BUSINESS COMBINATION

6 Months Ended

Jun. 30, 2016

BUSINESS COMBINATION

BUSINESS COMBINATION

3.          BUSINESS COMBINATION

Horizon Acquisition: On May 29, 2015 (the “Effective Date”), Matson completed its acquisition of Horizon whereby MatNav acquired Horizon’s Alaska operations and assumed all of Horizon’s non-Hawaii assets and liabilities (the “Horizon Acquisition”).  Immediately before the completion of the Horizon Acquisition, Horizon sold certain of its subsidiaries to the Pasha Group (the “Pasha Transaction”) that: (i) conducted Horizon’s Hawaii operations (including owning the assets used to conduct such Hawaii operations and being responsible for the liabilities related thereto), and (ii) employed the Horizon employees who conducted its Hawaii operations.  Horizon also completed the termination of its Puerto Rico operations during the first quarter of 2015.  The Alaska operations are recorded within the Ocean Transportation segment of the Company.

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.  As a result of the Horizon Acquisition, the Company thereby acquired Horizon’s assets and thereby 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

As of June 30, 2016, the Company has finalized the purchase accounting for the Horizon Acquisition.  Horizon’s assets and liabilities acquired pursuant to the Horizon Acquisition were recorded based on the fair value estimates as of the Effective Date, with the remaining unallocated purchase price recorded as goodwill.  The following table summarizes the fair values assigned to Horizon’s assets acquired and liabilities assumed as a result of the Horizon Acquisition as of June 30, 2016:

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		46.3
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		(31.4)
Multi-employer withdrawal liability		(65.5)
Capital lease obligations		(1.6)
Horizon’s debt and warrants		(467.5)
Total identifiable assets less liabilities		(188.3)
Total cash paid for common shares		(29.4)
Goodwill	$	217.7

The amounts above include $2.0 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 adjustments relate primarily to the receipt of additional information regarding the fair value of certain assets acquired and liabilities assumed.  These adjustments include a $4.9 million adjustment to increase the Puerto Rico multi-employer withdrawal liability, offset by a $0.7 million adjustment to increase deferred tax assets and a $0.7 million adjustment to decrease accruals and other current liabilities, in the three and six months ended June 30, 2016, and a corresponding increase in goodwill of $3.5 million as a result of the Company receiving the final calculation of the required payments from the Trustees of the Puerto Rico Pension Fund on May 27, 2016. 

The final Puerto Rico multi-employer withdrawal liability was determined to be approximately $102.0 million, payable in 98 quarterly installments of $1,036,647, and a remainder payment.  Based upon the Company’s incremental borrowing rate of 3.87 percent, the Company determined the final fair value of the multi-employer withdrawal payments to be $65.5 million at May 29, 2015 compared to the preliminary allocation of $60.6 million.  The Company also recorded a $1.1 million adjustment to increase interest expense in the Consolidated Statements of Income and Comprehensive Income, with a corresponding increase to multi-employer withdrawal liability in the three and six months ended June 30, 2016, as a result of these purchase accounting changes and the accretion of the fair value of the multi-employer withdrawal liability.

The Company's Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2016 include revenue of $63.5 million and $134.2 million, and operating income of $3.4 million and $10.4 million, respectively, from Horizon’s operations. One-time acquisition related costs incurred post December 31, 2015 were not material. 

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)		(Unaudited)
	Three Months Ended		Six Months Ended
	June 30,		June 30,
(in millions, except per-share amount)	2015		2015
Pro Forma Combined:
Operating revenue	$	507.2	$	980.6
Net income	$	7.6	$	25.1
Basic Earnings Per-Share:	$	0.17	$	0.58
Diluted Earnings Per-Share:	$	0.17	$	0.57
Weighted-Average Number of Shares Outstanding:
Basic		43.5		43.4
Diluted		44.0		43.9