
Board with respect to its domestic rates. A rate in the noncontiguous domestic
trade is presumed reasonable and will not be subject to investigation if the
aggregate of increases and decreases is not more than 7.5 percent above, or more
than 10 percent below, the rate in effect one year before the effective date of
the proposed rate, subject to increase or decrease by the percentage change in
the U.S. Producer Price Index. Effective January 3, 2005, Matson increased its
rates in its Hawaii Service by $100 per container and $25 per vehicle, for both
westbound and eastbound, and its terminal handling charge by $40 per westbound
container, $20 per eastbound container and $5 per vehicle. Effective August 28,
2005, Matson increased its rates in its Guam Service by $100 per container, $25
per vehicle and 5 percent on items rated per weight or measure, and its terminal
handling charge by $40 per container, $5 per vehicle and 5 percent on items
rated per weight or measure, both westbound and eastbound. Due to sustained
increases in fuel costs, Matson increased its fuel surcharge in its Hawaii and
Guam Services from 9.2 percent to 10.5 percent, effective April 18, 2005; to
11.5 percent, effective July 3, 2005; and to 13 percent, effective October 2,
2005. Matson's new China Service will be subject to the jurisdiction of the
Federal Maritime Commission ("FMC"). No such zone of reasonableness applies
under FMC regulation.
B. Real Estate
(1) General
As of December 31, 2005, A&B and its subsidiaries, including A&B
Properties, Inc., owned approximately 89,810 acres, consisting of approximately
89,580 acres in Hawaii and approximately 230 acres elsewhere, as follows:
Location No. of Acres
-------- ------------
Maui .......................... 68,681
Kauai ......................... 20,849
Oahu .......................... 38
Hawaii ........................ 11
California .................... 80
Texas ......................... 39
Washington .................... 13
Arizona ....................... 45
Nevada ........................ 21
Colorado ...................... 17
Utah .......................... 15
------
TOTAL ....................... 89,809
======
As described more fully in the table below, the bulk of this acreage
currently is used for agricultural and related activities, and includes pasture
land, watershed land and conservation reserves. The balance is used or planned
for development or other urban uses. An additional 2,909 acres on Maui and Kauai
are leased from third parties, and approximately 1,000 acres on Kauai have been
transferred to a joint venture, consisting of A&B and DMB Associates, Inc., an
Arizona-based developer, for the development of a master-planned resort
residential community. Such acreage is not included in the table above.
Current Use No. of Acres
----------- ------------
Hawaii
Fully entitled Urban (defined below) ....... 632
Agricultural, pasture and miscellaneous .... 59,679
Watershed land/conservation ................ 29,268
U.S. Mainland
Fully entitled Urban ....................... 230
------
TOTAL .............................. 89,809
======
A&B and its subsidiaries are actively involved in the entire spectrum
of real estate development and ownership, including planning, zoning, financing,
constructing, purchasing, managing and leasing, selling and exchanging, and
investing in real property.
(2) Planning and Zoning
The entitlement process for development of property in Hawaii is both
time-consuming and costly, involving numerous State and County regulatory
approvals. For example, conversion of an agriculturally-zoned parcel to
residential zoning usually requires the following three approvals:
o amendment of the County general plan to reflect the desired
residential use;
o approval by the State Land Use Commission ("SLUC") to
reclassify the parcel from the Agricultural district to the
Urban district; and
o County approval to rezone the property to the precise
residential use desired.
The entitlement process is complicated by the conditions, restrictions
and exactions that are placed on these approvals, including, among others, the
construction of infrastructure improvements, payment of impact fees,
restrictions on the permitted uses of the land, provision of affordable housing
and mandatory fee sale of portions of the project.
A&B actively works with regulatory agencies, commissions and
legislative bodies at various levels of government to obtain zoning
reclassification of land to its highest and best use. A&B designates a parcel as
"fully entitled" or "fully zoned" when the three land use approvals described
above have been obtained.
(3) Residential Projects
A&B is pursuing a number of residential projects in Hawaii, including:
(a) Wailea. In October 2003, A&B acquired 270 acres of fully-zoned,
undeveloped residential and commercial land at the Wailea Resort on Maui,
planned for up to 1,600 homes, for $67.1 million. A&B was the original developer
of the Wailea Resort, beginning in the 1970s and continuing until A&B sold the
Resort to the Shinwa Golf Group in 1989.
In January 2004, A&B commenced sales of 29 single-family homesites at
Wailea's Golf Vistas subdivision. The last three lots closed in the first
quarter of 2005.
In 2005, two bulk parcels were sold to third parties, including MF-5
(8.4 acres) and the remaining 80% installment sale of MF-9 (30.2 acres).
Including Wailea Golf Vistas, the two parcels mentioned in the preceding
sentence, and two other parcels sold in 2004, a total of 70 acres have been
sold. During 2005, A&B continued planning and design work on three parcels (30.3
acres), including MF-11 (10.6 acres), MF-19 (6.7 acres) and MF-7 (13 acres).
MF-11 is planned to be developed into a three-acre business parcel and 12
single-family lots. The three-acre parcel is in escrow, and construction is
expected to commence on the residential subdivision in mid-2006. Planning and
design work continues on the MF-19 parcel, planned for nine half-acre estate
lots, and on the MF-7 parcel, planned for 80 multi-family units. During 2005,
A&B also proceeded with a joint venture development on MF-8 (Kai Malu), as
described more fully below.
(b) Kai Malu at Wailea. In April 2004, A&B entered into a joint venture
with Armstrong Builders, Ltd. for development of the 25-acre MF-8 parcel at
Wailea, to be developed into 150 duplex units, averaging 1,800 square feet per
unit. Marketing commenced in January 2005 on the first phase of 34 units and, by
mid-2005, all 150 units were released for sale. Clearing and mass grading of the
site commenced in June 2005 and was substantially completed in December 2005.
Vertical home construction began in October 2005, with the first building pad
poured in November 2005. Phase I closings are expected to commence in the fourth
quarter of 2006.
(c) Haliimaile Subdivision. A&B's application to rezone 63 acres and
amend the community plan for the development of a 150- to 200-lot residential
subdivision in Haliimaile (Upcountry, Maui) was approved by the Maui County
Council in September 2005. The property is now fully entitled for development,
and engineering design for the subdivision has commenced.
(d) Kukui`ula. Kukui`ula is a 1,000-acre master planned resort
residential community located in Poipu, Kauai. In April 2002, an agreement was
signed with an affiliate of DMB Associates, Inc., an Arizona-based developer of
master planned communities, for the joint development of Kukui`ula. The project
will consist of approximately 1,200 high-end residential units. In July 2004,
the Kauai County Council gave final zoning and visitor designation area
approvals for the entire 1,000-acre project. In August 2004, A&B exercised its
option to contribute to the joint venture up to 40 percent of the project's
future capital requirements. Kukui`ula's Visioning Center for sales and
marketing was completed in March 2005, in time for the April commencement of the
project's sales and marketing campaign. Offsite infrastructure construction
commenced in June 2005, with the construction of the non-potable water system.
Onsite infrastructure construction is expected to commence in the first quarter
of 2006, with the construction of the Western Bypass Road, a major road serving
the project.
(e) Lanikea at Waikiki. Construction of the 100-unit Lanikea high-rise
condominium was completed in August 2005. A 13,500-square-foot commercial-zoned
parcel and 31 parking stalls in the Lanikea parking structure were sold in
January 2005. The 100 units were closed in July and August 2005.
(f) Hokua. Construction of the 247-unit high-rise luxury condominium
project, a joint venture development with MK Management LLC, was completed in
January 2006. The sale of all 247 units closed in January 2006.
(g) Keola La`i. In August 2004, A&B acquired a 2.7-acre fee simple
development site near Downtown Honolulu, Oahu, for the development of a
high-rise condominium project, consisting of 352 units, with an average size of
970 square feet, located on 37 residential floors above a five-story parking
garage. As required by the Hawaii Community Development Authority (HCDA),
approximately 20 percent of the units have been designated for sale to buyers
earning not more than 140 percent of the Honolulu median income. The Preliminary
Condominium Public Report was obtained in July 2005, enabling sales and
marketing to commence. In November 2005, the Contingent Final Public Report was
issued, and in December 2005, registration with the Department of Housing and
Urban Development (HUD) was completed, enabling sales contracts to be converted
into binding contracts. Pre-construction foundation work commenced in December
2005, including testing of existing concrete piles. Construction is expected to
commence in the first quarter of 2006, subject to certain pre-sale requirements.
(h) Ka Milo at Mauna Lani. In April 2004, A&B entered into a joint
venture with Brookfield Homes Hawaii Inc. to acquire and develop a 30.5-acre
residential parcel in the Mauna Lani Resort on the island of Hawaii. In May
2004, the property was acquired by the joint venture, and is planned for 37
single-family units (averaging 2,330 square feet) and 100 duplex townhomes
(averaging 2,040 square feet). In mid-2005, the project's civil and building
plans were approved and construction permits were issued. Sales and marketing
commenced in September 2005. Mass grading began in October 2005 and the
project's onsite sales center opened in December 2005.
(i) Kakaako Waterfront. In September 2005, A&B was selected by HCDA to
be the developer of its Kakaako Waterfront project. The current version of A&B's
proposal consists of approximately 150,000 square feet of new waterfront retail
space, two 200-foot tall residential towers, containing approximately 625
condominium units (approximately 20 percent of the units to be designated for
sale to buyers earning not more than 140 percent of the Honolulu median income),
an amphitheater and other public amenities, and the operation of the Kewalo
Basin marina. The project has generated community and political opposition. The
project will be reviewed and possibly altered or terminated by the Hawaii State
Legislature in the 2006 legislative session, and it is unclear whether this
project will proceed after the Legislature's review.
(j) Port Allen. This project covers 17 acres in Port Allen, Kauai, and
is planned for 75 condominium units and 60 single-family homes. In May 2005, A&B
commenced sales of the first two phases, consisting of 48 units. Final county
subdivision approval is expected in the first quarter of 2006.
(4) Commercial Properties
An important source of property revenue is the lease rental income A&B
receives from its leased portfolio, currently consisting of approximately 5.1
million leasable square feet of commercial building space, ground leases on 280
acres for commercial use, and leases on 10,791 acres for agricultural/pasture
use.
(a) Hawaii Commercial Properties
A&B's Hawaii commercial properties portfolio consists primarily of nine
retail centers, six office buildings and three industrial properties, comprising
approximately 1.6 million square feet of leasable space. Most of the commercial
properties are located on Maui and Oahu, with smaller holdings in the area of
Port Allen, on the island of Kauai. The average occupancy for the Hawaii
portfolio was 93 percent in 2005, compared to 90 percent in 2004. In February
2005, A&B acquired a four-acre parcel in Honolulu, which is ground leased to a
retail store. In October 2005, A&B acquired Lanihau Shopping Center, an existing
88,200-square-foot retail center located in Kona on the island of Hawaii. Also
in October 2005, A&B sold two downtown Honolulu office buildings, comprising
183,000 square feet of leasable space. In November 2005, A&B completed the
development of Kunia Shopping Center, consisting of 60,500 square feet including
in-line space and three pad sites.
Following a fire in February 2005, which destroyed about half of the
100,000-square-foot Kahului Shopping Center, A&B prepared a conceptual master
plan for the redevelopment of the 19-acre Kahului Shopping Center block. The
plan calls for the creation of a traditional "town center," consisting of
retail/office space and condominium units. A Special Management Area permit
application is expected to be submitted to the Maui County in the first quarter
of 2006.
The primary Hawaii commercial properties are as follows:
Leasable Area
Property Location Type (sq. ft.)
-------- -------- ---- ---------
Maui Mall............................... Kahului, Maui Retail 191,600
Mililani Shopping Center................ Mililani, Oahu Retail 180,300
Pacific Guardian Complex................ Honolulu, Oahu Office 142,200
Kaneohe Bay Shopping Center............. Kaneohe, Oahu Retail 124,500
P&L Warehouse........................... Kahului, Maui Industrial 104,100
Lanihau Shopping Center................. Kona, Hawaii Retail 88,200
Hawaii Business Park.................... Pearl City, Oahu Industrial 85,200
One Main Plaza.......................... Wailuku, Maui Office 82,000
Wakea Business Center................... Kahului, Maui Industrial/Retail 61,500
Kunia Shopping Center................... Waipahu, Oahu Retail 60,500
Kahului Office Building................. Kahului, Maui Office 56,700
Kahului Shopping Center................. Kahului, Maui Retail 56,600
Napili Plaza............................ Napili, Maui Retail 45,200
Fairway Shops at Kaanapali.............. Kaanapali, Maui Retail 34,600
Kahului Office Center................... Kahului, Maui Office 32,800
Stangenwald Building.................... Honolulu, Oahu Office 27,100
Port Allen Marina Center ............... Port Allen, Kauai Retail 23,500
Judd Building........................... Honolulu, Oahu Office 20,200
Several other commercial projects are being, or have been developed or
acquired, on Maui and Oahu, including:
(i) Triangle Square. Previous development at the 12-acre Triangle
Square commercial project in Kahului, Maui includes two retail buildings, a BMW
car dealership and three other improved commercial properties under long-term
ground leases. In January 2004, Hawaii's first Krispy Kreme store opened for
business on a 0.9-acre ground leased parcel. In January 2005, the Planning
Commission approved the issuance of a County Special Management Area permit for
a 6,500-square-foot build-to-suit Acura dealership on 1.1 acres and a
4,500-square-foot build-to-suit auto value center on 1.6 acres. Construction of
both buildings is expected to be completed by the fourth quarter of 2006,
completing the development of the entire Triangle Square project.
(ii) Maui Business Park. Located in Kahului, Maui, the initial phase of
Maui Business Park, developed between 1995 and 2000, consists of approximately
69.4 saleable acres, subdivided into 41 lots, having an average size of 23,700
square feet, and three bulk parcels. The property is zoned for light
industrial/commercial uses.
From 1995 through 1998, a total of 26.4 acres were sold, including 20.3
acres for the development of a 349,300-square-foot retail center, whose anchor
tenants are Borders Books & Music, Lowe's, OfficeMax and Old Navy. From 1999 to
2003, a total of 35.6 acres were sold, including a 12.8-acre parcel to Home
Depot, which completed a 135,000-square-foot store in May 2001, and a 14-acre
parcel to Wal-Mart, which completed a 142,000-square-foot store in October 2001.
In January 2005, the last three lots, comprising 1.8 acres, were sold.
In May 2002, the Maui County Council approved the inclusion of
approximately 179 acres in the Wailuku-Kahului Community Plan for the future
expansion of Maui Business Park. In February 2004 and May 2005, the SLUC
approved the reclassification of 172 acres to the Urban district. In April 2004,
A&B filed a zoning change application with the County of Maui for the 179 acres.
The zoning change application was recommended for approval by the Maui Planning
Commission in May 2005 and has been forwarded to the County Council for final
action.
(iii) Mill Town Center. Located in Waipahu, Oahu (approximately 12 miles
from Honolulu), the Mill Town Center is a light-industrial subdivision
consisting of 27.5 saleable acres, developed between 1999 and 2002. The property
was subdivided into 61 lots, having an average size of 29,100 square feet. In
2005, four additional lots were sold. In January 2006, one lot closed and the
last two lots (0.7 acres) are in escrow.
(iv) Kunia Shopping Center. In November 2002, A&B acquired a 4.6-acre,
fee simple vacant parcel, zoned for retail use, located in Kunia, Central Oahu
(near the Royal Kunia and Village Park residential communities). In 2005, the
development of a 60,500-square-foot neighborhood retail center was completed,
and the center's grand opening was held in November 2005. The center is 99
percent leased, including leases to Bank of Hawaii, Denny's, Jack-in-the-Box,
Starbucks, Jamba Juice, T-Mobile, Baskin-Robbins, Cole Academy and Auntie
Pasto's.
(v) Alakea Corporate Tower. In March 2003, A&B acquired a Class A
31-story office building in Downtown Honolulu (since re-named Alakea Corporate
Tower). The building contains approximately 158,300 square feet of office space,
and was acquired with the intent of converting the building into, and selling,
fee simple office condominium units. In October 2003, a Final Condominium Public
Report was issued for the project, with eight floors closing in 2003, 17.5
closing in 2004 and the remaining 5.5 floors closing in the first quarter of
2005.
(vi) Daiei Retail Parcel. In February 2005, A&B acquired the fee simple
interest in a four-acre parcel located in Central Honolulu for $19.3 million.
The property is ground leased until 2018 to a Japanese-owned company that
operates a 105,000-square-foot retail store on the premises. The parcel is fully
entitled for commercial and high-rise residential use.
(vii) Lanihau Phase II. In October 2005, concurrent with the acquisition
of the existing 88,200-square-foot Lanihau Shopping Center (Phase I), A&B
assumed a ground lease on 23 acres of vacant land, immediately adjacent to the
existing center, with an option to purchase the fee. Design, engineering and
marketing work has commenced on plans for 238,000 square feet of new retail and
office space.
(b) U.S. Mainland Commercial Properties
On the U.S. mainland, A&B owns a portfolio of commercial properties,
acquired primarily by way of tax-deferred exchanges under Internal Revenue Code
Section 1031. In January 2005, A&B completed the sales of Ontario Pacific
Business Centre, a 246,100-square-foot industrial property located in Ontario,
California, and Northwest Business Center, an 87,000-square-foot industrial/flex
building located in San Antonio, Texas. In June 2005, A&B acquired Deer Valley
Financial Center, a 126,600-square-foot office building located in Phoenix,
Arizona. A&B's Mainland portfolio currently includes approximately 3.5 million
square feet of leasable area, comprising eight retail centers, five office
buildings and six industrial properties, as follows:
Leasable Area
Property Location Type (sq. ft.)
-------- -------- ---- -------------
Ontario Distribution Center............. Ontario, CA Industrial 898,400
Sparks Business Center.................. Sparks, NV Industrial 396,100
Centennial Plaza........................ Salt Lake City, UT Industrial 244,000
Valley Freeway Corporate Park........... Kent, WA Industrial 228,200
Boardwalk Shopping Center............... Round Rock, TX Retail 184,600
San Pedro Plaza......................... San Antonio, TX Office 171,800
2868 Prospect Park...................... Sacramento, CA Office 161,900
Arbor Park Shopping Center.............. San Antonio, TX Retail 139,500
Mesa South Shopping Center.............. Phoenix, AZ Retail 133,700
Deer Valley Financial Center............ Phoenix, AZ Office 126,600
San Jose Avenue Warehouse............... City of Industry, CA Industrial 126,000
Southbank II............................ Phoenix, AZ Office 120,800
Village at Indian Wells................. Indian Wells, CA Retail 104,600
2450 Venture Oaks....................... Sacramento, CA Office 99,800
Broadlands Marketplace.................. Broomfield, CO Retail 97,900
Carefree Marketplace.................... Carefree, AZ Retail 85,000
Marina Shores Shopping Center........... Long Beach, CA Retail 67,700
Vista Controls Building................. Valencia, CA Industrial/Office 51,100
Wilshire Center......................... Greeley, CO Retail 46,500
A&B's Mainland commercial properties maintained an average occupancy
rate of 95 percent in 2005, unchanged from 2004.
In 2002, A&B expanded its development activities to Valencia,
California, a fast growing region north of Los Angeles with favorable
demographics and strong economic growth. A&B will continue its search for
Mainland expansion opportunities in other growing markets. The following
development projects have been secured to date in Valencia:
(i) Westridge Executive Plaza. In 2004, a joint venture agreement with
Westridge Executive Building, LLC completed the development of a
63,000-square-foot office building. By August 2005, the building was 98 percent
leased. In November 2005, the building was sold by the joint venture.
(ii) Crossroads Plaza. In June 2004, A&B signed a joint venture agreement
with Intertex Hasley, LLC, to form Crossroads Plaza Development Partners, LLC,
for the development of a 62,000-square-foot mixed-use neighborhood retail center
on 6.5 acres of commercial-zoned land. The property was acquired in August 2004.
(iii) Rye Canyon. In October 2004, a joint venture between A&B and
Intertex Properties, LLC acquired a 5.4-acre commercial-zoned parcel for the
development of an 82,000-square-foot office building. Prior to commencing
development of the property, the joint venture sold the property, and the sale
closed on January 25, 2006.
(iv) Centre Pointe Marketplace. In April 2005, A&B signed a joint venture
agreement with Intertex Centre Pointe Marketplace, LLC, and in the same month,
the venture acquired a 10.2-acre parcel for the development of a
102,000-square-foot retail center. The parcel is located adjacent to a recently
completed Sam's Club and a soon-to-be-completed Super Wal-Mart. Grading plans
were submitted in December 2005 and permits are expected to be received in early
2006.
(v) Bridgeport Marketplace. In July 2005, A&B entered into a joint
venture with Intertex Bridgeport Marketplace, LLC, and in October 2005, the
joint venture acquired 27.8 acres in Valencia. The development plans include the
subdivision of the site to create a 5-acre parcel for dedication as a public
park, a 7.3-acre parcel for sale to a church, which is scheduled to close in
June 2006, and a 15.5-acre parcel for the development of a 126,000-square-foot
retail center.
C. Food Products
(1) Production
A&B has been engaged in activities relating to the production of cane
sugar and molasses in Hawaii since 1870, and production of coffee in Hawaii
since 1987. A&B's current food products and related operations consist of: (1) a
sugar plantation on the island of Maui, operated by its Hawaiian Commercial &
Sugar Company ("HC&S") division, (2) a coffee farm on the island of Kauai,
operated by its Kauai Coffee Company, Inc. ("Kauai Coffee") subsidiary, (3) its
Kahului Trucking & Storage, Inc. ("KT&S") subsidiary, which provides sugar and
molasses hauling and storage, as well as petroleum hauling, mobile equipment
maintenance and repair services and self-service storage facilities on Maui and
(4) its Kauai Commercial Company, Incorporated subsidiary, which provides
services on Kauai similar to those provided by KT&S on Maui, as well as general
trucking services.
HC&S is Hawaii's largest producer of raw sugar, having produced
approximately 192,700 tons of raw sugar in 2005, or about 76 percent of the raw
sugar produced in Hawaii for the year (compared with 198,800 tons, or about 77
percent in 2004). The decrease in production was primarily due to yield losses
from a decline in cane age from drought, malicious fires, and leaf scald
disease, as well as a decision to slow harvesting activities in 2005 to gain age
on the crop in order to improve yields in 2006 and beyond. The intent of this
decision is to increase prospective crop yields and sugar production. 2005 sugar
production also was impacted by drought and disease, which began with the 2004
crop. Total Hawaii sugar production amounted to approximately 3 percent of total
U.S. sugar production in 2005. HC&S harvested 16,639 acres of sugar cane in 2005
(compared with 16,890 in 2004). Yields averaged 11.6 tons of sugar per acre in
2005 (compared with 11.8 in 2004). As a by-product of sugar production, HC&S
also produced approximately 57,100 tons of molasses in 2005 (compared with
65,100 in 2004).
In 2005, approximately 18,900 tons of sugar (compared with 15,500 in
2004) produced by HC&S were specialty food-grade raw sugars for sale under
HC&S's Maui Brand(R) trademark and to distributors that repackage the sugars
under their own labels. A further expansion of the production facilities for
these sugars is planned for 2007.
During 2005, Kauai Coffee had approximately 3,100 acres of coffee trees
under cultivation. The harvest of the 2005 coffee crop yielded approximately 1.8
million pounds of green coffee (the same as in 2004). Although production yield
remained the same, 1.8 million pounds is considered a small crop. In addition to
low yields, the mix of green coffee resulted in a higher percentage of commodity
grade green beans and a lower percentage of specialty grade green beans. The low
yield and unfavorable green bean mix may be attributable to poor plant
nutrition, reduced orchard density and insect infestation.
HC&S and McBryde Sugar Company, Limited ("McBryde"), a subsidiary of
A&B on Kauai and the parent company of Kauai Coffee, produce electricity for
internal use and for sale to the local electric utility companies. HC&S's power
is produced by burning bagasse (the residual fiber of the sugar cane plant), by
hydroelectric power generation and, when necessary, by burning fossil fuels,
whereas McBryde produces power solely by hydroelectric generation. The price for
the power sold by HC&S and McBryde is equal to the utility companies' "avoided
cost" of not producing such power themselves. In addition, HC&S receives a
capacity payment to provide a guaranteed power generation capacity to the local
utility. See "Energy" below for power production and sales data.
(2) Marketing of Sugar and Coffee
Substantially all of the bulk raw sugar produced in Hawaii is
purchased, refined and marketed by C&H Sugar Company, Inc. ("C&H"), of which A&B
divested its remaining equity position in 2005. C&H processes the raw cane sugar
at its refinery at Crockett, California, and markets the refined products
primarily in the western and central United States. HC&S markets its specialty
food-grade raw sugars to food and beverage producers and to retail stores under
its Maui Brand(R) label, and to distributors that repackage the sugars under
their own labels. HC&S's largest food-grade raw sugar customers are Cumberland
Packing Corp. and Sugar Foods Corporation, which repackage HC&S's turbinado
sugar for their "Sugar in the Raw" products.
Hawaiian Sugar & Transportation Cooperative ("HS&TC"), a cooperative
consisting of two sugar cane growers in Hawaii (including HC&S), has a supply
contract with C&H, ending in December 2008. Pursuant to the supply contract, the
growers sell their raw sugar to C&H at a price equal to the New York No. 14
Contract settlement price, less a discount and less costs of sugar vessel
discharge and stevedoring. This price, after deducting the marketing, operating,
distribution, transportation and interest costs of HS&TC, reflects the gross
revenue to the Hawaii sugar growers, including HC&S. Notwithstanding the supply
contract, HC&S arranged directly with C&H for the forward pricing of a portion
of its 2005 harvest, as described in Item 7A ("Quantitative and Qualitative
Disclosures About Market Risk") of Part II below.
At Kauai Coffee, coffee marketing efforts are directed toward
developing a market for premium-priced, estate-grown Kauai green coffee. Most of
the coffee crop is being marketed on the U.S. mainland and in Asia as green
(unroasted) coffee. In addition to the sale of green coffee, Kauai Coffee
produces and sells roasted, packaged coffee under the Kauai Coffee(R) trademark.
(3) Competition and Sugar Legislation
Hawaii sugar growers produce more sugar per acre than most other major
producing areas of the world, but that advantage is offset by Hawaii's high
labor costs and the distance to the U.S. mainland market. Hawaiian refined sugar
is marketed primarily west of Chicago. This is also the largest beet sugar
growing and processing area and, as a result, the only market area in the United
States that produces more sugar than it consumes. Sugar from sugar beets is the
greatest source of competition in the refined sugar market for the Hawaiian
sugar industry.
The U.S. Congress historically has sought, through legislation, to
assure a reliable domestic supply of sugar at stable and reasonable prices. The
current protective legislation is the Farm Security and Rural Investment Act of
2002 ("2002 Farm Bill"). The two main elements of U.S. sugar policy are the
tariff-rate quota ("TRQ") import system and the price support loan program. The
TRQ system limits imports by allowing only a quota amount to enter the U.S.
after payment of a relatively low tariff. A higher, over-quota tariff is imposed
for imported quantities above the quota amount.
The 2002 Farm Bill reauthorized the sugar price support loan program,
which supports the U.S. price of sugar by providing for commodity-secured loans
to producers. Unlike most other commodity programs, sugar loans are made to
processors and not directly to producers. HC&S is both a producer and a
processor. To qualify for loans, processors must agree to provide a part of the
loan payment to producers. Loans may be repaid either in cash or by forfeiture
without penalty. The 2002 Farm Bill eliminated the former loan forfeiture
penalty and marketing assessments, which increased the effective support level.
Under the 2002 Farm Bill, the government is required to administer the
loan program at no net cost by avoiding sugar loan forfeitures. This is
accomplished by reestablishing marketing allotments, which provides each
processor or producer a specific limit on sales for the year, above which
penalties would apply. It is also accomplished by adjusting fees and quotas for
imported sugar to maintain the domestic price at a level that discourages
producers from defaulting on loans. A loan rate (support price) of 18 cents per
pound for raw cane sugar is in effect for the 2003 through 2007 crops. The
supply agreement between HS&TC and C&H allows HS&TC to place sugar under loan
pursuant to the loan program, but prohibits forfeiting sugar under loan while
providing a "floor" price.
In 2005, the U.S. approved a trade pact with Central America and the
Dominican Republic, known as the United States Free Trade Agreement
("CAFTA-DR"). In 2006, the first year of the agreement, additional sugar market
access for participating countries will amount to about 1.2 percent of current
U.S. sugar consumption (107,000 metric tons), growing to about 1.7 percent
(151,000 metric tons) in its fifteenth year.
U.S. domestic raw sugar prices remain volatile. The pricing situation
continues to be challenging, even to efficient producers like HC&S. A
chronological chart of the average U.S. domestic raw sugar prices, based on the
average daily New York No. 14 Contract settlement price for domestic raw sugar,
is shown below:
[CHART]
JAN-02 21.03
FEB 20.63
MAR 19.92
APR 19.64
MAY 19.52
JUN 19.82
JUL 20.86
AUG 20.92
SEP 21.65
OCT 22.05
NOV 22.22
DEC 21.94
JAN-03 21.62
FEB 21.67
MAR 22.14
APR 21.87
MAY 21.80
JUN 21.55
JUL 21.32
AUG 21.29
SEP 21.34
OCT 20.97
NOV 20.90
DEC 20.38
JAN-04 20.54
FEB 20.59
MAR 20.86
APR 20.86
MAY 20.69
JUN 19.96
JUL 20.15
AUG 20.09
SEP 20.47
OCT 20.31
NOV 20.41
DEC 20.54
JAN-05 20.57
FEB 20.21
MAR 20.54
APR 21.30
MAY 21.96
JUN 21.98
JUL 21.94
AUG 20.95
SEP 21.10
OCT 21.71
NOV 21.82
DEC 21.80
Liberalized international trade agreements, such as the General
Agreement on Tariffs and Trade, or GATT, include provisions relating to
agriculture that can affect the U.S. sugar or sweetener industries materially.
Recent negotiations under the U.S.-Central America Free Trade Agreement, or
CAFTA, as well as other trade discussions, have resulted in lower U.S. sugar
prices.
Kauai Coffee competes with coffee growers located worldwide, including
in Hawaii. Coffee commodity prices have partially recovered from near record
lows.
(4) Properties and Water
The HC&S sugar plantation, the largest in Hawaii, consists of
approximately 43,300 acres of land, including about 900 acres leased from the
State of Hawaii, about 700 acres leased from the Department of Hawaiian Home
Lands and 1,300 acres under lease from private parties. Approximately 34,900
acres are under cultivation, and the balance is leased to third parties, not
suitable for cultivation, or used for plantation purposes, such as roads,
reservoirs, ditches and plant sites.
On Kauai, approximately 3,100 acres are under cultivation by Kauai
Coffee.
It is crucial for HC&S and Kauai Coffee to have access to reliable
sources of water supply and efficient irrigation systems. A&B's plantations
conserve water by using a "drip" irrigation system that distributes water to the
roots through small holes in plastic tubes. All but a small area of the
cultivated cane land farmed by HC&S is drip irrigated. All of Kauai Coffee's
fields are drip irrigated.
A&B owns 16,000 acres of watershed lands on Maui that supply a portion
of the irrigation water used by HC&S. A&B also held four water licenses to
another 38,000 acres owned by the State of Hawaii on Maui, which over the years
has supplied approximately one-third of the irrigation water used by HC&S. The
last of these water license agreements expired in 1986, and all four agreements
were then extended as revocable permits that were renewed annually. In 2001, a
request was made to the State Board of Land and Natural Resources to replace
these revocable permits with a long-term water lease. Pending the conclusion of
a contested case hearing before the Board on the request for the long-term
lease, the Board has renewed the existing permits on a holdover basis. For
further information regarding the contested case hearing, see "Legal
Proceedings" below.
D. Employees and Labor Relations
As of December 31, 2005, A&B and its subsidiaries had approximately
2,177 regular full-time employees. About 1,014 regular full-time employees were
engaged in the food products segment, 1,050 were engaged in the transportation
segment, 48 were engaged in the real estate segment, and the balance was in
administration. Approximately 48 percent were covered by collective bargaining
agreements with unions.
At December 31, 2005, the active Matson fleet employed seagoing
personnel in 285 billets. Each billet corresponds to a position on a ship that
typically is filled by two or more employees because seagoing personnel rotate
between active sea duty and time ashore. Approximately 22 percent of Matson's
regular full-time employees and all of the seagoing employees were covered by
collective bargaining agreements.
Historically, collective bargaining with longshore and seagoing unions
has been complex and difficult. However, Matson and Matson Terminals consider
their relations with those unions, other unions and their non-union employees
generally to be satisfactory.
Matson's seagoing employees are represented by six unions, three
representing unlicensed crew members and three representing licensed crew
members. Matson negotiates directly with these unions. Matson's agreements with
the Seafarer's International Union and shore-based units of the Sailors Union of
the Pacific and the Marine Firemen's Union were renewed in mid-2005 without
service interruption.
SSAT, the previously-described joint venture of Matson and SSA,
provides stevedoring and terminal services for Matson vessels calling at U.S.
Pacific Coast ports. Matson, SSA and SSAT are members of the Pacific Maritime
Association which, on behalf of its members, negotiates collective bargaining
agreements with the ILWU on the U.S. Pacific Coast. Matson Terminals provides
stevedoring and terminal services to Matson vessels calling at Honolulu and on
the island of Hawaii. Matson Terminals is a member of the Hawaii Stevedore
Industry Committee which, on behalf of its members, negotiates with the ILWU in
Hawaii.
During 2004, Matson renewed its collective bargaining agreement with
ILWU clerical workers at Long Beach through June 2007 without service
interruption.
During 2005, Matson contributed to multiemployer pension plans for
vessel crews. If Matson were to withdraw from or significantly reduce its
obligation to contribute to one of the plans, Matson would review and evaluate
data, actuarial assumptions, calculations and other factors used in determining
its withdrawal liability, if any. In the event that any third parties materially
disagree with Matson's determination, Matson would pursue the various means
available to it under federal law for the adjustment or removal of its
withdrawal liability. Matson Terminals participates in a multiemployer pension
plan for its Hawaii ILWU non-clerical employees. For a discussion of withdrawal
liabilities under the Hawaii longshore and seagoing plans, see Note 11
("Employee Benefit Plans") to A&B's financial statements in Item 8 of Part II
below.
Bargaining unit employees of HC&S are covered by two collective
bargaining agreements with the ILWU. The agreements with the HC&S production
unit employees and clerical bargaining unit employees will expire January 31,
2008. One of the collective bargaining agreements covering the two ILWU
bargaining units at Kahului Trucking & Storage, Inc. was extended in 2003 and
will expire June 30, 2008, and the other general agreement will expire March 31,
2006. There are two collective bargaining agreements with Kauai Commercial
Company, Incorporated employees represented by the ILWU. The agreement covering
the production unit employees was renegotiated in 2004 and will expire April 30,
2007. The agreement covering the clerical employees was renegotiated in 2005 and
will expire April 30, 2007. The collective bargaining agreement with the ILWU
for the production unit employees of Kauai Coffee was renegotiated and expires
January 31, 2007.
E. Energy
Matson and Matson Terminals purchase residual fuel oil, lubricants,
gasoline and diesel fuel for their operations. Residual fuel oil is by far
Matson's largest energy-related expense. In 2005, Matson vessels used
approximately 1.80 million barrels of residual fuel oil (compared with 1.87
million barrels in 2004).
Residual fuel oil prices paid by Matson started in 2005 at $27.60 per
barrel and ended the year at $48.06. The low for the year was $27.60 per barrel
in January and the high was $59.63 in October. Sufficient fuel for Matson's
requirements is expected to be available in 2006.
As has been the practice with sugar plantations throughout Hawaii, HC&S
uses bagasse, the residual fiber of the sugar cane plant, as a fuel to generate
steam for the production of most of the electrical power for sugar milling and
irrigation pumping operations. In addition to bagasse, HC&S uses coal, diesel,
fuel oil, and bio-diesel (recycled cooking and motor oil) to produce power
during factory shutdown periods when bagasse is not being produced. In 2005,
HC&S produced and sold, respectively, approximately 219,000 MWH and 96,300 MWH
of electric power (compared with 209,000 MWH produced and 93,700 MWH sold in
2004). The increase in power sold was due to heavy precipitation throughout the
summer of 2005, which increased hydroelectric power production and decreased
irrigation pumping of well water. In addition, management made a concerted
effort to increase power sales in order to take advantage of higher power prices
and help offset increases in operating costs from petroleum-based products.
HC&S's oil use decreased to approximately 10,800 barrels in 2005, from
approximately 11,300 barrels used in 2004. Coal use for power generation
increased to approximately 59,000 short tons, from approximately 52,000 short
tons used in 2004.
In 2005, McBryde produced approximately 35,200 MWH of hydroelectric
power (compared with 36,500 MWH in 2004). Power sales in 2005 amounted to
approximately 27,500 MWH (compared with 30,500 MWH in 2004). The decrease in
power production and sales was due primarily to less rainfall in 2005, which
decreased overall hydroelectric power generation and increased the necessity to
use power for irrigation pumps.
F. Available Information
A&B files reports with the Securities and Exchange Commission (the
"SEC"). The reports and other information filed include: Forms 10-K, 10-Q, 8-K
and other reports and information filed under the Securities Exchange Act of
1934 (the "Exchange Act").
The public may read and copy any materials A&B files with the SEC at
the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. The
public may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet website that
contains reports, proxy and information statements, and other information
regarding A&B and other issuers that file electronically with the SEC. The
address of that website is www.sec.gov.
A&B makes available, free of charge on or through its Internet website,
A&B's annual reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable
after it electronically files such material with, or furnishes it to, the SEC.
The address of A&B's Internet website is www.alexanderbaldwin.com.
ITEM 1A. RISK FACTORS
The business of A&B and its subsidiaries (collectively, the "Company")
faces numerous risks, including those set forth below or those described
elsewhere in this Form 10-K or in the Company's filings with the SEC. The risks
described below are not the only risks that the Company faces, nor are they
necessarily listed in order of significance. Other risks and uncertainties may
also impair its business operations. Any of these risks may have a material
adverse effect on the Company's business, financial condition, results of
operations and cash flows.
An economic decline or decrease in market demand for the Company's services and
products in Hawaii, the U.S. mainland or Asia may adversely affect the Company's
operating results and financial condition.
Adverse economic conditions or a decrease in market demand for the
Company's services and products in Hawaii, the U.S. mainland or Asia may
negatively impact the Company's results of operations and cash flows. A
weakening of the economic drivers in Hawaii, which include tourism, military
spending, construction starts and employment, or a decrease in market demand may
adversely impact the level of freight volumes and real estate activity in
Hawaii. A decline in the overall economy or market demand in the U.S. mainland
may reduce the demand for goods from Hawaii and Asia, travel to Hawaii and
domestic transportation of goods, adversely affecting inland and ocean
transportation volumes, the sale of Hawaii real estate to Mainland buyers, and
the Hawaii real estate markets generally. A change in the cost of goods or
currency exchange may decrease the freight volume from Asia to the United
States.
The Company may face new or increased competition.
The Company's transportation segment may face new competition by other
established or start-up shipping operators that enter the Company's markets. The
entry of a new competitor or the addition of ships by existing competition on
any of the Company's routes could result in a significant increase in available
shipping capacity that could have a material adverse effect on the Company's
business. See also discussion under "Business and Properties - Transportation -
Competition" above.
The Company's real estate segment operates in highly competitive
markets. There are numerous other developers, managers and owners of commercial
and residential real estate and undeveloped land that compete or may compete
with the Company. They compete or may compete with the Company for management
and leasing revenues, land for development, properties for acquisition and
disposition, and for tenants and purchasers for properties. Such competition
could have an adverse effect on the Company's business.
The Company is subject to risks associated with entering into a foreign shipping
market.
In February 2006, Matson launched its Hawaii/Guam/China service. The
Company has not operated in China before and has limited experience with
operations outside of the United States. The Company is subject to risks
associated with entering a foreign shipping market, which include:
o challenges caused by language and cultural differences;
o challenges in doing business with a foreign government and foreign
companies;
o difficulties in staffing and managing foreign operations;
o legal and regulatory restrictions;
o decreases in shipping rates;
o competition with established shippers;
o difficulties in building relationships with foreign businesses and
establishing brand recognition;
o currency exchange rate fluctuations;
o political and economic instability; and
o customary operational risks related to starting a new business.
If some or any of these risk factors occur, the Company's future
operating results may be adversely affected.
The Company's significant operating agreements and leases could be replaced.
The significant operating agreements and leases of the Company in its
various businesses expire at various points in the future and could be replaced,
thereby adversely affecting future revenue generation. For example, the
Company's food products segment sells substantially all of its bulk raw sugar
through the cooperative HS&TC, which has a supply contract with C&H Sugar
Company, Inc., ending in December 2008. Replacement of this supply contract on
less favorable terms to the Company may adversely affect the Company's sugar
business.
Rising fuel prices may adversely affect the Company's profits.
Fuel is a significant operating expense for the Company's shipping
operations. The price and supply of fuel is unpredictable and fluctuates based
on events beyond the Company's control. Increases in the price of fuel may
adversely affect the Company's results of operations. Rising fuel prices may
also increase the cost of construction materials delivered to Hawaii, thus
affecting the Company's development projects, as well as the cost of producing
and transporting sugar. In addition, rising fuel prices may suppress economic
activity generally.
Increases in interest rates may adversely affect the Company's profits.
An increase in interest rates could reduce the demand for
transportation of goods, real estate, coffee and sugar. Such reduction in demand
could adversely affect the Company's profitability. An increase in interest
rates may also increase the cost of financing to the Company. See also
discussion regarding interest rates in Item 7A below.
Changes to federal, state or local law may adversely affect the Company's
business.
The Company is subject to federal, state and local laws and
regulations, including government rate regulations, land use regulations,
government administration of the U.S. sugar program, new environmental
regulations relating to air quality initiatives at port locations, and cabotage
laws. Changes to the laws and regulations governing the Company's business could
adversely affect the Company's financial condition. For example, if the Jones
Act were repealed or substantially amended, the Company's shipping business
could be adversely affected.
The Company is subject to risks associated with real estate construction and
development.
The Company's development projects are subject to risks relating to the
Company's ability to complete its projects on time and on budget. Factors that
may result in a development project exceeding budget or being prevented from
completion include:
o an inability to secure sufficient financing or insurance on
favorable terms;
o construction delays or cost overruns, either of which may increase
project development costs;
o an increase in commodity costs;
o the discovery of hazardous or toxic substances, or other
environmental problems;
o an inability to obtain zoning, occupancy and other required
governmental permits and authorizations;
o an inability to secure tenants necessary to support the project;
o failure to achieve or sustain anticipated occupancy or sales levels;
and
o an inability to sell the Company's constructed inventory.
If some or any of these risk factors occur, the Company may not achieve
its projected returns on projects under development.
The unavailability of water for agricultural irrigation and to support real
estate development could adversely affect the Company.
It is crucial for the Company's real estate and food products segments
to have access to reliable sources of water for the development of real estate
projects and the irrigation of sugar cane and coffee, respectively. As further
described in "Legal Proceedings" below, there are two administrative hearing
processes challenging the Company's ability to divert water from streams in
Maui. If the Company is not permitted to divert stream waters for its use, it
would have a significant adverse effect on the Company's sugar operations.
The Company is involved in joint ventures and is subject to risks associated
with joint venture relationships.
The Company is involved in joint venture relationships, especially in
its real estate segment, and may initiate future joint venture projects as part
of the Company's overall development strategy. A joint venture involves certain
risks such as:
o the Company may not have voting control over the joint venture;
o the venture partner at any time may have economic or business
interests that are inconsistent with the Company's; and
o the venture partner could experience financial or other difficulties
and be unable to fulfill its commitments.
Interruption or failure of the Company's information technology and
communications systems could impair the Company's ability to effectively provide
its shipping and logistics services, which could damage the Company's reputation
and harm its operating results.
The Company, especially its transportation segment, is highly dependent
on information technology systems. These dependencies primarily include
accounting, billing, disbursement, cargo booking, vessel scheduling and stowage,
customer service, banking, payroll and employee communication systems. All of
these systems are subject to reliability issues, integration and compatibility
concerns, and security-threatening intrusions. The Company may experience brief
or extended failures caused by the occurrence of a natural disaster, or other
unanticipated problems at the Company's facilities. Any failure of the Company's
systems could result in interruptions in its service, reducing its revenue and
profits and damaging its reputation.
A decline in raw sugar prices will adversely affect the Company's business.
The business and results of operations of the Company's food products
segment are substantially affected by market factors, principally the domestic
and international prices for raw cane sugar. These market factors are influenced
by a variety of forces, including prices of competing crops, weather conditions,
and United States farm and trade policies. If the price for raw cane sugar were
to drop, the Company's food products segment may be adversely affected. See also
discussion under "Business and Properties - Food Products - Competition and
Sugar Legislation" above.
The Company is subject to risks associated with raw sugar and coffee production.
The Company's raw sugar and coffee production are subject to risks,
which include:
o weather;
o disease;
o water availability (see risk factor above regarding unavailability
of water); and
o equipment failures in factory or power plant.
If some or any of these risk factors occur, the Company's food products
segment may be adversely affected.
Work stoppages or other labor disruptions by the Company's unionized employees
may adversely affect the Company's operations.
As of December 31, 2005, the Company had approximately 2,177 regular
full-time employees, of which approximately 48 percent were covered by
collective bargaining agreements with unions. The Company's transportation and
food products segments may be adversely affected by employee action against
efforts by its management or the management of other companies in its industry
to control labor costs, restrain wage increases or modify work practices. In
addition, in the future, the Company may not be able to negotiate, on terms and
conditions favorable to it, renewals of its collective bargaining agreements
with unions in its industry and strikes and disruptions may occur as a result of
its failure or the failure of other companies in its industry to negotiate
collective bargaining agreements with such unions successfully.
The loss of or damage to key vendor and customer relationships may adversely
affect the Company's business.
The Company's business is dependent on its relationships with key
vendors and customers. The ocean transportation business relies on its
relationships with freight forwarders, and large retailers and consumer goods
and automobile manufacturers, as well as other larger customers. Relationships
with railroads and shipping companies are important in the Company's intermodal
business. For the food products segment, its relationship with C&H Sugar Company
affects the Company's sale of raw sugar. The loss of or damage to any of these
key relationships may affect the Company's business adversely.
Earnings on pension assets, or a change in pension law and on key assumptions,
may adversely affect the Company's financial performance.
The amount of the Company's employee retirement benefit costs and
obligations are calculated on assumptions used in the relevant actuarial
calculations. Adverse changes in any of these assumptions due to economic or
other factors, or lower returns on plan assets, may adversely affect the
Company's results and financial condition. In addition, a change in federal law,
including changes to the Employee Retirement Income Security Act and Pension
Benefit Guaranty Corporation premiums, may adversely affect the Company's
single-employer and multiemployer pension plans and plan funding.
The Company is subject to, and may in the future be subject to, disputes, or
legal or other proceedings, that could have a material adverse effect on the
Company.
The nature of the Company's business exposes it to the potential for
disputes, or legal or other proceedings, from time to time relating to labor and
employment matters, personal injury and property damage, environmental matters,
construction litigation, and other matters, as discussed in the other risk
factors disclosed in this section or in other Company filings with the SEC. In
addition, Matson is a common carrier, whose tariffs, rates, rules and practices
in dealing with its customers are governed by extensive and complex foreign,
federal, state and local regulations, which may be the subject of disputes or
administrative and/or judicial proceedings from time to time. These disputes,
individually or collectively, could harm the Company's business by distracting
its management from the operation of its business. If these disputes develop
into proceedings, these proceedings, individually or collectively, could involve
significant expenditures by the Company, or result in significant changes to
Matson's tariffs, rates, rules and practices in dealing with its customers, all
of which could have a material adverse effect on the Company's future revenue
and profitability. For a description of significant legal proceedings involving
the Company, see "Legal Proceedings" below.
The Company is susceptible to weather and natural disasters.
The Company's transportation operations are vulnerable to disruption as
a result of weather and natural disasters such as bad weather at sea,
hurricanes, typhoons, tsunamis and earthquakes. Such events will interfere with
the Company's ability to provide on-time scheduled service, resulting in
increased expenses and potential loss of business associated with such events.
In addition, severe weather and natural disasters can result in interference
with the Company's terminal operations, and may cause serious damage to its
vessels, loss or damage to containers, cargo and other equipment, and loss of
life or physical injury to its employees.
For the real estate segment, the occurrence of natural disasters, such
as hurricanes, tsunamis, floods, fires and unusually heavy or prolonged rain,
could have a material adverse effect on its ability to develop and sell
properties or realize income from its projects. The occurrence of natural
disasters could also cause increases in property insurance rates and
deductibles, which could reduce demand for, or increase the cost of owning or
developing, the Company's properties.
For the food products segment, drought, greater than normal rainfall,
hurricanes or agricultural pestilence may have an adverse effect on the sugar
and coffee planting, harvesting and production.
Weather and natural disasters could trigger an economic downturn, which
may lead to lower demand for shipping or real estate.
War, terrorist attacks and other acts of violence may adversely impact the
Company's operations and profitability.
War, terrorist attacks and other acts of violence may cause consumer
confidence and spending to decrease, or may affect the ability of tourists to
get to Hawaii, thereby adversely affecting the Company. Additionally, future
terrorist attacks could increase the volatility in the U.S. and worldwide
financial markets. Acts of war or terrorism may be directed at the Company's
shipping operations, or may cause the U.S. government to take control of
Matson's vessels for military operation. Any of these occurrences could have a
significant adverse impact on the Company's revenues, costs and operating
results.
Loss of the Company's key personnel could adversely affect its business.
The Company's future success will depend, in significant part, upon the
continued services of its key personnel, including its senior management. The
loss of the services of key personnel could adversely affect its future
operating results because of such employee's experience and knowledge of its
business and customer relationships. If key employees depart, the Company may
have to incur significant costs to replace them and its ability to execute its
business model could be impaired if it cannot replace them in a timely manner.
The Company does not expect to maintain key person insurance on any of its key
personnel.
If the Company is not in compliance with relevant laws and regulations, such as
continuing to maintain effective internal controls in accordance with Section
404 of the Sarbanes-Oxley Act of 2002, it could have an adverse effect on the
Company's financial results or the market price of the Company's stock.
The Company will continue its ongoing process of addressing all
compliance matters. If the Company is not in compliance for any reason with all
relevant laws and regulations, such as maintaining effective internal controls
over financial reporting, the Company's financial results or the market price of
the Company's stock could be adversely affected, and the Company may be subject
to penalties and sanctions.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 3. LEGAL PROCEEDINGS
See "Business and Properties - Transportation - Rate Regulation" above
for a discussion of rate and other regulatory matters in which Matson is
routinely involved.
On September 14, 1998, Matson was served with a complaint filed by the
Government of Guam with the Surface Transportation Board (the "Board"), alleging
that Sea-Land Services, Inc., APL and Matson have charged unreasonable rates in
the Guam trade since January 1991. Matson did not begin its Guam Service until
February 1996. In 2002, APL was dismissed as a defendant based on the statute of
limitations. On April 23, 2002, the parties filed initial briefs addressing the
appropriate rate reasonableness methodology to be applied. The parties filed
reply briefs on June 17, 2002. The Board heard oral argument on November 16,
2005.
In August 2001, HC&S self-reported to the State of Hawaii Department of
Health (the "DOH") possible violations of state and federal air pollution
control regulations relating to a boiler at HC&S's Maui sugar mill. The boiler
was constructed in 1974 and HC&S thereafter operated the boiler in compliance
with the permits issued by the DOH. Because the boiler is fueled with less than
50 percent fossil fuels and is therefore a "biomass boiler" under state air
pollution control rules, the DOH initially concluded, and the DOH permits
reflected, that the boiler was not subject to the more stringent regulations
applicable to "fossil fuel-fired" boilers. In 2001, HC&S identified federal
regulatory guidance that provides that a boiler that burns any amount of fossil
fuel may be a "fossil fuel-fired boiler." HC&S then voluntarily reported the
possible compliance failures to the DOH. In September 2003, the DOH issued to
HC&S a Notice and Finding of Violation and proposed penalty of $1.98 million.
The amount of the penalty is being contested. In the opinion of management,
after consultation with counsel, this matter will not have a material adverse
effect on A&B's financial statements, and appropriate accruals for this matter
have been recorded.
In January 2004, a petition was filed by the Native Hawaiian Legal
Corporation, on behalf of four individuals, requesting that the State of Hawaii
Board of Land and Natural Resources (the "BLNR") declare that A&B and its
subsidiaries (collectively, the "Company") have no current legal authority to
continue to divert water from streams in East Maui for use in the Company's
sugar growing operations, and to order the immediate full restoration of these
streams until a legal basis is established to permit the diversions of the
streams. The Company objected to the petition, asked the BLNR to conduct
administrative hearings on the matter and requested that the matter be
consolidated with the Company's currently pending application before the BLNR
for a long-term water license.
Since the filing of the petition, the Company has been working to make
improvements to the water systems of the petitioner's four clients so as to
improve the flow of water to their taro patches. An interim agreement was
entered into during the first quarter of 2004 between the parties to allow the
improvements to be completed, deferring the administrative hearing process. That
agreement, however, has since expired without renewal by the petitioners.
Nevertheless, the Company has continued to make improvements to the water
systems.
The administrative hearing process on the petition is continuing, and
the Company continues to object to the petition. The effect of this claim on the
Company's sugar-growing operations cannot currently be estimated. If the Company
is not permitted to divert stream waters for its use, it would have a
significant adverse effect on the Company's sugar-growing operations.
On October 19, 2004, two community-based organizations filed a Citizen
Complaint and a Petition for a Declaratory Order with the Commission on Water
Resource Management of the State of Hawaii ("Water Commission") against both an
unrelated company and HC&S, to order the companies to leave all water of four
streams on the west side of Maui that is not being put to "actual, reasonable
and beneficial use" in the streams of origin. The complainants had earlier
filed, on June 25, 2004, with the Water Commission a petition to increase the
interim in-stream flow standards for those streams. The Company objects to the
petitions. If the Company is not permitted to divert stream water for its use to
the extent that it is currently diverting, it may have an adverse effect on the
Company's sugar-growing operations.
A&B and its subsidiaries are parties to, or may be contingently liable
in connection with, other legal actions arising in the normal conduct of their
businesses, the outcomes of which, in the opinion of management after
consultation with counsel, would not have a material adverse effect on A&B's
results of operations or financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
For the information about executive officers of A&B required to be
included in this Part I, see section B ("Executive Officers") in Item 10 of Part
III below, which is incorporated herein by reference.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
A&B common stock is listed on The Nasdaq Stock Market and trades under
the symbol "ALEX." As of February 6, 2006, there were 3,609 shareholders of
record of A&B common stock. In addition, Cede & Co., which appears as a single
record holder, represents the holdings of thousands of beneficial owners of A&B
common stock.
A summary of daily stock transactions is listed in the Nasdaq National
Market Issues section of major newspapers. Trading volume averaged 298,182
shares a day in 2005, compared with 220,300 shares a day in 2004 and 155,900 in
2003.
The quarterly high and low sales prices and closing prices, as reported
by The Nasdaq Stock Market, and cash dividends paid per share of common stock,
for 2005 and 2004, were as follows:
Market Price
Dividends -----------------------------------
Paid High Low Close
---- ---- --- -----
2005
----
First Quarter $ 0.225 $ 47.14 $ 40.78 $ 41.20
Second Quarter $ 0.225 $ 46.82 $ 36.82 $ 46.35
Third Quarter $ 0.225 $ 56.10 $ 46.12 $ 53.24
Fourth Quarter $ 0.225 $ 55.50 $ 45.48 $ 54.24
2004
----
First Quarter $ 0.225 $ 35.14 $ 31.41 $ 32.96
Second Quarter $ 0.225 $ 34.97 $ 29.05 $ 33.45
Third Quarter $ 0.225 $ 34.24 $ 30.15 $ 33.94
Fourth Quarter $ 0.225 $ 44.74 $ 33.27 $ 42.42
Although A&B expects to continue paying quarterly cash dividends on its
common stock, the declaration and payment of dividends in the future are subject
to the discretion of the Board of Directors and will depend upon A&B's financial
condition, results of operations, cash requirements and other factors deemed
relevant by the Board of Directors. A&B strives to pay the highest possible
dividends commensurate with operating and capital needs. A&B has paid cash
dividends each year since 1903. The most recent increase in the quarterly
dividend rate was effective the first quarter of 1998, from 22 cents per share
to 22.5 cents. In 2005, dividend payments to shareholders totaled $39.4 million,
which was 31 percent of reported net income for the year. The following dividend
schedule for 2006 has been set, subject to final approval by the Board of
Directors:
Quarterly Dividend Declaration Date Record Date Payment Date
------------------ ---------------- ----------- ------------
First January 26 February 17 March 2
Second April 27 May 11 June 1
Third June 22 August 3 September 7
Fourth October 26 November 9 December 7
A&B common stock is included in the Dow Jones U.S. Transportation
Average, the Dow Jones U.S. 65 Stock Composite, the Dow Jones U.S. Industrial
Transportation Index, the Dow Jones Marine Transportation Index, the S&P
MidCap 400, the Russell 1000 Index and the Russell 3000 Index.
There were no shares of A&B common stock repurchased by the Company
during 2005 or 2003. During 2004, A&B repurchased 76,200 shares of its stock for
an average price of $29.95 per share. A&B's Board of Directors has authorized
A&B to repurchase up to two million shares of its common stock.
During 2005, 14,142 shares were returned to the Company in connection
with the exercise of options to purchase shares of the Company's stock. The fair
value averaged $43.79 per share. None of these shares were returned to the
Company during the fourth quarter.
The Company has share ownership guidelines for non-employee Directors.
At present, all Directors own A&B stock, and it is expected that each Director
will meet the guidelines within the specified five-year period. Stock ownership
guidelines also are in place for senior executives of the Company.
A&B 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 A&B'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 (other than the acquiring party) to purchase additional shares of
A&B's stock or shares of an acquiring company's stock at prices below market
value.
Securities authorized for issuance under equity compensation plans as
of December 31, 2005, included:
----------------------------------------------------------------------------------------------------------------------
Number of securities
remaining available for
Number of securities to be Weighted-average exercise future issuance under
Plan Category issued upon exercise of price of outstanding equity compensation plans
outstanding options, options, warrants and (excluding securities
warrants and rights rights reflected in column (a))
(a) (b) (c)
----------------------------------------------------------------------------------------------------------------------
Equity compensation plans 1,486,135 $31.16 1,793,954*
approved by security holders
----------------------------------------------------------------------------------------------------------------------
Equity compensation plans
not approved by security
holders -- -- 146,653**
----------------------------------------------------------------------------------------------------------------------
Total 1,486,135 $31.16 1,940,607
----------------------------------------------------------------------------------------------------------------------
* Under the 1998 Plan, 1,558,048 shares may be issued either as restricted
stock grants or option grants.
** A&B has two compensation plans under which its stock is authorized for
issuance and that were adopted without the approval of its security
holders. (1) Under A&B's Non-Employee Director Stock Retainer Plan,
each outside Director is issued a stock retainer of 300 A&B shares
after each year of service on A&B's Board of Directors. Those 300
shares vest immediately and are free and clear of any restrictions.
These shares are issued in January of the year following the year of
the Director's service to A&B. Directors that retire during the year
may be awarded a prorated number of shares based on the time served.
(2) Under A&B's Restricted Stock Bonus Plan, the Compensation Committee
identifies the executive officers and other key employees who
participate in one- and three-year performance improvement incentive
plans and formulates performance goals to be achieved for the plan
cycles. At the end of each plan cycle, results are compared with goals,
and awards are made accordingly. Participants may elect to receive
awards entirely in cash or up to 50 percent in shares of A&B stock and
the remainder in cash. If a participant elects to receive a portion of
the award in stock, an additional 50 percent stock bonus may be
awarded. In general, shares issued under the Restricted Stock Bonus
Plan may not be traded for three years following the award date;
special vesting provisions apply for the death, termination or
retirement of a participant.
Of the 146,653 shares that were available for future issuance, 5,575
shares were available for future issuance under the Non-Employee
Director Stock Retainer Plan and 141,078 shares were available for
issuance under the Restricted Stock Bonus Plan.
ITEM 6. SELECTED FINANCIAL DATA
The following financial data should be read in conjunction with Item 8,
"Financial Statements and Supplementary Data," and Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
(dollars and shares in millions, except per-share amounts):
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
Revenue:
Transportation:
Ocean transportation $ 878.3 $ 850.1 $ 776.3 $ 686.9 $ 682.3
Logistics services 431.6 376.9 237.7 195.1 122.0
Real Estate:
Leasing 89.7 83.8 80.3 73.1 70.7
Sales 148.9 82.3 63.8 93.0 89.2
Less amounts reported in discontinued
operations(1) (56.5) (10.3) (47.3) (81.6) (19.6)
Food Products 123.2 112.8 112.9 112.7 106.0
Reconciling Items(7) (8.4) (6.5) -- -- --
---------- ---------- --------- --------- ----------
Total revenue $ 1,606.8 $ 1,489.1 $ 1,223.7 $ 1,079.2 $ 1,050.6
========== ========== ========== ========== ==========
Operating Profit:
Transportation:
Ocean transportation $ 128.0 $ 108.3 $ 93.2 $ 42.4 $ 60.7
Logistics services 14.4 8.9 4.3 3.1 1.6
Real Estate:
Leasing 43.7 38.8 37.0 32.9 34.1
Sales 44.1 34.6 23.9 19.4 17.9
Less amounts reported in discontinued
operations(1) (16.5) (5.0) (22.3) (22.8) (9.9)
Food Products 11.2 4.8 5.1 13.8 5.7
---------- ---------- ---------- ---------- ----------
Total operating profit 224.9 190.4 141.2 88.8 110.1
Write-down of long-lived assets(2) (2.3) -- (7.7) -- (28.6)
Gain on sale of investment(3) -- -- -- -- 125.5
Dividends and other -- -- -- -- 2.1
Interest expense, net(8) (13.3) (12.7) (11.6) (11.6) (18.6)
General corporate expenses (24.1) (20.3) (15.2) (13.2) (13.2)
---------- ---------- ---------- ---------- ----------
Income from continuing operations
before income taxes 185.2 157.4 106.7 64.0 177.3
Income taxes (69.4) (59.8) (39.2) (20.1) (63.7)
---------- ---------- ---------- ---------- ----------
Income from continuing operations $ 115.8 $ 97.6 $ 67.5 $ 43.9 $ 113.6
========== ========== ========== ========== ==========
Identifiable Assets:
Transportation(5) $ 1,183.3 $ 953.4 $ 981.9 $ 880.1 $ 888.2
Real Estate(6) 705.9 661.0 612.8 500.3 476.1
Food Products 159.0 152.8 154.4 163.4 153.3
Other 22.7 11.0 10.5 8.9 26.8
---------- ---------- ---------- ---------- ----------
Total assets $ 2,070.9 $ 1,778.2 $ 1,759.6 $ 1,552.7 $ 1,544.4
========== ========== ========== ========== ==========
Capital Additions:
Transportation(5) $ 175.2 $ 128.7 $ 133.4 $ 10.5 $ 59.7
Real Estate(4), (6) 79.0 10.9 107.7 83.7 72.0
Food Products 13.0 10.2 12.6 9.9 9.4
Other 1.4 1.4 1.7 0.9 0.3
---------- ---------- ---------- ---------- ----------
Total capital additions $ 268.6 $ 151.2 $ 255.4 $ 105.0 $ 141.4
========== ========== ========== ========== ==========
Depreciation and Amortization:
Transportation(5) $ 60.9 $ 58.0 $ 51.9 $ 51.0 $ 55.4
Real Estate(1), (6) 12.5 12.3 11.3 9.1 7.8
Food Products 9.4 9.0 8.2 8.5 9.1
Other 0.5 0.4 0.3 0.4 0.5
---------- ---------- ---------- ---------- ----------
Total depreciation and
amortization $ 83.3 $ 79.7 $ 71.7 $ 69.0 $ 72.8
========== ========== ========== ========== ==========
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
Earnings per share:
From continuing operations before
discontinued operations:
Basic $ 2.66 $ 2.29 $ 1.62 $ 1.07 $ 2.80
Diluted $ 2.63 $ 2.26 $ 1.61 $ 1.06 $ 2.79
Net Income:
Basic $ 2.89 $ 2.37 $ 1.95 $ 1.42 $ 2.73
Diluted $ 2.86 $ 2.33 $ 1.94 $ 1.41 $ 2.72
Return on beginning equity 13.9% 12.4% 11.2% 8.2% 15.9%
Cash dividends per share $ 0.90 $ 0.90 $ 0.90 $ 0.90 $ 0.90
At Year End
Shareholders of record 3,628 3,792 3,959 4,107 4,252
Shares outstanding 44.0 43.3 42.2 41.3 40.5
Long-term debt - non-current $ 296 $ 214 $ 330 $ 248 $ 207
(1) Prior year amounts restated for amounts treated as discontinued operations.
(2) The 2005, 2003 and 2001 write-downs were for an "other than temporary"
impairment in the Company's investment in C&H. The Company's investment in
C&H was sold on August 9, 2005 at the then approximate carrying value.
(3) In 2001, the Company sold its holdings in BancWest, realizing a gain of
approximately $125.5 million.
(4) Includes tax-deferred property purchases that are considered non-cash
transactions in the Consolidated Statements of Cash Flows; excludes
capital expenditures for real estate developments held for sale.
(5) Includes both Ocean Transportation and Logistics Services. Assets for
Logistics Services comprise less than one percent of the total assets for
the transportation industry.
(6) Includes Leasing, Sales and Development activities. Assets that are leased
to third parties comprised approximately 66 percent of the 2005 year-end
real estate assets. These assets are not broken out separately since gains
or losses resulting from the sales of leased property are included with the
sales of property development for segment reporting rather than reported
with the leasing segment. The free cash flow from operations for the leasing
segment, before subtracting capital expenditures and after adding back
depreciation, was approximately $47 million for 2005. This non-GAAP measure
is commonly used in evaluating the performance and understanding the
operations of businesses that invest in real estate. It is sometimes used as
a percentage of assets under management to evaluate the performance of an
income-earning real estate portfolio.
(7) Includes inter-segment revenue and interest income classified as revenue for
segment reporting purposes. Amounts for 2001 - 2003 were not material.
(8) Includes Ocean Transportation interest expense of $9.6 million for 2005,
$5.7 million for 2004, $2.6 million for 2003, $2.4 million for 2002, and
$5.1 million for 2001. Substantially all other interest expense was at the
parent company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following analysis of the consolidated financial condition and
results of operations of Alexander & Baldwin, Inc. and its subsidiaries
(collectively, the "Company") should be read in conjunction with the
consolidated financial statements and related notes thereto. Amounts in this
narrative are rounded to millions, but per-share calculations and percentages
were calculated based on thousands. Accordingly, a recalculation of some
per-share amounts and percentages, if based on the reported data, may be
slightly different than the more accurate amounts included herein.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
The Company, from time to time, may make or may have made certain
forward-looking statements, whether orally or in writing, such as forecasts and
projections of the Company's future performance or statements of management's
plans and objectives. These statements are "forward-looking" statements as that
term is defined in the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements may be contained in, among other things, Securities
and Exchange Commission ("SEC") filings, such as the Forms 10-K, 10-Q and 8-K,
press releases made by the Company, the Company's Internet Web sites (including
Web sites of its subsidiaries), and oral statements made by the officers of the
Company. Except for historical information contained in these written or oral
communications, such communications contain forward-looking statements. These
include, for example, all references to 2006 or future years. These
forward-looking statements are not guarantees of future performance, and involve
a number of risks and uncertainties that could cause actual results to differ
materially from those projected in the statements, including, but not limited to
the factors that are described in Part I, Item 1A under the caption of "Risk
Factors" of this Form 10-K, which section is incorporated herein by reference.
CONSOLIDATED RESULTS OF OPERATIONS
--------------------------------------------------------------------------------------------------
(dollars in millions, except per-share amounts) 2005 2004 2003
--------------------------------------------------------------------------------------------------
Operating Revenue $ 1,607 $ 1,489 $ 1,224
Operating Costs and Expenses $ 1,422 $ 1,326 $ 1,109
Other Income and (Expenses) $ -- $ (6) $ (8)
Income Taxes $ 69 $ 59 $ 40
Net Income $ 126 $ 101 $ 81
Other Comprehensive Income (Loss) $ 2 $ (1) $ 19
--------------------------------------------------------------------------------------------------
Basic Earnings Per Share $ 2.89 $ 2.37 $ 1.95
--------------------------------------------------------------------------------------------------
Operating Revenue for 2005 increased $118 million, or 8 percent,
compared with 2004. The increase was due principally to $55 million growth in
Matson Integrated Logistics revenue, $27 million higher revenue for ocean
transportation, $17 million in higher revenue from real estate sales (after
subtracting revenue from discontinued operations), $10 million from higher
revenue in food products and $9 million higher revenue from real estate leasing
(after subtracting leasing revenue from assets classified as discontinued
operations). The reasons for revenue growth are described below, by business
segment, in the Analysis of Operating Revenue and Profit.
Operating Revenue for 2004 increased $265 million, or 22 percent,
compared with 2003. Logistics services contributed $139 million to the increase
due to a late 2003 business acquisition and top-line business growth. Ocean
transportation contributed $70 million of the increase due principally to
increased volumes and rate actions. Property sales contributed $54 million.
Property leasing and food products revenue were comparable to 2003. The property
leasing and property sales revenue included in the Consolidated Statements of
Income are stated after subtracting discontinued operations.
Because the Company regularly develops and sells income-producing real
estate, the revenue trends for these two segments are best understood before
subtracting discontinued operations. This analysis is provided in the Analysis
of Operating Revenue and Profit below.
Operating Costs and Expenses for 2005 increased by $96 million, or 7
percent, compared with 2004. Costs of logistics services increased $45 million
due to business growth. Cost of transportation services increased by $5 million
due to higher terminal and vessel operating costs (both of which were due to
higher volume), and start up costs for the China Long Beach Express Service.
Costs of property sales and leasing services, after removing discontinued
operations, increased $27 million due to property sales and routine operating
and maintenance costs. Cost of agricultural goods and services increased $5
million compared with 2004 due mostly to higher personnel, fuel and fertilizer
costs. Selling, General and Administrative costs increased by $12 million due to
higher depreciation, amortization of leasehold improvements, professional
service fees, employee benefit costs, salaries and wages and charitable
contributions, partially offset by lower Sarbanes-Oxley Act internal compliance
costs.
Operating Costs and Expenses for 2004 increased by $217 million, or 20
percent, compared with 2003. Costs of logistics services increased $130 million
due to business growth. Cost of transportation services increased by $67 million
due to higher terminal and vessel operating costs (both of which were due to
higher volume), a 2003 $17 million pension settlement gain, an accrual in 2003
for the settlement of a claim with the State of Hawaii and improved performance
of joint ventures. Costs of property sales and leasing services, after removing
discontinued operations, increased $27 million due to property sales and routine
operating and maintenance costs. Cost of agricultural goods and services
declined $3 million compared with 2003. Selling, General and Administrative
costs increased by $4 million due to consulting costs for Sarbanes-Oxley section
404 readiness, audit fees, increased accruals for incentive plans, and higher
non-qualified benefit plans expenses.
Operating costs for 2005 and 2003 included impairment losses of $2
million and $8 million, respectively, of the carrying value of the Company's
investment in C&H Sugar Company, Inc. ("C&H"). The 2005 impairment loss was in
connection with the ultimate disposition of the Company's investment in C&H on
August 9, 2005.
Additional information about business- and segment-specific
year-to-year fluctuations is included under the caption Analysis of Operating
Revenue and Profit and is intended to supplement the discussion of consolidated
operations.
Other Income and Expenses is comprised of a $5 million gain from an
insurance settlement following a fire earlier in the year at the Kahului
Shopping Center on Maui, equity in earnings of real estate joint ventures,
interest revenue and interest expense. Interest expense of $13 million for 2005
was comparable to 2004. 2004 interest expense of $13 million was $1 million
higher than in 2003, due principally to lower balances of low-interest debt.
Income Taxes were higher for 2005 compared with 2004 due primarily to
higher pre-tax income, partially offset by a lower effective tax rate of 37.5
percent versus 38 percent for 2004. Income taxes were higher for 2004 compared
with 2003 due primarily to higher pre-tax income and a higher effective tax rate
of 38 percent versus 37 percent for 2003.
Other Comprehensive Income or Loss for 2005, 2004 and 2003 comprised
the minimum pension liability adjustments (Note 11 in Part II Item 8 of this
Form 10-K) and, for 2004 and 2003, the change in fair value of a treasury lock
agreement (Note 9 in Part II Item 8 of this Form 10-K).
ANALYSIS OF OPERATING REVENUE AND PROFIT
Detailed information related to the operations and financial
performance of the Company's Industry Segments is included in Note 15 in Part II
Item 8 and in Part II Item 6 of this Form 10-K. The following information should
be read in relation to information contained in that information.
Transportation Industry
Ocean Transportation; 2005 compared with 2004
---------------------------------------------
------------------------------------------------------------------------------
(dollars in millions) 2005 2004 Change
------------------------------------------------------------------------------
Revenue $ 878.3 $ 850.1 3%
Operating profit $ 128.0 $ 108.3 18%
------------------------------------------------------------------------------
Volume (units)
Hawaii containers 175,800 169,600 4%
Hawaii automobiles 148,100 157,000 -6%
Guam containers 16,600 17,200 -3%
------------------------------------------------------------------------------
Ocean Transportation revenue of $878.3 million for 2005 was 3 percent
higher than the $850.1 million reported in 2004. Of this increase, $17.6 million
was due to increases in the fuel surcharge, $13.6 million was due to higher
Hawaii container and conventional volumes offset partially by lower automobile
volume, and $8.4 million was due to yields and cargo mix in all services.
Charter and other revenue was $12.9 million lower than in 2004 as a result of
less U.S. Government business and fewer charter opportunities. The fuel
surcharge mitigates the effects of fluctuating fuel costs and is adjusted
quarterly. 2005 revenue was also affected adversely by a 52-week operating year
versus 53 weeks in 2004 and by competitive effects on both volume and rates.
For 2005 compared with 2004, Hawaii Service container volume was 4
percent higher and automobile volume was 6 percent lower. Container volume
increase was principally the result of stabilized growth in the Hawaii economy,
in turn, fueled by tourism and construction. Guam container volume was 3 percent
below 2004 due to normal business fluctuations. The lower automobile volume was
the result of unusually high shipments from automobile manufacturers to renew
rental car fleets in late 2004 and increased competition. The lower automobile
volume, however, did not materially affect operating profit adversely for the
year because the incremental vehicles would have been carried in containers, a
method of shipment that is not cost-efficient for rolling stock. The greater
competitive effect of lower automobile volume on Matson's earnings was a
lowering of certain cargo rates.
Operating profit of $128 million for 2005 was $19.7 million greater
than the $108.3 million reported for 2004. This was primarily the result of
$12.4 million higher equity in earnings of SSAT, $9.2 million from favorable
yields and mix in all services, $7.9 million from higher container, and
conventional volume, and $3 million from lower vessel and overhead operating
costs partially offset by $6.7 million of higher outside transportation costs
and $4 million lower operating profit from vessel charters and other business.
Sea Star Line LLC contributed $2.1 million to last year's operating profit;
Matson's minority interest in that investment was sold in August 2004.
Ocean Transportation; 2004 compared with 2003
---------------------------------------------
---------------------------------------------------------------------------------
(dollars in millions) 2004 2003 Change
---------------------------------------------------------------------------------
Revenue $ 850.1 $ 776.3 10%
Operating profit $ 108.3 $ 93.2 16%
---------------------------------------------------------------------------------
Volume (units)
Hawaii containers 169,600 162,400 4%
Hawaii automobiles 157,000 145,200 8%
Guam containers 17,200 17,800 -3%
---------------------------------------------------------------------------------
Ocean Transportation revenue of $850.1 million for 2004 was 10 percent
higher than the $776.3 million reported in 2003. Of this increase, $28.2 million
was due to higher container and automobile volume, $27.9 million was due to
improved yields and rate actions, $12.6 million was to mitigate increased fuel
costs through a bunker fuel surcharge, and the remaining $5.1 million was due to
purchased transportation services, vessel charters and other factors. To
mitigate the effects of fluctuating fuel costs, Matson charges a fuel surcharge.
For 2004, Hawaii Service container volume was 4 percent higher than in
2003 and automobile volume was 8 percent higher, both reflecting higher market
growth due, in part, to the improving Hawaii economy. Automobile volume
increases also reflect rental fleet replacements in 2004. Guam container volume
was 3 percent below 2003 volume due to the fall-off of cargo from Typhoon
Pongsona recovery efforts.
Operating profit of $108.3 million for 2004 was $15.1 million greater
than the $93.2 million reported for 2003 reflecting principally $42.7 million of
favorable revenue yields, cargo mix, higher cargo volume and vessel charters,
the non-recurrence of a 2003 expense of $4.7 million to settle an excise tax
issue with the State of Hawaii, $3.7 million of lower overhead costs and $2.6
million of higher returns from joint ventures. These favorable factors were
partially offset by $24.6 million of higher vessel operating costs due
principally to the addition, in the second half of 2004, of two vessels in the
Hawaii Service to accommodate the higher volume and to ensure customer shipping
needs were met during recent Southern California terminal labor shortages, $7.9
million for net benefit plan expenses (mostly due to the non-recurrence of a
2003 pension settlement gain), and $6.1 million of outside transportation and
other costs.
Logistics Services; 2005 compared with 2004
-------------------------------------------
-------------------------------------------------------------------------------
(dollars in millions) 2005 2004 Change
-------------------------------------------------------------------------------
Revenue $ 431.6 $ 376.9 15%
Operating profit $ 14.4 $ 8.9 62%
-------------------------------------------------------------------------------
Matson Integrated Logistics, Inc. ("MIL") provides intermodal marketing
and truck brokerage services throughout North America. Revenue increased 15
percent for 2005 compared to 2004, due to improvements in the mix of business,
rates and a 20 percent increase in highway volume, partially offset by a 6
percent decline in domestic and international volumes. The increase in highway
volume was principally due to market shifts, the late 2004 business acquisition
and organic growth. In December 2004, MIL acquired certain assets, obligations
and contracts of a Texas-based business that provides truck and rail brokerage
services.
MIL's operating profit increased by 62 percent compared to 2004 due to
higher yields and overall increased volumes partially offset by higher personnel
costs and other overhead.
Logistics Services; 2004 compared with 2003
-------------------------------------------
-------------------------------------------------------------------------------
(dollars in millions) 2004 2003 Change
-------------------------------------------------------------------------------
Revenue $ 376.9 $ 237.7 59%
Operating profit $ 8.9 $ 4.3 2.1x
-------------------------------------------------------------------------------
Revenue was $376.9 million for 2004, compared with $237.7 million in
2003. Operating profit was $8.9 million for 2004, compared with $4.3 million
earned in 2003. The 2004 revenue and operating profit growth were primarily the
result of a late-2003 business acquisition and new revenue due to continuing
business growth. In December 2003, MIL acquired the assets and the operating
contracts of an Ohio-based business that provides truck brokerage services.
The revenue for MIL includes the total amount billed to customers for
transportation services. The primary costs of the business include purchased
transportation for that cargo. As a result, the operating profit margins for
this business are consistently lower than for other A&B businesses. The primary
operating profit and investment risks in the intermodal business are the quality
of receivables and the costs of purchased transportation, both of which are
monitored closely by management.
Real Estate Industry
Leasing; 2005 compared with 2004
--------------------------------
---------------------------------------------------------------------------------
(dollars in millions) 2005 2004 Change
---------------------------------------------------------------------------------
Revenue $ 89.7 $ 83.8 7%
Operating profit $ 43.7 $ 38.8 13%
---------------------------------------------------------------------------------
Occupancy Rates:
Mainland 95% 95% --
Hawaii 93% 90% 3%
---------------------------------------------------------------------------------
Leasable Space (million sq. ft.):
Mainland 3.5 3.7 -5%
Hawaii 1.6 1.7 -6%
---------------------------------------------------------------------------------
Revenue for 2005, before subtracting amounts treated as discontinued
operations, of $89.7 million was 7 percent higher than the $83.8 million
reported in 2004. Operating profit, also before subtracting discontinued
operations, was $43.7 million for 2005, or 13 percent higher than the $38.8
million earned in 2004. The higher operating profit was due primarily to 2005
property acquisitions as well as higher rental rates and improved Hawaii
occupancies. Hawaii occupancy increased, principally due to tenancy increases in
retail and office properties as well as the varying mix of properties in the
portfolio due to sales and acquisitions. Mainland occupancy remained unchanged
from 2004. In 2005, two Mainland properties and two Hawaii office buildings were
sold and a Mainland property, the Lanihau Shopping Center in Kona on the island
of Hawaii and a retail property in Honolulu were acquired. The Kunia Shopping
Center development on Oahu was completed in 2005.
The real estate leasing portfolio earnings were comprised of 23 percent
for office property, 37 percent for retail property, 19 percent for industrial
property and 21 percent for other property, principally ground leases.
Leasing; 2004 compared with 2003
--------------------------------
--------------------------------------------------------------------------------
(dollars in millions) 2004 2003 Change
--------------------------------------------------------------------------------
Revenue $ 83.8 $ 80.3 4%
Operating profit $ 38.8 $ 37.0 5%
--------------------------------------------------------------------------------
Occupancy Rates:
Mainland 95% 93% 2%
Hawaii 90% 90% --
--------------------------------------------------------------------------------
Leasable Space (million sq. ft.):
Mainland 3.7 3.7 --
Hawaii 1.7 1.7 --
--------------------------------------------------------------------------------
Revenue, before subtracting amounts treated as discontinued operations,
was $83.8 million for 2004, or 4 percent higher than the $80.3 million reported
in 2003. Operating profit, also before subtracting discontinued operations, was
$38.8 million for 2004, or 5 percent higher than the $37 million earned in 2003.
The higher operating profit was due primarily to 2004 property acquisitions, the
full year effect of 2003 property purchases, higher rental rates and improved
mainland occupancies. Mainland occupancy increased, due principally to tenancy
increases in retail properties as well as the varying mix of properties in the
portfolio due to sales and acquisitions. Hawaii occupancy remained unchanged
from 2003. The composition of the leased portfolio remained relatively stable
during 2004.
As with any large real estate portfolio of commercial properties,
occupancy levels will vary between reporting periods based on known lease
expirations, unanticipated lease terminations, and properties sold and purchased
in the interim periods. The Company's portfolio includes leases covering a wide
range of space sizes and income, with no necessary correlation between lease
size and lease income.
Real-estate Sales; 2005 compared with 2004 and 2003
---------------------------------------------------
-------------------------------------------------------------------------------
(dollars in millions) 2005 2004 2003
-------------------------------------------------------------------------------
Revenue $148.9 $ 82.3 $ 63.8
Operating profit $ 44.1 $ 34.6 $ 23.9
-------------------------------------------------------------------------------
2005: Revenue, before subtracting amounts treated as discontinued
operations, from property sales was $148.9 million and operating profit was
$44.1 million. Sales during 2005 primarily include residential sales in Hawaii
of $81 million, commercial sales in Hawaii of $41 million, commercial sales on
the U.S. mainland of $24 million, and the sale of a land parcel on Maui for $2
million. Operating profit also included $3 million for the Company's share of
net earnings in five of its real estate joint ventures.
2004: Revenue, before subtracting amounts treated as discontinued
operations, from property sales was $82.3 million and operating profit was $34.6
million. Sales during 2004 primarily included commercial sales in Hawaii of $43
million and residential sales in Hawaii of $37 million. Operating profit also
included $3 million of the Company's share of net earnings in its five real
estate joint ventures, including the sales of 14 residential units on Oahu and
the island of Hawaii in 2004.
2003: Revenue of $63.8 million and operating profit of $23.9 million
resulted primarily from commercial and industrial lot sales in Hawaii of $30
million, commercial sales on the U.S. mainland of $24 million, residential sales
in Hawaii of $9 million and two land parcels on Maui for $1 million. Operating
profit also included the Company's share of earnings in two real estate joint
ventures of $4 million that, combined, reflect the sales of 142 residential
units on Oahu and the island of Hawaii in 2003.
The mix of property sales in any year or quarter can be diverse. Sales
can include developed residential real estate, commercial properties,
developable subdivision lots, undeveloped land, and property sold under threat
of condemnation. The sale of undeveloped land and vacant parcels in Hawaii
generally provides a greater contribution to earnings than does the sale of
developed and commercial property, due to the low historical cost basis of the
Company's Hawaii land. Consequently, property sales revenue trends, cash flows
from the sales of real estate and the amount of real estate held for sale on the
balance sheets do not necessarily indicate future profitability trends for this
segment. The reporting of property sales is also affected by the classification
of certain property sales as discontinued operations.
Discontinued Operations; Real-estate - The sales of certain
income-producing assets are classified as discontinued operations if the
operations and cash flows of the assets clearly can be distinguished from the
remaining assets of the Company, if cash flows for the assets have been, or will
be, eliminated from the ongoing operations of the Company, if the Company will
not have a significant continuing involvement in the operations of the assets
sold and if the amount is considered material. Certain assets that are "held for
sale," based on the likelihood and intention of selling the property within 12
months, are also treated as discontinued operations. At the time a property is
classified as "discontinued," the previously recognized revenue and expenses for
the property are reclassified to discontinued operations so historically
reported information is updated to reflect discontinued operations at each
reporting interval.
The revenue, operating profit, and after-tax effects of these
transactions for 2005, 2004 and 2003 were as follows (in millions, except
per-share amounts):
--------------------------------------------------------------------------
2005 2004 2003
--------------------------------------------------------------------------
Sales Revenue $ 50.1 $ 1.1 $ 36.9
Leasing Revenue $ 6.4 $ 9.2 $ 10.4
Sales Operating Profit $ 13.9 $ 1.5 $ 17.9
Leasing Operating Profit $ 2.6 $ 3.5 $ 4.4
After-tax Earnings $ 10.2 $ 3.1 $ 13.8
Basic Earnings Per Share $ 0.23 $ 0.08 $ 0.33
--------------------------------------------------------------------------
2005: The sales of two office buildings in Honolulu, one
warehouse/distribution complex in Ontario, California, one service
center/warehouse complex, consisting of three buildings in San Antonio, Texas,
and the fee interest in a parcel in Maui were considered discontinued
operations. Additionally, the revenue and expenses of an office building in
Wailuku, Maui and three parcels on Maui have been classified as discontinued
operations even though the Company had not sold the properties by the end of
2005. The three parcels were sold in January 2006.
2004: The sale of a Maui property was classified as a discontinued
operation. In addition, two office and one light industrial properties met the
criteria for classification as discontinued operations even though the Company
had not sold the properties by the end of 2004. One of the office properties and
the light industrial property were sold in January 2005.
2003: The sales of a Nevada commercial property and five of the
commercial properties on Maui met the criteria for classification as
discontinued operations.
Food Products Industry
Food Products; 2005 compared with 2004
--------------------------------------
--------------------------------------------------------------------------------
(dollars in millions) 2005 2004 Change
--------------------------------------------------------------------------------
Revenue $ 123.2 $ 112.8 9%
Operating profit $ 11.2 $ 4.8 2.3x
--------------------------------------------------------------------------------
Tons sugar produced 192,700 198,800 -3%
--------------------------------------------------------------------------------
Food products revenue increased 9 percent for 2005 compared to 2004 due
mainly to $5.5 million received as part of an agricultural disaster relief
program, $5.1 million for higher power sales, $2.2 million of higher trucking
and royalty revenue and $1.7 million higher molasses sales, partially offset by
$4.3 million of lower sugar and coffee sales. Operating profit was $6.4 million
better than 2004 due mainly to the same factors noted above, offset partially by
higher costs for fuel, chemicals, fertilizer and personnel.
Compared with 2004, sugar production was 6,100 tons lower due primarily
to yield losses from a decline in cane age from drought, malicious fires, and
leaf scald disease as well as a decision to increase the age of the cane to
achieve a more optimal yield. The average revenue per ton of sugar for 2005 was
1 percent lower than in 2004.
Coffee production of 1.8 million pounds for 2005 was substantially the
same as 2004 production. Both years' crops suffered from low yields and an
increased mix of lower-value commodity grade beans. Factors such as plant
nutrition, water quality, reduced orchard density and insect infestation have an
impact on the low yields and crop mix. The lower-than-expected coffee harvest
for 2005 resulted in a loss of $1.8 million to reduce the carrying value of the
inventory to its net realizable value. A similar loss of $1.6 million was
recorded in 2004.
Approximately 90 percent of the Company's sugar production was sold to
Hawaiian Sugar & Transportation Cooperative ("HS&TC") during 2005 under a
standard marketing contract. HS&TC sells its raw sugar to C&H at a price equal
to the New York No. 14 Contract settlement price, less a discount and less costs
for sugar vessel discharge and stevedoring. This price, after deducting the
marketing, operating, distribution, transportation and interest costs of HS&TC,
reflects the gross revenue to the Company.
Food Products; 2004 compared with 2003
--------------------------------------
------------------------------------------------------------------------------
(dollars in millions) 2004 2003 Change
------------------------------------------------------------------------------
Revenue $ 112.8 $ 112.9 --
Operating profit $ 4.8 $ 5.1 -6%
------------------------------------------------------------------------------
Tons sugar produced 198,800 205,700 -3%
------------------------------------------------------------------------------
Revenue of $112.8 million and operating profit of $4.8 million for 2004
was nearly the same as the amounts reported in 2003. Higher power sales volume
and prices of $5.5 million, higher Maui Brand Sugar and Kauai Coffee roasted
coffee sales and lower operating costs were fully offset by $4 million of lower
raw sugar prices, $3 million of lower raw sugar production volume, an expense of
$1.6 million to reduce the carrying cost of coffee inventory to the amount it
expects to realize when inventories are sold, and lower molasses sales.
Compared with 2003, sugar production was 6,900 tons lower due to
adverse weather conditions and yield losses. The average revenue per ton of
sugar for 2004 was 5 percent lower than in 2003. Power sales of $15.3 million
were 56 percent higher than in 2003.
Coffee production of 1.8 million pounds for 2004 was 1.5 million pounds
lower than the 3.3 million pounds produced in 2003. This lower production was
principally due to heavy rain and wind on Kauai during the harvest season that
knocked coffee cherries off the trees and reduced the ability to harvest coffee.
ECONOMIC OUTLOOK AND INDUSTRY GROWTH OPPORTUNITIES
The information included in this caption includes forward looking
information. The actual economic, operating results, trends and expectations
noted below will be different from actual events; those differences might be
significant and might affect, among other measures and trends, revenues,
expenses, assets, liabilities, shareholders' equity and cash flows.
With the exception of the anticipated local inflation rate--approaching
4 percent--virtually all of Hawaii's concurrent economic measures remain strong
and favorable. Many, in fact, are being reported higher than expected as Hawaii
continues its broad-based economic growth.
Most forecasters anticipate some moderation in the pace of the State's
growth in 2006-7. Among the reasons cited are: limited remaining capacity in
visitor accommodations, higher costs and interest rates, and fewer people
remaining in the skilled labor pool.
In 2005, the visitor industry enjoyed a record year, with total
visitors up 6.8 percent, soundly surpassing 2000, the previous high for most
measures. Domestic travelers continued to provide the largest contribution to
growth, even as international visitors continued a slow recovery. Visitor
spending, at $11.5 billion, was also a new record. Hotel occupancy levels and
room rates were high because of demand and because time-share conversions and
renovations have reduced the available pool of accommodations.
Job growth continued, with a 2.8 percent rise in the total job count
during the third quarter, the most recent period for which data are available.
Within that total, the important construction sector was up 9.7 percent.
Hawaii's unemployment rate was 2.7 percent in December 2005, compared with the
national rate of 4.9 percent. December 2005 was the tenth consecutive month that
Hawaii's rate was below 3 percent.
Hawaii's rapid rise in housing prices appears to have moderated, with
inventories of homes for sale growing--from very low levels--and smaller numbers
of sales transactions. Prices appear to be settling at a high level. The median
prices in December 2005 for single-family home re-sales were: Oahu $610,000, up
23.2 percent over December 2004; Maui $725,000, up 22 percent; Kauai $610,000,
up 7 percent; and the Big Island $432,000, up 16.9 percent.
Based on early 2005 tax collections that were up nearly 14 percent, the
State of Hawaii's Council on Revenues recently raised its forecast to an 8
percent projected increase, which would generate a surplus of $535 million in
the present fiscal year 2006-07. With a forecast of a 7.5 percent increase for
the following fiscal year, an additional surplus of $632 million would be
generated. The legislative session that begins in early 2006 will decide how
those potential surplus funds might be utilized. Deferred school maintenance has
been prominently mentioned as a need, while some form of tax relief also is
likely.
The Company believes that the economic growth in its core markets will
continue into 2006, but at a somewhat more moderate pace than in recent years.
A&B's growth strategies, as previously announced, continue to focus on both the
real estate and transportation businesses and are guided by two primary
objectives: (1) sustaining profit momentum at Matson in spite of external
challenges and (2) continued success in identifying and investing in profitable
real estate.
The Company had previously noted that it is targeting long-term annual
earnings growth of approximately 10 to 12 percent but that annual growth will
vary. The Company also noted that 2006 earnings should be lower than 2005 due to
the termination of the APL Alliance and the commencement of Matson's new China
Long Beach Express Service in February 2006.
The composition of the Company's assets is currently about 57 percent
in transportation, about 34 percent in real estate and less than 9 percent in
food products. The Company's long-term strategic intent is to increase the
growth of real estate at a somewhat faster pace than the transportation growth
through an active real estate investment program, including land acquisitions,
development of new and current projects, joint ventures and maintenance of
income-producing properties. Because Matson expects to utilize its Capital
Construction Fund ("CCF") as partial funding for a containership purchase in
2006, its net asset additions for the coming year will be mitigated somewhat.
Capital spending for the food products businesses is expected to remain modest.
Real Estate: Continued expansion of A&B's real estate businesses is
expected to be achieved through completion of existing development projects,
continued strength in the Company's income portfolio, sales of owned real
estate, and continued efforts in identifying and executing a pipeline of new
acquisitions and development projects in a variety of property types.
In recent years the Company has begun two significant projects, the
2003 acquisition and ensuing development and sale of 270 acres of undeveloped
land at Wailea on Maui and the development of a 1,000-acre project at Kukui`ula
on Kauai in a partnership with an affiliate of DMB Associates, Inc. Of the
Wailea properties, the Company has sold about 70 acres and has about 60 acres in
various stages of development, either by itself or through joint ventures. The
remaining acreage could be either developed or sold, depending on market
factors. The Company is looking for additional long-term projects to complement
Wailea and Kukui`ula. Such projects could entail the development of currently
owned lands, or investments in new lands or ventures.
A&B also will continue pursuing projects with a 3-5 year return
horizon. The Company will try to replicate its recent success with the Hokua and
Lanikea condominiums and the Kunia Shopping Center, for example, through
developments such as Keola La`i, Lanihau Phase II and other, to-be-identified,
projects.
A facet of plans for continued growth of the real estate business will
be expanding the use of joint ventures. Joint ventures have benefited A&B by
dispersing risk among a greater number of projects and enabling the Company to
partner with businesses that have complementary expertise, thereby creating
greater value than pursuing the same opportunities alone.
Transportation: While Matson has recently undertaken a long-anticipated
transition in its Guam service and the startup of a new China service, which
together will reduce 2006 earnings, long-term growth prospects for the
transportation businesses continue to be favorable.
As described in the Company's 2004 Form 10-K, the expiration of
Matson's alliance with American President Lines, Ltd. in February 2006 and the
transition to the China Long Beach Express Service is expected to negatively
impact 2006 pre-tax earnings by approximately $32-37 million, including the
impacts of both operations and interest expense.
Competition in the Hawaii Service will be influenced in 2006 by the
full-year presence of the operator of a new dedicated automobile and truck
carrier, which began bi-weekly service from California to Hawaii in March 2005.
The operator has targeted automobiles, buses, trucks and other rolling stock,
and signed a multi-year contract with Chrysler Corporation for the carriage of
westbound automobiles. The new carrier's impact on Matson has been muted by
Matson's service enhancements and successful contract extensions with General
Motors and Ford, and the signing by Matson of a contract to carry cars for
Nissan, which had been a customer of Horizon Lines, Matson's other principal
competitor. The initial public offering of stock by Horizon Lines during 2005
has not had an impact on the competitive environment.
Matson Integrated Logistics ("MIL") is expected to continue growing
through both the development of existing business relationships and through
acquisitions. The intermodal and truck brokerage businesses are fragmented and
MIL expects to take advantage of synergistic acquisitions.
Food Products: A&B, through its Hawaiian Commercial & Sugar ("HC&S")
operations on Maui produces approximately 75 to 80 percent of the state's sugar.
HC&S' strengths in this price-constrained business are its irrigation
infrastructure, innovative uses of technology, its workforce and a strong union
relationship. While agriculture remains the best and highest use for much of the
Company's land, it faces declining margins on the sale of commodity products.
For that reason, the business strategy for food products is to expand its Maui
Brand Sugar products, develop new sources of energy sales and develop new
revenue sources from sugar byproducts. In addition, because raw sugar production
is mostly a fixed cost operation, A&B continues to focus on higher production
volume and yields.
FINANCIAL CONDITION AND LIQUIDITY
Debt and Liquid Resources: Liquid resources of the Company, 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 $620 million at December 31, 2005, a decrease of $13 million from
December 31, 2004. This net decrease was due primarily to $43 million in lower
available balances on revolving credit and private placement shelf facilities
and $4 million of lower receivable balances, partially offset by $16 million
less accrued deposits to the CCF and $15 million of higher cash and cash
equivalent balances.
Working Capital: Working capital was $49 million at December 31, 2005,
a decrease of $4 million from the balance at the end of 2004. The lower working
capital was due primarily to $26 million lower balance of real estate held for
sale, and $19 million higher accounts payable balances, partially offset by $16
million less accrued (withdrawals) deposits to the Capital Construction Fund,
$15 million increased cash and cash equivalents and $6 million in higher current
deferred tax assets. The higher accounts payable balance was primarily due to
the growth of logistics services business.
At December 31, 2005, the Company had receivables totaling $177
million, compared with $181 million a year earlier. These amounts were net of
allowances for doubtful accounts of $14 million for each of 2005 and 2004. The
decrease in receivables was mainly the result of payment of a note receivable
for a parcel of land, partially offset by increased business activity,
particularly in the logistics services business. The Company's management
believes that the quality of these receivables is good and that its reserves are
adequate. Cash balances were higher due to strong cash flows during the year
combined with the timing of redeployment opportunities and low debt balances
that could be repaid. At the end of 2005, the Company accrued $1 million as a
planned withdrawal from its Capital Construction Fund. This accrual represents
an addition to current assets for qualified purchases already made but for which
a withdrawal from the CCF was not made at year end. The fluctuations in other
working capital accounts resulted from normal operating activities.
Long-Term Debt and Credit Facilities: Long-term debt, including current
portion of long-term debt and current notes payable, was $327 million at the end
of 2005 compared with $245 million at the end of 2004. This $82 million increase
was due mainly to $105 million of financing for the purchase of the MV Manulani
and the assumption of $11 million of debt in connection with a June 2005 real
estate purchase, partially offset by $34 million of normal debt repayments. The
weighted average interest rate for the Company's outstanding borrowings at
December 31, 2005 was approximately 5.4 percent.
In May 2005, Matson entered into an Amended and Restated Note Agreement
with The Prudential Insurance Company of America and Pruco Life Insurance
(collectively and individually "Prudential") for $120 million. The agreement
amended and superseded Matson's $65 million private shelf facility with
Prudential that would have expired in June 2007, against which $15 million had
been drawn and was outstanding at the date of the new agreement. Included in the
agreement are Series A and Series B notes. Series A comprises the above noted
$15 million note and Series B comprises 15-year term notes totaling $105
million. Both series are secured by the MV Manulani, which was delivered to the
Company in May 2005. The Series A note caries interest at 4.31 percent and has
$13 million currently outstanding. The $105 million Series B notes carry
interest at 4.79 percent and mature in May 2020.
In June 2005, A&B Properties, Inc., a wholly owned subsidiary of the
Company, assumed $11.4 million of secured debt in connection with the purchase
of an office building in Phoenix, Arizona. This debt bears interest at 6.2
percent and matures in October 2013.
In June 2005, Matson executed a $105 million secured reducing revolving
credit agreement with DnB NOR Bank ASA and ING Bank N.V. This financing is for
the planned purchase, in 2006, of a new containership, the MV Maunalei. The
facility provides for a 10-year commitment beginning with the June 2005
execution of the agreement, but funding will not occur until the containership
is delivered, most likely in the third quarter of 2006. The maximum amount that
can be outstanding on the facility declines in eight annual commitment
reductions of $10.5 million each, commencing on the second anniversary of the
closing date. The interest rate for the facility is 0.375 percent over the
London Interbank Offered Rate ("LIBOR") for the first five years. For the
remaining term, the interest rate is 0.450 percent over LIBOR.
In September 2005, Matson renewed and extended its $30 million
revolving credit agreement with Wells Fargo Bank, National Association. This
facility extends to September 30, 2009, including a one-year term option and
carries interest at LIBOR plus 47.5 basis points.
In October 2005, the Company extended its uncommitted short-term $78.5
million working capital credit facility with First Hawaiian Bank for one year,
until January 1, 2007. The amount available under this facility is reduced by
amounts borrowed against First Hawaiian Bank's $53.5 million share of the
Company's $200 million revolving credit facility.
Credit facilities are described in Note 9 of Part II Item 8 of this
Form 10-K.
Deferred Tax Obligations: The Company's net deferred tax obligation was
$399 million at December 31, 2005 compared with $329 million at December 31,
2004. This $70 million increase was due principally to the tax deferrals that
resulted from deposits to the CCF and purchases of property on a tax-deferred
basis, offset partially by book depreciation in excess of tax depreciation.
Capital Construction Fund: During 2005, the Company deposited $219
million into the CCF and withdrew approximately $150 million, most of which was
due to the delivery of a new containership. The CCF is described in Note 8 of
Part II Item 8 of this Form 10-K.
Cash Flows: Cash Flows from Operating Activities were $278 million for
2005, compared with $173 million for 2004. The higher operating cash flow was
due principally to deferral of income taxes and higher net income. The large
income tax deferral was the result of deposits to the CCF that were tax
deductible in 2004 and 2005.
Capital Expenditures: For 2005, capital expenditures, including
purchases of property using tax-deferred proceeds and additions to real estate
held for sale but excluding assumed debt, totaled $293 million. This was
comprised principally of $144 million for the purchase of the MV Manulani, $103
million for real estate acquisitions, development and property improvements, $31
million for other transportation related assets, and $13 million for
agricultural projects. Of the real-estate related capital expenditures, $24
million was for the construction of Lanikea, a Waikiki high-rise residential
building (closings were completed in August 2005), and $5 million was for
pre-development of a downtown Honolulu high-rise residential project.
Tax-Deferred Real Estate Transactions: Sales - There were seven sales
and 5 small condemnations of property during 2005, totaling $56 million, that
qualified for potential tax-deferral under the Internal Revenue Code Sections
1031 and 1033. The sales included a warehouse/distribution complex in Ontario,
California, two office buildings in Honolulu, Hawaii, one service
center/warehouse complex, consisting of three buildings in San Antonio, Texas,
one commercial parcel in Waikiki and the fee interest in three parcels in Maui.
The proceeds from these sales were immediately available for reinvestment in
replacement property. During 2004, the Company had no material tax-deferred real
estate sales. As of December 31, 2005, $27 million was available for
reinvestment on a tax-deferred basis.
The proceeds from 1031 tax-deferred sales are held in escrow pending
future use to purchase new real estate assets. The proceeds from 1033
condemnations are held by the Company until the funds are redeployed. The funds
related to 1031 transactions are not included in the Statement of Cash Flows but
are included as non-cash information below the Statement.
Purchases - During 2005, the Company purchased, using the proceeds from
tax-deferred sales, the fee simple interest in a leased property in Honolulu, a
two-story office building in Phoenix, Arizona and the Lanihau Shopping Center in
Kailua-Kona, Hawaii. Of the $22.3 million purchase price for the Phoenix
building, the Company assumed $11.4 million of debt and used $10.9 million of
tax-deferred proceeds, of which $8.2 million was from 1031 tax-deferred
exchanges and $2.7 million was from earlier 1033 land condemnations. The Lanihau
Shopping Center was purchased as a reverse tax-deferred exchange that will
partially re-deploy funds from other property sales that closed on October 25,
2005. During 2004, the Company had no material tax-deferred real estate
purchases.
For reverse tax deferred transactions, the Company purchases a property
in anticipation of receiving funds in a future property sale. Funds used for
reverse 1031 purchases are included as capital expenditures on the Statement of
Cash Flows and the related sales of property, for which the proceeds are linked,
are included as property sales in the Statement. As of December 31, 2005, $8.2
million of Company funds had been advanced to purchase assets on a reverse-1031
basis. The Company expects that it will receive sufficient funds in early 2006
to replenish these advances.
INVESTMENTS
During 2005, the Company had the following principal investments, each
of which was accounted for following the equity method of accounting:
A) Bridgeport Marketplace: In July 2005, A&B entered into a joint
venture with Intertex Bridgeport Marketplace, LLC and, in
October 2005, the venture acquired 27.8 acres in Valencia,
California. The development plans for the site include the
subdivision of the site to create a 5-acre parcel for
dedication as a public park, a 7.3-acre parcel for sale to a
church, which is scheduled to close in June 2006, and a
15.5-acre parcel for the development of a 126,000 square-foot
retail center. The Company has a 50 percent voting interest in
Bridgeport Marketplace.
B) Centre Pointe Marketplace: In April 2005, A&B signed a joint
venture agreement with Intertex Centre Pointe Marketplace,
LLC, and in April, the venture acquired, for $7.9 million, a
10.2-acre parcel for the planned development of a
102,000-square-foot retail center in Valencia, California. The
parcel is located adjacent to a recently completed Sam's Club
and a soon-to-be-completed Super Wal-Mart. The Company has a
50 percent voting interest in Centre Pointe Marketplace.
C) Crossroads Plaza: In June 2004, A&B signed a joint venture
agreement with Intertex Hasley, LLC, to form Crossroads Plaza
Development Partners, LLC, for the planned development of a
62,000-square-foot mixed-use neighborhood retail center on 6.5
acres of commercial-zoned land in Valencia, California. The
property was acquired in August for $3.5 million. The Company
has a 50 percent voting interest in Crossroads Plaza.
D) Hokua: In July 2003, the Company entered into an operating
agreement with MK Management LLC, for the joint development of
"Hokua at 1288 Ala Moana" ("Hokua"), a 40-story, 247-unit
luxury residential condominium in Honolulu. The Company's
original investment in the venture was $40 million. The 247
units closed in January 2006, resulting in the repayment of
the Company's original investment, plus a significant portion
of its income on its investment. The Company has a 50 percent
voting interest in Hokua.
E) Kai Malu at Wailea: In April 2004, A&B entered into a joint
venture with Armstrong Builders, Ltd. for development of the
25-acre MF-8 parcel at Wailea, planned for 150 duplex units.
Home construction began in October, and the first closings are
expected to commence in the fourth quarter of 2006. The
Company has a 50 percent voting interest in Kai Malu at
Wailea.
F) Ka Milo at Mauna Lani: In April 2004, the Company entered into
a joint venture with Brookfield Homes Hawaii Inc., NYSE:BHS,
("Brookfield") to acquire and develop a 30.5-acre residential
parcel in the Mauna Lani Resort on the island of Hawaii. In
May 2004, the property was acquired by the joint venture for
$6.6 million, and is planned for 37 single-family units and
100 duplex town-homes. Sales and marketing commenced in
September 2005, and grading commenced in October 2005. The
Company has a 50 percent voting interest in the venture.
G) Kukui`ula: Kukui`ula is a 1,000-acre master planned resort
residential community located in Poipu, Kauai. In April 2002,
an agreement was signed with an affiliate of DMB Associates,
Inc., an Arizona-based developer of master planned
communities, for the joint development of Kukui`ula. The
project will consist of approximately 1,200 high-end
residential units. Offsite infrastructure construction
commenced in June 2005, with the construction of the
non-potable water system. Onsite infrastructure construction
is expected to commence in the first quarter of 2006, with
the construction of the Western Bypass Road, a major road
serving the project. The Company has a 50 percent
voting interest for significant decisions of Kukui`ula.
H) Rye Canyon: In October 2004, the Company acquired 5.4 acres of
commercial-zoned land in Valencia, California for $1.5
million, planned for the development, with a joint venture
partner, of an 82,000-square-foot office building.
Subsequently, the venture agreed to sell the land for $4
million. The sale closed in January 2006.
I) Westridge LLC: In 2004, a joint venture with Westridge
Executive Building, LLC completed the development of a
63,000-square-foot office building. By August 2005, the
building was 98 percent leased. In November 2005, the building
was sold by the joint venture for $20.8 million.
J) SSA Terminals: Matson is part owner, with SSA Marine Inc., of
SSA Terminals, LLC ("SSAT"), which provides stevedoring and
terminal services at five terminals in three West Coast ports
to the Company and other shipping lines. Matson's ownership
interest in SSAT is 35 percent.
The Company has evaluated investments in the aforementioned
unconsolidated affiliates relative to Financial Interpretation ("FIN") Number 46
"Consolidation of Variable Interest Entities," as revised, and has determined
that the investments in these affiliates are either not subject to or do not
meet the consolidation requirements of FIN No. 46. Accordingly, the Company
accounts for its investments following the consolidation provisions of
Accounting Research Bulletin No. 51 "Consolidated Financial Statements," as
amended.
Notes 5, 6 and 14 in Part II Item 8 of this Form 10-K provide
additional information about the Company's investments.
CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET
ARRANGEMENTS
Contractual Obligations: The information noted in the table and notes
below is forward looking. The actual payments for the matters noted below could
be different than the amounts noted below; that difference could be
significantly larger or smaller than indicated. At December 31, 2005, the
Company had the following contractual obligations (in millions):
Payment due by period
---------------------
Contractual Obligations Total 2006 2007-2009 2010-2011 Thereafter
----------------------- ----- ---- --------- --------- ----------
Long-term debt obligations (a) $ 327 $ 31 $ 95 $ 50 $ 151
Estimated interest on debt (b) 122 17 39 17 49
Purchase obligations (c) 55 52 3 -- --
Post-retirement obligations (d) 36 3 10 8 15
Non-qualified benefit obligations (e) 28 3 7 12 6
Operating lease obligations (f) 112 19 30 14 49
------ ------ ------ ------ -------
Total $ 680 $ 125 $ 184 $ 101 $ 270
====== ====== ====== ====== =======
(a) Long-term debt obligations include principal repayments of
short-term and long-term debt as described in Note 9 of Part II
Item 8 of this Form 10-K.
(b) Estimated interest on debt is determined based on scheduled
payments of the long-term debt at the interest rates in effect
as of December 31, 2005. Because the Company has facilities that
are at variable interest rates and expects to have new borrowing
facilities in place during the years noted in the table, actual
interest is expected to be in an amount greater than the amounts
indicated.
(c) Purchase obligations include only non-cancellable contractual
obligations for the purchases of goods and services.
(d) Post-retirement obligations include expected payments to medical
service providers in connection with providing benefits to the
Company's employees and retirees. The $15 million noted in the
column labeled "Thereafter" comprises estimated benefit payments
for 2012 through 2015. Post-retirement obligations are described
further in Note 11 of Part II Item 8 in this Form 10-K.
(e) Non-qualified benefit obligations includes estimated payments to
executives and directors under the Company's four non-qualified
plans, as described in Note 11 of Part II Item 8 in this Form
10-K. The $6 million noted in the column labeled "Thereafter"
comprises estimated benefit payments for 2012 through 2015.
Additional information about the Company's non-qualified plans
is included in Note 11 of Part II Item 8 in this Form 10-K.
(f) Operating lease obligations include principally land, office and
terminal facilities, containers and equipment using long-term
lease arrangements that do not transfer the rights and risks of
ownership to the Company. These amounts are further described in
Note 10 of Part II Item 8 in this Form 10-K.
Off Balance Sheet Arrangements: Financing arrangements that are not
recorded on the Company's balance sheet at December 31, 2005 in effect at the
end of 2005 included the following (in millions):
Arrangement 2005
----------- ----
Capital appropriations (g) $ 582
Guarantee of HS&TC debt (h) $ 1
Guarantee of Hokua debt (i) $ 15
Standby letters of credit (j) $ 16
Bonds (k) $ 8
Benefit plan withdrawal obligations (l) $ 65
These amounts are not recorded on the Company's balance sheet and,
based on the Company's current knowledge and with the exception of note (i), it
is not expected that the Company or its subsidiaries will be called upon to
advance funds under these commitments.
(g) At December 31, 2005, the Company and its subsidiaries had an
unspent balance of total appropriations for capital expenditures
of approximately $582 million. These expenditures are primarily
for a new vessel, real estate developments, vessel maintenance,
containers and operating equipment and vessel modifications.
There are, however, no contractual obligations to spend the
entire amount. Of this amount, approximately $391 million is
expected to be spent during 2006, $165 million during 2007 and
$26 million during 2008. The Company's internal cash flows,
existing credit lines and a new credit line that is discussed
under Subsequent Events below are expected to be sufficient to
finance these capital needs. The actual payments for the
capital expenditures could be different than the amounts noted
above; that difference could be significantly larger or smaller
than indicated.
(h) The Company has guaranteed up to $21.5 million of a $30 million
Hawaiian Sugar & Transportation Cooperative ("HS&TC") revolving
credit line. HS&TC is a raw-sugar marketing and transportation
cooperative that is used to market and transport the Company's
raw sugar to C&H Sugar Company, Inc. ("C&H"); the Company is a
member of HS&TC. Under normal circumstances the guarantee
would not exceed $15 million. The amount would only increase
to $21.5 million if the amounts owed by C&H are outstanding
beyond normal 10-day payment terms. As of December 31, 2005,
approximately $1 million was outstanding on the facility.
(i) At December 31, 2005, A&B Properties, Inc. ("Properties") had a
limited loan guarantee equal to the lesser of $15 million or
15.5 percent of the outstanding balance of the construction loan
for the Hokua condominium project, in which Properties is an
investor. The outstanding balance of the venture's construction
loan at December 31, 2005 was $100 million. However, with the
closing of 247 residential units on January 11, 2006, the
construction loan was paid off on that date.
(j) At December 31, 2005, the Company has arranged for standby
letters of credit totaling $16 million. This includes letters of
credit, totaling approximately $14 million, which enable the
Company to qualify as a self-insurer for state and federal
workers' compensation liabilities. The balance includes
approximately $2 million for insurance-related matters,
principally in the Company's real estate business.
(k) Of the $8 million in bonds outstanding at December 31, 2005, $6
million is for customs bonds, $1 million relates to real estate
construction projects in Hawaii and $1 million of bonds are for
ocean transportation matters.
(l) The withdrawal liabilities for multiemployer pension plans, in
which Matson is a participant, aggregated approximately $65
million as of the most recent valuation dates. Management has no
present intention of withdrawing from and does not anticipate
termination of any of those plans.
Certain of the businesses in which the Company holds non-controlling
investments have long-term debt obligations. Other than obligations described
above, those investee obligations do not have recourse to the Company and the
Company's "at-risk" amounts are limited to its investment. For certain real
estate joint ventures, the Company may also be obligated to perform work through
bond indemnifications and/or commitments to complete construction of the real
estate development if the joint venture does not perform. These investments are
described above and in Note 6 in Part II Item 8 of this Form 10-K.
Other Contingencies: As with most industrial and land development
companies of its size, the Company's shipping, real estate, and agricultural
businesses have certain risks that could result in expenditures for
environmental remediation. The Company believes that based on all information
available to it, the Company is in compliance, in all material respects, with
applicable environmental laws and regulations. In addition, the Company has
emergency response and crisis management programs.
In February 2006, Matson's Long Beach terminal operator, SSAT (Long
Beach) LLC, commenced negotiations of an amendment to its Preferential
Assignment Agreement with the City of Long Beach that would include changes
requested by Matson to implement its new China Service as well as environmental
covenants applicable to vessels which call at Pier C. The environmental
requirements are part of programs proposed by both the ports of Los Angeles and
Long Beach designed to reduce airborne emissions in the port area. Under the
proposed requirements, Matson would be required to install equipment on certain
of its vessels to allow them to accept a shore-based electrical power source
instead of using the vessel's diesel generators while in port, use low sulfur
fuel, limit usage of the terminal by its steamships and take other actions
designed to reduce emissions. Matson expects that it will be permitted to make
the vessel modifications over time, following execution of the amendment and
installation by the City of the required shoreside equipment. The cost of the
modifications has not been accrued as an obligation because the amount, or range
of amounts, cannot currently be estimated.
The Company and certain subsidiaries are parties to various other legal
actions and are contingently liable in connection with other 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. Additional information about contingencies is included in Part I
Item 3 "Legal Proceedings" of this Form 10-K, which section is incorporated
herein by reference.
CRITICAL ACCOUNTING POLICIES
The Company's accounting policies are described in Note 1 of Part II
Item 8. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America, upon which the
Management's Discussion and Analysis is based, requires that management exercise
judgment when making estimates and assumptions about future events that affect
the amounts reported in the financial statements and accompanying notes. Future
events and their effects cannot be determined with absolute certainty and actual
results will, inevitably, differ from those estimates. These differences could
be material.
The most significant accounting estimates inherent in the preparation
of A&B's financial statements are described below.
Asset Impairments: The Company's properties and investments are
reviewed for impairment if changing events or circumstances indicate that the
carrying amount of the assets may not be recoverable. This evaluation is based
on historical experience with similar assets and the assets' expected use in the
Company's business. The identification of impairment indicators of assets and
investments subsequent to acquisition and the estimates used in valuing these
amounts could result in different amounts recorded for property or investments
and, accordingly, the related depreciation and equity in earnings of
unconsolidated affiliates could be different.
Depreciation: Depreciation requires an estimate by management of the
useful life of each property item as well as an allocation of the costs
associated with a property to its various components. These assessments are
based on industry information as well as the Company's experience with similar
assets. If the Company changed its allocation of costs or changed the estimates
of useful lives of property, depreciation expense could be different.
Valuation of Purchased Leases and Contracts: Upon acquisition of real
estate, the Company assesses the fair value of acquired assets (including land,
buildings, tenant improvements and acquired above and below market leases and
the origination cost of acquired in-place leases in accordance with SFAS No.
141) and acquired obligations, and allocates the purchase price based on these
assessments. Different assessments could result in the carrying values of the
asset and the amortization charges being different.
Unconsolidated Affiliates: The Company accounts for its investments in
unconsolidated affiliates under the equity method when the Company's ownership
interest is more than 20 percent but less than 50 percent and the Company does
not exercise direct or indirect control over the investee. Factors that are
considered in determining whether or not the Company exercises control include
rights of partners regarding significant business decisions, including
dispositions and acquisitions of assets, board and management representation,
financing decision making, operating and capital budget approvals and
contractual rights of partners. To the extent that the Company is deemed to
control these entities, the entities would have to be consolidated. This would
affect the balance sheet, operations, and debt covenants.
Revenue Recognition and Collectibility: The Company has a wide range of
revenue types, including, for example, rental income, property sales, shipping
revenue, intermodal and logistics revenue and sales of raw sugar, molasses and
coffee. Before recognizing revenue, the Company assesses the underlying terms of
the transaction to ensure that recognition meets the requirements of relevant
accounting standards. Among these requirements is that the amount is
collectible. If assessments regarding collectibility are different, revenue and
assets could be different.
Revenue Recognition for Certain Long-term Real Estate Developments: The
Company and its joint venture partners account for long-term real estate
development projects that have material continuing post-closing involvement,
such as Kukui`ula, using the percentage-of-completion method. Following this
method, the amount of revenue recognized is based on development costs that have
been incurred through the reporting period as a percentage of total expected
development cost. Costs are allocated to units sold based on relative sales
values. This generally results in a stabilized gross margin, but requires
judgments and estimate for such components as expected per-unit sales prices and
total project costs.
Voyage Revenue: The Company recognizes voyage revenue using the
percentage completion method that is based on the relative transit times between
reporting periods. These transit times are very predictable, but if the Company
incorrectly estimates transit times due to unforeseen delays in transit, revenue
could be over or under stated.
Environmental Reserves: The estimated costs for environmental
remediation are recorded by the Company when the obligation is known and can be
estimated. If a range of probable loss is determined, the Company will record
the obligation at the low end of the range unless another amount in the range
better reflects the expected loss. These analyses are performed, depending on
the circumstances, by internal analysis or the use of third-party specialists.
The assumptions used in these analyses as well as the extent of the known
remediation can have an impact on the resulting valuation and that difference
could be material.
Pension and Post-retirement Estimates: The Company's pension and
post-retirement obligations and net periodic costs are actuarially determined
based on the following key assumptions: discount rate, estimated future return
on plan assets, and the health care cost trend rate.
The 2005 net periodic cost for qualified pension and post-retirement
obligations was determined using a discount rate of 6 percent and the pension
and post-retirement obligations as of December 31, 2005 were determined using a
discount rate of 5.75 percent. For the Company's non-qualified benefit plans,
the 2005 net periodic cost was determined using a discount rate of 5 percent and
the December 31, 2005 obligation was determined using a discount rate of 5.25
percent. The discount rate used for determining the year-end benefit plan
obligation was calculated using a weighting of expected benefit payments and
rates associated with high-quality corporate bonds for each year of expected
payment to derive an estimated rate at which the benefits could be effectively
settled at December 31, 2005, rounded to the nearest quarter percent.
The estimated return on plan assets of 8.5 percent was based on
historical trends combined with long-term expectations, the mix of plan assets,
asset class returns, and long-term inflation assumptions. One-, three-, and
five-year pension returns were 12.4 percent, 15.7 percent, and 3.3 percent,
respectively. The Company's long-term investment return has averaged
approximately 10 percent.
Historically, the health care cost trend rate experienced by the
Company has been approximately 9 percent. For 2005, its post-retirement
obligations were measured using 9 percent health care cost trend rate,
decreasing by 1 percent annually until the ultimate rate of 5 percent rate is
reached in 2010.
For 2005, the Company's pension income substantially offset pension
expense for its qualified pension plans. In 2004, the Company had net pension
expense of $2 million and, in 2003, it had net pension income of $2 million. The
Company expects the qualified plan income to be approximately $1 million for
2006.
Lowering the expected long-term rate of return on the Company's
qualified plan assets from 8.5 percent to 8 percent would have increased pre-tax
pension expense for 2005 by approximately $1 million. Lowering the discount rate
assumption by one-half of one percentage point would have increased pre-tax
pension expense by $2 million.
The Company has determined that its post-retirement prescription drug
plans are actuarially equivalent to Part D of the Medicare Prescription Drug
Improvement and Modernization Act of 2003. The 2005 post-retirement obligations
include the benefits of the Act's subsidy. These amounts are not material.
The value of qualified plan assets increased from $295 million at the
beginning of 2005 to $315 million at the end of the year. The 2005 net increase
was primarily the result of an actual return of $35 million less benefit
payments of $15 million. At 2005 year end the projected benefit obligation was
$294 million, an increase of $20 million from a year earlier. Plan funding was
107 percent at December 31, 2005. The Company does not expect to make any cash
funding into its qualified plans during 2006.
Additional information about the Company's benefit plans is included in
Note 11 of Part II Item 8 of this Form 10-K.
OTHER MATTERS
Subsequent Events: In January and February of 2006, the Company
received approximately $61 million of cash from Hokua LLC, a limited liability
company in which A&B is an investor. As this venture winds down its affairs,
distributions of the remaining cash are expected to be made to the partners.
These distributions are not expected to be material.
In February 2006, the Company executed a commitment letter with
Prudential Investment Management, Inc. to borrow up to $150 million in unsecured
senior term notes and to enter into a three-year uncommitted private shelf
agreement that would allow the Company to borrow an amount not to exceed the net
balance of $400 million less the then total outstanding principal balances owed
to Prudential. This commitment is subject to certain conditions, due diligence,
completion of documentation, agreement on terms, and various approvals. The
Company currently intends to borrow, under this facility, $50 million in late
2006 and $75 million during the first half of 2007.
Stock Options: Information regarding the accounting for and pro forma
effect of options to purchase shares of the Company's stock is included in Notes
1 and 13 of Part II Item 8 of this Form 10-K.
Impact of Newly Issued and Proposed Accounting Standards: In December
2004, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 123 (revised 2004) "Share-Based
Payment" ("SFAS No. 123R") as a revision of SFAS No 123, "Accounting for
Stock-Based Compensation." SFAS No. 123R supersedes Accounting Principles Board
Opinion ("APBO") No. 25, "Accounting for Stock issued to Employees and amends
SFAS No. 95. "Statement of Cash Flows." SFAS No. 123R requires companies to
measure the cost for all employee awards of equity instruments based on the fair
value of the award on the grant date and the estimated probability of the award
actually vesting. This cost is then recognized over the period during which an
employee is required to provide service in exchange for the award or over the
period in which performance based measures are achieved. Pro forma disclosure of
the effects of equity based awards is not an alternative once the new standard
is adopted.
The Company adopted SFAS No. 123R effective January 1, 2006 using the
"modified prospective" method. Following this method, compensation costs is
recognized for all share-based payments granted after January 1, 2006 and for
the portions of share-based awards that had not vested as of January 1, 2006.
The after-tax annual effect of adopting this standard would have been
approximately $2 million in 2005.
In February 2006, the FASB amended SFAS No. 123R to stipulate that
companies must assess the probability of contingent cash settlement events in
determining the classification of equity instruments such as stock options. If
cash settlement is outside of a company's control and is probable of occurrence,
the instruments are treated as a liability and adjusted to market value at each
reporting date. If cash settlement is not probable, then the instruments are
treated as equity. The Company has contracts with certain of its management that
require cash settlement of options to purchase shares of the Company's stock in
the event of a change in control. The Company has determined that a change in
control is not probable and will classify these stock options in accordance with
ASR 268.
Other recently issued or adopted accounting standards, none of which
have a material effect on the Company's financial statements, are described in
Note 1 of Part II Item 8 in this Form 10-K.
Management Changes: The following management changes occurred during
2005:
o Ronald P. Barrett was promoted to vice president sales
mainland U.S. of Matson effective July 1, 2005.
o Christopher J. Benjamin was promoted to senior vice
president of A&B effective July 1, 2005. Mr. Benjamin is
also A&B's chief financial officer.
o Richard S. Bliss, Matson vice president and area manager of
Matson Hawaii, retired effective April 1, 2005.
o Peter W. Burns was promoted to vice president of Matson
Terminals Inc. effective April 4, 2005.
o Nelson N. S. Chun was promoted to senior vice president and
chief legal officer of A&B effective July 1, 2005.
o Matthew J. Cox was promoted to executive vice president and
chief operating officer of Matson effective July 1, 2005.
o John E. Dennen was promoted to vice president of Matson
effective July 1, 2005. Mr. Dennen is also Matson's
controller.
o Branton B. Dreyfus was promoted to vice president West Coast
terminals and vehicle operations of Matson effective July 1,
2005.
o John F. Gasher, A&B vice president, retired effective
January 1, 2005.
o David I. Haverly was promoted to vice president, asset
management of A&B Properties, Inc. effective January 1,
2005.
o Dale B. Hendler was promoted to vice president corporate
development and planning of Matson effective July 1, 2005.
o G. Stephen Holaday was named president of A&B's agribusiness
group of companies effective July 1, 2005.
o David L. Hoppes was promoted to senior vice president ocean
services of Matson effective July 1, 2005.
o Paul K. Ito joined A&B as Director of Internal Audit on
April 1, 2005.
o Merle A. K. Kelai, Matson vice president community
relations, retired effective February 1, 2005.
o Richard B. Stack, Jr. was promoted to vice president,
development of A&B Properties, Inc. effective January 1,
2005.
o Stanley M. Kuriyama was promoted to chief executive officer
and president of A&B's newly formed Land Group effective
July 1, 2005.
o Paul A. Londynsky was promoted to vice president safety,
quality & environmental and chief security officer of Matson
effective July 1, 2005.
o Gary Y. Nakamatsu was promoted to vice president sales
Hawaii of Matson effective July 1, 2005.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A&B, in the normal course of doing business, is exposed to the risks
associated with fluctuations in the market value of certain financial
instruments. A&B maintains a portfolio of investments, pension fund investments
and, through its Capital Construction Fund, an investment in mortgage-backed
securities. Details regarding these financial instruments are described in Notes
1, 5, 6, 8 and 11 in Part II Item 8 of this Form 10-K.
A&B is exposed to changes in U.S. interest rates, primarily as a result
of its borrowing and investing activities used to maintain liquidity and to fund
business operations. In order to manage its exposure to changes in interest
rates, A&B utilizes a balanced mix of debt maturities, along with both
fixed-rate and variable-rate debt. The nature and amount of A&B's long-term and
short-term debt can be expected to fluctuate as a result of future business
requirements, market conditions, and other factors.
The Company periodically uses derivative financial instruments such as
interest rate and foreign currency hedging products to mitigate risks. The
Company's use of derivative instruments is limited to reducing its risk exposure
by utilizing interest rate or currency agreements that are accounted for as
hedges. The Company does not hold or issue derivative instruments for trading or
other speculative purposes nor does it use leveraged financial instruments.
Hedge accounting requires a high correlation between changes in fair value of
cash flows of the derivative instrument and the specific item being hedged, both
at inception and throughout the life of the hedge. The Company discontinues
hedge accounting prospectively when it is determined that a derivative is no
longer effective in offsetting changes in the fair value or cash flows of the
hedged item, the derivative expires or is sold, terminated or exercised, or the
derivative is discontinued as a hedge investment because it is unlikely that a
forecasted transaction will occur.
All derivatives are recognized in the consolidated balance sheets at
their fair value. On the date the derivative contract is entered into, the
Company designates the derivative as either a fair value or a cash flow hedge.
Changes in the fair value of a derivative that is highly effective as, and that
is designated and qualifies as, a fair value hedge, are recorded in current
period earnings along with the gain or loss on the hedged asset or liability.
Changes in the fair value of a derivative that is highly effective as, and that
is designated and qualifies as, a cash flow hedge, are recorded in Other
Comprehensive Income (Loss) and are reclassified to earnings in the period in
which earnings are affected by the underlying hedged item. The ineffective
portion of hedges is recognized in earnings in the current period.
A&B believes that, as of December 31, 2005, its exposure to market risk
fluctuations for its financial instruments is not material.
The following table summarizes A&B's debt obligations at December 31,
2005, presenting principal cash flows and related interest rates by the expected
fiscal year of repayment. The Company had no variable rate debt outstanding at
December 31, 2005. A&B estimates that the carrying value of its debt is not
materially different from its fair value.
Expected Fiscal Year of Repayment as of December 31, 2005
---------------------------------------------------------------------------------------
2006 2007 2008 2009 2010 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
(dollars in millions)
Fixed rate $ 31 $ 31 $ 32 $ 32 $ 31 $ 170 $ 327
Average interest rate 5.42% 5.31% 5.24% 5.15% 5.07% 5.17% 5.22%
A&B's sugar plantation, HC&S, has a contract to sell its raw sugar
production through 2008 to Hawaiian Sugar & Transportation Cooperative
("HS&TC"), an unconsolidated sugar and marketing cooperative, in which A&B has
an ownership interest. Under that contract, the price paid will fluctuate with
the New York No. 14 Contract settlement price for domestic raw sugar, less a
fixed discount. A&B also has an agreement with C&H Sugar Company, Inc., the
primary purchaser of sugar from HS&TC, which allows A&B to forward price, with
C&H, a portion of its raw sugar deliveries to HS&TC. That agreement has a
provision that permits, under certain circumstances, the sales of sugar at a
floor price.
A&B has no direct material exposure to foreign currency risks, although
it is indirectly affected by changes in currency rates to the extent that this
affects tourism in Hawaii. The Company expects that all material transactions
related to its China Long Beach Express Service that commenced in February 2006,
will be denominated in U.S. dollars.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Management's Reports........................................... 50
Report of Independent Registered Public Accounting Firm........ 51
Consolidated Statements of Income.............................. 52
Consolidated Statements of Cash Flows.......................... 53
Consolidated Balance Sheets.................................... 54
Consolidated Statements of Shareholders' Equity................ 55
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies.......... 56
2. Acquisitions........................................ 62
3. Subsequent Events................................... 62
4. Discontinued Operations............................. 63
5. Impairment and Disposal of Investments.............. 63
6. Investments in Affiliates........................... 64
7. Property ........................................... 65
8. Capital Construction Fund........................... 65
9. Notes Payable and Long-term Debt.................... 66
10. Leases.............................................. 68
11. Employee Benefit Plans.............................. 69
12. Income Taxes........................................ 73
13. Stock Options and Restricted Stock.................. 74
14. Commitments, Guarantees, Contingencies and
Related Party Transactions.............................76
15. Industry Segments................................... 79
16. Quarterly Information (Unaudited)................... 81
17. Parent Company Condensed Financial Information...... 83
MANAGEMENT'S REPORTS
MANAGEMENT'S RESPONSIBILITY FOR INTERNAL CONTROL OVER FINANCIAL REPORTING
The Management of Alexander & Baldwin, Inc. has the responsibility for
establishing and maintaining adequate internal control over financial reporting.
Internal control over financial reporting is defined in Rule 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934, as amended, as a process
designed by, or under the supervision of, the company's principal executive and
principal financial officers and effected by the company's board of directors,
management and other personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with accounting principles generally
accepted in the United States of America and includes those policies and
procedures that:
o Pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of
assets of the company;
o Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with accounting principles generally accepted in the United States of
America, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors
of the company; and
o Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the company's assets
that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting only provides reasonable assurance with respect to financial statement
presentation and preparation. Projections of any evaluation of effectiveness to
future periods are subject to the risks that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Management assessed the effectiveness of the Company's internal control
over financial reporting as of December 31, 2005. In making this assessment,
Management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated
Framework. Based on its assessments, Management believes that, as of December
31, 2005, the Company's internal control over financial reporting is effective.
The Company's independent registered public accounting firm, Deloitte & Touche
LLP ("Deloitte"), has issued an audit report on Management's assessment of the
Company's internal control over financial reporting. That report appears on page
51 of this Form 10-K.
/s/ W. Allen Doane /s/ Christopher J. Benjamin
W. Allen Doane Christopher J. Benjamin
President and Chief Executive Officer Senior Vice President and Chief
February 24, 2006 Financial Officer
February 24, 2006
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Alexander & Baldwin, Inc.:
We have audited the accompanying consolidated balance sheets of
Alexander & Baldwin, Inc. and subsidiaries (the "Company") as of December 31,
2005 and 2004, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 2005. We also have audited management's assessment, included in the
accompanying "Management Report - Management's Responsibility for Internal
Control Over Financial Reporting" that the Company maintained effective internal
control over financial reporting as of December 31, 2005 based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company's management is
responsible for these financial statements, for maintaining effective internal
control over financial reporting, and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on these financial statements, an opinion on management's assessment,
and an opinion on the effectiveness of the Company's internal control over
financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audit of financial statements included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. Our
audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, evaluating
management's assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
A company's internal control over financial reporting is a process
designed by, or under the supervision of, the company's principal executive and
principal financial officers, or persons performing similar functions, and
effected by the company's board of directors, management, and other personnel to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Alexander &
Baldwin, Inc. and subsidiaries as of December 31, 2005 and 2004, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2005, in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion,
management's assessment that the Company maintained effective internal control
over financial reporting as of December 31, 2005, is fairly stated, in all
material respects, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Furthermore, in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2005, based on the criteria established
in Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Honolulu, Hawaii
February 24, 2006
ALEXANDER & BALDWIN, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per-share amounts)
Year Ended December 31,
2005 2004 2003
---- ---- ----
Operating Revenue:
Ocean transportation $ 873 $ 846 $ 776
Logistics services 432 377 238
Property leasing 83 74 70
Property sales 98 81 27
Food products 121 111 113
-------- -------- --------
Total revenue 1,607 1,489 1,224
-------- -------- --------
Operating Costs and Expenses:
Cost of transportation services 673 668 601
Cost of logistics services 390 345 215
Cost of property sales and leasing services 107 80 53
Cost of agricultural goods and services 110 105 108
Selling, general and administrative 140 128 124
Impairment loss for operating investment 2 -- 8
-------- -------- --------
Total operating costs and expenses 1,422 1,326 1,109
-------- -------- --------
Operating Income 185 163 115
Other Income and (Expense)
Gain on insurance settlement 5 -- --
Equity in income of real estate affiliates, net 3 3 4
Interest income 5 4 --
Interest expense, net of amounts capitalized (13) (13) (12)
-------- -------- --------
Income From Continuing Operations Before Income Taxes 185 157 107
Income taxes 69 59 40
-------- -------- --------
Income From Continuing Operations 116 98 67
Income from discontinued operations, net of income
taxes (see Note 4) 10 3 14
-------- -------- --------
Net Income 126 101 81
Other Comprehensive Income (Loss):
Minimum pension liability adjustment (net of taxes of $1,
$1 and $(13)) 2 (2) 20
Change in cash flow hedge (net of taxes) -- 1 (1)
-------- -------- --------
Comprehensive Income $ 128 $ 100 $ 100
======== ======== ========
Basic Earnings per Share of Common Stock:
Continuing operations $ 2.66 $ 2.29 $ 1.62
Discontinued operations 0.23 0.08 0.33
-------- -------- --------
Net income $ 2.89 $ 2.37 $ 1.95
======== ======== ========
Diluted Earnings per Share of Common Stock:
Continuing operations $ 2.63 $ 2.26 $ 1.61
Discontinued operations 0.23 0.07 0.33
-------- -------- --------
Net income $ 2.86 $ 2.33 $ 1.94
======== ======== ========
Average Common Shares Outstanding 43.6 42.6 41.6
See notes to consolidated financial statements.
ALEXANDER & BALDWIN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Year Ended December 31,
2005 2004 2003
---- ---- ----
Cash Flows from Operations:
Net income $ 126 $ 101 $ 81
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 84 80 73
Deferred income taxes 68 (11) (6)
Gains on disposal of assets (30) (12) (18)
Equity in income of affiliates, net (17) (9) (9)
Write-down of long-lived assets and investments 2 -- 8
Changes in assets and liabilities:
Accounts and notes receivable 5 (21) 3
Inventories (4) 1 (1)
Prepaid expenses and other assets (8) (14) 3
Deferred drydocking costs (1) 9 1
Pension and post-retirement assets and obligations (1) 3 (1)
Accounts and income taxes payable 39 26 16
Other liabilities 4 20 6
Real Estate Developments Held for Sale:
Real estate inventory sales 45 30 15
Expenditures for new real estate inventory (34) (30) (35)
------- ------- -------
Net cash provided by operations 278 173 136
------- ------- -------
Cash Flows from Investing Activities:
Capital expenditures for property and developments (231) (151) (214)
Receipts from disposal of income-producing
property, investments and other assets 25 22 8
Deposits into Capital Construction Fund (219) (2) (4)
Withdrawals from Capital Construction Fund 150 142 47
Payments for purchases of investments (32) (39) (17)
Proceeds from sale and maturity of investments 2 7 6
------- ------- -------
Net cash used in investing activities (305) (21) (174)
------- ------- -------
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt 104 56 293
Payments of long-term debt (27) (158) (233)
Payments of short-term
borrowings - net (7) -- --
Repurchases of capital stock -- (2) --
Proceeds from issuance of capital stock 11 26 20
Dividends paid (39) (38) (37)
------- ------- -------
Net cash provided by (used in) financing
activities 42 (116) 43
------- ------- -------
Cash and Cash Equivalents:
Net increase for the year 15 36 5
Balance, beginning of year 42 6 1
------- ------- -------
Balance, end of year $ 57 $ 42 $ 6
======= ======= =======
Other Cash Flow Information:
Interest paid, net of amounts capitalized $ (17) $ (14) $ (11)
Income taxes paid, net of refunds $ 3 $ (61) $ (45)
Non-cash Activities:
Debt assumed in real estate purchase $ 11 -- --
Tax-deferred property sales $ 55 -- $ 34
Tax-deferred property purchases $ (28) -- $ (41)
See notes to consolidated financial statements.
ALEXANDER & BALDWIN, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except per-share amount)
December 31
2005 2004
---- ----
ASSETS
Current Assets
Cash and cash equivalents $ 57 $ 42
Accounts and notes receivable, less allowances of $14 for each year 177 181
Sugar and coffee inventories 6 4
Materials and supplies inventories 12 11
Real estate held for sale 9 35
Deferred income taxes 16 10
Prepaid expenses and other assets 25 20
Accrued withdrawal (deposit), net to Capital Construction Fund 1 (15)
--------- ---------
Total current assets 303 288
Investments in Affiliates 154 111
Real Estate Developments 71 82
Property - net 1,289 1,133
Capital Construction Fund 93 40
Pension Assets 68 65
Other Assets 93 59
--------- ---------
Total $ 2,071 $ 1,778
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable and current portion of long-term debt $ 31 $ 31
Accounts payable 134 115
Payrolls and vacation due 19 19
Uninsured claims 16 16
Income taxes payable 12 6
Post-retirement benefit obligations -- current portion 3 3
Accrued and other liabilities 39 45
--------- ---------
Total current liabilities 254 235
--------- ---------
Long-term Liabilities
Long-term debt 296 214
Deferred income taxes 415 339
Post-retirement benefit obligations 47 45
Uninsured claims and other liabilities 45 41
--------- ---------
Total long-term liabilities 803 639
--------- ---------
Commitments and Contingencies
Shareholders' Equity
Capital stock - common stock without par value; authorized, 150 million
shares ($0.75 stated value per share); outstanding,
44.0 million shares in 2005 and 43.3 million shares in 2004 36 35
Additional capital 175 150
Accumulated other comprehensive loss (7) (9)
Deferred compensation (6) (2)
Retained earnings 827 741
Cost of treasury stock (11) (11)
--------- ---------
Total shareholders' equity 1,014 904
--------- ---------
Total $ 2,071 $ 1,778
========= =========
See notes to consolidated financial statements.
ALEXANDER & BALDWIN, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 2005
(In millions, except per-share amounts)
Capital Stock Accumulated
------------------------------------- Other
Issued In Treasury Compre-
------------------ --------------- hensive Deferred
Stated Additional Income Compen- Retained
Shares Value Shares Cost Capital (Loss) sation Earnings
------ ----- ------ ---- ------- ------ -------- --------
Balance, December 31, 2002 45.1 $ 34 3.9 $ (12) $ 85 $ (27) -- $ 644
Stock options exercised - net 0.9 1 -- -- 26 -- -- (4)
Issued - incentive plans -- -- (0.1) -- 1 -- -- --
Minimum pension liability -- -- -- -- -- 20 -- --
Cash flow hedge -- -- -- -- -- (1) -- --
Net income -- -- -- -- -- -- -- 81
Cash dividends -- -- -- -- -- -- -- (37)
---- ----- ---- ------ ----- ------ ----- ------
Balance, December 31, 2003 46.0 35 3.8 (12) 112 (8) -- 684
Shares repurchased (0.1) -- -- -- -- -- -- (2)
Stock options exercised - net 1.0 -- -- -- 34 -- -- (4)
Issued - incentive plans 0.1 -- (0.1) 1 4 -- $ (2) --
Minimum pension liability -- -- -- -- -- (2) -- --
Cash flow hedge -- -- -- -- -- 1 -- --
Net income -- -- -- -- -- -- -- 101
Cash dividends -- -- -- -- -- -- -- (38)
---- ----- ---- ------ ----- ------ ----- ------
Balance, December 31, 2004 47.0 35 3.7 (11) 150 (9) (2) 741
Shares repurchased -- -- -- -- -- -- -- --
Stock options exercised - net 0.6 1 -- -- 17 -- -- (1)
Issued - incentive plans -- -- (0.1) 0 8 -- (4) --
Minimum pension liability -- -- -- -- -- 2 -- --
Net income -- -- -- -- -- -- -- 126
Cash dividends -- -- -- -- -- -- -- (39)
---- ----- ---- ------ ----- ------ ----- ------
Balance, December 31, 2005 47.6 $ 36 3.6 $ (11) $ 175 $ (7) $ (6) $ 827
==== ===== ==== ====== ===== ====== ===== ======
See notes to consolidated financial statements.
ALEXANDER & BALDWIN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business: Founded in 1870, Alexander & Baldwin, Inc.
("A&B") is incorporated under the laws of the State of Hawaii. A&B operates
primarily in three industries: transportation, real estate and food products.
These industries are described below:
Transportation - carrying freight, primarily between various ports on
the U.S. Pacific Coast and major Hawaii ports and Guam; chartering
vessels to third parties; arranging intermodal and motor carrier
services and providing logistics services in North America; and
providing terminal, stevedoring and container equipment maintenance
services in Hawaii. The Company began carrying cargo from two ports in
China to Los Angeles in February 2006.
Real Estate - purchasing, developing, selling, managing, leasing and
investing in commercial (including retail, office and industrial) and
residential properties, in Hawaii and on the U.S. mainland.
Food Products - growing sugar cane and coffee in Hawaii; producing bulk
raw sugar, specialty food-grade sugars, molasses and green coffee;
marketing and distributing roasted coffee and green coffee; providing
sugar, petroleum and molasses hauling, general trucking services,
mobile equipment maintenance and repair services, and self-service
storage in Hawaii; and generating and selling electricity.
Principles of Consolidation: The consolidated financial statements
include the accounts of Alexander & Baldwin, Inc. and all wholly owned
subsidiaries ("the Company"), after elimination of significant intercompany
amounts.
Investments in Affiliates: Significant investments in businesses,
partnerships, and limited liability companies in which the Company does not have
control are accounted for under the equity method. Generally, these are
investments in businesses in which the Company's voting ownership is between 20
percent and 50 percent.
Segment Information: The Company has five segments operating in three
industries: Transportation, Real Estate, and Food Products. The Transportation
industry is comprised of ocean transportation and integrated logistics service
segments. The Real Estate industry is comprised of leasing and real estate sales
segments. The Company reports segment information in the same way that
management assesses segment performance. For purposes of certain segment
disclosures, such as identifiable assets, the Company's development activities
are included with the property sales segment. Additional information regarding
these segments is found in Note 15.
Cash and Cash Equivalents: Cash equivalents are composed of highly
liquid investments with an original maturity of three months or less and which
have no significant risk of change in value.
Allowances for Doubtful Accounts: Allowances for doubtful accounts are
established by management based on estimates of collectibility. The changes in
allowances for doubtful accounts, included on the Balance Sheets as an offset to
"Accounts and notes receivable," for the three years ended December 31, 2005
were as follows (in millions):
Balance at Write-offs Balance at
Beginning of year Expense and Other End of Year
----------------- ------- --------- -----------
2003 $ 11 $ 5 $ (4) $ 12
2004 $ 12 $ 6 $ (4) $ 14
2005 $ 14 $ 5 $ (5) $ 14
Inventories: Raw sugar and coffee inventories are stated at the lower
of cost (first-in, first-out basis) or market value. Other inventories, composed
principally of materials and supplies, are stated at the lower of cost
(principally average cost) or market value.
Drydocking: Under U.S. Coast Guard Rules, administered through the
American Bureau of Shipping's alternative compliance program, all vessels must
meet specified seaworthiness standards to remain in service. Vessels must
undergo regular inspection, monitoring and maintenance, referred to as
"drydocking," to maintain the required operating certificates. These drydocks
occur on scheduled intervals ranging from two to five years, depending on the
vessel age. Because the drydocks enable the vessel to continue operating in
compliance with U.S. Coast Guard requirements, the costs of these scheduled
drydocks are deferred and amortized until the next regularly scheduled drydock
period. Deferred amounts are included on the Consolidated Balance Sheets in
other current and non-current assets. Amortized amounts are charged to operating
expenses in the Consolidated Statements of Income. Changes in deferred
drydocking costs are included in the Consolidated Statements of Cash Flows in
Cash Flows from Operations.
Property: Property is stated at cost, net of accumulated depreciation
and amortization. Expenditures for major renewals and betterments are
capitalized. Replacements, maintenance, and repairs that do not improve or
extend asset lives are charged to expense as incurred. Gains or losses from
property disposals are included in the determination of net income. Costs of
developing coffee orchards are capitalized during the development period and
depreciated over the estimated productive lives. Upon acquiring real estate, the
Company allocates the purchase price to land, buildings, in-place leases and
above and below market leases based on relative fair value.
Depreciation: Depreciation is computed using the straight-line method.
Estimated useful lives of property are as follows:
Classification Range of Life (in years)
-------------- ------------------------
Buildings 10 to 40
Vessels 10 to 40
Marine containers 2 to 25
Terminal facilities 3 to 35
Machinery and equipment 3 to 35
Utility systems and other 5 to 50
Coffee orchards 20
Real Estate Development: Expenditures for real estate developments are
capitalized during construction and are classified as Real Estate Developments
on the Consolidated Balance Sheets. When construction is substantially complete,
the costs are reclassified as either Real Estate Held for Sale or Property,
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
either operating or investing activities, based upon the Company's intention to
sell the property or to retain ownership of the property as an investment
following completion of construction.
For development projects that have material continuing post-closing
involvement, capitalized costs are allocated using the direct method for
expenditures that are specifically associated with the unit being sold and the
relative-sales-value method for expenditures that benefit the entire project.
These project-wide costs typically include land, grading, roads, water and
sewage systems, landscaping and project amenities.
Capitalized Interest: Interest costs incurred in connection with
significant expenditures for real estate developments, the construction of
assets, or investments in joint ventures are capitalized. Capitalization of
interest is discontinued when the asset is substantially complete and ready for
its intended use. Capitalization of interest on investments in joint ventures is
recorded until the underlying investee commences operations; this is typically
when the investee has other-than-ancillary revenue generation.
Fair Value of Financial Instruments: The fair values of cash and cash
equivalents, receivables and short-term and long-term borrowings approximate
their carrying values.
Real Estate Assets: Real estate is carried at the lower of cost or fair
value. Fair values generally are determined using the expected market value for
the property, less sales costs. For residential units and lots held for sale,
market value is determined by reference to the sales of similar property, market
studies, tax assessments, and cash flows. For commercial property, market value
is determined using recent comparable sales, tax assessments, and cash flows. A
large portion of the Company's real estate is undeveloped land located in the
State of Hawaii on the islands of Maui and Kauai. The cost basis of the
Company's undeveloped land on Maui and Kauai, excluding the recently acquired
Wailea property, is about $150 per acre, a value much lower than fair value.
Impairments of Long-Lived Assets: Long-lived assets are reviewed for
possible impairment when events or circumstances indicate that the carrying
value may not be recoverable. In such evaluation, the estimated future
undiscounted cash flows generated by the asset are compared with the amount
recorded for the asset to determine if a write-down may be required. If this
review determines that the recorded value will not be recovered, the amount
recorded for the asset is reduced to estimated fair value.
Goodwill and Intangible Assets: Goodwill and intangibles are recorded
on the Balance Sheets as other non-current assets. The Company is required to
conduct an annual review of goodwill and intangible assets for potential
impairment. Goodwill impairment testing requires a comparison between the
carrying value and fair value of a reportable goodwill asset. If the carrying
value exceeds the fair value, goodwill is considered impaired. The amount of the
impairment loss is measured as the difference between the carrying value and the
implied fair value of the goodwill, which is determined using estimated
discounted cash flows. Impairment testing for non-amortizable intangible assets
requires a comparison between fair value and carrying value of the intangible
asset. If the carrying value exceeds fair value the intangible asset is
considered impaired and is reduced to fair value. In 2005, the Company did not
record a charge to earnings for an impairment of goodwill or other intangible
assets as a result of its annual review. At December 31, 2005 and 2004, the
unamortized amount of goodwill and other intangible assets totaled $10 million
and $8 million, respectively.
Voyage Revenue Recognition: Voyage revenue is recognized ratably over
the duration of a voyage based on the relative transit time in each reporting
period; commonly referred to as the "percentage of completion" method. Voyage
expenses are recognized as incurred. Probable losses on voyages are provided for
at the time such losses can be estimated. Freight rates are provided in tariffs
filed with the Surface Transportation Board of the U.S. Department of
Transportation.
Logistics Services Revenue and Cost Recognition: The revenue for
logistics services includes the total amount billed to customers for
transportation services. The primary costs include purchased transportation
services. Revenue and the related purchased transportation costs are recognized
based on relative transit time, commonly referred to as the "percentage of
completion" method. The Company reports revenue on a gross basis in accordance
with the criteria in EITF 99-19, "Reporting Revenue Gross as a Principal versus
Net as an Agent."
Real Estate Sales Revenue Recognition: Sales are recorded when the
risks and benefits of ownership have passed to the buyers (generally on closing
dates), adequate down payments have been received, and collection of remaining
balances is reasonably assured. For development projects, including Kukui`ula,
that have material continuing post-closing involvement and for which total
revenue and capital costs are estimable, the Company uses the
percentage-of-completion method for revenue recognition. Under this method, the
amount of revenue recognized is based on development costs that have been
incurred through the reporting period as a percentage of total expected
development cost. This generally results in a stabilized gross margin
percentage, but requires judgments and estimates.
Real Estate Leasing Revenue Recognition: Rental revenue is recognized
on a straight-line basis over the terms of the related leases, including periods
for which no rent is due (typically referred to as "rent holidays"). Differences
between revenue recognized and amounts due under respective lease agreements are
recorded as increases or decreases, as applicable, to deferred rent receivable.
Also included in rental revenue are certain tenant reimbursements and percentage
rents determined in accordance with the terms of the leases. Income arising from
tenant rents that are contingent upon the sales of the tenant exceeding a
defined threshold are recognized in accordance with Staff Accounting Bulletin
101, which states that this income is to be recognized only after the
contingency has been removed (i.e., sales thresholds have been achieved).
Sugar and Coffee Revenue Recognition: Revenue from bulk raw sugar sales
is recorded when delivered to the cooperative of Hawaiian producers, based on
the estimated net return to producers in accordance with contractual agreements.
Revenue from coffee is recorded when the title to the product and risk of loss
passes to third parties (generally this occurs when the product is shipped or
delivered to customers) and when collection is reasonably assured.
Non-voyage Ocean Transportation Costs: Depreciation, charter hire,
terminal operating overhead, and general and administrative expenses are charged
to expense as incurred.
Agricultural Costs: Costs of growing and harvesting sugar cane are
charged to the cost of production in the year incurred and to cost of sales as
raw sugar is delivered to the cooperative of Hawaiian producers, as permitted by
Statement of Position No. 85-3, "Accounting by Agricultural Producers and
Agricultural Cooperatives." Costs of growing coffee are charged to inventory in
the year incurred and to cost of sales as coffee is sold.
Discontinued Operations: The sales of certain income-producing assets
are classified as discontinued operations, as required by Statement of Financial
Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," if the operations and cash flows of the assets
clearly can be distinguished from the remaining assets of the Company, if cash
flows for the assets have been, or will be, eliminated from the ongoing
operations of the Company, if the Company will not have a significant continuing
involvement in the operations of the assets sold and if the amount is considered
material. Certain assets that are "held for sale," based on the likelihood and
intention of selling the property within 12 months, are also treated as
discontinued operations. Upon reclassification, depreciation of the assets is
stopped. Sales of land and residential houses are generally considered inventory
and are not included in discontinued operations.
Employee Benefit Plans: Certain ocean transportation subsidiaries are
members of the Pacific Maritime Association ("PMA") and the Hawaii Stevedoring
Industry Committee, which negotiate multiemployer pension plans covering certain
shoreside bargaining unit personnel. The subsidiaries directly negotiate
multiemployer 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 and defined contribution
plans cover substantially all other employees.
Accounting Method for Stock-Based Compensation: As allowed by SFAS No.
123, "Accounting for Stock-Based Compensation," and by SFAS No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure," the Company has
elected to continue to apply the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, no
compensation cost is recognized in the Company's net income for options granted
with exercise prices that are equal to the market values of the underlying
common stock on the dates of grant.
Pro forma information regarding net income and earnings per share,
using the fair value method and reported below, has been estimated using a
Black-Scholes option-pricing model. This model was developed for use in
estimating the fair value of traded options which do not have vesting
requirements and which are fully transferable. The Company's options have
characteristics significantly different from those of traded options. The
following assumptions were used in determining the pro forma amounts:
2005 2004 2003
---- ---- ----
Stock volatility 22.2% 22.8% 24.4%
Expected term from grant date (in years) 6.4 5.8 5.2
Risk-free interest rate 4.0% 3.6% 3.3%
Dividend yield 2.2% 2.1% 2.7%
Based upon the above assumptions, the computed annual weighted average
fair values of employee stock options granted during 2005, 2004, and 2003 were
$10.18, $7.44, and $5.21, respectively, per option.
Had compensation cost for the stock options been based on the estimated
fair values at grant dates, the Company's pro forma net income and net income
per share in each of the three years ended December 31, 2005, would have been as
follows (in millions, except per share amounts):
2005 2004 2003
---- ---- ----
Net Income:
As reported $ 126 $ 101 $ 81
Stock-based compensation
expense determined under fair
value based method for all
awards, net of related tax effects (2) (2) (1)
------- ------- -------
Pro forma $ 124 $ 99 $ 80
======= ======= =======
Net Income Per Share:
Basic, as reported $ 2.89 $ 2.37 $ 1.95
Basic, pro forma $ 2.85 $ 2.33 $ 1.93
Diluted, as reported $ 2.86 $ 2.33 $ 1.94
Diluted, pro forma $ 2.82 $ 2.30 $ 1.91
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 calculation of Diluted Earnings per
Share includes the dilutive effect of unexercised options to purchase the
Company's stock. Total shares considered antidilutive and that were not included
in the computation of diluted earnings per share for 2003 were 508,000. The
shares for 2005 and 2004 were not significant.
2005 2004 2003
---- ---- ----
Effect on average shares outstanding of
assumed exercise of stock options (in
millions of shares):
Average number of shares
outstanding 43.6 42.6 41.6
Effect of assumed exercise of
outstanding stock options 0.4 0.6 0.3
---- ---- ----
Average number of shares
outstanding after assumed
exercise of stock options 44.0 43.2 41.9
==== ==== ====
Income Taxes: Significant judgment is required in determining the
Company's tax liabilities in the multiple jurisdictions in which the Company
operates. Income taxes are reported in accordance with SFAS No. 109, "Accounting
for Income Taxes." Deferred income taxes are provided for the tax effect of
temporary differences between the tax basis of assets and liabilities and their
reported amounts in the financial statements. Deferred tax assets and deferred
tax liabilities are adjusted to the extent necessary to reflect tax rates
expected to be in effect when the temporary differences reverse. Adjustments may
be required to deferred tax assets and deferred tax liabilities due to changes
in tax laws and audit adjustments by tax authorities. To the extent adjustments
are required in any given period, the adjustments would be included within the
tax provision in the statement of operations and/or balance sheet.
The Company has not recorded a valuation allowance. A valuation
allowance would be established if, based on the weight of available evidence,
management believes that it is more likely than not that some portion or all of
a recorded deferred tax asset would not be realized in future periods.
The Company's income tax provision is based on calculations and
assumptions that are subject to examination by different tax authorities. The
Company establishes accruals for certain tax contingencies and interest when,
despite the belief that the Company's tax return positions are properly
supported, the Company believes certain positions are likely to be challenged
and that the Company's positions may not be fully sustained. The tax contingency
accruals are adjusted in light of changing facts and circumstances, such as the
progress of tax audits, case law, and the expiration of statutes of limitations.
If events occur and the payment of these amounts proves to be unnecessary, the
reversal of the liabilities would result in tax benefits being recognized in the
period it is determined the liabilities are no longer necessary. If the
Company's estimate of tax liabilities proves to be less than the ultimate
assessment, a further charge to expense would result.
Derivative Financial Instruments: The Company periodically uses
derivative financial instruments such as interest rate and foreign currency
hedging products to mitigate risks. The Company's use of derivative instruments
is limited to reducing its risk exposure by utilizing interest rate or currency
agreements that are accounted for as hedges. The Company does not hold or issue
derivative instruments for trading or other speculative purposes nor does it use
leveraged financial instruments. Hedge accounting requires a high correlation
between changes in fair value of cash flows of the derivative instrument and the
specific item being hedged, both at inception and throughout the life of the
hedge. The Company discontinues hedge accounting prospectively when it is
determined that a derivative is no longer effective in offsetting changes in the
fair value or cash flows of the hedged item, the derivative expires or is sold,
terminated or exercised, or the derivative is discontinued as a hedge investment
because it is unlikely that a forecasted transaction will occur.
All derivatives are recognized in the consolidated balance sheets at
their fair value. On the date the derivative contract is entered into, the
Company designates the derivative as either a fair value or a cash flow hedge.
Changes in the fair value of a derivative that is highly effective as, and that
is designated and qualifies as, a fair value hedge, are recorded in current
period earnings along with the gain or loss on the hedged asset or liability.
Changes in the fair value of a derivative that is highly effective as, and that
is designated and qualifies as, a cash flow hedge, are recorded in Other
Comprehensive Income (Loss) and are reclassified to earnings in the period in
which earnings are affected by the underlying hedged item. The ineffective
portion of hedges is recognized in earnings in the current period.
Comprehensive Income: Comprehensive Income includes all changes in
Stockholders' Equity, except those resulting from capital stock transactions.
Other Comprehensive Income (Loss) includes the minimum pension liability
adjustments (see Note 11) and gains or losses on certain derivative instruments
used to hedge interest rate risk (see Note 9). Comprehensive Income is not used
in the calculation of Earnings per Share.
Environmental Costs: Environmental expenditures are recorded as a
liability and charged to operating expense when the obligation is probable and
the remediation cost is estimable. Certain costs, however, are capitalized in
Property when the obligation is recorded, if the cost (1) extends the life,
increases the capacity or improves the safety and efficiency of property owned
by the Company, (2) mitigates or prevents environmental contamination that has
yet to occur and that otherwise may result from future operations or activities,
or (3) is incurred or discovered in preparing for sale property that is
classified as "held for sale." The amounts of capitalized environmental costs
were not material at December 31, 2005 or 2004.
Use of Estimates: The preparation of the condensed consolidated
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts
reported. Future actual amounts could differ from those estimates.
Impact of Newly Issued and Proposed Accounting Standards: In December
2004, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 123 (revised 2004) "Share-Based
Payment" ("SFAS No. 123R") as a revision of SFAS No 123, "Accounting for
Stock-Based Compensation." SFAS No. 123R supersedes Accounting Principles Board
Opinion ("APBO") No. 25, "Accounting for Stock issued to Employees and amends
SFAS No. 95. "Statement of Cash Flows." SFAS No. 123R requires companies to
measure the cost for all employee awards of equity instruments based on the fair
value of the award on the grant-date and the estimated probability of the award
actually vesting. This cost is then recognized over the period during which an
employee is required to provide service in exchange for the award or over the
period in which performance based measures are achieved. Pro forma disclosure of
the effects of equity based awards is not an alternative once the new standard
is adopted.
The Company adopted SFAS No. 123R effective January 1, 2006 using the
"modified prospective" method. Following this method, compensation costs are
recognized for all share-based payments granted after January 1, 2006 and for
the portions of share-based awards that had not vested as of January 1, 2006.
The after-tax annual effect of adopting this standard would have been
approximately $2 million in 2005.
In February 2006, the FASB amended SFAS No. 123R to stipulate that
companies must assess the probability of contingent cash settlement events in
determining the classification of equity instruments such as stock options. If
cash settlement is outside of a company's control and is probable of occurrence,
the instruments are treated as a liability and adjusted to market value at each
reporting date. If cash settlement is not probable, then the instruments are
treated as equity. The Company has contracts with certain of its management that
require cash settlement of options to purchase shares of the Company's stock in
the event of a change in control. The Company has determined that a change in
control is not probable and will classify these stock options in accordance with
Accounting Series Release No. 268.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an
amendment of ARB No. 43, Chapter 4." This standard clarifies the accounting for
abnormal amounts of idle facility expense, freight, handling costs and spoilage,
requiring that, under some circumstances, these costs should be treated as
period charges. This standard is effective for reporting periods beginning after
June 15, 2005. This standard did not affect the consolidated financial
statements.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets - an amendment of APB Opinion No. 29." This standard
addresses the accounting for reciprocal transfers of non-monetary assets and is
effective for reporting periods beginning after June 15, 2005. This standard did
not affect the consolidated financial statements.
Rounding: Amounts in the Consolidated Financial Statements and Notes
are rounded to millions, but per-share calculations and percentages were
determined based on un-rounded amounts. Accordingly, a recalculation of some
per-share amounts and percentages, if based on the reported data, may be
slightly different.
2. ACQUISITIONS
In December 2004, Matson Integrated Logistics, Inc. ("MIL"), a
subsidiary of Matson Navigation Company, Inc., acquired certain assets,
obligations and contracts of Aquitaine Assets LLC, ("AQ") for approximately $3
million plus a percentage of annual earnings over five years. Headquartered in
Houston, Texas, AQ provides comprehensive highway, intermodal and logistics
services. The purchase agreement contains an earn-out provision based on the
EBITDA generated by the acquired assets though 2009. No debt was assumed in
connection with the acquisition.
3. SUBSEQUENT EVENTS
In January and February of 2006, the Company received approximately $61
million of cash from Hokua LLC, a limited liability company in which A&B is an
investor. As this venture winds down its affairs, distributions of the remaining
cash are expected to be made to the partners. These distributions are not
expected to be material.
In February 2006, the Company executed a commitment letter with
Prudential Investment Management, Inc. to borrow up to $150 million in unsecured
senior term notes and to enter into a three-year uncommitted private shelf
agreement that would allow the Company to borrow an amount not to exceed the net
of $400 million less the then total outstanding principal balances owed to
Prudential. This commitment is subject to certain conditions, due diligence,
completion of documentation, agreement on terms, and various approvals. The
Company currently intends to borrow, under this facility, $50 million in late
2006 and $75 million during the first half of 2007.
4. DISCONTINUED OPERATIONS
During 2005, the sales of two office buildings in Honolulu for $26
million, one warehouse/distribution complex in Ontario, California, for $18
million, one service center/warehouse complex, consisting of three buildings in
San Antonio, Texas, for $6 million, and the fee interest in a parcel in Maui
were considered discontinued operations. Additionally, the revenue and expenses
of an office building in Wailuku, Maui and three parcels on Maui have been
classified as discontinued operations even though the Company had not sold the
properties by the end of 2005. The three parcels were sold in January 2006.
During 2004, the sale of a Maui property was classified as a
discontinued operation. In addition, two office and one light industrial
properties met the criteria for classification as discontinued operations even
though the Company had not sold the property by the end of 2004. Two of these
properties were sold in January 2005.
During 2003, the sales of a Nevada commercial property and five
commercial properties on Maui met the criteria for classification as
discontinued operations.
The revenue, operating profit, income tax expense and after-tax effects
of these transactions for the three years ended December 31, 2005, were as
follows (in millions, except per share amounts):
2005 2004 2003
---- ---- ----
Sales Revenue $ 50 $ 1 $ 37
Leasing Revenue $ 6 $ 9 $ 10
Sales Operating Profit $ 14 $ 2 $ 18
Leasing Operating Profit $ 2 $ 3 $ 4
Income tax expense $ 6 $ 2 $ 8
After-tax Earnings $ 10 $ 3 $ 14
Basic Earnings Per Share $ 0.23 $ 0.08 $ 0.33
Diluted Earnings Per Share $ 0.23 $ 0.07 $ 0.33
The revenue and operating profit generated from these properties in
prior years were reclassified from continuing operations to discontinued
operations for consistency with the current treatment. Consistent with the
Company's intention to reinvest the sales proceeds into new investment property,
the proceeds from the sales of property treated as discontinued operations were
deposited in escrow accounts for tax-deferred reinvestment in accordance with
Section 1031 of the Internal Revenue Code.
5. IMPAIRMENT AND DISPOSAL OF INVESTMENTS
Through August 8, 2005, the Company held common and preferred stock
holdings in C&H Sugar Company Inc. ("C&H"). As a result of operating losses and
declining cash flows at C&H, combined with adverse market changes, the Company
concluded in 2003 that C&H's estimated future earnings and cash flows would not
allow recovery of the carrying value of the investments. This loss in value was
considered an "other than temporary" impairment condition; accordingly, the
carrying values of the investments were written down by $8 million during the
fourth quarter of 2003. During the second quarter of 2005, the Company recorded
a $2 million loss in connection with the ultimate disposition of the investment
in C&H in August 2005. The impairment charges were recorded as a separate line
item in Operating Costs and Expenses in the Consolidated Statements of Income.
6. INVESTMENTS IN AFFILIATES
At December 31, 2005 and 2004, investments consisted principally of
equity in affiliated companies, limited liability companies, and limited
partnership interests. These investments are summarized, by industry, as follows
(in millions):
2005 2004
---- ----
Equity in Affiliated Companies:
Real Estate $ 114 $ 84
Transportation 40 23
Food Products -- 3
Other -- 1
------- -------
Total Investments $ 154 $ 111
======= =======
Real Estate: The Company and its real estate subsidiaries have
investments in nine joint ventures that operate and/or develop real estate. The
Company does not have a controlling interest in any of these ventures and,
accordingly, accounts for its investments in the real estate ventures using the
equity method of accounting. The most significant of these investments includes
Kukui`ula and Hokua.
Kukui`ula is a joint venture that was formed in 2002 with an affiliate
of DMB Associates, Inc., an Arizona-based developer, to develop a 1,000-acre
master planned resort residential community located in Poipu, Kauai. The Company
has a 50 percent voting interest in Kukui`ula and its equity ownership is tiered
based on the venture achieving incremental traunches of profitability. When
completed, the project will consist of approximately 1,200 high-end residential
units. Offsite infrastructure construction commenced in June 2005, with the
construction of the non-potable water system. Onsite infrastructure construction
is expected to commence in the first quarter of 2006, with the construction of
the Western Bypass Road, a major road serving the project. The Company's
carrying value of the investment was $30.3 million and $43.3 million at the
December 31, 2005 and 2004, respectively.
In 2003, the Company entered into an operating agreement with MK
Management LLC, for the joint development of "Hokua at 1288 Ala Moana"
("Hokua"), a 40-story, 247-unit luxury residential condominium in Honolulu. The
Company has a 50 percent voting interest in Hokua and its equity ownership is
tiered based on the venture achieving incremental traunches of profitability.
The Company's total investment in the venture was $40 million. The sales of all
247 residential units closed in January 2006, resulting in distributions to the
Company in 2006 of $61 million in addition to cash distributions totaling $1
million prior to 2006, including a return of the Company's original $40 million
investment. The Company's carrying value of the investment was $39.2 million and
$48.1 million at December 31, 2005 and 2004, respectively.
The Company's other joint ventures are described in Part I Items 1 and
2 and in Part II Item 7 of this Form 10-K.
Transportation: Matson, a wholly owned subsidiary of the Company, is
part owner of an LLC with SSA Marine Inc., named SSA Terminals, LLC ("SSAT"),
which provides stevedoring and terminal services at five terminals in three West
Coast ports to the Company and other shipping lines. Matson's 35 percent
minority interest is accounted for under the equity method of accounting. The
"Cost of transportation services" included approximately $137 million, $130
million, and $130 million for 2005, 2004, and 2003, respectively, paid to this
unconsolidated affiliate for terminal services.
The Company's equity in earnings or (loss) of unconsolidated
transportation affiliates of $17 million, $6 million and $4 million for 2005,
2004, and 2003, respectively, was included on the consolidated income statements
with costs of transportation services because the affiliates are integrally
related to the Company's ocean transportation operations since SSAT provides all
terminal services to Matson for the U.S. West Coast and Sea Star was formed, in
part, to charter vessels from the Company.
In August 2004, Matson sold its 19.5 percent investment in Sea Star
Line, LLC ("Sea Star") to another owner of Sea Star for approximately $7 million
and recognized a gain of approximately $1 million.
Food Products: On August 9, 2005, the Company sold its ownership
interests in C&H, comprising approximately 36 percent of C&H's common voting
stock, 40 percent of its junior preferred stock, and 100 percent of its senior
preferred stock, for a nominal amount. Prior to this sale, the Company recorded,
in 2005, a loss of $2.3 million to write down the investment to the value
expected to be received upon its ultimate disposition. Approximately 90 percent
of the Company's Maui sugar production is sold to C&H through an intermediary
raw sugar marketing and transportation cooperative, HS&TC. The Company had an
obligation to provide a security deposit for self-insurance workers'
compensation claims incurred by C&H employees prior to December 24, 1998. This
$3.2 million obligation was eliminated in November 2005, when C&H and its new
parent company posted a replacement security deposit with the State of
California.
Other: Other investments are principally investments in limited
partnerships that are recorded at the lower of cost or fair value. The values of
these investments are assessed annually.
7. PROPERTY
Property on the Consolidated Balance Sheets includes the following (in
millions):
2005 2004
---- ----
Vessels $ 1,000 $ 848
Machinery and equipment 517 504
Buildings 359 337
Land 158 138
Water, power and sewer systems 102 99
Other property improvements 86 70
--------- ---------
Total 2,222 1,996
Less accumulated depreciation and amortization 933 863
--------- ---------
Property - net $ 1,289 $ 1,133
========= =========
8. CAPITAL CONSTRUCTION FUND
Matson is party to an agreement with the United States government that
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 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
and certain related equipment 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 December 31,
2005, the oldest CCF deposits date from 2005. Management believes that all
amounts on deposit in the CCF at the end of 2005 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, Matson 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 Consolidated Balance Sheets either as obligations of the
Company's current assets or as receivables from the CCF. At December 31, 2005,
the Company has accrued a $1 million withdrawal 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 Consolidated Balance Sheets or Consolidated
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, 2005 and 2004, the balances on deposit in the CCF are
summarized as follows (in millions):
2005 2004
--------------------- ----------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
Mortgage-backed securities $ 1 $ 1 $ 3 $ 3
Cash and cash equivalents 93 93 22 22
Accrued (withdrawals) deposits, net (1) (1) 15 15
----- ----- ----- -----
Total $ 93 $ 93 $ 40 $ 40
===== ===== ===== =====
Fair value of the mortgage-backed securities was determined based on
identical or substantially similar security values. No central exchange exists
for these securities; they are traded over-the-counter. The Company earned $0.1
million in 2005, $0.4 million in 2004, and $0.8 million in 2003, on its
investments in mortgage-backed securities. The fair values of the cash and cash
equivalents, comprised principally of commercial paper and money market funds,
are based on quoted market prices. These investments mature on or before
February 23, 2006.
9. NOTES PAYABLE AND LONG-TERM DEBT
At December 31, 2005 and 2004, notes payable and long-term debt
consisted of the following (in millions):
2005 2004
---- ----
Revolving Credit loans, 2005 high 4.6%,
low 2.95% -- $ 7
Title XI Bonds:
5.27%, payable through 2029 $ 53 55
5.34%, payable through 2028 51 53
Term Loans:
4.79%, payable through 2020 102 --
4.10%, payable through 2012 35 35
7.43%, payable through 2007 15 22
7.55%, payable through 2009 15 15
7.42%, payable through 2010 14 17
4.31%, payable through 2010 13 15
7.43%, payable through 2007 10 15
6.20%, payable through 2013 11 --
7.57%, payable through 2009 8 11
------- -------
Total 327 245
Less current portion 31 31
------- -------
Long-term debt $ 296 $ 214
======= =======
Long-term Debt Maturities: At December 31, 2005, maturities of all
long-term debt during the next five years are $31 million in each of 2006 and
2007, $32 million in each of 2008 and 2009, and $31 million in 2010.
Revolving Credit Facilities: The Company has a $200 million revolving
credit and term loan agreement with six commercial banks that expires in January
2008. Any revolving loan outstanding on the maturity date may be converted into
a one-year term loan that would be payable in four equal quarterly installments.
Interest on amounts borrowed carry interest at London Interbank Offered Rate
("LIBOR") plus 0.475 percent. The agreement contains certain restrictive
covenants, the most significant of which requires the maintenance of an interest
coverage ratio of 2:1 and total debt to earnings before interest, depreciation,
amortization, and taxes of 3:1. At December 31, 2005 and 2004, no amounts were
outstanding under this agreement.
The Company has a $78.5 million uncommitted short-term revolving credit
agreement with First Hawaiian Bank, which is also the agent for the previously
noted $200 million revolving credit facility. The agreement extends to January
2007, but may be canceled by the bank or the Company with due notice. The amount
which the Company may draw under the facility is reduced by the amount drawn
against the bank under the previously referenced $200 million multi-bank
facility and by letters of credit issued under the $78.5 million uncommitted
facility. At December 31, 2005, no amounts were outstanding under the facility,
but $2 million in letters of credit had been issued against the line. At
December 31, 2004, $7 million was outstanding. Amounts drawn on this facility
are classified as current, unless the Company intends to move the drawn amount
to another facility that is classified as long term. For sensitivity purposes,
if the $200 million facility had been drawn fully, the amount that could have
been drawn under the borrowing formula at 2005 year-end would have been $23
million.
In June 2005, Matson executed a $105 million secured reducing revolving
credit agreement with DnB NOR Bank ASA and ING Bank N.V. This financing is for
the planned purchase, in 2006, of a new containership, the MV Maunalei. The
facility provides for a 10-year commitment beginning with the June 2005
execution of the agreement, but funding will not occur until the containership
is delivered in 2006. The maximum amount that can be outstanding on the facility
declines in eight annual commitment reductions of $10.5 million each, commencing
on the second anniversary of the closing date. The interest rate for the
facility is 0.375 percent over LIBOR the first five years. For the remaining
term, the interest rate is 0.450 percent over LIBOR.
Matson has a $30 million revolving credit and term loan agreement with
Wells Fargo Bank, National Association that extends to September 30, 2009,
including a one-year term option. Any revolving loan outstanding on the maturity
date may be converted into a one-year term loan that would be payable in four
equal quarterly installments. Interest on amounts borrowed carry interest at
LIBOR plus 0.475 percent. The agreement contains certain restrictive covenants,
the most significant of which requires that Matson maintain a minimum tangible
net worth of not less than $250 million or 65 percent of the tangible net worth
at the beginning of the most recent fiscal year and the maintenance of an
interest coverage ratio of 2:1. At December 31, 2005 and 2004, no amounts were
outstanding under this agreement.
Matson has a $50 million revolving credit and term loan agreement with
Bank of America, N.A. that expires in December 2006. Interest on amounts
borrowed carry interest at LIBOR plus 0.475 percent. The agreement contains
certain restrictive covenants, the most significant of which requires that
Matson maintain a minimum tangible net worth of not less than $250 million or 65
percent of the tangible net worth at the beginning of the most recent fiscal
year and the maintenance of an interest coverage ratio of 2:1. At December 31,
2005 and 2004, no amounts were outstanding under this agreement.
The unused borrowing capacity under all revolving credit facilities as
of December 31, 2005 totaled $301 million. This amount excludes the $105 million
that will become available to the Company in the third quarter of 2006 with the
delivery of the MV Maunalei.
Title XI Bonds: In August 2004, Matson partially financed the delivery
of the MV Maunawili with $55 million of 5.27 percent fixed-rate, 25-year term,
U.S. government Guaranteed Ship Financing Bonds, more commonly known as Title XI
bonds. These bonds are payable in semiannual payments of $1.1 million beginning
in March 2005.
In September 2003, Matson partially financed the delivery of the MV
Manukai with $55 million of 5.34 percent fixed-rate, 25-year term, Title XI
bonds. These bonds are payable in semiannual payments of $1.1 million.
Unsecured Private Shelf Agreements: At December 31, 2005, the Company
had a private shelf agreement for $75 million under which no amounts had been
drawn. The agreement expires in March 2006 and is expected to be replaced with
the agreement that is described in Note 3.
Vessel Secured Term Debt: In May 2005, Matson entered into an Amended
and Restated Note Agreement with The Prudential Insurance Company of America and
Pruco Life Insurance (collectively and individually "Prudential") for $120
million. The agreement amended and superseded Matson's $65 million private shelf
facility with Prudential that would have expired in June 2007, against which $15
million had been drawn and was outstanding at the date of the new agreement.
Included in the agreement are Series A and Series B notes. Series A comprises
the previously noted $15 million note and Series B comprises 15-year term notes
totaling $105 million. Both series are secured by the MV Manulani, which was
delivered to the Company in May 2005. The Series A note carries interest at 4.31
percent and has $13 million currently outstanding. The $105 million Series B
notes carry interest at 4.79 percent and mature in May 2020.
Real Estate Secured Term Debt: In June 2005, A&B Properties, Inc., a
wholly owned subsidiary of the Company, assumed $11.4 million of secured debt in
connection with the purchase of an office building in Phoenix, Arizona. This
term loan carries interest at 6.2 percent and matures in October 2013.
Interest Rate Hedging: To hedge the interest rate risk associated with
obtaining financing for two vessels, the Company entered into two interest rate
lock agreements with settlements corresponding to the 2003 and 2004 vessel
delivery schedules. Under the agreements, the Company agreed to pay or receive
an amount equal to the difference between the net present value of the cash
flows for a notional principal amount of indebtedness based on the existing
yield of a U.S. treasury bond at the date when the agreement is established and
the date when the agreement is settled. The agreements were settled in 2003 and
2004 and the deferred gains or losses associated with the settlements are being
amortized as adjustments to interest expense over the 25-year term of the
underlying debt. These amounts were not material to consolidated interest
expense.
10. LEASES
The Company as Lessee: Principal operating leases include land, office
and terminal facilities, containers and equipment, leased for periods that
expire between 2006 and 2052. 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 $38 million, $29 million,
and $29 million for the years ended December 31, 2005, 2004, and 2003,
respectively. Rental expense for operating leases that provide for future
escalations are accounted for on a straight-line basis. Future minimum payments
under operating leases as of December 31, 2005 were as follows (in millions):
Operating
Leases
---------
2006 $ 19
2007 12
2008 9
2009 9
2010 8
Thereafter 55
-------
Total minimum lease payments $ 112
=======
The Company as Lessor: The Company leases land, buildings, land
improvements, and three vessels under operating leases. The historical cost of
and accumulated depreciation on leased property at December 31, 2005 and 2004
were as follows (in millions):
2005 2004
---- ----
Leased property - transportation $ 158 $ 155
Leased property - real estate 560 513
Less accumulated depreciation (170) (153)
------- -------
Property under operating leases--net $ 548 $ 515
======= =======
Total rental income under these operating leases for the three years
ended December 31, 2005 was as follows (in millions):
2005 2004 2003
---- ---- ----
Minimum rentals $ 112 $ 109 $ 107
Contingent rentals (based on sales volume) 3 2 2
------- ------- -------
Total $ 115 $ 111 $ 109
======= ======= =======
Future minimum rentals on non-cancelable leases at December 31, 2005
were as follows (in millions):
Operating
Leases
---------
2006 $ 66
2007 52
2008 42
2009 34
2010 23
Thereafter 138
-------
Total $ 355
=======
11. EMPLOYEE BENEFIT PLANS
The Company has funded single-employer defined benefit pension plans
that cover substantially all non-bargaining unit employees and certain
bargaining unit employees. In addition, 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.
Asset Allocations, Investments and Plan Administration: The Company's
weighted-average asset allocations at December 31, 2005 and 2004, and 2005
year-end target allocation, by asset category, were as follows:
Target 2005 2004
------ ---- ----
Domestic equity securities 60% 59% 61%
International equity securities 10% 14% 15%
Debt securities 15% 12% 14%
Real estate 15% 12% 10%
Other and cash -- 3% --
---- ---- ----
Total 100% 100% 100%
==== ==== ====
The Company has an Investment Committee that meets regularly with
investment advisors to establish investment policies, direct investments and
select investment options. The Investment Committee is also responsible for
appointing trustees and investment managers. The Company's investment policy
permits investments in marketable securities, such as domestic and foreign
stocks, domestic and foreign bonds, venture capital, real estate investments,
and cash equivalents. Equity investments in the defined benefit plan assets do
not include any direct holdings of the Company's stock but may include such
holdings to the extent that the stock is included as part of certain mutual fund
holdings.
Contributions are determined annually for each plan by the Company's
pension administrative committee, based upon the actuarially determined minimum
required contribution under the Employee Retirement Income Security Act of 1974
("ERISA"), as amended, 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 did not make
any contributions during 2005 and contributed approximately $5 million to its
defined benefit pension plans in 2004. No contributions are expected to be
required in 2006.
Benefit Plan Assets and Obligations: The measurement date for the
Company's benefit plan disclosures is December 31st each year. The status of the
funded defined benefit pension plan, the unfunded accumulated post-retirement
benefit plans, the accumulated benefit obligation, and assumptions used to
determine benefit information at December 31, 2005, 2004, and 2003, is shown
below (dollars in millions):
Pension Benefits Other Post-retirement Benefits
--------------------------------------- -------------------------------------
2005 2004 2003 2005 2004 2003
---- ---- ---- ---- ---- ----
Change in Benefit Obligation
Benefit obligation at
beginning of year $ 274 $ 262 $ 289 $ 54 $ 49 $ 47
Service cost 6 6 6 1 1 1
Interest cost 16 16 19 3 3 3
Plan participants'
contributions -- -- -- 2 2 2
Actuarial (gain) loss 13 4 7 1 4 1
Benefits paid (15) (14) (16) (5) (5) (5)
Amendments -- -- 17 -- -- --
Settlements -- -- (60) -- -- --
-------- -------- -------- ------- ------- -------
Benefit obligation at
end of year 294 274 262 56 54 49
-------- -------- -------- ------- ------- -------
Change in Plan Assets
Fair value of plan assets at
beginning of year 295 274 254
Actual return on plan assets 35 30 58
Employer contribution -- 5 --
Benefits paid (15) (14) (16)
Settlements -- -- (22)
-------- -------- --------
Fair value of plan assets
at end of year 315 295 274
-------- -------- --------
Prepaid (Accrued) Benefit Cost
Funded status - Plan assets greater
than benefit obligation 21 21 12 (56) (54) (49)
Unrecognized net actuarial
(gain) loss 46 46 52 6 6 2
Unrecognized prior
service cost 2 2 3 -- -- --
Intangible asset -- -- 1 -- -- --
Minimum pension liability (1) (4) (6) -- -- --
-------- -------- -------- ------- ------- -------
Prepaid (Accrued) benefit cost $ 68 $ 65 $ 62 $ (50) $ (48) $ (47)
======== ======== ======== ======= ======= =======
Accumulated Benefit Obligation $ 265 $ 248 $ 234
======== ======== ========
Weighted Average Assumptions:
Discount rate 5.75% 6.00% 6.25% 5.75% 6.00% 6.25%
Expected return on plan assets 8.50% 8.50% 8.50%
Rate of compensation increase 4.00% 4.00% 4.00% 4.00% 4.00% 4.00%
Initial health care cost trend rate 9.00% 9.00% 8.50%
Ultimate rate 5.00% 5.00% 5.00%
Year ultimate rate is reached 2010 2009 2008
The expected return on plan assets is based on the Company's
historical returns combined with long-term expectations, based on the mix of
plan assets, asset class returns, and long-term inflation assumptions, after
consultation with the firm used by the Company for actuarial calculations. One-,
three-, and five-year pension returns were 12.4 percent, 15.7 percent, and 3.3
percent, respectively. The long-term average return has been approximately 10
percent. The actual returns have generally exceeded the benchmark returns used
by the Company to evaluate performance of its fund managers.
The Company has determined that its post-retirement prescription drug
plans are actuarially equivalent to Part D of the Medicare Prescription Drug
Improvement and Modernization Act of 2003. The 2005 post-retirement obligations
include the benefits of the Act's subsidy. These amounts are not material.
The information for qualified pension plans with an accumulated benefit
obligation in excess of plan assets at December 31, 2005 and 2004 is shown below
(in millions):
2005 2004
---- ----
Projected benefit obligation $ 35 $ 53
Accumulated benefit obligation $ 30 $ 47
Fair value of plan assets $ 28 $ 45
Components of the net periodic benefit cost for the defined benefit
pension plans and the post-retirement health care and life insurance benefit
plans during 2005, 2004, and 2003, are shown below (in millions):
Pension Benefits Other Post-retirement Benefits
------------------------------------ ----------------------------------
2005 2004 2003 2005 2004 2003
---- ---- ---- ---- ---- ----
Components of Net Periodic
Benefit Cost/(Income)
Service cost $ 6 $ 6 $ 6 $ 1 $ 1 $ 1
Interest cost 16 16 19 3 3 3
Expected return on plan
assets (24) (23) (22) -- -- --
Recognition of net (gain) loss 2 2 7 1 -- --
Amortization of prior
service cost -- 1 5 -- -- --
Recognition of settlement
(gain)/loss -- -- (17) -- -- --
------ ------ ------ ------- ------- -------
Net periodic benefit
cost/(income) $ -- $ 2 $ (2) $ 5 $ 4 $ 4
====== ====== ====== ======= ======= =======
Unrecognized gains and losses of the post-retirement benefit plans are
amortized over five years. Although current health costs are increasing, the
Company attempts to mitigate these increases by maintaining caps on certain of
its benefit plans, using lower cost health care plan options where possible,
requiring that certain groups of employees pay a portion of their benefit costs,
self-insuring for certain insurance plans, encouraging wellness programs for
employees, and implementing measures to mitigate future benefit cost increases.
If the assumed health care cost trend rate were increased or decreased
by one percentage point, the accumulated post-retirement benefit obligation, as
of December 31, 2005, 2004 and 2003, and the net periodic post-retirement
benefit cost for 2005, 2004 and 2003, would have increased or decreased as
follows (in millions):
Other Post-retirement Benefits
One Percentage Point
---------------------------------------------------------------------------------
Increase Decrease
---------------------------------- -----------------------------------
2005 2004 2003 2005 2004 2003
---- ---- ---- ---- ---- ----
Effect on total of service and
interest cost components $ 1 $ -- $ -- $ -- $ -- $ --
Effect on post-retirement
benefit obligation $ 5 $ 6 $ 5 $ (4) $ (5) $ (4)
Non-qualified Benefit Plans: The Company has non-qualified supple-
mental 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 $19
million at December 31, 2005 and 2004. These amounts include an additional
minimum pension liability of $6 million. A 5.25 percent discount rate was used
to determine the 2005 obligation. The expense associated with the non-qualified
plans was $4 million, $3 million, and $7 million, for 2005, 2004 and 2003,
respectively. The 2003 expense included settlement and special termination
losses totaling $3 million. The 2004 expense included settlement losses totaling
$600,000.
Estimated Benefit Payments: The estimated future benefit payments for
the next ten years are as follows (in millions):
Pension Non-qualified Post-retirement
Year Benefits Plan Benefits Benefits
---- -------- ------------- --------
2006 $ 16 $ 3 $ 3
2007 16 4 3
2008 16 1 3
2009 16 2 4
2010 17 11 4
2011-2015 96 7 19
Minimum Pension Liabilities: The Company has recorded minimum pension
liabilities for its qualified and nonqualified plans as required by SFAS No. 87
representing the excess of unfunded accumulated benefit obligations over
previously recorded pension cost liabilities. The change in the unfunded
accumulated benefit obligations was attributed primarily to fluctuations in the
values of pension assets combined with a reduction in the discount rate
assumption. The components for 2004 and 2005 were as follows (in millions):
Other Non-current
Other Non-current Liabilities Accumulated Other
Asset (unrecognized) (additional Comprehensive
prior service cost) minimum liability) Deferred Tax Asset (Gain) / Loss
----------------------- ------------------ ------------------ -----------------
December 31, 2003 $ 1 $ (9) $ 3 $ 5
Change (1) (3) 2 2
----- ----- ----- -----
December 31, 2004 -- (12) 5 7
Change -- 4 (2) (2)
----- ----- ----- -----
December 31, 2005 $ -- $ (8) $ 3 $ 5
===== ===== ===== =====
Multiemployer Plans: Matson participates in 13 multiemployer plans and
has an estimated withdrawal obligation with respect to four of these plans that
totals $65 million. Management has no present intention of withdrawing from and
does not anticipate termination of any of these plans. Total contributions to
the multiemployer pension plans covering personnel in shoreside and seagoing
bargaining units were $11 million in 2005, $9 million in 2004, and $5 million in
2003.
In December 2003, Matson Terminals, Inc., a subsidiary of Matson, and
two other Hawaii marine terminal operators formed the Hawaii Terminals
Multiemployer Plan. The transfer of two of the Company's defined benefit plans'
benefit obligations to the new multiemployer plan resulted in a settlement gain
of $17 million. Approximately $22 million of assets were transferred to the
multiemployer plan in December 2003 in connection with this matter.
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 multiemployer plans are subject to the plan termination insurance
provisions of ERISA and are paying premiums to the Pension Benefit Guaranty
Corporation ("PBGC"). The statutes provide that an employer who withdraws from,
or significantly reduces its contribution obligation to, a multiemployer 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, Matson 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. Accordingly, no withdrawal obligation for this plan is included in
the total estimated withdrawal obligation.
12. INCOME TAXES
The income tax expense on income from continuing operations for the
three years ended December 31, 2005 consisted of the following (in millions):
2005 2004 2003
---- ---- ----
Current:
Federal $ 5 $ 64 $ 43
State 1 6 3
------ ------ -----
Current 6 70 46
Deferred 63 (11) (6)
------ ------ -----
Total continuing operations tax expense $ 69 $ 59 $ 40
====== ====== =====
During 2005, Matson deposited $219 million of cash into the CCF and
expects to receive the tax benefit on $204 million of this amount in 2005; the
tax benefit on $15 million was recorded in 2004. For 2005, the current tax
benefit from the $204 million of deposits was $78 million. This amount was
included in deferred tax liabilities on the consolidated balance sheet at
December 31, 2005. Additional information about the CCF is included in Note 8.
Income tax expense for the three years ended December 31, 2005 differs
from amounts computed by applying the statutory federal rate to income from
continuing operations before income taxes, for the three years ended December
31, 2005 for the following reasons (in millions):
2005 2004 2003
---- ---- ----
Computed federal income tax expense $ 65 $ 55 $ 37
State income taxes 3 3 3
Other--net 1 1 --
------ ------ -----
Income tax expense $ 69 $ 59 $ 40
====== ====== =====
Total State and Federal tax credits totaled $2 million, $1 million, and
$2 million for 2005, 2004 and 2003, respectively. These comprised capital goods
excise credits, research and experimental credits, enterprise zone credits,
credits arising from the production of electricity from qualified facilities,
rehabilitation credits for certified historic structures and investments in
qualified high-tech investment tax credits.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31
of each year are as follows (in millions):
2005 2004
---- ----
Deferred tax assets:
Capital loss carry-forward $ 12 --
Benefit plans 6 $ 5
Insurance reserves 12 11
Joint ventures and other investments 7
Other 15 12
------- -------
Total deferred tax assets 45 35
------- -------
Deferred tax liabilities:
Basis differences for property and equipment 263 223
Tax-deferred gains on real estate transactions 127 118
Capital Construction Fund 35 15
Joint ventures and other investments 13 --
Other 6 8
------- -------
Total deferred tax liabilities 444 364
------- -------
Net deferred tax liability $ 399 $ 329
======= =======
The realization of the deferred tax assets related to the capital loss
carryover is dependent upon the future generation of capital gains. Management
considers projected future transactions and tax planning strategies in making
this assessment. Management believes it is more likely than not that the Company
will generate such gains before the capital loss carryover expires in 2010.
Therefore, no valuation allowance was established for this deferred tax asset as
of December 31, 2005.
Examinations of the Company's federal income tax returns have been
completed through 1999. The Internal Revenue Service may audit the Company's
federal income tax returns for years subsequent to 2001. Additionally, the
Company is routinely involved in state and local income tax audits. Although the
outcome of tax audits is always uncertain, the Company believes that adequate
amounts of tax have been provided for adjustments that may be expected to result
for these years.
In 2003, the Company received non-taxable death benefit proceeds of
approximately $1.4 million resulting in a one-time reduction of income tax
expense. The Company's 2003 effective tax rate on continuing operations would
have been 37.3 percent, excluding this item.
In 2005, 2004, and 2003, income tax benefits attributable to employee
stock option transactions of $4 million, $6 million and $2 million,
respectively, were not included in the tax provision, but were charged directly
to stockholders' equity.
13. STOCK OPTIONS AND RESTRICTED STOCK
Employee Stock Option Plans: The Company has two stock option plans
under which key employees are granted options to purchase shares of the
Company's common stock.
Adopted in 1998, the Company's 1998 Stock Option/Stock Incentive Plan
("1998 Plan") provides for the issuance of non-qualified stock options to
employees of the Company. Under the 1998 Plan, option prices may not be less
than the fair market value of the Company's common stock on the dates of grant
and the options become exercisable over periods determined, at the dates of
grant, by the Compensation Committee of the A&B Board of Directors that
administers the plan. Generally, options vest ratably over three years and
expire ten years from the date of grant. Payments for options exercised may be
made in cash or in shares of the Company's stock. If an option to purchase
shares is exercised within five years of the date of grant and if payment is
made in shares of the Company's stock, the option holder may receive, under a
reload feature, a new stock option grant for such number of shares as is equal
to the number surrendered, with an option price not less than the greater of the
fair market value of the Company's stock on the date of exercise or one and
one-half times the original option price.
Adopted in 1989, the Company's 1989 Stock Option/Stock Incentive Plan
("1989 Plan") is substantially the same as the 1998 Plan, except that each
option is generally exercisable in full one year after the date granted. The
1989 Plan terminated in January 1999, but options granted through 1998 remain
exercisable.
Restricted Stock: The 1998 and 1989 Plans also permit the 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 vested fully
upon issuance or may vest in one or more installments, upon such terms and
conditions as are determined by the committee that administers the plans. During
2005, 132,600 shares were issued at a value of $44.45 per share. These shares
vest ratably over three years. All 132,600 shares were outstanding at December
31, 2005. During 2004, 66,100 shares were issued at a value of $33.51 per share.
These shares vest ratably over five years. 51,720 shares were outstanding at
December 31, 2005. Compensation expense is being recognized in earnings during
the vesting period.
Director Stock Option Plans: The Company has two Directors' stock
option plans. Under the 1998 Non-Employee Director Stock Option Plan ("1998
Directors' Plan"), 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 8,000 shares of the Company's common
stock at the fair market value of the shares on the date of grant. Each option
to purchase shares generally becomes exercisable ratably over three years
following the date granted.
The 1989 Non-Employee Directors Stock Option Plan ("1989 Directors'
Plan") is substantially the same as the 1998 Directors' Plan, except that each
option generally becomes exercisable in-full one year after the date granted.
This plan terminated in January 1999, but options granted through termination
remain exercisable.
Changes in shares and the weighted average exercise prices for the
three years ended December 31, 2005, were as follows (shares in thousands):
Employee Plans Directors' Plans
---------------------- ------------------------- Weighted
1998 1989 Average
1998 1989 Directors' Directors' Total Exercise
Plan Plan Plan Plan Shares Price
---- ---- ---------- ---------- ------ --------
December 31, 2002 1,739 1,210 96 126 3,171 $ 24.84
Granted 426 -- 24 -- 450 $ 26.16
Exercised (274) (690) (24) (27) (1,015) $ 24.48
Canceled (54) (61) (3) (12) (130) $ 24.61
-------- -------- ------ ------ ---------
December 31, 2003 1,837 459 93 87 2,476 $ 25.23
Granted 351 -- 64 -- 415 $ 33.47
Exercised (759) (363) (6) (28) (1,156) $ 24.78
Canceled (11) (1) -- -- (12) $ 24.02
-------- -------- ------ ------ ---------
December 31, 2004 1,418 95 151 59 1,723 $ 27.61
Granted 196 -- 72 -- 268 $ 43.35
Exercised (420) (57) (7) (17) (501) $ 25.55
Canceled (4) -- -- -- (4) $ 26.01
-------- -------- ------ ------ ---------
December 31, 2005 1,190 38 216 42 1,486 $ 31.16
======== ======== ====== ====== =========
Exercisable 626 38 93 42 799 $ 27.15
-------- -------- ------ ------ ---------
As of December 31, 2005, the Company had reserved 1,558,048 and 235,906
shares of its common stock for the issuance of options under the 1998 Plan and
1998 Directors' Plan, respectively. Additional information about stock options
outstanding as of 2005 year-end is summarized below (shares in thousands):
Weighted Weighted
Shares Average Weighted Shares Average
Range of Outstanding Remaining Average Exercisable Price of
Exercise as of Contractual Exercise as of Exercisable
Price 12/31/2005 Years Price 12/31/2005 Options
----- ---------- ----- ----- ---------- -------
$20.01 - 23.00 86 3.6 $ 21.03 86 $ 21.03
$23.01 - 26.00 52 2.0 $ 24.07 52 $ 24.07
$26.01 - 29.00 675 5.8 $ 26.87 536 $ 27.08
$29.01 - 32.00 28 4.3 $ 30.47 22 $ 30.29
$32.01 - 35.00 376 8.0 $ 33.47 103 $ 33.47
$35.01 - 44.45 269 9.1 $ 43.35 -- --
----- -----
$ 0.00 - 44.45 1,486 6.7 $ 31.16 799 $ 27.15
===== =====
14. COMMITMENTS, GUARANTEES, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
Commitments, Guarantees and Contingencies: Commitments, excluding the
operating and capital lease commitments that are described in Note 10, that were
in effect at December 31, 2005 included the following (in millions):
Arrangement 2005
----------- ----
Capital appropriations (a) $ 582
Guarantee of HS&TC debt (b) $ 1
Guarantee of Hokua debt (c) $ 15
Standby letters of credit (d) $ 16
Bonds (e) $ 8
Benefit plan withdrawal obligations (f) $ 65
(a) At December 31, 2005, the Company and its subsidiaries had an
unspent balance of total appropriations for capital expenditures
of approximately $582 million. These expenditures are primarily
for a new vessel, real estate developments, vessel maintenance,
containers and operating equipment and vessel modifications.
There are, however, no contractual obligations to spend the
entire amount. Of this amount, approximately $391 million is
expected to be spent during 2006, $165 million during 2007
and $26 million during 2008. The Company's internal cash flows,
existing credit lines and a new credit line that was discussed
above are expected to be sufficient to finance these capital
needs. The actual payments for the capital expenditures could
be different than the amounts noted above; that difference
could be significantly larger or smaller than indicated.
(b) The Company has guaranteed up to $21.5 million of a $30 million
Hawaiian Sugar & Transportation Cooperative ("HS&TC") revolving
credit line. HS&TC is a raw-sugar marketing and transportation
cooperative that is used to market and transport the Company's
raw sugar to C&H Sugar Company, Inc. ("C&H"); the Company is a
member of HS&TC. Under normal circumstances the guarantee
would not exceed $15 million. The amount would only increase
to $21.5 million if the amounts owed by C&H are outstanding
beyond normal 10-day payment terms. As of December 31, 2005,
approximately $1 million was outstanding on the facility.
(c) At December 31, 2005, A&B Properties, Inc. ("Properties") had a
limited loan guarantee equal to the lesser of $15 million or
15.5 percent of the outstanding balance of the construction loan
for the Hokua condominium project, in which Properties is an
investor. The outstanding balance of the venture's construction
loan at December 31, 2005 was $100 million. However, with the
closing of 247 residential units on January 11, 2006, the
construction loan was paid off on that date.
(d) At December 31, 2005, the Company has arranged for standby
letters of credit totaling $16 million. This includes letters of
credit, totaling approximately $14 million, which enable the
Company to qualify as a self-insurer for state and federal
workers' compensation liabilities. The balance includes
approximately $2 million for insurance-related matters,
principally in the Company's real estate business.
(e) Of the $8 million in bonds outstanding at December 31, 2005, $6
million is for customs bonds, $1 million relates to real estate
construction projects in Hawaii and $1 million of bonds are for
ocean transportation matters.
(f) The withdrawal liabilities for multiemployer pension plans, in
which Matson is a participant, aggregated approximately $65
million as of the most recent valuation dates. Management has no
present intention of withdrawing from and does not anticipate
termination of any of those plans.
Certain of the businesses in which the Company holds non-controlling
investments have long-term debt obligations. Other than obligations described
above, those investee obligations do not have recourse to the Company and the
Company's "at-risk" amounts are limited to its investment. For certain real
estate joint ventures, the Company may also be obligated to perform work through
bond indemnifications and/or commitments to complete construction of the real
estate development if the joint venture does not perform. These investments are
described in Note 6.
Environmental Matters: As with most industrial and land development
companies of its size, the Company's shipping, real estate, and agricultural
businesses have certain risks that 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. In addition, the
Company has emergency response and crisis management programs.
After HC&S self-reported, in 2001, to the State of Hawaii Department of
Health ("DOH") possible violations of state and federal air pollution control
regulations relating to a boiler at its Maui sugar mill, the DOH issued a notice
of violation and proposed penalty of approximately $2 million in September 2003.
Although the Company operated in accordance with the requirements of permits
issued by the DOH in 1974, the permit conditions may not have reflected the
federal standards fully. Upon identifying and self-reporting the matter in late
2001, the Company immediately took corrective action to comply with the
regulations. The amount of the penalty is being contested. The Company is
continuing to engage in discussion with the DOH but a final determination of the
matter has not yet been made. The Company believes that the resolution of this
matter will not have a material effect on the Company's consolidated financial
statements and that appropriate accruals for this matter have been recorded.
Additionally, in late 2003 the Company paid $1.6 million to settle a
claim for payment of environmental remediation costs incurred by the current
owner of a sugar refinery site in Hawaii that previously was sold by the Company
in 1994. In connection with this settlement, the Company assumed responsibility
to remediate certain parcels of the site. The Company has accrued an obligation
of approximately $2.1 million for the estimated remediation costs.
Other Contingencies: In February 2006, Matson's Long Beach terminal
operator, SSAT (Long Beach) LLC, commenced negotiations of an amendment to its
Preferential Assignment Agreement with the City of Long Beach that would include
changes requested by Matson to implement its new China Service as well as
environmental covenants applicable to vessels which call at Pier C. The
environmental requirements are part of programs proposed by both the ports of
Los Angeles and Long Beach designed to reduce airborne emissions in the port
area. Under the proposed requirements, Matson would be required to install
equipment on certain of its vessels to allow them to accept a shore-based
electrical power source instead of using the vessel's diesel generators while in
port, use low sulfur fuel, limit usage of the terminal by its steamships and
take other actions designed to reduce emissions. Matson expects that it will be
permitted to make the vessel modifications over time, following execution of the
amendment and installation by the City of the required shoreside equipment. The
cost of the modifications has not been accrued as an obligation because the
amount, or range of amounts, cannot currently be estimated.
In January 2004, a petition was filed by the Native Hawaiian Legal
Corporation, on behalf of four individuals, requesting that the State of Hawaii
Board of Land and Natural Resources ("BLNR") declare that the Company has no
current legal authority to continue to divert water from streams in East Maui
for use in its sugar-growing operations, and to order the immediate full
restoration of these streams until a legal basis is established to permit the
diversions of the streams. The Company objected to the petition, asked the BLNR
to conduct administrative hearings on the matter and requested that the matter
be consolidated with the Company's currently pending application before the BLNR
for a long-term water license.
Since the filing of the petition, the Company has been working to make
improvements to the water systems of the petitioner's four clients so as to
improve the flow of water to their taro patches. The administrative hearing
process on the petition is continuing, no substantive progress was reached in
2005, and the Company continues to object to the petition. The effect of this
claim on the Company's sugar-growing operations cannot currently be estimated.
If the Company is not permitted to divert stream waters for its use, it would
have a significant adverse effect on the Company's sugar-growing operations.
In October 2004, two community-based organizations filed a Citizen
Complaint and a Petition for a Declaratory Order with the Commission on Water
Resource Management of the State of Hawaii ("Water Commission") against both an
unrelated company and HC&S, to order the companies to leave all water of four
streams on the west side of the island of Maui that is not being put to "actual,
reasonable and beneficial use" in the streams of origin. The complainants had
earlier filed, in June 2004, with the Water Commission a petition to increase
the interim in-stream flow standards for those streams. No substantive progress
was reached during 2005 for resolution of these petitions. The Company objects
to the petitions. If the Company is not permitted to divert stream water for its
use to the extent that it is currently diverting, it may have an adverse effect
on the Company's sugar-growing operations.
The Company and certain subsidiaries are parties to various other legal
actions and are contingently liable in connection with other 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.
Related Party Transactions: Notes 5 and 6 includes additional
information about transactions with unconsolidated affiliates, which affiliates
are/were also related parties, due to the Company's minority interest
investments.
C&H, an entity in which the Company had a minority ownership equity
interest until August 9, 2005 (see Notes 5 and 6), is a party to a sugar supply
contract with Hawaiian Sugar & Transportation Cooperative ("HS&TC"), a raw sugar
marketing and transportation cooperative that the Company uses to market and
transport its sugar to C&H. Under the terms of this contract, which expires with
the 2008 crop, C&H is obligated to purchase, and HS&TC is obligated to sell, all
of the raw sugar delivered to HS&TC by the Hawaii sugar growers, at prices
determined by the quoted domestic sugar market. The price that the Hawaii sugar
growers receive for the sale of raw sugar is the C&H contract price, reduced for
the operating, transportation and interest costs incurred by HS&TC, net of
revenue generated by HS&TC for charter voyages. Revenue from raw sugar sold to
HS&TC was $59 million, $63 million, and $71 million, during 2005, 2004, and
2003, respectively. At December 31, 2005, 2004 and 2003, the Company had amounts
receivable from HS&TC of $1 million, $10 million and $9 million, respectively.
15. INDUSTRY SEGMENTS
Operating segments are components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker, or decision-making group, in deciding how to allocate
resources and in assessing performance. The Company's chief operating
decision-making group is made up of the president and lead executives of the
Company and each of the Company's segments. The lead executive for each
operating segment manages the profitability, cash flows, and assets of his or
her respective segment's various product or service lines and businesses. The
operating segments are managed separately, because each operating segment
represents a strategic business unit that offers different products or services
and serves different markets. The Company has five segments that operate in
three industries: Transportation, Real Estate and Food Products.
The Transportation industry is comprised of two segments. Ocean
Transportation carries freight between various U.S. Pacific Coast, major Hawaii
ports, Guam and other Pacific ports; holds investments in ocean transportation
entities that are considered integral to its operations and terminal service
businesses (see Note 6); and provides terminal, stevedoring and container
equipment management services in Hawaii. The Company began carrying cargo from
two ports in China to Los Angeles in February 2006. The operating results for
the China Long Beach Express Service are expected to be included with the Ocean
Transportation segment. Logistics Services provides intermodal and motor carrier
services and provides logistics services in North America.
The Real Estate industry is comprised of two segments operating in
Hawaii and on the U.S. mainland. Property Leasing owns, operates, and manages
commercial properties. Property Development and Sales develops and sells
commercial and residential properties. When property that was previously leased
is sold, the revenue and operating profit are included with this later segment.
The Food Products segment grows sugar cane and coffee in Hawaii;
produces bulk raw sugar, specialty food-grade sugars, molasses and green coffee;
markets and distributes roasted coffee and green coffee; provides sugar,
petroleum and molasses hauling, general trucking services, mobile equipment
maintenance and repair services, and self-service storage in Hawaii; and
generates and sells, to the extent not used in the Company's operations,
electricity.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies. Reportable segments
are measured based on operating profit, exclusive of non-operating or unusual
transactions, interest expense, general corporate expenses, and income taxes.
Industry segment information for each of the three years ended December
31, 2005 is summarized below (in millions):
For the Year 2005 2004 2003
---- ---- ----
Revenue:
Transportation:
Ocean transportation $ 878.3 $ 850.1 $ 776.3
Logistics services 431.6 376.9 237.7
Real Estate:
Leasing 89.7 83.8 80.3
Sales 148.9 82.3 63.8
Less amounts reported in discontinued
operations(1) (56.5) (10.3) (47.3)
Food Products 123.2 112.8 112.9
Reconciling Items (2) (8.4) (6.5) --
---------- ---------- ----------
Total revenue $ 1,606.8 $ 1,489.1 $ 1,223.7
========== ========== ==========
Operating Profit:
Transportation:
Ocean transportation $ 128.0 $ 108.3 $ 93.2
Logistics services 14.4 8.9 4.3
Real Estate:
Leasing 43.7 38.8 37.0
Sales 44.1 34.6 23.9
Less amounts reported in discontinued
operations(1) (16.5) (5.0) (22.3)
Food Products 11.2 4.8 5.1
---------- ---------- ----------
Total operating profit 224.9 190.4 141.2
Write-down of long-lived assets(3) (2.3) -- (7.7)
Interest expense, net(4) (13.3) (12.7) (11.6)
General corporate expenses (24.1) (20.3) (15.2)
---------- ---------- ----------
Income from continuing operations
before income taxes $ 185.2 $ 157.4 $ 106.7
========== ========== ==========
Identifiable Assets:
Transportation(6) $ 1,183.3 $ 953.4 $ 981.9
Real Estate(7) 705.9 661.0 612.8
Food Products 159.0 152.8 154.4
Other 22.7 11.0 10.5
---------- ---------- ----------
Total assets $ 2,070.9 $ 1,778.2 $ 1,759.6
========== ========== ==========
Capital Additions:
Transportation(6) $ 175.2 $ 128.7 $ 133.4
Real Estate(5), (7) 79.0 10.9 107.7
Food Products 13.0 10.2 12.6
Other 1.4 1.4 1.7
---------- ---------- ----------
Total capital additions $ 268.6 $ 151.2 $ 255.4
========== ========== ==========
Depreciation and Amortization:
Transportation(6) $ 60.9 $ 58.0 $ 51.9
Real Estate(1), (7) 12.5 12.3 11.3
Food Products 9.4 9.0 8.2
Other 0.5 0.4 0.3
---------- ---------- ----------
Total depreciation and
amortization $ 83.3 $ 79.7 $ 71.7
========== ========== ==========
(1) Prior year amounts restated for amounts treated as discontinued operations.
See Notes 1 and 4 for additional information.
(2) Includes inter-segment revenue and interest income classified as revenue for
segment reporting purposes.
(3) The 2005 and 2003 write-downs were for an "other than temporary" impairment
in the Company's investment in C&H. The Company's investment in C&H was
sold on August 9, 2005 at the then approximate carrying value.
(4) Includes Ocean Transportation interest expense of $9.6 million for 2005,
$5.7 million for 2004, and $2.6 million for 2003. Substantially all other
interest expense was at the parent company.
(5) Includes tax-deferred property purchases that are considered non-cash
transactions in the Consolidated Statements of Cash Flows; excludes capital
expenditures for real estate developments held for sale.
(6) Includes both Ocean Transportation and Logistics Services. Assets for
Logistics Services comprise less than one percent of the total assets
for the transportation industry.
(7) Includes Leasing, Sales and Development activities.
16. QUARTERLY INFORMATION (Unaudited)
Segment results by quarter for 2005 are listed below (in millions,
except per-share amounts):
2005
------------------------------------------------------------
Q1 Q2 Q3 Q4
---------- ---------- ---------- ----------
Revenue:
Transportation:
Ocean transportation $ 206.2 $ 221.0 $ 227.5 $ 223.6
Logistics services 96.1 106.6 108.5 120.4
Real Estate:
Leasing 21.9 21.3 23.3 23.2
Sales 45.9 14.6 61.7 26.7
Less amounts reported in discontinued
operations (1) (26.4) (1.9) (1.7) (26.5)
Food Products 22.4 32.2 34.6 34.0
Reconciling Items (2) (1.5) (1.9) (2.1) (2.9)
----------- ---------- ----------- ----------
Total revenue $ 364.6 $ 391.9 $ 451.8 $ 398.5
=========== ========== =========== ==========
Operating Profit (Loss):
Transportation:
Ocean transportation $ 29.7 $ 38.7 $ 36.8 $ 22.8
Logistics services 3.0 3.6 3.5 4.3
Real Estate:
Leasing 10.7 10.5 11.4 11.1
Sales 16.5 4.8 15.6 7.2
Less amounts reported in discontinued
operations(1) (7.0) (0.7) (0.7) (8.1)
Food Products 9.0 0.3 (0.1) 2.0
----------- ---------- ----------- ----------
Total operating profit 61.9 57.2 66.5 39.3
Write-down of Long-lived Assets -- (2.2) (0.1) --
Interest Expense (2.8) (3.0) (4.1) (3.4)
General Corporate Expenses (5.3) (5.2) (5.8) (7.8)
----------- ---------- ----------- ----------
Income From Continuing Operations
before Income Taxes 53.8 46.8 56.5 28.1
Income taxes (20.4) (17.8) (21.4) (9.8)
----------- ---------- ----------- ----------
Income From Continuing Operations 33.4 29.0 35.1 18.3
Discontinued Operations(1) 4.3 0.4 0.4 5.1
----------- ---------- ----------- ----------
Net Income $ 37.7 $ 29.4 $ 35.5 $ 23.4
=========== ========== =========== ==========
Earnings Per Share:
Basic $ 0.87 $ 0.67 $ 0.81 $ 0.54
Diluted $ 0.86 $ 0.66 $ 0.81 $ 0.53
(1) See Note 4 for discussion of discontinued operations.
(2) Includes inter-segment revenue and interest income classified as revenue for
segment reporting purposes.
Segment results by quarter for 2004 are listed below (in millions,
except per-share amounts):
2004
------------------------------------------------------------
Q1 Q2 Q3 Q4
---------- ---------- ---------- ----------
Revenue:
Transportation:
Ocean transportation $ 196.5 $ 208.1 $ 215.0 $ 230.5
Logistics services 74.1 93.5 99.5 109.8
Real Estate:
Leasing 20.8 20.4 20.9 21.7
Sales 40.1 28.3 11.6 2.3
Less amounts reported in discontinued
operations (1) (2.2) (3.3) (2.3) (2.5)
Food Products 13.4 28.9 38.3 32.2
Reconciling Items (2) (1.5) (1.7) (1.8) (1.5)
----------- ---------- ----------- ----------
Total revenue $ 341.2 $ 374.2 $ 381.2 $ 392.5
=========== ========== =========== ==========
Operating Profit (Loss):
Transportation:
Ocean transportation $ 18.6 $ 31.4 $ 33.0 $ 25.3
Logistics services 1.0 2.6 2.2 3.1
Real Estate:
Leasing 9.5 9.2 10.1 10.0
Sales 19.0 13.4 2.5 (0.3)
Less amounts reported in discontinued
operations(1) (1.1) (1.9) (1.0) (1.0)
Food Products 2.6 0.3 0.6 1.3
----------- ---------- ----------- ----------
Total operating profit 49.6 55.0 47.4 38.4
Interest Expense (3.3) (3.2) (3.1) (3.1)
General Corporate Expenses (4.1) (4.8) (5.3) (6.1)
----------- ---------- ----------- ----------
Income From Continuing Operations
before Income Taxes 42.2 47.0 39.0 29.2
Income taxes (15.8) (18.1) (14.8) (11.1)
----------- ---------- ----------- ----------
Income From Continuing Operations 26.4 28.9 24.2 18.1
Discontinued Operations(1) 0.7 1.2 0.6 0.6
----------- ---------- ----------- ----------
Net Income $ 27.1 $ 30.1 $ 24.8 $ 18.7
=========== ========== =========== ==========
Earnings Per Share:
Basic $ 0.64 $ 0.71 $ 0.58 $ 0.44
Diluted $ 0.63 $ 0.70 $ 0.58 $ 0.42
(1) See Note 4 for discussion of discontinued operations.
(2) Includes inter-segment revenue and interest income classified as revenue for
segment reporting purposes.
17. PARENT COMPANY CONDENSED FINANCIAL INFORMATION
Set forth below are the unconsolidated condensed financial statements
of Alexander & Baldwin, Inc. ("Parent Company"). The significant accounting
policies used in preparing these financial statements are substantially the same
as those used in the preparation of the consolidated financial statements as
described in Note 1, except that, for purposes of the tables presented in this
footnote, subsidiaries are carried under the equity method.
The following table presents the Parent Company's condensed Balance
Sheets as of December 31, 2005 and 2004 (in millions):
2005 2004
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $ 7 $ 1
Accounts and notes receivable, net 11 13
Real estate held for sale 6 6
Prepaid expenses and other 16 11
-------- --------
Total current assets 40 31
-------- --------
Investments:
Subsidiaries consolidated, at equity 879 829
-------- --------
Property, at Cost 395 379
Less accumulated depreciation and amortization 192 182
-------- --------
Property -- net 203 197
-------- --------
Due from Subsidiaries 62 44
-------- --------
Other Assets 37 29
-------- --------
Total $ 1,221 $ 1,130
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 18 $ 24
Accounts payable 5 5
Income taxes payable 7 7
Other 19 18
-------- --------
Total current liabilities 49 54
-------- --------
Long-term Debt 83 98
-------- --------
Other Long-term Liabilities 22 22
-------- --------
Deferred Income Taxes 53 52
-------- --------
Commitments and Contingencies
Shareholders' Equity:
Capital stock 36 35
Additional capital 175 150
Accumulated other comprehensive loss (7) (9)
Deferred compensation (6) (2)
Retained earnings 827 741
Cost of treasury stock (11) (11)
-------- --------
Total shareholders' equity 1,014 904
-------- --------
Total $ 1,221 $ 1,130
======== ========
The following table presents the Parent Company's condensed Statements
of Income for the years ended December 31, 2005, 2004 and 2003 (in millions):
2005 2004 2003
---- ---- ----
Revenue:
Food products $ 89 $ 86 $ 90
Property leasing 22 21 19
Property sales 3 5 2
Interest and other 14 5 13
--------- --------- ---------
Total revenue 128 117 124
--------- --------- ---------
Costs and Expenses:
Cost of agricultural goods and services 90 86 87
Cost of property sales and leasing services 10 9 8
Selling, general and administrative 24 20 16
Interest and other 9 10 13
Income taxes (8) (11) --
--------- --------- ---------
Total costs and expenses 125 114 124
--------- --------- ---------
Income from Continuing Operations 3 3 --
Discontinued Operations, net of income taxes 1 -- --
--------- --------- ---------
Income Before Equity in Income
of Subsidiaries Consolidated 4 3 --
Equity in Income from Continuing Operations of
Subsidiaries Consolidated 113 95 67
Equity in Income from Discontinued
Operations of Subsidiaries Consolidated 9 3 14
--------- --------- ---------
Net Income 126 101 81
Other Comprehensive Income (Loss), net of income taxes 2 (1) 19
--------- --------- ---------
Comprehensive Income $ 128 $ 100 $ 100
========= ========= =========
The following table presents the Parent Company's condensed Statements
of Cash Flows for the years ended December 31, 2005, 2004 and 2003 (in
millions):
2005 2004 2003
---- ---- ----
Cash Flows from Operations $ 29 $ 34 $ 19
------ ------ -------
Cash Flows from Investing Activities:
Capital expenditures (13) (12) (14)
Proceeds from disposal of property and investments 1 6 2
Dividends received from subsidiaries 60 40 40
------ ------ -------
Net cash provided by investing activities 48 34 28
------ ------ -------
Cash Flows from Financing Activities:
Decrease in intercompany payable (19) (15) (62)
Proceeds from (repayments of) long-term debt, net (24) (38) 32
Proceeds from issuance of capital stock 11 26 20
Repurchases of capital stock -- (2) --
Dividends paid (39) (38) (37)
------ ------ -------
Net cash used in financing activities (71) (67) (47)
------ ------ -------
Cash and Cash Equivalents:
Net increase (decrease) for the year 6 1 --
Balance, beginning of year 1 -- --
------ ------ -------
Balance, end of year $ 7 $ 1 $ --
====== ====== =======
Other Cash Flow Information:
Interest paid, net of amounts capitalized $ (7) $ (9) $ (9)
Income taxes paid, net of refunds $ 3 $ (61) $ (45)
Other Non-cash Information:
Depreciation expense $ (12) $ (12) $ (11)
Tax-deferred property sales $ 3 -- --
Tax-deferred property purchases $ (3) -- --
General Information: The Parent Company is headquartered in Honolulu,
Hawaii and is engaged in the operations that are described in Note 15, "Industry
Segments." Additional information related to the Parent Company is described in
the foregoing notes to the consolidated financial statements.
Long-term Debt: At December 31, 2005 and 2004, long-term debt consisted
of the following (in millions):
2005 2004
---- ----
Revolving Credit loans, 2005 high 4.6%, low 2.95% -- $ 7
Term Loans:
4.10%, payable through 2012 $ 35 35
6.20%, payable through 2013 3 --
7.44%, payable through 2007 15 22
7.55%, payable through 2009 15 15
7.42%, payable through 2010 14 17
7.43%, payable through 2007 10 15
7.57%, payable through 2009 9 11
------- -------
Total 101 122
Less current portion 18 24
------- -------
Long-term debt $ 83 $ 98
======= =======
Long-term Debt Maturities: At December 31, 2005, maturities of all
long-term debt during the next five years are $18 million annually from 2006
through 2009 and $17 million in 2010.
Revolving Credit Facilities: The Company has a $200 million revolving
credit and term loan agreement with six commercial banks that expires in January
2008. Any revolving loan outstanding on the maturity date may be converted into
a one-year term loan that would be payable in four equal quarterly installments.
Interest on amounts borrowed carry interest at London Interbank Offered Rate
("LIBOR") plus 0.475 percent. The agreement contains certain restrictive
covenants, the most significant of which requires the maintenance of an interest
coverage ratio of 2:1 and total debt to earnings before interest, depreciation,
amortization, and taxes of 3:1. At December 31, 2005 and 2004, no amounts were
outstanding under this agreement. When the Company does have outstanding
balances on the credit line, the amounts are classified as non-current because
the Company has the intent and ability to refinance the facility beyond twelve
months.
The Company has a $78.5 million uncommitted short-term revolving credit
agreement with First Hawaiian Bank, which is also the agent for the above noted
$200 million revolving credit facility. The agreement extends to January 2007,
but may be canceled by the bank or the Company with due notice. The amount which
the Company may draw under the facility is reduced by the amount drawn against
the bank under the previously referenced $200 million multi-bank facility and by
letters of credit issued under the $78.5 million uncommitted facility. At
December 31, 2005, no amounts were outstanding under the facility, but $2
million in letters of credit had been issued against the line. At December 31,
2004, $7 million was outstanding. Amounts drawn on this facility are classified
as current, unless the Company intends to move the drawn amount to another
facility that is classified as long term. For sensitivity purposes, if the $200
million facility had been drawn fully, the amount that could have been drawn
under the borrowing formula at 2005 year-end would have been $23 million.
Unsecured Private Shelf Agreements: The Company has a private shelf
agreement for $75 million that expires in March 2006. No amount had been drawn
on this facility at December 31, 2005.
Real Estate Secured Term Debt: In June 2005, the Company, together with
its real-estate subsidiaries, purchased an office building in Phoenix, Arizona,
and assumed $11 million of mortgage-secured debt. A&B owns approximately 24
percent of the Phoenix office building. At December 31, 2005, approximately $3
million of the $11 million was recorded on the parent company's books,
consistent with ownership of the property. The property is jointly and severally
owned by three Company entities.
Other Long-term Liabilities: Other Long-term Liabilities at December
31, 2005 and 2004 consisted principally of deferred compensation, executive
benefit plans, additional minimum pension liability, and self-insurance
liabilities.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
A. Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the
period covered by this report. Based on such evaluation, the Company's Chief
Executive Officer and Chief Financial Officer have concluded that, as of the end
of such period, the Company's disclosure controls and procedures are effective.
B. Internal Control over Financial Reporting
(a) See page 50 for management's annual report on internal control over
financial reporting.
(b) See page 51 for attestation report of the independent registered
public accounting firm.
(c) There have not been any changes in the Company's internal controls
over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) during the Company's fiscal fourth quarter
that have materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A. Directors
For information about the directors of A&B, see the section captioned
"Election of Directors" in A&B's proxy statement dated March 6, 2006 ("A&B's
2006 Proxy Statement"), which section is incorporated herein by reference.
B. Executive Officers
The name of each executive officer of A&B (in alphabetical order), age
(in parentheses) as of March 31, 2006, and present and prior positions with A&B
and business experience for the past five years are given below.
Generally, the term of office of executive officers is at the pleasure
of the Board of Directors. For a discussion of compliance with Section 16(a) of
the Securities Exchange Act of 1934 by A&B's directors and executive officers,
see the subsection captioned "Section 16(a) Beneficial Ownership Reporting
Compliance" in A&B's 2006 Proxy Statement, which subsection is incorporated
herein by reference. For a discussion of change in control agreements between
A&B and certain of A&B's executive officers, and the Executive Severance Plan,
see the subsections captioned "Change in Control Agreements" and "Executive
Severance Plan" in A&B's 2006 Proxy Statement, which subsections are
incorporated herein by reference.
James S. Andrasick (62)
President and Chief Executive Officer of Matson, 7/02-present;
Executive Vice President of A&B, 4/02-4/04; Chief Financial Officer and
Treasurer of A&B, 6/00-2/04; Senior Vice President of A&B, 6/00-4/02; first
joined A&B or a subsidiary in 2000.
Christopher J. Benjamin (42)
Senior Vice President of A&B, 7/05-present; Chief Financial Officer of
A&B, 2/04-present; Vice President of A&B, 4/03-6/05; Director (Corporate
Development & Planning) of A&B, 8/01-4/03; Vice President, ChannelPoint, Inc.,
10/99-6/01.
Meredith J. Ching (49)
Vice President (Government & Community Relations) of A&B,
10/92-present; Vice President (Government & Community Relations) of A&B-Hawaii,
Inc. ("ABHI"), 10/92-12/99; first joined A&B or a subsidiary in 1982.
Nelson N. S. Chun (53)
Senior Vice President and Chief Legal Officer, 7/05-present; Vice
President and General Counsel of A&B, 11/03-6/05; Partner, Cades Schutte LLP,
10/83-11/03.
Matthew J. Cox (44)
Executive Vice President and Chief Operating Officer, 7/05-present;
Senior Vice President and Chief Financial Officer of Matson, 6/01-6/05;
Controller of Matson, 6/01-1/03; Executive Vice President and Chief Financial
Officer, Distribution Dynamics, Inc., 8/99-6/01.
W. Allen Doane (58)
President and Chief Executive Officer of A&B, and Director of A&B and
Matson, 10/98-present; Chairman of Matson, 7/02-1/04; Vice Chairman of Matson,
12/98-7/02, 1/04-present; Executive Vice President of A&B, 8/98-10/98; Director
of ABHI, 4/97-12/99; Chief Executive Officer of ABHI, 1/97-12/99; President of
ABHI, 4/95-12/99; first joined A&B or a subsidiary in 1991.
G. Stephen Holaday (61)
President, Agribusiness, 7/05-present; Plantation General Manager,
Hawaiian Commercial & Sugar Company, 1/97-present; Vice President of A&B,
12/99-4/04; Senior Vice President of ABHI, 4/89-12/99; Vice President and
Controller of A&B, 4/93-1/96; first joined A&B or a subsidiary in 1983.
John B. Kelley (60)
Vice President (Investor Relations) of A&B, 8/01-present; Vice
President (Corporate Planning & Investor Relations) of A&B, 10/99-8/01; Vice
President (Investor Relations) of A&B, 1/95-10/99; Vice President of ABHI,
9/89-12/99; first joined A&B or a subsidiary in 1979.
Stanley M. Kuriyama (52)
Chief Executive Officer and Vice Chairman of A & B Properties, Inc.,
12/99-present; President and Chief Executive Officer, Land Group, 7/05-present;
Vice President (Properties Group) of A&B, 2/99-4/04; Executive Vice President of
ABHI, 2/99-12/99; first joined A&B or a subsidiary in 1992.
Alyson J. Nakamura (40)
Secretary of A&B, 2/99-present; Assistant Secretary of A&B, 6/94-1/99;
Secretary of ABHI, 6/94-12/99; first joined A&B or a subsidiary in 1994.
Thomas A. Wellman (47)
Vice President of A&B, 2/04-present; Controller of A&B, 1/96-present;
Assistant Treasurer of A&B, 1/96-12/99, 6/00-2/04; Treasurer of A&B, 1/00-5/00,
2/04-present; Vice President of ABHI, 1/96-12/99; Controller of ABHI,
11/91-12/99; first joined A&B or a subsidiary in 1989.
Ruthann S. Yamanaka (52)
Vice President (Human Resources) of A&B, 9/04-present; Senior Vice
President of Hawaiian Airlines, Inc., 3/98-8/04.
C. Audit Committee Financial Experts
For information about the Audit Committee Financial Experts, see the
section captioned "Audit Committee Report" in A&B's 2006 Proxy Statement, which
section is incorporated herein by reference.
D. Code of Ethics
For information about A&B's Code of Ethics, see the subsection
captioned "Code of Ethics" in A&B's 2006 Proxy Statement, which subsection is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
See the section captioned "Executive Compensation" in A&B's 2006 Proxy
Statement, which section is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
See the section captioned "Security Ownership of Certain Shareholders"
and the subsection titled "Security Ownership of Directors and Executive
Officers" in A&B's 2006 Proxy Statement, which section and subsection are
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the subsection captioned "Certain Relationships and Transactions"
in A&B's 2006 Proxy Statement, which subsection is incorporated herein by
reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information concerning principal accountant fees and services appears
in the section captioned "Ratification of Appointment of Independent Auditors"
in A&B's 2006 Proxy Statement, which section is incorporated herein by
reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
A. Financial Statements
The financial statements are set forth in Item 8 of Part II above.
B. Financial Statement Schedules
All schedules are omitted because of the absence of the conditions
under which they are required or because the information called for is included
in the financial statements or notes thereto.
C. Exhibits Required by Item 601 of Regulation S-K
Exhibits not filed herewith are incorporated by reference to the
exhibit number and previous filing shown in parentheses. All previous exhibits
were filed with the Securities and Exchange Commission in Washington, D.C.
Exhibits filed pursuant to the Securities Exchange Act of 1934 were filed under
file number 0-565. Shareholders may obtain copies of exhibits for a copying and
handling charge of $0.15 per page by writing to Alyson J. Nakamura, Secretary,
Alexander & Baldwin, Inc., P. O. Box 3440, Honolulu, Hawaii 96801.
3. Articles of incorporation and bylaws.
3.a. Restated Articles of Association of Alexander & Baldwin, Inc., as
restated effective May 5, 1986, together with Amendments dated April
28, 1988 and April 26, 1990 (Exhibits 3.a.(iii) and (iv) to A&B's Form
10-Q for the quarter ended March 31, 1990).
3.b. Revised Bylaws of Alexander & Baldwin, Inc. (as amended through
January 26, 2006).
4. Instruments defining rights of security holders, including indentures.
4.a. Equity.
4.a. Rights Agreement, dated as of June 25, 1998 between Alexander &
Baldwin, Inc. and ChaseMellon Shareholder Services, L.L.C. and Press
Release of Alexander & Baldwin, Inc. (Exhibits 4 and 99 to A&B's
Form 8-K dated June 25, 1998).
4.b. Debt.
4.b. (i) Third Amended and Restated Revolving Credit and Term Loan
Agreement, dated November 19, 2001, among Alexander & Baldwin, Inc.
and First Hawaiian Bank, Bank of America, N.A., Bank of Hawaii, The
Bank of New York, Wells Fargo Bank, National Association, American
Savings Bank, F.S.B., and First Hawaiian Bank, as Agent (Exhibit 4.b.
to A&B's Form 10-K for the year ended December 31, 2001).
(ii) First Amendment to Third Amended and Restated Revolving Credit and
Term Loan Agreement, effective as of February 4, 2004, among Alexander
& Baldwin, Inc. and First Hawaiian Bank, Bank of America, N.A., Bank of
Hawaii, The Bank of New York, Wells Fargo Bank, National Association,
American Savings Bank, F.S.B., and First Hawaiian Bank, as Agent
(Exhibit 4.b.(ii) to A&B's Form 10-Q for the quarter ended March 31,
2004).
(iii) Second Amendment to Third Amended and Restated Revolving Credit
and Term Loan Agreement, effective as of October 1, 2004, among
Alexander & Baldwin, Inc. and First Hawaiian Bank, Bank of America,
N.A., Bank of Hawaii, The Bank of New York, Wells Fargo Bank, National
Association, American Savings Bank, F.S.B., and First Hawaiian Bank, as
Agent (Exhibit 4.b.(iii) to A&B's Form 10-Q for the quarter ended
September 30, 2004).
10. Material contracts.
10.a. (i) Issuing and Paying Agent Agreement between Matson Navigation
Company, Inc. and U.S. Bank National Association, as
successor-in-interest to Security Pacific National Trust (New York),
with respect to Matson Navigation Company, Inc.'s $150 million
commercial paper program dated September 18, 1992 (Exhibit
10.b.1.(xxviii) to A&B's Form 10-Q for the quarter ended September 30,
1992).
(ii) Note Agreement among Alexander & Baldwin, Inc., A&B-Hawaii, Inc.
and The Prudential Insurance Company of America, dated as of June 4,
1993 (Exhibit 10.a.(xiii) to A&B's Form 8-K dated June 4, 1993).
(iii) Amendment dated as of May 20, 1994 to the Note Agreement among
Alexander & Baldwin, Inc., A&B-Hawaii, Inc. and The Prudential
Insurance Company of America, dated as of June 4, 1993 (Exhibit
10.a.(xviv) to A&B's Form 10-Q for the quarter ended June 30, 1994).
(iv) Amendment dated as of June 30, 1995 to the Note Agreement, among
Alexander & Baldwin, Inc., A&B-Hawaii, Inc. and The Prudential
Insurance Company of America, dated as of June 4, 1993 (Exhibit
10.a.(xxvii) to A&B's Form 10-Q for the quarter ended June 30, 1995).
(v) Amendment dated as of November 29, 1995 to the Note Agreement among
Alexander & Baldwin, Inc., A&B-Hawaii, Inc. and The Prudential
Insurance Company of America, dated as of June 4, 1993 (Exhibit
10.a.(xvii) to A&B's Form 10-K for the year ended December 31, 1995).
(vi) Revolving Credit Agreement between Alexander & Baldwin, Inc.,
A&B-Hawaii, Inc., and First Hawaiian Bank, dated December 30, 1993
(Exhibit 10.a.(xx) to A&B's Form 10-Q for the quarter ended September
30, 1994).
(vii) Amendment dated August 31, 1994 to the Revolving Credit Agreement
between Alexander & Baldwin, Inc., A&B-Hawaii, Inc., and First Hawaiian
Bank dated December 30, 1993 (Exhibit 10.a.(xxi) to A&B's Form 10-Q for
the quarter ended September 30, 1994).
(viii) Second Amendment dated March 29, 1995 to the Revolving Credit
Agreement between Alexander & Baldwin, Inc., A&B-Hawaii, Inc., and
First Hawaiian Bank, dated December 30, 1993 (Exhibit 10.a.(xxiii) to
A&B's Form 10-Q for the quarter ended March 31, 1995).
(ix) Third Amendment dated November 30, 1995 to the Revolving Credit
Agreement between Alexander & Baldwin, Inc., A&B-Hawaii, Inc., and
First Hawaiian Bank, dated December 30, 1993 (Exhibit 10.a.(xvii) to
A&B's Form 10-K for the year ended December 31, 1996).
(x) Fourth Amendment dated November 25, 1996 to the Revolving Credit
Agreement between Alexander & Baldwin, Inc., A&B-Hawaii, Inc., and
First Hawaiian Bank, dated December 30, 1993 (Exhibit 10.a.(xviii) to
A&B's Form 10-K for the year ended December 31, 1996).
(xi) Fifth Amendment dated November 28, 1997 to the Revolving Credit
Agreement between Alexander & Baldwin, Inc., A&B-Hawaii, Inc., and
First Hawaiian Bank, dated December 30, 1993 (Exhibit 10.a.(xix) to
A&B's Form 10-K for the year ended December 31, 1997).
(xii) Sixth Amendment dated November 30, 1998 to the Revolving Credit
Agreement between Alexander & Baldwin, Inc., A&B-Hawaii, Inc., and
First Hawaiian Bank, dated December 30, 1993 (Exhibit 10.a.(xiv) to
A&B's Form 10-K for the year ended December 31, 1998).
(xiii) Seventh Amendment dated November 23, 1999 to the Revolving
Credit Agreement between Alexander & Baldwin, Inc., A&B-Hawaii, Inc.,
and First Hawaiian Bank, dated December 30, 1993 (Exhibit 10.a.(xv) to
A&B's Form 10-K for the year ended December 31, 1999).
(xiv) Eighth Amendment dated May 3, 2000 to the Revolving Credit
Agreement ("Agreement") between Alexander & Baldwin, Inc. and First
Hawaiian Bank, dated December 30, 1993 (A&B-Hawaii, Inc., an original
party to the Agreement, was merged into Alexander & Baldwin, Inc.
effective December 31, 1999) (Exhibit 10.a.(xxvii) to A&B's Form 10-Q
for the quarter ended June 30, 2000).
(xv) Ninth Amendment dated November 16, 2000 to the Revolving Credit
Agreement between Alexander & Baldwin, Inc. and First Hawaiian Bank,
dated December 30, 1993 (Exhibit 10.a.(xvii) to A&B's Form 10-K for the
year ended December 31, 2000).
(xvi) Tenth Amendment dated November 30, 2001 to the Revolving Credit
Agreement between Alexander & Baldwin, Inc. and First Hawaiian Bank,
dated December 30, 1993 (Exhibit 10.a.(xviii) to A&B's Form 10-K for
the year ended December 31, 2001).
(xvii) Eleventh Amendment dated November 21, 2002 to the Revolving
Credit Agreement between Alexander & Baldwin, Inc. and First Hawaiian
Bank, dated December 30, 1993 (Exhibit 10.a.(xix) to A&B's Form 10-K
for the year ended December 31, 2002).
(xviii) Twelfth Amendment dated November 12, 2003 to the Revolving
Credit Agreement between Alexander & Baldwin, Inc. and First Hawaiian
Bank, dated December 30, 1993 (Exhibit 10.a.(xviii) to A&B's Form 10-K
for the year ended December 31, 2003).
(xix) Thirteenth Amendment dated October 19, 2004 to the Revolving
Credit Agreement between Alexander & Baldwin, Inc. and First Hawaiian
Bank, dated December 30, 1993 (Exhibit 10.a.(xvix) to A&B's Form 10-Q
for the quarter ended September 30, 2004).
(xx) Fourteenth Amendment dated October 31, 2005 to the Revolving
Credit Agreement between Alexander & Baldwin, Inc. and First Hawaiian
Bank, dated December 30, 1993 (Exhibit 10.a.(xx) to A&B's Form 10-Q for
the quarter ended September 30, 2005).
(xxi) Private Shelf Agreement between Alexander & Baldwin, Inc.,
A&B-Hawaii, Inc., and Prudential Insurance Company of America, dated as
of August 2, 1996 (Exhibit 10.a.(xxxiii) to A&B's Form 10-Q for the
quarter ended September 30, 1996).
(xxii) First Amendment, dated as of February 5, 1999, to the Private
Shelf Agreement between Alexander & Baldwin, Inc., A&B-Hawaii, Inc.,
and Prudential Insurance Company of America, dated as of August 2, 1996
(Exhibit 10.a.(xxii) to A&B's Form 10-K for the year ended December 31,
1998).
(xxiii) Private Shelf Agreement between Alexander & Baldwin, Inc. and
Prudential Insurance Company of America, dated as of April 25, 2001
(Exhibit 10.a.(xlvii) to A&B's Form 10-Q for the quarter ended June 30,
2001).
(xxiv) Amendment, dated as of April 25, 2001, to the Note Agreement
among Alexander & Baldwin, Inc., A&B-Hawaii, Inc. and The Prudential
Insurance Company of America, dated as of June 4, 1993, and the Private
Shelf Agreement between Alexander & Baldwin, Inc., A&B-Hawaii, Inc.,
and Prudential Insurance Company of America, dated as of August 2, 1996
(Exhibit 10.a.(xlviii) to A&B's Form 10-Q for the quarter ended June
30, 2001).
(xxv) Private Shelf Agreement between Matson Navigation Company, Inc.
and Prudential Insurance Company of America, dated as of June 29, 2001
(Exhibit 10.a.(xlix) to A&B's Form 10-Q for the quarter ended June 30,
2001).
(xxvi) First Amendment dated July 12, 2004 to the Private Shelf
Agreement between Matson Navigation Company, Inc. and Prudential
Insurance Company of America, dated as of June 29, 2001 (Exhibit
10.a.(xxiv) to A&B's Form 10-Q for the quarter ended June 30, 2004).
(xxvii) Amended and Restated Note Agreement dated May 19, 2005 among
Matson Navigation Company, Inc., The Prudential Insurance Company of
America, and Pruco Life Insurance Company (Exhibit 10.1 to A&B's Form
8-K dated May 19, 2005).
(xxviii) First Preferred Ship Mortgage dated May 19, 2005, between
Matson Navigation Company, Inc. and The Prudential Insurance Company of
America (Exhibit 10.2 to A&B's Form 8-K dated May 19, 2005).
(xxix) Security Agreement between Matson Navigation Company, Inc. and
the United States of America, with respect to $55 million of Title XI
ship financing bonds, dated July 29, 2004 (Exhibit 10.a.(xxvi) to A&B's
Form 10-Q for the quarter ended September 30, 2004).
(xxx) Credit Agreement between Matson Navigation Company, Inc. and Bank
of America, N.A., dated October 25, 2002 (Exhibit 10.a.(xxvii) to A&B's
Form 10-K for the year ended December 31, 2004).
(xxxi) First Loan Modification Agreement dated December 15, 2004 to the
Credit Agreement between Matson Navigation Company, Inc. and Bank of
America. N.A., dated October 25, 2002 (Exhibit 10.a.(xxviii) to A&B's
Form 10-K for the year ended December 31, 2004).
(xxxii) Loan Agreement between Matson Navigation Company, Inc. and
Wells Fargo Bank, National Association, dated as of October 3, 2003
(Exhibit 10.a.(xxix) to A&B's Form 10-K for the year ended December 31,
2004).
(xxxiii) First Amendment to Loan Agreement and Second Modification to
Promissory Note between Matson Navigation Company, Inc. and Wells Fargo
Bank, National Association, dated as of September 30, 2004 (Exhibit
10.a.(xxx) to A&B's Form 10-K for the year ended December 31, 2004).
(xxxiv) Revolving Line of Credit Note and Loan Agreement between Matson
Navigation Company, Inc. and Wells Fargo Bank, National Association
dated September 30, 2005 (Exhibit 10.1 to A&B's Form 8-K dated
September 30, 2005).
(xxxv) Senior Secured Reducing Revolving Credit Agreement between
Matson Navigation Company, Inc. and DnB NOR Bank ASA, dated June 28,
2005 (Exhibit 10.1 to A&B's Form 8-K dated June 28, 2005).
(xxxvi) Private Shelf Agreement between Alexander & Baldwin, Inc. and
Prudential Investment Management, Inc., dated as of November 25, 2003
(Exhibit 10.a.(xxiv) to A&B's Form 10-K for the year ended
December 31, 2003).
(xxxvii) Letter Amendment dated as of November 25, 2003 to the Private
Shelf Agreement between Alexander & Baldwin, Inc., A&B-Hawaii, Inc.,
and Prudential Insurance Company of America, dated as of August 2,
1996, and the Private Shelf Agreement between Alexander & Baldwin, Inc.
and Prudential Insurance Company of America, dated as of April 25,
2001, among The Prudential Insurance Company of America, Pruco Life
Insurance Company, Pruco Life Insurance Company of New Jersey and
Alexander & Baldwin, Inc. (Exhibit 10.a.(xxv) to A&B's Form 10-K for
the year ended December 31, 2003).
(xxxviii) Promissory Note, dated September 18, 2003, by Deer Valley
Financial Center, LLC, Huntington Company, L.L.C., Geneva Company,
L.L.C., and Metzger Deer Valley, LLC in favor of PNC Bank, National
Association (Exhibit 10.a.(xxxvi) to A&B's Form 10-Q for the quarter
ended June 30, 2005).
(xxxix) Consent and Assumption Agreement With Release and Modification
of Loan Documents, dated June 6, 2005, among Deer Valley Financial
Center, LLC, Huntington Company, L.L.C., Geneva Company, L.L.C.,
Metzger Deer Valley, LLC, R. Craig Hannay, A&B Deer Valley LLC, ABP
Deer Valley LLC, WDCI Deer Valley LLC, Alexander & Baldwin, Inc., and
Midland Loan Services, Inc. (Exhibit 10.a.(xxxvii) to A&B's Form
10-Q for the quarter ended June 30, 2005).
(xl) Borrower's Certificate, dated June 6, 2005, by A&B Deer Valley
LLC, ABP Deer Valley LLC, and WDCI Deer Valley LLC in favor of Wells
Fargo Bank N.A. (Exhibit 10.a.(xxxviii) to A&B's Form 10-Q for the
quarter ended June 30, 2005).
(xli) Floating Continuing Guarantee, dated July 29, 2005, among
Alexander & Baldwin, Inc., American AgCredit, PCA and other financial
institutions (Exhibit 10.a.(xxxix) to A&B's Form 10-Q for the quarter
ended June 30, 2005).
(xlii) Amended and Restated Asset Purchase Agreement, dated as of
December 24, 1998, by and among California and Hawaiian Sugar Company,
Inc., A&B-Hawaii, Inc., McBryde Sugar Company, Limited and Sugar
Acquisition Corporation (without exhibits or schedules) (Exhibit
10.a.1.(xxxvi) to A&B's Form 8-K dated December 24, 1998).
(xliii) Amended and Restated Stock Sale Agreement, dated as of December
24, 1998, by and between California and Hawaiian Sugar Company, Inc.
and Citicorp Venture Capital, Ltd. (without exhibits) (Exhibit
10.a.1.(xxxvii) to A&B's Form 8-K dated December 24, 1998).
(xliv) Pro forma financial information relative to the Amended and
Restated Asset Purchase Agreement, dated as of December 24, 1998, by
and among California and Hawaiian Sugar Company, Inc., A&B-Hawaii,
Inc., McBryde Sugar Company, Limited and Sugar Acquisition Corporation,
and the Amended and Restated Stock Sale Agreement, dated as of December
24, 1998, by and between California and Hawaiian Sugar Company, Inc.
and Citicorp Venture Capital, Ltd. (Exhibit 10.a.1.(xxxviii) to A&B's
Form 8-K dated December 24, 1998).
(xlv) Vessel Construction Contract between Matson Navigation Company,
Inc. and Kvaerner Philadelphia Shipyard Inc., dated May 29, 2002
(Exhibit 10.a.(xxvii) to A&B's Form 10-Q for the quarter ended
June 30, 2002).
(xlvi) Vessel Purchase and Sale Agreement between Matson Navigation
Company, Inc. and Kvaerner Shipholding, Inc., dated May 29, 2002
(Exhibit 10.a.(xxviii) to A&B's Form 10-Q for the quarter ended
June 30, 2002).
(xlvii) Waiver of Cancellation Provisions Vessel Construction Contracts
among Matson Navigation Company, Inc., Kvaerner Philadelphia Shipyard
Inc. and Kvaerner Shipholding Inc., dated December 30, 2002
(Exhibit 10.a.(xxx) to A&B's Form 10-K for the year ended
December 31, 2002).
(xlviii) Shipbuilding Contract (Hull 003) between Kvaerner Philadelphia
Shipyard Inc. and Matson Navigation Company, Inc., dated February 14,
2005 (Exhibit 10.a.(xxxix) to A&B's Form 10-K for the year ended
December 31, 2004).
(xlix) Amendment No. 1 dated February 18, 2005, to Shipbuilding
Contract (Hull 003) between Kvaerner Philadelphia Shipyard Inc. and
Matson Navigation Company, Inc., dated February 14, 2005
(Exhibit 10.a.(xl) to A&B's Form 10-K for the year ended
December 31, 2004).
(l) Amendment No. 2 dated October 28, 2005, to Shipbuilding Contract
(Hull 003) between Aker Philadelphia Shipyard, Inc. (formerly Kvaerner
Philadelphia Shipyard Inc.) and Matson Navigation Company, Inc.,
dated February 14, 2005.
(li) Shipbuilding Contract (Hull BN460) between Kvaerner Philadelphia
Shipyard Inc. and Matson Navigation Company, Inc., dated February 14,
2005 (Exhibit 10.a.(xli) to A&B's Form 10-K for the year ended
December 31, 2004).
(lii) Amendment No. 1 dated February 18, 2005, to Shipbuilding
Contract (Hull BN460) between Kvaerner Philadelphia Shipyard Inc. and
Matson Navigation Company, Inc., dated February 14, 2005 (Exhibit
10.a.(xlii) to A&B's Form 10-K for the year ended December 31, 2004).
(liii) Amendment No. 2 dated October 28, 2005, to Shipbuilding
Contract (Hull BN460) between Aker Philadelphia Shipyard, Inc.
(formerly Kvaerner Philadelphia Shipyard Inc.) and Matson Navigation
Company, Inc., dated February 14, 2005.
(liv) Right of First Refusal Agreement between Kvaerner Philadelphia
Shipyard Inc. and Matson Navigation Company, Inc., dated February 14,
2005 (Exhibit 10.a.(xliii) to A&B's Form 10-K for the year ended
December 31, 2004).
(lv) Amendment No. 1 dated October 28, 2005, to Right of First Refusal
Agreement between Aker Philadelphia Shipyard, Inc. (formerly Kvaerner
Philadelphia Shipyard Inc.) and Matson Navigation Company, Inc.,
dated February 14, 2005.
*10.b.1. (i) Alexander & Baldwin, Inc. 1989 Stock Option/Stock Incentive
Plan (Exhibit 10.c.1.(ix) to A&B's Form 10-K for the year ended
December 31, 1988).
-----------------------------
*All exhibits listed under 10.b.1. are management contracts or compensatory
plans or arrangements.
(ii) Amendment No. 1 to the Alexander & Baldwin, Inc. 1989 Stock
Option/Stock Incentive Plan (Exhibit 10.b.1.(xxvi) to A&B's Form 10-Q
for the quarter ended June 30, 1992).
(iii) Amendment No. 2 to the Alexander & Baldwin, Inc. 1989 Stock
Option/Stock Incentive Plan (Exhibit 10.b.1.(iv) to A&B's Form 10-Q for
the quarter ended March 31, 1994).
(iv) Amendment No. 3 to the Alexander & Baldwin, Inc. 1989 Stock
Option/Stock Incentive Plan (Exhibit 10.b.1.(ix) to A&B's Form 10-K for
the year ended December 31, 1994).
(v) Amendment No. 4 to the Alexander & Baldwin, Inc. 1989 Stock
Option/Stock Incentive Plan (Exhibit 10.b.1.(v) to A&B's Form 10-K for
the year ended December 31, 2000).
(vi) Alexander & Baldwin, Inc. 1989 Non-Employee Director Stock Option
Plan (Exhibit 10.c.1.(x) to A&B's Form 10-K for the year ended December
31, 1988).
(vii) Amendment No. 1 to the Alexander & Baldwin, Inc. 1989
Non-Employee Director Stock Option Plan (Exhibit 10.b.1.(xxiv) to A&B's
Form 10-K for the year ended December 31, 1991).
(viii) Amendment No. 2 to the Alexander & Baldwin, Inc. 1989
Non-Employee Director Stock Option Plan (Exhibit 10.b.1.(xxvii) to
A&B's Form 10-Q for the quarter ended June 30, 1992).
(ix) Amendment No. 3 to the Alexander & Baldwin, Inc. 1989 Non-Employee
Director Stock Option Plan (Exhibit 10.b.1.(ix) to A&B's Form 10-K for
the year ended December 31, 2000).
(x) Alexander & Baldwin, Inc. 1998 Stock Option/Stock Incentive Plan
(Exhibit 10.b.1.(xxxii) to A&B's Form 10-Q for the quarter ended March
31, 1998).
(xi) Amendment No. 1 to the Alexander & Baldwin, Inc. 1998 Stock
Option/Stock Incentive Plan (Exhibit 10.b.1.(xi) to A&B's Form 10-K for
the year ended December 31, 2000).
(xii) Amendment No. 2 to the Alexander & Baldwin, Inc. 1998 Stock
Option/Stock Incentive Plan (Exhibit 10.b.1.(xlvi) to A&B's Form 10-Q
for the quarter ended March 31, 2002).
(xiii) Amendment No. 3 to the Alexander & Baldwin, Inc. 1998 Stock
Option/Stock Incentive Plan (Exhibit 10.b.1.(xiii) to A&B's Form 10-Q
for the quarter ended March 31, 2005).
(xiv) Forms of Non-Qualified Stock Option Agreement and Restricted
Stock Issuance Agreement pursuant to the Alexander & Baldwin, Inc. 1998
Stock Option/Stock Incentive Plan (Exhibit 10.b.1.(xiii) to A&B's Form
10-Q for the quarter ended September 30, 2004).
(xv) Form of Performance-Based Restricted Stock Issuance Agreement
pursuant to the Alexander & Baldwin, Inc. 1998 Stock Option/Stock
Incentive Plan (Exhibit 10.1 to A&B's Form 8-K dated January 27, 2006).
(xvi) Alexander & Baldwin, Inc. 1998 Non-Employee Director Stock Option
Plan (Exhibit 10.b.1.(xxxiii) to A&B's Form 10-Q for the quarter ended
March 31, 1998).
(xvii) Amendment No. 1 to the Alexander & Baldwin, Inc. 1998
Non-Employee Director Stock Option Plan (Exhibit 10.b.1.(xiii) to A&B's
Form 10-K for the year ended December 31, 2000).
(xviii) Amendment No. 2 to the Alexander & Baldwin, Inc. 1998
Non-Employee Director Stock Option Plan, dated February 26, 2004
(Exhibit 10.b.1.(xiv) to A&B's Form 10-Q for the quarter ended March
31, 2004).
(xix) Amendment No. 3 to the Alexander & Baldwin, Inc. 1998
Non-Employee Director Stock Option Plan, dated June 23, 2004 (Exhibit
10.b.1.(xvi) to A&B's Form 10-Q for the quarter ended June 30, 2004).
(xx) Alexander & Baldwin, Inc. Non-Employee Director Stock Retainer
Plan, dated June 25, 1998 (Exhibit 10.b.1.(xxxiv) to A&B's Form 10-Q
for the quarter ended June 30, 1998).
(xxi) Amendment No. 1 to Alexander & Baldwin, Inc. Non-Employee
Director Stock Retainer Plan, effective December 9, 1999 (Exhibit
10.b.1.(xi) to A&B's Form 10-K for the year ended December 31, 1999).
(xxii) A&B Deferred Compensation Plan for Outside Directors (Exhibit
10.c.1.(xviii) to A&B's Form 10-K for the year ended December 31,
1985).
(xxiii) Amendment No. 1 to A&B Deferred Compensation Plan for Outside
Directors, effective October 27, 1988 (Exhibit 10.c.1.(xxix) to A&B's
Form 10-Q for the quarter ended September 30, 1988).
(xxiv) A&B Excess Benefits Plan, Amended and Restated effective
February 1, 1995 (Exhibit 10.b.1.(xx) to A&B's Form 10-K for the year
ended December 31, 1994).
(xxv) Amendment No. 1 to the A&B Excess Benefits Plan, dated June 26,
1997 (Exhibit 10.b.1.(xxxi) to A&B's Form 10-Q for the quarter ended
June 30, 1997).
(xxvi) Amendment No. 2 to the A&B Excess Benefits Plan, dated December
10, 1997 (Exhibit 10.b.1.(xx) to A&B's Form 10-K for the year ended
December 31, 1997).
(xxvii) Amendment No. 3 to the A&B Excess Benefits Plan, dated April
23, 1998 (Exhibit 10.b.1.(xxxv) to A&B's Form 10-Q for the quarter
ended June 30, 1998).
(xxviii) Amendment No. 4 to the A&B Excess Benefits Plan, dated June
25, 1998 (Exhibit 10.b.1.(xxxvi) to A&B's Form 10-Q for the quarter
ended June 30, 1998).
(xxix) Amendment No. 5 to the A&B Excess Benefits Plan, dated December
9, 1998 (Exhibit 10.b.1.(xxii) to A&B's Form 10-K for the year ended
December 31, 1998).
(xxx) Amendment No. 6 to the A&B Excess Benefits Plan, dated October
25, 2000 (Exhibit 10.b.1.(xxviii) to A&B's Form 10-K for the year ended
December 31, 2000).
(xxxi) Amendment No. 7 to the A&B Excess Benefits Plan, dated October
22, 2003 (Exhibit 10.b.1.(xxvii) to A&B's Form 10-K for the year ended
December 31, 2003).
(xxxii) Restatement of the A&B Executive Survivor/Retirement Benefit
Plan, effective February 1, 1995 (Exhibit 10.b.1.(xxii) to A&B's Form
10-K for the year ended December 31, 1994).
(xxxiii) Amendment No. 1 to the A&B Executive Survivor/Retirement
Benefit Plan, dated October 25, 2000 (Exhibit 10.b.1.(xxx) to A&B's
Form 10-K for the year ended December 31, 2000).
(xxxiv) Restatement of the A&B 1985 Supplemental Executive Retirement
Plan, effective February 1, 1995 (Exhibit 10.b.1.(xxiv) to A&B's Form
10-K for the year ended December 31, 1994).
(xxxv) Amendment No. 1 to the A&B 1985 Supplemental Executive
Retirement Plan, dated August 27, 1998 (Exhibit 10.b.1.(xliii) to A&B's
Form 10-Q for the quarter ended September 30, 1998).
(xxxvi) Amendment No. 2 to the A&B 1985 Supplemental Executive
Retirement Plan, dated October 25, 2000 (Exhibit 10.b.1.(xxxiii) to
A&B's Form 10-K for the year ended December 31, 2000).
(xxxvii) Restatement of the A&B Retirement Plan for Outside Directors,
effective February 1, 1995 (Exhibit 10.b.1.(xxvi) to A&B's Form 10-K
for the year ended December 31, 1994).
(xxxviii) Amendment No. 1 to the A&B Retirement Plan for Outside
Directors, dated July 1, 1998 (Exhibit 10.b.1.(xlii) to A&B's Form 10-Q
for the quarter ended September 30, 1998).
(xxxix) Amendment No. 2 to the A&B Retirement Plan for Outside
Directors, dated October 25, 2000 (Exhibit 10.b.1.(xxxvi) to A&B's Form
10-K for the year ended December 31, 2000).
(xl) Amendment No. 3 to the A&B Retirement Plan for Outside Directors,
dated December 9, 2004 (Exhibit 10.b.1.(xxxix) to A&B's Form 10-K for
the year ended December 31, 2004).
(xli) Amendment No. 4 to the A&B Retirement Plan for Outside Directors,
dated February 24, 2005 (Exhibit 10.1 to A&B's Form 8-K dated February
23, 2005).
(xlii) Form of Severance Agreement entered into with certain executive
officers, as amended and restated effective August 24, 2000 (Exhibit
10.b.1.(xli) to A&B's Form 10-Q for the quarter ended September 30,
2000). Schedule to Form of Severance Agreement entered into with
certain executive officers, as amended and restated effective August
23, 2004 (Exhibit 10.b.1.(xxxix) to A&B's Form 10-Q for the quarter
ended June 30, 2004).
(xliii) Form of Agreement entered into with certain executive officers,
effective January 1, 2006. Schedule to Form of Agreement entered into
with certain executive officers (Exhibit 10.2 to A&B's Form 8-K dated
January 27, 2006).
(xliv) Alexander & Baldwin, Inc. Executive Severance Plan, effective
January 1, 2006 (Exhibit 10.3 to A&B's Form 8-K dated December 7,
2005).
(xlv) Alexander & Baldwin, Inc. One-Year Performance Improvement
Incentive Plan, as restated effective October 22, 1992 (Exhibit
10.b.1.(xxi) to A&B's Form 10-K for the year ended December 31, 1992).
(xlvi) Amendment No. 1 to the Alexander & Baldwin, Inc. One-Year
Performance Improvement Incentive Plan, dated December 13, 2001
(Exhibit 10.b.1.(xxxvii) to A&B's Form 10-K for the year ended December
31, 2001).
(xlvii) Amendment No. 2 to the Alexander & Baldwin, Inc. One-Year
Performance Improvement Incentive Plan, dated February 25, 2004
(Exhibit 10.b.1.(xxxix) to A&B's Form 10-Q for the quarter ended March
31, 2004).
(xlviii) Amendment No. 3 to the Alexander & Baldwin, Inc. One-Year
Performance Improvement Incentive Plan, dated December 7, 2005 (Exhibit
10.2 to A&B's Form 8-K dated December 7, 2005).
(xlix) Alexander & Baldwin, Inc. Three-Year Performance Improvement
Incentive Plan, as restated effective October 22, 1992 (Exhibit
10.b.1.(xxii) to A&B's Form 10-K for the year ended December 31, 1992).
(l) Alexander & Baldwin, Inc. Deferred Compensation Plan effective
August 25, 1994 (Exhibit 10.b.1.(xxv) to A&B's Form 10-Q for the
quarter ended September 30, 1994).
(li) Amendment No. 1 to the Alexander & Baldwin, Inc. Deferred
Compensation Plan, effective July 1, 1997 (Exhibit 10.b.1.(xxxii) to
A&B's Form 10-Q for the quarter ended June 30, 1997).
(lii) Amendment No. 2 to the Alexander & Baldwin, Inc. Deferred
Compensation Plan, dated June 25, 1998 (Exhibit 10.b.1.(xxxvii) to
A&B's Form 10-Q for the quarter ended June 30, 1998).
(liii) Amendment No. 3 to the Alexander & Baldwin, Inc. Deferred
Compensation Plan, dated October 25, 2000 (Exhibit 10.b.1.(xliii) to
A&B's Form 10-K for the year ended December 31, 2000).
(liv) Amendment No. 4 to the Alexander & Baldwin, Inc. Deferred
Compensation Plan, dated December 7, 2005 (Exhibit 10.1 to A&B's Form
8-K dated December 7, 2005).
(lv) Alexander & Baldwin, Inc. Restricted Stock Bonus Plan, as restated
effective April 28, 1988 (Exhibit 10.c.1.(xi) to A&B's Form 10-Q for
the quarter ended June 30, 1988).
(lvi) Amendment No. 1 to the Alexander & Baldwin, Inc. Restricted Stock
Bonus Plan, effective December 11, 1997 (Exhibit 10.b.1.(ii) to A&B's
Form 10-K for the year ended December 31, 1997).
(lvii) Amendment No. 2 to the Alexander & Baldwin, Inc. Restricted
Stock Bonus Plan, dated June 25, 1998 (Exhibit 10.b.1.(xxxviii) to
A&B's Form 10-Q for the quarter ended June 30, 1998).
(lviii) Amendment No. 3 to the Alexander & Baldwin, Inc. Restricted
Stock Bonus Plan, dated December 8, 2004 (Exhibit 10.b.1.(liii) to
A&B's Form 10-K for the year ended December 31, 2004).
21. Subsidiaries.
21. Alexander & Baldwin, Inc. Subsidiaries as of February 18, 2006.
23. Consent of Deloitte & Touche LLP dated February 24, 2006.
31.1 Certification of Chief Executive Officer, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer, as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32. Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ALEXANDER & BALDWIN, INC.
(Registrant)
Date: February 24, 2006 By /s/ W. Allen Doane
-----------------------------------
W. Allen Doane, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ W. Allen Doane President and Chief February 24, 2006
------------------------------- Executive Officer and
W. Allen Doane Director
/s/ Christopher J. Benjamin Senior Vice President February 24, 2006
------------------------------- and Chief Financial
Christopher J. Benjamin Officer
/s/ Thomas A. Wellman Vice President, February 24, 2006
------------------------------- Controller and
Thomas A. Wellman Treasurer
/s/ Charles M. Stockholm Chairman of the Board February 24, 2006
------------------------------- and Director
Charles M. Stockholm
/s/ Michael J. Chun Director February 24, 2006
-------------------------------
Michael J. Chun
/s/ Walter A. Dods, Jr. Director February 24, 2006
-------------------------------
Walter A. Dods, Jr.
/s/ Charles G. King Director February 24, 2006
-------------------------------
Charles G. King
/s/ Constance H. Lau Director February 24, 2006
--------------------------------
Constance H. Lau
/s/ Carson R. McKissick Director February 24, 2006
-------------------------------
Carson R. McKissick
/s/ Douglas M. Pasquale Director February 24, 2006
-------------------------------
Douglas M. Pasquale
/s/ Maryanna G. Shaw Director February 24, 2006
-------------------------------
Maryanna G. Shaw
/s/ Jeffrey N. Watanabe Director February 24, 2006
-------------------------------
Jeffrey N. Watanabe
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statements
33-31922, 33-31923, 33-54825, and 333-69197 on Form S-8 of our reports dated
February 24, 2006, relating to the financial statements of Alexander & Baldwin,
Inc. and subsidiaries and management's report on the effectiveness of internal
control over financial reporting, appearing in this Annual Report on Form 10-K
of Alexander & Baldwin, Inc. and subsidiaries for the year ended December 31,
2005.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Honolulu, Hawaii
February 24, 2006