SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ý ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2018
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)
(State or other jurisdiction of
incorporation or organization)
3 Waterway Square Place, Suite 1000
The Woodlands, Texas
(Address of principal executive offices)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Units, each consisting of one share of Common Stock,
NASDAQ Capital Market
$0.0001 par value, and one Warrant to purchase Common Stock
Common Stock, $0.0001 par value
NASDAQ Capital Market
Warrants to purchase Common Stock
NASDAQ Capital Market
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. o Yes ý No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. o Yes ý No
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. ý Yes o No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). ý Yes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 299.405 of this Chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
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
The aggregate market value of the voting stock held by non-affiliates of Nexeo Solutions, Inc. was $350,498,787 as of March 31, 2018, using the definition of beneficial ownership contained in Rule 13d-3 promulgated pursuant to the Securities Exchange Act of 1934, as amended, and excluding shares held by directors and executive officers. As of November 30, 2018, there were 89,698,331 shares of the Company's common stock outstanding, par value $0.0001 per share.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive proxy statement relating to the 2019 Annual Meeting of Stockholders of Nexeo Solutions, Inc., which will be filed with the Securities and Exchange Commission within 120 days of September 30, 2018, are incorporated by reference in Item 10, Item 11, Item 12, Item 13 and Item 14 of Part III of this Form 10-K.
TABLE OF CONTENTS
The following terms and abbreviations appearing in the text of this Annual Report on Form 10-K have the meanings indicated below.
The Nexeo Solutions, Inc. 2016 Long Term Incentive Plan
Holdings, Sub Holding and Solutions together with Nexeo Solutions Canada Corporation
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
The FASB Accounting Standards Codification
Ashland Inc. and its subsidiaries
Accounting Standards Update issued by the FASB
TPG Accolade Delaware, L.P.
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
The business combination between WLRH and Holdings pursuant to the Merger Agreement, which was consummated on the Closing Date
U.S. Federal Clean Air Act
Canadian tranche of the ABL Facility
U.S. Comprehensive Environmental Response, Compensation and Liability Act
U.S. Chemical-Facility Anti-Terrorism Standards
June 9, 2016
Company / Successor / Nexeo
Nexeo Solutions, Inc. (f/k/a WL Ross Holding Corp.) and its consolidated subsidiaries
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
The ABL Facility and the Term Loan Facility, collectively
U.S. Clean Water Act
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
U.S. Department of Homeland Security
Director Founder Shares
The 30,000 original Founders Shares transferred to the Company’s prior independent directors
The global distribution business purchased by the Predecessor from Ashland
California Department of Toxic Substances Control
Earnings before interest, tax, depreciation and amortization
Europe, Middle East and Africa
U. S. Environmental Protection Agency
U.S. Emergency Planning and Community Right-To-Know Act
Earnings or loss per share
Enterprise resource planning
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
U.S. Securities Exchange Act of 1934, as amended
Financial Accounting Standards Board
U.S. Foreign Corrupt Practices Act
U.S. Federal Hazardous Material Transportation Law
$30.0 million tranche within the ABL Facility for non-Canadian foreign subsidiaries to issue loans and letters of credit
First Pacific Advisors, LLC
The 12,506,250 shares of Company common stock issued to the Sponsor at the time of the IPO
Gross domestic product
Nexeo Solutions Holdings, LLC
U.S. Hazardous Materials Regulations
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
The initial public offering of WLRH, consummated on June 11, 2014
Agreement and Plan of Merger, as amended, by and among WLRH, Blocker Merger Sub, Company Merger Sub, Holdings, Blocker, and Nexeo Holdco, LLC dated as of March 21, 2016
The Company Merger and the Blocker Merger, collectively
Merger Sub I
Pilates Merger Sub I Corp, a Delaware corporation and direct wholly owned Subsidiary of Univar
Merger Sub II
Pilates Merger Sub II Corp, a Delaware corporation and direct wholly owned Subsidiary of Univar
The Company’s leased facility in Montgomery, Illinois that commenced in the first fiscal quarter of 2017
NASDAQ Stock Market
8.375% Senior Subordinated Notes of the Predecessor due 2018
New York Stock Exchange
U.S. Occupational Safety and Health Act of 1970
U.S. Occupational Safety and Health Administration which administers the OSH Act
Other Retained Remediation Liabilities
Under the ADA Purchase Agreement, Ashland agreed to retain 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 of the ADA Purchase Agreement
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 Credit Facilities
Predecessor ABL Facility and Predecessor Term Loan Facility, collectively
Predecessor Term Loan Facility
Holdings’ senior secured term loan credit facility which was terminated in connection with the Business Combination
U.S. Private Securities Litigation Reform Act of 1995
Performance share unit issued under the 2016 LTIP
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
Retained Specified Remediation Liabilities
Under the ADA Purchase Agreement, Ashland agreed to retain all known environmental remediation liabilities as of the date of closing of the ADA Purchase Agreement
Restricted stock unit issued under the 2016 LTIP
Ryder Truck Rental, Inc.
Lease Agreement entered into by and between the Predecessor and Ryder in May 2015 for certain transportation equipment with payments of approximately $35.0 million over seven year term.
People’s Republic of China State Administration of Foreign Exchange
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)
U.S. Securities Act of 1933, as amended
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
Nexeo Solutions, LLC
WL Ross Sponsor LLC, the sponsor entity of WLRH prior to the Business Combination.
Nexeo Solutions Sub Holding Corp.
The comprehensive tax legislation enacted by the U.S. government on December 22, 2017, commonly referred to as the Tax Cuts and Jobs Act.
Term Loan Facility
Term loan credit facility pursuant to that certain credit agreement by and among Holdings, Solutions, Sub Holding, Bank of America, N.A., as administrative and collateral agent, the other agents party thereto and the lenders party thereto
TLB Amendment No. 1
The amendment to the Term Loan Facility dated March 22, 2017
TLB Amendment No. 2
The amendment to the Term Loan Facility dated December 19, 2017
TPG Capital, L.P. together with its affiliates, including TPG Accolade
TPG Accolade, L.P.
TPG Restricted Stock Grants
Restricted stock agreements entered into between TPG and certain of the Company’s officers and employees
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
Nexeo Holdco, LLC, TPG VI, Nexeo I, LP., TPG VI Nexeo II, L.P. and TPG VI FOF Nexeo L.P.
TRA Termination Agreement
The TRA Termination Agreement included as Exhibit 10.1 to the Form 8-K filed with the SEC on September 18, 2018.
U.S. Toxic Substances Control Act
Ultra Chem Acquisition
The April 3, 2017 acquisition of the equity interests of the Mexico City, Mexico based chemicals distribution business of the Ultra Chem Group pursuant to the Ultra Chem Stock Purchase Agreement
Ultra Chem Closing Date
April 3, 2017
Ultra Chem Group
The Mexico City, Mexico based chemicals distribution business of Ultra Chem, S. de R.L. de C.V. and its related entities
Ultra Chem Stock Purchase Agreement
The Stock Purchase Agreement dated March 9, 2017 related to the purchase of the equity interests of Ultra Chem Group
Univar Merger Agreement
Agreement and Plan of Merger by and among Nexeo, Univar, Merger Sub I and Merger Sub II dated as of September 17, 2018 providing for the acquisition of Nexeo by Univar.
United States of America
U.S. Generally accepted accounting principles
U.S. Tranche of the ABL Facility
WL Ross Holding Corp.
Unless the context otherwise requires, the financial information presented in this Annual Report on Form 10-K (this "Form 10-K") is the financial information of the Company on a consolidated basis together with its subsidiaries.
The terms "the Company," "us," "our" and "we" and similar terms in this Annual Report on Form 10-K refer to Nexeo Solutions, Inc. and its consolidated subsidiaries.
TRADEMARKS AND TRADE NAMES
We own or have rights to various trademarks, service marks, and trade names that we use in connection with the operation of our business. This Form 10-K may also contain trademarks, service marks and trade names of third parties, which are the property of their respective owners. Third party trademarks, services marks, trade names or products used or displayed in this Form 10-K belong to the holders and are not intended to, and do not imply a relationship with, or endorsement or sponsorship by us. Solely for convenience, the trademarks, service marks and trade names referred to in this Form 10-K may appear without the ®, TM or SM symbols, but omission of these references is not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our right or the right of the applicable licensor to these trademarks, service marks and trade names.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain information and statements contained in this Annual Report on Form 10-K are forward-looking statements within the meaning of the PSLRA codified in 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. Certain forward-looking statements are included in this Annual Report on Form 10-K, principally in the sections captioned "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations."
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 and our Predecessor’s historical experience and our present expectations or projections.
Our future results will depend upon various other risks and uncertainties, including those described in "Item 1A. Risk Factors." Readers are cautioned not to place undue reliance on forward-looking statements, which reflect management's current expectations and assumptions about future events, and speak only as of the date of this Annual Report on Form 10-K. 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.
Item 1. Business
We are a global materials distributor for chemicals products in North America and Asia and for 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 re-packaging, private-label manufacturing and product testing in the form of chemical analysis, product performance analysis and product development. We also provide on-site and off-site hazardous and non-hazardous environmental services, including waste collection, transportation, recovery, disposal arrangement and recycling services in North America, primarily the U.S. During fiscal year 2018, we distributed nearly 24,000 products in more than 80 countries for approximately 1,400 suppliers to approximately 27,300 customers.
We have long-standing relationships with major chemicals and plastics producers and suppliers, a strong geographic presence and supply chain network and a balanced customer base that benefits from the service and distribution value we provide. The products we distribute are used in various end markets and customer segments within a broad cross section of manufacturing industries, including 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.
The depth and diversity of our product line and service offerings allows us to provide many of our customers with a one-stop-shop resource for their chemicals and plastics needs. For customers with multiple locations, our centralized business model helps ensure consistency of product offerings and a single point of contact. Our services and broad product offerings allow for product customization, cost savings to customers on transaction and transportation costs and reliance on a single supplier to source all of a customer's diverse product requirements.
We believe we provide a compelling value proposition to suppliers as a single bulk buyer of their products and acting as an extension of their sales force by representing their brands and providing technical support to customers. Our deep understanding of key end markets presents suppliers with additional market reach and penetration opportunities, while our operating platform supports supplier visibility into the marketing and distribution of their products. We also believe we provide value to suppliers by distributing to larger customers through dedicated strategic accounts sales and marketing programs designed to solidify key relationships through enhanced customer service, efficient delivery and specialized value-added solutions. In addition to the value-added services mentioned above, we also provide dedicated stocking programs, vendor-managed inventory, quarterly customer demand forecasting, technical support and supply chain services.
We have an experienced management team with deep knowledge of the industry. We continue to implement strategies and invest to build upon our strengths by creating industry-leading marketing capabilities, including our focus on specific end markets, sales force effectiveness tools, market-based pricing and geographic expansion.
We distribute our product portfolio through a global supply chain consisting of approximately 170 owned, leased or third party warehouses, rail terminals and tank terminals with a private fleet of 1,110 units, including tractors and trailers, primarily in North America. We currently employ approximately 2,760 employees globally. At September 30, 2018, we had approximately 510 sales professionals in North America, EMEA and Asia, including technical support, field managers and strategic account managers who assist our customers in the selection and application of commodity and specialty products for their end products and processes.
We were formed as a Delaware corporation on March 24, 2014, under the name WL Ross Holding Corp., as a special purpose acquisition company for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses. We completed our IPO in June 2014, raising approximately $500.0 million in cash proceeds. We neither engaged in any operations nor generated any revenue prior to the Business Combination.
We acquired the business of Nexeo Solutions Holdings, LLC on June 9, 2016 through the Business Combination. In connection with the closing of the Business Combination, we changed our name from "WL Ross Holding Corp." to "Nexeo Solutions, Inc." and changed our ticker symbol for our common stock on NASDAQ from "WLRH" to "NXEO".
On September 17, 2018, Nexeo and Univar entered into the Univar Merger Agreement providing for the acquisition of Nexeo by Univar. The Univar Merger Agreement and the proposed transaction were approved unanimously by the Board of Directors of both Nexeo and Univar and are subject to review by the SEC and regulatory agencies in the U.S. and other jurisdictions. The Univar Merger Agreement is also subject to a number of conditions, including, among other things and as further described in the Univar Merger Agreement: (i) the adoption by Nexeo’s stockholders of the Univar Merger Agreement, (ii) the approval by Univar’s stockholders of the issuance of the shares of Univar common stock in connection with the proposed transaction contemplated by the Univar Merger Agreement, (iii) the receipt of other required regulatory approvals, (iv) the absence of any law or governmental order prohibiting the proposed transaction, (v) the effectiveness of Univar's registration statement and the approval for listing on the NYSE of the shares of Univar common stock in connection with the proposed transaction contemplated by the Univar Merger Agreement, (vi) no material adverse effect on Nexeo's and Univar's operations having occurred since the signing of the Univar Merger Agreement and (vii) the termination of the TRA. There can be no assurance that the conditions to the completion of the proposed transaction will be satisfied or waived or that the proposed transaction will be completed. On November 16, 2018, Univar and Nexeo announced that the waiting period under the HSR Act expired.
See Note 3 to our consolidated financial statements for further discussion of the Univar Merger Agreement.
The global market for industrial materials encompasses the products we offer. This market contains both products distributed directly to customers by suppliers and indirectly by distribution channel partners. Indirect distribution channel partners, like us, serve as intermediaries between suppliers and customers representing an additional step in the distribution supply chain. Suppliers leverage their distribution partners to administer the complexity of servicing the small and mid-size customer base while providing needed technical product expertise. The total available market of distribution is driven by macroeconomic factors, as well as suppliers’ decisions to either serve markets or customers directly or use a distribution partner. By creating and executing superior distribution services and related capabilities, we strive to encourage suppliers to increase the magnitude of business being served by us as a distribution partner in the global market.
The chemicals and plastics materials distribution industry is characterized by increasingly complex regulatory, environmental and safety landscapes, the need for market intelligence that requires time and effort to develop and, in some cases, significant capital investments for transportation and storage infrastructure. Adding to the complexity of this business environment is the increasing demand by end customers for individualized solutions. These solutions are generally comprised of essential products and value-added services including blending, packaging and other special handling and special logistics requirements such as 24/7 delivery. We believe our ability to serve these complex needs as a result of our capabilities and scale will encourage suppliers to further leverage distributors like us as their preferred channel to market.
We strive to become a brand extension partner for key suppliers, provide best-in-class service, and align our sales force expertise with our customers' needs. Our value proposition focuses on supplier needs and direct customer activities. We have established four main strategies that drive our formula for success.
Go-To-Market Strategy. We aspire to use our technical capabilities, expertise and experience to commercially align with supplier strategies to operate as a brand extension while leveraging tools and systems to drive long-term loyalty through trust and transparency. Our sales force drives our customer-focused growth by utilizing technical expertise. The customer's journey is enhanced with a customized interface tailored for each customer's individual needs.
Profitability Growth & Margin Expansion. We seek to form strategic partnerships by leveraging foundational capabilities to demonstrate value propositions. We plan to optimize our portfolio by eliminating low profit business, expanding specialty product mix and executing ongoing productivity initiatives. To supplement growth, we have been actively pursuing accretive bolt-on acquisitions of product lines and businesses complementary to our current offerings.
Operational Excellence. We are committed to continued operational excellence by broadening our value-added service capabilities and delivering best-in-class service through a culture of continuous improvement. We focus on pricing strategies to optimize profit and efficient cash utilization through fully integrated purchasing and global enterprise cash management. Our commitment to high quality service is demonstrated by dedicated customer service representatives, company-owned warehouses, a private fleet having an on-time delivery percentage of 98.8% and sophisticated inventory management practices.
Driving Scale & Fostering Innovation. We benefit from data-driven decision making and focus on scalable, long-term growth drivers. We continuously drive synergies by leveraging our centralized platform.
We operate in a competitive industry and strive to differentiate ourselves from our competition by providing true end-to-end solutions, which requires using the right combination of integrated services that have the capacity and sophistication to serve larger customers while maintaining enough versatility to serve smaller customers. We believe our strengths include the following:
Centralized, scalable technology platform that allows us to efficiently manage the inherent complexity of our business and supports value creation by unlocking scale and scope efficiencies from both organic growth and strategic acquisitions;
Exceptional distribution network with strategically located facilities optimizing route density; and
Extensive product knowledge and end market expertise allowing us to act as an extension of our suppliers while providing application-based, value-added services to our customers.
We operate through 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 different 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 our Environmental Services line of business, which does not meet the materiality threshold for separate disclosure, is included in an "Other" segment.
Chemicals. Our Chemicals line of business distributes specialty and industrial chemicals, additives and solvents to industrial users via railcars, barges and bulk tanker trucks and as packaged goods in trucks. Our chemicals products are distributed in approximately 50 countries worldwide, primarily 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, the 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. Our 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 mixed truckloads, or less-than-truckload quantities. We distribute plastics products in more than 60 countries worldwide, primarily in North America, EMEA and Asia. Our Plastics line of business serves a broad cross section of industrial segments, including key automotive and healthcare end markets.
Other. Our 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, transportation, recovery, disposal arrangement and recycling services in North America, primarily in the U.S. These environmental services are offered through our network of distribution facilities used as transfer facilities and through a staff of dedicated on-site waste professionals. Our Environmental Services line of business serves multiple end markets such as aerospace and defense, automotive, chemical manufacturing, industrial manufacturing and oil and gas.
The table below provides a summary by line of business of the approximate number of customers served and key product offerings as of September 30, 2018:
Approximate Customers: 14,000(1)
Approximate Customers: 11,100(1)
Approximate Customers: 2,200(1)
Polyolefins (including Polypropylene)
Non-Hazardous and Hazardous Waste Disposal
Non-Hazardous Waste Treatment/Recycling
(1) Customer duplication between lines of business is immaterial
In each of the past three fiscal years, polypropylene was the only product that accounted for over 10.0% of our consolidated net revenue. During the fiscal years ended September 30, 2018, 2017, and 2016 polypropylene accounted for 15.9%, 15.5%, and 17.6%, respectively, of total consolidated net revenue. For the period from October 1, 2015 through June 8, 2016, polypropylene accounted for 17.7% of the Predecessor total consolidated net revenue.
The charts below provide a summary of the proportional revenue contributions from our lines of business and primary geographic markets during the fiscal year ended September 30, 2018, based on the jurisdiction of the subsidiary entity receiving revenue credit for the sale. It was not practical to provide a summary of the revenue contributions of our primary geographic markets based on external customer location. The substantial majority of our sales to customers in the geographic markets described below are made by entities located within the applicable geographic market.
Our lines of business generally leverage the same infrastructure, distribution networks, information technology and operational processes, but are differentiated by the products they distribute, their geographic footprints and their distinct customer and supplier relationships. See Note 16 to our consolidated financial statements for additional financial information with respect to our reportable segments.
We source chemicals and plastics from a wide array of suppliers, including many leading global chemicals and plastics producers. We generally purchase and take possession of these products and then resell and deliver them to our customers. While our top ten suppliers generally fulfill approximately 55% of total product procured by value on an annual basis, we source products from approximately 1,400 suppliers. Two suppliers accounted for 11.6% and 9.6%, respectively, of consolidated purchases during the fiscal year ended September 30, 2018, 12.1% and 9.9%, respectively, for the fiscal year ended September 30, 2017 and 11.9% and 10.4%, respectively, for the fiscal year ended September 30, 2016. Two suppliers accounted for 12.0% and 9.8%, respectively, for the period from October 1, 2015 through June 8, 2016 for the Predecessor consolidated purchases.
We maintain multiple sourcing options for most key products that we distribute to help ensure supply continuity and competitive pricing for our customers. We believe the depth of our supplier base ensures that we are able to satisfy the needs of all of our customers in all of our key geographic regions.
Our Chemicals and Plastics lines of business generally source products from distinct sets of suppliers.
Chemicals. We source chemicals from many suppliers, including several of the largest global chemical companies such as DowDuPont, Eastman Chemical, LyondellBasell, Methanex and Solvay. Our ten largest suppliers generally account for approximately 55% by value of the chemical products procured on an annual basis.
Plastics. Our plastics suppliers include several of the largest global chemical companies and plastics producers, such as BASF, Borealis, ExxonMobil Chemical Co., LyondellBasell and SABIC. Our ten largest suppliers generally account for approximately 85% by value of the plastics products procured on an annual basis.
In developing our supplier relationships, we evaluate prospective suppliers to determine the value they offer to the supply chain. We focus on suppliers that manufacture products utilized within the end markets we serve and provide opportunities that maintain healthy demand. Our key suppliers must also demonstrate a proven track record of reliability and commitment to invest in their businesses, as well as product price leadership.
We believe we provide value to suppliers in numerous ways, including the following:
We serve as an aggregator of customer demand, enabling us to act as a single bulk buyer of our suppliers’ products;
We act as an extension of suppliers’ sales force by representing their brands and providing technical support to customers, particularly those that are small and mid-sized, as well as larger customers through our strategic accounts program;
We develop compelling value propositions in various end markets by providing core commodity products, core specialty products and value-added services to target certain customer segments we believe can generate sustainable and profitable revenue growth;
We provide quarterly customer demand forecasting and visibility into the marketing and distribution of the suppliers’ products; and
We have leading pricing technology to capture maximum value for our suppliers' brands in the marketplace.
Product Line Management and Purchasing
Our supplier relationships are managed by separate product management teams within our Chemicals and Plastics lines of business. These teams focus on developing and maintaining supplier relationships, monitoring existing product lines and trends, and analyzing potential new products. Product management teams work in close coordination with our sales and marketing teams, allowing them to quickly and effectively identify customer buying and demand trends.
Our purchasing department is generally responsible for executing purchase orders to suppliers through our ERP system. For the majority of our operations, this system provides a centralized control platform throughout the entire supply chain, enabling the purchasing department to optimize procurement decisions. See "—Proprietary Operating Systems" below.
Our supply agreements allow flexibility, to help ensure product availability and our ability to set the specific terms of any purchase in accordance with prevailing market conditions. The agreements include commonly expected general terms and conditions such as volume expectations, pricing, price change mechanisms and guidelines for conflict resolution. Many of the agreements with key suppliers also provide for rebates upon achievement of specified volume purchase levels. Purchase prices are generally market-based and fluctuate in accordance with the costs of the relevant raw materials. We do not usually enter into contracts that are non-terminable, are "take or pay" or have other similar requirements.
Global Distribution Channels
We are organized around the philosophy that key operating processes, such as demand forecasting, purchasing and supplier selection, can be optimized for cost and efficiency when concentrated in a centralized business model. Accordingly, we operate our distribution network under a "hub-and-spoke" model by processing large volumes of inventory at our main regional hubs and shipping them to smaller local warehouses on a demand-driven basis from where they are delivered to customers. Products are transported to smaller customers in mixed truckloads or less-than-truckload quantities.
Our facilities are strategically placed to optimize route density in an effort to balance high-quality customer service with execution costs. In North America, we operate several "hub-and-spoke" models as described above. We believe this model is beneficial, as it enables us to efficiently aggregate customer demand, and allows us to match a large number of suppliers and customers at a lower cost. This system also supports economies of scale, a key driver of our profitability, as the aggregation of inventory at the "hubs" reduces inventory procurement costs and permits fleet optimization and efficient route planning through shipment consolidation and frequent deliveries to the "spokes." During fiscal year 2018, these facilities served approximately 21,200 customers.
In EMEA, our international plastics business operates through 23 third party operated warehouses and eight sales offices. These warehouses are located across EMEA, and during fiscal year 2018 they served approximately 4,400 customers.
In Asia, our international chemicals and plastics businesses operate through 16 third party operated warehouses and eight sales offices. These warehouses are located in China and served approximately 1,700 customers during fiscal year 2018.
The following table lists each of the active distribution facilities we own or lease and does not include third party operated facilities. We classify a facility as a "bulk facility" if it is engaged in delivering goods in bulk to our customers.
Distribution Facilities as of September 30, 2018
North American Facilities
Line(s) of Business
Richmond, British Columbia
Carson, California (1)
Chemicals and Plastics
Chemicals and Plastics
Chemicals and Plastics
Chemicals and Plastics
Willow Springs, Illinois
Kansas City, Kansas
Kansas City, Kansas
Baton Rouge, Louisiana
Chemicals and Plastics
Baton Rouge, Louisiana
Chemicals and Plastics
Chemicals and Plastics
Nuevo Leon, Mexico
Chemicals and Plastics
Chemicals and Plastics
Saint Paul, Minnesota
Chemicals and Plastics
St. Louis, Missouri
Carteret, New Jersey
Chemicals and Plastics
Charlotte, North Carolina
Binghamton, New York
Plastics and Environmental Services
Tonawanda, New York
Chemicals and Plastics
Chemicals and Plastics
Plastics and Environmental Services
Chemicals and Plastics
Grove City, Ohio
Chemicals and Plastics
Chemicals and Plastics
Catano, Puerto Rico
Anderson, South Carolina
Columbia, South Carolina
Chemicals and Plastics
Chemicals and Plastics
(1) During the first half of fiscal year 2019, we plan to acquire the land currently being leased.
Our principal executive offices are located in The Woodlands, Texas. We believe that our facilities are adequate for our current operations.
Transportation of products to and from customers and suppliers is a fundamental component of our business. During fiscal year 2018, our North American distribution service relied on our private fleet of trucks, tankers and trailers for 69.4% of volume delivered from our warehouses to our customers. We relied on common carriers for the remainder of our deliveries.
At September 30, 2018, our private fleet consisted of 1,110 owned and leased units that carry solid, bulk and liquid materials.
Private Fleet Characteristics as of September 30, 2018
Number of Vehicles
Average Age (years)
Bulk Liquid Tankers
Dry Bulk Trailers
In addition, we currently lease approximately 400 railcars, which are primarily used for supplier shipments to our locations, stock transfers between our locations and occasional shipments to customers.
Our private fleet characteristics change constantly based on our market needs. We believe that we maintain an advantage over many of our competitors with our private fleet enterprise wide on-time delivery percentage of 98.8%. Our private fleet permits us to meet our customers’ demand and reduces their inventory risk through "just-in-time" delivery. Moreover, our ability to service our customers is less encumbered by the commercial transportation market providing reliability of service to customers, especially during periods of undersupply.
In certain circumstances, we deliver full truckloads or large quantities of commodity products directly from a supplier to a customer, primarily via common carrier, and provide sourcing and supply chain support in connection with the delivery. Although the products move directly from supplier to customer, we remain the sole point of contact for both the customer and the supplier and generally take ownership of the products while in transit, bearing the risk of loss during transportation. Direct supply sales accounted for 18.1% of sales for the fiscal year ended September 30, 2018.
Sales and Marketing
For the fiscal year ended September 30, 2018, we served approximately 27,300 customers from a broad range of end markets resulting in approximately 480,000 orders for nearly 24,000 products. We have developed a sales and marketing organization with a broad scope of sales coverage to ensure we can service a diverse customer base.
As of September 30, 2018, our sales team consisted of approximately 510 sales professionals situated throughout North America, EMEA and Asia, including customer-facing personnel, such as technical support and corporate account managers, located in local markets. There are approximately 400 sales professionals based in North America, while approximately 60 sales professionals are based in EMEA and 50 sales professionals are based in Asia.
Our sales force compensation and incentive structure is designed to ensure alignment between the goals of the sales representatives and those of our overall business. All sales representatives earn a fixed base salary and variable rewards based on performance. We believe sales force compensation alignment is a key driver for the success of our business.
Customer Pricing Processes
We use data-driven pricing strategies, which enable our product managers to determine product pricing through the use of systems and tools that provide insight on relative market pricing across a number of factors including end markets, geography, packaging type and volume. Product managers, whose main responsibility is to cultivate and build supplier relationships, also develop a broad understanding of suppliers’ product offerings and the market’s needs. We have empowered these managers to make pricing decisions, working closely with our sales team to structure pricing for an optimal balance of price and volume to maximize profitability. The following is a description of our customers by line of business:
Chemicals. Our Chemicals customer base ranges from some of the largest global companies to smaller regional, private companies. Generally, no single Chemicals customer accounts for more than 5.0% of Chemicals sales, annually, while the five largest customers by value represent less than 10.0% of Chemicals sales on an annual basis.
Plastics. Our Plastics customer base is diverse and serves a variety of end markets. Generally, no single Plastics customer accounts for more than 5.0% of Plastics sales, annually, while the five largest customers by value represent less than 5.0% of Plastics sales on an annual basis.
Environmental Services. Our Environmental Services line of business includes customers who generate hazardous and non-hazardous waste in North America. One Environmental Services customer accounts for more than 5.0% but less than 10.0% of Environmental Services sales, annually, while the five largest customers generally account for less than 25.0% of Environmental Services sales on an annual basis.
Our customer contracts for the sale of chemicals and plastics products are generally framework agreements that do not contain an obligation to buy or sell. We use the agreements to define the general terms and conditions of sale and set volume expectations, pricing and price change mechanisms. The final terms of sale for each purchase are negotiated at the time of sale unless otherwise established by the terms of the contract. Consistent with industry standards, we may offer volume-based incentives to large customers if the customer purchases a specified volume with us over a specified time period. Our customer contracts for the provision of environmental services are generally framework agreements pursuant to which we provide environmental services from time to time, with fees agreed at the time the service is provided. These contracts are generally terminable by either party with or without cause upon 30 days’ notice. Additionally, our on-site environmental services contracts are typically term-based arrangements, with fee structures negotiated at the time of execution.
In addition to our products, we provide a range of value-added services, including mixing and blending to specific customer requirements, lab testing and analysis, formulating, repackaging from large to small quantities, vendor inventory management and technical support. We continue to seek opportunities to profitably expand our value-added services to differentiate our value proposition and create competitive advantages.
Three key services we offer are repackaging, custom blending and lab services. Our hub facilities handle large quantities of materials, usually receiving shipments by railcar or tank truck. Bulk deliveries are often repackaged into smaller containers, such as gaylords, totes and drums, which are in turn delivered to customers by truck. Our custom blending capabilities include buying in bulk from our large base of suppliers, lab testing for product customization and blending of numerous products to meet customer specifications. Our labs provide product testing services to our customers in the form of chemical analysis and product performance analysis. We employ a team of scientists and experienced formulation experts to help customers with product development, failure analysis and other technical support in a broad range of chemical and product applications.
Proprietary Operating Systems
We have developed a highly scalable technology platform with a centralized system and robust data analytics. These highly sophisticated systems enhance operational flexibility and facilitate the volume of customer orders, global sourcing, customer relations, distribution-related logistics, regulatory compliance, risk management controls and financial reporting. The operating platform consists of our transportation management system, pricing system, digital marketing, customer portal and ERP system. Our ERP system is used across the Company, with the exception of our subsidiary in China. The advanced data gathering and analysis capabilities of our ERP system, and the efficiencies it provides, enable us to operate flexibly and create significant advantages across the supply chain. Our ERP system also provides advanced volume forecasting, enabling us to forecast rolling weekly volumes, anticipate demand shift fluctuations and quickly respond to rapidly changing customer needs. This capability helps our suppliers by providing reliable and accurate demand forecasts that result in improved efficiency, flexibility and faster execution. These daily forecasts also translate into better pricing as they allow for optimization of production schedules. We believe that continuous automation implementation drives operational excellence and productivity.
Seasonal changes may affect our business and results of operations. We serve a large number of customers in a broad range of end markets and our business trends follow the seasonality patterns exhibited by these end markets and customers. For example, we generally tend to realize lower sales across all of our lines of business in the fourth calendar quarter of each year (which is our first fiscal quarter) because industrial production tends to be seasonally lower during that period. Our business may also be affected by our suppliers’ decisions regarding seasonal capacity and production.
The chemicals and plastics distribution markets in which we operate are highly fragmented. The primary competitive factors affecting each of our lines of business are the diversity and quality of the product portfolio, service offerings, reliability of services and supply, technical support and price and delivery capabilities. In addition, producers represent another source of competition, as many elect to distribute products through direct sales as opposed to indirect distributors. For some of the markets in which we operate, if large chemical producers elect to limit or consolidate their outsourcing of distribution, partner with other distributors, or distribute their products directly to end-user customers, competition would increase. Additionally, competition could increase from producers reducing their level of distribution outsourcing to maintain profit margin during periods of poor macroeconomic factors and pricing weakness, particularly for commodity products that require nominal service complexity to the end-user customer. We believe that our reputation, our broad range of product offerings and our speed and responsiveness, coupled with our valued-added services and the breadth of our distribution network, allow us to compete effectively and achieve scale benefits.
Our principal Chemicals distribution competitors include Azelis, Brenntag AG, Helm, ICC Chemicals, IMCD and Univar Inc. Additionally, our Chemicals line of business competes with many regional and local companies throughout North America as well as a number of smaller companies in certain niche markets.
Our primary Plastics distribution competitors in North America are Channel Prime Alliance, Entec Polymers, M. Holland Company and PolyOne Distribution. Our primary Plastics competitors in EMEA are Albis, Biesterfeld, Distrupol and two divisions of Ravago: Resinex and Ultrapolymers. Our primary Plastics competitors in Asia are KDF, Nagase and Sinochem.
The primary competitors of our Environmental Services line of business are Clean Harbors, Heritage, Univar Inc. and Veolia.
At September 30, 2018, we had approximately 2,760 employees worldwide, with approximately 2,190 employees in the U.S., 100 employees in Canada, 180 employees in EMEA, 120 employees in Asia, and 170 employees in Latin America. In the U.S., approximately 150 of our employees are represented by unions in six locations representing seven bargaining units, five of which are affiliated with the International Brotherhood of Teamsters and two of which are affiliated with the United Steelworkers.
We are subject to extensive regulation by federal, state and local governments and similar international agencies relating to the sale and distribution of our products. These regulations govern the use, labeling, packaging, transportation, storage and distribution of chemicals and hazardous substances. We are also subject to domestic and international import, export and customs regulations, and statutes and regulations relating to government contracting. In addition, we are subject to extensive environmental laws and other regulations concerning, among other things, emissions to the air, discharges to land, and water and the generation, handling, storage, transportation and disposal of non-hazardous and hazardous waste in various federal, state, local and foreign jurisdictions, including EMEA and Asia. We are also subject to other federal, state, local and foreign laws and regulations regarding health and safety matters. Below is a summary of certain of these regulations.
We operate in a number of domestic and foreign jurisdictions and are subject to various types of governmental regulation relating to the protection of the environment. Such regulation comes in the form of federal, state, local and foreign laws and regulations concerning such issues as the handling, storage and transportation of chemicals, release of pollutants into the air, soil and water, disposal of hazardous and non-hazardous wastes, remediation of contaminated sites, protection of workers from exposure to hazardous substances and the public disclosure of information regarding environmental hazards. Some aspects of our businesses also require us to maintain various environmental permits and licenses. We believe that we are in substantial compliance with all applicable environmental laws, regulations and permits; however, environmental compliance costs in the form of compliance with regulations, remediation obligations, capital improvements, operating expenses and/or limitations on operations can be substantial.
Many of the environmental laws and regulations affecting our operations relate to the prevention and remediation of impacts to air, soil or water resulting from the release of regulated materials. Past operations at some of our facilities have resulted in the contamination of soil and groundwater, some of which require remediation. Under the ADA Purchase Agreement, Ashland retained liability for remediation obligations known prior to March 31, 2011 related to Ashland's ownership and operation of the Distribution Business. In addition, Ashland retained liability for all other environmental remediation liabilities arising prior to March 31, 2011 for which Ashland received notice on or before March 31, 2016. After March 31, 2016, we assumed responsibility for all newly reported contamination and are required to indemnify Ashland should Ashland incur any expense related to such newly reported contamination. In situations where Ashland does not fulfill its indemnification obligations to us, we may be responsible for substantial remediation costs at or associated with our facilities or with the Distribution Business.
Comprehensive Environmental Response, Compensation, and Liability Act
In the U.S., CERCLA and analogous state laws regulate the remediation of certain contaminated sites and establish liability for the release of hazardous substances and related damages to natural resources from such sites. Under CERCLA, potentially responsible parties (including waste generators, waste transporters, and parties arranging for waste disposal) are subject to strict and, in certain circumstances, joint and several liability, for the cost of remediating contaminated sites. Our Chemicals and Environmental Services lines of business conduct waste disposal activities and handle products which could subject us to CERCLA liability.
In addition, we currently indemnify some of our Environmental Services customers for liabilities related to waste disposal activities that such customers may incur under certain environmental laws, including CERCLA.
Resource Conservation and Recovery Act
RCRA and analogous state laws regulate the generation, transportation, treatment, storage and disposal of hazardous waste. RCRA also establishes the regulatory framework for the management of certain non-hazardous wastes. RCRA requires owners and operators of hazardous waste treatment, storage and disposal facilities to obtain a RCRA permit. These permits may include both remedial actions and operational conditions. RCRA requires owners and operators of regulated facilities to investigate and remediate hazardous waste releases and to demonstrate compliance with financial assurance requirements. The financial assurance requirements are designed to ensure that adequate financial resources exist to respond to any releases of hazardous wastes at a permitted site and to perform any necessary corrective action and permanent site closure activities. Several of our facilities are subject to RCRA permits and some are undergoing corrective action to address previous releases of regulated materials as required under their permits. While we were required to assume responsibility for corrective action at a few sites in connection with the transfer of the business from Ashland to the Predecessor, Ashland, pursuant to the ADA Purchase Agreement, agreed to continue to perform certain known ongoing corrective actions at these sites until they are completed and to indemnify the Predecessor for any costs necessary to complete these actions. However, we retain responsibility for any RCRA violations resulting from our own operations.
Clean Air Act
CAA and analogous state laws establish a variety of programs designed to regulate the discharge of pollutants into the air. Under these laws, permits may be required before construction can commence on any new or modified source that has the potential to emit a significant amount of any regulated pollutant, such as nitrogen oxides and volatile organic compounds. Additionally, we may be required to register with state environmental agencies, monitor and report emissions, and install new or improved emission control equipment in certain situations, including for existing sources of air emissions. Furthermore, CAA may require that we obtain federal operating permits for any major sources of air pollution, which incorporate applicable pollution control requirements and require reporting and certification obligations. CAA also requires owners and operators of facilities that produce, handle, process, distribute, or store threshold quantities of chemicals to implement and update detailed risk management plans, which must be filed with and approved by the EPA. We could be required to incur additional expenditures to comply with CAA, including costs to install and operate emissions control equipment at our facilities.
Clean Water Act
The EPA regulates discharges of pollutants into waters of the U.S. through the CWA. Pursuant to the CWA, the EPA establishes wastewater standards and water quality standards for contaminants discharged into surface waters such as streams, rivers and lakes. The discharge of any regulated pollutant from point sources (such as pipes and manmade ditches) into the waters of the U.S. is prohibited without a state or federally issued discharge permit. Several of our facilities are currently subject to and must comply with CWA permit limitations on the discharge of industrial wastewater and storm water.
Toxic Substances Control Act
The TSCA authorizes the EPA to require chemical manufacturers, importers, and exporters to comply with reporting, record keeping, testing, and other requirements relating to chemical substances or mixtures. The TSCA is primarily designed to ensure that certain chemicals do not pose an unreasonable risk to human health or the environment. The TSCA Chemical Substances Inventory, which is maintained by the EPA, lists approximately 85,000 covered chemical substances. Before a chemical substance can enter interstate commerce (either through manufacture or importation), the EPA must review and approve the substance’s pre-manufacture notice. As part of that review process, the EPA may identify conditions—up to and including a ban on production—limiting the use of a chemical substance before it enters commerce. The TSCA also requires the testing of chemicals by manufacturers, importers and processors and requires those importing or exporting chemicals to comply with certification reporting and recordkeeping requirements. The TSCA also requires that any chemical distributor having information reasonably suggesting a substantial risk of injury to health or the environment notify the EPA immediately. The TSCA reform legislation enacted in June 2016 expanded the EPA's authority to review and regulate new and existing chemicals. In addition, when we import chemicals into the U.S. or export chemicals out of the U.S., we must comply with the TSCA’s import certification and export notice requirements. We must also comply with the TSCA’s various recordkeeping requirements.
Emergency Planning and Community Right-To-Know Act
The EPCRA requires facilities manufacturing, processing, or storing designated hazardous chemicals to report certain information about their products to state and local officials and fire departments. These reporting obligations are intended to assist state and local governments in developing emergency response plans in the case of a chemical release and to provide information to the public regarding the type and amount of toxic or hazardous chemicals stored at a particular facility. In addition, facilities releasing toxic chemicals into the environment above certain thresholds must report such releases to the EPA as part of the facilities’ "Toxics Release Inventory." Because many of our chemical distribution facilities handle hazardous chemicals, we are subject to the reporting requirements under the EPCRA.
