Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
The Company, from time to time, may make or may have made certain forward-looking statements, whether orally or in writing, such as forecasts and projections of the Company’s future performance or statements of management’s plans and objectives. These statements are “forward-looking” statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements may be contained in, among other things, SEC filings such as Forms 10-K, 10-Q and 8-K, the Annual Report to Shareholders, press releases made by the Company, the Company’s Internet websites (including websites of its subsidiaries), and oral statements made by the officers of the Company. Except for historical information contained in these written or oral communications, such communications contain forward-looking statements. These include, for example, all references to 2022 or future years. New risk factors emerge from time to time and it is not possible for the Company to predict all such risk factors, nor can it assess the impact of all such risk factors on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Accordingly, forward-looking statements cannot be relied upon as a guarantee of future results and involve a number of risks and uncertainties that could cause actual results to differ materially from those projected in the statements, including but not limited to the factors that are described in Part I, Item 1A under the caption of “Risk Factors” of this Form 10-K, which section is incorporated herein by reference. The Company is not required, and undertakes no obligation, to revise or update forward-looking statements or any factors that may affect actual results, whether as a result of new information, future events, or circumstances occurring after the date of this report.
OVERVIEW
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a discussion of the Company’s financial condition, results of operations, liquidity and certain other factors that may affect its future results from the perspective of management. The discussion that follows is intended to provide information that will assist in understanding the changes in the Company’s Consolidated Financial Statements from year to year, the primary factors that accounted for those changes, and how certain accounting principles, policies and estimates affect the Company’s Consolidated Financial Statements. 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, 2020 and 2019 can be found in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 , filed with the SEC on February 26, 2021.
MD&A is presented in the following sections:
◾ Historical Financial Information
◾ Fourth Quarter 2021 Discussion and Update on Business Conditions
◾ Consolidated Results of Operations
◾ Analysis of Operating Revenue and Income by Segment
◾ Liquidity and Capital Resources
◾ Commitments, Contingencies and Off-Balance Sheet Arrangements
◾ Critical Accounting Estimates
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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)
2021
2020
2019
2018
2017
Operating Revenue:
Ocean Transportation
$
3,132.8
$
1,853.9
$
1,666.6
$
1,641.3
$
1,571.8
Logistics
792.5
529.4
536.5
581.5
475.1
Total Operating Revenue
$
3,925.3
$
2,383.3
$
2,203.1
$
2,222.8
$
2,046.9
Operating and Net Income:
Ocean Transportation (1)
$
1,137.7
$
244.8
$
90.8
$
131.1
$
126.4
Logistics
49.8
35.5
38.3
32.7
20.9
Total Operating Income
1,187.5
280.3
129.1
163.8
147.3
Interest expense
(22.6)
(27.4)
(22.5)
(18.7)
(24.2)
Other income (expense), net
6.4
6.1
1.2
2.6
2.1
Income before Income Taxes
1,171.3
259.0
107.8
147.7
125.2
Income taxes (2)
(243.9)
(65.9)
(25.1)
(38.7)
105.8
Net Income
$
927.4
$
193.1
$
82.7
$
109.0
$
231.0
Capital Expenditures:
Ocean Transportation
$
322.4
$
190.0
$
294.5
$
385.4
$
305.3
Logistics
2.9
2.3
15.8
15.8
1.7
Total Capital Expenditures
$
325.3
$
192.3
$
310.3
$
401.2
$
307.0
Depreciation and Amortization:
Ocean Transportation
$
128.6
$
107.4
$
93.6
$
87.0
$
93.3
Logistics
7.3
7.5
6.8
7.4
7.9
135.9
114.9
100.4
94.4
101.2
Deferred Dry-docking Amortization — Ocean Transportation
24.3
25.1
34.3
37.4
46.2
Total Depreciation and Amortization
$
160.2
$
140.0
$
134.7
$
131.8
$
147.4
Earnings Per Share in Net Income:
Basic
$
21.67
$
4.48
$
1.93
$
2.55
$
5.38
Diluted
$
21.47
$
4.44
$
1.91
$
2.53
$
5.35
Cash dividends per share declared
$
1.06
$
0.90
$
0.86
$
0.82
$
0.78
As of December 31:
Cash and cash equivalents
$
282.4
$
14.4
$
21.2
$
19.6
$
19.8
Total debt obligations — including current portion
$
614.7
$
744.8
$
958.4
$
856.4
$
857.1
Total Shareholders' equity
$
1,667.4
$
961.2
$
805.7
$
755.3
$
677.2
Shares outstanding
41.0
43.2
42.9
42.7
42.5
(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.
