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2017-10-01 2017-12-31 0001604416 srt:NorthAmericaMember 2018-10-01 2018-12-31 0001604416 country:CA 2017-10-01 2017-12-31 0001604416 us-gaap:EMEAMember 2017-10-01 2017-12-31 0001604416 nexeo:OtherNorthAmericaMember 2017-10-01 2017-12-31 0001604416 srt:AsiaMember 2017-10-01 2017-12-31 0001604416 us-gaap:OperatingSegmentsMember us-gaap:AllOtherSegmentsMember 2018-09-30 0001604416 us-gaap:OperatingSegmentsMember nexeo:PlasticsMember 2018-09-30 0001604416 us-gaap:CorporateNonSegmentMember 2018-09-30 0001604416 us-gaap:OperatingSegmentsMember us-gaap:AllOtherSegmentsMember 2018-12-31 0001604416 us-gaap:CorporateNonSegmentMember 2018-12-31 0001604416 us-gaap:OperatingSegmentsMember 2018-09-30 0001604416 us-gaap:OperatingSegmentsMember nexeo:PlasticsMember 2018-12-31 0001604416 us-gaap:OperatingSegmentsMember nexeo:ChemicalsMember 2018-12-31 0001604416 us-gaap:OperatingSegmentsMember 2018-12-31 0001604416 us-gaap:OperatingSegmentsMember nexeo:ChemicalsMember 2018-09-30 xbrli:shares nexeo:interest_rate_swap iso4217:USD xbrli:shares iso4217:USD xbrli:pure nexeo:vote nexeo:segment nexeo:country
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
(Mark One)
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the quarterly period ended December 31, 2018
or 
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the transition period from                 to             
Commission File Number: 001-36477
 
 
NEXEO SOLUTIONS, INC.
(Exact name of registrant as specified in its charter) 
Delaware
 
46-5188282
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
3 Waterway Square Place, Suite 1000
The Woodlands, Texas
 
77380
(Address of principal executive offices)
 
(Zip Code)
 
(281) 297-0700
(Registrant’s telephone number, including area code)
 
 
  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  o
 
Indicate by check mark whether the registrant has submitted electronically 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).    Yes  ý    No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer o
 
Accelerated filer   x
 
 
 
Non-accelerated filer   o
 
Smaller reporting company  o
 
 
Emerging growth company  o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No  ý

As of February 1, 2019, there were 89,698,331 shares of the Company’s common stock outstanding.


Table of Contents

TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 

2

Table of Contents

Glossary

The following terms and abbreviations appearing in the text of this report have the meanings indicated below.
2016 LTIP
The Nexeo Solutions, Inc. 2016 Long Term Incentive Plan
ABL Borrowers
Holdings, Sub Holding and Solutions together with Nexeo Solutions Canada Corporation
ABL Facility
The asset-based credit facility pursuant to that certain asset-based credit agreement by and among the ABL Borrowers, Bank of America, N.A., as administrative agent and the lenders party thereto and the other parties thereto
ASC
The FASB Accounting Standards Codification
ASU
Accounting Standards Update issued by the FASB
Blocker
TPG Accolade Delaware, L.P.
Blocker Merger
The merger of Blocker Merger Sub into Blocker on June 9, 2016, immediately following the Company Merger, with Blocker continuing as the surviving entity
Blocker Merger Sub
Neon Acquisition Company LLC, which was a wholly-owned subsidiary of WLRH at the time of the Blocker Merger
Business Combination
The business combination between WLRH and Holdings pursuant to the Merger Agreement, which was consummated on the Closing Date
CAD
Canadian dollar
Canadian Tranche
Canadian tranche of the ABL Facility
Closing Date
June 9, 2016
Company / Nexeo
Nexeo Solutions, Inc. (f/k/a WL Ross Holding Corp.) and its consolidated subsidiaries
Company Merger
The merger of Company Merger Sub with and into Holdings consummated on June 9, 2016, with Holdings continuing as the surviving entity
Company Merger Sub
Neon Holding Company LLC, which was a wholly-owned subsidiary of WLRH at the time of the Company Merger
Credit Facilities
The ABL Facility and the Term Loan Facility, collectively
Deferred Cash Consideration
The deferred payment to be made in cash to the Selling Equityholders pursuant to the Merger Agreement, where such deferred cash payments will generally be in an amount equal to the Company’s prevailing stock price at the time that the Company pays such deferred cash payments multiplied by the number of Excess Shares or as otherwise set forth in the Merger Agreement
DTSC
California Department of Toxic Substances Control
EBITDA
Earnings before interest, tax, depreciation and amortization
EMEA
Europe, Middle East and Africa
ERP
Enterprise resource planning
Excess Shares
The 5,178,642 shares of Company common stock used to calculate the Deferred Cash Consideration payable to the Selling Equityholders pursuant to the Merger Agreement
Exchange Act
U.S. Securities Exchange Act of 1934, as amended
FASB
Financial Accounting Standards Board
FILO Tranche
$30.0 million tranche within the ABL Facility for non-Canadian foreign subsidiaries to issue loans and letters of credit
Founder Shares
The 12,506,250 shares of Company common stock issued to the Sponsor at the time of the IPO
GDP
Gross domestic product
Holdings
Nexeo Solutions Holdings, LLC
HSR Act
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
IPO
The initial public offering of WLRH, consummated on June 11, 2014
Merger Agreement
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
Mergers
The Company Merger and the Blocker Merger, collectively

3

Table of Contents

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
Montgomery Lease
The Company’s leased facility in Montgomery, Illinois commencing in the first fiscal quarter of 2017
NASDAQ
NASDAQ Stock Market
NYSE
New York Stock Exchange
Peso
Mexican peso
Predecessor
Holdings and its subsidiaries for the periods prior to the Closing Date
PSLRA
U.S. Private Securities Litigation Reform Act of 1995
PSU
Performance share unit issued under the 2016 LTIP
RCRA
U.S. Resource Conservation and Recovery Act
RMB
Chinese renminbi
RSU
Restricted stock unit issued under the 2016 LTIP
Ryder
Ryder Truck Rental, Inc.
Ryder Lease
Lease agreement entered into by and between the Predecessor and Ryder in May 2015 for certain transportation equipment
SAFE
People’s Republic of China State Administration of Foreign Exchange
SEC
U.S. Securities and Exchange Commission
Secured Net Leverage Ratio
The ratio of Consolidated Total Indebtedness divided by EBITDA (terms as defined in the Term Loan Facility agreement)
Securities Act
U.S. Securities Act of 1933, as amended
Selling Equityholders
The holders of equity interests in Holdings (other than Blocker) and the holders of equity interests in Blocker, in each case, as of the time immediately prior to the Business Combination
Solutions
Nexeo Solutions, LLC
Sponsor
WL Ross Sponsor LLC, the sponsor entity of WLRH prior to the Business Combination.
Sub Holding
Nexeo Solutions Sub Holding Corp.
Tax Act
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. 2
The amendment to the Term Loan Facility dated December 19, 2017
TPG
TPG Capital, L.P. together with its affiliates, including TPG Accolade
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
TRA
The Tax Receivable Agreement entered into in connection with the Business Combination, by and between the Company and the Selling Equityholders, dated as of June 9, 2016
TRA Holders
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.
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 Group
The Mexico City, Mexico based chemicals distribution business of Ultra Chem, S. de R.L. de C.V. and its related entities

4

Table of Contents

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
Univar, Inc.
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.
U.S.
United States of America
USD
U.S. Dollar
U.S. GAAP
U.S. Generally accepted accounting principles
U.S. Tranche
U.S. Tranche of the ABL Facility
WLRH
WL Ross Holding Corp.


5

Table of Contents

Forward-Looking Statements

Certain information and statements contained in this Quarterly Report on Form 10-Q are forward-looking statements within the meaning of the PSLRA codified at Section 27A of the Securities Act, and Section 21E of the Exchange Act. This statement is included for purposes of complying with the safe harbor provisions of the PSLRA. Forward-looking statements include statements regarding our expectations, beliefs, intentions, plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements that are other than statements of historical facts. These statements may be identified, without limitation, by the use of forward-looking terminology such as “anticipate,” “assume,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “may,” “will,” “could,” “would” and similar expressions. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider any such list to be a complete set of all potential risks, including cybersecurity risks, or uncertainties, and we urge you not to place undue reliance on any forward-looking statements, which reflect management’s current expectations and assumptions about future events, and which are based on currently available information as to the timing and outcome of future events. Certain forward-looking statements are included in this Quarterly Report on Form 10-Q, principally in the section captioned “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements set forth in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018 filed with the SEC on December 6, 2018.
 
These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effect on us. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate. Unless otherwise indicated or the context otherwise requires, comments concerning our expectations for future revenues and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions. Our forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections. These factors are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could have material adverse effects on our future results.

Our future results will depend upon various other risks and uncertainties, including those described in the section captioned “Item 1A. Risk Factors” in Part I of our Annual Report on Form 10-K for the fiscal year ended September 30, 2018 filed with the SEC on December 6, 2018. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise. All forward-looking statements attributable to us are qualified in their entirety by this cautionary statement.



6

Table of Contents

PART I
Item 1. Financial Statements


Nexeo Solutions, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited, in millions, except share amounts and par value)
 
December 31, 2018
 
September 30, 2018
Current Assets
 

 
 

Cash and cash equivalents
$
54.6

 
$
58.9

Accounts and notes receivable (net of allowance for doubtful accounts of $3.9 million and $4.2 million, respectively)
549.5

 
607.8

Inventories
360.5

 
338.8

Income taxes receivable
6.4

 
5.9

Other current assets
16.9

 
17.3

Total current assets
987.9

 
1,028.7

 
 
 
 
Non-Current Assets
 

 
 

Property, plant and equipment, net
279.1

 
284.9

Goodwill
697.6

 
699.9

Other intangible assets, net of amortization
204.0

 
211.6

Deferred income taxes
1.5

 
2.3

Other non-current assets
9.0

 
16.2

Total non-current assets
1,191.2

 
1,214.9

Total Assets
$
2,179.1

 
$
2,243.6

 
 
 
 
Current Liabilities
 

 
 

Short-term borrowings, current portion of long-term debt and capital lease obligations
$
49.3

 
$
47.7

Accounts payable
308.1

 
380.1

Accrued expenses and other liabilities
38.8

 
67.2

Due to related party pursuant to contingent consideration obligations
14.5

 
14.7

Income taxes payable
2.7

 
2.9

Total current liabilities
413.4

 
512.6

 
 
 
 
Non-Current Liabilities
 

 
 

Long-term debt and capital lease obligations, less current portion, net
805.1

 
752.4

Deferred income taxes
29.0

 
30.7

Due to related party pursuant to contingent consideration obligations
100.1

 
122.8

Other non-current liabilities
12.0

 
10.6

Total non-current liabilities
946.2

 
916.5

Total Liabilities
1,359.6

 
1,429.1

 
 
 
 
Commitments and Contingencies (see Note 14)


 


