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SEC Filings

10-Q
NEXEO SOLUTIONS, INC. filed this Form 10-Q on 08/09/2016
Entire Document
 
Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the quarterly period ended June 30, 2016
or 
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the transition period from                 to             
Commission File Number: 001-36477
 
 
NEXEO SOLUTIONS, INC.
(Exact name of registrant as specified in its charter) 
Delaware
 
46-5188282
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
3 Waterway Square Place, Suite 1000
The Woodlands, Texas
 
77380
(Address of principal executive offices)
 
(Zip Code)
 
(281) 297-0700
(Registrant’s telephone number, including area code)
WL Ross Holding Corp.
1166 Avenue of the Americas
New York, New York 10036
December 31
(Former name, former address and former fiscal year, if changed since last report)
 
 
  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer o
 
Accelerated filer   x
 
 
 
Non-accelerated filer  o
(Do not check if a smaller reporting company)
 
Smaller reporting company  o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No  ý

As of August 4, 2016, there were 89,286,936 shares of the Company’s common stock issued and outstanding.



TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 

2


Glossary

The following terms and abbreviations appearing in the text of this report have the meanings indicated below.

2016 LTIP
The Nexeo Solutions, Inc. 2016 Long Term Incentive Plan approved by the shareholders of the Company on June 8, 2016
ABL Agent
Bank of America, N.A., as administrative and collateral agent of the New ABL Facility
ABL Borrowers
Holdings, Sub Holding and Solutions together with Nexeo Solutions Canada Corporation
ADA Purchase Agreement
Ashland Distribution Acquisition purchase agreement
ASC
The FASB Accounting Standards Codification
Ashland
Ashland Inc. and its affiliates
ASU
Accounting Standards Update issued by the FASB
Blocker
TPG Accolade Delaware, L.P.
Blocker Merger
The merger of Blocker Merger Sub into Blocker on June 9, 2016, immediately following the Company Merger, with Blocker continuing as the surviving entity
Blocker Merger Sub
Neon Acquisition Company LLC, which was a wholly-owned subsidiary of WLRH at the time of the Blocker Merger
Business Combination
The business combination between WLRH and Holdings pursuant to the Merger Agreement, which was consummated on June 9, 2016
CAD
Canadian dollar
Canadian Tranche
Canadian tranche of the New ABL Facility
Closing Date
June 9, 2016
Company / Successor
Nexeo Solutions, Inc. f/k/a WL Ross Holding Corp.
Company Merger
The merger of Company Merger Sub with and into Holdings consummated on June 9, 2016, with Holdings continuing as the surviving entity
Company Merger Sub
Neon Holding Company LLC, which was a wholly-owned subsidiary of WLRH at the time of the Company Merger
Deferred Cash Consideration
The deferred payment to be made in cash to the Selling Equityholders pursuant to the Merger Agreement, where such deferred cash payments will generally be in an amount equal to the Company’s prevailing stock price at the time that the Company pays such deferred cash payments multiplied by the number of Excess Shares or as otherwise set forth in the Merger Agreement

Director Founder Shares
30,000 original Founders Shares were transferred to the Company’s prior independent directors
DTSC
United States Department of Toxic Substances Control
EBITDA
Earnings before interest, tax, depreciation and amortization
EMEA
Europe, Middle East and Africa
EPS
Earnings or loss per share
Excess Shares
The 5,654,960 shares of common stock used to calculate the Deferred Cash Consideration payable to the Selling Equityholders pursuant to the Merger Agreement

Exchange Act
Securities Exchange Act of 1934, as amended
FASB
Financial Accounting Standards Board
FILO Tranche
$30.0 million tranche within the New ABL Facility for non-Canadian foreign subsidiaries to issue loans and letters of credit
Founder Shares
The 12,506,250 shares of common stock issued to Sponsor at the time of the IPO
GDP
Gross domestic product
Holdings
Nexeo Solutions Holdings, LLC
IPO
The initial public offering of WLRH, consummated on June 11, 2014
Issuers
Nexeo Solutions Finance Corporation and Solutions, collectively
Merger Agreement
Agreement and Plan of Merger, as amended, by and among WLRH, Blocker Merger Sub, Company Merger Sub, Holdings, Blocker, and New Holdco dated as of March 21, 2016
Mergers
The Company Merger and the Blocker Merger, collectively

3


NASDAQ
NASDAQ Stock Market
New ABL Facility
Asset-based credit facility pursuant to that certain asset-based credit agreement by and among the ABL Borrowers, the ABL Agent, the lenders party thereto and the other parties thereto
New Credit Facilities
New ABL Facility and New Term Loan Facility, collectively
New Holdco
Nexeo Holdco, LLC
New Term Loan Facility
Term loan credit facility pursuant to that certain credit agreement by and among Holdings, Solutions, Sub Holding, the Term Agent, the other agents party thereto and the lenders party thereto
Nexeo Plaschem
Nexeo Plaschem (Shanghai) Co., Ltd., a wholly-owned subsidiary of the Company
NLRB
United States National Labor Relations Board
Notes
Predecessor 8.375% Senior Subordinated Notes due 2018
Performance-Based Units
Units within the Predecessor Equity Plan that vest in accordance with a performance-based schedule
Predecessor
Holdings and its subsidiaries for the periods prior to the Closing Date
Predecessor ABL Facility
Holdings asset-based loan facility which was terminated in connection with the Business Combination
Predecessor Credit Facilities
Predecessor ABL Facility and Predecessor Term Loan Facility, collectively
Predecessor Equity Plan
Predecessor restricted equity plan
Predecessor Term Loan Facility
Holdings’ senior secured term loan facility which was terminated in connection with the Business Combination
PSLRA
Private Securities Litigation Reform Act of 1995
PSU
Performance share unit issued under the 2016 LTIP
RMB
Chinese renminbi
Ryder
Ryder Truck Rental, Inc.
Ryder Lease
Lease Agreement entered into by and between the Predecessor and Ryder in May 2015 for certain transportation equipment
SAFE
People’s Republic of China State Administration of Foreign Exchange
SEC
Securities and Exchange Commission
Selling Equityholders
The holders of equity interests in Holdings (other than Blocker) and the holders of equity interests in Blocker, in each case, as of the time immediately prior to the Business Combination
Solutions
Nexeo Solutions, LLC
Sponsor
WL Ross Sponsor LLC, the sponsor entity of WLRH prior to the Business Combination.
Sub Holding
Nexeo Solutions Sub Holding Corp.
Term Agent
Bank of America, N.A. as administrative agent and collateral agent of the New Term Loan Facility
Time-Based Units
Units within the Predecessor’s Equity Plan
TPG
TPG Capital, L.P. together with its affiliates, including TPG Accolade
TPG Accolade
TPG Accolade, L.P.
TRA
The Tax Receivable Agreement entered into in connection with the Business Combination, by and between the Company and the Selling Equityholders, dated as of June 9, 2016
U.S.
United States of America
U.S. GAAP
United States generally accepted accounting principles
U.S. Tranche
United States tranche of the New ABL Facility
WLRH
WL Ross Holding Corp.


4


Forward-Looking Statements

Certain information and statements contained in this Quarterly Report on Form 10-Q are forward-looking statements within the meaning of the PSLRA codified at Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. This statement is included for purposes of complying with the safe harbor provisions of the PSLRA. Forward-looking statements include statements regarding our expectations, beliefs, intentions, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements that are other than statements of historical facts. These statements may be identified, without limitation, by the use of forward-looking terminology such as “anticipate,” “assume,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “may,” “will,” “could,” “would” and similar expressions. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete set of all potential risks or uncertainties, and we urge you not to place undue reliance on any forward-looking statements, which reflect management’s current expectations and assumptions about future events, and which are based on currently available information as to the timing and outcome of future events. Certain forward-looking statements are included in this Quarterly Report on Form 10-Q, principally in the section captioned “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I. When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements set forth in our Annual Report on Form 10-K for the year ended December 31, 2015 filed on January 14, 2016, in our Form 8-K filed on June 15, 2016, our Registration Statement on Form S-3 filed on June 23, 2016 and within the information incorporated by reference therein.
 
Each of the forward-looking statements included in or incorporated by reference in this Quarterly Report on Form 10-Q speaks only as of the date on which that statement is made. We expressly disclaim any obligation to update or revise any forward-looking statement, all of which are expressly qualified in their entirety by this cautionary statement, whether as a result of new information, future events or otherwise. Historical results are not necessarily indicative of the results expected for any future period.

We believe it is important to communicate our expectations to our shareholders. However, there may be events in the future that we are not able to accurately predict or over which we have no control. The risk factors and cautionary language discussed or incorporated by reference in this Quarterly Report on Form 10-Q provide examples of risks, uncertainties and events that may cause actual results to differ materially from the expectations described by us in our forward-looking statements, including among other things:

the benefits of the Business Combination;

our future financial performance;

changes in the markets in which we compete;

our ability to grow and manage profitability; maintain relationships with suppliers; obtain adequate supply of products and retain our key employees;

our ability to enter into alliances and complete acquisitions of other businesses;

the outcome of any known and unknown litigation; and

other statements preceded by, followed by or that include the words “anticipate,” “assume,” “believe,” “estimate,” “expect,” “intend,” “plan,” “may,” “will,” “could,” “would” or similar words and expressions.

These forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that may cause our actual results, performance, or achievements to differ materially from any expected future results, performance, or achievements expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. These risks and uncertainties include, but are not limited to:

the ability to maintain the listing of our common stock on NASDAQ;

the risk that the Business Combination will disrupt plans and operations;


5


the ability to recognize the anticipated benefits of the Business Combination, which may be affected by, among other things, competition, the ability to maximize the business of the Predecessor, and the ability of the business to grow and manage growth profitably;

costs related to the Business Combination;

changes in applicable laws or regulations;

the inability to profitably expand into new markets;

the possibility that we may be adversely affected by other economic, business, and/or competitive factors; and

other risks and uncertainties indicated in this Quarterly Report on Form 10-Q, including those in Part II under “Item1A. Risk Factors.”




6


PART I
Item 1. Financial Statements

Nexeo Solutions, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited, in millions, except share amounts and par value)
 
Successor
 
 
Predecessor
 
June 30, 2016
 
 
September 30, 2015
Current Assets
 

 
 
 

Cash and cash equivalents
$
38.6

 
 
$
127.7

Accounts and notes receivable (net of allowance for doubtful accounts of $0.1 million and $3.8 million, respectively)
475.9

 
 
508.7

Inventories
321.5

 
 
325.1

Other current assets
21.8

 
 
22.0

Total current assets
857.8

 
 
983.5

 
 
 
 
 
Non-Current Assets
 

 
 
 

Property, plant and equipment, net
339.1

 
 
231.2

Goodwill
693.4

 
 
373.7

Deferred income taxes

1.6

 
 
0.3

Other intangible assets, net of amortization
216.2

 
 
111.4

Other non-current assets
9.9

 
 
8.8

Total non-current assets
1,260.2

 
 
725.4

Total Assets
$
2,118.0

 
 
$
1,708.9

 
 
 
 
 
Current Liabilities
 

 
 
 

Short-term borrowings and current portion of long-term debt and capital lease obligations
$
50.0

 
 
$
72.4

Accounts payable
313.6

 
 
326.6

Accrued expenses and other liabilities
47.9

 
 
63.9

Income taxes payable
1.3

 
 
2.5

Total current liabilities
412.8

 
 
465.4

 
 
 
 
 
Non-Current Liabilities
 

 
 
 

Long-term debt and capital lease obligations, less current portion, net
780.6

 
 
854.4

Deferred income taxes
39.8

 
 
91.5

Due to related party pursuant to contingent consideration obligations
142.2

 
 

Other non-current liabilities
5.4

 
 
12.6

Total non-current liabilities
968.0

 
 
958.5

Total Liabilities
1,380.8

 
 
1,423.9

 
 
 
 
 
Commitments and contingencies (see Note 13)


 
 


Equity
 

 
 
 

Preferred stock, $0.0001 par value (1,000,000 shares authorized, none issued and outstanding as of June 30, 2016)

 
 

Common stock, $0.0001 par value (300,000,000 shares authorized, 89,222,418 shares issued and outstanding as of June 30, 2016)

 
 

Additional paid-in capital
757.7

 
 

Series A membership interest

 
 
490.4

Series B membership interest

 
 
5.1

Accumulated deficit
(18.3
)
 
 
(162.9
)
Accumulated other comprehensive loss
(2.2
)
 
 
(47.6
)
Total equity
737.2

 
 
285.0

Total Liabilities and Equity
$
2,118.0

 
 
$
1,708.9

 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

7


Nexeo Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited, in millions, except share and per share data)
 