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FOURTH QUARTER 2021 DISCUSSION AND UPDATE ON BUSINESS CONDITIONS
Ocean Transportation: 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 primarily driven by higher other terminal revenue and higher revenue per lift.
Logistics: 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.
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CONSOLIDATED RESULTS OF OPERATIONS
The following analysis of the financial results of operations of Matson for the years ended December 31, 2021 and 2020 should be read in conjunction with the Consolidated Financial Statements in Item 8 of Part II below.
Consolidated Results: 2021 compared with 2020:
Years Ended December 31,
(Dollars in millions, except per share amounts)
2021
2020
Change
Operating revenue
$
3,925.3
$
2,383.3
$
1,542.0
64.7
%
Operating costs and expenses
(2,737.8)
(2,103.0)
(634.8)
30.2
%
Operating income
1,187.5
280.3
907.2
323.7
%
Interest expense
(22.6)
(27.4)
4.8
(17.5)
%
Other income (expense), net
6.4
6.1
0.3
4.9
%
Income before income taxes
1,171.3
259.0
912.3
352.2
%
Income taxes
(243.9)
(65.9)
(178.0)
270.1
%
Net income
$
927.4
$
193.1
$
734.3
380.3
%
Basic earnings per share
$
21.67
$
4.48
$
17.19
383.7
%
Diluted earnings per share
$
21.47
$
4.44
$
17.03
383.6
%
Fiscal Year: 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 $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 $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 $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 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 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 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.
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ANALYSIS OF OPERATING REVENUE AND INCOME BY SEGMENT
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: 2021 compared with 2020:
Years Ended December 31,
(Dollars in millions)
2021
2020
Change
Ocean Transportation revenue
$
3,132.8
$
1,853.9
$
1,278.9
69.0
%
Operating costs and expenses
(1,995.1)
(1,609.1)
(386.0)
24.0
%
Operating income
$
1,137.7
$
244.8
$
892.9
364.7
%
Operating income margin
36.3
%
13.2
%
Volume (Forty-foot equivalent units (FEU), except for automobiles) (1)
Hawaii containers
157,600
145,700
11,900
8.2
%
Hawaii automobiles
46,600
46,600
—
0.0
%
Alaska containers
78,200
72,600
5,600
7.7
%
China containers
184,800
118,900
65,900
55.4
%
Guam containers
21,900
18,900
3,000
15.9
%
Other containers (2)
20,200
17,500
2,700
15.4
%
(1) Approximate volumes included for the period are based on the voyage departure date, but revenue and operating income are adjusted to reflect the percentage of revenue and operating income earned during the reporting period for voyages in transit at the end of each reporting period.
(2) Includes containers from services in various islands in Micronesia and the South Pacific, and Okinawa, Japan.
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 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 primarily driven by higher lift volume and higher other terminal revenue.
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Logistics: 2021 compared with 2020:
Years Ended December 31,
(Dollars in millions)
2021
2020
Change
Logistics revenue
$
792.5
$
529.4
$
263.1
49.7
%
Operating costs and expenses
(742.7)
(493.9)
(248.8)
50.4
%
Operating income
$
49.8
$
35.5
$
14.3
40.3
%
Operating income margin
6.3
%
6.7
%
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
Sources of liquidity available to the Company at December 31, 2021 compared to December 31, 2020, were as follows:
Cash and Cash Equivalents, Restricted Cash and Accounts Receivable : Cash and cash equivalents, restricted cash and accounts receivable, net, as of December 31, 2021 and 2020 were as follows:
As of December 31,
(In millions)
2021
2020
Change
Cash and cash equivalents
$
282.4
$
14.4
$
268.0
Restricted cash
$
5.3
$
5.3
$
—
Accounts receivable, net (1)
$
343.7
$
253.4
$
90.3
(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:
As of December 31,
Change
(In millions)
2021
2020
2019
2021-2020
2020-2019
Net cash provided by operating activities (1)
$
984.1
$
429.8
$
248.8
$
554.3
$
181.0
Net cash used in investing activities (2)
(323.4)
(177.0)
(306.9)
(146.4)
129.9
Net cash (used in) provided by financing activities (3)
(392.7)
(261.5)
62.0
(131.2)
(323.5)
Net increase (decrease) in cash, cash equivalents and restricted cash
268.0
(8.7)
3.9
276.7
(12.6)
Cash, cash equivalents and restricted cash, beginning of the period
19.7
28.4
24.5
(8.7)
3.9
Cash, cash equivalents and restricted cash, end of the period
$
287.7
$
19.7
$
28.4
$
268.0
$
(8.7)
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(1) Changes in Net Cash Provided by Operating Activities: Changes in net cash provided by operating activities for the years ended December 31, 2021, 2020 and 2019 were as follows:
Change
(In millions)
2021-2020
2020-2019
Net income
$
734.3
$
110.4
Amortization of operating lease right of use assets
28.5
14.1
Depreciation and amortization
21.0
14.5
Non-cash deferred income taxes
(18.9)
28.5
Other non-cash related changes, net
(3.1)
11.7
Income and distributions from SSAT, net
(38.5)
24.7
Accounts receivable, net
(42.3)
(65.8)
Prepaid expenses and other assets
(70.0)
(2.6)
Accounts payable, accruals and other liabilities
(5.2)
58.7
Operating lease liabilities
(23.8)
(16.0)
Deferred dry-docking payments
(19.5)
9.1
Deferred dry-docking amortization
(0.8)
(9.2)
Other long-term liabilities
(7.4)
2.9
Total
$
554.3
$
181.0
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 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: Changes in net cash used in investing activities for the years ended December 31, 2021, 2020 and 2019 were as follows:
Change
(In millions)
2021-2020
2020-2019
Cash deposits into CCF
$
101.2
$
(36.2)
Withdrawals from CCF
(101.2)
36.2
Other capital expenditures
(205.9)
(13.3)
Capitalized vessel construction expenditures
72.9
131.3
Proceeds from disposal of property and equipment, net
(13.4)
11.9
Total
$
(146.4)
$
129.9
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. 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
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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:
Change
(In millions)
2021-2020
2020-2019
Proceeds received from issuance of fixed interest debt
$
(325.5)
$
325.5
Repayments of fixed interest debt
157.2
(174.4)
Repayments and borrowings under revolving credit facility, net
235.5
(451.4)
Repurchase of Matson common stock
(198.3)
—
Payment of financing costs
15.5
(18.5)
Tax withholding related to net share settlements of restricted stock units
(8.8)
(2.5)
Dividends paid
(6.7)
(2.0)
Change in other payments, net
(0.1)
(0.2)
Total
$
(131.2)
$
(323.5)
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.
Debt: Total debt as of December 31, 2021 and 2020 is as follows:
As of December 31,
(In millions)
2021
2020
Change
Revolving credit facility
$
—
$
71.8
$
(71.8)
Fixed interest debt
629.0
688.3
(59.3)
Total Debt
$
629.0
$
760.1
$
(131.1)
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. 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 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.
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Capital Expenditures: The Company expects to make the following capital expenditures during the years ending December 31, 2022 and 2023:
Expected Capital Expenditures (in millions)
2022
2023
Maintenance and other capital expenditures
$80 - $90
~ $75
Equipment to support new Ocean Transportation tradelane services
$55 - $60
—
Payments on new neighbor island flat-deck barge
~ $10
—
LNG installations on existing vessels
$15 - $20
$55 - $65
Total Estimated Capital Expenditures
$160 - $180
$130 - $140
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
Commitments and Contingencies: A description of other commitments and contingencies is set forth in Note 9, Note 11 and Note 17 to the Consolidated Financial Statements in Item 8 of Part II below, and is incorporated herein by reference.
Off-balance sheet Arrangements: 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
The Company’s significant accounting policies are described in Note 2 to the Consolidated Financial Statements in Item 8 of Part II below. The preparation of Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America, upon which the Company’s Management Discussion and Analysis of Financial Condition and Results of Operations is based, requires that management exercise judgment when making accounting estimates about future events that may affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Future events and their effects cannot be determined with certainty and actual results will, inevitably, differ from those accounting estimates. 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
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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. Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of our Board of Directors.
Long-Lived Assets, Intangible Assets and Goodwill: The Company evaluates its long-lived assets, intangible assets and goodwill for possible impairment in the fourth quarter, or whenever events or changes in circumstances indicate that it is more likely than not that the fair value is less than its carrying amount. The Company has reporting units within the Ocean Transportation and Logistics reportable segments.
Long-lived Assets and Finite-lived Intangible Assets: Long-lived assets and finite-lived intangible assets are grouped at the lowest level reporting unit for which identifiable cash flows are available. In evaluating for impairment, the estimated future undiscounted cash flows generated by each of these asset groups are compared with the carrying value recorded for each asset group to determine if its carrying value is recoverable. If this review determines that the amount recorded will not be recovered, the amount recorded for the asset group is reduced to its estimated fair value. These asset impairment analyses are highly subjective because they require management to make assumptions and apply considerable judgments to, among other things, estimates of the timing and amount of future cash flows, expected useful lives of the assets, potential impact of future events, including changes in economic conditions and operating performance, and future costs of maintenance and improvements of the assets. 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. The Company has evaluated its long-lived assets and finite-lived intangible assets for impairment and determined that there was no impairment for the years ended December 31, 2021, 2020 and 2019.
Indefinite-life Intangible Assets and Goodwill: The Company’s intangible assets include goodwill, customer relationships and a trade name, and are grouped at the lowest level reporting unit for which identifiable cash flows are available. In estimating the fair value of a reporting unit, the Company uses a combination of a discounted cash flow model and fair value based on market multiples of earnings before interest, income taxes, depreciation and amortization (“EBITDA”). The discounted cash flow approach requires the Company to use a number of assumptions, including market factors specific to the business, the amount and timing of estimated future cash flows generated by the business over an extended period of time, long-term growth rates for the business, and a discount rate that considers the risks related to the amount and timing of the cash flows. Although the assumptions used by the Company in its discounted cash flow model are consistent with the assumptions the Company used to generate its internal strategic plans and forecasts, significant judgment is required to estimate the amount and timing of future cash flows from the reporting unit and the risk of achieving those cash flows. When using market multiples of EBITDA, the Company makes judgments about the comparability of multiples in closed and proposed transactions. Accordingly, changes in assumptions and estimates, including, but not limited to, changes driven by external factors, such as industry and economic trends, and those driven by internal factors, such as changes in the Company’s business strategy and its internal forecasts, could have a material effect on the Company’s financial condition or its future operating results. 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, 2021, 2020 and 2019.
Insurance Related Liabilities: The Company is uninsured for certain risks but when feasible, many of these risks are mitigated by insurance. The Company purchases insurance with deductibles or self-insured retentions. Such insurance includes, but is not limited to, employee health, workers’ compensation, marine liability, cybersecurity, auto liability and physical damage to property and equipment. 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, 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. 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
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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: The estimation of the Company’s pension and post-retirement benefit expenses and liabilities requires the Company to make various assumptions. These assumptions include factors such as discount rates, expected long-term rate of return on pension plan assets, salary growth, health care cost trend rates, inflation, retirement rates, mortality rates and expected contributions. Actual results that differ from the assumptions made could materially affect the Company’s financial condition or its future operating results. The effects of changing assumptions are included in unamortized net gains and losses, which directly affect accumulated other comprehensive income (loss). Additionally, these unamortized gains and losses are amortized and reclassified to income (loss) over future periods.
Additional information about the Company’s pension and post-retirement plans and assumptions used is included in Note 11 to the Consolidated Financial Statements in Item 8 of Part II below.
Income Taxes: The Company’s income tax expense requires the Company to make various estimates and judgments. These estimates and judgments are applied in the calculation of taxable income, tax credits, tax benefits and deductions, and in the calculation of certain deferred tax assets and liabilities, which arise from differences in the timing of recognition of revenue, costs and expenses for tax purposes. The calculation of deferred tax assets and liabilities may be impacted by various factors including but not limited to changes in tax rates; changes in tax laws, regulations, and rulings; changes in interpretations of existing tax laws, regulations and rulings; and changes in the evaluation of the Company’s ability to realize deferred tax assets including operating loss and tax credit carryforwards. Deferred tax assets and liabilities are adjusted to the extent necessary to reflect tax rates expected to be in effect when the temporary differences reverse. Significant changes to these estimates may result in an increase or decrease to the Company’s income taxes in a subsequent period.
The Company records a valuation allowance if, based on the weight of available evidence, management believes that it is more likely than not that some portion or all of a recorded deferred tax asset would not be realized in future periods.
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.