10-K 1 form10k.htm ALEX FORM 10-K form10k.htm

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, 2011
 
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 000-00565
(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
NYSE

Securities registered pursuant to Section 12(g) of the Act:
None

Number of shares of Common Stock outstanding at February 15, 2012:
41,871,540

Aggregate market value of Common Stock held by non-affiliates at June 30, 2011:
$1,980,995,573

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 o

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 o 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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File  required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

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, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x
Accelerated filer  o
Non-accelerated filer  o (Do not check if a smaller reporting company)
Smaller reporting company  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

Documents Incorporated By Reference
Portions of Registrant’s Proxy Statement for the 2012 Annual Meeting of Shareholders (Part III of Form 10-K)

 
 

 


TABLE OF CONTENTS

PART I

 
Page
       
Items 1 & 2.
 
Business and Properties                                                                                              
1
       
A.
 
Transportation                                                                                              
2
   
(1)
Freight Services
2
   
(2)
Vessels
3
   
(3)
Terminals
3
   
(4)
Logistics and Other Services
3
   
(5)
Competition
4
   
(6)
Labor Relations
7
   
(7)
Rate Regulation                                                                                    
7
         
B.
 
Real Estate                                                                                              
7
   
(1)
General                                                                                    
7
   
(2)
Planning and Zoning                                                                                    
8
   
(3)
Development Projects                                                                                    
8
   
(4)
Leased Portfolio                                                                                    
11
         
C.
 
Agribusiness                                                                                              
13
   
(1)
Production                                                                                    
13
   
(2)
Marketing of Sugar                                                                                    
14
   
(3)
Sugar Competition and Legislation                                                                                    
14
   
(4)
Land Designations and Water                                                                                    
15
         
D.
 
Employees and Labor Relations                                                                                              
16
         
E.
 
Energy                                                                                              
17
       
F.
 
Available Information                                                                                              
18
       
Item 1A.
 
Risk Factors                                                                                              
19
       
Item 1B.
 
Unresolved Staff Comments                                                                                              
29
       
Item 3.
 
Legal Proceedings                                                                                              
29
       
Item 4.
 
Mine Safety Disclosures                                                                                              
31
   
Executive Officers of the Registrant                                                                                                                     
31


PART II

Item 5.
 
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
32
       
Item 6.
 
Selected Financial Data                                                                                              
35
       
Item 7.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
38


 
 

 



 
Page
       
Items 7A.
 
Quantitative and Qualitative Disclosures About Market Risk
60
       
Item 8.
 
Financial Statements and Supplementary Data                                                                                              
61
       
Item 9.
 
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
 
111
       
Item 9A.
 
Controls and Procedures                                                                                              
111
       
A.
 
Disclosure Controls and Procedures                                                                                              
111
       
B.
 
Internal Control over Financial Reporting                                                                                              
111
       
Item 9B.
 
Other Information                                                                                              
111

PART III

Item 10.
 
Directors, Executive Officers and Corporate Governance                                                                                              
112
       
A.
 
Directors                                                                                              
112
       
B.
 
Executive Officers                                                                                              
112
       
C.
 
Corporate Governance                                                                                              
113
       
D.
 
Code of Ethics                                                                                              
113
       
Item 11.
 
Executive Compensation                                                                                              
113
       
Item 12.
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
113
       
Item 13.
 
Certain Relationships and Related Transactions, and Director Independence
113
       
Item 14.
 
Principal Accounting Fees and Services                                                                                              
113


PART IV

Item 15.
 
Exhibits and Financial Statement Schedules                                                                                              
114
       
A.
 
Financial Statements                                                                                              
114
       
B.
 
Financial Statement Schedules                                                                                              
114
       
C.
 
Exhibits Required by Item 601 of Regulation S-K                                                                                              
114
       
Signatures                                                                                                                     
123
   
Consent of Independent Registered Public Accounting Firm                                                                                                                     
125


ALEXANDER & BALDWIN, INC.
 
FORM 10-K
 
Annual Report for the Fiscal Year
Ended December 31, 2011
 
PART I
 
ITEMS 1 & 2.  BUSINESS AND PROPERTIES
 
Alexander & Baldwin, Inc. (“A&B” or the “Company”) is a multi-industry corporation with its primary 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 its subsidiaries.  Property development, commerial real estate 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, China and other Pacific island ports; arranging domestic and international rail intermodal service, long-haul and regional highway brokerage, specialized hauling, flat-bed and project work, less-than-truckload, expedited/air freight services, and warehousing and distribution services; and providing terminal, stevedoring and container equipment maintenance services in Hawaii.
 
 
B.
Real Estate - engaging in real estate development and ownership activities, including planning, zoning, financing, constructing, purchasing, managing and leasing, selling and exchanging, and investing in real property.
 
 
C.
Agribusiness - growing sugar cane in Hawaii; producing bulk raw sugar, specialty food-grade sugars and molasses; marketing and distributing specialty food-grade sugars; generating and selling, to the extent not used in A&B’s operations, electricity; and providing general trucking services in Hawaii, including sugar and molasses hauling, and mobile equipment maintenance and repair services.  In March 2011, the Company executed an agreement to lease land and sell coffee inventory and certain assets used in a coffee business it previously operated to Massimo Zanetti Beverage USA, Inc.
 
For information about the revenue, operating profits and identifiable assets of A&B’s industry segments for the three years ended December 31, 2011, see Note 14 (“Industry Segments”) to A&B’s financial statements in Item 8 of Part II below.
 
Separation Transaction:   On December 1, 2011, the Company announced that its Board of Directors unanimously approved a plan to pursue the separation of the Company to create two independent, publicly traded companies:

·  
A Hawaii-based land company with interests in real estate development, commercial real estate and agriculture (composed of the Real Estate and Agribusiness segments described above), which will retain the Alexander & Baldwin, Inc. name; and

·  
An ocean transportation company serving the U.S. West Coast, Hawaii, Guam, Micronesia and China, and a domestic logistics company under the Matson name (composed of the businesses in the Transportation segment described above).

The separation is expected to be completed in the second half of 2012.

On February 13, 2012, the Company entered into an Agreement and Plan of Merger to reorganize itself as a holding company incorporated in Hawaii.  The holding company structure will help facilitate the separation by allowing the Company to organize and segregate the assets of its different businesses in an efficient manner prior to the separation and facilitate the third party and governmental consent and approval process. In addition, the holding company reorganization will help preserve the Company’s status as a U.S. citizen under certain U.S. maritime and vessel documentation laws (popularly referred to as the Jones Act) by, among other things, limiting the percentage of outstanding shares of common stock in the holding company that may be owned (of record or beneficially) or controlled in the aggregate by non-U.S. citizens (as defined by the Jones Act) to a maximum permitted percentage of 22%.  For more information on the Jones Act and its effect on the Company, see “Description of Business and Properties – Transportation – Jones Act.”

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.  Principal westbound cargoes carried by Matson to Hawaii include dry containers of mixed commodities, refrigerated commodities, packaged foods, building materials, automobiles and household goods.  Principal eastbound cargoes carried by Matson from Hawaii include automobiles, household goods, dry containers of mixed commodities, food and beverages, and livestock.  The majority of Matson’s Hawaii Service revenue is derived from the westbound carriage of containerized freight and automobiles.
 
Matson’s Guam Service provides weekly containership freight services between the U.S. Pacific Coast and Guam.  Additional freight destined to and from the Commonwealth of the Marianas Islands, the Republic of Palau and the island of Yap in the Federated States of Micronesia is transferred at Guam to and from connecting carriers for delivery to and from those locations.
 
Matson’s Micronesia Service offers container and conventional freight service between the U.S. Pacific Coast and the islands of Kwajalein, Ebeye and Majuro in the Republic of the Marshall Islands and the islands of Pohnpei, Chuuk and Kosrae in the Federated States of Micronesia.  Cargo is transferred at Guam to a Matson-operated ship that provides bi-weekly service to and from those islands.  Matson also carries cargo originating in Asia to these islands by receiving cargo transferred from other carriers in Guam.

Matson’s China Service is part of an integrated Hawaii/Guam/China service.  This service employs five Matson containerships in a weekly service that carries cargo from the U.S. Pacific Coast to Honolulu, then to Guam.  The vessels continue to the ports of Xiamen, Ningbo and Shanghai in China, where they are loaded with cargo to be discharged in Long Beach.  These ships also carry cargo destined to and originating from Guam, the Commonwealth of Northern Marianas, the Republic of Palau and the Republic of the Marshall Islands.  In 2011, Matson operated a second vessel string for part of the year that employed five chartered containerships in a weekly service that carried cargo from the U.S. Pacific Coast directly to the ports of Hong Kong, Yantian and Shanghai in China, where they also loaded cargo to be discharged in Long Beach.  Operation of the second vessel string was terminated in the third quarter of 2011.

See “Rate Regulation” below for a discussion of Matson’s freight rates.
 

 
 

 

(2)           Vessels
 
Matson’s owned fleet consists of 10 containerships (excluding three containerships time-chartered from third parties that serve the Micronesia and discontinued the second China string); three combination container/roll-on/roll-off ships; 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, with the oldest vessel acquired in 1978, represent an investment of approximately $1.2 billion expended. The majority of vessels in the Matson fleet has 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.
 
Vessels owned by Matson are described on page 4.
 
As a complement to its fleet, Matson owns approximately 34,000 containers, 14,000 container chassis and generators, 900 auto-frames and miscellaneous other equipment. Capital expenditures incurred by Matson in 2011 for vessels, equipment and systems totaled approximately $44 million.
 
(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 355,900 lifts in 2011 (compared with 351,200 lifts in 2010).  The terminal 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 for other vessel operators on the islands of Hawaii, Maui and Kauai.  Capital expenditures incurred by Matson Terminals in 2011 for terminals and equipment totaled approximately $1.7 million.
 
SSA Terminals, LLC (“SSAT”), a joint venture of Matson Ventures, Inc., a wholly-owned subsidiary of Matson, and SSA Ventures, 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”), China Shipping, CMA/CGM, Hapag Lloyd, OOCL, NYK Line and Maersk.  SSAT operates six terminals:  two in Seattle, one of which is operated by SSA Terminals (Seattle), LLC, a joint venture with China Shipping Terminals (USA) LLC (“China Shipping”) where ownership is split SSAT 66.7% and China Shipping 33.3%, two in Oakland, one of which is operated by SSA Terminals (Oakland), LLC, a joint venture with NYK Terminals (Oakland), Inc. (“NYK”) where ownership is split SSAT 80% and NYK 20%, and two in Long Beach, one of which is operated by SSA Terminals (Long Beach), LLC, a joint venture with ownership divided equally between SSAT and Terminal Investment Limited, an affiliate of MSC.
 
(4)           Logistics and Other Services
 
Matson Logistics, Inc. (“Matson Logistics,” formerly known as “Matson Integrated Logistics, Inc.”), a wholly-owned subsidiary of Matson, is a transportation intermediary that provides rail, highway, air, warehousing and other third-party logistics services for North American customers and international ocean carrier customers, including Matson.  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 Logistics is able to reduce transportation costs for its customers.  Matson Logistics is headquartered in Concord, California, operates seven regional operating centers, has sales offices in over 35 cities nationwide, and operates through a network of agents throughout the U.S. Mainland.
 
Matson Logistics Warehousing, Inc. (“Matson Logistics Warehousing,” formerly known as “Matson Global Distribution Services, Inc.”) is a wholly-owned subsidiary of Matson Logistics that principally provides warehousing and distribution services. With the acquisition of a regional warehouse company in Northern California in 2008, Matson Logistics Warehousing’s service menu was expanded to include operating a Foreign Trade Zone.  (Matson Logistics Warehousing has a license with the City of Oakland to operate Foreign Trade Zone #56 on behalf of the City and, as a result, has designated parts of its warehouses for customers desiring duty free storage.)  Through Matson Logistics Warehousing, Matson Logistics provides customers with a full suite of domestic and international transportation services.
 
(5)           Competition
 
Matson’s Hawaii Service has one major containership competitor, Horizon Lines, Inc., that serves Long Beach, Oakland, Tacoma and Honolulu.  The Hawaii Service also has one additional liner competitor, Pasha Hawaii Transport Lines, LLC that operates a pure car carrier ship, specializing in the carriage of automobiles, large pieces of rolling stock, such as trucks and buses, and household goods.  Matson’s Guam Service had one major competitor, Horizon Lines, Inc., until November 2011 when Horizon Lines ended its service to that area.  Until that time, Horizon Lines served Guam with weekly service from Long Beach, Oakland and Tacoma to Guam.  Several foreign carriers also serve Guam with less frequent service, along with Waterman Steamship Corporation, a U.S.-flagged carrier, which periodically calls at Guam.
 
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.  Over the years, additional barge competitors periodically have entered and left the U.S.-Hawaii trades, mostly from the Pacific Northwest.
 
Matson vessels are operated on schedules that provide shippers and consignees regular day-of-the-week sailings from the U.S. Pacific Coast and day-of-the-week arrivals in Hawaii.  Matson generally offers an average of three sailings per week, though this amount may be adjusted according to seasonal demand and market conditions.  Matson provides over 150 sailings per year, which is greater than all of its domestic ocean competitors’ sailings combined.  One westbound sailing each week continues on to Guam and China, so the number of eastbound sailings from Hawaii to the U.S. Mainland averages two per week 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.
 

