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SEC Filings

10-Q
NEXEO SOLUTIONS, INC. filed this Form 10-Q on 05/10/2017
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 March 31, 2017
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)
 
 
  
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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
 
 
Emerging growth company  o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 May 5, 2017, there were 89,281,617 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
ABL Borrowers
Holdings, Sub Holding and Solutions together with Nexeo Solutions Canada Corporation
ABL Facility
The asset-based credit facility pursuant to that certain asset-based credit agreement by and among the ABL Borrowers, Bank of America, N.A., as administrative agent and the lenders party thereto and the other parties thereto
ADA Purchase Agreement
The Ashland Distribution Acquisition purchase agreement
ASC
The FASB Accounting Standards Codification
Ashland
Ashland Inc. and its subsidiaries
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 the Closing Date
CAD
Canadian dollar
Canadian Tranche
Canadian tranche of the ABL Facility
Closing Date
June 9, 2016
Company / Successor / Nexeo
Nexeo Solutions, Inc. (f/k/a WL Ross Holding Corp.) and its consolidated subsidiaries
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
Credit Facilities
The ABL Facility and the Term Loan Facility, collectively
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
Distribution Business
The global distribution business purchased by the Predecessor from Ashland
DTSC
California Department of Toxic Substances Control
EBITDA
Earnings before interest, tax, depreciation and amortization
EMEA
Europe, Middle East and Africa
ERP
Enterprise resource planning
Excess Shares
The 5,178,642 shares of Company common stock used to calculate the Deferred Cash Consideration payable to the Selling Equityholders pursuant to the Merger Agreement
Exchange Act
U.S. Securities Exchange Act of 1934, as amended
FASB
Financial Accounting Standards Board
FILO Tranche
$30.0 million tranche within the ABL Facility for non-Canadian foreign subsidiaries to issue loans and letters of credit
Founder Shares
The 12,506,250 shares of Company common stock issued to the 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

3


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
Montgomery Lease
The Company’s leased facility in Montgomery, Illinois commencing in the first fiscal quarter of 2017
NASDAQ
NASDAQ Stock Market
New Holdco
Nexeo Holdco, LLC
Nexeo Plaschem
Nexeo Plaschem (Shanghai) Co., Ltd., a wholly-owned subsidiary of the Company
NLRB
U.S. National Labor Relations Board
Notes
8.375% Senior Subordinated Notes of the Predecessor due 2018
Other Retained Remediation Liabilities
Under the ADA Purchase Agreement, Ashland agreed to retain other environmental remediation liabilities unknown at the closing of the Ashland Distribution Acquisition related to the Distribution Business for which Ashland receives notice prior to the fifth anniversary of the closing
Performance-Based Units
Units within the Predecessor Equity Plan that vest in accordance with a performance-based schedule
Peso
Mexican peso
Predecessor
Holdings and its subsidiaries for the periods prior to the Closing Date
Predecessor ABL Facility
Holdings asset-based credit facility which was terminated in connection with the Business Combination
Predecessor Equity Plan
Predecessor restricted equity plan
Predecessor Term Loan Facility
Holdings’ senior secured term loan credit facility which was terminated in connection with the Business Combination
PSLRA
U.S. Private Securities Litigation Reform Act of 1995
PSU
Performance share unit issued under the 2016 LTIP
RCRA
U.S. Resource Conservation and Recovery Act
Retained Remediation Liabilities
Under the ADA Purchase Agreement, collectively, the Retained Specified Remediation Liabilities and the Other Retained Remediation Liabilities
RMB
Chinese renminbi
RSU
Restricted stock unit issued under the 2016 LTIP
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
U.S. Securities and Exchange Commission
Secured Net Leverage Ratio
The ratio of Consolidated Total Indebtedness divided by EBITDA (terms as defined in the Term Loan Facility agreement)
Securities Act
U.S. Securities Act of 1933, as amended
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
Term Agent
Bank of America, N.A. as administrative agent and collateral agent of the Term Loan Facility
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
Time-Based Units
Units issued under the Predecessor’s Equity Plan
TLB Amendment No. 1
The amendment to the Term Loan Facility dated March 22, 2017
TPG
TPG Capital, L.P. together with its affiliates, including TPG Accolade
TPG Accolade
TPG Accolade, L.P.

4


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
Ultra Chem Acquisition
The April 3, 2017 acquisition of the equity interests of the Mexico City, Mexico based chemicals distribution business of Ultra Chem, S. de R.L. de C.V. and its related entities pursuant to the stock purchase agreement dated March 9, 2017
U.S.
United States of America
USD
U.S. Dollar
U.S. GAAP
U.S. Generally accepted accounting principles
U.S. Tranche
U.S. Tranche of the ABL Facility
WLRH
WL Ross Holding Corp.


5


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, 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.” 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 fiscal year ended September 30, 2016 filed with the SEC on December 8, 2016.
 
These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effect on us. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate. Unless otherwise indicated or the context otherwise requires, comments concerning our expectations for future revenues and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions. Our forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections. These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could have material adverse effects on our future results. Our future results will depend upon various other risks and uncertainties, including those described in the section captioned “Item 1A. Risk Factors” in Part I of our Annual Report on Form 10-K for the fiscal year ended September 30, 2016 filed with the SEC on December 8, 2016. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise. All forward-looking statements attributable to us are qualified in their entirety by this cautionary statement.



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)
 
March 31, 2017
 
September 30, 2016
Current Assets
 

 
 

Cash and cash equivalents
$
95.3

 
$
47.5

Accounts and notes receivable (net of allowance for doubtful accounts of $1.4 million and $1.4 million, respectively)
540.4

 
474.8

Inventories
336.4

 
315.8

Other current assets
23.8

 
25.7

Total current assets
995.9

 
863.8

 
 
 
 
Non-Current Assets
 

 
 

Property, plant and equipment, net
327.3

 
322.6

Goodwill
661.0

 
665.7

Other intangible assets, net of amortization
211.2

 
215.0

Deferred income taxes
1.6

 
1.1

Other non-current assets
10.9

 
10.7

Total non-current assets
1,212.0

 
1,215.1

Total Assets
$
2,207.9

 
$
2,078.9

 
 
 
 
Current Liabilities
 

 
 

Short-term borrowings, current portion of long-term debt and capital lease obligations
$
47.1

 
$
47.7

Accounts payable
353.3

 
325.8

Accrued expenses and other liabilities
37.6

 
45.7

Due to related party pursuant to contingent consideration obligations

5.1

 

Income taxes payable
2.3

 
2.0

Total current liabilities
445.4

 
421.2

 
 
 
 
Non-Current Liabilities
 

 
 

Long-term debt and capital lease obligations, less current portion, net
871.3

 
765.6

Deferred income taxes
16.4

 
23.1

Due to related party pursuant to contingent consideration obligations
135.9

 
118.4

Other non-current liabilities
7.5

 
5.8

Total non-current liabilities
1,031.1

 
912.9

Total Liabilities
1,476.5

 
1,334.1

 
 
 
 
Commitments and contingencies (see Note 13)


 


 
 
 
 
Equity
 

 
 

Preferred stock, $0.0001 par value (1,000,000 shares authorized, none issued and outstanding as of March 31, 2017 and September 30, 2016)

 

Common stock, $0.0001 par value (300,000,000 shares authorized; 89,276,183 shares issued and outstanding as of March 31, 2017 and 89,286,936 shares issued and outstanding as of September 30, 2016)

 

Additional paid-in capital
761.6

 
758.9

Accumulated deficit
(19.0
)
 
(9.6
)
Accumulated other comprehensive loss
(11.2
)
 
(4.5
)
Total equity
731.4

 
744.8

Total Liabilities and Equity
$
2,207.9

 
$
2,078.9

 
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 
 March 31, 2017
 
Six Months Ended 
 March 31, 2017
 
 
Three Months Ended 
 March 31, 2016
 
Six Months Ended 
 March 31, 2016
Sales and operating revenues
$
917.7

 
$
1,712.5

 
 
$
862.2

 
$
1,689.9

Cost of sales and operating expenses
815.5

 
1,525.9

 
 
760.9

 
1,493.4

Gross profit
102.2

 
186.6

 
 
101.3

 
196.5

Selling, general and administrative expenses
80.0

 
154.5

 
 
76.7

 
151.4

Transaction related costs
0.3

 
1.1

 
 
6.3

 
7.3

Change in fair value of contingent consideration obligations
10.0

 
20.6

 
 

 

Operating income
11.9

 
10.4

 
 
18.3

 
37.8

Other income, net
0.2

 
2.6

 
 
0.9

 
2.6

Interest income (expense)


 
 
 
 


 
 
Interest income
0.1

 
0.2

 
 
0.1

 
0.1

Interest expense
(12.5
)
 
(24.5
)
 
 
(15.5
)
 
(31.1
)
Net income (loss) from continuing operations before income taxes
(0.3
)
 
(11.3
)
 
 
3.8

 
9.4

Income tax expense (benefit)
0.8

 
(1.9
)
 
 
1.8

 
3.1

Net income (loss) from continuing operations
(1.1
)
 
(9.4
)
 
 
2.0

 
6.3

Net income from discontinued operations, net of tax

 

 
 
0.1

 
0.1

Net Income (Loss) Attributable to Nexeo Solutions, Inc.
$
(1.1
)
 
$
(9.4
)
 
 
$
2.1

 
$
6.4

 
 
 
 
 
 
 
 
 
Net loss per share available to common stockholders
 
 
 
 
 
 
 
 
    Basic and diluted
(0.01
)
 
(0.12
)
 
 
 
 
 
Weighted average number of common shares outstanding
 
 
 
 
 
 
 
 
    Basic and diluted
76,746,168

 
76,746,168

 
 
 
 
 
 
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 
 March 31, 2017
 
Six Months Ended 
 March 31, 2017
 
 
Three Months Ended 
 March 31, 2016
 
Six Months Ended 
 March 31, 2016
Net income (loss)
$
(1.1
)
 
$
(9.4
)
 
 
$
2.1

 
$
6.4

Unrealized foreign currency translation gain (loss), net of tax
5.7

 
(7.0
)
 
 
6.1

 
(0.6
)
Unrealized gain on interest rate hedges, net of tax
0.3

 
0.3

 
 
