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Item 7. Management’s Discussion and Analysis

2021-02-26 compared with 2020-02-28 · 92 added, 112 removed, 202 unchanged (50% of the section changed)

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MD&A is provided as a supplement to, and should be read in conjunction with the Consolidated Financial Statements and the accompanying notes to the Consolidated Financial Statements in Item 8 of Part II below.

Discussion and analysis of the financial condition and results of operations of Matson for the years ended December 31, 2018 and 2017 can be found in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 , filed with the SEC on March 4, 2019.

Discussion and analysis of the financial condition and results of operations of Matson for the years ended December 31, 2019 and 2018 can be found in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 , filed with the SEC on February 28, 2020.

MD&A is presented in the following sections:

◾ Business Outlook

◾ Fourth Quarter 2020 Discussion and Update on Business Conditions

◾ Consolidated Results of Operations

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◾ Other Matters

BUSINESS OUTLOOK

The following is the Company’s fourth quarter 2019 discussion and 2020 outlook:

Fourth Quarter 2020 Discussion and Update on Business Conditions

Ocean Transportation:

The Company’s container volume in the Hawaii service in the fourth quarter 2019 was 1.1 percent higher year-over-year primarily due to positive container market growth.

Although Hawaii’s rate of economic growth is expected to continue slowing, recent increases in key economic factors, such as construction activity and visitor traffic, are expected to support continued GDP growth.

The Company expects volume in 2020 to be higher compared to the level achieved in 2019, reflecting favorable economic conditions in Hawaii and stable market share.

In China, the Company’s container volume in the fourth quarter 2019 was 4.3 percent higher year-over-year primarily due to larger vessel capacity deployed in the tradelane coupled with strong demand for Matson’s differentiated service.

Matson continued to realize a sizeable rate premium in the fourth quarter 2019 and achieved average freight rates that were modestly lower than the exceptional level achieved in the fourth quarter 2018.

In the fourth quarter of 2018, the Company experienced unusually strong performance as a result of the U.S.-China trade situation.

For 2020, the Company expects to face challenging conditions in the first half of the year as a result of COVID-19, but expects the second half of the year to be comparable to the strong performance achieved in the second half of 2019.

Therefore, the Company expects volume in 2020 to be modestly lower than the prior year and average freight rates in 2020 to approximate the levels achieved in 2019.

In Guam, the Company’s container volume in the fourth quarter 2019 was 7.7 percent lower on a year-over-year basis primarily due to typhoon relief volume in the year ago period.

For 2020, the Company expects volume to approximate the level achieved last year and expects the highly competitive environment to remain.

In Alaska, the Company’s container volume for the fourth quarter 2019 declined 0.7 percent year-over-year.

The Company experienced slightly lower northbound volume and modestly higher southbound volume compared to the levels achieved in fourth quarter 2018.

For 2020, the Company expects volume to be modestly higher than the level achieved in 2019, with higher northbound volume, including volume in the first quarter related to the dry-docking of a competitor’s vessel, and slightly lower southbound volume compared to the levels achieved in 2019.

The contribution in the fourth quarter 2019 from the Company’s SSAT joint venture investment was $5.0 million lower than the fourth quarter 2018.

The decrease was primarily due to higher terminal operating costs and lower lift volume.

For 2020, the Company expects the contribution from SSAT to be lower due to lower lift volume primarily driven by the negative effects of COVID-19, partially offset by improved operating cost efficiencies.

As a result of the business outlook noted above, the Company expects full year 2020 Ocean Transportation operating income to be higher than the $90.8 million achieved in 2019.

In the first quarter 2020, the Company expects Ocean Transportation operating income to be approximately breakeven versus the $9.4 million achieved in the year ago period.

The vast majority of the estimated $15 million COVID-19 financial impact is factored into the Ocean Transportation operating income outlook for the first quarter 2020.

In the fourth quarter 2019, operating income for the Company’s Logistics segment was $1.5 million lower compared to the operating income achieved in the fourth quarter 2018.

For 2020, the Company expects Logistics operating income to be lower than the level achieved in 2019 of $38.3 million.

In the first quarter 2020, the Company expects Logistics operating income to be lower than the $8.1 million achieved in the first quarter 2019.

The full year 2020 and first quarter 2020 operating income outlook includes a modest negative financial impact from COVID-19.

Depreciation and Amortization:

For the full year 2020, the Company expects depreciation and amortization expense to be approximately $135 million, inclusive of dry-docking amortization of approximately $25 million.

Other Income (Expense):

The Company expects full year 2020 other income (expense) to be approximately $2 million in income, which is attributable to other component costs related to the Company’s pension and post-retirement plans.

Interest Expense:

The Company expects interest expense for the full year 2020 to be approximately $33 million.

Income Taxes:

In the fourth quarter 2019, the Company’s effective tax rate was 22.4 percent.

For the full year 2020, the Company expects its effective tax rate to be approximately 26.0 percent.

Net Income, Operating Income and EBITDA:

The Company expects net income in 2020 to be flat year-over-year and expects consolidated operating income and EBITDA in 2020 to be approximately $143 million and $280 million, respectively, including approximately $15 million negative impact from COVID-19.

Capital and Vessel Dry-docking Expenditures:

For the full year 2019, the Company made other capital expenditure payments of $91.2 million, capitalized vessel construction expenditures of $219.1 million, and dry-docking payments of $25.9 million.

For the full year 2020, the Company expects to make other capital expenditure payments, including maintenance capital expenditures, of approximately $110 million, vessel construction expenditures (including capitalized interest and owner’s items) of approximately $75 million, and dry-docking payments of approximately $15 million.

The Company’s container volume in the Hawaii service in the fourth quarter 2020 was 0.8 percent higher year-over-year primarily due to an additional westbound sailing and higher demand for sustenance and home improvement goods, partially offset by lower tourism activity as a result of the pandemic.

The State of Hawaii eased visitor travel restrictions to the islands in October and saw an improvement in the daily passenger counts, but tourism activity remained significantly below the levels achieved in the prior year period.

Tourism levels are expected to remain low until the pandemic subsides and to have a meaningfully negative impact on Hawaii’s economy.

In China, the Company’s container volume in the fourth quarter 2020 was 139.1 percent higher year-over-year due to volume from the CLX+ service in addition to higher volume on the CLX service as a result of our increased capacity in the tradelane.

Matson continued to realize a rate premium in the fourth quarter 2020 and achieved average freight rates that were higher than in the year ago period .

The Company expects elevated consumption of e-commerce and other commodities coupled with other supply and demand factors in the tradelane to largely remain favorable in the first half of 2021 as the pandemic persists.

As the pandemic subsides with widespread vaccination, we expect some of the supply and demand factors that we are currently benefitting from to remain and continue to drive demand for our CLX and CLX+ services.

In Guam, the Company’s container volume in the fourth quarter 2020 increased 4.2 percent year-over-year primarily due to higher demand for sustenance and home improvement goods, partially offset by lower tourism activity as a result of the pandemic.

In the near-term, we expect depressed tourism levels to have a negative impact on the Guam economy.

In Alaska, the Company’s container volume for the fourth quarter 2020 increased 18.9 percent year-over-year as a result of higher northbound volume primarily due to two additional sailings and higher demand for sustenance and home improvement goods, and modestly higher southbound volume.

The Alaska economy continues to be negatively impacted by the economic effects from the COVID-19 pandemic and a low oil price environment.

In the near-term, we expect the economy to slowly recover, but remain challenged until the pandemic subsides.

The contribution in the fourth quarter 2020 from the Company’s SSAT joint venture investment was $10.9 million, or $7.9 million higher than the fourth quarter 2019.

The increase was driven by higher lift volume.

In the fourth quarter 2020, operating income for the Company’s Logistics segment was $9.6 million, or $2.0 million higher compared to the operating income achieved in the fourth quarter 2019.

The increase was due primarily to a higher contribution from transportation brokerage as a result of elevated goods consumption and inventory restocking and tight supply and demand fundamentals in our core markets.

CONSOLIDATED RESULTS OF OPERATIONS

The following analysis of the financial condition and results of operations of Matson for the years ended December 31, 2019 and 2018 should be read in conjunction with the Consolidated Financial Statements in Item 8 of Part II below.

The following analysis of the financial results of operations of Matson for the years ended December 31, 2020 and 2019 should be read in conjunction with the Consolidated Financial Statements in Item 8 of Part II below.

Consolidated Results:

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Fiscal years ended December 31, 2020 and 2019 include 52 weeks.

Consolidated Operating Revenue for the year ended December 31, 2019 decreased $19.7 million, or 0.9 percent, compared to the prior year.

The decrease was due to an increase in Ocean Transportation revenue of $25.3 million offset by a decrease in Logistics revenue of $45.0 million.

Consolidated Operating Revenue for the year ended December 31, 2020 increased $180.2 million, or 8.2 percent, compared to the prior year.

The increase was due to an increase in Ocean Transportation revenue of $187.3 million offset by a decrease in Logistics revenue of $7.1 million.

Operating Costs and Expenses for the year ended December 31, 2020 increased $29.0 million, or 1.4 percent, compared to the prior year.

The increase was due to an increase in Ocean Transportation operating costs and expenses of $33.3 million which was partially offset by a decrease in Logistics operating costs and expenses of $4.3 million.

Operating Income for the year ended December 31, 2019 decreased $34.7 million, or 21.2 percent, compared to the prior year.

The decrease was due to a decrease in Ocean Transportation operating income of $40.3 million which was partially offset by an increase in Logistics operating income of $5.6 million.

Operating Income for the year ended December 31, 2020 increased $151.2 million, or 117.1 percent, compared to the prior year.

The increase was due to an increase in Ocean Transportation operating income of $154.0 million which was partially offset by an decrease in Logistics operating income of $2.8 million.

The reasons for changes in operating revenue, operating costs and expenses, and operating income are described below, by business segment, in the Analysis of Operating Revenue and Income by Segment.

Interest Expense was $27.4 million for the year ended December 31, 2020, compared to $22.5 million in the prior year.

The increase in interest expense was due to higher interest on increased borrowings under the revolving credit facility and a lower offset amount of capitalized interest associated with the new vessel construction.

Other Income (Expense), net was $1.2 million for the year ended December 31, 2019, compared to $2.6 million in the prior year, and relates to the amortization of certain components of net periodic benefit costs or gains related to the Company’s pension and post-retirement plans.

Income Taxes for the year ended December 31, 2019 was $25.1 million, or 23.3 percent of income before income taxes, compared to $38.7 million, or 26.2 percent of income before income taxes in the prior year.

The 2019 income tax rate is lower than the 2018 income tax rate primarily due to $2.9 million, or 2.7 percent of non-cash benefit included in income tax expense in 2019, compared to a $2.9 million, or 2.0 percent of non-cash expense included in income tax expense in 2018 related to discrete tax adjustments resulting from applying the Tax Cuts and Jobs Act of 2017 (the “Tax Act”).

Net Income during the year ended December 31, 2019 decreased $26.3 million, or 24.1 percent, compared to the prior year.

The increase in interest expense was due to a lower offset amount of capitalized interest associated with new vessel construction, partially offset by a reduction in outstanding debt.

Other Income (Expense), net was $6.1 million for the year ended December 31, 2020, compared to $1.2 million in the prior year, and relates to the amortization of certain components of net periodic benefit costs or gains related to the Company’s pension and post-retirement plans, and interest income received from income tax refunds.

The increase in Other income (expense) was due to favorable adjustments reflected in the Company’s pension and post-retirement plan liabilities and higher interest received from income tax refunds during the year ended December 31, 2020.

Income Taxes for the year ended December 31, 2020 were $65.9 million, or 25.4 percent of income before income taxes, compared to $25.1 million, or 23.3 percent of income before income taxes in the prior year.

The 2019 income tax rate benefited from a $2.9 million, or 2.7 percent of non-cash benefit included in income tax expense, resulting from applying the Tax Cuts and Jobs Act of 2017 (the “Tax Act”).

Net Income during the year ended December 31, 2020 increased $110.4 million, or 133.5 percent, compared to the prior year.

ANALYSIS OF OPERATING REVENUE AND INCOME BY SEGMENT

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Ocean Transportation revenue increased $187.3 million, or 11.2 percent, during the year ended December 31, 2020, compared with the year ended December 31, 2019.

The increase was primarily due to higher freight revenue in Alaska, higher freight rates in Hawaii, and higher revenue in China, partially offset by lower container volume in Hawaii and lower fuel-related surcharge revenue.

On a year-over-year FEU basis, Hawaii container volume decreased 1.4 percent primarily due to negative container market growth and weather-related impacts in the first quarter of 2019;

Alaska volume increased by 0.4 percent primarily due to higher northbound volume, partially offset by northbound volume related to the dry-docking of a competitor’s vessel in the year ago period and lower southbound volume;

China volume was 3.9 percent higher primarily due to stronger volume post Lunar New Year;

Guam volume was 1.5 percent lower primarily due to typhoon relief volume in fourth quarter 2018;

and Other containers volume increased 3.7 percent.

Ocean Transportation operating income decreased $40.3 million, or 30.7 percent, during the year ended December 31, 2019, compared with the year ended December 31, 2018.

The decrease was primarily due to higher terminal handling costs, higher vessel operating costs (including Maunalei lease expense), and a lower contribution from SSAT, partially offset by a higher contribution from the Alaska service.

The increase was primarily due to higher freight revenue in the China service, including revenue associated with the CLX+ service, partially offset by lower fuel-related surcharge revenue and lower revenue in Hawaii.

On a year-over-year FEU basis, Hawaii container volume decreased 0.6 percent primarily due to lower volume as a result of the pandemic and its effects on tourism, partially offset by volume associated with the dry-docking of one of Pasha’s vessels in the second quarter and higher demand for sustenance and home improvement goods;

Alaska volume increased by 4.6 percent primarily due to higher northbound volume, including volume associated with the dry-docking of a competitor’s vessel and one additional sailing, partially offset by modestly lower southbound volume;

China volume was 85.8 percent higher primarily due to volume from the CLX+ service in addition to higher volume on the CLX service as a result of our increased capacity in the tradelane;

Guam volume was 2.6 percent lower primarily due to lower demand for retail-related goods resulting from the pandemic and its related effects;

and Other container volume increased 3.6 percent.

Ocean Transportation operating income increased $154.0 million, or 169.6 percent, during the year ended December 31, 2020, compared with the year ended December 31, 2019.

The increase was primarily due to a higher contribution from the China service, including the contribution from the CLX+ service, and lower vessel operating costs, including the impact of one less vessel operating in the Hawaii service, partially offset by a lower contribution from the Hawaii service.

The Company’s SSAT terminal joint venture investment contributed $26.3 million during the year ended December 31, 2020, compared to a contribution of $20.8 million during the year ended December 31, 2019.

The decrease was primarily due to higher terminal operating costs and the absence of favorable one-time items in the year ago period, partially offset by higher lift volume.

The increase was largely attributable to lower operating costs.

2020 compared with 2019:

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Logistics revenue decreased $7.1 million, or 1.3 percent, during the year ended December 31, 2020, compared with the year ended December 31, 2019.

The decrease was primarily due to lower transportation brokerage revenue, partially offset by higher freight forwarding revenue.

Logistics operating income increased $5.6 million, or 17.1 percent, for the year ended December 31, 2019, compared with the year ended December 31, 2018.

The increase was due primarily to higher contributions from freight forwarding and transportation brokerage.

The decrease was primarily due to lower transportation brokerage and freight forwarding revenue.

Logistics operating income decreased $2.8 million, or 7.3 percent, for the year ended December 31, 2020, compared with year ended December 31, 2019.

The decrease was due primarily to a lower contribution from freight forwarding.

LIQUIDITY AND CAPITAL RESOURCES

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Accounts receivable, net (1)

(1) Eligible accounts receivable of $1.7 million and $1.0 million at December 31, 2019 and 2018, respectively, were assigned to the CCF.

(1) Eligible accounts receivable of $1.7 million at December 31, 2020 and 2019 were assigned to the CCF.

Changes in the Company’s cash, cash equivalents and restricted cash for the years ended December 31, 2020, 2019 and 2018 were as follows:

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Net cash provided by (used in) financing activities (3)

Net increase in cash, cash equivalents and restricted cash

Net (decrease) increase in cash, cash equivalents and restricted cash

Cash, cash equivalents and restricted cash, beginning of the period

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Non-cash deferred income taxes

Amortization of operating lease right of use assets

Other non-cash related changes, net

Amortization of operating lease right of use assets

Income and distributions from SSAT, net

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Other long-term liabilities

The change in deferred income taxes is primarily related to the remeasurement of the Company’s deferred assets and liabilities, and other discrete tax adjustments resulting from applying the Tax Act as of December 31, 2017.

The change in amortization of operating lease right of use assets and operating lease liabilities relates to the adoption of the new lease accounting standard during the year ended December 31, 2019.

The change in the amortization of operating lease right of use assets and operating lease liabilities primarily relates to the timing of adopting the lease accounting standard during the year ended December 31, 2019.

The Company’s share of income from SSAT was $26.3 million during the year ended December 31, 2020, compared to $20.8 million in the prior year, while distributions from SSAT was $55.4 million during the year ended December 31, 2020, compared to $25.2 million of distributions received in the prior year.

Deferred dry-docking payments were $16.8 million for the year ended December 31, 2020, compared to $25.9 million in the prior year.

The increase in deferred dry-docking payments was due to an increase in vessel dry-docking activities during the year ended December 31, 2019, compared to the prior year.

Changes in accounts receivable are due to the timing of collections as of December 31, 2019, compared to the prior year.

The decrease in deferred dry-docking payments was due to a reduction in vessel dry-docking activities during the year ended December 31, 2020, compared to the prior year.

Changes in accounts receivable are primarily due to increased revenues during the year ended December 31, 2020, compared to the prior year, and also due to the timing of collections as of December 31, 2020, compared to the prior year.

Changes in prepaid expenses and other assets are due to the timing of prepaid income taxes, changes in the amount of insurance related receivables and changes in other prepaid amounts as of December 31, 2020, compared to the prior year.

Changes in accounts payable, accruals and other liabilities for the year ended December 31, 2019, compared to the prior year are due to the timing of payments associated with those liabilities.

Changes in accounts payable, accruals and other liabilities are primarily due to increased operating costs during the year ended December 31, 2020, compared to the prior year, and also due to the timing of payments associated with those liabilities.

(2) Changes in Net Cash Used in Investing Activities:

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Capitalized vessel construction expenditures (including capitalized interest and owners’ items) was $87.8 million for the year ended December 31, 2020, compared to $219.1 million in the prior year.

The decrease in capitalized vessel construction expenditures (including cash deposited into the CCF less cash withdrawals from the CCF which are used for vessel construction related payments) is due to a reduction in progress payments related to the construction of new vessels.

The decrease in capitalized vessel

construction expenditures (including cash deposited into the CCF less cash withdrawals from the CCF which are used for vessel construction related payments) is due to fewer progress payments related to the construction of new vessels during 2020, compared to the prior year.

Other capital expenditures (excluding capitalized vessel construction expenditures) was $104.5 million for the year ended December 31, 2020, compared to $91.2 million for the prior year.

The increase was primarily due to higher levels of capital expenditures related to the installation of scrubbers on vessels, the Hawaii Sand Island terminal expansion and modernization program, and the construction of the Anchorage Service Center during the year ended December 31, 2019, compared to the prior year.

The increase was primarily due to higher levels of capital expenditures related to the installation of scrubbers on vessels and the Hawaii Sand Island terminal expansion and modernization program during the year ended December 31, 2020, compared to the prior year.

Proceeds from the disposal of property and equipment was $15.3 million for the year ended December 31, 2020, compared to $3.4 million for the prior year.

Disposals of property and equipment during the year ended December 31, 2018 included net proceeds of approximately $106.0 million from the

sale and leaseback of a vessel, and $28.4 million from other container and equipment sale and leaseback transactions.

There were no sale and leaseback transactions in 2019.

Proceeds from the sale of other investments of $3.7 million for the year ended December 31, 2018 related to the surrender of life insurance policies.

There were no sales of other investments during the year ended December 31, 2019.

Disposals of property and equipment during the year ended December 31, 2020 included net proceeds of approximately $14.3 million from the sale and leaseback of container and equipment.

(3) Changes in Net Cash Provided by (Used in) Financing Activities:

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(In millions)

Proceeds received from issuance of fixed interest debt

Repayments of fixed interest debt and capital leases

Borrowings under revolving credit facility, net

Repurchase of Matson common stock

Dividends paid

Repayments and borrowings under revolving credit facility, net

Payment of financing costs

Change in other payments, net

Repayments of fixed interest debt and capital leases increased to $42.1 million for the year ended December 31, 2019, compared to $30.7 million in the prior year due to scheduled fixed interest debt payments.

Net borrowings from the Company’s revolving credit facility was $144.1 million for the year ended December 31, 2019, compared to $30.0 million in the prior year.

The increase in borrowing under the revolving credit facility was primarily due to vessel construction payments and other capital expenditure.

There was no repurchase of Matson stock during the years ended December 31, 2019 or 2018.

During the year ended December 31, 2017, the Company repurchased $19.3 million of Matson stock.

Dividends paid was $37.2 million for the year ended December 31, 2019, compared to $35.4 million for the year ended December 31, 2018.

During the year ended December 31, 2020, the Company received $325.5 million of proceeds from two new Title XI debt issuances, paid $47.1 million in scheduled principal payments, and prepaid $169.5 million of private debt at par, compared to $42.1 million in scheduled principal payments in the prior year.

Net repayments of the Company’s revolving credit facility totaled $307.3 million for the year ended December 31, 2020, compared to net borrowings of $144.1 million in the prior year.

The decrease in borrowing under the revolving credit facility was primarily due to an increase in cash provided by operating activities, proceeds from the issuance of Title XI debt, and a reduction in vessel construction payments.

The Company paid $18.5 million in financing costs related to the Title XI debt issuance during the year ended December 31, 2020.

No financing costs were incurred in the prior year.

Total debt as of December 31, 2020 and 2019 is as follows:

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Fixed interest debt

Total debt increased by $102.0 million during the year ended December 31, 2019, compared to the prior year.

The increase in the Company’s revolving credit facility was primarily due to the funding of progress payments related to the construction of new vessels and other capital expenditure during the year ended December 31, 2019.

The reduction in fixed interest debt was due to scheduled debt payments made during the year ended December 31, 2019.

As of December 31, 2019, the Company had $75.1 million of remaining availability under the revolving credit facility, with a maturity date of June 29, 2022.

Total debt decreased by $198.3 million during the year ended December 31, 2020 compared to the prior year.

The decrease in the Company’s revolving credit facility during the year ended December 31, 2020 was primarily due to increased cash provided by operating activities, a reduction in progress payments related to the construction of new vessels, and proceeds from new Title XI financing that was used to pay down the revolving credit facility.

The increase in fixed interest debt was due to the new Title XI financing agreements entered into during 2020 which were partially offset by scheduled debt payments made during the year ended December 31, 2020.

As of December 31, 2020, the Company had $570.1 million of unused capacity under the revolving credit facility, which matures on June 29, 2022.

The leverage ratio under the debt agreements as of December 31, 2020 was approximately 1.7 times.

The Company’s debt is described in Note 8 to the Consolidated Financial Statements in Item 8 of Part II.

Working Capital:

The Company had working capital deficiency of $147.1 million at December 31, 2019, compared to working capital deficiency of $52.4 million at December 31, 2018.

The increase in working capital deficiency at December 31, 2019 is partially due to the recording of the short-term portion of operating lease liabilities of $66.6 million as of December 31, 2019, in accordance with the adoption of the new lease accounting standard, and a $17.8 million decrease in accounts receivable.

Working capital is impacted by the timing of collections associated with accounts receivable and other assets, and the timing of payments associated with accounts payable, accruals and other liabilities.

The Company had a working capital deficiency of $205.6 million at December 31, 2020, compared to a working capital deficiency of $147.1 million at December 31, 2019.

Working capital is impacted by the use of cash to reduce the Company’s long-term revolving credit facility as of December 31, 2020, by the amount and timing of collections associated with accounts receivable and other assets, and by the amount and timing of payments associated with accounts payable, accruals and other liabilities.

Working capital deficiency increased as of December 31, 2020, primarily due to the reduction in prepaid expenses and other assets as a result of the collection of income tax and insurance receivables, and an increase in other liabilities due to employee incentives and other accruals.

Capital Expenditures:

In 2021, the Company expects to make the following capital expenditures:

(i) maintenance related capital expenditures of approximately $60 - $70 million;

(ii) acquisition of equipment to support growth in the CLX+ and AAX services of approximately $55 million;

(iii) construction of a new barge of approximately $25 million;

and (iv) dry-dock scrubber installation costs of approximately $20 million.

Such capital expenditures are expected to be financed through cash provided by operating activities and the Company’s revolving credit facility.

CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET ARRANGEMENTS

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Contractual Obligations (in millions)

Vessel construction obligations (1)

Total debt obligations (1)

Operating lease obligations (2)

Estimated interest on debt (3)

Vendor and other obligations (4)

Qualified defined benefit pension obligations (4)

Non-qualified pension obligations (5)

Post-retirement benefit obligations (5)

Multi-employer withdrawal obligations (5)

Operating lease obligations (7)

(1) Vessel construction obligations represent contractual agreements entered into for the construction of new vessels.

Vendor and other obligations (6)

Post-retirement benefit obligations (4)

Non-qualified pension obligations (4)

(1) Total debt obligations include principal repayments of outstanding debt (see Note 8 to the Consolidated Financial Statements in Item 8 of Part II below, for additional information).

(2) Operating lease obligations primarily consist of real estate and terminal leases, vessel charter leases, operations equipment and other leases entered into under non-cancellable arrangements (see Note 9 to the Consolidated Financial Statements in Item 8 of Part II below, for additional information).

(3) Estimated interest on debt is determined based on:

(i) the stated interest rate for fixed debt, and (ii) the estimated variable interest on revolving credit facility assuming the balance at December 31, 2020 remains outstanding until maturity.

(4) Qualified defined benefit pension, non-qualified pension and post-retirement benefit obligations include estimated payments for the next ten years.

The amounts noted in the column labeled “Thereafter” represent estimated benefit payments for 2026 through 2030 (see Note 11 to the Consolidated Financial Statements in Item 8 of Part II below, for additional information).

(5) Multi-employer withdrawal obligations relate to the discounted liability associated with Horizon’s mass withdrawal from Puerto Rico’s multi-employer ILA-PRSSA and the partial withdrawal liability associated with the Local 153 Fund of the OPEIU (see Note 12 to the Consolidated Financial Statements in Item 8 of Part II below, for additional information).

(6) Vendor and other obligations include:

(i) non-cancellable contractual capital project obligations (excluding vessel construction obligations shown in (1) above);

(i) non-cancellable contractual capital project obligations;

(ii) dry-docking related obligations;

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Amounts are considered obligations if a contract has been agreed to specifying significant terms of the contract, and the amounts are not reflected in the Consolidated Balance Sheets.

(5) Qualified defined benefit pension, non-qualified pension and post-retirement benefit obligations include estimated payments for the next ten years.

The amounts noted in the column labeled “Thereafter” represent estimated benefit payments for 2025 through 2029 (see Note 11 to the Consolidated Financial Statements in Item 8 of Part II below, for additional information).

(6) Multi-employer withdrawal obligations relate to the discounted liability associated with Horizon’s mass withdrawal from Puerto Rico’s multi-employer ILA-PRSSA and the partial withdrawal liability associated with the Local 153 Fund of the OPEIU (see Note 12 to the Consolidated Financial Statements in Item 8 of Part II below, for additional information).

(7) Operating lease obligations primarily consist of real estate and terminal leases, vessel charter leases, operations equipment and other leases entered into under non-cancellable arrangements (see Note 9 to the Consolidated Financial Statements in Item 8 of Part II below, for additional information).

Estimated timing and amount of payments related to unrecognized tax benefits of $18.3 million as of December 31, 2020 are excluded from the table due to the uncertainty of such timing and payments, if any.

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Additional information related to leases and the vessel lease guarantee is set forth in Note 9 to the Consolidated Financial Statements in Item 8 of Part II below, and is incorporated herein by reference.

CRITICAL ACCOUNTING ESTIMATES

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company’s significant accounting policies are described in Note 2 to the Consolidated Financial Statements in Item 8 of Part II below.

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and (ii) changes in those accounting estimates would have had a material impact on the financial condition or results of operations of the Company.

The critical accounting estimates inherent in the preparation of the Company’s Consolidated Financial Statements are described below.

The critical accounting policies and estimates inherent in the preparation of the Company’s Consolidated Financial Statements are described below.

Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors.

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The Company has evaluated its indefinite-life intangible assets and goodwill for impairment and determined that there was no impairment for the years ended December 31, 2020, 2019 and 2018.

Uninsured Risks and Related Liabilities:

Insurance Related Liabilities:

The Company is uninsured for certain risks but when feasible, many of these risks are mitigated by insurance.

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For certain risks, the Company elects to not purchase insurance because of the excessive cost of such insurance or the perceived remoteness of the risk.

In addition, the Company retains all risk of loss that exceeds the limits of the Company’s insurance policies.

When estimating its reserves for uninsured risks and related liabilities, the Company considers a number of factors, including historical claims experience, demographic factors, current trends, and analyses provided by independent third-parties.

Periodically, management reviews its assumptions and estimates used to determine the adequacy of the Company’s reserves for uninsured risks and related liabilities.

The Company’s uninsured risks and related liabilities contain uncertainties because management is required to apply judgment and make long-term assumptions to estimate the ultimate cost to settle reported claims, and of claims incurred but not reported, as of the balance sheet date.

In addition, the Company retains all risk of loss that exceeds the limits of the Company’s insurance policies, or for other risks where insurance is not commercially available.

When estimating its reserves for retained risks and related liabilities, the Company considers a number of factors, including historical claims experience, demographic factors, current trends, and analyses provided by independent third-parties.

Periodically, management reviews its assumptions and estimates used to determine the adequacy of the Company’s reserves for retained risks and other related liabilities.

The Company’s retained risks and other related liabilities contain uncertainties because management is required to apply judgment and make long-term assumptions to estimate the ultimate cost to settle reported claims, and of claims incurred but not reported, as of the balance sheet date.

If management uses different assumptions or if different conditions occur in future periods, the Company’s financial condition or its future operating results could be materially impacted.

21 unchanged sentences

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What changed 10-K

Item 7. Management’s Discussion and Analysis