 
 

 

MATSON NAVIGATION COMPANY, INC.
OWNED FLEET

           
Usable Cargo Capacity
       
Maximum
Maximum
Containers
Vehicles
Molassess
 
Official
Year
 
Speed
Deadweight
       
Reefer
       
Vessel Name
Number
Built
Length
(Knots)
(Long Tons)
20’
24’
40’
45’
Slots
TEUs(1)
Autos
Trailers
Short Tons
                             
Diesel-Powered Ships
                           
R. J. PFEIFFER
979814
1992
713’ 6”
23.0
27,100
107
--
1,069
--
300
2,245
--
--
--
MOKIHANA
655397
1983
860’ 2”
23.0
29,484
52
--
950
--
342
1,994
1,323
38
--
MANULANI
1168529
2005
712’ 0”
23.0
29,517
4
--
1,040
128
284
2,372
--
--
--
MAHIMAHI
653424
1982
860’ 2”
23.0
30,167
150
--
1,494
--
408
2,824
--
--
--
MANOA
651627
1982
860’ 2”
23.0
30,187
150
--
1,494
--
408
2,824
--
--
3,000
MANUKAI
1141163
2003
711’ 9”
23.0
29,517
 4
--
1,115
64
284
2,378
--
--
--
MAUNAWILI
1153166
2004
711’ 9”
23.0
29,517
 4
--
1,115
64
284
2,378
--
--
--
MAUNALEI
1181627
2006
681’ 1”
22.1
33,771
424
--
984
--
328
1,992
--
--
--
                             
 
Steam-Powered Ships
                           
KAUAI
621042
1980
720’ 5-1/2”
22.5
26,308
74
128
708
--
270
1,644
44
--
2,600
MAUI
591709
1978
720’ 5-1/2”
22.5
26,623
74
128
708
--
270
1,644
--
--
2,600
MATSONIA
553090
1973
760’ 0”
21.5
22,501
36
45
789
26
258
1,727
450
85
4,300
LURLINE
549900
1973
826’ 6”
21.5
22,213
6
--
777
38
246
1,646
761
55
2,100
LIHUE
530137
1971
787’ 8”
21.0
38,656
296
--
861
--
188
2,018
--
--
--
                             
Barges
                           
WAIALEALE (2)
978516
1991
345’ 0”
--
5,621
--
--
--
--
  36
--
230
45
--
MAUNA KEA (3)
933804
1988
372’ 0”
--
6,837
--
276
    24
--
  70
379
--
--
--
MAUNA LOA (3)
676973
1984
350’ 0”
--
4,658
24
24
124
16
  78
335
--
--
2,100
HALEAKALA (3)
676972
1984
350’ 0”
--
4,658
24
24
124
16
  78
335
--
--
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.

 
 

 

During 2011, approximately 77% of Matson’s revenues generated by ocean services came from trades that were subject to the Jones Act. 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. The Jones Act is a long-standing cornerstone of U.S. maritime policy. Under the Jones Act, all vessels transporting cargo between covered U.S. ports must, subject to limited exceptions, be built in the U.S., registered under the U.S. flag, manned by predominantly U.S. crews, and owned and operated by U.S.-organized companies that are controlled and 75% owned by U.S. citizens. U.S.-flagged vessels are generally required to be maintained at higher standards than foreign-flagged vessels and are supervised by, as well as subject to rigorous inspections by, or on behalf of, the U.S. Coast Guard, which requires appropriate certifications and background checks of the crew members. Our trade route between Hawaii and the U.S. Pacific Coast represents the non-contiguous Jones Act market. Vessels operating on this trade route are required to be fully qualified Jones Act vessels. Other U.S. maritime laws require vessels operating between Guam, a U.S. territory, and U.S. ports to be U.S.-flagged and predominantly U.S.-crewed, but not U.S.-built. Foreign-flag vessels carrying cargo to Hawaii from non-U.S. locations also provide competition for Matson’s Hawaii Service. Asia, Australia, New Zealand, Mexico, South America and South Pacific islands have direct foreign-flag services to Hawaii.
 
Matson is a member of the American Maritime Partnership (formerly known as the Maritime Cabotage Task Force), which supports the retention of the Jones Act and other cabotage laws that regulate the transport of goods between U.S. ports. Cabotage laws, which reserve the right to ship cargo between domestic ports to domestic vessels, are not unique to the United States; similar laws are common around the world and exist in over 50 countries. In general, all interstate and intrastate marine commerce within the U.S. falls under the Jones Act, which is a cabotage law. As island economies, Hawaii and Guam are highly dependent on ocean transportation. The Jones Act ensures frequent, reliable, roundtrip service to keep store shelves stocked, reduces inventory costs and helps move local products to market. The Company believes the Jones Act enjoys broad support from President Obama and both major political parties in both houses of Congress. The Company believes that the ongoing war on terrorism has further solidified political support for the Jones Act, as a vital and dedicated U.S. merchant marine is a cornerstone for a strong homeland defense, as well as a critical source of trained U.S. mariners for wartime support. 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 American Maritime Partnership 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.
 
Matson has operated its China Long Beach Express Service, CLX1, since February 2006.  Matson provides weekly containership service between the ports of Xiamen, Ningbo and Shanghai and the port of Long Beach.  Enroute to China, the ships stop at Honolulu, then Guam, carrying cargo destined to those areas.  From Honolulu, connecting service is provided to other ports in Hawaii.  From Guam, connecting service is provided to other Pacific islands.  The ships then continue from Guam to the ports of Xiamen, added in 2009, Ningbo and Shanghai, and return directly to Long Beach.  Matson operated a second China Long Beach Express Service, CLX2, between August 2010 and September 2011 when this service was terminated.  Major competitors in the China Service include well-known international carriers such as Maersk, COSCO, Evergreen, Hanjin, APL, China Shipping, Hyundai, MSC, OOCL, KLine and NYK Line.  Matson competes by offering fast and reliable freight availability from Shanghai to Long Beach, providing fixed day 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 ships and providing state-of-the-art technology and world-class customer service.  Matson operates offices in Hong Kong, Xiamen, Ningbo and Shanghai, and has contracted with terminal operators in Xiamen, Ningbo and Shanghai.
 
Matson Logistics competes with thousands of local, regional, national and international companies that provide transportation and third-party logistics services. The industry is highly fragmented and, therefore, competition varies by geography and areas of service. At a national level, Matson Logistics competes most directly with C.H. Robinson Worldwide and the Hub Group. Competition is differentiated by the depth, scale and scope of customer relationships; vendor relationships and rates; network capacity; and real-time visibility into the movement of customers’ goods and other technology solutions. Additionally, while Matson Logistics primarily provides surface transportation brokerage, it also competes to a lesser degree with other forms of transportation for the movement of cargo, including air 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.  In the last 40 years, only once-in 2002, when International Longshore and Warehouse Union (“ILWU”) workers were locked out for ten days on the U.S. Pacific Coast-has Matson’s operations been disrupted significantly by labor disputes.  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”).  Matson raised its rates in its Hawaii service, effective January 2, 2011, by $120 per westbound container and $60 per eastbound container and its terminal handling charges by $175 per westbound container and $85 per eastbound container.  Matson raised its rates in its Guam service, effective January 30, 2011, by $120 per westbound and eastbound container and its terminal handling charges by $175 per westbound and eastbound container.  Rising fuel-related costs caused Matson to raise its fuel-related surcharge from 21.75 percent to 26.5 percent in its Hawaii service and from 23.25 percent to 28 percent in its Guam service, effective February 27, 2011.  Dramatic increases in fuel costs caused Matson to raise its fuel-related surcharge to 35 percent in its Hawaii service and 36.5 percent in its Guam service, effective March 27, 2011.  As a result of the sustained surge in fuel prices, Matson raised its fuel-related surcharge to 43.5 percent in its Hawaii service and 45 percent in its Guam service, effective May 1, 2011.  Due to sustained near record high fuel prices, Matson raised its fuel-related surcharge to 47.5 percent in its Hawaii service and 49 percent in its Guam service, effective June 12, 2011.  As a result of subsequent declines in bunker fuel prices, Matson decreased its fuel-related surcharge to 45.5 percent in its Hawaii service and to 47 percent in its Guam service, effective August 28, 2011.  Matson again decreased its fuel-related surcharge to 42.5 percent in its Hawaii service and to 44 percent in its Guam service, effective September 25, 2011.  Matson further decreased its fuel-related surcharge to 40.5 percent in its Hawaii service and 42 percent in its Guam service, effective October 9, 2011.  Matson raised its rates in its Hawaii service, effective January 1, 2012, by $175 per westbound container and $85 per eastbound container and its terminal handling charges by $50 per westbound container and $25 per eastbound container. As a result of rising bunker fuel prices and other energy related costs, Matson increased its fuel-related surcharge to 45.5 percent in its Hawaii service, effective February 26, 2012. Matson’s 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, 2011, A&B and its subsidiaries, including A&B Properties, Inc., owned approximately 88,166 acres of land, consisting of approximately 87,695 acres in Hawaii and approximately 471 acres on the U.S. Mainland, as follows:

Location
No. of Acres
       
Maui
 
67,240
 
Kauai
 
20,375
 
Oahu
 
70
 
Big Island
 
10
 
TOTAL HAWAII
 
87,695
 
       
       
Texas
 
150
 
California
 
100
 
Georgia
 
63
 
Utah
 
55
 
Colorado
 
36
 
Washington
 
27
 
Nevada
 
21
 
Arizona
 
19
 
TOTAL MAINLAND
 
471
 

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 for urban purposes or planned for development. An additional 2,990 acres on Maui, Kauai and Oahu are leased from third parties, and are not included in the tables. The tables do not include approximately 1,200 acres under joint venture development.

Current Use
No. of Acres
       
Hawaii
     
Fully entitled Urban (defined below)
 
750
 
Agricultural, pasture and miscellaneous
 
57,775
 
Watershed/conservation
 
29,170
 
       
U.S. Mainland
     
Fully entitled Urban
 
471
 
TOTAL
 
88,166
 

 
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 complex, 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 approvals:
 
 
·
amendment of the County general plan to reflect the desired residential use;
 
 
·
approval by the State Land Use Commission to reclassify the parcel from the Agricultural district to the Urban district;
 
·  
amendment of the Community Plan; and
 
 
·
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 requirement to construct infrastructure improvements, payment of impact fees, restrictions on the permitted uses of the land, requirement to provide 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 all of the above-mentioned land use approvals have been obtained.
 
(3)           Development Projects
 
A&B is pursuing a number of projects in Hawaii, including:
 
Maui:
 
(a)           Maui Business Park II.  In 2008, A&B received final zoning approval for 179 acres in Kahului, Maui, representing the second phase of its Maui Business Park project, from agriculture to light industrial.  The zoning change approval is subject to various conditions, such as providing land for affordable housing and a wastewater treatment plant.  In 2009, the County granted preliminary approval of several subdivision applications within the project, preliminary design of project infrastructure was completed, and construction drawings for a water system were submitted for approvals.  In 2010, A&B continued to process permits and construction drawings for subdivision improvements through various State and County agencies, and commenced demolition of existing structures to prepare for construction of subdivision improvements. In 2011, the project’s offsite private water system was completed, including two potable-quality wells, storage and transmission systems. Construction of subdivision improvements for the first phase of the project was delayed due to permit issues. Limited construction of subdivision improvements commenced in December 2011.
 
(b)           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.
 
A&B has since sold 29 single-family homesites at Wailea’s Golf Vistas subdivision and six bulk parcels:  MF-4 (10.5 acres); MF-15 (9.4 acres); MF-5 (8.4 acres); MF-9 (30.2 acres); a three-acre business parcel within the 10.4-acre MF-11 parcel; and a 4.6-acre portion of the 15.6-acre B I & II parcel.  The 25-acre MF-8 parcel was developed in a joint venture with Armstrong Builders into 150 duplex units, with 12 units available for sale.  Due to limited demand for vacant lots, A&B is evaluating development scenarios for its 12 single-family ocean-view lots at the 7.4-acre MF-11 parcel and nine half-acre estate ocean-view lots at the 6.7-acre MF-19 parcel.  A&B continues to evaluate development scenarios for the remaining 153 acres, including MF-7 (13 acres), MF-10 (13.7 acres) and B-1 (11.0 acres).
 
(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, but design approval has been deferred until an acceptable water source can be confirmed.
 
(d)           Aina ‘O Kane.  Aina ‘O Kane is planned to consist of 103 residential condominium units in five four-story buildings, with 20,000 square-feet of ground-floor commercial space, in Kahului.  In 2010, A&B installed the project’s water meters and, in July 2011, a two-year extension of the Special Management Area (SMA) permit was secured.  The project is positioned for development when market conditions improve.
 
(e)           Kahului Town Center.  The redevelopment plan for the 19-acre Kahului Shopping Center block reflects the creation of a traditional “town center,” consisting of approximately 440 residential condominium units and 240,000 square feet of retail/office space.  This project is on hold until market conditions improve.
 
Kauai:
 
(f)           Kukui`ula.  In April 2002, A&B entered into a joint venture with DMB Communities II (“DMBC”), 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 up to 1,500 resort 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.  In May 2009, A&B entered into an amended agreement with DMBC to increase A&B’s ownership participation in Kukui`ula in exchange for more favorable participation rights to future cash and profit distributions, while limiting DMBC’s future contributions to $35 million. In 2011, all resort core amenities were completed and opened for business, including the 18-hole golf course, the community’s clubhouse, pool and spa facilities. The project’s 78,900-square-foot commercial center, The Shops at Kukui’ula, is 75 percent leased. A total of 81 residential lot sales had closed as of December 31, 2011, and a 4.2-acre commercial parcel was sold in 2011. Several developer agreements are under negotiation on various bulk parcels with one agreement executed in 2011. Under the agreement, the joint venture receives a payment for each lot when construction of the home is completed and sold by the contractor. At a 5.4-acre developer parcel, planned for 15 homes, construction was completed on a “lodge” model unit and two lodge units have been sold, with construction expected to be completed in 2012. The capital contributed by A&B to the joint venture included approximately $222 million of cash contributions as of December 31, 2011, and $30 million representing the value of land initially contributed. DMBC has contributed $188 million, which includes the amended $35 million mentioned above.
 
Oahu:
 
(g)           Waihonua at Kewalo.  In 2010, A&B acquired a fully-entitled high-rise condominium development site in the Kakaako district of Honolulu on Oahu. During 2011, construction plans were prepared and processed for approvals for the 341-unit high-rise development. Condominium documents were approved in November and sales and marketing commenced in December, with favorable initial results. Subject to meeting satisfactory pre-sale requirements, construction is projected to commence in 2012.
 
(h)           Gateway at Mililani Mauka Shopping Center.  In December 2011, A&B acquired a 4.3-acre development parcel within the 7.4-acre Gateway at Mililani Mauka Shopping Center on Oahu, including an existing, fully-leased 5,900 square-foot multi-tenant retail building and four fully-infrastructured building pads. Gateway is currently improved with a McDonald’s, a Tesoro gas station and mini-mart, and a new Longs/CVS Drugstore (under construction).  A&B plans to develop an additional 28,400 square feet of retail space on the development parcel.
 
(i)           Waiawa.  In August 2006, A&B entered into a joint venture agreement with an affiliate of Gentry Investment Properties for the development of a 1,000-acre master-planned primary residential community (530 residential-zoned acres) in Central Oahu. The master development agreement between Kamehameha Schools ("KS") and Gentry was terminated and, in 2011, KS, Gentry and A&B agreed upon settlement terms and are no longer pursuing development of the project, which resulted in a $6.4 million reduction in the carrying value of A&B’s investment.
 
(j)           Keola La`i.  In 2008, A&B completed construction of a 42-story condominium project near downtown Honolulu, consisting of 352 residential units, averaging 970 square feet, and four commercial units, with the majority of the residential units and two commercial units closed in 2008. Six residential units and the remaining commercial unit closed in 2011.  Three residential units are available for sale.
 
Big Island of Hawaii:
 
(k)           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, planned for 137 single-family units and duplex townhomes.  A total of 27 units were constructed in 2007 and 2008, with all 27 units sold following the last three closings in 2011. A newly-constructed unit also closed in 2011. The venture is proceeding with its revised development plan, focusing on more single-family units.
 
U.S. Mainland:
 
During 2011, A&B explored the sale of certain Mainland joint venture investments, resulting in the sale of its Bridgeport Marketplace investment. The Company regularly evaluates its development activities and strategies, including joint venture development plans with its partners, for project feasibility.
 
              (l)Bakersfield.  In November 2006, A&B entered into a joint venture with Intertex P&G Retail, LLC, for the planned development of a 575,000-square-foot retail center on a 57.3-acre commercial parcel in Bakersfield, California.  The parcel was acquired in November 2006.  Although development plans remain on hold due to current economic conditions, the venture continues negotiations with a national anchor tenant and is evaluating development options.
 
              (m)Bridgeport Marketplace.  In July 2005, A&B entered into a joint venture with Intertex Bridgeport Marketplace, LLC for the development of a retail center in Valencia, California.  Construction of the center was completed in 2009, and A&B sold its interest in the venture in March 2011.
 
              (n)Crossroads Plaza.  In June 2004, A&B entered into a joint venture with Intertex Hasley, LLC, for the development of a 56,000-square-foot mixed-use neighborhood retail center on 6.5 acres in Valencia, California.  The property was acquired in August 2004.  The sale of a pad site building closed in 2007, and construction of the center was completed in 2008.  As of December 31, 2011, the center was 91 percent leased.
 
              (o)Palmdale Trade & Commerce Center.  In December 2007, A&B entered into a joint venture with Intertex Palmdale Trade & Commerce Center LLC, for the planned development of a 315,000-square-foot mixed-use commercial office and light industrial condominium complex on 18.2 acres in Palmdale, California, located 60 miles northeast of Los Angeles and 25 miles northeast of Valencia.  The parcel was contributed to the venture in 2008.  The venture is negotiating with a potential tenant for a 300,000 square-foot build-to-suit facility.
 
(p)           Santa Barbara Ranch.  In November 2007, A&B entered into a joint venture with Vintage Communities, LLC, a residential developer headquartered in Newport Beach, California, for the planned development of a 1,040-acre exclusive large-lot subdivision, located 12 miles north of the City of Santa Barbara.  In 2008, due to worsening economic conditions, A&B suspended further investment in the project and recognized a $3.0 million impairment.  In 2010, based on market conditions, the Company took an additional impairment loss of approximately $1.9 million.
 
 (4)           Leased Portfolio
 
An important source of income and cash flow is the lease rental income A&B receives from its portfolio of commercial income properties, consisting of approximately 7.9 million leasable square feet of commercial building space as of December 31, 2011.
 
(a)           Hawaii Properties
 
A&B’s Hawaii commercial properties portfolio consists of retail, office and industrial properties, comprising approximately 1.4 million square feet of leasable space as of December 31, 2011.  Most of the commercial properties are located on Maui and Oahu, with smaller holdings in the area of Port Allen, on Kauai, and Kona, on the island of Hawaii.  The average occupancy for the Hawaii portfolio was 91 percent in 2011, versus 92 percent in 2010.  Lower occupancy was primarily due to lower occupancy at the 238,300 square-foot Komohana Industrial Park on Oahu.  In 2011, A&B sold the 61,500-square-foot Wakea Business Center II on Maui, the 28,100-square-foot Apex Building on Maui and two leased fee parcels.  In December 2011, A&B acquired a 4.3-acre parcel on Oahu within the Gateway at Mililani Mauka shopping center, including a fully-leased 5,900 square-foot retail building, planned for development of an additional 28,400 square feet of retail space.
 

 
 

 

The primary Hawaii commercial properties owned as of year-end 2011 were as follows:
 
 
Property
 
Location
 
Type
Leasable Area
(sq. ft.)
       
Komohana Industrial Park
Kapolei, Oahu
Industrial
238,300
Maui Mall
Kahului, Maui
Retail
185,700
Waipio Industrial
Waipahu, Oahu
Industrial
158,400
Kaneohe Bay Shopping Center
Kaneohe, Oahu
Retail
123,900
Waipio Shopping Center
Waipahu, Oahu
Retail
113,800
P&L Warehouse
Kahului, Maui
Industrial
104,100
Lanihau Marketplace
Kailua-Kona, Hawaii
Retail
88,300
Port Allen (4 buildings)
Port Allen, Kauai
Industrial/Retail
87,400
Kunia Shopping Center
Waipahu, Oahu
Retail
60,400
Kahului Office Building
Kahului, Maui
Office
58,300
Lahaina Square
Lahaina, Maui
Retail
50,200
Kahului Shopping Center
Kahului, Maui
Retail
43,200
Kahului Office Center
Kahului, Maui
Office
32,900
Stangenwald Building
Honolulu, Oahu
Office
27,100
Judd Building
Honolulu, Oahu
Office
20,200
Maui Clinic Building
Kahului, Maui
Office
16,600
Lono Center
Kahului, Maui
Office
13,400
Gateway at Mililani Mauka
Mililani, Oahu
Retail
5,900

 
 (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. A&B’s Mainland commercial properties portfolio consists of retail, office and industrial properties, comprising approximately 6.5 million square feet of leasable space as of December 31, 2011.  A&B’s mainland commercial properties’ occupancy rate of 92 percent improved from 85 percent in 2010.  Although there is some improvement in the leasing environment in certain mainland markets, rents in most markets, while showing improvement over 2010, remain below 2007 levels.
 
In 2011, A&B completed the sales of the 139,500-square-foot Arbor Park Shopping Center in San Antonio, Texas. Also in 2011, A&B completed the acquisitions of the 84,000-square-foot Union Bank facility in Everett, Washington, and the 146,900-square-foot Issaquah Office Center in Issaquah, Washington.
 

 
 

 

A&B’s mainland commercial properties owned as of year-end 2011 were as follows:
 
 
Property
 
Location
 
Type
Leasable Area
(sq. ft.)
       
Heritage Business Park
Dallas, TX
Industrial
1,316,400
Savannah Logistics Park
Savannah, GA
Industrial
1,035,700
Midstate 99 Distribution Center
Visalia, CA
Industrial
   789,100
Sparks Business Center
Sparks, NV
Industrial
   396,100
Republic Distribution Center
Pasadena, TX
Industrial
   312,500
Activity Distribution Center
San Diego, CA
Industrial
   252,300
Centennial Plaza
Salt Lake City, UT
Industrial
   244,000
Meadows on the Parkway
Boulder, CO
Retail
   216,400
1800 and 1820 Preston Park
Plano, TX
Office
   198,800
Ninigret Office Park X and XI
Salt Lake City, UT
Office
   185,500
San Pedro Plaza
San Antonio, TX
Office/Retail
   171,900
Rancho Temecula Town Center
Temecula, CA
Retail
165,500
2868 Prospect Park
Sacramento, CA
Office
   162,900
Issaquah Office Center
Issaquah, WA
Office
146,900
Little Cottonwood Center
Sandy, UT
Retail
141,600
Concorde Commerce Center
Phoenix, AZ
Office
   140,700
Deer Valley Financial Center
Phoenix, AZ
Office
   126,600
Northpoint Industrial
Fullerton, CA
Industrial
   119,400
Broadlands Marketplace
Broomfield, CO
Retail
   103,900
Union Bank
Everett, WA
Office
84,000
2890 Gateway Oaks
Sacramento, CA
Office
     58,700
Wilshire Shopping Center
Greeley, CO
Retail
     46,500
Royal MacArthur Center
Dallas, TX
Retail
     44,100
Firestone Boulevard Building
La Mirada, CA
Office
     28,100

C.           Agribusiness
 
(1)           Production
 
A&B has been engaged in the production of cane sugar in Hawaii since 1870.  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) renewable energy operations on the island of Kauai, operated by its McBryde Resources, Inc. subsidiary, (3) its Kahului Trucking & Storage, Inc. (“KT&S”) and Kauai Commercial Company, Incorporated (“KCC”) subsidiaries, which provide several types of trucking services, including sugar and molasses hauling on Maui, mobile equipment maintenance and repair services on Maui, Kauai, and the Big Island, and self-service storage facilities on Maui and Kauai, and (4) Hawaiian Sugar & Transportation Cooperative (“HS&TC”), a single member agricultural cooperative that provides raw sugar marketing and transportation services solely to HC&S. HS&TC owns the MV Moku Pahu, a Jones-Act qualified integrated tug barge bulk dry carrier, which is used to transport raw sugar from Hawaii to the U.S. West Coast and coal from the U.S. West Coast to Hawaii.
 
HC&S is Hawaii’s only producer of raw sugar, producing approximately 182,800 tons of raw sugar in 2011 (compared with 171,800 tons in 2010).  The primary reasons for the increase in production were improved yields on the plantation due to better agronomic practices, a higher average age of the crop at harvest, and increased delivery of irrigation water. HC&S harvested 15,063 acres of sugar cane in 2011 (compared with 15,488 in 2010).  Yields averaged 12.1 tons of sugar per acre in 2011 (compared to 11.1 in 2010).  As a by-product of sugar production, HC&S also produced approximately 53,100 tons of molasses in 2011 (compared to 52,800 in 2010).
 
In 2011, approximately 18,700 tons of sugar (compared to 16,300 tons in 2010) were processed by HC&S into specialty food-grade sugars under HC&S’s Maui Brand® trademark or repackaged by distributors under their own labels.  This increase in production was due to longer, steady production runs throughout the harvesting season, enhanced operation of the specialty brand sugar production line, and more efficient labor operations.
 
In March 2011, the Company executed an agreement to lease land and sell coffee inventory and certain assets used in a coffee business it previously operated to Massimo Zanetti Beverage USA, Inc. (“MZB”), including intangible assets.  The Company has retained fee simple ownership of the land, buildings, power generation, and power distribution assets, but no longer operates the coffee plantation.
 
HC&S and McBryde Sugar Company, Limited (“McBryde”), a subsidiary of A&B, 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.  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
 
Approximately 90 percent of the bulk raw sugar produced by HC&S in 2011 was purchased by C&H Sugar Company, Inc. (“C&H”).  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.
 
The remaining 10 percent of the raw sugar was used by HC&S to produce specialty food-grade sugars, which are sold by HC&S to food and beverage producers and to retail stores under its Maui Brand® label, and to distributors that repackage the sugars under their own labels.  HC&S’s largest food-grade sugar customers are Cumberland Packing Corp. and Sugar Foods Corporation, which repackage HC&S’s turbinado sugar for their “Sugar in the Raw” product line.
 
Hawaiian Sugar & Transportation Cooperative (“HS&TC”), a sugar grower cooperative in Hawaii (of which HC&S currently is the only member), has a supply contract with C&H ending in December 2012.  Pursuant to the supply contract, the cooperative sells raw sugar to C&H at a price equal to the New York No. 16 Contract settlement price, less a volume-based discount.
 
(3)           Sugar Competition and Legislation
 
 Hawaii has traditionally produced 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 legislation is the Food Conservation and Energy Act of 2008, which expires on December 31, 2012 (“2008 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 from countries other than Canada and Mexico 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.  Also, a new but limited sucrose ethanol program was added in 2008, which allows sugar to be diverted into ethanol production when the market is deemed to be oversupplied.
 
The 2008 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.  A loan rate (support price) of 18.50 cents per pound (“¢/lb”) for raw cane sugar was in effect for the 2010 and 2011 crops. The loan rate increases to 18.75 ¢/lb for the 2012 and 2013 crops (the last year of the bill). The U.S. rates are adjusted by region to reflect the cost of transportation. The 2010 adjusted crop loan rate in Hawaii is 16.52 ¢/lb. The Company does not currently participate in the sugar price support loan program.
 
In 2005, the U.S. approved a trade pact with Central America and the Dominican Republic, known as the Central America-Dominican Republic-United States Free Trade Agreement.  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), which will grow to about 1.7 percent (151,000 metric tons) in its fifteenth year.
 
Implementation of the North American Free Trade Agreement (NAFTA) began in 1994.  This agreement removed most barriers to trade and investment among the U.S., Canada and Mexico.  Under NAFTA, all non-tariff barriers to agricultural trade between the U.S. and Mexico were eliminated.  In addition, many tariffs were eliminated immediately or phased out.  Starting in 2008, Mexico was permitted to ship an unlimited quantity of sugar duty-free to the U.S. each year.
 
U.S. raw sugar prices remained relatively stable and flat for over thirty years.  The full implementation of NAFTA in 2008, which unified the U.S. and Mexican sugar markets, increased price volatility.  In 2009, a tight NAFTA supply/demand outlook and a soaring world raw sugar market combined to push U.S. raw sugar prices to 29-year highs.  Prices have remained at high levels for most of 2011.  A chronological chart of the average U.S. domestic raw sugar prices, based on the average daily New York No. 16 Contract settlement price for domestic raw sugar, is shown below (not adjusted for inflation):
 
 
 
(4)           Land Designations and Water
 
The HC&S sugar plantation, the only remaining sugar plantation in Hawaii, consists of 43,300 acres, with approximately 35,500 acres under active sugar cane cultivation.
 
On Kauai, approximately 3,000 acres are cultivated in coffee by Massimo Zanetti Beverage USA, Inc., which leases the land from the Company. Additional acreage is cultivated in seed corn and used for pasture purposes.
 