 
Successor
 
 
Predecessor
 
Three Months Ended 
 June 30, 2016
 
Nine Months Ended 
 June 30, 2016
 
 
April 1 Through June 8, 2016

October 1, 2015 Through June 8, 2016

Three Months Ended 
 June 30, 2015

Nine Months Ended 
 June 30, 2015
Sales and operating revenues
$
214.3

 
$
214.3

 
 
$
650.2

 
$
2,340.1

 
$
988.8

 
$
3,019.3

Cost of sales and operating expenses
195.5

 
195.5

 
 
574.8

 
2,068.2

 
877.5

 
2,716.8

Gross profit
18.8

 
18.8

 
 
75.4

 
271.9

 
111.3

 
302.5

Selling, general and administrative expenses
19.1

 
19.2

 
 
57.5

 
208.9

 
82.9

 
248.5

Transaction related costs
15.9

 
18.0

 
 
26.1

 
33.4

 

 
0.1

Change in fair value of contingent consideration obligations
(2.3
)
 
(2.3
)
 
 

 

 

 

Operating income (loss)
(13.9
)
 
(16.1
)
 
 
(8.2
)
 
29.6

 
28.4

 
53.9

Other income

 

 
 
0.3

 
2.9

 
8.4

 
9.1

Interest income (expense)
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
0.3

 
0.9

 
 

 
0.1

 

 
0.1

Interest expense
(3.2
)
 
(3.2
)
 
 
(11.2
)
 
(42.3
)
 
(16.2
)
 
(48.9
)
Income (loss) from continuing operations before income taxes
(16.8
)
 
(18.4
)
 
 
(19.1
)
 
(9.7
)
 
20.6

 
14.2

Income tax expense (benefit)
(1.3
)
 
(1.3
)
 
 
1.1

 
4.2

 
1.8

 
2.7

Net income (loss) from continuing operations
(15.5
)
 
(17.1
)
 
 
(20.2
)
 
(13.9
)
 
18.8

 
11.5

Net income (loss) from discontinued operations, net of tax

 

 
 

 
0.1

 

 
(0.8
)
Net income (loss)
$
(15.5
)
 
$
(17.1
)
 
 
$
(20.2
)
 
$
(13.8
)
 
$
18.8

 
$
10.7

 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss per share available to common shareholders
 
 
 
 
 
 
 
 
 
 
 
 
    Basic and diluted
$
(0.45
)
 
$
(0.81
)
 
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding
 
 
 
 
 
 
 
 
 
 
 
 
    Basic and diluted
34,072,056

 
21,241,897

 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.


8


Nexeo Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss)
(Unaudited, in millions)
 
 
Successor
 
 
Predecessor
 
Three Months Ended 
 June 30, 2016
 
Nine Months Ended 
 June 30, 2016
 
 
April 1 Through June 8, 2016
 
October 1, 2015 Through June 8, 2016
 
Three Months Ended 
 June 30, 2015
 
Nine Months Ended 
 June 30, 2015
Net income (loss)
$
(15.5
)
 
$
(17.1
)
 
 
$
(20.2
)
 
$
(13.8
)
 
$
18.8

 
$
10.7

Unrealized foreign currency translation gain (loss), net of tax
(2.2
)
 
(2.2
)
 
 
(3.4
)
 
(4.0
)
 
5.3

 
(19.6
)
Unrealized gain on interest rate hedges, net of tax

 

 
 
0.1

 
0.3

 

 
0.1

Other comprehensive income (loss), net of tax
(2.2
)
 
(2.2
)
 
 
(3.3
)
 
(3.7
)
 
5.3

 
(19.5
)
Total comprehensive income (loss), net of tax
(17.7
)
 
(19.3
)
 
 
(23.5
)
 
(17.5
)
 
24.1

 
(8.8
)
Comprehensive loss attributable to noncontrolling interest, net of tax

 

 
 

 

 

 
0.1

Total comprehensive income (loss) attributable to Predecessor and Successor, net of tax (1)
$
(17.7
)
 
$
(19.3
)
 
 
$
(23.5
)
 
$
(17.5
)
 
$
24.1

 
$
(8.7
)
 
(1)    The tax effects for each component presented are not material.

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.


9


Nexeo Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Equity
(Unaudited, in millions, except share amounts)

 
Series A Membership Interest
 
Series B Membership Interest
 
Accumulated Deficit
 
Accumulated Other Comprehensive Loss
 
Total
Balance at September 30, 2015, Predecessor
$
490.4

 
$
5.1

 
$
(162.9
)
 
$
(47.6
)
 
$
285.0

Repurchases of membership units

 
(0.1
)
 

 

 
(0.1
)
Equity-based compensation

 
2.7

 

 

 
2.7

Comprehensive loss:
 
 
 
 
 
 
 
 
 
Net loss

 

 
(13.8
)
 

 
(13.8
)
Other comprehensive loss

 

 

 
(3.7
)
 
(3.7
)
Balance at June 8, 2016, Predecessor
$
490.4

 
$
7.7

 
$
(176.7
)
 
$
(51.3
)
 
$
270.1


 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Loss
 
Total
 
Shares
 
Amount
 
 
 
 
Balance at September 30, 2015, Successor
14,853,927

 
$

 
$
6.2

 
$
(1.2
)
 
$

 
$
5.0

Reclassification of shares previously subject to redemption
14,168

 

 
0.1

 

 

 
0.1

Net loss

 

 

 
(0.1
)
 

 
(0.1
)
Balance December 31, 2015
14,868,095

 

 
6.3

 
(1.3
)
 

 
5.0

Reclassification of shares previously subject to redemption
150,231

 

 
1.5

 

 

 
1.5

Net loss

 

 

 
(1.5
)
 

 
(1.5
)
Balance March 31, 2016
15,018,326

 

 
7.8

 
(2.8
)
 

 
5.0

Reclassification of shares previously subject to redemption
47,512,924

 

 
475.2

 

 

 
475.2

Redeemed shares
(29,793,320
)
 

 
(298.5
)
 

 

 
(298.5
)
Warrant conversion
2,240,000

 

 

 

 

 

Private placement shares issued May 23, 2016
23,492,306

 

 
234.9

 

 

 
234.9

Shares issued to Selling Equityholders
27,673,604

 

 
276.7

 

 

 
276.7

Fair value equity contribution from Sponsor in the form of Founder Shares transferred to Selling Equityholders

 

 
30.2

 

 

 
30.2

Shares issued for advisory services and deferred underwriting fees
3,078,578

 

 
30.8

 

 

 
30.8

Fair value equity contribution from Sponsor in the form of Founder Shares transferred to directors for services rendered

 

 
0.3

 

 

 
0.3

Equity-based compensation

 

 
0.3

 

 

 
0.3

Comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
         Net loss

 

 

 
(15.5
)
 

 
(15.5
)
         Other comprehensive loss

 

 

 

 
(2.2
)
 
(2.2
)
Balance at June 30, 2016, Successor

89,222,418

 
$

 
$
757.7

 
$
(18.3
)
 
$
(2.2
)
 
$
737.2



The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.


10



Nexeo Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited, in millions)
 
Successor
 
 
Predecessor
 
Nine Months Ended 
 June 30, 2016
 
 
October 1, 2015 Through June 8, 2016
 
Nine Months Ended June 30, 2015
Cash flows from operating activities
 

 
 
 
 
 

Net income (loss) from continuing operations
$
(17.1
)
 
 
$
(13.9
)
 
$
11.5

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 

 
 
 
 
 

Depreciation and amortization
4.3

 
 
37.7

 
39.6

Debt issuance costs and original issue discount amortization
(0.4
)
 
 
6.1

 
6.5

Non-cash transaction costs
12.8

 
 

 

Provision for bad debt
0.1

 
 
1.2

 
0.3

Inventory impairment

 
 

 
1.6

Deferred income taxes
(1.9
)
 
 
1.1

 
2.0

Equity-based compensation charges
0.3

 
 
2.7

 
0.9

Change in fair value of contingent consideration obligations
(2.3
)
 
 

 

Gain on sale of property and equipment

 
 
(2.0
)
 
(1.0
)
Gain on debt extinguishment, net

 
 
(0.6
)
 

Changes in operating assets and liabilities:
 

 
 
 
 
 

Accounts and notes receivable
(6.0
)
 
 
34.4

 
77.3

Inventories
7.0

 
 
8.4

 
10.9

Other current assets
2.8

 
 
(4.1
)
 
6.5

Accounts payable
(27.3
)
 
 
13.4

 
(63.2
)
Related party payable

 
 
(0.3
)
 
(1.6
)
Accrued expenses and other liabilities
(2.6
)
 
 
(9.7
)
 
4.0

Changes in other operating assets and liabilities, net
0.3

 
 
(4.9
)
 
(1.7
)
Net cash provided by (used in) operating activities from continuing operations
(30.0
)
 
 
69.5

 
93.6

Net cash provided by (used in) operating activities from discontinued operations

 
 
0.1

 
(0.6
)
Net cash provided by (used in) operating activities
(30.0
)
 
 
69.6

 
93.0

Cash flows from investing activities
 

 
 
 
 
 

Additions to property and equipment
(1.4
)
 
 
(14.2
)
 
(27.3
)
Proceeds from the disposal of property and equipment

 
 
2.4

 
2.3

Proceeds withdrawn from trust account
501.1

 
 

 

Cash consideration paid for Business Combination, net of cash acquired
(360.6
)
 
 

 

Net cash provided by (used in) investing activities
139.1

 
 
(11.8
)
 
(25.0
)
Cash flows from financing activities
 
 
 
 
 
 
Proceeds from issuance of common stock
234.9

 
 

 

Redemption of common stock
(298.5
)
 
 

 

Proceeds from Sponsor convertible note and Sponsor promissory note
0.7

 
 

 

Repayment of Sponsor convertible notes and Sponsor promissory note
(1.0
)
 
 

 

Repurchases of membership units

 
 
(0.1
)
 

Tax distributions associated with membership interests

 
 

 
(0.1
)
Purchase of additional equity interest in Nexeo Plaschem

 
 

 
(34.3
)
Proceeds from short-term debt
4.9

 
 
20.9

 
36.9

Repayment of short-term debt
(1.7
)
 
 
(17.1
)
 
(47.6
)
Proceeds from issuance of long-term debt
823.6

 
 
292.1

 
494.3

Repayment of long-term debt and capital lease obligations
(41.0
)
 
 
(417.3
)
 
(514.6
)
Repayment of Predecessor long-term debt
(767.3
)
 
 

 

Cash paid for debt issuance costs
(25.3
)
 
 

 

Net cash used in financing activities
(70.7
)
 
 
(121.5
)
 
(65.4
)
Effect of exchange rate changes on cash and cash equivalents

 
 
0.3

 
(1.8
)
Increase (decrease) in cash and cash equivalents
38.4

 
 
(63.4
)
 
0.8

Cash and cash equivalents at the beginning of the period
0.2

 
 
127.7

 
88.2

Cash and cash equivalents at the end of the period
$
38.6

 
 
$
64.3

 
$
89.0

 
 
 
 
 
 
 

11


Supplemental disclosure of cash flow information:
 

 
 
 
 
 

Cash paid during the period for interest
$
7.2

 
 
$
32.9

 
$
39.6

Cash paid during the period for taxes
$
1.5

 
 
$
3.4

 
$
4.0

Supplemental disclosure of non-cash operating activities:
 
 
 
 
 
 
Non-cash payment of deferred underwriting fees
$
18.3

 
 
$

 
$

Supplemental disclosure of non-cash investing activities:
 
 
 
 
 
 
Non-cash capital expenditures, including capital leases
$
1.2

 
 
$
16.5

 
$
2.3


 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

12


Nexeo Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited, currencies in millions, except per share amounts)
 
1. Basis of Presentation and Nature of Operations
 
Basis of Presentation

Nexeo Solutions, Inc. (together with its subsidiaries, the “Company”) is the result of the business combination between WLRH and Holdings.  WLRH was incorporated in Delaware on March 24, 2014 and was formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses. WLRH completed its IPO in June 2014, raising approximately $500.0 million in cash proceeds. WLRH neither engaged in any operations nor generated any revenue prior to the Business Combination.

On the Closing Date, WLRH and Holdings consummated the Business Combination, pursuant to the Merger Agreement. In connection with the closing of the Business Combination, WLRH changed its name from “WL Ross Holding Corp.” to “Nexeo Solutions, Inc.” and changed the ticker symbol for its common stock on NASDAQ from “WLRH” to “NXEO”.

WLRH was identified as the acquirer for accounting purposes and Holdings was identified as the acquiree and accounting predecessor.  The Company’s financial statement presentation distinguishes a “Predecessor” for the periods prior to the Closing Date.  WLRH, which includes Holdings for periods subsequent to the Business Combination, was subsequently renamed Nexeo Solutions, Inc. and is the “Successor” for periods after the Closing Date. The acquisition was accounted for as a business combination using the acquisition method of accounting and the Successor financial statements reflect a new basis of accounting for the assets and liabilities of Holdings that is based on the fair value of net assets acquired and liabilities assumed.  See Note 3 for further discussion of the Business Combination.  As a result of the application of the acquisition method of accounting as of the Closing Date, the condensed consolidated financial statements for the Predecessor period and for the Successor period are presented on a different basis and are, therefore, not comparable.

On the Closing Date, the Company’s Board of Directors approved a change in WLRH’s fiscal year-end from December 31 to September 30.  As a result of this change and the Business Combination, the condensed consolidated financial statements presented within this 10-Q include the transition period from October 1, 2015 through June 30, 2016.

The Successor periods in the condensed consolidated financial statements as of June 30, 2016 and for the three and nine months ended June 30, 2016 includes 22 days (June 9, 2016 through June 30, 2016) of the combined operating results, as well as the full three and nine months ended June 30, 2016 of WLRH’s operating results, which reflect its financial activity including transaction costs and equity structure changes in preparation of the consummation of the Business Combination. Operating results during the three and nine months ended June 30, 2015 for WLRH were not significant or meaningful and therefore are not presented in the condensed consolidated statements of operations. Operating results for the Predecessor for the three and nine months ended June 30, 2015 are presented as they are reflective of the ongoing operations of the acquired business.

           The Predecessor periods in the condensed consolidated financial statements represent the operating results of Holdings and its subsidiaries prior to the Business Combination.

           The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and in accordance with the rules and regulations of the SEC.  As such, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring adjustments, except as disclosed herein) considered necessary for a fair statement have been included.  Results of operations for the periods presented herein are not necessarily indicative of results to be expected for the fiscal year ending 2016.  Financial data presented herein should be read in conjunction with the information included in or incorporated by reference into the Company’s Form 8-K filed on June 15, 2016 and Form 8-K/A filed on June 15, 2016.

           The consolidated financial data as of September 30, 2015 presented in these unaudited condensed consolidated financial statements were derived from the Predecessor’s audited consolidated financial statements, but do not include all disclosures required by U.S. GAAP.


13


Nature of Operations

The Company is a global distributor of chemicals products in North America and Asia and plastics products in North America, EMEA and Asia. In connection with the distribution of chemicals products, the Company provides value-added services such as custom blending, packaging and re-packaging, private-label manufacturing and product testing in the form of chemical analysis, product performance analysis and product development.  The Company also provides environmental services, including waste collection, recovery and arrangement for disposal services and recycling in North America, primarily in the U.S., through its Environmental Services line of business. The Predecessor was a distributor of composites products in North America until July 1, 2014, when these operations were sold and as a result, activity associated with these operations is reflected as discontinued operations for all periods presented.

The Company connects a network of approximately 1,300 suppliers with a diverse base of approximately 27,500 customers. The Company offers its customers products used in a broad cross-section of end markets including household, industrial and institutional, lubricants, performance coatings (including architectural coatings, adhesives, sealants and elastomers), automotive, healthcare, personal care, oil and gas and construction. The Company distributes approximately 23,000 products into over 80 countries through a supply chain consisting of approximately 170 owned, leased or third-party warehouses, rail terminals and tank terminals globally. The Company has a private fleet of over 1,000 units, including tractors and trailers, primarily located in North America.
 
The Company currently employs approximately 2,550 employees globally.    
 
2. Significant Accounting Policies and Recent Accounting Pronouncements
 
Significant Accounting Policies

The Predecessor’s significant accounting policies are substantially the same as those of the Company presented below.
Principles of Consolidation

The accompanying condensed consolidated financial statements include all the accounts of the Company and all wholly-owned subsidiaries in which it maintains control. Significant intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates, Risks, and Uncertainties
 
The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and the disclosures of contingent assets and liabilities. Significant items that are subject to such estimates and assumptions include:

the fair value of assets acquired and liabilities assumed in a business combination;
the assessment of recoverability of long lived assets, including property and equipment, goodwill and intangible assets, income taxes, reserves and environmental remediation;
the estimated useful lives of intangible and depreciable assets;
the grant date fair value of equity-based awards;
the recognition, measurement and valuation of current and deferred income taxes;
the recognition and measurement of contingent consideration related to the TRA liability; and
the recognition and measurement of contingent consideration related to the Deferred Cash Consideration.

Although management bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, actual results could differ significantly from the estimates under different assumptions or conditions.

The Company’s financial instruments exposed to concentration of credit risk consist primarily of cash and cash equivalents. Although the Company deposits cash with multiple banks, these deposits, including those held in foreign branches of global banks, may exceed the amount of insurance provided on such deposits. These deposits may generally be redeemed upon demand and bear minimal risks.


14


No single customer accounted for more than 10.0% of revenues for any line of business, or on a consolidated basis, for each of the periods reported. The Company has two suppliers that each account for between 10% and 13% of consolidated purchases for the Successor and Predecessor periods in the current fiscal year. In the prior fiscal periods presented, the Predecessor had one supplier that accounted for approximately 13% of consolidated purchases.

Cash and Cash Equivalents
 
All highly liquid temporary investments with original maturities of three months or less are considered to be cash equivalents.

Accounts and Notes Receivable and Allowance for Doubtful Accounts
 
Accounts receivable are recorded net of discounts and allowance for doubtful accounts. The Company performs ongoing credit evaluations of its customers and generally does not require collateral from its customers. The Company’s accounts receivable in the U.S. and Canada are collateral under the New Credit Facilities.

The Company records an allowance for doubtful accounts as a best estimate of the amount of probable credit losses for accounts receivable. On a recurring basis, the Company reviews this allowance and considers factors such as customer credit, past transaction history with the customer and changes in customer payment terms when determining whether the collection of a receivable is reasonably assured. Past due balances over 90 days and over a specified amount are reviewed individually for collectability. Receivables are charged off against the allowance for doubtful accounts when it is probable a receivable will not be recovered.

Certain customers of Nexeo Plaschem are allowed to remit payment during a period of time ranging from 30 days up to nine months. These notes receivables, which are supported by banknotes issued by large banks in China on behalf of these customers, are included in Accounts and notes receivable on the Company's condensed consolidated balance sheets and totaled $7.0 million at June 30, 2016 for the Successor and $4.5 million at September 30, 2015 for the Predecessor, respectively.
 
The allowance for doubtful accounts was $0.1 million at June 30, 2016 for the Successor and $3.8 million at September 30, 2015 for the Predecessor. Bad debt expense, a component of Selling, general and administrative expenses in the condensed consolidated statements of operations, totaled $0.1 million for the three and nine months ended June 30, 2016 for the Successor, $0.1 million and $1.2 million for the periods from April 1, 2016 through June 8, 2016 and from October 1, 2015 through June 8, 2016 for the Predecessor, respectively, and net recoveries of $0.4 million and expenses of $0.3 million for the three and nine months ended June 30, 2015 for the Predecessor, respectively.

Inventories
 
Inventories are carried at the lower of cost or market using the weighted average cost method. The Company’s inventories in the U.S. and Canada are collateral under the New Credit Facilities.

Goodwill and Intangibles
 
The Company had goodwill of $693.4 million at June 30, 2016 associated with the Business Combination. The Predecessor had goodwill of $373.7 million at September 30, 2015 resulting from previous acquisitions. The purchase consideration of an acquisition is allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. The estimated fair values are determined after review and consideration of relevant information including discounted cash flows, quoted market prices and estimates made by management. To the extent that the purchase consideration exceeds the fair value of the net identifiable tangible and intangible assets acquired, such excess is allocated to goodwill.

The Company had other intangible assets, net of amortization, of $216.2 million at June 30, 2016 consisting of customer relationships and the trade name. These intangible assets are amortized on a straight-line basis over their estimated useful lives, including customer relationships which are amortized over 12 years and the trade name is amortized over four years. The Predecessor had other intangible assets, net of amortization, of $111.4 million at September 30, 2015 consisting of leasehold improvements, customer-related intangibles, supplier-related intangibles, non-compete agreements and certain trademarks and trade names.




15


Property, Plant and Equipment
 
Property, plant and equipment includes plants and buildings, machinery and equipment and software and computer equipment. Property, plant and equipment acquired or constructed in the normal course of business are initially recorded at cost. Property and equipment acquired in business combinations are initially recorded at their estimated fair value. Property, plant and equipment are depreciated by the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of their economic useful life or their lease term. The range of useful lives used to depreciate property, plant and equipment is as follows:

 
Successor
 
 
Predecessor
 
Estimated Useful
Lives (years)
 
 
Estimated Useful
Lives (years)
Plants and buildings
5-35
 
 
5-35
Machinery and equipment
2-30
 
 
2-30
Software and computer equipment
3-10
 
 
3-10

Repairs and maintenance expenditures that do not extend the useful life of the asset are charged to expense as incurred. Major expenditures for replacements and significant improvements that increase asset values or extend useful lives are capitalized. The carrying amounts of assets that are sold or retired and the related accumulated depreciation are removed from the accounts in the year of disposal, and any resulting gain or loss is reflected in the condensed consolidated statements of operations.

Leases
    
The Company leases certain property, plant and equipment in the ordinary course of business. The leases are classified as either capital leases or operating leases. Assets under capital leases are included in Property, plant and equipment, net in the condensed consolidated balance sheets and are depreciated over the lesser of the lease term or the useful life of the assets. Capital lease obligations are included in Short-term borrowings, current portion of long-term debt and capital lease obligations and Long-term debt and capital lease obligations, less current portion, net in the condensed consolidated balance sheets. Generally, lease payments under capital leases are recognized as interest expense and a reduction of the capital lease obligations. Lease payments under operating leases are recognized as an expense in the condensed consolidated statements of operations on a straight-line basis over the lease term.

Impairment of Goodwill and Other Long-lived Assets
 
Goodwill.  Goodwill is tested for impairment annually as of March 31 and whenever events or circumstances make it more likely than not that an impairment may have occurred. Goodwill is reviewed for impairment at the reporting unit level, which is defined as operating segments or groupings of businesses one level below the operating segment level. The Company’s operating segments are the same as the reporting units used in its goodwill impairment test. Goodwill is tested for impairment by comparing the estimated fair value of a reporting unit, determined using a market approach if market prices are available or alternatively, a discounted cash flow model, with its carrying value. The annual evaluation of goodwill requires the use of estimates about future operating results, valuation multiples and discount rates of each reporting unit to determine their estimated fair value. Changes in these assumptions can materially affect these estimates. Once an impairment of goodwill has been recorded, it cannot be reversed. No goodwill impairment was recognized during any of the periods presented.

Other Long-Lived Assets. Property, plant and equipment and other intangibles with definite lives are tested for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable. When an impairment test is performed and the undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of the asset. The factors considered by management in performing this assessment include current operating results, trends and prospects, as well as the effect of obsolescence, demand, competition and other economic factors.

16



Debt Issuance Costs
 
Costs associated with the revolving credit facility are recorded as debt issuance costs, which are included in Other non-current assets in the condensed consolidated balance sheets and are being amortized as interest expense over the contractual lives of the related agreements. Costs associated with non-revolving debt facilities are recorded as a reduction of the long-term debt, and are amortized as interest expense over the contractual lives of the related agreements. See Notes 4 and 7.

Commitments, Contingencies and Environmental Costs 

Liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment and/or remediation can be reasonably estimated. Gain contingencies are not recorded until management determines it is certain that the future event will become or is realized.

Liabilities for environmental remediation costs are recognized when environmental assessments or remediation are probable and the associated costs can be reasonably estimated. Generally, the timing of these provisions coincides with the commitment to a formal plan of action or, if earlier, the divestment or closure of the relevant sites. The amount recognized reflects management’s best estimate of the expenditures expected to be required. Actual environmental expenditures that relate to current or future revenues are expensed or capitalized as appropriate. Actual expenditures that relate to an existing condition caused by past operations and that do not impact future earnings are expensed. 

Ashland agreed to retain known environmental remediation liabilities and other environmental remediation liabilities for releases of hazardous materials occurring prior to March 31, 2011, which Ashland received notice prior to March 31, 2016. See Note 13.

Earnings or Loss per Share of Successor

Basic EPS which excludes dilution, is computed by dividing income or loss available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common shares and the proceeds from such activities, if any, were used to acquire shares of common stock at the average market price during the reporting period. During a net loss period, the assumed exercise of in-the-money stock options and unvested stock has an anti-dilutive effect, and therefore such potential shares are excluded from the diluted EPS computation.

Per share information is based on the weighted average number of common shares outstanding during each period for the basic computation and, if dilutive, the weighted average number of potential common shares resulting from the assumed conversion of outstanding stock options, unvested stock and unvested stock units for the diluted computation.

For both the three and nine months ended June 30, 2016, there were 12,476,250 Founder Shares that were not included in the computation because market conditions were not yet satisfied and 1,547,500 PSU awards that were not included in the computation of diluted shares outstanding because performance targets and/or market conditions were not yet met for these awards. Diluted shares outstanding also did not include 25,012,500 shares based on the exercise of 50,025,000 outstanding out-of-the-money warrants as their impact on the Company’s net loss is anti-dilutive for both the three and nine months ended June 30, 2016.

The Predecessor was organized as a limited liability company, therefore EPS for the predecessor periods was not applicable.

Concentrations of Credit Risk
 
All of the Company’s financial instruments involve elements of credit and market risk. The most significant portion of this credit risk relates to nonperformance by counterparties. To manage counterparty risk associated with financial instruments, the Company selects and monitors counterparties based on its assessment of their financial strength and on credit ratings, if available.


17


Foreign Currency
 
The reporting currency of the Company is the U.S. dollar. With few exceptions, the local currency is the functional currency for the Company's foreign subsidiaries. In consolidating the results of operations, income and expense accounts are translated into U.S. dollars at average exchange rates in effect during the period and asset and liability accounts are translated at period-end exchange rates. Translation gains or losses are recorded in the foreign currency translation component in Accumulated other comprehensive income (loss) in shareholders’ equity and are included in net earnings only upon sale or liquidation of the underlying foreign subsidiary or affiliated company.

Transactions undertaken in currencies other than the functional currency of a subsidiary are translated using the exchange rate in effect as of the transaction date and give rise to foreign currency transaction gains and losses. Foreign currency transaction gains and losses are recorded as a component of Selling, general and administrative expenses. Net foreign currency transaction losses from various currencies were $0.4 million for the three and nine months ended June 30, 2016 for the Successor. Net foreign currency transaction losses were $1.3 million and $1.6 million for the periods April 1, 2016 through June 8, 2016 and from October 1, 2015 through June 8, 2016 for the Predecessor, respectively, and $0.3 million and $0.9 million for the three and nine months ended June 30, 2015 for the Predecessor, respectively.

Revenue Recognition
 
Revenues are recognized when persuasive evidence of an arrangement exists, products are shipped and title is transferred or services are provided to customers, the sales price is fixed or determinable and collectability is reasonably assured. Revenue for product sales is recognized at the time title and risk of loss transfer to the customer, based on the terms of the sale. For products delivered under the Company’s standard shipping terms, title and risk of loss transfer when the product is delivered to the customer’s delivery site. For sales transactions designated Freight on Board shipping point, the customer assumes risk of loss and title transfers at the time of shipment. Deferred revenues may result from (i) delivery delays for products delivered under the Company’s standard shipping terms or (ii) from other arrangements with its customers. Sales are reported net of tax assessed by qualifying governmental authorities.
 
The Company is generally the primary obligor in sales transactions with its customers, retains inventory risk during transit and assumes credit risk for amounts billed to its customers. Accordingly, the Company recognizes revenue primarily based on the gross amount billed to its customers. In sales transactions where the Company is not the primary obligor and does not retain inventory risk, the Company recognizes revenue on a net basis by recognizing only the commission the Company retains from such sales and including that commission in sales and operating revenues in the condensed consolidated statements of operations.
 
Consistent with industry standards, the Company may offer volume-based rebates to large customers if the customer purchases a specified volume with the Company over a specified time period. The determination of these rebates at an interim date involves management judgment. As a result, the Company’s revenues may be affected if a customer earns a rebate toward the end of a year that the Company had not expected or if its estimate of customer purchases are less than expected. The Company has the experience and access to relevant information that the Company believes are necessary to reasonably estimate the amounts of such deductions from gross revenues. The Company regularly reviews the information related to these estimates and adjusts its reserves accordingly if and when actual experience differs from previous estimates. The Company recognizes the rebate obligation as a reduction of revenue based on its estimate of the total volume of purchases from a given customer over the specified period of time. Customer rebates totaled $0.6 million for the three and nine months ended June 30, 2016 for the Successor. Customer rebates totaled $1.1 million and $4.0 million for the periods April 1, 2016 through June 8, 2016 and from October 1, 2015 through June 8, 2016 for the Predecessor and $1.1 million and $3.9 million for the three and nine months ended June 30, 2015 for the Predecessor, respectively.  Customer rebates due to customers were $3.6 million at June 30, 2016 for the Successor and $4.0 million at September 30, 2015 for the Predecessor.  These payables are included in Accrued expenses and other liabilities in the condensed consolidated balance sheets.
 
Supplier Rebates
 
Certain of the Company's vendor arrangements provide for purchase incentives based on the Company achieving a specified volume of purchases. The Company records the volume-based purchase incentives as a reduction of inventory costs (and related cost of sales) based on its purchases to date and its estimates of purchases for the remainder of the calendar year. The Company receives these incentives in the form of rebates that are payable only when the Company's purchases equal or exceed the relevant calendar year target. Supplier rebates are recorded as a reduction of inventory costs and accrued as part of cost of sales for products sold based on progress towards earning the supplier rebates, taking into consideration cumulative

18


purchases of inventory to date and projected purchases through the end of the applicable calendar year. Supplier rebates totaled $0.5 million for the three and nine months ended June 30, 2016 for the Successor. Supplier rebates totaled $1.8 million and $6.5 million for the periods April 1, 2016 through June 8, 2016 and from October 1, 2015 through June 8, 2016 for the Predecessor, respectively, and $3.4 million and $11.2 million for the three and nine months ended June 30, 2015 for the Predecessor, respectively. Supplier rebates due to the Company were $2.4 million at June 30, 2016 for the Successor and $3.4 million at September 30, 2015 for the Predecessor. These receivables are included in Accounts and notes receivable in the condensed consolidated balance sheets.

Shipping and Handling
 
All shipping and handling amounts billed to customers are included in revenues. Costs incurred related to the shipping and handling of products are included in cost of sales.

Expense Recognition
 
Cost of sales include material and production costs, as well as the costs of inbound and outbound freight, purchasing and receiving, inspection, warehousing, internal transfers and all other distribution network costs. Selling, general and administrative expenses include sales and marketing costs, advertising, research and development, customer support, environmental remediation and administrative costs. Because products and services are generally sold without any extended warranties, liabilities for product warranties are not significant. There were no material advertising expenses for each of the three and nine months ended June 30, 2016 for the Successor. Advertising expenses totaled $0.5 million and $1.3 million for the periods April 1, 2016 through June 8, 2016 and from October 1, 2015 through June 8, 2016 for the Predecessor, respectively, and $0.4 million and $1.7 million for the three and nine months ended June 30, 2015 for the Predecessor, respectively. There were no material research and development expenses incurred during any of the periods presented.
 
Income Taxes
 
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the financial statements. Under this method, the Company determines deferred tax assets and liabilities on the basis of the differences between the financial statement and tax bases of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The provision for income taxes includes income taxes paid, currently payable or receivable, and those deferred. 

The Company recognizes deferred tax assets to the extent that it believes that these assets are more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determines that it would be able to realize its deferred tax assets in the future in excess of the net recorded amount, it would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

The Company records uncertain tax positions in accordance with ASC 740 on the basis of a two-step process in which (1) the Company determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority.

The Predecessor was organized as a limited liability company and was taxed as a partnership for U.S. income tax purposes. As such, with the exception of a limited number of state and local jurisdictions, the Predecessor was not subject to U.S. income taxes. Accordingly, the members of the Predecessor reported their share of the Predecessor’s taxable income on their respective U.S. federal tax returns. The Predecessor’s sole active U.S. corporate subsidiary, Sub Holding, was subject to tax at the entity level in the U.S. The net earnings for financial statement purposes differed from taxable income reportable by the Predecessor to the members as a result of differences between the tax basis and financial reporting basis of certain assets and liabilities and other factors. The Predecessor was required to make quarterly distributions to members to fund their tax obligations, if any, attributable to the Predecessor’s taxable income. In some jurisdictions, the Predecessor made such distributions in the form of tax payments paid directly to the taxing authority on behalf of its members. Controlled foreign corporations are subject to tax at the entity level in their respective jurisdictions.


19


Due to related party pursuant to Contingent Consideration Obligations

As described in Note 3, as part of the consideration for the Business Combination, the Company entered into the TRA and agreed to pay the Deferred Cash Consideration pursuant to the Merger Agreement.   The Company’s obligation for these contingent consideration amounts was initially measured at fair value as of the Closing Date.  The Company’s contingent consideration liabilities are required to be recorded at fair value as of the end of each reporting period with any changes in fair value recorded in operating income. Changes in the estimates and inputs used in determining the fair value of the contingent consideration could have a material impact on the amounts recognized.

Share-Based Compensation

The Company accounts for share-based compensation expense for equity instruments granted in exchange for employee and director services. Share-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the vesting period of the equity award grant.

The Company’s PSU awards contain both market and performance-based conditions. At the grant date, market conditions are incorporated into the fair value measurement using a Monte Carlo simulation model under the assumptions that performance-based conditions are met and not met. The Company then determines the probability that performance-based conditions will be met and incorporates this into the grant date fair value of the award.

The compensation cost for the PSU awards is amortized over the vesting period on a straight-line basis, net of estimated forfeitures. Forfeiture rates are estimated based on consideration of historical forfeitures of the Predecessor’s actual forfeitures of its share-based compensation awards and a peer group of companies.

Recent Accounting Pronouncements Adopted

In June 2014, the FASB issued ASU 2014-12, Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. This ASU requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition and an entity should apply existing guidance in Topic 718, Compensation-Stock Compensation, as it relates to awards with performance conditions that affect vesting to account for such awards. The Company adopted these amendments on January 1, 2016, which did not have a material impact on the Company’s financial position or results of operations.

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. ASU 2015-16 eliminates the requirement for an acquirer to retrospectively adjust provisional amounts recorded in a business combination to reflect new information about the facts and circumstances that existed as of the acquisition date and that, if known, would have affected measurement or recognition of amounts initially recognized. The amendment requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The Company adopted this standard during the three months ended June 30, 2016. Any future adjustments to the amounts initially recognized for assets and liabilities acquired as a result of the Business Combination will be recognized in the period in which they are identified.

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. This ASU requires an entity to classify all deferred tax assets and liabilities as noncurrent. These amendments are effective for fiscal years beginning after December 15, 2016 and interim periods within those years and early adoption is permitted. The Company adopted this standard during the three months ended June 30, 2016 on a prospective basis and its adoption did not have a material impact on the Company’s financial position or results of operations, or on the Predecessor’s financial position or results of operations for the periods presented.

In April and August 2015, the FASB issued ASU No. 2015-03 and ASU No. 2015-15, “Interest-Imputation of Interest,” respectively, to simplify the presentation of debt issuance costs. These amendments require debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the debt liability. The FASB clarified that debt issuance costs related to line-of-credit arrangements can be presented as an asset and amortized over the term of the arrangement. The Company adopted these amendments on January 1, 2016 on a retrospective basis. As a result, the Predecessor financial statements have been adjusted to reclassify $9.1 million of debt issuance costs from Other non-current assets and into Long-term debt and capital lease obligations, less current portion, net on the condensed consolidated balance sheets as of September 30, 2015.
 

20


New Accounting Pronouncements Not Yet Adopted

In May 2014, the FASB issued ASU 2014-9, Revenue from Contracts with Customers (Topic 606). The amendments in this ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition and require that revenue be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14, which deferred the effective date of ASU 2014-9 for all entities by one year. These amendments will be effective in annual reporting periods beginning after December 15, 2017 including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016 including interim reporting periods within that reporting period. The Company is in the process of evaluating the provisions of this ASU and assessing the potential effect on the Company’s financial position or results of operations.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. The amendments in this ASU require an entity to measure inventory at the lower of cost or net realizable value, whereas guidance previously required an assessment of market value of inventory, with different possibilities as to determining market value. This ASU is effective for fiscal years beginning after December 15, 2016 and interim periods within those years and early adoption is permitted. The Company is in the process of evaluating the provisions of the ASU, but does not expect it to have a material effect on the Company’s financial position or results of operations.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities. This ASU (i) requires all equity investments in unconsolidated entities other than those measured using the equity method of accounting, to be measured at fair value through earnings; (ii) when the fair value option has been elected for financial liabilities, requires that changes in fair value due to instrument specific credit risk be recognized separately in other comprehensive income and accumulated gains and losses due to these changes and will be reclassified from accumulated other comprehensive income to earnings if the liability is settled before maturity; and (iii) amends certain fair value disclosure provisions related to financial instruments carried at amortized cost. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years and early adoption is permitted. The Company is in the process of evaluating the provisions of the ASU and assessing the potential effect on the Company’s financial position or results of operations.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires all leases with terms greater than 12 months, whether finance or operating, to be recorded on the balance sheet, reflecting a liability to make lease payments and a right-to-use asset representing the right to use the underlying asset for the lease term. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee will not significantly change from current GAAP. These amendments are effective for the reporting periods beginning after December 15, 2018 with early adoption permitted. An entity will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption. The Company is in the process of evaluating the potential effects of this standard and believes it may have a significant impact on its consolidated financial statements due, in part, to its substantial number of operating lease obligations.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The updated guidance simplifies several aspects of accounting for certain aspects of share-based payment awards to employees, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as the classification of related matters in the statement of cash flows. This ASU is effective for interim and annual reporting periods beginning after December 15, 2016. The Company is in the process of evaluating the provisions of this ASU and assessing the potential effect on the Company’s financial position and results of operations.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  This ASU requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.  Forward-looking information will now be used to better inform credit loss estimates.  The amendments in this ASU are effective for fiscal years beginning December 15, 2020 including interim periods within those years.  Early adoption is permitted.  The Company is currently in the process of evaluating the provisions of this ASU, and assessing the potential effect on the Company’s financial position or results of operations.


21


3. Business Combination

On June 9, 2016, the Company consummated the Business Combination pursuant to the Merger Agreement, whereby WLRH acquired Holdings (including the portion of Holdings held by Blocker) through a series of two mergers. As a result of the transactions contemplated by the Merger Agreement, Holdings and Blocker became wholly-owned subsidiaries of WLRH.

The estimated purchase consideration for the Business Combination was as follows:
Cash
$
424.9

Less: cash acquired
(64.3
)
Equity(1)
276.7

Founder Shares transferred to Selling Equityholders(1)
30.2

Contingent consideration - Fair value of Deferred Cash Consideration
49.6

Contingent consideration - Fair value of TRA
94.9

Total purchase consideration(2)
$
812.0


(1) See Note 11.
(2) In addition to the total purchase consideration above, the Company assumed the outstanding indebtedness of the Predecessor, including related accrued interest through the Closing Date, totaling $774.3 million. The proceeds of the New Credit Facilities were used to repay such indebtedness and accrued interest immediately following the consummation of the Business Combination.

The total purchase consideration described above is preliminary and subject to finalization of fair value assessment for the contingent consideration liabilities. Additionally, the total purchase consideration is subject to completion of the final working capital adjustment, which is expected to be completed within 75 days after the Closing Date.

Contingent Consideration - Deferred Cash Consideration

The contingent consideration associated with the Deferred Cash Consideration will be an amount in cash equal to the prevailing price of the Company’s common stock at the time that the Company pays such deferred cash payment multiplied by the number of Excess Shares.  Certain circumstances require the Company to pay all or a portion of the Deferred Cash Consideration to the Selling Equityholders, where such cash amount is calculated as set forth in the Merger Agreement, including (i) where the volume weighted average trading price of the Company’s common stock for any period of 20 trading days in any 30 trading day period exceeds $15.00 per share, and (ii) if any Excess Shares remain on June 30, 2021. In such circumstances, the Company alternatively has the option to conduct offerings of common stock at least equal to the number of any remaining Excess Shares at that time, and remit the gross proceeds thereof (less any underwriting discounts and commissions) to the Selling Equityholders. However, to the extent the number of shares issued in such offerings does not equal the full amount of Excess Shares remaining at the time of the offering, the Company’s obligations with respect to any remaining Excess Shares, including the obligation to continue to complete any necessary additional offerings, shall continue. In order to estimate the fair value of the Deferred Cash Consideration, the Company estimates the value of the Excess Shares using a Monte Carlo simulation model.

Contingent Consideration - TRA

Concurrent with the completion of the Business Combination, the Company incurred the liability for the contingent consideration related to the TRA, which reflects amounts owed to the Selling Equityholders. This liability generally provides for the payment by the Company to the Selling Equityholders of 85% of the net cash savings, if any, in U.S. federal, state and local income taxes that the Company actually realizes (or is deemed to realize in certain circumstances) in periods after the Closing Date as a result of (i) certain increases in tax basis resulting from the Company Merger, (ii) certain tax attributes of Holdings existing prior to the Mergers, (iii) net operating losses and certain other tax attributes of Blocker available to the Company as a result of the Blocker Merger and (iv) imputed interest deemed to be paid by the Company as a result of, and additional tax basis arising from, payments the Company makes under the TRA. The Company will retain the benefit of the remaining 15% of the net cash savings, if any. The Company estimated the fair value of the TRA liability based on a discounted cash flow model which incorporates assumptions of projected taxable income, projected income tax liabilities and an estimate of tax benefits expected to be realized as a result of the Business Combination. The estimated fair value of the TRA liability as of the Closing Date was $94.9 million. The undiscounted cash flows associated with the TRA liability were estimated to be between $190.0 million and $230.0 million over the time period during which the tax benefits are expected to be realized, currently estimated at over 20 years.


22


The amount and timing of any payments due under the TRA will vary depending upon a number of factors, including the amount and timing of the taxable income the Company generates in the future and the U.S. federal, state and local income tax rates then applicable. In addition, payments made under the TRA will give rise to additional tax benefits for the Company and therefore to additional potential payments due under the TRA. The term of the TRA commenced upon the consummation of the Mergers and will continue until all tax benefits that are subject to the TRA have been utilized or expired, unless the Company exercises its right to terminate the TRA early. If the Company elects to terminate the TRA early, its obligations under the TRA would accelerate and it generally would be required to make an immediate payment equal to the present value of the anticipated future payments to be made by it under the TRA, calculated in accordance with certain valuation assumptions set forth in the TRA.

The liabilities related to the Deferred Cash Consideration and the TRA are included in Due to related party pursuant to contingent consideration obligations on the Company’s condensed consolidated balance sheets.

Preliminary Purchase Consideration Allocation

The Business Combination is accounted for under the acquisition method, which requires the Company to perform an allocation of the purchase consideration to the assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The excess of the purchase consideration over the estimated fair values is recorded as goodwill. The following table summarizes the Company’s preliminary allocation of the purchase consideration to assets acquired and liabilities assumed at the acquisition date:
 
Preliminary Purchase Consideration
Allocation
 
 
Accounts receivable
$
470.0

Inventory
328.5

Other current assets
24.5

Property, plant and equipment
339.5

Customer-related intangible
197.0

Trade name
20.5

Other non-current assets
3.3

Deferred tax assets
1.2

Goodwill
695.6

Total assets acquired
2,080.1

 
 

Short-term borrowings and current portion of capital leases
40.6

Accounts payable
338.0

Other current liabilities
52.7

Long-term portion of capital leases
23.0

Long-term debt
767.3

Deferred tax liability
41.3

Other non-current liabilities
5.2

Total liabilities assumed
1,268.1

 
 

Net assets acquired
$
812.0


The total purchase consideration and the related purchase consideration allocation above are preliminary as the Company has not yet completed all the necessary fair value assessments, including the assessments of property, plant and equipment, intangibles, contingent consideration and the related tax impacts on these items. Any changes within the measurement period in the estimated fair values of the assets acquired and liabilities assumed and the working capital adjustments may change the amount of the purchase consideration allocable to goodwill. The fair value and related tax impact assessments are to be completed within twelve months of the Closing Date, and could have a material impact on the components of the total purchase consideration and the purchase consideration allocation.
    

23


Transaction costs incurred by the Company associated with the Business Combination were $15.9 million and $18.0 million for the three and nine months ended June 30, 2016 for the Successor, respectively. The Company also incurred a total of $25.3 million of debt issuance costs related to the New Credit Facilities in connection with the consummation of the Business Combination.

Transaction costs incurred by the Predecessor associated with the Business Combination were $26.1 million and $33.4 million for the period from April 1, 2016 through June 8, 2016 and the period from October 1, 2015 through June 8, 2016, respectively.

A summary and description of the acquired assets and assumed liabilities fair valued in conjunction with applying the acquisition method of accounting follows:
 
Accounts Receivable
 
Accounts receivable consists of receivables related to the customers of the acquired business, as well as various other miscellaneous receivables. The accounts receivable and other miscellaneous receivables were recorded at their approximate fair value based on expected collections of the Predecessor. Accordingly, accounts receivable included a fair value adjustment of $4.2 million to reduce gross receivables to their net value after consideration of expected uncollectable amounts at the Closing Date.
 
Inventory
 
Inventory consists primarily of finished products to be distributed to the acquired business’s customers. The fair value of inventory was established through application of the income approach, using estimates of selling prices and costs such as selling and marketing expenses to be incurred in order to dispose of the finished products and arriving at the future profitability that is expected to be generated once the inventory is sold (net realizable value). The inventory fair value step up of $13.8 million will be recognized in income as the inventory is sold, which is expected to be within two months of the Closing Date. The Company recognized $6.9 million of the inventory fair value step up during the three months ended June 30, 2016, which is included in Cost of sales and operating expenses in the condensed consolidated statement of operations.
 
Other Current Assets
 
Other current assets consist primarily of prepaid expenses, which did not have a fair value adjustment as part of acquisition accounting since their carrying value approximated fair value.
 
Property, Plant and Equipment
 
Property, plant and equipment consists primarily of: 42 owned distribution locations in the United States, Puerto Rico and Canada; 11 leased locations in the United States, Canada, Puerto Rico, Mexico, Europe and China (excluding third-party operated warehouses); office equipment and other similar assets used in the Predecessor's operations. The preliminary allocation of the purchase consideration for property, plant and equipment was based on the fair market value of such assets determined using the cost approach. The cost approach consisted of estimating the fixed assets’ replacement cost less all forms of depreciation. The fair value of land was determined using the comparable sales approach. The fair value adjustment to property, plant and equipment was $107.3 million.

Customer-Related Intangible
 
Customer relationships were valued through the application of the income approach. Under this approach, revenue, operating expenses and other costs associated with existing customers were estimated in order to derive cash flows attributable to the existing customer relationships. The resulting estimated cash flows were then discounted to present value to arrive at the fair value of existing customer relationships as of the valuation date. The value associated with customer relationships will be amortized on a straight-line basis over a 12-year period, which represents the approximate point in the projection period in which a majority of the asset’s cash flows are expected to be realized based on assumed attrition rates. The Company recognized $197.0 million for these intangible assets as part of the preliminary purchase consideration allocation.
 

24


Trade Name
 
The Nexeo trade name was valued through application of the income approach, involving the estimation of likely future sales and an estimated royalty rate reflective of the rate that a market participant would pay to use the Nexeo name. The fair value of this asset will be amortized on a straight-line basis over a period of four years, estimated based on the period in which the Company expects a market participant would use the name prior to rebranding and the length of time the name would be expected to maintain recognition and value in the marketplace. The Company recognized $20.5 million for this intangible asset as part of the preliminary purchase consideration allocation.
 
Other non-current assets
 
Other non-current assets acquired represents certain long-term deposits, which did not have a fair value adjustment as part of acquisition accounting since their carrying value approximated fair value.

Goodwill
 
Goodwill represents the excess of the total purchase consideration over the fair value of the underlying net assets acquired, largely arising from the workforce and extensive efficient distribution network that has been established by the acquired business. Of the total amount of goodwill recognized as part of the preliminary purchase consideration allocation above, the Company expects approximately $284.6 million to be deductible for tax purposes.
 
Short-term borrowings and current portion of capital leases.

Short-term borrowings and current portion of capital leases includes short term borrowings of Nexeo Plaschem and the current portion of capital leases, which did not have a fair value adjustment as part of acquisition accounting since their carrying value approximated fair value.

Accounts Payable
 
Accounts payable represent short-term obligations owed to the vendors of the acquired business, which were assumed in the Business Combination. These obligations did not have a fair value adjustment as part of acquisition accounting since their carrying value approximated fair value.
 
Other Current Liabilities
 
Other current liabilities represent primarily accrued expenses, including accrued payroll, accrued interest on long-term debt, certain accrued taxes and various other liabilities arising out of the normal operations of the acquired business. The majority of these liabilities did not have a fair value adjustment because their carrying value approximated fair value. However, no fair value was recognized for certain recorded liabilities that did not meet the definition of a liability under the acquisition method of accounting.
 
Long-term Portion of Capital Leases

The long-term portion of capital leases includes the non-current portion of capital leases for machinery and equipment, which did not have a fair value adjustment as part of acquisition accounting since their carrying value approximated fair value.

Long-term Debt

Long-term debt represents the outstanding principal balance at the Closing Date of the Predecessor Term Loan Facility and the Notes which did not have a fair value adjustment as part of acquisition accounting since the carrying value approximated fair value.

25



Deferred Taxes
 
Deferred tax assets and liabilities are attributable to the difference between the estimated fair values allocated to inventory, property, plant and equipment and identified intangibles acquired for financial reporting purposes and the amounts determined for tax reporting purposes and give rise to temporary differences.  The deferred tax assets and liabilities will reverse in future periods or have reversed as the related tangible and intangible assets are amortized, acquired inventory is sold, or if goodwill is impaired.

Impact of the Business Combination on the Company’s Consolidated Financial Information
 
For the three and nine months ended June 30, 2016, the Company’s consolidated sales and operating revenues and net loss include $214.3 million and $1.4 million, respectively, related to the operations of the acquired business since the closing date of the Business Combination.

Consolidated Pro Forma Financial Information
 
The consolidated pro forma results presented below include the effects of the Business Combination as if they had occurred as of the beginning of the previous fiscal year, or October 1, 2014.  The consolidated pro forma results reflect certain adjustments related to this acquisition, primarily the amortization expense associated with estimates for the acquired intangible assets, inventory adjustments to fair value, depreciation expense based on the new fair value of property, plant and equipment, transaction costs, interest expense and income taxes.

The consolidated pro forma financial information below is not necessarily indicative of either future results of operations or results that might have been achieved had the Business Combination been completed on October 1, 2014.

 
Three Months Ended June 30, 2016
 
Nine Months Ended 
 June 30, 2016
 
Three Months Ended 
 June 30, 2015
 
Nine Months Ended 
 June 30, 2015
Sales and operating revenues
$
864.5

 
$
2,554.4

 
$
988.8

 
$
3,019.3

Operating income (loss)
21.4

 
54.8

 
24.6

 
(28.1
)
Net income (loss) from continuing operations
6.6

 
14.9

 
13.8

 
(35.7
)
Net income (loss)
6.6

 
15.0

 
13.8

 
(36.4
)
Basic and diluted net income (loss) per share
0.09

 
0.19

 
0.18

 
(0.47
)

For all periods presented above, the basic and diluted net income (loss) per share amounts were computed using weighted average shares outstanding of 76,746,168, which assumes all shares issued as a result of the Business Combination would have been issued on October 1, 2014. There were 12,476,250 Founder Shares not included in the basic or diluted computations because market conditions are assumed to be not satisfied. Additionally, 1,547,500 PSU awards were not included in the computation of diluted shares outstanding because performance targets and/or market conditions are assumed not to have been met for these awards. Diluted shares outstanding also did not include 25,012,500 shares based on the exercise of 50,025,000 warrants because the warrants were out-of-the-money and their impact on the pro forma net income (loss) for all periods presented.


26


4. Certain Balance Sheet Information

Cash and Cash Equivalents
 
Cash and cash equivalents were $38.6 million as of June 30, 2016 for the Successor and $127.7 million as of September 30, 2015 for the Predecessor. These amounts included the following:
 
Successor
 
 
Predecessor
 
June 30, 2016
 
 
September 30, 2015
Cash held by foreign subsidiaries
$
35.4

 
 
$
54.1

Non-U.S. dollar denominated currency held by foreign subsidiaries
$
33.0

 
 
$
45.0

Currency denominated in RMB
$
8.9

 
 
$
4.7


Non-U.S. dollar denominated currency held by foreign subsidiaries was primarily in euros and RMB. While the RMB is convertible into U.S. dollars, foreign exchange transactions are subject to approvals from SAFE. The Company does not anticipate any significant adverse impact to overall liquidity from restrictions on cash and cash equivalents.

Inventories

Inventories at June 30, 2016 and September 30, 2015 consisted of the following:
 
Successor
 
 
Predecessor
 
June 30, 2016
 
 
September 30, 2015
Finished products
$
317.2

 
 
$
320.9

Supplies
4.3

 
 
4.2

Total
$
321.5

 
 
$
325.1


The Company’s inventories in the U.S. and Canada are collateral under the New Credit Facilities.

Other Non-Current Assets

Other non-current assets at June 30, 2016 and September 30, 2015 consisted of the following:
 
Successor
 
 
Predecessor
 
June 30, 2016
 
 
September 30, 2015
Debt issuance costs of revolving credit facilities
$
6.7

 
 
$
5.4

Other
3.2

 
 
3.4

Total
$
9.9

 
 
$
8.8



In connection with the New Credit Facilities, the Company incurred debt issuance costs of $25.3 million during the nine months ended June 30, 2016. Of these, $6.8 million related to the New ABL Facility and were recorded in Other non-current assets on the condensed consolidated balance sheet. The remaining $18.5 million of debt issuance costs related to the New Term Loan Facility and were recorded as a reduction of the debt. See Note 7.

Amortization of debt issuance costs related to the New ABL Facility recorded in Interest expense in the condensed consolidated income statements was $0.1 million for the three and nine months ended June 30, 2016 for the Successor.

In connection with the Business Combination, debt issuance costs totaling $9.3 million, associated with the Predecessor were derecognized as part of the purchase consideration allocation. Amortization of debt issuance costs related to the Predecessor ABL Facility recorded in interest expense were $0.6 million and $2.1 million for the periods April 1, 2016 through June 8, 2016 and from October 1, 2015 through June 8, 2016 for the Predecessor, respectively, and $0.8 million and $2.3 million for the three and nine months ended June 30, 2015 for the Predecessor, respectively.


27


Investments and Cash Previously Held in Trust

Prior to the Business Combination, the Company held in a trust account securities which the Company had the ability and intent to hold until maturity. Held-to-maturity treasury securities were recorded at amortized cost and adjusted for the amortization of the original discount. During the nine months ended June 30, 2016, the Company recognized $0.6 million of amortization related to the original discount, which was recorded in Interest income in the condensed consolidated income statement. As part of the Business Combination, the Company withdrew all proceeds from the trust account.

5. Property, Plant and Equipment
 
Property, plant and equipment at June 30, 2016 and September 30, 2015 consisted of the following:
 
Successor
 
 
Predecessor
 
June 30, 2016
 
 
September 30, 2015
Land
$
55.7

 
 
$
41.2

Plants and buildings
93.7

 
 
78.3

Machinery and equipment (1)
135.2

 
 
167.8

Software and computer equipment
43.5

 
 
68.8

Construction in progress
14.0

 
 
12.9

Total
342.1

 
 
369.0

Less accumulated depreciation
(3.0
)
 
 
(137.8
)
Property, plant and equipment, net
$
339.1

 
 
$
231.2


(1) Includes $25.1 million and $13.1 million, respectively, related to equipment acquired under capital leases.

In connection with the Business Combination, property, plant and equipment of the Predecessor was adjusted to fair market value. See Note 3.

Depreciation expense recognized on the property, plant and equipment described above was as follows:
 
Successor
 
 
Predecessor
 
Three Months Ended 
 June 30, 2016
 
Nine Months Ended 
 June 30, 2016
 
 
April 1 Through June 8, 2016
 
October 1, 2015 Through June 8, 2016
 
Three Months Ended June 30, 2015
 
Nine Months Ended June 30, 2015
Depreciation expense
3.0

 
3.0

 
 
7.5

 
27.1

 
9.2

 
27.8


Equipment Lease

In May 2015, the Predecessor entered into the Ryder Lease for transportation equipment. The Ryder Lease covers the rental of 202 tractors, which replaced a significant portion of the Company’s private fleet of tractors and has a term of seven years. The Ryder Lease is accounted for as a capital lease and requires minimum annual payments of approximately $5.5 million per year. The Company is permitted to terminate the lease of an individual tractor on the anniversary of its delivery date, provided that certain conditions are met. In the event the Company terminates the lease of an individual tractor in accordance with the terms of the Ryder Lease, the Company may elect to purchase the individual tractor at a predetermined residual value or return the tractor to Ryder, subject to an adjustment based on the then-current market value of the individual tractor.


28


Facility Lease

The Company is currently in discussions with the Illinois Tollway Authority regarding the sale of one of the Company’s facilities under an eminent domain proceeding numbered Illinois State Tollway Authority v. Nexeo Solutions, LLC, Case No. 15 L 50521, Parcel No. WA-12-012. The sale is expected to be finalized during fiscal year 2017. The Company does not expect to record a loss in connection with this transaction.

In March 2016, in connection with the relocation of the operations currently managed at the facility described above, the Predecessor entered into a lease agreement for a new facility in Montgomery, Illinois. The lease has a term of 15 years, with annual payments beginning at $1.1 million per year and annual escalations of 2.5% per year. The lease agreement includes three renewal options of five years each. The lease term is expected to begin in November 2016. This lease agreement will be accounted for as a capital lease.

6. Goodwill and Other Intangibles

Goodwill
 
The following is a progression of Successor goodwill by reportable segment: 
Successor
Chemicals
 
Plastics
 
Other
 
Total
Balance September 30, 2015
$

 
$

 
$

 
$

Business Combination
335.3

 
295.0

 
65.3

 
695.6

Foreign currency translation
(0.1
)
 
(2.1
)
 

 
(2.2
)
Balance at June 30, 2016
$
335.2

 
$
292.9

 
$
65.3

 
$
693.4


Goodwill by reportable segment as of September 30, 2015 for the Predecessor was $269.7 million for Chemicals, $91.5 million for Plastics and $12.5 million for Other.

Goodwill amounts by reportable segment at June 30, 2016 are based on the preliminary purchase consideration allocation of the Business Combination, which is based on preliminary valuations performed to determine the fair value of the acquired assets and assumed liabilities as of the Closing Date. Accordingly, the amounts allocated to goodwill are subject to adjustments to reflect the completion of the fair value assessments related to the Business Combination, which are expected to be completed within twelve months of the Closing Date. These final valuations could have a material impact on total goodwill and goodwill by reportable segment. See Note 3.

Goodwill Impairment Test
 
Goodwill is tested for impairment annually as of March 31 and whenever events or circumstances make it more likely than not that an impairment may have occurred. Goodwill is reviewed for impairment at the reporting unit level, or operating segment, for the Company.

Significant management judgment is required in the estimates and assumptions made for purposes of the Company’s goodwill impairment testing. If actual results differ from these estimates and assumptions or market conditions materially change, the analysis could be negatively impacted and could result in an impairment charge in future periods.


29


Other Intangible Assets

Definite-lived intangible assets at June 30, 2016 and September 30, 2015 consisted of the following: 
 
 
 
Successor
 
 
 
June 30, 2016
 
Estimated
Useful Life
(years)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Customer-related
12
 
$
197.0

 
$
(1.0
)
 
$
196.0

Trade name
4
 
20.5

 
(0.3
)
 
20.2

Total
 
 
$
217.5

 
$
(1.3
)
 
$
216.2


 
 
 
Predecessor
 
 
 
September 30, 2015
 
Estimated
Useful Life
(years)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Customer-related
5-14
 
$
121.3

 
$
(33.6
)
 
$
87.7

Supplier-related
10
 
17.0

 
(2.6
)
 
14.4

Leasehold interest
1-20
 
2.1

 
(1.3
)
 
0.8

Non-compete agreements
3-5
 
10.0

 
(4.5
)
 
5.5

Trademarks and trade names
2-6
 
6.2

 
(3.2
)
 
3.0

Total
 
 
$
156.6

 
$
(45.2
)
 
$
111.4

 
Amortization expense recognized on the intangible assets described above was as follows:
 
Successor
 
 
Predecessor
 
Three Months Ended 
 June 30, 2016
 
Nine Months Ended 
 June 30, 2016
 
 
April 1 Through June 8, 2016
 
October 1, 2015 Through June 8, 2016
 
Three Months Ended June 30, 2015
 
Nine Months Ended June 30, 2015
Amortization expense
$
1.3

 
$
1.3

 
 
$
2.8

 
$
10.6

 
$
3.9

 
$
11.8


Expected amortization expense for the years ending September 30, 2017 through 2021 is $21.5 million, $21.5 million, $21.5 million, $19.9 million, and $16.4 million, respectively.

Other intangible assets at June 30, 2016 are based on the preliminary purchase consideration allocation of the Business Combination, which is based on preliminary valuations performed to determine the fair value of the acquired assets and assumed liabilities as of the Closing Date. The amounts allocated to other intangible assets are preliminary and therefore subject to adjustments to reflect the completion of the fair value assessments related to the Business Combination, which are expected to be completed within twelve months of the Closing Date. These final valuations could have a material impact on other intangible assets. See Note 3.

7. Debt
 
Short-term borrowings outstanding and the current portion of long-term debt and capital lease obligations at June 30, 2016 and September 30, 2015 are summarized below:
 
 
Successor
 
 
Predecessor
 
 
June 30, 2016
 
 
September 30, 2015
Short-term borrowings
 
$
41.0

 
 
$
34.9

Current portion of long-term debt and capital lease obligations
 
9.0

 
 
37.5

Total short-term borrowings and current portion of long-term debt and capital lease obligations, net
 
$
50.0

 
 
$
72.4


30



Long-term debt outstanding at June 30, 2016 and September 30, 2015 is summarized below:
 
Successor
 
 
Predecessor
 
June 30, 2016
 
 
September 30, 2015
New ABL Facility
$
131.1

 
 
$

New Term Loan Facility
655.0

 
 

Predecessor ABL Facility

 
 
85.5

Predecessor Term Loan Facility

 
 
647.2

Notes

 
 
159.2

Capital lease obligations (1)
25.2

 
 
12.7

Total long-term debt
811.3

 
 
904.6

Less: unamortized debt discount (2)
(3.3
)
 
 
(3.6
)
Less: debt issuance costs(3)
(18.4
)
 
 
(9.1
)
Less: current portion of long-term debt and capital lease obligations
(9.0
)
 
 
(37.5
)
Long-term debt and capital lease obligations, less current portion, net
$
780.6

 
 
$
854.4


(1) 
Capital lease obligations exclude executory costs and interest payments associated with the underlying leases. See “Capital Lease Obligations” below.
(2) 
At June 30, 2016, included $3.3 million of unamortized debt discount related to the New Term Loan Facility for the Successor. At September 30, 2015, included $1.9 million of unamortized debt discount related to the Predecessor’s Term Loan Facility, with the remainder related to the Notes. Debt discount is amortized to interest expense over the life of the respective instruments using the effective interest rate method.
(3) 
See discussion below under New Term Loan Facility and Debt Issuance Cost Amortization and Note 2 related to the adoption of ASU 2015-03 and ASU 2015-15.

Short-Term Borrowings
 
Short-term borrowings are associated with the Company’s operations in China and are summarized below:
 
 
Facility Limit
 
Outstanding Borrowings Balance
 
Weighted Average Interest Rate on Borrowings
 
Outstanding LOC and Bankers’ Acceptance Bills
 
Remaining Availability
June 30, 2016 - Successor
 
 
 
 
 
 
 
 
 
 
Bank of America - China (1)
 
$
28.8

 
$
27.2

 
3.7%
 
$

 
$
1.6

Bank of Communications - China (2)
 
22.6

 
13.8

 
5.3%
 
8.5

 
0.3

Total
 
$
51.4

 
$
41.0

 
 
 
$
8.5

 
$
1.9

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2015 - Predecessor
 
 
 
 
 
 
 
 
 
 
Bank of America - China
 
$
23.8

 
$
23.0

 
3.5%
 
$

 
$
0.8

Bank of Communications - China
 
23.6

 
11.9

 
6.1%
 
7.1

 
4.6

Total
 
$
47.4

 
$
34.9

 
 
 
$
7.1

 
$
5.4


(1)  
The borrowing limit of this facility is denominated in U.S. dollars. This line of credit is secured by a standby letter of credit drawn on the New ABL Facility covering at least 110% of the facility’s borrowing limit amount. Borrowings under the line of credit are payable in full within 12 months of the date of the advance.
(2)
The borrowing limit of this facility is denominated in RMB. This line of credit is secured by a standby letter of credit drawn on the New ABL Facility covering at least 100% of the facility’s borrowing limit amount. Borrowings under the line of credit are payable in full within 12 months of the date of the advance.

In addition to the above lines of credit, Nexeo Plaschem has an arrangement through which it makes borrowings on a short-term basis, usually six months, by using its line of credit with the bank or by pledging the proceeds of its notes receivable. The borrowings under this arrangement are used to fund Nexeo Plaschem’s working capital requirements. At June 30, 2016 and September 30, 2015, there were no outstanding borrowings, no notes receivable pledged and no outstanding bankers’ acceptance bills issued to suppliers under this arrangement.

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Nexeo Plaschem has another similar arrangement whereby it is able to pledge proceeds from its notes receivable in exchange for bankers’ acceptance bills issued to suppliers. No notes receivable were pledged under this arrangement at June 30, 2016 and September 30, 2015.

Long-Term Debt

New ABL Facility

On June 9, 2016, the ABL Borrowers entered into the New ABL Facility which provides for revolving credit financing including a U.S. Tranche of up to $505.0 million and a Canadian Tranche of up to the U.S. dollar equivalent of $40.0 million, and a FILO Tranche up to $30.0 million. Under the New ABL Facility, up to $50.0 million in the case of the U.S. Tranche and $10.0 million in the case of the Canadian Tranche may be short-term borrowings upon same-day notice, referred to as swingline loans. The New ABL Facility is unconditionally guaranteed, jointly and severally, by Holdings and its wholly-owned subsidiary, Sub Holding. Additionally, Solutions, Holdings and Sub Holding are also co-borrowers under the U.S. Tranche and the FILO Tranche of the New ABL Facility on a joint and several basis, and Nexeo Solutions Canada Corp. is the borrower under the Canadian Tranche. The New ABL Facility matures on June 9, 2021. Provided no default or event of default then exists or would arise therefrom, the ABL Borrowers have the option, at the beginning of each quarter, to request that the New ABL Facility be increased by an aggregate amount, when included with any incremental borrowings issued under the New Term Loan Facility, not to exceed $175.0 million.

The New ABL Facility includes a letter of credit sub-facility, which permits up to $200.0 million of letters of credit under the U.S. Tranche (which may be denominated in U.S. dollars, euros or other currencies approved by the administrative agent and the issuing bank) and up to the U.S. dollar equivalent of $10.0 million of letters of credit under the Canadian Tranche (which may be denominated in CAD only). The New ABL Facility also contains a FILO Tranche which can be used by any non-Canadian foreign subsidiary for loans or letters of credit up to an aggregate amount not to exceed $30.0 million.

Obligations under the New ABL Facility are also secured by a first priority lien on inventory and accounts receivable of the ABL Borrowers and a second priority lien on outstanding equity interests of Holdings and certain of its subsidiaries.

The amount of available credit changes every month, depending on the amount of eligible receivables and inventory the ABL Borrowers have available to serve as collateral. In general, the facility is limited to the lesser of (i) the aggregate commitment or (ii) the sum of (a) 90% of eligible accounts receivable, as defined, and (b) 85% of the orderly liquidation value of the eligible inventory and (c) 100% of cash and cash equivalents held in blocked accounts, as defined, maintained by the ABL Agent, for each ABL Borrower. Available credit for the U.S. and Canadian Tranches are calculated separately, and the borrowing base components are subject to customary reserves and eligibility criteria.

Borrowings under the U.S. Tranche and the Canadian Tranche of the New ABL Facility bear interest, at the ABL Borrowers’ option, at either an alternate base rate or Canadian prime rate, as applicable, plus an applicable margin (ranging from 0.25% to 0.75% pursuant to a grid based on average excess availability) or LIBOR or Canadian BA rate (as defined therein), as applicable, plus an applicable margin (ranging from 1.25% to 1.75% pursuant to a grid based on average excess availability). Loans under the FILO Tranche, within the New ABL Facility, bear interest at an alternate base rate plus an applicable margin (ranging from 1.00% to 1.50% pursuant to a grid based on average excess availability) or LIBOR plus an applicable margin (ranging from 2.00% to 2.50% pursuant to a grid based on average excess availability). In addition to paying interest on outstanding principal amounts under the New ABL Facility, the ABL Borrowers are required to pay a commitment fee in respect of the unutilized commitments, which commitment fee is 0.250% or 0.375% per annum and is determined based on average utilization of the New ABL Facility (increasing when utilization is low and decreasing when utilization is high). The ABL Borrowers are required to pay customary letters of credit fees.
 
The New ABL Facility requires that if the sum of (i) excess availability, as defined (for the ABL Borrowers) and (ii) the amount by which the then-current borrowing base exceeds the aggregate commitments under the New ABL Facility (for the ABL Borrowers) is less than the greater of (a) $40.25 million and (b) 10.0% of the Line Cap (as defined in the New ABL Facility), the ABL Borrowers shall comply with a minimum fixed charge coverage ratio of at least 1.0 to 1.0. In addition, the New ABL Facility contains negative covenants that restrict Holdings and its subsidiaries, including the ABL Borrowers from, among other things, incurring additional debt, granting liens, entering into guarantees, entering into certain mergers, making certain loans and investments, disposing of assets, prepaying certain debt, declaring dividends, modifying certain material agreements or changing the business it conducts.
 

32


The New ABL Facility also contains certain customary representations and warranties, affirmative covenants and events of default, including among other things payment defaults, breach of representations and warranties, covenant defaults, cross-defaults and cross-acceleration to certain indebtedness, certain events of bankruptcy, certain events under the Employee Retirement Income Security Act of 1974, as amended from time to time, material judgments, actual or asserted failure of any guaranty or security document supporting the New ABL Facility to be in full force and effect, and change of control. If such an event of default occurs, the lenders under the New ABL Facility are entitled to take various actions, including the acceleration of amounts due under the New ABL Facility and all actions permitted to be taken by a secured creditor.
 
The weighted average interest rate on borrowings under the New ABL Facility was 2.6% at June 30, 2016. Solutions had the U.S. dollar equivalent of $73.7 million in outstanding letters of credit under the New ABL Facility at June 30, 2016. The collective credit availability under the U.S. and Canadian Tranches of the New ABL Facility was $125.2 million at June 30, 2016. There was no availability under the FILO Tranche at June 30, 2016.

The ABL Borrowers’ accounts receivable and inventory in the U.S. and Canada are collateral under the New ABL Facility. These accounts receivable and inventory totaled $601.1 million in the aggregate as of June 30, 2016 for the Successor.

Fees paid to the lenders in connection with the New ABL Facility totaled $6.8 million and were recorded as debt issuance costs in Other non-current assets on the condensed consolidated balance sheets to be amortized as interest expense over the remaining term of the New ABL Facility. See Note 4.

As of June 30, 2016, the ABL Borrowers were in compliance with the covenants of the New ABL Facility.

New Term Loan Facility

On June 9, 2016, Neon Finance Company LLC (which was subsequently merged with and into Solutions) entered into a New Term Loan Facility that provides secured debt financing in an aggregate principal amount of up to $655.0 million and the right, at Solutions’ option, to request additional tranches of term loans in an aggregate principal amount, when included with any incremental borrowings issued under the New ABL Facility, of up to $175.0 million, plus unlimited additional amounts such that the aggregate principal amount of indebtedness outstanding at any one time does not cause the consolidated net senior secured leverage ratio, calculated on a pro forma basis, to exceed 4.1 to 1.0. Availability of such additional tranches of term loans are subject to the absence of any default, and among other things, the receipt of commitments by existing or additional financial institutions. Borrowings under the New Term Loan Facility bear interest at the borrower’s option at either (i) LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, which shall be no less than 1.0%, plus an applicable margin of 4.25% or (ii) a base rate determined by reference to the highest of (a) the prime commercial lending rate published by Bank of America, N.A. as its "prime rate," (b) the federal funds effective rate plus 0.50% and (c) a one-month LIBOR rate plus 1.0%, plus an applicable margin of 3.25%. Commencing with the quarter ending September 30, 2016, Solutions is required to make scheduled quarterly payments in an aggregate annual amount equal to 1.0% of the aggregate principal amount of the initial term loans made on the Closing Date of the Mergers, with the balance due at maturity. The New Term Loan Facility matures on June 9, 2023. The interest rate for the New Term Loan Facility was 5.25% at June 30, 2016. Proceeds of $651.7 million, net of discount of $3.3 million were received in connection with the New Term Loan Facility.
 
Additionally, the New Term Loan Facility agreement requires Solutions to make early principal payments on an annual basis, commencing with the fiscal year ended September 30, 2017, if cash flows for the year, as defined in the agreement, exceed certain levels specified in the agreement. Solutions generally has the right to prepay loans in whole or in-part, without incurring any penalties for early payment. Solutions is not required to make an early principal payment for the fiscal year ended September 30, 2016.
 
The New Term Loan Facility contains a number of covenants that, among other things and subject to certain exceptions, restrict Holdings’ ability and the ability of its subsidiaries to incur additional indebtedness, pay dividends on its capital stock or redeem, repurchase or retire its capital stock or other indebtedness, make investments, loans and acquisitions, create restrictions on the payment of dividends or other amounts to the Company from its restricted subsidiaries, engage in transactions with its affiliates, sell assets, including capital stock of its subsidiaries, alter the business it conducts, consolidate or merge, incur liens. The credit agreement governing the New Term Loan Facility does not require Solutions to comply with any financial maintenance covenants and contains certain customary representations and warranties, affirmative covenants and provisions relating to events of default. As of June 30, 2016, Solutions was in compliance with the covenants of the New Term Loan Facility.


33


Obligations under the New Term Loan Facility are secured by a first priority lien on outstanding equity interests of Holdings and certain subsidiaries and a second priority lien on accounts receivables and inventory that are subject to the New ABL Facility first priority lien.

Fees paid to the lenders in connection with the New Term Loan Facility totaled $18.5 million and were recorded as a reduction of the debt balance to be amortized as interest expense over the remaining term of the New Term Loan Facility.

Redemption of Predecessor 8.375% Senior Subordinated Notes due 2018

On June 9, 2016, all of the approximately $149.7 million principal amount of the Notes outstanding were redeemed at a redemption price equal to 100% of the principal amount. The Issuers and the guarantors under the Notes were released from their respective obligations under the Notes and the Indenture (as defined in the Merger Agreement) governing the Notes.
During the second quarter of fiscal year 2016, the Predecessor acquired $9.5 million in aggregate principal amount of its Notes for $8.7 million in cash and recorded a gain on early extinguishment of $0.6 million, inclusive of the write-off of related debt issuance costs and original issue discount which was recorded in Other income in the condensed consolidated statement of operations.

Debt issuance costs totaling $1.4 million were derecognized as part of the purchase consideration allocation.

Predecessor ABL Facility

On June 9, 2016, the Predecessor’s $540.0 million multicurrency ABL Facility was terminated. There was no outstanding balance at the time of termination. Solutions provided notice to the administrative agent and settled all remaining commitments under the facility. Accordingly, the administrative agent released the credit parties from their respective obligations under the facility, effective June 9, 2016.

Predecessor debt issuance costs totaling $3.3 million were derecognized as part of the purchase consideration allocation.

The weighted average interest rate on borrowings under the Predecessor ABL Facility was 1.8% at September 30, 2015. At September 30, 2015, the Predecessor had $67.4 million in outstanding letters of credit under the Predecessor ABL Facility. Collective credit availability under the U.S. and Canadian tranches of the Predecessor ABL Facility was $321.4 million at September 30, 2015.

Predecessor Term Loan Facility
    
On June 9, 2016, the principal outstanding balance of $617.5 million related to all three tranches of the term loans under the Credit Agreement was paid and the facility was terminated. Accordingly, the administrative agent released the credit parties from their respective obligations and all other commitments under the facility, effective June 9, 2016.

Related debt issuance costs totaling $4.6 million were derecognized as part of the purchase consideration allocation.

Debt Issuance Cost Amortization

Amortization expense included in interest expense related to debt issuance costs of the New Term Loan Facility was $0.1 million for the three and nine months ended June 30, 2016 for the Successor, $0.8 million and $3.0 million for the periods April 1, 2016 through June 8, 2016 and from October 1, 2015 through June 8, 2016 for the Predecessor, respectively, and $1.0 million and $3.1 million for the three and nine months ended June 30, 2015 for the Predecessor, respectively.

Capital Lease Obligations

The capital lease obligation balance of $25.2 million as of June 30, 2016 is primarily associated with tractors delivered under the Ryder Lease. See Note 5. This obligation excludes future executory costs payments of $2.1 million per year, for aggregate executory costs of $13.2 million, as well as decreasing annual interest payments ranging from $1.0 million to $0.3 million, for aggregate interest payments totaling $4.7 million.


34


8. Derivatives
 
Prior to the Business Combination, the Predecessor was a party to interest rate swap agreements of varying expiration dates through March 2017, to help manage the exposure to interest rate risk related to the variable-rate Predecessor Term Loan Facility. As a result of the Business Combination, the Predecessor Term Loan Facility was extinguished, the related swap agreements were terminated and an early termination payment penalty of $0.3 million was paid in the Successor period and recorded in Transaction related costs in the condensed consolidated statements of operations. No new swaps have been entered into.

The interest rate swaps were accounted for as cash flow hedges. Accordingly, gains or losses resulting from changes in the fair value of the swaps were recorded in other comprehensive income to the extent that the swaps are effective as hedges. Gains and losses resulting from changes in the fair value applicable to the ineffective portion, if any, were reflected in income. Gains and losses recorded in other comprehensive income were reclassified into and recognized in income when the interest expense on the Predecessor Term Loan Facility was recognized.

Gains and losses net of reclassifications into income related to the Predecessor’s interest rate swaps were as follows:
 
 
 
Predecessor
 
Recorded to
 
April 1 Through June 8, 2016
 
October 1, 2015 Through June 8, 2016
 
Three Months Ended 
 June 30, 2015
 
Nine Months Ended 
 June 30, 2015
Realized loss
Interest expense
 
$
0.1

 
$
0.3

 
$
0.1

 
$
0.4

Unrealized gain
Other comprehensive income
 
$
0.1

 
$
0.3

 
$

 
$
0.1

 
See Note 9 for additional information on the fair value of the Predecessor’s derivative instruments.

9. Fair Value Measurements
 
The accounting standard for fair value measurements establishes a framework for measuring fair value that is based on the inputs market participants use to determine the fair value of an asset or liability and establishes a fair value hierarchy to prioritize those inputs. The fair value hierarchy is as follows:
 
● Level 1—Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets.

● Level 2—Other inputs that are directly or indirectly observable in the marketplace.
 
● Level 3—Unobservable inputs that are supported by little or no market activity.
 
The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions a third party would use in pricing an asset or liability based on the best information available under the circumstances. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, which may affect the valuation of the assets and liabilities and their placement within the fair value hierarchy levels. The Company considers active markets as those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

Fair value of financial instruments
    
The carrying amount of cash and cash equivalents, accounts and notes receivable, accounts payable and short-term borrowings approximate their fair value due to the short-term maturity of those instruments.
 

35


The carrying values of borrowings outstanding under the New Credit Facilities approximate fair value at June 30, 2016 primarily due to their variable interest rate. The estimated fair value of these instruments is classified by the Company as a Level 3 measurement within the fair value hierarchy due to the varying interest rate parameters as outlined in the respective loan agreements. The carrying values of borrowings under the Predecessor Credit Facilities approximated fair value at September 30, 2015 primarily due to their variable interest rate.
 
The estimated fair value of the Predecessor Notes was $149.2 million at September 30, 2015, including accrued interest of $1.1 million. The estimated fair value of the Notes was classified by the Predecessor as a Level 3 measurement within the fair value hierarchy. The estimated fair value of these instruments was calculated based upon a pricing model using the estimated yield calculated from interpolated treasury and implied yields to quoted price as inputs. The Predecessor’s relative credit standing was one of the inputs to the valuation.

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

In addition to the financial instruments that are recorded at fair value on a recurring basis, the Company records assets and liabilities at fair value on a non-recurring basis as required by U.S. GAAP, such as a result of impairment charges or as part of a business combination. See Note 3 for further discussion of the Business Combination. These fair value measurements were classified as Level 3 within the fair value hierarchy.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The preliminary fair value of the contingent consideration related to the Deferred Cash Consideration as discussed in Note 3 was $49.6 million at the Closing Date. The fair value of the contingent consideration related to the Deferred Cash Consideration was $46.7 million as of June 30, 2016. The measurement of the contingent consideration related to the Deferred Cash Consideration is classified by the Company as a Level 3 measurement within the fair value hierarchy. In order to estimate the fair value of the Deferred Cash Consideration, the Company estimates the value of the Excess Shares using a Monte Carlo simulation model with the market price of the Company’s common stock at each valuation date being the most important input to this model. An increase in the market price of the Company’s common stock has the same directional effect on the value of the liability related to the Deferred Cash Consideration.

The preliminary fair value of the liability for the contingent consideration related to the TRA as discussed in Note 3 was $94.9 million at the Closing Date. The fair value of the liability for the contingent consideration related to the TRA was $95.5 million as of June 30, 2016. The liability for the contingent consideration related to the TRA is classified by the Company as a Level 3 measurement within the fair value hierarchy. The Company estimates the fair value of the liability for the contingent consideration related to the TRA based on a discounted cash flow model which incorporates assumptions of projected taxable income, projected income tax liabilities and an estimate of tax benefits expected to be realized as a result of the Business Combination. Key inputs to the valuation are prevailing tax rates and market interest rates impacting the discount rate. An increase in the discount rate has the opposite directional effect on the value of the liability related to the TRA. An increase in prevailing tax rates has the same directional effect on the value of the liability related to the TRA.

The fair value measurements of the contingent consideration above at the Closing Date are preliminary. Any changes within the measurement period in the estimated fair values of these liabilities may change the amount of the purchase price allocable to goodwill. Any subsequent changes in the fair value of the contingent consideration from their initial fair value recognition at the Closing Date will be recognized as a component of Operating income (loss) in the condensed consolidated statements of operations. Changes in the estimates and inputs used in determining the fair value of the contingent consideration could have a material impact on the amounts recognized as a component of Operating income (loss) in future periods.

Prior to the Business Combination, the Predecessor was a party to interest rate swap agreements of varying expiration dates through March 2017 to help manage the Predecessor’s exposure to interest rate risk related to its variable-rate Predecessor Term Loan Facility. As a result of the Business Combination, the Predecessor Term Loan Facility was extinguished, the related swap agreements were terminated and an early termination payment of $0.3 million was made and recorded in Transaction related costs in the condensed consolidated statements of operations. No new swaps have been put in place to manage interest rate exposure associated with the New Term Loan Facility. At September 30, 2015, the Predecessor recorded $0.4 million in Accrued expenses and other liabilities and $0.1 million in Other non-current liabilities in the condensed consolidated balance sheet related to these instruments.

During the three and nine months ended June 30, 2016 and 2015, the Company and the Predecessor did not have any transfers between Level 1, Level 2 or Level 3 fair value measurements.


36


10. Share-based Compensation

Successor

On June 8, 2016, the Company’s shareholders approved the 2016 LTIP, with an effective date of March 30, 2016, covering approximately a ten-year period. No awards may be granted after March 20, 2026. The 2016 LTIP permits the grant of up to 9,000,000 shares of common stock for various types of awards to employees, directors and consultants of the Company or its subsidiaries, including incentive and non-incentive stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalents, stock awards, conversion awards and performance awards.
 
Vesting conditions of awards under the 2016 LTIP are determined by the Compensation Committee of the Board of Directors of the Company, including treatment upon the occurrence of a change of control of the Company. Upon a change of control, the Compensation Committee has the discretion to remove forfeiture restrictions, accelerate vesting, require recipients of awards to surrender the awards for cash consideration, cancel unvested awards without payment of consideration, cause any surviving entity to assume and continue any outstanding awards, or make other such adjustments as the Compensation Committee deems appropriate to reflect such change of control.

If any change is made to the Company’s capitalization, appropriate adjustments will be made by the Compensation Committee as to the number and price of shares awarded under the 2016 LTIP, the securities covered by such awards, the aggregate number of shares of common stock of the Company available for the issuance of awards under the 2016 LTIP, and the maximum annual per person compensation limits on share-based awards under the 2016 LTIP.

Other than in connection with a change in capitalization or other transaction where an adjustment is permitted or required under the terms of the 2016 LTIP, the Compensation Committee is prohibited from making any adjustment or approving any amendment that reduces or would have the effect of reducing the exercise price of a stock option or stock appreciation right previously granted under the 2016 LTIP unless the Company’s shareholders have approved such adjustment or amendment.
 
In each calendar year during any part of which the 2016 LTIP is in effect, an employee may not receive awards under the plan in excess of 1,000,000 shares of common stock, or a value of greater than $12.0 million if an award is to be paid in cash or if settlement is not based on shares of common stock, in each case, multiplied by the number of full or partial calendar years in any performance period established with respect to an award, if applicable. A non-employee member of the Board of Directors of the Company may not be granted awards with a cumulative value of greater than $1.0 million during any calendar year for services rendered in their capacity as a director. This limit does not apply to grants made to a non-employee director for other reasons not related to their services as a director.

During the three and nine months ended June 30, 2016, the Company granted 1,547,500 PSUs to certain officers and employees. The performance aspect of the PSUs vest on June 30, 2019, entitling the recipient to receive a certain number of shares of the Company’s common stock, based on the Company’s achievement of the performance goals included in the PSUs. Depending on the performance of the Company’s common stock during the approximate three year performance period, a recipient of the award is entitled to receive a number of common shares equal to a percentage, ranging from 0% to 200%, of the initial award granted, with a 35% total shareholder return entitling the recipient to receive 100% of the award granted. As a result, the Company may issue up to 3,095,000 shares related to these awards. If the Company’s total shareholder return for the performance period is negative,