Chemical Facility Anti-Terrorism Standards
DHS regulates the security of certain high-risk chemicals facilities through CFATS. CFATS utilizes a Chemical Security Assessment Tool to identify those chemical facilities potentially deemed "high risk." The first step is user registration, followed by the completion of a top-screen evaluation. The top-screen evaluation analyzes whether a facility stores regulated chemicals above specified thresholds. If it does, the facility must complete a Security Vulnerability Assessment, which examines the likelihood that a threat against a facility will be successful. From there, the facility must develop a Site Security Plan to respond to any identified security vulnerabilities. The Site Security Plan must address such matters as access control, personnel credentialing, recordkeeping, employee training, emergency response, testing of security equipment, reporting of security incidents and suspicious activity, and deterring, detecting and delaying potential attacks. DHS must review and approve or deny all Security Vulnerability Assessments and Site Security Plans. CFATS also requires regulated facilities to keep detailed security records and allow DHS the right to enter, inspect, and audit the property, equipment, operations and records of such facilities. Our facilities handle a number of chemical substances subject to CFATS security requirements, and thus, some of our facilities must comply with its site security requirements. Other legislative and regulatory initiatives designed to minimize the vulnerability of chemical storage and transportation assets could result in increased regulation of our industry, potentially imposing additional limitations on our operations and causing us to incur higher operating and compliance costs.
Regulation of the Transportation of Hazardous Materials
The transportation of hazardous materials is a significant part of our business and is regulated by the Department of Transportation under the FHMTL and its implementing regulations, the HMR. The HMR regulate the handling of hazardous materials, hazardous wastes, hazardous substances, and marine pollutants, and establish rules applicable to myriad aspects of the transportation process, including employee training, incident notification, labeling and placarding of shipments, shipment preparation, carriage of hazardous materials, emergency response and the development of safety and security plans. Several Department of Transportation agencies, including the Pipeline and Hazardous Materials Safety Administration, the Federal Aviation Administration, the Federal Railroad Administration, the Federal Motor Carrier Safety Administration and the U.S. Coast Guard share responsibility for enforcing the FHMTL.
Certain international standards and regulations also govern the transportation of hazardous materials shipments within, to, and from the U.S. Such regulations include the International Civil Aviation Organization’s 132 Technical Instructions for the Safe Transport of Dangerous Goods by Air, the International Maritime Dangerous Goods Code, Transport Canada’s Transportation of Dangerous Goods Regulations and the International Atomic Energy Agency Regulations for the Safe Transport of Radioactive Materials. These standards and regulations prescribe, among other things, requirements for packaging, maximum weight and handling of hazardous materials. U.S. agencies have sought to harmonize their rules with international standards and regulations, but when hazardous materials are transported to, from, and within the U.S. in accordance with one or more of these international standards or regulations, U.S. HMR requirements must still be followed.
The majority of our logistics services, including transport of hazardous materials, involve highway transportation. The Transportation Security Administration requires any driver seeking to obtain, renew, or transfer a hazardous materials endorsement on a state-issued commercial driver’s license to undergo a security threat assessment. Additionally, under the Transportation Worker Identification Credential program, workers, including truckers, requiring unescorted access to maritime facilities must be issued tamper-resistant biometric credentials to access such facilities.
Like environmental regulations, the regulations governing the transportation of hazardous materials are often subject to modification. Compliance with new regulations on the transportation of hazardous materials could adversely affect our business by raising our compliance and operational costs.
Occupational Safety and Health Regulations
We are subject to the OSH Act, which addresses safety and health in workplace environments. In addition to the OSH Act, we are subject to applicable state occupational safety and health regulations as well as the safety and health rules of applicable jurisdictions outside of the U.S, such as the Workplace Hazardous Materials Information System in Canada.
The OSH Act is administered by OSHA, which has established maximum workplace chemical exposure levels. Manufacturers and distributors of chemicals must employ a hazard communication program utilizing labels and other forms of warnings, as well as safety data sheets, setting forth safety and hazardous materials information to employees and customers. OSHA’s Hazard Communication Standard covers both physical hazards (such as flammability or the potential for explosions) and health hazards. Employers are required to provide a certain level of training to ensure that relevant employees are equipped to properly handle chemicals. OSHA has modified its Hazard Communication Standard to make it consistent with the United Nation’s Globally Harmonized System of Classification and Labeling of Chemicals. The new standards include more specific requirements for hazard classification, as well as standardized label components that provide consistent information and definitions for hazardous chemicals and a standard approach to conveying information on safety data sheets. Our Chemicals line of business has already completed its transition to the revised Hazard Communication Standard.
Our Chemicals line of business in Canada has completed the transition to Health Canada's Globally Harmonized System - aligned Hazardous Products Regulations standard.
Both the U.S. and Canada Hazard Communication Standards remain subject to periodic updates and revisions, and those changes, as well as other regulatory initiatives in occupational health and safety, could result in increased operation and compliance costs.
We operate in a number of domestic and foreign jurisdictions and are subject to various types of governmental regulation relating to use, labeling, packaging, storage and distribution of chemicals and hazardous substances. Statutes and regulations governing the import, export and control of our products are enforced by government agencies such as the U.S. Customs and Border Protection, the Drug Enforcement Administration, the Department of Homeland Security, the Department of Commerce, the Department of Transportation, the Food and Drug Administration, the Department of Agriculture and similar international agencies.
We believe that we are in compliance in all material respects with federal, state and local regulations relating to the sale, distribution, import and export of our products. We have automated systems, processes and procedures in place to support compliance with these regulations, and because we have these automated systems, processes and procedures in place, we believe we conduct our global business in compliance in all material respects with applicable statutes and regulations as promulgated in the countries into which we sell our products. Although we believe we are in compliance in all material respects with such laws and regulations, any non-compliance could result in substantial fines or otherwise restrict our ability to conduct our business.
We are not substantially dependent upon patents, trademarks or licenses.
Our operations are subject to significant hazards and risks inherent in the transportation, storage and disposal of chemicals and other potentially hazardous materials. We seek to mitigate these risks with effective industry-specific risk management techniques that include continuing and improving upon current loss prevention, claims management and training programs as well as a comprehensive insurance program. We have insurance coverage at levels that we consider adequate for our worldwide facilities and activities. Our insurance policies cover, among others, the following categories of risk: property damage and business interruption; marine cargo throughput, product and general liability; environmental liability; directors’ and officers’ liability and fraud and crime/theft.
We electronically file reports with the SEC, including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to such reports. The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov. Additionally, information about us, including our reports filed with the SEC, is available through our website at www.nexeosolutions.com. Such reports are accessible at no charge through our website and are made available as soon as reasonably practicable after such reports are filed with or furnished to the SEC. Our website and the information contained on that site, or connected to that site, are not incorporated by reference into this Annual Report on Form 10-K.
Item 1A. Risk Factors
We are subject to certain risks and hazards due to the nature of our business activities. Although it is not possible to identify all of the risks we encounter, we have identified the following significant risk factors that could materially adversely affect our business, financial condition, cash flows or results of operations.
Risks Related to the Proposed Transaction with Univar
On September 17, 2018, Univar and Nexeo entered into the Univar Merger Agreement. The Univar Merger Agreement has increased our exposure to non-business related risks associated with the potential loss of stockholder value due to increased market speculation in connection with the proposed transaction. Additionally, there is increased risk of loss of key employees and talent during the pre-close and post transition periods.
The proposed transaction is subject to certain conditions, including conditions that may not be satisfied or completed on a timely basis, if at all.
The Univar Merger Agreement and the proposed transaction were approved unanimously by the Board of Directors of both Nexeo and Univar and are subject to review by the SEC and regulatory agencies in the U.S. and other jurisdictions. The Univar Merger Agreement is also subject to a number of conditions, including, among other things and as further described in the Univar Merger Agreement: (i) the adoption by Nexeo’s stockholders of the Univar Merger Agreement, (ii) the approval by Univar’s stockholders of the issuance of the shares of Univar common stock in connection with the proposed transaction contemplated by the Univar Merger Agreement, (iii) the receipt of other required regulatory approvals, (iv) the absence of any law or governmental order prohibiting the proposed transaction, (v) the effectiveness of Univar's registration statement and the approval for listing on the NYSE of the shares of Univar common stock in connection with the proposed transaction contemplated by the Univar Merger Agreement, (vi) no material adverse effect on Nexeo's and Univar's operations having occurred since the signing of the Univar Merger Agreement and (vii) the termination of the TRA. There can be no assurance that the conditions to the completion of the proposed transaction will be satisfied or waived or that the proposed transaction will be completed.
In order to complete the proposed transaction, Univar and Nexeo must obtain certain governmental approvals, and if such approvals are not granted or are granted with conditions, completion of the proposed transaction may be jeopardized or the anticipated benefits of the proposed transaction could be reduced.
Completion of the proposed transaction is conditioned upon the receipt of other required regulatory approvals.
Although Nexeo and Univar have agreed in the Univar Merger Agreement to use their reasonable best efforts, subject to certain limitations, to make certain governmental filings and obtain the required governmental approvals, as the case may be, there can be no assurance that the relevant approvals will be obtained. In addition, the governmental entities that provide these approvals have broad discretion in administering the governing regulations. As a condition of approving the proposed transaction, these governmental entities may require divestitures, impose conditions, terms, obligations, or place restrictions on the conduct of Univar’s business after completion of the proposed transaction. Under the terms of the Univar Merger Agreement, Univar and Nexeo are required to use their respective reasonable best efforts to obtain the consents, approvals, permits and authorizations of any governmental entity required to consummate the proposed transaction.
Nexeo and Univar cannot be certain when, if, or under what conditions these approvals will be obtained. Failure to obtain such approvals may result in the delay or abandonment of the proposed transaction. There can be no assurance that regulators will not require divestitures, impose conditions, terms, obligations or place restrictions on the conduct of business, and that such divestitures, conditions, terms, obligations or restrictions will not have the effect of delaying the completion of the proposed transaction or imposing additional material costs on or materially limiting the revenues of the combined company following the proposed transaction, or otherwise adversely affecting Univar’s businesses and results of operations after the completion of the proposed transaction. In addition, Nexeo and Univar can provide no assurance that these divestitures, conditions, terms, obligations or restrictions will not result in the delay or abandonment of the proposed transaction.
Even after the remaining regulatory approvals that are a condition to the completion of the proposed transaction have been obtained, Nexeo and Univar can provide no assurances that the proposed transaction will not be challenged. Governmental authorities could seek to block or challenge the proposed transaction, including after the completion of the proposed transaction. In addition, private parties and individual states may bring legal actions under the antitrust laws in certain circumstances. Nexeo and Univar may not prevail and may incur significant costs in settling or defending any action under the antitrust laws. There can be no assurances that a challenge to the proposed transaction on antitrust grounds will not be made or, if a challenge is made, what the result will be.
Failure to complete the proposed transaction may negatively impact our share price and our future business and financial results.
If the proposed transaction is not completed for any reason, our ongoing businesses may be adversely affected and, without realizing any of the benefits of having completed the proposed transaction, we would be subject to a number of risks, including the following:
We may experience adverse reactions from the financial markets, including negative impacts on our stock prices;
We may experience negative reactions from our customers, regulators and employees;
We will be required to pay certain costs relating to the proposed transaction, whether or not the proposed transaction is completed; and
Matters relating to the proposed transaction (including integration planning) will require substantial commitments of time and resources by our management, which would otherwise have been devoted to day-to-day operations and other opportunities that may have been beneficial to us as an independent company.
If the proposed transaction is not completed, the risks described above may materialize and may adversely affect our businesses, financial condition, financial results and stock price.
In addition, we could be subject to litigation related to any failure to complete the proposed transaction or related to any enforcement proceeding commenced against us to perform our respective obligations under the Univar Merger Agreement. If the proposed transaction is not completed, these risks may materialize and may adversely affect our businesses, financial condition, financial results and stock prices.
While the proposed transaction is pending, we will be subject to contractual restrictions under the Univar Merger Agreement that may have an adverse effect on our businesses.
The Univar Merger Agreement contains customary covenants which restrict us, without Univar’s consent, from taking certain specified actions until the proposed transaction closes or the Univar Merger Agreement terminates. These restrictions may prevent us from pursuing otherwise attractive business opportunities that may arise prior to the completion of the proposed transaction or termination of the Univar Merger Agreement.
We will incur significant transaction and integration costs in connection with the proposed transaction.
We expect to pay significant transaction costs in connection with the proposed transaction. These transaction costs include legal, accounting, tax and financial advisory expenses, printing expenses, mailing costs and other related charges. A portion of the transaction costs will be incurred regardless of whether the proposed transaction is completed.
In accordance with the Univar Merger Agreement, we will generally pay our own costs and expenses in connection with the proposed transaction, whether or not the transaction is completed. Additionally, we have the right to terminate the Univar Merger Agreement under certain circumstances.
Uncertainty regarding the proposed transaction could cause suppliers, customers and other counterparties to delay or defer decisions concerning our Company that could adversely affect us.
The proposed transaction will occur only if stated conditions are met, many of which are outside our control. In addition, both parties to the Univar Merger Agreement have rights to terminate the Univar Merger Agreement under specified circumstances. Accordingly, there may be uncertainty regarding the completion of the proposed transaction. This uncertainty may cause suppliers, customers and other counterparties to delay or defer decisions concerning our businesses, which could negatively affect our respective businesses, results of operations and financial conditions. Suppliers, customers and other counterparties may also seek to change existing agreements with us as a result of the proposed transaction. Any delay or deferral of those decisions or changes in agreements with us could adversely affect our businesses, results of operations and financial conditions, regardless of whether the proposed transaction is ultimately completed.
Uncertainty regarding the proposed transaction could affect our ability to retain key employees or attract new key employees that could adversely affect our business.
Uncertainty about the effect of the proposed transaction on employees and customers may have an adverse effect on us, regardless of whether the Univar Merger Agreement is eventually completed. These uncertainties may impair our ability to attract, retain and motivate key personnel until the Univar Merger Agreement is completed, or the Univar Merger Agreement is terminated, and for a period of time thereafter. Employee retention and recruitment may be particularly challenging for us during the pendency of the Univar Merger Agreement, as employees and prospective employees may experience uncertainty about their future roles with Univar. The departure of existing key employees or the failure of potential key employees to accept employment with us, despite our retention and recruiting efforts, could have a material adverse impact on our business, financial condition and operating results, regardless of whether the Univar Merger Agreement is eventually completed. Additionally, the loss of employees who manage key customer and supplier relationships or key products could negatively affect our ability to sell and support our business effectively, which could negatively impact our results of operations.
Risks Related to Our Business and Industry
We face competition from other companies, which places downward pressure on prices and profitability.
We operate in highly competitive markets and compete against a large number of domestic and foreign companies. Competitiveness is based on several key criteria, including product performance and quality, product price, product availability, product handling and storage capabilities, the ability to understand customer product development processes and respond to their needs, delivery capabilities and customer service, including technical support. In addition, competitors’ pricing decisions could compel us to decrease our prices, which could negatively affect our profitability. Furthermore, producers sometimes elect to distribute their products directly to end-user customers, rather than rely on indirect distributors like us. While we do not believe that our results depend materially on access to any individual supplier's products, a significant increase in the number of suppliers electing to serve customers directly could result in less revenue and gross profit for us either due to competitive pressure from suppliers or products becoming unavailable to us or both.
Certain competitors are significantly larger than we are and may have greater financial resources. As a result, these competitors may be better able to withstand changes in market and industry conditions, including changes in the prices of raw materials and general economic conditions.
The prices of the products we purchase and sell are volatile.
Rising or otherwise volatile raw material prices for our suppliers, especially those of hydrocarbon derivatives, may cause costs to increase or may result in volatility in our profitability. Also, costs associated with the distribution of our products fluctuate in the same direction as fuel and other transport-related costs. Our ability to pass on increases in our costs to our customers is dependent upon market conditions, such as the presence of competitors in particular geographic and product markets and of the prevailing pricing mechanisms in customer contracts.
Many of our products are commodities or include significant commodity content; however, we have no control over the changing market value of the commodities. For example, excess supplies or changes in demand of crude oil-based and/or natural gas-based feedstocks may cause base commodity chemical product prices to fall. This could subsequently result in a drop in prices for propylene and ethylene-based plastics products. We also typically maintain significant inventories of the products we sell in order to meet our customers’ service level requirements. Declining prices, particularly rapid declines like those that occurred at times during fiscal year 2015 and 2016, typically cause customers to reduce inventories and wait for lower prices in anticipation of continued falling prices. Additionally, rapidly declining prices can cause our inventory value to be higher than market and subject us to impairment charges. As a result of these factors, we are subject to price risk with respect to our product inventories. Significant unanticipated changes in market conditions can affect future product demand, which could materially and adversely affect the value of our inventory. If we overestimate demand and purchase too much of a particular product when customers are reducing/minimizing their purchases, we face a risk that the price of that product will fall, leaving us with inventory that we cannot profitably sell. As a result, our sales volumes and gross profit may decline.
If we underestimate demand and do not purchase sufficient quantities of a particular product and prices of that product rise, we could be forced to purchase that product at a higher price in order to satisfy customer demand for that product, but we may not be able to increase pricing to our customers resulting in reduced profitability.
Volatility in product prices also affects our borrowing base under the ABL Facility. A decline in prices of our products reduces the value of our product inventory collateral, which, in turn, may reduce the amount available for us to borrow under the ABL Facility.
Many of our contracts with suppliers and customers are terminable upon notice.
Our revenue stream is variable because it is primarily generated as customers place orders and customers may change their requirements or cancel their orders. We generally enter into framework agreements with customers and suppliers that set out volume and other performance expectations over the term of the contract, but purchases and sales of products are usually made by placing individual purchase orders based on customer demand or forecasts. Since many of our contracts with both suppliers and customers do not include firm obligations to buy or sell products or are otherwise terminable upon notice, we might, in certain instances, be unable to meet our customers’ orders, which could harm our business relationships and reputation and result in reduced profitability. In circumstances where customers terminate contracts or cancel orders, we may be unable to find alternative buyers for the materials we purchased and may be forced to hold such materials in inventory. Our gross profit could be negatively affected if suppliers or customers renegotiate contractual terms to our disadvantage. Additionally, while some of our relationships for the distribution and sale of specialty chemicals have exclusivity or preference provisions, we may be unable to enforce these provisions effectively for legal or business reasons.
We are affected by demand fluctuations and other developments in the broader economy, including any prolonged economic crisis.
Our businesses mainly service clients in North America, EMEA and Asia, specifically China, making us vulnerable to downturns in those economies. Our sales and gross profits could decline as a result of economic recessions, changes in industrial production processes or consumer preferences, significant episodes of inflation, fluctuations in interest and currency exchange rates, and changes in the fiscal or monetary policies of governments in North America, EMEA and Asia, specifically China. See also "—We are exposed to fluctuations in foreign exchange rates" and "—Our substantial international operations subject us to risks of doing business in foreign countries."
General economic conditions and macroeconomic trends could also negatively affect the creditworthiness of our customers, which could increase our credit risk with respect to our trade receivables. Similarly, volatility and disruption in financial markets could limit our customers’ ability to obtain financing necessary to maintain or expand their own operations, thereby reducing demand for our products.
Disruptions in the supply of or an inability to supply the products that we distribute could result in a loss of customers or damage to our reputation.
Our business depends on access to adequate supplies of the products that our customers purchase from us. From time to time, we may be unable to access adequate quantities of certain products because of supply disruptions due to natural disasters, extreme weather, industrial accidents, scheduled and unscheduled production outages, high demand leading to allocation, port closures and other transportation disruptions and other circumstances beyond our control. These types of events could negatively affect our results of operations.
We purchase certain products and raw materials from suppliers, often pursuant to written supply contracts. If those suppliers are unable to fulfill our orders timely or choose to terminate or otherwise avoid contractual arrangements, we may not be able to obtain the products from alternate sources. The loss of one or more significant suppliers or a supplier of certain key products, or a significant change in the business strategies of our suppliers could disrupt our supply of the products our customers purchase from us. If we are unable to obtain and retain qualified suppliers under commercially acceptable terms, our ability to deliver products in a timely, competitive and profitable manner could be adversely affected.
Further, if our forecasts are below actual market demand, or if market demand increases significantly beyond our forecasts, then we may not be able to satisfy customer product needs, which may cause our customers to purchase their products from our competitors and could result in a loss of market share.
Additionally, domestic and global government regulations related to the manufacture or transport of certain products may impede our ability to obtain those products on commercially reasonable terms.
If for any reason we experience widespread, systemic difficulties in filling our customers’ orders, we face the risk of customer dissatisfaction, possible loss of customers, damage to our reputation, or paying a supplier a higher price in order to obtain the needed products on short notice, any of which could result in loss of revenues and lower profitability.
We are exposed to fluctuations in foreign exchange rates.
A portion of our sales and costs of sales are denominated in currencies other than the functional currency of our subsidiaries, exposing us to currency transaction risk. Additionally, because we report our consolidated results in USD, the results of operations and the financial position of our international operations, which are generally reported in the relevant local currencies, are then translated into USD at the applicable exchange rates for inclusion in our consolidated financial statements, exposing us to currency translation risk. Further, we have exposure to foreign exchange fluctuations arising from the remeasurement of certain foreign operations where the USD is the functional currency but accounting records are kept in local currency. Consequently, any change in exchange rates between our foreign subsidiaries' functional currencies and the USD will affect our consolidated statements of operations and balance sheets when the results of those operating companies are translated/remeasured into USD for reporting purposes. During fiscal year 2018, our most significant currency exposures were to the RMB, the CAD and the Peso and our results of operations were negatively impacted due to these exposures. The exchange rates between these and other foreign currencies and the USD may fluctuate substantially, and these fluctuations may have an adverse effect on our results of operations in future periods. See "Item 7A. Quantitative and Qualitative Disclosures about Market Risk."
We require significant working capital.
We have significant working capital needs, as the nature of our business requires us to purchase and maintain inventories that enable us to fulfill customer demand. In addition, we extend a significant amount of trade credit to our customers to purchase our products. Increases in the price of the products we purchase from suppliers or our selling prices to customers could result in increased working capital needs, as it is more expensive to maintain inventories and extend trade credit, which could adversely affect our liquidity and cash flows. We generally finance our working capital needs through cash flows from operations and borrowings under our ABL Facility. If we are unable to finance our working capital needs on the same or more favorable terms going forward, or if our working capital requirements increase and we are unable to finance the increase, we may not be able to purchase the products required by our customers or extend them the credit they require to purchase our products, which could result in a loss of sales.
The amount of borrowings permitted under the ABL Facility may fluctuate significantly, which may adversely affect our liquidity, results of operations and financial condition.
The amount of borrowings permitted at any time under the ABL Facility is limited by a borrowing base that is comprised of the value of our and certain of our subsidiaries' eligible inventories and accounts receivable. As a result, our access to credit under the ABL Facility is potentially subject to significant fluctuations depending on the value of the eligible assets in the borrowing base as of any valuation date. The inability to borrow under the ABL Facility may adversely affect our liquidity, results of operations and financial condition.
We may not be able to generate sufficient cash flows to service all of our indebtedness and may be forced to take other actions in order to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on, or to refinance, our debt obligations will depend on our financial and operating performance, which is subject to prevailing economic and competitive conditions and certain financial, business and other factors beyond our control. There can be no assurance that our business will generate sufficient cash flows from operating activities or that future sources of capital will be available to us in an amount sufficient to permit us to service our indebtedness or to fund our other liquidity needs. If we are unable to generate sufficient cash flows to satisfy our debt obligations, we may have to undertake alternative financing plans, such as refinancing or restructuring some or all of our indebtedness, selling assets, reducing or delaying capital investments or seeking to raise additional capital. We cannot assure you that any refinancing would be possible, that any assets could be sold or, if sold, of the timing of the sales and the amount of proceeds that may be realized from these sales, or that additional financing could be obtained on acceptable terms, if at all. Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms, would materially and adversely affect our financial condition and results of operations and our ability to satisfy our obligations under the Credit Facilities.
In addition, if we cannot make scheduled payments on our indebtedness, we will be in default and, as a result:
our debt holders could declare all outstanding principal and interest to be due and payable;
the lenders under the ABL Facility could terminate their commitments to lend us money and foreclose against the assets securing their borrowings;
the lenders under the Term Loan Facility and our other secured lenders could foreclose against the assets securing their borrowings; and
we could be forced into bankruptcy or liquidation.
Despite our current level of indebtedness, we may incur substantially more indebtedness in the future, which could further exacerbate the risks described above. At September 30, 2018, we had $817.1 million of principal amount of debt outstanding. In addition, we have $344.2 million of borrowings available under the ABL Facility, and under the terms of the Credit Facilities and subject to our continued compliance with specified ratios, we have the option:
under the ABL Facility, to raise up to $175.0 million of incremental or increased revolving credit commitments; and
under the Term Loan Facility, to raise incremental term loans.
If borrowed, these incremental commitments and loans would be senior secured indebtedness. Furthermore, we and our subsidiary guarantors are permitted to incur additional unsecured indebtedness under the Credit Facilities, which could intensify the related risks that we and our subsidiaries now face.
Our substantial indebtedness could adversely affect our results of operations and financial condition and prevent us from fulfilling our obligations under our indebtedness.
Our substantial indebtedness could have important consequences with respect to our business, including the following:
increasing our vulnerability to general adverse economic and industry conditions and limiting our ability to adjust rapidly to changing market conditions;
requiring us to dedicate a substantial portion of our cash flows from operations to pay principal and interest on our indebtedness, which would reduce the availability of cash to fund working capital, capital expenditures, acquisitions or other future business opportunities that could affect the execution of our growth strategy;
negatively impacting the terms on which customers or suppliers do business with us or alternatively requiring us to provide such customers or suppliers with credit support;
placing us at a competitive disadvantage as compared to our competitors that have less debt; and
exposing us to risks associated with interest rate fluctuations, which could result in increased interest expense if interest rates rise and we have to borrow additional funds under our variable interest rate Credit Facilities.
In addition, there can be no assurance that our business will generate sufficient cash flows from our operations in the future to service our indebtedness and to meet our other cash needs.
Restrictive covenants in our financing documents may adversely affect our operations.
Our Credit Facilities contain a number of restrictive covenants that impose operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interest, including our ability to:
incur or assume additional debt or provide guarantees in respect of obligations of other persons;
issue redeemable stock and preferred stock;
pay dividends or distributions or redeem or repurchase capital stock;
prepay, redeem or repurchase debt;
make loans, investments and capital expenditures;
engage in sale/leaseback transactions;
restrict distributions from our subsidiaries;
sell assets and capital stock of our subsidiaries;
consolidate or merge with or into another entity, or sell substantially all of our assets; and
enter into new lines of business.
A breach of the covenants under the Credit Facilities could result in an event of default under the Credit Facilities and our other indebtedness. An event of default under the Credit Facilities would permit the lenders under the facilities to declare all amounts outstanding under the facilities to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders under the Credit Facilities could proceed against the collateral granted to them to secure the borrowings under the facilities.
We depend on transportation and storage assets, some of which we do not own, in order to store and deliver products to our customers.
Although we maintain a significant portfolio of owned and leased transportation assets in North America, including trucks, tankers, railcars, barges and trailers, we also rely on transportation provided by third parties, such as common carriers, to deliver products to our customers. For the fiscal year ended September 30, 2018, common carriers accounted for approximately 31% of deliveries from our North American warehouses. For the fiscal year ended September 30, 2018, we leased 14 of our 55 distribution facilities and operated through more than 100 third party operated warehouses. In addition, in EMEA and Asia, we operated through third party operated transportation assets and warehouses for the fiscal year ended September 30, 2018.
Our access to third party transportation and storage is not guaranteed, and we may be unable to transport or store products at economically attractive rates or at all in certain circumstances, particularly in cases of adverse market conditions, such as shortages in transportation or storage capacity or disruptions to transportation infrastructure. We could also be subject to increased costs associated with transportation and storage that we may not always be able to recover from our customers, including fluctuating fuel prices, labor shortages, regulatory changes and unexpected increases in the charges imposed by common carriers and other third parties involved in transportation. Strikes or other service interruptions by third party transporters could also cause our operating expenses to rise and adversely affect our ability to deliver products on a timely basis. Any condition which results in our inability to store and deliver products to our customers for a prolonged period of time or our failure to deliver products in a timely manner, could harm our business relationships, reputation and brand and render portions of our business unprofitable.
We rely on the proper functioning of our computer and data processing systems and a large-scale malfunction could result in disruptions to our business.
We use an integrated ERP system to manage complexity across our supply chain by processing transactions and financial data in real-time, including ordering, purchasing, inventory management and delivery information. The proper functioning of our ERP platform and related IT systems is critical to the successful operation of our business and the implementation of our business strategies. Computer and data processing systems are susceptible to malfunctions and disruptions, including due to equipment damage, power outages, computer viruses and a range of other hardware, software and network problems. We cannot guarantee that we will not experience any malfunctions or disruptions in the future. A significant or large-scale malfunction or interruption of our computer or data processing systems could adversely affect our ability to keep our operations running effectively, including our ability to process orders, properly forecast customer demand, receive and ship products, maintain inventories, collect account receivables and pay expenses, which could materially adversely affect our business, financial condition, cash flows or results of operations. Any of these risks, if they materialize could significantly harm our reputation, expose us to substantial liabilities and have a material adverse effect on our business, financial condition and results of operations.
We may be unable to identify, purchase or integrate desirable acquisition targets. Future acquisitions may not be successful and we may not realize the anticipated cost savings, revenue enhancements or other synergies from any such acquisition.
We may investigate and acquire strategic businesses with the potential to be accretive to earnings, increase our market penetration, strengthen our market position or enhance our existing product offerings. There can be no assurance that we will identify or successfully complete transactions with suitable acquisition candidates in the future. A failure to identify and acquire desirable acquisition targets may slow our growth.
Additionally, if we were to undertake a substantial acquisition, the acquisition would likely need to be financed in part through additional financing from banks, through public offerings or private placements of debt or equity securities or through other arrangements. There can be no assurance that the necessary acquisition financing would be available to us on acceptable terms if and when required.
There also can be no assurance that any already completed acquisitions will be successful. We could have difficulty integrating the operations, systems, management and other personnel, technology and internal controls of a new acquisition with our own. These difficulties could disrupt our ongoing business, distract our management and employees, increase our expenses and adversely affect our results of operations. Matters related to integration may also delay and/or jeopardize strategic initiatives in place to enhance profitability. We may also experience an adverse impact on our operations and revenues if acquisition or integration activities disrupt key customer and supplier relationships or if we fail to retain, motivate and integrate key management and other employees of acquired businesses. Even if we are able to integrate successfully, we may not be able to realize the potential cost savings, synergies and revenue enhancements that were anticipated from any acquisition, either in the amount or within the time frame that we expected, and the costs of achieving these benefits may be higher than, and the timing may differ from, what we expected. Furthermore, the entities that we acquire in the future may not maintain effective systems of internal controls, or we may encounter difficulties integrating our system of internal controls with those of any acquired entities, which could prevent us from meeting our reporting obligations.
In connection with any acquisitions, we may acquire liabilities that may not adequately be covered by insurance or an enforceable indemnity or similar agreement from a creditworthy counterparty. As a result, we may be responsible for significant out-of-pocket expenditures and these liabilities, if they materialize, could have a material adverse effect on our business, financial condition, cash flows and results of operations.
The service of key employees or our inability to attract new key employees could adversely affect our business.
We may have difficulty locating, hiring and retaining qualified and experienced employees, including managerial, sales, sourcing and technical support personnel. This could have an adverse effect on our ability to operate and grow our business. Additionally, the loss of employees who manage key customer and supplier relationships or key products could negatively affect our ability to sell and support our business effectively, which could negatively impact our results of operations. This could be particularly true in certain foreign jurisdictions or with recent acquisitions where legacy relationships are important to the viability of the business.
We may fail to extend or renegotiate our collective bargaining agreements with our labor unions as they expire from time to time, and disputes with our labor unions may arise or our unionized employees may engage in a strike or other work stoppage.
As of September 30, 2018, approximately 150 of our 2,190 employees in the U.S. were represented by unions in six locations and seven separate bargaining units. Five of the local unions are affiliated with the International Brotherhood of Teamsters and two are affiliated with the United Steelworkers.
If we fail to extend or renegotiate our collective bargaining agreements, if disputes with our unions arise or if our unionized workers engage in a strike or other work stoppage, we could incur higher operation and labor costs or experience a significant disruption of operations.
Our employees in EMEA are represented by works councils or other labor organizations appointed pursuant to local law consisting of employee representatives who have rights to negotiate working terms and to receive notice of significant actions. These arrangements grant protections to employees and subject us to employment terms that are similar to collective bargaining agreements which may limit operational flexibility and increase operational expenses and labor costs.
Our substantial international operations subject us to risks related to doing business in foreign countries.
For the fiscal year ended September 30, 2018, we sold products to customers located in over 80 countries and generated 26.6% of total sales outside the U.S. These sales may represent an even larger portion of our net sales in the future. Also, we currently operate through approximately 70 third party warehouses located outside the U.S. Accordingly, our business is subject to risks related to the differing legal, political, social and regulatory requirements and economic conditions of many jurisdictions.
Legal and political risks are inherent in the operation of a company with our global scope. For example, it may be more difficult for us to enforce our agreements or collect receivables through foreign legal systems. In addition, the global nature of our business presents difficulties in hiring and maintaining a workforce in some countries and managing and administering an internationally dispersed business. In particular, the management of our personnel across several countries can present logistical challenges, including difficulties related to operating under different business cultures and languages.
Foreign countries may also impose additional withholding taxes or otherwise tax our foreign income, or adopt other restrictions on foreign trade or investment, including currency exchange controls. The imposition of tariffs is also a risk that could impair our financial performance.
There is a risk that foreign governments may nationalize private enterprises in countries where we operate. In some countries or regions, terrorist activities and the response to these activities may threaten our operations more than those in the U.S. and may result in limited operations, especially in the event of activities which may threaten the health and safety of our employees. Also, changes in general economic and political conditions in countries where we operate, particularly in emerging markets, are a risk to our financial performance.
There can be no assurance that the consequences of these and other factors relating to our multinational operations will not have an adverse effect on us.
As a multinational corporation doing business in the United States and various foreign jurisdictions, changes in tax laws could have an adverse impact on our earnings.
Changes to tax laws, rules and regulations, including changes in the interpretation or implementation of tax laws, rules and regulations by the Internal Revenue Service or other domestic or foreign governmental bodies, could affect us in substantial and unpredictable ways. Such changes could result in changes in our global structure, international operations or intercompany agreements, which could materially reduce our net income in future periods or result in restructuring costs, increased effective tax rates and other expenses.
We have significant operations in China and the laws and regulations applicable to our operations there are sometimes vague and uncertain. Any changes in such laws and regulations could materially adversely affect our business, financial condition, operating results and cash flows.
Our operations in China contributed, in aggregate across all lines of business, $211.9 million, $214.2 million, and $58.8 million in revenue for the fiscal years ended September 30, 2018, 2017, and 2016, respectively. China’s legal system is a civil law system based on written statutes, where decided legal cases have little value as precedents, unlike the common law system prevalent in the U.S. There are substantial uncertainties regarding the interpretation and application of China’s laws and regulations, including among others, the laws and regulations governing the conduct of business in China, or the enforcement and performance of arrangements with customers and suppliers in the event of death, bankruptcy or the imposition of statutory liens or criminal proceedings. The Chinese government has been developing a comprehensive system of commercial laws, and considerable progress has been made in introducing laws and regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade. However, because the laws and regulations are relatively new, and because of the limited volume of published cases and judicial interpretation and their lack of force as precedents, interpretation and enforcement of these laws and regulations involve significant uncertainties. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. We cannot predict what effect the interpretation or enforcement of existing or new laws or regulations may have on our business in China. If the relevant authorities find that we are in violation of China’s laws or regulations, they would have broad discretion in dealing with such a violation, including levying fines or requiring that we discontinue any portion or all of our business in China.
The promulgation of new laws, changes to existing laws and the pre-emption of local regulations by national laws may adversely affect our business in China. There can be no assurance that a change in leadership, social or political disruption, or unforeseen circumstances affecting China’s political, economic or social life, will not affect China’s government’s ability to continue to support and pursue the promulgation of new laws and changes to existing laws, as described above. Such a shift in leadership, social or political disruption or unforeseen circumstances could have a material adverse effect on our business and prospects.
Changes in legislation, regulation and government policy may have a material adverse effect on our business in the future.
Elections in the United States and other democracies in which we conduct business could result in significant changes in, and uncertainty with respect to, legislation, regulation and government policy directly affecting our business or indirectly affecting us because of impacts on our customers and producers. Legislative and regulatory proposals that could have a material direct or indirect impact on us include, but are not limited to, disallowances of income tax deductions, taxes or other restrictions repatriating foreign earnings, restrictions on imports and exports, modifications to international trade policy, including withdrawal from trade agreements, environmental regulation, changes to immigration policy, changes to health insurance legislation and the imposition of tariffs and other taxes on imports. We are currently unable to predict whether such changes will occur and, if so, the ultimate impact on our business. To the extent that such changes have a negative impact on us, our producers or our customers, including as a result of related uncertainty, these changes may materially and adversely impact our business, financial condition, results of operations and cash flows.
Our business could be negatively affected by security threats, including cybersecurity threats, and other disruptions.
We face various security threats, including cybersecurity threats to gain unauthorized access to sensitive, confidential or personal information or to render data or systems unusable, threats to our facilities, threats from disgruntled employees and terrorist acts. The potential for such security threats subjects our operations to increased risks that could have a material adverse effect on our business. In particular, our implementation of various procedures and controls to monitor and mitigate security threats and to increase security for our, and our customer's and supplier's information, facilities and infrastructure may result in increased capital and operating costs. Moreover, there can be no assurance that such procedures and controls will be sufficient to prevent security breaches from occurring. If any of these security breaches were to occur, they could lead to losses of sensitive information, critical infrastructure or capabilities essential to our operations and could have a material adverse effect on our reputation, financial position, results of operations or cash flows and could result in claims being brought against us. Cybersecurity attacks in particular are becoming more sophisticated and include, but are not limited to, malicious software, attempts to gain unauthorized access to data (either directly or through our vendors) and other electronic security breaches that could lead to disruptions in critical systems, unauthorized release of confidential or otherwise protected information and corruption of data. If any information about our customers and suppliers retained by us were the subject of a successful cybersecurity attack against us, we could be subject to litigation or other claims by the affected customers or suppliers. All events as described in this risk factor could damage our reputation and lead to financial losses from expenses related to remediation actions, loss of business or potential liability.
Attempts to expand our distribution services into new geographic markets may not achieve profitability for a period of time or at all.
We plan to expand our distribution services into new geographic markets, which will require us to make capital investments to extend and develop our distribution infrastructure. If we do not successfully add new distribution centers and routes, if we experience unanticipated costs or delays or if we experience competition in such markets that is greater than we expect, we may not achieve profitability in new regions for a period of time or at all.
Consolidation of our competitors in the markets in which we operate could place us at a competitive disadvantage and reduce our profitability.
We operate in an industry which is highly fragmented on a global scale, but in which there has been a trend toward consolidation in recent years. Consolidation of our competitors may jeopardize the strength of our position in one or more of the markets in which we operate and any advantages we currently have due to the comparative scale of our operations. Losing some of those advantages could adversely affect our business, financial condition, cash flows and results of operations, as well as our growth potential.
Our business is subject to many operational risks that can result in injury or loss of life, environmental damage, exposure to hazardous materials and other events that could potentially lead to the interruption of our business operations and/or the incurrence of significant costs.
The operations in our Chemicals and Environmental Services lines of business inherently involve the risk that chemical products or hazardous substances could be released into the environment from our facilities or equipment, either through spills or other accidents. Many of the chemical products and waste we handle, or have handled in the past, are potentially dangerous, and could present the risk of fires, explosions, exposure to hazardous materials and other hazards that could cause property or environmental damage or personal injury to our employees and third parties. Responding to the occurrence of any such incidents could cause us to incur potentially material expenditures related to response actions, government penalties, natural resource damages, business interruption and third party injury or property damage claims.
While we utilize extensive safety procedures and protocols in the operation of our businesses, there are risks inherent to the chemical distribution and environmental services industries. These relate primarily to the storage, handling, transportation and disposal of chemicals, wastes and other hazardous substances, which are subject to operational hazards and unforeseen interruptions caused by events beyond our control. These risks include, but are not limited to, accidents, explosions, fires, breakdowns in equipment or processes, acts of terrorism and severe weather. These events can result in injury or loss of life, environmental damage, exposure to hazardous materials and other events that could potentially lead to the interruption of our business operations and/or the incurrence of significant costs. In addition, the handling of chemicals has the potential for serious impacts on human health and the environment from such events as chemical spills, exposures and unintentional discharges or releases of toxic or hazardous substances or gases.
Our insurance policies may not cover all losses, costs or liabilities that we may experience.
Although we cover our operational risks with insurance policies in certain instances and to the extent our management deems appropriate, these policies are subject to customary exclusions, deductibles and coverage limits that we believe are in accordance with industry standards and practices. We are not insured against all risks, however, and we cannot guarantee that we will not incur losses beyond the policy limits or outside the coverage of our insurance policies. Moreover, from time to time, various types of insurance for companies involved in chemical distribution and environmental services have not been available on commercially acceptable terms or, in some cases, available at all. There can be no assurance that we will be able to maintain adequate insurance coverage in the future, that premiums, which have increased significantly in the last several years, will not continue to increase in the future, or that we will not be subject to liabilities in excess of available insurance.
Although we maintain liability insurance, there can be no assurance that this type or the level of coverage is adequate or that we will be able to continue to maintain our existing insurance or obtain comparable insurance at a reasonable cost, if at all. A product recall or a partially or completely uninsured judgment against us could have a material adverse effect on our business, financial condition, cash flows or results of operations.
Accidents, environmental damage, misuse of our products, adverse health effects or other harm related to hazardous materials that we carry or store could result in damage to our reputation and substantial remediation obligations.
Our business depends to a significant extent on our customers’ and suppliers’ trust in our reputation for quality, safety, reliability and environmental responsibility. Actual or alleged instances of safety deficiencies, inferior product quality, exposure to hazardous materials resulting in illness, injury or other harm to persons or property, environmental damage caused by us or our products, as well as misuse or misappropriation of our products, such as for terrorist activities or in the processing of illegal drugs, could damage our reputation and result in the loss of customers or suppliers. There can be no assurance that we will not incur such problems in the course of our operations. Also, there may be safety, personal injury or other environmental risks related to our products which are not known today. Any of the foregoing events, outcomes or allegations could also subject us to legal claims, and we could incur substantial legal fees and other costs in defending such claims.
Accidents or other incidents alleged to have taken place at our facilities, while a product is in transit, in a product’s end use application or otherwise involving our personnel or operations could also expose us to substantial liabilities and have a material adverse effect on our business, financial condition, cash flows and results of operations. Because many of the products we handle are potentially dangerous, we face the ongoing risk of explosions, fires, unintended releases and other hazards that may cause property damage, physical injury, illness or death.
There can be no assurance that these types of events will not occur in the future. If these events occur, whether through our own fault, the fault of a third party, pre-existing conditions at our facilities or among our fleet, natural disaster or other event outside our control, our reputation could be significantly damaged. We could also become responsible, through the application of environmental or other laws or by court order, for substantial monetary damages, costly investigation or remediation obligations and various fines or penalties, which may include liabilities arising from third party lawsuits or environmental clean-up obligations. The amount of any costs we may incur under such circumstances could substantially exceed any insurance we have to cover those losses.
Our business exposes us to potential product liability claims and recalls, which could adversely affect our financial condition and performance.
We are a distributor of products that third party manufacturers produce. We also sell a limited number of products directly to retail stores. Accordingly, our business involves an inherent risk of exposure to product liability claims, product recalls, product seizures and related adverse publicity. A product liability claim or judgment against us could also result in substantial and unexpected expenditures, affect consumer or customer confidence in our products, and divert management’s attention from other responsibilities. We generally extend to our customers the warranties provided to us by our suppliers and, accordingly, the majority of our warranty obligations to customers are intended to be covered by corresponding supplier warranties. However, there can be no assurance that our suppliers will continue to provide such warranties to us in the future, that warranty obligations to our customers will be covered by corresponding warranties from our suppliers or that our suppliers will be able to financially provide protection.
We are relying upon the creditworthiness of Ashland, which is indemnifying Holdings for certain liabilities associated with the Distribution Business. To the extent Ashland is unable (or unwilling) to satisfy its obligations to us, we may have no recourse under the ADA Purchase Agreement and will bear the risk of the liabilities associated with the Distribution Business.
Under the ADA Purchase Agreement, Ashland agreed to retain the Retained Remediation Liabilities. Ashland’s obligation for these liabilities is not subject to any claim thresholds or deductibles. However, 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 Ashland 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.
Based on the indemnification discussed above, we do not currently have any environmental or remediation reserves for matters that are covered by the ADA Purchase Agreement. If any Retained Specified Remediation Liability ultimately exceeds the liability ceilings described above, we would be responsible for such excess amounts. In addition, we are responsible for liabilities associated with our operation of the business, we would be required to take appropriate environmental or remediation reserves.
Several of our facilities are currently undergoing active remediation for previous impacts to soil and groundwater. Under the ADA Purchase Agreement, Ashland retained liability for all known remediation obligations related to its ownership and operation of the Distribution Business before March 31, 2011 and agreed to indemnify us for any losses associated with these liabilities, subject to some limitations. To date, we have not incurred any such costs. We may also discover new or previously unknown contamination which may not be indemnified by Ashland. In those cases and in situations where Ashland is unable or unwilling to fulfill its indemnification obligations, we may be responsible for substantial remediation costs.
To the extent Ashland is unable or unwilling to satisfy its indemnification obligations, we may have no recourse under the ADA Purchase Agreement and will bear the risk of the pre-closing liabilities associated with the Distribution Business, including certain known environmental liabilities.
We may be subject to personal injury claims related to exposure to hazardous materials and asbestos.
Our Chemicals and Environmental Services lines of business involve the storage, transportation and handling of hazardous materials, including chemicals and wastes. The nature of these operations could subject us to personal injury claims from individuals or classes of individuals related to exposure to such materials. We may also be subject to personal injury claims related to exposure to asbestos. Although we do not manufacture or distribute any products containing asbestos, asbestos-containing building materials have been identified at some of our facilities; these materials could present an exposure risk if improperly handled. Under the ADA Purchase Agreement, Ashland retained liability for all personal injury claims related to its ownership and operation of the Distribution Business before the closing date of the Ashland Distribution Acquisition filed on or before March 31, 2016, and will indemnify us for certain losses associated with these liabilities, subject to some limitations. Ashland will not indemnify us, however, for any personal injury claims filed after March 31, 2016 and for any personal injury claims arising from our own ownership and operation of the Distribution Business assets after the closing date of the Ashland Distribution Acquisition, nor will Ashland indemnify Holdings for any claims related to the removal or abatement of asbestos-containing materials. There can be no assurance that we will not incur any of these claims that could result in a material impact on our business, financial condition, cash flows or results of operations in the future.
We are exposed to ongoing litigation and other legal and regulatory actions and risks in the course of our business, and we could incur significant liabilities and substantial legal fees.
We are subject to the risk of litigation, other legal claims and proceedings and regulatory enforcement actions in the ordinary course of our business. The outcomes of these proceedings cannot be predicted with certainty. In addition, we cannot guarantee that the results of current and future legal proceedings will not materially harm our business, reputation or brand, nor can we guarantee that we will not incur losses in connection with current or future legal proceedings that exceed any provisions we may have set aside in respect of such proceedings. Many of the products we sell can cause liabilities to arise many years after their sale and use. Insurance purchased at the time of sale may not be available when costs arise in the future, and suppliers may no longer be available to provide indemnification or stand behind their warranties. There can be no assurance that we will not incur legal or regulatory cost that could result in a material impact on our business, financial condition, cash flows or results of operations in the future.
Our international sales and operations require access to international markets and are subject to applicable laws relating to trade, export and import controls and economic sanctions, the violation of which could adversely affect our operations.
We must comply with foreign laws relating to trade, export and import controls and economic sanctions. We may not be aware of all of such laws for the markets in which we do business, which subjects us to the risk of potential violations. Non-compliance could result in the loss of authorizations and licenses to conduct business in these countries or civil or criminal penalties. We must also comply with all applicable export and import laws and regulations of the U.S. and other countries. Such laws and regulations include, but are not limited to, the Export Administration Act, the Export Administration Regulations, the Arms Export Control Act and the International Traffic in Arms Regulations. The applicability of such laws and regulations generally is limited to "U.S. persons" (i.e., U.S. companies organized or registered to do business in the U.S. and to U.S. citizens, U.S. lawful permanent residents and other protected classes of individuals). However, these laws and regulations have certain extraterritorial effect in some instances, particularly with respect to the reexport of U.S.-origin equipment. We must comply with U.S. sanctions laws and regulations, which are primarily administered by the U.S. Department of Treasury’s Office of Foreign Assets Controls, as well as other U.S. government agencies. Transactions involving sanctioned countries, entities and persons are prohibited without U.S. government authorization (which will rarely be granted). The applicability of such sanctions laws and regulations generally is limited to U.S. persons. However, these sanctions laws and regulations have certain extraterritorial effect in some instances, particularly with respect to the reexport of U.S.-origin equipment. Moreover, U.S. sanctions against Cuba are specifically designed to cover foreign companies owned and controlled by U.S. companies and certain U.S. sanctions against Iran are designed to target foreign companies.
There can be no assurance that compliance with these laws and regulations will not have a material impact on our results of operations or cash flows in the future. Furthermore, while we have not experienced penalties from the violation of these laws that have materially impacted our results of operations or cash flows in any of the periods presented in this Annual Report on Form 10-K, violations of U.S. laws and regulations relating to trade, export and import controls and economic sanctions could result in significant civil and/or criminal penalties for our U.S. and foreign operations, including fines, onerous compliance requirements, prohibitions on exporting and importing, prohibitions on receiving government contracts or other government assistance and other trade-related restrictions. It should be noted that U.S. enforcement of such laws and regulations continues to increase, along with penalties for violations.
If we do not comply with the U.S. Foreign Corrupt Practices Act, we may become subject to monetary or criminal penalties.
The FCPA generally prohibits companies and their intermediaries from bribing foreign officials for the purpose of obtaining or keeping business. We currently take precautions to comply with this law. However, these precautions may not protect us against liability, particularly as a result of actions that may be taken in the future by agents and other intermediaries through whom we have exposure under the FCPA even though we may have limited or no ability to control such persons. Additionally, we have operations in certain countries, including Mexico, Russia and China, where strict compliance with the FCPA may conflict with local customs and practices. There can be no assurance that we will not be subject to penalties that might materially impact our business, financial condition, cash flows or results of operations in the future. Our competitors include foreign entities not subject to the FCPA, and hence compliance with this law may put us at a competitive disadvantage.
Regulatory compliance may divert our management's attention from day-to-day management of our business, which could have a material adverse effect on our business.
Our management team may not successfully or efficiently manage our continued transition to a public company that is subject to significant regulatory oversight and reporting obligations under the federal securities laws and the regulations imposed by NASDAQ. These regulations continue to evolve with the ongoing implementation of requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act and other new SEC regulations. In particular, these new obligations will require substantial attention from our senior management and could divert their attention away from the day-to-day management of our business, which could materially and adversely impact our business operations.
Our balance sheet includes significant intangible assets, which could become impaired.
At September 30, 2018, our intangible assets totaled $911.5 million, including $699.9 million in goodwill resulting from the Business Combination and the Ultra Chem Acquisition. We may also recognize additional goodwill and intangible assets in connection with any future business or asset acquisitions. Under U.S. GAAP, we are required to evaluate goodwill for impairment at least annually. Although we have not had an impairment on these intangible assets, we cannot guarantee that no material impairment will occur, particularly in the event of a substantial deterioration in our future profitability prospects, either in our business as a whole or in a particular segment. If we determine that the carrying value of our long-lived assets, goodwill or intangible assets is less than their fair value, we may be required to record impairment charges in the future which may significantly impact our profitability. The determination of fair value is highly subjective and can produce significantly different results based on the assumptions used and methodologies employed.
Changes in accounting standards issued by the FASB or other standard-setting bodies may adversely affect our financial statements.
Our financial statements are subject to the application of U.S. GAAP, which is periodically revised and/or expanded. Accordingly, from time-to-time we are required to adopt new or revised accounting standards issued by recognized authoritative bodies, including the FASB and the SEC. It is possible that future accounting standards we are required to adopt could change the current accounting treatment that we apply to our consolidated financial statements and that such changes could have a material adverse effect on our results of operations and financial condition.
If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results and risk our ability to have such controls attested to by our independent auditors.
We are required to comply with Section 404 of the Sarbanes Oxley Act, which requires, among other things, that companies maintain disclosure controls and procedures to ensure timely disclosure of material information, and that management review the effectiveness of those controls on a quarterly basis. Effective internal controls are necessary for us to provide reliable financial reports and to help prevent fraud, and our management and other personnel devote a substantial amount of time to these compliance requirements. Moreover, these rules and regulations increased our legal and financial compliance costs and make some activities more time-consuming and costly. We cannot be certain that we will be able to maintain adequate controls over our financial processes and reporting in the future or that we will be able to comply with our obligations under Section 404 of the Sarbanes Oxley Act. Section 404 of the Sarbanes-Oxley Act also requires us to evaluate annually the effectiveness of our internal controls over financial reporting as of the end of each fiscal year and to include a management report assessing the effectiveness of our internal controls over financial reporting in our Annual Report on Form 10-K. If we fail to maintain the adequacy of our internal controls, we cannot assure you that we will be able to conclude in the future that we have effective internal controls over financial reporting and/or we may encounter difficulties in implementing or improving our internal controls, which could harm our operating results or cause us to fail to meet our reporting obligations. We cannot assure that we will receive a positive attestation from our independent auditors with respect to our internal controls. In the event we identify significant deficiencies or material weaknesses in our internal control that we cannot remediate in a timely manner or if we are unable to receive a positive attestation from our independent auditors with respect to internal controls, we might be subject to additional scrutiny by regulatory authorities, such as the SEC. Any such action could adversely affect our financial results and may also result in delayed filings with the SEC which could cause investors and others to lose confidence in the reliability of our financial statements.
We may incur significant costs and liabilities in the future resulting from new or existing environmental or safety laws or regulations or an accidental release of wastes or other materials into the environment.
Our Chemicals line of business, as well as the Predecessor's Composites line of business, involve the storage and distribution of various chemicals, solvents, additives, resins and catalysts to various end markets. Our Environmental Services line of business involves the collection, recovery, recycling and disposal of hazardous and non-hazardous materials. All of these lines of business, and to a lesser extent our Plastics line of business, are subject to increasingly stringent federal, state, local and foreign laws and regulations associated with protection of the environment. These laws and regulations govern such matters as the handling, storage and transportation of chemicals and composites, releases of pollutants into the air, soil, and water disposal of hazardous and non-hazardous wastes, remediation of contaminated sites, protection of workers from exposure to hazardous substances, and public disclosure of information regarding environmental and safety hazards. Our failure to comply with any environmental and safety laws or regulations could result in the assessment of administrative, civil or criminal penalties the imposition of investigatory or remediation liabilities and the issuance of injunctive relief, which could subject us to additional operational costs and constraints. Each of these outcomes could have an adverse effect on our business, financial condition, cash flows or results of operations.
Environmental and safety laws and regulations are subject to frequent modification, and recent trends indicate a movement towards increasingly stringent environmental and safety requirements. As a result, we may be required to make substantial expenditures to comply with future environmental and safety laws and regulations, and such expenditures could have an adverse effect on our business, financial condition, cash flows or results of operations. For example, the EPA has recently increased its regulation of toxic substances under TSCA. New or increased governmental restrictions on the transportation, use or disposal of certain chemicals, both domestically and abroad, could also reduce demand for our products, adversely affecting our operations.
Growing concerns about climate change may result in the imposition of additional regulations or restrictions to which we may become subject. Climate changes include changes in rainfall and in storm patterns and intensities, water shortages, significantly changing sea levels and increasing atmospheric and water temperatures, among others. A number of governments or governmental bodies have introduced or are contemplating regulatory changes in response to climate change, including regulating greenhouse gas emissions. Potentially, additional U.S. federal regulation may be forthcoming with respect to greenhouse gas emissions (including carbon dioxide) and/or “cap and trade” legislation that could impact our operations. The outcome of new legislation or regulation in the U.S. and other jurisdictions in which we operate may result in new or additional requirements, additional charges to fund energy efficiency activities, and fees or restrictions on certain activities. Furthermore, the potential impact of climate change and related regulation on our customers is highly uncertain and there can be no assurance that it will not have an adverse effect on our business, financial condition, cash flows or results of operations.
Risks Related to Our Securities
TPG and FPA, collectively, have significant influence over us, which could limit your ability to influence the outcome of key transactions, including a change of control.
TPG and FPA (and their affiliates), collectively, owned approximately 63.2% of our outstanding common stock as of September 30, 2018. Because of the degree of concentration of voting power, the ability to elect members of and representation on our board of directors (the "Board") and influence our business and affairs, including any determinations with respect to mergers or other business combinations, the acquisition or disposition of assets, the incurrence of indebtedness, the issuance of any additional shares of our common stock or other equity securities, the repurchase or redemption of shares of our common stock and the payment of dividends, may be diminished.
Our stock price could be extremely volatile, and, as a result, you may not be able to resell your shares at or above the price you paid for them.
In recent years the stock market in general has been highly volatile. As a result, the market price and trading volume of our common stock is likely to be similarly volatile, and investors in our common stock may experience a decrease, which could be substantial, in the value of their stock, including decreases unrelated to our results of operations or prospects, and could lose part or all of their investment. The price of our common stock could be subject to wide fluctuations in response to a number of factors, including those described elsewhere in this Annual Report on Form 10-K and our other filings with the SEC such as:
operating results could fluctuate on a quarterly basis as a result of a number of factors, including, among other things, the timing of contracts, orders, the delay or cancellation of a contract, and changes in government regulations;
actual or anticipated fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;
changes in the market’s expectations about our operating results;
our operating results failing to meet the expectation of securities analysts or investors in a particular period;
changes in financial estimates and recommendations by securities analysts concerning us or the specialty chemicals industry in general;
operating and stock price performance of other companies that investors deem comparable to us;
low trading volume of our common stock may adversely affect its liquidity and reduce the number of market makers and/or large investors willing to trade in our common stock, making wider fluctuations in the quoted price of our common stock more likely to occur;
our ability to market new and enhanced products on a timely basis;
changes in laws and regulations affecting our business;
our ability to meet compliance requirements;
commencement of, or involvement in, litigation involving us;
changes in our capital structure, such as future issuances of securities or the incurrence of additional debt;
the volume of shares of our common stock available for public sale;
any major change in the Board or management;
sales of substantial amounts of common stock by our directors, executive officers or significant stockholders or the perception that such sales could occur; and
general economic and political conditions such as recessions, interest rates, fuel prices, international currency fluctuations and acts of war or terrorism.
Securities class action litigation has often been initiated against companies following periods of volatility in their stock price. This type of litigation could result in substantial costs and divert our management’s attention and resources, and could also require us to make substantial payments to satisfy judgments or to settle litigation.
There may be sales of a substantial amount of our common stock by our current stockholders, and these sales could cause the price of our common stock to fall.
As of November 30, 2018, there were 89,755,231 shares of common stock issued and 89,698,331 shares outstanding. Of our issued and outstanding shares that were issued prior to the Business Combination, all are freely transferable, except for any shares held by our "affiliates," as that term is defined in Rule 144 under the Securities Act. Future sales of our common stock may cause the market price of our common stock to drop significantly, even if our business is doing well.
We and certain of our current stockholders may sell large amounts of our common stock in the open market or in privately negotiated transactions, which could have the effect of increasing the volatility in our stock price or putting significant downward pressure on the price of our common stock.
Sales of substantial amounts of our common stock in the public market, or the perception that such sales will occur, could adversely affect the market price of our common stock and make it difficult for us to raise funds through securities offerings in the future.
Future issuances of capital stock could reduce your influence over matters on which stockholders vote.
The Board has the authority, without action or vote of our stockholders, to issue all or any part of our authorized but unissued shares of common stock, including shares issuable upon the exercise of options, or shares of our authorized but unissued preferred stock. Issuances of common stock or voting preferred stock would reduce your influence over matters on which our stockholders vote and, in the case of issuances of preferred stock, would likely result in your interest in us being subject to the prior rights of holders of that preferred stock. However, as previously noted, the Univar Merger Agreement contains customary covenants which restrict us, without Univar's consent, from taking certain specified actions until the proposed transaction closes or the Univar Merger Agreement terminates. Such restrictions preclude us from issuing any shares of our capital stock, subject to customary exceptions.
Warrants are exercisable for our common stock, which, if exercised, would increase the number of shares eligible for future resale in the public market and result in dilution to our stockholders.
As of November 30, 2018, outstanding warrants to purchase an aggregate of 25,012,500 shares of our common stock were exercisable in accordance with the terms of the warrant agreement governing those securities. These warrants will expire at 5:00 p.m., New York time, on June 9, 2021 or earlier upon redemption or liquidation. The exercise price of these warrants is $5.75 per half share, or $11.50 per one full share, subject to certain adjustments. To the extent such warrants are exercised, additional shares of our common stock will be issued, which will result in dilution to the holders of our common stock and increase the number of shares eligible for resale in the public market. Sales of substantial numbers of such shares in the public market or the fact that such warrants may be exercised could adversely affect the market price of our common stock.
If securities or industry analysts do not publish or cease publishing research or reports about us, our business, or our market, or if they change their recommendations regarding our common stock adversely, the price and trading volume of our common stock could decline.
The trading market for our common stock will likely be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market, or our competitors. Securities and industry analysts do not currently, and may never, publish research on us. If no securities or industry analysts commence coverage of us, our stock price and trading volume would likely be negatively impacted. If any of the analysts who may cover us change their recommendation regarding our stock adversely, or provide more favorable relative recommendations about our competitors, the price of our common stock would likely decline. If any analyst who may cover us were to cease coverage of us or fail to regularly publish reports on it, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
Anti-takeover provisions contained in our certificate of incorporation and bylaws could impair a takeover attempt.
Our second amended and restated certificate of incorporation, or charter, and bylaws contain provisions that could have the effect of delaying or preventing changes in control or changes in our management without the consent of the Board. These provisions include:
a staggered board providing for three classes of directors, which limits the ability of a stockholder or group to gain control of the Board;
no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;
the right of the Board to elect a director to fill a vacancy created by the expansion of the Board or the resignation, death, or removal of a director in certain circumstances, which prevents stockholders from being able to fill vacancies on the Board;
the ability of the Board to determine whether to issue shares of our preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;
a prohibition on stockholder action by written consent upon and following the date when TPG and the Sponsor cease to own more than 30% of the outstanding shares of stock (the "Trigger Date"), which forces stockholder action to be taken at an annual or special meeting of our stockholders;
a prohibition on stockholders calling a special meeting upon and following the Trigger Date, which forces stockholder action to be taken at an annual or special meeting of our stockholders;
the requirement that a meeting of stockholders may be called only by the Board after the Trigger Date, which may delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors;
providing that after the Trigger Date directors may be removed prior to the expiration of their terms by stockholders only for cause or upon the affirmative vote of 75% of the voting power of all of our outstanding shares of capital stock;
a requirement that changes or amendments to the charter or the bylaws must be approved (i) before the Trigger Date, by a majority of the voting power of our outstanding common stock, which such majority shall include at least 65% of the shares then held by the Sponsor and TPG, and (ii) thereafter, certain changes or amendments must be approved by at least 75% of the voting power of our outstanding common stock; and
advance notice procedures that stockholders must comply with in order to nominate candidates to the Board or to propose matters to be acted upon at a stockholders’ meeting, which may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of the Company.
These provisions, alone or together, could delay hostile takeovers and changes in control of us or changes in our management. Any provision of the charter or bylaws that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our common stock.
We have no current plans to pay cash dividends on our common stock for the foreseeable future.
We may retain future earnings, if any, for future operations, expansion and debt repayment and have no current plans to pay any cash dividends for the foreseeable future. Any decision to declare and pay dividends as a public company in the future will be made at the discretion of the Board and will depend on, among other things, our results of operations, financial condition, cash requirements, contractual restrictions and other factors that the Board may deem relevant. In addition, our ability to pay dividends may be limited by covenants of any existing and future outstanding indebtedness we or our subsidiaries incur, including the Credit Facilities. As a result, a stockholder may not receive any return on an investment in our common stock unless such stockholder sells our common stock for a price greater than that which it paid for it.
Our securities may be delisted from NASDAQ.
Our common stock and warrants are currently listed on NASDAQ. However, we cannot assure you that we will be able to comply with the continued listing standards of NASDAQ. If we fail to comply with the continued listing standards of NASDAQ, our securities may become subject to delisting. If NASDAQ delists our common stock or warrants from trading on its exchange for failure to meet the continued listing standards, we and our security holders could face significant material adverse consequences including:
a limited availability of market quotations for our securities;
a limited amount of analyst coverage; and
a decreased ability for us to issue additional securities or obtain additional financing in the future.
Item 1B. Unresolved Staff Comments
Item 2. Properties
See "Item 1. Business—Global Distribution Channels —Facilities" for a description of our principal properties.
Item 3. Legal Proceedings
We are not currently a party to any legal proceedings that, if determined adversely against us, individually or in the aggregate, would have a material adverse effect on our financial position, results of operations or cash flows.
In July 2014, Ashland filed a lawsuit -- 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 sought a declaration that Holdings was obligated to indemnify Ashland for losses Ashland incurred pertaining to the Other Retained Remediation Liabilities, up to the amount of a $5.0 million deductible, which Ashland contended applied pursuant to the ADA Purchase Agreement. Ashland further alleged that Solutions breached duties related to that agreement by not having so indemnified Ashland for amounts Ashland incurred for the Other Retained Remediation Liabilities at sites where Ashland disposed of wastes prior to the Ashland Distribution Acquisition, and on that basis sought unspecified compensatory damages, costs and attorney’s fees. On June 21, 2017 the Company's Motion for Summary Judgment in this lawsuit was granted. Ashland appealed the ruling on July 20, 2017. On January 31, 2018, the Delaware Supreme Court affirmed the lower court's grant of the Company's Motion for Summary Judgment. Ashland did not request a rehearing of the ruling. Therefore, the judgment in the Company's favor is final and this matter is closed. The Company does not currently have any environmental or remediation reserves for matters covered under the ADA Purchase Agreement.
In June 2014, we self-disclosed to the DTSC that an inventory of our Fairfield facility had revealed potential violations of RCRA and the California Health and Safety Code. Although no formal proceeding has been initiated, we expect the DTSC to seek payment of fines or other penalties for non-compliance. We do not expect the amount of any such fine or penalty to have a material adverse effect on our business, financial position or results of operations.
We expect that, from time to time, we may be involved in lawsuits, investigations and claims arising out of our operations in the ordinary course of business.
Item 4. Mine Safety Disclosures
Item 5. Market for Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company's common stock, warrants and units are currently quoted on NASDAQ under the symbols "NXEO", "NXEOW" and "NXEOU", respectively.
Common Stock, Warrants and Units Prices
The following table sets forth, for the periods indicated, the reported high and low sales prices for our common stock, warrants and units.
Fiscal Year 2018:
Fiscal Year 2017:
As of November 30, 2018, there were 96 holders of record of our common stock, one holder of record for our warrants and one holder of record of our units. Some of our securities are held in "street name" and held of record by banks, brokers and other financial institutions.
We have not paid any cash dividends on shares of our common stock to date. The payment of cash dividends in the future will be dependent upon our revenues and earnings, capital requirements and general financial condition. In addition, our Credit Facilities currently limit our ability to pay dividends and our board of directors is not currently contemplating and does not anticipate declaring any dividends in the foreseeable future. Further, if we incur any additional indebtedness, our ability to declare dividends may be limited by restrictive covenants that we may agree to in connection therewith.
Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
The Company is the result of the Business Combination between WLRH and Holdings as of the Closing Date and referred to as the "Successor". The "Predecessor" financial information reflects the operations of Holdings prior to the Closing Date of the Business Combination.
This table should be read in conjunction with Item 1 "Business", Item 1A "Risk Factors", Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations" and our audited consolidated financial statements and the notes thereto included under Item 8 of this Annual Report on Form 10-K.
Fiscal Year Ended September 30,
October 1, 2015 Through June 8,
Fiscal Year Ended September 30,
Statement of Operations Data:
Sales and operating revenues
Net income (loss) from continuing operations
Net income (loss) attributable to Nexeo Solutions, Inc.
Net income (loss) per share available to common stockholders
Weighted average number of common shares outstanding
Statement of Cash Flow Data (1):
Net cash provided by (used in):
Other Financial Data(2):
Capital expenditures, excluding acquisitions (3)
Depreciation, amortization and impairment loss
*The fiscal year ended September 30, 2016 includes 114 days of the acquired business’ operating activities as a result of the consummation of the Business Combination on June 9, 2016.