The Hawaii Legislature, in 2005, passed Important Agricultural Lands (“IAL”) legislation to fulfill the State constitutional mandate to protect agricultural lands, promote diversified agriculture, increase the State’s agricultural self-sufficiency, and assure the availability of agriculturally suitable lands.  In 2008, the Legislature passed a package of incentives, which is necessary to trigger the IAL system of land designation.  In 2009, A&B received approval from the State Land Use Commission for the designation of over 27,000 acres on Maui and over 3,700 acres on Kauai as IAL.  These designations were the result of voluntary petitions filed by A&B.
 
It is crucial for HC&S to have access to reliable sources of water supply and efficient irrigation systems.  HC&S conserves water by using “drip” irrigation systems that distribute 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.
 
A&B owns 16,000 acres of watershed lands in East Maui, which supply a portion of the irrigation water used by HC&S.  A&B also held four water licenses to another 30,000 acres owned by the State of Hawaii in East Maui, which over the last ten years have supplied approximately 58 percent 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 (the “BLNR”) to replace these revocable permits with a long-term water lease.  Pending the conclusion by the BLNR of this contested case hearing on the request for the long-term lease, the BLNR has renewed the existing permits on a holdover basis. A&B also holds rights to an irrigation system in West Maui, which provided approximately 14 percent of the irrigation water used by HC&S over the last ten years. For information regarding legal proceedings involving A&B’s irrigation systems, see “Legal Proceedings” below.
 
D.           Employees and Labor Relations
 
As of December 31, 2011, A&B and its subsidiaries had approximately 2,100 regular full-time employees.  About 880 regular full-time employees were engaged in the agribusiness segment, 1,101 were engaged in the transportation segment, 42 were engaged in the real estate segment, and the remaining were in administration.  Approximately 48 percent were covered by collective bargaining agreements with unions.
 
At December 31, 2011, the active Matson fleet employed seagoing personnel in 197 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 25 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, the Sailors Union of the Pacific and the Marine Firemen’s Union were renewed in mid-2008 through June 2013. Contracts that Matson has with the American Radio Association were renewed in mid-2009 through August 15, 2013. Contracts that Matson has with the Masters, Mates & Pilots (“MM&P”) and the Marine Engineers Beneficial Association (“MEBA”) for ships built prior to 2003 were renewed in mid-2009 through August 15, 2013.  Contracts that Matson has with MM&P and the MEBA for ships built after 2003 expire on August 15, 2013 and include provisions for a wage reopener, which was negotiated in mid-2009 to cover the remaining contract period.  Matson’s MEBA contracts were extended on December 29, 2011 and now expire on August 15, 2018.
 
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.  A six-year PMA/ILWU Master Contract, which covers all Pacific Coast longshore labor, was negotiated in 2008 and will expire on July 1, 2014.  Matson Terminals provides stevedoring and terminal services to Matson and other vessel operators calling at Honolulu and on the islands of Hawaii, Maui and Kauai.  Matson Terminals is a member of the Hawaii Stevedore Industry Committee, which negotiates with the ILWU in Hawaii on behalf of its members.  In 2008, Matson signed six-year agreements with each of the ILWU units, which will expire on July 1, 2014.
 
During 2010, Matson maintained its collective bargaining agreements with ILWU clerical workers in Honolulu and Oakland, which are in effect through June 2014.  The bargaining agreement with ILWU clerical workers in Long Beach was renegotiated in 2010 for another three-year period.  The health & welfare and pension provisions were not renegotiated; however, the parties agreed to match the provisions that are negotiated between the ILWU clerical workers in Long Beach and the other employers.  Those negotiations are continuing and are expected to be finalized in 2012.
 
During 2011, 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.  Also, Matson participates in a multiemployer pension plan for its office clerical workers in Long Beach.  Matson Terminals participates in two multiemployer pension plans for its Hawaii ILWU non-clerical employees.  For a discussion of withdrawal liabilities under the Hawaii longshore and seagoing plans, see Note 10 (“Employee Benefit Plans”) to A&B’s consolidated 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 and technical employees bargaining units cover approximately 640 workers and expire on January 31, 2014.  The bargaining unit employees at KT&S also are covered by two collective bargaining agreements with the ILWU.  The bulk sugar employees’ agreement expires on June 30, 2014 and the agreement with all other employees expires on March 31, 2012, with renegotiations expected to begin in March 2012.  There are two collective bargaining agreements with KCC employees represented by the ILWU.  These agreements expire on April 30, 2012, with renegotiations expected to begin in April 2012.
 
E.           Energy
 
Matson and Matson Terminals purchase residual fuel oil, lubricants, gasoline and diesel fuel for their operations and also pay fuel surcharges to drayage providers and rail carriers.  Residual fuel oil is by far Matson’s largest energy-related expense.  In 2011, Matson purchased approximately 2.7 million barrels of residual fuel oil for its vessels, which included fuel for Matson’s CLX2 service discontinued in the third quarter of 2011, compared with 2.1 million barrels in 2010.
 
Residual fuel oil prices paid by Matson in 2011 on the west coast started at $83.23 per barrel and ended the year at $113.93.  The lowest west coast price for the year was $82.13 per barrel in January, and the high price was $124.36 in December.  Sufficient fuel for Matson’s requirements is expected to be available in 2012.
 
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 or during periods when bagasse is not produced in sufficient quantities.  HC&S also generates a limited amount of hydroelectric power.  To the extent it is not used in A&B’s factory and farming operations, HC&S sells electricity.  In 2011, HC&S produced and sold, respectively, approximately 191,300 MWH and 64,900 MWH of electric power (compared with 190,400 MWH produced and 68,300 MWH sold in 2010). The decrease in power sold was due to increased power used for irrigation pumps to improve soil moisture levels and yields. Hydroelectric generation was depressed during the year due to extended drought conditions on Maui.  HC&S’s use of oil in 2011 of 9,700 barrels was 42 percent less than the 16,700 barrels used in 2010.  The decrease was primarily due to higher bagasse production used in power generation as a result of improved yields on the farm.  Coal used for power generation was 58,600 short tons, about 2,600 tons less than that used in 2010.  Less coal was required because of the higher bagasse production from the fields.
 
In 2011, McBryde produced approximately 29,800 MWH of hydroelectric power (compared with approximately 29,500 MWH in 2010).  To the extent it is not used in A&B-related operations, McBryde sells electricity to Kauai Island Utility Cooperative.  Power sales in 2011 amounted to approximately 22,100 MWH (compared with 19,000 MWH in 2010).
 
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 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, liquidity, 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.

Changes in U.S., global, or regional economic conditions that result in a further decrease in consumer confidence or market demand for the Company’s services and products in Hawaii, the U.S. Mainland, Guam or Asia may adversely affect the Company’s financial position, results of operations, liquidity, or cash flows.

A continuation or further weakening of the U.S., Guam, Asian or global economies may adversely impact the level of freight volumes, freight rates, and real estate leasing, sales and development activity. Within the U.S., a continuation or further weakening of economic drivers in Hawaii, which include tourism, military spending, construction starts, personal income growth, and employment, or the further weakening of consumer confidence, market demand or the economy in the U.S. Mainland, may further reduce the demand for goods to and from Hawaii and Asia, travel to Hawaii and domestic transportation of goods, adversely affecting inland and ocean transportation volumes or rates, the sale of Hawaii real estate, and the real estate leasing and development markets. In addition, overcapacity in the global or transpacific ocean transportation markets or a change in the cost of goods or currency exchange rates may adversely affect freight volumes or rates in the Company’s China service.

The Company may face new or increased competition.

The Company’s transportation segment may face new competition by 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 volumes or rates.  See also discussion under “Business and Properties - Transportation - Competition” above.

For the Company’s real estate segments, 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.  Increased vacancies, decreased rents, sales prices or sales volume, or lack of development opportunities may lead to a deterioration in results from the Company’s real estate business.

The Company’s significant operating agreements and leases could be replaced on less favorable terms or may not be replaced.

The significant operating agreements and leases of the Company in its various businesses expire at various points in the future and may not be replaced or could be replaced on less favorable terms, thereby adversely affecting the Company’s future financial position, results of operations and cash flows.

The reduction in availability of mortgage financing and the volatility and reduction in liquidity in the financial markets may adversely affect the Company’s real estate business.

During 2008 and 2009, the financial industry experienced significant instability due to, among other things, declining property values and increasing defaults on loans. This led to tightened credit requirements, reduced liquidity and increased credit risk premiums for virtually all borrowers. Fewer loan products, tighter loan qualifications and higher interest rates make it more difficult for borrowers to finance the purchase of units in the Company’s projects. Tightening of credit in the commercial markets may adversely affect the Company’s ability to secure construction or other financing on acceptable or favorable terms for the Company’s residential and commercial projects, working capital requirements, or investment needs. Additionally, the stringent requirements to obtain financing for buyers of commercial properties make it significantly more difficult for the Company to sell commercial properties and may negatively impact the sales prices and other terms of such sales. The stringent credit environment may also impact the Company in other ways, including the credit or solvency of customers, vendors, or joint venture partners, and the ability of partners to fund their equity obligations to the joint venture.

A deterioration of the Company’s credit profile or disruptions of the credit markets could restrict its ability to access the debt capital markets or increase the cost of debt.

A deterioration in the Company’s credit profile may ultimately have an adverse effect on the Company’s ability to access the private or public debt markets and also may increase its borrowing costs.  If the Company’s credit profile deteriorates significantly, its access to the debt capital markets or its ability to renew its committed lines of credit may become restricted, or the Company may not be able to refinance debt at the same levels or on the same terms. Because the Company relies on its ability to draw on its revolving credit facilities to support its operations, when required, any volatility in the credit and financial markets that prevents the Company from accessing funds (for example, a lender that does not fulfill its lending obligation) could have an adverse effect on the Company’s financial condition and cash flows. Additionally, the Company’s credit agreements generally include an increase in borrowing rates if the Company’s credit profile deteriorates. Furthermore, the Company incurs interest under its revolving credit facilities based on floating rates. Floating rate debt creates higher debt service requirements if market interest rates increase, which would adversely affect the Company’s cash flow and results of operations.

Failure to comply with certain restrictive financial covenants contained in the Company’s credit facilities could preclude the payment of dividends, impose restrictions on the Company’s business segments, capital resources or other activities or otherwise adversely affect the Company.

The Company’s credit facilities contain certain restrictive financial covenants, the most restrictive of which include the maintenance of minimum shareholders’ equity levels, a maximum ratio of debt to earnings before interest, depreciation, amortization, and taxes, and the maintenance of a minimum unencumbered property investment value. If the Company does not maintain the required covenants, and that breach of covenants is not cured timely or waived by the lenders, resulting in default, the Company’s access to credit may be limited or terminated, dividends may be suspended, and the lenders could declare any outstanding amounts due and payable. Additionally, the Company’s credit facilities contain other terms limiting its ability to incur additional indebtedness, including restrictions on total debt outstanding and restrictions on secured debt outstanding. The Company’s continued ability to borrow under its credit facilities is subject to compliance with these financial and other non-financial covenants.

An increase in fuel prices, or changes in the Company’s ability to collect fuel surcharges, 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 are unpredictable and fluctuate 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 services 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. Increases in energy costs for the Company’s leased real estate portfolio are typically recovered from lessees, although the Company’s share of energy costs increases as a result of lower occupancies and higher operating cost reimbursements impact the ability to increase underlying rents. Rising fuel prices also may increase the cost of construction, including delivery costs to Hawaii, and the cost of materials that are petroleum-based, thus affecting the Company’s development projects. Finally, rising fuel prices will impact the cost of producing and transporting sugar.


 
 

 

Noncompliance with, or changes to, federal, state or local law or regulations, including passage of climate change legislation or regulation, 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 including those relating to air quality initiatives at port locations, and cabotage laws. Noncompliance with, or 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 and results of operations. In addition, changes in environmental laws impacting the shipping business, including passage of climate change legislation or other regulatory initiatives that restrict emissions of greenhouse gasses, may require costly vessel modifications, the use of higher-priced fuel and changes in operating practices that may not all be able to be recovered through increased payments from customers.  The real estate segments are subject to numerous federal, state and local laws and regulations, which, if changed, may adversely affect the Company’s business. The agribusiness segment is subject to the federal government’s administration of the U.S. sugar program, such as the 2008 Farm Bill, and the Hawaii Public Utilities Commission’s regulation of avoided energy cost rates paid to the Company in connection with it sale of electric power. Further changes to these laws and regulations could adversely affect the Company. Climate change legislation, such as limiting and reducing greenhouse gas emissions through a “cap and trade” system of allowances and credits, if enacted, may have an adverse effect on the Company’s 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, 2011, the Company had approximately 2,100 regular full-time employees, of which approximately 48 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 or benefits 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 sales 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, agent and customer relationships may adversely affect the Company’s business.

The Company’s business is dependent on its relationships with key vendors, agents, customers and tenants. 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 and agents are important in the Company’s intermodal business. For agribusiness, HC&S’s relationship with C&H Sugar Company, Inc. is critical. 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 ocean transportation segment, these dependencies 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, reductions in its revenue and profits and damage to 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, floods 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 segments, the occurrence of natural disasters, such as hurricanes, earthquakes, tsunamis, floods, fires, tornados and unusually heavy or prolonged rain, could damage its real estate holdings, resulting in substantial repair or replacement costs to the extent not covered by insurance, a reduction in property values, or a loss of revenue, and could have an adverse effect on its ability to develop, lease and sell properties. 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 planting, harvesting and production, electricity generation and sales, and the Agribusiness segment’s facilities, including dams and reservoirs.

 
The Company maintains casualty insurance under policies it believes to be adequate and appropriate. These policies are generally subject to large retentions and deductibles. Some types of losses, such as losses resulting from a port blockage, Matson business interruption, physical damage to dams, pollution stemming from non-marine operations  or crop  damage , generally are not insured. In some cases the Company retains the entire risk of loss because it is not economically prudent to purchase insurance  coverage or because of the perceived remoteness of the risk. Other risks are uninsured because insurance coverage may not be commercially available. Finally, the Company retains all risk of loss that exceeds the limits of its insurance.
 

