NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The accompanying interim unaudited condensed consolidated financial statements have been prepared by Maui Land & Pineapple Company, Inc. (together with its subsidiaries, the “Company”) in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information that are consistent in all material respects with those applied in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, and pursuant to the instructions to Form 10-Q and Article 8 promulgated by Regulation S-X of the Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and notes to financial statements required by GAAP for complete financial statements. In the opinion of management, the accompanying condensed consolidated financial statements contain all normal and recurring adjustments necessary to fairly present the Company’s financial position, results of operations and cash flows for the interim periods ended June 30, 2017 and 2016. The condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended December 31, 2016.
2.
|
USE OF ESTIMATES AND RECLASSIFICATIONS
|
The Company’s reports for interim periods utilize numerous estimates of general and administrative expenses and other costs for the full year. Future actual amounts may differ from these estimates. Amounts reflected in interim reports are not necessarily indicative of results for a full year. Certain amounts in the December 31, 2016 condensed consolidated balance sheet were reclassified to conform to the current period’s presentation. Such amounts had no impact on total assets and liabilities or net income and comprehensive income previously reported.
3.
|
BASIC AND DILUTED SHARES
|
Basic and diluted weighted-average shares outstanding for the periods ended June 30, 2017 and 2016 were as follows:
|
|
Three
Months
Ended
|
|
|
Six
Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
18,982,871
|
|
|
|
18,928,999
|
|
|
|
18,968,176
|
|
|
|
18,903,643
|
|
Potentially dilutive
|
|
|
27,500
|
|
|
|
26,873
|
|
|
|
27,500
|
|
|
|
26,873
|
|
Basic net income per share is computed by dividing net income by the weighted-average number of common shares outstanding. Diluted net income per share is computed similar to basic net income per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares from share-based compensation arrangements had been issued.
Potentially dilutive shares arise from non-qualified stock options to purchase common stock and non-vested restricted stock. The treasury stock method is applied to determine the number of potentially dilutive shares for non-vested restricted stock and stock options assuming that the shares of non-vested restricted stock are issued for an amount based on the grant date market price of the shares and that the outstanding stock options are exercised.
Property at June 30, 2017 and December 31, 2016 consisted of the following:
|
|
June 30,
2017
|
|
|
December 31,
2016
|
|
|
|
(in thousands)
|
|
Land
|
|
$
|
5,059
|
|
|
$
|
5,059
|
|
Land improvements
|
|
|
24,732
|
|
|
|
18,051
|
|
Buildings
|
|
|
24,884
|
|
|
|
24,884
|
|
Machinery and equipment
|
|
|
10,965
|
|
|
|
10,965
|
|
Total property
|
|
|
65,640
|
|
|
|
58,959
|
|
Less accumulated depreciation
|
|
|
34,048
|
|
|
|
33,215
|
|
Net property
|
|
$
|
31,592
|
|
|
$
|
25,744
|
|
Land
Most of the Company’s 23,000 acres of land were acquired between 1911 and 1932 and is carried in its balance sheets at cost. Approximately 21,000 acres of land are located in West Maui and comprise a largely contiguous parcel that extends from the shoreline to an elevation of approximately 5,700 feet. This parcel includes approximately 900 acres within the Kapalua Resort, a master-planned, destination resort and residential community located in West Maui encompassing approximately 3,000 acres. The Company’s remaining 2,000 acres of land are located in Upcountry Maui in an area commonly known as Haliimaile and are mainly comprised of leased agricultural fields, including related processing and maintenance facilities.
Land Improvements
Land improvements are comprised primarily of roads, utilities, and landscaping infrastructure improvements at the Kapalua Resort. Also included is the Company’s potable and non-potable water systems in West Maui. The majority of the Company’s land improvements were constructed and placed in service in the mid-to-late 1970’s. Depreciation expense would be considerably higher if these assets were stated at current replacement cost.
Buildings
Buildings are comprised of restaurant, retail and light industrial spaces located at the Kapalua Resort and Haliimaile which are used in the Company’s leasing operations. The majority of the buildings were constructed and placed in service in the mid-to-late 1970’s. Depreciation expense would be considerably higher if these assets were stated at current replacement cost.
Machinery and Equipment
Machinery and equipment are mainly comprised of zipline course equipment installed in 2008 at the Kapalua Resort and used in the Company’s leasing operations. Also included are machinery and equipment used in the Company’s utilities operations.
5
.
|
ASSETS HELD FOR SALE AND REAL ESTATE OPERATING REVENUES
|
Assets held for sale at June 30, 2017 and December 31, 2016 consisted of the following:
|
|
June 30,
2017
|
|
|
December
31,
2016
|
|
|
|
(in
thousands)
|
|
Upcountry Maui, 630-acre parcel of agricultural land
|
|
$
|
156
|
|
|
$
|
156
|
|
Upcountry Maui, 80-acre parcel of agricultural land and wastewater treatment facility
|
|
|
56
|
|
|
|
56
|
|
Kapalua Resort, 15-acre Kapalua Golf Academy practice course
|
|
|
-
|
|
|
|
247
|
|
Assets held for sale
|
|
$
|
212
|
|
|
$
|
459
|
|
None of the above assets held for sale have been pledged as collateral under the Company’s credit facility.
Included in the Company’s real estate operating revenues for the three months ended June 30, 2017 are approximately $6.7 million of land improvements that were conveyed to the Company by the owner of a 125-acre portion of the Company’s Kapalua Mauka project. The owner purchased the 125-acre property, commonly known as Mahana Estates, in 2009. As part of the sale, the owner agreed to subsequently develop and convey to the Company upon completion certain easements, subdivision and utility improvements related to the Mahana Estates property. The owner completed and conveyed the land improvements to the Company in April 2017.
In February 2017, the Company sold the 15-acre Kapalua Golf Academy practice course located in the Kapalua Resort for $7.0 million to the owner of the Kapalua Plantation and Bay Golf Courses. The property was sold without any development entitlements. The sale resulted in a gain of approximately $6.4 million. The Company applied $5.6 million of the sale proceeds toward its revolving line of credit facility.
In June 2016, the Company sold a fully-entitled 304-acre working-class community project located in West Maui, commonly referred to as Pulelehua, for $15.0 million. The sale resulted in a gain of approximately $14.3 million. The Company utilized the proceeds from the sale to payoff the outstanding balance of a term loan.
The Company has a $15.0 million revolving line of credit facility with First Hawaiian Bank (Credit Facility). The Credit Facility matures on December 31, 2019 and provides for two optional one-year extension periods. Interest on borrowings is at LIBOR plus 3.50% (4.55% at June 30, 2017). The Company has pledged its 800-acre Kapalua Mauka project and approximately 30,000 square feet of commercial leased space in the Kapalua Resort as security for the Credit Facility. Net proceeds from the sale of any collateral are required to be repaid toward outstanding borrowings and will permanently reduce the Credit Facility’s revolving commitment amount. There are no commitment fees on the unused portion of the Credit Facility.
The terms of the Credit Facility include various representations, warranties, affirmative, negative and financial covenants and events of default customary for financings of this type. Financial covenants include a minimum liquidity (as defined) of $1.0 million, a maximum of $45.0 million in total liabilities, and a limitation on new indebtedness. The Company believes it is in compliance with the covenants under the Credit Facility.
7
.
|
SHARE-BASED COMPENSATION
|
The Company’s directors, officers and certain members of management receive a portion of their compensation in shares of the Company’s common stock granted under the Equity and Incentive Award Plans (Equity Plans). Share-based compensation is valued based on the average of the high and low share price on the date of grant. Shares are issued upon execution of agreements reflecting the grantee’s acceptance of the respective shares subject to the terms and conditions of the Equity Plans. Restricted shares issued under the Equity Plans vest quarterly and have voting and regular dividend rights but cannot be disposed of until such time as they are vested. All unvested restricted shares are forfeited upon the grantee’s termination of directorship or employment from the Company.
Each of the Company’s non-employee directors and certain members of management receive restricted shares of common stock annually. Share-based compensations totaled $207,000 and $77,000 for the six months ended June 30, 2017 and 2016, respectively, for vesting of restricted shares granted.
The Company’s officers and certain members of management receive share-based compensation based on their achievement of certain predefined performance goals and objectives under an incentive compensation plan. Such share-based compensation is comprised of an annual incentive paid in shares of common stock and a long-term incentive paid in restricted shares vesting quarterly over a period of three years. Share-based compensations totaled $812,000 and $560,000 for the six months ended June 30, 2017 and 2016, respectively, for shares issued and the vesting of restricted shares granted to the Company’s officers and certain members of management.
8
.
|
ACCRUED RETIREMENT BENEFITS
|
Accrued retirement benefits at June 30, 2017 and December 31, 2016 consisted of the following:
|
|
June 30
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension plans
|
|
$
|
7,514
|
|
|
$
|
7,560
|
|
Non-qualified retirement plans
|
|
|
1,716
|
|
|
|
1,674
|
|
Total
|
|
|
9,230
|
|
|
|
9,234
|
|
Less current portion
|
|
|
(169
|
)
|
|
|
(175
|
)
|
Non-current portion of accrued retirement benefits
|
|
$
|
9,061
|
|
|
$
|
9,059
|
|
The net periodic benefit costs for pension and postretirement benefits for the three and six months ended June 30, 2017 and 2016 were as follows:
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Interest cost
|
|
$
|
560
|
|
|
$
|
708
|
|
|
$
|
1,120
|
|
|
$
|
1,415
|
|
Expected return on plan assets
|
|
|
(562
|
)
|
|
|
(677
|
)
|
|
|
(1,124
|
)
|
|
|
(1,355
|
)
|
Recognized actuarial loss
|
|
|
204
|
|
|
|
253
|
|
|
|
408
|
|
|
|
507
|
|
Pension and other postretirement expenses
|
|
$
|
202
|
|
|
$
|
284
|
|
|
$
|
404
|
|
|
$
|
567
|
|
The Company uses a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company’s effective tax rate for 2017 and 2016 reflects the recognition of expected federal alternative minimum tax liabilities and interim period tax benefits and changes to its tax valuation allowance.
10
.
|
REPORTABLE OPERATING SEGMENTS
|
The Company’s reportable operating segments are comprised of the discrete business units whose operating results are regularly reviewed by the Company’s Chief Executive Officer – its chief decision maker – in assessing performance and determining the allocation of resources. The Company’s reportable operating segments are as follows:
|
•
|
Real Estate – includes land planning and entitlement, development and sales activities. This segment also includes the operations of Kapalua Realty Company Ltd., a general brokerage real estate company located in the Kapalua Resort.
|
|
•
|
Leasing – includes residential, resort, commercial, agricultural and industrial land and property leases, licensing of the Company’s registered trademarks and trade names, and stewardship and conservation efforts.
|
|
•
|
Utilities – includes the operations of the Company’s two Hawaii Public Utilities Commission-regulated subsidiaries which provide potable and non-potable water and wastewater transmission services to the Kapalua Resort. In addition, this segment also includes management of ditch, reservoir and well systems which provide non-potable irrigation water systems in West and Upcountry Maui.
|
|
•
|
Resort Amenities – include the operations of the Kapalua Club, a private, non-equity club providing its members special programs, access and other privileges at certain of the amenities at the Kapalua Resort.
|
The Company’s reportable operating segment results are measured based on operating income , exclusive of interest, depreciation, general and administrative, share-based compensation, pension and other postretirement expenses.
Reportable operating segment revenues and income for the three and six months ended June 30, 2017 and 2016 were as follows:
|
|
Three Months
|
|
|
Six Months
|
|
|
|
Ended June 30,
|
|
|
Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
Operating Segment Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
$
|
6,852
|
|
|
$
|
15,498
|
|
|
$
|
13,991
|
|
|
$
|
15,666
|
|
Leasing
|
|
|
1,370
|
|
|
|
1,277
|
|
|
|
2,956
|
|
|
|
2,892
|
|
Utilities
|
|
|
829
|
|
|
|
878
|
|
|
|
1,505
|
|
|
|
1,726
|
|
Resort amenities and other
|
|
|
285
|
|
|
|
324
|
|
|
|
567
|
|
|
|
670
|
|
Total Operating Segment Revenues
|
|
$
|
9,336
|
|
|
$
|
17,977
|
|
|
$
|
19,019
|
|
|
$
|
20,954
|
|
Operating Segment Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
$
|
6,700
|
|
|
$
|
14,142
|
|
|
$
|
13,103
|
|
|
$
|
14,009
|
|
Leasing
|
|
|
783
|
|
|
|
732
|
|
|
|
1,900
|
|
|
|
1,634
|
|
Utilities
|
|
|
403
|
|
|
|
289
|
|
|
|
526
|
|
|
|
506
|
|
Resort amenities and other
|
|
|
72
|
|
|
|
54
|
|
|
|
21
|
|
|
|
164
|
|
Total Operating Segment Income
|
|
$
|
7,958
|
|
|
$
|
15,217
|
|
|
$
|
15,550
|
|
|
$
|
16,313
|
|
1
1
.
|
C
OMMITMENTS AND CONTINGENCIES
|
There have been no changes in the status of commitments and contingencies as reported in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016. There are various other claims and legal actions pending against the Company. In the opinion of management, after consultation with legal counsel, the resolution of these other matters is not expected to have a material adverse effect on the Company’s results of operations.
12
.
|
F
AIR VALUE MEASUREMENTS
|
GAAP establishes a framework for measuring fair value, and requires certain disclosures about fair value measurements to enable the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. GAAP requires that financial assets and liabilities be classified and disclosed in one of the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
The fair value of cash, receivables and payables approximate their carrying value due to the short-term nature of the instruments. The valuation is based on settlements of similar financial instruments all of which are short-term in nature and are generally settled at or near cost. The fair value of long-term debt was estimated based on borrowing rates currently available to the Company for long-term debt with similar terms and maturities. The carrying amount of long-term debt at June 30, 2017 and December 31, 2016 was $1.2 million and $6.9 million, respectively, which approximated fair value. The fair value of long-term debt has been classified in the level 2 category.
13
.
|
NEW ACCOUNTING PRONOUNCEMENTS
|
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
. This ASU requires that an entity use the defined five step process to recognize revenue. The ASU also requires additional disclosures and is effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period. While the Company continues to assess its contracts with customers, it does not currently expect a material impact on results of operations, cash flows or financial position. The Company expects the consolidated financial statement disclosures over revenue recognition will expand in order to comply with the ASU.
In March 2017, FASB issued ASU No. 2017-07, Compensation-Retirement Benefits. This ASU aims to improve the presentation of the net periodic pension cost and net periodic postretirement benefit cost by requiring the reporting of the service cost component in the same line item or items as other compensation costs arising from services rendered by employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations This ASU will be effective for public business entities for annual periods beginning after December 15, 2017. The Company is in the process of assessing the impact of ASU No, 2017-07 on its financial statements.
In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718) Scope of Modification Accounting. This ASU clarifies which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The standard is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. The Company is in the process of assessing the impact of ASU No, 2017-09 on its financial statements.