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Item 7. Management’s Discussion and Analysis

2022-02-25 compared with 2021-02-26 · 159 added, 117 removed, 177 unchanged (61% of the section changed)

14 unchanged sentences

MD&A is presented in the following sections:

◾ Historical Financial Information

◾ Fourth Quarter 2021 Discussion and Update on Business Conditions

2 unchanged sentences

◾ Liquidity and Capital Resources

◾ Contractual Obligations, Commitments, Contingencies and Off-Balance Sheet Arrangements

◾ Commitments, Contingencies and Off-Balance Sheet Arrangements

◾ Critical Accounting Estimates

◾ Other Matters

HISTORICAL FINANCIAL INFORMATION

The comparative selected financial information of the Company is presented for each of the five years in the period ended December 31, 2021.

The information should be read in conjunction with Item 8, “Financial Statements and Supplementary Data.” All fiscal years include 52 weeks, except for the year ended December 31, 2021 which includes 53 weeks (a description of the Company’s fiscal year is included in Note 2 of the Consolidated Financial Statements in Item 8 of Part II below):

(In millions, except per share amounts)

Operating Revenue:

Ocean Transportation

Total Operating Revenue

Operating and Net Income:

Ocean Transportation (1)

Total Operating Income

Interest expense

Other income (expense), net

Income before Income Taxes

Income taxes (2)

Capital Expenditures:

Ocean Transportation

Total Capital Expenditures

Depreciation and Amortization:

Ocean Transportation

Deferred Dry-docking Amortization — Ocean Transportation

Total Depreciation and Amortization

Earnings Per Share in Net Income:

Cash dividends per share declared

As of December 31:

Cash and cash equivalents

Total debt obligations — including current portion

Total Shareholders' equity

Shares outstanding

(1) The Ocean Transportation segment includes $56.3 million, $26.3 million, $20.8 million, $36.8 million and $28.2 million of equity in income from the Company’s investment in SSAT for 2021, 2020, 2019, 2018 and 2017, respectively.

(2) Income taxes for the years ended December 31, 2019, 2018 and 2017 include a non-cash income tax (expense)/benefit of $2.9 million, $(2.9) million and $154.0 million, respectively, related to the remeasurement of the Company’s deferred assets and liabilities and other discrete adjustments as a result of applying the Tax Cut and Jobs Act of 2017.

FOURTH QUARTER 2021 DISCUSSION AND UPDATE ON BUSINESS CONDITIONS

Ocean Transportation:

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 Company’s container volume in the Hawaii service in the fourth quarter 2021 was 10.4 percent higher year-over-year.

The increase was primarily due to (i) higher retail- and hospitality-related demand due to the continued rebound in tourism and the Hawaii economy and (ii) the benefit of an extra week, compared to the pandemic-reduced volume in the year ago period.

Volume in the fourth quarter 2020 was negatively impacted by the state’s COVID-19 mitigation efforts, including restrictions on tourism.

Tourism and the Hawaii economy continued to rebound in the fourth quarter 2021 despite a softening in airline passenger traffic early in the quarter due to the state’s efforts to address the spread of the COVID-19 Delta variant.

In the near-term, we are cautiously optimistic on further economic recovery in Hawaii primarily due to improvement in the unemployment rate and increasing tourism traffic, including international visitors later in the year, but incremental waves of COVID-19 variants present the possibility of further economic slowdowns.

In China, the Company’s container volume in the fourth quarter 2021 increased 32.7 percent year-over-year.

The increase was primarily due to volume from the China-California Express (“CCX”) service and the benefit of an extra week.

The total number of eastbound voyages in the China service, including the impact of an extra week, increased by nine year-over-year, of which eight were CCX voyages and one was a CLX voyage.

Volume demand in the quarter was driven by e-commerce, garments and other goods.

Matson continued to realize a significant rate premium over the Shanghai Containerized Freight Index in the fourth quarter 2021 and achieved average freight rates that were considerably higher than in the year ago period.

Supply chain congestion remains the current issue in the Transpacific tradelane due to ongoing elevated consumption trends, U.S.

domestic supply chain constraints, and inventory restocking.

For 2022, we expect these conditions to remain largely in place through at least the October peak season and expect elevated demand for our China service for most of the year.

