0001545654-14-000065.txt : 20141106 0001545654-14-000065.hdr.sgml : 20141106 20141106170703 ACCESSION NUMBER: 0001545654-14-000065 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20140930 FILED AS OF DATE: 20141106 DATE AS OF CHANGE: 20141106 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Alexander & Baldwin, Inc. CENTRAL INDEX KEY: 0001545654 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE [6500] IRS NUMBER: 454849780 STATE OF INCORPORATION: HI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-35492 FILM NUMBER: 141201682 BUSINESS ADDRESS: STREET 1: 822 BISHOP STREET, P.O. BOX 3440 CITY: HONOLULU STATE: HI ZIP: 96801 BUSINESS PHONE: (808) 525-6611 MAIL ADDRESS: STREET 1: 822 BISHOP STREET, P.O. BOX 3440 CITY: HONOLULU STATE: HI ZIP: 96801 FORMER COMPANY: FORMER CONFORMED NAME: A & B II, Inc. DATE OF NAME CHANGE: 20120502 FORMER COMPANY: FORMER CONFORMED NAME: & B II, Inc. DATE OF NAME CHANGE: 20120326 FORMER COMPANY: FORMER CONFORMED NAME: A&B II, Inc. DATE OF NAME CHANGE: 20120326 10-Q 1 a2014q310qdoc.htm 10-Q 2014 Q3 10Q Doc

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2014

OR
o
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 001-35492

ALEXANDER & BALDWIN, INC.
(Exact name of registrant as specified in its charter)
Hawaii
45-4849780
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
P. O. Box 3440, Honolulu, Hawaii
822 Bishop Street, Honolulu, Hawaii
(Address of principal executive offices)
9680l
96813
(Zip Code)

(808) 525-6611
(Registrant’s telephone number, including area code)

N/A
(Former name, former address, and former
fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No 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 (§232.405 of this chapter) 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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

Number of shares of common stock outstanding as of September 30, 2014:     48,754,941
 





PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS

ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(In millions, except per share amounts) (Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
2014
 
2013
 
2014
 
2013
Operating Revenue:
 
 
 
 
 
 
 
Real estate leasing
$
31.3

 
$
18.8

 
$
93.3

 
$
54.2

Real estate development and sales
18.2

 
10.1

 
40.5

 
12.0

Construction and natural materials
58.4

 

 
173.1

 

Agribusiness
45.5

 
35.9

 
88.2

 
94.1

Total operating revenue
153.4

 
64.8

 
395.1

 
160.3

Operating Costs and Expenses:
 
 
 
 
 
 
 
Cost of real estate leasing
19.6

 
11.3

 
58.6

 
31.8

Cost of real estate development and sales
5.4

 
3.3

 
16.5

 
3.6

Cost of construction contracts and natural materials
48.0

 

 
141.9

 

Costs of agribusiness revenues
52.7

 
34.4

 
91.8

 
80.1

Selling, general and administrative
12.1

 
9.6

 
37.9

 
24.4

Grace acquisition costs

 
2.0

 

 
4.5

Total operating costs and expenses
137.8

 
60.6

 
346.7

 
144.4

Operating Income
15.6

 
4.2

 
48.4

 
15.9

Other Income and (Expense):
 
 
 
 
 
 
 
Income related to joint ventures
1.5

 
0.7

 
0.3

 
1.8

Reduction in KRS II carrying value (Note 12)
(15.1
)
 

 
(15.1
)
 

Gain on insurance

 
1.3

 

 
1.3

Impairment and equity losses related to real estate joint ventures

 
(6.6
)
 

 
(6.6
)
Interest income and other
1.1

 
1.2

 
2.6

 
1.6

Interest expense
(7.2
)
 
(4.2
)
 
(21.6
)
 
(11.7
)
Income (Loss) From Continuing Operations Before Income Taxes
(4.1
)
 
(3.4
)
 
14.6

 
2.3

Income tax expense (benefit)
(14.9
)
 
(0.6
)
 
(5.9
)
 
2.1

Income (Loss) From Continuing Operations
10.8

 
(2.8
)
 
20.5

 
0.2

Income From Discontinued Operations (net of income taxes)

 
7.2

 
34.3

 
14.2

Net Income
10.8

 
4.4

 
54.8

 
14.4

Income attributable to noncontrolling interest
(0.6
)
 

 
(2.0
)
 

Net Income Attributable to A&B Shareholders
$
10.2

 
$
4.4

 
$
52.8

 
$
14.4

 
 
 
 
 
 
 
 
Basic Earnings Per Share:
 
 
 
 
 
 
 
Continuing operations attributable to A&B shareholders
$
0.21

 
$
(0.06
)
 
$
0.38

 
$

Discontinued operations attributable to A&B shareholders

 
0.16

 
0.70

 
0.33

Net income attributable to A&B shareholders
$
0.21

 
$
0.10

 
$
1.08

 
$
0.33

Diluted Earnings Per Share:
 
 
 
 
 
 
 
Continuing operations attributable to A&B shareholders
$
0.21

 
$
(0.06
)
 
$
0.38

 
$

Discontinued operations attributable to A&B shareholders

 
0.16

 
0.69

 
0.33

Net income attributable to A&B shareholders
$
0.21

 
$
0.10

 
$
1.07

 
$
0.33

Weighted Average Number of Shares Outstanding:
 
 
 
 
 
 
 
Basic
48.8

 
43.1

 
48.7

 
43.1

Diluted
49.3

 
43.8

 
49.2

 
43.7

Amounts Attributable to A&B Shareholders:
 
 
 
 
 
 
 
Income from continuing operations, net of tax
$
10.2

 
$
(2.8
)
 
$
18.5

 
$
0.2

Discontinued operations, net of tax

 
7.2

 
34.3

 
14.2

Net income
$
10.2

 
$
4.4

 
$
52.8

 
$
14.4

 
 
 
 
 
 
 
 
Cash dividends declared per share
$
0.04

 
$

 
$
0.12

 
$

See Notes to Condensed Consolidated Financial Statements.

1



ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(In millions) (Unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
2014
 
2013
 
2014
 
2013
Net Income
$
10.8

 
$
4.4

 
$
54.8

 
$
14.4

Other Comprehensive Income:
 
 
 
 
 
 
 
Defined benefit pension plans:
 
 
 
 
 
 
 
Net gain (loss) and prior service cost

 

 
1.2

 
(2.0
)
Amortization of prior service credit included in net periodic pension cost
(0.4
)
 
(0.4
)
 
(1.0
)
 
(1.0
)
Amortization of net loss included in net periodic pension cost
1.1

 
1.9

 
3.3

 
5.8

Income taxes related to other comprehensive income
(0.3
)
 
(0.6
)
 
(1.4
)
 
(1.1
)
Other Comprehensive Income
0.4

 
0.9

 
2.1

 
1.7

Comprehensive Income
$
11.2

 
$
5.3

 
$
56.9

 
$
16.1

Comprehensive income attributable to noncontrolling interest
(0.6
)
 

 
(2.0
)
 

Comprehensive income attributable to A&B
$
10.6

 
$
5.3

 
$
54.9

 
$
16.1


See Notes to Condensed Consolidated Financial Statements.

2



ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In millions) (Unaudited)
 
September 30,
2014
 
December 31, 2013
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
9.2

 
$
3.3

Accounts and other notes receivable, net
29.4

 
36.5

Contracts retention
9.2

 
9.3

Costs and estimated earnings in excess of billings on uncompleted contracts
13.5

 
10.5

Inventories
81.0

 
68.1

Real estate held for sale

 
15.9

Deferred income taxes
9.2

 
7.8

Income tax receivable
4.9

 
3.0

Prepaid expenses and other assets
18.6

 
17.0

Total current assets
175.0

 
171.4

Investments in Affiliates
348.6

 
341.4

Real Estate Developments
254.4

 
249.1

Property – net
1,263.6

 
1,273.7

Intangible Assets - net
64.3

 
74.1

Goodwill
102.9

 
99.6

Other Assets
86.4

 
75.9

Total assets
$
2,295.2

 
$
2,285.2

LIABILITIES AND EQUITY
 
 
 
Current Liabilities:
 
 
 
Notes payable and current portion of long-term debt
$
46.9

 
$
105.2

Accounts payable
37.1

 
32.6

Billings in excess of costs and estimated earnings on uncompleted contracts
3.8

 
4.4

Accrued interest
3.3

 
5.9

Deferred revenue
1.7

 
17.8

Indemnity holdback related to Grace acquisition
23.5

 
18.8

Accrued and other liabilities
33.0

 
33.5

Total current liabilities
149.3

 
218.2

Long-term Liabilities:
 
 
 
Long-term debt
637.9

 
605.5

Deferred income taxes
194.6

 
188.7

Accrued pension and postretirement benefits
31.0

 
37.3

Other non-current liabilities
52.8

 
60.7

Total long-term liabilities
916.3

 
892.2

Commitments and Contingencies (Note 3)

 

Equity:

 
 
Common stock
1,147.4

 
1,142.3

Accumulated other comprehensive loss
(28.0
)
 
(30.1
)
     Retained earnings
99.3

 
53.7

Total A&B Shareholders' equity
1,218.7

 
1,165.9

Noncontrolling interest
10.9

 
8.9

Total equity
1,229.6

 
1,174.8

Total liabilities and equity
$
2,295.2

 
$
2,285.2


See Notes to Condensed Consolidated Financial Statements.

3



ALEXANDER & BALDWIN, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In millions) (Unaudited)

 
Nine Months Ended
 
September 30,
 
2014
 
2013
Cash Flows from (used in) Operating Activities:
$
3.3

 
$
(109.4
)
Cash Flows from Investing Activities:
 
 
 
Capital expenditures for property, plant and equipment
(27.3
)
 
(102.9
)
Capital expenditures related to 1031 commercial property transactions

 
(25.3
)
Proceeds from investment tax credits and grants related to Port Allen Solar Farm
4.5

 

Proceeds from disposal of property and other assets
8.5

 
2.3

Proceeds from disposals related to 1031 commercial property transactions
86.4

 
17.5

Payments for purchases of investments in affiliates
(37.9
)
 
(35.9
)
Proceeds from investments in affiliates
14.4

 
3.3

Change in restricted cash associated with 1031 transactions
(15.2
)
 
7.8

Cash acquired through consolidation of The Shops at Kukui'ula

 
0.3

Net cash provided by (used in) investing activities
33.4

 
(132.9
)
Cash Flows from Financing Activities:
 
 
 
Proceeds from issuances of long-term debt
126.0

 
428.0

Payments of long-term debt and deferred financing costs
(86.5
)
 
(196.8
)
Proceeds (payments) from line-of-credit agreements, net
(64.5
)
 
13.5

Dividends paid
(5.9
)
 

Proceeds from issuance of capital stock and other, net
0.1

 
0.6

  Net cash provided by (used in) financing activities
(30.8
)
 
245.3

Cash and Cash Equivalents:
 
 
 
  Net increase for the period
5.9

 
3.0

  Balance, beginning of period
3.3

 
1.1

  Balance, end of period
$
9.2

 
$
4.1

 
 
 
 
Other Cash Flow Information:
 
 
 
Interest paid
$
(24.7
)
 
$
(14.1
)
Income taxes paid
$
(12.6
)
 
$
(10.0
)
Other Non-cash Information:
 
 
 
Real estate exchanged for note receivable
$
3.6

 
$

Note payable assumed in connection with acquisition of Waianae Mall
$

 
$
20.6

Note payable assumed in connection with acquisition of Pearl Highlands Center
$

 
$
62.3

Notes payable assumed in connection with the consolidation of The Shops at Kukui'ula
$

 
$
51.2

Note receivable received in connection with the sale of Issaquah Office Center
$

 
$
13.0

Property (net) acquired in connection with the consolidation of The Shops at Kukui'ula
$

 
$
39.0

Capital expenditures included in accounts payable and accrued expenses
$

 
$
7.7


See Notes to Condensed Consolidated Financial Statements.

4



ALEXANDER & BALDWIN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
For the nine months ended September 30, 2014 and 2013
(In millions) (Unaudited)
 
 
September 30, 2014
 
September 30, 2013
 
 
A&B Share-
holders' Equity
 
Non-
controlling interest
 
Total
 
A&B Share-
holders' Equity
 
Non-
controlling interest
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning balance
 
$
1,165.9

 
$
8.9

 
$
1,174.8

 
$
914.4

 
$

 
$
914.4

Net income
 
52.8

 
2.0

 
54.8

 
14.4

 

 
14.4

Other comprehensive income, net of tax
 
2.1

 

 
2.1

 
1.7

 

 
1.7

Dividends paid on common stock
 
(5.9
)
 

 
(5.9
)
 

 

 

Share-based compensation
 
3.5

 

 
3.5

 
3.2

 

 
3.2

Shares issued or repurchased, net
 
(1.1
)
 

 
(1.1
)
 
(0.6
)
 

 
(0.6
)
Excess tax benefit from share-based awards
 
1.4

 

 
1.4

 
1.3

 

 
1.3

Ending balance
 
$
1,218.7

 
$
10.9

 
$
1,229.6

 
$
934.4

 
$

 
$
934.4



5



Alexander & Baldwin, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

(1)
Description of Business.  A&B is headquartered in Honolulu and operates four segments: Real Estate Development and Sales; Real Estate Leasing; Agribusiness; and Natural Materials and Construction.

Real Estate Leasing:  The Real Estate Leasing segment owns, operates, and manages retail, office, and industrial properties in Hawaii and on the Mainland. The Real Estate Leasing segment also leases land in Hawaii.

Real Estate Development and Sales: The Real Estate Development and Sales segment generates its revenues through the investment in and development and sale of land and commercial and residential properties in Hawaii.

Agribusiness:  The Agribusiness segment produces bulk raw sugar, specialty food grade sugars, and molasses; markets and distributes specialty food-grade sugars; provides general trucking services, equipment maintenance and repair services; leases agricultural land to third parties; charters the MV Moku Pahu between sugar voyages; and generates and sells electricity to the extent not used in A&B’s Agribusiness operations.

Natural Materials and Construction: On October 1, 2013, the Company acquired Grace Pacific ("Grace"), a Hawaii-based natural materials and infrastructure construction company. Natural Materials and Construction, which contains one segment and includes the results of Grace from the date of acquisition, mines, processes, and sells basalt aggregate; imports sand and aggregates for sale and use; imports and markets liquid asphalt; manufactures and markets asphaltic concrete; performs asphalt paving as prime contractor and subcontractor; manufactures and supplies precast/prestressed concrete products; and provides various construction and traffic-control related products and services.

(2)
Basis of Presentation.  The condensed consolidated financial statements are unaudited. Because of the nature of the Company’s operations, the results for interim periods are not necessarily indicative of results to be expected for the year. While these condensed consolidated financial statements reflect all normal recurring adjustments that are, in the opinion of management, necessary for fair presentation of the results of the interim period, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (GAAP) for complete financial statements. Therefore, the interim condensed consolidated financial statements should be read in conjunction with the consolidated balance sheets as of December 31, 2013 and 2012, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2013 and the notes thereto included in the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2013, and other subsequent filings with the SEC.

Rounding: Amounts in the condensed consolidated financial statement and Notes are rounded to the nearest tenth of a million, but per-share calculations and percentages were determined based on amounts before rounding. Accordingly, a recalculation of some per-share amounts and percentages, if based on the reported data, may be slightly different.

Certain amounts reflected in the condensed consolidated statements of cash flows were reclassified to improve the transparency of the Company's cash flows. The Company's 1031 activities in the condensed consolidated statement of cash flows were previously presented as non-cash activities, but those activities are now reflected as additional items within cash flows from investing activities. Net cash provided by (used in) operations, net cash provided by (used in) investing activities and net cash provided by (used in) financing activities did not change as a result of the reclassifications.

6



(3)
Commitments, Guarantees and Contingencies:  Commitments and financial arrangements not recorded on the Company's condensed consolidated balance sheet, excluding lease commitments that are disclosed in Note 10 of the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2013, included the following (in millions) as of September 30, 2014:

Standby letters of credit related to real estate projects
$
11.4

Bonds related to real estate and construction*
$
323.5


*
Represents bonds related to construction and real estate activities in Hawaii, and include construction bonds issued by third party sureties (bid, performance, and payment bonds) and commercial bonds issued by third party sureties (permit, subdivision, license, and notary bonds). In the event the bonds are drawn upon, the Company would be obligated to reimburse the surety that issued the bond. None of the bonds have been drawn upon to date, and the Company believes it is unlikely that any of these bonds will be drawn upon.
    
Indemnity Agreements:  For certain real estate joint ventures, the Company may be obligated under bond indemnities to complete construction of the real estate development if the joint venture does not perform. These indemnities are designed to protect the surety in exchange for the issuance of surety bonds that cover joint venture construction activities, such as project amenities, roads, utilities, and other infrastructure, at its joint ventures. Under the indemnities, the Company and its joint venture partners agree to indemnify the surety bond issuer from all losses and expenses arising from the failure of the joint venture to complete the specified bonded construction. The maximum potential amount of aggregate future payments is a function of the amount covered by outstanding bonds at the time of default by the joint venture, reduced by the amount of work completed to date. The recorded amounts of the indemnity liabilities were not material individually or in the aggregate.
 
Other Obligations:  Certain of the real estate businesses in which the Company holds a non-controlling interest have long-term debt obligations. One of the Company’s joint ventures had a $10 million loan scheduled to mature in August 2015. As a condition to providing the loan to the joint venture, the lender required that the Company and its joint venture partner guarantee certain obligations of the joint venture under a maintenance agreement. The maintenance agreement specified that the Company and its joint venture partner make payments to the lender to the extent that the loan-to-value measure or debt service ratio of the property held by the joint venture were below pre-determined thresholds. On September 26, 2014, the joint venture sold the commercial property and paid off the remaining balance on the loan, which terminated the Company's guaranty. The Company's share of the gain on the sale of the commercial property was not material.

The Company's Waihonua joint venture (Honolulu) has a $120 million construction loan to finance the construction of a 43-story, 341-unit high-rise condominium, which was sold-out in July 2013. The Company provided a limited guaranty to the lenders for up to $20 million, as well as certain other limited guaranties and a completion guaranty. The Company has determined that the fair value of its obligation under the guaranties is not material, and as of September 30, 2014, the Company had not paid or accrued any amounts under the guaranties.

The Company's Club Villas joint venture (Kauai) has a $14 million construction loan to finance the construction of up to six units, all of which have been pre-sold under binding sales contracts. The Company and its joint venture partner each provided a separate limited loan guaranty of 50 percent of $14 million on a several basis, and a completion guaranty. The Company has determined that the fair value of its obligation under the guaranties is not material, and as of September 30, 2014, the Company had not paid or accrued any amounts under the guaranties.
 
Other than obligations described above, obligations of the Company’s non-consolidated joint ventures do not have recourse to the Company and the Company’s “at-risk” amounts are limited to its investment.
 
Legal Proceedings and Other Contingencies: A&B owns 16,000 acres of watershed lands in East Maui that supply a significant portion of the irrigation water used by Hawaiian Commercial & Sugar Company (“HC&S”), a division of A&B that produces raw sugar. 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 56 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

7



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”) establish 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 streams 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 Water 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 November 30, 2012, the Intermediate Court of Appeals remanded the case back to the Water Commission, ordering the Commission to grant the petitioner’s request for a contested case hearing. On July 17, 2013, the Commission authorized the appointment of a hearings officer for the contested case hearing.  On August 20, 2014, the Commission expanded the scope of the contested case hearing to encompass all 27 petitions for amendment of the IIFS for East Maui streams, including the eight petitions that the Commission previously acted upon in 2008.

The water loss that may result from the Water Commission’s future decisions will impose challenges to the Company’s sugar growing operations. The water loss will result in a combination of future suppression of sugar yields and negative financial impacts on the Company that will only be quantifiable over time. Accordingly, the Company is unable to predict, at this time, the total impact of the water proceedings.

On June 25, 2004, two organizations filed a petition with the Water Commission to establish 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.  On August 15, 2012, the Hawaii Supreme Court overturned the Water Commission's decision and remanded the case to the Water Commission for further consideration in connection with the establishment of the IIFS. On April 4, 2014, the parties entered into a settlement on the amount of water to be returned to the four streams, and the Water Commission approved the settlement on April 17, 2014.

In January 2013, the Environmental Protection Agency (“EPA”) finalized nationwide standards for controlling hazardous air pollutant emissions from industrial, commercial, institutional boilers and process heaters (the “Boiler MACT” rule), which apply to Hawaiian Commercial & Sugar Company’s three boilers at the Puunene Sugar Mill. Compliance with the Boiler MACT rule is required by January 2016. The Company anticipates that the Puunene Mill boilers will be able to meet the new emissions limits without significant modifications, and that compliance costs will be less than $2 million, based on currently available information. The Company is currently developing strategies for achieving compliance with the new regulations, including identifying required upgrades to boiler and air pollution control instrumentation and developing the complex compliance monitoring approaches necessary to accommodate the facility’s multi-fuel operations. There remains significant uncertainty as to the final requirements of the Boiler MACT rule, pending an EPA response to various petitions for reconsideration and ongoing litigation. Any resulting changes to the Boiler MACT rule could adversely impact the Company’s compliance schedule or cost of compliance.
 
On June 24, 2014, the Hawaii State Department of Health (“DOH”) Clean Air Branch issued a Notice and Finding of Violation and Order (“NFVO”) to Hawaiian Commercial & Sugar Company (“HC&S”) alleging various violations relating to the operation of HC&S’s three boilers at its sugar mill. The DOH reviewed a five-year period (2009-2013) and alleged violations relating primarily to periods of excess visible emissions and operation of the wet scrubbers installed to control particulate matter emissions from the boiler stacks. All incidents were self-reported by HC&S to the DOH prior to the DOH’s review, and there is no indication that these deviations resulted in any violation of health-based air quality standards. The NFVO includes an administrative penalty of $1.3 million, which HC&S has

8



contested. The Company is unable to predict, at this time, the outcome or financial impact of the NFVO, but does not believe that the financial impact of the NFVO will be material to its financial position or results of operations.

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, LLC (formerly known as Alexander & Baldwin, Inc.), a wholly owned subsidiary of the Company, as a defendant. The Company vigorously denied the EEOC's allegations. In order to resolve the EEOC’s claims and to end further litigation expense, however, McBryde Resources and Alexander & Baldwin, LLC agreed to provide $425,000 (which will be paid by insurance) to a group of claimants identified by the EEOC and to follow an EEOC-mandated program of employment practices for two-and-a-half years. This settlement was documented in a consent decree entered by the court on September 3, 2014. There was no determination by the court that there were any violations of law and McBryde Resources and Alexander & Baldwin, LLC did not admit to any liability.
 
A&B is a party to, or may be contingently liable in connection with, other legal actions arising in the normal conduct of its businesses, the outcomes of which, in the opinion of management after consultation with counsel, would not have a material effect on A&B’s condensed consolidated financial statements as a whole.

(4)
Earnings Per Share (“EPS”): The following table provides a reconciliation of income from continuing operations to income from continuing operations attributable to A&B (in millions):
 
Quarter Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Income (loss) from continuing operations, net of tax
$
10.8

 
$
(2.8
)
 
$
20.5

 
$
0.2

Noncontrolling interest
(0.6
)
 

 
(2.0
)
 

Income (loss) from continuing operations attributable to A&B shareholders, net of tax
$
10.2

 
$
(2.8
)
 
$
18.5

 
$
0.2

The number of shares used to compute basic and diluted earnings per share is as follows (in millions):
 
Quarter Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Denominator for basic EPS – weighted average shares
48.8

 
43.1

 
48.7

 
43.1

Effect of dilutive securities:
 

 
 

 
 

 
 

Employee/director stock options and restricted stock units
0.5

 
0.7

 
0.5

 
0.6

Denominator for diluted EPS – weighted average shares
49.3

 
43.8

 
49.2

 
43.7


Basic earnings per share is computed based on the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed based on the weighted-average number of common shares outstanding adjusted by the number of additional shares, if any, that would have been outstanding had the potentially dilutive common shares been issued. Potentially dilutive shares of common stock include non-qualified stock options, time-based restricted stock units and performance share units. The vesting of performance share units is contingent upon the achievement of relative total shareholder return metrics. Prior to vesting, if all necessary conditions would have been satisfied by the end of the reporting period (as if the end of the reporting period were deemed to be the end of the performance measurement period), the dilutive effect of the performance share units, if any, is included in the computation of diluted EPS using the treasury stock method.

During the three and nine month periods ended September 30, 2014 and 2013, there were no anti-dilutive securities outstanding.

(5)
Fair Value of Financial Instruments.  The fair values of receivables and short-term borrowings approximate their carrying values due to the short-term nature of the instruments. The Company’s cash and cash equivalents, consisting

9



principally of cash on deposit, may from time to time include short-term money markets funds. The fair values of these money market funds, based on market prices (level 2), approximate their carrying values due to their short-maturities. The carrying amount and fair value of the Company’s long-term debt at September 30, 2014 was $684.8 million and $705.4 million, respectively, and $710.7 million and $723.2 million at December 31, 2013, respectively. The fair value of long-term debt is calculated by discounting the future cash flows of the debt at rates based on instruments with similar risk, terms and maturities as compared to the Company’s existing debt arrangements (level 2).

(6)
Inventories.  Sugar inventories are stated at the lower of cost (first-in, first-out basis) or market value. Materials and supplies and Natural Materials and Construction segment inventory are stated at the lower of cost (principally average cost, first-in, first-out basis) or market value.

