MATSON, INC. 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 2023 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 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
MD&A is presented in the following sections:
? Historical Financial Information
? Fourth Quarter 2022 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 endedDecember 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 endedDecember 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) 2022 2021 2020 2019 2018 Operating Revenue: Ocean Transportation$ 3,544.6 $ 3,132.8 $ 1,853.9 $ 1,666.6 $ 1,641.3 Logistics 798.4 792.5 529.4 536.5 581.5 Total Operating Revenue$ 4,343.0 $ 3,925.3 $
2,383.3
Operating and Net Income: Ocean Transportation (1)$ 1,281.2 $ 1,137.7 $ 244.8 $ 90.8 $ 131.1 Logistics 72.4 49.8 35.5 38.3 32.7 Total Operating Income 1,353.6 1,187.5
280.3 129.1 163.8 Interest income 8.2 - - - - Interest expense (18.0) (22.6) (27.4) (22.5) (18.7)
Other income (expense), net 8.5 6.4
6.1 1.2 2.6 Income before Taxes 1,352.3 1,171.3 259.0 107.8 147.7 Income taxes (2) (288.4) (243.9) (65.9) (25.1) (38.7) Net Income$ 1,063.9 $ 927.4 $ 193.1 $ 82.7 $ 109.0 Capital Expenditures: Ocean Transportation$ 190.9 $ 322.4 $ 190.0 $ 294.5 $ 385.4 Logistics 18.4 2.9 2.3 15.8 15.8
Total Capital Expenditures$ 209.3 $ 325.3 $
192.3
Depreciation and Amortization: Ocean Transportation$ 133.2 $ 128.6 $ 107.4 $ 93.6 $ 87.0 Logistics 8.1 7.3 7.5 6.8 7.4 141.3 135.9 114.9 100.4 94.4 Deferred Dry-docking Amortization - Ocean Transportation 24.9 24.3 25.1 34.3 37.4 Total Depreciation and Amortization$ 166.2 $ 160.2 $
140.0
Earnings Per Share in Net Income: Basic$ 27.28 $ 21.67 $ 4.48 $ 1.93 $ 2.55 Diluted$ 27.07 $ 21.47 $ 4.44 $ 1.91 $ 2.53
Cash dividends per share declared$ 1.22 $ 1.06 $
0.90
As ofDecember 31 : Cash and cash equivalents$ 249.8 $ 282.4 $ 14.4 $ 21.2 $ 19.6 Capital Construction Fund (3)$ 518.2 $ - $ - $ - $ - Total Debt (before deferred loan fees deduction) (4)$ 517.5 $ 629.0 $ 760.1 $ 958.4 $ 856.4 Total Shareholders' equity$ 2,296.9 $ 1,667.4 $
961.2$ 805.7 $ 755.3 Shares outstanding 36.3 41.0 43.2 42.9 42.7
The Ocean Transportation segment includes
Company's investment in SSAT for 2022, 2021, 2020, 2019 and 2018,
respectively.
Income taxes for the years ended December 31, 2019 and 2018 include a
non-cash income tax (expense)/benefit of
and liabilities and other discrete adjustments as a result of applying the
Tax Cut and Jobs Act of 2017.
(3) The Company's
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.
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FOURTH QUARTER 2022 DISCUSSION AND UPDATE ON BUSINESS CONDITIONS
Ocean Transportation: The Company's container volume in theHawaii 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 theHawaii 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 inHawaii 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. InChina , 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 theU.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. InGuam , 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 theGuam 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. InAlaska , 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 theAlaska 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
Logistics: 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. 30 Table of Contents
CONSOLIDATED RESULTS OF OPERATIONS
The following analysis of the financial results of operations of Matson for the years endedDecember 31, 2022 and 2021 should be read in conjunction with the Consolidated Financial Statements in Item 8 of Part II below.
Consolidated Results: 2022 compared with 2021:
Years Ended December 31,
(Dollars in millions, except per share amounts) 2022 2021 Change
Operating revenue $ 4,343.0 $ 3,925.3 $ 417.7 10.6 %
Operating costs and expenses (2,989.4) (2,737.8) (251.6) 9.2 %
Operating income 1,353.6 1,187.5 166.1 14.0 %
Interest income 8.2 - 8.2 100.0 %
Interest expense (18.0) (22.6) 4.6 (20.4) %
Other income (expense), net 8.5 6.4 2.1 32.8 %
Income before taxes 1,352.3 1,171.3 181.0 15.5 %
Income taxes (288.4) (243.9) (44.5) 18.2 %
Net income $ 1,063.9 $ 927.4 $ 136.5 14.7 %
Basic earnings per share $ 27.28 $ 21.67 $ 5.61 25.9 %
Diluted earnings per share $ 27.07 $
21.47
Fiscal Year: Fiscal years ended
Consolidated Operating Revenue for the year endedDecember 31, 2022 increased$417.7 million , or 10.6 percent, compared to the prior year. The increase was due to an increase in Ocean Transportation revenue of$411.8 million and an increase in Logistics revenue of$5.9 million . Operating Costs and Expenses for the year endedDecember 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$268.3 million , partially offset by a decrease in Logistics operating costs and expenses of$16.7 million . Operating Income for the year endedDecember 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 "Analysis of Operating Revenue and Income by Segment."
Interest Income was$8.2 million for the year endedDecember 31, 2022 and was due to amounts on deposit in cash and cash equivalent accounts, and cash on deposit within theCapital Construction Fund that were invested in interest bearing accounts during the year endedDecember 31, 2022 . Interest income for the year endedDecember 31, 2021 was nominal.
Interest Expense was
Other Income (Expense), net was$8.5 million for the year endedDecember 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 endedDecember 31, 2021 .
Income Taxes for the year ended
Net Income during the year endedDecember 31, 2022 increased$136.5 million , or 14.7 percent, to$1,063.9 million for the year endedDecember 31, 2022 , compared to the prior year. 31 Table of Contents
ANALYSIS OF OPERATING REVENUE AND INCOME BY SEGMENT
The following analysis of operating revenue and income by segment for the years endedDecember 31, 2022 and 2021 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: 2022 compared with 2021:
Years Ended December 31,
(Dollars in millions) 2022 2021 Change
Ocean Transportation revenue $ 3,544.6 $ 3,132.8 $ 411.8 13.1 %
Operating costs and expenses (2,263.4) (1,995.1) (268.3) 13.4 %
Operating income $ 1,281.2 $ 1,137.7 $ 143.5 12.6 %
Operating income margin 36.1 % 36.3 %
Volume (Forty-foot equivalent units (FEU),
except for automobiles) (1)
Hawaii containers 148,500 157,600 (9,100) (5.8) %
Hawaii automobiles 41,300 46,600 (5,300) (11.4) %
Alaska containers 84,900 78,200 6,700 8.6 %
China containers 163,100 184,800 (21,700) (11.7) %
Guam containers 21,100 21,900 (800) (3.7) %
Other containers (2) 22,500 20,200 2,300 11.4 %
Approximate volumes included for the period are based on the voyage departure (1) 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
Ocean Transportation revenue increased$411.8 million , or 13.1 percent, during the year endedDecember 31, 2022 , compared with the year endedDecember 31, 2021 . The increase was primarily due to higher average freight rates inChina , higher fuel-related surcharge revenue and higher volume inAlaska , partially offset by lower volume inChina andHawaii . 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 endedDecember 31, 2022 , compared with the year endedDecember 31, 2021 . The increase was primarily due to higher freight rates inChina and a higher contribution from SSAT, partially offset by lower volume inChina , 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
Logistics: 2022 compared with 2021:
Years Ended December 31,
(Dollars in millions) 2022 2021 Change
Logistics revenue $ 798.4 $ 792.5 $ 5.9 0.7 %
Operating costs and expenses (726.0) (742.7) 16.7 (2.2) %
Operating income $ 72.4 $ 49.8 $ 22.6 45.4 %
Operating income margin 9.1 % 6.3 %
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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 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
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 ofDecember 31, 2022 compared toDecember 31, 2021 , were as follows:
Cash and Cash Equivalents, Restricted Cash and Accounts Receivable: Cash and
cash equivalents, restricted cash and accounts receivable, net, as of
As of December 31,
(In millions) 2022 2021 Change
Cash and cash equivalents $ 249.8 $ 282.4 $ (32.6)
Restricted cash $ 3.9 $ 5.3 $ (1.4)
Accounts receivable, net (1) $ 268.5 $ 343.7 $ (75.2) Eligible accounts receivable of
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
As of December 31,
Change
(In millions) 2022 2021 2020 2022-2021 2021-2020
Net cash provided by operating activities
(1) $ 1,271.9 $ 984.1 $ 429.8 $ 287.8 $ 554.3
Net cash used in investing activities (2) (729.3) (323.4) (177.0) (405.9) (146.4)
Net cash used in financing activities (3) (576.6) (392.7) (261.5) (183.9) (131.2)
Net (decrease) increase in cash, cash
equivalents and restricted cash (34.0) 268.0 (8.7) (302.0) 276.7
Cash, cash equivalents and restricted cash,
beginning of the period 287.7 19.7 28.4 268.0 (8.7)
Cash, cash equivalents and restricted cash,
end of the period $ 253.7 $ 287.7 $
19.7
Changes in Net Cash Provided by Operating Activities: Changes in net cash
(1) provided by operating activities for the years ended December 31, 2022 , 2021
and 2020 were as follows:
Change
(In millions) 2022-2021 2021-2020
Net income $ 136.5 $ 734.3
Non-cash depreciation and amortization 5.4 21.0
Deferred income taxes 57.0 (18.9)
Other non-cash related changes, net (1.7) (3.1)
Income and distributions from SSAT, net (26.4) (38.5)
Accounts receivable, net 164.9 (42.3)
Prepaid expenses and other assets 2.9 (70.0)
Accounts payable, accruals and other liabilities (71.3) (5.2)
Operating lease liabilities (54.4) (23.8)
Non-cash amortization of operating lease right of use assets 49.7 28.5
Deferred dry-docking payments 10.6 (19.5)
Non-cash deferred dry-docking amortization 0.6 (0.8)
Other long-term liabilities 14.0 (7.4)
Total $ 287.8 $ 554.3
Income from SSAT was $83.1 million for the year ended December 31, 2022 ,
compared to $56.3 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, 2022 , compared to the prior year. Cash distributions from
SSAT were $47.3 million for the
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year endedDecember 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 ofDecember 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 endedDecember 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 endedDecember 31, 2022 . Deferred dry-docking payments were$25.7 million for the year endedDecember 31, 2022 , compared to$36.3 million in the prior year. The decrease in deferred dry-docking payments was due to a decrease in vessel dry-dock related activities during the year endedDecember 31, 2022 , compared to the prior year. Changes inNet Cash Used in Investing Activities: Changes in net cash used in (2) investing activities for the years endedDecember 31, 2022 , 2021 and 2020 were as follows: Change (In millions) 2022-2021 2021-2020 Cash deposits into CCF$ (551.6) $ 101.2 Withdrawals from CCF 33.4 (101.2) Capitalized vessel construction expenditures (47.5) 72.9 Other capital expenditures 163.5 (205.9) Proceeds from disposal of property and equipment, net, and other (3.7) (13.4) Total$ (405.9) $ (146.4)
Capitalized vessel construction expenditures was$62.4 million for the year endedDecember 31, 2022 , compared to$14.9 million in the prior year. 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 endedDecember 31, 2022 , compared to$310.4 million for the prior year. Other capital expenditures during the year endedDecember 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$95.8 million . Changes inNet Cash Used in Financing Activities: Changes in net cash used in (3) financing activities for the years endedDecember 31, 2022 , 2021 and 2020 were as follows: Change (In millions) 2022-2021 2021-2020
Repurchase of Matson common stock$ (198.7) $ (198.3) Proceeds received from issuance of fixed interest debt - (325.5) Repayments of fixed interest debt (52.2) 157.2 Repayments and borrowings under revolving credit facility, net 71.8 235.5 Withholding tax related to net share settlements of restricted stock units
(5.7) (8.8)
Payment of financing costs 3.0 15.5
Dividends paid (2.1) (6.7)Change in other payments, net
- (0.1)
Total $ (183.9) $ (131.2) The Company paid$397.0 million to repurchase common stock during the year endedDecember 31, 2022 , compared to$198.3 million in the prior year. The Company did not issue any new fixed interest debt during the years endedDecember 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 endedDecember 31, 2021 , the Company paid$71.8 million , net to fully repay the Company's revolving credit facility. There were no borrowings under the revolving credit facility during the year endedDecember 31, 2022 . 34
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Capital Construction Fund : The Company utilizes its CCF to fund milestone payments for the construction of new vessels. The Company's CCF is described in Note 7 to the Consolidated Financial Statements. Cash on deposit in the CCF and assigned accounts receivable as ofDecember 31, 2022 and 2021 is as follows: As of December 31, (In millions) 2022 2021Capital Construction Fund : Cash on deposit$ 518.2 $ - Assigned accounts receivables$ 9.9 $ 9.8 During the years endedDecember 31, 2022 and 2021, the Company deposited$582.8 million and$31.2 million into the CCF, respectively. During the years endedDecember 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 termU.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
Debt: The Company utilizes a mix of fixed and variable debt for liquidity and to fund the Company's operations. Total debt as ofDecember 31, 2022 and 2021
is as
follows:
As of December 31 ,
(In millions) 2022 2021 Change
Fixed interest debt
$ 517.5 $ 629.0 $ (111.5) Total debt decreased by$111.5 million during the year endedDecember 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 endedDecember 31, 2022 . As ofDecember 31, 2022 , the Company had$642.1 million of unused capacity under the revolving credit facility, with a maturity date ofMarch 31, 2026 . The Company's debt is described in Note 8 to the Consolidated Financial Statements in Item 8 of Part II. OnJanuary 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 inMarch 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$178.0 million atDecember 31, 2022 , compared to a working capital surplus of$92.1 million atDecember 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 endedDecember 31, 2022 was due to the increase in cash provided by operating activities. 35 Table of Contents
Capital Expenditures: The Company expects to make the following capital
expenditures during the years ending
Expected Capital Expenditures (in millions) 2023 2024
2025
New vessel construction milestone payments and related costs$55 $75
LNG installations and reengining on existing vessels$60 -$65 $50 -$55 - Maintenance and other capital expenditures$80 -$90 $80 -$90 $80 -$90 Total Estimated Capital Expenditures$195 -$210 $205 -
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 onDaniel K. Inouye has begun and work onKaimana 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 atSand 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
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 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 inthe 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 accounting estimates would have had a material impact on the financial condition or results of operations of the 36
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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 andGoodwill : 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 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 endedDecember 31, 2022 , 2021 and 2020. Indefinite-life Intangible Assets andGoodwill : 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 endedDecember 31, 2022 , 2021 and 2020. 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$45.4 million and$35.9 million atDecember 31, 2022 and 2021, respectively. The Company's estimate of insurance related liabilities could change if management uses different assumptions or if 37
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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.
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