 
 
 
 
Equity
 

 
 

Preferred stock, $0.0001 par value (1,000,000 shares authorized, none issued and outstanding as of December 31, 2018 and September 30, 2018)

 

Common stock, $0.0001 par value (300,000,000 shares authorized; 89,755,231 shares issued and 89,698,331 shares outstanding as of December 31, 2018 and 89,747,062 shares issued and 89,727,546 shares outstanding as of September 30, 2018)

 

Additional paid-in capital
773.3

 
771.5

Retained earnings
50.4

 
34.2

Accumulated other comprehensive income (loss)
(3.6
)
 
9.0

Treasury stock, at cost: 56,900 and 19,516 shares as of December 31, 2018 and September 30, 2018
(0.6
)
 
(0.2
)
Total equity
819.5

 
814.5

Total Liabilities and Equity
$
2,179.1

 
$
2,243.6

 

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

7

Table of Contents

Nexeo Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited, in millions, except share amounts and per share data) 
 
Three Months Ended December 31,
 
2018
 
2017
Sales and operating revenues
$
935.8

 
$
929.6

Cost of sales and operating expenses
837.1

 
822.7

Gross profit
98.7

 
106.9

Selling, general and administrative expenses
79.8

 
84.8

Transaction related costs
8.2

 
0.1

Change in fair value of contingent consideration obligations
(22.9
)
 
(18.6
)
Operating income
33.6

 
40.6

Other income, net
0.1

 
0.1

Interest income (expense)


 
 
Interest income
0.2

 
0.1

Interest expense
(13.5
)
 
(13.0
)
Net income before income taxes
20.4

 
27.8

Income tax expense
4.2

 
1.3

Net income
$
16.2

 
$
26.5

 
 
 
 
Net income per share available to common stockholders
 
 
 
    Basic
$
0.21

 
$
0.35

    Diluted
$
0.21

 
$
0.34

Weighted average number of common shares outstanding
 
 
 
    Basic
76,945,078

 
76,793,518

    Diluted
77,094,430

 
77,139,236



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


8

Table of Contents

Nexeo Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited, in millions) 
 
Three Months Ended December 31,
 
2018
 
2017
Net income
$
16.2

 
$
26.5

Unrealized foreign currency translation gain (loss), net of tax (1)
(6.9
)
 
1.1

Unrealized gain (loss) on interest rate hedges, net of tax (2)
(5.7
)
 
1.9

Other comprehensive income (loss), net of tax
(12.6
)
 
3.0

Total comprehensive income, net of tax
$
3.6

 
$
29.5


(1)
Tax effects are not material.
(2) 
Tax impact of the unrealized gains and losses related to the interest rate swaps was $2.0 million and $0.6 million for the three months ended December 31, 2018 and 2017, respectively.

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


9

Table of Contents

Nexeo Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Equity
(Unaudited, in millions, except share amounts)
 
Common Stock
 
Treasury Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Balance at September 30, 2018
89,727,546

 
$


19,516

 
$
(0.2
)
 
$
771.5


$
34.2


$
9.0


$
814.5

Vesting of restricted stock units
8,169

 

 

 

 

 

 

 

Shares associated with employee tax withholding for vesting of certain equity awards
(37,384
)
 

 
37,384

 
(0.4
)
 

 

 

 
(0.4
)
Equity-based compensation

 

 

 

 
1.8

 

 

 
1.8

Comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
        Net income

 

 

 

 

 
16.2

 

 
16.2

Other comprehensive loss

 

 

 

 

 

 
(12.6
)
 
(12.6
)
Balance at December 31, 2018
89,698,331

 
$

 
56,900

 
$
(0.6
)
 
$
773.3

 
$
50.4

 
$
(3.6
)
 
$
819.5


 
Common Stock
 
Treasury Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income
 
Total
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Balance at September 30, 2017
89,344,065

 
$

 
9,576

 
$
(0.1
)
 
$
764.4

 
$
4.8

 
$
8.5

 
$
777.6

Issuance of restricted stock
415,867

 

 

 

 

 

 

 

Vesting of restricted stock units
8,162

 

 

 

 

 

 

 

Forfeiture of restricted stock award
(24,008
)
 

 

 

 

 

 

 

Shares associated with employee tax withholding for vesting of certain equity awards
(2,777
)
 

 
2,777

 

 

 

 

 

Equity-based compensation

 

 

 

 
1.7

 

 

 
1.7

Comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
        Net income

 

 

 

 

 
26.5

 

 
26.5

Other comprehensive income

 

 

 

 

 

 
3.0

 
3.0

Balance at December 31, 2017
89,741,309

 
$

 
12,353

 
$
(0.1
)
 
$
766.1

 
$
31.3

 
$
11.5

 
$
808.8


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

10

Table of Contents

Nexeo Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited, in millions)
 
Three Months Ended December 31,
 
2018
 
2017
Cash flows from operations
 

 
 
Net income
$
16.2

 
$
26.5

Adjustments to reconcile to cash flows from operations:
 

 
 
Depreciation and amortization
17.2

 
19.5

Debt issuance costs amortization, debt issuance costs write-offs and original issue discount amortization
1.2

 
1.1

Provision for bad debt
(0.2
)
 
0.3

Deferred income taxes
1.6

 
(1.8
)
Equity-based compensation expense
1.8

 
1.7

Change in fair value of contingent consideration obligations
(22.9
)
 
(18.6
)
Changes in assets and liabilities:
 

 
 
Accounts and notes receivable
55.8

 
36.9

Inventories
(23.1
)
 
(50.5
)
Other current assets
(0.3
)
 
(1.6
)
Accounts payable
(70.7
)
 
(60.8
)
Accrued expenses and other liabilities
(26.4
)
 
(12.6
)
Changes in other operating assets and liabilities, net
(0.4
)
 
0.7

Net cash used in operating activities
(50.2
)
 
(59.2
)
Cash flows from investing activities
 

 
 
Additions to property and equipment
(4.8
)
 
(4.1
)
Proceeds from the disposal of property and equipment

 
0.6

Cash paid for asset acquisitions
(1.7
)
 

Net cash used in investing activities
(6.5
)
 
(3.5
)
Cash flows from financing activities
 
 
 
Cash paid to TPG related to TRA

 
(4.2
)
Proceeds from short-term debt
29.6

 
27.9

Repayments of short-term debt
(28.0
)
 
(31.6
)
Proceeds from issuance of long-term debt
252.7

 
231.7

Repayments of long-term debt and capital lease obligations
(200.7
)
 
(172.9
)
Payment of debt issuance costs

 
(0.8
)
Net cash provided by financing activities
53.6

 
50.1

Effect of exchange rate changes on cash and cash equivalents
(1.2
)
 
0.1

Decrease in cash and cash equivalents
(4.3
)
 
(12.5
)
Cash and cash equivalents at the beginning of the period
58.9

 
53.9

Cash and cash equivalents at the end of the period
$
54.6

 
$
41.4

Supplemental disclosure of cash flow information:
 

 
 
Cash paid during the period for interest
$
12.4

 
$
14.0

Cash paid during the period for taxes (net of refunds)
$
3.0

 
$
1.6

Supplemental disclosure of non-cash investing activities:
 
 
 
Non-cash capital expenditures
$
1.9

 
$
1.4


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

11

Table of Contents

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

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information. As such, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments, except as disclosed herein) considered necessary for a fair statement have been included. Results of operations for the three months ended December 31, 2018 are not necessarily indicative of results to be expected for the fiscal year ending September 30, 2019. Quarterly financial data should be read in conjunction with the consolidated financial statements and accompanying notes for the fiscal year ended September 30, 2018 included in the Company's Annual Report on Form 10-K filed with the SEC on December 6, 2018.

The consolidated financial data as of September 30, 2018 presented in these unaudited condensed consolidated financial statements were derived from the Company’s audited consolidated financial statements, but do not include all disclosures required by U.S. GAAP.

Nature of Operations

The Company is a global materials distributor for chemicals products in North America and Asia and for plastics products in North America, EMEA and Asia. In North America, primarily in the U.S., the Company provides on-site and off-site hazardous and non-hazardous environmental services, including waste collection, transportation, recovery, disposal arrangement and recycling services. The Company offers its customers products used in a broad cross-section of end markets including household, industrial and institutional, lubricants, performance coatings (including architectural coatings, adhesives, sealants and elastomers), automotive, healthcare, personal care, oil and gas and construction. In connection with the distribution of chemicals products, the Company provides value-added services such as custom blending, packaging and re-packaging, private-label manufacturing and product testing in the form of chemical analysis, product performance analysis and product development.

2. Recent Accounting Pronouncements
 
Recent Accounting Pronouncements Adopted

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in this ASU supersede the revenue recognition requirements in Topic 605, Revenue Recognition and require that revenue be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. These amendments are effective for annual reporting periods beginning after December 15, 2017 including interim reporting periods within that reporting period. The Company adopted this standard on October 1, 2018. For disclosures related to the adoption of this guidance, see Note 3.

In August 2016 the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.  This ASU made eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The new standard is effective for fiscal years beginning after December 15, 2017. The Company adopted this standard as of October 1, 2018 and it did not have a material effect on the Company’s financial position or results of operations.


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New Accounting Pronouncements Not Yet Adopted

The Company continues the evaluation of the potential effects on its financial position or results of operations of the accounting pronouncements disclosed in its consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2018 filed with the SEC on December 6, 2018, including ASU 2016-02, Leases. The Company is in the process of evaluating the potential effects of ASU 2016-02 and is formulating its implementation plan, including potential changes to accounting systems, policies and internal controls to support the adoption of the new guidance.

3. Revenue

On October 1, 2018, the Company adopted the new revenue standard and there were no adjustments recorded in connection with the adoption.

The Company generally disaggregates revenues from contracts with customers by its operating segments. Reportable segmentation reflects how the Company reviews the financial performance of its operations. The Company also disaggregates revenues by geography and for its Chemicals and Plastics operating segments, by product type. Disaggregation by geography and product type provides information relevant to understanding underlying economic and regional trends.

The following table disaggregates external customer net sales by geography:
 
Three Months Ended December 31, 2018
 
Chemicals
 
Plastics
 
Other
 
Consolidated
U.S.
$
393.4

 
$
262.4

 
$
41.0

 
$
696.8

Canada
23.0

 
21.9

 
0.2

 
45.1

Other North America
17.5

 
12.3

 

 
29.8

EMEA

 
120.0

 

 
120.0

Asia
4.6

 
39.5

 

 
44.1

Total external customer net sales
$
438.5

 
$
456.1

 
$
41.2

 
$
935.8


The following table disaggregates external customer net sales by specialties, non-specialties and environmental services:
 
Three Months Ended December 31, 2018
 
Chemicals
 
Plastics
 
Other
 
Consolidated
Specialty
$
136.5

 
$
218.9

 
$

 
$
355.4

Non-Specialty
302.0

 
237.2

 

 
539.2

Environmental Services

 

 
41.2

 
41.2

Total external customer net sales
$
438.5

 
$
456.1

 
$
41.2

 
$
935.8



Revenue is recognized when performance obligations are satisfied, which generally occurs when goods or services are transferred to the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. Payment terms and conditions may vary by regions where the Company operates; however, the term between invoicing and when payment is due is less than one year. As of December 31, 2018, none of the Company’s contracts contained a significant financing component.

The Company is generally the primary obligor in sales transactions with its customers and recognizes revenue primarily based on the gross amount billed to the customer. In sales transactions where the Company is not the primary obligor, it recognizes revenue on a net basis by recognizing only the commission retained from such sales and including that commission in sales and operating revenues in the condensed consolidated statements of operations.

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Consistent with industry standards, the Company may offer volume-based rebates to large customers if the customer purchases a specified volume with the Company over a specified time period. The Company utilizes its experience and access to relevant information to reasonably estimate the amounts of such deductions from gross revenues and regularly reviews the estimates and adjusts accordingly if and when actual experience differs from estimates.

Sales are reported net of tax assessed by governmental authorities. Shipping and handling activities are considered fulfillment costs, and the related amounts billed to customers are included in revenues.

Specialty

The Company classifies the products it sells as specialty products when the products have specified applications, are not easily duplicated and innovation is the main catalyst for product change. These products present higher costs to customers to make a change, have longer sales cycles and may include value added services that are critical to customer purchasing decisions.

Non-Specialty

Products which are not specifically classified as specialty products by the Company are classified as non-specialty products. Typically, attributes of non-specialty products include ease of product change, shorter sales cycles and increased market availability of substitute products. With some exceptions in the Plastics line of business, these attributes generally cause customers of non-specialty products to be more price sensitive.

Environmental Services

The Company generates revenue from environmental services as they are performed and the underlying economic value is transferred to customers. The Company’s environmental services provided to customers are related to waste management services, including on-site services on customer premises and offsite. These services include the collection, recycling and arrangement for disposal of both hazardous and non-hazardous waste products.

Costs to Obtain or Fulfill Contracts with Customers

The Company does not incur significant costs to obtain contracts and therefore none have been capitalized.

Deferred Revenue

While the Company typically bills the customer when products are transferred into the control of the customer, the Company occasionally collects revenues from customers in bill and hold or other similar arrangements or when customers have provided the Company with consideration prior to the Company satisfying a performance obligation.  The Company recognizes these prepayments as deferred revenues and the balances as of December 31, 2018 and September 30, 2018 were not material.

4. Acquisitions

Merger Agreement with Univar

On September 17, 2018, Nexeo and Univar entered into the Univar Merger Agreement providing for the acquisition of Nexeo by Univar.

Subject to the terms and conditions set forth in the Univar Merger Agreement, holders of Nexeo’s common stock will receive (A) the Cash Consideration, described below, and (B) 0.305 of a share of Univar common stock (referred to as the "Stock Consideration").


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The “Cash Consideration” will be $3.29 per share, subject to reduction by up to $0.41 per share based on the closing price of Univar common stock on the day prior to the closing of the proposed transaction. The Cash Consideration will be reduced on a linear basis between $3.29 per share and $2.88 per share to the extent that the closing price of Univar common stock is between $25.34 and $22.18. If the closing price of Univar common stock is $22.18 per share or lower, the Cash Consideration will be $2.88 per share. If the closing price of Univar common stock on is $25.34 per share or higher, the Cash Consideration will be $3.29 per share.

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 (which occurred on January 29, 2019) 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. Additional required filings have been made with other regulatory agencies in certain foreign jurisdictions and the process is ongoing.

The Univar Merger Agreement contains customary representations and warranties made by each of Univar and Nexeo, and also contains customary pre-closing covenants, including covenants, among others, by each of Univar and Nexeo to operate its respective businesses in the ordinary course consistent with past practice and to refrain from taking certain actions without the other party’s consent during the period prior to closing.

The proposed transaction is expected to close in the first quarter of 2019. Transaction costs incurred by the Company associated with the Univar Merger Agreement were $8.2 million during the three months ended December 31, 2018.

Asset Acquisitions

In December 2016, the Company acquired customer contracts and a customer list. Additionally, in connection with this transaction, the Company entered into a supply agreement and a licensing agreement granting the Company the non-exclusive use of a certain trademark. The total consideration associated with this transaction was $8.5 million, of which $5.1 million was paid at closing and $1.7 million was paid in January 2018 and December 2018. The Company recognized intangible assets totaling $8.5 million in December 2016 which are included in Other intangible assets, net of amortization on the Company’s condensed consolidated balance sheets. The acquired intangible assets will be fully amortized over estimated useful lives ranging between 10 and 13 years.

5. Certain Balance Sheet Information

Cash and Cash Equivalents
 
Cash and cash equivalents were $54.6 million as of December 31, 2018 and $58.9 million as of September 30, 2018. These amounts included the following:
 
December 31, 2018
 
September 30, 2018
Cash held by foreign subsidiaries
$
45.7

 
$
52.9

Non-USD denominated currency held by foreign subsidiaries
$
44.3

 
$
48.8

Currency denominated in RMB
$
3.5

 
$
6.5



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

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Inventories

Inventories at December 31, 2018 and September 30, 2018 consisted of the following:
 
December 31, 2018
 
September 30, 2018
Finished products
$
355.6

 
$
334.0

Supplies
4.9

 
4.8

Total
$
360.5

 
$
338.8



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

Other Non-Current Assets

Other non-current assets at December 31, 2018 and September 30, 2018 consisted of the following:
 
December 31, 2018
 
September 30, 2018
Debt issuance costs of the ABL Facility
$
3.5

 
$
3.8

Deposits
2.0

 
2.5

Interest rate swap (1)
1.8

 
8.0

Other
1.7

 
1.9

Total
$
9.0

 
$
16.2

(1) See Note 9 for additional information.

Amortization of debt issuance costs related to the ABL Facility recorded in Interest expense in the condensed consolidated statements of operations was $0.3 million for the three months ended December 31, 2018 and 2017.


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Due to Related Party Pursuant to Contingent Consideration Obligations

Contingent Consideration - Deferred Cash Consideration

The contingent consideration associated with the Deferred Cash Consideration will be an amount in cash equal to the prevailing price of the Company’s common stock at the time that the Company pays such deferred cash payment multiplied by the number of Excess Shares (5,178,642 Excess Shares as of December 31, 2018).  Based on the terms of the Excess Shares, certain circumstances require the Company to pay all or a portion of the Deferred Cash Consideration to the Selling Equityholders, where such cash amount is calculated as set forth in the Merger Agreement, including (i) where the volume weighted average trading price of the Company’s common stock for any period of 20 trading days in any 30 trading day period exceeds $15.00 per share, and (ii) if any Excess Shares remain on June 30, 2021. If any Excess Shares remain on June 30, 2021, the Company must elect to either (i) within five business days of such date, pay the Selling Equityholders an amount in cash equal to the product of the number of remaining Excess Shares multiplied by the volume weighted-average trading price for the 20 trading day period immediately preceding such date or (ii) use reasonable best efforts to sell such shares to a third party in a primary offering and pay the gross proceeds thereof (less any underwriting discounts and commissions) to the Selling Equityholders. However, to the extent the number of shares issued in such offerings does not equal the full amount of Excess Shares remaining at the time of the offering, the Company’s obligations with respect to any remaining Excess Shares, including the obligation to continue to complete any necessary additional offerings, shall continue.

In order to estimate the fair value of the Deferred Cash Consideration, the Company estimates the value of the Excess Shares using a Monte Carlo simulation model. The estimated fair value of the Deferred Cash Consideration liability was $43.5 million and $62.7 million as of December 31, 2018 and September 30, 2018, respectively. See Note 10.

Upon consummation of the Univar Merger Agreement, the obligation to pay the Deferred Cash Consideration will be accelerated. The Deferred Cash Consideration will be calculated as an amount in cash equal to the Excess Shares multiplied by an amount equal to the Cash Consideration plus the implied value of the Stock Consideration based on the closing trading price of Univar's common stock on the day prior to the completion of the proposed transaction.

Contingent Consideration - TRA

Concurrent with the completion of the Business Combination, the Company incurred the liability for contingent consideration related to the TRA, which reflects amounts owed to the Selling Equityholders. This liability generally provides for the payment by the Company to the Selling Equityholders of 85% of the net cash savings, if any, in U.S. federal, state and local income taxes that the Company actually realizes (or is deemed to realize in certain circumstances) in periods after the Closing Date as a result of (i) certain increases in tax basis resulting from the Company Merger, (ii) certain tax attributes of Holdings existing prior to the Mergers, (iii) net operating losses and certain other tax attributes of Blocker available to the Company as a result of the Blocker Merger and (iv) imputed interest deemed to be paid by the Company as a result of, and additional tax basis arising from, payments the Company makes under the TRA. The Company will retain the benefit of the remaining 15% of the net cash savings, if any. The Company estimated the fair value of the TRA liability based on a discounted cash flow model which incorporates assumptions of projected taxable income, projected income tax liabilities and an estimate of tax benefits expected to be realized as a result of the Business Combination. The current undiscounted cash flows associated with the TRA liability were estimated to be approximately $125.8 million over the time period during which the tax benefits are expected to be realized, currently estimated at over 20 years. The estimated fair value of the TRA liability is $71.1 million and $74.8 million as of December 31, 2018 and September 30, 2018, respectively. See Note 10.


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

In connection with the Univar Merger Agreement, Nexeo and the TRA Holders entered into a TRA Termination Agreement under which the parties agreed to terminate the TRA, upon consummation of the proposed transaction. Upon termination of the TRA, a cash payment to the TRA Holders will be made in an amount equal to $60.0 million. In the event the Univar Merger Agreement is terminated, the TRA Termination Agreement will no longer be in force.

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

6. Property, Plant and Equipment
 
Property, plant and equipment at December 31, 2018 and September 30, 2018 consisted of the following:
 
December 31, 2018
 
September 30, 2018
Land
$
50.5

 
$
50.8

Plants and buildings(1)
109.7

 
109.7

Machinery and equipment (2)
154.6

 
153.4

Software and computer equipment
70.7

 
70.5

Construction in progress
8.3

 
5.4

Total
393.8

 
389.8

Less accumulated depreciation (3)
(114.7
)
 
(104.9
)
Property, plant and equipment, net
$
279.1

 
$
284.9


(1) Includes $13.7 million related to facilities acquired under capital leases for the periods ended December 31, 2018 and September 30, 2018.
(2) Includes $26.5 million related to equipment acquired under capital leases for the periods ended December 31, 2018 and September 30, 2018.
(3) Includes $8.3 million and $7.4 million, respectively, related to facilities and equipment acquired under capital leases.

Depreciation expense recognized on the property, plant and equipment described above was as follows:
 
Three Months Ended December 31,
 
2018
 
2017
Depreciation expense
$
10.1

 
$
12.6



Included in the carrying value of property, plant and equipment in the Company’s condensed consolidated balance sheets are certain closed facilities located in the U.S., which collectively have a carrying value of $1.1 million as of December 31, 2018 and September 30, 2018. The facilities do not currently meet the criteria for held-for-sale classification; accordingly, they remain classified as held and used.

During the fourth quarter of fiscal year 2017, the Company entered into a purchase agreement to buy land currently leased at one of the Company's distribution centers. The purchase is expected to be finalized during fiscal year 2019 for approximately $10.8 million.


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7. Goodwill and Other Intangibles

Goodwill
 
The following is a progression of goodwill by reportable segment: 
 
Chemicals
 
Plastics
 
Other
 
Total
Balance at September 30, 2018
$
362.4

 
$
274.0

 
$
63.5

 
$
699.9

Foreign currency translation
(0.5
)
 
(1.8
)
 

 
(2.3
)
Balance at December 31, 2018
$
361.9

 
$
272.2

 
$
63.5

 
$
697.6



Goodwill Impairment Test
 
Goodwill is tested for impairment annually as of March 31 and whenever events or circumstances make it more likely than not that an impairment may have occurred. Goodwill is reviewed for impairment at the reporting unit level, or operating segment, for the Company. The Company performed an impairment test as of March 31, 2018 and concluded that goodwill was not impaired. For purposes of the impairment testing of the Company's recognized goodwill, fair value measurements are determined using the income approach, based largely on inputs that are not observable to active markets, which would be deemed Level 3 fair value measurements as defined in Note 10.

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

Definite-lived intangible assets at December 31, 2018 and September 30, 2018 consisted of the following:
 
 
 
December 31, 2018
 
September 30, 2018
 
Estimated
Useful Life
(years)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Customer-related
5-13
 
$
239.0

 
$
(49.1
)
 
$
189.9

 
$
239.6

 
$
(44.1
)
 
$
195.5

Supplier-related
6-10
 
3.1

 
(0.5
)
 
2.6

 
3.1

 
(0.4
)
 
2.7

Trade name
2-10
 
23.3

 
(14.1
)
 
9.2

 
23.3

 
(12.7
)
 
10.6

Below-market leases
1-7
 
0.7

 
(0.6
)
 
0.1

 
0.7

 
(0.5
)
 
0.2

Non-compete agreements
3-10
 
4.6

 
(2.4
)
 
2.2

 
4.6

 
(2.0
)
 
2.6

Total
 
 
$
270.7

 
$
(66.7
)
 
$
204.0

 
$
271.3

 
$
(59.7
)
 
$
211.6



Amortization expense recognized on the intangible assets described above was as follows:
 
Three Months Ended December 31,
 
2018
 
2017
Amortization expense
$
7.1

 
$
6.9




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8. Debt
 
Short-term borrowings outstanding and the current portion of long-term debt and capital lease obligations at December 31, 2018 and September 30, 2018 are summarized below:
 
December 31, 2018
 
September 30, 2018
Short-term borrowings
$
39.6

 
$
38.1

Current portion of long-term debt and capital lease obligations
9.7

 
9.6

Total short-term borrowings and current portion of long-term debt and capital lease obligations, net
$
49.3

 
$
47.7



Long-term debt outstanding at December 31, 2018 and September 30, 2018 is summarized below:
 
December 31, 2018
 
September 30, 2018
ABL Facility
$
159.0

 
$
104.6

Term Loan Facility
638.8

 
640.4

Capital lease obligations (1)
33.2

 
34.0

Total long-term debt
831.0

 
779.0

Less: unamortized debt discount (2)
(2.2
)
 
(2.3
)
Less: debt issuance costs (3)
(14.0
)
 
(14.7
)
Less: current portion of long-term debt and capital lease obligations
(9.7
)
 
(9.6
)
Long-term debt and capital lease obligations, less current portion, net
$
805.1

 
$
752.4

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

Short-Term Borrowings
 
The Company’s short-term borrowings are associated with the Company’s operations in China and are summarized below:
 
 
Facility Limit
 
Outstanding Borrowings Balance
 
Weighted Average Interest Rate on Borrowings
 
Outstanding LOC and Bankers’ Acceptance Bills
 
Remaining Availability
December 31, 2018
 
 
 
 
 
 
 
 
 
 
Bank of America - China (1)
 
$
24.3

 
$
22.1

 
4.6
%
 
$

 
$
2.2

Bank of Communications - China (2)
 
21.8

 
17.5

 
5.4
%
 
3.4

 
0.9

Total
 
$
46.1

 
$
39.6

 
 
 
$
3.4

 
$
3.1

September 30, 2018
 
 
 
 
 
 
 
 
 
 
Bank of America - China (1)
 
$
24.3

 
$
22.2

 
4.6
%
 
$

 
$
2.1

Bank of Communications - China (2)
 
21.8

 
15.9

 
5.4
%
 
5.1

 
0.8

Total
 
$
46.1

 
$
38.1

 
 
 
$
5.1

 
$
2.9

(1)  
The borrowing limit of this facility is denominated in USD. This line of credit is secured by a standby letter of credit drawn on the ABL Facility covering at least 110% of the facility’s borrowing limit amount. Borrowings under the line of credit are payable in full within 12 months of the date of the advance. The Company has the ability to provide additional capacity under these lines of credit, if needed.
(2)
The borrowing limit of this facility is denominated in RMB. This line of credit is secured by a standby letter of credit drawn on the ABL Facility covering at least 100% of the facility’s borrowing limit amount. Borrowings under the line of credit are payable in full within 12 months of the date of the advance.


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Long-Term Debt

ABL Facility

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

The weighted average interest rate on borrowings under the ABL Facility was 3.98% at December 31, 2018. The Company had the USD equivalent of $69.5 million in outstanding letters of credit under the ABL Facility at December 31, 2018. The collective credit availability under the U.S. and Canadian Tranches of the ABL Facility was the U.S. equivalent of $258.1 million at December 31, 2018. There was $5.0 million availability under the FILO Tranche at December 31, 2018. The ABL Facility matures on June 9, 2021.

Obligations under the ABL Facility are secured by a first priority lien on all ABL Facility first lien collateral, including eligible inventory and accounts receivable of the ABL Borrowers, and a second priority lien on all Term Loan Facility first lien collateral including outstanding equity interests of the Borrower and certain of the other subsidiaries of Holdings, in each case, subject to certain limitations; provided, that no ABL Facility first lien collateral or Term Loan Facility first lien collateral owned by the Canadian Borrower secure the obligations owing under the U.S. Tranche of the ABL Facility. These accounts receivable and inventory totaled $669.6 million in the aggregate as of December 31, 2018.

As of December 31, 2018, the ABL Borrowers were in compliance with the covenants of the ABL Facility.

Term Loan Facility

The Term Loan Facility provides secured debt financing in an aggregate principal amount of up to $655.0 million and the right, at the Company’s option, to request additional tranches of term loans in an aggregate principal amount, when included with any incremental borrowings issued under the ABL Facility, of up to $175.0 million, plus unlimited additional amounts such that the aggregate principal amount of indebtedness outstanding at the time of incurrence does not cause the Secured Net Leverage Ratio, calculated on a pro forma basis, to exceed 4.1 to 1.0. Availability of such additional tranches of term loans is subject to the absence of any default and, among other things, the receipt of commitments by existing or additional financial institutions.

The Company is required to make scheduled quarterly payments in an aggregate annual amount equal to 1.0% of the aggregate principal amount of the outstanding term loans as of the Closing Date of the TLB Amendment No. 2, with the balance due at maturity. The weighted average interest rate for the Term Loan Facility was 5.69% at December 31, 2018. The Company amortized $0.1 million of debt discount to interest expense during the three months ended December 31, 2018 and 2017. The Term Loan Facility matures on June 9, 2023.
 
Additionally, the Term Loan Facility requires the Company to make mandatory principal payments on an annual basis, if cash flows for the year, as defined in the Term Loan Facility, exceed certain levels specified in the Term Loan Facility. The Company was not required to make such mandatory principal payment for the fiscal year ended September 30, 2018. The Company generally has the right to prepay loans in whole or in part, without incurring any penalties for early payment.

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

As of December 31, 2018, the Company was in compliance with the covenants of the Term Loan Facility.

Debt Issuance Cost Amortization

Amortization expense included in interest expense related to debt issuance costs of the Term Loan Facility was $0.7 million for the three months ended December 31, 2018 and 2017.

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Capital Lease Obligations

The capital lease obligation balance of $33.2 million as of December 31, 2018 is primarily associated with the Ryder Lease and the Montgomery Lease. The Ryder Lease obligation excludes decreasing annual interest payments ranging from $0.8 million to less than $0.1 million, for aggregate interest payments totaling $2.5 million. The Montgomery Lease obligation excludes decreasing annual interest payments ranging from $1.0 million to $0.1 million, for aggregate interest payments of $12.4 million.

9. Derivatives
 
The Company is a party to interest rate swap agreements of varying expiration dates ranging from February 2020 through February 2023, to help mitigate interest rate risk related to the variable rate Term Loan Facility. As of December 31, 2018, the notional amount of the seven outstanding interest rate swap agreements was $599.1 million. The swap agreements are accounted for as cash flow hedges. Gains or losses resulting from changes in the fair value of the swaps are recorded in other comprehensive income. Gains and losses recorded in other comprehensive income are reclassified into and recognized in income when the interest expense on the Term Loan Facility is recognized.

Derivative assets and liabilities at December 31, 2018 and September 30, 2018 consisted of the following:
 
Recorded to
 
December 31, 2018
 
September 30, 2018
Short-term derivative asset
Other current assets
 
$
2.1

 
$
2.2

Long-term derivative asset
Other non-current assets
 
$
1.8

 
$
8.0

Short-term derivative liability (1)
Accrued expenses and other liabilities
 
$

 
$

Long-term derivative liability
Other non-current liabilities
 
$
1.2

 
$

Other Comprehensive Income
Accumulated other comprehensive income
 
$
2.4

 
$
8.1


(1) Short-term derivative liability for the three months ended December 31, 2018 and the fiscal year ended September 30, 2018 was less than $0.1 million.

Gains and losses (net of reclassifications into income, including any ineffective portion) related to the interest rate swaps were as follows:
 
 
 
Three Months Ended December 31,
 
Recorded to
 
2018
 
2017
Realized loss
Interest expense
 
$
0.1

 
$
0.4

Unrealized gain (loss), net of tax
Other comprehensive income
 
$
(5.7
)
 
$
1.9



The tax impact of the unrealized gains and losses related to the interest rate swaps was $2.0 million and $0.6 million for the three months ended December 31, 2018 and 2017, respectively. At December 31, 2018, $2.5 million in unrealized gains were expected to be realized and recognized in income within the next twelve months.

See Note 10 for additional information on the Company’s fair value of the derivative instruments.


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10. Fair Value Measurements
 
The accounting standard for fair value measurements establishes a framework for measuring fair value that is based on the inputs market participants use to determine the fair value of an asset or liability and establishes a fair value hierarchy to prioritize those inputs. The fair value hierarchy is as follows: