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, 2006
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:
Name of each exchange
Title of each class on which registered
------------------- ---------------------
Common Stock, without par value NASDAQ
Securities registered pursuant to Section 12(g) of the Act:
None
Number of shares of Common Stock outstanding at February 16, 2007:
42,877,919
Aggregate market value of Common Stock held by non-affiliates at June 30, 2006
$1,870,984,515
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. [X]
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 12, 2007 (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.............................. 5
B. Real Estate........................................... 6
(1) General...................................... 6
(2) Planning and Zoning.......................... 7
(3) Residential Projects......................... 7
(4) Commercial Properties........................ 9
C. Agribusiness.......................................... 11
(1) Production................................... 11
(2) Marketing of Sugar and Coffee................ 12
(3) Sugar Competition and Legislation............ 12
(4) Coffee Competition and Prices................ 13
(5) Properties and Water......................... 13
D. Employees and Labor Relations......................... 14
E. Energy................................................ 15
F. Available Information................................. 16
Item 1A. Risk Factors.......................................... 16
Item 1B. Unresolved Staff Comments............................. 23
Item 3. Legal Proceedings..................................... 23
Item 4. Submission of Matters to a Vote of Security Holders... 24
Executive Officers of the Registrant.................................... 24
PART II
Item 5. Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of
Equity Securities..................................... 25
Item 6. Selected Financial Data............................... 28
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 30
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk.................................................. 49
Item 8. Financial Statements and Supplementary Data........... 51
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure................... 94
Item 9A. Controls and Procedures............................... 94
A. Disclosure Controls and Procedures.................... 94
B. Internal Control over Financial Reporting............. 94
Item 9B. Other Information..................................... 94
PART III
Item 10. Directors, Executive Officers and Corporate
Governance............................................ 95
A. Directors............................................. 95
B. Executive Officers.................................... 95
C. Corporate Governance.................................. 96
D. Code of Ethics........................................ 96
Item 11. Executive Compensation................................ 96
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters........ 96
Item 13. Certain Relationships and Related Transactions,
and Director Independence............................. 96
Item 14. Principal Accountant Fees and Services................ 96
PART IV
Item 15. Exhibits and Financial Statement Schedules............ 97
A. Financial Statements.................................. 97
B. Financial Statement Schedules......................... 97
C. Exhibits Required by Item 601 of Regulation S-K....... 97
Signatures.............................................................. 106
Consent of Independent Registered Public Accounting Firm................ 108
ALEXANDER & BALDWIN, INC.
FORM 10-K
Annual Report for the Fiscal Year
Ended December 31, 2006
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 agribusiness
operations are conducted by A&B and certain other subsidiaries of A&B.
The business industries of A&B are generally as follows:
A. Transportation - carrying freight, primarily between various
U.S. Pacific Coast, Hawaii, Guam, other Pacific island, and
China ports; chartering vessels to third parties; arranging
domestic and international rail intermodal service, long-haul
and regional highway brokerage, specialized hauling, flat-bed
and project work, less-than-truckload and expedited/air
freight services; 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. Agribusiness - 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, to the extent not used in
A&B's factory operations, electricity.
For information about the revenue, operating profits and identifiable
assets of A&B's industry segments for the three years ended December 31, 2006,
see Note 13 ("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 2006, Matson carried approximately 173,200 containers
(compared with 175,800 in 2005) and 118,700 automobiles (compared with 148,100
in 2005) 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 majority 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 certain islands in Micronesia. In 2006,
Matson carried approximately 15,100 containers (compared with 16,600 in 2005)
and 3,200 automobiles (compared with 4,500 in 2005) in the Guam Service.
Matson replaced its prior Guam Service upon termination of its alliance
with American President Lines, Ltd. ("APL") with an integrated Hawaii/Guam/China
service that began in February 2006. The service employs five Matson
containerships 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.
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. This service was improved and
Matson's costs were reduced in August 2006 when Matson replaced its monthly
barge service to these islands with a bi-weekly ship service operating from
Guam. Cargo originating on the Pacific Coast and in Hawaii is sent to Guam on
the weekly Guam vessel and transferred to a ship chartered by Matson that sails
every two weeks to Kwajalein, Ebeye and Majuro. This ship also calls at ports on
the islands of Chuuck, Pohnpei and Kosrae in the eastern part of the Federated
States of Micronesia.
See "Rate Regulation" below for a discussion of Matson's freight rates.
(2) Vessels
Matson's fleet consists of 12 containerships, including one
containership time-chartered from a third party that serves Micronesia; three
combination container/trailerships, including a combination ship time-chartered
from a third party; one roll-on/roll-off barge and two container barges equipped
with cranes that serve the neighbor islands of Hawaii; and one container barge
equipped with cranes that is available for charter. The 17 Matson-owned vessels
in the fleet represent an investment of approximately $1.1 billion expended over
the past 28 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 Philadelphia Shipyard, Inc. ("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, was delivered in July of 2006. The purchase price for the MV
Maunalei also included approximately $3.2 million of interest incurred by Aker
during construction, which, together with other adjustments, resulted in a total
purchase price to $146.6 million. The purchase of the MV Maunalei was funded
with the CCF, operating cash flows and a secured revolving credit facility that
was executed on June 28, 2005. No progress payments were required under the
contract; accordingly, payment in full was made upon delivery. Also, in February
2005, Matson entered into a right of first refusal agreement with Aker, which
provides that, after the MV Maunalei was 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 26,200
containers, 11,700 container chassis, 1,100 auto-frames and miscellaneous other
equipment. Capital expenditures incurred by Matson in 2006 for vessels,
equipment and systems totaled approximately $222 million.
In July 2005, Matson entered into two agreements with the United States
Maritime Administration ("Marad") to manage three of Marad's ready reserve
vessels. The contract for two of the vessels was canceled at the convenience of
Marad, and not as a result of any fault of Matson, effective July 29, 2006, with
the payment of a cancellation fee to Matson. 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 was extended for one year, with the
possibility of an additional one-year extension, and the per diem rate was
increased.
(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 421,500 containers in 2006 (compared
with 417,500 in 2005). 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 2006 was 1.7 million lifts.
Capital expenditures incurred by Matson Terminals in 2006 for terminals
and equipment totaled approximately $2 million.
(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 seven regional operating centers, has 30 sales offices, and
operates through a network of agents throughout the U.S. mainland.
(5) Competition
Matson's Hawaii Service and Guam Service have one major containership
competitor that serves Long Beach, Oakland, Tacoma, Honolulu and Guam. The
Hawaii Service also has one additional liner competitor that operates a pure car
carrier ship, specializing in the carriage of automobiles and large pieces of
rolling stock such as trucks and buses.
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 NAVIGATION COMPANY, INC.
OWNED FLEET
-----------
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
--------------------
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 -- --
MAUNALEI............ 1181627 2006 -- 681' 1" 22.1 33,771 4 -- 1,188 -- 300 2,400 -- --
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
LIHUE............... 530137 1971 1978 787' 8" 21.0 38,656 286 276 681 -- 188 1,979 -- --
Barges
------
WAIALEALE (2)....... 978516 1991 -- 345' 0" -- 5,621 -- -- -- -- 35 -- 230 45
MAUNA KEA (3)(4).... 933804 1988 -- 372' 0" -- 6,837 -- 276 24 -- 70 380 -- --
MAUNA LOA (3)....... 676973 1984 -- 350' 0" -- 4,658 -- 144 72 -- 84 316 -- --
HALEAKALA (3)....... 676972 1984 -- 350' 0" -- 4,658 -- 144 72 -- 84 316 -- --
Molasses
----------
Vessel Name Short Tons
----------- ----------
Diesel-Powered Ships
--------------------
R.J. PFEIFFER....... --
MOKIHANA............ --
MANULANI............ --
MAHIMAHI............ --
MANOA............... --
MANUKAI............. --
MAUNAWILI........... --
MAUNALEI............ --
Steam-Powered Ships
-------------------
KAUAI............... 2,600
MAUI................ 2,600
MATSONIA............ 4,300
LURLINE............. 2,100
LIHUE .............. --
Barges
------
WAIALEALE (2)....... --
MAUNA KEA (3)(4).... --
MAUNA LOA (3)....... 2,100
HALEAKALA (3)....... 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) Roll-on/Roll-off Barge.
(3) Container Barge.
(4) Formerly named "Islander."
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. Matson operates over 200 sailings
per year, double the westbound voyages of its nearest competitor, and arranges
additional sailings when cargo volumes require additional capacity. One
westbound sailing each week continues on to Guam and China, so the number of
eastbound sailings from Hawaii to the U.S. mainland is over 150 per year with
the potential for additional sailings. 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 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 competes 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 ("zone of reasonableness"). Effective January 1,
2006, Matson increased its rates in its Hawaii Service by $125 per westbound
container and $75 per eastbound container, and its terminal handling charge by
$60 per westbound container and $30 per eastbound container. Matson also
announced increases to its rates in its Hawaii Service effective January 1,
2007, by $100 per westbound container and $50 per eastbound container, and its
terminal handling charge by $150 per westbound container and $75 per eastbound
container. Due to increases in fuel costs in the first half of 2006, Matson
increased its fuel surcharge in its Hawaii and Guam Services from 13 percent to
15 percent, effective January 1, 2006; to 18.5 percent, effective April 2, 2006;
and to 21.25 percent, effective June 4, 2006. As a result of subsequent declines
in fuel costs, Matson decreased its fuel surcharge to 19.75 percent, effective
October 1, 2006, to 18.75 percent, effective November 5, 2006, and to 17.5
percent, effective January 28, 2007. In mid-February, due to increases in fuel
costs, Matson announced an increase in its fuel surcharge to 19.5 percent,
effective March 11, 2007. Matson's new China Service is 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, 2006, A&B and its subsidiaries, including A&B
Properties, Inc., owned approximately 89,440 acres, consisting of approximately
89,195 acres in Hawaii and approximately 245 acres elsewhere, as follows:
Location No. of Acres
-------- ------------
Maui ................................................ 68,650
Kauai ............................................... 20,515
Oahu ................................................ 30
------
TOTAL HAWAII....................................... 89,195
======
California .......................................... 80
Texas ............................................... 50
Washington .......................................... 15
Arizona ............................................. 30
Nevada .............................................. 20
Colorado ............................................ 15
Utah ................................................ 35
------
TOTAL MAINLAND..................................... 245
======
As described more fully in the table below, the bulk of this acreage
currently is used for agricultural, pasture, watershed and conservation
purposes. A portion of these lands is used or planned for development or other
urban uses. An additional 2,870 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) ..................... 605
Agricultural, pasture and miscellaneous .................. 59,320
Watershed/conservation ................................... 29,270
U.S. Mainland
Fully entitled Urban ..................................... 245
------
TOTAL ............................................ 89,440
======
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:
Maui:
(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 1,200 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 2004 and 2005, A&B sold 29 single-family homesites at Wailea's Golf
Vistas subdivision and four bulk parcels: MF-4 (10.5 acres), MF-15 (9.4 acres),
MF-5 (8.4 acres) and MF-9 (30.2 acres). In 2006, A&B continued planning, design
and permitting work on three parcels (30.3 acres): MF-11 (10.6 acres), MF-19
(6.7 acres) and MF-7 (13.0 acres). In 2006, a three-acre business parcel at
MF-11 was sold and construction of 12 single-family lots are expected to
commence in 2007. The MF-19 parcel is planned for nine half-acre estate lots,
and the MF-7 parcel is planned for 80 multi-family units. During 2006, A&B also
proceeded with a joint venture development on MF-8 (Kai Malu), as described
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 into 150 duplex units, averaging 1,800 square feet per unit. In 2006, all
150 units were sold under binding contracts at an average price of $1.3 million.
Vertical construction commenced in October 2005 and the first units closed in
October 2006. A total of 22 units closed in 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. In 2006, onsite infrastructure design work was
submitted to county agencies and preliminary large lot subdivision approval was
granted in August. A&B continues to work on the development of a water source.
Kauai:
(d) Kukui`ula. In April 2002, A&B entered into a joint venture with an
affiliate of DMB Associates, Inc., an Arizona-based developer of master planned
communities, for the development of Kukui`ula, a 1,000-acre master planned
resort residential community located in Poipu, Kauai, planned for approximately
1,200 high-end residential units. In 2004, A&B exercised its option to
contribute to the joint venture up to 40 percent of the project's future capital
requirements. Several key construction and subdivision plan approvals were
obtained in 2006 for major roadways and subdivision parcels Y (88 lots) and
M-1/M-4 (35 lots). Civil construction of roadways, subdivision improvements and
water systems occurred in 2006. Closings commenced in the fourth quarter of
2006, with 17 lots closing at an average price of $1.9 million.
(e) Port Allen. This project covers 17 acres in Port Allen, Kauai, and
is planned for 75 condominium units and 60 single-family homes. Final county
subdivision approval was obtained in the first quarter of 2006. However,
unusually heavy rains in early 2006 and county-required changes to the elevation
of the condominium project resulted in construction delays. Civil construction
commenced in November 2005 and vertical construction of the single-family homes
commenced in October 2006. As of mid-February 2007, there were 55 binding
contracts for the 58 released homes and 44 non-binding contracts for the 48
released condominium units. The first homes are expected to close in mid-2007.
Oahu:
(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 at an average
price of $1.1 million.
(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 residential units, averaging
970 square feet, located on 37 residential floors above a five-story parking
garage. As required by the State, 63 of the units ("Reserve Units") have been
designated for sale to buyers earning not more than 140 percent of the Honolulu
median income. Sales and marketing commenced for the market-priced units
("Market Units") in mid-2005 and for the Reserve Units in late-2006. As of the
middle of February 2007, 227 Market Units and 58 of the Reserve Units were under
binding contracts, with the remaining Reserve Units under non-binding contracts.
(h) Waiawa. In August 2006, A&B closed a joint venture agreement with
an affiliate of Gentry Investment Properties (Waiawa Development LLC), for the
development of 530 residential-zoned acres in Central Oahu. The venture will act
as the master developer for the project, planned for 5,000 residential units,
and will be selling parcels to homebuilders. Construction plans are progressing
on the project's major offsite infrastructure and parcel subdivisions, with
construction expected to commence in 2008.
(i) Kakaako Waterfront. In September 2005, A&B was selected by the
Hawaii Community Development Authority, a state agency, to be the developer of
its Kakaako Waterfront project. In early 2006, legislation was passed
prohibiting residential development within the project, causing A&B to withdraw
as the developer of the project.
Big Island of Hawaii:
(j) 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. The project
is planned for 37 single-family units (averaging 2,330 square feet) and 100
duplex townhomes (averaging 2,040 square feet). Mass grading began in October
2005. The project's model home was completed in September 2006. Construction has
commenced on the first phase of 24 units, where, as of mid-February 2007, there
were 15 binding contracts at an average price of $1.3 million.
(4) Commercial Properties
An important source of property revenue is the lease rental income A&B
receives from its portfolio of commercial income properties, currently
consisting of approximately 5.3 million leasable square feet of commercial
building space.
(a) Hawaii Properties
A&B's Hawaii commercial properties portfolio consists of retail, office
and industrial properties, comprising approximately 1.5 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 98 percent in 2006, compared to
93 percent in 2005. In March 2006, A&B sold One Main Plaza, an
82,000-square-foot office building in Wailuku, Maui. In December 2006, A&B sold
Lanihau Shopping Center, an 88,200-square-foot retail center, and option rights
to 23 acres of adjacent vacant commercial-zoned land, in Kona, Hawaii. In
November 2006, A&B completed the construction of two single-tenant buildings at
Triangle Square in Kahului, Maui.
The primary Hawaii commercial properties are as follows:
Leasable Area
Property Location Type (sq. ft.)
-------- -------- ---- ---------
Maui Mall......................... Kahului, Maui Retail 191,300
Mililani Shopping Center.......... Mililani, Oahu Retail 180,300
Pacific Guardian Complex.......... Honolulu, Oahu Office 143,200
Kaneohe Bay Shopping Center....... Kaneohe, Oahu Retail 124,500
P&L Warehouse..................... Kahului, Maui Industrial 104,100
Port Allen........................ Port Allen, Kauai Industrial/Retail 87,900
Hawaii Business Park.............. Pearl City, Oahu Industrial 85,200
Triangle Square................... Kahului, Maui Retail 65,400
Wakea Business Center............. Kahului, Maui Industrial/Retail 61,500
Kunia Shopping Center............. Waipahu, Oahu Retail 60,600
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 35,000
Kahului Office Center............. Kahului, Maui Office 32,800
Stangenwald Building.............. Honolulu, Oahu Office 27,100
Judd Building..................... Honolulu, Oahu Office 20,200
Other commercial projects are discussed below:
(i) Maui Business Park. In April 2004, A&B filed a zoning change
application with the County of Maui for the re-zoning of 179 acres in Kahului,
Maui, representing the second phase of its Maui Business Park project, from
agriculture to light industrial. Since May 2005, the zoning change application
has been with the County Council, but due to a large backlog of projects pending
before the Council's Land Use Committee, a hearing was not scheduled in 2006.
(ii) 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
2006, the last three lots were sold.
(b) U.S. Mainland 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 June 2006, A&B completed the sales of Carefree Marketplace, an
85,000-square-foot retail center in Carefree, Arizona, and Mesa South Shopping
Center, a 133,700-square-foot retail center in Phoenix, Arizona. In January
2006, A&B acquired Ninigret Office Park X and XI, a 185,200-square-foot office
complex in Salt Lake City, Utah. In June 2006, A&B acquired Gateway Oaks, a
58,700-square-foot office building in Sacramento, California and 1800 and 1820
Preston Park, a 198,500-square-foot, two-building office complex in Plano,
Texas. In December 2006, A&B completed the acquisition of Concorde Commerce
Center, a 138,500-square-foot office building in Phoenix, Arizona. A&B's
Mainland portfolio currently includes approximately 3.85 million square feet of
leasable area, comprising six retail centers, nine 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
1800 and 1820 Preston Park.............. Plano, TX Office 198,500
Ninigret Office Park X and XI........... Salt Lake City, UT Office 185,200
Boardwalk Shopping Center............... Round Rock, TX Retail 184,600
San Pedro Plaza......................... San Antonio, TX Office 171,800
2868 Prospect Park...................... Sacramento, CA Office 162,900
Arbor Park Shopping Center.............. San Antonio, TX Retail 139,500
Concorde Commerce Center................ Phoenix, AZ Office 138,500
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 100,000
Broadlands Marketplace.................. Broomfield, CO Retail 97,900
Marina Shores Shopping Center........... Long Beach, CA Retail 67,700
2890 Gateway Oaks....................... Sacramento, CA Office 58,700
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 98 percent in 2006, compared to 95 percent in 2005.
In 2002, A&B began development activities in 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 are
currently under development in Valencia:
(i) Crossroads Plaza. In June 2004, A&B entered into a joint venture
with Intertex Hasley, LLC, for the development of a 60,000-square-foot mixed-use
neighborhood retail center on 6.5 acres. The property was acquired in August
2004. Sitework commenced in 2006. The retail space is substantially pre-leased,
and construction is progressing.
(ii) Centre Pointe Marketplace. In April 2005, A&B entered into a joint
venture with Intertex Centre Pointe Marketplace, LLC for the development of a
104,700-square-foot retail center on a 10.2-acre parcel. The project is
substantially pre-leased, and vertical construction is underway.
(iii) Bridgeport Marketplace. In July 2005, A&B entered into a joint
venture with Intertex Bridgeport Marketplace, LLC for the development of a
27.8-acre parcel. The property is planned to be subdivided into a 5-acre parcel
for a public park, a 7.3-acre parcel for sale to a church, and a 15.5-acre
parcel for the development of a 128,600-square-foot retail center. Mass grading
is complete and the retail center is substantially pre-leased.
In October 2004, a joint venture between A&B and Intertex Properties,
LLC acquired a 5.4-acre parcel in Valencia 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.
In November 2006, A&B expanded its development activities to
Bakersfield, California and entered into a joint venture with Intertex P&G
Retail, LLC for the development of a 600,000-square-foot retail center on a
57.3-acre parcel. Design and pre-leasing activities are underway and a
preliminary site plan was submitted to the Bakersfield Planning Department.
C. Agribusiness
(1) Production
A&B has been engaged in the production of cane sugar in Hawaii since
1870, and the production of coffee in Hawaii since 1987. A&B's current
agribusiness 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, and (3) its Kahului Trucking &
Storage, Inc. ("KT&S") and Kauai Commercial Company, Incorporated ("KCC")
subsidiaries, which provide all types of trucking services, including sugar and
molasses hauling on Maui and Kauai, mobile equipment maintenance and repair
services on Maui, Kauai, and the Big Island, and self-service storage facilities
on Maui and Kauai.
HC&S is Hawaii's largest producer of raw sugar, producing approximately
173,600 tons of raw sugar in 2006, or about 81 percent of the raw sugar produced
in Hawaii for the year (compared with 192,700 tons, or about 76 percent, in
2005). The decrease in production was primarily due to yield losses from a
drought during growing months, a lower crop age, and fertilizing and other
farming issues. Total Hawaii sugar production amounted to approximately 3
percent of total U.S. sugar production in 2006. HC&S harvested 16,950 acres of
sugar cane in 2006 (compared with 16,639 in 2005). Yields averaged 10.2 tons of
sugar per acre in 2006 (compared with 11.6 in 2005). As a by-product of sugar
production, HC&S also produced approximately 55,900 tons of molasses in 2006
(compared with 57,100 in 2005).
In 2006, approximately 15,500 tons of sugar (compared with 18,900 tons
in 2005) were processed by HC&S into specialty food-grade raw sugars that were
sold under HC&S's Maui Brand(R) trademark or repackaged by distributors under
their own labels. A further expansion of the production facilities for these
sugars commenced in 2006.
During 2006, Kauai Coffee had approximately 3,100 acres of coffee trees
under cultivation. The 2006 harvest yielded approximately 2.7 million pounds of
green coffee (compared with 1.8 million pounds in 2005). In addition to higher
yields, the mix of green coffee resulted in a higher percentage of specialty and
mid-grade green beans and a lower percentage of commodity grade green beans. The
higher yield and favorable green bean mix are attributable to improved plant
nutrition and reduced 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"), in 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. As mentioned above,
approximately 9 percent of the raw sugar is used by HC&S to produce specialty
food-grade raw sugars, which is sold by HC&S 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 2006 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.
Kauai Coffee's customers include specialty and commodity brokers, hotels, and
large regional roasters.
(3) Sugar Competition and 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 amounted 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-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
JAN-06 23.61
FEB 23.85
MAR 23.10
APR 23.56
MAY 23.48
JUN 23.35
JUL 22.44
AUG 21.28
SEP 21.27
OCT 20.23
NOV 19.76
DEC 19.61
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.
(4) Coffee Competition and Prices
Kauai Coffee competes with coffee growers located worldwide, including
in Hawaii. Coffee commodity prices have largely recovered from near record lows.
The market for specialty coffee in the United States is very
competitive. Because of its quality and branding, Kauai Coffee has been
successful at selling most of its coffee at a premium above commodity market
prices. Kauai Coffee has long-term, repeat customers that account for the bulk
of its sales, though there is strong competition and the contracts are subject
to renegotiation each year.
Approximately one-fifth of Kauai Coffee's production is off-grade
coffees, which are loosely tied to world commodity market prices. Kauai Coffee
engages in short-term contracts with established customers to ensure that it
receives the best price possible for these coffees. These prices are subject to
price adjustments on an annual basis.
Kauai Coffee's business is dependent upon the supply of green coffee.
Green coffee production volume and unit costs vary each year depending upon
farming conditions. The unit cost per pound impacts the cost of goods for Kauai
Coffee's wholesale roasted and retail programs.
(5) Properties and Water
The HC&S sugar plantation, the largest in Hawaii, consists of
approximately 43,300 acres, including a small portion of leased lands.
Approximately 35,100 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.
The Hawaii Legislature, in 2005, passed Important Agricultural Lands
("IAL") legislation to protect agricultural lands, promote diversified
agriculture, increase the State's agricultural self-sufficiency, and assure the
availability of agriculturally suitable lands, and is currently considering a
package of incentives whose passage is necessary to trigger the IAL system of
land designation. Under the 2005 legislation, either the landowners or the
counties may propose lands to be designated as IAL, subject to the approval of
the SLUC. If a majority of a landowner's landholdings (excluding conservation
lands) are designated as IAL pursuant to the voluntary landowner petition
process, no additional lands may be so designated by the SLUC, unless otherwise
proposed by the landowner. Lands designated IAL shall not be reclassified by the
State or rezoned by the counties unless such lands meet the standards and
criteria established by the Legislature, and such reclassification or rezoning
is approved by the State or applicable county, respectively, by a two-thirds
vote. Lands designated IAL shall also be eligible for certain incentives,
intended to support agricultural activity on these lands. The IAL incentives,
which are currently being considered by the Legislature, may include tax credits
for agricultural investments and regulatory relief. The IAL system will not take
effect until the Legislature has established the agricultural incentives to be
provided to IAL. A&B continues to work with the Legislature, as well as other
farmers and landowners, to ensure a satisfactory package of agricultural
incentives is provided for IAL.
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 and other legal
proceedings affecting A&B's use of or access to irrigation water, see "Legal
Proceedings" below.
D. Employees and Labor Relations
As of December 31, 2006, A&B and its subsidiaries had approximately
2,197 regular full-time employees. About 1,014 regular full-time employees were
engaged in the agribusiness segment, 1,061 were engaged in the transportation
segment, 51 were engaged in the real estate segment, and the balance was in
administration. Approximately 49 percent were covered by collective bargaining
agreements with unions.
At December 31, 2006, the active Matson fleet employed seagoing
personnel in 275 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 through June
2008 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 ("PMA") which, on behalf of its members, negotiates collective
bargaining agreements with the ILWU on the U.S. Pacific Coast. The current
six-year PMA/ILWU Master Contract, which covers all West Coast longshore labor,
will expire on June 30, 2008. 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 2006, 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 9 ("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. The bargaining unit employees at KT&S are also covered by two collective
bargaining agreements with the ILWU. The agreement with the bulk sugar employees
will expire June 30, 2008, while the agreement with all other employees was
renegotiated in 2006 and will expire March 31, 2009. There are two collective
bargaining agreements with KCC employees represented by the ILWU. The agreement
covering the production unit employees will expire April 30, 2007. The agreement
covering the clerical employees will expire April 30, 2007. The collective
bargaining agreement with the ILWU for the production unit employees of Kauai
Coffee expired January 31, 2007, and Kauai Coffee is in the process of
renegotiations.
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 2006, Matson vessels used
approximately 2.2 million barrels of residual fuel oil (compared with 1.8
million barrels in 2005).
Residual fuel oil prices paid by Matson started in 2006 at $48.70 per
barrel and ended the year at $45.86. The low for the year was $41.52 per barrel
in January and the high was $62.78 in October. Sufficient fuel for Matson's
requirements is expected to be available in 2007.
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 recycled motor oil to generate power during factory shutdown
periods when bagasse is not being produced. To the extent it is not used in
A&B's factory operations, HC&S sells electricity. In 2006, HC&S produced and
sold, respectively, approximately 208,000 MWH and 98,000 MWH of electric power
(compared with 219,000 MWH produced and 96,300 MWH sold in 2005). The increase
in power sold was due to management's 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 increased its use of oil from 10,800
barrels in 2005 to 28,500 barrels in 2006, most of which was low-cost, recycled
motor oil. Coal use for power generation was 59,700 short tons, slightly more
than that used in 2005.
In 2006, McBryde produced approximately 35,100 MWH of hydroelectric
power (about the same as that in 2005). To the extent it is not used in A&B's
coffee operations, McBryde sells electricity to Kauai Electric. Power sales in
2006 amounted to approximately 27,100 MWH (compared with 27,500 MWH in 2005).
F. Available Information
A&B files reports with the Securities and Exchange Commission (the
"SEC"). The reports and other information filed include: annual reports on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 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. All forward-looking statements made by the Company or
on the Company's behalf are qualified by the risks described below.
GENERAL
An economic decline or decrease in market demand for the Company's services and
products in Hawaii, the U.S. mainland, Guam or Asia may adversely affect the
Company's operating results and financial condition.
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 rates 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 or capacity by existing
competition on any of the Company's routes could result in a significant
increase in available shipping capacity that could have an 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 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'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 agribusiness 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 and availability may adversely affect the Company's profits.
Fuel is a significant operating expense for the Company's shipping and
agribusiness 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 based on market
and competitive conditions. Increases in fuel costs also can lead to other
expense increases, through, for example, increased costs of energy,
petroleum-based raw materials and purchased transportation services. In the
Company's ocean transportation and logistics segments, the Company is able to
utilize fuel surcharges to partially recover increases in fuel expense, although
increases in the fuel surcharge may adversely affect the Company's competitive
position and may not correspond exactly with the timing of increases in fuel
expense. Changes in the Company's ability to collect fuel surcharges may
adversely affect its results of operations. Rising fuel prices may also increase
the cost of construction, including delivery costs 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.
Changes to federal, state or local law or regulations 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, 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
impose significant additional costs on the Company and adversely affect the
Company's financial condition. For example, if the Jones Act and the regulations
promulgated thereunder were repealed, amended, or otherwise modified, non-U.S.
competitors with significantly lower costs may consequently enter any of the
Jones Act routes or the Company's business may be significantly altered, all of
which may have an adverse effect on the Company's shipping business.
Work stoppages or other labor disruptions by the unionized employees of the
Company or other companies in related industries may adversely affect the
Company's operations.
As of December 31, 2006, the Company had approximately 2,197 regular
full-time employees, of which approximately 49 percent were covered by
collective bargaining agreements with unions. The Company's transportation, real
estate and agribusiness segments may be adversely affected by actions taken by
employees of the Company or other companies in related industries against
efforts by management to control labor costs, restrain wage increases or modify
work practices. Strikes and disruptions may occur as a result of the failure of
the Company or other companies in its industry to negotiate collective
bargaining agreements with such unions successfully. For example, in its real
estate segment, the Company may be unable to complete construction of its
projects if building materials or labor is unavailable due to labor disruptions
in the relevant trade groups.
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, 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. The loss of or damage to any of these key relationships may affect the
Company's business adversely.
Interruption or failure of the Company's information technology and
communications systems could impair the Company's ability to operate and
adversely affect its business.
The Company is highly dependent on information technology systems. For
example, in the transportation segment, these dependencies primarily include
accounting, billing, disbursement, cargo booking and tracking, vessel scheduling
and stowage, equipment tracking, customer service, banking, payroll and employee
communication systems. All information technology and communication systems are
subject to reliability issues, integration and compatibility concerns, and
security-threatening intrusions. The Company may experience 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 or production, reducing its revenue and profits and
damaging its reputation.
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, all of which could have an adverse
effect on the Company's business.
For the real estate segment, the occurrence of natural disasters, such
as hurricanes, earthquakes, 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 agribusiness segment, drought, greater than normal rainfall,
hurricanes, earthquakes, tsunamis, floods, fires, other natural disasters or
agricultural pestilence may have an adverse effect on the sugar and coffee
planting, harvesting and production, and the agribusiness segment's facilities,
including dams and reservoirs.
Heightened security measures, war, actual or threatened terrorist attacks,
efforts to combat terrorism 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. Heightened security measures are likely
to slow the movement of freight through U.S. or foreign ports, across borders or
on U.S. or foreign railroads or highways and could adversely affect the
Company's business and results of operations.
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 and
skilled employees. 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.
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, and may
initiate future joint venture projects. A joint venture involves certain risks
such as:
o the Company may not have voting control over the joint
venture;
o the Company may not be able to maintain good relationships
with its joint venture partners;
o the venture partner at any time may have economic or
business interests that are inconsistent with the Company's;
o the venture partner may fail to fund its share of operations
and development activities, or to fulfill its other
commitments, including providing accurate and timely
accounting and financial information to the Company; and
o the joint venture or venture partner could lose key personnel.
In connection with its real estate joint ventures, the Company is
sometimes asked to guarantee completion of a joint venture's construction and
development of a project, or to indemnify a third party serving as surety for a
joint venture's bonds for such completion. If the Company were to become
obligated under such arrangement, the Company may be adversely affected.
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, 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. 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 an adverse effect on the Company's future operating results,
including profitability, cash flows, and financial condition. For a description
of significant legal proceedings involving the Company, see "Legal Proceedings"
below.
TRANSPORTATION
The Company is subject to risks associated with conducting business in a foreign
shipping market.
In February 2006, Matson launched its Hawaii/Guam/China service. The
Company is subject to risks associated with conducting business in a foreign
shipping market, which include:
o challenges in operating in a foreign country and doing
business and developing relationships with foreign companies;
o difficulties in staffing and managing foreign operations;
o legal and regulatory restrictions;
o decreases in shipping rates;
o competition with established and new shippers;
o difficulties in developing and establishing brand recognition;
o currency exchange rate fluctuations;
o political and economic instability; and
o challenges caused by cultural differences.
Any of these risks has the potential to adversely affect the Company's
operating results.
Acquisitions may have an adverse effect on the Company's business.
The Company's growth strategy, especially in logistics services,
includes expansion through acquisitions. Acquisitions may result in difficulties
in assimilating acquired companies, and may result in the diversion of the
Company's capital and its management's attention from other business issues and
opportunities. The Company may not be able to integrate companies that it
acquires successfully, including their personnel, financial systems,
distribution, operations and general operating procedures. The Company may also
encounter challenges in achieving appropriate internal control over financial
reporting in connection with the integration of an acquired company.
The Company's logistics services are dependent upon third parties for equipment,
capacity and services essential to operate their business, and if they fail to
secure sufficient third party services, their business could be adversely
affected.
The Company's logistics services are dependent upon rail, truck and
ocean transportation services provided by independent third parties. If they
cannot secure sufficient transportation equipment, capacity or services from
these third parties at a reasonable rate to meet their customers' needs and
schedules, customers may seek to have their transportation and logistics needs
met by other third parties on a temporary or permanent basis. As a result, the
Company's business, consolidated results of operations and financial condition
could be adversely affected.
The loss of several of the Company's logistics services major customers could
have an adverse effect on the Company's revenue and business.
The Company's logistics services derive a significant portion of their
revenues from their largest customers. For 2006, the Company's logistics
services' largest ten customers accounted for approximately 37% of the Company's
logistics services' revenue. A reduction in or termination of the Company's
logistics services by several of their largest customers could have an adverse
effect on the Company's revenue and business.
REAL ESTATE
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, or at all;
o construction delays or cost overruns, either of which may
increase project development costs;
o an increase in commodity or construction 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 or difficulty in complying with local, city,
county and state rules and regulations regarding permitting,
zoning, subdivision, utilities and water quality as well as
federal rules and regulations regarding air and water quality
and protection of endangered species and their habitats;
o an inability to have access to reliable sources of water;
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.
Any of these risks has the potential to adversely affect the Company's
future operating results.
A decline in leasing rental income could adversely affect the Company.
The Company owns a portfolio of commercial income properties. Factors
that may adversely affect the Company's profitability include:
o a significant number of the Company's tenants are unable to
meet their obligations;
o operating and ownership costs are materially higher than
anticipated;
o the Company is unable to lease space at its properties when
the space becomes available;
o the rental rates upon a renewal or a new lease are
significantly lower than expected; or
o the discovery of hazardous or toxic substances, or other
environmental problems.
Governmental entities have adopted or may adopt regulatory requirements that may
restrict the Company's development activity.
The Company is subject to extensive and complex laws and regulations
that affect the land development process, including laws and regulations related
to zoning and permitted land uses. Government entities have adopted or may
approve homebuilding regulations or laws that could negatively impact the
availability of land and building opportunities within those areas. In December
2006, Maui County adopted a Residential Workforce Housing Policy, which requires
developers of residential developments of five or more units to sell or rent 40%
to 50% of the total number of units at below market rates, or pay significant
fees or contribute property to the County for low-income housing. These
requirements could make the cost of developing new projects prohibitive. It is
possible that increasingly stringent requirements will be imposed on developers
in the future that could adversely affect the Company's ability to develop
projects in the affected markets or could require that the Company satisfy
additional administrative and regulatory requirements, which could delay
development progress or increase the development costs of the Company. Any such
delays or costs could have an adverse effect on the Company's revenues and
earnings.
AGRIBUSINESS
The unavailability of water for agricultural irrigation could adversely affect
the Company.
It is crucial for the Company's agribusiness segment to have access to
reliable sources of water for the irrigation of sugar cane and coffee. 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 an adverse effect on the Company's sugar operations.
A decline in raw sugar or coffee prices will adversely affect the Company's
business.
The business and results of operations of the Company's agribusiness
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 sugar or coffee were
to drop, the Company's agribusiness segment would be adversely affected. See
also discussion under "Business and Properties - Agribusiness - 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 poor farming practices;
o increases in costs, including, but not limited to fertilizer,
fuel, and drip tubing;
o water availability (see risk factor above regarding
unavailability of water);
o equipment failures in factory or power plant; and
o labor, including labor availability (see risk factor above
regarding labor disruptions).
Any of these risks has the potential to adversely affect the Company's
future agribusiness operating results.
OTHER
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 operating results, cash flows, 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 may have exposure under its multiemployer plans in which it
participate that extends beyond its funding obligation with respect to the
Company's employees.
The Company contributes to various multiemployer pension plans. In the
event of a partial or complete withdrawal by the Company from any plan which is
underfunded, the Company would be liable for a proportionate share of such
plan's unfunded vested benefits. Based on the limited information available from
plan administrators, which the Company cannot independently validate, the
Company believes that its portion of the contingent liability in the case of a
full withdrawal or termination may be material to its financial position and
results of operations. In the event that any other contributing employer
withdraws from any plan which is underfunded, and such employer (or any member
in its controlled group) cannot satisfy its obligations under the plan at the
time of withdrawal, then the Company, along with the other remaining
contributing employers, would be liable for its proportionate share of such
plan's unfunded vested benefits. In addition, if a multiemployer plan fails to
satisfy the minimum funding requirements, the Internal Revenue Service will
impose certain penalties and taxes.
The Company is required to evaluate its internal controls over financial
reporting under Section 404 of the Sarbanes-Oxley Act of 2002, and any adverse
results from such evaluation could result in a loss of investor confidence in
the Company's financial reports and have an adverse effect on the Company's
stock price.
Section 404 of the Sarbanes-Oxley Act requires that publicly reporting
companies cause their managements to perform annual assessments of the
effectiveness of their internal controls over financial reporting and their
independent auditors to prepare reports that address such assessments. Although
the Company has concluded that its internal controls over financial reporting
were effective as of December 31, 2006, there can be no assurances that the
Company will reach the same conclusion at the end of future years. If the
Company is unable to assert that its internal control over financial reporting
is effective, or if the Company's auditors are unable to attest that its
management's report is fairly stated or if they are unable to express an opinion
on the effectiveness of the Company's internal controls, the Company could lose
investor confidence in the accuracy and completeness of its financial reports,
which would have an adverse effect on the Company's stock price.
The foregoing should not be construed as an exhaustive list of all
factors that could cause actual results to differ materially from those
expressed in forward-looking statements made by the Company or on its behalf.
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. On February 2, 2007, the Board issued a decision, setting a briefing
schedule to determine whether there is effective competition in the Guam trade,
as requested by Matson. If the Board determines that there is effective
competition, it will dismiss the complaint. Otherwise, the Board will proceed to
investigate the reasonableness of the challenged rates using the Board's
Constrained Market Pricing methodology used in rail rate cases, rather than the
methodology proposed by the Government of Guam.
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. In
June 2006, the DOH proposed to HC&S a Consent Order in which HC&S would pay
$60,000 and implement a two-phase Supplemental Environment Project totaling at
least $305,000. Following a public comment period, HC&S and the DOH signed the
Consent Order in December 2006.
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.
On November 16, 2006, the Shipbuilders Council of America, Inc. and
Pasha Hawaii Transport Lines LLC filed a complaint against the U.S. Department
of Homeland Security, the U.S. Coast Guard and the National Vessel Documentation
Center in the U.S. District Court for the Eastern District of Virginia. The
complaint seeks review of a ruling by the National Vessel Documentation Center
that work to be performed on Matson's C9 vessels in foreign and U.S. shipyards
would not result in loss of coastwise trading privileges of the vessels. The
Coast Guard believes its ruling is correct and intends to vigorously defend its
decision. Matson is not named as a defendant, but Matson's motion to intervene
has been granted. In a separate but related matter, the same plaintiffs have
asked Marad to investigate the continued eligibility of nine of Matson's
vessels, including the three C9 vessels, to participate in the Capital
Construction Fund and cargo preference programs as a result of modifications
performed, or to be performed, in foreign shipyards. Marad is compiling a record
of the views submitted by the parties in interest, but has not made a decision
as to whether to conduct such an investigation. Matson believes that it has
conducted its activities in compliance with the law, long-standing precedents,
policies and regulations of the Coast Guard and Marad.
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 16, 2007, there were 3,521 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 Global
Market Issues section of major newspapers. Trading volume averaged 300,185
shares a day in 2006, compared with 298,182 shares a day in 2005 and 220,300 in
2004.
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 2006 and 2005, were as follows:
Market Price
Dividends ----------------------------------
Paid High Low Close
---- ---- --- -----
2006
----
First Quarter $ 0.225 $ 54.86 $ 46.60 $ 47.68
Second Quarter $ 0.250 $ 51.06 $ 40.50 $ 44.27
Third Quarter $ 0.250 $ 45.01 $ 39.29 $ 44.37
Fourth Quarter $ 0.250 $ 47.70 $ 42.73 $ 44.34
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
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 second quarter of 2006, and was increased from
22.5 cents per share to 25.0 cents per share. In 2006, dividend payments to
shareholders totaled $42.4 million which was 35 percent of reported net income
for the year. The following dividend schedule for 2007 has been set, subject to
final approval by the Board of Directors:
Quarterly Dividend Declaration Date Record Date Payment Date
------------------ ---------------- ----------- ------------
First January 25 February 16 March 1
Second April 26 May 10 June 7
Third June 28 August 2 September 6
Fourth October 25 November 8 December 6
A&B common stock is included in the Dow Jones U.S. Transportation
Average, the Russell 1000 Index, the Russell 3000 Index, the Dow Jones U.S.
Composite Average, and the S&P MidCap 400.
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, 2006, 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 1,557,056 $34.47 1,463,588*
approved by security holders
-----------------------------------------------------------------------------------------------------------------
Equity compensation plans -- -- 101,577**
not approved by security
holders
-----------------------------------------------------------------------------------------------------------------
Total 1,557,056 $34.47 1,565,165
-----------------------------------------------------------------------------------------------------------------
* Under the 1998 Stock Option/Stock Incentive Plan, 1,283,682 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
adopted on June 25, 1998, 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
restated effective April 28, 1988, 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 101,577 shares that were available for future issuance, 2,975
shares were available for future issuance under the Non-Employee
Director Stock Retainer Plan and 98,602 shares were available for
issuance under the Restricted Stock Bonus Plan.
During 2006, the Company repurchased 1,653,795 shares of its stock for
an average price of $43.34. There were no shares of A&B common stock repurchased
by the Company during 2005. During 2004, A&B repurchased 76,200 shares of its
stock for an average price of $29.95 per share. In October 2006, A&B's Board of
Directors authorized A&B to repurchase up to two million shares of its common
stock. The new authorization will expire on December 31, 2008. The shares
repurchased in 2006 were made under a previous share repurchase authorization
that expired on December 31, 2006.
During 2006, 5,629 shares were returned to the Company in connection
with the exercise of options to purchase shares of the Company's stock. The fair
value of these shares averaged $53.61 per share. None of these shares were
returned to the Company during the fourth quarter.
Issuer Purchases of Equity Securities
-----------------------------------------------------------------------------------------------------------------
Total Number of Maximum Number
Shares Purchased as of Shares that
Part of Publicly May Yet Be Purchased
Total Number of Average Price Announced Plans Under the Plans
Period Shares Purchased Paid per Share or Programs or Programs
-----------------------------------------------------------------------------------------------------------------
Oct 1 - 31, 2006 -- -- -- --
-----------------------------------------------------------------------------------------------------------------
Nov 1 - 30, 2006 108,453 (1) -- (1) 108,453 (1) 2,346,205 (2)
-----------------------------------------------------------------------------------------------------------------
Dec 1 - 31, 2006 -- -- -- --
-----------------------------------------------------------------------------------------------------------------
(1) On June 27, 2006, A&B entered into an accelerated share repurchase
agreement ("ASR") with Goldman, Sachs & Co. ("Goldman") to repurchase
shares of A&B's common stock for an aggregate purchase price of
approximately $63 million. Under the ASR, 984,000 and 361,342 shares
were delivered on June 30, 2006 and July 12, 2006, respectively. On
November 15, 2006, upon the termination of the ASR agreement, the
Company received an additional 108,453 shares based upon the volume
weighted average price of A&B's common stock from July 8, 2006 through
November 15, 2006. No additional cash payment was required in
connection with the receipt of these shares. During 2006, the Company's
total share repurchases under its share repurchase program, which
included purchases under the ASR and open market purchases, totaled
1,653,795 shares for $71.7 million at an average price of $43.34 per
share.
(2) In October 2006, A&B's Board of Directors authorized A&B to
repurchase up to two million shares of its common stock. The new
authorization will expire on December 31, 2008. The shares repurchased
in 2006 were made under a previous share repurchase authorization that
expired on December 31, 2006.
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):
2006 2005 2004 2003 2002
---- ---- ---- ---- ----
Revenue:
Transportation:
Ocean transportation $ 945.8 $ 878.3 $ 850.1 $ 776.3 $ 686.9
Logistics services 444.2 431.6 376.9 237.7 195.1
Real Estate:
Leasing 100.6 89.7 83.8 80.3 73.1
Sales 97.3 148.9 82.3 63.8 93.0
Less amounts reported in discontinued
operations(1) (94.1) (60.5) (13.4) (50.0) (84.8)
Agribusiness 127.4 123.2 112.8 112.9 112.7
Reconciling Items(6) (14.2) (8.4) (6.5) -- --
---------- ---------- ---------- ---------- ----------
Total revenue $ 1,607.0 $ 1,602.8 $ 1,486.0 $ 1,221.0 $ 1,076.0
========== ========== ========== ========== ==========
Operating Profit:
Transportation:
Ocean transportation $ 105.6 $ 128.0 $ 108.3 $ 93.2 $ 42.4
Logistics services 20.8 14.4 8.9 4.3 3.1
Real Estate:
Leasing 50.3 43.7 38.8 37.0 32.9
Sales 49.7 44.1 34.6 23.9 19.4
Less amounts reported in discontinued
operations(1) (42.7) (18.6) (6.3) (23.4) (24.0)
Agribusiness 6.9 11.2 4.8 5.1 13.8
---------- ---------- ---------- ---------- ----------
Total operating profit 190.6 222.8 189.1 140.1 87.6
Write-down of long-lived assets(2) -- (2.3) -- (7.7) --
Interest expense, net(7) (15.0) (13.3) (12.7) (11.6) (11.7)
General corporate expenses (22.3) (24.1) (20.3) (15.2) (13.2)
---------- ---------- ---------- ---------- ----------
Income from continuing operations
before income taxes 153.3 183.1 156.1 105.6 62.7
Income taxes (57.3) (68.7) (59.3) (38.8) (19.7)
---------- ---------- ---------- ---------- ----------
Income from continuing operations $ 96.0 $ 114.4 $ 96.8 $ 66.8 $ 43.0
========== ========== ========== ========== ==========
Identifiable Assets:
Transportation(4) $ 1,241.7 $ 1,183.3 $ 953.4 $ 981.9 $ 880.1
Real Estate(5) 820.5 705.9 661.0 612.8 500.3
Agribusiness 168.7 159.0 152.8 154.4 163.4
Other 20.3 22.7 11.0 10.5 8.9
---------- ---------- ---------- ---------- ----------
Total assets $ 2,251.2 $ 2,070.9 $ 1,778.2 $ 1,759.6 $ 1,552.7
========== ========== ========== ========== ==========
Capital Additions:
Transportation(4) $ 218.8 $ 175.2 $ 128.7 $ 133.4 $ 10.5
Real Estate(3), (5) 94.3 79.0 10.9 107.7 83.7
Agribusiness 15.0 13.0 10.2 12.6 9.9
Other 1.5 1.4 1.4 1.7 0.9
---------- ---------- ---------- ---------- ----------
Total capital additions $ 329.6 $ 268.6 $ 151.2 $ 255.4 $ 105.0
========== ========== ========== ========== ==========
Depreciation and Amortization:
Transportation(4) $ 59.6 $ 60.9 $ 58.0 $ 51.9 $ 51.0
Real Estate(1), (5) 14.2 12.5 12.3 11.3 9.1
Agribusiness 10.1 9.4 9.0 8.2 8.5
Other 0.9 0.5 0.4 0.3 0.4
---------- ---------- ---------- ---------- ----------
Total depreciation and amortization $ 84.8 $ 83.3 $ 79.7 $ 71.7 $ 69.0
========== ========== ========== ========== ==========
2006 2005 2004 2003 2002
---- ----- ----- ---- ----
Earnings per share:
From continuing operations:
Basic $ 2.22 $ 2.63 $ 2.27 $ 1.61 $ 1.05
Diluted $ 2.20 $ 2.60 $ 2.24 $ 1.59 $ 1.04
Net Income:
Basic $ 2.84 $ 2.89 $ 2.37 $ 1.95 $ 1.42
Diluted $ 2.81 $ 2.86 $ 2.33 $ 1.94 $ 1.41
Return on beginning equity 12.1% 13.9% 12.4% 11.2% 8.2%
Cash dividends per share $ 0.975 $ 0.90 $ 0.90 $ 0.90 $ 0.90
At Year End
Shareholders of record 3,506 3,628 3,792 3,959 4,107
Shares outstanding 42.6 44.0 43.3 42.2 41.3
Long-term debt - non-current $ 401 $ 296 $ 214 $ 330 $ 248
1 Prior year amounts restated for amounts treated as discontinued operations.
2 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.
3 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.
4 Includes both Ocean Transportation and Logistic Services. As of December 31,
2006, assets for Logistics Services comprised less than five percent of the
total assets for the transportation industry.
5 Includes Leasing, Sales and Development activities. Assets that are leased
to third parties comprised approximately 61 percent of the 2006 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 was approximately $39 million for 2006. Free cash flow is defined as
net income (computed in accordance with GAAP) for the segment plus
depreciation and amortization and certain non-cash items that in the
Company's view are not reflective of the underlying operations, reduced by
required capital expenditures. Free cash flow is a non-GAAP measure, and may
differ from definitions of free cash flow used by other companies. Free cash
flow does not represent cash generated from operating activities in
accordance with GAAP and should not be considered as an alternative to net
income (determined in accordance with GAAP), as an indication of the leasing
segment's financial performance or to cash flow from operating activities
(determined in accordance with GAAP) as a measure of the leasing segment's
liquidity, nor is it indicative of funds available to fund the leasing
segment's cash needs. Free cash flow 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.
6 Includes inter-segment revenue, interest income, and other income classified
as revenue for segment reporting purposes. Amounts for 2002 and 2003 were
not material.
7 Includes Ocean Transportation interest expense of $13.3 million for 2006,
$9.6 million for 2005, $5.7 million for 2004, $2.6 million for 2003, and
$2.4 million for 2002. Substantially all other interest expense was at the
parent company.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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, SEC filings,
such as the Forms 10-K, 10-Q and 8-K, the Annual Report to Shareholders, 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 2007 or future years. New risk factors
emerge from time to time and it is not possible for the Company to predict all
such risk factors, nor can it assess the impact of all such risk factors on the
Company's business or the extent to which any factor, or combination of factors,
may cause actual results to differ materially from those contained in any
forward-looking statements. Accordingly, forward-looking statements cannot be
relied upon as a guarantee of future results 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. The Company is not
required, and undertakes no obligation, to revise or update forward-looking
statements or any factors that may affect actual results, whether as a result of
new information, future events, or circumstances occurring after the date of
this report.
OVERVIEW
Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A") is designed to provide a discussion of the Company's
financial condition, results of operations, liquidity and certain other factors
that may affect its future results from the perspective of management. The
discussion that follows is intended to provide information that will assist in
understanding the changes in the Company's financial statements from year to
year, the primary factors that accounted for those changes, and how certain
accounting principles, policies and estimates affect the Company's financial
statements. MD&A is provided as a supplement to, and should be read in
conjunction with, the consolidated financial statements and the accompanying
notes to the financial statements. MD&A is presented in the following sections:
o Business Overview
o Critical Accounting Estimates
o Consolidated Results of Operations
o Analysis of Operating Revenue and Profit by Segment
o Liquidity and Capital Resources
o Contractual Obligations, Commitments, Contingencies and
Off-Balance-Sheet Arrangements
o Economic & Business Outlook
o Other Matters
BUSINESS OVERVIEW
Alexander & Baldwin, Inc. ("A&B"), founded in 1870, is a Hawaii
diversified corporation headquartered in Honolulu that operates in five segments
in three industries--Transportation, Real Estate, and Agribusiness (formerly
Food Products).
Transportation: The Transportation industry is comprised of ocean
transportation and integrated logistics service segments. The Ocean
Transportation segment is an asset-based business that derives its revenue
primarily through the carriage of containerized freight between various U.S.
Pacific Coast, Hawaii, Guam, other Pacific island, and China ports. The Ocean
Transportation segment also has a 35 percent interest in an entity that provides
terminal and stevedoring services at U.S. Pacific Coast facilities to Matson and
numerous international carriers. Additionally, the Ocean Transportation segment
provides terminal, stevedoring and container equipment management services in
Hawaii.
The Logistics Services segment is a non-asset based business that is a
provider of domestic and international rail intermodal service, long-haul and
regional highway brokerage, specialized hauling, flat-bed and project work,
less-than-truckload, and expedited/air freight services. As a non-asset based
business, the Logistics Services segment does not own transportation assets.
Rather, the Logistics Services segment generates its revenues by purchasing
transportation services from direct (asset-based) carriers and reselling those
services to its customers. By concentrating its buying power and/or
consolidating shipments from multiple customers, the Logistics Services segment
is able to negotiate favorable rates from the direct carriers, while at the same
time offering lower rates than customers would otherwise be able to negotiate
themselves.
The Transportation industry accounted for 87 percent, 66 percent, and
55 percent of the revenue, operating profit, and identifiable assets,
respectively, in 2006 on a consolidated basis.
Real Estate: The Real Estate business is comprised of two segments that
have operations in Hawaii and on the U.S. mainland. The Real Estate Sales
segment, a developer headquartered in the State of Hawaii, generates its
revenues through the development and sale of commercial and residential
properties. The Real Estate Sales segment seeks to diversify its investments by
entering into long-term, large projects as well as shorter-term development
projects, partnering with other developers to leverage expertise, developing
newly purchased landholdings in Hawaii and on the U.S. mainland, in addition to
developing the Company's core landholdings in Hawaii, and adhering to strict
underwriting requirements.
The Real Estate Leasing segment owns, operates, and manages commercial
properties. The Real Estate Leasing segment focuses on acquiring high-quality
retail, office, and industrial properties in good locations, primarily with
tax-deferred 1031 proceeds, and on effectively managing those properties to
increase margins through higher occupancies and cost management. The Real Estate
Leasing segment's assets are well-diversified by geography and product-type.
The Real Estate industry accounted for 5 percent, 30 percent, and 36
percent of the revenue, operating profit, and identifiable assets, respectively,
in 2006 on a consolidated basis.
Agribusiness: The Agribusiness industry, which contains one segment, is
the largest grower of sugar cane and coffee in the State of Hawaii. The segment
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 factory operations,
electricity.
The Agribusiness industry accounted for 8 percent, 4 percent, and 7
percent of the revenue, operating profit, and identifiable assets, respectively,
in 2006 on a consolidated basis.
CRITICAL ACCOUNTING ESTIMATES
The Company's significant accounting policies are described in Note 1
to the Consolidated Financial Statements. 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 may 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 critical accounting estimates. These differences
could be material.
The Company considers an accounting estimate to be critical if: (i) the
accounting estimate requires the Company to make assumptions that are difficult
or subjective about matters that were highly uncertain at the time that the
accounting estimate was made, and (ii) changes in the estimate that are
reasonably likely to occur in periods subsequent to the period in which the
estimate was made, or use of different estimates that the Company could have
used in the current period, would have a material impact on the financial
condition or results of operations. The most significant accounting estimates
inherent in the preparation of the Company's financial statements are described
below.
Asset Impairments: The Company's long-lived assets, investments, and
inventory are reviewed for impairment if events or circumstances indicate that
the carrying amount of the long-lived asset may not be recoverable, an
other-than-temporary loss in investment value has occurred, or the carrying cost
of inventory declines below its net realizable value. These asset impairment
loss calculations contain uncertainties because they require management to make
assumptions and apply judgments to, among others, estimates of future cash
flows, asset fair values, useful lives of the assets, and discount rates that
reflects the risk inherent in future cash flows. These factors depend on a
number of conditions, including uncertainty about future events, and thus the
accounting estimates may change from period to period. If management uses
different assumptions or if different conditions occur in future periods, the
Company's financial condition or its future operating results could be
materially impacted.
Revenue Recognition for Certain Long-term Real Estate Developments: As
discussed in Note 1 to the Consolidated Financial Statements, revenues from real
estate sales are generally recognized when sales are closed and title passes to
the buyer. For certain real estate sales, 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 the percentage of development costs that have been
incurred through the reporting period in relation to total expected development
cost associated with the subject property. Accordingly, if material changes to
total expected development costs occur, the Company's financial condition or its
future operating results could be materially impacted.
Self-Insured Liabilities: The Company is self-insured for certain
losses related to, including, but not limited to, employee health, workers'
compensation, general liability, real and personal property, and real estate
construction defect claims. However, the Company obtains third-party insurance
coverage to limit its exposure to these claims. When estimating its self-insured
liabilities, the Company considers a number of factors, including historical
claims experience, demographic factors, and valuations provided by independent
third-parties. Periodically, management reviews its assumptions and the
valuations provided by independent third-parties to determine the adequacy of
the Company's self-insured liabilities. The Company's self-insured liabilities
contain uncertainties because management is required to apply judgment and make
long-term assumptions to estimate the ultimate cost to settle reported claims
and claims incurred but not reported as of the balance sheet date. If management
uses different assumptions or if different conditions occur in future periods,
the Company's financial condition or its future operating results could be
materially impacted.
Equity Method Investments: All of the unconsolidated entities held by
the Company are accounted for by the equity method of accounting because the
criteria for consolidation set forth in FASB Interpretation No. 46 (revised
December 2003), "Consolidation of Variable Interest Entities" (FIN 46R) or AICPA
Accounting Research Bulletin No. 51, Consolidated Financial Statements ("ARB
51"), and its related interpretations, have not been met. In determining whether
an unconsolidated entity is a variable interest entity, and if the entity is
determined to be a variable interest entity, whether the Company is the primary
beneficiary, the Company is required to use various assumptions, including cash
flow estimates and related probabilities for different cash flow scenarios. To
the extent that these assumptions change as a result of new or additional
information or changes in market conditions, the conclusion to apply the equity
method may change and the Company's financial condition or its future operating
results could be materially impacted.
Share-Based Compensation: The Company provides a share-based
compensation plan, which includes non-qualified stock options and non-vested
share awards. (Refer to Note 11 to the Consolidated Financial Statements for a
complete discussion of the Company's share-based compensation programs.) The
Company determines the fair value of its non-qualified stock option awards at
the date of grant using the Black-Scholes option-pricing model, which requires
management to make assumptions and to apply judgment to determine the fair value
of the awards. These assumptions and judgments include estimating the future
volatility of the Company's stock price, expected dividend yield, future
employee turnover rates, and future employee stock option exercise behaviors.
Performance-based, non-vested share awards require management to make
assumptions regarding the likelihood of achieving company or personal
performance goals. Accordingly, changes in some or all of these assumptions
could materially affect the Company's financial condition or its future
operating results.
Environmental Reserves: The estimated costs for environmental
remediation are recorded by the Company when the environmental liability has
been incurred and can be estimated. An environmental liability has been incurred
when both of the following conditions have been met: (i) litigation has
commenced or a claim or an assessment has been asserted, or, based on available
information, commencement of litigation or assertion of a claim or an assessment
is probable, and (ii) based on available information, it is probable that the
outcome of such litigation, claim, or assessment will be unfavorable. 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 estimates are developed, depending on the circumstances, by
internal analysis or the use of third-party specialists. Changes in assumptions
used in these analyses could materially affect the Company's financial condition
or its future operating results.
Pension and Post-retirement Estimates: The estimation of the Company's
pension and postretirement obligations, costs and liabilities requires that the
Company make use of estimates of the present value of the projected future
payments to all participants, taking into consideration the likelihood of
potential future events such as salary increases and demographic experience.
These assumptions may have an effect on the amount and timing of future
contributions.
The assumptions used in developing the required estimates include the
following key factors:
o Discount rates
o Expected return on pension plan assets
o Salary growth
o Inflation
o Retirement rates
o Mortality rates
o Expected contributions
The effects of actual results differing from the above assumptions by
the Company could materially affect the Company's financial condition or its
future operating results. The effects of changing assumptions are included in
unamortized net gains and losses, which directly affect accumulated other
comprehensive income. Unamortized gains and losses are amortized and
reclassified to income (loss) over future periods.
The 2006 net periodic cost for qualified pension and post-retirement
obligations was determined using a discount rate of 5.75 percent and the
qualified pension and post-retirement obligations as of December 31, 2006 were
determined using a discount rate of 6.0 percent. For the Company's non-qualified
benefit plans, the 2006 net periodic cost was determined using a discount rate
of 5.25 percent and the December 31, 2006 obligation was determined using a
discount rate of 5.75 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, 2006, 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 15.6 percent, 13.2 percent, and 8.6 percent,
respectively. The Company's long-term investment return has averaged
approximately 10.5 percent.
Historically, the health care cost trend rate experienced by the
Company has been approximately 9 percent. For 2006, 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 2011.
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 2006 by approximately $1.5 million. Lowering the discount
rate assumption by one-half of one percentage point would have increased pre-tax
pension expense by $1.5 million. Additional information about the Company's
benefit plans is included in Note 9 of the Consolidated Financial Statements.
Income Taxes: The Company makes certain estimates and judgments in
determining income tax expense for financial statement purposes, in accordance
with Statement of Financial Accounting Standards No. 109. These estimates and
judgments occur in the calculation of tax credits, tax benefits, and deductions,
and in the calculation of certain tax assets and liabilities, which arise from
differences in the timing of recognition of revenue and expense for tax and
financial statement purposes. Significant changes to these estimates may result
in an increase or decrease to the Company's tax provision in a subsequent
period.
In addition, the calculation of tax liabilities involves significant
judgment in estimating the impact of uncertainties in the application of complex
tax laws. Resolution of these uncertainties in a manner inconsistent with
management's expectations could materially affect the Company's financial
condition or its future operating results.
Recent Accounting Pronouncements: See Note 1 to the Consolidated
Financial Statements for a full description of the impact of recently issued
accounting standards, which is incorporated herein by reference, including the
expected dates of adoption and estimated effects on the Company's results of
operations and financial condition.
CONSOLIDATED 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.
--------------------------------------------------------------------------------------------------------
(dollars in millions, except per-share amounts) 2006 Chg. 2005 Chg. 2004
--------------------------------------------------------------------------------------------------------
Operating Revenue $ 1,607 -- $ 1,603 8% $ 1,486
Operating Costs and Expenses 1,459 3% 1,420 7% 1,324
-------- -------- --------
Operating income 148 -19% 183 13% 162
Other Income and (Expenses) 5 NM -- NM (6)
Income Taxes (57) -17% (69) 17% (59)
Discontinued Operations 26 117% 12 200% 4
-------- -------- --------
Net Income $ 122 -3% $ 126 25% $ 101
======== ======== ========
Basic Earnings Per Share $ 2.84 -2% $ 2.89 22% $ 2.37
Diluted Earnings Per Share $ 2.81 -2% $ 2.86 23% $ 2.33
--------------------------------------------------------------------------------------------------------
Operating Revenue for 2006 increased less than 1 percent, or $4
million, to $1,607 million. Real estate leasing revenue increased 20 percent in
2006 (after subtracting leasing revenue from assets classified as discontinued
operations), primarily due to higher occupancies, higher lease rates, and
additions to the leased portfolio. Ocean transportation revenue increased 8
percent in 2006, principally due to higher fuel surcharge revenues as a result
of higher direct and indirect energy costs, initiation of the new China service,
and improved yields and cargo mix. Logistics services revenue increased 3
percent in 2006, primarily due to higher yields and mix, partially offset by a
decline in volumes for freight transported by rail. Real estate sales revenue
decreased by 92 percent in 2006 (after subtracting revenue from discontinued
operations) due to the timing and mix of properties sold. Because of the
episodic nature of property sales, the Company views changes in real estate
sales revenues on a year-over-year basis before the reclassification of revenue
to discontinued operations to be more meaningful in assessing segment
performance. Additionally, due to the timing of sales for development properties
and the mix of properties sold, management believes performance is more
appropriately assessed over a multi-year period. Furthermore, year-over-year
comparisons of revenue are not complete without the consideration of results
from the Company's investment in its real estate joint ventures, which are not
included in operating revenues, but are included in operating profit. The
Analysis of Operating Revenue and Profit by Segment that follows, provides
additional information on changes in real estate sales revenue and operating
profit.
Operating Revenue for 2005 increased 8 percent, or $117 million, to
$1,603 million. Logistics services revenue increased 15 percent in 2005,
primarily due to a 20 percent increase in volumes related to freight transported
by truck, partially offset by a 6 percent decline in volumes related to freight
transported by rail. Real estate leasing revenue increased 11 percent in 2005
(after subtracting leasing revenue from assets classified as discontinued
operations) due principally to 2005 property acquisitions, higher rental rates,
and higher Hawaii occupancies. Agribusiness revenue increased 9 percent in 2005
primarily due to the receipt of a payment under a federal disaster relief
program and higher power sales. Ocean transportation revenue increased 3 percent
in 2005, principally due to increases in fuel surcharge revenues and higher
Hawaii container volumes. Real estate sales revenue increased 21 percent in 2005
(after subtracting revenue from discontinued operations) primarily due to the
sale of all 100 units at the Company's Lanikea residential high-rise project in
Waikiki.
The reasons for business- and segment-specific year-to-year
fluctuations in revenue growth are further described below in the Analysis of
Operating Revenue and Profit by Segment.
Operating Costs and Expenses for 2006 increased by 3 percent, or $39
million, to $1,459 million. Ocean transportation costs increased 12 percent in
2006, primarily due to higher fuel costs, terminal handling, and equipment
costs. Agribusiness costs increased 7 percent in 2006, principally due to higher
crop production costs and repairs to irrigation reservoirs. Real estate sales
and leasing costs decreased 56 percent, primarily due to the timing and mix of
development sales. Selling, General and Administrative costs ("SG&A") increased
by 4 percent, or $6 million, to $146 million in 2006 due to higher personnel and
benefit costs that included $2.8 million in non-cash stock option expense as a
result of the adoption of SFAS No. 123R. SG&A as a percentage of revenue has
remained constant from 2004 to 2006. However, this trend may not continue in
2007 and future years as a result of the adoption of SFAS 123R, which requires
the expensing of the fair value of employee stock options. Accordingly,
management expects that salaries and related costs as a percentage of operating
revenues may be more volatile.
Operating Costs and Expenses for 2005 increased by 7 percent, or $96
million, to $1,420 million. Real estate sales and leasing costs increased 35
percent in 2005, primarily due to the sale of all 100 units at the Company's
Lanikea residential high-rise project in Waikiki. Logistics services costs
increased by 13 percent in 2005, primarily due to an increase in volumes related
to freight transported by truck. SG&A costs in 2005 increased by 9 percent, or
$12 million, to $140 million due to higher depreciation, amortization of
leasehold improvements, professional service fees, personnel and benefit costs,
and charitable contributions, partially offset by lower Sarbanes-Oxley Act
internal compliance costs. Operating costs and expenses for 2005 also included
impairment losses of $2 million for 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 as further described in Note 4 to the Consolidated Financial
Statements.
The reasons for changes in business- and segment-specific year-to-year
fluctuations in operating costs, which affect segment operating profit, are more
fully described below in the Analysis of Operating Revenue and Profit by
Segment.
Other Income and Expenses in 2006 is comprised of equity in earnings of
real estate joint ventures, interest revenue and interest expense. Equity in
income of real estate affiliates was $11 million higher in 2006 due principally
to the Company's share of earnings from its Hokua joint venture, which completed
sales of all 247 luxury residential units in the first quarter of 2006. Interest
expense of $15 million in 2006 was $2 million higher than 2005 due to higher
average debt balances. Other income in 2005 was higher than 2006 and 2004
because it included a $5 million gain from an insurance settlement following a
fire earlier in that year at the Kahului Shopping Center on Maui. Interest
income and expense for 2005 was comparable to 2004.
Income Taxes were lower for 2006 compared with 2005 due primarily to
lower pre-tax income. The effective tax rates in 2006 and 2005 were comparable.
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
in 2005 versus 38 percent for 2004.
ANALYSIS OF OPERATING REVENUE AND PROFIT BY SEGMENT
Additional detailed information related to the operations and financial
performance of the Company's Industry Segments is included in Part II Item 6 and
Note 13 to the Consolidated Financial Statements. The following information
should be read in relation to the information contained in those sections.
Transportation Industry
Ocean Transportation; 2006 compared with 2005
---------------------------------------------
--------------------------------------------------------------------------------
(dollars in millions) 2006 2005 Change
--------------------------------------------------------------------------------
Revenue $ 945.8 $ 878.3 8%
Operating profit $ 105.6 $ 128.0 -18%
Operating profit margin 11.2% 14.6%
--------------------------------------------------------------------------------
Volume (units):
Hawaii containers 173,200 175,800 -1%
Hawaii automobiles 118,700 148,100 -20%
Guam containers 15,100 16,600 -9%
China containers 32,700 -- NM
--------------------------------------------------------------------------------
Ocean Transportation revenue increased 8 percent, or $67.5 million, to
$945.8 million in 2006. The increase reflected a number of factors, including a
$43.4 million increase in fuel surcharge revenues to help offset increases in
direct and indirect fuel costs, $22.5 million increase due to aggregate volume
increases in Matson's service lines due to the new China service, $19.3 million
increase due to improved yields and cargo mix, and $14.8 million due to higher
purchased transportation costs that are billed to customers. These increases
were partially offset by $40.5 million in lower vessel charter revenue,
resulting from the expiration of the APL Alliance in the first quarter of 2006.
Matson's Hawaii automobile volume for 2006 was 20 percent lower than 2005, due
to lower auto retail sales, lower demand from rental car agencies as a result of
reduced auto manufacturer incentives and longer holding periods for autos, and
competitive pressures. Total Hawaii container volume was down 1 percent from
2005, reflecting reduced shipments in the lower-margin building materials
segment, reduced military freight due to non-recurring military deployments that
occurred in 2005, and reduced household goods shipments reflecting the
moderation in the growth of Hawaii's economy. Guam container volume was down 9
percent from 2005, primarily due to competitive pressures resulting from the
transition in vessel schedules, as well as a decline in the Saipan garment trade
and tourism industries.
Operating profit decreased 18 percent, or $22.4 million, to $105.6
million in 2006. This decrease was primarily the result of the following
operating expense changes, which offset revenue increases. Direct and indirect
fuel costs increased $53.1 million, primarily as a result of higher energy
costs, terminal handling costs increased $14.3 million due primarily to
increased rates related principally to wage- and wharfage-related cost
increases, equipment control, leasing, and repair costs increased $14.9 million,
primarily due to the new China service, and other costs increased due to the
reimbursement of government vessel construction subsidies of $4.8 million.
Additionally, selling, general, and administrative expenses increased $5.1
million primarily due to employee related costs. These increases were partially
offset by lower vessel operating expenses of $2.4 million, driven primarily by
lower claims expenses and lower vessel wages, resulting from fewer vessel
operating days. Other expense changes included a $3.3 million gain on the sale
of two surplus and obsolete vessels in 2006, and Matson's SSAT joint venture
contributed $3.8 million less in 2006. Earnings from this venture are not
included in revenue, but are included in operating profit.
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%
Operating profit margin 14.6% 12.7%
--------------------------------------------------------------------------------
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 increased 3 percent, or $28.2 million, to
$878.3 million in 2005. 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. Revenue for 2005 was also affected
adversely by a 52-week operating year versus 53 weeks in 2004 and by competitive
effects on both volume and rates. Matson's Hawaii service container volume was 4
percent higher and automobile volume was 6 percent lower. The 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.
Operating profit increased by 18 percent, or $19.7 million, to $128
million in 2005. This increase was primarily the result of the following
operating expense changes, which partially offset revenue increases. Matson's
SSAT joint venture contributed $12.4 million higher equity in earnings (earnings
from this venture are not included in revenue, but included in operating profit)
and vessel and overhead operating costs decreased by $3 million due to lower
vessel wages, lower fuel consumption, and lower vessel overhead. Lower vessel
wages in 2005 are due to lower staffing levels as a result of labor shortages.
Lower fuel consumption was due to higher fuel consumption in 2004 as a result of
the West Coast labor shortage, partially offset by higher fuel costs in 2005.
Lower vessel overhead in 2005 compared to 2004 was due to reduced dry-docking
amortization costs.
Logistics Services; 2006 compared with 2005
-------------------------------------------
--------------------------------------------------------------------------------
(dollars in millions) 2006 2005 Change
--------------------------------------------------------------------------------
Intermodal revenue $ 287.4 $ 287.5 --
Highway revenue 156.8 144.1 9%
--------- ---------
Total Revenue $ 444.2 $ 431.6 3%
--------------------------------------------------------------------------------
Operating profit $ 20.8 $ 14.4 44%
Operating profit margin 4.7% 3.3%
--------------------------------------------------------------------------------
Logistics revenue increased 3 percent, or $12.6 million, to $444.2
million in 2006. This growth was principally the result of higher volumes and
rates for freight transported by truck ("Highway"). Revenue related to freight
transported by rail ("Intermodal") declined slightly due to a 14 percent
decrease in volumes that was largely offset by higher rates. Volume decreases
for Intermodal were due to rail service performance issues, which caused a
diversion of business from rail to truck, and market conditions that drove
business direct to suppliers.
Logistics operating profit increased 44 percent, or $6.4 million, to
$20.8 in 2006. The increased operating profit was primarily the result of higher
yields relative to purchased transportation costs, offset in part by higher
personnel costs. Higher yields related to freight transported by truck resulted
from stronger demand relative to available truck supply. Higher yields related
to freight transported by rail benefited from general rate increases, but were
offset by volume decreases described previously. Margins achieved in 2006 were
significantly higher than in preceding periods and may not be indicative of
future results.
The revenue for integrated logistics services includes the total amount
billed to customers for transportation services. As a non-asset based logistics
company, the primary costs include purchased transportation services from
asset-based vendors, such as railroads and trucking companies. As a result, the
operating profit margin for this business is narrower than other businesses of
the Company. The primary operating profit and investment risk for this business
is the quality of receivables, which is monitored closely.
Logistics Services; 2005 compared with 2004
-------------------------------------------
--------------------------------------------------------------------------------
(dollars in millions) 2005 2004 Change
--------------------------------------------------------------------------------
Intermodal revenue $ 287.5 $ 267.6 7%
Highway revenue 144.1 109.3 32%
--------- ---------
Total Revenue $ 431.6 $ 376.9 15%
--------------------------------------------------------------------------------
Operating profit $ 14.4 $ 8.9 62%
Operating profit margin 3.3% 2.4%
--------------------------------------------------------------------------------
Logistics revenue increased 15 percent, or $54.7 million, to $431.6
million in 2005. This increase was due to improvements in the mix of business,
yields, and a 20 percent increase in volumes related to freight transported by
truck, partially offset by a 6 percent decline in volumes related to freight
transported by rail. The increase in volume for freight transported by truck 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.
Logistics operating profit increased by 62 percent, or $5.5 million, to
$14.4 million in 2005. The increase was due to higher yields and overall
increased volumes partially offset by higher personnel costs and other overhead.
Real Estate Industry
Real estate leasing and sales revenue and operating profit are analyzed
before subtracting amounts related to discontinued operations. This is
consistent with how the Company's management evaluates and makes decisions for
the Company's real estate businesses. A discussion of discontinued operations
for the real estate business is included separately.
Leasing; 2006 compared with 2005
--------------------------------
--------------------------------------------------------------------------------
(dollars in millions) 2006 2005 Change
--------------------------------------------------------------------------------
Revenue $ 100.6 $ 89.7 12%
Operating profit $ 50.3 $ 43.7 15%
Operating profit margin 50.0% 48.7%
--------------------------------------------------------------------------------
Occupancy Rates:
Mainland 98% 95%
Hawaii 98% 93%
--------------------------------------------------------------------------------
Leasable Space (million sq. ft.):
Mainland 3.8 3.5 9%
Hawaii 1.5 1.6 -6%
--------------------------------------------------------------------------------
Real estate leasing revenue and operating profit for 2006 were 12
percent and 15 percent higher, respectively, than the amounts reported in 2005.
These increases were due principally to higher Hawaii and Mainland occupancies
and lease rates, 2006 property acquisitions, and full-year results from Kunia
Shopping Center, an Oahu retail development which opened in November 2005. In
2006, two retail centers in Arizona, a Maui office building, a commercial
property on the island of Hawaii, and several Maui leased fee parcels were sold.
The real estate leasing portfolio earnings consisted of 25 percent for
office property, 37 percent for retail property, 18 percent for industrial
property, and 20 percent for other property, principally ground leases.
Leasing; 2005 compared with 2004
--------------------------------
--------------------------------------------------------------------------------
(dollars in millions) 2005 2004 Change
--------------------------------------------------------------------------------
Revenue $ 89.7 $ 83.8 7%
Operating profit $ 43.7 $ 38.8 13%
Operating profit margin 48.7% 46.3%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Occupancy Rates:
Mainland 95% 95%
Hawaii 93% 90%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Leasable Space (million sq. ft.):
Mainland 3.5 3.7 -5%
Hawaii 1.6 1.7 -6%
------------------------------------------------------------------------ -------
Real estate leasing revenue and operating profit for 2005 were 7
percent and 13 percent higher, respectively, than the amounts reported for 2004.
The higher revenue and 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 the second half of 2005.
The real estate leasing portfolio earnings consisted 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.
Real-Estate Sales; 2006 compared with 2005 and 2004
---------------------------------------------------
-----------------------------------------------------------------------------------------------
(dollars in millions) 2006 2005 2004
-----------------------------------------------------------------------------------------------
Hawaii improved $ 43.7 $ 25.5 $ --
Mainland improved 35.6 24.1 --
Hawaii development sales 4.5 72.5 60.0
Hawaii unimproved/other 13.5 26.8 22.3
--------- --------- ---------
Total Revenue 97.3 148.9 82.3
-----------------------------------------------------------------------------------------------
Operating profit before joint ventures 35.3 40.8 31.3
Equity in earnings of joint ventures 14.4 3.3 3.3
--------- --------- ---------
Total Operating profit $ 49.7 $ 44.1 $ 34.6
-----------------------------------------------------------------------------------------------
Operating profit margin 51.1% 29.6%
-----------------------------------------------------------------------------------------------
The lower revenue and higher operating profit results were due to the
mix and timing of real estate sales in 2006 compared with 2005, as well as the
treatment of income earned from the Company's joint ventures. Earnings from
joint ventures are not included in revenue, but are included in operating
profit. The composition of these sales is described below.
2006: Real estate sales revenue, before subtracting amounts treated as
discontinued operations, included the sale of two retail centers in Arizona, a
commercial property on the island of Hawaii, a Maui office building, several
commercial parcels on Maui, a commercial property on Oahu, and a 19-percent
installment payment for an agricultural parcel on Kauai. Operating profit for
2006 was significantly higher as a percentage of real estate sales revenue
compared to 2005 because operating profit also included $14.4 million for the
Company's earnings from its real estate joint ventures (which are not included
in revenue for the segment). The joint venture earnings principally relate to a
portion of the Company's earnings from its Hokua joint venture, which completed
sales of all 247 residential condominium units in January 2006, and joint
venture earnings from the Company's Kai Malu project, partially offset by higher
marketing expenses related to the Company's Kukui'ula project.
2005: Real estate sales revenue from property sales, before subtracting
amounts treated as discontinued operations, included the sale of all 100 units
at the Company's Lanikea residential high-rise project in Waikiki, a commercial
office building on Oahu, a warehouse/distribution complex in Ontario,
California, the final 80-percent installment payment for a development parcel at
Wailea, several Maui and Oahu commercial properties, a residential development
parcel and three residential properties on Maui, a service center/warehouse
complex comprised of three buildings in San Antonio, Texas, and 5.5 units in an
office condominium project on Oahu. Additionally, a gain of $5 million was
recognized in operating profit during the third quarter for a partial property
damage insurance settlement related to the Kahului Shopping Center fire.
Operating Profit also included $3.3 million for the Company's share of earnings
in joint ventures (which are not included in revenue for the segment).
2004: Real estate sales revenue, before subtracting amounts treated as
discontinued operations, from property sales included 28 residential properties,
17.5 office condominium units, 33 Maui and Oahu commercial inventory properties,
and three residential development parcels. In addition to the profit
contribution from these sales, 2004 operating profit included $3.3 million for
the Company's share of earnings in joint ventures (which are not included in
revenue for the segment).
The mix of real estate 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, real estate sales revenue trends, cash
flows from the sales of real estate, and the amount of real estate held for sale
on the balance sheets do not necessarily indicate future profitability trends
for this segment. Additionally, the operating profit reported in each quarter
does not necessarily follow a percentage of sales trends because the cost basis
of property sold can differ significantly between transactions. The reporting of
real estate sales is also affected by the classification of certain real estate
sales as discontinued operations. Finally, earnings from joint venture
investments are not included in segment revenue, but are included in operating
profit.
Discontinued Operations; Real-estate - The revenue, operating profit,
and after-tax effects of discontinued operations for 2006, 2005 and 2004 were as
follows (in millions, except per-share amounts):
----------------------------------------------------------------------------
2006 2005 2004
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Sales Revenue $ 89.7 $ 50.1 $ 1.1
Leasing Revenue $ 4.4 $ 10.4 $ 12.3
Sales Operating Profit $ 40.1 $ 13.9 $ 1.5
Leasing Operating Profit $ 2.6 $ 4.7 $ 4.8
After-tax Earnings $ 26.5 $ 11.5 $ 3.9
Basic Earnings Per Share $ 0.62 $ 0.26 $ 0.10
----------------------------------------------------------------------------
2006: The revenue and operating profit from the sale of two retail
centers in Arizona, an office building on Maui, a commercial property on the
island of Hawaii, and several commercial parcels in Hawaii were included in
discontinued operations.
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 were classified as discontinued
operations even though the Company had not sold the properties by the end of
2005. The three parcels were sold in 2006.
2004: The sale of a Maui property was classified as a discontinued
operation. In addition, two office properties and one light industrial property
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.
Agribusiness Industry (formerly Food Products)
Agribusiness; 2006 compared with 2005
-------------------------------------
--------------------------------------------------------------------------------
(dollars in millions) 2006 2005 Change
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Revenue $ 127.4 $ 123.2 3%
Operating profit $ 6.9 $ 11.2 -38%
Operating profit margin 5.4% 9.1%
--------------------------------------------------------------------------------
Tons sugar produced 173,600 192,700 -10%
--------------------------------------------------------------------------------
Agribusiness revenue increased 3 percent, or $4.2 million, to $127.4 in
2006. Excluding the $5.5 million disaster relief payment received in 2005,
revenue increased 8 percent due mainly to $4.3 million in higher repair services
and trucking revenue, $4.1 million from higher power sales, $2.6 million in
higher equipment rentals and soil sales, and $2.2 million in higher specialty
sugar and molasses sales. Lower revenue of $5.4 million from lower bulk raw
sugar sales volumes partially offset the previously noted increases. Operating
profit decreased 38 percent, or $4.3 million, to $6.9 million in 2006. However,
excluding the $5.5 million disaster relief payment received in 2005, operating
profit increased 21 percent due mainly to the same factors noted above. This 21
percent increase in operating profit reflected the effect of the factors
mentioned above as well as higher 2006 crop production costs and repair costs
for irrigation reservoirs. Production costs were higher due to increases in
personnel, materials and supplies, fertilizer, and chemicals expenses. Also,
2006 included one additional week compared to 2005 (53 weeks in 2006 vs. 52
weeks in 2005).
Compared with 2005, sugar production in 2006 was 10 percent, or 19,100
tons, lower due primarily to dry-weather conditions during growing months,
less-than-optimal fertilizer applications last year, and a lower crop age. The
average revenue per ton of sugar for 2006 was $350, or 2 percent higher than in
2005.
Coffee production of 2.7 million pounds for 2006 was 50 percent, or 0.9
million pounds, higher than 2005 production. The 2006 crop benefited from higher
yields and an increased percentage of higher-value specialty and mid-grade green
beans and a lower percentage of commodity grade green beans. The higher yield
and favorable green bean mix were attributable to improved plant nutrition,
reduced insect infestation, and favorable weather. 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. There was no
impairment loss recorded in 2006.
Approximately 91 percent of the Company's sugar production was sold to
Hawaiian Sugar & Transportation Cooperative ("HS&TC") during 2006 under a
marketing contract. The remainder was sold as specialty sugar. 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.
Agribusiness; 2005 compared with 2004
-------------------------------------
--------------------------------------------------------------------------------
(dollars in millions) 2005 2004 Change
--------------------------------------------------------------------------------
Revenue $ 123.2 $ 112.8 9%
Operating profit $ 11.2 $ 4.8 2.3x
Operating profit margin 9.1% 4.3%
--------------------------------------------------------------------------------
Tons sugar produced 192,700 198,800 -3%
--------------------------------------------------------------------------------
Agribusiness revenue increased 9 percent, or $10.4 million, in 2005 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 in 2005 was 3 percent, or 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
negatively impacted 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.
LIQUIDITY AND CAPITAL RESOURCES
Overview: Cash flows provided by operating activities continue to be
the Company's most significant source of liquidity. Additional sources of
liquidity were provided by available cash and cash equivalent balances as well
as borrowings on available credit facilities.
Cash Flows: Cash Flows from Operating Activities were $106 million for
2006, compared with $278 million for 2005. This decrease was principally the
result of higher 2005 proceeds from the sale of units in the Company's Lanikea
residential high-rise project in Waikiki, higher year-to-date income tax
payments, higher development expenditures for real estate inventory, and lower
Matson earnings, partially offset by proceeds received from the Company's Hokua
joint venture in 2006.
Cash Flows used in Investing Activities were $124 million for 2006,
compared with $305 million for 2005. A critical component of the Company's
long-term growth strategy is its capital expenditure program. In 2006, the
Company's capital expenditures, excluding purchases of property using
tax-deferred proceeds, additions to real estate held-for-sale, and related
assumed debt, totaled $281 million. This was comprised principally of $147
million for the purchase of the MV Maunalei, which completed the Company's four
ship modernization and replacement strategy, equipment purchases for the ocean
transportation segment, primarily related to the Company's new China service,
$46 million in expenditures related to property development activities, and $15
million related to routine asset replacements for agricultural operations and
specialty sugar expansion activities. The cash used for transportation capital
expenditures was partially funded by Capital Construction Fund withdrawals. The
amounts reported in Capital Expenditures on the Statement of Cash Flows exclude
$49 million of tax-deferred purchases since the Company did not actually take
control of the cash during the exchange period. In 2007, the Company expects
that capital expenditures will be lower than 2006 due to the completion of the
Company's four-ship modernization program and equipment purchases for its China
service transition that were described previously; however, capital expenditures
in the real estate business are expected to increase. In 2007, the Company's
capital expenditure budget is expected to range from $300 to $325 million,
including capital expenditures for real estate developments and 1031 lease
portfolio acquisitions that would not be included in capital expenditures under
investing activities in the statement of cash flows. Certain real estate capital
expenditures are excluded from investing activities on the statement of cash
flows because the expenditures are either classified as operating cash flows
(when made for real estate held for sale) or non-cash activities (when made
using tax-deferred proceeds from prior tax-deferred sales).
Cash Flows from Financing Activities for 2006 totaled $6 million,
compared with $42 million for 2005. The decrease in cash flows from financing
activities is due primarily to share repurchases and dividends that were offset
by proceeds from debt issuance. In June 2006, A&B purchased 200,000 shares on
the open market at an average price of $42.37. Additionally, the Company also
entered into an accelerated share repurchase agreement ("ASR") with Goldman,
Sachs & Co. on June 27, 2006 to repurchase shares of A&B's common stock for an
aggregate purchase price of approximately $63 million. As of December 31, 2006,
A&B had repurchased 1,653,795 shares of its stock at an average price of $43.34.
On October 26, 2006, the Company's board of directors authorized the
repurchase of up to two million shares of its common stock in the open market,
in privately-negotiated transactions or by other means. The new authorization,
which augmented the previous authorization of two million shares that expired
December 31, 2006, expires on December 31, 2008. As of December 31, 2006, two
million shares remained available for repurchase under the new share
authorization.
The Company believes that funds generated from the expected results of
operations, available cash and cash equivalents, and available borrowings under
credit facilities will be sufficient to finance the Company's business
requirements for the next fiscal year, including working capital, capital
expenditures, dividends, and potential acquisitions and stock repurchases. There
can be no assurance, however, that the Company will continue to generate cash
flows at or above current levels or that it will be able to maintain its ability
to borrow under its available credit facilities.
Tax-Deferred Real Estate Transactions: Sales - During 2006, sales and
condemnation proceeds that qualified for potential tax-deferral treatment under
the Internal Revenue Code Sections 1031 and 1033 totaled approximately $90
million. The proceeds consisted primarily of the sales of two retail centers in
Arizona, a Maui office building, a commercial property on the island of Hawaii,
several commercial parcels on Maui and Oahu, and two parcels on Kauai.
Purchases - During 2006, the Company utilized $92 million in proceeds
from tax-deferred sales, which included $84 million used for 2006 acquisitions
and $8 million attributed to a 2005 acquisition under a reverse 1031
transaction. The properties acquired with tax-deferred proceeds in 2006
principally included a two-building office property in Salt Lake City, Utah, a
two-building office complex in Plano, Texas, a two-story office building in
Sacramento, California, and a three-story office building in Phoenix, Arizona.
The proceeds from 1031 tax-deferred sales are held in escrow pending
future use to purchase new real estate assets. The proceeds from 1033
condemnations are held by the Company until the funds are redeployed. As of
December 31, 2006, $12.3 million of proceeds from tax-deferred sales had not
been reinvested and $16.8 million expired without reinvestment.
The funds related to 1031 transactions are not included in the
Statement of Cash Flows but are included as non-cash activities below the
Statement. For "reverse 1031" transactions, the Company purchases a property in
anticipation of receiving funds from 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.
Sources of Liquidity: Funds generated by operating activities continue
to be the Company's most significant source of liquidity. Additional sources of
liquidity for the Company, primarily comprised of cash and cash equivalents,
receivables, sugar and coffee inventories, totaled $230 million at December 31,
2006, a decrease of $10 million from December 31, 2005. This net decrease was
due primarily to $12 million in lower cash balances, partially offset by $1
million in higher receivables balances and $1 million in higher sugar and coffee
inventories.
The Company also has various revolving credit and term facilities that
provide additional sources of liquidity for working capital requirements or
investment opportunities on a short-term as well as longer-term basis. Long-term
debt, including current portion of long-term debt and current notes payable, was
$442 million at the end of 2006 compared with $327 million at the end of 2005.
As of December 31, 2006, available borrowings under these facilities, which are
more fully described below, totaled $478 million.
The Company has a $400 million three-year unsecured note purchase and
private shelf agreement with Prudential Investment Management, Inc. and its
affiliates (collectively, "Prudential") under which the Company may issue notes
in an aggregate amount up to $400 million, less the sum of all principal amounts
then outstanding on any notes issued by the Company or any of its subsidiaries
to Prudential and the amounts of any notes that are committed under the note
purchase agreement. The facility expires on April 19, 2009 and borrowings under
the shelf facility bear interest at rates that are determined at the time of the
borrowing. Under the facility, Prudential is committed to purchase three series
of notes under three scheduled draws totaling $125 million, at rates ranging
from 5.53 percent to 5.56 percent. In December 2006, the Company received $50
million that represents the first of three scheduled draws under the facility.
The second and third draws will be received in March and June 2007 in the
amounts of $50 million and $25 million, respectively. At December 31, 2006, $164
million was available under the facility, including the additional $75 million
that will be drawn in 2007 under the committed series of notes.
The Company has two revolving senior credit facilities with six
commercial banks that expire in December 2011. The revolving credit facilities
provide for an aggregate commitment of $325 million, which consists of a $225
million and $100 million facility for A&B and Matson, respectively. Amounts
drawn under the facilities bear interest at London Interbank Offered Rate
("LIBOR") plus 0.225 percent, provided the Company maintains an S&P/Moody's
rating of A-/A3 or better. At December 31, 2006, $27 million was outstanding,
$20 million in letters of credit had been issued against the facilities, and
$279 million remained available for borrowing. Amounts drawn under these
facilities are classified as current, unless the Company intends to move the
drawn amount to another facility that is classified as long-term. The $27
million outstanding as of December 31, 2006 was classified as a long-term
borrowing since the Company intends to refinance the short-term borrowing with
proceeds from the Prudential $400 million three-year unsecured note purchase and
private shelf agreement.
Matson has a $105 million secured reducing revolving credit agreement
with DnB NOR Bank ASA and ING Bank N.V. which provides for a 10-year commitment
beginning in June 2005. The maximum amount that can be outstanding under the
facility declines in eight annual commitment reductions of $10.5 million each,
commencing on the second anniversary of the closing date. The incremental cost
to borrow under the facility is 0.225 percent above LIBOR. As of December 31,
2006, $70 million was outstanding under the facility and $35 million remained
available.
The Company's ability to access its credit facilities is subject to
its compliance with the terms and conditions of the credit facilities, including
financial covenants. The financial covenants require the Company to maintain
certain financial covenants, such as minimum consolidated shareholders' equity
and maximum debt to EBITDA ratios. At December 31, 2006, the Company was in
compliance with all such covenants. Credit facilities are more fully described
in Note 7 to the Consolidated Financial Statements.
The Company's and Matson's credit ratings from Standard and Poor's as
of October 27, 2006 were both A- with a stable outlook. Factors that can impact
the Company's and Matson's credit ratings include changes in operating
performance, the economic environment, conditions in industries in which the
Company has operations, and the Company's and Matson's financial position. If a
credit downgrade were to occur, it could adversely impact, among other things,
future borrowing costs and access to capital markets.
Debt is maintained at levels the Company considers prudent based on its
cash flows, interest coverage ratio, and percentage of debt to capital. From
current levels, the Company intends to increase its leverage, primarily through
strategic investments, to the 35-40 percent range. This is a range that the
Company believes optimizes its use of leverage and minimizes its cost of
capital, but still leaves sufficient flexibility and capacity to pursue
strategic investments.
CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET
ARRANGEMENTS
Contractual Obligations: At December 31, 2006, the Company had the
following estimated contractual obligations (in millions):
Payment due by period
---------------------
Contractual Obligations Total 2007 2008-2009 2010-2011 Thereafter
----------------------- ----- ---- --------- --------- ----------
Long-term debt obligations (a) $ 442 $ 41 $ 64 $ 66 $ 271
Estimated interest on debt (b) 161 23 41 33 64
Purchase obligations (c) 114 75 39 -- --
Post-retirement obligations (d) 34 3 6 7 18
Non-qualified benefit obligations (e) 36 7 3 13 13
Operating lease obligations (f) 70 10 14 11 35
------ ------ ------ ------ -------
Total $ 857 $ 159 $ 167 $ 130 $ 401
====== ====== ====== ====== =======
(a) Long-term debt obligations include principal repayments of
short-term and long-term debt as described in Note 7 to the
Consolidated Financial Statements.
(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, 2006. 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 $18 million noted in the
column labeled "Thereafter" comprises estimated benefit payments
for 2013 through 2016. Post-retirement obligations are described
further in Note 9 to the Consolidated Financial Statements.
(e) Non-qualified benefit obligations includes estimated payments to
executives and directors under the Company's four non-qualified
plans, as described in Note 9 to the Consolidated Financial
Statements. The $13 million noted in the column labeled
"Thereafter" comprises estimated benefit payments for 2013
through 2016. Additional information about the Company's
non-qualified plans is included in Note 9 to the Consolidated
Financial Statements.
(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 8 to the Consolidated Financial Statements.
Off Balance Sheet Arrangements: See Note 12 of the Consolidated
Financial Statements, which is incorporated herein by reference, for a
description of contingent commitments that totaled approximately $97 million at
December 31, 2006.
ECONOMIC & BUSINESS OUTLOOK
In 2006, the pace of growth in the Hawaii economy slowed and moderate
growth is expected to continue into 2007. The Hawaii economy remains healthy, as
evidenced by a stable, growing tourism industry, a large military presence with
its attendant expenditures, a robust retail environment, and expectations of
continued, large infrastructure projects. In 2007, Hawaii is expected to see
continued growth in real personal income, visitor arrivals, and job growth of
1.8 percent, 2.0 percent, and 1.5 percent, respectively (source: University of
Hawaii Economic Research Organization). Although the rate of inflation is
expected to ease in 2007 from higher-than-expected levels in 2006, it may have a
dampening effect on real economic growth. Nevertheless, with an expectation of a
stable, but modestly growing economy, A&B expects continued good performance in
2007 as it explores additional growth opportunities.
The Company's long-term strategic intent is to expand its real estate
segment through an active real estate investment program, including land
acquisitions, development of new and current projects, joint ventures, and
effective maintenance of income-producing properties. In the ocean
transportation segment, growth will be influenced by various initiatives, which
include the expansion of Matson Integrated Logistics ("MIL"), extension of
cross-selling opportunities between MIL and Matson, and the margin growth of
Matson's expedited service from China. In the Agribusiness segment, growth
opportunities include the expansion of Agribusiness' specialty sugar products,
but may also include various energy initiatives, which are in the early stages
of evaluation.
Real Estate - Leasing: The Company's lease portfolio consists of
high-quality properties in attractive locations, generates approximately 50
percent of the Company's real estate income, and together with real estate sales
segment assets, comprises 36 percent of consolidated identifiable assets. These
properties are well diversified by geography, asset class, and tenant profile,
which provides protection against location-specific downturns. In addition, the
lease portfolio serves to mitigate the effect of potential slowdowns in the
development activities of the Company's business. Occupancy at year-end averaged
98 percent for Mainland properties and 98 percent for Hawaii properties.
Although these near-record occupancies cannot be sustained indefinitely, the
Company expects steady performance in 2007 as it continues to expand its leased
portfolio and improve the performance of its properties through re-tenanting and
property repositioning. In addition, in the Hawaii market, where current market
vacancy rates are at or near historic lows of 2.3 percent, 7.0 percent and 2.2
percent for industrial, office, and retail properties, respectively, the Company
expects continued strength in its lease rate structure.
Real Estate - Sales: The Company's development activities, which are
primarily concentrated in Hawaii, consist of a diversified "pipeline" of
property types, including, but not limited to: primary residential condominiums,
primary residential single or multi-family homes, resort residential housing,
office and industrial condominiums, commercial properties, and raw and improved
land.
In the primary residential market, which includes single family homes
and condominiums, the rapid rise in sales prices leveled off in the second half
of 2006. Traditional measures of market strength and depth, such as sales
volume, inventory of homes for sale, and the number of days on market, have
weakened. Despite these recent trends, median year-over-year sales prices for
single family homes and condominiums on the island of Oahu were up 6.8 percent
and 15.2 percent in 2006, respectively. To mitigate risk in its real estate
portfolio, the Company adheres to disciplined underwriting, which may include
self-imposed pre-sale or pre-leasing requirements, phased development, and joint
ventures with third-parties.
In 2007, the Company expects continued growth, driven by the completion
of existing development pipeline projects, sales of owned real estate, and
opportunistic acquisitions. The Company also will continue to pursue its
strategy of identifying and developing projects that are longer-term in nature
that create stable income and profit streams while providing additional
diversification of its portfolio.
One of the Company's largest long-term projects is Kukui'ula, a
1,000-acre resort residential joint venture project on the island of Kauai,
which is a premier destination development being built in partnership with an
affiliate of DMB Associates, Inc. over a 10-15 year time horizon. While 2006
sales activity did not meet original expectations due to permitting delays and
recent market conditions, the prospects for the development remain favorable.
Sales of lots commenced in late 2006 and the Company expects closings to
continue for several years as the property is developed and sold. The
contribution to profit from this development in the near-term will be limited,
since the joint venture will be required to apply the percentage-of-completion
method of accounting for revenue recognition. However, from a cash flow
perspective, the joint venture will receive the full benefit generated from the
sales of its lots, which enable it to fund significant future construction
activities, thereby reducing partner capital requirements.
Other long-term projects in the pipeline include the Wailea Resort
development lands, and the Waiawa project, a master-planned community for
primary housing in central Oahu that is being developed in a joint venture with
Gentry Investment Properties.
Progress at other key residential developments, including Keola La'i in
Honolulu, Kai Malu at Wailea on Maui, and Port Allen in Kauai, continues to be
positive and will generate earnings for the Company over the next two years. A&B
also will continue to pursue similar projects with a 3-5 year return horizon to
complement its current slate of properties.
Transportation: In 2006, Matson completed its transition from its APL
alliance service to the startup of a new China service. Matson's performance to
date in China has been strong, and Matson was recently recognized by Drewry
Shipping Consultants as the world's best on-time carrier. It is upon this
foundation, coupled with its core logistics expertise that the Company believes
it can create an expedited shipping service from China that will first serve to
distinguish Matson from a highly competitive field, and second, provide an
improved rate structure in the future.
Performance in the Hawaii Service will continue to be influenced by the
strength of Hawaii's economy as well as Matson's competitors, in both the
container and auto segments. In March 2005, a new dedicated automobile and truck
carrier began bi-weekly roll-on, roll-off (ro-ro) service from California to
Hawaii. The operator targeted automobiles, buses, trucks and other rolling
stock, and has had success in 2006 in securing new accounts for the carriage of
westbound automobiles. The impact from the addition of this competitor has been
mitigated by Matson's service enhancements and successful contract extensions
with major accounts in 2005 and throughout 2006. Through conversion of one of
its C-9 class ships, Matson expects to add additional ro-ro capacity in 2007 to
improve its throughput and productivity related to auto carriage. In addition,
Horizon Lines will add capacity to its Hawaii container service starting in the
second quarter of 2007. The additional container capacity is estimated at
6 to 7 percent of the total market.
Matson Integrated Logistics is expected to continue growing through the
capture of new business opportunities, extension of its product offerings, and
expansion of its service area coverage. To extend its national footprint, MIL
may take advantage of opportunistic acquisitions in the highly fragmented
intermodal and truck brokerage sectors. Additionally, MIL will explore supply
chain opportunities at all of its network nodes throughout the coming year.
Agribusiness: A&B, through its Hawaiian Commercial & Sugar ("HC&S")
operations on Maui, produces approximately 75 to 80 percent of the sugar grown
in Hawaii. The commodity-based industry poses specific challenges, including
revenue enhancement and cost containment. While agriculture remains the best and
highest use for much of the Company's land, declining margins in this segment
may impact future profitability. In 2006, the Company commenced construction of
new facilities to expand its specialty sugar production, distribution and
marketing capabilities. The Company expects these investments to produce
favorable results as early as 2007, and it is encouraged by the growing market
demand in this higher-margin, high-growth segment of the food processing
industry. In addition, the Company is evaluating the expansion of its energy
production capacity (ethanol and electricity) through the use of cane juice and
leaves from the sugar cane plant. Although the Company has not completed its
evaluation, the Company did conclude in 2006 that production of ethanol from
available molasses alone is not economically feasible.
In addition to the economic and market information presented above,
there are two primary sources of periodic economic forecasts for the state of
Hawaii; the University of Hawaii Economic Research Organization (UHERO) and the
state's Department of Business, Economic Development & Tourism (DBEDT). For more
information please refer to the websites of these organizations at
www.uhero.hawaii.edu and www.hawaii.gov/dbedt/info/economic, respectively.
OTHER MATTERS
Management Changes: The following management changes occurred during
2006 and through February 16, 2007:
Charles M. Stockholm retired as non-executive chairman of the boards of
A&B and Matson effective April 27, 2006.
W. Allen Doane was named chairman of the boards of A&B and Matson
effective April 28, 2006. Mr. Doane is also president and chief
executive officer of A&B.
Christopher J. Benjamin was named treasurer of A&B effective May 1,
2006, and continues in the positions of senior vice president and chief
financial officer of A&B.
Tim Reid was named assistant treasurer of A&B effective May 1, 2006.
Thomas A. Wellman resigned as vice president, treasurer, and controller
of A&B effective May 1, 2006.
Paul K. Ito was promoted to controller of A&B effective May 1, 2006.
Ruthann S. Yamanaka resigned as vice president, human resources of A&B,
effective May 13, 2006.
John B. Kelley, vice president, investor relations of A&B, passed away
on May 24, 2006.
Kevin L. Halloran was named director of corporate finance and investor
relations of A&B, effective October 11, 2006.
Son-Jai Paik was named vice president, human resources of A&B,
effective January 1, 2007.
Allan D. Darling was named director, internal audit of A&B, effective
January 22, 2007.
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, 3, 4, 6 and 9 to the Consolidated Financial Statements.
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.
In February 2005, Matson entered into a right of first refusal
agreement with Aker Philadelphia Shipyard, which provides that, subsequent to
the delivery of the MV Maunalei, 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. The right of
first refusal was accounted for as a derivative under FASB Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The amount
recorded was not material. Other than the right of first refusal, the Company
had no other derivative financial instruments outstanding as of December 31,
2006 or 2005.
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's fixed rate debt consists of $345 million in principal
term notes. The Company's variable rate debt consists of $97 million in
principal term notes. Other than in default, the Company does not have an
obligation to prepay its fixed-rate debt prior to maturity and, as a result,
interest rate risk and the resulting changes in fair value would not have a
significant impact on the fixed rate borrowings unless the Company was required
to refinance such debt.
The following table summarizes A&B's debt obligations at December 31,
2006, presenting principal cash flows and related interest rates by the expected
fiscal year of repayment.
Expected Fiscal Year of Repayment as of December 31, 2006 (dollars in millions)
--------------------------------------------------------------------------------------------------
Fair Value at
December 31,
2007 2008 2009 2010 2011 Thereafter Total 2006
---- ---- ---- ---- ---- ---------- ----- ----
Fixed rate $ 31 $ 32 $ 32 $ 31 $ 27 $ 192 $ 345 $ 336
Average interest rate 5.33% 5.27% 5.21% 5.15% 5.19% 5.21% 5.23%
Variable rate $ 10 $ -- $ -- $ -- $ 8 $ 79 $ 97 $ 97
Average interest rate 5.87% -- -- -- 5.86% 5.87% 5.87%
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 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. Additionally, transactions related to its China Service that
commenced in February 2006, are primarily denominated in U.S. dollars, and
therefore, the Company's foreign currency exposure is not material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Management's Annual Report on Internal Control Over
Financial Reporting............................................ 52
Report of Independent Registered Public Accounting Firm........ 53
Consolidated Statements of Income.............................. 54
Consolidated Statements of Cash Flows.......................... 55
Consolidated Balance Sheets.................................... 56
Consolidated Statements of Shareholders' Equity................ 57
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies......... 58
2. Discontinued Operations........................... 65
3. Impairment and Disposal of Investments............. 65
4. Investments in Affiliates.......................... 65
5. Property .......................................... 68
6. Capital Construction Fund.......................... 68
7. Notes Payable and Long-Term Debt................... 69
8. Leases .......................................... 71
9. Employee Benefit Plans............................. 72
10. Income Taxes....................................... 77
11. Stock Options and Non-Vested Stock................. 79
12. Commitments, Guarantees and Contingencies.......... 83
13. Industry Segments.................................. 86
14. Quarterly Information (Unaudited).................. 88
15. Parent Company Condensed Financial Information..... 90
16. Related Party Transactions......................... 93
MANAGEMENT'S ANNUAL REPORT ON 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, 2006. 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, 2006, the Company's internal control over financial reporting is effective.
The Company's independent registered public accounting firm, Deloitte & Touche
LLP, has issued an audit report on management's assessment of the Company's
internal control over financial reporting. That report appears on page 53 of
this Form 10-K.
/s/ W. Allen Doane /s/ Christopher J. Benjamin
W. Allen Doane Christopher J. Benjamin
Chairman, President and Senior Vice President, Chief
Chief Executive Officer Financial Officer and Treasurer
February 23, 2007 February 23, 2007
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, 2006 and 2005,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 2006. We
also have audited management's assessment, included in the accompanying
"Management Report--Management's Annual Report on Internal Control Over
Financial Reporting," that the Company maintained effective internal control
over financial reporting as of December 31, 2006, based on the 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, 2006 and 2005, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2006, 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, 2006, 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, 2006, based on the
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
As discussed in Note 1 to the consolidated financial statements, on January 1,
2006, the Company changed its method of accounting for share-based payment
arrangements to conform to Statement of Financial Accounting Standards ("SFAS")
No. 123(R), Share-Based Payment, and as of December 31, 2006, the Company
adopted a new accounting standard for the reporting of defined benefit pensions
and other post retirement plans, SFAS No. 158, Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plans--an amendment of FASB Statements
No. 87, 88, 106, and 132(R).
/s/ Deloitte & Touche
Honolulu, Hawaii
February 23, 2007
ALEXANDER & BALDWIN, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per-share amounts)
Year Ended December 31,
2006 2005 2004
---- ---- ----
Operating Revenue:
Ocean transportation $ 936 $ 873 $ 846
Logistics services 444 432 377
Property leasing 95 79 71
Property sales 8 98 81
Agribusiness 124 121 111
-------- -------- --------
Total operating revenue 1,607 1,603 1,486
-------- -------- --------
Operating Costs and Expenses:
Cost of ocean transportation services 754 673 668
Cost of logistics services 395 390 345
Cost of property sales and leasing services 46 105 78
Cost of agricultural goods and services 118 110 105
Selling, general and administrative 146 140 128
Impairment loss for operating investment -- 2 --
-------- -------- --------
Total operating costs and expenses 1,459 1,420 1,324
-------- -------- --------
Operating Income 148 183 162
Other Income and (Expense)
Gain on insurance settlement -- 5 --
Equity in income of real estate affiliates 14 3 3
Interest income 6 5 4
Interest expense, net of amounts capitalized (15) (13) (13)
-------- -------- --------
Income From Continuing Operations Before Income Taxes 153 183 156
Income taxes 57 69 59
-------- -------- --------
Income From Continuing Operations 96 114 97
Income from discontinued operations, net of income taxes (see
Note 2) 26 12 4
-------- -------- --------
Net Income $ 122 $ 126 $ 101
======== ======== ========
Basic Earnings per Share of Common Stock:
Continuing operations $ 2.22 $ 2.63 $ 2.27
Discontinued operations 0.62 0.26 0.10
-------- -------- --------
Net income $ 2.84 $ 2.89 $ 2.37
======== ======== ========
Diluted Earnings per Share of Common Stock:
Continuing operations $ 2.20 $ 2.60 $ 2.24
Discontinued operations 0.61 0.26 0.09
-------- -------- --------
Net income $ 2.81 $ 2.86 $ 2.33
======== ======== ========
Average Number of Shares Outstanding 43.2 43.6 42.6
Average Number of Dilutive Shares Outstanding 43.6 44.0 43.2
See notes to consolidated financial statements.
ALEXANDER & BALDWIN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Year Ended December 31,
2006 2005 2004
---- ---- ----
Cash Flows from Operating Activities:
Net income $ 122 $ 126 $ 101
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization 85 84 80
Deferred income taxes 40 68 (11)
Gains on disposal of assets (49) (30) (12)
Share-based expense 10 -- --
Equity in income of affiliates, net of distributions 1 (17) (9)
Write-down of long-lived assets and investments -- 2 --
Changes in assets and liabilities:
Accounts and notes receivable 5 5 (21)
Inventories (1) (4) 1
Prepaid expenses and other assets (35) (8) (14)
Deferred dry-docking costs (6) (1) 9
Liability for benefit plans 6 (1) 3
Accounts and income taxes payable (28) 39 26
Other liabilities 21 4 20
Real Estate Developments Held for Sale:
Real estate inventory sales 4 45 30
Expenditures for new real estate inventory (69) (34) (30)
------- ------- -------
Net cash provided by operations 106 278 173
------- ------- -------
Cash Flows from Investing Activities:
Capital expenditures for property and developments (281) (231) (151)
Receipts from disposal of income-producing
property, investments and other assets 61 25 22
Deposits into Capital Construction Fund (66) (219) (2)
Withdrawals from Capital Construction Fund 159 150 142
Payments for purchases of investments (40) (32) (39)
Proceeds from sale and maturity of investments 43 2 7
------- ------- -------
Net cash used in investing activities (124) (305) (21)
------- ------- -------
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt 217 104 56
Payments of long-term debt and deferred financing costs (102) (27) (158)
Payments of short-term borrowings - net -- (7) --
Repurchases of capital stock (72) -- (2)
Proceeds from issuance of capital stock, including excess tax benefit 5 11 26
Dividends paid (42) (39) (38)
------- ------- -------
Net cash provided by (used in) financing activities 6 42 (116)
------- ------- -------
Cash and Cash Equivalents:
Net increase for the year (12) 15 36
Balance, beginning of year 57 42 6
------- ------- -------
Balance, end of year $ 45 $ 57 $ 42
======= ======= =======
Other Cash Flow Information:
Interest paid $ (20) $ (17) $ (14)
Income taxes refunded (paid), net $ (49) $ 3 $ (61)
Non-cash Activities:
Debt assumed in real estate purchase $ -- $ 11 --
Tax-deferred property sales $ 60 $ 55 --
Tax-deferred property purchases $ (49) $ (28) --
See notes to consolidated financial statements.
ALEXANDER & BALDWIN, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except per-share amount)
December 31
2006 2005
---- ----
ASSETS
Current Assets
Cash and cash equivalents $ 45 $ 57
Accounts and notes receivable, less allowances of $14 for each year 178 177
Sugar and coffee inventories 7 6
Materials and supplies inventories 12 12
Real estate held for sale -- 9
Income taxes receivable 5 --
Deferred income taxes 10 16
Prepaid expenses and other assets 28 25
Accrued withdrawal (deposit), net to Capital Construction Fund -- 1
--------- ---------
Total current assets 285 303
Investments in Affiliates 149 154
Real Estate Developments 147 71
Property - net 1,499 1,289
Capital Construction Fund 1 93
Benefit Plan Assets 56 68
Other Assets 114 93
--------- ---------
Total $ 2,251 $ 2,071
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable and current portion of long-term debt $ 41 $ 31
Accounts payable 136 134
Payrolls and vacation due 18 19
Uninsured claims 12 16
Income taxes payable -- 12
Liability for benefit plans -- current portion 3 3
Accrued and other liabilities 47 39
--------- ---------
Total current liabilities 257 254
--------- ---------
Long-term Liabilities
Long-term debt 401 296
Deferred income taxes 442 415
Liability for benefit plans 52 47
Uninsured claims and other liabilities 72 45
--------- ---------
Total long-term liabilities 967 803
--------- ---------
Commitments and Contingencies
Shareholders' Equity
Capital stock - common stock without par value; authorized, 150 million
shares ($0.75 stated value per share); outstanding,
42.6 million shares in 2006 and 44.0 million shares in 2005 35 36
Additional capital 179 175
Accumulated other comprehensive loss (19) (7)
Deferred compensation -- (6)
Retained earnings 843 827
Cost of treasury stock (11) (11)
--------- ---------
Total shareholders' equity 1,027 1,014
--------- ---------
Total $ 2,251 $ 2,071
========= =========
See notes to consolidated financial statements.
ALEXANDER & BALDWIN, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 2006
(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 Total
------ ----- ------ ---- ------- ------ ------ -------- -----
Balance, December 31, 2003 46.0 $ 35 3.8 $ (12) $ 112 $ (8) -- $ 684 $ 811
Net income -- -- -- -- -- -- -- 101 101
Other comprehensive income,
net of tax:
Minimum pension liability
(net of taxes of $1) -- -- -- -- -- (2) -- -- (2)
Cash flow hedge -- -- -- -- -- 1 -- -- 1
-------
Total comprehensive income 100
-------
Shares repurchased (0.1) -- -- -- -- -- -- (2) (2)
Stock options exercised - net 1.0 -- -- -- 34 -- -- (4) 30
Shares issued - incentive plan 0.1 -- (0.1) 1 4 -- $ (2) -- 3
Dividends ($0.90 per share) -- -- -- -- -- -- -- (38) (38)
----- ----- --- ------ ----- ------ ----- ------- -------
Balance, December 31, 2004 47.0 35 3.7 (11) 150 (9) (2) 741 904
Net income -- -- -- -- -- -- -- 126 126
Other comprehensive income,
net of tax:
Minimum pension liability
(net of taxes of $1) -- -- -- -- -- 2 -- -- 2
-------
Total comprehensive income 128
-------
Stock options exercised - net 0.6 1 -- -- 17 -- -- (1) 17
Shares issued - incentive plan -- -- (0.1) -- 8 -- (6) -- 2
Share-based compensation -- -- -- -- -- -- 2 -- 2
Dividends ($0.90 per share) -- -- -- -- -- -- -- (39) (39)
----- ----- --- ------ ----- ------ ----- ------- -------
Balance, December 31, 2005 47.6 36 3.6 (11) 175 (7) (6) 827 1,014
Net income and other
comprehensive income -- -- -- -- -- -- -- 122 122
Shares repurchased (1.7) (1) -- -- (7) -- -- (64) (72)
Stock options exercised - net 0.1 -- -- -- 5 -- -- -- 5
Shares issued - incentive plan 0.2 -- -- -- 2 -- -- -- 2
Share-based compensation -- -- -- -- 10 -- -- -- 10
Adjustment to initially
adopt SFAS No. 123R -- -- -- -- (6) -- 6 -- --
Adjustment to initially
adopt SFAS No. 158, net of -- -- -- -- -- (12) -- -- (12)
tax
Dividends ($0.975 per share) -- -- -- -- -- -- -- (42) (42)
----- ----- --- ------ ----- ------ ----- ------- -------
Balance, December 31, 2006 46.2 $ 35 3.6 $ (11) $ 179 $ (19) $ -- $ 843 $ 1,027
====== ===== === ====== ===== ====== ===== ======= =======
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 Agribusiness.
These industries are described below:
Transportation - carrying freight, primarily between various U.S.
Pacific Coast, Hawaii, Guam, other Pacific island, and China ports;
chartering vessels to third parties; arranging domestic and
international rail intermodal service, long-haul and regional highway
brokerage, specialized hauling, flat-bed and project work,
less-than-truckload and expedited/air freight services; and providing
terminal, stevedoring and container equipment maintenance services in
Hawaii.
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.
Agribusiness - 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, to the extent not used
in factory operations, electricity.
Principles of Consolidation: The consolidated financial statements
include the accounts of Alexander & Baldwin, Inc. and all wholly-owned and
controlled subsidiaries (the "Company"), after elimination of significant
intercompany amounts.
Risks and Uncertainties: Factors that could adversely impact the
Company's operations or financial results include, but are not limited to, the
following: increased competition; strikes or work stoppages; increased cost of
energy; changes in laws and regulations relating to the Company's business;
unfavorable economic and political conditions in domestic or international
markets; litigation or legal proceedings; adverse weather conditions; changes in
the legal and regulatory environment; changes in accounting and taxation
standards, including an increase in tax rates; an inability to achieve the
Company's overall long-term goals; an inability to protect the Company's
information systems; future impairment charges; and global or regional
catastrophic events.
Investments in Affiliates: Significant investments in businesses,
partnerships, and limited liability companies in which the Company does not have
a controlling financial interest, but has the ability to exercise significant
influence, are accounted for under the equity method. A controlling financial
interest is one in which the Company has a majority voting interest or one in
which the Company is the primary beneficiary that absorbs the majority of the
expected losses, or receives a majority of the expected residual returns, or
both, of a variable interest entity as defined in FASB Interpretation No. 46
(revised December 2003), "Consolidation of Variable Interest Entities" (FIN
46R).
Segment Information: The Company has five operating segments in three
industries: Transportation, Real Estate, and Agribusiness. The Transportation
industry is comprised of ocean transportation and integrated logistics service
segments. The Real Estate industry is comprised of real estate leasing and real
estate sales segments. The Company reports segment information in the same way
that the chief operating decision maker assesses segment performance. For
purposes of certain segment disclosures, such as identifiable assets, the
Company's development activities are included with the real estate sales
segment. Additional information regarding these segments is found in Note 13.
Use of Estimates: The preparation of the consolidated financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the amounts reported. Significant estimates and assumptions are used
for, but not limited to: (i) asset impairments, (ii) revenue recognition for
long-term real estate developments, (iii) self-insured liabilities, (iv) cash
flow scenarios related to unconsolidated investments, (v) share-based
compensation, and (vi) income taxes. Future results could be materially affected
if actual results differ from these estimates and assumptions.
Cash and Cash Equivalents: Cash equivalents are composed of highly
liquid investments with a maturity of three months or less at the date of
purchase. The Company carries these investments at cost, which approximates fair
value. Outstanding checks in excess of funds on deposit totaled $9 and $27
million at December 31, 2006 and 2005, respectively, and are reflected as
current liabilities in the Consolidated Balance Sheets.
Fair Value of Financial Instruments: The fair values of cash and cash
equivalents, receivables and short-term borrowings approximate their carrying
values due to the short-term nature of the instruments. The carrying amount and
fair value of the Company's long-term debt at December 31, 2006 was $442 million
and $433 million, respectively.
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, 2006
were as follows (in millions):
Balance at Write-offs Balance at
Beginning of year Expense and Other End of Year
----------------- ------- --------- -----------
2004 $ 12 $ 6 $ (4) $ 14
2005 $ 14 $ 5 $ (5) $ 14
2006 $ 14 $ 2 $ (2) $ 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.
Dry-docking: 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
"dry-docking," to maintain the required operating certificates. These dry-docks
occur on scheduled intervals ranging from two to five years, depending on the
vessel age. Because the dry-docks enable the vessel to continue operating in
compliance with U.S. Coast Guard requirements, the costs of these scheduled
dry-docks are deferred and amortized until the next regularly scheduled dry-dock
period. Routine vessel maintenance and repairs that do not improve or extend
asset lives are charged to expense as incurred. Deferred amounts are included on
the Consolidated Balance Sheets in other non-current assets. Amortized amounts
are charged to operating expenses in the Consolidated Statements of Income.
Changes in deferred dry-docking costs are included in the Consolidated
Statements of Cash Flows in Cash Flows from Operating Activities.
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. 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 and amortization is computed using the
straight-line method over the estimated useful lives of the assets. 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 15
Terminal facilities 3 to 35
Machinery and equipment 3 to 35
Utility systems and other 5 to 50
Coffee orchards 20
In 2006, Matson extended the useful life of certain of its vessels
based on extensive modifications and improvements that extended the useful lives
of these vessels. The increase in the useful life of the vessels resulted in a
reduction in depreciation expense of $2.5 million, on an after-tax basis, or
$0.06 per diluted share in 2006.
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 either sell the completed asset or to hold it
as an investment, respectively. 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, 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 during the period in
which activities necessary to get the asset ready for its intended use are in
progress. 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. Total interest expense was $21 million,
$17 million, and $15 million in 2006, 2005, and 2004, respectively. Capitalized
interest was $6 million, $4 million, and $2 million in 2006, 2005, and 2004,
respectively.
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 an evaluation, the estimated future
undiscounted cash flows generated by the asset are compared with the amount
recorded for the asset to determine if its carrying value is not recoverable. If
this review determines that the recorded value will not be recovered, the amount
recorded for the asset is reduced to estimated fair value. 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
approximately $150 per acre, a value much lower than fair value.
Goodwill and Intangible Assets: Goodwill and intangibles are recorded
on the Balance Sheets as other non-current assets. Goodwill and intangible
assets relate to the acquisition of certain assets, obligations, and contracts
of two logistic service entities in 2003 and 2004. The purchase agreements
included earnout provisions based on EBITDA through 2009. The Company reviews
goodwill for potential impairment on an annual basis, or more frequently if
indications of impairment exist. Intangible assets are reviewed for impairment
whenever events or changes in circumstances would indicate the carrying amount
of the intangible asset(s) may not be recoverable.
The changes in the carrying amount of goodwill and intangible assets for the
years ended December 31, 2006 and 2005 were as follows (in millions):
Intangible
Goodwill Assets
-------- ----------
Balance, December 31, 2004 $ 3 $ 5
Additions 2 1
Amortization -- (1)
------- -------
Balance, December 31, 2005 5 5
Additions 4 --
Amortization -- (1)
------- -------
Balance, December 31, 2006 $ 9 $ 4
======= =======
Revenue Recognition: 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. In general, the Company recognizes revenue when persuasive
evidence of an arrangement exists, delivery of the service or product has
occurred, the sales price is fixed or determinable, and collectibility is
reasonably assured.
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.
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 following the
guidance in Emerging Issues Task Force 99-19, "Reporting Revenue Gross as a
Principal versus Net as an Agent." The Company serves as principal in
transactions because it is responsible for the contractual relationship with the
customer, has latitude in establishing prices, has discretion in supplier
selection, and retains credit risk.
Real Estate Sales Revenue Recognition: Sales are recorded when the
risks and rewards 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 associated with the subject property. 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 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 inventory 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, excluding orchard
development costs, 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 Share-Based Compensation: On January 1, 2006, the
Company adopted SFAS No. 123 (revised 2004), "Share-Based Payment" (SFAS No.
123R) using the modified prospective method. SFAS No. 123R requires the
measurement and recognition of compensation expense for all share-based payment
awards made to employees and directors. Prior to January 1, 2006, the Company
accounted for share-based compensation under Accounting Principles Board ("APB")
Opinion No. 25, which required recognition of compensation expense based on the
intrinsic value of the equity instrument awarded. Consequently, no share-based
compensation expense for stock option grants was reflected in net income since
all options granted had an exercise price equal to the market value of the
underlying common stock on the date of grant. If the Company had applied the
fair value recognition provisions of SFAS No. 123, as amended by SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure," the
effect on net income and earnings per share for the years ended December 31,
2005 and 2004 would have been as follows (in millions, except per-share
amounts):
2005 2004
---- ----
Net Income:
As reported $ 126 $ 101
Share-based compensation
expense determined under fair
value based method for all
awards, net of related tax effects (2) (2)
------- -------
Pro forma $ 124 $ 99
======= =======
Net Income Per Share:
Basic, as reported $ 2.89 $ 2.37
Basic, pro forma $ 2.85 $ 2.33
Diluted, as reported $ 2.86 $ 2.33
Diluted, pro forma $ 2.82 $ 2.30
The Company's various stock option plans are more fully described in Note 11.
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 and non-vested stock. The computation of average dilutive shares
outstanding excluded non-qualified stock options to purchase 0.2 million shares
of common stock for the year ended December 31, 2006. These amounts were
excluded because the options' exercise prices were greater than the average
market price of the Company's common stock for the periods presented and,
therefore, the effect would be anti-dilutive. The anti-dilutive shares for 2005
and 2004 were not significant.
2006 2005 2004
---- ---- ----
Effect on average shares outstanding of
assumed exercise of stock options (in
millions of shares):
Average number of shares
outstanding 43.2 43.6 42.6
Effect of dilutive securities:
outstanding stock options and
non-vested stock 0.4 0.4 0.6
---- ---- ----
Average number of shares
outstanding after effect of
dilutive securities 43.6 44.0 43.2
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. All derivatives are recognized in the
consolidated balance sheets at their fair value. At December 31, 2006 and 2005,
there were no material derivative instruments held by the Company.
Comprehensive Income: Comprehensive Income includes all changes in
Stockholders' Equity, except those resulting from capital stock transactions.
Other Comprehensive Income (Loss) includes gains or losses on certain derivative
instruments used to hedge interest rate risk (see Note 7).
Environmental Costs: Environmental expenditures are recorded as a
liability and charged to operating expense when the environmental liability has
been incurred and can be estimated. An environmental liability has been incurred
when both of the following conditions have been met: (i) litigation has
commenced or a claim or an assessment has been asserted, or, based on available
information, commencement of litigation or assertion of a claim or an assessment
is probable, and (ii) based on available information, it is probable that the
outcome of such litigation, claim, or assessment will be unfavorable. 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. 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,
2006 or 2005.
Self-Insured Liabilities: The Company is self-insured for certain
losses that include, but are not limited to, employee health, workers'
compensation, general liability, real and personal property, and real estate
construction defect claims. However, the Company obtains third-party insurance
coverage to limit its exposure to these claims. When estimating its self-insured
liabilities, the Company considers a number of factors, including historical
claims experience, demographic factors, and valuations provided by independent
third-parties. Periodically, management reviews its assumptions and the
valuations provided by independent third-parties to determine the adequacy of
the Company's self-insured liabilities.
Impact of Recently Issued Accounting Standards: On July 13, 2006, the
Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes--an interpretation of FASB Statement
No. 109" ("FIN 48"). This Interpretation prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. This
Interpretation also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure, and transition. The
new interpretation will be effective for fiscal years beginning after December
15, 2006. The Company will adopt this interpretation on January 1, 2007.
Although the Company has not completed its evaluation, the adoption of FIN 48
is not expected to have a material impact on the Company's consolidated
financial position, results of operations, or cash flows.
On September 15, 2006, the FASB issued SFAS No. 157 ("SFAS No. 157"),
"Fair Value Measurements," which defines fair value, establishes guidelines for
measuring fair value, and expands disclosures regarding fair value measurements.
SFAS No. 157 does not require any new fair value measurements but rather
eliminates inconsistencies in guidance found in various prior accounting
pronouncements. SFAS No. 157 is effective for fiscal years beginning after
November 15, 2007. The Company is currently evaluating the impact of SFAS No.
157, but does not expect that the adoption of SFAS No. 157 will have a material
impact on the Company's consolidated financial position, results of operations,
or cash flows.
The Company adopted SFAS No. 158 ("SFAS No. 158"), "Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans" as of
December 31, 2006, as required. This standard amends FASB Statements No. 87, 88,
106 and 132(R) and requires an employer to recognize the overfunded or
underfunded status of a defined benefit postretirement plan (other than a
multiemployer plan) as an asset or liability in its statement of financial
position and to recognize changes in that funded status in the year in which the
changes occur through comprehensive income. The pension asset or liability is
the difference between the plan assets at fair value and the projected benefit
obligation as of year end. For other postretirement benefit plans, the asset or
liability is the difference between the plan assets at fair value and the
accumulated postretirement benefit obligation as of year end. Note 9 provides
additional information about the impact resulting from the adoption of SFAS No.
158.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements" ("SAB 108"). SAB 108
provides guidance on the consideration of the effects of prior year
misstatements in quantifying current year misstatements for the purpose of a
materiality assessment. SAB 108 establishes an approach that requires
quantification of financial statement errors based on the effects of each of the
Company's balance sheets and statements of operations and the related financial
statement disclosures. The Company adopted SAB 108 as of December 31, 2006. The
adoption of SAB 108 did not have a material impact on the Company's consolidated
financial position, results of operations, or cash flows.
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. DISCONTINUED OPERATIONS
During 2006, the sales of two retail centers in Phoenix, Arizona, for
approximately $36 million, an office building on Maui, for approximately $16
million, a retail center in Kailua-Kona on the island of Hawaii for
approximately $27 million, and several commercial parcels in Hawaii were
included in 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 had 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 and
the office building in Maui was sold in March 2006.
During 2004, the sale of a Maui property was classified as a
discontinued operation. In addition, two office and one light industrial
property 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.
The revenue, operating profit, income tax expense and after-tax effects
of these transactions for the three years ended December 31, 2006, were as
follows (in millions, except per share amounts):
2006 2005 2004
---- ---- ----
Sales Revenue $ 90 $ 50 $ 1
Leasing Revenue $ 4 $ 10 $ 12
Sales Operating Profit $ 40 $ 14 $ 2
Leasing Operating Profit $ 3 $ 5 $ 4
Income tax expense $ 17 $ 7 $ 2
Income from Discontinued Operations $ 26 $ 12 $ 4
Basic Earnings Per Share $ 0.62 $ 0.26 $ 0.10
Diluted Earnings Per Share $ 0.61 $ 0.26 $ 0.09
The results of operations from these properties in prior years were
reclassified from continuing operations to discontinued operations to conform to
the current year's accounting 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.
3. 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"). 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.
4. INVESTMENTS IN AFFILIATES
At December 31, 2006 and 2005, investments consisted principally of
equity in limited liability companies, each of which was accounted for following
the equity method of accounting because either: (i) the entity was not within
the scope of FASB Interpretation No. 46 (revised December 2003) "Consolidation
of Variable Interest Entities" ("FIN 46R"), as amended, (ii) the entity was not
determined to be a variable interest entity ("VIE"), or (iii) the Company was
not determined to be the primary beneficiary. These investments are summarized,
by industry, as follows (in millions):
2006 2005
---- ----
Equity in Affiliated Companies:
Real Estate $ 99 $ 114
Transportation 50 40
------- -------
Total Investments $ 149 $ 154
======= =======
Operating results include the Company's proportionate share of income
(loss) from its equity method investments. A summary of financial information
for the Company's equity method investments by industry is as follows (in
millions):
December 31,
2006 2005
---- ----
Real Estate Transportation Real Estate Transportation
----------- -------------- ----------- --------------
Current assets $ 93 $ 56 $ 309 $ 58
Noncurrent assets 235 123 128 81
------ ------- ------- -------
Total assets $ 328 $ 179 $ 437 $ 139
====== ======= ======= =======
Current liabilities $ 86 $ 46 $ 245 $ 36
Noncurrent liabilities 43 5 14 3
------ ------- ------- -------
Total liabilities $ 129 $ 51 $ 259 $ 39
====== ======= ======= =======
Year Ended December 31,
2006 2005 2004
---- ---- ----
Real Estate:
Operating revenue $ 311 $ 8 $ 6
Operating costs and expenses 248 1 4
------ ------ -------
Operating income $ 63 $ 7 $ 2
====== ====== =======
Transportation:
Operating revenue $ 501 $ 486 $ 384
Operating costs and expenses 477 449 371
------ ------ -------
Operating income $ 24 $ 37 $ 13
====== ====== =======
In addition to the investments described above, the Company formerly
held ownership interests in C&H (that was sold in August 2005) and Sea Star
Line, LLC ("Sea Star") (that was sold in August 2004). Prior to the sale of C&H,
the Company recorded, in 2005, a loss of $2 million to write down the investment
to the value expected to be received upon its ultimate disposition. Matson's
sale of its 19.5 percent investment in Sea Star for approximately $7 million
resulted in a gain of approximately $1 million in 2004.
Real Estate: In 2006, the Company and its real estate subsidiaries had
investments in ten joint ventures that operate and/or develop real estate. The
Company does not have a controlling financial interest, as interpreted under FIN
46R, in any of these ventures and, accordingly, accounts for its investments in
the real estate ventures using the equity method of accounting. A summary of the
Company's principal investments is as follows:
A) Bakersfield: In November 2006, A&B entered into a joint venture
with Intertex P&G Retail, LLC, for the development of a 600,000
square-foot retail center on a 57.3-acre commercial parcel in
Bakersfield, California. The parcel was acquired in November 2006.
The Company has a 50 percent voting interest in the venture.
B) 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
final subdivision plan was recorded and includes 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, and a 15.5-acre parcel for
the development of a 126,600 square-foot retail center. The Company
has a 50 percent voting interest in the venture.
C) Centre Pointe Marketplace: In April 2005, A&B entered into a joint
venture with Intertex Centre Pointe Marketplace, LLC, and in April
2005, the venture acquired a 10.2-acre parcel for the planned
development of a 104,700-square-foot retail center in Valencia,
California. The Company has a 50 percent voting interest in the
venture.
D) Crossroads Plaza: In June 2004, A&B entered into a joint venture
with Intertex Hasley, LLC, for the planned development of a
60,000-square-foot mixed-use neighborhood retail center on 6.5
acres of commercial-zoned land in Valencia, California. The
property was acquired in August 2004. The Company has a 50 percent
voting interest in the venture.
E) Hokua: In July 2003, the Company entered into a joint venture with
MK Management LLC, for the 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 and its income on
its investment. The Company has a 50 percent voting interest in the
venture.
F) Kai Malu at Wailea: In April 2004, A&B entered into a joint venture
with Armstrong Builders, Ltd. for development of a 150-unit duplex
project on a 25-acre parcel in Wailea. Closings commenced in the
fourth quarter of 2006 and are expected to be completed in 2008.
The Company has a 50 percent voting interest in the venture.
G) Ka Milo at Mauna Lani: In April 2004, the Company entered into a
joint venture with Brookfield Homes Hawaii Inc., NYSE:BHS,
("Brookfield") to 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 venture, and is planned for 37
single-family units and 100 duplex town-homes. The Company has a 50
percent voting interest in the venture.
H) Kukui'ula: Kukui`ula is a 1,000-acre master planned resort
residential community 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
development of Kukui`ula, which is planned to consist of
approximately 1,200 high-end residential units. The Company has a
50 percent voting interest in the venture.
I) Rye Canyon: In October 2004, the Company entered into a joint
venture with Intertex Properties, LLC for the development of an
office building on 5.4 acres of commercial-zoned land in Valencia,
California. The property was acquired in 2004. Subsequently, the
venture decided to sell the land for $4 million. The sale closed in
January 2006.
J) Waiawa: In August 2006, the Company entered into a joint venture
with an affiliate of Gentry Investment Properties (Waiawa
Development LLC) for the master development of 530 residential
acres in Central Oahu. The Company has a 50 percent voting interest
in the venture.
Transportation: Matson, a wholly owned subsidiary of the Company, owns
a 35 percent membership interest in 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 accounts for its interest in SSAT under the equity method of
accounting. The "Cost of transportation services" included approximately $146
million, $137 million, and $130 million for 2006, 2005, and 2004, respectively,
paid to this unconsolidated affiliate for terminal services.
The Company's equity in earnings or (loss) of unconsolidated
transportation affiliates of $13 million, $17 million and $6 million for 2006,
2005, and 2004, 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.
5. PROPERTY
Property on the Consolidated Balance Sheets includes the following (in
millions):
2006 2005
---- ----
Vessels $ 1,145 $ 1,000
Machinery and equipment 572 517
Buildings 412 359
Land 156 158
Water, power and sewer systems 105 102
Other property improvements 95 86
--------- ---------
Total 2,485 2,222
Less accumulated depreciation and amortization 986 933
--------- ---------
Property - net $ 1,499 $ 1,289
========= =========
6. 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,
2006, the oldest CCF deposits date from 2006. Management believes that all
amounts on deposit in the CCF at the end of 2006 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.
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, 2006 and 2005, the balances on deposit in the CCF are
summarized as follows (in millions):
2006 2005
--------------------- ---------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- ----- --------- -----
Mortgage-backed securities $ 1 $ 1 $ 1 $ 1
Cash and cash equivalents -- -- 93 93
Accrued (withdrawals) deposits, net -- -- (1) (1)
----- ----- ----- -----
Total $ 1 $ 1 $ 93 $ 93
===== ===== ===== =====
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 2006, $0.1 million in 2005, and $0.4 million in 2004, 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.
7. NOTES PAYABLE AND LONG-TERM DEBT
At December 31, 2006 and 2005, notes payable and long-term debt
consisted of the following (in millions):
2006 2005
---- ----
Revolving Credit loans, 5.58% $ 27 $ --
Title XI Bonds:
5.27%, payable through 2029 51 53
5.34%, payable through 2028 48 51
Term Loans:
4.79%, payable through 2020 95 102
6.00%, payable through 2015 70 --
5.53%, payable through 2016 50 --
4.10%, payable through 2012 35 35
7.55%, payable through 2009 15 15
7.42%, payable through 2010 11 14
4.31%, payable through 2010 11 13
6.20%, payable through 2013 11 11
7.44%, payable through 2007 7 15
7.57%, payable through 2009 6 8
7.43%, payable through 2007 5 10
------- -------
Total 442 327
Less current portion 41 31
------- -------
Long-term debt $ 401 $ 296
======= =======
Long-term Debt Maturities: At December 31, 2006, maturities of all
long-term debt during the next five years and thereafter are $41 million in
2007, $32 million in 2008 and 2009, $31 million in 2010, $35 million in 2011,
and $271 million thereafter.
Revolving Credit Facilities: The Company has two revolving senior
credit facilities with six commercial banks that expire in December 2011. The
revolving credit facilities provide for an aggregate commitment of $325 million,
which consists of a $225 million and $100 million facility for A&B and Matson,
respectively. Amounts drawn under the facilities bear interest at London
Interbank Offered Rate ("LIBOR") plus 0.225 percent, provided the Company
maintains an S&P/Moody's rating of A-/A3 or better. The agreement contains
certain restrictive covenants, the most significant of which requires the
maintenance of minimum shareholders' equity levels, minimum property investment
values, and a maximum ratio of debt to earnings before interest, depreciation,
amortization, and taxes. At December 31, 2006, $27 million was outstanding, $20
million in letters of credit had been issued against the facility, and $279
million remained available for borrowing. As of December 31, 2006, amounts drawn
on this facility were classified as non-current because the Company had the
ability and intent to refinance the balance on a long-term basis.
The Company has a $400 million three-year unsecured note purchase and
private shelf agreement with Prudential Investment Management, Inc. and its
affiliates (collectively, "Prudential") under which the Company may issue notes
in an aggregate amount up to $400 million, less the sum of all principal amounts
then outstanding on any notes issued by the Company or any of its subsidiaries
to Prudential and the amount of any notes that are committed under the note
purchase agreement. The facility expires on April 19, 2009 and borrowings under
the shelf facility bear interest at rates that are determined at the time of the
borrowing. Under the facility, Prudential is committed to purchase three series
of notes under three scheduled draws totaling $125 million, at rates ranging
from 5.53 percent to 5.56 percent. In December 2006, the Company received $50
million that represents the first of three scheduled draws under the facility.
The second and third draws will be received in March and June 2007 in the
amounts of $50 million and $25 million, respectively. The Prudential agreement
contains certain restrictive covenants that are substantially the same as the
covenants contained in the $325 million revolving senior credit facilities. At
December 31, 2006, $164 million was available under the facility, including the
additional $75 million that will be drawn in 2007 under the committed series of
notes.
Matson has a $105 million secured reducing revolving credit agreement
with DnB NOR Bank ASA and ING Bank N.V. that expires in June 2015. The maximum
amount that can be outstanding on the facility declines in eight annual
commitment reductions of $10.5 million each, commencing in June 2007. The
incremental borrowing rate for the facility is 0.225 percent over LIBOR through
June 2010. For the remaining term, the incremental borrowing rate is 0.300
percent over LIBOR. The agreement contains certain restrictive covenants, the
most significant of which requires the maintenance of minimum net worth levels,
minimum working capital levels, and maximum ratio of long-term debt to net
worth. At December 31, 2006, $70 million was outstanding and $35 million
remained available for borrowing.
The unused borrowing capacity under all revolving credit and term
facilities as of December 31, 2006, including the scheduled $75 million to be
drawn in 2007 under the Prudential $400 million facility, totaled $478 million.
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 $1.1 million semiannual payments that
commenced 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 $1.1 million semiannual payments that
commenced in March 2004.
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 with $11.0 million currently outstanding. The Series B notes carry
interest at 4.79 percent with $94.5 million currently outstanding.
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, with an outstanding amount of $11.2 million at December 31, 2006,
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.
8. LEASES
The Company as Lessee: Principal operating leases include land, office
and terminal facilities, containers and equipment, leased for periods that
expire through 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 $37 million, $38 million, and $29
million for the years ended December 31, 2006, 2005, and 2004, 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, 2006 were as follows (in millions):
Operating
Leases
---------
2007 $ 10
2008 8
2009 6
2010 6
2011 5
Thereafter 35
-------
Total minimum lease payments $ 70
=======
The Company as Lessor: The Company leases land, buildings, and land
improvements under operating leases. The historical cost of, and accumulated
depreciation on, leased property at December 31, 2006 and 2005 were as follows
(in millions):
2006 2005
---- ----
Leased property - transportation $ -- $ 158
Leased property - real estate 591 560
Less accumulated depreciation (88) (170)
------- -------
Property under operating leases--net $ 503 $ 548
======= =======
Total rental income under these operating leases for the three years
ended December 31, 2006 was as follows (in millions):
2006 2005 2004
---- ---- ----
Minimum rentals $ 74 $ 112 $ 109
Contingent rentals (based on sales volume) 3 3 2
------- ------- -------
Total $ 77 $ 115 $ 111
======= ======= =======
Future minimum rentals on non-cancelable leases at December 31, 2006
were as follows (in millions):
Operating
Leases
---------
2007 $ 70
2008 61
2009 51
2010 37
2011 27
Thereafter 107
-------
Total $ 353
=======
9. 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.
As of December 31, 2006, the Company adopted the recognition and
disclosure provisions of SFAS No. 158, as required. This standard amends FASB
Statements No. 87, 88, 106 and 132(R) and requires an employer to recognize the
overfunded or underfunded status of a defined benefit postretirement plan (other
than a multiemployer plan) as an asset or liability in its statement of
financial position and to recognize changes in that funded status in the year in
which the changes occur through comprehensive income. The pension asset or
liability is the difference between the plan assets at fair value and the
projected benefit obligation as of year end. For other postretirement benefit
plans, the asset or liability is the difference between the plan assets at fair
value and the accumulated postretirement benefit obligation as of year end. The
incremental effect from the application of SFAS No. 158 on individual line items
in the Consolidated Balance Sheet as of December 31, 2006 is as follows:
As of December 31, 2006
(in millions)
Before After
Application Application
of SFAS of SFAS
No. 158 Adjustments No. 158
----------- ----------- -----------
Benefit plan assets $ 70 $ (14) $ 56
Total assets 2,265 (14) 2,251
Liability for benefit plans - noncurrent 50 2 52
Uninsured claims and other liabilities 68 4 72
Deferred income taxes 450 (8) 442
Total long-term liabilities 969 (2) 967
Accumulated other comprehensive income (7) (12) (19)
Total shareholders' equity 1,039 (12) 1,027
Total liabilities and shareholders' equity 2,265 (14) 2,251
Asset Allocations, Investments and Plan Administration: The Company's
weighted-average asset allocations at December 31, 2006 and 2005, and 2006
year-end target allocation, by asset category, were as follows:
Target 2006 2005
------ ---- ----
Domestic equity securities 60% 58% 59%
International equity securities 10% 14% 14%
Debt securities 15% 11% 12%
Real estate 15% 12% 12%
Other and cash -- 5% 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 2006 or 2005 to its defined benefit pension plans No
contributions are expected to be required in 2007. The Company's funding policy
is to contribute cash to its pension plans so that it meets at least the minimum
contribution requirements.
In August 2006, the Pension Protection Act of 2006 (the "Act") was
enacted into law. While the Company is still evaluating the Act and additional
IRS guidance is required before the Company can fully evaluate its impact, the
Company does not currently expect the Act to have any significant effect on its
current funding strategy for its pension plans.
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 and the unfunded accumulated post-retirement
benefit plans at December 31, 2006 and 2005 are shown below (dollars in
millions):
Pension Benefits Other Post-retirement
---------------- ---------------------
Benefits
--------
2006 2005 2006 2005
---- ---- ---- ----
Change in Benefit Obligation
Benefit obligation at
beginning of year $ 294 $ 274 $ 56 $ 54
Service cost 7 6 1 1
Interest cost 17 16 3 3
Plan participants'
contributions -- -- 2
Actuarial (gain) loss (7) 13 (6) 1
Benefits paid (15) (15) (3) (5)
Amendments 1 -- -- --
-------- -------- ------- -------
Benefit obligation at
end of year 297 294 51 56
-------- -------- ------- -------
Change in Plan Assets
Fair value of plan assets at
beginning of year 315 295
Actual return on plan assets 49 35
Employer contribution -- --
Benefits paid (15) (15)
-------- --------
Fair value of plan assets
at end of year 349 315
-------- --------
Funded Status at End of Year $ 52 $ 21 $ (51) $ (56)
======== ======== ======= =======
Amounts recognized on the Consolidated Balance Sheets and the
accumulated benefit obligations at December 31, 2006 and 2005 are as follows (in
millions):
Pension Benefits Other Post-retirement
---------------- ---------------------
Benefits
--------
2006 2005 2006 2005
---- ---- ---- ----
Prepaid (Accrued) Benefit Cost
Funded status - Plan assets greater
(less) than benefit obligation 21 (56)
Unrecognized net actuarial (gain)
loss 46 6
Unrecognized prior service cost 2 --
Intangible asset -- --
Minimum pension liability (1) --
-------- -------
Prepaid (Accrued) benefit cost $ 68 $ (50)
======== =======
Non-current assets $ 56 $ --
Current liabilities -- (3)
Non-current liabilities (4) (48)
-------- --------
Total $ 52 $ (51)
======== ========
The information for qualified pension plans with an accumulated benefit
obligation in excess of plan assets at December 31, 2006 and 2005 is shown below
(in millions):
2006 2005
---- ----
Projected benefit obligation $ 35 $ 35
Accumulated benefit obligation $ 30 $ 30
Fair value of plan assets $ 30 $ 28
Amounts recognized in accumulated other comprehensive income at
December 31, 2006 are as follows (in millions):
December 31, 2006
Other
Pension Post-Retirement
Benefits Benefits
-------- ---------------
Net loss (gain) $ 15 $ (2)
Unrecognized prior service cost (credit) 3 --
------ ------
$ 18 $ (2)
====== ======
The estimated prior service cost for the defined benefit pension plans
that will be amortized from accumulated other comprehensive income into net
periodic benefit cost in 2007 is $0.4 million. The estimated net loss that will
be recognized in net periodic pension cost for the defined benefit pension plans
in 2007 is negligible. The estimated prior service credit for the other defined
benefit postretirement plans that will be amortized from accumulated other
comprehensive income into net periodic pension benefit over the next fiscal
year is $0.3 million.
Unrecognized gains and losses of the post-retirement benefit plans are
amortized over five years. Although current health costs are expected to
increase, 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.
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 2006 post-retirement obligations
include the benefits of the Act's subsidy. These amounts are not material.
Components of the net periodic benefit cost for the defined benefit
pension plans and the post-retirement health care and life insurance benefit
plans and the weighted average assumptions used to determine benefit information
during 2006, 2005, and 2004, are shown below (in millions):
Pension Benefits Other Post-retirement Benefits
------------------------------- ------------------------------
2006 2005 2004 2006 2005 2004
---- ---- ---- ---- ---- ----
Components of Net Periodic
Benefit Cost/(Income)
Service cost $ 7 $ 6 $ 6 $ 1 $ 1 $ 1
Interest cost 17 16 16 3 3 3
Expected return on plan assets (26) (24) (23) -- -- --
Recognition of net (gain) loss 2 2 2 1 1 --
Amortization of prior service cost -- -- 1 -- -- --
------ ------ ------ ------- ------- -------
Net periodic benefit cost/(income) $ -- $ -- $ 2 $ 5 $ 5 $ 4
------ ------ ------ ------- ------- -------
Weighted Average Assumptions:
Discount rate 6.00% 5.75% 6.00% 6.00% 5.75% 6.00%
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% 9.00%
Ultimate rate 5.00% 5.00% 5.00%
Year ultimate rate is reached 2011 2010 2009
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 15.6 percent, 13.2 percent, and 8.6 percent,
respectively. The long-term average return has been approximately 10.5 percent.
The actual returns have generally exceeded the benchmark returns used by the
Company to evaluate performance of its fund managers.
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, 2006, 2005 and 2004, and the net periodic post-retirement
benefit cost for 2006, 2005 and 2004, would have increased or decreased as
follows (in millions):
Other Post-retirement Benefits
One Percentage Point
-------------------------------------------------------------------------------
Increase Decrease
---------------------------------- -----------------------------------
2006 2005 2004 2006 2005 2004
---- ---- ---- ---- ---- ----
Effect on total of service and
interest cost components $ -- $ 1 $ -- $ -- $ -- $ --
Effect on post-retirement
benefit obligation $ 5 $ 5 $ 6 $ (4) $ (4) $ (5)
Non-qualified Benefit Plans: The Company has non-qualified supplemental
pension plans covering certain employees and retirees, which provide for
incremental pension payments from the Company's general funds so that total
pension benefits would be substantially equal to amounts that would have been
payable from the Company's qualified pension plans if it were not for
limitations imposed by income tax regulations. The funded status, relating to
these unfunded plans, totaled $(27) million at December 31, 2006. A 5.75 percent
discount rate was used to determine the 2006 obligation. The expense associated
with the non-qualified plans was $4 million, $4 million, and $3 million, for
2006, 2005 and 2004, respectively. The 2004 expense included settlement losses
totaling $600,000. As of December 31, 2006, the amounts recognized in
accumulated other comprehensive income for unrecognized loss and unrecognized
prior service (credit) were $12 million and $(0.9) million, respectively.
The estimated net loss that will be recognized in net periodic pension cost in
2007 is approximately $1 million. The estimated prior service credit that will
be amortized from accumulated other comprehensive income into net periodic
pension benefit over the next fiscal year is negligible.
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
---- -------- ------------- --------
2007 $ 16 $ 7 $ 3
2008 16 1 3
2009 16 2 3
2010 17 12 3
2011 17 1 3
2012-2016 101 13 18
Multiemployer Plans: Matson participates in 10 multiemployer plans and
has an estimated withdrawal obligation with respect to four of these plans that
totals approximately $66 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 2006, $11 million in
2005, and $9 million in 2004.
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.
10. INCOME TAXES
The income tax expense on income from continuing operations for the
three years ended December 31, 2006 consisted of the following (in millions):
2006 2005 2004
---- ---- ----
Current:
Federal $ 26 $ 5 $ 64
State 3 1 6
------- ------ ------
Current 29 6 70
Deferred 28 63 (11)
----- ------ ------
Total continuing operations tax expense $ 57 $ 69 $ 59
===== ====== ======
Matson recorded a current tax benefit of $36 million for a deposit of
$95 million into CCF in 2006 and a current tax benefit of $78 million for a
deposit of $204 million in 2005. The current tax benefits in both years reduced
the current income tax payable, but did not reduce total income tax expense
because a reduction in the current income tax expense was offset by an increase
in deferred tax expense. Additional information about the CCF is included in
Note 6.
Income tax expense for the three years ended December 31, 2006 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, 2006 for the following reasons (in millions):
2006 2005 2004
---- ---- ----
Computed federal income tax expense $ 54 $ 65 $ 55
State income taxes 4 3 3
Other--net (1) 1 1
------ ------ ------
Income tax expense $ 57 $ 69 $ 59
====== ====== ======
Total State and Federal tax credits totaled $2 million annually for
2006 and 2005 and $1 million for 2004. The credits related to capital goods
excise tax credits, credits for investments in qualified high-tech businesses,
enterprise zone credits, credits for the production of electricity from
qualified facilities, and credits for expenditures on rehabilitation of
certified historic structures.
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):
2006 2005
---- ----
Deferred tax assets:
Capital loss carry-forward $ 8 $ 12
Benefit plans 18 6
Insurance reserves 10 12
Other 14 15
------- -------
Total deferred tax assets 50 45
------- -------
Deferred tax liabilities:
Basis differences for property and equipment 304 263
Tax-deferred gains on real estate transactions 142 127
Capital Construction Fund 11 35
Joint ventures and other investments 13 13
Other 12 6
------- -------
Total deferred tax liabilities 482 444
------- -------
Net deferred tax liability $ 432 $ 399
======= =======
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 carry-forward expires in 2010.
Therefore, no valuation allowance was established for this deferred tax asset as
of December 31, 2006.
The Company also has California alternative minimum tax credit
carryforwards of approximately $3.5 million at December 31, 2006 to reduce
future California state income taxes over an indefinite period.
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 2002. Additionally, the
Company is routinely involved in state and local income tax audits. The State of
Illinois is auditing the Company's returns for years 2003 and 2004. Although the
outcome of tax audits is uncertain, the Company believes that adequate amounts
of tax have been provided for adjustments that may result from these audits.
The Company's income taxes payable has been reduced by the tax benefits
from share-based compensation. The Company receives an income tax benefit for
stock options calculated as the difference between the fair market value of the
stock issued at the time of exercise and the option exercise price, tax
effected. The Company also receives an income tax benefit for non-vested stock
when they vest, measured as the fair market value of the stock at the time of
vesting, tax effected. The net tax benefits from share-based transactions were
$1.3 million, $4.2 million, and $6.2 million for 2006, 2005, and 2004,
respectively, and the portion of the tax benefit related to the excess of the
tax deduction over the amount reported as expense under SFAS No. 123R was
reflected as an increase to additional paid-in-capital in the Consolidated
Statements of Shareholders' Equity.
11. STOCK OPTIONS AND NON-VESTED 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
outstanding and exercisable.
Non-vested 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.
Generally, time-based, non-vested stock vests ratably over three years and
performance-based, non-vested stock vests in one year, provided that certain
individual, business unit, and corporate goals are achieved.
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.
As of December 31, 2006, the Company had reserved 1,283,682 and 179,906
shares of its common stock for the issuance of options under the 1998 Plan and
1998 Directors' Plan, respectively.
SFAS No. 123R requires companies to estimate the fair value of stock
option awards on the date of grant using an option-pricing model, consistent
with the provisions of SFAS No. 123R and SEC Staff Accounting Bulletin No. 107,
"Share-Based Payment." The Company estimates the grant-date fair value of its
stock options using a Black-Scholes valuation 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 weighted average grant-date fair values of the options granted
during 2006, 2005, and 2004 were $13.96, $10.18, and $7.43, respectively, per
option, using the range of assumptions provided in the table below:
2006 2005 2004
---- ---- ----
Expected volatility 22.1%-22.7% 22.2%-22.3% 22.8%
Expected term (in years) 6.3-8.1 6.4 5.8
Risk-free interest rate 4.5%-5.1% 3.9%-4.0% 3.6%
Dividend yield 1.7%-2.4% 1.9%-2.2% 2.1%
o Expected volatility was primarily determined using the historical
volatility of A&B common stock over a 6-year period, but the Company
may also consider future events that it reasonably concludes
marketplace participants might consider. Accordingly, the Company
believes that the expected volatility estimate is representative of the
stock's future volatility over the expected term of its employee share
options. An increase in the expected volatility assumption will
increase share-based compensation expense.
o The expected term of the awards represents expectations of future
employee exercise and post-vesting termination behavior and was
primarily based on historical experience. The Company analyzed various
groups of employees and considered expected or unusual trends that
would likely affect this assumption and determined that the range of
6.3 to 8.1 years, which varied by group of employees, was reasonable
for 2006. An increase in the expected term assumption will increase
share-based compensation expense.
o The risk free interest rate was based on U.S. Government treasury
yields for periods equal to the expected term of the option on the
grant date. An increase in the risk-free interest rate will increase
share-based compensation expense.
o The expected dividend yield is based on the Company's current and
historical dividend policy. An increase in the dividend yield will
decrease share-based compensation expense.
Application of alternative assumptions could produce significantly
different estimates of the fair value of share-based compensation, and
consequently, the related amounts recognized in the Consolidated Statements of
Income.
Activity in the Company's stock option plans for the three years ended
December 31, 2006 was as follows (in thousands, except exercise price amounts):
Weighted
Employee Plans Directors' Plans Average
------------------ ------------------
1998 1989 1998 1989 Total Exercise
Plan Plan Plan Plan Shares Price
---- ---- ---- ---- ------ --------
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
Forfeited & Expired (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
Forfeited & Expired (4) -- -- -- (4) $ 26.01
----- ---- --- --- -----
December 31, 2005 1,190 38 216 42 1,486 $ 31.16
Granted 174 -- 56 -- 230 $ 51.54
Exercised (110) (11) (6) (12) (139) $ 26.34
Forfeited & Expired (20) -- -- -- (20) $ 40.92
----- ---- --- --- -----
December 31, 2006 1,234 27 266 30 1,557 $ 34.47
===== ==== === === =====
Vested or expected to vest
at December 31, 2006 1,209 27 261 29 1,526 $ 34.47
----- ---- --- --- -----
Exercisable 828 27 141 30 1,026 $ 29.38
----- ---- --- --- -----
The weighted average remaining contractual term for outstanding
options, options vested or expected to vest, and options exercisable at December
31, 2006 was 6.2 years, 6.2 years, and 5.2 years, respectively. The aggregate
intrinsic values for outstanding options, options vested or expected to vest,
and options exercisable at December 31, 2006 were $17.2 million, $16.8 million,
and $15.5 million, respectively.
The following table summarizes non-vested stock information as of
December 31, 2006 (in thousands, except weighted-average, grant-date fair value
amounts):
Weighted
Non-vested Average
Stock Grant-Date
Shares Fair Value
------ ----------
December 31, 2003 5.8 $ 25.83
Granted 66.1 $ 33.51
Vested (5.8) $ 25.83
Forfeited (1.5) $ 33.51
-------
December 31, 2004 64.6 $ 33.51
Granted 132.6 $ 44.45
Vested (12.9) $ 33.51
Forfeited -- --
-------
December 31, 2005 184.3 $ 41.38
Granted 154.5 $ 52.38
Vested (57.1) $ 41.97
Forfeited (8.0) $ 47.90
-------
December 31, 2006 273.7 $ 47.28
=======
A summary of the compensation cost and other measures related to
share-based payments is as follows (in millions):
2006 2005 2004
---- ---- ----
Share-based expense (net of estimated
forfeitures):
Stock options $ 2.8 $ -- $ --
Non-vested stock 6.8 2.3 0.4
---------- ---------- -----------
Total share-based expense 9.6 2.3 0.4
Total recognized tax benefit (2.3) (0.4) (0.1)
---------- ---------- -----------
Share-based expense (net of tax) $ 7.3 $ 1.9 $ 0.3
========== ========== ===========
Cash received upon option exercise $ 3.4 $ 12.2 $ 26.0
Intrinsic value of options exercised $ 2.9 $ 11.0 $ 15.6
Tax benefit realized upon option
exercise $ 1.1 $ 4.2 $ 5.9
Fair value of stock vested $ 3.0 $ 0.6 $ 0.2
As of December 31, 2006, there was $3.4 million of total unrecognized
compensation cost related to unvested stock options. That cost is expected to be
recognized over a weighted average period of approximately 1.4 years. As of
December 31, 2006, unrecognized compensation cost related to non-vested stock
was $6.3 million. That cost is expected to be recognized over a weighted average
period of 1.4 years.
12. COMMITMENTS, GUARANTEES AND CONTINGENCIES
Commitments, Guarantees and Contingencies: Commitments and financial
arrangements, excluding the operating and capital lease commitments that are
described in Note 8, included the following as of December 31, 2006 (in
millions):
Arrangement 2006
----------- ----
Guarantee of HS&TC debt (a) $ 3
Standby letters of credit (b) $ 20
Bonds (c) $ 8
Benefit plan withdrawal obligations (d) $ 66
These amounts are not recorded on the Company's balance sheet and it is
not expected that the Company or its subsidiaries will be called upon to advance
funds under these commitments.
(a) The Company has guaranteed up to $21.5 million of a $30 million
Hawaiian Sugar & Transportation Cooperative ("HS&TC") revolving credit
line. This guarantee was issued before December 31, 2002, and
therefore, is not subject to the scope of FASB Interpretation No. 45
("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others."
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,
2006, $3 million was outstanding under the facility.
(b) Consists of standby letters of credit, issued by the Company's
lenders under the Company's revolving credit facilities. Approximately
$14 million of the letters of credit are required to allow the Company
to qualify as a self-insurer for state and federal workers'
compensation liabilities. The balance includes approximately $5 million
for insurance-related matters, principally in the Company's real estate
business. In the event the letters of credit are drawn upon, the
Company would be obligated to reimburse the issuer of the letter of
credit. None of the letters of credit has been drawn upon to date, and
the Company believes it is unlikely that any of these letters of credit
will be drawn upon.
(c) Consists of approximately $6 million in U.S. customs bonds,
approximately $1 million related to real estate construction projects
in Hawaii, and approximately $1 million related to transportation and
other matters. In the event the bonds are drawn upon, the Company would
be obligated to reimburse the surety that issued the bond. None of the
bonds has been drawn upon to date, and the Company believes it is
unlikely that any of these bonds will be drawn upon.
(d) Represents the withdrawal liabilities for multiemployer pension
plans, in which Matson is a participant. The withdrawal liability
aggregated approximately $66 million as of the most recent valuation
date. Management has no present intention of withdrawing from and does
not anticipate termination of any of the aforementioned plans.
Indemnity Agreements: For certain real estate joint ventures, the
Company may be obligated under bond indemnities in order to complete
construction of the real estate development if the joint venture does not
perform. These indemnities are designed to protect the surety or lender. To
date, no such indemnities have been called upon. The Company accounts for these
indemnities in accordance with FIN 45.
During 2006, the Company entered into three separate indemnity
agreements. The indemnities were entered into in connection with the delivery of
one or more bonds by sureties in connection with the Company's joint venture
real estate projects. The bonds are being issued to cover various construction
activities. Under the indemnities, the Company and co-indemnitors agree to
indemnify and exonerate the sureties from all loss in connection with any of the
bonds issued.
Completion Guarantees: For certain real estate joint ventures, the
Company may be required to perform work to complete construction if the joint
venture fails to complete construction. These guarantees are intended to assure
the joint venture's lender that the project will be completed as represented to
the lender. To date, no such guarantees have been called upon. The Company
accounts for these completion guarantees in accordance with FIN 45.
Under the provisions of FIN 45, the Company recorded a liability for
the indemnities and completion guarantees based on their fair values. The fair
values of the liabilities recorded by the Company in connection with the
indemnities and completion guarantees were not material.
Financing Agreement: On April 20, 2006, the Company entered into a
three-year unsecured note purchase and private shelf agreement with Prudential
Investment Management, Inc. and its affiliates (collectively, "Prudential")
under which the Company may issue notes in an aggregate amount up to $400
million less the sum of all principal amounts then outstanding on any notes
issued by the Company or any of its subsidiaries to Prudential and the amount of
any such notes then committed to be purchased by Prudential. The agreement
provides for the commitment by Prudential to purchase and, subject to a right of
cancellation by the Company, the commitment by the Company to issue three new
series of senior promissory notes totaling $125 million. In December 2006, the
Company received $50 million that represents the first of three scheduled draws
under the facility. The second and third draws will be received in March and
June 2007 in the amounts of $50 million and $25 million, respectively.
Certain of the businesses in which the Company holds a non-controlling
interest 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. These investments are
more fully described in Note 4.
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. It is the Company's policy, as part of its due
diligence process for all acquisitions, to use third-party environmental
consultants to investigate the environmental risks and to require disclosure
from land sellers of known environmental risks. Despite these precautions, there
can be no assurance that the Company will avoid material liabilities relating to
environmental matters affecting properties currently or previously owned by the
Company. No estimate of such potential liabilities can be made although the
Company may, from time to time, purchase property which requires modest
environmental clean-up costs after appropriate due diligence. In such instances,
the Company takes steps prior to acquisition to gain assurance as to the precise
scope of work required and costs associated with removal, site restoration
and/or monitoring, using detailed investigations by environmental consultants.
By adhering to the policies described above, the Company believes that it is
unlikely that environmental clean-up costs will have a material effect on its
future results of operations or financial position. 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 2001, HC&S self-reported 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. As a result, 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. In December 2006, HC&S and DOH arrived at a final
settlement. Under the settlement, HC&S agreed to pay a fine of $60,000 and to
implement a two-phase Supplemental Environmental Project (SEP) totaling at least
$305,000.
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 million for the estimated remediation costs.
Other Contingencies: 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 material 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 in central 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 a material adverse effect
on the Company's sugar-growing operations.
In June 2006, Matson's Long Beach terminal operator, SSAT (Long Beach)
LLC, completed negotiations of an amendment to its Preferential Assignment
Agreement with the City of Long Beach that includes 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 amendment, in order for
Matson to continue to call at the premises (as defined in the amendment), Matson
is 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 ("cold ironing"), use low sulfur fuel, limit
usage of the terminal by its steamships and take other actions designed to
reduce emissions. The amendment also requires that the Port of Long Beach incur
significant capital expenditures to provide shore-side power, the timing and
amount of which is not certain. Alternatively, Matson may use a combination of
alternative technologies to achieve 90 percent of the emissions reduction
provided by cold ironing; however it is not clear whether the alternative
technologies available to Matson will allow for the achievement of the 90
percent threshold. The modifications to Matson's vessels to meet emission
standards generally must be completed by the end of 2012. The estimated cost of
the modifications is projected to be between $500,000 and $1 million per ship.
The costs of the modifications have not been reflected as a loss or accrued as a
liability because the expenditures for the modifications, while they are likely
to be made in the future, have not been incurred and would result in the
creation of a capital asset that would provide future economic benefits.
On November 16, 2006, the Shipbuilders Council of America, Inc. and
Pasha Hawaii Transport Lines LLC filed a complaint against the U.S. Department
of Homeland Security, the U.S. Coast Guard and the National Vessel Documentation
Center in the U.S. District Court for the Eastern District of Virginia. The
complaint seeks review of a ruling by the National Vessel Documentation Center
that work to be performed on Matson's C-9 class vessels in foreign and U.S.
shipyards would not result in loss of coastwise trading privileges of the
vessels. The Coast Guard believes its ruling was correct and intends to
vigorously defend its decision. Matson is not named as a defendant, but Matson's
motion to intervene has been granted. In a separate but related matter, the same
plaintiffs have asked the U.S. Department of Transportation Maritime
Administration ("Marad") to investigate the continued eligibility of nine of
Matson's vessels, including the three C-9 vessels, to participate in the Capital
Construction Fund and cargo preference programs as a result of modifications
performed, or to be performed, in foreign shipyards. Marad is compiling a record
of the views submitted by the parties in interest, but has not made a decision
as to whether to conduct such an investigation. Matson believes that it has
conducted its activities in compliance with the law, long-standing precedents,
policies and regulations of the Coast Guard and Marad.
The Company and certain subsidiaries are parties to other various legal
actions and are contingently liable in connection with claims and contracts
arising in the normal course of business, the outcome of which, in the opinion
of management after consultation with legal counsel, will not have a material
adverse effect on the Company's financial position or results of operations.
13. INDUSTRY SEGMENTS
Operating segments are components of an enterprise for which discrete
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 Agribusiness.
The Transportation industry is comprised of two segments. Ocean
Transportation carries freight between various U.S. Pacific Coast, major Hawaii
ports, Guam, China and other Pacific ports; holds investments in ocean
transportation entities that are considered integral to its operations and
terminal service businesses (see Note 4); and provides terminal, stevedoring and
container equipment management services in Hawaii. Logistics Services arranges
domestic and international rail intermodal service, long-haul and regional
highway brokerage, specialized hauling, flat-bed and project work,
less-than-truckload and expedited/air freight services.
The Real Estate industry is comprised of two segments operating in
Hawaii and on the U.S. mainland. Real Estate Leasing owns, operates, and manages
commercial properties. Real Estate Sales develops and sells commercial and
residential properties. When property that was previously leased is sold, the
revenue and operating profit are included with the Real Estate Sales segment.
The Agribusiness industry, which includes one 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, 2006 is summarized below (in millions):
For the Year 2006 2005 2004
---- ---- ----
Revenue:
Transportation:
Ocean transportation $ 945.8 $ 878.3 $ 850.1
Logistics services 444.2 431.6 376.9
Real Estate:
Leasing 100.6 89.7 83.8
Sales 97.3 148.9 82.3
Less amounts reported in discontinued
operations(1) (94.1) (60.5) (13.4)
Agribusiness 127.4 123.2 112.8
Reconciling Items (2) (14.2) (8.4) (6.5)
---------- ---------- ----------
Total revenue $ 1,607.0 $ 1,602.8 $ 1,486.0
========== ========== ==========
Operating Profit:
Transportation:
Ocean transportation $ 105.6 $ 128.0 $ 108.3
Logistics services 20.8 14.4 8.9
Real Estate:
Leasing 50.3 43.7 38.8
Sales 49.7 44.1 34.6
Less amounts reported in discontinued
operations(1) (42.7) (18.6) (6.3)
Agribusiness 6.9 11.2 4.8
---------- ---------- ----------
Total operating profit 190.6 222.8 189.1
Write-down of long-lived assets(3) -- (2.3) --
Interest expense, net(4) (15.0) (13.3) (12.7)
General corporate expenses (22.3) (24.1) (20.3)
---------- ---------- ----------
Income from continuing operations
before income taxes $ 153.3 $ 183.1 $ 156.1
========== ========== ==========
Identifiable Assets:
Transportation(6) $ 1,241.7 $ 1,183.3 $ 953.4
Real Estate(7) 820.5 705.9 661.0
Agribusiness 168.7 159.0 152.8
Other 20.3 22.7 11.0
---------- ---------- ----------
Total assets $ 2,251.2 $ 2,070.9 $ 1,778.2
========== ========== ==========
Capital Additions:
Transportation(6) $ 218.8 $ 175.2 $ 128.7
Real Estate5, (7) 94.3 79.0 10.9
Agribusiness 15.0 13.0 10.2
Other 1.5 1.4 1.4
---------- ---------- ----------
Total capital additions $ 329.6 $ 268.6 $ 151.2
========== ========== ==========
Depreciation and Amortization:
Transportation(6) $ 59.6 $ 60.9 $ 58.0
Real Estate1, (7) 14.2 12.5 12.3
Agribusiness 10.1 9.4 9.0
Other 0.9 0.5 0.4
---------- ---------- ----------
Total depreciation and
amortization $ 84.8 $ 83.3 $ 79.7
========== ========== ==========
(1) Prior year amounts restated for amounts treated as discontinued operations.
See Notes 1 and 2 for additional information.
(2) Includes inter-segment revenue, interest income, and other income classified
as revenue for segment reporting purposes.
(3) The 2005 write-down was 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 $13.3 million for 2006,
$9.6 million for 2005, and $5.7 million for 2004. 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. As of December
31, 2006, assets for Logistics Services comprised less than five percent of
the total assets for the transportation industry.
(7) Includes Leasing, Sales and Development activities.
14. QUARTERLY INFORMATION (Unaudited)
Segment results by quarter for 2006 are listed below (in millions,
except per-share amounts):
2006
------------------------------------------------------------
Q1 Q2 Q3 Q4
----------- ---------- ----------- ----------
Revenue:
Transportation:
Ocean transportation $ 219.3 $ 243.6 $ 243.2 $ 239.7
Logistics services 108.4 116.4 113.1 106.3
Real Estate:
Leasing 24.6 24.4 25.5 26.1
Sales 23.8 36.8 5.0 31.7
Less amounts reported in discontinued
operations (1) (24.9) (38.2) (3.0) (28.0)
Agribusiness 15.5 37.8 41.8 32.3
Reconciling Items (2) (6.1) (3.3) (2.7) (2.1)
----------- ---------- ----------- ----------
Total revenue $ 360.6 $ 417.5 $ 422.9 $ 406.0
=========== ========== =========== ==========
Operating Profit (Loss):
Transportation:
Ocean transportation $ 18.3 $ 24.4 $ 34.2 $ 28.7
Logistics services 4.7 5.3 5.1 5.7
Real Estate:
Leasing 12.1 12.2 12.5 13.5
Sales 27.1 10.9 1.2 10.5
Less amounts reported in discontinued
operations(1) (16.0) (15.9) (2.7) (8.1)
Agribusiness 6.5 3.1 0.6 (3.3)
----------- ---------- ----------- -----------
Total operating profit 52.7 40.0 50.9 47.0
Interest Expense (3.2) (3.0) (4.0) (4.8)
General Corporate Expenses (5.2) (5.1) (5.0) (7.0)
----------- ---------- ----------- ----------
Income From Continuing Operations
before Income Taxes 44.3 31.9 41.9 35.2
Income taxes (16.9) (11.6) (15.7) (13.1)
----------- ---------- ----------- ----------
Income From Continuing Operations 27.4 20.3 26.2 22.1
Discontinued Operations(1) 10.0 9.9 1.7 4.9
----------- ---------- ----------- ----------
Net Income $ 37.4 $ 30.2 $ 27.9 $ 27.0
=========== ========== =========== ==========
Earnings Per Share:
Basic $ 0.85 $ 0.69 $ 0.66 $ 0.64
Diluted $ 0.84 $ 0.68 $ 0.65 $ 0.63
(1) See Note 2 for discussion of discontinued operations.
(2) Includes inter-segment revenue, interest income, and other income classified
as revenue for segment reporting purposes.
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) (27.2) (2.7) (2.7) (27.9)
Agribusiness 22.4 32.2 34.6 34.0
Reconciling Items (2) (1.5) (1.9) (2.1) (2.9)
----------- ---------- ----------- ----------
Total revenue $ 363.8 $ 391.1 $ 450.8 $ 397.1
=========== ========== =========== ==========
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) (7.4) (1.1) (1.2) (8.9)
Agribusiness 9.0 0.3 (0.1) 2.0
----------- ---------- ----------- ----------
Total operating profit 61.5 56.8 66.0 38.5
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 53.4 46.4 56.0 27.3
Income taxes (20.3) (17.7) (21.3) (9.4)
----------- ---------- ----------- ----------
Income From Continuing Operations 33.1 28.7 34.7 17.9
Discontinued Operations(1) 4.6 0.7 0.8 5.5
----------- ---------- ----------- ----------
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 2 for discussion of discontinued operations.
(2) Includes inter-segment revenue, interest income, and other income classified
as revenue for segment reporting purposes.
15. 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, 2006 and 2005 (in millions):
2006 2005
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $ 2 $ 7
Accounts and notes receivable, net 20 11
Real estate held for sale -- 6
Prepaid expenses and other 14 16
-------- --------
Total current assets 36 40
-------- --------
Investments:
Subsidiaries consolidated, at equity 939 879
-------- --------
Property, at Cost 428 395
Less accumulated depreciation and amortization 199 192
-------- --------
Property -- net 229 203
-------- --------
Due from Subsidiaries 68 62
-------- --------
Other Assets 34 37
-------- --------
Total $ 1,306 $ 1,221
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 18 $ 18
Accounts payable 6 5
Income taxes payable 12 7
Other 22 19
-------- --------
Total current liabilities 58 49
-------- --------
Long-term Debt 141 83
-------- --------
Other Long-term Liabilities 31 22
-------- --------
Deferred Income Taxes 49 53
-------- --------
Commitments and Contingencies
Shareholders' Equity:
Capital stock 35 36
Additional capital 179 175
Accumulated other comprehensive loss (19) (7)
Deferred compensation -- (6)
Retained earnings 843 827
Cost of treasury stock (11) (11)
-------- --------
Total shareholders' equity 1,027 1,014
-------- --------
Total $ 1,306 $ 1,221
======== ========
The following table presents the Parent Company's condensed Statements
of Income for the years ended December 31, 2006, 2005 and 2004 (in millions):
2006 2005 2004
---- ---- ----
Revenue:
Agribusiness $ 97 $ 89 $ 86
Property leasing 24 21 20
Property sales 1 3 5
Interest and other 9 14 5
--------- --------- ---------
Total revenue 131 127 116
--------- --------- ---------
Costs and Expenses:
Cost of agricultural goods and services 96 90 86
Cost of property sales and leasing services 11 10 9
Selling, general and administrative 24 24 20
Interest and other 7 9 10
Income taxes 1 (8) (11)
--------- --------- ---------
Total costs and expenses 139 125 114
--------- --------- ---------
Income (loss) from Continuing Operations (8) 2 2
Discontinued Operations, net of income taxes 10 1 1
--------- --------- ---------
Income Before Equity in Income
of Subsidiaries Consolidated 2 3 3
Equity in Income from Continuing Operations of
Subsidiaries Consolidated 104 112 95
Equity in Income from Discontinued
Operations of Subsidiaries Consolidated 16 11 3
--------- --------- ---------
Net Income 122 126 101
Other Comprehensive Income (Loss), net of income taxes -- 2 (1)
--------- --------- ---------
Comprehensive Income $ 122 $ 128 $ 100
========= ========= =========
The following table presents the Parent Company's condensed Statements
of Cash Flows for the years ended December 31, 2006, 2005 and 2004 (in
millions):
2006 2005 2004
---- ---- ----
Cash Flows from Operations (including dividends received from
subsidiaries) $ 65 $ 89 $ 74
------ ------ ------
Cash Flows from Investing Activities:
Capital expenditures (35) (13) (12)
Proceeds from disposal of property and investments 22 1 6
------ ------ ------
Net cash used by investing activities (13) (12) (6)
------ ------ ------
Cash Flows from Financing Activities:
Change in intercompany payables/receivables (6) (19) (15)
Proceeds from (repayments of) long-term debt, net 58 (24) (38)
Proceeds from issuance of capital stock, including tax 5 11 26
benefit
Repurchases of capital stock (72) -- (2)
Dividends paid (42) (39) (38)
------ ------ ------
Net cash used in financing activities (57) (71) (67)
------ ------ ------
Cash and Cash Equivalents:
Net increase (decrease) for the year (5) 6 1
Balance, beginning of year 7 1 --
------ ------ ------
Balance, end of year $ 2 $ 7 $ 1
====== ====== ======
Other Cash Flow Information:
Interest paid, net of amounts capitalized $ (7) $ (7) $ (9)
Income taxes paid, net of refunds $ (49) $ 3 $ (61)
Other Non-cash Information:
Depreciation expense $ (13) $ (12) $ (12)
Tax-deferred property sales $ 13 $ 3 --
Tax-deferred property purchases $ (13) $ (3) --
General Information: The Parent Company is headquartered in Honolulu,
Hawaii and is engaged in the operations that are described in Note 13, "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, 2006 and 2005, long-term debt consisted
of the following (in millions):
2006 2005
---- ----
Revolving Credit loans, 5.58% $ 27 $ --
Term Loans:
5.53%, payable through 2016 50 --
4.10%, payable through 2012 35 35
7.55%, payable through 2009 15 15
7.42%, payable through 2010 11 14
6.20%, payable through 2013 3 3
7.44%, payable through 2007 7 15
7.57%, payable through 2009 6 9
7.43%, payable through 2007 5 10
------- -------
Total 159 101
Less current portion 18 18
------- -------
Long-term debt $ 141 $ 83
======= =======
Long-term Debt Maturities: At December 31, 2006, maturities of all
long-term debt during the next five years are $18 million annually from 2007
through 2009, $17 million in 2010, $16 million in 2011, and $72 million
thereafter.
Revolving Credit Facilities: The Company has a revolving senior credit
facility with six commercial banks that expires in December 2011. The revolving
credit facility provides for a commitment of $225 million. Amounts drawn under
the facility bear interest at London Interbank Offered Rate ("LIBOR") plus 0.225
percent, provided the Company maintains an S&P/Moody's rating of A-/A3 or
better. The agreement contains certain restrictive covenants, the most
significant of which require the maintenance of minimum shareholders' equity
levels, minimum property investment values, and a maximum ratio of total debt to
earnings before interest, depreciation, amortization, and taxes. At December 31,
2006, $27 million was outstanding, $5 million in letters of credit had been
issued against the facility, and $193 million remained available for borrowing.
As of December 31, 2006, amounts drawn on this facility were classified as
non-current because the Company had the ability and intent to refinance the
balance on a long-term basis.
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, 2006, 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, 2006 and 2005 consisted principally of deferred compensation, executive
benefit plans, additional minimum pension liability, and self-insurance
liabilities.
16. RELATED PARTY TRANSACTIONS
Related Party Transactions: Notes 3 and 4 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 3 and 4), 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 and
molasses sold to HS&TC was $59 million, $62 million, and $65 million, during
2006, 2005, and 2004, respectively. At December 31, 2006, 2005 and 2004, the
Company had amounts receivable from HS&TC of $11 million, $7 million and $10
million, respectively.
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 52 for management's annual report on internal control over
financial reporting.
(b) See page 53 for attestation report of the independent registered
public accounting firm.
(c) There have not been any changes in the Company's internal control
over financial reporting (as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) during the 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, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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 12, 2007 ("A&B's
2007 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 February 16, 2007, 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 2007 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 "Other Potential Post-Employment Payments" in
A&B's 2007 Proxy Statement, which subsections are incorporated herein by
reference.
James S. Andrasick (63)
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 (43)
Senior Vice President of A&B, 7/05-present; Chief Financial Officer of
A&B, 2/04-present; Treasurer of A&B, 5/06-present; Vice President of A&B,
4/03-6/05; Director (Corporate Development & Planning) of A&B, 8/01-4/03; first
joined A&B or a subsidiary in 2001.
Meredith J. Ching (50)
Vice President (Government & Community Relations) of A&B,
10/92-present; first joined A&B or a subsidiary in 1982.
Nelson N. S. Chun (54)
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 (45)
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; first joined A&B or a subsidiary in 2001.
W. Allen Doane (59)
Chairman of the Board of A&B, 4/06-present; 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, 4/06-present; Vice Chairman of Matson,
12/98-7/02, 1/04-4/06; first joined A&B or a subsidiary in 1991.
G. Stephen Holaday (62)
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.
Paul K. Ito (36)
Controller of A&B, 5/06-present; Director, Internal Audit of A&B,
4/05-4/06; Senior Manager, Deloitte & Touche LLP, 5/96-3/05.
Stanley M. Kuriyama (53)
President and Chief Executive Officer, Land Group, 7/05-present; Chief
Executive Officer and Vice Chairman of A & B Properties, Inc., 12/99-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 (41)
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.
Son-Jai Paik (34)
Vice President (Human Resources) of A&B, 1/07-present; Vice President,
Human Resources, LINA Korea, CIGNA Corporation, 3/03-12/06; Human Resources
Director, Cigna International Expatriate Benefits, CIGNA Corporation,
12/01-2/03.
C. Corporate Governance
For information about the Audit Committee of the A&B Board of
Directors, see the section captioned "Certain Information Concerning the Board
of Directors" in A&B's 2007 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 2007 Proxy Statement, which subsection is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
See the section captioned "Executive Compensation" and the subsection
captioned "Compensation of Directors" in A&B's 2007 Proxy Statement, which
section and subsection are 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 2007 Proxy Statement, which section and subsection are
incorporated herein by reference. See the Equity Compensation Plan Information
table in Item 5 of Part II.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
See the section captioned "Election of Directors" and the subsection
captioned "Certain Relationships and Transactions" in A&B's 2007 Proxy
Statement, which section and subsection are 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 2007 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 25, 2007).
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).
10. Material contracts.
10.a. (i) 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).
(ii) 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).
(iii) 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).
(iv) 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).
(v) Amendment dated as of January 16, 2007 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.
(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) $400,000,000 Note Purchase and Private Shelf Agreement among
Alexander & Baldwin, Inc., Prudential Investment Management, Inc., The
Prudential Insurance Company of America, Prudential Retirement
Insurance and Annuity Company, Gibraltar Life Insurance Co., Ltd.,
and The Prudential Insurance Company, Ltd., dated as of April 19, 2006
(Exhibit 10.1 to A&B's Form 8-K dated April 20, 2006).
(xxvi) Credit Agreement, dated December 28, 2006, between Alexander &
Baldwin, Inc. and First Hawaiian Bank, Bank of America, N.A., Wells
Fargo Bank, National Association, BNP Paribas, American Savings Bank,
F.S.B., and Bank of Hawaii (Exhibit 10.1 to A&B's Form 8-K dated
December 28, 2006).
(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) 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).
(xxxi) 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).
(xxxii) 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).
(xxxiii) 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).
(xxxiv) Credit Agreement, dated December 28, 2006, between Matson
Navigation Company, Inc. and First Hawaiian Bank, Bank of America,
N.A., Wells Fargo Bank, National Association, BNP Paribas, American
Savings Bank, F.S.B., and Bank of Hawaii (Exhibit 10.2 to A&B's Form
8-K dated December 28, 2006).
(xxxv) 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).
(xxxvi) 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).
(xxxvii) 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).
(xxxviii) General Contract of Indemnity, among Alexander & Baldwin,
Inc., Kukui'ula Development Company (Hawaii), LLC, DMB Kukui'ula LLC,
and DMB Communities LLC, in favor of Travelers Casualty and Surety
Company of America, dated June 13, 2006 (Exhibit 10.1 to A&B's Form 8-K
dated June 14, 2006).
(xxxix) Mutual Indemnification Agreement, among Kukui'ula Development
Company (Hawaii), LLC, DMB Kukui'ula LLC, DMB Communities LLC, and
Alexander & Baldwin, Inc., dated June 14, 2006 (Exhibit 10.2 to A&B's
Form 8-K dated June 14, 2006).
(xl) General Agreement of Indemnity, among Alexander & Baldwin, Inc.,
Kukui'ula Development Company (Hawaii), LLC, and DMB Communities LLC,
in favor of Safeco Insurance Company of America, dated August 30, 2006
and entered into September 5, 2006 (Exhibit 10.1 to A&B's Form 8-K
dated September 5, 2006).
(xli) Mutual Indemnification Agreement, among Kukui'ula Development
Company (Hawaii), LLC, DMB Kukui'ula LLC, DMB Communities LLC, and
Alexander & Baldwin, Inc., dated August 30, 2006 and entered into
September 5, 2006 (Exhibit 10.2 to A&B's Form 8-K dated September 5,
2006).
(xlii) 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).
(xliii) 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).
(xliv) 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).
(xlv) 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).
(xlvi) 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).
(xlvii) 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).
(xlviii) 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).
(xlix) 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).
(l) 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).
(li) 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 (Exhibit 10.a.(l) to A&B's Form 10-K for the year
ended December 31, 2005).
(lii) 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).
(liii) 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).
(liv) 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 (Exhibit 10.a.(liii) to A&B's Form 10-K
for the year ended December 31, 2005).
(lv) Amendment No. 3 dated July 7, 2006, to Shipbuilding Contract
(Hull BN460) between Aker Philadelphia Shipyard, Inc. and Matson
Navigation Company, Inc., dated February 14, 2005 (Exhibit 10.a.(lv)
to A&B's Form 10-Q for the quarter ended June 30, 2006).
(lvi) 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).
(lvii) 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 (Exhibit 10.a.(lv) to A&B's Form 10-K
for the year ended December 31, 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) Amendment No. 5 to the Alexander & Baldwin, Inc. 1989 Stock
Option/Stock Incentive Plan (Exhibit 10.b.1.(vi) to A&B's Form 10-Q for
the quarter ended September 30, 2006).
(vii) 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).
(viii) 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).
(ix) 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).
(x) 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).
(xi) Amendment No. 4 to the Alexander & Baldwin, Inc. 1989 Non-Employee
Director Stock Option Plan (Exhibit 10.b.1(xi) to A&B's Form 10-Q for
the quarter ended September 30, 2006).
(xii) 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).
(xiii) 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).
(xiv) 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).
(xv) 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).
(xvi) Amendment No. 4 to the Alexander & Baldwin, Inc. 1998 Stock
Option/Stock Incentive Plan (Exhibit 10.b.1.(xiv) to A&B's Form 10-Q
for the quarter ended June 30, 2006).
(xvii) Amendment No. 5 to the Alexander & Baldwin, Inc. 1998 Stock
Option/Stock Incentive Plan (Exhibit 10.b.1.(xvii) to A&B's Form 10-Q
for the quarter ended September 30, 2006).
(xviii) Form of Restricted Stock Issuance Agreement pursuant to the
Alexander & Baldwin, Inc. 1998 Stock Option/Stock Incentive Plan
(Exhibit 10.b.1.(xv) to A&B's Form 10-Q for the quarter ended June 30,
2006).
(xix) Form of Restricted Stock Issuance Agreement pursuant to the
Alexander & Baldwin, Inc. 1998 Stock Option/Stock Incentive Plan.
(xx) Form of Non-Qualified Stock Option Agreement and Addendum pursuant
to the Alexander & Baldwin, Inc. 1998 Stock Option/Stock Incentive Plan
(Exhibit 10.b.1.(xvi) to A&B's Form 10-Q for the quarter ended June 30,
2006).
(xxi) Form of Non-Qualified Stock Option Agreement pursuant to the
Alexander & Baldwin, Inc. 1998 Stock Option/Stock Incentive Plan.
(xxii) 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).
(xxiii) Form of Performance-Based Restricted Stock Issuance Agreement
pursuant to the Alexander & Baldwin, Inc. 1998 Stock Option/Stock
Incentive Plan.
(xxiv) 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).
(xxv) 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).
(xxvi) 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).
(xxvii) 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).
(xxviii) Amendment No. 4 to the Alexander & Baldwin, Inc. 1998
Non-Employee Director Stock Option Plan (Exhibit 10.b.1(xxv) to A&B's
Form 10-Q for the quarter ended September 30, 2006).
(xxix) 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).
(xxx) 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).
(xxxi) A&B Deferred Compensation Plan for Outside Directors, amended
and restated effective January 1, 2005 (Exhibit 10.b.1.(xxiv) to A&B's
Form 10-Q for the quarter ended June 30, 2006).
(xxxii) A&B Excess Benefit Plan, amended and restated effective January
1, 2005 (Exhibit 10.b.1.(xxv) to A&B's Form 10-Q for the quarter ended
June 30, 2006).
(xxxiii) A&B Executive Survivor/Retirement Benefit Plan, amended and
restated effective January 1, 2005 (Exhibit 10.b.1.(xxvi) to A&B's Form
10-Q for the quarter ended June 30, 2006).
(xxxiv) A&B 1985 Supplemental Executive Retirement Plan, amended and
restated effective January 1, 2005 (Exhibit 10.b.1.(xxvii) to A&B's
Form 10-Q for the quarter ended June 30, 2006).
(xxxv) 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).
(xxxvi) 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).
(xxxvii) 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).
(xxxviii) 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).
(xxxix) 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).
(xl) 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).
(xli) Alexander & Baldwin, Inc. Executive Severance Plan, effective
January 1, 2006 (Exhibit 10.3 to A&B's Form 8-K dated December 7,
2005).
(xlii) 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).
(xliii) 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).
(xliv) 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).
(xlv) 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).
(xlvi) 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).
(xlvii) 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).
(xlviii) Alexander & Baldwin, Inc. Deferred Compensation Plan, amended
and restated effective January 1, 2005 (Exhibit 10.b.1.(xlii) to A&B's
Form 10-Q for the quarter ended June 30, 2006).
(xlix) 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).
(l) 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).
(li) 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).
(lii) 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 16, 2007.
23. Consent of Deloitte & Touche LLP dated February 23, 2007.
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 23, 2007 By /s/ W. Allen Doane
---------------------------------------------
W. Allen Doane, Chairman of the Board,
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 Chairman of the Board, February 23, 2007
--------------------------------
W. Allen Doane President and Chief
Executive Officer and
Director
/s/ Christopher J. Benjamin Senior Vice President, February 23, 2007
--------------------------------
Christopher J. Benjamin Chief Financial Officer
and Treasurer
/s/ Paul K. Ito Controller February 23, 2007
--------------------------------
Paul K. Ito
/s/ W. Blake Baird Director February 23, 2007
--------------------------------
W. Blake Baird
/s/ Michael J. Chun Director February 23, 2007
--------------------------------
Michael J. Chun
/s/ Walter A. Dods, Jr. Director February 23, 2007
--------------------------------
Walter A. Dods, Jr.
/s/ Charles G. King Director February 23, 2007
--------------------------------
Charles G. King
/s/ Constance H. Lau Director February 23, 2007
--------------------------------
Constance H. Lau
/s/ Douglas M. Pasquale Director February 23, 2007
--------------------------------
Douglas M. Pasquale
/s/ Maryanna G. Shaw Director February 23, 2007
--------------------------------
Maryanna G. Shaw
/s/ Jeffrey N. Watanabe Director February 23, 2007
--------------------------------
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 report relating
to the financial statements of Alexander & Baldwin, Inc. and subsidiaries and
management's report on the effectiveness of internal control over financial
reporting dated February 23, 2007, appearing in the Annual Report on Form 10-K
of Alexander & Baldwin, Inc. and subsidiaries for the year ended December 31,
2006.
/s/ Deloitte & Touche
Honolulu, Hawaii
February 23, 2007