0.1

 
0.2

Other comprehensive income (loss), net of tax
6.0

 
(6.7
)
 
 
6.2

 
(0.4
)
Total comprehensive income (loss), net of tax attributable to Nexeo Solutions, Inc. (1)
$
4.9

 
$
(16.1
)
 
 
$
8.3

 
$
6.0

 
(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 Statement of Equity
(Unaudited, in millions, except share amounts)

 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Loss
 
Total
 
Shares
 
Amount
 
 
 
 
Balance at September 30, 2016
89,286,936

 
$


$
758.9


$
(9.6
)

$
(4.5
)

$
744.8

Forfeiture of restricted stock award
(10,753
)
 

 

 

 

 

Equity-based compensation

 

 
2.7

 

 

 
2.7

Comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
         Net loss

 

 

 
(9.4
)
 

 
(9.4
)
         Other comprehensive loss

 

 

 

 
(6.7
)
 
(6.7
)
Balance at March 31, 2017
89,276,183

 
$

 
$
761.6

 
$
(19.0
)
 
$
(11.2
)
 
$
731.4



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
 
Six Months Ended 
 March 31, 2017
 
 
Six Months Ended 
 March 31, 2016
Cash flows from operations
 

 
 
 

Net income (loss) from continuing operations
$
(9.4
)
 
 
$
6.3

Adjustments to reconcile to cash flows from operations:
 

 
 
 

Depreciation and amortization
34.6

 
 
27.4

Debt issuance costs amortization, debt issuance costs write-offs and original issue discount amortization
2.0

 
 
4.4

Provision for bad debt
(0.1
)
 
 
1.1

Deferred income taxes
(5.6
)
 
 
0.9

Equity-based compensation expense
2.7

 
 
0.6

Change in fair value of contingent consideration obligations
20.6

 
 

(Gain)/loss on sale of property and equipment
0.1

 
 
(1.9
)
Gain on debt extinguishment, net

 
 
(0.6
)
Gain related to reimbursements of certain capital expenditures incurred
(2.7
)
 
 

Changes in assets and liabilities:
 

 
 
 

Accounts and notes receivable
(70.4
)
 
 
20.7

Inventories
(23.7
)
 
 
6.3

Other current assets
1.9

 
 
(3.7
)
Accounts payable
33.8

 
 
(3.7
)
Related party payable

 
 
(0.2
)
Accrued expenses and other liabilities
(10.6
)
 
 
(10.7
)
Changes in other operating assets and liabilities, net
0.9

 
 
(3.3
)
Net cash provided by (used in) operating activities
(25.9
)
 
 
43.6

Cash flows from investing activities
 

 
 
 

Additions to property and equipment
(14.5
)
 
 
(9.4
)
Proceeds from the disposal of property and equipment
0.1

 
 
2.0

Proceeds from reimbursement of certain capital expenditures incurred
2.9

 
 

Cash paid for acquisitions
(5.1
)
 
 

Net cash used in investing activities
(16.6
)
 
 
(7.4
)
Cash flows from financing activities
 
 
 
 
Repurchases of membership units

 
 
(0.1
)
Proceeds from short-term debt
19.5

 
 
18.6

Repayments of short-term debt
(19.1
)
 
 
(15.0
)
Proceeds from issuance of long-term debt
385.5

 
 
207.3

Repayments of long-term debt and capital lease obligations
(293.6
)
 
 
(314.7
)
Payments of debt issuance costs
(1.3
)
 
 

Net cash provided by (used in) financing activities
91.0

 
 
(103.9
)
Effect of exchange rate changes on cash and cash equivalents
(0.7
)
 
 
(0.3
)
Increase (decrease) in cash and cash equivalents
47.8

 
 
(68.0
)
Cash and cash equivalents at the beginning of the period
47.5

 
 
127.7

Cash and cash equivalents at the end of the period
$
95.3

 
 
$
59.7

Supplemental disclosure of cash flow information:
 

 
 
 

Cash paid during the period for interest
$
24.7

 
 
$
26.4

Cash paid during the period for taxes
$
2.6

 
 
$
2.9

Supplemental disclosure of non-cash investing activities:
 
 
 
 
Non-cash capital expenditures
$
15.8

 
 
$
15.8

Non-cash intangible assets acquired
$
3.4

 
 
$

Supplemental disclosure of non-cash financing activities:
 
 
 
 
Non-cash capital lease obligations, net
$
13.4

 
 
$
13.8

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

11


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 and certain other parties 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”.

The Company’s financial statement presentation distinguishes a “Predecessor” for the periods prior to the Closing Date and a “Successor” for the periods after the Closing Date. In the Business Combination, Holdings was identified as the acquiree and Predecessor and WLRH, subsequently renamed “Nexeo Solutions, Inc.”, was identified as the acquirer and Successor. 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. See Note 3 for further discussion of the Business Combination.

           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. 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 three and six months ended March 31, 2017 are not necessarily indicative of results to be expected for the fiscal year ending September 30, 2017. Quarterly financial data should be read in conjunction with the consolidated financial statements and accompanying notes for the fiscal year ended September 30, 2016 included in the Company's Annual Report on Form 10-K filed with the SEC on December 8, 2016.

           The consolidated financial data as of September 30, 2016 presented in these unaudited condensed consolidated financial statements were derived from the Company’s audited consolidated financial statements, but do not include all disclosures required by U.S. GAAP.

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 Company connects a large network of suppliers with a diverse base of 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 products internationally through a supply chain consisting of owned, leased or third-party warehouses, rail terminals and tank terminals globally. The Company has a private fleet of tractors and trailers, primarily located in North America.
     

12


2. Recent Accounting Pronouncements
 
Recent Accounting Pronouncements Adopted

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory, which eliminates the exception that prohibits the recognition of current and deferred income tax effects for intra-entity transfers of assets other than inventory until the asset has been sold to an outside party. The application of the amendments will require the use of a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption. The Company adopted this standard during the three months ended December 31, 2016 and the adoption did not have a material impact on the Company’s financial position or results of operations for the periods presented.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which revises the definition of a business. The amendments in this ASU specify for an acquisition to be considered a business, it must include an input and a substantive process that together significantly contribute to the ability to create outputs. The amendments also further define outputs, and specify that an acquisition where the fair value of gross assets acquired is concentrated in a single asset or group of similar assets would not constitute a business. The Company adopted this standard during the three months ended December 31, 2016 on a prospective basis and applied the amendments to the asset acquisition that occurred during the three months ended December 31, 2016. See Note 3.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this ASU removed step two of the goodwill impairment test and specify that an entity will recognize an impairment loss for the amount by which a reporting unit’s carrying amount exceeds its fair value. The Company adopted this guidance during the three months ended March 31, 2017 as part of its annual impairment test and the adoption did not have a material impact on the Company’s financial position or results of operations for the periods presented.
 
New Accounting Pronouncements Not Yet Adopted

The Company continues the evaluation of the potential effects on its financial position or results of operations of the accounting pronouncements disclosed in its consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K filed with the SEC on December 8, 2016, including ASU 2014-09, Revenue from Contracts with Customers, and ASU 2016-02, Leases.

3. Acquisitions

Asset Acquisition

In December 2016, the Company entered into an asset purchase agreement whereby it acquired certain customer contracts and a customer list. Additionally, in connection with this transaction, the Company entered into a supply agreement and a licensing agreement granting the Company the non-exclusive use of a certain trademark. The total consideration associated with this transaction was $8.5 million, of which $5.1 million was paid at closing. The remaining consideration will be paid in equal amounts on or before January 1, 2018 and January 1, 2019. The remaining consideration is included in Accrued expenses and other liabilities and Other non-current liabilities on the Company’s condensed consolidated balance sheets. In connection with this transaction, the Company recognized intangible assets totaling $8.5 million which are included in Other intangible assets, net of amortization on the Company’s condensed consolidated balance sheets. The acquired intangible assets will be fully amortized over estimated useful lives ranging between 10 and 13 years.

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.


13


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

Less: cash acquired
(64.3
)
Equity
276.7

Founder Shares transferred to Selling Equityholders
30.2

Contingent consideration - Fair value of Deferred Cash Consideration
45.4

Contingent consideration - Fair value of TRA(1)
86.2

Total purchase consideration(2)
$
799.1


(1) During the three months ended March 31, 2017, the Company recorded a $2.0 million adjustment. See below.

(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 Credit Facilities were used to repay such indebtedness and accrued interest immediately following the consummation of the Business Combination.

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 (5,178,642 Excess Shares as of March 31, 2017).  Based on the terms of the 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. If any Excess Shares remain on June 30, 2021, the Company must elect to either (i) within five business days of such date, pay the Selling Equityholders an amount in cash equal to the product of the number of remaining Excess Shares multiplied by the volume weighted-average trading price for the 20 trading day period immediately preceding such date or (ii) use reasonable best efforts to sell such shares to a third party in a primary offering and pay 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. The estimated fair value of the Deferred Cash Consideration liability as of the Closing Date was $45.4 million. See Note 9.

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. During the three months ended March 31, 2017, the Company recorded a $2.0 million adjustment to the estimated fair value of the TRA liability as of the Closing Date, related to the assessments of the tax attributes associated with certain entities. Including this adjustment, the estimated fair value of the TRA liability as of the Closing Date was $86.2 million. Including this adjustment, the undiscounted cash flows associated with the TRA liability as of the Closing Date were estimated to be between $180.0 million and $220.0 million over the time period during which the tax benefits are expected to be realized, currently estimated at over 20 years.


14


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 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, with WLRH determined to be the accounting acquirer of Holdings, 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 Closing Date:
 
Preliminary Purchase Consideration
Allocation
Accounts receivable
$
470.0

Inventory
328.5

Other current assets
25.8

Property, plant and equipment
328.3

Customer-related intangible
201.0

Trade name
21.0

Below-market leases
0.7

Other non-current assets
3.2

Deferred tax assets
1.2

Goodwill
667.6

Total assets acquired
2,047.3

 
 

Short-term borrowings and current portion of capital leases
40.6

Accounts payable
335.9

Other current liabilities
52.8

Long-term portion of capital leases
23.0

Long-term debt
767.3

Deferred tax liability
23.1

Other non-current liabilities
5.5

Total liabilities assumed
1,248.2

 
 

Net assets acquired
$
799.1


During the six months ended March 31, 2017, the Company recorded an adjustment to the fair value of accounts payable and deferred tax liabilities of $2.1 million and $1.3 million, respectively. Goodwill was impacted by these two adjustments and also by the $2.0 million adjustment to the fair value of the TRA described above which increased the purchase consideration. The total purchase consideration allocation above is preliminary as the Company has not yet completed the necessary fair value assessments, including the assessments of property, plant and equipment, intangibles and the related tax impacts on these items. Any changes within the measurement period may change the amount of the purchase consideration allocable to goodwill. The fair value and 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 allocation.