Inventories at September 30, 2014 and December 31, 2013 were as follows (in millions):
 
September 30, 2014
 
December 31, 2013
Sugar inventories
$
18.4

 
$
16.8

Work in process - sugar
8.8

 

Asphalt
22.3

 
17.9

Processed rock, Portland cement, and sand
14.2

 
12.9

Work in process - aggregate
3.1

 
2.7

Retail merchandise
1.6

 
1.8

Parts, materials and supplies inventories
12.6

 
16.0

Total
$
81.0

 
$
68.1


(7)
Share-Based Compensation.  Under the 2012 Plan, which provides for grants of equity-based incentive compensation, 4.3 million shares of common stock were initially reserved for issuance, and as of September 30, 2014, 1,376,473 shares of the Company’s common stock remained available for future issuance, which is reflective of a 2.7 million share reduction for outstanding equity awards replaced in the separation transaction from Matson, Inc. in 2012. The shares of common stock authorized to be issued under the 2012 Plan may be drawn from the shares of the Company’s authorized but unissued common stock or from shares of its common stock that the Company acquires, including shares purchased on the open market or in private transactions.

Activity in the Company’s stock option plans in 2014 was as follows (in thousands, except weighted average exercise price and weighted average contractual life):
 
2012
Plan
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Contractual
Life
 
Aggregate
Intrinsic
Value
Outstanding, January 1, 2014
1,337.3

 
$
19.21

 
 
 
 
Exercised
(161.6
)
 
$
21.16

 
 
 
 
Forfeited and expired

 
$

 
 
 
 
Outstanding, September 30, 2014
1,175.7

 
$
18.94

 
4.6
 
$
20,625

Exercisable, September 30, 2014
1,126.1

 
$
18.78

 
4.5
 
$
19,934



10



The following table summarizes non-vested restricted stock unit activity through September 30, 2014 (in thousands, except weighted average grant-date fair value amounts):
 
2012
Plan
Restricted
Stock
Units
 
Weighted
Average
Grant-Date
Fair Value
Outstanding, January 1, 2014
242.3

 
$
27.92

Granted
123.0

 
$
39.38

Vested
(86.3
)
 
$
25.36

Outstanding, September 30, 2014
279.0

 
$
33.76


A portion of the restricted stock unit awards are time-based awards that vest ratably over three years. The remaining portion of the awards represents market-based awards that cliff vest after two years, provided that the total shareholder return of the Company’s common stock over the two-year measurement period meets or exceeds pre-defined levels of relative total shareholder returns of the Standard & Poor’s MidCap 400 index.

The fair value of the Company’s time-based awards is determined using the Company’s stock price on the date of grant. The fair value of the Company’s market-based awards is estimated using the Company’s stock price on the date of grant and the probability of vesting using a Monte Carlo simulation with the following assumptions:

 
For the year ended December 31, 2014
For the year ended December 31, 2013
Volatility of A&B common stock
25.4%
31.8%
Average volatility of peer companies
27.3%
35.7%
Risk-free interest rate
0.4%
0.3%

A summary of compensation cost related to share-based payments is as follows (in millions):
 
Quarter Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Share-based expense (net of estimated forfeitures):
 
 
 
 
 
 
 
Stock options
$
0.1

 
$
0.3

 
$
0.4

 
$
1.0

Restricted stock units
1.0

 
0.8

 
3.1

 
2.2

Total share-based expense
1.1

 
1.1

 
3.5

 
3.2

Total recognized tax benefit
(0.3
)
 
(0.3
)
 
(1.0
)
 
(1.0
)
Share-based expense (net of tax)
$
0.8

 
$
0.8

 
$
2.5

 
$
2.2


(8)
Discontinued Operations.  The revenues and expenses related to the sale of Maui Mall, a retail property on Maui sold in January 2014, have been classified as discontinued operations. During 2013, the sales of four industrial properties, three retail properties and two office buildings were classified as discontinued operations.

The results of operations from these properties in prior periods were reclassified from continuing operations to discontinued operations to conform to the current period’s accounting presentation. Consistent with the Company’s intention to reinvest the sales proceeds into new investment property, the proceeds from the sales of property treated as discontinued operations were deposited in escrow accounts for tax-deferred reinvestment in accordance with Section 1031 of the Internal Revenue Code. As described in Note 10, the Company early adopted Accounting Standards Update (ASU) 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”), which changes the requirements for reporting discontinued operations.


11



The revenue, operating profit, income tax expense and after-tax effects of these transactions were as follows (in millions): 
 
Quarter Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Proceeds from the sale of income-producing properties
$

 
$
37.3

 
$
70.1

 
$
52.2

Real estate leasing revenue

 
8.7

 
0.2

 
25.8

 
$

 
$
46.0

 
$
70.3

 
$
78.0

 
 
 
 
 
 
 
 
Gain on sale of income-producing properties
$

 
$
7.7

 
$
55.9

 
$
12.0

Real estate leasing operating profit

 
4.1

 
0.2

 
11.3

Total operating profit before taxes

 
11.8

 
56.1

 
23.3

Income tax expense

 
4.6

 
21.8

 
9.1

Income from discontinued operations
$

 
$
7.2

 
$
34.3

 
$
14.2


(9)
Pension and Post-retirement Plans.  The Company has defined benefit pension plans that cover substantially all non-bargaining unit and certain bargaining unit employees. The Company also has unfunded non-qualified plans that provide benefits in excess of the amounts permitted to be paid under the provisions of the tax law to participants in qualified plans. In 2007, the Company changed the traditional defined benefit pension plan formula for new non-bargaining unit employees hired after January 1, 2008 and replaced it with a cash balance defined benefit pension plan formula. Subsequently, effective January 1, 2012, the Company froze the benefits under its traditional defined benefit plans for non-bargaining unit employees hired before January 1, 2008 and replaced the benefit with the same cash balance defined benefit pension plan formula provided to those employees hired after January 1, 2008. Retirement benefits under the cash balance pension plan formula are based on a fixed percentage of employee eligible compensation, plus interest. The plan interest credit rate will vary from year-to-year based on the ten-year U.S. Treasury rate.

The assumptions related to discount rates, expected long-term rates of return on invested plan assets, salary increases, age, mortality and health care cost trend rates, along with other factors, are used in determining the assets, liabilities and expenses associated with pension benefits. Management reviews the assumptions annually with its independent actuaries, taking into consideration existing and future economic conditions and the Company’s intentions with respect to these plans. Management believes that its assumptions and estimates are reasonable. Different assumptions, however, could result in material changes to the assets, obligations and costs associated with benefit plans.

The components of net periodic benefit cost recorded for the three months ended September 30, 2014 and 2013 were as follows (in millions):
 
Pension Benefits
 
Post-retirement Benefits
 
2014
 
2013
 
2014
 
2013
Service cost
$
0.7

 
$
0.7

 
$

 
$

Interest cost
2.1

 
1.9

 
0.2

 
0.1

Expected return on plan assets
(2.7
)
 
(2.7
)
 

 

Amortization of prior service credit
(0.2
)
 
(0.2
)
 

 

Amortization of net loss
1.0

 
1.9

 
0.1

 
(0.1
)
Net periodic benefit cost
$
0.9

 
$
1.6

 
$
0.3

 
$



12



The components of net periodic benefit cost recorded for the nine months ended September 30, 2014 and 2013 were as follows (in millions):
 
Pension Benefits
 
Post-retirement Benefits
 
2014
 
2013
 
2014
 
2013
Service cost
$
1.9

 
$
1.9

 
$
0.1

 
$
0.1

Interest cost
6.2

 
5.7

 
0.4

 
0.3

Expected return on plan assets
(8.0
)
 
(8.2
)
 

 

Curtailment

 

 

 
(0.5
)
Amortization of prior service credit
(0.6
)
 
(0.6
)
 

 

Amortization of net loss
3.0

 
5.8

 
0.2

 
(0.1
)
Net periodic benefit cost
$
2.5

 
$
4.6

 
$
0.7

 
$
(0.2
)

(10)
New Accounting Pronouncements. In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (ASU) 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”). This update changes the requirements for reporting discontinued operations under Subtopic 205-20. A disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when either (i) the component of an entity or group of components of an entity meets the criteria to be classified as held for sale, (ii) the component of an entity or group of components of an entity is disposed of by sale, or (iii) the component of an entity or group of components of an entity is disposed of other than by sale. The amendments in ASU 2014-08 improve the definition of discontinued operations by limiting discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity’s operations and financial results. The amendments in the update require additional disclosures about discontinued operations and disclosures related to the disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation. The amendments in ASU 2014-08 are to be applied to all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. The Company has early adopted the provisions under ASU 2014-08.

In May 2014, the FASB issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, as a new Topic, Accounting Standards Codification (ASC) Topic 606. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized.  The core principle is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU is effective for annual periods beginning after December 15, 2016 and shall be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is currently evaluating the potential impact of adopting this new accounting standard.

(11)
Accumulated Other Comprehensive Income. The changes in accumulated other comprehensive income by component for the nine months ended September 30, 2014 were as follows (in millions, net of tax):
 
Pension and postretirement plans
 
nine months ended September 30, 2014
Beginning balance
$
30.1

Amounts reclassified from accumulated other comprehensive income, net of tax
(2.1
)
Ending balance
$
28.0



13



The reclassifications of other comprehensive income components out of accumulated other comprehensive income for the three and nine months ended September 30, 2014 and 2013 were as follows (in millions):
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
Details about Accumulated Other Comprehensive Income Components
2014
 
2013
 
2014
 
2013
Actuarial gain (loss)*
$

 
$

 
$
1.2

 
$
(2.0
)
Amortization of defined benefit pension items reclassified to net periodic pension cost:
 
 
 
 
 
 
 
Net loss*
$
1.1

 
1.9

 
$
3.3

 
5.8

Prior service credit*
(0.4
)
 
(0.4
)
 
(1.0
)
 
(1.0
)
Total before income tax
0.7

 
1.5

 
3.5

 
2.8

Income taxes
(0.3
)
 
(0.6
)
 
(1.4
)
 
(1.1
)
Other comprehensive income net of tax
$
0.4

 
$
0.9

 
$
2.1

 
$
1.7


*
These accumulated other comprehensive income components are included in the computation of net periodic pension cost (see Note 9 for additional details).

(12)
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. Deferred tax assets and deferred tax liabilities are adjusted to the extent necessary to reflect tax rates expected to be in effect when the temporary differences reverse. Adjustments may be required to deferred tax assets and deferred tax liabilities due to changes in tax laws and audit adjustments by tax authorities. To the extent adjustments are required in any given period, the adjustments would be included within the tax provision in the condensed consolidated statements of income or balance sheet.

Prior to June 30, 2012, the Company was included in the consolidated tax return of Matson, Inc. (formerly Alexander & Baldwin Holdings, Inc.) for results occurring prior to June 30, 2012. Upon Separation from Matson, Inc. (“Matson”) in 2012, the Company’s unrecognized tax benefits were reflected on Matson’s financial statements because Matson is considered the successor parent to the former Alexander & Baldwin, Inc. affiliated tax group. In connection with the separation from Matson, the Company entered into a Tax Sharing Agreement with Matson. As of September 30, 2014, $0.3 million remained as a liability for the indemnity to Matson in the event the Company’s pre-Separation unrecognized tax benefits are not realized. As of September 30, 2014, the Company has not identified any material unrecognized tax positions.

On September 13, 2013 the IRS and Treasury Department released final regulations on the deduction and capitalization of expenditures related to tangible property (“Tangible Property Regulations”).  These final regulations apply to tax years beginning on or after January 1, 2014. Several of the provisions within the regulations will require a tax accounting method change to be filed with the IRS resulting in a cumulative effect adjustment. To account for the adoption of these regulations, $8.6 million was reclassified from deferred income taxes (non-current) to other current and non-current liabilities; however, the Company is still assessing the final impact of these regulations and whether any tax accounting method changes will be required to comply with these regulations.

The Company is subject to taxation by the United States and various state and local jurisdictions. As of September 30, 2014, the Company’s 2012 and 2013 tax years are open to examination by the tax authorities. In addition, tax years 2010, 2011 and 2012, for which the Company was included in the consolidated tax group with Matson, are open to examination by the tax authorities in the Company’s material jurisdictions. In addition, the 2009 tax year is also open to examination by California. The Company is not currently under examination by any tax authorities.

In July 2014, the Company invested $23.8 million in KIUC Renewable Solutions Two LLC ("KRS II"), an entity that owns and operates a 12-megawatt solar farm in Koloa, Kauai. The Company accounts for its investment in KRS II under the equity method. The investment return from the Company's investment in KRS II is principally composed of federal and state tax benefits. These tax credits are accounted for using the flow-through method, which

14



reduces the provision for income taxes in the year the tax credits first become available. The total KRS II net tax benefits that the Company recognized for book purposes in the third quarter of 2014 was approximately $13.7 million. As tax benefits are realized over the life of the investment, the Company recognizes a non-cash reduction to the carrying amount of its investment in KRS II. For the three and nine month periods ended September 30, 2014, the Company recorded a non-cash reduction of $15.1 million in Other income (expense) in the condensed consolidated statements of income. The Company expects that future reductions to its investment in KRS II will be recognized as tax benefits are realized.

The effective income tax rate for the nine month period ended September 30, 2014 was lower than the statutory rate due primarily to federal and state tax credits related to the Company's investment in KRS II. The tax benefits from the solar farm investment reflected in the Company's annual effective tax rate was partially offset by an out-of-period 2013 adjustment to income taxes, which had the effect of increasing income tax expense and reducing net income and income from continuing operations by $1.6 million in the year-to-date period, or approximately $0.03 per diluted share. Income taxes for the year ended December 31, 2013 were lower by $1.6 million and net income and income from continuing operations for the year ended December 31, 2013 were higher by $1.6 million, or approximately $0.04 per share. The Company does not believe this adjustment was material to the financial results of previously issued annual or interim financial statements and, therefore, did not restate any prior period amounts.

(13)
Notes Payable and Long-Term Debt. On December 18, 2013, the Company entered into a short-term facility ("Bridge Loan"), by and among A&B LLC, Bank of America, N.A., and other lenders party thereto, to finance a portion of the Company's $372.7 million purchase of the Kailua Portfolio in 2013. On December 20, 2013, the Company consummated the acquisition and borrowed $60 million under the Bridge Loan, which bore interest at LIBOR plus 3 percent. The Bridge Loan was paid off on January 6, 2014 with reverse 1031 proceeds from the disposition of Maui Mall.

(14)
Derivative Instruments. The Company is exposed to interest rate risk related to its floating rate debt. The Company balances its cost of debt and exposure to interest rates primarily through its mix of fixed and floating rate debt. From time to time, the Company may use interest rate swaps to manage its exposure to interest rate risk.
The Company measures its interest rate swaps at fair value. The fair values of the Company's interest rate swaps (Level 2) are determined based on discounted cash flow analysis, reflecting the terms of the contracts, and utilize observable inputs such as interest rates and yield curves.
As of September 30, 2014, the Company had a gross notional amount of $20.6 million related to interest rate swaps that were assumed in connection with 2013 acquisitions, in which the floating rates were swapped for fixed rates. The table below presents the fair value of derivative financial instruments, which are included in Other non-current liabilities in the condensed consolidated balance sheets (in millions):
 
As of September 30,
 
As of December 31,
 
2014
 
2013
Interest rate swap liability - floating to fixed rate
$
2.8

 
$
2.8

The amount of expense the Company recorded in Interest income and other in the condensed consolidated statements of income for the change in the fair values of the interest rate swaps was not material in 2014. No income or expense was recorded in the third quarter of 2013 related to the interest rate swaps since the swaps were acquired in the fourth quarter of 2013.

15



(15)
Segment Results. Segment results for the three and nine months ended September 30, 2014 and 2013 were as follows (in millions):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
 
2014
 
2013
 
2014
 
2013
Revenue:
 
 
 
 
 
 
 
Real Estate1:
 
 
 
 
 
 
 
Leasing
$
31.3

 
$
27.5

 
$
93.5

 
$
80.0

Development and Sales
18.2

 
47.4

 
110.6

 
64.2

Less amounts reported in discontinued operations

 
(46.0
)
 
(70.3
)
 
(78.0
)
Natural Materials and Construction
58.4

 

 
173.1

 

Agribusiness
45.5

 
35.9

 
88.2

 
94.1

Total revenue
$
153.4

 
$
64.8

 
$
395.1

 
$
160.3

Operating Profit, Net Income:
 
 
 
 
 
 
 
Real Estate1:
 
 
 
 
 
 
 
Leasing
$
12.1

 
$
11.2

 
$
35.9

 
$
32.7

Development and Sales
11.4

 
4.6

 
71.5

 
6.3

Less amounts reported in discontinued operations

 
(11.8
)
 
(56.1
)
 
(23.3
)
Natural Materials and Construction
5.9

 

 
17.3

 

Agribusiness
(7.3
)
 
2.2

 
(3.8
)
 
14.3

Total operating profit
22.1

 
6.2

 
64.8

 
30.0

Interest expense
(7.2
)
 
(4.2
)
 
(21.6
)
 
(11.7
)
General corporate expenses
(3.9
)
 
(3.4
)
 
(13.5
)
 
(11.5
)
Grace acquisition costs

 
(2.0
)
 

 
(4.5
)
Reduction in KRS II carrying value (Note 12)
(15.1
)
 

 
(15.1
)
 

Income (loss) from continuing operations before income taxes
(4.1
)
 
(3.4
)
 
14.6

 
2.3

Income tax expense (benefit)
(14.9
)
 
(0.6
)
 
(5.9
)
 
2.1

Income (loss) from continuing operations
10.8

 
(2.8
)
 
20.5

 
0.2

Income from discontinued operations (net of income taxes)

 
7.2

 
34.3

 
14.2

Net income
10.8

 
4.4

 
54.8

 
14.4

Income attributable to noncontrolling interest
(0.6
)
 

 
(2.0
)
 

Net income attributable to A&B
$
10.2

 
$
4.4

 
$
52.8

 
$
14.4


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



16



(16)    Grace Acquisition - Valuation of Assets and Liabilities.

The Company applies the provisions of the Financial Accounting Standards Board's Accounting Standards Codification Topic 805, Business Combinations ("ASC 805") to acquisitions. Under ASC 805, assets acquired and liabilities assumed are recorded at fair value. The excess of the purchase price over the net fair value of assets acquired and liabilities assumed is recorded as goodwill. The fair values of assets acquired and liabilities assumed are determined through the market, income or cost approaches, and the valuation approach is generally based on the specific characteristics of the asset or liability. Under the market approach, value is estimated using information from transactions in which other participants in the market have paid for reasonably similar assets that have been sold within a reasonable period from the valuation date. Adjustments are made to compensate for differences between reasonably similar assets and the item being valued. Under the income approach, the future cash flows expected to be received over the life of the asset, taking into account a variety of factors, such as long-term growth rates and the amount and timing of cash flows, are discounted to present value using a rate of return that accounts for the time value of money and investment risk factors. Under the cost approach, the Company estimates the cost to replace the asset with a new asset taking into consideration a variety of factors such as age, physical condition, functional obsolescence, and economic obsolescence. The fair value of liabilities assumed is calculated as the net present value of estimated payments using prevailing market interest rates for liabilities with similar credit risk and terms.

The assets acquired and liabilities assumed in the Grace acquisition have been measured at their fair values at October 1, 2013 as set forth below. The excess of the purchase price over the fair values of the net assets acquired was recorded as goodwill, which primarily reflects the value of the know-how, operating processes and employee base of Grace, and other intangible assets that do not qualify for separate recognition.

The fair values and related adjustments recorded in the first nine months of 2014 for the assets acquired and liabilities assumed for Grace are as follows:
 
Preliminary Valuation
October 1, 2013
 
Adjustments/reclassifications
 
Adjusted Valuation
September 30, 2014
Fair value of consideration transferred
$
240.7

 
$

 
$
240.7

 
 
 
 
 
 
Cash
5.7

 

 
5.7

Intangible assets
5.8

 
(1.0
)
 
4.8

All other assets
277.4

 
0.9

 
278.3

Total assets acquired
288.9

 
(0.1
)
 
288.8

Liabilities assumed
138.5

 
3.2

 
141.7

Total net assets acquired
150.4

 
(3.3
)
 
147.1

Excess of purchase price over net assets acquired
$
90.3

 
$
3.3

 
$
93.6


During the first nine months of 2014, the Company recorded an adjustment to the preliminary valuation, resulting in a net increase to goodwill of $3.3 million. The net adjustment did not have a significant impact on the Company's condensed consolidated statements of operations, balance sheet, or cash flows for all periods presented, and therefore, was not retrospectively adjusted in the financial statements. The adjustment to goodwill was primarily due to adjustments to the fair value of liabilities related to the maintenance and management of former quarry sites. The provisional measurements of assets and liabilities set forth above are subject to further change, but in any event, no later than one year from the acquisition date.
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following analysis of the condensed consolidated financial condition and results of operations of Alexander & Baldwin, Inc. and its subsidiaries (collectively, the “Company”) should be read in conjunction with the condensed consolidated financial statements and related notes thereto included in Item 1 of this Form 10-Q and the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 filed with the U.S. Securities and Exchange Commission.



17



FORWARD-LOOKING STATEMENTS

Alexander & Baldwin, Inc. (“A&B” or the “Company”), from time to time, may make or may have made certain forward-looking statements, whether orally or in writing, such as forecasts and projections of the Company’s future performance or statements of management’s plans and objectives. These statements are “forward-looking” statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may be contained in, among other things, Securities and Exchange Commission (“SEC”) filings, such as the Forms 10-K, 10-Q and 8-K, 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. 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 “Risk Factors” of the Company’s 2013 Annual Report on Form 10-K and other filings with the SEC. 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.

INTRODUCTION
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is a supplement to the accompanying condensed consolidated financial statements and provides additional information about A&B’s business, recent developments, financial condition, liquidity and capital resources, cash flows, results of operations and how certain accounting principles, policies and estimates affect A&B’s financial statements. MD&A is organized as follows:
 
Business Overview: This section provides a general description of A&B’s business, as well as recent developments that the Company believes are important in understanding its results of operations and financial condition or in understanding anticipated future trends.
Consolidated Results of Operations: This section provides an analysis of A&B’s consolidated results of operations for the three and nine months ended September 30, 2014 and 2013.
Analysis of Operating Revenue and Profit by Segment: This section provides an analysis of A&B’s results of operations by business segment.
Liquidity and Capital Resources: This section provides a discussion of A&B’s financial condition and an analysis of A&B’s cash flows for the nine months ended September 30, 2014 and 2013, as well as a discussion of A&B’s ability to fund its future commitments and ongoing operating activities through internal and external sources of capital.
Outlook: This section provides a discussion of management’s general outlook about the Hawaii economy and the Company’s markets.
Other Matters: This section provides a summary of other matters, such as officer and management changes.

BUSINESS OVERVIEW

Alexander & Baldwin, whose history in Hawaii dates back to 1870, is a corporation headquartered in Honolulu that conducts business in four operating segments—Real Estate Development and Sales; Real Estate Leasing; Agribusiness; and Natural Materials and Construction.

Real Estate Leasing:  The Real Estate Leasing segment owns, operates, and manages retail, office, and industrial properties in Hawaii and on the Mainland. The Real Estate Leasing segment also leases land in Hawaii.

Real Estate Development and Sales: The Real Estate Development and Sales segment generates its revenues through the investment in and development and sale of land and commercial and residential properties in Hawaii.
    
Agribusiness: The Agribusiness segment produces bulk raw sugar, specialty food grade sugars, and molasses; markets and distributes specialty food-grade sugars; provides general trucking services, equipment maintenance and repair services; leases agricultural land to third parties; charters the MV Moku Pahu between sugar voyages; and generates and sells electricity to the extent not used in A&B’s Agribusiness operations.

Natural Materials and Construction: On October 1, 2013, the Company acquired Grace Pacific ("Grace"), a Hawaii-based natural materials and infrastructure construction company. Natural Materials and Construction, which contains one

18



segment and includes the results of Grace from the date of acquisition, mines, processes, and sells basalt aggregate; imports sand and aggregates for sale and use; imports and markets liquid asphalt; manufactures and markets asphaltic concrete; performs asphalt paving as prime contractor and subcontractor; manufactures and supplies precast/prestressed concrete products; and provides various construction- and traffic-control- related products and services.

CONSOLIDATED RESULTS OF OPERATIONS

Consolidated – Third quarter of 2014 compared with 2013
 
Quarter Ended September 30,
 
 
(dollars in millions)
2014
 
2013
 
Change
Operating revenue
$
153.4

 
$
64.8

 
136.7
 %
Operating costs and expenses
137.8

 
60.6

 
127.4
 %
Operating income
15.6

 
4.2

 
4X

Other income and (expense)
(19.7
)
 
(7.6
)
 
159.2
 %
Income (loss) from continuing operations before income taxes
(4.1
)
 
(3.4
)
 
20.6
 %
Income tax expense (benefit)
(14.9
)
 
(0.6
)
 
25X

Discontinued operations (net of income taxes)

 
7.2

 
(100.0
)%
Net income
10.8

 
4.4

 
145.5
 %
Income attributable to noncontrolling interest
(0.6
)
 

 
NM

Net income attributable to A&B
$
10.2

 
$
4.4

 
131.8
 %
 
 
 
 
 
 
Basic earnings per share attributable to A&B
$
0.21

 
$
0.10

 
110.0
 %
Diluted earnings per share attributable to A&B
$
0.21

 
$
0.10

 
110.0
 %

Consolidated operating revenue for the third quarter of 2014 increased $88.6 million, or 136.7 percent, compared to the third quarter of 2013. This increase was principally due to $58.4 million of revenue from Natural Materials and Construction due to the acquisition of Grace on October 1, 2013, $12.5 million in higher Real Estate Leasing revenue, $9.6 million in higher Agribusiness revenues, and $8.1 million in higher Development and Sales revenue. The reasons for the revenue changes are described below, by business segment, in the Analysis of Operating Revenue and Profit by Segment.

Consolidated operating costs and expenses for the third quarter of 2014 increased $77.2 million, or 127.4 percent, compared to the third quarter of 2013, due principally to $48.0 million of cost related to the Natural Materials and Construction segment that was acquired on October 1, 2013, $18.3 million in higher Agribusiness costs, $8.3 million in higher Real Estate Leasing costs, $2.1 million in higher Real Estate Development and Sales cost, $2.5 million in higher selling, general and administrative costs, principally attributable to the addition of Grace, partially offset by $2.0 million of Grace acquisition costs incurred in 2013. The reasons for the operating cost and expense changes are described below, by business segment, in the Analysis of Operating Revenue and Profit by Segment.

Other income and (expense) was $(19.7) million in the third quarter of 2014 compared to $(7.6) million in the third quarter of 2013. The change in other income and (expense) was primarily due to a $15.1 reduction ($9.1 million net of tax at the statutory rate) in the value of the Company's tax equity investment in KIUC Renewable Solutions Two LLC ("KRS II"), an entity that operates a 12-megawatt solar project on Kauai. The Company's $23.8 million investment in KRS II, which was made in the third quarter of 2014, is reduced as the associated tax benefits, which are reflected in the income tax expense (benefit) line, are recognized. The total tax benefit recognized in connection with the Company's investment in KRS II in the third quarter of 2014 was approximately $13.7 million. Interest expense increased in the third quarter of 2014 due to an increase in debt related to 2013 acquisitions.

Income taxes and the effective tax rate for the third quarter of 2014 was lower compared to the third quarter of 2013 due primarily to federal and state tax credits related to the Company's investment in the KRS II project.

19



Consolidated – First nine months of 2014 compared with 2013
 
Nine Months Ended September 30,
(dollars in millions)
2014
 
2013
 
Change
Operating revenue
$
395.1

 
$
160.3

 
146.5
%
Operating costs and expenses
346.7

 
144.4

 
140.1
%
Operating income
48.4

 
15.9

 
3X

Other income and (expense)
(33.8
)
 
(13.6
)
 
148.5
%
Income from continuing operations before income taxes
14.6

 
2.3

 
6X

Income tax expense (benefit)
(5.9
)
 
2.1

 
NM

Discontinued operations (net of income taxes)
34.3

 
14.2

 
141.5
%
Net income
54.8

 
14.4

 
4X

Income attributable to noncontrolling interest
(2.0
)
 

 
NM

Net income attributable to A&B
$
52.8

 
$
14.4

 
4X

 
 
 
 
 
 
Basic earnings per share attributable to A&B
$
1.08

 
0.33

 
3X

Diluted earnings per share attributable to A&B
$
1.07

 
0.33

 
3X


Consolidated operating revenue for the first nine months of 2014 increased $234.8 million, or 146.5 percent, compared to the first nine months of 2013. This increase was principally due to $173.1 million of revenue from Natural Materials and Construction due to the acquisition of Grace on October 1, 2013. Real Estate Leasing revenue (excluding revenue from discontinued operations) increased $39.1 million and Real Estate Development and Sales revenue increased $28.5 million, but was partially offset by $5.9 million in lower Agribusiness revenue. The reasons for the revenue change are described below, by business segment, in the Analysis of Operating Revenue and Profit by Segment.

Consolidated operating costs and expenses for the first nine months of 2014 increased $202.3 million, or 140.1 percent, compared to the first nine months of 2013, due principally to $141.9 million of cost related to the Natural Materials and Construction segment that was acquired on October 1, 2013, $26.8 million in higher Real Estate Leasing costs (excluding costs from discontinued operations), $12.9 million in higher Real Estate Development and Sales costs, $13.5 million in higher selling, general and administrative costs, principally attributable to the addition of Grace, and $11.7 million in higher Agribusiness costs, partially offset by $4.5 million of Grace acquisition costs incurred in 2013. The reasons for the operating cost and expense changes are described below, by business segment, in the Analysis of Operating Revenue and Profit by Segment.

Other income (expense) was $(33.8) million in the first nine months of 2014 compared with $(13.6) million in the first nine months of 2013. The change in other income and (expense) was principally due to a reduction in the value of the Company's investment in KRS II as cited for the quarter. The Company's investment in KRS II is reduced as the associated tax benefits, which are reflected in income tax expense (benefit), are recognized. Additionally, interest expense was higher as a result of an increase in debt related to 2013 acquisitions.

Income taxes and the effective tax rate in the first nine months of 2014 were lower than the first nine months of 2013 due to federal and state tax credits related to the Company's investment in the KRS II project. The tax benefits from the KRS II investment reflected in the Company's annual effective tax rate was partially offset by an out-of-period 2013 adjustment to income taxes, which had the effect of increasing income tax expense and reducing net income and income from continuing operations by $1.6 million in the year-to-date period, or approximately $0.03 per diluted share. Income taxes for the year ended December 31, 2013 were lower by $1.6 million and net income and income from continuing operations for the year ended December 31, 2013 were higher by $1.6 million, or approximately $0.04 per share. The Company does not believe this adjustment was material to the financial results of previously issued annual or interim financial statements and, therefore, did not restate any prior period amounts.



20



ANALYSIS OF OPERATING REVENUE AND PROFIT BY SEGMENT

REAL ESTATE INDUSTRY

Real Estate Development and Sales and Real Estate Leasing revenue and operating profit are analyzed before subtracting amounts related to discontinued operations. This is consistent with how A&B generates earnings and how A&B’s management evaluates performance and makes decisions regarding capital allocation for A&B’s real estate businesses. A discussion of discontinued operations for the real estate business is included separately.
 
Effect of Property Sales Mix on Operating Results: Direct year-over-year comparison of the real estate development and sales results may not provide a consistent, measurable indicator of future performance because results from period to period are significantly affected by the mix and timing of property sales. Operating results, by virtue of each project’s asset class, geography and timing are inherently variable. Earnings from joint venture investments are not included in segment revenue, but are included in operating profit. The mix of real estate sales in any year or quarter can be diverse and can include developed residential real estate, commercial properties, developable subdivision lots, undeveloped land, and property sold under threat of condemnation. The sale of undeveloped land and vacant parcels in Hawaii generally provides higher margins than does the sale of developed and commercial property, due to the low historical-cost basis of A&B’s Hawaii land. Consequently, real estate sales revenue trends, cash flows from the sales of real estate, and the amount of real estate held for sale on the balance sheets do not necessarily indicate future profitability trends for this segment. Additionally, the operating profit reported in each quarter does not necessarily follow a percentage of sales trend because the cost basis of property sold can differ significantly between transactions.
 
Real Estate Leasing – Third quarter of 2014 compared with 2013
 
Quarter Ended September 30,
(dollars in millions)
2014
 
2013
 
Change
Real estate leasing segment revenue
$
31.3

 
$
27.5

 
13.8
 %
Real estate leasing segment operating costs and expenses
(19.0
)
 
(15.9
)
 
19.5
 %
Selling, general and administrative
(0.3
)
 
(0.5
)
 
(40.0
)%
Other income
0.1

 
0.1

 
 %
Real estate leasing operating profit
$
12.1

 
$
11.2

 
8.0
 %
Operating profit margin
38.7
%
 
40.7
%
 
 
Net Operating Income*
19.1

 
17.5

 
9.1
 %
Leasable Space (million sq. ft.)
 
 
 
 
 
Hawaii - improved
2.4

 
2.2

 
 
Mainland - improved
2.5

 
5.9

 
 
Total improved
4.9

 
8.1

 
 
Hawaii urban ground leases (acres)
116.3

 
65.2

 
 

*
Refer to page 24 for a discussion of management's use of a non-GAAP financial measure and the required reconciliation of non-GAAP measures to GAAP measures.

Real Estate Leasing segment revenue for the third quarter of 2014, before subtracting amounts presented as discontinued operations, was 13.8 percent higher than 2013, primarily due to a net expansion of the portfolio from 2013 sales and acquisitions activity.

Operating profit for the third quarter of 2014 was 8.0 percent higher than 2013 for the reasons previously cited for the revenue increase, partially offset by higher depreciation and amortization expenses resulting from a step-up in asset bases for acquisitions made in 2013 pursuant to IRS code section 1031. Tenant improvement costs and leasing commissions were $2.2 million and $1.5 million for the three months ended September 30, 2014 and 2013, respectively.

Net operating income for the quarter increased by 9.1 percent. The increase was due to the expansion of the Hawaii portfolio in 2013 and improved Mainland office performance, but was partially offset by the sale of Mainland assets in 2013 and Maui Mall in January 2014.


21



The Company's commercial portfolio's weighted average occupancy summarized by geographic location and property type for the quarter ended September 30, 2014 was as follows:
Weighted average occupancy - percent
Hawaii
Mainland
Total
Retail
93%
90%
92%
Industrial
99%
99%
99%
Office
83%
89%
88%
Total
94%
94%
94%

Improved leasable space decreased in the third quarter of 2014, compared with the third quarter of 2013. The table below identifies sales and acquisitions between July 1, 2013 and September 30, 2014:
Dispositions
 
Acquisitions
Date
 
Property
 
Leasable sq. ft
 
Date
 
Property
 
Leasable sq. ft
9-13
 
Centennial Plaza
 
244,000

 
9-13
 
Pearl Highlands
 
415,400

9-13
 
Issaquah Office Center
 
146,900

 
9-13
 
Shops at Kukui’ula
 
78,900

10-13
 
Republic Distribution Center
 
312,500

 
12-13
 
Kailua Improved Portfolio
 
386,200

12-13
 
Activity Distribution Center
 
252,300

 
12-13
 
Kailua Ground Leases*
 
51 acres

12-13
 
Heritage Business Park
 
1,316,400

 
 
 
 
 
 
12-13
 
Savannah Logistics Park
 
1,035,700

 
 
 
 
 
 
12-13
 
Broadlands Marketplace
 
103,900

 
 
 
 
 
 
12-13
 
Meadows on the Parkway
 
216,400

 
 
 
 
 
 
12-13
 
Rancho Temecula Town Ctr.
 
165,500

 
 
 
 
 
 
1-14
 
Maui Mall
 
185,700

 
 
 
Total Improved Acquisitions
 
880,500

 
 
Total Dispositions
 
3,979,300

 
 
 
Total Ground Lease Acq.
 
51 acres


* Land acquired and ground leased to tenants includes 760,000 square feet of tenant-improved commercial space

Same store occupancy in the third quarter of 2014 was 94%, compared to 92% in 2013, due primarily to higher Mainland occupancy at an industrial property and two office properties in California. "Same store" refers to properties that were owned throughout the entire duration of both periods under comparison, including stabilized properties. Stabilized properties refer to commercial properties developed by the Company that have achieved 80 percent economic occupancy in each of the periods presented for comparison.

Real Estate Leasing – First nine months of 2014 compared with 2013
 
Nine Months Ended September 30,
(dollars in millions)
2014
 
2013
 
Change
Real estate leasing segment revenue
$
93.5

 
$
80.0

 
16.9
 %
Real estate leasing segment operating costs and expenses
(57.0
)
 
(46.1
)
 
23.6
 %
Selling, general and administrative
(0.9
)
 
(1.4
)
 
(35.7
)%
Other income
0.3

 
0.2

 
50.0
 %
Real estate leasing operating profit
$
35.9

 
$
32.7

 
9.8
 %
Operating profit margin
38.4
%
 
40.9
%
 
 
Net Operating Income*
58.3

 
50.6

 
15.2
 %
Leasable Space (million sq. ft.)
 
 
 
 
 

Hawaii - improved
2.4

 
2.2

 
 

Mainland - improved
2.5

 
5.9

 
 

Total Improved
4.9

 
8.1

 
 
Hawaii urban ground leases (acres)
116.3

 
65.2

 
 

*
Refer to page 24 for a discussion of management's use of a non-GAAP financial measure and the required reconciliation of non-GAAP measures to GAAP measures.


22



Real Estate Leasing segment revenue for the nine months ended September 30, 2014, before subtracting amounts presented as discontinued operations, was 16.9 percent higher than 2013, primarily due to sales and acquisitions activity (shown in the previous section), as well as improved performance from Mainland office properties.

Operating profit for the nine months ended September 30, 2014, before subtracting amounts presented as discontinued operations, was 9.8 percent higher than 2013 for the reasons previously cited for the revenue increase, partially offset by higher depreciation and amortization expenses resulting from a step-up in asset bases for acquisitions made pursuant to IRS code section 1031. Tenant improvement costs and leasing commissions were $4.6 million and $5.4 million for the nine months ended September 30, 2014 and 2013, respectively.

Net operating income increased 15.2 percent for the nine months ended September 30, 2014 as compared to same period last year. The increase was primarily due to the expansion of the Hawaii portfolio through acquisitions and improved Mainland office performance, partially offset by the sale of Mainland assets in 2013 and Maui Mall in January 2014.

The Company's commercial portfolio's weighted average occupancy summarized by geographic location and property type for the nine months ended September 30, 2014 was as follows:
Weighted average occupancy - percent
Hawaii
Mainland
Total
Retail
93%
90%
92%
Industrial
99%
99%
99%
Office
81%
88%
87%
Total
93%
93%
93%

Same store occupancy increased to 93% in 2014, compared to 91% in 2013, due to higher Mainland occupancy at an industrial property and two office properties in California.


23



Use of Non-GAAP Financial Measures

The Company presents net operating income (“NOI”), which is a non-GAAP measure derived from Real Estate Leasing Segment revenues (determined in accordance with GAAP, less straight-line rental adjustments) minus property operating expenses (determined in accordance with GAAP). NOI does not have any standardized meaning prescribed by GAAP, and therefore, may differ from definitions of NOI used by other companies. The Company provides this information to investors as an additional means of evaluating ongoing core operations. NOI should not be considered as an alternative to net income (determined in accordance with GAAP) as an indicator of the Company's financial performance, or as an alternative to cash flow from operating activities as a measure of the Company's liquidity. NOI is commonly used as a measure of operating performance because it is an indicator of the return on property investment, and provides a method of comparing property performance over time. NOI excludes general and administrative expenses, straight-line rental adjustments, interest income, interest expense, depreciation and amortization, and gains on sales of interests in real estate. The Company believes that the Real Estate Leasing segment's operating profit after discontinued operations is the most directly comparable GAAP measurement to NOI. A reconciliation of Real Estate Leasing segment operating profit to Real Estate Leasing segment NOI is as follows:

Reconciliation of Real Estate Leasing Operating Profit to NOI
(In Millions, Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
 
 
 
 
 
 
 
Real Estate Leasing segment operating profit before discontinued operations
$
12.1

 
$
11.2

 
$
35.9

 
$
32.7

Less amounts reported in discontinued operations (pre-tax)

 
(4.1
)
 
(0.2
)
 
(11.3
)
Real Estate Leasing segment operating profit after subtracting discontinued operations
12.1

 
7.1

 
35.7

 
21.4

Adjustments:


 


 


 


Depreciation and amortization
6.8

 
6.0

 
21.0

 
17.8

Straight-line lease adjustments
(0.7
)
 
(0.5
)
 
(1.8
)
 
(2.2
)
General and administrative expenses
0.9

 
0.8

 
3.2

 
2.3

Discontinued operations

 
4.1

 
0.2

 
11.3

Real Estate Leasing segment NOI
$
19.1

 
$
17.5

 
$
58.3

 
$
50.6



Real Estate Development and Sales – Third quarter and first nine months of 2014 compared with 2013
 
Quarter Ended September 30,
(dollars in millions)
2014
 
2013
 
Change
Improved property sales revenue
$

 
$
37.3

 
(100.0
)%
Development sales revenue
2.7

 
4.4

 
(38.6
)%
Unimproved/other property sales revenue
15.5

 
5.7

 
171.9
 %
Total Real Estate Development and Sales segment revenue
18.2

 
47.4

 
(61.6
)%
Cost of Real Estate Development and Sales
(5.3
)
 
(33.1
)
 
(84.0
)%
Operating expenses
(4.0
)
 
(4.8
)
 
(16.7
)%
Write down of The Shops at Kukui'ula joint venture investment

 
(6.3
)
 
(100.0
)%
Earnings from joint ventures
1.5

 
0.7

 
114.3
 %
Other income
1.0

 
0.7

 
42.9
 %
Total Real Estate Development and Sales operating profit
$
11.4

 
$
4.6

 
147.8
 %
Real Estate Development and Sales operating profit margin
62.6
%
 
9.7
%
 
 


24



 
Nine Months Ended September 30,
(dollars in millions)
2014
 
2013
 
Change
Improved property sales revenue
$
64.1

 
$
52.2

 
22.8
 %
Development sales revenue
19.0

 
4.4

 
4X

Unimproved/other property sales revenue
27.5

 
7.6