Notes to Consolidated Financial Statements
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1.
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BACKGROUND AND BASIS OF PRESENTATION
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Description of Business:
Alexander & Baldwin, Inc. ("A&B" or the "Company") is headquartered in Honolulu, Hawai`i and operates
three
segments: Commercial Real Estate; Land Operations; and Materials & Construction.
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•
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Commercial Real Estate ("CRE"):
includes leasing, property management, redevelopment and development-for-hold activities. Significant assets include improved commercial real estate and urban ground leases. Income from this segment is principally generated by leasing and operating real estate assets.
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•
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Land Operations:
involves the management and optimization of A&B's land and related assets primarily through the following activities: planning, zoning, financing, constructing, selling, and investing in real property; leasing agricultural land; and renewable energy. Primary assets include landholdings, renewable energy assets (investments in hydroelectric and solar facilities and power purchase agreements) and development-for-sale projects and investments. Financial results from this segment are principally derived from renewable energy operations, income/loss from real estate joint ventures, real estate development sales and fees, and land parcel sales.
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•
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Materials & Construction ("M&C"):
performs asphalt paving as prime contractor and subcontractor; imports and sells liquid asphalt; mines, processes and sells basalt aggregate; produces and sells asphaltic concrete; provides and sells various construction- and traffic-control-related products; and manufactures and sells precast concrete products. Assets include two grade A (prime) rock quarries, an asphalt storage terminal, hot mix asphalt plants and quarry and paving equipment. Income is generated principally by materials supply and paving construction.
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On October 15, 2018, the Company filed its tax return with the IRS, including the 2017 Form 1120-REIT with which it elected to be treated as a REIT for U.S. federal income tax purposes commencing with its 2017 taxable year. At
December 31, 2018
, the Company had
72.0 million
shares outstanding.
Reclassifications:
In November 2018, the Securities and Exchange Commission (SEC) finalized the Disclosure Update Simplification Project, which eliminated Rule 3-15(a)(1) reporting of Gain or Loss on Sale of Properties by REITs. To conform with ASC 360 and the SEC rule change, the Company has classified the gain on dispositions of real estate assets in operating income in the Company’s consolidated statements of operations. The Company reclassified the prior periods to conform to the current year presentation. This change resulted in an increase in operating income of
$9.3 million
and
$8.1 million
during the years ended
December 31, 2017
and
2016
, respectively. The Company also reclassified
$2.5 million
to deferred revenue from other long-term liabilities on the consolidated balance sheet as of
December 31, 2017
to conform to the current year presentation.
Rounding:
Amounts in the consolidated financial statements and notes are rounded to the nearest tenth of a million. Accordingly, a recalculation of some per-share amounts and percentages, if based on the reported data, may result in differences.
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2.
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SIGNIFICANT ACCOUNTING POLICIES
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Principles of Consolidation:
The consolidated financial statements include the accounts of Alexander & Baldwin, Inc. and all wholly owned and controlled subsidiaries, after elimination of intercompany amounts. Significant investments in businesses, partnerships and limited liability companies in which the Company does not have a controlling financial interest, but has the ability to exercise significant influence, are accounted for under the equity method. A controlling financial interest is one in which the Company has a majority voting interest or one in which the Company is the primary beneficiary of a variable interest entity. In determining whether the Company is the primary beneficiary of a variable interest entity in which it has an interest, the Company is required to make significant judgments with respect to various factors including, but not limited to, the Company’s ability to direct the activities that most significantly impact the entity’s economic performance, the rights and ability of other investors to participate in decisions affecting the economic performance of the entity, and kick-out rights, among others. Activities that significantly affect the economic performance of the entities in which the Company has an interest include, but are not limited to, establishing and modifying detailed business, development, marketing and sales plans, approving and modifying the project budget, approving design changes and associated overruns, if any, and approving project financing, among others. The Company has not consolidated any variable interest entity in which the Company does not also have voting control because it has determined that it is not the primary beneficiary since decisions to direct the activities that most significantly impact the entity’s performance are shared by the joint venture partners.
The consolidated financial statements include the results of GP/RM, a supplier in the precast concrete industry, and GLP Asphalt, LLC ("GLP"), an importer and distributor of liquid asphalt, which are owned
51%
and
70%
, respectively. These entities
are consolidated because the Company holds a controlling financial interest through its majority ownership of the voting interests of the entities. The remaining interest in these entities is reported as noncontrolling interest in the consolidated financial statements. Profits, losses and cash distributions are allocated in accordance with the respective operating agreements.
Use of Estimates:
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported. Estimates and assumptions are used for, but not limited to: (i) asset impairments, including intangible assets and goodwill, (ii) litigation and contingencies, (iii) revenue recognition for long-term real estate developments and construction contracts, (iv) pension and postretirement estimates, and (v) income taxes. Future results could be materially affected if actual results differ from these estimates and assumptions.
Customer Concentration:
For the year ended
December 31, 2018
, the Land Operations segment recognized
$162.2 million
of gross profit from the sale of agricultural land on Maui to Mahi Pono Holdings, LLC
. Grace derives a significant portion of Materials & Construction revenues from a limited customer base. For the
years ended December 31, 2018, 2017 and 2016
, billings of approximately
$53.0 million
,
$67.7 million
, and
$52.0 million
, respectively, were generated directly and indirectly from projects administered by the City and County of Honolulu. For the
years ended December 31, 2018, 2017 and 2016
, billings of approximately
$40.4 million
,
$60.2 million
,
$50.1 million
, respectively, were generated directly and indirectly from the State of Hawai`i, where Grace served as general contractor or subcontractor.
Fair Value Measurements:
The fair value of the Company's cash and cash equivalents, accounts receivable and short-term borrowings approximate their carrying values due to the short-term nature of the instruments. The Company records long term notes receivables and interest rate swaps at fair value.
FASB ASC Topic 820,
Fair Value Measurements and Disclosures ("ASC 820")
, as amended, establishes a fair value hierarchy, which requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The hierarchy places the highest priority on unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurements) and assigns the lowest priority to unobservable inputs (Level 3 measurements). The three levels of inputs within the hierarchy are defined as follows:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect the Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
If the technique used to measure fair value includes inputs from multiple levels of the fair value hierarchy, the lowest level of significant input determines the placement of the entire fair value measurement in the hierarchy.
The Company carries its interest rate swaps at fair value. The fair values of the Company's interest rate swaps (Level 2 measurements) are based on the estimated amounts that the Company would receive or pay to terminate the contracts at the reporting date and are determined using interest rate pricing models and interest rate related observable inputs. See Note 15, for fair value information regarding the Company's derivative instruments.
The fair value of the Company's long-term notes receivable notes approximates the carrying amount of
$16.3 million
at
December 31, 2018
. The fair value and carrying amount of these notes was
immaterial
at
December 31, 2017
. The fair value of these notes is estimated using a discounted cash flow analysis in which the Company uses unobservable inputs such as market interest rates determined by the loan to value and market capitalization rates related to the underlying collateral at which management believes similar loans would be made and classified as a Level 3 measurement in the fair value hierarchy.
The carrying amount and fair value of the Company's debt at
December 31, 2018
was
$778.1 million
and
$758.0 million
, respectively, and
$631.2 million
and
$642.3 million
at
December 31, 2017
respectively. The fair value of 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 measurement).
During year ended 2018,
2017
and
2016
, the Company recorded aggregate impairment charges of
$79.4 million
,
$22.4 million
and
$11.7 million
related to goodwill and long lived assets and an other than temporary impairment charges of
$188.6 million
related to equity method investments, see further discussion in the respective sections below. The Company has classified
the fair value measurements as a Level 3 measurement in the fair value hierarchy because they involve significant unobservable inputs such as cash flow projections, discount rates and management assumptions.
Cash and Cash Equivalents:
Cash equivalents consist of highly liquid investments with a maturity of three months or less at the date of purchase. The Company carries these investments at cost, which approximates fair value. There were no outstanding checks in excess of funds on deposit at
December 31, 2018
and
2017
.
Allowance for Doubtful Accounts:
Allowances for doubtful accounts are established by management based on estimates of collectability. Estimates of collectability are principally based on an evaluation of the current financial condition of the Company’s customers and their payment history, which are regularly monitored by the Company. The changes in the allowance for doubtful accounts, included on the consolidated balance sheets as an offset to
Accounts receivable, net
for the
years ended December 31, 2018, 2017 and 2016
were as follows (in millions):
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Balance at
Beginning of Year
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Provision for Bad Debt
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Write-offs
and Other
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Balance at
End of Year
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2018
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$1.4
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$1.3
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$(0.7)
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$2.0
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2017
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$1.0
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$1.0
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$(0.6)
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$1.4
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2016
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$1.7
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$0.8
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$(1.5)
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$1.0
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Operating Cycle
: The Company uses the duration of the construction contracts that range from one year to three years as its operating cycle for purposes of classifying assets and liabilities related to contracts. Accounts receivable and contracts retention collectible after one year related to the Materials & Construction segment are included in current assets in the consolidated balance sheets and amounted to
$7.7 million
and
$8.0 million
at
December 31, 2018
and
2017
, respectively. Accounts and contracts payable related to the Materials & Construction segment payable after one year are included in current liabilities in the consolidated balance sheets and amounted to
$0.7 million
and
$0.4 million
at
December 31, 2018
and
2017
, respectively.
Long-term notes receivable
: The Company's long-term notes receivable are recorded at cost within
Other assets
on the consolidated balance sheet. Generally, a loans allowance is established when the Company determines that it will be unable to collect any remaining amounts due under the agreement.
Inventories:
Materials & supplies and Materials & Construction segment inventory are stated at the lower of cost (principally average cost, first-in, first-out basis) or market value. Inventories
at December 31, 2018 and 2017
were as follows (in millions):
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2018
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2017
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Asphalt
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$
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9.4
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$
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12.2
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Processed rock and sand
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9.5
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13.5
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Work in progress
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4.0
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2.8
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Retail merchandise
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2.0
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1.7
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Parts, materials and supplies inventories
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1.6
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1.7
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Total
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$
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26.5
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$
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31.9
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Property:
Property is stated at cost, net of accumulated depreciation and amortization. Expenditures for major renewals and betterments are capitalized. Replacements, maintenance, and repairs that do not improve or extend asset lives are charged to expense as incurred. Upon acquiring commercial real estate that is deemed a business, the Company records land, buildings, leases above and below market, and other intangible assets based on their fair values. Costs related to due diligence are expensed as incurred.
Depreciation:
Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets or the units-of-production method for quarry production-related assets. Estimated useful lives of property are as follows:
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Classification
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Range of Life (in years)
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Building and improvements
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10 to 40
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Leasehold improvements
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5 to 10 (lesser of useful life or lease term)
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Water, power and sewer systems
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5 to 50
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Rock crushing and asphalt plants
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25 to 35
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Machinery and equipment
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2 to 35
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Other property improvements
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3 to 35
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Restricted Cash:
The Company's restricted cash balance primarily consists of proceeds from §1031 tax-deferred sales held in escrow pending future use to purchase new real estate assets and the proceeds from §1033 condemnations.
Real Estate Developments:
Expenditures for real estate developments are capitalized during construction and are classified as real estate developments on the consolidated balance sheets. When construction is substantially complete, the costs are reclassified as
Real Estate Development Inventory and Property Held for Sale
, based upon the Company’s intent to either sell the completed asset or to hold it as an investment property, respectively. Cash flows related to real estate developments inventory are classified as operating activities. Cash flows related to the development of properties that the Company expects to retain ownership of are classified as investing activities.
For development projects, capitalized costs are allocated using the direct method for expenditures that are specifically associated with the unit being sold and the relative-sales-value method for expenditures that benefit the entire project. Capitalized development costs typically include costs related to land acquisition, grading, roads, water and sewage systems, landscaping, capitalized interest, and project amenities. Direct overhead costs incurred after the development project is substantially complete, such as utilities, maintenance and real estate taxes, are charged to selling, general and administrative expense as incurred. All indirect overhead costs are charged to selling, general and administrative costs as incurred.
Capitalized Interest:
Interest costs on developments and major redevelopments are capitalized as part of real estate development and redevelopment projects that have not yet been placed into service. Capitalization of interest commences when development activities and expenditures begin and end upon completion, which is when the asset is ready for its intended use. Total interest cost incurred was
$35.9 million
,
$26.4 million
,
$28.3 million
in
2018
,
2017
and
2016
, respectively. Capitalized interest costs related to development activities were
$0.6 million
,
$0.8 million
and
$2.0 million
in
2018
,
2017
and
2016
, respectively.
Real Estate Development Inventory and Property Held for Sale:
The Company separately classifies real estate development inventory and assets held for sale in its consolidated financial statements. Real estate investments to be disposed of are reported at the lower of carrying amounts or estimated fair value, less costs to sell. The following table summarizes the assets held for sale at
December 31, 2018
(in millions):
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2018
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2017
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Commercial Real Estate Assets
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$
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—
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$
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68.7
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Impairment of real estate assets
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—
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(22.4
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)
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Real Estate Assets held for sale
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—
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46.3
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Real Estate development-for-sale inventory
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31.1
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21.1
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Real estate development inventory and property held for sale
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$
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31.1
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$
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67.4
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Impairment of Long-Lived Assets and Finite-Lived Intangible Assets:
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. These asset impairment 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, A&B’s financial condition or its future financial results could be materially impacted.
During the fourth quarter of 2018, the Company concluded that the carrying values of certain paving and quarry assets in its Materials & Construction segment were not recoverable due primarily to persisting, competitive market pressures that have negatively affected sales and margins. As a result, the Company recorded impairment charges of
$40.6 million
during the fourth quarter of 2018 to reduce the carrying amounts to the estimated fair value. The Company classified these fair value measurements as Level 3. The weighted average discount rate used in the intangible valuation was
13.5%
. Changes to Materials & Construction fixed assets and intangible assets for the year ended
December 31, 2018
consisted of the following (in millions):
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Intangible Assets
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Materials & Construction
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Fixed Assets
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Materials & Construction
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Balance, January 1, 2018
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$
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139.5
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Balance, January 1, 2018
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$
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16.5
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Additions to fixed assets
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11.1
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Amortization
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(0.9
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)
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Depreciation
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(11.2
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)
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Intangible impairment
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(7.0
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)
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Fixed asset impairment
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(33.6
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)
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Balance, December 31, 2018
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$
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8.6
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Balance, December 31, 2018
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$
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105.8
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During the year ended December 31, 2017, the Company recorded aggregate impairment charges of
$22.4 million
related to certain of the Company's U.S. Mainland commercial properties that were classified as held for sale. The impaired assets were measured at fair value on a nonrecurring basis subsequent to their initial recognition. The Company estimated the fair values of these long-lived assets based on the Company’s own judgments about the assumptions that market participants would use in pricing the real estate assets and available, observable market data. The Company classified these fair value measurements as Level 3.
During the year ended December 31,
2016
, as a result of a change in its strategy for development activities, the Company recorded non-cash impairment charges of
$11.7 million
related to certain non-active, long-term development-for-sale projects.
Impairment of Investments in Unconsolidated Affiliates:
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 believed to be 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 require management to make assumptions and apply judgments to estimates regarding the timing and amount of future cash flows that may consider various factors, including sales prices, development costs, market conditions and absorption rates, 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.
Weakness in particular real estate markets, difficulty in obtaining or renewing project-level financing or development approvals, 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.
During the fourth quarter of 2018, the Company determined that its investment in Kukui`ula was other-than-temporarily impaired as a result of changing its strategy and no longer intending to hold its investment through the duration of the project. As a result, the Company estimated the fair value of its investment in Kukui`ula using a discounted cash flow model and recorded a non-cash, other-than-temporary impairment of
$186.8 million
. The Company classified the fair value measurement as Level 3. The weighted average discount rate used in the valuation was
18.0%
.
The Company made investments of
$23.8 million
in 2014 and
$15.4 million
in 2016 in tax equity investments related to the construction and operation of (1) a 12-megawatt solar farm on Kauai and (2)
two
photovoltaic facilities with a combined capacity of
6.5
megawatts on Oahu, respectively. The Company recovers its investments primarily through tax credits and tax benefits, which are recorded in the
Income tax expense (benefit)
line item in the consolidated statements of operations. As these tax benefits were received and recognized, the Company recorded non-cash reductions of the investments' carrying value. For the
years ended December 31, 2018, 2017 and 2016
, the Company recorded net, non-cash reductions of the investments' carrying value of
$0.5 million
,
$2.6 million
, and
$9.8 million
, respectively, as
Reductions in solar investments, net
on the consolidated statements of operations.
Intangible Assets:
Intangible assets are recorded on the consolidated balance sheets as other non-current assets and are generally related to the acquisition of commercial properties. Intangible assets acquired in
2018
and
2017
were as follows:
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2018
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2017
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Amount
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Weighted Average Life (Years)
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Amount
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Weighted Average Life (Years)
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In-place/favorable leases
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$
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38.7
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11.9
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$
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0.3
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1.6
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Intangible assets for the years ended
December 31, 2018
and
2017
included the following (in millions):
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2018
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2017
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In-place leases
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$
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102.1
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$
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70.2
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Favorable leases
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24.6
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|
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17.9
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Permitted quarry rights
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8.0
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|
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18.0
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Trade name/customer relationships
|
2.2
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|
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2.2
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Amortization of in-place leases
|
(53.2
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)
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(45.6
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)
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Amortization of favorable leases
|
(13.7
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)
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(12.1
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)
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Amortization of permitted quarry rights
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(0.1
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)
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(2.5
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)
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Amortization of trade name/customer relationships
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(1.5
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)
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|
(1.2
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)
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Intangible assets, net
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$
|
68.4
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|
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$
|
46.9
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Aggregate intangible asset amortization was
$8.7 million
,
$6.0 million
, and
$9.2 million
for
2018
,
2017
and
2016
, respectively. Estimated amortization expenses related to intangible assets over the next five years are as follows (in millions):
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Estimated
Amortization
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2019
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$
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6.8
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2020
|
5.6
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2021
|
5.0
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2022
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4.5
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2023
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3.9
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Goodwill:
The Company reviews goodwill for impairment at the reporting unit level annually and whenever events or changes in circumstances indicate that it is more likely than not that the fair value of the reporting unit is less than its carrying amount. The goodwill impairment test estimates the fair value of a reporting unit using various methodologies, including an income approach that is based on a discounted cash flow analysis and a market approach that involves the application of market-derived multiples. The discounted cash flow approach relies on a number of assumptions, including future macroeconomic conditions, market factors specific to the reporting unit, the amount and timing of estimated future cash flows to be generated by the business over an extended period of time, and a discount rate that considers the risks related to the amount and timing of the cash flows, among others. Under the market multiple methodology, the estimate of fair value is based on market multiples of EBITDA (earnings before interest, taxes, depreciation and amortization) or revenues. When using market multiples of EBITDA or revenues, the Company must make judgments about the comparability of those multiples in closed and proposed transactions and comparability of multiples for similar companies.
If the results of the Company's test indicates that a reporting unit's estimated fair value is less than its carrying value, an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit's fair value, not to exceed the total amount of goodwill allocated to that reporting unit.
The Company's goodwill balance primarily relates to the acquisition of Grace Pacific in 2013. Grace Pacific has three reporting units in the Materials & Construction segment: GPC (primarily consisting of the Grace Pacific’s quarry, paving, and liquid asphalt operations), GPRS (primarily consisting of Grace Pacific’s roadway and maintenance solutions operations) and GPRM (primarily consisting of Grace Pacific’s prestressed and precast concrete operations). The valuation that was performed
of each reporting unit assumes that each is an unrelated business to be sold separately and independently from the other reporting units.
Based upon the results of the valuation, the GPC and GPRS reporting unit's carrying values exceeded their estimated fair values and goodwill was determined to be impaired. The decline in fair value was due primarily to persisting, competitive market pressures that have negatively affected sales and margins. Therefore, the Company recorded a non-cash charge of
$37.2 million
during the fourth quarter of 2018. The Company classified these fair value measurements as Level 3. The weighted average discount rate used in the valuation was
13.6%
. As of
December 31, 2018
, the Company’s goodwill balance totaled
$65.1 million
of which,
$56.4 million
related to Grace Pacific.
The changes in the carrying amount of goodwill allocated to the Company's reportable segments for the years ended
December 31, 2018
and
2017
were as follows (in millions):
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Materials & Construction
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Commercial Real Estate
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Total
|
Balance, January 1, 2017
|
$
|
93.6
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|
|
$
|
8.7
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|
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$
|
102.3
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Changes to goodwill
|
—
|
|
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—
|
|
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—
|
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Balance, December 31, 2017
|
93.6
|
|
|
8.7
|
|
|
102.3
|
|
Goodwill impairment
|
(37.2
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)
|
|
—
|
|
|
(37.2
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)
|
Balance, December 31, 2018
|
$
|
56.4
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|
|
$
|
8.7
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|
|
$
|
65.1
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|
There was no goodwill allocated to the Land Operations segment.
Discontinued Operations:
On December 31, 2015, due to continuing and significant operating losses stemming from low sugar prices and poor production levels, the Company determined it would cease sugar operations at its HC&S division on Maui upon completion of its final harvest in 2016. HC&S completed its harvest in December 2016, and the Company ceased its sugar operations (the "Cessation"). As a result, the Company concluded that its sugar operations met the requirements to be reported as discontinued operations for all periods presented. See Note 4, "Discontinued Operations" and Note 18 "Cessation of Sugar Operations" for additional detail.
Revenue recognition:
Sources of revenue for the Company primarily include commercial property rentals, sales of real estate, real estate development projects, material sales and paving construction projects. The Company generates revenue from
three
distinct business segments:
Commercial Real Estate: The Commercial Real Estate segment
owns, operates, leases, and manages a portfolio of retail, office, and industrial properties in Hawai`i; it also leases urban land in Hawai`i to third-party lessees. Commercial Real Estate revenue is recognized on a straight-line basis over the term of the corresponding lease. Also included in rental revenues are certain tenant reimbursements and percentage rents determined in accordance with the terms of the lease. The Company records revenue for real estate taxes paid by its tenants for commercial properties with an offsetting expense in
Cost of Commercial Real Estate
in the accompanying consolidated statement of operations, as the Company has concluded it is the primary obligor.
Land Operations:
Revenues from sales of real estate are recognized at the point in time when control of the underlying goods is transferred to the customer and the payment is due (generally on the closing date). For certain development projects the Company will use a percentage of completion for revenue recognition. Under this method, the amount of revenue recognized is based on the development costs that have been incurred throughout the reporting period as a percentage of total expected developments associated with the development project.
Materials & Construction:
Revenue from the Materials & Construction segment is primarily generated from material sales and paving and construction contracts. The recognition of revenue is based on the underlying terms of the transactions.
Materials
: Revenues from material sales, which include basalt aggregate, liquid asphalt and hot mix asphalt, are usually recognized at a point in time when control of the underlying goods is transferred to the customers (generally this occurs when materials are picked up by customers or their agents) and when the Company has a present right to payment for materials sold.
Construction
: The Company's construction contracts generally contain a single performance obligation as the promise to transfer individual goods or services are not separately identifiable from other promises in the contracts and is, therefore, not distinct. Revenue is earned from construction contracts over a period of time as control is continuously transferred to customers.
Construction contracts can generally be categorized into two types of contracts with customers based on the respective payment terms; either lump sum or unit priced. Lump sum contracts require the total amount of work be performed under a single
fixed price irrespective of actual quantities or actual costs. Earnings on both unit price contracts and lump sum fixed-price paving contracts are recognized using the percentage of completion, cost-to-cost, input method, as it is able to faithfully depict the transfer of control of the underlying assets to the customer. Certain construction contracts include retainage provisions. The balances billed but not paid by customers pursuant to these provisions generally become due upon completion and acceptance of the project work or products by the owners.
The Company deems its contract prices reflective of the standalone selling prices of the underlying goods and services since the contracts are required to go through a competitive bidding process.
Employee Benefit Plans:
The Company provides a wide range of benefits to existing employees and retired employees, including single-employer defined benefit plans, postretirement, defined contribution plans, post-employment and health care benefits. The Company records amounts relating to these plans based on various actuarial assumptions, including discount rates, assumed rates of return, compensation increases, turnover rates and health care cost trend rates. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current economic conditions and trends. The Company believes that the assumptions utilized in recording obligations under the Company’s plans, which are presented in Note 11, “Employee Benefit Plans,” are reasonable based on its experience and on advice from its independent actuaries; however, differences in actual experience or changes in the assumptions may materially affect the Company’s financial position or results of operations.
Certain amounts in the Company's prior period consolidated financial statements have been reclassified to conform to the current period presentation. Specifically, the Company disaggregated and separately presented long-term costs of its employee benefit plans within
Accrued retirement benefits
in its consolidated balance sheet. In connection with such presentation, the Company reclassified
$2.8 million
of accrued costs related to its non-qualified benefit plans from
Other non-current liabilities
and
$19.9 million
of accrued costs related to its qualified pension and post-retirement benefit plans from
Accrued pension and post-retirement benefits
in its consolidated balance sheet at
December 31, 2017
.
Share-Based Compensation:
The Company records compensation expense for all share-based payment awards made to employees and directors. The Company’s various equity plans are more fully described in Note 13, "Share-Based Awards."
Redeemable Non-controlling Interest:
Non-controlling interests in subsidiaries that are redeemable for cash or other assets outside of the Company’s control are classified as mezzanine equity, outside of equity and liabilities, and are adjusted to fair value on each annual balance sheet date. The resulting changes in fair value of the estimated redemption amount, increases or decreases, are recorded with corresponding adjustments against earnings surplus or, in the absence of earnings surplus, common stock.
Earnings Per Share (“EPS”):
Basic and diluted earnings per share are computed and disclosed in accordance with FASB Accounting Standards Codification Topic 260,
Earnings Per Share
. The Company utilizes the two-class method to compute earnings available to common shareholders. Under the two-class method, earnings are adjusted by accretion amounts to redeemable noncontrolling interests recorded at redemption value. The adjustments represent in-substance dividend distributions to the noncontrolling interest holder as the holder has a contractual right to receive a specified amount upon redemption. As a result, earnings are adjusted to reflect this in-substance distribution that is different from other common shareholders. In addition, the Company allocates net earnings to each class of common stock and participating security as if all of the net earnings for the period had been distributed. The Company's participating securities consist of time-based restricted unit awards that contain a non-forfeitable right to receive dividends and, therefore, are considered to participate in earnings with common shareholders. Basic earnings per common share excludes dilution and is calculated by dividing net earnings allocated to common shares by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share is calculated by dividing net earnings allocable to common shares by the weighted-average number of common shares outstanding for the period, as adjusted for the potential dilutive effect of non-participating share-based awards.
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 accompanying consolidated statements of operations.
The Company believes that it is more likely than not that the benefit from its state nonrefundable energy tax credit carryforward will not be realized. Consequently, in
2017
the Company recorded a valuation allowance of
$6.9 million
on the deferred tax asset relating to this credit carryforward. If our assumptions change and the Company determines that it will be able
to realize the credit, the tax benefits relating to any reversal of the valuation allowance on the deferred tax assets will be recognized as a reduction in
Income tax benefit (expense)
on the consolidated statements of operations. As a result of tax losses incurred in the TRS for the past three years, primarily related to the Materials & Construction segment, the Company recorded an additional non-cash valuation allowance against the deferred tax assets of approximately
$84.6 million
in December 2018, of which
$16.5 million
related to deferred tax assets recorded prior to 2018 and resulted in deferred tax expense for the year ended December 31, 2018.
The Company also records a liability for uncertain tax positions not deemed to meet the more-likely-than-not threshold. The Company did not have material uncertain tax positions at
December 31, 2018
and
2017
.
The Company accounts for tax credits related to its investments in KRS II and Waihonu using the flow-through method, which reduces the provision for income taxes in the year the tax credits first become available.
Comprehensive Income (Loss):
Other comprehensive income (loss) principally includes amortization of deferred pension and postretirement costs. The components of accumulated other comprehensive loss, net of taxes, were as follows for the years ended
December 31, 2018
and
2017
(in millions):
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Unrealized components of benefit plans:
|
|
|
|
Pension plans
|
$
|
(54.8
|
)
|
|
$
|
(43.1
|
)
|
Post-retirement plans
|
—
|
|
|
(1.0
|
)
|
Non-qualified benefit plans
|
(0.4
|
)
|
|
(0.1
|
)
|
Interest rate swap
|
3.3
|
|
|
1.9
|
|
Accumulated other comprehensive income (loss)
|
$
|
(51.9
|
)
|
|
$
|
(42.3
|
)
|
The changes in accumulated other comprehensive income (loss) by component for the
years ended December 31, 2018, 2017 and 2016
were as follows (in millions, net of tax):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Benefit Plans
|
|
Interest Rate Swap
|
|
Total
|
Balance, January 1, 2016
|
$
|
(45.3
|
)
|
|
$
|
—
|
|
|
$
|
(45.3
|
)
|
Other comprehensive income (loss) before reclassifications, net of taxes of $2.1 and $1.0 for employee benefit plans and interest rate swap, respectively
|
(3.4
|
)
|
|
1.6
|
|
|
(1.8
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss), net of taxes of $2.3 and $0.2 for employee benefit plans and interest rate swap, respectively
|
3.7
|
|
|
0.2
|
|
|
3.9
|
|
Balance, December 31, 2016
|
$
|
(45.0
|
)
|
|
$
|
1.8
|
|
|
$
|
(43.2
|
)
|
Other comprehensive income (loss) before reclassifications, net of taxes of $1.2 and $0.2 for employee benefit plans and interest rate swap, respectively
|
(2.0
|
)
|
|
(0.2
|
)
|
|
(2.2
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss), net of taxes of $1.8 and $0.2 for employee benefit plans and interest rate swap, respectively
|
2.8
|
|
|
0.3
|
|
|
3.1
|
|
Balance, December 31, 2017
|
$
|
(44.2
|
)
|
|
$
|
1.9
|
|
|
$
|
(42.3
|
)
|
Other comprehensive income (loss) before reclassifications, net of taxes of $0 for interest rate swap
|
—
|
|
|
1.0
|
|
|
1.0
|
|
Other comprehensive income (loss) before reclassifications, net of taxes of $0 for employee benefit plans
|
(4.9
|
)
|
|
—
|
|
|
(4.9
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss), net of taxes of $0 for employee benefit plans
|
3.4
|
|
|
—
|
|
|
3.4
|
|
Impact of adoption of ASU 2018-02
|
(9.5
|
)
|
|
0.4
|
|
|
(9.1
|
)
|
Balance, December 31, 2018
|
$
|
(55.2
|
)
|
|
$
|
3.3
|
|
|
$
|
(51.9
|
)
|
The reclassifications of other comprehensive income (loss) components out of accumulated other comprehensive income (loss) for the
years ended December 31, 2018, 2017 and 2016
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Unrealized interest rate hedging gain (loss)
|
|
$
|
1.0
|
|
|
$
|
(0.4
|
)
|
|
$
|
2.6
|
|
Actuarial loss
|
|
(4.9
|
)
|
|
(3.2
|
)
|
|
(4.5
|
)
|
Reclassification adjustment for interest expense included in net income (loss)
|
|
—
|
|
|
0.5
|
|
|
0.4
|
|
Amortization of defined benefit pension items reclassified to net periodic pension cost:
|
|
|
|
|
|
|
Net loss*
|
|
4.6
|
|
|
4.3
|
|
|
7.5
|
|
Prior service credit*
|
|
(0.7
|
)
|
|
(0.8
|
)
|
|
(1.0
|
)
|
Curtailment (gain)/loss*
|
|
(0.6
|
)
|
|
(0.3
|
)
|
|
(1.5
|
)
|
Settlement (gain)/loss*
|
|
0.1
|
|
|
1.4
|
|
|
—
|
|
Total before income tax
|
|
(0.5
|
)
|
|
1.5
|
|
|
3.5
|
|
Income taxes
|
|
—
|
|
|
(0.6
|
)
|
|
(1.4
|
)
|
Other comprehensive income (loss), net of tax
|
|
$
|
(0.5
|
)
|
|
$
|
0.9
|
|
|
$
|
2.1
|
|
* This accumulated other comprehensive income (loss) component is included in the computation of net periodic pension cost (see Note 11 for additional details).
Self-Insured Liabilities:
The Company is self-insured for certain losses that include, but are not limited to, employee health, workers’ compensation, general liability, real and personal property, and real estate construction warranty and defect claims. When feasible, the Company obtains third-party insurance coverage to limit its exposure to these claims. When estimating its self-insured liabilities, the Company considers a number of factors, including historical claims experience, demographic factors, and valuations provided by independent third-parties.
Interest and other income (expense),
net
is primarily comprised of a net gain on the sale of the Company's joint venture interest in the Ka Milo real estate development-for-sale project, the non-service cost components of pension and postretirement benefit expense and interest income. For the
years ended December 31, 2018, 2017 and 2016
,
Interest and other income (expense), net
included the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Pension and postretirement benefit (expense)
|
|
$
|
(3.0
|
)
|
|
$
|
(3.8
|
)
|
|
$
|
(4.2
|
)
|
Interest income
|
|
1.5
|
|
|
5.3
|
|
|
1.8
|
|
Sale of Ka Milo joint venture interest
|
|
4.2
|
|
|
—
|
|
|
—
|
|
Other income (expense)
|
|
0.1
|
|
|
0.6
|
|
|
0.7
|
|
Interest and other income (expense), net
|
|
$
|
2.8
|
|
|
$
|
2.1
|
|
|
$
|
(1.7
|
)
|
Recently adopted accounting pronouncements
In May 2014, Financial Accounting Standards Board (the "FASB") issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
("ASU 2014-09") to provide guidance for revenue recognition and has superseded the revenue recognition requirements in FASB Accounting Standards Codification ("ASC") 605, as well as most industry-specific guidance. Under ASU 2014-09, revenue is recognized when a customer obtains control of the promised goods or services in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services.
The Company adopted the provisions of ASU 2014-09 as of January 1, 2018 using the modified retrospective transition method and applied ASU 2014-09 to those contracts that were not completed as of January 1, 2018 and whose revenue was historically accounted for under ASC 605. The cumulative impact of the adoption was a net reduction to
Other assets
and
Distributions in excess of accumulated earnings
of
$1.4 million
at January 1, 2018.
In accordance with ASU 2014-09, the impact of adoption to our consolidated balance sheet was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
|
Impact of adoption
|
|
Balance at January 1, 2018
|
Other Assets
|
$
|
56.2
|
|
|
$
|
(1.4
|
)
|
|
$
|
54.8
|
|
(Distribution in excess of accumulated earnings) Earnings surplus
|
$
|
(473.0
|
)
|
|
$
|
(1.4
|
)
|
|
$
|
(474.4
|
)
|
The adoption of ASU 2014-09 did not significantly impact the Company's revenue recognition treatment for its Materials & Construction business segment due to the short term duration of the Company's construction contracts.
The Company's Commercial Real Estate business segment recognizes its revenue under the accounting framework of ASC 840,
Leases
and is therefore excluded from the scope of ASU 2014-09.
In May 2017, the FASB issued ASU No. 2017-09,
Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting
. The guidance clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The adoption of this standard did not have an impact on the Company's financial position or results of operations.
On December 22, 2017, the Tax Cuts and Jobs Act (the "Act") of 2017 was signed into law. The Act made significant changes, including lowering the U.S. corporate tax rate from 35% to 21% effective January 1, 2018. As the Company only operates in the U.S., the international provisions of the Act are not currently relevant to the Company.
ASC 740,
Income Taxes
, requires companies to recognize the effect of the tax law changes in the period of enactment. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118") which allowed companies to record provisional amounts during a measurement period not extending beyond one year from the Act's enactment date. As of December 31, 2017, the Company recorded a provisional amount of
$3.0 million
due to a remeasurement of its deferred tax assets and liabilities. As of December 31, 2018, the Company has not made a material adjustment to the provisional amount and has completed the accounting for all impacts of the Act.
In February 2018, the FASB issued ASU 2018-02,
Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Act. The amendments allow the Company to reclassify the stranded tax effects resulting from the Act, the difference between the historical federal corporate income tax rate of 35% and the newly enacted corporate income tax rate of 21%. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018 with early adoption permitted, including adoption in any interim period. The Company adopted the standard effective December 31, 2018, and reclassified
$9.1 million
of stranded tax effects from
Accumulated other comprehensive income (loss)
to
Distributions in excess of accumulated earnings
related to the Company's pension and post-retirement liability and interest rate swap.
Recently issued accounting pronouncements
In June 2016, the FASB issued ASU No. 2016-13,
Measurement of Credit Losses on Financial Instruments
which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. The guidance replaces the existing incurred loss impairment model with an expected loss methodology, which will result in more timely recognition of credit losses. This ASU is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements and footnote disclosures.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
(Topic 842)
("ASU 2016-02"). ASU 2016-02 requires the identification of arrangements that should be accounted for as leases by lessees. In general, lease arrangements exceeding a twelve month term must now be recognized as assets and liabilities on the balance sheet of the lessee. Under ASU 2016-02, a right-of-use ("ROU") asset and lease obligation will be recorded for all leases, whether operating or financing, while the income statement will reflect lease expense for operating leases and amortization/interest expense for financing leases. The balance sheet amount recorded for existing leases at the date of adoption of ASU 2016-02 must be calculated using the applicable incremental borrowing rate at the date of adoption. This ASU is effective for financial statements issued for fiscal years beginning after December 15, 2018. The FASB has subsequently issued other related ASU, which amend ASU 2016-02 to provide transition practical expedients that an entity may elect to apply and other guidance. In July 2018, the FASB issued ASU 2018-11,
Leases: Targeted Improvements
, which provides companies with an additional transition option that would permit the application of ASU 2016-02 as of the adoption
date rather than to all periods presented. The Company expects to use this transition option upon adoption of the new standard on January 1, 2019 and use the effective date as the date of initial application. Consequently financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019.
Under ASU 2016-02, the guidance allows lessors to make an accounting policy election, by class of underlying asset, to not separate non-lease components from lease components if certain requirements are met but requires lessors to recognize real estate tax expense and recovery income for tenants that self-pay real estate taxes. In addition, initial direct costs for both lessees and lessors would include only those costs that are incremental to the arrangement and would not have been incurred if the lease had not been obtained. The new standard provides a number of optional practical expedients in transition. The Company expects to elect the 'package of practical expedients,' which permits the Company to not reassess under the new standard prior conclusions about lease identification, lease classification and initial direct costs.
The Company has finalized its assessment of the inventory of its leases that will be impacted by the adoption. While the Company does not expect the adoption of the new guidance to have a significant change in the accounting treatment and disclosures of the Company's leases, the Company expects to recognize new ROU assets and lease liabilities on the consolidated balance sheet for equipment, office, and real estate leases and to provide new disclosures about the Company's leasing activities as a lessee. On adoption, the Company currently expects to recognize additional operating liabilities of approximately
$31.0 million
, with corresponding ROU assets of the same amount based on the present value of the remaining minimum rental payments under current leasing standards for existing operating leases. For leases with a term of 12 months or less, the Company expects to make an accounting policy election by class of underlying asset to not recognize lease liabilities and lease assets. For leases where it is the lessor, the Company expects that accounting for lease components will largely be unchanged from existing GAAP and to elect the practical expedient to not separate non-lease components from lease components. The Company does not expect the guidance regarding the capitalization of leasing costs to have a significant change in its leasing activities as a lessor between now and adoption.
In August 2017, the FASB issued ASU 2017-12,
Targeted Improvements to Accounting for Hedging Activities.
The guidance amends the hedge accounting model in ASC 815 to enable entities to better portray the economics of their risk management activities in the financial statements and enhance the transparency and understandability of hedge results. The amendments expand an entity's ability to hedge nonfinancial and financial risk components and reduce complexity in fair value hedges of interest rate risk. This ASU eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted in any interim period or fiscal year before the effective date. For cash flow and net investment hedges existing at the date of adoption, entities will apply the new guidance using a modified retrospective approach (i.e., with a cumulative effect adjustment recorded to the opening balance of retained earnings as of the initial application date). The guidance provides transition relief to make it easier for entities to apply certain amendments to existing hedges (including fair value hedges) where the hedge documentation needs to be modified. The presentation and disclosure requirements apply prospectively. The Company is currently assessing the impact that adopting this new standard will have on its consolidated financial statements and footnote disclosures.
In June 2018, the FASB issued ASU 2018-07,
Improvements to Nonemployee Share-Based Payment Accounting
. The guidance expands the scope of ASC 718 to include share-based payment transactions with the exception of specific guidance related to the attribution of compensation cost. The guidance also clarifies that any share-based payment awards granted in conjunction with selling goods or services to customers should be evaluated under ASC 606. This ASU is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. The Company is currently assessing the impact that adopting this new standard will have on its consolidated financial statements and footnote disclosures. The Company is currently assessing the impact that adopting this new standard will have on its consolidated financial statements and footnote disclosures.
In August 2018, the FASB issued ASU 2018-13,
Changes to the Disclosure Requirements for Fair Value Measurement
. The guidance amends and removes several disclosure requirements including the valuation processes for Level 3 fair value measurements. This ASU also modifies some disclosure requirements and requires additional disclosures for changes in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements and requires the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This ASU is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company is currently assessing the impact that adopting this new standard will have on its consolidated financial statements and footnote disclosures.
In August 2018, the FASB issued ASU 2018-14,
Changes to the Disclosure Requirements for Defined Benefit Plans
. The guidance clarifies current disclosures and removes several disclosure requirements including accumulated other comprehensive income expected to be recognized over the next fiscal year and amount and timing of plan assets expected to be returned to the employer. This ASU also requires additional disclosures for the weighted-average interest crediting rates for cash balance plans
and explanations for significant gains and losses related to changes in the benefit plan obligation. This ASU is effective for fiscal years beginning after December 15, 2020. The Company is currently assessing the impact that adopting this new standard will have on its consolidated financial statements and footnote disclosures.
In October 2018, the FASB issued ASU 2018-17,
Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities
. The guidance changes the guidance for determining whether a decision-making fee is a variable interest. Under the new ASU, indirect interests held through related parties under common control will now be considered on a proportional basis when determining whether fees paid to decision makers and service providers are variable interests. Such indirect interests were previously treated the same as direct interests. This ASU is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company is currently assessing the impact that adopting this new standard will have on its consolidated financial statements and footnote disclosures.
3. RELATED PARTY TRANSACTIONS
Construction Contracts and Material Sales.
The Company entered into contracts in the ordinary course of business, as a supplier, with affiliates that are members in entities in which the Company also is a member. Revenues earned from transactions with affiliates were
$16.6 million
,
$21.1 million
, and
$12.0 million
for the
years ended December 31, 2018, 2017 and 2016
, respectively. Receivables from these affiliates were
$2.2 million
and
$2.9 million
at
December 31, 2018
and
2017
. Amounts due to these affiliates were
$0.6 million
and
immaterial
at
December 31, 2018
and
2017
, respectively.
Commercial Real Estate.
The Company entered into contracts in the ordinary course of business, as a lessor of property, with unconsolidated affiliates in which the Company has an interest, as well as with certain entities that are partially owned by a director of the Company. Revenues earned from these transactions were
$4.3 million
,
$5.2 million
and
$6.1 million
for the
years ended December 31, 2018, 2017 and 2016
, respectively. Receivables from these affiliates were
immaterial
at
December 31, 2018
and
2017
, respectively.
Land Operations.
During the
year ended December 31, 2018
, the Company recorded
$1.1 million
in developer fee revenues related to management and administrative services provided to certain unconsolidated investments in affiliates and interest earned on notes receivable from related parties. Developer fee revenues recorded for the years ended
2017
, and
2016
were
$2.4 million
and
$4.6 million
, respectively. Receivables from these affiliates were
immaterial
at
December 31, 2018
and
2017
.
During the
year ended December 31, 2018
, the Company completed the acquisition of
five
commercial units at The Collection high-rise residential condominium project on Oahu from its joint venture partners for
$6.9 million
paid in cash.
During the
year ended December 31, 2017
, the Company extended a
five
-year construction loan secured by a mortgage on real property to one of its joint ventures. Receivables from this affiliate were
$13.5 million
and
$6.8 million
at
December 31, 2018
and
2017
, respectively.
4. DISCONTINUED OPERATIONS
In December
2016
, the Company completed its final sugar harvest and ceased its sugar operations.
The historical results of operations have been presented as discontinued operations in the consolidated financial statements and prior periods have been recast.
The revenue, operating income (loss), gain on asset dispositions, income tax benefit (expense) and after-tax effects of these transactions for the
years ended December 31, 2018, 2017 and 2016
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Sugar operations revenue
|
|
$
|
—
|
|
|
$
|
22.9
|
|
|
$
|
98.4
|
|
Cost of discontinued sugar operations
|
|
—
|
|
|
22.5
|
|
|
87.5
|
|
Operating income (loss) from sugar operations
|
|
—
|
|
|
0.4
|
|
|
10.9
|
|
Sugar operations cessation costs
|
|
(0.6
|
)
|
|
(2.7
|
)
|
|
(77.6
|
)
|
Gain (loss) on asset dispositions
|
|
—
|
|
|
6.0
|
|
|
—
|
|
Income (loss) from discontinued operations before income taxes
|
|
(0.6
|
)
|
|
3.7
|
|
|
(66.7
|
)
|
Income tax benefit (expense)
|
|
—
|
|
|
(1.3
|
)
|
|
25.6
|
|
Income (loss) from discontinued operations, net of income taxes
|
|
$
|
(0.6
|
)
|
|
$
|
2.4
|
|
|
$
|
(41.1
|
)
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
(0.01
|
)
|
|
$
|
0.05
|
|
|
$
|
(0.84
|
)
|
Diluted earnings (loss) per share
|
|
$
|
(0.01
|
)
|
|
$
|
0.04
|
|
|
$
|
(0.83
|
)
|
There was no depreciation and amortization related to discontinued operations for the
years ended December 31, 2018 and 2017
. Depreciation and amortization related to discontinued operations was
$70.9 million
for the
year ended December 31, 2016
.
5. INVESTMENTS IN AFFILIATES
The Company's investments in affiliates consist principally of equity investments in limited liability companies in which the Company has the ability to exercise significant influence over the operating and financial policies of these investments. Accordingly, the Company accounts for its investments using the equity method of accounting. The Company’s investments in affiliates totaled
$171.4 million
and
$401.7 million
at December 31, 2018 and 2017
, respectively. The amounts of the Company’s investment
at December 31, 2018 and 2017
that represent undistributed earnings of investments in affiliates were approximately
$7.8 million
and
$8.2 million
, respectively. Dividends and distributions from unconsolidated affiliates totaled
$51.1 million
in
2018
,
$10.4 million
in
2017
and
$71.6 million
in
2016
.
Operating results include the Company's proportionate share of net income (loss) from its equity method investments. A summary of combined financial information related to the Company's equity method investments
at December 31, 2018 and 2017
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Current assets
|
|
$
|
71.1
|
|
|
$
|
153.1
|
|
Non-current assets
|
|
755.8
|
|
|
754.9
|
|
Total assets
|
|
$
|
826.9
|
|
|
$
|
908.0
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
26.8
|
|
|
$
|
52.5
|
|
Non-current liabilities
|
|
149.2
|
|
|
192.8
|
|
Total liabilities
|
|
$
|
176.0
|
|
|
$
|
245.3
|
|
A summary of the net income (loss) information related to the Company's equity method investments for the
years ended December 31, 2018, 2017 and 2016
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Revenues
|
|
$
|
243.6
|
|
|
$
|
200.5
|
|
|
$
|
489.3
|
|
Operating costs and expenses
|
|
209.7
|
|
|
166.3
|
|
|
449.8
|
|
Gross profit (loss)
|
|
$
|
33.9
|
|
|
$
|
34.2
|
|
|
$
|
39.5
|
|
Income (loss) from Continuing Operations*
|
|
$
|
17.4
|
|
|
$
|
16.0
|
|
|
$
|
31.7
|
|
Net Income (loss)*
|
|
$
|
16.5
|
|
|
$
|
15.5
|
|
|
$
|
31.7
|
|
* Includes earnings from equity method investments held by the investee.
|
|
|
During the fourth quarter of 2018, the Company determined that its investment in Kukui`ula was other-than-temporarily impaired due to changing its strategy and no longer intending to hold its investment through the duration of the project. As a result, the Company estimated the fair value of its investment in Kukui`ula using a discounted cash flow model and recorded a non-cash impairment charge of
$186.8 million
to reduce the carrying value of the investment. The carrying value of the Company's investment in Kukui`ula, which includes capital contributed by A&B to the joint venture and the value of land initially contributed, net of joint venture earnings and losses and impairments was
$115.4 million
and
$302.6 million
at December 31, 2018 and 2017
, respectively. The total capital contributed to the joint venture by the Company as a percent of total committed was approximately
60%
at December 31, 2018
. The Company does not have a controlling financial interest in the joint venture, but exercises significant influence over the operating and financial policies of the venture, and therefore, accounts for its investment using the equity method. Due to the complex nature of cash distributions to the members, net income of the joint venture is allocated to the members, including the Company, using the Hypothetical Liquidation at Book Value (“HLBV”) method. Under the HLBV method, joint venture income or loss is allocated to the members based on the period change in each member’s claim on the book value of net assets of the venture, excluding capital contributions and distributions made during the period.
In 2014, the Company also contributed land, pre-paid development assets and cash to The Collection LLC, a joint venture formed to develop a
464
-unit high-rise residential condominium project on Oahu, consisting of a
396
-saleable unit high-rise condominium tower,
14
three-bedroom townhomes, and a
54
-unit mid-rise building. In addition to the Company's initial contribution, the Company also secured equity partners that contributed an additional
$16.8 million
in cash. The Company's total agreed upon contribution, which includes the land and pre-paid development assets already contributed, was
$50.3 million
. The Company's investment
at December 31, 2018 and 2017
was
$0.8 million
and
$18.5 million
, respectively. The Company accounts for its investment under the equity method.
At December 31, 2018
, the joint venture has closed out on the sales of all tower units, loft units and townhomes in the project.
In 2016, the Company invested
$15.4 million
in Waihonu, an entity that operates
two
photovoltaic facilities with a combined capacity of
6.5
megawatts in Mililani, Oahu. The Company does not have a controlling financial interest in Waihonu, but exercises significant influence over the operating and financial policies of the venture, and therefore, accounts for its investment under the equity method. Due to the complex nature of cash distributions, net income of the joint venture is allocated to the Company using the HLBV method, as described in the above paragraph. During the
years ended December 31, 2018, 2017 and 2016
, the Company recorded a net, non-cash reduction of
$0.5 million
,
$2.4 million
, and
$8.7 million
, respectively, in
Reductions in solar investments, net
on the consolidated statement of operations
.
At December 31, 2018 and 2017
, the Company's investment was
$0.9 million
and
$1.4 million
, respectively.
The Company also has investments in various other joint ventures that operate or develop real estate and joint ventures that engage in materials and construction-related activities and renewable energy. The Company does not have a controlling financial interest, but has the ability to exercise significant influence over the operating and financial policies of these joint ventures and, accordingly, accounts for its investments in these ventures using the equity method of accounting.
6. REVENUE AND CONTRACT BALANCES
The Company recognizes revenue when control of promised goods or services is transferred to the customer at an amount that reflects the consideration which the Company expects to be entitled to in exchange for those goods or services.
The Company disaggregates revenue from contracts with customers by revenue type as the Company believes it best depicts how the nature, amount, timing and uncertainty of the Company's revenue and cash flows are affected by economic factors. Revenue by type for the
year ended December 31, 2018
was as follows (in millions):
|
|
|
|
|
|
|
|
2018
|
Revenues:
|
|
|
Commercial Real Estate
1
|
|
$
|
140.3
|
|
Land Operations:
|
|
|
Development sales revenue
|
|
54.3
|
|
Unimproved/other property sales revenue
|
|
210.5
|
|
Other operating revenue
|
|
24.7
|
|
Total Land Operations
|
|
289.5
|
|
Materials & Construction
2
|
|
214.6
|
|
Total revenues
|
|
$
|
644.4
|
|
1
As discussed in Note 2, Commercial Real Estate revenue is not in scope under ASU 2014-09 however is presented here for completeness.
2
Materials & Construction included
$18.5 million
of revenue not in scope under ASU 2014-09 for the
year ended December 31, 2018
.
The total amount of contract consideration allocated to either wholly unsatisfied or partially satisfied performance obligations was
$128.7 million
at December 31, 2018
. The Company expects to recognize as revenue approximately
60%
to
65%
of the remaining contract consideration allocated to either wholly unsatisfied or partially satisfied performance obligations in 2019, with the remaining recognized thereafter.
The Company has elected the practical expedient provided in ASU 2014-09 to not disclose information about remaining performance obligations that have original expected durations of one year or less. In addition, the Company has elected the transition practical expedient in ASU 2014-09 to not disclose the amount of the transaction price allocated to the remaining performance obligations and an explanation of when the Company expects to recognize that amount as revenue for the
year ended December 31, 2018
. The Company has elected these practical expedients as the majority of its wholly, or partially, unfulfilled performance obligations are expected to be recognized in less than one year
.
Timing of revenue recognition may differ from the timing of invoicing to customers.
Costs and estimated earnings in excess of billings represent amounts earned and reimbursable under contracts but have a conditional right for billing and payment such as achievement of milestones or completion of the project. When events or conditions indicate that it is probable that the amounts outstanding become unbillable, the transaction price and associated contract asset is reduced.
Billings in excess of costs and estimated earnings are billings to customers on contracts in advance of work performed, including advance payments negotiated as a contract condition. Generally, unearned project-related costs will be earned over the next twelve months.
The following table provides information about receivables, contract assets and contract liabilities from contracts with customers
at December 31, 2018 and 2017
:
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2018
|
|
2017
|
Accounts receivable, net
|
|
$
|
49.6
|
|
|
$
|
34.1
|
|
Contracts retention
|
|
11.6
|
|
|
13.2
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
9.2
|
|
|
20.2
|
|
Current deferred revenue
|
|
0.1
|
|
|
0.9
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
5.9
|
|
|
5.7
|
|
Variable consideration
(1)
|
|
62.0
|
|
|
—
|
|
Other long term deferred revenue
|
|
1.1
|
|
|
2.5
|
|
(1)
Variable consideration recorded in connection with the disposal of agricultural land on Maui. See Note 21.
For the
year ended December 31, 2018
, the Company recognized revenue of approximately
$4.2 million
related to the Company's contract liabilities reported
at December 31, 2017
. The amount of revenue recognized from performance obligations satisfied in prior periods was not material.
Information related to uncompleted contracts as of December 31,
2018
and
2017
is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
2018
|
|
2017
|
Costs incurred on uncompleted contracts
|
|
$
|
218.0
|
|
|
$
|
137.5
|
|
Estimated earnings
|
|
30.3
|
|
|
35.8
|
|
Subtotal
|
|
248.3
|
|
|
173.3
|
|
Billings to date
|
|
(245.0
|
)
|
|
(158.8
|
)
|
Total
|
|
$
|
3.3
|
|
|
$
|
14.5
|
|
Property on the consolidated balance sheets
at December 31, 2018 and 2017
includes the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Buildings
|
|
$
|
604.6
|
|
|
$
|
471.6
|
|
Land
|
|
680.5
|
|
|
613.3
|
|
Machinery and equipment
|
|
68.3
|
|
|
74.7
|
|
Asphalt plants and quarry assets
|
|
49.6
|
|
|
80.2
|
|
Water, power and sewer systems
|
|
37.1
|
|
|
109.9
|
|
Other property improvements
|
|
74.1
|
|
|
70.5
|
|
Subtotal
|
|
1,514.2
|
|
|
1,420.2
|
|
Accumulated depreciation
|
|
(192.2
|
)
|
|
(272.7
|
)
|
Property - net
|
|
$
|
1,322.0
|
|
|
$
|
1,147.5
|
|
Depreciation expense for the
years ended December 31, 2018, 2017 and 2016
was
$32.5 million
,
$32.3 million
and
$106.1 million
, respectively.
8. NOTES PAYABLE AND LONG-TERM DEBT
At December 31, 2018 and 2017
, notes payable and long-term debt consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Outstanding
|
Debt
|
|
Stated Rate (%)
|
|
Maturity Date
|
|
2018
|
|
2017
|
Secured:
|
|
|
|
|
|
|
|
|
GLP Asphalt Plant
|
|
( a )
|
|
2021
|
|
—
|
|
|
$
|
4.8
|
|
Kailua Town Center
|
|
( b )
|
|
2021
|
|
$
|
10.5
|
|
|
$
|
10.8
|
|
Kailua Town Center #2
|
|
3.15%
|
|
2021
|
|
4.7
|
|
|
4.9
|
|
Laulani Village
|
|
3.93%
|
|
2024
|
|
62.0
|
|
|
—
|
|
Pearl Highlands
|
|
4.15%
|
|
2024
|
|
85.3
|
|
|
87.0
|
|
Manoa Marketplace
|
|
( c )
|
|
2029
|
|
60.0
|
|
|
60.0
|
|
Subtotal
|
|
|
|
|
|
$
|
222.5
|
|
|
$
|
167.5
|
|
Unsecured:
|
|
|
|
|
|
|
|
|
|
|
Term Loan 1
|
|
2.00%
|
|
2018
|
|
—
|
|
|
0.1
|
|
Term Loan 2
|
|
3.31%
|
|
2018
|
|
—
|
|
|
1.0
|
|
Term Loan 3
|
|
5.19%
|
|
2019
|
|
2.3
|
|
|
4.4
|
|
Series D Note
|
|
6.90%
|
|
2020
|
|
32.5
|
|
|
48.8
|
|
Term Loan 4
|
|
( d )
|
|
2021
|
|
9.4
|
|
|
9.4
|
|
Bank Syndicated Loan
|
|
( e )
|
|
2023
|
|
50.0
|
|
|
—
|
|
Series A Note
|
|
5.73%
|
|
2024
|
|
28.5
|
|
|
28.5
|
|
Series E Note
|
|
3.90%
|
|
2024
|
|
—
|
|
|
62.6
|
|
Series J Note
|
|
4.66%
|
|
2025
|
|
10.0
|
|
|
—
|
|
Series B Note
|
|
5.55%
|
|
2026
|
|
46.0
|
|
|
46.0
|
|
Series C Note
|
|
5.56%
|
|
2026
|
|
24.0
|
|
|
25.0
|
|
Series F Note
|
|
4.35%
|
|
2026
|
|
22.0
|
|
|
22.0
|
|
Series H Note
|
|
4.04%
|
|
2026
|
|
50.0
|
|
|
50.0
|
|
Series K Note
|
|
4.81%
|
|
2027
|
|
34.5
|
|
|
—
|
|
Series G Note
|
|
3.88%
|
|
2027
|
|
42.5
|
|
|
50.0
|
|
Series L Note
|
|
4.89%
|
|
2028
|
|
18.0
|
|
|
—
|
|
Series I Note
|
|
4.16%
|
|
2028
|
|
25.0
|
|
|
25.0
|
|
Term Loan 5
|
|
4.30%
|
|
2029
|
|
25.0
|
|
|
25.0
|
|
Subtotal
|
|
|
|
|
|
$
|
419.7
|
|
|
$
|
397.8
|
|
Revolving Credit Facilities:
|
|
|
|
|
|
|
|
|
|
|
GLP Asphalt Revolving Credit Facility
|
|
( f )
|
|
2020
|
|
0.4
|
|
|
0.5
|
|
Revolving credit facility
|
|
( g )
|
|
2022
|
|
136.6
|
|
|
66.0
|
|
Subtotal
|
|
|
|
|
|
137.0
|
|
|
66.5
|
|
Total Debt (contractual)
|
|
|
|
|
|
$
|
779.2
|
|
|
$
|
631.8
|
|
Unamortized debt premium (discount)
|
|
|
|
|
|
(0.2
|
)
|
|
0.5
|
|
Unamortized debt issuance costs
|
|
|
|
|
|
(0.9
|
)
|
|
(1.1
|
)
|
Total debt (carrying value)
|
|
|
|
|
|
778.1
|
|
|
631.2
|
|
Less current portion
|
|
|
|
|
|
(39.0
|
)
|
|
(46.0
|
)
|
Long-term debt
|
|
|
|
|
|
$
|
739.1
|
|
|
$
|
585.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Loan has a stated interest rate of LIBOR plus 1.00%.
|
(b) Loan has a stated interest rate of LIBOR plus 1.50% and is swapped through maturity to a 5.95% fixed rate.
|
(c) Loan has a stated interest rate of LIBOR plus 1.35% and is swapped through maturity to a 3.14% fixed rate.
|
(d) Loan has a stated interest rate of LIBOR plus 2.00% and is secured by a letter of credit.
|
(e) Loan has a stated interest rate of LIBOR plus 1.80%, based on pricing grid.
|
(f) Loan has a stated interest rate of LIBOR plus 1.25%.
|
(g) Loan has a stated interest rate of LIBOR plus 1.85%, based on pricing grid.
|
Revolving Credit Facilities:
The Company had a revolving senior credit facility that provided for an aggregate
$350.0 million
,
5
-year unsecured commitment ("Revolving Credit Facility"), with an uncommitted
$100.0 million
increase option. The Revolving Credit Facility also provides for a
$100.0 million
sub-limit for the issuance of standby and commercial letters of credit and an
$80.0 million
sub-limit for swing line loans. Amounts drawn under the facilities bear interest at a stated rate, as defined,
plus a margin that is determined based on a pricing grid using the ratio of debt to total adjusted asset value, as defined. The agreement contains certain restrictive covenants, the most significant of which requires the maintenance of minimum shareholders’ equity levels, minimum EBITDA to fixed charges ratio, maximum debt to total assets ratio, minimum unencumbered income-producing asset value to unencumbered debt ratio, and limitations on priority debt, as defined in the agreement. In December 2015, the Revolving Credit Facility was amended to extend the maturity date to December 2020.
In September 2017, the Company entered into a Second Amended and Restated Credit Agreement ("A&B Revolver") with Bank of America N.A., as administrative agent, First Hawaiian Bank, and other lenders party thereto, which amended and restated its existing
$350.0 million
committed Revolving Credit Facility. The A&B Revolver increased the total revolving commitments to
$450.0 million
, extended the term of the Revolving Credit Facility to September 15,
2022
, amended certain covenants (see below), and reduced the interest rates and fees charged under the Revolving Credit Facility. All other terms of the Revolving Credit Facility remain substantially unchanged.
At
December 31, 2018
, the Company had
$136.6 million
of revolving credit borrowings outstanding,
$11.3 million
in letters of credit had been issued against the facility, and
$302.1 million
remained available.
At December 31, 2017, the Company had, at one of its subsidiaries, GLP, a
$30.0 million
line of credit with a maturity date in October 2018. The credit line is collateralized by the subsidiary's accounts receivable, inventory and equipment and may only be used for asphalt purchase. The Company and the noncontrolling interest holders are guarantors, on a several basis, for their pro rata shares (based on membership interests) of borrowings under the line of credit. In September 2018, GLP entered into a Third Amended Credit Agreement with Wells Fargo Bank, National Association, which amended and extended its existing
$30 million
committed revolving credit facility ("GLP Asphalt Revolving Credit Facility"). The GLP Asphalt Revolving Credit Facility maturity was extended to October 5,
2020
. Additionally, the interest rate was reduced by
25 basis points
and a fee of
20 basis points
on the unused amount of the GLP Asphalt Revolving Credit Facility has been added. All other terms of the GLP Asphalt Revolving Credit Facility remain substantially unchanged.
Unsecured Term Loans:
On September 24, 2013, KDC LLC ("KDC"), a wholly owned subsidiary of A&B and a
50%
member of Kukui`ula Village LLC ("Village"), entered into an Amended and Restated Limited Liability Company Agreement of Kukui`ula Village ("Agreement") with DMB Kukui`ula Village LLC, a Delaware limited liability company, as a member, and KKV Management LLC, a Hawai`i limited liability company, as the manager and a member. Under the Agreement, KDC assumed control of Village and accordingly, A&B consolidated Village's assets and liabilities at fair value, which including a
$9.4 million
loan ("Term Loan 4") secured by a letter of credit. The Term Loan 4 is interest only and bears interest at LIBOR plus
2.0%
. At
December 31, 2018
, the outstanding balance of the Term Loan 4 was
$9.4 million
.
In December 2015, the Company entered into an agreement (the "Prudential Agreement") with Prudential Investment Management, Inc. and its affiliates (collectively, "Prudential") for an unsecured note purchase and private shelf facility that enables the Company to issue notes in an aggregate amount up to
$450.0 million
(“Prudential Shelf Facility”), less the sum of all principal amounts then outstanding on any notes issued by the Company or any of its subsidiaries to Prudential and the amounts of any notes that are committed under the Prudential Agreement. The Prudential Agreement, as amended, expired in December 2018 and contained certain restrictive covenants that are substantially the same as the covenants contained in the Revolving Credit Facility, as amended. Borrowings under the uncommitted shelf facility bear interest at rates that are determined at the time of the borrowing.
Changes to Revolver Amendment and Pru Amendment Covenants
:
The principal amendments under the A&B Revolver and the Pru Amendment are as follows:
|
|
•
|
An increase in the maximum ratio of debt to total adjusted asset value from
0.5
:
1.0
to
0.6
:
1.0
.
|
|
|
•
|
An increase in the aggregate maximum amount of priority debt at any time from
20%
to
25%
.
|
|
|
•
|
Allows the Company to consummate the holding company merger to adopt certain governance changes and facilitate the Company's ongoing compliance with REIT requirements.
|
|
|
•
|
Sets the minimum shareholders' equity amount to be
$850.6 million
plus
75%
of the net proceeds received from equity issuances, less non-recurring costs related to the REIT conversion, among other additions and subtractions.
|
|
|
•
|
Allows for the payment of minimum dividends required to maintain REIT status and other dividends in any amount so long as no event of default shall then exist or would exist after giving effect to such dividends.
|
As a result of the special distribution that was declared on November 16, 2017 and settled on January 23, 2018 related to the Company's REIT conversion (See Note 13), the Company received waivers related to the impact of the Special Distribution (as defined below) on the minimum shareholder’s equity computation for its Revolving Credit Facility and its unsecured term loan agreements.
In September 2017, the Company entered into an amendment (the "Pru Amendment") of its Second Amended and Restated Note Purchase and Private Shelf Agreement, dated as of December 10, 2015, which amended certain covenants (see below). Additionally, the Pru Amendment included a provision for a contingent incremental interest rate increase of
20 basis points
on all outstanding notes unless, following the Company's planned earnings and profits purge, the maximum ratio of debt to total adjusted asset value is equal to or less than
0.35
to
1.00
with respect to any fiscal quarter ending on or before September 30, 2018. The contingent interest rate adjustment, if triggered, will continue until such time that the Company's ratio of debt to total adjusted asset value declines to
0.35
to
1.00
or below. If the contingent interest rate adjustment is not triggered on September 30, 2018, or if triggered, but subsequently the Company's ratio of debt to total adjusted asset value declines to
0.35
to
1.00
or below, the contingent interest rate adjustment shall have no further force or effect. In October 2018 the interest rates for all Prudential Notes and the AIG Note increased by
20 basis points
based on a leverage based ratio maximum requirement. The
20 basis point
increase shall be in effect until the leverage based ratio hurdle has been achieved.
In October 2017, the Company entered into a rate lock commitment to draw
$50.0 million
under its Prudential Shelf Facility, pursuant to which the Company drew
$50.0 million
in November 2017. The note bears interest at
4.04%
and matures on November 21,
2026
. Interest only is paid semi-annually and the principal balance is due at maturity.
In October 2017, the Company entered into a second rate lock commitment to draw
$25.0 million
under its Prudential Shelf Facility, pursuant to which the Company drew
$25.0 million
in December 2017. The note bears interest at
4.16%
and matures on December 8,
2028
. Interest only is paid semi-annually and the principal balance is due at maturity.
In November 2017, the Company entered into a rate lock commitment to draw
$25.0 million
under its Note Purchase and Private Shelf Agreement with AIG Asset Management (U.S.), LLC. Under the commitment, the Company drew
$25.0 million
in December 2017. The note bears interest at
4.30%
and matures on December 20,
2029
. Interest only is paid semi-annually and the principal balance is due at maturity.
In February 2018, the Company entered into an agreement with Wells Fargo Bank, National Association and a syndicate of other financial institutions that provides for a
$50.0 million
term loan facility ("Wells Fargo Term Facility" or "Bank Syndicated Loan"). The Company also drew
$50.0 million
under the Wells Fargo Term Facility in February 2018 and used such term loan proceeds to repay amounts that were borrowed under the Company's Revolving Credit Facility. Borrowings under the Wells Fargo Term Facility bear interest at a stated rate, as defined, plus a margin that is determined using a leverage based pricing grid.
In April 2018, the Company completed an agreement with Prudential to refinance its previously existing term loan of
$62.5 million
that bore interest at
3.90%
and matured in 2024, which resulted in three separate term loans:
$10.0 million
at a fixed interest rate of
4.66%
maturing in
2025
;
$34.5 million
at a fixed interest rate of
4.81%
maturing in
2027
; and
$18.0 million
at a fixed interest rate of
4.89%
maturing in
2028
.
As a result of the special distribution that was declared on November 16, 2017 and settled on January 23, 2018 related to the Company's REIT conversion (See Note 13), the Company received waivers related to the impact of the Special Distribution (as defined below) on the minimum shareholder’s equity computation for its Revolving Credit Facility and its unsecured term loan agreements.
Real Estate
Secured Term Debt:
On December 20, 2013, the Company consummated the acquisition of the Kailua Portfolio, a collection of retail assets on Oahu. In connection with the acquisition of the Kailua Portfolio, the Company assumed a
$12.0 million
mortgage note, which matures in September
2021
, and an interest rate swap that effectively converts the floating rate debt to a fixed rate of
5.95%
. At
December 31, 2018
, the balance of the mortgage note was
$10.5 million
. The Company also secured a
$5.0 million
second mortgage on the Kailua Portfolio during the first quarter of 2017, which bears interest at
3.15%
and matures in
2021
. The second mortgage has an outstanding balance at
December 31, 2018
of
$4.7 million
.
On September 17, 2013, the Company closed the purchase of Pearl Highlands Center, a
415,400
-square-foot, fee simple retail center in Pearl City, Oahu (the “Property”), for
$82.2 million
in cash and the assumption of a
$59.3 million
mortgage loan (the “Pearl Loan”), pursuant to the terms of the Real Estate Purchase and Sale Agreement, dated April 9, 2013, between PHSC Holdings, LLC and A&B Properties. On December 1, 2014, the Company refinanced and increased the amount of the loan secured by the Property. The new loan ("Refinanced Loan") was increased to
$92.0 million
and bears interest at
4.15%
. The Refinanced Loan matures in December 2024, and requires monthly principal and interest payments of approximately
$0.4 million
. A final principal payment of approximately
$73.0 million
is due on December 8, 2024. The Refinanced Loan is secured by the Property under a Mortgage and Security Agreement between the Company and The Northwestern Mutual Life Insurance Company.
In 2016, ABL Manoa Marketplace LF LLC, A&B Manoa LLC, ABL Manoa Marketplace LH LLC, and ABP Manoa Marketplace LH LLC (the "Borrowers"), wholly owned subsidiaries of the Company, entered into a
$60.0 million
mortgage loan agreement ("Loan") with First Hawaiian Bank ("FHB"). The Loan bears interest at LIBOR plus
1.35%
and matures on August 1,
2029
. The Loan requires interest-only payments for the first
36 months
and principal and interest payments for the remaining
120 months
using a
25 years
amortization period. A final principal payment of
$41.7 million
is due on August 1, 2029. The Company had previously entered into an interest rate swap with a notional amount of
$60.0 million
to fix the variable interest rate on the Company's debt at an effective rate of
3.14%
(see Note 15). The Loan is secured by Manoa Marketplace under a Mortgage, Security Agreement and Fixture Filing between the Borrowers and FHB, dated August 1, 2016.
The approximate book values of assets used in the Commercial Real Estate segment pledged as collateral under the foregoing credit agreements at
December 31, 2018
was
$369.2 million
. The approximate book values of assets used in the Materials & Construction segment pledged as collateral under the foregoing credit agreements at
December 31, 2018
was
$23.9 million
. There were
no
assets used in the Land Operations segment that were pledged as collateral.
In connection with the TRC Acquisition, the Company assumed a
$62.0 million
mortgage secured by Laulani Village that matures on May 1,
2024
. The note bears interest at
3.93%
and requires monthly interest payments of approximately
$0.2 million
until May 2020 and principal and interest payments of approximately
$0.3 million
thereafter.
Current portion of long term debt:
The Company expects to pay the current portion of long term debt due in 2019 with cash flows provided from operations.
Debt Maturities:
At
December 31, 2018
, debt maturities during the next five years and thereafter, excluding amortization of debt discount or premium, are
$29.9 million
in
2019
,
$30.1 million
in
2020
,
$51.6 million
in
2021
,
$165.7 million
for
2022
,
$83.8 million
in
2023
, and
$418.1 million
thereafter.
|
|
9.
|
LEASES - THE COMPANY AS LESSEE
|
Principal non-cancelable operating leases include land, office space, harbors and equipment leased for periods that expire through
2031
. Management expects that in the normal course of business, most operating leases will be renewed or replaced by other similar leases. Rental expense under operating leases totaled
$6.1 million
,
$6.1 million
, and
$6.8 million
for
2018
,
2017
, and
2016
, respectively. Rental expense for operating leases that provide for future escalations are accounted for on a straight-line basis.
Future minimum payments under non-cancelable operating leases were as follows (in millions):
|
|
|
|
|
|
|
|
Minimum Lease Payments
|
2019
|
|
$
|
5.5
|
|
2020
|
|
5.4
|
|
2021
|
|
5.3
|
|
2022
|
|
5.3
|
|
2023
|
|
4.5
|
|
Thereafter
|
|
13.9
|
|
Total
|
|
$
|
39.9
|
|
|
|
10.
|
LEASES - THE COMPANY AS LESSOR
|
The Company leases to third-parties land and buildings under operating leases. The historical cost of, and accumulated depreciation on, leased property
at December 31, 2018 and 2017
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Leased property - real estate
|
$
|
1,263.0
|
|
|
$
|
1,089.0
|
|
Less accumulated depreciation
|
(104.4
|
)
|
|
(104.0
|
)
|
Property under operating leases - net
|
$
|
1,158.6
|
|
|
$
|
985.0
|
|
Total rental income, excluding tenant reimbursements (which totaled
$35.6 million
,
$33.0 million
and
$31.8 million
for the
years ended December 31, 2018, 2017 and 2016
, respectively), under these operating leases were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Minimum rentals
|
$
|
93.0
|
|
|
$
|
95.4
|
|
|
$
|
95.2
|
|
Contingent rentals (based on sales volume)
|
4.7
|
|
|
4.4
|
|
|
5.4
|
|
Total
|
$
|
97.7
|
|
|
$
|
99.8
|
|
|
$
|
100.6
|
|
Future minimum rentals on non-cancelable operating leases
at December 31, 2018
were as follows (in millions):
|
|
|
|
|
|
Operating Leases
|
2019
|
$
|
97.6
|
|
2020
|
96.2
|
|
2021
|
78.2
|
|
2022
|
69.3
|
|
2023
|
59.9
|
|
Thereafter
|
407.8
|
|
Total
|
$
|
809.0
|
|
11. EMPLOYEE BENEFIT PLANS
The Company has funded single-employer defined benefit pension plans that cover substantially all non-bargaining unit employees and certain bargaining unit employees. In addition, the Company has plans that provide certain retiree health care and life insurance benefits to substantially all salaried and certain hourly employees. Employees are generally eligible for such benefits upon retirement and completion of a specified number of years of credited service. The Company does not pre-fund these health care and life insurance benefits and has the right to modify or terminate certain of these plans in the future. Certain groups of retirees pay a portion of the benefit costs.
Plan Administration, Investments and Asset Allocations:
As the plan sponsor for its defined benefit pension plan, the Company is responsible for the investment and management of the pension plan assets. The Company manages the pension plan assets based upon a liability-driven investment strategy, which seeks to increase the correlation of the pension plan assets and liabilities to reduce the volatility of the plan's funded status and, over time, improve the funded status of the plan. As a result, the asset allocation of the defined benefit pension plan is weighted toward fixed income investments, which reduces investment volatility but also reduces investment returns over time. In connection with the liability-driven investment strategy, the Company appointed an investment adviser that directs investments and selects investment options, based on established guidelines.
The Company’s weighted-average asset allocations at December 31,
2018
and
2017
, and
2018
year-end target allocation, by asset category, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Target
|
|
2018
|
|
2017
|
Fixed income securities
|
|
100
|
%
|
|
99
|
%
|
|
98
|
%
|
Cash and cash equivalents
|
|
—
|
%
|
|
1
|
%
|
|
2
|
%
|
Total
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Fixed income debt securities include investment-grade corporate bonds from diversified industries and U.S. Treasuries.
The expected return on plan assets assumption (
4.30%
for
2018
) is principally based on the long-term outlook for various asset class returns, asset mix, the historical performance of the plan assets under the liability-driven investment strategy, and a comparison of the estimated long-term return calculated to the distribution of assumptions adopted by other plans with similar asset mixes. For the years ended December 31,
2018
and
2017
, the plan assets experienced a negative return of
5.10%
and a positive return of
3.90%
, respectively. Over the long-term, the actual returns have generally exceeded the benchmark returns used by the Company to evaluate performance of its fund managers.
The Company’s pension plan assets are held in a master trust and stated at estimated fair value, which is based on the fair values of the underlying investments. Purchases and sales of securities are recorded on a trade-date basis. Interest income is recorded on the accrual basis. Dividends are recorded on the ex-dividend date.
The fair values of the Company’s defined benefit pension plan assets at December 31,
2018
and
2017
, by asset category, are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at
|
|
|
December 31, 2018
|
|
December 31, 2017
|
|
|
Total
|
|
Quoted Prices in Active Markets (Level 1)
|
|
Significant Observable Inputs
(Level 2)
|
|
Total
|
|
Quoted Prices in Active Markets (Level 1)
|
|
Significant Observable Inputs
(Level 2)
|
Asset Category
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1.4
|
|
|
$
|
1.4
|
|
|
$
|
—
|
|
|
$
|
4.5
|
|
|
$
|
4.5
|
|
|
$
|
—
|
|
Fixed income securities
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury obligations
|
|
—
|
|
|
—
|
|
|
—
|
|
|
81.2
|
|
|
81.2
|
|
|
—
|
|
Domestic corporate bonds and notes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
102.3
|
|
|
—
|
|
|
102.3
|
|
Foreign corporate bonds
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9.6
|
|
|
—
|
|
|
9.6
|
|
Assets measured at NAV
|
|
172.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
173.6
|
|
|
$
|
1.4
|
|
|
$
|
—
|
|
|
$
|
197.6
|
|
|
$
|
85.7
|
|
|
$
|
111.9
|
|
Investments in funds that are measured at fair value using the NAV per share practical expedient in accordance with ASC 820 have not been classified in the fair value hierarchy tables above. The NAV is based on the fair value of the underlying assets owned by the fund and is determined by the investment manager or custodian of the fund. The fair value amounts presented are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the fair value of plan assets. These investments primarily include other fixed income investments and securities.
The fixed income securities in
2017
, primarily consisting of corporate bonds and U.S. government treasury and agency securities, were valued based upon the closing price reported in the market in which the security is traded. U.S. government agency, corporate asset-backed securities, and mortgage securities may utilize models, such as a matrix pricing model, that incorporate other observable inputs such as cash flow, security structure, or market information, when broker/dealer quotes are not available.
The table below presents a reconciliation of all pension plan investments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31,
2017
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Significant
|
|
|
Unobservable Inputs (Level 3)
|
|
|
Real Estate
|
|
Private Equity
|
|
Insurance
|
|
Total
|
Beginning balance, January 1, 2017
|
|
$
|
—
|
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
0.2
|
|
Actual return on plan assets:
|
|
|
|
|
|
|
|
|
Assets held at the reporting date
|
|
—
|
|
|
(0.1
|
)
|
|
(0.1
|
)
|
|
(0.2
|
)
|
Ending balance, December 31, 2017
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Contributions are determined annually for each plan by the Company’s pension Administrative Committee, based upon the actuarially determined minimum required contribution under the Employee Retirement Income Security Act of 1974, as amended, the Pension Protection Act of 2006, and the maximum deductible contribution allowed for tax purposes. In
2018
, the Company made
no
contributions to its defined benefit pension plans. In
2017
and
2016
, the Company contributed approximately
$49.2 million
, and
$0.5 million
, respectively, to its defined benefit pension plans. The Company’s funding policy is to contribute cash to its pension plans so that it meets at least the minimum contribution requirements.
For the plans covering employees who are members of collective bargaining units, the benefit formulas are determined according to the collective bargaining agreements, either using career average pay as the base or a flat dollar amount per year of service.
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 changed 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 eligible compensation, plus interest. The plan interest credit rate will vary from year-to-year based on the 10-year U.S. Treasury rate.
Benefit Plan Assets and Obligations:
The measurement date for the Company’s benefit plan disclosures is December 31 of each year. The status of the funded defined benefit pension plan and the unfunded accumulated post-retirement benefit plans at December 31,
2018
and
2017
and are shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Post-retirement Benefits
|
|
Non-qualified Plan Benefits
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Change in Benefit Obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
206.1
|
|
|
$
|
197.0
|
|
|
$
|
12.3
|
|
|
$
|
11.9
|
|
|
$
|
3.4
|
|
|
$
|
7.3
|
|
Service cost
|
|
1.8
|
|
|
2.8
|
|
|
0.1
|
|
|
0.1
|
|
|
0.1
|
|
|
0.1
|
|
Interest cost
|
|
7.4
|
|
|
8.0
|
|
|
0.4
|
|
|
0.4
|
|
|
0.1
|
|
|
0.2
|
|
Plan participants’ contributions
|
|
—
|
|
|
—
|
|
|
0.8
|
|
|
1.0
|
|
|
—
|
|
|
—
|
|
Actuarial (gain) loss
|
|
(11.8
|
)
|
|
12.3
|
|
|
(1.4
|
)
|
|
0.7
|
|
|
(0.2
|
)
|
|
0.1
|
|
Benefits paid
|
|
(13.9
|
)
|
|
(14.0
|
)
|
|
(1.6
|
)
|
|
(1.8
|
)
|
|
(0.1
|
)
|
|
(0.1
|
)
|
Settlement
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.6
|
)
|
|
(4.2
|
)
|
Benefit obligation at end of year
|
|
$
|
189.6
|
|
|
$
|
206.1
|
|
|
$
|
10.6
|
|
|
$
|
12.3
|
|
|
$
|
2.7
|
|
|
$
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
197.6
|
|
|
$
|
143.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Actual return on plan assets
|
|
(10.1
|
)
|
|
19.3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Employer contributions
|
|
—
|
|
|
49.2
|
|
|
0.8
|
|
|
0.8
|
|
|
0.7
|
|
|
4.3
|
|
Participant contributions
|
|
—
|
|
|
—
|
|
|
0.8
|
|
|
1.0
|
|
|
—
|
|
|
—
|
|
Benefits paid
|
|
(13.9
|
)
|
|
(14.0
|
)
|
|
(1.6
|
)
|
|
(1.8
|
)
|
|
(0.1
|
)
|
|
(0.1
|
)
|
Settlement
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.6
|
)
|
|
(4.2
|
)
|
Fair value of plan assets at end of year
|
|
$
|
173.6
|
|
|
$
|
197.6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded Status and Recognized Liability
|
|
$
|
(16.0
|
)
|
|
$
|
(8.5
|
)
|
|
$
|
(10.6
|
)
|
|
$
|
(12.3
|
)
|
|
$
|
(2.7
|
)
|
|
$
|
(3.4
|
)
|
The accumulated benefit obligation for the Company’s qualified pension plans was
$189.6 million
and
$206.1 million
at December 31,
2018
and
2017
, respectively. Amounts recognized on the consolidated balance sheets and in accumulated other comprehensive income (loss) at December 31,
2018
and
2017
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Post-retirement Benefits
|
|
Non-qualified Plan Benefits
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Non-current assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Current liabilities
|
|
—
|
|
|
—
|
|
|
(0.8
|
)
|
|
(0.8
|
)
|
|
(0.2
|
)
|
|
(0.8
|
)
|
Non-current liabilities
|
|
(16.0
|
)
|
|
(8.5
|
)
|
|
(9.8
|
)
|
|
(11.5
|
)
|
|
(2.5
|
)
|
|
(2.6
|
)
|
Total
|
|
$
|
(16.0
|
)
|
|
$
|
(8.5
|
)
|
|
$
|
(10.6
|
)
|
|
$
|
(12.3
|
)
|
|
$
|
(2.7
|
)
|
|
$
|
(3.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss (gain) (net of taxes)
|
|
$
|
56.2
|
|
|
$
|
44.6
|
|
|
$
|
—
|
|
|
$
|
1.0
|
|
|
$
|
0.5
|
|
|
$
|
0.6
|
|
Unrecognized prior service credit (net of taxes)
|
|
(1.4
|
)
|
|
(1.5
|
)
|
|
—
|
|
|
—
|
|
|
(0.1
|
)
|
|
(0.6
|
)
|
Total
|
|
$
|
54.8
|
|
|
$
|
43.1
|
|
|
$
|
—
|
|
|
$
|
1.0
|
|
|
$
|
0.4
|
|
|
$
|
—
|
|
The information for qualified pension plans with an accumulated benefit obligation in excess of plan assets at December 31,
2018
and
2017
are shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Projected benefit obligation
|
|
$
|
189.6
|
|
|
$
|
206.1
|
|
Accumulated benefit obligation
|
|
$
|
189.6
|
|
|
$
|
206.1
|
|
Fair value of plan assets
|
|
$
|
173.6
|
|
|
$
|
197.6
|
|
The estimated prior service credit for the defined benefit pension plans that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost in
2019
is
$0.6 million
. The estimated net loss that will be recognized
in net periodic pension cost for the defined benefit pension plans in
2019
is
$4.1 million
. The estimated net loss for the other defined benefit post-retirement plans that will be amortized from accumulated other comprehensive income (loss) into net periodic pension cost in
2019
is
negligible
. The estimated prior service cost for the other defined benefit post-retirement plans that will be amortized from accumulated other comprehensive income (loss) into net periodic pension cost in
2019
is
negligible
.
Unrecognized gains and losses of the post-retirement benefit plans are amortized over 5 years. Although current health costs are expected to increase, the Company attempts to mitigate these increases by maintaining caps on certain of its benefit plans, using lower cost health care plan options where possible, requiring that certain groups of employees pay a portion of their benefit costs, self-insuring for certain insurance plans, encouraging wellness programs for employees, and implementing measures to mitigate future benefit cost increases.
Components of the net periodic benefit cost and other amounts recognized in other comprehensive income (loss) for the defined benefit pension plans and the post-retirement health care and life insurance benefit plans during
2018
,
2017
, and
2016
, are shown below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Post-retirement Benefits
|
|
Non-qualified Plan Benefits
|
Components of Net Periodic Benefit Cost
|
|
2018
|
|
2017
|
|
2016
|
|
2018
|
|
2017
|
|
2016
|
|
2018
|
|
2017
|
|
2016
|
Service cost
|
|
$
|
1.8
|
|
|
$
|
2.8
|
|
|
$
|
3.1
|
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
Interest cost
|
|
7.4
|
|
|
8.0
|
|
|
8.5
|
|
|
0.4
|
|
|
0.4
|
|
|
0.5
|
|
|
0.1
|
|
|
0.2
|
|
|
0.2
|
|
Expected return on plan assets
|
|
(8.2
|
)
|
|
(9.4
|
)
|
|
(10.0
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of net loss
|
|
4.2
|
|
|
4.1
|
|
|
7.1
|
|
|
0.3
|
|
|
—
|
|
|
0.2
|
|
|
0.1
|
|
|
0.2
|
|
|
0.2
|
|
Amortization of prior service cost
|
|
(0.5
|
)
|
|
(0.5
|
)
|
|
(0.5
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.2
|
)
|
|
(0.3
|
)
|
|
(0.5
|
)
|
Amortization of curtailment (gain)/loss
|
|
—
|
|
|
—
|
|
|
(0.9
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.6
|
)
|
|
(0.3
|
)
|
|
(0.6
|
)
|
Amortization of settlement (gain)/loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
|
1.4
|
|
|
—
|
|
Net periodic benefit cost
|
|
$
|
4.7
|
|
|
$
|
5.0
|
|
|
$
|
7.3
|
|
|
$
|
0.8
|
|
|
$
|
0.5
|
|
|
$
|
0.8
|
|
|
$
|
(0.4
|
)
|
|
$
|
1.3
|
|
|
$
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss (gain)
|
|
$
|
6.5
|
|
|
$
|
2.4
|
|
|
$
|
4.4
|
|
|
$
|
(1.4
|
)
|
|
$
|
0.7
|
|
|
$
|
—
|
|
|
$
|
(0.2
|
)
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
Amortization of unrecognized gain (loss)
|
|
(4.2
|
)
|
|
(4.1
|
)
|
|
(7.1
|
)
|
|
(0.3
|
)
|
|
—
|
|
|
(0.2
|
)
|
|
(0.1
|
)
|
|
(0.2
|
)
|
|
(0.2
|
)
|
Amortization of prior service credit
|
|
0.5
|
|
|
0.5
|
|
|
0.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.2
|
|
|
0.3
|
|
|
0.5
|
|
Amortization of curtailment (gain)/loss
|
|
—
|
|
|
—
|
|
|
0.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.6
|
|
|
0.3
|
|
|
0.6
|
|
Amortization of settlement (gain)/loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.1
|
)
|
|
(1.4
|
)
|
|
—
|
|
Total recognized in other comprehensive income (loss)
|
|
2.8
|
|
|
(1.2
|
)
|
|
(1.3
|
)
|
|
(1.7
|
)
|
|
0.7
|
|
|
(0.2
|
)
|
|
0.4
|
|
|
(0.9
|
)
|
|
1.0
|
|
Total recognized in net periodic benefit cost and Other comprehensive income (loss)
|
|
$
|
7.5
|
|
|
$
|
3.8
|
|
|
$
|
6.0
|
|
|
$
|
(0.9
|
)
|
|
$
|
1.2
|
|
|
$
|
0.6
|
|
|
$
|
—
|
|
|
$
|
0.4
|
|
|
$
|
0.4
|
|
The weighted average assumptions used to determine benefit information during
2018
,
2017
, and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Post-retirement Benefits
|
|
Non-qualified Plan Benefits
|
|
|
2018
|
|
2017
|
|
2016
|
|
2018
|
|
2017
|
|
2016
|
|
2018
|
|
2017
|
|
2016
|
Weighted Average Assumptions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
4.33
|
%
|
|
3.70
|
%
|
|
4.20
|
%
|
|
4.38
|
%
|
|
3.70
|
%
|
|
4.20
|
%
|
|
3.78
|
%
|
|
3.50
|
%
|
|
3.90
|
%
|
Expected return on plan assets
|
|
4.30
|
%
|
|
6.80
|
%
|
|
7.10
|
%
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Rate of compensation increase
|
|
0.5%-3%
|
|
|
0.5%-3%
|
|
|
0.5%-3%
|
|
|
0.5%-3%
|
|
|
0.5%-3%
|
|
|
0.5%-3%
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Initial health care cost trend rate
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
6.20
|
%
|
|
6.50
|
%
|
|
6.80
|
%
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Ultimate rate
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
4.50
|
%
|
|
4.50
|
%
|
|
4.50
|
%
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Year ultimate rate is reached
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
2037
|
|
|
2037
|
|
|
2037
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
If the assumed health care cost trend rate were increased or decreased by one percentage point, the accumulated post-retirement benefit obligation, at December 31,
2018
,
2017
, and
2016
and the net periodic post-retirement benefit cost for
2018
,
2017
, and
2016
would have increased or decreased as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Post-retirement Benefits One Percentage Point
|
|
|
Increase
|
|
Decrease
|
|
|
2018
|
|
2017
|
|
2016
|
|
2018
|
|
2017
|
|
2016
|
Effect on total of service and interest cost components
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
(0.1
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Effect on post-retirement benefit obligation
|
|
$
|
1.0
|
|
|
$
|
1.3
|
|
|
$
|
1.0
|
|
|
$
|
(0.8
|
)
|
|
$
|
(1.0
|
)
|
|
$
|
(0.9
|
)
|
Estimated Benefit Payments:
The estimated future benefit payments for the next ten years are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024-2028
|
Estimated Benefit Payments
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
13.2
|
|
|
13.1
|
|
|
13.0
|
|
|
13.1
|
|
|
12.9
|
|
|
62.9
|
|
Post-retirement Benefits
|
|
0.8
|
|
|
0.8
|
|
|
0.8
|
|
|
0.7
|
|
|
0.7
|
|
|
3.3
|
|
Non-qualified Plan Benefits
|
|
0.3
|
|
|
1.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2.0
|
|
Multiemployer Plans:
Grace and certain subsidiaries contribute to a number of multiemployer defined benefit pension plans under the terms of collective-bargaining agreements that cover their union-represented employees. The risks of participating in these multiemployer plans are different from single-employer plans in the following aspects:
|
|
a.
|
Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers.
|
|
|
b.
|
If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers.
|
|
|
c.
|
If the Company chooses to stop participating in some of its multiemployer plans, the Company may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
|
The Company's participation in these plans for the year ended December 31,
2018
, is outlined in the table below. The "EIN Pension Plan Number" column provides the Employee Identification Number (EIN) and the 3-digit plan number, if applicable. The most recent Pension Protection Act (PPA) zone status available in
2018
is for the plan's year-end at December 31,
2017
, for the Pension Trust Fund for Operating Engineers Pension Plan and Laborer's National (Industrial) Pension Fund. The zone status available for
2018
for the Hawai`i Laborers Trust Funds is for the plan year-end at February 28,
2018
. GP Roadway Solutions, Inc. and GP/RM Prestress, LLC have separate contracts and different expiration dates with the Hawai`i Laborers Trust Fund. The zone status is based on information that the Company received from the plan and is certified by the plan's actuary. Among other factors, plans that are less than
65%
funded are "red zone" plans in need of reorganization; plans between
65%
and
80%
funded or that have an accumulated funding deficiency or are expected to have a deficiency in any of the next six years are "yellow zone" plans; plans that meet both of the "yellow zone" criteria are "orange zone" plans; and if the plan is funded more than
80%
, it is a "green zone" plan. The "FIP/RP Status Pending/Implemented" column indicates plans for which a financial improvement plan (FIP) or a rehabilitation plan (RP) is either pending or has been implemented. The last column lists the expiration dates of the collective-bargaining agreements to which the plans are subject.
There were
no
plans to which the Company contributed more than
5%
of the total contributions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Protection Act Zone Status
|
FIP/RP Status
|
Contribution by Entity
|
Contribution by Entity
|
Contribution by Entity
|
Surcharge Imposed
|
Expiration Date
|
Current Plan Year End
|
Fund
|
EIN Plan No.
|
2018 and 2017
|
Pending/Implemented
|
Jan. 1 - Dec. 31, 2018
|
Jan. 1 - Dec. 31, 2017
|
Jan. 1 - Dec. 31, 2016
|
Operating Engineers
|
94-6090764; 001
|
Yellow
|
Yes
|
$
|
4.7
|
|
$
|
4.9
|
|
$
|
4.7
|
|
No
|
9/2/19
|
12/31/18
|
Laborers National
|
52-6074345; 001
|
Yellow
|
Yes
|
0.2
|
|
0.2
|
|
0.1
|
|
No
|
8/31/21
|
12/31/18
|
Hawai`i Laborers
|
99-6025107; 001
|
Green
|
No
|
0.9
|
|
0.8
|
|
0.7
|
|
No
|
8/31/19
|
2/28/18
|
Hawai`i Laborers
|
99-6025107; 001
|
Green
|
No
|
0.2
|
|
0.2
|
|
0.2
|
|
No
|
9/30/19
|
2/28/18
|
Total
|
|
|
|
$
|
6.0
|
|
$
|
6.1
|
|
$
|
5.7
|
|
|
|
|
Defined Contribution Plans
: The Company sponsors defined contribution plans that qualify under Section 401(k) of the Code and provides matching contributions of up to
3%
of eligible compensation. The Company’s matching contributions expensed under these plans totaled
$0.6 million
in each of the years ended December 31,
2018
and
2017
. The Company also maintains profit sharing plans and, if a minimum threshold of Company performance is achieved, provides contributions of
1
to
5%
, depending upon Company performance above the minimum threshold. There were
$0.4 million
of profit sharing contribution expenses recognized in
2018
, and
no
profit sharing contribution expenses in
2017
and
2016
.
Grace 401(k) Plans
: The Company allows for discretionary non-elective employer contributions up to the sum of
10%
of each eligible employee's compensation for the 12 months in the plan year, subject to certain limitations. Management revenue sharing bonuses can be deferred to the employee's 401(k) account, but will be subject to the IRS' annual limit on employee elective deferrals. Grace recognized discretionary employer contribution and revenue sharing expense of
$1.8 million
in
2018
, and
$2.0 million
of contribution and revenue sharing expense for
2017
and
2016
.
For the taxable years prior to 2017, the Company filed a consolidated federal income tax return, which included all of its wholly owned subsidiaries. On October 15, 2018, the Company filed its 2017 Form 1120-REIT with the IRS. The Company's TRS filed separately as a C corporation. The Company also files separate income tax returns in various states. The Company completed the necessary preparatory work such that the Company believes it has been organized and operating in a manner that enables it to qualify, and continue to qualify, as a REIT for federal income tax purposes commencing with its taxable year ended December 31, 2017.
As a REIT, the Company will generally be allowed a deduction for dividends that it pays, and therefore, will not be subject to United States federal corporate income tax on its taxable income that is currently distributed to shareholders. The Company may be subject to certain state gross income and franchise taxes, as well as taxes on any undistributed income and federal and state corporate taxes on any income earned by its TRS. In addition, the Company could be subject to corporate income taxes related to assets held by the REIT that are sold during the 5-year period following the date of conversion, to the extent such sold assets had a built-in gain as of January 1, 2017. The Company does not intend to dispose of any REIT assets after the REIT conversion within the 5-year period, unless various tax planning strategies, including Code Section 1031 like-kind exchanges or other deferred tax structures, are available to defer the built-in gain tax liability.
Distributions with respect to the Company’s common stock can be characterized for federal income tax purposes by a shareholder of the Company as ordinary income, capital gains, unrecaptured section 1250 gains, return of capital, or a combination thereof, depending on the circumstances. Taxable distributions paid for the years ended December 31, 2017 and 2016 were classified as ordinary income (however, distributions paid for the year ended December 31, 2016 to U.S. shareholders who were individuals, trusts and estates may have been “qualified dividends” eligible for the reduced 20% tax rate). Distributions for the year ended December 31, 2018 included taxable ordinary income and, depending on a particular holder’s basis in its stock of the Company, a non-taxable return of capital, gain from the sale or exchange of property, or a combination thereof.
The income tax expense (benefit) on income (loss) from continuing operations for the
years ended December 31, 2018, 2017 and 2016
consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
(0.3
|
)
|
|
$
|
(2.6
|
)
|
|
$
|
2.9
|
|
State
|
|
—
|
|
|
(0.5
|
)
|
|
0.9
|
|
Current
|
|
$
|
(0.3
|
)
|
|
$
|
(3.1
|
)
|
|
$
|
3.8
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
$
|
14.0
|
|
|
$
|
(200.7
|
)
|
|
$
|
(1.4
|
)
|
State
|
|
2.6
|
|
|
(14.4
|
)
|
|
0.2
|
|
Deferred
|
|
$
|
16.6
|
|
|
$
|
(215.1
|
)
|
|
$
|
(1.2
|
)
|
Income tax expense (benefit)
|
|
$
|
16.3
|
|
|
$
|
(218.2
|
)
|
|
$
|
2.6
|
|
Income tax expense (benefit) for the years ended December 31,
2018
,
2017
, and
2016
differs from amounts computed by applying the statutory federal rate to income from continuing operations before income taxes for the following reasons (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Computed federal income tax expense
|
|
$
|
(11.1
|
)
|
|
$
|
3.3
|
|
|
$
|
12.3
|
|
State income taxes
|
|
(15.6
|
)
|
|
0.1
|
|
|
0.6
|
|
Valuation allowance
|
|
84.4
|
|
|
6.9
|
|
|
—
|
|
REIT rate differential
|
|
(51.5
|
)
|
|
(2.2
|
)
|
|
—
|
|
Nondeductible transaction costs
|
|
—
|
|
|
—
|
|
|
2.4
|
|
Tax credits, including solar
|
|
—
|
|
|
(0.3
|
)
|
|
(8.7
|
)
|
Return to provision
|
|
—
|
|
|
(1.1
|
)
|
|
0.1
|
|
Amended return
|
|
0.6
|
|
|
(0.1
|
)
|
|
(0.2
|
)
|
Share-based compensation
|
|
—
|
|
|
(4.0
|
)
|
|
(1.5
|
)
|
Noncontrolling interest
|
|
(0.6
|
)
|
|
(0.7
|
)
|
|
(0.7
|
)
|
Rate change effect related to REIT conversion
|
|
—
|
|
|
(223.0
|
)
|
|
—
|
|
Rate change effect related to Tax Cuts and Jobs Act of 2017
|
|
—
|
|
|
3.0
|
|
|
—
|
|
Impairments
|
|
10.7
|
|
|
—
|
|
|
—
|
|
Other—net
|
|
(0.6
|
)
|
|
(0.1
|
)
|
|
(1.7
|
)
|
Income tax expense (benefit)
|
|
$
|
16.3
|
|
|
$
|
(218.2
|
)
|
|
$
|
2.6
|
|
The Company's effective tax rate was higher for the year ended
2018
compared to the same period in
2017
primarily due to the Company recording a valuation allowance in 2018 on their net deferred tax assets. In addition, the Company generated a substantial deferred tax benefit in 2017 from the de-recognition of deferred tax assets and liability associated with the conversion to a REIT.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities
at December 31, 2018 and 2017
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Deferred tax assets:
|
|
|
|
|
Employee benefits
|
|
$
|
10.6
|
|
|
$
|
9.1
|
|
Capitalized costs
|
|
9.7
|
|
|
10.7
|
|
Joint ventures and other investments
|
|
55.7
|
|
|
2.8
|
|
Impairment and amortization
|
|
0.8
|
|
|
0.7
|
|
Solar investment benefits
|
|
16.7
|
|
|
16.6
|
|
Insurance and other reserves
|
|
2.6
|
|
|
2.9
|
|
Disallowed interest expense
|
|
4.4
|
|
|
—
|
|
Net operating losses
|
|
8.3
|
|
|
7.7
|
|
Other
|
|
1.5
|
|
|
1.4
|
|
Total deferred tax assets
|
|
$
|
110.3
|
|
|
$
|
51.9
|
|
Valuation allowance
|
|
(91.5
|
)
|
|
(6.9
|
)
|
Total net deferred tax assets
|
|
$
|
18.8
|
|
|
$
|
45.0
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
Property (including tax-deferred gains on real estate transactions)
|
|
$
|
17.0
|
|
|
$
|
25.7
|
|
Interest rate swap
|
|
1.0
|
|
|
0.7
|
|
Other
|
|
0.8
|
|
|
2.1
|
|
Total deferred tax liabilities
|
|
$
|
18.8
|
|
|
$
|
28.5
|
|
|
|
|
|
|
Net deferred tax assets (liabilities)
|
|
$
|
—
|
|
|
$
|
16.5
|
|
Federal tax credit carryforwards at
December 31, 2018
totaled
$8.7 million
and will expire in
2036
. State tax credit carryforwards at
December 31, 2018
totaled
$6.9 million
and may be carried forward
indefinitely
under state law. At
December 31, 2018
the Company had federal net operating loss carryforwards of
$6.0 million
,
$3.4 million
of which expire in
2037
, with the remaining being carried forward indefinitely under federal law. At
December 31, 2018
the Company had state net operating loss carryforwards of
$2.2 million
, of which
$1.5 million
will expire in
2037
,
$0.1 million
expiring in
2038
, and
$0.6 million
carrying forward indefinitely.
A valuation allowance must be provided if it is more likely than not that some portion of all of the deferred tax assets will not be realized, based upon consideration of all positive and negative evidence. Sources of evidence include, among other things, a history of pretax earnings or losses, expectations of future results, tax planning opportunities and appropriate tax law.
Due to the recent losses the Company has generated in its TRS, the Company believes that it is more likely than not that its U.S. and state deferred tax assets will not be realized as of
December 31, 2018
. Therefore, the Company established a valuation allowance of
$84.6 million
on its net U.S. and state deferred tax assets. Should the Company determine that it would be able to realize its deferred tax assets in the foreseeable future, an adjustment to the deferred tax assets may cause a material increase to income in the period such determination is made. Significant management judgment is required in determining the period in which reversal of a valuation allowance should occur.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning of Year
|
|
Additions
|
|
Reductions
|
|
Balance at End of Year
|
2018
|
|
$
|
6.9
|
|
|
$
|
84.6
|
|
|
$
|
—
|
|
|
$
|
91.5
|
|
2017
|
|
$
|
—
|
|
|
$
|
6.9
|
|
|
$
|
—
|
|
|
$
|
6.9
|
|
The Company’s income taxes receivable has been increased by the tax benefits from share-based compensation. The Company receives an income tax benefit for exercised stock options calculated as the difference between the fair market value of the stock issued at the time of exercise and the option exercise price, tax-effected. The Company also receives an income tax benefit for restricted stock units when they vest, measured as the fair market value of the stock issued at the time of vesting, tax effected. There were
no
net tax benefits from share-based transactions for
2018
. The net tax benefits from share-based payment award transactions totaled
$5.3 million
for
2017
.
For the
years ended December 31, 2018 and 2017
, the Company recorded a reduction of
$0.5 million
and
$2.6 million
, respectively, in
Reductions in Solar Investments, net
in the accompanying consolidated statements of operations.
The Company recognizes accrued interest and penalties on income taxes as a component of income tax expense. At
December 31, 2018
, accrued interest and penalties were not material. At
December 31, 2018
, the Company has not identified any material unrecognized tax positions.
The federal audit of the 2013, 2014, 2015 and 2016 tax years has concluded. There were no material adjustments to the income statement resulting from the completion of this audit. At
December 31, 2018
, the Company does not have any open income tax examinations.
13. SHARE-BASED PAYMENT AWARDS
The 2012 Incentive Compensation Plan ("2012 Plan") allows for the granting of stock options, restricted stock units and common stock. During
2018
, the Company retroactively approved an increase to the shares of common stock reserved for issuance at
January 1, 2018
from
4.3 million
shares to
5.3 million
shares. At December 31, 2018 there were
1.9 million
remaining shares available for grants. 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 private transactions.
The 2012 Plan consists of
four
separate incentive compensation programs: (i) the discretionary grant program, (ii) the stock issuance program, (iii) the incentive bonus program and (iv) the automatic grant program for the non-employee members of the Company’s Board of Directors. Share-based compensation is generally awarded under
three
of the four programs, as more fully described below.
Discretionary Grant Program:
Under the Discretionary Grant Program, stock options may be granted with an exercise price no less than
100%
of the fair market value (defined as the closing market price) of the Company’s common stock on the date of the grant. Options generally become exercisable ratably over
three years
and have a maximum contractual term of
10 years
. There were
no
option grants in 2018 and 2017, and the Company currently has no plans to issue options in the future.
Stock Issuance Program:
Under the Stock Issuance Program, shares of common stock or restricted stock units may be
granted
.
Equity awards granted may be designated as time-based awards or market-based performance awards.
Automatic Grant Program:
At each annual shareholder meeting, non-employee directors will receive an award of restricted stock units that entitle the holder to an equivalent number of shares of common stock upon vesting.
The following table summarizes the Company's stock option activity for the
year ended December 31, 2018
(in thousands, except weighted-average exercise price and weighted-average contractual life):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 Plan
Stock Options
|
|
Weighted-
Average
Exercise
Price
|
|
Weighted-
Average
Contractual
Life
|
|
Aggregate
Intrinsic
Value
|
Outstanding, January 1, 2018
|
|
630.5
|
|
$
|
12.58
|
|
|
|
|
|
Exercised
|
|
(48.8)
|
|
$
|
8.62
|
|
|
|
|
|
Canceled
|
|
(1.6)
|
|
$
|
13.11
|
|
|
|
|
|
Outstanding, December 31, 2018
|
|
580.1
|
|
$
|
12.91
|
|
|
2.0 years
|
|
$
|
3,232
|
|
Vested or expected to vest
|
|
580.1
|
|
$
|
12.91
|
|
|
2.0 years
|
|
$
|
3,232
|
|
Exercisable, December 31, 2018
|
|
580.1
|
|
$
|
12.91
|
|
|
2.0 years
|
|
$
|
3,232
|
|
On November 16, 2017, the Company declared a special distribution to its shareholders in the aggregate amount of
$783.0 million
(approximately
$15.92
per share) (the "Special Distribution") in connection with its conversion to a REIT. On January 23, 2018, the Company completed the Special Distribution to shareholders in the form of
$156.6 million
of cash dividends and issuance of
$626.4 million
of common shares. On October 15, 2018 the Company filed its tax return including the 2017 Form 1120-REIT with the IRS. As of
December 31, 2018
, the Company had approximately
72.0 million
shares outstanding.
The following table summarizes non-vested restricted stock unit activity for the
year ended December 31, 2018
(in thousands, except weighted-average grant-date fair value amounts):
|
|
|
|
|
|
|
|
|
|
2012 Plan
Restricted
Stock Units
|
|
Weighted-
Average
Grant-date
Fair Value
|
Outstanding, January 1, 2018
|
|
318.9
|
|
$
|
36.66
|
|
Anti-dilutive adjustment for Special Distribution
|
|
182.9
|
|
|
Granted
|
|
248.4
|
|
$
|
28.76
|
|
Vested
|
|
(181.4)
|
|
$
|
22.59
|
|
Canceled
|
|
(147.5)
|
|
$
|
25.30
|
|
Outstanding, December 31, 2018
|
|
421.3
|
|
$
|
25.91
|
|
The time-based restricted stock units granted to employees vest ratably over a period of
three years
. The time-based restricted stock units granted to non-employee directors prior to
2018
vest ratably over a period of
three years
, and the time-based restricted stock units granted to non-employee directors during
2018
vest over
one year
. The market-based performance share units cliff vest over
three years
, provided that the total shareholder return of the Company's common stock over the relevant period meets or exceeds pre-defined levels of total shareholder returns relative to indices, as defined.
At December 31, 2018, there was
$5.5 million
of total unrecognized compensation cost related to non-vested restricted stock units granted under the 2012 plan; that cost is expected to be recognized over a period of
three years
.
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 for
2018
and
2017
was 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 weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
2018 Grants
|
|
2017 Grants
|
Volatility of A&B common stock
|
|
22.7
|
%
|
|
24.1
|
%
|
Average volatility of peer companies
|
|
21.6
|
%
|
|
25.6
|
%
|
Risk-free interest rate
|
|
2.3
|
%
|
|
1.6
|
%
|
The weighted average fair value of the time-based restricted units and market-based performance share units was
$28.76
in
2018
and
$42.85
in
2017
. No compensation cost is recognized for actual forfeitures of time-based or market-based awards if an employee is terminated prior to rendering the requisite service period. There was
no
tax benefit realized upon vesting for the year ended December 31,
2018
. Tax benefit realized upon vesting were
$1.0 million
and
$0.9 million
for December 31,
2017
and
2016
, respectively.
The Company recognizes compensation cost net of actual forfeitures of time-based or market-based awards. A summary of compensation cost related to share-based payments is as follows for the years ended December 31,
2018
,
2017
and
2016
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Share-based expense:
|
|
|
|
|
|
|
Time-based and market-based restricted stock units
|
|
$
|
4.7
|
|
|
$
|
4.4
|
|
|
$
|
4.1
|
|
Total share-based expense
|
|
4.7
|
|
|
4.4
|
|
|
4.1
|
|
Total recognized tax benefit
|
|
—
|
|
|
(0.5
|
)
|
|
(1.4
|
)
|
Share-based expense (net of tax)
|
|
$
|
4.7
|
|
|
$
|
3.9
|
|
|
$
|
2.7
|
|
|
|
|
|
|
|
|
Cash received upon option exercise
|
|
$
|
0.4
|
|
|
$
|
8.1
|
|
|
$
|
4.6
|
|
Intrinsic value of options exercised
|
|
$
|
0.4
|
|
|
$
|
13.2
|
|
|
$
|
2.6
|
|
Tax benefit realized upon option exercise
|
|
$
|
—
|
|
|
$
|
4.2
|
|
|
$
|
1.0
|
|
Fair value of stock vested
|
|
$
|
4.0
|
|
|
$
|
3.7
|
|
|
$
|
2.2
|
|
14. COMMITMENTS AND CONTINGENCIES
Commitments, Guarantees and Contingencies:
Commitments and financial arrangements not recorded on the Company's consolidated balance sheet, excluding lease commitments that are disclosed in
Note 9
, included the following (in millions) at
December 31, 2018
:
|
|
|
|
|
Standby letters of credit
(a)
|
$
|
11.3
|
|
Bonds
(b)
|
$
|
475.2
|
|
(a)
Consists of standby letters of credit, issued by the Company’s lenders under the Company’s revolving credit facilities, and relate primarily to the Company’s real estate activities. In the event the letters of credit are drawn upon, the Company would be obligated to reimburse the issuer of the letter of credit.
(b)
Represents bonds related to construction and real estate activities in Hawai`i. Approximately
$403.8 million
represents the face value of construction bonds issued by third party sureties (bid, performance and payment bonds) and the remainder is related to 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 for the amount of the bond, reduced for the work completed to date. As of
December 31, 2018
, the Company's estimated remaining exposure assuming defaults on all existing contractual construction obligations was approximately
$108.5 million
.
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.
The Company is a guarantor of indebtedness for certain of its unconsolidated joint ventures' borrowings with third party lenders, relating to the repayment of construction loans and performance of construction for the underlying project. At
December 31, 2018
, the Company's limited guarantees on indebtedness related to
one
of its unconsolidated joint ventures totaled
$3.1 million
.
Other than obligations described above and those described in
Note 5
and
Note 8
, obligations of the Company's 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:
Prior to the sale of approximately
41,000
acres of agricultural land on Maui to Mahi Pono Holdings, LLC (“Mahi Pono”) in December 2018, A&B, through East Maui Irrigation Company, LLC (“EMI”), also owned approximately
16,000
acres of watershed lands in East Maui and also held four water licenses to approximately
30,000
acres owned by the State of Hawai`i in East Maui. The sale to Mahi Pono includes the sale of a
50%
interest in EMI (which closed February 1, 2019), and provides for A&B and Mahi Pono, through EMI, to jointly continue the existing process to secure long-term leases from the State for delivery of irrigation water to Mahi Pono for use in Central Maui.
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 completion by the BLNR of a contested case hearing it ordered to be held on the request for the long-term lease, the BLNR has kept the existing permits on a holdover basis.
Three
parties filed a lawsuit on April 10, 2015 (the "4/10/15 Lawsuit") alleging that the BLNR has been renewing the revocable permits annually rather than keeping them in holdover status. The lawsuit asks the court to void the revocable permits and to declare that the renewals were illegally issued without preparation of an environmental assessment ("EA"). In December 2015, the BLNR decided to reaffirm its prior decisions to keep the permits in holdover status. This decision by the BLNR is being challenged by the
three
parties. In January 2016, the court ruled in the 4/10/15 Lawsuit that the renewals were not subject to the EA requirement, but that the BLNR lacked legal authority to keep the revocable permits in holdover status beyond one year. The court has allowed the parties to make an immediate appeal of this ruling, which appeal remains pending. In May 2016, the Hawai`i State Legislature passed House Bill 2501, which specified that the BLNR has the legal authority to issue holdover revocable permits for the disposition of water rights for a period not to exceed
three years
. The governor signed this bill into law State Legislature passed House Bill 2501, which specified that the BLNR has the legal authority to issue holdover revocable permits for the disposition of water rights for a period not to exceed
three years
. The governor signed this bill into law as Act 126 in June 2016. Pursuant to Act 126, the annual authorization of the existing holdover permits was sought and granted by the BLNR in December 2016, November 2017 and November 2018.
On December 7, 2018, a contested case request filed by the Sierra Club was denied by the BLNR. On January 7, 2019, Sierra Club filed a lawsuit in the circuit court of the first circuit in Hawai`i against BLNR, A&B, and EMI, seeking to invalidate the extension of the revocable permits for, among other things, failure to perform an EA. It also seeks to enjoin the diversion by EMI of more than
25 million
gallons a day pending completion of an EA. In connection with A&B’s obligation to continue the existing process to secure long-term water leases from the State, A&B and EMI will defend against the claims made by the Sierra Club.
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 consolidated financial statements as a whole.
15. DERIVATIVE INSTRUMENTS
The Company is exposed to interest rate risk related to its floating rate interest 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.
Cash Flow Hedges of Interest Rate Risk
During 2016, the Company entered into an interest rate swap agreement with a notional amount of
$60.0 million
which was designated as a cash flow hedge. The Company structured the interest rate swap agreement to hedge the variability of future interest payments due to changes in interest rates with regards to the Company's long-term debt. A summary of the key terms related to the Company's outstanding cash flow hedge at
December 31, 2018
, is as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
|
Maturity
|
Fixed
|
|
Notional Amount at
|
|
Fair Value at
|
Classification on
|
Date
|
Date
|
Interest Rate
|
|
December 31, 2018
|
|
December 31, 2018
|
|
December 31, 2017
|
Balance Sheet
|
4/7/2016
|
8/1/2029
|
3.14%
|
|
$
|
60.0
|
|
|
$
|
3.9
|
|
|
$
|
2.8
|
|
Other assets
|
The Company assessed the effectiveness of the cash flow hedge at inception and will continue to do so on an ongoing basis. The effective portion of the changes in fair value of the cash flow hedge is recorded in accumulated other comprehensive income (loss) and subsequently reclassified into interest expense as interest is incurred on the related-variable rate debt. When ineffectiveness exists, the ineffective portion of changes in fair value of the cash flow hedge is recognized in earnings in the period affected.
Non-designated Hedges
At
December 31, 2018
, the Company has
one
interest rate swap that has not been designated as a cash flow hedge whose key terms are as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
|
Maturity
|
Fixed
|
|
Notional Amount at
|
|
Fair Value at
|
Classification on
|
Date
|
Date
|
Interest Rate
|
|
December 31, 2018
|
|
December 31, 2018
|
|
December 31, 2017
|
Balance Sheet
|
1/1/2014
|
9/1/2021
|
5.95%
|
|
$
|
10.5
|
|
|
$
|
(0.5
|
)
|
|
$
|
(0.9
|
)
|
Other non-current liabilities
|
During the
year ended December 31, 2018
, the Company terminated an interest rate swap that was not designated as a cash flow hedge. The interest rate swap was classified as
Other non-current liabilities
on the consolidated balance sheet and had a fair value of
$0.3 million
at
December 31, 2017
.
The following table represents the pre-tax effect of the derivative instruments in the Company's consolidated statement of comprehensive income (loss) during the
years ended December 31, 2018 and 2017
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Derivatives in Designated Cash Flow Hedging Relationships:
|
|
|
|
|
Amount of (gain) loss recognized in OCI on derivatives (effective portion)
|
|
$
|
(1.0
|
)
|
|
$
|
0.4
|
|
Amounts of (gain) loss reclassified from accumulated OCI into earnings under
Interest expense
(ineffective portion and amount excluded from effectiveness testing)
|
|
$
|
—
|
|
|
$
|
(0.5
|
)
|
Derivatives Not Designated as Cash Flow Hedges:
|
|
|
|
|
Amount of gain (loss) realized and unrealized loss on derivatives recognized in earnings under
Interest income and other
|
|
$
|
0.4
|
|
|
$
|
0.6
|
|
The Company recorded
$0.4 million
and
$0.6 million
of income related to the change in fair value of the interest rate swaps not designated as cash flow hedges during
2018
and
2017
in
Interest and other income (loss)
in the accompanying consolidated statements of operations.
The Company measures all of its interest rate swaps at fair value. The fair values of the Company's interest rate swaps (Level 2) are based on the estimated amounts that the Company would receive or pay to terminate the contracts at the reporting date and are determined using interest rate pricing models and interest rate related observable inputs.
16. EARNINGS PER SHARE ("EPS")
Basic earnings per common share excludes dilution and is calculated by dividing net earnings allocated to common shares by the weighted-average number of common shares outstanding for the period. Diluted earnings per common share is calculated by dividing net earnings allocated to common shares by the weighted-average number of common shares outstanding for the period, as adjusted for the potential dilutive effect of non-participating share-based awards as well as adjusted by the number of additional shares, if any, that would have been outstanding had the potentially dilutive common shares been issued.
The following table provides a reconciliation of income (loss) from continuing operations to income (loss) from continuing operations available to A&B shareholders and net income (loss) available to A&B shareholders for the
years ended December 31, 2018, 2017 and 2016
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Income (Loss) from Continuing Operations
|
|
$
|
(69.2
|
)
|
|
$
|
228.1
|
|
|
$
|
32.7
|
|
Loss (income) attributable to noncontrolling interest
|
|
(2.2
|
)
|
|
(2.2
|
)
|
|
(1.8
|
)
|
Income (loss) from continuing operations attributable to A&B shareholders
|
|
(71.4
|
)
|
|
225.9
|
|
|
30.9
|
|
Undistributed earnings allocated to redeemable noncontrolling interest
|
|
—
|
|
|
1.8
|
|
|
1.3
|
|
Income (loss) from continuing operations available to A&B shareholders
|
|
(71.4
|
)
|
|
227.7
|
|
|
32.2
|
|
Income (loss) from discontinued operations available to A&B shareholders
|
|
(0.6
|
)
|
|
2.4
|
|
|
(41.1
|
)
|
Net income (loss) available to A&B shareholders
|
|
$
|
(72.0
|
)
|
|
$
|
230.1
|
|
|
$
|
(8.9
|
)
|
The number of shares used to compute basic and diluted earnings per share for the
years ended December 31, 2018, 2017 and 2016
were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Denominator for basic EPS - weighted average shares outstanding
|
|
70.6
|
|
|
49.2
|
|
|
49.0
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
Non-participating stock options and restricted stock unit awards
|
|
—
|
|
|
0.8
|
|
|
0.4
|
|
Special Distribution
|
|
—
|
|
|
3.0
|
|
|
—
|
|
Denominator for diluted EPS - weighted average shares outstanding
|
|
70.6
|
|
|
53.0
|
|
|
49.4
|
|
There were
no
shares of anti-dilutive securities outstanding during the
years ended December 31, 2018, 2017 and 2016
.
17. REDEEMABLE NONCONTROLLING INTEREST
The Company has a
70%
ownership interest in GLP that was acquired in connection with the acquisition of Grace Pacific LLC. The redeemable noncontrolling interest of GLP is recorded at the greater of (i) the initial carrying amount, increased or decreased for the noncontrolling interest's share of net income or loss and distributions or (ii) the redemption value, which is derived from a specified formula. These adjustments are reflected in the computation of earnings per share using the two-class method.
18. CESSATION OF SUGAR OPERATIONS
A summary of the pre-tax costs and remaining costs associated with the Cessation were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2018
|
|
|
Charges
|
|
Cumulative Amount
|
|
Remaining
|
|
Total
|
Employee severance benefits and related costs
|
|
$
|
—
|
|
|
$
|
22.1
|
|
|
$
|
—
|
|
|
$
|
22.1
|
|
Asset write-offs and accelerated depreciation
|
|
—
|
|
|
71.3
|
|
|
—
|
|
|
71.3
|
|
Property removal, restoration and other exit-related costs
|
|
0.6
|
|
|
10.1
|
|
|
0.3
|
|
|
10.4
|
|
Total Cessation-related costs
|
|
$
|
0.6
|
|
|
$
|
103.5
|
|
|
$
|
0.3
|
|
|
$
|
103.8
|
|
Activity of the Cessation-related liabilities during the
year ended December 31, 2018
were as follows (in millions):
|
|
|
|
|
|
|
|
Other Exit Costs
1
|
Balance at December 31, 2017
|
|
$
|
4.6
|
|
Expense
|
|
0.6
|
|
Cash payments
|
|
(1.1
|
)
|
Balance at December 31, 2018
|
|
$
|
4.1
|
|
1
Includes asset retirement obligations.
Cessation-related liabilities are presented within
Accrued and other liabilities
in the accompanying consolidated balance sheets at December 31,
2018
and
2017
.
19. SEGMENT RESULTS
Operating segments are components of an enterprise that engage in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. The Company operates
three
segments: Commercial Real Estate; Land Operations; and Materials & Construction.
The Commercial Real Estate segment owns, operates, and manages a portfolio of retail, office and industrial properties in Hawai`i and on the Mainland totaling
3.5 million
square feet of GLA. The Company also leases approximately
109
acres of commercial land in Hawai`i to third-party lessees.
The Land Operations segment generates its revenues and creates value through an active and comprehensive program of land stewardship, planning, entitlement, development, real estate investment and sale of land and commercial and residential properties, principally in Hawai`i.
The Materials & Construction segment performs asphalt paving as prime contractor and subcontractor; imports and sells liquid asphalt; mines, processes and sells rock and sand aggregates; produces and sells asphaltic concrete; provides and sells various construction- and traffic-control-related products and manufactures and sells precast concrete products.
The accounting policies of the operating segments are described in Note 2 Significant Accounting Policies. Reportable segments are measured based on operating profit, exclusive of interest expense, general corporate expenses and income taxes. Revenues related to transactions between reportable segments have been eliminated in consolidation. Transactions between reportable segments are accounted for on the same basis as transactions with unrelated third parties.
General contractor and subcontractor revenues for the
years ended December 31, 2018, 2017 and 2016
were derived directly and indirectly from the State of Hawai`i in the amounts of
$40.4 million
,
$60.2 million
, and
$50.1 million
, respectively. In addition, for the
years ended December 31, 2018, 2017 and 2016
, amounts were derived directly and indirectly from the City and County of Honolulu in the amounts of
$53.0 million
,
$67.7 million
and
$52.0 million
respectively.
Operating segment information for the
years ended December 31, 2018, 2017 and 2016
is summarized below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Operating Revenue:
|
|
|
|
|
|
|
Commercial Real Estate
|
|
$
|
140.3
|
|
|
$
|
136.9
|
|
|
$
|
134.7
|
|
Land Operations
|
|
289.5
|
|
|
84.5
|
|
|
61.9
|
|
Materials & Construction
|
|
214.6
|
|
|
204.1
|
|
|
190.9
|
|
Total operating revenue
|
|
644.4
|
|
|
425.5
|
|
|
387.5
|
|
Operating Profit (Loss):
|
|
|
|
|
|
|
Commercial Real Estate
1
|
|
58.5
|
|
|
34.4
|
|
|
54.8
|
|
Land Operations
2,6
|
|
(26.7
|
)
|
|
14.2
|
|
|
7.0
|
|
Materials & Construction
7
|
|
(73.2
|
)
|
|
22.0
|
|
|
23.3
|
|
Total operating profit (loss)
|
|
(41.4
|
)
|
|
70.6
|
|
|
85.1
|
|
Gain (loss) on the sale of commercial real estate properties
|
|
51.4
|
|
|
9.3
|
|
|
8.1
|
|
Interest expense
|
|
(35.3
|
)
|
|
(25.6
|
)
|
|
(26.3
|
)
|
General corporate expenses
|
|
(27.6
|
)
|
|
(29.2
|
)
|
|
(22.1
|
)
|
REIT evaluation/conversion costs
|
|
—
|
|
|
(15.2
|
)
|
|
(9.5
|
)
|
Income (Loss) from Continuing Operations Before Income Taxes
|
|
$
|
(52.9
|
)
|
|
$
|
9.9
|
|
|
$
|
35.3
|
|
|
|
|
|
|
|
|
Identifiable Assets:
|
|
|
|
|
|
|
Commercial Real Estate
|
|
$
|
1,530.4
|
|
|
$
|
1,128.1
|
|
|
$
|
1,119.5
|
|
Land Operations
3
|
|
350.0
|
|
|
604.2
|
|
|
632.8
|
|
Materials & Construction
|
|
297.1
|
|
|
379.2
|
|
|
371.8
|
|
Other
|
|
47.7
|
|
|
119.7
|
|
|
32.2
|
|
Total assets
|
|
$
|
2,225.2
|
|
|
$
|
2,231.2
|
|
|
$
|
2,156.3
|
|
|
|
|
|
|
|
|
Capital Expenditures:
|
|
|
|
|
|
|
Commercial Real Estate
4
|
|
$
|
282.7
|
|
|
$
|
32.8
|
|
|
$
|
98.7
|
|
Land Operations
5
|
|
1.4
|
|
|
1.4
|
|
|
5.3
|
|
Materials & Construction
|
|
11.0
|
|
|
6.3
|
|
|
9.3
|
|
Other
|
|
1.0
|
|
|
0.2
|
|
|
0.3
|
|
Total capital expenditures
|
|
$
|
296.1
|
|
|
$
|
40.7
|
|
|
$
|
113.6
|
|
|
|
|
|
|
|
|
Depreciation and Amortization:
|
|
|
|
|
|
|
Commercial Real Estate
|
|
$
|
28.0
|
|
|
$
|
26.0
|
|
|
$
|
28.4
|
|
Land Operations
|
|
1.9
|
|
|
1.6
|
|
|
6.7
|
|
Materials & Construction
|
|
12.1
|
|
|
12.2
|
|
|
11.7
|
|
Other
|
|
0.8
|
|
|
1.6
|
|
|
1.8
|
|
Total depreciation and amortization
|
|
$
|
42.8
|
|
|
$
|
41.4
|
|
|
$
|
48.6
|
|
1
Commercial Real Estate segment operating profit (loss) includes intersegment operating revenue, primarily from the Materials & Construction segment, and is eliminated in the consolidated results of operations.
2
Land Operations segment operating profit (loss) includes equity in earnings (losses) from the Company's various real estate joint ventures and non-cash reductions related to the Company's solar tax equity investments.
3
The Land Operations segment includes assets related to its investment in various real estate joint ventures.
4
Represents gross capital additions to the commercial real estate portfolio, including gross tax deferred property purchases but excluding the assumption of debt, that are reflected as non-cash transactions in the consolidated statements of cash flows.
5
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, and excludes investment in joint ventures classified as cash flows from investing activities.
6
Land Operations segment operating profit (loss) for the
year ended December 31, 2018
includes impairments related to its long-term developments and equity method investments of
$1.6 million
and
$188.6 million
, respectively, in addition to a margin on the bulk sale of
41,000
acres of diversified agricultural land of
$162.2 million
.
7
Materials & Construction segment operating profit (loss) for the
year ended December 31, 2018
includes impairments related to its goodwill, fixed assets, and intangible assets of
$37.2 million
,
$33.6 million
, and
$7.0 million
, respectively.
20. REAL ESTATE ACQUISITIONS
During the year ended
December 31, 2018
, the Company acquired
five
commercial properties for an aggregate purchase price of
$303.7 million
that were accounted for as asset acquisitions. The aggregate purchase price included a mortgage with a contractual principal amount of
$62.0 million
that is secured by one of the properties and
$2.7 million
of capitalized and acquisition-related costs paid to third parties.
The allocation of purchase price to assets acquired and liabilities assumed were as follows (in millions):
|
|
|
|
|
Fair value of assets acquired and liabilities assumed
|
Assets acquired:
|
|
Land
|
$
|
92.8
|
|
Property and improvements
|
173.9
|
|
In-place/favorable leases
|
38.7
|
|
Total assets acquired
|
$
|
305.4
|
|
|
|
Liabilities assumed:
|
|
Unfavorable leases
|
$
|
2.7
|
|
Long term debt*
|
61.0
|
|
Total liabilities assumed
|
63.7
|
|
Net assets acquired
|
$
|
241.7
|
|
*
Includes a fair value adjustment of $1.0 million.
|
As of the acquisition date, the weighted-average remaining lives of both the in-place/favorable leases and unfavorable leases were approximately
12 years
.
21. LAND SALE
On December 17, 2018, A&B entered into a Purchase and Sale Agreement and Escrow Instructions (the "PSA") with Mahi Pono Holdings, LLC (the "Buyer"). Pursuant to the terms of the PSA, A&B sold approximately
41,000
acres of agricultural land located on the island of Maui and
100%
of the Company's ownership interest in Central Maui Feedstocks LLC and Kulolio Ranch LLC (collectively, "Agricultural Land Sale") in exchange for cash consideration of approximately
$261.6 million
, less customary closing costs and fees, subject to certain contingencies and reserves of approximately
$19.5 million
. The Agricultural Land Sale closed on December 20, 2018, with the exception of approximately
800
acres that were delivered to the Buyer in February 2019. In connection with the Agricultural Land Sale, the Company recognized gross profit of approximately
$162.2 million
during the year ended December 31, 2018. The Company also deferred approximately
$62.0 million
of revenue related to certain performance obligations involving leases with the State of Hawai`i to provide rights to draw water (“State Water Leases”), as well as ensuring that the Buyer has continued access to water prior to the issuance of the State Water Leases. Under the terms of the PSA, the Company may be required to remit amounts up to
$62.0 million
to the Buyer to the extent performance obligations are not met.
The Agricultural Land Sale was deemed an asset sale and represents normal recurring activity for the Land Operations segment. Revenue and the cost of the land sold were presented within
Operating Revenue: Land Operations
and
Cost of Land Operations,
respectively,
in the accompanying consolidated statements of operations.
The disposition of the Agricultural Land Sale did not qualify to be reported as discontinued operations since the disposition did not represent a strategic shift in the Company’s operations. Accordingly, the operating results of the assets are reflected in the Company’s results from continuing operations for all periods presented through the date of disposition.
In addition to the Agricultural Land Sale, in February 2019, the Company sold
50%
of its interest in East Maui Irrigation Company, LLC ("EMI") to the Buyer in exchange for cash proceeds of
$2.7 million
and concurrently entered into a joint venture operating agreement that governs the operation and management of EMI.
22. SUBSEQUENT EVENTS
In February 2019, the Company closed on the sale of real property comprised of approximately
42
acres of land and land improvements, residential workforce housing credits, and associated developer rights in Wailea, Maui to Ledcor Properties
Corporation, a construction and development company, for cash consideration of approximately
$23.6 million
, less customary closing costs and fees.
On February 26, 2019, the Company's Board of Directors declared a cash dividend of
$0.145
per share of outstanding common stock, payable on
March 26, 2019
to shareholders of record as of the close of business on
March 11, 2019
.
23. UNAUDITED SUMMARIZED QUARTERLY INFORMATION
Unaudited quarterly results for the years ended
December 31, 2018
and
2017
were as follows (in millions, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
Revenue
|
$
|
113.3
|
|
|
$
|
112.1
|
|
|
$
|
119.4
|
|
|
$
|
299.6
|
|
Total operating profit (loss)
|
10.3
|
|
|
18.8
|
|
|
32.4
|
|
|
(102.9
|
)
|
Income (Loss) from Continuing Operations Before Income Taxes
|
44.8
|
|
|
2.8
|
|
|
16.8
|
|
|
(117.3
|
)
|
Net Income (Loss) Attributable to A&B Shareholders
|
$
|
47.3
|
|
|
$
|
2.5
|
|
|
$
|
14.8
|
|
|
$
|
(136.6
|
)
|
|
|
|
|
|
|
|
|
Net income (loss) Available to A&B shareholders
|
47.3
|
|
|
2.5
|
|
|
14.8
|
|
|
(136.6
|
)
|
Basic Earnings (Loss) Per Share
|
$
|
0.71
|
|
|
$
|
0.03
|
|
|
$
|
0.21
|
|
|
$
|
(1.90
|
)
|
Diluted Earnings (Loss) Per Share
|
$
|
0.66
|
|
|
$
|
0.03
|
|
|
$
|
0.20
|
|
|
$
|
(1.90
|
)
|
|
|
|
|
|
|
|
|
Weighted-Average Number of Shares Outstanding:
|
|
|
|
|
|
|
|
Basic
|
66.4
|
|
|
72.0
|
|
|
72.0
|
|
|
72.0
|
|
Diluted
|
72.2
|
|
|
72.3
|
|
|
72.4
|
|
|
72.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
Revenue
|
$
|
93.2
|
|
|
$
|
98.1
|
|
|
$
|
111.5
|
|
|
$
|
122.7
|
|
Total operating profit (loss)
1
|
17.5
|
|
|
21.8
|
|
|
30.7
|
|
|
0.6
|
|
Income (Loss) from Continuing Operations Before Income Taxes
|
3.8
|
|
|
7.5
|
|
|
11.3
|
|
|
(12.7
|
)
|
Net Income (Loss) Attributable to A&B Shareholders
|
$
|
6.3
|
|
|
$
|
4.3
|
|
|
$
|
6.1
|
|
|
$
|
211.6
|
|
|
|
|
|
|
|
|
|
Net income (loss) Available to A&B shareholders
|
6.8
|
|
|
4.5
|
|
|
6.6
|
|
|
212.2
|
|
Basic Earnings (Loss) Per Share
|
$
|
0.14
|
|
|
$
|
0.10
|
|
|
$
|
0.13
|
|
|
$
|
4.31
|
|
Diluted Earnings (Loss) Per Share
|
$
|
0.14
|
|
|
$
|
0.09
|
|
|
$
|
0.13
|
|
|
$
|
3.42
|
|
|
|
|
|
|
|
|
|
Weighted-Average Number of Shares Outstanding:
|
|
|
|
|
|
|
|
Basic
|
49.1
|
|
|
49.2
|
|
|
49.2
|
|
|
49.2
|
|
Diluted
|
49.6
|
|
|
49.6
|
|
|
49.6
|
|
|
62.0
|
|