15


Transaction costs incurred by the Company associated with the Business Combination were $0.2 million and $1.0 million during the three and six months ended March 31, 2017, respectively, and $6.3 million and $7.3 million during the three and six months ended March 31, 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 consisted 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 an adjustment of $4.1 million to reduce gross receivables to their net value after consideration of expected uncollectable amounts at the Closing Date.
 
Inventory
 
Inventory consisted 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 was recognized in income during the fiscal year ended September 30, 2016, which is included in Cost of sales and operating expenses in the consolidated statements of operations.
 
Other Current Assets
 
Other current assets consisted 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 consisted primarily of: 42 owned distribution locations in the U.S., Puerto Rico and Canada; 11 leased locations in the U.S., 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 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 $96.1 million. The Company's assessment of replacement cost of certain property and equipment is preliminary, and will be completed within twelve months of the Closing Date.

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 $201.0 million for these intangible assets as part of the preliminary allocation of the purchase consideration. The Company's assessment of the expected future cash flows related to the customer intangibles is preliminary, and will be completed within twelve months of the Closing Date.
 

16


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 $21.0 million for this intangible asset as part of the preliminary allocation of the purchase consideration. The Company's assessment of these future cash flows is preliminary and will be completed within twelve months of the Closing Date.
 
Below-Market Leases

The Company recognized an intangible asset related to favorable lease terms of certain properties under operating leases where rental payments were determined to be less than current market rates. The intangible asset will be amortized over the remaining life of the operating leases, which ranges from one to seven years. The Company recognized $0.7 million for this intangible asset as part of the preliminary allocation of the purchase consideration.

Other non-current assets
 
Other non-current assets acquired represented 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 allocation of the purchase consideration above, the Company expects approximately $191.5 million to be deductible for tax purposes as of March 31, 2017. As the fair value assessments of the acquired assets and liabilities are finalized within twelve months of the Closing Date, the amount of goodwill recognized as of the Closing Date is subject to change.
 
Short-term borrowings and current portion of capital leases

Short-term borrowings and current portion of capital leases included 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 represented 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 represented 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 included 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.


17


Long-term Debt

Long-term debt represented 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.

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. The estimates of the deferred taxes are preliminary as they are dependent on the final fair values allocated to property, plant and equipment and identified intangibles.  Additionally, the Company’s entity structure includes several partnerships.  The estimates of deferred taxes are preliminary as the evaluation of the tax basis of each individual partner's interest in the partnerships has not been fully completed.

Unaudited 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 October 1, 2014, the beginning of the fiscal year prior to the year the Business Combination was consummated.  The consolidated pro forma results reflect certain adjustments related to this acquisition, primarily the estimated changes in fair value of the contingent consideration liability, amortization expense associated with estimates for the acquired intangible assets, 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 March 31, 2017
 
Six Months Ended March 31, 2017
 
Three Months Ended March 31, 2016
 
Six Months Ended March 31, 2016
Sales and operating revenues
$
917.7

 
$
1,712.5

 
$
862.2

 
$
1,689.9

Operating income
12.1

 
11.3

 
11.8

 
18.3

Net income (loss) from continuing operations
(1.1
)
 
(8.9
)
 
0.6

 
(1.8
)
Net income (loss)
(1.0
)
 
(8.8
)
 
0.6

 
(1.8
)
Basic and diluted net income (loss) per share
(0.01
)
 
(0.12
)
 
0.01

 
(0.02
)
 
 
 
 
 
 
 
 
Proforma weighted average number of common shares outstanding
 
 
 
 
 
 
 
Basic
76,746,168

 
76,746,168

 
76,746,168

 
76,746,168

Diluted
76,746,168

 
76,746,168

 
76,810,686

 
76,746,168


For all periods presented above, the basic 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, 1,587,000 outstanding 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. As of the three months and six months ended March 31, 2017, the 53,765 shares of unvested restricted stock awards issued to directors were not included in the diluted share calculation as their impact on the Company’s net loss would have been anti-dilutive. However, the impact of these restricted shares was included in the diluted share calculation for the three months ended March 31, 2016. The 28,000 RSUs granted during the six months ended March 31, 2017 were not included in the computation of pro forma diluted shares outstanding for the three and six months ended March 31, 2016 as they were awarded subsequent to the Business Combination.


18


4. Certain Balance Sheet Information

Cash and Cash Equivalents
 
Cash and cash equivalents were $95.3 million as of March 31, 2017 and $47.5 million as of September 30, 2016. These amounts included the following:
 
March 31, 2017
 
September 30, 2016
Cash held by foreign subsidiaries
$
30.4

 
$
41.9

Non-USD denominated currency held by foreign subsidiaries
$
25.6

 
$
36.9

Currency denominated in RMB
$
4.9

 
$
6.5


Non-USD denominated currency held by foreign subsidiaries was primarily in euros and RMB. While the RMB is convertible into USD, foreign exchange transactions are subject to approvals from SAFE. The Company does not anticipate any significant adverse impact to overall liquidity from potential limitations on the transfer or conversion of cash and cash equivalents.

Inventories

Inventories at March 31, 2017 and September 30, 2016 consisted of the following:
 
March 31, 2017
 
September 30, 2016
Finished products
$
331.8

 
$
311.7

Supplies
4.6

 
4.1

Total
$
336.4

 
$
315.8


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

Other Non-Current Assets

Other non-current assets at March 31, 2017 and September 30, 2016 consisted of the following:
 
March 31, 2017
 
September 30, 2016
Debt issuance costs of the ABL Facility
$
5.8

 
$
6.4

Other
5.1

 
4.3

Total
$
10.9

 
$
10.7


Amortization of debt issuance costs related to the ABL Facility recorded in Interest expense in the condensed consolidated statements of operations was $0.3 million and $0.6 million for the three and six months ended March 31, 2017, respectively. Amortization of debt issuance costs related to the Predecessor ABL Facility recorded in interest expense was $0.7 million and $1.5 million for the three and six months ended March 31, 2016, respectively.


19


5. Property, Plant and Equipment
 
Property, plant and equipment at March 31, 2017 and September 30, 2016 consisted of the following:
 
March 31, 2017
 
September 30, 2016
Land
$
50.3

 
$
50.4

Plants and buildings(1)
105.7

 
89.8

Machinery and equipment (2)
136.9

 
130.5

Software and computer equipment
55.2

 
49.0

Construction in progress
15.5

 
16.5

Total
363.6

 
336.2

Less accumulated depreciation (3)
(36.3
)
 
(13.6
)
Property, plant and equipment, net
$
327.3

 
$
322.6


(1) Includes $13.7 million for the three months ended March 31, 2017 related to facilities acquired under capital leases.
(2) Includes $25.1 million and $25.2 million, respectively, related to equipment acquired under capital leases.
(3) Includes $2.4 million and $1.1 million, respectively, related to facilities and equipment acquired under capital leases.

Depreciation expense recognized on the property, plant and equipment described above was as follows:
 
Successor
 
 
Predecessor
 
Three Months Ended 
 March 31, 2017
 
Six Months Ended March 31, 2017
 
 
Three Months Ended 
 March 31, 2016
 
Six Months Ended March 31, 2016
Depreciation expense
$
12.1

 
$
23.3

 
 
$
9.9

 
$
19.6


Included in the carrying value of property, plant and equipment in the Company’s condensed consolidated balance sheets are certain closed facilities located in the U.S., which collectively have a carrying value of $1.1 million as of March 31, 2017 and $1.2 million as of September 30, 2016. The facilities do not currently meet the criteria for held-for-sale classification; accordingly, they remain classified as held and used.

Facility Lease

The Company’s sale of its Franklin Park facility to the Illinois Tollway Authority under an eminent domain proceeding was completed in September 2016.

As a result of the sale of this facility, the Company relocated operations to a new leased facility in Montgomery, Illinois. The Montgomery Lease has a term of 15 years, with annual payments beginning at $1.1 million per year, excluding executory costs, and annual escalations of 2.5% per year. The Montgomery Lease includes three, five-year renewal options. The Montgomery Lease was accounted for as a capital lease and began in the first quarter of fiscal year 2017 at an initial cost of $13.2 million. In connection with the relocation of these operations, the Company incurred certain capital expenditures for which it has received and will continue to receive reimbursements from the Illinois Tollway Authority. During the three and six months ended March 31, 2017, the Company recorded a gain of $0.2 million and $2.7 million, respectively, related to such capital expenditures incurred and reimbursed to date, included in Other Income on the condensed consolidated statements of operations.


20


6. Goodwill and Other Intangibles

Goodwill
 
The following is a progression of goodwill by reportable segment: 
 
Chemicals
 
Plastics
 
Other
 
Total
Balance at September 30, 2016
$
331.6

 
$
271.1

 
$
63.0

 
$
665.7

Measurement period adjustment
(0.6
)
 
(0.7
)
 
(0.1
)
 
(1.4
)
Foreign currency translation
(0.2
)
 
(3.1
)
 

 
(3.3
)
Balance at March 31, 2017
$
330.8

 
$
267.3

 
$
62.9

 
$
661.0


Goodwill amounts by reportable segment at March 31, 2017 are based on the preliminary allocation of the purchase consideration of the Business Combination as of the Closing Date. Accordingly, the amounts allocated to goodwill are subject to adjustments to reflect the completion of the purchase price allocation, which will be completed within twelve months of the Closing Date and 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. As of March 31, 2017, the Company tested the goodwill recorded at each of its operating segments and concluded that goodwill was not impaired. For purposes of the annual impairment testing of the Company's recognized goodwill, fair value measurements were determined using the income approach, based largely on inputs that are not observable to active markets, which would be deemed Level 3 fair value measurements as defined in Note 9. These inputs include management’s expectations about future revenue growth and profitability, working capital needs and capital expenditures. Inputs also include estimates of a market participant’s expectations for 1) a discount rate at which the cash flows should be discounted in order to determine the fair value of such expected cash flows, and 2) an estimated income tax rate. The Company also considered a market approach using the comparable company method, which resulted in a fair value estimate of each reporting unit that was comparable to the income approach. The Company’s valuation based on the income approach is considered to be an appropriate valuation methodology for the annual goodwill impairment test.

The fair values of the Company’s reporting units were determined to exceed their respective carrying amount by more than 20%, with the exception of the Plastics line of business, for which the fair value of the reporting unit exceeded its carrying value by approximately 2%. Holding all other assumptions consistent, if the estimated discount rate fluctuated by approximately 50 basis points, the fair values of the individual reporting units would fluctuate between 6% and 10% in the opposite direction. Additionally, material increases or decreases in the expectations for revenue growth and profitability for a prolonged period of time could also impact the fair value of the reporting units in the same direction. Holding all other assumptions consistent, if gross profit margins of the individual reporting units fluctuated by 50 basis points each year over the entire valuation period, the fair values of the individual reporting units would fluctuate between 3% and 15% in the same direction.

The annual evaluation of goodwill requires the use of estimates about future operating results of each reporting unit to determine its estimated fair value. Changes in forecasted operations can materially affect these estimates, which could materially affect the Company’s results of operations. The estimate of fair value requires significant judgment and is based on management’s fair value estimates on assumptions that are believed to be reasonable; but that are unpredictable and inherently uncertain, including: estimates of future growth rates, operating margins and assumptions about the overall economic climate as well as the competitive environment for the reporting units. There can be no assurance that these estimates and assumptions made for purposes of the goodwill testing as of the time of testing will prove to be accurate predictions of the future. If assumptions regarding business plans, competitive environments or anticipated growth rates are not correct, the Company may be required to record goodwill impairment charges in future periods, whether in connection with future annual impairment testing, or earlier, if an indicator of an impairment is present prior to the next annual evaluation.
 

21


Other Intangible Assets

During the six months ended March 31, 2017, the Company recognized a new intangible asset class. See Note 3. Definite-lived intangible assets at March 31, 2017 and September 30, 2016 consisted of the following:
 
 
 
March 31, 2017
 
September 30, 2016
 
Estimated
Useful Life
(years)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Customer-related
12
 
$
199.2

 
$
(13.5
)
 
$
185.7

 
$
200.3

 
$
(5.2
)
 
$
195.1

Trade name
4
 
21.0

 
(4.3
)
 
16.7

 
21.0

 
(1.7
)
 
19.3

Below-market leases
1-7
 
0.7

 
(0.2
)
 
0.5

 
0.7

 
(0.1
)
 
0.6

Asset purchase - acquired intangibles
10-13
 
8.5

 
(0.2
)
 
8.3

 

 

 

Total
 
 
$
229.4

 
$
(18.2
)
 
$
211.2

 
$
222.0

 
$
(7.0
)
 
$
215.0


Amortization expense recognized on the intangible assets described above was as follows:
 
Successor
 
 
Predecessor
 
Three Months Ended 
 March 31, 2017
 
Six Months Ended March 31, 2017
 
 
Three Months Ended 
 March 31, 2016
 
Six Months Ended March 31, 2016
Amortization expense
$
5.7

 
$
11.3

 
 
$
3.9

 
$
7.8


7. Debt
 
Short-term borrowings outstanding and the current portion of long-term debt and capital lease obligations at March 31, 2017 and September 30, 2016 are summarized below:
 
March 31, 2017
 
September 30, 2016
Short-term borrowings
$
38.0

 
$
38.4

Current portion of long-term debt and capital lease obligations
9.1

 
9.3

Total short-term borrowings and current portion of long-term debt and capital lease obligations, net
$
47.1

 
$
47.7


Long-term debt outstanding at March 31, 2017 and September 30, 2016 is summarized below:
 
March 31, 2017
 
September 30, 2016
ABL Facility
$
214.4

 
$
117.7

Term Loan Facility
650.1

 
653.4

Capital lease obligations (1)
36.8

 
24.8

Total long-term debt
901.3

 
795.9

Less: unamortized debt discount (2)
(2.9
)
 
(3.2
)
Less: debt issuance costs (3)
(18.0
)
 
(17.8
)
Less: current portion of long-term debt and capital lease obligations
(9.1
)
 
(9.3
)
Long-term debt and capital lease obligations, less current portion, net
$
871.3

 
$
765.6


(1) 
Capital lease obligations exclude executory costs and interest payments associated with the underlying leases. See “Capital Lease Obligations” below.
(2) 
The unamortized debt discount is related to the Term Loan Facility and amortized to interest expense over the life of the instrument using the effective interest rate method.
(3) 
See discussion below under Term Loan Facility and Debt Issuance Cost Amortization.


22


Short-Term Borrowings
 
The Company’s 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
March 31, 2017
 
 
 
 
 
 
 
 
 
 
Bank of America - China (1)
 
$
24.3

 
$
23.6

 
4.2
%
 
$

 
$
0.7

Bank of Communications - China (2)
 
21.8

 
14.4

 
5.2
%
 
7.2

 
0.2

Total
 
$
46.1

 
$
38.0

 
 
 
$
7.2

 
$
0.9

September 30, 2016
 
 
 
 
 
 
 
 
 
 
Bank of America - China (1)
 
$
28.4

 
$
27.3

 
4.0
%
 
$

 
$
1.1

Bank of Communications - China (2)
 
22.5

 
11.1

 
5.2
%
 
10.5

 
0.9

Total
 
$
50.9

 
$
38.4

 
 
 
$
10.5

 
$
2.0


(1)  
The borrowing limit of this facility is denominated in USD. This line of credit is secured by a standby letter of credit drawn on the 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 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.

Long-Term Debt

ABL Facility

The ABL Facility provides for committed revolving credit financing including a U.S. Tranche of up to $505.0 million, a Canadian Tranche of up to the USD equivalent of $40.0 million and a FILO Tranche up to $30.0 million. Provided no default or event of default then exists or would arise therefrom, the ABL Borrowers have the option to request that the ABL Facility be increased by an aggregate amount, when included with any incremental borrowings issued under the Term Loan Facility, not to exceed $175.0 million.

Borrowings under the U.S. Tranche and the Canadian Tranche of the 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 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 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 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 weighted average interest rate on borrowings under the ABL Facility was 2.56% at March 31, 2017. Solutions had the USD equivalent of $70.8 million in outstanding letters of credit under the ABL Facility at March 31, 2017. The collective credit availability under the U.S. and Canadian Tranches of the ABL Facility was the U.S. equivalent of $196.2 million at March 31, 2017. There was $5.0 million availability under the FILO Tranche at March 31, 2017. The ABL Facility matures on June 9, 2021.

Obligations under the ABL Facility are secured by a first priority lien on all ABL first lien collateral, including eligible inventory and accounts receivable of the ABL Borrowers, and a second priority lien on all Term Loan first lien collateral including outstanding equity interests of the Borrower and certain of the other subsidiaries of Holdings, in each case, subject to certain limitations; provided, that no ABL Facility first lien collateral or Term Loan Facility first lien collateral owned by the Canadian Borrower secure the obligations owing under the U.S. tranche of the ABL Facility. These accounts receivable and inventory totaled $663.0 million in the aggregate as of March 31, 2017.

23



Fees paid to the lenders during the fiscal year ended September 30, 2016 in connection with the 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 ABL Facility. See Note 4.

As of March 31, 2017, the ABL Borrowers were in compliance with the covenants of the ABL Facility.

Term Loan Facility

The Term Loan Facility 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 ABL Facility, of up to $175.0 million, plus unlimited additional amounts such that the aggregate principal amount of indebtedness outstanding at the time of incurrence does not cause the Secured Net Leverage Ratio, calculated on a pro forma basis, to exceed 4.1 to 1.0. Availability of such additional tranches of term loans is subject to the absence of any default and, among other things, the receipt of commitments by existing or additional financial institutions.

On March 22, 2017, the Company completed TLB Amendment No. 1 amending the current Term Loan Facility. TLB Amendment No. 1 reduced the interest rate margin applicable to outstanding term loans by 50 basis points from 4.25% to 3.75% for LIBOR loans and from 3.25% to 2.75% for base rate loans. In addition, the 1% LIBOR floor was eliminated. TLB Amendment No.1 provides a prepayment premium equal to 1% of the amount of the term loan applicable to certain repricing transactions occurring on or prior to six months from the effective date of TLB Amendment No. 1.

Commencing with the quarter ended 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 average interest rate for the Term Loan Facility was 4.83% at March 31, 2017. The Company amortized $0.1 million and $0.3 million of debt discount to interest expense during the three and six months ended March 31, 2017, respectively. The Term Loan Facility matures on June 9, 2023.
 
Additionally, the Term Loan Facility agreement requires Solutions to make mandatory principal payments on an annual basis, with the first required calculation determined at fiscal year-end (September 30, 2017), if cash flows for the year, as defined in the Term Loan Facility exceed certain levels specified in the Term Loan Facility. Solutions generally has the right to prepay loans in whole or in part, without incurring any penalties for early payment.

Obligations under the Term Loan Facility are secured by a first priority lien on all Term Loan first lien collateral, including outstanding equity interests of the Borrower and certain of the other subsidiaries of Holdings, and a second priority lien on all ABL first lien collateral, including accounts receivable and inventory of the loan parties under the Term Loan Facility, subject to certain limitations.

Fees paid to the lenders during the fiscal year ended September 30, 2016 in connection with the 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 Term Loan Facility.

As of March 31, 2017, Solutions was in compliance with the covenants of the Term Loan Facility.

Debt Issuance Cost Amortization

Amortization expense included in interest expense related to debt issuance costs of the Term Loan Facility was $0.6 million and $1.1 million for the three and six months ended March 31, 2017, respectively. As a result of TLB Amendment No. 1, the Company incurred debt issuance costs of $1.3 million during the three months ended March 31, 2017, which will be amortized throughout the remaining life of the Term Loan Facility. Amortization expense included in interest expense related to debt issuance costs of the Predecessor Term Loan Facility and the Notes was $1.1 million and $2.2 million for the three and six months ended March 31, 2016, respectively.


24


Capital Lease Obligations

The capital lease obligation balance of $36.8 million as of March 31, 2017 is primarily associated with the Ryder Lease and the Montgomery Lease. The Ryder Lease obligation excludes decreasing annual interest payments ranging from $1.0 million to $0.2 million, for aggregate interest payments totaling $4.2 million. The Montgomery Lease obligation excludes decreasing annual interest payments ranging from $1.0 million to $0.1 million, for aggregate interest payments of $14.1 million. See Note 5.

8. Derivatives
 
During the three months ended March 31, 2017, the Company entered into four interest rate swap agreements with a combined notional amount of $300.0 million to help mitigate interest rate risk related to the variable-rate Term Loan Facility. The swap agreements expire at various dates from February 2020 through March 2022 and are accounted for as cash flow hedges. Gains or losses resulting from changes in the fair value of the swaps are 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, are reflected in income. Gains and losses recorded in other comprehensive income are reclassified into and recognized in income when the interest expense on the Term Loan Facility is recognized.

Derivative assets and liabilities at March 31, 2017 and September 30, 2016 consisted of the following:
 
Recorded to
 
March 31, 2017
 
September 30, 2016
Short-term derivative asset
Other current assets
 
$
0.1

 
$

Long-term derivative asset
Other non-current assets
 
$
1.6

 
$

Short-term derivative liability
Accrued expenses and other liabilities
 
$
1.4

 
$

Other Comprehensive Income
Accumulated other comprehensive loss
 
$
0.3

 
$


Prior to the Business Combination, the Predecessor was a party to interest rate swap agreements to mitigate the exposure to interest rate risk related to the variable-rate Predecessor Term Loan Facility. The agreements had varying expiration dates through March 2017, and 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 interest rate swaps of the Company and the Predecessor were as follows:
 
 
 
Successor
 
 
Predecessor
 
Recorded to
 
Three Months Ended 
 March 31, 2017
 
Six Months Ended March 31, 2017
 
 
Three Months Ended 
 March 31, 2016
 
Six Months Ended March 31, 2016
Realized loss
Interest expense
 
$
0.3

 
$
0.3

 
 
$
0.1

 
$
0.2

Unrealized gain
Other comprehensive income(loss)
 
$
0.3

 
$
0.3

 
 
$
0.1

 
$
0.2


At March 31, 2017$1.3 million in unrealized losses were expected to be realized and recognized in income within the next twelve months.

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


25


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—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

● Level 2—Quoted prices in markets that are not active or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.
 
● Level 3—Prices or valuation models that require inputs that are both significant to the fair value measurement and less observable for objective sources (i.e., 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 values 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.
 
The carrying values of borrowings outstanding under the Credit Facilities approximate fair value at March 31, 2017 and September 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.
 
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. Generally, assets are recorded at fair value on a non-recurring basis as a result of impairment charges or as part of a business combination. As discussed in Note 3, during the six months ended March 31, 2017, the Company recorded non-recurring fair value measurements related to its asset acquisition. In addition, in the fiscal year ended September 30, 2016, the Company recorded non-recurring fair value measurements related to 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

Contingent Consideration

The fair value of the contingent consideration related to the Deferred Cash Consideration as discussed in Note 3 was $43.1 million and $35.0 million as of March 31, 2017 and September 30, 2016, respectively. 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 a significant input to this model. Unobservable inputs to the valuation are the expected volatility during the applicable period as well as a marketability discount to reflect the illiquidity of the Excess Shares given their terms. 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. An increase in the volatility and marketability discount will lower the value of the liability related to the Deferred Cash Consideration.

26



The fair value of the liability for the contingent consideration related to the TRA as discussed in Note 3 was $97.9 million and $83.4 million as of March 31, 2017 and September 30, 2016, respectively. 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 will lower the value of the liability related to the TRA and an increase in prevailing tax rates will increase the value of the liability related to the TRA.

During the three months ended March 31, 2017, the Company recorded a $2.0 million adjustment to the estimated fair value of the TRA liability as of the Closing Date, related to the assessments of the tax attributes associated with certain entities.

Changes in the fair value of the contingent consideration obligations for the six months ended March 31, 2017 were as follows:
 
TRA
 
Deferred Cash Consideration
 
Total Fair Value
Contingent consideration as of September 30, 2016
$
83.4

 
$
35.0

 
$
118.4

Measurement period adjustment
2.0

 

 
2.0

Change in fair value of contingent consideration(1)
12.5

 
8.1

 
20.6

Contingent consideration as of March 31, 2017
$
97.9

 
$
43.1

 
$
141.0

(1) Included in Operating income(loss) in the condensed consolidated statements of operations.

Significant 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.

Interest Rate Swaps

The Company classifies interest rate swaps within Level 2. During the three months ended March 31, 2017, the Company entered into four interest rate swap agreements to help mitigate interest rate risk related to the variable-rate Term Loan Facility. The agreements expire at various dates through March 2022. At March 31, 2017, the Company recorded $0.1 million in Other current assets, $1.6 million in Other non-current assets and $1.4 million in Accrued expenses and other liabilities in the condensed consolidated balance sheet related to these instruments.

Prior to the Business Combination, the Predecessor was a party to interest rate swap agreements to mitigate the Predecessor’s interest rate risk related to its variable-rate Predecessor Term Loan Facility. The agreements had varying expiration dates through March 2017. At March 31, 2016, the Company recorded $0.3 million in Accrued expenses and other liabilities and less than $0.1 million in Other non-current liabilities in the condensed consolidated balance sheet related to these instruments. As a result of the Business Combination, the Predecessor Term Loan Facility was extinguished and the related interest rate swap agreements were terminated.

During the six months ended March 31, 2017 and 2016, the Company and the Predecessor did not have any transfers between Level 1, Level 2 or Level 3 fair value measurements.

10. Share-based Compensation and Employee Benefit Plans

On June 8, 2016, the Company’s stockholders 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.

27



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 stockholders 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 six months ended March 31, 2017, the Company granted 162,000 and 212,000 PSUs, respectively, to employees. The performance aspect of the PSUs vests 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 424,000 shares of the Company’s common stock related to these awards. If the Company’s total shareholder return for the performance period is negative, then the number of units ultimately awarded is based on the Company’s achievement of its cumulative Adjusted EBITDA target, as defined by the PSU agreement, during the performance period. If total shareholder return is between negative 15% and 0%, a recipient is entitled to receive a number of shares of stock between 50% and 70% of the number of PSUs granted. If the cumulative Adjusted EBTIDA target is not met, or the total shareholder return is less than negative 15%, no shares of the Company’s common stock will be issued. The Company used the Monte Carlo simulation model to estimate the fair value of the PSU awards at the grant date, considering the probability of satisfying the various performance criteria. The resulting grant date fair value is recognized as expense on a straight-line basis from the grant date through the end of the performance period. The assumptions used in the Monte Carlo simulation model for PSUs included an expected stock price volatility of 40% based on a peer group of similar companies, an expected dividend yield of 0%, an expected term of between two and three years, and a risk-free interest rate of between 0.93% and 1.3%.

The following table summarizes PSU award activity during the six months ended March 31, 2017:
 
PSUs
 
Average Grant
Date Fair Value
Per Unit
Unvested PSUs at September 30, 2016
1,542,500

 
$
9.12

Grants
212,000

 
7.66

Vested

 

Forfeited/Canceled
(167,500
)
 
9.13

Unvested PSUs at March 31, 2017
1,587,000

 
$
8.92


The PSU awards are accounted for as equity instruments, and the Company recognized compensation expense of $1.1 million and $2.2 million as a component of Selling, general and administrative expenses on the condensed consolidated statements of operations for the three and six months ended March 31, 2017, respectively, related to the PSUs. As of March 31, 2017, the outstanding PSUs had a weighted-average remaining contract life of 2.2 years. As of March 31, 2017, there was $9.9 million of total unrecognized compensation expense related to non-vested PSUs.


28


During the fiscal year ended September 30, 2016, the Company also granted 64,518 shares of restricted stock to certain of the Company's non-employee directors under the 2016 LTIP. The restricted stock will vest on the anniversary of the grant date provided the director continues his services as a director of the Company. The fair value of the restricted stock was determined by the closing price of the Company's common stock on the date of grant.

The following table summarizes restricted stock activity during the six months ended March 31, 2017:
 
Shares of Restricted Stock
 
Average Grant
Date Fair Value
Per Unit
Restricted stock at September 30, 2016
64,518

 
$
9.27

Grants

 

Vested

 

Forfeited/Canceled
(10,753
)
 
9.27

Restricted stock at March 31, 2017
53,765

 
$
9.27


The restricted stock awards are accounted for as equity instruments, and the Company recognized compensation expense of $0.1 million and $0.3 million as a component of Selling, general and administrative expenses on the condensed consolidated statements of operations during the three and six months ended March 31, 2017, respectively, related to the restricted stock. As of March 31, 2017, there was $0.1 million of total unrecognized compensation expense related to restricted stock, and a weighted average remaining life of 0.3 years.

During the fiscal year ended September 30, 2016, TPG entered into agreements with certain of the Company's officers and employees to award a total of 100,000 shares of restricted stock to such officers and employees from shares of the Company's common stock owned by TPG. These awards vest in equal amounts over a three-year period provided that such officers and employees continue their employment with the Company. The Company recognized compensation cost of $0.1 million and $0.2 million as a component of Selling, general and administrative expenses on the condensed consolidated statements of operations during the three and six months ended March 31, 2017, respectively, related to these awards. As of March 31, 2017, there was $0.7 million of total unrecognized compensation cost related to these awards, and a weighted average remaining life of 2.2 years.

While these awards were not made pursuant to the 2016 LTIP, they constitute equity-based compensation and therefore will count against the 2016 LTIP's share reserve to the extent the awards vest.

During the six months ended March 31, 2017, the Company granted certain employees a total of 28,000 RSUs that vest equally over a three-year period on the anniversary of the grant date provided the employee remains employed by the Company. Upon vesting, the recipients will receive a share of common stock in the Company for each RSU awarded. The fair value of these RSUs was determined based on the closing price of the Company’s stock on the grant date.

The following table summarizes RSU award activity during the six months ended March 31, 2017:
 
RSUs
 
Average Grant
Date Fair Value
Per Unit
Unvested RSUs at September 30, 2016

 
$

Grants
28,000

 
7.28

Vested

 

Forfeited/Canceled

 

Unvested RSUs at March 31, 2017
28,000

 
$
7.28


The RSUs are accounted for as equity instruments, and the Company recognized compensation cost of less than $0.1 million as a component of Selling, general and administrative expenses on the condensed consolidated statements of operations during the three and six months ended March 31, 2017 related to the RSUs. As of March 31, 2017, there was $0.2 million of total unrecognized compensation cost related to the RSUs, and a weighted average remaining life of 2.6 years.


29


The Company also awarded 10,500 phantom RSUs and 10,000 phantom PSUs to certain non-U.S. employees. The phantom RSUs vest equally over a three-year period on the anniversary of the grant date while the phantom PSUs vest under the same conditions as the PSU awards described above. Upon vesting and provided the employee remains employed by the Company at that time, the awards will be settled in cash. In accordance with ASC 718, these specific phantom RSU and phantom PSU awards are accounted for as a liability, with the awards re-measured at the end of each reporting period based on the closing price of the Company’s common stock or using a Monte Carlo simulation model, as applicable. Compensation expense is recognized ratably on a straight-line basis over the requisite service period. An immaterial amount of compensation expense was recognized during the three and six months ended March 31, 2017 related to these awards.

As of March 31, 2017, there were 7,210,735 shares of the Company’s common stock available for issuance under the 2016 LTIP.

Defined Contribution Plans

Qualifying employees of the Company are eligible to participate in the Solutions 401(k) Plan. The 401(k) Plan is a defined contribution plan designed to allow employees to make tax deferred contributions as well as company contributions, designed to assist employees of the Company and its affiliates in providing for their retirement. The Company matches 100% of employee contributions up to 4.0%. The Company makes an additional contribution to the 401(k) Plan of 1.5%, 3.0%, or 4.5%, based upon years of service of one to ten years, eleven to twenty years and twenty-one years or more, respectively. A version of the 401(k) Plan is also available for qualifying employees of the Company in its foreign subsidiaries.

The following summarizes contributions to the plans described above:
 
Successor
 
 
Predecessor
 
Three Months Ended March 31, 2017
 
Six Months Ended March 31, 2017
 
 
Three Months Ended March 31, 2016
 
Six Months Ended March 31, 2016
Contributions recorded as a component of cost of sales and operating expenses
$
1.0

 
$
2.0

 
 
$
1.0

 
$
1.9

Contributions recorded as a component of selling, general and administrative expenses
1.6

 
3.2

 
 
1.7

 
3.2

Total contributions
$
2.6

 
$
5.2

 
 
$
2.7

 
$
5.1


Predecessor Equity Plan
 
The Predecessor previously issued unregistered Series B units in Holdings to directors and certain officers and employees. The units issued were initially unvested, and with respect to units issued to certain officers and employees, 50% of the Series B units would vest 20% annually over a five-year period (“Time-Based Units”) and 50% of the Series B units would vest in accordance with a performance-based schedule that was divided into five separate and equal twelve month periods (“Performance-Based Units”). The Board of Directors of the Predecessor established EBITDA-based performance targets for purposes of determining vesting of the Performance-Based Units. Further, all Performance-Based Units would automatically vest upon a liquidity event, provided the award holder remained employed through the date of the liquidity event. The Series B Units were accounted for as equity instruments, and the Predecessor recognized compensation expense of $0.3 million and $0.6 million, respectively, as a component of Selling, general and administrative expenses on the condensed consolidated statements of operations during the three and six months ended March 31, 2016 related to these awards.

All vested and unvested Series B units in existence as of the closing of the Business Combination were exchanged for equity interests of New Holdco, which received a portion of the consideration paid to the Selling Equityholders in the Company Merger in exchange for such Series B Units.


30


11. Equity

Common Stock
The authorized common stock of the Company consists of 300,000,000 shares. Holders of the Company’s common stock are entitled to one vote for each share of common stock. As of March 31, 2017, there were 89,276,183 shares of common stock issued and outstanding, which includes the 12,476,250 Founder Shares.
Founder Shares
As of March 31, 2017 there were 12,476,250 Founder Shares. These Founder Shares are subject to forfeiture on the tenth anniversary of the Closing Date unless:
with respect to 50% of such Founder Shares, the last sale price of the Company’s common stock as quoted on NASDAQ equals or exceeds $12.50 per share (as adjusted for stock splits, dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30 trading day period; and
with respect to the remaining 50% of such Founder Shares, the last sale price of the Company’s common stock equals or exceeds $15.00 per share (as adjusted for stock splits, dividends, reorganizations, recapitalizations and the like) for any 20 trading days within any 30 trading day period; or
the post-combination company completes a liquidation, merger, stock exchange or other similar transaction that results in all or substantially all of its stockholders having the right to exchange their shares of common stock for consideration in cash, securities or other property or any transaction involving a consolidation, merger, proxy contest, tender offer or similar transaction in which the post-combination company is the surviving entity which results in a change in the majority of the Company’s board of directors or management team or the Company’s post-combination stockholders immediately prior to such transaction ceasing to own a majority of the surviving entity immediately after such transaction.
The Founder Shares will not participate in dividends or other distributions with respect to the shares prior to these targets being met, whereupon the Founder Shares shall be entitled to all dividends and distributions paid on the common stock after the Business Combination as if they had been holders of record entitled to receive distributions on the applicable record date.
Warrants
As of March 31, 2017 there were 50,025,000 warrants outstanding to purchase 25,012,500 shares of common stock at an exercise price of $11.50 per share.
Preferred Stock
The authorized preferred stock of the Company consists of 1,000,000 shares. As of March 31, 2017, there were no shares of preferred stock issued and outstanding.


31


12. Earnings per Share

A reconciliation of the numerators and denominators of the basic and diluted per share computation follows. No such computation is necessary for the Predecessor period as the Predecessor was organized as a limited liability company and did not have publicly traded common shares.
 
 
Three Months Ended 
 March 31, 2017
 
Six Months Ended March 31, 2017
Basic:
 
 
 
 
Net loss
 
$
(1.1
)
 
$
(9.4
)
Weighted average number of common shares outstanding during the period
 
76,746,168

 
76,746,168

    Net loss per common share - basic
 
$
(0.01
)
 
$
(0.12
)
 
 
 
 
 
Diluted:
 
 
 
 
Net loss
 
$
(1.1
)
 
$
(9.4
)
Denominator for diluted earnings per share:
 
 
 
 
Weighted average number of common shares outstanding during the period
 
76,746,168

 
76,746,168

Incremental common shares attributable to outstanding unvested restricted stock and unvested restricted stock units
 

 

Denominator for diluted earnings per common share
 
76,746,168

 
76,746,168

     Net loss per common share - diluted
 
$
(0.01
)
 
$
(0.12
)

For the three and six months ended March 31, 2017, there were 12,476,250 Founder Shares excluded from the basic and diluted computations because such shares were subject to forfeiture, 1,587,000 PSU awards which 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 of common stock issuable on the exercise of 50,025,000 warrants because the warrants were out-of-the-money. As of the three and six months ended March 31, 2017, the 53,765 shares of unvested restricted stock awards issued to directors and 28,000 shares of restricted stock units awarded to employees were not included in the diluted share calculation, as their impact on the Company’s net loss would have been anti-dilutive.

13. Commitments, Contingencies and Litigation
 
Operating Leases
 
The Company is a lessee of office buildings, retail outlets, transportation equipment, warehouses and storage facilities, other equipment, facilities and properties under operating lease agreements that expire at various dates. Rent expense (including rentals under short-term leases) was $6.7 million and $13.1 million for the three and six months ended March 31, 2017, respectively, and $6.0 million and $12.2 million for the three and six months ended March 31, 2016, respectively.

Future minimum non-cancellable rental payments as of March 31, 2017 are as follows:
2018
$
14.9

2019
12.4

2020
8.2

2021
6.1

2022
5.1

Thereafter
5.3

Total
$
52.0



32


Capital Leases

The Company leases certain equipment and facilities under capital lease agreements. As of March 31, 2017 future minimum lease payments under capital leases were as follows:
2018
$
6.9

2019
7.2

2020
7.2

2021
7.0

2022
7.0

Thereafter
38.7

Total minimum capital lease payments
74.0

Less amount representing executory costs
(18.6
)
Less amount representing interest
(18.6
)
Present value of net minimum capital lease payments
$
36.8


Environmental Remediation
 
Due to the nature of its business, the Company is subject to various laws and regulations pertaining to the environment and to the sale, handling, transportation and disposal of chemicals and hazardous materials. These laws pertain to, among other things, air and water, the management of solid and hazardous wastes, transportation and human health and safety.

On March 31, 2011, the Predecessor purchased certain assets of the global distribution business (the "Distribution Business") from Ashland (the "Ashland Distribution Acquisition"), evidenced by the ADA Purchase Agreement.  In the ADA Purchase Agreement, Ashland agreed to retain all known environmental remediation liabilities ("the Retained Specified Remediation Liabilities") and other environmental remediation liabilities unknown at the closing of the Ashland Distribution Acquisition related to the Distribution Business for which Ashland received notice prior to the fifth anniversary of the closing (the "Other Retained Remediation Liabilities") (collectively, the "Retained Remediation Liabilities").  Ashland’s liability for the Retained Remediation Liabilities is not subject to any claim thresholds or deductibles other than expenses the Predecessor incurs arising out of the Other Retained Remediation Liabilities. Had the Predecessor incurred expenses arising out of the Other Retained Remediation Liabilities, Ashland’s indemnification obligation would have been subject to an individual claim threshold of $0.2 million and an aggregate claim deductible of $5.0 million. Ashland’s indemnification obligations under the ADA Purchase Agreement as described above terminated as of March 31, 2016, other than for the Retained Remediation Liabilities.  As a result, any environmental remediation liabilities reported to the Company after March 31, 2016 and not arising out of a Retained Remediation Liability will be liabilities of the Company. In addition, the Company is obligated to indemnify Ashland for any remediation liabilities, other than the Retained Remediation Liabilities, received by Ashland after March 31, 2016.

In July 2014, Ashland filed a lawsuit numbered Ashland Inc. v. Nexeo Solutions, LLC, Case No. N14C-07-243 JTV CCLD, in the Superior Court for the State of Delaware in and for New Castle County.  In the suit, Ashland seeks a declaration that, pursuant to the ADA Purchase Agreement, Solutions is obligated to indemnify Ashland for losses Ashland incurs pertaining to the Other Retained Remediation Liabilities, up to the amount of the aggregate $5.0 million deductible applicable to expenses incurred by Solutions, whether or not Solutions incurs any expenses or obtains any indemnity from Ashland.  Ashland further alleges that Solutions has breached duties related to the ADA Purchase Agreement by not having so indemnified Ashland for amounts Ashland has incurred for Other Retained Remediation Liabilities at sites where Ashland disposed of wastes prior to the Ashland Distribution Acquisition, and on that basis seeks unspecified compensatory damages, costs and attorney’s fees.  The Company disagrees with Ashland’s construction of the ADA Purchase Agreement and is vigorously defending the lawsuit. The Company does not currently have any environmental or remediation reserves for matters covered under the ADA Purchase Agreement.

The Company’s reserves will be subject to numerous uncertainties that affect its ability to accurately estimate its costs, or its share of costs if multiple parties are responsible. These uncertainties involve the legal, regulatory and enforcement parameters governing environmental assessment and remediation, the nature and extent of contamination, the extent of required remediation efforts, the choice of remediation methodology, availability of insurance coverage and, in the case of sites with multiple responsible parties, the number and financial strength of other potentially responsible parties.


33


Other Legal Proceedings
 
As a part of the Ashland Distribution Acquisition, Ashland agreed to retain and be responsible for certain product liability litigation related to the Distribution Business for which Ashland received written threat or notice prior to the fifth anniversary of the closing (as defined further in the ADA Purchase Agreement, the “Retained Litigation Product Liabilities”). Ashland is not obligated to indemnify the Company for Retained Litigation Product Liabilities as to which it had not received notice of a pending proceeding or threat of a proceeding by March 31, 2016. The Company is responsible for indemnifying Ashland for any Retained Litigation Product Liabilities for which such notices or threats were first received by Ashland after March 31, 2016.

The Company is subject to various claims and legal proceedings covering a wide range of matters that arise in the ordinary course of its business activities, including product liability claims. Management believes that any liability that may ultimately result from the resolution of these matters will not have a material adverse effect on the financial condition or results of operations of the Company.
 
Other Contingencies
 
In June 2014, the Predecessor self-disclosed to the DTSC that an inventory of its Fairfield facility had revealed potential violations of the Resource Conservation and Recovery Act and the California Health and Safety Code. Although no formal proceeding has been initiated, the Company expects the DTSC to seek payment of fines or other penalties for non-compliance. The Company does not expect the amount of any such fine or other penalty to have a material adverse effect on its business, financial position or results of operations.

14. Related Party Transactions
    
Contingent Consideration Obligations Pursuant to the TRA and the Merger Agreement

Subsequent to the Business Combination, TPG beneficially owns approximately 35% of the Company’s common stock, including Founder Shares, and is considered a related party of the Successor. In connection with the Business Combination, TPG became a party to the TRA and obtained the right to receive the Deferred Cash Consideration pursuant to the Merger Agreement. The fair value of these contingent consideration liabilities was $141.0 million as of March 31, 2017, of which $135.9 million is recorded in Due to related party pursuant to contingent consideration obligations in Non-current Liabilities and $5.1 million is recorded in Due to related party pursuant to contingent consideration obligations in Current Liabilities on the Company’s condensed consolidated balance sheets. See Note 3 and Note 9.

Predecessor - Other Agreements with TPG

The Predecessor entered into agreements with TPG, including a management services agreement pursuant to which the Predecessor paid TPG management fees and also consulting fees for services provided. The fees incurred in connection with this agreement were recorded in Selling, general and administrative expenses in the condensed consolidated statements of operations. As a result of the Business Combination on the Closing Date, TPG and the Predecessor terminated the management services agreement and their rights and obligations thereunder.

The table below summarizes activity recorded during the respective periods related to the items described above:
 
Successor
 
 
Predecessor
 
Three Months Ended 
 March 31, 2017
Six Months Ended March 31, 2017
 
 
Three Months Ended 
 March 31, 2016
Six Months Ended March 31, 2016
Sales to related entities:
 
 
 
 
 
 
TPG
$
1.5

$
2.2

 
 
$
0.8

$
1.8

Amounts included in Selling, general and administrative expenses
 
 
 
 
 
 
Management fees to TPG
$

$

 
 
$
0.7

$
1.6

Consulting fees to TPG
$

$

 
 
$
0.2

$
0.2


There were no purchases from TPG related entities in the Successor or Predecessor periods.

34



TPG related entities owed the Company $0.5 million at March 31, 2017 and $0.6 million at September 30, 2016 which were included in Accounts and notes receivable in the Company’s condensed consolidated balance sheets.

15. Income Taxes
 
The Company and its two active U.S. corporate subsidiaries, Blocker and Sub Holding, were both incorporated in the U.S. and as such are subject to U.S. income taxes. The Company and Blocker will file a consolidated U.S. Federal income tax return and both will file various state returns. Sub Holding will file a separate U.S. Federal income tax return and various state tax returns. The Company’s controlled foreign corporations are subject to taxation at the entity level in their respective jurisdictions.

Holdings is organized as a limited liability company and is taxed as a partnership for U.S. income tax purposes. As such, with the exception of a limited number of state and local jurisdictions, Holdings is not subject to U.S. income taxes. Accordingly, Blocker and Nexeo Solutions, Inc. report their share of Holdings’ taxable income earned after the Closing Date on their respective U.S. federal tax return.

Income tax expense for the three months ended March 31, 2017 was $0.8 million on pre-tax loss of $0.3 million for the Successor compared to the income tax expense of $1.8 million on pre-tax income of $3.8 million for the three months ended March 31, 2016 for the Predecessor. The current period tax expense was largely attributable to foreign income tax expense on profitable foreign operations. The prior period tax expense was largely attributed to foreign income tax expense on profitable foreign operations.

Income tax benefit for the six months ended March 31, 2017 was $1.9 million on pre-tax loss of $11.3 million for the Successor compared to the income tax expense of $3.1 million on pre-tax income of $9.4 million for the six months ended March 31, 2016 for the Predecessor. The current period tax benefit was largely attributable to U.S. operations related to deferred taxes driven by the net loss incurred during the current period. The prior period tax expense was largely attributed to foreign income tax expense on profitable foreign operations.

For all periods, the Company computed the provision for income taxes based on the actual year-to-date effective tax rate by applying the discrete method.  Use of the annual effective tax rate, which relies on accurate projections by legal entity of income earned and taxed in foreign jurisdictions, as well as accurate projections by legal entity of permanent and temporary differences, was not considered a reliable estimate for purposes of calculating year-to-date income tax expense.

At March 31, 2017 and September 30, 2016, the valuation allowance was $3.2 million and $2.8 million, respectively, primarily relating to Nexeo Plaschem operations. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based upon management’s expectations at March 31, 2017, management believes it is more likely than not that it will realize the majority of its deferred tax assets.

Uncertain Tax Positions

U.S. GAAP prescribes a recognition threshold and measurement attribute for the accounting and financial statement disclosure of tax positions taken or expected to be taken in a tax return. The evaluation of a tax position is a two-step process.  The first step requires the Company to determine whether it is more likely than not that a tax position will be sustained upon examination based on the technical merits of the position.  The second step requires the Company to recognize in the financial statements each tax position that meets the more likely than not criteria, measured as the amount of benefit that has a greater than 50% likelihood of being realized. Differences between the amount of tax benefits taken or expected to be taken in the income tax returns and the amount of tax benefits recognized in the financial statements represent the Company’s unrecognized income tax benefits, which are recorded as a liability, with the long-term portion included in Other non-current liabilities and the current portion included in Accrued expenses and other liabilities on the Company’s condensed consolidated balance sheets.

The Company recognizes interest and penalties related to uncertain tax positions, if any, as a component of Income tax expense in the condensed consolidated statements of operations. There was an insignificant amount of interest and penalties recognized during all periods. As of March 31, 2017 and September 30, 2016, the Company had $0.6 million and $1.2 million, respectively, related to uncertain tax positions, including related accrued interest and penalties. This decrease was related to the release of uncertain tax provisions from the prior year and lapses in statutory tax periods.

35



The Company or one of its subsidiaries files income tax returns in various state and foreign jurisdictions. Within the U.S., the Company is subject to federal and state income tax examination by tax authorities for periods after December 2012. With respect to countries outside of the U.S., with certain exceptions, the Company’s foreign subsidiaries are subject to income tax audits for years after 2011.

16. Segment and Geographic Data
 
The Company operates through three lines of business, or operating segments: Chemicals, Plastics and Environmental Services, which market to different sets of customers operating in an array of industries, with various end markets and customer segments within those industries. For segment presentation and disclosure purposes, the Chemicals and Plastics lines of business constitute separate reportable segments while the Environmental Services line of business, which does not meet the materiality threshold for separate disclosure and the historical composites products sales in Asia are combined in an "Other" segment.

Each line of business represents unique products and suppliers, and each line of business focuses on specific end markets within its industry based on a variety of factors, including supplier or customer opportunities, expected growth and prevailing economic conditions. Across the Chemicals and Plastics lines of business there are numerous industry segments, end markets and sub markets that the Company may choose to focus on. These end markets may change from year to year depending on the underlying market economics, supplier focus, expected profitability and the Company’s strategic agenda.
 
The Chemicals, Plastics and Environmental Services lines of business compete with national, regional and local companies throughout North America. Additionally, the Chemicals and Plastics lines of business compete with other distribution companies in Asia. The Plastics line of business also competes with other distribution companies in EMEA. Competition within each line of business is based primarily on the diversity of the product portfolio, service offerings, reliability of services and supply, technical support, price and delivery capabilities. The accounting policies used to account for transactions in each of the lines of business are the same as those used to account for transactions at the corporate level.
 
The Chemicals and Plastics lines of business are distribution businesses, while the Environmental Services line of business provides hazardous and non-hazardous waste collection, recovery, recycling and arrangement for disposal services.
 
A brief description of each segment follows:
  
Chemicals. The Chemicals line of business distributes specialty and industrial chemicals, additives and solvents to industrial users via railcars, barges, bulk tanker trucks and as packaged goods in trucks. The Company’s chemical products are distributed in more than 50 countries worldwide, primarily in North America 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. While the Chemicals line of business serves multiple end markets, key end markets within the industrial space are household, industrial and institutional, performance coatings (including architectural coatings, adhesives, sealants and elastomers), lubricants, oil and gas and personal care.
 
Plastics. The Plastics line of business distributes a broad product line consisting of commodity polymer products and prime engineering resins to plastics processors engaged in blow molding, extrusion, injection molding and rotation molding via railcars, bulk trucks, truckload boxes and less-than-truckload quantities. The Company's plastics products are distributed in more than 50 countries worldwide, primarily in North America, EMEA and Asia. The Plastics line of business serves a broad cross section of industrial segments with a current focus on the healthcare and automotive end markets.
 
Other. The Environmental Services line of business, in connection with certain waste disposal service companies, provides customers with comprehensive on-site and off-site hazardous and non-hazardous waste collection, recovery and arrangement for disposal services or recycling in North America, primarily in the U.S. These environmental services are offered through the Company’s network of distribution facilities which are used as transfer facilities or through a staff of dedicated on-site waste professionals.
 

36


The Chief Executive Officer is the Chief Operating Decision Maker. The Chief Operating Decision Maker reviews operating results in order to make decisions, assess performance and allocate resources to each line of business. In order to maintain the focus on line of business performance, certain expenses are excluded from the line of business results utilized by the Company’s Chief Operating Decision Maker in evaluating line of business performance. These expenses include certain depreciation and amortization, selling, general and administrative expense, corporate items such as transaction related costs, interest and income tax expense. These items are separately delineated to reconcile to reported net income. No single customer accounted for more than 10% of revenues for any line of business for each of the periods reported. Intersegment revenues were insignificant.
 
Certain assets are aggregated at the line of business level. The assets attributable to the Company’s lines of business, that are reviewed by the Chief Operating Decision Maker, consist of trade accounts receivable, inventories, goodwill and any specific assets that are otherwise directly associated with a line of business. The Company’s inventory of packaging materials and containers as well as property, plant and equipment are generally not allocated to a line of business and are included in unallocated assets.

Summarized financial information relating to the Company’s lines of business is as follows:
 
Successor
 
 
Predecessor
 
Three Months Ended 
 March 31, 2017
 
Six Months Ended March 31, 2017
 
 
Three Months Ended 
 March 31, 2016
 
Six Months Ended March 31, 2016
Sales and operating revenues
 
 
 
 
 
 
 
 
Chemicals
$
415.0

 
$
767.4

 
 
$
389.0

 
$
767.7

Plastics
471.7

 
884.2

 
 
443.9

 
862.4

Other
31.0

 
60.9

 
 
29.3

 
59.8

Total sales and operating revenues
$
917.7

 
$
1,712.5

 
 
$
862.2

 
$
1,689.9

Gross profit
 
 
 
 
 
 
 
 
Chemicals
$
50.6

 
$
93.3

 
 
$
50.1

 
$
97.4

Plastics
45.8

 
81.8

 
 
44.8

 
85.4

Other
5.8

 
11.5

 
 
6.4

 
13.7

Total gross profit
$
102.2

 
$
186.6

 
 
$
101.3

 
$
196.5

Selling, general & administrative expenses
80.0

 
154.5

 
 
76.7

 
151.4

Transaction related costs
0.3

 
1.1

 
 
6.3

 
7.3

Change in fair value related to contingent consideration obligations
10.0

 
20.6

 
 

 

Operating income
11.9

 
10.4

 
 
18.3

 
37.8

Other income
0.2

 
2.6

 
 
0.9

 
2.6

Interest income (expense)
 
 
 
 
 
 
 
 
Interest income
0.1

 
0.2

 
 
0.1

 
0.1

Interest expense
(12.5
)
 
(24.5
)
 
 
(15.5
)
 
(31.1
)
Income (loss) before income taxes
$
(0.3
)
 
$
(11.3
)
 
 
$
3.8

 
$
9.4


 
March 31, 2017
 
September 30, 2016
IDENTIFIABLE ASSETS
 

 
 

Chemicals
$
698.9

 
$
656.8

Plastics
747.1

 
708.7

Other
85.2

 
85.0

Total identifiable assets by reportable segment
1,531.2

 
1,450.5

Unallocated assets
676.7

 
628.4

Total assets
$
2,207.9

 
$
2,078.9



37


Goodwill amounts by reportable segment at March 31, 2017 are based on the preliminary allocation of the purchase consideration of the Business Combination as of the Closing Date. Accordingly, the amounts allocated to goodwill are subject to adjustments that could have a material impact on total goodwill and goodwill by reportable segment. See Note 3.

Revenues by geographic location, based on the jurisdiction of the subsidiary entity receiving revenue credit for the sale, are presented below:
 
Successor
 
 
Predecessor
 
Three Months Ended 
 March 31, 2017
 
Six Months Ended March 31, 2017
 
 
Three Months Ended 
 March 31, 2016
 
Six Months Ended March 31, 2016
U.S.
$
684.2

 
$
1,271.6

 
 
$
655.7

 
$
1,281.2

Canada
46.7

 
83.6

 
 
39.0

 
74.9

Other North America
12.7

 
25.2

 
 
12.8

 
25.2

Total North America Operations
$
743.6

 
$
1,380.4

 
 
$
707.5

 
$
1,381.3

EMEA
124.4

 
221.3

 
 
108.4

 
213.1

Asia
49.7

 
110.8

 
 
46.3

 
95.5

Total
$
917.7

 
$
1,712.5

 
 
$
862.2

 
$
1,689.9

 

17. Subsequent Events

Ultra Chem Acquisition

On April 3, 2017, the Company completed the Ultra Chem Acquisition for approximately $58.0 million pursuant to a stock purchase agreement dated March 9, 2017.


38


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Company’s financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and with the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2016 filed with the SEC on December 8, 2016. This discussion contains forward-looking statements reflecting our current expectations, estimates and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the sections entitled “Risk Factors” and “Forward-Looking Statements” elsewhere in this Quarterly Report on Form 10-Q. 

The terms “the Company,” “us,” “our” and “we” and similar terms in this report refer to Nexeo Solutions, Inc. and its consolidated subsidiaries.
 
Overview
 
The Company is the result of the Business Combination between WLRH and Holdings that closed on June 9, 2016 and is referred to as the “Successor.” The “Predecessor” financial information reflects the operations of Holdings prior to the Closing Date of the Business Combination.

We are 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, we provide value-added services such as custom blending, packaging and repackaging, private-label manufacturing and product testing in the form of chemical analysis, product performance analysis and product development. We also provide environmental services, including waste collection, recovery and arrangement for disposal services and recycling in North America, primarily in the U.S., through our Environmental Services line of business.

We have long-standing relationships with major chemicals and plastics producers and suppliers, a strong geographic presence and supply chain network and a relatively stable customer base that benefits from the service and distribution value we provide. The products we distribute are used in a broad cross section of manufacturing industries, in various end markets and customer segments within those industries, including the household, industrial and institutional, lubricants, performance coatings (including architectural coatings, adhesives, sealants and elastomers), automotive, healthcare, personal care, oil and gas and construction end markets.
 
We distribute our broad product portfolio internationally through a supply chain consisting of owned, leased or third-party warehouses, rail terminals and tank terminals globally. We have a private fleet of tractors and trailers, primarily in North America.

Segment Overview
 
We are organized into three lines of business, or operating segments: Chemicals, Plastics and Environmental Services. Our lines of business market to different sets of customers operating in an array of industries, with various end markets and customer segments within those industries. For segment presentation and disclosure purposes, our Chemicals and Plastics lines of business constitute separate reportable segments while the Environmental Services line of business, which does not meet the materiality threshold for separate disclosure is included in the "Other" segment.

A brief description of each of our lines of business follows:
 
Chemicals. The Chemicals line of business distributes specialty and industrial chemicals, additives and solvents to industrial users via railcars, barges, bulk tanker trucks, and as packaged goods in trucks. While our chemicals products are distributed in more than 50 countries worldwide, we primarily distribute our chemicals products in North America and Asia. In connection with the distribution of chemicals products, we provide 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. While our Chemicals line of business serves multiple end markets, key end markets within the industrial space are household, industrial and institutional, performance coatings (including architectural coatings, adhesives, sealants and elastomers), lubricants, oil and gas and personal care.
 

39


Plastics. The Plastics line of business distributes a broad product line consisting of commodity polymer products and prime engineering resins to plastics processors engaged in blow molding, extrusion, injection molding and rotation molding via railcars, bulk trucks, truckload boxes and less-than-truckload quantities. While our plastics products are distributed in more than 50 countries worldwide, we primarily distribute our plastics products in North America, EMEA and Asia. The Plastics line of business serves a broad cross section of industrial segments with a current focus on the healthcare and automotive end markets.

Environmental Services. The Environmental Services line of business, in connection with certain waste disposal service companies, provides customers with comprehensive on-site and off-site hazardous and non-hazardous waste collection, recovery and arrangement for disposal services or recycling in North America, primarily in the U.S. These environmental services are offered through our network of distribution facilities which are used as transfer facilities or through a staff of dedicated on-site waste professionals.

Key Factors Affecting our Results of Operations and Financial Condition
 
General and regional economic conditions. The consumption of chemicals and plastics in the broad industry segments and end markets that we serve generally corresponds to the level of production of goods and services in the global economy, amplified by the regional economies where we have commercial operations. As a result, when general economic conditions improve or deteriorate, our volumes tend to fluctuate accordingly. We manage our cost structure in line with general economic conditions, but our volumes and profitability are ultimately correlated with the underlying demand for the end-products of the industries we serve.

Price fluctuations. The prices at which we resell the products we distribute in our Chemicals and Plastics lines of business generally fluctuate in accordance with the prices that we pay for these products. Product prices we pay are largely driven by the underlying global and regional economic conditions that drive the prices of two primary raw materials of production: crude oil (primarily naphtha) and natural gas (primarily ethane). These two raw material sources are used in the production of propylene and ethylen