3.BUSINESS COMBINATION

Horizon Acquisition:

The Company completed the Horizon Acquisition on May 29, 2015 (the “Effective Date”) by which MatNav acquired Horizon’s Alaska operations and assumed all of Horizon’s non-Hawaii assets and liabilities. Immediately before the completion of the Horizon Acquisition, Horizon sold its Hawaii operations, and related assets and liabilities to the Pasha Group (the “Pasha Transaction”). Horizon also completed the termination of its Puerto Rico operations during the first quarter of 2015.

On the Effective Date, a subsidiary of the Company merged with Horizon and as a result, the Company acquired 100 percent of Horizon’s outstanding shares and warrants for a cash price of $0.72 per-share. The Company also acquired Horizon’s assets and assumed its liabilities including Horizon’s debt (net of proceeds from the Pasha Transaction). Immediately following the Horizon Acquisition, the Company repaid the assumed debt which included accrued interest and breakage fees, and redeemed all of Horizon’s outstanding warrants.

Total consideration including debt paid and warrants redeemed by the Company is as follows:

(in millions)	Total Consideration
Common shares	$	29.4
Warrants	37.1
Horizon’s debt (including accrued interest and breakage fees)	428.9

Total	$	495.4

Horizon’s assets acquired and liabilities assumed were recorded based on fair value estimates as of the Effective Date, with the remaining unallocated purchase price recorded as goodwill. Such fair value estimates require significant judgment including the valuation of property and equipment, intangible assets, debt and warrants, the assumptions used in calculating the multi-employer withdrawal pension liabilities, and the determination of net deferred tax assets. The Company’s fair value estimates are subject to revision pending the Company’s final fair value analysis and purchase price calculations. Consequently, the fair value amounts presented are preliminary and are subject to revision. Final estimates of fair value, including the estimated fair value of multi-employer withdrawal liability may be significantly different from those reflected in the Company’s Consolidated Financial Statements as of December 31, 2015.

The following table summarizes the estimated fair values assigned to Horizon’s assets acquired and liabilities assumed as a result of the Horizon Acquisition as of December 31, 2015:

Purchase Price Allocation (in millions)	Total
Cash and cash equivalents	$	0.8
Accounts receivable	31.7
Other current assets	7.2
Deferred tax assets, net	45.6
Property and equipment	170.4
Intangibles - Customer relationships	140.0
Other long-term assets	4.1
Accounts payable	(22.8		)
Accruals and other current liabilities	(32.1		)
Multi-employer withdrawal liability	(60.6		)
Capital lease obligations	(1.6		)
Horizon’s debt and warrants	(467.5		)

Total identifiable assets less liabilities	(184.8		)
Total cash paid for common shares	(29.4		)

Goodwill	$	214.2

The amounts above include $5.5 million of purchase price adjustments recorded to the preliminary purchase price allocation initially reported in the Company’s interim condensed consolidated financial statements for the three and six-months ended June 30, 2015. Purchase price allocation adjustments relate primarily to the receipt of additional information regarding the fair value of certain assets acquired and liabilities assumed.

Deferred tax assets, net: The Company recorded Horizon’s deferred tax assets and liabilities, net of any change of ownership limitations and valuation allowance for State operating losses, of $45.6 million.

Property and equipment: Property and equipment of $170.4 million includes the fair value acquisition of seven Jones Act qualified containerships and vessel spare parts of $130.7 million, containers and equipment of $17.9 million, terminal facilities and other property of $9.7 million, and construction in progress of $12.1 million.

Intangibles, customer relationships: The Company recorded intangible assets of $140.0 million related to customer relationships, which are being amortized over 21 years. In determining the amortization period, the Company considered the historical trends of Horizon’s customers in the Alaska service and related attrition rates. The Company also considered potential future attrition risks, which are mitigated by the limited number of existing Jones Act-qualified vessels available that are required to perform competing ocean transportation services in Alaska, and the long delivery lead times associated with building such vessels in the U.S. The Company also considered existing competition and the high capital investment required to establish an asset-based ocean transportation business, the substantial investment required in infrastructure, and the need to develop a broad base of customer relationships over a period of time. As a result, the Company believes that the Alaska service customers are considered less vulnerable to attrition.

Multi-employer withdrawal liability: Horizon ceased all of its operations in Puerto Rico during the first quarter of 2015 which resulted in a mass withdrawal from its multi-employer ILA-PRSSA Pension Fund. The Company estimated the liability related to the multi-employer pension plan of $60.6 million based upon the expected future undiscounted payments of $73.9 million at May 29, 2015, to be paid by quarterly payments of approximately $1.0 million commencing the fourth quarter of 2015, payable over a period of approximately 18 years, discounted using the risk-free U.S. Treasury rate (see Note 12).

Debt and warrants: The Company recorded the fair value of debt and warrants of $467.5 million arising from the Horizon Acquisition, which included accrued interest and breakage fees. The Company subsequently repaid all of the debt and redeemed the warrants during the period ended June 30, 2015.

Goodwill: The Company recorded goodwill of $214.2 million arising from the Horizon Acquisition, which represents the excess of the fair value of the consideration paid by the Company over the fair value of the underlying identifiable Horizon assets acquired and liabilities assumed. In accordance with Accounting Standards Codification (ASC) 805, Business Combination, goodwill will not be amortized, but instead will be tested for impairment at least annually, and whenever events or circumstances have occurred that may indicate a possible impairment. The goodwill is recorded in the Ocean Transportation segment (see Note 6).

Goodwill arises as a result of several factors. The Horizon Acquisition represents an extension of the Company’s existing platform on the U.S. West Coast and extends the geographical reach of the Company’s ocean transportation services to include the port of Tacoma, Washington, to the ports of Anchorage, Kodiak, and Dutch Harbor in Alaska. The Horizon Acquisition also includes container stevedoring, container equipment and maintenance, and other terminal services in the Alaska ports of Anchorage, Kodiak and Dutch Harbor. Furthermore, the Horizon Acquisition provides an assembled workforce of experienced personnel with knowledge of the Alaska shipping industry and of its customers. The Company expects to leverage its existing infrastructure and operations to integrate the Alaska operations and eliminate duplicative corporate overhead costs.

The Company’s Consolidated Statements of Income and Comprehensive Income for the year ended December 31, 2015 include operating revenue of $179.3 million, and net losses before income taxes of $7.8 million, respectively, from Horizon’s operations. One-time acquisition related costs of approximately $19.0 million incurred as a result of the Horizon Acquisition, is included in selling, general and administrative costs in the Consolidated Statements of Income and Comprehensive Income.

Pro Forma Financial Information (Unaudited):

The following unaudited pro forma financial information presents the combined operating results of the Company, and those of Horizon excluding its Hawaii operations, as if the Horizon Acquisition had been completed at the beginning of each period presented below. The unaudited pro forma financial information includes the accounting effects of the business combination, including the amortization of intangible assets, depreciation of property and equipment, and interest expense. The unaudited pro forma financial information is presented for informational purposes only and is not indicative of the result of operations that would have been achieved if the Horizon Acquisition had taken place at the beginning of the periods presented, nor should it be taken as an indication of our future consolidated results of operations.

Unaudited pro forma financial information for the years ended December 31, 2015 and 2014 is as follows:

	(Unaudited)
	Year Ended
	December 31,
(in millions, except per-share amount)	2015		2014
Pro Forma Combined:
Operating revenue	$	2,019.7	$	2,045.1
Net income from continuing operations	$	100.2	$	61.7

Basic Earnings Per Share:	$	2.30	$	1.43
Diluted Earnings Per Share:	$	2.28	$	1.42

Weighted Average Number of Shares Outstanding:
Basic	43.5		43.0
Diluted	44.0		43.4

The following is a summary of the pro-forma adjustments to the Combined Consolidated Statement of Operations:

(1)

Eliminate operating revenue and net income related to Horizon’s Hawaii operations to reflect the Pasha Transaction.

(2)

Eliminate Horizon’s interest expense due to the repayment of Horizon’s debt, and record interest expense based upon an estimated Company borrowings.

(3)

Record additional depreciation and amortization expense due to increase in fair value of the acquired tangible and intangible assets.

(4)

Record adjustment to income tax expense based upon Matson’s estimated income tax rate.

(5)

Record adjustments for certain acquisition related expenses.