In Guam, the Company’s container volume in the fourth quarter 2021 increased 14.0 percent year-over-year primarily due to higher retail-related demand compared to the pandemic-reduced volume in the year ago period.

In the near-term, we are cautiously optimistic on further economic growth in Guam as tourism traffic improves as the year progresses.

In Alaska, the Company’s container volume for the fourth quarter 2021 increased 10.2 percent year-over-year primarily due to (i) the increase in volume from the Alaska-Asia Express (“AAX”), (ii) the benefit of an extra week, and (iii) higher southbound volume.

In the near-term, we expect improving economic trends in Alaska, but the recovery’s trajectory continues to remain uncertain.

The contribution in the fourth quarter 2021 from the Company’s SSAT joint venture investment was $21.3 million, or $10.4 million higher than the fourth quarter 2020.

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.

The increase was primarily driven by higher other terminal revenue and higher revenue per lift.

In the fourth quarter 2021, operating income for the Company’s Logistics segment was $14.8 million, or $5.2 million higher compared to the level achieved in the fourth quarter 2020.

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

CONSOLIDATED RESULTS OF OPERATIONS

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Diluted earnings per share

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

Fiscal years ended December 31, 2021 and 2020 include 53 and 52 weeks, respectively.

Consolidated Operating Revenue for the year ended December 31, 2021 increased $1,542.0 million, or 64.7 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.

The increase was due to an increase in Ocean Transportation revenue of $1,278.9 million and an increase in Logistics revenue of $263.1 million.

Operating Costs and Expenses for the year ended December 31, 2021 increased $634.8 million, or 30.2 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.

The increase was due to an increase in Ocean Transportation operating costs and expenses of $386.0 million and an increase in Logistics operating costs and expenses of $248.8 million.

Operating Income for the year ended December 31, 2021 increased $907.2 million, or 323.7 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 increase was due to an increase in Ocean Transportation operating income of $892.9 million and an increase in Logistics operating income of $14.3 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 $22.6 million for the year ended December 31, 2021, compared to $27.4 million in 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.

The decrease in interest expense was due to lower outstanding debt during the year ended December 31, 2021, compared to the prior year.

Other Income (Expense), net was $6.4 million for the year ended December 31, 2021, compared to $6.1 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.

The increase in Other income (expense) was due to favorable adjustments reflected in the Company’s pension and post-retirement plan liabilities during the year ended December 31, 2021.

Income Taxes for the year ended December 31, 2021 were $243.9 million, or 20.8 percent of income before income taxes, compared to $65.9 million, or 25.4 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”).

The 2021 income tax rate benefited from a 2.5 percent deduction related to foreign-derived intangible income (“FDII”) under Section 250 of the Internal Revenue Code.

The Company benefits from a FDII deduction as it relates to a U.S.

corporation that generates income from services provided to foreign countries.

The 2021 income tax rate also benefited from other discrete adjustments that lowered the effective tax rate in the current year.

Net Income during the year ended December 31, 2021 increased $734.3 million, or 380.3 percent, compared to the prior year.

ANALYSIS OF OPERATING REVENUE AND INCOME BY SEGMENT

The following analysis of operating revenue and income by segment for the years ended December 31, 2020 and 2019 should be read in conjunction with the Company’s reportable segments information included in Item 6 of Part II and Note 3 to the Consolidated Financial Statements in Item 8 of Part II.

The following analysis of operating revenue and income by segment for the years ended December 31, 2021 and 2020 should be read in conjunction with the Company’s reportable segments information included in Note 3 to the Consolidated Financial Statements in Item 8 of Part II.

Ocean Transportation:

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Ocean Transportation revenue increased $1,278.9 million, or 69.0 percent, during the year ended December 31, 2021, compared with the year ended December 31, 2020.

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 increase was primarily due to higher revenue in China and Hawaii, higher fuel-related surcharge revenue, and higher revenue in Alaska.

The higher revenue in China was primarily due to considerably higher average freight rates and higher volume.

The higher revenue in Hawaii and Alaska was primarily the result of higher volume.

On a year-over-year FEU basis, Hawaii container volume increased 8.2 percent primarily due to (a) higher retail and hospitality-related demand due to the reopening of the Hawaii economy compared to the negatively impacted volume in the year ago period as a result of the pandemic and the state’s COVID-19 mitigation efforts and (b) the benefit of an extra week, partially offset by volume associated with the dry-docking of a competitor’s vessel in the second quarter of last year;

Alaska volume increased by 7.7 percent due to (i) the increase in volume from the AAX, (ii) higher northbound volume primarily due to higher retail-related demand compared to the negatively impacted volume in the year ago period as a result of the pandemic and the state’s COVID-19 mitigation efforts, (iii) higher southbound volume, and (iv) the benefit of an extra week;

China volume was 55.4 percent higher primarily due to (A) incremental volume from the CLX+ service, (B) the addition of volume from the CCX service, (C) higher volume on the CLX service as a result of increased capacity in the tradelane, and (D) the benefit of an extra week;

Guam volume was 15.9 percent higher primarily due to higher retail-related demand compared to the negatively impacted volume in the year ago period as a result of the pandemic and the island’s COVID-19 mitigation measures;

and Other container volume increased 15.4 percent primarily due to higher volume in Okinawa and the addition of China-Auckland Express volume in the South Pacific.

Ocean Transportation operating income increased $892.9 million during the year ended December 31, 2021, compared with the year ended December 31, 2020.

The increase was primarily due to considerably higher average freight rates and higher volume in China, partially offset by higher operating costs and expenses primarily due to the CLX+ and CCX services.

The Company’s SSAT terminal joint venture investment contributed $56.3 million during the year ended December 31, 2021, compared to a contribution of $26.3 million during the year ended December 31, 2020.

The increase was largely attributable to lower operating costs.

The increase was primarily driven by higher lift volume and higher other terminal revenue.

2021 compared with 2020:

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Operating income margin

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 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.

Logistics revenue increased $263.1 million, or 49.7 percent, during the year ended December 31, 2021, compared with the year ended December 31, 2020.

The increase was primarily due to higher transportation brokerage and supply chain management revenue.

Logistics operating income increased $14.3 million, or 40.3 percent, for the year ended December 31, 2021, compared with the year ended December 31, 2020.

The increase was due primarily to higher contributions from supply chain management, transportation brokerage and freight forwarding.

LIQUIDITY AND CAPITAL RESOURCES

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Accounts receivable, net (1)

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

(1) Eligible accounts receivable of $9.8 million and $1.7 million at December 31, 2021 and 2020, respectively, were assigned to the CCF.

Changes in the Company’s cash, cash equivalents and restricted cash for the years ended December 31, 2021, 2020 and 2019 were as follows:

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Net cash used in investing activities (2)

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

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

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

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

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

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(In millions)

Net income from operations

Amortization of operating lease right of use assets

Depreciation and amortization

Non-cash deferred income taxes

Other non-cash related changes, net

Amortization of operating lease right of use assets

Income and distributions from SSAT, net

Operating lease liabilities

Deferred dry-docking payments

Accounts receivable, net

1 unchanged sentence

Accounts payable, accruals and other liabilities

Operating lease liabilities

Deferred dry-docking payments

Deferred dry-docking amortization

Other long-term liabilities

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.

Income from SSAT was $56.3 million for the year ended December 31, 2021, compared to $26.3 million in the prior year.

The increase in income from SSAT was primarily due to higher operating profits generated by SSAT during the year ended December 31, 2021, compared to the prior year.

Cash distributions from SSAT were $46.9 million for the year ended December 31, 2021, compared to $55.4 million in the prior year.

Cash distributions from SSAT are dependent on the level of cash available for distribution after operational and capital needs of SSAT.

Changes in accounts receivable were primarily due to increased levels of revenue and the timing of collections associated with those receivables.

Changes in prepaid expenses and other assets were primarily due to increased prepaid fuel and other operating related costs, primarily due to increased levels of operations, and prepaid income taxes primarily due to increased levels of earnings for the year ended December 31, 2021, compared to the prior year.

Changes in accounts payable, accruals and other liabilities were primarily due to the increased level of operating costs and the timing of payments associated with those liabilities.

Changes in operating lease liabilities were primarily due to new operating lease additions partially offset by operating lease terminations during the year ended December 31, 2021.

Deferred dry-docking payments were $36.3 million for the year ended December 31, 2021, compared to $16.8 million in 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 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.

The increase in deferred dry-docking payments was due to an increase in vessel dry-dock related activities during the year ended December 31, 2021, compared to the prior year.

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

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(In millions)

Capitalized vessel construction expenditures

Cash deposits into CCF

1 unchanged sentence

Other capital expenditures

Capitalized vessel construction expenditures

Proceeds from disposal of property and equipment, net

Proceeds from sale of other investments

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 fewer progress payments related to the construction of new vessels during 2020, compared to the prior year.

Capitalized vessel construction expenditures was $14.9 million for the year ended December 31, 2021, compared to $87.8 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) was due to the completion of the Company’s fleet renewal program in 2020.

Capitalized vessel construction expenditures incurred in 2021 related to the construction of a new flat-deck barge.

Other capital expenditures (excluding capitalized vessel construction expenditures) was $310.4 million for the year ended December 31, 2021, compared to $104.5 million for 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, 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:

Changes in net cash provided by (used in) financing activities for the years ended December 31, 2020, 2019 and 2018 were as follows:

During the year ended December 31, 2021, the Company increased its purchases of containers, chassis and other terminal equipment, as compared to the prior year period, primarily driven by the increased level of operating activities.

The increase in other capital expenditures was also due to the repurchase of Maunalei for $95.8 million, repurchase of other leased equipment, installation of scrubbers on certain vessels, and the timing of certain capital project activities during 2021 as compared to 2020.

The decrease in proceeds from the disposal of property and

equipment was primarily due to the sale and leaseback of chassis and container equipment for net proceeds of $14.3 million during the year ended December 31, 2020.

There were no sale and leaseback transactions during the year ended December 31, 2021.

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

Changes in net cash (used in) provided by financing activities for the years ended December 31, 2021, 2020 and 2019 were as follows:

(In millions)

Proceeds received from issuance of fixed interest debt

Repayments of fixed interest debt and capital leases

Repayments of fixed interest debt

Repayments and borrowings under revolving credit facility, net

Repurchase of Matson common stock

Payment of financing costs

Tax withholding related to net share settlements of restricted stock units

Dividends paid

Change in other payments, net

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.

During the year ended December 31, 2020, the Company received $325.5 million of proceeds from two new Title XI debt issuances.

No new debt was issued during the year ended December 31, 2021.

During the year ended December 31, 2021, the Company paid $59.3 million of scheduled principal payments, compared to $47.0 million of scheduled principal payments paid during the prior year.

The Company prepaid $169.5 million of private debt at par in the year ended December 31, 2020.

There was no prepayment of debt during 2021.

Net repayments of the Company’s revolving credit facility totaled $71.8 million for the year ended December 31, 2021, compared to $307.3 million in the prior year.

Net repayments of Company’s revolving credit facility were driven by increased cash generated by the Company’s operating activities.

The Company’s revolving credit facility was fully repaid during the year ended December 31, 2021.

The Company paid $3.0 million in financing costs related to amendments of its debt facilities during the year ended December 31, 2021, compared to $18.5 million in financing costs primarily related to the Title XI debt issuance in the prior year.

The Company paid $198.3 million to repurchase common stock during the year ended December 31, 2021.

No stock was repurchased in the prior year.

Total debt as of December 31, 2021 and 2020 is as follows:

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Fixed interest debt

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.

Total debt decreased by $131.1 million during the year ended December 31, 2021 compared to the prior year, and was fully repaid as of December 31, 2021.

The decrease in the Company’s revolving credit facility was primarily due to increased cash generated by the Company’s operating activities.

The decrease in fixed interest debt was due to scheduled debt payments made during the year ended December 31, 2021.

As of December 31, 2021, the Company had $642.0 million of unused capacity under the revolving credit facility, which matures on March 31, 2026.

The leverage ratio under the debt agreements as of December 31, 2021 was approximately 0.5 times.

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Working Capital:

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.

The Company had a working capital surplus of $92.1 million at December 31, 2021, compared to a working capital deficiency of $205.6 million at December 31, 2020.

Working capital is impacted by the use of cash to reduce the Company’s long-term revolving credit facility, capital expenditures, 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.

The change in the Company’s working capital during the year ended December 31, 2021 was primarily due to increased cash provided by operating activities.

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

Contractual Obligations:

At December 31, 2020, the Company had the following estimated contractual obligations:

Payment Due By Period

Contractual Obligations (in millions)

Total debt obligations (1)

Operating lease obligations (2)

Estimated interest on debt (3)

Qualified defined benefit pension obligations (4)

Multi-employer withdrawal obligations (5)

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;

(ii) dry-docking related obligations;

and (iii) other contractual obligations.

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.

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.

The Company expects to make the following capital expenditures during the years ending December 31, 2022 and 2023:

Expected Capital Expenditures (in millions)

Maintenance and other capital expenditures

Equipment to support new Ocean Transportation tradelane services

Payments on new neighbor island flat-deck barge

LNG installations on existing vessels

Total Estimated Capital Expenditures

Maintenance and other capital expenditures includes amounts the Company expects to spend on the second phase of its program to modernize and renovate its terminal facility at Sand Island, Honolulu, Hawaii, repurchases of leased equipment, and annual equipment purchases to support the Company’s operations.

LNG installations on existing vessels includes capital expenditure costs of approximately $35 million to install tanks, pipes and cryogenic equipment on Daniel K.

Inouye, and approximately $60 million to re-engine Manukai to operate on LNG and conventional fuels.

The LNG installation on Daniel K.

Inouye is expected to begin in the first quarter of 2023 and last approximately five months.

The twelve-month project to re-engine Manukai is expected to start after Daniel K.

Inouye exits the dry-dock.

The Company expects to fund capital expenditure from cash flows generated by operating activities, cash and cash equivalents and available borrowings under its revolving line of credit.

Capital expenditures for other projects may arise during the year in addition to the amounts presented in the table above.

The Company is also actively considering additional LNG installations on Kaimana Hila , at a cost of approximately $35 million, and on the two Kanaloa Class vessels ( Lurline and Matsonia ), at a cost of approximately $40 million each.

The Company is also reviewing options for the replacement of three Jones Act qualifying vessels currently in use in the Alaska service for delivery later this decade.

Costs related to these projects have not been included in the table above.

Repurchase of Shares:

During the year ended December 31, 2021, the Company repurchased approximately 2.5 million shares for a total cost of $200.1 million.

The maximum number of shares that may be purchased under the Company’s stock repurchase program was 515,797 shares at December 31, 2021.

From January 1, 2022 through February 16, 2022, the Company repurchased approximately 0.3 million shares for a total cost of $30.5 million.

On January 27, 2022, the Company’s Board of Directors approved the addition of three million shares to the Company’s existing share repurchase program.

COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET ARRANGEMENTS

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Off-balance sheet Arrangements:

Except as described below, the Company is not party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on the Company’s financial condition, results of operations or cash flows.

Future minimum payments under operating leases are $302.3 million as of December 31, 2020.

In addition, the Company provided a lessor with a maximum residual value guarantee related to the lease of a vessel.

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.

The Company is not party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on the Company’s financial condition, results of operations or cash flows.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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These differences could be material.

The Company considers an accounting estimate to be critical if:

(i)(a) the accounting estimate requires the Company to make assumptions that are difficult or subjective about matters that were highly uncertain at the time that the accounting estimate was made, (b) changes in the estimate are reasonably likely to occur in periods after the period in which the estimate was made, or (c) use of different estimates by the Company could have been used;

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

The Company considers an accounting estimate to be critical if (i)(a) the accounting estimate requires the Company to make assumptions that are difficult or subjective about matters that were highly uncertain at the time that the accounting estimate was made, (b) changes in the estimate are reasonably likely to occur in periods after the period in which the estimate was made, or (c) use of different estimates by the Company could have been used;

and (ii) changes in those

accounting estimates would have had a material impact on the financial condition or results of operations of the Company.

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

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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.

Insurance related liabilities were $35.9 million and $32.4 million at December 31, 2021 and 2020, respectively.

The Company’s estimate of insurance related liabilities could change if management uses different assumptions or if

different conditions occur in future periods, however the Company does not expect any such change would have a material impact on the Company’s financial condition and results of operations.

Pension and Post-Retirement Plans:

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Additional information about the Company’s income taxes is included in Note 10 to the Consolidated Financial Statements in Item 8 of Part II below.

OTHER MATTERS

New Accounting Pronouncements:

See Note 2 to the Consolidated Financial Statements in Item 8 of Part II below for additional information on new accounting pronouncements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis