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Item 7. Management’s Discussion and Analysis

2023-02-24 compared with 2022-02-25 · 118 added, 117 removed, 219 unchanged (52% of the section changed)

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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.

MD&A is provided as a supplement to the Consolidated Financial Statements and the accompanying notes to the Consolidated Financial Statements in Item 8 of Part II below, and should be read in conjunction with the Company’s Annual Reports on Form 10-K and other reports on Forms 10-Q and 8-K, and other publicly available information.

Discussion and analysis of the financial condition and results of operations of Matson for the years ended December 31, 2021 and 2020 can be found in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 , filed with the SEC on February 25, 2022.

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The comparative selected financial information of the Company is presented for each of the five years in the period ended December 31, 2022.

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):

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 to the Consolidated Financial Statements in Item 8 of Part II below):

(In millions, except per share amounts)

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Total Operating Income

Interest income

Interest expense

Other income (expense), net

Income before Income Taxes

Income before Taxes

Income taxes (2)

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Cash and cash equivalents

Total debt obligations — including current portion

Capital Construction Fund (3)

Total Debt (before deferred loan fees deduction) (4)

Total Shareholders' equity

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(1) The Ocean Transportation segment includes $83.1 million, $56.3 million, $26.3 million, $20.8 million and $36.8 million of equity in income from the Company’s investment in SSAT for 2022, 2021, 2020, 2019 and 2018, 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.

(2) Income taxes for the years ended December 31, 2019 and 2018 include a non-cash income tax (expense)/benefit of $2.9 million and $(2.9) 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.

(3) The Company’s Capital Construction Fund is described in Note 7 to the Consolidated Financial Statements in Item 8 of Part II.

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

FOURTH QUARTER 2022 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.

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.

The Company’s container volume in the Hawaii service in the fourth quarter 2022 was 13.0 percent lower year-over-year.

The decrease was primarily due to (i) lower retail- and hospitality-related demand compared to elevated pandemic levels in the year ago period and (ii) one less week .

During the quarter, the Company saw retail customers continue to manage inventories to weaker consumer demand levels despite continued improvement in the Hawaii economy supported by a low unemployment rate and relatively strong tourist arrivals, including a modest improvement in international tourist trends.

In the near-term, Matson expects economic growth in Hawaii supported by continued strength in tourism and a low unemployment rate, but there are negative trends as a result of higher inflation, higher interest rates and the end of the pandemic-era stimulus helping personal income that creates uncertainty in the economic growth trajectory.

In China, the Company’s container volume in the fourth quarter 2022 decreased 47.2 percent year-over-year.

The decrease was primarily due to (i) lower demand for the CLX and CLX+ services, (ii) the discontinuation of the CCX service in the third quarter 2022 and (iii) one less week.

Matson continued to realize a significant rate premium over the Shanghai Containerized Freight Index (“SCFI”) in the fourth quarter 2022 but achieved average freight rates that were lower than in the year ago period.

Currently in the Transpacific marketplace, business conditions remain challenging as retailers continue to right-size inventories amid weakening consumer demand, increasing interest rates and economic uncertainty.

As such, the Company expects its CLX and CLX+ services in the first quarter and first half of the year to reflect freight demand levels below normalized conditions with lower year-over-year volumes and a lower rate environment.

Absent an economic “hard landing” in the U.S., Matson expects improved trade dynamics in the second half of 2023 as the Transpacific marketplace transitions to a more normalized level of demand.

Regardless of the economic environment, Matson operates the two fastest and most reliable ocean services and, as a result, the Company expects to continue to earn a significant rate premium to the SCFI .

In Guam, the Company’s container volume in the fourth quarter 2022 decreased 14.0 percent year-over-year primarily due to lower retail-related demand.

In the near-term, the Company expects continued improvement in the Guam economy with increasing tourism and a low unemployment rate, but there are negative trends as a result of higher inflation, higher interest rates and the end of the pandemic-era stimulus helping personal income that creates uncertainty in the economic growth trajectory.

In Alaska, the Company’s container volume for the fourth quarter 2022 decreased 7.7 percent year-over-year due to (i) lower northbound volume primarily due to one less sailing and one less week and (ii) lower southbound volume primarily due to lower domestic seafood volume and one less week, partially offset by higher export seafood volume from Alaska-Asia Express (“AAX”).

In the near-term, the Company expects the Alaska economy to benefit from low unemployment and increased energy-related exploration and production activity as a result of elevated oil prices, but there are negative trends as a result of higher inflation, higher interest rates and the end of the pandemic-era stimulus helping personal income that creates uncertainty in the economic growth trajectory.

The contribution in the fourth quarter 2022 from the Company’s SSAT joint venture investment was $1.0 million, or $20.3 million lower than the fourth quarter 2021.

The decrease was primarily driven by lower other terminal revenue, lower lift volume and higher operating costs.

In the fourth quarter 2022, operating income for the Company’s Logistics segment was $12.8 million, or $2.0 million lower compared to the level achieved in the fourth quarter 2021.

The decrease was primarily due to a lower contribution from supply chain management consistent with lower demand in the Transpacific tradelane.

CONSOLIDATED RESULTS OF OPERATIONS

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Operating income

Interest income

Interest expense

Other income (expense), net

Income before income taxes

Income before taxes

Basic earnings per share

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Operating Costs and Expenses for the year ended December 31, 2022 increased $251.6 million, or 9.2 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.

The increase was due to an increase in Ocean Transportation operating costs and expenses of $268.3 million, partially offset by a decrease in Logistics operating costs and expenses of $16.7 million.

Operating Income for the year ended December 31, 2022 increased $166.1 million, or 14.0 percent, compared to the prior year.

The increase was due to an increase in Ocean Transportation operating income of $143.5 million and an increase in Logistics operating income of $22.6 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.

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

Interest Income was $8.2 million for the year ended December 31, 2022 and was due to amounts on deposit in cash and cash equivalent accounts, and cash on deposit within the Capital Construction Fund that were invested in interest bearing accounts during the year ended December 31, 2022.

Interest income for the year ended December 31, 2021 was nominal.

Interest Expense was $18.0 million for the year ended December 31, 2022, compared to $22.6 million in the prior year.

The decrease in interest expense was due to lower outstanding debt during the year ended December 31, 2022, 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.

Other Income (Expense), net was $8.5 million for the year ended December 31, 2022, compared to $6.4 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.

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, 2022 were $288.4 million, or 21.3 percent of income before income taxes, compared to $243.9 million, or 20.8 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.

The 2021 income tax rate benefited from certain discrete tax adjustments that lowered the effective tax rate in the prior year.

Net Income during the year ended December 31, 2022 increased $136.5 million, or 14.7 percent, to $1,063.9 million for the year ended December 31, 2022, compared to the prior year.

ANALYSIS OF OPERATING REVENUE AND INCOME BY SEGMENT

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Ocean Transportation revenue increased $411.8 million, or 13.1 percent, during the year ended December 31, 2022, compared with the year ended December 31, 2021.

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.

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

On a year-over-year FEU basis, Hawaii container volume decreased 5.8 percent primarily due to lower retail-related demand and one less week;

Alaska volume increased 8.6 percent due to (i) higher export seafood volume from AAX, (ii) higher northbound volume primarily due to higher retail-related demand and volume related to a competitor’s dry-docking, partially offset by one less week and (iii) higher southbound volume primarily due to higher domestic seafood volume;

China volume was 11.7 percent lower primarily due to (a) lower demand for the CLX and CLX+ services and (b) one less week, partially offset by incremental volume on the CCX service;

Guam volume decreased 3.7 percent primarily due to lower retail-related volume;

and Other containers volume increased 11.4 percent.

Ocean Transportation operating income increased $143.5 million during the year ended December 31, 2022, compared with the year ended December 31, 2021.

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 increase was primarily due to higher freight rates in China and a higher contribution from SSAT, partially offset by lower volume in China, higher operating costs and expenses (including fuel-related expenses) primarily due to the CLX+ service and higher terminal handling costs.

The Company’s SSAT terminal joint venture investment contributed $83.1 million during the year ended December 31, 2022, compared to a contribution of $56.3 million during the year ended December 31, 2021.

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

The increase was primarily driven by higher other terminal revenue.

2022 compared with 2021:

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Logistics revenue increased $5.9 million, or 0.7 percent, during the year ended December 31, 2022, compared with the year ended December 31, 2021.

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.

The increase was primarily due to higher revenue in freight forwarding, supply chain management and warehousing, partially offset by lower transportation brokerage revenue.

Logistics operating income increased $22.6 million, or 45.4 percent, during the year ended December 31, 2022, compared with the year ended December 31, 2021.

The increase was primarily due to higher contributions from 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:

The Company’s primary sources of liquidity are its cash flows generated from operating activities and its debt.

Sources of liquidity available to the Company as of December 31, 2022 compared to December 31, 2021, were as follows:

Cash and Cash Equivalents, Restricted Cash and Accounts Receivable :

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(1) Eligible accounts receivable of $9.9 million and $9.8 million at December 31, 2022 and 2021, respectively, were assigned to the CCF.

For additional information on the CCF, see Note 7 to the Consolidated Financial Statements.

Changes in the Company’s cash, cash equivalents and restricted cash for the years ended December 31, 2022, 2021 and 2020 were as follows:

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Net cash used in investing activities (2)

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

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

Net cash used in financing activities (3)

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

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

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(In millions)

Amortization of operating lease right of use assets

Depreciation and amortization

Non-cash deferred income taxes

Non-cash depreciation and amortization

Deferred income taxes

Other non-cash related changes, net

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Operating lease liabilities

Non-cash amortization of operating lease right of use assets

Deferred dry-docking payments

Deferred dry-docking amortization

Non-cash deferred dry-docking amortization

Other long-term liabilities

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The increase in income from SSAT was primarily due to higher operating profits generated by SSAT during the year ended December 31, 2022, 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.

Cash distributions from SSAT were $47.3 million for the

year ended December 31, 2022, compared to $46.9 million in the prior year.

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

Changes in accounts receivable were primarily due to lower accounts receivables outstanding at the end of December 31, 2022, due to lower revenue at the end of the year as compared to prior year, and the timing of collections associated with those receivables.

Changes in prepaid expenses and other assets were primarily due to increased prepaid fuel, insurance and other operating related costs, primarily due to an increase in the cost for such expenses, and prepaid income taxes primarily due to the use of the CCF fund during the year ended December 31, 2022, compared to the prior year.

Changes in accounts payable, accruals and other liabilities were primarily due to a decrease in operating activity resulting in a reduction 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 leases that expired during the year ended December 31, 2022.

Deferred dry-docking payments were $25.7 million for the year ended December 31, 2022, compared to $36.3 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.

The decrease in deferred dry-docking payments was due to a decrease in vessel dry-dock related activities during the year ended December 31, 2022, compared to the prior year.

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

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Withdrawals from CCF

Other capital expenditures

Capitalized vessel construction expenditures

Proceeds from disposal of property and equipment, net

Other capital expenditures

Proceeds from disposal of property and equipment, net, and other

Capitalized vessel construction expenditures was $62.4 million for the year ended December 31, 2022, compared to $14.9 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.

The increase in capitalized vessel construction expenditures (including cash and interest deposited into the CCF less cash withdrawals from the CCF which are used for vessel construction related payments) was due to the commencement of the Company’s new fleet renewal program in 2022.

Capitalized vessel construction expenditures incurred in 2022 related to milestone payments on the construction of three new vessels and the construction of a new flat-deck barge.

Other capital expenditures (excluding capitalized vessel construction expenditures) was $146.9 million for the year ended December 31, 2022, compared to $310.4 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

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:

Other capital expenditures during the year ended December 31, 2021 included the purchase of additional containers, chassis and other terminal equipment to support the increase in the Company’s operational activities, and the repurchase of Maunalei vessel for $95.8 million.

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

Changes in net cash used in financing activities for the years ended December 31, 2022, 2021 and 2020 were as follows:

(In millions)

Repurchase of Matson common stock

Proceeds received from issuance of fixed interest debt

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Repayments and borrowings under revolving credit facility, net

Repurchase of Matson common stock

Withholding tax related to net share settlements of restricted stock units

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.

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.

The Company paid $397.0 million to repurchase common stock during the year ended December 31, 2022, compared to $198.3 million in the prior year.

The Company did not issue any new fixed interest debt during the years ended December 31, 2022 and 2021.

The Company paid $111.5 million of prepaid and scheduled fixed interest debt principal payments, compared to $59.3 million of scheduled principal payments paid during the prior year.

During the year ended December 31, 2021, the Company paid $71.8 million, net to fully repay the Company’s revolving credit facility.

There were no borrowings under the revolving credit facility during the year ended December 31, 2022.

Capital Construction Fund:

The Company utilizes its CCF to fund milestone payments for the construction of new vessels.

The Company’s CCF is described in Note 7 to the Consolidated Financial Statements.

Cash on deposit in the CCF and assigned accounts receivable as of December 31, 2022 and 2021 is as follows:

As of December 31,

(In millions)

Capital Construction Fund:

Cash on deposit

Assigned accounts receivables

During the years ended December 31, 2022 and 2021, the Company deposited $582.8 million and $31.2 million into the CCF, respectively.

During the years ended December 31, 2022 and 2021, the Company made withdrawals of $64.6 million and $31.2 million out of the CCF, respectively, which were used to make milestone payments for the construction of new vessels.

Cash on deposit in the CCF is held in short term U.S.

Treasury Obligation Funds and classified as a long-term asset in the Company’s Consolidated Balance Sheets, as the Company intends to use qualified cash withdrawals from the CCF to fund long-term investments in the construction of new vessels.

Assigned accounts receivable in the CCF are classified as part of accounts receivable in the Consolidated Balance Sheets due to the nature of the assignment.

On February 17, 2023, the Company pledged an additional $200.0 million of eligible accounts receivables to the CCF, and deposited an additional $100.0 million of cash into the CCF.

The Company utilizes a mix of fixed and variable debt for liquidity and to fund the Company’s operations.

Total debt as of December 31, 2022 and 2021 is as follows:

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(In millions)

Revolving credit facility

Fixed interest debt

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.

Total debt decreased by $111.5 million during the year ended December 31, 2022 compared to the prior year.

The decrease in fixed interest debt was due to the prepayment of $50.4 million of outstanding principal of private placement term loans and scheduled debt repayments of private placement term loans and Title XI debt made during the year ended December 31, 2022.

As of December 31, 2022, the Company had $642.1 million of unused capacity under the revolving credit facility, with a maturity date of March 31, 2026.

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

On January 27, 2023, the Company prepaid $14.3 million of outstanding principal on the Maunawili Title XI Bonds representing all of the remaining outstanding principal for this bond.

The Company is also expecting to prepay the outstanding principal of approximately $12.1 million Manukai Title XI Bonds in March 2023, representing all of the estimated outstanding principal for this bond.

The Company’s Title XI Bonds are described in Note 8 to the Consolidated Financial Statements in Item 8 of Part II below.

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.

The Company had a working capital surplus of $178.0 million at December 31, 2022, compared to a working capital surplus of $92.1 million at December 31, 2021.

Working capital is primarily impacted by the amount of net cash provided by operating activities, the amount of capital expenditures, the amount and timing of collections associated with accounts receivable, prepaid expenses and other assets, and by the amount and timing of payments associated with accounts payable, accruals, income taxes, debt and other liabilities.

The increase in the Company’s working capital surplus during the year ended December 31, 2022 was due to the increase in cash provided by operating activities.

Capital Expenditures:

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Expected Capital Expenditures (in millions)

New vessel construction milestone payments and related costs

LNG installations and reengining on existing vessels

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.

New vessel construction milestone payments and related costs are for the Company’s new vessel program for the construction of three new vessels at a cost of approximately $1.0 billion with expected delivery dates during the fourth quarter of 2026, the second quarter of 2027 and the fourth quarter of 2027.

Future milestone payments are expected to be financed with cash currently on deposit in the Company’s CCF, cash and cash equivalents on the Consolidated Balance Sheets and through cash flows generated from future operations, borrowings available under the Company’s unsecured revolving credit facility or additional debt financings .

LNG installations on existing vessels includes capital expenditures for the installation of tanks, piping and cryogenic equipment on existing Aloha Class vessels so that they can operate on LNG and conventional fuels.

The LNG installation project on Daniel K.

Inouye has begun and work on Kaimana Hila is currently scheduled to begin during the second quarter of 2024.

Each installation is expected to cost approximately $35 million.

Additionally, the Company plans to begin reengining Manukai to operate on LNG and conventional fuels during the second quarter of 2023 at a total cost of approximately $60 million.

Maintenance and other capital expenditures include amounts that the Company expects to spend on various capital projects including capital expenditures related to the second and third phase of its program to modernize and renovate its terminal facility at Sand Island, Honolulu, Hawaii, repurchases of leased equipment, vessel maintenance and annual equipment purchases to support the Company’s operations.

Repurchase of Shares:

During the year ended December 31, 2022, the Company repurchased approximately 5.0 million shares for a total cost of $397.0 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.

The maximum remaining number of shares that may be repurchased under the Company’s stock repurchase program was 1,533,371 shares at December 31, 2022.

COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET ARRANGEMENTS

3 unchanged sentences

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

CRITICAL ACCOUNTING ESTIMATES

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

3 unchanged sentences

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.

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

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

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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.

Long-lived assets and finite-lived intangible assets are grouped at the lowest level 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.

42 unchanged sentences

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