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 or willingness of tourists to travel to Hawaii, thereby adversely affecting Hawaii’s economy and 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 real estate holdings, 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 and increase the cost 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 the Company’s 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:

 
the Company may not have voting control over the joint venture;
 
the Company may not be able to maintain good relationships with its venture partners;
 
the venture partner at any time may have economic or business interests that are inconsistent with the Company’s;
 
the venture partner may fail to fund its share of capital for operations and development activities, or to fulfill its other commitments, including providing accurate and timely accounting and financial information to the Company;
 
the joint venture or venture partner could lose key personnel; and
 
the venture partner could become bankrupt, requiring the Company to assume all risks and capital requirements related to the joint venture project, and the related bankruptcy proceedings could have an adverse impact on the operation of the partnership or joint venture.

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 to perform under such arrangement, the Company may be adversely affected.

The Company is subject to, and may in the future be subject to, disputes, legal or other proceedings, or government inquiries or investigations, that could have an adverse effect on the Company.

The nature of the Company’s business exposes it to the potential for disputes, legal or other proceedings, or government inquiries or investigations, relating to antitrust matters, 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. For example, 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 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 or result in significant expenditures or losses 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.  As a real estate developer, the Company may face warranty and construction defect claims, as described below in the “Real Estate” section of this “Risk Factors” item.  For a description of significant legal proceedings involving the Company, see “Legal Proceedings” below.

Changes in the value of pension assets, or a change in pension law or key assumptions, may adversely affect the Company’s financial performance.

The amount of the Company’s employee pension and postretirement 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, changes in discount rates, higher health care costs, or lower actual or expected 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.  These factors, as well as a decline in the fair value of pension plan assets, may put upward pressure on the cost of providing pension and medical benefits and may increase future pension expense and required funding contributions. Although the Company has actively sought to control increases in these costs, there can be no assurance that it will be successful in limiting future cost and expense increases, and continued upward pressure in costs and expenses could further reduce the profitability of the Company’s businesses.
 
The Company may have exposure under its multiemployer plans in which it participates 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 that 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 that 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’s proposed separation into two independent, publicly-traded companies (one company comprising the Company’s real estate and agriculture businesses and the other comprising the Company’s transportation business) is subject to risks inherent to a large-scale transaction.

The proposed separation of the Company into two independent, publicly-traded companies is subject to multiple risks and uncertainties, including the risk that the separation will not be consummated, the risk that financing transactions contemplated as part of the separation cannot be consummated on terms and conditions acceptable to the Company, and the risk that the transaction does not qualify for tax-free treatment under applicable sections of the Internal Revenue Code.  If the separation is consummated, it is possible that, due to unforeseen changes in market and economic conditions or other events, the two resulting companies may not achieve the full strategic and financial benefits expected from separation or that such benefits may be delayed.  As a result, the aggregate market price of the common stock of the two resulting companies could be less than the market price of the Company’s common stock if the separation had not occurred.

TRANSPORTATION

The Company is subject to risks associated with conducting business in a foreign shipping market.

The Company, through Matson’s China service, is subject to risks associated with conducting business in a foreign shipping market, which include:

 
challenges in operating in a foreign country and doing business and developing relationships with foreign companies;
 
difficulties in staffing and managing foreign operations;
 
U.S. and foreign legal and regulatory restrictions, including compliance with the Foreign Corrupt Practices Act and foreign laws that prohibit corrupt payments to government officials;
 
global vessel overcapacity that may lead to decreases in volumes and shipping rates;
 
competition with established and new shippers;
 
currency exchange rate fluctuations;
 
political and economic instability;
 
protectionist measures that may affect the Company’s operation of its wholly-owned foreign enterprise; and
 
challenges caused by cultural differences.

Any of these risks has the potential to adversely affect the Company’s operating results.

Compliance with environmental laws and regulations may adversely affect the Company’s business.

The Company’s vessel operations are subject to various federal, state and local environmental laws and regulations, including, but not limited to, the Oil Pollution Act of 1990, the Comprehensive Environmental Response Compensation & Liability Act of 1980, the Clean Water Act, the Invasive Species Act and the Clean Air Act. Continued compliance with these laws and regulations may result in additional costs and changes in operating procedures that may adversely affect the Company’s business.

 
The Company is subject to risks related to a marine accident or spill event.
 
 
The Company’s vessel operations could be faced with a maritime accident, oil spill, or other environmental mishap. Such event may lead to personal injury, loss of life, damage of property, pollution and suspension of operations. As a result, such event could have an adverse effect on the Company’s business.
 

Acquisitions may have an adverse effect on the Company’s business.

The Company’s growth strategy 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 may pay a premium for an acquisition, resulting in goodwill that may later be determined to be impaired, adversely affecting the Company’s financial condition and results of operations.

The Company’s logistics services are dependent upon third parties for equipment, capacity and services essential to operate the Company’s logistics business, and if the Company fails to secure sufficient third party services, its 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 the Company cannot secure sufficient transportation equipment, capacity or services from these third parties at a reasonable rate to meet its 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 major customers could have an adverse effect on the revenue and business of the Company’s logistics business.

The Company’s logistics business derives a significant portion of its revenues from its largest customers. For 2011, the Company’s logistics business’ largest ten customers accounted for approximately 25 percent of the business’ revenue. A reduction in or termination of the Company’s logistics services by several of the logistics business’ largest customers could have an adverse effect on the Company’s revenue and business.

Repeal, substantial amendment, or waiver of the Jones Act or its application could have an adverse effect on the Company’s business.

If the Jones Act was to be repealed, substantially amended, or waived and, as a consequence, competitors with lower operating costs by utilizing their ability to acquire and operate foreign-flag and foreign-built vessels were to enter any of the Company’s Jones Act markets, the Company’s business would be adversely affected. In addition, the Company’s advantage as a U.S.-citizen operator of Jones Act vessels could be eroded by periodic efforts and attempts by foreign interests to circumvent certain aspects of the Jones Act. If maritime cabotage services were included in the General Agreement on Trade in Services, the North American Free Trade Agreement or other international trade agreements, or if the restrictions contained in the Jones Act were otherwise altered, the shipping of maritime cargo between covered U.S. ports could be opened to foreign-flag or foreign-built vessels.

The Company’s business could be adversely affected if the Company were determined not to be a U.S. citizen under the Jones Act.

Although the Company believes it currently is a U.S. citizen under the Jones Act, the Company does not have restrictions in place that protect its ability to maintain its status as a U.S. citizen under the Jones Act.  As a result, non-U.S. citizens could intentionally or inadvertently own in the aggregate more than 25 percent of the Company’s common stock, and the Company would no longer be considered a U.S. citizen under the Jones Act. Such an event could result in the Company’s ineligibility to engage in coastwise trade, the imposition of substantial penalties against it, including seizure or forfeiture of its vessels, and the inability to register its vessels in the United States, each of which could have an adverse effect on the Company’s financial condition and results of operation.

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:

 
an inability of the Company or buyers to secure sufficient financing or insurance on favorable terms, or at all;
 
construction delays, defects, or cost overruns, which may increase project development costs;
 
an increase in commodity or construction costs, including labor costs;
 
the discovery of hazardous or toxic substances, or other environmental, culturally-sensitive, or related issues;
 
an inability to obtain, or significant delay in obtaining, zoning, occupancy and other required governmental permits and authorizations;
 
difficulty in complying with local, city, county and state rules and regulations regarding permitting, zoning, subdivision, utilities, affordable housing, and water quality as well as federal rules and regulations regarding air and water quality and protection of endangered species and their habitats;
 
an inability to have access to sufficient and reliable sources of water or to secure water service or meters for its projects;
 
an inability to secure tenants necessary to support the project or maintain compliance with debt covenants;
 
failure to achieve or sustain anticipated occupancy or sales levels;
 
buyer defaults, including defaults under executed or binding contracts;
 
condemnation of all or parts of development or operating properties, which could adversely affect the value or viability of such projects; and
 
an inability to sell the Company’s constructed inventory.

Any of these risks has the potential to adversely affect the Company’s 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 portfolio’s profitability include:

 
a significant number of the Company’s tenants are unable to meet their obligations;
 
increases in non-recoverable operating and ownership costs;
 
the Company is unable to lease space at its properties when the space becomes available;
 
the rental rates upon a renewal or a new lease are significantly lower than prior rents or do not increase sufficiently to cover increases in operating and ownership costs;
 
the providing of lease concessions, such as free or discounted rents and tenant improvement allowances; and
 
the discovery of hazardous or toxic substances, or other environmental, culturally-sensitive, or related issues at the property.

The bankruptcy of key tenants may adversely affect the Company’s revenues and profitability.

The Company may derive significant revenues and earnings from certain key tenants. If one or more of these tenants declare bankruptcy or voluntarily vacates from the leased premise and the Company is unable to re-lease such space or to re-lease it on comparable or more favorable terms, the Company’s liquidity, financial position, results of operations and cash flows may be adversely impacted. Additionally, the Company’s results of operations may be further adversely impacted by an impairment or “write-down” of intangible assets, such as lease-in-place value or a deferred asset related to straight-line lease rent, associated with a tenant bankruptcy or voluntary vacancy.

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 regulations or laws that could negatively impact the availability of land and development opportunities within those areas.  For example, in December 2007, Maui County adopted an ordinance requiring verification of water source availability and sustainability for all developments prior to submission of subdivision construction plans.  This requirement adds further process delays and burdens the developer with identifying and developing new water sources.  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.

Real estate development projects are subject to warranty and construction defect claims in the ordinary course of business that can be significant.

As a developer, the Company is subject to warranty and construction defect claims arising in the ordinary course of business. The amounts payable under these claims, both in legal fees and remedying any construction defects, can be significant and exceed the profits made from the project. As a consequence, the Company may maintain liability insurance, obtain indemnities and certificates of insurance from contractors generally covering claims related to workmanship and materials, and create warranty and other reserves for projects based on historical experience and qualitative risks associated with the type of project built. Because of the uncertainties inherent to these matters, the Company cannot provide any assurance that its insurance coverage, contractor arrangements and reserves will be adequate to address some or all of the Company’s warranty and construction defect claims in the future. For example, contractual indemnities may be difficult to enforce, the Company may be responsible for applicable self-insured retentions, and certain claims may not be covered by insurance or may exceed applicable coverage limits. Additionally, the coverage offered and the availability of liability insurance for construction defects could be limited or costly. Accordingly, the Company cannot provide any assurance that such coverage will be adequate or available at all, or available at an acceptable cost.

The Company’s real estate investments are relatively illiquid.

The Company’s investments in real estate are relatively illiquid, which may limit the Company’s ability to strategically reposition its portfolio in the near-term as a response to changes in economic, financial, investment or other conditions, or may prevent or delay the Company’s efforts to generate cash from these sales. The Company cannot predict whether it will be able to sell any property or investment at the price or on the terms set by the Company or whether any price or other terms offered by a prospective purchaser would be acceptable to the Company.

The Company’s financial results are significantly influenced by the economic growth and strength of Hawaii.

The vast majority of the Company’s real estate development activity is conducted in Hawaii. Consequently, the growth and strength of Hawaii’s economy has a significant impact on the demand for the Company’s real estate development projects. As a result, any adverse change to the growth or health of Hawaii’s economy could adversely affect the Company’s financial condition and results of operations.


 
 

 

The value of the Company’s development projects and its commercial properties are affected by a number of factors.

Weakness in the real estate sector, difficulty in obtaining or renewing project-level financing, and changes in the Company’s investment and development strategy, among other factors, may affect the value of commercial properties or the feasibility of certain development projects owned by the Company or by its joint ventures. If the fair value of the Company’s development projects or the undiscounted cash flows of its commercial properties were to decline below the carrying value of those assets, the Company would be required to recognize an impairment loss, which would have an adverse effect on the Company’s financial position and results of operations.

AGRIBUSINESS

The lack 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. As further described in “Legal Proceedings” below, there are challenges to the Company’s ability to divert water from streams in Maui. In addition, the Company’s access to water is subject to weather patterns that cannot be reliably predicted.  If the Company is not permitted to divert stream waters for its use or there is insufficient rainfall, it would have an adverse effect on the Company’s sugar operations, including possible cessation of operations.

A decline in raw sugar 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, particularly the domestic prices for raw cane sugar. These market factors are influenced by a variety of forces, including prices of competing crops and suppliers, weather conditions, and United States farm and trade policies. If the price for sugar were to decline, 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 production.

The Company’s production of raw sugar is subject to numerous risks that could adversely affect the volume and quality of sugar produced, including:

 
weather and natural disasters;
 
disease;
 
weed control;
 
uncontrolled fires, including arson;
 
government restrictions on farming practices due to cane burning;
 
increases in costs, including, but not limited to fuel, fertilizer, herbicide, and drip tubing;
 
water availability (see risk factor above regarding lack of water);
 
equipment failures in factory or power plant;
 
labor, including labor availability (see risk factor above regarding labor disruptions) and loss of qualified personnel; and
 
lack of demand for the Company’s production.

Any of these risks has the potential to adversely affect the Company’s future Agribusiness operating results.


 
 

 

A reorganization or termination of the Company’s sugar business could result in impairment losses and restructuring costs.

If the Company’s sugar business is unable to sustain profitability, the Company may reorganize or terminate its sugar operations. The reorganization or termination of sugar operations may result in an impairment loss and restructuring costs that would adversely affect the Company’s financial performance.

The Company’s power sales contracts could be replaced on less favorable terms or may not be replaced.

The Company’s power sales contracts, as described under “Business and Properties – Energy” above, expire at various points in the future and may not be replaced or could be replaced on less favorable terms, which could adversely affect the Company’s Agribusiness operations.

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.

The market for power sales in Hawaii is limited.

The power distribution systems in Hawaii are small and island-specific; currently, there is no ability to move power generated on one island to any other island.  In addition, Hawaii law limits the ability of independent power producers, such as the Company’s Agribusiness operations, to sell its output to firms other than the local utilities on each island.  Further, any sales of electricity by the Company to the utilities on each island must be done under long term agreements subject to the approval of the State Public Utilities Commission.  Unlike some areas in the Mainland, Hawaii’s independent power producers have no ability to use utility infrastructure to transfer power to other locations.


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.
 
A&B owns 16,000 acres of watershed lands in East Maui that supply a significant portion of the irrigation water used by HC&S.  A&B also held four water licenses to another 30,000 acres owned by the State of Hawaii in East Maui, which over the last ten years have supplied approximately 58 percent 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 (the “BLNR”) to replace these revocable permits with a long-term water lease.  Pending the conclusion by the BLNR of this contested case hearing on the request for the long-term lease, the BLNR has renewed the existing permits on a holdover basis.  If the Company is not permitted to utilize sufficient quantities of stream waters from State lands in East Maui, it could have a material adverse effect on the Company’s sugar-growing operations.
 
In addition, on May 24, 2001, petitions were filed by a third party, requesting that the Commission on Water Resource Management of the State of Hawaii (“Water Commission”) amend established interim instream flow standards (“IIFS”) in 27 East Maui streams that feed the Company’s irrigation system. On September 25, 2008, the Water Commission took action on eight of the petitions, resulting in some quantity of water being returned to the streams rather than being utilized for irrigation purposes. In May 2010, the Water Commission took action on the remaining 19 petitions resulting in additional water being returned to the streams. A petition requesting a contested case hearing to challenge the Water Commission’s decisions was filed with the Commission by the opposing third party.  On October 18, 2010, the Water Commission denied the petitioner’s request for a contested case hearing. On November 17, 2010, the petitioner filed an appeal of the Commission’s denial to the Hawaii Intermediate Court of Appeals.  On August 31, 2011, the Intermediate Court of Appeals dismissed the petitioner’s appeal.  On November 29, 2011, the petitioner appealed the Intermediate Court of Appeals’ dismissal to the Hawaii Supreme Court.  On January 11, 2012, the Hawaii Supreme Court vacated the Intermediate Court of Appeals’ dismissal of the petitioner’s appeal and remanded the appeal back to the Intermediate Court of Appeals.
 
On June 25, 2004, two organizations filed with the Water Commission a petition to amend established IIFS for four streams in West Maui to increase the amount of water to be returned to these streams.  The West Maui irrigation system provided approximately 14 percent of the irrigation water used by HC&S over the last ten years. The Water Commission issued a decision in June 2010, which required the return of water in two of the four streams. In July 2010, the two organizations appealed the Water Commission’s decision to the Hawaii Intermediate Court of Appeals.  On June 23, 2011, the case was transferred to the Hawaii Supreme Court.
 
The loss of East Maui and West Maui water as a result of the Water Commission’s decisions will impose challenges to the Company’s sugar growing operations. While the resulting water loss does not immediately threaten near-term sugar production, it will result in a future suppression of sugar yields and will have an impact on the Company that will only be quantifiable over time. Accordingly, the Company is unable to predict, at this time, the outcome or financial impact of the water proceedings.
 
On April 21, 2008, Matson was served with a grand jury subpoena from the U.S. District Court for the Middle District of Florida for documents and information relating to water carriage in connection with the Department of Justice’s investigation into the pricing and other competitive practices of carriers operating in the domestic trades.  Matson understands that while the investigation originally was focused primarily on the Puerto Rico trade, it also includes pricing and other competitive practices in connection with all domestic trades, including the Alaska, Hawaii and Guam trades.  Matson does not operate vessels in the Puerto Rico and Alaska trades.  It does operate vessels in the Hawaii and Guam trades.  Matson has cooperated, and will continue to cooperate, fully with the Department of Justice.  If the Department of Justice believes that any violations have occurred on the part of Matson or the Company, it could seek civil or criminal sanctions, including monetary fines.  The Company is unable to predict, at this time, the outcome or financial impact, if any, of this investigation.
 
The Company and Matson were named as defendants in a consolidated civil lawsuit purporting to be a class action in the U.S. District Court for the Western District of Washington in Seattle.  The lawsuit alleged violations of the antitrust laws and also named as a defendant Horizon Lines, Inc., another domestic shipping carrier operating in the Hawaii and Guam trades.  On November 30, 2010, the judge dismissed the complaint with prejudice.  On September 29, 2011, the Ninth Circuit panel unanimously affirmed the District Court’s dismissal.  The plaintiffs did not seek further review of the decision.
 
In June 2011, the Equal Employment Opportunity Commission (“EEOC”) served McBryde Resources, Inc., formerly known as Kauai Coffee Company, Inc. (“McBryde Resources”) with a lawsuit, which alleged that McBryde Resources and five other farms were complicit in illegal acts by Global Horizons Inc., a company that had hired Thai workers for the farms.  The lawsuit was filed in the U.S. District Court for the District of Hawaii.  In July 2011, the EEOC amended the lawsuit to name Alexander & Baldwin, Inc. as a defendant.  At a hearing on October 26, 2011, the judge dismissed the lawsuit, without prejudice.  The EEOC filed a second amended complaint on December 16, 2011.  In response, McBryde Resources and Alexander & Baldwin, Inc. filed a motion to dismiss the second amended complaint.  McBryde Resources and Alexander & Baldwin, Inc. will vigorously defend themselves in this matter.  The Company is unable to predict, at this time, the outcome or financial impact, if any, of the lawsuit.
 
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.  MINE SAFETY DISCLOSURES
 
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 New York Stock Exchange and trades under the symbol “ALEX.” As of February 15, 2012, there were 2,944 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 New York Stock Exchange section of major newspapers. Trading volume averaged 254,081 shares a day in 2011 compared with 201,147 shares a day in 2010 and 292,309 shares a day in 2009.

The quarterly intra-day high and low sales prices and end of quarter closing prices, as reported by the New York Stock Exchange, and cash dividends paid per share of common stock, for 2011 and 2010, were as follows:

   
Dividends
 
Market Price
   
Paid
 
High
 
Low
 
Close
2011
                               
First Quarter
 
$
0.315
   
$
46.00
   
$
39.18
   
$
45.65
 
Second Quarter
 
$
0.315
   
$
55.50
   
$
44.50
   
$
48.16
 
Third Quarter
 
$
0.315
   
$
51.66
   
$
36.48
   
$
36.53
 
Fourth Quarter
 
$
0.315
   
$
45.53
   
$
33.09
   
$
40.82
 
                                 
2010
                               
First Quarter
 
$
0.315
   
$
36.43
   
$
31.23
   
$
33.05
 
Second Quarter
 
$
0.315
   
$
37.42
   
$
29.02
   
$
29.78
 
Third Quarter
 
$
0.315
   
$
36.37
   
$
28.92
   
$
34.84
 
Fourth Quarter
 
$
0.315
   
$
40.54
   
$
33.63
   
$
40.03
 

Although A&B expects to continue paying quarterly cash dividends on its common stock prior to separation, the declaration and payment of dividends 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.

           Matson is subject to restrictions on the transfer of net assets to A&B under certain debt agreements; however, these restrictions have not had any effect on the Company’s shareholder dividend policy, and the Company does not anticipate that these restrictions will have any impact in the future. At December 31, 2011, the amount of net assets of Matson that may not be transferred to the Company was approximately $259 million.

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.

On October 27, 2011, A&B’s Board of Directors authorized A&B to repurchase up to two million shares of its common stock beginning January 1, 2012. The authorization, which replaced a previous authorization that expired December 31, 2011, will expire on December 31, 2013.

The Company did not repurchase any of its common stock in 2011, 2010 or 2009.

















           Securities authorized for issuance under equity compensation plans as of December 31, 2011, included:

Plan Category
Number of securities to be issued upon exercise of outstanding options, warrants and rights
Weighted-average exercise price of outstanding options, warrants and rights
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
 
(a)
(b)
(c)
Equity compensation plans approved by security holders
2,553,667
$38.39
1,925,746*
Equity compensation plans not approved by security holders
--
--
--
Total
2,553,667
$38.39
1,925,746

 
*
Under the 2007 Incentive Compensation Plan, 1,925,746 shares may be issued either as restricted stock grants, restricted stock units grants, or stock option grants.





 
 

 

ITEM 6. SELECTED FINANCIAL DATA

The following  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 shareholders of record and per-share amounts):

   
2011
 
2010
 
2009
 
2008
 
2007
 
Revenue:
                               
Transportation:
                               
Ocean transportation
 
$
1,077.6
 
$
1,016.5
 
$
888.6
 
$
1,023.7
 
$
1,006.9
 
Logistics services
   
386.4
   
355.6
   
320.9
   
436.0
   
433.5
 
Real Estate:
                               
Leasing
   
100.1
   
94.4
   
103.2
   
107.8
   
108.5
 
Sales
   
66.2
   
136.1
   
125.6
   
350.2
   
117.8
 
Less amounts reported in discontinued operations1
   
(47.5
)
 
(126.7
)
 
(136.6
)
 
(164.6
)
 
(142.6
)
Agribusiness5
   
161.7
   
163.9
   
107.0
   
124.3
   
123.7
 
Reconciling Items2
   
(22.1
)
 
(26.3
)
 
(16.3
)
 
(10.7
)
 
(9.2
)
Total Revenue
 
$
1,722.4
 
$
1,613.5
 
$
1,392.4
 
$
1,866.7
 
$
1,638.6
 
                                 
Operating Profit:
                               
Transportation:
                               
Ocean transportation3
 
$
74.1
 
$
118.7
 
$
58.3
 
$
105.8
 
$
126.5
 
Logistics services
   
5.0
   
7.2
   
6.7
   
18.5
   
21.8
 
Real Estate:
                               
Leasing
   
39.3
   
35.3
   
43.2
   
47.8
   
51.6
 
Sales3
   
15.5
   
50.1
   
39.1
   
95.6
   
74.4
 
Less amounts reported in discontinued operations1
   
(23.8
)
 
(54.5
)
 
(59.2
)
 
(77.1
)
 
(78.4
)
Agribusiness5
   
22.2
   
6.1
   
(27.8
)
 
(12.9
)
 
0.2
 
Total operating profit
   
132.3
   
162.9
   
60.3
   
177.7
   
196.1
 
Interest expense, net4
   
(24.8
)
 
(25.5
)
 
(25.9
)
 
(23.7
)
 
(18.8
)
General corporate expenses
   
(20.3
)
 
(23.3
)
 
(21.8
)
 
(21.0
)
 
(27.3
)
Income from continuing operations before income taxes
   
87.2
   
114.1
   
12.6
   
133.0
   
150.0
 
Income taxes
   
32.3
   
44.7
   
5.0
   
48.2
   
56.6
 
Income from continuing operations
   
54.9
   
69.4
   
7.6
   
84.8
   
93.4
 
Income (loss) from discontinued operations
   
(20.7
)
 
22.7
   
36.6
   
47.6
   
48.8
 
Net Income
 
$
34.2
 
$
92.1
 
$
44.2
 
$
132.4
 
$
142.2
 

1
Prior year amounts restated for amounts treated as discontinued operations.

2
Includes inter-segment revenue, interest income, and other income classified as revenue for segment reporting purposes.

3
The Ocean Transportation segment includes approximately $8.6 million, $12.8 million, $6.2 million, $5.2 million, and $10.7 million of equity in earnings from its investment in SSAT for 2011, 2010, 2009, 2008, and 2007, respectively. The Real Estate Sales segment includes approximately ($7.9) million, $2.0 million, $9.0 million, and $22.6 million in equity in (loss) earnings from its various real estate joint ventures for 2011, 2010, 2008, and 2007, respectively. Equity in earnings from joint ventures in 2009 was negligible.

4
Includes Ocean Transportation interest expense of $7.7 million for 2011, $8.2 million for 2010, $9.0 million for 2009, $11.6 million for 2008, and $13.9 million for 2007. Substantially all other interest expense was incurred at the parent company.

5
Includes a $4.9 million gain in 2010 related to an agriculture disaster relief payment for drought experienced in prior years and a $5.4 million gain recorded upon consolidation of HS&TC in 2009.

 
 

 

SELECTED FINANCIAL DATA (CONTINUED)

   
2011
 
2010
 
2009
 
2008
 
2007
 
Identifiable Assets:
                               
Transportation:
                               
Ocean transportation6
 
$
1,082.6
 
$
1,095.5
 
$
1,095.2
 
$
1,153.9
 
$
1,215.0
 
Logistics services
   
76.8
   
73.8
   
72.4
   
74.2
   
58.6
 
Real Estate:
                               
Leasing
   
770.9
   
739.4
   
627.4
   
590.2
   
595.4
 
Sales6
   
451.4
   
420.8
   
415.6
   
344.6
   
408.9
 
Agribusiness
   
157.8
   
150.3
   
156.8
   
172.2
   
174.6
 
Other
   
4.8
   
14.8
   
12.2
   
15.1
   
26.6
 
Total assets
 
$
2,544.3
 
$
2,494.6
 
$
2,379.6
 
$
2,350.2
 
$
2,479.1
 
                                 
Capital Expenditures:
                               
Transportation:
                               
Ocean transportation
 
$
44.2
 
$
69.4
 
$
12.7
 
$
35.5
 
$
65.8
 
Logistics services7
   
3.0
   
1.8
   
0.6
   
2.4
   
2.0
 
Real Estate:
                               
Leasing8
   
43.6
   
164.7
   
108.8
   
100.2
   
124.5
 
Sales9
   
5.2
   
0.1
   
0.1
   
0.6
   
0.3
 
Agribusiness
   
10.5
   
6.8
   
3.4
   
15.2
   
20.5
 
Other
   
--
   
0.3
   
0.3
   
0.8
   
0.3
 
Total capital expenditures
 
$
106.5
 
$
243.1
 
$
125.9
 
$
154.7
 
$
213.4
 
                                 
Depreciation and Amortization:
                               
Transportation:
                               
Ocean transportation
 
$
70.6
 
$
69.0
 
$
67.1
 
$
66.1
 
$
63.2
 
Logistics services
   
3.2
   
3.2
   
3.5
   
2.3
   
1.5
 
Real Estate:
                               
Leasing1
   
21.6
   
20.3
   
19.5
   
17.9
   
15.7
 
Sales
   
0.2
   
0.2
   
0.3
   
0.2
   
0.2
 
Agribusiness
   
11.9
   
12.7
   
11.9
   
11.5
   
10.7
 
Other
   
1.1
   
1.9
   
3.1
   
2.7
   
1.3
 
Total depreciation and amortization
 
$
108.6
 
$
107.3
 
$
105.4
 
$
100.7
 
$
92.6
 

6
The Ocean Transportation segment includes approximately $56.5 million, $52.9 million, $47.2 million, $44.6 million, and $48.6 million related to its investment in SSAT as of December 31, 2011, 2010, 2009, 2008, and 2007, respectively. The Real Estate Sales segment includes approximately $290.1 million, $274.8 million, $193.3 million, $162.1 million, and $134.1 million related to its investment in various real estate joint ventures as of December 31, 2011, 2010, 2009, 2008, and 2007, respectively.

7
Excludes expenditures related to Matson Logistics’ acquisitions, which are classified as acquisition of businesses in Cash Flows from Investing Activities within the Consolidated Statements of Cash Flows.

8
Represents gross capital additions to the leasing portfolio, including gross tax-deferred property purchases that are reflected as non-cash transactions in the Consolidated Statements of Cash Flows.

9
Excludes expenditures for real estate developments held for sale which are classified as Cash Flows from Operating Activities within the Consolidated Statements of Cash Flows. Operating cash flows for expenditures related to real estate developments were $14 million, $22 million, $6 million, $39 million, and $110 million for 2011, 2010, 2009, 2008, and 2007, respectively.


 
 

 


SELECTED FINANCIAL DATA (CONTINUED)

   
2011
   
2010
   
2009
   
2008
   
2007
 
                                         
Earnings per share:
                                       
From continuing operations:
                                       
Basic
 
$
1.32
   
$
1.68
   
$
0.19
   
$
2.05
   
$
2.20
 
Diluted
 
$
1.31
   
$
1.67
   
$
0.19
   
$
2.04
   
$
2.17
 
Net income:
                                       
Basic
 
$
0.82
   
$
2.23
   
$
1.08
   
$
3.21
   
$
3.34
 
Diluted
 
$
0.81
   
$
2.22
   
$
1.08
   
$
3.19
   
$
3.30
 
                                         
Return on beginning equity
   
3.0
%
   
8.5
%
   
4.1
%
   
11.7
%
   
13.8
%
Cash dividends per share
 
$
1.26
   
$
1.26
   
$
1.26
   
$
1.235
   
$
1.12
 
                                         
At Year End
                                       
Shareholders of record
   
2,923
     
3,079
     
3,197
     
3,269
     
3,381
 
Shares outstanding
   
41.7
     
41.3
     
41.0
     
41.0
     
42.4
 
Long-term debt – non-current
 
$
507
   
$
386
   
$
406
   
$
452
   
$
452
 



 
 

 

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 2012 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:

 
Business Overview
 
Separation Transaction
 
Critical Accounting Estimates
 
Consolidated Results of Operations
 
Analysis of Operating Revenue and Profit by Segment
 
Liquidity and Capital Resources
 
Contractual Obligations, Commitments, Contingencies and Off-Balance-Sheet Arrangements
 
Business Outlook
 
Other Matters

BUSINESS OVERVIEW

Alexander & Baldwin, Inc. (“A&B” or the “Company”), founded in 1870, is a multi-industry corporation headquartered in Honolulu that operates in five segments in three industries—Transportation, Real Estate, and Agribusiness.

Transportation: The Transportation Industry consists of Ocean Transportation and Logistics Services segments. The Ocean Transportation segment, which is conducted through Matson Navigation Company, Inc. (“Matson”), a wholly-owned subsidiary of A&B, is an asset-based business that derives its revenue primarily through the carriage of containerized freight between various U.S. Pacific Coast, Hawaii, Guam, China and other Pacific island ports. Additionally, the Ocean Transportation segment has a 35 percent interest in an entity that provides terminal and stevedoring services at U.S. Pacific Coast facilities.

The Logistics Services segment, which is conducted through Matson Logistics, Inc. (“ML”), a wholly-owned subsidiary of Matson, is a non-asset based business that is a provider of domestic and international rail intermodal service (“Intermodal”), long-haul and regional highway brokerage, specialized hauling, flat-bed and project work, less-than-truckload, expedited/air freight services, and warehousing and distribution services (collectively “Highway”). Warehousing, packaging and distribution services are provided by Matson Logistics Warehousing, Inc. (“MLW”), a wholly-owned subsidiary of ML.

Real Estate: The Real Estate Industry consists of two segments, both of which have operations in Hawaii and on the U.S. Mainland. The Real Estate Sales segment generates its revenues through the development and sale of land and commercial and residential properties. The Real Estate Leasing segment owns, operates, and manages retail, office, and industrial properties. Real estate activities are conducted through A&B Properties, Inc. and various other wholly-owned subsidiaries of A&B.

Agribusiness: Agribusiness, which contains one segment, produces bulk raw sugar, specialty food grade sugars, and molasses; markets and distributes specialty food-grade sugars; provides general trucking services, mobile equipment maintenance, and repair services in Hawaii; and generates and sells, to the extent not used in the Company’s Agribusiness operations, electricity. The Company also is the sole member in Hawaiian Sugar & Transportation Cooperative (“HS&TC”), a cooperative that provides raw sugar marketing and transportation services.

In March 2011, the Company executed an agreement to lease land and sell coffee inventory and certain assets used in a coffee business it previously operated to Massimo Zanetti Beverage USA, Inc. (“MZB”), including intangible assets. The coffee inventory and assets were sold for approximately $14 million. There was no material gain or loss on the transaction. The Company retained fee simple ownership of the land, buildings, power generation, and power distribution assets, but no longer operates the coffee plantation.

SEPARATION TRANSACTION

On December 1, 2011, the Company announced that its Board of Directors unanimously approved a plan to pursue the separation of the Company to create two independent, publicly traded companies:

·  
A Hawaii-based land company with interests in real estate development, commercial real estate and agriculture (composed of the Real Estate and Agribusiness segments described above), which will retain the Alexander & Baldwin, Inc. name; and

·  
An ocean transportation company serving the U.S. West Coast, Hawaii, Guam, Micronesia and China, and a domestic logistics company under the Matson name (composed of the businesses in the Transportation segment described above).

The separation is expected to be completed in the second half of 2012.

On February 13, 2012, the Company entered into an Agreement and Plan of Merger to reorganize itself as a holding company incorporated in Hawaii.  The holding company structure will help facilitate the separation by allowing the Company to organize and segregate the assets of its different businesses in an efficient manner prior to the separation and facilitate the third party and governmental consent and approval process. In addition, the holding company reorganization will help preserve the Company’s status as a U.S. citizen under certain U.S. maritime and vessel documentation laws (popularly referred to as the Jones Act) by, among other things, limiting the percentage of outstanding shares of common stock in the holding company that may be owned (of record or beneficially) or controlled in the aggregate by non-U.S. citizens (as defined by the Jones Act) to a maximum permitted percentage of 22%.  For more information on the Jones Act and its effect on the Company, see “Description of Business and Properties – Transportation – Jones Act.”


 
 

 

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 MD&A 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 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)(a) 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, (b) changes in the estimate are reasonably likely to occur in periods subsequent to the period in which the estimate was made, or (c) use of different estimates by the Company could have been used, and (ii) changes in those assumptions or estimates would have had a material impact on the financial condition or results of operations of the Company. The critical accounting estimates inherent in the preparation of the Company’s financial statements are described below.

Impairment of Long-Lived Assets and Finite-Lived Intangible Assets: The Company’s long-lived assets, including finite-lived intangible 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. The Company has evaluated certain long-lived assets, including intangible assets, for impairment; however, no impairment charges were recorded in 2011, 2010, and 2009 as a result of this process. These asset impairment analyses are highly subjective because they require management to make assumptions and apply considerable judgments to, among others, estimates of the timing and amount of future cash flows, expected useful lives of the assets, uncertainty about future events, including changes in economic conditions, changes in operating performance, changes in the use of the assets, and ongoing costs of maintenance and improvements of the assets, 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.

Impairment of Investments: The Company’s investments in unconsolidated affiliates are reviewed for impairment whenever there is evidence that fair value may be below carrying cost. An investment is written down to fair value if fair value is below carrying cost and the impairment is other-than-temporary. In evaluating the fair value of an investment and whether any identified impairment is other-than-temporary, significant estimates and considerable judgments are involved.  These estimates and judgments are based, in part, on the Company’s current and future evaluation of economic conditions in general, as well as a joint venture’s current and future plans. Additionally, these impairment calculations are highly subjective because they also require management to make assumptions and apply judgments to estimates regarding the timing and amount of future cash flows, probabilities related to various cash flow scenarios, and appropriate discount rates based on the perceived risks, among others. In evaluating whether an impairment is other-than-temporary, the Company considers all available information, including the length of time and extent of the impairment, the financial condition and near-term prospects of the affiliate, the Company’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value, and projected industry and economic trends, among others. Changes in these and other assumptions could affect the projected operational results and fair value of the unconsolidated affiliates, and accordingly, may require valuation adjustments to the Company’s investments that may materially impact the Company’s financial condition or its future operating results. For example, if current market conditions deteriorate significantly or a joint venture’s plans change materially, impairment charges may be required in future periods, and those charges could be material.

In 2011, the Company recorded a $6.4 million reduction in the carrying value of its investment in Waiawa, a residential joint venture on Oahu, due to the joint venture’s termination of its development plans. The Company’s remaining investment in the venture, which is not material, represents the Company’s share of expected cash proceeds from the pending sale of the joint venture lands.

Continued weakness in the real estate sector, difficulty in obtaining or renewing project-level financing, and changes in the Company’s development strategy, among other factors, may affect the value or feasibility of certain development projects owned by the Company or by its joint ventures and could lead to additional impairment charges in the future.

Impairment of Vessels: The Company operates an integrated network of vessels, containers, and terminal equipment; therefore, in evaluating impairment, the Company groups its assets at the ocean transportation entity level, which represents the lowest level for which identifiable cash flows are available. The Company’s vessels and equipment are reviewed for possible impairment when events or circumstances, such as recurring operating losses, indicate that their carrying values may not be recoverable. In evaluating impairment, the estimated future undiscounted cash flows generated by the asset group are compared with the amount recorded for the asset group 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 group is reduced to estimated fair value. These asset impairment loss analyses are highly subjective because they require management to make assumptions and apply considerable judgments to, among other things, estimates of the timing and amount of future cash flows, expected useful lives of the assets, uncertainty about future events, including changes in economic conditions, changes in operating performance, changes in the use of the assets, and ongoing costs of maintenance and improvements of the assets, 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. To date, the Company has not recorded any impairment related to its vessels. Additional information about the Company’s vessels as of December 31, 2011 is as follows:


 
  
Original
Acquisition
Date
 
  
 
Purchase
Price (1)
 
  
Net Book Value
as of
December 31, 2011
 
Maunalei
  
 
September 2006
  
  
$
158
  
  
$
130
  
Manulani
  
 
June 2005
  
  
 
152
  
  
 
119
  
Maunawili
  
 
September 2004
  
  
 
103
  
  
 
79
  
Manukai
  
 
September 2003
  
  
 
106
  
  
 
78
  
RJ Pfieffer
  
 
August 1992
  
  
 
159
  
  
 
61
  
Mokihana
  
 
January 1996
  
  
 
96
  
  
 
38
  
Kauai
  
 
September 1980
  
  
 
91
  
  
 
20
  
Mahimahi
  
 
January 1996
  
  
 
58
  
  
 
16
  
Manoa
  
 
January 1996
  
  
 
59
  
  
 
16
  
Maui
   
June 1978
     
78
     
14
 
Waialeale
   
November 1991
     
11
     
4
 
Lurline
   
August 1998
     
18
     
3
 
Mauna Kea
   
August 1988
     
10
     
3
 
Matsonia
  
 
October 1987
  
  
 
95
  
  
 
2
  
Lihue
  
 
January 1996
  
  
 
8
  
  
 
2
  
Haleakala
   
December 1984
     
13
     
1
 
Mauna Loa
   
December 1984
     
11
     
1
 
Moku Pahu
   
December 2009
     
6
     
4
 
Total vessels
  
     
  
 $
1,232
  
  
591
  
 
(1)
Purchase price includes any subsequent improvements or modifications.

Legal Contingencies: The Company’s results of operations could be affected by significant litigation adverse to the Company, including, but not limited to, liability claims, construction defect claims, antitrust claims, and claims related to coastwise trading matters. The Company records accruals for legal matters when the information available indicates that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Management makes adjustments to these accruals to reflect the impact and status of negotiations, settlements, rulings, advice of counsel and other information and events that may pertain to a particular matter. Predicting the outcome of claims and lawsuits and estimating related costs and exposure involves substantial uncertainties that could cause actual costs to vary materially from those estimates. In making determinations of likely outcomes of litigation matters, the Company considers many factors. These factors include, but are not limited to, the nature of specific claims including unasserted claims, the Company’s experience with similar types of claims, the jurisdiction in which the matter is filed, input from outside legal counsel, the likelihood of resolving the matter through alternative dispute resolution mechanisms and the matter’s current status. A detailed discussion of significant litigation matters is contained in Note 13 to the Consolidated Financial Statements.

Allowance for Doubtful Accounts: Receivables are recorded net of an allowance for doubtful accounts. The Company estimates future write-offs based on delinquencies, credit ratings, aging trends, and historical experience. The Company believes the allowance for doubtful accounts is adequate to cover anticipated losses; however, significant deterioration in any of the aforementioned factors or in general economic conditions could change these expectations, and accordingly, 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, risks and rewards passes to the buyer. For certain real estate sales, the Company and its joint venture partners account for revenues on long-term real estate development projects that have 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 or revenues 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 including, but not limited to, employee health, workers’ compensation, general liability, real and personal property, and real estate construction warranty and defect claims. Where feasible, the Company obtains third-party excess 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, current trends, and analyses provided by independent third-parties. Periodically, management reviews its assumptions and the analyses 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.

Goodwill: The Company reviews goodwill for impairment annually and whenever events or changes in circumstances indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. In estimating the fair value of a reporting unit, the Company uses a combination of a discounted cash flow model and fair value based on market multiples of earnings before interest, taxes, depreciation and amortization (“EBITDA”). The discounted cash flow approach requires the Company to use a number of assumptions, including market factors specific to the business, the amount and timing of estimated future cash flows to be generated by the business over an extended period of time, long-term growth rates for the business, and a discount rate that considers the risks related to the amount and timing of the cash flows. Although the assumptions used by the Company in its discounted cash flow model are consistent with the assumptions the Company used to generate its internal strategic plans and forecasts, significant judgment is required to estimate the amount and timing of future cash flows from the reporting unit and the risk of achieving those cash flows. When using market multiples of EBITDA, the Company must make judgments about the comparability of those multiples in closed and proposed transactions. Accordingly, changes in assumptions and estimates, including, but not limited to, changes driven by external factors, such as industry and economic trends, and those driven by internal factors, such as changes in the Company’s business strategy and its internal forecasts, could have a material effect on the Company’s business, financial condition and results of operations.

Pension and Post-Retirement Estimates:  The estimation of the Company’s pension and post-retirement expenses and liabilities requires that the Company make various assumptions. These assumptions include the following factors:

 
Discount rates
 
Expected long-term rate of return on pension plan assets
 
Salary growth
 
Health care cost trend rates
 
Inflation
 
Retirement rates
 
Mortality rates
 
Expected contributions

Actual results that differ from the assumptions made with respect to the above factors 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. Additionally, these unamortized gains and losses are amortized and reclassified to income (loss) over future periods.

The 2011 net periodic costs for qualified pension and post-retirement plans were determined using a discount rate of 5.75 percent. The benefit obligations for qualified pension and post-retirement plans, as of December 31, 2011, were determined using a discount rate of 4.80 percent and 4.90 percent, respectively. For the Company’s non-qualified benefit plans, the 2011 net periodic cost was determined using a discount rate of 4.50 percent and the December 31, 2011 obligation was determined using a discount rate of 3.90 percent. The discount rate used for determining the year-end benefit plan obligation was generally calculated using a weighting of expected benefit payments and rates associated with high-quality U.S. corporate bonds for each year of expected payment to derive a single estimated rate at which the benefits could be effectively settled at December 31, 2011.

The estimated return on plan assets of 8.25 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 (losses) were (4.2) percent, 8.8 percent, and (0.3) percent, respectively. The Company’s long-term rate of return (since inception in 1989) was 8.0 percent.

As of December 31, 2011, the Company’s post-retirement obligations were measured using an initial 9 percent health care cost trend rate, decreasing by 1 percent annually until the ultimate rate of 5 percent is reached in 2016.

Lowering the expected long-term rate of return on the Company’s qualified plan assets by one-half of one percent would have increased pre-tax pension expense for 2011 by approximately $1.4 million. Lowering the discount rate assumption by one-half of one percentage point would have increased pre-tax pension expense by approximately $2.4 million. Additional information about the Company’s benefit plans is included in Note 10 to the Consolidated Financial Statements.

As of December 31, 2011, the market value of the Company’s defined benefit plan assets totaled approximately $257 million, compared with $285 million as of December 31, 2010. The recorded net pension liability was approximately $109 million as of December 31, 2011 and approximately $70 million as of December 31, 2010. The Company expects to make contributions totaling $21 million to certain of its defined benefit pension plans in 2012. The Company’s contributions to its pension plans were approximately $5 million in 2011 and $6 million in 2010.

Income Taxes: The Company makes certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments are applied in the calculation of tax credits, tax benefits and deductions, and in the calculation of certain deferred 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 uncertain tax positions taken or expected to be taken with respect to 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)
 
2011
 
Chg.
   
2010
 
Chg.
   
2009
 
Operating Revenue
 
$
1,722
 
7
%
 
$
1,614
 
16
%
 
$
1,392
 
Operating Costs and Expenses
   
1,608
 
8
%
   
1,488
 
10
%
   
1,358
 
Operating Income
   
114
 
-10
%
   
126
 
4
X
   
34
 
Other Income and (Expense)
   
(27
)
2
X
   
(12
)
-45
%
   
(22
)
Income Taxes
   
32
 
-29
%
   
45
 
9
X
   
5
 
Income From Continuing Operations
   
55
 
-20
%
   
69
 
10
X
   
7
 
Discontinued Operations (net of taxes)
   
(21
)
N
M
   
23
 
-38
%
   
37
 
Net Income
 
$
34
 
-63
%
 
$
92
 
2
X
 
$
44
 
                                 
Basic Earnings Per Share
 
$
0.82
 
-63
%
 
$
2.23
 
2
X
 
$
1.08
 
Diluted Earnings Per Share
 
$
0.81
 
-64
%
 
$
2.22
 
2
X
 
$
1.08
 


2011 vs. 2010

Operating Revenue for 2011 increased 7 percent, or $108 million, to $1,722 million. Ocean Transportation revenue increased 6 percent, principally due to higher fuel surcharge revenues resulting from higher fuel prices. Logistics Services revenue increased 9 percent, principally due to higher Intermodal and Highway volumes. Real Estate Leasing revenue increased 15 percent in 2011 (after subtracting leasing revenue from assets classified as discontinued operations), primarily due to acquisitions and higher mainland occupancies. Agribusiness revenue decreased 2 percent, primarily due to lower coffee revenue as a result of the sale of the assets of the coffee operations in the first quarter of 2011. 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.

Because of the recurring nature of property sales, the Company views changes in Real Estate Sales and Real Estate Leasing 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. Year-over-year comparisons of revenue are also not complete without the consideration of results from the Company’s investment in its real estate joint ventures, which are not included in consolidated operating revenue, but are included in segment 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 before reclassifications to discontinued operations.

Operating Costs and Expenses for 2011 increased by 8 percent, or $120 million, to $1,608 million. Ocean Transportation costs increased 13 percent, primarily due to higher vessel operating expenses and higher terminal handling costs. Logistics Services cost increased 11 percent due primarily to higher purchased transportation costs. Real Estate Sales and Leasing costs increased by 12 percent, primarily due to property acquisitions. These increases were offset by Agribusiness costs, which decreased 13 percent due principally to a lower volume of sugar sold, combined with higher production levels. Selling, General and Administrative costs (“SG&A”) decreased 3 percent due principally to higher non-qualified benefits paid in 2010 related to the retirement of certain senior executives. 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 Expense: Other expense in 2011 increased $15 million, compared with 2010, due primarily to $8 million in joint venture losses, a $4 million gain in 2010 related to the settlement of a non-performing mortgage note acquired as an investment, a $5 million payment received in 2010 for agriculture disaster relief, and a $2 million decrease in interest income in 2011, partially offset by $1 million in lower interest expenses.

Income Taxes were lower in 2011 compared with 2010 on an absolute basis due principally to lower income. The effective tax rate in 2011 was lower than the rate in 2010 due principally to deductible expenses in both periods that had a greater impact on the 2011 effective rate because of the lower income relative to 2010.

2010 vs. 2009

Operating Revenue for 2010 increased 16 percent, or $222 million, to $1,614 million. Ocean Transportation revenue increased 14 percent, principally due to higher overall volumes and yields, principally in the China trade, as well as higher fuel surcharge revenues resulting from higher fuel prices. Agribusiness revenue increased 57 percent, primarily due to higher sugar prices and higher sales volume. Logistics Services revenue increased 11 percent, principally due to higher Intermodal and Highway volumes. Real Estate Leasing revenue increased 14 percent in 2010 (after subtracting leasing revenue from assets classified as discontinued operations), primarily due to acquisitions, partially offset by lower mainland renewal rents. Real Estate Sales revenue decreased 14 percent in 2010 (after subtracting revenue from discontinued operations) due principally to lower property sales. 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 2010 increased by 10 percent, or $130 million, to $1,488 million. Ocean Transportation costs increased 9 percent, primarily due to higher vessel operating expenses and higher terminal handling costs. Logistics Services cost increased 12 percent due primarily to higher purchased transportation costs. Agribusiness costs increased 15 percent due principally to a higher volume of sugar sold. Real Estate Sales and Leasing costs increased by 11 percent, primarily due to property acquisitions. Selling, General and Administrative costs (“SG&A”) increased 3 percent due principally to higher non-qualified benefit expenses related to the retirement of certain senior executives. 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 Expense: Other expense in 2010 decreased $10 million, compared with 2009, due primarily to a $5 million agriculture disaster relief payment for drought experienced in prior years, a $4 million gain related to the settlement of a non-performing mortgage note acquired as an investment, $2 million in higher real estate joint venture income, and a $2 million increase in interest income in 2010. The decrease in other expense was partially offset by a $5 million gain recorded in 2009 upon consolidation of HS&TC.

Income Taxes were higher in 2010 compared with 2009 on an absolute basis due principally to higher income. The effective tax rate in 2010 was lower than the rate in 2009 due principally to non-deductible expenses in both periods that had a lesser impact on the 2010 effective rate because of the higher income relative to 2009.

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 14 to the Consolidated Financial Statements. The following information should be read in relation to the information contained in those sections.

Transportation Industry

Ocean Transportation; 2011 compared with 2010

(dollars in millions)
 
2011
   
2010
 
Change
Revenue
 
$
1,077.6
   
$
1,016.5
 
6
%
Operating profit
 
$
74.1
   
$
118.7
 
-38
%
Operating profit margin
   
6.9
%
   
11.7
%
   
Volume* (units):
                   
Hawaii containers
   
140,000
     
136,700
 
2
%
Hawaii automobiles
   
81,000
     
81,800
 
-1
%
China containers – CLX1
   
59,000
     
60,000
 
-2
%
Guam containers
   
15,200
     
15,200
 
--
%

* Container volumes included for the period are based on the voyage departure date, but revenue and operating profit are adjusted to reflect the percentage of revenue and operating profit earned during the reporting period for voyages that straddle the beginning or end of the reporting period.

Ocean Transportation revenue increased $61.1 million, or 6 percent, in 2011 compared to 2010. This increase was principally due to $73.2 million in higher fuel surcharges, due to increased fuel prices, as well as $9.6 million in net volume growth, principally in Hawaii. These increases were partially offset by $21.8 million in lower yields and cargo mix primarily in the China trade.

Total Hawaii container volume increased 2 percent in 2011 compared with 2010, due to a new connecting carrier agreement with a large international carrier that commenced at the end of 2010 and other customer gains, partially offset by one less week in 2011 compared to 2010. Matson’s Hawaii automobile volume for the year was 1 percent lower than 2010, due principally to the timing of automobile rental fleet replacement activity. China container volume decreased 2 percent in 2011, compared with 2010, principally due to increased competition from excess capacity in the trade. Guam container volumes were relatively flat as weaker market conditions were offset by fourth quarter gains related to the departure of a competitor from the trade in mid-November.

Operating profit (which includes $7.1 million of CLX2 shutdown expenses) decreased $44.6 million, or 38 percent, in 2011 compared to 2010. The decrease in operating profit was principally due to $21.8 million in lower yields and cargo mix primarily related to the China trade. Additionally, terminal handling costs increased $10.0 million due primarily to higher rates, and outside transportation costs increased $3.9 million due to higher volume. Operations overhead costs increased $1.5 million due to additional equipment repositioning costs, partially offset lower equipment lease expenses, and also vessel operating expenses were $1.2 million higher, due to the increased contractual labor costs and generally higher costs. The lower yields and increases in costs were partially offset by $5.4 million in higher overall cargo volume.  Operating profit was also impacted by $4.2 million in lower SSAT joint venture earnings due to reduced volume.

 
 

 


Ocean Transportation; 2010 compared with 2009

(dollars in millions)
 
2010
   
2009
 
Change
Revenue
 
$
1,016.5
   
$
888.6
 
14
%
Operating profit
 
$
118.7
   
$
58.3
 
2
X
Operating profit margin
   
11.7
%
   
6.6
%
   
Volume* (units):
                   
Hawaii containers
   
136,700
     
136,100
 
--
 
Hawaii automobiles
   
81,800
     
83,400
 
-2
%
China containers – CLX1
   
60,000
     
46,600
 
29
%
Guam containers
   
15,200
     
14,100
 
8
%

* Container volumes included for the period are based on the voyage departure date, but revenue and operating profit are adjusted to reflect the percentage of revenue and operating profit earned during the reporting period for voyages that straddle the beginning or end of the reporting period.

Ocean Transportation revenue increased $127.9 million, or 14 percent, in 2010 compared to 2009. This increase was principally due to $55.8 million increase in revenue due to higher yields, principally in the China trade, a $33.6 million increase in revenue related to overall higher volumes, and a $32.3 million increase in fuel surcharges due to higher fuel prices.

Total Hawaii container volume increased slightly in 2010 compared with 2009, primarily reflecting one additional week in Matson’s 2010 fiscal year. Matson’s Hawaii automobile volume for the year was 2 percent lower than 2009, due principally to the timing of automobile rental fleet replacement activity. China container volume increased 29 percent in 2010, compared with 2009, due to an increase in market demand. Guam container volumes increased 8 percent due to an increase in market demand related, in part, to activities associated with the expected U.S. military build-up.

Operating profit increased $60.4 million in 2010 compared to 2009. The increase in operating profit was principally due to $55.8 million in higher yields, principally related to the China trade, and a $28.2 million increase due to a net increase in volume driven by the China trade. The improvement in operating profit was partially offset by terminal handling costs, which increased by $22.1 million due to contractual increases in terminal fees and handling charges. Additionally, vessel operating expenses increased $9.1 million due to higher fuel, drydock, and contractual labor costs, partially offset by lower vessel insurance costs. Outside transportation costs increased $4.0 million due primarily to higher ocean carrier volume and operations overhead costs increased $2.9 million due to additional equipment repair costs. The increase in costs was partially offset by a $6.6 million increase in SSAT joint venture earnings, principally due to higher west coast container lift volumes in 2010, and $6.3 million of higher costs in 2009 related to the rudder failure on the MV Mokihana.

Logistics Services; 2011 compared with 2010

(dollars in millions)
 
2011
   
2010
 
Change
Intermodal revenue
 
$
234.5
   
$
204.1
 
15
%
Highway revenue
   
151.9
     
151.5
 
--
 
Total Revenue
 
$
386.4
   
$
355.6
 
9
%
Operating profit
 
$
5.0
   
$
7.2
 
-31
%
Operating profit margin
   
1.3
%
   
2.0
%
   

Logistics Services revenue increased $30.8 million, or 9 percent, in 2011 compared with 2010. This increase was principally due to higher Intermodal volume which increased 7 percent, driven primarily by increased inland activity to support Ocean Transportation’s China business.

Logistics Services operating profit decreased $2.2 million, or 31 percent, in 2011 compared with 2010. Operating profit decreased despite the increased Intermodal volume cited above, due primarily to lower warehousing results, but was also due to a large military contract move that occurred in the first quarter of 2010.

Logistics Services; 2010 compared with 2009

(dollars in millions)
 
2010
   
2009
 
Change
Intermodal revenue
 
$
204.1
   
$
188.0
 
9
%
Highway revenue
   
151.5
     
132.9
 
14
%
Total Revenue
 
$
355.6
   
$
320.9
 
11
%
Operating profit
 
$
7.2
   
$
6.7
 
7
%
Operating profit margin
   
2.0
%